THE ECONOMIC SITUATION

HL Deb 09 February 1966 vol 272 cc762-876

3.59 p.m.

Debate resumed.

LORD MANCROFT

My Lords, I am grateful to the noble Lord, Lord Snow, for the Statement about prototype reactors. He has made me realise, by explaining to me how little I know about prototype reactors, that I am not quite so ignorant about economic affairs as I thought I was.

We are grateful to the noble Lord, Lord Carrington, for raising this debate to-day. I propose to take a great deal of the advice which will be given us by the many noble and expert Lords who will be addressing the House. I propose principally to take the advice of the noble Lord, Lord Egremont, in the Motion he raised some time ago, that all our speeches are too long. If there is some doubt as to what is the solution to our problems, it appears to be that we are roughly agreed upon what are their causes. The noble Lord, Lord Shepherd, has quoted his shop steward friends, who maintain that we have spent too much money in trying to police the whole of the world. There may be something in what they say. Unfortunately, it seems nowadays that most countries seem to spend more in a year by accident on defence than their predecessors spent on purpose in the years before the war. That is the first reason.

The second reason for our difficulties appears to be that we have spent too much money abroad, giving it to recipients who are neither as grateful, nor as careful with that money as they might have been: money which could have been better spent on hospitals, roads and prototype reactors in this country. The third reason is that we have been acting as a world banker in charge of one of the two reserve currencies, thus increasing the pound's vulnerability, restricting our own freedom of manœuvre and making it more difficult to devalue. Fourthly, we have spent on a Welfare State, however desirable that may be, more money than we could really afford. But when we come to solutions, it is not quite so easy. I was slightly confused before the noble Lord, Lord Shepherd, gave us his customary courteous reply. I am still confused now, though, of course, on a much higher level.

We have received advice from other quarters. We have received advice from the financial pundits, all of whom warn us that we are going to be in for a tough Budget—largely, I suppose, in order to encourage foreign onlookers about our determination to put our house in order. I cannot ask the noble Lord who is to reply for the Government to anticipate his right honourable friend's Budget. Might I, however, point out to him that all the financial provisions which this Government have so far introduced have involved commerce and industry in enormous administrative expenses. Great complication has been involved and great financial expense incurred on tryng to make the Government's provisions work.

It used to be said that in the North they manufactured things; that everything South of Lincoln was overheads. We are spending far too much in industry on overheads like accountants and lawyers. I have nothing against accountants, unless they are employed by the Government; and I myself was once a lawyer. But the most important man in any business to-day is the export manager—not the accountant, and not the lawyer. I beg Her Majesty's Government to relieve us as much as possible from the burden of unnecessary administration when they are preparing their forthcoming "tough Budget".

The noble Lord, Lord Byers, referred to a remarkable broadcast last night. In that we received indirectly another piece of advice, to which the noble Lord, Lord Shepherd, also referred, and this from the electors of Hull. Hull is a highly in-dustrialised part of the world where about three-fifths of the voters are unionised, fully employed, highly paid. Their wages have gone up considerably in the last eighteen months. I suspect that a substantial majority (though not substantial enough to allow the Prime Minister to categories legitimate opposition as tomfoolery) were expressing gratitude for the fact that they have been allowed to get round Mr. Brown's plans.

A third class of advice we have received is from the many American businessmen who visit us and examine our methods and production. This becomes a little galling after a bit, but we have to expect it. They have lent us an enormous sum of money; we are grateful for that. Going back to the days of Marshall Aid, that most unsqualid act, they have poured money into our coffers, and they are entitled to ask themselves about our ability to repay our debts. However, we should be better able to repay some of these debts if American businessmen were not so eager to push the British businessman out of every market they possibly can all over the world. That does not make it easy for us to repay our debts. Nevertheless, we must take careful note of what they say by way of criticism.

There has been recently published the views of a collection of American management specialists visiting this country from Detroit. Their verdict bears out very much what has been said by the three previous speakers this afternoon. They point out that our ability to expand industrially depends as much as anything on to-morrow's management. Here I have no interest to declare, being, unfortunately, 52 and to-day's management. They go on to add that they are distressed by the air of cynicism which they find in to-morrow's management. I wonder how true that is. Speaking for myself, I am afraid that it is particularly true at the moment.

Responding to the Prime Minister's exhortation to modernise, my firm has recently installed, at enormous expense, and after two years' careful planning, a computer. Within the first week of its installation, we had four power cuts in the London area which resulted in the computer grinding to an instant halt and taking no less than four hours to get back into action. The noble Lord opposite therefore will pardon me if I say that my enthusiasm for the Minister of Power is at the moment well this side of unrestrained hysteria.

LORD SHEPHERD

My Lords, we know that the noble Lord is always fair, and I hope that he does not wish to go on record as blaming the present Minister of Power for the inadequacy of supply of electricity within the London area.

LORD MANCROFT

My Lords, I am blaming nobody, but if any of your Lordships should, by chance, have in his attic a second-hand abacus that you do not want, I should be pleased to know about it. The point I am stressing is that the nation's real wealth depends upon the management of to-morrow. It is, of course, a team job, as well. Of course the noble Lord's friends, the shop stewards, have a vital part to play, but if the management to-morrow lets the shop stewards down, both are lost. At the moment it appears that the Government are not giving enough encouragement to that one vital man, to-morrow's manager.

Here I take up a point which was made by my noble Leader Lord Carrington and by the noble Lord, Lord Shepherd, in their slight argument about the incidence and the burden of taxation. We are more dependent upon personal incentive than any other industrialised nation. We are now heavily taxed where it matters most—on the income of that manager of to-morrow, the creator of to-morrow's wealth. The Americans and the Germans fully realise this. They allow their best executives to keep more of their gross income than we do. The difference between us and America and Germany lies not in the level of taxes, but in the steep graduation of direct tax rates. Despite all that Mr. Selwyn Lloyd did for the surtax payer—it raised an enormous political uproar at the time, but it was soon forgotten when it was seen how just it was—we still are levelling a great deal more than our principal competitors abroad.

The new Companies Bill will shortly be debated in your Lordships' House, and I do not wish to anticipate that debate. One clause of that Bill suggests that the individual salaries of company directors be set out annually for the benefit of the public and the shareholders. I wonder whether it would be advisable to set out the net amount, rather than the gross amount which that company director earns, so that the public may really know what his "take-home pay" is I believe that the noble Lord, Lord Beeching, did a great service to this cause when he insisted on £24,000. He brought it home to the man in the street exactly what £24,000 meant in take-home pay and how much taxation can really take. Surely individual enterprise, if the noble Lord, Lord Shepherd, is right on his comments about management, is to be encouraged and not condemned.

Surely the time has come when we can agree that "profits" is no longer a dirty word, and that profits are, in fact, the test of industrial efficiency. There are noble Lords opposite who do not like the profit motive, but facts have to be faced as they are and not as you would like them to be. This was the trouble initially with nationalisation, which was an honourable idea but which fell to the ground for the principal reason that it did not face facts as they are. No doubt a man ought to work better, more energetically, more loyally, for his country than he would for a private boss. But the blunt fact is that he does not. This is one of the facts which we must face. We have to face the fact that everybody loathes paying taxes—the noble Lord, Lord Shepherd, himself made this point. Recent polls held by the Evening News put this out as the greatest disincentive of the lot.

It is not just the burden of taxes we have to pay: it is the inequity of the burden about which I am complaining, and of the damage which it is doing at the moment. Why, for instance, should a husband and wife be taxed as one person, and yet death duties be charged on money left by the husband to his widow?

That is crazy. Why should a transfer of shares to children be counted as realisation of capital gains while income is taxed as though no transfer had ever taken place? That is not the burden of taxation; that is the inequity of taxation; that is the greed of the State. This is what I believe makes for the cynicism to which so many of our foreign critics draw attention.

And I think it is a very bad thing when Budgets and Finance Bills, which hitherto have had the purpose of raising revenue, are used for the paying-off of old political scores. It was said of George III that whilst his prejudices were always consistent, his policies never were. There is, alas! still a slight Georgian touch in the policies of the noble Lords opposite. Some of them are still prepared to give too little incentive to the individuals who matter, and in their love for equality spread such incentive as there is among the good, the bad and the indifferent. That is what makes for the cynicism of the man who really matters—the manager of to-morrow.

Some noble Lords opposite do not accept that high merit should earn high reward. There are still some of them who are suspicious of the individual as a saver and as an investor. But we have to face the fact that we live in a world of a mixed economy, and we are going to live in a world of a mixed economy for a long time. On this side of the House we have to rub along with nationalisation, which we do not much care for. Noble Lords opposite have to learn to rub along with profits, without which they will never get real energy out of industry, whether at the management level or at the level of the shop floor. There are too many noble Lords opposite who believe that the solution to an economic problem is to get up in the middle of the night and steal the money out of their own trousers pockets. Unfortunately, they are our trousers pockets as well.

4.12 p.m.

LORD COHEN OF BRIGHTON

My Lords, this afternoon we have to deal with a great problem—a problem which I suggest should, in our consideration of it, be dealt with in the short and in the long term. Before I deal with that aspect, however, I should like to say a word about the speech of the noble Lord, Lord Mancroft. I, too, encouraged by the Government to have greater organisation in my office, have just gone to the expense of installing a computer. It has taken a great deal of time to consider this matter and I have had a team advising me as to the type of computer we should have. I realised, when installing the computer and having the rest of my organisation run by electricity, that there are times when electricity does not work, so I provided for that possibility by installing a generator. Obviously that is the thing to do, and I should have thought that any efficient firm—and I am sure that the noble Lord, Lord Mancroft, has an efficient firm—would think of that first when installing electrical equipment in an office. However, perhaps his firm was not rightly advised by business consultants.

This afternoon we have to consider the problem in two stages; one is the short and the other is the long. I should like to deal very briefly—because there is going to be a great deal of repetition this afternoon—with the problem of shortly getting into as good a position as we possibly can, and later I will come to the general reorganisation of our industry in the long-term. But may I first refer to the balance-of-payments position and the fact that the figures are being brought into balance during this year. That subject will be discussed over and over again this afternoon, and I am not going to say any more about it except this. There has been criticism and dark pictures painted on the other side of the House. Apparently noble Lords on one side think that things are not so good as they are.

I could not help thinking of a short article which appeared in the Financial Times last week. The Financial Times is by no means a Labour organisation, but in dealing with the reduction of the deficit it said: This is the fifth successive month in which reserves have risen. Last month's rise was £5 million but the public figures, as is well known, understate the true position. The authorities have made it clear that they are using the bulk of their gains to repay debts to the central banks and to meet forward commitments. That we all know.

Their tactics hide the real size of the improvements. Gold figures show that sterling is no longer suffering from an immediate crisis of confidence. This is the important point which I want to make: The extreme doubts and anxieties of last summer no longer affect the foreign exchange market, and holders of sterlings feel able to take a calmer and more long-term view. This is the success the Government have achieved and improved our position from the stormy days of 1965. This means that the foreign bankers, whom we have criticised in the past, are pleased and satisfied with the policies that this Government are carrying out, because they believe, as we believe, that the Government are going to deal with the problems which face us both in the short term and in the long term.

The question was bound to be asked this afternoon: How is production going? It was said that production is more or less static at the moment. In fact, production increased by 2 per cent. last year, but I accept immediately that it is static, and let us consider the reason. The question is not how much you produce, but what kind of goods you produce and how valuable they are to the economy. We have two related problems here. There is the question of what we are going to produce to improve our position in the world, so that we can continue to export and not consume at home so much of the goods that are produced. We are now in a period of transition. There is the transfer of labour, which is naturally taking place, from the less valuable industries to those which are necessary for us in the years ahead. The science-based industries, as is said in the National Plan, and those producing capital equipment, should expand faster than others—I refer to oil refining, chemicals, electricity supply, man-made fibres and telecommunications—and, of course, the biggest expansion should be in mechanical and electrical engineering.

It has been a disgrace that machine tools are being imported into this country, which was once the workshop of the world. When one has seen the import figures, and has seen that not only are we not exporting enough machine tools but are bringing machine tools into this country, one realises what a grave mistake has been made. We must therefore assume that that kind of production must go up; whereas the other side of production—that is, the older consumer goods industries, textiles, clothing, food and drinks (and, of course, coal production is coming down as well)—will stay at 2 per cent. or possibly come down. But the production of the vital industries, the industries which are going to make recovery possible in this country, must go up.

We heard criticism earlier in the debate on the question of the hire-purchase restrictions. As your Lordships know, the hire-purchase debt is now £1,196 million. It has gone up from £1,115 million and is increasing. I am one of those who will go very much further and say, so far as hire purchase is concerned, that it is not enough to reduce the period of repayment and to increase the deposit that should be paid. Hire-purchase companies should come under the same control as the joint stock banks. It is extraordinary that the hire-purchase companies are entirely free from directives from the Governor of the Bank of England. The joint stock banks are not free, the building societies—with which I have something to do—are not free. But the hire-purchase companies can pay what rates of interest they like and can lend in whatever direction they like, sometimes for goods, and sometimes for other purposes which are not valuable to the economy.

It seems an obvious step to me to say that this great section of our financial life should have no right at all to carry on entirely independent of control, paying whatever rates of interest it thinks are wise—and some of them are very much too high, borrowing at 8 and 8½ per cent. and lending at 12 and 14 per cent.—and lending in directions which may not be for the common good. I hope that, before too long, the hire-purchase companies will come under much greater control, so that the Governor of the Bank of England, in dealing with the financial position, can deal also with the hire-purchase companies.

My noble friend Lord Shepherd mentioned the question of investments, and stressed that it is important that this year we should build up our investments as much as we can. I am associated with an industry which, at the moment, is having a great inflow of money. I refer to the building society movement. It is interesting to know that the building societies, which last year advanced £996 million, have in their coffers to-day, in cash or as gilt-edged securities, no less than £918 million, and have money coming in faster than it has ever done in the past. So they are playing their part in developing the national housing plan and in taking from the community additional savings to produce the houses which are so badly wanted.

THE EARL OF DUNDEE

Would they reduce their interest?

LORD COHEN OF BRIGHTON

When we can reduce the bank rate we will reduce the rate of interest on mortgages. As a matter of fact—this has nothing to do with the debate this afternoon-we are working on a very tight margin, a very tight margin indeed. But there is a possibility (and I am not going to say more than that) that in this Session proposals will be made in another place which may help at least those who are buying their houses and who are not so well off as the more wealthy members of the community. I say no more than that: that there is quite a strong probability that, in another place, there will be a proposal made which I am sure everyone will value.

My Lords, I have dealt briefly with the existing position. I could say a great deal more about it. For example, I could speak about the re-equipment of factories. In that connection, I want to make just this comment. There has been a certain amount of criticism of the corporation tax. It is a new tax here, although it is a tax that has been in America for some time. Do not let us forget that this tax has set aside from the earnings of companies something between £200 million and £250 million which they can use for re-equipment—and every Member of this House will agree with me that the re-equipment of our industries is something which is really vital. Having said all that, although not dealing with it as fully as I should have liked, as we have so many speakers this afternoon, I am going to turn my mind for a moment from the present to the future.

We are living in a rapidly changing and shrinking world. Radio communications and the speed of air transport have brought the countries of the world together. Our export markets are no longer Europe only: they are Africa, India and China, they are the world. Businessmen, therefore, must think of these world-wide markets. One of the outstanding trends of the past decade has been the acceptance by the business community—and I stress this in view of the speech to which we have just listened—of more and more guidance from Government circles. This trend—and I say this without any doubt—must clearly accelerate; and what, ten years ago, would have been regarded as a dangerous interference, is now being accepted as the province and function of national planning.

In fact, in 1964 the President of the Confederation of British Industries, Sir Peter Runge—and I assure your Lordships that he is not a member of the Party on this side of the House—said: With a policy of full employment, the abandonment of which is not acceptable on political or social grounds, restraints on prices and incomes can no longer be imposed by the workings of a free market. We can no longer accept laissez-faire. Laissez-faire was for too long the kind of policy we heard about in this country, particularly when dealing with the industries of the future. In the United States President Kennedy took action so far as steel prices are concerned; and certainly President Johnson has taken in some ways much greater powers than we have ever dreamt of in this country. Throughout the world there is an abandonment of traditional key attitudes, and this is allied to the designs of policy to obtain better social balance and not merely economic enrichment.

I am glad we are going to have informative company accounts. I think it is very valuable that the community should know much more about public companies, which are often dealing with their money and as to which they have no idea what is happening. Of course I want to see the science of business management go ahead. Business management in this country, as a science, has not moved anything like so fast as it should have done. How many of our large firms have their regular management committees, their business consultants? How many of our large firms have an "O and M" department? An "O and M" department is an organisation and management department comprising two or three chartered accountants, preferably, or one or two chartered accountants, who, from outside the general organisation, see how the organisation is going and make suggestions for improvement. How many of our firms do that? Yet, if one goes to America, one finds there that business consultantcy and "O and M" are all part of the structure of business life. Surely that is something we must learn to have here.

I believe that progressive industry should welcome employee representation on the board of directors. And why not? You want to get the workers with you. It is all very well to say, as we have heard earlier, that we have to remunerate the manager with a greater salary, but the manager is not the only man in the business. The chap on the shop floor is also important. He has to feel that he is part of the organisation. In the industry of the future it will be no good looking at industry as "we" and "they"—we the management, they the workers. They must all be one team; and representation on the board, management committees of which the employees and directors can both be a part, and so on, all go to make up the picture of industry which is necessary for our future.

It is clear that the earning of good profits is essential for an advancing and progressive society. My Lords, we on this side—and I must emphasise this—have no objection to profits if they are, indeed, a normal prerequisite to an improving and maintained standard of living. We have no objection to them if everyone benefits from them. Efficient companies should know that they can have greater profit and, as part of the greater profit, greater earnings for the employees, so that—and this is extremely important—linked with the new spirit, the employees should know that their efforts will give them improved living standards. That is how we are going to get greater productivity. That is how we should do it.

We must eliminate the lack of security. Redundancy pay, about which we have heard, has gone a step in that direction, but we want to go much further. I should like to refer your Lordships to the agreement that General Motors came to with their employees. It is an agreement which has stood the test of time— and do not forget that General Motors is the largest firm in the world. As the chairman once said, "What is good for General Motors is good for the United States of America". They signed an agreement with their workers which included a method of sharing the gains from higher productivity. How many firms in this country have signed such an agreement? The chairman of General Motors has said that the agreement implied full recognition that productivity is the key to progress. It is also stressed in the agreement that the standard of living of all the employees depends on technological progress, better tools, methods, processes and equipment, and a co-operative attitude on the part of all parties in such progress.

We have to face the future of the electronic age. I said that this is long-term; but "long-term" will be here before we know where we are. There must be more emphasis on the maximum utilisation of the machine, on modern equipment, and less on the men. There must be more emphasis on maximising the use of all factors of production and distribution; there must be more emphasis on the promotion of flexibility, and the readiness to accept new ideas and methods. There should be an increasing emphasis on incentives to management—and that, I expect, will be accepted on the other side of the House—with opportunities for them to benefit specifically from their own contribution and generally from the firm's overall increase in efficiency and profitability. I must emphasise again that, subject to that, we on this side of the House have no objection whatever to profits, provided that they are enjoyed not only by management but by those who work in the industries as well, by those on the shop floor.

We have to face the problem of the electronic age. The greatest revolution in the history of man is the advent of the automatic factory and the widespread use of computers, which are as yet only in their infancy. How many computers are there in this country? May I say here, digressing for a moment, that I was very impressed with the team of American advisers on computers that we have. At the moment, we are deciding between I.C.T. and General Electric computers, both of which are produced in this country—something I am very pleased about. I thought that we were going to be bound to have I.B.M., and I am pleased that those produced in this country have stood up so well with these American advisers. But, to revert to what I was saying, almost every job involving physical effort will be done by machines. All routine clerical work will be done by computers—even shopping and paying into the bank will be mechanised.

