Public Expenditure (Hansard, 2 December 1981)

§ Mr. Speaker
The Chancellor of the Exchequer.

§ Mr. Bruce Douglas-Mann (Mitcham and Morden)
On a point of order, Mr. Speaker.

§ Mr. Speaker
Does the point of order relate to the statement by the Chancellor of the Exchequer that will follow?

§ Mr. Douglas-Mann
Yes, Mr. Speaker. Would it not be more convenient for the House and for all who will consider the discussion this afternoon if the written text from which the Chancellor is about to make his statement were available to Members before he made it? I have just inquired at the Vote Office and discovered that the statement is not yet available. Consequently, hon. Members must consider the Chancellor's statement solely on the basis of what they hear from him.

§ Mr. Speaker
Order. That has been the custom, as the hon. Gentleman knows, for a very long time. The Chancellor of the Exchequer will now make his statement.

§ The Chancellor of the Exchequer (Sir Geoffrey Howe)
With permission, Mr. Speaker, I wish to make a statement about the Government decisions on public expenditure in 1982–83 and on the future pattern of national insurance contributions for next year on the basis of the Government Actuary's report which is being laid before the House tomorrow. In each case the proposals follow the annual reviews which take place at this time of year. They will take effect not in this financial year but in the next one, 1982–83.
I am also publishing today, as required by the Industry Act 1975, the forecast of economic prospects for 1982. Eighteen months ago the annual increase in the retail price index was 22 per cent. and a year ago 15 per cent. It is now about 12 per cent. Over the next year we expect a further reduction to about 10 per cent. Output is expected to rise by about 1 per cent., and manufacturing output rather more rapidly. The outlook, in short, is for gradual recovery. [Laughter.]
As I told the House in my Budget Statement, we are no longer planning public expenditure in volume terms but in cash. The plans for next year, which appeared in the last White Paper in volume terms, had therefore to be revalued in cash. On that basis the starting point for discussions about 1982–83 was a cash total of £110 billion.
The net result of the decisions that I am announcing today will be to raise that figure by almost £5 billion, to bring the planning total for next year to about £115 billion. The exact total for next year will depend upon decisions that cannot be taken yet about the appropriate provision for certain demand-determined programmes and for the contingency reserve.
At the time of the Budget we expected cash expenditure in 1982–83 to grow more slowly than we now envisage. We now believe it appropriate to increase the planned provision for certain programmes to reflect changed circumstances.
It is too early to judge with precision what those changes will mean for next year's PSBR. On the basis of the conventional assumptions set out in the Industry Act forecast there is no present reason to depart from the projections published at the time of the previous Budget.
238 I shall, of course, have to take all the relevant factors into account when the time comes for framing next year's Budget.
I shall inform the House now about some of the main changes. Increases in programmes—whether on account of policy or of changed demands—amount to about £6 billion, but we have made offsetting reductions in previous plans of over £1 billion. Those restrict the net increase to the figure of £5 billion that I have already mentioned.
The administrative costs of central Government are not far short of 10 per cent. of total public expenditure. We are determined to reduce that proportion and maintain the drive for more efficient management throughout the public sector. Our spending plans provide broadly for increases of 4 per cent. in the total sums available for the pay of public servants from next settlement dates. The provision for administrative costs will be further reduced by the impact of a general reduction of at least 2 per cent. in all cash-limited expenditure. That will involve economies in the cost of maintenance and improvement of Government buildings as well as in manpower and ancillary services. We shall continue to reduce Civil Service numbers so as to maintain progress towards our aim to have 102,000 fewer staff in post in April 1984 than when the Government came into office.
My right hon. Friends the Secretaries of State for the Environment and for Wales are about to undertake consultations with the local authority associations on the increase in local housing income, including rents to be assumed for grant and subsidy purposes. Subject to those consultations and to the contribution of our successful policy for increasing council house sales, we hope to be able to maintain activity on public housing construction and improvement at approximately the same level as this year.
There will be some reductions in the cash provision for some other capital programmes including those for water services, motorways and trunk roads, and certain local authority services. There has, however, been a substantial fall in tender prices. Because of that, there should be no significant impact on our published plans for water services, motorways and trunk roads.
Our cash provision will again allow continued growth in the National Health Service. More of the cost of the health services will be financed by contributions and charges. We shall be increasing the Health Service contribution by 0.1 per cent. The full present range of exemptions from charging remains unchanged. Two out of every three prescriptions will continue to be provided free of charge. Where a charge is payable, it will be raised to £1.30. There will also be increases in charges for dental and ophthalmic services. Further details will be placed in the Vote Office today and given in the Official Report by my right hon. Friend the Secretary of State for Social Services.
The increase in student grants for the next academic year will be 4 per cent. in line with the pay increases broadly envisaged for employees in the public services. The parental contribution scale will remain unchanged, but the minimum award will be kept at the present cash level.
I turn now to national insurance and other social security payments. Those benefits will be uprated in line with the forecast movement in prices from November 1981 239 to November 1982. As is customary, the announcement of the forecast of the movement of prices and the consequent changes in benefit rates will be made next spring.
The House will know that the increase in the RPI to November 1981 will probably be some 2 per cent. higher than the 10 per cent. increase allowed for when calculating this year's uprating. For retirement pensions and other long-term benefits, the shortfall will be made good in the November 1982 uprating. We shall thus continue to fulfil our pledge to retirement pensioners that they will be fully protected against inflation. In the case of the short-term benefits, however, next year's increase will be equal to the expected increase in the retail price index during the next 12 months.
All in all, we are planning to spend very substantial extra sums of money next year on social security. The great bulk of this is on pensions, which alone will cost the fund nearly £1.5 billion more next year than this. Expenditure on other benefits and outgoings is also expected to increase, in part due to a further small rise in unemployment—an assumption which is reflected in the Government Actuary's report. These increases, together with the slower rate of growth in contribution income, would mean that if we took no action on contributions, there would be substantial deficits in the national insurance and redundancy funds. Those deficits must be financed. In addition, as I have said, we have decided to propose an increase of 0.1 per cent. in the allocation to the National Health Service. The taxpayers contribution to the fund—the so-called Treasury supplement—will at the same time be reduced by 1½ per cent.
In view of the burdens of national insurance on employers, the Government think it right that the greater part of the increase in contributions should come from employees. It is, moreover, right that those in work should shoulder the additional costs. We therefore propose that the rate of contributions for employees should be raised by 1 per cent. from the beginning of April next—it would then be 8.75 per cent. of relevant earnings. There will be some increase for the self-employed. The percentage rate for employers will not be changed.
The lower earnings limit, which sets the starting point of the contributions, will be increased to £29.50 per week, in line with the single rate retirement pension. The upper earnings limit, which sets the ceiling up to which payments are made proportionate to income, will be increased to £220 per week, within the normal criteria. The House will appreciate that, although the percentage rates charged to employers will not be changed, the cash amount which they pay in national insurance contributions and national insurance surcharge will rise in line with any increase in the wages and salaries which they pay, and also as a result of the increase in the upper earnings limit. The amount which employees pay in contributions will be similarly affected, as well as by changes in their contribution rates.
The increase in contribution rates, as well as the decision to exempt employers from it, both in respect of the redundancy fund and in respect of national insurance, will require legislation. My right hon. Friend the Secretary of State for Social Services will give notice of the necessary Bill today. On presentation of the Bill tomorrow, he will lay before the House the Government Actuary's report. He will also make available in the Vote 240 Office today, and in the Offical Report, a statement of the assumptions used by the Government Actuary, full details of the changes in rates and limits for all classes of contributors, including the self-employed, and a table showing a breakdown of total payments in 1982–83 compared with 1981–82.
I turn now to other areas where spending next year is to rise. The increases have been concentrated in four main areas—local government, nationalised industries, defence and employment measures.
Local authorities are likely to overspend substantially this year. We recognise that it would not be practicable to eliminate that overspend in a single year. We therefore propose to allow an increase in the programmes for local authority current expenditure in 1982–83 of some £1,350 million. That will provide authorities with a reasonable target. They will still be required to make substantial economies.
My right hon. Friend the Secretary of State for the Environment proposes to provide a level of grant support for local authorities in England of 56 per cent. My right hon. Friends will be consulting local authorities about that and about commensurate provision in Scotland and Wales.
The nationalised industries' total bids for increased external finance amounted to about £2½ billion. That would have been in addition to the nearly £1½ billion already provided in the plans. We have decided to allow them about half their new bids, some £1,300 million in total. Nevertheless, if, as the Government and the House very clearly expect, they continue their drive to contain current costs, both by increasing efficiency and by making moderate pay settlements, they should be able to maintain their aggregate capital investment programme at much the same level as was envisaged in the plans published last March, a level 15 per cent. higher in real terms than in 1980–81.
In order to enable us to carry through the policies set out in the June Defence White Paper we are increasing the provision for defence next year by a further £480 million. That includes the cost of carrying forward the 1981 Armed Forces pay award.
Improvements to the various special employment programmes were announced by my right hon. Friend the Prime Minister on 27 July. Those added some £650 million to public expenditure next year. My right hon. Friend the Secretary of State for Employment will be making an announcement on further training measures in due course. In all, nearly £800 million will be added to the employment programme next year, already planned at nearly £2 billion. A substantial proportion of that additional spending will go to help the young unemployed.
I am circulating in the Official Report a summary of the changes for 1982–83 in the cash allocation to Departments and in the external financing limits for nationalised industries. Full details of our new plans for 1982–83, and the two following years, will be set out in the public expenditure White Paper to be published at the time of the Budget.
I am sure that the House will want an early opportunity to discuss the public expenditure plans I have announced this afternoon. I understand that my right hon. Friend the Leader of the House hopes to arrange a debate on that next week.

