THE ECONOMIC SITUATION

HL Deb 09 February 1966 vol 272 cc733-60

2.35 p.m.

LORD CARRINGTONrose to draw attention to the Economic Situation; and to move for Papers. The noble Lord said: My Lords, it is some time since we had a debate on Economic Affairs, and since we do not debate the Budget and the Finance Bill until later in the year we shall probably not have another opportunity of discussing the financial situation until the middle of the Summer. I must say, at the outset, that I am a little surprised that this debate on a subject of great importance, and with a very distinguished list of speakers, is not to be answered by a Cabinet Minister. This does not in any way mean that we consider either noble Lord who is to reply for the Government inadequate, but Cabinet Ministers are in a rather special position and have considerably greater responsibilities.

If the Prime Minister eventually brings himself to the point of making up his mind whether or not he is going to have an election, and if he wins it—two fairly big "ifs"—both noble Lords will undoubtedly and deservedly be promoted to the Cabinet. Until this happens, I think I should say that in this sort of debate we shall usually expect a senior Minister to reply. If Lord Alexander of Hillsborough, whom we remember with such affection, were still alive, he would certainly at this point say "Hear, hear!", because he made it pretty clear when he was the Leader of the Opposition that he also took this view.

THE EARL OF LONGFORD

My Lords, I am always pleased to be rebuked by the noble Lord, Lord Carrington. But anticipating some strictures of this kind I looked up the records for the last two years. I found that when he was Leader of the House, although not a Minister—he worked hard in a Department at that time—he made six speeches of some importance, and in the year-and-a-quarter since I have been Leader I have made twenty-four. I bring forward those figures only to show that when one has a responsibility for a Department it is extremely difficult to make a great many speeches in this House.

LORD CARRINGTON

My Lords, the difficulty is that the Government have to decide how many Cabinet Ministers they have in the House of Lords. The present Government have restricted the number of Cabinet Ministers in this House to two. When the Conservative Party were in Government there were sometimes four and always three, so we could share our responsibilities. It is not my fault if the Prime Minister has decided that this House is worthy of only two Cabinet Ministers. If the noble Earl is really saying that he is too busy to come down and speak to your Lordships in a debate of this kind, then I suggest that he goes to the Prime Minister and asks for more representation in this House.

THE EARL OF LONGFORD

My Lords, I said that I felt sure that I would do better in this respect, in quantity, than the noble Lord did when he was Leader of the House.

LORD CARRINGTON

My Lords, I am afraid that I do not understand the point of that observation. Perhaps the noble Earl will follow my advice and ask the Prime Minister for another Cabinet Minister in this House.

I am glad to see that a large number of your Lordships are to speak in this debate, and, in particular, so many from industry and the City who have first-hand knowledge and experience of what is actually happening. There seems to be an awful lot of us, and I shall therefore try to speak fairly briefly. When I was in Australia the other day a friend of mine said, in the course of general discussion, and more in sorrow than in anger, some rather unflattering and unfavourable things about the economic performance of Britain, and although he did not compare our performance with that of Australia I think that the implication was there. I replied—I hope reasonably—that there was one very big difference between the Australian situation and ours, and that was that in Australia they had every conceivable kind of raw material. They were exporters of food: Western Australia was apparently composed almost entirely of iron ore and other valuable minerals; gas had been found in commercial quantities; oil had been found in commercial quantities, and there was pretty well nothing that the Australians had not got. We in Britain, on the other hand, had got only coal—which was currently a pretty unfashionable raw material, and an expensive one to produce—and our brains. So we left it; but I began to wonder afterwards how accurate my friend had been.

It is easy, of course, to produce a set of statistics which will prove almost everything. I read in Lloyds Bank Review the other day an interesting article on the subject of productivity which posed the question: How fast can Britain grow? I found some very interesting facts which I do not think I had fully realised before—I probably should have realized them, but I did not. For example, although we appear to speak very confidently of the slow-down in our economic growth, figures do not really bear this out. In 1938, the volume of United Kingdom exports was exactly the same as it had been in 1890, and we did very much better from 1955 to 1964 than we had done for about 60 years. So much, incidentally, for the gibe by noble Lords opposite about "thirteen wasted years of Tory rule".

But even so, my Lords, we did less well than all our European competitors, but better than the United States. This, I think, goes to show, though I think it is very difficult to draw any exact conclusions, that a lot of our competitors were more backward industrially than we were, and therefore their percentage of improvement must necessarily have been greater. The article goes on to suggest that now that they have caught up it may well be possible for us to take advantage of what the article calls "the opportunities of backwardness." The fact still remains, however, that though we may have done fairly well since the war, we have not done well enough. We have got to do better, and in the future we must do better. At the same time, I am sure it would be unwise and unfair not to point out that we are doing no worse now—indeed, we are doing better—than we did in the more remote past.

Before the war, our position was to a certain extent masked by a number of favourable factors, perhaps the most important one being that markets almost exclusive to us were available in the Commonwealth and Empire. For example, before the war in Australia, which I know best, almost all consumer goods were imported from Britain. Now Australia produces over 95 per cent. of everything that it consumes; and what is true there is equally true in some degree of the rest of the world. We were able, in those days, to produce goods and have an assured market without too much regard to the economics of production, the cost of the goods or, perhaps, sometimes, their quality.

