BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 13 June 1979 vol 968 cc459-579

4.16 p.m.

Mr. Denis Healey (Leeds, East)

I must start by thanking the Chancellor of the Exchequer for his kind words about myself yesterday. I would like to reciprocate by congratulating him on the style, structure and brevity of what was by any standard a quite exceptional Budget Statement. As he is now joining a small but select fraternity of Finance Ministers—an office which in all countries under all parties at all times is one of the most difficult and testing—I would like to start by saying one or two things on which I agree with what he said.

First, I think that the right hon. and learned Gentleman was right to consider our national problems in a longer perspective than is offered by the immediate past or even by the past 25 years. He was right also to emphasise, as I myself did so often, that our economic troubles are very largely home-made and that we must find a cure for them at home. He was right, too, to make no more than a perfunctory and ritual attack on the legacy that I bequeathed him. He could scarcely have done more without contradicting the opening sections of his own Financial Statement, which list the achievements of the British economy in the last 12 months, and comparing them with the appalling prospect in the first year of the Conservative Government. Indeed, he could have done no more than he did without undermining the credibility of the Chief Secretary to the Treasury, who has never hidden his admiration for the Labour Government's economic responsibility.

I must criticise the Chancellor, however—and this will be the main burden of my speech—for what I believe to be his obstinate refusal to learn any lessons from the past, particularly from the experiences of the last Conservative Government, of which he was a member—a Government elected on the same policies as this Government and who attempted, with the same reckless dedication to the same election rhetoric, to carry out those policies with the same blind indifference to social and political realities, bringing about catastrophic consequences both for themselves and for the nation as a whole.

Nothing that the Chancellor said yesterday gave us any reason to believe that the consequences of this new reversion to pre-war Conservatism will be any different from those which followed on the last occasion. Indeed, the circumstances in which the Chancellor is repeating the experiment attempted by the right hon. Member for Sidcup (Mr. Heath) are far less propitious than those in 1970.

As the Chancellor himself pointed out in his review of the past year, average earnings increased by 14 per cent. in the 1977–78 pay round and rather faster in manufacturing industry. Indeed, in that round the whole excess over the Government's guidelines took place in the private sector. In the countries which compete with us, increases then ranged from 7½ per cent. in France to only 2 per cent. in West Germany, with a severe loss in the competitiveness of the goods we have to sell, both at home and abroad.

In the current pay round, excessive pay increases have continued, and again the private sector has consistently led the way. The best proof of this is the massive increases required for workers in the public sector if they are to restore the position they held only a few years ago. I must say that it was a bit thick of the right hon. and learned Gentleman to complain about what he called the forward commitments on public sector pay that he had inherited. After all, he has just decided gratuitously to pay immediately, and without phasing, massive increases not only to the police and the Armed Services but also to doctors and dentists, judges and top civil servants.

Against that background, I am not clear what he means by his complaint about the forward commitments that he has inherited. Is he complaining that we did not pay the nurses and the crossing sweepers immediately everything they are likely to get from the comparability studies, or that while a judge earning £460 a week has the right to an immediate and massive increase, a nurse on £54 a week has no right to similar comparability? Nevertheless, we are now certain this year to have a level of earnings increase nationwide at least as high as last year. As a result, as I warned the House in January, there is bound to be an increase in inflationary pressure and some loss of jobs.

Another consequence is that the Chancellor started his Budget preparations with a public sector borrowing requirement £1½ billion higher than it should have been on the assumptions in last November's forecast. So he had to cut the PSBR by at least £1½ billion before he started to consider any other fiscal changes. But the effect of excessive pay increases on inflation and employment this year is bound to be aggravated by the massive increase in oil prices since the revolution in Iran—an increase which I fear may still have some way to go.

On some not unrealistic forecasts, the increase in oil prices this year could add over 2 per cent. to the cost of living in Britain by Christmas. This is not counting the increase in petrol tax which the Budget decided yesterday. Moreover, the increase in oil prices which we may face by the end of this year could slow down world growth to a snail's pace by the middle of next year. For this reason, I believe that the Chancellor's Financial Statement is far too optimistic about the likely growth of world trade in the coming 12 months or so.

Both these factors—excessive pay increases in the current round and the massive increase in oil prices—are likely to increase the rate of inflation and to reduce the number of jobs in the coming year. So this Budget would have been a difficult one, in any case, for any Chancellor. Any other Government faced with this situation would have taken care to frame their Budget to have the minimum effect in raising prices and the maximum effect in creating jobs. But the right hon. Gentleman has chosen precisely the opposite course. As the Chancellor's Financial Statement makes clear, the main economic effect of his Budget is to produce a massive increase in both prices and unemployment.

The right hon. and learned Gentleman rightly paid tribute to the civil servants in the Treasury and the Revenue Departments for the skill and dedication with which they serve any Chancellor. I fully endorse his views. It is clear from the Financial Statement and Budget Report that the civil servants in the Treasury have made heroic attempts to make the Chancellor's sums add up arithmetically, though I am bound to say there are some very soggy patches in that arithmetic and a lot of fudging. For example, they have scored a saving of £1 billion in public expenditure through the sale of public assets. Yet the Chancellor still has not the slightest idea what assets he will sell, when he will sell them, or what price they will fetch.

To estimate the effect of his rigid application of cash limits as reducing public expenditure by a full £1 billion this year is very difficult to justify. I also see from the Financial Statement that the Chancellor plans to cut fixed investment by the public corporations by 4½ per cent. in the remaining nine and a half months of this fiscal year. As the House will recall, the previous Government planned that fixed investment by the public corporations should rise by £400 million in the present fiscal year. I do not believe it is possible—I am sure that the Chancellor has been told this by his advisers—to cut fixed investment already under way to the extent suggested in so short a time. If the public corporations are to make the cuts in public expenditure which the Chancellor plans, they are likely to do so by raising charges rather than by cutting capital investment.

Finally, I would invite the attention of connoisseurs of Budget speeches on both sides of the House to the right hon. and learned Gentleman's sentence about the public sector borrowing requirement. I could hear the blood trickling down the Treasury's gutters as the discussions took place before agreement was reached, if it ever was reached, on those words. Nevertheless, with a bit of fudging here and there, the Treasury may have succeeded in making the Chancellor's figures appear to add up arithmetically. But they do not add up socially, politically or psychologically, and for this reason they cannot add up economically.

One constant element in this Government's policies in the few weeks they have been in office is their total indifference to the effect of their policies on inflation. By some weird trick of economic theology, they seem able to see rising prices as having nothing to do with inflation. When the Prime Minister decided to abolish the Price Commission, she set the signal, predictably enough, for an orgy of price increases—bread, milk, electricity, gas and postal charges. You name it; we have had it.

The Government's indifference to the price effect of their policies reached stupefying dimensions in yesterday's Budget. In 10 minutes of his speech yesterday, the right hon. and learned Gentleman threw away the results of five years' painful work by the previous Government and the people of this country in bringing down the rate of inflation. During the election, some of my hon. Friends predicted that the Chancellor might have to double the rate of value added tax to pay for his tax cuts. The right hon. and learned Gentleman branded that as a shameful lie. What did he do yesterday? He near doubled it to 15 per cent. and told us that this would increase the cost of living next Monday by 3½ per cent. at a stroke, if I may quote the right hon. Member for Sidcup.

The increase in the duty on petrol has added a quarter of a percentage point immediately to the cost of living. As it feeds through into other prices by its effect on transport costs, it is likely to increase the cost of living by at least another quarter of a percentage point within a few months. I see today that the Road Federation reckons that it will add £900 million to the cost of road transport in the coming months. The increases in indirect tax the Chancellor announced yesterday, by his own reckoning, will add 4 per cent. to the retail price index by September. Nearly all of that will be with us next month.

This explains the relevance of a question asked by one of my hon. Friends about how the pensioner will be protected over the next six months from price increases which take place tomorrow. I hope that I can count on the friendship of the hon. Member for Truro (Mr. Penhaligon) in this Parliament, although I could not always rely on it in the last.

The increase in indirect taxes is only part of the effect of this Budget in raising the rate of inflation. The cuts in public expenditure are also bound to raise prices. For example, the cut of one-third of £1 billion in the rate support grant is likely to be met in part by increases in rates—for all the huffing and puffing of the Secretary of State for the Environment yesterday. In many cases, cuts in industrial support are bound to be met by increases in the price of goods produced by the firms concerned.

The cut of another £⅓ billion in finance for the electricity, gas and coal boards and for BNOC is bound to be met in part by further increases in fuel charges, as the feeble reference by the Chancellor to this point yesterday made clear. Prescription charges will be more than doubled—another increase in the RPI. The looked-for savings in transport expenditure are also likely to be met by higher fares than previously planned.

On the most conservative estimate, the public expenditure cuts alone will add 1 per cent. to the cost of living, although this will be spread unevenly over the coming 12 months. On top of that, we face the price effects of interest rates at 14 per cent. Can the Chief Secretary tell us, when he speaks, how much he expects mortgage rates to rise in consequence? He will have been told that every increase of 1 per cent. in the mortgage rate adds one-third of a percentage point to the cost of living.

Finally, none of this arithmetic covers the cost of the increase in food prices which is certain to be generated if the Government carry out their election undertaking to devalue the green pound to parity.

The Chancellor was unnaturally coy yesterday about the prospects for inflation after his Budget. I had to search the Financial Statement to discover what he really thinks. In fact, he thinks that inflation will rise to 16 per cent. in September. The Secretary of State for Social Services, who has just made his statement on social security, admitted that he expects the rate of inflation to reach 17½ per cent. by November. How much further will it rise before it peaks, if it ever does peak? It will be rising at ¾ per cent. a month in the winter of this year, long after the tax increases have had their impact.

I want to put a question to the Chief Secretary. The forecast shows that although inflation will have reached 17½ per cent. by November it is expected to have fallen to only 13½ per cent. by September 1980. I say "only 13½ per cent.", but that is over 3 per cent. higher than the rate of inflation which the Conservative Party inherited from us when it took office a short time ago. The right hon. and learned Gentleman told us yesterday, and it was repeated by the Secretary of State—

Mr. John Bruce-Gardyne (Knutsford)

Inflation was accelerating fast when Labour left office.

Mr. Healey

The hon. Member must learn to contain his ardour if he is to command our respect. No doubt he will have an opportunity to speak in the coming days. You will of course have heard, Mr. Speaker, that his Leader regards him as Cabinet material—although unfortunately there was no patch on the suit she had to make which that piece of material exactly fitted. However, no doubt he will be able to address us from a vertical position in the future rather than the recumbent position from which he made that intervention.

As I was saying, the Chancellor told us yesterday—this was repeated by his right hon. Friend this afternoon—that the increase in value added tax was once for all. If he believes that, he will believe anything. Does he really believe that if the Government raise the cost of living by 5 per cent. at a stroke it will have no impact on wage increases? If he does believe that, I suggest that he consults his opposite number in the French Government about the French experience after they generated price increases once for all last year.

What will be the effect of yesterday's Budget on wages in the next round? The assumption in the Financial Statement is that earnings will rise in the next pay round about as much as in the last two rounds, though rather faster in the public sector. That is what it says. That would be pretty terrible. It would mean a severe erosion of our competitiveness for the third year running.

But is not that estimate grossly over-optimistic, anyway, against the background of this Budget? The Chancellor will recall that the earnings increase in the private sector in the 1977–78 round was 16 per cent. He expects that to be repeated in the next year. It does not look like being less in this round.

But this year's wage round started with inflation running at 8 per cent. and, as the Financial Statement points out, after one of the biggest increases in living standards in any year since the war. Nevertheless, thanks to the unremitting efforts of the Conservative Party in Opposition to destroy the Government's pay policy in principle and to abolish all means of influencing private sector settlements in practice, the earnings increase this year is likely to be about double the increase in the rate of inflation when the round began.

According to the Chancellor's own Budget Statement yesterday, next year's wage round will start with price increases running at at least 16 per cent.—5 per cent. of which is directly caused by the Chancellor's action. What on earth gives the right hon. and learned Gentleman such confidence that that will generate an earnings increase no higher than that assumed in the Financial Statement?

The right hon. and learned Gentleman really has no right to preach as he did yesterday about the senselessness of higher wage increases when, by his own actions, he is increasing prices by 5 per cent. at a stroke and presiding over the immediate payment of provocative pay increases to those on the highest salaries in the country. He must not be surprised if others follow the example that he has set.

He must have seen that only this week, the workers in the British Oxygen Company, which is one of the first companies to settle in the pay round and which has a stranglehold over much of Britain's industrial output, have already filed a claim for a 30 per cent. pay increase and have said that that claim is not negotiable.

I understand very well that in this situation the Prime Minister should still be talking vaguely of imposing a wage freeze, but by talking in that way she is giving every group of workers the strongest possible incentive to get the highest possible wage increase they can squeeze out of their employers, and to do so as soon as possible.

Does the right hon. Lady really intend to impose a wage freeze if that does happen—and, if so, how does she propose to get out of it without a wage explosion? She has told us often enough that any wage policy is liable to generate increases which wipe out its effect once it has run its course. If that is true—I do not believe that it need be true—it is doubly true of the effect of a wage freeze.

One possible explanation of the Chancellor's confidence is that he believes in the power of monetary policy to determine wages with a blind religious fanaticism worthy of an Iranian ayatollah or of the Secretary of State for Industry. But, as the right hon. Member for Sid-cup pointed out, that belief has no foundation in fact or logic. A firm faced with the threat of a strike which will mean immediate bankruptcy will always pay up and load the cost on to the consumer in higher prices, risking the possibility of bankruptcy later on rather than the certainty of bankruptcy tomorrow.

Indeed, I suspect, as I shall explain, that the Chancellor parts company with the Secretary of State for Industry on this matter and agrees rather with the right hon. Member for Sidcup. But he must know—the markets have already taken this point—that this part of his Budget is a recipe for a winter of discontent which will dwarf, in its disastrous effects on the economy and on society, anything we have known in this country in the past.

I should like to know where the Secretary of State for Employment was when this was going on in the Cabinet. Where is he this afternoon? He after all is the man who will have to carry the can for the Budget's consequences. No doubt he is still recuperating from the consequences of the battle that he lost in the Cabinet and that is why he is not with us today.

Mr. David Crouch (Canterbury)

As the former Chancellor of the Exchequer, will the right hon. Gentleman give some thought to the care with which he should be addressing the House and to the encouragement that he might be giving to excessive wage settlements? He does have some responsibility from the Opposition side.

Mr. Healey

I know that the hon. Gentleman takes these matters seriously—much more seriously, I believe, than some of his Front Bench colleagues. However, I spent a great deal of my time during the five years that I was Chancellor talking to the leaders and rank and file in the trade union movement, seeking to convince them that increases in earnings which went way beyond increases in productivity could generate only inflation and not improvements in living standards. I believe that to be true. I am certain that it is true.

A growing number of people in the country in general and in the trade union movement in particular are beginning to accept that there is no better policy on pay than the one for which the last Government searched for so many years. If one is to achieve anything in pay policy, the Government must take seriously their responsibilities towards working people. They cannot expect wage restraint if they show no restraint whatever in their self-interested policies.

There is another possible explanation for the reckless folly of the Chancellor of the Exchequer. It could be the belief that the increase in unemployment intended by his Budget will bring the unions to heel. If he really believes that, he could not be more wrong. Apart from the callous brutality of an economic policy based on that assumption—a theory once widely believed among economists—it has not operated anywhere in the industrial world for many years. Nevertheless, the Budget implies a steady increase in unemployment for the foreseeable future, after 20 months under the Labour Government when unemployment was steadily falling. The prospect of a steady increase in unemployment and in company bankruptcies makes so mystifying the belief upon which the Chancellor rests the whole of his Budget strategy—that somehow or other his cuts in income tax will transform economic performance in the boardroom and on the shop floor.

Some of the Chancellor's policies for increasing unemployment are naked and unashamed. We understand that the Civil Service Department has been told to order its minions to prepare for cuts of up to 150,000 jobs in the Civil Service alone. The savage cut of £172 million in support for the Manpower Services Commission and for job creation measures is bound to have an immediate and direct effect on unemployment.

Employment throughout the private sector is bound to suffer no less than employment in the public sector. The savage cuts planned in fixed investment by the public sector will be at the expense of employment in those private sector firms which produce buildings and capital equipment for the public sector. The construction industry already is deeply concerned about the effect on its activities of the cuts in road building and in public and private sector housing.

The main effect of the Budget in increasing unemployment will be through its impact on activity in the economy as a whole. Let us examine the prospect as the Chancellor described it. We must shudder at his admission that he has set us on a course for steady and continuing rises in unemployment.

The Chancellor told us yesterday that the central purpose of his Budget was to transform the performance of the British economy by creating incentives through cuts in income tax. But that will not result from his measures as he describes them in his Financial Statement. What does he foresee? He foresees a falling gross domestic product of 1 per cent. in the current fiscal year, as against the rise of over 3 per cent. last year. He foresees a fall of 2½ per cent. in manufacturing output as against an increase—too low but still an increase—of nearly 1 per cent. last year.

The Chancellor foresees a fall in private sector investment of 0.5 per cent. after three years under Labour when it rose at an unprecedented rate. He foresees a fall in stock building. The only area in which the right hon. Gentleman foresees an increase in activity other than in imports is in exports. But that seems to be accounted for fully by North Sea oil. The outlook for manufacturing industry has never been as gloomy as the right hon. and learned Gentleman describes it in the aftermath of his Budget.

The Chancellor foresees a continuing fall in the competitiveness of our manufacturing industry under the triple impact of domestic inflation—largely generated by himself—excessive pay increases and a high exchange rate. As he frankly admits in his Statement, trade volumes are adversely affected as a result of exchange rate changes and changes in competitiveness with a considerable time lag.

The consequences of the recent changes in relative costs will continue to affect the economy through and beyond the period of the forecast in the Financial Statement. Next year the outlook is bad enough. But the prospects for the year following the right hon. Gentleman's next Budget in April 1980, in which, he says, he will deliver another dose of the same medicine as we were given yesterday, is one of total gloom.

In the Chancellor's public statements, he has always affected total confidence in the ability of his tax measures to improve performance, but that is not what he says in his written Financial Statement. The words in the Red Book are worth reading. I do not know who wrote them. Perhaps one of my erstwhile friends wrote them, but the Chancellor must have approved them. He says: The forecasts are largely based on economic relationships fitted to the historical data of the last 10 or 15 years. Although the economy is modelled in such a way as to take into account insofar as is possible the effects of policy changes, it remains a possibility that large changes in policy will affect the economy in ways which are not foreseen. He can say that again. He continues: It is particularly difficult to take account of possible changes in confidence and expectations or, for the slightly longer term, of the effect of incentives on supply side relationships". He can say that again. The historical data of the last 15 years—particularly in the period when the Government in which the present Chancellor was a member under the leadership of the right hon. Member for Sidcup adopted precisely those policies—tell him that there will be no incentive effect whatever. The right hon. Member for Sidcup spent the last two years in office traipsing from one audience of business men to another complaining that he had given them all the tax cuts for which they had asked and yet still there was no investment and no improvement in our industrial performance. Of course, the right hon. Gentleman was right to complain.

Here I come to a mystery which underlies the whole Budget. Right up to and after the recent general election the Chancellor seemed to suggest that his approach would be based on the rigid monetarism set out by the Secretary of State for Industry on many occasions. The Chancellor promised that he would commit himself in his first Budget to a progressive reduction in the public sector borrowing requirement and to a progressive lowering of money targets, starting this year. He suggested that he would commit himself to specific targets for a period of years ahead, so that everybody would know what would happen and the so-called philosophy of rational expectation would have its magical effects upon everybody's behaviour. As some of the right hon. Gentleman's disappointed acolytes have pointed out in today's press, this seems to have gone out the window. The monetary targets for the next 10 months, as the Financial Times said, probably will mean a higher target range for the fiscal year than that which I set myself.

The PSBR which the Chancellor has fixed is only insignificantly different from mine. Indeed, the Chancellor tells us in the Financial Statement that the PSBR this year could be anything between £5½ billion and £11 billion. The Chancellor has prided himself on shaving £¼ billion off the figure that I set by the dubious arithmetic that I described earlier.

Mr. Bruce-Gardyne

Will the right hon. Gentleman give way?

Mr. Healey

Does the hon. Member for Knutsford (Mr. Bruce-Gardyne) actually want to rise to a vertical position?

Mr. Bruce-Gardyne

Is the right hon. Gentleman seriously asking the House to money supply was growing in any way remotely consonant with the targets that he had set?

Mr. Healey

In the six months since I set the 12 per cent. target, it has been slightly above the target range at 13 per cent. Such a fluctuation is normal in all countries. We must not forget that the Swiss Government and the German Government, whom the Conservatives are always asking us to admire, had excesses over a longer period due to the same cause—inflows of foreign currency—of 6 per cent. and nearly 12 per cent. over the targets which they set. Of course, these fluctuations take place from time to time. As the right hon. and learned Gentleman will be told by the Governor of the Bank of England, if he has not been told already, no one should be too alarmed about these movements, provided that steps are taken to correct them over the total period.

The key to the right hon. and learned Gentleman's Budget is not economic strategy but political prejudice. He has simply reverted to the traditional Conservative principle of rewarding the minority of the rich at the expense of the majority of the British people.

The right hon. and learned Gentleman spent some time—in fact, a lot of time—fiddling the figures of the effects of his Budget on living standards. He chose to base his comparisons not on a normal family with children but on a family without children, because he did not want to admit the effect on net family income of the cancellation of the increase in child benefits—more necessary than ever against the inflation which he has engendered—on which the Labour Government had decided.

The right hon. and learned Gentleman picked on a married couple without children with what was called average earnings of £100 a week. But 60 per cent. of adult males in this country have earnings below £100 a week. The vast majority of working women, married or unmarried, have incomes well below that level. The net effect of the Budget measures, leaving aside the public expenditure price increases, for a family on £60 a week is only 75p. The right hon. and learned Gentleman is taking no account of the effect on family incomes of the coming increases in fares, rents, rates, believe that at the time he left office the prescription charges, mortgage payments and food.

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

And school meals.

Mr. Healey

If we want to know the truth, we must return again to the Financial Statement. I wonder whether the right hon. and learned Gentleman read it before he had it published. One would expect that to show a substantial increase in consumer expenditure, which is the measure of living standards. But what does it show? It shows a fall of 1 per cent. in consumer expenditure over the next 12 months—a fall of 1 per cent. But that 1 per cent. fall in living standards is not equally shared throughout the country.

As the right hon. and learned Gentleman's most devoted admirer in the British press, The Sun newspaper, pointed out this morning, the head of ICI will double his net income to £800 a week as a result of the Budget. The head of the Ford Motor Company will get an extra £300 a week. I have no doubt that that will improve his morale no end, but it will not improve his bargaining position when he meets the trade unions in the annual pay negotiations next August. Indeed, he will have to settle next year's pay deal when price increases have already been rising at 16 per cent. for three months and before the cuts in the standard rate are reflected in the pay packet.

Compare again the fate of the judge with that of the nurse. After his enormous salary increase, the judge gets a net gain of £47 a week from the tax cuts announced yesterday. The nurse gets only £1.77 a week—a good deal less than is needed even to cover the increase in indirect taxes.

The effect of these tax changes is only one example of the right hon. and learned Gentleman's reversion to what the Secretary of State for Industry, in one of his earlier incarnations at the Conservative Party conference in 1972, described as the social values of Mr. Gradgrind and Mr. Bumble. The right hon. and learned Gentleman is more than doubling prescription charges paid exclusively by the sick in order to extend relief to the wealthy from capital transfer tax. He is bringing dividend controls to an end at the same time as he is bringing the link between pensions and earnings to an end. He is making it more expensive to buy a house in Britain but allowing the wealthy £100,000 a year to buy houses abroad. He is singling out overseas aid for cuts while increasing defence expenditure. He is cutting aid to British industry while freeing the banks to use our reserves for financing the trade of our competitors. He is selling off the people's assets in the United Kingdom, despite the income that they generate for the taxpayer, and allowing private individuals to build up assets abroad.

This would not have been an easy Budget for any Chancellor at present, but the right hon. and learned Gentleman has made all his problems far more difficult by his reckless and insensate dedication to an election rhetoric which was specifically designed to appeal to private greed. The disastrous consequences of his Budget will be felt not just in the next 12 months but for many years to come.

