Autumn Statement

HC Deb 06 November 1986 vol 103 cc1083-98 3.30 pm

The Chancellor of the Exchequer (Mr. Nigel Lawson)

With permission, Mr. Speaker, I should like to make a statement.

Cabinet today agreed the Government's public expenditure plans for the next three years. In the normal course of events that would be followed by the publication of the printed autumn statement, accompanied by an oral statement to the House, next Tuesday. For obvious reasons, that is not possible this year. So while the autumn statement will be printed in the normal way and presented to Parliament as soon as the House reassembles next Wednesday, I thought it would be for the convenience of the House if I made my oral statement today. This will cover all three of the key elements in the printed statement: the Government's outline public expenditure plans for each of the next three years and the expected outturn for this year; proposals for next year's national insurance contributions; and the forecast of the economic prospects for 1987 required by the Industry Act 1975.

The full text of the economic forecast, together with the public expenditure figures and the rest of the information customarily published with this statement, will be available from the Vote Office as soon as I have sat down. They will also appear in the printed autumn statement to be published next week.

I turn first to the outturn for the current financial year, 1986–87. The public expenditure planning total now looks likely to amount to almost £140½ billion—£1¼ billion, or a little less than 1 per cent., above what was allowed for in this year's public expenditure White Paper. The main reason for this excess is a 9 per cent. rise in the current spending of local authorities — far more than was provided for.

However, other items on the expenditure side, the largest of which is debt interest, are likely to fall short of what was forecast at the time of the Budget, thus reducing the total overrun on the expenditure side to about £1½ billion.

On the receipts side, the North sea tax take is likely to be even lower, by about £1 billion, than I envisaged at the time of the Budget, largely because for a long period the oil price has been below the $15 a barrel level on which the Budget arithmetic was explicitly based. This shortfall, however, is more than offset by the continuing buoyancy of non-oil tax revenues, in particular VAT and corporation tax. Non-oil revenues now look likely to exceed the Budget forecast by £2 billion. This would imply a net overrun on the receipts side of about £1 billion, rather more than that on the expenditure side. But this will be reduced by a change I propose to make to the North sea fiscal regime.

The collapse of the oil price has led to a sharp cutback in investment activity in the North sea, with inevitable consequences for the United Kingdom offshore supplies industry both in Scotland and the north-east of England. I therefore propose, on a carefully targeted basis, to accelerate the arrangements for the repayment to the oil companies of advance petroleum revenue tax due to them. The details of this change, which will require legislation early in the new Session of Parliament, are set out in a press notice which the Inland Revenue will be issuing as soon as I have sat down.

The new arrangements will have a revenue cost this financial year of some £300 million, which will be fully recouped over the next three years. Taking this into account, the public sector borrowing requirement for the current year is still forecast to be about £7 billion, the figure I set in the Budget.

I turn now to the public expenditure plans for the next three years. Since 1982–83, public spending, both before and after deducting the proceeds of privatisation, has been declining as a proportion of national output. It is set to be lower still this year. The Government are determined to ensure that this trend continues—to see to it that total public spending, even without taking account of privatisation proceeds, continues to decline as a percentage of GDP.

The plans I am about to announce for the next three years secure that objective. Indeed, they show that by the end of the period the ratio of public spending to national output will be back to the level of the early 1970s. But within this overall constraint, and in the context of their policy priorities, the Government have felt it right to allow an increase in the previously announced planning totals for 1987–88 and 1988–89.

Compared with the prospective outturn for the current year, we are now planning for an average growth in the public expenditure planning total of about 1¼ per cent. a year in real terms — well within the prospective growth of the economy as a whole. The new planning totals have thus been set at £148½ billion for 1987–88 and £154¼ billion in 1988–89, an increase of £4¾ billion and £5½ billion respectively over the totals previously published. For 1989–90, the planning total has been set at £161½ billion.

As usual, these totals incorporate estimates for the proceeds of privatisation. Last year I increased the estimate of these proceeds very substantially to £4¾ billion in each of the three survey years, a figure which I expect to be duly achieved this year. Although the privatisation programme is now moving ahead more strongly than evervfhjbp;[before, I have decided to make only a modest further addition to this estimate, bringing it to £5 billion in each of the next three years. The new planning totals also contain substantial reserves, rising from £3½ billion in 1987–88 to £7½ billion in 1989–90.

The public expenditure increases I have announced allow us to make realistic provision both for local authority current expenditure, over which the Government have no direct control, and for demand-led programmes such as social security, while still leaving scope for increased spending on services to which the Government attach particular priority.

But before referring to some of the more important changes, let me make one thing absolutely clear. There can be no question of allowing the projected increases in public expenditure over the next two years to undermine the prudence of the Government's overall fiscal stance. The Government's fiscal stance has been clearly set out in the medium-term financial strategy published at the time of this year's Budget. There will be no relaxation of that stance.

