Commons Sitting of 5 July 1979

Preamble
The House met at half-past Two o'clock
PRAYERS
[Mr. SPEAKER in the Chair]
PRIVATE BUSINESS

  BRITISH RAILWAYS (SELBY) BILL
  Order for consideration of Lords amendments read.
  To be considered upon Monday next.

  UNIVERSITY COLLEGE LONDON BILL [Lords] (By Order)
  Orders for Second Reading read.
  To be read a Second time upon Thursday next.

ORAL ANSWERS TO QUESTIONS
  NORTHERN IRELAND

    Irish Republican Army (Terrorist Conspiracy)
    Mr. Molyneauxasked the Secretary of State for Northern Ireland what study he has made of the fresh evidence of international complicity in the Irish Republican Army terrorist conspiracy.
    The Secretary of State for Northern Ireland (Mr. Humphrey Atkins): I am studying the available evidence very carefully and I can assure the House that we are ready with our partners abroad to take appropriate action against any such international terrorist links.
    Mr. Molyneaux: Will the Secretary of State assure us that he will not discount the assertions made by the various terrorist gangs? Will he ensure that Her
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    Majesty's ambassadors in the countries concerned are fully briefed so that they are in a position to offer accurate advice to the Governments of those countries? Perhaps he will enlist the aid of his right hon. Friend the Prime Minister to persuade those Governments to assist in stamping out terrorism in all its forms.
    Mr. Atkins: The best answer that I can give is "Yes, Sir"
    Rev. Ian Paisley: Will the Secretary of State inform the House whether he has any evidence that the Provisional IRA had a recent conference with the Basque terrorists in Spain?
    Mr. Atkins: No, Sir. I cannot tell the House that we have any direct evidence of that. However, there is considerable co-operation between the Governments of the countries affected. All evidence is carefully studied and acted upon where possible.
    Mr. Wilkinson: In view of my right hon. Friend's decision on Monday to proscribe the Irish National Liberation Army, may I ask whether there was any evidence of international collusion or contacts with that body? Did those contacts in any way influence his decision?
    Mr. Atkins: Yes, Sir. There are indications that the Irish National Liberation Army is acting in concert with other terrorist groups throughout the world. That influenced what we decided to do on Monday.

    Security
    Mr. Michael McNair-Wilsonasked the Secretary of State for Northern Ireland if he will make a statement about the security situation in the Province particularly along the border.
    Mr. Goodladasked the Secretary of State for Northern Ireland if he will make a statement on security in the Province.
    Mr. Lathamasked the Secretary of State for Northern Ireland whether he will make a statement on the security situation.
    Rev. Ian Paisleyasked the Secretary of State for Northern Ireland if he will make a statement on the security situation in Northern Ireland.
    Mr. Humphrey Atkins: Since I answered a question on this subject on 24 May, the security forces have maintained their pressure on the terrorists. Seven people have been charged with five murders, including four men charged with the killing of a Reserve constable in Londonderry on 20 May, one charged with the shooting of a member of the Ulster Defence Regiment in Belfast on 6 June and others charged in relation to sectarian murders in Portadown on 31 March and Belfast on 9 June. Six people have been convicted for murder and five for attempted murder.
    During this period 12 persons have died as a result of terrorism of whom five were civilians and seven were members of the security forces, and there have been a total of 100 bomb attacks. In an exchange of fire with the security forces in South Armagh on 9 June a terrorist was fatally wounded and two others seriously injured.
    As I told the House on Monday 2 July, we are giving special attention to security in the border areas. The number of troops allocated to those areas has already been significantly increased. I have agreed with Ministers in the Republic of Ireland that the combined efforts of our two countries' security forces in these areas can and must be improved. We shall follow this up with determination.
    Mr. McNair-Wilson: I am most grateful to my right hon. Friend for those figures giving successes by our security forces. May I press him a little further about his talks in Dublin? When he came back, I think I am right in saying that at a press conference he suggested that the Criminal Jurisdiction Act might be operated more profitably than it had been operated in the past by Governments of both parties. Can he say what was in his mind? Does he consider that the Garda and the RUC might be allowed to cross the border to interrogate suspects?
    Mr. Atkins: Yes. I concentrated, in what I said publicly after the meeting, on the Criminal Jurisdiction Act, because it seemed to me that this was the area in which we were most likely to make progress. The courts in the Irish Republic have consistently refused to extradite people for political offences, although
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    the Government of the Republic expressed their willingness to operate the Criminal Jurisdiction Act. It seemed to me that this was the most likely way in which to make the kind of progress we need.
    I raised with the Government of the Republic the sugestion that where crimes are committed in the North and people are apprehended in the South, members of the RUC should be enabled to assist in the interrogation—and, of course, the reverse would be true as well. This seems to me to be a sensible proposition and it is one that the Government of the Republic are currently considering.
    Several Hon. Members rose—
    Mr. Speaker: I propose to call first those hon. Members whose questions are being answered. I should be grateful if questions could be brief.
    Mr. Goodlad: Will my right hon. Friend tell the House how many people have been charged with terrorist offences in the Province in the past 12 months, how many people have been convicted of terrorist offences, and whether he is optimistic about the trend?
    Mr. Atkins: In the past 12 months, 711 people have been charged with terrorist offences, and I am glad to be able to tell the House that an even greater number of people have been convicted in that period, although not necessarily the same people. In the past 12 months, 876 people have been convicted of terrorist offences. There is cause for cautious optimism that the establishment of the rule of law is making progress if this number of terrorists is being apprehended, brought to trial and convicted.
    Mr. Latham: Is my right hon. Friend aware that within three weeks all hon. Members will have to make an agonising personal decision on the subject of capital punishment? Will he make it his business to try to give to the House his view and that of the leaders of the security forces on whether the restoration of capital punishment would help the position in the Province?
    Mr. Atkins: I think that the House knows my personal views well enough from the number of occasions on which this matter has been discussed in the years that I have been here. I shall take

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    note of my hon. Friend's suggestion and be most willing to give guidance to hon. Members on the possible effects on terrorism of a change in the law.
    Rev. Ian Paisley: Does the right hon. Gentleman agree that it is necessary to stop the flow of arms to the terrorists? Will he tell us how many arms have been captured in the past year and their countries of origin? Does the right hon. Gentleman agree that the best solution to the problem with the Irish Republic would be an extradition treaty? Will he press on the Irish Government the fact that they should sign the European convention on terrorism?
    Will the right hon. Gentleman also tell the House what happened to the person who was wounded recently in the north of Ireland? Is it not a fact that a person was allowed to walk out of a hospital in the south of Ireland and go free?
    Mr. Atkins: There were two people wounded in the incident to which the hon. Gentleman refers. One of them is currently serving a sentence of six months' imprisonment in the Republic and the other is at home.
    I cannot, I am afraid, without notice, give the hon. Gentleman the figures for which he asks, but I shall be very glad to let him have them later. The arms obtained by terrorists come exclusively from overseas, and there is evidence that substantial numbers of them arrive in Northern Ireland by land rather than by sea.
    Mr. McCusker: Does the right hon. Gentleman recall telling me last week that 19 serious incidents had occurred in my constituency, after which the terrorists concerned returned to the Irish Republic? Did he raise the matter of those statistics with Mr. O'Kennedy? Is he aware that Mr. O'Kennedy and his security forces would know the identity of the men who committed those atrocities? Is the right hon. Gentleman aware that the two men who were wounded were wounded not by the security forces but by a civilian in my constituency, after which they received medical attention in a hospital in the Republic and were then allowed to go free, following which one of them was arrested and charged with a motoring offence?
    Mr. Atkins: All those matters were discussed in my meeting with the Ministers
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    of the Republic. As I have said already, there is no doubt in my mind, nor in the minds of the Ministers of the Republic, that this cross-border traffic makes things much too easy for terrorists. That is why I was delighted to hear from the Government of the Republic that they had established a task force specifically devoted to the terrorist threat in the border areas. This kind of co-operation between the RUC and the Garda, and between the two Governments, seems to be far and away the best method of getting on top of the problem.
    I have already mentioned the two wounded men. One of them is imprisoned in the Republic. There is still time for us to seek to encourage the authorities there to use the Criminal Jurisdiction Act, if evidence can be found.
    Mr. Kilfedder: Is the Secretary of State aware that the Ulster people, who are being slaughtered daily, are sick of the fruitless talks which go on between Westminster and Dublin? Will he take action to end the pretence whereby the Government of the Irish Republic claim to be taking effective action against the IRA terrorists there, and force that Government to act, as any friendly neighbouring State should, to end the menace of the evil men who operate from the safety of the Irish Republic?
    Mr. Atkins: I, too, am sick of this and wish to do anything I can to bring it to an end, as I have repeatedly said. At my meeting with the foreign affairs Minister of the Republic and the Minister of Justice, both expressed their determination to eradicate terrorism, which they recognised as being a threat not just to the people of Northern Ireland but to themselves. They have taken certain steps and are considering others. As I said before, I intend to follow this up with determination. We shall see what happens.
    Mr. John: Will the Secretary of State let us know when he expects progress to be made on the matter of the Criminal Jurisdiction Act? When will the Dublin Government be in a position to come to a decision on that issue?
    In answer to his hon. Friend the Member for Melton (Mr. Latham), the Secretary of State indicated his views on capital punishment. Am I to take it from that

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    that he intends to intervene in the debate to make clear to the House his views as Secretary of State for Northern Ireland?
    Mr. Atkins: I do not know what course the debate on capital punishment will follow. In answering my hon. Friend's supplementary question. I was reminding the House of my own personal views, which have been expressed consistently over 24 years. It will clearly be necessary during that debate for the effect on terrorist activity of a change in the law to be made clear. I would not like to say at this stage that I shall be doing it—it may be somebody else—but clearly the House will need that advice, and I am certain that it will get it.
    The Government of the Republic are prepared to operate the Criminal Jurisdiction Act at any time. The Act was passed by us in this House in 1975, and was followed by the Irish Government in, I think, 1976. They have consistently expressed their readiness to use the Act, provided that evidence is forthcoming from the North which will enable them to mount a prosecution.

    Northern Ireland Housing Executive
    Mr. Bradfordasked the Secretary of State for Northern Ireland if he will make a statement on the Rowland report in respect of the Northern Ireland Housing Executive.
    Mrs. Knightasked the Secretary of State for Northern Ireland if he will publish the conclusions of the Rowland Commission.
    The Under-Secretary of State for Northern Ireland (Mr. Philip Goodhart): The report of the investigatory Commission into Northern Ireland Housing Executive contracts, chaired by Judge Rowland, was laid before Parliament today as a Command Paper. I have placed in the Library of the House a copy of a statement by my right hon. Friend the Secretary of State on the report, and additional copies have been sent to all Members from Northern Ireland. The report shows that substantial sums of public money have been wasted. Action has already been taken to correct the errors that were made and further action will be
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    taken to tighten control over housing expenditure in Northern Ireland.
    Mr. Bradford: I am grateful to the Minister for that reply. Bearing in mind the Commission's comment that money may have found its way into the hands of the IRA, may I ask how much of the £21 million Housing Executive deficit, which was wiped out by Her Majesty's Government, is estimated to have gone to the IRA through the two Provisional IRA building companies which were set up with the assistance of the former Secretary of State, the right hon. Member for Leeds, South (Mr. Rees)? Secondly, will the Minister take action against those civil servants in the Housing Executive and the Department of the Environment who were involved in the duplication of a £2 million payment which went, first, for maintenance work and, secondly, for rehabilitation work on precisely the same properties?
    Mr. Goodhart: On the latter point, the Commission found that many things had gone wrong in the Housing Executive, but it did not find that they had gone as badly wrong as is suggested by the hon. Gentleman. If the hon. Gentleman has any further evidence, I should be glad to receive it.
    Substantial sums have been wasted—more than £1 million—and investigations were made over many years by the police and others to see whether there was criminal culpability. Alas, no evidence could be found which was sufficient to bring a charge. Most of those directly responsible have left the employ of the Housing Executive since these regrettable events occurred.
    Mrs. Knight: Will my hon. Friend bear in mind that, intentionally or unintentionally, the Rowland Commission was not given the wide-ranging powers by the last Government which it should have been so that it could investigate the truth? When my hon. Friend looks at the conclusions of the Rowland Commission, will he also look very carefully at the report by two policemen from my area in the West Midlands, who investigated the matter thoroughly and found that, through the agency of the Northern Ireland Housing Executive, money had been diverted from the taxpayer to firms set up by the IRA, actually in Long Kesh,

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    and that without doubt money went into IRA hands?
    Mr. Goodhart: I am grateful for the enthusiasm with which my hon. Friend has pursued over the years these serious wastages of public money. It is absolutely wrong that any public funds, directly or indirectly, should be paid to paramilitary organisations, and we intend to take firm action to see that it never happens again.
    Mr. Wm. Ross: Is it not clear from this report that the whole concept of the Northern Ireland Housing Executive was founded upon propaganda? The sooner we get rid of this monstrosity the better.
    Mr. Goodhart: I do not accept that. The Northern Ireland Housing Executive has had to face many difficulties since it was set up, but, by and large, it has discharged its duties well.
    Mr. John: Will the hon. Gentleman accept it from me when I say that any steps which are taken to tighten up the administration and thus prevent the misuse of public funds will be welcomed by us? Secondly, will he take this opportunity of restating what he put far too strongly, namely, that the conclusion of the Rowland report was that money may have found its way, indirectly, into the hands of the IRA? There is certainly no evidence, according to the statement by his right hon. Friend, that it did so. Thirdly, will he re-emphasise the fact that the Rowland Commission found that the Housing Executive had done a very good job in difficult circumstances?
    Mr. Goodhart: I just made that point, I hope. The circumstances were very difficult. The circumstances in which the Housing Executive operates are still very difficult. Alas, it is plain from the evidence in the Rowland report that a substantial sum of money probably found its way, indirectly, into the hands of paramilitary organisations, and we intend to see that that does not happen again.

    Totalisator
    Mr. J. Enoch Powellasked the Secretary of State for Northern Ireland what steps he proposes to take to bring the law governing use of the totalisator in Northern Ireland into line with that for the rest of the United Kingdom, and what he estimates would be the revenue effect of doing so.
    The Minister of State, Northern Ireland Office (Mr. Hugh Rossi): This matter is currently being considered as part of a general review of the law in Northern Ireland relating to all forms of betting, gaming and lotteries. Reliable estimates cannot be made of the revenue effects of possible changes in the law.
    Mr. Powell: Will the Minister seriously consider taking this single and separate matter by itself and dealing with, it promptly, since, without the use of any public money or the establishment of a board, it would enable those who are ready to do so to go ahead now?
    Mr. Rossi: The difficulty of proceeding with the legalisation of totalisators in advance of completing a general review is that most of the matters which are the subject of the review are regarded by those directly concerned as being equally pressing. Therefore, I do not consider it right to single out one particular item, for priority treatment.
    Mr. Abse: If laws are to be aligned, why should not priority be given to laws relating to fundamental human rights, such as homosexuality, abortion, and fundamental canons of the criminal law such as conspiracy? Why should this appallingly subsidised Province, at its own whim—
    Mr. Speaker: Order. The hon. Gentleman should put a question on the Order Paper. This question is about the totalisator. It is unfair to try to get another question in which is unrelated to that subject.

    Young Persons (Training)
    Mr. Kenneth Lewisasked the Secretary of State for Northern Ireland what proposals he has for providing increased opportunities for young people in Northern Ireland to secure training in skilled employment.
    Mr. Rossi: I have made it my business to visit as many as possible of the places in Northern Ireland providing opportunities for youth training. I am convinced of the usefulness of the work which is being done and see no need to alter present arrangements.
    Mr. Lewis: I am sure that the Minister is aware that when young men cannot get

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    jobs, especially in the circumstances existing in Northern Ireland, they become involved in violent mischief. When they obtain dead-end jobs, they become involved in moonlighting and violence. Is he aware that, according to my information, the opportunities in Northern Ireland for young men to be trained in skills are inadequate.
    Mr. Rossi: I am well aware of all that my hon. Friend has said. I have been singularly impressed by the schemes in operation in Northern Ireland, though that is not to say that there is no room for improvement. We are constantly looking at this issue.
    Mr. Fitt: Is the Minister aware of the disquiet that was announced recently by the Irish Congress of Trades Unions regarding the Government expenditure cutbacks? This will have a serious effect on any organisations which are designed to help young people. Will the Government rethink any cutbacks which they have proposed in this direction?
    Mr. Rossi: I can assure the hon. Gentleman that the cutbacks have no detrimental effect upon training schemes.
    Mr. John: The hon. Gentleman says that he sees no reason to change existing arrangements. Will he have regard to the June report of the Northern Ireland economic council in which it was said that apprenticeship and similar schemes should be put on a more stable and permanent basis? Will the Government consider the provision of permanent schemes now to help in the creation of apprenticeships in Northern Ireland?
    Mr. Rossi: The hon. Gentleman is well aware of the Government training schemes in Northern Ireland and the number of people who go through them. Naturally we shall always consider improving what we have there at the moment.

    Public Expenditure
    Mr. Stallardasked the Secretary of State for Northern Ireland what are the estimated effects of the proposed reduction of £35 million in annual public expenditure.
    Mr. Rossi: This information was given in a statement made by my right hon.
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    Friend the Secretary of State on 13 June, which received widespread publicity in Northern Ireland. I am sending a copy of it to the hon. Gentleman.
    Mr. Stallard: In the few weeks that the hon. Gentleman has been in his present position has he learned that there is a widely-held belief in Northern Ireland that when Britain sneezes the Six Counties catch a cold? Does he accept that the lengthening of dole queues, which are already the longest in the United Kingdom, and a reduction in the opportunities for education and jobs for school leavers is no way to bring about a solution to the tragic problems of Northern Ireland? Can he assure me that his right hon. Friend will now impress upon his Cabinet colleagues the need to maintain the special status of Northern Ireland?
    Mr. Rossi: I can assure the hon. Gentleman that that is exactly what my right hon. Friend is doing.
    Mr. Farr: In view of the very high rate of unemployment in the Province, will my hon. Friend make sure that any cuts in expenditure will hit employment projects as little as possible?
    Mr. Rossi: I am glad to give my hon. Friend that assurance. We have taken particular care not to take the soft option of making cuts in capital construction programmes. We have avoided that.

    Political Initiative
    Mr. Peter Robinsonasked the Secretary of State for Northern Ireland what plans he has to make progress towards the re-establishment of a devolved, democratic Parliament and Government in Northern Ireland; and if he will make a statement.
    Miss Maynardasked the Secretary of State for Northern Ireland when he intends to take a political initiative in Northern Ireland; and if he will make a statement.
    Mr. Canavanasked the Secretary of State for Northern Ireland when he expects next to meet leaders of the political parties in Northern Ireland.
    Mr. Humphrey Atkins: As was stated in the Gracious Speech, the Government's aim is to seek an acceptable way of restoring to the people of Northern

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    Ireland more control over their own affairs. I do not think that this is best pursued by political action of a dramatic kind. The arrival of a new Government, with a full parliamentary term ahead of them, has itself changed the situation. I have begun talks with the leaders of parties representing a wide range of opinion in Northern Ireland, and I intend to continue these talks in a determined search for a satisfactory way forward. This is an initiative in itself, and it has already begun.
    Mr. Robinson: In view of the Secretary of State's comment to the House on Monday that solutions can best be found by the people of Northern Ireland, is he prepared seriously to consider establishing a convention in Northern Ireland, with the result of that convention to be put to the people by way of referendum?
    Mr. Atkins: I am not yet persuaded that this would be a helpful step to take. At present there seems no reason to suppose that a new convention would produce proposals any more acceptable—either in Northern Ireland or in this House—than the 1975 convention.
    Miss Maynard: Is the Secretary of State aware that next month the British Army will have been in Northern Ireland for 10 years, yet the bloodshed, slaughter and killing still go on? The only good thing about which we can rejoice is that we have seen the end of Stormont. Does not the right hon. Gentleman think that it is high time that some political initiative was taken to try to solve this intractable problem, for example, by meeting the parties in Northern Ireland and the representatives of the Government of the Republic? Whether it is dramatic or undramatic political action, I believe that some political initiative should be taken.
    Mr. Atkins: In my main answer I attempted to get across to the House that an initiative is being taken. I am taking it. I believe that patient negotiation, with a determination to move forward, is the best way of achieving it. I am talking to leaders of all political parties in Northern Ireland, and I hope very much that between us we can make progress towards what we all want, which is more control in Northern Ireland, by the people
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    of Northern Ireland, over their own affairs.
    Mr. Canavan: Will the Secretary of State give a categorical assurance that the Government will reject any proposal that the problems of Northern Ireland can be solved simply by more military oppression and a return to the old Stormont system of government? Will the right hon. Gentleman try not to be too influenced by the fact that some of the most extreme elements of the Unionist extremists have chosen to sit on the Government Benches?
    Mr. Atkins: It is no longer a matter for me where hon. Members sit in this House. I assure the hon. Gentleman that there is not a solely military solution to this problem. The British Army needs to be present in the Province as long as the police require the Army's support to maintain law and order. It will remain there as long as that is necessary. However, I quite accept that there is no purely military solution. That is why I am having these political discussions with party leaders.
    Mr. Biggs-Davison: I congratulate my right hon. Friend on ruling out the sort of instant initiative that leads to disheartening fiasco. Will he start the process of reviving local democracy by examining the functions of district councils and the composition of statutory boards?
    Mr. Atkins: Yes. This is one of the ways in which progress could be made, but it is not the only way. There are a great many others. In my discussions, which I intend to continue, my object is to find progress that is generally acceptable. Unless we can find a way forward which is acceptable to the people of Northern Ireland, whether they be of the majority or minority population, that is not progress. Therefore, it is with that in mind that I am having these continuing and private discussions with the leaders of political parties.
    Mr. J. Enoch Powell: Is the right hon. Gentleman aware that all political parties which enjoy any significant electoral support in the Province are represented in this House, and that he can and should maintain constant contact and consultation with those parties and their leaders in this House?
    Mr. Atkins: Yes.
    Rev. Ian Paisley: Will the Secretary of State tell the people of Northern Ireland today from the Dispatch Box that the internal affairs of Northern Ireland are a matter between the Government, this House and the people of Northern Ireland and have nothing to do with negotiation with the Dublin Government?
    Mr. Atkins: The future of Northern Ireland is a responsibility of the Government and this House. I made that clear in my discussions with the Government of the Republic when I was there last week, and that is wholly accepted. Of course, they are interested in what happens, but the responsibility remains here.
    Mr. Fitt: With regard to acceptability, does the Secretary of State recall that it was the malpractice which took place in local authorities throughout Northern Ireland which was largely responsible for the birth of the civil rights movement? Will he accept from me that any attempt to grant further powers to the existing local authorities in Northern Ireland will be fiercely resisted by the minority population?
    Mr. Atkins: The hon. Gentleman's question illustrates most clearly that the answer to this problem is not all that simple.

    Political Consultations
    Mr. Flanneryasked the Secretary of State for Northern Ireland if he will convene a meeting of all the legal political parties in Northern Ireland along with the Government of the Republic of Ireland to discuss the present situation in Northern Ireland.
    Mr. Humphrey Atkins: I have made it clear that I am willing to talk to any responsible body or party which has an interest in achieving a peaceful settlement but, for the time being, I believe that such talks are likely to make more progress if they take place on a bilateral basis.
    Mr. Flannery: Does the right hon. Gentleman agree that, important though security is, it is depressing that most questions asked in this House are purely about security, particularly when everyone knows that any solution must be a political one? I gather that the right hon.
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    Gentleman agrees with that. Does he also agree that the Ulster Unionists in this House merely want to return to the old Stormont regime, although they know that what Stormont did precipitated all that is happening now—[Interruption.] I appreciate that Unionist Members do not want to listen to this, because it is relevant—[Interruption.] I gather that I am making my point. Does the right hon. Gentleman agree that this question differs from the others in the sense that it wants to bring together all legal political parties, and the Government of the Republic, so that they can talk—not independently of one another—and say exactly what they feel? Would not that be a good beginning to a political solution of the problem?
    Mr. Atkins: First, I am not responsible for what questions are asked in this House. I am responsible only for the answers. Secondly, the House was interested to hear the hon. Gentleman's views about the Ulster Unionist Party. Thirdly, I do not believe that at this time a round table discussion is the best way of moving forward. As I said in my main answer, while the time may come for that I do not believe that it has yet arrived, and I prefer to pursue the Government's objectives through bilateral discussions.
    Mr. Kilfedder: The Secretary of State said in answer to a previous question that there was no military solution to the crisis in Northern Ireland. Does he not realise that that appalling statement will have a serious effect on Ulster people who believe that the fight in the Province is between the forces of law and order and the Provisional IRA terrorists who are against any kind of political progress?
    Mr. Atkins: I was trying to convey to the House that the military solution is not the only one. We must try to beat the terrorists, but when we have beaten them there will still be a political difference between law-abiding and peaceful people in Northern Ireland which must also be resolved. There will be no let-up in our efforts to beat the terrorists, but the discussions about the political future of the Province must continue at the same time.
    Mr. Stan Thorne: Since the partition of Ireland is really at the root of the whole problem, what steps will the Secretary of State take to overcome the errors of partition created by his predecessors?
    Mr. Atkins: I am trying to find an acceptable form of government for the people who live in the Province because in the past they have demonstrated, by way of a poll, that they wish to remain part of the United Kingdom. As long as they wish to remain part of the United Kingdom, that is what will happen. I am trying to make some progress in finding an acceptable form of government for that part of the United Kingdom.

    Rates
    Mr. Hardyasked the Secretary of State for Northern Ireland if he will state the average rate contribution per head paid in Northern Ireland; and how this relates to payments in the Yorkshire and Humberside region with which the Province is officially compared for local government finance purposes.
    Mr. Rossi: I regret that the hon. Gentleman is mistaken. Northern Ireland is no longer compared with the Yorkshire and Humberside region as a consequence of the 1976 report of the working party on the regional rate which stated that family incomes in Northern Ireland compared unfavourably with those in his region.
    Exact comparisons are not possible, but the figures for the average rate contribution are roughly £69 in Northern Ireland and £90 in Yorkshire and Humberside.
    Mr. Hardy: The rate support grant per head is one-third greater in Northern Ireland than it is in Yorkshire. Are the people of Northern Ireland fully aware of their advantageous position in relation to rate support? Further, will the people of Northern Ireland suffer the same degree of retrenchment which the present Government offer Yorkshire and Humberside, and, if so, will the gap be wider or narrower?
    Mr. Rossi: The hon. Member is operating on a false premise. A rate support grant exercise has been conducted in relation to family size, income, needs and resources. This exercise shows that the level of rate in Northern Ireland is approximately correct in that it is close to the level that would have been struck had Northern Ireland been treated as a rating area of England and Wales.
    Mr. J. Enoch Powell: Is it not a fact that rating cannot be a satisfactory or just system of taxation in the absence of representative local government?
    Mr. Rossi: That is another question altogether, as the right hon. Gentleman is aware.
    Mrs. Knight: Will my hon. Friend take note of the fact that, with councillors being paid allowances as they are, there is a great deal of difference between an area which has no councillors at all and one which has? In that instance, Humberside is very much more fortunate than Ulster.
    Mr. Rossi: I note what my hon. Friend says.

    Terrorism
    Mr. Wm. Rossasked the Secretary of State for Northern Ireland how many incidents of a terrorist nature there have been in Northern Ireland during the last months; and how many persons have been killed as a result.
    The Minister of State, Northern Ireland Office (Mr. Michael Alison): Since the beginning of June there have been 134 incidents of a terrorist nature in Northern Ireland resulting in the deaths of four civilians and seven members of the security forces.
    Mr. Ross: Is the Minister aware that most of these incidents were planned and carried out from across the border? Is he also aware that there are almost 100 wanted people in Donegal alone and that the hypocrisy of the Dublin Government in relation to terrorist offences was exposed by the fact that they have sent back an aircraft hijacker to face American justice but refuse to return many murderers to face British justice?
    Mr. Alison: I am aware that a great deal of terrorist activity is planned, effectively, from across the border, but I reject any allegation of hypocrisy on the part of the Dublin Government.
    Mr. McCusker: May I express good wishes to those two SAS members who were acquitted in a murder trial in Northern Ireland yesterday? Will the Minister encourage their colleagues to take the kind of action that they took last year when they managed to kill a

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    few terrorists, bearing in mind that a number of people have been killed by terrorists in my constituency?
    Mr. Alison: It would be better to allow both the House and the public to ponder the effects of the conclusion of the trial of the two SAS men who were acquitted, and to study the statement made by the General Officer Commanding as a result of the trial.

  EDGE HILL
  Mr. Altonasked the Prime Minister if she has any plans to visit Edge Hill.
  The Prime Minister (Mrs. Margaret Thatcher): I have no plans to do so.
  Mr. Alton: How does the Prime Minister reconcile the proposed cuts in public expenditure, which are jeopardising the future of nursery schools in the Edge Hill area, and which are resulting in the withdrawal of home helps and ancillary help for children, with the proposal that the Merseyside county council should go ahead with a £40 million inner ring road scheme which will result in the loss of 1,000 jobs? Is the Prime Minister prepared to intervene to try to get the inner ring road scheme scrapped?
  The Prime Minister: I have looked into the question of the inner ring road because a number of the hon. Member's constituents feel very strongly about it. They felt particularly strongly that they could not have a public inquiry because of the Liverpool Corporation Act 1966 and its successor, which is now being considered in Committee. But this is really a matter for the Merseyside county council, and there are some who hold that scheme will provide more employment, release a lot of blighted land and give a badly needed boost to the area. These people believe that the constituency and the Liverpool council are forward looking and are preparing for the future.

  PRIME MINISTER (ENGAGEMENTS)
  Mr. Cadburyasked the Prime Minister if she will list her official engagements for 5 July.
  The Prime Minister: This morning I presided at a meeting of the Cabinet. In
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  addition to duties in this House, I shall have further meetings with ministerial colleagues and others.
  Mr. Cadbury: My right hon. Friend will be well aware of the need to encourage the use of secret ballots to improve industrial relations in British industry. Will she consider, during her crowded schedule today, bringing forward as urgently as possible some proposals to make funds available to pay for secret ballots?
  The Prime Minister: As my hon. Friend knows, in our manifesto we undertook to bring in a Bill to provide funds for postal ballots because we believe that trade union members should be able to register their votes secretly, just as we can for parliamentary candidates. We hope that that Bill will come forward before the end of the year.
  Mr. Stoddart: In spite of her busy schedule today, will the Prime Minister, immediately following Question Time, have a conference with the Home Secretary to discuss the case of Mr. Chris Kelzani, who has been held prisoner at Horfield gaol since 13 June because the Home Office is unable to execute a deportation order as this man has no right of abode elsewhere? Is she aware that that order was signed on the basis of admittedly incorrect information supplied to the Ministers concerned?
  The Prime Minister: I shall have to say "'No" to the hon. Member for the specific reason that the Home Secretary is at present in the Isle of Man on an official visit. Of course, I shall draw the attention of my colleagues in the Home Office to this case and I shall ask them to look into it immediately.
  Mr. Alexander: Will my right hon. Friend take time off today to talk to the Building Societies Association and make the point that, while she is not willing to interfere in its day-to-day affairs, she will nevertheless regret it if it finds a need to increase mortgage interest rates?
  The Prime Minister: There was a regular meeting of the joint advisory committee involving the Building Societies Association today. I cannot accede to my hon. Friend's request, but I must point out that my views on mortgage rates are very well known and I

  1551
  hope that the building societies will think long and hard before they make any suggestion to raise the present mortgage rate.
  Mr. Hooley: Since the Prime Minister has proclaimed that she will stand up for British interests in the Common Market, will she explain why she has capitulated on the question of the interest relief grants for North Sea oil equipment and why she is handing over control of the steel industry to the Community?
  The Prime Minister: I do not think that we have made any changes at all in the governing treaties of the Community which the previous Government recommended this country to join.
  Mr. Goodladasked the Prime Minister if she will list her official engagements for 5 July.
  The Prime Minister: I refer my hon. Friend to the reply which I have just given.
  Mr. Goodlad: Will my right hon. Friend take time today to read the press reports of the decisions taken yesterday by the Labour Party NEC? Does she believe that the decision that the Leader of the Opposition should not nominate life peers to another place is likely to strengthen or weaken parliamentary democracy? Does she regard this as a sinister step on the road to a unicameral legislature?
  The Prime Minister: I am responsible for many things, but not for the activities of the Labour Party. It always appears to me that, although some of them are trying to leave the other place, others are trying to get into it. That might help to keep it in existence.
  Mr. Flannery: In the midst of her many engagements, will the Prime Minister take time to study the deliberations of the National Union of Mineworkers many of whose members are in the Channel Islands this week? Will she examine their demands for an increase in pay, and consult her right hon. Friend the Member for Sidcup (Mr. Heath), the former Prime Minister, and learn the lesson which he failed to learn?
  The Prime Minister: The NUM will negotiate with the National Coal Board and not with me.
  Mr. Budgen: Will my right hon. Friend take the opportunity today to explain that she and the Government have no lawful authority to interfere with the rate of interest which is either charged or received by the building societies?
  The Prime Minister: My hon. Friend, as usual, is absolutely correct.
  Mr. Robert Sheldon: Will the Prime Minister look into the subject of incentives, in which she has a great interest? Will she examine one other aspect of the matter and consider her exchange rate policy which has resulted in imports of manufactured goods coming down in price by around 10 per cent. since she took over? The greatest incentive we now have, as a result of this Government, is the incentive to import finished manufactures at a lower price than was available before she took over, to the great disadvantage of British industry. Will she reconsider her policy?
  The Prime Minister: The right hon. Gentleman raises an important point. The other aspect of the matter is that this state of affairs keeps down the rate of inflation in this country. He is making a very good case for the relaxation of exchange controls.
  Mr. Brothertonasked the Prime Minister if she will list her official engagements for Thursday 5 July.
  The Prime Minister: I refer my hon. Friend to the reply which I gave earlier.
  Mr. Brotherton: Bearing in mind the vital importance of reducing the size of the public sector, will my right hon. Friend consider the appointment of a Minister for denationalisation?
  The Prime Minister: As my hon. Friend knows, I do not like adding extra Ministries to those we already have. I believe that we already have a very good Minister in my right hon. Friend the Secretary of State for Industry, who could and will carry out that policy very ably.
  Mr. Marks: Will the right hon. Lady take time today to read some of her past speeches, particularly the one in which she gave an unshakeable pledge that the next Conservative Government would transfer teachers' pay from rates to taxation, abolish domestic rates and maintain

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  the mortgage rate at 9½per cent.? What are her views on those matters now?
  The Prime Minister: With respect to the hon. Gentleman, I think that it was on that manifesto that the Labour Government got in.
  Mr. Wigley: On the subject of exchange rates, is the right hon. Lady aware that the implications are not only cheaper imports, but export difficulties for manufacturing concerns in the United Kingdom? Is she further aware that only last week a factory in my constituency manufacturing typewriters announced that it was closing down for the very reason of the rate of exchange of the pound against the dollar?
  The Prime Minister: I am aware that the exchange rate is causing some difficulty for some exporters, but it is also keeping down the rate of increase of inflation in this country. That, too, is important. Once again, the hon. Gentleman is making a very good case for the relaxation of exchange controls which I trust he supported in the Budget Statement.
  Mr. James Callaghan rose—
  Mr. Rost: Welcome back.
  Mr. Callaghan: I understand the cry "Welcome back". That is what the country is saying just at this moment.
  The Prime Minister has said that it is her policy to reduce the minimum lending rate, but that is in conflict with the building societies' lack of liquidity. Will she undertake to examine the prospect of helping to keep down mortgage interest rates by temporarily advancing to the building societies a sum of public money—
  Mr. Budgen: No.
  Mr. Callaghan: —to maintain their liquidity? Would that not achieve both her objects? It would anticipate the lowering of MLR, and at the same time prevent the building societies from putting up their rates, at a small cost to the Government.
  The Prime Minister: I understand the scheme which the right hon. Gentleman is proposing. It was put into operation by his right hon. Friend the Member for Leeds, East (Mr. Healey) in 1974. Equally, the right hon. Gentleman knows
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  that the building societies have very substantial reserves.
  Mr. Callaghan: But if there is a choice between not using those reserves and mortgage interest rates rising, will the right hon. Lady not allow her prejudices to stand in the way but advance this money at very little cost? At the moment, does she not realise that the Government are looking like a lot of Charlies in relation to their monetary policy?
  The Prime Minister: The Government intend to run a firmly-controlled monetary policy. That was the former Chancellor of the Exchequer's intention, but it slipped a bit when we came up to the election. Because it slipped a bit, we now face monetary troubles. I emphasise that the building societies have substantial reserves. I think that it will be for them to consider using some of those first.
  Mr. Charles Morrison: May I follow up the supplementary question put by my hon. Friend the Member for Northwich (Mr. Goodlad)? Will my right hon. Friend, either today or at the earliest possible opportunity, further consider the question of the future of the House of Lords? If she were to do that, would it not have the double advantage of living up to the Conservative Party manifesto, which stated that it wished to strengthen the Second Chamber, and help the Leader of the Opposition in his battle against his own Left wing?
  The Prime Minister: As my hon. Friend knows, we believe in a strong Second Chamber, regardless of which side of the House happens to be in government. We should have a powerful revising Second Chamber. Equally, there are many people who wish to reform the House of Lords. Alas, it is not so easy to find agreement on the way to reform it. That is the problem.
  Mr. Dubsasked the Prime Minister if she will list her official engagements for 5 July.
  The Prime Minister: I refer the hon. Member to the reply I have already given.
  Mr. Dubs: Will the right hon. Lady find time today to remind herself of the good work undertaken by the law centres all over the country on behalf of their

  1555
  local communities? Will she use her influence with her beloved Wandsworth council to persuade it not to cut two of the law centres in the borough?
  The Prime Minister: How the Wandsworth council disburses its income is a matter for the council. I feel certain that the hon. Gentleman will put his point to the finance committee.
  Mr. Farr: Will my right hon. Friend have time to fit into her itinerary today a visit from the National Indian Brotherhood from Canada? About 300 delegates are visiting this country. My right hon. Friend might care to know that they wish to give her a message and that they are bearing gifts.
  The Prime Minister: I am sorry to have to refuse my hon. Friend's request. If they are bearing gifts, it is important that I do. Otherwise it might be misunderstood.