§ Mr. Peter Shore (Stepney and Poplar)
The Chancellor of the Exchequer will understand that after two and a half 241 years of unique and spectacular failure in his management of the British economy, the House had only minimum expectations of his statement today. For "learn nothing" incompetence, continued unnecessary damage to the economy and sheer wanton damage inflicted upon most of the nation and all the unemployed, he has reached a new low in this abysmal statement.
The right hon. and learned Gentleman spoke of gradual recovery, and he got the horse laugh that he richly deserved. Is he aware that the 1 per cent. growth in gross domestic product that he envisaged in his economic forecast would have to be sustained for the next eight years—until the year 1990—before the national output of wealth equalled what it was when he took power two and a half years ago?
The Opposition expect a full debate in Government time at an early date. Meanwhile, I have six questions—[Interruption.] It was a long statement, and I am entitled to put my questions to the Chancellor—however embarrassing he may find it to answer them. Once again, public expenditure will overrun this year. First, is not the reason for the increase to be found in the continued and worsening effects of unemployment—including cash payments, lost revenue and subsidies to publicly owned industries—that his budgetary, monetary and exchange rate policies have inflicted upon us?
Secondly, the right hon. and learned Gentleman spoke about a £5 billion increase in public expenditure for 1982–83. Is it not true that whether that public expenditure plan means an increase or decrease in real public expenditure, depends entirely upon how much prices rise next year? Even if they were to rise by the Treasury's overoptimistic assumption of 7 per cent., the figures would provide for only a tiny increase in public expenditure. If they rise, as the forecast itself indicates, by 10 per cent., the plans amount to an absolute cut, yet again, in real public spending. With that will come all the deflationary effects that we have already seen.
Thirdly, is it not disgraceful that, having created an additional 1.6 million unemployed—700,000 since last November's mini-Budget—the Chancellor should yet again savage his victims? Is he not aware that unemployment pay was cut by 5 per cent. last year, that earnings-related benefits ceased by his decision this month, and that, as with all social security incomes, the unemployed will be underpaid by 2 per cent. for a whole year owing to the miscalculation of the current year's inflation rate? Now, on top of this, he has decided—although it is buried in obscure text—to cut benefit for the unemployed and other short-term supplementary benefit recipients by a further 2 per cent. by failing to compensate for this year's inflation. This will mean that the average family man receiving unemployment benefit will be about £13 a week less well off than he would have been if the arrangements pertaining in May 1979 were continuing today.
Fourthly, will the Chancellor confirm that the proposed increase in council rents, of which we have had considerable leakage, is about £2.50 a week, and that if he pursues that figure with his right hon. Friend the Secretary of State for the Environment, the Government will have succeeded in doubling council house rents within three years?

