Industry and the Economy

HC Deb 27 November 1980 vol 994 cc581-658

Mr. Speaker

The Privy Councillors who have indicated to me that they wish to speak will understand that I follow Mr. Speaker Selwyn Lloyd's rule, or custom, of not calling two Privy Councillors from the same party immediately after each other. This means that some, I am afraid, will have to wait for a long time.

4.2 pm.

Mr. Denis Healey (Leeds, East)

I beg to move, at the end of the Question, to add: but humbly regret that Her Majesty's Government is maintaining economic policies which are ruining great sections of British industry, have produced the greatest fall in output and employment since the Thirties and offer no prospect of improvement in the foreseeable future. I must start, I fear, by expressing my surprise and regret that the Chancellor of the Exchequer has not thought fit to make a statement about the circumstances in which, voluntarily or involuntarily, he misled the House on Monday. I shall ask him some questions about this later in my speech, and I hope that he will answer them in his speech and not by written reply.

We now witness the complete collapse of the Government's economic policy as the Government laid it down 18 months ago and described it in the last Budget. The policy was never directed to the real economy but wholly to certain monetary and financial objectives. The Government aimed to sacrifice everything else to the control of the growth in the money supply, believing that this was the only thing that a Government can control. In the last eight months, however, sterling M3, the measure of the money supply the Government have chosen, has been growing at a rate over twice the target set for it in the Budget. The public sector borrowing requirement, the other totem pole of the Government's policy, has also been growing at twice the rate set in the Budget. The Chancellor of the Exchequer did not pretend on Monday that the measures he then announced would bring either of them back to its target by the end of the financial year.

Meanwhile, public expenditure, which the Government undertook to cut, is higher this year than at any time for the past four years. According to the Chancellor on Monday, it will be ½ per cent. higher next year than was planned for this year, although he told us in the Budget Statement that it should be 1 per cent. lower next year than was planned for this year. He let us know on Monday that the public sector borrowing requirement will, at the end of this year, be at least £3 billion higher than the target set in the last Budget, even if he increases taxes in his next Budget by £2 billion to £3 billion, as he appears determined to do.

It was no surprise to read in the Financial Times yesterday: The City concluded yesterday that the Government has effectively lost touch with its medium-term strategy, and that left the financial markets floundering. The Secretary of State for Industry—we are used to him moaning about his past sins—was uncharacteristically cheerful when he said the other day that the Government had wasted their first year. By their own test, they have wasted their first two years and are at risk of wasting their third.

The Prime Minister, however, put a different gloss on the Government's performance in an interview yesterday. She said: Of course, if you are going from A to B, you do not always necessarily go on a total straight line. There are sometimes obstacles in your way. You might just have to deviate just a little bit—but not blown off course in any way. The Prime Minister was not blown off course. She fixed the rudder of her ship so that it goes round in circles, and it is still going round in circles. Gone are the happy days when she used to boast in this Chamber that her admirers on the extreme Right in every country in the world were swooning at her feet. Now we hear, again from the Financial Times: On the right wing of the Republican Party where the Prime Minister was once most warmly admired 'Thatcherised' has in recent weeks become a verb of sad warning. Here, it is implied, is what could become of Mr. Reagan if he deviates from the true path. "Never bright confident morning again", Prime Minister, with a vengeance.

I now turn from the abstract statistics about sterling M3 and the PSBR to see what "Thatcherisation" means for the real economy in which men and women have to earn their living, if she allows them to. The real economy is suffering more catastrophically today than it was in the worst days of the 1930s. Unemployment is rising rapidly to 3 million. In fact, the Employment Gazette suggested yesterday that real unemployment may already be higher than 3 million because hundreds of thousands of people who are unemployed are not registering, especially married women and people retiring early. I notice that the number of people drawing short-time subsidy has jumped by a quarter of a million in the last few months. Those, I fear, are people whose unemployment has simply been deferred. They will be joining the register in a few months.

The Government, according to the statement that the Chancellor issued on Monday, expect output to have fallen by 4½ per cent. in the two years which end in spring 1982. They admit, in the same forecast, that the fall could be as high as 6 per cent. Manufacturing output has already fallen 19 per cent. from the peak that it reached in 1979 and the CBI said a few days ago that it expects a bigger fall in manufacturing output in 1980–81 than took place between 1929 and 1931.

The Chancellor and the Prime Minister often like to claim that this is basically a shake-out of labour that is making industry leaner but more efficient. Industry is certainly leaner but it is not more efficient. One reads, again in the Employment Gazette, that in the last 12 months output in manufacturing industry has fallen more than one-third faster than employment has fallen. In other words, output per man employed in manufacturing industry has fallen very substantially in the last 12 months. On top of that, investment is collapsing and industrial training is slashed. Now, the Government are throwing the £50 million cost of industrial training boards on to firms that already cannot afford to continue their own training programmes. There is no end in sight. The Manpower Services Commission predicts that unemployment will continue rising at least into 1984.

The damage done to our long-term prospects by this appalling outlook is difficult to exaggerate. It means that the firms that manage to survive in the desert created by the Government will find it very difficult to respond to any recovery, because they will have to meet recovery with clapped-out machinery and short of skilled workers.

Everybody is asking—I am sure on both sides of the House—why the Government's performance has been so appalling and why the prospect is so terrifying. I am glad that the Chancellor told his Back Benchers the answer in a speech a couple of days ago. He said that he was hemmed in by his election promises. He could have fooled me, because the very first thing he did when he came into office was to double the rate of value added tax, send prescription charges soaring, slash social benefits, organise an immense increase in the total burden of taxation and double the rate of inflation. He did not exactly promise during the election campaign to do all those things. No, that one will not wash.

Now, we look at a more serious excuse, which the right hon. and learned Gentleman offered us on Monday and which the Prime Minister and other Ministers are always putting forward. It is that the Government's appalling economic record is a by-product of recession in the world as a whole produced by the recent increase in oil prices. But Britain is the only country in the industrial world that has actually gained—and substantially—by the increase in oil prices: an increase in Government revenue of £4,000 million this year, a £7,000 million benefit to the balance of payments compared with what would otherwise have occurred, and an increase in our real gross domestic product of about 5 per cent.

Yet Britain's performance is far worse than that of any other major industrial country, although all the others are suffering severely from the increase in oil prices, which has done immense damage to their balance of payments, cut their real gross domestic product and brought no increase in their revenue but a big increase in their rate of inflation.

The trade figures—the Secretary of State for Trade boasted of this in last night's debate—have shown little effect so far on activity in Britain as a result of the world recession. The world recession has scarcely begun in terms of the growth of world trade. That growth is still continuing, although at a somewhat lower level than before the oil price increase, but the effects of the world recession could be shattering next year.

First, oil prices are likely to rise again in real terms, if not immediately at least at the end of the winter, when countries begin to rebuild the stocks that they have run down. The United States and Japan have already announced that they intend to increase their stocks of oil during the winter. If that happens and if other countries make no attempt to help those that are short of oil, to prevent them going to the spot market, there will be an explosion of oil prices at some time in the next few months, and if that explosion is met by deflationary policies in other countries, as it as been this year, we shall face a severe world recession when the impact of the present recession is already being felt and the full impact of the increase in Britain's exchange rate will be felt.

There is also the risk of a much tighter fiscal and monetary policy in the United States. We cannot be sure of that, because we do not know whether President Reagan will follow Mr. Laffer or Mr. Friedman as his main adviser. But the fact is that the switch to monetary base control, which the Financial Secretary was so keen on a few years ago, has had little effect in controlling the money supply in the United States. What it has done is to produce violent lurches in interest rates which are extremely disturbing to the foreign exchange markets.

The tragedy is that nothing effective is being done by the Governments of the industrial world to deal with these dangers, which are already apparent. When proposals have been made, they have almost been treated with contempt by this Government. I hope that the right hon. Member for Sidcup (Mr. Heath) will have something to say about what might be done to reduce the dangers of a much more severe recession in the world next year, but I want to confine myself to the subject of the debate.

The reason for the appalling performance of the British economy over the past 18 months is not that the Government were hemmed in by their election promises, and it is not the world recession. The reason is clearly stated in the document "Economic Prospects to End-1981", published by the Chancellor on Monday, which says: it is domestic demand, more than trade, which has led the recession. The Chancellor's own publication also says that one of the main causes of reducing our trade has been a high and rising exchange rate.

I want to say a few words about those two elements in our current position—the deflation by the Government, for which they are wholly responsible, and the rise in the exchange rate, for which they are responsible in part, though not in whole.

The deflation is the direct result of Government policy. They have cut public expenditure heavily in ways that have thrown the main burden on private industry, at a time when private spending is being held back, partly by the monetary squeeze on business profits and partly by the increase in personal savings produced by the fear of inflation and unemployment, which itself is caused by the Government.

The combination of the fall in public spending and the increase in savings has taken enormous sums out of the economy. Some of the money has been fed back by increases in the public sector borrowing requirement due to increased benefits and lost revenue—the PSBR rises by £1 billion for every 1 per cent. that GDP falls, and every additional 100,000 people out of work add £500 million to the PSBR. Yet the Government persist in trying to deflate still further in the hope of reducing the PSBR still further. They have not learnt the old lesson that one cannot get a poultry farm out of the red by starving the chickens.

If, as the Government always maintain, inflation is caused by too much money chasing too few goods, it is not very clever to reduce the supply of goods much more than the supply of money. Yet that is what the Government have achieved in the past 18 months.

The extraordinary thing is that on Monday, instead of doing something to cope with the deflation that he has created, the Chancellor gave us another dose of the same medicine and promised yet another dose in the forthcoming Budget. The changes in public expenditure and the increases in national insurance contributions will deflate demand in the economy by about £2,000 million in 1981–82 and will cut real gross domestic product by about 1½ to 2 per cent. It will increase the registered unemployed by another 100,000, thereby immediately feeding back another £500 million on to the PSBR.

Moreover, the composition of the Chancellor's package was calculated to do the maximum harm to British industry, and not only to British industry but to those very people whom the Prime Minister promised on taking office to protect—those least able to carry the burden. The increase in employees' national insurance contribution adds a burden of £1,000 billion—or is it £1¼ billion? I shall come to that in a moment; we have had both figures from the Chancellor in the past 24 hours. That is far more regressive than a comparable increase of about 1¼p in the standard rate of income tax, because the national insurance contribution is levied on people who are too poor to pay income tax and it ceases to rise once someone is earning more than £200 a week.

We also had the shabby breach of promise made to the pensioners, who are having their pensions cut next year by 1 per cent., although a married couple of pensioners are already £3 a week worse off than they would have been if the Government had stuck to the rules which we laid down when we were in office.

This cut of 1 per cent. in the pension increase next year is added to the 5 per cent. cut already made on all short-term benefits. So, in a year's time, all people on short-term benefit will have increases which are 6 per cent. less than the increase in inflation over the next 12 months.

All this is being done to the poor in our society at a time when rents are due to rise by up to £3 a week, rates are liable to rise by 25 per cent. next year, in many parts of the country school meals and school buses are being abolished, and all nationalised industry charges will rise as well, thereby adding to fares bills for heat and lighting for the poorer in our society.

One of the shabbiest of all cuts in this respect was the cut in overseas aid, which, as a result, will be 26 per cent. lower than was planned by the Labour Government and 10 per cent. lower than even this Government planned last year.

Of course, industry is being very hard hit by the measures announced on Monday. Firms will be hit by enormous rate increases, and they are still having to pay energy prices which are far higher than those paid by any of our competitors in the industrial world.

When the Chancellor of the Exchequer was asked on Monday how industry would come out of his package, he laid great stress on the help that firms would get from the 2 per cent. cut in the MLR. First of all, as I have said on many occasions, a cut of only 2 per cent. is bound to be too small to affect the exchange rate, and so it has proved. The direct effect in reducing industry's interest rate charges will be only about £700 million, which is more than wiped out by the increases which the Government have imposed on industry recently — £400 million by making industry pay the first eight weeks of sick pay and £50 million by making it carry the cost of the industrial training boards.

Then we come to the only surprise in the statement on Monday. I refer, of course, to the dog that did not bark in the night — the increase in the employers' national insurance payment, which was concealed very carefully by the right hon. and learned Gentleman. I want to ask him some questions about this, and I hope that he will reply in his speech and not put it out in a written answer late on Friday afternoon.

First, what is the total net revenue derived by the Government as a result of these changes in national insurance contributions, including raising the ceiling to £200, which, incidentally, he announced on Monday? Will it be the £386 million which the Department of Health and Social Security told the press? Will it be the £573 million which No. 10 Downing Street told the press yesterday and is printed in some newspapers? Will it be the £960 million calculated by The Guardian newspaper on the assumption that wages rise next year in line with the Government's own intentions?

One thing the Chancellor of the Exchequer cannot say is that he was forced to raise this additional revenue from industry. It was perfectly open to him under the legeislation which, as he rightly said, was introduced by us to raise the ceiling to £177. That would have reduced the cost to industry by £250 million. He chose not to do this. He chose instead to put an unnecessary and additional impost on British industry and to conceal the consequences.

Mr. Tim Eggar (Enfield, North)

Will the right hon. Gentleman give way?

Mr. Healey

No, but if the Chancellor of the Exchequer wishes to intervene I shall gladly give way to him.

I must confess that I cannot but regard the right hon. and learned Gentleman's words during his interrogation on Monday as, to say the very least, a little disingenuous. After telling us about the increase in employees' contributions, and after telling us about the increase in the ceiling for contributions to £200 a week, he said: The additional contribution income"— he did not say "from the employees"— will be about £1 billion in 1981–82."—[Official Report, 24 November 1980; Vol. 994, c. 316.] No one in the House or outside it could be blamed for taking those words to imply that that was the total net contribution being made. When it was followed by the very cleverly phrased sentence — a real lawyer's sentence, if I may say so—about no increase in the rate for the employers, they must have assumed, as the CBI did at first, that there would be no additional burden falling on industry.

The Chancellor of the Exchequer really must answer some of the questions which the Prime Minister failed to answer when she was questioned a few moments ago. The Daily Telegraph wrote this morning that some Ministers seemed surprised that the employers' increase had not been detailed to them when the Cabinet had its lengthy review of public expenditure, and it added: in a day of considerable confusion within the Government, it was at first stated that the Prime Minister had not known of the increase until a special meeting at Downing Street on Tuesday morning. But later last night, it was stated that Mrs. Thatcher had known before that meeting about the 'broad level' of the increase. One thing is certain, and that is that the House of Commons did not know about the increase, because it was not told. It appears that the Cabinet did not know. Perhaps the Prime Minister did not know. The only question left to ask is whether the Chancellor knew. If the Chancellor knew, why on earth did he not tell the House, the Cabinet and the Prime Minister? [HON. MEMBERS: "Let him tell us."] No. I think that the Chancellor has the right to be left in peace to arrange his notes.

As I have pointed out, the right hon. and learned Gentleman himself has admitted in the document which he published on Monday that deflation is the main cause of the slump which he has created. But exchange rates have also played an important role. They have risen 20 per cent., on a weighted average, in the last 12 months, and they are crucifying manufacturing industry. We hear reports of the damage done every time nowadays that a company chairman opens his mouth.

The increase in oil prices at a time when we are self-sufficient in oil is bound to exert some upward pressure on our exchange rate, if only because it helps our balance of payments. But the major factor in pushing up the exchange rate for the last 12 months at least has been the very high short-term interest rates. At present, the treasurers of the great multinational companies have no confidence in any long-term investment. Thus, they send billions of pounds of money across the exchanges in search of short-term interest rate differentials. The differential that matters is not just that between sterling and the dollar; it is the differential between sterling and any of the five major currencies, which include the deutschemark, the yen and the French franc.

The markets by which the Conservative Party set so much store nowadays are rewarding vice rather then virtue across the foreign exchanges. If higher inflation brings higher short-term interest rates in a country, the money will flow to that country and push up its exchange rate. I can see that some Government supporters understand this very well. That is why, for most of the time since the creation of the EMS, the deutschemark has been at the bottom and has been in danger of falling out in recent weeks and the Italian lira has very often been at the top, although in terms of inflation rate or even balance of payments performance this year the German economy is very much the stronger of the two.

In such circumstances, the cut in minimum lending rate is not enough, especially since it was discounted by the foreign exchange markets before it took place. The Government had indicated that a small cut was coming soon. A 4 per cent. cut was the minimum that would have had a significant effect on the exchange rate. The Government could have done that without damaging their control of the money supply, partly because a lot of company borrowing is made to pay these excessive interest rates, but partly also—I hope that the Government have learnt this from their bitter experience in monetary matters—because it is difficult to control the money supply through interest rates alone.

The countries that have succeeded in controlling their money supply have done so because they have had effective and direct control over the growth of bank credit. However, Lord Barber abolished these conrols in Britain when he introduced the ill-famed document "Competition and Credit Control", and as a result the banks have been able to evade all the instructions given to them by the Governor of the Bank of England, particularly since the Government were idiotic enough to abolish exchange control a year ago, thus enabling even a small town branch of a London clearer to borrow through a subsidiary abroad if it were in danger of incurring difficulties.

Mr. Eggar

Since the House knows that the right hon. Gentleman remains a committed monetarist, and since he is against controlling money supply through interest rates, does he welcome moving towards a monetary base system?

Mr. Healey

I have just explained that the monetary base system is far less effective as a measure of control. It involves wide swings in interest rates, as in America. It does not control the money supply, but it increases turbulence across the exchanges. If the hon. Gentleman thinks that I am a monetarist in any of the senses that the Conservative Party is—

Mr. Eggar

Is the right hon. Gentleman a monetarist or not?

Mr. Healey

Not in that sense— [Interruption.] I shall give the hon. Member for Enfield, North (Mr. Eggar) a child's guide to the economy and then I shall send him a few notes to explain what I mean.

It is extraordinary that the Government have not only allowed the banks to evade their attempts at monetary control but, instead of punishing them for undermining their policy, have rewarded them. They have allowed them to keep all the windfall profits they have derived from the Government's interest rate policy and through the evasion of monetary control when they should have taxed the banks' excessive profits. The Chancellor is the voyeur of the Treasury Bench. He has been looking for 18 months at the possibility of taxing bank profits. Will be move from sight to action? That may not be a pretty sight, but we should love to see it. I hope he will tell us something on that score this evening.

Two years have been wasted by the Government, by their own account. They not have been a waste if the Government have learnt something from the disasters that have followed their current policies. They will have been totally wasted, however, if the Government continue to claim that they are still on course, that they will remain so and that, because there is no alternative, they will continue to pursue policies that have demonstrably failed. Of course, there are many alternatives to the Government's policies. One alternative to knocking one's head against a brick wall is to stop, and that would not be a bad one for the Government to start with.

However, there are more constructive alternatives if the Government are prepared to learn from the experience of other Governments with economies that are more successful than ours. For example, if they want monetary targets they must set them close to the expected growth of monetary GDP. Germany, often held up as an example to us, has always set its monetary targets above the growth of monetary GDP and, incidentally, has always had a performance slightly beyond its targets.

All other countries that pursue monetary targets—none of them does it as a be-all-and-end-all of policy—have been prepared to relax them when they have put their citizens out of work through raising the exchange rate too high. The Germans relaxed their monetary policy in 1968. The Swiss abandoned it for nearly a year because it was putting Swiss citizens, not just the gastarbeiter, out of work.

Second, the Government must, like other Governments, allow the PSBR to rise when the economy is clearly working below capacity. That acts as an automatic regulator which tends to restore balance to the economy. Third, the Government must take action to reduce the appreciation of the pound. Norway, where oil constitutes a far bigger percentage of the economy than it does here, has, in spite of it, managed to keep its exchange rate down through a combination of low interest rates, intervention and inward control. Until the Government have tried some such combination, they have no right to tell us that there is no way of doing the job. Other countries have done it and we could do it, too.

If the Government do as I suggest, they will be able to use our oil revenues not to finance unnecessary unemployment but to cut indirect taxes and to invest in new technologies on the scale of our competitors, such as Germany, Japan and France. France has just announced a new five-year plan through which it will spend £10 billion entirely in financing and supporting new technology. Why do we not do the same?

However, none of these measures will work for long if employers and unions take advantage of the more relaxed fiscal and monetary policy to raise their prices or their earnings way beyond increases in their productivity. However, unless the Government can achieve moderation in pay and prices they will have an explosion in both the moment that deflation eases. The explosion that has in the past followed incomes policies introduced in a crisis, as they always have been in this country, will be nothing to the explosion in pay and prices that will follow the years of strangulation imposed by the Government.

The experience of all countries in recent years has shown that, without the sort of social consensus that leads to moderation on pay and prices, increased demand means increased prices rather than increased output. If demand is restricted, output rather than prices is cut, and that is the Government's current problem. The necessary moderation will not be achieved unless there is consensus rather than confrontation, or at least an aim for that, over the whole range of policies. It is no good attempting to discuss with the unions and the employers nothing but pay and prices. The Government must also discuss with them their policies for industrial expansion and for social justice.

Governments that have succeeded in this endeavour have had an extraordinarily good performance on output, employment and, inflation. Those countries include Japan and Germany among the big Powers and Austria and Norway among the smaller. The striking factor about Austria and Norway is, contrary to the figures that we are given so often by the Conservatives, that they have not only high output and low inflation but unemployment below 2 per cent. What a prize that would be for us if we could achieve it.

The tragedy is that this Government will not even attempt to achieve such a consensus. They will learn neither from their own experience nor from that of others. Their policy has failed—there is no question about that. They have no alternative whatsoever, so the Chancellor stumbles around, dazed and punch-drunk, tinkering with the wreckage of his monetary locomotive amid the hiss of the escaping steam and the shrilling of the siren. The Prime Minister, with the mechanical dogmatism which we know so well, says "Everything is all right, and if not it is the fault of the Governor of the Bank of England or the rest of the Cabinet." It is never her fault. She was saying that again on television yesterday.

The fact is that we have a broken-backed Chancellor pursuing a broken-backed policy — a type of manic monetarism diluted only by administrative incompetence and political opportunism. There is no future for this country so long as this Government remain in office.

4.40 pm

The Chancellor of the Exchequer (Sir Geoffrey Howe)

I begin by dealing directly with the charge laid by the right hon. Member for Leeds, East (Mr. Healey) that I misled the House in any respect this week. I reject absolutely without qualification the suggestions that I misled the House or anybody else by what I said. As the House well knows, the size of national insurance contributions payable by both employers and employees is calculated under the system that took its present shape under the social security legislation of the last Labour Government. That system provides that the contributions payable by employers and employees depend upon two separate factors—the percentage rate payable by either side and the upper and lower limits of the band of earnings on which those rates are levied.

The lower end of that band of earnings is fixed by reference to the value of the single pension. The upper end of that band is fixed at about seven times the size of that pension. The legislation requires the pension to be increased from time to time in the light of inflation so that the value of the pension is maintained. Exactly the same legislation requires an increase in the ceiling on the range of income on which contributions are charged. The system means that both benefits and contributions go up together. Obviously, the one has to match the other. Benefits have to be paid for, and no one argues against that.

In exactly the same way, the contribution bands also have to go up. There is, and was, nothing secret about that system. Far from being a secret, the system has been on the statute book in the same form since it was placed there by the Labour Government. There is nothing secret about the amounts to be paid. The last Administration, when it addressed itself to this question, did not at any stage address itself to it differently. The right hon. Member for Leeds, East and all Opposition Members understand that well.

The system that we followed was established and operated by the Labour Government. We followed that system in exactly the same way. When the right hon. Gentleman was in office the upper limit of the earnings band, which was increased by the announcement that we made this week, was increased each November in three stages, from £90 to £135. When the Labour Party was dealing with these matters, on each occasion Ministers informed the House only by means of written answer. Indeed, if there was anything exceptional about the announcement that I made on Monday, it was that it was the first occasion that an increase had been announced orally in the House instead of by written answer.

Several Hon. Members rose—

Sir Geoffrey Howe

Of course—

Hon. Members

Give way.

Mr Speaker

Order. It is clear that the Chancellor of the Exchequer is not giving way.

Sir Geoffrey Howe

Of course, every time that the band was increased by the Labour Party, as it was each November year after year, the amount of money payable by employers was automatically increased under the legislation passed by the Labour Government. I cannot recall hearing one word of protest from Labour Members at that time about the additional burden on employers.

Several Hon. Members rose—

Sir Geoffrey Howe

Opposition Members—

Hon. Members

Give way.

Mr. Speaker

Order.

Sir Geoffrey Howe

Opposition Members have asked some serious questions and laid some serious charges against me. I am addressing myself to those charges. When I have done that, I shall answer their questions within the limits of the debate. Members of the Labour Party made no complaint about the increased burden on employers when they operated exactly the same system in exactly the same way. Therefore, they are not entitled to make complaints about it at this time. Not one aspect of the system that we inherited from the Labour Government was changed in any way by the decisions that I announced on Monday.

The right hon. Member for Leeds, East has not told the House that more than £100 million of the £386 million increase of which he now complains represents an amount of additional national insurance surcharge payable as a result of the upper earnings limit going up to carry the burden of the national insurance surcharge that he himself invented. I made no change in that.

The only change that I made, and the only change of which I did, therefore, tell the House, was to raise the percentage rate of contributions, from the employee alone, from 6¾ per cent. to 7¾ per cent. That was the only departure from the regular annual routine laid down by the Labour Government. For that single change I gave the figure of £1 billion for the additional payments by employees. Each year, the other changes were notified by written answer. The only change that we made directed to raise additional revenue beyond that which would have come in the ordinary way from the operation of the ordinary system was the change that I announced to the House.

Mr. David Ennals (Norwich, North)

Why, if the Chancellor of the Exchequer feels that he explained the matter to the House, did not the House, the CBI and the public know about it? Why did the Chief Secretary say the next day that with hindsight it would have been better if the situation had been explained to the House?

Sir Geoffrey Howe

All those who follow these matters were able to see what was happening. [HON. MEMBERS: "Rubbish."] Most of all, the right hon. Member for Leeds, East should have known. The procedure followed was exactly that laid down by the Government of which he was a member.