BUSINESS OF THE HOUSE
Mr. James Callaghan: Will the Leader of the House please state the business for next week?
The Chancellor of the Duchy of Lancaster and Leader of the House of Commons (Mr. Norman St. John-Stevas): The business for next week will be as follows:
MONDAY 9 JULY and TUESDAY 10 JULY—Completion of Committee stage of the Finance Bill.
At the end on Tuesday, motion on the Customs Duty (Personal Reliefs) (No. 1) (Amendment) Order.
WEDNESDAY 1I JULY—Motions on Ministers' and Members' salaries, allowances and pensions.
THURSDAY 12 JULY—Remaining stages of the Education Bill.
FRIDAY 13 JULY—Private Members' Bills.
MONDAY 16 JULY—Remaining stages of the European Assembly (Salaries and Pensions) Bill.
Debate on the 1980 preliminary draft Community budget, when EEC documents 7633/79 and 5528/79 will be relevant.
Mr. Callaghan: I have read a report that next week the Foreign Secretary will make an important statement in another place about Government policy on Rhodesia. Will the Leader of the House give an assurance that a similar statement will be made in this House at the same time? I repeat the request that I made last week, that before the Prime Minister departs for Lusaka, in view of the important discussions that will take place and the danger of Britain's being isolated, we should have an opportunity to discuss the Southern African situation. I understand that a number of representations have been made by hon. Members to the Leader of the House relating to Wednesday's business on Ministers' and Members' salaries. Will the motions reflect the result of those discussions?
Mr. St. John-Stevas: I shall look into the question of the statement that the right hon. Gentleman raised. With regard to a debate on African affairs, I hope that I shall be able to meet his request. As for Wednesday's debate, I have

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had representations from right hon. and hon. Members. I realise that my last statement on the subject was received with something less than rapture. I hope that the motions will be received with greater satisfaction. They will be laid tomorrow. While sticking to the principles that the Government have enunciated, they will take into account the representations made.
Mr. Callaghan: I shall leave any comment on that matter until we see the motions. I revert to what the Leader of the House said about a statement, which is unsatisfactory. It is not sufficient for him to say that he will look into the question of a statement being made on Rhodesia next Tuesday. We believe that it is unfortunate that a Foreign Secretary should not be here to be accountable to this House. I must repeat my request to the Leader of the House and ask for an assurance that no statement will be made in the House of Lords that is not made in this House at the same time.
Mr. St. John-Stevas: There are two questions. With regard to the debate, I cannot go further than I have gone. With regard to the statement, I believe that it is the custom that statements are made in both Houses. I shall see that it is done on this occasion.
Mr. Latham: In view of the continuing unsatisfactory situation over parliamentary papers, will my right hon. Friend at least assure the House that it will know as much about this industrial dispute as it knows about virtually every other dispute? Can we be told at least who are the parties to the dispute and what steps my right hon. Friend is taking to solve it?
Mr. St. John-Stevas: It is a matter for my hon. Friend the Minister of State, Civil Service Department, but I am naturally keeping in close touch with the situation. It is a dispute involving the Institution of Professional Civil Servants, which is in dispute about certain gradings of scientific employees. We are doing our best to see that it is settled satisfactorily, but in these matters there are difficult obstacles to overcome.
Mr. Stephen Ross: In view of the Secretary of State for Industry's announcement on Monday on the possible future of the Post Office, is it not time that the
1558
House was given a chance to debate the long-published Carter report?
Mr. St. John-Stevas: I shall convey that view to my right hon. Friend.
Mr. du Cann: Is my right hon. Friend aware that if the Government are coming forward with fresh proposals on the remuneration of Members of Parliament and Ministers' remuneration which reflect the advice that some of us have tried to give, in the interests of the House as a whole, that will be warmly welcomed? Is he aware that it would be the opinion of the overwhelming majority of Members of this House that—however helpful may be the advice from the Government—a decision on these matters should be taken by Members of Parliament on a genuinely free vote? If he is to table motions, will they be tabled as soon as possible, so that we have the longest possible opportunity to study them?
Mr. St. John-Stevas: I am grateful for the remarks of my right hon. Friend. The motions will be tabled tomorrow. That will give adequate time for Members to consider them. The ultimate decision in these matters is for the House of Commons. I have made that plain all along. They are not new proposals. They have evolved.
Dr. McDonald: In view of the increasing use of computerised information about employees, will the right hon. Gentleman make sure that we have a debate soon on the report of the committee on data protection?
Mr. St. John-Stevas: I am aware of the importance of the report which the hon. Lady has mentioned. I am afraid that I cannot promise a debate before we rise for the Summer Recess.
Mr. Dudley Smith: Following his reply to my hon. Friend the Member for Melton (Mr. Latham), will my right hon. Friend advise his colleague to make a statement to the House next week about the supply of parliamentary papers? It is intolerable that Parliament should be inconvenienced in this way.
Mr. St. John-Stevas: Nobody is more concerned than I am about the matter. It is clear that for Parliament to function fully we must have the necessary papers. We have made emergency arrangements.

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I hope that we shall make progress in settling this dispute, but it takes two to settle a dispute.
Mr. Coleman: The right hon. Gentleman will no doubt have seen the report of the British Steel Corporation, and he will be aware of the concern about the steel industry. May we have an early debate on the steel industry before the House goes into recess?
Mr. St. John-Stevas: It would be difficult to guarantee that. I shall look into the matter.
Mr. McCrindle: Will the debate on the restoration of the death penalty, promised in the Conservative manifesto, take place during the week after next?
Mr. St. John-Stevas: I appreciate the concern of my hon. Friend. It is not customary to announce business two weeks in advance, but I assure my hon. Friend that the debate will take place before we rise for the Summer Recess.
Mr. William Hamilton: Does the right hon. Gentleman recognise that although next Friday is a day for Private Members' Bills debates, there is an important and highly controversial Bill on the amendment of abortion legislation? The Bill has not yet been printed. This creates great difficulties. Will the right hon. Gentleman consult the sponsors of the Bill to make sure that they take steps to see that hon. Members get copies of it in good time?
Mr. St. John-Stevas: I had noticed the subject of the Private Member's Bill. I shall consult the sponsors on the matter, as suggested by the hon. Gentleman. I had intended to keep away from them, for two obvious reasons.
Mr. Eldon Griffiths: Will my right hon. Friend revert to the important question raised by the Leader of the Opposition about statements made in the House of Lords by the Foreign Secretary? He will know that in the past, when there has been a Foreign Secretary in the Lords, it has been the invariable practice that statements are repeated in this House. In his reply to the right hon. Member for Cardiff, South-East (Mr. Callaghan) I am afraid that my right hon. Friend, perhaps inadvertently, said that he would ensure that this was done on this occasion.
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Will my right hon. Friend give a clear undertaking, so that there is no misunderstanding, that it will be the Government's normal practice to ensure that statements made in the House of Lords are made in this House at the same time?
Mr. St. John-Stevas: I can give my hon. Friend that assurance. I am grateful to him for enabling me to clarify the position and for providing suitable words—"the normal practice". I think that we are all rather nervous about using such words as "invariably" or "always" when we are in politics.
Mr. Leadbitter: Will the Leader of the House reconsider the urgent need for a debate on steel? Is he not aware that it is understood that the Government have reversed their policy on aids to the industry, thus allowing the Common Market to implement its code limiting aid and subsidies? The consequence will be to accelerate closures and cause greater hardship, making it urgently necessary that we have a debate before 23 July, when it is assumed that agreements will be made on those lines.
Mr. St. John-Stevas: As the hon. Gentleman will know, this is an extremely complex subject, and an important one. I shall look into the matter to see what can be done.
Mr. Bruce-Gardyne: May I revert to the subject of parliamentary papers? Does my right hon. Friend recall that last week, and I think the week before, he led us to understand that an early solution to the present problem would be found? It has not been. The interruption of the supply of parliamentary papers is nothing new; it has been going on for years. How long must it continue before we investigate the possibility of taking the printing of the papers out of the hands of the Stationery Office and entrusting it to private enterprise?
Mr. St. John-Stevas: My hon. Friend has rather misinterpreted what I said. I do not think that I ever said that an early solution would be found. I said that our best endeavours would be directed towards that end. I note my hon. Friend's point about changing the printing arrangements. We should have to consider very carefully before embarking on that course,

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because we might make the situation worse rather than better.
Mr. Skinner: Instead of having a motion on the Order Paper next Wednesday to increase the pay of Ministers and Members, will the right hon. Gentleman withdraw it and introduce another that allows old-age pensioners to have their increase brought forward to July, rather than having to wait until November? They need the money more than we do.
Mr. St. John-Stevas: I note what the hon. Gentleman says, but if I were to follow the course that he recommends I might gain one ally but I should lose a number of others.
Mr. Gummer: Will my right hon. Friend consider whether we may have a debate on the pig producing industry? Although the farming community is very pleased with what has been done by my right hon. Friend the Minister of Agriculture, Fisheries and Food so far, the industry needs a great deal of help. There is an emergency, and urgent action is needed.
Mr. St. John-Stevas: I am grateful to my hon. Friend for his tribute to the successes of my right hon. Friend the Minister of Agriculture, Fisheries and Food, I shall consider what my hon. Friend has said.
Mr. Rooker: Will the right hon. Gentleman arrange to make a statement next week so that he can tell the House by whose authority the updated copy of the Register of Members' Interests has been removed from the Library? This is an important matter. The majority of those on tire Register are still hon. Members.
Mr. St. John-Stevas: I shall certainly pursue investigations. It may be that there is no sinister explanation. The Register may merely have been borrowed.
Mr. Garel-Jones: Is my right hon. Friend aware that early-day motion 17, calling for a ban on the import of whale products and urging the Government to work for international agreement to bring about the end of the slaughter of whales on the high seas, has now been signed by nearly 100 right hon. and hon. Members on both sides of the House?
[That this House urges Her Majesty's Government to ban the import of all
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whale products and to work to secure a world wide ban on the slaughter of whales.]
As the International Whaling Commission is meeting in London on Monday and a statement of Government policy on the matter is expected, can my right hon. Friend assure the House that as soon as the statement is made we shall be given an early opportunity to debate it?
Mr. St. John-Stevas: I have seen the all-party motion on whales, tabled by my hon. Friend and others. It is a most important subject. I am a strong supporter of conservation, including that of animals. I am sure that the right course is for the Government to continue to work for the proper conservation of whales through the International Whaling Commission. We shall certainly note the conclusions of the important conference that is meeting in London on Monday.
Several Hon. Members rose—
Mr. Speaker: Order. I appeal to hon. Members not to argue a case but to ask a question as briefly as they can.
Mrs. Renée Short: The right hon. Gentleman appears to have made no progress in the setting up of Select Committees since last week. When will he?
Mr. St. John-Stevas: The hon. Lady is not quite correct. We have made considerable progress in the setting up of Select Committees. If the hon. Lady looks at the Order Paper today she will find that another Select Committee has been set up. If she is referring to the 12 new Select Committees, I can tell her that discussions are going on through the usual channels, and we hope to be in a position to table motions before the House rises.
Mr. Lawrence: Further to questions about the parliamentary papers, is my right hon. Friend aware that feeling, at any rate on the Conservative Benches, is very strong that the Stationery Office should be relieved of its monopoly in the matter? Otherwise, as my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) said, we shall go on and on with the problem, year in, year out. Would not the best way of resolving the strength of opinion in the House be to have a debate on the subject?
Mr. St. John-Stevas: It would be difficult to fit in a debate next week. I

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am well aware of the strength of feeling on both sides of the House at being deprived of the full service of papers. But we are all grateful for the efforts that have been made by the staff to keep us supplied with papers.
Mr. Cryer: Will the proposals on Members' salaries be linked in any way with full-time membership of the House, or will hon. Members be allowed to continue garnering their parliamentary adviser-ships and directorships? Will the debate cover the updating and publication of the Register of Members' Interests, which seems to have fallen by the wayside over the past two or three years? Does the right hon. Gentleman envisage any time being given to debating Department of Trade reports which are now gathering dust, such as the report on Keyser Ullmann?
Mr. St. John-Stevas: That was a curious assortment of questions, all put together by the ingenuity of the hon. Gentleman. The report in question is a matter for the Department of Trade. With regard to the Register of Members' Interests, I am considering what should be done, in the best interests of the House and the country. The hon. Gentleman would be over-optimistic if he considered that the question of employment outside the House would be the subject of the motions to be laid tomorrow. Members of talent can combine their duties here with employment elsewhere. It is not only individuals who may gain from that. I believe that the House as a whole benefits.
Mr. Wilkinson: As only one question at Prime Minister's Question Time on the last three occasions was on any subject other than listing the Prime Minister's business for the day, will my right hon. Friend seriously consider the commitment that he made this time last week to discuss in the appropriate quarters the format of Prime Minister's questions? Many of us believe that an intelligent and informative primary question is just as important as a clever supplementary one.
Mr. St. John-Stevas: It is a complex issue, which has already been considered by a Committee. Certain actions were taken by the Leader of the Opposition when he was Prime Minister which were not entirely successful in resolving the
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issue. We have returned to the status quo. Perhaps the best thing to do is to refer this matter to the new Procedure Committee when it is set up.
The practice of hon. Members themselves is important. If they are dissatisfied, they have the remedy in their own hands. My right hon. Friend the Prime Minister, who, by general consent is answering questions in such a brilliant fashion, has indicated that she is prepared to answer questions put to her by hon. Members.
Mr. Spearing: It has been announced that on Monday 16 July we shall discuss the further stages of the European Assembly (Salaries and Pensions) Bill, to be followed by a debate on the draft EEC budget proposals. As the proposals in the Bill—unlike the announcement at 3.45 a.m. on Wednesday about possible links between Assembly representatives and hon. Members of the House—are uncontentious, and the budget is a highly contentious and important matter, will the Leader of the House consider reversing the business so that we can consider the EEC budget first and the Bill second?
Mr. St. John-Stevas: I understand the hon. Member's opinion, but I cannot give him the undertaking for which he asks. I hope that the remaining stages of the Bill will be dispatched reasonably quickly. There will then be more time to debate the important budget proposals.
Mr. Cormack: Is my right hon. Friend aware that the state of this building is causing considerable alarm? Will he make a statement in the near future about cleaning the building?
Mr. St. John-Stevas: I assure my hon. Friend that he is safe. I agree that it would be a good idea to have the building cleaned, but perhaps this is not the most appropriate moment to increase expenditure in this way. It is a matter for the Services Committee, and I am considering it.
Mr. Hardy: I do not know whether any Conservative Member is safe. When are we to consider the Bill that the Secretary of State for the Environment appears to have promised, which will effect an astonishing transformation in the degree of control that central Government can exercise over local authorities' finances?
Mr. St. John-Stevas: I appreciate the hon. Member's interest in this matter, and I thank him for it. Such a Bill will not be introduced before the Summer Recess.
Mr. Nicholas Winterton: Is my right hon. Friend aware that, uniquely, I find that I am supporting the hon. Member for Wolverhampton, North-East (Mrs. Short) in pressing my right hon. Friend for the setting up of the new Select Committees? Is he aware that this is an urgent matter? Will he table a motion before the House rises for the Summer Recess so that the new Social Services Select Committee can continue its important inquiry into perinatal and neonatal mortality, which will save public funds and lives?
Mr. St. John-Stevas: We are proceeding expeditiously, and we hope that there will be developments soon. I am delighted to note the support that my hon. Friend is giving to the hon. Member for Wolverhampton, North-East (Mrs. Short). I hope that it is a case of supply and demand.
Mr. Greville Janner: In the tradition of cordial relations, may I support the question by the hon. Member for Staffordshire, South-West (Mr. Cormack) about the cleaning and restoration of this building? The Leader of the House said that the matter should be referred to the Services Committee. That Committee has recommended that the building should be cleaned because it will cost millions of pounds more if the job is left undone any longer. May we at least have a debate on the subject?
Mr. St. John-Stevas: I note what the hon. and learned Gentleman has said. It would be excellent if it could be done within the parameters of the public expenditure reductions to which the Government are committed. I recall the way in which Paris was transformed by M. Andre Malraux, who was Minister for the arts and was responsible for the buildings being cleaned. It may prove to be an economy in the long run if the Palace of Westminster, which is one of the finest nineteenth century building in existence, were cleaned.
Several Hon Member rose—
Mr. Speaker: Order. I propose to call the four hon. Members who have
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been trying to catch my eye, and nobody else.
Mr. Kenneth Lewis: Will the Leader of the House consider linking parliamentary salaries to the salaries of those who produce our parliamentary papers when they are not on strike? They receive good pay—rather better than ours.
Mr. St. John-Stevas: That would not be a suitable linkage, because hon. Members' productivity is much higher.
Mr. Christopher Price: Does the Leader of the House think that one all-night sitting is sufficient for the remaining stages of the Education Bill? Since that Bill is designed mainly to preserve the 11-plus examination in the constituencies of the Chief Whip and the Home Secretary, will the Leader of the House arrange for them to be on the Front Bench all night to listen to the debate?
Mr. St. John-Stevas: My right hon. Friend the Patronage Secretary is most assiduous in his attendance in the Chamber and the House generally. My right hon. Friends and I, like the poor, are always with hon. Members. I imagine that the possibility of an all-night sitting is more of a threat than a promise. I hope that since an entire day has been allotted to the remaining stages of this short Bill it will be possible to dispose of it before the dawn breaks.
Mr. English: May we he assured that the Select Committees that concern the House will be appointed before the Summer Recess? I am talking of those Select Committees on Broadcasting, the Register of Members' Interests and the House of Commons Commission.
Mr. St. John-Stevas: These matters are not entirely within my control, but I shall do my best to ensure that those Committees are appointed.
Mr. Canavan: May we have a statement next week about an investigation into the £2 million, Government-backed underwater training centre at Fort William, in view of the Glasgow Herald and BBC reports about inadequate safety and faulty design standards? Is the Leader of the House aware that the chairman of the operating company, who has pocketed £24,000 in the past couple of years, is a former Tory Minister—the hon. Member for Honiton (Mr. Emery)?
Mr. St. John-Stevas: I am sure that my hon. Friend, who is chairman of that body, is earning his salary. I shall look into the other matter urgently.
Mr. Newens: Last week the Leader of the House intimated that he hoped to be able to make an announcement today on the rearrangement of Question Time so that more time could be devoted to foreign affairs, other than European affairs. Is he able to make good his promise?
Mr. St. John-Stevas: I am pursuing this difficult and delicate matter. Opinions and interests of different hon. Members and different Departments have to be reconciled harmoniously. I hope to bring the negotiations to a successful and happy conclusion and make an announcement next week.
Mr. Winnick: Has the Leader of the House seen early-day motion 78—"Tory Inflation and the Building Societies' Interest Rates"?
[That this House considers that any increase in the present mortgage interest rates would be a further blow to living standards after the very inflationary steps undertaken by the present Government; and therefore calls upon the Secretary of State for the Environment to urge the building societies not to increase their interest rates.]
Should we not have a debate on this matter, which could adversely affect a large number of people who are struggling to buy their own homes? Since the Tories are supposed to be so keen on owner-occupation, surely the Leader of the House will provide time for a debate.
Mr. St. John-Stevas: I agree that it is a most important matter for millions of people throughout the country, but since the Government believe that the building societies should be able to cope with the present situation without raising the mortgage interest rate, I do not think that it would be right to have an immediate debate.
Mr. Allen McKay: In view of the energy crisis, does the Leader of the House not feel that we should debate the situation with a view to bringing all energy sources under one umbrella, with a co-ordinated fuel policy, which would conserve fuel and give the country a lead?
Mr. St. John-Stevas: I do not think that the hon. Gentleman's suggestion about co-ordination, interesting though it is, is a matter for me, though I shall certainly refer it to my right hon. Friend the Secretary of State for Energy. I am keeping the situation under review, and we may be able to have a debate on the subject. However, there are conflicting claims by equally urgent matters.
Mr. Michael Hamilton: On a point of order, Mr. Speaker. Reference was made to my hon. Friend the Member for Honiton (Mr. Emery). Were you given notice of that reference, or was my hon. Friend given notice? If not, will you require that allegation to be withdrawn?
Mr. Canavan rose—
Mr. Speaker: Order. I shall give the hon. Member for West Stirlingshire (Mr. Canavan) an opportunity to speak in a moment. I listened very carefully, and as far as I could gather there was no reflection on the personal honour of the hon. Member for Honiton (Mr. Emery). If such a reflection was implied or meant, it would be required to be withdrawn. Mr. Canavan.
Mr. Canavan: I am quite happy to leave the matter there, Mr. Speaker.
Mr. Cryer: On a point of order, Mr. Speaker. Earlier I raised the point about Members' interests. It seems to me that there is a general rule that where certain Members of Parliament—mostly Conservative Members—choose to line their pockets with the proceeds of directorships and parliamentary advisers' posts outside, which are sometimes the subject of public comment in Department of Trade reports, newspaper reports and in other ways when their companies get into financial difficulties, other hon. Members have a right and a duty to comment on those affairs. The fact that some Members of Parliament choose not to devote their full time and attention to matters here—although their constituents generally have to in their jobs—should in no way inhibit an hon. Member from bringing to bear in the House of Commons full and fair comment on those hon. Members and their companies.
Mr. Speaker: I always deprecate personal references—[Interruption]—yes, I

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do, because I think that general arguments of principle can be pursued without personal references. However, if there is—
Mr. Skinner: Mr. Speaker is right.
Mr. Speaker: Order. If the hon. Member for Bolsover (Mr. Skinner) cannot be quiet, perhaps he would like to leave.
It is very important that any reflection on the honour of an hon. Member must be withdrawn at once. I gather that there was no reflection on the honour of the hon. Member for Honiton.
Mr. Alexander W. Lyon: On a point of order, Mr. Speaker. You will have heard the assurance given by the Leader of the House, reiterating the Prime Minister's undertaking that she was willing to answer questions at Prime Minister's Question Time on any subject of Government policy. May we have an assurance that the Table Office will note that undertaking and will not stop hon. Members from tabling questions to the Prime Minister on any subject?
Mr. Cormack: Further to that point of order Mr. Speaker. Is it within your competence to instruct the Table Office that if it is selecting questions to the Prime Minister and it has selected a question asking about her engagements for the day it should not select another identical question to follow it?
Mr. Speaker: Order. Whatever questions are submitted are put into the general shuffle and if substantive questions come out early so be it. That is all to our advantage. However it seems that there are many more open questions and that they have been coming to the top in the shuffle.
Mr. James Callaghan: Further to the point of order, Mr. Speaker. Just for the sake of clarity may I ask whether you have been notified or whether the Table Office has been notified by the Prime Minister that what seemed to be a casual remark was really meant—namely, that she is prepared to answer questions on any subject? If that is so, it would clearly mean that hon. Members would be able to put down questions on a wide range of subjects and would transform Question Time into something much more interesting. Of course, what her Ministers would
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say about that would be another matter. Have you any information on this point. Mr. Speaker?
Mr. St. John-Stevas: Further to that point of order, Mr. Speaker, may I add a little information to what I have said? I think that my right hon. Friend the Prime Minister was expressing her willingness to respond to a change in the manner of questioning her. She was not, however, saying that she would undertake to answer questions for all her Ministers.
Mr. Callaghan: May I ask the Leader of the House what he means?
Mr. St. John-Stevas: The Leader of the Opposition may ask me what I mean, but may I suggest that he should address his remark to the Prime Minister?
Several Hon. Members rose—
Mr. Speaker: Order. If I may answer the Leader of the Opposition, I have not received any notification other than the statement made on the Floor of the House.
Mr. Callaghan: Further to that point of order, Mr. Speaker. I am not trying to be tiresome, but may I ask what will be the practice of the Clerks if they receive such questions—as they may well do in the light of that remark and the failure of the Leader of the House to explain what it meant—over the next few days until the issue is cleared up? Will the Clerks be ready to accept any question that is put down on any subject that is appropriate to be put to any Minister?
Mr. Speaker: As the Leader of the Opposition knows, the Minister who is answering has a decision to take in this matter. He knows that well. He has been a Minister. The Clerks will accept questions that are in order to go on the Order Paper. I can say no more.
Several Hon. Members rose—
Mr. Speaker: Order. I am prepared to take two further points of order, and then we must move on.
Mr. Rooker: Further to that point of order, Mr. Speaker. In order to avoid confusion and the wasting of time on Monday, may I point out now that another Minister is in the same position as the Prime Minister? I refer to the

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Paymaster General, who has a very wide brief. I tabled a substantive question to him asking whether he was satisfied with the co-ordination of Government information on social services. It came out as the first question for the five minute question session on Monday. However, that question was immediately transferred to the Department of Health and Social Security. We are therefore in precisely the same position with the Paymaster General as with the Prime Minister, and the Leader of the House may wish to bear that in mind, otherwise we shall waste time next week as well.
Mr. Alexander W. Lyon: Further to the point of order, Mr. Speaker. This is not simply a question of the Table Office, accepting questions that are in order. The important point is to discover what is in order. In the past the Table Office has indicated that it will not take questions on a subject on which the Prime Minister has indicated, through the usual channels, that she will not be questioned. As I understood the Prime Minister's statement the other day, she was removing that blockage. We are anxious to find but whether it is she or the Table Office that will block these questions. It therefore becomes a matter for the House if the Table Office is to say that it will take questions on any subject and then leave it to the Prime Minister's Office to decide on which subjects she will be questioned.
Mr. Skinner: Further to the point of order, Mr. Speaker. It is most important that this matter is cleared up today. Hon. Members have only eight chances for oral questions in any given fortnight. They use them as they please, according to their taste. The possibility that an hon. Member may have his question transferred by the Prime Minister at the last possible moment means that he could lose his place in the queue. It is most important that this matter should be cleared up so that we know precisely what the bounds are. If one tables a question about the Prime Minister's official engagements, that will look inane on the Order Paper if it is repeated about 30 times, but an hon. Member has to do that to be sure that his question will get past the post. We are therefore now in a position where it seems that some questions can be accepted, but hon. Members
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cannot be sure which they are. Such questions might be all right by the Table Office, which will allow them to go forward, but the Prime Minister then has the option, when the question has reached a reasonable position, to throw it out. That means that some hon. Members can have their questions withdrawn. It is most important that the Leader of the House should make the point abundantly clear one way or the other.
Mr. St. John-Stevas: Further to the point raised by the Leader of the Opposition, Mr. Speaker. I cannot reply wholly for the Prime Minister. Perhaps it would be satisfactory to the right hon. Gentleman and to the House if I were to convey to the Prime Minister the exchange that has taken place so that she can convey to me, and to the right hon. Gentleman, what it was she intended to convey by that remark.
Mr. James Callaghan: I think that that is the best way of proceeding. It would be very helpful, if I am still in order, Mr. Speaker, if the Prime Minister, or the Leader of the House, could make a statement on Monday, for the benefit of the House, so that we can know what questions will be accepted. Let me add that it will be very difficult to define.

STATUTORY INSTRUMENTS &c.
Mr. Speaker: By leave of the House, I shall put together the Questions on the two motions.
Ordered,
That the draft Shipbuilding (Redundancy Payments Scheme) (Great Britain) (Amendment) Order 1979 be referred to a Standing Committee on Statutory Instruments. &c.
Ordered,
That the draft Shipbuilding (Redundancy Payments Scheme) (Northern Ireland) (Amendment) Order 1979 be referred to a Standing Committee on Statutory Instruments. &c.—[Mr. St. John-Stevas.]

SCOTTISH ESTIMATES
Ordered,
That the Estimates set out hereunder be referred to the Scottish Grand Committee:—

Class IV, Vote 6, Trade, Industry, Energy and Employment (Scotland).

Class VI, Vote 1, Roads and Transport Services (Scotland).

Class VII, Vote 1, Housing, Scotland.

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Class VIII, Vote 2, Other Environmental Services, etc., Scotland.

Class IX, Vote 7, Law, Order and Protective Services (Grants and Miscellaneous) Scotland.

Class X, Vote 2, Education, Libraries and Arts (Scotland).

Class XIII, Vote 25, Other Services, Scottish Office.

Class XVII, Vote 2, Rate Support Grants to Local Revenues, Scotland.

Class XVIII, Vote 4, Rate Rebates Grants to Local Revenues, Scotland.—[Mr. St. John-Stevas.]

FINANCE BILL
Considered in Committee. [Progress 4 July.]
[Mr. BERNARD WEATHERILL in the Chair]

FINANCE BILL
  Clause 4

    CONTINUATION OF REGULATOR POWERS
    Question proposed, That the clause stand part of the Bill.
    4.12 p.m.
    Mr. Denis Healey: It is traditional to treat the debate on the regulator clause as the opportunity for a general discussion on the economy, and I gather from what the Chief Secretary said the other day that he would be glad to follow that precedent today. It is particularly important to have that debate this year because since we last had a general discussion of the economy we have had the decision of the OPEC countries to raise the price of oil and the meeting of the Heads of Government at the Tokyo summit. I start with these two issues because the international environment in which our own economy has to operate is exceptionally important now.
    Even before the OPEC summit we had had the most sombre warnings from the international organisations most directly concerned, about the effect of the likely movement of the price and supply of oil on the world economy. The International Energy Authority, for example, had warned us that we would all face a cut in real income in what it called "a decade of austerity". It went on to say, perhaps in excessively dramatic terms, that there was no known way of meeting the worldwide demand that there would be for energy in five years' time.
    The European Commission talked of a decade of "brutal structural change", and of large scale social and economic crisis unless the necessary steps for dealing with the situation were taken in time. Since then we have had the meeting, in Geneva, of the OPEC countries which, I think the Chief Secretary will agree, has essentially validated a change in the price of oil which had already been brought about by the international markets. They simply restored the price of oil, in real terms, to the level at which it stood in 1975.

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    But although the increase in oil prices announced in Geneva was much smaller, in percentage terms, than we saw in 1973–74, in money terms it was almost as large. That means that its effect on world inflation and world growth will be similar to the effect of the oil price increase in 1973–74. As I shall shortly argue, I think that the increase in oil prices this year is likely to impose even greater strains on the world's financial mechanisms.
    What disappointed me about the Tokyo summit was that it largely evaded the issues of the effect of the oil price increase this year on inflation and growth on the world's currency system, and concentrated almost all its attention on trying to reach some agreement on restricting the consumption of oil. But even that agreement, in so far as one was reached, recorded and communicted in Tokyo, was ambiguous and equivocal. It was full of reservations and escape clauses. As my right hon. Friend the Leader of the Opposition pointed out the other day, almost every country chose a different base year, and a different target year for its reduction in oil consumption.
    I understand—and I hope the Chief Secretary will clear this up—that the United States, Canada and Japan disagreed with the European countries at the summit on whether North Sea oil, for example, was included in the base year in the various cases. So far as I can follow the communique, for 1980 the European Governments promised to maintain 1978 levels of oil imports and use whereas Canada, Japan and the United States promised to maintain 1979 levels. But for 1985 Europe promised to maintain the 1978 levels whereas the United States committed itself to maintain 1977 levels and Canada and Japan adopted complex numerical formulas which I must confess I find it difficult to follow precisely.
    One thing is quite clear. There was no agreement in Tokyo on the distribution of European energy saving between the various members of the Community because, indeed, the European Community had agreed a week earlier that it would not adopt independent national targets. I suppose that the British Government, like the other European Governments represented at the summit, have still got to sort that out with their colleagues
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    when they meet at the summit, I think, in November. Italy adopted a formula which gave her almost a complete let-out by saying that she would accept a target status within the overall committment of the Community.
    The serious question I put to the Chief Secretary is this. How are the countries represented at the Tokyo summit to achieve the reductions of energy use to which they committed themselves, and will those reductions be sufficient? The only sensible way of achieving these reductions is, to quote the words of President Ortoli of the European Commission;
    "To plan and act for brutal structural change".
    For example, we should be prepared to finance, through Governments, the development of new technologies which are less energy-intensive such as the technology of microconductors. We ought to have more public investment in the coal industry, to which the Tokyo summit gave prime importance, more Government investment in the nuclear industry and more Government investment in public transport.
    I see from today's newspapers that the German Government have committed themselves to specific action in all these areas in a statement made yesterday. There is no sign that the British Government are prepared to accept any of the responsibilities which I believe are implied in the Tokyo communique. The German Government are already spending more in subsidising their coal industry than we are spending on subsidising all our nationalised industries put together. But when the Prime Minister was questioned about this the other day she was very cool indeed about giving any additional assistance to the coal industry. She concentrated all her attention on the nuclear industry which was given secondary importance in the Tokyo comunique.
    What worries me most about that communique, and about the interpretation which the right hon. Lady put on it, is that it seems to be relying essentially on a fall in the rate of economic growth in the countries concerned to achieve the reduction in the use of oil. Worse still, it relies not only on a fall in the rate of growth, but on an absolute fall in output world wide and in trade world wide.

