Economic Policy

HC Deb 24 November 1980 vol 994 cc205-20 3.33 pm

The Chancellor of the Exchequer (Sir Geoffrey Howe)

With permission, Mr. Speaker, I wish to make a statement affecting both revenue and expenditure in the coming financial year.

I am today publishing the economic forecast that is required by the 1975 Industry Act. I said in my Budget speech that I would consider this autumn the roll-over of the monetary target of 7 to 11 per cent. growth at an annual rate set for the period from February 1980 to next April. I have done so in the light of monetary developments and developments in the economy generally.

Inflation is now falling rapidly. But monetary growth is likely to exceed the target. Recent statistics have, of course, been bedevilled by distortions apparent since the abolition of the corset imposed by the previous Administration. The excess will certainly be less than the figures so far suggest. There are signs that bank lending is now starting to slow down. And, as the public sector moves into surplus in the new year, I expect monetary growth to slow down in the rest of the target period.

The existing monetary target continues until April 1981. I do not propose today to extend the target period beyond that date, but I shall announce a new target in the Budget. The Budget will be designed to ensure that the thrust of the medium-term financial strategy is maintained.

The Treasury and the Bank of England have completed the consultations arising from the Green Paper on methods of monetary control published last March. As a result, between now and the Budget a number of improvements will be set in hand.

First, detailed consideration of new prudential arrangements for the banks will be brought to a conclusion so that the reserve asset ratio, which has complicated monetary control, can be phased out.

Secondly, the Bank of England will develop changes in its open market operations and last-resort lending in ways that will allow the market a greater role in the determination of the structure of short-term interest rates.

Thirdly, we are considering the future of the clearing banks' cash ratio and also collecting and publishing an additional series for banking retail deposits. These steps are desirable in their own right. They would be consistent with a gradual evolution towards a monetary base system and will help us to judge how far such a system would contribute towards our medium-term monetary objectives.

I shall take further steps to mobilise directly a larger share of personal savings. I shall, in particular, extend the eligibility for index-linked certificates so as to attract a total of not less than £3 billion of new money into national savings next year.

As the House already knows, the unadjusted figure for the PSBR in the first half of this financial year was about £8½ billion. I expect a much lower figure for the second half of the year. But it could be around £11½ billion for the year as a whole. Over half the increase is attributable to the recession being deeper than expected. I now expect the volume of expenditure this year to be some 1½ per cent. higher than expected at the time of the last White Paper, once again very largely because of the effects of the recession. If any excesses emerge over this year's cash limits, such overspending will be fully offset by reductions in the corresponding cash limits for 1981–82.

Spending on unemployment and other benefits will be higher next year than allowed for in the White Paper of last March. The effect of the recession on trading conditions is similarly reflected in the external financing limits for the nationalised industries for 1981–82, which, excluding steel, are being announced separately today. These provide £620 million more than in the March White Paper. Even so, these industries are being required to secure substantial economies totalling more than £¾ billion. These amounts, and the other public expenditure changes that I shall mention, are in the 1980 survey prices at which the decisions have been taken — that is, broadly the prices of a year ago.

My right hon. Friend the Secretary of State for Employment last week announced extensions of the special employment measures. The Government have also decided to increase the provision for selective assistance for investment and support for industrial research and development. Next year the additional costs of these two measures will be £245 million and £50 million respectively.

Part of these increases will be balanced by the substantial reduction in our net contribution to the European Community budget as a result of the agreement negotiated on 30 May. We now expect our refunds next year to be some £650 million.

In order further to offset upward pressures on expenditure, we are making cuts in the volume provision for the majority of spending programmes. Our aim is to keep the planning total for the volume of public expenditure in 1981–82 about 1 per cent. below the outturn now expected for the current year.

I should mention some of the main changes. The scale of defence expenditure is such that we must make some adjustment. Planned expenditure in 1981–82 will be £200 million less than allowed for in the March White Paper. Defence expenditure grew by 3 per cent. in 1979–80. It is now expected to grow by some 2½ per cent. both this year and next.

For local authority current spending next year, we shall be seeking a reduction of about 3 per cent. in volume compared with the level we planned for this year. We also propose to calculate the rate support grant on the basis of providing a lower percentage of the reduced volume than the 61 per cent. — for England and Wales— in recent RSG settlements. My right hon. friends the Secretaries of State for the Environment, Scotland and Wales will be consulting their local authority associations on these proposals before the RSG settlements next month.

During 1980, prices have increased less than we allowed for when we decided on the uprating of social security benefits for this November. This will mean some increase in the real value of benefits. Subject to the necessary legislation, this over-provision, at present estimated at one percentage point, will be deducted from the 1981 uprating. This will maintain the real value of the retirement pension. Public service pensions will be treated in the same way. Any further action on index-linked public sector pensions will follow the report of the Scott inquiry, which is expected next month. We have also decided that the earnings limit for retirement pensioners will remain unchanged. A decision on child benefit uprating will be taken at the time of the Budget.

In addition to a number of other specific reductions, cash-limited Government spending programmes, except health, are being cut by 2 percent. The total savings from all these reductions are over £1 billion next year.

