HL Deb 01 November 1955 vol 194 cc121-42

3.13 p.m.

LORD PETHICK-LAWRENCE rose to call attention to the Economic Situation; and to move for Papers. The noble Lord said: When I last addresed your Lordships on economic and financial matters in the spring of this year I expressed my view that the functions of the two Houses of Parliament on such questions were widely different. Constitutionally, the other place is, by prerogative and by Statute, the sole arbiter of supply and taxation. Its Members sit there by virtue of their representative character and, as such, are charged with the duty of guarding the interests of their constituents; and they would be failing in that duty if they did not thresh out, and even wrangle over, the conflicting merits and demerits of the financial proposals as seen from the angle of those for whom they speak. Our position in this House is, of course, quite different: we do not, in that sense, represent anyone but ourselves, and we should be ill-advised indeed if we were to place what the Prayer calls "private interests, prejudices and partial affections" before the wellbeing of the realm as a whole. It is in this spirit that I propose to examine the present economic situation, including, of course, the proposals put forward in the other place by the Chancellor of the Exchequer.

The major historical facts are, I submit, matters of common agreement. We all remember that after the First World War there were in this country rapidly falling prices, a slump and widespread unemployment; and no-one,. I imagine, would deny to-day that those were the consequences of a deflation deliberately engineered by the Bank of England, with the approval, or at any rate the connivance, of the Government of the day. This deflation culminated in the restoration of the gold standard at its old parity. The situation continued to get worse under both Governments in the 'twenties of this country, until finally sterling was again devalued and cut adrift from any fixed relationship to gold or the dollar. The miseries of those days hit deep into the souls of the people of this country, and when, at the end of the Second World War, the Labour Government decided to pursue an entirely different policy they had almost universal support for this action. But times were very difficult. The United States, abruptly and, as President Truman himself afterwards admitted, ungenerously, cut off Lease-Lend; demobilisation of millions of men and women had to be organised; there was a world shortage of food and raw materials; and British industry had to be entirely reconstituted D n a peace basis. In those circumstances, the Labour Government, of which I was a member, realised that, while their main objective must be to restore the nation to the maximum employment of its resources, they must retain a firm grip over the whole economy so as to avoid the twin evils of inflation and deflation.

I remember well how, in the Cabinet, careful reviews were regularly presented to us of the work to be done and of the materials and manpower available for its execution. It was, as your Lordships will remember, a hard battle. Sir Stafford Cripps was dubbed "Austerity Cripps" for the part he took in winning it. He was not wholly successful. In 1949 sterling was devalued, and later, when the Korean war sent world prices rocketing upwards, our gold and dollar reserve suffered a serious depletion. While the storm was gathering ahead, there was a General Election in this country and a Conservative Government were returned to office. After a time, things improved —whether that improvement was due mainly to the action the Chancellor of the Exchequer took or whether it was due almost entirely or mainly to extraneous causes is a question with which I am not dealing at this moment, because I want to confine myself to facts which are incontrovertible. I shall return to that point a little later on in my speech.

About the end of 1954 the situation again began to show signs of getting worse, and in the spring of this year Mr. Butler, the Chancellor of the Exchequer, took two actions. In the first place he raised the bank rate, in two stages, to 4½ per cent., and in the second place he introduced a Budget in which he remitted taxation, mostly by reducing the rate of income tax, by some £150 million a year. The deterioration continued and was not helped by several prolonged strikes. That brings me to the present day, and to a state of affairs which no-one who understands the facts and is concerned for the welfare of this country can view without alarm. Our gold and dollar reserves covering the whole sterling area are now steadily going down; the balance of trade of the United Kingdom is considerably against us, and imports are increasing far more rapidly than exports. In the first nine months of this year, whereas the exports increased as against the previous year by 6 per cent., the imports have increased by 15 per cent. Not only so, but while world trade in the first six months of this year rose by some 13 per cent., British exports rose only by some 4 per cent. While this was going on, wages and prices seemed to be chasing one another in an upward spiral; profits have been reaching record heights and, taking the year as a whole, equities have made startling gains on the Stock Exchange. All those are the recognised symptoms of inflation.

