HC Deb 11 March 1981 vol 1000 cc909-79

[Relevant European Community documents: No. 10444180 and the annual report on the economic situation in the Community (1980) and the economic policy guidelines for 1981.]

4.44 pm
Mr. Peter Shore (Stepney and Poplar)

Although we have had in recent years at least one mini-Budget and sometimes two, it is the maxi-Budget that still stands at the centre of our economic debate. The Budget is the hinge that joins the past with the future. It is the occasion when we discuss the accounts of the Government and of the whole economy, and it is the occasion when the Chancellor of the Exchequer is obliged to appraise, as he did yesterday, his contribution to the nation's health, and to reaffirm or change his strategy. It is the occasion not just for the Chancellor to give his Budget judgment but for us to pass judgment on the Budget and the Chancellor. That is a duty and a pleasure that I shall perform later in my speech.

First, in a kinder moment, may I offer a word of congratulation? After two years of increasing divisiveness in Britain, the Chancellor succeeded yesterday in drawing together all the disparate elements of the nation—unions and managers, TUC and CBI, taxpayers, housewives, pensioners, those who drink, those who drive, those who smoke and newspapers as varied in style if not in ownership as The Times and The Sun. All have been brought together in a great collective spirit of total hostility to what the Chancellor has done.

The whole House and the country have been swift to recognise the enormity of what the Chancellor did yesterday. The nation has been subjected to a form of collective punishment. Pay packets have been robbed, consumers of drink, tobacco and petrol have been assaulted. The bare minimum has been given to pensioners and social security recipients of all kinds. The plight of industry, apart from a few crumbs for small firms, an ill-conceived slock levying scheme and the long overdue 2 per cent. cut in MLR, has been simply ignored. True, the Chancellor has taxed the windfall gains made by the oil companies and the banks. We have no objection to that, except to question why the levy is to fall on bank deposits rather than profits, and why he did not introduce this measure a year ago.

A great opportunity was missed yesterday. The Chancellor's sins of commission and omission are all the more grievous when we recall, as we must, the present crippled state of industry and the economy. In the past year registered unemployment rose by just on 1 million to the staggering total of 2.4 million; one in 10 of the people in Britain are out of work. Last year national output fell by 3 per cent., industrial production by just under 11 per cent. and manufacturing production by about 15 per cent. in the period December 1979 to December 1980. Construction industry output was down by about 11 per cent. Investment is falling, particularly in manufacturing industry.

What a spectacle we present to the world. Capital is pouring out of Britain in direct investment and still more in the purchase of shares by our pensions and insurance funds in the enterprises of our foreign competitors, while bankrupt British firms sell off modern machinery at knockdown prices to those same competitors.

Yet upon this gravely damaged and weakened economy the Chancellor yesterday launched a new and savage attack. First, he massively reduced purchasing power by his failure to index personal tax reliefs, as he was pledged to do by the speeches he made in previous Budget debates and by the clear intent of the Conservative Party's election manifesto. Instead of an uprating of 15 per cent. to meet the December to December inflation rate of last year, he has swindled the nation by allowing no uprating. Thus, in real terms an additional £2,500 million of direct taxation now falls upon the British taxpayer. Yesterday my right hon. Friend the Leader of the Opposition recalled what the Chancellor told the House on 26 March 1980 and I will not repeat it. The disadvantages of not indexing allowances that the Chancellor so eloquently stated only a year ago are just as valid now as they were then.

Secondly, the Chancellor has raised the whole range of indirect taxes, apart from VAT. If he had valorised their rates, he would have imposed increases of about 15 per cent. and the revenue would have been increased by over £1,000 million. However, he has decided to more than double the rate. An additional £2,400 million will therefore be imposed through increased taxation on alcohol, tobacco and on other indirect taxed commodities., including petrol and the vehicle Excise duty. The tax on petrol and derv will be unwelcome not only to motorists in general, but to industry and above all the rural areas of this country.

Thus, by those two decisions alone, purchasing power will have been reduced by about £5,000 million. That comes on top of the announcement on 24 November of a 1 per cent. increase, taking effect on 1 April, in employees' national insurance contributions. That measure will remove a further £1 billion from overall personal incomes.

The burdens have not been equally spread. The failure to index income tax allowances does not produce an equal burden. Its effects are far more like those of a poll tax. Those on low incomes will bear the largest proportion of the rise in their tax. Families with children who receive extra child benefit will get their 50p, but that increase, as the Chancellor of the Exchequer and the Secretary of State for Social Services know, is only half that needed to restore child benefit to its value in April 1979. The indirect tax increases will not only push up prices but will bear disproportionately on those on lower incomes. The taxes on beer and cigarettes will not be borne equally. Those with the smallest incomes of all—the elderly, the sick and the increasing number of unemployed—are hit directly. They are promised a cut of 1 per cent. in their living standards—a 9 per cent. rise in benefit compared with forecast inflation of 10 per cent.

Therefore, there is not only a perverse economic strategy in the Budget but a perverse social strategy. Those least well off bear the heaviest burdens. The strategy is as socially unjust as it is economically unjustifiable.

In today's circumstances, any Chancellor with an ounce of common sense who was not obsessed with ivory tower theories of economic and monetary management would understand that the main need of British industry is for a substantial increase in export and domestic demand, not for a massive curtailment. Yet curtailment is precisely what the Chancellor has achieved. The effects are only too predictable.

The Red Book published yesterday takes forward the national accounts to 1981–82. As those who have read it will know, the picture for the rest of this year is disastrous. Gross domestic product is predicted to fall by a further 2 per cent. Manufacturing output is predicted to fall by a further 6 per cent. Exports are expected to decline by 5½ per cent. According to earlier Treasury information, investment in manufacturing industry will decline by about 17 per cent. Some pick-up is seen for 1982, but, apart from restocking and a possible fall in the savings ratio, there is precious little supporting evidence for that.

As most independent forecasts suggest, the prospect ahead is at best stagnation at an appallingly low level of output and, more probably, a renewal of decline. Far more revealing is the Government's expenditure White Paper, which raises the unemployment assumption to 2.5 million in 1981–82 and to 2.7 million in the two subsequent years. Those figures exclude school leavers.

Therefore, as he knows full well, the Chancellor is presiding over not just a short-term setback to be followed by a revival of employment in output but a continuing and massive decline in the prosperity of this country.

Against that background and with that prospect, how on earth can the Chancellor of the Exchequer and the Prime Minister justify the continuation of their policies? No excuse is to be found in external circumstances. The second oil shock of 1979–80, unlike that of 1974–75, has led to less violent deflationary action so far by the major trading nations. For much of 1980, world trade held up well—and British exports with it. Further, unlike 1974–75, when Britain had not a drop of indigenous oil, in 1980, alone among the industrial nations, Britain is broadly self-sufficient in its oil supplies. However, last year OECD countries as a whole managed to increase their output by 1¼ per cent. while that of Britain declined by 3 per cent. This year they are expected to achieve a smaller increase of ¾ per cent., while Britain will experience a decline of 2 per cent. Unemployment in the OECD area rose by 3 million last year, as the Chancellor of the Exchequer told us in his speech yesterday. However, he failed to tell us that the OECD increase was an average of 15 per cent. while in Britain unemployment rose by 65 per cent.

The main cause of our disproportionate setback is internal to the United Kingdom. It is the main consequence of Thatcherism, of the blinkered and aggressive monetarism to which this country has been subjected since May 1979. Inflation has been the prime target. It has been squeezed, but employment and production have been nearly throttled. In the Government's pursuit of sound money and in their effort to control the sterling M3 money supply, interest rates last year were pushed to unprecedented levels. Among the most baleful consequences has been an unprecedentedly rapid rise in the exchange rate of the pound. That has acted as a tax on our exports and a subsidy to our imports, the last thing which a trading nation such as ours wants or can afford.

Yesterday's reduction in the MLR, overdue but welcome as it is, has already been discounted. It is likely to have at best—I doubt whether it will be in the right direction—a marginal effect on the exchange rate. High interest rates have put heavy direct pressures on the costs of British industry. At the general election of 1979, MLR stood at 12 per cent. The net borrowing requirement of industrial and commercial companies was less than half what it is today. Every 1 per cent. increase in the cost of bank borrowing is roughly equivalent for industry to about £350 million per annum. For much of the past two years, therefore, industry has had to carry the burden of additional annual payments, ranging from about £700 million per annum to over £1,700 million at the peak. The effect is all too clear. As costs have increased, profit margins have shrunk. Redundancies, partial closures, layoffs, cutbacks on research and development, cuts in new investment and last year, most massively, the rundown in stocks have inevitably followed from the monetary squeeze. Few firms have escaped. Even the mighty ICI was plunged into loss in the last half of its fiscal year and company liquidations last year reached an all-time high.

Against those massive losses, what has been the gain? The Chancellor of the Exchequer boasted yesterday that inflation has moderated—that is, from the sky-high level to which the Chancellor pushed it in his first Budget. Year-on-year inflation is now running at 13 per cent., which is nearly what it was when the present Government took office. Some day it might even reach the single figures achieved during the greater part of 1978. If it does, for how long will it be? Industry's profits are now so low that it is bound to seize the first opportunity to restore the profit margin.

Moreover, through the Government's crass mismanagement of nationalised industries and public sector charges, a wave of new price increases is about to be released. Electricity prices, after the two major increases this year, are due to rise by about 11 per cent. in April. Gas prices are scheduled to rise by about 15 per cent. in April and by a further 10 per cent. in October. The 16 per cent. increase in postal charges in January has yet to come through to the RPI. Local authority rents are due to rise by a staggering £3.30 per week from April, so that the average rent will be about 80 per cent. higher than it was two years ago. Yesterday's Budget has at a stroke added 2 per cent. to the RPI with more to come as the tax on petrol and fuel oil feeds through into prices and as pay pressures increase.

Clearly the policy has not worked, and its tiny success has been bought at a disproportionate price. The central question for most of us before the Chancellor addressed the House yesterday was whether the right hon. and learned Gentleman had learnt anything from the bitter experience of the past two years. Our hopes were based not only upon the appalling injury that had already been inflicted on the economy, nor just on the Government's obvious failure to achieve their blinkered targets, but on the steady release of information from so many independent sources, including the all-party Select Committee that has devoted itself to studying the theory and practice of Thatcherism during the past year and which completed its report on monetary policy only last Thursday.

I hope that the Chancellor and the Prime Minister will read that report. They will find little in it for their comfort but a great deal for their education. I draw their attention to just a few of the report's most crucial findings. First and foremost, because it goes to the central tenet of the monetarist's faith, the report concluded: we have not been convinced by evidence of a direct causal relationship from growth in the money supply to inflation … the Treasury's own evidence tends to refute suggestions of any simple relationship in the short and medium term. Second, on the optimistic belief that monetary policy would combat future inflation by changing inflationary expectations, the Select Committee had this to say: We conclude that in the light of experience this view is not valid … It is unrealistic to suppose that negotiated wages and administered prices respond rapidly and automatically to announcements about monetary policy, however credible they may be. The influence of monetary policy on wage and price inflation does not therefore appear primarily through the setting of targets or through expectations, but rather in the short term through the lowering of economic activity and the appreciation of the exchange rate". Is that not what happened during the past two years?

What had the Chancellor to say yesterday about this so moderately worded but nevertheless damning indictment? In his mulish, stubborn way he simply dismissed it. Of course, there are now to be a few modifications. But, as he likes to put it, the"central thrust" of the Government's policy is to continue on its ruinous way. Again, targets have been announced—not just for this year but for the next three. And in the midst of the worst recession for 50 years the public sector borrowing requirement is to be massively reduced. It would be ruinous, the Chancellor says, to change course now. The plain truth is that it is ruinous already and that the ruin will only increase if recent policies proceed.

We are discussing not just a matter of methodology or of economic management but the question of values and priorities. The House should understand what this policy means, above all in human terms. There will be no growth, only decline, in the British economy. Unemployment will rise from the 2.4 million it stands at today to nearly 3 million between now and the next Budget. In a revealing address at the Church of St. Lawrence Jewry the Prime Minister a week ago told us what animates her approach to economic policy. To her inflation is an evil. It is morally debilitating—not just the accelerated inflation of the 1970s, but the gentle inflation of 1945 to 1970 as well. In her words, she puts the demise of inflation at the top of my list of economic priorities. It is, in my view, a moral issue not just an economic one. Unemployment is the second and equally great human and economic problem". As she put it, of all the difficulties I face unemployment concerns me most of all. So there we have it. Inflation is an evil—"a moral issue". Unemployment is"a problem", a major difficulty. And here in this value judgment is a divide as profound as any I have met. Let me tell the Prime Minister that she has got it the wrong way round. Inflation is a great problem, a major difficulty that we must overcome. It is unemployment that is evil and immoral.

Unemployment involves not just a loss of wealth and waste but the wretchedness that comes from it, the destruction of self confidence and of human dignity. Let the right hon. Lady contemplate for a moment just how many of her fellow citizens face these evils now. One in 10 of our people is today registered as unemployed. The figure would be far higher if women registered as men do. For men the figure is already one in eight. What about our young people for whose moral welfare I have no doubt the right hon. Lady is concerned? For those in the age group 20 to 29, one in seven males is jobless today; for young women the figure is one in nine. For school leavers—those between 16 and 19—almost one in five of the males and one in six of the females are out of work. Has the Prime Minister even begun to understand the individual, the family and the community consequences of what she is doing, and doing knowingly?

We have heard so often the final justification of the Prime Minister and the Chancellor for all this. They will proclaim that there is no alternative to the course that they are pursuing. They will say that all these injuries are inescapable, that in order to defeat inflation the whole nation must go through this nightmare of monetary misery. However, apart from a small group of her economic Ministers, and, I suppose I had better add, her new economic adviser, and apart from a number of City institutions, virtually no one in the land agrees with them—certainly not the former Prime Minister, the right hon. Member for Sidcup (Mr. Heath); certainly not his predecessor, Mr. Harold Macmillan; certainly not the TUC; certainly not the Opposition; and, now, and most interestingly, certainly not the CBI. The CBI, too, has looked into the future, and what it has seen has appalled it. That is why it has proposed a gradual expansionary build-up between now and 1984–85, a fiscal expansion reaching some £6 billion per annum in the later years. Yet, even if all its proposals were adopted, on its own estimate they would get unemployment down to only 2¼ million by 1985. That is some indication of the magnitude of the problem that now confronts us: the deep pit of recession that the Government have dug for the British economy.

We shall need far bolder action than that, but let me at least state some of the priorities for action now. It will be clear to all hon. Members that the Budget should have made an immediate and powerful attack on the uncompetitiveness of British industry. There is a range of measures that we could take that would help to reduce industrial costs. First, there are fuel costs which for some industrial consumers are higher than they are for industrialists in other trading nations. The Chancellor acknowledged that in his Budget speech, and his decision to reduce the prices of electricity and gas to bulk users is to be welcomed. However, I am not convinced that that covers the whole issue of high energy costs, and I do not understand why the right hon. and learned Gentleman has not accepted the arguments of industry and of the NEDO working party to remove the heavy oil duty.

The second factor, which for much of British industry has far more relevance, is the national insurance surcharge which at present yields over £3,000 million per annum. In an earlier debate I urged the Chancellor to reduce the surcharge quickly and substantially. I would have wanted it to be cut by one-third this year. If that would have taken too much of what is available, the surcharge reduction should have been concentrated selectively on British manufacturing industry. Thirdly, I should have liked the regional employment premium to be reinstated for manufacturing industry in the development areas and at an effective rate.

Fourth, and by far the most important, is action upon interest rates. The Chancellor has reduced interest rates—he should have done it long ago—so that they are today no higher than when he took office two years ago. That provides some relief for industry, but we have considerably further to go with MLR. A cut to 10 per cent. and a clear intention of further progress into single figures would have a wholly welcome effect both in reducing the direct cost to industry and the servicing of bank loans and upon the over-high exchange rate of the pound.

These measures, in their combined effect, should substantially alter the cost competitiveness of British industry. They would make possible a substantial growth in exports and, equally important, enable British manufacturers to displace foreign competitors in our home market.

Mr. Nigel Forman (Carshalton)

One fact that the right hon. Gentleman has not mentioned—it is notable for its absence—is that in each of the last three pay rounds, as my right hon. and learned Friend pointed out yesterday, the pay costs of manufacturing industry went up by 14 per cent., although productivity increased by only 1 per cent. Since much of that took place during the Labour Government's term of office, or was the result of their actions, what practical suggestions can the right hon. Gentleman address to the fundamental problem of competitiveness?

Mr. Shore

It does not lie with the hon. Gentleman to put that point to me. In my approach to this most important question, I would never exclude the related question of prices. If the Government start out with the proclaimed belief that no agreement is needed on incomes and prices, and if it is said that it is theoretically impossible for incomes to add to inflation—and that is part of their misguided ideology—and if on top of that they heap taxes on expenditure—for example, in the way that VAT was increased two years ago—what response can the hon. Gentleman expect?

Like all hon. Members, I am aware that with North Sea oil and with the pound as a petro-currency, the exchange rate presents new and special difficulties. We cannot supinely accept, as the Government have done for the past two years, an exchange rate that in no sense reflects the competitiveness of our manufacturing industry and that has inflicted—as the Secretary of State for Trade has been among the first to recognise—great damage on our industry. The matter is all the more urgent, because, although during the past year exporters have done remarkably well in maintaining their export share, evidence is growing to show that many firms are now exporting at a loss.

As the Government know, in its recommendations to the Chancellor of the Exchequer this year, the CBI heavily emphasised the urgent need to reduce the exchange rate. It recommended to the Government that they should make an explicit declaration to the effect that they understand the need for lowering the exchange rate and will seek to achieve that. That in itself is important, because, as we are all aware, the Chancellor of the Exchequer and other Ministers have gone out of their way in previous debates to welcome the strength of sterling. They have emphasised only its effect on import prices.

I also agree with the CBI that the best way to bring this about is to reduce interest rates. But I have no doubt that, if it should prove necessary, it would be right for the Government to instruct the Bank of England to intervene in the foreign exchange market and to use whatever other devices are necessary to that end. Although a return to competitiveness would in itself have welcome demand effects on the British economy, I have no doubt that, given the depth of this recession, a substantial direct stimulus to demand is also necessary. That stimulus will come only from an increase in public expenditure. The question is as to the form that that public expenditure package should take. I should like to see some increase in social security benefits and a full and proper uprating of child benefits so that their real value of April 1979 is restored. I should like to see the full uprating of sickness and unemployment benefits, which were so meanly cut last year, and, of course, the withdrawal of the miserable 1 per cent. clawback from pensions this November.

However, I entirely agree with those who would place the major emphasis now upon capital investment programmes by the nationalised industries, and by local authorities and central Government. The electrification of the railways is a project which, on merit, is well worth pursuing. There are many more such projects. In addition, there is a clear need for an enhanced housing programme, for hospital and prison building, and for new investment in our ageing water and sewerage systems. A number of road programmes should undoubtedly be brought forward.

The particular attraction of such public investment programmes is that they would help to bring into employment both men and materials in the construction and building industries, which are now so under-used and in which so many firms face disaster. Moreover, the great merit of this type of programme is that it is nearly 100 per cent. British. The foreign content of public investment programmes and, indeed, of nationalised industry investment programmes is almost negligible. We should also reinforce the special employment measures, with particular attention to training programmes and to the reinstatement of the small firms employment subsidy.

Sir William Clark (Croydon, South)

I have followed with great interest what the right hon. Gentleman has said. However, if the Government were to increase public expenditure as he has suggested, the public sector borrowing requirement would increase. The right hon. Gentleman is also advocating a reduction in the minimum lending rate. How does the right hon. Gentleman think that the Government could, in that case, fund the public sector borrowing requirement?

Mr. Shore

I shall answer that partly by reference to an interesting intervention that was made by the hon. Member for Horncastle (Mr. Tapsell) last time we debated such matters. He asked how the minimum lending rate could be lowered from 16 per cent. to 14 per cent. last November when the money supply was almost double the Government's target and when the public sector borrowing requirement was clearly over-running the programmed level.

The truth of the matter is that a considerable margin is involved. However, I shall touch on that subject again in a moment.

Mr. Tim Eggar (Enfield, North) rose—

Mr. Bowen Wells (Hertford and Stevenage) rose—

Mr. Shore

I shall not give way again.

Mr. Eggar rose—

Mr. Bowen Wells rose—

Mr. Deputy Speaker (Mr. Bernard Weatherill)

Order. We cannot have every hon. Member jumping up.

Mr. Shore

Last, but not least, I want to see a flow of investment into the renewal and expansion of our manufacturing industries and substantial backing for the growth industries of the future.

One of the most interesting contributions in the recent CBI medium-term document—which, I believe, is called the"Will to Win"—is the proposal for a new and reinforced industrial strategy. In essence, the CBI proposes that industry and Government should plan for the future and that the great surpluses of our society—and, in particular, North Sea oil—should be channelled into industry and not squandered on the financing of unemployment.

I acknowledge that there are difficulties in financing the public sector borrowing requirement, but we have done it before, just as other countries have, and we can do it again. The crucial factor is to ensure that the public expenditure or tax reduction measures that will increase it should at the same time increase production and the gross domestic product. That is why we must give strong emphasis to export—and investment-led growth.

Of course, if economic policy is geared, as it is today, to declining output and rising unemployment, the public sector borrowing requirement will inevitably increase. Measures taken to reduce it, either by new cuts in public expenditure or by new increases in taxation, will reduce industrial output and the gross domestic product still further. Further deflation will then lead to a further increase in the public sector borrowing requirement. Has not that downward spiral been evident in the past two years?

If economic policy is geared, as it should be, to expansion, the public sector borrowing requirement, apart from the initial impulse of increased public expenditure, will be no higher as a proportion of gross domestic product, because growth generates revenue and, through reducing unemployment, also cuts public expenditure. Indeed, all the forecasts that I have seen show that an increased public sector borrowing requirement is substantially self-financing—provided that it is linked to growth—two years after it has been incurred.

Mr. Eggar rose—

Mr. Bowen Wells rose—

Mr. Deputy Speaker

Order. The rule is one Member at a time, or not at all if the right hon. Gentleman does not give way.

