§ 3.0 p.m.
§ Order of the Day for the Second Reading read.
§ LORD SHEPHERDMy Lords, on behalf of my noble friend the Leader of the House, I beg to move the Second Reading of this Bill. I think it is the general practice, over a large number of years, that we use this occasion for a wide-ranging debate on the economic situation of our country. My task this afternoon, I think, must be to deal with the Bill. There is considerable ground to cover and my noble friend the Leader 93 of the House has thought it right, since the Government are forward-looking, that we should have another Minister intervening later in the debate to give some of the thoughts of the Government about the future, in particular about the future of the export trade.
I hope that we shall have a constructive debate, without any form of rancour. From the list of speakers, I am sure that we shall have a number of useful and constructive speeches. May I say immediately that we will consider them carefully? And may I say how pleased we are that the noble Viscount, Lord Watkinson, is to intervene this afternoon? I shall listen to his speech with particular interest.
We have passed through a period of very great anxiety during which serious charges have been made against Her Majesty's Government. It is said that we created the crisis of November, that we have been impetuous and hasty, and that we have failed to produce the programmes required to meet the dangers and difficulties that face this country. Another accusation is that we have dismayed our friends abroad and created uncertainty in the City of London and in other financial circles. These are serious charges. I shall refute them and explain the circumstances of our actions. But I think it is true to say—and I do not think any noble Lord opposite will disagree with me—that when we set out with new ideas, and break with the old, traditional methods which in themselves have failed, the new methods, whatever they may be, create uncertainties in their early stages. I cannot help but feel that that is one of the reasons for the uncertainty which undoubtedly exists.
To use the words of Mr. Maudling, we inherited the difficulties of the previous Government. I do not think noble Lords opposite can suggest that we created them. When I look at the figures, I am reminded of the "creeping danger" which my noble friend Lord Snow spoke of in a debate some days ago. I think it is true that this country had been lulled into feeling that all was well and did not recognise—and I think that this may be true of the Party opposite—the creeping danger, not only in our national economy, but also within industry.
Any Government, of whatever political persuasion, would hope to find two things 94 when taking office: first of all, a sound base from which they can proceed and honour the pledges they made at the Election and, secondly, and perhaps more important, time—time to translate beliefs and ideas into plans, plans that will interlock, because I do not believe that it will be disputed that the plans for economy, foreign affairs, defence and social services must all interlock. I do not think that it will be disputed that on October 16 Her Majesty's Government had neither of these things. We inherited a weak and dangerous economic base. We found events pressing upon us, events that required decision and action. I do not believe that any Government have inherited the problems we have inherited with so little time in which to act. I do not wish this afternoon to be controversial, but it is clear that it was the Party opposite which had the responsibility until October 15, and it was they who decided to retain that responsibility to that date.
Perhaps noble Lords opposite did not recognise the gathering storm clouds. Perhaps they may have recognised them and preferred to look the other way. But noble Lords cannot say that they had no warning. If we look at the trends in 1959 and 1960, which should be indelible on their minds, we see that they were basically similar to the trends in 1963 and 1964. For the first half of 1960 our visible and invisible trade, seasonally adjusted, showed a deficit of £91 million. For the same period of 1964 and on the same basis we had a deficit of £182 million. I think that that was sufficient warning to the Administration which had the responsibility until October 15.
Imports were at a high level and we had what were called disappointing exports, stagnant production and increasing Government expenditure. We had the warning signals, even though, like the typhoon, they did not presage the severity of the situation. But the Party opposite decided that they would not raise the storm warning. I believe that if we had taken action earlier a great deal of the severity of the position in October and November, if not avoided, could have been largely mitigated. Therefore, noble Lords opposite must bear a great responsibility in that matter.