§ Mr. Frank Allaun (Salford, East)
More than that.

§ Mr. Shore
I always err on the side of understatement. By cutting the percentage grant to local authorities from 59 per cent. to 56 per cent., the Chancellor has inflicted on all ratepayers a certain increase of at least 10 per cent. in addition to essential increases to meet inflation and to maintain services.
Has it not occurred to the Chancellor and his colleagues that these increases in rents, rates, and prescription, dental and other charges, together with the reduced payments for the unemployed, seem almost designed to exacerbate social and other problems, particularly in inner city areas whose intense stresses and strains were reported upon by Lord Scarman only last week?
Fifthly, what justification is there for yet another 1.1 per cent. increase in national insurance and health contributions? The Chancellor must know full well that national insurance is a far more regressive tax than income tax and will remain so in spite of his raising of the contribution ceiling. Of course, we accept that those at work have a responsibility to assist, by means of taxation, those who, through age, disablement, sickness or unemployment, are unable to provide for themselves. But have not the Government a responsibility, too—first, to reduce the number of unemployed rather than actively to increase it, and, secondly, to make their own proper contribution to the national insurance fund, which was cut substantially exactly a year ago and which is again to be cut today? Exactly what will be the cash increase in national insurance contributions now to be paid by employers in the year 1982–83?
Sixthly, I come to the absurd and damaging targets in the medium-term financial strategy—which, incidentally, I totally reject. Is it not clear that, by their own lights, the Government have failed and are failing on public expenditure, on the public sector borrowing requirement, on the money supply, and on inflation? So will the Chancellor now, at long last, accept that the whole ghastly experiment which his monetarist policies have inflicted upon this country has been a disastrous failure, that he has played the part of principal gravedigger for the British economy, and that a major reversal of policy is now, in the national interest, desperately needed?

§ Sir Geoffrey Howe
I shall deal with the right hon. Gentleman's questions in turn. It is too early to be certain yet, at this stage of the year, what the outturn for public expenditure in this year is likely to be, but the present estimate is that it may be about £107 billion, which represents an effective increase of about £2 billion over the plans published at the time of the Budget. Within those spending programmes, cash limited programmes generally are being held and the great majority of other increases are being met from within the contingency reserve. The largest part of the £2 billion increase, some two-thirds of the total, is due to increased expenditure by local government, which is one of the reasons for the measures introduced before the House by my right hon. Friend the Secretary of State for the Environment.
As regards the likely size of public spending next year, the best judgment at this stage is that it is likely to be about the same next year as this year, stated in cost terms.
As regards the changes in benefit levels, in relation to the unemployed in particular, the House will bear in mind that at the same time as we are considering the appropriate level for these benefits, we must take account of the fact that many people still in work—in order, very wisely, to 243 protect their employment and to improve the prospects of their employers—are having to accept wage increases significantly below the rate of increase in inflation. In those circumstances, it is right that the increase in the level of benefits provided for the unemployed and in other short-term benefits should be confined to matching it against the expected increase in inflation.
I remind the House that retirement pensioners and others on long-term benefits will continue to be fully protected against price inflation.
As regards local authority rents, my right hon. Friends the Secretary of State for the Environment and the Secretary of State for Wales will be consulting the local authority associations on a proposal that local authorities' reckonable income, including rents, for housing subsidy purposes, should be assumed to increase by a flat rate of £250 per dwelling per week. The exact figure will depend upon the results of that consultation and will vary from authority to authority. The figure reflects the view of the Secretaries of State of the increase required in the light of the factors which are set out in the consultation document which they will issue later today. Among these are the fact that almost half of council house tenants receive help with their rents from rebates or supplementary benefit, and the fact that the average level of council house rents today represents no more than 7 per cent. of average earnings.
I come to the rate support grant. It is important for the sake of the economy as a whole, and as the House would wish, to ensure proper and effective control of the size and rate of growth of expenditure by local authorities. As I have already said, some two-thirds of this year's expected increase over the Budget figures is likely to be attributable to over-expenditure by local authorities. We are making provision next year for some £1.35 billion additional expenditure by local authorities. In those circumstances, the rate support grant provision proposed by my right hon. Friend is not unreasonable.
As regards national insurance contributions, it is entirely right that at times when the number of people out of work, as the House well knows, has been rising, the increase in the contributions necessary to maintain the national insurance and redundancy funds in the right position should be placed upon those who are at work. That is our proposal.
The right hon. Gentleman may have misunderstood one of the figures that I gave. The total increase is not 1.1 per cent. The total increase in national insurance contributions is 1 per cent., including the 0.1 per cent. additional contribution to the National Health Service.
As regards additional payments from employers, there will be some increase in the amounts payable by employers as a result of the increase in the upper earnings limit. The increase in national insurance contributions payable by employers will be £140 million, and that for the national insurance surcharge will be £47 million. Those, as I say, arise as a result of the changes in the upper earnings limit. Other changes will take place, in the ordinary way, as a result of changes in the earnings and wages payable by employers, and, on the expectation underlying the figures in that respect, it is likely that national insurance contributions will rise by £512 million and the national insurance surcharge by £225 million—a total of £737 million. I emphasise, however, that those 244 latter figures are the figures which follow from the increase in wages and salaries that is in any event taking place.
Finally, I come to the rhetoric with which the right hon. Gentleman began and ended his questions. I reject absolutely the suggestion that this represents any departure from the Government's economic strategy. All that it represents—[Interruption.] The decisions that I have announced are necessary to maintain the framework for developing growth along the lines indicated at the beginning of my statement.