Mr. Shore

I am as aware as anyone, and certainly as aware as the Prime Minister, of the need to face and control inflation. However, the inflation that faces us today, and the inflation that we are likely to face, even given a strong expansion of demand, is still unlikely, given the tremendous unused capacity of British industry, to mount serious pressure on our domestic resources and our domestic capacity to produce.

The danger, as it has been for many years past, is the danger of cost inflation as wages, salaries and prices in a world of powerful corporations and strong trade unions chase each other and push costs to even higher levels, without increasing real earnings. The Chancellor of the Exchequer and the Prime Minister believe, wrongly, that the only way to deal with it is through creating unemployment and diminishing the national output. I believe that the only possible way is to deal with it directly with both sides of industry, cementing with them an agreement on a counter-inflation policy as an essential element in a broader policy for national revival. But let no one have any doubt that there is here a choice. Surely no one, after these past two appalling years, can have any doubt as to which is the better way.

The central aim of economic policy is the creation of wealth and the expansion of output. That is what Government policy, the Budget, trade and industrial policy and counter-inflation policies are all about.

I accept that those who will the end of expansion must also will the means. Those means in a modern economy will require not a rolling back of the frontiers of the State but a far more positive and purposive role. That is the only way that we believe Britain should proceed, and that is the very opposite direction to which the Government are driving.

Mr. Eggar rose—

Mr. Shore

I must give in summary form the judgment that I promised at the beginning of my speech. This is a Budget for unemployment. It is a Budget for the accelerating decline of the industry and the economy of the country. It is a"know-nothing, learn-nothing Budget" that will only compound and reinforce the errors of 1979 and 1980. Undeniably, it is a Budget of failure. Two years ago, against our vehement opposition, the Chancellor set out on his ill-fated and misguided programme for reviving the nation by cuts in public expenditure, reductions in the PSBR, tax cuts to give incentives to those at work and—the keystone in the whole arch of his policy—rigorous quantitative control of the money supply.

The Chancellor is a leathery character, but he must be blushing at what he had to announce yesterday. The PSBR that was to be reduced to £8,500 million in 1981 turned out at £13,500 million. Public expenditure that was due to be cut by £600 million in fact increased by £1,400 million last year. Tax burdens, taking direct and indirect taxes together, are now substantially higher than at any time during the period of the Labour Government. As for money supply—does the Chancellor remember these words?—it is one of the very few things that the Government actually have within their power to control". It turns out to be not within the range of 7 per cent. to 11 per cent. but at 20 per cent.

I do not give a fig for the Chancellor's monetary and PSBR targets. I welcome his failure to achieve them because success in such targeting would have caused still greater ruin to British industry. But I care about the real world of economic growth, the level of employment, the balance of trade, the level of inflation and the contentment and morale of our people. Judged both by my criteria and by the Chancellor's self-chosen yardsticks, what a record of failure he has recorded. I devoutly hope, for his own sake but still more for the sake of the country, that this is the last Budget that the Chancellor and the wayward mistress of No. 10 will present.

5.23 pm
The Chief Secretary to the Treasury (Mr. Leon Brittan)

Before dealing with my own theme of public expenditure, I naturally want to respond to the critique of the Budget put forward by the right hon. Member for Stepney and Poplar (Mr. Shore). At an early stage in his speech he chose to criticise the lecture given by my right hon. Friend the Prime Minister and stigmatised her, by a selective reading of that lecture, for putting inflation as a priority above unemployment. She did no such thing in her lecture. But the right hon. Gentleman's central error has been to perpetrate a fallacy fundamental to the thinking of Opposition Members—namely, that there is a choice between inflation and unemployment, and that, if one does not mind having a bit of inflation, one can manage to deal with the problem of unemployment. We reject the propositions put forward by the right hon. Gentleman and his right hon. and hon. Friends because we do not accept that in today's conditions those alternative choices present themselves.

As I represent a constituency in the North-East I do not need a lecture from Opposition Members about the evils of unemployment. I am perfectly well aware of the human consequences in terms of misery that unemployment brings to individuals and the waste of resources caused by a high level of unemployment.

It would do credit to the right hon. Gentleman's sense of justice and fairness if he were prepared to accept that if we differ from him in what should be done it is not because we are any less concerned about the social ills affecting the country but because we disagree about the best way of dealing with the problem.

Mr. Jack Straw (Blackburn) rose—

Mr. Brittan

I shall not give way at this stage.

The right hon. Gentleman has put before the House, dressed up in a slightly, but only slightly, novel form, a recipe for fiscal irresponsibility that would be certain to lead to massive inflation which in turn would make the present level of unemployment seem piddling. I say that because the lessons show that. The right hon. Gentleman in essence said that the Budget is highly deflationary and that we can and should safely reflate on a massive scale.

The right hon. Gentleman wants us to remove the national insurance surcharge which the Labour Government imposed and to put on the regional employment premium which they took off. He wants us to expand and to expand massively. He favours a particular form of reflation which, to the extent that it has any shadow of a cover, lurks behind an ill-defined reinstatement of a prices and incomes policy which has been tried so often and found wanting every time. The lesson surely is that a repetition of Clegg is hardly a recipe for economic success.

The right hon. Gentleman was saying that, just as reflation would have been correct in the 1930s, so it is today. His condemnation of the Budget is based on the false premise that it is massively deflationary. In fact, faced with increased expenditure arising from the recession and a prospective public sector borrowing requirement of £14 billion, compared with the projected £7½ billion in the medium-term financial strategy, I do not think that it can remotely be described as deflationary to adopt policies leading to a PSBR of £10½ billion.

Those policies involve a net tax increase next year of £3½ billion, not the larger figure that has been bandied about. It will not deflate the economy further. But it will prevent inflation from rising. The right hon. Gentleman ignored—

Mr. Shore rose—

Mr. Brittan

Perhaps I may proceed to the body of my argument. The right hon. Gentleman ignored the fundamental difference between the problems of the inter-war years and those we face today. The case for a Keynesian expansion in the 1930s was in part that there was no inflation then and little immediate risk that adding to demand would stimulate it. Thus, for a time at least, nearly all the impact of higher spending would be on real output and little or none on prices. Cutting interest rates, which were very low, would not then have helped to stimulate economic activity.

The argument goes on to the effect that there was an excess of savings over investment at that time leading to the accumulation of idle funds, and that perhaps we could delude workers into accepting real wage cuts because the money illusion would prevent them from realising what was happening to them.

Mr. Shore

The right hon. and learned Gentleman is making the point that demand management is more difficult in the 1970s and 1980s than it was in the 1930s. Can he explain the point that he made, which absolutely amazed me, that by taking £3½ billion out of demand he is not deflating the economy? What on earth is deflation? How does he define it?

Mr. Brittan

The right hon. Gentleman has failed to put that figure in the context of what is happening in the economy as a whole which, as I explained briefly, involves the Government spending substantially more on the steel industry, British Leyland and extra employment measures. I am saying that at a time when public spending is increasing, whether we like it or not, it is wrong to regard a change in target from £7½ billion PSBR to £10½ billion PSBR as inflation.

Mr. Straw

Last year.

Mr. Brittan

Of course. If I may continue with the analysis that the hon. Member for Blackburn (Mr. Straw) finds so distasteful that it is making him even more restive than normal, the sort of conditions that I have described in the 1930s, in which a strategy of the kind that the right hon. Member for Stepney and Poplar has set forth might conceivably have been valid, do not apply today. Adding to monetary demand feeds through largely into prices and very little into real output. The right hon. Member should know that from what happened in 1974 and 1975.

If the right hon. Gentleman does not like that period and suggests that the conditions were different then, let us take it further forward to 1978 to 1980. In that period the growth in monetary demand fed almost entirely through into higher prices. Moreover, again compared with the situation in the 1930s, today there is a general agreement that cutting the high levels of interest rates which have prevailed since the 1950s stimulates real production. The right hon. Gentleman must think that, because he asked us to cut interest rates more than we have already done.

There is not today an excess of savings over investment opportunities. If anything, there is an insufficiency of savings in relation to the investment needs of industry and of the Government. The money illusion, which played so large a part in the Keynesian analysis, is as dead as the dodo. Unions understandably bargain for real wages, not money wages, and they are quick to anticipate and entrench the inflation that comes with reflation by raising their wage demands in step with expectations about rising prices.

That problem will not be solved by the shadowy incomes policy in novel dress hinted at by the right hon. Gentleman. In other words, the belief that reflation today would do the trick and painlessly bring back jobs is no doubt profoundly comforting but equally profoundly ill-founded. The events of 1974 to 1976 should have made that clear enough by now. They led to the now classic statement, which I know is not popular in certain quarters of the House, by the right hon. Member for Cardiff, South-East (Mr. Callaghan) the former Prime Minister:"We used to think we could spend our way out of a recession, but that option is no longer open to us,"

The right hon. Member for Stepney and Poplar has made it clear that he does not share that view. Indeed, he has been quite candid about that. To that extent, the Social Democrats are right in saying that it is not they who have moved, but the official Labour Party. Where that leaves the right hon. Member for Leeds, East (Mr. Healey) I do not know. Perhaps that explains why he is not here today.

There is of course—we ought to face it—a more seductive variant for the argument for massive expansion which has substantial support and with which I want to deal. We are invited to embark on a massive programme of productive and highly commercial investment by the nationalised industries in telecommunications, sewerage, railway electrification and so on. It is often suggested that we can finance all this in a particularly painless way with North Sea oil revenues.

North Sea oil revenues have been known about, forecast and built into the Government's revenue and spending plans for many years. They are already committed. If they were not available, other taxes would have to be higher, public borrowing would be greater or public spending would have to be lower. It is no easier to finance some new project from them than from VAT, dog licences or income tax. It is economic nonsense to suggest the contrary.

The creation of a special fund with a label round it would make no difference. We still have to decide what to do about: the revenue coming from the North Sea which we have thus diverted. Do we spend less on schools, hospitals or roads? Do we put up taxes? Or do we simply have a high level of borrowing? None of these questions has been faced, let alone answered, by those who see this as an easy route to salvation.

Mr. Frank Hooley (Sheffield, Heeley)

Will the right hon. and learned Gentleman give way?

Mr. Brittan

Perhaps I may develop this point further. Virtually the same point arises when it is suggested that the nationalised industries should be allowed to borrow freely on the market and to spend more in that way. Whether or not such borrowing were to be classified within the PSBR is a side issue. But, other things being equal, it would compete directly with the borrowing needs of productive industry. What is more, it would compete very effectively. With the Government standing behind any nationalised industry as de facto guarantor, lending to it would be highly attractive to investors when compared. with the alternative of buying private sector bonds and debentures. In other words, there would be crowding out: of private investment. We would be substituting additional investment in railways or water for investment in, for example, engineering or agriculture and we would delay the recovery of the private sector.

If it is desired to avoid the risk of such crowding out and not simply to increase the public sector borrowing requirement, something else will have to give. That would happen if we went down that route just as much as if we went down the North Sea route. What would have to give? The gross addition to the PSBR would have to be offset either by tax increases or by spending cuts. The same questions would arise. How popular would that be? Do people really want cuts of that kind?

Mr. Hooley

The right hon. and learned Gentleman is saying that the discovery of North Sea oil and gas adds nothing to the real wealth of this country. It manifestly does. How can he claim that massive expenditure on financing a dole queue of 3 million people is more productive to the real wealth of this country than the same expenditure on the creation of real wealth through the public corporations or, indeed, the private sector?

Mr. Brittan

I am sorry that I have not made myself sufficiently clear to the hon. Gentleman. I have done the reverse of what the hon. Gentleman has accused me of doing. So far from saying that North Sea oil revenues are of no value, I have said that they are of very great value and that if we did not have them we would have to put up other taxes or spend less money. That is an elementary but true proposition. That is why I believe that the route that I have outlined, which has been seductively put forward in many quarters, is not the real route to our salvation.

Mr. Robert Maclennan (Caithness and Sutherland)

Referring to the right hon. and learned Gentleman's remarks about crowding out private investment, on the basis of any so far declared investment intentions by private industry, will he explain what investment will be crowded out?

Mr. Brittan

It is not possible to specify a particular kind. The hon. Gentleman is confusing the general with the particular. One cannot identify it. It is not a case of saying that one particular project would crowd out another.

Naturally, we are all concerned about the state of the infrastructure and the benefits that improvements to it might bring. All I am saying is that we would be allowing ourselves to be under a great delusion if we were to think that massive improvements to the infrastructure could safely be allowed to go ahead without sacrificing something else, without pushing up taxes and without risking massive inflation.

If it is said that we should face the prospect of inflation and that a general reflation is feasible in the present conditions, that is an argument that we can meet head on. However, there is no short cut. We should not be beguiled into thinking that we can have it on the cheap.

Mr. Austin Mitchell (Grimsby) rose—

Mr. Brittan

No, I shall not give way. I have more to say about public spending, which is the particular responsibility of the Chief Secretary, and which I know is a matter of particular interest to the hon. Member for Grimsby (Mr. Mitchell). First, however, I want to deal with two matters that were touched on by the right hon. Member for Stepney and Poplar that I know caused great concern both inside and outside the House.

Quite apart from arguing that we should have had what I believe would be a massively inflationary reflation, the right hon. Gentleman attacked the Budget measures as being regressive and socially unjust. Certainly, the Budget seeks a measure of sacrifice from everybody, both as earners and as consumers, to pay for the extra expenditure that has been necessary because of the recession—expenditure which the right hon. Gentleman would like more of, but to which we have in fact contributed in some measure—and also to enable conditions to be safe for interest rates to come down, as they did yesterday, without risking inflation.

To do all that requires sacrifices. Of course, the effects will vary between households, according to circumstances. However, I remind the right hon. Gentleman of two features of the Budget which, perfectly understandably, he did not emphasise. First, we have taken steps to shelter the most vulnerable people by fully price protecting child benefits and by giving help to the disabled, particularly the blind. Secondly, the decision not to index income tax—that, of course, includes the higher rate bands this year—means that, in proportion to income, the largest increases in the real tax burdens next year will fall on those with the highest incomes. If hon. Members care to study the figures, which are readily available, they will see that that is true.

There is another matter of concern, namely, the increase in petrol duty. Concern has been expressed about that in a variety of quarters. I shall not disguise the extra burden that it will involve. In my own constituency, which contains both rural and urban areas, I am well placed to know exactly what that means. But it is also right to point out that, after this increase, the tax burden on a gallon of petrol will still be no higher in real terms than it was in the summer of 1970.

It is worth pointing out, too, not in an endeavour to underestimate the situation but simply to put it in its context, that our prices will be no higher than the average price in the European Community. In my view, it is reasonable to expect the motorist to play his part in securing a soundly based economy. In that connection, it is right to take into account the fact that the increase in petrol duty is broadly in line with that being applied to beer and cigarettes.

Mr. Robin F. Cook (Edinburgh, Central)

The right hon. and learned Gentleman said that the tax burden will fall most heavily as a percentage on those who earn at the highest level. May I draw his attention to the figures? Through the failure to increase the thresholds and through the increase in Excise duties, the loss to a man earning £3,500 is £3.89 per week. The loss to the man earning £15,000 is only £5.69. The percentage effect is a 6 per cent. cut for the low income household, and a 3 per cent. cut for the high income household. Will the Chief Secretary now retract what he said?

Mr. Brittan

The hon. Gentleman has fallen into the error of comparing the percentage of income with the percentage of tax. Certainly, I shall look into the figures that he gave, but I can assure him that the statement that I made was a carefully considered and accurate one.

I turn to public expenditure more specifically because it is my particular responsibility as Chief Secretary. I welcome the opportunity to explain to the House more fully than the Chancellor was able to do yesterday the outcome of public expenditure last year and our plans for the coming year and beyond.

The Government came to power committed to reducing public spending over their period of office. We saw that as being essential if we were to redress the balance between the private and public sectors, about which my right hon. and learned Friend spoke yesterday. It is also essential if we are to control inflation effectively, without suffering excessively high levels of interest rates, with all the damage that they inflict on the wealth-producing sector of the economy. That view of what was needed contrasts sharply with that of our predecessors, as we heard today, and on this occasion the right hon. Member for Stepney and Poplar does not depart from his pedigree.

Our predecessors made deliberate plans for spending to grow at a rate of over 2 per cent. a year. They did so, not as a reaction to recession, but as a deliberate long-term act of policy. But while the Opposition call for increased expenditure in one form or another, there are others in the House and outside who criticise us for not cutting spending enough. It is therefore appropriate in the Budget debate for me to try to explain what has happened.

The broad picture is a simple one. We made the often difficult decisions that were required to cut spending plans. Those cuts have been genuine. They have been implemented. Policies have been changed to achieve them. Measures have been taken to encourage efficiency, and the numbers of staff in the Civil Service and so on have been reduced. Moreover, those cuts have been maintained, in spite of pressure to relax them. Indeed, we made further cuts last November.

But the cuts have been overlaid by increases in spending in other areas, for the most part, but not exclusively, relating to the recession. The net effect is that spending this year is higher than it was last year, and higher than we had intended a year ago. But for all that, it is significantly below the previous Government's plans. Expenditure in both our first two years of office is estimated to have been 3½ per cent. lower in real terms than the plan we inherited, and our plans for 1981–82 are almost 5 per cent. lower. That is a big change of direction, particularly if one takes into account the long time scale of many public spending plans.

Some of the cuts have been difficult to achieve but have been wholly beneficial when actually attained. In that category comes the re-negotiation of our contribution to the European Communities, which is expected to result in special refunds of about £600 million in this financial year, and about £825 million in the coming year. In that category also come measures to reduce the size of the public sector, such as council house sales and the special sales of assets. The latter have already yielded nearly £l½ billion.

Other cuts have reflected changing circumstances. Education expenditure will, in the coming year, be nearly 10 per cent. lower than planned by our predecessors. Spending on public sector housing will be 40 per cent. lower.

But some cuts have involved making changes which we would not have wished to make if more finance could have been responsibly made available. In social security we had to decide to uprate pensions and other long-term benefits in line with prices only and we made a number of other changes, including the abolition of the earnings-related supplement. Those measures have saved about £½ billion in 1981–82 and are expected to save £1 billion in 1983–84. Even our priority programmes for defence and law and order have had to contribute their share of savings.

The cuts have in no way been indiscriminate. Those who protest so vociferously against them are profoundly wrong, but I have to tell my hon. Friends who challenged the reality of the cuts that those who protest are not protesting against a mere illusion. Total spending would be much higher without those cuts. However, as I have said, they have been partially overlaid by the increases that we have had to make in other areas.

Before looking at the nature of, and the reasons for, those increases it is right to ask to what extent the increased spending has come about because of conscious decisions taken in changed circumstances and to what extent they have come about because of a failure of control. The answer is that where the Government can control expenditure directly we have in general succeeded. In the year just ending, cash limits have been largely adhered to. The exception is the expected overspend over the revised defence cash limit.

Increased expenditure on the nationalised industries was financed from the contingency reserve, specifically set aside to cater for unanticipated or unquantifiable needs. In the case of the expected overspend on the local authorities' current account, the Government have no direct control, but the overspend will be smaller by at least 3 per cent. than it would have been were it not for my right hon. Friend the Secretary of State for the Environment's action in calling for revised budgets, and withholding grant.

But there is a further factor that has led to increased spending. Within the areas subject to direct or indirect control, an element of underspending is normally anticipated and allowed for in the planned totals. This year, however, spending has been closer to plan than expected. That again is, in part, attributable to the recession.

Most important of all, there is a significant area where the Government do not directly control total expenditure. In the case of many programmes we determine the rates of benefit or grant, and the criteria of eligibility, but when that is done the expenditure depends entirely on the number of eligible applicants coming forward. Spending of that type can be controlled only by altering the rules and the entitlement, and even then that can often have only a much delayed effect. In the year just ending, in this category the benefits paid to the unemployed, the expenditure on special employment measures, and the cost of agriculture support, have all been higher than expected.

The plans in the White Paper for the coming year show the net effect of the cuts that we have made coming through on a larger scale, being partly offset by the continuation of the upward pressures that have affected expenditure recently. We have to allow for higher spending on many of the categories of expenditure that I have just described. Other increases are the result of deliberate decisions. For example, the nearly £1 billion of extra expenditure on special employment measures and redundancy fund expenditure next year reflects in part the decisions that my right hon. Friend the Secretary of State for Employment announced last November. We have increased the limits on nationalised industry borrowing next year by £1¼ billion and have allowed £¾ billion for British Leyland and Rolls-Royce.

The net effect, set out in the White Paper, shows the planned total for next year at very much the same level as the expected outturn for this year. But there are two further additions not allowed for in the White Paper that will add to the planning total in the coming year.

The first addition is a substantive one. My right hon. and learned Friend the Chancellor announced yesterday two changes that will add about ⅓ per cent. to the planning total. We have increased the contingency reserve to allow for developments since the White Paper went to print. They include not only the withdrawal of the accelerated pit closure plan but the real improvements in certain benefits announced by my right hon. Friend the Secretary of State for Social Services earlier this afternoon. We have increased the external financing limits of the electricity and gas industries to allow for the changes in energy prices to industrial customers.

The second addition is essentially a bookkeeping entry. It will be necessary to adjust the external financing limit of the British National Oil Corporation to allow for the fact that the new North Sea oil tax, and changes in existing reliefs, will reduce its profits. Similarly the limit for the British Gas Corporation will have to be adjusted to take account of the gas levy. Although those will add to the planning total, there is obviously no net effect on the PSBR. The amount of money lost to the Government from one pocket will return to another via the new tax and levy.

The figures in this year's White Paper for 1982-83 and 1983–84 show substantial reductions in spending in real terms. The House is entitled to ask how, if spending is not to fall next year, it can credibly be expected to fall in the following year, and to fall even more in the year after that. The principal answer to that question relates to the time scale of much public spending. When a change in plans is made, it takes time to reach its full effect. It is for that reason, that our plans presented to the House yesterday are realistic, showing smaller cuts in the earlier years, and larger ones in the later years. For that reason, the plans for the later years can realistically show a significant decline compared with this year and next year. The cuts are only slowly coming into full effect. Some have not yet begun. For instance, the earnings-related supplement to short-term benefits will end in January next, and in other cases they build up steadily—for example, the reductions in housing and in spending on education.