The only question which remains is: how long will it be before the right hon. Lady follows the other precedent set by the right hon. Member for Sidcup? At what point will her opportunism finally override her obstinacy?

4.56 p.m.

The Chief Secretary to the Treasury (Mr. John Biffen)

In the debate yesterday, the Leader of the Opposition concluded with the comment that my right hon. and learned Friend's Budget was a reckless gamble with our economic future"—[Official Report. 12 June 1979; Vol. 968, c. 270.] The right hon. Member for Leeds, East (Mr. Healey), ever loyal, echoed that this afternoon.

Mr. Healey

I did not echo it. I proved it.

Mr. Biffen

I am not sure that the right hon. Gentleman did prove it. He seemed to make a skilful play to the Benches behind him, anxious to try to have a happier life ahead than he has had in the recent past. However, I do not wish now to dwell on the problems which have been created for the Labour Party by my right hon. and learned Friend's Budget but to put to the House what I think are the two major characteristics of that Budget, to comment a little further on the background to the Budget and then to turn to my responsibilities in terms of public spending.

I suggest to the Leader of the Opposition that the Budget is not reckless. Yes, it is bold and certainly in some senses it is stern, but I believe it is responsible.

Mr. James Callaghan (Cardiff, South-East)

Stern?

Mr. Biffen

I said "stern", and I stand by that. I believe that in the area of monetary policy my right hon. and learned Friend has exhibited determined and prudent proposals designed to prosecute a monetary policy which will be a major determinant in the totality of the Government's economic policy over the year ahead. That is shown in the action that has been taken for the public sector borrowing requirement, for the M3 monetary aggregates and in the raising of the minimum lending rate. No one could look at that package and suggest that it was a soft option.

I should like to take up the point that was put to me by the Chancellor of the Exchequer—[HON. MEMBERS: "Oh."]—by the right hon. Member for Leeds, East. I must say that he has lost so much of his past style that it is a reflection on me that I had not instinctively slipped into referring to him as the right hon. Member for Leeds, East. I shall try to do better in future.

In answer to the point that he made, I cannot state what the future pattern of mortgage interest rates will be. The man most able to make an authoritative comment upon that is the chairman of the Building Societies Association. I understand that he has made a statement today to the effect that he does not see any reason why they should rise in the immediate future. Clearly any future rise—if there is to be one—would be related to how long the minimum lending rate stays at its present level. Certainly the right hon. Member for Leeds, East was long enough in the post of Chancellor of the Exchequer to know that no one would stand at this Box and speculate about that matter.

Mr. Denzil Davies (Llanelli)

Since the hon. Gentleman said that the Budget, from a monetary point of view, is a stern one in respect of interest rates, would he not agree that interest rates in the end are affected by the general rate of inflation? Could he give an assurance to the House that he would not allow interest rates to fall substantially—or, indeed, by any amount—below the general rate of inflation in the economy?

Mr. Biffen

I can give no such undertaking and the right hon. Member for Llanelli (Mr. Davies), who was a distinguished junior Minister at the Ministry, knows perfectly well that no one can stand at this Box and answer that kind of question.

Mr. Rooker

rose—

Mr. Biffen

I will not give way for a moment. I am sure that we shall have plenty of opportunity to take this a stage further.

I want to turn for a moment to the speech of the right hon. Member for Leeds, East. I thought that his speech linked the economic debate we had on the Loyal Address and the Budget debate well. They run together as one, because we are already beginning to discuss broad philosophical divisions on the question of economic management.

The right hon. Member for Leeds, East said that the Chancellor of the Exchequer's figures did not add up socially, politically or psychologically and, therefore, they could not do so economically. Those are fighting words from the right hon. Gentleman, particularly in the light of tax changes which I think are a fundamental point of my right hon and learned Friend's Budget, namely, the determination to have a substantial and, perhaps, fundamental switch from direct to indirect taxation, thus allowing our tax system to approximate more to those of the economies of North America and Western Europe. The monetary tax packages are, effectively, the Budget. The second package will obviously cause a degree of controversy but I believe that the right hon. Member for Leeds, East tended to forget all too often in the past that he has shown a disposition to favour exactly the kind of switch that has been undertaken by my right hon and learned Friend the Chancellor.

I wonder whether the right hon. Member for Leeds, East recollects writing in Barrons Magazine on 27 September 1976: I definitely do think the present level of taxation serves as a disincentive and those rates must come down. We have the wrong balance in this country between our direct and indirect taxation.

Mr. Healey

Of course I held those views and still do. I did a great deal to change the balance when I—[HON. MEMBERS: "Oh."] Oh, yes. On occasion I taxation under the Conservatives represented a majority of the revenue. I switched it to a minority during my period of office. I cut income tax repeatedly and on occasion I made—[Hon. Members: "Oh."] Oh yes. On occasion I made increases in indirect taxation, but I always took account of the psychological effect of my actions on the British people. That is the failure of the present Government.

Mr. Biffen

The right hon. Gentleman went on to say: we can turn to more reliance on indirect taxes like VAT. He will recollect that he was the Chancellor who cut VAT. Therefore, he really has a rather tawdry reputation in this area and I can understand his sensitivity.

What we are witnessing is the Labour Party regrouping. There is a retreat away from the policies that the right hon. Member for Leeds, East pursued while he was in office. He was kind enough to say that I had been one of the Labour Government's more generous critics over recent years. That is perfectly true. My monetaristic instincts led me to be even more charitable than my natural generosity would allow. However, this afternoon we heard quite a devastating denunciation of the extremes of monetarism, and it will not be long before "the extremes" is deleted from the actual phrase. We had talks about the right hon. Gentleman being able to work some kind of alliance with his hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) so that relationships would be happier in this Parliament than in the last.

Mr. Healey

Truro.

Mr. Biffen

I beg the right hon. Gentleman's pardon, but I had not thought that the hon. Member for Truro (Mr. Penhaligon) had been a great participant in economic debates during the last Parliament I now realise that the right hon. Member for Leeds, East is as bad on his geography as he is on his economics.

In the Queen's Speech we had, coming from the so-called moderate wing of the Labour Party, the attack upon my right hon. and hon. Friends—undoubtedly by inference upon my right hon. and learned Friend the Chancellor of the Exchequer—regarding the social and moral values that motivated their policies. In particular I was struck by the speech of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) on 16 May when he talked about the tyranny of private wealth and private power, but tyranny nevertheless."—[Official Report, 16 May 1979; Vol. 967, c. 228.] This was in the context of Tawney's writings.

There is a very simple measure appropriate for any Member from Birmingham, and that is this: in the context of this Budget, will the blue-collar Birmingham worker be corrupted or become the agency of tyranny by the substance of a 30p basic tax rate and the prospect of a 25p tax rate?

Mr. Rooker

And 17½ per cent. inflation.

Mr. Biffen

The hon. Member for Perry Barr points out the prospective rate of inflation and we shall doubtless have many opportunities, as the weeks revolve into months and years, to see whether inflation in this Parliament, under this Government, will bear comparison with the rate under the last Government.

Mr. Eric S. Heffer (Liverpool, Walton)

We shall remember that.

Mr. Biffen

I expect this to be a place of long memories. I make these preliminary points because I believe that what the country is seeing, and what is being seen in this House, is a fairly speedy retreat by the Labour Party from the stance that it adopted during the last couple of years before the general election. In other words, there is a great desire to get back to the world that existed before the IMF letter.

Mr. Harry Ewing (Stirling, Falkirk and Grangemouth)

Would the right hon. Gentleman accept that he is being just a bit unfair, particularly to the Labour Party? I do not complain about his unfairness to the Labour Party but I certainly do not expect it from him. The case of the Labour Party and the Labour Government was that if we contained inflation at 8 per cent. we felt we had a right to ask the trade union movement to contain its wage demands to reasonable figures. What my right hon. Friend the Member for Leeds, East (Mr. Healey) said in his speech was that if the Conservative Chancellor pushed inflation to 20 per cent. he had no right to ask the trade union movement to contain its wage demand within 5 per cent., 8 per cent. or 10 per cent.

Mr. Biffen

Yes, but out of this equation the hon. Gentleman leaves the balance of fiscal and monetary policy, which is vital to the control of inflation. He and I may have a profound disagreement about that. He nods his head and confirms that that is so. We shall have plenty of opportunity to debate this further, but he will, I hope, concede that we adopt this fundamentally different position. The analysis I make, given my premise, is not unfair with regard to the Labour Party.

I said that I should like to say a word or two about what I conceived to be my main role in respect of public spending and as Chief Secretary answering to the House in that regard, so I now turn to public spending. I want to put five propositions to the House on the subject of public spending.

The first is that we have domestic and world conditions which suggest that there are only very modest prospects for economic growth. I am reinforced in holding that view by a speech made on 5 June by the Governor of the Bank of England when he said: But can we hope to return to the relatively high rate of growth which was achieved in the 1960s and early 1970s? My own feeling is that there has been a change of gear, and that we must expect low rates of growth, for the foreseeable future. I have an instinct that that is so. I believe it will be a very real constraining factor upon this country, and we should recognise the implications of that. For it means that if growth, as it were, cannot provide the resources for lower taxation, lower taxation must come from reduced levels of public spending.

It was just over one year ago that the right hon. Member for Heywood and Royton (Mr. Barnett), in a debate on the Finance Bill on 27 April, almost accused me of arguing that public spending cuts were the essential precondition for the reduction of taxation. I assure him that he was quite right. That was my view then and it remains my view today.

Mr. Frank Hooley (Sheffield, Heeley)

Do not all the nice phrases which the right hon. Gentleman is using really add up to the fact that what he is advocating is a sustained and continuous growth in unemployment?

Mr. Biffen

Not at all.

The second proposition that I wish to put to the House is that the burden of public spending has increased, is again increasing and ought to be diminished. It is now three years or so since Commissioner Roy Jenkins said: I do not think that you can push public expenditure significantly above 60 per cent. and maintain the values of a plural society with adequate freedom of choice. I believe that those were valid words then. The percentage is probably somewhere in the low fifties, and let me say at once that one has a margin before one approaches the critical figure mentioned by Commissioner Jenkins. But there is a powerful inertia about public spending which will push it inexorably in that direction. I believe that the warning he sounded is one which should combine both sides of the House.

Mr. Rooker

Does the Chief Secretary include in that figure spending on pensions, which is not really public spending but a transfer from one part of society to another? If that is the case, and Roy Jenkins knows this as well, public expenditure will never get anywhere near the 60 per cent. figure which he mentioned.

Mr. Biffen

It included the transfer payments. The hon. Member for Perry Barr must clearly have his quarrel with both Commissioner Jenkins and myself. I believe that the proposition was valid. I assure the hon. Gentleman that some heads nodded on the Benches behind him, some of them within his own party, when I made the comment.

Mr. Heffer

Does the right hon. Gentleman recall that when this was said by Commissioner Jenkins, some Labour Members said that it was nonsense? It is just as much nonsense now that it is being said by the right hon. Gentleman. Part of the argument in relation to public expenditure is that much of it went towards bolstering private industry in order to help private industry create and develop employment in the development areas. If that is withdrawn, it can only mean disaster for areas such as Merseyside.

Mr. Biffen

I realise that it is picking at wounds ever to discuss Commissioner Jenkins with the Parliamentary Labour Party. I note what the hon. Member for Liverpool, Walton (Mr. Heffer) said about industrial policy. Again, there will be plenty of occasions on which to debate that. As he knows perfectly well, I do not accept his view. Indeed, this is an area where there will have to be a retrenchment in public expenditure.

The third proposition, which I hope is reasonably non-controversial—certainly less controversial than Commissioner Jenkins—is that there is a broad spectrum of agreement about the actual techniques of public sector expenditure control, namely, through the cash limits. This was a system commenced during the time of the right hon. Member for Leeds, East, and it was carried on with great skill by the right hon. Member for Heywood and Royton. I am sure that the right hon. Gentleman would join me in acknowledging the respect paid to that system by both the Public Accounts Committee and the Select Committee on Expenditure.

There is no doubt that the cash limits system will be under some strain. The cash limits in the expenditure White Paper presented by the right hon. Member for Heywood and Royton assumed pay increases of 5 per cent. in 1979–80 and price increases of 8 per cent. to 9 per cent. We have made it clear that we will not increase cash limits to accommodate higher prices. That point was made clear on 22 May by my right hon. and learned Friend the Chancellor of the Exchequer. Indeed, the previous Labour Government had said that this would have been their policy too.

We said that we would honour the previous Government's commitment to adjust the cash limits following pay settlements reached by the universities and health authorities, and my hon. Friend the Minister of State, Civil Service Department announced that the cash limits on Departments would support a general cut of 3 per cent. in Civil Service manpower this year, with only limited exceptions. The Government's proposals for revised cash limits have been published accordingly.

The local authorities have been asked to pursue the same kind of policy of squeeze, both general and on manpower costs. The Chancellor announced yesterday that this has been reinforced by a cut of £300 million in the increase in rate support grant, which would otherwise be required to cover local authorities' pay settlements, and by a corresponding reduction in Scotland. I believe that this policy of a generalised squeeze through the cash limits is sound and practicable. It will not be easy to carry through, but it has some advantages. Its effects are fairly evenly spread between capital and current expenditure within the area covered by cash limits, and that itself is of some importance. It also leaves those responsible for spending the money to decide their own priorities and their own methods of effecting the necessary savings, working within the stated cash allocations.

I do not underestimate the severity of the strain that this will mean throughout the public sector, but I am encouraged by the fact that in 1976–77 the prices on non-pay expenditure rose by about 5 per cent. over the provision in the limits. The cash limits were not increased, and only two limits out of 125 were broken. That was a record established at that time. I see that I get an assent from the Opposition Front Bench. I hope that it is a record which we can follow on this occasion.

Mr. David Stoddart (Swindon)

I have listened carefully to what the right hon. Gentleman is saying, and it seems to me that there will be this squeeze on the cash limits in the public sector. I am sure the right hon. Gentleman will agree that that is bound to increase unemployment in the public sector. In the light of the fact that manufacturing and industrial output generally is estimated to fall during the next year, where will those people go? Does the right hon. Gentleman agree that they can go to only one place—on the dole?

Mr. Biffen

The hon. Gentleman will know perfectly well that no Minister has stood at the Dispatch Box and forecast the expected levels of unemployment. I shall certainly not do that. But what I do not deny for a moment is that this is a severe package, and the severity is made necessary by the situation that we inherited.

Mr. James Callaghan

No one will believe that.

Mr. Biffen

The Leader of the Opposition says that no one will believe that. I certainly think that there are more productive ways in politics than constantly blaming each other about inheritances. None the less, the situation was that public spending had increased very much faster than had originally been planned, and the rate of growth in the economy was very much lower than had been expected, and, therefore, corrective action had to be taken. It is not pleasant to be undertaking corrective action, but it is a jolly sight better to take it now than to let the situation fester so that one finally ends up in a much worse situation.

I turn now to the fourth proposition—that is, the need for this House to be ever vigilant in monitoring expenditures that are without its formal grasp. I have in mind here something referred to yesterday by my right hon. and learned Friend the Chancellor and, indeed, by the Leader of the Opposition—namely, the United Kingdom contribution to the European Community budget. The growth of the net United Kingdom contribution to the Community budget is profoundly unsatisfactory. All the evidence is that the figure could soon reach about £1,000 million. Sir Donald Maitland has stated that for the United Kingdom the position will get worse after 1978 —on the existing budgetary formula— and there is no reason to expect any improvement on the basis of existing Community policies. Given that situation, I believe that it would be the wish throughout the House that my right hon. and learned Friend the Chancellor is successful in bringing about his determination to try to effect budgetary reforms so that a more equitable arrangement can be made.

Mr. Douglas Jay (Battersea, North)

On that particular point, can the right hon. Gentleman say at what point this budget contribution will come before the House so that we may, as he says, scrutinise it and take a vote on it?

Mr. Biffen

That is a point which should be addressed to the Leader of the House and not to me.

The fifth proposition that I put to the House is that the real area of controversy is how we spend public money, because that is a major factor in determining our political loyalties. Public spending is essentially protective spending. It is a collective investment, either for military security or social protection, and the Budget before the House emphasises the Conservative approach to our concept of the protective role of the State.

I say clearly that defence, quite deliberately, has not been cut. It has, in fact, received a modest increase in its budget. That is a conscious priority, made all the more so by virtue of the fact of the arguments in the White Paper presented in February this year by the right hon. Member for Sheffield, Park (Mr. Mulley). I quote from that White Paper: As seen by Western eyes, the growth in quantity of the Soviet forces, together with continued qualitative improvements, has extended their capability well beyond what can be considered necessary for purely defensive purposes. Given that analysis, we believe that it is appropriate that we should respond with our level of defence expenditure.

Secondly, we have protected spending on law and order. As my right hon. and learned Friend said yesterday, spending will not be reduced on the Health Service. But, of course, areas have been chosen for reductions in spending. They are the activities carried on under the Votes of the Department of Industry and the Department of Employment. They cover the full range of State economic activities that are normally described as an industrial policy. I have no doubt that this area of debate will extend through the lifetime of this Parliament, for what has been presented to the House of necessity could be only a very preliminary package. [HON. MEMBERS: "Oh."] Certainly.

I believe that the analysis that was made as recently as 10 May by the right hon. Edmund Dell, drawing upon his experience in the previous Government, is one which would serve the House well. I shall read into the record, as it were, what Edmund Dell had to say: The trouble in this country is that people, and indeed, industry itself, look to Government far too much, and as a result Governments which, if they kept their interventions in a low key, might do some marginal good, are led into dramatic and costly interventions which usually do a great deal of harm. The hon. Member for Walton shakes his head, but those were the words of a fellow Merseyside Member of Parliament.

Mr. Heffer

I should like to draw the right hon. Gentleman's attention to the fact that we would not have Cammell Laird shipyard in existence on Merseyside now, and we would not have the jobs that its workers have, had it not been for the Government's intervention. Rolls-Royce would not have been in existence, and one could mention a list as long as one's arm of companies, factories and industries that exist because of Government intervention. The former right hon. Member for Birkenhead, Mr. Dell, was wrong in what he said, and the right hon. Gentleman is just as wrong in repeating it.

Mr. Biffen

Clearly, all those from the Labour Party whom I have quoted this afternoon do not meet with the approval of many Opposition Members.

Mr. R. B. Cant (Stoke-on-Trent, Central)

If I may be personal, may I ask the right hon. Gentleman whether the economics that he envisages under this particular head include the declassification of the constituency of Oswestry as an intermediate area?

Mr. Biffen

I do not know, obviously, but I am very happy to place on record the fact that I never sought the classification of Oswestry as an intermediate development area. I hope that the hon. Gentleman will take that from me.

From the final proposition, I come to an inevitable, albeit forlorn, conclusion.

Mr. Bruce-Gardyne

Before my right hon. Friend comes to that conclusion, will he give the House today, or, perhaps, ask my right hon. and learned Friend the Chancellor to give the House on Monday, some indication of the expectation of the proportion of resources to be pre-empted by the public sector by public expenditure in the current financial year, after the changes in this Budget?

Mr. Biffen

That is a question which would be more authoritatively answered on Monday than at this moment.

From my final proposition, I come to the inevitable and forlorn conclusion. It is that the Labour Party has a wildly ambitious and expansive concept of the protective role of the State. The right hon. Member for Bristol, South-East (Mr. Benn) will become increasingly a powerful advocate of the new kind of Socialism. That will have a vaulting ambition, which he indicated in his speech to the House on 21 May, when he said: Our experience has shown that market forces cannot provide steady growth."—[Official Report, 21 May 1979; Vol. 967, c. 716.] There is no way that one can provide steady growth. The search for it is as foredoomed as the quest for perpetual motion. When politicians use language to suggest that they have that magic formula, they seek just those few extra powers, that further additional resource, to enable it all to come true, and it cannot. That is my charge against the right hon. Member for Bristol, South-East. He will have on his side, covertly if not openly, an enormous number of right hon. and hon. Gentlemen opposite, and it will inevitably lead to a desire for a more pervasive control of the economy.

Above all, as the right hon. Member for Bristol, South-East previously said, import ceilings are now inescapable because of the state of our industry. That is part of a wider whole. The reaction of the Labour Party is to have a greater degree of State control—not necessarily nationalisation, but a far greater pervasive control over the economy and the main decision-taking points.

Having come to that conclusion, I am determined that the only constructive alternative must come from this Treasury Bench. It must come from knowing that high spending and high taxation can cause a taxpayers' revolt. An example of that was Mr. Glistrup in Denmark and more currently in North America the success of Howard Jarvis in California. A taxpayers' revolt can create political ferment that undermines the deliberate and planned allocation of public resources. Therefore, this Treasury Bench is determined to bring State spending under some control before its magnitude drags us down. That policy is socially responsible and economically reasonable, and on that score we stand to be counted.

5.32 p.m.

Mr. Bill Homewood (Kettering)

I made an early application for my maiden speech. If I had waited longer, I might have developed a complex amidst such eloquence and never made the application. My sensibilities are not diminished by the knowledge that my predecessor, Sir Geoffrey de Freitas, was a distinguished Member of this House for a great many years.

I pay tribute to Sir Geoffrey, with whom I have worked since 1964. In that year he narrowly defeated me at the selection conference for the Labour candidate. I have always had a subjective belief that the best man won, but was not prepared to admit it until I contemplated this speech. Sir Geoffrey served his country and constituency well. He was kind, considerate and conscientious and, perhaps more important, he was effective in matters concerning the well-being of his constituents, particularly in the multiplicity of small businesses and farming that form a substantial part of the working activity of the area.

Sir Geoffrey's standing in the constituency played a substantial part in my electoral difficulties. I hope to reverse that trend in the future, but if when I leave the House for the last time it is said that I proved to be an adequate successor, I shall have done a good job.

The only advantage that I would claim is that most of my life has been spent within a few miles of Kettering. I worked in the constituency for almost 20 years. Since moving my home to the West Midlands, I have worked in the Kettering area two or three days a week as a fulltime trade union officer in the iron and steel industry. I know the problems that I shall be expected to tackle.

Kettering's industrial structure covers a substantial part of the whole spectrum of manufacturing and agricultural activity. It is diversified to a degree where it is almost a microcosm of the national scene. Its variegated content ranges from the immense heavy steel industry in Corby, through the light industry of boots and shoes, garments and engineering, to some of the lushest grazing pastures in the country. We also have more than our share of stately homes. I have no doubt that at some time I shall attract the attention of the heritage association, or whatever the stately homes trade union calls itself.

Unfortunately, over the past few years industrial activity in the Kettering constituency has tended to have clay feet. The staple industries of steel, boots and shoes and garments are under more pressure from the world recession than most other industries. It will be my constant duty to draw the Government's attention to the social consequences to my constituents of certain policies arising from the Budget. These consequences will be most dramatic if the British Steel Corporation is encouraged in its belief that the Corby iron and steel works should be closed.

Corby is a new town, less than two generations old. It was created from the early 1930s to serve almost exclusively the iron and steel industry. Despite brave attempts by local institutions and individuals to diversify the industrial structure of the town, it is almost exclusively dependent on iron and steel. Any attempt to close the iron and steel works without adequate provision for new jobs would be a savage blow to Corby. Irrespective of the debate about the iron and steel works, I shall be pressing for the grant of special area status, which is necessary for the diversification of industry in Corby.

Despite its youth, Corby has areas that are as run down as any to be found in the most deprived inner cities. Whole streets of houses are boarded up as a protection against vandals. That is the result of steel works layoffs because of recessional activity or attempts to make the works viable by raising productivity and demanning.

Employment in the steel and tube works has already fallen from a peak of 30,000 to less than 11,000. The premature decay of some parts of the town is attributable to that. The frenzied efforts of many people to fill the gap with new jobs has met with little success.

If this is the picture now, little imagination is needed to envisage the scene if about 5,500 jobs are lost from the iron and steel works. It is also easy to envisage the multiplier effect of this on a one-industry dependent community. At present 84 buses a day are run into the works, and the unemployment level in the town could not possibly be less than 25 per cent. of the available work force. The impact of this would not stop at the town boundaries of Corby. The whole Kettering constituency and adjacent constituencies would be severely affected.

For Corby itself—I am reluctant to use emotive terms, but I feel that there is no other word—the result would be devastating. It is no wonder that the work force of Corby says that there will be no talk of closure until replacement jobs are available. I urge the Government to reflect long and hard before they accept the British Steel Corporation's proposals for Corby iron and steel works.