Several Hon. Members rose—

Mr. Speaker

Order. Only one hon. Member at a time may address the House.

Sir Geoffrey Howe

The right hon. Member for Leeds, East was responsible for making the changes. In exactly the same way as he, we came to the House with a written answer to make the changes. The only change of which the House was informed on Monday was the only change that made any difference to the system established by the right hon. Gentleman. If my right hon. Friend the Chief Secretary made certain observations about this matter, I say that the only reason why it might have been more prudent to make any observation about this would have been if one could have foreseen the totally bogus row created by the Opposition.

Several Hon. Members rose—

Mr. Speaker

Order. It should be clear to the House by now that the Chancellor will not give way.

Sir Geoffrey Howe

There is one further observation to be made. When rates of contribution are increased, it is the normal practice, under the legislation of the Labour Party, for that increase to be shared equally between employer and employee. On this occasion, far from placing added burdens on employers, we decided to relieve them of their normal share of the extra revenue from the changing rate, of which I told the House on Monday not one penny would be paid by employers. The additional revenue that they will pay comes not from any change that we made but from the legislation of the Labour Government. We have protected the employer from any fresh burden. The right hon. Member for Leeds, East did exactly the opposite.

Mr. Healey

Will the Chancellor answer the question that I put to him? If he was so anxious to protect employers, why did he not increase the ceiling by the minimum provided in the law, thereby saving employers £250 million of the £386 million that he says this change will cost?

Sir Geoffrey Howe

Because the figure arrived at by way of conclusion follows from the Government Actuary's analysis of what it is prudent to impose. Moreover, it is entirely within the limits laid down by the legislation enacted by the Labour Party.

The Opposition have no right to make complaints of this kind. Their record in office on the matter was to heap burden after burden upon the employer. In 1977 the right hon. Gentleman imposed quite specifically and gratuitously on the employer the first national insurance surcharge of 2 per cent. In 1978 he raised the national insurance surcharge to 3½ per cent. In the same year he raised the employers' national insurance contribution rate by 1¼ per cent., as against ¾ per cent. for the employee. On no occasion did the Labour Government act to abate or modify the burden falling on the employer. On occasion after occasion, they acted to increase that burden. The right hon. Gentleman is the last person who has any right whatsoever to criticise the steps that we have taken. [Interruption.]

Mr. Speaker

Order. I know that the House is excited, but we must be able to hear what the Minister is saying.

Sir Geoffrey Howe

The Labour Party has no right whatsoever to criticise the way in which we followed the system laid down by the Labour Government's legislation.

When I came before the House on Monday, I told it everything—all that there was to be told about the only consequence of the only change that we then made. The House was fully informed about that, and the Labour Party has no right to criticise.

Mr. Richard Wainwright (Colne Valley)

The Chancellor spoke just now of the rise in the top income limit for social security contributions being automatic. Surely, he knows that the statute gives him a wide area of choice between six and a half times the pension and seven and a half times the pension. Surely, he should have informed the House, when he was dealing with the whole span of social security contributions, why he chose to go to the top of the scale.

Sir Geoffrey Howe

The hon. Gentleman must have failed to hear what was said by my right hon. Friend the Prime Minister as well as myself. Changes in that band—the spread to the top limit of earnings—have been announced every year and each year by written answer in exactly the same way as we have done. There was no reason whatsoever to do anything different.

Mr. Healey

The Chancellor must recall that he told us about the increase to £200 in his statement on Monday. Thai was not left until the next day. However, he did not explain to the House the consequences to the employer, nor did he explain why he had chosen the upper, rather than the lower, end of the band. If he was able, as I am, to see the discomfort and scepticism on the faces behind him, he would realise that he would have done much better to make an apology instead of going through the preposterous rigmarole to which we have just been subjected.

Sir Geoffrey Howe

I certainly feel under no obligation whatsoever to offer any apology in the face of the advocacy of the right hon. Gentleman. He knows perfectly well that we acted in accordance with the procedures laid down, and I have nothing more to add. Indeed, it is not the only point on which the right hon. Gentleman does less than credit to his insight when he was in office.

Mr. Andrew Faulds (Warley, East)

Bring back Barber.

Mr. Speaker

Order. If I heard the remark correctly, it seems that the House is difficult to please. When Black Rod wants to come, hon. Members do not want him.—[HON. MEMBERS: "No. Barber."] — I withdraw my remark; I misheard the hon. Gentleman. I suggest now that we all listen to the Chancellor.

Mr. Faulds

On a point of order, Mr. Speaker. You unfortunately misheard me. I should welcome Black Rod instead of this performance. I was referring to the late unlamented chap who is now in another place.

Sir Geoffrey Howe

The point with which we have just dealt is not the only one on which the analysis of the right hon. Member for Leeds, East does less than credit to what I believed he had learnt when he was in office. He was at pains today to say that if the House believed that he was a monetarist it would believe anything. I am not at all clear what the right hon. Gentleman's position is. I had understood him to attach some importance to monetary policy. He took a great deal of time when in office to expound the principles of monetary policy to us. Is he now saying that he has turned his back on that, or does he have some special brand of his own?

The right hon. Gentleman seems prepared to adopt almost any posture. He appeared at one point in his speech to be criticising the excessive rate of monetary growth. At the next moment he appeared to be criticising deflationary policies. At one point he was apparently arguing that we had failed in our ambitions to cut public spending. The next moment he was complaining that we had made cuts in public spending that were far too massive. As always, the right hon. Gentleman's analyses and recipes are inconsistent with each other. He was also suggesting, as he did on Monday, that the PSBR should be allowed to increase to almost any figure that he cared to think of, and at the same time he advocated a much larger cut in MLR.

The right hon. Gentleman was at pains — it is important that we should not allow the argument to go unchallenged—to suggest that the problems that we face in our economy are unique to this country. It would be a fundamental mistake to cherish the illusion that Britain alone today is beset by economic problems of that kind. Virtually every other economy is still reeling from the impact of the doubling in the price of oil since 1978. In the last three months for which figures are available, industrial production in the six major overseas economies, even including Japan, has fallen by an annual rate of almost 10 per cent.

We have witnessed in the same period the steepest decline in industrial growth in American history. As profits have suffered around the world, so have jobs well beyond the frontiers of our own country. Over the past 18 months unemployment in the seven major OECD economies has risen by over 2½ million. The Opposition do no good by trying to ignore the facts. It has been said that our unemployment is part of an affliction that is affecting the whole world. The Western world is gripped by the most complex and perilous recession that we have seen since 1945. Those are not my words but the words of the right hon. Member for Ebbw Vale (Mr. Foot), the Leader of the Opposition. They were true when he uttered them and they are infinitely more true today.

We do not doubt that the Labour Party, whatever else it may be committed to, is clearly committed to the conquest of unemployment. So are we. The fact is, however much Labour Members may scoff, that unemployment has climbed in Britain under successive Governments since the war. The average level of unemployment from 1951 to 1964 was about 300,000. From 1964 to 1970 it increased to 500,000. From 1970 to 1974 it increased to 750,000. During the last Government of the Labour Party—namely, from 1974 to 1979—it increased to about 1,250,000.

If we set that mounting trend of unemployment alongside one other trend, we see clearly one of the causes of it. Over the same 20 years successive Governments have witnessed a higher average rate of inflation than did their predecessors. From 1951 to 1964 inflation averaged 3½ per cent. a year. It was 4½ per cent. from 1964 to 1970. From 1970 to 1974 it was 9 per cent. During the past five years it has been 15 per cent. a year. That is the background against which some, including some members of the Labour Party, say "Tackle high unemployment and low growth by adding to the domestic demand." Surely, we have learnt that along that way lies more inflation, fewer jobs and not more growth. We shall never reverse the trend towards higher unemployment unless we reverse the same trend towards higher inflation.

Mr. Clinton Davis (Hackney, Central) rose—

Sir Geoffrey Howe

At the heart of our strategy is our conviction that inflation is the first enemy. That stems not from any preoccupation with monetarism or anything else; it is the lesson of Britain's economic history since the war.

If I may, I shall flatter the Leader of the Opposition once more by quoting a remark that he made to his hon. Friend the Member for Bolsover (Mr. Skinner). It was not very long ago that he said to his hon. Friend: I think that my hon. Friend must face the fact that inflation helps to cause unemployment."—[Official Report, 28 October 1975; Vol. 898, c. 1269.] It is a great thing to reflect that at least we have as the Leader of the Opposition someone who echoes the message uttered by the Government who were led by the right hon. Member for Cardiff, South-East (Mr. Callaghan) and who also echoes the message that inflation is the cause of unemployment.

It is in that context that other industrial countries have recently been restating their determination to press on with the battle against inflation. We must do the same. We must recognise, as does the right hon. Member for Leeds, East, that monetary policy has a crucial part to play in that. The rapid growth of sterling M3 in recent months was a predictable response to the removal of the corset. However, there have been other reasons: the size of the surplus on the current account of the balance of payments, the financial needs of the corporate sector and, in the first half of the year, the scale of public sector borrowing.

It is against that picture that we must consider the outlook for monetary growth in the months ahead. A very different picture should emerge by the end of the current target period in April 1981. Public sector borrowing in the second half of the financial year is likely to be less than half what it was in the first six months.

There are signs of a downturn in the growth of bank lending. As inflation eases, and, above all, if wage settlements continue at a realistic level, the downturn should be confirmed. Over the 14 months of the target period, monetary growth will be significantly less than the figures so far would suggest.

In those circumstances, and provided that we continue to develop appropriate fiscal policies, it clearly does not make sense to raise interest rates. It is equally unnecessary to allow real interest rates to continue rising by leaving nominal rates unchanged while the rate of inflation falls. That is the background against which we saw, this week, the cut in minimum lending rate from 16 to 14 per cent. That is the background against which we have been reviewing the techniques for monetary control in the light of the response to the March Green Paper. The changes that I announced on Monday open up a way to a move, in the longer term, to a system of judgments about the appropriate level of interest rates to be replaced by control of the monetary base. Such a system has attractions, and a decision for or against it will be taken, as is right, as more information becomes available.

In the meantime, monetary control in the next year will be improved if the public sector can mobilise directly a larger share of personal savings. The target for next year is to attract £3 billion in new money into national savings. Since 17 November the indexed national savings certificate has been available to anyone aged over 60 years. By the end of last week about £120 million had already flowed in. In due course I intend to extend eligibility to purchase the certificates so that other sectors of the population will be able to obtain the benefits of this form of saving.

I have also decided to increase the maximum deposit in the investment account of the National Savings Bank to £200,000 and to improve the attractiveness of the premium bond scheme. Full details are being announced by the Department of National Savings today.

Mr. Clinton Davis

I am obliged to the right hon. and learned Gentleman for enabling me to interrupt his gabble. Will be admit or deny that the overall effect of the measures that he announced on Monday, at a time of already deepening recession, will have an adverse effect on employment?

Sir Geoffrey Howe

The measures that I announced on Monday, as should be perfectly clear to the hon. Gentleman, are designed to ensure that public sector borrowing does not become excessive and that interest rates do not become excessive. They are designed in that way to ensure that unemployment begins to decrease rather than to increase. All these measures, including monetary measures, will help to maintain our medium-term strategy. They will help the Government to borrow in ways that are not inflationary. However, we must also ensure that borrowing is held firmly in check. That is why it is important to come to the right judgment on the size of the public sector borrowing requirement.

We have always accepted that it may be legitimate for the PSBR to be higher at a time of recession. What divides us from the Opposition is our anxiety that it should not be allowed to go too far, and certainly nowhere near as far as the right hon. Gentleman says. It is for that reason that we are proposing to take action, as I announced on Monday, on both sides of the account, namely, to increase revenue in the next financial year and to deal with public expenditure.

Those measures have to take account of the way in which current pressures are affecting different parts of the economy in different ways. They have to take account as well of the need for legislation ahead of the Budget if a full year's revenue is to be secured. At present, there is a significant lack of balance between the personal and company sectors. That is made significantly worse by the rise in the exchange rate to which the right hon. Gentleman referred. It must be recognised that consumers gain real extra purchasing power on top of rapid increases in money earnings, so that for the great majority of those in work real living standards have been rising, while output has been falling. In the meantime, many companies suffer and have been suffering. International competition makes it difficult to recover higher costs, whether in domestic or export markets.

All those pressures reinforce a steady shift that has been taking place over decades from investment into consumption and from profits towards pay, so that the real rate of return earned by industry, apart from the North Sea activities, has been falling steadily and remorselessly.

That is the background to the decision that I announced about taxation of North Sea profits and increased national insurance contributions. The economic squeeze has not hit North Sea operations or those who have been able to keep their jobs. It is in those areas that we must seek such new revenue as we need. The rising price of oil has changed the balance between the interests of the oil companies operating in the North Sea and the legitimate needs of the nation. I judge that the nation can sensibly look for a larger share of the higher revenues from North Sea operations and so aim to secure an extra £1 billion from that source next year.

Petroleum revenue tax by itself is unable to do the job, and we may need to make changes in the direction of this new tax. Of course, the Government recognise the importance that the industry attaches to stability in the North Sea fiscal regime. We cannot ignore the increase in world oil prices, and we cannot insulate the North Sea sector from the problems of the rest of the British economy.

I have already explained the position with regard to employees' contributions. The new departure is the increase in contribution rate for employees only. If I had followed the example of the Labour Party, I should have put an additional burden of £½ billion on the employer under the normal arrangements. I shall, of course, look again at the whole balance when I frame my Budget next year.

One thing is clear: to reduce the real value of employers' payments across the entire national insurance contribution machinery or through the national insurance surcharge would not be the best way of helping manufacturing, which is bearing the brunt of the pressure. Only one-third of the total payments from that source comes from manufacturing. It is much better to concentrate help where it is most needed. It is for that reason that our new stock relief scheme, which will cost about £300 million next year, has been introduced and will come into effect next year.

We have had to look to those revenue changes to play an important part in getting the right fiscal balance, but we have also been pursuing the crucial objective of curtailing the size of public spending. The decisions that we recently announced ensure both that the long-run strategy set out in our March White Paper is secured and that the pattern and level of expenditure next year are adjusted to changing circumstances.

Inevitably, because of the recession, public spending next year will be somewhat higher than previously intended. With higher unemployment, more people will be eligible for social security benefits. The nationalised industries are bound to draw more heavily on the Government in such times. As the House knows, we have made provision for special employment measures, increasing the figure by about £250 million to about £570 million. Those measures are not, of course, intended as a solution to unemployment, but they will have a very substantial impact, especially upon youth unemployment, as well as preventing the growth of long-term unemployment among school leavers and helping to equip people of all ages for new jobs.

At the same time, reductions are being made beyond those planned in last March's White Paper, partly to finance these extra expenditures and partly to bring down the burden imposed by the public sector on private industry. Governments all over Europe have come to realise that the provision of public services must be scaled to what the productive economy can afford. They have come to realise that scaling down must be applied to social security as well as to other programmes. In Sweden and Denmark, for example, pensions are being uprated by reference not to the consumer price index but to an index that excludes energy prices, and in one country to an index that excludes indirect taxes. That kind of change has been contemplated in other countries. We are taking our own measures here, as I have already announced to the House.

Mr. Healey

It has been widely leaked that the Chancellor is planning substantial increases in the tax on drink and tobacco. Is he aware that beer and tobacco form 12 per cent. of the old-age pensioners' price index? Can he assure the House that he will not seek to impose another cut on the living standards of old-age pensioners by this back-door method?

Sir Geoffrey Howe

Like the right hon. Gentleman, I do not propose to anticipate my Budget judgments. I am aware, as he was, of the part played by tobacco and alcohol in the budget of every family in this country, but he will have to wait and see. What we are doing is to continue the shift away from the spending plans of the last Administration. Although our plans for next year are somewhat higher than we envisaged in March, they will be about £5 billion below the level planned by the last Government. The volume of public spending next year should be about 1 per cent. below the outturn now expected for the current year.

Some people argue that we should have gone much further in cutting public expenditure. The Opposition argue that we should have gone nothing like so far. Critics on both sides ignore the balance and the success of what we have achieved, and they ignore the difficulties of trying to do more. Whatever the Labour Party may think, it is clearly right to maintain the priority that we give to the defence of the nation. That has not enabled us to preserve that programme in its entirety, but our record is likely to remain one of the best in the Alliance.

It is clearly right to sustain spending on the Health Service in real terms, even if we have to seek higher national insurance contributions from employees to provide the additional revenue. It is clearly reasonable not to increase social security benefits in real terms at a time when the real incomes of those who finance them are falling, but we are fulfilling our undertaking to protect pensioners against inflation. With falling school rolls there is a clear case for economies in expenditure on education, but even those cannot be achieved overnight if the quality of basic education is to be maintained.

Finally, there can be no doubt that it is right to give continuing importance to preserving law and order. Outside defence, law and order, health and social security, we are making massive economies. By next year, real spending at 1980 survey prices on the remaining programmes will be £3½ billion less than it was two years ago, with particularly big contributions from housing—£1½ billion—and education—£½ billion. If it is not right to look at programmes of that kind, how is it possible to make sensible reductions in the overblown burden of public expenditure? It is equally important not to ignore what we have also achieved — a similar pattern of significant reductions virtually everywhere else.

There are still some who argue that, regardless of all that we have been doing, there are easy billions of pounds to save. That is to ignore what has already been done. It is to ignore, for example, what has been done about the size of the Civil Service. Since the election, numbers have been reduced by about 5 per cent.—35,000 altogether. The largest fall, approaching 10 per cent., has been achieved in my own departments. To make such criticisms is to ignore the target that we have set ourselves, which is a reduction of 100,000 by 1983, which will give us a smaller Civil Service than at any time since the war. That will mean a cost saving of over £1 billion per year.

One particular difficulty that we face this year is the impact of last year's catching-up pay settlements for workers in the public services. Those settlements, the inevitable consequence of the collapse of the previous Administration's over-rigid pay norms, have meant that even to provide the same level of services in terms of volume costs more. We cannot allow that to happen again. The Government are determined that the pay bill in the public services must reflect what the country can afford. That is why we have made it clear that next year's rate support grant settlement will not provide for average increases in pay exceeding 6 per cent.

With regard to our own employees, we have made it equally clear that pay settlements cannot be determined exclusively by comparability. No Government can guarantee the living standards of those who work in the public services regardless of the realities of what is happening in the rest of the economy.

No one need have any doubt about the determination of this Administration to control public expenditure, in terms of both volume and cost. No one should have any doubt that we are pursuing the right strategy through conditions inevitably more adverse than anyone had foreseen. Our objective must be to adjust the balance of the economy, to lay the foundations for renewed growth with the conquest of inflation. The strategy is achieving just that. The decline in gross domestic product is coming towards an end. Pay bargaining is displaying a new sense of realism. Industrial disputes are fewer at this time than at any time in the last 30 years. Inflation during the last six months has been running at an annual rate of less than 10 per cent. This week's reduction in interest rates will bring further valuable encouragement.

I invite the House to reject the Opposition amendment and to give our strategy the support that it deserves.

5.19 pm

Mr. James Callaghan (Cardiff, South-East)

I promise not to detain the House for long, but I cannot let this occasion pass without recording my dismay at the course which events and actions in this country are taking. I feel that we are in a most serious crisis, and I cannot say that the speech of the Chancellor of the Exchequer today has done anything to relieve my anxieties or those of many other hon. Members.

I shall not spend time on the dispute about the national insurance contributions, except to say that the Chancellor does not seem to understand what the complaint is. It is that he gave the House a picture about the future of industry and the burdens that he would impose upon employers. He did not mention this particular aspect of it and, therefore, either wittingly or unwittingly, he gave a misleading impression. Knowing the Chancellor, my view is that he was not aware of what was happening. If only he had come to the House and said "I am sorry that I did not give the full picture; it might have been better if I did", he could have saved 20 minutes of his speech. That is what it comes to. No one is accusing the right hon. and learned Gentleman of dishonesty, but we feel that on Monday he gave an impression to the country that the position, of industry would be better to the tune of £386 million than it has turned out to be.

My right hon. Friend the Member for Leeds, East (Mr. Healey) today gave us the facts about the situation. It is deteriorating because of the oil price increases, the world recession and the cuts in demand at home—a restriction in demand which the Government are themselves imposing. My case is a simple one. This is not the time to cut demand. This is the time when demand should sensitively but properly be increased. That is the difference between us and Conservative Members.

The facts speak for themselves. Unemployment is rising and will continue to rise. It will affect both the public sector borrowing requirement and, more importantly, the lives of millions of families in our country. It is to that matter that I want to address my remarks later. Factories are being dismantled. Apprenticeships are fewer than they have ever been. There is a deterioration in our physical assets, both public and private. That is the reality of the situation. The country is going down. It is going backwards at the present time. It is clear that some effort must be made to reverse that trend. I heard nothing in the ragbag of proposals that have been put forward by the Government to give me the impression that there was a coherent strategy behind what they were trying to do.

It is clear that the Government had no conception that their policies would produce results as serious as they have turned out to be. Even as recently as 20 July last, the Secretary of State for Employment, in an interview in the Sunday Times, was repeating the official forecast — admittedly he was a little sceptical about it — about unemployment in 1981. Unemployment already stands at 2.1 million. Last July he told the Sunday Times that the official forecast for unemployment in 1981 was 1.8 million.

The situation has deteriorated more rapidly and seriously than the Government ever expected or intended. Manufacturing output is lower than they intended when they embarked on these policies, as is investment in new plant and machinery. Our gross domestic product is smaller than the Government intended. All these things have happened, whether they intended them to happen or not. It is because of the seriousness of the situation that we cannot accept that the Government's present policies will remedy the position in which the country finds itself.

There are now between 80 and 90 per cent. of firms working below capacity. Was that the Government's intention when they embarked upon these policies? I cannot believe that it was, yet the Prime Minister finds it impossible ever to admit that in the slightest respect she could be wrong about anything. As a result, on the radio last night she told us that she would not be blown off course in any way. I do not believe it. Of course the Government have been blown off course. Indeed, their own two chosen instruments show that they have been blown off course. We were to have a proper monetary discipline … with publicly stated targets

which would control the increase in the money supply. At the same time, each year we were to have "a gradual reduction" in the size of the public sector borrowing requirement. We were told that the first was "essential" to the policy and that the second was "vital", but neither has been achieved by the Government. I happen to be sceptical about these matters, but if the Government attach such importance to them and describe them as "vital" and "essential", how can they believe that they are on course with their policies?

The situation would have been far worse had the Government adhered to their target. However, these matters have become articles of faith—in the same way in which I have seen other monetary matters become articles of faith—instead of being used and discarded when their usefulness is ended. Of course, the control of the money supply has a place in our affairs, and of course the level of the PSBR matters, but it is absurd and ridiculous to elevate them to the level to which they have been elevated by the Government.

In the interests of our manufacturing cycle, in the interests of those who are unemployed and in the interests of all the things that need doing, I beg the Government to think again. We must have a change from this policy which shows no prospect of improvement in 1981. Indeed, I believe that 1981 will be a worse year than 1980. In their saner moments, Ministers say that what is required is better management, better trade union practices, a closer relationship between productivity and earnings and higher technology. All those things are true, but they persist in believing that if they treat the monetary target as a regime — just like the old gold standard, and with the same consequences—adhere to them through thick and thin and sit tight, matters will come right. To my great horror, that is what the Prime Minister said on the radio last night. They will not.

I therefore ask that changes be made in the Government's policy. If the Government restrict demand, as they are doing today, both private and public, costs are bound to go up, firms will not be able to make the proft that is required for investment, output will decline and unemployment will increase. I should have thought that that was simple common sense. Once more I urge the Government to think again.

Another problem which I wish to raise before I sit down relates to Wales. This month, Wales has the unenviable distinction of having the highest percentage of unemployment in Britain— 11.4 per cent. overall and 13.3 per cent. male unemployed. About one man in seven in South Wales is out of work. There is some wild talk in Wales at present which is discountenanced and, I hope, disavowed by everyone who has any sense of responsibility about the way in which we conduct our affairs. However, the Government should be in no doubt that it exists. Labour Members of Parliament for Wales have asked me to raise this matter.

Two days ago, my right hon. Friend the Member for Rhondda (Mr. Jones), who is our spokesman on Welsh affairs, sent a letter to the Prime Minister about the problem of steel in Wales. There is a growing and dismaying belief that either Llanwern or Port Talbot is to be closed down. This springs from the review of steel output under the corporate plan that will be put before the Government. Points about it have in some way been leaked to the public, and it is believed that there will be a shutdown of one strip mill or the other. The letter to the Prime Minister says that Wales cannot stand another such hammer blow. I repeat that with all the seriousness that I can.

There is no need for me to say that every one of us will discountenance violence or unlawful tactics in Wales. However, I beg the Government to accept the fact that small groups of people will misuse the economic situation in order to undertake action to bring about a great divide in the country and endanger our democratic practices. My right hon. Friend the Member for Rhondda and I—all of us — will throw what weight and influence we have against that.

I urge the Government to treat with seriousness the fact that if Wales suffers the closure of one of those great strip mills on the coast the consequences will be extremely serious. I beg the Government to think again about that. Not only will there be consequences for steel. There will be the ripple consequences to coal, to the pits producing the coal and to the ancillary industries. When our people in Wales become unemployed, there is nothing for them to do and nowhere for them to go. I urge the Government to think again.

I believe that the time has come for the Government to put in hand new projects, as was done in the 1930s. I know that I am described in the newspapers as old-fashioned, but I draw on my history. In the 1930s, even the Conservative Government launched a great project to build the "Queen Mary" on the Clyde when there was fierce unemployment at a level that I am glad most hon. Members have not experienced. We should start to do the same thing again.

I should like to make some suggestions to the Government. They should use British steel in North Sea oil rigs. They should undoubtedly increase the amount that is being used here, irrespective of the consequences. They should also start on a Channel tunnel. A great project such as that could be started, and if it affected the public sector borrowing requirement, so much the better. I would not care if it did. The Government should start to invest in and modernise the railway system. They should bring the ports system up to date and place orders with the engineering industry. They should assist new construction and expand the housing programme and get the housing market moving again.