When this Government took office, on the best advice available to us we believed 95 that at the end of 1964 we should be facing a deficit, on current and long-term capital account, in the region of £700 million to £800 million—one of the largest deficits in the long history of this country. It is true that these figures include large items of a temporary nature, such as an abnormal level of stock-building and of overseas investment by the oil industry. But that does not excuse the previous Government for not acting to bring the total deficit under control. It may well be that 1965 will be better, but it is the case that these temporary and abnormal capital items tend to be repeated. It was expected that the deficit might fall to about half this year's figure. But in the view of Her Majesty's Government a deficit of that size, coming on top of that of 1964, was totally unacceptable.
It has been said that the position of our imports this year is due largely to stockpiling; and this may well be so. They are certainly at a high level, and I think great care will be needed in assessing their particular character. No one would deny that large increases of stocks of raw materials and semi-manufactures were a necessary accompaniment of the expansion of the domestic output; and the rise in fixed investment was bound to draw extra imports of machinery. But there must be considerable concern regarding so large an increase in the import of manufactured goods as a whole.
If we take the average of the nine months to September, we see imports of manufactured goods rising from £46T million a month in 1961, to £533 million a month in 1963, and (I ask the House to bear this figure particularly in mind) to a figure of £70 million a month in 1964. It was this sort of increase which made it imperative to take some action to reduce the growth of imports. There was some criticism (I remember the words of the noble Earl, Lord Ferrers, in a supplementary question) in regard to the imposition of surcharges in relation to EFTA. I do not think that this can be a matter of pride, but it may be of interest that during the first nine months of this year the published figures of our imports exceeded those of our exports to that area by about £90 million.
Two questions obviously presented themselves to the Government when we took office: whether action was 96 necessary; and what action had to be taken. Could we be like Mr. Micawber and wait for something to turn up? If action was required—and I think it is clear from the figures I have already given that some action was required—what action had to be taken? Could we rely upon long-term measures to develop the efficiency of our industry, to obtain an incomes policy, and to promote a greater export drive? Could we rely upon such long-term plans? The Government decided that the situation was so serious that short-term and temporary measures could not be avoided.
Once we had come to that decision, a number of other questions immediately arose. There are some people who have advocated that we should have devalued the pound sterling immediately. Her Majesty's Government absolutely rejected that suggestion. We could, of course, have adopted the 1961 "Stop-Go" policy with all the damaging consequences to employment, the fall-back of investment, and the slowing down of production. If we were to consider that particular one, we had to take into account what was the overall position of our economy. Was it overloaded or overheated? It was the view of the Government that this was not so. As to the "Stop-Go" policy, I would remind the House that it has been the policy of my Party to oppose that method, which was adopted by the previous Administration, and we have opposed it rigorously in this House.
The Government thought it was essential to strike where the greatest danger lay, which was within the balance-of-payments field, and in particular our imports, and, at the same time, to introduce a limited help to our exporters. We felt that that would meet the situation that then existed. Having accepted that imports had to be curbed, how were we to do it? Were we to adopt quantitative restrictions? Well, there was one advantage there in that it would comply with international trade agreements. But Her Majesty's Government found that the system of quantitative controls would be far too rigid: it would restrict freedom of choice; it would "freeze" patterns of trade, and certainly it would raise the whole question of existing contracts. Further, administrative machinery would have had to be set up. It would have imposed a delay during which time we 97 could well have had a flood of imports into this country which would have been quite intolerable.
The Government therefore decided to adopt the system of a temporary import charge. As your Lordships will see in the Bill, we are proposing a surcharge of 15 per cent. on a wide range of manufactured goods. I recognise that this is in some ways a contravention of our international agreements, but it is the view of Her Majesty's Government that it is less injurious to trade; it has a great deal of flexibility; and, above all else, it can have immediate effect. I must say that I was very pleased indeed to hear from the noble Viscount, Lord Amory, when he was speaking on the gracious Speech, that he felt that the surcharge system was infinitely better than the quantitative restriction. We believe that this 15 per cent. surcharge will reduce our imports in a full year by something approaching £300 million.
Perhaps I should remind your Lordships of our import position. In 1963 we imported about £1, 350 million worth of the goods covered by the new charge; in 1964 it is estimated that the figure for these goods would have risen to about £1, 700 million, an increase of 25 per cent.; and in 1965, unless some corrective measures have been taken, this trend might well have continued. Apart from reducing, or (shall I say?) holding in curb, the import figure, the revenue of about £200 million in a full year from this charge would have a deflating influence on our economy.