I shall be publishing in the Official Report and making available in the Vote Office now a summary of the effect on expenditure programmes in 1981–82 of these decisions. Further details of the changes for the years to 1983–84 will be set out in the public expenditure White Paper to be published at the time of the Budget.

We must also restrict the cost, and so the cash requirements, of the public sector. The cost of public expenditure programmes is as important as volume. It is essential to our fiscal policy, and also entirely fair, to look in the corning year for a much lower growth in public service earnings than in the recent past. It has already been announced that the rate support grant limit will allow for a 6 per cent. annual increase in earnings from due settlement dates in the current pay round. It will provide for an increase in prices other than pay of 11 per cent. between the average levels for 1980–81 and 1981–82. Expenditure in other parts of the public services will be subject to broadly the same financial disciplines.

I have also been giving consideration to the revenue requirements for financing next year's expenditure. I am determined that the public sector borrowing requirement in 1981–82 should be consistent with the Government's medium-term economic strategy and the need to ease the burden of adjustment at present falling on industry. The main fiscal decisions must await my Budget. But I have already announced proposals for a new scheme of stock relief. This largely removes from continuing businesses the threat of tax clawback and holds out the prospect of significant relief for companies and the self-employed.

If we are to secure a full financial year's revenue, given the lead times involved, some other decisions are necessary now. That is why this is regularly the time of year for reviewing and announcing changes in national insurance contributions. We have concluded that an increase in employees' contributions would be appropriate. Full details of the changes, and their effects on the national insurance fund, are set out in the Government Actuary's report, to be published tomorrow.

In the first place, we propose that employees' contributions should be increased next year by ¼ per cent., which the Government Actuary's calculations show would be needed to keep the fund in balance, while meeting larger demands for benefits.

Secondly, in order to maintain the planned level of health services, we propose that the health element of the national insurance contribution should be increased, again for employees, by a further ¼ per cent.

Thirdly, the fund at present receives a substantial contribution from the general taxpayer through the Treasury supplement. In addition, the whole cost of noncontributory benefits also falls on the general taxpayer. In these circumstances, it is right that those in work should shoulder directly a larger share of the cost of contributory benefits. We propose, therefore, to reduce the Treasury supplement to the fund from 18 percent. to 14½ per cent. This will be offset by a further increase in the employees' rate of ½ per cent.

The combined effect of these changes will increase the employees' rate of national insurance contributions from 1 April 1981, on earnings between £27 per week and £200 per week, from 6¾ per cent. to 7¾ per cent. The additional contribution income will be about £1 billion in 1981–82. Other rates and levels, including those for the self-employed, will also change. Having regard, however, to the financial pressures on industry and the way in which the employers' share has grown in recent years, employers' contribution rates—including the surcharge — will remain unchanged. My right hon. Friend the Secretary of State for Social Services will introduce the necessary legislation.

Since March there has been time to assess more fully the implications of the steep rise in the price of oil since 1978. This has been on as large a scale as that in 1973–74. The Government have concluded that there is scope for a further increase in oil taxation.

Petroleum revenue tax—because of the way reliefs are structured—does not provide an adequate means of obtaining further revenue. I shall, therefore, introduce in the next Finance Bill a supplementary tax to be paid in addition to PRT, to take effect from the beginning of next year. Present indications for the new tax point towards a rate of 20 per cent. on gross revenue less an allowance. It will apply to fields that are in production whether or not they are yet liable to PRT. It will be deductible in calculating petroleum revenue tax and corporation tax. The Inland Revenue is setting out further details in a press notice and will be inviting the industry to hold immediate consultations with it.

We are also examining the scheme of PRT reliefs, and any changes, which will take effect from the same date, will be included in the next Finance Bill.

I am confident that none of these changes will deprive companies of a fair return on their North Sea projects and exploration. They will together yield around £1 billion in 1981–82, mostly from the new tax.

The changes that I have announced should leave no room for doubt about my determination to control the PSBR so as to lighten the burden on the private sector. The growth in sterling M3 and the wider monetary aggregates is expected to decline in the new year and the narrower aggregates have been growing slowly. Inflation has come down appreciably and is well below the current level of short-term interest rates. In agreement with the Governor of the Bank of England, I have therefore concluded that some reduction in these rates is possible. Accordingly, the Bank of England, with my approval, is this afternoon announcing a reduction in minimum lending rate of two percentage points.

Mr Denis Healey (Leeds, East)

I start by thanking the Chancellor of the Exchequer for confirming the press leaks about his mini-Budget. I do not think that there was a single announcement that he made this afternoon, other than the reduction in minimum lending rate, that was not contained in newspapers over the last two or three days. I remind the right hon. and learned Gentleman that this is the fifth package of economic measures that he has introduced in less than 18 months.

Does not the right hon. and learned Gentleman feel it a little ironic that he has chosen as the day for making this announcement a Monday on which the Welfare State is suffering the greatest blow that it has suffered since the war, through big cuts in the real value of benefit increases introduced today, and a Monday on which the CBI is reporting the grimmest prospects for British industry since the great slump of the 1930s and when 78 per cent. of firms have said that they are now working below capacity? The right hon. and learned Gentleman has chosen this date to inflict further brutal blows on the Welfare State and to drive Britain further into depression.