Undoubtedly Corby is a special case. Despite the Government's strong position in the House, I do not believe that any informed electorate would give a mandate to produce such a situation in one town. Neither can the Corby steel workers contemplate any quick access to fresh employment in the rest of the Kettering constituency. During the pre-election compaign period I visited many boot and shoe factories in the area. Practically everywhere I went I heard demands from the employers themselves for more protection and more assistance to refurbish their industry.

Some of my more elderly constituents constantly pointed out that at one time there had been a boot and shoe factory in almost every other street in Kettering, Desborough and Rothwell, but now one has to be pre-informed of an address before it is possible to find even one such factory. When I asked where all the workers had gone, the short reply was that they were all at the iron and steel works in Corby.

During the election campaign I received a long letter from the Boot and Shoe Employers' Association detailing the severe pressures on the industry caused by cheap imports. The association is certain that some of these imports are being sold in this country at prices that are below the cost of production. I had a long meeting with the officials of the Shoe and Allied Trades Research Association, who stated categorically that if the last Government had not changed the attitude of all previous Governments to the boot and shoe industry three and a half years ago, there would be no boot and shoe industry in this country today.

Despite the decline in the industry, boots and shoes still provide a great many jobs in the Kettering constituency. All those concerned with the industry are convinced that given continued support for a few more years, the industry will not only survive but will grow in strength to a point where it will have no fears about foreign competition, which is solely responsible for its present malaise. Let nobody believe that the charge of low productivity can be levelled at the boot and shoe workers in an industry where straight piecework still forms the basis of pay structure in the vast majority of cases.

The same can be said of the garment industry, another large-scale employer in the Kettering constituency, where on straight piecework the employees have developed a tempo which cannot be found in the manufacturing establishments using the more sophisticated incentive schemes associated with work measurement. Yet the garment industry, also because of cheap imports, has only been able to maintain its employment levels by full use of the job assistance schemes of the last Government.

I believe that my constituency is under threat. I was pleased to hear, when I attended the mayor's reception in Kettering the other evening, that the new borough council would set up an industry committee.

I urge the Government to make an early start on the building of the A1-M1 link road to which the last Government gave their approval, because this provides the most important single step that could be taken to help my constituency to provide new industry. Thank you, Mr. Deputy Speaker for enabling me to make my maiden speech. I thank the House also for the courtesy that it has accorded to me.

5.47 p.m.

Mr. Geoffrey Rippon (Hexham)

I am glad that I have the opportunity to congratulate the hon. Member for Kettering (Mr. Homewood) on what I hope is the first of a whole series of interesting contributions to our debates. He has shown from the outset that he is very concerned with his constituents, and as long as he displays such genuine concern on matters about which he clearly has great knowledge he will always be listened to in this House with respect.

The hon. Member for Kettering has been in local government. Before I came into the House I, too, was in local government, and I believe that is a very good foundation on which to base a long and distinguished parliamentary career, which I am sure that the hon. Gentleman will have. We all appreciate his reference to his predecessor, Sir Geoffrey de Freitas, who was a great servant of the House and the country. We shall miss his contributions greatly, both here and in the European Parliament. For many years I have been, with him, joint President of the European League for Economic Co-operation and I would like to think that the new hon. Member for Kettering, who has displayed such interest in domestic affairs, will also share his predecessor's interest in the wider international scene.

I begin by joining in the congratulations that have been expressed to my right hon. and learned Friend the Chancellor of the Exchequer. The Chief Secretary has rightly described this as a bold Budget. I am sure that the Chancellor is right to have made the decisive switch from direct to indirect taxation, and I welcome the assurances that he gave yesterday that he intends to pursue this course. I look forward to a maximum rate of tax of 50p in the pound on both earned and unearned income, and in due course a standard rate of 25p in the pound.

In present times I believe that the distinction between earned and unearned income is artificial and unreal and that the Chancellor is right to try, right from the start, to mitigate the unfair burden that has fallen in the past on people who have had to pay the investment income surcharge. To put these matters in perspective, it is right to say that if the distinction between earned and unearned income had been abolished altogether in this Budget, it would have cost another £200 million to £300 million. I base that on replies which the former Chief Secretary to the Treasury gave to me in March. To reduce the maximum rate of tax on earned income to 50p would cost the Chancellor only an additional £130 million. That is not a very great amount out of total public expenditure of £65,000 million. That is the loss of revenue on paper, but I believe that rates of tax at this level would provide the Chancellor with an increase in revenue and not a reduction

I am sorry that we had to listen once more this afternoon to all the stupidities of the former Chancellor of the Exchequer, who claims that the Conservative Government have been elected by the chairman of Ford and the judges. In fact, the benefits from widespread reductions in taxation will spread right across the country.

Although my right hon. and learned Friend the Chancellor of the Exchequer can expect higher revenue as a result of reducing taxation at the upper levels, I think that it has been clear for some time that, if there were to be any substantial relief at the lower end of the scale, there had to be a considerable increase in the rate of VAT on the present range of goods and services as well as some reduction in public expenditure. I believe that my right hon. and learned Friend was right to say that, taking into account the zero rating on food and other essentials, an average level of VAT of 8 per cent. is still below the level in many other European countries, and it leaves the consumer with a choice whether he buys and pays. My right hon. and learned Friend was right to stress that what matters is take-home pay and the real standard of living.

It would be a national tragedy if trade union leaders sought to juggle the cost of living statistics as affected by VAT changes without taking account of tax reductions—which, in effect, the former Chancellor of the Exchequer irresponsibly suggested they might do. If trade union leaders were to take the advice of the former Chancellor, I believe that there would be a danger of continuing the downward course in relation to other European countries, to which my right hon. and learned Friend referred yesterday, and of pursuing the catastrophic wage demands which have so seriously eroded our standard of living.

I thought that the right hon. Member for Leeds, East (Mr. Healey), as a former Chancellor of the Exchequer, made a deplorable contribution to this debate. It was made on a basis which the right hon. Gentleman knew at the outset to be false. His speech was entirely characteristic of the man who held that high office. I hope that he will never hold high office again.

The trouble is that statistics are so often looked at in a vacuum, assuming that no motive power comes from any other direction. If one changes the policies, one changes the statistics. In this connection I believe that the Government should now take steps to make the cost of living index more relevant to modern times. It is absurd that in the discussions that take place we should ignore tax reductions and their effect on the cost of living. Let me make a slightly more controversial suggestion. I believe that alcohol and tobacco should be taken out of the cost of living index altogether as not being necessities of life, and people may choose whether to buy them. I certainly smoke too much and drink, but I urge that course against my own self-interest.

As for the next round of pay awards, about which the former Chancellor spoke so much this afternoon, I continue to have no confidence in the composition of the Standing Commission on pay comparability. I am sorry that the Government have decided merely to review the position after completion of work on the current references and cases where the references have already been agreed. As The Economist said on 2 June, there is still time for the Government to appoint some tough-minded commissioners of their own to contribute to the discussions and the August reports. I believe that they would be wise to do so, otherwise they may be stuck with reports for which they have no responsibility and which may not be relevant to the country's needs.

The only aspect of Budget strategy on which I have some reservation is the raising of the minimum lending rate to the crisis figure of 14 per cent. I well understand the pressures on the Chancellor of the Exchequer which led him to take action to control the money supply, but there comes a point when the raising of interest rates fuels inflation rather than moderates a boom. In the old days one could talk of a crisis rate of 6 per cent. to 8 per cent. as moderating a boom. I do not think that argument applies to rates as high as 14 per cent. High interest rates are a disincentive to new investment, and, in so far as they strengthen the exchange rate of sterling in the short term, it is only largely by attracting "hot" money that we do not want, and to the detriment of the competitiveness of our exports. In the meantime, such interest rates needlessly put up the cost of debt already incurred. The higher the rate of interest a man offers me to borrow my money, the less likely I regard the prospect of getting it back. That may apply especially if the person concerned owns a printing press so that it does not return with the same real value.

In the longer term—and I accept this as an essential part of the Budget strategy—we must demonstrate to the world that we are determined to stop borrowing, to live within our means and to speed up the repayment of the enormous burden of international debt which the Labour Government incurred on our behalf. Only if we take these steps will the pound be truly strengthened.

Sound monetary policy involves both a sound budgetary and economic policy. I agree with my right hon. Friend the Chief Secretary that the new monetarism has its role to play in our economic strategy. But I echo the words of Lord Roll of Ipsden, who said not so long ago: I find it, like the case for floating exchange rates, an example of an excessively mechanistic outlook and, therefore, in the deepest sense irrational. It represents an instance of the never-ending search for the simple cure—all so beguiling and yet so dangerous, particularly in anything relating to the problems of society. As the Chief Secretary said, there are no magic formulae. Monetarism is not a magic formula, nor is control of the money supply. The matter is much more complex than that.

I conclude by making some comments about the proposed cuts in public expenditure, particularly as they affect regional and employment policies. Total public expenditure, as the Chief Secretary said, is admittedly far too high. It amounts to over £65,000 million. That represented £1,075 per head of population in 1977–78, and the Government inherited plans, about which the former Chief Secretary told me, to raise that figure to £1,221 per head in 1979–80. That excludes about £70 per head for capital investment in the nationalised industries. That is a considerable burden of public expenditure which the Government have to reduce.

I hope that the present Government will not follow the example of the Labour Government in believing that the problem can be solved simply by cutting Britain's contribution to the Community budget. I am all in favour of changing the size and shape of the Community budget, but let us bear in mind the fact that as against public expenditure in this country of well over £1,000 per head, our expenditure in the Community is £5.80 per head if one takes account of monetary compensatory amounts, or £14.4 per head if one does not do so, and the figure is £20 per head if one takes the most extreme estimates of the Cambridge economists.

That is a sizeable amount of public expenditure, but let us not fool ourselves into believing that if we play about with the Community budget we shall solve our public expenditure problems. My right hon. and learned Friend the Chancellor was right to say that the Government intend to use cash limits vigorously. That is exactly as intended by the Labour Government and it was stated by them.

But I do believe that what matters is how public expenditure, whatever the total, is apportioned between productive and non-productive expenditure, between annual and capital expenditure, and between public consumption and public investment. Public expenditure to create permanent new jobs and wealth is, possibly, today more rather than less necessary in many respects. The high level of unemployment which we have inherited means that the expenditure on unemployment benefit and supplementary benefit for the unemployed and their families is estimated to be in the present financial year £1,320 million, or £1,000 million more than when the Conservative Government left office in 1974.

Twice I have seen Labour Governments double unemployment in the North-East of England—a tragic and unproductive waste of financial and human resources. There is no benefit from high unemployment and the social, financial and economic costs are huge. Therefore, I hope that the Government will set about restoring the regional policies that are needed on the lines introduced by us previously and that they will do so as part and parcel of a policy to restore national prosperity.

Many of the millions spent on unemployment benefit would be better spent on public capital expenditure. I see no reason why the Government should not continue to use their power as a purchaser to create real national assets—airports, better roads and hospitals. The former Chancellor of the Exchequer touched upon that matter in his speech. One of the main reasons why the level of unemployment has doubled is a result of the previous Government's policy which demoralised the construction industry. To a Labour Government public expenditure is always geared to consumption rather than investment.

I should like to know how the various Government Departments will achieve their planned cuts. We are told that the Department of the Environment will save £440 million—not a great amount. In so far as that is achieved by the scrapping of the Community Land Act, that is splendid. What about the rest of the cuts? No doubt, the general body of taxpayers are right to complain about the giving of grants and subsidies this year of £1,600 million to London local government—about twice Britain's contribution to the Community budget—if that results in the Socialist-controlled irresponsible Southwark council building a town hall at the cost of £50 million when we can manage to build one for about £3 million in Northumberland.

However, the fact that we can stop that sort of expenditure should not mean that we should stop the construction of an essential bypass or the development of an airport. As the Chief Secretary is an innovator in these matters, I hope that he will depart from the practice of previous Chief Secretaries—at any rate, in Conservative Governments—of interfering in the detail of departmental expenditure.

The late Lord Bridges said—unfortunately only after he retired—that the Treasury is quite good on strategy but bad on detail. I remember telling one of my right hon. Friend's predecessors that £500 million could be taken from the Department of Environment's budget if I could be given £5 million of free money.

We should prevent the sort of absurdity recently reported in my local newspaper. Five candidates were applying for a job of considerable importance to the tourist industry. They were told on the telephone that the appointment could not now be made. I do not believe that is the way to control £65,000 million of public expenditure. More responsibility should rest with the departmental Minister and the permanent secretary, who is chief accounting officer.

The next stage arrives when the procedure of the House is reformed, as we have been promised. Higher priority must be given to scrutiny by the House of departmental expenditure. I agree with what the Chief Secretary said about the need to scrutinise public expenditure, but not only the expenditure of the European Community. We see the Community budget in advance, and we are able to express views about it in the European Parliament and elsewhere. We have been rather slow here in catching up on the matter, but, as my hon. Friend the Member for Scarborough (Mr. Shaw), who has been responsible for monitoring the European budget, knows, information is available at an earlier stage.

The trouble with public expenditure in this country is that the House scrutinises it after the money has been spent instead of before. I hope that the Chief Secretary, in pursuance of his objective that Parliament should be ever vigilant in monitoring public expenditure, will give the House the opportunity to do so. In that way, Parliament can accept its share of responsibility both for total expenditure and for regional and other allocations.

The Secretary of State for Employment, speaking recently in the North-East, stressed the need to streamline organisations dealing with planning and the attraction of industry to areas of high unemployment. He said: There seems to be plethora of organisations trying to help industry here. We have a lot of manpower locked up in these bodies and they are not producing anything. I sometimes think this is one of our national problems. We spend all our time planning for production and we do not get around to producing". I entirely agree with those remarks.

I should like to know the Government's intentions about the future role of the economic planning councils. My experience leads me to feel, at least as far as the Northern region is concerned, that these are the primary bodies to which the Government should look for help and advice in carrying out an effective regional strategy. However, an important proviso to that is that their functions should be more precisely defined than they are at present.

In emphasising the importance of regional policy, I do not in any way suggest that the health of any region can be regarded as separate from the health of the economy as a whole. The grants, aids and subsidies—of which there have been a number—are frequently merely palliative and not what is required to deal with the structural changes taking place in our economy.

I believe that we need to restore a sense of responsibility to expenditure on regional development. We should ensure that good value for money is achieved and conditions are created in which the country shares in greater prosperity. Because I believe that the Chancellor's Budget provides that opportunity, I welcome it. All hon. Members should play a part in grasping that opportunity.

6.6 p.m.

Mr. Richard Wainwright (Colne Valley)

In the absence from the House—which I believe to be temporary—of John Pardoe, it falls to me to take up some of the themes with which he used to raise the collective blood pressure of the House. I always considered that to be a great service to the Chamber, especially when a certain drowsiness had descended upon hon. Members late in the evening. Mr. Pardoe has the gift of elegant provocation. I cannot hope to emulate that. Whereas he was always able to deal with the guts of the former Treasury Bench, I shall have to try to seek out their successors' conscience and intellect—a task in which I do not wholly despair.

Mr. Joel Burnett (Heywood and Royton)

The hon. Gentleman may as well sit down now.

Mr. Wainwright

No, no. I deprecate the atmosphere of pessimism with which the former Chief Secretary is trying to put me off.

The Budget seems to be based on four main maxims, one of which was touched upon with a wealth of well-informed experience by the right hon. and learned Member for Hexham (Mr. Rippon). Out of the four maxims, the Liberal Party wholly rejects three. First, we reject the extraordinary idea which served the Conservative Party well at the election that public expenditure is a concept wholly distinct from—and to be contrasted with—private expenditure. According to the Conservatives, the arguments of choice lie almost wholly with private expenditure.

The right hon. and learned Member for Hexham dealt faithfully with that fallacy. I should like to pursue a little further the foolishness of that distinction now that we are off the hustings. That argument ignores the vast interrelationship between the public and private sectors. The public sector provides the private sector with an enormous amount of orders and consequently employment. I also reject the idea that the argument of choice—especially important to a pluralist Liberal—lies so largely with private spending as distinct from public spending.

Take the following example from the life of an ordinary person. If a householder is afflicted with a broken window in his private house and a dangerously deep pothole in the public highway outside, and if, as is the case with most people, his time is limited, he has the choice between doing a do-it-yourself job on his window or spending his limited leisure nagging his local councillors to get the pothole mended and the danger abated.

If, as I fear will occur increasingly this year, the result of all his demonstrations, protests, letters to the town hall and phone calls to councillors is the adamant reply that there is no money in the public coffers for the mending of the hole in the road, that citizen will be deprived of choice. The limiting of public expenditure is an inhibition on the amount of choice in his life.

I hope that now that the election is over and the slogan has served its temporary purpose, we shall not have great matters of public importance based on that fallacious distinction.

The second concept that seems, unfortunately, to have informed the Budget is the idea, which it seems we shall not get out of the Government's mind, that the Keynesian analysis and remedies are no longer appropriate to the times in which we live and that we must go back to the homely maxims that were pervasive in the nineteenth century and the early part of this century and which landed the country in one depression after another.

That seems to be the proud boast of the Government in their early days, but they will soon have to modify their stance when they find difficulty in keeping the peace and keeping some sort of social cohesion in this country—as they will if they follow their present lines of thought to any further degree.

The Chancellor of the Exchequer made great play of the failure of the last Government to administer Keynesian remedies in a satisfactory and effective way. He mocked the former Prime Minister's statement to the Labour Party conference in which he said: We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you, in all candour, that that option no longer exists. Anyone could have told the former Prime Minister—and John Pardoe did so frequently—that if he left out of his remedy a proper wages policy, spending his way out of a recession was bound to come to grief. The present Chancellor makes no acknowledgment of that flaw in the policy of the last Government. He draws the wholly false conclusion that all that sort of thinking must go out of the window and that we must return to the primitive monetarist notions of Chicago.

The third maxim and the one that is most deplorable in a party that claims to be proud of its democratic history is that the Government take the pessimistic—indeed, I would say the nihilistic—view that it is beyond the capacity of Parliament to control trade union monopoly power. That seems to be a confession of political bankruptcy. They have to resort to the empty maxim of pushing it all back to the people. The Government say that they cannot deal with the monster of trade union monopoly power and that it will have to be dealt with by the people and on a million shop floors. That is an abdication of government and I do not believe that when the British people see the consequences of their electoral decision next winter they will be willing to tolerate a Government who practise this approach.

Liberals remain convinced that it is possible to mobilise the consent of this country, through a representative Parliament, to deal with any monopoly power, whether it comes from trade unions, multinational companies or anywhere else. It is simply a matter of summoning the political will and having an electoral system that will give the country a representative Parliament and enable majority consent to be properly mobilised. Those are the three concepts which we reject.

The fourth concept that seems to inform the Budget, and with which, in many ways, we agree, is that part of a widespread reform of the tax structure should be an adjustment of the balance between direct and indirect taxation. To the extent that the Budget pays some homage to that, we welcome it.

However, I have some questions about the Government's approach in shifting the emphasis from direct taxation to indirect taxation. My first concern is the Chancellor's ominous claim, which has been repeated today, that this action in the Budget is a "once and for all" measure. I hope that the Financial Secretary will tell us in winding up what is meant by "once and for all". I hope that it does not mean that this year's shift is the end of the matter and that the Government believe that they have done enough to last for this Parliament. It is an extraordinary phrase and we are entitled to an interpretation of what it implies.

Mr. Jim Craigen (Glasgow, Maryhill)

Does the Liberal Party favour an even bigger increase in VAT beyond the 15 per cent. that we now have?

Mr. Wainwright

Over a five-year period, certainly. I am not asking for a bigger instalment this year. Nothing that I have said has indicated that. I am complaining that if we take the Chancellor's words at their face value, there is an implication that the Government have done their duty for this Parliament and that they believe that the balance has been adjusted sufficiently. I hope that we shall have reassurance on that point.

On the same theme, we always hoped that an inbuilt mechanism would be provided in a reformer's budget so that some degree of continuity in the development of indirect taxation would be automatic. I therefore very much regret that the principle of indexation has been so sparingly applied in the Budget.

I hope that we shall hear a better justification than we have had so far for the Government's failure to index the excise duties on drink and tobacco. Our view is that indexation should have been applied to the excise duties on drink, tobacco and petrol.

The Financial Secretary to the Treasury (Mr. Nigel Lawson)

Petrol has been increased by more than it would have been under indexation.

Mr. Wainwright

Petrol is not indexed at all. It has been the subject of an arbitrary increase which is virtually the opposite of indexation.

Mr. Peter Hordern (Horsham and Crawley)

I understand that the Liberal Party is in favour of raising VAT substantially and that the other part of its economic policy is to have a compulsory prices and incomes policy. Will the hon. Gentleman say a word or two about how negotiations with the unions would proceed on that basis?

Mr. Wainwright

If I am allowed the opportunity, I shall be coming to that as one of the maxims which I believe to be wrongly conceived by the Government in framing the Budget.

Before I leave the question of direct versus indirect taxation, I must say something about the extraordinary action of the Government in reducing the top rate at one go without altering the lowest rate in any respect.

It seems to us that the Government should either have tackled the undoubtedly necessary reduction in the top rate over two years, coming down this year to, say, 70 per cent.—[HON. MEMBERS: "Why?"] Because of the psychological effect. I agree that the amount involved is not large, but hon. Members cannot ignore the psychological effect which has already burst upon us through innumerable radio programes that have advertised the seemingly fantastic effect of bringing the top rate down from 83 per cent. to 60 per cent. in one go.

That reduction should have been phased or, as a quid pro quo, which would have been acceptable to me, the lower rate, which we, among others, prevailed upon the previous Chancellor to introduce during the Lib-Lab pact, should have been reduced from 25 per cent. to 20 per cent. at the same time. That would have had a considerable effect on the poverty trap, which has not been satisfactorily dealt with by this Government.

I come to the question of expanding the economy, which in our view could be done if the economy had the safety net—or, if one prefers a different analogy, the corset or girdle—of an enforceable and sustained incomes policy, not a panic pay freeze, to which I believe we are probably heading; not a hastily contrived, cobbled together incomes policy of the kind we have processed through this Parliament all too many times; not a policy which everybody knew would finish in a year or two because of the imminence of an election; not a policy which could be undermined by the Left wing of a ruling party; but a policy carefully thought out and efficiently administered through Parliament, a policy which could be sustained over a considerable period.

If the Government had had the courage to adopt that approach and to learn the lessons of the previous Conservative Government under the leadership of the right hon. Member for Sidcup (Mr. Heath), I believe that, instead of looking forward this winter to a period of no growth, of steadily rising unemployment and very little impact on the eventual rate of inflation, instead of that grim prospect, which destroys any incentive effect that may be in the taxation changes, we could have looked forward to a careful reflation of the economy.

I stress that we on the Liberal Bench at any rate do not acknowledge that the net overall effect of this Budget will be to provide a significant number of people with an incentive. It is no good giving people in the Sahara Desert an incentive to grow beans. If one creates a depressed economy, it is not much good giving people an incentive to produce an enormous number of extra goods which the community does not have the resources to buy, especially at a time when world markets are also depressed.

We entirely reject the idea that this Budget can honestly be labelled an incentive Budget. I happen to have lived through a period in the West Riding before the war when there were any number of incentives, when taxes on high earned incomes were, in the light of today, fantastically low; but the only people in my recollection who were able to take advantage of those incentives were accountants rivalling each other in getting bankruptcy jobs, and pawnbrokers. The incentive provided by low tax rates in a depressed economy is scarcely worth considering. But I repeat that the reflation could take place only if we had the safety net of a statutory incomes policy.

Finally, I believe that there could be scope, again if we had this safety net, for a modest increase in public expenditure rather than the cutback which will be inflicted on the country. For example, I believe that there is an admirable demand for more expenditure on public transport. I should like to see others follow the example of South Yorkshire, which has had the sense heavily to subsidise public transport fares so that places such as Sheffield and Rotherham are not cluttered up with expensive, gas-guzzling private cars to the extent that other cities are.

I should like to see a great deal more spent on those aspects of school life which deal with the emotional development of children as well as their intellectual development, because I believe that our penny-pinching economies at present will produce enormously expensive, as well as humanly deplorable, maladjustments among the adolescents of the future.

I should like to see a great deal more spent on the maintenance of our roads, which are becoming a scandal in many parts of the country, and an extremely expensive scandal for those who are responsible for vehicles.

I am glad that the pension part of the transfer payments system is having attention, but I believe that there is scope for a considerable increase in some other welfare payments.