§ Mr. Shore
I am grateful to the Chancellor of the Exchequer for having come clean on several points. It is helpful for the House to know what the basis of rents will be and to know the answer in relation to the increase for employers in national insurance contributions.
I shall press the right hon. and learned Gentleman on two points. First, will he confirm that in real terms he is planning a reduction in public expenditure next year? The 10 per cent. increase in inflation that is forecast must bring that about, if the figures that he has given are correct. Secondly, will he tell the House—there is no reason why he should not—what the average increase in rates will be as a result of the reduction in the percentage grant?

§ Sir Geoffrey Howe
In replying to the point about the likely outlook for the economy, I shall take into account the two components affecting increases in public expenditure. I refer to the likely increase in public expenditure on goods and services and to the planned increase in public expenditure on pay in the public services. I shall repeat the answer that I have already given the right hon. Gentleman. Next year, public expenditure is likely to be about the same as public expenditure in the present year, in cost terms. Rate increases and the levels of rates are very much within the control of local authorities. [Interruption.] This year, as in all other years, there have been wide variations in the level of rate increases proposed. They take account of the substantial increases in expenditure which are incurred, in particular, by Labour-controlled authorities. It is noteworthy that the rate increases proposed by Labour-controlled authorities are generally far in excess of those proposed by Conservative-controlled authorities. There is no reason to expect extravagant rate increases this year. [HON. MEMBERS: "Answer the question."] The answer lies—as it should lie and as the House would wish it to lie—in the hands of local authorities.

§ Mr. Edward du Cann (Taunton)
To bring some new hope to our people at a time of world recession, will my right hon. and learned Friend put the great resources of the Treasury and those of the Department of Industry behind the idea of facilitating a programme of public works, privately financed, such as the Severn barrage, the Channel link and so on? There is a long list of such projects. To assist my right hon. and learned Friend in his maintained objective of controlling public expenditure—which is so difficult to achieve—will he now allow the Comptroller and Auditor General access, for audit purposes, to the 50 per cent. of public expenditure to which he is currently denied access and encourage, in particular, the development of the value-for money audit? That is what is needed.

§ Sir Geoffrey Howe
I accept the importance of the last point which my right hon. Friend made. The House 245 debated such matters on Monday. We shall bring forward further proposals to increase the effectiveness of supervision, on behalf of this House, of public expenditure throughout the public sector. My right hon. Friend drew attention to capital programmes. However, as I said in the statement, the arrangements being made for local authority housing and in relation to other aspects of local authority capital expenditure—taking into account on the one hand increased receipts from council house sales and on the other, the reduction in tender prices—are designed to maintain those programmes pretty well in line with the present outlook.
My right hon. Friend has investigated this subject and well knows that the present plans provide for a probable increase in nationalised industry investment next year of about 15 per cent. in real terms compared with last year. My right hon. Friend also mentioned a major programme of public works, financed by private capital. I remind him, with gratitude, of the report of the Treasury and Civil Service Committee, which made two important qualifications when encouraging such expenditure. It is said that we should take great care not to end up by paying more for borrowing money to finance works in the public sector. It also said that we should take great care to design methods of borrowing money from the private sector that contributed to an increase in efficiency in those public sector activities.
We shall bear those two recommendations firmly in mind when considering my right hon. Friend's suggestion.

Several Hon. Members
rose—

§ Mr. Speaker
Order. Hon. Members have been told that there will be a debate on this subject. I propose to allow a full half-hour of questions, excluding the 35 minutes that have already been taken up. We shall then have to move on to other business.

§ Mr. Joel Barnett (Heywood and Royton)
Would it not have been better if the right hon. and learned Gentleman had conceded that in the coming year—and, indeed, for some years—there will be no improvement in real living standards and that he is planning to cut them, instead of talking about a gradual recovery, which is utter nonsense and which is seen as such by everyone on both sides of industry? Now that the right hon. and learned Gentleman's medium-term strategy is in total tatters—the Prime Minister calls it "flexibility"—will he use that flexibility to reduce unemployment and, if necessary, increase the public sector borrowing requirement instead of positively increasing unemployment, as he has announced today? Perhaps the right hon. and learned Gentleman will give us the figure. Will the right hon. and learned Gentleman show that amount of flexibility in the coming year?