We shall want to discuss some of the details of the Chancellor's statement in the debate on Thursday. However, I am interested to see that he has now confirmed that all the foundations of his economic policy are in ruins and that the money supply and the PSBR have been rising in the last six months at twice the rate he had planned for them.

I see from the forecast that the right hon. and learned Gentleman has just made available in the Vote Office that he expects output to have fallen by up to 6 per cent. in the two years to April 1982 instead of rising by 5 per cent. as it did during the years when the Labour Party was in power. Is he aware that this fall of 10 per cent. over two years in what should have been our rate of growth will by itself add £10,000 million to the public sector borrowing requirement? Why is he now allowing the automatic stabiliser, represented by this natural increase in the PSBR, to come to the help of the British economy as the Financial Secretary to the Treasury suggested should be done in a speech earlier this year?

We gather from the Chancellor's statement this afternoon that he is prepared to accept a PSBR this year £3 billion higher than he told us he was planning only six months ago. Why is he not prepared to allow another £7 billion to be added to the PSBR in the coming year? What gain does he feel he will get even to the PSBR from the decisions that he has announced this afternoon? How many more men and women will be added to the dole queues as a direct result of the measures that he has announced? What will be the cost to the PSBR in the coming year in terms of lost revenue and increased benefit?

We gather that the Government Actuary is to announce tomorrow his expectation about the increase in unemployment over the next 12 months. This is a figure that has been widely quoted in the newspapers— no doubt to be confirmed tomorrow—of 2.7 million men and women. The assumption made by the Actuary last year has turned out to be 500,000 too low. Are there any grounds, after this statement, for not believing that the level of unemployment in 12 months' time will be well over 3 million?

The Opposition welcome the Chancellor's announcement that he will put a tax on the windfall profits of the oil companies, although we do not welcome the fact that he will use all the revenue that he derives from North Sea oil in the coming year to finance unnecessary levels of unemployment. Why is he not announcing today a windfall tax on the profits of the clearing banks, which, owing to the record interest rates of the last 12 months, have profits which are absolutely obscene in a situation in which British industry is suffering as it is?

How does the Chancellor justify the massive breach of the Government's promises on personal taxation involved in the announcement that he has made? The national insurance increases are equivalent to an increase of well over 1p in the standard rate of income tax, but they are highly regressive by comparison with an increase in the standard rate of income tax. How on earth can the Chancellor justify loading £1,000 million of extra taxation on people earning up to £200 a week when the value of the benefits that they are intended to finance is being cut by this Government and not increased?

Is the Chancellor aware that, contrary to what he suggested, his statement involves massive new burdens on British industry? The cut in the rate support grant, we are told, will involve increases in local authority rates of 25 per cent., on average, during the next 12 months. The cuts in public expenditure will involve substantial further increases in the prices charged by nationalised industry for its products—and this at a time when the decision to make the employer responsible for the first eight weeks of sickness pay is in itself another £400 million on to British industry.

Above all, how does the right hon. and learned Gentleman justify this savage attack on the Welfare State? I must ask how the right hon. Lady, whom we are glad to see joining the right hon. and learned Gentleman at this moment, can reconcile the swindling of old-age pensioners next year out of 1 per cent. of the increase to which they are entitled with the many statements that she made during the general election campaign which, when quoted to her in the Cabinet, we are told, turned her puce?

Can the Chancellor of the Exchequer confirm what seems to be the implication of his statement that, after cuts of 2 per cent. in every aspect of public expenditure except health, public expenditure next year will be 1½ per cent. higher than he planned in the statement that he made at the time of the last Budget?

We welcome the fact that the minimum lending rate has been cut by 2 per cent. It should have been cut by 4 per cent. many months ago. We gather that the main purpose of the statement that the Chancellor made today has been to persuade the City of London that this cut in minimum lending rate is justified, although nothing in the Government's monetary performance can justify it under the Government's own criteria. We are told that the whole purpose of the Government's economic policy is to affect expectations. Can any rational person, after listening to the statement this afternoon, have any expectations of this Government other than that they will break every promise, miss every target, fail in every undertaking and, in so doing, bring catastrophe to the British economy and ruin to the Welfare State?

Sir Geoffrey Howe

The right hon. Gentleman has wholly misunderstood the nature of my statement and has uttered some characteristically imprudent observations about it. As the whole House must understand, this country, like every other large industrial society, is having to grapple with a major industrial recession that is impeding the growth of almost every other industrial economy. In those circumstances, it is inevitable that unemployment should be rising, as it has, from the very high levels that we inherited from the last Government. It is right that in those circumstances adjustments should be made in the burden of financing unemployment benefits. It is right that those who remain in employment should be invited to bear a percentage of that cost by the increase that I have described in national insurance contributions.