§ LORD DRUMALBYNMy Lords, may I interrupt the noble Lord on this matter because I think it is most important? He is, I take it, basing his calculations on the assumption that this charge will go on for a full year until 1965, without any reductions as provided for in the Bill.
§ LORD SHEPHERDI am grateful to the noble Lord, Lord Drumalbyn. He has, in fact, corrected something. It would be wrong—and it is the one impression that I do not want to give—to think that there is any fixed period for this particular charge. I was coming on to that, but the noble Lord's interruption helps me to put forcibly to your Lordships' House that this is a temporary charge. The figure I have quoted would 98 apply if the charge were in existence for a full twelve months. It is true that this charge can be reduced by Order in Parliament. I cannot find words strong enough to emphasise that this is not a protective barrier behind which some of our suppliers and manufacturers can shelter. It will not be removed in the interests of any particular organisation, but it will be removed as soon as the general economic position permits; and it will be under review in a few months. There has been a considerable criticism in your Lordships' House of Her Majesty's Government in regard to consultations. The Government recognise their responsibilities in international agreements, and carefully considered their obligations before taking this step. It is said that there should have been consultations. But consultations with whom? Were we to consult with EFTA, the Common Market countries, the United States, the Commonwealth, and some of those developing countries with whom we have been developing trade? Surely, if we had consulted with one, we should have had to consult with all. If it was a question of secrecy, could we have retained the secrecy with consultations over such a wide field?
What do we mean by "consultations"? Do we mean, by "consultations", extending the period of notice, or do we mean when there is a possibility for negotiations? If that is what we mean, how would it have been possible for Her Majesty's Government in that position to obtain speed and to retain secrecy? In the circumstances, however regrettable it was—and Her Majesty's Government recognise this—I do not think there was any alternative to the action that we have taken.
Now I wish to turn to the second part of our steps dealing with the balance of payments, the export incentive. I believe that, by and large, our manufacturing costs are competitive in the export markets; but there are some impediments and discouragements. The Government have decided to introduce a scheme for the repayment to exporters of sums broadly equivalent to the amounts of certain indirect taxes which enter into the cost of production of exported goods. The rates of rebates will range from approximately 1 per cent. to 3 per cent., and the House will know 99 that oil and petrol taxes will also be affected. There will also be the full rebate of import charge paid on imports incorporated in export goods.
I have seen in the Press some criticism that this is a niggardly gesture. This is a first step, I believe, in the direction of giving direct help to our exporters. But it is only a first step, and we are having urgent and sustained investigations and discussions as to how we can help our exporters. We have set up the Commonwealth Export Council and the British National Export Council, and I am quite sure your Lordships would agree with me if we were to express our thanks and appreciation to Sir William MacFadzean, who has agreed to be Chairman of both these Councils. It has been estimated that some 200 firms are responsible for 50 per cent. of our exports. There is clearly scope for a large number of firms to do much more, and if this could be achieved our exporting problems could be substantially solved.
The Government have announced the introduction of a number of proposals to improve the quality and range of help which the Government presently afford to exporters, and this matter is now under review by the President of the Board of Trade. Our aim will be twofold: to secure the redoubling of effort by those firms that already make a substantial contribution but, above all, to broaden the base of our exporting effort to include those firms which are at present chiefly concerned in selling their goods in the home market.
A marked increase in the rate of expansion of British exports is a fundamental element in the Government's economic and social policies. Those policies themselves will contribute to the strengthening of our industrial performance, so that we may achieve a steady economic growth, sustained by a strong balance of payments. Perhaps I may speak for one moment as one who used to be an exporter. I cannot help feeling that sometimes in this country there is a reluctance to try to export because the task is difficult. But our competitors overseas are not supermen. There is no reason whatever why we should not expand our trade if we remember one thing: they do not buy from us; we sell. If we adopt the spirit 100 of going out to sell, and not expecting persons to come to us and buy, I am quite sure that we shall make tremendous strides in our export business. The cost of this aid will be £75 million. The two proposals—the proposals for the import charge and for the export rebate—your Lordships will find in Clauses 3 and 7, with the appropriate Schedules.