During the Recess I have been in touch with a number of people who do not profess to be versed in economic and financial matters, and they have said to me something of this sort: "Why bother about it? We are all doing quite well. The factories are humming; the workers are getting good wages; the shareholders are getting good dividends and there is no unemployment, so why cannot Mr. Butler leave us alone to get on with it? "For my part, I certainly do not share that view. All my life I have been an active exponent of stable money, and the fact that I was a violent opponent of deflation in the 'twenties has never disguised from me the fact that inflation is an equally dangerous evil. Both are forms of robbery. Every contract running over a period of years presupposes something approximating to the steady purchasing power of money, and when this is not maintained one or other of the parties is cheated of his right. Inflation and deflation are like Scylla and Charybdis, and it is the duty of the Chancellor of the Exchequer to navigate the Ship of State successfully between them. If that is true of countries in general, I think your Lordships will agree that there is no country of which it is more true than this island country of ours. We cannot feed ourselves or feed our mills except by trading with the outside world, and woe betide any Chancellor or Government who fails to recognise this fact!

But how is inflation to be stopped? Let me enumerate some of the remedies. The first which will occur to all of us is by increasing production. I suppose we are all agreed upon this, on whichever side of the House we sit, at any rate as a general principle. That is why the main decision of the Labour Government in 1945 was sound; and that is why full employment of every man and woman able and willing to work is essential, and why the few "croakers" who call the present employment "too full," and who want to reduce it and seek to have a larger number of unemployed, cut no ice with the majority of the people of this country. That is why it is a good thing to have a queue of people eager to use the materials and the labour, and not the other way.

The second method of trying to meet inflation is by monetary means—that is to say, by raising the bank rate. There is no doubt whatever that that method, coupled as it was with what is called open market transactions, worked during the nineteenth century. It was a somewhat blunt and brutal weapon, but it worked. It involved bankruptcies, and generally involved disastrous unemploy- ment. Again in 1919, it was the method successfully employed to bring about wholesale reduction of prices and the miseries of the 'twenties to which I have already referred. This was the weapon employed by Mr. Butler in 1952, shortly after he became Chancellor of the Exchequer. Many of his supporters—maybe some on the Benches that I see opposite me, but certainly large masses of them in the country—think that the bulk of the improvement which took place in 1952 was due to that policy of making money dear which the Chancellor of the Exchequer adopted at that time. I do not think Mr. Butler has ever said that himself, and I believe that he and his advisers know far too much about it ever to have made such a claim. The real fact, of course, was that the terrific rise of prices brought about by the Korean war had come to an end. They fell sharply, with the result that there was an immense change in the terms of trade. Astounding as it may seem, that change amounted to a figure of somewhere about £500 million a year.

I have never denied that raising the bank rate is one way, even if an expensive, indiscriminating and somewhat brutal way, of producing an anti-inflationary tendency. All the same, there is very little evidence that raising the bank rate in the early months of this year, 1955, had much effect. 'The joint stock banks countered it by selling securities, and, with the proceeds, continued to make advances. It was not until the Chancellor of the Exchequer gave a directive to them to contract their advances that they acted in the way he wanted. In the meantime, he had opened the floodgates further by his largesse to the income tax payers in the April Budget. The result of all that was that there has been to this day very little improvement in the situation.

The third way which is put forward is to reduce the amount of money in the hands of consumers by direct taxation. Mr. Butler did the exact reverse of that in April. But in any case it is now clear, even if it was not then, that the main overspending—and this is very important —has not been done so much by the consumer in his personal capacity as by corporate bodies seeking to get new capital equipment. It may he that some noble Lords do not agree with me in that state- ment. Let me just remind them of the present Budget position, taking into account not merely the figures above the line but the figures below the line. They will realise, if they do that, that at the moment there is the almost unprecedented figure of over £600 million deficit in the accounts. I am quite aware that, as the year goes through, part of that will be corrected by the inflow of the proceeds of taxation, but that is one sign.

Another sign is the large number of people in the business world who are pressing for capital in order to float their enterprises. Though it is a good thing in the main, as I said just now, that there should be a queue of people waiting to do things, if, in the aggregate, they succeed in doing more than the economy can provide for in the way of raw materials and labour, they are merely creating inflation. If noble Lords are still not satisfied, I should just like to read an extract—and this is the only extract I propose to read—from The Times leading article of yesterday, in the course of which the writer speaks of the unexpectedly great expansion of industrial and, to a lesser extent, municipal capital expenditure. It is this, lot any upsurge in public current expenditure or any great upsurge in private consumption, that has caused the temporary increase of the overload on the economy.