The right hon. Gentleman is wholly wrong when he says that my right hon. Friend's pledge to the pensioners is not being kept to the full. I have made clear that the real value of the pension is being maintained. It is entirely necessary and right, when we contemplate the growing share of welfare benefits as part of this country's spending, to take steps to see that this growth does not outstrip the resources of the productive economy. It is right that, in that respect as in every other of my statements, we should take steps to balance the burden being imposed by the public sector on the productive sector so that the productive sector is able to expand as it should.

The right hon. Gentleman suggested that our policies were in ruins. He chose to cite the CBI in support of that assertion. He may not have noticed that the CBI report makes a number of things clear—that the fall in output that has been taking place is slowing down and, as the forecast makes clear, is likely to be bottoming out shortly and that the level of pay settlements being arrived at in the private sector has come down sharply, as is right

The CBI document also makes clar that the level of inflation is now coming down very sharply, as I made clear in my statement. At a six-monthly rate, it is now running below 10 per cent., very much below the rate we inherited from the last Administration. In those circumstances, it is entirely right that I should have announced the other measures that I have outlined to the House.

The right hon. Gentleman spoke for a moment about the extent to which I should be wise to take his advice in reacting to the automatic stabiliser. If the House is to take the right hon. Gentleman's credentials seriously and believe that the advice of the Labour Party, of which he is deputy leader, is that the public sector borrowing requirement next year should rise to about £18 billion at the same time as minimum lending rate is cut by 4 per cent., the House has the final condemnation of the right hon. Gentleman's irresponsibility as a financial spokesman.

Several Hon. Members rose—

Mr. Speaker

The House is aware that it will have an opportunity in the course of this week to debate the Chancellor's statement. In order to be fair to the House, including the hon. Members who wish to take part in the debate on defence and foreign affairs, I shall allow half an hour for questions to the Chancellor of the Exchequer. If hon. Members' questions are brief, that ought to cover everyone.

Mr. J. Enoch Powell (Down, South)

Without inviting the Chancellor of the Exchequer to anticipate further than he has done his next Budget, may I ask whether he is aware that he will need a massive further increase in general taxation if he is to relieve the continuing burden on industry from the still high interest rate without risking the prospects of a recurrence of inflation at levels that we have not yet known?

Sir Geoffrey Howe

I am aware of the necessity, when the time comes to formulate my Budget next year, of ensuring that the public sector borrowing requirement is consistent with our medium-term financial strategy and with lightening the load that would otherwise unfairly rest upon industry.

Mr. Terence Higgins (Worthing)

As timing is vital and a cut in public sector borrowing is a necessary precondition of a cut in MLR, can my right hon. and learned Friend tell the House which of his measures will affect borrowing this year, as against next year? In particular, can he say why the increases in expenditure are to be offset by a reduction in the EEC budget when Ave were told that that was to be used to reduce the public sector borrowing requirement? Given the importance of cutting public expenditure and public borrowing this year, will my right hon. and learned Friend consider using the regulator, particularly on cigarettes and tobacco?

Sir Geoffrey Howe

I identified the money to be received from the EEC budget as making a contribution to the reduction of the PSBR next year of about £650 million, as was intended. The measures that I have announced are not designed to affect borrowing or spending in the current year, but we remain resolutely determined to enforce the cash limits that have been imposed and to make sure that any overspending within the limits is recouped from spending next year. I have considered my right hon. Friend's suggestion about the use of the regulator but I have judged that the contribution that it could make in the current financial year, even if it were right to think of using it, is not sufficient to justify its use at this stage.

Mr. Richard Wainwright (Colne Valley)

Does the right hon. and learned Gentleman realise that the sharp right-angle turn that he has confirmed forces the dwindling numbers at work to pay more and more national insurance tax in return for less and less benefit? Is he aware that the national insurance tax, which is not a matter of invitation, is the most regressive, cruel, primitive and. crude tax that could be imagined? If he must break his election promises about direct taxation, he should do so in a less obviously uncivilised way. Does the right hon. and learned Gentleman realise that the increase in the national insurance tax is not called for by the National Insurance Acts and that he is wrong to imply that he has a duty next year to increase contributions to keep the fund in balance? Does he not know that the Comptroller and Auditor General has made plain that it is only in the longer term that the level of the fund has to bear a relationship to the demands upon it?

As for the whole scope of the Budget that the right hon. and learned Gentleman has announced, is he aware that it would have been much more appropriate, in order to prevent a runaway recession, to have loaded the whole lot on to the public sector borrowing requirement, with the safeguard of an approved incomes policy?

Sir Geoffrey Howe

The hon. Gentleman does not appear to have learnt a great deal from the experience of recent years. It is clear that to try to offset the effects of loading unjustifiably large borrowing on the public sector borrowing requirement by the introduction of an incomes policy would be to do both wrong things simultaneously and to go in exactly the wrong direction. The hon. Gentleman spoke about the burden being placed on national insurance contributors. The Government Actuary's assessment is that one-quarter of the 1 per cent. that I mentioned would be justified for that reason. It is wrong to say that this is taking place at a time when benefits are being cut. Benefits are rising by a substantial amount today for the overwhelming majority of beneficiaries. When unemployment is rising in this country, as in many others around the world, it is surely right for the burden of financing that rise in unemployment to fall on the shoulders of those who are fortunate enough to be at work.

