TAXATION AND PUBLIC EXPENDITURE

HL Deb 06 March 1957 vol 202 cc262-346

2.50 p.m.

LORD COLERAINE rose to call attention to the level of taxation and public expenditure, and its effect upon the condition of the people; and to move for Papers. The noble Lord said: My Lords, I am glad to think that there is no real conflict between the Motion I am moving and that which stands on the Order Paper in the name of the noble Lord, Lord Pethick-Lawrence, "to call attention to the present economic and financial situation." The experience of the noble Lord in these matters, and his understanding of them, is so much wider and so much deeper than my own that I should not like to enter into a condition of competitive co-existence with him about them. I feel that I might fare badly in the competition, and even my existence might be in some jeopardy. That, I think, applies to competitive co-existence in every sphere There is an inevitable relationship between the burden of taxation, the level of public expenditure and the general economic situation. It is really impossible to discuss the economic situation without reference to taxation and public expenditure, and it is certainly impossible to discuss taxation without reference to our general situation. The noble Lord perhaps might attach less importance to taxation as a factor than I do—I regard it as probably the dominant factor at the present time—but still I am sure that he would not altogether ignore it.

May I say at once that it is not my purpose this afternoon to elicit from Her Majesty's Government any statement of policy. I realise that at the present time, when the Chancellor of the Exchequer will be opening his Budget within a very few weeks in another place, it would be quite impossible for the Government to make any such statement. May I say, too, that it is not my purpose to criticise Government policy. In so far as any criticism is implied in what I have to say it is more in the nature of self criticism. I mean that we are all involved, Government and Opposition, Minister of the Crown and private citizen. The plain fact of the matter is that for ten years past we have been swept along in a kind of orgy of inflation, which at one and the same time has increased the burden of taxation and made it easier to bear. How often have we heard Ministers, not only Ministers of this Government but Ministers of previous Governments, when they got into difficulties, saying, "Things are not so bad, and, after all, we are having these difficulties only because we have been so prosperous." My Lords, that is not the judgment of statesmen; that is the judgment of drunkards. It is precisely like saying, "The only reason that I feel badly this morning is that I had such a wonderfully good time last night." Indeed, there is a very close analogy between inflation, as we have had it over the past decade, and acute alcoholism. In both cases the condition of the body deteriorates and in both cases the patient himself feels much better than he really is.

As I say, it is not my purpose to seek a statement of Government policy. It is not my purpose to criticise Government policy. It is simply to consider, as objectively as may be and as impartially as may be, the effect of taxation at its present rates and at its present rates of progression, and the effect of public expenditure, which is the concomitant of that, upon the present condition and the future prospects of the British people.

My Lords, it seems to me that we stand in this country now at a very critical moment of time. It is rather like when the American settlers came to the continental divide. They had left the Atlantic watershed behind them and they were faced with an unknown country ahead, with unknown difficulties, unknown dangers, and, as it turned out, unknown opportunities, too. What we have been accustomed to think of as the post-war period has, I believe, come to an end. It came to an end with the events of last autumn. I think we all recognise that, in greater or lesser degree. And what we are looking forward to now is a future that is quite new. I would say that the main characteristics of the post-war period, which, as I say, has ended, have been a great and welcome increase in the production of British industry and a remarkable and equally welcome rise in the general average standard of the life of the British people.

Now there is more than one factor, I think, which accounts for these favourable developments. There has been a radical redistribution of wealth through taxation. There has been full employment, which has meant that there have been many more hands available for production. There has been the necessity to repair all over the world the ravages of the war. And there has been, too, through a great part of the period, an absence of normal competition in overseas markets. All this has been accompanied by a chronic inflation, which has created great hardship and savage injustice among some of the most valuable sections of the community, and which has exacerbated and made more intractable a recurrent balance of payments problem.

When we look at the new landscape that is opening up, what can we discern? The inflation may be under control now, but I think he would be a rash man who would say that it was permanently under control. We have averted the last balance of payments crisis, but he would be a very rash man who would say that in twelve months' time, eighteen months' time, there will not be another. At the same time, the favourable factors which operated in the post-war period are not operating to-day with the same effect. It is not possible really to conceive that anything further can be done for the standard of life of the British people by a further redistribution of wealth. It is not possible to think that there can be any extension, in present circumstances, of full employment. Every man's hand, every woman's hand, is fully employed at the present time. There is virtually an end of post-war reconstruction, and day by day we are conscious of an increase in competition in international markets. In other words, the unfavourable factors seem to be persisting while the favourable factors are losing much of their effect.

There are evidently great difficulties ahead of us, but there are great opportunities too. Yesterday in this House the noble Lord, Lord Mills, developed the Government's new programme for atomic energy applied to industrial uses. That alone might transform the outlook for our people in a few years' time. Then there is the European market and the free, trade area associated with it. That, too, might make an almost unbelievable transformation in the prospects, not only of the British people, but of the Western world as a whole.

Now I do not believe that we can develop atomic energy, as the noble Lord, Lord Mills, outlined the policy yesterday, without a reduction of the burden of taxation. If we try to develop it with the same burden of taxation, I do not see how we can escape another violent inflationary impulse. Nor do I see how we can possibly compete in a free trade area in Europe under the present rates of taxation. The proposition I am submitting to your Lordships this afternoon is simply this: that we can neither overcome the difficulties which face us nor seize the opportunities which are open to us unless the burden of taxation is reduced; and that means, of course, unless the level of public expenditure is reduced, too.

It seems to me that an industrial economy like our own depends mainly on two factors—human energy and the tools which are at the disposal of that energy for its use. In other words, it depends on incentives and investment. The economy of any industrial country—for example, the United States of America—depends on precisely the same factors. If we compare our position with that of the U.S.A. we see that they have there a higher standard of living, much higher real wages and much greater political influence. Of course, they have resources that we have not got. They have population that we have not got, and that makes a vast difference. But there are other countries with equal population and equal resources which do not enjoy the same standard of living or the same real wages as are enjoyed by the people of the United States of America—Russia, for instance. There is more involved here than just resources and population.

First of all, I believe that there is a deep psychological difference in the attitude of the average American and that of the average Englishman towards wealth as such. The American bases himself upon Ambition. If he can get ahead, it does not concern him that others get ahead too—perhaps even further ahead than he. The Englishman of these days seems to base his outlook not upon Ambition but upon Envy. He is far too inclined to ask, not, "What am I going to do myself?", but rather, "What is that other fellow doing and how can I stop him from being better off than I am?" The Leader of the Parliamentary Labour Party has more than once asked: how can one expect people to work harder when they see others so much better off than they are themselves? That is not the American attitude.

LORD PAKENHAM

My Lords, may I interrupt the noble Lord? Can he give the reference for the statement from the Leader of the Parliamentary Labour Party from which he has just quoted?

LORD COLERAINE

My Lords, I am afraid I cannot give the noble Lord the reference now, but I could find it very easily and I will try to find it in the course of the debate; but I am quite sure that on more than one occasion the Leader of the Parliamentary Labour Party has evinced sentiments of that kind. I believe there is this deep psychological difference between the United States of America and ourselves, but there are two very great practical differences: there is far more investment in the United States and there are far many more and greater, personal incentives. More use is made of energy and of the tools which are at its disposal.

I should like to recite three brief facts which I have recently culled from the newspapers. One is that the horse-power at the disposal of the American worker is 2½ times that at the disposal of the British worker. The second fact is that the International Longshoremen's Association recently settled for a basic rate of 2.80 dollars an hour; of course, their earnings would be at a much higher rate than that. The third fact is that a Mr. Harlow Curtice, who, I believe, makes motor cars, had in the year 1954 a net tax-free income of more than £40,000. I believe these three facts, which seem to have no relation to each other, to be very closely connected. If it were not for the personal income of men like Mr. Curtice, and hundreds of others like him, there would not be at the disposal of the American worker 2½ times the amount of horse-power that there is at the disposal of the British worker; and if there were not that amount of horse-power at the disposal of the American worker, then it would be quite impossible for the International Longshoremen's Association to secure a basic rate of 2.80 dollars an hour. I believe that is something on which we might ponder.

There are these two factors in our economy—incentive and investment. I believe that in practice it is only through the savings of individuals or of companies that we can accumulate the reserves which are necessary for investment. After all, investment is not just a matter of a number of gentlemen sitting round a board table and deciding what they shall do. Investment ultimately is, and must be, the withdrawal of present consumption from present production in order to invest for the future. And I maintain that taxation to-day makes it really impossible for either individuals or companies to put aside for investment sufficient of their present production. So far as companies are concerned, income tax and profits tax are both very high. There is, additionally, the tax on undistributed profits which I believe is self-defeating. There are, in most cases, inadequate, sometimes grossly inadequate, depreciation allowances.

I said a moment ago that I believed ultimately savings could come only from individuals or companies, and I know that many people (I dare say some noble Lords opposite) believe that savings for investment can come through Government action by the accumulation of a Budget surplus. I admit that, as a theory, it is perfectly watertight: if the Government take away from other consumers, whether individuals or companies, purchasing power, and if the Government do not themselves expend that purchasing power, there will be a margin for investment. But though the theory is absolutely watertight, though the theory is mathematically perfect, it breaks down in practice, and it does so because these islands are inhabited not by digits but by human beings. If the Government, for whatever noble purpose—whether for defence or for social services or for investment—take more than a certain proportion of the national product, the consumer reacts. Especially does he react in a time of full employment. He demands higher wages, and he gets higher wages. All you have done by seeking to create a Budget surplus is to give another boost to the inflationary spiral.

I have spoken about investment, about the tools which we use, upon which so much of our prosperity depends—what about incentives? And there, again, is it not worth while looking at the United States of America to see what happens there? I instanced the case of Mr. Harlow Curtice with his £40,000 a year net income. But it is not only he and people like him who are more comfortable in the United States; the working man with his £40 or £50 a week is more comfortable too. And in quite a number of industries, in quite a number of parts of the United States, earnings of that order are not uncommon. The young professional man and the young manager as well have wonderful opportunities.

I should like just to give the House a few figures bearing on comparative rates of taxation in the United States and in this country. It is a little difficult to be precise, because the comparison depends very much on what rate of exchange you select. My comparison is based on a rate of 2.80 dollars to the pound—the official rate of exchange. I think that that is probably an unfair comparison, because it takes too much account of the difference in the standards of life between America and this country. On the other hand, if you take a rate of 5 dollars to the pound the result would not be very different, but the equation, I think, would still be at fault the other way. On a basis of 2.80 dollars to the pound, then, the man with £3,000 a year in this country has £950 taken from him; in the United States he has £444 taken from him. A man with £4,000 a year in this country has £1,550 taken from him; in the United States he has £670 taken from him. A man with £8,000 a year here has £4,400 deducted; in America, he has £1,880 deducted. I am speaking of a married man with two children and earned income in both cases.

The superiority of the United States, as I judge it, in this respect, is emphasised and underlined by the range of income which I have selected, because that is the range of income of younger management, the young man who is just coming up into management, who is going to assume new responsibilities, who is going to get ahead and carry his business with him. I believe that these figures are immensely important, not only for what they state but for what they imply. And what they imply is not just that real salaries are higher in the United States but that real wages are higher as well. It is a truism that there are no such things as bad troops; there are only bad officers. I think it is probably equally true that there is no such thing as a bad workman; there is only bad management. The level of real wages, I believe, depends at least as much, and probably more, upon management than upon collective bargaining. Collective bargaining can affect, and does affect, wages in monetary terms. But very often it leaves real wages no better. All management, whether it is good or whether it is bad, can and does affect real wages.

But it is not only the burden of taxation which acts as so great a disincentive in this country; it is injustice, too. What justice can there be in surtax beginning to-day at a level of £2,000 a year? The theory of surtax is perfectly well known; it is the theory of progressive taxation, which probably we all accept in greater or less degree. The theory is that at a certain level a man becomes a rich man and, therefore, he can contribute considerably more than his less fortunate fellow-citizen. But consider that figure of £2,000 in terms of to-day's values and in terms of pre-war values, even in 1938. What we are seeing to-day, in effect, is that the surtax level begins not at £2,000 a year but at something like £600 a year, because that is the value of £2,000 a year to-day in terms of pre-war when surtax was invented.

Then there is the question of the earned income allowance. The basis of earned income allowance is that earned income is worthy to be admired and has a social purpose; unearned income, on the other hand, is not so admirable and of doubtful social value. I do not take that view. But that is the general basis of earned income allowance, as I understand it. If that is so, why in the world should earned income be socially valuable up to £2,200 a year (or whatever the figure is) and then suddenly become something despicable and objectionable?

Another injustice is the way husband and wife's income is treated here. It is treated quite differently in the United States. A wife nowadays has property distinct from her husband because that is thought to be her right. Why in the world does she not have income distinct from her husband? Then there is the question of education. Why should a man who is beneath the surtax line have an able son educated at the university at the expense of the State, whereas a man with £2,100 a year, however able his son may be, is required to educate him at his own expense at the university?—and in present circumstances cannot do so because he cannot afford to do so. Surely there is no kind of reason or justice in that.

I believe that these two factors, the burden of taxation and the plain and obvious injustice of much of our present taxation system, have a profoundly debilitating effect, which is becoming progressively more marked. I am not expressing an opinion: I am stating a fact, and it is a fact that is reflected in certain trends in the present emigration figures. I am not against emigration. I think it is of value to the world and to this country that a proportion of the best British people should go abroad to other parts of the world, but if that is carried too far, it can be a disturbing symptom; and it is a very disturbing symptom to-day.

Perhaps your Lordships saw in the Observer, a month or so ago, an inquiry into the attitude to emigration of undergraduates at Cambridge University. The inquirers took a sample of undergraduates in their second year and in their final year. They found that more than 11 per cent. had definitely decided to emigrate and that a further 27 per cent. were actively considering emigration. An important element was that of that total, 44 per cent. were science students—in other words, just the kind of men we can least afford to lose. In the great majority of cases, the cause of this decision was given as lack of incentives and high taxation.

That is confirmed by some statistics that have been furnished to me by the professional institutions. Last year, of the new entrants to the Institution of Mechanical Engineers—that is, of young qualified men—more than 10 per cent. left for the United States and Canada; of entrants to the Institution of Electrical Engineers, 5½ per cent.; of those to the Institution of Production Engineers more than 11½ per cent., and of those to the Royal Aeronautical Society, 121 per cent. More than one-tenth of those upon whom we are going to rely for the development of atomic energy, for the development of aircraft and for the development of defence by guided missiles and so on, are leaving this country because they find conditions here unjust and intolerable. A day or two ago, my noble friend Lord Home said in your Lordships' House that he considered these alarmist reports exaggerated. I do not believe that these reports are alarmist: I do believe that they are extremely alarming.

I said at the beginning of my speech that I did not expect a statement of policy from Her Majesty's Government. I must add to that comment that I cannot advise them on their policy. Sometimes my mind goes back to 1940. I knew in the early summer of 1940 that this country had to be defended, but I did not know how it was going to be defended. I know to-day that public expenditure has got to be controlled and that the burden of taxation has got to be reduced, though I cannot say how it will happen. All I can say, with a feeling at any rate of assurance, is what will happen if this is not done. Much more is at stake than any question of prosperity or living standards. I believe that free society itself is at stake. I believe that our Parliamentary institutions are at stake. For far too long in this country economic policy has been a matter of bargaining between politicians of all Parties and voters of all classes, whereby the voters sell their votes to politicians; and the price they are paying, though they do not know it, is their future. I am certain that, unless we pull ourselves together, democracy as we know it, Parliamentary government, must come to an end. It has happened before. It has happened elsewhere. It could happen here, and it could happen soon. I beg to move for Papers.

3.27 p.m.

LORD PETHICK-LAWRENCE

My Lords, we have had a very interesting speech from the noble Lord, Lord Coleraine, and we are greatly indebted to him for inaugurating this debate to-day. He will not expect me straight away to attempt to deal with many of the suggestions which he brought forward in the course of his speech. Perhaps I may be permitted to say this. A great many of the things he said, of course, are non-controversial: that taxation is very high; that it is important that people should save, and that it is only people who have got any money who can save. All that is perfectly true. But he also said a great many very controversial things which, were the debate to confine itself to the points he raised, would have to be debated quite hotly between one side and the other. For instance, he purported to quote from my right honourable friend the Leader of the Labour Party. He did not quote his words—no doubt he could not have done so on the spur of the moment; but it is not fair to make a statement alleged to be the statement of a prominent man without producing the actual words, because, at best, what the noble Lord said was an inference which he drew from some statement made by my right honourable friend. I venture to think, speaking from knowledge of my right honourable friend, that he never would have made the statement attributed to him, and in those circumstances I think that it would be rather better if accusations of that kind were not made.

LORD COLERAINE

My Lords, may I say to the noble Lord that I stand in error for not having brought the reference with me? I believe that what I said represents what the Leader of the Opposition did say, but I will check the point, and if I find out that I am wrong I will unhesitatingly withdraw it before the end of the debate.

LORD PETHICK-LAWRENCE

My Lords, I am obliged to the noble Lord, but I do not think that that quite covers the position. I think that a statement of that kind ought not to be made without quoting the actual words, because it is certainly not the sentiment of my right honourable friend. I have never known him to suggest that one man ought not to save because some other person is getting too much money. I think that is quite foreign to the views of the sensible politically minded people in my Party and those of us who sit on this side of the House naturally resent a little that the imputation should have been made. I do not want to press it too far, but I thought I should point out the fact.