Within the totality of public expenditure, the largest increase is for the local authorities, whose current spending next year is now put at £4 billion above the previous provision. This in part reflects the fact that the previous plans simply carried forward the same level or cash spending as in 1986–87. At the same time, we are increasing next year's aggregate Exchequer grant — the contribution that taxpayers make to local government spending — by almost 10 per cent. over this year's settlement, a rise of almost £1½ billion.

These substantial sums demonstrate in particular the priority the Government are giving to education, which, including the new proposals on pay and conditions of service for teachers announced last week, accounts for about half the total increase in provision. There is also a substantial increase in provision for the police.

On top of the increased provision for the cost of education in schools, which is contained within local authority current spending, there will be additional spending on the universities of £60 million in 1987–88 and £70 million in 1988–89.

Spending on the health and personal social services will be increased by more than £600 million. For the National Health Service alone, the increase in England amounts to more than £300 million a year. Combined with the additional resources being generated by greater efficiency, this will not only enable the Health Service to cope with the growing number of elderly patients, but will also allow it to improve services.

Gross provision for housing investment is being increased by £450 million. This will sustain the rising trend of spending on local authority renovation and improvements and provide additional resources for the housing associations.

In the light of this year's experience, £1¾ billion has been added to next year's provision for social security, most of which represents a greater expected expenditure on existing means-tested benefits.

Provision for investment in roads is being increased by £65 million next year and £75 million the year after, mostly for local authority roads.

For defence, the provision remains as planned in the last White Paper after allowing for minor changes, including a reduction in the estimated cost of the Falklands deployment. The defence programme will continue to benefit from the substantial real growth in previous years and the wide-ranging action to improve efficiency and value for money.

Taking all programmes together, the additions to planned capital expenditure amount to getting on for £1 billion in 1987–88, of which about two thirds is local authority spending. Further details of these and other changes will be contained in the printed autumn statement which will be published as soon as the House returns next week. In addition, full details, together with information on running costs and manpower, will be given in the public expenditure White Paper early in the new year.

I now turn to national insurance contributions. The Government have conducted the usual autumn review of contributions in the light of advice from the Government Actuary on the prospective income and expenditure of the national insurance fund, and taking account of the benefit uprating which my right hon. Friend the Secretary of State for Social Services announced on 22 October.

The lower earnings limit will be increased next April to £39 a week, in line with the single person's pension, and the upper earnings limit will be similarly raised to £295 a week. The limits for the reduced rate bands which I announced in last year's Budget will also be increased again in April but by proportionately larger amounts. The upper limit for the 5 per cent. and 7 per cent. bands will be raised to £65 a week and £100 a week respectively, and the upper limit for the 9 per cent. rate for employers will be raised to £150 a week.

The taxpayers' contribution to the national insurance fund — the so-called Treasury supplement — will be reduced by 2 per cent. to 7 per cent., but this will not require any change in contribution rates. Thus, the main class I contribution rates will once again remain unchanged at 9 per cent. for employees and 10.45 per cent. for employers.

Finally, I turn to the Industry Act forecast. Both growth and inflation have turned out to be slightly lower this year than I envisaged at the time of the Budget. Growth now looks like turning out at 2½ per cent., against a Budget forecast of 3 per cent., and inflation in the fourth quarter of this year is likely to be 3¼ per cent. against the Budget forecast of 3½ per cent.

The principal reason for this slower growth has been the disappointing performance of exports, which were hard hit by the cutback in spending by OPEC and other primary producers affected by the sharp fall in commodity prices in general and the oil price in particular.

Combined with a halving in the value of our own oil exports, this has meant a significant deterioration in the current account of the balance of payments, from a surplus of some £3½ billion in 1985—and a cumulative surplus of £21 billion over the six years from 1980 to 1985 inclusive —to a forecast of broad balance for 1986.

Looking ahead to 1987, the prospects are generally encouraging.

While the necessary adjustment of the exchange rate to the oil price collapse has now taken place, it will inevitably take time before the full benefits come through in higher non-oil exports and lower import growth. This means that we can expect the current account of the balance of payments to go into deficit next year, for the first time since 1979, to the tune of some £1.5 billion. Even so, non-oil exports are forecast to rise next year by 5.5 per cent. compared with an increase of only 1 per cent. this year, with manufacturing output in consequence up by 4 per cent. And with domestic demand continuing to expand at the same rate as this year, the economy overall is likely to grow by a further 3 per cent. next year — the sixth successive year of steady growth at an average annual rate of almost 3 per cent.

Recorded inflation is likely to edge up a little, to 3.75 per cent. in the fourth quarter of 1987. This is almost entirely due to the effect on the RPI of the timing of mortgage rate changes. The Government's commitment to a monetary policy that will squeeze out inflation remains unabated.

Meanwhile the likelihood of faster growth next year, coming at a time when unemployment already appears to have stopped rising, suggests that the prospects for some fall in unemployment are now more promising. But this promise could still be frustrated by excessive pay settlements.