Mr. Paul Dean (Somerset, North)

On the day when pensions are being increased by 16½ per cent., may I warmly welcome the Government's firm intention to maintain the real value of pensions in future, in spite of the increased cost that will inevitably be involved? Does my right hon. and learned Friend agree that in the allocation of scarce resources pensioners cannot hope to compete with the industrial muscle of trade unions unless they have a firm guarantee from the Government, underwritten by Parliament?

Sir Geoffrey Howe

It is clearly right that we should take account, as we have over the years, of the interests and needs of pensioners in our society, but it is also right that we should remember the substantial extent to which the cost and burden of the total social security budget has been rising as a percentage of public expenditure. During recent years, quite apart from unemployment, the real value of the retirement pension has risen by 31 per cent. That is a formidable record, for which Governments of both parties are entitled to take credit. It must be right to take the action that I have announced to ensure that that record is kept in balance and that the burden is fairly shared.

Mr. Joel Barnett (Heywood and Royton)

Given that the recession is deeper than the Chancellor of the Exchequer expected, does he accept that by worsening the vicious circle that he had already created by adding to the level of unemployment and requiring yet further cuts in benefits next year he is introducing further measures while telling us that his policies are working?

Sir Geoffrey Howe

Many times in the past, when the right hon. Gentleman was in Government, he explained the extent to which public borrowing, above almost anything else, going beyond what could be sensibly financed was the most formidable threat to full employment and the conquest of inflation. In reaching the judgments that I have announced to the House I have had to take into account his advice, which has been given on many occasions.

Mr. John Bruce-Gardyne (Knutsford)

Can my right hon. and learned Friend confirm that when he refers to the determination to maintain the thrust of the Government's medium-term financial strategy, which is most welcome, he intends that his monetary targets next year will be lower than the rolled-over targets for the current year? On pay in the public sector, will be confirm that the limits for cash from the taxpayer to finance settlements of 6 per cent. which have been announced for the public sector will apply also to the Armed Services, among others?

Sir Geoffrey Howe

The Armed Services are one of the groups for which the House has long recognised the existence of special arrangements in the review of their pay. They will have to be considered in the context of the policy as a whole. [HON. MEMBERS: "What about the firemen?"] The figure of 6 per cent. in relation to the allowance being made in cash limits for the pay element has so far been announced only in relation to the rate support grant. Broadly, the same financial discipline will be applied with the other cash limits. I shall be making my announcement about next year's monetary target in the Budget and my hon. Friend can be assured that the action that I take will be designed to maintain the thrust of our medium-term financial strategy.

Mr. Robert Sheldon (Ashton-under-Lyne)

While I welcome the reduction in the MLR, may I ask whether the Chancellor of the Exchequer is aware that there is no certain relationship between a reduction in MLR and a lowering of the value of the pound? In fact, when MLR was reduced in the summer, the value of the pound went up. Will the right hon. and learned Gentleman therefore leave himself scope to do what every Government since the war have done, namely, actively to intervene in the foreign exchange markets in order to make sure that the pound goes down?

Sir Geoffrey Howe

The right hon. Gentleman has his own recollections of the way in which, and the extent to which, his right hon. Friend the Member for Leeds, East (Mr. Healey) — the former Chancellor — attempted to intervene on a substantial scale during 1977 and was in the event obliged to abandon that exercise. The experience of that attempt does not lead me to accept the right hon. Gentleman's advice now.

Mr. Peter Emery (Honiton)

Will ray right hon. and learned Friend accept that there should be massive congratulations to him—as will come from industry, and particularly small industry—on reducing MLR by 2 per cent. today? Will be tell the House that as he is producing a windfall tax on the oil industry he is still considering, as was announced in his Budget, the possibility of doing the same with regard to the banks? Can my right hon. and learned Friend explain why, when we are trying to reduce overall public expenditure, there will still be a major increase for the nationalised industries of, I believe, £620 million expenditure approved by the Government when most hon. Members on the Conservative Benches would like to see that figure come down?

Sir Geoffrey Howe

I am grateful to my hon. Friend for his congratulations. He rightly recollects that when the possibility of a tax on the windfall profits of banks was considered in the debates on the Finance Bill my hon. Friend the Financial Secretary made clear that the decision then being taken was being taken in the context of that Bill for that year. It must be remembered that the banks have a part to play, and are playing a large part, in the financing of the rest of the corporate industrial sector.

As for the burden being put on the rest of the economy by the nationalised industries, it is certainly right that those industries taken into public ownership, largely as part of the onward march towards Socialism, are not exactly good advertisements for the efficiency with which such public ownership serves the community's interests. But it must be stated that a significant part of the increase is clue to pressures on the nationalised industries similar to those being applied to the private sector to increase its borrowing. The nationalised industries are being required to make economies in excess of £¾ billion. I agree with my hon. Friend, and, I hope, with all my hon. Friends, that the best answer to excessive and uncontrolled borrowing and borrowing and demands from the nationalised industries must lie in the policy to which we are committed of privatisation, of return to the private sector so far as possible.