I must now come to the other two measures in the Bill. I said earlier that it is the view of Her Majesty's Government that our economy to-day is finely balanced. There does not appear to be any great overloading; there is some strain in one or two industries, in particular the building industry. But we do not think that there is any need as of now to carry out strong deflationary policies. If we reduce our imports by £300 million a full year (and here the noble Lord, Lord Drumalbyn, is right), that is bound to create some strain on our productive capacity. Her Majesty's Government, and the Chancellor of the Exchequer in particular, have therefore thought it right that there should be some corrective measures to this. It is for this reason that the Chancellor has decided to increase the hydro-carbon oil tax, and the increase came into immediate effect by a Resolution in another place.
I think we should look at this particular operation as one stage. We shall be increasing the revenue at the rate of approximately £200 million in a full year, as a result of the temporary import charge, and by £93 million, through the increased tax on oil. The cost of our export rebate will be approximately £75 million. We believe that by this Budget we are easing the demand on our resources by about £218 million. With effect from April, 1965, the Chancellor proposes the raising of income tax by 6d. in the pound. I think it is right, when one considers this, to take into account the proposals and measures, which will shortly come to your Lordships' House for consideration, dealing with the increase in pensions and the abolition of prescription charges.
We on this side of the House believe that, whatever may be our difficulties, we have a duty and a responsibility to those many thousands of old folk who undoubtedly live in distress and misery 101 to-day. I think it was for many of us an eye-opener when we went round at the General Election and canvassed at the street door. It was only when we were asked into the house that we really appreciated the poverty and the misery of these people. I think we were absolutely right to do what we propose in this Bill. I believe that the country as a whole agrees with us.
Let us also recognise that what we have done has been misunderstood. This will be a heavy cost, a cost of approximately £345 million. Therefore, some corrective measures are necessary. The Chancellor of the Exchequer proposes that the major part of these pension increases should be met by increased contributions. Contributions will be raised shortly and the increases will bring in approximately £274 million, leaving a balance of £71 million to be found by the Exchequer. The Chancellor now feels that in April not only should we raise that sum, but we should provide an excess; and the additional income tax of 6d. in the pound will bring in £122 million in a full year.
This rise in income tax will affect only the taxpayer in the higher bracket. A married man with no children earning £16 a week will not pay any increase. This will apply equally to a married couple, with two children, earning £22 a week. I have seen some criticism that this will be a disincentive to our young scientists and our young executives, but I think this is a great exaggeration. If one takes a married couple, both working, with a combined income of £2, 500 a year, this increase will mean an extra tax payment of £20 a year. For a married couple with no children where the husband is earning £3, 000 a year, the increase will be £42 per annum. I should have thought that to those people—and I think this will be true—these relatively small increases will be a reasonable price for an easy conscience when one looks to the old people.
My Lords, there has been much discussion as to whether this Budget is inflationary or deflationary. The Government's view is that by itself it maintains the present balance, but, in conjuction with the 7 per cent. bank rate, it would appear that the balance is now slightly tilted towards reducing pressure on our economy. As I said earlier, there is some pressure, but within a relatively 102 small number of industries. It has been said that these tax increases will be cost inflationary. Whenever taxes are. raised there is a tendency for costs to rise, but it is the view of Her Majesty's Government that what has been done does not justify any considerable increase in costs, both in production and in the retail shops, and that in our position one should make an appeal to all those persons who are in some position of authority and responsibility to see that these increases are kept to the minimum.
I do not think I need say a great deal about the corporation and capital gains taxes. Your Lordships' House will no doubt have read the statement that was made by the Chancellor of the Exchequer yesterday, which goes a great deal forward and I think will quieten many of the previous uncertainties.