The strategy that we have followed since 1979 has brought inflation down to the lowest level for two decades, combined with sustained growth and steadily rising living standards. This is a combination that has eluded successive Governments for a generation. We have brought it about by the determined pursuit of free markets and sound money. And that is what we shall stick to.

Mr. Roy Hattersley (Birmingham, Sparkbrook)

First, I welcome the increased expenditure on health, housing and education, small though the increases in the health and housing budgets are. The sick, the homeless and parents will wish that there could be a general election every year. They will wonder why they have waited so long. They will not believe that the sudden change of heart and sudden change of judgment could possibly survive a Tory election victory.

Let me tell the Chancellor straightaway that his figures and forecasts are treated with increasing suspicion, not simply inside the House, but outside it. Therefore, I shall ask him a series of specific questions about the numbers that he has half offered us today. Will he confirm that programme spending is forecast to increase by £7.5 billion in 1987–88 — £4.7 billion on the planning totals, £250 million from privatisation, and £2.58 billion from the contingency reserve?

Will the Chancellor confirm that much of that extra spending is not the result of his careful planning, but the product of overspending this year, which he attempted, but failed, to control and is now taking on into the year that follows? Education at £1.6 billion, social security at £1.6 billion and the EEC at £440 million represent expenditure to which the Chancellor was passionately opposed when they came about.

There is a coy reference in paragraph 29 of his statement to a "greater expected expenditure" on existing means-tested benefits. Translated into English, that means that long-term unemployment has been far greater than the Chancellor kept on pretending that it would be both a year ago and at Budget time. Does the right hon. Gentleman agree that the buoyancy of non-oil tax revenue is largely the result of wage increases which have outstripped inflation — wage increases which he has constantly condemned, which he attempted to reduce, and for which he now attempts to take the credit?

Is it surprising that, against that background, the House and the country will be wholly sceptical about the right hon. Gentleman's conversion to public spending and the continuation of such policies over a substantial period? So that we can better judge the Chancellor's sincerity, will he make it clear where he stands on the whole variety of targets that were once the centre piece of his policy? Does he support the Governor of the Bank of England in his view that broad money targets should be abandoned? If he does, will he confirm that the medium-term financial strategy, of which he is the author, has finally been laid to rest?

Furthermore, will the Chancellor tell us about the fiscal adjustment, about which we heard so much last year and the year before until it suddenly disappeared? He is right to say that we have heard nothing about it, and that is why our suspicions are increased about the honesty and integrity of his figures. In the March forecast, we were told that the figure would be £2 billion, and that has been spent. Does that mean that there will be no cuts in taxes next year or that the Chancellor will increase the public sector borrowing requirement—not dealt with in the statement —to accommodate tax increases? If he will do neither, will he once more preside over an increase in the total tax burden that the Government levy?

Does the Chancellor realise that the current account deficit is more optimistic than that predicted by any other forecast, and that each forecast is absolutely incredible? Is not the economic outturn now worse than what he predicted at Budget time in a number of crucial areas? I shall ask him, item by item, to confirm or deny that. Is it or is it not a fact that the balance of payments is £3½ billion worse than he forecast at Budget time? Is it or is it not a fact that output in the first half of this year has increased at half the speed that was forecast at Budget time? Is it or is it not a fact that exports have risen at less than one fifth of the rate forecast at Budget time?

Despite all that, and despite all those prospects being worse, the Government propose greater spending than when the prospects were better. Is the Chancellor surprised that we are sceptical about his proposals or that he is fast losing any reputation he ever possessed for financial respectability?

In previous years, in an attempt to sustain his reputation, the Chancellor has done deep damage to the real economy. Now, he is cynically pretending to change course, and one question above all must be asked of him: Having made this apparent swerve, how does he justify the waste and suffering in th seven years of his previous policy? How does he justify the cuts in Government expenditure that robbed the pensioners and closed hospitals, or the medium-term financial strategy, which added 2 million to total unemployed? That was supposed to be the price of getting the economy right. The economy is not right, yet unemployment remains at an unacceptable level. Today's statement has done nothing to help in that essential area.

Mr. Lawson

Since the right hon. Gentleman absented himself from the whole of Treasury questions to have time to mug up the questions he has just asked, I should have thought that he could have done a little better than he did. I shall do my best to answer the right hon. Gentleman's questions. I shall take them in the order that he asked them. [Interruption.] If right hon. and hon. Members do not want me to answer the right hon. Gentleman's questions, I shall not answer them. [Interruption.]

Mr. Speaker

Order. I ask the House to hear the Chancellor.

Mr. Lawson

The right hon. Gentleman referred to the public expenditure increase. I have already announced the public expenditure increase, and it is as he says. He then referred to the buoyancy of revenues. The buoyancy of revenues is due, above all, to two facts — first, continuing vigorous economic growth and, secondly, the greatly increased profitability of companies which has led to a large increase in the yield of corporation tax.

The right hon. Gentleman asked about the medium-term financial strategy. If he had been paying attention he would have heard me explicitly reaffirm the medium-term financial strategy.