What I am proposing is good investment for the future. I know that it will knock the PSBR. I am not suggesting that we should throw money away, but in some essential elements our physical capacity is deteriorating sadly, and the Government have a responsibility and could wisely invest in the future, if only they would do so. We also need large-scale training and more apprentices. I am calling for emergency action in these matters.

I do not have time to go into detail now, but f hope that the right hon. Member for Sidcup (Mr. Heath) will refer to the opportunity that was missed by the leaders of the world at Venice last July. They focused only on inflation. They did not focus on the world recession. It is now beginning to hit us, and it will hit us even harder in 1981.

The private sector must be profitable. My hon. Friends and I have not always said that as clearly as we should have done. But there must also be large-scale planned intervention by the Government in this serious situation. Such intervention must be sensitive, but it must take place. If Conservative Members bury their heads in the sand, as they have done so far, they will not be creating a social consensus; they will be widening the social divide and they will be responsible for what happens as a result. I urge the Government to think again.

5.34 pm

Mr. Edward Heath (Sidcup)

I, too, am grateful for the opportunity to make an intervention, which I hope will be brief. I do not wish to dwell on the question of the insurance contributions, which has occupied so much time this afternoon. I simply wish to say that my right hon. and learned Friend the Chancellor of the Exchequer, a colleague as a Law Officer for many years, is a man of undoubted integrity, and I am sure that no hon. Member believes that he intended to mislead the House. He has only to say that if, after his statement, any hon. Member was led to a wrong conclusion he regrets it, and I am sure that the House will accept that unequivocally.

What I have in common with the right hon. Member for Cardiff, South-East (Mr. Callaghan) is that, undeniably, our generation came into Parliament because we were determined to prevent what happened in the 1930s from occurring again and to prevent a breakdown in the social structure and the political institutions that led to the rise of authoritarianism in Europe and finally to the Second World War. That was our determination, and for 25 years, from 1950 to 1975, the people we represented had a better standard of living, bigger and better homes, better education, a better Health Service, better roads and better transport and were able to enjoy holidays such as they had not envisaged before.

Therefore, I think that the House will appreciate that I am not one who apologises for that period during the postwar years to the middle of 1975. It is now a tragedy that it has passed. We are now faced with massive unemployment, on a scale certainly at the level of the 1930s and to become greater. The improvement in housing, education and the standard of living has stopped. To all of us, that is a matter of the greatest possible regret.

The Chancellor said that he wished to get a better balance in the economy. As a result of an extraordinary transatlantic telephone conversation that I had with Professor Friedman, I find that I am not entirely alone among those in the Conservative Party who worked for its victory who are worried about the present situation. One of our intentions after the 1930s was to ensure that the Conservative Party was never again considered to be the party of unemployment. I ask my hon. Friends to think seriously about that in our present circumstances. When one wants a better balance in the economy, unemployment should be dealt with. Otherwise, the risks to our party—if I may talk to my party for one moment—are very great and will defeat the other purposes that we have in mind.

Mr. John Bruce-Gardyne (Knutsford)

How many elections did you lose?

Mr. Heath

It was not on the question of unemployment. Unemployment is of vital importance, particularly to the unemployed. [Interruption.] If my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) wishes to go off to write leaders for The Daily Telegraph, he can do so.

I spoke about a better balance in the economy. I have endeavoured to make speeches about that in the past, and, in view of the support for some of the proposals, I wish to mention them again to my right hon. and learned Friend the Chancellor. When he talks about monetarism to Labour Members, he says that they have a choice between whether they wish him to be a stronger or weaker monetarist. That is not the point. The point is whether his attempt to pursue a strict monetarist policy is, in some aspects, having undesirable effects, which are defeating his own ends. For example, can it be right to have rates of interest under which those who have spent 20 or 30 years of their lives—as my father did—building up their own family business have found it destroyed in this past year? The Secretary of State for Trade says that other people will take their place. They may do so in time, but that is no consolation to the people who have had 30 years of work destroyed because of the level of interest rates. Nor does it allow for the length of time taken by people to build up a new family business or any other business.

The point here is that what the Chancellor wanted to obtain could have been brought about if interest rates had not been at that level, because they have proved to be self-defeating. The cost of unemployment produced by them is greater than the interest rate benefit. That is one of the self-defeating aspects of that approach.

The same thing applies to the sterling rate. Can it be right to have sterling at the present level? I have been one of those who have always fought for a high sterling rate. But what has mattered in this last period has been the speed at which it has reached its present level. I do not believe that any firm can cope with an increase of 30 per cent. in the rate of sterling over a period of 15 months. How can it increase its productivity sufficiently to deal with that?

Here again, there is a fallacious argument. It is not the efficient who can cope with that. The efficient, as we see from our great firms, have a very small margin for improvement in a given period of time. Therefore, when they are faced with that rate of increase in such a short time they are in the utmost difficulties, as we now see. It would have been right to ensure that sterling did not rise as fast as that. [HON. MEMBERS: "How?"] I shall deal with these questions.

What we have seen has been the management of a monetary policy based entirely on the level of interest rates. It is that which has prevented the Government from making other charges such as the Germans and the Swiss made when they found it necessary in order to ensure that their currencies did not rise at a great rate.

When I am told that what we are doing is following the German policy and creating another German miracle, I remind the House that the Germans were immensely careful to ensure that when the mark appreciated it was by 4 per cent. or 4½ per cent. German manufacturers, of course, cried out against it, and they were told "You can manage." Then there was a break of about two and a half years and the rate was put up by another 3½ per cent. That is how the mark was improved and the German economy was improved. It could not have stood a rate of appreciation such as we have gone through in the last 15 months. If a Government are prepared to use technical means other than the interest rate, they can do much more to control the level at which the currency settles, and that is what is required.

The Chancellor of the Exchequer, by his announcement on Monday, showed that he has now freed himself from the shackles of the strict monetarism to which he claims to have applied himself in the past 18 months, because in no way do the figures that he has given relate to each other in terms of strict monetarism. I welcome this wholeheartedly. If only he will realise it, he has the freedom now to act in other ways than interest rates in order to give him much greater flexibility and a much better balance in the economy as a whole. I beg him not to cast that opportunity away.

The Chancellor of the Exchequer has now given figures for the total public sector borrowing requirement for the rest of this year, and we now know that he is to reduce interest rates at the same time. These matters bear no relationship to each other. The plain fact is that now that he has freed himself from the shackles, he should take every opportunity to use the maximum flexibility open to him in order to remove the dangers that we see—to the big firms from the rate of sterling and to the small family businesses from the high interest rates from which they have had to suffer, with the accompanying danger from unemployment that exists in each case.

There is no doubt at all that we have lost competitiveness. I remind my right hon. Friend the Prime Minister that the Financial Times showed that three-fifths of the problem is due to the sterling rate and only two-fifths to the wage spiral. I suggest that three-fifths is a very substantial contribution to the loss of competitiveness. What is happening is that firms are quietly withdrawing from this country, setting up their production overseas and supplying this country as the foreign market. This is already indicated in the figures for imported manufactures. More and more we shall see imports going up from manufactures made by British firms overseas, whose only way of surviving is to use Britain as the foreign market and the other places as the home market. This, too, is a regrettable aspect of what is happening.

I want to deal with one subject that has been mentioned by the right hon. Members for Cardiff, South-East and Leeds, East (Mr. Healey), and that is oil. I was struck last night by the words of the Secretary of State for Trade. In replying to the debate, he used the words "when the recession passes". This recession will not pass by. If anything, it will become deeper and deeper, for the reason that we now have the most powerful cartel that the world has ever known controlling the one raw material that is basic to industry in the Western world and to the medium developing countries and those that are industrialising. The cartel will continue to increase oil prices. If there is an OPEC meeting in December, the guaranteed prices will be raised to the spot price. I have no doubt whatever of that.

It will mean a still further contribution from all of us to the OPEC surpluses. The figures have now become most striking. The developed world will now have a deficit of at least $50 billion in 1980. The German surplus has gone. The Japanese surplus has gone. We may just have a slight surplus. But the total will be at least $50 billion.

The non-oil exporting developing world will have a deficit of at least $75 billion, and that can be filled only by further borrowing. The OPEC countries will have a surplus of at least $120 billion, and much more likely $150 billion. If that is drained off from the world, there is bound to be a still deeper recession. Theare can be no other process. We cannot cope with that by making our own recession deeper still.

There should be an urgent initiative by the leaders of the Western world in order to bring about a meaningful dialogue and a concordat about the future supplies and prices of oil for the world as a whole. It will, of course, be difficult to get it. By 1979, the commercial banks had succeeded in recycling a considerable proportion of the OPEC surpluses. That was why, although unemployment still remained high, it had begun to come down. Now, the whole process has to start all over again, because the commercial banks believe that they are fully extended in terms of borrowing from OPEC and investing in the developing world.

We must, therefore, find alternative means of recycling, and it can be done only through international institutions or through Governments. Basically, for OPEC it will have to be through international institutions. If this is to be. done, the international institutions, the World Bank and the International Monetary Fund must be acceptable to OPEC in their power structure, and that is not the case at the moment. I regret, therefore, that the Chancellor did not find himself in a position to accept a new power structure at the September meeting of the World Bank and the IMF.

The structure also has to be acceptable to the rest of the developing world. That means that OPEC will have to secure something for commodities and access for industrial goods, something on the control of transnationals and something on wiping out the indebtedness of the 20 or 30 poorest countries in the world. Why must this be done? It must be done for a political reason—that the OPEC countries want their votes in the matter of the Arab-Israeli conflict.

We come back to another political problem. There must be urgent Western leadership to find a solution to the Palestinian problem. We cannot sit here and say that our troubles are due either in whole—as some may argue—or in part to a world depression and then do nothing about it. I call on my right hon. Friend the Prime Minister to take the lead in these matters in seeking a dialogue with OPEC, in working for the proposals that have been put forward in the Brandt commission for a mini-summit.

Already the steering committee of the Foreign Ministers has met. The summit will be in Mexico in June. I want to see Britain invited. I do not want to see Britain kept outside because the 20 or 30 Heads of Government are able to say "Britain has nothing to contribute. She is not interested. Look at what she has done about her overseas aid." I want to see the British Government taking the lead in this matter. I want my right hon. Friend to be in Mexico and taking the lead in finding a solution rather than saying that this is something that can wait until we have solved our own problems. That is the basic position that I should like my right hon. Friend the Prime Minister to take up.

I urge the Government to use the flexibility that they gained last Monday afternoon, either by design or chance. I urge them to take a lead in the Western world. in the industrialised world, in the Nine and in the Seven who meet together and to establish a meaningful dialogue with OPEC and to find a solution to that problem. It will bedevil the world for the rest of this century unless we find alternative supplies of energy. It will leave us with a situation that will prove nothing more or less than the prolongation of the thirties—and who can tell what the outcome of such a situation would be?

5.50 pm

Mr. J. Enoch Powell (Down, South)

I am sure that you will understand, Mr. Speaker, the trepidation I feel in accepting your invitation to join the game in the big league. After all, the right hon. Member for Cardiff, South-East (Mr. Callaghan) and the right hon. Member for Sidcup (Mr. Heath), who have just addressed the House, both set out, with conviction and sincerity, to put the economy to rights. For both of them, it ended in open and humiliating failure. Therefore, one to whom it has not fallen to accept, or even to share, that responsibility is bounden to submit his observations to the House with hesitation and humility.

This debate on the Loyal Address and other debates that have preceded it have tended—with the exception of the speech of the right hon. Member for Sidcup—to consist of a barrage and counter-barrage of selective quotations of statistics, matching one selected period that just happens to be of one political colour against another period of the opposite political colour, all of them attributing to those political colours and to the policies of those Administrations the growing misfortunes that the speakers detect.

The amendment belongs to that style of debate, but the debate itself is overshadowed by a grim reality —the grim reality of the perpetual and persistent increases in unemployment, till it now stands at between 2 million and 3 million. The proposition before the House states that the Government's economic policies are responsible for that effect.

The speech of the right hon. Member for Leeds, East (Mr. Healey) was weak in one respect. It was clear that he did not like the Government's policies. It was also clear that he does not like the current economic situation. What was weak, if not altogether missing, was any clear explanation of the causal link between the two. If one were to ask any Opposition Member or any opponent or critic of the Government what was causing such havoc, one would receive two replies. It would be said that the Government's savage cuts in public expenditure were responsible, or, alternatively, that it was the rigorous, rigid and cruel maintenance of their grip on the money supply.

On Monday, the Chancellor of the Exchequer announced that there would be a revision of public expenditure in the coming year. He said that it would be increased under some heads by £1,130 million and that it would be reduced under other heads by £1,710 million. That difference of £580 million, a mere drop in the ocean, is the sole point on which the whole pyramid of the accusation rests.

Still, all that is to occur next year; it has not happened yet. Presumably, our present discontents cannot arise from that announcement. So what about current expenditure? One of the papers circulated reminds us that this year the Chancellor of the Exchequer intended public expenditure to be £1 billion—out of £77 billion—less than in the previous year— representing a reduction of just over 1 per cent. in public expenditure. Is that theory the gravamen of the accusation that these policies are the cause of our predicament? The answer is "No, not really." For in the same breath the Chancellor of the Exchequer told us that that is not what happened. He said that there had been an unexpected increase of £1.5 billion in public expenditure, for which he had not planned. He said that there had been a reduction of £1.5 billion in revenue. What a gratifying Keynesian scene — an increase in public expenditure and a reduction in taxation. Just what the doctors ordered. It is all very well for the right hon. Member for Leeds, East to say "Not enough, not enough." His trouble is that we are not facing a falling public expenditure and rising taxation. In current months, we face a reduction in the yield of taxation and an increase in public expenditure.

Is money supply, then, at the root of the problem? In one of his inconsistent passages, the right hon. Member for Leeds, East admitted that the money supply could not be the cause, because the Government had not succeeded in securing a grip in the money supply, although they had set out to do so.

We can never, I am sure, come to grips with the nation's problem by thus attempting to encapsulate a year and a half of Government policy and a year and a half of experience and trying to relate the one exclusively to the other, particularly as the factors do not match.

We must take into account instead that this year's unemployment is probably not, alas, the culmination but the latest stage of a process that has endured for at least a decade. I shall not weary the House by going back over more decades, for the decade that began in 1970 includes all the events I need to mention. We are duty bound to ask — even if we cannot answer satisfactorily — why unemployment, with very few variations, mounted steadily despite all the changes in that decade.

Take oil and the balance of payments. The fact that we are now in near balance on current account because of oil has been mentioned as a possible explanation. What does the record say? From 1970 to 1973 we were broadly in balance on current account. To use that accursed expression, the nation was "paying its way", but as it paid its way through those years unemployment began to mount. Then our current account went into deficit; it went into deeper and still deeper deficit. Yet unemployment continued to mount. The right hon. Member for Sidcup said that in the past year or two there had been another reversal. Once again we are paying our way, yet still unemployment continues to mount. It is impossible to sustain the proposition that somehow this secular upward movement of unemployment is a consequence of the composition of the trading account of this country with the rest of the world.

Mr. Alexander W. Lyon (York)

Will the right hon. Gentleman explain why, between 1974 and 1979, although unemployment mounted by 700,000, the number of jobs dropped by only 20,000, but in the last six months the number of jobs has dropped by about 700,000?

Mr. Powell

We can all draw attention to the variations throughout this whole period in the rate of the emerging phenomenon of heavy unemployment. But that does not permit us to grasp at temporary and chance factors and assign to them the responsibility for that with which we are confronted.

Is it perhaps the value of the pound sterling, the intolerably strong pound, for which we so devoutly prayed over many years and have treated as a curse since it came to us at last? No, it is not that. Through all the years when the pound was declining as though it would "go through the floor", as the phrase used to be, unemployment mounted, and when it turned and came up again and strengthened unemployment still went on mounting.

Is it the incidence of inflation? Inflation has varied in its intensity during the 10 years from 1970 to 1980, but I challenge anyone to find the means of matching the fluctuations of the inflation rate with any alteration in the upward movement and progress of unemployment.

We are not entitled to ignore, as the motion deliberately ignores, this larger scene. The nation will despise us if, instead of facing it honestly, we take refuge in a battle with peashooters.

What type of causation produces a strong secular change of this kind?

Mr. Frank Hooley (Sheffield, Heeley)

In the 10 years from 1968 to 1978 the work force steadily increased. There were 1 million more women employed in 1978 than in 1968. The right hon. Gentleman is confusing the technical insured population figure in that period with what happened in real terms to people in work.

Mr. Powell

I am surprised at the hon. Gentleman for desiring to wish away a phenomenon with which the British people are very well acquainted. They know very well that this reality of unemployment can run concurrently with an increase in the absolute level of unemployment. What we face is the fact that emerging over that period of 10 years is an increasing inability to find the need and the pattern of production which will fully, or nearly fully, employ our population.

I submit that a movement so secular and pronounced must correspond to some deep change in the pattern of this country's relationship with the rest of the world and the pattern of its own society and economy, but simply because we are faced with an unsolved problem, a graph for which we cannot find a fit, we ought not to take refuge in mere pretence. We should deal with what we know, with what we can see and with what is not open to dispute.

What is not open to dispute about the whole of that period is that the economy and employment have, at the very least, not benefited from the phenomenon of almost steadily increasing inflation. No longer are there any voices prepared to say "If only we could have a higher rate of inflation, all would be well." Those voices, at any rate, have fallen silent. Nor is there any dispute that if a Government spend vast sums in excess of those which they receive in revenue, two consequences follow. One is an intolerable burden placed upon other investment, including productive investment—that is expressed by the interest rate—and the other is the necessity for that Government to monetarise debt and cause inflation.

On Monday, the right hon. Member for Leeds, East made merry with the public sector borrowing requirement — the excess of the Government's actual expenditure over incoming revenue. The right hon. Gentleman said that the Chancellor is prepared to accept a PSBR £3 billion higher than he told us … Why is he not prepared to allow another £7 billion to be added to the PSBR in the coming year?"—[Official Report, 24 November 1980; Vol. 994, c. 318.] I was reminded of that famous quip of Richard Bentley against a fallacy of Boyle: The gentleman's logic is that of a man who would say that if Milo the athlete could carry an ox, therefore he could carry a brace of elephants. Such is Mr. Boyle's reasoning. In the days when the right hon. Gentleman was not discharging the easier task of moving amendments to the Address but was responsible for the nation's finances, it was not his experience or advice that if we had got an excess £3 billion on the PSBR we should put another £7 billion on top. The right hon. Gentleman did not do that in a period when unemployment was visibly increasing at a rate not far off the rate at which it is increasing today. The right hon. Gentleman did not say that we should put £10 billion on top of £10 billion to make a £20 billion public sector borrowing requirement. We know, and he knows, what everyone today knows: that the result is ruinous. It may or may not be related causally to the phenomenon of unemployment, but it is ruinous in its own right, ruinous of society and ruinous of government.

The Government have already announced that they intend to introduce measures which will add £2 billion to the revenue in the coming financial year. I hope that the Chancellor selected those measures for mention now only because they required six months' notice to yield a full year's return in 1981–82. The right hon. and learned Gentleman dare not face 1981–82 with the size of uncovered public sector borrowing requirement which has fallen to his lot in 1980–81.

There is only one major step that the Chancellor can take which will restore honesty to this country's public finance. Public expenditure will run at approximately or a little more than the level that is forecast. I want to look forward, not back, but one of the mistakes made by the Government on taking office 18 months ago was greatly to over-estimate the flexibility and compressibility of the total of public expenditure. There is in practice only one side of the account on which the Chancellor can operate—the revenue side.

In order to do that, it will not be sufficient for him just to find two sacrificial lambs, smallish lambs, for the slaughter — oil, because everyone is prepared to take something out of oil; and the insurance contribution, because it is not really taxation, is it? Yes, of course it is, but it is in some ways an easy option. That will not see the right hon. and learned Gentleman through. He must get from other sources a large additional revenue.

Let me put a figure on it by way of example. Does not the EEC have a special word for that? Yes, in EEC terminology it is called "illustrative". So let me offer an illustrative figure of £4 billion or £5 billion. Very well, so there is £6 billion or £7 billion extra on revenue to match the soaring borrowing requirement with which the Chancellor is confronted. Then he can take from the industry of this country the burden which the Government's necessity of attempting to borrow these huge sums places upon it.

Let no one imagine — it is an easy fallacy to propagate — that this will somehow take away from people something that they have got. That is not so. As long as the Government are spending at a given rate, that amount of resources is being derived from the people of this country. If it is not coming by taxation, it is coming from savings, and if it is not coming from savings it is coming through inflation, which transfers resources from the people to the Government as surely as any tax does.

Therefore, what the Government are called upon to do in order to restore honesty to public finance is not to "take money out of the economy"—it is a vulgar fallacy that is encapsulated in the phrase. They are called upon to finance, to enable the country to finance — honestly, openly and in the proper way; graduate it as one pleases — that which the country is determined to spend, is bound to spend and, overwhelmingly, ought to spend.

If the Government can make the country understand that that is what they are asking of it and that that is what they intend to do—that they intend that this country, having taken its decisions on how it shall live, what it shall spend and what shall be its public services, shall finance those honestly and not dishonestly, openly and not covertly—I believe that the Government will have the support of the country, without which no Government can enable a nation to face the economic changes which impend over the United Kingdom.

6.12 pm

Sir William Clark (Croydon, South)

I agree very much with the right hon. Member for Down, South (Mr. Powell) when he speaks about the public sector borrowing requirement, to which I shall return later.

My right hon. and learned Friend the Chancellor was absolutely right in his statement on Monday. I think that the recession is much deeper than any of us thought it would be. It is unfair of Opposition Members to deride the Chancellor for making a statement to the House. I remind hon. Members that it is normal for the Chancellor, about half-way through the fiscal year, to give a report on what should be happening the following year.

In addition to the recession, not all of us have taken on board what were the unpaid cheques that we inherited from the previous Administration. One of the greatest was that left by Professor Clegg. Obviously, that distorted what was thought to be the PSBR for the current year.

Before returning to that matter, perhaps I may nail the accusation about pensioners. It should be remembered that the present Government have kept faith with pensioners. During the period of the previous Labour Government, pensioners fell behind financially. In the first increase in pensions given under the present Government, and in the recent increase, we have kept the pensioners up to scratch in relation to inflation, even making up the backlog left by the Labour Government.

We must be realistic about our social benefits. Many people talk about the retired pensioner as if he were living on the poverty line. Some pensioners are short of money and are living in poor circumstances, but not all of them. When one remembers that in the private sector it depends on the profitability of a particular firm as to whether an increase is given, I do not think that one can say that welfare benefits in the other sector must be exempted altogether from inflation. But, if this happens, in no circumstances can we carry out this slight reduction of 1 per cent. under the inflation rate if at the same time we do not do something about the index-linked pensions in the public sector. We cannot possibly single out merely the retirement pensioner.

There is growing concern in the country, particularly in the private sector, apart from the fact that the private sector thinks that it has taken most of the squeeze in the economy, about the business of pensions, in which the public sector which enjoys inflation-proof pensions is compared with the private sector. Even in private sector pension schemes there will be some element of inflation-proofing—probably between 3 per cent. and 5 per cent. This is creating two nations. I do not think that the Government can allow the public sector to be immunised against inflation at the expense of the private sector. After all, all these pensions and all Government expenditure come from the taxpayer in the last resort.

Mr. John Page (Harrow, West)

Does my hon. Friend accept the view, therefore, following on from what he said, that those who have index-linked pensions have at present the greatest possible reason for low wage demands and the reduction of inflation, because otherwise the rest simply will not stick for what they are getting now?

Sir William Clark

I do not know whether I go all the way with my hon. Friend on that matter. The point that I am trying to make is that there is a distinct difference between the treatment of a private pensioner and the treatment of a public pensioner. If we are to do something about not automatically increasing welfare benefits, including retirement pensions, all that I can say to the Chancellor is that the growing concern about public pensions must be dealt with.

I agree with the right hon. Member for Down, South that we need more cuts. I welcome the cuts that have taken place in the Civil Service, of about 35,000 out of about 700,000. I wish that it could be cut much more. I suppose that it is self-criticism to say that I do not think that we have vigorously tackled the matter of public sector staff. In the private sector we have seen that the unemployment figures have been increasing, but that is because there are more people out of work in the private sector than in the public sector. We must be more vigorous in cutting public sector staff. The private sector has had to do so for cash reasons, and there is no reason why we should not do the same in the public sector.

I regret the projected increase in the PSBR. Obviously, I do not agree with the right hon. Member for Leeds, East (Mr. Healey), who wants even an increased PSBR of more than £10 billion. That is ridiculous. There are two culprits to blame for the public sector borrowing requirement—nationalised industries and local authorities.

I hope that the Prime Minister and the Cabinet will pay more attention to nationalised industries. We promised before and after the election that we would act on denationalisation, or privatisation as it is now called. Are we satisfied that we have gone far enough? We have sold Ferranti and made a few other small disposals, but I wish that the Government would get a move on with oil, British Airways, telecommunications and so on.

It may be claimed that we cannot sell British Airways, for example, because they are not profitable and we would not get a good price. But convertible debentures would solve that problem and the sale of the airline would not only swap assets from the public sector to the private sector and make the airline more competitive; it would allow employees to take part in share option schemes, which are another plank of Conservative policy. I wish that the Government would look at other ways of selling public assets.

Nationalised industries have many hidden assets. Surplus land, especially that owned by British Rail, is only one example. We are having to borrow at high rates of interest. Why do we not get rid of all the surplus land? I admire Labour Members, because they are the best spenders of other people's money that I know. But they are only good at spending other people's money.

The second culprits are local authorities. They have a phenomenal amount of surplus assets. For example, a recent report shows that the Greater London Council owns masses of surplus property. What is it doing with 2,700 shops? Why can they not be sold? What does the GLC want with the London Pavilion? Why does it not get rid of its industrial estates? The most recent estimate indicates that the GLC has surplus assets of £1,000 million. The council has more than 15,000 separate items among its surplus assets. Imagine the administrative staff needed to look after those assets. If the GLC wants to start new developments, it will come to the Government to borrow the money and the public sector borrowing requirement will increase. Yet the GLC is sitting on masses of surplus assets. That situation is repeated throughout the country.