There was one other thing which the noble Lord said on which I should like to comment. He said that companies, owing to the heavy taxation to which they were subject, could not be expected to save to cover capital expenditure. It is all a matter of degree. In the figure that I have here for 1955, so far as I can understand it (I have only just had this piece of paper handed to me), no less than £1,496 million, representing undistributed profits of companies, was being saved to provide capital for the future. I am not going to suggest that the amount could not be more, still, but that is a considerable sum.

I would remind the noble Lord also that a large sum of savings is contributed every year by people in the lower ranges of income tax. I have said in this House—I think I said it on the last occasion that I spoke on finance—that it is most important that the people in the lower ranges of income should be encouraged to save more; and, to that extent, I am fully in agreement with the noble Lord. But even as it is, they do save a great deal—last year I believe that these smaller savings amounted to over £100 million. The noble Lord must remember, too, that a great deal of the savings of what are called the "working classes" go into building societies when these people are buying their own houses. Although I should not disagree with some of the things the noble Lord said, perhaps he would think again about the generalisations he has attempted to draw from some particular facts which he ventured to lay before your Lordships. With those remarks, which are naturally rather inadequate, I want now to turn to some wider aspects of the financial question.

Your Lordships will have noticed that I have a Motion on the Order Paper which goes a little further than the Motion of the noble Lord: To call attention to the present economic and financial situation; and to move for Papers. I put it down because I thought that in this debate we might as well cover the wider aspects of finance, and I thought that your Lordships would allow me to develop some other aspects in addition to that which the noble Lord has so interestingly put before your Lordships. With a view to taking part in this debate, I have read through the latest Government publication in January last called Economic Trend, and I have also read a number of other statistical and economical papers, as no doubt many of your Lordships have done.

My conclusion—and I think in all probability it is the conclusion of a number of other noble Loads who have travelled the same road—is that not a very clear picture emerges from a study of all these papers. Whether we look at production, the state of trade, the rates of exchange, the gold reserves, the level of prices, the standard of living, or whether we direct our attention to the peril of inflation, the feeling is neither one of complete satisfaction nor of utter dissatisfaction. I should describe the degree of prosperity in this country at the present time as middling. If, as I believe to be true, we have in a sense stagnated during the last year, we have not appreciably gone back. If we have not entirely solved and scotched the germ of inflation, we have at least checked the more violent forms of the disease. Now that we have leached, and perhaps passed, the nadir of our fortune, it seems to me that the time has come to consider which of all the nasty medicines the Government have compelled us to swallow in the last year were really necessary, and how far they have contributed to our prospect of recovery.

Before I come to that, however, I feel it incumbent on me to say a word or two—and I promise your Lordships I shall be brief—on how far the doings of the Government or, perhaps I should say, of the late Government have aggravated cur difficulties. There is no doubt that the Suez action, whether it was right or wrong, wrought immense damage to our economy. It upset the carefully estimated calculations made by the Chancellor of the Exchequer for the Budget; it ran down perilously the gold and dollar reserves; it bumped tie exchange value of sterling along the bottom of the gold points; it compelled the Chancellor of the Exchequer to go hat in hand to the United States Congress, who sent him empty away. It is necessary to mention these things, because no account of our present difficulties would be complete without them. Further, it is not possible to disentangle the effects of Suez from the general effects of the financial policy of the Government. But, Laving said what I have on this matter, I do not propose to develop the argument any further.

I return, then, to a consideration of the financial policy of the Government and of Chancellors of the Exchequer from 1951 onwards. It is part of the propaganda case of the Conservative Party that, whereas the wicked Socialist Government delighted in binding private enterprise with restrictions and controls, the Tory Party exists to "Set the people free". But the unfortunate thing is that that statement does not coincide with the facts, and it is, in reality, largely a myth. The two Labour Governments after the war found themselves confronted from the start with a large mass of controls and restrictions which had been imposed not by the Socialist Party, as such, but by the Coalition Government, and were quite necessary—and I think most Members of your Lordships' House, to whatever Party they belong, will agree—during the war. During the course of the Socialist Administrations a great many of those restrictions and controls were taken off; and when the Conservative Government came into power in 1951 they took off a further number, and they went on taking off these physical controls.

But—and this is what many members of the Party opposite do not realise—their Government not only retained financial controls but laid great stress on them, to such a successful degree that the Bank Rate had gone up from 2 per cent., at which it had stood ever since 1932 (with the exception of three months in 1939) to 5½ per cent. No responsible Chancellor of the Exchequer belonging to the Party opposite, and no responsible Minister, would be so foolish as to suggest that, in this modern age, the Government can dispense altogether with planning. That may be suggested outside this House and outside Parliament, but every responsible man in the Conservative Party must realise that planning of some kind or other is necessary. If that were not so, then I should be inclined to say of the Tory Party what my noble leader said a few days ago in this House of Members sitting on the Liberal Benches: that he was watching the decline and fall of their Party. But we are not witnessing that, because no Tory Government is foolish enough to do away with planning altogether.

The real issue is not whether we are to have controls or no controls; it is not whether we are to have planning or no planning; it is not even whether we are to have exclusively physical controls or exclusively monetary controls: it is the degree of reliance placed on the physical or monetary controls that are going to be adopted. The two principal Conservative Chancellors of the Exchequer, Mr. Butler first and the present Prime Minister afterwards, have gone "hot" for the monetary controls and, as I say, they put the bank rate up to 54 per cent. They have argued that inflation could be stopped only by this great rise in the bank rate. Your Lordships will remember that I have throughout taken an entirely different point of view. I have urged them not necessarily not to use monetary means but to recognise that that was a subordinate method of controlling inflation, and not the main method to be adopted. I have urged them to eke out the effects of monetary controls by more selective methods of control, instead of what I called before, and I call again, the blunt bludgeon of a high bank rate.

What I am going to claim to-day in this House is that a considerable body of orthodox financial opinion has now veered round to my point of view. This has happened not because of any victory of theoretical argument, but because of the much more compelling argument of the logic of events. Now what have events shown? They have shown, in the first place, that in these modern days When we have a large floating debt—great numbers of Treasury Bills and all the rest of it—and in these days of modern banking and modern company methods, the naked imposition of dear money by an increase in the bank rate is by no means the sure and rapid means of scotching inflation that it was believed to be, and probably was, in the Halycon days of the gold standard at the end of the 19th century and at the beginning of the present century. I do not think that would be denied by anybody who knows anything about finance. It has been shown, in the second place, that dear money is very expensive to the Government itself, and very unfair in its application to various sections of the public; that it is liable to cause an increase in prices and costs not easily distinguishable from the inflation which it is supposed to be designed to cure. It has been shown, in the third place, that other ancillary methods, such as advice to the joint stock banks, and making rules and regulations for hire purchase, may be at least as efficacious as, and perhaps even more efficacious than, the raising of the bank rate and dear money itself.

I believe that I shall not be contradicted when I say that a large number of people (I do not say everyone; I would not say that for a moment) who thought that dear money was the one panacea by which inflation would be checked, have come round, in the course of the years, to my point of view. Your Lordships will find proof of that, if you have not admitted it already, in a good many newspaper statements by financial experts in the financial columns of the Press. Curiously, I have some kind of support for it even from the Chancellor of the Exchequer himself, because when he announced in the House of Commons some four weeks ago that the bank rate was going down from 5½ per cent. to 5 per cent. he said [OFFICIAL REPORT, Commons. Vol. 564 (No. 47), col. 606]: This is not a signal for bankers or others controlling sources of finance to relax credit or to ease restrictions on lending. Surely, by saying that he abandoned the claim that the height of the bank rate was in itself a measure of the squeeze imposed. I feel that there is much greater support for my thesis to-day than there has been on previous occasions when I have laid my views before your Lordships. It may well be that the Government themselves are prepared to go to a certain extent in my direction, and to admit that the bank rate, certainly alone, perhaps not even mainly, is not the right means for combating inflation. I do not feel sure that that is so; and still less do I feel sure that there does not linger in the affection of a number of people, whose business it is to advise the Government, a hankering after dealing with the whole question of inflation and other monetary and economic evils of the country by the sole hard knock of the bank rate.

That being so, I have a suggestion to make to the noble Viscount who is to reply, and I hope that he will give it careful consideration. As there is a large body of opinion which has come some way, at any rate, to meet my point of view, I suggest that the time has come when it would be a great advantage to appoint a Royal Commission, or some other appropriate body, to investigate this problem and to discover whether, if ever inflation rears its ugly head again, we have to burn down the whole house to get roast pig on this occasion; and by careful investigation, whether in these days, when we have this large floating debt, and other gadgets and methods of finance which were quite unknown at the end of the 19th and the beginning of the 20th century, the time has not come to produce some new weapon to deal with inflation that will not involve the ugly consequences which have necessarily followed the over-emphasis on this one method of meeting it.

I remember—and I expect a great many noble Lords do—what was called the Macmillan Committee and the Report that it issued some quarter of a century ago. In case there are some younger Members of this House who do not go back as far as that, I should say that it was nothing to do with the present Prime Minister. It was called the Macmillan Report because of Lord Macmillan, who was the Chairman of the Committee. One of the useful services that that Committee performed was to discover what afterwards came to be known as the "Macmillan gap". The Macmillan gap meant that, while it was easy to raise money in the City for large enterprises in this country, and very easy for foreign enterprises to raise money, a large number of worthy firms could not get the required capital because they were not big enough and because they were British and not foreign. The Macmillan gap was something which this Committee discovered.

I venture to hope that the Government will take quite seriously the suggestion I am making—it has been made elsewhere—that the time is now ripe for the setting up of some form of Committee or Commission which will thresh out this question thoroughly. This is not really a Party question; it is a question of finance, which ought to be threshed out by people of knowledge and intelligence giving evidence. I understand that the noble Viscount, Lord Hailsham, is going to reply to this debate, and although I cannot expect him to get up and say that he agrees on behalf of the Government and that they will do it at once, I hope that he will say that the Government will, at his initiation, give this matter very careful thought and, if they find it desirable, will adopt the proposal. At any rate, I hope he will be able to assure me that the matter will not be lost sight of but will be considered carefully, thoroughly and seriously by the Government.

3.53 p.m.

LORD GRANTCHESTER

My Lords, in initiating this debate, the noble Lord, Lord Coleraine, has done a service in focusing attention upon the level of public expenditure and, as a consequence, the high level of taxation and other evils not so apparent but none the less very real which inevitably follow in the wake of high expenditure. The noble Lord, Lord Pethick-Lawrence, has widened the scope of the debate and contributed to it in one of those surveys at which he is so adept. I propose to confine myself to a much narrower field. In this matter of taxation there is so much confused thinking. Our society has become so complicated that it is necessary to go back, I think, to a few basic principles for a foundation.

In the days of absolute rulers, the people of this country made clear that the right to tax was not a privilege conferred upon those rulers, but they have not been so successful in modern times. Perhaps they have been deceived by the delusion that, under a system of universal suffrage, taxation is levied and paid by the same people, but that is very far from the truth. In a simple society it may still be true, but it is not true in the society in which we live in this country. In view of that, I suggest that the maxim that there should be "no taxation without representation" needs restating, so as to bring us back to the principle that taxation should be with the consent of the taxed. Taxation which is not justified in the eyes of the taxed is an affront to a free man. It has to be justified both as to its purpose and as to its extent.

It has become the fashion to-day in many circles to speak as if the State had the right to all the earnings of its citizens; that it was justified in retaining so much as it believed it required, returning only as much as was necessary to keep the citizen still working. Even Conservative Chancellors of the Exchequer have talked of having "nothing to give away," and some economists have aided and abetted them by advising them to "mop up" purchasing power in order to prevent the citizen from exercising the rights of ownership over his earnings. We shall have done a service if, as a result of this debate, this fundamental thesis that taxation must be justified is more widely accepted. I think we shall all agree that it is justified for the purchase of common essential services which are equitably distributed. I think we should all agree that it is justified to meet the welfare of the needy. I need not go into the first category. We have learnt that security is a relative term and that we may as well limit our expenditure to what we can afford. I think Her Majesty's Government are now alive to this necessity and that they are planning accordingly.

So far as contributions for welfare are concerned, we may perhaps remind ourselves that the Jewish law settled for 10 per cent. of income, with a bonus, I think, in every seventh year; but there was no suggestion of progressive income tax. There was no suggestion of a highly-graduated system of taxation which has been called "the supreme danger of democracy." It was a flat rate on income. There was no question of discriminatory taxation. May I suggest, or repeat, that the sooner purchase tax is replaced by a sales tax the better, not only because purchase tax is discriminatory but for other reasons which I need not go into now, one of them being the arrangements that we hope to make in the European common market.

The point is, surely, that if taxation becomes an instrument of coercion against a minority or a group, it is not only an instrument of coercion but it becomes an instrument of tyranny. In the complicated mechanism of our modern State we are quite willing to have the collective administration of funds which provide for the welfare services so far as they are not paid for by contributions. One does not want to see anyone in need, and to ensure this efficiently in a modern State central administration is essential; but we must be sure that it is need which is being met.

My Lords, I have referred to taxation as becoming an instrument of tyranny. I should like to ask your Lordships to think for a moment what safeguards there are in this country against that kind of tyranny if it is found intolerable and if a person is one of a minority, or belongs to a group which is ill-organised or is not sufficiently vocal. We have in this country no written Constitution to which he can appeal; we have no Supreme Court which can protect him. Relief against this kind of tyranny, which means the effective confiscation of a man's earnings, is not yet included in any convention of human rights. What can a citizen in this country do? In former days he could pack up and emigrate. He has a much smaller opportunity to do this to-day. It is more difficult to find a country to go to, and he can take much less with him than formerly. But, as the noble Lord, Lord Coleraine, has said, the number of people seeking to emigrate should make us think, and ask whether it is because they are being deprived of the rewards for which they work, or think that they will be deprived of the rewards; if they stay here and work.

It is noteworthy that citizens in this country have much less opportunity than those in any other Western European country at the present time to protect their savings, because they still have no right to buy foreign currencies and they still have no right to buy gold—a right which has been restored in every other Western European country. I should like to ask Her Majesty's Government when the right to buy gold will be restored to British citizens. In some countries this right is regarded by the Government as one of the weapons in the fight against inflation. If every citizen who buys a little gold for a twenty-first birthday present or a wedding present watches the price of gold rising, that is a signal that inflation is creeping on again, and a warning; and it helps to have such a signal which is being watched by the citizens of a country.

In painting the picture in this way, I may be asked how the economy has been kept going at all. The noble Lord, Lord Pethick-Lawrence, referred to the fact that it could not be described as bad—it was middling, but at least it has been kept going. The Royal Commission on Taxation, looking back, reported that the disincentive effect of high taxation was perhaps not so great as might have been expected. It is true that, looking forward, they could not prophesy what its effect might eventually be upon a coming generation. But I think the Royal Commission might have looked a little further, The economy has been kept going, in my view, because the life of those in employment has been increasingly cushioned since the war. Life has been made more comfortable in working hours. For example, I think that nearly half as much more office space per employee is taken up than before the war. Homes in the cities and in the country have been converted into offices—and some of them make very nice offices. In addition, there have been many what I would call undesirable innovations by no means all affecting the better off in business. But more comfort in the office is not a substitute for less money to spend in the home. The economy may be kept going at the expense of the cultured life. It is the cultural values in the home which are destroyed by over-taxation, which is particularly unfortunate at the beginning of a new scientific and technical age.

The noble Lord, Lord Coleraine, has already quoted some of the figures of comparison between the amount left in the hands of the managerial and professional workers in this country compared with the amount left to those who perform the same function in other countries. A table was given in the Financial Times of, I think, February 23. It is not necessary for me to quote the figures; anyone who is interested can look them up. It is clear from the figures that those in this country have much less to spend after taxation than in any other country. But these figures do not give the whole picture. The disparity in reality is much greater than those figures suggest or show, at any rate so far as European countries are concerned. The figures which were given in the Financial Times and which the noble Lord, Lord Coleraine, quoted, are worked out on the basis of the rate of tax applicable in the countries mentioned. But the position cannot fairly be judged on the rate of tax without taking into account the method of fixing the assessments upon which the rate is charged.

Most European countries have not at their disposal a highly qualified body of accountants such as we have in this country, who are of inestimable assistance to the Inland Revenue. The taxation officials abroad, so I am given to understand by those who have to deal with them, are much more lenient in fixing the assessments, both personal and company, than the officers of the Inland Revenue in this country. The noble Lord referred to the surtax level. Surely we can all agree that it is ridiculous, with the £ worth only 7s. 10d. of its 1939 value, that the surtax level remains unaltered. If this group of taxpayers had any shop stewards I am sure they would be ringing bells all day long.

I think there is general agreement that taxation must be cut to give our citizens a chance to live the life for which they work, and to enable business to survive in competition with other countries. Taxation can be cut only if expenditure is reduced, because such expenditure as can be afforded—surely the test for expenditure is what can be afforded—must be paid for either by taxation or by the raising of money on the market, if inflation is to be avoided. In discussing the economic position, the financial position, taxation or any other related matter we cannot get away from this question of inflation.