The right hon. Gentleman asked about the fiscal adjustment. He may not be aware that last year I announced that I would, and I did from last year, discontinue the practice of giving the fiscal adjustment, because it is a misleading and unreliable essay. Subsequent events proved the rightness of that course.

He then asked about the PSBR for next year. I made it quite clear in my statement that the PSBR in 1987–88 will be held to 1¾ per cent. of GDP. So there will be no expansion of the PSBR.

The right hon. Gentleman said that some things, such as exports, are lower this year than I forecast at the time of the Budget, and that GDP is 2½ per cent. as against 3 per cent. That is absolutely right, as I announced in my statement. However, inflation was lower also. The right hon. Gentleman wondered how it was, when those items had fallen short of expectations, that I could announce an increase in public expenditure. Clearly he is unaware that the public expenditure increase is for the years ahead. As I have made clear, the prospect for the years ahead is for a growth of 3 per cent.—higher than the 2½ per cent. we have had this year. The right hon. Gentleman failed to take into account the fact that, since 1982–83, public expenditure has consistently fallen as a share of gross domestic product, and will continue to do so. That is in sharp contrast to the position when the Labour party was in government when, despite the IMF, it was rising faster than GDP. That is what got us into the problems that we had in the 1970s. The right hon. Gentleman accused me — if I took down his words correctly — of "cynically pretending to change course". I can assure him that we are not changing course.

Sir William Clark (Croydon, South)

Is my right hon. Friend aware that his statement will be welcomed, in as much as the borrowing requirement will not be increased but will be held as forecast? Will he re-emphasise that, this year, there is extra captial expenditure—the total is a lower proportion of GDP—and that, out of £148 billion the capital expenditure allocation will be over £22 billion?

Mr. Lawson

My right hon. Friend is right and I thank him for his remarks. Capital expenditure has been increased by almost £1 billion in 1987–88 over the previously published plans. The Opposition are on extremely shaky ground on capital expenditure because we all recall what they did to slash it on the Health Service, hospitals, roads and anything else on which they could lay their hands.

Mr. David Penhaligon (Truro)

Does the Chancellor of the Exchequer agree that at least one conceivable weakness in his current strategy is the degree to which he is relying on the tax take that he receives from various resources as a result of the current credit boom, which is something that cannot be sustained? This is creating demand which in turn is creating consumption and imports, but it is not creating the jobs and investment that we require. The Chancellor admits in his statement that we shall have a balance of payments deficit. Could not his strategy lead to pressure on the pound in terms of interest rates and its valuation, and is it not right to say, to quote an American president, that we ain't seen nothing yet?

Mr. Lawson

That was rather a long question, if it was a question at all. If the hon. Gentleman is interested, the forecast for consumer demand in 1987 is a growth of 4 per cent. compared with 5 per cent. this year. The forecast is that consumer demand will be growing more slowly next year than this year, whereas both investment and exports will be growing more rapidly.

Mr. Terence Higgins (Worthing)

The statement as a whole is welcome, but does my right hon. Friend recall that those advocating higher public expenditure have stressed the importance of concentrating on capital rather than on current expenditure? Is he satisfied with the balance between the two? Is there not cause for concern about the level of wage settlements, especially when they are linked to national wage agreements, which are a means of increasing unemployment in areas where it is highest?

Mr. Lawson

My right hon. Friend holds a position of special responsibility as the Chairman of the Select Committee on the Treasury and Civil Service, and he is right to point to the problems of excessive pay increases in the public sector. As I said in my statement, the greatest single area of growth is in local authority current spending. Some of the spending is very welcome, but roughly 45 per cent. of local authority current expenditure is on pay, excluding teachers' pay. The rapid rise in that expenditure, over which the Government have no direct control, is a major problem in getting the balance right between current expenditure and capital expenditure, about which my right hon. Friend is rightly concerned.

Mr. Robert Sheldon (Ashton-under-Lyne)

Since the last public expenditure White Paper, how much has the reserve for 1987–88 and that for the following year been reduced? In other words, how far has the Chancellor of the Exchequer eaten into that contingency reserve? Since the previous autumn statement, has the assumption for unemployment next year been increased or reduced?

Mr. Lawson

The assumption for unemployment next year will appear in the Government Actuary's report, and will be slightly higher than the figure in the Government Actuary's previous report. The right hon. Gentleman will forgive me if I am wrong, but I think that the increase is 50,000, representing an increase that has already taken place. It is not a projection of a future increase. The reserve always comes down as the year rolls closer. The reduction is especially large this year and is one of £2¾ billion, from £6¼ billion to £3½ billion for 1987–88. The reduction is rather on the large side because, as I said in my statement, and as we stated explicitly in last year's autumn statement, the figure for local authority expenditure for 1987–88 had not been agreed. Therefore, we carried forward the same cash figure for 1986–87 and stated that we had made special allowance in a specially enlarged reserve to accommodate that. This year we have put in what we consider to be a realistic assessment of local authority current expenditure for all three years.