With regard to spending in the areas where it has actually increased in the past year, future plans take full account of the new pattern. They now provide for a much more realistic level of support for employment and industry during the recession.

None the less it is disappointing that the recessionary effects and other increases have meant that even in 1983–84 we shall not have secured all the reduction in spending that we had hoped for last year, so we shall be having a very careful look in the coming annual survey to consider whether more can be done to offset the increases that have occurred and make more progress towards our original targets over the next three years.

Mr. loan Evans (Aberdare)

Will the right hon. and learned Gentleman give way?

Mr. Brittan

No. I hope that the hon. Gentleman will forgive me, but I am about to finish. I would have wished, if there had been more time—though I assure the House that I do not intend to do so—to say more about the major improvements in spending control that my right hon. and learned Friend announced yesterday. The move to cash planning will, in my view, have a significant effect in injecting a new air of realism into public spending. The major improvements in spending control go a long way towards securing the expenditure reductions that we have agreed and thus to underpin the fight against inflation. Together with the measures taken to encourage enterprise, to which the right hon. Member for Stepney and Poplar did not refer, they furnish us with the springboard for economic recovery.

The Opposition have been full of predictions of gloom. I see no grounds for such despair. In the Red Book the Government's projections for the economy suggest that the fall in output is all but over and that GDP will begin to grow again—albeit slowly—in the second half of this year. I very much doubt whether independent economic forecasters will suggest anything very different—the consensus of their views has certainly pointed in the same direction. The Central Statistical Office's longer leading indicators point to some recovery within months. The CBI and Financial Times surveys of business opinion also suggest that we may be reaching a turning point.

The problem facing us today is, perhaps, that people's awareness of the economic situation tends to lag behind events. Their pessimism is at its greatest just when it is becoming clear that things are changing. Naturally, they will be sceptical initially. Inevitably, too, the cries for emergency action will be strongest at just the moment when a policy of all-out expansion, as advocated by the right hon. Member for Stepney and Poplar, would overdo what is in any case in prospect.

Dr. Jeremy Bray (Motherwell and Wishaw) rose

Mr. Brittan

No, I shall not give way. I well remember a not dissimilar situation in 1972. Just as it does today, the case for the expansionery Budget introduced then rested, in large measure, on the fear that the economy would, if such a Budget was not introduced, spiral downwards indefinitely. Yet, as we now know, the spontaneous process of expansion had already set in by the time that that Budget was introduced. We are determined not to make that mistake again.

6 pm

Mr. David Steel (Roxburgh, Selkirk and Peebles)

It is a great pity that the Chief Secretary moved from his post in the Home Office where we had learned to respect the work that he was doing. I find, looking round the Government now, that the minority of the Cabinet that still supports the current economic policy is divided into two sections. There are those, such as the Secretary of State for Industry, the Secretary of State for Trade, the Financial Secretary to the Treasury and the Prime Minister herself who actually believe in the policy. They expound it with great conviction. There are those, such as the Chancellor of the Exchequer and, I suspect now, the Chief Secretary to the Treasury who accept their lawyers' brief and plough through it regardless. It is totally unconvincing. If they were honest with themselves, they would join ranks with the majority of the Cabinet who do not believe in it. The Minister for Industry and Information Technology, in a phrase on Monday that took away the breath of the House at the time referred to the dead hand of the British Treasury."—[Official Report, 9 March 1981; Vol. 1000, c. 620.] Some hon. Members wondered at the time what he meant. He clearly had foreknowledge of the Budget that the Chancellor was to unveil the following day.

I want to make it clear from the start that we in the Liberal Party start from a position of basic disagreement with the Treasury Bench about the public sector borrowing requirement on which the Chief Secretary dwelt for so long in his speech.

It seems to us incredible that the Government start from the proposition that a £10½ billion PSBR next year is sacrosanct when, last year, the forecast of £8½ billion turned out to be £13½ billion. When one considers that of the new sacrosanct target of £10½ billion, the total cost of unemployment—in terms of benefits and loss of revenue—is £8 billion, one can see how foolish that commitment is.

The Chancellor said yesterday that the Government must borrow less. I wrote down the words he used. The question arises: borrowing less for what? Surely, what matters is the purpose for which the Government are borrowing money. We are indebted to the CBI for hammering away at the fact that, a decade ago, one-fifth of all Government expenditure was on capital projects whereas, last year, only one-tenth of Government spending was on capital projects. Surely, this is what is wrong. It is not that the Government are spending money but that they are not spending money in the right way. It seems contradictory for Ministers to go around the country urging industry to invest in the future when the Government themselves are refusing to do that very thing in the public sector of industry. They do not seem even to accept the economic fact that forward public expenditure of itself will create demand in the private sector, help with the general picture of the economy and reduce the level of unemployment.

When one looks around the public sector, one sees the need to modernise the railways. One sees the deterioration in the telecommunications industry. It is noticeable to everyone that even the telephone system is deteriorating year by year. One hears the complaints of local authorities about the sewerage system. The evident needs of the road system show the great opportunity that exists for expansion in the construction industry. One sees the need for modernising coal mines in order to close down older mines. All these areas cry out for public expenditure that would benefit this country in the long term, and provide jobs and help private industry in the short term.

Where the Government show most criminal neglect is in relation to public spending on energy conservation. There is great scope for helping the long-term structure of the economy by reducing our consumption of energy through encouragement of a massive expansion of the insulation programme in domestic dwellings and public-buildings, not to mention possible public expenditure on schemes such as the Severn barrage.

The first basic criticism of the Government is that they simply look at the total of public spending without analysing its content. They have failed to embark on the kind of imaginative programme that would have a short-term effect on unemployment and, at the same time, a long-term effect on improving the structure of our economy. One of our basic disagreements with the Government is that, whenever alternative proposals are made—whether by the Liberal Party or anyone else—we are met by the accusation from the Government that we somehow want to weaken the battle against inflation.

The Chancellor was at it again yesterday. The right hon. and learned Gentleman stated: Some have urged that I should abandon the battle against inflation as our top priority".—[Official Report, 10 March 1981; Vol. 1000, c. 759.] No one has urged the Chancellor to do that. It is a figment of his imagination. If proof was required, one has to remember that we now have the Treasury model, the great computer in the sky or wherever it exists, into which everyone is welcome to feed proposals. The Liberal Party, like the Treasury itself, has made use of the Treasury model. We have fed our Budget proposals into the great machine which the Financial Secretary controls. The Treasury Bench can no longer accuse those with alternative policies of inflation-mongering when the Treasury model itself indicates that our proposals are not inflationary. I believe that the Treasury Ministers are the last people to go around tarring everyone with the brush of wanting to give up the battle against inflation whenever we criticise Government policy.

Even the limited exercise of making use of the Treasury model takes no account of other policies that should be pursued to help to counter inflation. I refer particularly to the need for an incomes strategy—I use the word"strategy" advisedly. Within the concept of incomes strategy, many interesting ideas are now being peddled on incomes policies. As a party long committed to incomes policy, we are willing to look with fresh eyes at the new proposals as they come forward, whether from Mr. Aubrey Jones, Professor Meade, Mr. Phelps-Brown or anyone else. The Government must come to their senses and recognise that, without a change in the structure of wage bargaining and some component thinking on incomes increases in the battle against inflation, they are on the road to ruin.

The Government rely on the idea that there is a new sense of realism in pay bargaining. Of course there is a sense of realism. People will not press for higher wages if it means that their company will go bankrupt. They will not press for higher wages if they know that the alternative is to join the ever-growing dole queue. That is no solution to what happens when, as even the Government must hope, the economy turns round and instead of men chasing jobs, we have jobs chasing men. They will have done nothing in the meantime to change the inflationary nature of wage bargaining. They simply say that they will rely on free collective bargaining. When the upturn comes, if it comes, the floodgates will open again and we shall be back on the same old cycle of inflation.

I cannot understand why, when the Government are engaged in a fresh exercise to look at the machinery for pay determination in the public sector, they will not open their minds to the fact that for the future health of our economy and sustaining the battle against inflation, they need also to look at various proposals for getting a consensus on the control of incomes. I believe strongly, and my party has long taken the view, that we shall not get an incomes policy accepted in this country unless we change the nature of industrial relations and the climate within which incomes policy is being introduced. A great part of Liberal thinking on incomes policy is that we must devise a scheme that is flexible enough to give employees a share of the value added in their companies so that the process of wage bargaining is related much more directly to the out-turn and improvement in productivity throughout the economy.

At The Guardian lunch in the Mansion House today the Prime Minister, in an interesting and abrasive speech, said that she found it difficult to persuade people to look beyond next week's pay packet. She will not persuade people to do that by a series of lectures and hectoring. There must be a change in basic industrial attitudes if that is to be achieved.

The right hon. Member for Stepney and Poplar (Mr. Shore) said that wages were rising faster than productivity. That has been said in every part of the House for many years. It is one of the basic, endemic problems in our economy. Until we address our minds to that problem, the Government's long-term economic programme will not succeed. The Government are shutting their minds to that issue. That is why we want to see a massive extension of the concept of industrial partnership—in the structure of companies, the development of profit sharing, the development of wider share ownership, the removal of the anomalies mentioned by my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) in his speech yesterday and the companies legislation that inhibits the development of co-operatives.

We want not only the modest investment scheme for new businesses that the Chancellor announced yesterday but a development more on the lines of the Loi Monory in France, where each person is encouraged to invest through tax incentives. That is the way to achieve a climate of opinion in Britain to the effect that investment, productivity, and competitiveness are important. That cannot be preached from political platforms. It must be built into our industrial structure. We want a complete change in the structure of our industrial and economic: framework to create such a climate.

I turn to my specific criticisms of the Budget. The failure to do anything about the national insurance surcharge is remarkable. The Government are fond of telling people that they have priced themselves out of jobs. I am advised that the cost of national insurance for employers and employees is 21 per cent. of the wage bill. It is the Government who are pricing people out of jobs. The CBI was right to demand a reduction in that area.

It is astonishing that the Government did not take the opportunity to remove the heavy fuel duty, which is a comparatively low revenue gatherer but which adds to basic industrial costs. The massive increase in the price of petrol, well beyond indexation, was especially surprising because of the Chancellor's remarks during debates on the 1977 Finance Bill. At that time we were fighting the imposition of a 5p increase on petrol by the Labour Government. The Chancellor said: This is a selective tax … it is deliberately biased against those who have no option about the method by which they travel to work. It is deliberately biased against those living in rural areas."—[Official Report, 9 May 1977; Vol. 931, c. 937.] That was said by a man who in his first Budget increased the price of petrol by l0p and who is now increasing it by a further 20p. The man who objected to a 5p increase has now made a 30p increase. Nothing is more demeaning, not only to the Chancellor but to the whole process of politics, than to have people saying one thing in Opposition and then doing the opposite sixfold when they are in Government. It is also surprising that, given the opportunity to encourage conservation of energy, the Government have picked on mopeds and motor cycles as an increased source of revenue.

On the failure to index the personal allowances for income tax, it has not been sufficiently stressed that the Chancellor is taking from us an additional 3p on the standard rate of income tax—in other words, he has undone precisely what he did in his first Budget. There was the great claim that the Conservative Party, if returned to power, would reduce income tax. This additional 3p is to be taken in a more illusionary way so that the effect is not as noticeable as putting 3p back on the standard rate. The amount of money is the same, but the method is open to more criticism because it is more regressive. We have already said that some individuals, especially women pensioners, will be brought into the tax net when the pensions are increased in November.

I do not know why the Financial Secretary should take all the blame for the U-turn. He was not the only member of the Government who was party to the Rooker-Wise amendment. The Minister of State, Treasury served on that Committee, as did the Secretary of State for Energy and the hon. Member for Eastbourne (Mr. Gow)—the Prime Minister's poodle. They all voted for the principle of indexation of personal allowances. I have an even higher authority. The Chancellor must have forgotten what he said to the House in his 1980 Budget Statement. He spoke about the temptation to increase the personal allowances so that they fell some way short of the rise in prices during 1979. He said: this would have a number of undesirable effects. It would lower the starting point of income tax in real terms, compared with a year ago. It would increase the number of taxpayers. It would narrow the gap between tax thresholds and the main social security benefits, and it would impose particularly heavy burdens on those with the smallest incomes. All those effects would be most undesirable."— [Official Report, 26 March 1980; Vol. 980, c. 1474.] If it was undesirable in 1980 to index personal allowances some way short of the increase in prices, surely not to index them at all is monstrous. The right hon. and learned Gentleman is not U-turning—he is standing on his head spinning somersaults.

This is the third Budget in a row in which the Chancellor has increased the overall take of tax from the public. In a telling phrase that comes out time and time again, Ministers say that so-and-so—in the Minister's speech today it was the motorist—must be among those who must be sacrificed to obtain a soundly based economy. Where is the evidence of that soundly based economy, for which we are all being sacrificed? What has happened? We remember the election posters on all the hoardings showing great queues of unemployed, and all the Saatchi and Saatchi cinema advertisements. The queues are now twice as long.

We remember the commitment to reduce taxation, especially income tax. That commitment has been reversed in the Budget. The Government have increased inflation. They claim that it is now coming down, but they put it up in the first place. They have reduced our industrial base. They have created a socially and geographically divisive series of economic measures. They are sticking to their dogmatic monetarism. That policy no longer has any support. The all-party Treasury Committee has denounced it. Half of the Cabinet has denounced it. The CBI has denounced it. Even the Daily Express editorial has denounced it. Where are the Government's friends now?

A sad feature is that the Opposition are still not putting forward their full programme. The right hon. Member for Stepney and Popular was brilliant in both his criticism and his analysis of the Budget, but he was short on solutions. He put forward one or two solutions with which I agreed, but we did not hear from him the demand that we should make our position much worse by leaving the EEC. We did not hear from him the demand that we should massively extend State ownership, although he made a passing reference to it. His feelings towards an incomes policy were drawn out only through an intervention by a Conservative Member. Nor did we hear from him about the commitment and advice that he has had from the Cambridge School of Economics that the import barriers would have to be 70 per cent. across the board to be effective. I do not believe that there is any future for Britain by going in the isolationist, protectionist, State-controlled direction.

It is because of a disastrous and failing economic policy from the Government, coupled with the lack of an acceptable alternative from the Opposition, that we must now look for a fresh strategy that involves the spreading of both power and wealth in industry. I hope that that will come from the new grouping in politics. I hope that we shall hear more about that not only from my hon. Friend the Member for Colne Valley (Mr. Wainwright) on Monday but from the right hon. Member for Stockton (Mr. Rodgers) tomorrow. I believe that that is what the public are demanding. It is what they are entitled to get. I am determined that they shall have that alternative put to them before too long.

6.19 pm
Mr. Edward du Cann (Taunton)

Not for the first time I find myself agreeing with a number of the points made by the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel), the leader of the Liberal Party. I shall come to those points in a moment. I agree especially with his criticism of the right hon. Member for Stepney and Poplar (Mr. Shore), the spokesman for the Opposition. Although he was cheered mightily by his Labour supporters, and although he is a man whom we all respect and like, he had not a single constructive word to say about alternative policies. That was remarkable and striking.

Most of today's speeches, including that of my right hon. and learned Friend the Chief Secretary to the Treasury—I believe that it was his maiden speech at the Dispatch Box in his present capacity and the House wishes him great good fortune and success in the heavy and responsible work that he has to do—have been concerned with inflation. My right hon. and learned Friend the Chancellor of the Exchequer is entirely right to maintain as his chief objective ensuring to the utmost of his ability that we bring about the reduction of inflation. There are other objectives, but that remains paramount among them, and so it should. Inflation is a scourge. Inflation is disruptive of society. Inflation can destroy the social fabric of a nation. We came a short while ago far too close to that precipice. I have supported my right hon. and learned Friend strongly in that policy and I support him now. I shall support him and his colleagues in future.

It is right for the House and the nation to rejoice in the success that the Government have already had. The rate of inflation is substantially less than it was. In addition, industrial relations when measured in terms of strikes appear to be vastly better than they were under the previous Administration. We have a strong balance of payments and there is undoubtedly a new note of realism abroad in our nation. These are great gains and they must be held.

There is much in the Budget to approve and to applaud, not least the substantial catalogue of help for small businesses that occurred in this Budget and the previous one. We should approve and applaud the work that is being done for the disabled. Each of us can easily find features to dislike. I dislike the idea of an index-linked gilt-edged security. I dislike the incursion of the State into the private savings sector.

Like the budget or loathe it, none can deny the remarkable courage of my right hon. and learned Friend in producing it—[Laughter]. I wish him every success. The laughter to which we have been privileged to listen confirms that one of the most unattractive aspects of our Budget discussions, whether in the Chamber, on television or on the radio, is the way in which to so great an extent partisan or sectional interests are ground. The speech of the right hon. Member for Stepney and Poplar was notable from that point of view as was, to some extent, the speech of the right hon. Member for Roxburgh, Selkirk and Peebles. I did not know that the Liberal Party's proposals had been fed into the Treasury model computer. I shall be interested to read any material that has been published. It sounds rather like the maiden being fed to the dragon. I only hope that she enjoyed the experience.

We must look much more widely at our nation's problems and our place in the world and try not to adopt the usual attitude of"What is in it for me?" or"What is in it for my party?". I approve strongly of the medium-term financial strategy. The Treasury and Civil Service Committee endorsed it. It was a bold concept. It is undoubtedly right for the Chancellor of the day to provide an aim and to state plainly his target so that the nation may be aware of it.

The Treasury and Civil Service Committee has commented on the medium-term financial strategy and its implementation, but not quite in the way that the right hon. Member for Roxburgh, Selkirk and Peebles suggested. I was surprised that the Chancellor did not refer to that text more. Like it or dislike it, that examination—taking evidence from distinguished academics and practical people at home and abroad, from the Chancellor and from the Governor of the Bank of England—is probably the most serious examination of economic policies as currently practised in the United Kingdom that the House, through its representatives, has undertaken. It surely merits discussion.

There was an earlier matter on which the Treasury and Civil Service Committee reported. I hope that the report was of help to the House. The Committee reported one year ago that it believed that the assumptions underlying the medium-term financial strategy were not well founded. I quote as one example the proposal that it would be possible to turn round the finances of the nationalised industries over the period of the strategy by about £2½ billion. The Committee stated that it thought that as a result of that of the Government's measures a disproportionate burden would fall on manufacturing industry. The implication was that performance in investment and in the reduction of unemployment was likely to be unhappy.

The Committee pointed out that it was absurd to award salary increases in the Civil Service of about 25 per cent. while the Government purported to have an 18 per cent. cash limit. The Government took prompt action and I hope that they will continue to be resolute. I am sorry that the warnings given a year ago were not heeded. It is as a result of that that we have the problems of today.

The chief problem lies in the realm of public expenditure. That is what the Budget is all about. The House would find it worth while giving some attention to the second paragraph of the Red Book, to which my right hon. and learned Friend the Chief Secretary referred. He used almost the same words as appear in the Red Book.

The second and third sentences of the second paragraph of part II of the Red Book state: But the projected level of public expenditure implies a tax burden significantly higher than the Government would wish. For this reason the Government regards the level of public expenditure as requiring the most serious attention during the 1981 survey. When I wished my right hon. and learned Friend good fortune, that was not a mere politeness. His task is perhaps the most significant of any in the Government at present. Public expenditure has not been controlled by the Government in the past. That is why the Chancellor is in such difficulty. That is why he is almost having to scrape the barrel to raise revenue. I do not envy him his task. We should support him most strongly because I believe that he had and has no alternative.

We require the House and the nation to face the facts of the world situation in which we are having to trade and exist. The Chancellor referred to the problems stemming from the increase in the price of oil, which he observed has increased so substantially over the past several years. That is not the only problem. The whole context is one to cause us grave concern.

There is a world recession. At any rate, world trade is not growing as fast as one would expect. It is tragic to relate that there was no leadership, especially at the time of the Carter Administration, in the free world. That is what we must develop. I hope that we may give it ourselves if we do not find it in the new President.

Secondly, there are the fearsome implications of technology. The House knows all about them. Thirdly, there is the immense competition from the new"Japans" of this world as the manufacturing base shifts from North America and Europe to the Far East.

We have our structural problems, which we talk about so much in the House but do not always face. Over the years we have hardly increased production at the rate that we could and should. Let us be plain about the position at home. The domestic economic situation is grave. It is intensely worrying. Anyone who is engaged in manufacturing industry or commerce knows that to be a fact. The level of unemployment today—never mind what some say it will reach—is intolerable. The reduction in manufacturing output and capacity in our nation is unacceptable. Further, it is worse than it appears on the surface. If it were not for the temporary short-time working compensation scheme and the excellent work that the Government are doing to try to help young people, the situation would be much worse.

If one talks to company managements—as right hon. and hon. Members must do frequently—it becomes easily apparent that it is likely that within the next 12 months many of the most significant companies in the United Kingdom will face very real problems indeed. Some may even find themselves unable to survive. That is the position. Many British companies are kept alive today and keep people in work only because of their overseas earnings.

I will not accept that the disasters—for that is what we have in human, corporate and community terms—are inevitable. We should mount a programme for national economic recovery, a programme to restore—and it will not be easy—higher levels of employment and national prosperity. The base must be a greater degree of industrial productivity. The first responsibility is the Government's, to set the scene and capture imagination. So much of the problem is psychological. I abhor the climate of gloom. It is the Government's responsibility also to declare objectives.

May I make practical suggestions and give examples of what I believe might be done? People may agree or disagree with me, but let us work on practical ideas. As the right hon. Member for Roxburgh, Selkirk and Peebles said so wisely, by far the largest share of public expenditure is taken by current spending, of which far and away the greatest item is wages. It is staggering how the proportion has risen in recent years. I shall weary the House with a few statistics. In the fiscal year 1974–75 the amount of current spending was under 80 per cent. and capital expenditure was 21½4 percent. By 1980–81, current spending had risen to 89 per cent. and capital expenditure had fallen to 11 per cent. The cost of administration rises, yet there is proportionately less construction, fewer capital projects and fewer—to use the Prime Minister's striking phrase—real jobs. That we must change. We must spend far more on real things and far less on administration. That is the first change that I would urge on the Government. I do not argue for cuts in public expenditure. They are sterile things to talk of on their own. However, let us spend what we spend more wisely.