Mr. Bruce-Gardyne

Does my hon. Friend agree that there is a third culprit, namely, the Ministry of Defence? No other Ministry has so consistently overspent its cash limits. It should be brought back into the discipline of cash limits.

Sir William Clark

I would have mentioned the subject of defence, but I knew that my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) intended to raise it in the debate. I want to keep to my time limit.

I welcome the reduction of 2 per cent. in the MLR. That will help business. It has been suggested that there should have been a 4 per cent. reduction, but I do not believe that even that would affect our exchange rate. There might be a hiccup in the value of the pound, but it would soon return to 2.398 or 2.3 against the dollar.

As the right hon. Member for Down, South said, when our currency was weak we were clamouring for a strong pound. Now that we have a strong pound, there are those who say that we need a weak pound. What is it to be? One of the reasons for the strong pound is the petrocurrency that we enjoy. The second reason, which is overlooked by the Opposition, is that, for some reason or another, foreigners have faith in the way that our economy is going. Confidence in the country, coupled with our North Sea oil, is leading to a high value of the pound.

There have been arguments about the automatic increase in national insurance contributions by employers. My right hon. and learned Friend the Chancellor of the Exchequer was fair in his explanation. The Opposition ask why he did not mention the £386 million, but they do not refer to the action that he took on stock relief. Industry enjoys about £1,300 million a year in stock relief, and on 14 November my right hon. and learned Friend introduced a scheme to cancel the clawback. That involves savings of between £300 million and £400 million for industry and cancels out the £386 million increase in national insurance contributions. The Opposition's complaints are bogus.

I take the point made by the right hon. Member for Down, South about increased taxation but I do not agree with him, because an increase in taxation would have the usual result of killing incentive. I accept that we shall not be able to reduce the PSBR by much, but I hope that my right hon. and learned Friend the Chancellor will not forget that tobacco and alcohol, which are not necessities of life, could bear higher taxes in the Budget.

There are criticisms of the course on which we are embarked. Some say that we are too strong on monetarism and others complain that we are too weak. The proof of the pudding is in the eating. There are encouraging signs — I put it no higher than that — that the policy is working. Inflation is down to 15.4 per cent. on an annual basis, under 10 per cent. on a six-monthly basis and about 7 per cent. on a monthly basis. That is a plus. One of the main enemies of any economy is inflation. It erodes wages, incomes and savings. We must do everything possible to eradicate it. The erosion of past years must stop.

The second encouraging sign is that there appears to be a change of attitude among the working population. The ordinary trade unionist no longer listens with such attention to the strident voices of some trade union leaders.

Of course, business men grumble. I have never known a business man who did not grumble; they are as bad as farmers. But most business men that I know agree, even though they may grumble, that we are on the right course and that we must cut the public sector and stop overspending.

There are many, inside and outside the House, who try to run away from problems. They are fainthearted, looking over their shoulder for electoral advantage or whatever. I advise my right hon. and learned Friend the Chancellor of the Exchequer to pay no attention to the faint hearts. Let us keep on the present course. Many of those who are advocating a different course have a wishbone where their backbone should be.

6.30 pm

Mr. Douglas Jay (Battersea, North)

For the first time in my life I find myself almost wholly in agreement with the right hon. Member for Sidcup (Mr. Heath) and almost wholly in disagreement with the right hon. Member for Down, South (Mr. Powell).

The last few months and this debate have proved that the policy of the monetary extremists in the Cabinet is unworkable. They have now had to admit defeat, first when the Chancellor announced his 6 per cent. pay norm in the public sector and secondly when he announced an overshoot of nearly 50 per cent. this year in the PSBR. Only six months ago, Ministers were all saying that a pay norm of any kind was unnecessary. If they cannot control the PSBR, or the money supply as they call it, their policies cannot work. We now learn that the PSBR that was supposed to be limited to £8.5 billion for the whole year is expected to exceed £11 billion. The Secretary of State for Industry is reported as summing up the situation in this way: We have achieved part of our purposes by methods we never had in mind … What has been happening we don't really know. In order to help the Secretary of State to find his way, I shall record briefly what I think are the economic fallacies which have landed Ministers in the muddle in which we see them today. The first and worst—this is ignored by the right hon. Member for Down, South—is that the monetarists mistake cost inflation for demand inflation and then proceed to treat it as such. The result inevitably — it is the cause for which the right hon. Gentleman was looking—is that demand is held down and costs rise and unemployment soars. That is what has been happening. Secondly, they confuse the quantity of money with the flow of spending and so try to restrain the wrong thing, which, in this case, they then find cannot be measured anyway. Thirdly, they think that the volume of bank money is determined by public borrowing when it is really largely determined by private borrowing. That has been the case in this country since the war.

The Prime Minister, in this debate, propounded yet another fallacy in saying that the public sector must be prevented from pre-empting, as she called it, resources from the private sector. When 15 per cent. of the labour and capital of the whole nation is unemployed, the public sector does not poach from the private sector. All it does, by spending or investing, is to prevent unemployment being a hit higher than it is already.

As a result of these confusions, we find the nation today plunged into what is not really a mysterious recession, somehow coming from Heaven, but an old-fashioned, man-made cumulative deflation. Of course, the monetary cranks still do not understand that deflation of this kind is cumulative, because one man's spending is another man's income. As the Financial Times said on 15 November, It has been estimated that each additional unemployed worker is equivalent, directly or indirectly, to an extra £5,000 of public sector borrowing. The cost of 2 million unemployed to the Budget is something like £10 billion. That is probably an underestimate. It is about the same as the whole PSBR at the present time.

It was because the deflationary process was cumulative that the German and American deflations of 1929 to 1933 did not stop of their own accord but went on to the point of collapse which brought Hitler to power in Germany and continued until Roosevelt totally reversed the policy in the United States. We are now confronted again by what is a man-made deflation and not a Heaven-sent recession. I suspect sometimes that the epitaph on this Government will be "They made a wilderness and called it a recession."

The central absurdity in the whole monetary mania is the belief that our economic problems can be solved by producing less and less real goods and employing fewer and fewer people. According to the CBI figures—they are extraordinary figures — quoted in the Financial Times on Monday, United Kingdom manufacturing output is expected to fall in 1980 and 1981 by 14 per cent., whereas in 1930 and 1931, two of the worst years of the depression, it fell by only 11 per cent. That is an amazing comment on the Government's policies.

United Kingdom real national output today must be running at almost 15 per cent. below our existing productive capacity. If it is only 10 per cent. below, we are losing about £20 billion of national income every year as a result of these policies, together, as we know, with some international factors. That £20 billion is about twice the PSBR that we are now crucifying ourselves to reduce by about £1 million. It is by ignoring these central truths that the Government have achieved the astonishing feat of creating the worst economic situation since the war in the middle of an unprecedented oil bonanza.

In effect, a large part of the Government's policy, particularly in relation to the public sector, is to pay people to do nothing rather than to pay them to do some work and then to claim that something has been achieved by throwing them into unemployment. Another consequence of deflation and increasing unemployment is that productivity is falling and more restrictive practices will undoubtedly be encouraged, as has always happened before.

There is, of course, an alternative. A wise economic policy would aim at producing the maximum of real goods and services and would use the monetary instrument to achieve that. Then the Budget problem would become, in time, soluble. The revenues would flow in and the monetary deficit would disappear. I give just one example. In housing, all over London at present there are derelict homes needing repair. There are ill-housed families needing accommodation. There are unemployed building workers without jobs. Nothing is necessary to bring the three together except the money that should be the instrument for doing so. That is denied. The houses, incidentally, are steadily deteriorating past repair. I could develop the examples of defence and shipbuilding if there were more time.

Mr. Harold Macmillan, another Conservative ex-Prime Minister who has been giving us his advice, showed more wisdom than the monetarist cranks on the Treasury Bench in saying quite simply, in a broadcast a few weeks ago, that the answer is not more deflation; it is reflation. The answer is not to have people out of work but to use the plant and machinery to produce more wealth. Nevertheless, I must say that we should not fall into the opposite illusion of thinking that one can have successful expansion without any sort of incomes policy. One cannot, for the following basic reason.

Of course, if costs in money terms do not rise faster than output, there is no fundamental difficulty or obstacle to full employment. But if money costs rise faster than output—this is what we have all been contending with over the past 10 years — any Government will find themselves in the purely arithmetical dilemma that, if they raise the money demand at as fast a rate as costs, prices must rise. If that is not done, the demand will fall below costs and unemployment will grow, as is happening now. That is the basic dilemma facing the whole Western world. In crude terms, unless there is some form of incomes policy there cannot be full employment without price inflation.

I believe that there is a constructive alternative policy for this country in the present situation. First, let us lower interest rates and get them quickly down to single figures. It is sheer nonsense for the Prime Minister to say that the Government cannot control or influence interest rates. They were controlled effectively from 1940 to 1950 by directly rationing bank credit. Incidentally, that is what the French Government are doing at the moment.

Secondly, let us allow the exchange rate to fall and, if necessary, bring it down further by acquiring higher exchange reserves. Thirdly, let us devise an agreed voluntary and long-term incomes policy covering dividends and prices as well as salaries and wages.

Mr. J. Enoch Powell

Fourthly, make it work.

Mr. Jay

Fourthly, when we have done that, let us expand purchasing power, mainly through capital investment, both public and private.

Finally, the same all-out support should be given to our exporting firms, in particular private exporting firms, as the Japanese, French and many other Governments are giving at present but which our Government are not doing. May I add to that list that we should apply our approved tariff to all industrial imports, from whichever part of the world they come.

That, I believe, is the way ahead, and there is really no obstacle to it, except the monetarist extremists in the Treasury.

6.42 pm

Mr. Maurice Macmillan (Farnham)

As the right hon. Member for Battersea, North (Mr. Jay) quoted a specific ex-Prime Minister, perhaps I should remind the House that I spent much of my early career on the Back Benches attacking the economic policies of the Government of which that Prime Minister was the head. However, I shall not pursue that course this evening.

I am bound to say that, even if the Government have not been blown off course, they appear to have changed from the starboard to the port tack. I for one welcome that change. Although the basic direction may be continued, I hope that we shall now see some basic changes of method.

Of course, some form of monetary policy is necessary, as is some form of control over money supply. But must we have what is tantamount to an old-fashioned squeeze? Could we not have a rather more sophisticated, more effective and more flexible monetary policy? Must the policy be based on the indicator of sterling M3, which in My opinion is erratic and uncertain and produces erratic and unpredictable figures for growth in the money supply?

My right hon. and learned Friend the Chancellor of the Exchequer may think that he has radar to steer the ship of State through fog and pack ice, but all he has is a rather weak foghorn which, echoing off the icebergs, is listened to by a slightly deaf navigator. We need to have not only changes in technology but a far more basic change in attitudes generally.

There is one point on which I agree with some of my right hon. and hon. Friends who have spoken and, indeed, with the right hon. Member for Battersea, North. We should remember the other side of the inflation equation; not only limiting the supply of money that is available but taking more positive steps towards increasing the supply of marketable goods and services. I should like to see a further two percentage points taken off interest rates as soon as possible, because there seems to be a lack of willingness and ability among people to invest in productive industry.

I want to say a few words about attitudes to public expenditure and about industrial policies, and I shall end on an international note.

One of the reasons why successive Governments have failed to control public spending properly is that they have not distinguished between capital and current expenditure, nor between the purposes for which money is raised or borrowed. In the old days we had expenditure above and below the line. When it comes to borrowing, there is a big difference, as businesses know only too well, between borrowing to invest and borrowing to pay the current bills.

I agree with what the right hon. Member for Down, South (Mr. Powell) said about raising taxation, provided that taxation is raised only to cover current spending and not necessary capital expenditure as well. It is ridiculous to expect the Government, any more than private industry, inevitably to finance solely out of current income the expansion of, or new investment in, nationalised industries and other concerns.

Moreover, the Government should pay far more attention to the different forms of capital expenditure. They are heavily engaged in the type of investment from which we should expect a commercial return — for example, the sale of electricity and gas.

May I say, in passing, that I hope that the Government will not try to meet the bills of other sectors of the nationalised industries by putting up unduly the prices of the profitable sectors—above all, of energy —beyond the prices which our competitors have to pay, particularly as the gas and electricity industries are making a profit.

There are some types of public expenditure on capital account from which one can expect to get an economic benefit, either in saving current spending or in the infrastructure generally. There is also social capital in the form of new hospitals, schools and so on which may well increase current expenditure.

I beg my right hon. and hon. Friends, in approaching problems of taxation and borrowing, to think a little more carefully about the purposes for which they are seeking to raise money. In so doing, they should try to divest themselves and local authorities as far as possible from the day-to-day provision of those services which could equally well be provided by private enterprise. In that way they would be imposing upon private enterprise the necessity to invest and removing that investment from the public sector borrowing requirement.

There is much confusion between the functions of control, direction and management, both in industry and government. It is not necessary, for example, for local authorities actually to run refuse collection services, provided that they ensure that those services are satisfactory to the public. That is the second point I wish to make about public spending, that the Government should seek to limit their commitment in current expenditure to where it is absolutely necessary and to distinguish in capital expenditure between much-needed investment and wasting money on lost causes.

In some ways, similar problems face the Government in relation to their industrial policies, problems of structure and organisation. It is my belief that, until now, the Government have rather forgotten that they are dealing with large organisations which are in some ways outside the influences of the market as well as market considerations themselves. The large transnational companies and the well-organised corporations, which of necessity have such long-term investment plans, cannot respond actively to market influences, and this applies especially in the high technology industries.

In dealing with what might be called organised corporate power, I ask the Government to look a little more carefully at their mechanisms and techniques and see whether they can develop to some extent the functions performed by the NEDC.

Perhaps most important of all is the effect of Government policies not on the larger companies but on the smaller and growing and innovating companies. We in this country have a lower proportion of medium-sized businesses than almost any other in the Western world. We have made special concessions to small businesses, but that is not quite enough because there is the danger that those concessions will encourage small businesses not to grow, whereas their own as well as the national interest requires the Government to do everything possible to encourage their expansion.

I hope that the Government will look at methods of helping small businesses to finance their own expansion, perhaps by fiscal means or possibly by guaranteed loans. I hope, too, that the Government's financial policies will put pressure on the banks to fulfil the proper function of bankers and consider the nature of the concerns which they are being asked to finance rather than simply acting as usurers or moneylenders putting out money against asset values only.

It is my hope also that the Government will use fiscal or other methods to encourage the employees of larger companies to branch out on their own with their own expertise similar to the schemes in the United States of providing "venture capital" and so on. I find it intolerable that there is so much to be done and so much wasted capacity. I cannot believe that this is absolutely necessary in the control of inflation.

It is absurd that we in the West generally and in the United Kingdom in particular should now be facing a situation where it is likely that we shall be called upon to make greater contributions to our own defence and still be unable to employ the idle capacity in management and workpeople's skills and the actual physical equipment in our factories and shipyards. There are difficulties, and I do not seek to minimise them, not least in people's attitudes in industry, both management and workpeople.

Perhaps one of the changes of attitude required if policies of this sort are to be followed without leading to greater inflation is a new look at the word "productivity". Until now, it has meant, in the minds of trade union leaders, workpeople, managers and the Government, schemes for producing the same amount of goods with fewer people at work. Most countries look at it the other way round. In their eyes, "productivity" means schemes for producing more goods with the same number of people, reducing unit costs in order that they may be able to take on more people to produce still more goods. It is that cycle which we in the United Kingdom have never really succeeded in achieving.

After all these years, I have come to the conclusion that part of the problem at least lies in a negative attitude of mind which has failed to see that, by doing something better and by reducing its price while increasing its quality, one is finding a new market which will lead not to fewer people being needed but more, because of the expansion in markets at home and overseas.

Heaven knows, there is enough to be done abroad. My right hon. Friend the Member for Sidcup (Mr. Heath) said a great deal about it, and I do not want to cover ground which he has already covered, but as long ago as 1973 it became quite clear that some sort of international mechanism was needed to steer the great wealth of the oil-producing countries into investment to produce new industries and, for example, desalination and irrigation schemes in their own countries as well as in the developing countries. But this cannot be done other than on the basis of some international effort, and one which I hope will be led by a British Government.

Of course, the reduction of inflation is extremely important, but let it be done by a monetary policy which makes sense and not by a squeeze—by an attempt to create new wealth as well as to restrain activity. I ask the Government to try to find more refined and selective methods of saving public expenditure, based on a more sophisticated analysis of what it is for. I ask them to give at least a little nibble of the carrot to industry, especially small and medium businesses and the innovators.

When it comes to the world situation, I beg my right hon. and hon. Friends to cease blaming all our problems on it and simply reacting to it but to adopt positive policies and take a lead.

It was said of an ancient but rather decadent people that they had waited so long for something to happen that they had forgotten that they could make happenings themselves. I beg the Government to act so that the same can never be said of the United Kingdom.

6.57 pm

Mr. Richard Wainwright (Colne Valley)

Just as we on the Liberal Bench welcomed warmly the speeches of the right hon. Members for Sidcup (Mr. Heath) and Battersea, North (Mr. Jay), so I found much to endorse in what the right hon. Member for Farnham (Mr. Macmillan) said, especially his comments about the murder of small businesses, about the tragedy of deliberately wasted production capacity and about the need to encourage more of that kind of public spending which creates wealth by adding to our capital stock, against which there seems to be such childish prejudice in the Government just because it happens to be public spending. All these matters are covered in the Liberal amendment for this debate, which has been on the Order Paper all this week. I hope to return to it briefly in a moment, but first I must refer to the Liberal view of the way in which the Chancellor of the Exchequer has treated the House this week.

It is essential for good order and mutual trust in this House that whenever there is a single set of Government measures they should be fully communicated to us in a single statement. What we find intolerable in what the right hon. and learned Gentleman has done is that the story of £1 billion of national insurance contribution revenue was put to us in an oral statement to the House earlier in the week and then—lo and behold!—another £½ billion increase in the revenue from that same national insurance was put to us in a written statement smuggled out when everyone had gone home.

It is intolerable that the single matter should be separated in this way. When the Chancellor of the Exchequer told the House: The additional contribution income will be about £1 billion in 1981–82"—[Official Report, 24 November 1980; Vol. 994, c. 316] naturally every hon. Member thought that that was the end of the story. To be told a few days later, by the device of a written answer, that there was another £½ billion—half as much again—coming under the same heading is an intolerable way to treat the House.

The other aspect that has not had full consideration is the way in which Ministers of recent Governments of both parties have somehow led the House to believe that the endless and very dangerous rise in the national insurance tax—which is what it is—is somehow automatic and is not the result of deliberate ministerial decision. That is not wholly true. As I tried to remind the Chancellor when he made his statement—he made no reaction then—the Comptroller and Auditor General has made it clear that the only obligation under the statute is that the national insurance fund should stand in the longer term in proper relation to the demands made upon it. In other words, there is no need for a year-to-year balance of the fund but, naturally, over the years the fund must be kept in balance. Since there is currently a large surplus in it, which the Government jealously treasure as a means of financing public sector borrowing, there is no need for the full increase in the employee's contribution, which the Government are inflicting as a primitive form of taxation.

The same applies to the controversial proposal to lift the top income limit for the contribution, which caused all the storm this week. It is false to use the word "automatic", as the Chancellor did this afternoon, because the 1975 Act deliberately gives the Government a wide area of discretion. They can raise the limit by between six and a half times and seven and a half times the basic rate of pensions. It is, therefore, crystal clear that some member of the Government had to make a deliberate choice that presumably was ratified by the Cabinet. Their choice was to go to the top of the band with a limit of £200 a week. That was a deliberate decision. It did not happen automatically, and the decision ought to have been communicated openly and frankly to the House.

I come next to the whole question of the Government's strategy or lack of it. The right hon. Member for Sidcup conspicuously welcomed the fact that the Government had got rid of their monetary obsession and were now much more flexible. I wish that I could be as cheerful about it as the right hon. Gentleman. The Government seem to me to be clinging obstinately to the rags and tatters of their Monetary obsession. I see no sign that they have put anything constructive in its place. It is, therefore, a little early to be optimistic on this score.

In my experience of fundamentalists—that is what we are dealing with in the Government—two things can happen when they lose their faith. Either they go to the dogs and the bottle—which they usually do—or they turn to some other enthusiasm with equal naivety and equal vigour. I cannot pronounce at the moment which way these disillusioned fundamentalists in the Government will go, but at the moment I see no sign of any new enthusiasm, and I detect from the depressed visages on the Government Front Bench this afternoon that it may be the dogs and the bottle.

I can understand all three Treasury Ministers being profoundly depressed. Never in the long and fascinating history of relationships between the Bank of England and Nos. 10 and 11 Downing Street has such a gigantic and public snook been so obviously cocked at the Treasury and the Prime Minister as was done by the Bank of England this week, when it had the disagreeable task of trying to make sense of the drop in MLR. I hope that the House will bear with me if I give my evidence for that in quoting the Bank of England's notes to editors.

The Bank's literary style is not as vivid as that of the Leader of the Opposition. Of course, we do not expect anything in the way of dramatic language, but the note by the Bank rejects the whole monetary approach in this remarkable way: Although £M3 and other broad monetary aggregates have grown rapidly in recent months"— and then it goes on to say that there has been a sharp decline in the rate of inflation, all indicating that the policy is having a strong restraining influence. In other words, inflation is being brought down wholly contrary to the movement of the money stock. That is the most obvious disavowal of monetarism that could be expected from a sober institution.

I believe that the Government are not sincere in the priority that they claim so stridently to give to inflation. I have believed that throughout their period of office, because if they genuinely thought that they could stop inflation not even they would have the gall to issue Government stock saddling the people with rates of interest as high as 13 or 14 per cent. well into the next century. The Government know that their only way of making that appalling burden of debt tolerable to the British people in future is to reduce the real interest rate by continued inflation.

How right were other speakers this afternoon to say that we now have not some scientific application of monetary policy but a thoroughly old-fashioned 1920s and 1930s slump, aggravated by the fact that sterling is now a strong petrocurrency. We are back with the additional burden of sterling's over-valuation, back in the economic days of Baldwin, Neville Chamberlain and Ramsay MacDonald. To the last I am beginning to think that the Chancellor has a very strong resemblance. When the Chancellor comes to the Dispatch Box within the next few weeks, as I confidently expect that he will, to say "Never mind, Britain is going on and on and on, and up and up and up", we shall know that he has become identical in speech with the late Ramsay MacDonald.

The tragedy of the whole absurd experiment is that it offers no kind of lasting cure either to the difficulties of inflation or to the horrors of unemployment. One of two events will occur. Either we shall continue with unemployment at a tragically high rate of a constant 2 million or so, rising occasionally to 3 million, or we shall experience a resurgence of inflation. The Government have never been able to give the slightest evidence that they can engineer some kind of recovery, which they may try to do as the election approaches, without immediately returning to the old inflationary pressures.

Can anyone imagine that trade union negotiators who are so bitter and disappointed at being forced under this threat of deliberate slump to accept humiliating pay settlements have been converted in their hearts and turned into a servile group of cap-touchers simply by the Government's policies? They will, of course, return with full vigour to pressing their case as soon as the threat of heavy unemployment is temporarily lifted.

I mention that because those of us who have consistently favoured an incomes policy with statutory back-up have always been told that we ignore the problems of re-entry. Of course, if we had a sensible political system there would be no problems of re-entry, because the incomes policy could be sustained from one Government to the next, with some adjustments as people's views changed. However, so long as there is this absurd zig-zag political system the re-entry problems from monetary policy will be every bit as difficult as those emanating from incomes policy. Perhaps because of the bitterness engendered they may be much greater.

The aspect of the present position to which we bitterly object is a that there is wanton failure to use and also a wanton misuse of the great national resources of this country, which is still one of the wealthiest. An appalling quantity of national resources was squandered in the last 18 months by the runaway explosion in public pay that the Government sat back and encouraged. That enormous explosion has led to the worst and most unjustifiable type of public expenditure. To some extent, that was matched until recently by unnecessarily high settlements in the private sector.

Mr. Bruce-Gardyne

Will the hon. Gentleman remind the House of his party's attitude to the Clegg comparability commission?

Mr. Wainwright

We have always strenuously opposed any partial incomes policy. Of course, there is room for a comparability study if it is part of a comprehensive incomes policy for the whole nation. Partial attempts, such as the present 6 per cent. limit, are bound to cause envy, strife and dissension and will eventually come to pieces.

I have dealt with the misuse of public resources, which has led to so much calamitous overspending in the last year. I turn to the failure to use our national resources. Our national capital stock, as a result of endless cuts in public capital expenditure in the last seven years, is now in a perilously rundown condition. It is obsolete and dilapidated, as anybody knows who uses the London Underground, tries to make a long-distance telephone call or uses our road system. As a result, if and when recovery comes Britain will not be equipped to take advantage of it.

Humiliating situations arise. I am told that British Rail has been forced to add 10 minutes to its proud schedule between London and Glasgow with the new advanced train simply because it has not been able to maintain parts of the track. That must have been a bitter decision. Our road system is going to pieces for lack of attention.

The chairmen of the nationalised industries have recently spoken up well. All Governments are to blame. The silly point is that we persist in treating the borrowing of nationalised industries for commercial purposes, for the creation of wealth, as part of the public sector borrowing requirement and as if it were to be used to pay civil servants or provide allowances.

The chairmen of the nationalised industries are an able and underpaid group of people. We believe that they are right to protest, as did the chairman of the National Coal Board, in evidence to the Treasury and Civil Service Select Committee at the end of July. He said that sums of money which are borrowed for profitable investment should not be included in the PSBR any more than private industries' borrowings". He added that when the Coal Board's expenditure for creating wealth is included in the PSBR it automatically makes it appear as if it is an undesirable thing, whereas, in fact, with those borrowings we are creating new wealth for the country. I shall not detail tonight all the obvious projects which are calling out for attention at a time when skilled people are unemployed and available. We should put a pipeline out to the North Sea oilfields to bring back the gas which is being flared and wasted in enormous quantities. That would have a powerful effect on the steel industry by providing enormous quatities of pipe.