I remember as a child—and I am sure this is an experience which is shared by many of your Lordships—that at school and elsewhere I was told, and firmly believed, that British goods were the best in the world, the best-designed, the most durable, and the best value for money. I must say I really wonder whether that was so, and whether we were not living at a time of complacency, a hangover from our Victorian past, certain that everything that the British did was inevitably better than anything anybody else did. I have no doubt that quite often it was better, and I do not wish in any way to run down my own country, but I think that in a number of cases we asserted our superiority without having taken nearly enough trouble to ensure that what we made was better than anyone else's.

One thing is certain, and that is that we are now much more aware than we were a few years ago of our shortcomings and our deficiencies. One has got only to pick up a newspaper to find an attitude of questioning and criticism and a general awareness that, if we are to maintain our standard of life in this country, our design, our salesmanship, the quality of our goods and all the rest of it must be continually improving. Perhaps they do not always improve, but at any rate we know they should, and we know that not everything we do is automatically right. Perhaps in some ways we have become a little too self-critical. One is inclined to read about the contracts we have lost, and not about the contracts we have gained. I think we have to beware of running ourselves down too much; but, on the whole, it has been a distinct advantage that our complacency has largely disappeared, and that the attitude of British businessmen selling abroad has become much more vigorous.

Just before Christmas I followed in the footsteps of a Scottish trade mission to Australia which had done remarkably well and got a number of valuable and firm contracts. I think that is very encouraging. It is an indication of a much more progressive and enterprising attitude. Perhaps it would be churlish to ask why this was the first mission of its kind that had ever gone there, and why nobody had ever thought about it before.

Here then, it seems to me, are two very important reasons for our economic difficulties. First, we have lost our captive market. Competition with other countries has grown, other countries have become more industrialised, and in many cases with more up-to-date machinery and factories. Secondly, we have no raw materials and have to exist, as we have always had to exist, but now against much more competition, on our brains and initiative. There is not very much we can do about the lack of raw materials, except not to make it worse; and I hope that the Government and noble Lords opposite will pay very careful attention to the speeches which were made in this House when we debated the effects of the corporation tax on companies trading overseas—and here I must declare an interest—and, in particular, to the speech made by the noble Lord, Lord Byers, who is particularly knowledgeable on this aspect. It really is not sensible that British companies producing raw materials in other parts of the world should be put at a disadvantage compared with their foreign competitors. It is the sort of company which has to be encouraged, for we depend upon them for the basic raw materials of our industry.

Incidentally, I hope that the Government will study very carefully, as I am sure they have, the speech made by the Governor of the Bank of England on Monday night. He pointed out the importance of investment overseas and the disadvantages which we in this country are now suffering. Anyone concerned with overseas companies and investment will loudly echo his comments and hope for signs of Government reform.

As for the rest, it is the duty of the Government so to order our economy that we can continue to increase our standard of life; but in order to do that we must get our balance of payments right. How, then, have the Government done in the period they have been in office? There have certainly been fairly good results in exports, and all of us welcome that, because there is no Party issue in that matter. I only hope that neither the Government nor the Opposition will claim the credit for it, for the credit lies with industry and they should get it.

Equally, we must welcome the rise in our gold and dollar reserves which has been taking place every month for the last few months. Here again, I do not want to go back on old history. Whatever the reason for the increase in our reserves, we should all be grateful for it. But here, as I do not pretend to be an expert on these matters, I must say that I find it rather confusing that, though no doubt the figures reflect a trend, the Bank of England can select and announce a quite arbitrary monthly figure. It is very difficult for those of us who do not spend our entire time on these matters to know exactly what is going on; but, so far as I can judge, not only have our published reserves risen, but we have paid off some of the substantial debt which we have incurred. Here again, this fact must be greatly welcomed.

Last week the Chancellor of the Exchequer announced that Government spending had been contained to the 4½ per cent. increase for which he had planned. So far, so good. But 4½ per cent. is a much larger figure than the increase we are achieving in production, and perhaps the most ominous sign of trouble to come is that, far from going up, production seems to be either at a standstill or going down.

My Lords, the most important piece of policy machinery upon which the Government have relied in the economic sphere has been the Prices and Incomes Board. With incontestable logic they maintain that if you can hold prices, incomes and wages down, it follows that our relative competitiveness must increase. Of course, if it were possible to do that, this would do so. As a matter of fact, I think we saw it happen when Mr. Selwyn Lloyd was Chancellor of the Exchequer, when, as a result of his standstill, our relative competitiveness did improve very considerably for a period. But I have the gravest doubts about the way the Government are trying to work their incomes policy, both in their organisation and in what they are asking the Prices and Incomes Board to do. Before I go any further—and I shall be critical—I do not want it to be thought that I am criticising Mr. Aubrey Jones. I think he undertook this very difficult job purely out of a sense of public duty and I have absolutely no doubt that he is doing the best he can within the limits of what he has been asked to do.

But before I come to that, I have one serious criticism of the way in which the Government have organised the White- hall machine and the ministerial functions. The Government have decided to have two Ministers in charge of our economic affairs: the First Secretary of State, who is responsible for economic affairs generally, and the Chancellor of the Exchequer, who is responsible for fiscal affairs. For the life of me I do not understand how you can separate the two subjects. How can you have one body of officials and one Minister planning our economic future, setting targets and plans and all the rest, and, at the same time, another Minister, the Chancellor of the Exchequer, not even a member of N.E.D.C.—incidentally, when Mr. Maudling was the Conservative Chancellor he was the Chairman of that body—concerned with sterling and the balance of payments and taxation. And both these Ministers are working in complete isolation, departmentally at any rate, from each other. I do not think, with respect, that I have ever seen or heard of a more impractical organisation, and the sooner it is done away with the better. It really must be the responsibility of one Minister to take a view of our economic situation as a whole—and that must, of course, include all the individual items which go to make up the whole picture.