The fourth method that is sometimes adopted is by extensive control over the whole economy. When I first entered another place, the orthodox view of the function of the Chancellor of the Exchequer was that he was concerned almost exclusively with the purse of the Exchequer—that is to say, with the receipts and payments of the State Budget—and that he left the Bank of England and the City to deal with the rest of the economy, which was in that day mostly in private hands. I always opposed that view and, little by little, the Chancellor of the Exchequer has taken to himself a wider sphere of activity, which is illustrated by the form in which the Financial Statement is to-day exhibited.. In Mr. Butler's autumn Budget, he, recognises this to the extent, of issuing directives to the public sector regarding their capital policy. That is a perfectly sound thing to do, in principle. The fact that: they are public authorities, whether they are municipal or public enterprises, is the means by which he is enabled to do it most easily. Whether he has done what he has done wisely or fairly, I am not prepared to say. In particular, this drive on the municipalities seems to me to be conducted rather in a mean manner, by trying to force the smaller municipalities to enter the hurly-burly of the money market if they want to raise a loan and, if they come back to the Treasury, by taking a "rake-off"—that is what it amounts to —on every loan that they secure.

With regard to the private sector of industry, the Chancellor of the Exchequer seems to think it adequate to confine his attention to the indiscriminating bludgeon of an increased bank rate. Personally, I think the time will come when he and parties on both sides will come to realise, as some of us do to-day, that the Chancellor of the Exchequer is bound to exercise and enforce priorities in the interests not only of the individual but also of the nation itself. In the meanwhile, by not doing that, it seems to me that he has taken a very unfair attitude towards the wound-be smaller borrowers, people like farmers, small firms and others, who in some cases are at the present time being forced into bankruptcy.

The final method that I can see—there may be others I have not thought of—of attempting to restrain inflation is by putting up the price of consumer goods and by imposing a tax on them. To the ordinary man in the street, that seems a little like Alice Through The Looking Glass. To the ordinary man in the street, at any rate, to put up prices for the purpose of keeping prices down and keeping wages down as well, seems like a contradiction in terms. Of course, I understand the theory of it. The theory of it is that you put up the prices of a large number of things by tax. That will induce some people to go without them, even though some of them are really necessary; and even if they do not go without them, they will have less money to spend on other things. That is all right in theory, but I have an uncomfortable feeling that it is not the way it will work in practice. Let us just see how it does work.

Mrs. Brown goes to the shops. She must buy a great many of these necessaries which are affected by additional purchase tax in this autumn Budget; she is absolutely in need of them for the house- hold and she has to pay more for them. She comes home and says, "Bill, I cannot make do on the money that you give me every week. I must have more." He goes to his employer and says. "I must have more money because my wife cannot make do on the money I have been giving her up to now." Therefore it seems to me much more likely that this increase in tax on household articles of everyday use which the common people buy, instead of acting in a deflationary manner will act in an inflationary manner. It puts up the price of certain articles which must be bought, the housewife wants more money, the husband asks for, and in many cases will get, more wages. The wage increases will mean cost increases; cost increases will mean price increases, and the whole vicious spiral will go on.

I am quite prepared to agree that perhaps that might not happen if the ordinary citizen were convinced that Mr. Butler's Budget was a fair one—if they said, "We may not understand inflation, but we are told that it is a most terrible thing and that we are going to suffer from it. We must all take our fair share of the difficulty, and in our opinion Mr. Butler has made a fair deal." If they felt it was quite fair, I think the large bulk of the people would accept his Budget scheme. But it is difficult to imagine that that will be so. I find it difficult to understand how even Mr. Butler thinks it is a fair Budget. In his Budget broadcast on the Wednesday night, following his speech in the House, he himself said that he thought the bulk of the people would think it fair; therefore one must suppose that he is hoping that they will. But I find it difficult to take that view.

Let me put the most charitable interpretation on Mr. Butler's actions. I assume that in April he optimistically believed that his monetary squeeze would restrain inflation and that he could even afford to aggravate the inflation by giving away some £150 million by remissions in taxation. In September he realised that the squeeze was not doing the work that he anticipated it would do, so he clamped an approximately equal amount on different articles and on an entirely different set of people. Let us look at it in this way, which seems to me to be one which we are entitled to use. Put the two Budgets into one—after all, they are the combined financial provisions that the Chancellor of the Exchequer has made for the year 1955–56. Putting the two together, from the point of view of the Exchequer there is no loss and no gain. From the point of view of the public, the Chancellor has made certain remissions to one set of people and he is taking taxes to make up for those remissions out of an entirely different set of people. I do not want to press it too hard, but, broadly speaking, the people to whom Mr. Butter gave the largest share of the remissions were, as I showed five months ago, the well-to-do people, and many of the people from whom he is taking taxes are the less-well-off people. I will just put this question to your Lordships and leave the matter there. In view of those facts, do your Lordships, whether sitting on this side of the House, on the Liberal Benches, or on the Benches opposite, really consider it likely, that the ordinary man and woman in this country will think it is a fair Budget? My Lords, I beg to move for Papers.

