Budget Resolutions and Economic Situation

HC Deb 12 March 1981 vol 1000 cc1011-98

[Relevant European Community documents: No. 10444/80 and the annual report on the economic situation in the Community (1980) and the economic policy guide lines for 1981.]

3.52 pm

The Secretary of State for Social Services(Mr. Patrick Jenkin)

Yesterday I gave the House the Government's proposals for increasing the main social security benefits next November. As last year, the Government have published the annual expenditure White Paper at the same time as the Budget, and I shall offer a few comments on the main expenditure programmes for which I am responsible.

I never forget, and I know that the House never forgets, that overwhelmingly the money for whose spending I am accountable to the House of Commons is spent on meeting the needs, either by way of income support or by way of health or social care, of those who, through age, handicap, sickness or poverty look to the community for help. If savings in these programmes have to be found—and in the harsh economic climate in which we find ourselves they have had to be found—it is inescapable that the effects should be felt by those who benefit from these programmes.

To argue, as the Opposition do with what is becoming monotonous regularity, that the economies that I have had to find in the health and social security programmes amount to a dismantling of the Welfare State—or some such extravagant claim—is quite frankly absurd.

The expected cash outturn for the current financial year for the social security programme is about £23,000 million. Next year, 1981–82, the cash cost of the programme is expected to rise to about £27,400 million. This is an increase in the cash cost of around 19 per cent. year on year. At constant prices the increase in expenditure is likely to be about 7 per cent.

Last year the Social Services Select Committee—I am glad to see the hon. Member for Wolverhampton, North-East (Mrs. Short) in her place—asked me to publish a table showing the total expenditure on social security benefits by broad groups of beneficiary, and this we have done on page 122 of the White Paper. The table shows that, as well as increasing spending on the unemployed, expenditure continues to grow for the elderly, for the long-term sick and the family.

I have had to make cuts and some of them have been painful. Despite that, I have been able to honour our commitment to keep pensions in line with prices, to protect the safety net for the poorest, to increase benefits for the disabled, to give increased help with fuel costs, to provide further help for one-parent families, and to maintain child benefit in line with the commitments that have been given. That is not a bad record.

We have honoured our pledge to keep total spending on the Health Service in line with the plans of our predecessors and so maintain a modest level of annual growth. Gross spending on the Health Service in Great Britain, taking current and capital spending together, has increased by about 2.4 per cent. in real terms this year and is planned to increase by about 2.9 per cent. next year.

Of course, more of the cost is now being met by higher charges and next year around £250 million will be met by higher health contributions. Those who argue that we are destroying the National Health Service are simply talking through their hats.

Though some local authorities have had to make substantial economies in local social services, total spending in England rose last year by about 4.4 per cent. in real terms and it should be about the same level this year. For next year the White Paper suggests continuing slow growth, that actual spending will depend upon the decisions which the local authorities will take in town hall and county hall throughout the country. To talk of the destruction of the Welfare State in the face of those actual spending figures is simply foolish.

I take up some detailed points on the social service programmes. I have given the figures for the growth of spending on the National Health Service. About 70 per cent. of the money voted for health goes on paying the staff. The other 30 per cent. goes on buildings, equipment, supplies and all the other costs necessary to sustain the service.

Whether we achieve the growth and improvement in services which the rise in spending should provide depends more than on almost any other factor on bargaining sensibly about pay. The NHS staff has received considerable pay increases under the present Government. In round terms, the pay bill of about £4 billion in March 1979 is expected to reach about £6 billion in March 1981, an increase in pay going well ahead of the increase in prices. These figures do not include what might happen in the current round of pay negotiations.

For 1981–82 the Government have set a cash limit of 6 per cent. for pay and 11 per cent. for non-pay factors. Within the pay factor of 6 per cent., it is for the Whitley councils concerned to determine the levels of settlement that are appropriate for each of the 20 or so negotiating groups. I recognise clearly all the difficulties in these negotiations, but I cannot stress too strongly the need for pay settlements to be reached within the limits of the pay factor. If this is not done, the only result will be that higher pay will eat into the money provided for better services. It is the Government's wish to see pay settlements that are fair to the staff concerned, but they must also be fair to the community as a whole, which bears the cost. Employment in the National Health Service is very secure, in marked contrast to the hazards of redundancy and short-time working which currently face many in the private sector. I hope that those who are responsible for pay bargaining in the Health Service will take these important factors fully into account.

I do not believe that, in the longer term, pay bargaining in the public sector can be left entirely to the rigidities of a cash limit. As for the Civil Service, Health Service workers should be able to look to a pay system that offers the prospect of fair treatment relative to the rest of the community, within the limits of what that community can afford. Especially must this be so of major groups such as nurses and midwives for whom no obvious comparators exist outside the National Health Service.

It is essential that we ensure that nurses do not suffer because there is no ready system for ensuring that their pay is kept up to date. I have made this plain to both sides of the Nurses and Midwives Whitley Council and I am awaiting their response to my suggestions of possible ways of placing nurses, pay on a more satisfactory basis for the longer term. Similar considerations apply to the professions supplementary to medicine.

There is a second consequence of the NHS pay bill amounting to 70 per cent. of the total Vote. I am glad to see my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) in his place. If the service is expanding, so will the number of doctors, nurses and other professional staff. My hon. Friend complained in a recent letter to The Times that the staff in the National Health Service had grown since the last election by something in excess of 20,000. I think that I am not doing my hon. Friend an injustice when I say that he seemed to think it a matter for criticism. I am bound to say to him in all kindness that I disagree. He and I both fought the last election on the promise that we would maintain the growth in the National Health Service, and growth in the service means growth in manpower.

The suggestion appears to be made that we are talking only about the growth of administrators. Those who say this may have been watching too many television programmes recently. Let me give the House the facts. I start with a word of caution. The figures I shall give are only estimates, for the good reason that to save administration I do not require health authorities to submit returns to me of actual numbers employed more than once a year. They should therefore be treated with some caution, but I am satisfied that they are of the right order of magnitude.

Of the total increase in NHS staff—the figures I give are whole-lime equivalents—of around 19,700 between September 1979 and September 1980, more than 1,000 were extra doctors and dentists, some 8,000 to 9,000 were extra nurses and midwives, rather more than 5,000 were additional professional and technical staff, including the paramedical professions such as physiotherapists, occupational therapists, laboratory technicians and similar staff. Only 600 were works and maintenance staff, about 800 were ambulance staff, about 600 were ancillary staff and just over 2,500 were administrative and clerical staff. More than three-quarters of the extra number were therefore medical, nursing or other professional staff directly providing clinical service for patients. Of the administrative and clerical staff, only a very small proportion form part of management. The rest provide essential clerical support for the rising numbers of doctors, nurses and other professionals. Consultants must have secretaries. Wards need ward clerks. Out-patient departments need clerks to arrange appointments. Records departments need clerks to maintain records.

The real argument is about management costs, on which we are maintaining a very strict system of control. Last March, we had set for ourselves a target for management costs of 5.25 per cent. of total costs—a figure which compares very favourably with large organisations in this country and overseas. The figure actually achieved was 5.05 per cent. In other words, we are ahead of our own target. Of course, we seek a further significant reduction in the proportion of management costs to around 4.5 per cent. by 1984–85 from the new slimmed down structure of the National Health Service on which we are now working.

Those who argue that the Health Service should be cutting staff are arguing for cuts in the service itself. That is not the policy of Her Majesty's Government. We are committed to maintaining the growth of the Health Service, and I hope that that policy has the support of the House. Of course we must increase efficiency. There is evidence of increasing efficiency in the falling waiting lists. Waiting lists are rightly a matter for concern. In March 1979, they reached a record figure of more than three-quarters of a million in England. Last month, my hon. Friend the Minister for Health announced that, on the latest figures available, waiting lists have dropped by 111,000 since the election. I regard that as a very welcome trend, indeed.

Mr. Peter Hordern (Horsham and Crawley)

I hope that if I am lucky enough to catch your eye, Mr. Speaker, during the course of the debate I shall be able to advance more of the arguments, as I wish to keep my intervention very short.

Mr. Speaker

Order. The hon. Gentleman gives me the chance to say that he is by no means alone in that desire. There is a very long list of Members wishing to speak.

Mr. Hordern

I am aware of that, Mr. Speaker. In that case, may I remind my right hon. Friend that it is not just in the last year, for which the Government are directly responsible, that the number of people employed in the Health Service increased by 25,000? Every year for the last 20 years, since 1961, a similar increase has taken place. The number of people engaged in the service has therefore grown from 575,000 in 1961 to 1.2 million at the latest count. Of course, I well understand that the increase has been very much concerned with extra doctors and nurses, but my right hon. Friend will agree that there has also been a substantial increase in the number of administrators. He will recognise that the extra cost of wages and salaries, to which he has directly referred— [HON. MEMBERS:"Speech".]

Mr. Speaker

Order. Is the hon. Gentleman making the speech that he intended to make later? It is a rather long intervention.

Mr. Hordern

I was just coming to the question, Mr. Speaker.

My right hon. Friend will recognise that the cost of extra wages and salaries, to which he rightly referred, was £900 million in the last year. Will he kindly tell the House when he proposes to carry out our election pledge to simplify and decentralise the service and cut back on bureaucracy? When shall we see some cuts in the number of administrators in the Health Service?

Mr. Jenkin

My hon. Friend, who I am sure will be able to develop his argument further—[HON. MEMBERS:"Oh".] I was referring to the fact that the permanent secretary from my Department will be answering questions from the Public Accounts Committee, of which my hon. Friend is a distinguished luminary. My hon. Friend will therefore be able to develop the argument in greater detail. He will know that within months of coming into office we published our proposals for simplifying the structure. We consulted on them last July and I announced the outcome. I have published a circular. There have been consultations about setting up the new district health authorities and their boundaries and composition. I have had proposals from all 14 regional health authorities and I shall make announcements on that during the next two or three months. I have announced the first already. That is for the Wessex region.

By April 1982, we hope to have a substantially slimmed down administrative structure. Over the following two years, we expect to achieve substantial savings in the administrative structure of the National Health Service. By the time my hon. Friend and I defend our seats at the next general election, I am confident that that election manifesto pledge will have been entirely fulfilled.

I referred a moment ago to the contribution made to maintaining spending on health through increased charges. This brings me to a matter which has, I know, exercised a number of my hon. Friends in the past—the extent to which people from overseas get treatment from the National Health Service free of charge. I remind the House of the present position. Subject to a number of exceptions, a person who comes here from overseas in order to receive treatment for an existing condition has to be regarded as a private patient and is charged accordingly. On the other hand, a person who falls ill while visiting this country is treated free of charge. This general position is complicated by the existence of a number of reciprocal agreements and the reciprocal arrangements within the European Community.

The problems that we identified are essentially two. First, at a time when the NHS is under pressure, with long waiting lists for some specialties in some parts of the country, it is not self-evident that people coming from overseas should be entitled to use these services free of charge. So far as I am aware, no other country offers that kind of free comprehensive service to visitors. Secondly, the existence of that entitlement leads to fairly widespread abuse by foreigners who come to this country suffering from an existing complaint and then claim free treatment on the grounds that they have fallen ill while here. Under the present rules, it is extremely difficult to disprove such a claim.

For both these reasons, we believe that in the present financial circumstances it is right that visitors from other countries should be asked to pay for the medical treatment they need while here. We propose, therefore, to make regulations providing for charges to visitors from abroad for hospital treatment. Subject to a number of exceptions, the new charges will apply to those who are not ordinarily resident in the United Kingdom. We propose that free outpatient treatment at accident and emergency or casualty departments should be continued and, of course, visitors will remain entitled to treatment of immediate necessity where there are reciprocal health agreements or under the Community scheme.

We propose, too, to make an exception for visiting spouses and dependent children of people who are settled here. They will continue to be entitled to any immediate treatment by the National Health Service free of charge. Charges will also not be made to people who have come here to settle, to certain migrant workers, or to those who have stayed here for three years.

Consultations with the Health Service have already established that it should be perfectly feasible for hospitals to determine by two or three simple questions and answers, supported by such evidence as may be necessary, whether a patient is entitled to treatment free of charge.

Mr. Donald Stewart (Western Isles)

I am interested in the logistic side of that argument. How does the right hon. Gentleman expect to collect the money in cases where persons abroad will not pay up?

Mr. Jenkin

I have no doubt that there may be some bad debts, but we are confident that the overwhelming amount of the money will be collected. I shall come to this in a moment, but I would expect that, like British tourists who go abroad, a very large number of people will cover themselves by insurance.

I hope to table the regulations shortly. We shall wish to consult the health professions and other interested bodies about the details of the scheme before the regulations are published. In particular, we shall wish to consult on certain other exemptions which we have in mind and on the detail of the provisions. I hope that consultations will be completed in time to allow us to make the regulations later this year and to bring them into force on 1 October next. This will come around the end of the 1981 tourist season, and I hope that the announcement which I am now making will give sufficient notice for the travel industry and others to warn people intending to visit Britain after that date that they should take out the necessary insurance cover if they so wish.

A power to charge visitors from overseas has been on statute book since 1949. In bringing this power into force, we are doing no more than the vast majority of other countries have always done, and I hope that the proposals which I have outlined will have the support of the House.

Mrs. Gwyneth Dunwoody (Crewe)

The Minster is announcing a major change in the normal procedures of the NHS. Is it his intention that overseas students who are studying in this country, many of them with positive assistance from the Government through various education schemes, are to be charged for medical services? Does he intend that at the time of admission to casualty departments clerks should in future demand evidence of status from someone of any other nationality as to his right to be in this country?

Mr. Jenkin

I have already made it clear that accident and emergency and casualty departments will continue to give treatment free. If a patient is subsequently admitted to hospital, it will be for the admission clerks to ask the necessary questions in order to determine whether the patient is entitled to free treatment. That is exactly what happens in hospitals all over the world, and I cannot believe that our NHS is incapable of doing that.

We have never treated students as a special category under the NHS, and we do not want to start now. Of course, a number of sponsored students can come here on the assumption that they will be entitled to free treatment if they fall ill. It will then be for the sponsoring authorities to make themselves responsible for the cost of meeting their treatment. That is something about which we wish to consult, As to students who have already embarked on courses and who will be here next October, we shall wish to consult the appropriate interests to see whether there should be some transitional provision for them. That is something with which I have some sympathy. We shall want to consider the financial consequences of making a concession.

Mrs. Dunwoody

The right hon. Gentleman is using the occasion of a Budget debate to make a major announcement about policy decisions which he ought to be prepared to debate on the Floor of the House. He is making a statement without making it clear whether the Foreign Office has given its agreement, whether money is to be made available and whether there has been any consultation. In fact, he is suggesting something which will do enormous damage to the good will which is normally shown to this country by other nationals.

Mr. Jenkin

The hon. Lady has held Government office and she knows perfectly well that an announcement of this sort could not be made unless it had the agreement of the Government as a whole. Therefore, she may take that as axiomatic.

Mr. David Ginsburg (Dewsbury)

I noted what the right hon. Gentleman said about this applying to people who are not ordinarily resident in this country. He will be aware that there is a category of person who has the right of entry or the right of residence—

Mr. Terence Higgins (Worthing)

On a point of order, Mr. Speaker. What has this to do with the Budget?

Mr. Speaker

It appears to have a lot to do with the Minister's speech, and I have called him to address the House.

Mr. Ginsburg

I think that my question is in order. The Minister will be aware that there is a category of person who, whether he is ordinarily resident here or not, has the right of entry and residence under immigration law. Will these restrictions apply to that category of person?

Mr. Jenkin

There will be an opportunity to debate this matter when the regulations come before the House. Perhaps the hon. Gentleman will forgive me if I do not give a detailed answer to his question.

As to whether this matter is appropriate to the Budget, I referred at the beginning of my speech to the fact that the Government have published a public expenditure White Paper. In paragraph 10 of section 2.11 there is a reference to the change that I am announcing, which will add about £5 million in a full year to the financing of the NHS. With the greatest respect to my right hon. Friend the Member for Worthing (Mr. Higgins), I think that that is a relevant matter for a Budget debate.

There is one other matter to which I want to refer, and that is the Chancellor's announcement of restoring tax relief on health insurance premiums paid under employer-employee schemes. The Government are committed to encourage the growth of the private sector in health, on the very sensible ground that this increases the amount of resources brought to the nation's health care. During the election, we gave a commitment that we would restore this tax relief. I am glad that my right hon. and learned Friend was able to announce this change in the Budget.

I see from the press that this announcement attracted the ritual condemnation by spokesmen for some of the Health Service unions. I think that we should treat these comments with a little reserve, for it appears that these people do not always practise quite what they preach.

The House may have seen an article in the Daily Mirror on Tuesday which stated: Leaders of a health union that officially condemns private medical schemes have been secretly operating one for themselves. The scheme covers 50 officials of the Confederation of Health Service Employees". On a number of occasions recently, I have been lectured by Mr. Albert Spanswick, the general secretary of COHSE, about what he called the iniquities of private medical care. So I am bound to say that I am even more astonished when I go on to read in the Daily Mirror that the scheme was organised by COHSE's General Secretary Albert Spanswick in 1979, the year he publicly attacked another union for planning the same thing We all knew about the Midland brewery workers who signed up with BUPA, and about the workers in the electrical contracting industry who made a private health deal with their employers. But now we have one of the major Health Service unions doing the same thing. I very much welcome that. It seems a sensible thing to do, but I hope that Mr. Spanswick will understand that it will be with some impatience that I shall listen to his future lectures on the subject.

Mr. Nigel Spearing (Newham, South)

Did the right hon. Gentleman have the courtesy to check with Mr. Spanswick about the accuracy of that report?

Mr. Jenkin

No. On matters of this sort that is perfectly legitimate. The story has not been denied, and has been repeated in another newspaper. After all, the Daily Mirror is not a paper which normally supports the Conservative Party.

I should like to mention a number of the concessions which the Chancellor made by way of help for the disabled. He has doubled the blind person's allowance from £180 to £360 a year. There are new and extended VAT reliefs on a number of aids for the disabled, including one for which I know Motability has pressed—the relief on adaptations to cars for the disabled. He has widened the scope of reliefs from capital taxation for trusts for the disabled.

While on the subject, I should like to say a word about the importance that the Government attach to the voluntary sector and its role in sharing the caring. We have gone to great lengths to maintain our support for the voluntary movement. In spite of the pressure on resources, I have maintained each year the real value of the money available to the voluntary sector active in the area of health and personal social services. For the current year, grants will total around £7 million, and I intend to maintain that in real terms in the coming year. Something over 225 organisations get help from my Department under these"section 64" grants.

While unemployment remains as high as it is, we are very anxious to give further opportunities for those who cannot find jobs to undertake voluntary work. On Tuesday, the Chancellor of the Exchequer announced that the earnings limit for people getting unemployment benefit was to go up from 75p to £2 a day. I can tell the House that this is part of a wider package of proposals easing the conditions under which unemployed people can combine drawing benefit with doing voluntary work. I intend to introduce regulations fairly soon to give effect to these changes, which, though modest, will make a contribution in an area which I know has given some cause for concern to organisations that would like to draw more volunteers from this source.

Two further matters were raised by several hon. Members during the questions that followed my statement yesterday. One concerned the taxation of widows and women aged between 60 and 65. That matter was fully dealt with by my right hon. Friend the Financial Secretary at the conclusion of last night's debate. There is nothing that I need add to that today. The other issue that was raised was the effect of the Budget on the poverty trap and on work incentives. My hon. Friends the Members for Bristol, West (Mr. Waldegrave) and for Buckingham (Mr. Benyon) expressed anxieties about that aspect of the Budget. I should like to enlarge on the replies that I gave yesterday.

I want to be quite clear what we are talking about when we refer to the poverty trap. When I use that phrase, I mean the situation in which a person may lose a part of any pay increase because of the combination of higher tax and national insurance contributions with a possible reduction or even the loss of some means-tested benefits. It is perfectly true that in theory a marginal tax rate of 100 per cent. can be arrived at by adding up the effects of tax, the national insurance contributions, family income supplement, and the loss of housing benefits. But the tax rate has not changed, the national insurance contribution is up by only one percentage point and FIS awards run on for a year regardless of any pay increases in that year. Therefore, I return to the point I made yesterday, namely, that nothing announced in the Budget deepens the poverty trap or worsens the marginal tax rate. The poverty trap is not the real problem. As Jonathan Bradshaw said in a recent publication by the Study Commission on the Family: The idea that an increase in earnings can result in a sudden drop in disposable resources is nonsense". The fact is that the bark of the poverty lobby is worse than the bite of the poverty trap. The real problem is, of course, that holding the income tax allowances at their present level is estimated to draw a little over 500,000 more people into income tax at the basic rate during the course of the year. It follows that the effect on working families with low incomes is to increase their marginal tax rate by 30 per cent. if they did not pay tax previously.

Mr. Ralph Howell (Norfolk, North)

Is not my right hon. Friend aware of the depth of the poverty trap and that the treadmill society is already deterring people from working? The fact that another 500,000—or even 1 million—people will be drawn into the tax net must add to that problem. I simply cannot understand how my right hon. Friend can claim that this provision does not deepen the poverty trap. Will my right hon. Friend clarify one other matter? I understand that child benefit is to be increased by 50p for those who are working but by £1 for those with teenage children who are not working and by 60p for the parents of non-teenage children. Surely that will aggravate the situation, because people are less well off when they are in work than when they are out of work. Will my right hon. Friend give an explanation?

Mr. Jenkin

I am trying to draw a distinction between the poverty trap and the problem of work incentives. The two are not the same. I shall come to the in-work and out-of-work incentive problem in a moment. My hon. Friend's first question has anticipated the point that I was about to make. I have already said that the effect of the Budget is not to deepen the poverty trap. Nothing that the Chancellor of the Exchequer announced on Tuesday in any way heightens the marginal tax rate. However, I concede that more families will be brought into the tax net. Therefore, the poverty trap's effect is widened, but the impact on particular families is not deepened.

Mrs. Dunwoody

There are just more of them.

Mr. Jenkin

Let us get the situation clear. The key point concerns how many more. By definition, we are talking about families who receive family income supplement and who may lose it as income rises. The number of families affected in this way by the Budget cannot be more than about 10,000. The hon. Member for Crewe (Mrs. Dunwoody) may argue that that is 10,000 too many. However, in relation to perhaps more than 100,000 families who are in receipt of family income supplement and in relation to the 500,000 people who are brought into income tax, 10,000 is a very small number. Hon. Members should recognise that.

Those who argue that the Chancellor of the Exchequer should have raised the basic rate of tax rather than hold the allowances must recognise that that would have deepened the poverty trap for everyone by raising the marginal rate of tax on every extra pound earned. Quite apart from all the other disadvantages of putting up the basic rate, I cannot believe that that would have been welcomed by interests concerned with the low paid.

I turn to the other question of my hon. Friend the Member for Norfolk, North (Mr. Howell) about work incentives or the Budget's impact on the balance of income in work and out of work. It has been suggested—my hon. Friend also made the point—that, with tax allowances unchanged and with increased benefits, the incentive to work must be worsened. I studied this question very carefully with my advisers. As a result, I must tell the House that the effect of the Budget on work incentives is largely neutral. The incentive problem, as my hon. Friend for Norfolk, North has frequently pointed out with such force, has always primarily affected families with children. I am very glad to see that in his latest issue of"Why work?" my hon. Friend has come round to the view that increasing child benefit is one of the best ways of mitigating the"why work?" problem. By increasing child benefit by over 10 per cent., which benefits those who are in work and is offset against benefits for those who are out of work, we have made sure that for families with children—and particularly for larger families—the work incentive problem has not got worse. The 9 per cent. increase in the level of most socal security benefits preserves the real net income of those out of work, but the increase in child benefit of 50p, coupled for those who are entitled to it to the improvements in family income supplement, means that these benefits have been increased more than the benefits paid to the unemployed.

Mr. Ralph Howell

Is my right hon. Friend aware that his arguments are incomprehensible? He spoke about my"Why work?" pamphlet. One of that pamphlet's main conclusions was that there should be uniform child support. By increasing child support more for those who are out of work than for those who are in work, the Government: are aggravating the problem. There is no sense in arguing otherwise.

Mr. Jenkin

With the greatest respect to my hon. Friend, I suggest that he should follow the practice of tabling some questions. This is not the right moment to go into the detailed figures. I have tables of figures with me that support the proposition that I am putting to the House. If my hon. Friend would like to table questions in order to extract those figures, he will see that his assumptions are not supported by the facts.

Perhaps I can best sum up the position as regards incentives in the following way. Ignoring for the moment housing benefits and making reasonable assumptions about increases in earnings, the position after the November 1981 uprating will be that for families relying on unemployment benefit only the incentive to work will be improved. If a family man who becomes unemployed receives supplementary benefit, and if when working he would qualify for family income supplement, again, the incentive to take up work increases. It is a fact that the great majority of those families on supplementary benefit would either earn more in work than they receive on supplementary benefit or they would be eligible for FIS, which would have much the same effect.

Of course, it will be argued that not all families who are entitled to FIS claim it. I acknowledge that, but it is an important part of the role of the unemployment review officers who work in supplementary benefits to point out to people who believe that they would be worse off if they were to take a job what the benefits are to which they would become entitled. As well as FIS, these would include housing benefits and school meal and milk concessions.

The truth is that the increase in child benefit is demonstrating the value which those of us who have always supported child benefit claim for it. Increasing child benefit is one of the very best ways of dealing with the"why work?" problem. Indeed, I will go further. I wonder whether, if we had retained the old child tax allowance system, the Chancellor of the Exchequer would have fell able, in a year in which he was holding down the personal allowances, to increase the child tax allowances. Child benefit, on the other hand, stands as a separate benefit and because it is paid both in and out of work and because it goes to all families, whether they are above or below the tax threshold, it has enabled my right hon. and learned Friend, even in this most difficult of years, to protect families and in general to maintain incentives.

At a time of severe economic difficulty and in a Budget that by any standards is tough, the Government can justifiably claim to be looking after those who depend on social service support. We are maintaining in both the letter and the spirit our pledge to keep pensions and other long-term benefits in line with prices. We have honoured our commitment on child benefit. The improvements in mobility allowance and in the invalidity allowances and the VAT reliefs reflect our commitment to help the disabled. Maintaining the gross spending on the National Health Service should not only keep pace with the demographic trends but allow some modest improvement in services.

Unlike the Labour Party when it was in power, we have not cancelled the Christmas bonus. We did not cheat the pensioners by leaving out the peak inflation months. We have not slashed the capital investment in the National Health Service. I have no doubt that we shall hear from the hon. Member for Birmingham, Perry Barr (Mr Rooker) his characteristic catalogue of woes and complaints. If he calls for higher spending, I hope that he will tell us where he would get the money to pay for it. If he calls for higher borrowing—and I must say that I was astonished at the right hon. Member for Stepney and Poplar (Mr. Shore) saying that he cared not a fig for the public sector borrowing requirement; I hope that he never becomes Chancellor—he must describe to the House the effects of the higher interest rates that that would generate. If he calls for higher taxation, he must describe to us the effect upon the poverty trap and work incentives. If he calls for the abolition of health charges, he must tell us where the money will come from to make up for the loss of revenue.

If the hon. Gentleman provides the House with none of those answers we shall treat his catalogue of woes with the contempt it deserves. Those who challenge the Government's economic policy owe it to the House and the country to tell us what they would do instead. This they have consistently and signally failed to do. The Budget represents the only honest strategy that will bring about the defeat of inflation and lay the foundations of our future prosperity. As such, it deserves the support of the House and of the country.

4.33 pm

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

By any standards, we have just listened to an astonishing speech. I hope that the House and the Secretary of State will forgive me if I do not follow most of it. I protest most strongly on behalf of the Opposition about the fact that the right hon. Gentleman devoted three-quarters of his speech to matters related not to the Budget but wholly to the public expenditure White Paper. The fact that they are coincidental has been used by the Secretary of State to avoid answering many of the points about social security.

No warning was given about the major announcement today. Many hon. Members who will take part in the debate will want to relate their remarks to the Chancellor's Budget Statement, following upon his Budget judgment. They will not be able to cross-examine the Secretary of State or, indeed, the Minister of Health—whom I do not even see in the Chamber—about this major announcement. We ask that a fresh statement be made early next week so that the Secretary of State may be cross-examined by those hon. Members on both sides of the House who have a detailed and consistent interest in health matters. I understand that the Secretary of State gave no indication through the usual channels that he was about to make such a profound new statement of Government policy, and we protest most strongly about that.

It clearly shows, of course, that the right hon. Gentleman has very little to say about the social security aspect of the Budget. As I said yesterday, he did not even hold a press briefing after his statement, which had very little content.

I want to take the Secretary of State up on one point—that of the savings in management costs for the Health Service. The Birmingham area health authority, which I met last week, with other hon. Members from both sides of the House, flatly refutes the charge and the challenge of a 10 per cent. saving owing to reorganisation. It is a non-starter. Any hon. Member, on either side of the House, could tell the Secretary of State that if he were given an opportunity to cross-examine the right hon. Gentleman after his statement.

The Secretary of State has in many ways redefined the poverty trap. It is no good his merely relying on the fact that the Budget Statement did not include, for example, the extra 1 per cent. on national insurance that comes into force in the new financial year, in a few weeks' time, provision for which became law in December. We cannot simply ignore that.

When the Government came to office the marginal rate of tax—which is the Secretary of State's definition of the poverty trap—was 31¼p in the pound, the basic rate of income tax was 25p and the national insurance contribution was 6¼p. The marginal rate of tax from April this year will be 37¾p in the pound, basic-rate income tax will be 30p, and national insurance will be 7¾p. It is no good the Under-Secretary of State huffing and puffing. The lowest rate of tax when the Government came to office was 25p in the pound. When we enter into tax matters it is legitimate to count the 25p. So, on the Secretary of State's own definition of the poverty trap, there will be an increase from 31¼p in May 1979 to 37¾p in April 1981. That cannot be refuted.

The Secretary of State also said yesterday—and he laboured this point to his hon. Friend the Member for Norfolk, North (Mr. Howell), who has now left the Chamber—that: The incentive problem is not the same as the poverty trap. He went on: Neither the incentive effect nor the poverty trap has been worsened by the decisions announced yesterday."—[Official Report, 11 March 1981; Vol. 1000, c. 897.] Quite frankly, that just does not square with the information that has been made available to hon. Members in the short time since the statement, and I give the House three sets of statistics provided for me by the Low Pay Unit. The Secretary of State may wish to challenge these figures later on and I should be grateful if they could be refuted, but these are figures that I wish to put to him and to the House.

Let us consider the case of a married couple with two children and compare November 1980 with November 1981. The tax-free income—I will define the terms—in November 1980 was £50.75. That is the married man's tax allowance and the child benefit for two children. The family income supplement level for the same family was £74. Supplementary benefit, defined in this case as the supplementary benefit level representing the gross earnings that a married man would need in order to have the same disposable income as an identical family on supplementary benefit, would be £65.15. So we have the tax-free income of someone at work at £50.75 and the comparative supplementary benefit figure at £65.15.

Let us now look at the figures for November 1981 as a result of yesterday's statement. The tax-free income of the family has gone up by £1—that is, 50p a head for the two children, because the tax allowance has remained the same. So the £50.75 becomes £51.75. The family income supplement level has risen from £74 to £82. The equivalent supplementary benefit level as I have defined it has risen from £65.15 to £73.85. So whereas the difference, just looking at the tax-free income and the supplementary benefit levels, was between £50.75 and £65.15 in November last year, it is now between £51 and £73—a massive increase; £1 on one figure and more than £8 on the other.

What can that mean but a major problem in terms of incentives and the poverty trap for many thousands of families? It is irrefutable that those figures—I have had them checked and rechecked because I said that I wanted to use them in the House this afternoon—flow from the Chancellor's Budget Statement.

Mr. Patrick Jenkin

I have here Finance Bill briefing No. 1, which has been prepared by the Low Pay Unit, and I just do not recognise any of the figures that the hon. Gentleman has given.

Mr. Rooker

There is a perfectly good reason for that. I realised that last night that the figures were wrong and I rang up the unit and said that I did not understand the figures. I shall be happy to give the Secretary of State my copy of the new figures, which were reworked by the director of the Low Pay Unit and his staff this morning. They had made a mistake, comparing April with April, and had made a further error in one of the detailed statistics. I knew that the figures were wrong when I saw them and I was not going to come to the House without being sure how the figures were calculated. So I shall be more than happy to let the Secretary of State have my figures.

This situation has arisen because of the Chancellor's decision not to raise tax allowances. I am prepared to meet the Government on common ground on this; they have chosen the tax allowances argument. I ask the House to leave aside the automatic indexation provision that was passed in 1977 and reworked last year in the Finance Act. Let us not argue for or against automatic indexation. Let us consider the argument for raising the tax allowances.

I ask the House to listen to the arguments for raising tax allowance put by Tory Members when they were in Opposition. Let us forget the arguments for which the Financial Secretary is famed and look at the bull-point of the argument for or against raising allowances. I start with yesterday's edition of the Financial Times and quote from the leader: The decision to override Rooker-Wise in order to avoid a rise in nominal tax rates is deplorable. It is regressive"— I do not think that that is denied— and therefore widens the poverty trap;"— the Secretary of State had been careful not to say that. He says that it does not deepen it, but widens it— it means that those who have made realistic pay settlements"— that is a crucial point in this year of 6 per cent.— do not get the advantage an honest change might have offered of some tax relief. The"honest change" referred to was 3p relief on the basic rate.

I want to put some of the arguments that have been put by certain Tory Members. My right hon. Friend the Leader of the Opposition made it abundantly clear on Tuesday, in response to the Chancellor's Budget Statement, that we should hold accountable to the House those hon. Members who voted in a particular way and supported the amendments in 1977.

Of the 15 Conservative Members of Parliament still in the House who voted in Committee on the Finance Bill on 14 June 1977 in favour of the change, 11 are now members of the Government- The creme de la creme become members of the Standing Committees on Tory Finance Bills. The one hon. Member who refused to vote with the Tory Opposition—which is how I voted—was never again allowed to serve in Committee on a Finance Bill, namely, the hon. Member for Wolverhampton, South-West (Mr. Budgen).

It so happens that on the night of 14 June all five speeches made by Conservative Members of Parliament pushing the then Government to raise the tax threshold were from present members of the Government. I wish to put on record the reasons why they thought there should be a rise in the tax allowances, and I start with the right hon. Member for Blaby (Mr. Lawson), who is now the Financial Secretary to the Treasury. He said: Finally, let me say that one of the matters that concern us on both sides of the Committee is the problem of the poverty trap which has occurred in a much more acute form as a result of the reduction in the real value of these allowances". That is exactly what happened this year.

I move to the hon. Member for Norfolk, South (Mr. MacGregor), who is now the Under-Secretary of State for Industry. He waxed lyrical over several columns about the problems of the poverty trap in his constituency. He said, speaking of personal tax allowances: If the Government had kept them in line with inflation, they would not have dealt with all the problems which are now created by direct taxation, but certainly they would have helped very much with the poverty trap. The hon. Member gave examples that had arisen in his constituency and went on: the only way open to us to try to deal with this problem and to try to help those in work is by means of the amendments and to raise the thresholds for all the personal allowances in order to put this group of people back in a better position. The real way to help people a; that level, although I agree that the reduction from 35p to 33p will help considerably, is to raise the thresholds for the allowances. The same is true now. Rather than freezing allowances, it must be better to give relief on the basic rate. The hon. Member concluded: The very least we can do is to put the age allowance back to where it was last year so that in tax terms these people are no worse off than they were this time last year. He was referring there to pensioners.

Mr. Patrick Jenkin

This is a point of some importance, which we need to get clear. If the equivalent of not putting up the allowances is 3p on the basic rate, does the hon. Gentleman not recognise that if my right hon. and learned Friend had done that even on this narrow, but important, question of the poverty trap, that would have deepened the poverty trap for many more thousands of people than have been brought into it by the modest widening to which I referred? We estimate that about 10,000 extra families will be brought in as a result of this, whereas many times that number would have been affected by a deepening of the poverty trap.

Mr. Rooker

Yes, but on the Secretary of State's own statement to the House today half a million people would not have been brought into the tax net. We have to strike a balance. I can find the money by the redistribution of the £6 billion handed out by the Government in their first Budget to the higher rate taxpayers. I question the figure of half a million given by the Secretary of State and I should like to explore that further.

Going back to what Government supporters were saying in 1977, the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), now Minister of State, Foreign and Commonwealth Office, said: people at or near the poverty level are the last people who should be invited to pay income tax at all. Apart from anything else, raising the personal allowances lets a lot of people out of paying income tax and reduces the administration on tax collection. For all those reasons I believe that it is an essential priority to keep the thresholds high in income tax, whatever else we may have to do. It is not possible for Back Benchers or Front Bench Opposition spokesmen to table amendments that have the effect of raising revenue, but that should not prevent the House of Commons from making its judgment and perhaps forcing the Chancellor to reconsider his judgment. The hon. Member for Cirencester and Tewkesbury went on: I do not believe that any other legislature in the world would tolerate having its members put into such a position. The hon. Gentleman was referring to our not being able to argue the case on tax allowances while our hands were tied behind our backs because of being unable to move revenue-raising amendments.

The hon. Member for Braintree (Mr. Newton), who is now an Assistant Whip, referred to the sheer absurdity of the current situation in which people are expected to pay tax on incomes which are held to be below the poverty line, as defined by the State. I find it impossible to conceive of anybody who can justify that situation. He voted for my amendments. He went on: It is wrong that there should be an announcement of a pensions increase which is designed to recompense retired people for the erosion that their incomes have suffered by inflation… by failing to raise tax allowances by the same extent, make sure that a very large proportion of those people will not get the full benefit of the increase. He was referring to the increase that had been announced in the retirement pension.

The right hon. Member who led for the Opposition, the right hon. Member for Guildford (Mr. Howell), now the Secretary of State for Energy, talked about the hideous overlap between taxation and benefits which creates the disincentive to work and the discouragement at all levels in our society."—[Official Report, Standing Committee D, 14 June 1977; c. 451–96.] He explained, in highly technical terms, that it was not right to speak about the high cost of indexation, because there is no cost as such. The £2½ billion that the Chancellor said it would cost was £2½ billion that he did not get this year. He will get it only because of inflation, and that is the level of the tax increase.

I have not finished with what Conservative Members said, because the present Secretary of State is well on record. I have quoted from Committee speeches made on 14 June. On 17 June the Secretary of State, at the Dispatch Box on Friday morning, said about tax thresholds: The tax threshold is now so low that even those on means-tested benefits are paying tax". That was as though, all of a sudden at the wave of a wand, the Government had stopped three-quarters of family income supplement beneficiaries from paying tax. As he well knows, far more than three-quarters of all those on FIS will be paying tax.

The Secretary of State continued: It is this stultifying, frustrating system that is the real poverty trap. The reason is mainly, though not solely, the high initial tax rates and the absurdly low tax thresholds. We have higher tax rates and lower tax thresholds now than when the Government came into office. Towards the end of his speech the Secretary of State laid it on: The first and most important thing is that tax thresholds must be raised."—[Official Report, 17 June 1977; Vol. 933, c. 786–93.] There can be no qualification to those speeches by Conservative Members.

Mr. Chris Patten (Bath)

Read out the Minister's reply.

Mr. Rooker

I have read the Minister's reply. Unfortunately, I have had to re-read some of my own speeches because—I do not criticise any hon. Member—I can claim that I am wholly consistent from both sides of the Chamber. My right hon. Friends are supporting the proposal that I have made in opposition to what the Government have done. There has been a change and we do not deny that. If the hon. Member for Bath (Mr. Patten) wishes to keep arguing about what replies have been given, I can quote many examples where the Government have started to give reasons for not doing something. The change in tax allowance for the blind is one example. Hon. Members from both sides of the House have argued for many years about dealing with disability allowances through the tax system. We should deal with them through the social security system. I have heard both Conservative and Labour Treasury Ministers make that case which, by and large, one must accept. Yet this time the Government have overturned it, to provide one of the crumbs. At the same time they did not change the supplementary benefit addition for the blind, which has remained at £1.25 a week. They have changed the tax allowance. That has affected only those blind members of our community who are fortunate enough to pay income tax and to be in work.

I want to deal with one section of our community, those women between the ages of 60 and 64. If the Secretary of State thinks that the Financial Secretary's speech last night is the end of the matter, I have news for him. The Financial Secretary made if clear that the Inland Revenue's tolerance level for assessment is £30. It does not collect tax where the liability to tax is £30 or less. That is equivalent to £100 of income when one pays tax at the basic rate. I accept that. I posed a question about figures yesterday. It would appear that women between the ages of 60 and 64 years, the only people who are affected—no men are affected—would seem to be taken care of by the Financial Secretary's statement last night and the Secretary of State's statement today. I wish to disagree and perhaps throw something new into the argument. I did not raise this matter yesterday because there was no time to ask questions following the Statement. It is a fair and legitimate point to make.

The retirement pension for millions of people—not hundreds of thousands—consists of two parts. It consists of the basic standard retirement pension, technically known as category A and category B, which was uprated yesterday. But for several million people the second part consists of graduated pension—the Boyd-Carpenter money as it was known at the time. That, by no stretch of the imagination, is separate from the retirement pension. In the Government's social security statistics year book the graduated pension information is given as part of the retirement pension tables. It was not expected to be classed as an occupational pension. It is State retirement pension which is paid for by contribution.

In November 1979, about 600,000 women between the ages of 60 and 64 received an average graduated pension of 45p a week. That has gone up now, but 45p a week is equivalent to £23 per annum. If that is added to the figure that I quoted yesterday—given that there are 32 weeks of one pension and 20 weeks of another—the annual income of a woman pensioner totals £1,460, which rises to £1,483, £108 above the single person's tax allowance of £1,375. Unless the Treasury is prepared to waive or alter the £30 collection figure, 609,000 women will be taxed on that £108—£85 of which is the retirement pension and £23 is graduated pension. Is that the Government's intention? I hope that they will not argue that the graduated pension is like an occupational pension and therefore should be treated as separate other income. Graduated pension is 100 per cent. locked into the retirement pension system. On average, the graduated pension is 45p a week. If it were more than about 32p a week that would carry these ladies over the £100, and therefore they are caught in the tax system.

I wish to make this point. I think that the Secretary of State has the message and I hope that the Prime Minister has. I do not think that she would want to be seen to have headed up a Budget that has had that effect on 609,000 women between the ages of 60 and 64. That must have been unintentional.

Mr. Andrew F. Bennett (Stockport, North)

It would be particularly unfair if the Government said that they would write off the tax requirement for the women in that category. But if that group paid the graduated contributions and were receiving the graduated benefit, they would not have anything written off, and therefore they will be worse off as a result of paying that graduated contribution.

Mr. Rooker

My hon. Friend is correct. The same argument can be made if one includes an occupational pension. I accept that the rules for occupational pension schemes are totally different from those for the graduated pension. But once a woman in that category with a small occupational pension has gone over the threshold, all her pension above the tax allowance is taxable. Some of that money is State retirement pension. It cannot be the Government's intention by freezing tax allowances to put hundreds of thousands of women into that unfair position. If anyone from the Treasury Bench wishes to intervene, I shall gladly give way. I hope that the Government will say that they will change that or bring forward an amendment to the Finance Bill or to the Budget Resolutions. It is irrefutable that the Government have got themselves into one hell of a mess about all these women because they did not think through the consequences of not raising the tax threshold.

Mr. David Ennals (Norwich, North)

Would it not be helpful if we were given some clarification from the Treasury Bench? We have in the Chamber two Treasury Ministers as well as the Secretary of State for Social Services. They must know the answer to my hon. Friend's question and it would help to save time if one intervened and gave us some clarification.

Mr. Rooker

I have offered to give way. A reply now would considerably ease the worries of those women. There are outside groups who lobby on their behalf, but the women are not organised into trade unions. They are retired and most are single and the only people who can speak for them are Members of Parliament. There will be cause for concern if the Government cannot make an early statement—I do not mean in the winding-up speech tonight—about the position of those 600,000 women. Obviously, the Government do not want to do so at the moment. I understand that the Prime Minister is in the Tea Room, if anyone wants to pop down to see her. When a Prime Minister turns up in the Tea Room, it is usually a sign that the Government are in trouble.

I want to take up one point on child benefit payments, and I have to digress on to the public expenditure White Paper. On page 124 the Government clearly state that they are assuming that in the next financial year the four-weekly payment system of child benefit will be introduced for 80 per cent. of mothers. The financial planning is based on that assumption.

I have to remind the House that consultation on the matter finished on 28 February, 12 days ago. On 3 March the Under-Secretary of State for Health and Social Security said in reply to a question from her hon. Friend the Member from Brentwood and Ongar (Mr. McCrindle): There are differences of view on the proposal to pay child benefit four-weekly and the Government will wish to consider these carefully."—[Official Report, 3 March 1981; Vol. 1000, c. 82.] That was nine days ago. The hon. Lady promised that the Government would make a statement to the House before Easter. Just how carefully are the Government considering the representations following their consultation? They said in the White Paper published yesterday that their financial planning for the next year was based on the scheme going ahead. What does"careful consultation" mean on a matter that affects 80 per cent. of mothers, 50 per cent. of whom collect child benefit weekly because they need it weekly?

Mr. Patrick Jenkin

The hon. Gentleman is waxing eloquent, but I think that I can put him out of his misery. The Government have not yet made up their minds. We are genuinely consulting, and we shall take the most careful note of the representations from many organisations and individuals. In due course we shall come to the House and announce our conclusions. The White Paper makes the assumption—some assumption has to be made—about whether, and to what extent, the change will take place. That is all that the White Paper figures are based on. I hope that I have slightly relieved the hon. Gentleman's anxieties.

Mr. Rooker

It would have been helpful if the White Paper had said that the financial planning was subject to the Government's consideration of consultations and that the plan might be changed. There is no rider in the White Paper. I take it that the right hon. Gentleman has just added a rider to the White Paper. I accept that and am grateful for it.

The other part of the Budget Statement affecting children to which I wish to refer is the list of benefit upratings reported in column 900 of yesterday's Hansard. We are concerned about the child allowance for short-term national insurance beneficiaries, namely, the unemployed and the sick. The existing weekly rate for their children is £1.25. The new weekly rate will be 80p.

Mr. Patrick Jenkin

That is because of child benefit.

Mr. Rooker

I know. I am not claiming that there is a reduction, but I have not finished. I wish to point out the amount of the increase. The present allowance for the child of someone who is unemployed or sick is the child benefit of £4.75, plus the £1.25 to which I have referred. The new allowance for the children of the sick and unemployed will be the new child benefit of £5.25, plus 80p. The total is increased from £6 to £6.05. That is the generosity shown to the children of the sick and unemployed.

Mr. Patrick Jenkin

Has the hon. Gentleman consulted his right hon. Friend the Member for Leeds, East (Mr. Healey), because that is precisely the arrangement that he operated in 1977?

Mr. Rooker

I do not carry the 1977 unemployment figures in my head, but they must have been less than half the current figures.

Mr. Patrick Jenkin

The hon. Gentleman is changing the subject.

Mr. Rooker

I am not changing the subject. Does not the number of people affected by unemployment figure in the Secretary of State's consideration of the income that they should receive? Is that wholly irrelevant to the uprating of benefits? Is the Secretary of State saying that? His PPS says that he is saying that. I am grateful for that confirmation.

I have concentrated on some of the social security aspects of the Budget because they are my responsibility. The Opposition do not have to give chapter and verse for where we would find extra money. That is not a requirement on the Opposition when we are less than two years into a Parliament. However, we have opposed the Government's tax handouts to the higher paid and their redistribution of resources from the wealthy to the working poor and the non-working poor. I have got that the wrong way round. It did not feel right coming from my lips. I will rephrase it to get it right for the record. We have opposed the Government's redistribution of resources from the working poor and the non-working poor to the wealthy and we shall continue to do so. That is clearly what has happened.

The Secretary of State cannot claim that we are not in a tenable position. We would argue on the question of the redistribution of resources. We are not bound by the Tory Party manifesto, which said: Income tax starts at such a low level that many poor people are being taxed to pay for their own benefits. We know that that is the case and we wish to change it by wholly different Budgets from the despicable and disreputable Budget that the Chancellor introduced on Tuesday.

5.8 pm

Sir Hugh Fraser (Stafford and Stone)

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) made a spirited speech when he moved away fron the great nights of the Finance Bill Committee between 5 and 17 June 1977 and on to broader issues. I should like to discuss some of the broader issues of the Budget.

The right hon. Member for Orkney and Shetland (Mr. Grimond) said that he had attended 30 Budget debates. I must have attended about 50. Nearly all have been bad, despicable, or at least unpopular with large parts of the population. But whichever Government have been in office, the one trend running through every Budget of the past 20 years has been the continuing increase in Government expenditure. I am glad that my right hon. and learned Friend the Chancellor of the Exchequer will in future use contemporary cash limits of money spent and at money values today.

In the Budget of 1960 total Government expenditure was £8,000 million. This year, 20 years later, it is £90,000 million. This means that Government spending has increased by 1,100 per cent. over 20 years and the gross national product has increased by about 750 per cent. This is the crisis of British capitalism forced on the nation by do-gooders on both sides of the House over the last 20 years.

I should like to spell out a few more of the problems that we face. Government expenditure, some of it administrative and some of it waste, amounts now to £30,000 million a year directly in Government salaries. It is increasing at a rate of 25 per cent. a year, twice the rate of the increase in wages throughout the rest of the community. Another aspect of this situation, touched upon by my right hon. Friend the Member for Taunton (Mr. du Cann) yesterday, is that Government money going into long-term investment has fallen from 25 per cent. 20 years ago to under 10 per cent. today. That explains why so much of the basics of the infrastructure of this country is in peril. There is peril in relation to sewers, railways, canals, slums and industrial dereliction.

This is what has happened over a period of 20 or more years due to the actions of those on both sides of the House—some perhaps acting unwittingly, but some of them very wittingly—who have been the enemies of a system of successful capitalism. My right hon. Friend the Prime Minister won the last election to arrest this rake's progress. I believe that it will remain the issue on which she will win the next election. People are thoroughly fed up when they look at these figures and see the difficulties forced on this country.

Of course the Budget is unpopular. Budgets are nearly always unpopular. We still suffer cumulatively from the effects over the last three years of at least five factors. These are causes to make the Budget costly and unpopular. There has been the continuation of various Socialist policies still running through the economy. There has been the effect of the oil price increases. There has been the effect of bailing out nationalised industries, such as BL and the BSC. There has been the effect of continuing wasteful expenditure in Government. There has also been the fact that, over the last three years, spending by the public has gone up by 18 per cent. It is a question of spending then and paying later. The people of this country have to pay today in this Budget. That is why it is unpopular.

I believe, seriously, that the Government, in general, are on the right course. We have seen the alternatives, or some of them, put forward by what I call the Left wing on the Opposition Benches, hon. Members who come from parts of Bristol and parts of Liverpool. They represent the extreme form of Left-wing alternatives. Hon. Members should consider what is happening in Poland to judge the success of that type of Socialism, whether from the economic or Social Democratic point of view.

Some right hon. and hon. Members say that the way to overcome these problems is by reinflating the economy. In fact, in crude figures the economy, at this moment, is being inflated by something like £10 billion of borrowing. To those hon.Members and such moderate institutions as the CBI, the TUC and NEDC, who suggest that another £5 billion or £6 billion should be pumped into the economy my reply is that it will not work. It is the road to Rio and South American hyperinflation and the road to serfdom for this country. I believe, however, that some of my hon. Friends take this view. They are in dangerous error. Perhaps The Economist should start an annual competition for the silliest committees in this country. There would be the TUC committee. There would be the CBI committee. There would be the NEDC committee. I only hope that the 1922 Committee is not a runner in this competition.

Looking at this matter as a broad issue, broader than the approach to it by the hon. Member for Perry Barr, I will support the Government and, of course support them through difficulties. To me some proposals are ideologically incorrect, such as taxing windfall profits, whether the Gas Council, the banks, or oil companies. These are unpleasant and, in my view, foolish. Like the right hon. Member for Orkney and Shetland, I have been here long enough to remember a large number of budgets. Budgets are like hiccups: after a few days of shaking and quaking the public go away and forget them, providing that the economy and the people running the economy are facing in the right direction with the right objectives. I believe that the Government, on the whole, have the right objectives and the right means for achieving them.

I would go even further than have some of my hon. Friends. I believe that there is still a case for cutting back on Government expenditure. If we had cut back before on Government expenditure, we should not have the unpleasant type of Budget before us that we have today. I hope that some of my right hon. Friends will look more carefully at their spending Departments. I take one instance. It is proper that we should help those who are unemployed, but such programmes as the youth unemployment scheme are wasteful both in terms of expenditure and socially. Better methods could be found educationally and in the employment to help these people to play a better part in the economy. There are masses of things that could be done but which are not being done that would involve no further expense to Her Majesty's Government or to the taxpayer.

Provided that the Government are not deflected from their course—I hope that Ministers will read Mr. Sam Brittan's article in the Financial Times today—these objectives are still obtainable—a reduction of bank rate, a reduction of inflation and a return by 1983 and 1984 to a growth in the economy of somewhere between 3 and 3½ per cent. The alternative put forward by the reinflators is a zero alternative. The Government, provided that they stick to their guns, have every chance of succeeding. This is potentially still a rich country, potentially an active country, and potentially a country which, in an era of gathering darkness throughout the world, could still be a beacon to help in the settlement of many of the world's problems.

5.20 pm

Mr. David Ennals (Norwich, North)

I have a great regard for the right hon. Member for Stafford and Stone (Sir H. Fraser), but the speech that he has just made was not one of his best. To say that the Budget will be forgotten rapidly and that it is just a hiccup is totally wrong. In my period in Parliament and public life I do not recall a Budget that was so condemned by all sides. I doubt whether any hon. Member can recall a Budget that has come in for such criticism. All that the right hon. Gentleman wants is a Budget that is even more despicable.

I shall not deal with health and social security alone. I congratulate my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) on an outstanding speech. It exposed brilliantly the hypocrisy of the Government Front Bench in relation to tax allowances. It also exposed the Government's inability to answer the straight questions that he put to them. They should have been answered by a Treasury Minister without further delay.

The Secretary of State for Social Services has taken a lot of credit for the increase in the mobility allowance. I expect that he would like me to praise him for it. He must realise that most of the increase will be eaten up by the massive increase in the cost of driving. I calculate that the Secretary of State got his increase in the mobility allowance only because of the existence of Motability, which would have gone out of the business of providing cars for disabled people if he had not managed to achieve a £2 increase.

Let us examine the effect of the Budget on the area that I represent. One could be forgiven for assuming that the Chancellor of the Exchequer picked on Norfolk as a special target for his venom. Norfolk has the fastest growing population in the country. A large proportion of its population is elderly. It comprises people who already live there, who are moving in for the first time, or are returning to retire. Their meagre resources will be cut by the deliberate decision to keep pension increases and supplementary benefit below the forecast and to freeze personal allowances. That will affect many thousands of people in my part of the country. They will be among the 1 million who will be brought into the tax net as a result of the Chancellor's decisions. It is hard luck for the elderly.

Norfolk workers earn the lowest wages. The average wage is £92.30 a week in East Anglia. That puts the area, almost at the bottom of the national league table. In this low wage area, the heavy direct and indirect tax increases will have a serious effect on living standards. That is not only my view; it is a view expressed by the Norwich chamber of commerce, which has explained the effect that the Budget will have on the retail trade.

Norfolk experienced a low level of unemployment in the past. It is facing a dramatic change in its unemployment level, as is every other part of the country. Because the area starts from a lower base, the rate of increase is one of the fastest in the country. Proportionately, unemployment in East Anglia is rising faster than in most other areas. In Norwich alone 7,500 people are unemployed, with virtually no job opportunities.

Large and small firms are announcing redundancies weekly. The bankruptcy rate is at an all-time high. Unemployment is bound to rise as a result of the decisions announced by the Chancellor in his Budget. That view has also been expressed by the regional chairman of the CBI. The right hon. Member for Stafford and Stone said that he would like to abolish the CBI and the TUC but somebody must represent industry and commerce.

Norfolk has the highest number of car owners in relation to its population. There has been a sharp reaction there to the punitive increase in petrol tax. People there are especially dependent on their cars for mobility, for getting to work and doing their shopping. I am surprised at the apparent silence of Government Members from the Norfolk area. They do not seem to be troubled by the issue. Perhaps they will creep quietly into our Division Lobby when the vote on the petrol tax is taken on Monday evening.

The levy is intolerable. Not only does it affect the individual car driver; it will work its way through the public transport system and put further damaging costs on industry. That has not been taken into account by the Chancellor in his estimates of its effect on retail prices.

Norfolk has a low level of county authority services. The county council cuts back with enthusiasm. More damage will be done through further cuts. Many students from the University of East Anglia came to the Commons yesterday to lobby the Secretary of State about the increase in overseas students' fees. The University Grants Committee and the Committee of Vice-Chancellors and Principals of the United Kingdom Universities told the Secretary of State for Education and Science today that Britain's university system could disintegrate into chaos. If the Government proceed with their planned cuts, about 15 per cent. less in real terms will be available in the next three years. Those committees contemplate the closing of whole universities and entire faculties of other universities. The university of East Anglia will have to fight for its survival if the policies proposed are carried out.

Norfolk probably has the most effective network of voluntary, charitable organisations. I speak of organisations such as the Spastics Society, MENCAP—the National Society for Mentally Handicapped Children—and Dr. Barnardo's. Such organisations were hoping for some relief from the 15 per cent. VAT which hit them so hard. They have made representations to the Chancellor and the Prime Minister. They hoped that they would be granted some relief so that they would not have to abandon essential services. They are angry with and disappointed by the Chancellor's response.

I have used Norfolk as an example of the devastating effects of this down-and-out Government's policies and their down-and-out Budget. We shall do all that we can to force a change of course to give some hope to the people of Britain. The power now lies with Government Back Benchers. They have to face the challenge in the next few days. They have to decide between now and the vote on Monday whether their worries about petrol tax will make then act like Lobby fodder, with all the consequences that that will have on the electoral prospects and the health of the country.

Yesterday the Prime Minister said that we needed guts and courage. The guts and the courage must come from some of the Conservative Members who know that what the Chancellor did in his Budget can only damage out future economy and, ultimately, therefore, our people.

5.30 pm

Sir David Price (Eastleigh)

I bring the House back from the problems of Norfolk to the general economic situation facing the Chancellor of the Exchequer. I hope that the House will agree with me, at least on the initial analysis, even if we do not agree on the remedies.

I hope that the House will agree that my right hon. and learned Friend faced, and continues to face, two apparently conflicting objectives. The first objective was to continue the battle against inflation, and in his Budget Statement he explained why that was so important. The second was to give a shot in the arm to British industry and, he hoped, to employment.

I am sure that the House will agree that good progress has been made in the battle against inflation. However, since the Financial Secretary forecasts in his little Red Book that through 1981 retail prices are likely to go up by about 10 per cent., we cannot be complacent about the risks of further inflation. This analysis suggests that the Chancellor should continue with his strict monetarist policies. However, two major facts lead me to question the validity of that proposition.

The first is that the Chancellor's policies have been uneven in their effect, and the private sector has been squeezed much harder than the public sector. The effect of that can be seen in last year's price rises. There was a 30 per cent. increase in a basket of prices of the nationalised industries, whereas there was only a 10 per cent. increase in the level of shop prices. That happened because the forces of competition were effective in the shops, because the nationalised industries were statutory monopolies, and also—let it be acknowledged—partly because of Government policy. The second fact is the substantial decline in the output of manufacturing industry of about 15 per cent. and the continued increase in unemployment. An unemployment level of 10 per cent. of the working population is totally unacceptable.

The principal causes of this unhappy state of affairs lie in the current world recession and in the further massive increases in oil prices. Not enough stress has been laid on those factors in our debates so far. Since the beginning of 1979, the average price of OPEC crude oil has trebled. There is a consequential imbalance in the flow of funds within the world trading community.

Last year, the 17 leading oil exporting countries had a combined favourable balance of payments on current account of about $142,000 million. That is equivalent to the gross national product of a country of the size of Spain or the Netherlands. That imbalance is and remains a major cause of world recession.

There are other contributory causes, which I shall not go into because of time. Suffice to say that, in my judgment, it will be of little avail to win the battle against inflation if in so doing Britain's wealth creators are so battered that they lose both the will and the capacity to take advantage of the new opportunities which the conquest of inflation may offer. Thus, the second objective of the Chancellor's Budget must be to give an urgent shot in the arm to the wealth creators in our society, especially manufacturing industry.

This may suggest to some people an old-fashioned Keynsian reflation through boosting consumer demand. Personally, I believe that that would be the wrong thing to do. It would certainly be counter-productive in the continuing battle against inflation. It would also be more likely to increase the flow of imported consumer goods into Britain than lead to a lot of new orders coming to our own manufacturers.

I hope that so far I have carried with me most right hon. and hon. Members. Certainly I see little difference between my analysis and that of my right hon. and learned Friend the Chancellor. However, he and I begin to part company on the very difficult problem of how to reconcile the two apparently conflicting objectives of continuing to fight inflation and at the same time giving an urgent blood transfusion to British industry in a single package of economic and fiscal measures.

Last Friday, in my constituency, I put forward a 14-point programme that I offered for consideration to the Chancellor. I called it"The Budget thoughts of a high Tory". I must tell the House that my right hon. and learned Friend did not adopt the Price programme in its entirety. At the very best—I am an extremely generous man, as the House knows—the Chancellor scored 5 out of 10 on the Price rating.

I shall outline briefly one or two of the points in my programme, and see whether the House agrees with me. First, the minimum lending rate should be reduced substantially. With an underlying rate of inflation of about 7 per cent., a reduction in minimum lending rate to 10 per cent. could be safely entertained. My right hon. and learned Friend went half-way to meet that objective. I hope that in the next few weeks he will go the whole way and meet the 10 per cent. target.

Secondly, thereafter, the whole concept of the minimum lending rate should be quietly phased out and interest rates allowed to find their own level. I was delighted that my right hon. and learned Friend seemed to be moving rapidly in that direction.

Thirdly—here I am perhaps a little controversial—the Chancellor should announce our intention to join the European monetary system. We should do that later in the summer, when the exchange rate consequences of abolishing the minimum lending rate had worked their way through.

I see no proper solution to the continuing controversy about common agricultural policy until we are members of a European monetary system. Moreover, that move would lock the pound into the European monetary system. It would produce greater stability in our exchange rates—something that is constantly being asked for by industry. Also, it would make forward planning less of a gamble for British manufacturers, who are increasingly making their investment decisions in terms of the European market as a springboard for the world.

Fourthly, I propose that the prices of our nationalised energy industries should be modified in favour of the large industrial user, not only the chemical industry but also—here I speak as a Member who represents horticulture—large glasshouse users, on precisely the same terms as in other European countries with which we have to compete. The NEDO working party report spelt that out clearly.

I am grateful to my right hon. and learned Friend for the measures that he announced in his Budget. He will not think it ungenerous of me to say that I reserve some of my praise until I see how the measures work out in practice.

Fifthly—here again I am perhaps a little controversial—I suggest that there should be a major programme of public sector capital investment aimed at improving our national infrastructure—as was said by my right hon. Friend the Member for Stafford and Stone (Sir H. Fraser)—and at providing much needed orders to our construction and engineering industries. Established firms need more orders now.

I have in mind such projects as further rail electrification, the building of more bypasses, the advancement of British Telecom's capital programme, the ordering of much-needed ships for the Royal Navy, and the provision of more equipment for the police and the fire and ambulance services. Such a programme could be of substantial help to British industry now. It would not be inflationary, because we have resources of plant and people currently lying idle.

Sixthly, I would encourage small businesses to grow, and, in doing so, to take major risks. In order to do that their liabilities for capital gains tax should be index linked and the rates and rules of capital transfer tax should be substantially reduced. I welcome my right hon. and learned Friend's package of aid to small business, but I still prefer my own.

Seventhly—this is very important—the Treasury rules should be changed to encourage more partnership arrangements between the public and private sectors. I shall not develop that theme now. However, those who follow the movings of the esoteric Treasury mind will know what I am talking about.

Eighthly—and here I shall be a little controversial—the Chancellor should take a more relaxed view of the public sector borrowing requirement. I am concerned about the apparent obsession in Whitehall with the PSBR as the virility symbol of Government policy. I do not underestimate its importance, but it should not be the only measure of success or failure of economic policy. In any case, why must the cash needs for the current public expenditure be treated in the same way as the cash needs for public capital investment? Again my right hon Friend the Member for Stafford and Stone pointed out that there had been a major reduction in investment in the infrastructure. That is very important for the future of our country.

Time forbids me to develop my points further. I hope that I have said enough to give the House the main thrust of how I would handle the matter. As an experienced Treasury watcher of 30 years' standing, I have come to recognise that a distinctive hallmark of that most self-assured of Departments of State is this—that, whenever the economic going gets rough, it identifies one economic target against which to persuade the Chancellor of the day to mobilise the entire forces of the Government. The Chancellor must therefore lead his political troops in an heroic cavalry charge against the chosen target. The target for many years was defending the exchange rate of the pound sterling. The current target is the PSBR. It is not so much a case of"Yes, Minister" but of"Charge, Minister!" Every few years we have to repeat the charge of the Light Brigade. I carry the scars of a number of those charges.

I simply repeat the remark of the French Marshal Busquet, who witnessed the first charge of the Light Brigade in 1854: C'est magnifique, mais ce n'est pas la guerre. I suggest to the House that the PSBR is only one battle; it is not the entire campaign. The real war is being fought in every market place of the world, where British business men are continually competing for world orders.

I invite the Chancellor when he comes to sum up to make it clear that the whole Government machine and the entire Civil Service are now dedicated to making Britain successful in her commercial and industrial struggles in the markets of the world. It is in everyone's interests that there should be fair and sensible international rules on how world trade is conducted. However, the Chancellor should make it clear that if other countries bend the rules, so shall we. For instance, we must play the French at their own game and stop moaning about it.

In 1981, the name of the game is the survival, and, it is to be hoped, the prosperity, of British industry. It is upon that that the welfare of the British people depends. It is to achieve the survival and prosperity of British industry that the Government's economic strategy must be aimed.

5.43 pm

Mr. William Rodgers (Stockton)

I believe that the whole House enjoyed the contribution of the hon. Member for Eastleigh (Sir D. Price). I wish to follow him in much of what he said. I, too, wish to deal with the general direction of the Budget rather than the particular matters that were discussed between the two Front Benches this afternoon.

The right hon. Member for Stafford and Stone (Sir H. Fraser) must be alone in believing that the Budget was a good one. On my reading, it is seen by most people as a disaster. The only question is what sort of a disaster. Is it an inevitable, a necessary or, simply, a gratuitous disaster? By"inevitable", I mean, is it an inescapable consequence of what has gone before? It could be said that the mistake once made was bound to be compounded. By"necessary", I mean, is it a painful further stage on the road to recovery, unpopular in the short run, but justified? By"gratuitous", I mean is it both the wrong Budget for the occasion and the worst of the range of alternatives? In my view, it is a gratuitous disaster. There was no need for a Budget of that kind, and it will do nothing to solve the nation's problems.

In a characteristic outburst yesterday, the Prime Minister rounded on her critics for lacking guts for the fight. I sympathise with her up to a point. Some of her erstwhile friends soon left her when the going got tough. They voted for her policies and applauded the Chancellor's first Budget; they failed to recognise its direction. I sympathise also in that I do not believe that the combined weight of the TUC and the CBI always defines the public good. Equally, it is foolish of the Prime Minister to expect blind loyalty from those who plainly see what a mess she is making of things. They did not ask her to pursue her policies, right or wrong. If they were wrong, they hoped that she would change them.

Unlike some of my elders and betters, I seldom remember my speeches and, least of all, when I made them, but on 24 March 1979, speaking in Newcastle, I stated: Mrs. Thatcher could prove to be a one-woman disaster area for Britain. The risks of her leadership are high and the consequences could be severe. I was reprimanded for such strenuous and, it was said, untypical language. My statement was thought to be an unjustified personal attack. Even my colleagues considered my remarks unwise and exaggerated. Alas, they were not. The truth has proved cruel.

I quote a further passage from that speech, not so much because of its comment on the Prime Minister as because it seems to be the right approach to the complex problems of Government. I stated: The need in the period ahead"— that was two years ago, before the general election— is for mature government based upon steady policies. The task is to heal and reconcile and to seek the widest measure of support. It is of the greatest importance that Governments and Parliament should seek to create the environment for economic success, but in the absence of steady policies they never will. How can industry survive, plan and prosper if it does not know from one day to another what assumptions it should make? Government after Government have followed the same course.

The right questions for every new Government to ask themselves about their economic policy is whether it relates to the nation's needs and whether it will work. Instead, most new Governments ask themselves how they can be different from their predecessors and how quickly they can carry out commitments in their manifesto, even if they bear little relation to the problems that the country faces. It happened after 1974 and until the summer of 1975, by which time inflation was running at an annual rate of 27 per cent. It was only then that the Government got to grips with reality. It has happened since 1979, but in this case the Government show no sign that they understand the depth of the pit that they have dug for themselves.

I do not underestimate the daunting responsibility of every Chancellor in managing a mixed economy. It is the most exacting office of State. Perhaps it is a comment on that that in the whole post-war world only two Chancellors have had the compensation of making it to No. 10, next door. Every Chancellor of the Exchequer makes mistakes, but some make more mistakes than others. The present Chancellor of the Exchequer now seems set to be remembered, or perhaps conveniently forgotten, in the same breath as Lord Barber.

I referred to steady policies. I have in mind policies both within the public and private sectors of industry and between them. The frontier may change from time to time, but it should do so on merit and not for doctrinaire or presentational reasons. I deplore the Government's obsession with selling off parts of the public sector. As Secretary of State for Transport, I placed the National Freight Corporation under a tight financial regime, believing that it should become profitable and competitive in transport. It is irresponsible of the Government now to seek to sell it off after a great deal of public money has been invested in its success. Similarly, it is foolish to have a shopping list of industries over which the threat of nationalisation constantly hangs, although a change of ownership would be irrelevant to performance.

ICI, to name only one company, is going through a difficult time, but does anyone seriously believe that it would be better run if it were nationalised? Every Government should be plainly committed to an efficient and successful public sector of industry, and an efficient and profitable private sector capable of competing in the market. They should seek to create an environment in which both can prosper on the basis of settled rules and known objectives. It is an extraordinary commentary on the achievement of the Government and the present Chancellor of the Exchequer that both the public and private sectors are in disarray.

I looked again at the interesting and honest speech that the Financial Secretary made in Zurich in January. Defending the Government's policy, and talking for a moment about the Government's success, he said: As a result, British companies throughout the length and breadth of the country are becoming more efficient, leaner, tauter, fitter and more productive. However, the truth is that they are going out of business.

I do not say that either the degree or direction of public intervention in industry has always been wise or successful. In making public money available to the private sector, a distinction was seldom drawn between social objectives, however worthy, such as avoiding unemployment, and industrial objectives, by which I mean the achievement of growth and an increase in efficiency. As a result, the cash handout became the easy option. I am strongly in favour of indicative planning on the basis of informed co-operation between the Government and both sides of industry. However, I am deeply sceptical about compulsory planning agreements. Why should Ministers and civil servants have a greater capacity for successful decision-making in industry than skilled managers and others who have made their life in industry?

Therefore, on principle I do not condemn the Government's wish to stand back a little from day-to-day intervention, but that does not excuse them for creating an environment not for success but for failure. A Government who pursue myths of their own making are bound to become unstuck. Each myth also creates another. It is nonsense to believe that a Government can successfully manage a mixed economy simply through control of the money supply. However, it is also dishonest to pretend that the level of the money supply is not an important consideration for any Chancellor of the Exchequer. The right hon. Member for Leeds, East (Mr. Healey) recognised that between 1975 and 1978. He was right.

It is also nonsense to believe that a rigid and unrealistic incomes policy can be successfully imposed as the single solution to inflation, is naive to pretend that a Government can survive without a strategy for incomes, assuming instead that an intolerable level of unemployment will force down wage settlements. I am sorry that the right hon. Member for Stepney and Poplar (Mr. Shore) did not say that plainly yesterday, because I know that that is what he believes.

The history of incomes policy in recent years has been a merry-go-round of expedients, cobbled together at short notice and sustained in an atmosphere of tension and anxiety. However, that is no reason to abandon the search for a settled and flexible incomes policy based on patience, co-operation and realism, which will stick for the longer term. That should be said loud and clear by any political party seeking to become the Government of Britain. It should not be ducked because some trade unions do not like it.

It is nonsense to believe that all public spending is good, irrespective of priorities and whether it is cost-effective. However, equally, it is silly to regard public spending as a scapegoat for our economic ills and to introduce cuts in essential services which do damage that is disproportionate to the saving and that push up the Government's borrowing requirements. It is a matter of balance and judgment, and not of rules and restrictions. Judgment is what the Chancellor of the Exchequer lacks, and there is no substitute for it, either in cohorts of highly-paid advisers or in the obsessions of economic gurus. That is why the Budget remains gratuitous.

Mr. Hordern

The right hon. Gentleman talked about a settled but flexible incomes policy, which he advocates. That is an important point. Does he suggest that the policy should be carried out by means of statutory legislation or a voluntary agreement? If it is by a voluntary agreement, how does he seek to secure it?

Mr. Rodgers

I said that the policy should be based on patience, co-operation and realism. All those require a high degree of consultation. All point in the direction of a voluntary incomes policy. I have always made it clear—I have said it consistently in the House of Commons since the first Prices and Incomes Bill of 1966, when the right hon. Member for Worthing (Mr. Higgins) and the hon. Member for Horsham and Crawley (Mr. Hordern) took part in the Committee stage—that from time to time it is necessary in the short run, if the Government are in an economic squeeze of a kind that they induced, that they should consider the possibility of a short-term compulsory policy. I do not believe that a compulsory policy can work in the long term. That is why it is important, when in Opposition, for a political party seriously seeking to win power to discuss the possibilities and to try to find a basis of co-operation.

I now turn to some other features of the Budget. I agree with those who said that it was unnecessary and socially regressive to refuse any increase in income tax allowances or rate bands. It was unnecessary to do so little in response to the cry for help from industry. The Budget should have given hope. It should have been a Budget that put the regeneration of industry firmly in the centre as its clear and unequivocal objective. The Chancellor of the Exchequer should have built around that.

I shall make two brief comments from my experience as Secretary of State for Transport. Early in 1979 I was able to announce the Government's intention to abolish vehicle excise duty. I believe that that was the right decision at the time and that the present Government were wrong to abandon it. The result in the Budget is the same mixture as before—£10 on the licence and a huge increase in the price of petrol, which is desperately unwelcome in the present economic climate.

The hon. Member for Eastleigh and other hon. Members referred to railway electrification. I wish to mention it again and claim parentage, as I set up the review the report of which has been widely endorsed. I agree with right hon. and hon. Members on both sides of the House that a decision to implement the report would give a welcome boost to the economy, feeding through to the private sector from the public sector.

I have mentioned the Government's mean and doctrinaire approach to the public sector and the need for cost-effective public spending. There is no doubt that cuts in capital expenditure are having a damaging effect. There has been a sharp fall in fixed capital formation, at a time when almost all nationalised industries are badly in need of investment. I do not understand—nor does the CBI—why the Government, in their pursuit of a lower public sector borrowing requirement, have lumped together revenue items with necessary capital spending. Investment in the public sector feeds through to the private sector. It means the generation of wealth and the creation of jobs—two benefits for the price of one. I hope that, even if the Government do not intend to move on that matter during the course of the Budget debate, we shall hear of progress soon.

I turn to the problems of the regions. It is bad enough that unemployment stands at 2½ million, and is still rising, but for the most part regional variations are as sharp today as they were many years ago. I do not want to minimise unemployment, wherever it is, including London and the South-East, but it is almost twice as high in Wales and Scotland as it is in London and the South-East, and highest—apart from Northern Ireland—in the North, where my constituents live. Male unemployment, at more than 15 per cent., is outrageous. It is a tragic waste of resources. It is destructive of the human spirit, of families, and of the social fabric. The time has come to put regional policy back on the agenda. It is shameful that the Government have abandoned the attempt to stimulate growth in those parts of the country where industrial change has been most violent and industrial dereliction is most real.

Why not introduce a new regional employment premium, with a generous starting point and a five-year taper? Given the cost of unemployment, it need not add to public expenditure. Why not introduce a once-and-for-all investment subsidy designed to produce a surge of investment in buildings and equipment during a limited period? I said that the Government should have put the regeneration of industry at the centre of their Budget. They should have included a regional component, also.

We are all familiar with Britain's long-term problems of slow growth, or no growth, and declining competitiveness in international markets. We have debated that subject before, and will do so again. We should all concede that high inflation and high unemployment are acutely damaging to our nation. It is foolish to pretend that either does not matter, or to assume that in the long run lower inflation and lower unemployment are conflicting objectives. In the 1970s they rose steadily together, from a retail price index of 6.4 per cent. in 1970 to 13.4 per cent. in 1979, and from 600,000 out of work in 1970 to 1.3 million in 1979. They rose together through the 1970s, and they can fall together through the 1980s. That should be our aim. Instead, the Government have been obsessed by inflation and are being destroyed by unemployment.

That is not the way to run the country. The Budget is a gratuitous blow to the nation. It is socially unjust and politically incompetent. It sets back the timetable for rebuilding Britain out of depression and despair.

6.5 pm

Mr. Terence Higgins (Worthing)

The late Iain Macleod was fond of saying that if a Budget appeared to be extremely good on Budget day, it would be proportionately bad by the Second Reading of the Finance Bill. I do not recall that he ever said that the opposite of that proposition was true. Perhaps it was merely an oversight on his part. I listened with great interest to the speech of the right hon. Member for Stockton (Mr. Rodgers). I hope to take up some of his points.

The correct analysis of the Budget requires an understanding of two fundamental points—first, the constraints under which the Chancellor of the Exchequer is working and, secondly, the danger of any alternative reflationary strategy. The constraints stem fundamentally from the Government's failure to cut public expenditure and the public sector borrowing requirement, and the potentially massive increase as a result of the handouts in prospect for the British Steel Corporation, British Leyland and the National Coal Board. The Chancellor must cope with the dead weight of the nationalised industries. If the PSBR is to be so great, he can fund it only at high rates of interest.

My right hon. and learned Friend was constrained also by the great demand of industry for a reduction in the minimum lending rate. While we are subject to those constraints, there is no alternative to the increases in taxation that have been proposed in the Budget. In that sense it was a no-option Budget.

The Opposition Front Bench are calling for a reflationary Budget—a U-turn. It was irresponsible of the right hon. Member for Stepney and Poplar (Mr. Shore) to say that he did not care a fig about what happened to money supply or the public sector borrowing requirement.

Mr. Robert Sheldon (Ashton-under-Lyne)

The hon. Gentleman is misquoting my right hon. Friend the Member for Stepney and Poplar (Mr. Shore). He did indeed say that he did not give a fig about the money supply, but in relation to the PSBR he said that he did not give a fig for the Government's PSBR.

Mr. Higgins

The Government's PSBR must be financed by the country as a whole. I do not think that the right hon. Gentleman's point was relevant. We have seen a massive recession in Britain. The fact that it is so large makes not only a quantitative difference but a qualitative difference. Many industrial companies have greatly reduced their labour forces and overmanning. If recovery takes place, they will be in a good position to spread their overheads, cut their unit costs and, possibly, even to pay more to those whom they still employ. But they will not re-employ many of those who have been made redundant. In that context, the so-called Employment Protection Act 1975 of the present Leader of the Opposition has the reverse effect of that envisaged. It inhibits, and will continue to inhibit, the re-employment of those who are currently unemployed.

To undertake the massive reinflation advocated yesterday by the right hon. Member for Stepney and Poplar would not have a significant impact on unemployment. If we are honest, it is doubtful whether anything that any Government could do would have a significant impact on the level of employment during the next two or three years. To reflate in those circumstances would create a real danger of adding to unemployment, and certainly would not create permanent jobs for those currently unemployed.

We must accept that it is a mistake to suppose that there is not still considerable pressure on wage claims—for example, the water workers and the civil servants. The civil servants are striking contrary to all their traditions. As the Select Committee on the Treasury and Civil Service pointed out, last year they received an increase of about 25 per cent. through a series of devices that took them way beyond what was intended in the cash limits. They are now striking for more this year. Let us not under-estimate the extent of the inflationary pressures that exist as a result of pressure from trade unions that are far more concerned with obtaining inflationary wage increases for their members than with taking any action to help their former members who are now unemployed.

I wish to say a word or two about the Select Committee report, which in many ways forms the background to the Budget. It points out that the declared policy of the Government was to reduce inflation through the strict control of the money supply measured by M3, using cuts in the PSBR and interest rates.

The report observes that the Government have not succeeded in reducing the PSBR. Indeed, it has been far above the limit set. The Government took action through the Bank of England to inhibit the rise in interest rates. They did not use either of their chosen weapons to the extent necessary to achieve their policy. To that extent, there has been no true monetarist experiment. However, there has been a high PSBR, high interest rates and severe deflation. We are not experiencing a monetarist experiment.

After the Budget the Chancellor will be much closer to his declared policy of a reduction in the PSBR and reduced interest rates. The severe measures that my right hon. and learned Friend is proposing provide a real opportunity to reduce interest rates. It would have been easy for him to introduce a softer Budget, to have made a nominal reduction in MLR of two points and to have created a situation in which market pressures would have soon resulted in MLR rising once more. My right hon. and learned Friend is right to have avoided that danger.

At the same time we must register a sense of profound disappointment that the PSBR is being reduced by an increase in taxation rather than by a reduction in public expenditure. My right hon. Friend the Prime Minister stressed this afternoon that, having had so much public expenditure, we must pay for it by higher taxes. That is certainly true, but it is of little consolation to someone such as myself who maintained from day 1 of this Government that public expenditure should be reduced. If it had been reduced in the very early stages, we should now be in a very different position. That is something for which my right hon. Friend and the entire Government bear a heavy responsibility.

There are variations of a monetarist policy. I regard myself as an eclectic dry in these matters. That is a reasonable description. The Select Committee sets out four possible categories of monetarist. First, there are the instant monetarists, the new classicists; secondly, there are the less instant monetarists; thirdly, there is a group of Keynesian economists; finally, there is Professor Kaldor at the other extreme. The Select Committee comes out clearly by implication against the instant monetarist. It is not convinced by the monetarists' argument that there is a clear link between money supply on a casual basis and the rate of inflation. I find myself broadly in agreement with that position.

I join the right hon. Member for Stockton, who argued that it is wrong to suppose that the control of the money supply is not vital. In the long term or the medium term it is a necessary but not a sufficient condition for controlling inflation. That is where I take my stand.

It is not the task of a Select Committee to suggest alternative policies. It is strange that quite sophisticated writers in the heavy press seem to think that we have failed by not suggesting alternatives. The Select Committee on the Treasury and Civil Service, an all-party group, is not in the position of proposing alternative policies. However, I shall be rather less inhibited. It seems that some constructive suggestions should be made.

The medium-term financial strategy, which was set out last year in the Red Book for the first time, was said to be designed to change expectations. When the Select Committee cross-examined the Chancellor of the Exchequer and the Governor of the Bank of England some time ago, its members were told that the difference between old-fashioned deflation and the Government's policy was the medium-term financial strategy, which would change expectations.

The figures for M3, which are still to be taken as the monetary guide line, and the PSBR have been far in excess of the figures set out in the first year of the medium-term financial strategy. We must assume that any effect that that has had on expectations over the past year must have been perverse. Moreover, that greatly undermines the strategy's credibility this year and makes it more difficult for it to be sustained.

The medium-term financial strategy is having a positively depressing effect on industrial expectations. It is construed that a reduction over four or five years of the money supply means that deflation will continue into the indefinite future. That is not necessarily so. However, that is the impression that is created in the absence of any other explanation from the Government of why the economy should recover.

Ministers frequently say"When the economy recovers" or"When this happens, things will be better", but there has not been an explanation from the Government of why there should be an upturn against the background of the medium-term financial strategy. I appeal to my hon. and learned Friend the Minister of State, Treasury, to ensure that we are given an explanation of why there should be an upturn under this policy.

It is vital from an industrialist's point of view for the Government to provide a coherent explanation. Industry is now more efficient. If an upturn comes, it will be able to spread its overheads and cut its unit costs. That is only part of the supply side of the equation. The other part is the encouragement of investment. Industrialists will not invest unless they believe that there is a prospect of greater markets. No industrialist in his right mind will do so if that is not the background.

We had something of an explanation from the Financial Secretary in a speech at the Financial Times Euromarkets Conference on 21 January 1980. He said: But in the world of monetary targets, the level of demand is effectively determined by the rate of inflation. A rate of inflation higher than the monetary target will cause demand to be depressed, as a smaller volume of goods is purchased at a higher price; similarly, a rate of inflation lower than the monetary target will give rise to a boost to demand. In other words, what matters is the rate of change in the real money supply. That may be an explanation, but one is bound to ask two questions. First, at what level of change in the rate of the increase in prices does the cross-over take place and the real money supply begin to rise? I fear that it is at an extremely low rate of inflation. Some estimates have suggested 4 per cent. or 5 per cent., and we are a long way short of that. Why do we have to wait for an autonomy to develop rather than take action that will ensure that it happens rather earlier. It seems that we must ensure that in addition to a medium-term financial strategy we have a medium-term demand strategy.

As I have stressed, I am not arguing for rapid reflation. However, I dispute my right hon. and learned Friend's contention in his Budget Statement that there has been no lack of demand in the economy recently. We have had a strange recession. Interest rates, inflationary wage claims and the sterling exchange rate have been high, and the recession started at the level not of final demand but of intermediate demand. That is where all the destocking took place. That has to be considered as well as final demand.

The figures in the Red Book show that there must have been lack of demand somewhere along the line. That is because there has been a significant fall in GDP. If we are to overcome the feeling among industrialists that the medium-term financial strategy means that there will be deflation for the indefinite future and therefore no point in investing, the strategy must be accompanied by an explanation, spelt out clearly by Ministers, of why the upturn will take place. That must be related to the action that the Government are taking in the Budget. It must be seen that it gives a prospect of some increase, no matter how slow, careful or gradual it may be, in the level of demand.

That will ensure that the economy benefits and we do not throw away the significant sacrifices that have been made by many over the past two or three years for a variety of reasons that I have described. It is all too easy to say that we should put the present policy in reverse and go for some short-run palliatives. We must not do that. However, we must give industry and commerce, especially manufacturing industry, the prospect of a real recovery that will be sustained.

Mr. Frank Hooley (Sheffield, Heeley) rose—

Mr. Higgins

No. I shall not give way because I am about to conclude.

It is crucial that that prospect is given, and my right hon. and learned Friend did not give it in his Budget Statement. He did not refer to that dear old-fashioned expression that used to be the centre of Budget speeches, namely, the Budget judgment.

We must not ignore what is happening to the real economy. Control of the money supply is essential, but management of the economy is within the Chancellor's control within a framework of markets, and certainly within a framework of markets where we are trying to increase competition and remove restrictive trade practices on both labour and managerial sides.

That being so, in winding up the debate on Monday my right hon. and learned Friend must give the country hope for the future, because it is high time that we got the economy going again. If that is done properly, it does not necessarily mean that we shall lose the battle against inflation. We must win the battle against inflation, but we must get some real growth into the economy as well.

6.20 pm

Mr. Donald Stewart (Western Isles)

I am pleased to follow the right hon. Member for Worthing (Mr. Higgins), as it was my good fortune to do last year. Although I greatly disagree with some of what he said, he made a vigorous speech putting forward some good suggestions. The right hon. Gentleman lost me when he described himself as"dry", as I think that in an argument of this kind I should be guilty of rising damp or at any rate of condensation. The reason why the Chancellor did not refer to the Budget judgment was perhaps that there was no judgment behind it.

Like the right hon. Member for Stockton (Mr. Rodgers), I wish to broaden the debate from the specialist opening speeches from the Front Benches. One of the claims of the Conservative Party before the general election was that, it the electorate backed it, it would be electing a party that kept its promises. This is not the first occasion since the 1979 election on which the Conservatives have been guilty of dereliction of those promises, but some aspects of this Budget will increase public cynicism about this place.

What has happened to the reduction in taxes? Even in the Chancellor's first Budget VAT was clawed back at the same time as tax concessions were given. This time, personal allowances have been frozen. That is equivalent to an increase in income tax. The abandonment of the Rooker-Wise-Lawson amendment exposes the dishonesty of Conservative Members who supported it.

I welcome the recognition of the International Year for Disabled People in the Chancellor's action, although it still falls far short of what disabled people need. The same may be said of the allowances for the blind.

Very little can be said in favour of the rest of the package. I confess that I am pleased to see that the Vestey loophole for tax evasion is finally being plugged, although a great deal of money ran from the Exchequer with that horse before the stable door was closed.

Very little can be said about the general outline of the Budget. It is based upon the absurd nostrums which the Prime Minister uses as incantations. Examination shows that most have no basis whatever either in theory or in experience. They were completely exposed in a Sunday Times editorial on 8 February, which I recommend to hon. Members rather than take the time of the House to read it out.

Tobacco and alcohol are fair targets for tax raising, although taxes on drink are already showing diminishing returns, so the whisky tax is not likely to produce the revenue that the Chancellor expects.

The most outrageous imposition, which has been condemned all round, is the increase of 20p on the price of a gallon of petrol. Today's editorial in the Daily Mail, referring to the tax, says: This, say the knights of the shires, is unfair to rural folk. Maybe it is, but they should also remember that Britain is an overwhelmingly urban society in which policy should not be determined by its impact on the Archer family. From their inception, the Government have been divisive. They are now dividing the town folk from the country folk. The effect of the petrol surcharge is devastating for rural communities. It will be interesting to see what representatives from rural communities do when that surcharge is put to the vote on Monday night.

The increase is particularly devastating in a constituency such as mine, which has no railways and few bus services, so that almost all travel and freight depends upon cars, vans and lorries. Ominously, as a result of this price increase, MacBrayne Haulage, one of the largest hauliers to the Western Isles, has already announced an increase in its tariff from Monday next. It is a most injurious blow to an area designated by the EEC as the most disadvantaged in the United Kingdom—with 20 per cent, unemployment—and food prices there will rocket.

The bitterest medicine for rural areas in Scotland is that, despite the £5 billion worth of Scottish oil, rural Highlands and Islands communities will be forced by this colossal rise in fuel costs to endure a soaring cost of living. The Government should accept the case for a weighting allowance on the London model for such areas.

It has been said that Japan and Germany have a highly competitive position in world markets because their factories were totally destroyed during the war. One wonders whether the Prime Minister is trying to get the United Kingdom into a similar position from which to launch economic revival. It seems hardly necessary to arouse fears about the Socialist aims of the right hon. Member for Bristol, South-East (Mr. Benn) and his hon. Friends when the Government themselves are busily destroying the capitalist system.

The Government speak of sacrifices all round, but it is clear that those least able to bear them are coming off worst. Questioned on television, the Chief Secretary—I am sorry that he is not present now—was asked whether the Budget did not bear more heavily upon the poor. He replied blandly that everyone had to make a contribution. That unfeeling attitude is typical of the Government. The Chief Secretary forbore to say"Let them eat cake". No doubt that will come with the 1982 Budget.

It is also sheer nonsense for the right hon. Member for Daventry (Mr. Prentice) to say, as he said yesterday, that the £10 Christmas bonus is increasingly resented by pensioners. Nearly all pensioners can do with £10, even at the value to which the pound has been reduced. It is clear that the Government intend Santa Claus to have a selective list of people to whom he may deliver his gifts.

I understand that the 2 per cent, reduction in MLR has had little influence on the money market. The minimum required was 3 per cent., so the Chancellor did not get even that right.

On the strength—if that is the word—of this Budget, the United Kingdom can file its petition in bankruptcy. The Budget is designed for the Tory heartland of South-East England. It is bitter medicine for Scotland. My party has called for a Scottish oil fund to provide for 200,000 jobs, for a reduction in VAT of at least 3 per cent., for aid to industrial energy users through tax incentives for conservation, which surely should be acceptable all round, and—most essential of all—for a fuel subsidy for the fishing industry, such as French fishermen receive from their Government but the British Government deny to our own men in spite of the contribution from the Scottish oilfields.

The hon. Member for Eastleigh (Sir D. Price) in his interesting speech mentioned cavalry charges. The Prime Minister seems determined, like General Custer, to make a last stand although total defeat is staring her in the face. I hope that when we vote on Monday there will be enough Conservative Members around who, if not motivated by national and constituency obligations, will at least refrain from going with the Prime Minister in her capacity as General Custer and thus take the precaution of seeing that their own scalps are preserved in the massacre that awaits the Conservative Party in the next general election.

6.29 pm

Mr. William Waldegrave (Bristol, West)

I shall not follow the arguments of the right hon. Member for Western Isles (Mr. Stewart) except on one point, namely, his objection to the increase in petrol duty. But I hope to explain later that the basis for my objection is very different from his.

In my view, most of the criticism of the Budget has been misconceived. The real accusation against it is that it is not the best way to maintain, as the Chancellor is absolutely and emphatically right to try to maintain, the medium-term financial strategy. It is perfectly fair for the Prime Minister to try to smoke out those whose opposition to the Budget derives from their opposition to the whole strategy. Consistency demands that their opposition should have been just as vocal last year or the year before.

My dislike of the Budget is not based on the belief that an increase in nominal demand of more than the 10 per cent, or so that we shall get in the next year would be helpful. I am sure that it would not. The only people who would benefit from such a bogus expansion would be those famous names from the 1970s property speculation boom, many of whom have got themselves back in control of public companies because they predicted a U-turn in this Budget and wanted to be in a position to profit from the ensuing property boom. Doubtless, they are among the Chancellor's critics today, and a good thing, too.

Why, then, do I feel this Budget to be so seriously mistaken? Mistaken I believe it to be, and likely to prolong the recession, thereby risking once again all the public spending and public revenue objectives that we have seen brushed aside so easily by the juggernaut of the slump. It is not because we need more paper money demand. An increase in nominal GNP of about 10 per cent, next year is perfectly reasonable. What the economy needs is the beginning of that slow and steady increase in effective demand for the goods of the private sector and the productive public sector that comes, in terms of the medium-term financial strategy, in the way that my right hon. Friend the Member for Worthing (Mr. Higgins) described so accurately.

In terms of the medium-term financial strategy it comes at the point when broadly measured money, or money GNP, increases faster than inflation. That is only safely possible once inflation is low enough for the drop in inflationary expectations to be real and for price stability to be secure.

The previous medium-term financial strategy predicted that happy state for next year, but this year's strategy really predicts it only for the year 1983–84, and that on the basis of some pretty dubious assumptions about spending, such as a wholly implausible turnaround in the financial position of the nationalised industries.

It is sometimes not understood by those who criticise the medium-term financial strategy that its monetary language is easily translated into the now unfashionable language of responsible Keynesianism. The medium-term financial strategy postulates as a central objective a sound restoration of demand-pull to the economy after inflation is controlled. It rules out the temptation to risk hyperinflation again by printing our way out of recession before inflation and inflationary expectations are squeezed out.

Unfortunately, this Budget risks this chance of a return to a reasonable, predictable increase in demand in line with what the underlying productive capacity of the economy can meet in terms of increased real output. It puts that at risk in two ways. First, it puts up prices in the short term. I know that there will be some offsetting gains in the RPI from the drop in mortgage rates, though that will not be as much as it would otherwise have been, because the new privileges given to the State as borrower in terms of indexing will keep building society interest rates above what they would otherwise have been.

Therefore, there will be an RPI increase as a result of the Budget. Let us hope that it is only the 2 per cent predicted by the Treasury. I fear that it may be more. That will feed into pay claims in the real world and into expectations—perhaps wrongly conceived, but none the less real—of further inflation.

Secondly, the Budget has done nothing significant to release a huge hidden pressure that is waiting to push up prices again as soon as the recession has turned the corner. I am referring to the requirement of companies to restore their profit margins. Many companies are today trading at absurdly low margins. As soon as they can, they will put up prices. This is a hidden source of postponed price rises, just as sure as was the structure of subsidies that we inherited from the last Government.

The Budget has helped a little with the cost of interest. It should also have taken a major step to lessen company costs further through a cut in the national insurance surcharge.

Within the context of this strategy, then, it was essential to maintain the battle against price rises as the prime objective and, therefore, to have avoided this year's increase in indirect taxes. In normal times, indirect taxes would have been perfectly acceptable, including the petrol increase, which merely returns it to its real 1970 price. But this is not a normal time. This is the critical point in a difficult and potentially heroic battle to get inflation down quickly enough to restore some demand safely to the economy before unemployment reaches the level of catastrophe.

Some parts of the expenditure for which I have called, and some of the taxes that I have suggested should have been forgone, could quite safely have been financed out of the increased revenue and lower expenditure derived from bringing forward the end of the recession if only by a few months. But—and it is a very big but—there would have had to be one other main and principal source of finance. It is to that that we should have turned.

The Chancellor is absolutely right to say that the dramatic distortion of the economy in the last two years has come from the improvement in the position of the personal sector. He is absolutely right to take money back from that sector, but in my view he is wrong in the way that he has done so.

Spending taxes—the first instrument—are not only regressive; at this crucial point, as I have tried to argue, they threaten the whole strategy. And by not raising the allowances we take spending money away most of all from the lower-paid and those on small fixed incomes. It is not they who have looked after themselves at the expense of the unemployed and the economy as a whole in the last two years. It has been the powerful, often highly unionised groups, on or above average earnings, such as the miners and the teachers. It is the latter, not the poor, who should have to bear the temporary cost of the recession.

The Chancellor should have bitten the bullet and put up income tax rates. Of course, that would have been rough for us, as a political party, but so will the explaining of a reacceleration of price rises and a longer slump. I would have been far happier facing my Conservative association with the explanation of the need for a temporary crisis rise in income tax rates—which would have been necessary to raise the allowances, to do without the indirect tax increases, and to allow £800 million or so off the national insurance surcharge—than I shall be explaining the postponement of the end of the slump and the threat of an upturn in prices as well as the blow to the hopes of industry.

It would have been a crisis measure. It would have been temporary. The continued sharp fall in prices would have meant that a non-inflationary money supply target next year would have allowed the beginning of a benign increase in demand, which would have put back hope into industry, some of whose lost profit would have been restored by the combination of falling interest rates and a cut in the NIS.

As it is, I am afraid that the blow to returning confidence represented by the Budget will prolong the recession in spite of the further spending cuts that the Government will attempt later this year, including the now quite inevitable cuts in defence spending. At the same time, we have shifted the burden of carrying the main temporary costs of the recession on to the lower-paid by letting the weight be distributed by the most regressive parts of the tax system.

The Secretary of State for Social Services—I pay great tribute to him—won a fine victory in terms of child benefit, and that considerably lessens the effects of the regression. However, in terms of this Budget we are not very worthy successors to that great former leader of our party, the centenary of whose death falls on 19 April.

The trouble all stems from the fact not that we are too single-minded, as we are often accused of being, but that we are schizophrenic on a crucial point. Is our principal objective to cut direct taxes and to follow Professor Laffer down the primrose path of supply-side economics, or is our principal objective the ending of inflation and the restoration of sound growth in line with the medium-term financial strategy?

At this critical juncture of events the two are in conflict—a conflict whose resolution has been evaded in a Budget that fails to begin that national reconstruction without which all the pain of the last two years will have been in vain.

6.38 pm

Mr. David Winnick (Walsall, North)

We heard a frank speech from the hon. Member for Bristol, West (Mr. Waldegrave). He referred to the problems facing the low-paid, and I shall refer to them in my own remarks. I agree with him that the Budget will deepen the recession.

There is general agreement in the country, and probably a majority opinion in the House, that this is indeed a disastrous Budget. It will certainly inflict even more damage on the economy. It will deepen the recession. Many more people will lose their jobs and their protection against poverty as a result of the Chancellor's speech on Tuesday. In fact, Tuesday was a black day for Britain and for British industry.

I doubt whether any recent Budget has provoked such a storm of protest in the country as has that introduced by the Chancellor on Tuesday. We know of the dissension among the ranks of Tory Back Benchers. Some of their speeches have reflected their views.

There have also been leaks and reports in the press. The Secretary of State for Employment, a senior Cabinet Minister, told us through the columns of The Times that he would not resign. The right hon. Gentleman told us that he was going to fight his corner. So far, he has not fought his corner of the Cabinet very succesfully. The former Leader of the House, the right hon. Member for Chelmsford (Mr. St. John-Stevas), was sacked in the recent reshuffle. He was asked whether, if he had not been sacked, he would have resigned. He replied that that question was more applicable to present members of the Cabinet, and that it was for them to decide whether they could put up with present policies and with the Budget. Therefore, we know that there is much dissension in the Cabinet.

I wonder whether the Prime Minister and the Chancellor of the Exchequer have much of a majority in Cabinet meetings. Those Cabinet Ministers who clearly disagree with the Budget are under some obligation to make their position clearer than the Secretary of State for Employment did in that newspaper statement.

The Budget is deflationary. In the past two years industry has suffered greatly. Reference has been made to the 2 per cent, cut in the minimum lending rate. Without that cut a large chunk of British manufacturing industry would probably not have been able to survive. In addition, one must bear in mind the effect of high interest rates on the pound. We need a far larger cut in the minimum lending rate. Indeed, other measures are needed in order to reflate the econeomy. The 20p increase in the price of a gallon of petrol will harm private motorists. It is a further blow to industry, particularly to the motor industry in the West Midlands.

The Budget did not seek to cut unemployment. In his speech on Tuesday the Chancellor of the Exchequer told the House that he understood and sympathised with the hardship suffered by the unemployed. The Prime Minister never loses an opportunity at Question Time and during debates to tell us that she understands the plight of the unemployed. They are crocodile tears. It is a difficult to accept that the words of the Prime Minister and of the Chancellor of the Exchequer are sincere when they talk about the sufferings of the unemployed, because their policies have caused the largest rise in unemployment since the 1930s. The figures tell us that.

No hon. Member would deny that unemployment will increase substantially as a result of the Budget. It is not a matter of deploring unemployment or of saying that one understands and sympathises. We must bring in policies that will reverse the tide of rising unemployment. We do not want sympathetic words that will not help those who do not have jobs. It is part of the Government's policy to use the discipline of mass unemployment as a form of income or wage restraint.

It is no use the Government denying that there is an incomes policy. There is one. It is different from that pursued—rightly or wrongly—by the Labour Government. However, it is similar to that which operated before the Second World War. It uses the fear of being sacked. In some places there are 500 applicants for every job. The Government believe that that fear will instill the necessary discipline into wage bargaining and that it will undermine the trade union movement. Indeed, the Government have used that weapon during the past 22 months.

We wanted the Budget to unveil policies that would allow manufacturing industry to operate properly once more. In my constituency and nearby there are empty factories. In the Black Country of the West Midlands factories have closed down during the past 12 to 18 months. There are derelict buildings. When will those factories operate again? Will they ever operate again? We know what has happened to the former employees. They are on the dole queue. Most of them have been unable to find jobs. The derelict buildings are an indictment of the Government's policies.

Since the Government came into office there has been a 16 per cent, drop in manufacturing output. That explains why the West Midlands has such a heavy rate of unemployment. Indeed, unemployment has risen faster in that region than in any other part of the country. The past 22 months have been a monetarist nightmare. I was rather amused at one point when I read the Treasury and Civil Service Committee's report. It said that there had been no monetarist experiment. There has been one, and I have already described it as a"monetarist nightmare" for the British people.

The Chancellor of the Exchequer told us that tax cuts would stimulate and galvanise—although perhaps"galvanise" is more the Secretary of State for Industry's word—investment and industry. When the Chancellor of the Exchequer introduced his first Budget, in June 1979, he said: I have stressed the urgent need for new policies to reverse the decline of the British economy".—[Official Report, 29 June 1979; Vol. 968, c. 262.] Those were his words. What has happened to investment in manufacturing industry? There has been a 13 per cent, drop in investment—some"stimulating" and"galvanising". While the Government have been in office unemployment has increased nationally by 90 per cent., and in the West Midlands by 125 per cent.

It saddens me to think of the victories that the Conservative Party scored in a number of West Midland marginal constituencies. Unfortunately, many people were taken in. Labour Members lost their seats in those marginal constituencies. Many of those who voted for Conservative Members have paid the penalty. A good number of them are on the dole queues. Even more are on short-time working. In the next 12 to 18 months many more will suffer the indignity and humiliation of unemployment.

It is disturbing, but the Government appear to be dissatisfied with the cuts in public expenditure. To judge from the White Paper, we can expect further cuts in all Departments. The hon. Member for Bristol, West said that those cuts would include defence. I should be glad to see cuts in defence expenditure. However, the other cuts will cause only further deflation.

I deal next with an industry in which I take a close interest, namely, the construction industry. No doubt the Chancellor of the Exchequer thought that he was being generous when he announced measures that amounted to £5 million. Instead of such piddling measures, the Government should take proper action on housing and construction. In the public sector housing starts are the lowest since the 1920s. Many people are desperately waiting for accommodation. Does it not make sense to take construction workers out of the dole queues and to build the necessary houses? Not only would that be useful for the public sector, but it would provide work for the private sector. Several small businesses—of the very kind that Conservative Members were always on about when they were in Opposition—would be helped by a revival in housing and construction. Some of those small businesses would not then have to go into liquidation.

Like my hon. Friends, I deplore the fact that there will be no increase in the tax allowance. As has been said, that will cause great hardship, particularly to those on low pay. In addition, it will cause hardship to many pensioners and to several of my constituents who, in addition to their pensions, have small private incomes. They will be brought into the income tax net and be taxed, when they should not be paying any tax at all.

Mr. David Mellor (Putney)

I cannot help feeling that there is a lot of confusion in some of the points that the hon. Gentleman is making. Can he help us by saying how we can do better, not have cuts and yet keep taxes down?

Mr. Winnick

Well, it was the Conservative Party that campaigned for income tax reductions. My view has never been that. What I want to do is to protect those most in need. That is why, had I been here, I should have supported the Rooker-Wise amendment. There is no reason why those who can afford it should not pay their whack in income tax. I have never been convinced that we are so overtaxed that action is called for on the scale we saw in the second Budget of this Government.

Many people have discovered since the general election that although the Conservatives when in Opposition promised they would reduce income tax, and did so, that has not benefited a large number of them. The vast majority of my constituents have not received any benefit. Indeed, they are paying more in taxes, even without what will happen as a result of the Chancellor's Statement on Tuesday. Indirect taxation went up. So it is nonsense to think that a reduction in income tax helps those on modest incomes. What it does is give substantial gains to people who do not need that type of assistance.

Although it is to be welcomed that there is to be some additional assistance with fuel bills, I consider that the increase is very small, from £1.40 to £1.65 a week. Moreover, it applies only to people over 70 and on supplementary benefit. When we realise what is to happen to gas and electricity, the prices of which will go up by 25 per cent, or more during 1981, it seems cruel indeed to deny those who will receive this small increase, pensioners and others, a really decent amount with which to pay their fuel bills. There are many people who are not on supplementary benefit—for example those receiving rebates—but who, in my view, should get some assistance because of the large increase in the prices of gas and electricity.

I said when I began my remarks that there was no majority in the House for the Budget. If there were a free vote on Monday, certainly on the other side of the House, I very much doubt whether there would be a majority for the Chancellor. I believe that Conservative Members of Parliament have to decide. It is a difficult decision and I understand their anxieties. Those who believe that the Budget is right have no anxieties. There is nothing to be concerned about and they will go into the Division Lobby in a happy frame of mind. But those Conservative Members who think differently should ask themselves whether they really believe it is right and proper to put party before country.

Nearly 41 years ago a Conservative-dominated House of Commons decided not to give a large majority to Neville Chamberlain. No doubt it could have been argued at that time that Conservative Members should have supported their Prime Minister. It was a very good job for Britain that a large number of Conservative Members decided to put Britain first.

I believe that the Prime Minister and the Chancellor of the Exchequer are a curse to this country—in their own way as much as a curse as Neville Chamberlain was in 1940. The policies pursued by the Prime Minister and the Chancellor of the Exchequer and the few allies that they have in the Cabinet are disastrous. They have already caused tremendous suffering to people up and down the country, and they will cause even more difficulties and hardship because of the Budget. I hope there will be enough Conservative Members who will say"Enough is enough. I will put my country first. I will put industry first, and I will do what I can to change the leadership of my party and the Government, because in doing so I shall be helping this country to survive."

6.55 pm

Mr. Peter Hordern (Horsham and Crawley)

I think that I can safely ignore most of the hyperbole of the hon. Member for Walsall, North (Mr. Winnick), but I will mention just one point to which he referred, because it points out the dilemma in which the country and the economy find themselves at present.

The hon. Gentleman referred to the very rapid increase in the number of unemployed in his constituency and, indeed, in the West Midlands in general. It will be within the knowledge of the House that those areas where unemployment is highest are those in which we have the largest proportion of manufacturing industry. In the hon. Gentleman's constituency and in the West Midlands as a whole the proportion of those employed in manufacturing industry is the highest in the country. It is about 38 per cent, of the employed population. Therefore, working, as manufacturers do, with the very narrow profit margins that they have, it should not be a surprise that the number of unemployed has grown at a faster rate in the West Midlands than in any other part of the country.

Unlike the hon. Gentleman, I do not ascribe this condition to the monetarist policies of my right hon. and hon. Friends. I ascribe it to something very different—the development and the movement of our exchange rate over the last six years or so. When the hon. Gentleman's Government was in office, pursuing policies that the right hon. Member for Stepney and Poplar (Mr. Shore) encourages us to believe that the Labour Party, if they were ever again to form the Government, would pursue once more, they contrived to place our affairs in the hands of the International Monetary Fund, not once but twice.

During the course of those years from 1972, when the pound stood at $2.44, the dollar value fell to $1.57 in October 1976. The then Chancellor of the Exchequer—the right hon. Member for Leeds, East (Mr. Healey)—had to be hauled off an aeroplane on his way to Tokyo, I think it was, to deal with the situation, and very soon the IMF moved in. So the result of the right hon. Gentleman's policies and the Labour Government's policies has been that for two or three years our affairs have been handled by the International Monetary Fund.

But there has been one very important additional factor to the benefits that steadfast management by the IMF have brought to our country. I refer, of course, to the increasing presence of North Sea oil. We were, and we still are to a minor degree, an importer of oil, but we are now very nearly in balance. This has made a substantial difference, of course, to our balance of trade and, much more important, to the fact that after all these years we no longer need to export the same quantity of manufactured goods in order to hold the same price of sterling.

The reason why the level of unemployment in the constituency of the hon. Gentleman the Member for Walsall, North is so high is that, because of oil and because of our, on the whole, rather good management—although with certain weaknesses, to which I shall turn later in my speech—the price of sterling against the dollar and all other currencies has gone up by more than 50 per cent, in three years. There is no way in which manufacturing industry—I am thinking of conventional products—can compete with other countries' conventional products with that sort of appreciation.

So the problem that this country has to face is one of very rapid change for industry, which has for the last 40 years or so been told that manufacturing industry must export or die. That is the problem that faces the whole of industry, the Government and the country.

As I said, the right hon. Member for Stepney and Poplar holds no credit for the value of the pound. He is all for expanding public expenditure. He said that he did not care for the PSBR of my right hon. Friend the Chancellor. The truth is, I do not think that he cares for the PSBR at all.

If the Opposition have a policy, it resides once more in the policy of incomes restraint—it is an incomes policy, however it is wrapped up. I do not think that the right hon. Member carried with him the hon. Member for Liverpool, Walton (Mr. Heffer) or some other Opposition Members—certainly not the hon. Member for Walsall, North. His solution is that public expenditure does not matter; all that matters is a voluntary arrangement with the trade unions. It is like asking us to back a horse that has never yet completed the course and has fallen at so many fences that it is impossible to count them.

Mr. Ennals

Where in his description does the hon. Gentleman place the fact that in the 15 months leading to the general election and the return of the Government unemployment was steadily going down, month by month, and output was slowly going up? Now there has been a great reversal, and almost an extra 1 million has been added to the unemployment figure. How do those facts fit into the hon. Member's suave presentation?

Mr. Hordern

I had intended to move on to another matter, but as the right hon. Gentleman tempts me I must say that I find it odd that he has the nerve to talk about unemployment when his leader in the Labour Government had responsibility for presiding over a doubling of the unemployment figure in a very short time. Furthermore, the right hon. Gentleman presided over the total collapse of an incomes policy that led to the appointment of Professor Clegg, the author of many of our present troubles.

I was referring to the Opposition and their predilection for an incomes policy. They have one other idea, which is that whatever the consequences they would instruct the authorities to drive down the price of sterling so that our industries could compete. That appears to be their solution. I have news for the Opposition. Any suggestion that public expenditure would go in the way that they recommend, or any suggestion that the PSBR did not matter, would drive down sterling without any instructions to the authorities. So I do not believe that the Opposition's policies are credible.

I wish that I could believe that the policies put forward by the Liberal Party and the Social Democrats, whom we heard this afternoon, were any better, but they too, it seems, rely for success entirely upon a voluntary incomes policy. The Liberal Party engaged in a short-term marriage to the Labour Government—a gunshot marriage; the Lib-Lab alliance. It did not last for long. The Liberal Party called it off as soon as it could. Now the Liberals are engaging in a second marriage, to the Social Democrats, on the same basis—that a voluntary incomes policy would do. Doctor Johnson had some wise words for the leader of the Liberal Party. When asked for his opinion about a second marriage he said: it was the triumph of hope over experience. We have to address ourselves to the question whether monetarism or the control of public expenditure, to which my right hon. Friend the Member for Worthing (Mr. Higgins) referred so aptly, is the right course for us to follow. I have no doubt that that is the right course to follow and that it is the course that we should have followed right at the beginning—better control of public expenditure.

My hon. Friend the Member for Bristol, West (Mr. Waldegrave) said that we should stick to our medium-term financial strategy, that we should encourage industry, and that the way to do so was by increasing direct taxation. That was a most courageous statement. I believe, however, that there is still substantial room for cutting public expenditure, and it is to that point that I wish to turn.

I am glad that my right hon. Friend the Secretary of State for Health and Social Services is here. He has been extremely courteous in allowing me to get some figures from his office. His Department has been endlessly helpful in the assistance that it has given to me. What I am about to say applies not just to my right hon. Friend; it applies to successive Governments over a long period. The growth of some of our social services, in terms of staff, has been extraordinary by any standards. That must be set against a decline in manning standards in the private sector, particularly in manufacturing industry. In 1961 the number of people employed in the Health Service was 575.000. In June last year the number was 1.2 million—an extra 625,000—according to the Central Statistical Office during the past year.

My right hon. Friend told me, quite fairly, that a substantial number of the extra staff were doctors and nurses. I accept that. He also said that there were some administrators and other functionaries who had to be employed if the service was to function properly.

There is a note in the public expenditure White Paper showing that, far from increasing, the number of hospital beds would decline in the next few years. Furthermore, the number of hospital beds has declined substantially over the past 20 years. The public service cannot be immune from good management. To say that it should double the number of personnel over 20 years and go on increasing without ever stabilising is an unreasonable proposition.

Mr. Patrick Jenkin

I hope that my hon. Friend will take the opportunity of the appearance of my permanent secretary before the Public Accounts Committee to explore these issues in detail, because they are certainly important. I must tell him, in all courtesy, that it is not as simple as he says. If he examines the hospital statistics, showing the much shorter time that patients spend in hospital, and if he recognises the much more intensive care that that involves, with the extra burden on doctors and nurses, he will see that the productivity of the National Health Service has improved substantially over the years. If I may say so with the greatest respect, merely counting heads does not produce the truth.

Mr. Holdern

I must tell my right hon. Friend, with the greatest courtesy that I can muster, that I refuse to accept that the standards of the Health Service have more than doubled in the past 20 years. I am sorry to say that most people outside the House, and perhaps inside, would say that, if anything, standards have deteriorated.

Mrs. Renée Short (Wolverhampton, North-East):rose—

Mr. Ronald W. Brown (Hackney, South and Shoreditch)

Will the hon. Gentleman give way?

Mr. Hordern

No. However good the standards are, it is a pity that so much money has gone in wages and salaries in the Health Service over the past five years. Wages have more than doubled in that time. They have gone from £1.8 million to £4.02 million. It is a pity that £900 million more had to be found in wages and salaries last year. Think what the economy could have done with that! [HON. MEMBERS:"That is because of Clegg".] Of course that was due to Professor Clegg.

Mr. Brown

Go and get a job in the Health Service. Look at the waiting list in Horsham.

Mr. Hordern

I sincerely hope that my right hon. Friend will take firm control of the Health Service and the number of people employed in it from now on. Opposition Members have no care for the private sector. They must understand that it is the private sector that has to pay for the increasing costs of our social services.

I regret to say that the same applies to the education service. I am not talking about the past year, because there happened to be a marginal improvement. I find it difficult to see why over 20 years the number of full-time staff who are neither lecturers nor teachers should have expanded from 81,000 to 200,000, and the number of part-time staff who are neither teachers nor lecturers should have expanded from 90,000 to 483,000. one must ask what all those people are doing in the education service.

That has meant a considerable increase in wages and salaries in the public sector. One of the hopes that one has about the Budget is that if the Government are successful in controlling public sector pay it is a good reason for supposing that the private sector will be able to recover. A great deal depends on that.

I want to mention two items that were announced in the Budget. The first is the £400 million from the banks—a particularly unfortunate affair. It is easy enough to take £400 million from the banks; what is not so easy to accept is that industry, small businesses and farmers throughout the country will be unable to find the sum of between £6,000 million and £8,000 million that will now be withdrawn from lending. The banks can lend up to 15 times their capital. I hope that my right hon. and learned Friend the Chancellor understands what he is doing in taking that money from the banks.

The second announcement in the Budget concerns the new gilt-edged index-linked bonds. There has been much talk about that, but I had hoped that that instrument would not be introduced. Some people may say that it is because the Government have such confidence in the future rate of inflation that now is the time to do it, but I remind my right hon. Friends that the bond is due to last until 1996—which is a further 15 years. That is a long time to guarantee the rate of inflation.

A gilt-edged stock has not yet been issued that has kept pace with the rate of inflation. This is a real guarantee, and its expense will probably be prodigious if it is to last for 15 years. More important is that if things had gone as they should and interest rates had been reduced there would have come a time, perhaps in a year or two, when the market could once more issue industrial debentures and loan stocks. There is no possibility of companies issuing these stocks in future, because they will not be able to compete with index-linked stock.

As for the North Sea oil bond, the less said about that the better. It represents no charge on our North Sea oil whatever. It might just as well be linked with the price of bananas. But that is another gimmick.

We are midway through the Parliament. My experience of Parliaments is that at about this time the Government tend to become restive as their supporters get restive. Somehow or other Chancellors are able to persuade themselves that expansion is in order for the economy. We have heard it all before, many times. I salute my right hon. and hon. Friends for taking the courageous and tough action that they have in producing the unpopular proposals on taxes.

The opposition to the proposals has come not only from the Labour Party, the Liberal Party and other sectors, but even from some of my right hon. and hon. Friends. Sometimes I feel that there are so many leaks in the corridors from the wets that one might be advised to wear galoshes. In case it is thought that a better observance of what Lord Keynes said would be helpful, I leave the House with what he said in similar circumstances just after the First World War. In"The Economic Consequences of the Peace" he said: Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency — The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments unable or too timid or too short-sighted to secure from loans or taxes the resources they required have printed notes for the balance. That is the policy that many right hon. and hon. Gentlemen still suggest we should follow: not so Keynes; not so me.

7.14 pm

Mr. Andrew F. Bennett (Stockport, North)

I congratulate the hon. Member for Horsham and Crawley (Mr. Hordern) on maintaining the Conservative tradition of couching support for the Government in various terms, but really attacking them for most of his speech. No Conservative Back Bencher has yet wholeheartedly supported the Government. The hon. Member was concerned about the overmanning, as he called it, of the education and health services, although he appeared to think that it was all right to employ doctors and nurses or teachers and lecturers. But does he not think that it is better to employ a ward orderly to serve meals to patients than to ask a nurse to do it? Is it not better for a consultant to dictate letters to a secretary than to have to write them in longhand? Is it not better for a science teacher to teach pupils than to spend time preparing experiments and equipment?

It is important to achieve the right balance of resources rather than make a blanket judgment that teachers and lecturers, doctors and nurses are all right but that the rest are unnecessary.

This is a difficult debate. First, we have the general global debate on the Budget; secondly, we have a debate on the Government expenditure plans; and, finally, we are supposed to concentrate some attention on the social security benefit upratings. I suggest that the House has been diddled out of a proper debate on the Government's expenditure plans.

I can see the logic of publishing the expenditure plans with the Budget, but if we are to discuss them together the day or two days normally given to debating the Government's expenditure plans should be added to the Budget debate to give us a greater opportunity to consider the whole area. It is unsatisfactory if the two are run together every year.

I want to consider the social security proposals and the upratings. I invite the Chancellor of the Exchequer to visit Stockport to investigate the serious problems facing my constituents. I suggest that he argues with them the relevance that the Budget has to their problems. If he did that he would have to think again. He would see the increasing numbers living in poverty, at a disadvantage and in steadily growing misery.

The foremost concern of my constituents is that they want the right to work. For example, for the past 12 months the work force of Adamson Containers, Station Road, Redditch, has been on short time. Soon they may all be made redundant. That firm has done all the right things. It does not have old, outdated equipment. In the past five years it has built a new factory and equipped it with new equipment. It set about training a work force to do the welding on the containers.

All that the firm has lacked in the last 18 months has been orders for containers, and that has been because of the high exchange rate—the key factor in its being able to sell containers abroad. Of course, there have been other problems. Interest rates have made it impossible for the firm to build containers for stock. It has difficulties in storing containers, as there are problems of size, but the real problem is expense.

Now the firm is finding it increasingly difficult to persuade British ship owners to buy its containers; because of the exchange rate, those British shipping firms are buying from abroad. They are looking to investment relief to help with purchases.

It is reasonable to require Bitish shipping firms to buy British if they obtain investment relief from the Government. The Budget offers no crumb of help to firms that have done all the correct things to regenerate industry. Even bringing down the minimum lending rate is not enough to enable Adamson Containers to build its goods for stock.

The firm would like to be able to take on more school leavers for training, if only it had the opportunity to produce containers. Of course, if it were at full production it would have a beneficial knock-on effect for the rest of British industry, because, at full production, its demand for steel is considerable. If the Chancellor has nothing to help the firm, I hope that in the near future some of his colleagues will be able to offer help.

I could take the Chancellor to the industrial estates in Stockport, where many small firms are making good products with hard-working labour forces. They are bitterly disappointed at the Budget because they do not come into the category of small firms that the Chancellor mentioned. They employ 20 or 30 workers. Those are just the sort of firms that Stockport and the country need to grow into big firms with 300 or 400 employees. But they are too big to benefit from most of the Chancellor's measures for small firms.

The sort of person who will benefit from the Chancellor's offers is the bloke who decides that he can make a killing out of importing Royal Wedding souvenirs—Union Jacks or Lady Diana pencil sharpeners—and flog them this year. He will probably import them from Hong Kong or Taiwan and he will do well out of the Chancellor's package. The small firms with 20 or 30 employees making good products would like encouragement to expand and create jobs in Stockport, but there is little for them in the Budget.

I could take the Chancellor to the unemployment benefit office in Stockport and ask him to talk to skilled men in their fifties who have worked all their lives but for whom the prospect of getting another job is virtually non-existent. They see nothing in the Budget for them. As their redundancy money runs out and their unemployment benefit begins to be exhausted they begin to realise how harsh it is to live long-term on the short-term rate of social security benefit.

I would take the Chancellor on to the really disadvantaged—the job disadvantaged—who have no skills and are in poor health or are disabled. Throughout most of the 1960s and 1970s they could sometimes get jobs. They were in and out of work, doing the jobs that no one else wanted. They face the prospect of being permanently in the dole queue, with no opportunity to get back into work. The Government say in the White Paper that those people will be a permanent part of the unemployed this year, next year and the year after. Could the Chancellor of the Exchequer tell them that he is planning to keep them out of work for that length of time?

What about women workers who are suffering increasing unemployment in Stockport? They went out to work not to earn pin money but because it was essential for them to raise their basic family income to a decent level. Many had husbands in low-paid jobs and many were bringing up families on their own. They are very bitter because of the way that the Government have allowed the textile industry to wither away and be destroyed. Cheap imports are coming in because of the exchange rate and because other countries have had favourable fuel prices, particularly for petroleum feed stocks.

Those women are particularly bitter because they see in Stockport shops the brand names that they used to produce—household names that most people believe are British products. Those women know that the products are made in almost every country in the world except Britain, yet their neighbours still buy them as if they were British products.

I should like to take the Chancellor on to some of the households in Stockport where people are living in poverty, particularly those with children and on sickness or unemployment benefit. I would ask him to try to work out a family budget on £20 or £30 a week, except that having seen what he has done to the country over the past two years I fear that he would have those households facing disaster in a matter of days rather than months.

Let us consider a person on sickness or unemployment benefit who has children. As a result of the Chancellor's uprating he will get an extra 5p a week for each child, to take account of inflation. How on earth does one manage to feed a family and children when one has less than £1 per meal to spend? Let hon. Members try to do it. Let them go round the shops and see what can be bought for that sort of money. Those who have to do that are in total despair, yet we ask people to do it year in and year out. When people with limited skills are asked to do that they find it extremely difficult and frustrating.

There are houses riddled with damp in Stockport. Any self-respecting public health inspector would have closed them in the 1960s. Now they are not described as damp but merely as suffering from condensation—the new"in' term for black moulding damp. The council houses that are affected in that way are those that the council cannot afford, or cannot get permission, to modernise or those that it has modernised but had to do on the cheap—the very cheap.

Mr. Tom McNally (Stockport, South)

Will my hon. Friend confirm that the term"condensation" is a term of hell for real people living in real houses and that unless the Government deal with the problem in Stockport and elsewhere we shall be condemning generations of council house tenants to sub-standard housing? We must make the Government understand. Condensation is not an excuse; the problem must be solved.

Mr. Bennett

I feel as strongly as my hon. Friend does about the problem of condensation. In fact, it is a double problem. There is a lack of resources in the housing department for dealing with the problem, but there is also the problem of the tenants' lack of resources. They cannot afford to heat their houses, either to give themselves comfort or to drive out the damp.

I could take the Chancellor to the Age Concern"pop-in" centre in Stockport and ask him to explain to pensioners why he has not increased the tax allowance this year. Many pensioners spent a lot of time trying to get together a private pension to supplement the State pension. They are bitter that this year's pension increase will be totally taxed. Because of the small pension schemes that they arranged for themselves, they have put themselves into the tax bracket and the whole of this year's pension increase will be subject to tax.

My hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) asked about the Boyd-Carpenter pensioners. Will the Government tax them? I hope that we shall have a clear statement tonight about the pensioners whose State pensions will apparently be taxed from next November. Most of those pensioners are asking the question that they ask year after year: why is it that the Chancellor can put up so many things now, but the pensions have to wait until November?

Why is it that the increases to the Royal Household can go up from 1 April but the pensioners cannot get their money until November? Why is it that the prices of cigarettes, beer and petrol are going up straight away but pensioners must wait? If the Budget was early this year so that the Chancellor could get the benefit of a full year's income from all those sources, why could not the Government bring forward the uprating of pensions or claw back two of the lost weeks from last year?

Pensioners ask what has happened to the promise that they would benefit from increases in the standard of living—the Labour Government's pension laws. If they had been in operation a married couple would get an extra £2.05 on top of this year's increase. Why has it been necessary for the pensioners, rather than other people, to make sacrifices?

Finally, I ask the Chancellor to talk to school leavers. They were born at a time when there was a bulge in the birth rate and as they leave school they are facing a dearth of jobs. School leavers are frustrated and angry. For most of their time at school their teachers were telling them to work hard and to do well because the future of the country depended upon a skilled labour force. Yet, when they come on to the labour market they find that there is no opportunity to obtain a skill. They see, or may hear, that the Government, in their White Paper, are talking about cutting back expenditure on further and higher education.

It is perhaps a mistake for me to ask the Chancellor of the Exchequer to come and look at the problems of Stockport and of the country. We should perhaps be asking him to move quickly on to the Woolsack this summer and addressing our message to his successor. The people of Stockport want jobs and decent homes. They do not wish to find that, increasingly, they have to put up with poverty. They do not want this no-hope Budget.

7.30 pm

Mr. Cyril D. Townsend (Bexleyheath)

The House is grateful to the hon. Member for Stockport, North (Mr. Bennett) for his tour of Stockport and his defence of his marginal seat. I think, however, that the House would be more grateful if I did not follow the hon. Gentleman around his housing estates and shopping areas.

It is not necessary to hold a candle to the daylight to see that we face an economic crisis in Britain that is without precedent since the growth of post-war prosperity. The House knew on Tuesday that the Chancellor of the Exchequer brought hard and heavy tidings. It was, indeed, a watershed Budget.

As usual, the Budget was complex and comprehensive—and this year it was also highly controversial. Much of it I warmly welcome, such as the reduction in minimum lending rate—which is worth, one gathers, about £700 million to industry—the improved child benefit, for which a number of us have been campaigning, the special help for the disabled, which is highly appropriate this year, the raising of the VAT threshold, which is so often forgotten, and other important means for helping small firms, but its overall strategy must be questioned. It asks us, in turn, the question:"what sort of party do we think we are in the 1980s?" To modify a fine phrase of Lord Woolton, one of our most outstanding party chairmen,"Can we both cope and care?"

It was right that the Chancellor and, indeed, the Cabinet should have been given the benefit of any doubt that I and some of my hon. Friends have had about the Government's economic policies for a year or so. These doubts have centred on the selection of one monetary weapon, M3, with which to combat the inflationary dragon. Lord Melbourne, no doubt basing his comment on his wide knowledge of men and public affairs, once said: Nobody learns anything by experience. Everybody does the same thing over and over again. I believe that incoming Governments are under an obligation to break new ground, to innovate and to experiment. We should be honest with ourselves. In the last 25 years, under both the major parties, we have not found any quick or easy solutions. In addition, there has been a personal factor for me and also, I know, for many of my colleagues. We hold the Chancellor in great regard, in particular his informality even in high office, his intellect and his all-round professionalism. Undoubtedly, his economic policies have brought many successes. Our inflation rate, measured over the last six months, is far below the level of those of many of our competitors. Despite the rise in the value of the pound, our exports achieved wonders in 1980. We had a surplus in our trade with the European Community for the first time for 10 years—the aim of a number of recent Governments. There is a new realism in British industry.

No doubt some will say, when they learn later of my criticisms, that when the going got tough I was not prepared to give wholehearted support to the Government. I would say this to them: I shall always be prepared to support tough measures when I believe that they will lead to better conditions for the people. The preaching of unpopular as well as popular passages of the Gospel is part of the way of life of priests and politicians alike. My fundamental doubt is whether the Budget will lead to better conditions for our people. My growing fear is that it will lead to higher unemployment, lower investment and an even greater shrinking of our industrial base on which our future must depend. When, in a few years' time, our oil no longer flows in the pipes, we shall all depend upon world-beating products flowing from our factories.

Not unnaturally, I long to be convinced that I am wrong about the Budget. I long to be able to believe that the severity against consumers is necessary to breathe life back into our dying industries. I long to be convinced that this is not a deflationary Budget, but I notice that the vast majority of economic pundits, whom I respect, agree with me that it is. Many hon. Members on the Conservative Benches will have found more sense in the recent technical criticisms of the Treasury and Civil Service Committee report than they would care to admit in public. Many are puzzled and perplexed by the Government's growing estrangement from the CBI, the Institute of Directors, chambers of commerce throughout the land and leaders of small businesses.

Unlike the old Labour Party, which is a creature of the trade union movement, the Conservative Party is not, and never has been, a creature of the CBI, but one cannot help wondering why it is that an organisation that is designed to represent the views of industries throughout the land finds our policies so difficult to comprehend.

Mr. Raymond Whitney (Wycombe)

My hon. Friend is right in saying that the Government have been under criticism from the Institute of Directors and the CBI. Given that those criticisms come from different directions, will he not allow for the possibility that the Government may, after all, be right?

Mr. Townsend

My hon. Friend is entitled to the happy thought that we few hundreds, sitting on these green Benches, know rather more than do the official representatives of British industry in these islands. Industry was led to expect more than it has received. That is why there is such widespread disappointment in business circles. When 100,000 words from this Budget debate have been safety gathered into the columns of Hansard one landmark will remain on the political landscape for all time. In the middle of one of the biggest world recessions of our century, faced with a rising unemployment level, at present numbering 2.4 million, the Government decided to introduce a restrictive Budget. Inevitably, this will deepen the recession in the immediate future. We shall see unemployment climb over the 3 million mark before the next election. In turn, that will increase the North-South divide, which, rightly, is a matter of great concern to hon. Members in all parts of the House.

Unemployment is now Britain's major problem. It is undermining whole communities. In financial terms, rising unemployment takes a bigger share of the available public money, which means further cutbacks elsewhere. In the 1930s unemployment was cheap. In the 1980s it is extremely expensive.

Given the Government's inheritance of public spending out of control and massive and growing international debts, there can be no question of unbridled public expenditure on the scale suggested by the TUC. The TUC's ideas are nonsense on stilts. They point to, not away from, decay and desolation. I suggest that there is a place for spending about an extra £1,000 million a year on carefully costed capital projects, such as better roads for London's dockland, the neglected sewerage pipes, the electrification of British Rail and, as has already been mentioned, building ships for the Royal Navy. Without such a programme I sincerely believe that the Chancellor will fail to capture the public imagination. He captured it before with his enterprise zones.

We are talking about national psychology and not just national statistics. I commend to all the well-thought-out ideas of my right hon. Friend the Member for Taunton (Mr. du Cann). If we had not allowed so much money to be siphoned off into British Leyland, steel and coal, more money would be available to create jobs in the new growth areas of industry and the Budget could have done more to ease the lot of small businesses. That is our central problem.

My hon. Friend the Member for Bristol, West (Mr. Waldegrave) mentioned tax allowances. I need not cover again the ground that he so admirably covered, except to say that I believe that the Government's proposals have profound implications for the last and least in our society. With respect to the Chancellor, and perhaps to the Prime Minister, in the last few years they have listened too much to their economic advisers and not enough to their supporters in Parliament and the country. Harold Macmillan appeared on BBC television in October last year. He was quoted as saying: One should never be tied to a dogma if it is a piece of mechanism. If it is the principle, that is different. Governing Great Britain is about far more than maintaining the public sector borrowing requirement at some arbitrary figure. We have no need to defend f10½ billion as a lioness defends her cubs. As a Government we can afford to be less strident and more flexible in pursuing our long-term political objectives. If we do not pursue our policies on foreign affairs, defence, home affairs and the Health Service, no other party will do it for us.

With respect to my Front Bench, it lacks wisdom to risk all on comparatively narrow points of economic management and to give electoral chances to those who are at present down, out and hopelessly divided, and who do not deserve those chances.

For those reasons I appreciated the Putney speech by my right hon. Friend the Chancellor of the Duchy of Lancaster and the observations on television of my right hon. Friend the Secretary of State for Trade. Like the latter, I did not enter Parliament to become a member of a kamikaze pilots' association.

Since the time of Pitt and Peel, our party, unlike the Liberal Party in the last century and the Socialist Party in this century, has steered clear of doctrinaire solutions to the nation's problems. We have put our trust not in theories but in people. Lord Randolph Churchill said"Trust the people". That is the way that we shall get our country through the world crisis. That is the only way.

7.42 pm

Mr. David Ginsburg (Dewsbury)

Apart from the right hon. Member for Stafford and Stone (Sir H. Fraser) the hon. Member for Bexleyheath (Mr. Townsend), joined a string of Conservative Members who are critical of the Budget. It was a moving speech. I hope that the Chief Secretary will tell the Prime Minister something about the feelings in his party about the Budget. After many years in the House I have seldom experienced a Budget which has been so universally criticised or which has engendered such gloom and depression in the Chamber and outside.

A characteristic of a successful Budget is that apart from its technical merits there is a central design which enthuses and motivates the taxpayer. Lloyd George, even Neville Chamberlain, Stafford Cripps, R. A. Butler and, more recently, Roy Jenkins, and my right hon. Friend the Member for Leeds, East (Mr. Healey), had personalities and a direction of message which they projected to the man in the street. Not for nothing is the science of economics called political economy. Governments seek to evoke a response from the people. In this case, I have to say with sadness and certainty that the overwhelming emotion aroused by the Budget is one of unrelieved gloom and hopelessness, with anger a close second.

Leaving aside the question of equity and fairness, the Chancellor's first two Budgets were associated with a reduction in taxation. The second Budget led to a fall in the rate of inflation. This Budget is different. There is no doubt in the House that it will produce a higher burden of taxation, a still higher level of unemployment, unnecessarily high interest rates and excessively high rates of inflation. It has next to no friends in the British business press. It has been ill-received by our friends and allies, and in the United States. The French President said that if interest rates were the same level in France there would be a revolution.

Why has this happened? We must face the fact that the Government are boxed in. They have no room to manoeuvre. They are committed to a respectable level of public expenditure by the logic of events or by the pressure of the votes of the wets in the Cabinet last autumn. At the same time they are affected by the monetarists imposing their solution on the financing problem.

Some of my hon. Friends have said that the crunch will come on Monday. They have made appeals to the patriotism of Government Members. I shall not be so indelicate. There are regular crunches, but the main crunch will come later in the year when Conservative Ministers will confront the logic of their commitments on one side with their monetary policy on the other.

However, we shall still have to endure very high interest rates. I speak not merely of the minimum lending rate but of the additional amount that companies will have to pay to borrow. Because of a disappointing drop of only 2 per cent, in minimum lending rate there is the prospect of a much stronger pound in the next few weeks. It is dangerous to forecast exchange rates, but there are already signs that the pound is strong once again. The Budget provides powers to stem the inflow of foreign money into Britain. Special measures of reverse exchange control are envisaged as a result of the Budget.

For a Government dedicated to market solutions to problems; for a Government who say that the market is always right, I find their action perplexing. I am tempted to ask what Professors Friedman or Hayek would say about the measures. However, a much deeper criticism can be made. Proposals for reverse exchange control are significant because they show that the Government are aware of the underlying strength of sterling, especially with high interest rates, even if they are naively far too confident that money seeking a high interest rate home will not find its way past the artificial barriers.

In the light of that, I believe that the Chancellor's interest rate policy is inexcuseable. As the hon. Member for Horsham and Crawley (Mr. Hordern) said, so strong is the underpinning effect of oil money that we could easily afford to allow our interest rates to go down substantially further before there is a risk of a serious run on the pound. A 2 per cent. reduction in minimum lending rate in the present circumstances is derisory. It contributes to unemployment and also to inflation. Instead of low interest rates, we are using high rates to choke off economic growth and activity. Unemployment, far from remaining static, is scheduled to go up.

No one knows—again, the question was put from the Opposition Benches—when the recession will end. Even if it bottoms out this year, what will happen to those who have lost their jobs? It is unlikely that many of the businesses that have been ravaged or destroyed by the recession will take back former workers. If we are to get people back to work we shall need much more ambitious programmes than the ones that we have heard about so far. New jobs—I emphasise the word"new"—on an unprecendented scale must be created. New export industries will need to be built up. Import substitution industries should be created, and there will have to be an expansion in the service industries.

A constituency like mine, which 10 years ago, despite low wages, had what I suppose in statistical terms would be called a subnormal rate of unemployment, now has unemployment at record levels. It has nearly trebled over the past few years and it is still increasing. Government aid is needed to build a new industrial infrastructure in my constituency and in the neighbouring constituencies. Within six months of the general election the Secretary of State for Industry removed the prop, in the sense that the area was scheduled as an intermediate area and received grants for industrial development. That prop has been removed, and there are no signs that the Secretary of State proposes to restore it.

The Government's estimates for the rate of inflation are higher than their estimates for pay increases. The one budgetary sum that the Chancellor is likely to get right this time is the drop that he is deliberately engineering in national living standards. However, that drop will not be implemented on the ground of equity. No; these imposts will be borne disproportionately by those on the lowest incomes.

The narrowness of the Government's own taxation options is also apparent in the Budget. Where there are few tax options the burden of the taxes increased becomes more burdensome. Had the Government needed to raise additional money, it would have been different if the VAT route had not been totally closed. As a tax, VAT favours exports. It bears more harshly on the final consumer than on businesses. It can be a much more discriminatory tax than, say, petroleum duty, if there are a number of rates.

It should be said that the Government inherited a more flexible VAT structure when they came to power in 1979. Now, they are prisoners of their own uniformity. For example, there is no reason why energy-using goods could not be charged more for VAT, as happened when my right hon. Friend the Member for Leeds, East was Chancellor of the Exchequer. I suppose that the administration of the Civil Service over-persuaded the Government. I suggest that there is still a chance for a major reappraisal of VAT when we consider the Finance Bill.

This is a bad Budget. If the debate has served any purpose it has provided an occasion when the House, almost with unanimity, has spoken against the Government. Perhaps that will not change a bad Budget into a good Budget, but at least some of its most obnoxious features may be modified before the summer.

7.54 pm

Mr. Peter Lloyd (Fareham)

The hon. Member for Dewsbury (Mr. Ginsburg) rightly wants interest rates to fall. Yet most of his speech seemed to be devoted to proposals that would put them up. Only a reduction in Government borrowing over the medium and long term will enable interest rates to come down and stay down.

The past few days have reminded me of an opinion that I heard expressed some years ago by a former Member of the House who had been here for many years. He said that he had heard many Budgets presented during that time, and those that received a favourable initial reception were in the following months invariably revealed to be fundamentally flawed, while those that excited immediate condemnation were often found to have enduring merits. I put this Budget in the latter category.

However, I have doubts about it. My major doubt is whether the sums are right. I have been able to cast only a passing glance at the massive collection of figures that we have been given, but I wonder whether some of them are not perhaps a little optimistic, particularly those concerning the financing of the nationalised industries. If the Government issue a balance sheet it is most important that it should retain credibility and that the figures should come out more or less that way, if confidence is to be retained. In that respect the Government have lost some ground over the past year or so.

My second complaint about the Budget is that it did not come sooner. If the Treasury was not able gradually to bring its spending and income more into line, personal tax rates should have been put up long ago, and industry would not have to suffer the eighteen months to two years of excessively high interest rates.

Like my hon. Friend the Member for Bristol, West (Mr. Waldegrave), I am worried that Rooker-Wise has been set aside, with all that that means for the poverty trap. Having listened to the two Front Bench spokesmen who opened the debate I am not now sure what it does mean, but it will certainly be keeping more people in taxation than is basically necessary. Better, I believe, would have been that the allowances should have been fully indexed, and 3p or 4p added to the basic rate of income tax. In that way we should have paid for the extra revenue that is coming from the additional petrol duty, for that is the kind of arbitrary imposition that is not merely unpopular but has a habit of working its way rapidly through to prices.

Moreover, the indexation of the basic tax bands would be a more honest approach. It would achieve a more positive reaction from the people who would pay it, because they are the people in work and they are the people who have improved their real spending power over the past few years.

The doubts and complaints that I have pale into relative insignificance against my relief that the Chancellor has reasserted his objectives to control the money supply and reduce borrowing, despite all the short-sighted advice that he has been given not only by Opposition Members but by organisations outside the House. Even the CBI, which should know better, comes out with the old recommendation of pumping enormous sums into the economy. All that that would do would be, perhaps, to end the recession a couple of months earlier than otherwise would have happened, but at the price of starting the next recession very much sooner and at a higher level of inflation and a lower level of employment and economic activity than the present one started at. The Chancellor deserves our thanks and congratulations for preserving us from that.

Where I believe that the Government have failed—my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) touched on the matter—is in cutting public spending. I do not say that the Exchequer gap could have been bridged by cuts in public expenditure—in fact, I do not think so—but the Government's mistake has been to go at it too fast and expect results too quickly.

Bold cash limits and harsh across-the-board percentage cuts through every Department, with the next Budget in mind, all taken at a rush, have the habit of evaporating in the face of what are euphemistically called economic and political realities. There is no fast way sensibly to cut the vast and complex Government machine, but there is scope for doing so, as my right hon. Friend the Member for Daventry (Mr. Prentice) made clear in a well informed and brave speech yesterday.

The task of cutting public expenditure thoroughly is one for a whole Parliament. It requires sector-by-sector examination and, above all, more time and knowledge than busy Ministers are able to give to it. It needs an extension and broadening of the type of studies being undertaken by Sir Derek Rayner to get behind the forms and structures of present spending patterns, instead of every now and then slashing boldly structures that already exist.

Such matters are irrelevant for some hon. Members on the Opposition Benches, for whom the level of spending and borrowing does not matter. I am amazed that when in office they did not borrow even more wildly than they did to do all the helpful and virtuous things that we should all like to see done. The realities for the Labour Government were the same as they are for us. When their borrowing shot through the ceiling, instead of our all arriving on the next floor in Utopia we landed in the arms of the International Monetary Fund.

I am not surprised that Opposition Front Bench speakers, some of whom undoubtedly know what the score is, do not spell out the implications of their party's stance. They wisely stick to Chancellor-bashing in speeches long on adjectives and short on analysis and prescription. If they said what their party's position implied they would probably lose another dozen or so of their more sober colleagues to the Council for Social Democracy.

I did not hear the speech of the right hon. Member for Stockton (Mr. Rodgers)—I shall read it tomorrow in Hansard—so I do not know whether he echoed his ally, the leader of the Liberal Party, who was calling for lower interest rates, increased spending and a statutory prices and incomes policy—a unique collection of failed policies which, if the right hon. Member did call for them, would probably ensure that Members of the Labour Party seeking to join the Council for Social Democracy would think twice.

I turn now to some of my hon. Friends—most notably my hon. Friend the Member for Bexleyheath (Mr. Townsend)—who feel that although Government borrowing in the normal way should be held in check it can be allowed to rise in time of recession and, therefore, that the Chancellor's measures, or many of them, are not really necessary. Every time I hear that case put I am struck by the fact that the level of borrowing that they will permit is, by an amazing coincidence, always the level that we have or that we could reach without unpleasant decisions having to be taken. It is far too good to be true, and basically unconvincing.

The Government are running, even now, a deficit, that, as a percentage of GDP, is much higher than Governments ran in the 1930s and 1960s, when Keynes was the guiding light. Indeed, if the present level of borrowing and public financing were projected back into the 1960s, the Government would emerge not as fiercely monetarist, as many hon. Members on the Opposition Benches like to paint them, but as the most indulgently Keynesian Government of all time, except for the Labour Administration who I mentioned, who ended on their knees before the IMF.

Had the Government tried to accommodate the growing deficit by borrowing, there would have been two results. First, it would rapidly have convinced the world that the Government were no longer seriously determined to keep the economy in balance and to defeat inflation. The pound would have dropped not only by the few percentage points that would have acted as an encouraging bonus for exporters but sufficiently to increase costs dramatically and to set off again the whole dreary round of inflationary pressures at home, which would rapidly lead back into export prices.

Secondly, when the recession ended, as it will, and the private sector picked up, it would demand capital for stock rebuilding and investment; but that demand would occur before benefits accrued to the Exchequer in terms of higher tax receipts or lower unemployment payments. Interest rates would therefore be forced back up, threatening to strangle the recovery before it got going.

The Chancellor's measures are vital if the growth in the economy that is to come is to be sustained. But there is an argument, which is serious and which is therefore worth answering, that the tax increases that the Chancellor is imposing will diminish consumer spending and so postpone recovery, if not cancel it altogether. I do not believe it, so long as the measures prove sufficient not merely to permit interest rates to fall the two points that they have fallen already but to continue falling and to permit the mortgage rate to go down, too. When they come down they will release further discretionaiy spending on the part of consumers. Moreover, there has been an increase in real earnings over the past few years for a high proportion of the population in work, which has gone into a high level of personal saving. Lower interest rates will make such savings less attractive.

Secondly, with inflation staying down because of the policies that the Government adopted and are sustaining, there will be less of the fear that has acted as an incentive for the high saving. Therefore, I see no reason for arguing that consumer spending will not be more buoyant, so I believe that the Chancellor's approach in the Budget is not only brave but will be fully vindicated.

8.6 pm

Mr. Alfred Dubs (Battersea, South)

When the Chancellor finished his Budget speech I noticed the dismay among his hon. Friends behind him, the like of which I have never seen since I became a Member of the House. His Budget decisions are testing the loyalty of his supporters beyond permissible limits. I have talked to Government Back Benchers in other parts of the Palace of Westminster and I have yet to find one who is not utterly alarmed and dismayed by the Budget decisions.

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

The hon. Gentleman has just heard one.

Mr. Dubs

The general conclusion seems to be that the Budget is not in the country's interests and will prove to be particularly damaging. I get no political satisfaction from the Budget. Although it will be advantageous to the Labour Party in an election, I do not relish the thought of what it will do to the country.

There is a point at which the rise in unemployment that the Budget will bring about will damage the social fabric of the country. That alarms me. We shall have a generation of school leavers who will never know what it is like to have a job. The damage that that will do goes beyond economics. It will damage the trust between people and the community. I fear for the future of the country if the policies are not reversed.

I do not need to repeat the economic indicators quoted by hon. Members earlier in the debate.

Mr. Richard Needham (Chippenham)

Does the hon. Gentleman not accept that the youth opportunities programme gives every young person a guarantee of work experience within six months of leaving school, and after that a further period of work experience? It is not true to say that some young people will never have work experience.

Mr. Dubs

There are currently thousands of young people who will never have the chance of a job after leaving school. I welcome the increase in the youth opportunities programme. However, it lasts for only one year. What happens to young people when they have completed the programme and there are no jobs for them? They will have had one year off the streets, and then they will be back on the dole queue. Therefore, at best, the youth opportunities programme is a temporary expedient, which can be justified only if it is to tide people over for the day when there are jobs. However, if there are no jobs at the end of the day it is only a hypocritical farce and not a genuine contribution to solving the unemployment problem.

Other hon. Members have said that our record as a country, judged by any of the main economic indicators—whether it be the decline in output or the increase in unemployment—is significantly worse than that of any other major advanced Western country. Therefore, it is no excuse to say that an international recession is affecting all countries equally. That is not so. Many of our difficulties are those of the Government's making.

I now turn to a different, although related, point. Over the past few days and weeks there have been numerous leaks about the Government's Budget intentions, some surprisingly accurate and others less so. I wonder whether we could manage our affairs in a different and more sensible way. Instead of keeping Budget decisions a secret until the Chancellor of the Exchequer rises at the Dispatch Box, would it not be better if the main options that the Government were considering could be made public officially rather than unofficially? Then we could have a better insight into the Government's real economic decisions, when they had made up their minds on the options before them. That practice is followed in the United States and other countries. I should have thought that it would make for a more informed and sensible debate if we could get rid of the obsession with Budget secrecy until the last possible moment.

Some of the options which were put forward prepared many of us for the decisions which the Chancellor announced, although I was surprised that MLR was not lowered more than had been suggested. The duty increases on alcohol, cigarettes and petrol were perhaps expected by everyone, although it was not expected that the duty on petrol would be increased so much.

The slight benefits and incentives to industry surprised every hon. Member. There was virtually unanimous opinion in the House and in the country that a more positive incentive to industry was desperately needed. I was surprised at the small incentives to industry announced by the Chancellor.

On many occasions, as at The Guardian dinner the other day, the Prime Minister has said that there is no alternative to the Government's present economic policies. Even in terms of overall Conservative thinking, which I do not share, I wonder whether it is necessary to assume that PSBR can be reduced only by reducing overall economic activity. Even in Conservative economic terms, would it not be possible to achieve a lower PSBR at a higher overall level of activity in the economy? If lowering the PSBR is the only path of economic thinking open to us in the Government's terms, might not an alternative solution be some economic growth, less unemployment, more tax income from people who would then be at work and more tax income from higher company profits—all at a higher level of economic activity and GDP?

This country is uniquely placed to consider those options. We have oil revenues and we are sheltered from balance of payments difficulties, at least for the moment. Therefore, I should have thought that we were the one country in Western Europe which could boldly say that we should expand our economy and that if that is the way to reduce PSBR, so much the better.

Despite questions by hon. Members on both sides of the House, it is not clear why the PSBR, as at present defined, is the chosen indicator. General Government expenditure, as defined in the Red Book, shows that although the estimated outturn in 1980–81 was a deficit, the Budget forecast for 1981 was a surplus, measured in terms of current receipts and current expenditure. The forecast for 1981–82 is a surplus, measured in those terms. There is a deficit when we add other elements of expenditure, particularly capital expenditure and more particularly that of public corporations.

As I understand the thinking underlying the PSBR, it is that if the financing of a Channel tunnel were to come entirely from the private sector there would be no adverse effect on the PSBR. However, if a Channel tunnel were to be financed from the public sector there would be an effect on the PSBR. The economic effect of the investment, whether financed by the private or the public sector, would be equivalent in terms of the effect on money supply and, above all, on inflation. I do not understand why we are so hide-bound by a definition of the PSBR which reduces the freedom of manoeuvre of any Government who take that approach. I shall be interested to hear the Minister's comment on that matter.

The White Paper mentioned cuts in public spending. The Government have not been successful in imposing their public spending targets on the economy, except in local government and housing. Those of us who have been affected by those cuts know how damaging they have been. Elsewhere, the cuts have not been so successful. It is now acknowledged that one of the reasons has been the heavy burden of paying for the increase in unemployment and therefore the increase in the social security budget.

Various assumptions are made in the Government White Paper, such as 2.5 million unemployed, excluding school leavers, for 1981–82 and 2.7 million for 1982–83. If the public expenditure estimates are based on those assumptions, what will happen if unemployment goes above the figure suggested, as may happen in the years in question? Public expenditure will increase further because of the additional cost of the unemployed, through either unemployment benefits or supplementary pensions. The unemployment figures suggested for estimating purposes in the White Paper are on the low side if the Government's expenditure targets are to be realised. I hope that the Government expenditure targets for unemployment are much too high, but I fear that unemployment will rise and that therefore public expenditure will also rise.

Throughout the election campaign and ever since there has been a cry from the Government Front Bench that incentives in the economy were the key to a change in the pattern of the economy. In the first Budget after the 1979 election there were to be tax reductions—indeed, there were significant tax reductions for the better-off. Where has the argument about incentives gone now? As thresholds are not indexed, more people will have to pay tax, particularly the least well-off. What about incentives for them? Whatever the hopes for increasing incentives, in which the Government believed during their first Budget, I wonder whether those hopes have been eroded by the passage of time and by successive Budgets which have taken away any existing incentives.

I could quote many things that have been said from the Government Front Bench in those Budgets, but that would be sadistic. On 26 March 1980 the Chancellor of the Exchequer said: Last year, we made an important start on tackling that inheritance."— from the previous Government— We set about reducing the rate of monetary growth. We achieved large reductions in dangerously oversized public spending plans. We reduced the share of Government spending and borrowing in the nation's output. And when, last November, the money target looked like being exceeded, we acted promptly and decisively."—[Official Report, 26 March 1980; Vol. 981, c. 1441.] Whatever the Chancellor of the Exchequer said about acting decisively and promptly, in every single respect the Government have failed to do what they set out to do.

Therein lies a tragedy. Britain has paid and is still paying the penalty for the Government's policies. There has been no significant benefit except some reduction in the rate of inflation—but not yet to the level prevailing when the Government took office. We have suffered enormously from the Government's policies. I fear that unless there is a major change of course long before the next Budget we shall suffer even more. Damage has been caused to the people—damage that they did not deserve, and which we should not be suffering. I call upon the Government to change course before it is too late.

8.20 pm

Mr. Fred Silvester (Manchester, Withington)

The hon. Member for Battersea, South (Mr. Dubs) does the Government an injustice when he says that they have not achieved anything except a slight reduction in inflation. I have listened to almost all of the debate during the past two days, and the one thing that strikes me is the complete certainty of some hon. Members about what we should do. I do not share that certainty. The management of the economy is full of unknowable factors. I approach it with doubt and circumspection. My right hon. and learned Friend the Chancellor of che Exchequer had a difficult task, and we must not make it more difficult.

Yet there is no point in beating about the bush, so I must say that I believe that in one important particular the Budget is wrong. I do not expect my right hon. and learned Friend to agree with me now and to change the Budget, but because management of the economy is a continuing process there will be opportunities in the coming year for him to take action to meet my point. I hope that he will consider that.

I wish to take up the point raised by the hon. Member for Battersea, South. The Chancellor and his colleagues have achieved more since taking office than they have been given credit for—especially in matters that will be seen to be of great benefit as the recession ends. There is a much better manning structure in much of industry and there will be substantial increases in productivity as the recession ends. There has been a more realistic level of wage settlements and there is a better understanding of the relationship between remaining competitive and the level of unemployment. We have brought into the open the pent-up inflation that existed under the held-back prices of the nationalised industries, the Clegg awards, and so on.

Despite my hon. Friends criticisms of and their disappointment over the level of public expenditure, I believe that we have substantially changed the sense of direction in that respect. That is not to be sneezed at. Those factors are of substantial credit to the Government and will bring great benefit to Britain as we move forward. It is a question of pricking the make-believe to which we have all become accustomed.

Nevertheless, there is one Budget disappointment, which has been mentioned several times in the debate. I refer to what the Budget proposals mean for industry. The continued success of our policies depend not only upon discipline but upon encouragement. The Government cannot be seen only as a stern judge meting out admonition from the sidelines. They must be participators, being seen to be bending over backwards to help those in difficulty.

Unlike some of my hon. Friends, my objection does not lie in the proposed tax changes. I accept the need for substantial increases in tax income from the personal sector. Others of my hon. Friends object to the petrol tax, and others to the non-indexation of personal allowances. But raising taxes is always an extremely unpleasant business. The Chancellor's options are not unlimited. If we accept the need for more taxation, the Chancellor deserves some support in his freedom to make decisions.

My objection is simple and fundamental. The Budget is based upon a single proposition. The Chancellor has decided that the public sector borrowing requirement shall be £10½ billion. Upon that point, like some great inverted pyramid, the remainder depends. But why £10½ billion? The Chancellor originally said that in the medium-term financial strategy our aim was £7½ billion. The Financial Secretary last night confirmed that £10½ billion had been arrived at by sticking to the original figure and adding the £3 billion estimated cost of the recession in 1981–82. When the original figure of £7½ billion was announced it was described as an illustrative PSBR. It was a guide, not binding on the Chancellor, which could be reconsidered in the light of circumstances. In his speech the Chancellor said that as PSBR of £14 billion—which we would reach if we made no changes—would be irresponsible and unacceptable. I agree with that. Incidentally, my hon. Friend the Member for Fareham (Mr. Lloyd) was unfair to my hon. Friend the Member for Bexleyheath (Mr. Townsend). He did not say that the amount of change should be exactly comparable to the things that we could do without hurting anybody. That was quite unjust.

I accept that maintaining a PSBR of £14 billion would be irresponsible and unacceptable. The Chancellor said that, taking everything into account, £10½ billion was right. It represents his judgment of the amount that can be found in the market without putting up interest rates.

My right hon. Friend the Prime Minister, in her speech at The Guardian lunch yesterday, added some further explanation. She is quoted in The Times as saying: We managed to borrow something under £ 13 billion last year. We didn't manage to borrow everything we spent. And part of it was borrowed with an interest rate of 17 per cent, and quite a lot at 16 per cent. But nearly £13 billion is not £10½ billion. Interest rates are falling internationally, and with the fall in the rate of inflation the cost of borrowing is becoming positive once again. So why £10½ billion? Why not £ 11½ billion, or £ 12 billion?

The forecasts for both the PSBR and interest rates are notoriously uncertain. We can be sure of only one thing—there will be error. The question for the Chancellor is not whether he can get his figures statistically spot-on but whether it is better to err on the side of contraction or on the side of expansion. The Chancellor has chosen contraction. It is that judgment that I believe to be wrong. The House will note that this is not a plea for a great reflation. I am not talking about the irresponsible spree suggested by Labour Members. I am saying"Why not £11½ billion, or £12 billion?"

Much has been made of the proposition that at this stage of a Parliament the Government lose their nerve. It is said that the Treasury always acts behind the event and that just when things are getting better it gives the economy a shove and we are back in the world of inflation and unwise expansion. This weakness is said to arise because Members of Parliament cave in when faced with the unpopularity of economic discipline. That was mentioned by my right hon. Friend the Chief Secretary last night and by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) earlier today.

I accept that that has happened in the past, but a little history can be a dangerous thing. We must make judgments that are based not on general propositions but on the situation as we find it. I hope that on this fairly narrow issue my hon. Friends who make a judgment that is different from the Chancellor's will not be accused of a lack of guts. The Budget is part of a process of economic management and is not a test of virility. I pose my question not because I think that it presents the easier option but because I think that it offers the right option.

Why do I make such a great song and dance about an extra £1½ billion? I suppose that in the sum total of public expenditure such a figure is peanuts. The answer is that such a sum would go a long way towards giving a boost to private industry.

There are a few signs that the recession may be reaching its bottom. If that is not so, there is all the less reason for a restrictive Budget. If it is so, we should ask how we can best help to take advantage of the movement, bearing in mind that anything that we do now will take some time to have an effect.

Everything turns upon ensuring that our industry is in its best shape to compete with industry outside our borders. The Budget does much in that direction and I do not underestimate it. It proposes a change in the MLR and includes provisions to deal with stock relief, energy prices and small businesses. These provisions are all most welcome. However, other proposals are omitted that could help still more. I draw special attention to the national insurance surcharge and some measure of public investment.

We cannot implement every proposal, but if we implement some we shall help to make our industry healthier for when the upturn comes. I should put at the top of my list a sensible programme of public investment and support for research and development. The main arguments for such programmes are well known and have already been canvassed. I shall not repeat them. I merely say that it is estimated in the public expenditure White Paper that current expenditure will rise by £1.3 billion between 1979–80 and 1981–82, while capital expenditure will fall by £1½5 billion. That cannot be right.

I share the concern of my hon. Friends that total public expenditure is too high and that we have so far been disappointed in our efforts to reduce it. That failure has not been for want of trying, and we must continue trying. It is the duty of any Government to maintain a constant battle against current expenditure on items not directly related to the temporary cost of the recession. The object is not merely to save money but to ensure that when the smoke of the recession clears we have a slimmed down and more cost-effective public service.

Our capital investment and our private industry should not be made to wait for that day. If we delay, it will be like saying to a hungry man"We cannot feed you better because your fat neighbour has gobbled up too much food". We need to be more sensitive. We should go to the store to buy a little more on credit so that the hungry man may eat a little better, while we continue to wrestle with his neighbour's obesity.

I ask that we find some way of accommodating further relief for industry within the limits of a modestly expanded PSBR.

8.34 pm

Dr. Oonagh McDonald (Thurrock)

I noted with interest the remark of the hon. Member for Manchester, Withington (Mr. Silvester) that he would have liked the Chancellor to give some encouragement in the Budget. When the Chancellor introduced his first Budget in June 1979 he adopted that approach. He argued that through the reduction in taxes encouragement would be offered to the consumer to spend and encouragement would be given to private industry.

The Government introduced the tax and price index to mark that great change in policy. It was to be a much better measure of the growth in people's real income than the RPI. In 1979–80 the RPI was 3½ per cent. higher than the tax and price index. Since then the tax and price index has faded into the background.

When the Chancellor described the impact of the Budget measures he used the RPI as a measure. He said that the Budget would cause the RPI to rise by 2 per cent. I am not surprised that he conveniently forgot about the tax and price index. I was able to obtain today the Central Statistical Office's preliminary estimate of the effect of the Budget upon that index. It would be nice if the Chief Secretary to the Treasury, instead of conversing with my hon. Friend the Member for Blackburn (Mr. Straw), would confirm the Central Statistical Office's estimate that the tax and price index will rise by between 5 per cent. and 6 per cent. and that that is a proper measure of the severe deflationary effect of the Budget upon people's incomes.

It is high time that the Government stopped trying to cover up the tax and price index. They should come clean and continue to produce it, and ensure that it is prominently displayed in press notices to the newspapers. We shall then know exactly what the Government's policies are and the ways in which they have changed during the Government's period of office. I shall not embarrass the Government Front Bench further by referring to the way in which the tax and price index was so gloriously introduced in June 1979, only to be carefully hidden now as though it were a guilty family secret—which, not surprisingly, it has now become.

The TPI is a measure of the way in which the personal sector is to bear the main brunt of the Government's policies. The post-Budget predictions of Phillips and Drew show the impact of the Budget on the personal sector. Altogether, taking the November measures that will take effect next month with the Budget measures announced on Tuesday, the Chancellor will take £4½ billion from the personal sector.

This will be revealed to people in about a month's time, when they receive their take-home pay. With the national insurance contribution increase there will be a cut in cash terms in their take-home pay. On male average earnings, manual and non-manual, which are now about £140 per week, the loss in take-home pay will be £1.39. The median figure, which is a better measure of what most people earn, will show a cut of £1.31 in take-home pay. The cuts in the median and average take-home pay for women will be 82p and 89p per week respectively.

Next month, therefore, those who are still in work will feel the impact of the Government's policy on their take-home pay. In April, at the end of the first week in which this takes effect, they will look at their pay packets and realise what the Government have done to them. As they find that their incomes then fail to keep pace with the real increase in the cost of living as measured by the TPI they will realise it still further in the months following.

As the Low Pay Unit has carefully spelt out, the impact of the Government's measures will be borne not just by those in work but particularly by low-paid workers. The burden of the additional £2½ billion raised will fall disproportionately heavily upon the low paid. The number of low-paid workers paying income tax will rise by over 1 million, and the number of families in the poverty trap will increase. My hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) gave the details of the implications for the low-paid. I shall therefore not repeat them. But it must be borne in mind that far from relieving the low-paid the Government are actually increasing the burden of taxation upon them.

Time after time in the previous Parliament, Conservative Members spoke about the increasing burden of taxation. I wonder what they would now say if the Opposition Front Bench were to decide on a Supply day debate on that topic. Would serried ranks of Conservative Members repeat the speeches that they made when we were in Government? I should point out that eventually we began to reduce that burden on the low-paid, chiefly by the introduction of the 25p rate band.

I often remember the words of the Prime Minister on the day after she was elected, when she quoted from St, Francis of Assisi and expressed her concern about poverty. I wondered at the time how she had the gall to quote from St. Francis as she stood outside No. 10 Downing Street, bearing in mind the kind of policies that she would introduce. I wonder still more what she does when she remembers that she repeated such words, because she has reduced many works to poverty and reduced the incomes of those who are in receipt of benefits. I hope that the Prime Minister remembers with deep embarrassment, guilt and sorrow that she had the nerve to say such things at the beginning of her period of office. She must have known full well that she was not there to protect the interests of the poor but, rather, the interests of the better-off.

I turn to social security benefits, and to pensions in particular. The Chancellor said that such benefits were to be increased by 1 per cent, less than the rate of inflation, as measured by the RPI but, as I have said, the TPI will be 5 per cent. or 6 per cent. higher than that. How much will pensioners and others whose benefits are taxed suffer from November onwards, when the uprating of pensions and other benefits will take place and they find that it is harder even than at present to manage on what the Government have deemed fit to dole out to them? The Government forget completely the contribution that many such people have made to the country's wealth in the past, but it is something of which those people remind me in letters.

As well as a fall in the incomes of those in work there will be a fall in the incomes of those in receipt of benefit. As a result of severe deflation in the private and personal sector—I have not yet mentioned deflation in the public: sector—Phillips and Drew now expects a drop of 3½ per cent. in the real GDP this coming year. That is much greater than the drop that the Government expect to occur. Phillips and Drew also expects unemployment on the wide definition—that is, including school leavers—to exceed 3 million by the end of this year and to increase further next year. The Government talk only in terms of unemployment of 2.5 million by the end of this year.

To some extent the Government have fixed their figures by excluding all school leavers. They have provided each school leaver with a place on the youth opportunities scheme. I in no way wish to criticise that effort on the Government's part, but come next December, when we look at the unemployment figures, we should bear in mind that even though school leavers will have places on such schemes they will not have real and permanent jobs in industry or elsewhere.

That will be the important point to bear in mind, especially when the predictions on which the Manpower Services Commission is working show that the number of such school leavers is expected to be 300,000 in the first quarter of next year. Therefore, when we look at the unemployment figures this time next year we should add an extra 300,000 to account for those on youth opportunities schemes who will not be provided with permanent jobs. In that way, they will be taken off the unemployment register.

I have touched on only some aspects of the Budget but I have said enough to show that in the terms in which the Government should measure its impact it is totally disastrous for this country. It is disastrous for those who are in work and who receive low pay, as well as for those who are in receipt of benefits. The Chancellor of the Exchequer has meanly refused to raise those benefits in line with the real cost of living that will be experienced next November. The Budget is disastrous for this country. It is difficult to see how industry can recover from its impact or how there can be an upturn during the course of the next financial year.

8.45 pm

Mr. Richard Needham (Chippenham)

May I take this opportunity, Mr. Deputy Speaker, to congratulate you on your arrival in office and on calling me? As long as you continue to call me, I shall hope that you long continue in office.

Yesterday, my right hon. and learned Friend the Chief Secretary said that the Keynesian money illusion was"as dead as the dodo." I am a small business man in private manufacturing industry. I am beginning to think that I might have greater connections with the dodo than I had previously realised. Together with all my right hon. and hon. Friends, I welcome the Budget and the assistance that it gives to small businesses. I am particularly relieved that the Budget has not—with the exception of its failure to index the lower end of the income scale—done anything to harm those most in need.

However, I take issue with my right hon. and hon. Friends on the Treasury Bench about the level of demand. They maintain that it will not be affected by the Budget. Yesterday, the Chief Secretary said: I do not think that it can remotely be described as deflationary … It will not deflate the economy further."—[Official Report, II March 1981; Vol. 1000 c. 920.] Last night my right hon. Friend the Financial Secretary reinforced that view.

Last year, manufacturing output fell by between 9 per cent. and 15 per cent. At the same time, the volume of imports fell, yet the Government claimed—no doubt rightly—that consumption had increased. If the volume of imports and manufacturing output both fell, yet consumption rose, one must ask where that consumption came from. The answer is that it came from stocks. The Government maintain that consumption rose as a result of destocking. The Government believe that as destocking has—in their view—come to an end, orders will flow back to industry.

Page 29, table 11 of the Red Book shows the Government's plans for this year. According to those plans, although destocking will continue in the first half of 1981 it will drop significantly in the second half of 1981. The overall level of final expenditure in 1981, when compared to 1980, increases. I suggest that restocking will ultimately depend on the level of demand and on the current level of stocks.

I am not in a position to establish the current level of stocks in retailing and wholesaling. Perhaps the Government have those figures. There does not seem to be a vast shortage of goods in the shops. It seems strange that wholesalers and retailers should start to restock in significant quantities when they do not feel that the demand exists. In addition, they will not restock if they believe that they can get away with a lower level of stocks than before. It could well be argued that stocks in this country until the last two years were too high.

If we consider that level of stock with some doubt in our minds we have to ask what the present Budget will do to demand. The Government say that it will affect demand to the tune of £3.6 billion. It will take nearly £4,000 million of real expenditure out of people's pockets: roughly £1,900 million by failing to introduce Rooker-Wise; £500 million on drink; £400 million on tobacco; £900 million on petrol. On top of that, wages are currently increasing at less than the rate of inflation.

This is where I take issue with my hon. Friend the Member for Fareham (Mr. Lloyd), who seems to think that if this Budget had been reflationary, if the Government had done something else, it would have put off the end of the recession only by a couple of months. But that view can be maintained only if the effects of the Budget are not deflationary. The Government are therefore pinning their faith, first, on increasing stock and, secondly, as my hon. Friend the Member for Fareham said, on savings and the belief that because savings are so high they will come back into consumption.

That is slightly optimistic, for two reasons. The Government are encouraging an increase in saving, for a start. They are trying through Granny bonds to increase savings from £2 billion to £3 billion. The second and most important point is that the level of savings is maintained at the present time because of the fear of unemployment. People will not shed their savings into consumption unless they are convinced that the level of unemployment is likely to come down, because they are worried—understandably—about how they will pay their mortgages, maintain HP payments and fulfil other commitments if they lose their jobs.

Therefore, if restocking does not take place, if savings do not come into the spending side of the equation, the Government will find that this becomes a deflationary Budget with a vengeance.

What effect will the cut in minimum lending rate have? Its effect on the pound appears to be neutral, overall, and if the level of borrowing comes down to £10.5 billion it is possible that the effect on the pound will be to push it up, because less money will be required. As the hon. Member for Manchester, Withington (Mr. Silvester) said, quite rightly, with interest rates coming down, the opportunity may arise to borrow money from other sources.

What is the net return on interest rates at the moment? On short-term rates, inflation is running at 6 or 7 per cent. and we still have interest rates of 12 per cent.

Furthermore, will the banks be prepared to finance increased stocks, even supposing companies in the retail or the manufacturing sector want to increase their stocks, when the Government have decided to put a £400 million tax on them?

For all these reasons, I am afraid that the effects will inevitably be considerably more deflationary than the Chancellor has accepted, and I must honestly admit that his previous mathematical attempts have not filled me with confidence. It is easy for right hon. and hon. Gentleman to laugh and joke about that but, frankly, their plans for reflation would certainly put this country back into a Brazilian league in a matter of months, if not weeks. The right hon. Member for Stepney and Poplar (Mr. Shore) gave no real, concrete alternatives to what the Government are doing.

There is certainly a tightrope, and a narrow one, between having a slightly higher PSBR and perhaps lowering interest rates more, and following the route that the Government have chosen. The problem with the route that the Government have chosen is that their figures are probably wrong. If so, industry, which elected the Government, will not be prepared to go on accepting the hammering that it has had. If my right hon. Friends on the Front Bench would come out selling with me next week, they would see what the level of demand is.

If the figures are not right it would be extremely useful for the Government to establish, through the NEDC, the TUC and the CBI, a committee to study the position on stock re-building in a similar way to the energy discussions that I am delighted to know are being conducted, if belatedly. At least we would know earlier in the financial year the position on the rebuilding of stock, on which so many of the Chancellor's plans depend.

If the. Chancellor has got it wrong and the Budget is deflationary, and output goes down, unemployment will go up, transfer payments will increase, and next year he will be back for more. If he comes back next year for more, some of us, I am afraid, will not be prepared to give it to him.

8.56 pm

Mr. Kenneth Carlisle (Lincoln)

It is a pleasure to follow my hon. Friend the Member for Chippenham (Mr. Needham) in the debate. Although I may respect him, I deeply disagree with him. I agree with him that the Budget is tough and unpopular. Of that, no one can be in doubt. Indeed, it was bound to be so, for Britain is engaged in a profound economic and industrial struggle. The effects of the world recession have been compounded by the lack of competitiveness in this country—a lack that has been growing for 30 years. We are inevitably a weak economy in the face of a world storm. If the Budget is to reflect this crisis honestly, it cannot be a happy one. To be realistic, it should be severe, and hence unpopular in the short term. The much more important question for the country is whether the Budget is right.

In the short time available, rather than analyses the Budget I shall stick to my main theme. As a country, we need more than anything to be an efficient and growing industrial community and to have growing businesses, which alone can provide the jobs that we need and the services that society demands in ever-increasing quality and number.

Without doubt, inflation is the worst enemy of profitable and confident business. We have learnt this from experience. With high inflation, business cannot plan ahead with confidence because it does not know what will happen. It has to borrow ever-increasing sums to finance new stocks, hence its indebtedness grows. The wage demands of the work force understandably become more strident, and profits, and hence investment, slump. We have been through this and know the effects. We know, too, how inflation attacks the most vulnerable in our community. It dissolves the cement of society. Therefore, a Government whose aim is the good of the country must attack inflation.

We know all about this, and the evidence is there for us to read. The most successful economies—those of Japan, Switzerland and Germany—have been the most successful in controlling inflation. The inflation rate in the United Kingdom is falling. Government measures take more than a year to work through to the economy, and the fall in the inflation rate has been the signal success of the Government.

The greatest danger now is that an unbalanced reflation which merely generate a new inflation, with the consequences for jobs and output that we all know. Surely we all remember the massive inflation of the Government of my right hon. Friend the Member for Sidcup (Mr. Heath), which was encouraged by the intense pressure that Conservative Back Benchers brought back from their constituencies. That is relevant to today. It led neither to more jobs nor to more efficient industry. It created a welter of frivolous activity, with no foundation. In the end it led to greater inflation than we had ever had.

Inflation seems to me to be like some of the great scourges of the past, such as bubonic plague, diphtheria and, more recently, poliomyelitis. In their time they were considered to be major threats, yet science killed them and now we hardly think of them at all. So it is, partly, with inflation. Now that it is falling it is easy to overlook or even deride its insidious poison. But inflation has not been cured. Science has created no magic vaccine to kill it. If we are careless it will without doubt once more engulf us. It can be subdued only by hard graft and good housekeeping.

Controlled inflation is one need of industry. Lower interest rates are another, because business needs capital in order to grow. That must be clear to everyone, as interest rates have been mentioned much in the debate. There is competition for limited funds.

One reason for the high interest rates of the past year has been the eager demands of the Government for greater loans. Thus, if we are to be consistent, all of us who have clamoured for lower interest rates—in my view correctly—should ask for a reduction in Government borrowing.

With the Budget, the decision for the Government has been tough. They must now ensure that both inflation and interest rates continue to fall, yet all the clamour is for reflation. That is the easy way out. The difficult way for the Government is for them to stick firmly to their course and ensure that there is no frivolous reflation which will cost us jobs in the end. When the economy turns, as it will, it will be soundly based and jobs will be there, with confidence and security.

The time has come for the winding-up speeches. I shall draw my remarks to a close but I urge the Government not to panic on their course, because times will become better. When the economy turns, we want it to be a sure, forthright and honest reflation.

9.3 pm

Mr. Jack Straw (Blackburn)

The debate has been characterised by the fact that apart from the opening Back-Bench speech of the right hon. Member for Stafford and Stone (Sir H. Fraser) and the short closing speech of the hon. Member for Lincoln (Mr. Carlisle), there has not been one word of praise from the Conservative Benches for the Budget. In the careful code language of the Conservative Party the condemnation has been damning indeed. It has ranged from the hon. Member for Bexleyheath (Mr. Townsend)—echoing no doubt his neighbour and mentor, the right hon. Member for Sidcup (Mr. Heath)—who said that the overall strategy must be questioned, to the hon. Member for Fareham (Mr. Lloyd), who said that he had a few doubts. Among those few doubts was the question"Are the sums right?".

In the years to come, when the history of this, the worst Government since Lord North, is written, 10 March 1981 will go down as the Government's day of reckoning, their day of judgment, the day when the Conservative Party in the country and in the House and its paymasters in the City and in industry finally had to face the consequences of the fraud and deception practised on the electorate in May 1979. That fraud was translated into Government action in the Chancellor's first Budget on 12 June that year.

Memories in politics are short—too short—but the enormity of the Conservative Party's fraud and the depths of its failure soon become clear when we consider what it said two years ago—what it said would happen—and what it has done. It was not just that the Prime Minister promised the electorate a better life, and not just that she planned to transform the economic health of the nation. She said that she would also transform its whole philosophy and moral values. In a rally at the City Hall, Cardiff on 16 April 1979 she said: The spirit of our Britain will be one of hope and endeavour …where all are equal in votes and before the law, but where this equality is a springboard for those who want a better life. The incoming Government, she went on, would free the national energies of the people with real rewards for effort and skill. These are the values which will bind together a wounded nation. She ended: what human folly can destroy, human wisdom can restore. It might have been better if she had said"What human wisdom has created, Conservative folly can destroy".

When the Chancellor presented his first Budget the words of the Prime Minister's Cardiff speech were ringing in his ears. His was an"opportunity Budget", to give the British people a greater opportunity than they have had for years to win a higher standard of living—for their country and for their families as well as for themselves. The Chancellor said: I dare to believe that they will respond to the opportunity that I have offered them today."—[Official Report, 12 June 1979; Vol. 968, c. 263.] In 1980 the message was much the same, though more muted, even though the time scale had changed. The Chancellor said: In the decade that lies ahead Britain has the opportunity to follow a more hopeful path. We have ended the 1970s with a society that is becoming less tolerant because we live with an economy that has been growing no richer. The 1980s can be very different."—[Official Report, 26 March 1980; Vol. 980, c. 1489.] As we know to our cost, the 1980s have indeed been very different. In the 1970s the problem was one of relative decline. We were growing, but less fast than our competitors. In the 1980s, relative decline has turned into absolute decline, with the hopes and expectations of millions not just for a better life but for the sort of life that they had previously enjoyed wholly dashed by this, the most callous of Governments.

As the Chancellor surveys the wreckage of his hopes and expectations he stands alone—well, almost alone, since yesterday the Prime Minister told The Guardian lunch that behind every good man stands a good woman and, taxing the credibility not only of the House but of the nation, she invited us, on that basis, to believe that she stood behind the Chancellor.

I can well understand the anger of the Prime Minister at those who, when the ship is clearly sinking, with no lifeboats in sight, prefer to take their chance in the water than face the certainty of annihilation with her. While the mouthpieces of this malevolent policy may have been primarily the Prime Minister and the Chancellor of the Exchequer, the whole Conservative Party and its allies must bear responsibility for the catastrophe. They elected the Prime Minister as leader of the Conservative Party. They did not have to elect a fanatic like her. They could have chosen less obvious wreckers, like the Secretary of State for Employment, the Home Secretary, or even, notwithstanding his speech earlier, the right hon. Member for Stafford and Stone. But they chose the Prime Minister, and the whole Conservative Party spent the three years before the election relentlessly peddling their myths that the nation was more heavily taxed than any other, that scroungers were to blame for Britain's relative failure, and that the State was suffocating enterprise and initiative.

When the Chancellor unveiled his election Budget on 12 June 1979 and rewarded those earning £300 a week and more with massive tax cuts, the whole of the Conservative Benches cheered him to the echo.

Mr. Michael Foot (Ebbw Vale)

They waved their Order Papers.

Mr. Straw

Yes, they did. Those who are running for cover, scared out of their skins at the prospects that lie ahead, showed no such reservations at the time. In many ways the crime of those collaborators is much greater than even that of the Prime Minister and the Chancellor of the Exchequer. Those two have at least been intellectually honest; they have never allowed facts to interfere with their prejudices. The other members of the Conservative Party have an advantage over the Chancellor. They, at least, understood what the Chancellor was doing and what were likely to be the consequences of his actions. They, at least, understood that he was trying to defy the rules of economic gravity and to prove, after all, that the world was flat. Yet they kept quiet.

Nor should we allow the Conservatives' paymasters—business and industry—to escape the consequences of the actions that they urged and applauded at the time. They, too, participated in this folly and in this catastrophe. The British Institute of Management and the Confederation of British Industry fell over themselves to issue sycophantic and laudatory messages of praise for the Chancellor's 1979 Budget. The British Institute of Management issued a stirring statement on the Budget of opportunity, It said: Managers will have seen that Sir Geoffrey Howe's Budget met, almost entirely, the proposals made by the British Institute of Management. This is a significant achievement for the 'voice of managers.' It is an important turning point in government's approach to the nation's economic problems. This letter, signed by Mr. Roy Close and Mr. Leslie Tolley, concluded: the Budget opens up a new prospect for managers. It provides a large part of what BIM has asked for on their behalf. We must by our enterprise, strategic boldness, personal effort and leadership, seize the new opportunity. Mr. Tolley seized the opportunity all right. He is chairman of the well known engineering firm, Renold Chains. Such was the opportunity, strategic boldness and personal effort and enterprise that he showed that he had to cut his company's dividend in the year that followed and close down one great factory of that company in Coventry, sacking 800 workers.

Then there is the Confederation of British Industry—the same Confederation of British Industry that, only a few months ago, promised a bare-knuckle fight with the Government, and whose president, Sir Raymond Pennock, yesterday described this year's Budget as yet another kick in the teeth for industry. The tune was very different two years ago. The then director-general. Sir John Methven, issued a letter to all his members conveying the resolution that the CBI council had passed. In his letter, he said that it was very rare indeed for the CBI council to pass resolutions. It said: This Council fully supports the strategy and direction of the Budget … The CBI Council therefore calls on all CBI member firms to do everything in their power through the efficient and competitive management of their enterprises to ensure that the policies, which the CBI has long advocated and which are now being pursued by the Government, lead to higher productivity, higher living standards, more jobs and a more successful economy, in the interests of the British people as a whole. It ended with some telling words that we shall not allow the CBI to forget. Sir John Methven, on behalf of the council, said: If we fail in this new environment—when we are being given the sort of incentives we have asked for—we may never be believed again. We may never get such a chance again. And we shouldn't be surprised then if other, unpalatable alternative strategies gain more attraction. How right the late director-general of the CBI was. Other less palatable alternatives to the CBI and the Conservative Party will indeed gain attraction as people realise that the Conservative Party had its last chance with the June 1979 Budget and has failed wholly to meet that prospect and to take that chance.

Nor can the Conservative Party or anyone within it seriously blame the world recession for the calamity that has befallen this country, or use it as an excuse for the fact that the 1979 Budget has failed to meet expectations. Before the 1979 general election, during Labour's period of government, the present Prime Minister never conceded that world factors had anything to do with the British economy. She acted then as if the world did not exist. Now she acts as if the British Government does not exist and that Britain's parlous state is due to factors beyond her control.

The truths about the world recession were well spelt out this week by my right hon. Friends the Members for Ebbw Vale (Mr. Foot) and for Stepney and Poplar (Mr. Shore). They were confirmed in the text of a little-noticed press release issued by the Government themselves on the occasion of the Chancellor's mini-Budget on 24 November, which said: it is domestic demand, more than trade, which has led to this recession. They are damned out of their own mouths. The point was reinforced this morning by the hon. Member for Chelsea (Mr. Scott) who, on Radio 4, said that the recession in Britain had not yet begun to bite and went on to say that he feared that it would make the recession produced by this Government even worse.

The Gospel according to St. Luke tells us that: joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance. That joy is only for those who truly repent. It is not enough for Conservatives to confine themselves to convoluted and squalid expressions of regret or token gestures such as voting for 5p off the increase in petrol duty. If they want to be accepted as true repenters, nothing less than a thorough revolt will do. Eleven minutes in the 1922 Committee, as they had this evening, is not enough. They must have a thorough revolt of the kind that led to the dismissal of Neville Chamberlain in 1940. Otherwise, the disbelievers on the Tory Benches may be saved from that special circle of hell to which my right hon. Friend the Leader of the Opposition referred as being reserved for Chancellors, but they will surely find themselves locked in purgatory, for ever contemplating a most terrible future.

For all the criticism that has been heaped on the Budget, it might have been expected that the Government would abandon their outrageous claim that there is no alternative to the present policies. But no; yesterday the Chief Secretary to the Treasury ploughed through a speech with no entertainment of any alternatives, however marginal.

Mr. Patrick Jenkin

Perhaps the hon. Gentleman did not hear his hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker), who, when challenged about alternatives, said that at this stage in the Parliament it was not the Opposition's business to produce any alternatives. Does he disagree with his hon. Friend?

Mr. Straw

It is not for the Secretary of State to suggest that my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) was out of order or irrelevant. I never heard a less relevant speech, or one that failed to a greater degree to address itself to the central issue, than that made by the Secretary of State today. He answered none of the pertinent questions posed by my hon. Friend. We have spent the last two days spelling out the alternatives.

In a passage that showed that the Chief Secretary is as resistant to argument as his mentor and friend, the Chancellor of the Exchequer, he refused to concede that the Budget was deflationary. That taxed even the credulity of Government Back Benchers, such as the hon. Member for Chippenham (Mr. Needham).

If taking £3½ billion out of demand is not deflationary, what is? If inflation, to which the Government so object, expands demand, deflation must reduce demand. By taxing more heavily, not to expand public expenditure but to keep it level and cut the public sector borrowing requirement, the Budget takes money out of the economy. None of the flim-flam from the Chief Secretary can convince me otherwise.

Those who seek to reflate the economy must address themselves to two key issues. The first is how such expansion can be funded and the second involves the inflationary consequences of such additional demand. These are serious issues. They should not be dismissed or treated in the cavalier manner in which the Chief Secretary treated them yesterday.

Yesterday the Chief Secretary set his face against any increase in the public sector borrowing requirement. The £ 10½ billion is roughly equal to the loss to the Treasury of 2½ million beople being out of work. That sum was the absolute limit. It was a limit that perplexed the hon. Member for Manchester, Withington (Mr. Silvester), both as to its manner of calculation and the necessity for it to be absolute.

To achieve that target the Chief Secretary told a press conference—he was a little more delphic in the House—that further cuts in Government spending would be required. To increase the PSBR, the Chief Secretary suggested, would crowd out investment and could lead to a rise in interest rates.

For two years the Government were obsessed with the money supply as a prime means of controlling inflation and the PSBR. Now, with a little help from their friends on the Treasury Select Committee, they realise that the relationship between the money supply and the PSBR is highly complex. The target has shifted, and the PSBR has become the key. It is the new mark of machismo of the Government, or, as the hon. Member for Eastleigh (Sir D. Price) said, their new virility symbol, and they certainly need a virility symbol.

Both the"crowding-out" theory and the view that a higher PSBR automatically leads to higher interest rates defy examination and the last year's experience. Crowding out could indeed occur at levels of full employment, but that is not the problem that we face today. Today there is massive under-utilisation of both physical and human resources. With such poor investment prospects, industry is not seeking additional funds. The argument that an increasing money supply should lead inexorably to a rise in interest rates has been wholly confounded by the experience of last year, when the money supply doubled its target and the PSBR went up 60 per cent. above target, yet the Government reduced interest rates by five full points, from 17 per cent. to 12 per cent.

Moreover, in an illuminating article published just before last year's Budget, entitled This crazy obsession with borrowed money", Malcolm Crawford, the economics editor of The Sunday Times, said: Ministers and the Tory back-benchers who are prodding them —the Government— greatly exaggerate the effect of government borrowing on interest rates". He went on: A higher PSBR has not raised interest rates except very briefly. Indeed, according to the Bank of England's model of the financial system, a rise in the PSBR of 1 per cent. of GDP moves interest rates by less than 0.2 per cent. I have repeatedly brought that point to the Government's attention during the past year, asking if they shared the Bank of England's scepticism about the relationship between interest rates and the PSBR, but I have never received a satisfactory answer.

Mr. Higgins

The hon. Gentleman is confusing a number of different variables. The crucial relationship is what I have described elsewhere as a Bermuda triangle for economics between money supply, interest rates and PSBR. The hon. Gentleman said that people are arguing that an increase in the money supply leads to an increase in interest rates. To whom is he attributing that remark?

Mr. Straw

I attribute that remark to the Financial Secretary in an intervention that he made on 23 January 1981. I shall be happy to give the right hon. Gentleman the exact quotation later.

Moreover, at today's level of roughly 6 per cent. of the GDP, the PSBR appears not historically high, taking account of the depth of the recession. Work done by the Library of the House suggests that the implementation of demand plans along the lines suggested by the TUC, which was seeking overall a £6 billion reflation, would involve extra borrowing over the base line of £3.2 billion this year and £3 billion next year, dropping to £2.7 billion in 1983 and £2.2 billion in 1984. Given the historically high saving ratio and the £10 billion flow of funds annually from the pension funds and insurance companies, such an increase in the PSBR, in our judgment, could readily be funded, particularly if exchange controls were reintroduced.

It does not lie in the mouths of the Government to say that there is a shortage of funds when, in a little noticed but key announcement by the Government in a press notice, they are not only keeping on the statute book their powers to control the outflow of funds but taking new powers to control the inflow of funds. There was no need for the Government to do that within the terms of the EEC directive this year. We accept the need for it, of course, but we shall question closely the relationship between the taking of these powers and the free market philosophy to which the Government so often claim to adhere.

When the right hon. Gentleman the leader of the Liberal Party yesterday referred to the work that had been done by the Liberal Party on the Treasury model of the economy, he met with certain derision from the Government Benches. I share the scepticism that was expressed by many Conservative Members about the magic wand approach of the Liberals and their surrogates, and their suggestion that if we simply accept a few more of their clichés we can solve the country's problems at a stroke.

Mr. Stephen Ross (Isle of Wight)

No one ever said any such thing.

Mr. Straw

The hon. Gentleman should have listened to the right hon. Member for Stockton (Mr. Rodgers). When asked what kind of incomes policy he wanted, he said that he wanted one that would come through patience, co-operation and realism.

While we may treat with some sceptism the words of the Liberal Party, we should take work done on the Treasury computer a little more seriously, not because the computer foretells the future but because it is a little better at predicting the likely consequences of policies than are the Chancellor of the Exchequer and his team. In his Budget two years ago, the Chancellor started a contest with the computer. The computer stated that the economy would decline; the Chancellor said that it would respond to the opportunities provided in his Budget. He went on to say that, so far as the computer could be viewed as making a reliable prediction, which itself is open to doubt— it cannot be taken to mean that the Budget is, in the traditional language of neo-Keynesian economists, perversely contractionary."—[Official Reprt, 12 June 1979; Vol. 968, c. 243.] In fact, it was about as unfair a competition as that between Ptolemy and Galileo, one saying that the sun went round the earth and the other that the earth went round the sum. There are no prizes for guessing who was right.

I invite hon. Members on the Government Benches to look closely at the computer runs carried out by the Library on the CBI and the TUC proposals. They suggest that on those proposals price rises would be higher than on the present deflationary trend of this Government, but that they would not be significantly or unacceptably higher. In return for that and for relatively modest increases in the PSBR there would be significant reductions in the levels that unemployment would otherwise reach.

We talk about inflationary consequences. The Government must address themselves to the inflationary consequences of a deflationary policy, as the hon. Member for Bristol, West (Mr. Waldegrave) said, and to the inflationary consequences that are likely to follow the minute that the economy bottoms out and demand starts to firm.

It is no good the Government trying to dismiss their critics as irresponsible inflationists. The belief in the need for measured reflation is shared across the House and the country—by half the hon. Members on the Conservative Benches and. if the reports are true, by half the Cabinet, too. They know, as we know, that the Government could follow a different path. The fact that they have not done so is proof, if anyone needed proof, that they place the fate of the unemployed far below the pursuit of the in narrow dogma and even further below their desire to break with the trade union movement, to dismantle the Welfare State and to re-establish the privilege and power that they and those whom they represent lost just after the war.

If anyone disbelieves that, let me offer them two pieces of evidence. The Prime Minister is still peddling her wicked ideas that unemployment demonstrates a personal fault of those involved and that jobs are available if only the unemployed have the moral fibre to look for them. In an article in a woman's magazine late last year she stated: You know, despite unemployment, there are still plenty of opportunities available for those who are willing to look for them. I've had a meeting to discuss this very point this morning, … a Job Centre arranged 15 interviews for a Monday, only six turned up. On Tuesday 12 interviews, only eight turned up, and so it goes on. That comes from a Prime Minister who knew at the time that, for example, in the West Midlands 17 people were chasing every job, even allowing for the fact that only one-third of the vacancies are notified to jobcentres. In the North-West 13 people and in Wales 10 people were chasing every job.

In an idle moment a month ago, I picked up from the Vote Office an interesting little document called"Talking Points". It was supposed to deal with the British economy. As a new Opposition spokesman, I felt it might provide me with illumination. It told me about the balance of payments, the tartan field in production, coal gasification and vehicles. It went on to refer to the inflation rate. On the back it told me about water supply schemes, motor cycles, ships, a pulp mill project and rural electrification in Nigeria. There was not a word about the British economy or unemployment, which should be the most serious and profound talking point on the economy. If the Government want us to believe that they care about unemployment, why do they not include in their propaganda a reference to what is happening to unemployment, which is the most serious issue facing us today?

Tonight, we face a Government who have betrayed their party, and a party that has betrayed the nation. The evil that they have inflicted will take many years to repair, but repair it we must and repair it we will.

9.30 pm

The Minister of State, Treasury (Mr. Peter Rees)

The hon. Member for Blackburn (Mr. Straw) made a powerful speech. Those of us who have followed with admiration his exploits in a previous incarnation, through the pages of Mrs. Castle's diaries, will not be surprised at that. Whether his rhetoric owed more to the right hon. Lady or to the right hon. Member for Norwich, North (Mr. Ennals), I leave the House to estimate.

Mr. Peter Shore (Stepney and Poplar)

Has the hon. and learned Gentleman finished reading the diaries?

Mr. Rees

The diaries are very long. I shall do so in time. It is always fascinating to read about the rather byzantine intrigues of the right hon. Gentleman's party.

Dare I say to the hon. Member for Blackburn that I do not believe that the Government have betrayed their party? That must be some deep race memory of what happened to his party in 1931. That may be happening to his party now. I do not believe that a Budget debate is the appropriate moment to explore the painful internal situation of the Labour Party. I shall leave that to another occasion. [Interruption.] We conduct our affairs with a certain decent regard for public decorum.

I shall try to bring the debate back to the central theme. The hon. Member for Blackburn was perhaps a little long on rhetoric and a little short on diagnosis and remedies. There is an obligation on Opposition parties to produce a comprehensive and coherent economic position for the country to consider as a possible alternative to the policies offered by the Government of the day. [Interruption.] We consistently criticised the Opposition when they were in Government. At that time, and in May 1979, we offered a fairly comprehensive position for the country to evaluate. The Opposition may not have liked that position, but it commended itself to the country, and I am sure that it will be approved when it becomes necessary to go to the country again.

The ultimate luxury of politics is the furious and undeviating pursuit of merely one issue, with not even a sidelong glance at the impact which that pursuit may have. [Interruption.] I am venturing some different criticisms of the first contribution of the hon. Member for Blackburn from the Dispatch Box in a Budget debate. I hope that I am doing so with modesty and courtesy.

The ultimate irresponsibility for an Opposition party is to produce an incoherent critique, with figures that do not add up. My authority for that is not only my own view but that of the right hon. Member for Leeds, East (Mr. Healey), who has been signally absent from our debates on this occasion. Perhaps he would be a little ashamed that his party appears to have forgotten the lessons that it painfully learnt between 1975 and 1979. Perhaps he has recognised that responsibility in the Labour Pary does not pay off.

The contribution of the right hon. Member for Stepney and Poplar (Mr. Shore) was one long dirge, full of apocalyptic clichés, but amounting to little—reflation, of course. If I had to attach one of the currently fashionable labels, without meaning to be at all offensive. I would call it neo-Keynesian reflation. At what level of PSBR would the right hon. Gentleman have aimed? We did not receive an answer from him, although we received it obliquely from his hon. Friend. We are entitled to ask that question, because it is precisely the question that the right hon. Member for Leeds, East asked us when we were in Opposition in 1978. Now, as so often, the positions in public life are reversed. I am entitled to ask the right hon. Gentleman at what level he would set the PSBR.

Mr. Straw

At what level did the Government, when in Opposition in 1978, say that they wanted to set the PSBR?

Mr. Rees

Our answer then was what the market would take. We now have the advantage of the four or five years that have lain in between. I must press the right hon. Gentleman. At what level does he want the PSBR? Is it £18 billion? What tax mix is he advocating? What levels of interest rates does he think appropriate, and are they consistent with his PSBR? Are we to assume from his silence that he has no views on those points? He appears to think that the exchange rate is completely subject to Government control. Like so much of his thinking, he is stuck in the period of Bretton Woods, in which his powerful intellect was developed. What does he regard as the appropriate exchange rate, and how would he achieve it? May we assume from his continuing silence that he has no view on that?

The right hon. Gentleman was a little evasive and obscure in his speech. Would he inflict on his long-suffering fellow-countrymen another statutory prices and incomes policy? Are he and his colleagues creeping back to the failures of 1964 to 1970 and 1974 to 1979? Or is he leading us forward to some sunlit upland sketched out for him and his parliamentary colleagues by the national executive of the Labour Party?

The right hon. Gentleman should be a little more candid. There will be opportunities for him to be so on Monday. We shall look for a coherent critique and explanation of those important and significant points— [Interruption.] I have discovered over the years that the hon. Member for Crewe (Mrs. Dunwoody) is good at intervening from a sedentary position. If she wishes to put forward her view on those matters I shall readily give way. Does she have anything to contribute to the debate? If not, perhaps she will do me the courtesy of listening a little more quietly.

Mrs. Dunwoody

If the Secretary of State for Social Services had had the courtesy to inform us that he intended to make a policy statement today, those with Opposition responsibilities for such matters would have been delighted to make a speech in the Budget debate.

Mr. Rees

My right hon. Friend the Secretary of State made his contribution with his customary courtesy and eloquence. The Budget debate provides precisely the opportunity to say what he did. The hon. Lady may have preferred it if he had made a statement at 3.30 pm so that she could have asked him one or two questions, but I do not think that the House can seriously complain about my right hon. Friend's conduct. He behaved with perfect propriety. I am sorry that the hon. Lady takes a different view. I hope that there will be some other occasion when we can put balm on her obviously wounded soul.

As we recieve so little assistance from the Labour Party on these matters, I turn to the position of the Liberal Party. I suspect that it would be a kindness to pass over in silence the contribution of the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel). Mr. John Pardoe may have been erratic, but he had a certain style, originality and panache. I have a great regard for the right hon. Gentleman, but he appears to think that a permanent statutory prices and incomes policy, coupled with a share incentive scheme, will pass with the electorate as an economic policy. He will have to think more deeply than that. Is it possible that the Liberal Party is waiting for a fresh infusion of ideas from the Council for Social Democracy—

Mr. Stephen Ross

The Government could do with a little of that.

Mr. Rees

Our position has been carefully thought out and consistently applied.

I did not see the hon. Member for Isle of Wight (Mr. Ross) in his place when his right hon. Friend the Member for Roxburgh, Selkirk and Peebles was making his contribution to the debate. I suggest that the hon. Gentleman contains his ardour. He may well have a chance to catch your eye, Mr. Speaker, on Monday. If he is successful in doing so we may hear a different view of Liberal policy. We know that there are as many views of Liberal policy as there ate Liberal Members.

I am genuinely sorry that the right hon. Member for Stockton (Mr. Rodgers) is not in his place. It is obvious that his contribution was supposed to be the lapidary statement or decalogue from the Council for Social Democracy in matters economic. I had hoped that that would take the form of the elegant thinking of Mr. Roy Jenkins, which he presented to the country in his most recent lecture to the Institute of Fiscal Studies.

I pay an unsolicited tribute to Mr. Jenkins, who has one of the most fastidious minds in British public life. I doubt whether, when Chancellor of the Exchequer he was seriously tested by forces of world depression or increases in the real price of oil. However, I pay tribute to him. I do not think that it is a tribute that will be paid to him by his former right hon. and hon. Friends. He brought the PSBR down to zero, if not to a negative figure. That was quite a considerable achievement. I am always ready to offer my admiration and tribute even to opponents who do courageous and worthwhile things. It is a pity that the lesson was not fully learnt by others who followed him as Labour Chancellors.

The right hon. Member for Stockton peddled a rather different series of nostra—namely, a prices and incomes policy based on patient co-operation and realism. What that means and how it differs from, or how it can be fitted into, the policies of the Liberal Party I leave to the right hon. Gentleman and his hon. Friends to explain on another occasion. Otherwise, he seemed to tread delicately, with elegant generalities, between the positions of the Labour Party and the Conservative Party.

Mr. Robert Sheldon (Ashton-under-Lyne) indicated assent—

Mr. Rees

I am glad that at least I carry the Opposition Front Bench with me on that. The right hon. Gentleman said that no one can control a mixed economy through the money supply. That is not a proposition to which the Government adhere. We feel that control of the money supply has a point—

Mr. Straw

A point?

Mr. Rees

Yes, a point. I shall refer to our doctrinal position, if it is a doctrinal position, in a moment. I am always happy to oblige the Opposition Front Bench, because its occupants have so little with which to cheer themselves these dark days.

Mr. Sheldon

Hear, hear.

Mr. Rees

That must be so as they watch the ruins of a once great party. They must feel a little sad.

Mr. Sheldon

We do.

Mr. Rees

I am not referring to my party. It is not for me to intrude into the domestic griefs of Labour Members.

I find no proposition more misleading or trivial than that the Treasury is in the grip of a bunch of theoretician monetarists who are concerned to test their theories to destruction. If I thought that there were any truth in that proposition, I should be reassured by the worthwhile contribution of my right hon. Friend the Member for Worthing (Mr. Higgins) who has had great experience in these matters both inside and outside Government.

Mr. Sheldon

Why did the right hon. Member for Worthing (Mr. Higgins) speak from the Back Benches?

Mr. Rees

The right hon. Gentleman must know that I have no control over such matters. In the time-honoured phrase, that is not a matter for me. If the Opposition have any doubt about my right hon. Friend's judgment they should be reassured by the conclusions of the Select Committee on the Treasury and Civil Service, of which he is such a distinguished ornament.

I admit to having met fleetingly Professors Friedman and Hayek. I admit that there are those in the Treasury who have a nodding acquaintance with the quantitative theory of money. I admit that I share with some of my right hon. and hon. Friends a concern about the damage that inflation can do to industry generally and to our society as a whole.

Let me diffidently confess that I feel some slight satisfaction that the rate of inflation will drop at the end of the year to about 10 per cent. per annum.

I must tell my hon. Friend the Member for Lincoln (Mr. Carlisle) that, having studied the example of the Labour Government, I hesitate to make bold, long-term predictions. I remember the jaunty self-confidence with which the right hon. Member for Leeds, East came to the Dispatch Box year after year to explain what he was about to inflict upon the long-suffering British people. Almost always built into his calculation was a growth factor of 3 per cent. per year. Sadly, year after year, his predictions were proved false. I therefore shall not fall into his error.

I emphasise, however, particularly to those of my hon. Friends who I know have reservations on this point, that there are entirely practical rather than theoretical reasons for my right hon. and learned Friend's Budget.

Dr. MacDonald

What are they?

Mr. Rees

With a little patience, I shall come to them, if you, Mr. Speaker, are patient with me. I still have a quarter of an hour to develop this theme, although I may need to catch your eye on another occasion, as these are weighty matters, which need to be developed at some length. Certainly, I have not had quite the length of time that the right hon. Member for Stepney and Poplar had.

Undoubtedly, the centrepiece of my right hon. and learned Friend's Budget must be the figure of £10½ billion for the public sector borrowing requirement. I know that my hon. Friend the Member for Eastleigh (Sir D. Price), who has considerable experience in these matters, my hon. Friends the Members for Manchester, Withington (Mr. Silvester) and Bexleyheath (Mr. Townsend), and even the hon. Member for Battersea. South (Mr. Dubs), feel that we may attach a little too much significance to that figure. It has been described by some as a virility symbol. I am not conscious that this Government need any virility symbols, I believe that we are sufficiently robust to stand on our own merits without genuflecting to symbols.

I know that some will be sceptical about the figure. Some will think it a little too high, while others will think it a little too low. It is, of course, higher than the figure that appeared in the medium-term financial strategy, but it is considerably lower than the likely outturn for this year.

Mr. Dubs

While we are dealing with the 1980–81 financial year, can the hon. and learned Gentleman tell the House what difference there would have been in the impact on the economy had the PSBR been the £8½ billion that was anticipated rather than the £13½ billion that is the estimated outturn? Had the Government achieved their forecast, what would have been the practical effect?

Mr. Rees

It would have eased my right hon. and learned Friend's task considerably on Tuesday, and I have no doubt that he would have been able to bring down the minimum lending rate earlier and with greater speed.

The pressure from the Opposition is to increase the public sector borrowing requirement. We had the statement, which I hope will be recorded imperishably for all time, that the right hon. Member for Stepney and Poplar does not give a fig for the public sector borrowing requirement. If he ever has to cope with the money markets of the world, that figure will be recalled and the British public will pay dearly for that rash and ill-thought-out intervention.

Mr. Shore

Let there be no doubt at all about what I said. I said that I did not give a fig for the PSBR figure that the Government have presented to the nation for this financial year—and I do not—because I believe that that figure is based upon a deliberate and knowing degree of deflation in the economy to which the hon. and learned Gentleman has not yet addressed his mind. He has talked about the reduction of the rate of inflation. It is about time that he addressed himself to what his targets are for unemployment in the course of this year.

Mr. Rees

I think that I shall have to digest slowly, through Hansard, exactly what proposition the right hon. Gentleman was trying to convey to the House. I still find it a little obscure.

I know that some will feel that the demands that we are making on the British taxpayer in order to reduce the public sector borrowing requirement to £ 10½ billion are too stringent—I know that my hon. Friend the Member for Bristol, West (Mr. Waldegrave), whose speech I followed carefully, felt that that was so—and also that we place too much weight upon indirect taxes rather than upon direct taxes. However, I hope that the country has learnt that merely because there is some slight—and it is slight—impact on RPI in increasing indirect taxes, that is no pretext or justification for wage claims that cannot be justified by the competitiveness of the industries to which they relate.

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) criticised us—and he is quite entitled to do so—for not having revalorised the personal allowances. Obviously, that was a difficult decision for my right hon. and learned Friend. Dare I say it—possibly I am not the person normally to pay tributes to the hon. Member for Perry Barr—but he is the only person, at least on his side of the House, who could legitimately have made that point. As Mrs. Wise has now left the House of Commons, he was the only member of the Labour Party then who pressed for the valorisation of thresholds in that year.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon), who was then the Financial Secretary, adopted an entirely different position. Therefore, quite prudently, he has remained silent on this occasion.

Of course, fiscal sacrifices have been asked of the British people in order to achieve this figure for the PSBR, but the pay-off from this Budget should be lower interest rates, and there has been no more insistent cry from the country than that interest rates should be reduced. We have now created the conditions for a reduction, and my right hon. and learned Friend announced a reduction of 2 per cent. on Tuesday.

The beneficiaries will be widely spread, but principally they will be British industry and home buyers. I hope that they will recognise what has been done for them. In particular, I hope that, on reflection, the leaders of British industry will recognise that perhaps they have been a little churlish in their instant dismissal of this Budget. I do not think that I need go through the rather rich imagery of bare knuckles, kicks in the teeth, and so on.

Before coming to some of the more positive elements of the Budget, I again turn briefly to the speech of my right hon. Friend the Member for Worthing. He asked how recovery would be engineered, and he raised a whole series of questions. Obviously, they deserve serious consideration, and they will no doubt get it from the Treasury Select Committee. My right hon. Friend will recall that on page 29 of the Red Book there is a figure of 1 per cent. growth in the GDP. Although he called himself an"eclectic dry", I suspect that at heart he may be a crypto-Keynesian. I do not mean that in any offensive sense, because, as I said, this is a legitimate area for debate.

A given amount of money will finance greater activities, provided that inflation comes down. That must surely be the engine of recovery if that is what my right hon. Friend looks for. Perhaps I do not take quite so a mechanical view of the economy as he does, or at least of the role of a Government.

Mr. Higgins

If that is so, my hon. and learned Friend is suggesting that the cross-over comes at the level of inflation that he mentioned earlier, namely, 10 per cent. That is why the figure in the Red Book is a plus of 1 per cent. Is my hon. and learned Friend really arguing that?

Mr. Rees

I did not say that the cross-over would come precisely at that point. That, indeed, is a matter to be explored. I am not saying precisely at what point it will come. I am not even saying that it will occur this year. My right hon. Friend was taking me a little too literally.

I turn to the more positive touches in the Budget. There are touches that I hope the country will recognise as evidence of the Government's sensitivity on a whole range of issues. There is the increase in the blind person's allowance, the increase in child benefit, the increase in the mobility allowance and the VAT relief for charities. But the central and consistent theme of the Budget is the relief and encouragement for business, on which, at the end of the day, the prosperity of this country and the jobs of our fellow countrymen will depend.

The ground has been laid for a steady recovery as we pull out of the recession. It has been seeded by a whole range of imaginative measures, both in this Budget and in the last.

Mrs. Dunwoody

Oh.

Mr. Rees

The hon. Lady, who obviously does not follow these matters very closely, will not recall last year's enterprise package, the close company provisions, the enterprise zone provisions, provisions for venture capital and share incentive schemes—which pleased the Liberal Party—and the retirement and annuity provisions. They were just a few. If the hon. Lady contains herself and looks at the Finance Act 1980 she will see evidence of all of that.

Against that background, let me emphasise the benefits that a reduced public sector borrowing requirement will provide for industry. This year, we are going further. We are introducing a loan guarantee scheme in agreement with certain clearing banks and with the ICFC. This scheme will be open for applications for three years, subject to an overall maximum of £50 million to be lent in each year. That is not an inconsiderable sum.

We are introducing a new measure of stock relief without any form of credit restriction. The tenor of the evidence that we have received was that that should be eliminated. We have met industry more than half-way on that point. We are increasing the profit limits for the small companies' rate of corporation tax in order to reduce the marginal rate from 66 per cent. to 60 per cent. We are giving tax relief on interest on money borrowed for investment in partnerships and industrial co-operatives. The Labour Administration never conceived of that.

We are extending the tax relief for capital losses on investment in unquoted investment companies. We are raising the registration and deregistration thresholds for VAT. The small company sector has raised that point consistently with us. We shall publish a consultative paper about the tax measures needed to enable a company to purchase its own shares in parallel with the provisions in the current Companies Bill.

We are increasing the rate of the industrial buildings allowance and liberalising some of the development land tax rules in order to encourage not only industry generally but the construction industry in particular. We need new factories as well as new plant if we are to take advantage of the upturn when it comes.

We are introducing a special front-end loaded tax relief from income tax for individuals who invest directly in the ordinary shares of new trading companies, up to a maximum of £10,000 a year. That is unique in the Western world and will, I hope, channel a great deal of new private investment into that area. In the aggregate, these are not inconsiderable measures and they will, I hope, indicate clearly that the Government are keen to create opportunities for new enterprise and for new jobs.

If the House looks for positive encouragement and not merely for the negative encouragement of the containment of inflation, of a lower public sector borrowing requirement and of lower interest rates, it will find a whole raft of measures for which there is no parallel, even under the Labour Administration, who had the most imaginative assistance from Lord Lever. I gather that his services are to be available to a different party. We look for some constructive contributions, and perhaps for some support, from the Social Democrats on this issue.

Mr. Rooker

I am grateful to the Minister for giving way, because he has only a couple of minutes left. Does he intend to say anything about the position of the 600,000 women who have been placed in the invidious position that I described earlier, due to the Budget?

Mr. Rees

My right hon. Friend the Financial Secretary gave a comprehensive answer on that point.

Mr. Rooker

No.

Mr. Rees

This is not a very attractive precedent. However, we borrowed it from the right hon. Member for Leeds, East.

Mr. Rooker

That did not happen under us.

Mr. Rees

The hon. Gentleman said that some of those women would have another source of income. [Interruption.] Those who fall within the tax net will have another source of income. [Interruption.] There will always be some at the margin. I cannot satisfy the hon. Member for Perry Barr in the time available. The hon. Gentleman can explore the matter in Committee if he so wishes.

In a rather hysterical flight of rhetoric—even for him—the Leader of the Opposition described the Budget as a"no-hope Budget" with the words written over some monetarist inferno. I suspect that subconciously he must have been recalling uneasily the closure of the last furnace in the steel mills of Ebbw Vale under the Government of which he was Secretary of State for Employment. Let the right hon. Gentleman wrestle with his conscience over that if he will—but preferably not in this Chamber. On some other occasion, let him define—if he can—what he means by monetarism.

Let us consider whether this is a"no-hope Budget". No hope for families with increased child benefit? No hope for the blind, with their blind allowance doubled? No hope for the disabled, with the increased mobility allowance and the VAT reliefs announced?

Mr. Shore rose—

Mr. Rees

I shall not give way to the right hon. Gentleman. No hope for home buyers, with the reduction in interest rates?

Mr. Shore rose—

Mr. Rees

If the right hon. Gentleman will do me the courtesy of sitting down, I can continue. No hope for business and for jobs, given all the enterprise provisions that I have listed? This is a long-term Budget, which conforms with the objectives that we set and that the country approved in May 1979.

This is a Budget that demonstrates that we are still moving surely towards those objectives. It is a Budget that I have no hesitation in commending to the House.

Debate adjourned.—[Mr. Boscawen.]

Debate to be resumed upon Monday next.