Secondly, I have doubts about the workings of the Prices and Incomes Board. In the first place, I think they are being asked to do far too much. Everything seems to be thrown at them; and quite a lot of the things which are thrown at them are not really suitable for their judgment. For example, I am sure it was wrong to ask the Prices and Incomes Board to make recommendations or decisions, whatever you would like to call them, on whether or not the Services should get their pay rise. This is a matter quite removed from the ordinary wage claim. Leaving aside whether or not the Government have an obligation to implement the recommendations of the Grigg Report, this is surely a field in which the Prices and Incomes Board can have nothing very much to contribute. The decision as to what to pay the Forces must surely rest with the Government: they know how many men they want in the Services; they know the effect which an apparent or actual breach of faith about pay would have on the morale and recruitment of the Services, and they know what their plans are for the size of the Forces for the commitments which they have. I do not understand how the Prices and Incomes Board can be even remotely helpful on a topic such as that. With great respect, all they did was to recommend that the Grigg Report should be adopted.

What I am trying to say it this. It seems to me that this is certainly an abdication of Government responsibility; and in some respects the Government are turning Mr. Aubrey Jones into a policy maker—which, surely, is something he should not be or, I imagine, would want to be. I also have grave doubts about the Early Warning System which I understand the First Secretary is going to try to put on the Statute Book in a Bill which is to be published shortly. I do not understand how this is going to work. Clearly the T.U.C. does not like the look of it and, if one can believe the Sunday newspapers, several trade union leaders have made it fairly clear that they would rather go to jail than pay fines for contravening the provisions of the Bill. It really is difficult, I think, to see what is to be gained by these proposals which could not just as well be achieved by agreement with the T.U.C. and the C.B.I.

I noticed that at Hull during the by-election, the Chancellor of the Exchequer said that he hopes that after the Spring prices will start to fall. This, I suppose, means after the Budget, if we are to have one. And Mr. Marsh, in the debate in another place on January 27, on the cost of living, said that the cost-of-living position was under control—a phrase he will undoubtedly live to regret. We shall get later this week an indication of the future. The real test of the Government's policy will be their attitude to the threatened railway strike and the National Union of Railwaymen. Will they endorse the Prices and Incomes Board or will they make concessions to the N.U.R.? In many ways this is the real test, not only of the Government's determination and resolution but also of whether it will be possible to have a prices and incomes policy based on the Government's ideas.

My Lords, what has happened so far? Earnings have risen in a year by about 9 per cent.; prices have risen by nearly 5 per cent.; but production in November (the latest month for which I can get figures) is two points lower than it was this time last year. This is a very serious state of affairs. I think that a perfectly valid criticism of the Government's economic policy is that they have artificially concentrated far too much on the incomes policy side and neglected the other aspects. For example, they have not dealt with the level of demand; and that failure has led directly to the increase in earnings, nearly 6 per cent. above the Government norm. Equally, the rise in earnings has increased the demand. And the fact that on Monday further curbs were announced on hire-purchase policy underline this failure. In the fifteen months during which the Government have been in office there has been no success in this direction and, as a result, I am quite sure that we are about to see a steep rise in prices, which have fallen far behind earnings. It will be impossible to maintain the quite artificial situation which exists now, and sooner or later the dam on prices must break. Although the fault may be the Government's; the consequences, alas! will fall on all of us.

Noble Lords opposite may well ask: "What would you do?" I think we would say that the whole of any economic policy which we follow must, in effect, be an incomes policy, and we would operate it by keeping demand at the right level, by encouraging productivity, by greater industrial efficiency and by incentives through competition. Here, it seems to me, there are at least two other things which the Government should do but which they are not doing. The first is to tackle the problem of restrictive practices—and I see no signs whatever of their doing this; though everybody knows that these practices exist—and included in them must be the problem of strikes, both official and unofficial, which can do harm to our economy quite out of proportion to the grievances that they seek to remedy. There must be better ways of settling our affairs. I am certain that when a Conservative Government comes back into power this must be one of the first things, difficult though it is, which we must tackle.

The second issue is that of taxation. On previous occasions when I have spoken in this House in economic debates, I have said—and I think, broadly speaking, the House has agreed—that exhortations are no longer enough. People no longer believe in economic crises and in all the paraphernalia and jargon of our economic difficulties. I am coming more and more to the conclusion that if we are to succeed in increasing productivity and keeping prices down—in other words, persuading people to work efficiently; persuading management to introduce new and up-to-date methods, and persuading people to work harder—this will have to be done by a drastic revision of our taxation policy.

I do not for one moment underestimate the difficulties. But until we devise a system whereby it is possible for those who work really hard, or who take risks, or who have particular skills and crafts which are vital to the nation's welfare, to keep more of the money they earn, we shall not get our increased production and efficiency. It may be hard for a Socialist Government to realise it (though I am sure they do), but people work for money; they work for reward and not just for the good of the community. And if we want to see increases in productivity, then we must not take away the fruits of a man's labour, whether he be in management or on the shop floor. If a managing director is doing a good job, he should be just as much entitled to a big reward as the man who is working hard on the shop floor. Here again a Conservative Government, when returned, will do something to revise our taxation system.