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    And even this absolute fall in world output and world trade is intended, so far as I follow it, to achieve simply a 5 per cent. cut in the use of energy, the 5 per cent. cut to which the members of the International Energy Authority committed themselves earlier this year.
    But there is no guarantee whatever that a cut of 5 per cent. in energy use will be sufficient to limit the power of the OPEC countries to exercise their monopoly in this field to increase prices further. Any one OPEC country can increase the bargaining power of the group as a whole by cutting output further, as, I understand, Colonel Gaddafi appeared to suggest he might do a few days ago.
    Moreover, as Prince Yamani pointed out in a very interesting speech given in London, I think, after the Geneva conference, the oil produced by the OPEC countries is produced in areas of immense political instability, and in these areas war or revolution could cut oil output worldwide by some 3 million barrels a day—"as well it may"—to quote Prince Yamani's words as reported in the Financial Times. He went on to add that if there was an interruption in the supply of oil of this size, which is about twice the reduction in supply which we got from the revolution in Iran a few months ago, the price would quickly rise to $50 a barrel, in other words, more than double the maximum price increase which was authorised by the OPEC countries in Geneva last week.
    It seems to me that in this situation we need desperately to open a structured dialogue between the oil consumers and the oil producers for long-term stability in both the price and the supply of oil. There was the opportunity for such a dialogue in 1974, but it was missed at that time because the United States Administration then believed in the power of the market to achieve everything that was needed. It was seduced by the arguments of Professor Milton Friedman, and I think it worth quoting his words since I know that the Chief Secretary attaches immense importance to his most casual observation. Professor Friedman wrote in Newsweek in April 1974:
    "In order to keep prices up the Arabs would have to curtail output to zero. They would not for long keep the world price of crude at ․10 a barrel. Well before that point the cartel would collapse."
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    It is sad to look back on what has happened and on the visible impotence of the market to achieve the results which are required in this respect. So far as I know, no Government in the world still believe in the power of market forces to balance the supply and the price of oil in this way, although the right hon. Lady and, I think, the Chief Secretary still basically believe in the theories of Professor Friedman in this regard. If the right hon. Gentleman disagrees, I hope that he will tell us what he really does believe.
    The problem is that it will be much more painful and difficult to organise a dialogue between the oil consuming and producing countries now in 1979 than it was in 1974 because neither the consumers nor the producers will find it easy to get a common position on the issues or, indeed, to make an agreement stick. Even since last week, for example, we have seen that President Carter has had to delay for an indefinite period his own statement on how to implement the undertakings which he made at Tokyo, and the Nigerian Government have already decided to ask the oil companies to pay the spot price for all the oil which they buy from Nigeria.
    Moreover, it is certain that the OPEC countries would in such a dialogue raise political problems which concern them both in Africa and in the Middle East, and there is bound to be continuing uncertainly and disagreement about the precise role which the developing countries would play in such a dialogue.
    Nevertheless, I believe it to be essential that we should try to develop a dialogue between the oil consumers and producers if we are to achieve any longterm stability in the price and supply of oil. I hope that the Chief Secretary will be able to tell us precisely how Her Majesty's Government intend to approach the problem.
    Until we get agreement in such a dialogue—so far, no such dialogue is even contemplated, as far as I am aware—I believe that the whole world will continue to face a high risk of a further increase in the price of oil this year, perhaps in three months' time when the OPEC countries have their next meeting, as they decided to do in Geneva the other day.
    But what worries me most of all about the proceedings in Tokyo is that no real

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    thought seems to have been given at the summit to how to deal with the effect of the increase in oil prices which has already taken effect, quite apart from any further increase in oil prices which we may have to face in the coming months or years. I shall offer the Committee a few reflections on the areas where I think there will be common ground between both sides, since the increase in oil prices is bound to have some effect on the world environment in which our own economy operates.
    Obviously, it is impossible in practice, though one can invent ways in theory, to protect any of the consumer countries against the domestic price inflation which will follow from the higher world price of oil. But I must put again to the right hon. Gentleman the question that we debated at some length yesterday in proceedings on earlier clauses of the Bill. Do we have to add to the increased price of oil in all our countries—the increase which is the inevitable consequence of the higher world price—further increases in price generated by increases in the tax on oil?
    There is very little evidence to show that increases in the price of oil will have more than a short-term effect on the demand for oil. Perhaps I may say in passing that, as Chancellor of the Exchequer, I found the same to be true of tobacco. One puts up the price of cigarettes, there is an immediate effect on the consumption of cigarettes, but within a few months consumption reverts to its earlier pattern. This seems to be true also for the demand for oil.
    Mr. Alexander W. Lyon: Did my right hon. Friend note last night that in one of his speeches the hon. and learned Member for Dover and Deal (Mr. Rees), Minister of State at the Treasury, gave the factor of an increase of X per cent. reducing oil demand by 0·2X per cent., which in the circumstances would be infinitesimal?
    Mr. Healey: Yes, I did notice that, and I entirely agree with my hon. Friend that if the hon. and learned Gentleman were right about that it would be an infinitesimal effect on demand in return for a very substantial effect on the cost of living and inflation in our country.
    My own view—I think that it is the view of all of us on these Opposition
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    Benches, including the Liberal Party as well as the Labour Party—is that to inflict as a Government, as the present Government are doing, a gratuitous further increase both on industrial costs and on inflationary pressures by an increase in the taxation of oil is bound to be counter-productive when all the possible effects are balanced out.
    I put this question also to the Chief Secretary. How will the OPEC countries react to a situation in which the consumer countries, already complaining bitterly about the increase in the world price of oil, deliberately increase the price still further by their own action? Are not the OPEC countries liable to say "If the consumer countries are prepared to take a further increase in the price of oil, why should not we get the revenue from it by increasing the world price further instead of leaving it to them, the consumer countries, to increase the domestic price by domestic taxation?"
    I am convinced—we argued this yesterday and put forward an amendment on the matter which was defeated by the Government—that it would be much better to do as the German Government are now considering, as reported in the Financial Times today, that is, to offset any increase in oil prices by a cut in the duty on motor cars—in our country, the vehicle excise duty—which, indeed, the last Labour Government planned to do but with which, I understand, the present Government have decided not to proceed. I hope that the Minister, who did not have the opportunity of intervening on this matter yesterday, will give us his personal view.
    Would it not be much wiser to follow the example which the previous Government set, and which the German Government are now considering following, namely, offsetting any increase in the duty on petrol by a reduction in the vehicle excise duty so that the whole transaction has no net effect on inflationary pressures through the retail price index?
    4.30 p.m.
    The most worrying problem that arises from the increase in oil prices is how the Governments of the world can reduce the effect of the increase on the growth of the world economy. The increase in oil prices in 1973–74, which in

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    economic terms was roughly similar to the present increase although in percentage terms much larger, produced the deepest world recession since the 1930s. I think that most observers accept that the effect of the increase this time could be worse.
    Between 1973—the first oil price increase during the Yom Kippur war—and 1978 the OPEC countries managed to spend their additional revenues extremely quickly, much faster than any of us at the time believed would be possible. Their surplus shrank from $64 billion in 1974 to $15 billion in 1978. The OPEC surplus last year was less deflationary in its effect on the world economy than the combined surplus of Japan, Germany and Switzerland. However, it would be unwise to assume that the OPEC countries will be able this time to mop up their additional earnings so quickly. There is evidence in many of the OPEC countries that the limits of digestion have been reached. The first great spurt of industrialisation has already taken place.
    Secondly, all the OPEC countries have good reason to fear the effects on their domestic inflation of trying to spend so much money so fast. It is reasonable to believe, as some experts have estimated, that the oil-producing countries are liable to have a surplus of about $45 billion in the next few years beyond that which they can absorb internally. What will happen to that enormous surplus, which is a reduction in world demand of $45 billion?
    Last time the private banking system carried the main burden of recycling the surpluses, especially to the developing world. However, as a result of what has happened in the past five years, many developing countries are having continually to borrow new money to service their existing debt. Many of them do not want to have to borrow even more to increase the burden of debt that they already carry. Moreover, many of the private banks that played a central role in the earlier recycling process have reached, if not exceeeded, the prudential limits of their borrowing which would be set by their central banks.
    One reason for the mushroom growth of the Euro-currency markets is that it is a way by which private banks may evade
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    prudential limits set by their own national monetary authorities.
    On top of the problem that it is unlikely, to put it no higher, that the private banking system can recycle the new oil surpluses to the same degree, there is evidently much less disposition by the oil-producing countries to deposit their surpluses in the United States. The rate of inflation in the United States is already approaching 15 per cent. a year. The dollar has been falling steeply for some time. After a six months' armistice, it shows signs of falling again in world terms. Therefore, the OPEC countries are likely to look for other places to stash their funds.
    According to the newspapers, some of them are even talking of ceasing to denominate oil in dollars and demanding payment in a basket of other currencies that will be less susceptible to depreciation. The Chief Secretary will know that if that tendency develops—there is no reason to think that it will not—the world is liable to face the risk of a new wave of currency instability, at a moment when it appeared to be escaping from the last wave of instability.
    Against that background, it is vital that the International Monetary Fund develops a potential mechanism for coping with the problem of recycling the OPEC surpluses. Surely the Community could take the lead, as we did in 1975. I regret that there was no sign in the communique issued after the Tokyo summit even of an awareness of the problem, never mind any intention to try to deal with it. I hope that the right hon. Gentleman will tell us that the British Government are at least aware of the problem of developing official mechanisms for recycling oil surpluses and that they are prepared to take some initiative.
    As a person with a little experience in this area, I must tell the right hon. Gentleman that if we miss the opportunity of a decision at the meeting of the interim committee at the end of September in Belgrade, it is unlikely that anything will be done for another six months. By then the currents may be set in a direction which makes the problem much more difficult to solve.
    I turn to the problems faced by the United Kingdom economy in the light of the problems created by the increasing

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    price of oil and the decreasing supply. We are—the right hon. Lady the Prime Minister has clearly demonstrated that she is aware of this—cushioned from the balance of payments effect of the oil price increase because we are producing enough oil in the North Sea to meet, or pay for, our own needs for oil. On the other hand, because we are more dependent on world trade than most other countries, we are liable to suffer more than they are from the effect of the oil price increase on world trade.
    The gloomy forecasts that the right hon. Gentleman and his colleagues put during the Budget debates did not take account of the recent increase in oil prices. Do the right hon. Gentleman and his colleagues in the Government believe any longer that we are likely to expand the volume of our exports by 5½ per cent. in the current fiscal year? If they do they are alone in the world in holding that view.
    Let us consider the problems that we face. Everybody throughout the world is now expecting a lower growth in world trade than most expected a few months ago. We must also expect much fiercer competition for what growth there is in world trade. For example, Japan will find it impossible to pay for a reduced level of oil imports without much greater exports world wide of manufactured goods. It is already apparent that Japan will concentrate the main thrust of its new export drive on Europe rather than the United States.
    Meanwhile, the United Kingdom is quickly losing competitiveness. It is clear from the assumptions that have been published by the Department of Health and Social Security to explain its uprating proposals in the coming year that the Department is assuming an increase in the growth of earnings in the coming year of 16 per cent. for the third year running, although productivity in Britain is rising at 2 per cent. per annum as an absolute maximum. If the right hon. Gentleman disagrees with me, no doubt he will produce different figures.
    The Government appear to have no policy for dealing with an increase in wage costs of that order, except that we understand, though only from leaks in the newspapers, that the Government may start general discussions with employers and trade unions in the autumn, not about
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    wages but about the economy in general. Talks in the autumn will be too late to affect the outturn of the next wage round. That is determined by settlements that take place in August and September.
    It is worth looking at some of the unofficial financial forecasts that have poured off the presses since the Budget. They were made by various private bodies before the latest increase in OPEC prices. A striking feature is that the forecasts convey a picture of inspissated gloom, irrespective of the economic theories espoused by the various groups concerned. We are all familiar with the view of the Cambridge School of Applied Economics that we face a downward spiral of growth. Economic Models takes a different view of economic matters, but tells us that there will be no growth in our economy for at least two years.
    A Financial Times survey of consumer confidence published yesterday shows consumer confidence at its lowest level since the crisis of late 1976. I hope that Conservative Members will ponder the striking fact that pessimism is highest among those who stand to gain most from the Budget income tax cuts. The Financial Times reported:
    "The survey shows that the biggest switch from optimism to pessimism among consumers has come among ABC-1 men—those in professional and executive jobs—who stand to gain most from the Budget's income tax cuts. Their consumer confidence index has dropped a dramatic 60 points—from a positive index of 27 per cent. to a minus 33 per cent. in one month. All four social classification subgroups have dropped from a positive to a negative figure this month."
    The Chief Secretary smiles a little quizzically. Is he trying to laugh the matter off? He must know that confidence is the name of the game in economic management and this type of pessimism, justified or not, tends to be self-fulfilling.
    The most interesting forecast is that of ITEM—the Independent Treasury Economic Model Club—which uses the Treasury model. That has reached appalling conclusions, but it explains its difference from the Treasury forecast exclusively in terms of a different judgment on the outlook for export growth, which is the central variable on which I asked the Chief Secretary's opinion a moment ago. The Treasury may justify its modified gloom only on the assumption of 5½ per cent. increase in the volume of exports

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    this year. Does the Chief Secretary still believe that? I can see he does not, not for one second. It is written on his face in lines of granite.
    4.45 p.m.
    When I was Chancellor of the Exchequer I remember a gentleman by the name of Mr. Peter Riddell who had an extraordinary ability either for guessing or obtaining Treasury views. That young man had an extraordinary talent, if I may pay him that compliment, although I do not know whether he is aware of our discussions. He reported in the Financial Times this morning that the Chief Secretary has submitted a paper to that famous Public Expenditure Survey Committee, which my right hon. Friend the Member for Llanelli (Mr. Davies) knows so well, suggesting that there would be little or no growth in total United Kingdom output for the next few years and possibly in the lifetime of this Parliament.
    In the next three or four years there will be a steady and dramatic growth in the volume output of North Sea oil. There will be even higher growth in the value of North Sea oil because its price will rise with world oil prices. No increase in the growth of the economy for several years will mean a catastrophic fall in output in the rest of the economy, in manufacturing and probably in the services. That would be a difficult problem for any Government, whatever policy they chose to adopt. Our complaint about the Government's policy is that they are inflicting wounds on the economy by their own budgetary measures which will make the problems more difficult to deal with. I forbear to twist the bayonet in wounds that the Chief Secretary is carrying and which are suppurating before our eyes.
    The Chief Secretary to the Treasury (Mr. John Biffen): They are stigmata.
    Mr. Healey: We all like the Chief Secretary, but I have never thought that he saw himself as Jesus Christ. I see him as one of the minor martyrs and I have no doubt that he will fulfil that role with immense distinction—I suspect in the months rather than the years ahead.
    The Chief Secretary admitted a few days ago that the increases in indirect taxation will raise the retail price index
    1586
    by about 4 per cent. The Bank of England confirmed that. On top of that the cuts in public expenditure, the increase in public charges and the increase in mortgage rates will add another 1 per cent. or 2 per cent.
    The central problem is that if the Government fix a target growth for sterling M3 of 9 per cent. for the current year and commit themselves to reduce that figure year by year—and the Financial Secretary has nailed himself to that cross again recently—the economy will be subjected to a vicious monetary squeeze while the rate of inflation is being increased by the Government's actions to 18 per cent. or more. The same is true of a public sector borrowing requirement of £8·3 billion, when the rate of inflation is being raised to 18 per cent. or 20 per cent.
    I ask the Chief Secretary to reflect and comment on the astounding fact that the Government are using higher taxes to push up prices and using higher interest rates to bring down prices again. That is the economics of the madhouse, but it is the policy to which the Government have committed themselves. One result is that we shall probably face next week an increase in mortgage interest rates to 13 per cent. I repeat the figures for the benefit of the horizontal hon. Member for Knutsford (Mr. Bruce-Gardyne), who is wagging his head at me. The hoary locks are swinging in the breeze.
    A family on £100 a week with a £10,000 mortgage will lose 75p a week of mortgage relief as a result of the cuts in the standard rate and then lose another £1·70 per week through the increase in the mortgage interest rate to 13 per cent. That family will lose £2·45 a week as a result of the Government's monetary policy, which merely covers the whole of the tax relief. On top of that, leaving aside the increases in public charges, it must pay £1·90 a week in increased VAT, according to the Government's figures.
    The right hon. Lady made it clear this afternoon that there will be no cut in the minimum lending rate. Instead she will try to henpeck the building societies into keeping their interest rates steady, against their own interests. I can see that henpecking will be the equivalent of jawboning in our economy for the immediate future. It is no good arguing with the building societies. The right hon. Lady

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    can offer no honest prospect of a fall in interest rates as long as the Government stick to their current targets for monetary growth against an inflation prospect such as we have today.
    A further consequence of the contradiction between the Government's budgetary and monetary policies is that we shall increase the attractiveness of the United Kingdom as a haven for the world's footloose funds. I well understand the Chancellor welcoming this in an ambiguous answer to a recent planted written question about the virtues of rocketing exchange rates. The inflow of foreign funds last week triggered off investment into gilts in the United Kingdom and saved the Government from a funding crisis that was extremely worrying when we discussed these matters last Wednesday. I understand that the right hon. and learned Gentleman takes pleasure in the fact that the 5 per cent. increase in the world value of sterling since the Budget may cut almost enough off the retail price index in the coming year to offset the effect of the increase in oil prices. If he takes that element in Treasury arithmetic seriously, he must also take seriously the other element in Treasury arithmetic that I well recall from my period in the Treasury. A 5 per cent. increase in the value of sterling will cut 1·2 per cent. off the growth rate within two years. We face a serious contradiction between those elements of Government policy.
    I know that the right hon. and learned Gentleman, perhaps more than any of his colleagues in the Government, is hoping to resolve this problem by abolishing exchange controls. He knows from his experience since the Budget that a relaxation of exchange controls is likely to have the reverse effect in the present situation—
    Mr. Nick Budgen: In the short term.
    Mr. Healey: I am delighted to have the opportunity of commenting on that intervention. Let me quote from what was said by the deputy chairman of Commercial Union. Speaking as the head of one of the largest of our financial houses, he said:
    "'I don't think abolition of controls would increase our investment overseas much'"
    If we go to the fountainhead, the delphic oracle of the monetary theory
    1588
    that the right hon. and learned Gentleman espouses, Greenwell and Company, let me quote what Mr. Hammond, a partner in that firm, said:
    "'Outflows would only build up over quite a long period, say five years.… The main interest'"—
    in outflows—
    "'is likely to be among the richer private clients'"
    In other words, a relaxation of exchange controls would provide a funk hole for millionaires' money and would not be likely to lead to any movement of funds that would have any effect on the exchange rate. If Government supporters think that, let them look at the experience of Japan, Germany and Switzerland in recent years.
    Mr. John Bruce-Gardyne: The right hon. Gentleman referred to the experience of Japan and other countries in these matters. He quoted the Treasury opinion of the impact an increase in the exchange rate would have on the future growth rate two years later. I accept that that may be the Treasury forecast. However, it is totally the reverse of the experience of Japan and Germany, which have experienced rapidly appreciating exchange rates and rates of growth that we have never begun to achieve.
    Mr. Healey: The hon. Gentleman never ceases to remind us when he speaks on these matters on other occasions that Germany and Japan adopted up-market industrial policies and that they have a high rate of productivity compared with ours. I have never accepted the view that depreciation is an answer to our economic problems. Equally, infinite appreciation can be a disaster. Later I shall quote the Swiss experience on this matter. The hon. Gentleman studies these matters carefully, and I know that he will attend to what I say.
    Switzerland faced this problem last year. She faced a conflict between the monetary policies required to maintain her monetary targets, which were attracting inflows and sending up the value of the Swiss franc, and the possible disappearance of her manufacturing base. Herr Leutwiler, one of the ablest of the central bankers, recommended that the Government should abandon their monetary policy to save Swiss manufacturing

    1589
    industry. The money supply in Switzerland rose by many times the rate of increase in money GDP. After a gap of about a year, Switzerland is now trying to establish monetary control. Her Majesty's Government will face the same problem, but in a much less favourable environment than that of Switzerland, which, for many years, had moderation in wage increases and a high level of productivity.
    The Prime Minister's theological obsession with the most primitive form of monetary policy, combined with total indifference to all other elements in the economy—especially wage policy and productivity—can lead her only to disaster and make it more difficult for her even to adopt the solution of this problem that was adopted by the Swiss Government and the central bank recently.
    Mr. Budgen: It is sometimes too easy to make comparisons between ourselves and other European countries. For instance, where we make a comparison between ourselves and Switzerland, is it not fair to say that in this country there is a rapidly declining faith in money, and thus a greater propensity to increase the velocity of circulation? Switzerland has had stable money for a long time. It may be possible to increase the supply of money in the short term dramatically and for it not to be taken up by those who have it to use.
    Mr. Healey: I shall not get into a too-detailed academic argument. I agree with the hon. Gentleman on this. I discussed the matter with the Swiss bankers in the past few weeks. A great deal of the foreign money that went to Switzerland did not go straight into the money supply. The readiness of people who hold money in Switzerland to move their money once it is there is much less than it would be in a country where the inflation tradition is much higher. That supports my main point. The British Government, faced with this conflict between monetary policy and industrial interest, will find it much more difficult to adopt the Swiss solution.
    The real trouble is that the only way in which the Government can hope to solve the problem is by changing the fiscal policy which has created it—the attempt to set a 9 per cent. money supply
    1590
    increase against an 18 per cent. inflation. I note that some Conservative Members seem to agree with me on this. As we are apparently so close to agreement between the Opposition Front Bench and the Conservative Front Benches, I hope that the Chief Secretary will take some notice of the growing consensus and accept that the fiscal policy put forward by the Government a few weeks ago is absolutely disastrous to any common objective which men of common sense in this country could adopt.
    The only way in which the Government can escape from the dilemma on which they have impaled themselves is not by the Swiss route but by changing the fiscal conditions created by the Budget, which has created the problem.
    5 p.m.
    Mr. Bruce-Gardyne: I had rather begun to wonder about the wisdom of this new tradition of the regulator debate and I confess that, in listening to the right hon. Member for Leeds, East (Mr. Healey) my doubts on this subject have certainly not diminished.
    It is, after all, only three weeks since we had the Budget debate, which is an occasion for fairly wide-ranging economic discussion. I slightly wonder whether we need to go over the ground at such length after such a short interval. When I heard the right hon. Gentleman apparently repeating the debate that we had yesterday on clause 2, it seemed to me that the time might have been spent rather better elsewhere. [Interruption.] The right hon. Gentleman was not here yesterday when the debate opened and did not hear the ground that was covered at that stage.
    Mr. Tam Dalyell: Was the hon. Member for Knutsford (Mr. Bruce-Gardyne) present at the time?
    Mr. Bruce-Gardyne: The answer is "Yes", and I spoke.
    Nevertheless, I listened to the right hon. Gentleman's comments with great interest. I felt perhaps his gloom on this occasion was perhaps as overdone as his optimism used to be when he sat on the Treasury Bench.
    I do not think that there is any dispute anywhere that the increase in world oil prices is bound to have a depressing effect on the world economy, and that the immediate outlook for international trade

    1591
    and domestic industry is not a particularly encouraging one. But I suspect that some of the comments in recent weeks from the OECD, and particularly the European Community, quoted by the right hon. Gentleman, about "brutal structural change" and the like, are rather overdone. I would hazard a guess that within, at the most, 18 months—and perhaps rather less than that—oil will be in surplus again, and that we shall find once again, as we did about 18 months ago, that there are tankers circulating the globe and unable to find refineries to offload their contents.
    The right hon. Gentleman talked about Governments having lost faith in market forces. The fact is, of course, that the course of oil prices has been, is and will be essentially dictated by those same market forces. When there is a circumstance such as the disruption in Persia—which, so far as I am aware, had nothing to do with the concerted planning in which the right hon. Gentleman occasionally believes, at least when he is in opposition—there is a very slight diminution in supply. This leads to speculative purchasing, and to anxieties about future shortages which are self-fulfilling, so that there is then a very rapid increase in price, as we have had this year. That process will undoubtedly, 1 believe, be reversed. It is not possible to say how soon that will be, but I shall be surprised if it is not very largely reversed within the next 18 months.
    I think that talk of apocalyptic contraction in the world economy, and a condition of constantly soaring oil prices, is probably rather overdone. Nevertheless, having said that, I would certainly accept some of the anxieties expressed by the right hon. Gentleman about the prospects for manufacturing industry in this country. I would also accept that the rise in the sterling exchange rate—which has been proceeding now for several months and has recently been accelerating—is bound to have uncomfortable implications for what is sometimes called the real economy in this country.
    I am bound to say to the right hon. Gentleman that this is not a phenomenon which dates exclusively from the coming into power of my right hon. Friends. I remember suggesting, in the debate which led to the fall of the right hon. Gentleman's
    1592
    own Government, that we were already suffering in fairly visible and acute form from what was described as the Dutch disease. This is a condition of the real economy, as it is called, being rendered less competitive, being held back by a rising exchange rate reflecting the possession of a particular natural resource. This has been with us for some time, and I have no doubt that we shall need to accommodate ourselves to it.
    What steps, if any, should we or could we take to diminish the risk of damage to the competitiveness of domestic manufacturing industry? It is very easy to see what we should not be doing. I am quite sure that we should not listen to the advice of those—and the right hon. Gentleman is not among them—who are already urging us to bring down interest rates sharply, regardless of the impact that that would have on the Government's monetary targets. Here I part company entirely with the right hon. Gentleman. I believe that the Government's monetary targets are right and must have absolutely overriding priority. The only consequence of trying artificially to diminish interest rates would be to put those targets in jeopardy. That is one step that we should not take at any price.
    In this context I was very relieved to hear the answer that my right hon. Friend the Prime Minister gave to my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) at Question Time today on the subject of mortgage interest rates. This is undoubtedly a delicate subject for all Governments. I remember being told once by someone who is, shall we say, not 100 miles from the last Conservative Administration, that at that time it was no use my complaining, as I did, about the excessive rate of expansion in the money supply, since any substantial increase in interest rates was ruled out on the ground of the impact it would have on mortgage rates.
    It is perfectly true that an increase in mortgage interest rates is politically very unpopular. But we should always bear in mind that mortgagors—I speak as one of them, so I suppose I should declare an interest, but it is probably an interest that is common to many other hon. Members—are not exactly the most underprivileged members of society. They already enjoy the benefit of relief from taxation on the interest they pay on their

    1593
    mortgages, and a rapidly appreciating asset which is not subject to capital gains tax. The effect of achieving, by Government intervention, in whatever form, the avoidance of an increase in mortgage interest rates which would otherwise have occurred, is doubly deleterious to the home buyer as opposed to the home owner. It diminishes the flow of mortgage money and increases the price of houses.
    For all those reasons, but above all because I believe that the monetary objectives of the Government must have overriding priority, I was delighted to hear from my right hon. Friend the Prime Minister this afternoon that she has no intention whatever of listening to the siren voices from the Opposition Front Benches and elsewhere, that have already talked about the desirability of tinkering with the mortgage rate in a downward direction. I hope that the right hon. Member for Leeds, East is not attempting to intervene from a prone position, which is something that he occasionally accuses me of doing.
    Mr. Healey: I compliment the hon. Member for Knutsford (Mr. Bruce-Gardyne) and I apologise sincerely for doing it from a prone position. I think that his innocence is almost matched by his ignorance. If the hon. Gentleman really thinks that the Prime Minister was giving the undertaking that he has said he thought she was giving, he has another think coming.
    Mr. Bruce-Gardyne: The right hon. Gentleman seems to think that he can read my right hon. Friend's mind. I reckon that I can read it better than he can. In any case, I have listened to her words and they are on the record. He cannot frighten me in that way.
    Naturally it would be very desirable to see a significant reduction of the MLR. It is a wildly expensive way of financing public expenditure to borrow at 14 per cent. Secondly, these interest rates—here the right hon. Member for Leeds, East is absolutely correct—either stimulate further the rise in the exchange rate, or lead to an inflow of funds which is liable to disturb the control of the money supply. Therefore, I certainly agree with the desire to see a fall in interest rates at the earliest practical moment, but it must not
    1594
    be artificially engendered at the cost of jeopardising the Government's monetary objectives.
    Mr. Denzil Davies: Is the hon. Gentleman really saying that, with an inflation rate of 20 per cent. towards the end of the year—or even 17½ per cent. on the Government's figures before the OPEC price rise—interest rates should fall below 14 per cent?
    Mr. Bruce-Gardyne: I am grateful to the right hon. Member for leading me on to the next point in my brief contribution to the debate. I have believed throughout, from the moment of the publication of the Red Book, that the Treasury's national income forecasts of inflation are exaggerated. I am all the more convinced of that in the light of what has happened since the Budget statement.
    As I understand it, those forecasts were based on the assumption of a stable exchange rate and we have had nothing of the kind. It is very unsatisfactory that forecasts of the inflation rate are published based on assumptions which are quite obviously invalid even at the time they are made, and which may increase the Government's difficulty in financing the PSBR and inflationary expectations. The sooner the national incomes forecasts that are published in the Red Book are revised, the happier I shall be.
    That apart, I hope that we shall move rapidly towards the elimination of exchange controls. I accept a great deal of what the right hon. Member for Leeds, East said about the limited effect that that would be likely to have on the movement of the exchange rate. In the short run, at any rate, that may very well be true. In my view, the case for the elimination of exchange controls is overwhelming and we have a cast iron opportunity to do it now. Above all, it is essential that we reduce, and reduce as soon as may be, the PSBR.
    5.15 p.m.
    I was delighted to hear my right hon. Friend the Chief Secretary say during the Budget debate that the public expenditure economies announced in the Budget statement were to be regarded only as a preliminary package. I say "Hoorah" to that. It should be noted from the Red Book—I know these things are not altogether reliable in the Red

    1595
    Book—that the proportion of public expenditure to national resources will increase and not diminish over the next 12 months.
    I believe that the need for further and substantial economies in public expenditure remains and has, perhaps, considerable urgency.
    Mr. Dalyell: I understand well the general policy of the Government to reduce public expenditure as soon as possible. I know nothing about the Knutsford constituency, but I know something of the hon. Gentleman's previous constituency, South Angus, and the surrounding area of Dundee. Has the hon. Gentleman brought into his calculations precisely what "as soon as possible" means in relation to the reduction of public expenditure? In a place such as Dundee, where major works are under way, it is extremely inefficient suddenly to halt public expenditure programmes? To use the phrase "as soon as possible" in the context of his previous constituency is extremely inefficient, apart from anything else.
    Mr. Bruce-Gardyne: I do not want to be diverted on to the argument about where precisely further economies can be made, because I do not want to delay the House.
    Mr. Richard Wainwright: Why not?
    Mr. Bruce-Gardyne: If the hon. Gentleman will wait a minute, I will give him a sideline on that. In reply to the hon. Member for West Lothian (Mr. Dalyell), I agree that whenever we have curbed public expenditure under successive Governments—his own and those I have supported in the past—the capital programmes have been chosen, with the implications that he pointed out
    What we must do this time, above all, is achieve economies in the current programmes. I realise the difficulties that this presents, because it means in many cases diminution of the scale of employment in the public sector. One knows what the resistance is to such a step.
    Mr. Budgen: Does my hon. Friend agree that the only sure guide to cutting public expenditure is not to go in for across-the-board cuts but to reconsider the functions of the State and decide that
    1596
    whole areas of State activity can eventually be stopped?
    Mr. Bruce-Gardyne: Yes, I agree with my hon. Friend about that, although one must recognise that that, too, is a fairly lengthy process. What we must urge on our right hon. Friends on the Front Bench is that they must proceed with commendable speed.
    As I see it, the need for a reduction in the size of the PSBR and substantial further economies in public expenditure is rendered the more acute by the rise in sterling. Only by substantially diminishing the PSBR can we expect to achieve a reduction in interest rates without an excessive growth of the money supply, and hence a rapid, further acceleration in inflation. Thus, it is in this way, and in this way alone, that we can healthily ensure that the exchange rate does not gravely incommode the capacity of the private sector of the British economy to provide healthy, long-term employment in the future.
    Mr. Robert Sheldon: The hon. Member for Knutsford (Mr. Bruce-Gardyne) mentioned his doubts about having a regulator debate at all. I agree that at a time when all the debates on the Finance Bill are compressed, as they are at present, we have a fair number of opportunities to express economic thoughts. However, I maintain the value of a regulator debate under normal circumstances.
    When Iain Macleod brought this into being, I think it was in 1968, the regulator debate up to that time had been very narrow indeed. In fact, I recall being pulled up by Mr. Horace King, who was then Chairman of Ways and Means, when I tried to point out the way in which the regulator could be improved. He pointed out, correctly at the time, that I could not even discuss that, and that I had to see whether it was good or bad and leave it at that. At that time no alternatives could be discussed. Of course, later we had wide-ranging economic debates because they had the power of fain Macleod behind them.
    The hon. Member for Knutsford made a good point, because during the passage of the Finance Bill one gets involved in rather minute details and one can readily lose sight of the overall picture. I agree that this is not the case at the present

    1597
    time, but it frequently is. It is no bad thing, half way through these debates, to pull back, look at the overall picture and see what we are doing in that overall context.
    Since the election we have seen economic management moving from a Labour to a Tory concept. There are efficient ways of running both, although obviously I would prefer a Labour-controlled economy. However, there are successful economies of different kinds. If we look around the world we see obvious cases, such as Germany, Japan and France, which have successful economies in quite different ways. There are different relationships between industry and Government and different roles of the banks. These all produce success in different ways.
    If I were asked what kind of Labour success I would wish to achieve, I would say that it would be with general agreement with working people, whereby they are brought more and more into affairs so that the economy is discussed with them and their co-operation is sought and obtained. That is what I would look forward to as a fundamental part of a successfully operating Labour economy.
    A successful Tory economy, I suppose on the French model, might have been one that was carried out in 1958. That was one of the most brilliant changes in the fortunes of a country's economic history that we have seen in post-war years. Under the power, influence and prestige of President de Gaulle there was, for those times, severe devaluation, accompanied by severe deflation. Therefore, one had a combination of the carrot and the stick, and one had the valve in one's overseas trade. As a result, exports were cheaper, imports were dearer, and the stick denied easy home trade to industry in France and forced it to export. Therefore, there was this fundamental shift, which so many economies have sought to achieve. Our own economy was one of them, but we failed.
    Such a policy can cause considerable hardship during the changeover from easy home trade to exports. That can cause hardship, but I happen to believe that Tory policies usually do. If I were asked what kind of hardship I would wish to see—either hardship that produces a viable
    1598
    economy or hardship that does not—I would, of course, say the first, but naturally I would prefer the kind of Labour policy that I have already mentioned.
    However, what we have is very far removed from that. We have a most unsuccessful Tory policy, which will appreciate the value of currency, not devalue it, and deflate. The question that we must ask is "What is industry expected to do?" Exports will be more difficult because of exchange rate policy, and the home trade will be more difficult because of deflationary policy. All the various mouthings that we keep hearing—that the best way to increase exports is through productivity, non-price competitiveness and improvements in the supply side of the economy—are all hogwash.
    The industrial strategy was, at any rate, an attempt to get industry talking to Government. That is valuable but limited, but the rest of this kind of policy has no meaning. It is just words, which results in no action at all. Of course, it would be ideal if we could improve productivity, non-price competitiveness and the supply side of the economy. But no one believes that doing anything to the exchange rate does that. Faced with the dilemmas in this area, the Government have the responsibility to see that their measures lead to useful changes. If they have no clear vision of how they can improve things, they should at any rate make sure that they do not inhibit those valuable changes that are possible.
    I believe that the Government are undertaking a disastrous policy. The high value of the pound will lead to a high level of imports. The Financial Statement and Budget Report says:
    "Imports of goods and services are forecast to rise one per cent. over the coming year from the rather high level in the first half of 1979."
    Since the first half of 1979 we have had an enormous appreciation in the value of sterling. If anyone believes that all we shall see is a 1 per cent. increase in imports, particularly manufactured imports—that is the nub of the question—he is very optimistic indeed.
    Even before the world trade recession, exporters made a bee-line for United Kingdom shores. We were a country that had certain advantages because of North Sea oil, and had certain open doors for the entry of imports into this country.