The Government will therefore have to give thought to the use of leisure, to the development of the arts, to the intelligent appreciation of the countryside and to recreational facilities which improve the stature and physical health of our people. We go towards an age of material plenty; but to do this and to take advantage of everything that can be offered, it is abundantly clear that there is one factor to be taken into consideration, and one factor only: education. If we want to utilise all the machinery and to compete with the markets of the world, then I would have in golden letters in every Government office, the words: "Education, Education, Education." We must have an educated democracy to utilise those machines so that we can move towards this Millenium to which I referred.

Finally, my Lords, I will refer to the markets of the world: the Common Market, the markets of the East, the markets where we have the opportunity to sell our goods. If we entered the Common Market to-day, with some of our industries in the state they are now, there would indeed be a vast mass of bankruptcies. The first job we must do is to bring in machines and new ideas, so that we can compete with those who have already installed them. If we were to do this, we could face the future. I know that this country, which has been the workshop of the world, has that opportunity.

I know that I have dealt in the main with the future, but that is because I did not want to repeat the many words we are going to hear this afternoon, or any criticisms to which we shall have to reply, on the question of the present and how the Government's plans are working. But I say this: the First Secretary of State is doing a marvellous job. He is putting his heart and soul into it. Although no one can expect success at first, although there are failures (we are human, and there are bound to be failures), yet we are moving in the right direction. The more publicity we can have for the prices and incomes policy, the more people can realise that they are part of the community, the greater the chances of success in the future.

So far as the five years that lie ahead are concerned, we must pay back quite a considerable amount of debt; and that I believe we can do. As has already been said, exports are up 7 per cent. on last year; and they can be increased. Imports are fairly stable. So the general position looks far more optimistic than some speakers on the other side of the House would have us believe. If we can, from now till 1970, go all-out, not only to extinguish the balance-of-payments problem (which will be dealt with this year) but to pay off—and we saw something in this connection on television last night—the outstanding debt that has been raised, we can go forward after 1970 on the lines I have suggested. And that, I believe, will enable us to return to the prosperity which we knew in the days when we used to hear at school that Britain makes the best instruments in the world; that "the sun never sets …" and so on. I believe that we can get to that when we use instruments and management and carry with us the workers in endeavouring to create that better state.

4.35 p.m.

VISCOUNT CHANDOS

My Lords, I must begin by declaring an interest. I am a director of I.C.I. and of two insurance offices. As I have said before to your Lordships, the present Government inherited a difficulty and they succeeded in changing it into a crisis. I think all succeeding Governments, of whatever political complexion, will inherit difficulties concerning the balance of payments, for they are inherent in our position. The extent to which these difficulties avoid crises depends on the confidence reposed in us by others.

Sir Paul Chambers, I thought, put the point with a force and clarity which is seldom seen in economic analyses. Using very round figures, he said that the external trade of this country is about £10,000 million—£5,000 million imports and £5,000 million exports. Our reserves, to which the noble Lord who has just resumed his seat referred, are, in round figures, about £1,000 million. But we should not forget that the majority of that £1,000 million reserves is borrowed money, a fact to which the noble Lord did not refer. Therefore, if at any time there should be an excess of imports over exports, even temporarily, the percentage of the imbalance, owing to the gearing, will be reflected by a reduction of ten times the percentage in our reserves; for a one per cent. imbalance equals a 10 per cent. reduction in the reserves.

In ordinary times, when the world has confidence in our financial control and in our general policies, the gap is filled by the international banking system without crisis. When this confidence is lacking; when, for example, at the time of the General Election, the world read of the nakedly inflationary policies of the Party now in power, and of the irrelevant proposal, for example, to nationalise steel, that confidence was killed, and much more painful and much more drastic measures had to be resorted to.

I was about to say, "Faced by the crisis of their own making" but perhaps that is unfair, so I will say: "Faced with the crisis largely of their own making," the Government acted with courage. I mean that. They first made a bonfire of all their Election promises—dynamic expansion, large increases in production, many more houses, lower rates for mortgages, modernisation of British industries, stability of prices—and replaced these promises (and I repeat, not sarcastically, that this was courageous) with a much more severe form of Mr. Selwyn Lloyd's credit restrictions: the high bank rate, import levies, and the whole apparatus of restriction which is invariably built into Socialism.

"Thou shalt not" is the slogan of Socialism. As the old nannies used to say to the children: "Whatever you are doing, stop it." It would perhaps be too harsh, in the urbane atmosphere of your Lordships' House, to quote extensively the Prime Minister's statements about "Stop, Go" when he was plain Mr. Wilson. I will let him off with one quotation: We remember, he cried, the bitter experience of the 7 per cent. bank rate, the deliberate slamming on of the brakes. A word or two appears necessary, after the bonfire of promises, about how the alternatives have worked out. Let us first look at the credit squeeze. The Government principle is: "You tighten your belts; we loosen ours." Between January, 1965, and January, 1966, the total advances by the London clearing banks rose, in round figures, by £169 million. We all know, however, that during this period, by exhortation and by pressure from the Bank of England, advances in the private sector, that is, to companies as well as to private persons, have in the aggregate been drastically reduced. "Whilst you are compelled to reduce, we happily expand. Tighten your belts while we loosen ours."

Next, I must refer to the corporation tax and the new tax structure, in so far as they can be understood. These measures represent a long-term and concerted attack on private enterprise. Let nobody doubt that at all. After all, it is not surprising, and not discreditable, for the Socialist Government to attack the capitalist system. That is what one might expect. But they are doing it. The corporation tax and its surrounding measures are aimed primarily at the shareholder. To maintain their present rate of dividend would cost companies many hundreds of millions of pounds more than it does now. Otherwise expressed, the retentions or the cash flow would be reduced by these amounts, if dividend were maintained. On top of all this, there is the capital gains tax. The effects of these measures are, at least at long term, three-fold. They are: first, to reduce the amount to be received by shareholders; secondly, to stifle, if not to kill, one of the sources of private finance—namely, equity issues; and thirdly, ultimately to drive industry into the Government's arms for its finance.

Further evidence of this intention is to be seen in the formation of the new £150 million Corporation, which seeks ostensibly to promote mergers and to find capital and apparently management for selected companies. I have some experience of mergers and I cannot at the moment recall any merger that fell through for lack of finance. Generally they fall through for other reasons—often because the heads of the two companies do not like one another. I cannot think of—and I should be interested to know if any noble Lord could think of—a case where a merger has fallen through for lack of finance. The Government have been fortunate—and I say it in all sincerity—in securing the part-time services of Sir Frank Kearton, but no one can envy him in his task. Why is this? Because the policy of the new Corporation must be naked discrimination. Paragraph 7 of the White Paper says: The Corporation will give priority to schemes of rationalisation and modernisation which offer good prospects of early returns in terms of increased exports or reduced import requirements, and will have regard to the regional aspects of the Government's policies for economic development. Then comes this delicious sentence: It will not support ventures which have no prospect of achieving eventual viability. This reminds me of the boy who went to his father and said, "I am going on the Stock Exchange, father. I want to earn my fortune." His father, being a wise old guy, replied, "My boy, you will have to remember that sometimes stocks go down as well as up." The boy said," You don't think I shall be stupid enough to buy stocks that are going to go down!" That is what the White Paper is saying.

The Corporation will soon find itself helping mergers and rationalisation in one industry by providing capital for groups of companies of which it approves, and withholding it from those of which it disapproves. Those to whom support is denied will find themselves competing with others who are financed by money which they themselves as taxpayers have in part provided. What happens to Government contracts? Perhaps some spokesmen on the Front Bench opposite would like to tell us. Let us assume that an independent company tenders at the same price as a company in which the Government have either some shaky loans or a shareholding. Where is the contract going to be placed? I think that we can all guess. Is this a fair way to go on, to meet competition with the taxpayers' own money? There is a general feeling that the Government have some money of their own; but it is our money, and our money is going to be used to compete with ourselves. I am not sure whether my noble friend's analogy of robbing your own pocket in the middle of the night fits here.

The Corporation will be an instrument of political policy. I believe that it is another measure of creeping nationalisation, nationalisation by the back door. Moreover, £150 million in the first instance—I draw your Lordships' attention to these words in the White Paper—is a far larger sum than is necessary to achieve the ostensible purposes of the new Corporation—namely, to promote mergers. Of course, what is intended is long-term investment in industry in the private sector.

The White Paper purports to be aimed at rationalisation, a word which means putting more companies together, reducing overhead expenses and eliminating others. But the Government in their actions fly directly in the face of this policy. Look at the policy over Fair-field's and read that in conjunction with the White Paper and you will see something of the absurdity of a proposal which puts the shipbuilding industry on the North-East coast into great difficulties by building an enormous shipyard on the Clyde with Government money. I commend Sir John Hunter's speech to the attention of your Lordships. The Fairfield scheme does exactly the opposite of rationalisation. The Clyde scheme creates new capacity where rationally there is already too much. The whole thing is crazy. We, as Conservatives, must make it plain to everybody, and keep on making it plain, that these measures, the new Corporation and the whole new tax system, are major blows, though partly surreptitious, against capitalism and the private enterprise system.

This leads me to turn to the parrot cry of modernising British industry—a slogan, I fear, used by both Parties, which incidentally makes the task of exporting a good deal more difficult. All industries in all countries are always in need of modernisation, but we give the false impression that we are hopelessly inefficient. The noble Lord who spoke last was, I think, adding his great ability and eloquence to this particular proposition. After all, with no indigenous raw materials except coal, as my noble friend said, British industry is now exporting to the competitive markets of the world about £5,000 million of manufactured goods, in addition to our invisible earnings. The suggestion, so often repeated, that our difficulties over the balance of payments is due to inefficient British industry is sheer rubbish. What has happened is that Government expenditure overseas—and the noble Lord, Lord Shepherd, faced the problem openly—has risen from about £100 million to £500 million, upon which we receive no return whatever. I think I am right in saying that out of that, some £190 million is aid to countries overseas, for which we get no monetary return and so far as I can make out not much other return of gratitude, either. This is the main cause of our difficulties over the balance of payments. Everyone should reject the idea that it is due to the inefficiency of British industry. It is not British industry that wants modernisation; it is the Government themselves and their nationalised industries.

Let me look for a moment at transport. Mr. Marples enlisted the aid of my noble colleague, Lord Beeching, to modernise the railways, and the famous Beeching Report was the result. The Government have been too timorous to carry it forward with the speed and resolution that is necessary, and beyond sacking the Minister of Transport, which was probably a mistake (I hope I may have the noble Lord's attention for the moment), they have not applied themselves to modernisation. They have now apparently set themselves the task of nationalising Lord Beeching and people like him but when they have to bring in private industry to put nationalised industries on their feet it seems to be odd to go the other way.

As a diversion, and in a spirit of some levity, I would add that when there was an acute shortage of electricity and gas, someone—was it a Minister? I forget who it was—had the idea of preventing the oil companies from advertising the sale of oil: an original idea for curing shortages created by others. If only this brilliant idea had been carried a little further, the Minister of Transport could have sought to cure the congestion on the railways at Christmas by not advertising the time of departure of trains and withdrawing the A.B.C. from circulation. This would immediately have reduced traffic on the railways. Then he could have withdrawn petrol from the motorists and secured the Chancellor of the Exchequer's hope that we should all stay at home, even if we had to shiver.

The policy regarding private industry is a curiosity. It is a sort of whimsy.

First of all, you kick the owners, the millions of shareholders, around; you try to prevent their savings from getting into the finance of private companies; squeeze them at home; use these compulsory cuts to increase the overdrafts of nationalised industries, and then you propose further nationalisation. That is one side of the picture. The other is to woo the exporter, to promise Government help for new plant, provided that the Government (who have no means of finding out) decide what plants require grants, and all the rest of it. Having brutally assaulted private industry, punched them and kicked them into the gutter, you offer them some lollipops—although there is very little lolly in them. This type of policy is mistaken. A Government can only create a climate in which enterprise can flourish and, above all, in which enterprise can be rewarded; if profits are regarded as indecent, no amount of grants and lollipops will replace the incentives to adventure, to risk, to export, to expand and to prosper.

I should now like to point to some of the difficulties over the scarcity of labour, to which the noble Lord on the other side referred. Some of these are created by Government regional policy. It will be found that the shortage of skilled men in shipbuilding in the North-East is largely due to the artificial promotion of light engineering companies, which have drawn the skilled labour away from established industry. This is happening as a result of the Government's development policy.

LORD SHEPHERD

Would the noble Lord say that we should continue to let the pressure within the Midlands grow, merely to provide some easy forms of employment for the employers in the North-East?

VISCOUNT CHANDOS

No. I am only pointing out the practical problem. When the Government are dealing with a regional scheme, instead of spending new capital, they should be assured that the existing capital has the supply of labour necessary to make its plan work at full bat, as the noble Lord, Lord Cohen of Brighton, has said. That is quite a simple point.

I am not going into the sad story of Mr. Brown, except for a short moment.

The incomes policy as a means of controlling inflation is an absurdity. If you have the right financial policy and you are able to curb or check Government expenditure, both at home and abroad, then it is possible there will not be a sharp rise in wages or income. But when you let these things go loose, as you have, poor Mr. Brown finds himself sitting on the safety valve; and from time to time his colleagues make the boiler considerably hotter, and he must at times be wondering about his trousers. I wonder whether the noble Lord would like to explain the actions of the Postmaster General, who increased the wages of postmen by about 20 per cent., when everyone connected with the trade union movement knows that he could have settled the matter for much less. How did this get past the Cabinet, I wonder—a Cabinet that is wedded to increases of 3½ per cent. I should like to suggest that Mr. Wedgwood Benn be offered a Life Peerage as a reward for his services.

Meanwhile, since the Government have been in power (according to Mr. Brown, the figures are under-stated), wages and salaries have risen by 7½ per cent., company profits by 1 per cent., and the retail price index by 5 per cent. I must not detain your Lordships much longer—

A NOBLE LORD

Hear, hear.

VISCOUNT CHANDOS

Thank you. An incomes and wages policy which is expected to cure inflation, or control inflation, is complete nonsense. You cannot use a piece of wood instead of mercury in a thermometer. Mr. Brown will find, if he looks at the history of the German economy in 1936, when all prices and wages were fixed, that the result was a hidden and vast inflation and the lowest productivity ever in the history of that country.

I want to devote my last few remarks to saying this. The noble Lord, Lord Cohen of Brighton, applauded the further restrictions on hire-purchase. I quite understand why he did that, and I am not criticising it. However, I wish to put the other side. Since hire-purchase is, in fact, a stimulus to present consumption, it should, in a properly organised economic policy, be balanced by the artificial stimulus of savings. This is the positive measure in which we on these Benches believe, rather than the negative one only, which always seeks to restrict what is happening.

How is it possible artificially to stimulate savings? I am not going into it in detail, but I suggest that the right sort of measure is to have a Government loan, to increase the sort of Victory Bond idea up to a point where an individual can hold about £10,000 or £5,000 of them, which would not count for death duties in his estate, and which would be deliverable at par in relation to his other liabilities.

LORD COHEN OF BRIGHTON

I did not say "to restrict" hire-purchase companies. I said "to control them", which is just what the noble Viscount is saying.

VISCOUNT CHANDOS

The noble Lord misunderstood me. I did not say that it was wrong. If "control" of hire-purchase means that it is going to be allowed to extend, then it seems pointless. In this context, I should have thought that control meant to reduce it. The noble Lord began by saying how glad he was to see that hire-purchase was to be restricted. What I am saying is that hire-purchase as a stimulus to consumption must be offset by a stimulus to savings, and that the only way we shall get expansion without inflation is by saving.

To sum up, the Government's economic policy, in so far as it can be discerned, is doing the wrong thing in the wrong way. It is aimed at the replacing of private decision by State decision, as Mr. Enoch Powell had it the other day. It is, furthermore, nationalisation by the back door. The efficiency of nationalised industries has been low in every country that has tried them. Do the Government regard it as a mere coincidence that the only steel company which is losing money, and losing it fast, is the one under nationalised ownership? When the Russians are now seeking to introduce market factors into their economy we in this country are so out of date that we are trying to abolish them.

4.58 p.m.

LORD ROBBINS

My Lords, after the brilliant and powerful speeches which have been made on both sides of the House regarding the long-term problem, I hope I may be forgiven if I return in my brief observations to the short-term. I do not proceed on the maxim enunciated by the late Lord Keynes, that in the long run we are all dead, but I do say that in our present position, if we do not solve our short-term problem, then, in the long-term, we shall have a very bad time.

When we last debated this subject, on the occasion of the Finance Bill in the summer, the position was very grim indeed. Funds were pouring out of the country at a disturbing rate. Rates of exchange were sustained only by the lavish use of support from abroad. The Press and the clubs were reverberating with hints or fears of imminent devaluation.

To-day things look decidedly better. The pressure has eased. Rates of exchanges are at a level which suggests that money is still coming back to London. The reserves have been increasing for some months. For all this, I think we should give credit where credit is due. Doubtless much is due to the solidarity of the international banking community—so often the subject of misrepresentation and abuse. But, in my judgment, much credit is due to those in positions of responsibility here, who in truly alarming circumstances kept their heads and took appropriate action—to the Chancellor of the Exchequer and to the Governor and officials of the Bank of England. I am sure that many Members of your Lordships' House will have been delighted to observe the honour recently bestowed by Her Majesty on that great public servant, Sir Maurice Parsons.

But, gratifying though it is to have moved out of this region of extreme danger, I find it difficult to share the euphoria prevalent in many quarters about our present prospects. Indeed, I marvel at the volatility of public opinion about a situation which, apart from these squalls and tempests on the capital account, still presents the same basic problems as it did last summer.

First, we are still in a position of serious weakness as regards liquid debt. I do not know the exact position as regards emergency credits, but it is clear that we still have to repay what we have borrowed from the International Monetary Fund. And even if this were done, even if our reserves stood at the pre-crisis level without borrowing, it would surely be abundantly clear that they were not high enough then. Current discussion seems to hold that this can all be looked after by improved arrangements regarding international liquidity. But this is far too complacent; such arrangements are not yet in being. Even if they were, they would not excuse us from the necessity of some strengthening of our own position which, having regard to our external obligations, has long tended to be dangerously weak. And let no one evade the responsibility by arguing as if such a policy were out of the question. One has only to look elsewhere, at Germany and France, for instance, to see what is possible without undue sacrifice.

But, secondly, quite apart from the capital position, it is evident that the position on current account is still far from satisfactory. It is true that we are not running the unprecedented deficit of 1964 and that the recent trade returns have been more favourable. But it is equally true that we are not yet in balance. The figures given by the noble Lord, Lord Shepherd, show a position which is certainly not conducive to any equanimity. If it does not get better, we cannot go on. For the time being the crisis of confidence has been stilled and our credit is restored. We have achieved a breathing space. But confidence in the capital position depends upon health in the current account. If we cannot achieve equilibrium on the current account within a measurable time, the crisis will recur—I would say with increased violence. If we cannot achieve a surplus, then we cannot repay our debts, we cannot strengthen the reserve, and we cannot play our part in the political stabilisation and economic development of the world.

What then, my Lords, are the prospects? I am not ashamed to say that I am not prepared to make exact predictions. There are projections available—and some have been indirectly alluded to this afternoon—some hopeful, some not so hopeful. Doubtless these have some use as indicating the complicated arithmetical implications of certain quantitative assumptions. It would be foolish to say that this sort of thing should not be done, but it would be equally foolish to say that it has the status of a genuine forecast—a projection is not a prediction. The actual progress of events is the resultant of many factors, so many of which are not within our control, that we deceive ourselves and entertain false notions of policy if we assume that quantitative prediction in this field is at all within our grasp.