Experiments with the Treasury economic model, the detailed results of which I would not dream of inflicting on the House this evening, have shown that, if only we could summon up the political will to have a proper incomes policy, it would be perfectly viable gently to reflate the economy instead of inflicting on the country the misery and the positive lack of incentive which this Budget will inflict.

6.24 p.m.

Mr. Peter Lloyd (Fareham)

Thank you, Mr. Deputy Speaker, for allowing me to catch your eye and make my first speech to the House.

I echo other new hon. Members in saying how much I appreciate the courtesy of you and Mr. Speaker, and through you I express thanks to the officers and staff of the House, who have been unfailingly helpful. During my first week I was never able to walk abstractedly past a policeman twice in any five minutes without his asking me in a kindly tone whether I needed any help in finding my way.

My constituency was ably represented by Dr. Reginald Bennett for the past 29 years. For all but five of those years he sat for Gosport as well as Fareham, until in 1974 that borough declared UDI. Over the years he accumulated great experience, and it is very fitting that he should now have two successors in the House rather than the usual one.

Dr. Bennett was, and I am glad to say still is, a shrewd, affable and amusing character. He was a great asset to the many committees on which he served with distinction, particularly those developing closer ties with Parliaments in other countries in Western Europe. I was delighted, but not in the least surprised, to find how many friends he had here. I can well understand why the House invited him to take on the chairmanship of its Catering Sub-Committee of the Services Committee. I can also see that he succeeded in giving the House the diet it needed. I find that my hon. Friends are invariably alert and vigorous, whilst Opposition hon. Members give frequent and reassuring proof of the rude health in which he left them.

Listening to other maiden speakers and hearing of the merits of their constituencies, I have felt like saying "Snap" to most of them, for Fareham contains in a small space a remarkable breadth of interest, activity and enterprise. It stands on the Solent coast of South Hampshire, astride the new M27, connecting the villages of Portsmouth and Southampton, which nestle modestly on its eastern and western fringes.

The constituency boasts the best unspoilt seventeenth century and eighteenth century High Street in Southern England and a brand new climate-controlled shopping centre, which attracts customers from farther and farther afield, and particularly from those two villages that I mentioned. It ranges from farming through a flourishing horticulture to the most rapid residential and commercial development in the region in its western wards, whilst along the Hamble river there is a network of highly skilled small boat-builders and their allied trades.

However, Fareham is also the home of advanced technology in a host of small, specialised, science-based businesses and a giant Plessey factory and laboratory complex. It has the strongest connectaion with the Armed Services, particularly the Navy, and not merely because so many Service families have chosen to make their homes there. It has HMS "Collingwood", the Navy's largest training school specialising in all branches of electronics. It has the headquarters of Vosper Thornycroft, the highly successful warship designers and builders, who were roughly, unwillingly and unwisely bundled into the loss-making part of British Shipbuilders back in 1977. It also boasts a school of navigation, which has done and is doing so much to improve the skill and safety of our Merchant Navy and the merchant navies of other countries.

The Budget changes proposed by my right hon. and learned Friend the Chancellor of the Exchequer are a bold and justified gamble on the capacity, energy and initiative of the British people. My constituents will be impressed, as they do not include many members of the executive of the National Union of Mine-workers, by my right hon. and learned Friend's determination to put so many of his election pledges so rapidly into practice. Although what many of those in business want is a period of stability and consistency, they will, I am certain, regard the undoubted dislocation of the VAT increase to be a price well worth paying for the decisive shift from direct taxation.

I congratulate my right hon. and learned Friend on resisting the pressures he undoubtedly met to extend differential rates of VAT. The small-boat industry in my constituency, which has an excellent export record, suffered grievously when the Labour Government imposed a 25 per cent. rate on the grounds that boats are a rich man's luxury. One man's luxury provides another man's livelihood, and Governments merely create distortions, inefficiency and unemployment when they seek to make such distinctions.

As a result of this Budget, the small boat producers in my constituency can now compete on an equal level with other manufacturers, but I hope that my right hon. and learned Friend will turn an equally sceptical eye on the many other anomalies which still exist.

There will also be a welcome in my constituency for the Chancellor's more realistic rate of development land tax which replaces the projected level under which only the quixotic, innumerate or desperate would bring land to the market. In Fareham, a great deal of new development is under way, making heavy demands on the borough council for community halls, open spaces and playing fields.

I know that one of the many impressive qualities of senior Treasury officials is an ability to argue with total conviction why the proceeds of any tax should invariably and inevitably find their way to the Treasury. I hope that the Chancellor will nevertheless insist that a useful proportion at least of the development land tax will go to the local authorities concerned to help them defray the heavy expense of providing necessary social infrastructure.

As I have said, I have many Service families in my constituency. Although it is a digression from the Budget debate, I would like to point out that there was much satisfaction when my hon. and learned Friend the Minister of State, Home Office declared the Government's willingness to meet objections to the present arrangements for the electoral registration of Service men's wives. The existing system has been much resented, and has meant that many Service wives both in my constituency and in many others did not vote in the last election. So I shall have much pleasure in checking at intervals with my hon. and learned Friend about how the necessary legislation is coming along.

Needless to say, the promptness with which the Government carried out their election pledge to give the full pay award recommended for the Services has been greatly appreciated. It is still too early to say how beneficial its effects will be on the manpower and skill resources of the Armed Forces. But pay is never the only reason for uncertain morale, poor recruiting and early retirement. It cannot be stressed too strongly that Service men need to feel not only that they are filling a crucial role but have the training, weapons and support to fill it effectively. I have had many young soldiers and sailors complaining to me about their vehicles and equipment, which have deteriorated so alarmingly in the last few years, before they have even considered mentioning their own pay.

Unless resources are devoted to equipping our forces with the quality of weapons that we manufacture for foreign Governments, the extra amount spent on pay will be rendered futile. I hope that the Chancellor, who has increased defence spending this year, will be finding further resources in future years to make up for the appalling neglect of the past.

I thank you, Mr. Deputy Speaker, and, through you, the House for the attention paid to me.

6.35 p.m.

Mr. Ron Brown (Edinburgh, Leith)

I congratulate the hon. Member for Fareham (Mr. Lloyd) on a very able speech. I am sure that we shall hear more from him in future.

At the same time, I am sure that most hon. Members, having heard my name called, are rather disappointed. I am the Scottish Ron Brown. The other Ron Brown—my hon. Friend the hon. Member for Hackney, South and Shoreditch (Mr. Brown)—is rather tall, elegant and debonair. At least, that is what he tells me, so I accept it. Having the same name creates some problems. Indeed, some of my colleagues in the Labour Party and the press have suggested that I should change my name, but that is extremely difficult. One wag suggested to the other Ron Brown, that he could perhaps hyphenate his name, and I understand that it is perhaps almost a custom in the Brown family. However, I think that the other Ron Brown was wise enough to ignore that advice. What's in a name, anyway?

It is also interesting to note that I replace another Ron—Ronnie King Murray. He served my constituency as its Member from 1970 until the last general election and was Lord Advocate in the Labour Government. He told me "When you are in the House, give my regards to my friends", and I am doing so. Mr. King Murray has a new job. He has been called to the Bar, but hon. Members need not rush out thinking that it is Annie's Bar—he is not buying a round. Ronald King Murray is now a judge in Scotland, and I am sure that he will do very well in that position.

My constituency is referred to as Edinburgh, Leith, but that is a misnomer. Leith is Leith, as my constituents will tell you, Mr. Deputy Speaker. There are good reasons for that, because it has suffered over the years. Indeed, there was a constant fight for independence. Leithers were extremely proud when independence was achieved in the nineteenth century because they fought against feudalism to get it. But in 1920 Leith was merged with Edinburgh, against the wishes of the vast majority of the people of Leith.

The House will understand, therefore, that there is a particular type of feeling in my constituency and how that feeling has developed in a certain way, because there is real anger at the treatment of Leith by successive Edinburgh city councils. Hon. Members need only go to Leith to see what I mean—it is run down and neglected. Obviously, it is part of my job here to try to reverse that process.

I appreciate that there is a tradition not to say anything controversial in a maiden speech in this House. Whether that is true or not, I find it hard to contain my feelings, particularly as the Government have declared class war on the country, which means that living standards are under attack in order to boost profits.

The Government's proposals will undoubtedly lead to confrontation. They are simply a recipe for turning moderates into militants. Perhaps the Government do not see that. Perhaps they and their supporters in this House are so naive that they cannot appreciate that certain things are going to happen.

The Government have no mandate to do what they like, and certainly not in industrial Scotland. I am here with an increased majority from Leith, and many other Scottish Labour Members are here with increased majorities, because the Scottish working class knew what would happen under a Conservative Government. Tory policies will hit all parts of the United Kingdom, and they will certainly hit Leith.

The nationalised industries have a special role to play in the economy, but the Tory philosophy is entirely different. That means that there is a direct threat, for example, to shipyards like Robb Caledon Shipbuilders Limited in my constituency, with 700 jobs involved—only 700, but they are important. There are another 2,000 jobs in the local economy, again jobs which are extremely important because we have many small companies producing goods and services in the area which depend on shipbuilding.

I must be clear: I do not like 1930s-style government. My constituency Labour Party does not like this Government and has told me bluntly that in the event of public assets being sold off by the Conservatives and then being taken back into public ownership by a future Labour Government, there should be no compensation for the renationalisation. I agree with that point of view, and I am sure that it will get increased support throughout the Labour movement.

The unions, too, are ready to fight—there is no doubt about that. I speak as an ex-convener of shop stewards, and I know the feeling on the shop floor at the present time. That feeling will get a lot worse. Those on the shop floor will make it fairly hot for the Tory Government, which will have to face up to reality. The reality is in the world outside. It is not here. We all have to face up to that situation.

The Government will obviously learn the hard way. That is the lesson of history. It has been seen so often and yet the same mistakes are made. If there is a lesson of history for the Tory Party, there is also a lesson for the Labour Party. It is not enough to oppose the Tories in this House. Our leadership has to rally the working class in constituencies up and down the country and defend basic rights. That is a job I am ready to tackle in my capacity as a trade unionist and a Member of Parliament. I am sure that my colleagues here tonight agree with that view.

After all, the Socialist way is the better way. That is one of the points that has to be made clear. If the Labour Party is to give a lead in this country, we have to get back to basic principles.

6.41 p.m.

Mr. Terence Higgins (Worthing)

The late Iain Macleod was fond of saying that Labour Governments always increase taxation and the Conservative Governments always cut taxation. Yesterday the Chancellor of the Exchequer, in his Budget speech, fulfilled fully that tradition. I congratulate him most heartily.

One of the features of this Budget debate has been the number of maiden speeches. It is with great pleasure that I congratulate my hon. Friend the Member for Fareham (Mr. Lloyd) on making his maiden speech. I have known him for many years when he was chairman of the Cambridge University Conservative Association and chairman of the Bow Group. I am aware of his expertise in the subject we are debating. My hon. Friend can be proud of his maiden speech. He referred to his predecessor, Dr. Reginald Bennett, to whom Members of this House are indebted for his work on the Catering Sub-Committee. My hon. Friend described his constituency as a constituency with everything. If there is one thing that a constituency with everything should have, it is my hon. Friend as its Member of Parliament. We were glad to hear his speech.

The hon. Member for Edinburgh, Leith (Mr. Brown) comes from an area, the home of Adam Smith, remarkable for economic analysis. I hope he will read in Hansard what I have to say about him, for clearly he is no respecter of traditions. I see now, however, that the hon. Gentleman has returned. There was a touch of humour in what he said. He will obviously be a controversial character. The hon. Gentleman said that we must take account of the real world outside as well as inside the House of Commons. This place also has its reality, and we shall look forward to answering some of his controversial remarks on another occasion. On this occasion, I congratulate him on what he had to say.

In addition to presenting a most distinguished Budget yesterday, my right hon. and learned Friend the Chancellor made a splendid speech. Since the proceedings of the House have been broadcast, it has been difficult for Chancellors of the Exchequer who, on previous occasions, might have spoken for two or almost three hours to condense everything they had to say into a short space of time. The present Shadow Chancellor had difficulty on the first occasion that the Budget speech was broadcast.

My right hon. and learned Friend structured his speech perfectly and managed to get in more changes in taxation per minute than any Chancellor of the Exchequer has probably done in the history of this House. I welcome the changes that have been made, particularly the pension increase. I welcome also the remarks of my right hon. Friend the Secretary of State for Social Services today about the determination of the Government to ensure that pensioners share in the rising standard of living.

I welcome the change in the investment income surcharge. The raising of the threshold on which that is payable will do much to help those living on fixed incomes who have suffered more than anyone from the effects of inflation.

There is only one notable omission from the Chancellor's speech in the area of policy affecting pensioners. That is the question of the earnings rule. The cost of abolishing the earnings rule is not high in comparison with some of the large amounts that have been mentioned. I hope that my right hon. and learned Friend will, in the later stages of the debate, consider whether something cannot be done now on that subject, which is of considerable importance to many pensioners.

The press commentary on my right hon. and learned Friend's speech suggested that it may be something of a gamble. I do not believe that is true. I believe that it is a historic change of direction. The orders of magnitude have changed a great deal compared with five years ago. Then, one could make a significant impact if one cut taxes by £400 million. Now, one does not get even 1p off the standard rate for that amount.

My right hon. and learned Friend was right to go for some big changes. We on this side believe that people will respond to tax incentives and changes. But if those changes had been only small it would have been difficult to prove or disprove their impact. The order of the change brought about by my right hon. and learned Friend will demonstrate how people respond to changes. It means that the Chancellor has had to change the rate of value added tax substantially. I welcome the fact that he has gone for a single positive rate. The level was necessitated by the substantial cuts in income tax at all levels, promised by the Conservative Party in the election campaign.

Mr. Alan Clark (Plymouth, Sutton)

I should like to put a question to my hon. Friend because he has had experience at the Treasury. Many speakers have said that they look forward to people responding to these stimuli. I would ask him—"Responding by doing what?".

Mr. Higgins

I believe that people will respond by producing more, working harder and seeking promotion rather than by going on doing the same job. That is the crux of the whole matter.

I welcome the fact that the Chancellor has not proposed changes in the structure of value added tax. The zero rating of essential items such as food and fuel is extremely important. I hope that the Government will take an equally abrasive attitude on the question of harmonising VAT in the Common Market to that being taken on our contributions to the Common Market. The structure of the tax we devised was far better than in any other Common Market country. It is important that the new Government should defend that position.

It is right that the income tax changes should have widened differentials. In recent years, we have seen a constant squeezing of differentials. The Leader of the Opposition said yesterday that the pressure for wage claims came from the lowest paid. Anyone who has been sitting on the top end of the scale may get that impression, but we know that industrial muscle is held by those at the upper end of the scale. It is important that, in future wage bargaining, the effect of the tax changes on differentials, particularly on those at the upper end of the working scale, such as the electricity generating industry, should be taken fully into account. That is a point worth stressing.

The main point to which I want to turn is the importance of the relationship between public sector wage claims on the one hand and cash limits and the money supply on the other. There has been much controversy over the years about incomes policy. It seems to me that everyone must be in favour of an incomes policy within the public sector, not least those who take a monetarist view of our economic affairs. If the level of public sector wage claims increases compared with what was expected, that will tend, in the absence of any other changes, to result in a larger deficit, a larger public sector borrowing requirement and an increase in money supply. The public sector wage claim in that sense will tend to be self-financing. That is the crux of the whole matter.

I was slightly disappointed by what my right hon. Friend the Chief Secretary to the Treasury said on the question of cash limits. He rightly paid tribute to his predecessor in setting up the cash limits system. He omitted to criticise his predecessor for then wrecking that system by making allowance for inflationary wage claims in the public sector. What happened under the last Government and would have happened increasingly if they had remained in power was that inflationary wage claims were setting the cash limits and not cash limits dealing with the inflationary wage claims. It is important that we should have a clear statement on what are those cash limits. I understood from what has been said that they had been published. I am not sure whether that is so. My right hon. and learned Friend can perhaps make that clear in his winding-up speech.

I hope also that we can have a categorical assurance from the Government that, whatever those cash limits are, they will be observed, and that if an inflationary wage claim is granted within that same part of the cash limits, an offsetting adjustment will be made. Otherwise, the system becomes nonsense and disastrous, for the reasons that I have given. If we cannot have it from my hon. Friend in winding up tonight, I hope that we can have that assurance from the Chancellor on Monday.

Related to this matter is the proposal that the cash limits system should be integrated for a substantial part of the public sector with the Estimates system of the House of Commons. That will mean that the responsibility for facing up to an inflationary public sector settlement will rest with the House as well as the Government. That is a substantial and important change, because it means that the union pressing its claim will be doing so not only against the Government but against the House. We shall have to face up to that in the course of this Parliament.

Dr. Jeremy Bray (Motherwell and Wishaw)

The hon. Gentleman has argued cogently for the use of cash limits in wage negotiations, but how would he deal with cases in which the negotiating body covers a wider area than is the responsibility of one Department—as is the case with the main area which the Government are attacking at the moment, that of Civil Service pay?

Mr. Higgins

Account clearly has to be taken of the effect on individual sectors. I do not believe that that presents any insuperable problem, but we can debate it in detail at a later stage.

The Budget's rationale will need to be explained clearly to all those concerned with wage claims. The Leader of the Opposition himself said yesterday that he expected inflation to be going up by 12 per cent. by the end of this year, even in the absence of this Budget. We did not hear much of that in the election campaign, when most people would have been interested to hear him say it. But that is what he said yesterday.

Mr. Rooker

No, he did not.

Mr. Higgins

Yes he did—the hon. Gentleman should look in Hansard.

From the Red Book, one sees that it is not just a question of expecting the year-on-year figure to rise to 16 per cent.; it also says that it is expected that the figure will fall substantially to 13½ per cent. in the following year. We should consider the after-tax effects of wage claims and stress that a tax cut, and the resulting increase in take-home pay, is not subject to tax, whereas a wage claim is. Therefore, the tax cut is much more important than the benefits from a wage increase.

If inflationary wage claims persist and people do not take a sensible view of the effects of this Budget, that will inevitably increase unemployment. It need not do so otherwise. Therefore, the public relations aspect is very important.

A great deal of stress has been put on the similarity between this Budget and that of 1970. Labour Members say that somehow everything went wrong then. It is therefore worth pointing out that, from 1970 to 1974, inflation was half the level it was under the last Labour Government, unemployment was much less and the real standard of living went up faster than ever before. So I am not unduly perturbed by claims that we are following the same course—especially since my right hon. and learned Friend has been far more dramatic and has given more incentives than were given then.

However, one aspect requires more explanation than, in his necessarily curtailed speech yesterday, the Chancellor could give. I have always taken the view that one must stress both money supply and aggregate demand, so I think that it is the right approach, as he described it, to "squeeze inflation" out of the economy. That is reflected in the Red Book figures for the increase in GDP.

However, my right hon. and learned Friend will also know that at successive conferences the CBI, for example, has stressed the need to get real output up and to encourage investment and the fact that, at the end of the day, that must depend on a reasonable increase in the level of demand. Therefore, although the Red Book figures are entirely understandable in terms of the Chancellor's approach, we need a description of how he sees the longer-term prospects for the economy in terms of increasing the level of output over, say, the five-year period. Once we have got rid of inflation and squeezed it out of the economy, there are real prospects for future investment, growth in employment and rises in the real standard of living.

It has become platitudinous to say that the problems of our economy lie in supply, not demand. That is so, but it means that we must do everything possible to encourage investment. It also means—this is the other side of the equation—that the new Conservative Government must take a much more positive line than the previous Government did in increasing competition. That is essential if we are to get the supply side right.

There has been reference already to the wage claim in the British Oxygen Company. Possibly the monopoly of that organisation should be examined and action taken.

We must increase competition and ensure that, in the nationalised sector, the financial criteria which have fallen by the wayside over the years are reasserted comprehensively and sensibly. Then, I believe, the economy will respond to the Chancellor's challenge—for challenge it is—and the result of backing his objectives will be an increase in the real standard of living of the country and a substantial improvement in our economic situation over the next five years. I believe that our problems can be cured only by the sort of radical change that my right hon. and learned Friend has introduced.

6.58 p.m.

Mr. Jim Craigen (Glasgow, Maryhill)

First, I should like to add my congratulations to the two maiden speakers who have taken part in this debate—particularly, as a fellow Scot, my hon. Friend the Member for Edinburgh, Leith (Mr. Brown), who gave us a competent, yet pawky, first speech and who, I believe, will quickly find his feet in the House.

This Budget creates the illusion of incentive. For the average wage earner, and certainly for those on lower incomes, there will be little comfort by way of incentive or opportunity, other than not to spend, because he does not benefit from the tax cuts. I can understand that the Chancellor felt under some pressure to satisfy the great expectations which had been built up before the general election for substantial tax cuts.

It is interesting that in his Budget speech the Chancellor deliberately started with the cuts for the tax brackets at the top. The incentive certainly seems to be at that level rather than further down.

In the longer term, the Budget will be damaging to the country and a considerable price will have to be paid for it. It has already been said that it is an inflationary Budget. The right hon. and learned Member for Hexham (Mr. Rippon) came close to suggesting that we should throw away the retail price index, or at least exclude those items which were likely to increase it.

I can imagine that many people in the distributive industries will be unhappy with the substantial increase in VAT, coming as it does with increased petrol costs and the difficulties that many retailers will experience with delivery and general merchandising costs. The increase in the retail price index will not help export competitiveness. The Government must take that seriously.

The Chancellor said that the Budget provides opportunity. He made it clear that tax reductions are the cornerstone of his Budget. However, those reductions are not likely to create any great stimulus to the economy. The Financial Statement predicts that economic activity will decline slightly in the next year or so. But these measures will inhibit industrial development rather than further their growth.

The blow of the increased minimum lending rate will not help industrial development. It will mean headaches for people who must pay mortgages and difficulties for local authorities. Local authorities will experience additional pressure because of the rate support grant levels. The Budget will prod more workers into seeking larger pay claims to offset the disincentive and lack of opportunity in spending.

I turn to the problem of local government. The Chief Secretary is by nature a sensitive man. He is certainly in a highly sensitive position at the Treasury when dealing with local authorities. This afternoon he treated us to a rather philosophical approach to a practical area of government. There is a temptation in the House to underrate the importance of local government. We legislate for the local authorities. If we deprive them of resources to fulfil their obligations under that legislation, we shall put the social fabric under strain. The Chief Secretary said that that was in his mind when he spoke this afternoon.

The bulk of complaints received by hon. Members relate to local authorities. The squeezing of the rate support grant will not ease our postbags. It will create many difficult problems for our local authority colleagues.

The arbitrary nature of the reductions contradicts legislation which has been passed in the House—legislation that local authorities must implement on our behalf. The changes in the rate support grant do not take sufficient account of the current pay settlements for local authority workers.

We have no Ministers in the Chamber from the Scottish Office, but I wish to refer to discussions between Scottish Office Ministers and the Convention of Scottish Local Authorities. I imagine that they will be similar to discussions in England and Wales. My impression is that the local authorities have been told that there is no guarantee that the rate support grant level will operate for the full 12 months. Housing is not to be sacrosanct in the reductions in public expenditure.

Before the election, Conservatives said that it was important to cut out waste in public expenditure. Most hon. Members would not argue against that. But the chopping and changing between central and local government on resources can be wasteful if there are too many changes in the targets given to local authorities. Local authority officials say that it can be time consuming, frustrating and wasteful to revise budgets too often. If the Government are determined to follow the proposed course, they should at least give the local authorities more time to make adjustment.

I fear that the Chancellor of the Exchequer will be back before long seeking to repair the damage that he has unleashed on prices, incomes and employment levels. There should be an obligation upon the Chancellor to present an employment Budget in which an assessment is made of the extent to which the changes and the shift from direct to indirect taxation will result in higher unemployment and of the areas in which redundancies will occur.

The bite for local authorities will be on revenue expenditure this time. That can mean only that there will be redundancies in many local authority areas. This is a lawyer's Budget. It will not put the United Kingdom any further up the world economic league table. On the contrary, it will push us further down the greasy pole.

7.6 p.m.

Mr. John Major (Huntingdonshire)

I am grateful to you, Mr. Deputy Speaker, for calling me so rapidly after my return to the Chamber. I apologise to the House for my absence from the Chamber for part of the debate. I hope that hon. Members will accept my assurance that it was unavoidable for brief periods.