I wish that in all these matters—taxation, restrictive practices, incomes policy and all the rest of it—the Government seemed to have the will to solve the problems. I hope that your Lordships will not think that I have been too gloomy about the economic situation, but I cannot see that things are likely to improve as the year goes on: they are much more likely to get worse. Of course there have been successes, and I would not wish to deny that. But overall the Government have not succeeded in regulating demand and have not tackled the fundamental problems of our economy. As the political correspondent of The Times said on Monday, in an article about the Prime Minister and his general policy: Declarations of intent are not enough. There must be a policy and the policy must be put into action. The British people are not for ever going to be deceived by political sleight of hand. They will ask for much more than that; and I hope that it will be soon, because the welfare of everyone in this country, and indeed our survival, depends upon it. My Lords, I beg to move for Papers.

3.3 p.m.

LORD BYERS

My Lords, my first task must be to congratulate the noble Lord, Lord Carrington, on his attempt to reshuffle the Cabinet of the Labour Government. I must say that it was worth a go, but I do not think he will get very far with it. Secondly, the whole House in indebted to the noble Lord for initiating this debate at a very appropriate moment in history. Inevitably, in a debate of this sort, there will be a good deal of repetition, and I find that I can follow the noble Lord in many of the things which he has said.

There has been a spate of pronoucements in the past week on the economic situation, and some of it is a little confusing. We have had the Governor of the Bank of England cautioning—probably rightly—the joint stock banks against further lending. We have had from the Prime Minister warning of a tough and honest Budget. We were told how close we were to the brink last July—and I think it came as a surprise to many of us. We have heard from the President of the Board of Trade announcements of the traditional clamp down on hire purchase, which seems to be one of our chief regulators, now. On the other hand, the Chancellor of the Exchequer made a fairly "bullish" speech to the Foreign Press Association, and that was followed by yesterday's announcement about continuing curbs on public expenditure. All in all, there seems to be agreement that the economy is still overstrained and that restrictions of the traditional Conservative kind have to be applied.

I would ask the Government: is this in fact a correct diagnosis? What is the real picture at the present time? For instance, are the measures taken last year by the Government, particularly the postponement of expenditure, now taking effect? As I see it, the rate of industrial output at the moment is rising so slowly that it is almost imperceptible. I believe it is rising at only about 1 per cent. per annum. This means, presumably, that demand for imports has been reduced and that this in turn must have helped the balance of payments. But this slowing down in output does not appear to have been accompanied by any increase in unemployment—so we must be producing less with the same number of workers. That should be a worrying thing for the country. On the other hand, we are continuing to attract overseas money, but we are doing that only because we are keeping interest rates high and not because the foreign investor has any new confidence in our ability to become more efficient or because we are increasing output per man hour.

As the noble Lord, Lord Carrington, said, we do not want to denigrate British industry—a great deal of it is very efficient—but it must be our concern in a debate of this sort to try to point out the weaknesses, so that they can be put right. I think the truth is that we are no nearer to finding a more permanent solution of our economic problem, the problem of the erosion of the value of the pound by higher incomes forcing up prices; nor have we seen—at least I have not seen any real signs of improvement in productivity and efficiency.

I do not pretend that there is any easy solution to all this, but I think there are a number of directions in which we ought to look for a solution, even if they are not all that palatable. There are far too many antique attitudes in all sections of the country which are putting the brakes on progress. The main task, as many of us have so often said in your Lordships' House, must be to increase the national wealth through greater efficiency. Any fool can find ways to redistribute the national cake; the real problem is to increase the size of it. And that is what needs a united team effort.

If we are going to increase the national cake we shall have to look afresh at a number of facets of the economy. I would support the noble Lord, Lord Carrington, on the question of the incomes policy. I do not accept that it has failed, although I was appalled, when I looked at the Independent Television programme last night on pay and prices, to discover how few people in the audience understood what people were talking about when they mentioned incomes policy or productivity. If that is representative, we have a long way to go, before we get success. I believe that the idea is a good one, but at the moment it is bogged down because it is universally regarded as a wage freeze. I think the noble Lord fell into this trap when he remarked on Mr. Selwyn Lloyd's standstill. I am not blaming him, because a lot of people think that the incomes policy is a wage freeze or, at best, a wage pause or standstill. The emphasis is too often on holding wages down—to 3½ per cent., or something else—instead of on the improvement of productivity through greater efficiency, and, as the noble Lord said, on the abandonment of restrictive practices. What we ought to be saying to the productive worker is to come forward and show us how he can justify the high wages which we want to give him for the increased efficiency he has demonstrated. I believe that this is not understood by the public at the present time.

I am glad to see that the Prime Minister is now openly attacking restrictive practices. That is a tremendous step forward. But we must do more than just make speeches about it: we must attack and expose these restrictive practices and get them abandoned. We have to get across the idea that what matters is not high incomes or high wages but the relationship between rising incomes and productivity. We want to see high wages, but we want to see them based on productivity and efficiency. I have a feeling, for instance, that we should get better service from the railways if there were fewer railwaymen and they were paid more. I believe that the argument today should not be about whether or not there is going to be a strike, but how to implement the suggestions made in Mr. Aubrey Jones' Report about getting better productivity in the whole system. I do not believe that can be obtained under duress. I hope that we shall try to get the argument going on increased productivity, and on efficient and better services for the public on the railways, in a better atmosphere.

I think there is a great deal more throughout industry that management and trade union leaders could do on this question of initiating productivity drives. I should like to know who is going to start the productivity stakes moving. I feel that we need a new emphasis here. I throw out the idea, merely for consideration, that it might be worth while renaming the Prices and Incomes Board and calling it something like the Productivity Improvement and Related Incomes and Prices Board. I think productivity must be put first, so that people realise that they are going to be able to justify higher wages.