Much less ambitious but, in my judgment, much more fruitful, is to ask whether the underlying conditions are or are not propitious to further improvement. We know that the state of the balance of payments depends, if not wholly at any rate in large part, upon the relationship of incomes and prices here to incomes and prices elsewhere. We know that if our balance is in deficit, then if this is to be cured—still more if a surplus is to be achieved—it is certainly desirable that prices and incomes here should rise less rapidly than elsewhere. Obviously that is not the whole of the story: there are changes in productivity and in the conditions of demand to be taken into account, and also the influence of changes in tariffs and quantitative controls. But as a first approximation the principle I have enunciated will do. It would really be a most astonishing fluke if, with prices and incomes here increasing faster than elsewhere, the balance of payments became more favourable.

Now if we approach our problem this way, it is pretty clear that the present position is by no means free from danger. I am not prepared to diagnose the trends in the leading areas elsewhere—though I should be surprised if at present there were strong inflationary tendencies operating in more than a minority of cases. But we know that at a time when it is imperative that our own income levels should not rise more rapidly than productivity, in fact the reverse has been the case. In the twelve months up to last October, average earnings rose by something of the order of magnitude of 8 per cent. Does anyone in his senses believe that productivity rose in like proportion, however it is measured? Whatever projections based upon the assumption of no inflation may suggest, a movement of this sort in the economic level must render them largely irrelevant. Indeed, if it continues—and I hope it will not—I am clear not only that the balance of payments will continue adverse, but also that it will prove eventually impossible to maintain the present parity of sterling. I am not saying that this will happen—far from it. I am say?

ing only that it will happen if we cannot curb the inflation.

To guard against these dangers, the fashionable remedy has been an incomes policy. Our little world of soi-disant experts arouse in people a feeling of contempt for the policies of financial prudence and the allegedly baneful influences of the Treasury and the Bank of England which, they seem to think, are the chief obstacles to limitless prosperity. If you remonstrate with them gently, and remind them that hitherto in world history beyond a certain point high-pressure spending has always led to inflation and trouble with balances of payments, the reply is always, "Oh, well, we need an incomes policy."

My Lords, I submit that what we need most of all is more objectivity and less wishful thinking about this subject. Let me make myself clear. Few sensible people, I suppose, are against an incomes policy in the public sector. Where there is no compulsion from calculations of profit and loss, there, if there is no clear policy concerning the extent to which incomes can be allowed to advance, things will get hopelessly out of gear, not only within the public sector but throughout the economy as a whole. I will not pause to ask what that policy should be it is quite a complicated problem. I only insist that so far as the public sector is concerned—and it is a big sector—an incomes policy is of paramount necessity.

Nor, my Lords, do I wish to blow cold upon the idea of restraint and good sense in collective bargaining wherever it takes place. Unlike some noble Lords, I have watched with sympathy and admiration the efforts of Mr. George Brown and other men of good will to spread a greater sense of responsibility in matters of this sort. I agree that if we could count on a universal disposition among employers not to concede wage claims which would compel rises in prices, and among trade unionists not to make them, then we could rely on a fair prospect for the purchasing power of money and stability in foreign exchanges.

But can we depend on this? I sincerely wish I could say yes, but neither general reasoning nor past experience affords much warrant for such optimism. General reasoning suggests that when the economy is working to such capacity that the number of jobs being offered is greater than the number of applications for them, in other words a labour shortage, there is a tendency for employers to bid against one another and for the trade unions to increase their claims. Analysis of past experience shows this working out with depressing regularity.

Professor Phillips, a colleague of mine at the London School of Economics, has worked on this problem with results which have a significant moral for policy. Professor Phillips finds that over a long period of time, with very few exceptions, when the use of capacity, as measured in terms of employment, has passed a percentage of somewhere between 97 .5 and 98, there has been a tendency for incomes to rise faster than productivity and thus to produce rising prices and difficulties with the balance of payments. It is well known that Professor Paish has examined the post-war history here, using a different index of capacity and has reached substantially similar results. I have no doubt that many of our troubles since the war are to be explained in this way. We have been pushing too hard and have often fallen over in consequence.

At the present time we are well beyond what may be called the "Phillips point"; and I find it difficult to believe that the present movement of incomes is not still further evidence of the tendencies which these investigations have unearthed. It is not to deny the necessity of a coherent policy for the Government as employer, or to deprecate appeals for moderation and good sense throughout the labour market as a whole, to believe that if the economy is over-loaded then we shall not save ourselves from inflation by talking of an incomes policy. There can be a successful incomes policy only if the pressure on capacity is not too great.

Fortunately for all of us, the present Government, while trying manfully to bring an incomes policy into operation, have not been prepared to rely on these attempts alone. They have resorted to further measures, in both the fiscal and the monetary spheres, intended to take the heat out of the system; and it is doubtless to the adoption of these measures that we owe the restoration of confidence abroad. The foreigner will believe in the effectiveness of incomes policy when he sees a movement of earnings more in line with productivity. But, rightly or wrongly, he pays immediate attention to measures operating on aggregate expenditure. I think great credit is due to the present Government for having confronted our difficulties in a pragmatic spirit and for having had the courage to impose curbs and restraints which in the nature of things were likely to prove unpopular.

The great question at the moment is will these measures bite? Will the present restraints on expenditure be sufficient to arrest the inflation and restore the balance of payments? At the present moment we have to face the fact that they have not worked sufficiently. The balance has yet a long way to go before it is satisfactory, and meanwhile the rise in incomes goes on at a pace which is latent with danger. It may be that later in the year things will be different. There is certainly a strong pressure on profit margins and, despite the good spirits on the Stock Exchange, an underlying sentiment of sobriety in responsible quarters concerning business prospects in the near future. But I confess I am still very apprehensive. The inflationary forces are still strong and I doubt whether we have yet done enough to bring them under control.

In any case, two considerations seem to me to be important. The first is that if present measures are insufficient we should nerve ourselves to take more. When so much has been done already it would be an ignominious and damaging thing to abandon the struggle and let the pound go and the value of money depreciate with a use of capacity which is still some 98 .8 per cent. of the labour force. I suggest that this is no time to talk of easements in the forthcoming Budget. The serious question is whether a "no change" Budget will be enough.

The second consideration is that if and when this policy begins to act at all strongly, whatever Government are in power will find themselves exposed to a new danger—the temptation to relax before the restraints have become fully effective. And there will be a temptation, too, to whatever Party is in opposition—a temptation to claim that, if it were in power, these ardours and endurances would not be necessary. My Lords, I hope very much these temptations will be resisted. If they are not then certainly our troubles will begin over again. It is the distinction of the present Government not to have flinched from stern measures, and I submit that it is the duty of all of us, whether or not we agree with the Government in other ways, to give these measures continuing support.

5.19 p.m.

LORD FRANCIS-WILLIAMS

My Lords, as I have listened to many of these speeches I have found myself irresistibly reminded of a comment made by a Conservative paper, the Sunday Times, on Mr. Heath's recent speech on the social services. Mr. Heath, it said, "struck an attitude but failed to define a strike". It seems to me that often in these economic debates the Benches opposite are littered with attitudes.

I am sorry the noble Lord, Lord Carrington, is not now here; I thank him for sending me a note explaining why, and I hope he will not mind if I make a few references to him in his absence. The noble Lord, Lord Carrington, of course had a good deal to say in criticism. "Sleight of hand" I remember was one phrase he used, and he is fully entitled to criticise and he does it in a very gentlemanly way. Not, I am glad to say, stooping to the exaggerated caricatures that seem to lurk in the mind of the noble Viscount, Lord Chandos. The noble Viscount, Lord Chandos, in fact almost succeeded in persuading me that a British big businessman could be as riddled by black political prejudice as my more Left-wing friends used to try to persuade me was so when I was very young. But I do not want to waste time following him along the dark corridors of his nightmares. What a pleasure it was to have Lord Robbins following him, a reasonable, reasoning man, and to hear a speech which, whether one agreed with all of it or not, had an inner objective and was based on a serious attempt to measure up to the problems; to criticise where he felt critcism was due and to praise where he believed that praise was needed!

These economic debates tend to follow rather a pattern, a pattern in which we are told what the Benches opposite think is rotten but in which, as my noble friend Lord Shepherd pointed out, they are apt to be short of proposals. They tell us what they think the Government are doing badly but rarely how they would put it right. Indeed, I have come to the conclusion that the basis of the general attack is simply the inherent belief that only Conservatives ought to govern.

Mr. Peregrine Worsthorne, that resolute newspaper theoretician of Conservatism, decided the other week that Mr. Wilson was really a Conservative. He did not decide so because he felt that Mr. Wilson had taken any of the Conservative Party's programme; indeed, clearheaded and far-sighted as Mr. Wilson is, it would be difficult for him to do, because I do not know quite where he would find it. But Mr. Worsthorne decided Mr. Wilson was a Conservative because, he said, he had shown that he knew how to govern, where poor Mr. Heath had not; and, since he knew how to govern, then, q.e.d., he must be a Conservative because it is a natural law that Conservatives should rule. But in fact there is no Divine Right in this matter, and certainly not one bestowed on Conservatives alone. In this matter, "All God's chillun got wings". I am sure that even the Liberal Party has wings, although its problem is to find an air space in which to try them out. But it is always a pleasure to hear the noble Lord, Lord Byers, because at least he has something positive to say. And I was glad to hear him say that in his view the wages and incomes policy had not failed.

I should like to know what is the attitude, on this vital, central matter, of the Party on the Benches opposite. It is often extremely difficult to discover whether they would like the wages and incomes policy to succeed, or whether they hope that it will fail. We know, of course, that in the Conservative ranks there are some, like Mr. Enoch Powell, who want it to fail. Mr. Powell does not simply want to steal the money out of the pockets that Lord Mancroft referred to; he wants to take the trousers as well, and to let capital and labour fight it out in bearskins, with clubs. But that, one gathers, is not the official wholehearted Conservative policy. But what is it? What do they want? It would be nice to know.

This wages and incomes policy is perhaps the most difficult operation in the world. It has not been done successfully in any other country, and I frankly admit that nobody can be certain whether it can be done successfully in this. It is the Everest of the economic and political world; or, to be more modern, and perhaps more accurate, the moon-probe. And all one can say so far is that one is beginning to get some photographs back, and they suggest that there may be firm ground instead of, as so many insisted, a waste of sand to sink into. But even if there is firm ground, it is going to be enormously difficult to build; and good will from every section of the community, and from every political Party, will be needed to make it possible.

What has happened so far is that the rise in prices has been halted more than the rise in wages. I know we shall all agree that one needs a brake on both, but at least I suggest that that is the right way round: a halt on prices greater than a halt on wages is better than a halt on wages greater than a halt on prices, because it is only by that kind of beginning that we shall be able to escape from a system in which wages are continuously chasing prices, with chaos all round.

We want a good deal of new thinking on these matters. We want a good deal of new thinking on restrictive practices. I remember, when I was in America, being invited to go along to a number of union meetings being held by the West Coast Longshoremen. They had been told by the employers, and they knew, that they were losing trade from the West Coast because of restrictive practices and refusals to use mechanised handling methods. They replied, "Very well, but our rule book built up over many years is a valuable possession of the union and the union members, and what we are prepared to propose to you is that we will sell our rule book to you and start afresh if you are prepared to pay for it a very substantial number of dollars, out of which we can build a fund to deal with problems of redundancy and so on among our members." I do not say that that approach would necessarily commend itself to either side of industry in this country. But it suggests a readiness to open one's mind and look at new ideas and new approaches, however strange and revolutionary and curious they may seem. That is vitally necessary on both sides of industry. I suggest that what particularly dis- tinguishes this Government is that in a difficult political and economic situation they have shown a readiness to develop a flexibility of approach, to examine all sorts of new proposals and to experiment in new ways.

In the past, the Conservative Party, as a sort of statutory grimace to fortune, used to accuse the Labour Party of being dogmatic. They said its codes were built in a Victorian workshop, through the window of which the light of modern day seldom penetrated. Having been forced to recognise that this is nonsense, as it always was, they have now shifted the attack, so that every new idea, every flexible approach to problems, is described as a gimmick or, to use Lord Carrington's phrase, a new sleight of hand. But what we are in fact seeing is a fluid, courageous and flexible policy in many ways, to seek a solution to a difficult and, in some ways, almost intractable problem. Some of those ways will fail, some will succeed; some are beginning to do so. I suggest that noble Lords opposite should get out of the habit of deploring. No one deplores more nicely than Lord Carrington. I do not insist that they should cheer—that would be too much—but I do suggest that they should at least try to be open-minded. It would be good for the country and, in the end, they might even find that it was good for them.

5.33 p.m.

LORD ALDINGTON

My Lords, I hope that when I have finished speaking the noble Lord, Lord Francis-Williams, will at least credit me with trying to be objective. I have a few slightly critical things to say, and I am sure he will bear with me while I say them. I should like to ask him whether he will practise what he has just preached. I was not certain that his account of my noble Leader's speech showed all that objectivity which he has preached to us. This position in which we are now is in many ways familiar to many of us, and I expect that some of your Lordships have the same feeling as I have had: that one likes to think and say something new about it. Having watched what the Government have been doing in the last year or more, I have a feeling that they have suffered from this bug, too, and have been looking hard around to try to find something new to do about our affairs. I am bound to say I have some sympathy with that approach.

I hope, in what I trust will not be too long this evening, to touch briefly on the short-term problem—much more briefly since I have listened to what Lord Robbins has so brilliantly said to us—and to have some words to say about our longer-term position, which of course is not separate from the short-term but is most relevant to short-term difficulties in which we are. I think one must start with an analysis of the position as one sees it oneself. I am bound to say that I disagree with the optimism shown, rather robustly, by the noble Lord, Lord Cohen of Brighton, though I am far from being a defeatist. Looking at it from the industrial point of view. I say to your Lordships that the nation's economic situation seems to me much more dangerous than many people admit. It is more dangerous at home, first, because wages and employment have been rising and production has not; and, secondly, because the enormous increase in labour costs over recent months, an increase which is higher than the average of 8, 9 or 10 per cent., whichever figure one uses, in many places where it matters most, and particularly in export industries, has not yet been reflected fully, either in the cost of production in industry or in the price of many of the things that we buy in the shops and many of the things which industry uses to build into exports.

It is more dangerous overseas for similar reasons, and for this additional reason, too: though the full measure of increases in costs has not yet been fully reflected in industry, there are signs in the published reports, which many of your Lordships may have read, that exports are less profitable than they were a year ago. It may well be that some of our competitors suffer from the disease of increasing costs as badly as we do. As Lord Robbins told us, many of them, but by no means all, have. But even those that have, have not had to bear the load of overseas Government expenditure or overseas aid which we bear. Quite often, therefore, they have suffered less than we have from their inflations.

The noble Lord, Lord Shepherd, reminded us in his speech that the countries of Western Europe have increased their exports over the last year by about 9 per cent. whereas we have increased ours by only 7 per cent. So, in looking forward from the relatively favourable export statistical position for 1965, we should be wise somewhat to temper our feeling of satisfaction. I would add to this the knowledge that we are to repay a really enormous debt by 1970. On top of that, perhaps for reasons which your Lordships will understand, I would repeat a warning that I tried to give in a debate in May last on overseas investments—a warning which was reinforced by the Governor of the Bank of England in distinguished company on Monday night—that in the long run the prevailing hostile attitude found in the present Government's taxation laws towards overseas investment must damage our exports and must reduce our overseas earnings. That is the analysis upon which I base my subsequent remarks.

Just a word on the short-term position. I am convinced, and have long been convinced, by the point that Lord Robbins put to your Lordships, and by Professor Paish's writings as well, that we must aim at getting a spare capacity of something between 2 and 2 ½ per cent. That is putting the 97 ½ to 98 the other way round. I think the Government agree, too, that there must be an amount of spare capacity, and that is why they have, from time to time, been trying to deflate. But I agree that we must now go further. A number of steps have been taken in the Budgets and by credit squeezes, continuing right up to yesterday, designed to reduce demand, and I hope that if it is found that more has to be done it will be done quickly.

I can imagine that there must be many members of the Government, as well as noble Lords on this side of the House, who must be thinking, rather wanly, whether it would not have been wiser a year ago to do much more in this way, so that by now we might be thinking not of squeezing further but of getting more expansion again. If one looks back at the much-derided action taken by right honourable friends of mine in the years 1957 and 1961, one should draw some comfort that there is an advantage in doing these things in time, and rather savagely, so that one does not have to endure a year, a year and a half, or more, of squeezes, new squeezes, exhortations, increases of tax, and so on.

I say that with hindsight, but one must be fair, because there were many people outside the Government ranks who thought they had done enough last year. There were, as the noble Lord, Lord Champion, said, some people—siren voices to whom I paid no attention—who thought that too much had been done in the way of disinflation. But let us not waste too much time in looking back. Let us hope that we shall solve this problem quickly and create more spare capacity, so that we can get the economy going efficiently again.

If I may assume for the moment that we are successful in doing that, I come to the longer-term problems, problems which so far, one must honestly admit, nobody has successfully solved. One can put the problems which face this country in various ways, but to-night I will put the matter to your Lordships in this way. We in this country are simply not efficient enough, as a nation, to get the increase in production, whether for home consumption or of goods we can sell overseas, at the rate at which we absolutely insist on increasing our demands upon our resources. It is not just a question of tackling our demands. We must look at both sides of the equation and see what we can do about efficiency. I believe that greater efficiency is the key to our future.

In recent years it has been more popular to talk about growth. We have had two plans for growth at a rate which seemed to the planners to be reasonable. In both cases, events quickly falsified the optimism of the planners. If the nation insists on taking a certain rate of growth as its principal object, that in my opinion, is putting the cart before the horse. The nation's object should be to increase efficiency. If we do, the proper amount of growth in production and in exports will certainly follow. Growth is a consequence of right action. That does not mean that I am one of those who condemn as useless the national planning exercise connected with growth. I am sorry that the noble Lord, Lord Shepherd, should have castigated some of us who were not here for the debate on the National Plan. So far as I remember, I was trying to deal with our overseas earnings about 6,000 miles away, and I apologise to him for my absence. I will say a few words about that in the course of my next few remarks.

It seems to me not only sensible but essential that any Government with responsibility for creating conditions in which industry shall work best is bound to examine from time to time all the detailed components of the nation's economy—and all the more so in this country, where the public sector takes up such a large part of our resources. A plan of the kind of which I am thinking tells us not what will happen, but what can happen in certain events. It is certainly a good thing to know, as a result of the current National Plan, that the nation's resources are enough for an annual increase of 4 per cent. by 1970. But there is some danger in bandying that figure about. One of the dangers is that people at once act as if, just by stating the figure of 4 per cent. annual growth in the Plan, that figure has been assured. This is far from the truth.

It is not only the ordinary people who act in that way; the Government do, too. In the National Plan itself, Government expenditure was said to be designed to increase at about 4¼ to 4½ per cent. each year over the period of the Plan, but the assumption of that was that in these early years the output of the nation would increase by from 3.8 to 4 per cent. The Government still go on with the increase in Government expenditure, even though there has been no increase in national output at all in the last twelve months, or, if there has been, it has been of the order of 1 per cent. That may be right for political reasons; but, if it is right, that alters the Plan very much; and if they are to avoid inflation the Government have to compensate for their extra expenditure in the Government sector by reducing expenditure in the private sector. We have not heard that said, but it seems to me to follow; and I think your Lordships will agree.

Having stated this short and, I hope, agreeable attitude to the National Plan, so long as we do not attach too much importance to it, I should like to come to some points on two of the basic conditions which I think any Government must try to establish in the economic field. I agree with what the noble Lord, Lord Byers, said about the importance of competition, the ending of restrictive practices, and also on the importance of the steps taken to ease the path of those who suffer from change. I agree with all that. The two conditions to which I wish to refer are these. First, the Government should do all they can to make the capitalist system work better from time to time.

SEVERAL NOBLE LORDS

Oh!

LORD ALDINGTON

Yes, my Lords. We are not so arrogant on this side of the House that we believe that the system we now have—a system which, after all, has brought us and noble Lords opposite to the position in life we now have—is not improvable upon. The second condition is that the Government itself must keep the economy in balance. The first one relates to what we can do to improve the working of the private-enterprise capitalist system—noble Lords need not be too frightened: these notes are not so long as they might look. Much of what has been said in this area by my noble friend who sits next to me, the noble Viscount, Lord Chandos, I wanted to say myself. He put some of the things more pungently and more amusingly than I could put them, and I very much support what he had to say.