Mr. Ernest Armstrong (Durham, North-West)

Does the Chancellor understand that there will be growing bitterness and resentment in areas such as the Northern region, which are meeting the cost of his policies, and that the vulnerable sections of those communities are once again being asked to pay the price? Does he recognise that the reductions in local government expenditure, for instance, will mean fewer home helps, fewer dinner attendants, and so on? They are the very people who are receiving low wages in order to eke out an existence. That contrasts starkly with the tax handouts that the right hon. and learned Gentleman gave in his first Budget. The division into two nations is causing bitterness and resentment with which the right hon. and learned Gentleman must come to terms. He must recognise that fiscal policy irrespective of the social consequences will lead to the ruin of the country.

Sir Geoffrey Howe

I am well aware of the extent to which hon. Members on both sides of the House wish to see the fabric and effectiveness of our social services maintained. Having represented a Merseyside constituency, I know also of the extent to which there is justified concern about the possible division of our society into two nations. But surely we must now all recognise that if we are to maintain and extend the quality of our social services we must look first and foremost to the health of our productive industrial economy. If we are to do that, in the North as well as in the South, it is crucial that we should be taking the measures that I have now announced to reduce the burden of interest rates on the productive trading sector, because—believe me, Mr. Speaker—I receive as many representations from both sides of industry in the North as I do from the South for the burden of the public sector upon the trading part of our society to be lightened.

Mr. Charles Morrison (Devizes)

Is my right hon. and learned Friend aware that the Government cannot reduce the rate support grant — a reduction that I well understand to be necessary—and expect local authorities at the same time to maintain their services at the existing level? There is a limit to the amount of waste that can be cut out. I do not imagine that my right hon. and learned Friend wishes to see huge rate increases. Therefore, have the Government given any consideration to reducing some of the statutory obligations on local government?

Sir Geoffrey Howe

My right hon. Friend the Secretary of State for the Environment and other colleagues have been giving consideration to ways in which the burden of statutory control can be lightened, and they have been making changes to that effect. But it must also be well understood by my hon. Friend, as I am sure it is, that if we are to secure the effective implementation of these reductions in public spending a continuing duty rests on local government to go on striving for efficiency, the achievement of low pay settlements and rising productivity, because they are just as important in the public sector as they are in the private sector.

Several Hon. Members rose—

Mr. Speaker

I shall call the spokesman from the Opposition Front Bench at 4.30 pm.

Mr. Jim Marshall (Leicester, South)

Does the Chancellor accept that the measures that he announced today add up to a further tightening of the deflationary screw? Will be now reply to the question put to him by my right hon. Friend the Member for Leeds, East (Mr. Healey) and say how many people whom he describes as those fortunate enough to be in work will now lose that privileged position as a direct consequence of the measures that he has announced today?

Sir Geoffrey Howe

It is most important that those discussing the likely increase in unemployment understand that it will not take place as a result of measures announced today or of anything of that kind. The pressures giving rise to increasing unemployment in France, Germany, the United States and Canada — indeed, in every one of the industrial countries of the Western world — owe nothing whatever to the measures announced today. They owe a great deal to the fact that the entire industrial world faces a major recession as a result of the last huge increase in oil prices. Unhappily, our society faces that same recession with additional disabilities, because we have had a much higher rate of wage inflation over a number of years and, most important of all, because of our declining competitiveness, for which there are a number of reasons.

In those circumstances, there is no action that any Government could take today to offset or prevent the onset of that recession. What we can do is to ensure that the balance of our economy is effectively preserved, so that when the recession moves away we shall be better placed than we have been in the past to take advantage of the prospects.

Mr. T. H. H. Skeet (Bedford)

Will my right hon. and learned Friend give an assurance that the new supplementary tax on oil will be related only to the real price of oil and not to any other measures? Will be make certain that in order to maintain adequate reserves of oil in the future exploration is adequately provided for out of the profits earned by the companies?

Sir Geoffrey Howe

The details of the new tax will be among the matters for consultation on the basis of the documents that are being made available today. I shall bear my hon. Friend's point in mind. Of course, the intention will be to maintain an environment in which exploration continues to be worth while and encouraged. My right hon. Friend the Secretary of State for Energy hopes next month to make announcements about the next licensing round.

Mr. Dick Douglas (Dunfermline)

Will the right hon. and learned Gentleman concede that, no matter what his right hon. Friend the Prime Minister may say about not being for turning, the electorate will consider that she and her Government are not for trusting in relation to their overall economic policy? Will be answer some of the questions that have been put to him about the increase in unemployment that might be expected during the next two years and the downturn in manufacturing output? In addition, will be give the House now the figures for the total Government take from North Sea oil?

Sir Geoffrey Howe

I could hazard a reasonably accurate guess at the answer to the last question, but it would be safer if I had it put to me in precise terms by the hon. Gentleman, when I shall answer it.