I think we must speak plainly on this matter. It is nothing but sheer dishonesty for a Government to incur liabilities, either on its own behalf or on behalf of the nationalised industries, and then to pay the bill by increasing the note issue or by the issue of Treasury Bills. Unfortunately, Parliament has proved no check against this sort of dishonesty. In spite of various funding operations, Treasury Bills are five times as many as they were in 1939 and the note issue is over four times what it was in 1939, while production is up only by 35 to 40 per cent. It is no wonder and no mystery that the price level is, on an average, up by three times. That is the inevitable result, and it is the direct responsibility of successive Governments which have been unable to refrain from overspending and have created this credit to pay for their overspending.

To that extent I agree, therefore, with the noble Lord, Lord Pethick-Lawrence, that it is not bank rate, it is not the credit squeeze and interference between the banks and their customers, that should be the instruments to deal with inflation. It is the Government's responsibility to cut expenditure and the creation of credit which goes with over-expenditure. Noble Lords will not be surprised to hear me say that I do not believe that cheap or dear money should be determined by the Chancellor of the Exchequer or that he should even announce changes in the bank rate. I think the price of money should be determined by the ordinary laws of supply and demand, and that, intervention apart, the price of it is a result of the demand for it.

In discussing this problem of checking inflation, it is interesting to note that the Party of noble Lords on my left when the Labour Government was in office refused to trust the German Parliament in the matter of the creation of credit, and insisted on a central bank to act as policeman. They were so right that the strength of the German mark to-day is a tribute to the great favour that the Labour Government helped to confer upon the German people. To-day every German is grateful to them. But, unfortunately, that same Government trusted Parliament in this country, in which they then had a majority, and destroyed the independence of the Bank of England and so any check that the Bank of England could have had upon this matter of the creation of credit, making the Bank of England just a tool of the Treasury. I should like to ask Her Majesty's Government how long they are going to wait before they give us in this country the same safeguard that the Labour Government, when they were in office, helped to provide for the German people.

Now I am coming to the matter that the noble Lord, Lord Pethick-Lawrence, raised. I was not going to ask for a Royal Commission; I was going to ask for a Select Committee. I think Her Majesty's Government may well say that they would like a matter such as this studied further by experts. If the Government feel, as I do, that the general question of monetary policy also needs review, I hope they will agree to the plea which the noble Lord made and which I should like to reinforce, at any rate, for a Select Committee to be appointed to look into some of these difficult matters and to report on them. There are a number of Members of your Lordships' House who are well qualified to serve on such a Committee. The British banks and other institutions have great experience in the provision of credit at home and abroad, and there is not a city so able to consider matters like these as the City of London. I should like this Committee to consider not only the matter which the noble Lord, Lord Pethick-Lawrence, has suggested, but other matters which I think are part of the same general problem; the place, for instance, of the central bank; the function and use of the conventional instruments of monetary policy; the relative value of private savings through Governmental channels, such as the National Savings Movement and Premium Bonds, compared with private savings invested either directly in industry or indirectly in industry through the institutions.

In the international field. I think this Committee must consider, for instance, the effect of American aid on the price structure of commodities, which is a very important matter for the trade of this country. It must consider the effect of American aid on the national currencies of the countries which accept American aid. I suggest that that may be found to be an inflationary factor. It must consider the results of the concentration of economic development in the hands of Governments, which is again largely due to American policy, instead of the promotion of diversification through the operation of the market and individual enterprise. All these are matters which need urgent study on the highest level. It is possible that the answer may be the old answer of the classical economists, a free market economy built on a foundation of sound money. Add to this, the administration of subsidies for the needy, the building of a welfare society as it should be and not necessarily as it is. But, my Lords, I do not want to speculate on what the results of this inquiry might be. We should certainly come out of such an inquiry with a better understanding and a clearer picture of some of the economic difficulties with which we are faced and of the economic position of the world generally. Perhaps we might get a few new good ideas which would help us all. I cannot urge too strongly the desirability of this inquiry.

4.18 p.m.

VISCOUNT WAVERLEY

My Lords, I hope I shall not have to claim the attention of your Lordships for very long, but the debate in which we are now engaged touches so many matters to which I have had to give attention at one time or another that I feel I perhaps have a duty to make what contribution I can to the elucidation of what many of us, I am sure, feel is a very perplexing situation. I venture to say that I have no doubt that there are two main preoccupations which must be occupying the attention of the Chancellor of the Exchequer at this moment. There are, on the one hand, those considerations which affect the total burden of taxation upon this community, and on the other hand those affecting the balance of payments, the state of our reserves. They are, of course, not unconnected, but I should like at the outset to deal with those two sets of considerations separately.

It has been asserted, and I think with perfect justification, that the total burden of taxation in this country at the present time is greater than in any other civilised country, by whatever standard the measurement may be made. In that connection my noble friend, Lord Coleraine, drew a striking comparison with the United States. I should like to return to that point a little later. Meanwhile, I would merely say that the fact that the total weight of taxation to which we are subjected is greater than in any other country must tend to check enterprise, and must tend to discourage private saving and to stimulate capital consumption. As my noble friend Lord Coleraine pointed out, it must be an inducement to young men of promise to emigrate and it must tend to hamper the establishment in this country of branches of businesses overseas. These are matters that have quite recently been most effectively dealt with by Professor Paish and by the noble Lord, Lord Heyworth, in his Stamp Memorial Lecture.

I have referred so far to general tendencies. I now wish briefly to emphasise certain special features of our system of direct taxation. The first point I wish to make is one to which I believe great importance should be attached, though singularly enough it seems almost to have escaped attention so far: that a progressive tax (and I am speaking now of income tax and surtax) in an inflationary period takes an increasing proportion of the income of the taxpayer, even while rates remain unchanged, because the taxpayers are pushed up and up into higher levels of taxation; and the effect is all the greater if real national income is rising, because there again, more and more come into the higher levels of taxation, not of real income but of money income.

The effect of rising prices in increasing the proportion of real income (not merely money income) taken in tax is only one factor affecting the proportion yielded by constant rates of tax. There is a second factor, which is the tendency for the proportion of income received by higher income groups to fall. That tendency is already in evidence. I will not stop to go into the reasons for it, but the statistics are quite clear. The fact seems to justify the conclusion that lower marginal rates might, in the recent past, have yielded more in tax revenue than the rates that were actually in operation. I should like to return a little later to the conclusions to which this argument seems to lead.

For the moment, I want to say a word on the second set of considerations which I said at the outset must be claiming the attention of any Chancellor of the Exchequer. I am sure there is no need to stress the importance of stepping up investment and increasing productivity; but we must always be alive—and a Chancellor of the Exchequer must always be alive—to the danger that this might be done at the expense of an increase in external debt or at the expense of a loss of external assets, which is what has happened from time to time in the past. There is a tendency to rely on a large Budget surplus; but such a surplus, compensating for a deficiency in other forms of saving—and primarily of course, a Budget surplus must be regarded as a form of saving—may defeat itself by choking the springs of enterprise, if that surplus is obtained only by increased taxation. In this connection the weak financial position of our national industries is a disturbing factor, and in this particular instance, at any rate, pegging prices or charges, which is sometimes suggested, is bound to be a dangerous expedient, because it reduces the surpluses of the public corporations; and there will be the same effect in regard to undistributed company profits. I emphasise, therefore, that a rise in income with stable prices must be inflationary in tendency unless the increases are fully offset by voluntary saving.

Let us look back for a moment at what has happened quite recently. In the two years up to the end of 1955—and that Was before Suez—our reserves fell by no less than 400 million dollars. In the same period the price index went up by 10 points. Compare now the position in France and Germany. There the reserves went up, not down, by 1,000 million dollars. The price index in France went up 2 points and in Germany 4 points. During that period in the United States of America the price index was steady. During that period of two years, the increase in the volume of spending was greater than the increased flow of goods; in other words, there was an increase in the supply of money, and this is very material to what the noble Lord, Lord Pethick-Lawrence, had to say about the monetary weapon. The increase in the supply of money, and not a deficiency of production, was our trouble. I suggest that, an such circumstances, monetary control and appropriate fiscal measures should go hand in hand. In my opinion, with great respect to the noble Lord, Lord Pethick-Lawrence, it would be utter folly to discard the instrument of monetary control; but certainly reliance should not, in my opinion, be placed on that alone.

LORD PETHICK-LAWRENCE

I do not want to interrupt the noble Lord, but that, in effect, is what I said. I do not propose to discard the monetary weapon. I say that it should take its place with others and not be the main or sole support.

VISCOUNT WAVERLEY

My Lords, perhaps I was wrong, but I thought the noble Lord wanted monetary control to have a subordinate and unimportant place. It may in certain circumstances be of the greatest importance. And as I am speaking of fiscal measures, may I just refer, in passing, to one such measure which was suggested in the White Paper on Employment Policy which some noble Lords may recall was issued during the lifetime of Mr. Churchill's Government? I believe the Labour Government later showed some inclination to act on what was there suggested, which was that power ought to be taken to step up or to reduce insurance contributions according to whether the tendency of the moment was inflationary or deflationary.

That brings me to the point that there is in all these matters not only an economic factor but also a psychological factor; and it seems to me to be rather an odd circumstance that after the last war the emphasis was always on the danger of deflation, with hardly any reference at all to the danger of inflation. That was no doubt a consequence of what happened in the recollection of many after the First World War, when there was disastrous deflation. But my point is that in such an atmosphere, direct physical controls assisted by Budget surpluses may tend to be ineffectual, as indeed they proved to be. Monetary measures at that time were neglected, perhaps because they had been tried earlier and had failed. They were not even resorted to when the drastic step of deflation was taken. It was only later that the monetary weapon was brought into use. Then, when it was brought into use, after being effective for a time, it began to lose its effect, perhaps (though I do not know) because of the investment allowances and a reduction in taxation.

Now, as the noble Lord, Lord Grantchester, emphasised in this connection, account must always be taken of the disturbing effect of a great volume of short-term debt which is equivalent to money, and which must be dealt with at a time when the monetary weapon is being resorted to. In these circumstances, it is surely necessary that attention should be concentrated mainly on economies—economies falling into the sphere of policy. What scope is there there? Of course there is defence. It attracts everyone's attention, but I would venture to utter a warning against expecting too much too soon from economies in the sphere of defence. There is the question of subsidies. There I shall no doubt be striking a controversial note, but it appears to me that there is, and will be for some time, great scope for economy in regard to subsidies. I am quite unashamed in expressing my antagonism to the whole principle of subsidies. In time of crisis they may be necessary, but in my view we want to build up a community of people who can stand on their own feet and earn their own keep, not a community of parasites dependent on contributions from elsewhere towards their essentials of life.

When I say that, I am not uttering any threat at all gainst conditions of the Welfare State. That we must accept; that is all to the good. I would not for one moment say a single word in deprecation of what has been established in this country, and is universally accepted, under the general heading of the Welfare State. But even in regard to the incidence of the Welfare State the action taken by a Labour Chancellor of the Exchequer in imposing a small charge on prescriptions does, I think, show that there is, even there, scope for some adjustments which should be salutary, apart altogether from their actual effect in saving public expense. What we need, above everything, is a steady increase in production, without any corresponding increase in our commitments.

But while economies must, in my opinion, as I have said, claim our most immediate attention, our tax structure certainly ought not to be neglected. The surtax limit, now at £2,000, should unquestionably in my view, be raised, and raised very soon, as Lord Coleraine suggested. I do not know whether the Trades Union Congress, when they recently suggested that any alleviation in surtax should be limited to the lower ranges, had in mind the unquestionable fact, to which I called attention a few moments ago, of the effect of a progressive tax system under inflationary conditions. I think, also, that one must take account, in considering the structure of our tax system, of social, apart from purely economic, effects. It is true—and I think it is a sad fact—that, as a result of the course which taxation in this country has taken, the possibility of large private benefactions has been enormously diminished. Art, culture, universities, have all become increasingly dependent on the State, and we have at this very moment the deplorable spectacle, as I think, of the State being compelled to resist admittedly worthy appeals, on the ground that the cost involved could not be faced. And the position in that respect has been gravely aggravated by a decision taken a good many years ago in regard to seven-year covenants.

Your Lordships may remember that it was decided by a Labour Chancellor of the Exchequer that such covenants should no longer avail to relieve the taxpayer of a charge of surtax. I did not at the time challenge the decision that was taken, though I had the opportunity of doing so, because I recognised that there probably had been abuse in connection with those covenants. But we ought all to have in our minds exactly what that decision implied. It is simply this: that when income had been effectively diverted so that it ceased to be the income of the original recipient, it was, and is to-day, nevertheless subject to surtax as if it continued to be the income of the original recipient. In my view, looked at fairly, that was a perfectly monstrous decision though there may have been grounds for it at the time; to say, as was said in another place on that occasion, that the Government could not afford to continue to treat such covenants as they had been treated in the past was really to trifle with the considerations of justice which were involved in that decision.

I come now to another point which I think may be controversial, but it seems to me that, consciously or unconsciously, we in this country have been maintaining for a considerable time a tax system tending to universal collectivism. In these circumstances, to talk of "a property-owning democracy" becomes rather a mockery. The virtues of equality have been much talked about. I have said previously what I personally think about the folly of carrying the pursuit of equality too far. One wants to have the grosser inequalities eliminated. One wants to have equality of opportunity. One wants to be sure that the poorest people are able to maintain themselves at a reasonable standard. Beyond that, I see no virtue; in fact I see great vice, in pursuing as a principle—in the minds of some, I am afraid, it is a sacred principle—the principle of equality.

Here in this country, as has already been pointed out in this debate, inequalities are less than they are elsewhere. Comparison was made by the noble Lord, Lord Coleraine, with the United States of America, where the income of a married couple is split for purposes of taxation. The same is true, I think, in New Zealand. There are other countries where family income is divided over a larger number of units. The effect of that is to reduce very substantially the total burden on the taxpayer. It is quite true that such a measure as that to which I have been referring has the effect of giving a definite and a selective advantage to the higher income groups. That is a fact which must be faced. I am aware that the recent Royal Commission gave some thought to this matter, and their general conclusion was against the introduction in this country of the system which obtains in the United States. I personally think that the paragraph in the wholly admirable Report which dealt with that particular matter was rather less persuasive than most of the other passages in the Report. But there it is; that was their conclusion.

I recognise that, if one starts talking about what happens in America, one may be reminded, and very justifiably reminded, that in America they have a capital gains tax. I have always been against a capital gains tax, for a variety of reasons. If we bring capital gains within the range of taxation, then we must give ample scope to the taxpayer to produce evidence of capital losses; and we may be perfectly sure, human nature being what it is, that while we should get the fullest evidence of capital losses, some capital gains would escape the notice of even the most vigilant tax collector. But I would leave the question of a capital gains tax alone, and rely on death duties to make up in due course all, and more than all, that would be collected, as compared with the existing system, by introducing a capital gains tax.

I do not think that our consideration of the whole problem of the tax structure need end with what has already been said in the course of this debate and with what I have said just now about income tax and surtax. There is the question of death duties. Some time ago, the structure of the system of death duties was radically changed and the separate assessment of legacy duty was abandoned. I am inclined to think that that may have been unfortunate. It may well have contributed, and contributed materially, to the confiscatory aspect of our tax system, to which I have just referred. The noble Lord, Lord Grantchester, referred to a matter which I think is worthy of consideration. He said he thought that purchase tax should be abandoned, and that we should have something in the nature of a retail sales tax. I have always felt that purchase tax is open to objection, that it is apt to be rather capricious in its application; and I have said publicly in the past that I thought that it should be either wholly abandoned or reduced to the condition of a luxury tax, frankly so described.

As regards a retail sales tax, if we find insufficient scope in the measures that the economic situation may force upon us in adjustments in the weight and structure of our direct taxation, I think there may be something to be said for a general tax on expenditure in the form of a retail sales tax. A scheme for such a tax was framed years ago by the Revenue authorities, as I happen to remember, and if we are to take a comprehensive sweep and go into all these matters, I suggest that it might be well worth while to go into that again.

VISCOUNT ALEXANDER OF HILLSBOROUGH

My Lords, does the noble Viscount suggest that that should be a flat rate of tax on retail sales or is it to be applied cumulatively from production sales through wholesale sales and the like?

VISCOUNT WAVERLEY

My Lords, I do not want to go into too much detail on this point, but I happened to be at the head of one of the Revenue departments at the time this proposal was investigated. One difficulty about getting the question properly investigated is that, while the main taxation about which we are concerned is in the sphere of the Board of Inland Revenue, anything in the nature of a sales tax would be in the sphere of the Department of Customs and Excise; and noble Lords will know what that dichotomy may probably involve. But two different plans were considered. There was a plan for a tax confined to retail sales and there was also a plan for a turnover tax, which would have included not only retail but also wholesale sales, and all along the line. That is what I think the noble Viscount has in mind. In what I had to say, I was thinking about the plan for a retail sales tax only as one which might be worth considering if adjustments in the existing structure of direct taxation were found not to afford sufficient scope. Of course, a retail sales tax is a kind of subsidy in reverse, so to speak, and strong objection may be raised; but in the situation in which we find ourselves we have to look at everything.