Let me make my points as briefly as I can. First, I would mention the new Companies Bill. Much was expected of this following the Jenkins Committee Report, and I think that many people have been disappointed; it does not cover nearly as much as it ought to cover. But let us be thankful for small mercies. What it says about information is good for efficiency, for it is right that companies should give more information to their shareholders. In this way the shareholding system is enabled better to work. By getting more information they can make better investment decisions, and rationalisation and mergers become easier to obtain, because people will not make false deductions about values from a misreading of inadequate information.

There are other matters in the Companies Bill reference to which would perhaps spoil the harmony of the House this afternoon. One of them relates perhaps personally to some of us, on both sides of the House—to the noble Lord, Lord Cohen of Brighton, as well as to myself; and that is the disclosure of chairmen's emoluments. I have no objection to that. I think there are very reputable arguments in the national interest in favour of it. But there is at least one disreputable argument which has been adduced in some quarters in favour of it which I hope has played no part in the Government's mind in inserting that clause in the Bill. I think it is true that the position of the chairman in our company structure is very important in ensuring the responsibility of management to the shareholders, and if this is so then it may well be right that the chairman is required to disclose not only his soul but his pocket as well.

The second matter in which the private enterprise system can be helped or hindered by the Government is in personal taxation, and I agree with what has been said by other noble Lords on this side of the House. Under the present provisions of the personal taxation laws of this Government, taxation on tomorrow's managers and on top management of to-day is too high. In the United States the maximum level of taxation is 70 per cent. In this country it is 91 per cent. and it is graduated on the way up to 91 per cent. in sharp contrast to what happens in the United States and elsewhere. This can be altered without affecting the total amount of taxation by transferring to indirect taxation on expenditure some of the load on direct taxation on earnings. For this purpose Mr. Nicholas Kaldor should be very helpful to the Government and might well give them some advice which we would not take so much objection to as some of the advice that he has given in other spheres.

The Government have tried to help the capitalist system work by starting a merchant bank of their own. My noble friend Lord Chandos, sitting next to me, has already said some things about this. I join with the questions and the doubts that he has raised. I add to them this point, which I do not think has been properly considered either in public discussion or here. Many people have many ideas of good rationalisation and mergers. Every chairman of every company must have frequently considered how this might help or how that might help. In the end, under the present system mergers go forward because on balance the board in charge thinks that is good and that board and that managing director then have a responsibility of ensuring that the merger works.

In the Industrial Reorganisation Corporation that will not be so. Sir Frank Kearton, whom we all greatly respect and honour, has had much experience of mergers in his own company. He has remained responsible not only for the decision on what should be merged but for making a success of the merger. This is not proposed under the Industrial Reorganisation Corporation system and this makes a great difference. This introduces me to an argument about responsibility which I want to put as shortly as possible to noble Lords opposite, and I beseech them to take notice of it. I believe that it is the very greatest mistake, and it can do the very greatest damage in business affairs, if the lines of responsibility are blurred. The Government have a responsibility in our affairs to make political decisions. Industry have a responsibility for making a profit out of their business because profit is a sign whether they are doing things efficiently. Do not let us confuse the two.

When in another place I was Chairman of the Select Committee on Nationalised Industries over five years, I saw example after example of how boards of nationalised industries, either by their terms of reference or by the well-meaning interference of many of my then right honourable friends, had confused their idea of their responsibility, and, as we said in frequent Reports from that Committee—Reports which were in practically every case unanimous—it was that confusion of responsibility which had led in so many cases to the disastrous results to which we have become used.

I detect the extension into the private sector of that blurring of the lines of responsibility. I beseech the Government to let the leaders of industry—those who are responsible for managing each firm—carry out their task according to the law and not to subject them to ad hoc directions or to attempts by very persuasive and powerful arguments to pressure—which it amounts to—to divert from what is otherwise a good commercial decision. If they accept that there is something in what I have to say, they really should look at some of the committee structure which has been set up between the Government and industry, not only by themselves but by their predecessors. The reason for these joint committees is well understood: it is in order to get Government and both sides of industry better to understand each other. But we have to remember that if we take really efficient leading men in industry away from their jobs, their jobs are going to suffer, and if we take the second best men then the committee is going to suffer. So I ask them just to have a look and consider whether they have not gone too far. I am not asking that all these committees be terminated. I am suggesting a course for which the Greeks had two words, as classics scholars will remember, meden agan: nothing too much.

If I may detain your Lordships for a few minutes more, I should now like to leave that part of the Government's duty in the economic field and pass to the condition of securing a proper balance between resources and demand. The noble Lord, Lord Robbins, has already referred to this problem, as have other noble Lords who have spoken, because it relates to the incomes policy. Part of the argument that goes on centres on whether the Government should operate overall, as it were, right across the board, or whether through the incomes policy as we know it under Mr. George Brown they should seek to avoid too stringent operation overall by tackling the problems of the economy bit by bit, whether incomes, prices or whatever it is. It really seems to me that those who advocate this latter course of going at the components of the economy rather than overall forget that, in saying that it is necessary to tackle prices or incomes separately, they are assuming that they have already failed to get overall balance. All the experience that we have had since the war points to the fact that in the end you have to tackle the matter overall and you have to get this 2 to 2½ per cent. free capacity into the economy.

I am one of those who, not only for personal reasons but for other reasons, too, have a great deal of admiration for Mr. George Brown's unlimited energy and vigour and stimulating effect, but on this I think that he has misplaced his energies at a time when the real problem lay in the field of the Chancellor of the Exchequer; and no one, however much he may like Mr. George Brown, can truthfully argue that he has made a success. He may have kept prices down, if one can say that when prices have only risen by 5 per cent. they have been kept down, but in doing so he may well have added to his other problems because more money is around and it is mopped up (as they say) rather less quickly. If we ever needed experience, he has proved that an incomes policy by itself does not solve the problem of getting the resources into balance with the demand.

Let us look at the other side. How can the Government do more to get more efficiency out of industry and out of those who work? I suppose that no one has yet found the answer; but I think one must look across the Atlantic and see what happens there because there is no doubt that in many industries in the United States the average output per man is between two and three times as much as it is over here. Why is that? It is not just a question of capital equipment. We are not, as some noble Lords think, full of factories equipped with old, fuddy-duddy, out-of-date machines. We have some of the best machines; we have some of the most modern; and there are many United States companies which know that companies in this country have even more modern machinery and lines than they have. Nor is it right to condemn management. I know it is a popular thing to do; particularly directors of hoards are always apt to go out in public and say how bad management is except their management. Management have faults—of course they have—and perhaps their main fault is that they have not been able to alter the attitude of those working with them to the problem of efficiency.

Somehow or other in this country people who work in our industry seem to want less than their counterpart in the United States. They are content with less. Why is that? I do not know; but if one really tries to take the whole matter up by its roots I think one must take account of this simple fact: that in the United States essentials are much dearer than they are here and luxuries are much cheaper. That is taking the rate of exchange as it is. This is so with food and it is so with housing. Whether that has anything to do with it or not I do not know; but somehow or other one has to face the problem of the attitudes of those who work, whether they are on the staff in management or on the shop floor. Anyone in industry knows that where one has been successful in tackling that one has remarkably better results—and incidentally remarkably greater happiness around one. But this is not just an industrial problem.; it is a national problem as well.

1 wonder whether—and this is where I come back to the Government's role at the moment—part of the explanation may be that many people in this country look to the Government to do things for them which no Government can in fact do. We have got so used to blaming the Government for everything and expecting help from the Government for many things which it is quite right that Governments should provide through social services and so on. Now I put it to the Government that, in their forays into the industrial field, they are adding to the difficulties of those who are trying to remind the ordinary working man that it is upon his individual shoulders and his individual effort that the future of the country depends. He must be taught not to expect to find that "Whitehall knows best". Because, you know, he is rather a cussed man too, and I think that in the end the more the Government interfere, the less he likes it and the less good he may be.

My Lords, I say that because it fits in with part of my theme: that lines of responsibility are getting blurred. It is not just the threat of nationalisation; it is not just the Industrial Reorganisation Corporation; it is not just the idea that committees, whether they are little "Neddies" or anything else, can make industry more efficient than it is. Industry makes itself efficient by competition. It is this feeling that "Whitehall knows best" and "Whitehall will tell us what to do" that is wrong. I do not believe that most people in the Government really think that, although their Socialist doctrine makes other people think they do. I am violently opposed to it, and I beseech them, before they go too far with further directions, before they go too far with the legislation which the noble Lord, Lord Shepherd, said they are committed to introduce about early warning, to think once again about the responsibility of Government in the economic field. Government takes political decisions; Governments are political animals. Leave it to industry to make the financial and commercial decisions. That way the country is far more likely to get more efficient—which, after all, is the aim which we all share.

6.6 p.m.

LORD HILTON OF UPTON

My Lords, this is a very interesting debate. So far, we have listened to some wonderfully interesting speeches. So far, on average, the speeches have taken about 22 or 23 minutes each. There are sixteen more speeches to come, and, according to my reckoning, if we go on at this rate, taking into consideration the winding up speech, we shall be here until midnight. So I do not intend to keep up the average of 22 or 23 minutes, but will do my best to take only half that time.

I should like to refer to one or two points that the noble Lord, Lord Aldington, has just made. I could not agree with him more when he stresses the importance of greater efficiency in industry. I am sure that this is one of the "musts" if we are to get out of the problem that we find ourselves in at the present time. The noble Lord, Lord Aldington, and a number of other noble Lords from the other side, referred to the fact that, since the Labour Government came into power, wages have increased by 9 per cent. whereas prices have increased by 5 per cent. only. I wonder whether the noble Lord will agree with me that the reason for this is that when the Labour Government came into power wages were at such a low ebb. The noble Lord, Lord Aldington, is pulling a face now. I repeat that wages were at a very low ebb when the Labour Government came in—and would anybody in this House now say that wages are too high?

LORD ALDINGTON

My Lords, would the noble Lord allow me to reply? He asked me a question. I am afraid I do not agree with what he has said. I do not think it is a question of arguing, rather philosophically, whether wages are too high or not. The point is that wages have grown much faster than output, and that is why we have got into a mess. That is the point I was trying to make.

LORD HILTON OF UPTON

But the noble Lord would not agree that wages are too high at the present time? At any rate, we all agree that this is a very worrying situation in which we find ourselves at the present time, although we cannot agree on the reason for it. On this side we say we know the reason; but, of course, noble Lords opposite deny that the last Tory Government are to blame. But even if we cannot agree on the reason, we all agree that this situation must be taken in hand at once and improved. Of course, the great question is: how? During the past three hours or so we have had many suggestions as to how this is to be done. I suppose we should also agree that increased production and increased exports are really the only solution to our present economic problem. But how are we to achieve this? I intend, my Lords, to make one suggestion as to how I consider this can be achieved.

The noble Lord who has just sat down referred to the very up-to-date machinery in our factories. This is quite true, and there is no doubt about it: both management and workers in this country have the "know-how", but for some reason or other it appears that it is not being used to its best advantage. Reference has been made by a number of speakers, especially those from the other side, to restrictive practices.

The thing that interests me is that when restrictive practices are mentioned by speakers from the other side of the House, the word "strike" is generally heard. Naturally, no responsible person in this country believes in unofficial strikes; in fact, we are usually sorry when strikes of any sort occur. But restrictive practices are not confined to strikes. I would remind the House, as a lifelong trade unionist—and other colleagues on this side who have had the same experience, will agree with me—that when trouble arises in industry very often both sides are in some way to blame. The workers blame the management and management blame the troublesome workers. But my experience is that usually there is blame on both sides.

One of the surest ways of this country getting out of its present difficulties is that we should have better and more friendly relationships between both sides of industry. My noble friend Lord Cohen of Brighton has left the Chamber; but he referred to this very point. He said that often the workers are referred to as "them" and the management as "us" or vice versa, as two distinct parts. But if we could introduce real co-operation into industry, if we could get management to confide in the workers, then I believe that we could succeed. And many instances could be given of where this has been tried and has succeeded. I am sure, also, that if we could get this closer co-operation it would lead to the greater efficiency of which the noble Lord who has just sat down has spoken.

This has been proved already in agriculture, to my knowledge, by some of the progressive farmers who take the workers into their confidence. When we think of the tremendous increase in production from our farms since the war, despite the loss of a quarter of a million male full-time workers, I think it is proof positive that the real sort of co-operation can work. In the National Plan, agriculture is asked to make an additional increase in production of something like £200 million by 1970, while at the same time releasing many men workers to be trained to work in industry. In agriculture, both sides have accepted this challenge, and I am sure that the targets will be reached. There have been one or two references by speakers on the other side which I thought were not very complimentary to the workers. As a lifelong trade unionist myself, I have full confidence in the workers of this country, and I believe them still to be the best in the world.

My Lords, I said that I would be brief. I will be true to my word. I should like to end with an appeal to all managers and employers in the country to take their workers more fully into their confidence and to encourage better relationships. I am sure the workers will respond. After all, to succeed, industry needs the best from both sides. Some farmers I know have tried already and have proved that it works. In the summer I was in Russia, and I was interested to find that they also practised this. It is very successful in that country. I repeat that I believe if properly practised here it will go far to get us out of the troubles in which we find ourselves.

6.15 p.m.

LORD RENNELL

My Lords, I rise to detain you for only a short time, if for no better reason than that a great deal of what I say may not be very congenial to colleagues of mine on this side of the House. Certainly I hope that what I am going to say is not controversial. I start by saying I find it difficult to disagree with a great deal of what has been proposed by the present Government. Furthermore, I should like to add that so far I find myself in full agreement with statements made by responsible members of the Government, as lately as that of the Prime Minister made on Monday evening. My difficulty is that what is done is not always consistent with what is said.

I shall take only two points that I wish to deal with. One is the question of balance of payments—and I am sorry that the noble Lord, Lord Robbins, did not touch on what I think is possibly one of the most difficult and insoluble problems about the balance of payments. It is true that we have to try to rectify our balance of payments. Unfortunately, at this stage in the world economy all the greater nations that have a financial background, financial power and industrial powers are trying to do the same thing at the same time. It is not possible for all nations to improve and rectify their balance of payments at the same time, except at somebody else's expense. Here the "somebody else" is the people less fortunately situated than the United States and ourselves, and many European Powers. In other words, the rectification of the balance of payments of the U.S.A. (about which we read almost daily in the Press), what we are trying to do here, what the French have been trying to do in France, what the Italians have succeeded in doing in Italy, and what the Germans are worried about is the same situation. But this rectification leads only to somebody else having to provide a deficit, or adds to the collective deficit of all those people who are at the present moment in deficit on their balance of payments.

It does not follow that we should not have tried, and should not try, to correct the adverse balance of payments which we still have. But it is arguable that we did not necessarily set about it in the right way. The gravamen of my criticism is not so much what is proposed but the way it has been done, and the timing. There was—and I accept it—in 1963 and 1964 probably an excessive amount of spending by this country abroad. Some of that was the Government's spending abroad, to which reference has been made. But there is also the point, which was much referred to about a year ago, of the excessive amount of investment we were making abroad; and various steps were taken to curb that.

Investment abroad, as the Governor M. the Bank of England also said on Monday, has in the past been the lifeblood of this country; but, of course, any excess of spending, whether it be on high living or investment or anything else, can be overdone. I accept that we probably over-invested in the private sector abroad during the two years prior to 1965. We have, as is well known, a very large private portfolio of foreign investment accumulated since the war—and, especially, accumulated during the two or three years prior to 1965, notably in the U.S.A. lf, in the Autumn of 1964 and the beginning of 1965, there had been a repatriation of a substantial amount of that foreign investment in the private sector, it would have had a very marked effect on our exchange and on our balance of payments. It could have had the effect of a £100 to £200 million disinflation and thus would have avoided a great deal of the borrowing, both then and later on last year. I accept that entirely. But the steps that the Government took on the subject of investment produced, inevitably, precisely the opposite effect.

One of the first measures that were brought in was that the holders of investments in the United State at a given rate of exchange, which was highly technical and involved buying security dollars at a premium, should on selling be mulcted of 25 per cent. of the profit on exchange which they may or may not have made. In other words, there was a deliberate discouragement not to repatriate investments, which had already shown considerable profit. If people were wanted to bring back investments into this country, they ought to be given some incentive to do so, not a disincentive either by taking away a part of their profit or by mulcting them in a very large amount of capital gains, which of course did not happen until the Budget last year. So far from encouraging people to disinvest in the private sector abroad, the opposite was done. That, I think, frankly, was a mistake.

If we go on from there to the various other measures which have been disposed progressively by the Government following the Budget of last year, we come to this controversial subject of the corporation tax. In the past there have been many arguments about the necessity of a tax of this form. It is an exceedingly complicated and highly technical matter and I do not pretend to understand it, but I do know that by making a sudden change, I think without sufficient thought or study, by transforming ordinary income tax on companies into a corporation tax, which will take effect very soon, a new form of taxation was instituted, the precise economic effect of which is still not known. That has produced a state of uncertainty in industry and commerce which, to my mind, is extremely regrettable.

I am not saying that a corporation tax is a bad thing. At one moment I certainly was taken by the idea of a corporation tax instead of income tax on corporations. But it is worth pointing out that a body of opinion, both in the United States, where there is a corporation tax, and in France, where there has been a corporation tax, is wondering whether this form of tax is really the best method of taxing corporations. It is at this point, while this highly respectable body of opinion is wondering whether it is the right way of taxing corporations, that we have introduced a corporation tax, the outcome of which is pure guesswork. In business, in industry and in commerce to-day, we are making estimates by guesswork of what the effect will be. I agree with my noble friend Lord Chandos that a corporation tax at a certain level might reduce the cash flow and make it difficult for companies either to pay the same dividends or even any dividends at all, and will certainly reduce the cash flow into companies which hitherto has gone to modernising their plants and extending their activities. But we do not know how great the effect is going to be. No doubt the corporation tax was introduced for good theoretical reasons, and it might be right. I am not saying that it is not right, but it was introduced much too quickly, and with much too little thought, into an economy already in difficulties, and in my view it has aggravated the difficulties in both the industrial and commercial fields.

I do not want to go into the question of the capital gains tax, because practically every country in the world has some form of this tax. Whether the particular form that has been introduced is practical or practicable, and whether there are enough people to administer it, is a matter of opinion, but again I think that it was introduced for a political reason. It might have a good economic reason (I am not condemning it out of hand), but it was introduced in too much of a hurry and has produced an effect which is the same as that produced by certain other measures, including the clamping on of a 15 per cent. surcharge to imports.

This was done overnight and produced consternation in Europe, among our good friends in the Free Trade Area, because they had not been consulted. And the effect on a great many people there, as well as in America, was that this was a panic measure—and panic measures produce panic. I have no doubt that this aggravated the situation. I do not mean to say that a surcharge on imports was not probably the right way of going about dealing with our excess imports situation, but I say that it was done in a hurry and the timing was wrong. If your Lordships will throw your minds back to the year after the end of the war, you will remember that there were a great many doctrines produced by the Party on the other side of the House about how they were going to do this, that and the other in the course of their five years. The result was a lot of ill-considered and ill-conceived bits of nationalisation and taxation and local government spending, which, in a great many cases, have had to be amended.

This is criticism not of a policy, but of timing and of a lack of appreciation of the situation. As several noble Lords have already said, credit and creditability and standing depend on what other people think of you; and if we, as individuals, or the Government, as a collectivity, or the nation as a whole, indulge in measures, without considering all the possible consequences abroad, those measures are apt to damage our own reputations, the reputation of the Govern- ment and the reputation of the country, even though in the long run those measures may prove to be right. So that my principal criticism is that we have seen too much legislation too quickly, leaving in too many people's minds an effect the opposite of what the noble Lords on the other side of the House would like to achieve. They have had the attitude: better get on and do this, because we may not be elected next time. I think that is the conclusion of a great many people. A little more judgment, a little more ponderation, even with a diminutive majority, would have given the public in this country, and certainly abroad, a great deal more confidence that the Government knew what they were doing. Noble Lords opposite will appreciate that I have not criticised any particular measure, but have criticised the timing.