Mr. Michael Fallon (Darlington)

Is it not those who are lucky enough to work in the public sector who will gain most from the transformation of the star chamber into the school tuck shop? Cannot my right hon. Friend hold out any hope of reducing the heaviest burden of taxation on the lowest paid in the private sector, who do not have the advantages of those in the public sector?

Mr. Lawson

I think that some of my colleagues—I shall not mention names—who have appeared before the so-called star chamber will be slightly surprised to hear it described as a school tuck shop. My hon. Friend knows full well the nature of the Government's taxation objectives. Taxation, however, is a matter for the Budget and not one for now. Clearly a pound cannot be used twice. A pound which is used in higher public expenditure is not available for reductions in taxation.

Mr. Chris Smith (Islington, South and Finsbury)

The Chancellor announced in his statement an increase of £450 million in expenditure on housing. As the Government, in their report last year, estimated that £20 billion were required to bring local authority housing stock into a livable state of repair, do my constituents now have to wait 41 years for repairs to be carried out?

Mr. Lawson

I do not accept the figures which the hon. Gentleman has quoted, which were put together by local authorities, which made their own assessments of what they thought was necessary. The figures were published subsequently by the Department of the Environment. The statistics were provided by the local authorities in the various areas. The increase in housing expenditure, which I have announced, is an important one, and I hope that Opposition Members will not deride it.

Sir Edward du Cann (Taunton)

If my right hon. Friend is still seeking reductions in the absolute levels of expenditure in addition to the proportionate levels to which he referred, and large consequential reductions in taxation — we hope that we shall hear much more of both matters in his Budget next year — will he give urgent consideration to the proposal, which I think is supported in all quarters of the House, for the repatriation of agricultural policy? The runaway extavagance of the common agricultural policy is not only a continuing scandal, but the indiferrence of the member Governments of the European Community in grappling with it is something which is causing great impatience throughout the nation.

Mr. Lawson

I am sure that my right hon. Friend knows that Britain and its Government are taking the lead in seeking the reforms of the CAP that are long overdue. The problems of overproduction and subsidisation of food and agriculture are not peculiar to the European Community. It is a worldwide phenomenon: it is exactly the same in the United States, Japan and throughout the industrialised world. That is why my right hon. Friend the Prime Minister, at the Tokyo summit earlier this year, insisted on having for the first time in a summit communiqué mention made of a problem which the whole world must address. It is one of the greatest problems facing the world over the next 10 years.

Mr. J. Enoch Powell (South Down)

Does the Chancellor of the Exchequer recognise that the ending of the long run of large surpluses on the current account of the balance of payments should be greatly welcomed in view of its beneficial effect upon the level of economic and, particularly, industrial activity?

Mr. Lawson

I note the right hon. Gentleman's views, although I do not believe that the linkage is quite as simple as he suggests.

Mr. David Howell (Guildford)

If there is to be an increase of £4.75 billion above the planned totals for public expenditure next year, and if, as my right hon. Friend says, there is to be no relaxation of the Government's fiscal stance, is it safe to conclude that there will be, thanks to the vigour and dynamism of the economy next year, a natural increase in revenue of about the same amount? If that is right, is it not an encouraging prospect for those of us who still want to see substantial tax cuts?

Mr. Lawson

I share my right hon. Friend's desire to see substantial, continuing tax cuts, but we shall have to wait until next year's Budget to see what the prospects will be.

Mr. Jack Ashley (Stoke-on-Trent, South)

Does the Chancellor seriously deny that, although he has been talking about the prudence of the Government's overall fiscal stance, the reality is that he has just begun to paddle his electoral canoe with a moderate expansion financed by privatisation? Will he recognise that he will not get very far with the dead weight of mass unemployment costing £20 billion? The sooner he addresses his mind to that fact, the better it will be for the country and, indeed, for the Government.

Mr. Lawson

I share the right hon. Gentleman's concern at the level of unemployment. I should have hoped that he would welcome the fact that, over the past six months there has been no increase in unemployment. The most recent seasonally adjusted figures are the same as they were six months ago. As for paddling electoral conoes, I can well understand why the right hon. Gentleman is so nervous about the prospect of an election.

Mr. Alex Fletcher (Edinburgh, Central)

Does my right hon. Friend agree that the autumn statement again refutes the bogus accusation that the Government have written off Scotland? Will he confirm that Government spending on public services in Scotland is now greater in real terms than it was in 1979 and that Scotland is also getting better value for money, as Government funds are aimed at greater efficiency in the public services and the creation of new jobs in the private sector rather than subsidising industries that are no longer competitive?

Mr. Lawson

My hon. Friend is right. He might also have added that we are blessed with a Scottish Chief Secretary.

Mr. Dick Douglas (Dunfermline, West)

Will the Chancellor reflect on the fact that, seven years after the Conservative party came to power and after receiving £50 billion in revenue from North sea oil, he predicts an encouraging internationally competitive position in 1987. What does he mean by "encouraging" in terms of the balance of payments and current account? In terms of North sea oil advance petroleum revenue tax, what effect is this likely to have on the cash flows of oil companies and on exploratory and development activities in the North sea in relation to Scottish employment?