3.45 p.m.

THE PAYMASTER GENERAL (THE EARL OF SELKIRK)

My Lords, I confess frankly that I have been looking forward keenly to listening to what the noble Lord, Lord Pethick-Lawrence, had to say on the Budget statement of last Wednesday. I think it is a real privilege to hear in this House an objective critic speaking without partiality. From what the noble Lord has said, I think that is a fair statement to make. If perhaps a cloud of Socialist dogma occasionally descends on his words it is only momentarily, and in a very short time his own personality shines forth with his personal judgment, I think it is of great value to-day to have the noble Lord's view, because there is probably no subject that is more difficult to diagnose than inflationary pressure of one character or another. I say, frankly, that there is no subject more difficult to expound; certainly there is no subject more easy to misrepresent—the noble Lord has not done that at all. There is another point—namely, that however unfair inflation may be (the noble Lord called it "robbery"), any action which is taken to check inflation is necessarily unpopular. It is doubtful whether any action could be taken which would have that effect unless it were in some measure unpopular. That is the reason why inflation is to-day the Achilles' heel of democratic government. And that is true not only of this country but of many countries in different parts of the world.

Perhaps I should say a word about the reason why this Budget is necessary. The noble Lord opposite has run over the points and I shall just underline substantially what he has already said. I think it is about twelve months since anxiety began to be felt in regard to the pressure on the economy, but the position became clear when the figures for the second half of last year came to be analysed. It is fair to say that immediate steps were taken, first in January, and again in February, by raising the bank rate and later by restricting credit through hire purchase. I think I can claim that those efforts were not entirely unsuccessful, because in any case by April of this year the strength of sterling had improved; the drain on the reserves appeared to have stopped, and the trade figures had improved. It was largely for the purpose of strengthening the economy that some reductions in direct taxation were made. We may have a perfectly honest difference of opinion as to how important in the economy is the element of incentive. The noble Lord opposite has argued that taken together, the two Budgets do not present in all fairness the picture which he thinks they should. All I have to say is, that they take into account different circumstances and have different objectives in view. My right honourable friend said yesterday, that if he was guilty of an error it was, after all, an error on the right side, and I believe that is a fair statement. Of course, the noble Lord does not like the bank rate: he has never liked it. There is a lack of logic in what he says, for in 1919 he said that the effect of the bank rate was too great; yet his present complaint about the bank rate is that it is not having enough effect. It is not the bank rate but the manner in which it is being used; and it is upon that that judgment must be formed.

I will run over the general lines of what has happened since that time. As the noble Lord has said, it is quite clear that our economy has become overloaded. Efforts have been made to obtain more than the economy can provide, both in materials and in labour. The first half-year showed that the current account surplus was down to £17 million, which is about £150 million less than in the corresponding period of the year before. Frankly, this surplus is too small for our overseas capital equipment. Demands on labour were getting very heavy, and at the present time the number of vacancies notified is roughly twice the total number of unemployed. There is a shortage of steel, which became increasingly marked in the course of this year. The cost of living rose three points in June, and, as the noble Lord quite correctly said, there has been a very considerable rise in industrial investment in capital equipment. This can 'be shown by the amount of factory building which is taking place and by orders for machine tools, which have grown very rapidly this year. In itself, of course, this was excellent, but it must not become too heavy for the country as a whole. Nevertheless, it is interesting to note that one of the recent criticisms heard was that capital investment had not been going ahead quite fast enough. It is now taking a considerable surge forward.

The trade gap for June and July was about twice that for April and May, accentuated, of course, by strikes. The gold and dollar reserves fell by about £40 million for the months of July, August and September. To meet this situation the Chancellor of the Exchequer took his third action of the year at the end of July, impressing upon the banks the necessity to strengthen the higher bank rates by curtailing their own advances. This step was not ineffectual, but to-day we do not think it is enough by itself. But, as the Governor of the Bank of England said last month, to some extent the effect of this action was limited by the fact that much of the economy in the public sector was relatively isolated from that particular form of restriction.