    1599
    But the world recession will magnify that enormously. With world trade expected not to expand at anything like the rate that it was previously hoped, the United Kingdom market will become a much more attractive market than ever before. We shall see the full force of that competition searching desperately to discover new markets as it is squeezed out of its old ones. I believe that we shall see these markets offering attractive openings for imports and producing much higher levels than had been forecast.
    My right hon. Friend the Member for Leeds, East (Mr. Healey) was right to point out the difficulties of the OPEC surpluses. I do not take the view of the hon. Member for Knutsford. He thinks that market forces deal with oil and everything else, but he leaves two things out of account. He looks at the static view. He does not take into account the dynamics of the situation and the fact that market forces take some time to operate. They operate when new supplies are brought into production and when there is a willing buyer and a willing seller. There are political involvements here, and there are very long time lags indeed to bring on stream new supplies of oil. I am attracted by a number of ways in which the market operates on essential areas, but I do not believe that this is one of them.
    5.30 p.m.
    I was interested in an article in the Financial Times on 3 July, which took the view that there should be a freeing of exchange control. It said:
    "It must be admitted that there is no guarantee that in present circumstances even a full liberalisation of capital movements would take the pressure off sterling;"
    I agree with that. It went on to say:
    "but at least it could then be said that the pressure reflected market forces rather than an administrative contrivance. Only then could it be judged rationally if the very doubtful case for opposing market forces by currency intervention should be re-examined."
    I am asking for that re-examination because I do not believe that liberalising exchange control will have the effect of pushing sterling down. It could well be perverse. It will be some time before there is a movement out of sterling, and in that time people will feel that they have an asset with a much more readily interchangeable use. This is likely to increase the value of sterling. Therefore
    1600
    I believe that we have been rather obsessive about the money supply. I do not believe that it is something that we can arrive at with the amount of exactness that the hon. Member for Knutsford implies.
    I believe in domestic credit expansion, over which we have some control ourselves. But as for trying to control the money coming in, bearing in mind its quite different nature from the money supply, that is beyond us. This is money that can come in and go out again. Switzerland took a rather relaxed view of this matter. Germany used the Barderpot plan to limit the generation of money in this way. We should be adult, too, and take this as something that is forced upon us by foreigners who eventually can remove that money, but we need to look after domestic credit expansion.
    I am surprised at how far we have moved from the idea of domestic credit expansion, which was, after all, our first incursion into monetarism. Mr. Roy Jenkins had an idea here, and he made use of it. I do not believe that one can get these exact relationships, or these targets, that are put forward with such precision in an area where it is not known exactly what money means. This is quite spurious. We must use judgment. Also, we must have a Chancellor who has the confidence of those who matter and who respect his judgment and his monetary position. To seek to produce this exactness, which is what The Economist once called "shut-eyed monetarism", is wrong, and we should dismiss the idea.
    What worries me most is that running the economy with a high level of inflation and with monetary methods pursued well beyond anything that can have any close relationship to reality is rather like allowing children into the signal box at Crewe to play with the levers. This could be very dangerous indeed. In this case the Government are playing not only with jobs but with the industrial economy of our country. This could be very serious.
    I am made even more gloomy by the Financial Times, which does not make very happy reading these days. On 2 July, in an article by Peter Riddell, it said:
    "Treasury officials have recently completed one of the gloomiest ever medium-term economic assessments."

    1601
    I believe that that is right. It anybody had to produce those forecasts that the Chief Secretary has been seeing it would make reading that would make his present position—sitting there with his head in his hands—fully understandable.
    We all know that the national income forecast is not a precise tool, and Chancellors who have used it in this way have been rather foolish. They abdicate their position and give it to those who produce these figures. With sensible use this forecast shows direction, and if one has a feel for the economy it gives an indication of certain movements. It is better than having a Chancellor of the Exchequer without feel or judgment, but the ideal thing, of course, is to have both.
    The national income forecast shows what is happening to industry. If one discusses these matters with people in industry—the people who take the decisions to buy or sell abroad, to invest or expand or even to contract—one finds that the kind of forecast that the Treasury has put out is likely to be based on the present industrial reality. It is even more noteworthy when we hear someone like Mr. Methven of the CBI asking firms to invest again in order to show their confidence in their Government. That sounds so much like a re-run of 1972.
    The favourite game being played by a number of people is forecasting the date of the Government's U-turn. Various dates have been put forward, but the general feeling is that there will be a U-turn in July 1980. That is the time when the national income forecasts are produced, just before the Summer Recess. They are produced because Parliament will not be sitting and any changes that need to be made have to come before the House. That forecast might show what will happen during the autumn in various critical areas. By that time, 15 months after taking power, the Government might be a little less cocksure about their ability to change events in what I believe are quite disastrous directions. In fact, they might start having doubts bearing in mind that those forecasts are alleged to be reasonably accurate, by and large. The Government might then see that the forecasts for pay, prices, exports or imports and
    1602
    possibly most important of all, for the balance of payments and for unemployment, will be very gloomy.
    Not long ago I read an article about "drinking our oil". It had considerable impact on many people who were worried and anxious that this great national resource should not be wasted. They realised that this was an opportunity that would come only once in our history. I regret that, far from drinking our oil—and perhaps getting some benefit from it—we seem to be throwing it away.
    Conservative Members who feel that they have discovered the philosopher's stone by a 3p reduction in income tax and the pursuit of monetarist goals will come to realise that a wider vision is necessary. Their gloom, when they accept what is likely to happen, will lead to considerable changes. I hope that the disillusionment will come earlier rather than later, in order to avoid the serious damage to our economy which I fear lies ahead of us under the present economic management.
    Mr. Budgen: I shall try to be brief, if only because I hope to be able to catch Mr. Speaker's eye on other occasions, and I have no doubt that I am already well established in the black book.
    I take up the point made by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) about his preference for judging the increase or decrease in the money supply by domestic credit expansion. It does not surprise me that Mr. Roy Jenkins was in favour of that guide because he is, and always was, in favour of fixed exchange rates. He saw fixed exchange rates as a necessary preliminary for entering the European monetary system. I suspect that the right hon. Member for Ashton-under-Lyne may be in favour of DCE because he is prepared to say that he is in favour of fixed exchange rates, or at least he is prepared to tolerate them. Also, he may well be in favour of exchange controls and, if necessary, even inward exchange controls. I am not in favour of the EMS or of fixed exchange rates. Therefore, if one takes that severely negative attitude, it is inevitable that one prefers to judge increases in money supply by M3.
    Mr. Denzil Davies: The hon. Gentleman will realise that if there is a balance of payments deficit, as we could well have

    1603
    in the next six month, that helps the nominal sterling M3 figures and makes them look very good indeed. That is where domestic credit expansion is a better indicator of the growth of money supply than is sterling M3. The hon. Gentleman should not easily dismiss what my right hon. Friend was saying.
    Mr. Budgen: Theoretically, if one has a floating exchange rate the balance of payments comes into equilibrium.
    Mr. Denzil Davies: Theoretically.
    Mr. Budgen: Yes, theoretically because it does not do so immediately. That is why I suspect that the right hon. Member for Ashton-under-Lyne is prepared to tolerate a rigid exchange rate. None of us will have a totally rigged economy or a totally free economy. If the right hon. Gentleman's preference is for a totally rigged economy, he is no more likely to obtain it than I shall obtain the totally free economy that I should like to see.
    Although I was in partial agreement with some of the comments made by the right hon. Member for Leeds, East (Mr. Healey) I did not go along with him—as he tried to assert I did—in the latter part of his remarks after he had referred to the Swiss example. In referring to the Swiss example, I thought he was saying that the way out of our present difficulties is to have a temporary increase in the money supply. I am glad that that is not what he was saying. What he was saying was that he felt that the monetary stance of the Government and their fiscal stance were at variance. He is entitled to attack the Government's fiscal stance. He is entitled to say that the imposition of indirect taxes, which temporarily increase the RPI to about 18 per cent., is in his opinion politically and socially wrong. But it does not have any effect on the rate of inflation. The right hon. Gentleman is also entitled to say that an RPI running at 18 per cent. may, for the sake of argument, unhappily stimulate compensating wage claims. But if those wage claims are met, it does not create inflation, although it certainly will create unemployment.
    The right hon. Gentleman does not give sufficient attention to the importance of time lags. He is saying that the monetary squeeze which is beginning to bite now will have effect immediately. It will do
    1604
    no such thing. What we are dealing with when we talk of the RPI at present is an indication—only one indication but a rough one—of the way in which money is depreciating. When we talk of money supply—whether defined by DCE or M3—we are talking about the prospective rate of inflation. We are speaking of what will be the rate of inflation in 18 months or two years' time. There is no disparity between the Government's fiscal stance and their monetary stance.
    I wish to take up the point made by my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) on interest rates. He and I were delighted by the robust way in which the Prime Minister dealt with the subject of mortgage interest rates this afternoon. I agree with the Shadow Chancellor of the Exchequer that the reply given to me cannot properly be construed as an undertaking by the Government never to interfere in mortgage interest rates for the rest of this Parliament. But when one takes the reply given to me along with that given to the Leader of the Opposition to his detailed and specific suggestion for ways in which these interest rates might be rigged, I believe that they constitute the most firm rebuttal of any suggestion that the Conservative Government should rig interest rates in favour of mortgages. I must emphasise how delighted I am at that rebuttal.
    5.45 p.m.
    Although I agree with my hon. Friend the Member for Knutsford that the first and most important promise that the Conservatives made before they took power was to halve inflation and to do so by the already well-tried monetarist means adopted by the Labour Government, their secondary, but important, promises were that they would conform to the rule of law, liberalise the economy, and reduce the public sector. Those three secondary promises would all have been in jeopardy if any attempt had been made to rig interest rates in favour of mortgagors.
    It is easy to talk of the dangers to the rule of law when the former Prime Minister is bribing his constituents at Bridgend with taxpayers' money. But that sort of arbitrary and discretionary action is equally bad when used to benefit those who are thought to be the natural supporters of the Tory Party. I do not think it would be possible to support those

    1605
    splendid assertions if our natural supporters had been helped at this difficult moment.
    Secondly, it would not have been possible to sustain the argument that we were in favour of the liberalisation of the economy. It is plain that mortgagors derive many advantages from the fact that they have one of the best hedges against inflation because they borrow money of declining worth against a real asset. I think I am right in saying that in the last year house prices have risen by 40 per cent. That is the advantage of inflation to mortgagors. The disadvantage is that when the inflationary game has to be stopped a bit, mortgage interest rates rise. If mortgagors are to ask that they should be protected from the disadvantages of inflation, perhaps they would wish also to surrender some of the advantages which they have gained. There is no suggestion of that, and they must take the rough with the smooth.
    Equally, the third of the secondary objectives of this Administration was to cut the public sector. I agree with all those who say that cutting public expenditure is extremely difficult. I do not say that necessarily by itself it has a deflationary effect, but it certainly has a depressing effect on the economy.
    Let us examine the moral authority of the Tory Party if, in the first two or three months of its period of power, it had sought to give any form of special exemption or relief to those who are believed to be its supporters. How will it look if, for the sake of argument, we have to take the horrifying decision—and as one who has been in favour of this decision I appreciate that it is horrifying—to cut off State support to the British Steel Corporation, losing as it did £309 million of taxpayers' money last year?
    How will it look if we have been supporting the owner-occupier in, say, Bexley, Sidcup, which I only take for the sake of argument, or in Wolverhampton, South-West, which contains many people who work in British Leyland? It will not look convincing if we have supported those who are believed to be our supporters, and, to a large extent, our marginal supporters, if we then have to take away, as it will be put by hon. Members on the Labour Benches, the support and subsidy said to be enjoyed,
    1606
    although I dispute the claim, by ordinary working people. We must be evenhanded.
    I hope that this Administration will be able to review substantially the indiscriminate subsidy being paid to those who live in council accommodation. The Chief Secretary looks at me. I know that no commitment has been made on that matter, but it will be morally impossible to make those reductions in public expenditure, certainly in the early months of this Administration, if at all, if we do anything to support those who are believed to be our marginal supporters, the owner-occupiers. This is the time when the Tory Party will be judged. It will not be judged on whether it makes brave noises about subsidies, the special advantages and the exemptions enjoyed by that section of the population that is believed to support the Labour Party. This Administration will be judged on whether it has the courage, the consistency and, I would go so far as to say, the honour, to apply the same principles to those who are believed to be its supporters.
    Dr. Oonagh McDonald: I have listened with interest to previous speakers in the debate. I cannot follow the hon. Member for Knutsford (Mr. Bruce-Gardyne) in the wonderfully optimistic picture he painted of the future of the world economy and our own economy. I cannot support his view that the oil will once again flow freely, that we need no longer be concerned about the price of oil that demand will begin to rise and that all our problems will be solved.
    I was interested to hear the remarks of Conservative Members and how they view now the result of the Government's action. They see only too clearly that the rise in MLR to 14 per cent. will mean a rise in the interest rate on mortgages to unprecedented levels, probably this month. It appears that this possible rise in the mortgage interest rate has taken them by surprise. They look with horror at the results of their own actions. We see the interesting spectacle of Conservative Members clutching their courage in their hands as they face the electorate, especially that portion of the electorate they have always said gives them their greatest support—the property-owning democracy, the home owners. They now say to that portion of the electorate that life will

    1607
    be made as difficult as possible. Conservative Members are saying that they know what will happen but that they will not draw back.
    Mr. Budgen rose—
    Dr. McDonald: I will not give way. That is what the hon. Gentleman's remarks meant. At least, that is how his constituents will interpret them. All the other predictions on the development of our economy in the coming months and years contain nothing of the optimism previously expressed by Conservative Members. For example, the ITEM Club—the Independent Treasury Economic Model Club—predictions published in The Guardian on Monday show a fall in gross domestic product of 4 per cent. between the second halves of 1979 and 1980, inflation accelerating to a peak of nearly 20 per cent. by next spring, unemployment rising steadily to over two million, meaning one in 12 out of work, and the current account balance of payments recording a £1¾ billion deficit this year followed by a £2½ billion deficit in 1980 and 1981. That is the picture of the future which too many forecasters are presenting. There is nothing of the optimism expressed by Conservative Members.
    Mr. Tristan Garel-Jones: The hon. Lady has quoted from ITEM. Her right hon. Friend the Member for Llanelli (Mr. Davies) and the former Chancellor, the right hon. Member for Leeds, East (Mr. Healey), have already quoted with some relish from the same report. I hope she agrees that the statement by ITEM begins by saying that the situation in which the country finds itself is an appalling one. It says that we have high unemployment, rising inflation and stagnant growth. I hope she agrees that there is no way in which this Government can be held responsible for those facts. The ITEM report goes on to make judgments. The judgments of the hon. Lady and her right hon. Friends of what might happen in the future have not proved frightfully successful in the last five years.
    The Temporary Chairman (Sir Stephen McAdden): Order. I remind hon. Members that all interruptions prolong speeches, and that long interruptions prolong them interminably.
    Dr. McDonald: I had intended to say the hon. Member for Watford (Mr. Garel-Jones) will not be surprised to hear that the prospects were not exciting but that the economic strategy on which this Government have embarked will make matters much worse. The Budget has made a difficult situation—caused partly by the rise in oil prices—very much worse. The Budget puts up prices at a time when industry is being squeezed by rising costs and weak demand. That squeeze will be made much worse by the withdrawal of Government support. Job creation schemes are being cut. Money available for training and retraining is also to be reduced. The whole Government economic strategy will make everything much worse.
    One part of that strategy—the cuts in public spending—will have disastrous effects on the economy. The Government have committed themselves to the view that public spending takes away from the private sector funds that could be used for investment, that it crowds out investment funds that could be used by the private sector. The Government take the view that increasing public spending depresses the private sector and that only if the frontiers of public spending are rolled back will the private sector somehow spring into life and flourish. This view is entirely mistaken.
    The Government regard public spending as merely oppressive and fail to understand the inter-relationship between public and private spending. Public spending, among other things, means the purchase of goods and services from the private sector. One can estimate that in 1977–78 the extent of those purchases by both central Government and local authorities probably amounted to about £7 billion. That part of public spending will be especially squeezed by the Government's policies. Local authorities estimate that this year they will have to knock about £800 million off their own spending.
    6 p.m.
    Central Government consumption is expected to fall next year by just over 1 per cent. The real drama of the public sector squeeze will be seen on the capital side, where expenditure is projected to fall by about 12 per cent. between the second half of 1978 and 1979. The effect will be to deflate demand in the private

    1609
    sector. That will make it much more difficult for companies, both large and small, to expand. In particular, small and medium-sized firms which may be supplying local authorities with goods and services, or undertaking small building projects or maintaining or improving council houses, will also have to cut back their provision for other parts of the private sector once they find that they cannot depend on public spending.
    Such cuts have important deflationary effects on the economy as a whole. It is to close one's eyes to reality to think that by cutting public spending one allows the private sector to expand. One does not. One deflates it in an important way.
    Mr. K. Harvey Proctor: Will the hon. Lady give way?
    Dr. McDonald: No.
    It is high time the Government learnt that lesson and abandoned their policy of cutting back public spending in the naive belief that private industry and services will suddenly flourish.
    Such cuts have a further effect. They lead to greater deflation and in turn to more unemployment. That has the effect, not of cutting the public sector borrowing requirement but of increasing it, because of the loss of tax revenues and the increased payments of unemployment and social security benefits. Therefore, rather than making the whole economic position easier, cutting public spending makes it worse and defeats the Government's object of cutting back sharply on the public sector borrowing requirement for this year and next. It is a self-defeating, destructive and deflationary policy. It can only make the whole position much worse and confirm the kind of forecasts that are being made by ITEM and others.
    I want also to talk about the effect on investment. We do not know the full details of the cutbacks on support for industry which the Government are at present considering, but some changes have already been made. For example, payment of regional development grant has been postponed for a short period. That will not help.
    The problem is that many private companies are finding it more and more difficult to finance investment out of internal cash flow. Therefore, any withdrawal
    1610
    of Government subsidies to them, or delay in providing them, is bound to mean that investment plans will be reviewed and probably curtailed, if not abandoned. Once again we shall find that manufacturing investment falls. The Government seem set on a course of making that fall much worse.
    Therefore, we see that every part of Government policy on public spending is deflationary. It will in no way help to solve the country's problems. It will increase unemployment and make the probability of the figure of 2 million unemployed being reached by the end of 1980 a certainty.
    Mr. William Clark: The Committee has listened to a predictably Left-wing speech by the hon. Member for Thurrock (Dr. McDonald). Its tenor was that all that the country has to do to overcome its problems is to keep spending Government money, public money. I remind the hon. Lady that when we talk about Government money we should call it the taxpayers' money.
    The hon. Lady should think again when she says that we must prop up this and that. For many years we seem to have been living in an artificial economic atmosphere, propping up jobs and loss-making industries. There is a feeling that the State owes people a living.
    Our economic system contains the stupidity that welfare benefits are not taxed, while the hard-earned income of the workers is, albeit the rate of taxation may have come down a little. We have the anomaly as between welfare benefits and earnings, and our penal taxation also causes a tremendous amount of moonlighting throughout the country, which in my view is a serious problem.
    One of my criticisms of the previous Government is that they gave aid to moonlighting. I see that some Labour hon. Members are laughing. I remind them that under the previous Chancellor of the Exchequer the Inland Revenue excused people who were moonlighting in Fleet Street, signing as Mickey Mouse and giving similar silly names when collecting their pay. An amnesty was given to people who had earned money but, as a result of using a false identity, had not paid tax. How can people be expected to work hard when they see their neighbours getting away with that sort of

    1611
    thing? It is time that we got out of our economic straitjacket.
    All the speeches from the Opposition Benches, starting with that of the right hon. Member for Leeds, East (Mr. Healey) have been pessimistic. To listen to them, it might be thought that all our troubles started on 3 May. In fact, the Labour Government had got us into our present predicament with a huge public sector borrowing requirement, much larger than all the so-called forecasters had expected. I do not know whether it came as a surprise to the then Chancellor, but even this figure was exceeded.
    There is a danger in being too pessimistic. I shall give some reasons why I do not think that there is room for so much pessimism, despite the economy that we took over. There is always a danger of talking ourselves into a slump, saying that everything will go wrong. That affects the psychological approach of would-be investors and business men. They see such forecasts and wonder "Why bother?" Therefore, we should not be too pessimistic.
    Inflation figures are bandied about. The figure that my right hon. and learned Friend the Chancellor has given, and which I think my right hon. Friend the Chief Secretary has given, is, for what it is worth, about 13 per cent., plus probably 4 per cent., making 17 per cent. The Opposition keep talking about 20 per cent. inflation. That is psychologically wrong. Labour hon. Members seem to think that this is funny, because they think that it gives them a party advantage to exaggerate the position and be so pessimistic. We should stop seeking party political advantage, blaming everything on each other. Possibly both Governments have been guilty of it for too long, particularly in economic debates.
    I am an advocate of the lifting of all exchange control. Here I do not share the pessimism of the right hon. Member for Leeds, East. After all, this country has invested abroad heavily. If our capital is invested abroad, not only do we have the repatriation of dividends and profits, but it creates markets abroad for our goods.
    Much has been said about the mortgage interest rate. I declare an interest, since I am a vice-president of the Building Societies Association. It is an honorary
    1612
    post for which I get nothing. I do not take part in its deliberations. Many hon. Members from both sides have a similar interest. We tend to overlook that although the building societies' interest rate is now 11¾ per cent.—which is high—the effective rate is 8¼ per cent. after tax. That is a fair rate compared with world rates. If the mortgage interest rate went up to 13 per cent. the effective rate would be 9·1 per cent., which is not high. However, I should regret the building societies deciding to put up the mortgage interest rate.
    The jump in minimum lending rate to 14 per cent. cannot be sustained for long, although I have no knowledge of Treasury thinking. The building societies should accept that it is a temporary measure. Their liquidity is fairly good. Unless they jack up their rates, they will lose investors if the MLR remains where it is. For every borrower from a building society, there are five investors. The building societies have an obligation. They must protect their investors' money.
    We should not overplay the other advantages of being an owner-occupier. I am an owner-occupier, and my ambition is to see even more people owning their own homes. The largest asset of the average man—or woman—at the end of his working life is usually the house which he leaves to his children. I am all for that.
    That is exempt from capital gains tax. I am delighted that that is so. I hope that that tax will be phased out eventually. If the interest rate goes up, there will be a cash flow problem for owner occupiers. We should not ignore that.
    A person may have bought a house for £10,000, and it may now be worth £40,000, but that money cannot be utilised. If he wants to move, he will have to pay £40,000 for a new property. One should not overplay the capital advantages of being an owner-occupier. Buying a house is an excellent form of savings for any family, because when the house is sold ultimately the money can be used by the family.
    Forecasts are made in the Red Book and other books, in various papers, magazines and financial journals. Hon. Members often quote what the forecasters say. An hon. Member may make a good speech in the House. Some people will say that he has made a good speech and that he

    1613
    knows what he is talking about. Others will say that it was a rotten speech and that he does not know what he is talking about.
    I intend no disrespect to the writers of financial journals, but when I read their forecasts I always remember that I am reading one man's opinion which is not shared by everybody. Treasury forecasts have, under both Governments, been wildly out. What worries me is that when a forecast is put in front of a Minister, that Minister acts upon it. If the forecast is wrong, his action is bound to be wrong.
    The hon. Member for Thurrock and the right hon. Member for Leeds, East mentioned the forecasts of ITEM. Those forecasts are exaggerated, but if such forecasts are swallowed generally they affect the economic activities of the country.
    6.15 p.m.
    Everyone agrees that the public sector borrowing requirement is too high. I agree with my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) that it is impractical for the Government to stop capital investment. A reduction in expenditure must come from current expenditure. Some may come from capital expenditure, but not much.
    The value of sterling has risen. It was $2·23 yesterday. At one time it was below $2. In 1974, sterling stood at $2·40. At that rate our exporters were exporting. The bleat now is that our exporters cannot export. What were the exporters doing when sterling was standing at $2·40? This is where the pessimists come in. I accept that the value of sterling is an element in the amount that we export, but exports are not affected by the value of sterling alone. I am in the export business. What really matter are the delivery date, the quality and the after-sales service. That is where we are falling down.
    The hon. Member for Thurrock and I recently went on a visit to Malaysia. The Malaysian Government wanted to buy Range Rovers but they could not get them. Instead, they must buy from America. The Range Rover is a first-class vehicle. We should not be too pessimistic about exports. I cannot see why it is difficult to export when the value of sterling is $2·23.
    1614
    Even Labour Members must know that their policy of more and more State intervention and more and more propping up of jobs has not worked. We are bottom of almost all the economic leagues. We must break out of this economic straitjacket somehow.
    Obvously, a change of strategy is bound to mean difficulty and hardship at the beginning. The medicine that we have been administering has not returned the patient to full health. With a change of strategy the medicine may prove unpleasant in the immediate future. However, as a nation we must stop living from month to month, from year to year, from general election to general election, for party advantage. That is why I am delighted that the Government have taken a step in the right direction.
    I have known my right hon. Friend the Chief Secretary for many years. I hope that the Government will stick to their strategy—knowing my right hon. Friend as I do I am sure that they will—because it is the only future for this country. There is no party bias in this. There may be a philosophical difference between the two sides of the House, but we are all here to do what we can to increase the living standard of this country. The Budget is a step in that direction.
    Mr. R. B. Cant: The more I listen to the Conservatives, the more they worry me. I do not think that they have as much contact with the real world as the many directorships that they enjoy—all of them unpaid, of course—seem to suggest. When I return to my constituency, and certainly when I go into the working men's club on a Friday night for a drink of beer, I try to remind myself that the policies that we discuss here have a relationship with the lives that these people live. Obviously they have a most important relationship, and that is why, in a sense, I fear for the future.
    In the Budget the Government are going back not to the nineteenth century but to the eighteenth. Everyone from the Prime Minister down is mesmerised by Adam Smith and the invisible hand. They feel that somehow if only, in Lenin's phrase, the State would wither away as a great administrative machine the energies of the people would be released and the

    1615
    market forces, the price mechanism, manifesting itself in one way or another, would bring us prosperity.
    I do not want to go over the general ground that is more appropriate to a Second Reading debate. I confess that I agree with my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) that this general debate on the regulator is not what it used to be. It used to be a debate just on the regulator during my time as a Member, but now it gives us much broader opportunities.
    Sterling has been mentioned, and it might well therefore be useful to bring our debate up to date by having a general discussion about the exchange rate as another type of regulator—perhaps a little more modern than the old-fashioned variety. Everything associated with Keynesianism, national Keynesianism and international Keynesianism, is now out of date, although there are a few lingering Keynesians on the Labour Benches.
    That prompts me to comment that I feel even more deserted than usual. I sometimes wonder what visitors to our proceedings think when they enter this great Chamber, this mother of democratic Chambers, to listen to a great debate on the Finance Bill, and see only a handful of Members of Parliament present. I only hope that I shall not be obliged to do this evening what I did the other evening and continue speaking to fill in the time so that the debate, in accordance with some sort of mysterious Parkinson's law, can stretch on to 10 o'clock.
    Perhaps because of our experience in the past 10 or 15 years we have become a nation of pessimists. Every piece of good news we somehow twist so that we view it as bad news. We examine the good news carefully to find something wrong with it so that we can put it right. All the time that I have been a Member of Parliament we have been dealing with the problem of devaluation. I am sorry that Bryan Gould is not here, because no one put the case for a devalued pound more intelligently, with more eloquence or with more persistence than he did. He is greatly missed, although there may be someone among the new intake who can take his place.
    1616
    Most hon. Members have referred to the subject of the exchange rate. They have analysed it a little, and then they have quickly moved on to discuss the mortgage rate. No one has pointed out that we have gone from the problem of a depreciating pound to a position in which we are embarrassed by a pound that is appreciating. We do not know whether that is good or bad. If it is good, we do not understand fully the implications of it. If it is bad, we do not know what to do about it. Most people—not including myself—think that it is terrible. My right hon. Friend the Member for Ashton-under-Lyne believes that it is bad, but confessed that he did not know what to do about it and that it was something that we have to live with.
    Many commentators go so far as to say that this is the No. 1 problem in the economy. They say that devalation with a depreciating currency is bad because it increases the price of imports and affects the inflationary process. At any rate, they say, it permits one to increase one's capacity to export. Introduced into this general argument is the mysterious concept of the J curve—that there is a period during which one has to wait for things to get worse before they get better. The general feeling is, however, that depreciating currencies might be a good thing.
    Equally, there are many who say that appreciating currencies are excellent because they do the opposite. They undoubtedly help us with the problem of inflation, although it is difficult to see to what extent one can quantify that. Everybody quotes the Financial Times in general and Samuel Brittan in particular. I shall not ask the Chief Secretary to stand up and comment because I know that he has had a heavy week and it would be totally unfair of me to do so. Nobody, obviously, has read today's Financial Times, or perhaps those who have read it have not mastered the complex graph tucked away in the right hand corner of the page. Perhaps it did not tell readers the story that they wanted to hear. If that is so, perhaps they have ignored the story. If one accepts the lesson of Mr. Brittan's argument, the element of competitiveness is not seriously undermined. Here, presumably, we have the J curve in a slightly different context.

    1617
    6.30 p.m.
    I presume that the period of office of this Government will be for the next five years, though that is not what the Chief Secretary appeared to be saying the other night. He seemed to indicate that there might be an election next May. Perhaps he is troubled by some kind of misgivings. He shakes his head. In that time we would emerge from this period of uncompetitiveness in export markets. At the same time, we would have the delightful situation in which the effect on wholesale prices and manufacturing costs of an appreciating currency would be substantial. That, however, does not get us very far.
    There is much to be said for and against this type of regulator—the exchange rate. The main point, however, about the present exchange rate is that raised by my right hon. Friendthe Member for Ashton-under-Lyne who implied—as have my right hon. Friend the Member for Bristol, South-East (Mr. Benn), and other members of the Tribune group—that this is the one policy instrument that will lead to the de-industrialisation of this country. This is the great question that has to be answered.
    Although we can argue for and against a depreciating or appreciating exchange rate, I have not heard any positive statement about it save that made by the Chancellor of the Exchequer in response to an inspired question. The Chancellor said that he believed in a strong pound whatever the consequences might be. Sooner or later we shall have to decide whether we propose to do anything about this. Do we accept this as a policy? Shall we allow the exchange rate to rise to $2·40 or $2·50 without taking compensatory steps to offset any of the disadvantages that may arise? Perhaps we can do something about the reasons for the present exchange rate though some of them may remain with us for some time.
    I like the comment made by the Financial Times, which I have not yet heard quoted in the house, about a "catch 1979" situation. We have a very strong pound because money supply is under control. Money supply is under control for the simple reason that it is leaking abroad, and because it is leaking abroad the balance of payments has been
    1618
    upset. The pound is strong because we have a weak balance of payments.
    I hope that hon. Members on the Tory Benches have understood that, although the Chief Secretary looks puzzled. That is the "catch 1979" situation. The Chief Secretary can check on what I have said by reading the Financial Times. I am not arguing that, for other reasons, we should attempt to promote a balance of payments deficit as a matter of policy. If we see the state of the dollar as the reason for our strong pound, what are we to do about it? It is said that the OPEC countries will no longer invest in dollars but will put their money into sterling because it is the currency of the future.
    Mr. Tim Renton: Cheer up.
    Mr. Cant: In a moment I shall be adopting the role of choirmaster, not because we have a Conservative Government, but for other reasons.
    Mr. Biffen: Perhaps because we do not have a Labour Government.
    Mr. Cant: We must not be negative. We are presented with a problem, because it is obvious that the dollar is now out of control; because the money supply targets have been deliberately totally confused in the United States. The present situation there has come about after a very short monetary lag.
    I take issue with the announcement in the Budget that MLR would go up to 14 per cent. I criticised my right hon. Friend the Member for Leeds, East (Mr. Healey) when he was Chancellor for jacking up the rate of interest by two points during the previous Session. It is a lever that Chancellors of the Exchequer reach for without substantial reasons for doing so. I think that the reasons behind the Chancellor's decision are wholly bogus. Like all Chancellors, he is bemused by the gilt-edged market and the need to finance the public sector borrowing requirement. He has to go through what I believe is called the Duke of York scenario, where the rate of interest goes up and up until the point is reached when it is felt that—as the writers in the brokers' circulars to which I have referred would have it—we are on the point of a reduction in the rate, at which moment when the reduction in interest rates takes

    1619
    place, the institutions and all the others go into the market for a killing as the capital value of gilt-edged securities rises.
    The truth is that the whole question of interest rate policy in this country ought to be handled with rather more intelligence, since it has serious implications. To put the rate of interest up to 14 per cent. for no good reason whatever not only might affect such things as mortgage interest rates but will result, and has resulted, in a flow of funds into this country on a massive scale, and so on. Why bother to work if one can get a yield of 13 per cent. or 14 per cent. on gilt-edged securities? If someone has a reasonable amount of money, he can get a bigger income by just clipping coupons than he can by engaging as a top executive in some of our biggest corporations. In my view, therefore, a reduction in the rate of interest should not be long delayed, and if it brings the pound down a little, that is just too bad.
    The most important factor, as we all know, is that we now have a currency that is backed by oil. Here again, however, as has been said not only today but on many occasions, we have a love-hate relationship with that great bonanza. Many people think that it is the worst thing that ever happened to us because we get either the Dutch disease, which has been referred to, or the slightly different variety, the Norwegian disease—or we get the English disease, which will be slightly different again and will result in a straightforward de-industrialisation of this country.
    But, surely, anyone in his right mind must accept that a bonanza of this kind and of this magnitude is something that we should welcome with both hands. If it has the disastrous consequences which a number of people try to show it might have, there is something wrong with us as a Government, as an Opposition or whatever it may be.
    I think that the simplest parallel that has been offered was offered, I believe, by Professor Posner, who talked about a man who had a little business and found at the bottom of his garden that the mountain had turned into a crock of gold. What should he do with it? Obviously, one ought to ensure that one used it in part to make one's business operations
    1620
    much more efficient, that one had more investment and so on, but if that is not wholly possible, or if one would prefer to take another option, one would buy property in the nearest big town.
    Perhaps we just cannot find the formula to enable us to achieve our objective in this situation. How many times have we on these Benches spoken about North Sea oil as a means of restructuring the British economy, yet all we are doing at the moment, in effect, is financing the import of Japanese and Common Market cars and using North Sea oil, in part, to run them. We are simply wasting it. So this also is something that we must take into account.
    The more relevant consideration, however, is whether, if we do not feel that we have the capacity to undertake that restructuringg of British industry, it might be useful not to tinker about with modifying exchange controls but to dismantle them totally. We hear many arguments to the effect that the rate of return on capital in this country is so low that if one invested it abroad at least it could not be lower. If we are not careful, of course we shall go right back to the situation that we had even as late as the 1930s when, because of investments abroad, at least half our total import bill was paid for by invisible earnings, half of which were dividends on overseas investments.
    6.45 p.m.
    We must have a substantial discussion on the options open to us. It is no good we in the House of Commons, or anyone outside, just saying that we have a problem. Many people say that this is the No. 1 problem. Hamish McRae and all those others who write in The Guardian tell us that sort of thing week by week. But it is no good merely saying that this is the problem if one does not get down to tackling what we should do about it.
    What I think would be most difficult to accept is that we were allowing the £ sterling to appreciate merely because the Treasury was so concerned that there might be a re-run of the 1976 crisis, when some people in the Bank of England and the Treasury thought that they saw money pouring into this country and took the sort of action that led to a substantial run on the pound.