It is now 23 years since I first sat in the Gallery and listened to the 1956 Budget debate. I confess that at that time I had hoped to take part in debates in the House but I did not imagine how long I should have to wait. At that time I did not imagine that I would have the privilege of representing such an ancient and famous constituency as Huntingdonshire, nor did I imagine that I should follow such a distinguished predecessor as Sir David Renton.

Huntingdonshire is a remarkable constituency in many ways. It is an ancient constituency. It has returned Members to the House since the first Parliament of Simon de Montfort. It is proud of that tradition. It is proud because amongst its former Members was, for a brief period, Oliver Cromwell. He caused your predecessors, Mr. Deputy Speaker, more trouble than I anticipate causing, at least in my early days.

Huntingdonshire also has a happy tradition that I shall encourage it to retain—of re-electing its Members time and time again. I enter no note of complacency but there seems to have been some doubt about motives on some occasions. I came across a letter from a discerning constituent in the eighteenth century who wrote to a friend of his Member of Parliament. He said: Of course we keep re-electing our Member. How else can we get rid of the fellow for six months at a time? That sentiment could not possibly apply to Sir David Renton.

Many hon. Members will have known Sir David for many years. They will recognise that he was always elected on merit. He served his country, his constituents and his party—in that order—for one-third of a century and successfully fought 10 general elections. By any yardstick that is a remarkable record.

In Huntingdonshire today Sir David is held, as he has been for many years, in great respect and is regarded with great affection. He will miss the House. I formed the impression that he loved the place. From what I have heard from right hon. and hon. Members from all parties, the House is also likely to miss his presence. I shall be satisfied if I am able to retain the affection of my constituents and colleagues as David retained it for 33 years.

In his Budget Statement my right hon. and learned Friend said that he and his three predecessors framed their first Budgets in difficult circumstances. That is not surprising. It was largely because of mismanagement of the economy on many occasions and difficulties that arose that there was a change of Government at a general election and a new Chancellor had the opportunity to present a Budget.

If we accept that thesis as being accurate, we can see immediately the consequences and importance of the first Budget of a Parliament—a Budget which claims to set, and I believe does set, the pattern for Budgets which will follow throughout the period of this Government—framed in the remarkably adverse, difficult and conflicting contradictory conditions facing my right hon. and learned Friend.

I believe that public opinion requires four things of the Government in terms of economic management. It requires them to cut taxes, to curb inflation, to create new jobs and, as far as possible, to maintain satisfactory public services. But the simple truth is that although public opinion may require all those four things, with the best will in the world the Chancellor and his colleagues cannot possibly achieve them all at the same time. In order to create jobs and to maintain public services, it is necessary first to cut taxes and to curb inflation.

My right hon. and learned Friend made a very bold start in that respect. Indeed, some Opposition Members would claim that his steps were rather too bold for comfort. The Leader of the Opposition said that it was a reckless Budget, but I suspect that if his party had permitted that kind of Budget to be introduced a year or two years ago, the right hon. Gentleman might have remained Prime Minister or at least have lost the election by a slightly less decisive margin.

The Budget is in many ways bound to be controversial, as all Budgets are. I hope that it will not seem niggardly to make the point that the success of this Budget over a period will certainly depend upon the Government's determination and success in restraining public expenditure. In the natural course of events, they are bound to face pressures within and outside the House to break with their cash limits and to increase the public sector borrowing requirement that they have set themselves.

Indeed, if the tapes are correct—I am sure that they are on this occasion—Mr. McGahey of the National Union of Mineworkers has already said that he feels that the Budget will enable the unions to create conditions which will bring about a general election in 18 months or so. Whether or not he said that, I can only say that I should have more respect for that view if Mr. McGahey were to put his politics on the line and seek to get himself elected to this House to present that view here rather than at a safe disance from it.

If we back away from the cash limits and the economic management that we have set ourselves, we shall face a distinct change in economic policy. Therefore, I was pleased to hear my right hon. Friend the Chief Secretary this afternoon reiterate that the Government's commitment to spending cuts and to restraining the level of public expenditure generally was substantial and that the Government intend to keep to it.

Whenever we talk about spending cuts there is bound to be a certain amount of uproar. It is never popular to cut services. But it seems that much of the uproar which is currently being engendered is to a large extent synthetic. However, seeing the hon. Member for Birmingham, Perry Bar (Mr. Rooker) in his place, I would exempt from that criticism those Opposition Members who sit below the Gangway. It seems that they are in opposition whomsoever is in Government. I doubt that their anger is at all synthetic. No doubt the right hon. Member for Leeds, East (Mr. Healey) would agree that they are continually in opposition.

I think that the public spending cuts are acceptable. I agree that difficulties will certainly be faced, most notably in local government. I propose to deal with that matter later. The public expenditure cuts are tolerable, provided that they are seen to be fair. I think that they will be seen to be justified if they are successful in curbing inflation at a time when taxes have been reduced as well.

Perhaps I may give an illustration of the equity that is necessary if we are to carry this policy through. In this respect I shall talk about the proposed reduction in the rate support grant. I am prepared to support a cut in the total level of rate support grant, but I think that it will be seen as unfair in some quarters if those local authorities which pruned expenditure in recent years are now to suffer disproportionately to fund those which overspent.

Problems have arisen in Cambridgeshire in recent years because of the distribution of the total sum of rate support grant. Cambridgeshire and Huntingdonshire have the most rapidly increasing population of any part of the United Kingdom. That is substantially because Cambridgeshire, on the outskirts of Peterborough, and, in my constituency, St. Ives, St. Neots and many villages have encouraged and accepted overspill from the large cities to mitigate the problems there. But regrettably, having done that, they have found no amendment in the way that the rate support grant has been distributed and they now receive approximately 40 per cent. of the needs element which goes to the inner city areas.

Having spent a great deal of my youth in Brixton, I accept that there are great problems in the inner city areas and that they need to be dealt with, but I trust that the Government will look at the maldistribution of the rate support grant, if not in time for the next distribution, at least in time for the distribution which will follow that.

The most important aspects of the Chancellor's Budget Statement, if one pitches one's mind forward to the medium term, are those elements which we trust, and I believe, will lead to a growth in jobs. In Huntingdonshire and elsewhere, there is a desperate need not just for the maintenance of existing jobs but for the physical creation of new jobs to reduce unemployment and to take up the increasing numbers who are leaving school and will be seeking jobs for the first time.

In my constituency, for the reasons that I mentioned, the population has doubled since 1966, but the number of jobs has not doubled or anything like it. In many villages, where some right hon. and hon. Members may think there are no problems, there are no local jobs for the youngsters who have grown up there and left school. There is no local employment for them. Because of the maldistribution of the rate support grant, there is an inadequate level of rural transport. Even if they were able to get to any of the main centres of population in order to travel to London to find employment, the cost would be so high that they would be unable to afford it at the level of salaries they could command.

I appreciate that we can keep a problem at bay temporarily by throwing subsidies at it, but if we are to curb that problem in the medium term in my constituency and in many others, it requires the establishment of new companies and a great increase in the total number of jobs available. I believe that my right hon. and learned Friend yesterday introduced certain tax and other measures which, over two to three years, will create a climate in which jobs can be increased and begin to be formed. I wholly welcome those measures.

If I may put a marker down for subsequent Budgets, I hope that my right hon. and learned Friend will as soon as possible consider some mitigation of the levels of capital transfer tax with the aim of ensuring that the many small firms and farms which provide so much employment in rural areas, and, in terms of small firms, in many city areas, are permitted to expand and not to be broken down because of the imposition of capital transfer tax between generations.

The House has already accepted the principle of inflation-indexed personal allowances. I hope that it will also accept the principle that, in terms of capital transfer tax, it might be appropriate to tax land on its earning capacity rather than on the inflated capital value that has arisen in recent years partly because of institutional purchases and partly because of the cost of land in the European Economic Community.

There are some social elements in my right hon. and learned Friend's speech which I welcome and wish to touch on briefly. The cash amount of the increase in retirement pensions will be generally welcomed in this House. I should like to mention the plight of many people who are retired.

Since it affects many of my constituents who are retired, I am delighted to see the abolition of dividend control and the reduction of the investment income surcharge, particularly the extent of the reduction that has been made. The surcharge has always been utterly indefensible, by any practical logic, in a society that wishes to encourage investment and needs investment to provide jobs. It is grossly unfair that those who were sufficiently prudent during their lifetime to save should find themselves punitively taxed for saving and investing, as every Chancellor of every party has asked them to do so many times hi recent years. I believe my right hon. and learned Friend's measures in this respect to be simple justice. They will be widely welcomed in my constituency and many others.

Time after time in recent general elections, retirement pensioners in my constituency have said to me "Why on earth should we save? Why on earth should we invest? When we have saved and invested, our savings have been subjected to dividend control and we have then been punitively taxed on what was left." I am delighted to see that that situation is to be changed.

There is one other brief matter on which I should like to touch—again making a point that I trust will be picked up some time later during this Parliament—and that is that retirement pensioners simply cannot and do not understand, however it is explained to them, why it is that tax changes can be back-dated to the beginning of the tax year but that retirement pension increases cannot.

I understand the sophisticated arguments that are frequently advanced for this, but the truth of the matter is that pensioners simply do not understand it, and they widely resent it. I hope that at some stage during the period of this Parliament it will be possible, if not to pay pension increases earlier, at least to ensure that when they are paid in November they are back-dated to the beginning of the tax year.

I am grateful to the House, Mr. Deputy Speaker, for its traditional indulgence to a newcomer. I appreciate it, but I shall not expect it—and I imagine that I shall not receive it—on future occasions. Certainly with a background of politics in Brixton and Camden I am rather more used to a rowdy reception, and may perhaps feel happier with it in any event.

In conclusion, I believe that in his Budget Statement yesterday my right hon. and learned Friend laid the foundations of a strategy for a wider and more profitable industrial and commercial base, provided that our policies are carried through for the period of this Parliament in the fashion that we expect. I hope that the Chancellor will continue his work and that he will find it possible—though it would certainly not be possible in this Parliament—to present as many Budgets as his predecessor did. As the years roll on I hope that he will be successful with those Budgets, and if he is I look forward to being in my place to support him.

7.22 p.m.

Mr. Derek Foster (Bishop Auckland)

I am glad, Mr. Deputy Speaker, to be one of the many maiden speakers to be called in this debate. Many hon. Members will remember with respect and affection my distinguished predecessor, Mr. James Boyden, who served the House, my constituency and his party for almost 20 years. He served the people of Durham for much longer, being, before his election, a county councillor and the director of the extra-mural department of Durham university.

In Government Jim Boyden was, in succession, Joint Under-Secretary of State for Education and Science, Parliamentary Secretary to the Ministry of Public Building and Works and Undersecretary of State for Defence for the Army. From 1974 to the end of the last Parliament he served as Chairman of the Expenditure Committee.

Jim Boyden was a perfect gentleman. He was a man of immense charm; a kind, generous, hard-working and conscientious Member who dealt with constituency business with great efficiency and the minimum of fuss and self-advertisement. His standard will be difficult to maintain. I am sure that the whole House will join me in wishing Jim Boyden and his wife a long and happy retirement.

Bishop Auckland is arguably the most beautiful Labour-held seat in England. It includes Shildon, the pioneer railway town, the new town of Newton Aycliffe, a shining example of Labour's successful industrial development policies, the historic market town of Bishop Auckland and Barnard Castle, the gateway to glorious Teesdale.

Upon succeeding Hugh Dalton in 1959 James Boyden, in his maiden speech, also spoke of the beauties of the constituency but referred to the clouds hanging over South-West Durham. Since 3 May the storm clouds of deep depression have descended over the whole of the North-East. Our people recognise the radical new policies of the Budget as the re-run of a 1930s horror film. Left to market forces, South-West Durham would have been deserted and derelict long ago. It is only by the massive interference with market forces, by the use of the carrot and the stick, that the economy of the North-East has been diversified over recent years.

In spite of the valiant efforts of the previous Government, an even stronger regional development policy is needed if the North-East is to attain self-sustaining growth during the next decade. That is why it is so disappointing that so far no reference has been made to the development agency which was mentioned in the Labour Party manifesto. Indeed, little reference has been made to regional development at all. That is not surprising, for, if the Government are sincere in their touching faith in market forces, they must necessarily dilute regional policy, especially in the teeth of mounting pressure from inner city areas, the West Midlands and central London.

That dilution began only days after the election, in the reported refusal of the Government to intervene in the threatened redundancies of 560 Monsanto workers in South-West Durham. Perhaps the Government do not recognise the disastrous proportions of those closures. For the small towns of South-West Durham it is equivalent to the closure of half the shipyards on Tyneside and Wear-side. Ten years will not see the recreation of 560 jobs in South-West Durham even if the growth of the economy outstrips the most optimistic forecast.

A profitable multinational company is to be allowed to withdraw without any thought of its social responsibility, throwing 560 men on the scrap heap, men who were made redundant from the mines only 10 or 12 years ago. Those men will have little prospect of alternative employment for the rest of their working lives.

No one is advocating the permanent retention of "non-jobs", but surely, in an area such as this, the Government and a multinational company have a joint responsibility to retain those jobs whilst exploring every option for viability and making determined efforts to attract replacement jobs.

The Government make much of creating a climate in which industry can flourish and of encouraging small businesses, as if at the first whisper of tax cuts thousands of embryonic business men will frog-march the unemployed into their factories in an orgy of wealth creation and wealth sharing. Why, then, was South-West Durham not burgeoning with medium and small businesses in the 1950s and 1960s? The North-East has always had fewer small businesses than any other region, and it will take more than the incantation of Tory slogans to change that.

Conservative Members will discover that cheap workshop and factory space is needed, that financial, technical and marketing advice must be freely available and that risk capital for very small projects can be a problem. They will find that this infrastructure is best provided in a spirit of partnership with central and local government, the financial institutions and the entrepreneur—a partnership involving more public spending on industrial development, not less. Yet we hear that regional development grants are to be slashed and that the National Enterprise Board is to be emasculated.

Labour Members fought hard to secure a regional dimension to the NEB. As a result, only weeks ago, a successful partnership between the NEB and a small business in Bishop Auckland was forged, creating 130 jobs. Now it seems that the NEB's valuable work of restructuring and diversification in the regions is to disappear. Perhaps the Government will clarify their intentions on regional development. I have letters from several small business men in my constituency, expressing fears that regional capital grants to small businesses are to be slashed. If this happens, several projects in the new town of Newton Aycliffe will be axed, with the loss of several hundred jobs.

Will the Government also clarify whether they intend to continue the previous Government's level of support to the Development Commission and COSIRA in their excellent work providing nursery factories in areas such as Middle-ton in Teesdale, Cockfield, Evenwood and Barnard Castle? New jobs are urgently needed in these rural areas to reverse the urban drift of the young and vigorous and to save village life. All these projects are examples of public expenditure encouraging the formation and growth of small businesses in a development region. Conservative Members would have us believe that public spending strangles private development. The truth is that much private development is dependent on, and supported by, public spending.

I should finally like to say a word about the Manpower Services Commission's special employment programmes, which have given new heart to hundreds of South-West Durham's school leavers and long-term unemployed. In the youth opportunities programme, the Government are now encouraging the use of the least expensive modules and shortening the average stay. This will inevitably dilute the value of the education and training content and destroy the concept of progression from one module to another.

In the special temporary employment programme, the new target of 12,000 to 14,000 places is derisory when there are 200,000 to 300,000 long-term unemployed, many of them under 25 and many in the North-East. An education and training programme for adults, similar to the youth opportunities programme, is urgently required. Let the new Government prove their claim to compassion by investing public money in giving new hope and skills to the long-term unemployed, instead of castigating the allegedly feckless and work-shy.

I am proud to be the son of a shipyard worker who himself knew the humiliation and demoralisation of long unemployment during the 1930s. That heritage has propelled me into this House to make my small contribution to ridding South-West Durham of the twin social evils of unemployment and low pay, and to pass on to our youngsters educational and employment opportunities worthy of their great qualities and skills.

If sacrifices have to be laid on the altar of the transient god of free enterprise, let the Government look elsewhere—not to the North-East. If the new Government must have their pound of flesh, the knife must not fall on South-West Durham, which has already suffered too much and too long.

I am most grateful for your indulgence, Mr. Deputy Speaker, and that of the House.

7.36 p.m.

Dr. Alan Glyn (Windsor and Maidenhead)

It falls to me to congratulate the hon. Member for Bishop Auckland (Mr. Foster) on his maiden speech. He has certainly lost no time in presenting to this House and to the Government the problems facing his constituency. I also join in his tribute to his predecessor, who came into this House at the same time as I and who, I know, did very well in Government. I join the hon. Gentleman in wishing his predecessor and his wife an enjoyable retirement.

I shall be brief. Like many of my colleagues, I welcome the Budget because it does three important things. First, it redeems many of the pledges that we made during the general election campaign. Secondly, it forms the basis of what I regard as a long-term strategy for the running of our economy. I hope that the Conservative Government will have sufficient time—five, 10 or 15 years—to be able to develop the economy and improve the standard of living in this country. It is also specifically mentioned that we should pay off some of the debts incurred by the previous Government. In addition—and this is the most important item—the Budget gives for the first time some incentive to people who wish to work.

I like the way in which my right hon. and learned Friend the Chancellor introduced the Budget. He did not start by blaming the previous Government for their misdeeds. He concentrated far more on the problems that face this country and the way in which the Government should tackle them. He did not say too much about blank cheques, and I thought that the Opposition were particularly generous when they remarked how he had compiled such a complex Budget in such a short time under very difficult circumstances, But, at the same time, one must remember that the debts that were accumulated by the previous Government occurred in spite of the revenue that we have been receiving from North Sea oil.

The shift from direct to indirect taxation is something for which many of us have been pressing. Certainly, I have been pressing for it in this House for the past 20 years, and I welcome it. I hope that in his next Budget my right hon. and learned Friend will go further and not only increase that percentage but simplify the whole tax system code in order to make it very much easier for the ordinary individual to understand. At the present time our whole tax structure is far too complicated. I know that my hon. and learned Friend the Minister of State, Treasury is only too well aware of this complexity, because he has spent a long time in tax chambers sorting out the tax difficulties of his clients. I hope that we shall see this alteration in the structure.

In particular, I hope that we shall go further and abolish the system that imposes a greater tax on unearned income than on earned income. Many of my constituents have worked extremely hard for all their lives, and they were encouraged to save out of taxed income and to invest that income. But, having done so, they find that they are susceptible to an additional rate of tax. In other words, they are taxed not once, not twice, but three times for having saved their money instead of spending it.

The great advantage of indirect taxation is that it allows the taxpayer to pay tax as and when he wishes. He can either spend his money or he can save it or invest it. But it is up to him what he does with it. It is not up to the State.

I turn briefly to two or three other points. First, I was not entirely satisfied with the Government on the subject of the use of North Sea oil revenue. That revenue must be used for the building of new industries in Britain so that we are well equipped when that source of energy supply goes.

I also ask whether the shortfall in our oil supplies is due to the fact that the long-term contracts in regard to North Sea oil prohibited us from diverting some of that oil to avoid the minor crisis we are now facing.

I welcome the relaxation of exchange controls, because foreign investment is very important. Some hon. Members will remember our Budgets before the war. They were much simpler, dealing with about £3,000 million. I believe that nearly 50 per cent. of our income came from overseas investment. By relaxing exchange controls and allowing investment abroad, we could use investment money to the benefit of our country. We have spent money on law and order and on the Army, and it is well spent. In the Budget, mention is made of defence. The House will know that for a long time I have pressed that we should increase our expenditure on defence. In view of the build-up of the Warsaw Pact forces, which my right hon. Friend the Chief Secretary mentioned, we must replace our Polaris weapons, or at least modernise them, as was mentioned in reply to a question recently by the Lord Privy Seal.

It is the social and moral values of Britain which we must look at. We must ensure the freedom of our people to spend, to save and to invest. We must make sure that our industrial expansion continues as fast as our economy will permit. That will take some time. I cannot see miracles around the corner. It will be five or 10 years before we get ourselves back to being economically as strong as many of our European partners.

It is incentives that make people work. The present Government have started off by giving taxpayers the incentives to work and to build up businesses. They are encouraging greater emphasis on self-reliance, and less reliance on the State. With those incentives, properly used, and with all the talents and initiatives that we have in Britain, and with the Conservative Party remaining in power sufficiently long—I believe that it will take one or two Parliaments to do this—we can once again be one of the richest and most powerful nations of the world.

7.43 p.m.

Mr. Stan Thorne (Preston, South)

At the beginning of what I hope will not be a lengthy speech, I pay tribute to the contribution made by my hon. Friend the Member for Bishop Auckland (Mr. Foster). I am sure that the House will hear much from him in defence of the working people of his area, whom he has come here to protect. Most hon. Members will be interested in his future contributions.

I do not intend to follow up the remarks made by the hon. Member for Windsor and Maidenhead (Dr. Glyn). I hope that he will excuse me for not doing so, even though I am interested in his carrots-and-sticks approach to the Budget. I hope to deal with part of that later.

Over recent weeks, I have heard reference—I do not know whether this involves the hon. and learned Member for Dover and Deal (Mr. Rees)—to the fact that the Conservatives have a mandate to pursue certain policies. That must be challenged, because it is largely myth. The reality is that in the election 76 per cent. of the electorate voted, and of that 76 per cent. only 44 per cent. voted Conservative. Therefore, of the number who voted, 56 per cent. rejected the ideology or philosophy put forward by the Tory Party. [HON. MEMBERS: "Oh."] These figures can be verified.

The overall position is that the present Government govern with the support of 33.3 per cent. of the people.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

Will the hon. Gentleman give way?

Mr. Thorne

I remember an occasion—before the hon. Gentleman who wishes to interrupt me became a Member of the House—when the present Prime Minister rejected a 33 per cent. result in an election on the ground that it was grossly inadequate. That was the vote on Scottish devolution. One-third of the electorate in Scotland voted "Yes". That was rejected by the then Leader of the Opposition as being completely inadequate, undemocratic, and so on, and as giving no mandate to the then Government. Yet we are asked to accept that now, because the Tories are in power due to the support of 33.3 per cent. of the people, they have, magically, some sort of mandate. They will learn very early on—

Mr. Beaumont-Dark

Will the hon. Gentleman give way?

Mr. Thorne

If the hon. Gentleman insists, by all means.

Mr. Beaumont-Dark

Bearing in mind that we had the biggest plurality of votes—over 2 million—of this generation, we have the voters with us. Is the hon. Gentleman now asking for proportional representation? If so, I should be most interested to hear it.

Mr. Thorne

I am prepared to excuse the hon. Gentleman's ignorance. I have previously indicated in this House that I believe in proportional representation. That may surprise the hon. Gentleman. I am not particularly interested in the representation of stockbrokers who drive Rolls-Royce cars or are driven in them. Nevertheless, I accept the concept of PR.

The point that I was making was that precisely because the present Government have no authority to rule on behalf of the electorate but only on behalf of 33.3 per cent. of them, everything that the Government advance in this House will be subject to the closest possible scrutiny by Opposition Members. Each policy advocated will be considered on its merits.

On that basis, I turn to the Budget. Simply, it is a Budget that is designed further to assist the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) and his friends among the wealthy to become even fatter than they are now. I do not mean that personally and literally, because that description does not apply to the hon. Gentleman. However, generally, it is clearly a Budget designed to support the hon. Gentleman and his friends.

It could be argued, as I think it was by the Chancellor—this is no time to mince words—that some of the policies advocated in the Budget were a continuance of the previous Government's policies. In spite of what may be said from the Opposition Front Bench tonight, that fact must be accepted. I shall return to the matter shortly.

Following the Budget, a production worker may gain between £1 and £5 a week, according to the bargain that he has been able to achieve in his factory. He will certainly face VAT at 15 per cent., prescription charges of 45p, a petrol increase of 10p a gallon, increased minimum lending rate, with all that that entails, and increased rents and house prices. The forecast for inflation is 16 or 17 per cent. but it may be even higher by the end of the year.

Substantial wage demands will inevitably follow. Who on the Labour Benches could argue against the pursuance of such demands? At the top end of the earnings table, VAT increases are virtually irrelevant—and I refer again to the hon. Member for Selly Oak. He will have no difficulty in paying the 15 per cent. As always, the lower income groups will be most vulnerable to the draught from this Budget.