What, then, was the Chancellor to do? Of course, we could have slipped along somehow until April without any major calamity—that was one possible course. Alternatively, we could have imposed Draconian measures, which would have left it beyond doubt that some form of inflation had set in. We have sought to take the path which the noble Lord has described as narrow, between Scylla and Charybdis, in this fourth action which Her Majesty's Government have taken this year in keeping on the narrow path which this country requires. I should like to emphasise how narrow that path is. We have an overseas trade, visible and invisible, of something in the order of £8,000 million. The balance we have in mind is perhaps 2 per cent. or 3 per cent. A very slight movement one way or the other would rectify the position altogether, but the situation is made much more acute by the relative shortage of reserves which we have in this country at the present time.

It is not only a question of our long-term balance of payments; it is a question of whether our currency is stable, for we could go on increasing our exports as we are at the present time. But I believe that as long as inflationary pressure is there our imports would tend to increase even faster. It is therefore essential to our overseas trade and for this country that we should succeed in achieving internal stability; and, of course, we are the bankers and trustees of the sterling area. On the whole this has been a favourable year in regard to terms of trade, and we have to bear that in mind. It does not mean that our overseas markets have become easier, because in the last twelve months German and Japanese competition has been growing rapidly and in this last year fairly heavy imports of both coal and steel have been necessary—of the order of £100 million. I am very glad to hear that the noble Lord shares the view that action is necessary—indeed, I am glad that there is, on all sides, no doubt that some action should be taken.

Turning to what action should be taken, there are roughly two views. On the one hand there are those who say that direct Government control should be imposed with, probably, some sharp increase in taxation. The other camp believes that the only practical action is a very large reduction in Government expenditure. So, broadly speaking, those are the two schools of thought: reduction of Government expenditure on the one side, and increased Government controls on the other. Controls are cumbersome instruments which necessarily involve, in nearly every case, some form of allocation or rationing. We believe that the choice of the man who buys or uses is more efficient than the choice by an official on his behalf. Let me quote the building industry as an example. It has been very striking to note that, since building licences have been withdrawn, efficiency in the building industry—that is, output per man—has very considerably increased. After six years of planned economy it still required the assistance of a Government Department for a boy to buy a bar of chocolate. Apart front other considerations, I can only fed that that is very inefficient. The second point is one brought out some time ago by the noble Lord, Lord Brand: that controls are infectious. If you put on one you have to put on others in order to balance; and so controls spread, bit by bit, through the whale community. My third objection to controls is that, fundamentally, they treat the symptoms of the disease without treating the cause. They give the appearance of a balance without necessarily obtaining a fundamental balance. They do not take inflationary pressure, as such, out of the economy.

May I now turn to the school of thought which says that our present problems can be resolved by much heavier cuts in Government expenditure. To some extent, we are following that line, and have been following it. I should like to quote what the Chancellor of the Exchequer has said. To-day, the Government are taking only 26 per cent. of the gross national product, against the 29 per cent. which was being taken when this Government came to power; and we are doing that despite a very considerable increase in defence expenditure and after strengthening—and I can emphasise strengthening—the social services in this country. If anyone advances that policy of reducing Govern-merit expenditure then he must say which section it is that he wants to cut—whether it is defence, the Welfare State, agriculture or food subsidies or atomic development, because those are the major issues which as a matter of policy will require to be changed if any really considerable cut has to he made. At the present time we do not think it is either wise or necessary to take any such step.

What do we propose to do? Our policy falls into two parts; first, to reduce the claims of investment on materials and labour, but to do so without damaging the growth of capital and equipment; secondly, in some way to reduce consumer purchasing power in this country as a whole—in other words, to change this country, at least in some degree, from a sellers' market to something more closely resembling a buyers' market at home. Under the first head, that of investment expenditure, come the existing restrictions on credit, to which we add reduction in Government expenditure on certain capital works, a careful review of the future capital programme of the nationalised industries and the reduction of capital expenditure of local authorities. Under the second heading—that is to say, the reduction of consumer expenditure—we have the hire-purchase restrictions which already exist and the increase in purchase tax. Thirdly, there is the increase of certain Post Office charges to bring the Post Office services more fully on a self-accounting basis—I understand that the purpose of the Post Office is always to be on a self-balancing basis. Fourthly, there is the increase in companies profits tax. These broad categories, of course, interact on each other and they cannot be so sharply distinguished as I have indicated.