Mr. Lawson

It is encouraging that the forecast is for growth of 3 per cent. in 1987—the sixth successive year of growth of 3 per cent. or thereabouts — and of inflation remaining low.

As for the North sea oil picture, with special reference to Scotland, about which the hon. Gentleman is something of an expert, the APRT change is deliberately geared precisely to the point to which he adverted. That is why it will require immediate legislation. It is to help the immediate cash flow position, particularly of smaller independent companies. That has an important bearing on the workload of the offshore supply industry in Scotland and in the north-east of England. It is a repayment of tax that has already been paid by them.

Mr. Ian Gow (Eastbourne)

In deciding what weight to give the shadow Chancellor's advice on these matters, will my right hon. Friend reflect on the fact that 15 December marks the eleventh anniversary of the infamous letter from a former Chancellor to the managing director of the International Monetary Fund and that that letter had been preceded by a rate of inflation of 26.9 per cent? Will my right hon. Friend take this opportunity to reaffirm his own commitment and that of the Prime Minister to stable prices by the end of the next Parliament?

Mr. Lawson

That is certainly our aim and ambition. Having got inflation down, as my hon. Friend pointed out, from 26.9 per cent. at its peak during the last Labour Government to 3 per cent. today, it is the aim and ambition of the Government and myself to reach stable prices by the end of the next Parliament.

Mr. Ian Wrigglesworth (Stockton, South)

Will the Chancellor come clean and admit to the House that, along with the abandonment of his monetary targets, the autumn statement and the accompanying boasting press releases about public expenditure today, he has completed the abandonment of his past monetarist policies? Will he admit that he is doing that to generate a short-term preelection boom to seek a short-term party political benefit? Will he confirm that the long-term damage of the policy is borne out by the £1.5 billion balance of payments deficit, which he forecast this afternoon, and the assumption that there will still be over 3 million people unemployed in 1990? Will he change his policies so that demand is channelled into investment and exports rather than into consumption and imports?

Mr. Lawson

The hon. Gentleman is extraordinary. It is almost inevitable that, given the halving of our oil export earnings virtually overnight, there would be a period during which the balance of payments in the current account would go to deficit before the non-oil majority of the economy could increase their exports sufficiently and compete more effectively against imports. That is what will happen. As I pointed out in my earlier remarks, non-oil exports are expected to rise by 5½ per cent., almost twice the rate of the economy as a whole, and non-oil business investment is likely to rise about 3 per cent. in line with the rise in the economy as a whole. I am talking about a balanced growth, not one that is loaded particularly on to consumption, with consumption, investments and exports all going ahead.

Several Hon. Members

rose—

Mr. Speaker

Order. I have to bear in mind that there is to be a further statement after this one, and there is also to be an economic debate. I will allow questions to go on for a further 10 minutes on this matter, during which time I hope that each hon. Member who has risen will be called. Those who are seeking to take part in the subsequent debate might reserve their questions until then.

Mr. Eric Forth (Mid-Worcestershire)

I congratulate my right hon. Friend on achieving a remarkable balance between obtaining the responsible management of the economy that we have expected from the Government until now and acceding to the reasonable requests of those who wanted an element of greater expenditure. How does my right hon. Friend see the economic environment in the current year, particularly for the business sector, to which we look for the generation of wealth in the future and, indeed, of future employment?

Mr. Lawson

The continuing low inflation and the high company profitability which is enjoyed in the corporate sector—the highest for about 20 years—coupled with the benefit that the non-oil sector has enjoyed arising from the adjustment of the exchange rate to the fall in oil prices, give British industry, and particularly British manufacturing industry, an unparalleled opportunity. I am sure they are capable of grasping that opportunity, and I hope they do so.

Mr. Reg Freeson (Brent, East)

The Chancellor in his autumn statement, if I recall it correctly, expressed the hope for a reduction in unemployment from 1987. The Government actuarial figures, to which he referred, suggest an immediate increase in unemployment. In June or July this year, the Secretary of State for Employment forecast a reduction in unemployment by the end of this year. Can the Chancellor explain what these contradictory statements mean, if anything at all?

Mr. Lawson

The right hon. Member for Birmingham, Sparbrook (Mr. Hattersley) in his question about unemployment, correctly pointed out that the Government Actuary's figure was not a forecast but an assumption based on the current rate of unemployment. It is an assumption that has been adopted by Governments of both parties.

Mr. Michael Latham (Rutland and Melton)

So that this will be clearly understood by the local authority negotiators, will my right hon. Friend confirm that the increases in the education provision are intended to fund only the level of settlement suggested last week by my right hon. Friend the Secretary of State for Education and Science and not a penny more?