The next facet I want to mention is overmanning. This, I think, is a very real problem, which goes right throughout our industry; and we do not know how deep it is. In the old days, unemployment was regarded in many quarters as a means of disciplining the workers and inculcating a healthy respect for management by creating a sense of insecurity in the man's mind. We should all agree, I think, that this was a barbarous, although a common, practice. To-day we have to substitute an entirely new concept. We have to discourage overmanning, under-employment and manpower hoarding, all of which means that we have to reduce the labour force. We have to make the redundancy and re-training system work efficiently, so that manpower is appropriately redeployed as quickly as possible. I supported the redundancy payments scheme, but I am beginning to wonder whether we have the right principle. Under that scheme, as I understand it, the firm which gets rid of men has to contribute substantially to their redundancy payments. It may well be that we shall have to consider reducing the labour force by spreading redundancy payments over people who are not reducing their work force. Unemployment accompanied by re-training must be regarded as a steppingstone to an improvement in a worker's earning power, and not as something which is a disciplinary factor in the industrial system. There is much to be done if we are to accelerate that idea.

Similarly, as we all know, there is a chronic under-use of capital assets in this country. We do not seem to make as much use of the shift system as we might. It was put to me the other day that one of the reasons advanced for the unpopularity of the shift system is the fact that those going on certain shifts miss their favourite television programme. This may have a social repercussion. It might be worthwhile instituting a study to see whether the programmes could be repeated, possibly at midnight—although I should not be watching. I do not think that it is necessarily a disadvantage, if it has been done in America and it may be worthwhile finding out what their experience has been.

It is against this background that the Industrial Reorganisation Corporation must be judged. I have nothing against the idea of putting up £150 million for this sort of plan. I doubt if it could ever become nationalisation by the backdoor, as some fear, because, frankly, I think it would be difficult to get any sort of success story from it. But I do not think that this will make a real contribution to the industrial problems that we are facing. I think that, at the most, it is a fleabite which might be quite useful for carrying out one or two industrial experiments, but I doubt whether it will be nationalisation by the backdoor, as has been suggested.

I want to put forward this idea for the removal or reduction of protection. The ruthless persistence of competition, in place of monopoly, followed by a few bankruptcies, would probably do more to instill efficiency into our system than any amount of playing about with industrial reconstruction or corporations, or whatever you like to call it. While the surcharge, a relatively high tariff policy and monopoly conditions continue, I do not see how we shall get real efficiency in British industry. It is most distressing to see that the present Government have no new means of attacking the economic problems that the last one had. In my view, a brake-and-accelerator policy cannot get the proper results if the engine itself is not efficient and needs retuning. By all means let us have the credit squeeze, restrict hire-purchase and limit local government demand and expenditure. But this is only first aid. We have at the same time to reduce protection, get rid of restrictive practices, stimulate competition and probably make labour more expensive—something like a payroll tax Unless we tackle both sides of the problem, we are going to have the inflation-deflation circle every eighteen months or two years. What worries me is that we are not tackling the other side of the problem: protection, competition, restrictive practices and productivity.

Finally, what about the balance of payments? Government expenditure overseas is still the real bogey. The Government, I understand, are spending net about £500 million, and about three-fifths of this is military expenditure, of which quite a bit is on East of Suez. This is the balance-of-payments drain. Over the rest of the overseas transactions in the private field there is, in fact, a substantial surplus provided by private enterprise. I was grateful for the reference which the noble Lord, Lord Carrington, made to this question of overseas investments. I am not going to elaborate on this matter. Many of us in this House made speeches on it at the time of the Budget, the Finance Bill and so on. All I would do is to ask the Government to take serious note of what Lord Cromer said, because I think they will find that the speeches we made on this side are completely valid. In the interests of the nation—not just of the companies, such as the one to which I belong (and I have declared my interest time and time again)—there is a limit to the length of time for which this penalty can be imposed on companies having direct interests overseas.

I conclude by saying that I think the whole question of this economic situation cannot be dealt with by a credit squeeze or hire-purchase restrictions here and there. This whole problem is one in which we have to tackle all these aspects; and, in particular, I believe that the Government may well be justified in taking a risk. Now that we have halved the balance-of-payments deficit, is it really necessary to go on and wipe it out completely? Is it not time that we cheapened imports by reducing tariff protection, getting rid of the surcharge and letting the chill wind of competition in on the system?

3.18 p.m.

LORD SHEPHERD

My Lords, we are all grateful to the noble Lord, Lord Carrington, for introducing this Motion and for the manner in which he did it. I must say that in one respect I was disappointed. The noble Lord seemed to be very much like a boxer who flicked his left hand—or should I say his Right hand—out hoping to score points, but was never prepared to cross with the other fist for a conclusion. The noble Lord dealt with the problems that face us and criticised various aspects of Government policy, but not once did he give us any firm conclusion as to the manner in which he or his Party, if returned to power, would deal with the economic situation, short-term and long-term.

There was one significant fact in his speech, and that is the recognition by the noble Lord that we are dealing with a long-term problem. He referred to the days when we were very happy in this country, when we said that British goods were the best in the world, and said that this was in the era of complacency. This is very true, and in some respects it still exists. There are still too many manufacturers and workers in this country who think that, because they produce British goods, they are the best in the world. But those of us who have had experience of world trade will know that, although there was a period during which we were in the lead, most of the leading countries like Japan, Germany and France have not only caught up with us but now exceeded us.