Let me, in conclusion, say this. There is no need to be unduly pessimistic about our situation. If we make proper use of the monetary weapon and the fiscal weapon, the two going together, as I have said, and not pulling in opposite directions as they have done at times in the past; if there is a proper understanding of the situation in all quarters and the necessary restraints are exercised, we may find ourselves, from the fact that our productivity is likely to increase steadily from year to year, and from that fact alone, before very many years have passed, if we do not undertake new commitments out of proportion to the normal increase in the population, in a much more comfortable situation than we are in to-day.

4.46 p.m.

VISCOUNT CROOKSHANK

My Lords, I hope that I may claim the indulgence of your Lordships in addressing the House for the first time. I feel in a curious situation, as doing something novel and yet something very familiar, because I am certain that in debates on this subject I have made more speeches in this Chamber, generally either preceding or following the noble Lord, Lord Pethick-Lawrence, than anywhere else in the world. But to-day, of course, it is in a different capacity.

We have had a most interesting review of the financial and economic situation in which we find ourselves, and interesting taxation proposals have been canvassed; but at the back of our economic difficulties all through recent years has been the perennial problem of the balance of payments and our gold and dollar reserves. Whilst I do not wish, to-day, to make any general review or any great speech on these matters, I think that there are one or two points on which I might help by bringing them to your Lordships' notice. I start from two premises which are universally accepted—there is nothing controversial here. The first is the fact that most of the time we have been short of dollars. Therefore, we have had to put work into the export dollar drive, to sell more exports in dollar countries and the other side of the coin, to refrain, so far as we can, from expenditure in dollars and to try to find alternate sources of supply. Secondly, partly as a corollary to that, there has been the wish and ambition to develop so far as we can the British connection everywhere, particularly in our Colonial Empire and in the Commonwealth countries.

In a recent visit I made to Australia (I hope your Lordships will not think that I am here in the guise of Kipling's" Paget, M.P."—or, perhaps I should say "that peripatetic Peer, Lord Paget") I had brought to my notice a startling example, which may not be known to some of your Lordships, of the magnitude of the new enterprises which are being projected there. One of the greatest engineering projects in the world to-day is taking place in Australia—a project called the Snowy Mountain Plan, which diverts two rivers and makes them flow in a completely different direction. In the course of doing that, the project not only brings water for a vast irrigation scheme in the northern part of the State of Victoria, but also develops enormous electrical power. The scale of this undertaking is something which is so immense that greater publicity should have been given to it long ago.

The scheme, to be spread over twenty to twenty-five years, involves the construction of seven major dams, seventeen power stations of the largest capacity, eighty-three miles of tunnelling and 330 miles of aqueducts. Already, 150 miles of first-class road have been constructed in connection with the scheme. One dam will be almost the highest in the world, and the water it contains will be eight times that of Sydney Harbour. So we are talking about something which, in point of fact, is larger in conception and expense than either the great Tennessee Valley Authority or the St. Lawrence Waterway. Naturally, there have been a great many contracts in connection with this scheme, and there will be a great many more—and here is the point to which I want to direct your Lordships' attention and possibly that of others outside this Chamber.

It is true that in connection with the power stations that have already been erected we have succeeded in getting a certain number of contracts, and British electrical machinery has been installed. On the civil engineering side, however, there have so far been five contracts (one is completed and four others are in the course of completion), to the value of £37½ million sterling. That is a great deal of money. Of those contracts we, the British, have not obtained a single one. And it is not because we were beaten in price, but because we never tendered for any of them. This for an enormous Commonwealth development in Australia, where they wanted us to come in if we possible could! The information which I have, and it is completely authentic, is that for those five contracts there were, altogether, thirty different tenders. But there was no single British tender. There was one which was part British and part Austrian; but it was irregular in its nature, and never even started the course. Those which were secured were three American, one Norwegian and one French. And this, in spite of the fact that the authorities went out of their way to extend the time for tendering, in order to make it as easy as possible and to encourage anybody from this country to come in.

This state of affairs has led to great disappointment out there, and I was constantly asked how came it about that there were no British tenders. I am not in a position to speak for British industry, so I have not the slightest idea of the real answer; but one has to try to think out what may be the cause. I wondered, if this sort of thing happened there, how often it happens elsewhere, because it is not only this great scheme that is going ahead. Australia and New Zealand, like Canada, are booming and developing; and tremendous bridge schemes, as well as civil engineering contracts, are going forward. I wondered what the reasons for the absence of British tenders might be. The first might well be that there was insufficient information in this country about what could happen and what was "in the wind." That can be rectified; indeed, in so far as it has anything to do with the Australian end of the story, it is—I will not say being rectified, because they would not agree that there was anything wrong, but more publicity is being given. During the coming year three major contracts are coming forward for tender—and by "major", I mean the sort of contract covering a power house, a dam and a three-mile tunnel, running into many millions of pounds.

The second explanation I ventured to give when I was asked was that there might be on the part of British firms some fear of the quality and reliability of Australian labour engaged on these projects. There ought to be no fear on that score, because, of the work that has been taken in hand, in case alter case the contract has been finished ahead of contractual time; and the number of disputes has been practically nil. Therefore, that ought not to be a deterrent.

The third, and probably the real explanation, is lack of resources, because we are so pressed ourselves. It may be that the capital development on which we are engaged here in regard to the atomic programme, the development of airfields and nationalised industries, has almost exhausted the resources available to these great contracting civil engineering firms. If that is so, then I think, considering how much it would help our general economic situation to be able to go into projects of this sort—if for no other reason than that of saving the dollar expenditure involved when American contractors succeed in getting allocation of the work—there should perhaps be a greater review here of how we expect over the next two, three, four or five years to use such capital as becomes available for this sort of work. I do not say an overall plan; I do not say planning in any detail; but at any rate, a general review, to see that we do not exhaust all the possibilities in the very urgent requirements at home, and lose the opportunities overseas, in our Commonwealth countries and in the Colonies—opportunities which over the years may well, for all I know, pay us much better.

So, without putting anything forward very definitely, I leave with my noble friends on the Front Bench that thought: that there are these schemes going forward overseas, and we are not taking any part in them, to the intense disappointment of those who are most concerned. If, as is the case, they are so anxious that we should participate, we ought to do everything we can to make that easier. At the present moment, largely owing to the price of wool, the countries on the other side of the world are booming. In Australia, for example, they have been able to make some relaxation in the import restrictions which, purely for balance of payment reasons, they had placed on their imports. If we can ourselves do something to contribute, we shall improve our own economic situation; and, after all, at the end of the day, that is our primary concern. In recent months obviously we have gone through financial and economic difficulties of considerable magnitude. But it seems to-day (I have been back only a short time), from such conversations and contacts that I have had, that: there is a feeling of a slight lightening of the burden. Perhaps it is merely because we are approaching spring; but perhaps it is that we have realised how hard the road is, and that it is only by hard and harsh measures that we shall be able to get to the end of it.

4.58 p.m.

LORD BALFOUR OF INCHRYE

My Lords, I am sure I shall have the support of noble Lords in all quarters of the House in offering congratulations to the noble Viscount, Lord Crookshank, on his maiden speech, delivered with such authority and such knowledge. I am sure, also, your Lordships will agree with me in saying that your Lordships' House is fortunate to have the accession of debating strength that has come with the presence of the noble Viscount, Lord Crookshank.

The noble Lord, Lord Coleraine, in his most interesting speech, said that the economic characteristics of the post-war period, as he saw them, were two: the first, the expansion of production; and the second, the higher standard of life brought about by the redistribution of income. I submit to your Lordships that there is a third characteristic of this post-war period. It is that under successive Governments we have had a series of balance of payment crises, and each of those has been declared to be the last, until the next has arrived. The noble Lord, Lord Pethick-Lawrence, spoke about the prosperity in our country, and I think he described it as "middling prosperity." I believe it is an illusion to talk about prosperity in this country unless it is qualified by thought of our economic position in relation to the rest of the world. We may be comfortable here, within our own boundaries, but we are on a knife-edge so far as the rest of the world is concerned, as we have seen time and time again, and one set-back in the United States, one unexpected setback such as Suez, can upset our economy. Therefore, our prosperity must be thought of in relation also to the incipient dangers which beset us.

We have had different Parties and different remedies, but we have had the same troubles during the past ten years. Now we have a Government who are pledged to free enterprise as the basis of British industrial life. They are pledged to restore incentives for the individual, to a policy of industrial and overseas investment, and also to a policy of economy in Government expenditure. That is what Her Majesty's Government are pledged to—in fact, the very things my noble friend Lord Coleraine stressed. But it is no good the best friend of the Government to-day not admitting that the Government's stock is very low—it is. But the supporters of the Government say—and I hope rightly—that the Government are having to do unpopular things for the good of the nation, and that all will come right before the next Election. I only hope that that is so. But may it not be—I put this forward with all humility—that the Government are in some disfavour all round because they do not seem to be courageously grappling with those industrial and individual problems they were elected to tackle, and which must be tackled if we are to avoid the dangers spoken about by my noble friend Lord Coleraine in his peroration?

The Government can expect the opposition of the Socialist Party, many of whose members' aim and delight is to try to achieve the egalitarian State. The noble Lord, Lord Pakenham, challenged my noble friend Lord Coleraine on a quotation that he gave, and said that he had not given chapter and verse. Mr. Bevan has made so many statements, so widely publicised, that there is no need to give particular quotations, but no doubt the noble Lord, Lord Pakenham, will remember Mr. Bevan's, "Redistribution is retribution". That was his famous phrase in the 1945 Election. I only quote that in support of my submission that the egalitarian State is the ideal of many noble Lords who belong to the Party opposite.

The Government may expect that opposition, but the Government also faces discontent amongst its most loyal supporters in the country, as the figures of the recent by-elections have shown. Also, it faces discontent among those 2 million of what I would term "floating voters," in whose hands is largely the decision at an Election as to what form of Government we are to have. The resentment of the professional classes, management and technicians, at their slow extinction by the present tax system in relation to their positions, is something of which we have evidence throughout the country at the present time. The Conservative Party declares its belief—and I thoroughly support it—in the individual and the opportunity for the individual. If that is so, there is no justification for continuing the present taxation system, which is tragically lengthening the emigration queues, about which we have heard from previous speakers, of young technicians and management class who feel frustrated as regards prospects in this country and who are desiring to emigrate to where they feel greater opportunities exist.

We have no right to expect that the Government will countenance the continuation of this system of taxation with what the noble Lord, Lord Coleraine, has so aptly called its grave injustices. I do not believe a little help here and there in the adjustment of burdens is going to be enough to restore the position. I believe we have to do some radical rethinking on personal taxation, and be ready to have big changes away from the present system. We need that reduction in Goverment expenditure about which the noble Viscount, Lord Waverley, and other noble Lords have spoken. Successive Governments have said that they were going to reduce Government expenditure. They have shaved it here and there, but always the whiskers of expenditure and waste grow almost as soon as the whisker has been shaved.

The present Prime Minister announced that he hoped to make savings of approximately £100 million—broadly speaking, 2 per cent. of our total expenditure. But already those savings have been offset by new expenditure. To-day, we read about £40 million—and I am not saying that it was not essential expenditure—being spent on the Swift, and £16 million being spent on developing an Army vehicle which is of no use. If Governments shave expenditure, it is really effective in the light of the various unexpected items of Government expenditure that any Administration has to face. I believe that to achieve any big saving in domestic expenditure, as opposed to arms expenditure, we must do some basic re-thinking. The Welfare State must continue to safeguard need. hazards out of the control of the individual, sickness and old age. But I believe we must throw over the idea which has crept up on us that a Government can do better for the citizen and can spend better for the citizen than a citizen could do for himself if he were given the release of the necessary resources from the present rapacious tax gatherers under our present tax system.

The practical application of this revolt against the Government assumption of the Government as the spending agent for the citizen would be widespread. It would mean such things as no subsidised rents for four-figure incomes; no food subsidies—and the noble Viscount, Lord Waverley spoke about subsidies in general—which are equivalent to 6s. 6d. per week for a family of four, and cost £213 million in 1955–56. It would mean no free Health Service benefits for those who could afford to pay for their own doctors. It would mean no need to try to lead a life of what I call "on the expense account", which so many industrial men are forced to do at the present time. Against this, it would mean a level of personal taxation which would allow a man to order his affairs as he wished, to order his own housing, to feed his own family, to doctor as he wished, and to educate his children as lie wished.

I have submitted to your Lordships that I do not believe that we are ever going to get this essential reduction of Government expenditure which noble Lords on all sides of the House admit is necessary, unless we do some fundamental re-thinking such as I have submitted to your Lordships this afternoon. My noble friend Lord Coleraine concluded his speech by comparing his memories of 1940 with to-day, and he said that in 1940 he could not see how the country was going to be defended, but that he knew it had to be defended. There are many differences between 1940 and now, but one of the big differences is that in 1940 we had bold leadership and a united people. I believe that to-day we can have, and have got, bold leadership. I do not know how far we have a united people. But I believe leadership can carry this country through, if that leadership is determined and bold in its conception of what is required in the proposals the Government have put forward.

5.10 p.m.

LORD PAKENHAM

My Lords, the noble Lord who has just spoken is often provocative, and never less than stimulating, but he will forgive me if I do not follow his agreeable speech in any detail. I wish to confine myself, with the permission of the House, to one rather large aspect of the topics we are discussing, and I know that my noble Leader, Lord Alexander of Hillsborough, will reply strongly to any points that seem to need a strong reply We are not dissenting by any means from everything the noble Lord said: we are agreeing here and disagreeing there.

I want, if I may, to deal with the particular proposal put forward by the noble Lord, Lord Pethick-Lawrence, for a new inquiry, comparable to the Macmillan Inquiry of 1931, and to give it my very strong support. It flows naturally from the speeches that have been made by the noble Lord, Lord Pethick-Lawrence, over the last few years. I certainly do not approach this matter in any partisan spirit any more than the noble Lord, Lord Pethick-Lawrence does. I was grateful, as I am sure we all were, for Lord Coleraine's generous remarks about the noble Lord, Lord Pethick-Lawrence, which were fully justified. All I would say about the speech of the noble Lord, Lord Pethick-Lawrence, and also that of the noble Lord, Lord Coleraine, is that his modesty about his own credentials was far less justified than his modesty about the credentials of the noble Lord, Lord Pethick-Lawrence.

All my noble friends on this side of the House will wish me to join with the noble Lord, Lord Balfour of Inchrye, in congratulating the noble Viscount, Lord Crookshank, on his maiden speech. It is, perhaps, rather impertinent for someone of my standing to congratulate a past Leader of the House of Commons. To-day, I would only say that the House of Lords is sometimes said to be the best debating Chamber in the world. I am not sure that it is a topic on which we are very well qualified to pronounce an opinion, but, whether we are good or whether we are bad at debating here, we shall be all the better for the addition of the noble Viscount, Lord Crookshank. I know that we shall want to hear him again often. I do not know that it has fallen to any of us in this House to receive the kind of welcome that came to the famous economist known, of course, to the noble Viscount so well: I refer to Mr. Ricardo. When he was elected to another place in 1819, there was a unanimous cry of "Ricardo, Ricardo!" during an economic debate. I do not know that it has fallen to any of us, but I do not see why there should not be a cry of "Crookshank, Crookshank!" the next time we bring economic matters under review. I certainly should contribute adequately to the call.

To come to the question of an inquiry similar to that of the Macmillan Committee, the proposal, of course, flows naturally from what the noble Lord, Lord Pethick-Lawrence, has been saying for a number of years. I emphasise that it was, I think, the Daily Telegraph that gave a lead in this matter last year, but the Statist, a non-Party economic journal, was early on the spot; and in February this year the Midland Bank Review brought the whole subject to general notice. That doyen of financial journalists, Sir Oscar Hobson, who has done so much to make an honoured profession still more honoured, and who last year thought the subject premature, is now advocating it with unsurpassed authority and skill in the News Chronicle and the Banker. So I think we may regard it as floating very strongly.

The broad question which Sir Oscar considers requires investigation—and I think most of us see it rather this way—is that of monetary control. It is not, of course, the only question requiring investigation, but it is, in his view, one that could be isolated. The issues there are highly technical—and I shall have a few words of a quasi-technical character to submit to your Lordships later on—but I am sure that all who advocate this proposal are ultimately concerned with the human result, with the effect on employment, productivity and the standard of life. I am sure that that is in the mind of the noble Lord, Lord Pethick-Lawrence. That is not to say that this inquiry should range over the whole field of economic policy, let alone social policy; except indirectly, it should not, in my view, be concerned with trade policy or with the topic specifically mentioned in the Motion of the noble Lord, Lord Coleraine—taxation; or with the question of how much we can afford by way of public expenditure, though, of course, Government borrowing and the interest which we pay on the National Debt are one example of a problem which is outside the strictly financial field yet which nowadays is inseparable from financial topics in discussion.

May I say that questions of Government expenditure and taxation, as I think one is bound to observe (I do not say this in any critical spirit; we are a House of Parliament, not a statistical society), while they contain a large technical element—and they involve also a good many issues of a non-Party type which relate to equality between man and man—are inextricably bound up with the great Party division between Right and Left in this country. Those of us who take our place on the Left will almost always be in favour of a solution which contains a larger dose of equality than would appeal to our Right Wing friends. I am not talking of absolute equality; I am not arguing the ultimate goal; but in any ultimate discussion we tend towards more equality than noble Lords opposite would favour. Again, we are less reluctant than they usually are, in practice, to welcome an active intervention by the central authorities.