    1621
    I see the hon. Member for Mid-Sussex (Mr. Renton) looking at his watch. I have to keep going.
    Mr. Michael Spicer: Why?
    Mr. Cant: All right. I shall finish. To summarise briefly, I am saying, in effect, that it is time that we had a substantial debate on this problem and did not just keep saying that we think that an appreciating exchange rate is a good thing or a bad thing. It has enormous implications for the future of our country. Of course, it is political dynamite because, once one reaches the stage of taking the option of deciding to dismantle exchange controls, one lays oneself open to the arguments of those who believe—this happens in every country—that the export of capital in itself de-industrialises a country, it gives jobs to others, it reduces jobs available at home, and so on.
    Therefore, as I said at the outset, I am on the side of those who say that a strong pound plus this bonanza of gold is something for which—I know not whom else to thank—we should thank God. It cannot be the result of what politicians have achieved. So let us thank God for it and hope that we shall do not what Norway has done or what Holland has done with it but turn it to the great advantage of this great country.
    Mr. Stephen Dorrell: I entered the Chamber not expecting to make a speech. When I took my place I was told that the debate was concerned with the regulator, a subject that I do not profess to know very much about. I was also told that by one of the more arcane procedures of the House of Commons the debate is a licence to talk about almost anything that has to do with the Finance Bill as long as it can be tied loosely with the clause under discussion.
    I shall take up the remarks of the hon. Member for Stoke-on-Trent, Central (Mr. Cant) about the exchange rate and the effect that the appreciation of the pound in the past few weeks is having, and will continue to have, on British manufacturing industry.
    I begin by declaring an interest. Before I became a Member of this place I was responsible in my company for building
    1622
    up a subsidiary in Holland that was largely responsible for marketing British exports. I have some experience of dealing with a strong currency buoyed up by hydrocarbons. The Dutch disease is something that I dealt with every day of my working life before I came to this place.
    In those earlier days I used to read with some interest the contributions Bryan Gould made to the deliberations of the House of Commons. As the hon. Member for Stoke-on-Trent, Central said, he used to argue his case with considerable force. Secondly, I read his contributions because they made my life as an exporter, at least in the short term, rather easier. Thirdly, Bryan Gould taught me law when I was at Oxford. I continued to treat his contributions with the respect that I always reserve for my tutors.
    It is important to underline the real danger that the quick rise in the rate of the pound poses to large sections of British manufacturing industry that are indulging in exports. Not very long ago I was at a reception held by the CBI during which the whole range of political subjects was discussed. A comment that was made again and again was that many of the companies that specialise in exports were finding that their profit margins had been not only eaten into but had disappeared. Many of the companies that are exporting now are doing so at a loss.
    It is not difficult to understand why that is so. Over the past six months there has been a 10 per cent. appreciation of the exchange rate. There are not many companies that are able to export with that sort of margin on their sales. Unless a company can obtain a higher price in the market in which it is selling, it will find itself selling at largely the same price. In those circumstances the company's profits will bear the whole cost of the rise in the value of the pound. A pound that is rising at the rate that we have seen in the past six months poses considerable threats.
    It is not a sufficient answer to say that the rising pound will concentrate our attention as a nation on the high technology and high value industries. That may be true in the long term, but no industry can adjust its method of operation in six months to respond to changed disciplines in the short term. In the long

    1623
    term, currency stability and the pressure that that will bring through differential inflation rates, will be a good discipline for a manufacturing economy, but the large rise in the exchange rate over a comparatively short period poses substantial problems for managers in exporting industries. Those are problems that many in that position do not know precisely how to overcome.
    I accept the argument that the exchange rate is not by and large in the direct control of the Government. When the previous Labour Government were in office we had repeated examples of the Government not being able to fix exchange rates. A Government cannot say "This is the exchange rate that we want for the next few months." We had the clearest example of this when the right hon. Member for Leeds, East (Mr. Healey) decided that the United Kingdom should not become a member of the European monetary system as he was afraid that the pound could not keep up with the mark. That is a clear illustration of how poor politicians are at predicting exchange rates and controlling them. I accept that in the long term the Government cannot directly control exchange rates.
    However, I am coming strongly to the view that the Government should remove the artificial props that are forcing up the exchange rate. I refer specifically to exchange controls, which were mentioned by the hon. Member for Stoke-on-Trent, Central. At a time when our currency is being forced up to the substantial embarrassment of exporters, it seems extraordinary that we should be holding it up even further and artificially by the imposition of exchange controls.
    The hon. Gentleman said that some would argue that the export of capital leads to deindustrialisation. We may be certain—the Dutch example is a good illustration—that while the export of capital may lead to some deindustrialisation it does not lead to it with anything like the speed and efficiency of an artificially high exchange rate.
    The problem for British industry is not a shortage of available funds for investment but a shortage of opportunities for profitable investment. By keeping funds artificially within the United Kingdom we are further diminishing the areas in which companies may profitably invest. I do
    1624
    not accept that we shall contribute to deindustrialisation by removing exchange controls.
    There is a further argument in favour of removing exchange controls. At present we have the great boon of North Sea oil. That is a relatively short term boon. It would be greatly to the advantage of the United Kingdom to invest the money that is derived from North Sea oil in longer term money-earning assets overseas so that we do not have the exchange rate fluctuations of a strong exchange rate for the 10 or 15 years when North Sea oil is at its peak, followed by a fall-off. We should invest the money that is gained from North Sea oil in overseas investments so that the balance of payments implications of North Sea oil are substantially evened out.
    Mr. John Garrett: Does the hon. Gentleman have in mind investment overseas in any form of property or investment, or does he differentiate between a bijou residence on the Costa Smeralda or some other type of investment in Western Europe?
    Mr. Dorrell: The hon. Gentleman will have noticed that I justified my argument by talking about spreading income over a longer period so that income would be gained from North Sea oil and would come through the balance of payments after the oil had been exhausted. I do not know of any bijou residences on the Costa Brava or anywhere else that will yield a substantial income in that sense. It would be better to have a productive asset overseas.
    In the aftermath of UNCTAD V we are talking about the process of industrial adjustment. That is a context in which we can usefully encourage investment in developing countries in productive assets and so contribute to much greater efficiency in the United Kingdom and the development of other countries. Indeed, that is actively encouraged in some countries by Government intervention. Such an approach would be in this country's interests and in the interests of many other countries. It is a happy example of where expediency and principle happen to work in the same direction. There is a strong case for relaxing and abolishing exchange control with all due speed.

    1625
    In the context of a high exchange rate, I direct my remarks to MLR and associate myself strongly with the comments of the hon. Member for Stoke-on-Trent, Central about the need for a reform of the way in which the Government raise the public sector borrowing requirement. In the past five years we have been treated so many times to the spectacle of the Government forcing up interest rates merely to reduce them, to finance their own borrowing requirements. Would it not be more sensible to adopt adjustable interest rates or some other form of more ordered financing for the PSBR that did not have an effect on the exchange rate and an effect on interest rates throughout the economy? Those are precisely the effects that the present system has, and we have witnessed examples of those effects for many years.
    7 p.m.
    The high rate of MLR is having an undesirable effect on exchange rates and manufacturing industry and—although the hon. Gentleman tended to pooh-pooh it—on mortgage interest rates. Unless the rate goes down fairly quickly there will be a rise in the mortgage interest rate. That is not necessary if there is a more sensible way of financing the Government's borrowing requirements. I believe in that. It has the effect of going some way in dealing with the problems associated with an artificially high exchange rate.
    I mentioned the European monetary system. I said I accepted that we could not solve our problems by means of a perpetual devaluation of the pound. Is it not time for the Government to look once again at the merits of membership of the European monetary system so that businesses which seek to develop export markets may have confidence in the continuity of the exchange rate levels and stability of exchange rates. Managers in industry are not in the business of predicting exchange rates. They cannot be expected to lay down large sums of investment money merely on the ups and downs of exchange rates.
    My next subject has nothing to do with the exchange rates. It has something to do with the regulator. It plays an important part in bringing the community
    1626
    as a whole behind the Government's budgetary strategy. I press upon the Chief Secretary the idea that now that the Government have honoured their pledge to reduce the marginal rates of income tax they should, with the same expedition, proceed to honour their pledge to set up a wages forum, in which the leaders of unions and management and the self-employed may deal on the open with the conflicts involved in any economic policy.
    In the past few years we have heard much about an incomes policy, whether the Government should have an incomes policy, and the advantages and disadvantages involved. It has always been overlooked that every Government must have an incomes policy because they must decide what they will pay their own employees. When they decide the cash limits they must fix the level of wages settlements within them. In doing so the Government are making public a wages policy.
    I do not need to lecture the Chief Secretary about the force of markets. If the Government decide to pay all their employees a certain percentage more in a given year, by the force and operation of the free markets that has an effect throughout the economy. Governments have incomes policies, whether or not they call them that. The debate is not concerned with whether we have incomes policies but about the forum in which they should be decided. It is much better that those policies should be decided in discussion, where possible, between representatives from all sides, every one of whom has an interest, than it is to decide them on the picket line.
    The Chancellor, in his Budget, decided to pursue what everyone accepts to be a relatively high-risk strategy. That risk has a great chance of paying off. I hope and believe that it will pay off handsomely if we take every opportunity to explain it to those whom it most intimately affects.
    Mr. Reg Race: The principal problem to which I want to address myself is that of the public sector borrowing requirement. It has been part of this debate.
    Government supporters talk about the PSBR as though it were abstract and something removed from the real world.

    1627
    The PSBR is about people. It consists largely of payments made to the unemployed and the failure to recoup income tax and national insurance contributions from them. Indeed, one of the principal arguments for cutting the PSBR is the need to cut unemployment. If we cut the PSBR by means of a policy with an unemployment target, which says that we shall get down to the mid-1960 levels of unemployment in five years, it will do more than anything else to eliminate the PSBR. The National Institute of Economic and Social Research showed that if we got back to the unemployment levels of the mid-1960s we would have not a public sector deficit—as we have now—but a substantial surplus of around £3,000 million on the public sector.
    The problem to which the Government must address themselves is not necessarily one of switching resources between the public and private sectors. That is a symptom of our problems rather than the centrality of them.
    I was interested to hear the comment made by the hon. Member for Loughborough (Mr. Dorrell), who said, in a phrase that was completely unnoticed by Government supporters, that British industry did not now have a problem about finding funds to invest but did have one in finding proper investment possibilities for them. The Government are in a difficulty that they are trying to move resources from the public to the private sector without any economic justification. We have already had the evidence of the Treasury to the Wilson committee on financial institutions that went into some detail about this question. It concluded that there was absolutely no problem about the financing problems of British industry in terms of investment but that there were other problems that had to be sorted out.
    This afternoon we witnessed the interesting spectacle of Government supporters trying to persuade their own Government not to drag back from their hawkish monetary policy. It has been instructive for the public today to listen to Government supporters making those points and arguing that the interest rate on mortagages should be increased dramatically to fit in with the Government's overall monetary policy. Many people—not only mortgage holders, but also those outside that category—who
    1628
    listened to those arguments must have thought that they might not vote for the Conservative Party at the next election if that is the kind of measure the Government take.
    The problem that the Government will face over the next three or four years is whether they can obtain public support for their policies. Let us talk about that. The Cabinet may have discussed the general political objectives of the Government and the general economic policies that they want to see carried out so as to secure their return at the next general election. It would have been eminently sensible if they had done that. One of the questions is what level of income tax the Conservative Party would like to see at the next general election. We have heard from a number of Conservative Party politicians that there is a case for a 25p basic rate of income tax.
    If we have a 25p basic rate of income tax, and we achieve that before a general election in five years' time, it can only mean—given the Government's commitment to maintain their tight monetary policy and to maintain the parity of sterling at or around the kind of level at which it is now—substantial and continuing cuts in the public sector in order to pay for that income tax commitment.
    If we get down to a 25p in the pound rate of basic income tax, that will mean, on my calculations, that there will have to be a cut of around £2,000 million each year in real terms in the public sector borrowing requirement. If the Government really believe that they will be able to carry that policy through with the support of the British people, I am certain that they will have to think again very quickly, because there will be substantial public opposition to the kinds of cuts that we are having at the moment and to any future cuts. If the Government reflect on this question, it may be that when they publish their next public expenditure White Paper, in January, we shall find that they have thought carefully about the kind of policy they introduce. I am sure that their intention is to make that their first big attack on the rolling programme of public expenditure provision.
    Mr. Peter Bottomley: Does that argument apply to the introduction of the 25 per cent. rate by the previous Chancellor in regard to the

    1629
    first slice of taxable income? I recognise that it is not as great as having the basic rate at 25 per cent. altogether, but does the same logical argument apply?
    Mr. Race: The argument applies in part, because the 25 per cent. rate of income tax, the lower rate band of tax, which the TUC wanted the Chancellor to introduce—he introduced it and it has been of great benefit to many lower-paid workers in this country—was a charge on the Treasury and had to be paid for in some way. No one is disputing that. What I am saying is that, given the monetary commitment of this Government to the kind of monetary ceilings which have been announced, any reduction on that scale in the basic rate of income tax is bound to have absolutely crucial and serious consequences for the level of the public services.
    7.15 p.m.
    I turn now to the size of the public sector borrowing requirement in relation to the size of the deficit in the PSBR in other countries. We often have the spectacle of Conservative Members talking as though Britain were some kind of scroungers' paradise, some kind of luxury area for the public sector, when clearly this is not the case. Anyone who looks at the figures seriously knows that very well.
    The figures published by the Organisation for Economic Co-operation and Development show that the average percentage of gross national product which was accounted for by the public sector in 1975 was 49 per cent. I have taken 1975 as the base year because that was the year before the Labour Government started to cut public expenditure. That was the historic high in public expenditure terms in the United Kingdom economy.
    What do we find when we compare the OECD average of 49 per cent. with the United Kingdom figure? The United Kingdom figure, as it happened, was 45 per cent., for Canada the figure was 42·5 per cent., for the United States of America it was 36·7 per cent., and for Japan it was 27·4 per cent. These figures are not startling. They are well known to many Conservative Members, who really must stop talking in the way in which some of
    1630
    them have today about the level of the public sector borrowing requirement being an unsupportable burden for the British economy. It is a load of bunkum, and progressive elements in the Conservative Party know that.
    Another question which is extremely important to the British people at the present time is what we do with our North Sea oil resources. The Labour Government published last year a White Paper on North Sea oil and economic strategy, "The Challenge of North Sea Oil". In that document they spelt out the kind of commitment the Labour Government had about using North Sea oil resources for the benefit of our economy as a whole. They said, on the one hand, that North Sea oil revenues ought to be used to reduce income taxation where this was possible, to improve our public services where this was possible, and to restructure industry where this was possible.
    We have had absolutely nothing of a practical character from this Government as to the way in which those oil revenues are to be used. We have simply had assertions as to the superiority of market forces. I want to ask the Chief Secretary a simple question. Do the Government intend to follow the policy of the Labour Government in this simple respect and to publish an annual report—as was promised in the White Paper published by the Labour Government—on the way in which North Sea oil revenues are to be used so that the House may make some assessment of whether we are suffering from the Dutch disease, the Norwegian disease, or any other disease that may be prevalent? I believe that the question of North Sea oil revenues is very significant indeed.
    There has been a very strong commitment in the Budget to monetary targets. If we are talking about monetary targets, let us talk about the real economic effects of cash limits on the public sector. Over the last three financial years the impact of cash limits on the public sector in the United Kingdom has been disastrous in macro-economic terms. It has been disastrous because it has taken £7,000 million from real demand. That has been the global impact of these cash limits on our economic growth and on our public services generally. This impact has really been out of this world.

    1631
    In the 1960s we used to regard a Budget which took £2,000 million from income taxation as a give-away Budget, a marvellous Budget, that would improve our economic performance and help people. Now we see the year-by-year gradual erosion of the public sector expenditure programmes by this cash limit process.
    This matter ought to be looked at seriously by the House, because it is producing a position in which the global demand management of the economy by the Government cannot be carried out properly. It is also undermining the way in which the public services are organised and run. When there are strict cash limits, what happens is that the public services, if they are near to the cash limits halfway through the financial year, have to make random and unscheduled cuts in their expenditure programmes in order to stay within the cash limits, to the detriment of many of the public services in which people in Britain work.
    The practical consequences of this budgetary policy that we have seen have not yet hit the newspapers, they have not yet hit the television screens, but they will do so very quickly, because we are already seeing local health authorities and local authorities making known their plans about public expenditure. I will mention some of them. No doubt hon. Members will be interested in the way in which these plans are being carried out.
    In South Glamorgan, for example, a vital service such as the ambulance service will have a 10 per cent. financial cut. As a result of the Budget, there are very substantial effects in educational services up and down the country. The Secretary of State for Education and Science, in a parliamentary answer the other day, told us that there would be 2,000 fewer nursery places because of the cut in the nursery education programme.
    Virtually every shire county in the country is making cuts in education programmes. In Cornwall there is a £125,000 reduction in this year's education budget. Newham, a Labour-controlled authority, is cutting out a third of its nursery building programme because of the effects of the Budget. In Sheffield the capital building programme is being cut by £48,000. Clwyd is taking a cut of £1·6 million in the current year.
    1632
    Cheshire is a classic example. It is a Tory-controlled authority and if the plans that its executives and officers are at present putting through are carried out, it will cut 547 teachers off the pay roll and shut 50 schools. Hampshire is planning the same kind of butchery in its education services. It is planning to cut 900 jobs in the education service, including 400 teachers. In Kent there will be a 5 per cent. cut in manpower across the board.
    This kind of global and massive reduction found support from the hon. Member for Wolverhampton, South-West (Mr. Budgen), who said that if we were to have butchery we should have even-handed butchery. I think that Tory Members should reflect on the nature of the evenhanded butchery that is meted out by the Government to the public services, and the political consequences that that involves for new members of the Government with marginal seats. The impact of that type of policy will mean that the local community groups, as well as political parties in their constituencies, will be fighting hard against the consequences of the budgetary policy and any future public expenditure policy that the Government introduce.
    Another area that we saw as important is one which the Chancellor of the Exchequer magnanimously said in his Budget speech he would not touch. If I remember correctly he said "it is not our intention to reduce spending in the Health Service." We all know that that statement cannot be taken at its face value. The reality is that VAT has been increased on supplies to the National Health Service. There is a large increase in the relative price of goods which the NHS buys because of the large amount of energy used in the production of medicines and other equipment. There is the failure to index NHS services in line with increasing demand so that when there is a larger number of geriatrics in the population the amount of money allocated to regional and area health authorities will not be increased to compensate for that legitimate increase in demand.
    There is the increased cost of energy which is, in part, a consequence of the Budget. There is a £22 million shortfall in the cash limit which will be imposed by the Government as a consequence of their policy. The Government say that

    1633
    the Clegg comparability findings for ancillary staff and ambulance men will not be implemented in full. They may be paid in full to the workers, but the area and regional health authorities will not receive the full amount of the increase recommended by the Clegg report. They will have £22 million lopped off it.
    There is also the impact of resource reallocation. That cannot be underestimated at this time. If we have resource reallocation with a declining National Health Service budget, this poses dramatic problems for the regional and local health authorities because their budgets are held back to allow the deprived regions to receive more.
    All those factors will cause a very substantial loss of jobs in the Health Service and education. We can already see demands for the next round of public expenditure cuts. There was a demand put forward in an article in the Evening Standard recently that the school meals service should not be statutorily imposed but should be voluntary. It was said that it should be the responsibility of the local authority to determine whether the school meals service existed.
    If that kind of policy were to be followed through by the Government, it would mean not just a diminution of the nutritional intake of many of our poorer children—indeed the majority of the children in our schools—but a substantial attack on jobs in the public sector and an increase in the PSBR. That must be borne in mind, because if the number of people on the dole is increased, automatically, all other things being equal, the level of the PSBR is increased. People begin to claim unemployment benefit, stop paying tax and national insurance contributions, and receive other State benefits.
    Therefore, the policy of cutting spending in the public sector and justifying it on some spurious ground of moving resources from the public to the private sector is really nonsense. The Government will very quickly recognise that because there are people on both sides of the Committee who will ask them a very simple question in 18 months. They will be asked "How much, in terms of resources, has been moved from the public to the private sector? How much extra investment has actually been
    1634
    generated?" The matter will really come home to roost at that stage, because I suspect that the answer will be "A very small amount indeed".
    There is one other problem that the Government face, and that is the question of wage expectations in the next pay round which begins in August. This cannot be ignored. Before I became a Member of the House, I was a member of the National Union of Public Employees and wrote wage claims for that union. One thing that I would do, if I were doing that job now, would be to look at the extent to which the Government's budgetary policy had increased VAT, and had increased prices because of the devaluation of the green pound, to see what the going rate would be in terms of the claims which would be put in by the trade union movement, for the next wage round. There is absolutely no doubt that the going rate in people's minds, which is what matters, will start at 20 per cent.
    The Government may say "All right, let us control that in the private sector because employers will simply pay what they can afford and those people who make excessive wage claims will soon run up against hostile employers". That will be tested in the market place, and we shall see what the Government do about it.
    But let us look at the public sector. The reality is that if we have a strict cash limit in the public sector—the Health Service, universities, water authorities and local government—the real incomes of people in the public sector will be cut. It may be that the Government feel that the decline in our relative wealth, because of the increase in the price of oil, has to be shouldered by somebody.
    Let us be absolutely clear about the Government's policy. Are they saying that because of the cash limit policy in the public sector they will pass on all the problems of oil financing and the reduction in real income which that generates to the lower paid workers in the public sector? Is that what the Government propose? Will they allow income tax on the higher paid to be reduced in forthcoming Budgets, or are we to have something else?
    How will the Government deal with the question of fairness? A policy of

    1635
    strict cash limits in the public sector will undermine the pitiful wages that many workers take home. I should like to see those on the Treasury Bench take home what a hospital ancillary worker or a local government council worker takes home at the end of the week. They would soon change their idea about what was an adequate income if they had to do that.
    The Government's general economic strategy and policy on cash limits will actually undermine any kind of policy they have on wage bargaining in the next pay round. I also believe that the policy that is followed in this Budget will undermine the Clegg comparability inquiry, regarding the comparison between public sector and private sector employment. If there is a 20 per cent.—or, indeed, a 6 per cent.—increase in prices and a consequent increase in wages in the private sector to compensate for that over the next 12 months, the gap between public and private sector incomes is immediately opened up again and defeats the object of the Clegg inquiry. We shall have to see whether the policy of the Government is to countenance that.
    I believe that the even-handed butchery which the Government propose in the Budget will be quickly rejected by the people because they will see what is being done in their name and will say "We do not want that. We do not want the anarchists in the Conservative Party"—because that is precisely what it is, anarchy.
    The Conservative Party often says that trade unionists are anarchists. In my view, the word "anarchy" means that people do not want to see a form of government impinging on their lives. Anarchists are people who want to restrict the legitimate areas of government. That is precisely the kind of argument we have had from Treasury Ministers about the imposition of their policies. Their attitude is "Leave it to the market place"—in other words, leave it to the anarchists.
    7.30 p.m.
    Mr. Michael Spicer: I had not intended to intervene, but I was very much triggered off by the speech of the hon. Member for Wood Green (Mr. Race). It only dawned on me towards the end of
    1636
    the speech, when he reminded us that he was previously an active member of NUPE, that the whole of his speech fitted into some sort of context. Up to that point, it had not made much sense.
    Of all the countries that the hon. Gentleman mentioned, the United Kingdom had by far the highest proportion of GDP allocated to public spending. I am open to correction, but I think that the figure the hon. Gentleman gave was 49 per cent. at its peak, with all the others ranging down from that.
    Mr. Race: The figure that I gave was 49 per cent. as the average for the 10 OECD countries. The figure for the United Kingdom was 45 per cent. Of course, there were some below that; for example, Canada, 42·5 per cent.; Japan 27·4 per cent. and the United States 36·7 per cent.
    Mr. Spicer: Japan and, until recently, the United States are successful countries. The real issue which the hon. Gentleman misses, as does most of the Socialist Party, is that our GNP is probably the lowest of all the countries that he mentioned. Of course, there is pressure on the provision of public services. It is precisely because it is necessary for this country to expand its GNP—and no public sector will do that—and because the fruits of hard work in the private sector have to be earned before we can start expanding the public sector, that the Conservative Party was elected to govern the country.
    The whole thrust of the hon. Gentleman's argument goes back to the cloud-cuckoo-land of Socialism, which believes that the money grows on trees and that it is simply a matter of pumping more money into the public sector, without appreciating that it must come either from a creative private sector or from inflation. The logic of what the hon. Gentleman was saying is the logic of the last five years of Socialism, because since they tried to do both we have experienced inflation. Because the Budget strategy is aimed at bringing down the rate of inflation, I am one of those who beg the Government to stick to their guns.
    A lot of discussion has taken place about the rate of interest and about the exchange rate. I very much agree with what the hon. Member for Stoke-on-Trent, Central (Mr. Cant) said, although

    1637
    there was one part of the speech where I got a little lost. That was when he said that the pound was strong because of the balance of payments deficit. I did not follow that argument very closely. However, by and large, I agreed with the hon. Gentleman when he said that on balance a strong pound was a good thing.
    I take the view that the right rate for the pound is its market rate. I do not think that there is any other right rate for the pound. Therefore, I disagree with my hon. Friend the Member for Loughborough (Mr. Dorrell) when he says that the value of the pound is extraordinarily high. It has been much higher in the past. I accept entirely what my hon. Friend said about the difficulties for industry when the value of the pound moves erratically, but it would need a lot of justification to argue that the value of the pound is particularly high at present. I believe that the present trend in the value of the pound is good for British industry. It is having an extremely salutary effect. The contacts that I have in industry are already reacting to this.
    Mr. Donald Anderson: Has the hon. Gentleman not read a number of recent company reports which blame their performance in export markets on the strength of the pound? Of course, this trend can only be fortified by a high MLR.
    Mr. Spicer: The question is not whether exporters are complaining about the present value of the pound, but rather what they are doing about it to make themselves more efficient. In a national context, a strong pound has the effect of making people more efficient at what are historically not very unfavourable exchange rates. For example, it was not that long ago that we had a pound that was worth $2·40. Therefore, I very much hope that the Government will not be influenced by those who complain about the present rate of the pound.
    Mr. Alexander W. Lyon: Will the hon. Gentleman explain to me why it is that over a substantial part of its recent historic past Germany has kept the deutschemark below the market rate, with the objective of increasing its export performance?
    Mr. Spicer: I do not believe that that was its objective. Indeed, the German example proves the point that I am trying to make. Over a long period of time the deutschemark has been an extremely strong currency, and Germany has thrived because of that. There may be all sorts of other reasons why Germany has been embarrassed by its surpluses, but it was not because it was trying to increase its exports. In fact, quite the converse. Germany proves the point that a strong currency is a good thing for the effectiveness of the industry concerned.
    Mr. Jack Straw: Has the hon. Gentleman considered the example of Holland, where there has been deep anxiety about the level of the exchange rate for precisely the same reasons as the exchange rate has risen in this country, namely, the distorting effect which their energy resources have had on the overall level of their exchange rate and the effect that that has had on manufacturing exports?
    Mr. Spicer: The economies that I want to emulate are those of Japan, which has an extremely strong currency, has sold effectively around the world and has an efficient industry, and West Germany, which also has an extremely strong currency and has sold effectively around the world. Conversely, the United States has recently had a weak currency, which is not helping in the export of its manufactured goods. The Dutch have had their own problems. How they have reacted to their perhaps over-valued currency because of gas, and so on, is a matter for them. I maintain that a strong currency, in those economies that have been particularly successful in the Western world has been to the benefit of those countries.
    I come to the question of interest rates. The hon. Member for Wood Green complained about the Conservative Government potentially hitting the public sector as against the private sector. With interest rates, I think that one can argue the opposite. I believe that the Government are right to run a tight monetary policy and, therefore, a high interest policy. I hope that they will stick to their guns. The worst thing that the Government could do would be to try to hang on to high interest rates while at the same time letting it be known that they will shortly come down.

    1639
    Reports today in the London Evening Standard about nods and winks from the Government to the building societies are very disturbing. According to these reports, the Government have told the building societies that the test of virility will go on but they need not worry because the minimum lending rate will come down in the next month or so. That is an open invitation to buy gilts tomorrow and to put the pressure on. I believe that if for political reasons one is worried about higher mortgage rates, this is the time not to be worried. After all, everyone is agreed that we have plenty of time. I am concerned about Ministers being called in and nods and winks being given to the building societies. The Government must stand firm, and be seen to stand firm, on their strategy. I am clear about their strategy—it is to get inflation under control.
    Conservative Members have not said enough in public about the huge increases in prices that were in the pipeline when we came into office. It is time that we dispelled the myth that we took over, abolished the Price Commission and suddenly prices spiralled as a result. That is a myth. The price rises were in the pipeline.
    Because of the high pound, people are now adjusting downward their inflation forecasts for the end of this year. I apologise for not being here when the right hon. Member for Leeds, East (Mr. Healey) referred to a company called Economic Models. That is a company of which I am managing director, and I should declare an interest. The right hon. Member said that Economic Models had given a gloomy forecast. I have no editorial control over forecasts, but I should point out that all along our company has had a much lower forecast than the Government have had for the rate of inflation. This was because of what we thought would happen to sterling.
    There is no question in my mind but that we inherited great inflationary pressures and that the policies that we are now putting into effect will bring down inflation. Even Government forecasts are now being revised downward. We have introduced a policy of injecting competition, and that is right. Also, we have a policy of trying to motivate, through tax cuts and incentives, those who create wealth in order to create more wealth,
    1640
    from which we shall be able to pay all the members of NUPE and everyone else in the public sector.
    When that happens we shall be able to return to a situation in which the standard of our public services equals that enjoyed in other countries. We have inherited some of the worst public services in Europe. That is not of our making. It is nothing to do with the Conservative Party and the cuts that will take place in the future. It is what we have inherited. We have done so not because of the evil-mindedness of the previous Government but because they did not bother about generating resources from which we could create public services.
    Mr. Race: Will the hon. Gentleman reflect on the fact that the whole plan for cuts in expenditure during the term of the previous Labour Government emanated from three sources—the International Monetary Fund, the City of London and the Conservative Front Bench? Therefore, to say that the Conservative Party has no responsibility for the kind of public services that we have is really stretching the point.
    Mr. Spicer: What a terrible indictment of the previous Government. They were so out of control of themselves that they had to go to the Conservative Front Bench, the City of London and the IMF to get their policies. Of course that is true, but what an extraordinary intervention by the hon. Gentleman. It is certainly true that the IMF put things right, and we are very grateful for that. It was the only way in which we could possibly tolerate Socialism. However, the idea that the Conservative Front Bench helped to formulate the Labour Government's policy is a view that I have not heard before from Labour Benches.
    I took part in this debate as a reflex action to the speech of the hon. Member for Wood Green. It was a very well prepared speech, but it was totally misguided. I also rose to plead with my Government, and particularly my right hon. Friend the Chief Secretary, who feels strongly about these matters, to make sure that they stick firm to their correct strategy. Certainly their strategy is not just for this year and this Budget. I hope that they will see it through the next five years, so that at the end of that period

    1641
    we can talk about having a Government who are popular.
    7.45 p.m.
    Mr. Alexander W. Lyon: The speech of the hon. Member for Worcestershire, South (Mr. Spicer) is a good indication of the fact that a spontaneous speech is always the most interesting and helpful in these debates. This debate has been described as "unnecessary" by some earlier speakers and they have suggested that we should abandon this practice of using the debate on the clause. I believe that it is useful for us to sit back and consider the impact of the Budget on our economic prospects in the light of the immediate reactions to it, and the OPEC decisions which have changed the outlook and which should have changed the Budget judgment.
    The best part of the debate will be the speech of the Chief Secretary. I listened with interest to his speeches, both during the Budget debate and then on Second Reading of this Bill, to find out the strategy for the future.
    The Chancellor made one of the shortest Budget speeches on record. I approve of that. I have always thought that the long, rambling speech that most Chancellors make before getting to the meat of their proposals is a complete waste of time. I think these points would be better used for justifying speeches later in the course of our debates on the Finance Bill. As a result, the Chancellor has never actually argued the economic case for his proposals. He has said that his Government were elected upon a strategy of giving back to people more of their own money. Thus they hoped to encourage incentives and give people the freedom of choice that came from switching over to indirect taxation. They hoped that from that would spring a new initiative which would change our economic prospects. The Chancellor never argued this out in terms of the economic structure, or the analysis of the trends and how this kind of philosophy would relate to those trends.
    In the Budget debate, the Chief Secretary was very careful not to say anything at all about economic analysis. He gave us a good knockabout speech about the Opposition and the leadership prospects. All we want from him tonight is a serious attempt to answer the doubts
    1642
    that have been expressed throughout the Budget debate, throughout the Second Reading and throughout the earlier Committee speeches on the effect of that on the economic prospects as a whole.
    What do the Government think they can do to change the economic prospects? My answer is that the Chief Secretary does not know. I believe that it is his honest opinion that it is beyond our capacity to be able to decide what will be our economic prospects. One can change the atmosphere by creating a different kind of phychological attitude towards work and the enrichment of oneself, but as a Government one cannot dictate the economic prospects ahead.
    I am sorry to have to give the Chief Secretary an example which he might use against me. Only yesterday at a conference arranged in the House I was listening to Professor Maurice Peston, who was an adviser to the Labour Government, and he said precisely that. He, as a distinguished economist, shared with many other economists a distinct bewilderment about what was happening in the world economy, and therefore what was happening in the national economy, and about what any economic adviser should be telling a Government to do to change the economic prospects.
    If economists and Treasury experts have reached that stage, perhaps it is right that, in common with the Prime Minister, we should go for what basically are "gut" judgments. In other words, instead of saying "Will the money supply do this? Should we do that because the balance of payments is so much? What about the rate of sterling?" we should say to ourselves "What is it that we in this country basically want, and should we put it as our top priority?"
    The hon. Member for Worcestershire, South was right to say that the real difficulty about our public services is not so much the cuts—although I feel that the cuts which are now envisaged, and those imposed by the Labour Government, are detrimental—but the fact that as a country we are too poor. I believe that if we are too poor to take on all the priorities we would like, the emphasis should be on diverting resources to the public sector, because it is that sector which provides the basic standard of living. I have argued that case before and the Chief Secretary knows my view.