May I now go on to say that I think the measures that have been taken in the last twelve months or so to try to correct the extremely difficult situation in which we found ourselves over the winter of 1964–65 have been, let me say, very orthodox and such as practically any Government in this country would have had to adopt. For a known situation, in medicine or elsewhere, there are certain orthodox remedies, especially where the disease has been studied. Heaven knows! we have had this disease of what is called "Stop and Go", of inflation and restriction, so many times since the war that the disease is fairly well-known, and was known in that winter. If, as was said by another noble Lord, those remedies had been taken in that winter, I think we should not now be in the difficult situation in which we are.

As it is, I agree that the short-term position is infinitely better than it was a year ago. The long-term position remains a complete imponderable, and a complete imponderable which does not depend entirely upon us—and by that I mean not upon us in this country or any particular Party in this country. If we are going to continue, in the United States, here and elsewhere, with a policy which is going to be deflationary, if every nation is going to correct its balance of payments at the same time, the people who will be mainly injured, apart from the unemployed in the countries themselves, occasioned by deflation, will be the developing countries, because money may not be available to help them continue with their development.

I do not know the answer to that problem. I hope that the noble Earl who is sitting on the Bench in front of me will say something (I had hoped that the noble Lord, Lord Robbins, might have done so) about how we can get out of the difficulty of all nations trying to repay their debts without borrowing any money, and where the funds will be obtained from.

THE MINISTER WITHOUT PORTFOLIO (LORD CHAMPION)

Do not ask me to answer that one.

LORD RENNELL

That is the problem we are facing. The solution to that is not a short-term solution; it must be a very long-term solution. In other words, I venture to doubt whether our balance of payments is going to be corrected, or correctable, within the year 1966. I personally am doubtful whether it ought to be corrected to a zero point of complete balance both sides within this year, because I think that that would injure not only people here, but people overseas, and our friends overseas, a great deal.

It is by no means only Europe or the United States that is in this frame of mind of trying to correct its balance of payments. It is happening in Japan, and it is happening in Australia. In Australia, the position is extremely difficult for precisely the same reason—namely, they are trying to correct their balance of payments without borrowing too much money elsewhere—that is, if they can find it. It is, in fact, getting more and more difficult to find the money, because everybody is restricting foreign lending. In America it has been practically turned off, and foreign lending here has been much restricted. If people have been in the habit, as practically all Powers have been, of borrowing money, and of having their trade financed by ourselves and the United States, and this were to stop, or to be so restricted that it would get them into trouble, then I see a virtually insoluble problem. I do not know where at that point we go, except by taking this all very slowly, and not trying to do it suddenly, as I think the present Government did try in the winter of 1964–65.

Apart from that, I have no other points that I want to make at this late hour, and I hope that certain colleagues of mine who are sitting below me will not castigate me too much for being so nice and kind about the policy of the Government in matters of taxation and economics.

6.35 p.m.

LORD WILLIAMSON

My Lords, there is a long list of speakers in this debate, so in the short time that I intend to speak I will confine myself to one or two aspects of industrial relations. I think it was on May 26 last year, on a Motion introduced by the noble Earl, Lord Dundee, that I made a passing reference to what I believe to be true—and I think many people believe it to be true: that sour industrial relations in many parts of Britain—and not unimportant parts—have created a sort of "couldn't care less" attitude, which has resulted in wasted time and effort and stoppages of all sorts—strikes, go-slows and working to rule. I believe this to be true to-day, to a substantial extent. In consequence, in spite of what the noble Viscount, Lord Chandos, said about the efficiency of British industry, with which to an extent I agree, there is, I think, a large field in British industry where there could be a great deal of improvement.

I know that noble Lords opposite will not mind if I mention that the Party which they represent has constantly invited us to rely on the mechanism of the free market and the law of supply and demand, when things in short supply would be dear, and things in good supply would be cheaper. That being so, it is not surprising that some workpeople, who remember the days when labour was plentiful and wages were low, see no reason why, now that labour is scarce, they should not sell their labour for the best price they can get and, while the going is good, get as much as they can.

Noble Lords who have followed the proceedings of the Trades Union Congress in the last few years will agree, I think, that the leadership of the Trades Union Congress have emphasised that persistence in this attitude of the strongest trying to get as much as they could, and leaving the weaker sections of the population to fend for themselves, was bound to bring serious consequences. Yet this is what has been happening, to a certain extent, aided and abetted by some employers, who have been prepared to pay any price to seduce labour, particularly trained labour, from other employers in the knowledge that they could easily pass on the extra payments of wages in higher prices. It is this that has mainly put us in trouble. It is now, I think, dawning on most people that the theory of a free-for-all is all wrong and highly dangerous; and I believe that the present Government are doing all they can to reverse the trend.

I was pleased to hear the noble Lord, Lord Cohen of Brighton, mention the statement made by Sir Peter Runge (whom I know very well) in 1964, when he was President of the Federation of British Industries. I will not waste your Lordships time by repeating it, but I had a note to say that Sir Peter Runge had said this. In addition, the Management Consultants' Association, a well-informed body, have said: Government policy planning is necessary to eliminate the economic and social wastes which arise in a free economy. I would emphasise that I do not believe it is official trade union action which has resulted in what is called the "wages drift". I believe that to a large extent this is due, as I have said before, to employers' bidding for labour, particularly in the southern half of the country. There is plenty of evidence that many employers on the negotiating bodies have bargained very hard over a concession of a few shillings on a wages application, yet, on their other hand, have gone back to the factory and given bonuses of all kinds which have resulted in these very high wages being paid. It is not surprising, therefore, that in some of the unfortunate industries, some of the public service industries—and we had experience some three years ago with the hospitals and the nurses—the employees have become restive and taken action, official and unofficial, in order to catch up with this wages drift.

I believe that the right to strike is inviolate in a free democracy. I remember Sir Winston Churchill saying to me, "Never give up the right to strike, the right of workmen to please themselves whether or not they will work for an employer on the terms offered". Then, with a little smile, he said, "But not a general strike", because of course he very well remembered 1926. Nevertheless, I personally believe—and I am not alone—that, with the exercise of common sense and a twentieth century approach, many strikes need never happen, or should seldom happen. In my experience, when a strike takes place it is usually on for a couple of weeks; both sides get bashed about, and a lot of innocent folk, who have nothing to do with the strike, suffer. Then the parties are brought together after a week or a fortnight, and the dispute is either sent to arbitration or settled by the good old method of British compromise, which, with good will on both sides, could have been done before the strike started. The result is that workers have lost wages, the firm has lost production, prestige and good will, and the country is worse off for it. I do not know what some of the up-and-coming developing countries think about it when we invite them to follow our system of democracy and they sometimes see the nonsense going on in this country, particularly in the difficulties we are experiencing at the present time.

So the taking of strike action should be the rare exception, and used only as a defence against recalcitrant and unreasonable employers, because I believe there is nothing more likely to put the right to strike in jeopardy than its abuse. In this connection, one aspect of the matter which should give cause for concern is the alarming incidence of unofficial industrial action, mostly taken in defiance of the rules and constitutions of the unions. I was amazed to read a newspaper report of the Ministry of Labour figures, where it was estimated that between 1960 and 1964 nearly 95 per cent. of strikes were unofficial. This accounted for nearly 60 per cent. of days lost. Unofficial strikes are those taken on the shop floor and without notice being given to the employer, very often lightning action, go-slows, stoppages, and so on. It is all very well to argue that the unions should discipline their members for breaking the rules. Unions have this responsibility, and some unions take action to exercise their authority. But employers also have responsibility in this connection. There is plenty of evidence to show that quite often employers, who have refused to concede reasonable concessions to official union negotiators, have been ready to capitulate and concede to the unofficial strikers or to the threat of an unofficial strike. This sort of thing has not only discredited official trade union leadership, but has led some of the rank and file to believe that militancy and strong-arm methods pay dividends.

I should like to tell your Lordships a little story as briefly as I can. In South Wales my union had a factory—I do not know the name now—where there was a very good shop steward, a chap with personality and common sense. He had held his job for a long time. The men wanted an extra bus to get them to wherever they lived; the firm were supplying transport. This shop steward went in every three months or so and said, "Can we have this extra bus, because men are hanging about waiting?" The answer was "No". The shop steward went back and said, "I am sorry I have not got them to agree; they still say No." That went on until on one occasion the men started to row with him and tell him off. He got fed up, and threw his ticket on the table and said, "I have had enough. Get another shop steward." So they got another shop steward, a nice little militant chap. He went in on the Friday morning and asked to see the managing director. He said: "Listen! About this bus. I am the new shop steward. If the bus is not on next Wednesday morning the whole works will stop." And the bus was there on Wednesday morning. I mention this story because any trade union leader will tell you that there is a lot of this going on.

Why is it that all too often workers prefer to take strike action rather than go to arbitration? Confidence in arbitration has been undermined by a fear—not altogether unjustified—that arbitration courts were being unduly influenced by Government policies, and that in some cases decisions were reached, not on the facts and the evidence, but to conform with official policies operating at the time. This lack of confidence that workers will not get a fair deal at arbitration on the facts of a dispute is very sad and very dangerous, because if conciliation has broken down, more often than not the alternative to arbitration is a strike. Lack of confidence in arbitration can increase substantially the incidence of strikes, go-slows, working to rule, and other impediments to production. So why do we not have arbitration courts with a reputation for justice and fair decisions, similar to the reputation built up by our law courts? Why should not decisions of the arbitration courts command the respect accorded to decisions of the law courts?

Surely it is not outside the range of possibility to appoint personnel of the highest calibre to arbitration courts, who would not allow themselves to be influenced by outside considerations, and so build up general confidence in arbitration that fair and equitable decisions would be reached on the facts and the evidence. Because some time or other, if we are to survive as a first-class nation, the strike as a means of settling ordinary industrial disputes will have to be replaced by something more sensible, more modern, more equitable, and less expensive.

I end by saying that I think the kernel of the problem of our economic difficulties is still the same. Unless we earn a great deal more we must spend a great deal less; and the road we should take to make the steps more acceptable and less hurtful should be not so much to keep incomes down, as to get production up. But here's the rub. If we do not take the necessary steps to get production up—and there are many steps that could he taken—then incomes must somehow he kept in line with the limited production.

6.48 p.m.

VISCOUNT AMORY

My Lords, I am always glad when I find myself following the noble Lord, Lord Williamson, for whose record and character I have the greatest respect. I wish I could this evening follow him into the field of industrial relations, in which he knows I am interested. I would only, in passing, make one reference to one point he made when he was talking about bidding by employers for scarce labour. I quite agree that that goes on. The point I should like to make is that that is one symptom of excess demand. The noble Lord, Lord Hilton of Upton, has just gone, and I should have liked to tell him that I find myself very much in agreement with the views he expressed. I would start by apologising to my noble friend, Lord Carrington, who is not here at the moment, and to the noble Lord, Lord Byers, that owing to an unavoidable engagement I was not able to be present during their speeches. If I say anything which is in flat contradiction to the noble Lord, Lord Carrington, I rely on my noble friend Lord Dundee to make the most violent signals in my direction.

The noble Lord, Lord Rennell, will forgive me if I do not follow him into the field of international currency settlements, although it is very important indeed in the long term. I would recall only one thing: I remember the very well-liked and respected managing director of the International Monetary Fund, Mr. Per Jacobsson once saying to me that an essential element in this was that each country should itself show a proper measure of self-discipline in relation to its affairs. When one looks at the economic scene I think one has the impression that we have been here before, and the theme of what I should like to say is that we really must be sure that we make every possible effort to learn from past experience.

I found myself in absolute agreement with everything the noble Lord, Lord Robbins, said in his excellent speech, if I may say so. I think we ought to start by reminding ourselves that it is only for about twenty years that Governments have been seriously undertaking the responsibility of keeping national economies on a level keel. During that time all Governments have been proceeding by trial and error, and it is essential that with that method we should learn by experience and try to do better next time. I think there are some signs that the present Government are being less, and not more, successful than their predecessors in the situation in which we now find ourselves. When I was at the Treasury I admitted that I usually knew which way to turn the controlling knobs, but how far to turn them and when to begin turning them back was far more difficult. Much-needed statistics were usually five or six months behind events, and the result was—and has been, I think—that action is apt to be taken late which, if it had been taken earlier, would not have needed to be so drastic.

It is no part of my aim this evening, my Lords, to indulge in any recrimination or try to allot shares of blame. I should be the first to admit that, as one who, for two and a half years, had a hand in these matters, I certainly was guilty of mistakes in judgment and timing. Every Government since the war has sought four aims simultaneously: full employment, reasonably stable prices, a sound balance of payments and expansion or growth. Sometimes the emphasis has been put on one and sometimes on another, but no Government in this or any other developed country has succeeded in combining all four of these things for more than about eighteen months or two years. The result is that in this country, where we have a narrow margin to play with, we have been in and out of economic trouble, with crises every two or three years. That has left the nation perplexed and frustrated, and I believe most people would gladly accept a period of discipline, and even of austerity, if they were confident that it would really get us on firm ground on which we could give a better account of ourselves.

When we are looking for evidence objectively, what have been our main faults? I suggest there are several. First of all, I think we have tended to do ourselves too well too early. We have preempted, as it were, the results of expected gains in output, productivity, exports and savings, and committed them or spent them before we had really earned them. Secondly, I think we have tried to do too many things at once in circumstances which dictated a stern choice of priorities. In those circumstances we have tended to say, "Let us have them all". Then we have, without question, attempted to run the economy flat out, and every time we have tried that the economy has become overheated. Lastly, I think we have wanted, and I fear we have felt entitled to, material gains from increased productivity and efficiency without being quite willing to pay the price in terms of increased effort and change in our traditional ways.

Of course, my Lords, if we prefer to lead a more placid and less challenging and dynamic existence than some of our neighbours, then we must not expect the same advances in materialistic rewards that our more vigorous neighbours may get. The noble Lord, Lord Plowden, in an address some time ago, I thought put this particularly well. I will quote him: We have to make up our minds what kind of country we want to be and what price we are prepared to pay to achieve this. We can be an important Power in the world if we are prepared to devote the necessary resources to it. We can be a generous helper to less fortunate countries if we are prepared to consume less ourselves. We can have a rapid rate in growth and a rapidly rising standard of living if we will accept the necessity of change and the fact that change is often uncomfortable. What we cannot do is to think that we, as individuals, can get all the benefits from being progressive and adaptable while leaving other people with the pains and the disturbances that is the price of progress and adaptability. I think that is a very good description of the position.

Coming back to the four aims which I mentioned just now, I believe, with hindsight, that we have paid not enough attention relatively to two of them: a sound balance of payments and reasonably stable prices: that is to say, sound and reliable money. Full employment has been our first priority, and who, remembering the sad inter-war years, has reason to be surprised that this is so? To be willing to work and to be denied the opportunity is one of the bitterest hardships that civilised human beings can encounter, so I have no quarrel with putting that aim well to the fore. But in our circumstances full employment can be safeguarded in the long run only if proper attention is paid to other aims, including those two I have mentioned—a sound balance of payments and a relatively stable price level.

In recent years it has been the fashion, and I think it is a wrong fashion, to give expansion top priority without regard to the other aims which I have mentioned. I think economists and politicians have been equally guilty. I do not want to be misunderstood. I believe that steady, long-term expansion is a major aim which must be followed with zest and determination, because in the long run everything depends on it, but not without regard to other considerations which, in our position, are essential to the realisation of the aim of sound expansion. I agree with what my noble friend Lord Aldington has said on that matter. Before one sets out to adopt as top priority improvement in our material lot, we really must safeguard the basis of our existing standard more effectively. I think the danger of the fashionable battle cry to-day, "Growth of any kind at any price", is that we may be guilty of what I understand to be a cardinal strategic error of winning the immediate objective but losing one's base.

In passing, I should like to lodge a modest protest against the fashionable error on the part of some people who I think are in danger of fostering the notion that all or any kind of growth is equally valuable. I do not myself even accept necessarily that at a particular moment a 5 per cent. rate of growth is exactly twice as good as 2½ per cent. It depends how much in the way of price you have to pay for either. But, having said that, I think there is no question about it that we need a higher rate of average annual industrial investment and, still more important, more efficient industrial investment.

I have mentioned one magic word, "growth", and I should like to mention another one which has an element of incantation about it, "planning." My noble friend Lord Aldington referred to this. Some people seem to think and act as if once having adopted a plan then, like adopting matrimony, one is home and safe, so to speak; it is respectable, modern and dynamic—I mean planning, not matrimony. But what is comprised in the plan seems to those people of subordinate importance, a matter almost of mere mechanics. I am all for planning. Once the Government have accepted the responsibility of overall control of our economic affairs, then it must be right that there should be a strategic plan and that we should work steadfastly towards its achievement. When, therefore, the Secretary of State for Economic Affairs—or it may have been the Prime Minister; I have forgotten which—said the Government were going to issue a master plan, I wholly approved, though from past experience I was a little apprehensive about what it would contain if it exceeded (shall we say?) 100 pages. Alas! when it emerged my worst fears were confirmed; there were 474 pages. I recently heard a very distinguished scientist say in a flippant mood, "If you put in your plan for the coming year what you have actually achieved the year before, you can feel reasonably sure that your plan will he realised". That is not quite relevant to this national plan because the Government have not done that; they have made some important projections.

However, I fear that the Secretary of State's Plan is likely to prove disappointing. I think the Plan attempts to plan in too great detail, and I fear even that as a forecast it is likely to prove far from accurate. That is not unusual. My own view of a plan is that the moment you have finished it, the very next day, you ought to start modifying it; it ought to be a running thing and not something you print and publish and issue which everybody keeps at the bedside, because it becomes out of date almost at once. That is not a criticism only of this Plan, but of any plan which proceeds on these lines. The assumption on which much of the Plan seems to be based regarding the annual average increase in productive potential looks like being considerably above, unfortunately, what is likely to be achieved during the next five years. Nevertheless, I welcome the Plan because I think it very important that by trial and error we should improve our experience and our expertise in the field of forecasting. In passing, I would say that I am a strong supporter of the N.E.D.C. and wish it all possible luck, and I hope it will be strongly supported.

Two points I should like to make small warning noises over. I hope the Government will not fall for the notion that some of their supporters seem to have, that import restrictions can be a substitute for internal deflationary measures. So far as import restrictions may be necessary—and I do not dispute they may be at times—they make internal deflationary steps more, and not less, necessary. The other little warning noise I would make is that the Government, I gather, propose to allow public expenditure to rise up to 4¼ per cent. in real terms or about 7 per cent. in money terms. If they do this, on present form, then in the present conditions of very full pressure on our resources they will have to ensure that demand in the field of nonpublic expenditure is reduced. Otherwise, excess pressure will continue and become aggravated.

Now I come to three specific suggestions which I should like to commend, with respect, to the Government. The Chancellor of the Exchequer, I think about three months ago, said, I understand, "The battle of sterling is over and won but the battle of the economy is still to be won". Sir Alexander Spearman, the Member for Scarborough and Whitby in another place, in an excellent speech in the debate on the Address, quoted this and commented that the battle of sterling could not be said to be won until the battle of the economy had been won. I am sure that is right, because one is a reflection of the other.

I do not in fact think the Chancellor of the Exchequer meant to draw a distinction between the two, because I am quite certain he would agree with what I have said.

During the period of office of Conservative Governments the Party supporters of the present Administration, and in fact many of the present Ministers, as my noble friend Lord Chandos said earlier, were wont to deride and denigrate orthodox instruments of economic control, money rates, credit restriction, restriction of Government expenditure and of Government borrowing. When they assumed office, they said, they would have nothing to do with such outmoded devices. In particular anything savouring of "Stop-Go" came in for their vehement denunciation. As my noble friend Lord Chandos said, the present Government have used all these allegedly outmoded mechanisms in an attempt, so far I think less successful than their predecessors, to contain consumer spending power.