For a start, let us consider the cash limits, which are now assimilated with the Estimates as a result of the work of the House as a whole and the devoted work of the Treasury. Let us divide the cash limits into the amounts spent on capital items and the amounts spent on administration so that we can have a close look at what is happening.

Secondly, there is something that the Government and the House can do together. We have in front of us a report from the Public Accounts Committee under the chairmanship of the right hon. Member for Heywood and Royton (Mr. Barnett). It recommends the establishment, broadly speaking, of a national audit service and a re-emphasis of the work of the Exchequer and Audit Department into the area of value for money. Let us back ourselves up. Let us give ourselves a tool that we can put to work to see that taxpayers' cash is better spent.

Thirdly, let us consider the business of Supply. We have set up the Procedure Committee under the chairmanship of my right hon. Friend the Member for Worthing (Mr. Higgins) to look into Supply. The whole House knows how careless we are in voting money. Let us accelerate the establishment of a systsm that will enable Back Bench Members and Select Committees in particular to examine Supply more meticulously than before. Let us get a grip on what is spent. Let us not complain all the time that the Government do it or do not do it. Let us take over some of the responsibility ourselves and give ourselves the machinery to do that. Let us practise what some of us have preached for some time.

Fourthly, there are matters that the Government and the City of London can do together. I should like to see my right hon. and learned Friend the Chancellor set up a special section in the Treasury, or perhaps it can be done in the Prime Minister's office. Let instructions go to Departments to send in all the capital projects that have been lying in pigeon-holes and on shelves for a very long time. Right hon. and hon. Gentlemen know them as well as I do—the Channel tunnel or Channel bridge, the Severn barrage in my part of the world, electrification and bridges. There are a hundred schemes. Let them be examined by the people in the City of London.

We boast that we have the finest, most effective and most efficient financial apparatus in the world. Let us see which projects can be privately funded and then get on with them. It will not be inflationary or add to the bills that we should have to meet if it were nationalised industries or the Government who were spending the money. Let us raise the money privately. There is plenty of money in the pockets of the people through which we can work our way out of the depression.

Then again there are matters that the Government alone can do. I was most interested in the passage in my right hon. and learned Friend's speech yesterday when he said how heavy now was the burden of social services—£27 billion, more than one-quarter of total Government expenditure. What will we do about that? None of us wants to see it cut; all of us argue that more money should be spent if possible, yet what do we have? We have set up the most complex, wasteful and incomprehensible system of transfer payments in the world. We all know, again, that too much money goes to the administrators and too little very often to those who should be in receipt of benefits. Let us have an immediate inquiry into how we can simplify the system and make it easier to understand, so that those who deserve benefits the most can get the most.

Sixthly, the Government, whom I so strongly support, must make a better effort to get a grip on nationalised industries. The amount of money that we are giving so carelessly, let us say to the British Steel Corporation, is a disgrace. It would have been wiser to have appointed a receiver some time ago. We should have sold off large parts of the industry. As it is, we are perpetuating difficulties for ourselves. Equally, it is a disgrace that we have such huge overmanning in British Airways. Let us go for the nationalised industries much more strongly. Let us sell off everything that we can. Let us reduce the difficult areas to more manageable proportions.

Seventhly—and here I so much agree with the right hon. Member for Roxburgh, Selkirk and Peebles when he talks of wider share ownership, profit-sharing and so on—I hope that the House will not mind my boasting that I began the modern unit trust industry in this country and equity-linked life insurance contracts. I am a profound believer in spreading the ownership of property. I hope that it will not be very long before we have comprehensive legislation from this Government to make that acceptable on a much wider scale. Let us mobilise the energy and enthusiasm of our people into a crusade to begin the economic regeneration of our country.

Amidst all the gloom, I find myself an optimist. I still believe that our managers, technicians and workpeople are the most conscientious, loyal and competent in the world. However, what we need above all is leadership. I look to my right hon. and hon. Friends to give it.

6.38 pm
Dr. Jeremy Bray (Motherwell and Wishaw)

We have listened to an admirable speech by the right hon. Member for Taunton (Mr. du Cann). If I may say so, it represented a truly Tory and pragmatic view of economic policy of a kind which we used to hear from the Front Bench and which perhaps we shall hear again but which we had not heard hitherto yesterday or today. The practical suggestions that he made would command a great deal of agreement on the Opposition Benches, particularly increased capital spending on major projects in the public sector that could be financed privately or publicly. Never mind, let us get on with them.

Hon. Members on the Select Committee on the Treasury and Civil Service would also like to pay tribute to the right hon. Gentleman for his chairmanship. He guided a pretty rebellious crew through a detailed, searching and hard-working examination, which came up with as balanced and impartial a summary of the merits and difficulties of monetary policy as we are likely to get in this Parliament or any national Assembly anywhere in the free world which is considering such difficult problems. Having put in all that effort in the Select Committee, we are anxious to see the lessons drawn in the House and in the economic policy of the Government.

I hope that we may first dispose of the tabloid argument that we still hear in speeches from the Chief Secretary, who has perhaps not had time to learn better, as well as from the Prime Minister, the Chancellor of the Exchequer and others. We hear arguments about suitcase money. The Prime Minister might reflect that she has printed more money than any previous Prime Minister. In percentage terms, she has printed a greater increase in the money supply than any Prime Minister since her right hon. Friend the Member for Sidcup (Mr. Heath). The intention to do anything in particular about the money supply is very different from its achievement. The Prime Minister, in pursuing policies of the kind that she has pursued, was almost inevitably bound to lose control of the money supply, as has turned out to be the case.

There is then the argument that one cannot spend one's way out of a recession and that one cannot create real jobs by Government spending. In the Select Committee, we learnt to have a degree of respect for the Treasury model. We learnt that it has been more accurate in predicting the course of events than Ministers have been and more accurate than many outside and more superficial attempts to describe the economy.

But in order to be impartial, I quote recent evidence from the London Business School model—if that is regarded by Conservative Members as a more dispassionate source of evidence—on the impact of an increase in public spending of £100 million per quarter. Over the first four years, far from leading to no increase in total spending, it leads to an increase in total spending of well above £100 million per quarter. This means that in fact there is crowding in. Private spending increases along with public spending, so that one creates jobs not only in the public sector but in the private sector. That is the evidence of the London Business School model, as produced at a Social Science Research Council seminar last week.

There is then the tabloid argument that one must first tackle inflation and only then can one tackle unemployment. I shall return to that in a moment. But let us remember that that does not lead to the conclusion that when one has dealt with inflation one has necessarily restored full employment. One may have wrecked the economy in one's attempt to cure inflation. The practical problem is not that one should deal with inflation first and then go on to deal with unemployment but how one can tackle both so that inflation can be brought down and kept down while full employment is restored. The Government have not begun to think about that problem and they are now standing on the edge of a precipice as they worry themselves stiff about the consequences of a major fall in the value of the pound, which is likely to occur in the next few weeks or months.

On that tabloid level, I hope that Ministers will come off it and stop trying to kid not only their own Back Benchers, who have ceased to believe them, but the country about the kind of dogma that they have been offering.

There is then a more serious level of argument from Ministers and Conservative Members which, without wishing to be derogatory to the Financial Secretary, I would call the journalistic argument. That argument lay behind the first memorandum of evidence from the Treasury to the Select Committee, which exposed to the Select Committee the fact that the Treasury was not really thinking about the problems. There was an enormous contrast between the quality of the initial evidence to the Select Committee from the Treasury, which was superficial and resembled the kind of stuff that one used to read from the Financial Secretary in his journalistic days, and the evidence from the Bank of England which was carefully and cautiously argued and related to the technical arguments in the literature. The same applied to the arguments from foreign central banks, notably the Bundesbank, from foreign economists of great distinction such as Milton Friedman and James Tobin as well as from other Continental, American and British economists.

That tabloid argument, souped up to the journalistic level, which we saw in the Treasury evidence was really the clue that did the damage to the Government's case in the Select Committee. We burrowed away, and the conclusions that we reached are spelt out in the latter half of the report. They are not spelt out in the conclusions chapter, which represented merely the horse-trading in the Committee in its final sessions, in which inevitably, one would not expect proper treatment of the arguments. Chapters 6 to 9 contain the guts of the argument on monetary policy.

First, on the question of PSBR, interest rates and money supply, it is apparently the case that increases in the PSBR are generally accompanied, followed by or associated with increases in the money supply. But what are the consequences of this in a cycle? If there is a cyclical increase in the borrowing requirement because of increased unemployment benefit and a fall in tax yields, the borrowing requirement of course increases above expected levels. In many circumstances, the money supply will increase as well. But if the Government have a money supply target, they must then either increase taxation or cut public spending in order to bring the money supply back on target. This therefore switches off the automatic stabilisers and destabilises output. That is what the Chancellor did yesterday in the Budget. At a time when, as he thought, he needed to bring the money supply back to his target, he actually cut the real economy in order to cut the PSBR in order to cut the money supply.

A more realistic policy is to say that, if we have inevitable cyclical increases in the borrowing requirement, there will be no long-term effect if they are accommodated in the money supply target as well. But the Chancellor did not have the courage or the insight to do that yesterday.

In the next chapter, there is the argument about how the money supply works in an open economy in relation to the exchange rate. The international monetarist argument was that tightening the money supply increased the exchange rate and accelerated the impact of monetary policy on the domestic economy and got a quick response in prices and wages so that there was no major loss in output.

Experience has been precisely the contrary. The effect of announcing money supply targets is to have a colossal impact on the exchange rates, sending it roaring away, to create total uncompetitiveness for manufacturing industry and thus to cause a catastrophic fall in output. That fall in output becomes associated with an inventory recession because interest rates are increased in the attempt to enforce the tight money policy. Therefore, far from international monetarism smoothing the course of monetary policy, it makes it impracticable in a free society and an open economy.

There is then the question of the costs of monetary policy. What is the relative effect upon output by comparison with its effect upon inflation? We heard from the Chief Secretary today that if one increases public spending one relaxes the monetary target, and this has a far greater effect on inflation than output. Again, the evidence is precisely the contrary.

When the Treasury saw its mistake in being offhand and superficial in its treatment of the Committee and sent us a paper on the background to economic policy, one paragraph included a reference to the only estimate that had been given of the costs of monetary policy. That was a paper by Laidler, who in his evidence to the Committee dismissed his own work as"back of an envelope" calculations. Nevertheless, that was solemnly quoted by the Treasury as the only estimate by any economist which supported the Government's gradualist policy.

The Laidler estimate was that it needed only a 1 per cent. increase in unemployment for one year to reduce the continuing rate of inflation by 5 per cent. That is marvellous. Had we been able to reduce the rate of inflation by 10 per cent. with a couple of percentage points increase in unemployment for just one year, heavens above, that would have been a good bargain even though it would have been an unpleasant cost to pay. If the Government really calculated that it needed only a 2 per cent. increase in unemployment in one year to bring down inflation by 10 per cent., we can understand why they were such enthusiastic monetarists.

However, in that same paragraph, the Treasury went on to refer to evidence in an annex which gave its own estimate of the output costs of reducing inflation. There the picture was entirely different. It showed that, in order to reduce inflation by just 1 per cent., one had to sacrifice 4 per cent. of output for one year and 2½ per cent.-years of unemployment. Therefore, in order to achieve the 10 per cent. reduction in inflation, one would need not the 2 per cent. in unemployment which Laidler estimated, but 25 per cent.-years of unemployment—that is, 5 per cent. for five years or 10 per cent. for two and a half years, however one takes the dose.

That twelvefold error in the cost estimation of monetary policy was the fundamental miscalculation which the Government made in espousing a monetary policy.

It could be admitted that, even though the Government had miscalculated, they had a policy and they would stick to the money supply targets. The Friedman get-out—we heard it again during his pre-Budget assessment on"Panorama" on Monday—is that the blame for the loss of control of the money supply last year could simply be placed on inadequate techniques for the control of money as practised by the Bank of England. That is the same old lame excuse which Friedman has thrown at every central bank which has attempted monetary policy.

The House will find the detailed argument in chapter 9 of our report, which says that if we try to follow monetary targets in an open economy, with competitive banking and no controls on capital movements, we have an incompatible set of objectives as a result of which it will go wrong. We saw how the attempt to use the corset went wrong, in that there was the leak into commercial bills overseas. But the argument now is that money-based control will do the trick.

The House should think about that for a moment. Money-based control, by controlling the deposits of the clearers at the Bank of England, will effectively create a limited supply of licences to the banks to create money. That limited supply of licences will be"bid up" in a free market to whatever price or interest rates are needed for each individual bank to achieve the necessary ratios to cover its own deposits.

If that puts up the cost of banking in this country too much and people can borrow more cheaply overseas, those people will promptly switch their banking overseas. Already the standing arrangement by the clearers in this country is that the moment any mandatory money-based control system is imposed their major depositors and major accounts will switch to the European branches of the British clearers. The computer systems, forms and everything else are already set up in order to do that. Therefore, money-based control will not create control of the money supply. That is the argument in a nutshell—in those four chapters—and that is why over the weekend the press said that there was a remarkable crystallisation of opinion last week.

We saw the logic underlying the Government's monetary policies effectively destroyed by the painstaking work of an all-party Committee of this House. Where does that leave us in terms of the Government's political position? It leaves a barrage of intense disbelief on the Conservative Benches as to what Conservative Ministers are doing. That is obviously an acute political problem for the Conservative Party, and I wish it luck in solving it.

As to the practical effect of yesterday's Budget, we have not seen its like since the battle of the Somme when the cream of the nation poured over the trenches to be mown down by the machine guns of the opposite side. Conservative Members will be mown down in their constituencies in the next election—gallant, but not very Tory. Nevertheless, to do that by pushing first women, children, young people and the sick over the top of the trenches so that it is they who catch the fire is despicable.

6.57 pm
Mr. John Browne (Winchester)

Yesterday afternoon, the Leader of the Opposition termed this a"no-hope Budget". Personally, I think that it would have been more correct had the right hon. Gentleman termed it the"last-hope Budget". I believe that it presents us with the last hope genuinely to achieve a technological revolution based upon sound money. In short, it is our last hope of remaining a developed, technological nation rather than becoming an underdeveloped industrial nation on a base of hyper-inflation.

My right hon. and learned Friend the Chancellor has been placed in a difficult position He certainly was in presenting this Budget. A severe world recession has bitten into this country in a very big way, certainly from the second half of 1980 onwards. The United Kingdom economy is in a chronically unhealthy state. Many hon. Members, particularly Labour Members, have referred to the sickness of our economy. It is a sickness which is so bad and so deep that it could not possibly be the fault of a Government who have been in office for only two years or less. It has been the fault of British Governments for at least 20, if not 30, years. It is indeed a difficult task to turn that economy round.

Overmanning was disguised by both Conservative and Labour Parties by endlessly funding State-owned industries and by creating unprofitable jobs which had to be paid for through taxation, borrowing and, in the end, inflation.

Mr. Austin Mitchell

Perhaps the hon. Gentleman will consider this important point. With the pound at its present over-valued level, if people in large sections of British industry worked for free they still could not take those industries back to the competitive situation in which they were in 1976. The over-valued pound and our lack of competitiveness are the central problem, not the factors about which the hon. Gentleman is talking.

Mr. Browne

That perfectly illustrates my point. The £ stands at about 2.20 against the dollar; 10 years ago it stood at 2.80. In 1971 it was at a Smithsonian parity of 100 and today it is at about 82, so it is 20 per cent. cheaper than it was 10 years ago. We have been grossly overpaying ourselves over the past 10 years. It hurts to go back to a currency even 20 per cent. cheaper than it was 10 years ago. Of course it hurts. It exposes the inflation we have suffered over the past 10 years.

My right hon. and learned Friend the Chancellor had a very difficult task in planning and executing the Budget. People in general do not like reality. They like to talk about facing reality, but actually facing it is different. The Chancellor was subjected to enormous pressures, and he has produced a clever Budget which balances the aims of controlling Government expenditure and of giving a new and dynamic opportunity to British industry.

This Government have been in power for almost two years. In mid-term, Governments tend to get worried about their policies and start to turn around. Despite pressures from the Labour Party, the Liberal Party, the CBI, trade unions, nationalised industries, from within the Conservative Party and even from within the Government, I am pleased that the Prime Minister and the Chancellor resisted the temptation to do a U-turn and so throw to the wind all the efforts that have already been made. I therefore think that the Budget is not only clever but courageous, and I strongly support the words of my right hon. Friend the Member for Taunton (Mr. du Cann). It is also a Budget of reality—a painful reality. It is relatively easy for the Government to spend £1.2 billion on British Leyland, but when it comes to raising that amount of revenue they find that the whole of the excise duty increases on cigarettes, beer, spirits and wine do not amount to more than £1 billion.

I have criticisms of the Budget, praise and hopes. Whilst I support the Budget in general, I want to mention some reservations. My first reservation is on the windfall profits tax on banks. Here I declare an interest as a banker. It is nothing short of amazing to me that a Conservative Government should impose this tax on one of our international export earners. The years 1973 and 1980 were two peak periods of bank earnings, and they were both periods of high interest rates.

Mr. Douglas Hogg (Grantham)

I am interested in what my hon. Friend is saying, but does he not agree that the high profits of the banks have a great deal more to do with high interest rates than with their productive practices?

Mr. Browne

Yes, I agree with my hon. Friend; that is true, or part of it is true. He mentions what are generally termed"high profits", and that is what I am trying to illustrate. The years 1973 and 1980 were years when so-called high profits were earned. But, measured on a return on capital basis, that represents 8 per cent. Indeed, the average between 1973 and 1980 was a mere 4½ per cent. return on capital. I question whether my hon. Friend would consider that to be a high profit deserving of a virtually retrospective windfall tax. On a world basis, 4½ per cent. is uncompetitive.

This tax is most unfortunate because it sets a precedent which can, in future, be abused by taxing success and backing losers even more than we do today. It is my guess that the £400 million taken from the banks will go straight to the Department of Industry to be passed on to nationalised industries.

I am sorry that the Government turned a deaf ear to my suggestion of encouraging banks to invest large amounts of their equity funds in the equity of high-risk new ventures. I am also sorry that the banks did not seize that initiative, with the result that they now face this windfall profits tax.

I believe that the extension of the eligibility of people over 50 to purchase granny bonds is misguided. Why not extend the eligibility to persons of 18 years of age? If we are to have indexation at all, why not allow everyone to benefit from it? Extending it to 18-year-olds would have done an enormous amount to pull out of bank deposits the £5 billion of new, personal bank deposits that is now distorting M3. It would have brought the money back to the Government in a far less inflationary way. I ask the Chancellor to think about the possibility of extending eligibility for granny bonds to people of 18 years of age and, at the same time, offering old-age pensioners an index-linked annuity. At the age of 65, people are not much interested in 25 years into the future. They want money now.

The Budget is a painful reality. The pain is the price we must all pay for past Government weakness and inability to break the stranglehold of the employment cartels and so to control both the quantity and the quality of Government spending. The question is not simply how much the Government are spending but also what they are spending it on. As my right hon. Friend the Member for Taunton said, it is the difference between administration and real investment. On the one hand we have privileged trade unions which can demand wages, and on the other hand nationalised State monopolies which can charge and pay prices out of all relation to the market. They also can and do hold up technological advance, to the great detriment of our country. Monetarism is a free market philosophy. It has worked very effectively in the free market private sector, but it has barely got its hands around the public sector.

My most serious criticism of the Budget is the decision to issue a gilt-edged security linked to inflation. In general, indexation has the effect of building inflation into the system. More seriously, it reduces the will and even the wish, at grass roots level, to kill inflation. It is scandalous that the Government have taken the step of issuing an index-linked security in their own long-term debt market. It is a precedent that, I fear, will be followed and within five or 10 years many billions of pounds worth of index-linked gilts will be available, without restriction of purchaser.

Of course, it makes Government funding easier, but at what rate? It is easier now for index-linked bonds, but what about the future fixed rate market? Of course, it will help to reduce MLR. It also helps private pension funds to gain an index-linked asset, but this can be justified only because we have not killed index-linking of pensions in the public sector. It is building inflation into the system, and I fear that it will be most difficult to cure.

Secondly, it will have the effect of virtually killing the long-term corporate debt market. Generally, Government indexation has a bad effect on morale, upon expectations and thus upon business investment plans. I beg the Chancellor to reconsider the issue of that index-linked gilt-edged security.

I am sorry that there was no mention in the Budget of some restitution of fiscal neutrality between some of the financial institutions and individuals in order to encourage people to hold on to their money and to invest it in British industry rather than giving it to tax-privileged institutions.

I am sorry that there was no mention of deemed domicile, which is so destructive by threatening the tax status of many major international operators and individuals who operate from bases in this country. I am also sorry that there was no mention of any reform in the rating system.

So much for my reservations. In general, I praise and support the Budget. I was very pleased to see that this year we have given due consideration to people such as the blind and the disabled. It is a Budget of last hope and of painful reality. However, it is also a Budget of opportunity for business, particularly for new businesses which are the key to our achievement of the technological revolution and to the creation of profitable jobs, as opposed to mere jobs.

Mr. Bill Homewood (Kettering)

Will the hon. Gentleman give way?

Mr. Browne

No, because many hon. Members wish to speak.

I was pleased to see the fall of 2 per cent. in minimum lending rate. That will be worth approximately £700 million to industry. I was pleased to see the extension of stock relief and the introduction of energy relief at the upper end of the consumption market. I am also pleased that the Chancellor has agreed to allow companies to buy their own shares in the form of Treasury stock, which I have long requested. This added market liquidity for the shares of companies will greatly benefit the flow of equity money to investment in shares of British companies.

This has been an epic Budget of opportunity for new business. The revisions of the capital transfer tax and the introduction of a loan guarantee scheme, for which I have long asked, are most welcome. May I, at this point, congratulate my hon. Friend the Member for Upminster (Mr. Loveridge) on his persistence in his Committee in demanding this scheme from the Government.