In replying for the Government, I think I should mention first of all the problem of the balance of payments. The Government, the nation, have to deal with the short term and plan for the long term. In reply to the noble Lord, Lord Byers, I think I should say that the Government are committed—and we believe it to be right—to seeing that by the end of 1966 we have put right our balance-of-payments position. We received considerable assistance last year. We gave that undertaking, and I think it would be wrong for us to find an easy way out of our situation. I think I should repeat, as the Chancellor of the Exchequer has repeated time after time, that our object must be to correct our balance of payments. The noble Lord, Lord Carrington, gave us credit to that extent. As he knows, in 1964 we had a deficit on current account of £534 million. The provisional figure for 1965 is £270 million. While we were hoping for something better, we have achieved the target we set ourselves when we took office. Our gold and dollar reserves are up, and we have made substantial repayments to those from whom we borrowed.

I think it is interesting to look at our import position, as opposed to our export position. In the years 1961–64, which was the period of the last cycle of growth, there was an increase of 19 per cent. in our imports, and yet during that period our exports rose by only 12 per cent. In 1964, our imports rose in one year by £639 million or 11 per cent. over the previous year. The most significant thing is that a substantial part of that growth consisted of manufactured goods which this country could have produced itself if it had had the capability and the organisation to do it. In 1965, due to the surcharges and various credit restrictions which the Government placed on imports, we were able to contain that increase in imports to 1 per cent. In fact, thinking in terms of imports, the National Plan provides for a 4½ per cent. increase in volume, yet during 1965 we were able to contain that increase to about 0.2 per cent. The Government look to these surcharges as being of a temporary nature, and would wish to give them up as soon as possible, but at the moment we do not think it is practicable, in view of that high rate of increase. As the House will know, the E.D.C.s (the small "Neddies" for industry and, in particular, for exports) are undertaking most urgent inquiries and considerations as to how we can save imports, particularly the imports of manufactured goods.

In the field of exports, as the noble Lord, Lord Carrington, said, we had a reasonably good year. In the period 1954–64 our exports increased by about 3 per cent. per annum. In 1965 they increased by 7 per cent., which was a substantial improvement. But do not let us forget that the European countries increased their exports in the same period by 9 per cent. There is no room for complacency in the fact that we were able to increase our exports during 1965; but, on all the evidence we have before us, there is reason to believe that if we seize the opportunities during 1966 we should be able to see a substantial improvement in our exports.

We have had a number of discussions on overseas investment. The net outflow during the first nine months of 1964 was £250 million. During the same period of 1965, it was £182 million. I understand, and to a degree accept, the views of the noble Lords, Lord Carrington and Lord Byers, as to the benefits that arise from overseas investments. But I would not put it as high as the noble Lord, Lord Byers, that it is essential for our exports. I have seen the growth of the German export trade in Malaysia and the Far East when, to my knowledge, there was no German investment. I agree that this is one factor that we should like to see developed, but this is not the time, taking into account the great necessity of correcting our balance of payments as soon as possible and to remain in surplus certainly up to 1970.

I do not think there is any doubt that internal pressures have been building up during 1965. We have low unemployment; we have a high but a flat rate of production, and rising prices. All these are indicators of increasing pressure on our resources. The Government have taken actions, as they said they would, without fear, or even seeking electoral favour. We have added restrictions on hire-purchase this week, and we have made fresh arrangements regarding public expenditure figures. In the circumstances and in the light of the knowledge we have, I do not think any noble Lord will say that the decisions taken by the Government this week were wrong. We must contain our consumption at home in order to provide an increasing capability for export and, above all else, to contain the size of our imports. The Government—and the noble Lord, Lord Byers, referred to this—are determined to contain our public expenditure within a growth of 4¼ per cent. per annum. It is perfectly true that this is based on the National Plan, and that our production figures are not yet in line with the National Plan. But I will come to that aspect in a moment.

As the noble Lord, Lord Byers, said, perhaps our greatest problem in connection with Government expenditure and the balance of payments is the very heavy burden which this country bears in the field of Defence and many other aspects of overseas policy. I have been making a number of speeches in the country to the shop stewards, and on every occasion they ask: Why is it that this country undertakes a Defence expenditure that the United States or other countries would regard as intolerable? As the House knows, we are anxiously considering what can be done to reduce our expenditure overseas. This is a major part—and it must be—in balancing our accounts, not only during 1966, but in the future. But we shall need the support of noble Lords opposite. Whenever we have suggested restrictions in Government expenditure in the field of the aircraft industry, they have been our greatest critics. When we have sought to reduce the expenditure within the Territorial Army, again they have been our biggest critics.

My Lords, I will come to the point raised by the noble Lord, Lord Carrington, on taxation, but one cannot contain, or even reduce, public expenditure unless one is prepared to say where it is to be done. Are we going to do it in defence, in regard to roads or hospitals or schools?

LORD BYERS

My Lords, while following the noble Lord's argument, in the case of the aircraft industry was not the real difficulty whether we were going to save British money or dollars?

LORD SHEPHERD

My Lords, I think that was the point made by the noble Lord, but there were others who said that we were reducing our expenditure at the expense of the British aircraft industry. This is true. But we were making considerable savings of public expenditure by purchasing aircraft overseas rather than at home.