One mistake I think made in the past, and I made it myself on one occasion, was to begin to turn the knobs the other way before one had secured the full advantages of the measures one was taking at that moment. I know that the Secretary of State for Economic Affairs has sometimes gone to great lengths to deny that deflation is the object of the exercise, sometimes, I would guess, to the embarrassment of his colleague the Chancellor of the Exchequer. Obviously deflation—or, that more euphemistic word, disinflation—has been and is the object of the exercise, and to imagine otherwise is seriously to diminish the chances of the exercise being successful. The biggest single economic error that successive Governments have made is in trying, for very good and very natural reasons, to run the economy too close to the ceiling of maximum capacity. The pressure on resources, particularly on manpower, is still at present in most parts of the country extremely high. If the present deflationary, or I will call it disinflationary, policies were to be relaxed too soon the effect on our balance of payments could be absolutely disastrous. I was somewhat comforted this afternoon by remarks made by the noble Lord, Lord Shepherd, which seemed to indicate that the Government was fully alive to that possible risk. I agree completely with what the noble Lord, Lord Robbins, said about what happens when attempted output gets very close to the ceiling of maximum capacity.

I beg the Government to remember that all experience to date has shown that, when attempted output exceeds about 95 per cent. of capacity, which is equivalent to around 1¾ per cent. or at most 2 per cent. unemployment, then serious economic troubles develop. I want to make it clear that I am not talking about 95 per cent. of employment, which is a different thing. When ever one has gone above 95 per cent. level of capacity money incomes, and later costs, have risen more rapidly than production.

The second suggestion concerns the Prices and Incomes Board. I am in favour of an incomes policy.

THE MINISTER WITHOUT PORTFOLIO (LORD CHAMPION)

My Lords, I wonder whether the noble Viscount will allow me to intervene. He talks about using 95 per cent. capacity, and that is just about the right figure. I am in some little difficulty here, because it seems to me that what he is really saying is that he is thinking of 95 per cent. of the labour that is available. Therefore, there would be 5 per cent. of unemployment. I wonder whether he could help me on that point?

VISCOUNT AMORY

My Lords, I am glad the noble Lord interrupted, because that is exactly what I was trying to make clear that I did not mean. I was talking there of 95 per cent. of productive capacity in terms of potential of production. That, economists interpret in terms of manpower as amounting to something like between say 1.7 and 2 per cent. in unemployment, on the basis of our present Index. Another time I will go into an argument about this with the noble Lord, but I beg him to accept it from me that I do not mean 5 per cent. unemployment; mean something between 1.7 per cent. and 2 per cent. at most.

My second suggestion concerns the Prices and Incomes Board. I have said that I was in favour of an incomes policy. But in the twin tasks that I believe Mr. Aubrey Jones and his colleagues are faced with, they are confronted with an almost impossibly difficult remit. With regard to incomes, I believe it is possible to do something, and I will go so far as to say something is actually being done there. There is some effect on the climate of opinion in which wage negotiations take place. If one can affect that climate of opinion favourably in the national interest, that is something well worth a great effort, and is most valuable in itself.

I am far less sanguine about the other side of the coin, prices. Prices are a reflection of cost and demand, and in a complicated economy it is utterly impossible to control prices directly in detail. In conditions of inflation the attempt to hold down prices is really attacking the symptoms and not the disease; and so far as it succeeds, it may indeed, as I think my noble friend Lord Aldington implied, aggravate the disease itself. If prices are artificially held back, at some point the dam will burst, as past experience has shown. That is why I myself am not in favour of wage and price freezes, though I am strongly in favour of restraint.

We all admire the energy and the courage of the Secretary of State for Economic Affairs. What I fear is that this Board is going to be grossly and unfairly overloaded with a multiplicity of impossibly difficult tasks, until its back is broken. That would be a great pity. I beg the Government not to use it as a temporary repository for every embarrassing problem on the economic battlefield in parenthesis, may I confess that, at first sight, I do not much like either of the two most recent economic measures announced. The new system of investment grants seems to me to lay too heavy a burden of discrimination and discretion on officials, and I doubt whether they can possibly weigh the technical and commercial criteria involved.

The proposed Industrial Reorganisation Corporation looks to me as if it may have within it the seeds of future misuse. The object of promoting mergers in suitable cases is an excellent one, but I have a haunting fear that it will be subjected to pressures, applied misguidedly but genuinely in the national interest, to pump new capital into industries or concerns which, if they are not capable of performing this operation for themselves, it would be in the true national interest should be allowed to go to the wall.

The last suggestion I have to make—because I am anxious to stop—concerns the sombre subject of taxation. I think it likely, when our successors look back, that they will rate as foolish the raising of such a high proportion of our national revenue by taxation of personal, and even company, incomes. When I was at the Treasury I was conscious of this, and by introducing a reduction in the standard rate of income tax I tried to make a modest move in the right direction. I personally would recommend a good look at some form of widely-based retail turnover tax, or something like that, possibly on the lines they have in Eire. I think it is highly desirable to have two cost-of-living indices, one including taxes and duties and other charges deliberately imposed by Government, and a separate one excluding those items. I urge the Government to seek every opportunity of transferring some part of the heavy burden of taxation from earnings to spending. I believe that to do so would make good sense, the way that modern economies are developing.

In conclusion, we all know that the Government are faced with a host of exacting problems in the economic field, and I trust they will choose the right priorities. The advice I would give them, I think, would be on the lines of the note that one remembers at the top of examination papers: Do not attempt more than three questions, and leave an ample margin on the Left. The most urgent question of all at present must be to strengthen our balance of payments and so put ourselves into the position where we can repay the short-term indebtedness that we have incurred in the past year. In my opinion, that must take precedence over any and every desire for further short-term improvements and well-being in our standard of living.

At the end of his speech this afternoon the noble Lord, Lord Shepherd, extended an invitation to noble Lords to help the Government in their economic task. I am sure that all of us, regardless of our Party, will wish to help in every way, and will wholeheartedly support every well-judged measure, however unpleasant, aimed at strengthening the national economy.

7.19 p.m.

LORD SINCLAIR OF CLEEVE

My Lords, I confess that in my innocence I envisaged myself as dealing to-night with a few of the salient points in our economic situation. Now, after some four and three-quarter hours of wide-ranging debate, in which a forest of salient points have been raised, I am going to try to devote myself to a few of the fundamentals, going to the other extreme. I confess that, like Lord Robbins, whose speech I listened to with the greatest admiration and with the utmost agreement, I find that, on the whole, these fundamentals are distinctly depressing.

In considering how I would approach this subject, my mind went back to a Debate on the Address in your Lord ships' House in the early days on November, 1957, a period which your Lordships will remember immediately succeeded one more sterling crisis and a raising of bank rate to 7 per cent. Plus ca change…! That debate was notable for two speeches, one by the late Lord Pethick-Lawrence, and the other by the late Lord Brand. A good deal was said about inflation and balance of payments and the relationship between them. I could not do better, by way of indicating-the line I should like to take to-night, than quote the concluding sentences front Lord Brand's speech on that occasion: What I have tried to show is that in our highly artificial economy we must earn larger and not smaller surpluses on our balance of payments. If we inflate and others do not, we may, as I have argued, have no surplus at all shortly. With reserves as they are, this would mean more trouble. Do trade union leaders understand this sequence of events? One would suppose that they must. A great deal depends on their wisdom and moderation."—[OFFICIAL REPORT, Vol. 206, col. 52; 6/11/57.] To his question I would add another: do the people of this country as a whole fully understand the position?

It is a sad fact that one can point to little improvement in the situation in which our economy stands to-day compared with what it was then. Indeed, in some respects it is markedly worse. We have had a series of recurring crises in sterling. One way or another they have been surmounted—in the last fourteen months on two occasions by the extremely successful mobilisation of assistance from abroad by the Bank of England. In November, 1964, there was obtained no less than £ 1,000 million in lines of credit, which, incidentally, are sometimes assumed to be adding pro tanto to our indebtedness, but in fact have only added to it to the comparatively minor extent to which they have been drawn upon.

I have no desire to be a prophet of gloom. On the contrary, I believe this country has the ability to surmount its difficulties if—and it is a most important condition—the facts of the situation and what it is necessary to do are fully realised. I will try to give your Lordships shortly, as I see it, the position in regard to our balance-of-payments deficit and the reserves problem. The balance-of-payments deficit on current and long-term capital account was in the region of £ 400 million to £ 450 million in 1965, which was a considerable improvement on the deficit of £ 756 million in 1964. But, as the noble Lord, Lord Robbins, pointed out it is a long way from the state of equilibrium which the Chancellor of the Exchequer hopes to achieve by the end of the current year, 1966. If the noble Lord, Lord Rennell, to whose speech I listened with great interest, is right in saying that the deficit could have been appreciably less had we indulged in greater repatriation of overseas investment, that still does not take away from us the obligation of doing everything we can to reduce this deficit, which is still quite serious.

Our reserves of gold and convertible currencies at the end of 1965 stood at £ 1,073 million, but, as the noble Viscount, Lord Chandos. pointed out, they included £ 857 million borrowed from the International Monetary Fund. Even allowing for the fact that they rose in January by £ 5 million to £ 1,078 million, after certain undisclosed payments to central banks, that is not a situation with which we can be content. Indeed, the Chancellor has made it plain that he is alive to the gravity of the situation and that it has been aggravated by reason of inflation.

As has been said, the United Kingdom is like a great bank with considerable call liabilities but wholly insufficient liquid assets. The main cause of these recurring crises and threatened runs on sterling is the inadequacy of our reserves. I always felt, in the years immediately after the war, that it was a reflection on the intelligence of the civilised world that no way could be found adequately and quickly to cure the imbalance in world exchanges which arose from unevenness of the incidence of the destruction of wealth caused by the war. The attempt at Bretton Woods was, of course, in the right direction, but it proved inadequate owing to the size of the dollar gap, though for a time that was magnificently and most generously remedied by Marshall Aid. But the world problem of the inadequacy of liquid reserves is very much with us to-day. I only hope that the deliberations of the Committee set up last Autumn by the I.M.F. will produce a solution, or the lines of a solution, to a problem which Mr. Maudling highlighted in 1962, and to which he reverted in 1964. Perhaps this is a rather distant background to our problem to-day of economic viability. But it is important that some solution should be found. Suffice it for the moment to say that our balance-of-payments problem will not have been resolved even if equilibrium on current and capital account is attained by the end of 1966, for a surplus must still be earned to repay our debts; and our reserves must be built up.

These facts lead straight into an examination of our ability to export still more of our production. This point has been referred to over and over again this afternoon, and I was glad to hear, as indeed is the case, that we have nothing to be ashamed of in our export record. There are individual cases where manufacturers have laid themselves open to accusations of inefficient performance in the matter of packaging, marking, delivery dates, and so on, but these cases are much fewer than they were. On the whole the great majority of firms, both large and small, engaged in the export trade have in recent years done a splendid job. The shows which this country has put on recently in international trade fairs reflect this, and I believe that best of all was the last one, that held in Tokyo. We have no reason to be complacent, but encouragement based on understanding of the problems will produce more dividends than criticism which is often ill-informed.

There is, however, one rather disturbing feature of the statistical position about exports and imports in relation to balance of payments, to which the noble Lord, Lord Shepherd, referred. Out of a total increase in imports between 1958 and 1964 of £ 1,950 million, no less than £ 1,250 million was represented by finished and semi-finished goods. To some extent these imports would be re-exported, but I am afraid that a great many of them represented goods that might have been manufactured in this country. These figures are taken from the statistics of the London and Cambridge Economic Service. They represent c.i.f. values at current prices, and, to put them in perspective, I would add that the value of our total imports for 1964 was £ 5,649 million, of which semi-manufacturers were £ 1,323 million and finished manufacturers £ 834 million, together comprising 38 per cent. of the whole.

Reverting to exports, the real handicap under which those who are trying to export more are suffering to-day is the handicap of rising costs. We have heard a great deal about inflation, and I do not propose to go over the whole ground. But in a situation in which output is going up at the rate of 2 per cent., and hourly wage rates and earnings are going up by 8 or 9 per cent., these are the ingredients of an intolerable situation. Moreover, the output figure is that obtained after taking full account of all the increased mechanisation that we have to-day. So the resulting productivity figure is in that respect extremely disappointing. That is the greatest danger, as I see it to-day, to our economic prosperity in the short run.

I was one of those who had some hopes for, and faith in, the Cohen Committee, and its successor, the Heyworth Committee. I had hopes for "Nicky" until the trade unions felt that they could not co-operate with it. I had hopes for the Prices and Incomes Board on the theory, particularly, that when the facts relating to increases in costs, restrictive practices and so forth could be put into perspective by some completely independent body, against the background of our national economy and publicised, then informed public opinion would materially help to prevent the situation from getting out of hand. It is not, as the noble Lord, Lord Williamson, said, a question of keeping down wages and prices: it is rather a question of maintaining the value of money, and ensuring that prices con- tinue to be open to the full blast of free competition. It is tragic that, despite all the First Secretary and his Department could do, the first impact of the setting up of the Prices and Incomes Board should have produced an acceleration of wage claims far above the norm.

Constitutionally, I am opposed to excessive rigidity in the conduct of our economic affairs. I believe that on the whole we get the best results by free bargaining and free competition. But these things have to be conducted against the background of an appreciation of the true facts of the economic situation, and that is why, like my noble friend Lord Amory, I think that "Neddy", or something like it, is absolutely essential in the world in which we live. Yet I am appalled at the possibility (although fortunately it is no more than a possibility) of legislative force being given to some aspects of the prices and incomes policy. I think this would be a great mistake, and one more step towards excessive rigidity, putting industry virtually into a straitjacket.

I think there is undue rigidity, too, in the framework in which our banking system operates. If our competitive position is to improve, we need all the flexibility we can achieve, with funds for investment moving where they are likely to be most effective in promoting modernisation and development. Incidentally, it is a sad reflection on the present restrictions and new forms of taxation that, according to the statistics of one of the largest joint stock banks, whereas up to 1962 debenture and other fixed-interest securities had rarely exceeded one-half of new issues by companies—and were often one-third or less—in 1963 and 1964 the proportion was around three-fifths, and in 1965 about nine-tenths; and in amount substantially greater than ever before. Then again, direct investment overseas is handicapped and the income from overseas subsidiaries (a form of trading which under world conditions to-day should be an increasingly valuable source of strength to our balance of payments) is heavily penalised.

Reference has been made to the Industrial Reorganisation Corporation. I shall not elaborate on that, although I agree with a great many of the criticisms that have been made; in particular, the fact that it contains the seed of a measure of State control of a part of industry which is at present free. I think that paragraphs 9 and 10 of the White Paper rather suggest that. I know that nationalisation is not the intention, but there is here an element of possible State control which I can see nothing to justify.

In this connection of "rigidity" it is perhaps relevant to refer, however briefly, to a problem which is just over the horizon, and that is the capital needs of the steel industry. I suppose I should here declare an interest, in that I am a Director of the Finance Corporation for Industry, which has over the last twenty years advanced considerable funds to help finance the steel industry. The needs that will require to be met over the next three or four years, if this industry is to retain its high position, go far beyond the funds available through this source. Yet, while this industry remains under the threat of nationalisation, it is impossible for the firms concerned to raise the capital they need through ordinary market channels, as otherwise they would be able to do.

This is a basic industry with a proud record. It has served the country well. The Iron and Steel Board provides all that any Government need require in the way of general guidance within the framework of national economic planning, without the incubus on either side of detailed control of management. There may well be ways of detail in which this machinery could be improved, but, broadly, I think that what I have said about the Board is true. Surely, in all conscience, the Government have enough on their plate already. If this great industry is to retain its position in world markets—and it is no mean contributor, directly and indirectly, to our balance of payments—and if it is to continue economically and efficiently to satisfy our own internal needs, it should be freed now from the threat of re-nationalisation and enabled to go to the market for the capital it requires.

Looking at the situation broadly, one cannot escape the conclusion that the factor above all else which makes some restriction and rigidity unavoidable in the short term is the high rate of Government expenditure. The National Plan, as we have already heard, provides for a limitation of the increase in public expenditure to 4¼per cent. per annum in real terms. That means, at present prices, £ 500 million. But as we are going at the moment, the additional cost of existing commitments will soon absorb that sum. Moreover, to that has to be added the cost of new commitments, such as housing subsidies and rate reliefs, the cost of increases in wages and salaries in the public sector, not to mention other costs, of which transport has perhaps the most immediate inflationary effect. The only major savings that are in prospect are by retardation of essential public works, such as the road programme, and curtailment of expenditure on defence where our resources are already stretched to the limit in relation to our obligations and needs.

Also, as has been said more than once, we have overfull employment—one of the factors which makes for an artificial acceleration of wage rates. By redundancy payments and higher unemployment pay, the hardships of temporary unemployment are greatly reduced. Some of the things we ought to do would produce temporary unemployment, but a rise of, say, 1 per cent. in the unemployment figures is insignificant in relation to the rise that would follow enforced deflation; and, unless we change course a bit now, that is where we are heading.

It would be absurd to say that, with world conditions as they are to-day, we can kill inflation here. But we must bring it under control and ensure that our rate of inflation does not exceed that of our competitors—and, desirably, bring it lower. There is in many quarters, I believe, a simple faith that economic growth of itself can counter the ill effects of inflation. Unfortunately, however, there exists the possibility that incomes could for a time grow faster. Of course we want to encourage growth, and to that end economic policy and, in particular, the weight and structure of taxation should be directed towards the encouragement of initiative and enterprise, for that is the whole basis of economic growth.

But, that said, my Lords, if we could take steps to cut our coat according to our cloth, if we could readjust our priorities for a time, if we could restrain demand and get away from this terribly overstretched position so that we could build up our reserves, then we should be on our way to real prosperity. This may sound like old-fashioned stuff, but it is the only course that makes economic sense to me. It may not seem to be good politics—I am no judge of that. It certainly means retrenchment or post ponement of many things which are socially and politically desirable—but not, I believe, the essentials of defence. Yet I believe that if the true facts are presented, fully and fairly, and often enough, to the people of this country, so that they are generally understood, then most people will come to accept the fact that measures of economy which will, in time—and I confess that it may well be some considerable time—preserve the value of the pound are the only measures, however distasteful, that will, in the end, enable us to meet world competition and earn the standard of living we now enjoy, but which without them we shall assuredly not be able to retain.

7.41 p.m.

LORD NATHAN

My Lords, a few years ago much thinking on economic matters revolved round the problems which would arise from the reduction of tariff barriers and the free movement of goods and capital and labour from one country to another. Yet to-day this country is encircled by a higher barrier of tariffs than at any time in recent years, coupled with more stringent controls on the immigration of people and the emigration of capital than ever known in peace time. Government policy is directed to increasing productivity whilst keeping incomes and prices stable by persuasion or control; at encouraging mergers and amalgamations and at the same time setting their face against monopoly; at increasing exports and reducing imports; and at restraining overseas investment and encouraging investment at home. The United States, under pressure from Europe, is restraining overseas investment and thus reducing the entry of dollar capital here, whilst Europe has until only the other day been locked in internal disputes between France and the remaining Five.

So vast a change in outlook has taken place in so short a time that it is difficult to realise that, in an economic sense, this country has taken on the aspect of a fortress. The crisis in sterling has, perhaps rightly—I am sure rightly—so riveted attention that all measures to protect it have been deemed acceptable, and, outside a small circle, little thought seems to be given to what should happen next. What happens next is, however, highly relevant to what should be clone now. Expenditure on substitution of home production for imports may be justifiable in identifiable cases only if the fortress is to be maintained as such. Likewise, the prevention of monopoly may be relevant only where competing imports are permanently to be barred.