Although it is not his intention, the actions of the Tory Chancellor will have a good side effect and increase class consciousness. It is the most blatant piece of class budgeting that we have seen in Britain for a long time. No one can say that we were not warned. The writing was clearly on the wall—and I am sorry to say that the previous Chancellor and his Cabinet colleagues aided and abetted in that effect. The outcome will be another major increase in unemployment.

The Tory Government may hope to find the trade union movement quiescent in the face of rising unemployment. It will give the Tories a better bargaining position in the labour market with a reserve army of workers who are deprived of their livelihood and in difficulties through the social wage. In the Tory view they are more likely to be more responsive to industrial discipline. That is not new. It is the history of Tory Governments in the late 1920s and early 1930s. The working class are told to accept the terms "or else." It is an open invitation to the intense class conflict of capital versus labour on a scale that, as the previous Chancellor said, will make the past winter look like a tea party. We must adopt a new approach to the sharpening struggle between the haves and the have-nots.

The Budget concerns people at work, earning wages and salaries, but what of the 2 million to 2½ million who will be unemployed by this time next year? What standard of living will they have and at what cost to public expenditure? The Secretary of State for Social Services spoke of such benefits as pensions and mobility allowances, but there was no mention of proposed increases in benefits for the unemployed and their families. With rising prices, their prospects of maintaining even a reasonable standard of living will be seriously eroded. That will also result in falling demand and further aggravate unemployment, and in the background is the silicon chip, with its effect on production and the creation of fewer jobs, unless there is a planned use of resources to meet people's needs. There was no evidence of any such planning in the ideology that permeated the Budget Statement.

This winter we are likely to have a number of disputes like that of The Times. It is difficult to predict how many. As in the case of the hon. Member for Selly Oak and his colleagues, workers also have to act in defence of their economic interests. They will do that this winter in response to those in the Tory Party who see no remedy to our economic situation apart from making the poor pay more.

Many aspects of the position in Britain closely resemble the Weimar Republic in Germany, many years ago, which contributed much to the emergence of German Fascism. In that context, the job of the British Labour movement is tremendously important. If we are to capture the imagination and support of the majority of the British people to change the order of society in Britain and eliminate the continuous waste of human resources that capitalist society produces, we must reappraise the aims and tactics of the movement. The Budget will help concentrate our minds on the real alternatives to capitalism.

Members of the previous Labour Government must forget the past and not look with hope towards a pliant electorate that will follow three Tory Budgets to return a Labour Government to power. I do not want to see the same leadership and Cabinet Ministers in that situation. We must reappraise our philosophy on the problems that face us in this part of the twentieth century. The situation next year will be worse than that outlined by the Chancellor of the Exchequer. Public expenditure cuts will be infinitely worse than the current ones, and, as the Chancellor rightly pointed out, the rot continued under a Labour Chancellor.

My hon. Friends the Members for Birmingham, Perry Barr (Mr. Rooker) and for West Stirlingshire (Mr. Canavan) were sitting on the Front Bench when 37 of us declined to support the previous Government in cutting expenditure. To a large degree we reaped the whirlwind in this Budget following that type of measure introduced by the previous Government.

I remember going with a deputation from my trade union to see the then Chancellor of the Exchequer about the sale of BP shares. We were told that the alternative would have been an even higher level of public expenditure cuts. What was our choice? We all know the answer. The choice that we offered was to cut defence expenditure. Needless to say, the Chancellor at that time had no intention of doing that. So, once again by our past actions we have given the Conservatives the right to pursue the sale of BP shares.

Mr. Dennis Skinner (Bolsover)

My hon. Friend the Member for Preston, South (Mr. Thorne) would do well to finish off that dismal story. At the end of that financial year, despite the selling of BP shares and the massive cuts in public expenditure, which we refused to endorse, the sad fact was that the Budget calculations were out by £2,000 million.

Mr. Thorne

I am grateful to my hon. Friend the Member for Bolsover (Mr. Skinner). That is not the first time that he has come to my aid.

The ingredients in the Budget are such that, contrary to what the Chancellor anticipates from the increase in MLR, for example, certain things will happen which will worsen our economy and not assist it. It is inevitable that hot money will flow into Britain in bigger quantities. This will not go to the gilt market. These people want short-term liquidity, and their investments will have the effect of being additions to the money supply which the Chancellor seeks to suggest that he can control in some, way. Yet again it is not the British people who will gain from this but the wealthy foreign investors who can get their money in and out of Britain quickly.

I make a brief local point. In the public expenditure cuts housing will play a major part. Every Saturday morning I interview some pathetic cases—people with children who live on the fourteenth floor of multi-storey blocks. It is now five years since I was first elected to Parliament and I have been saying ever since then that something will be done about this problem. I have promised that there will be changes and that more houses will be built. But these things have been delayed again and again and again. When our Government were responsible for the delay, I had no hesitation in saying so. Now it is a Conservative Government who will be responsible for yet further delays. Some of these people with very small children clearly will not now be able to get out of the multi-storey flats for many years.

The North West water board has a project in my area. I have written to the chairman of the board on several occasions and I have found out that that project was to be in this year's capital programme. He had high expectations that a sewer that was desperately needed in the Haslam Park area of Preston would be built this year. Clearly, that, too, is likely to be swept to one side.

The whole purpose of these exercises in cutting public expenditure is really to cut the social wage and the quality of life of ordinary British people while the fat can go ahead and make their bigger profits at the expense of these people.

8.6 p.m.

Mr. Albert McQuarrie (Aberdeenshire, East)

I begin by paying tribute to my predecessor, Mr. Henderson, who during his period of service in this House worked most assiduously for his constituents. In that connection he was carrying on the highest tradition of Members elected for Aberdeenshire, East, and I hope that I shall be able to carry on that tradition and dedication during my time in this House.

I am delighted to have the opportunity of addressing the House for the first time. I represent that fine constituency of Aberdeenshire, East, which is a long way from this Chamber. But, thanks to modern travel, I am able to commute to this lovely City of London—to the Palace of Westminster—take part in the proceedings of the House, and then return to the green fields of the beautiful agricultural areas in my constituency and the rolling waves of the North Sea, where the oil and gas come ashore to aid this country's economy.

Aberdeenshire, East has one of the largest fishing communities in Europe. From the harbours of Fraserburgh and Peterhead, the fishing fleet sails out to catch fish not only for human consumption but also for the fish processing industry, which has many factories in my constituency. This industry plays a large part in the export drive. The fishermen have a hazardous job, often in very rough seas, and, sadly, a few of the boats never return to harbour. This leaves the community to face another disaster, with the wives and children mourning the loss of the bread-winner.

In this context I wish to draw attention to a matter which affects every industry, because when calamities like this take place they leave behind the widows. There are 3 million widows in Britain today and I wish to remind the Chancellor of their plight. I am aware that in the past many right hon. and hon. Members have fought for the rights and pensions of widows, but with very little success. Therefore, I make no apology for bringing the matter before the House once more.

I am very pleased that the Chancellor of the Exchequer proposes to complete the exemption from tax of war widows' pensions. The Royal British Legion, of which I am proud to be a member, has fought very hard for this, and I am sure that that organisation will be delighted to learn of the Chancellor's decision. However, I remind the Chancellor that many of the widows today are in that category because their husbands died after the war as a result of wounds sustained during the war. Those widows do not enjoy the rights of being classified as war widows.

I want all tax to be removed from all widows' pensions. I also want to see the existing anomalies removed. I urge the Chancellor to give us an indication that he will consider these matters. When a woman is widowed, she falls into one of several categories. Up to the age of 39 she receives £27.30 for 26 weeks, after which she receives nothing at all. Surely it is quite wrong to assume that she can go out to work or remarry. She may neither have the health nor the capacity to take on a job, and she is more than likely to have children of school age. She may not wish to remarry. Yet the State forces her after the 26-week period to take one of these alternatives or to throw herself on to the social security system. Widows aged between 40 and 49 receive a pension ranging from £5.85 a week to £18.14 a week. From 50 to 60 years of age the rate is £19.50. I have purposely omitted mentioning children's or earnings-related allowances to widows, as many are out with these categories. For those who are, the difference is not significant enough to improve the desperate situation in which those widows find themselves.

The widows receive no unemployment or sickness benefit. They cannot apply for industrial injury benefit, education grants, maternity or invalidity allowances. Even the child benefit is deducted from the widow's benefit pound for pound. They are in a constant poverty trap—and it is a trap from which this House must remove them. Why should widows' pensions not be paid in full on the same scale to all widows rather than have the variations which now exist? Why should all these other anomalies exist when the husbands had paid national insurance contributions all their working lives so that in the event of their death the widows would receive a proper pension?

Then there is the worst feature of all—the taxing of the widow's pension if she chooses, by need or desire, to take up employment. It is wrong that the pension should be taxed when the purpose of providing the allowance was to support the widow in the event of the husband's death. By all means tax the earned income, but leave the widow's pension alone and give the widows the full benefit of that allowance.

I ask my right hon. and learned Friend the Chancellor of the Exchequer to give serious consideration to improving the lot of these 3 million widows—a figure which increases daily. Will he endeavour to remove the anomalies by providing a standard widow's pension for all age groups, and grant the various benefits which are not now available to widows? Will he also indicate whether it is possible to bring in the complete tax exemption for widow's pension, as is being proposed for the existing war widows?

We have a moral obligation to look after these widows. Other needy groups may criticise, but if we make a start with a group which is the largest and which is suffering most, we shall at least have made some headway for others in the future.

Greater recognition should be given to the changed circumstances of married women after the death of their husbands. I further ask my right hon. and learned Friend the Chancellor seriously to consider amending legislation on the income tax liability, pension rights and social security rights of all widows, irrespective of age, on the death, of the husband. If we can do something for the 3 million widows who have lost their loved ones, we shall have the satisfaction of knowing that we have achieved something that is badly needed. We shall also be seen to be a caring House, and we shall earn the gratitude not only of the widows but of the nation itself.

8.12 p.m.

Mr. Jack Straw (Blackburn)

The hon. Member for Aberdeenshire, East (Mr. McQuarrie) has made an eloquent and compassionate speech, and I offer him my congratulations.

When my predecessor, Barbara Castle, made her maiden speech 34 years ago, she made a promise, with suitable apologies to Mrs. Malaprop, that in her career in this House she would be the "pineapple of politeness". As the right hon. Member for Heywood and Royton (Mr. Barnett) knows only too well, Barbara Castle's reputation for being a pineapple of politeness went before her throughout her parliamentary career. But perhaps other aspects of her reputation are better known in this House. I refer to her activities as a fighter, as unquestionably the most successful woman politician of her generation, as somebody with immense personal and political courage and as somebody who, at her best, was in the company of only three or four others in her capacity to inspire people and to replace sloth by zeal. All those qualities of Barbara Castle were well illustrated in Monday's European election results. Hers was the only constituency in the United Kingdom where there was a swing to the Labour Party.

This evening I wish to pay tribute to Barbara Castle. She was a marvellous constituency Member of Parliament for Blackburn, and Blackburn will miss her. She was, and is, one of the most significant national figures since the war. There are, and will be, many monuments and testimonies to her work. I refer to even the last five years of her efforts to bring about a better pension scheme, and of the commitment in legislation, for which she fought and won, to ensure that pensions rose in line with earnings as well as with prices—a provision which the Conservative Government are now seeking to dismantle.

I also refer to her fight to bring about benefits for the disabled and her efforts in seeking to transform the lives of disabled people and her work in the area of child benefits. Now, at a time of life when many others would be thinking of retiring, or indeed have already retired, Barbara Castle is about to embark on a new career as a leader of the Labour movement for Britain within the EEC.

It is certainly no easy task to follow Barbara Castle—although I greatly prefer following her and being in my position than being in the position of the hon. Member who represented Blackburn in 1910. He replaced Sir William Henry Hornby, who sat in this House for an uninterrupted period of 23 years without ever even making his maiden speech. It was said that he was too shy.

Barbara Castle's maiden speech was devoted to the problems of national reconstruction after the war. In Blackburn the need for reconstruction had been caused not only by the war but by the ravages of the 1920s and 1930s. The town's pre-war prosperity was based on the quicksands of the Empire. Blackburn at one time was the weaving centre of the world, and at its peak over three-quarters of its production was exported to China, to India and to our other colonies. But as those countries discovered that they were better off keeping the raw cotton and making it into cloth themselves, as competition, particularly from Japan, increased, and with the general decline in world trade, Blackburn was plunged into recession as deep as that which affected the North-East or South Wales. It had the unhappy experience of being the worst unemployment black spot of Lancashire—hardly an area in the 1920s and 1930s that was unblemished by black spots.

At its worst in 1931, unemployment in the town reached 46 per cent. Throughout the 1930s the figure rarely dropped below 30 per cent. Indeed, although towards the end of the 1930s other areas of the country enjoyed at least a partial recovery, Blackburn's unemployment shot up in one year alone by 4,000 between 1937 and 1938.

What was the reaction of the town? Was it simply to accept its fate, to accept that the invisible hand of free market forces had been amputated in that area, or was it to decide that things had gone too far and that local government and State intervention were likely to be the only way through? It was the latter course that was chosen, and it was the Conservative leadership of the town which formed an industrial sub-committee and went out seeking State and local intervention to bring new industries to the town.

There were two remarkable successes. The first provided sites and built access roads, with a grant of four-fifths rate relief, low initial rents, cut-price municipal electricity and other aids and inducements, which the right hon. Member for Leeds, North-East (Sir K. Joseph) would no doubt regard as harmful. It persuaded Philips, the Dutch multinational, to establish what became the largest valve-making plant in Europe. Secondly, the town persuaded the Government to site a nationalised undertaking, a Royal ordnance fuse-making factory, in the town. It is perhaps no accident that today these two establishments are still the largest employers in the town with nearly 6,000 employees between them.

Blackburn learnt a lesson from the recession of the 1930s, and the unrestricted private enterprise and the economic policies that went with it gave no solution to its problems. It learnt the lesson again in the recession of the mid-1970s. In that period unemployment rose to unacceptably high levels, and it is still too high. There is no question that, but for the intervention of the previous Labour Government in the form of jobs and industrial aid, unemployment would probably have doubled. Between 1974 and 1979, 4,228 jobs were saved by temporary employment subsidies. Another 449 jobs were saved by other Government measures. With the payment of over £2,800,000, another 2,244 jobs are being created through Government aid to industry and regional development grants.

One of the only new firms established in Blackburn in the 1970s was a small and private firm—upon which Conservative Members are so keen—BTB Engineering. It got off the ground only as a result of intervention and support from the National Enterprise Board. The managing director of that firm has allowed me to say that no private institution was willing to provide the finance to start up the firm. Today, it has 50 employees and it is successful. In the future it will be employing 200.

It is a deep tragedy for this country that the lessons learnt in Blackburn—even by the Conservatives—in the 1930s appear to have been lost to the present Government. The decisions announced yesterday will do nothing for the prosperity of my constituency, the North-West or the country generally.

Let me illustrate that by reference to two of the Chancellor's principal preoccupations—supply and our import and export performance in manufactured trade. In both those critical areas, the intentions of the Chancellor are likely to bear little, if any, relationship to the effect of his measures—as the small print in the Financial Statement makes so embarrassingly clear.

First, I turn to the supply side of the economy, with which the Chancellor is so concerned. What will be the consequences of yesterday's deflationary measures? The Treasury's main forecast is that the GDP will decline by 1 per cent. Worse, it predicts that manufacturing output will decline by 2½ per cent. No wonder the Chancellor and the Chief Secretary refused to give any estimate of the unemployment consequences of the measures. It is a reasonable assumption—a rule of thumb—that if GDP declines by 1 per cent., so may employment. If that is true, unemployment is likely to rise by at least 250,000.

Conservative Members still fail to understand—though they may learn fast enough from the howls of their constituents—that, although the cuts are in the public sector, much of the unemployment will fall in the private sector. It is also a fair working assumption that if manufacturing output falls by 2½ per cent. employment in manufacturing will fall by a similar percentage. That will mean a decline in manufacturing employment of 180,000 to 200,000.

Exhortations from Conservative Members to work harder will sound hollow to those who, as a result of the Budget, end up with no work. Conservative Members may provide two answers to that. First, they may dispute the Treasury forecasts. The text of the Red Book indicates that the Chancellor appears to have come close to disowning the forecasts altogether. I hope that the forecast pessimism proves incorrect. However, the forecasts are based on what has happened to our economy over the past 10 to 15 years, including the period when the Conservatives tried this strategy once before. It hardly lies in the mouth of the Chancellor to call upon the weight of evidence when it suits him—as he did yesterday with reference to the measures on exchange control—and then to deny the weight of the same evidence when its conclusions are uncomfortable to him.

Secondly, Conservative Members may say that even if the forecasts are correct the country is going through a temporary lean period and that we shall climb out of it in late 1980 and early 1981. However, once in a trough it is doubly difficult to achieve real growth. One has to climb out of the trough before one can even start. In the intervening period of decline, coupled with the poor prospects for world trade—about which the Chief Secretary spoke earlier—and the general disruption caused by the rise in oil prices, manufacturing capacity may be shut down for good. That will create further supply problems when, at a future date, the Chancellor tries to increase aggregate demand to get us out of the bog.

The Budget measures are likely to make the difficulties with supply even worse. Nineteen out of the 20 businesses in my constituency are small and they employ fewer than 200 persons. The prospects for those firms are bleak indeed. The little extra that business men have in their pockets as a result of yesterday's Budget will not in any sense compensate for the overdrafts upon which they rely for their survival being increased by 2 per cent. to 3 per cent. and now standing at 17 per cent. or 18 per cent.

While we are talking about small businesses, may I remind the House that the Chancellor of the Exchequer referred in the debate on the Loyal Address to the importance of small businesses in the United States and the lessons to be learnt from the United States—lessons which, he claimed, we reject at our peril. One lesson from the United States that the right hon. and learned Gentleman has already ignored is that last year Congress increased Federal subsidies and aid to small businesses by $300 million to a total of $935 million at a time when he is cutting such aid. So much for the lessons from the United States.

The second major deficiency of the Budget is that, far from helping home manufacturers, it may actually suck in even more imports and make it more difficult for our exports. The high and ever-increasing desire of British consumers to purchase imported manufactured goods is well rehearsed. The Chancellor made the point himself yesterday and in the debate on the Loyal Address when he drew attention to the fact that last year imports of manufactured goods had increased by 13 per cent. while our exports were increasing by only 2 per cent. in volume terms. The Budget is likely to continue that trend, and, indeed, make it worse.

There is no notion in the Budget Statement as to how the Government will seek to turn round the performance of our manufacturing industries. I suggest to Conservative Members that it may not be too long before the concern about the future of our manufacturing industries and our performance in export and import markets becomes so strong that some of the mutterings that we hear from Conservatives in the corridors of the House about the need for import controls are raised in the Chamber.

One additional burden that manufacturing industry has to bear is the distorting effect that North Sea oil has on the value of sterling so as effectively to overprice the value of our exported goods.

One reason why the Government's policy on subsidies for employment and industry is so short-sighted is that those subsidies, as well as helping to create and save jobs, act positively to benefit our exports by effectively subsidising their price. That can be well illustrated by a set of figures produced earlier this year by the Treasury for the Department of Employment. They suggested that for every £100 million spent on the temporary employment subsidy there was an improvement on the balance of payments of between £140 million and £180 million—compared with a deterioration in the balance of payments of £60 million if the same sum were expended by way of tax cuts.

Such aids and subsidies enable us to secure and improve the domestic manufacturing industry and its supply of goods and they enable us to subsidise our exports against an over-valued currency. Yet the Government's response is not to maintain or increase those aids and subsidies, but to slash them by nearly £400 million.

We are told that the Budget is part of a new beginning, but in my judgment there is nothing new under the sun about the policies that we are hearing from the Government. The sterile policies of monetarism have as much relevance to solving Britain's deep-seated industrial problems as the politics of the gold standard had in solving the problems of the 1920s and 1930s. Then it was my constituents who suffered while the Conservatives learnt. I fear that it will be the same again in future.

8.28 p.m.

Mr. Stephen Dorrell (Loughborough)

I begin, Mr. Deputy Speaker, by thanking you and the House for the honour you do me by listening to me this evening. It is a particular honour, because as the youngest Member of this new House I think that it is perhaps remarkable that I should be called to speak in the debate on what is, I think by general consent, one of the most important Budget Statements the House has heard in recent years.

My first and very pleasant duty is to congratulate the new hon. Member for Blackburn (Mr. Straw) on what I think every hon. Member will agree was a cogent and well-informed speech, and one that is fitting for the successor to Barbara Castle. He has a very difficult task to follow his predecessor. I should like to associate myself with the hon. Gentleman's wishing her well as the leader of the Labour group in the European Parliament.

Tradition is a great help to a newcomer in placing an ordered series of duties on him when he rises for the first time. My second duty, and again a pleasant duty, is to refer to my predecessor, Mr. John Cronin. He had represented the seat since 1955, a total of 24 uninterrupted years. During that time he built up a formidable reputation both in the House and in the constituency as a very able, very intelligent and very civilised man. His constituents who went to see him always found a sympathetic ear. He was always prepared to take up the case of people who needed help and to do everything he could to help them. He will always be remembered in the constituency for the kind way in which he dealt with his constituents and the effective way in which he took up their problems.

Mr. Cronin will also always be remembered in the House for the wise counsel he gave in speeches, particularly on defence, a subject that interests him very much. Both the House and the Labour Party will be the poorer for his loss. I am sure that every hon. Member wishes him well. I certainly do.

The third priority that tradition places on a new Member is that he should talk about his constituency. I should like to begin my comments about my constituency by remembering two other, relatively recent, predecessors. The first is the man who sat for Loughborough during the war, Lawrence Kimball, father of my hon. Friend the present Member for Gainsborough (Mr. Kimball). His predecessor was a man called Winterton, who Labour Members may be interested to hear sat as a Socialist.

The constituency that I represent is a combination of urban and rural areas within the charmed triangle of the three great industrial towns of the East Midlands. It is almost equidistant between Nottingham, Leicester and Derby. The economy of the Loughborough town is based on a wide variety of small and vigorous companies in the engineering, pharmaceutical and textile knitwear industries. There is a very low level of unemployment. The population of the town is increasing and I believe that we can say that the economy of the Loughborough area is in a healthy state.

In addition to industry, we have a new university of technology and a college of technology, so that in a sense education is a local industry.

I should like to mention the 5,000 people of Asian origin who came to Loughborough during the 1960s and early 1970s as refugees from odious regimes, largely hi East Africa. They have integrated very well into the community, where they perform a valuable job. I believe that they are accepted as equal members of the community. We have a very good record of race relations in Loughborough and I very much hope that that will continue indefinitely.

I suppose that "diversity" is the key word for the make-up of the constituency outside the town. It is made up of a series of towns and villages and a broad cross-section of interests. We have farmers and a large group of miners, because half the Leicestershire coalfield falls into the constituency. We also have the East Midlands airport

Therefore, Mr. Deputy Speaker, I believe that when it comes to my suggesting that I have a particular constituency interest in speaking I shall have that argument at my disposal for a broad range of debates. The argument is nowhere more true than in talking about the Budget.

I believe that I speak for the majority of my constituents when I welcome the basic thrust of the Budget. I believe that it will be welcomed throughout the community because it honours the basic priority that the Conservative Party put to the electorate at the general election—that we should, by reducing the deductions from the wage packet, increase the incentive for a man, first, to go to work, but, secondly, to do an extra hour's overtime, to acquire an extra skill and to bring about that increase in productivity which is essential if our country is to be able to compete with our competitors elsewhere in the industrialised world, and particularly in Western Europe.

The most dangerous fact for our economy, and the greatest danger that we face, is that the British worker on average produces less than comparable workers do in West Germany, France, Holland, Belgium and the other countries of the EEC. Until we can make it worth while for our workers to produce extra goods and bring our productivity up to those levels abroad, we cannot look for the standard of living that the people in those countries enjoy and which hon. Members on both sides of the House want to see for our own people.

That is why I believe it is so important that the emphasis of the Budget is on reducing the burden of income tax, particularly the marginal rates. The incentive argument is at its strongest at the marginal rates, where it involves the decision as to whether one does an extra hour's overtime or acquires a particular skill. That is where the incentive is at its greatest. If we can bring down the rates at the margin, the incentive is there to do that extra bit of work.