I should like to say one further word on the question of loans to local authorities—a subject which has been dealt with by the noble Lord, Lord Pethick-Lawrence, in his speech. We shall encourage local authorities to go to the market, but if they are unable to borrow from other sources they can, of course, approach the Local 1oans Board. But the rates which the Board will set will not be the credit of the Government but the credit generally of the local authorities who are making the approach. The noble Lord says that that is a "rake-off." May I explain why we are pursuing that policy? We are punning it because it will be a policy to discourage local authorities, on the whole, from going to the Board if they can get money elsewhere. One reason for this is that if the local authorities go to the Local Loans Board, the Board have to raise their money for loans to local authorities by means of Treasury Bilk Treasury Bills, in the hands of bankers, of course, rank as liquid assets, so the effect of that is in some way to enable the banks to increase the amounts of money they have to lend. We do not want that. We think it is wrong in the present: circumstances that the number and amount of Treasury Bills should be increased by means of extra loans to the Local Loans Board.

I would say this about local authorities. There are two ways in which we can curb any extension of Treasury Bills arising from the pressure of loans for local authorities. One is by direct Government control—that is to say, to make the expenditure al the local authorities subject to detailed approval by the Central Government. We think that is wrong, not only because it involves delay but also because it undermines the responsibility of local authorities themselves. We have taken the opposite view—namely, that local authorities are the best judges of local priorities and that it is for them to seek their own economies. This enhances their responsibility, and I think it is the right way to give effect to that which we have in mind. I think we all of us know of instances of local projects which may be desirable but which are not strictly necessary in present circumstances.

The noble Lord, Lord Pethick-Lawrence has said that the increased purchase tax will have a very adverse effect. We suggest that the actual effect on the cost of living will be very small. I think it is worth considering what is happening with regard to personal incomes at the present time. The figures for 1954 suggest that personal incomes increased in that year by about £800 million, or possibly a little more, while real production has not risen so fast. Perhaps I may give an example of the purchasing power which comes from these personal incomes. If we add together what is to-day spent on alcohol, tobacco and gambling we get a figure which I believe is somewhere in the order of £2,000 million a year, so it does seem that these increases are playing a considerable part in inflationary pressure in the country, and it is not unfair that this purchasing power should be marginally reduced. It may be argued that what we are taking by increase in purchase tax is such a small amount compared with the rises in personal incomes that it is hardly worth doing. To that I would say that if only a few people are discouraged from buying motor cars or television sets, electric cookers, or what you will, in the way of metal commodities, it will by that much reduce the pressure on the resources and labour and materials of the metal industries immediately concerned. If, on the other hand, people do buy in spite of taxes, they will have marginally so much less to spend on other things. I do not, of course, suggest that, taken by itself, the increase in purchase tax will be anything like enough—indeed, probably none of these measures will be enough taken in isolation. Nevertheless, I believe that, collectively, they will be sufficient to bring about the relatively small improvement in the balance of payments at which we aim.

Now I would say a word about the "D" scheme. I think the abolition of this scheme will be warmly welcomed by most manufacturers of textiles and furniture because the existing scheme, though undoubtedly an improvement on what went before, has so many anomalies that it tends to drive people out of making better-class textiles, which are the very class most used in export. That is of course, typical of the difficulty which faces all those who wish to pursue a policy of austerity, because it is primarily quality goods which we are exporting and we cannot force a foreigner to buy austerity goods if he does not want to do so. Very much the same considerations affect the cut glass industry and the silverware industry on the products of which duties have been slightly reduced. Both are craft industries which show signs of dying out unless help is given to assist their sales by giving them a slightly better home market.

And now a word on the companies tax. The tax on companies is part of the Chancellor's policy to make some inroads into purchasing power over the whole field of our economy. I suppose it is true to say that profits are slightly easier to make in times of inflation than at other times. I would add this with regard to the recent recommendations of the Royal Commission on this matter and the reluctance which has been shown to accept a separate rate of tax for distributed and non-distributed profits. The adoption of one rate for both classes of profit would not be acceptable in present circumstances, because those who distribute heavily would gain by such an alignment of the profits tax, while those who distribute with less restraint would lose by it. We feel that it would be wrong to suggest any encouragement to increase the distribution of profits. It is for that reason that we are unable to accept the recommendations of the Royal Commission.

The noble Lord, Lord Pethick-Lawrence, may suggest that the proposals which we put forward do not contain any clear policy. I suggest that the policy is perfectly clear. We do not propose to go back to an economy of siege, and for this reason. We can never have a prosperous island in isolation from the rest of the world, however accurately and dictatorially the economy may be planned on a national basis. The policy we have here outlined will leave the wheels of productive industry free to turn faster and faster, within the limits of the manpower and materials available, and it should give the maximum encouragement to exports. It leaves the structure of the Welfare State completely untouched. Further, it leaves the consumer with a free choice in spending his own income.