    1643
    What is clear is that it would have been easier for us in the Labour Government, and it will certainly be easier for this Government, if we can achieve growth. The real question is how to get growth. If the professors have gone away, covered themselves in books and decided that they do not know what they can do to attain growth, we are entitled to say that there are some things that will not achieve growth. We shall certainly not achieve growth by squeezing the economy dry or, to use the Chancellor's new version of the old Treasury nostrum, by squeezing inflation out of the economy.
    Inflation is an evil which we should all like to prevent if we could do so. It is obviously better if, year by year, the increase in prices is relatively small. We recognise that there are some who cannot protect themselves easily against inflation and they face difficulties. There is more difficulty in planning for industry than anything else where there are future commitments if inflation is to increase markedly. But in terms of overall competitiveness for the rest of the world, the real difficulty about inflation is the question of how much out of line our inflation is compared with that in other countries. The problem for us is that if we go to 16 per cent., 18 per cent. or 20 per cent. in the coming year, it will be considerably ahead of some of our major competitors.
    Inflation has never seemed to me to be the kind of ogre that some Conservative Members believe it to be. I remember Roy Jenkins when he was Chancellor saying that if ever inflation reached double figures, that would be the end of democracy in our time. Well, we have been into double figures for most of the past 10 years. Although I accept the strains which that sometimes creates, I see no sign of the end of democracy in our society. The idea that high inflation is consistent with a Weimar Republic, or indeed a banana republic in South America is not true. It depends on the relationship between our inflation and that in other countries. It depends also on the relationship between the ultimate capacity of the country to increase our productivity and our payments to our workers to pay for these increased prices.
    However, the basic problem relates to supply and demand and to increases in
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    growth. We have to examine the old Keynesian nostrums because they are still highly relevant. Perhaps Keynes has to be adapted in relation to the new pressures on our economic society. Perhaps things do not work as quickly by changes in demand as they used to. However, demand is still important. I accept that we also have to look at the supply side. But the supply side in this country is capable of development at the same rate and in the same way as the development in other Western European economies if we were to apply to our economy the same kind of investment as there exists in Germany, Japan, the United States and France. If our people are to work on average with £8,000-worth of machinery when those in Japan are working with £26,000-worth of machinery and in Germany with £30,000-worth of machinery, I believe that the kind of competitiveness that we can apply is very much less. That is a single factor in the comparison between economies which shows up markedly worse for us than for them.
    What came out of the conference which I attended the other day was a series of graphs illustrating the prospects for the balance of payments beginning in 1950. In 1950 the graph showed a marked positive balance between imports and exports. It showed the prospective lines converging at some time in the 1980s and then imports running ahead of exports. The picture in 1975 and that in 1970 was the same, except that the convergence was estimated to come rather earlier, and indeed did so. The fact was that those lines were converging in roughly the same arc, whatever Government were in power and whatever the policy adopted. Our balance of payments difficulties have been coming upon us over the past 20 years at roughly the same rate whatever Government were in power and whatever their policy. That occurred whether the Government were employing the policies of Lord Barber in 1970, which is not unlike the present policy, or the policy followed by the Labour Government in 1974, or indeed in 1968.
    The fact is that we have paid too little attention to the problems of investment and of getting our industry adjusted to compete with our industrial competitors. We have been much more concerned

    1645
    either with the balance of payments position or with the rise in inflation or, as at present, with the money supply. All those factors are regarded as being more important than the essential matter of growth—the essential requirement of supplying more to the market and of ensuring that the demand exists to encourage the market.
    The reason we do not get the investment is that industrialists who make the decisions about investment in the private sector do not believe that they have a long period ahead in which to make the return. Therefore, they do not put money in when they should. It is necessary that there should be a diversion of resources into industrial investment which is ordained, not by the anticipation that one is to make a reasonable return within the near future, but by the consideration that this money must go in at some stage to make us more competitive and to increase our production of wealth. That can be done only by the State.
    I am sorry to disagree with the claim of the hon. Member for Worcestershire, South who said that prospects for growth are generated only in the private sector. That is manifestly untrue. A great bulk of the public sector is part of the wealth-producing area. The National Health Service is not, of course, a wealth-producing area, but the gas and electricity industries are. A great area of public investment is crucial to our economic prospects and cannot be neglected.
    8 p.m.
    The Red Book outlines a reduction in public sector investment of about 5 per cent. and at the same time notes that the margin of error in that forecast is about 8 per cent. That indicates that in the public sector, where there has been better investment than in the private sector in recent years, Government policy means a major cut-back in our wealth-producing capacity. That comes out of public expenditure and out of the public sector. If, in addition to that and in response to their ideological commitment, the Government stop investing in the private sector and leave the private sector to invest in an atmosphere of high interest rates, the likelihood of obtaining the disproportionate sum of money into investment in the private sector is very slight.
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    Seen against the background of future prospects, painted so ably by my right hon. Friend the Member for Leeds, East (Mr. Healey), it is clear that the strategy adopted by the Government will not work. In one sense, I hope that the Government strategy does not work. I want Labour to win the next election. I can say in a partisan manner that if the Government's strategy does not work the Labour Party will be in government next time. But that would be too high a price to pay for a party victory. I want the country to get on its feet and to improve its wealth-producing capacity. That will not happen with the measures which the Government are adopting. They are out of line even with the commitment that should be followed over the next five years in the light of the analysis that could be made at the time of the Budget. In light of what we now know, the position is even worse.
    The prospective investment intentions of British manufacturing companies recently recorded by the CBI have shown a sharp downturn. The same picture was shown in the manpower estimate of employment prospects over the next 12 months that was recorded a week ago. The estimates of various forecasting groups—the hon. Member for Worcestershire, South says that he is the managing director of one—also show a sharp downturn. The famous Treasury report that has been quoted so many times, and for which the Chief Secretary was apparently responsible, shows nil growth over the next five years. If we have nil growth we shall not increase the living standards of ordinary people as the Government want. It does not matter whether we reduce the money supply, help the balance of payments or do something about the parity of sterling. If we do not have the growth, we shall not improve the private standard of living, let alone the public standard, and public services will not improve.
    Mr. Peter Bottomley: Surely the hon. Gentleman is not putting any more credence or logical argument on a projection of nil growth—even if that exists in the forecasts—than he would have done on the previous Government's forecast four years ago of 3 per cent. growth.
    Mr. Lyon: Such trite points can be made, but the estimates in both cases were presumably serious estimates by

    1647
    those with greater access to the figures than either the hon. Gentleman or myself. All hon. Members who have debated economic forecasting know that forecasts are frequently wildly wrong. The Conservative Party hopes that the current forecasts will prove to be wildly wrong. If the Treasury estimates that there will be nil growth over the next four or five years, the Government's expectations and their promises to the electorate that growth would be increased by their strategy do not seem to be confirmed initially by the response to the Budget and by what has happened since the Budget. That is an alarming fact for Conservative Members to accept.
    What will the Chief Secretary say to give us more optimism about our economic future? What will change on the present prospects? That is what it is all about. It is no good saying "We hope that the psychology will change and that workers will work harder. We hope that they will be more restrained." The right hon. Gentleman must give us some indication of how the Government will be able to change that climate. I do not think he can do that. The adoption of a free enterprise and noninterventionist attitude to a system rapidly collapsing around our ears, all round the world, will not work.
    When the Prime Minister visited Tokyo she abandoned her adherence to market forces. She came to the conclusion, along with the other leaders, that something had to be done about energy imports. Although I do not agree with all the arguments of my hon. Friends in the Tribune group in favour of import controls, the Cambridge school has made out a case for such controls and produced an analysis which needs serious consideration. If that is good enough for oil on a world scale, why is it not good enough for us to consider as a way of protecting our industry for a limited period, until we achieve greater investment in our industries and are able to make them more competitive in the world markets? That is a better strategy than the one adopted by the Government. If the Chief Secretary has a better strategy, I should like to hear it.
    Mr. Straw: My hon. Friend the Member for Wood Green (Mr. Race) spoke about the importance of the public sector in the economy and I wish to speak
    1648
    briefly about that subject. Conservative Members continue to fail to appreciate the connection between the public sector and the private sector. They are not two separate sectors, one sucking cash out of the other. They are interrelated, and many of the Government's public expenditure cuts will have a direct and damaging effect, not on the public sector and its employees, but on the private sector, on big businesses and small businesses alike.
    My hon. Friend the Member for Wood Green spoke about the cuts made in the capital building programmes of many education authorities. Those cuts fall not on bureaucrats in education departments but on the construction industry. Restrictions on the cash limits in the National Health Service will feed through to restrictions on the supply of goods. That, again, will cut into the employment and prosperity of British manufacturing industries.
    Although that point is often ignored by Conservative Members, it is not ignored by Conservative business men in my constituency. They appreciate the connection between the public sector and private wealth and their prosperity and employment only too well. A small dyeing and finishing works was sustained through a difficult period in the past year almost entirely by National Health Service contracts. It would not have got through on the basis of this Government's policy. In referring to the argument whether finance exists in the market for investment, I can also think of a small firm which has just got under way making small dumper trucks which would not have got going but for investment by the National Enterprise Board. Whatever may be said in the City or to the Wilson committee, the man who established that business went round the banks searching for equity participation in the business. He asked the Industrial and Commercial Finance Corporation for its participation. But it was only when he reached the National Enterprise Board, which took the trouble to see what he was doing, that the ICFC was persuaded to come in. That is another example of the importance of public sector institutions to private industry, not only in my constituency but in other areas of the country.
    My hon. Friend the Member for York (Mr. Lyon) referred to the strange picture of the Prime Minister defending her

    1649
    policies in this House but going off to Tokyo and adopting an interventionist line. A similar thing is happening to hon. Members at home. We hear hon. Members defending the non-interventionist policies of the Government to members of their Front Bench. What happens when they go to their constituencies?
    Two weeks ago, I was privileged to attend the first meeting of the North-East Lancashire Development Association, a body that exists to encourage development within North-East Lancashire. There were present five Members of Parliament—two Labour and three Conservative. The conclusion of that meeting was a resolution, unanimously passed, defending North-East Lancashire's assisted area status and urging the Government not to cut into that status. Yet we know that those same Conservative Members are party to the Government decision to cut into assisted area status. The most amusing part of that meeting was to witness one of those Conservative Members moving a motion that, in order to protect North-East Lancashire's status as an assisted area, it should become a development area. I was pleased on that occasion to second the motion put forward by the Conservative Member.
    Conservative Members are speaking with two voices, one in the House of Commons and another in their constituencies. They know only too well that the consequences of the policies they have decided in the House will be adverse and will lead to loss of jobs in their constituencies.
    I should like to speak briefly about one aspect of unemployment—whether the Government should publish forecasts of unemployment, along with forecasts of the other possible effects of their Budget measures. I had hoped that the House might have a chance to vote upon the matter. But that has not happened.
    Since an amendment to the Industry Act was moved by the hon. Member for Motherwell and Wishaw (Dr. Bray) in 1975, which now appears in schedule 5 of the Industry Act, the Treasury has been required to publish a range of economic forecasts twice a year. Many appeared in the Red Book on Budget day.
    1650
    Those forecasts include gross domestic product, consumer expenditure, private and public sector investment, stock building and so on. Important though they are, the only one of direct relevance to people in this country which they could immediately comprehend is the rise in the retail price index. But it is a grave omission that the most important figure forecast of all, namely, the rate and numbers of unemployed, should not be published by the Government. I do not blame this Government for the situation. I regret to say that the Labour Government also set their face against publishing unemployment forecasts. I believe that both Governments have been wholly wrong.
    8.15 p.m.
    The public surely has a right to know what are the likely unemployment consequences of the Budget measures. If they have the right to know what are the consequences for public corporations' fixed investment and for the retail price index, they also have a right to know the likely unemployment consequences.
    I also believe that these forecasts should be published because they will improve the quality of decisions. The great disease of all Governments is optimism—
    Mr. Chris Patten: And of forecasters.
    Mr. Straw: Forecasters as well. But they are less wrong in their optimism than Governments. We saw this over-optimism in the last Government. We are seeing it here. Under the last Government, Front Bench spokesmen kept saying that the corner would be turned in months rather than years, that 4 per cent. or 5 per cent. growth, or at least 3 per cent., was soon to be on the cards.
    We know what happened. We were obliged to enter the election campaign knowing that manufacturing output in 1979 was no higher, indeed slightly less, than in 1974. We are seeing the same under this Government. They say that the situation may be difficult for the next year or so but that once we see the light at the end of the tunnel, or suchlike cliches, things will get better. I do not believe that.
    Let me refer to experience over the past 10 years. Unemployment rose to 1 million by the winter of 1971. It rose from

    1651
    about 600,000 or 700,000 at the beginning of the year. Unemployment forecasts were not published. But we know that the Treasury was telling the Prime Minister and the Chancellor of the Exchequer of the day that unemployment was likely to rise to 1 million during that year. We can also deduce from the measures, or lack of measures, taken by the Chancellor and the Prime Minister at that time that they failed to take full note of those forecasts. They decided to shoot the messenger rather than to accept the bad news. Had those forecasts been published when the Treasury was putting them before the Prime Minister and the Chancellor, it is my belief that the Conservative Government of that period would have embarked on much more expansionist policies and would have at least sought to avert that rise in unemployment much earlier.
    One can use the same argument when talking of the experience of the Labour Government in the period between 1976 and 1977. Towards the end of 1977, unemployment rose to over 1½ million. Had the Government been required to say to what level unemployment was forecast to rise—these forecasts are not as wrong as people think—they might have reconsidered their policy decisions and taken steps much earlier than they did to avert the rise. In the end, they did take steps to reduce the level of unemployment just as the Government of the right hon. Member for Sidcup (Mr. Heath) did in 1971. But they took them too late. I have no doubt that if the unemployment forecasts had been available they would have been one additional pressure on the Government to change their policies and to introduce earlier measures.
    There has been much discussion in this Chamber and outside about whether the exchange rate is too high or too low, about whether we should be embarking on a course of devaluation to protect exports or whether we should maintain a high level of currencies in the long term as the best way of ensuring the competitive position of our manufacturers. I have tried to follow over many years the debate about what level of exchange rate should be set. I confess that I have come to the view that the level of the exchange rate is not the most significant factor.
    We know from experience over the past 10 years that the benefits of devaluations
    1652
    are quickly lost. But one conclusion to which I have come is that the worst thing is to have unstable exchange rates. That leads to a further element of risk and uncertainty in business decisions. It means that business men who, last year or the year before, when sterling was going down and appeared likely to stay down, were invoicing in foreign currencies discover today that this is costing them much more than the percentage rise in the exchange rate. It will mean that today they will start changing that practice, if they have not already done so, only to discover in some months' time that the exchange rate goes down.
    In my judgment, the most important thing for the Government to do, in so far as they can affect the exchange rate, is to ensure that it remains stable. The policy that the Government have been following has not done that.
    There has been talk about the effect of the relaxation of exchange controls. Here we have an interesting example of the way in which a relaxation which I assume was intended to lower the exchange rate has had a perverse effect and has, along with the rise in minimum lending rate, helped to destabilise the currency markets. Since the Budget, exchange rates have not gone down or stabilised but have shot up to levels which most of us accept are not likely to be sustained.
    Herein lies a question to which the Government must address themselves. This afternoon the Prime Minister said words to the effect that she looked forward to a further relaxation in exchange controls. But only two days ago she spoke of her support for a strong pound, by which I took her to mean the present levels.
    Are the Government supporting a further relaxation of exchange controls in order to bring down the pound? We must assume that that is the purpose. If it is, are they not therefore worried about the present level of the pound? Can they explain which is their policy? The worst position is to have them saying on the one hand that they believe in rates at their present levels and on the other hand that they believe in a relaxation of exchange controls, which, on conventional theory, is bound to lead to a reduction in the rates of exchange of sterling.

    1653
    The final point to which the Government must address themselves is the destabilising effect of a very high minimum lending rate. There is no question but that the high MLR is the reason why such large amounts of sterling have been sucked into this country. There is no question either but that many overseas investors may have taken their cue from the relaxation of exchange controls. Nonresidents have been able to take their money in and out of the country for many years, but they have regarded London as a much more open market than before. The combined effect of the relaxation of exchange controls and the high level of MLR will be to suck in hot money, which will only run out again whenever the situation changes, whenever the Government reduce MLR or there are adverse changes in our economic and financial situation.
    I ask the Chief Secretary to give us some elucidation of exactly what the Government's policy is on the exchange rate. Their present policy does not add up.
    Mr. John Townend: I was intrigued by the examples given by the hon. Member for Blackburn (Mr. Straw) of how small firms needed the public sector. Does he imagine that a private hospital would not have to buy its supplies in the same way as a public hospital does?
    The hon. Gentleman also spoke of someone who wanted to manufacture dumpers but could not obtain £5,000 of equity capital. Is it any wonder that, in the circumstances that existed when we took over, investors would not invest in risk-taking ventures? If the person who had to put up £5,000 received a 10 per cent. dividend of £500, and if he was on the top rate of taxation, it being unearned income he would receive precisely £10 a year, in return for probably a high degree of risk. My right hon. and learned Friend the Chancellor of the Exchequer has tried to go some way to deal with that difficulty. After the tax reductions in the Budget, such an investor would receive a net return of not £10 but £125.
    Mr. Straw: The equity concerned was not £5,000 but £60,000. I am pleased to say that the National Enterprise Board
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    and the Industrial and Commercial Finance Corporation are making a healthy return on their money. It was not a question of its being an unprofitable investment. It was and is profitable, but the financial institutions were too blind to invest in it. They were not properly geared up to provide that money.
    Secondly, it is very likely that the private hospital would buy cheap Korean or Taiwanese sheets, whereas hospitals in the National Health Service, because of the public procurement policies of the Labour Government—and I hope of the present Government—are required to buy British whenever they can.
    Mr. Townend: I do not think that the amount of capital required is significant. The return on the other £55,000 would have been £115.
    I was also intrigued by the hon. Member for York (Mr. Lyon), who showed that we can prove anything with figures. He said that one of the problems for British industry was that the average worker abroad had much more investment behind him. The implication was that we have not invested. There is another explanation—overmanning. We have heard from Mr. Rees-Mogg of The Times that in Germany, with roughly the same equipment, 40 men can produce what 400 produce in the newspaper industry in London. Clearly, if we divide the capital cost of machinery by 40 it comes out at 10 times more per man than if we divide it by 400.
    I really want to speak about two points that were raised by the hon. Member for Wood Green (Mr. Race). I came to the House as an ex-leader of a large county council. I have heard many times in the council chamber the sort of exaggeration and distortion of facts that we heard from the hon. Gentleman. I did not expect to hear it in this Chamber.
    When the hon. Gentleman started talking about the cuts in local government, what he said had a familiar ring. The Socialists never talk about economies or savings. They always talk about cuts. He gave the impression that county councils were sacking teachers, increasing teacher-pupil ratios and reducing the level of the service. I think that not one county council has been dismissing teachers. Any rundown has been by natural wastage.

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    The other fact that the hon. Gentleman omitted is that all county councils are running down their teaching force because the number of children going to school has been much reduced. We have too many teachers because of an utter failure of planning in the colleges of education. It takes three years to train a teacher and five years from a child's being born to his or her going to school.
    I think that on both sides of the Committee we are all agreed that the major problem for this country is the need to create more wealth and more jobs. In the Budget, the Government have taken an important first step in restoring incentives and reducing taxation. One factor tends to be overlooked. There was a very good case for reducing the higher rates of taxation not only on grounds of incentive but on morality grounds. I believe that taxes can reach a level above which it is immoral to increase them. When 100p in the pound is taken, taxation becomes expropriation. We had reached 98p, and I think that that was immoral.
    The Government have accepted that a major part must be played by small and medium-sized independent businesses if we are to have the extra employment that we desperately need.
    The Chief Secretary has done a first-class job, but it represents only half a package. I have a small business. I represent a constituency where the major employers are involved in small business. The reason why they are not expanding and taking on more staff involves more than the rate of taxation. We must amend much of the legislation that weighs down small businesses.
    I am thinking in particular of the Employment Protection Act. The Chief Secretary should persuade his colleagues that not only is it necesary to extend the time limit from six months to two years but that the Government should introduce an experiment that exempts all employers with fewer than 20 employees.
    8.30 p.m.
    Many people argue that that would result in second-grade jobs. I can see the logic in workers feeling that they need the protection of this legislation when they are employed by a multinational company based in Detroit, but when somebody is working for a proprietor who is in the business with him,
    1656
    he should not feel the same need. Nobody sacks an employee from a small business today unless he is no good. If such an experiment proved to be successful it could be extended to include firms employing 30 or 50 people.
    The hon. Member for Blackburn said that the British public would not accept a restriction in public expenditure. I believe that that depends upon where those restrictions are made. The hon. Member said that when unemployment goes up, public expenditure goes up. But if unemployment is reduced, public expenditure is reduced. A reduction in unemployment and in public expenditure would be popular. We can reduce public expenditure so that it is popular.
    Mr. Straw: How can one reduce public expenditure in a way which is popular and which does not increase unemployment?
    Mr. Townend: A reduction in unemployment means a reduction in unemployment pay. That is the Government's strategy.
    Mr. Straw: Will the hon. Member give way?
    Mr. Townend: No. We have dealt with this matter. The hon. Gentleman said that Conservatives believed that Britain was a scroungers' paradise. I would not say that. However, many people find it strange that they cannot get their letters delivered because of a shortage of postmen, when there is high unemployment.
    My company wanted to employ a joiner as a maintenance man. Payment for the job was based on the fixed union rate and there was not much scope for bonuses. Several joiners applied. They were drawing unemployment pay. When they knew that they could not receive £20 or £30 a week in bonus pay, they decided that they would prefer to remain unemployed. That is what annoys hardworking people. I trust that the Government will tighten the situation.
    This is a freedom Budget. It means that people will have freedom of choice in the way that they spend their money, and freedom as a result of the lifting of exchange control. We criticise the Communist countries for using walls physically to keep people in. We have built

    1657
    walls to prevent people from taking their hard-earned money abroad to retire, emigrate or visit their children. It is a first-class Budget.
    Mr. George Foulkes: My hon. Friend the Member for York (Mr. Lyon) explained to me that clause 4—and that is an evocative phrase to those in the Labour movement—dealing with the regulator powers is an opportunity for academics and economists, or those who believe themselves to be academics or economists, to make general comments on the state of the economy and the effect of the Budget. I am neither an academic nor an economist. Like the Chief Secretary, perhaps, I am a simple man. There is an advantage in that because we can interpret the Budget in the same way as people outside the Committee interpret it. That is important.
    The Chief Secretary is right to say that sometimes it is better to determine our policies by gut reaction than by the economic forecasts and models suggested by hon. Members from both sides of the Committee. I am interested in the kind of gut reaction that motivates the architects of the Budget. I do not believe that the architect of the Budget was the man whom we saw prominently in the newspapers and on television—the Chancellor of the Exchequer. The true architects of the Budget were the Prime Minister and the Chief Secretary. The right hon. Gentleman said earlier that he saw the Budget as being stern and severe. Earlier, when another hon. Member was talking about the virtues of pessimism rather than of optimism he cheered. I should therefore be interested to hear the Chief Secretary's philosophy when he replies to the debate this evening. We have not heard a great deal about that philosophy. I should like him to say what indication he has seen since 12 June and the presentation of the Budget Statement that the Budget strategy is working. The evidence that I have seen points in the opposite direction. I admit that only a short time has elapsed since then, but even in that period it is possible to see that his predictions are not coming true, that the trend is the other way.
    I am not an economist or an accountant, but I sometimes find it useful to employ the models that those professional gentlemen use. I shall use the model that
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    accountants use—the balance sheet. On the credit side is the philosophy that somehow if taxes are reduced incentives will increase. I should like the Chief Secretary to indicate what evidence there is to support that philosophy. I do not think that the fact that the Bee Gees are returning to this country, or that any other pop group might be similarly encouraged, is evidence in support of that philosophy.
    I believe that the opposite is the case. I believe that if people know that, through tax cuts, they will get more money if they stay in their existing jobs, their incentive to seek promotion and to do better the job that they already have is reduced. They will be deterred from seeking a better job with more money.
    We should be encouraging and giving incentives to two groups of people in particular. The first are the people who generate the wealth of the country. Far too many people—they are well represented in this House—are engaged in public relations or work as economists to produce economic models—
    Mr. Peter Bottomley: Barristers?
    Mr. Foulkes: Yes, barristers, too. Such people do not produce the wealth of the country.
    Mr. Bottomley: What did the hon. Member do?
    Mr. Foulkes: That is a good question, but I shall not answer it. The people who produce the wealth, the miners, are often vilified by Conservative Members when they ask for a decent wage. How many Conservative Members have been down a mine for a day, working at the coal face and experiencing the kind of conditions in which these men work to produce the wealth that enables Conservative Members to enjoy themselves? They should be sympathetic to the claims that the miners have formulated in the past few days. We should be encouraging the farmers and the fishermen—the people in the primary industries. There seems to be little in the Budget strategy to encourage them.
    The other group we should encourage are the people in the public services—and I am glad to see that the Chief Secretary appears to be more amused and optimistic tonight than he has been earlier in this debate—because we have positively

    1659
    discouraged every worker in the public services under the terms of this Budget.
    This is a tragedy that will get worse. It is tragic that people are homeless while building workers are unemployed, and as more of them become unemployed. It is a tragedy that there are still many adults who are totally, or partially, illiterate. Yet we are embarking on a policy which will result in more and more teachers being unemployed. The hon. Member for Bridlington (Mr. Townend) said that he knew of no local authority which had started paying off teachers. Of course he does not, because it is only a few weeks since the Budget.
    I know of local authorities which are beginning to appreciate what the full effects of cuts in public expenditure will he. Those authorities are beginning to realise that those cuts mean that large numbers of teachers, and other workers, will be paid off.
    It is a tragedy that we have people on long waiting lists to get into hospital. Yet we have a situation where we shall not be training the nurses and doctors to treat them.
    Mr. Robin F. Cook: My hon. Friend, to the great regret of its citizens, has fled the spendid city of Edinburgh. He will recall that Edinburgh has a Conservative district council. He may not be aware that yesterday the Conservative chairman of the cleansing committee of that Conservative district council was so incensed at the recommendation of the Secretary of State for Scotland that the frequency of the city's cleansing services should be reduced that she held a press conference to denounce it. Does my hon. Friend not agree that that is clear evidence that there is no glib, easy or popular way of cutting public expenditure, as the Tories suggest?
    Mr. Foulkes: My hon. Friend the Member for Edinburgh, Central (Mr. Cook) is right. Although I do not represent an Edinburgh constituency I am still temporarily resident there. I was in touch with the city, by telephone, earlier today and discovered that Councillor Mrs. Rosemary McArthur did precisely as my hon. Friend describes. She called a press conference to point out, even at this early stage, the effects of public expenditure cuts.
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    I confidently expect that there will be many more local authorities—including many Conservative-controlled authorities, with committees controlled by Conservative chairmen who went into local government with a genuine commitment to the improvement of services—which will be coming out strongly against this Government. This incident is the first swallow in a long hot summer for the Government.
    Returning to the accountants' models, we have only one item on the credit side of the balance sheet. That is the illusory idea that tax cuts will give an incentive to people to work harder to produce more and so help the economy. There is no evidence that that will happen. On the debit side, there are many items. I have spoken generally of expenditure cuts. I could go on at greater length about them but let us take housing.
    There will be major cuts in local government expenditure on housing. Before I came to this place—and this is where I shall answer a question put to me earlier—I worked for an organisation solely concerned with the care of old people. Over the next two decades we shall see a huge increase—about 40 per cent.—in the number of people over 85 years old. They will be the people who rely on the social services and who will need special housing provision.
    The public expenditure cuts proposed by the Government will reduce our ability to provide special housing for those old people. The inevitable consequence is that old people will continue to have to live in old and inadequate homes, in houses such as those in the constituency of my hon. Friend the Member for Edinburgh, Central, which do not have hot water, which do not have baths and which are thoroughly inadequate. This Conservative Government are condemning many people in their 80s and 90s to that sort of life as a result of the public expenditure cuts on which they insist.
    8.45 p.m.
    There is another strange irony now coming about as a result of the cuts in local government housing expenditure. Those who value houses for local authorities are now finding more remunerative jobs elsewhere and moving into the private sector. Their jobs in the public housing sector are not being filled, and local authorities are increasingly unable

    1661
    to employ the staff to value houses for sale to carry out the policy which the present Government ask them to pursue. Thus, on the one hand, the Government are asking local authorities to sell off more houses—I am not happy about that—and, on the other, they tell the authorities that they cannot fill the posts to enable them to value houses for sale.
    There is an even more frightening consequence for local government which must go on the debit side of the account. I see the hon. Member for Edinburgh, West (Lord James Douglas-Hamilton) in his place on the Government Benches. He served along with my hon. Friend the Member for Edinburgh, Central and me on a local authority. We worked together. We believed in the local democracy represented by the town council of Edinburgh at that time. My hon. Friend and I were certainly not faced with opposition from our political opponents on the council as we maintained our belief in local democracy. Yet all this is now to change as a result of the Government's commitment to public expenditure cuts. They are determined to go down this road, letting no one stand in their way, and now they are prepared to introduce a Bill which will limit the autonomy of local authorities.
    This new proposal ought never to have seen the light of day. The principle behind it undermines the whole basis of local democracy, and I believe that it will be opposed by people on both sides of the political fence at local level. The true principle of local democracy is being sacrificed to the Government's overriding belief in public expenditure cuts, and it is a frightening prospect which all of us should do our utmost to oppose.
    We had a debate on employment not long ago so I shall not speak at length about it now, but the cuts here, too, must go on the debit side. I served for some time on the special programmes board of the Manpower Services Commission. It was a great honour and privilege to represent local government on that board, and I saw that the MSC, through the special programmes board, was beginning to set in train an exciting and dynamic programme to offer opportunities for young people. This effort is being cut back just when it is beginning to grow.
    1662
    When I had to resign from the special programmes board, Mr. Richard O'Brien, the chairman of the Manpower Services Commission, wrote to me and said that he hoped that I would use my specialised knowledge gained as a member of the board in arguing in the House the case for developing the provision of services of that kind. Yet the experience which I and others gained over the past two years is to be wasted by the Conservative Government because of their singular belief in public expenditure cuts. They are prepared to throw aside the experience and worthwhile achievements of the Manpower Services Commission.
    The effect of the public expenditure cuts on education is another item on the debit side. I had the pleasure of serving as chairman of the Lothians region education committee and of the education committee of the Convention of Scottish Local Authorities. I mention that so that even hon. Members on the Government Benches may concede that I know a little about education.
    The Government are proposing that there should be no pilot scheme for mandatory grants for 16 to 18-year-olds—a thoroughly retrograde step. This scheme, which was devised by Mrs. Shirley Williams, presented an exciting prospect, and it would not have cost a great deal of money. The pilot scheme was to cost £10 million.
    The Temporary Chairman (Mr. Michael English): Order. The hon. Gentleman's references to his own history are no doubt fascinating, but there are other hon. Members wishing to speak and I think that it is desirable to bear in mind the time when the winding-up speeches should take place. This debate is customarily very wide, but I suggest that we should keep education policy out of it as far as we can.
    Mr. Foulkes: I bow to your superior knowledge, Mr. English, on all matters of procedure. I shall dwell a little longer on the effect that these measures will have on the economy and on our economic prospects. Cuts in building programmes within the education sector will have an effect on our economic prospects because they will increase unemployment in the building industry. Cuts in provision to universities will have, as all principals are saying, disastrous effects

    1663
    on the development of university education. It must be recognised that universities are necessary to produce the engineers, doctors and scientists on which our future depends.
    I appreciate that there are other hon Members who wish to speak and so I shall say only a few words in conclusion. I could continue for much longer on public expenditure cuts but I merely say that another feature on the debit side is the increase in the mortgage rate that we are about to witness. Discussions are taking place behind the scenes, but undoubtedly the rate will be increased.
    It was amusing earlier to hear Conservative Members say that the Government's strategy is to control inflation. They claim that that is the principal part of the Government's strategy. However, an inflation rate of 17 per cent. has already been forecast.
    On which side of the balance sheet should we put the increased strength of the pound? In many ways that increased strength must be put on the debit side because of the adverse effect that it will have on our export performance. If we take an accountant's approach to the balance sheet that the Government have produced, there is only that one doubtful credit. However, there are many entries on the debit side.
    I ask the Chief Secretary to explain the Government's philosophy. If he gives us an explanation, we might understand It. I shall certainly not agree with it, but at least we shall be one step nearer to understanding it.
    Mr. Peter Bottomley: First, I congratulate the hon. Member for South Ayrshire (Mr. Foulkes) on getting to the House of Commons. Having heard him recite the catalogue of boards on which he sat, it seems unlikely that he ever went to work or had time to be elected a Member of this place.
    The economic strategy should not be judged by the different economic models that have been put forward this evening. It should not be judged by what is achieved in four years' time. It should be judged by what happens to British industrial competitiveness, to the rate of inflation and to unemployment. What is important is what happens, rather than four-year forecasts.
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    Secondly, I emphasise that the retail price index does not measure inflation or the standard of living of the British people. It does not embrace income tax, but it includes rates. That is an example of the distortions within the index. That factor needs to be taken into account, especially following a Budget that has produced a change of emphasis.
    The underlying rate of inflation, which I define as the common element of increases in prices and increases in earnings, has a disastrously distorting effect not only on people's living standards now but on their judgment of what will be in their own interests in future action. The economic strategy needs to be judged by what happens within the next four years to the underlying rate of inflation. I hope that the Government will never be tempted to lay down detailed plans and to distort their actions and policies to fill every gap that shows. If they are, there might be more Government waste, in the absence of the self-correcting mechanism in the private sector.
    Finally, I caution the Government and the Opposition against the idea that Governments make better decisions than individuals taking decisions in their own interests and those of others. The classic example is education. The Government had strict control over the number of people entering and leaving teacher training colleges. They got the number wrong by a factor of 50 per cent., perhaps for political reasons. That is a classic example of where the Government, for the best reasons—perhaps giving in to political or trade union pressures—were disastrously wrong.
    Mr. K. J. Woolmer: The hon. Member for Woolwich, West (Mr. Bottomley) said that Governments should not imagine that they could achieve their aims by controls. I shall refer to two matters on which there has so far been no comment, but which the Government may be trying to control.
    I do not expect Front Bench speakers to comment greatly on the first matter, if only because they always seek to avoid expressing too strong an opinion on it. I refer to the question of the foreign exchange rate. I do not agree with my hon. Friend the Member for Blackburn (Mr. Straw), who said that the exchange rate

    1665
    did not matter, but that what mattered was the fact that it changed at all. If that were true, we might as well allow the exchange rate to go up continuously. Obviously, the exchange rate does matter. I agree with my hon. Friend the Member for South Ayrshire (Mr. Foulkes). I react to the point by observing the exchange rate and asking what are its effects.
    There is no question but that the considerable increase in the exchange rate has had a serious effect on the ability of manufacturing industry in Yorkshire—the area of which I see most—to make profits out of exports and to compete with imports. That follows as day follows night. The weighted average of the exchange rate against our competitors has now increased by 11 per cent. since the end of 1978, when the Bank of England Quarterly Bulletin commented that the export-import position was deteriorating seriously as a result of the problem of the firm exchange rate—which is a euphemism for a rapidly increasing rate.
    We have nothing to gain by pretending that the exchange rate does not matter. It does matter. It has gone up sharply. It is causing serious problems in that it affects our ability to compete in export markets and with imports. That fact is reflected in the deteriorating position of exports and imports. The balance of current trade on current account for the first five months of the year was in deficit to the tune of £1,400 million. That is a serious matter. We cannot ignore it.
    I should like to comment on the foreign exchange rate strategy, if only because Back Benchers should discuss it seriously if Front Bench Members cannot be expected to say that they would like to see it go down sharply.
    I should like to go beyond that and comment more seriously on the underlying economic strategy. The normal reason for a high exchange rate would be a strong balance of payments. A strong exchange rate would cause exports to diminish and imports to rise as the strong balance of payments disappeared. But in the meantime our citizens would have had an improvement in their living standards. The result of the trade surplus disappearing and the currency reaching a more realistic level would have been to improve their living standards.
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    9 p.m.
    In this country today we are in the odd position that we have a large current deficit and, instead of the curency falling, it has actually been rising. That is a serious matter. I have yet to come across anyone who seriously says that the way to improve a currency in serious deficit is to raise the exchange rate. If everyone tried to follow that logic, it would lead to a topsy-turvy world. We have a substantial deficit on the current account, and yet a high and rising pound. Why? The answer, I assume, is reasonably simple—that it is due to our oil and the oil deficits of other reserve currency countries.
    In a very uncertain world, institutions with money to invest in the financial markets have opted to invest in sterling and we have become, for want of a better word, a petro-currency. The unfortunate fact is that the money coming into the country is still highly volatile. It does not in any way affect the underlying long-term ability of our manufacturing and service industries to compete in world markets. Our exchange rate has been pushed up, we have attracted a lot of volatile money, and this has undermined, and is undermining, the basic long-term industrial, commercial and service industry strength of this country. Our strength is being eroded by very volatile money.
    The Bank of England Quarterly Bulletin for June admits that there is much more scope for volatile movements in sterling than in all but a few other currencies. In other words, we are dealing with volatile money. We are being pushed into an uncompetitive position by unstable, volatile money which is crucifying the long-term industrial and commercial productive strength of the country.
    The natural thing to happen in these circumstances would be for this inflow of money to push interest rates down. I would bow to anyone who could stand up in the Committee and explain to me how an inflow of money should do anything other than push interest rates down. The answer, of course, is that it should. In pushing interest rates down it should encourage investment, which we need in this country. By encouraging investment and bringing the exchange rate down, it should stimulate exports, enable us to

    1667
    compete with imports, and get our productive capacity on the move again.
    Why is that not happening? The odd thing that needs explaining is why the Government are determined to keep interest rates high at a time when all the obvious external pressures are for interest rates to come down. I cannot for the life of me understand why this question should not be much more openly discussed. Presumably the answer—the Minister will no doubt tell us when he replies to the debate—is that the Government are determined to squeeze out inflation at home by having a sharp squeeze on the volume and the cost of bank credit. We have the irony that foreign money comes in, and because foreign money comes in and the Government wish to prevent it spilling over into the domestic economy they are forced into the ludicrous position of pushing up interest rates even higher because that foreign money is coming in. The consequence is that more foreign money comes in.
    This is a ludicrous world where money comes in and we have a strong currency, that causes the Government to pursue even higher interest rate policies which brings in more foreign money. We have a stronger and stronger currency—that can be observed from what has happened in the last few months—with higher and higher interest rates, discouraging investment, threatening to increase mortgages, threatening to damage the construction industry even more and threatening rents and so on.
    Is not the answer that Government strategy is to maintain a strong sterling, as they call it—I would call it grossly overvalued sterling—as a way of maintaining a financial squeeze? The Prime Minister indicated today that in her view it helped to moderate inflation by reducing the cost of imports. This was the line that was taken by the last Labour Government. My suggestion is that it goes beyond that.
    The corollary of the financial squeeze is that investment and our competitiveness is squeezed. I cannot agree with the hon. Member who muttered "Rubbish" from a sitting position on the Government Benches, because every industrialist that I have talked to in my part of the world agrees that that is what is happening. The Bank of England and the chairman
    1668
    of Rolls-Royce say that is what is happening. So it is true.
    Why are the Government doing this? Why squeeze the economy when it depresses production and employment? This is because the Government believe that we need to shake or frighten the work force—and possibly employers—into realising, in the Government's terms, that the best form of incomes policy is a tight money policy. However, an unfortunate side effect is that that can be done only by unemployment. I confidently predict that this high rate of sterling, if it does not drop, will, on its own, put 300,000 more out of work within the next 12 months. And, like everyone else in the Committee, I hope to be here to argue whether that turns out to be true.
    This is an incomes policy via unemployment, is it not? I did not agree with the previous Labour Government pursuing a high sterling rate in order to moderate inflationary pressures through wage demands. I recognise that their attempt at an incomes policy was an important reason for them losing the last election—but at least they had the courage of their convictions and tried to pursue some form of incomes policy in an attempt to say to wage earners and employers that if they wanted a civilised way of deciding how much to produce and how to distribute it, it would be better done by an incomes policy than through massive unemployment.
    I acknowledge that hon. Members on my side of the House, as well as hon. Members opposite, may say that they prefer not to get involved in an incomes policy, but what we have—and we cannot divorce the exchange rate from this—is a deliberate attempt to maintain a high exchange rate, high interest rates, unemployment and deflation precisely to shift and change the attitudes of people towards their wages and towards prices. The big gamble is that the Government's policy will cause damage along the way, by shattering in many industries—in individual firms it will destroy—the ability to produce.
    The present policy of the Government will cause damage to employment, not just temporarily, but permanently. It will also cause a permanent loss of export markets. I see that the hon. Member for Mid-Sussex (Mr. Renton) is looking at his watch. I would only say that discussing