§ Sir Geoffrey Howe
The right hon. Gentleman has spoken more than once in the House, from his experience in the Treasury, of the importance of ensuring that resources are moved from real personal living standards and current expenditure into capital expenditure, on the lines recommended by hon. Members on both sides of the House. Given that real personal disposable income rose in the three years to 1980 by 17 per cent. and that during the same period the resources of the corporate sector fell substantially, some reduction—as is taking place this year—is inevitable in personal living standards, if we are to accumulate the resources for further investment and 246 achieve a reduction in unemployment. That is essential to the gradual recovery to which the forecast points. It is equally essential if we are to reduce unemployment on sustainable and effective terms.

§ Sir Ian Gilmour (Chesham and Amersham)
Since my right hon. and learned Friend's overriding priority is the defeat of inflation, will he tell the House what effect the increases in rents, rates, contributions and charges announced or implied this afternoon will have on the retail price index and on the tax and price index?

§ Sir Geoffrey Howe
The significant component that is likely to affect the retail price index is the proposed increase in local authority rents. That is likely to have an impact of about 0.6 per cent. However, I remind my right hon. Friend that the average level of council house rents still represents only about 7 per cent. of average earnings. In addition, about 50 per cent. of local authority tenants are in receipt of rebates. The changes in the national insurance contributions do not directly affect the retail price index.

Hon. Members
What about the tax and price index? Answer the question.

§ Mr. Maurice Macmillan (Farnham)
rose—

§ Mr. Speaker
Order. I had not realised that I had called two right hon. Members from the same side. I shall make up for that and call two Opposition Members to speak later.

§ Mr. Macmillan
Does my right hon. and learned Friend accept that he has not done very much to help private industry? In that context, what proportion of the programmes that have been reduced or reprieved represent capital expenditure? When does my right hon. and learned Friend expect interest rates to fall?

§ Sir Geoffrey Howe
The changes that I have announced in the outlook for public expenditure are designed to maintain a proper balance between public expenditure and the private sector—which my right hon. Friend is rightly concerned about—in order to increase, rather than diminish, the prospect of reductions in interest rates. As I have pointed out, the great bulk of capital programmes are in areas where resources—as a result of increased efficiency or higher sales of local authority housing—are likely still to be available for maintaining the effective volume of capital spending programmes.

§ Mr. Richard Wainwright (Colne Valley)
Is the Chancellor aware that what his statement describes as increasing the rate of employees' contributions to the national insurance fund by 1 per cent. means that, next April, this crude and regressive tax will have increased by 13 per cent. over the rate for the previous year? Will he say how much of this perverse increase is due to his decision to reduce yet again the Treasury supplement to the national insurance fund.

§ Sir Geoffrey Howe
Only a very small proportion is attributable to that; it represents a transfer from one pocket to another. The proposed increase of 1 per cent. is the same as that proposed last year. In all the circumstances, it is entirely right that the funds should be financed by additional contributions from those still in work.

§ Mr. Douglas Jay (Battersea, North)
Now that even some of the Chancellor's pet economists are regaining their sanity, cannot he do the same?

§ Sir Geoffrey Howe
If I need advice about my sanity, I shall not look to the right hon. Gentleman.

§ Sir William Clark (Croydon, South)
Will my right hon. and learned Friend not agree that it is the easiest thing in the world to spend other people's money and that, at the end of the day, it is the taxpayer who has to foot the bill? Will he further agree that, apart from the world recession, the trouble with our economy is the drain of the nationalised industries and overmanning in the public sector? Should not the selling off of nationalised industries be accelerated? Is it not time for a moratorium to be considered on public sector recruitment?

§ Sir Geoffrey Howe
I agree with my hon. Friend about the importance of ensuring that the size of the public sector does not continue to increase, in order to diminish the burden on the private trading sector of the economy. The change in the balance of public spending that I have announced is designed to help in that direction. My hon. Friend is also right to draw attention to the burden imposed on the economy by the large demands of the nationalised industries and the extent to which they are not exposed to competition and other economic pressures likely to increase efficiency. For that reason, we continue to attach importance to the proposals already announced and those still to be announced for continued privatisation of those industries. We shall maintain our plans to continue the reduction of those emmployed in the Civil Service by 102,000 by 1984.

§ Mr. John Morris (Aberavon)
What calculation has the Chancellor made of the effect of these measures on unemployment? Will the figure be higher or lower a year from now?

§ Sir Geoffrey Howe
These proposals are designed to improve the balance of the economy so that we can look forward, sooner rather than later, to a reduction in the growth of unemployment. It is our hope that we shall reach that turning point during the coming year.

§ Mr. Raymond Whitney (Wycombe)
Will my right hon. and learned Friend not agree that the public expenditure figures he has announced seem to suggest the relative failure of the cost-cutting exercise conducted by Sir Derek Rayner on a part-time basis over the last two and a half years? Savings of £100 million a year, welcome though they are, look small against £100 billion or £110 billion of total expenditure. Will my right hon. and learned Friend not agree that there is need for a savings exercise that is much more radical in its concept and execution?

§ Sir Geoffrey Howe
I would not want the House to be left with any impression that the exercise conducted by Sir Derek Rayner had been other than successful. Sir Derek has conducted and supervised many surveys that have contributed to substantial changes in policy and manpower policies, many of which are continuing to be brought into effect. Moreover, they do not represent anything like the whole of the Government's programme for the reduction of waste and inefficiency in the public sector. As a result of changes set in hand soon after the Government came to office, we are continuing to secure steady reductions in the totals employed in the Civil Service, amounting to over 100,000 by 1984. We shall continue to try to improve that progress. I take account of the important point made by my hon. Friend.