Moreover, in maintaining economic discipline in the community we have a duty not only to ourselves but to very large populations outside this country. We have to remember that about one quarter of the world uses sterling, or currency allied with sterling, as a medium of trade, and about one half of international trade is either conducted in, or facilitated in its conduct by, sterling. Its strength is not entirely dependent on this country, but there is no doubt that we in this country can entirely ruin confidence in sterling. What we do about sterling profoundly affects ten times as many people as live in this country. As the Chancellor of the Exchequer once said, one of the strongest links among British people, after the Crown, is sterling. Therefore if to-day we are unwilling to take some trouble about it, if now or in a future time we are unwilling to make some sacrifice in order to maintain the stability of sterling, we shall be running away from the leadership and responsibility which this country is carrying at the present time.

4.11 p.m.

LORD WILMOT OF SELMESTON

My Lords, I think your Lordships must have been astonished, as I was, to hear some of the remarks of the noble Earl, Lord Selkirk. We all agree about the necessity of defending sterling and of checking inflation, but we have to take account not only of what we desire to happen, but of what is likely to happen as a result of the proposals that the Chancellor of the Exchequer has just made. The main certain and immediate effect of these proposals is to raise the prices of many household goods and the cheaper forms of textiles, and also rents, for the mass of the population. The manner in which these proposals have been presented has been received with astonishment and hostility by most of the Press and by nearly everybody to whom f have talked in all sorts of places. The effect certainly will be to lose the good will of the public in trying to solve a national difficulty. I think that that is a grievous thing, because without the conscious cooperation of the public at large this matter cannot be put right.

The noble Earl described the problem briefly and correctly. It is basically a matter of excess of imports over exports—a gap in the balance of payments. With what happens inside our economy, we can deal; with what happens outside we have to take extraordinary measures. And there is nothing in these proposals which is going to effect this at all. They have no direct effect upon imports from hard currency areas, or anywhere else. They are merely an attempt to stern the purchase of imported materials in the domestic market by raising prices,—but not in any obvious way. If there had been a direct cut in the permitted import of some important foreign commodity, the purpose might have been seen, but the range of goods affected by the purchase tax increases is so unrelated to imported goods that nobody can see the connection. If one looks at the White Paper to see the effect of the first proposal, one sees on page:3 "Dustbins, mops, buckets, pot scourers, shopping baskets and shopping bags." What have these to do with the import of raw materials? They may have some trivial and indirect connection, but the purchasers do not see it. If the Chancellor had cut in half the import of American tobacco (though I am not proposing this) and there had been a shortage of American cigarettes, people would have understood what was going on: that we could not afford to spend so many dollars on tobacco. That: is an example of clearly identifiable cause and effect, but there is nothing identifiable in the Chancellor's proposals.

The noble Earl spoke about abolition of the "D" scheme. The "D" scheme may seem relatively unimportant to us, but to working class purchasers it is of great importance, because what is now proposed means a rise the price of all the most necessary things to the poorest people in the corn munity—children's clothes—

THE EARL OF SELKIRK

They are out.

LORD WILMOT or SELMESTON

Thank you, I am corrected—cheap adult clothing. Household goods of every kind are raised in price by the abolition of the "D" scheme, and, to make the pill even more difficult to swallow, at the same time expensive clothing is reduced in price by the effect of the Budget proposals. This has been commented upon widely in the popular Press of all shades of political opinion. There is not a single family in the country which does not see that Mr. Butler has reduced the price of expensive goods and increased the price of goods consumed exclusively by the working class. That is a serious thing to have done.

I do not follow the noble Earl at all when he talked about the disadvantages of the "D" scheme. How can it be wrong to encourage people to buy the sort of commodities which have only a domestic market and make it more difficult for them to buy the sort of commodities which primarily have an export market? I happen to be concerned in the production of very expensive silk fabrics by a large exporter of this class of goods. It is not going to help that firm in any way because it is the quality of their goods that sells them more than the price. There is a foreign demand for high-class British craftsmanship. These proposals do nothing at all to help the export trade; if anything, they work the other way by creating a demand for higher wages. The purchase tax increases are comparatively trivial in relation to the problem, but they are having a psychological effect out of all measure to any advantage the Chancellor of the Exchequer can possibly derive from them. I say it is a most serious thing to lose the good will and public spirit of practically the entire working-class population and it has been followed by immediate demands, clamant demands, for an increase in wages on the ground that this is the last straw and present wage levels do not meet properly the cost of living.