Like France, we should be overhauling and modernising our telecommunications system. The City of London, which depends on a worldwide efficient telecommunications network, is suffering a great handicap compared with New York and other centres because Sir William Barlow recently had to resign, due to the fact that he was not allowed money for reasonable telecommunications development. That was because of the obsession with the public sector borrowing requirement. British Rail needs an electrification programme. Such schemes should be attended to when industry is in recession.

Some people say that that is a reckless course, which is bound to increase the money supply. However, they overlook the fantastic asset of an enormously high savings ratio. The British people should be congratulated on the astonishingly high savings ratio that they maintain in spite of high inflation. The ratio is 18 per cent. That gives us a marvellous base on which to borrow for wealth creation.

We believe that the Government are losing faith in their original doctrine, but they are too stubborn to admit it and are putting nothing in its place. The sooner the Government are out, the better.

7.15 pm

Mr. Terence Higgins (Worthing)

I wish to take up the argument of the former Prime Minister, the right hon. Member for Cardiff, South-East (Mr. Callaghan). He suggested that the Government should take steps to reflate demand. I do not believe that there is any longer a tradeoff between inflation and unemployment. On the contrary, I believe that if inflation were to accelerate, in the long term that would result in the next round of the cycle in even higher unemployment. I have the greatest respect for the right hon. Gentleman's sincerity, and I share his deep concern about the level of unemployment, but I do not believe that his suggestion is a long-term solution to our problems.

I shall concentrate on one or two aspects of Government policy. There was a strange coincidence in the press a few days ago. I read two reports of speeches by Professor Friedman and Professor Galbraith. Professor Friedman was saying that the Government were not adopting what he regarded as monetary policy. Professor Galbraith was saying that the Government should press on with their policy to prove that Professor Friedman was wrong.

Professor Friedman is bound to come out of that better, because he has made it clear in his evidence to the Select Committee that he does not believe that the Government are pursuing a monetarist policy. However, by some of his nifty footwork he has changed his ground somewhat. He is really attacking the method by which the Government are seeking to control the money supply rather than that they are seeking to do so.

I am puzzled by the myth that the Government are pursuing a monetary policy in some sense. There are a number of reasons that lead one to suppose that they are not doing so. First, according to the statistics, the money supply and the public sector borrowing requirement are way beyond the limit that the Government set out in their targets. Secondly—and here I take issue with my right hon. Friend the Member for Sidcup (Mr. Heath)—the Government have not used the interest rates a l'outrance to control the money supply. On the contrary, the evidence of the Governor of the Bank of England to the Select Committee was that they pumped in about £2 billion to prevent interest rates from rising to an even higher level.

Thirdly, a true monetarist policy must involve a low public sector borrowing requirement and low interest rates as means of controlling money supply and not a high public sector borrowing requirement, which requires high interest rates in order to control money supply. That has been common ground between the Chancellor, myself and many others. The reality is that the Government should be controlling money supply by reducing the PSBR and lowering interest rates. In practice, because they have failed to control public expenditure, the opposite is true, with traumatic effects on industry.

The whole question of timing is vital. The Government have not succeeded in cutting public expenditure, with the result that PSBR has remained high. That is at the root of our problems. We need not a reversal of policy but a reinforcement of policy. I hope that we shall have a clear statement about what has now happened to the total, in real terms, of public expenditure at the various stages at which we were told that it was to be cut.

We have been told time and again by the Front Bench that a reduction in public sector borrowing is an essential precondition of a cut in minimum lending rate. However, that is not the situation in which we find ourselves, and yet the minimum lending rate has been cut. It is, therefore, arguable that the Government are not pursuing a monetarist policy but are in danger of pursuing a policy that is close to traditional deflation. That is an important point.

Again, we were told in the Select Committee that the difference between the Government's policy and deflation was the medium-term financial strategy, which would change expectations. There is much to be said for that view, but a Government cannot have credibility for a medium-term financial strategy if that is always going to start next year. It has not started this year. The Government are way outside the target, both on the money supply and on the public sector borrowing requirement.

I am, therefore, sorry that almost all the measures announced by the Chancellor this week do not take effect until next April. I should have much preferred to see increases in indirect taxation, particularly, for example, the revenue duty on commodities such as tobacco, which would have brought in revenue straight away. One could then have got back more rigidly to the target and reduced borrowing more rapidly. We should consequently have had real and significant cuts in interest rates, with a beneficial effect on industry. I am sad that the Government have not succeeded in doing that. We have lost yet another six months because we are now taking measures that will not even start to have an effect until next April.

I should like to say a word or two about the industrial scene. Unemployment is extremely serious, although to a significant extent it does not reflect the fact that the Government have cut public expenditure but rather the fact that they have not. I have some experience in these matters. I believe that unrest will be far greater when redundancy pay runs out than it will at the point at which people become redundant. However, let me say that in South Wales, where many of those who are highly paid in industry have priced themselves out of jobs, it will be very difficult indeed to find jobs that pay anywhere near the same amount as the jobs out of which they have put themselves. That is tragic, and I share the general concern.

I congratulate the Chancellor, first, on the stock relief that he has given to industry. That point has been slid over. He himself scarcely mentioned it in more than a sentence, although it is very important for industry. Secondly, I stress the importance of the temporary employment subsidy, which is essential if we are not to have a significant increase in unemployment. I hope that my right hon. and learned Friend will take carefully to heart the need to extend that subsidy.

The Chancellor has also taken effective action by accepting, almost in total, the recommendations of the Select Committee with regard to pay increases in the public sector, both in staging and on fiddling the results by changing the starting date. That did not happen in the official response by the Treasury to the Select Committee report. It came out in the press release issued this week. It is an important step. The cuts in real resources in the past 18 months or so have been offset by inflationary pay settlements in the public sector. The balance has changed between resources and pay and between consumption and investment. I welcome the change that the Chancellor has accepted, although I repeat that timing is important.

I have referred to the medium-term financial strategy. I do not believe that it would be right to rush into reflation, which would create all the problems that I have mentioned. However, there is need for a long-term strategy, not only on the monetary side but in terms of real resources. Industry has experienced what is said to be a monetarist policy, which appears to be the first part of a medium-term financial strategy. As one looks at the table in the Red Book, one sees that that strategy goes on reducing numbers, and there appears to be no light at the end of the tunnel. If we are to get the supply side right, there will have to be a slimming down in industry, more efficient use of labour and so on. However, we still have to get investment.

From my experience between 1970 and 1974 I am well aware of how slow industry is to react, whatever the rate of growth in demand. However, if there is no prospect of a situation in which that can happen, there is no prospect of getting the supply side right. I hope, therefore, that the medium-term financial strategy can be augmented by a view expressed by the Government on what they believe will happen to the real level of demand.

Here we come to a crucial point of explanation of the Government's policy. It has not been made at all clear in the press release this week or in the Gracious Speech how, as the medium-term financial strategy continues, the foundations for a renewal of growth are established. It is not clear why growth suddenly takes off. It could be the resurgence of the world economy, but, against the North Sea oil and exchange rate problems, or benefits, that we face, it seems unlikely that that will be the major factor. Taking the long-term view—and I stress that, because I am not arguing for immediate reflation — unless we assume downward flexibility of real prices and wages so that the demand extends in the technical jargon of the economist, or unless the Government do something to ensure that the splendid and more efficiently produced goods are bought, there is no reason why anyone should invest in or produce such goods. I hope that on a future occasion the Chancellor will take the trouble to explain that fundamental point. It is very' important.

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Gentleman is assuming that the Chancellor has a plan. The manifest conclusion of us all is that he has not.

Mr. Higgins

The manifest conclusion of us all is no such thing. It is important that the matter should be spelt out and generally understood in the CBI and in industry. I do not agree with the right hon. Gentleman on this occasion, although I often do agree with him. There is an opportunity to get the strategy right. I do not accept the panaceas that have been offered as alternatives. We have lost time. We must recognise that, because we have not succeeded in cutting public expenditure or public borrowing and we have not got interest rates down fast enough. None the less, there is a real prospect that we can build for the future, but we need a better explanation of the policy than we have had hitherto.

7.27 pm

Mr. Joel Barnett (Heywood and Royton)

I often find myself in agreement with the right hon. Member for Worthing (Mr. Higgins). However, I agree with quite a bit of what he said today, but not when he seemed to accept the myth that public expenditure can be cut with the ease that this Government accepted in their much more irresponsible days of Opposition. They now find that it is not so easy. I have cut more public expenditure in my time than this Government have done, and I speak with experience. The right hon. Gentleman also assumes in far too facile a way that cutting public expenditure in current circumstances is right. There is no evidence to support that.

Any Government at present would be faced with a most serious situation. We have had about 100 years of relatively poor industrial performance in this country. In addition, we are undoubtedly in a world recession. The right hon. Member for Sidcup (Mr. Heath) mentioned the danger of another upsurge in oil prices and how that would create a continuing world recession. That is a serious danger.

The right hon. Gentleman suggested to his right hon. Friend the Prime Minister—although I am not sure from the way that they looked at each other that that is the right term—that she should instigate a summit in order to try to bring about a recycling of OPEC surpluses. I think that the right hon. Gentleman is right. I think that the Prime Minister should try. However, it would be foolish for anyone managing the economy to assume that the right hon. Lady will succeed. The chance of getting agreement in that area in the short term is, to say the least, extremely slim.

One is bound to accept that there are no simple solutions to the present economic situation, whether from a monetarist or a Keynesian standpoint. The Government's objective of reducing the rate of inflation is one with which few would disagree. I do not disagree with the objective or with the approach of trying to do so as quickly as possible. The Government will reduce the rate of inflation in the short term. They cannot avoid doing that. Any Government who so massively deflate the economy would be bound to reduce the rate of inflation. That has nothing to do with monetarism or Keynesian policies. I am worried about what will be done in the process.

The Government are creating the worst possible form of vicious circle. It will require more and more cuts in public expenditure. If the Government cannot find those cuts, the circle will require increases in taxation of the sort suggested by the right hon. Member for Down, South (Mr. Powell). If the Government increase taxation next year to the tune of £8 billion and, having done that, add to the level of unemployment, they will add to the level of public expenditure and cut will have to cut into the vicious circle. They will have again to increase taxation and cut public expenditure.

We have heard about the argument that the Government have had about the way in which to present a 1 per cent. cut in the level of pensions next year. I do not believe that we have heard the last of that. If the Government continue to get deeper and deeper into the vicious circle, I fear that we shall have more and more cuts in benefits. That is the only way in which the Government will be able to break into the vicious circle. The Government have put themselves into an impossible position with their policy. If they persist with it, the social consequences—I hope that we shall recognise them—will be horrific. We shall see rising unemployment and cuts in benefit.

We have, as Galbraith has said, the most stable society and the most decent people. However, if we are faced with the situation that I have described, it will be difficult to control it. Even if the Government make a major U-turn, it will unfortunately be too late to prevent unemployment rising to 3 million. I fear that we shall not see that major U-turn.

Even if we have a moderate U-turn, the bitterness that will have been created will lead inevitably to inflation taking off again. There can be little doubt about that. Nothing fundamental has been done to deal with the long-term problem of inflation. If anyone is to persist with the type of policy that the Government are now pursuing, it is necessary to have a degree of certainty that one is right and that at the end of the day everything will come out marvellously. I find that difficult to understand, and I find it even more difficult that Conservative Members can accept it.

Mr. Robert Sheldon

They do not.

Mr. Barnett

The Government have stated that their chosen method of reducing the rate of inflation is control of the money supply. The right hon. Member for Worthing and many other Conservative Members will no doubt accept that it is not the money supply that has reduced the rate of inflation. That has been done by deflation piled on deflation piled on more deflation during a world recession. It cannot be argued that cuts in public expenditure or increases in taxation are the real cause of the problem. It is true that the Government have not been spectacularly successful in cutting public expenditure or taxation. They have not done much about truth in taxation. It is now being handled through the back door by national insurance contributions. I shall leave that on one side.

There may be a Conservative political case for cutting public expenditure and taxation, but there is no evidence that that approach will reduce the rate of inflation. There is no evidence that high levels of public expenditure and taxation cause inflation. There is no real evidence that a massive and rapid reduction in the rate of inflation will deal with the fundamental problems that we face.

Britain had inflation in single-figures until about 1974. At that time our industrial production was higher than that of many of our industrial competitors. The period when we had single-figure inflation ended with Britain's doing much worse than most of its industrial competitors despite single-figure inflation. Real living standards were the same. Manufacturing investment was the same. Public expenditure as a percentage of GDP was certainly not the highest in the world. It was not the lowest, but it was certainly not the highest. The same applied to total taxation and personal taxation. Despite all that, we still did much less well than most of our competitors.

I hope that we shall not subscribe to the myth—it seems to be the Government's central policy—that we have only to reduce the rate of inflation, regardless of the damage that is done in the process, and that, that having been achieved, everything will be all right. There is no evidence to make us believe that that is so.

That is not to say that it should not be a major objective to reduce the rate of inflation. It is one of the problems with some of the alternative strategies that I hear from time to time, including some from my right hon. and hon. Friends. There are some who ignore the problems of inflation altogether. It seems that the Government's sole policy is quickly to reduce the rate of inflation. They are ignoring the consequences, namely, the damage that will be done to our short-term and long-term prospects. That is my worry about the Government's policies.

What gains are to be seen from a massive reduction in the rate of inflation? I accept that with low levels of inflation we remove distortions, improve international competitiveness and to some extent reduce the level of unemployment. I do not doubt that if the level of inflation, of pay settlements and of the price of products within a company were lower, the company would be able to retain some additional employment. That must be true. However, there is no evidence that reductions of inflation will of themselves produce reduced unemployment.

Between 1950 and 1975 we had single-figure rates of inflation. Unemployment increased from 290,000 to 929,000. We often blame lack of economic growth entirely on high levels of inflation. Our growth of GDP in 1976 was 5 per cent. It was 3.8 per cent. in 1978. In 1979 it was 3.2 per cent. In all but four years of the period during which we had single-figure rates of inflation, there were low rates of economic growth. Even if we were able to get rates of inflation down to single figures, that would not of itself solve the problem, and certainly not if it were pursued in the manner that the Government have chosen.

There is a chicken-and-egg argument in this area. It is at least as likely that our poor industrial performance is responsible for the high rates of inflation as it is that high rates of inflation have caused poor industrial performance. I subscribe to the view that it is our poor industrial performance over a long period that has led to high rates of inflation, plus the fact that as a nation we have been unwilling to accept lower living standards to match our poor performance. That has been one of the major problems that has faced previous Governments, both Conservative and Labour, as well as the present one. That is the root cause of inflation; it is not that inflation causes poor performance.

The conclusion must be—it certainly is for me—that it is more important to improve our industrial performance, and particularly to increase the level of capital investment, than to get the rate of inflation down to single figures so rapidly as to destroy much of industry in the process. My fear is that we shall get the worst of all worlds. After four or five further wasted years, the economic solution will not just be further away. It will have been made much worse by the unfairness of the social policies that go side by side with existing policies. Those social policies rule out any prospect of getting agreement on keeping living standards in line with the growth in our resources.

I know that it is difficult enough to reach agreement with the trade unions if one is trying to pursue policies that are moderately acceptable, but in current circumstances we are alienating to a degree that will make the solution to our problems almost impossible. The danger at present is that we shall promise or imply that alternative policies can deliver both improved living standards and increases in public expenditure without any kind of agreement on the distribution of resources, especially incomes. That is the real danger.

Most of the available resources in the coming years, despite North Sea oil, will be needed to make good the cuts in capital expenditure that have gone on for years in both the public and private sectors. I take my own share of responsibility for that. I spent a fair amount of time cutting capital expenditure in the public sector. However, in the current situation the nationalised industries have been asked to make further cuts, amounting to £¾ billion, at a time when their capital structure is under threat in a way that it never has been before. This is not the time to be cutting their capital expenditure.

In those circumstances, for some years ahead we need a recognition that there will be very little room indeed for improving living standards if we are to find those desperately needed resources for capital investment in both the public and private sectors. What we do not need are promises to improve public services and increase living standards. That is why I hope that we in the Labour Party will concentrate on the only real hope that exists for the country — a Government reaching agreement with the trade union movement without promising that they can deliver what is not possible.

The tragedy of this week's statement by the Chancellor is not only the short-term damage that it will cause—which is bad enough—but also the fact that if persisted with there will be many years' delay before we can start putting right the decades of industrial decline to which I have referred. In the national interest, I hope that some right hon. and hon. Members and others outside the House will try to stop policies that are doing such enormous damage to industry before they do even greater damage to the social fabric of our society.

7.44 pm

Mr. Tim Eggar (Enfield, North)

I listened with great respect to the remarks of the right hon. Member for Heywood and Royton (Mr. Barnett). I sometimes wish that all speeches were as frank and honest as the one that we have just heard.

Along with my right hon. Friend the Member for Worthing (Mr. Higgins), I have felt for some time that the Government have not been following a pure monetarist policy. It has not been the pure monetarism that the Government themselves have led us to believe that they are carrying out or the pure monetarism that the popular press has portrayed it to be. If one wants proof, one has only to read the evidence of Professor Friedman when he appeared before the Select Committee or listen to the speeches of the right hon. Member for Down, South (Mr. Powell) or those of my right hon. Friend the Member for Worthing.

The fact is that on Monday the Government were finally forced to admit that they had to take a view on interest rates, and to do it publicly, whereas previously they had done it in a private manner through the gilt repurchase scheme. During the preceding week the Government were rightly forced to develop a policy for Government sector pay. There is no getting away from that.

I have felt for some time that the rate of MLR has been unnecessarily high and that it has had a knock-on effect on the exchange rate. The short-term demand for money has been far less responsive to the cost of borrowing as the recession has deepened. In other words, business men have been forced to borrow regardless of the cost. We had reached the stage at which high interest rates were leading directly to an increase in the money supply.

I am happy to note that the Government are moving only slowly and gradually towards monetary base control, because I feel that that carries with it, just as night follows day, an increased volatility in short-term interest rates. The Government have not been prepared to accept that volatility during the past 18 months, and I can see no reason why they should be prepared to accept it in the future. Monetary base control will also bring with it significant changes in the banking system and the building society structure. That is not something that we should wish on the country at a time of economic recession.

Conservative Members generally accept that we must reduce public expenditure further. It is clear to us that the country simply cannot continue to subsidise council house rents for those who can afford to buy their homes or are well able to pay the true economic rate. We know that people in work are suffering a real drop in their standard of living. Therefore, it would be totally inequitable if pensioners and those on social security benefits were not also asked to make sacrifices. Along with my right hon. Friend the Member for Worthing, I welcome the Government's decision to set a cash limit for Government sector pay. I also welcome the Chancellor's declaration to the Select Committee that in future years he will not fudge the figures on pay cash limits.

I therefore welcome these restrictions on current expenditure, but I urge caution. Unless we are careful, the Government will replace essentially fair taxes, such as income tax and VAT, with essentially unfair taxes, such as rates and increases in nationalised industry charges—for example, energy and rail—which become no more than an alternative form of indirect taxation.

It is one thing to reduce current spending; it is quite another to continue to cut into capital investment. We have now reached the stage at which there is net disinvestment by the public sector, and that cannot be good for the country.

I question very much the Government's concentration on the level of the PSBR next year. In other words, I wonder whether it is necessary to increase the revenue side of the account. I accept that, in the long run, the higher the real public sector borrowing requirement, the higher will interest rates have to be to finance it. For the second time in a decade, at a time of economic recession, we find that the response of British people to that recession has been a significant increase in the savings ratio. Since that has been coupled with a large inflow of funds into gilts from outside the country, I cannot see that running. a high level of PSBR will be totally incompatible with the control of the money supply. However, I urge caution. If the Government are to accept a higher level of PSBR—I hope that they will, in time—that higher level must go to financing higher capital investment, not current expenditure.

If the sacrifices that we are all making are to prove to be worth while, we must be able to benefit from the economic upturn when it comes. I do not share the pessimism of my right hon. Friend the Member for Sidcup (Mr. Heath), who commented that we would not get out of the recession, but I share deeply his concern about the problem of recycling OPEC surpluses. The commercial banks are no longer able to take on the task. It is only a question of time before we have a moratorium from a developing country, and at that stage the commercial banks will turn round and say, quite reasonably, that they are commercial undertakings and cannot continue to lend to medium-level developing countries because by doing so they would lose their shareholders' capital.

I should like to make three points about areas in the domestic sector on which the Government should concentrate. I support the hon. Member for Colne Valley (Mr. Wainwright) in his comments on the composition of the PSBR. There is no justification for capital investment in the nationalised industries to become a counting convention in the PSBR. It has obviously led—we have seen it for the past two years — to non-commercial decisions being forced on nationalised industries because the Government are focusing on the PSBR figures. I am not suggesting that we should fiddle the figures in the next year or two and take that investment out—that would be wrong, and it would be seen as such by the market and by the country — but as the upturn comes it would be reasonable for the Government to take those steps, perhaps in two or three years, and I hope that they will start floating the idea now so that it becomes accepted in, say, 1982 or 1983.

We must grasp the nettle of what we will do about wage settlements once the upturn in the economy reappears. We cannot say that the present low level of wage settlements—which I welcome—is due to a belief in the money supply figures. If the labour force really believes in the money supply figures, we shall have wage settlements of 19 per cent. rather than 8 or 10 per cent. In the words of the hon. Member for Colne Valley, we must look at the re-entry problem. I believe that the proposals in "The Right Approach to the Economy" for an economic forum were at least a basis on which we could move forward. It was with regret that I found that when the Government came into office they were not going to take action on those proposals. I say to the Government that unless we are to lose all the benefits that we believe we have gained from the sacrifices of the past year, we must work now on developing the idea of an economic forum for the upturn when it comes.

I turn next to a technical point, which I shall not develop in detail. We must examine the possibility of a thorough overhaul of the savings market. We on the Conservative Benches have rightly been concerned that private savings have been funnelled into funding the Government debt. We have ignored the fact that we have also distorted the economy by giving tax advantages to people to invest in the housing market through building societies. The building societies have tax advantages in the interest rates which they can offer through the composite rate structure. Also, the money that people take out from building societies for mortgages is tax deductible. The more those benefits increase, the higher interest rates become. As a result, people have preferred to invest in housing and property rather than in the stock market or in small businesses — a reasonable, rational economic reaction to market pricing.

Almost regardless of what the Government do, we shall see a significant reduction in the PSBR in 1982–83, purely because of the dramatic build-up in oil revenues. That means that there will be a reduction in the supply of gilts available to institutions to invest. That inherent reduction, coupled with what I hope will be a continuing Government effort to fund directly from the private sector through index-linked national savings certificates, means that there will inevitably be a re-emergence of the sterling capital market for United Kingdom companies, and once again, for the first time in 10 years, companies will be able to fund themselves on a fixed rate. But we must be careful. If Government funding from the private sector increases, there will be a natural draw down on the private sector funds available and the Government will be competing directly with the banks and building societies for whatever private sector savings are available.

It has been proved over the past 15 years that, because of their tax advantages, the building societies inevitably draw more from private savings than do the banks. If the Government are also fishing in the same pool, we are liable to get into a situation where the whole deposit base of the banking system is put under pressure and where the banks are not liquid enough or sure enough of their reserves to be able to make fixed-term loans — which would be a significant advantage to British industry—rather than overdrafts. I ask the Government to start thinking now about the whole structure of the savings market so that we can take advantage of the economic upturn when it comes.

Hon. Members will be aware that I have not been over-enthusiastic about the Government's economic strategy. However, that does not mean that I entirely reject monetary policy. Control of the money supply has a role in controlling the economy, but it is a necessary and not a sufficient tool of economic management. It is not much good setting off on a journey by car from London to Birmingham if the car can move only in a straight line, at a certain speed, and has only enough petrol to get to Birmingham. On the way to Birmingham the driver will need a steering wheel to get round corners and a brake and an accelerator if he meets any diversions.

The economy is exactly the same in many ways as the road between here and Birmingham. We cannot simply use a car that is going straight in the one direction at a predetermined speed. We have to be able to change the direction of the car and vary the speed. We cannot have that variation if we are relying purely on monetary policy.

8 pm

Mr. Martin J. O'Neill (Clackmannan and East Stirlingshire)

I should like to concentrate on the industrial aspects of the debate and to avoid the technicalities of the Treasury. Many of us who represent areas in which the industrial base of this country resides are very distressed at the effect of the Government's policies on manufacturing industry.

The hon. Member for Enfield, North (Mr. Eggar) introduced a motoring metaphor. He talked about embarking on great journeys up to Birmingham. I should like him to travel a little further north and see the damage that is being done by the Government's policies.

When I first spoke in this House, at the time of the last Gracious Speech, it was on the day when the Secretary of State for Industry made his famous speech about the six evils that, according to him, had beset British manufacturing industry over the last 25 years. It is salutary to look at what has happened in the last 18 months.

I have no desire to make a constituency speech, but my constituents work in firms such as BP, ICI, Coates Paton, DCL and the Hepworth ceramic group. Within that list of companies, we have what may fairly be regarded as a wide spread of profitable British industry. Yet these firms have contributed about 1,500 of the 3,000 redundancies that have occurred in my constituency and its environs in the last 18 months.

At the door of none of these firms can be laid the criticism of failing to invest, that the work force is not co-operative or that the firms have not gone out into the world to sell their goods and to provide products with which no other firms in their fields can compete in terms of quality. But, unfortunately, as a result of the Government's policy, they have had to cut back on production. They have had to lay off people. In many instances, they have been unable to bring into production the fruits of massive investment programmes which have been arrived at only after a great deal of negotiation with the trade union movement, difficulties with bankers and so on.

I mentioned Hepworth Ceramics. It has a subsidiary called G. R. Stein, which produces refractory bricks for the steel industry. It would be wrong to say that it would suffer solely because of the problems of British Steel, for probably only about 30 per cent. of its production is in that section of the steel industry. Another 35 per cent. goes to the private sector and the rest is sent abroad.