§ Mr. John Horam (Gateshead, West)
Does the Chancellor not appreciate that industry is crying out for additional demand for its products and that it can meet that demand without stoking the fires of inflation? What was needed today was not a status quo expenditure plan but a real reflationary Budget that many of my hon. Friends in the Social Democratic Party as well as many Conservative Members have been urging for some time. Will the right hon. and learned Gentleman confirm that the expenditure plans he has announced will have no real reflationary effect? In practice, he has listened to the chairman of the Conservative Back-Bench Finance Committee and has no intention of listening to the chairman of the 1922 Committee. What the Chancellor means by "gradual recovery" is an inexorable rise in the level of unemployment.

§ Sir Geoffrey Howe
The prospect of improved demand for industry and other parts of the economy depends on their capacity to produce additional volumes of goods and services at prices that are increasingly competitive with those with which they have to sell. The growth that is now foreseen as taking place is likely to be taking place just because of that. The fact that there has been a substantial increase of 41 per cent. in engineering orders in recent months is a reflection of the capacity of industry to increase its own demand by improving the efficiency of its own supply.
Just as there is considerable scope for increased selling in export markets, so there is considerable scope, by improved efficiency, for selling within the home market. One good example is to be seen in what I have said about capital expenditure on water services, roads and motorways. Although the cash provided for those programmes will be reduced, the volume of services provided will be maintained through increased efficiency on the part of those supplying the services.
The hon. Gentleman asks for a reflationary Budget. I must warn him that the implication of the very word "reflation" is that it is likely to increase the risk of higher inflation. I must also tell him that the balance of the Budget for next year consists of two components—the public expenditure component that I have announced and also the tax provisions that I shall lay before the House at that time. Only at that time will one be able to make a judgment of the total Budget plan.

§ Mr. John Golding (Newcastle-under-Lyme)
Is the Chancellor aware that it is inappropriate at the present time to describe unemployment benefit as a short-term benefit? What is his justification for paying an estimated 700,000 people who will be long-term unemployed a benefit less than that paid to those suffering disability or those in retirement? What justification exists for not making up to them the loss that they suffered this year through receiving increases less than the real cost of living? How will he make up the loss of wage-related benefits next year?

§ Sir Geoffrey Howe
It is necessary, as I have indicated, to take account of two factors, the relationship between payments to those out of work and payments likely to be received by those in work, and the impact of those benefit programmes on the total of public expenditure.

§ Mr. Terence Higgins (Worthing)
Is the overall effect of the measures that the Chancellor has announced to increase or decrease the level of aggregate demand in 1982–83?

§ Sir Geoffrey Howe
Taken by itself, the question relating to next year cannot be answered. The pattern of aggregate demand next year, to use the term employed by my right hon. Friend, depends on both halves of the Budget plan that comes before the House next year—on plans for expenditure that I have discussed today and on plans for revenue that will be discussed at the time of the Budget. The proposals that I have announced amount to the maintenance of public spending programmes in cost terms at about the same level.

§ Mr. A. E. P. Duffy (Sheffield, Attercliffe)
To get down to cases, is the Chancellor aware that his cut in rate support grant will mean a compensating rate increase for a local authority like Sheffield of 8 per cent. to 10 per cent., with a multiplier effect on local prices? How does he reconcile that effect with the Government's policies on inflation and pay, not to mention the current frenetic attempts of his right hon. Friend the Secretary of State for the Environment to suppress all rate increases?

§ Sir Geoffrey Howe
The level of rate increases depends on the level of spending programmes decided by local authorities. Those spending programmes, as I have already said, are responsible for about two-thirds of the likely increase in public spending during the current year. In addition, we have made provision for £1.35 billion additional resources for local government next year. In those circumstances, there should be no reason for prudent local authorities to embark on the kind of rate increases the the hon. Gentleman describes.

§ Mr. Anthony Nelson (Chichester)
May I tell my right hon. and learned Friend that we welcome his reassurance that the real value of pensions is to be maintained. However, in view of the fact that the standard of living of many pensioners and others has been and is being adversely affected by nationalised industry prices, particularly those which relate to telephone, transport and fuel, can he offer any real hope that these prices will be restrained more adequately in future, thereby maintaining the level of consumer demand?

§ Sir Geoffrey Howe
I am grateful to my hon. Friend for what he said about pensions. I understand the widespread concern about the impact on living standards and industrial costs of high price increases in the nationalised industries. It is for that reason, among others, that we have maintained the probable provision for nationalised industries to allow them to maintain their capital spending programmes on the lines foreshadowed earlier this year. We believe that it is possible for them to do that, provided that they continue to make efforts to improve their own efficiency, not least by keeping down their current wage costs.

§ Mr. William Hamilton (Fife, Central)
Is the Chancellor of the Exchequer aware that since he took office the tax burden on the average family, direct and indirect, has gone up by £26 a week? Will he deny or confirm that figure? How much will it be further increased by the package that he has announced today? In this connection, will he answer the question put by his right hon. Friend the Member for Chesham and Amersham 250 (Sir I. Gilmour): what is the increase on the tax and price index as a result of his announcement today? As he said that this is an unchanged policy of success, can he say what dazzling successes he will inflict on us in the next two years?

§ Sir Geoffrey Howe
Perhaps the hon. Gentleman will table a question about the precise impact. A number of the measures that I have announced today have not yet been finally decided. For example, the proposed rent increase is still a matter for discussion between my right hon. Friend and the local authority associations. However, I note the hon. Gentleman's concern about the increased tax burden on our people, and I hope that I may count on his support in future for continued economy in public expenditure.

§ Mr. Patrick McNair-Wilson (New Forest)
I congratulate my right hon. and learned Friend on his statement today, which continues the battle for national solvency. Will he take this opportunity to refute the remarks made by Professor Alan Budd, as reported in today's press, that the exchange rate is not relevant to the battle against inflation? Surely the experience of the last months has proved the exact opposite. Will my right hon. and learned Friend therefore resist demands for speedy reflation in view of the effect that that could have on the confidence of sterling holders?