As for the outlook for output and unemployment, like the right hon. Member for Leeds, East I have the gravest uncertainties about the pattern of forecasting, and particularly its timing. The hon. Gentleman will see that the Industry Act forecast published today suggests that the total output of the economy is now likely to have about bottomed out. Although there will be some decline next year on this year as a whole, the probability is that we have reached the bottom of the trough. That is the most likely outlook, but, of course, one cannot be sure about it.

The hon. Gentleman will be aware that Governments do not make a practice of forecasting unemployment. However, it is clear from the likely outlook for the world as well as for this country that unemployment is likely to go on rising for some time yet, although probably at a slower rate. When the Government Actuary's report appears tomorrow, it will be seen to contain the assumption which he has been asked to make about the average level of unemployment in the next financial year, 1981–82. For Great Britain, excluding school leavers, that average figure will be stated to be 2.3 million.

Mr. Kenneth Lewis (Rutland and Stamford)

Is my right hon. and learned Friend aware that many people who accepted that the borrowing requirement had to be kept down will be relieved to know that he has done it partly by cuts and partly by taxation? Many people were worried that cuts would take the full load. Therefore, it is generally acceptable that there should be a split between the two, and my right hon. and learned Friend should take credit for it.

Sir Geoffrey Howe

I am grateful to my hon. Friend. In arriving at the measures that I announced today, we have tried to maintain the kind of balance that my hon. Friend has urged upon us.

Mr. Donald Anderson (Swansea, East)

Is not this mini-Budget a confession by the Chancellor of the Exchequer that the Government have lost their first year? Who, then, is to blame? Whose fault is it? Does the right hon. and learned Gentleman agree with Professor Friedman that, although the monetary policies are correct, our present plight is due to the incompetent execution of them by those in the Bank and the Treasury? Who is at fault for the failure of the monetary policy?

Sir Geoffrey Howe

I have no intention of exchanging views with professors from any country. It should be noted that securing a reduction in the rate of inflation, which is the first objective of our economic policy, is beginning to be achieved. It is coming down, and it has come down more quickly than we forecast. In the last six months it has come down to an annual rate of less than 10 per cent., which is substantially below the rate on the same basis that we inherited from the last Government. Our success in that direction is the reason why I am taking action today. My intention is to sustain that success and keep our policies on course.

Mr. Nicholas Winterton (Macclesfield)

I welcome the reduction in the minimum lending rate. However, is my right hon. and learned Friend aware that some Government supporters may not be altogether happy about his increase in the national insurance contribution for employees? Whether or not my right hon. and learned Friend is playing straight with the House, this is another form of direct taxation, and surely we are pledged to reduce direct taxation. Does not my right hon. and learned Friend agree that this tax is a disincentive to work and that we should be seeking an increase in production, which is the only way to achieve real wealth out of which the country once again can pay its way?

Sir Geoffrey Howe

We are seeking and want to seek an increase in production to secure the increase in wealth that we need in the economy as a whole. The most pervasive and long-standing enemy of an expansion in production is inflation. That is why it is of crucial importance to reduce the level of public borrowing and to do so, as my hon. Friend wishes, in a way that is consistent with a reduction in interest rates. The one factor standing in the way of a reduction in interest rates of a responsible quality would be a refusal to recognise the need to secure the right volume of revenue along the lines that I have commended to the House.

Mr. K. J. Woolmer (Batley and Morley)

Is it not clear that the real problem of the economy is not that public sector spending is squeezing the private sector but that the private sector is suffering from grossly excess capacity and that there are more than 2 million unemployed and ample resources? Will not the consequence of today's statement be a further deflation in demand, more unemployed resources and the prospect of further cuts next year? When will the right hon. and learned Gentleman start expanding demand so that our producers can sell what they could produce instead of reducing demand and heaping further deflation upon deflation?

Sir Geoffrey Howe

The hon. Gentleman's analysis of the situation does not accord with that of the Government or with that of any wise analyst. If the hon. Gentleman still believes that the answer to our economic problems is to be found in expanding demand in the United Kingdom economy, he gravely deceives himself. Successive British Governments have expanded money and thereby sought to expand demand on a substantial scale and achieved no corresponding increase in output. The right way of dealing with the problem is to control inflation. Even today, there are ample markets around the world to which our goods can be sold if they can achieve the right degree of competitiveness. As we keep on emphasising, the answer to that is a more responsible pattern of pay bargaining of the kind which, fortunately, we see spreading widely throughout industry.

Mr. Tristan Garel-Jones (Watford)

Has my right hon. and learned Friend had any evidence from the clearing banks of their intention to respond to the call made by my right hon. Friend the Prime Minister in her recent speech ins. the City that they should exercise social responsibility with their profits? What sort of social responsibility would my right hon. and learned Friend like to see exercised? Can he confirm that, if it is not forthcoming, he has not yet discarded the possibility of a special tax on these windfall profits?

Sir Geoffrey Howe

I have replied already to the suggestion about a special tax on windfall profits in answer to my hon. Friend the Member for Honiton (Mr. Emery). The Prime Minster's explanation of her hope for more venturous attitudes by the clearing banks is an indication which has been heard in those quarters. As is seen from a number of steps already being taken by them, it is not being disregarded. I do not think that we have seen the end of the story yet.