No one on either side of the House likes the 3½ per cent. to 4 per cent. rise in the retail price index which my right hon. and learned Friend deems necessary to bring about that increase in incentive throughout the income tax structure. However, if we are to bring about the increase in productivity that I have been talking about, we have to give first priority to making that incentive available so that we can get the increased productivity and build a stronger industrial base.

The Leader of the Opposition said yesterday that the Chancellor had taken a reckless gamble. I believe that in a sense my right hon. and learned Friend has taken a gamble—not a reckless one, but a calculated gamble. It is because these are in a sense high-risk policies, because my right hon. and learned Friend is taking a calculated risk, that it is perhaps now more important than ever that, in addition to honouring our pledge to reduce taxation, we should also honour our pledge to increase the role of the National Economic Development Council, so that trade union representatives and the representatives of all other interested parties are brought into discussion on the future state of the economy during the summer and before the next wage round begins.

My hon. Friend the Member for Worthing (Mr. Higgins) said that any Government can have a wage policy. I think that he is right. The argument is not about whether one should have one. A Government have to decide on the wage levels of all the people who are their direct employees, and they also have a large say in the pay levels of their indirect employees. That, whatever one chooses to call it, is a wages policy. The only argument is whether one decides that policy by confrontation on the picket line or by discussion round the table.

The latter is the role that we saw in Opposition for the NEDC—a table round which these things can be discussed in the context of a conflict which can to some extent be neutralised. I hope that our pledge in this respect will not be forgotten by the Government in forming their economic policy during the next three or four months. I recall in conclusion the words once used in very different circumstances—we shall never negotiate out of fear, but, likewise, we shall never fear to negotiate.

8.40 p.m.

Dr. Jeremy Bray (Motherwell and Wishaw)

We have listened to a fine crop of maiden speeches from both sides of the House. As the first former hon. Member to speak for some time, I would like to pay tribute to them. The hon. Member for Loughborough (Mr. Dorrell) had a lively sense of the diversity of the problems of his constituency. He follows the former Member for Loughborough, John Cronin, a Member of many parts. I am sure that the hon. Gentleman will follow in that fine tradition.

We have been accustomed to seeing my hon. Friend the Member for Blackburn (Mr. Straw) for a long time and it is a pleasure to welcome him to the House. He follows a most distinguished right hon. Member, Barbara Castle, who has taken on another new lease of life in the European Parliament, which will be much enlivened by her presence. Blackburn is a town at the core of industrial England. I am sure that my hon. Friend will represent the constituency with as great a liveliness as Barbara Castle, whom I remember dragging me there to see British Northrop. I am sure that my hon. Friend will do likewise.

The hon. Member for Aberdeenshire, East (Mr. McQuarrie) made a refreshing and passionate plea on behalf of widows. It was a pleasant counterpoint to the tune we have heard from the other side of the Chamber during this debate. His predecessor, Douglas Henderson, was a lively representative of an episode in Scottish history that we would be rash to write off for ever. The hon. Gentleman follows a good tradition there.

The hon. Member for Huntingdonshire (Mr. Major) represents a beautiful constituency, as he says. It is matched, however, by that of my hon. Friend the Member for Bishop Auckland (Mr. Foster), who follows a longstanding friend of mine, Jim Boyden, a colleague in the North-East group of Members of Parliament.

With so many maiden speeches, it is rash of a former hon. Member to venture judgment on what has been a rather dramatic Budget. The Chief Secretary to the Treasury, in his opening speech, said that the Budget presented problems for the Labour Party. He was right. The Chief Secretary said that the Budget was not reckless but stern. It is like a man who gets up every morning, has a run before breakfast and a cold bath and regards himself as disciplining himself properly but in the evening has a magnificent dinner and a splendid "booze-up" and wonders why his health goes to pot.

The hon. Member for Worthing (Mr. Higgins) raised some doubts about the balance of Government policies. A good deal of the economic debate in this Parliament will take place not between the present Front Benches but between the Front and the Back Benches on whether the Front Benches have not got out of touch with economic reality and opinion in the outside world.

The respect in which the Chief Secretary was right to refer to the problems presented to the Labour Party is that the Budget has been presented with appalling aplomb, bearing in mind that it is the most avaricious Budget we have ever heard. No Chancellor has ever proposed bigger tax cuts for himself and his professional colleagues than did the present Chancellor yesterday. I pay the Treasury team the compliment that they believe in what they are doing. I am thinking especially of the Chief Secretary and the Financial Secretary to the Treasury. I believe that the Chancellor believes rather more in tax cuts than monetarism and that the Minister of State is perhaps looking forward to getting his knives into capital gains tax and capital transfer tax details on which he is so expert. As a whole, they are a team who believe in what they are doing.

In its monetary aspect, and therefore in its broad conception, the Budget is basically a continuation of the strategy of my right hon. Friend the previous Chancellor of the Exchequer. Not surprisingly, his attack on it from Labour's Front Bench has concentrated on the tax switch and its likely impact on wage bargaining. I am concerned with the strategy as a whole and the real alternatives to it.

The obvious first step in developing an alternative is to look at the fine print in the Budget Report and to look at the Treasury model which underlies it and which, despite all its shortcomings, is the best model of the United Kingdom economy we have.

When the Chancellor had given his answers to his sums in the Budget, I went back last night to the Treasury model and, burning some unaccustomed midnight oil, checked whether, with the new figures published and the new information that the Chancellor had to offer, better answers were not available. I will try to give some of them now, but perhaps more will be published in this week's New Statesman.

The linchpin of the Government's strategy is the money supply—cash and bank deposits. Its increase is limited by reducing public sector borrowing. Since the Chancellor wants to reduce taxation, that means reducing public spending still more. Unemployment does not figure in the Government's calculations. The pound and the balance of payments are allowed to look after themselves. It is indeed a reckless strategy.

The Chancellor intends to try to maintain the previous Chancellor's money supply and PSBR targets, broadly, but, with the higher inflation than expected at home and abroad and the higher inflation generated by the Budget itself, that amounts to a much tighter monetary squeeze than was previously planned. Some relaxation of the targets had been advocated even in the Tory press, but the Chancellor himself firmly rejected that course.

The right hon. and learned Gentleman hopes that the cuts in income tax and reduced inflationary expectations through the monetary squeeze will increase incentives and invigorate industry. He hopes that this will cause industry to increase exports and investment and to create new jobs. That lies beyond the short-term horizon of 1981; whether it will ever be achieved is a matter of political faith.

Much comment has been made on the forecast in the Budget Report, which is included as a result of a schedule which I introduced into the Industry Act 1975, for which hon. Members opposite gladly joined me and my hon. Friends below the Gangway in voting, against the advice of our Labour Whips, and which we carried. I am sure that the Government will look forward to building on that success and improving the provisions of that schedule.

However, when I introduced that schedule, which requires the Treasury to publish forecasts and give access to the model, I had intended the published forecasts to be closely related to the model, so that it would at least be possible to see the kind of assumptions made and to vary them—because no Budget is ever made on one set of assumptions.

From the interaction between the uncomprehending Treasury Ministers and evasive Treasury officials, the practice has grown up of publishing a forecast in the Budget Report on quite untraceable assumptions, and yesterday's was no exception. The only possible interpretation is that it is the forecast most favourable to Treasury policies, in the sense of being meant to induce the most favourable reaction from us and not the most favourable for the economy.

Of course, it was a very subtle move yesterday. Ministers clearly were not a factor at all in the making of the forecast: they did not seek to bias it, I am sure. They might have added the odd phrase or two at the end and qualified it, but they did not seek to influence it. But it was very clever of them to be able to span that spread of advice from within the Treasury, so that either way they have a basis on which they can either modify their policies, thus saying that they were honest and now they are adapting them, or go ahead and say that they are building further on the direction in which they moved this year.

The forecast, however, is an essay in persuasion and not in information. Had it been intended as an essay in information, the full forecast tapes would have been provided to the admirable forecasting services which have been developed, so that they could be seen and followed out in full and we should not have had the deep misunderstandings which have caused the fall in the stock market today, the rise in the pound and the fall in gilts. There may have been the fall in gilts, but the general disturbance would have been much less had the Government come clean and really shown the enormous uncertainties in the forecast by describing the range of assumptions on which those forecasts were made.

I returned to the model and produced a forecast on the basis of current data and compared it with the Budget Report forecast. The Chancellor's Budget is for an economy threatened with accelerating inflation and enjoying the windfall benefits for the balance of payments of North Sea oil. The likelihood is that North Sea oil will improve the current balance of payments and induce sufficient expectations for further improvement to encourage a capital inflow. That is what has been happening. That will force the exchange rate to a high level. Export prices will become uncompetitive, imports will flood in, United Kingdom manufacturing industry will lose orders and decline, and unemployment will rise. All that was happening, and it was accelerated yesterday.

If wage pressures relax, it will be no stimulus to economic growth. There will be short-term increases in profits and lower public sector borrowing. Consumer spending will stagnate, as will exports. Lack of demand will restrict investments. Public expenditure will continue to be restrained.

If, alternatively, wage pressures increase, consumer spending may increase temporarily. But higher interest rates and credit restrictions to restrict the money supply will cut investment and stocks, attract capital inflows, maintain the exchange rate, reduce exports and increase unemployment.

Whatever happens to wages under the Tory strategy, the economy is likely to stagnate and unemployment to rise still further. Profits, the balance of payments and the pound will flourish—so the City will be happy.

The effect of the Budget—coming on top of the breakdown of the 5 per cent. pay policy, the winter's industrial unrest, the oil price increase, and the current account deficit in the first quarter—has also been to accelerate these developments. The dangers, particularly of an over-valued exchange rate, are seen clearly by the Treasury. That is why in the Budget the Government have relaxed controls on capital movements. But, according to the people to whom I have spoken, this is thought as likely to cause the exchange rate to rise still further. That is because if people know that they can take out their funds easily they will be more likely to put them in. It will simply magnify the flows in and out.

To exert any sustained pressure on the exchange rate, one way or the other, it is necessary to act on the underlying fiscal and monetary strategy.

The Government's strategy does not permit direct action on the reflation of any sector of demand in the domestic economy, nor does it permit direct action through the exchange rate on exports. The Government's hands are tied.

The best empirical evidence of the Treasury's own model suggests that this is a self-inflicted restriction. I know that the Treasury model is a far from perfect instrument. Nobody has said so more often or more boringly than I. It needs further testing and development, although it has had far more testing than any other United Kingdom model. It should be used for optimising policy in the uncertain economic environment in which it operates and not merely for making uncertain forecasts. However, the direction in which policy should move is clearly evident.

The crucial effect is that of the exchange rate. The argument of various schools of monetarists is that an exchange rate change feeds through quickly, one way or another, into domestic costs so that devaluation has little lasting effect. Yet, for all the work done for and on the Treasury model, there is still a substantial effect of devaluation on the balance of payments which scarcely begins to fade away after six years. That is quite long enough to make substantial structural changes to the economy.

The argument must be that a competitive exchange rate offers the possibility of a period of considerable growth during which it should be possible for a determined Government with popular support to make substantial changes.

In trying to follow through the mechanics of the operation of the exchange rate, the Treasury has made matters more difficult by not making the financial sectors of the model accessible. Had those been available, the Chancellor's task of exposition yesterday would have been made easier. I hope that Treasury Ministers will make the financial sector model available soon and that they will publish complete forecasts of the whole model interacting so that the interaction of the financial sector and the real model can be seen fully in the way in which that complicated model should be now operating.

The Treasury will certainly have great difficulty in following the course of events as a result of the big changes which have been made in the Government's fiscal stance. In trying to reproduce the consequences of the Budget, I did not obtain the negative growth in the published forecast. I thought that there might be a growth of perhaps 1 per cent. next year and 2 per cent. the following year. I thought that perhaps the retail price index might rise not quite as high and that real personal disposable income might grow, not fall. I felt that company profits would grow enormously, that the public sector borrowing requirement should more or less be on target and the balance of payments likewise. But a 200,000 increase in unemployment this year and the following year is clearly indicated within wide margins of error in assumptions about the growth of the other factors in the Treasury model. The Chancellor did not tell us yesterday that the growth in unemployment would be as big as that. I think that he should have done.

The alternative is a policy which accepts a downward pressure on the pound by a higher level of public spending with a smaller switch from income tax to VAT which could maintain a growth rate of 3 per cent. during the current year and over 4 per cent. the following year. The effect on the retail price index would depend on the magnitude of the switch from income tax to VAT. Real personal disposable income would not grow very much more because, with the lower exchange rate, most of the effort would go into the restructuring of industry and the higher level of exports. Company profits would do extremely well and offer an additional margin for tax to boost the effect on the personal sector. The public sector borrowing requirement would be reduced, the balance of payments would be substantially improved, and unemployment could be cut.

That is the choice in economic strategy that we face. It is not a minor matter of switching between income tax and VAT, even to the scale of £4 billion a year; it is a matter of the whole underlying stance of the economic strategy of the Government. That has not been brought out by our Front Bench and it was not clearly portrayed by the Chancellor yesterday. But events during the coming two years, debate in the House and the work of Select Committees as they probe the assumptions of the Government's economic strategy will, I hope, bring out clearly that so far this Budget debate has been a phoney war. The real war is yet to come, but I am sure that we shall have it during the course of this Parliament, perhaps not all in this Budget, but in the interesting time which, to do it credit, the Treasury team has afforded us in the debates that lie before us.

8.58 p.m.

Mr. Joel Barnett (Heywood and Royton)

It is my pleasant task to speak in what I may call a swan song in these Budget debates. I have spoken in every Budget debate for the past 15 years. I have at times been a little controversial. On this occasion I shall try my best not to provoke the Financial Secretary too much. I know how easily provoked he is.

I start, as others have done, by congratulating the many excellent maiden speakers whom we have heard today. They have all been first-class and none the worse for being controversial. Some would argue that being controversial means only if one is disagreeing with the Budget. But, as many of my hon. Friends would argue, it is equally controversial to agree with the Budget, as I shall hope to indicate later. All the maiden speakers spoke fluently. They were entirely at one in paying kind tributes to their predecessors, which I know will be much appreciated by many who heard them.

My hon. Friend the Member for Kettering (Mr. Homewood) paid a glowing tribute to his predecessor, Sir Geoffrey de Freitas, whom we all know and respect, as the right hon. and learned Member for Hexham (Mr. Rippon) said in his remarks. The hon. Member for Fareham (Mr. Lloyd) paid an equal tribute to Dr. Reggie Bennett, who had something to do with the "Kitchen Committee" and the way in which one does or does not eat in this place. I found during the past five years that he had something to do with a deficit—though it was not entirely his fault—rising to figures which I shall leave over at this time.

My hon. Friend the Member for Edinburgh, Leith (Mr. Brown) paid a fine tribute to his predecessor, Ronnie King Murray, whom he tells us has now become a judge. Those of us who were in the Government with him know that he will make an excellent judge. The hon. Member for Huntingdonshire (Mr. Major) told us, as we all knew, of the excellent qualities of his predecessor, Sir David Renton, and something about the beautiful countryside of Huntingdonshire.

We on the Labour Benches do not always represent such beautiful parts of the country; we represent much nicer people but not always such nice parts of the country, though I should say that I represent a beautiful part of the country because I surround the hon. Member for Rochdale (Mr. Smith), and, as you can imagine, Mr. Deputy Speaker, that is quite a task. I have some beautiful spots there—spots around Rochdale, that is.

My hon. Friend the Member for Bishop Auckland (Mr. Foster) also represents a very beautiful constituency, and he paid tribute to his predecessor, Jim Boyden, whom we also know well for the excellent work that he did in the House.

The hon. Member for Aberdeenshire, East (Mr. McQuarrie) also made an excellent speech, and we remember his predecessor, the Scottish nationalist Douglas Henderson, who made somewhat different speeches.

My hon. Friend the Member for Blackburn (Mr. Straw) paid what was perhaps the greatest tribute of all, quite understandably and quite rightly. He paid tribute to a remarkable woman, Barbara Castle, who has by no means finished her political career, as my hon. Friend made quite clear and as I know very well, because she is the European Member of Parliament for the constituency in which I live, close to the United Kingdom one that I represent. I am sure that she will do a first-class job in Europe, not only for the Labour Party but for the country. My hon. Friend was absolutely right to pay that glowing tribute to her.

My hon. Friend the Member for Blackburn also told us that one of his predecessors, going back to 1910, was a rather shy Member of the House who had never spoken while sitting here for 23 years. Judging by the excellent speech of my hon. Friend, I certainly hope and expect that we shall hear much more from him in the next 23 years or more that he will, I hope, be a Member of the House.

The hon. Member for Loughborough (Mr. Dorrell) paid an excellent tribute to the hon. Member whom we all remember very well, our good friend Mr. John Cronin. It was a very sincere and moving tribute, and I know that those of us on the Labour side of the House who heard it much appreciated it.

I think that I have covered all the maiden speakers. All my hon. Friends spoke very simply, sincerely and deeply about the problems in their constituencies relating to jobs and employment. I shall say a word about that in my remarks on the Budget. All hon. Members spoke very well indeed and very fluently. I am sure that we all look forward to hearing them often in this House.

I turn to the maiden speech, as Chief Secretary to the Treasury, of the right hon. Member for Oswestry (Mr. Biffen). At the outset, I should say that there has been one very good change since 3 May—on which I compliment the Treasury, the Chancellor or whoever it was—which was to make the sensible decision to remove from the many burdens of the Chief Secretary responsibility for taxation, and also, I understand, responsibility for the EEC budget.

I am told that the Chief Secretary will have the assistance—if that is the right way of putting it—or will be assisting, the Financial Secretary on public expenditure. I believe that I have to congratulate him on having that assistance. I am not absolutely sure. It is, one might say, an offsetting burden for the reduction of burdens he has had. More seriously, I think it was a sensible thing to do because the Chief Secretary has more than enough to cope with in relation to the problems of public expenditure. To be relieved of some of the other burdens will, I hope, enable him to understand and deal with other problems with a little less difficulty. I sincerely wish him good luck and health to enjoy the difficult and onerous tasks and responsibilities that are ahead of him.

However, listening to him today, and judging from the start that he made, I fear that he is pushing his luck right from the beginning. The trouble with the Chief Secretary to the Treasury, as I know from many years of listening to him in the House and talking to him outside, is that unlike the Chancellor—who after years of being battered by his hon. Friend the Financial Secretary reluctantly came round to believing his own rhetoric—he does not need rhetoric but genuinely believes what he says. As some of my hon. Friends have said, one of the troubles about right hon. and hon. Members in Government today is that they believe what they have been saying. It is very worrying and frightening to think that they are now putting all this into practice. If I may, I shall deal with this a little later.

The trouble is that the Chief Secretary will have to learn the hard way that the monetary and fiscal policies in which he genuinely and sincerely believes might begin to look a little different in the hard world, where even monetarists must seek the co-operation of others who are not quite as monetarist as they, namely, trade unionists and others. The right hon. Gentleman will find that the Government will have to obtain their co-operation if they are to succeed, whether or not they pursue monetarist policies, Keynesian policies or neo-Keynesian monetarist policies. In any event, they will need that co-operation, and I fear that the pursuit of pure monetarism will rapidly lead to the kind of U-turn that most people are predicting.

At the outset, let me say that I entirely agree with one of the Chief Secretary's points in relation to the budgetary costs of the EEC. When I was in Brussels a few months ago, I sought to obtain the agreement of my ministerial colleagues for cash limits to apply as a ceiling to our budgetary costs in Europe. I must tell the right hon. Gentleman, as I am sure he will find, that it is not quite so easy to persuade them. I doubt whether he will find that the kind of gentlemanly tactics which we are told will now be deployed will succeed in achieving the objective that I believe most hon. Members want to see, namely, a reduction in our burden to the EEC budget.

I now turn to the Chief Secretary's main point about the burden of public expenditure. He said that it had increased and is still increasing and argued that it should now be reduced. The right hon. Gentleman called in aid a statement which Roy Jenkins made some time ago, when public expenditure was thought—I say "thought" advisedly—to be running at nearly 60 per cent. The Chief Secretary quoted a phrase of Mr. Roy Jenkins, who at the time was my right hon. Friend, about the dangers of a pluralistic society. As I say, at that time public expenditure was thought to be nearly 60 per cent. But in practice, a few days later, when we found more realistic definitions of public expenditure—with which no one on the then Opposition Front Bench disagreed—we discovered that the percentage of public expenditure of GDP had never been higher than 46½ per cent. and was then 42 per cent.

Therefore, the right hon. Gentleman chose a rather bad quotation to use, because the quotation of Roy Jenkins about a pluralistic society was out of date before he actually said it. Despite that, the Chief Secretary advocated that we must cut public expenditure again and again, as if all public expenditure was bad. I have a lot of respect for the right hon. Gentleman. He is an honest man, but he certainly never made any semblance of a case for that argument.

In this very Budget, public expenditure has been increased in one area by some £2,700 million in a full year—by the increase in pensions, which we were all pleased to see. I assume that the Chief Secretary is not opposed to that area of public expenditure, or to many others. Therefore, I think that we can get away from the sloganised arguments that cuts in public expenditure are good and should be continued almost as something that we take for granted.

I do not think that we should take this for granted for many other reasons, too. For example, the difference between public expenditure and taxation is frequently a very fine one. Indeed, there is very little difference at all. I published in the most recent public expenditure White Paper, in table 16, what are called tax expenditures. The table indicates very clearly that many areas of taxation are very close in their impact on individuals, if not identical in that respect, to public expenditure. One has only to think of pensions and the age allowance, of the child benefits and the child tax allowances that have now been phased out, of housing subsidies and mortgage relief. But, again, it goes much deeper than that. This argument was just not put at all by the right hon. Gentleman.

There may be a case—I concede this, too—for cutting public expenditure in order to bring about higher increases in gas and electricity prices, in rail and bus fares, in school meals and in a whole range of different items. We call these public expenditure cuts, which result in increased prices and charges. However, neither the right hon. Gentleman nor the Chancellor made the case for doing that as opposed to granting tax relief or, rather, doing it in order to provide tax relief.

But the case must be made. It needs to be made if anyone seeks to argue that we should, as a virtual fact of life, take it for granted that there must be income tax cuts and, therefore, there must be public expenditure cuts as well.

I go along with what the right hon. Gentleman said in one of his other points. He said that we may have to live with a situation whereby we have much lower rates of economic growth than we in Britain have known for a long time—and we have known low enough rates over many years. If that is so, the right hon. Gentleman's argument was "You must have income tax cuts. The only way, therefore, you can achieve them is by public expenditure cuts."

One is bound to ask why, because the right hon. Gentleman did not argue it. Why must one say and accept that there is an overwhelming case for poorer and poorer public services in order to make income tax cuts? Why is that case to be taken as read? I do not think that any of my hon. Friends will take it as read. I hope that many Conservative Members will not do so, either.

My hon. Friend the Member for Glasgow, Maryhill (Mr. Craigen), in a very thoughtful speech, made the same point. But whilst that case has not been argued or even discussed by either the Chancellor or the Chief Secretary, the Budget is based on what one might call a sort of blind faith that tax relief of itself will do everything that hon. Members believe is good to do—namely, transform Britain's economic performance. Therefore, the Conservatives make the large income tax cuts, as the Chancellor has done, and pay for this by public expenditure cuts and indirect tax increases.

If it could be shown that doing that would transform our industrial and economic performance, I would be in favour of it, because it is only from an improved industrial performance that ultimately we can improve public services in the way I want to see them improved and improve living standards and net take-home pay.

I want to examine briefly whether there is anything at all in the case that the Chancellor made as the central point in his Budget. As he put it, it is to give a greater opportunity than this country has had for years. Indeed, the Chancellor told us that the whole Budget had been designed primarily to provide that greater opportunity.

I wish to examine in relation to a few salary ranges whether that design will achieve its intended objective and whether this opportunity Budget and these incentives will do what the Chancellor says. Let us take a married man, a senior executive, on £30,000 a year. He will get approximately £4,262 in tax relief. It is possible that that man this morning went to his office and decided to work a lot harder. The hon. Member for Plymouth, Sutton (Mr. Clark) interrupted his hon. Friend the Member for Worthing (Mr. Higgins) to ask how people will respond to this opportunity Budget, and, with great respect, he was not able to answer that question. That particular man might work harder, but equally he might work harder at his golf handicap. That is just as likely.

Let us again take a junior executive on £10,000 a year. He will get tax relief of £348, which is just under £7 a week. Will he work a lot harder? It is possible, but he would be a pretty bad junior executive with poor ambitions if he was not working very hard now, despite the level of tax. It is, therefore, hard to believe that he will be affected by this great opportunity Budget.