§ Sir Geoffrey Howe
My hon. Friend has drawn attention to important matters. I have rejected the prospect already offered to me by Opposition Members of a speedy reflation of the economy. It is of course right that the level of the exchange rate is relevant to inflation.

§ Mr. Norman Atkinson (Tottenham)
The implication of the Chancellor's statement, in rejecting a speedy recovery of the economy, is that the economy at present is grossly overheated. Does he not realise that we shall soon have more than 3 million unemployed, with a further 750,000 young people in temporary occupations of one kind or another and relief work generally? Will he correct the misleading statement that he has just made that a 41 per cent. increase in engineering orders represents a growth in that industry, when employers in that industry have told him personally that they expect that by mid-1982 there will be a reduction in their total output and a reduction of more than 90,000 workers in their total work force? Will he put an end to the myths that he is spreading about growth in the engineering industry and the rest of the economy?

§ Sir Geoffrey Howe
There have been substantial increases in orders for engineering output, and they represent the achievement of higher growth prospects by efficient management and effective labour relations. It is by a determined co-operation to reduce costs that industry is likely to expand demand effectively and in a way that can be sustained.
I remind the hon. Gentleman that the prospect of speedy reflation of the economy, or any kind of reflation of the economy, is likely in the end to have precisely the opposite effect from the one he intends. Almost any analysis that has been published shows that substantial so-called reflationary packages result in modest increases in employment that are temporary, not lasting. It is only by sustaining the Government's determination to maintain the fight against inflation and the equal determination of both 251 sides of industry to improve their competitiveness that we can maintain the foundations for improvement in employment.

§ Sir David Price (Eastleigh)
Will my right hon. and learned Friend say what effects his announcement will have on public sector capital investment? Does he agree that, in trying to strike a balance between the need to maintain the battle against inflation and the need to boost the economy, this is the moment to mobilise unused resources in the economy by increasing capital investment?

§ Sir Geoffrey Howe
I have already accepted the point that was put to me by my right hon. Friend the Member for Taunton (Mr. du Cann) to that effect. It is of course important to secure a substantial reduction in the proportion of our resources devoted to current expenditure if we are to rebuild profits and investment and have the prospect of improved capital investment and durable employment in the future. It is for that reason that we believe that the provision that we have made for housing, including the proposed provision for housing rent increases and the continuation of local authority sales, and the provision made in respect of nationalised industries and in respect of investment in water services, roads and motorways, together are likely to allow the maintenance of those capital expenditure programmes.

§ Mr. Michael English (Nottingham, West)
Will the Chancellor of the Exchequer do something about the aspect of rates that is solely within the control of the House—in other words, the people who do not pay them? Is it not reasonable that when rates are likely to increase, country landowners, schools in the private sector, and others who do not pay rates, should at least pay 10 per cent. instead of nothing? Taking an analogy from the United States, does he think that it would be a good idea if we could all deduct the rates that we pay from our income tax?

§ Sir Geoffrey Howe
The hon. Gentleman knows very well that the effect of deducting rates from one's income tax bill would be to reduce the revenue to the Exchequer by a significant amount. It would have to be made up in some other way.

§ Mr. English
Not in the case of country landowners.

§ Sir Geoffrey Howe
I was about to deal with the hon. Gentleman's more sophisticated point. It is of course possible to make changes in the extent of rate exemptions, although that is not a matter to be discussed on a statement of this nature; it would be more appropriate in debates that the House is likely to have on the pattern of rating during the year ahead.

§ Mr. Paul Dean (Somerset, North)
Does my right hon. and learned Friend agree that the figures that he has announced today for increased expenditure on the elderly, training arrangements for the young, the widows, the disabled, the sick and the unemployed, confirm the Government's commitment to assist the most vulnerable sector of the community? Does it not show that the courage and determination that Her Majesty's Government have been applying to our deep-seated economic problems are beginning to produce good results?

§ Sir Geoffrey Howe
My hon. Friend is precisely right. The Government have shown their determination throughout to make available as many resources as possible for the protection of those whom my hon. Friend identified, and also to seek to control the total burden of public expenditure to allow the private sector to resume its growth along the lines that I have forecast for next year.

§ Mr. Dick Douglas (Dunfermline)
Does the Chancellor accept that if he wants the House to have confidence, if not in his sanity, at least in the fact that he has the reins of office in good control, he should not come to the House and use glib phrases such as "gradual recovery"? That is a spurious phrase to use about what he has done in terms of real public expenditure. Does he accept that the £5 billion increase—if we take his estimate of inflation of 10 per cent. —is in effect a decrease in real terms in public expenditure, and that the great burden of recovery will therefore be borne, if at all, by the people of this country in a regressive form? He is going backwards, not recovering at all.

§ Sir Geoffrey Howe
The hon. Gentleman has made his assessment in the wrong way. The £5 billion increase to which he referred is an increase to £115 billion from the original planned expenditure for next year of £110 billion. As I have already shown, the increase is larger than that on the likely outturn of expenditure in the current year. It is likely to represent a public expenditure programme of about the same size in cost terms.
The prospect of recovery, gradual or otherwise, cannot be advanced by the continued expansion of public expenditure. Only because we have maintained our determination to control the size of public expenditure, even in these difficult times, am I able to publish a forecast offering the prospect of growth in the year ahead.

§ Mr. Hal Miller (Bromsgrove and Redditch)
Will my right hon. and learned Friend be a little more positive and put his statement in the context of the Government's wider purposes? Does he not realise that what he has so far announced is increased costs for industry and increased tax and charges on those working in industry. Will he now tell us what it is all for and what it will achieve?