I do not think that the Party division, which is quite legitimate—indeed, it would be a strange society if we did not get some central Party division—need interfere to anything like the same extent with the search for agreement in the monetary field. Of course, psychologically, there is on what might be called the Right side of politics (I am talking not in a moral sense but in a political sense) a greater disposition to believe in the traditional wisdom of the City. I do not believe that the "Old Lady of Thread-needle Street" and the "Gentleman of Whitehall" could between them produce a hybrid child. There would be more scepticism on that point on the Left. Again, the thoughtful Conservative is probably ready to allow a fuller scope for the use of the monetary weapon than the Labour man. The noble Viscount, Lord Waverley, might want to place more emphasis on it than the noble Lord, Lord Pethick-Lawrence, or myself. That is a question of degree, rather than, if I may say so, of principle.

Again, there may be—but this is, in my opinion, less certain—a division about the use of the monetary weapon. The man of Labour politics would be more favourable to the idea of some selective use of a monetary policy on behalf of projects which possessed some public authorisation in the national interest. Some principle of selectivity in the use of the monetary weapon might be more favoured on the Left than on the Right. But these are differences which would be discovered and which might even be ironed out in the course of any inquiry. I see no reason why in such an inquiry some kind of fundamental agreement could not be arrived at. After all, I think we all agree nowadays—at least almost all of us in this House agree—that whoever is in power will require a monetary policy of some kind. The problem will not solve itself, and I know no one to-day—perhaps I am unlucky—who believes that we have discovered what we ought to know about how the monetary instrument should be used.

The central dilemma of our country is plain. It was brought out in the remarks of the noble Viscount, Lord Waverley. We all agree on certain objectives—full employment, maximum production, high capital investment—mentioned by the noble Viscount, Lord Waverley. They are on the positive side. On the negative side, or on the side of security, we want to protect sterling, to build up our reserves and to avoid inflation; and, of course, a greater flow of savings and greater exports are a condition of any success at all. To put it concretely, the question surely, from the national point of view, is how we can go ahead, working and building up our national capital and at the same time avoiding the flood of imports that sweeps away our reserves. That is the central dilemma.

May I say, without any sort of Party reference, that so far we have failed to find a monetary policy that enables us to reconcile what I might call our positive and our negative objectives. It seems to me absolutely true, as Lord Pethick-Lawrence has said, that in the last two years we have achieved a measure of security that we have paid for in terms of stagnation—I repeat his words. I do not think anybody can dispute that as a statement of fact, and I do not think that anybody who reads the financial papers will feel that Lord Pethick-Lawrence was putting it too strongly. I repeat, that monetary policy can, at best, supply only part of the answer. While some people to-day will feel that our monetary policy is the "best monetary policy we've got" (to quote a rather oft-used expression of a leader in another place), I think nearly everyone feels that there is much room for improvement.

When we discussed these matters in this House last year there was at least general agreement about the direction in which the monetary influence should be exercised. A policy of restraint or restriction, was accepted more or less all round. But I thought even then—and I ventured to say so—and I think so even more strongly now, that even when we are clear about the direction in which we want to work we still have a great deal to learn about the best technique For example, there has been much argument in the past year about the various ways by which the central authorities can restrict the total of bank credit, and in particular induce the commercial banks to curtail their lending. I beg the noble Viscount to avoid the technical issue as to whether bank deposits or bank advances give the more potent sort of inflation and to deal with the matter in a broad way.

Putting it broadly, it seems to me that there are four ways by which the central authorities can achieve the end of restraining credit, assuming that they want to restrain it. There is, first, the method of an increase in bank rate. I think that Lord Pethick-Lawrence has shown to-day and on previous occasions the great disadvantages attaching to that. I need not remind your Lordships of what he has said about the burden on the Exchequer and the foreign exchange through the collection of interests due to overseas people.

Then, there are various steps of a highly technical character which I think the noble Lord, Lord Aldenham, understands much better than I do, by which the central authority can reduce the liquid resource's of the commercial banks, assuming—a point that is sometimes overlooked—the continuance of the existing conventions. This diminishes the capacity of the commercial banks to lend. I will not go further into those recesses. Apart from the fact that these processes are shrouded in so much mystery that the public have little idea of what is going on, these methods tend to be expensive for the Government when the bank rate is high, and therefore this second method of restraining credit may not always fit in very well with the first method—namely, the increase of the bank rate. It may well be for this reason, amongst others, that the bank rate has recently been lowered, although in the words of the Chancellor "This is not the time to let up"—a combination of development that has puzzled a good many people.

Thirdly, still assuming that we want to restrain credit, there may be an official request, amounting to an instruction or directive, that landing is to be restrained. As I am sure Lord Aldenham would tell us, this is most unwelcome to many bankers of great experience. It seems to them so contrary to tradition and orthodoxy as to represent a denial of the law of nature. All these three methods have been in use for the last two years, and my only comment now—I speak certainly not on behalf of a bank, but just as a student—is to repeat what I said a year ago: that they have involved in their totality a self-denying ordinance among the banks which has, in effect, ruled out competition in the lending business. I submit that it would really be impossible to justify a continuance of private enterprise in banking if the present state of affairs were allowed to continue indefinitely. Everyone assumes that it is not going to be allowed to continue indefinitely, just for the reason that I have given. Everyone assumes that the present combination of techniques is temporary. But what is going to be put in its place? We all agree that it cannot, and must not, be allowed to go on indefinitely, but I have not met anybody who has been able to give me the smallest idea of what system of techniques is to follow this existing combination.

I suggested last year—of course, it was no novel suggestion of mine—the method of credit control through varying liquidity ratios. The noble Earl, Lord Selkirk, was polite enough to say that I might know more about that than he did. I am sure the noble Viscount, Lord Hailsham, would never admit that I know more about anything than he does. I do not expect a particular answer this afternoon, but I know that a particularly technical and efficient reply will be given to me. Under that particular method, an instruction emanates from the Government or central bank which formally imposes on the commercial banks a minimum ratio of liquid assets to deposits and raises it in times of restraint. A rise in this ratio means that the banks can lend less than before with a given distribution of assets.

I still believe that the addition of that technique to our other devices would be invaluable. I repeat to the noble Viscount that I am not pressing that suggestion to-day. I am not expecting a reply on that particular point to-day, if only because it is not my purpose this afternoon to suggest a dogmatic solution. In purpose, I am concerned only with the submission that we ought to know much more than we do about the working of monetary policy, and we can find out only by an organised and efficient search. Last year we were at least agreed on the need for some deflation, though I am not sure that it was called deflation—that is one of the disreputable words which would be used in attack; in defence the word used is "disinflation." But we were agreed about some kind of disinflation, although the right method of deflating eluded us. This year, speaking nationally, and surveying the national side of the controversy, I would say that we cannot even agree on whether we ought to inflate or deflate.

I repeat that I do not come before you as a fortunate prophet to whom all wisdom has been delivered. In the current number of the Banker there is an article called "Squeezing by Easing". It points out that there is still much uncertainty in the business world about the purposes that the reduction in bank rate was designed to serve. It adds that the notion of disinflation by bank rate reduction is a difficult one to swallow. It has stuck, it says, in the throats of people "more or less expert, even at word eating, than the Leader of the Opposition." I cannot attach any meaning to those last words; they seem to mean nothing at all. They seem to lower the high standard which the Banker almost invariably attains.

But, leaving aside those words, let us come to the views that journal expresses. The Banker has no doubt that the Government regards inflation as a much greater danger than deflation. I think that that is clearly the view of the Government at present, no doubt acting on expert advice. We here listen to the Government with interest; but we listen with hardly less interest to the Financial Times. In a prominent article on March 1 in the Financial Times, Mr. Roy Harrod contradicts flatly the Government's view. We recall that Mr. Roy Harrod in these latter days is an outstanding intellectual on the Conservative side. He was always an outstanding intellectual; now he is, I think I am right in saying, a Conservative intellectual. I will not quote him at length because I have referred noble Lords to the article on March 1; but he says there quite plainly: the problem giving rise to all this confused thinking is itself a mare's nest. For the economy no longer requires tight money at all. It has already been slack for an unhealthily long period; orders on investment account are too low; labour is being released, but not absorbed by the investment goods industries; much short-time is being worked and development is discouraged…. British industry has been in part refurnished, and the opportunities lie before us this year for a big move forward in production. It will be a thousand pities if this is frustrated by deflationist policy. There you get an absolute and total contradiction between experts' views at a very high level regarding the question of whether to inflate or deflate at the present time.

My Lords, I am not saying that because at any particular moment you get a disagreement between experts you must have a major inquiry, and still less am I saying that the report of the inquiry would tell us what to do at some particular moment in the near future. But I myself consider that the present disagreement is only a symptom of the fact that we do not to-day, as a nation, know anything like as much as we should about how the monetary instrument could reasonably be expected to work. That applies to the highly gifted and expert men who give their lives to this subject. It applies a fortiori to the ordinary business man or trade union official or legislator, or indeed the average citizen, whose decisions in the last resort depend on some understanding of our economic system and how it is supposed to be working if those decisions are going to help, rather than hamper, our national effort.

I disagree respectfully, in conclusion, with Sir Oscar Hobson, on one point. He would like the new Committee, unlike the Macmillan (Committee, to be composed entirely of bankers and economists. I urge strongly that industrialists and trade unionists should be included, as they were in the Macmillan Committee. We may not find another Mr. Ernest Bevin—we only get someone like that once in a lifetime—but I am sure it is essential that the voices of both sides of industry should be heard on this Committee. There are at least two reasons for that. In the first place, whatever solutions are arrived at should be widely disseminated and understood and respected by all. Further, although these problems, as I said at the beginning, are immensely technical, they are in the last resort wrapped up with the whole life of our people. They cannot adequately be tackled except by a Committee, which certainly must be technically equipped to the nth degree but must also represent the life's knowledge of the British people as a whole.

5.33 p.m.

LORD SALTER

My Lords, I was tempted, while the noble Lord, Lord Pakenham, was speaking, to follow him into the various controversial questions he raised, and in particular to discuss with him the one raised in Mr. Roy Harrod's article. On the whole, however, I am going to resist that temptation. I came here intending to make two points only and not to allow myself to be diverted into a long speech.

I want to make two specific suggestions in regard to our tax system. They are definitely related to the two purposes which the noble Lord, Lord Coleraine, stressed when he opened this debate to-day—namely, the need to encourage investments and the need to increase incentive. The major fact about our economic position now, as it has been for many years, is the fact of inflation. This does not mean that our real national income has been reduced. On the contrary, it has tended rather to go up. But if measured in terms of pounds it would, of course, seem to have gone up immensely more than it has. It has gone up moderately, but it is not moderately that the pound has gone down in purchasing value. There is no particular reason why the fact of inflation, and the depreciation of the value of the pound should entail a difference in our standard rate of income tax. By and large, our incomes, whether they are salaries or wages, also go up correspondingly; so also, then—quite rightly—does the amount which we pay in taxation on the standard rate of income tax. There are indeed special hard cases, such as pensioners and so on, which need to be dealt with specially, but there is no reason in the fact that the pound is losing its purchasing value why the standard rate of income tax should be changed.

But, my Lords, the situation is completely different when we come to the other purpose for which the pound is used in our tax system—namely, as a measuring rod to determine what people are so much worse off than the average person that they should have special reliefs; and, at the other end of the scale, what people are so much better off than the normal person that they should pay additional taxation in the way of surtax. As a measuring rod, the pound, during a period of inflation, is deceptive in the highest possible degree. It is fantastic that a man who was, quite rightly, held to be so well off at £2,000 a year when surtax was introduced that he should submit to extra taxation, should be treated as being a man exceptionally well off, and therefore as properly subject to a higher rate of tax, if he now has the same nominal income of £2,000, when that is worth only somewhere between a half and one-third of what it was worth when that limit was first established.

It is exactly the same as if a grocer, finding that he could not pay his way, decided that he must make the customer pay more; and then did it, not in the proper way by putting up the price of what he was selling, but by tampering with his weights and measures. That is exactly what the Government, successive Governments, have done, in keeping this same measuring rod to measure who are below the normal and who are above the normal in income for the purpose of special relief or additional taxation. It is sheer cheating. It would be very much better if they corrected their measuring rod and then, quite frankly and openly, said, "Now we must increase the rate of taxation beyond a certain point." We should, in my view, correct, and correct exactly and scientifically, the measuring rod for the purpose of determining who is the man above the normal standard rate level; and having done that we should, if necessary—that at least would be frank—increase the surtax rate on certain incomes above that level. But do not let us do it any longer by simply tampering with the measuring rod.

At the other end of the scale, of course, a good deal has been done by way of what successive Chancellors of the Exchequer, of both kinds of Government, have termed, quite wrongly, concessions. They have partially and unequally returned to the people at the lower levels of income some of the money that they were previously filching from their pockets by what is, in effect, tampering with their weights and measures. I suggest that there is no justification whatsoever for changing the measuring rod, or for putting the limits either below or above at something different from what that correction would give you, unless indeed the total national income has been reduced. In that case, it would be just to reduce the relief by a similar percentage, but otherwise I think there is no justification whatever. That is the first point I wanted to make.

The other is this. I think that the special relief given for earned income, as distinct from unearned income, is quite inadequate. I would ask your Lordships to look at the limits now set in our present tax scheme and then consider—I will not say whether the person who earns money should be given a special reward as having contributed more to the national wealth, though I might argue that. I will not even pursue the argument which I was pursuing in another connection just now by saying that the measuring rod has gone wrong. I would ask your Lordships to consider it solely on the basis of the oldest strictest and most orthodox Gladstonian principle of capacity to pay. Take the difference between the man with a gross income of, say, £4,000—who is by no means a rich man now. I mention that figure because those with that income are a very crucial class, from the point of view of the enterprise and efficient management, on which our general prosperity depends. Consider how little is the difference between the amount he pays in taxation, because he earns his money, and that paid by a man who has an equal gross income from investments. I think the difference is as little as somewhere about £200 or £300. But in order to be in a similar position to the man with investments, the first man has to prepare against the accident that he will lose his skill or his health or the market for his skill, and the other risk of dying and leaving his wife dependent on what he is able to leave. The man who has an equal income from dividends has none of these current expanses to incur, and the difference between those two, quite apart from any superior claim of the earner, as such, is immensely more than the limited relief now given to earned incomes under our present taxation system. Those are the only two points which I wish now to contribute to this general debate, which has, of course, covered a much wider field.

5.43 p.m.

LORD POLWARTH

My Lords, once upon a time nobility and wealth were considered to be synonymous. Nowadays, thanks to the operation of the system which we have been discussing this afternoon, that is no longer so, and perhaps, after all, that is not a bad thing, because it enables us here to discuss objectively a subject which is generally reserved for the other place but which I believe we have unrivalled experience and knowledge to discuss. I should like to congratulate the noble Lord, Lord Coleraine, on giving us the opportunity to do so. I do not propose to follow into the wider paths trod by the noble Lord, Lord Pethick-Lawrence. Perhaps it would not be out of order for me to offer him a personal congratulation on his qualification under Section 210 (1) (a) of the Income Tax Act, 1952. For those of your Lordships who have not the Act at your fingertips, I refer to the section which covers the increased rate of personal allowance payable to those described as maintaining a wife.

My Lords, I cannot say I am too sanguine that we shall receive a detailed reply to the suggestions about taxation which we are making to-day. After all, this is the close season for Chancellors of the Exchequer, as it is for most other game; but I can only hope that he will keep his ear open to all that is said this afternoon. My only grounds for speaking are that I belong to that profession which was recently described by a very distinguished and noble personage as one without which a great many people would be bankrupt from paying too much tax and a great many more would be in jail for paying too little. We in that profession have a peculiarly good view of the impact of the British system of taxation, both on corporate bodies and on a wide variety of individuals.

I think it is sometimes forgotten that the object of taxation is not to oppress either the rich or the poor but simply to raise the wherewithal to pay for the goods and services which we, as a nation, have decided we will stand ourselves. In some fields, with some of these goods and services, clearly there is scope for economy; for instance, in the field of defence we are very hopeful At the same time, we should not be too sanguine here, because while we are saving a large number of men and conventional arms there is no doubt that the devices with which they are being replaced can be extremely expensive toys.

Clearly, there is room for economy in some of the matters brought out in the Reports of the Public Accounts Committee and of the Auditor-General, one of which came out only yesterday. Perhaps the classic example which will come to your Lordships' mind is that of the 347,000 surplus chairs discovered in Army depôts throughout the country. When I told an unkind friend that I was thinking of quoting this example, he said that he did not think it was quite fair to do so, for, after all, the strength of the peacetime War Office had already doubled since 1939 and, at that rate, the chairs might soon all be required. I understand also that a spokesman has said on this subject that soon we shall all know "where we stand".