Mr. Andrew Faulds (Warley, East)

Since, earlier, the industrial relations policies and now the economic policies of the right hon. and learned Gentleman have both proved equally disastrous, will be do his country a service by retiring from politics, where he has repeatedly proved his ineptitude, and taking up a practice out of harm's way as a solicitor in somewhere like the Outer Hebrides?

Sir Geoffrey Howe

I am sure that the nation would be better served if the hon. Member for Warley, East (Mr. Faulds) himself resumed his own profession on the public stage rather than on the stage of the House of Commons.

Mr. Faulds

I do my job somewhat better than he does his.

Mr. Peter Viggers (Gosport)

Is it not a tribute to the tenacity of the present Government that it has been possible to allow an increase in real terms in defence expenditure? By doing so, has not my right hon. and learned Friend helped to secure the jobs of those in the shipbuilding and aviation industries?

Sir Geoffrey Howe

I am obliged to my hon. Friend for his comment.

Mr. Tam Dalyell (West Lothian)

If £¾ billion is to be cut back on the nationalised industries, what factual assessment have the Government made of the effect on the modernisation of the railways, on commuter services and on lines throughout the country? What are the facts of the assessment of what the Government are doing?

Sir Geoffrey Howe

The external financing limits of each of the nationalised industries have been decided after discussion between the responsible sponsoring Ministers and the managements of the industries concerned. In the public sector no less than in the private sector, access to external finance has to be curtailed in present economic circumstances.

Mr. Tim Eggar (Enfield, North)

Is my right hon. and learned Friend aware that a special welcome will be given to the additional method of funding the PSBR through index-linked national savings? Will my right hon. and learned Friend confirm that it is the aim of the Government to make available to companies a sterling capital market where they can fund their debts on a fixed-rate basis? To achieve this end, will my right hon. and learned Friend examine the possibility of ending the building societies' cartel and, in addition, ending their tax advantages?

Sir William Clark (Croydon, South)

Rubbish. There is no tax advantage.

Sir Geoffrey Howe

My hon. Friend the Member for Enfield, North (Mr. Eggar) raises matters that go far beyond the scope of my statement today. However, it is an objective of this Government to improve the opportunities for access by the company sector to the longterm capital market.

Mr. Peter Hardy (Rother Valley)

Will not the right hon. and learned Gentleman comfirm that his statement today is bound to increase unemployment, contrary to his earlier remarks, and that in the public sector of industry and in local government there are profound implications for increased unemployment? Will be also confirm that he has increased the cost of unemployment so that it must now reach £480 million for every additional 100,000 on the dole?

Sir Geoffrey Howe

The purpose of the measures that I have announced today is precisely in the opposite sense.

If we disregarded the imperatives written upon our economic analysis and did not take the action that I have announced today, it would be much more difficult to offer the prospect of a fall in unemployment in due course.

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

Does my right hon. and learned Friend accept that industrialists will welcome the fact that our MLR has come down two points, making borrowing in this country about 3 per cent. cheaper than it is in the United States of America? Will be also resist the siren voices of those who say that the excess profits of the banks should be taxed and taxed again? Does my right hon. and learned Friend realise that without the banks' profits a great deal of industry would not be able to survive and that as long as banks lend their money to industry they are doing the job that they are there to do?

Sir Geoffrey Howe

If ever I search for a voice to act as a counter-siren to the voices of sirens, I shall look in the direction of my hon. Friends.

Mr. D. N. Campbell-Savours (Workington)

Taking into account the reduction in MLR and the inevitable increases in industrial rates, what is the net effect of this mini-Budget on manufacturing costs? Will they rise or fall?

Sir Geoffrey Howe

That sort of question raises a large number of implications. The most important feature—the one for which industry has expressed its pleasure through its spokesmen in the House—is the reduction in MLR. That is a precise, visible and effective reduction of the costs to manufacturing industry, which I am sure will be widely welcomed.

Mr. Healey

The Chancellor has repeatedly stated that the increase in unemployment and the fall in output in Britain are due to the world recession. Is he not aware that in all the major countries that compete with us the fall in output and employment is only half as great as in Britain, although none of them enjoy the immense advantages that we enjoy from North Sea oil? Did he not give away the whole game when he admitted that an increase of 3 per cent. in the demand for the products of aerospace and shipbuilding through an increase in the defence budget would increase employment and output in those industries? Can he not get it into his thick head that deflation of the sort to which he is submitting the remainder of the economy is the main cause for excessive unemployment in Britain?

Sir Geoffrey Howe

It is remarkable that at no level of promotion within his party has the right hon. Gentleman learnt to speak with a degree of respect and common sense. Does he not realise that those countries with whom he wishes to compare Britain did not have to suffer during the past 15 years the misfortune of being governed for 11 of them by a Labour Government?

Mr. Speaker

Order. When the debate on the economy takes place, I shall bear in mind those hon. Members who were unfortunate today.

Following is the summary: