§ The Chancellor of the Exchequer (Sir Geoffrey Howe)
The House will tomorrow have the opportunity of paying its full tribute to Lord Butler, of whose death it has just learnt with such deep regret, but it would not be fitting for me to embark on my Budget proposals this afternoon without saying a word about one of my most gifted and distinguished predecessors.
It is almost 30 years to the day since "Rab" introduced his first Budget, and there are now only a handful of hon. Members who were present on that occasion. They I would, I am sure, agree that it was an historic occasion, as it marked both the end of the transition of the economy from war to peace and the beginning of the prosperity which was a feature of the 1950s and 1960s. He went on to present four more Budgets and, with the exception of the right hon. Member for Leeds, East (Mr. Healey), was the longest-serving Chancellor of the Exchequer since the war. His achievements for the country and his humanity and breadth of vision will be long remembered.
A tradition has emerged, I think, since "Rab" Butler's time that the Budget speech should be composed in some sense almost as though it were a detective story with many 727 lengthy passages of exposition before the denouement, the full picture being revealed only at the end. That was supposed to have something to do with waiting for the closure of the markets. Having listened to a good many of these annual rituals since first I entered the House, the thought has occurred to me, and no doubt to others, that perhaps there was an element of tantalising suspense that was thought desirable to retain the attention of hon. Members at fever pitch.
This afternoon, I propose to break with that tradition , and to tell the House without more ado that in this Budget I shall be proposing substantial reductions in taxation while at the same time reducing the Government's borrowing requirement.
This will be a Budget for industry—and so a Budget for jobs. But it will be a Budget for people as well. It is a Budget that will strengthen the foundations of economic recovery.
To set my proposals in context, I must start with a word about the past. Within the memory of almost every Member of this House, almost everyone in this country took it for granted, for example, that our buses, cars, or motor cycles were made in Britain from British steel. Most of the world's finest ships were still being built in our yards.
It is, after all, only 11 years since the Erskine bridge was built over the Clyde—to a design which would allow to pass below it a steady line of Cunarders from John Brown's world-beating yards at Clydebank.
So, until quite recently, we took it for granted that we had one of the highest living standards in Europe, if not in the world.
By 1979, all that had changed. Already, we had seen inflation go above 25 per cent. and already we had seen unemployment close to 1½ million. Fewer than half the new cars bought in Britain were being made here. Instead of building three out of every 10 merchant ships supplied to the markets of the world, as we had done just 25 years ago, we were building only three out of every hundred. Our share of world trade had been halved, and living standards in several European countries were at least half as high again as ours.
We had been paying ourselves too much and producing, and selling, too little. During the 1970s, money incomes had gone up 20 times as much as real output. That was a sure recipe for inflation, for lost markets, and for lost jobs.
Through all this, of course, many companies, many individuals, continued to record outstanding successes. But all too often they were swimming against the tide, because our overall economic performance had become one of the weakest and most inflation-prone of all the major industrial countries.
At the last election we made all this very clear. We made it plain, too, that reversing this decline would require a major effort—an effort that would need to be sustained over the lifetime of more than one Parliament. And so it will be.
But this country's problems are not ours alone. In the summer of 1979, the whole world was hit by the fresh surge of inflation and renewed recession that followed the second huge increase in the price of oil. The average price of a barrel of oil last year was $34. That was 26 times as much as in 1970, when it cost only $1.30.
728 The 1979 oil shock made the task of restoring our economy both more urgent and much more difficult. And it coincided with the surge in pay, and public spending, which the outgoing Government bequeathed to us.
So, in spite of North Sea oil, Britain entered the recession in poor shape, and rather earlier than other major countries.
Britain has, therefore, suffered worse than many. But we have not suffered alone. In the United States, in France, and in many smaller economies, unemployment has been rising sharply. In Germany last year, the number out of work rose by more than half a million, and there are now about 26 million people out of work in the industrial countries.
Even so, most Governments have reacted by continuing to give priority to the fight against inflation, and they have been making progress in that fight. But the battle is by no means won, so the outlook for the growth of world trade remains subdued.
It is in the light of this international environment that British policy has to be fashioned. All too often people still talk—and behave—as if British Government decisions alone were all that mattered for the British economy, and as if we could protect or subsidise ourselves against the impact of our competitors or the decisions of other Governments.
Yet the House knows how important for the United Kingdom are the policies of the OPEC countries in the world's oil markets, of the United States in relation to economic activity, inflation and interest rates throughout the world, and of Japan for the balance of world trade.
I shall have something to say later on about the impact of recent changes in the oil market. They are likely to have an encouraging effect on the international outlook for prices and output, and, in the medium term, on the stability of interest rates and exchange rates. But at present, it is interest rates and perhaps particularly interest rate volatility that are causing understandable concern, and I wish to say a word about that.
At a time of growing international tension, the United States is shouldering burdens for the defence of freedom for which all of those on this exposed flank of Europe should be grateful. The United States Government are also showing admirable commitment to the maintenance of monetary disciplines. For that, too, we should be grateful, for American inflation affects us all, because of the importance of the United States and of the dollar in the world economy.
We and our other friends have, therefore, a legitimate interest in the success of the United States Administration in reconciling their spending obligations with their own responsible pursuit of monetary discipline. If that success were only partial, there would be a risk of continuing high interest rates, which would be damaging to recovery—in the less developed world as well as in the industrial countries.
As I have told the House on a previous occasion, there is no reason to suppose that we in this country could insulate ourselves from such pressures by the simple single step of participation in the European exchange rate mechanism, because that has not been the experience of the existing participants.
Nor would concerted intervention in exchange markets be able, for any length of time, to contain the movement of funds that can be generated by the widening of interest rate differentials.
729 There is, therefore, all the more reason for the closest possible understanding between those responsible for managing the major economies, for, as I have said, their policies can all have a direct, and often speedy, impact upon each other. We in this country must do our best to exercise our influence on the policies of our allies and associates, both directly and through the European Community, the Commonwealth, OECD and the International Monetary Fund. And we do just that. That is why I attach so much importance to the regular meetings of Community Finance Ministers, and of the World Bank and the fund, and why I look forward to welcoming to London this summer my counterparts from throughout the Commonwealth.
But let nobody pretend that we could expect to exert any influence at all if our own policies failed to command respect abroad. It is, however, widely recognised abroad—though not always by some at home—that in the last three years we have made substantial progress in tackling our long-term problems.
Thanks to last year's Budget, public borrowing has gone down as a percentage of gross domestic product, giving us interest rates lower than they would otherwise have been. In the six months following the Budget, our rates were on average four points below American and French levels, and on a par with German rates, in spite of the difference between German and British levels of inflation. And output started rising from the middle of the year.
Inflation has almost halved since the spring of 1980. It should be in single figures during this year, and lower still in 1983.
Productivity has been rising sharply. In manufacturing industry last year, output per man rose by about 10 per cent.
Lower pay increases, combined last year with fast productivity growth, meant that unit labour costs in manufacturing rose hardly at all. Our performance was comparable with that of Germany and Japan, and better than all our other major competitors.
Exports were rising again by the end of 1981. In the last four months, their value and volume was well up on a year earlier. Business surveys, and most economic forecasts, point to a further rise over the next year.
In the economy as a whole, we now expect output to grow in 1982 by 1½ per cent. and by rather more in 1983.
This gives the lie to all those who argued, not least at the time of last year's Budget, that our policies were foredoomed, because the recovery that we foresaw, and worked for, is now taking place. My aim in this Budget is to nurture and help sustain that recovery.
I shall discuss, first, the central issue of unemployment. Helping industry to become more competitieve competitive is the best way of creating future employment. But there is a clear case for direct action by Government as well, and I shall have a new proposal to bring before the House. I shall then have something to say about monetary policy, and the level of Government borrowing in the year ahead. Finally, I shall come to the tax and other measures which we intend to take, primarily for the benefit of industry and jobs.