All that is as nothing compared with the superb and imaginative initiative which the Chancellor has taken in the establishment of the business start-up scheme. That is a major revolutionary step in at last offering an opportunity for British industry to achieve a technological revolution. My only wish is that it should be extended to existing small companies and not restricted merely to new ones. Let us encourage genuine public, as opposed to State, ownership.

For new businesses, this is a Budget of new and unprecedented opportunities. Much overmanning has already been shed by past policy of this Government.

Mr. Homewood

They are all on the dole.

Mr. Browne

That is right, but many managements are now more disciplined and more aggressive as a result of the disciplines and the forces of high interest rates in the past and of a relatively strong pound.

Mr. Austin Mitchell

Does not unemployment have a cost?

Mr. Browne

Yes, it does have a cost, but we must achieve the shedding of overmanning and, at the same time, the transfer of labour, management and capital from old, dying and dead industries to new, high-technology industries. That is what we must achieve. The Budget will do much to encourage the start-up of such new, high-technology companies.

Government spending is the key to beating inflation. I welcome a change in the measure of Government spending from a volume basis to a cash basis. That will prove important to understanding and expectations and, therefore, to planning and investment.

However, our biggest problem is credibility. Will the Government actually control spending and will the quality of that spending be improved, with a balance being restored by lessening the amount spent on administration and increasing expenditure on genuine profitable investment? I welcome and support the Government's medium-term finance strategy, which in itself was a ground breaker; it was a correct and bold move to help restore Government credibility.

The key to success of this last-hope Budget of opportunity is to control Government spending, in quality and in quantity. The key to that is to break the stranglehold of the employment cartels on our economy. So far, the denationalisation programme has been far too shallow and timid. There has been little or no sale of State assets and no imaginative formulas for leasing State assets. So far, the programme on industrial relations has been far too weak. We still have the closed shop. We still have no voluntary secret ballot on the shop floor. We still have trade unions with privileges which are now way out of date and which prevent rather than encourage genuine free collective bargaining.

Why should trade unions be one of the only institutions in the country which are not obliged to publish accounts? They control vast sums of money, yet trade unions do not have to publish accounts, as do companies. Trade union reform, the strict control of immigration, a crackdown on law and order and a revision of the rating system represented the bulk of the so-called middle ground at the time of the last general election. That middle ground was put loud and clear to the nation by my right hon. Friend the Prime Minister and resulted in a massive election victory. People wanted a Government to govern in the national interest as a whole.

I now turn to my fervent hopes, which I believe I share with the majority of the nation. We are prepared to face reality and we are prepared to accept the pain of that reality. All that we ask is that the Government should keep their side of the bargain. We trust that the Government will show more active support for the Prime Minister in pursuing the policies upon which she and our party were elected. The need is for credibility in controlling Government expenditure—not only the amount but the quality of that expenditure. Only the Government can show the leadership necessary to establish that credibility. I sincerely trust that they will not shrink from what I see as a last hope and a historic chance.

7.18 pm
Mr. Ted Fletcher (Darlington)

I congratulate the hon. Member for Winchester (Mr. Browne) on his moving speech. I assure him that there was hardly a dry eye on the Opposition Benches as we listened to the plight of the bankers. Not everyone has been upset at the return of a Tory Government. Some people have done well, including the bankers and the finance houses that contribute so liberally to the funds of the Tory Party.

In 1980, the four national banks made a profit of £1,600 million. For the first six months of this year, they made a profit of £770 million. The Government have been forced to introduce a system of guaranteeing the loans of small business men because the banks, with all this largesse, have been refusing to take risks and to help the small employer. It is a little farcical for Conservative Members to castigate the Government because, for once only, they are applying a windfall tax.

My right hon. Friend the Member for Stepney and Poplar (Mr. Shore) was right to say that fundamentally the Budget should have been aimed at solving the grave, economic problems with which we are faced. Our gravest economic problem is unemployment, yet nothing has been done to give the 2.5 million—soon to rise to 3 million—who are without work the slightest hope that the economy will be stimulated to create more jobs. My right hon. Friend the Leader of the Opposition described the Chancellor's proposals as a"no-hope Budget" and there is certainly no hope in it for thousands of people, particularly in the North-East. In north-west Durham, for example, one man in four is unemployed with no hope of getting work immediately. In Sunderland and Hartlepool the figure is one in five. Because of the poverty in the North-East one could at least have expected the Government to direct some of their economic policies towards reducing the level of unemployment.

There is now more unemployment than there has been in the past 50 years. The rise of over 1 million in the past 12 months is the greatest increase since 1924. In addition, industry has been running down. Industrial output fell by 7 per cent. and manufacturing production by 9 per cent. More companies went bust last year than at any time within memory, with a total of 6,900 company liquidations. By the end of the year they were running at 170 a week. In simple terms that means 34 companies going bankrupt every working day. Yet the Government have the effrontery to suggest that they are taking action to help the small employer. They should be doing something to stop existing companies going into liquidation rather than producing measures to encourage the creation of new companies.

Of course, all this must be related to the Government's cuts in public expenditure. Many of the companies in the small firms sector work on contracts for local authorities, building houses and providing equipment for schools and hospitals. They rely on the public service to enable them to provide employment. The drastic cuts in public services mean that many hundreds of thousands of small business men, particularly in the construction industry, are going out of business as a result of Tory policies. It is obscene, bearing in mind how many slums need to be cleared and how many substandard houses need to be repaired, that 300,000 construction workers are unemployed.

Judging from their Budget proposals the Government seem not to realise the need to prime the economy if these people, or at least some of them, are to be got back to work. I say"some" because some unemployment must always remain in the nature of the capitalist society in which we live. The introduction of the silicon chip and the computer into industry means that our industrial base must shrink every year if it is to accommodate the automation and other technical developments that these factors will bring. We cannot ignore the fact that, however prosperous industry becomes, it will need less and less labour. The Government are ignoring this aspect in their policies.

Unemployment therefore continues to rise and the Government's Budget proposals for dealing with the problem have been condemned from every quarter. Almost without exception, including most of the newspapers that normally support the Tory Party, the Budget has been condemned as vicious and disastrous for the people of this country. We are witnessing an unusual spectacle in which the TUC, the CBI and the Institute of Directors are united in telling the Government that the Chancellor's proposals will go no way towards solving our industrial problems.

The answer is to reflate the economy. That is the lesson that history teaches us. After the 1929 crash in America, Roosevelt restored full employment by a tremendous programme of public investment, with the Tennessee Valley Authority and so on—

Mr. John Browne

Will the hon. Gentleman give way?

Mr. Fletcher

The hon. Member was discourteous in not giving way to any hon. Member on the Labour Benches when he was speaking. I shall therefore not give way to him, but of course if any other hon. Members wish to intervene I shall gladly give way to them.

Mr. Homewood

I am grateful to my hon. Friend for giving way. He is right to say that the hon. Member for Winchester did not give way to my reasonable attempt to intervene.

My hon. Friend's comment about the influence of the Budget and the lessons of history is relevant. It is as true today as it was in the past that if we are to control inflation we shall have to do it in coexistence with the Keynesian method of reducing unemployment. Unless we can bring the two together there is no hope for this country. I think that that is what my hon. Friend is saying, and I agree with him.

Mr. Fletcher

I thank my hon. Friend for that intervention because that is precisely the point I am endeavouring to make. The CBI recognises that fact. It has suggested a £2.5 billion injection into the economy for railway electrification and so on. The TUC has suggested in its industrial document a £6 billion reflation. Anyone with a sense of history knows that if we reflate we can generate money by way of taxation and so on to help to pay for that reflation.

We have been told that it is necessary to cut back on public expenditure because it is running at too high a level. Figures from EEC documents, however, suggest that while we in Britain devote 47 per cent. of our national domestic product to public expenditure, the figure for West Germany is 46 per cent., for France 47 per cent. and for the Netherlands 59 per cent. Our main industrial competitors are, therefore, devoting a great deal more to public expenditure than we are,

Then there is the hidden taxation—the £1,300 million that the gas industry will have to pay directly to the Treasury over the next three years. That is another method of indirect taxation. We no longer talk about the cost of gas but about the gas price imposed by the Government. It is a tax that is imposed on industry and on old-age pensioners alike, and it presents them with higher energy costs generally than they would have if the Government had not demanded these excessive amounts.

On the subject of energy costs one should not forget the impact upon working people who use a car to get to work of the increase in the price of petrol.

It will also have a tremendous effect on the rural constituencies. I shall be surprised if Tory Members from the shires do not hound the Chancellor of the Exchequer for having put that extra tax on petrol. Some villages will soon return to the seventeenth and eighteenth centuries. In those days poor people had to walk to market to do their shopping. Bus services will no longer be adequate as the costs of travelling will not be funded by the Government. As a result, fares will be so excessive that many people will find themselves confined to their villages.

Let us consider the point that has been raised by the hon. Member for Winchester. He implied that we were pricing ourselves out of the market and that wages are too high. On 26 January his colleague, the Minister of State, Foreign and Commonwealth Office, the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), said that our labour was cheaper to employ than that of our major competitors. That is a fact.

Mr. John Browne rose

Mr. Fletcher

I shall not give way to the hon. Gentleman. Can he not take"No" for an answer?

The average British wage is only 56 per cent. of the average German wage. A prominent Minister has said that our labour costs are cheaper. Therefore, the Government cannot claim that we are pricing ourselves out of the market.

Mr. Nicholas Lyell (Hemel Hempstead)

I have listened carefully to the hon. Gentleman's argument. It is true that our wages are lower than those found on the Continent. However, would the hon. Gentleman comment on the important point that, as a proportion of value added, our wages are far higher than those of our competitors? That is the real problem. Our wages average nearly 70 per cent. of value added.

Mr. Fletcher

I do not know what the hon. Gentleman means by"value added". Earlier, it was pointed out that industrial production had increased by only 1 per cent. while wages had risen by 14 per cent. There is no relationship between those figures. Manufacturers are shedding labour because of the introduction of computers and technological advances. Production ratios remain the same while the labour force has often been reduced by half. Therefore, production is increasing although there are fewer workers. There is no relation between an increase in productivity and wage rises of 14 per cent. It cannot be claimed that working people are pricing themselves out of the market.

The Government have not considered such matters. They are concerned only to carry out a monetarist policy that aims to reduce public expenditure. They are concerned to thin out the working population in the hope that the rate of inflation will fall. Although constant references are made to the fact that the battle of inflation is being won, inflation must still be reduced to the level found when the Tories came into office. At that time inflation stood at 9.9 per cent. Therefore, the battle of inflation has not been won.

As a result of the Budget, the rate of inflation will probably increase. There can be no doubt that the Budget is a disaster for this country. I was not in the least surprised when I heard the Chancellor of the Exchequer's lacklustre performance. He was the architect of the Industrial Relations Act. That went into the dustbin of history. No politician has introduced a greater failure. More days were lost in strikes as an immediate result of that Act than at any time since the general strike of 1926.

After that performance I was surprised when the Prime Minister appointed the right hon. and learned Gentleman as Chancellor of the Exchequer. That was the most unlikely appointment in history since the Roman emperor Caligula appointed his horse a proconsul. The predictions that the right hon. and learned Gentleman has made seem to lack any economic basis. The Chancellor of the Exchequer might just as well put his predictions in"Old Moore's Almanac" as explain them to the House. During the past two years his figures have been consistently wrong. Time and again he has told the House that he can see a light at the end of the tunnel. The only thing that he can see is a train approaching in the other direction.

The unemployed, particularly those in County Durham, cannot see any light in the right hon. and learned Gentleman's Budget. Indeed, they are pessimistic about its outcome. The Tories are creating a society in which the rich become richer and the poor become poorer. I hope that my voice and that of my right hon. Friends will join with the many Conservative Members who are disillusioned with the contents of the Budget and say to the Chancellor"For God's sake go".

7.36 pm
Mr. Reg Prentice (Daventry)

I shall begin on a non-controversial note that will not take up very much time. I welcome the passage in the Budget speech in which my right hon. and learned Friend the Chancellor of the Exchequer announced some help for the disabled and for organisations that work with the disabled. I happen to be one of the many thousands who urged him to take that course. When I was Minister with responsibility for the disabled, and since then, I have been in touch with him on this subject. We all welcome that proposal. I couple those remarks with a welcome to the Chief Secretary's announcement about the new level of mobility allowance. That is an excellent way of helping people to help themselves should they have lost their natural means of mobility.

I turn to one of the debate's main themes, namely, public expenditure. Indeed, that was the main subject when my right hon. and learned Friend the Chief Secretary addressed the House earlier. It featured prominently in the powerful speeches of my right hon. Friend the Member for Taunton (Mr. du Cann) and of my hon. Friend the Member for Winchester (Mr. Browne). I shall concentrate on the theme that the Cabinet has failed—or has relatively failed—in some respects on that front. Yesterday the Chancellor of the Exchequer was faced with constraints that were greater than need have been the case. The constraints imposed by the long-term weaknesses of the British economy and by the effects of the world recession would have been great in any event. However, despite all the efforts of some Ministers and of the Treasury, public expenditure has risen and has created a worse situation than might have been the case.

Given those constraints, I have total admiration for the way in which the Chancellor of the Exchequer has handled the problems facing him. His principal judgments were right. They have not been challenged effectively by any hon. Members or by any member of the public. We should all join together in admiring his courage and resolution and the way in which he has kept his nerve and pursued the basic strategy on which the Government were elected.

The key to the Budget was my right hon. and learned Friend's decision that £10.5 billion was the maximum sum available for the public sector borrowing requirement. No one who has criticised the Budget, in the House or outside, has made a reasoned case against that judgment. The Chancellor was correct to conclude that the figure of £14 billion—which would have been the estimate if he had not made his tax increases—was unacceptably high. All the main criticisms have implied a still higher figure. That has been true of the newspaper editorials that criticised him this morning. It is true of the CBFs and the TUC's view and of speeches by Opposition Members. It was particularly true of the speech by the right hon. Member for Stepney and Poplar (Mr. Shore) when he opened the debate. That speech represented the right hon. Gentleman at his eloquent best, full of passionate rhetoric and no content. When he engages in that sort of exercise, he is one of the best speakers in the House except that when he sits down everyone is forced to ask"What was that all about?"

Having paid that tribute to the Chancellor, I turn to my theme of public expenditure. Since the Government took office public expenditure has increased. The Chief Secretary gave certain reasons, which I accept, for part of that increase, but I do not accept that that is the total reason why it has increased so much. It was pointed out by the Chancellor yesterday and again by the Chief Secretary today that the figure is 5 per cent. less in 1980–81 than it would have been under the published plans inherited from the Labour Government. Those published plans are a considerable underestimate of what the Labour Government would now have been spending. If we were to take literally the speeches made by Labour Members, particularly the amendments that they have moved in Committees on Bill after Bill in this Parliament, they would have piled up commitments to spend money on a much larger scale than the plans they put on paper when the were still in office.

No Government, certainly no post-war Government, have succeeded in keeping public expenditure under control. This Government have probably succeeded better than any other post-war Government, but their performance has not measured up to the needs of the critical situation with which the country is faced. As others have pointed out, we are concerned not merely with the total of public expenditure but with its shape. We are concerned that, within the given total, current expenditure has expanded at the expense of capital expenditure and also that public sector pay has increased as a proportion of the whole in such a way that more of a limited sum of money is being spent on wages and salaries and therefore less on public services.

Against that background, I welcome what the Chancellor said yesterday about the stricter application of cash limits. The Chief Secretary repeated it today, and there is a paragraph in the Red Book to which my right hon. Friend the Member for Taunton referred. The programmes of Departments are now given in cash as well as in volume terms. Those are welcome indications of the Government's determination to bring public expenditure under stricter control in the coming year.

I want to put it to my right hon. and hon. Friends on the Front Bench as strongly as I can that these new techniques can provide only a partial answer to the problem. The problem will not be solved solely by new methods of analysis or by stricter procedures to follow up overspending. It can be solved only by making hard political decisions, particularly in relation to what are often called the demand-led programmes. Those are programmes where a particular Act or declared policy enables people to make applications for benefits or help of one sort or another and the total spend depends on the volume of demand.

I repeat that I do not doubt that they will be hard political decisions—many of which will be unpopular and some of which may be breaches of election pledges—in terms of the overriding needs for the national economy.

I shall illustrate the problem from my experience in the Department of Health and Social Security where I worked for 22 months. I hasten to add that I do not think that the problem is confined to that Department. I quote it purely as an example. It is one of the best examples as it is one of the biggest spenders. Other large programmes, and also small programmes, can provide examples of savings that could be made if the Government were prepared to face up to the difficult decisions involved.

The Chancellor referred to the social security budget as being very large. He quoted a figure of £27 billion, which is the total estimated outlay on the social security side of the DHSS after the new upratings come into effect.

My right hon. Friend the Member for Taunton said that this was a complex system. It is indeed. Including child benefits, one half of the nation pays £27 billion to the other half of the nation. If one were to exclude child benefits, which are a special case, three-quarters of the nation pays £27 billion to one-quarter of the nation varying amounts of weekly income by a series of rules so complex that the recipients cannot understand them, the staff in the DHSS offices generally cannot understand them and, unhappily, the error rate is high as a result.

The 13 million recipients are often referred to in the House as people in need—the poorest and weakest section of our society. We have all used those phrases—I have used them myself. It is vital to recognise that that is not true of those 13 million people. It is true of some of them, but not all. I shall take the example of those over retirement age—the largest group—about 9 million people. Of that group, about 1⅔ million are within the supplementary benefit range. The remainder—more than 7 million—go right across the spectrum of society. Some will be only a little better off than the supplementary benefit level and others will be very well of. There will be others at all stages in between.

That is why Parliament should legislate year by year for the automatic uprating of all pensions in line with prices. That raises the question in a way that has seldom been debated in the House, except in a piecemeal fashion. I say"piecemeal" because the Government inherited from the Labour Government an extravagant formula for the uprating of benefits. It has been modified three times—first by the first Social Security Act of last Session in relation to retirement pensions and other long-term benefits. It was modified again by the second Social Security Act of the last Session in relation to short-term benefits. It is being modified for a third time by the Social Security Bill now in Committee which gives the Chancellor legislative sanctions for the 1 per cent. abatement in upratings which he announced in the Budget.

There is no reason to keep nibbling at the problem. It would be absolutely correct for the Government to have the discretion, as they had some years ago for a long time, to decide year by year what would be a proper uprating for that year, balancing the needs of the people concerned against other demands on the public purse. It would be good to do it in line with prices for everyone if economic circumstances allow or to do better than that and to raise the real living standards of pensioners. I see no reason why cuts in the education service, the Health Service or local government services should automatically follow because the uprating of social security benefits is a no-go area for the Chancellor.

For the year in question, 1980–81, we are indebted to Mr. Adam Raphael and others for the knowledge that the Cabinet last year was discussing the possibility of a 3 per cent. abatement in the uprating for the coming November. In other words there was to be an uprating of 7 per cent. instead of the 9 per cent. announced yesterday. It was and remains my view that 7 per cent. would have been about right in the prevailing circumstances.

Would that have meant breaking a pledge? It would. But I believe that all Governments—certainly all Governments of whom I have had experience—have had a choice during their periods of office as to which pledges to break. That applies to Labour and Conservative Governments. The lesson to be drawn from that is that politicians at election time make too many pledges. They make pledges that they are not always able to fulfil. Above all, they make pledges to spend money that the country has not yet earned.

The greatest possible benefit that the Government could confer on the retired population would be to bring inflation under control. That is infinitely more important than a marginal 60p or so on the uprating in any particular year.

Mr. Bob Cryer: (Keighley)

Give the pensioners the choice.

Mr. Prentice

I should like to make three brief points about the social security budget. First, I believe that the Christmas bonus should be abolished. That bonus costs money. It costs administrative time in DHSS offices. Therefore, it adds to the Department's salary bill. In my view, it is undignified to make that specific handout every year. It is a payment which is increasingly resented because the £10 is not uprated. Under both Labour and Conservative Governments there has been no uprating. The uprating could not be afforded either by a Labour Chancellor of the Exchequer or by the present Chancellor of the Exchequer. Therefore, year by year the resentment at receiving a derisory amount will rightly grow.

What has gone wrong with social security spending over the years has been that successive Governments have added new benefits but have not had the courage to abolish an existing benefit. I suggest that the Government could abolish the Christmas bonus.

The Government could also abolish the death grant. That has also become a derisory payment compared with the costs of a funeral. A survey published by the DHSS has shown that 90 per cent. of those who receive the death grant do not need it and say that they do not need it. I should prefer to see a meaningful sum concentrated on those who need it for seeing the jam spread across the board in a way which is of no real help to anyone. When I was responsible for the funeral expenses of my late father, I did not need a cheque for £32 from the DHSS. That would be true of every hon. Member. It would be true also of the great majority of the people we represent.

I regret that the plan to transfer the responsibility for the first eight weeks of sickness benefit from the State to employers has been postponed from this year. It was a good plan when it was published in Green Paper form. It was a better plan after the months of discussion that we held with employers, the TUC, the British Medical Association and everyone else involved. But it was unpopular. However, because it was unpopular, it should not have been ducked. We must say to everyone, particularly the business community,"If you are urging the Government to stop doing certain things, to withdraw the frontiers of Government, do not complain all the time if that process causes some temporary inconvenience". I think that we were entitled to more backing than we got. I hope that my right hon. and hon. Friends in the DHSS will return to this matter next year and that it will feature in the next Queen's Speech.

I turn briefly to public sector pay. For more than a year after the general election the problem of controlling public expenditure was bedevilled by the Clegg Commission awards. The Clegg Commission was one of the worst bits of our inheritance from the Labour Government. There is probably no point at this stage in holding an inquest on those events.

Since the disbandment of the Clegg Commission, the Government have adopted a tougher attitude, but not in my view tough enough. For example, I see no reason why the award by the arbitrator to the teaching profession last summer should have been allowed to stand. The Government had power under the Remuneration of Teachers Act to refer that award to both Houses of Parliament and to ask for it to be vetoed in view of the national economic situation. I believe that the Government should have taken that decision.