A forecast of broad future policy is an essential precondition to the operation of the Industrial Reorganisation Corporation, because otherwise no policy can be formulated for it. Efficiency and greater production there must be, but production of what is the question still unanswered. For instance, machine tools have been mentioned extensively this evening. Yet, if the surcharge is removed, are we to produce in this country machine tools presently produced in Sweden? So far we have been extraordinarily fortunate in that, whilst imposing tariffs against our friends, they have not retaliated. We cannot, however, expect that this will continue indefinitely. Possibly the complaint now being considered concerning the export of cattle, alleged to be subsidised, from this country is indicative of a certain atmosphere which is being created.

Further, as the Common Market goes forward, the barrier must increasingly work against us—as, indeed, it would be intended to do; nor will it be possible to jump that barrier by working through companies formed within the Common Market so long as overseas investment is restricted. Nor, if the United States continues to take the view that it must reduce its export of dollars to bring its accounts into balance, is the prospect of dollar investments here—or, indeed, exports for dollars—a bright one.

The sudden change from the grand concept of the open economy to what might be called the "city state" mentality may possibly have been necessary (and perhaps may still be necessary as a short-term, corrective measure) but is hound to be self-destructive, and must certainly be inimical to the interests of this country. It is no doubt very tempting to maintain a closed economy in order to put our economy in order by the introduction of new ideas and experiments such as the Prices and Incomes Board, the Industrial Reorganisation Corporation, and so forth. But a closed economy cannot provide a sure foundation, and I feel that we must not build our strength behind siege walls. The experiment can be successful only if it is subjected to the strains of traffic across the frontiers, because only then will it be tested and, one hopes, found strong and resilient.

Possibly some compensation for an admission of imports, even if only by reduction of the surcharge, will be found in the disinflationary effects of such imports to which reference has already been made. This might, indeed, be reinforced by budgetary measures. What I am particularly concerned about is that we should not build an edifice here behind siege walls and in fact find that we have built on sand; for those walls cannot last for any length of time.

Before it is possible to judge the potentialities of the Government's recent proposals relating to the reorganisation of industry and its incomes policy, it is essential to know what is the policy of the Government relating to the reduction of our own tariffs (including the surcharge), their policy towards the other members of EFTA and the E.E.C. now that the Luxembourg Meeting is over, and also, if the Government find it possible to say at this time, what their attitude is to the so-called "problem of international liquidity", which takes the form perhaps simply of the problem of the dollar deficit. Do the Government envisage withdrawal of the surcharge this year? Do they envisage some further reduction, either mutually or unilaterally, of trade barriers in the next twelve months, or indeed the next twenty-four months? Do they envisage the creation of a dollar-sterling bloc? Do they envisage sterling remaining a reserve currency? Is there any liaison between the Departments concerned with such matters—the Treasury, the Department of Economic Affairs, and the Board of Trade—or is each going its separate way? The noble Lord, Lord Carrington, referred to this with some anxiety which I confess I share.

These are urgent and vital questions immediately affecting decisions both public and private (if decisions of commercial and industrial companies can be called private), and I much hope that the noble Lord, Lord Champion, will be able to give us some guidance on these matters.

7.50 p.m.

LORD McCORQUODALE OF NEWTON

My Lords, at this late hour I shall be as brief as I can, but may I say to the noble Lord who has just sat down how pleasant it is to me to follow him? His father and I were associated in hospital work for very many years, and I hope that I shall often have the privilege of talking in the same debates as those in which he takes part.

We have had, I should have thought, a splendid debate this afternoon, full of wisdom, sound sense and humour. Possibly the most notable speeches from my point of view were those of the noble Viscount, Lord Amory, and the noble Lord, Lord Robbins, our two economists. I must confess that I find myself in agreement with them both. We had a very sensible suggestion, I thought, from the noble Lord, Lord Byers, early in the debate—that the name of the Prices and Incomes Board should be partly changed so as to emphasise that they are working more on productivity than on rigidity and on holding-down. We had some sound sense, with his usual wit, from the noble Lord, Lord Mancroft. I should have liked to take up some of the remarks of the noble Lord, Lord Williamson (who has now left the Chamber), about the trade unions, unofficial strikes and labour relations generally.

However, at this late hour I would only say this. We have had a recent White Paper from the Government in regard to the new Corporation which is going to be provided with £150 million in order to bring about mergers and groupings in industry and to take a financial interest in industry; and this has come in for some harsh criticism. It is my belief that one of the fundamental difficulties in getting higher productivity in industry is the rigid differentiation between the craft and the non-craft unions, the so-called skilled and the unskilled labour unions. The older skilled unions are, perhaps understandably but nowadays quite unnecessarily, fiercely defending the privileges that they won in old and harsher days. Would it not be a good thing if the Government could set up some committee to endeavour to bring about amalgamations and mergers among the unions just as much as among industry? If we could have only a few unions, one or two at the most, in each industry then I believe we should quickly get a breakdown of many of the restrictions which hamper us at the present time.

In passing, I would say that we are anxiously awaiting the prognostications of the Royal Commission on Trade Unions. But it moves very slowly. The Government, the Minister of Labour, have put in a massive report; many employers organisations have put in their recommendations and given evidence. But up till now the T.U.C. have been strangely silent. It seems to me that the work of that Royal Commission should be urged on as fast as possible. I believe that its recommendations and results may be of vital importance to industrial Britain over the next fifty years. I urge the T.U.C. and the trade unions generally not to drag their feet regarding this Royal Commission, but to come forward boldly with what they think should be done.

My Lords, I will now turn to the matter of the debate. It seems to me that the leading features of the economy at present are retarded growth, down to well below 2 per cent.; rapidly rising costs, with wage increases of nearly 10 per cent.; profit margins beginning to fall and total profits for the year 1966 which look like being very considerably less than in 1965—in spite of the substantial increases in industrial investment in the years 1964 and 1965. So we may well see before the end of this year a drastic slackening off in our investment incomes. I think this is underlined by the very disturbing fall-off in savings that we are seeing at the present time.

During the last year employment has been maintained at a very high level, as we have been told by many speakers. But there is a point which I think has been overlooked. Standard hours of work have been reduced in many cases, but overtime has increased to relatively the same amount; so the number of hours worked are the same but the costs are very much higher due to additional overtime pay instead of standard pay. Surely in these depressing circumstances, so far as financial stability is concerned, it is absolutely necessary for us to maintain a sound and progressive fiscal policy.

I would say that our fiscal policy should be that incentives to improve productivity must be strengthened and disincentives must be weakened. We cannot hope to achieve or maintain a sound balance so long as public expenditure remains at its present proportion of the national income; and still less if, as it is planned, it rises faster than the national income—and that is what has happened to a disturbing extent. The National Plan envisages a growth of 3.8 per cent., but we shall be lucky if we see a growth of 1 ½ per cent. or 2 per cent. this year. I think that public expenditure is well above the 4 per cent. which was laid down; and I see that some economists are suggesting that this year it may well reach not less than a 7 per cent. increase. It seems to me that a further review of public expenditure is absolutely imperative. There is need also to shift public expenditure, national and local governmental, so far as possible from social purposes to productive purposes.

My Lords, although this matter has been raised before, I should like to say a word or two on the question of taxation From the industrial point of view, direct taxation of income and capital is far too high, particularly at the upper end of the scale where it acts as a strong disincentive to effort. Some progress was made by the last Government in reducing the highest rate of income tax and surtax, but only slowly; and increased income tax in the last Budget last April reversed the process. The highest incomes, if you take a new method of describing them, are now taxed at over 1,000 per cent. on the net-of-tax basis. This net-of-tax basis, which is the one used for purchase tax in this country, is used in Denmark for calculating income tax, and its use is spreading to other countries. It means that tax is calculated as a proportion of income after the deduction of tax, and not as a proportion of the gross income including tax. Thus, if the gross rate of tax is 91 per cent. as it is at the highest levels in this country, the percentage net rate is 91 per cent. over 9 per cent. (for that is all that is left), or over 1,000 per cent.

The equivalent American figure was somewhere near 1,000 per cent. until 1964, when they began to cut taxes drastically, and it is now down to 233 per cent., or 70 per cent. gross. An equivalent cut in this country would, I believe, have the same effect as it has had in the United States—that is, to stimulate revenue, stimulate industry, add to productivity and be beneficial all round. Then, saving is penalised even more severely than earnings. Savings out of taxed income are taxed twice if invested in companies: first in the hands of the companies and then in the hands of the shareholders. In the hands of shareholders they are taxed as unearned income although they are savings and therefore are more heavily taxed than earnings. The appreciation in their capital value due to inflation is taxed as a capital gain, and then, if anything is still left at the taxpayer's death, a great slice is taken out of it in death duties.

We believe that the balance of the fiscal system should be shifted away from taxation of income and capital towards the taxation of consumption. My noble friend Lord Amory said the same thing. It is neither right nor sensible, surely, when we come to think of it, that we should impose the main burden of taxation on work and on saving. A move towards indirect taxation would slow down the rate of consumption and encourage exports, but still more, I believe, it would encourage effort and so productivity.

On all hands we hear the cry of more exports, and I am glad that two or three speakers have made the point that we run ourselves down too sharply on this matter. We are told that if our sales direction was better, if our management was better, if we were more export minded, if we printed this or did that, we should compete more successfully in the markets of the world. But a great deal of this is "hooey". If our costs are right, then we shall sell overseas as well as any of our competitors, and very much better than most—but our costs have to be right. I would remind the Government that 90 per cent. and more of our exports are on account of private enterprise, and the more the Government interfere with and inhibit private enterprise, the more difficult it will be for us to export.

I should like to say a word or two about investment incentives. Industry was asked what it thought was the best method of investment incentive. We took a great deal of time and care in finding out what the majority of firms, large and small, thought, and came to the definite conclusion that far and away the best investment incentive would be free depreciation; and we thought that this could be worked easily over a number of years. Failing that, if the Government felt that the taxation position at the present time was such that free depreciation could not be granted, then industry felt that the present investment incentives could continue, but on an increased scale, if possible. Industry contended that, under the new taxation principles, the amount of money available for these investment incentives was going to fall, and we were at pains to impress on the Government that we thought that these incentives were vital to the continued growth of the economy.

It was also suggested that investment incentives should take the form of cash payments, but the majority of my friends in industry decided that they did not like this at all. They thought it would lead to discrimination, that it would add intolerably to the burdens of the Board of Trade, and that it would lead to injustices between industries and between areas and to all sorts of disputes. And one thing industry does not like is that one portion of industry should be treated better than another. In the last two days, there have been cogent letters in The Times and elsewhere on the hotel industry, one of our largest dollar and foreign money earners, which has been left out entirely from the plan of investment incentives, whereas before this plan they were included. I would urge the Government to look again at this question of investment incentives and see whether they cannot do away with this discrimination.

I would say one last word about a matter which has not been mentioned to-night and which I mention with some diffidence, but which, in a great debate on our economic position, at a time when our overseas balance of trade is in such a precarious position, I think must be a matter of submission. I am not arguing here, because this is not the time, whether our policy on Rhodesia is right or wrong or whether our sanctions are not severe enough or too severe, but I think that we must take into consideration the cost of our present sanctions policy, its effect on our overseas trade position. Sanctions will undoubtedly damage Rhodesia, and also Zambia, but the economic results of the present policy, if it is long continued, may be even more grave for Britain, battling as we are with a huge debt and an adverse balance.

I am not in a position—I do not think anybody is really in a position—to make an accurate estimate of the probable cost to Britain of our present policy. The loss of exports to Rhodesia can be calculated. The rise in copper prices due to the difficulties of the export of Zambian copper can be calculated. The damage to institutions, such as Lloyd's and other insurance companies and banking firms, is more imponderable, but certainly it will be severe. The amount we shall have to pay in dollars, for American tobacco this year, rather than in sterling for Rhodesian tobacco, will be considerable. The fact that we are joint guarantors with Rhodesia of a large amount of debt, which we shall have to service, means we shall have to find a considerable amount. I have seen it estimated in one paper to be as much as £200 million for a full year, though I cannot vouch for that figure. It may be wildly out, but the amount is certainly great and should be taken into consideration. How ironic it would be, and what a tragedy it would be, if the end result of all this bitter business were to be that sanctions on Rhodesia were the last straw which broke the camel's back of our efforts to keep sterling sound in the world!

LORD PEDDIE

My Lords, I did not wish to interrupt the noble Lord during his speech, but I was intrigued with his suggestion for the adoption of a new principle in regard to the reduction of income tax, particularly at a higher level. Would he apply that principle to earned incomes, as well as to unearned incomes?

LORD McCORQUODALE OF NEWTON

My Lords, I was considering earned income from an industrial point of view as being the most important. I think that all taxation of direct sources is too high, but surely earned income is the most important factor, and I regard pensions and industrial savings as earnings.

8.10 p.m.

VISCOUNT STONEHAVEN

My Lords, I was impressed by a remark made by the noble Lord, Lord Rennell, when he said words to the effect that we must be careful, in putting our balance-of-payments right, that we do not damage the developing countries' balance of payments. I think he also said that he did not see where the money was coming from. For a few moments I want to say a few words on this rather narrow aspect; and I can assure your Lordships that I shall not be long. New money can come from primary productions. If you produce something fresh that was not there before, you can sell it, and that is new money. You can get more available money by the saving of money that has existed, but you would be using at a higher level; and, of course, steel production comes under those terms.

Under the heading of saving, this Government have a lot of planning in front of them, and I venture to put this point to them. In two nationalised industries, gas and electricity—and I want to say straight away that, in my opinion, both are extremely efficient—there is, so far as one can see, a free-for-all. We have had our fun and games here about cuts and so on, and I am not going to talk about that. What I want to do is to develop the points that can be exploited in the two sources of heat. The point about gas is that you can make it at your leisure and store it. Electricity you cannot store; you can only make it. Therefore, you get into difficulties always in peak load conditions. You will always have peak loads. But whereas daily fluctuation and peak loads of gas can be dealt with in the ordinary gas holders (we used to call them gasometers, but I am told that this is wrong), the seasonal variation can also be dealt with by underground storage. I would mention that the underground storage started off in the "wicked thirteen years", because it was in 1961—

LORD SHEPHERD

I think I must correct the noble Viscount. The powers that permit underground storage were contained in the Gas Act passed during the time of the present Administration. It was not possible to store gas underground until that Act was passed. I believe there was a great deal of difficulty from various local authorities and landlords over the passing of that Act.

VISCOUNT STONEHAVEN

The noble Lord is quite right, but that is not what I said: I said "the planning". Of course, the Bill suffered from the normal hazards of democracy, but now, fortunately, it is through.

There is another point. The capital cost required to produce the equivalent of a sent-out kilowatt in the gas world is about £8; the best capital cost for a sent-out kilowatt of electricity is £40. So there is a good differential in favour of gas, and gas should be used, capital-wise, to the maximum possible extent. If cooking and heating could be put on to gas in many large new buildings and—there is an enormous amount of building being done—that would save peak loads in electricity. Just think of one million people going home and switching on 3 kilowatts of electricity! That is a great load on the Electricity Boards. All these problems can be ironed out if the merits of gas are integrated with the merits of electricity. It is this integration of the two in the planning stage that I am urging.

I hope that the more glamorous finds of methane in the North Sea do not detract from the work going on in underground storage, because that underground storage, even if we get plenty of gas from the North Sea, is required for storing imported methane, which at the present time costs little more than the proposed price of gas from the North Sea. I think it is important to keep that open. Both industries use subsidised raw materials, but the gas industry uses far less than the electricity industry. Within their own accounting, however, both show a profit.

That is all I wish to say on that topic, but there is one other point, and that is the benefits in the balance-of-payments position that can be produced by agriculture; and as the foods we produce here are temperate foods, they do not hurt the balance of payments of the developing countries, which produce foods that are not temperate foods. Sir Winston Churchill said in 1953: There is no question of choosing between food production and exports. We must have both at the highest level driven forward with the fiercest energy. That is still true to-day. Therefore I welcome the £200 million expansion programme for agriculture—and here I must declare an interest. However, I have a few doubts, because, while we have had numerous White Papers and promises, what has happened is that at the moment when we get a new allocation of the bacon cut-up we have an increase of just under three-quarters of one per cent. in the allocation of bacon. Our farm improvement grant is cut to 25 per cent., and the balance of 75 per cent., which the wretched farmer has to borrow, suffers under the credit squeeze. We have no information as to what the Government are intending on replacement of initial allowances. Things of this sort do not add to the confidence of farmers.

There is one other neglected natural resource, and that is forestry. In the area where I live there are seven forests within twenty-five miles, and in 1970—that is, in four years' time—they will be producing roughly about 1 million Hoppus feet of thinnings. These forests are nearly 200 miles from Fort William. Is it not time that some plans were under way, because it takes a long time to work these things out? And 1970 is only four years away. At the same time, we still to-day have large imports of pitwood. We are over-producing in Scotland and cannot do anything about it; yet it is still being imported. I think this is something that should be looked at.

I want to say how much I enjoyed the speech of the noble Lord, Lord Hilton of Upton, and how I agree with him; and also, the speech of the noble Lord, Lord Williamson, and how much I sympathise. I started work in 1929, and in those days I used to go to work at five o'clock in the morning. I was paid 35s. a week, and if I did not like the job, there were three outside who did. That was the best thing that could have happened to me. But I should hate to see that sort of thing in these days. Night shifts are not quite so easy, either. If noble Lords had worked night shifts, as I have done, they would realise that they upset one. As a young married man I spent the first year of the war digging holes underneath the Thames, and it did not add to my enjoyment. So these factors should be considered.

Just to complete the record, I think the only point in this regard which the noble Lord, Lord McCorquodale of Newton, did not discuss was the question of the difficulties of absenteeism. Conditions are getting better, wages are going up and hours getting shorter; and yet, according to Lord Robens of Woldingham, there is an unsolved difficulty about absenteeism. Merely to complete what has been said on these matters, I think that should be considered, because it creates a difficult position.

8.22 p.m.

THE EARL OF LYTTON

My Lords, it is again a pleasure to take part in a debate initiated so fluently by the noble Lord, Lord Carrington, and it is easier with him absent to say how much I personally admire his combination of barbs of criticism with immaculate courtesy.

In 1931 the War Office unexpectedly asked me to choose a syllabus and teach the senior division at Sandhurst the dismal science of economics. So I am almost like a man come back from the grave in one sense, and in another I am the kind of person, the middleman, who puts it across to people who do not care much for the subject and understand it very little indeed. I notice the change from my time. When I taught, the gross national product was about £4,000 million, and in 1965 it was about £29,000 million. The first inference to be drawn is that we are an immensely wealthy nation, with tremendous resources, disposed, like everybody in the West, to exaggerate our crises. If you look at the people with whom I used to live in Africa, nomads, who faced the prospect of starvation year after year with composure, there is a little lack of proportion in what we clamour for.

Secondly, the inference to be made is that this is not a seven times increase of our wealth, but something just over two times—and my sources of information for this are much the same as the noble Lord, Lord Carrington's. This, I suggest, is a unique episode of inflation in any recorded history. I was shown a graph yesterday which indicated that the general level of prices at about the beginning of the First World War was just a shade lower than it was at the time of Waterloo. Therefore, the impression we have that inflation has always been with us seems not to be entirely true. This tremendous inflation which we are experiencing is a unique experience shared by all—it is a common problem.

I now turn briefly to the balance-of-payments crisis, which was one of my special lines when I gave instruction. I notice that there is no disagreement that there is a crisis. But I look at the foreword of the National Plan, and it appears to be indicated that exports are at fault. On page 65 of the same book rising costs are blamed, and so is the fact that incomes have gone up faster than productivity so that prices have risen 3 per cent. per annum. In order to check whether this has had the effect I should have expected, I produce the balance of payments (I understand that it is a published document) and I look at the exports. I am sorry to say that I can find no justification, nothing which helps me to put across the message by the study of either visible or invisible exports. I look down from 1952 to 1964, and see that there was a steady rise, with the exception of a couple of years, of £200 million to £300 million a year added to the year before, right up to the great addition in the crisis year of 1964.