    1669
    the destruction of our industrial production and the creation of 300,000 more unemployed through this aspect of the Government's policy alone is worth 10, 15 or 30 minutes of discussion in this Committee, and I certainly do not apologise for that.
    Mr. Alexander W. Lyon: My hon. Friend has good grounds for grievance, but as a new Member he may not know that PPSs are there to be seen and not heard, and preferably not even to be seen. The Chief Secretary's PPS has adopted an unfortunate habit of intervening by gesture. I hope that my hon. Friend will be firm with him.
    Mr. Woolmer: I always believe in being firm but courteous, and courteously ignoring the things in respect of which I am certain the Committee would not wish me to take a great deal of notice.
    It is a serious problem that the exchange rate is so high. It is serious because every commentator who looks at it acknowledges that the effect over 12 months to two years will be a sharp increase in unemployment. Those few people who back the Government, such as Mr. Brittan, do so because they believe that in the long run the benefits will outweigh this, but the long run will leave behind it several hundred thousand more unemployed.
    I accept that I have spoken on a narrow topic, but it is a topic that will have severe effects on this country. In the last quarter of the twentieth century there must be a better way of deciding how much to produce and how to divert resources into investment and productive capacity, without creating unemployment and pretending that we must have a free-for-all which creates either runaway inflation or a policy which creates enormous unemployment. The answer must lie in some form of co-operation and partnership between the people of this country and the Government—a partnership that recognises the role of trade unions, Government and employers.
    I unashamedly say that sooner or later any Government will return to some form of incomes policy. We may not like to admit it, because it has got a bad name in recent years. However, we shall have to return to some form of incomes policy to avoid either sharp inflation
    1670
    or the enormity of unemployment which I confidently predict will result from this Government's policies over the next 12 months.
    Mr. Biffen: The debate has ranged very widely, as is traditional on such an occasion as this. I think that practically everything has been within its ambit, except the export of live animals for slaughter and the reform of the abortion law. That is no bad thing, because the Committee, quite naturally, likes to assess the progress of the economy since the Budget, and this is traditionally an occasion when it does so.
    I therefore hope that the Committee will acquit me of any discourtesy if I do not address myself to the clause. It will be understood that it refers to regulator powers, and that hon. Members with a slide rule, if they wish to engage in the somewhat discredited Keynesian practice of fine tuning, can work out the additional revenue capacity that the Government possess at any one time.
    The hon. Member for South Ayrshire (Mr. Foulkes), in a fascinating speech, was kind enough to refer to me as a simple person. He clearly meant it as a compliment, because he linked himself with me in that capacity. I believe that God must have loved simple persons, because he made so many. Alas, we are desperately in the minority today, because we have been subject to wide-ranging contributions, often of a highly technical character, and it is my thankless task to try to encompass them in my remarks.
    Therefore, I want to hide behind the skirts provided by the hon. Member for York (Mr. Lyon), who wondered whether economics could any longer claim to have anything like the answers that it once possessed. He said that he had heard Professor Peston engage in a commendable form of agnosticism about what could be foreseen in the present situation. I agree entirely. I think that this humility should be enjoined on all of us who take part in this kind of debate when we try to make forecasts and even when we comment on more immediate topics.
    9.15 p.m.
    I also agree that politics have not always been so dominated by economics. In the city that the hon. Member for

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    York represents and certainly in my constituency the education proposals at the turn of the century were a matter of great controversy. In the 1900 Parliament they caused infinitely more rancour than present disputes over secondary school reorganisation or disputes over Irish home rule. These matters of controversy which dominated politics of a previous era were largely non-economic. If we move away from the belief that Governments can manufacture additional resources by the manipulation of the economy—and it is recognised that we have low growth at present—I believe that our politics inevitably will move into other non-economic areas. That was a diversion but it is not inappropriate to place it on the record.
    The right hon. Member for Leeds, East (Mr. Healey) commented that the most significant factor that had occurred since the Budget had been the OPEC decision to increase oil prices. Undoubtedly that is true. Two immediate consequences flow from it. The first is that the price increase transfers resources from the industrialised West, or particularly from the OECD economies, to the oil producers of the Third world. Secondly, that process is itself likely to provide some check on general economic activity throughout the West.
    I was asked specifically whether the Government would adhere to the forecast rise in exports of 5½ per cent. The Government will adhere to the forecast, with the corresponding margin of error of 4 per cent., which means that the rise could be between 1½ per cent. and 9½ per cent. That shows the wisdom of having a margin of correction in the Red Book.
    The conclusions that I draw from the two likelihoods proceeding from the oil price rise is that politicians have no mandate for assuming that there could be rising living standards on the basis of buoyant world trade. Therefore, everything must be earned by successful enterprise in the domestic and overseas market places. This point was made eloquently by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), who explained to me that he could not be in the Chamber tonight for the winding-up speeches.
    Some will take the opportunity of the situation and the challenge that it represents
    1672
    to the economic and social fabrics of the West to argue for decisive action on the part of public authority. I had the privilege of meeting Commissioner Ortoli at the Council of Ministers meeting in Luxembourg a few weeks ago. He is a man of great courtesy, a French patriot with a record of public service to his country and the Community. I do not know whether the words "There must be brutish structural change" are actually the words that he used or whether they were used by others in the Commission.
    I agree with my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne), but we must be a little wary before accepting that there must be brutish structural changes. I am a little worried when politicians inform their fellow citizens that the time has come for brutish structural change. I should like to know exactly how it will be brutish, who will receive the brutal consequences, and who will be exercising them.
    I have no doubt that there will be difficulties, but we would be wise to see how matters proceed in the next few months. In particular, there is obvious anxiety about the financing of world trade. I wish I could answer the right hon. Member for Leeds, East in the same succinct and crisp language as he used in addressing his questions to me. Alas, it is a situation where one can only
    "see through a glass, darkly"
    I have given the matter some thought, and I should like to make some observations to the right hon. Gentleman.
    At present we believe that the existing facilities of the IMF, which have been enlarged in the recent past, should prove to be adequate to meet the demands which are likely to be placed upon them and to provide the essential balance of payments assistance for countries which may stand in need of such help. We shall follow the situation closely. As is stated in the Tokyo communique:
    "The latest decision substantially to increase oil prices will also severely increase the problems facing developing countries without oil resources as well as the difficulties of developed countries in helping them"
    The remedy does not lie wholly in the operation of the international monetary system, however. The flow of financial resources to many developing countries requires to be increased. Such an increase can be promoted particularly from the

    1673
    private sector by the creation of a good investment climate in the developing countries. I am sure that the right hon. Gentleman will appreciate that it would be foolish for me to try to elaborate beyond that. I appreciate that the point is of fundamental seriousness and it is a matter to which we will address ourselves as the weeks proceed.
    One fundamental factor which has dominated this debate is the movement of the sterling exchange rate. This matter was referred to by many hon. Members, but it was my hon. Friend the Member for Knutsford, who explained to me why he could not stay for the end of this debate, who first mentioned the topic.
    The argument about the exchange rate causes lively controversy. I was interested in the remarks of the hon. Member for Batley and Morley (Mr. Woolmer). Not so far away, in a constituency which I imagine is almost a twin, there is his hon. Friend the Member for Dewsbury (Mr. Ginsburg), who spoke on the Second Reading of this Bill. The hon. Gentleman was given notice that I intended to raise this matter. He, too, explained that he could not be present. He said:
    "It is very much in the interests of the British economy to have a strong pound in order to keep down prices. For the Government, at this moment, to dismantle foreign exchange control and thereby fundamentally weaken the pound is a dangerous course of action"—[Official Report, 27 June 1979; Vol. 969, c. 556.]
    I think that that puts the matter far too simply, and it would be wholly contradicted by the hon. Member for Batley and Morley, but I hope he will realise that it is not a matter involving a nice, symmetrical controversy where the line runs down the centre of this aisle and the angels sit in the serried ranks of the Opposition and the apes sit on the Government Benches. Nature is more generous, or more random, in the disposition of her blessings. It is a debate that runs in a rather zig-zag fashion. My hon. Friend the Member for Knutsford was right when he said that there were uncomfortable implications for the real economy in the present situation.
    My hon. Friend also spoke of the difficulties he had encountered in his own experience as a manufacturer and an exporter. The matter has been before the House by way of a written question. My
    1674
    hon. Friend the Member for Birmingham, Selly Oak, (Mr. Beaumont-Dark) has expressed concern on this matter. It was the answer to that question by my right hon. and learned Friend the Chancellor of the Exchequer which caused a good deal of press comment a day or two ago. It would not be inappropriate, given the hazardous state of our official reporting, if I took this opportunity to put on record the reply that was given by my right hon. and learned Friend the Chancellor on the question of the exchange rate. He said:
    "I announced very substantial relaxations to the exchange controls, and particularly to the controls on outward direct investment, in my Budget Statement on 12 June. As I said then, I intend as time goes by to take further steps in the progressive dismantling of these controls, but the pace of relaxation must be influenced by the strength of sterling as well as by the speed with which our economic problems can be solved"—[Official Report, 3 July 1979; Vol. 969, c. 557.]
    This factor throws into relief another dimension of the debate that has not featured too much in the Committee proceedings today—the advantage that exists in having an exchange rate that is tolerably flexible. We have what, in shorthand terms, would be called a dirty float at the moment. The right hon. Member for Leeds, East knows perfectly well from a previous occasion how expensive it was to try and dirty the float beyond a certain point. I ask hon. Members in all parts of the Committee to consider the problems that would exist for sterling, given its current popularity and given the prospective volatility of currencies to which the right hon. Gentleman has referred, if we had a fixed currency. The speculation would be fantastic. It is not true that the present situation is a speculators' paradise. The speculators' paradise is much more likely to come about with a fixed currency. My hon. Friend the Member for Worcestershire, South (Mr. Spicer) referred to this point.
    I would like to make some considered comments on the present state of the exchange rate. The hon. Member for Batley and Morley asked whether I had a view other than my generally rather baleful pessimism and agnosticism which, it goes without saying, is an inbuilt attitude of mine on most problems, certainly economic problems. It seems to me that the recent euphoria surrounding sterling has been somewhat excessive. North Sea oil does not, by itself, cure our economic

    1675
    and social problems. We shall not suffer the same impact on our balance of payments as other countries, but we shall suffer certain effects because of higher oil prices, particularly as they affect the world economy.
    9.30 p.m.
    Related to that rather cautious statement is the statement of what might be done further in respect of dismantling exchange controls. That question has come from various part of the Committee. The Government intend progressively to dismantle them. They cause unnecessary cost and distortions. But the effect on the exchange rate and competitiveness of relaxing exchange controls is uncertain. Our exchange control relaxations must be seen as part of a long-term policy of freeing the economy from costs and distortions. It is on libertarian grounds rather than any other that I think the case can be most credibly advanced.
    I conclude my remarks on exchange control by saying that the recent movements cast some doubt on the whole question of the forecasts of the rate of increase in the retail price index. I am speaking with great circumspection and great agnosticism. Such is life in the House of Commons that one does not necessarily have enough time to listen to the BBC Radio 4 programme "PM". Therefore, not all my hon. Friends may have heard the valuable endorsement of the Government's prospects that fortuitously fell from the lips of Mr. Dominic Harrod. [HON. MEMBERS: "Oh."] Given the straw that I have, I hope that the Committee will allow me to make such bricks as I can.
    Mr. Budgen: May I remind my right hon. Friend that the previous Chancellor of the Exchequer always used to rely on an obscure German to support anything he had done? Cannot the Tory Party rake up somebody better than Dominic Harrod?
    Mr. Biffen: That would have been a valid intervention if I were praying Dominic Harrod in aid of the Government's policy. Perhaps I had better give the quotation, and then we can see the most productive use of it that the Committee can make. He said:
    "In the past few weeks the pound has risen by 10 per cent. against the foreign currencies of countries where Britain buys raw materials and manufactured goods … that
    1676
    rise in the pound should knock 2½p in the pound off the cost of living between now and the end of the year. Of the 3½p added to the cost of living by the higher rate of value added tax announced in the Budget, all but 1p may now disappear if the pound can hold the higher level of $2·20".
    Mr. Healey: I am fascinated to hear what the right hon. Gentleman is saying, but Mr. Harrod was factually wrong. As the right hon. Gentleman will know, the 10 per cent. effective appreciation of sterling started at the beginning of the year. Four-and-a-half per cent. of it has taken place since the Budget, but the forecasts with which the Chancellor of the Exchequer regaled the House at Budget time assume that half of that appreciation is already reflected in the retail price index. Therefore, the difference since the Budget is at most I per cent. after nine months. In fact, as I said this afternoon, it is roughly enough to cover the increased cost of oil, but no more. It goes nowhere near the increased prices resulting from increased value added tax.
    I am immensely grateful to the right hon. Gentleman for giving me the opportunity in this exegesis to put the stark horror of the Government's position before the Committee.
    Mr. Biffen: I have no wish to adjudicate in the statistical dispute between the right hon. Gentleman and Mr. Dominic Harrod. I mentioned Mr. Harrod in what the Treasury would call "an illustrative role".
    The movements in the exchange rates, whether they are of the order expansively suggested by Mr. Harrod, or whether they represent the proposals described by the right hon. Member for Leeds, East—and it is a question of degree—validate the scepticism with which the Committee is entitled to view all the forecasts which try to tell us what will happen 12 months hence.
    I do not know why the hon. Member for Edinburgh, Central (Mr. Cook) supposes that if one pillages past White Papers one will discover that the forecasting record of Governments is better than that undertaken by extra-governmental agencies.
    There is no doubt that the sterling exchange rate has been affected by the high minimum lending rate. Several hon. Members have suggested that there are powerful reasons for believing that the

    1677
    MLR will not long remain at its present level. The hon. Member for Batley and Morley said that all the obvious pressures are for interest rates to come down. The aim of monetary policy is that Government borrowing should enable credit to perform its legitimate industrial and commercial role.
    Mr. Woolmer: I was referring to the pressures from foreign money. I said that there were domestic reasons why the Government raised the rate.
    Mr. Biffen: That is a fair distinction and I accept the hon. Gentleman's correction.
    It grieved the Government to have to raise the minimum lending rate to 14 per cent. But it is central to any civilised approach to monetary policy. The right hon. Member for Leeds, East and the present Treasury Bench have good records as civilised monetarists. It is no good the right hon. Gentleman trying to pretend—when he has vacated Great George Street—that the heathens have moved in. The policies are different but the differences are not of the magnitude that entitles him to say that.
    Provided that we can get public spending and revenue into a reasonable relationship, the element of Government borrowing should be within the scope of an interest rate policy which enables credit to perform its legitimate commercial and industrial role.
    It has been said that even at the present rate of interest the Government are finding it difficult to make gilt-edged sales. The right hon. Member for Llanelli (Mr. Davies) said on Second Reading:
    "The Government must be rather worried. They have not sold much in the way of gilts since the Budget. The financial columns show the gilt-edged market to be pretty morbid and stagnant"—[Official Report, 27 June 1979; Vol. 969, c. 565.]
    I think that in the light of subsequent developments the right hon. Gentleman might wish to revise his judgment somewhat. The sales of gilt-edged stock have been reasonable, albeit the pattern has been uneven. I do not accept the right hon. Gentleman's pessimistic descriptions.
    The main consideration this afternoon and this evening has been the whole question of the relationship between MLR
    1678
    and the meeting on 13 July of the Building Societies Association and the consequences for mortgage interest rates. I am sure that the debate tonight, if it can be published in a reasonable form, will make most fascinating reading for members of the Treasury Bench. They will be able to learn of the robust views that have been advanced by a number of speakers including my hon. Friends the Members for Croydon, South (Mr. Clark), Knutsford and Wolverhampton, South-West (Mr. Budgen).
    It would be quite impertinent of me to try to add to the exchanges that took place this afternoon, involving the Prime Minister. I believe that the Committee will appreciate that this is an appropriate position for me to adopt.
    Much of the debate has been about the alleged structural weakness of the United Kingdom economy. The arguments on that score have been rehearsed many a time by politicians almost to the point of reducing the nation at large to boredom. I was not quite certain how the hon. Member for Blackburn (Mr. Straw) reached the view that the great disease of government is optimism. That may have been true until fairly recently, but so far I have been assailed on all sides for the rather lugubrious view that I am supposed to have about the economic prospects for this country. There has been some change. As the hon. Member for Stoke-on-Trent, Central (Mr. Cant) said, we do ourselves an injustice by too much gloomy rhetoric introspection when we try to assess the prospects for this country. Although the proposals in the Red Book are austere I necessarily do not take anything like as pessimistic a view of the consequences of them as some might allege.
    It is argued that there is little prospect of economic growth in the foreseeable future—that is, over the next 12 months. I do not think anyone disputes that that is a fair observation. My right hon. Friend the Secretary of State for Employment stated in the House on 19 June that he suspected:
    "that unemployment will rise in the next 12 to 18 months through a combination of factors"—[Official Report, 19 June 1979; Vol. 968, c. 1105.]
    Again, that point is generally accepted. The Government, like their predecessors, do not believe that there is any advantage in stating figures.

    1679
    The debate on the regulator has turned effectively on a number of approaches to the immediate problems of the economy. The view of the Government has been set out clearly in the Red Book. Central to that view is the recognition that we have a difficult situation because of a borrowing requirement of £8,000 million and the demands that that then makes on the monetary mechanisms to see that it is covered.
    9.45 p.m.
    Yet the monetary guidelines by which the present Administration operate, and the public sector borrowing requirement, are not significantly different from those indicated as appropriate by the right hon. Member for Leeds, East.
    Mr. Healey: With great respect, the right hon. Gentleman must deal with the point I raised, which I think would he common ground between us. A PSBR of £8½ billion and a target range for money supply growth of 8 per cent. to 12 per cent. is one thing with inflation running at 10 per cent. to 12 per cent.; it is quite another thing with inflation running at 18 per cent. to 20 per cent. In the latter case it really is a vicious monetary squeeze, as Mr. Gordon Pepper described a similar situation seven years ago.
    Mr. Biffen: I appreciate the right hon. Gentleman's point and assure him that my next point would have been that the difference, a real difference, was whether the balance of fiscal measures that were taken and the form of taxes chosen to finance—
    Mr. Healey: No, it is the rate of inflation.
    Mr. Biffen: I am not going to engage in Committee stage hair-splitting. There is that difference between us, and I acknowledge it. What I say is that the borrowing requirement and the guidelines are not themselves significantly different from what the right hon. Gentleman would have pursued. He would have argued that his fiscal measures would have made their attainment much more likely.
    Mr. Healey: Much easier.
    Mr. Biffen: Whether much easier, I know not.
    That is the nature of the difference between us. That in a sense is what a
    1680
    great deal of the argument during the Committee stage of this Bill has been about, up to the point of the regulator. It will doubtless be the same when we continue with our proceedings on Monday. The argument is whether we have the appropriate balance of taxation between direct and indirect and within direct taxation whether we have got the appropriate balance as between the various rates and allowances.
    The third proposition—it was not advanced from the Labour Front Bench though certainly indicated by the hon. Member for Thurrock (Dr. McDonald), and implicit also in the argument of the hon. Member for Wood Green (Mr. Race)—was that there was a need to boost demand by increased public spending.
    Mr. Foulkes: Hear, hear.
    Mr. Biffen: I am glad that I have not misinterpreted the Labour Back Benchers though apparently, on occasions, I have not yet mastered the nuances of the Opposition Front Bench. This is an area where there is a great gulf fixed between them and the Government. I also think at the moment that there is some gulf between them and their Front Bench. I think that is because, as past experience demonstrates, it is much more likely to cause accelerating inflation than it is to deal with the other problems which one might seek to mitigate.
    There is an argument which was not put in the debate today. I am sorry for that because I think that the Committee would have benefited from hearing a thorough-going exposition of the views of the new Cambridge school. However, the right hon. Member for Bristol, South-East (Mr. Benn) will doubtless make sure that our future debates are enlivened by a full exposition of the arguments for import controls and planning agreements. The damage they might do to the economy were well referred to by my hon. Friend the Member for Woolwich, West (Mr. Bottomley) when he spoke of the dangers of large-scale Government decisions. If we are looking for the circumstances where there is a transfer of wealth from the industrial OECD economies to the emerging economies, that is almost the last moment at which I think we should begin to pull up the drawbridge for the import control type of economy.

    1681
    However, this has been a constructive debate which has ranged extremely wide. I think that it is probably common ground among all who have taken part, whatever their diagnosis and prescription, that the dominant feeling is that inflation remains the central challenge in economic policy. It is our view that the monetary disciplines upon which we are engaged are absolutely essential. We believe that it will take time for them to operate. We are unmoved to be told that we shall be electorally unpopular over the coming months. We had not really supposed otherwise.
    Mr. Race: Oh!
    Mr. Biffen: The hon. Gentleman says "Oh" at that as though, having come to this place, he never expects to hear a political truth uttered.
    In conclusion, I come back to the tax differences which, I think, form the major difference between us.
    Mr. Healey: Much wider.
    Mr. Biffen: The right hon. Gentleman will have a chance on Monday to explain why the difference is much wider. The difference is that, in our view, the tax package is part of a much wider strategy intended to take account of the one resource which this country has which will long outlive the oil. I refer to the resource which was prayed in aid by my hon. Friend the Member for Bridlington (Mr. Townend), the British human resource.
    The prospect which we face is that whatever we do in this country, whatever standards of living we have and whatever social judgments we express, at the end of the day our future cannot rest upon any mineral wealth but must rest upon resources which will outlast industries which are currently in vogue and outlast mineral resources which are currently in amplitude. In only one resource can we place our faith and choose to be tested, and that is the British people.
    Mr. Denzil Davies: We have heard a characteristic, charming and, in some respects, good speech from the Chief Secretary, but I think that we shall grow a little tired over the next few years of the way in which, to some extent, he washes
    1682
    his hands of the responsibilities of government. It is all very well to say "We cannot do this and we cannot do that because the Government cannot influence the economy." In fact, in a modern society, the Government have a fairly large role to play, and the right hon. Gentleman cannot for ever shield himself behind his rather primitive philosophy that we cannot do very much, that we just sit in the Treasury and watch the market economy operate, washing our hands of it. I got that flavour from the right hon. Gentleman's speech, as we did from some of his previous interventions in the Committee.
    The right hon. Gentleman touched on some important matters. For example, he mentioned the question of recycling the oil moneys. I thought that the passage which he read out from his speech, which was obviously carefully written, was slightly complacent, as were many other parts of his speech. It is true that at the time of the last major price increase by OPEC the commercial banks—not so much the IMF but the commercial banks—fulfilled a role in that they were able to recycle—I think that that was the word—much of the money to the developing countries. But, as my right hon. Friend the Member for Leeds, East (Mr. Healey) pointed out in opening the debate, the commercial banks were getting into some difficulty with their lending, especially when the developing countries were borrowing merely to roll over debt.
    I think that the idea that that will happen again and the IMF is there to help is somewhat complacent, because we may well face over the next few years the need to look again at the role of international organisations and of the IMF in recycling money of this kind, since there is a gap there and I believe that there will be difficulty if these surpluses continue to build up.
    The right hon. Gentleman chastised me for saying on Second Reading that the Government broker was sweating a bit. At that time I thought that he was sweating a bit. The Government were saved by an inflow of money which in the end went into the gilt-edged market, much to the relief of the Chief Secretary and the Government broker. The funding programme has now improved considerably, but on Second Reading it was touch and go. That was the impression that I gained

    1683
    from reading the newspapers and observing the state of the gilt-edged market. The Government had not sold much stock between the Budget and that stage.
    We have heard some interesting comments by hon. Members on the exchange rate. Whatever views we may have about the need for a lower exchange rate, I do not know what action the Government can take. Possibly they can reduce interest rates slightly or free exchange controls. However, there are many areas in which the Government have no control, and the exchange rate is clearly one of them. It may be that they will be able to engineer a sort of step devaluation to the EMS if the other countries of the Common Market allow that to happen, but I have my doubts about that. The argument about the exchange rate is slightly sterile. Outside forces are pushing up the rate, and I do not know what the Government can do to prevent that from happening.
    The Chief Secretary talked about interest rates, a topical subject. No doubt discussions are taking place between Treasury officials and Ministers. Of course, Ministers will not be interfering in the discussions.
    The hon. Member for Worcestershire, South (Mr. Spicer) told the Chief Secretary to stand firm and not to put pressure on the building societies to keep the rate down. I think that that was the gist of his speech. I understood him to say that the monetary stance should be maintained and that the Government should not say "Perhaps in three weeks we shall reduce MLR" as a way of hinting to the building societies that they should not increase their rate. The right hon. Gentleman seemed to be in agreement with the hon. Member for Worcestershire, South. He was nodding vigorously in agreement. If that is the position, why are Treasury officials talking to building society representatives? Clearly they are talking to them and telling them no doubt to hold back, to wait and to bear in mind that interest rates may decline and that they should not rush in.
    I understand from reading The Daily Telegraph this morning that a 1 per cent. rise in interest rates will destroy the Government's Budget strategy. That was The Daily Telegraph's headline. It was something like "Budget Strategy at Risk". It suggested that a 1¼ per cent. increase in the building society rate will destroy the
    1684
    Budget strategy. So much for the Budget strategy if it can be destroyed by a 1 per cent. rise in the building society interest rate.
    The Chief Secretary has said that the debate provides us with an opportunity to review progress since the Budget. There has not been much progress since the Budget. In terms of the economy, there has been non-progress. The condition of the economy is getting worse and not better. I quote from this quarter's ITEM Club forecast. It is a respectable and well-researched document that uses the Treasury model. Its conclusions state:
    "The United Kingdom is heading for a worse slump than in 1974–75. It is caused by accelerating inflation colliding with the brick wall of monetary restraint. It coincides, and is intensified, by the oil price rise and world trade slump. It won't be resolved until someone's nerve breaks".
    That is a fair picture of the British economy over the next 18 months. It is contained in a well-researched document that uses the Treasury model. The Chief Secretary should not be as complacent as he appeared.
    Our main criticism of the Government's strategy is that at a time when the economy was slowing down because of world forces that are outside the control of any Government, and when we were moving towards a recession, the Government will turn the recession into a depression for the United Kingdom. We were moving towards stagnation, but the Government's policies will push us towards a slump.
    That is our main condemnation of the Government's policies. They have taken no account of general world trade conditions and general world conditions in framing their Budget and their policies. They will push us towards depression and slump, for two reasons. The first is their public expenditure policies.
    I do not want to argue the case whether there should be more public expenditure to boost the economy in the Keynesian fashion. Most people would agree, whatever the virtue of Keynes perhaps 20 years ago, that society is more complex and the economy is more difficult to control now. Although Keynesian economics have a part to play, clearly there are other factors and forces involved. Perhaps the Keynesian solution is too simplistic in many ways. If it is, the Government's approach—of merely

    1685
    cutting public expenditure and taxation as if it would solve our economic problems—is also too simplistic.
    10 p.m.
    After the Finance Bill becomes law, the Chief Secretary will go through the PESC exercise. The Treasury will look at the public expenditure cuts. I ask the Chief Secretary to think again when he comes to that exercise and ask himself whether it makes sense to embark upon another public expenditure cuts exercise. He said in previous debates that he was sharpening his axe ready for more cuts. He is intelligent and honourable. Before that exercise, he should ask himself honestly what sense it makes to cut public expenditure again at a time of world recession and, probably, world depression. There is no case for that, whatever the situation may be. If there were a different climate we could argue these matters in a different way. However, there is no case now for going further along the road of public expenditure cuts. They would result in unemployment, a loss of jobs and deepen the recession and depression.
    We know the argument that if public expenditure and taxation are cut, money is released for small businesses and entrepreneurs to create more jobs. I do not believe that that will happen. Perhaps a few extra jobs will be created by a few small business men. I hope so. Certainly the Opposition are as much in favour of developing small businesses as are the Government. [HON. MEMBERS: "Oh. "]Hon. Gentlemen should not react in that Pavlovian way. In the past three weeks the Government have done much to damage small businesses by means of the 14 per cent. interest rate.
    Perhaps I may now use my quotation. On 13 February 1979, when he was the Opposition spokesman for industry and small businesses, the Chief Secretary said:
    "I turn now to the third piece of advice that I generously offer to the Treasury Bench."—
    for which we are grateful—
    "It concerns the question of interest rates. A minimum lending rate of 14 per cent. is not a rate which allows credit to perform its legitimate commercial function. It is much closer to usury"
    1686
    That is medieval philosophising. This is what I mean by being complacent and a washing-of-hands attitude. As a member of this Government, he agreed to a 14 per cent. MLR. He agreed with me when I quoted him criticising the 14 per cent. interest rate.
    "For many small businesses it means that rates of borrowing will have to be 17 per cent., or perhaps even more. That hits particularly at small businesses and also hits innovative businesses"
    I now quote the peroration:
    "Therefore the Government's policy is militating exactly against innovation, which is one of the very areas that we should be seeking to encourage."—[Official Report, 13 February 1979; Vol. 962, c. 1078–9.]
    The right hon. Gentleman's tune is the same but his policies are different. He sings the same tune but puts his seal on a Budget that increases MLR to 14 per cent.
    I wonder whether the Chief Secretary is responsible for Government policy. He should try to defend Government policies rather than pretend that he does not agree with them, and that there is nothing he can do about them anyway. Government supporters believe that by cutting public expenditure we shall create a silicon valley mentality similar to that which exists in many parts of the United States.
    I ask the Chief Secretary not to be mesmerised by some of the reports from the United States of America showing considerable growth in small businesses, because that country is quite different from the United Kingdom. It is not the tax climate or structure which has caused it but many other far more deep-rooted reasons. [Interruption.] It is nothing to do with Socialism, either, as Conservative Members know very well.
    Mr. Budgen: Will not the right hon. Gentleman agree that, even if these tax cuts do not stimulate more creation of wealth, they are justified in that they give greater freedom to the citizens of this country?
    Mr. Davies: We have heard that argument previously and we know that it is freedom only for a minority. It is no use Conservative Members shaking their heads. It is quite clear from the figures that the majority of people in the country, the 20 million wage earners, are

    1687
    paying for those tax cuts and have no freedom of choice given to them by the Budget. The freedom is only for those earning more than £10,000 or £12,000 a year.
    I am glad to note that the Financial Secretary to the Treasury has now arrived. I do not know whether he has been with the Building Societies Association.
    I say again to the Chief Secretary that the policy will not work. It will not generate the jobs which have to be generated in order to keep unemployment down. It may generate a few jobs but only a very few in relation to the large number of jobs which will be lost, partly as a result of the world recession and partly as a result of the Government's public expenditure policies.
    I want to say a very brief word about the EEC budget, which has not been mentioned in the debate. I thought that the Chief Secretary was responsible for the EEC budget. [Interruption.] I now gather that the Financial Secretary is responsible for it. I tabled a question the other day asking the Treasury what was the net effect on the budgetary contribution next year of that famous agreement—the greatest agreement ever made by any Minister of Agriculture, Fisheries and Food in this country—made in Luxembourg. I wished to know what were the figures. I received a letter, not from the Financial Secretary but from the Chancellor of the Exchequer's own office, saying that it was the responsibility of the Minister of Agriculture to answer that question. The Financial Secretary nods. Is he really saying that the responsibility for the EEC budget is now with the Minister of Agriculture? If so, it is an extraordinary position. Naively, having been in the Treasury for four years, I put the question to the Chancellor of the Exchequer. I find it very strange to be told that the EEC budget is now in the hands of the Minister of Agriculture.
    If the Government are concerned about public expenditure and about the EEC budget, which is now a major part of public expenditure, any decisions taken should be taken in the light of the increase on the budget. It is clear, of course, that that did not happen. The decision in Luxembourg was probably taken initially without any recourse at all to the
    1688
    Treasury, and then somebody tried to work out the figures.
    The Financial Secretary to the Treasury (Mr. Nigel Lawson): Will the right hon. Gentleman tell the House what happened to the EEC budget and the British net contribution during the time that he was a Minister, and what success his Government had in reducing the British net contribution to the Community budget, which is far too high?
    Mr. Davies: The hon. Gentleman has not been involved in these debates and his intervention shows that he is a bit out of touch with the way the argument goes. The question is not whether we were worse or better than the present Government in controlling the EEC budget. That is not the problem. That is not the point I make. We all know the difficulties of controlling the EEC. But it is quite clear that on this occasion the Budget contribution took second place to the agricultural agreement. If the Financial Secretary is responsible for the EEC budget those decisions should be taken by him and not by the Minister of Agriculture, in Luxembourg. It will apparently cost £50 million on the EEC budget next year.
    I ask the Chief Secretary—who is responsible for answering, apparently, for the rest of public expenditure—does that £50 million have to be cut somewhere else? Does that extra amount on the EEC budget have to be taken off other public expenditure? If so, there is double damage to us. The first damage is the money which goes across the exchanges, and the second damage is in less capital expenditure, possibly, in this country as a result of the payments we make. I understand there may well be debate on the budget before long, but I merely make the point that if the Treasury is responsible for the EEC budget it should take that responsibility and not follow on after the Minister of Agriculture when he comes to such agreements.
    The second reason why the Government will deepen the recession, and perhaps turn it into a depression, is monetary policy. The Chief Secretary did not appear to understand the argument, so perhaps I should try to put it again, though I may not be any more successful than my right hon. Friend the Member for Leeds, East. We agree that there must

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    be sensible monetary policy. We agree that we cannot abandon money and that it is an important factor in controlling inflation. A target of 7 per cent. to 11 per cent.—or 9 per cent., if I keep to the figure given by the Chief Secretary—may be sensible in monetary terms when inflation is running at 10 per cent., 12 per cent. or 13 per cent., but it makes no sense at all when the Government deliberately put up the rate of inflation by 4 per cent., towards 20 per cent., in order to keep to the same monetary targets that existed when the inflationary expectation was 12 per cent. or 13 per cent. It would make no sense to any monetarist.
    Gordon Papper, who is the guru of monetarism, seems to understand this. Perhaps the Financial Secretary should read some of Greenwell's papers. I believe the Treasury has a subscription. The hon. Gentleman nods his head, from which I gather that he actually reads them. Perhaps he should look again because the point is made very clearly there. The Government are tightening their monetary control at a time when inflation is worsening and that will deepen the recession and increase unemployment.
    Finally, on monetary policy, it seems to me that the Government will have some difficulty reaching their target under their present policies. It will be very difficult for many reasons. Bank lending still goes ahead at a fair pace, I understand. Ministers hope, of course, that by putting up the interest rate it will slow down. But one factor in bank lending, as I understand it, is the expectation of inflation. If people expect inflation to be high it makes sense to borrow money from the banks, which is what might well happen. Even with an MLR of 14 per cent., if people expect an inflation rate of 20 per cent. or more it makes sense to borrow from the banks, especially with tax relief on interest.
    Mr. Budgen: What for?
    Mr. Davies: We do not know.
    Mr. Budgen: Was it not the most extraordinary feature of the last time that inflation was at a very high level that savings increased and all the expectations of a vast increase in the velocity of circulation were confounded?
    Mr. Davies: Yes, savings did increase but if the hon. Gentleman will look again he will see that they were mainly contractual savings and the savings of individuals.
    Mr. Budgen: No, surprisingly not.
    Mr. Davies: They are mainly contractual savings. The point I make is that bank lending could well increase at a time of inflation because it pays many people to borrow money from the banks because the value of that money will fall and when they repay that money there will be much less to repay.
    10.15 p.m.
    If that were to happen—as indeed it could—the only weapon that the Chief Secretary has for stopping it is to put up interest rates. He knows very well that the so-called corset, although it has a function, cannot do much when the pressures are really on. The only remedy which the Chief Secretary or the Treasury might have would be to put up interest rates which, of course, worsens the situation. The difficulty that I see in the Government reaching their monetary targets could be made worse by inflows. We know that because the pound is high the inflows have gone into the gilt-edged market. I leave this with the Treasury Front Bench as a thought.
    If the Treasury intends to remove all exchange controls, as I believe it is now thinking of doing, that may make the inflow situation worse. It may be paradoxical, but countries such as Germany and Switzerland, with no outward exchange controls at all, have found that to be so, and it may happen in this country. Once one breaks down the wall between external accounts and internal accounts, the money can go straight into the banking system, whereas now it is kept in the external account and may affect the money supply. I suggest that the Chancellor should think very carefully about this.
    The Financial Secretary is again shaking his head. He is obviously not up to his usual, sparkling, intellectual self. That long session with the building societies has clearly sapped his intellect. Perhaps he was unsuccessful in that session—who knows. However, I am making a serious point and I hope that the Government will listen.