I also see no reason why a few weeks ago, concerning the next award to the teachers, the employers' side on the Burnham Committee should have jumped from a 4 per cent. to a 7½ per cent. offer in one meeting. These rises for teachers lead directly to cuts in education in the classroom because the teachers' pay bill is forming a larger and larger share of the available limited cash year by year.

I think that we are entitled to urge the Government at this stage to stand firm on all outstanding claims—specifically, of course, the Civil Service claim. The Civil Service strike a few days ago and the selective strikes that followed and are to continue are a disgrace to the Civil Service and a betrayal of its standards. I speak as someone who worked for two years in the Civil Service and with it as a Minister for more than nine years. I have always cherished happy memories of the co-operation of the Civil Service with successive Governments. But the traditions of the Civil Service were and are being betrayed by an unrepresentative Left-wing minority dominating the biggest Civil Service trade union. Certainly a wider public were angry at what happened on Monday, and a wider public will be angry with the Government if they make any further offer to the civil servants in this situation. The civil servants have got to lose this one, and they deserve to lose it.

Mr. Lyell

At the same time, is it not right to say that, while the pay battle must be fought firmly and there must be no further increase, we must make it clearer to the Civil Service and to the nation that we must look for a new, fair formula, not the old pay research which was inadequate and excessively inflationary, so that civil servants can see their pay being worked out and take part in its working out?

Mr. Prentice

My hon. Friend is quite right. That was the last point that I wished to make on that matter.

Mr. Homewood rose

Mr. Prentice

What my hon. Friend said applies not only to civil servants but to the whole of the public sector. We have to get away from the old obsession with comparability, whether in the form of reports by the Pay Research Unil, the Top Salaries Review Body, the Doctors and Dentists Review Body, or whatever it may be, and have new concepts.

Mr. Homewood

If the civil servants lose—I do not think that they will lose—will it not be because they do not have as much muscle as the miners or the water workers?

Mr. Prentice

No. Each of those cases was very different. I remind the hon. Gentleman that a few months ago the national executive of the National Union of Mineworkers unanimously recommended to the membership that the National Coal Board's offer should be rejected and that consent should be given to industrial action. But in a pithead ballot the miners had the good sense to reject that advice and to carry on with their work. That shows that the attitudes being struck by trade union leaders often do not represent the real wishes of the rank and file. If there had been a secret ballot in the Civil Service, there would have been no strike last Monday. If there had been a secret ballot among steelworkers—a matter about which the hon. Member for Kettering (Mr. Homewood) has some knowledge—there would have been no steel strike last year.

The Chancellor spoke yesterday of the need for new thinking on the determination of public sector pay and of the need for market forces to play a larger part in that determination. I am sure that that is absolutely right. The public should be made aware that, if pay increases too much in the public sector in relation to cash limits, it will result in a direct cutting of services. If the proportion of the National Health Service budget spent on salaries is increased, there will be a cut in the health services. If teachers' pay is increased, there will be a cut in education, and increased pay in local authorities will mean a cut in local government services. That factor should be borne in mind by everyone concerned.

I have tried to suggest practical ways in which the control of public expenditure can become more effective. I speak as a total supporter of the Government's strategy. It is the only coherent strategy available to the nation, apart from the strategy that is put forward by the hon. Member for Keighley (Mr. Cryer) and his friends on the extreme Left of the Labour Party. There is nothing in between. No strategy has been presented by the demoralised Right wing of the Labour Party, or by the Liberals, or the Social Democrats. The Government's strategy is a real strategy, and it deserves to succeeed. It deserves the total, continuous and enthusiastic support of every Conservative Member and of every committed Conservative in the country.

Mr. Cryer

On a point of order, Mr. Deputy Speaker. It is customary and a convention of the House that when an hon. Member refers to another hon. Member—

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

Order. It is also customary for the Chair not to interfere in these matters. It is at the discretion of the Member.

8.2 pm

Mr. David Stoddart (Swindon)

The right hon. Member for Daventry (Mr. Prentice), who not long ago was wailing about extremists in his former constituency, appears to have become an extreme extremist himself, particularly when he attacks the weakest in our society, the old-age pensioners. Apparently, he wishes to make many of them, who would not previously have been so, subject to a means test.

Mr. Cryer

Does not my hon. Friend agree that the Opposition are united in their detestation of this nasty, vicious Budget, in their detestation of the right hon. Member for Daventry (Mr. Prentice), and in their congratulations to the rank and file members of the Labour Party who wisely threw him out?

Mr. Clinton Davis (Hackney, Central)

The right hon. Gentleman is a nauseating creep.

Mr. Stoddart

My hon. Friend the Member for Keighley (Mr. Cryer) makes a valid point. I shall express my own detestation of the Budget. I hope that the right hon. Member for Daventry will understand that members of all wings of the Labour Party are united in understanding that the Government have brought the country to a low depth of economic performance and that there are relevant Socialist policies—indeed, they are the only policies which will restore health to the economy.

This is probably the worst Budget that I have heard, certainly since 1945. It is the most oppressive and damaging Budget that I have experienced in my lifetime. Indeed, the Government appear to have lapsed from folly into insanity.

It can only be insanity to seek to deflate an economy which is already in deep slump. What sense can there be in taking resources out of the economy at a time when 2½ million people are unemployed and there are many unused resources in the economy, when factories are closing every day, and when many industries are working short time with under-used capacity? What sense is there in further deflating the economy in such circumstances?

It also makes no sense to attempt to cut the public sector borrowing requirement at present. I know that Conservative Members would not agree with that. Nevertheless, in the present economic situation it is not sensible to attempt to cut the public sector borrowing requirement, and at the same time take measures that are bound to put pressure on the PSBR to expand. Yet that is what the Government are doing. It is a paradox. I cannot understand the mentality that acts in that way.

The National Institute of Economic and Social Research estimates that for every 1 per cent. reduction in gross domestic product, £1,000 million will be added to the public sector borrowing requirement. If the Government are to deflate the economy to the extent that there will be a 2 per cent. cut in gross domestic product this year, it means that they will add £2,000 million of pressure to the public sector borrowing requirement. That is the Government's plan for 1981–82.

There was also a planned reduction of 2 per cent. in gross domestic product in 1980–81. All in all, that is a 4 per cent. reduction which, according to the NIESR, will add £4,000 million to the public sector borrowing requirement.

Had we had a neutral Budget or, better still, had we tried to increase the gross domestic product by 2 per cent., the swingeing increases in taxation that have been imposed by the Chancellor in the Budget would not have been necessary. The Government have brought this upon themselves. Indeed, the Budget locks us further into the spiral of decline which has taken place since the Government came to office on 3 May. Unless the Government realise that public expenditure should be used as the engine of recovery, there is no way out of that spiral of decline.

We hear much criticism about public expenditure. I have said that in the present circumstances, when the Government have undermined confidence in the private sector—that confidence has been undermined as a result of the Budget even more than it was before—there is only one way to restore health to the economy in both the public and private sectors, and that is by using public expenditure. If public expenditure on useful purposes is increased it will stimulate the private sector because, after all, the public sector is the customer of the private sector. That is not fully understood by the Government or even by private industry itself.

There is no doubt that the tax measures introduced by the Government will hit the poorer sections of our community hardest. The failure to increase tax allowances and the increases in the taxes on cigarettes, tobacco, beer and, most of all, petrol, will hit hardest those who can least afford to bear the taxation increases.

During the election campaign, the Prime Minister appeared on television and said so nicely and so delightfully to the British public"I want to leave more money in your pockets so that you can spend it as you please.". Far from leaving more money in people's pockets, the Government have taken it out in two ways. They have increased taxation, which they promised to cut, and they have increased the cost of living through VAT increases and other means. The Prime Minister's election promise has proved to be a complete and utter fraud—a swindle. People were a little gullible and many of them fell for that promise and voted the Government into office. By heaven, they have suffered for it in the past two years and they will go on suffering for some while yet.

We heard a great deal from the Conservatives when they were in opposition about the plight of middle income earners. My hon. Friend the Member for Keighley will remember hearing from Conservative Members terrible tales about the hardship suffered by middle income earners under the Labour Government. Under the Tory Government, those people are doing even worse. Their mortgages have gone up, their cost of living has gone up and now they are not even to get the tax reliefs promised to them by the Chancellor of the Exchequer and the Prime Minister before they took office.

On 1 April that group will be hit by another blow—the increased national insurance contributions. The Chancellor and the Prime Minister promised to help those people, but they will face swingeing increases of about £4 a week in their contributions. That has not hit them yet, but it will do so on 1 April and they will realise that the Government do not hit only the poor; they also hit the middle managers, who, they claimed before the election, were the salvation of our country. Everyone except the very rich has learned the hard lesson of Toryism: Tories help only their friends.

When I heard about the increase in the petrol tax I remembered the battle that the Labour Government had to fight when they wanted to put 5p a gallon on petrol. Even some of my hon. Friends did not agree with that proposal. Conservative Members said that it was a dastardly proposal, that it would cripple those in rural areas and cause hardship to their constituents because they would not be able to get to work. Am I not right?

Mr. Cryer

Yes, indeed.

Mr. Stoddart

I remember when I was a Government Whip listening to all those complaints with a bowed head. How sorry I felt for the people in Wiltshire and elsewhere. The Tories almost made me cry—though not quite, because, having lived in South Wales before the war, I knew that they were, as they are now, the party of unemployment.

Now that the Government are imposing an extra 20p on a gallon of petrol, what will those Conservative Members say to their rural constituents? Has the House ever heard such hypocrisy? I hope that all the Conservative Members who complained at the Labour Government's proposal to put 5p a gallon on petrol—the Financial Secretary to the Treasury was among those who complained—will rise against the Chancellor of the Exchequer and ensure that the increase in petrol tax is thrown out by the combined votes of my hon. Friends and the Tories who moaned so much about the Labour Government's proposal.

The increase in the price of petrol will affect not only rural areas. It will also affect those on shift work in Swindon, Keighley and elsewhere. There are no bus services to take them to work. Indeed, bus fares will almost certainly rise as a result of the increase in petrol tax, so fewer people will use the buses, there will be fewer buses and rural areas and others will be further cut off. I hope that Conservative Members will remember what they said two or three years ago.

I suppose that the most fraudulent part of the Budget is the failure to index-link tax allowances.

Mr. Hornewood

Rub it in, David. The Financial Secretary is here.

Mr. Stoddart

The Financial Secretary to the Treasury was Opposition Whip on the Finance Bill Committee in 1977 when I was the Government Whip.

Mr. Lyell

Will the hon. Gentleman give way?

Mr. Stoddart

No. The hon. Gentleman was not on the Finance Bill Committee.

The Financial Secretary did his best to organise a conspiracy to undermine the then Labour Government. I remember some of the closed meetings he arranged to try to embarrass the Government. I remember his speeches in Committee and on Report when he said that he believed in indexation of tax allowances—not only the basic allowance, but all allowances right up the scale.

Mr. Homewood

The Financial Secretary is nodding his head.

Mr. Stoddart

The Financial Secretary said that he believed in the indexation of all taxes. Two of my hon. Friends at that time also wanted to index tax allowances and for the best of motives. They had a good case, because they were trying to help the poor in our community by raising the tax threshold. They were doing a good job and they meant what they were saying.

The Financial Secretary supported indexation of tax allowances for nasty political purposes. He cannot deny that. If he were honest about his desire to help taxpayers, he would not now be sitting on the Government Front Bench. He would have resigned. Indeed, if he had any honour left he could still resign. The right hon. Gentleman said that he fought for the indexation of tax allowances and if he said he fought for it, he must have done so. He also said that he meant it. If he meant it, he should not be sitting on the Government Front Bench.

The Government of which the right hon. Gentleman is still a member, unfortunately—he should have resigned—forced this change, when in opposition, against the will of the Government of the day. They have now completely ratted on it. Not only have they not index-linked the tax allowances but they have given no increase in tax allowances at all. By sleight of hand and by cunning, they have increased the standard rate of tax by 3p in the pound.

I hope sincerely that the right hon. Gentleman, if he does not resign beforehand, will go home tonight and sleep uneasily in his bed and that, having slept uneasily with a bad conscience, he will go to the Prime Minister tomorrow morning and say"Madam, I can no longer serve you because I would feel dishonoured and besmeared if I supported the Chancellor in not doing what he said he would do and what I wanted him to do in Opposition."

Mr. Michael Spicer (Worcestershire, South)

Will the hon. Gentleman give way?

Mr. Stoddart

Was the hon. Gentleman on the Finance Bill Committee?

Mr. Spicer

The hon. Gentleman seems to be making a big issue out of this necessity to index. Will he remind the House how he voted on indexation?

Mr. Stoddart

Certainly. I voted against it. However, we are not talking about me. We are talking about the Financial Secretary to the Treasury. The fact of the matter is that he did vote for it. Now he is not doing it. He is going to vote against it. I am sure that he is a man of honour. I appeal to him, as a man of honour, to put that little letter on the desk in No. 10 Downing Street.

I wish to refer to the need for stimulating the economy through public works. The right hon. Member for Taunton (Mr. du Cann) did very well. The right hon. Gentleman put forward many projects that the Government should consider. One of them was electrification of the railways, which would not only modernise the railway system but would also make use of much of the spare capacity in the electricity system, as revealed in the Select Committee report on energy. Many things could be done, such as modernising the railways, building more houses, building better roads, and improving our public services which are declining into a state of disgraceful squalor.

There is much to be done. I support entirely the call by the right hon. Member for Taunton. I would, however, say to the right hon. Gentleman and also to the hon. Member for Winchester (Mr. Browne)—it is a pity that both have left the Chamber—that it is no use trying to suck up to the Government when they make such proposals, which are in accordance with Labour Party policy, while at the same time saying that the nationalised industries are not doing a good job, that they are wasteful and that they should be privatised. That will not wash.

British Leyland was not nationalised because the Labour Party was so bigoted that it wanted to nationalise the motor industry in this country. It was nationalised because it collapsed under private enterprise. The old BLMC failed to manage that industry properly and distributed profits when those profits should have been reinvested in the industry. It was not the Labour Party that nationalised Rolls-Royce or Upper Clyde Shipbuilders. Those who criticise the nationalised industries should remember that many of the troubles now experienced by them are the result of the Government policy of deflation.

This is the worst Budget that I have ever heard. It has been introduced by the worst and the most oppressive Government since the end of the war. The people are sick of them. It is time they resigned.

8.25 pm
Mr. Anthony Grant (Harrow, Central)

The hon. Member for Swindon (Mr. Stoddart) seems to be getting more like a poor man's Michael Foot. All he has discovered is the unremarkable fact that parties when in opposition say rather dafter things than when in Government—a fact that he might now well reflect upon. I wish to refer more to the remarks of my right hon. Friend the Member for Daventry (Mr. Prentice) whose speech was extremely brave and thoughtful. I regret that it was met with some degree of vindictiveness by Opposition Members. My right hon. Friend has shown a great deal more guts than many Opposition Members. He should be heard with respect in the House.

The right hon. Member for Stepney and Poplar (Mr. Shore), leading for the Opposition, received great cheers from his own side. His speech was splendid for its rhetoric. There were however, at least two aspects of it which I do not believe will bear examination in the cold light of dawn. The right hon. Gentleman worked himself up into a most tremendous lather about unemployment. Perspiration appeared on his brow and great cheers from the Opposition Benches greeted his remarks. I regard what he said as humbug to a very substantial degree.

I recall, when the Conservative Party was formerly in office, unemployment reaching the 1 million mark. I remember the hon. Member for Bolsover (Mr. Skinner) going berserk, being beside himself and thumping the Dispatch Box. I remember the shouts.

I had some responsibility for regional policy. At the time I left office the unemployment figure had come down to 600,000. I recall the present Leader of the Opposition, with all the splendid rhetoric that he manages rather better than the hon. Member for Swindon, saying that Labour would speak with a loud voice and raise the roof about unemployment reaching the disgraceful figure of 600,000. Within two years of the Labour Party getting into office and the right hon. Gentleman having responsibility directly for employment, the figure went up by 1 million to 1,600,000. I believe, passionately, that unemployment is a disaster for the country and for individuals, but I shall never take any lessons from Opposition Members on unemployment. It is a lot of humbug.

The second aspect of the speech of the right hon. Member for Stepney and Poplar that does not bear examination is his airy talk of an export-led boom. That is fine in rhetoric, but if the policies that dominate the Opposition are carried to fruition we shall become a tightly protected, narrow little country resistant to all outside trade. What is needed is not that we should buy British but that we should sell British. We shall not be able to trade in the world if the policies advocated by the Opposition, with their ever-increasing protectionist attitude, are allowed to come into effect. Far from having an export-led boom we shall become a narrow, closed, East European-type State so beloved of the right hon. Member for Bristol, South-East (Mr. Benn). We must take much of what the Opposition say with a substantial pinch of salt.

I turn to the Budget itself. Like many Budgets it could be described as a curate's egg—good in parts. I strongly support the Government's measures to help the disabled and the blind. I am vice-president of the Middlesex Disabled Drivers Association and the Harrow Association for the Disabled. I know that the measures recommended are precisely those that they have been urging on the Government for some time.

Had a Labour Chancellor, in the same circumstances, introduced such a measure, the House would have been awash with tears of compassion. Labour Members would have rolled about, their eyes filled with piety, full of compassion for what he had done. I hope that my hon. Friends will ram home the fact that the Government have taken action, which I very much welcome, to help the disabled.

I also strongly support the measures to help small firms. We must not forget that they have taken a substantial battering during the past two years. The two points reduction in minimum lending rate, the action on energy prices and the reforms of capital taxes are all to be welcomed. I work in a small firm from time to time and I know that those measures have been pressed upon the Government for a long time. However, they are better late than never.

I welcome the new measures to encourage business start-ups and investment in small firms. They are necessary for a reason that the Financial Secretary will appreciate. There is nothing wrong with youngsters in Britain. They are neither lazy nor idle. They are full of entrepreneurial spirit, and will work for 23 out of 24 hours. But ever-increasing numbers do it in what is called the black economy. They want to opt out of the complicated and trembling tax, social security and form-filling systems that have been imposed, especially by the Labour Government, on the small firms sector. That is a disturbing factor. We must take the matter seriously. It is happening in other countries.

I hope that the measures to help small firms will discourage young enthusiasts from simply opting out of society and working in the black economy. I hope that they will try to work within the system and develop in that way. If that does not work, I encourage the Government to be even more adept in their action to liberate small firms and the entrepreneurs and to remove the shackles and burdens on them.

I pay tribute to my hon. Friend the Under-Secretary of State for Northern Ireland, the Member for Basingstoke (Mr. Mitchell), who in his previous position at the Department of Industry fought hard for small firms. Having done that job myself I know how difficult it is when up against Treasury Ministers and mandarins. He has done very well indeed.

That leads me to what I regard as the worst side of the Budget. I am glad the Financial Secretary is in his place. I am concerned about the index-linking of tax relief. No doubt my right hon. Friend will reply in his usual robust way. I have been worried about the Rooker-Wise-Lawson amendment—if I dare use that phrase—for a long time. I took the trouble to reread the debate on Report. The right hon. Member for Down, South (Mr. Powell) debated with my right hon. Friend. I do not always—or indeed often—agree with the right hon. Gentleman, but on that occasion I found his arguments convincing. They carried the conviction that index-linking of tax relief in isolation is a distortion. It encourages some degree of dishonesty, in its broadest sense, by giving a weapon to Governments. It is undesirable for the reasons that he explained clearly.

If the Chancellor now proposes to abolish that policy by resolution, subject to what is said, I shall be inclined not only to support it but to welcome it. We must return to a more honest approach to Treasury matters. However, I shall not pursue that matter now. My hon. Friend the Member for Grantharn (Mr. Hogg) looks rather pregnant, so I shall give way on this occasion.

Mr. Douglas Hogg

I do not look at all pregnant. I fail to understand why the Rooker-Wise measure is dishonest. It seems essentially dishonest if we do not make it clear that the increase in personal allowances is not related to the increase in the cost of living. If that is made clear, there is no dishonesty.

Mr. Grant

Perhaps"dishonesty" is too strong a word. I contend that it is clearer if Governments have to say straightforwardly on each occasion why they are increasing allowances and why they are not. I should prefer the system that prevailed previously.

Mr. Michael Spicer

Is my hon. Friend saying that he would have changes in the rate of taxation rather than changes in the rates of allowance?

Mr. Grant

I am merely seeking to agree with my right hon. and learned Friend the Chancellor of the Exchequer. I presume that the Financial Secretary to the Treasury agrees with him. We must get rid of the automatic index-linking of personal allowances year after year.

One of our cardinal policies when we were in Opposition and when our policies were being framed was that there should be a decisive shift of the burden from direct to indirect taxation. I hope that that is still our policy and that it will remain so in future. If that ceases to be our policy, we shall have taken a somersault and proceeded in the opposite direction. We must move away from direct taxation, which is a tax on work and enterprise, towards a tax on spending, which is indirect taxation.

I am glad that my hon. Friend the Member for Worcestershire, South (Mr. Spicer) is in the Chamber. He said yesterday: This Administration came into office dedicated to the view that the basic problem of our economy was that there had been an excess of public spending as against private production, and that there was an excess of spending on consumption as against production and measures to encourage production."—[Official Report, 10 March 1981; Vol. 1000, c. 796.] I agree with him entirely. Viewed in that context, the Chancellor's policy is right. However, having come into office with the control of public expenditure being central to our policy, and having had the greatest experts known to mankind arguing that that should be our policy, it is a great disappointment that after nearly two years so little has been achieved. This is a great irritation to the private sector and especially to small firms. They think of the pain and suffering that they have experienced while the public sector has not been tackled.

As my right hon. Friend the Member for Taunton (Mr. du Cann) said, current expenditure always gallops ahead instead of capital expenditure. For example, my right hon. Friend the Secretary of State for the Environment announces that we must control the rate support grant. Chief executives and finance officers in every local authority say to their chairmen and members"We can cut out that old people's home. We cannot repair that road. We will not have that invalid children's school." That means that not one solitary architect leaves the planning department, not one assistant solicitor's clerk leaves the legal department and not one person leaves the tea-making department, which means that there are no cuts in current expenditure.