We must face the fact that in a large field of Government expenditure any major cuts would be quite unacceptable to the public of this country. For instance, there is the sphere of education, where, quite clearly, we are going to have to spend more, not less; and, not only that, we are going to have to obtain better value for what we are spending. There is the whole apparatus of the Welfare State, so aptly described by someone lately as "that marketing board for the milk of human kindness." I am not belittling the scope that exists for economy. That scope exists, of course, but we must face the fact that there can be no significant reduction in the total load of taxation; therefore our main efforts must be directed to seeing that the load is fairly spread.

When any lowering of taxation in any particular direction is suggested, every Government immediately conjures up the bogy of inflation. Of course, if we go on asking to be paid more without doing or making more, we shall have inflation. At the same time, we are constantly being told, and rightly so, that if we wish to increase our standard of living we must have greater efficiency and greater production. Stripped of jargon, we have to make more, better. What hope is there that we can make more better unless we have real incentives?—by that, I mean incentives to the worker, to the manager and to the shareholder. I am going to try to point out only one or two ways in which, I believe, we can increase those incentives. Many of them have already been put forward by other noble Lords this afternoon and many of them have been urged by the Royal Commission on Taxation in their Report.

First, in the field of company taxation, one of the essentials, if we are to hold our own in this increasingly competitive world, is that our factories should be equipped with the latest and most modern plant and machinery. In the course of the last two years I have visited a number of plants of firms in North America and of their highly efficient subsidiary companies in this country, and I have been struck by the different philosophy which exists in those companies with regard to plant and equipment. There, as soon as a piece of machinery has been superseded by something else, it is scrapped, thrown out, and new machinery is put in. Here, with exceptions, of course, the tendency is to keep the plant until it is worn out, which, with our British standards of construction, may be for a very long time.

I believe the reason for this difference lies in our system of depreciation allowances of which other noble Lords have spoken. I believe that these allowances, based as they are on the original cost of plant and taking no account of modern rates of progress and technique, are out of date. What is needed is the right of the manufacturer to choose very greatly accelerated rates of depreciation, and recognition of this problem of the increased cost of replacement. That, indeed, was recognised by the introduction, some two years ago, of the investment allowance which was a most enlightened action on the part of the then Chancellor of the Exchequer, only spoiled by its subsequent withdrawal so soon afterwards. As a first step, I urge that investment allowance should be restored. I urge the Government, in the interests of industry's planning and stability, that they should not tinker about with these rates of wear and tear for industrial plant and machinery but allow them to continue, so that industry will know where it stands.

Another reform which would be of great assistance to industry concerns profits tax. This, again, has been dealt with by other noble Lords who have spoken and I will not go into it in detail. The Royal Commission have covered the subject very fully and have come to the conclusion that there is really no validity in any of the claims made on behalf of the tax. In fact, they concluded that its incidence is complex and capricious and suggested that it should be replaced by a flat rate corporation tax. I think that that is a matter of some urgency.

Incentives to corporate bodies are all very well, but how much more important that there should be incentives to the individuals who make up those corporate bodies! Since the war there have been substantial reliefs to those in the lower income levels. I do not for one moment grudge them. But more and more our industrial progress depends on the executives, managers, scientists and men of skill, men to whom £2,000 a year is by no means an excessive salary to which to aspire. I will not go into the arguments about the level of surtax, though I believe that the incidence of surtax at £2,000 is now entirely out of date. One thing stands out and the Royal Commission commented strongly upon it. At the rate of £2,000, owing to the starting of the surtax and the cessation of earned income relief, there is a very sharp rise in the combined rate of taxation of an individual. I believe that, as a first step, there is a very strong case, as other noble Lords have said, for raising the limit of earned income relief, and, if necessary, reducing the rate of it in the higher levels. On the subject of surtax, I believe that half the trouble arises from its name. After all, you have to make a social return of income and send it to a special Department, and the name itself is a very useful political weapon. Surtax is, as the Act says, merely an additional income tax, designed to carry the rate of progression up from the lower levels to the higher. I believe that if we got rid of the name, half our troubles would disappear.

So much for direct taxation. I should now like to say a word about indirect taxation and, in particular, one form of indirect taxation, namely, purchase tax. Here again, like other noble Lords, I feel that it is high time that this tax was abandoned in favour of a flat rate sales tax. I am not going into the details of where and how that would be collected. It would mean more work for someone, of course, and the work would obviously be more widespread in some cases, but I do not believe that the sum total of it would be any greater than it is with purchase tax at present. Purchase tax, like profits tax, is a relic of a war-time tax, and of course there was the obvious temptation to continue it after the war to keep up revenue. It had the added attraction that it could be used as an economic weapon. It was always possible to alter the rate of this tax from time to time so as to encourage or discourage the demand for particular products. It has been fashionable to do this regularly at Budget time, and I wonder whether Chancellors of the Exchequer and their back-room boys have really appreciated the effect of this chopping and changing.

I think it is instructive to look at the position in the United States. By comparison, the necessities of life there are on the whole dear—dearer than they are here. They are dear in that they cost what they cost to produce. Luxuries, on the other hand, are cheaper, on the whole, by comparison with prices in this country. Here purchase tax at its lower levels is applied to many necessities and near necessities, and that is simply taken account of by the purchaser in his wage demands. So it simply adds to costs, pushes up wages and leads to inflation. When you get into the higher levels, applied to what are in fact luxuries, this tax takes the goods right out of the reach of the worker. There is therefore no inducement to him to work hard and try to get the money to buy these goods. I think it is high time that this tax was abandoned. It is a bad tax, and I do not think many people would be sorry to see it go.

There is just one other partner in industry for whom I would make one small plea—the shareholder. We are constantly being encouraged to save, and I think that at times those who exhort us to save tend to forget that there are other forms of savings besides those self-righteously described as "national savings". After all, industry in the long run, relies for its expansion on the shareholder who is prepared to put his capital at risk. What is the position at present? If he purchases shares he has to pay a duty of 2 per cent. on the purchase. I am connected with a number of investment trust companies and unit trusts, whose job it is to provide a channel for the small saver to put his capital at risk with industry, under the shelter of skilled management, and it is our experience that the greatest single deterrent to the small investor's doing so is this rate of stamp duty. If it cannot be abolished, or even if it cannot be reduced to its original level of 1 per cent., what logic is there in imposing this duty on the purchaser, who is the saver? Why should it not be imposed on the seller—or the person who is disposing of his savings?

My Lords, these are just one or two specific ideas; from my own specialised viewpoint; ideas as to how our tax burden could be, if not lightened, at least more fairly distributed, so as to give better incentives. I wonder whether your Lordships have ever reflected on the vast amount of brains and effort which is deployed in the task of seeing that the subject pays neither too much tax nor too little—neither more nor less than is his due. That task in material terms is totally unproductive, and at: times for those of us who are engaged in it, it can be most exasperatingly frustrating. I believe that if as great an effort were devoted to a sincere scrutiny of Government expenditure and an unprejudiced review of the whole distribution of taxation, then we should find this burden of taxation assuming a size and proportion which we could shoulder cheerfully and carry to good purpose.

5.57 p.m.

THE EARL OF CROMER

My Lords, if you take it that in 1945 £1 would buy 20s. worth of goods, in 1951, after some five years of Socialism, £1 would buy only 15s. 6d. worth of goods. In 1956 after five years of Conservative Government, that same £1 of 1945 would buy only 12s. 7d. worth of goods—a depreciation of the national currency of 37½ per cent. in about eleven years. What a deplorable failure of financial policies! Think of the hardships caused to those living on fixed incomes. Think of the fraud perpetrated on the thrifty who had been implored to save and not to spend. It is a terrible indictment of those responsible for our financial policies during these years, on whichever side of the House they may sit.

There was a time when the pound sterling was recognised the world over as a symbol of stability. It was the standard by which all other currencies were judged and, for that reason and that reason alone, it became the medium for the transaction of the bulk of world trade. Because it was freely and immediately convertible into any other of the lesser currencies should occasion arise, the pound was the one currency that was universally recognised and accepted on sight, and, indeed, it was greatly sought after. Within my lifetime, political control of the currency has undermined the world-wide confidence in the pound by subordinating integrity to political expediency. Instead of being the most coveted currency in the world, the foreigner to-day all too often holds sterling only when he has to, and then for as short a time as possible.

I believe that if the pound could be shown to have a firm basis of stability and was freely convertible in every respect, without reference to any control, however mild, which is no doubt very important psychologically to the foreigner, we should have a good chance of remaining the greatest trading nation in the world. Unless this happens, I think that it is only a matter of time before the sterling area as we know it will disintegrate. The overseas members are not going to be tied indefinitely to a currency which is constantly threatened and undermined by sociological experiments. I believe that it is essential to us in this country to have a currency that is recognised throughout the world as a safe medium for long-term investment as well as for current trade. If we precipitated the dissolution of the sterling area, it would be a disaster of the first order in which the main sufferer would be the United Kingdom.

It is interesting and at the same time tragic that the basic policy of the Treasury under both Socialist and Conservative Governments appears to have been to attempt to contain inflation by exceptionally burdensome purchase taxes and taxes on personal income to a degree of oppression, but with the money so raised not only to put still more purchasing power into the hands of many who do not need it because they are already earning good wages or salaries, but at the same time also to relieve these same people of responsibilities which to-day they are happily quite capable of meeting themselves. It is quite clear now that this policy has failed, and it has been clear for a number of years; but, for all the action that has been taken, it would appear that the Treasury is bankrupt of ideas. Be that as it may, what is really lacking surely is political leadership and integrity in these matters. A lack of these has been at the root of our economic troubles.

I recall that in a previous debate on these matters, when it was suggested that purchase tax was inflationary, the noble Lord replying for the Government said, with a certain amount of apparent satisfaction, that it had been proved that the consumption of specific articles decreased when purchase tax was raised. But what he did not say, because it cannot be shown statistically, is whether the money thus retained was actually saved or spent elsewhere. Unless it was saved, there was certainly no diminution in the pressure of inflation. That is the difficulty of purchase tax. I have little doubt that the greatest single causes of inflation are not only the high rate of Government spending but also the spending power which the Government heedlessly puts into the hands of others, which in turn calls for high rates of taxation, about which we have heard so much this afternoon. Such palliatives as the ingenuity of successive Chancellors of the Exchequer have evolved during the years to avoid facing up to the real issue seem to me to have been as successful as the commands of King Canute. He, at least, realised the futility of his commands.

Every time this issue has been raised, we have gathered that taxation could not be reduced because Government expenditure could not be reduced, apparently because every sector of expense is someone's sacred cow and cannot be touched. The noble Lord, Lord Polwarth, takes the rather gloomy view that it cannot be reduced in any event. I do not entirely agree with him in that respect. But at last we seem to have a Chancellor of the Exchequer who thinks in the same way as I do. I will return to this point in a moment.

When income tax first became firmly established in the last century, it was perfectly natural that it should be a progressive taxation based upon individual income. At the beginning of this century it was also natural that the social reformers should look to that source as the only source available for financing the embrionic welfare developments. At the same time, the rate of taxation never became so high that adequate capital formation was prevented There can be no possible justification for progressive taxation which penalises success. But since those far-off days, although within the lifetime of many people, there has been a major social revolution. Wages and cash incomes of millions of people have increased manifold and over the last fifty years, the living standards of millions of people have happily undergone a transformation. I am all in favour of high wages, provided they are properly earned.

But as well as this social revolution, brought about by higher wages, we have introduced the Welfare State, a Welfare State that was designed against the background of the past but which has to be paid for at the cost of the present. The majority of wage-earners to-day happily are not badly off, but too much of the cost of the Welfare State is devoted to relieving them of what unhappily they could not afford twenty-five years ago, but to-day in general can afford. We are not living in 1907 or 1927: this is 1957. It is absurd and unrealistic to expend too much of our energies on trying to mitigate the hardships of the past. We need all our energies to overcome the problems of the present, of which undoubtedly the paramount one is our economic survival.

The Labour Party doctrine of "fair shares for all" has led many people into the false belief that the Welfare State can be paid for substantially by the wealthier sections of the community. Of course, this is a myth. The Welfare State, in all its manifestations, costs £2,000 millions. If we take an individual income of £2,000 a year, even in our debased currency, as being the borderline at which anyone can be described as rich, the total income tax and surtax paid by all the people with an income over the £2,000 level has produced only £583 million, or roughly a quarter of the cost of the Welfare State. So that, when we get down to the facts, the people who have to pay for the Welfare State are, in the main, those with incomes below £2,000 a year. As this is an incontrovertible fact, surely it is neither desirable nor necessary for the man in Whitehall to dictate to all and sundry how to spend their own incomes. Even confiscatory taxation on the so-called rich cannot provide enough to run the Welfare Stale. This is not a question of Party politics. It is not a question between Right and Left but between right and wrong.

One or two letters that appeared in the correspondence columns of The Times a few weeks ago made out that people who think as I do wish to revert to the conditions of 1939 or earlier. This is the very opposite of what I wish to see. In point of fact, although there are many lessons to be learnt from the past, I think that many of our present troubles arise from thinking in terms of 1939 and earlier. I should like to congratulate the Chancellor of the Exchequer on his conception of the "Opportunity State". The creation of this is the only hope for this country and the only way in which the skilled young people will be persuaded to stay in this country. After all, it is only right and proper that a man or woman with skill, knowledge and capacity should seek opportunity rather than a dubious security.

I return to the question of Government expenditure. The most important fact to bear in mind, in my opinion, is that of the total expenditure of £6,000 million, a third (£2,000 million) is spent on the Welfare State. It is easy enough to pick on points that one considers wrong, and noble Lords who sit on the Front Bench have often complained that it is no good criticising unless one can put forward constructive suggestions. When I learnt that this debate was to take place I started to turn over in my mind such constructive suggestions as might be worth your Lordships' consideration. Since then the Government have introduced plans for the reform of local government finance and some adjustments in welfare arrangements. Both of these proposals I welcome, and I hope that they are the forerunner of other steps along the same road, as we need to go considerably further if we are to come within sight of the sort of economy we need to survive in this severely competitive world.

There is one particular point that I should like to suggest to your Lordships, which arises from my original premise; that is, the absolute necessity to stabilise the currency. The first principle, I would suggest, should be that in no circumstances should any spending agency, be it local government or any other authority, have automatic recourse to the Exchequer for reimbursement of their spending, either in whole or in part. To permit spending on the basis that a certain percentage will automatically be repaid from the Exchequer is not only bound to generate inflation, but breeds spendthrift ideas, and must make virtually impossible Treasury control of the spending of public money. In general, those who have the spending of money at their disposal should be responsible either for raising it, where appropriate, as in the case of local authorities and other similar authorities, or justifying their expenditure before it is made. Those who have to look to the raising of money are more careful with the spending of it than those who are, in effect, given a blank cheque.

On welfare expenditure, I would suggest that one must start on the basis that if a man is working his wages must be at a level to provide him with a decent standard of living, according to the times in which we live. I believe that such funds as the nation can make available for welfare should be devoted primarily to the care of those who, for some reason or another, cannot care for themselves, and to protect those whom, for some reason, society cannot look after in the normal sense. I can see no justification, in this day and age, for large-scale largesse to the population as a whole— such as, for example, family allowances. I suggest that it might be worth considering whether the Welfare State costs might not be divided into two categories: the first covering those items which the normal Christian morality demands of the State, such as National Assistance and the like, which should be left as a charge against the Budget as at present.

The second category, covering other items of the Welfare State, might, I suggest, be extracted completely from the normal Budget as we know it. It should be possible to have an entirely separate Social Security Budget (call it what you will) which would not have recourse to the general Exchequer. This Budget, I suggest, might be financed, first, by National Insurance contributions; and secondly, either by part of the proceeds from purchase tax, or, if purchase tax is to be abolished, by a special sales tax. Capital moneys, of course, could be raised in the normal manner. The merit of this idea, to my mind, is that it would disillusion those who believe that they are getting something free, and would produce an awareness of the truth of the situation, which is that the Welfare State has to be paid for, not by someone else but by every working member of the community.

I realise that I have raised one or two controversial issues. We have a new Administration, headed by a Prime Minister who clearly realises that if we fail to put the economics of our house in order, the future of this country is indeed black. As the old and tried policies have failed to achieve what is necessary, I feel that now is the time when new ideas should be aired and examined. I therefore welcome warmly the suggestion made by several noble Lords, that a Royal Commission or Select Committee should be set up to examine further the basis of Government expenditure. I fully realise that a month away from the Budget the noble and learned Viscount who is to reply to the debate will not be able to answer all the points that have been raised this afternoon, but I would ask him to tell his right honourable friend the Chancellor of the Exchequer that, if he is true to his intention to proceed with the creation of what really is an Opportunity State, he will find he has the support of all in this country who have its future at heart.

6.16 p.m.

LORD MOYNIHAN

My Lords, at this stage of the debate there is little new that can be said, but there are certain points that might be further emphasised and others that might be further underlined. On behalf of Members on these Benches—I can say "Members"—I should like to congratulate the noble Viscount, Lord Crookshank, on his maiden speech. I am sorry that the attendance is rather sparse this afternoon. He may be a little surprised, although I hope not disappointed, if I say that the numbers on these Benches are greater, and their voice stronger, than he has been used to for some time in the past. I would say, also, in all humility, how much we enjoyed his wisdom and how impatient we are to hear him on future occasions.