§ EARL ALEXANDER OF HILLSBOROUGHMy Lords, I should like, if I may, to interrupt the noble Lord for one moment just to ask whether the Government have really fully considered this attempt to work through a corporation profits tax. My memory of the occasions way back, just after the first war and again later on, when a good number of corporations were to be mulcted by unfair taxation is not very happy. I do hope this matter has been adequately considered.
§ LORD SHEPHERDMay I say to my noble friend—and I am so pleased he is here this afternoon—that he perhaps will see that the Statement of my right honourable friend the Chancellor yesterday specifically sought advice and comment by all interested parties. This is an effort to reframe our tax system and all advice and comment is obviously welcome. But we believe that this corporation tax is vitally necessary in that it will encourage companies to plough back profits so that we can increase our production through modernisation and efficiency. No doubt there will be points raised during the course of the debate, and I am quite sure that my noble friend the Leader of the House will be ready to answer them. But we have had a great deal of discussion on it, and we set great store by this in an effort to obtain an incomes policy.
Apart from these measures, I would remind the House that the Government 103 propose a Rent Bill in an effort to curb increases of rents and keep them in relation to wages, and to set up a National Price Review Body to try to prevent unnecessary rises in prices in our shops and factories.
My Lords, with regard to sterling, undoubtedly we have gone through a most anxious time. We have obtained a breathing space with the aid that has been made available. But I am bound to remind the House that this is not the first time that we have had a financial crisis, or a run on the pound. I would remind the House of the situation in 1957, and, again, the seriousness of the present situation as compared with the deficit of 1960. Nor can the previous Administration claim that there have been no warnings. The current account was deteriorating in 1963. By the last quarter of that year it had gone into deficit, and the deficit, seasonally adjusted, grew to £69 million in the first quarter, and to £113 million in the second quarter, of this year, not to speak of the outflow of long-term capital.
It has always been recognised that the autumn is a dangerous period and the position and facts were all known in financial circles. Therefore, there is no question, as has been suggested, of our being talked into the crisis. Through November the pound was under heavy pressure, the bank rate had to be raised to 7 per cent., and we had to get support from the Central Banks abroad amounting to 3,000 million dollars to defend the pound. Here, if I may, I would express a word of great appreciation to all those who were involved in these negotiations. What is clear from this immediate support is the recognition that one currency depends upon another.
There has been some case made, and some criticism, that we should have carried out a much stronger deflationary policy. This view has been canvassed abroad, and on the Continent. Her Majesty's Government do not believe that in the present circumstances there is any need to deflate the economy, but we shall be watching very carefully any trend; because, obviously, any increase in demand might tilt this finely balanced position in which we find ourselves. We shall watch with the utmost care. As noble Lords already know, the Govern- 104 ment are also carrying out a very careful and thorough investigation into Government expenditure. Our overseas rate of expenditure is in the region of £500 million a year. Certainly—and I think noble Lords opposite will welcome this—I think that here a full and careful and impartial inquiry is required.
My Lords, I think I have covered the Bill, and I should like to close with this comment. I read the other day that Sir Geoffrey Crowther (I think he was speaking at the Trust Houses annual general meeting) had said that this country was fighting for its life. I would not accept that: we have ample reserves still. But this I would say: if that were to be the spirit and the sentiment of all of us in this country during 1965, we could at last make a great step forward and break through our difficulties. Equally I do not think we should talk ourselves into being a second-rate management or a second-rate working country. There is a great deal that we could improve. This, I am afraid, cannot be legislated for. If it could, no doubt we might be able to achieve the end more quickly. We can obtain it only by co-operation. Her Majesty's Government are willing to co-operate with everyone. We are not the enemies of business or of commerce; we want cooperation with them. We want the co-operation of our workers. We have a formidable task ahead of us. We believe that we have the plans and the ideas that can give us that break-through. But we shall need the co-operation of all, and I hope that in the months and years to come we shall share and obtain the co-operation of noble Lords opposite. I beg to move.
§ Moved, That the Bill be now read 2a—(Lord Shepherd.)