We all know about the Clegg commission. It was a disaster that we ever became involved in the ludicrous tomfoolery that we inherited from the previous Labour Government. Now that the Clegg system is dead and we are able to stand firm, it is right that the civil servants should be a test of the Government's will and determination. It will not be understood by business men or, if I dare say so, by Government Back Bench Members if the Government give way. However, I am sure that they will not.

With the situation as it is, the Chancellor had no alternative but to follow the strategy that he followed. He is a man of great integrity. He has been a colleague of mine for many years. He is not obstinate; he is thoroughly sensible. He would put the interests of the nation before airy-fairy theories. He is right on this occasion; but I ask him to consider whether there is a danger of hitting too hard at a time of recession. I ask him to use his judgment and considerable common sense and to forget about the professors and academics. Whether of the Right or Left, they are, in isolation, always wrong. When things go wrong, they can run away. They have no responsibility. The Government and the Chancellor have to remain firm and see us through the difficulties. I have absolute faith that my right hon. and learned Friend will do that.

Let us take note of what my right hon. Friend the Member for Taunton said. We must not be too gloomy and depressed. Let us look on the bright side. Other countries envy our energy resources, our ability and our initiative. We have more Nobel prize winners than the Japanese and Americans put together. Much of our industry and many of our companies are in far better shape than they were two, three or four years ago. We have a degree of political stability, as they say abroad.

The hon. Member for Motherwell and Wishaw (Dr. Bray) likened us to the British troops at the battle of the Somme—we shall all be decimated. Perhaps we did suffer heavy casualties at the battle of the Somme, but we won the First World War and we shall win this one.

8.42 pm
Mr. Bill Homewood (Kettering)

It was entertaining to listen to the hon. Member for Harrow, Central (Mr. Grant), but I do not believe that he made a serious contribution. Of course he is not gloomy or depressed. He starts off with a salary of £11,750 as a Member of Parliament and probably picks up a hell of a lot more somewhere else. His expense account is not too bad either.

Mr. Douglas Hogg

Raise the level.

Mr. Homewood

I will not raise the level. It is about time that Conservative Members started to lower the level to the people who will suffer from the Budget. That is what we are talking about.

Unemployment in my constituency is on average 16 per cent. It is 22 per cent. in one town. The unemployed were looking to the Budget for hope that things would improve. What is in the Budget? It gives us another dose of substantial deflation. Unemployment will increase. When I listen to Conservative Members, it becomes abundantly clear that they are not interested in that.

I will now raise the level of debate. We cannot afford more deflation. I take on board what has been said about the part that the Financial Secretary played over tax thresholds. The situation is no less serious now than it was then, because it will have a marked effect on demand in this country.

I wish to raise the level of the argument to the point at which we look for something which will help my constituents to get out of a situation in which they are not only unemployed but may expect to remain so for a long period. I believe that the Government have got the whole thing upside down. One has only to consider the terms that they use. We hear a great deal about monetarism. Another brilliant phrase came up tonight which I had never heard before. I think that it was the"long-term comparative debt market". What on earth that means, I do not know any more than my constituents will. What I do know is that they are looking for some solution to their problems.

It is my belief that, since the early 1950s, not only in this country but throughout the entire Western industrial world, most economies have been propped up on the production of durable consumer goods such as fridges, washing machines, televisions, cars and so on. There is no longer any simple economic equation between money supply and demand. I believe that in the present situation one may mess about as much as one likes with fiscal and monetary arrangements, but one will still fail to induce the demand that is necessary to put our people back to work.

Perhaps I think more deeply about these matters than Conservative Members because I concern myself absolutely with the question of unemployment. I recognise that inflation is serious, but I believe that in our economic and social arrangements it has been overtaken by the need to do something about unemployment.

If the rise in gross national product and the increase in living standards in the 1950s and early 1960s was pinned on the first acquisition of those durable consumer goods by the vast majority of the population and the situation has now changed, we must examine that situation. I speak from experience of this. In the 1950s, I worked in the steel industry. During those years I acquired my first television set and my first car. All around me, my workmates in industry were doing exactly the same. After those first acquisitions had been made, one began to look for replacements.

The British people, unlike the Americans, are not inclined to the concept of obsolescence. We keep things for a long time. We have a natural instinct, not to hoard, but to use everything for as long as it gives satisfactory service. To cite a personal example, only the other day the flap on the cooker in my house started to fall away because a spring was going. When I suggested buying a new one, my wife said"Good God, no—it only needs a new spring." We have had that cooker for 17 years.

That is the problem that we must start to examine now. Demand is falling because in many respects people have already accumulated what they need. But at the same time there has been a rapid increase in technological development which is increasing supply dramatically.

Just before Christmas, a delegation from Philips, the electrical company, met the Labour Party industrial committee. They explained how productivity, coupled with the value of the pound, had hit their exports. During that discussion, the leader of the delegation made a remark which stuck in my mind. He said that when colour televisions first came into use in this country, which is not that long ago, it took one man three 10-hour shifts to assemble a colour television. Nowadays, one man can assemble a colour television in 1½ hours.

Given that situation, where will we find the indigenous demand in order to create a home market which will provide a satisfactory base from which we can launch the export and investment-led expansion which has been talked about on both sides of the House?

My reason for speaking so early in the debate is that I believe that, throughout the industrialised world, supply will now outstrip demand to such a degree that unless we act wisely the economic system, be it a capitalist or mixed economy, could collapse altogether. It is now essential for us to create demand for our products in the Third world. However, unless we are also prepared to recycle and redistribute our own income and wealth, and create the same demand among our own poorer groups, we shall never cure the terrible unemployment we now face.

If we are to achieve the competitive environment about which Conservative Members talk so frequently, and if we are to create the demand for the goods that will be produced, we must recognise that we are no longer facing a supply problem.

Earlier today, my right hon. Friend the Member for Stepney and Poplar (Mr. Shore) spoke about tackling the problem from the supply end. He spoke about supply economics, control of the money supply, increased productivity and a lowering of the PSBR. He talked about those things to challenge them. Frankly, I believe that we have already passed that stage. We have talked about supply economics for so long that it has become an obsession. We are destroying ourselves by not looking at the other side of the coin.

A worthwhile economy can be created by lower costs and prices; it can equally be attained by rising demand. Unless we do something about this almost immediately, we shall be in trouble. The Budget is diabolical. Nowhere does it recognise that in giving aid to small industries nothing is changed unless demand is created for their goods.

8.55 pm
Mr. Douglas Hogg (Grantham)

In view of the lateness of the hour, and as I know, Mr. Deputy Speaker, that you wish the winding-up speakers to commence immediately, I shall cut short my remarks. I was hoping to have a few nice words to say about the Budget, thus commending myself to my right hon. and hon. Friends.

Representing as I do an agricultural constituency, I am very pleased about the capital transfer tax concessions that have been made in respect of rented land. I am certain that these concessions will increase the amount of land available for letting that will come on to the market, and I am grateful for the concession.

I would, however, express my disquiet about another aspect of the Budget which troubles me deeply. I begin by touching on a matter that has been touched on by other hon. Members, namely, the increased Excise duties on petrol and oil. Again, I speak as one who represents a rural area. For us these increased burdens are of a substantial nature. For us the use of a car is a necessity, not a luxury. People have to drive to work and to the shops and the effect of these proposals is severe.

My quarrel goes further. It goes to the entire cost of the Budget. First, the Budget depresses demand. Although I am pleased to see the Chief Secretary on the Front Bench, I cannot share his view that the Budget does not depress demand. Secondly, it raises the cost of living by 2 per cent. in a full year. I am reluctant to see that happen at this time. One of the great successes that has been achieved over the past 18 months is the substantial diminution in the rate of inflation. I am wary of supporting any proposal that will put that success at risk.

That being so, I approach the Budget with considerable caution. We are being asked to put up prices in the short term so as to cut them in the long term. That proposition is fraught with danger, and we must determine that we are going in the right way. The Chancellor of the Exchequer, in support of his stand, is saying that we cannot sustain a public sector borrowing requirement in excess of £10.5 billion and that the whole campaign must be directed to reducing the PSBR to that level.

Here I feel real anxiety. We are asked to approve measures that will result in increased costs to our constituents. I am entitled to, and do, ask of the Financial Secretary what would be the effect in terms of increased interest rates and of inflationary pressures if we were to operate at a higher level of PSBR. What would be the effect on the economy if we tried to sustain a PSBR of £12 billion? What would be the effect on interest rates and on the rate of inflation?

I am faced with this conundrum. I am being asked to put up prices in the Budget, and I am being asked to support those proposals without being told what would be the effect of supporting a PSBR of about £12 billion. If we could support that level of PSBR, many of the burdens which are being contemplated by the Budget would disappear.

Many Conservative Members wonder whether, in a time of recession, we should pursue such a tight PSBR policy. I am not saying that the Front Bench is wrong, but if we are being asked to support those policies, which have marked and certain disadvantages, we must be told what would be the cost of following an alternative policy, and in particular what would be the cost of sustaining a PSBR of £12 billion. I ask that there be no generalities: let us be specific.

9.1 pm

Mr. Robin F. Cook (Edinburgh, Central)

I hope that I shall not cast a perpetual blight over the aspiring career of the hon. Member for Grantham (Mr. Hogg) if I say that he has talked more sense in the last three minutes than many of his colleagues in 20-minute speeches. I hope that the late hour at which he was called will not prevent the Financial Secretary from giving a considered and full reply to the pointed questions asked by his colleague in his short intervention.

We have had a good debate. Hon. Members who have sat through previous Budget debates will be aware that the first day of the Budget debate is challenging, because those who speak in the debate speak immediately after the Budget package has been revealed and have not had full time to consider its contents. I hope that I shall not be thought to detract from the achievement of those who took part in today's debate if I say that their task has been made perhaps easier as the Budget has been extensively trailed throughout the papers for the past two months. On Sunday I read a quotation in The Sunday Times from the chairman of the Conservative industry committee, who welcomed the Budget package on small businesses. I congratulate the Chancellor of the Exchequer on scoring a new first. He is the first Chancellor of the Exchequer who has managed to have his Budget welcomed 48 hours before it was unveiled to the House.

The press did not prepare us for one major part of the Budget package. Since January, when the Prime Minister called in three members of the Lobby and told them that she had had a word with the Chancellor of the Exchequer and had advised him that she would not let him put up the standard rate of income tax, we have been softened up by the press warning us that the Chancellor of the Exchequer would not index the personal allowances by the full rate of inflation. No paper prepared us for the fact that there would be no increase whatsoever in those personal allowances. No paper prepared us for the event that the Government have failed to put a single penny on the personal allowances, for which there is no precedent, right back to the Budget of 1968, when inflation was 2½ per cent. per annum. It was therefore right that some speakers, in particular my hon. Friend the Member for Swindon (Mr. Stoddart), should have concentrated on that point and reminded us that a distinguished member of the Treasury team played a leading part in putting on to the statute book a provision which obliged the Government to attempt the indexation of personal allowances.

The Chief Secretary, who represents that great industrial town in the North, Whitby, tried to imply that that measure will bear most heavily, in percentage terms, on those who earn the most. I intervened in his speech to try to put the record straight. I shall now take the opportunity to deal with that matter at great length. Figures have been prepared for me by the Institute for Fiscal Studies. They compare two outcomes. The first is where personal allowances and Excise duties are indexed by inflation, but by no more than inflation, and the other is what happened in practice in the Budget which was unveiled to the House yesterday. The figures are interesting. The household the institute has taken contains a man who is working and a wife who is not—that implies no judgment about the sexes but is simply the way the BBC asked it to frame the figures—with two children. The effect of the Budget is as follows. The household in which the income is £3,500 a year is worse off by £3.89 a week. The household in which the income is £7,000 a year is worse off by £4.67. Where the income of the household is £15,000 a year, the family is worse off by £5.69.

The House will note the very shallow progression in tax as the incomes rise steeply. The impact is a 6 per cent. cut for the low income household and a 2 per cent. cut for the household with the highest income, an income which is double the national average. The Government cannot now pretend that the Budget does anything other than penalise the low income earner most

It is perhaps relevant to remind the Government how they began. They did so with generous tax handouts to the wealthy. Those hon. Members who sat through the debates on that first Budget with me will remember the sense of triumph and rejoicing with which those handouts were celebrated. The vision held out to us was a thrusting and robust economy that was to be released by that"incentives Budget."

I remember the Secretary of State for Industry telling us that entrepreneurs would be galvanised by those tax incentives. When we asked him whether all entrepreneurs would be so galvanised, he said"No, not all, but some." Where are all those brave hopes now? Where are our galvanised entrepreneurs? As we survey the wreck of the economy over the past two years we perceive that that elegant theory of tax incentives regenerating the British economy was no more than saloon bar prejudice.

We can quantify who gained and who lost in the first two Budgets. The break-even point was somewhere between £10,000 and £12,500 a year. Only those earning more than £200 a week paid less in tax as a result of the Government's first two Budgets. That means that it was those who were at the least comfortable, and, in some cases, clearly wealthy who benefited. That is what the rhetoric of the nation being overtaxed turned out to mean, and that was how the Government began handling the fiscal affairs of the country.

How has it ended? The result has been to increase the tax on everybody else. The Government have applied the acid maxim of Vidal. It is not enough to succeed; others must fail. It is not enough that the wealthy should get wealthier; the poor must get poorer. The low income tax payers have already been hit twice. They have been hit by the abolition of the reduced rate band and by the increase in the national insurance contribution. Now they are to be hit hardest by thresholds that will fall under a Government who put out a manifesto claiming that they would raise tax thresholds. That fall will be most marked for elderly women between 60 and 65 who do not qualify for the age allowance and who will now find that for the first time since 1945 they are eligible to pay tax on the State pension. The House must consider whether it is right, proper or even decent for elderly women of that age to be asked to shoulder the tax burden imposed by the Government to enable them to secure their objectives.

There is another interesting and illuminating example of what the Government's policy means, which we can find by looking over the pages of history. The Chancellor said yesterday that he would not increase VAT. I should think not. When he increased VAT in the June 1979 Budget he established a clear link between that increase and the cuts in income tax. He said the increase I make must be sufficient to provide for substantial and worthwhile reductions in income tax."—[Official Report, 12 June 1979; Vol. 968, c. 250.] That last phrase should be stressed. The income tax cuts have gone. The thresholds are lower than when the Chancellor of the Exchequer took office. More people are paying tax now than when the Chancellor of the Exchequer took office. As a result of the abolition of the reduced rate band, they are also starting to pay tax at a higher rate than when he took office. In addition, VAT has been doubled.

If the right hon. and learned Gentleman had any political integrity he would have cut VAT yesterday to the level at which he found it when he came into office. He raised VAT on the ground that he would cut the burden of income tax. However, the Chancellor of the Exchequer will not reply to the debate. As the Financial Secretary will reply, we should look at some of his words. Out of their own mouths shall they be condemned. I remember not only the sterling work done by the Financial Secretary in securing the passage of the Rooker-Wise-Lawson amendment—on which he is now ratting—but also a speech that he made in 1979. He took the view that the increase in the retail price index, which reflected the increase in indirect taxes, was not a fair reflection of the cost of living under this Government. He argued that those increases were offset by the cuts in income tax. Indeed, the Financial Secretary invented a whole new set of statistics to take care of the position. He invented the tax and prices index. When he introduced that he spoke about wage bargainers. He offered them the following advice: But what I do say, and most firmly, is this: if you want a general guide to changes in the total costs facing taxpayers, look at the TPI, not the RPI. It is a much truer guide. We must ask the Financial Secretary and the Chancellor of the Exchequer whether they still give that advice to wage bargainers. In every month since July last year the tax and prices index has risen faster than the retail price index. I predict that as a result of yesterday's Budget, the tax and prices index will rise faster next month by two points than the retail price index.

I shall make another prediction. I suspect that the tax and prices index is about to become a victim of Sir Derek Rayner's review of Government statistical services. The brave new light that the Financial Secretary lit for wage bargainers will be snuffed out on a dark night by Sir Derek Rayner. I make one plea to the right hon. Gentleman. Will the right hon. Gentleman please let us have the tax and prices index for at least one month which will show the new indirect taxes and the new income levels with the old tax thresholds that have survived from last year? Let us have just one month of that index. That will show just how much the Government have penalised the taxpayer and how much they have hit the taxpayer's cost of living.

There is another dimension to the Budget's impact on individual households, namely, its impact on benefits. Two years ago the Government slashed the higher tax rate from 83 per cent. to 60 per cent. on what the Chief Secretary described as"humanitarian grounds". The same Government now wish to claw back a miserable 1 per cent. from the pension on the ground of over-provision. It must take necks of brass to describe the State pension as an"over-provision".

I wonder whether those who call the pension an"over-provision" have been in the homes of those dependent solely on State pensions. I wonder whether they have ever trodden a floorboard without carpet or seen the meal that is laid out in such a home. I wonder whether they have ever come across an elector—as I have—who is sitting down to a supper of boiled potatoes. Have they ever wondered what it is like not to buy new clothes for five years running? If they knew what that was like they would not describe the pension as an"over-provision".

The pensioner is not over-provided for. The Government have smashed the link with the rise in incomes. Yesterday, in his Budget speech and in his broadcast to the nation the right hon. and learned Gentleman emphasised the extent to which income earners who worked had done well and had kept ahead of prices. He made a virtue of the fact that incomes had increased faster than prices. Therefore, it is all the more vile and wicked to break the link between the increase in pensions and the increase in incomes. If that link had been preserved before yesterday's Budget the pension household of a married couple would be receiving £1.40 more than it was. It would be receiving £2.05 more as a result of yesterday's Budget. That is not an over-provision but an under-provision. That should be restored to that household.

The right hon. Member for Daventry (Mr. Prentice) had words about this to offer. That right hon. Gentleman left the Labour Party because he was moderate and we were extreme. On the basis of his speech, it now looks as though he is about to drift apart from the Tory Party because he is extreme and that party is too moderate. He suggested a solution to the problem—and the uprating. One would not then have to worry about linking it to prices or incomes. He went further. He said we should abolish the £10 Christmas bonus because people complained that it was not enough. We should abolish the death grant because people complained that was not enough. If people complain that the figure is not enough, let us abolish it totally. That would remove the problem and we should no longer have to argue about it.

All households receiving benefit are worse off under the Conservative Government than they would have been under the legislation that existed when we left office. People in receipt of long-term benefit are worse off because the Government have broken the link with rises in incomes. Beneficiaries in receipt of short-term benefits are worse off because of the 5 per cent. impost that the Government have levied in lieu of taxation. If they are in receipt of child benefit, they are worse off by 50p as a result of the Government's failure to uprate child benefit in 1979—a failure that has not been made good in the Budget.

Yet the social security budget has soared, despite the cuts in welfare benefits, because the numbers in receipt of social security have soared. I shall consider the effect of yesterday's Budget on the economy. Why have the numbers in receipt of social security increased under the Government? They have increased for the simple reason that the Government keep deflating the economy in successively desperate attempts to cut public expenditure. The havoc they have created over the past two years in seeking to cut public expenditure is impressive. We have witnessed the cuts in benefits to which I have referred. We have witnessed crumbling education standards. We have witnessed the collapse of the house building programme.

A distinguished member of a former Conservative Cabinet is chairman of a housing association in my city. Last week he released a statement saying that his housing association would shortly complete 25 sheltered housing units for which there are 900 applicants. That is the measure of what the Government have done to the house building programme.

The Government have created a crisis of investment in the nationalised industries. They have forced up prices in the public sector. As a result of the cash squeeze on public sector industries, public sector prices have increased by double the rate of the retail price index. One of the most inane features of the monetarist dogma of Conservative Members is that they have allowed themselves to be trapped into the perverse logic that when they push up the prices of public sector goods they thereby push down inflation.

When one surveys that havoc, one is tempted to say that the efforts of the Government to cut public expenditure have indeed been impressive. They should not pay too much heed to the right hon. Member for Daventry. They have tried. They deserve 10 out of 10 for effort. Yet they have been brought up face to face with a curious phenomenon. Every time that they cut public expenditure by reducing services it bobs up again—forced up by the costs of the increase in unemployment which is created by cutting services. I have news for the Government. They will never cut public expenditure fast enough to catch up with the increase in public spending caused by deflationary cuts. My hon. Friend the Member for Motherwell and Wishaw (Dr. Bray) dealt with that perfectly. He said, correctly, that the Government have created an automatic destabiliser. Every drop in output is reinforced by further cuts in public expenditure until the economy is locked in a tailspin down towards the ground, towards the crash. As we approach the ground and the crash, we hear the voice of the Chief Secretary telling us that it is important to cut public expenditure because of the crowding out theory. It is an insult to the intelligence of the House to suggest that, in an economy with the kind of spare capacity that we can see with our own eyes, and hear with our own ears, there is a crowding out problem.

One might have though that a spark of doubt had been kindled in the Chancellor's mind by the volume of criticism that he received last week. There was a report from the CB1, introduced by the director-general, with the words that unless there was a change of course the prospects were"profoundly depressing".

There was a report from the Treasury and Civil Service Select Committee. One would not have thought that there had been a report from the Treasury and Civil Service Select Committee listening to the speeches from the Government Dispatch Box during the past two days, but there was such a report. Indeed, as my hon. Friends the Members for Motherwell and Wishaw and Swindon pointed out, that report overwhelmingly made the case that any cut in inflation achieved by controlling the money supply would be grossly outweighed by the penalties imposed on output to such a degree that no rational man would choose that method of controlling inflation.

I was impressed by the response of the Treasury spokesman reported in The Guardian. On the Friday after publication of the Committee's findings The Guardian reported as follows: Reaction from the Treasury last night was distinctly muted. One senior official said that the report was slightly unfair. I will settle for that. It was slightly unfair, but the general thrust was right.