Mr. Lawson

Most certainly. The extremely generous settlement on teachers' pay which my right hon. Friend the Secretary of State for Education and Science announced is a decision. There is no question of any more being paid to the teachers than the substantial increases announced by my right hon. Friend. The total provision for the whole of the responsibilities of the Department of Education and Science — schools, universities and everything else has risen by £2¼ billion over the previous published plans.

Mr. Nigel Spearing (Newham, South)

Since the junior health Minister declared at the Dispatch Box last Friday that she was more than happy with a 30 per cent. cut in non-emergency ambulance services in London, may we assume that none of the £300 million which the Chancellor has announced will go to restore those grievous cuts?

Mr. Lawson

Those are matters for my right hon. Friend the Secretary of State for Health and Social Services.

Mr. Neil Hamilton (Tatton)

Does my right hon. Friend think that the response to his autumn statement by the right hon. Member for Birmingham, Sparbrook (Mr. Hattersley) was rather dyspeptic, as though he had just, unusually, had to swallow something that he found disagreeable? The right hon. Gentleman referred to Government cuts, but is it not the case that, in every year since 1979, public spending has increased in real terms and that the statement, in effect, announced that that trend will continue? Does not my right hon. Friend foresee after the next general election our Government getting to grips with public spending and being able to make real reductions in it?

Mr. Lawson

There has been a steady improvement on the position that we inherited. Taking general Government expenditure and deducting from it privatisation proceeds in order to obtain the steady underlying trend, public expenditure increased in real terms by about 3 per cent. a year, year in, year out, over the 10 years before 1978–79. That is why, as I said earlier, we got into the difficulties we did. During the first Parliament under the Government, we reduced that increase to 2¼ per cent. a year. During this Parliament, we have reduced it further to 1¾ per cent. a year so far. Over the three years to come, we plan to reduce it further to 1 per cent. a year.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

In his late and quite inadequate reference to unemployment, the Chancellor said that relief could only be prejudiced by high wage settlements, despite the virtual stagnation of private sector investment. Where in his statement can the Chancellor point to a single measure that might alleviate that upward pressure on interest rates which is preventing the revival of private sector investment?

Mr. Lawson

There is no stagnation of private sector investment. Private sector investment — I may have something to say about this in the following debate has risen in the upswing since the middle of 1981 faster than consumer spending. The forecast for 1987—this is the new fact which I have to tell the House—is for non-oil business investment to rise by about 3 per cent., or perhaps even a little more, fully in line with the growth of the economy as a whole. That is by no measure stagnation.

Mr. Nicholas Budgen (Wolverhampton, South-West)

If monetary indicators are no longer a good guideline to over-heating in the economy, will my right hon. Friend tell us what factors in the economy are now a good guide to over-heating?

Mr. Lawson

Monetary indicators are very important. I urge my hon. Friend, because of his deep and abiding interest in this subject, to read carefully the lecture by the Governor of the Bank of England at Loughborough which went into the matter in immense detail and was very persuasive, explaining the difficulties in interpreting broad money aggregates. However, MO—the narrowest of the aggregates—does not suffer from these deficiencies. It will be easier to see whether that is on track. I am glad to say that it is.

Mr. Tony Banks (Newham, North-West)

Is the Chancellor of the Exchequer aware that, next year, in the London borough of Newham the local authority will spend almost £3 million on bed and breakfast charges, whereas in 1984 it was spending only about £92,000? Will the right hon. Gentleman allow the London borough of Newham and the other local authorities to spend the almost £6 billion that is now in bank accounts, built up through the sale of council houses in capital receipts? If the right hon. Gentleman is not prepared to give that sanction, will he please explain how spending accumulated capital receipts affects the public sector borrowing requirement?

Mr. Lawson

It is clear that all public expenditure affects the public sector borrowing requirement, whether it is notionally financed out of accumulated receipts—which in practice may often have been spent anyway—or not.

Mr. John Butterfill (Bournemouth, West)

Does my right hon. Friend agree that by far the most disturbing aspect of his statement is the 9 per cent. overspend by local authorities? Will he join me in urging my colleagues who represent shire counties to press upon county councillors the advice and the example given to them by business interests and to take independent advice on the management of their services with a view to obtaining reductions in costs?

Mr. Lawson

I agree with my hon. Friend. County councillors and, indeed, all councillors on important councils will be well-advised to do that.

Mr. Eric Deakins (Walthamstow)

Are the estimates of Britain's contribution to the EEC budget over the next three years based on a continuation of the maximum VAT rate at 1.4 per cent.? If so, is that not a very unwise assumption?

Mr. Lawson

The answer to the first question is yes. the answer to the second question is no.

Mr. Harry Greenway (Ealing, North)

What account has my right hon. Friend been able to take of the projected rate rise in many Labour-controlled councils, such as Ealing where rate increases of between 50 and 100 per cent. are expected next April after the Labour council has been one year in power? Is my right hon. Friend aware of the devastating effect that that will have on the local economy and on people's ability to pay their rates?