The noble Lord, Lord Carrington then referred to the question of taxation. All of us would agree that taxation, at whatever height it is, is intolerable; but I should like to know from the noble Lord, Lord Carrington, and the noble Earl, Lord Dundee, whether they foresee a reduction in our present taxation rate. The noble Lords realise, of course, that taxation provides three things. It provides money to pay for our expenditure; it provides money to assist those who are less well off, such as the pensioners (and I do not think the noble Earl would suggest that this should be reduced, in view of the speech of his right honourable friend on Saturday); and, thirdly, it controls the economy. If we were to reduce taxation now, we should create an availability of expenditure which would wreck all our efforts in regard to the balance of payments.

LORD CARRINGTON

My Lords, I think the noble Lord misunderstood me. I was not talking about reducing taxation but about a revision of our taxation structure. The two things are not at all the same.

LORD SHEPHERD

My Lords, that may well be, but I believe the policy document for the noble Lord's Party Conference did talk in terms of a reduction of taxation; and if my memory is right the noble Lord, Lord Carrington, advocated it in his previous speech on the economic situation.

In view of the large number of speakers to follow, I do not wish to speak for too long a time, but I wish to deal briefly with three points intimately connected with the balance of payments. First of all, the labour supplies. I do not know whether the noble Lord, Lord Carrington, has read the National Plan. I am sorry that he did not take part in our debate. I appreciate that he was not here for that debate, but he has criticised my noble friend in regard to speaking to-day. We regarded the debate on the National Plan as of great importance. We had speeches from the noble Earl, Lord Dundee, the noble Lord, Lord Drumalbyn and the noble Viscount, Lord Eccles, but there was not another Member of the other side of the House who took part in that debate. Yet we regard the National Plan—as, I should have thought would most industrialists—as a document of considerable importance.

The National Plan shows that with our present rate of productivity, and with a redeployment in the regions, we shall be about 200,000 men short by 1970. There is the undoubted fact that already there is an acute shortage of skilled labour throughout the country. I should have thought that this would be the time when industrialists would realise that labour is now gold. As the noble Lord, Lord Byers, has said, industrialists have to find out how best to use the labour force and how best to find the machinery to reduce the labour force. One only has to see the unemployment figure for January, which is now down to 1.2 per cent. It may be that of that figure a very large percentage is unemployable, and therefore I should hope that the industrialists would look to their own organisations, because the noble Lord, Lord Byers, is absolutely right in saying that there is a great deal of under-employment in this country to-day.

The noble Lord, Lord Carrington, spoke about strikes and restrictive practices. We have always deplored strikes and restrictive practices because they are now unnecessary, but we are in fact dealing with a human problem. Many of the strikes which have occurred have been due to bad communications within the organisations. But, my Lords, do not let us be blind to the basic problem of labour in this country. It is the inefficient use of labour, largely due to unskilled management. In the last 18 months there has been a major breakthrough by enlightened management in the field of productivity agreements with the unions within the shipbuilding industry, the oil refining industry, the power industry and the print industry; and even within the steel industry we have been able to see major productivity agreements made which have given not only higher profits to the companies but higher wages and shorter working hours to the workers. If this can be done by enlightened management, surely it should be a challenge to all.

The Government recognise that there must be a major change within areas and within jobs. We have increased the number of I.D.C.s that have been granted to the regions, but we recognise that we must do something in regard to amenities to make the regions more attractive, and the Government are most grateful to the regional councils for what has been done. The Government will be introducing a further piece of legislation to increase the mobility of labour. The previous Administration introduced the Industrial Training Act, this Government passed the Redundancy Payments Act, and we hope your Lordships will expedite through this House the National Insurance Bill, which will give a wage-related benefit to workers.

In regard to production it is true that the expansionists must be disappointed. It was anticipated, in view of the economic measures which had to be taken to deal with the balance of payments, that there would be a period of levelling out of production, but it is interesting to see the growth of the capital goods and the engineering industries. These have increased, whereas many of the consumer industries which made very little impact in the export field have declined. But, unlike previous deflationary periods, while we have been able to keep production fairly flat there has been no reduction in investment. I should like to stress this. In the past investment has been made usually at a period of boom. This has put an increased burden upon our resources. It would be far more advantageous to invest at periods other than those of boom. All the information that is now available is that 1966 should see investment continue at about the present rate of 9 per cent.

One cannot stress too much the need for investment. If we consider the British wage cost during the period 1960 to 1965, we find that it increased by about 30 per cent. In Italy, Germany, Japan and France it increased between 45 and 70 per cent. But due to increased, sustained, investment in those countries, the new machinery and the new productivity agreements that were made were able to counter the increase in wages so that there was very little marked effect on the wage costs.

THE EARL OF DUNDEE

I think that what the noble Lord is saying about investment is very important. Has he any figures for the year 1965? The official publications only go to the end of 1964. It would be a great help to many of your Lordships if the noble Lord could give us the figures of investments for 1965 so far as they are known.

LORD SHEPHERD

I should like to help the noble Earl. I can only give him what is regarded as the provisional figure; it takes time for the statistics to be received. It seems that for the period of 1965 investment was running at about a 9 per cent, increase on 1964.

We hear a great deal about competition. I wish to speak about this in regard to the Industrial Reorganisation Corporation. I do not think there is any doubt that we have far too many cubs in this country and not enough lions. We need to see more mergers producing larger and more efficient organisations, not only to fight competitively within the home market but to be big enough to have the resources of design and research, and an efficient export department, in order to meet competition overseas. The noble Lord, Lord Byers, was quite right in saying that the Industrial Reorganisation Corporation does not represent nationalisation by the back door. The White Paper was perfectly clear in that; there is no means of compulsion.