I know that the Chancellor had a very bad week last week. He had the CBI report and the Treasury report. He also lost his pair, who defected to the Social democrats. One would have thought that such a week would have impressed any man. Yet, yesterday we had laid before us a Budget which could have been laid only on the basis that the monetarist theory held by the right hon. and learned Gentleman had been confirmed rather than exploded by the carnage of the past two years. No wonder his colleagues are puzzled. No wonder it is impossible at the moment to cross the Members' Lobby without being knocked down by Ministers rushing out to dissociate themselves from the Budget, saying they were not consulted or they were out of the country on that particular night.

Again, The Guardian tells us: Even ministers confessed yesterday they could not understand what was going on. Ministers who aspire to high office under the Crown have a duty to the nation—a duty to find out and to ask questions of the Treasury team. I should like to suggest two questions that they should ask. First, they should ask: what has happened to the assertion of"bottoming out". It will be remembered that last autumn we were assured that the economy was bottoming out. The Treasury was ambivalent as to what happened next—whether we got out the other side or just crawled along the bottom. But it was going to bottom out.

If one looks at the Red Book presented yesterday, one searches in vain for any sign of a bottom. If there was a bottom there before the Budget, the Chancellor kicked a big hole in it through which has disappeared every economic indicator.

I watched the Chancellor's broadcast yesterday very carefully. I noted that he said there were signs of improvement. He said Exports are doing well. It was such an extraordinary statement that I wrote it down there and then. If one turns to the appropriate page in the Red Book, one finds the Chancellor predicting that this year exports will fall by 5½ per cent.—the biggest fall of any of the indicators. That is doing well! There is a word to describe the assertion that that is doing well. It is a word that you would not allow me to use, Mr. Deputy Speaker. But it is a word that the Treasury team knows fits that assertion well. I hope that they will take it to heart.

There is another question that I suggest Ministers might put to the Treasury team: what happened to spontaneous growth? The theory was that when the Chancellor got the conditions right, when he had created the climate which was the whole point of the sacrifices, there would be spontaneous growth within the economy.

The hon. Member for Winchester (Mr. Browne)—who I am sorry to see has retired to his bank—in a celebrated speech, in which is to be found the final term which I think will go down in history as a description of the Budget—"a last-hope Budget"—urged the Chancellor not to throw away all the effort of the past two years. What has that effort been for? What have the sacrifices been for? Where will the spontaneous growth come from? It will not come from investment, because that will fall. It will not come from the public sector, because expenditure there will fall. It will not come from the consumer, because his expenditure will fall. It will not come from exports, because they will crash. The Chancellor may say that it will come from small businesses, and that the great resurgence of the economy will come from the unemployed ploughing back redundancy payments into setting up as jobbing contractors.

It is grotesque of this Government to say that they are the champion of the small business man. This Government have presided over more liquidations than in any year since records have been kept, and those liquidations have contributed to the mounting toll of the unemployed, about which my hon. Friends the Members for Darlington (Mr. Fletcher) and Kettering (Mr. Homewood) have spoken with such feeling.

Until recently, it would have been inconceivable that, at a time when there are 2½ million unemployed, a Chancellor of the Exchequer could come to the Dispatch Box and lay a Budget which failed to reduce that level of unemployment. It beggars belief that, at such a time, he can lay a Budget that is designed to increase the level of unemployment. Yet that is what he has done.

The White Paper on public expenditure forecasts an increase in unemployment to 2.7 million. We must judge that forecast increase against our historic experience of the Chancellor's predictions last year. Last spring, he warned us that unemployment by early 1981 might be 1.8 million. By June, he had revised that figure and was warning us that, by early 1981, it might be 2 million. By August unemployment was 2 million. The Chancellor then made a speech in which he had the brass neck to claim that this proved that his policies were working faster than he had anticipated.

If our experience is any guide, we should add 700,000 to the figure that is given in the White Paper. Even if the Government have halved the margin of error from last year, there will still be an unemployment rate of 3 million by the end of this year. Are they prepared to tolerate that? What level of unemployment are the Government not prepared to tolerate? That is the question that the House is entitled to ask.

I was struck by a letter in my local paper from one of my constituents who had advertised a single vacancy and was overwhelmed by applications. He concluded his letter by saying: Those who criticise the 'lazy' unemployed should undergo the depressing experience of reading through a bundle of application forms. The anger that one feels at such a waste of human resources is overwhelmed by a numbing sense of powerlessness. Yet the Treasury team is not powerless. It can act, and the House and the country are looking for action to reduce unemployment.

There is a phenomenon in the animal kingdom that is known to zoologists as displacement activity. A herd that is threatened responds with intense irrational activity to distract itself from the danger. There is no way in which I could better describe the activity of the members of the present Treasury team. The more jobs they destroy, the more factories they close, and the faster they erode our industrial capacity to survive, the more compulsively they fuss and fret over how to define the money supply and tinker with monetary control and the longer become the speeches of the Financial Secretary to foreign bankers about the money supply.

The time has come when the House must force the Treasury team to put aside its monetarist box of tricks and confront the decay of the economy over which it has presided. If the Treasury team is incapable of doing that, it should get out of the way and make room for a Government who can.

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

The hon. Member for Edinburgh, Central (Mr. Cook) made a speech which was worthy of the leader of his party. It was every bit as eloquent, every bit as entertaining and every bit as devoid of content. The hon. Gentleman will clearly go far. He had not a single word to say about the Opposition's policy, what it would do and how it would produce the results that he claims it might produce. I am not sure that I ought to address myself to his remarks, but, as a courtesy, I shall deal with three points that he raised.

The first matter might concern people outside as well as hon. Members. The hon. Member for Edinburgh, Central argued that widows and single women aged between 60 and 65, whose only income is a basic pension, would be liable to tax as a result of the Budget. I assure the House that that is not so. The Inland Revenue has a tolerance for assessment—it does not assess tax below a certain level. That tolerance is £30, which is equivalent to £100 of income at the basic rate. Since the £100 is more than the overlap between the pension and the single person's allowance, it follows that no one in that position will be assessed for tax as a result of the Budget. The use of the tolerance was first proposed by the right hon. Member for Leeds, East (Mr. Healey) when he was Chancellor of the Exchequer in 1976, and we are following his precedent.

Mr. David Steel

Surely what the Financial Secretary has said would not be true in a full year.

Mr. Lawson

The figures that I have quoted are authoritative. If the right hon. Gentleman wishes to write to me, I shall consider what he says.

Mr. Steel

I am suggesting that what the right hon. Gentleman said may be true in the coming year, with the increase starting in November, but it will not be true in a full year.

Mr. Lawson

It is true for the coming year, which is the question that I was asked. As for the future, that remains to be determined.

The hon. Member for Edinburgh, Central asked when the Treasury thought that the economy was likely to bottom out. He said that there was nothing in the Red Book that indicated that there would be any sort of bottoming out. The hon. Gentleman has not read the Red Book with his customary care. If he looks at page 27, he will see that our expectation is—I do not give any guarantee—

Mr. John Evans (Newton)

Who would take a guarantee from the right hon. Gentleman?

Mr. Lawson

Our expectation is that, taking full account of the Budget measures, there will be steady growth over the coming year. From the first half of 1981 to the first half of 1982, there is a projected steady growth of output and particularly of manufacturing output.

The hon. Member for Edinburgh, Central raised another point on which I should like to spend more time, because it affects me personally. The matter was also raised by the hon. Member for Swindon (Mr. Stoddart), of whom I am fond despite his personal attack on me today, and by my hon. Friend the Member for Harrow, Central (Mr. Grant). I understand why the hon. Member for Swindon feels so strongly. He is the battle-scarred victim of the Finance Bill Committee of 1977, as a result of which he was so chastened that he resigned from the Whips' Office and has remained on the Back Benches ever since.

Mr. Stoddart

I assure the right hon. Gentleman that I did not resign from the Whips' Office because of that incident.

Mr. Lawson

It certainly followed that. If the hon. Gentleman cares to tell the House at some stage precisely why he resigned from the Whips' Office, I am sure that we shall be greatly enlightened, illumined and entertained. He is perhaps saving it for his memoirs. At any rate, I am sure that it was a matter of high principle of the kind that I have mentioned.

The question really is how the position I took up and which the then official Opposition took up over the indexation of personal allowances squares with the decision in the Budget not to make any increase in the personal allowances or the higher rate thresholds which are also subject to the indexation provision. I do not normally—certainly not in a wind-up speech—like to quote from Hansard previous speeches of mine, but I think that it would be appropriate in this case in order to establish what the position was. [Interruption.] I listened patiently to the points made by the hon. Member for Swindon and others, and the House might do me the courtesy of listening to the explanation I am making, particularly since the Leader of the Opposition and the hon. Member for Swindon called for my resignation on these grounds. I am afraid that they will not have the pleasure of my resignation on this occasion.

I should like to quote what I said during the Committee stage of the Finance Bill on 3 June 1980 when the provision that is now the binding indexation provision was introduced into the Bill. I said: The whole purpose of this provision—a purpose which commanded not only my support, but the support of pretty well the whole of the then Conservative Opposition in Standing Committee in 1977 when the earlier provision was introduced—is that there should be truth in taxation; that there should be openness. If we decide to tax people more heavily, fair enough, let us come to Parliament and say that we want to do that, and let us justify it to the House of Commons. I went on to say: What was objectionable was allowing inflation steadily by stealth to increase the tax burden—without any explicit changes in law and without any changes in the allowances—and to erode the value of those allowances. That was the argument time and again. That was why I introduced my amendment to the so-called Rooker-Wise amendment in 1977, making it absolutely clear that this was not mandatory"— I repeat,"not mandatory"— and that the Government had the opportunity to put before Parliament a different figure if they wished to do so. That is why the clause is drafted with the phrase 'unless Parliament otherwise determines'."—[Official Report, 3 June 1980; Vol. 985, c. 1358–59.] That is exactly the position I have always held, and the position that I held in 1977.

Mr. Stoddart

I am sure that the right hon. Gentleman remembers the debate on the Report stage of the Finance Bill on 25 July 1977 when he gave this reason for his amendment, if I may take the time of the House to read it: Let me make clear why I moved the amendment to the amendment originally proposed by the hon. Member for Coventry, South-West. There were two reasons. The first was that in the form in which it was proposed I felt that there was no possibility of its being carried in Committee and certainly no chance of its reaching the statute book. I was concerned to see a measure of indexation on the statute book. Therefore, I proposed my amendment—and I am glad that, for once, it has had the effect I desired."—[Official Report, 25 July 1977; Vol. 936, c. 93.] That seems to conflict with what the right hon. Gentleman has said.

Mr. Lawson

No, it does not. Perhaps the hon. Gentleman will allow me to read on from columns 93 and 94 of Hansard for 25 July 1977. It was important to make it clear that what we were doing was to say 'Of course the Chancellor must have complete freedom of action, but it must be open, overt.' That is why I put down an amendment to make it clear that it was overt, that the Chancellor could say 'Here is an order, which I want the House to approve, which will mean that the allowances go up by very much less than the rise in the cost of living. In fact, they will be reduced in real terms.' Therefore, what we are getting at is truth in taxation. It is not some automaticity, which is a straw man."—[Official Report, 25 July 1977; Vol. 936, c. 94.] I have consistently argued that view. Opposition Members have no reason or right to pretend otherwise. I have made my position absolutely clear.

I am not saying that I welcome the decision not to increase personal allowances. Nor did my right hon. and learned Friend the Chancellor. As he said in his statement, that decision was taken because of economic circumstances and the need to reduce the public sector borrowing requirement. Under the old system no increase in personal allowances would not have been an issue at all. A clause dealing with the matter would not have been needed in the Finance Bill because the old allowances would have continued. Under the present system we are obliged to include such a clause. It will be debated and no doubt amendments will be proposed and voted on. That position will remain. We are not in any way undoing the requirement for the Government to take action in an open and overt way. This year we are asking the House to agree to keep last year's level of allowances for the coming year.

I wish to touch on a subject of great importance which has not been touched on in the debate so far. I refer to our overseas indebtedness. When the Government took office, we inherited official overseas debts totalling $22 billion, slightly greater than the total of our official reserves. In our first Budget we set ourselves the objective of securing a substantial reduction in the burden of official external debt during the life of this Parliament. Since then, we have reduced the total debt outstanding to $18 billion.

I can today announce that we have set in hand arrangements to repay this year the whole of the $2.5 billion Eurodollar loan raised by the Labour Government in 1974, which would otherwise have matured at various dates between now and 1984. Together with the scheduled repayments of other loans falling due in 1981, that prepayment, when completed, will reduce the total of our outstanding official external debt at the end of this year to around $14 billion. Our remaining debt, equivalent to about seven weeks exports, will be—indeed is already—smaller in relation to our foreign currency earnings than at any time since the Second World War. And we shall have achieved that reduction in a period when most other industrial countries have been drawing heavily on their reserves or increasing their international indebtedness.

With that considerable success behind us, the time has come to review our debt policy for the remainder of this Parliament. Much of our remaining debt is long term, bearing a low interest rate by today's standards. Moreover, the terms and maturity pattern of our outstanding debt provides fewer opportunities for early repayment than in the past. During the remainder of this Parliament, therefore, both gross and net debt repayments must, after the end of this year, be expected to be on a more modest scale than hitherto.

In addition, following this review, we have decided to amend the criteria by which the exchange equalisation account provides exchange risk cover on borrowing in foreign currency by public sector bodies. In future, official cover will normally be offered only on approved loans through the Community institutions with which we wish to maintain a modest programme of borrowing. There are also some occasions when public sector bodies will be able to borrow in foreign currency without cover—for example, if they have a foreign currency income on which they would otherwise be exposed to an exchange risk. Where such borrowers can demonstrate a need for foreign currency finance for their normal commercial transactions, they will be permitted to borrow abroad on appropriate terms. This form of uncovered public sector borrowing is in a totally different category from the official covered borrowing of the past, which was undertaken for Government purposes and in support of the reserves. It is therefore inappropriate to apply the requirements of the official debt repayment programme to it.

Nevertheless, any overseas finance raised on this uncovered basis will of course continue to be contained within each public corporation's external financing limit; and since it inevitably involves the United Kingdom's credit overseas, and is subject to Government approval by statute, its scale, form, terms and timing will continue to be subject to Government agreement.

Mr. J. Enoch Powell (Down, South)

We have recently cleared from the House the Fisheries Bill, which offered to the Sea Fish Industry Authority what the House understood at the time to be just such a cover against fluctuations of the exchange rate for its overseas borrowings as I gather will no longer be available.

Mr. Lawson

I am not so familiar or expert on the sea fish industry as the right hon. Gentleman, nor perhaps as I should be. But the position that I outlined will obtain as from today.

Dr. Bray

Does the Treasury envisage the use of the new powers that it is seeking on the amendment of exchange control powers? If so, in what circumstances does it envisage using them? Will the powers be used to influence the exchange rate?

Mr. Lawson

The hon. Gentleman may know that in May 1980 my right hon. and learned Friend the Chancellor of the Exchequer explained in a written answer that we intended over a period to make exchange control legislation rather more symmetrical than hitherto, it being hitherto concerned mainly with outflows, and to put it in conformity with the requirement contained in the European Community directive. I assure the hon. Gentleman that there is no present intention to make use of these powers. The Finance Bill seemed to be the most convenient vehicle to make the necessary legislative changes.

Mr. Robert Sheldon (Ashton-under-Lyne)

What would have happened if this provision had not been included in the proposed legislation?

Mr. Lawson

Precisely nothing. It is not essential, but it is sensible. We considered that as it was sensible for the reasons set out in my right hon. and learned Friend's written answer in May 1980 it would be sensible to include it in the proposed legislation. If the right hon. Gentleman has grave objections, no doubt he will let us know the nature of his objections and we shall consider them with all the gravity that they deserve.

In an important contribution to the debate my right hon. Friend the Member for Taunton (Mr. du Cann) praised the medium-term financial strategy, for which I thank him, and the report of his own Committee, the Select Committee on the Treasury and Civil Service. Anything that I were to add to the Committee's report would be a work of supererogation. My right hon. Friend mentioned the importance of maintaining and improving the control of public expenditure. As he well knows, the Government are entirely with him on that score. My right hon. and learned Friend the Chief Secretary devoted a fair amount of his speech to that topic.

However, my right hon. Friend the Member for Taunton was perhaps a little over-simplifying the matter when he suggested that our problem was that we had not paid sufficient heed to the excellent earlier report of his Committee. We are well aware of the need and desirability of cutting public expenditure. We also read his report. However, the difficulties are more of a fundamental, practical, political and, in the case of local government, constitutional nature. There are grave difficulties. I mentioned some of these in greater detail than I have time to do tonight in my speech in Zurich earlier this year. It is clear from the quotation in the Red Book to which my right hon. Friend referred that the Government are fully seized of the need to do better.

I am grateful to my right hon. Friend for his contribution, but the contrast that he made between current and capital spending—which is something that we very much bear in mind—is, nevertheless, sometimes presented in a slightly misleading way, as if current expenditure is a matter simply of administration. In fact, the great bulk, and the great growth area, of current expenditure is transfer payments, above all in the social security field, as my right hon. Friend the Member for Daventry (Mr. Prentice) pointed out. One has to bear that in mind when talking about current and capital expenditure.

My right hon. Friend the Member for Daventry made a notable contribution to the debate. He asked a number of questions that must be asked. [HON. MEMBERS:"Answer them."] I shall make my speech in my own way. I shall certainly not be told what to do by the hon. Member for Birmingham, Perry Barr (Mr. Rooker), whose reputation for making unfounded statements for which he subsequently does not apologise is known throughout the length and breadth of the country.

Mr. Frank Haynes (Ashfield)

Will the right hon. Gentleman give way?

Mr. Lawson

The right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) was full of ideas for increasing Government spending and cutting taxation, which is an agreeable pastime for someone who will never be faced with the responsibilities of administering a programme or managing the economy. He had a soupçon of doubt in his mind that big increases in expenditure and cuts in taxation might produce inflation. However, he went on to say that he had run the Liberal model through the Treasury computer and that that proved that it was not inflationary. I must say that he has turned naivety into a way of life. Since the Treasury computer was invented, every Government have run their policies through it, but that has not stopped inflation from getting worse and worse. The right hon. Gentleman will have to do better than that.

The right hon. Member for Stepney and Poplar (Mr. Shore) was concerned that high interest rates were causing a rise in the pound, which he felt was damaging to British industry and the economy. That is strange, bearing in mind that one remembers him at the Department of Economic Affairs fighting hard to keep up the value of the pound and fighting hard every day to prevent devaluation. He now comes here as an arch devaluationist.

However, let us leave aside the question whether the pound should be pushed up or down. Clearly the right hon. Gentleman alone knows what is the right level for the pound. Only he knows whether it was too low in one period or too high in another. He is very clever at that. What puzzles me is that, if it is interest rates, how can interest rates have caused the pound to rise since the Government took office? Since we took office, the rise in the effective exchange rate of the pound has been 15 per cent. Yet minimum lending rate today, at 12 per cent., is precisely the same as it was when we took office.

Let us look, then at relative interest rates. The hon. Member for Motherwell and Wishaw (Dr. Bray) will understand this, even though the Opposition Front Bench does not. The right hon. Gentleman may think that relative rates are more important. He is probably right. In so far as interest rates determine exchange rates, it is relative rates which have the main effect on flows of money across the exchanges. But when we took office the prime rate in the United States was 11¾ per cent. Today it is 18per cent. So over this period, relative interest rates in this country have moved very much lower than they were. Yet the exchange rate has risen. The right hon. Gentleman will have to find some other explanation for the increase in the exchange rate.

In addition to a massive devaluation—or at any rate devaluation; he did not vouchsafe quite how big—the right hon. Gentleman called for massive increases in State spending. There were to be no increases in taxation and huge increases in Government borrowing—again he was not prepared to tell us how big—but he was quite clear that interest rates should come down.

Dr. Bray rose

Mr. Lawson

In other words, he was saying that the money should be printed—the classic recipe of inflationists throughout the ages.

This brings me to the points made by my hon. Friend the Member for Grantham (Mr. Hogg) in his short and pertinent speech. He dealt with a matter which I think preoccupies many hon. Members on both sides of the House—the question of the Budget judgment as a whole, and the charge made by the Opposition that the Budget is deflationary. I maintain that is is not a deflationary Budget, although it is certainly an anti-inflationary Budget. That is its main purpose.

In judging the public sector borrowing requirement, we have taken fully into account the effect of the recession, and in particular the fact that it is proving deeper than we expected when we published the medium-term financial strategy a year ago. My right hon. and learned Friend the Chancellor pointed out in his Budget speech that the effect of the recession on the PSBR in 1981–82 is likely to be even greater than it was in 1980–81. Indeed, our best estimate—obviously rough at the edges—is that the extra severity of the recession has of itself probably added some £2½ billion to the 1980–81 PSBR and will add some £3 billion to the 1981–82 PSBR. It is that additional £3 billion, on top of the £7½ billion originally implied by the medium-term financial strategy when it was launched a year ago as an appropriate PSBR for 1981–82, which explains the Chancellor's Budget judgment that the appropriate PSBR for 1981–82 in current circumstances, taking full account of the recession, is l0½ billion.

Is the argument that that figure is too low? If, for example, the prospective PSBR for next year, on an unchanged tax basis, had been not £14 billion but, say, £10 billion, would it be argued that there should actually be a reduction of taxation in the Budget? I suspect that it would not. I suspect that the problem is not the Chancellor's judgment in terms of the £10½ billion, but the point from which we were obliged to start—the appalling prospect of a £14 billion PSBR. Like the £13½ billion PSBR for the year now ended, this cannot be explained simply as a consequence of the recession. As I pointed out a moment ago, we reckon that only some £2½ billion of the £5 billion overshoot is due to that.

There is no getting away from the fact that increased expenditure—whether it is on British Leyland, British Steel or whatever—must be paid for. Those who are concerned that the Budget is deflationary—by which I take it that they mean contractionary—have mistaken the fact that it is monetary conditions which in the last resort determine whether conditions are contractionary or not. So it is not a question of the fiscal stance. It is the relationship between monetary growth and the rate of inflation. Judged by that, there is nothing whatever to suppose that conditions at present, or those set by this Budget, are in any way contractionary.

Debate adjourned.—[Mr. Boscawen.]

Debate to be resumed tomorrow.