Mr. J. Enoch Powell (Down, South)

Has the right hon. Gentleman taken into account another possibility—that if they do work harder they will work worse?

Mr. Barnett

It is funny that the right hon. Gentleman should say that, because I was about to come to that point. Let us now take the man on £5,000 a year. That is said to be the wage of the average worker. If one tells people in my constituency and other areas in the North-West, North-East and elsewhere that the average wage is £100 a week, they will want to do something rather rude. However, let us assume that £5,000 is the average wage. In that case, a married man, presumably a skilled worker or office administrator, will get £165 in tax relief, which is just over £3 a week.

The assumption in this Budget is that that group of men on that salary will work harder. It assumes also that the £3,000-a-year man who will receive £2 a week in tax relief will work a lot harder for that, but he has been told by the Chancellor that it has only been given to him for him to pay his extra VAT. There is no evidence that these people will work harder. The Chief Secretary said last night on television in a programme where we appeared together that there is no evidence that they will work harder. The evidence is that at best it will make a marginal difference. A generalised tax incentive is not what is needed. We need a more personal incentive to the individual or small group of individuals.

Cutting income tax in that way will not work in the manner that the Chancellor envisages. The phrase "working harder" is usually used. The hon. Member for Loughborough said that people will therefore work more overtime. That does not mean that they will work harder. The likelihood is that working more overtime can mean less productivity, and research has shown that to be so. We need more productive output. We do not necessarily need people working more hours' overtime. This country needs people to produce goods more competitively with others abroad. It does not need people working slower during the day in order to get more overtime, so that they work less efficiently at a time when they are tired.

The Chancellor seems to believe that the answer to our problems can be found in an incentive or opportunity Budget. But, to put it no higher, this is unproven. In fact, it is almost certain that it will not be the kind of incentive that the right hon. and learned Gentleman hopes. If that is so, this is indeed a reckless gambler's Budget.

I disagree with my right hon. Friend the Leader of the Opposition. I do not think that this was a reckless Budget in the sense that he described it. I think that it was calculated on the wrong conclusion that it would have the effect that the Chancellor has talked himself into believing it will have. In that sense it was a gambler's Budget that has gone wrong, and it will go wrong for a variety of reasons.

Mr. Lawson

rose—

Mr. Barnett

The hon. Gentleman will have half an hour in which to speak shortly.

Mr. Lawson

I am trying to follow the right hon. Member's argument. Is he telling the House that in his opinion people will work harder if income tax is higher?

Mr. Barnett

I was not saying that, and the hon. Gentleman knows it. But he might be surprised to hear that there are women workers in a factory that I have visited in the North-West who decide how much take-home pay they want each week, and if the tax was reduced they could just as well get it with less work.

Mr. Lawson

rose—

Mr. Barnett

The hon. Gentleman should be a little more relaxed. He has got the job that he wanted. I was trying to make a non-controversial point, yet I still provoked him. God knows what would happen if I got controversial with him. I was trying to show that if this is an incentive Budget and if that is the way in which the Government hope to achieve success, it will not work.

The Government believe that it will work because they believe in cash limits and monetary policies. The Chief Secretary really does believe in this. He believes that it is necessary to cut public expenditure in order to bring the public sector borrowing requirement down and get it down even further in later years. He also believes that this will reduce money supply targets, but he must be among the first to concede that for the first 12 months the reduction is likely to be nil. In his first effort to cut public expenditure the Chancellor was scraping the barrel a bit. He even had to go to the blessed Norman who coughed up some miscellaneous savings on the arts to the tune of about £3 million. One cannot scrape much lower than that.

I have no doubts that there is a fair amount of double counting going on. I give notice that I shall come back to this point. Perhaps the Financial Secretary will tell us something about the economic assumptions relating to shortfall that will have been squeezed by the cuts in public expenditure and by the squeezing of cash limits. The Financial Secretary is always very open in these matters—or at least he was in Opposition, and I assume he still will be.

We are told that the reason for the difficulty was the inheritance from the previous Labour Government. I do not wish to take too much time in discussing that so-called inheritance. I believe that the Chief Secretary recognises that that argument is nonsense. He did not quite put the matter in that way, but that is what he meant.

We have been told that we left the Conservatives with public expenditure out of control. It appears that somebody else drafted the Red Book. We are told in that document: The estimated value of public expenditure in 1978–79 … is close to the forecast made in April 1978. The estimated volume implied by the estimated outturn figure is ½-1 per cent. lower than the projection included in Cmnd. 7439. Therefore, in regard to 1978–79 public expenditure was not out of control.

It will then be said that the period to be considered is 1979–80 because of what happened in respect of pay. It will be said that that is the reason why matters got out of control. That concerns the problem of cash limits. I am obliged to the right hon. Gentleman the Chief Secretary for his tribute to me for what I had done about cash limits. I know that some of my Labour colleagues would not pay such a fine tribute on that subject, because they do not quite understand how the system of cash limits works. They think that it is another means of cutting public expenditure. The fact is that if one spends more money on one thing, one has less to spend on something else. That certainly applies unless one prints the money. If one has to pay more because of much higher increases in pay, something has got to give.

There are difficulties about the purist theories of the Chief Secretary and the Chancellor of the Exchequer. The Chancellor has always exaggerated the extent to which cash limits can be used as a substitution for pay policy. Let me give an example. If one sets the cash limits for pay at 7 per cent., for example, and the RPI is running at 17 per cent., one has two options to put to the trade unions with which one is negotiating. One can say to the unions that they can settle for 7 per cent. and take a substantial cut in their living standards or, on the basis that both sides believe in free collective bargaining plus a comparability commission, it can be said that the Government as the employer will pay 17 per cent. However, that Government will have to take the view that it will need to cut the size of the labour force by 10 per cent. The trade unions will be told that they can choose which course they want to follow.

It may be possible to negotiate in that way. Indeed, it is possible that the trade union movement, as the moderate organisation it is, will say "That is an excellent idea. We shall choose one of those options." But it is possible that it will choose another option which will be less attractive to the Government, and also to me. I do not want to see this country going back to the industrial disputes of the kind we experienced last winter, or anything worse than that situation. Unfortunately, what the present Government have done is to provoke even the most moderate trade union leaders to be pushed by their members to accept neither of the two options open to the Government in fixing cash limits.

On the subject of cash limits and the inheritance which the present Government say they have to bear, what is the difference in their policy on cash limits compared to earlier periods? They have said that they are increasing the cash limits for the Armed Forces, the doctors, the dentists and the police. In regard to prices, the cash limits are to be kept at the figures we proposed. Our view on the subject of pay in the public sector was that there would be at least a squeeze of 2 per cent. The Government are bringing about a massive change because the squeeze is to be 3 per cent. Perhaps the Financial Secretary will say what will be the exclusions from that squeeze. Will it relate to everybody across the board—the DHSS, the Inland Revenue, Customs and Excise—with everybody being squeezed by a figure of 3 per cent.? Are there to be no exceptions?

In regard to local authorities, there has been a fair amount of bleating from the new Secretary of State for the Environment. There have been attempts to browbeat local authorities. The right hon. Gentleman may have some effect in later years. I suppose that he is enough to frighten anybody, but the likelihood is that in regard to 1979–80 the effect of cash limits and of the borrowing requirement in respect of local authorities will be minimal. Most local authority treasurers, as cautious people, will have sufficient in their balances to ensure that they will be able to manage without cuts and without the £335 million reduction which is to be made by the Chancellor. The Government's cash limit policy is little different—if at all different—from the one which they inherited. Therefore, I cannot understand what they have been complaining about.

The Budget will bring about a rise in unemployment and in flation and a fal lin GDP, private sector investment, manufacturing production and public corporation fixed investment. The borrowing requirement will be broadly what we set as our target. We are told that there are margins of error in the Red Book—it is a margin of error Budget. However, it is more than that, it is a naive Budget—believing all that the Conservatives have said in the past—and it is a provocative Budget. I fear that the margin of error is such that before long the country will pay a heavy price.

9.30 p.m.

The Financial Secretary to the Treasury (Mr. Nigel Lawson)

The right hon. Member for Heywood and Royton (Mr. Barnett) said that this was his swan song. I am not sure where he is going—whether to his lucrative practice in the North-West of England or merely to the Benches below the Gangway. By contrast, this is my ministerial maiden. However, it is a happy fact that the right hon. Gentleman and I are making our special contributions in the same debate, after all the debates in which we have been, both upstairs and down, by day and by night—particularly by night—in the past.

The right hon. Gentleman began and ended his speech by accusing Ministers of believing in their own policies. I plead guilty to that accusation. The hon. Member for Birmingham, Perry Barr (Mr. Rooker) made a sedentary interruption to the effect that he wished that the Labour Ministers had believed in their policies. He had a good point. The right hon. Gentleman was a good Chief Secretary. I say that here and I have said it in the past. However, he has suffered from one considerable defect. He has not merely lost some of the battles in the Cabinet that he should have won—we can forgive him for that—but he has exhibited a cynicism and hypocrisy which detracted from the qualities which he undoubtedly possesses. I believe that he showed that cynicism and hypocrisy particularly in the section of his speech concerning the cuts in income tax.

The reason why I intervened was that it seemed, to my astonishment, that he was saying that an increase in income tax would be a bigger incentive to work than a cut. He admitted as much. He knows that is not true. I should like to quote two recent extracts from his contributions to this controversy. On 3 March 1977 he said: There is ample anecdotal evidence about the disincentive of personal levels of taxation. I am under no illusion about that, even though one does not always get the hard evidence and the facts. I have seen several surveys and they do not provide hard evidence. However, I am not saying that, just because they are not always crystal clear in their evidence, there is no disincentive. We recognise that, in many instances, there is."—[Official Report, 3 March 1977; Vol. 927, c. 668.] Only a few months ago he went further than that on television when he said: Where we are taxed pretty heavily is in direct taxation and particularly on the margins at the lowest and highest levels, and that is where we have got to make some changes. We made a start, I hope we can do a lot more —not only a little more, a lot more. That is what we have now done. Yet the right hon. Gentleman does not have the honesty to congratulate my right hon. and learned Friend on doing precisely what he was saying only a few months ago needed to be done. He has conceded that it would produce the necessary incentive. Yet the right hon. Gentleman now comes to the House displaying the cynicism and hypocrisy which has marred his otherwise good record as Chief Secretary.

I should like to congratulate the seven maiden speakers who took part in the debate, especially my hon. Friends the Members for Fareham (Mr. Lloyd), Huntingdonshire (Mr. Major) and Loughborough (Mr. Dorrell). I particularly welcome a fellow Leicestershire Member, and my hon. Friend the Member for Loughborough had an outstanding victory at the general election. I also congratulate the hon. Members for Kettering (Mr. Homewood), Bishop Auckland (Mr. Foster) and Blackburn (Mr. Straw).

All those hon. Members made impressive speeches and spoke with great sincerity. It also turned out that, by the greatest of good fortune, each of them happened, by chance, to have been chosen to represent the most idyllic constituency in the United Kingdom. I hope that we shall hear a great deal from them all in future.

We also had a characteristically powerful contribution from my right hon. and learned Friend the Member for Hexham (Mr. Rippon), who argued the case for the publication in parallel with the retail price index of a cost of living or standard of living index which took account of changes in income tax. There is a strong case for that, provided that the index could be put on a sound statistical basis. It is certainly something which we are looking at.

My right hon. and learned Friend also had some interesting reflections on the control of public expenditure which I am sure my right hon. Friend the Chief Secretary, who was in the Chamber at the time, will have carefully noted.

The hon. Member for Colne Valley (Mr. Wainwright) spoke for the Liberal Party. I can commend him on one thing. He repeated all the economic fantasies of John Pardoe—but at much shorter length. In the context of VAT, the hon. Gentleman asked me what was meant by a "once and for all" increase. It means two things. First, contrary to the hon. Member, who wishes to see VAT going up, ever onwards, to higher levels, we believe that 15 per cent. is the sensible and right rate.

The expression also means that there is a great distinction between a once and for all shift in taxation, which has an immediate impact on the retail price index, though no long-term impact, and the process of inflation which is a continuing process in which prices are going up week in, week out, month in, month out, year in, year out. That is the distinction between a once and for all switch in taxation and continuing the process of inflation.

Mr. Richard Wainwright

I am obliged for the hon. Gentleman's two interpretations of that phrase. I understand what he said about a temporary addition to the retail price index, but is he really saying that the Government regard this year's increase in VAT as the finish for this Parliament of additions to VAT in order to reduce direct taxation?

Mr. Lawson

We have no intention of further increasing VAT, but all such decisions have to be made by my right hon. and learned Friend the Chancellor of the Exchequer in the light of the economic situation at the time.

Dr. Bray

Is not the usual phrase "no present intention" of making further increases?

Mr. Rooker

The Financial Secretary did not say that. Do not give him a get-out.

Mr. Lawson

If the hon. Member for Motherwell and Wishaw (Dr. Bray) cares to consult a dictionary, he will see that there is no material difference between the two phrases. However, I believe that it is as well to get away from cliches whenever one can.

My hon. Friend the Member for Worthing (Mr. Higgins) made a thoughtful speech and asked about the interaction between cash limits and public sector pay. The right hon. Member for Heywood and Royton also asked me that question. The position is that the policy was outlined by my right hon. and learned Friend in the debate on the Loyal Address and in the Budget Statement. The cash limits will reflect pay settlements reached, including the Armed Forces pay award. However, the cash limits on Departments and fringe bodies will be set to ensure that economies of 3 per cent. on Civil Service manpower costs are achieved this year on the lines announced by my hon. Friend the Minister of State, Civil Service Department. My hon. Friend also asked whether they had been published. The answer is that they have not yet been published but will be announced to the House shortly

Mr. Joel Barnett

When they are, will they perhaps at least add up? The Chancellor referred to a few different elements of the cash limits and then talked about the effect of the cash limit policy as being about £1 billion at 1979 survey prices."—[Official Report, 12 June 1979; Vol. 968, c. 246.] Will the hon. Gentleman be showing how that £1 billion is made up?

Mr. Lawson

I can assure the right hon. Gentleman that when the cash limits are published they will add up.

Mr. Higgins

I am glad to know that the figures will be published in future, but my hon. Friend has not quite answered my first question. It may be that he will not wish to do so now. Perhaps my right hon. and learned Friend the Chancellor will answer it in winding up at the end of the Budget debates. What I asked was whether we could have a categorical assurance once the cash limits had been set, if the level of pay claims and settlements was then higher than that assumed when setting the limits, that there would be a 100 per cent. offset within that same sector covered by the cash limits to compensate for that.

Mr. Lawson

My hon. Friend is quite right to stress the importance of cash limits being a constraint on pay rather than pay simply determining cash limits. On the precise formula, I advise my hon. Friend to wait, not very long, until the cash limits are published and the announcement is made to the House.

The hon. Member for Motherwell and Wishaw made a speech which in many ways was commendatory of the Budget, even though he had a fundamental disagreement with it. He asked whether the financial sector of the Treasury model would be made available. It is certainly my hope that it will be made available well in time for him to do his sums before the next Budget, even though it has not been available in time for this Budget. But I am not at all sure that it will help him a great deal. This is in no sense a derogatory remark about the Treasury model, or any other model, but the idea that somehow one can steer the economy by computer is a fantasy which only the hon. Gentleman believes.

The hon. Member also seemed to think that there was a secret weapon in devaluation. As he knows, I have never believed that it should be a prime purpose of economic policy artificially to hold up the exchange rate. I think that a big mistake was made by the Labour Government of 1964 to 1970 in this direction. However, that is not to say that salvation will be gained—I do not believe this for a moment—by deliberate depression of the exchange rate.

Mr. Denzil Davies

That is a very interesting point on devaluation. Would the hon. Gentleman then say that the present Government would not agree to any stepped devaluation of the pound to bring it into the European monetary system?

Mr. Lawson

I am glad that the right hon. Gentleman has intervened at this late stage in the debate, as he is a former Treasury Minister. We shall be making a statement on whether we intend to join the European monetary system in due course, and certainly, I would hope, by September.

I come now to the two other participants in our debate, Batman and Robin—the right hon. Member for Leeds, East (Mr. Healey) and the right hon. Member for Heywood and Royton.

Incidentally, I should inform the House that the right hon. Member for Leeds, East had the courtesy to inform me that unfortunately he would not be able to be here for the final speeches because he had a television engagement, which I am sure we all understand. He has his own battle for the Labour Party leadership to win.

Mr. Rooker

There are no votes on the telly.

Mr. Lawson

That is very extraordinary. The amount of time and trouble that both parties—I make no party point—have taken on television programmes in the election campaign hardly bears out the theory that there are no votes in television, although the hon. Gentleman may be right, because nobody knows.

The right hon. Member for Leeds, East said that the Budget was too deflationary. That was one of his main accusations. Since the right hon. Member for Leeds, East is not in his place, I ask the right hon. Member for Heywood and Royton what he would have done. Would he have had a bigger public sector borrowing requirement? Perhaps the right hon. Gentleman, who is usually so talkative, would like to answer. Evidently, he is now quiet and is not prepared to tell the House. Would he have had a higher target rate of growth for sterling M3? Evidently not. But if he would not have had a higher public sector borrowing requirement or a higher target rate for monetary growth—in other words, if he applauds those two key elements of the Budget strategy—he is endorsing the Budget strategy, as the hon. Member for Motherwell and Wishaw pointed out, and in fact there is no way in which he could say that his Budget, if he had introduced one, would be any less deflationary, as he calls it, than this Budget. In fact, this is not a deflationary Budget. It is a Budget designed to counter the inflationary trends already rampant in the economy.

Dr. Bray

With respect to my right hon. Friends, the hon. Gentleman should surely accept the fact that the burden of their attack has not been on the monetary aspects of the Budget but on the tax switch aspects, with the very big inflationary effects that they are having.

Mr. Lawson

I will come to that. I are sure that the hon. Member will agree that a main indicator of the stance of a Budget is its relationship with the PSBR, the change in the PSBR and the relationship between the money supply and the growth of money gross domestic product, which is something which right hon. Members opposite, when in Government, have frequently made plain.

One of the arguments of the right hon. Member for Leeds, East was that the problem will be wage restraint. I agree that there is a very heavy responsibility on right hon. and hon. Members opposite who have been in Government to maintain the attitude that they had when in Government and not suddenly, in an opportunistic way, to change, as they did when in Opposition before, and go around trying to stir up every extremist trade unionist that there is. The right hon. Member for Leeds, East said that the Government could not expect wage restraint because we have trampled on the susceptibilities of the TUC. I would like to quote another extract—my right hon. Friend quoted one earlier—from the excellent lecture given by Mr. Edmund Dell, a former Minister in the last Labour Cabinet, at the London School of Economics earlier this year. As his verdict on the performance of the last Government, Mr. Dell said: The trouble in the end was that too high a price was paid for whatever the leaders of the TUC could deliver. As policy was supposed to be in the interests of the country as a whole, including members of trade unions, it was not clear why in principle any price should be paid. At times, it seemed that nothing could be done without consultation with the TUC. That is a fair comment. The policies we are putting forward are policies which are in the interests of every member of every trade union. That is why more trade unionists than ever before voted for us. It would be foolish in the extreme to indulge in policies that would not bring economic success simply because they may be policies sought from time to time by leaders of the TUC.

The former Chancellor—I am glad to see him in his place now—also made great play of the fact that my right hon. and learned Friend the Chancellor of the Exchequer did not commit himself to future figures for the PSBR beyond the current year or to future figures for the money supply. This shows a great misapprehension. The Chancellor said in his Budget Statement: We are committed to the progressive reduction of the rate of growth of the money supply. In the context of a reduction in the public sector borrowing requirement and the public sector financial deficit, he also said: These are important steps in the right direction. I intend to continue along that path in the years ahead."—[Official Report, 12 June 1979; Vol. 968, c. 242–43.] Both of these are commitments. The fact that there are not numbers attached to them does not make them any less commitments. The possibility of the publication of figures in the future for future years has by no means been ruled out.

I come now to the income tax cuts which were the central feature of the Budget and about which hon. Gentlemen opposite complained so much. This is the most arrant hypocrisy. I quoted remarks by the right hon. Member for Heywood and Royton earlier. I would also like to quote the former right hon. Member for Manchester, Central, Mr. Harold Lever, ennobled by the ex-Prime Minister in his Dissolution Honours List for his sagacity. He said last year: I do not deny that there has to be a move to make our tax rates, especially on earnings, comparable with what our rivals or our friendly partners on the Continent have in the way of tax rates. The 83 per cent. rate"— he specified the top rate— is too high and has to come down as soon as we can possibly bring it down. That is the view that Labour held in Government. It is cynicism and hypocrisy of the lowest order to pretend now that they had said nothing of the sort and that the income tax cuts do not form part of an essential economic strategy for this country.

I come now to Government spending—

Mr. Tam Dalyell (West Lothian)

rose—

Mr. Lawson

I regret I have not time to give way again.

In this Budget, we have cut Government expenditure this year by £4 billion, or, if one does not include the £1 billion of disposals, by £3 billion. That has again been attacked by right hon. and hon. Members opposite. Let me quote another example—I know the right hon. Gentleman does not like it—of the hypocrisy of the right hon. Member for Heywood and Royton. This is what he said to his friends in the Chartered Institute of Public Finance and Accountancy in November 1976: Our public expenditure has grown faster than our rate of economic growth could sustain. I also believe that this has been an important reason for our generally poor industrial performance, for it has meant that the public sector—that is, both central and local government—has pre-empted financial and manpower resources at the expense of manufacturing industry. That position has to be reversed. It will be both painful and difficult. Prospective levels of public expenditure are higher now than they were in 1976, so it is as necessary to reduce them now as it was then.

My right hon. Friend the Chief Secretary set out our policies today and there is no case for the right hon. Member for Heywood and Royton to say now that this should not be done. He himself acknowledged the need. However, he also said that it was not merely painful and difficult but impossible to do it once a year had begun. Yet that is what we have done.

We have also reduced the public sector borrowing requirement and the public sector financial deficit. It has not been generally recognised how big a step the Chancellor has made with the public sector financial deficit, and against a most unpromising backcloth. He has reduced the deficit, on the figures forecast, to 3¾ per cent. of GDP. Throughout the period of the last Government, the deficit averaged 5¾ per cent. of GDP and at no time did it ever fall below 4 per cent.—which it reached only following the IMF-induced cuts which the right hon. Gentleman was mumbling about earlier.

My right hon. and learned Friend has achieved a much better balance between fiscal and monetary stringency than has been struck for many years—and certainly better than at any time during the last Government.

There have been criticisms of the Budget on the grounds of short-term demand management. But this is not a Budget about short-term demand management. It is about the long-term measures needed to improve the performance of the supply side of the economy.

It is a historic Budget, a Budget which includes the biggest income tax cuts ever made in a Budget. It is back to the levels of 1973–74 in one step—and it is only the first step. If the talented decide to leave our shores now, it is more likely to be on account of the weather.

There is, of course, a strict limit to what any Budget can do, and the improvements we seek to make will not happen immediately. We do not pretend that they will happen immediately. That is why the short-term forecast in the Red Book is not what the Opposition should be focusing on. It is the obsession with the short term which has been the bugbear of economic management in recent years. I am confident that this Budget provides the only chance in the long term of building the better and stronger economy that we wish to see.

Mr. Joel Barnett

How long?

Mr. Lawson

I do not know how long, but I am confident that there will be, during the lifetime of this Parliament, increasing evidence of the benefits that come from the tax cuts and other measures in this historic Budget. There is no case for cynicism or scepticism now. We have carried out what we said we would carry out, and that is why Labour Members are so discomfited. They never expected that we would carry out the promises that we made. Now, because they are so bemused, they have said "It will have no effect." This is despite the fact that they themselves, as I have quoted, time and time again said that this was needed, but they did not have the courage to do it.

Now it has been done, and if they are genuinely interested in the economic health, progress and prosperity of this country, I hope that they will support us and that they will encourage their friends in the trade union movement to recognise the benefits for them in this policy. If they do not—if they go whoring after every wild or extreme trade union leader, whoever he may be—there will be no votes in it for them. The country has had enough of it, and it will do them no good electorally. They should therefore share our hope for the fortunes and success of this country and for the success of this Budget.

It being Ten o'clock, the debate stood adjourned.

Debate to be resumed tomorrow.