If we ignore the difficulties that British Steel got into — and if we choose to forget that it was the Government's unwillingness to provide the money at the right time that forced British Steel into the painful industrial dispute that has caused so many of our difficulties—we still have to take account of the fact that that firm has had to accommodate gas price increases of about 30 per cent. in the last nine months. It has also had to face the difficulty arising from the value of the pound. It has had to compete with German and Austrian firms that are widely recognised in the industry as producing an inferior article. The firm has been put into an unfair position in relation to those foreign firms because of the burdens that the Government's policy has placed on it, especially in regard to energy prices and the foolish determination to maintain the pound at an unrealistic level.

In the last three or four years, the firm has invested about £17 million in the plant in my constituency. Much of that investment was to be met out of income, which was to be generated from profits in this year and the next—profits that will not now be forthcoming. Vast areas of the firm's massive plant are now lying idle simply because the firm has neither the market nor the resources to complete the project.

It is a source of concern to me that such a firm, with a massive sales force effectively positioned throughout the world, is unable to sell the goods that the people of Australia and the Far East are desperate to buy but are unable to buy because the price is not right for them.

These are not the kinds of firm against which can be levelled the sorts of criticisms or prescriptions set out by the Secretary of State for Industry 18 months ago. They are not the kinds of firm that have suffered unduly from high direct taxation. In the main, they have been fairly sophisticated in their accounting procedures and have not had to pay particularly high rates of tax. They have been able to avoid paying tax, to put it politely, because of the regime operating in this country.

They can also be acquitted of any charge of egalitarianism, because they have not gone out of their way to have workers on the board. They have consulted the workers through their organisations and undertaken programmes of training of shop stewards and so on but could never be regarded as indulgent co-operative organisations.

The firms that I have mentioned have not been threatened with nationalisation, although one might on another occasion be prepared to argue a case for that. If they have had any trouble from nationalisation, it has been from the State utilities, which have been forced to increase their energy prices. They have had problems in moving their goods in and out because of the increase in rail freight charges. But nationalisation in the form of the threat of State ownership has never been a problem for these firms.

The work force in my area could never be accused of taking a Luddite attitude—one of the most vicious of the evils to which the Secretary of State for Industry referred. Indeed, I find it difficult to discover evidence of Luddite trade unionism in the United Kingdom. I believe it to be one of the figments of the right hon. Gentleman's imagination. If it does exist, it is not in the parts of the industrial North in which I meet people. I find a tremendous spirit of co-operation, albeit brought about by adversity.

There is no evidence of the anti-enterprise culture that we are led to believe exists in certain parts of the country. In the central area of Scotland there are groups of workers employed by ICI, by BP and by the Weirs group, a major Scottish engineering firm. Most of the firms in the area are good examples of modern British manufacturing industry. They are very successful and cannot in any way be charged with being anti-enterprise. The people in my area may sometimes have difficulty in arriving at agreements with the firms over wages and conditions, but, generally speaking, the record of the central belt of Scotland in recent years has been a good one. The hon. Member for Renfrewshire, East (Mr. Stewart), who has long experience in the CBI, will bear out that the record of central Scottish manufacturing industry in the last 25 years has been one of innovation and, generally speaking, very good industrial relations. The firms concerned are, in the main, dependent on the expansion of Britain's role in world trade.

Last night, when the Secretary of State for Trade was replying to the debate I asked him about the prospects for Britain in terms of our share of world trade. He said that our share would continue at its present level. But a Treasury document of 24 November 1980, dealing with economic prospects to the end of 1981, stated that the loss of United Kingdom share this year, measured in volume terms, may be attributed mainly to a lagged response to worsening competitiveness. It continues: The growth of UK export markets (world trade in manufactures, UK weighted) is expected to slow down substantially, from an estimated 8 per cent. in 1980 to possibly 3 per cent. or so in 1981. Firms that have served Britain well during the past 10 or 20 years and have done everything required by the Secretary of State are faced by contracting markets and by increasing difficulties. In addition, if Britain somehow gets out of its economic difficulties, the bitterness and resentment felt in the industrial regions will remain in any re-entry to free collective bargaining.

In addition, trade unions will be unwilling to accept new work practices. The difficulties that we have experienced since the last economic slump of the 1930s and the deep-seated attitudes held by some trade unions in relation to the innovation of new equipment will have become manifest. In my area, those attitudes do not exist, but we are told that they exist in some parts of the country. Such attitudes will be found once more, as a result of the bitterness, and the seeds of sourness that have been sown.

Some people may not be able frequently to visit the industrial parts of Britain. If people wish to experience a taste of that bitterness, they need go no further than their local fire station. Last week I met the fire officers and men of a brigade. I heard how they felt about the way in which the Government have reneged on the undertaking that they gave when in Opposition. If people want to discover how public service workers feel about the way in which they are being treated, they should talk to those workers. They resent being regarded as a crowd of overpaid skivers who do not work hard enough and whose numbers should be cut by two or three in each department. If that is the Government's recipe after 18 months, Opposition Members will be forced to shake their heads in disbelief. We did not expect very much from the Government. We did not expect their original policies to succeed, but we hoped for improvement.

Recently, I read what Hugh Gaitskell said when he destroyed Rab Butler's prospects of assuming the leadership of the Conservative Party. Perhaps it is true also of the Chancellor of the Exchequer. Hugh Gaitskell said: He began in folly, continued in deceit, and he ended in reaction. That is what we expect from the Cabinet. This week we may not have seen examples of deceit but we have seen examples of incompetence. Some Labour Members may be as critical of their party as some of those on the Government Benches. In a short time the Government's incompetence has been shown up. People have seen how their employment policies have failed. The bitterness pervading the country has been seen. When the Government make their next U-turn, they must try to resolve their dreadful legacy.

8.13 pm

Mr. Julian Amery (Brighton, Pavilion)

In his earlier remarks the hon. Member for Clackmannan and East Stirlingshire (Mr. O'Neill) underlined the irony of the past 18 months. The Conservative Government have increased public expenditure in real terms and penalised the private sector. One is bound to ask how that has happened. Why did not the clever people in our "think tank" when we were in Opposition gauge how the policies should be applied? Perhaps they thought that local government and the nationalised industries would react in the same way as the private sector. Perhaps they thought that faced with cash limits and cuts in the rate support grant they would resist wage increases and cut down manning levels.

The Almighty in His infinite wisdom did not see fit to make local government officials and nationalised industry chairmen in the image of my right hon. Friend the Secretary of State for Industry. [AN HON. MEMBER: "Thank God for that."] We may regret that, but it remains a fact.

The right hon. Member for Heywood and Royton (Mr. Barnett) made, I thought, the outstanding speech of the debate. He accepted that inflation should be regarded as the main enemy. But I agree with him when he said that inflation was not a thing in itself but that it reflected a basic weakness in the economy's structure. It reflects, of course, an imbalance between supply and demand. One can think of it as too much money chasing too few goods or as paying oneself more than one has earned, or whatever one likes. How does one restore that balance?

One can restore the balance by damping down demand or by stimulating growth. The most difficult operation is to combine the two and to damp down demand at the same time as stimulating growth. It can be done, as I will try to show.

My right hon. Friends are committed to a deflationary policy. It has not been very successful in the public sector. To a certain extent, it has worked in the private sector, but I suspect that the world recession has had more effect on the private sector than interest rates or the high rate of sterling.

The Government should stick to their policy of trying to damp down demand. I am not one to suggest an alternative, but I want to suggest an addition. My right hon. Friends should give a little more consideration to the other side of the equation. They should not only consider how to damp down demand; they should also consider how to increase the supply of goods in order to mop up excessive demand.

How does one reconcile a deflationary policy with stimulating growth? In many periods of history it would have been impossible. It can be done only when technical advances create new possibilities, when new technology can lead to increased productivity. We now live in such a period. We are well into a new industrial revolution. In the past, certain sections of society could live in relevant affluence by exploiting others. Today, everybody could live in reasonable affluence if only we exploited the machine, and exploited it ruthlessly.

Only a quarter of our population produces the wealth on which the rest of us live. There is no reason why a quarter of our people cannot work shorter hours and earn much higher wages. The increased demand generated by the increased wages earned by those who remain at work would quickly produce new employment for those made redundant during the process of modernisation. Japan can be cited as an extreme example. We cannot compare it with our society. However, that has been going on in Japan for half a generation. There has been modernisation after modernisation. People have been made redundant and re-employed within such a short period that the firms concerned have usually kept them on the payroll even though they were unemployed.

Naturally, this calls for massive investment. At present that is difficult, though there may be something in the suggestions made in articles written by Lord Lever and Mr. Edwards. They wrote about banks channelling more money into investment and less into consumption. However, the heart of the problem is psychological.

The hon. Member for Clackmannan and East Stirlingshire may not have come across the Luddite element in our society, but it is strong in the community. Obviously, Fleet Street and the Isle of Grain are caricature examples of Luddite behaviour. Nevertheless, newspapers give examples almost every day. One can find examples of people who prefer to let themselves be exploited and to receive low wages for long hours of work although they could, if they worked with management, exploit the machine, gain higher wages and work shorter hours. How can we reach the stage when such psychology disappears?

In the old days, the view was that a tough deflationary policy would do the trick. The threat of unemployment would make people work harder and would produce more discipline in the work force. The threat of bankruptcy would put management on its toes and it would become more enterprising and inventive. There may still be something in that view. There are indications in some parts of the country that this aspect of the Government's policy is already having some effect. But I doubt whether it is enough today.

I was for 21 years candidate and Member for Preston, North, which is as good a cross-section of British industry as one can get. In those years I became convinced that a more positive approach was required. For almost 32 years now I have been preaching, I admit with very little effect, the importance of management and the work force requiring and being offered the carrot as well as the stick. That is easy enough in small firms where participation comes naturally. The few employees concerned know what goes on; they can see the books and there is no real problem. It is only in the larger firms that the problems arise and in nationwide bargaining.

I should like the Government to begin to take more positive steps to encourage participation. I do not like the word "participation". What does it mean? There is no blueprint for it. We cannot have the same scheme for an engineering works and a bank. However, participation could involve profit sharing and the easy acquisition on advantageous terms of shares in companies, in which the people concerned are working. It could involve works councils for the larger firms, such as they have in West Germany, which in my experience and from what I have been told have been the most positive aspect of the German Mitbestimmungstecht concept. It could also involve worker directors in the large companies not on the lines recommended in the Bullock report—being appointed by trade unions—but emerging from the shop floor. I should not like to see this concept made compulsory. That is not the British way.

I should like to see a registrar for participation appointed. If he approved of a particular scheme, the company concerned would be able to achieve some fiscal alleviation. To some extent, this is happening already. Many companies could receive a good deal more if we went that far. But I would go further. We need to mobilise public opinion in favour of productivity. That will be achieved only by public debate.

We sometimes leave this Chamber feeling very frustrated about whether we are doing any good, but the importance of our debates is that opinions are aired and anything scandalous is shown up. People cannot get away with making scandalous decisions in a democracy such as ours in the way that they can behind closed doors. Industrial relations today are discussed mainly behind closed doors. What appears in the press is usually incomprehensible to the ordinary reader; it is not understood.

I should like to see the little NEDCs and the NEDC itself gradually evolve as a consultative economic council debating the big economic issues of the day in public, and widely broadcast. We might be surprised by the results of such a fresh air cure. I do not believe that scandals such as those which go on in Fleet Street printing and on the Isle of Grain would continue if we had that kind of debate. Those involved would be laughed at and ridiculed by the public at large. That does not happen today because these matters are not sufficiently understood. I have been told when I have raised this matter that the trade unions would be unlikely to co-operate. I am not so sure. I doubt whether they would like to risk further unpopularity by insisting on secrecy.

In my judgment, the Government are right to proceed on their present course. Their policies will bring down inflation, but there is no assurance that they will lead to recovery. We could end up with stable prices but lower standards than we have today. That would not be a very happy solution. It may seem a little Utopian to talk of profit sharing when there are no profits, of modernisation when there is little capital available for investment, or of higher wages for the few when unemployment is on the increase. But if my right hon. Friend the Prime Minister is right in thinking that we may be near the turn of the tide towards the end of the year, or even if it is a little further delayed, it is none too soon to begin developing and preaching a positive policy as to how we propose to achieve growth through increased productivity.

8.25 pm

Mr. D. E. Thomas (Merioneth)

Since 1973, 50,000 jobs have been lost in industry in Wales. I shall concentrate my remarks on the Welsh economy. That decline was offset by an increase in service employment, in particular in the public sector.

The Gracious Speech states: Plans for public expenditure will take account of the need to restrict the claims of the public sector on the nation's resources. I should make clear that for the nation of Wales, particularly the region of South Wales, the public sector is the economy. Well over 40 per cent. of those still employed are public employees.

The crisis now affecting the South Wales economy is an example of the way in which the Government's policies of bashing the public sector are attacking the living standards and livelihood of the people of Wales. I was glad that the right hon. Member for Cardiff, South-East (Mr. Callaghan) took the opportunity today, in making his first major speech from the Back Benches, to highlight this issue. The depth of the crisis affecting South Wales arises from the interdependence of the steel and coal industries, with 40 per cent. of the South Wales coal output, in the form of coking coal, going to the steel industry.

We hear about open government. There is no consultation on, or open government in, the decisions now hanging over our heads. They are being taken in secret within the British Steel Corporation and, presumably, will be presented to the Government and the House in the middle of next month. Those decisions could result in the loss of a further 15,000 jobs in the steel industry in Wales, resulting in a further loss of 15,000 jobs in the coal industry, plus an additional effect on other industries. Therefore, we could be talking of a loss of 50,000 jobs, not during the period 1973 to 1980, but in two years, as the Wales TUC has indicated.

It is against that background that the Select Committee on Welsh affairs — I am not a member of that Committee, and, therefore, I can quote from its report objectively—said: notwithstanding the actions taken by Government, there exists in Wales not a jobs gap but a jobs chasm into which the economic and social structures of large parts of Wales are in danger of falling. We have heard of social disorder. The right hon. Member for Rhondda (Mr. Jones) has written to the Prime Minister in these terms. We already have social disorder in Wales. It has been created by the Government. We have socio-economic disorder created by the destruction of the public sector and the reliance on market forces. Any further action that is taken in Wales by organised labour as a response to that disorder must be seen as the Government's responsibility.

Mr. Raymond Whitney (Wycombe)

Is that a threat?

Mr. Thomas

Of course that is a threat. It is a realistic threat of the kind of response that we can expect from the people of Wales in 1980, as we saw in 1926. I cannot put it any plainer than that. It is not just from Wales. Responses to regional crises throughout Europe are clear and stark. The Government have only to look at the experience of the French Government in the steel industry in the regions of Lorraine and Nord in 1978 and 1979 to see what can happen when a Government decide on a blind economic strategy of destroying jobs in regions that are able to respond, if necessary, in a dramatic way, which will include confrontation and industrial action.

What we see in the crisis that is affecting Wales is a crisis of the whole welfare capitalist settlement post-1945. The fact that the Government are destroying the Welsh economy, particularly the economy of industrial South Wales, has to be paralleled with the destruction that they are undertaking of our education service, our personal social service, our jobs in the whole of our public sector and our services. The result of this, as we have heard from other speakers in the debate, is to exacerbate the deflation, because for every job destroyed in the public services, a further job is destroyed in the private sector.

We have had stark experience in industrial South Wales of the results of central State policy. We had that experience when there was a decision to convert Britain to a multi-fuel economy. The result of that on the coalfields of South Wales was calamitous. We saw in the 1960s under a Labour Government the closure of over 80 pits.

The dependence of industrial South Wales on the steel industry is something that has been encouraged by the way in which Government planning is sectoral rather than regional. Major sectoral decisions were taken to concentrate primary forms of steel production in South Wales in the late 1950s, when Llanwern was built, and so on. But there was no ancillary development of related metal industries so that one could see a balanced regional job provision growing out of that.

What we now see in the current crisis is the over-dependence of Wales on the steel industry rather than the over-dependence that was highlighted in the early 1960s in the economic plan then produced. That dependence is, as it were, a third generation of dependence on primary production, and the contraction following it is the third generation crisis for the working class in Wales.

After two decades of the rhetoric of reconstruction of the Welsh economy from successive Governments, we are now seeing systematic economic destruction. I can predict the kind of response that we shall have from the Government when they reply to the Select Committee. They will say that the recovery of Wales depends upon the recovery of the United Kingdom economy as a whole. That will be their cyclical argument, as cyclical, indeed, as the effect of their monetary policy in terms of creating deflation, because one cannot recover an economy without recovery within the depressed regions of that economy.

That recovery must be led through planned investment and public enterprise. The pattern of State intervention, whether it is Keynesian intervention, the corporatist intervention or the monetarist one by the present Government, must be changed. The over-dependennce of regions such as South Wales on particular sectoral policies must be removed, and there must be regional planning that allows the region to develop its own economic balance in terms of its own development.

We need immediate alleviation of the problem. We can demand that from the Government, though we shall probably not get it from them. We can demand the sort of public sector subsidy policies that exist for energy industries in Continental Europe. We can also demand, as part of the future alternative economic strategy for which we must fight, planned production on a regional basis, to ensure that the sort of sectoral dependence that I have criticised is not perpetuated.

More than anything, there must be effective planning and control of investment. The Welsh Development Agency is increasingly behaving as a poor public sector merchant bank. Indeed, it is trying to develop as a private sector merchant bank, as we have seen from its recent attempts to attract private capital. The WDA should be involved in planning agreements, with domestic and multinational capital, to ensure that when major job losses take place in a dependent region such as South Wales they can be replaced.

Those are the transitional demands of an alternative economic strategy. We cannot expect them that from this Government, but we shall demand themvery,. If the Government do not respond, I must tell them there are political groupings that have been formed within Wales that are determined to protect the interests of the Welsh working class. If a Government who have no mandate from Wales regard themselves as having a mandate to destroy Wales, Wales will destroy them.

8.36 pm

Mr. Charles Morrison (Devizes)

The hon. Member for Merioneth (Mr. Thomas) said that the economy cannot recover unless there is a recovery in the regions. The ultimate test of any economic policy in a small, over-populated country such as Britain is whether there is recovery in the regions, but the final objective of the Government is to ensure that there is not only economic recovery but economic prosperity in all parts of the country.

It is stating the obvious to say that the Government's continuing intention to control inflation remains not only a desirable but a necessary objective. If it is not achieved, the consequences will ultimately be still higher unemployment, reduced competitiveness and a shattering deterioration in standards of living.

However, none of us should run away with the belief that the control of inflation is the only priority and the only necessity. The right hon. Member for Heywood and Royton (Mr. Barnett) made that point in his excellent speech. It is just as necessary at a time of recession for the Government to do what they can not only to contain unemployment but to provide special assistance for the unemployed. In that respect I warmly welcome the measures recently announced by my right hon. Friend the Secretary of State for Employment. It is also necessary for the Government to do their utmost to maintain a strong industrial base in preparation for a better future.

It is to the gross disadvantage of the Government that they have to try to achieve such necessary objectives against a background of world depression, and there is a degree of incompatibility in some of the methods that must be adopted to achieve the objectives. That emphasises all the more the importance of the Government's exercising a degree of flexibility and some moderation and balance in their policies.

I share the view of my right hon. Friend the Member for Sidcup (Mr. Heath) that there will be no proper end to the recession until the problem of the OPEC surpluses is dealt with. Far too much optimism is being expressed about the recession bottoming out soon. There may be a temporary improvement, but until the problem of OPEC surpluses is dealt with we cannot look forward to anything approaching a rosy future.

I wish to refer briefly to some of the problems of industry, based particularly on knowledge that I have gleaned in my constituency in recent weeks. Some hon. Members will know that my constituency is not an archetypal industrial constituency. Nevertheless, industry provides an infinitely greater number of jobs in it than does agriculture. If the situation generally is as serious as it is in my constituency, it is easy for me to understand the seriousness of the position that must exist in some other constituencies, not least those in Wales, to which reference has been made.

Some businesses are flourishing. I suspect that some were flourishing in 1930. The greater part of industry, however, feels maltreated, uncertain and, in a number of cases, in danger of going bankrupt, often in spite of being highly efficient and cost-effective and making products that should, and will, remain basic requirements for many years to come in this country. What industry finds difficult to understand is that, while most of it has done what has been asked of it in the last 18 months—it has cut costs, has slimmed down, is leaner and keener, has become more competitive and has adopted a much more aggressive marketing policy in a difficult marketing situation—it is being heavily clobbered in relation to many items over which industry has no control but the Government have. I want to refer to one or two.

There is the strength of sterling. I should like to mention one company in my constituency which has written to me. I visited it recently. It is a company concerned mainly with electronics and, therefore, as it says itself, it can hardly be described as a lame duck. The plain truth is that many of its customers are being completely overwhelmed by low-cost imports and, in consequence, are either going out of business or cutting back severely. The opportunity for direct exports by this company is rapidly diminishing even at prices which allow no profit margins. In certain cases, the company is already selling at prices below factory cost in order to maintain some sort of foothold in markets that have been established over many years. No company can go on doing that for very long.

I am told that until recently the company had been successful suppliers of components to Japanese electronics companies operating in Europe. It is now becoming totally impossible to compete with the Japanese principals in those markets. Similarly, American companies operating in Europe are finding that components which until recently came from the United Kingdom can now be purchased much more cheaply in the United States. I am sure that it is excellent to have a strong currency. It seems utterly crazy, however, to expect industry to compete with a currency that has increased in value by almost 50 per cent. in three years for the artificial reason that we have North Sea oil.

Until now, the Government have said that they can do nothing about the strength of sterling. How long will they sustain that argument? Will they continue with it as each oil price increase forces up the value of sterling, perhaps to a parity of $2.60, $2.70, $2.80 or $3? Will they take no action, whatever the strength of sterling, while the competitiveness and strength of British industry are steadily destroyed abroad and at home, with cheap manufactured foreign goods being sucked in? The answer is "Of course not." The Government would take action if sterling went much higher. If I am right in my assumption, as I believe I must be — I cannot believe that the Government wish to see industry destroyed in that way—why do they not take action now, given the pressure under which industry is operating?

I turn to the question of interest rates. Of course, the reduction in MLR is to be welcomed. It will have a most beneficial effect on industrial costs. I only hope that it will be possible to reduce it still further. In the meantime, the benefit of the cut will be lessened by the increase in national insurance contributions, by the new responsibility to be imposed on companies for training board costs, perhaps by sickness benefit costs, and by energy costs and local authority rates. All these are matters of great concern to many companies throughout the country.

I am glad that my right hon. Friend the Secretary of State for Energy has recently shown some much-needed flexibility over energy prices, but it may be necessary for him to do much more.

With regard to local authority rates, it is no use the Government's continuing to think that local government can cut endlessly without impairing services. I raised this matter with my right hon. and learned Friend the Chancellor on Monday after his statement. Since the present Government came to office, far from reducing the responsibilities of local government they have in many respects increased them. They have also taken action that is likely to create the need for still more employees in local government. When the Government say that they have removed controls from local government, what they mean is that they have put themselves in a position in which they can reduce the number of policemen in the Department of the Environment who previously oversaw what local authorities were trying to do.

There are only two alternatives for local government, given a cut in the rate support grant. The Government must either reduce or remove obligations currently imposed on local authorities or accept higher rates. But rate increases as high as, or in excess of, the rate of inflation are at present wholly unacceptable to industry, given its parlous state. Therefore, I must ask the Government again to give further consideration to the statutory duties that have been imposed on local government.

I have tried briefly to highlight some of the matters that are worrying industry. What concerns me overall is that the Government should do their utmost to avoid an industrial battle of the Somme. They must, of necessity. On the very first day of that battle, on 1 July 1916, there were more casualties than in the whole of the Crimean, Boer and Korean wars put together. The strategy of that battle may have been right, the planning may have been perfect, but the tactics and the lack of imagination of inflexible generals led to untold carnage for virtually no gain. I do not wish to see that carnage equalled by an industrial carnage in this country for the same reasons, in spite of a well-intentioned strategy.

I ask the Government, in the coming difficult months, to show just a little more flexibility, just a little more moderation, just a little more balance, just a little less theory and perhaps just a little more practical common sense.

8.50 pm

Dr. Oonagh McDonald (Thurrock)

I fear that, despite what the hon. Member for Devizes (Mr. Morrison) said, a little more flexibility, somewhat better tactics and a little more sensitivity will not be enough to save the Government from creating the kind of industrial carnage which they seem utterly bent on. For it is not just the tactics, and so on, that are wrong. The Government's entire strategy is ill conceived, and it is by no means bringing any of the benefits that the Government predicted confidently in the first few days after they took office.

There were two main planks in the Government's economic policy affecting industry, and it is on those that I wish to concentrate. The first was that of tax cuts. The Government said that these alone would create the incentive needed to modernise British industry and make it more efficient. The second was a cut in public spending to free industry from the burden of public spending that it bore. The tax cuts plainly have brought no such benefits. Manufacturing production has fallen by 11 per cent. this year. Business confidence is at its lowest ebb. Industry after industry seems to be disappearing rapidly.

As for the cuts in public spending, it appears that the Secretary of State for Industry is convinced that this is the only aspect of the Government's stategy that will work. In a recent interview with British Business, he said: We have still to create the conditions that are encouraging to industry". That is the understatement of the year. He went on: and those conditions won't be brought about until we have ceased to crowd industry out by our excessive government spending. With that sort of conviction, the Government have already cut public spending by a little more than £7 billion at 1980 survey prices, and I include this week's announcements. None of those cuts need have been made if the Government had not, at the beginning of their period in office, cut the standard rate of income tax by 3p in the pound. By the end of the next financial year, that cut will have cost between £6.2 billion and £6.4 billion in terms of lost revenue. That cut in the standard rate of income tax has had no good influence on the economy. Instead, it has been paid for by cuts in public spending, which have had not only disastrous social consequences but disastrous consequences for industry as a whole.