Although we still have in this House a strong voice on these Benches, apparently the B.B.C. in their television series "Panorama", when they were discussing the future of your Lordships the other day, did not think that was the case. When I was a boy there was no television, and I had to learn the story of Robin Hood the hard way; that is to say, by reading it. At that early age I was not particularly intrigued with his association with Maid Marion, but equality of opportunity always interested me, although probably at that age I should not have put it in quite that way. As we all know, whether we have read it or seen it on television, Robin Hood stole from the rich and fed the poor. Successive Governments have taken money from the rich for so long now that there are very few honest rich left; and though the Government have not recently given to the poor the money that they have so taken, it is gratifying to see that there are far fewer poor now than there were previously, though under the present system of taxation the middle classes are rapidly taking their place.

Rather have Governments boosted up and enlarged beyond all measure the organisations which run their various Departments. The growth of the Civil Service is one of the most frightening things of the present day, and the waste of money there seems to be greater than almost anywhere else. I do not know how many of your Lordships read an article some fifteen months ago in the Economist called "Parkinson's Law." It I was an extremely witty article, containing some good home truths. It gave, among other things, statistical information regarding the Admiralty and the Colonial Office—figures that have not since been denied officially. I should like to quote some of those figures to show the point at issue. In the Admiralty in 1914 there were 146,000 active personnel and 2,000 officials. In 1928, there were only 100,000 active personnel but 3,569 officials. We know that since those days the numbers of active personnel in the Admiralty have gone down considerably, yet in 1935 the officials numbered 8,000 and, in 1954, over 33,000.

In the Colonial Office, one would have thought that over recent years their work would have been lessened through the diminishment of colonial territories. Yet the number of officials has risen from 372 in 1935 to 1,661 in 1954. One wonders what the figure will have reached when there are no Colonies left to administer. It is extremely difficult to see the end of this form of inflation. Let me be quite clear. I am not suggesting that we should abolish the Civil Service, but what I do suggest is that there might be a cessation of enlistment into the Civil Service until the figures are brought down to a reasonable level.

The method of financing Government Departments also, I think, gives cause for grave criticism. There is a tremendous amount of wasted expenditure. The Army have been in trouble recently because of the waste that has been shown there; yet they are not the only culprits. Surely it is the system which is wrong. Your Lordships know what the system is: all these Departments are given a certain sum of money every year. If, at the end of the financial year, at the end of March, there is a surplus, that surplus must go back to the Treasury. So in January and February they are all rushing round trying to find how to spend any surplus they might think they have, to avoid its having to go back. That is only human, but I should have thought that, in the case of the Army, there would be a better way than buying a ten years' supply of blanco. All this extra expenditure adds to the taxes that you and I have to pay.

Then we come to the question of the Government interest in the Savings Movement. In the Stock Exchange many years ago, they named Government securities, "gilt-edged" because they were the safest and the wisest form of investment. Since inflation came, that is no longer true; and many of us, to our cost, have found that it is not safe to invest money in gilt-edged securities, and that capital may well depreciate considerably. While inflation lasts, and while the value of the pound decreases, exactly the same can be said of savings. It is not right for a Government to advise its small investors to go into savings when their capital can so depreciate. If a company did not mention an important point on their prospectus, they could be accused of fraud. The Government are not mentioning a vital point, the point of inflation and the possible loss of capital, when they ask people to save. The noble Earl, Lord Cromer, mentioned the word "fraud". I think it should be underlined and not just passed over. The Government are telling people to save by way of National Savings Certificates (I am not referring to Premium Bonds, which are a different story), when in ten years' time, although their capital and interest is saved, the money they get may well be worth much less than the money they are saving now.

Finally, there are certain classes who are being penalised by the Government because they are attempting either to better themselves or their families or to live a moral life. So far as the latter point is concerned, it is still true to say that it is cheaper for a couple to live together unmarried than it is for them to live together as a married couple, because in no way can a married couple living together avoid being assessed jointly for surtax. Now, however indirectly it may be, the Government are penalising morality by letting that go on. That is, I think, a point that could be dealt with almost immediately.

Then there are the cases in which a family, through saving, are trying to better themselves in the field of education or medical treatment. Surely it is time that there was some relief from taxation for those who are prepared to save to send their children to the best schools—and I am afraid that, anyhow up to the present, one cannot say that the State school is yet the best school. Then a person is penalised for having his own private doctor. The old "family doctor" has gone on for generations. Why should not a person spend a little of the money he may have in having just a little more than the State will give him? But in doing that, why should he be forced to pay for his medicines, whereas other people who do not take the trouble get it all free? That is another problem that I think could be settled immediately. Those two, surely, are blatant attempts at bringing the standard of the people down to a level, rather than trying to raise it. Surely, Her Majesty's Government, with all the traditions behind them, should realise that and attempt to put it right.

We are all grateful to the noble Lord who initiated this debate, and we were most interested in everything he said. I was a little sorry that he had to refer on so many occasions to America. We all know that at this particular time the Americans are living better than we are. This is not completely new: we found it so in the early days of the war—I mean when America came into the war—when the American soldiers came over here and had far more money to spend than our own troops. But we found exactly the same in 1939 and 1940, when we went to France, when we were a little baffled that our troops had so much more money than the French. I do not think we should look at this and compare our own country with other countries, however high the taxation may be—and I am the first to demand that it should be lowered. It is still better to live in this country than in many other parts of the world. This country was in existence and a great place before America was, if I may use the word, "invented", and maybe we shall be here for a very long time to come. All I would ask is for a "new look" in the field of taxation and in the field of public expenditure. And what better time to tackle the problem than the present?

6.29 p.m.

VISCOUNT ALEXANDER OF HILLSBOROUGH

My Lords, we have had an extraordinarily interesting debate to-day, and however much I may have disagreed with him, I am grateful to the noble Lord, Lord Coleraine, for introducing his Motion. I listened to him with great attention, and my mind went back over the decades during which I have been interested in politics. Noble Lords on the Liberal Benches may be surprised to know that I was interested in politics when I was county secretary for the League of Young Liberals, nearly fifty years ago. Listening to the arguments of the noble Lord, Lord Coleraine, which he had obviously studied very well, and looking at the general economic, financial and social problems we are facing to-day, I found myself living again my studies of the speeches on Mr. Lloyd George's Budget of 1910 made by members of the Conservative Party and in the House of Lords. We heard them almost word for word, except, that on that occasion we had not the great outstanding pieces of properly justified expenditure on war for liberty and freedom in 1914–18, which very largely increased the liabilities falling generally upon the community. I recalled that when the noble Lord said, if he will forgive me for reminding him, that free society and Parliamentary institutions were at stake. We heard arguments like that from the Conservative Party when it was proposed to introduce the old age pension of 5s. a week. It was almost the exact language, and so I did not feel quite so alarmed about it, coming from that quarter of the House, as perhaps some might have felt.

Nevertheless, there is no doubt that, by the way in which he deployed his general arguments, the noble Lord has done a useful service in letting it be known from that quarter of the House that there is certainly no room for complacency in the present situation. One or two statements have been made on behalf of the Government in the past few weeks since the Suez adventure (I will not say that they came from all Ministers alike) from which one would imagine that everything was going to be for the best in the best of all worlds, in spite of all that we have gone through in the last twelve months. Therefore, I welcome the fact, that from that side of the House come warnings of this kind.

We have to look carefully—I am quite sure the noble Viscount who is going to reply will recognise this—at how the kind of arguments which are put forward to the Government in the present situation affect our own particular views of what needs to be done. In effect, the noble Lord, Lord Coleraine, said that two things were required. One was that we needed fundamentally to reduce expenditure, and the other was the need to reduce taxation. The other things, whether the incidence of taxes should be rearranged, and certain things of that kind, all fitted in, but that was the objective of his address to the House to-day. My noble friend Lord Pethick-Lawrence, I think, has rarely put a more succinct survey before your Lordships' House than he has done this afternoon. He did not want to take too long; otherwise, I am certain he would have driven home still further his points with plenty of figures, but he was wise enough not to trouble us with too many figures.

But when we come to look at the problem put to the House by the noble Lord, Lord Coleraine, we wonder where noble Lords opposite want to begin. I have listened carefully to the noble Earl. Lord Cromer, to the noble Lord, Lord Balfour of Inchrye, and to others. It seems to me that what is really desired is to make an attack—although the noble Earl, Lord Cromer, dissociated himself from this idea—on the way in which the present resources of the country are distributed as between the different sections of the population. I see that the noble Lord, Lord Balfour of Inchrye, shakes his head, but I will read the OFFICIAL REPORT to-morrow to make sure that I am not being unfair, speaking, as I am, on the spur of the moment, in reply to the debate; but certainly that was my impression.

I am bound to say that, when we consider what we have been talking about, and the fact that almost no one has mentioned that our expenditure in defence of liberty in the last three or four decades has been so colossal, we can perhaps fail to understand why we should have to meet part, at any rate, of the problem we face to-day. We have a debt of £29,000 million at the present time. It is not on the decrease, it is on the increase. The debt which existed at the end of the First World War was £8,000 million, but the actual expenditure of the substance of the country in these two Great Wars is not to be measured by the amount of the social debt they left behind. Far and away greater was the expenditure upon those undertakings. I dare say that experts more informed on these matters than I am would probably assess what we have had to spend at much nearer £130,000 million to £140,000 million in the last forty to fifty years—not what we have remaining, but what we have spent, and what damage we have suffered in our economy in consequence.

I am quite prepared to look at the general financial position, recognising that this great people of ours, composed of all classes of the community, has come through these two great struggles in our history, and that it has so brought them together that there was a decision, wisely made, by the Coalition Government in office during war time that there should be such a reconstruction of society as to bring justice to the people who that mixed Government recognised had made such vast contributions to the victory for liberty. I say advisedly (I am quite sure the noble Viscount, Lord Waverley, will not disagree with me, because he had so much to do with the keeping of our finances on as sound a basis as possible in circumstances of great difficulty, yet trying to keep a fair and just outlook upon the question of future social justice in the country) that many a time—not once but far more than once—I have seen our former Prime Minister, Sir Winston Churchill, in a state of great emotion when studying the post-war plans, and heard him say, I feel sure completely sincerely: "I know it is going to cost a lot of money, but look at what these people have done for us. They deserve every bit of it and they ought to have it." That was the atmosphere in which the Welfare State, about which we now hear so many sarcastic remarks, came into being. I am quite sure that there are many noble Lords on the opposite side of the House who would not wish to let the country forget the share that all Parties in the State had in building the Welfare State.

Now let us look at the present situation in a rather more critical and political way than I have done so far. The immediate and urgent situation to-day has not come about without some contribution to our difficulties from the present Government; we cannot shut our eyes to that fact. What the noble Viscount, Lord Crookshank, whose maiden speech we all welcomed so much, and whom we hope to hear speak often in the future, said is perfectly true. We are beset regularly with crises on the balance of payments, but there are some fluctuations in the call upon our reserves which could be avoided. That is one of the main problems that we are facing to-day. I am speaking now without reference to any records, but consider this. At the end of January of this year our gold and dollar reserves were down to approximately 2,100 million dollars. It may be that that does not look too bad a figure in relation to the state of our gold and dollar reserves in 1949, in which year, I think, we devalued. But in arriving at that figure of 2,100 million dollars at the end of January, as was pointed out in another place the other day, the Government had received the whole of the proceeds of the sale of the Trinidad Oil Company, and they had got the receipts from the borrowing from the International Monetary Fund and the International Bank. If they had been without any of those receipts, then the actual gold and dollar reserves at the end of January would have been lower than the figure at which it was deemed essential to devalue the currency.

Nor can there be any dispute whatsoever, in my judgment, that the decline of our gold and dollar reserves was greatly accelerated by the unfortunate adventure into Suez. I do not want to go into the details of that; I simply state what I believe to be the fact—that our expenditure and what it has cost us in our general credit overseas, combined together, were a large factor in that respect. It is in the light of that that we have to consider the speech of the noble Lord, Lord Coleraine, and particularly the speech of the noble Lord, Lord Polwarth. His was a most fascinating speech. I listened to it, and I liked the humour of it and the competence of the presentation of some parts of the case. But when I had finished listening to him, I wondered what on earth is going to happen, because he admitted frankly that a lot of the cuts in Government expenditure that are asked for are never likely to be made because they would not be accepted by the public at large. Then, when he went on to deal with the various forms of taxation which he would like to see reduced or transferred to somebody else, I wondered how on earth he would shape at the Treasury in producing a balanced Budget and giving the people, for whom no doubt he was speaking in his mind to-day, all that they wanted. I just could not make it up.

LORD POLWARTH

My Lords, if I may reply to the noble Viscount, I said specifically that any reductions and changes in taxation which I recommended were with the object of increasing productivity and therefore the national product, and of providing the means to carry these burdens.

VISCOUNT ALEXANDER OF HILLSBOROUGH

I am mindful of what the noble Lord said in that respect. What I am puzzled about is that when I went through the various things he mentioned and the process that could be adopted in present circumstances, I thought to myself: how is he going to get the money, and from whom? Perhaps he will look at his speech again. Perhaps he will be so kind as to tell me whether I am unfair about it, and exactly where the money was coming from. If he tells me I am, I shall be glad to send him a little note of regret, indicating that perhaps I have not represented him fairly. But that is the impression left upon me as I listened to him to-day.

We have had the meat of the matter put by my noble friend Lord Pethick-Lawrence, in pointing out that the attempt at control by the Government, in addition to their policy in Suez, has been fundamental in bringing us to the present position. I would go a little further than my noble friend Lord Pethick-Lawrence, who has a kind heart and is perhaps not so controversial as myself. I would say that not only is that so, but that the general policy of the Government since 1951, when they were first returned post-war as an elected Government, has been wrong economically. They went all out in order to see that their motto of "Set the people free" should be carried into the economic and financial sphere. In fact, there has been a free-for-all, and instead of its leading us into the position that we wanted, where we should have the most economic production in the world and should be able, therefore, to keep a hold upon the expanding markets overseas that we had already obtained from 1945 to 1950, we had such a movement in the direction of wages to catch up with all the increases in prices brought about by the Government's action, including their removal of food subsidies, that there was a serious check in the rate of our development, and especially so in our production.

There can be no argument about the figures. The figures show clearly that in the five years to 1950–51 our general increase of production was, on the average, something over 6 per cent. per annum. If you look at the last five years, you will find that our increase of production has not been much more than 3 per cent., and in the last eighteen months it has given cause for great anxiety to those in industry and finance who are specially interested in this matter. In 1953 we actually received 120 million dollars of defence aid from the United States. Instead of conserving that in order to get on with the production of our armaments programme without too much difficulty, we relieved direct taxation, gave away money—just as was done again by Mr. Butler in what we have been accustomed to call the Election Budget of 1955. In the Election campaign in 1955 it was being argued on Tory platforms, following the announcement by Mr. Butler, that, from the progress we were making and the prosperity we were enjoying, there was no reason at all why we should not easily double our standard of living in 25 years. Believe me, the exercise in a community of that kind of stimulation—the "free for all"—has meant that there has been more consumption and more demand. In order to bring that about, expenditure has gone up, prices have risen, and that has been reflected in a far higher rate of increases in salaries and wages than would otherwise have been the case.

That is the position we have to meet at the present time. I am puzzled to know from the speeches of the noble Lord who introduced the first Motion, and from the speeches of Lord Cromer, Lord Balfour of Inchrye and others, what they propose to do about it. Are the Government anxious not merely to have disinflation to hold the balance of payments right and to maintain a steady and stable currency, or do they want deflation? The people who were so often associated with myself in political matters and in industrial organisations believe, whether the Government like it or not, that what they are seeking is general deflation. The people had quite enough experience from 1918 up to 1932 not to want a repetition of that kind of thing.

In dealing with these matters, I think we had better understand quite clearly where we are. Nobody has more repeatedly or fairly stated this case than has my noble friend, Lord Pethick Lawrence. We are not, and never have been, against a proper measure of monetary control where required to meet a situation. But in the face of a national debt of £29,000 million and the need for keeping up our production to meet that situation, we cannot hope so to organise our economy without major planning. We cannot meet the needs of the particular year, or two or three years together, our needs abroad and at home, without proper planning, without having physical controls. The Party opposite are professedly dead against them, but as a consequence we suffer very serious results.

I do not want to take more time of your Lordships' House to-night, but I do beg all of us who are present to-night to remember that we regard each other from our different points of view as being sincere in trying to retain the best we can for our country. It hurts us over here as much as it hurts you over there if we see some of the youngest and best and most qualified of our population emigrating, for one reason or another, in numbers above the average. We want our population to be faithful and affectionate, loving and loyal to their own country; and we want conditions here such as would help and stimulate them. But we will never agree to return—and I gather from one or two interjections that even the Party opposite do not desire it—to the kind of pure, undiluted, competitive processes of the between-the-wars period which brought our people, the people we love and for whom we have worked all our lives, who gave themselves as loyally and as lovingly for their country as any other class in the community in that great struggle, to levels which ought never to have existed in modern times in this country. We will never permit that situation to return if we can help it.