The noble Earl said that the main objective of Government policy in these difficult circumstances is to convert the sellers' market into a buyers' market. But this would do the exact opposite. The rise in wages over the whole country, due to the wage demands set in motion by these proposals, will far more than offset any advantages which the Chancellor may get. We have to face the fact that in a few months' time, when these effects begin to load in upon us, we shall find, that not only has this Budget done nothing to meet the difficulties it set out to meet, but that we have a new situation of still greater rising inflation, for which we have no remedy. I suggest that that is the inevitable consequence of the Budget proposals. I apologise for dealing so long with this matter, but it is because of its wide implications. The noble Earl said that alcohol, tobacco and gambling absorbed a large part of public purchasing power, which was evidence that there is a large margin of available purchasing power to attack. But the Chancellor has not attacked these particular forms of spending. Had he gone straight at alcohol, tobacco and gambling, in a period of national difficulty, there would have been some reasonable understanding of it and I am sure much co-operation. But he has done nothing of the kind: he has gone right plumb at the basic necessities of the poorest working class house.

Now as to the pressure of investment: surely, it is the most clumsy way of trying to canalise your overfull investment programme into the most desirable channels merely to proceed in this haphazard way. Would not a wiser course be not to impose a whole range of controls on a wartime scale, but to take selective forms of investment and endeavour to canalise them into particular important channels? But what have the Government done? It is not so long since that they were forcing through Parliament a Television Bill designed to secure vast investment in a duplicate television system. The whole of this enormous effort, which makes great demands on one of the key industries, that of electronics, has to be financed by every kind of skilled exhortation to people to spend more upon consumable goods. Can the public be expected to make sense of a policy like that: diverting investment from the atomic power industry, the machine tool industry and the wide range of British specialities in scientific achievement into commercial television in order that there may be higher consumption of face creams, beer and every other thing which makes demands upon our industrial capacity?

Frankly, I do not understand upon what business principles, fiscal theory or any other logical and consistent form of thinking the Chancellor of the Exchequer has based this Budget. It seems to me that it is bound to confuse, to irritate and to create hostility in the maximum number of people. The opinions of the effects of the Budget are not different in the minds of people of very different circumstances. The view of the bus driver, which was expressed to me forcibly the day before yesterday, is precisely the view of the Stock Exchange: that this Budget is inflationary; that it will not curb inflation, but will increase it. Whereas before the Budget equity prices were being marked down, particularly in those sections of the equity market where inflation has the most effect, and gilt-edged were being marked up, the moment the Chancellor of the Exchequer's proposals were made known the tape showed War Loan fell by seven-eighths, and immediately equities, relying on increased purchases and increased spending, were marked up. That is the view of people who have great experience in evaluating the commercial effects of fiscal policy.

THE EARL OF SELKIRK

The noble Lord knows that equity prices were marked up immediately after the Budget of April, so that by his definition that would be a deflationary Budget.

LORD WILMOT OF SELMESTON

Not at all. That, too, was inflationary. The reason why equities were marked up in April was that the reduction of income tax put more purchasing power in the pockets of certain people, and therefore it was inflationary too. It marked up equities. This Budget will eventually put more purchasing power in the pockets of certain people also, because the wage demands, which will be irresistible, will more than offset the purchase taxes. It is an inflationary l3uclget, as I have sought to show, because the secondary effects will far more than offset the primary effects; and stock market prices do not look only to to-morrow but to next year as well. I am sure that anybody in the City listening to me will agree that that is the reason for the movement.

The noble Earl asks what we can do. If we cannot proceed in this loose way, what are we to do about it? Surely, the first thing to do is to take direct action to limit, if possible, excess importation of unnecessary things; and the other thing to do is to stimalate by every means production and export. There is no stimulation of production in this Budget. You have sickened the heart of every workman who has tried to do his best by making it more difficult for him to live and by forcing him, at a time when he is told there is great difficulty in the country, to support demands for rising wages. I do not think there is a single industrial leader who has ventured to speak since the Budget proposals were known who has made any kind of claim that it has eased his problems or done anything to increase his output. It will help to price him out of the export market. I suggest that not only is the Budget a complete failure to deal with the situation, but that its effects upon the life of the community will be disruptive, highly disagreeable and highly regrettable in present circumstances, and that within a short time we shall be faced with the necessity once again of dealing with a rising inflationary spiral which the Chancellor will have put into a higher gear.