§ Sir Geoffrey Howe
I am grateful for my hon. Friend's reminder of the importance of containing increases for industry. That is one of the Government's prime purposes and one of the reasons why we have to make a difficult series of choices about the pattern of public expenditure.
My statement represents one half of the balance sheet which is to be presented to the House at the time of next year's Budget. Plainly, we shall have to take decisions at that time, which so far as it is then possible to judge, will take us further in the right direction.

§ Mr. Michael Meacher (Oldham, West)
What is the justification for further public expenditure cuts when recent evidence shows that three-quarters of such cuts are simply swallowed up in increased expenditure on extra unemployment and supplementary benefits and taxes forgone? Is that not absurd when Treasury figures show that the costs of unemployment already exceed the total PSBR?
Secondly, how does the right hon. and learned Gentleman justify de-indexing unemployment benefit below the level of inflation when the original justification for this was that the benefit was not taxed? That no longer 253 applies. Will not this package simply lead this Christmas to the highest number of people living in means-tested poverty since the war?

§ Sir Geoffrey Howe
The general accuracy of the hon. Gentleman's remarks is demonstrated by his last observation. This package will have no effect whatsoever on conditions this Christmas. It is designed to apply to and make provision for the following financial year and it is wrong to believe that we can begin reducing the burden of unemployment on the economy by expanding public expenditure. The right way to do so is to contain the burden of public expenditure so as to offer the prospect of growth in the economy and of resumed employment growth as soon as possible.

§ Mr. Keith Speed (Ashford)
Can my right hon. and learned Friend tell the House what his estimate is of the total effect of all these measures on industrial costs?

§ Sir Geoffrey Howe
I cannot do so without notice. It would be very difficult to do so. The main point to bear in mind is that the national insurance increases imposed on industry are those which I have described. They follow only from the increases in wages and salaries being paid by industry and the increase in the upper earnings limit of the national insurance contribution.
On the other hand, there is the prospect of maintained capital investment programmes by the nationalised industries if they perform efficiently and the prospect of continued expenditure on the defence industries as a result of the increases that I have announced in the cash available. Those measures are designed to secure the right kind of balance along lines with which my hon. Friend will agree.

§ Mr. D. N. Campbell-Savours (Workington)
What does the right hon. and learned Gentleman mean by "in cost terms"? What will be the effect on the tax and price index, and are the right hon. and learned Gentleman's assessments of the revenues that will be raised by way of income tax in the current financial year in accord with what he said at the time of the last Budget?

§ Sir Geoffrey Howe
The answer to the hon. Gentleman's question about the tax and price index will depend on a number of factors. The change in cost terms is one of the more sensible ways of measuring the likely growth of programmes or maintenance of programmes in real terms.

§ Mr. Campbell-Savours
What does that mean?

§ Sir Geoffrey Howe
I have already given figures to the House about the burden of national insurance.

§ Mr. Michael Latham (Melton)
Is my right hon. and learned Friend even remotely satisfied with the level of industrial capacity and demand? If he is not, has he at least framed his measures in the hope of making further tax cuts in his spring Budget?

§ Sir Geoffrey Howe
The decisions to be taken in my spring Budget will be taken at that time in the light of a whole range of factors which will be clearer then than they are today, and when there is a better view of the year ahead. Of course I share my hon. Friend's concern to improve the prospects for industry and commerce. That is one of the reasons for having to face difficult decisions in relation to public expenditure programmes.

§ Mr. Gordon A. T. Bagier (Sunderland, South)
Will the right hon. and learned Gentleman answer two simple questions? In his statement he mentioned the small rise in unemployment forecast for the coming year. What is that forecast? What rise in unemployment does the right hon. and learned Gentleman foresee? How can I explain to the 145,000 people whom he has added to the unemployed list in the North-East how they can be expected to accept the 5 per cent. cut in their standards of living which took place last year and the 2 per cent. cut in the coming year?

§ Sir Geoffrey Howe
I have already dealt with the hon. Gentleman's last question.

§ Mr. Bagier
No you have not.

§ Sir Geoffrey Howe
The assumptions about unemployment in the year ahead will be contained in the Government Actuary's report which will be available tomorrow. The substance of it is contained in the document laid before the House by my right hon. Friend the Secretary of State for Social Services. The Government Actuary, in preparing his calculations, has worked on the assumption that the average number of unemployed excluding school leavers will be 2.6 million in the current year and 2.9 million in 1982–83 and in addition that the number of unemployed school leavers, adult students and people whose employment is stopped temporarily will average 220,000 in the present year and 225,000 in the year ahead. Those figures are consistent with the prospect of some fall in the total unemployment figure before the end of that year.

§ Mr. Shore
To give the Chancellor the opportunity to avoid any confusion or misleading of the House—to which some words in his statement might have given rise, particularly in relation to raising public expenditure—will he confirm that in real terms he does not expect any increase in public expenditure in 1982–83 over 1981–82? Will the Chancellor also confirm that that will happen only if the less plausible of his inflation assumptions are achieved, and that if the inflation assumption of 10 per cent. in the economic paper is achieved there will be a real cut in public expenditure next year?

§ Sir Geoffrey Howe
I repeat the answer that I have already given. [Hon. Members: "Answer the question."] The inflation forecast for the year ahead is that which I gave to the House at the outset of my statement. It is about 10 per cent. The likely rate of inflation for goods and services in the public sector might be a little below that. The likely sum payable for pay in the public service is in line with the figure of 4 per cent., as I have already told 255 the House. Taking account of those facts, public expenditure next year will probably not be very different from public spending this year, in cost terms.