Yet this aspect of Government policy is the only one that seems to meet with the approval of the CBI. I fail to understand why the CBI and industrialists do not understand their own interests better than that. It may be that they suffer from temporary amnesia whenever they consider public spending. Last year, Government support for industry in terms of grants and subsidies and also in terms of contracts and public purchasing amounted to more than £23 billion. That, surely, was an important cushion for industry and an important incentive for it to maintain production at a high level.

We can see the devastating effects of thes cuts in public spending if we consider just one industry, for example, construction. By March 1980, the Government had lopped nearly £2 billion off spending designed to set up contracts, and soon, to the construction industry alone. The result is that roughly 250,000 construction workers are unemployed, and the private construction industry is suffering. Meanwhile, the country's housing stock will deteriorate rapidly. By the middle 1980s it will cost about £14 billion at current prices to put it right, and we shall be suffering a serious housing shortage by then.

Industrialists and the Government fail to realise the importance of this sort of public spending to private industry. Far from taking money from private industry, such spending contributes directly to its continuance in business, to maintaining its production at a high level and to its profits. Of every £100 spent on council house building £85 goes to the private sector. Only 15 per cent. of council house building is by direct labour. Money spent on housing would therefore bring enormous social benefits by ending the ceaseless suffering of those on the waiting lists and those who live in damp and decaying properties, and would directly benefit the construction industry.

Firms other than building companies would benefit. Many firms in my constituency have already disappeared. One company making concrete building blocks closed down because existing heavy stocks had rendered it unnecessary for more to be manufactured. On Friday I shall visit a timber firm that employs my constituents on making doors, windows and roofing. It is a medium-sized, efficient firm with good industrial relations, but it is suffering from the effects of cuts in public spending and the recession in demand for private housing created by high interest rates.

If, instead of cutting public spending, the Secretary of State for Industry took stronger and more decisive steps to increase it, he would help to revive private industry. He has done a little here and there so far this year, but firms in my constituency would not now be collapsing if the level of public spending planned by the last Labour Government were being implemented today.

Unemployment in Thurrock has reached the unprecedented level of over 10 per cent. My constituency is in the allegedly prosperous South-East. It is not suffering as much as other parts of the country, but suffering it is, and directly because of Government policy. The Government should be indulging not in undirected tax cuts, which have done nothing to help private industry, but in a sustained programme of public spending and public investment—which would lead to private investment—and in strong interventionist policies.

Recently the chairman of the much-reduced NEB told the Institute of Fiscal Studies that the Government should support industry, especially high technology industry, by greater public investment and should look to the strong interventionist policies of countries such as America, West Germany and Japan. He chose Japan as his model and suggested that, like Japan, the Government should intervene and, from the different sections of industry, pick the winners, supporting them with a view to creating high technology, highly competitive concerns.

A policy of planned public spending would do much to rescue constituencies such as mine and those of my hon. Friends which are suffering from high unemployment and all the social evils that it brings in its train.

9 pm

Mr. John Silkin (Deptford)

Hon. Members who were in the House earlier this afternoon must have felt that they were present at a historic occasion. It was somewhat unusual for two former Prime Ministers to speak consecutively. In the speeches by my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) and the right hon. Member for Sidcup (Mr. Heath) we witnessed something the House has not seen that for a long time. They were speeches of enormous authority and great brilliance which revealed an extraordinary diffidence and modesty in two people who ran the country for many years.

The long series of debates on the Gracious Speech has been significant, because only rarely has the Gracious Speech been mentioned. We have discussed the economy, which deserves only a line or two in the Gracious Speech, unemployment and whether the Chancellor of the Exchequer was or was not misleading the House. It is extraordinary that during the worst economic crisis for years the House apparently is to spend almost the whole of the next Session legalising the production of Mickey Mouse telephones. That is the priority in this year's Gracious Speech.

If one wishes to test what the Government are thinking and doing, one should study the expressions on the faces of right hon. Gentlemen on the Treasury Bench. They reveal a great degree of unease and uncertainty. That was not so during the debate on the Gracious Speech last year. Then, the expressions were a little patronising, somewhat contemptuous, full of self-confidence and a little smug. Government Members were filled with a divine certainty that everything would be right. That was 18 months ago. It was in the halcyon period when, as my right hon. Friend the Member for Chesterfield (Mr. Varley) reminded the House yesterday, the Prime Minister entered No. 10 Downing Street, turned on the steps and quoted St. Francis. She said: Where there is discord, may we bring harmony. Where there is error, may we bring truth. Where there is doubt, may we bring faith. Where there is despair, may we bring hope.

The Chancellor of the Duchy of Lancaster, Leader of the House of Commons and Minister for the Arts (Mr. Norman St. John-Stevas)

That is absolutely right.

Mr. Silkin

The right hon. Gentleman may say that. I believe that the words are felicitous. The philosophy is immaculate. However, the rejection of the philosophy by the Prime Minister was her first U-turn.

Let us examine item by item, prescription by prescription. The Prime Minister said: Where there is discord, may we bring harmony. Harmony where? If one is to have harmony in a nation, one must go to the top of the governing party. One would expect, therefore, to see harmony in the Cabinet. Where else? However, that does not exist. Many months ago, one Minister might have said that he was sorry. But that was not said by all Ministers all the time. Now, they are saying that they are sorry for what other people are doing. In the eyes of people outside, the Cabinet is governed by leaks and disagreements. Whether they are wet or dry leaks does not matter. Harmony has turned to discord in the Cabinet. That is extremely interesting and enjoyable for the Opposition and the press, especially the Tory press, which, generally speaking, has to be kept on a tight rein. However, such discord becomes infectious. There is not much harmony in the Tory press these days. This morning the Daily Express attacked the Daily Mail and The Sun as fair weather friends of the Prime Minister. There is not much harmony in the press.

What about harmony in industry? We are told that something new is happening. The Secretary of State said it yesterday, the Prime Minister said it today; right hon. Ladies and Gentlemen are always saying it. They say that there is a new realism in industry as a result of the Government's policies — whether intended policies or involuntary replies to the world situation. They say that there is a new realism on the shop floor. The right hon. Lady told us today that we are witnessing improved industrial relations. Treasury Ministers and Tory Back Benchers give as an example the cutting of the number of days lost by strikes. It would be a little surprising if the number of days lost by strikes was not being cut. After all, there are almost 1 million fewer people at work than there were a year ago. Furthermore, when we have taken those out of consideration, as The Times pointed out this morning, more than 5 million hours have been lost in short-time working and another 5 million in lost overtime.

There are also fewer disputes. If the Secretary of State for Industry continues to fold his arms and watch the whole of industry disappear, there will be fewer and fewer disputes. There will be no one to cause them. However, there has not been very much harmony right from the beginning. There is not very much harmony created by a tight, rigid cash limit, which the right hon. Gentleman has had to go back on, in the steel industry, for example, which forced the first national strike in that industry for over 50 years.

That deals with the first of St. Francis's prescriptions that the right hon. Lady quoted on 4 May 1979. The second was: Where there is error, may we bring truth. I do not very often, particularly these days, quarrel with my right hon. Friend the Member for Leeds, East (Mr. Healey), but I shall on this occasion. The Chancellor of the Exchequer did not say that he was "hemmed in" by Tory election promises. According to The Daily Telegraph, he said that he was "boxed in". My right hon. Friend rightly gave an example of some of the election promises that were made. The right hon. and learned Gentleman, the Prime Minister and other Treasury Ministers do not seem to feel that they need to be boxed or hemmed in by them.

My right hon. Friend quoted the promise not to increase prescription charges, which, incidentally, was made by the right hon. Lady herself, although she left someone else to do the dirty work. There was a promise that there would be no doubling of VAT—it was a wicked Labour lie to suggest that there would be — but that promise was broken. No one felt boxed in about breaking that promise. Another Labour lie, for which I, regrettably, was responsible, was that if the Conservatives were elected they would reduce the green pound to parity in one year. It was said that that was not so. The promise was that it would take a whole Parliament to do that, and even then it would not be done if it would cause a rapid increase in food prices. However, it was done in one year. The Conservative Party made all those promises. It will take a long time before the truth is brought.

What about the promise to abolish rates? That was an interesting promise for the local authorities. We ask the Chancellor of the Exchequer to redeem that one as soon as possible. It was as election promise. The Conservative Party further promised not to sell out on fisheries. The sellout has not been delivered entirely, but it is well on the way. It will not be long before it is delivered.

When the Prime Minister quoted St. Francis, she said: Where there is error, may we bring truth. I do not think that that prescription has altogether served its purpose. Let us try the third prescription, namely: Where there is doubt, may we bring faith. When the Conservative Government were elected on 3 May 1979 there was considerable faith. There was no doubt about that. There was total faith in monetarism. It was not quite clear what it meant to members of the Government, but it clearly meant something. I find myself confused. I do not know whether it is Hayeck monetarism or Milton Friedman monetarism.

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

What about Healey monetarism?

Mr. Silkin

If the Chief Secretary is proposing to apply for membership of the Leeds, East Labour Party, I should not if I were him. His application is bound to be refused.

I understand from The Times of last Friday that Mr. Hayek still thinks that the Prime Minister is right. However, he thinks that she is being betrayed by half her Cabinet and Milton Friedman. He does not say which half of the Cabinet, but he names as fairly large traitors in this area the Secretary of State for Employment and the Lord Privy Seal.

Mr. Hayek has a simple monetarist formula for solving all our ills. He says that all we need is 20 per cent. unemployment for six months. He does not think that the Prime Minister's method of 10 per cent. unemployment for three years is quite good enough. He thinks that a good short, sharp shock — I think that is what the Home Secretary would call it—would be better.

Mr. Robert Parry (Liverpool, Scotland Exchange) rose—

Hon. Members

Hear, hear.

Mr. Parry

Never mind "Hear, hear". Are Conservative Members aware that it is stated in a written answer that in my constituency there are nearly 20,000 unemployed in an electorate of 34,000? That is nearly 60 per cent. unemployment. There will be a massive demonstration in Liverpool—[Interruption.]

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

Order. We shall make no progress unless we can hear what is being said.

Mr. Silkin

I realise that Conservative Members have to laugh to prevent themselves from seeing exactly what is happening to their Government and their constituencies. However, the sort of information that my hon. Friend the Member for Liverpool, Scotland Exchange (Mr. Parry) has presented is something to which they should listen. It is an important illustration of what is happening to the country and the fabric of our society. If there are similar rates of unemployment elsewhere, how long do Conservative Members think it will be before our boasted law and order, stability and all the rest of it are unable to survive the test?

My hon. Friend has demonstrated extremely effectively the extent of the logic of Mr. Hayek and of the Prime Minister, who is Mr. Hayek's favourite pupil. However, Mr. Hayek has talked about exactly what is happening in my hon. Friend's constituency. He said: Britain would have been much better if it had bigger and better bankruptcies. On that he cannot really fault the Government—it would be most unjust — because there were 936 bankruptcies last month, the highest total for almost half a century.

One of the reasons why Conservative Members made such a noise a moment ago is that most of them no longer believe in the monetarism in which they believed 18 months ago. HON. MEMBERS: "Rubbish."] Conservative Members can say "rubbish" to their hearts' content. It is not an elegant expression, nor is it intelligent, and I should like an intelligent interruption if I could have one.

Mr. John Biggs-Davison (Epping Forest) rose—

Mr. Silkin

I said "an intelligent interruption."

Mr. Biggs-Davison rose—

Mr. Deputy Speaker

Order.

Mr. Biggs-Davison rose—

Mr. Deputy Speaker

Order. The hon. Gentleman knows perfectly well that if the right hon. Gentleman does not give way he cannot have the Floor.

Mr. Silkin

No one likes intelligent interventions better than I do, and I am still waiting for one.

We are seeing the total destruction of that rather misguided ideal which motivated the Treasury Bench. Conservative Members are now beginning to understand that we have seen the end of that ideal.

There was the faith that there would be tax cuts. There were tax cuts in the Chancellor's first Budget, but they were more than eaten away by the increase in VAT. Now, everyone is talking about increasing taxation. The right hon. Member for Down, South (Mr. Powell) put it extremely logically. Of course there will be increases in tax, and everyone knows it, the Chancellor especially. Whether he disguises it as he did on Monday or whether he does it directly through income tax or in any other way, tax, increases there will be, and there is no doubt about it.

Another article of faith was that State moneys would no longer be allocated to steel, shipbuilding, the NEB or British Leyland. Conservative Members were somewhat absurd in that they relied on the Secretary of State for Industry, which is always a bad thing to do. I need go no further into that. It took a long time, it was too little and too late, but those subsidies were given. They shall continue to be given, because even the Secretary of State is beginning to learn that unless he gives the moneys those industries will go down the drain.

The other article of faith was privatisation. My hon. Friends and I are still waiting for the sell-off of British Airways and British Aerospace. It has not happened yet, and it does not look as if it can happen.

What about the faith that we would have radical changes in the CAP? Conservative Members, including the Minister of Agriculture, Fisheries and Food, attacked me because I did not make enough changes in the CAP. The Conservative manifesto stated: We believe that radical changes in the operation of the Common Agricultural Policy … are necessary". But suddenly the right hon. Gentleman is saying that the CAP is perfect and that he does not want any changes. Was not the same said about fisheries? I was accused of not being tough enough about fisheries, but suddenly the right hon. Gentleman is busy giving away our fisheries.

There is a simple reason for that. On 30 May this year, the Prime Minister did a deal in Brussels. She said that she would be satisfied only with a whole loaf, which by now would have meantabout£1,400 millionor£1,500million. She said that she would never be satisfied with half a loaf, but she had to be saisfied with half a loaf, although it will be pretty mouldy bread by the time she gets the money. She has not got it yet. In order to get it, she had to recognise that the principle of the common agricultural policy was right, and she gave her authority for that. I do not think that even the right hon. Member for Sidcup—he and I have disagreed over many years about the Common Market — ever accepted that the common agricultural policy was inviolate in principle. The Prime Minister also had to sign away a common fisheries policy by the end of the year, which she did. She has not yet got the money. She will lose the fish and the right to challenge the CAP. She may get her £700 million, or some of it, if the Danes are good enough to think that the bargain is right.

It is no wonder that faith has not arrived and that doubt is still with us. It is no wonder that, whereas 18 months ago the Tory Party and the Prime Minister were saying that they could solve the problem in their terms in one Session, they are now saying that it will require two Sessions. A year from now they will be saying that it will need four or five Sessions. Heaven forfend that it should go that way.

Ministers and policies are going in all directions. I read in the press the other day that even the Leader of the House is issuing coded smoke signals of dissent. He is civilised and cautious, and the code must be very good. I do not know what signals he is sending, although looked at from this side of the House the signals appear to be saying "Help".

There is only one member of the Treasury Bench who still has total faith in what is happening, despite the destruction of the policies and the ideals. That person is the Prime Minister. According to Patrick Cosgrave, who wrote a biography of the Prime Minister, in her young days the Prime Minister's favourite author was C. S. Lewis, which is perfectly normal for any undergraduate. It is worth re-reading "The Screwtape Letters", because there is a description there of a lady who is exactly like the Prime Minister. It says: She is the sort of woman who lives for others. You can always tell the others by their hunted expression. And most of her colleagues are hunted. The right hon. Lady quoted St. Francis of Assisi. Let us quote him in his entirety: Where there is despair, may we bring hope. Hope of unemployment? Who would ever have expected to see the Financial Times headline of yesterday which said: One in 12 adults workless in the record post-war total. That is what it is all about.

My hon. Friends look at their own regions and wonder what is happening to them. As far as this country is concerned, we are all regions now. Unemployment is increasing at a high rate everywhere. The West Midlands were once regarded as the heartland of the Conservative Party. They could never be touched, and they hardly were during the 1930s. During the past 12 months, unemployment in the West Midlands has risen by over 81 per cent. and in the East Midlands by 71 per cent. Even in the prosperous South-East it has risen by 60 per cent. Do not Conservative Members understand what is happening in this country? They can no longer rely on a built-in majority in the Midlands and in the South-East; it is not there. We are seeing the growth of national unemployment, not simply regional unemployment.

Added to this, we have the effect of the right hon. and learned Gentleman's "Budget" on Monday. It will mean that an additional 200,000 jobs will be lost by the end of the next financial year. That is what that bit of arithmetic did. I do not really mind whether the right hon. and learned Gentleman was trying to pull a fast one on Monday or whether he was trying to do a Tarzan act. That is immaterial; it is over and done with. What I say to him is that it is better to be honest with the House and with the country and to come straight out with things.

I have always admired the way in which the Chief Secretary to the Treasury deals with matters. He believes what he says to be right, and he accepts what he believes to be the penalties of being right. He is not afraid to say what he believes to be right. It is about time the Chancellor took that point of view.

We have seen the record of the Government during the past 18 months. That is why the Gracious Speech is clothed, as it is, in frivolous and irrelevant language—to hide from us its real purpose and its real faults and failures. As the country is made more and more aware of what is happening, it is turning away from the right hon. Lady and the whole of her Government.

It was said earlier in the debate—I think, echoing the Prime Minister — that people abroad are saying how wonderful the Government are. Not many people in this country are saying it. All they can see at the moment are the desperate tatters of a policy put forward in the hope that people will believe that there is no alternative to it.

But there is an alternative policy. First, we need to have more public spending. [Interruption.] Do not Conservative Members understand that three-quarters of the cuts made in public expenditure have been in the private sector? My hon. Friend the Member for Thurrock (Dr. McDonald) was right when she said that £23 billion had been cut from the private sector. The construction industry in capital alone has suffered a £2 billion cut. It is private industry that is suffering when public expenditure is cut in this way.

The CBI is learning a little but not very much. It has got as far as saying that there should be no cuts in capital expenditure. It is nearly there; it still has a little to learn. When it learns that we have to build schools but that if we build schools we must not sack the teachers, it will have learnt the lesson. [Interruption.] My hon. Friends need not worry about the noise. Conservative Members get much noisier the more the truth hurts. They are as quiet as little mice when they agree with a speech.

The other day, the right hon. Lady went to the motor exhibition in Birmingham. She ignored all the foreign stands and made a beeline for the Mini Metro stand. Good luck to her. But she did not draw the lesson that she should have learnt from it. The only way in which the Mini Metro, which is a world beater, could possibly be built was by public investment in BL. That is the truth of it.

The country knows and understands that we believe in public ownership and that we believe in public investment. We believe in seeing that, where necessary, there are controls to prevent imports which destroy our own manufacturing base from coming into this country.

That is the policy of the Labour Party. That is the policy that we shall take to the country when the time comes. But meanwhile we say this to the right hon. Lady and to her Government. The Gracious Speech which you are putting before this country and before this House is a fake and a disaster, as is your policy and your philosophy. Once again, this country — [HON. MEMBERS: "The Gracious Speech".] — I must teach Conservative Members who write the Gracious Speech. They might take a little lesson in civic rights and responsibilities. That is why we have moved the amendment, and that is why I call on my right hon. and hon. Friends to divide the House.

9.30 pm

The Chancellor of the Duchy of Lancaster, Leader of the House of Commons and Minister for the Arts (Mr. Norman St. John-Stevas)

It is the traditional duty of the Leader of the House to reply to the debate on the Gracious Speech. It is a daunting task to compress into 30 minutes a reply to a debate that has lasted six days and has ranged over the whole of the economic and political spectrum. The advantage is that I have done it before and, God and everyone else concerned willing, I shall do it again.

In many ways this has been a sombre debate, and that is appropriate. It takes place against a background of a world recession of the greatest gravity and against the background of domestic recession, the sharpness and depth of which has been referred to by so many hon. Members. Hon. Members have had to go back to the 1930s to find a parallel. Despite those sombre parallels, the debate has been enlivened by flashes of humour and wit. That is right, because it is part of our parliamentary tradition. I agree that today has been a remarkable day. The House has been at its best, and also at its worst.

The Opposition have been less than just to my right hon. and learned Friend the Chancellor of the Exchequer. I pay tribute to him for his moral courage and steadfastness in the face of totally unjustified attacks. We Chancellors must stand together. It is a day on which we have heard three remarkable speeches: that of the right hon. Member for Down, South (Mr. Powell), that of the right hon. Member for Cardiff, South-East (Mr. Callaghan) and that of my right hon. Friend the Member for Sidcup (Mr. Heath). [Interruption.] He is my friend. He has a lot of responsibility, because he launched me on what I think of, in my more euphoric moments, as my political career.

I thank the right hon. Member for Cardiff, South-East for his speech. At a time of great stress and difficulty, he threw his moral weight and authority against the people of violence and in maintenance of those who seek to uphold our liberties under the law. I also thank my right hon. Friend the Member for Sidcup for raising our eyes to the wider issues in the world. HON. MEMBERS: "Overseas aid."] There is no greater problem than the relationship between the developed and the undeveloped world. We have nothing to be ashamed of in terms of our record on overseas aid.

Mr. Michael Foot (Ebbw Vale)

Just to cheer things up, will the right hon. Gentleman tell us whether, on the question of overseas aid and the amount that should be allocated, he agrees with the right hon. Member for Sidcup (Mr. Heath) or with the Prime Minister?

Mr. St. John-Stevas

On this occasion my right hon. Friend the Member for Sidcup was not as short on facts as was the Leader of the Opposition, but he was not quite correct. Our aid record is excellent. Our gross aid is £1,000 million a year. It is higher than for most countries that take part in aid programmes.

It seems a long time since we heard the two excellent speeches by my hon. Friends the Members for Wokingham (Mr. van Straubenzee) and Nelson and Colne (Mr. Lee) moving the reply to the Gracious Speech. We have not heard much about education in the debate, but I should like to pay tribute to my hon. Friend the Member for Wokingham for his contribution to that area. It was both concerned and civilised. My hon. Friend had some fun with his name. I recall what the late Gilbert Harding said about my name. He said that it was not well known enough to be a household word—of course, that was said some years ago—and it was too long to be a detergent.

The right hon. Member for Deptford (Mr. Silkin) did not think a great deal of the Gracious Speech. However, I believe that it puts forward a moderate and balanced programme of legislation considerably lighter than in the last Session. That is right. It is no task of a Conservative Government to turn the House of Commons into a legislative engine. In any case it is not necessary, because we have 75 per cent. of our legislative promises on the statute book. By the end of this Session we shall have only 10 per cent. to fulfil.

Our programme is a good balance of economic, social and legal measures. The Industry Bill, the Iron and Steel Bill, the Companies Bill, the Insurance Bill and the Bill to reorganise the British National Oil Corporation are all contributions to solving our economic problems.

In the social sector, I draw the attention of the House to the Bill that proposes to deal with the problems of children with special educational needs, which at long last will implement the recommendations of the Warnock committee. The Wildlife and Countryside Bill is an important conservation measure.

In the legal sphere there will be Bills to abolish the "sus" law and to implement the Phillimore report on contempt of court, as well as the long-awaited Bill on the nationality laws. These are important Bills.

This may not be a very exciting programme, but it is workmanlike and necessary.

Mr. Laurie Pavitt (Brent, South) rose—

Mr. St. John-Stevas

Legislative work is tedious, and its tedium is appreciated fully only by those who have to take part in it.

We must also continue our work on the reform of Parliament long after the debates on economic affairs have been consigned to the volumes of Hansard—and there can surely be no greater oblivion than that.

Mr. Pavitt rose—

Mr. St. John-Stevas

The system of Select Committees, which have been such a resounding success—[HON. MEMBERS: "Oh."] They have. The Opposition may not like them, but they have redressed the balance between Westminster and Whitehall in favour of Westminster. We shall shortly be setting up a new Procedure Committee to investigate Supply and to restore a most important function of the House—the granting and withholding of Supply — a function that has not adequately been performed for many years. This is the Government's contribution on the legislative side. This constructive programme is something of a contrast to the Opposition's attitude.

The most extraordinary and depressing thing about this long debate is that we have had hardly a single constructive idea from the Opposition on the way to handle our affairs. It was the Leader of the Opposition who set the tone in that dog's dinner of an opening speech. It would have fed only a very small dog. I remind him that, unlikely as it may seem, he is now part of the constitution. As Leader of the Opposition, he is paid a salary to produce a constructive alternative to the present Government. I do not think that that money is being earned. Perhaps the right hon. Gentleman, like so many of his colleagues on the Front Bench, is too busy writing books. [HON. MEMBERS: "Cheap."] No, they are not cheap. They are extremely expensive. I know that, because I have bought the right hon. Gentleman's books.

There is one thing for which the Opposition are memorable—the literary output, the torrent of diaries, memoirs, novels, monographs and biographies that are pouring from them. I notice that the right hon. Member for Leeds, East (Mr. Healey) has added to his title "Healey's Eye—A Philosophic Memoir." As I look at the right hon. Gentleman, I should have thought that he was more suitable to a prize fight than a platonic dialogue. He made a rather unfortunate excursion into literature today when he misquoted the poet Browning, saying that it will never be a "bright confident morning again" instead of a "glad confident morning". Did he remember at that time the title of the poem "The Lost Leader"? It is disappointing that the only idea that the right hon. Gentleman could produce, after so many Budgets, was that ridiculous and unrealistic suggestion to increase the public sector borrowing requirement to £18½ billion.

Mr. Healey indicated dissent.

Mr. St. John-Stevas

The right hon. Gentleman said it. I added up his figures, and that is what it came to.

As in the economic fields, so in the social fields the Opposition are bereft of positive ideas or policies. On housing, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) — the so-called "gang of one"—is so obsessed with his vendetta against my right hon. Friend the Secretary of State for the Environment, which has achieved almost Sicilian proportions, that he has missed one of the most significant social revolutions of our age, which is that for the first time in the history of this country every citizen has the right to buy his own house. [Interruption.]

Several Hon. Members rose—

Mr. Deputy Speaker

Order. The Leader of the House.

Mr. St. John-Stevas,

At a stroke, we have bridged the wide—[Interruption.]

Several Hon. Members rose——

Mr. Deputy Speaker

Order. The Leader of the House.

Mr. Bob Cryer (Keighley)

On a point of order, Mr. Deputy Speaker. We have had enough misleading of the House already during this Session. [Interruption.]

Mr. Deputy Speaker

Order. It might be convenient if I could hear the point of order that the hon. Gentleman is making.