The Government recognise the very important part that has been played by the merchant banks, and this will continue. But the feeling in the Government was that we needed to have an organisation deliberately to set out and seek rationalisation and mergers. If private industry, private capital, wishes to participate in, or in fact to take over, the entire operation of rationalisation initiated by this new Corporation, the Government will be very pleased to see it. But £150 million for this type of operation is not a small sum. I will not mention the name, but I can think of an operation, which I believe was started two years ago, that started off with £10 million and brought about a rationalisation and merger to the tune of nearly £70 million. If further sums are necessary and this co-operation proves its worth, the Government will see that the capital of the Organisation is increased.

I would, if I may, come to the last point, and this must be, and must remain for a long time, a dominating thought. This is prices and incomes. The Government set out with this thought: What is the alternative to a prices and incomes policy? It can only be periods of deflation. Most of our memories will go back to the year 1960, when we had—what was it?—900,000 unemployed: a tremendous waste. But when we talk about restrictive practices and the need to sweep them away, if you are going to have these periods of unemployment you will lose all the opportunties you have of persuading the unions and work-people to give up their restrictive practices.

The Government set out to achieve the prices and incomes policy. We had to have discussions with representatives of management and representatives of the unions. We had the Declaration of Intent and then we had the agreement setting up the Board. The Board has had a remarkable effect in many ways. In the field of prices—and I grant that the noble Lord, Lord Carrington, did not make a great deal of the cost of living—it is interesting to see that since the Board came into being the cost of living has risen by only 1.9 per cent. This is a good deal lower than in previous periods. In the field of prices there are a number of significant victories, one might call them, to the Board. Some of them, of course, do not appear in public. The House may be interested to know that there was one organisation which wished to raise the price of its products by 67 per cent. and when it was threatened to send that to the Prices and Incomes Board it reduced the uplift to 5 per cent. I would have thought the very appearance of the Board has a salutary effect on those who wish unfairly to increase their prices.

In the field of bread, we held the bread price for nine months. Certain organisations raised their price, some kept their price, and some—God bless them!—lowered their price. I would suggest that that was an achievement for the Board. I would not wish to say—and I think it would be wrong for me to suggest it—that in regard to prices industry has behaved irresponsibly during the period of 1965. This is not true. In fact, we have had the greatest of co-operation from the mass of industry in maintaining prices.

But the same cannot be said—and I will be frank—in the field of incomes. We are dealing with a great human problem. Most of our workers have been brought up in a period when there have been in office the advocates of the market price for the commodity; if an article was scarce then you should pay a higher price. That was done in the case of land; it was done in the case of rent. And when you go to the workers and say, "Your commodity is scarce. Do not demand the price of its scarcity", they turn to these aspects, and it is very hard to say that in the national interest they should now curb the demand that they could well make to the country. But that call is being made. Ministers are going out, officers of the Department of Economic Affairs are going out, officers of other Ministries are going out, to talk to all sides of industry, because we recognise—and I think the noble Lord, Lord Carrington, will agree with me—that this is a matter of communication.

May I say this?—the noble Lord, Lord Carrington, referred to it. You need publicity. We had great publicity for strikes when 50 men put 5,000 out of work, but you get no publicity for productivity agreements or for men deliberately working overtime to produce an export order. There would be considerable help to the Government and to all those who are trying to impose an incomes policy if we had greater publicity of the achievements and a little less criticism in the headlines; that is so certainly from a national point of view. The unions agreed that increases in pay, wages, incomes, all forms of income, should be contained within 3 to 3½ per cent., which is the present rate of higher productivity. I agree with the noble Lord, Lord Byers, that what we have in this policy is not a wage freeze. What we have said, and what the unions have recognised, is that incomes must be related to productivity, but we have got to communicate this. It has been said that there is failure. It is interesting to see that just before 1965 there were long-term agreements and forward commitments for 7 million manual workers, and similar agreements for one million non-manual workers, all committed before this Government was in office, or before an incomes policy had been projected to the various organisations; and there were claims prepared for three million. This will represent a substantial part of the increase in our total wage bill and incomes.

But, because it is a human problem, one has to bear in mind, that as these organisations have received these increases there are others who feel that they must catch up. Therefore the Government asked the T.U.C. if they would set up a committee to consider the claims made by their unions. This was an invidious task to ask any union leaders to perform, but they voluntarily accepted it. It is not possible to give in public the success of that committee, because of the relationship between the T.U.C. and the unions, but I will say this: that that Council has behaved responsibly and has had an effect upon wage claims.

The Government recognise that an incomes policy is essential. They would not wish to face the alternatives which I have mentioned. Therefore they have thought it necessary to strengthen this policy by the introduction of legislation. It is controversial; but usually controversial legislation stimulates thought, and perhaps that may help us in our policy. It is only to provide an early warning system for prices and incomes, so that the Government should be aware of any major claim. It will not affect voluntary agreements or voluntary negotiation between the parties concerned. In that field I do not believe that it is possible or right to take statutory powers to deal with the matter.

I would end with this comment. We have a long-term problem in front of us. In time of war it is relatively simple to sustain one's people. You have the emotions and the fears. We are now fighting an economic battle, which is just as important as any war than we have ever fought, but it is in a field of which, quite frankly, few have a real understanding. Even the economists, the specialists in this field, dispute the terms and the actions that should be taken. But we must get the message across, even to management. It is remarkable how little management appreciate the things that have to be done, or even accept a willingness to do them. But, above all else, we must get the message across to our workers. That is a responsibility of the Government; but if any noble Lord in this House is prepared to help, we shall be grateful for his assistance.