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    If they are thinking of removing exchange controls, they had better be careful, because it could have that paradoxical effect of bringing more money into the banking system, thus making it more difficult for them to achieve their monetary target. That target is now 14 per cent., and the Chief Secretary wants to get it down to 9 per cent.
    So far as I can see, the Government's policy is one of high unemployment—that is bound to be the effect—high inflation, high interest rates to maintain and keep within the monetary targets and a high rate for sterling, about which I concede the Government cannot do much. That kind of policy cannot be good for manufacturing industry. Indeed, it will affect manufacturing industry very considerably. The effect will be a further de-industrialisation of the country, more loss of jobs in industry and more competition from
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    abroad in those sectors of manufacturing industry that are now experiencing competition.
    At the end of the day, we may be turned into a kind of financial, tourist attraction. I do not believe that the Tory Party minds too much about that, because it has never really been interested in industrial Britain. It is more interested in financial Britain. Financial Britain is the priority. If these policies are pursued, all we will have will be financial Britain and there will be no industrial Britain left.
    Question put and agreed to.
    Clause ordered to stand part of the Bill.
    To report Progress and ask leave to sit again.—[Mr. Biffen.]
    Committee report Progress; to sit again tomorrow.

ST. VINCENT (TERMINATION OF ASSOCIATION)
10.18 p.m.
The Minister of State, Foreign and Commonwealth Office (Mr. Nicholas Ridley): I beg to move,
That the draft Saint Vincent Termination of Association Order 1979, which was laid before this House on 27 June, be approved.
I apologise to the House for only now making my maiden speech in this Parliament. Indeed, the House may be glad that I have not troubled it until now. I think that this is the longest time that I have been in a Parliament without making a speech. However, it gives me enormous pleasure that it should be on the occasion of the island of St. Vincent seeking to gain independence that I first address the House.
The island has a long history of association with this country. It was given by Charles I to the Earl of Carlisle in 1627. He lost it, or something happened to it, and for many years there was a dispute between British and French forces as to who owned it. Finally, it was restored to Britain in 1783. It became an associated State under the West Indies Act 1967 on 27 October 1969. It now seeks to become independent exactly 10 years later on 27 October 1979. It will be the fourth of the associated States under the West Indies Act to seek independence.
There were two ways in which this could have been done. The first was under section 10(1) of the Act whereby a two-thirds majority in the Legislative Council and a two-thirds majority of those who vote in the referendum can give an associated State the right to opt for independence, irrespective of the views of this House. Secondly, there is an alternative under section 10(2). We in this House, by approving an Order in Council, can grant independence to an associated State. This is the method that has been used on every occasion. Since we have been requested by the Premier and the Governor of St. Vincent to lay this order, there is no dispute, and we are simply acceding to that request.
The House may wish me to speak on whether it is right to grant independence at this time. We believe that there is no doubt in this case. There are two criteria
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by which we judge the question of independence. The first is whether the majority of people want it and the second is whether there is a reasonable constitution which has been agreed as far as possible, and upon which the new State will start its independent existence.
On the first count, in the general election in St. Vincent in 1974, 69 per cent. of the people voted for the present Government, and that Government stood on a mandate of seeking independence. I believe that St. Vincent would have been given independence earlier had it not been for the eruption of the Soufriere volcano which caused considerable consternation, distress and economic damage. Naturally, the request for independence was postponed until the effect of that had been cleared up. I am happy to tell the House that the volcano appears to have been dormant since May and the latest reports indicate that there is no sign of a likely return to activity. In these circumstances the Premier believes that it is right to return those who were evacuated to their homes and to proceed with his plans for independence.
On the question of whether there is a reasonable constitution, there has been some difficulty here. There was a constitutional conference, but some members of the Opposition are not entirely happy with their representation there. Therefore, I feel that there is a special duty upon me to ensure that the constitution is reasonable in the light of those representations. I went to St. Vincent and discussed this matter with Mr. and Mrs. Joshua and Mr. Mitchell who are the three members in opposition at present. I succeeded in persuading the Premier to accept three amendments to the constitution which they put forward and which seemed to me to be minor improvements. On the other hand, I am not sure that it is right, in establishing a constitution, to build into it so much that it is binding upon future legislators. Therefore, I did not feel able to suggest to the Premier that he should adopt all the points put forward by the Opposition leaders.
When St. Vincent becomes independent, it is possible for the new Government to change their own constitution by a two-thirds majority in the Legislative Council. Therefore, I believe that it is

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right to grant independence at this time on the two criteria which are normally applied.
Some fear that the granting of independence will in some way reduce the help and assistance which we give to these West Indian islands whose economic circumstances are not as strong and as happy as we would wish them to be. But in the case of St. Vincent, I can commend to the House the fact that the arrangements which have been made are as generous as can be, considering our economic problems and our need to cut our aid programme.
Independent aid of £10 million, half in grant and half in loan, will be available to the island over a period of years for development projects. The value of technical co-operation which we have offered to the island over a two-year period is £370,000. The special provisions which we have made to repair the damage and to meet the cost of the volcanic eruption are £100,000 for food and drugs during the emergency, and the provision of a couple of ambulances and a further grant of £250,000 to help to get the crops back to a condition where they can again bear fruit.
I do not believe that—either at present or elsewhere in the future—we have used independence in any way to retard the economic development of St. Vincent. Indeed, the reverse could be said to be the case.
Some people feel that to grant independence to these islands would somehow mean pushing them out into an unfriendly world where the protection which has been given by their being one of Her Majesty's dependencies is stripped away. Independence means what it says. Once a State is independent, it is its responsibility to look to its own security and defence. I hope that these problems can be dealt with and that the fears of some Caribbean States on the subject of security can be dealt with by a greater association among the States. I welcome the setting up of the Organisation of Eastern Caribbean States, which I hope will develop not only militarily and in a security sense but economically. The more that such States co-operate, the more will be the strength of their position in a security as well as in an economic sense.
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We have reached the point where making more of the West Indies independent will aid the process of association. It is difficult to imagine a sensible association where some of the States are dependent and some are independent. The more we can speed up the process, the more I believe we contribute to the necessary association of the islands for their own good. We are being asked by the Caribbean States to help with regional security. We will certainly with our friends examine their suggestions and see in what way we can best help.
This is another act of decolonisation which confirms the total untruth of allegations that this country wishes to hold people in domination. Only the other day the Cuban Foreign Minister said:
"There remain many peoples subject to colonial domination, the Virgin Islands the Caymans, St. Vincent, St. Lucia, St. Christopher, Nevis, Anguilla. In these territories the colonial powers maintain powerful military bases which are frequently used for manoeuvres which put at risk not only the lives of the inhabitants and the conservation of their natural resources but also the peace and security of the region."
Apart from the fact that St. Lucia was made independent by the hon. Member for Merthyr Tydfil (Mr. Rowlands) during his time in Government—and I support him in that action, so that that territory should not be on the list—here before us is a demonstration that we are keen to grant independence to St. Vincent as well. I have been there and I saw no military base of any sort. The fear of the St. Vincentians is that there are inadequate military bases on St. Vincent. I therefore hope that the Cuban Foreign Minister will stop making such remarks.
We hope, in this country, that we have been able to make the transformation from Empire to viable democratic, happy States. We cannot guarantee their economic success, but I hope that the whole House will join me in wishing St. Vincent both prosperity and success, and a very long democratic future.
10.31 p.m.
Mr. Edward Rowlands: It is a pleasure to offer my congratulations to the Minister of State on his maiden speech in this Parliament. He and I have known each other well in personal and parliamentary terms. We have been pairs for more than a decade

1697
in the House. I must confess that I have never seen him as a parliamentary virgin and the coy way in which he introduced himself tonight does not accord with his traditional role. I am sure that we will see him in his usual robust role on future occasions.
This is the third section 10(2) order under the West Indies Act 1967 that the House has debated, considered and, I hope, approved, within the last couple of years. I had the pleasure of moving two orders. It is now a pleasure to listen to the eloquence of the hon. Gentleman in the moving of the third. If approved, it will launch yet another small mini-State into a rather inhospitable world. As on other occasions, the Government and this House are responding to the request from the democratically elected Government of St. Vincent to go to independence. In no way are we imposing a policy on the people of St. Vincent or the Government of St. Vincent, or trying to force them into independence.
I was pleased to hear the way in which the Minister of State referred to the Cuban Foreign Minister, who is a bit of a nut-case anyway. I have always shared the robust views expressed in this House about the attitudes of some of the cranks who have spoken in these terms. I recall vividly a marvellous visit by the Committee of 24 of the United Nations to Montserrat and other dependent territories of ours. With the Chief Minister sitting on the other side of the table, a sub-committee of the Committee described how they had come to save the territory from the yoke of colonialism and release it from the grip of British imperial power. I understand that the conversation continued for 20 or 30 minutes before the Chief Minister said "Let's pause here. We have the British exactly where we want them. Please don't interfere with the amicable arrangement of dependency that we have."
In many Caribbean territories, the relationship is anything but one that can be described as imperial or colonial. I do not wish to be complacent. I am sure, however, that we are legitimately responding, and have wished to respond, to requests and suggestions of those territories that remain broadly as dependent territories. It was a privilege in my time at the Foreign and Commonwealth
1698
Office to be the Minister responsible for our relationship with those territories. Inevitably, the House and the Government have to be satisfied that this request represents the wishes of the majority of the people of St. Vincent. As with previous orders, this aspect has inevitably posed the question of how this can be done and whether to use a provision in the West Indies Act—the simplest of all tests of opinion—for a referendum. Like the Minister, I would argue against using that rather simplistic, crude method of assessing opinion.
We are proceeding in the way specifically requested by the democratically elected Government of St. Vincent. It would be a grave step to reject that request. I took the view, and I think that the hon. Gentleman takes the view, that it would do more harm than good to propose an alternative view contrary to that of the Government representing the majority of the people, and in a small community to force the use of a divisive process for assessing opinion. It is far better to try, as the hon. Gentleman and I have done, to develop a consensus around the constitution, around the political processes which lead to independence. At the same time, although we have only marginal responsibility, we should ensure that the electoral processes and the electoral system are the best possible to allow the people of the State to make a free and fair choice of Government, not before but after independence.
Oppositions in all the associated States with which I have had dealings have understandably and inevitably opposed the sort of process that is proposed. I am sure that the hon. Gentleman can confirm this. However, it is only rarely that Oppositions oppose the principle of independence. It is always the timing that they oppose.
Understandably, too, the fear of Oppositions in small societies such as those which we are discussing is that the Government in power will attain independence and subsequently trample on Opposition rights and thwart free and fair elections. However, in the Caribbean, perhaps unlike some other parts of the world, Oppositions can draw comfort from political experience.
Despite the traumatic events of Grenada, the principle of change through

1699
the ballot box has been upheld in Jamaica, Barbados and—as recently as Monday of this wek—St. Lucia. Under a constitution drafted here, St. Lucia obtained its independence through an order passed only months ago, in the last Parliament, and on Monday the process of change from one Government to another was achieved by the free and fair processes of the ballot box.
It is no part of the duty of this House to involve itself in the internal affairs of St. Vincent or any other of the associated States. As I have said, it would be a grave step to refuse to accede to the legitimate request of a democratically elected Government, seeking independence through a normal legislative process laid down by previous Parliaments.
Given the criteria mentioned by the Minister—that we can satisfy ourselves that what is sought is the general wish, and that the constitution under which the State will go to independence upholds the tradition of democracy and personal civil rights—I do not think that we should stand in its way. I wholeheartedly support the order.
I think that the patient process to achieve the maximum possible consensus around the constitution has been carried out. I regret that individual Opposition leaders failed, at the last minute, to attend the constitutional conference last autumn. I think that they were wrong, and I have argued that strongly with them since. Both the hon. Gentlemen and I have had chances since the conference to discuss at considerable length with Mr. Joshua and Mr. Sonny Mitchell the various constitutional aspects of points that they should have made at the conference. I am glad to hear that the Minister, with his charm, has persuaded Premier Cato to accept a number of amendments put forward by the Opposition—not all, but at least some. I am pleased that the process took place in that spirit.
My only criticism of the Minister of State is that we cannot take the order out of context and he alluded only briefly to the situation into which we are to launch a new mini-State in the Caribbean. The Minister should have referred more substantively to the current situation in that area.
There have been serious developments since our previous debate on an independence
1700
order. The Minister mentioned the traumatic events in Grenada. That is a small society and we passed its independence order in February 1974. It has been the setting for the first coup in an Anglophone Caribbean country. "Coup" is a much abused word, but in this case we can define it as people coming to power through non-constitutional means.
That coup was followed by political turmoil in Dominica and both events were accompanied by rumours and press headlines alleging adventurist and mercenary activities in the area which have caused a shiver of worry and concern through the eastern Caribbean since they raise the possibility of an external threat to one or more of the smaller States.
Many of the rumours about mercenary activity have been press talk, but there are reasons for genuine concern and fear in the Caribbean. Developments have added force to the arguments of those who claim that mini-States will always create vulnerable political and economic situations.
It is, therefore, all the more important that the British Government should make clear their policy on the eastern Caribbean and the mini-States in the area. I was closely identified with the previous Government's policy and there was nothing in the Minister's remarks to lead me to believe that it is not a common policy. Granting independence to associated States is not a Pontius Pilate policy in which we wash our hands and walk away.
The policy of disengagement from anachronistic constitutional arrangements, which sums up associate Statehood, to independence should be pursued so that the United Kingdom can immediately re-engage in a modern relationship of co-operation and partnership with the small territories of the eastern Caribbean.
A refreshing and enlightened development in the Caribbean is the inspired thinking of some eastern Caribbean leaders, such as Tom Adams, the Prime Minister of Barbados, and Henry Forde his distinguished Foreign Minister. Premiers and politicians of the associated States have been trying to work out the consequential developments that should occur as a result of the growth of mini-States.

1701
The majority of associated State premiers would not have chosen the path of individual independence. Many to whom I have spoken had hoped that a confederation would have developed, but there was not the dynamic to achieve it. That was no one's fault—it was probably an inevitable consequence of the breakup of the West Indies federation.
A number of premiers have reluctantly accepted that individual independences would continue and we have had alongside that process some interesting and valuable planning and thinking about regional planning and co-operation. The Minister of State rightly said that we have to complete this progress to allow regional re-groupings to occur.
There have been interesting discussions aimed at converting the Council of Ministers into an organisation of eastern Caribbean States with joint responsibility for overseas representation which would help to co-ordinate foreign policy and to ensure the sovereignty, integrity and independence of the State by a collective arrangement. This is important.
Important discussions have taken place this week on forms of regional security and co-operation on security. Strong and detailed proposals have been made for a regional coastguard service centred on Barbados. That service would have a multi-purpose role—for example, fishing protection and drugs control. It would also be a possible deterrent to the bizarre scheme of mercenary freebooters and adventurers which could threaten the territorial integrity of such small States.
There has been a willingness to improve the police services of individual States within the eastern Caribbean region.
We talk of a thin blue line in the United Kingdom. Anyone who has seen the blue line in this area will realise that it barely exists. Not only would local police forces be incapable of resisting small, well armed invasion forces from outside but they would find it difficult to cope with an average demonstration within the territory. That cannot be good for the establishment of a social democratic society. The normal certainties of law and order are essential. We should approve the order in that context.
I feel passionately that the Government should give a clear commitment to provide
1702
full political and financial support—it will be a question of money in the end—to these regional developments. Such support is needed for the regional coastguard service, helping to establish the overseas representation system, the regional commission and the police. The coastguard service is of particular importance because of its multi-purpose role.
It has been said that the cost could be £8 million. I hope that the two Ministers will persuade the Treasury to allocate the money that the region deserves. It will be a contribution to security, peace and political stability.
That sounds a little imperialistic, coming from this side of the House. Sometimes I wonder which side I am on. But social democracy has worked—or can work—in this area. That is why what happened in Grenada was such a traumatic experience and caused such a shiver to run through the area. There is a Caribbean tradition of social democracy. Government Members have often preached about social democracy. We can help to do something about that in this area. There is a will that we should do so.
It would be sad if, for what in global terms are peanuts, the Minister of State or others, in their zeal to cut public expenditure, did not do the job properly and, for the sake of a ha'p'orth of tar, spoilt what could be a very useful arrangement of co-operation and assistance.
I and my right hon. and hon. Friends wish St. Vincent well. Apart from its beauty it has not been well endowed with natural resources. One of its natural geographical features, alas, is the Soufriere volcano which has wrought its evil work in the last few weeks. I was glad to hear of the decent and generous aid programme that has been proposed. I hope that the Minister will add to that in the way that I have suggested in regional terms. I hope that if and when the House approves the order, it will not just forget this mini-State but that those on both sides who have interests, connections and personal friendships with the people in the Caribbean will maintain their interest and commitment to what will be a new Commonwealth State.
Question put and agreed to.
Resolved,
That the draft Saint Vincent Termination of Association Order 1979, which was laid before this House on 27 June, be approved.

PARLIAMENTARY COMMISSIONER FOR ADMINISTRATION
Ordered,
That Mr. Antony Buck, Mr. Tony Durant, Mr Dan Jones, Mr. David Lambie, Miss Joan Maynard. Mr. John Stokes, Mr. Ray Whitney and Sir Thomas Williams be Members of the Select Committee on Parliamentary Commissioner for Administration.—[Mr. Brooke.]

JOINT COMMITTEE ON CONSOLIDATION, &c., BILLS
Ordered,
That so much of the Lords Message of 14th June as relates to the Joint Committee on Consolidation, &c., Bills be now considered.—[Mr. Brooke.]
Lords Message considered accordingly.
Ordered,
That Mr. Nicholas Baker. Mr. Richard Body, Mr. Arthur Davidson, Mr. David Hunt, Mr. Greviile Janner, Mr. Ivan Lawrence, Mr. Tom McNally, Sir Anthony Meyer, Mr. Barry Porter. Mr. William Wilson and Mr. Alec Wcodall be Members of the Committee to join with the Committee appointed by the lords on the Joint Committee on Consolidation. &c., Bills.
Ordered,
That the Members of the Committee nominated this day shall continue to be Members of the Committee for the remainder of this Parliament.
Ordered,
That this Order be a Standing Order of the House.—[Mr. Brooke.]
Message to the Lords to acquaint them therewith.

POLYURETHANE FOAM
Motion made, and question proposed, That this House do now adjourn.—[Mr. Brooke.]
10.52 p.m.
Mr. Ronald W. Brown: Once again I raise the question of the dangers of polyurethane foam and its use in furniture. This time, however, there is a difference in that at long last there is the real possibility of legislation to resolve the problem.
Re-reading the campaign that I and my union, the Furniture, Timber and
1704
Allied Trades Union have waged since 1968, may I say that it makes one sad that it has taken so long for the arguments we have put to be accepted. Since I first began to attack the use of this dangerous material in furniture and in the home, hundreds of men, women and children have lost their lives in fires in which burning foam was the major cause of death.
I believe that a heavy responsibility rests on the manufacturers of foam for these deaths. They know the dangers, not least of all because I have continually reminded them of them. Yet they have continued to produce 60,000 tons of this highly dangerous material each year. When one considers that 21b. of foam occupies 1 cu. ft., one can appreciate the dangerous volume of the material that is in every home, hospital, old people's home and the like. I was grateful to my hon. Friend the Member for Norwood (Mr. Fraser) who, as a Minister, decided to take action after an extremely valuable meeting that he and I had with my trade union at which we discussed the whole issue. As a result of his decision to take action the proposed regulations are now available.
I pay tribute to the new Minister for continuing that work on taking office. I wish to put a number of points to her. In a recent television interview she said that we should not try to rush too much. She saw no hope of regulations before the spring of 1980. May I urge her not to delay that long? What is contained in the proposals should have been implemented by manufacturers a long time ago—at least 10 years. There is nothing known today that I was not arguing then, and for the manufacturers now to plead for more time is just an insult. I hope that the Minister will be very firm and refuse to delay these safety measures.
The right hon. Lady stressed also the need for full consultation. That is right, but I do not know how much more consultation is needed. After 10 years and hundreds of deaths, I should have thought that consultation had gone far enough. Action is now required.
In the interview, the right hon. Lady appeared to favour the easy option of labelling. I urge her not take that course. She will recall that there are three options

1705
which have been put forward. Option A is for regulations requiring upholstered furniture offered for sale to the public to resist cigarette and match ignition sources to come into effect so as to provide the industry sufficient time to comply.
Option B is for regulations requiring upholstered furniture offered for sale to the public to resist cigarette and match ignition sources to come into effect after an interim period during which the prescribed categories of furniture either have to comply with the requirements or bear a warning label.
Option C is that there should be regulations requiring upholstered furniture offered for sale to the public either to resist cigarette and match ignition sources or bear a warning label. These provisions would continue in force indefinitely, subject to a review after two to three years.
The House should know that option A had the total support of all the people who are responsible for the health and safety of persons—the Home Office, the fire research station, the Property Services Agency, the Furniture, Timber and Allied Trades Union and, in fact, one association of fabric manufacturers. The second option, option B, attracted the support of only the Chief Fire Officers' and Assistant Chief Fire Officers' Association.
But the easy option C, the House will not be surprised to learn, attracted the support of all the manufacturers, fundamentally because, obviously, it is an easy option. It does not go very far and leaves things very much in limbo. For some extraordinary reason, the consumers' representative supported easy option C in her personal capacity and had no view from the Consumer Council, but I have since discussed this with the council because I am rather surprised at its attitude, and we are to meet next week to see whether we can firm up its view away from the easy option C and much more toward consumer protection.
Option A gives the consumer better protection, and I hope that the Minister, in her capacity as Minister responsible for consumer protection, will exercise her judgment in favour of consumers and adopt option A. In so doing, she will, I trust, recognise that this can be only a
1706
first step. Consumers will be properly protected only when a safe foam is produced.
I suggest that the manufacturers now be told that unless they can produce a safer foam within a specified time, they must cease to produce the present unsafe material thereafter. Foam is a highly dangerous material having a high burning rate, producing dense toxic superheated fumes with frightening explosive characteristics. No other material used in furniture has those qualities, and it is total nonsense to say that other materials burn, too. There is nothing that burns with the same fury as does polyurethane foam. If a drug had been produced and proved to be as dangerous as foam is, I do not believe that we would have been so casual about its continued use. It would have been withdrawn immediately.
In the same television interview, the Minister said:
"It is not practical to go back to the safer fillings used in furniture before foam because it would cost the use of skilled labour"
May I remind her that upholstering today is done by skilled labour and there would be no change? If the right hon. Lady reads the "Training for Skills" survey of the Furniture Industry Training Board, published in 1978, she will see that that is confirmed. Therefore, there is no excuse, and there is no foundation for the argument that there will be excess costs because of the use of skilled labour.
As for the materials, we have cotton felt, coir fibre, horse hair, and hog hair. Everything is available to enable a return to the proper, safe fillings that we had previously.
The Minister will rightly claim that the Home Office is also involved. In 1971, when I was trying to persuade the Home Office of the dangers of rubber and plastic foam in the home, I received a letter which read:
"It has been suggested that dropped cigarettes might ignite the foam fillings in furniture and bedding, but research has shown that, in fact, neither rubber nor plastic foam can be ignited in this way. It has also been said that toxic fumes are produced when rubber and plastic foams burn but we are advised that the hazard which any such fumes may present is insignificant compared with that presented by carbon monoxide, which is produced in almost every fire in a dwelling whether or not rubber or plastic foam is present."

1707
At the same time that that letter was sent to me the factory inspector presented a report to the Department of Employment in which he stated:
"The feature that particularly distinguishes foam plastic from most other combustibles, however, was the production of hydrogen cyanide and isocyanates. They were involved in amounts fully comparable in toxicity to the carbon monoxide. They represent an important additional hazard which may not previously have been properly recognized."
I received a letter from the Home Office representing its view that the issue that I had raised was a nonsense, and at the same time the factory inspector was taking an entirely different view. The Minister might be interested to know that the gentleman who signed the Home Office letter was Mr. F. W. Stacey, who is the chairman of the working party that has published the report offering the three options. I am worried that easy option C follows rather too closely the views of Mr. Stacey way back in 1971 when he was told by the factory inspector that he was not in touch with the issues.
That brings me to the keeping of statistics. For a long time there has been almost a conspiracy of silence to ensure that the role played by foam in fires is not fully understood. First, the statistics contain no reference to foam. Therefore, the assumption is always made that those who die in fires are merely the victims of fires, when had it not been for burning foam they would more than likely have been able to escape.
I hope that one of the questions being asked at the inquiry into the disaster at Woolworths, Manchester is whether those who died would have had a better chance of escape had foam not been present in the furniture. I expect the answer to be, yes, they would have had a better chance had foam not been present. If that is the answer, I hope that legal action will be taken by the dependants of the victims against the foam manufacturers for having knowingly contributed to the disaster by producing a material that they knew would make it impossible for people to escape if the foam caught fire.
That brings me to the question of the insurance companies. In 1973 I wrote an article for "The Post Magazine and Insurance Monitor" in which I suggested
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that a crash research programme was needed. I said then:
"Maybe the insurance industry could give a lead. Might I suggest I per cent. of the yearly average direct fire loss in the United Kingdom be subscribed by the insurance companies in proportion to the amount each pays out annually in fire compensation, to be devoted to establishing a research programme for developing a new, safe foam?
Not only will it help to save lives and property, but it will be an investment in reducing the amount of money that goes up in hot dense toxic smoke each year. Legislation could then be produced to ensure that only safe form would be manufactured. We need a determined attack upon the problem"
I went on to say:
"Let us be done with all the excuses and apologies. Finish with trying to prove that it is somebody else's responsibility. Accept that, in the year man was rocketed into orbit round the earth to carry out major repairs to the outside of a spaceship, it must be possible here on earth to ensure that material used in our furniture and furnishings is a great deal safer than the present generation of cellular plastics."
Six years following the publication of my article and hundreds of lives lost, not to mention hundreds of millions of pounds worth of damage, nothing has been done. No doubt the insurance company will pay out on the fire in Manchester, provided that it cannot find some reason not to do so. That was the story in 1968, when the insurance company refused to pay up. It took legislation to put that matter right.
Are the insurance companies blameless? Are they not also guilty of failing to treat this matter more seriously? I raised it with them in 1973. Have they not contributed to the deaths of these people when they could have taken action then? I do not know how we value the lives of all those husbands, wives, sons and daughters, who die each year as a result of fires in which polyurethane foam is the cause of death.
Society cannot any longer accept the right of manufacturers to continue to produce highly dangerous foam, which is the root cause of the trouble. I call upon the Government to tackle the problem urgently. However powerful the vested interests of the oil and chemical companies may be, in the end the buck stops here.
I finish on a cautionary note about prices. I have listened to people telling me how much it would put up prices

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if we were to make foam safe. I find extraordinary the argument that qualifies safety with money values.
Even if we take the argument that the first option will put 5 per cent. on the price, what is the price? There is a mark-up on furniture of 100 per cent. or more. If the price of manufactured goods increases by 5 per cent., the retailers mark up that value. A piece of furniture might cost £400 when it is manufactured; 5 per cent. of it is £20. However, in the shop the price will be increased by £40 because it will have been marked up. Instead of £20 on £800, it will be £40 on £800. It is time that we had a look at that aspect, too.
Safety does not mean that prices must go up, but I should be happy to put up prices in the cause of safety. In this case the mark-up price is so extraordinary that any increase in the price as a result of the attempt to make these commodities safe ought not to be marked up in that way. I hope that the Minister will take urgent action to ensure that if we can get the regulations through under option A the purchasers will not be forced to pay more money simply because the price has been marked up.
I am grateful to the Minister for continuing this work and trying to achieve safety for our people. I hope that she will carry on to the end to ensure that the interim work is done and that we shall finally produce a safe foam which will prevent the deaths of hundreds of people.
11.10 p.m.
The Minister for Consumer Affairs (Mrs. Sally Oppenheim): I welcome the debate, Mr. Deputy Speaker. I know that the hon. Member for Hackney, South and Shored itch (Mr. Brown) has a long and devoted history of concern with this matter. It is concern that I entirely share with him, as do a great many people throughout the country who were shocked by the tragedies which have occurred—and could go on occurring—causing just under two deaths a week. I do not know how there can be just under two deaths a week. It only shows what happens with official figures.
The fact that polyurethane foam, like many other fillings, is so easily ignitable, burns so fiercely and gives off such dense
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toxic smoke makes this a matter of urgency and concern. That is why, within just over two weeks of taking office, I decided that the problem was so urgent that I announced, without delay, in a written answer to the hon. Gentleman on 23 May, my intention to make regulations.
I have to tell the hon. Gentleman that the consultations are statutory under the Consumer Safety Act 1978, as a preliminary to the making of these regulations, so that there is no question of short-cutting the consultations. We are forced to hold them. I decided that they should be carried out with the utmost urgency. I am grateful to my hon. Friend the Member for Tynemouth (Mr. Trotter), who was responsible for the Consumer Safety Act, which has made it far easier for this process to be embarked upon and for the final regulations to be made. I give credit to my officials at the Department for the speed with which they have responded.
The consultative document was circulated on 1 June, inviting comments, with a deadline of 23 July. When the consultation process—about which the hon. Gentleman has complained, and which is statutorily required—is completed, an order will be drafted with all possible speed, but it will obviously, given the time scale for consultation, not be ready for debate and approval by both Houses before the House rises for the recess. I hope, however, that it will be ready very shortly after the House returns.
I propose in the regulations to go for option B and not the easy option C mentioned by the hon. Gentleman. I hope to explain to him my reason for this in the time available to me.
First, there will be a transition period during which manufacturers and importers will be able either to supply upholstered furniture carrying clear warning labels or to comply with the other requirements in the regulations. Those requirements will be that all furniture must be resistant to ignition by cigarettes and matches.
In practice this will mean, initially, that a covering or interlining will have to be used to meet the requirements of the proposed British standard. Secondly, after the transition period ends, the option of carrying a warning label will be

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removed and then all manufacturers and importers will have to comply with the rules as to flame resistance. I propose that this transition period should be as short as possible. The degree of flame resistance required will be set out in the proposed British standard which will lay down approved test methods, and I expect this standard to be available very shortly.
It is my hope that, subject to the outcome of consultation, enforcement will take place at the premises of manufacturers or importers and not at retail level, and that this will be carried out as cheaply and effectively as is possible and as is consistent with the need to prevent abuse.
The hon. Gentleman and others have asked that polyurethane foam should be banned altogether. I am bound to tell him, as I have told others, that this is neither a practical solution nor is it likely to be any more satisfactory than the course of action I am proposing. The hon. Gentleman's dramatic-sounding proposals do not stand up to scrutiny, nor do they take account of the research which has been carried out as to the feasibility of what he has proposed. I want to prevent these tragedies just as much as he does, but my approach is to propose solutions which are practical and likely to be effective, rather than the more dramatic approach adopted by the hon. Gentleman.
Polyurethane foam, as I know the hon. Gentleman will be aware, is by no means the only filling material to cause the hazards that we have discussed. There are other fillings, including the ones that he mentioned, which produce hazards of their own, which are potentially as dangerous as polyurethane foam itself. In banning the foam, we would not be eliminating those dangers. For example, latex foam smoulders longer, flames quicker and smokes more. Horse hair and hog's hair, mentioned by the hon. Gentleman, have undesirable effects and, in many cases, have worse toxic fumes than the polyurethane foam itself. Horse hair and wadding is slower to ignite, but ultimately when burning it gives off toxic gases which can be just as lethal as the polyurethane foam.
In requiring flame resistant coverings for upholstered furniture, we are avoiding all these dangers, not just the dangers of
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polyurethane foam, and making furniture safer, when it is not subjected to unreasonable pressures such as deliberate ignition or totally irresponsible behaviour. That is why I consider that control of the covering, until such time as a comparatively safe form of filling is discovered, is likely to be more practical than banning the foam itself. My main concern is consumer safety, coupled with the need to provide the goods that consumers want and need at a price that they can afford. The higher density foam used by the Department of the Environment was introduced for reasons not connected with flammability.
I am bound to tell the hon. Gentleman that, although my proposals will lead to some increase in costs, his proposals—the use of hair and coil springs, whether or not the skilled labour is any different—would necessitate a much longer process than stuffing with polyurethane foam. Therefore, it would put up the price of upholstered furniture beyond the reach of young married couples and, indeed, most of the population. That is the reality of what the hon. Gentleman is proposing. Clearly, that would not be an acceptable solution.
What I believe will occur is that if manufacturers find that the flame resistant coverings are creating cost problems, this will cause them to press for more urgent research into safer foam fillings. If these are produced, thus creating a safer and more economical alternative to polyurethane foam, so much the better. I hope that that will be the outcome of these regulations.
The hon. Gentleman asked whether I would initiate research into the development of safer foams. I must tell him that the foam manufacturers have undertaken a considerable amount of research already without notable success. These problems are not caused by lack of money, but are more to do with technology and motivation. I hope that the proposed regulations will provide the motivation for this research, which has been absent in the past.
The hon. Gentleman mentioned the huge profits in the furniture industry.
Mr. Ronald W. Brown: The markups.
Mrs. Oppenheim: The thing that matters to the industry, if it is to survive and continue to employ the people whom the hon. Gentleman wants it to employ, is that it should be making adequate profits. In fact, I am told that profits are about 5 per cent. to 7 per cent. on turnover, which is not very great at all.
In emphasising the urgency with which I have acted, I do not want to mislead the House about what has gone on before. The hon. Gentleman is absolutely right. The matter has been dragging on for about seven years, which I believe to have been far too long. But, in fairness, I must make it clear that a number of the processes involved in the delay were necessary, although in my opinion too prolonged. However, I inherited the benefit of a great deal of research and development that had gone on before, with which the hon. Gentleman will be familiar.
I am pleased to note that events accelerated when the matter came within the responsibility of a consumer protection
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Department. Obviously, I cannot answer for my hon. Friends in the Home Office.
I would like to pay a tribute, and I am sure the hon. Gentleman would like to be associated with it, to the work of the Fire Research Station at Boreham Wood.
I am satisfied that I have acted very promptly, and that subject to the approval of the House no time will be lost in bringing these regulations into effect. When this has occurred, I will still keep a watchful eye open for new developments, and will carefully monitor the effects of the new legislation in terms of fires prevented and lives saved, because that is what it is all about.
My overriding priority is, and will remain, to avert the terrible tragedies of the past and to make them very much less likely to occur in the future.
Question put and agreed to.
Adjourned accordingly at nineteen minutes past Eleven o'clock.