Mr. Cryer

We have had enough misleading of the House in our debates on the Queen's Speech. The Leader of the House said that every citizen has the right to buy his own home. That is patently not true. Private tenants do not have such a right. [Interruption.]

Mr. Deputy Speaker

Order. I have heard enough to know that that is not a point of order.

Mr. St. John-Stevas

Equally — [HON. MEMBERS: "Withdraw."] Equally important is the pledge that was given — [HON. MEMBERS: "Answer."] Even fewer tenants will be allowed to buy their own homes if the right hon. Member for Sparkbrook ever returns to power, because he has pledged that councils will be empowered to buy back at confiscatory prices houses that have been sold.

Hon. Members

The right hon. Gentleman is misleading the House.

Mr. David Winnick (Walsall, North)

On a point of order, Mr. Deputy Speaker. Is there no way in which we can persuade the Leader of the House to tell the truth?

Mr. St. John-Stevas

Well—[HON. MEMBERS: "Apologise."] I will not apologise, but if it will get me a little peace and quiet I will say that the hon. Member for Keighley (Mr. Cryer) is right. There are some private tenants who do not have the right to buy their own houses. [HON. MEMBERS: "All private tenants."] No, not at all.

Mr. James Wellbeloved (Erith and Crayford)

What about the unemployed?

Mr. St. John-Stevas

I shall move on to unemployment if I am allowed to do so. Before doing so, I should like to take this first opportunity to congratulate the right hon. Member for Ebbw Vale (Mr. Foot) on his translation to Leader of the Opposition.

Mr. Walter Harrison (Wakefield)

That has taken 16 minutes.

Mr. St. John-Stevas

The right hon. Member for Ebbw Vale owes me a great debt. I supported him in the election for the leadership of the Labour Party. Indeed, it is a double debt, because I did not tell anyone that I was doing so—unlike my noble Friend Lord Thorneycroft, who hailed the right hon. Member for Leeds, East as the morning star of monetarism. And that was the end of his candidature.

Anyhow, the bride has gone on to the church and I am left with the bridesmaid, the right hon. Member for Deptford, standing in as shadow Leader of the House, which is a rather tenuous position for a man of his ability and ambition. I wish him well. At the age of 57 he is one of the bright young hopefuls of the gerontocracy that occupies the Opposition Front Bench. [AN HON. MEMBER: "What is the age of the Leader of the House?"] Well, it is not as much as that, and in any case I am better preserved.

The speech of the right hon. Member for Deptford was as gloomy as every other speech from the Opposition. It has been interesting that every Labour Member who has spoken in the debate has disinterred with glee every piece of bad news that he or she could find.

Of course, things are difficult. No one could pretend otherwise. We as a nation depend more than any other nation on foreign trade, and we are in the middle of a world recession. But let us get it into some sort of perspective. We are nearing the bottom of the recession. Certainly things are bad, but they will get better.

I shall give one sphere where things are getting better. Inflation is coming down. The yearly rate is down to 15.4 per cent. The monthly rate is down to 4.3 per cent. That carries great hope for the future.

I ask Opposition Members to appreciate that the parallel with the 1930s is partly bad but it could also be partly good. While the early 1930s were a dismal period, the late 1930s were a great improvement. I am talking about the economic situation. I am not talking about foreign affairs.

Mr. Healey rose—

Mr. St. John-Stevas

If the right hon. Gentleman will allow me to finish this point, I shall give way to him. It was a period of falling unemployment. It was a period of great technical innovation, it was a period of the founding of new businesses. One can see them if one walks down the Great West Road. Those developments are being paralleled again.

Mr. Healey

Is the right hon. Gentleman really claiming that the objective of the Prime Minister is to improve the economic situation of this country by confecting a war?

Mr. St. John-Stevas

That is an absurd intervention. [HON. MEMBERS: "NO."] The right hon. Gentleman should go back to literature.

Another theme of the debate has been concern over unemployment. Both former Prime Ministers expressed their concern. So, rightly, did the hon. Member for Liverpool, Scotland Exchange (Mr. Parry). The unemployment situation is one of desperate concern, I believe, to every Member of the House. The right hon. Member for Down, South warned us against bringing out peashooters to project statistics across the Floor of the House and asked what would be the effect on the people in the dole queues.

Surely, this House can recognise the fact that we face long-term structural problems of unemployment in this country. While we will take our share of responsibility for the present unemployment figures, we will not accept the accusation, heard again and again from the Opposition, first by the right hon. Member for Bristol, South-East (Mr. Benn), that we are deliberately increasing unemployment as a matter of policy. [HON. MEMBERS: "You are."] It is untrue. It is scandalous. It is unworthy of the Opposition Front Bench to join in that accusation. There is not an hon. Member of the House who is not concerned about unemployment. It is a slander on the Government side of the House. It casts a shadow over the whole House of Commons to conduct a debate in that way.

However important our domestic relations, and however pressing, we have to see them always in the perspective of foreign affairs and defence. On the two crucial issues of membership of the EEC and nuclear defence, the Opposition's policy, as revealed in the debate, is completely irresponsible. It is the official policy of the Labour Party to withdraw from the Community and to scrap nuclear weapons. I can respect someone like the hon. Member for Keighley (Mr. Cryer)—I am paying the hon. Gentleman a tribute and he should catch it while it is available—and others on the Back Benches who, as an act of conscience, make their view on nuclear weapons known.

On another issue the hon. Gentleman resigned from the Government. That is something that should earn the respect of everyone in the House. But it is quite a different thing for someone who is Leader of the Opposition and, therefore, at some future time may be called to be in charge of the defence of this country, to be a unilateral disarmer. That casts doubt upon the whole of this country's policy.

So we come to the end of this debate, with the Opposition having put forward no constructive policies. What has emerged is that there is a clear-cut alternative, between a Government with all their faults and limitations — [HON. MEMBERS: "Hear, Hear."] Of course. All Governments have limitations. There is all the difference between a Government determined to face the realities of our situation, both at home and abroad, and put forward positive proposals to solve our problems and an Opposition who, on every major issue, are either totally confused or bitterly divided.

Mr. Foot

As the right hon. Gentleman seems to be running out of material, perhaps I can help him. I see that he is now holding up some more papers. That must be his reserve. I was looking at the sheet that he had in front of him.

Some of us who have listened to most of the debate think that it is one of the most remarkable debates that we have heard in the House. We are prepared to answer in future debates all the questions that the right hon. Gentleman has raised. Those who have listened to this debate are waiting to hear the Government's answer to the right hon. Member for Sidcup (Mr. Heath). Why does the Leader of the House not face up to what the right hon. Gentleman said? After all, the right hon. Gentleman was elected on the same manifesto as the Prime Minister. The right hon. Gentleman today spelt out to the House what would happen if the Government proceeded upon the present course. He said "Please, please, for the safety of this nation, change course." What is the answer of the Leader of the House to that?

Mr. St. John-Stevas

I hope—[HON. MEMBERS: "Answer."]—that I shall be allowed—

Mr. Deputy Speaker

Order. Unless we can hear what the right hon. Gentleman says, he cannot answer.

Mr. St. John-Stevas

My first remark is that the right hon. Gentleman is not a totally objective witness. My second is that, having been attacked from one side by my right hon. Friend the Member for Sidcup and from the other by the right hon. Member for Down, South, I conclude that we are probably getting it about right, against an Opposition who, on every major issue, whether public ownership, incomes policy, taxation, monetarism or membership of Europe—[HON. MEMBERS: "Answer."] I am answering the Leader of the Opposition. How can a party with so little unity and so little credibility offer an alternative Government?

Mr. Healey

Will the right hon. Gentleman give way?

Mr. St. John-Stevas

No.

Mr. Healey rose—

Mr. Deputy Speaker

Order.

Mr. St. John-Stevas

The truth is that despite the difficulties of the day, despite the period that we are going through, the hopes and aspirations of the majority of our fellow citizens, rest with this Government. When you are in the depths of winter, Mr. Deputy Speaker, you think that spring will never come. It will, and it does. What people need today is hope, the hope that Arthur Benson linked with glory, and it is this Government who alone at this crisis offer our country hope for the future.

Question put, That the amendment be made:—

The House divided: Ayes 259, Noes 319.

Division No. 2]	[10 pm.
AYES
Abse, Leo	Dunwoody, Hon Mrs G.
Adams, Allen	Eadie, Alex
Allaun, Frank	Eastham, Ken
Alton, David	Edwards, R. (W'hampt'n S E)
Anderson, Donald	Ellis, R. (NE D'bysh're)
Archer, Rt Hon Peter	Ellis, Tom (Wrexham)
Armstrong, Rt Hon Ernest	English, Michael
Ashley, Rt Hon Jack	Ennals, Rt Hon David
Ashton, Joe	Evans, Ioan (Aberdare)
Atkinson, N. (H'gey,)	Evans, John (Newton)
Bagier, Gordon A.T.	Ewing, Harry
Barnett, Guy (Greenwich)	Faulds, Andrew
Barnett, Rt Hon Joel (H'wd)	Field, Frank
Beith, A. J.	Fitch, Alan
Benn, Rt Hon A. Wedgwood	Fitt, Gerard
Bennett, Andrew (St'kp't N)	Flannery, Martin
Bidwell, Sydney	Fletcher, Raymond (Ilkeston)
Booth, Rt Hon Albert	Fletcher, Ted (Darlington)
Boothroyd, Miss Betty	Foot, Rt Hon Michael
Bottomley, Rt Hon A. (M'b'ro)	Ford, Ben
Bradley, Tom	Forrester, John
Bray, Dr Jeremy	Foster, Derek
Brown, Hugh D. (Provan)	Foulkes, George
Brown, Ron (E'burgh, Leith)	Fraser, J. (Lamb'th, N'w'd)
Brown, Ronald W. (H'ckn'y S)	Freeson, Rt Hon Reginald
Buchan, Norman	Freud, Clement
Callaghan, Rt Hon J.	Garrett, John (Norwich S)
Callaghan, Jim (Midd't'n & P)	Garrett, W. E. (Wallsend)
Campbell, Ian	George, Bruce
Campbell-Savours, Dale	Gilbert, Rt Hon Dr John
Canavan, Dennis	Ginsburg, David
Cant, R. B.	Golding, John
Carmichael, Neil	Gourlay, Harry
Carter-Jones, Lewis	Graham, Ted
Cartwright, John	Grant, George (Morpeth)
Cocks, Rt Hon M. (B'stol S)	Grimond, Rt Hon J.
Cohen, Stanley	Hamilton, W. W. (C'tral Fife)
Conlan, Bernard	Hardy, Peter
Cook, Robin F.	Harrison, Rt Hon Walter
Cowans, Harry	Hart, Rt Hon Dame Judith
Craigen, J. M.	Haynes, Frank
Crowther, J. S.	Healey, Rt Hon Denis
Cryer, Bob	Heffer, Eric S.
Cunliffe, Lawrence	Hogg, Hon Douglas (Gr'th'm)
Cunningham, G. (Islington S)	Holland, S. (L'b'th, Vauxh'll)
Dalyell, Tam	Home Robertson, John
Davidson, Arthur	Homewood, William
Davies, Rt Hon Denzil (L'lli)	Hooley, Frank
Davies, Ifor (Gower)	Horam, John
Davis, Clinton (Hackney C)	Howell, Rt Hon D.
Davis, T. (B'ham, Stechf'd)	Huckfield, Les
Deakins, Eric	Hudson Davies, Gwilym E.
Dean, Joseph (Leeds West)	Hughes, Mark (Durham)
Dempsey, James	Hughes, Robert (Aberdeen N)
Dewar, Donald	Hughes, Roy (Newport)
Dixon, Donald	Janner, Hon Greville
Dobson, Frank	Jay, Rt Hon Douglas
Dormand, Jack	John, Brynmor
Douglas, Dick	Johnson, James (Hull West)
Douglas-Mann, Bruce	Johnston, Russell (Inverness)
Dubs, Alfred	Jones, Rt Hon Alec (Rh'dda)
Duffy, A. E. P.	Jones, Barry (East Flint)
Dunn, James A.	Jones, Dan (Burnley)
Dunnett, Jack	Kaufman, Rt Hon Gerald

Kerr, Russell	Roberts, Albert (Normanton)
Kilfedder, James A.	Roberts, Allan (Bootle)
Kilroy-Silk, Robert	Roberts, Gwilym (Cannock)
Kinnock, Neil	Robertson, George
Lambie, David	Robinson, G. (Coventry NW)
Lamborn, Harry	Rodgers, Rt Hon William
Leadbitter, Ted	Rooker, J. W.
Leighton, Ronald	Ross, Ernest (Dundee West)
Lestor, Miss Joan	Ross, Stephen (Isle of Wight)
Lewis, Ron (Carlisle)	Rowlands, Ted
Litherland, Robert	Ryman, John
Lofthouse, Geoffrey	Sandelson, Neville
Lyon, Alexander (York)	Sheerman, Barry
Lyons, Edward (Bradf'd W)	Sheldon, Rt Hon R.
Mabon, Rt Hon Dr J. Dickson	Shore, Rt Hon Peter
McDonald, Dr Oonagh	Short, Mrs Renée
McElhone, Frank	Silkin, Rt Hon J. (Deptford)
McGuire, Michael (Ince)	Silkin, Rt Hon S. C. (Dulwich)
McKay, Allen (Penistone)	Silverman, Julius
McKelvey, William	Smith, Rt Hon J. (N Lanark)
MacKenzie, Rt Hon Gregor	Snape, Peter
Maclennan, Robert	Soley, Clive
McNally, Thomas	Spearing, Nigel
McNamara, Kevin	Spriggs, Leslie
McTaggart, Robert	Stallard, A. W.
McWilliam, John	Steel, Rt Hon David
Magee, Bryan	Stewart, Rt Hon D. (W Isles)
Marks, Kenneth	Stoddart, David
Marshall, Dr Edmund (Goole)	Stott, Roger
Marshall, Jim (Leicester S)	Strang, Gavin
Martin, M (G'gow S'burn)	Summerskill, Hon Dr Shirley
Mason, Rt Hon Roy	Taylor, Mrs Ann (Bolton W)
Maxton, John	Thomas, Dafydd (Merioneth)
Maynard, Miss Joan	Thomas, Jeffrey (Abertillery)
Meacher, Michael	Thomas, Mike (Newcastle E)
Mellish, Rt Hon Robert	Thomas, Dr R. (Carmarthen)
Mikardo, Ian	Thorne, Stan (Preston South)
Millan, Rt Hon Bruce	Tilley, John
Miller, Dr M. S. (E Kilbride)	Tinn, James
Mitchell, Austin (Grimsby)	Torney, Tom
Mitchell, R. C. (Soton Itchen)	Urwin, Rt Hon Tom
Morris, Rt Hon A. (W'shawe)	Varley, Rt Hon Eric G.
Morris, Rt Hon C. (O'shaw)	Wainwright, E (Dearne V)
Morris, Rt Hon J. (Aberavon)	Wainwright, R. (Colne V)
Morton, George	Walker, Rt Hon H. (D'caster)
Moyle, Rt Hon Roland	Watkins, David
Mulley, Rt Hon Frederick	Weetch, Ken
Newens, Stanley	Wellbeloved, James
Ogden, Eric	Welsh, Michael
O'Halloran, Michael	White, Frank R.
O'Neill, Martin	White, J. (G'gow Pollok)
Orme, Rt Hon Stanley	Whitehead, Phillip
Owen, Rt Hon Dr David	Whitlock, William
Paisley, Rev Ian	Willey, Rt Hon Frederick
Palmer, Arthur	Williams, Rt Hon A (S'sea W)
Park, George	Williams, Sir T. (W'ton)
Parker, John	Wilson, Rt Hon Sir H. (H'ton)
Parry, Robert	Wilson, William (C'try SE)
Pavitt, Laurie	Winnick, David
Pendry, Tom	Woodall, Alec
Penhaligon, David	Woolmer, Kenneth
Powell, Raymond (Ogmore)	Wrigglesworth, Ian
Price, C. (Lewisham W)	Wright, Sheila
Race, Reg	Young, David (Bolton E)
Radice, Giles	Tellers for the Ayes:
Rees, Rt Hon M (Leeds S)	Mr. Donald Coleman and
Richardson, Jo	Mr. James Hamilton.

NOES
Adley, Robert	Baker, Nicholas (N Dorset)
Aitken, Jonathan	Banks, Robert
Alexander, Richard	Beaumont-Dark, Anthony
Alison, Michael	Bell, Sir Ronald
Amery, Rt Hon Julian	Bendall, Vivian
Ancram, Michael	Bennett, Sir Frederic (T'bay)
Arnold, Tom	Benyon, Thomas (A'don)
Aspinwall, Jack	Benyon, W. (Buckingham)
Atkins, Rt Hon H. (S'thorne)	Best, Keith
Atkinson, David (B'm'th, E)	Bevan, David Gilroy
Baker, Kenneth (St.M'bone)	Biffen, Rt Hon John

Biggs-Davison, John	Garel-Jones, Tristan
Blackburn, John	Gilmour, Rt Hon Sir Ian
Blaker, Peter	Goodhart, Philip
Body, Richard	Goodhew, Victor
Bonsor, Sir Nicholas	Goodlad, Alastair
Boscawen, Hon Robert	Gorst, John
Bottomley, Peter (W'wich W)	Gow, Ian
Bowden, Andrew	Gower, Sir Raymond
Boyson, Dr Rhodes	Grant, Anthony (Harrow C)
Braine, Sir Bernard	Gray, Hamish
Bright, Graham	Greenway, Harry
Brinton, Tim	Grieve, Percy
Brittan, Leon	Griffiths, E. (B'y St. Edm'ds)
Brocklebank-Fowler, C.	Griffiths, Peter Portsm'th N)
Brooke, Hon Peter	Grist, Ian
Brotherton, Michael	Grylls, Michael
Brown, M. (Brigg and Scun)	Gummer, John Selwyn
Browne, John (Winchester)	Hamilton, Hon A.
Bruce-Gardyne, John	Hamilton, Michael (Salisbury)
Bryan, Sir Paul	Hampson, Dr Keith
Buchanan-Smith, Hon Alick	Hannam, John
Buck, Antony	Haselhurst, Alan
Budgen, Nick	Hastings, Stephen
Bulmer, Esmond	Havers, Rt Hon Sir Michael
Burden, Sir Frederick	Hawkins, Paul
Butcher, John	Hawksley, Warren
Butler, Hon Adam	Hayhoe, Barney
Cadbury, Jocelyn	Heath, Rt Hon Edward
Carlisle, John (Luton West)	Heddle, John
Carlisle, Kenneth (Lincoln)	Henderson, Barry
Carlisle, Rt Hon M. (R'c'n)	Heseltine, Rt Hon Michael
Channon, Rt. Hon. Paul	Hicks, Robert
Chapman, Sydney	Higgins, Rt Hon Terence L.
Churchill, W. S.	Hill, James
Clark, Hon A. (Plym'th, S'n)	Hogg, Hon Douglas (Gr'th'm)
Clark, Sir W. (Croydon S)	Holland, Philip (Carton)
Clegg, Sir Walter	Hooson, Tom
Cockeram, Eric	Hordern, Peter
Colvin, Michael	Howe, Rt Hon Sir Geoffrey
Cope, John	Howell, Rt Hon D. (G'ldf'd)
Cormack, Patrick	Howell, Ralph (N Norfolk)
Corrie, John	Hunt, David (Wirral)
Costain, Sir Albert	Hunt, John (Ravensbourne)
Cranborne, Viscount	Hurd, Hon Douglas
Critchley, Julian	Irving, Charles (Cheltenham)
Crouch, David	Jenkin, Rt Hon Patrick
Dean, Paul (North Somerset)	Jessel, Toby
Dorrell, Stephen	Johnson Smith, Geoffrey
Douglas-Hamilton, Lord J.	Jopling, Rt Hon Michael
Dover, Denshore	Joseph, Rt Hon Sir Keith
du Cann, Rt Hon Edward	Kaberry, Sir Donald
Dunn, Robert (Dartford)	Kellett-Bowman, Mrs Elaine
Durant, Tony	Kershaw, Anthony
Dykes, Hugh	Kimball, Marcus
Eden, Rt Hon Sir John	King, Rt Hon Tom
Edwards, Rt Hon N. (P'broke)	Kitson, Sir Timothy
Eggar, Tim	Knight, Mrs Jill
Elliott, Sir William	Knox, David
Emery, Peter	Lamont, Norman
Eyre, Reginald	Lang, Ian
Fairbairn, Nicholas	Langford-Holt, Sir John
Fairgrieve, Russell	Latham, Michael
Faith, Mrs Sheila	Lawrence, Ivan
Farr, John	Lawson, Nigel
Fell, Anthony	Lee, John
Fenner, Mrs Peggy	Lennox-Boyd, Hon Mark
Finsberg, Geoffrey	Lester Jim (Beeston)
Fisher, Sir Nigel	Lewis, Kenneth (Rutland)
Fletcher, A. (Ed'nb'gh N)	Lloyd, Ian (Havant & W'loo)
Fletcher-Cooke, Charles	Lloyd, Peter (Fareham)
Fookes, Miss Janet	Loveridge, John
Forman, Nigel	Luce, Richard
Fowler, Rt Hon Norman	Lyell, Nicholas
Fox, Marcus	McCrindle, Robert
Fraser, Rt Hon Sir Hugh	Macfarlane, Neil
Fraser, Peter (South Angus)	MacGregor, John
Fry, Peter	MacKay, John (Argyll)
Galbraith, Hon T. G. D.	Macmillan, Rt Hon M.
Gardiner, George (Reigate)	McNair-Wilson, M. (N'bury)
Gardner, Edward (S Fylde)	McNair-Wilson, P. (New F'st)

McQuarrie, Albert	Pattie, Geoffrey
Madel, David	Pawsey, James
Major, John	Percival, Sir Ian
Marland, Paul	Peyton, Rt Hon John
Marlow, Tony	Pink, R. Bonner
Marshall Michael (Arundel)	Pollock, Alexander
Mates, Michael	Porter, Barry
Mather, Carol	Powell, Rt Hon J.E. (S Down)
Maude, Rt Hon Angus	Prentice, Rt Hon Reg
Mawby, Ray	Price, Sir David (Eastleigh)
Mawhinney, Dr Brian	Proctor, K. Harvey
Maxwell-Hyslop, Robin	Pym, Rt Hon Francis
Mayhew, Patrick	Rathbone, Tim
Mellor, David	Rees, Peter (Dover and Deal)
Meyer, Sir Anthony	Rees-Davies, W. R.
Miller, Hal (B'grove)	Renton, Tim
Mills, lain (Meriden)	Rhodes James, Robert
Mills, Peter (West Devon)	Rhys Williams, Sir Brandon
Miscampbell, Norman	Ridsdale, Julian
Moate, Roger	Rifkind, Malcolm
Molyneaux, James	Rippon, Rt Hon Geoffrey
Monro, Hector	Roberts, Wyn (Conway)
Montgomery, Fergus	Ross, Wm. (Londonderry)
Morris, M. (N'hampton S)	Rossi, Hugh
Morrison, Hon C. (Devizes)	Rost, Peter
Morrison, Hon P. (Chester)	Royle, Sir Anthony
Mudd, David	Sainsbury, Hon Timothy
Murphy, Christopher	St. John-Stevas, Rt Hon N.
Myles, David	Scott, Nicholas
Neale, Gerrard	Shaw, Giles (Pudsey)
Needham, Richard	Shaw, Michael (Scarborough)
Nelson, Anthony	Shelton, William (Streatham)
Neubert, Michael	Shepherd, Colin (Hereford)
Newton, Tony	Shepherd, Richard
Normanton, Tom	Shersby, Michael
Onslow, Cranley	Silvester, Fred
Oppenheim, Rt Hon Mrs S.	Skeet, T. H. H.
Page, John (Harrow, West)	Smith, Dudley
Page, Rt Hon Sir G. (Crosby)	Speed, Keith
Page, Richard (SW Herts)	Speller, Tony
Parris, Matthew	Spence, John
Patten, Christopher (Bath)	Spicer, Jim (West Dorset)
Patten, John (Oxford)	Spicer, Michael (S Worcs)

Sproat, Ian	Wakeham, John
Squire, Robin	Waldegrave, Hon William
Stanbrook, Ivor	Walker, Rt Hon P. (W'cester)
Stanley, John	Walker, B. (Perth)
Steen, Anthony	Walker-Smith, Rt Hon Sir D.
Stevens, Martin	Wall, Patrick
Stewart, Ian (Hitchin)	Waller, Gary
Stewart, J. (E Renfrewshire)	Walters, Dennis
Stokes, John	Ward, John
Stradling Thomas, J.	Warren, Kenneth
Tapsell, Peter	Watson, John
Taylor, Robert (Croydon NW)	Wells, John (Maidstone)
Taylor, Teddy (S'end E)	Wells, Bowen
Tebbit, Norman	Wheeler, John
Temple-Morris, Peter	Whitelaw, Rt Hon William
Thatcher, Rt Hon Mrs M.	Whitney, Raymond
Thomas, Rt Hon Peter	Wickenden, Keith
Thompson, Donald	Wiggin, Jerry
Thorne, Neil (Ilord South)	Wilkinson, John
Thornton, Malcolm	Williams, D.(Montgomery)
Townend, John (Bridlington)	Winterton, Nicholas
Townsend, Cyril D, (B'heath)	Wolfson, Mark
Trippier, David	Young, Sir George (Acton)
Trotter, Neville
van Straubenzee, W. R.	Tellers for the Noes:
Vaughan, Dr Gerard	Mr. Spencer Le Marchant
Viggers, Peter	and Mr. Anthony Berry.
Waddington, David

Question accordingly negatived.

Main Question put and agreed to.

Resolved,

That an humble Address be presented to Her Majesty, as follows:

Most Gracious Sovereign,

We, Your Majesty's most dutiful and loyal subjects, the Commons of the United Kingdom of Great Britain and Northern Ireland in Parliament assembled, beg leave to offer our humble thanks to Your Majesty for the Gracious Speech which Your Majesty has addressed to both Houses of Parliament.

To be presented by Privy Councillors or Members of Her Majesty's Household.