Mr. Lawson

I fully understand the problem to which my hon. Friend alludes. The practice of Labour councillors, cynically pushing up expenditure and the rates and not caring who gets hurt — whether it is the householders or the small business man—does immense damage. We have sought to limit that damage by the introduction of rate capping in a number of areas. That has protected the ratepayers in those areas, but in many areas that are not rate capped Labour councillors are able to do, and are doing, great damage.

Mr. Dennis Skinner (Bolsover)

Is the Chancellor of the Exchequer aware that, if the BBC dared broadcast the truth about what he has had to say today, it might suggest that a pawnbroker stood up in the House of Commons, masquerading as the Chancellor of the Exchequer, surrounded by mountains of debts? It might suggest that that same man was handing out a few electoral bribes, never mentioning the fact that in seven years the credit card holders have become indebted to the tune of £27 billion and that the average family's debt as a proportion of real disposable income has gone up from 45 per cent. to 70 per cent. and that the Government borrowed $4 billion only seven weeks ago to bail out this failing economy and then, having finished what he had to say, having not mentioned anything about unemployment and the prospects for those people who are out of work he turned like a corkscrew and sat down next to the right hon. Lady who used to occupy the place called Grantham cafe, which has finished up as one of the 100,000 bankruptcies in Britain during the right hon. Gentleman's seven years' rule.

Mr. Lawson

Not even the BBC would be guilty of the hon. Gentleman's flight of fancy.

Mr. Edward Leigh (Gainsborough and Horncastle)

Following the question posed by my hon. Friend the Member for Bournemouth, West (Mr. Butterfill), will my right hon. Friend confirm that the £1.5 billion, or 10 per cent., increase in aggregate Exchequer grant should not be seen as an encouragement of profligacy in local government? On the contrary, it should be seen as an encouragement for local government to emulate central Government in contracting out and in the privatisation of services — something that many local authorities, even Conservative ones, have signally hitherto failed to do.

Mr. Lawson

I agree with my hon. Friend about the desirability of local authorities' contracting out and privatisation. Unfortunately, an insufficient number have done so, but those that have pursued that policy have gained great benefit for their ratepayers and need to pursue it further. What we have decided by way of aggregate Exchequer grant is fully sufficient for the needs of local authorities in Britain. I hope that there will be no occasion for anybody to suggest otherwise.

Dr. Norman A. Godman (Greenock and Port Glasgow)

With regard to the increase in public expenditure which has just been announced by the right hon. Gentleman, how much will go to Scotland?

Mr. Lawson

I have not the precise figures in my head. The hon. Gentleman will know full well that public expenditure per head in Scotland is considerably higher than public expenditure per head in England.

Mr. Alan Howarth (Stratford-on-Avon)

Does my right hon. Friend accept that the increased public expenditure on education—provided it is tied, as the Government rightly insist that it must be, to copper-bottomed staff contracts and a rigorous squeeze on local authority extravagance— should be properly regarded not simply as an increase in current expenditure but something quantitatively different — an investment in the future productive capacity of the nation?

Mr. Lawson

I think that we have a chance, with the decision, and its ramifications, which my right hon. Friend the Secretary of State for Education and Science has announced, of achieving a much needed transformation in our education system. That will result in teachers becoming professionals once again—which they were in danger of ceasing to be—and will be of great benefit to children. It will also benefit the future of this country, both its economic and wider future.

Mr. Harry Cohen (Leyton)

Can the Chancellor explain why he did not mention interest rates in his statement, especially as they have just gone up again? Industry, public services and employers are dependent on these rates. What does he propose to do to bring the interest rate down below 10 per cent? Interest rates have never reached that level under this Government.

Mr. Lawson

Interest rates have been below 10 per cent. during this Parliament. The hon. Gentleman is misinformed.

Mr. Donald Dewar (Glasgow, Garscadden)

The Chancellor said that he did not have the expenditure figures for Scotland in his head. As far as I can make out, looking at the papers in the Vote Office, they are not available there either.

Can the right hon. Gentleman explain why, in a statement which had an air of unreality about it, Scotland in particular has been treated in this unreal way? He will remember that normally there are separate figures for Scotland, Wales and Northern Ireland. This year there is a new beast — territorial and other Departments. That appears to cover Wales, Northern Ireland, Scotland certain parts of the Property Services Agency and Civil Service superannuation, which are linked in one aggregate figure. Can the Chancellor explain why this is so, and, having abolished Scotland in this rather cavalier and offhand way, will he guarantee that these aggregate figures are given at an early date and apologise to Scottish Members for this ludicrous situation in which it is impossible to get any impression of the impact of the statement in Scotland or the other parts of the United Kingdom to which I have referred?

Mr. Lawson

The hon. Gentleman really should not be so impatient. It was only today that the Cabinet agreed, as I announced, the public expenditure figures for the year. It is not customary for the House to be informed on the very day of the Cabinet decision. I thought that it would help the House if I did so on this occasion.

The figures for Scotland, Northern Ireland and Wales will be published in the normal way, in the printed autumn statement that will appear on Wednesday.