CONTINUATION OF REGULATOR POWERS

HC Deb 05 July 1979 vol 969 cc1574-692

Question proposed, That the clause stand part of the Bill.

4.12 p.m.

Mr. Denis Healey (Leeds, East)

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.

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 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. 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. 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 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 (York)

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 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 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 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 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 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 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 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 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 (Wolverhampton, South-West)

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 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 (Knutsford)

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 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 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 (West Lothian)

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 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 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 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 be artificially engendered at the cost of jeopardising the Government's monetary objectives.

Mr. Denzil Davies (Llanelli)

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 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 (Colne Valley)

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 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 (Ashton-under-Lyne)

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 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 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. 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 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. 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 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 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 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 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, 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 (Thurrock)

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 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 (Watford)

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 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 (Basildon)

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 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 (Croydon, South)

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 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 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 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.

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 (Stoke-on-Trent, Central)

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 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.

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.

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 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 (Mid-Sussex)

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 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 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.

I see the hon. Member for Mid-Sussex (Mr. Renton) looking at his watch. I have to keep going.

Mr. Michael Spicer (Worcestershire, South)

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 (Loughborough)

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 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 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 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 (Norwich, South)

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.

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 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 (Wood Green)

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. 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 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 (Woolwich, West)

Does that argument apply to the introduction of the 25 per cent. rate by the previous Chancellor in regard to the 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 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.

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.

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 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 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 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 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 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 (Swansea, East)

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 (Blackburn)

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.

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, 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 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 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.

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 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 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.

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 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 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 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.

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 (Bath)

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 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 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.

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 (Bridlington)

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 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.

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, 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 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 (South Ayrshire)

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 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 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 (Edinburgh, Central)

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.

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 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.

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 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.

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 (Batley and Morley)

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 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.

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 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 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 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 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 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 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 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 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 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 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 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 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.

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 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.

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 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 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 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 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 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 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 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 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.

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 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.