So we now say to the Government that we regret much of their policy in the last twelve months which has come home to roost economically. A little rise in gold reserves here and there from month to month may still merit a little appreciation, but we are placed in a difficult situation, if we go up and down like that at the moment. What we need to do is to restore confidence in the people. They have lost a great deal of the confidence they had, and I hope therefore that, whatever may be suggested to-night, the Government, in dealing with this matter will not overlook the fact that we need our people to be educated upon this particular problem. Let us have the Commission or something of that kind for which the noble Lord, Lord Pethick-Lawrence, pressed, and let us get the real facts of the situation home to the people. Let us get our ideas right, that we are going to be fair to all the people and not merely a section of the people. Then I think we can restore the kind of confidence that is needed to meet a very difficult situation.

6.54 p.m.

THE MINISTER OF EDUCATION (VISCOUNT HAILSHAM)

My Lords, I will not conceal the fact that when the vagaries of politics informed me, somewhat to my surprise, that at any rate for the time being I was to be the Minister to respond on behalf of the Treasury to debates in your Lordships' House, I viewed my new responsibilities with unmitigated pleasure, and that for two reasons. The first was that I felt quite certain that I should be able to enlarge my knowledge and enjoyment of economic subjects by the wealth and riches of the speeches which are made in the course of your Lordships' debates on these subjects. The second was that I greatly looked forward to having briefs from the Treasury of such unsurpassing power that everybody would take me for a serious authority on economics. In the first respect this afternoon I have not been disappointed. We have had a most enlightening and improving debate, and noble Lords who have spoken will forgive me if I mention only the two impressive speeches with which the debate began and the welcome maiden speech of my noble friend Lord Crookshank, whose intervention in our debate was such a pleasure to us all. If I mention individually no other speeches at this stage it is because there were so many so excellent contributions.

In the second respect, I am bound to say that I have been disappointed. As regards consulting those who are to advise me how to reply to a debate of this character, noble Lords will remember that in this month of the year the Treasury is in labour and the officials can talk of nothing but my right honourable friend's approaching confinement. I am allowed to say nothing except to wish him a safe delivery, a sentiment with which I am perfectly sure all your Lordships will generously agree. I fear that also applies in particular to the demand for a new Macmillan Committee or Royal Commission, whichever alternative were proposed. I am advised that such an announcement could be made only as part of my right honourable friend's Budget statement, and every Minister of the present Government must now live in terror of anticipating that in any way, for fear of causing repercussions in another place.

Indeed, my Lords, if I were really confined to the advice and instructions I have received I should make a speech which would be at least gratifying in its brevity. I feel, however, that some of your Lordships would feel that it was too brief; and therefore, with a suitable disclaimer of any internal knowledge of what is likely to emerge from the labours in Treasury Chambers, I thought I might be allowed to make a few comments, strictly of my own, on the observations which have fallen during the course of this debate, making it quite clear that I neither know what my right honourable friend intends nor, if I did, would I be free to disclose or anticipate it in any way. If any unwise speculator in the City is to attempt to draw deductions from anything I may say or keep silent about in any investment he may make in securities, I can only say that he will get what he deserves.

As I heard this debate develop, like the noble Viscount Who concluded for the Opposition, I cast my mind back on the experience of a rather shorter lifetime. When I first awoke to the realities of economics my father used to go to chambers at about 9 o'clock in the morning carrying in his right trouser pocket a remarkable gadget in which were contained golden sovereigns. There were quite a number of them retained by a spring in a device which was then the familiar accompaniment of every gentleman of the middle class. With that gadget he could go across Europe unarmed, without a passport, to every country except Imperial Russia, and there he could go with his sovereign case although he would require a passport too. He could enter a shop in Paris, take out one of his sovereigns and there receive change in the currency of the country, which he could in due course exchange again in Basle for Swiss francs at a perfectly well known rate of exchange. Indeed, as one looks upon that economic scene one is reminded inevitably of the words of the ageing Theiron. When he was asked by a young Frenchman what it had been like to live under the old régime, he replied "Qui n'a pas vècu avant la révolution, n'a jamais connu le bonheur de la vie."

In a sense, I agree with that judgment which was evidently that of the noble Lord, Lord Grantchester, on this subject. In substance, it is true, of course, that the avalanche which was let loose after 1914 destroyed the exchanges of Europe and undermined and finally took away the golden pound and all the various things which could have been comprehended in what the late Mr. Ernest Bevin called his "foreign policy" which I heard him utter in a place which was constitutionally different from the present. but in location not very differently situated from where we are now. He said "My idea of a foreign policy is to be able to get a ticket at Victoria Station and go where the hell I like." All that has been swept away, and we have lost much in the course of the disaster.

We who have been privileged to live in this age have indeed been born to an age of revolutionary change, not all of which has been for the best; but I must say that I am to some extent in agreement with the noble Viscount who has just resumed his seat that some, at any rate, of the spaciousness and charm of those memories is illusory. We remember the freedom, the stability, the ordered progress and, above all, the security from war which had persisted over the greater part of Europe for nigh on a century when it came to pieces in our hands; but we forget the bitter political struggles of those days, the severe industrial disputes, the constant endemic poverty, the as yet dimly apprehended social realities, all of which half a century of experience has taught us, and taught us much to our advantage, to consider.

Between the two wars, I look back to a different period. The golden sovereigns had disappeared from the trousers pockets of the middle class, but the pound could, as the saying then was, "still look the dollar in the face"—whatever that might mean. Contrary to what the noble Viscount has said, the economic historians will say that, despite the adverse elements to which I will presently attach what importance I feel right, the era was one none the less of economic progress and social progress on a great scale, which can be demonstrated by figures to any who are curious enough to inquire.

Very largely, the foundations of our present social security were laid during those years. None the less, we suffered from a continuing and increasing balance of payments problem, even then. It is well to remember, when we talk of our balance of payments problem to-day, that such a problem is by no means always associated with inflation. I can well remember the year 1931 when we had a balance of payments problem in an acute form associated with acute deflation. Side by side with the social and economic progress and with the persistent and growing problem of the balance of payments, that period of time was darkened by the spectre of the endemic depression which cast the shadow of unemployment over the whole of our national life, laying the foundations of bitterness and frustration from which we have only recently begun to recover. That was the second period through which we lived."

Since 1945, we have been living in a different atmosphere. Another world war has supervened. Once again our material resources were drained; once again we lost at any rate a part of the flower of our manhood, although not, happily, on the same scale as that first terrible blood bath of 1914 to 1918. Once again we looked forward with sincerity and conviction to the prospect of a new and better world which we should build on the ruins of the old. And I must say our hopes have not altogether been mistaken. I believe it is wrong to paint the picture in too gloomy tones. When I go about the streets of this city and see the children vigorous, straight-limbed, well clad, with bright faces and obviously never under-nourished, I cannot regret the changes which have taken place in those recent years. There is no unemployment. We talk about social security, but social security, in a sense, is full employment. In full employment there can be adequate wages. In full employment there can even be the means to provide the social security payments for those who have them not.

I cannot regard the tremendous economic progress to which I will draw attention in a moment as something which can fairly be described as the result of alcoholism. In that impressive speech with which my noble friend inaugurated this debate and with which, for the most part, I not only sympathised but agreed, I thought he did his best passages less than justice by that analogy. Since the war, there has been a tremendous recrudescence of social progress and economic strength in this country. During that time we have been subjected to many undeserved setbacks. Who could have foreseen, for instance, that less than five years after the end of hostilities we should be subjected to the Korean war, as a result of which we are now spending the best part of £1,500 million on defence? That is not our fault. It is not the fault of any Government. It is not due to what my noble friend, Lord Cromer, referred to as any want of integrity or political leadership. It is a burden to which we have been unjustifiably subjected but which we could not decently have avoided.

Now we are bearing more than our share of that burden. We are bearing, in proportion, a burden heavier than any other of the free States except the United States of America; and we have justifiably told our Allies that part of that burden must, in future, be more equally shared. But we need not be ashamed of our leadership in this respect. We need not blame our Governments for it. We need not, above all, allow it to depress us unduly if we cannot effect all the economies we desire; because side by side with that gigantic burden of defence we have shouldered a social programme the like of which the world has scarcely ever seen and the greater part of which is accepted by all bodies of opinion in this country.

Side by side with the social programme, to which I will revert in a moment, we have, at the same time, embarked on a great policy of economic investment. We have increased our assets overseas, I am told, by no less than £1,400 million, £700 million of which was achieved in the last five years. Recently the rate of internal investment has been running at somewhere about £3,000 million. Yesterday we had the announcement of a programme of a further £1,000 million, or thereabouts, if my recollection serves me rightly, for atomic development. We have embarked upon a reorganisation of our railways, and upon projects in school building and industrial construction which will occupy most of our resources for years to come. Barring accidents, we can therefore look forward to a period of increased prosperity and increased wealth. I am not here to apologise for my right honourable friend who said that in twenty-five years from 1955 we should have doubled our standard of living. I believe that that implies progress covering 7 per cent. of our gross national product in that time. I do not think that that was an extravagant forecast and I see no reason at all, therefore, why we should view the present situation as one for despondency or gloom, or for mutual recrimination on this occasion.

It is, of course, true that, side by side with this heavy burden of intense activity to which the nation has been subjected, there has also been a tremendous outburst of apolaustic enjoyment which has almost reached the proportions of a shopping spree at times. I do not think we need be ashamed of that at all. The inevitable consequence has undoubtedly been a period of what is called inflation, which has caused a great deal of inconvenience, though I must say, for my part, that it seems to have caused very much less inconvenience than the depression through which I lived in the earlier part of my manhood, and a great deal less suffering.

I do not regard as adequate even Lord Pethick-Lawrence's description of our state as "middling prosperity." I think that the right description for what we are going through is abounding prosperity and extreme economic precariousness. This great prosperity, balanced on a razor's edge, goes side by side with this intensive economic activity which has resulted in a gross national product of something like £16,000 million. We are faced with the perennial trouble of our balance of payments and the constant spectre of the decreasing value of money, both of which, quite legitimately, are pointed to by noble Lords who say that they threaten our economic security. They do; and they must be faced. As I ventured to say in another place, out of doors, only ten days ago, if the people of this country do not deal with what is facing them realistically, and with intellectual honesty, I very much doubt whether they will get another chance very much later. Let us not, on the whole, look upon these things as marks of any want of prosperity. Our trouble is that our prosperity is great, but it is not in the least secure.

That leads me to a short (I hope) discussion of the subjects upon which we base our expenditure. I have already dealt to some extent with defence, and your Lordships will know that considerable cuts in our expenditure are contemplated. But do not let us forget that, having made cuts, our expenditure will still be enormous by any pre-war standards—more than the whole of the pre-war Budget, on any view. As I understand, my right honourable friend is trying to limit his Estimates to last year's total—a somewhat modest ambition, if the desire is to cut Government expenditure. We are spending about £1,600 million a year on various social services. So far as education is con-corned, I do not come here in a white sheet, as one of the national dailies the other day said that I ought to do, because I preside, so it is said, over one of the most extravagant of Government Departments.

I do not regard education as an extravagance. I do not think that, in spending the money on education which we in fact spend, we are spending it extravagantly. A small inquiry would, I think, show that we were spending less than 3 per cent. of our national product upon education. That is rather less than half what the Americans are spending, and about one-third of what the Russians are spending. In fact, we get very much better value for our money than any other comparable system of education. I do not think any complaint can be levelled against us for spending £514 million a year, taking central and local expenditure together. I believe that it is an investment which will yield great dividends in every field. I know of no other way by which a country can remain great than by spending money on the education of its children. I believe that the world as a whole is only beginning dimly to apprehend the vast improvement in its standard of life which can be achieved by the education of its people. Because this is not a debate on the educational services I will say no more under that head.

It is true that many of the evils against which we planned, in 1944, 1945 and 1946, by way of our social services have not come about. The Beveridge Report and the White Papers which succeeded it were all based on the belief that we were going to have about 10 per cent. of unemployment. Many of the evils insured against were evils accentuated by that supposed possibility. I believe it is true that the social services then designed could have been designed more economically if it had been fully apprehended that we were going to have for fifteen years at least (and I hope it will last very much longer) a system of full employment. The Health Service plan was based on an expenditure of £175 million a year. Sir Stafford Cripps thought that he would limit it to £400 million a year. At the latest figures it is running at something like £690 million a year. These are very startling figures. As I see it, the National Heath Service, if not properly controlled, will run away with a very great deal of our national resources. Pension funds will be in the red, as far as I know, somewhere about the middle of next year, to the tune of £40 million. By about 1970, I am told, the annual deficit—not what it is spending, but the deficit—will be about £380 million if nothing is done about it.

LORD PETHICK-LAWRENCE

Does the noble Viscount mean per year, or the cumulative deficit?

VISCOUNT HAILSHAM

I think it is per year. But I am speaking without the book. However, I think I am speaking in fairly accurate terms.

These are facts which the country must face. It is no good using recriminatory terms when we point to the events which are occurring. We may not like them, but we have got to face them. I think that, unless fairly stern measures are taken to control them, our budgetary situation for our social services will face a serious financial crisis much sooner than we think. What then are we to do? Abandon the social services for which many people have spent part of their lives? Breaking off here, may I say that I did mislead the noble Lord, Lord Pethick-Lawrence just now. I should have said "cumulative deficit". I apologise. Are we going to abandon these social services? I think that that would not be the right course. I think we are entitled to say, as my right honourable friend said on, I think, February 19 in another place, that some greater charge for them must be made if they are to be maintained, and if honest finance is to be retained. After all, as one of your Lordships said, in a system of full employment a country is entitled to look to wages and salaries as primary sources out of which the ordinary necessities of life ought to be met. It is true that needs to be qualified by the insurance principle. We have learned to pay while we are well for what we may suffer when we are sick or indisposed. At the same time, we have all to be on guard against the belief, which I think has been growing in recent years, that we, as a nation or as individuals, have a right to a gradually expanding standard of life always at the expense of other people. As I see it, inflation is nothing more or less than just a large number of individuals making upon the cumulative resources of the country a large number of demands, amounting, in fact, to a bigger total than the cumulative resources are able to meet. It is against that that we must fight. That is the true nature of inflation.

I see absolutely no reason to believe that my right honourable friend and the Government, of which I am almost the junior Member, will fail to fight it. I may be wrong. I heard my noble friend Lord Balfour of Inchrye say that we were in low water in some respects. I am not altogether afraid of that. We have to face serious and hard decisions, but I believe that the country is simply waiting for the ring of new leadership and real moral authority coming from the Government. I believe (though here I may be wrong because I speak as one who should not perhaps say it) that in the few weeks that have elapsed since the change of Government, the loss of our Leader, which was a grievous blow to us all both personally and politically, has been responded to as a challenge. There is a new spirit moving over the face of the waters. There is a feeling that we can expect some kind of new look in the administration of affairs. I am aware that the new look may be also a stern one for the people to face, but I have never known a period in the history of this country when it did not respond to realities when those realities were conscientiously and courageously pointed out We must remember that in times like this it is not only Governments but countries and systems of government which are under trial. If we will not face the necessity for spending enough on investment and education, but continue to spend more on enjoyment than we spend on the true necessities of life, we shall find that the dictatorships will lead us, and will ultimately beat us in the race for the control of the world. What that would mean to the civilised community I should not like to think.

My Lords, I am deeply grateful, both to my noble friend Lord Coleraine, who moved the Motion, and to the noble Lord, Lord Pethick-Lawrence, for the way in which this debate has been conducted. I can assure them both that everything they have said will be faithfully reported to my right honourable friend, and if I have said nothing more positive about what his intentions may be, they will understand that that is out of deference to tradition and out of the depths of my own ignorance.

7.22 p.m.

LORD COLERAINE

My Lords, I cannot complain of my noble friend's reply to the debate on the Motion which I submitted to your Lordships' House. If I did not agree with every jot and tittle of his argument at the beginning of his speech, I certainly agreed wholly with the spirit at the end of it, and I am grateful to him for the consideration he has given to the matters which have been raised in the debate. I am also grateful for the fairness with which the noble Viscount, Lord Alexander of Hillsborough, dealt with my Motion in his winding-up speech. Therefore, there is no purpose in my proceeding with the Motion. However, before I withdraw it, there is one thing that I must say and one or two things that I should like to say.

When I was speaking earlier, I attributed to the Parliamentary Leader of the Labour Party certain comments. The noble Lord, Lord Pethick-Lawrence, asked if I could give a reference. I said that I had not got it then, but hoped that I should be able to provide it by the end of the debate. I have been unable to find the reference. Therefore, I must withdraw the imputation that I made against the Parliamentary Leader of the Labour Party, and I hope that the House will forgive me for the rashness with which I made a quotation which I had not verified. What I should like to say before I withdraw my Motion is how grateful I am to noble Lords who have spoken. I feel that it has added much to the importance of the debate that my noble friend Lord Waverley should have made his weighty speech. There have been other notable speeches from many of my noble friends. I regard it as a great and happy chance for me that this debate which I initiated should have been the occasion of the maiden speech of my noble friend Lord Crookshank. As I listened to his speech and to the Parliamentary manner I know so well, to his full information, the grace with which he spoke, and his conciseness, I was reminded of the schoolboy who wrote an essay about Queen Elizabeth I and began by saying: "Queen Elizabeth was known as the Virgin Queen. As a Queen she was a great success." My Lords, I beg leave to withdraw my Motion.

Motion for Papers, by leave, withdrawn.