I have not come back from the grave, as it were, to teach, but merely to inquire and to say that this document does not support the contention that exports are principally to blame for our crisis. They could be the principal way out. I expect they are, but on this record I think we have no grounds for criticism. I added up the total and divided it by the number of years, and the increase per annum appeared to be 6 per cent. The rise in prices has been 3 per cent. and, therefore, the rise is 3 per cent. in the value of our exports. We are told that this is insufficient, but we are told that without adequate evidence. We are told that there has been a falling off in our proportion of world exports. I do not think that is relevant. If Germany has risen from the flames of Hamburg, Japan from the ashes of Hiroshima, and Italy from the squallor of her immemorial poverty, one would expect a large increase in exports all over the world of which, naturally, we should have a smaller proportion without suffering in any way. The world would be generally enriched. Therefore, that statement by itself does not enable me to convince the farm worker, the man in the shop, or anyone else, and I cannot put it over.

To turn now to the invisible exports, principally the rate of interest on our foreign investments has been the golden goose year after year, and decade after decade. It is never anything but favourable, and to say that the visible balance is always unfavourable is a misuse of words. It is not unfavourable—it may be minus but, as the Governor of the Bank of England thought it proper to say to a group of international bankers: This may be extraordinary in some countries, but it is our daily custom, and quite normal that the visible balance should be minus. On the export side, I cannot see anything in this statement to account for our crisis at all. It is all on the import side, and there are three heavy items. One has grown from virtually nothing to £439 million. It is Government spending abroad which comes down on the import side of our balance of payments. Here I want to distinguish, because there has been some confusion in the debate. In my time, when I was teaching, we raised £800 million a year in revenue from taxation, while at the present time I think it is something like £8,000 million. As regards the balance of payments and distribution, that is not a thing on which I wish to comment at all. I do not know. All I know is that in my time, when the figure was £800 million, we said it was deplorable and could not go on, and now it is £8,000 million.

The point is that Government spending abroad is not merely the fruit of what it takes away from the people in this country, which is trivial; it has to be acquired and earned by experience. Therefore, when the United Nations invites all countries to devote 1 per cent. of their income to the developing countries, ours is £290 million. It sounds minute by comparison with what we raise in taxation, but it is almost unpayable on the balance of payments. To take just one item, as has been mentioned already, in three years our imports have gone up something like £1,000 million. I am afraid I do not concur in the notion that it is a reflection on our producers and that we should be able to produce the merchandise ourselves. It has always enriched us that we could supply the world with Rolls Royces, whisky and Harris tweeds and get in return Swiss watches, Zeiss glasses from Germany and Paris dresses. This enriches us and it is no criticism of our producers that imports are coming in, and it should not be said that we are too bad to compete with them. That fact is not evident, at any rate on this statement.

The third item which was apparent from the statement of the Governor of the Bank of England but not on my statement of current account, was an exceptional outflow of capital, and the export of capital in the year in which it is exported comes down on the import side of the balance of payments. I do not wish to say that there was a crisis; all I am saying is that I have not been given the material with which to put over an explanation. I see the attempt at income control, and I have to argue with people in the fields and elsewhere. I have done it in the last week, not with any great success because, as I say, the documents we have and the evidence put before us is not sufficient to prove the point which has been alleged.

For instance, when one goes to a trade unionist or a workman, or a trade unionist goes to the people he represents, they point to the rise in prices and they regard it as a right that their wages should go up so that their position remains as before. I am not sure that we can break this vicious circle if we accept that contention. Take the case of the industrialist who says, "I want to raise wages because I am expanding and I can employ highly skilled people", and then asks why he may not put up his wages, because he can cover those wages. What do I say?

Thirdly, in my own farming community—and I was glad to hear a word in favour of it said by the noble Viscount, Lord Stonehaven—we claim that we have greatly increased our productivity. It may be during this period of an emergency that the expanding industrialist, the workman in the shop whose wages have gone below the general level of prices, and the farmer must all hold fast, but we have not been given an argument and one starts with a complicated proposition. How is anybody going to decide, indeed how would Solomon be able to decide, the question of this increased productivity except with a long time lag? It seems to me that we have a tremendous problem and neither side has given me, the middleman who tries to put it across on the lower level, the necessary guidance to do so. I hope it can be done without one side belabouring the other for years of maladministration.

8.35 p.m.

VISCOUNT MASSEREENE AND FERRARD

My Lords, I do not want to reiterate the point which we have heard, if I may say so with respect, ad nauseam;namely, the fact that we pay ourselves more than we earn, and we therefore have the degradation of being heavily in debt to the world. But I should like for a moment to follow the noble Earl, Lord Lytton, on the question of Government expenditure overseas. I understood from what he said that the present Government expenditure overseas is about £500 million. It has increased since 1957 by £300 million, but I think the noble Earl said (and of course he is quite right) that this is a serious matter, because £500 million has to be found by way of exports. Surely I am right in saying that owing to the foreign investments held by private individuals, which I believe amount to about £10,000 million, the income on those foreign investments in fact covers the Government expenditure overseas.

I cannot foresee any downward trend occurring in this Government expenditure overseas in the near future, because, after all, we are now supporting the economy of Zambia. We have to supply them with all the necessities of life. No balance sheet appears to have been made out by the Government, but it is hound to be a very high cost. In addition, our policy with regard to sanctions against Rhodesia—

THE EARL OF LYTTON

My Lords, may I interrupt the noble Viscount? I do not dispute at all what he has just said, but what I said was that it was wrong to blame the exporters for it. Our exporters should not be blamed for the £500 million that the Government are paying to prop up Zambia, or anywhere else.

VISCOUNT MASSEREENE AND FERRARD

My Lords, while thanking the noble Earl for that comment, I would say that as is well known, it is the last straw that breaks the camel's back; and as we have heard this afternoon, the United Kingdom economy is a very overloaded camel, so I can only hope that the strain of supporting the dictatorships of Central Africa will not be that last straw which will break the back of sterling.

LORD SHEPHERD

My Lords, would the noble Lord say which are the dictatorships of East and Central Africa?

VISCOUNT MASSEREENE AND FERRARD

My Lords, surely the noble Lord knows them well enough.

LORD SHEPHERD

I am asking a question.

VISCOUNT MASSEREENE AND FERRARD

They are Malawi, Zambia—

LORD SHEPHERD

That is a dictatorship?

VISCOUNT MASSEREENE AND FERRARD

It is a dictatorship to all intents and purposes. Then there is the Congo; and although it is true that we have not yet sent the several millions aid to Tanzania, as we had intended, no doubt we shall do so. There is also Ghana—there are plenty of examples, and the noble Lord knows them perfectly well. I consider that the loss of our exports to Rhodesia may amount to £20 million, and perhaps even more. My Lords, the economy of the United Kingdom is in no state at the moment to shape politics in Africa, either of the Right or of the Left—and I am sure the noble Lord will agree with me on that.

As has been said several times in this debate, the first thing we have to do is to put our own house in order. If this country does not become solvent, we can play no part in world affairs at all. We are absolutely nothing. Like some other noble Lords, I have some sympathy with Mr. George Brown. He has come in for a great deal of satire and cartoonists' fun. We cannot entirely blame him for the apparent failure at the moment of the wages and incomes policy. I personally thought, as I believe a great many people did, that under a Labour Government the trade unions would have shown greater restraint regarding an incomes policy, but we have been rather deceived in this. I was amazed to read in the Sunday papers that several trade union leaders had appealed to Mr. Brown, in the interests of democracy, to drop his plan to fine trade union leaders if they refused to cooperate in the new procedures which are being drafted regarding the pressing of pay claims. If the unions in the past had had the interests of democracy at heart, there would now be no need to legislate on an incomes policy.

The great question is, can an incomes policy succeed? In a democracy such as ours, with full employment, are the people mature enough to have the self-restraint to adhere to the rules of an incomes policy? In the past I have done quite a lot of election canvassing, and I am of the opinion that the average person will not indulge in that restraint. I personally deplore the regimentation that is required if you legislate for an incomes policy. It is rather like putting the economy into a straitjacket. But can the country afford to wait for people to show restraint'? It may be one day they will show restraint. If we do not do something extremely soon we are going to rush to our doom like the Gadarene swine, with wages chasing o prices into national bankruptcy. I cannot see any way out of it if strong measures are not taken.

I was interested to hear the noble Lord, Lord Hilton of Upton, and other noble Lords mention agriculture. Mr. Gunter, talking of productivity, hit the nail on the head when he said that production has been almost stagnant while incomes have risen and risen. Agriculture is the one bright spot on the horizon in our economy; it is the only bright spot. In spite of last year's Price Review, which left farmers relatively £20 million worse off, they have yet managed to save £30 million in the nation's import bill. What a fine example to the rest of the nation, that here is an industry where, in spite of the fact that farmers' incomes have steadily fallen, their production has steadily increased! We have no strikes in agriculture; we have very close cooperation between employers and workers. I will not discuss here the reasons why, because there is not time, but it probably has something to do with the fact that the agricultural worker, being close to nature, understands the scheme of things better. If only farmers had more encouragement—I agree that the Government have just given them slight encouragement, but if only they could have far more—they could really transform the balance of payments position. The Department of Economic AffairsProgress Reportfor January says: The aim has been to reduce the pressure on the economy by selective measures which will allow industry to continue to build up the productive capacity on which the future economy of the country depends. Take the credit squeeze on the farmer. Members of the N.F.U. now owe the banks £503 million on overdrafts. 'That is double the sum of ten years ago. If we are to take the Department of Economic Affairs report for January seriously, it seems crazy to have this credit squeeze on the farmers, because the farmers are doing everything to decrease imports. The word "selective" appears not to have been applied to the farmers. I should like to see Her Majesty's Government give some directive to the banks to ease the credit squeeze on bona fide farmers. The banks can afford it; some of them have just published their accounts, and their profits are up between 20 and 30 per cent., apart from their hidden reserves which we do not, of course, know. I really put this seriously to the Government: why exert this credit squeeze on the farmers? The main object of a credit squeeze is to prevent excessive imports. The credit squeeze on the farmers is not achieving this; it is achieving the reverse affect.

Before I conclude I should like to mention something which I think has not been mentioned—namely, the North Sea gas and oil developments. I personally think that these have far greater potentialities than the average person understands. They may well transform our whole economy. In the past we have always had to be a trading nation; we have always had to strive for our living. Here, on our doorstep, we probably have vast, untapped resources of wealth. I ask the Government not to hamstring the development of this source of wealth by too rigid controls, and to allow private industry—in the oil trade in America they are called the "wildcatters"—reasonably free rein. This find seems to be a Divine act of Providence, to save this country from its improvidence.

The nightmare that always haunts me is that one day the people of this country will wake up with their fat wage packets and their grand cars. They will drive to the shops, and they will find that they are not able to buy any of the necessities, or the things in life that they have come to regard as necessities. For instance, they will not be able to buy any tobacco or some such commodity as that, because this country has not been able to afford to import it. It will be no good then telling the people, "You ought to have exercised restraint." Therefore I wish the Government every success in an incomes policy. I hope it is possible to achieve it without legislation, but personally I should doubt it.

8.53 p.m.

THE EARL OF DUNDEE

My Lords, as a credit-squeezed farmer, I should like to say how grateful I am to my noble friend Lord Massereene and Ferrard for putting this wonderful case on my behalf. Certainly, as a class of people, farmers have increased their production and their productivity enormously, while all their costs, the cost of their materials, have been going up and their profits and their receipts have been coming down. Therefore, I feel that they are eminently people who ought not to be squeezed.

I think that the large number of your Lordships who have taken part in this debate reflects the widespread interest and anxiety in the present economic situation. When the debate began, I had no idea whether it was going to take the form of a Party political battle or not. The answer is, most decidedly not. My noble friend Lord Amory, who in my opinion was one of the best Chancellors of the Exchequer we have ever had, said in his speech that, during his two and a half years of office, he had made some errors of judgment and of timing. I am afraid that if he had said that during his period of office in another place, his confession would have been greeted with howls of hostile exultation from his opponents. But in your Lordships' House the only result was a most amicable dialogue, accompanied by mutual protestations of friendship and offers of help, between my noble friend and the Benches opposite.

VISCOUNT AMORY

My Lords, if I may just intervene, I would say that there is a difference, too, in that I am now a Ministerial old-age pensioner of five and a half years' standing. Therefore I am in a safer position.

THE EARL OF DUNDEE

My Lords, one can always afford more easily to confess one's sins when the possibility of punishment has departed. But as I had the privilege, in a humble way, in your Lordships' House at that time of trying to explain away some of my noble friend's misdeeds, I am greatly touched to hear him making this confession now.

Every Government since the war has tried to do a great many things. We have all tried to expand our economy and to support sterling, which is one of the main currencies of the world, and to do more than anybody else, except the Americans, in defending the free world beyond our shores. We have had a considerable measure of success, in spite of all our difficulties. We are the only Power in the free world, except the United States, who has continuously, on a substantial scale, taken part in defending the free world outside our own frontiers. That means a great deal of what are called unrequited exports, exports for which we do not get paid and which are, therefore, a dead loss to our balance of payments. Whenever I read what I am quite sure are excellent but rather magisterial reports of O.E.C.D. about our condition every year, I have no doubt that they give us a lot of good advice, but they never seem to give us any credit for this. I have never noticed them mention it at all.

As for expansion, since the war we have more than doubled our prosperity, our product, our wealth and our wellbeing. Allowing for all the changes in the value of money, in the last fourteen years we have fully doubled our gross national product; we have more than doubled expenditure on social services and pensions, and the increase in our well-being is equal in amount to the growth of the previous fifty years. I think that is one of the most tremendous economic achievements in history. The noble Lord, Lord Shepherd, invites us to be patriotic, which I am sure we want to be, and to support the Government in their present efforts. That is the kind of appeal I always like to respond to. But, of course, it does not make it much easier when members of the noble Lord's Party abuse this phenomenal and unparalleled period of prosperity in our economic history as "a period of stagnation and Tory misrule".

But this expansion and this triple success—supporting sterling, defending the free world, and doubling our own prosperity—has been continually accompanied by a not always successful fight against inflation, and recurring apprehension about the position of our own currency and its value. If you were to ask me what is the real cause of this prime economic difficulty, which all Governments have had to face since the war, undoubtedly my answer would be that the fundamental cause is the failure of the International Conference at Bretton Woods during the war to accept the sensible proposals put forward by Lord Keynes—his original proposals for the management of international currency. If they had done that, then the commerce, the prosperity and the strength of the Free World would now be immeasurably greater than they are. But that is not a matter for which any British Government can possibly be held responsible. We are all agreed on the need for more national liquidity.

Most of your Lordships who are here know far more about political economy than I do, and you are all probably aware that in the last six years the United States has had accumulated adverse balance of payments which amount over that period to no less than 21,000 million dollars—that is about 3,500 million dollars every year on average, which would be between £1,200 million and £1,300 million. They have been able to manage it because of the enormous gold reserves which they hold, but if they go on for ever acting on their present principles and if the gold reserves are exhausted, then they will have to stop, and that adverse balance of payments, what has been of enormous benefit to the world and to the United States would then produce a very serious collapse in the world economy. However, that is not the responsibility of any British Government.

What we have to do is to try to carry out these tasks which some people may think are beyond our capacity to continue; others think we can. But we have got to do it more or less on a shoestring. What we can do to make the shoestring stronger is to see that there is ample investment at home, and I would agree with the noble Lords, Lord Byers and Lord Aldington, that it is equally desirable to our economy as a trading nation, both directly and in directly, that we should have more investment abroad. But we must see to it that we have ample investment at home, and ensure that our economy is efficient, competitive; and also we must try to see that increases in incomes do not exceed our productivity. There is particular anxiety at the moment about all three of these matters.

I interrupted the noble Lord, Lord Shepherd, on the question of investment, because I had figures only to the end of 1964. There was an increase in 1964 from a little under £5 thousand million to about £5.8 thousand million in the amount of national investment. The noble Lord was kind enough to tell me that he thought that, on present information, there would be a 9 per cent. increase on that in 1965. It is very good if that is so, and I hope it is. What we are more anxious about is 1966 and 1967, because investment is a matter which is often decided and committed a long time before it actually happens. The noble Lord knows that the Board of Trade always tries to make inquiries in order to make some estimate of what investment is likely to be over the next year, and if possible a little further ahead. I should be grateful if the noble Lord, Lord Champion, could give us some information on this.

LORD SHEPHERD

My Lords, perhaps I could help the noble Lord. I did say in my speech that the indications of the survey to which the noble Lord has referred are that manufacturing investment is very likely to hold up to the 1965 figure.

THE EARL OF DUNDEE

To the 1965 figure?

LORD SHEPHERD

Yes, and that that increase should continue.

THE EARL OF DUNDEE

In other words, 1966 should continue to hold its own with 1965. One reason for anxiety about this is that we have got the figures for National Savings for 1965, and they are very alarming. According to figures published by the National Savings Movement, in 1963, leaving aside accrued interest, the amount of National Savings amounted to a net figure of £194 million; in 1964 the figure was £231 million; and in 1965 it was minus £26 million, again leaving aside accrued interest. Withdrawals exceeded deposits by £26 million, and this is not a good omen for National Savings as a whole. But I am glad to hear that there is evidence from the Board of Trade of the likelihood of more industrial investment next year. This is of the highest importance if we are to win through out of the present situation.

Having read the Government's White Paper on investment incentives, I cannot say that I find myself able to regard it as a great improvement on the existing position. The one advantage it had—which was that one got 40 per cent. very quickly instead of much later on if one was in a development area—does not take effect for eighteen months. A whole lot of projects are excluded by the condition that investment must be put into either manufacturing or extractive processes. That cuts out a great deal of buildings and transport, which is often of far greater value of productivity than new investment in manufacturing or extractive processes. I may be reading the White Paper wrongly, but it seemed to me that the total amount which will be paid out by the Treasury under the new investment incentive scheme may well be about £100 million less than the amount which would have been distributed under the existing investment and depreciation allowances.

Another matter which is at present causing anxiety, a matter to which many of your Lordships have referred to-day, is the combination last year of industrial stagnation with rapidly rising prices—two things which have not coincided before. Usually, when we have had a period in which industrial production has risen not at all, or risen very little, as in 1958 or 1961, it has coincided with a period of price stability when we have been trying to disinflate. Periods in which prices have risen more rapidly than we wanted them to rise, as in 1960 and 1964, have coincided with very high levels of full production. But in 1965 industrial production, which had risen in six years to a point of 131 by the end of the year, stayed more or less at the same point, while prices rose by something like 5 per cent.

I think this must be considered in conjunction with a good feature of 1964, a very welcome increase in our exports, particularly in the last month for which figures were published the other day. I think that the monthly figure was £419 million, which was a record. But, of course, as with investments, exports are often arranged and contracted for quite a long time before they actually happen. We do not want to say anything which might have the effect of holding back the increase in exports in 1966 for which we hope; hut, of course, when there is this condition of stagnant industrial production, combined with a rise in prices, people are naturally anxious lest these two factors lead—as they are bound to do if they go on—to a steep rise in costs, which is bound to lower our competitive activity and our ability to export successfully.

The noble Lord, Lord Shepherd, in following my noble friend Lord Carrington, suggested that he had not put forward any constructive proposals. Although that is not usually the function of an Opposition, I though that my noble friend had put forward several proposals in regard to taxation and the removal of restrictive practices. At this time of night, I do not want to go into them at length, but if the noble Lord would care to read the pamphlet by Mr. Heath which was issued not long ago, called Putting Britain Right Ahead—

LORD SHEPHERD

I have read it.

THE EARL OF DUNDEE

—he will find there fairly exhaustive proposals for adjusting taxation and for tackling restrictive practices. Mr. Heath said that he will ask for an interim report, so that he can have quick action from the Royal Commission on Trade Unions, and for increasing competition. Also, I am not going into the question which he raises, of taking measures to prepare for the hoped-for entry into the Common Market, because we have had debates on that and I hope that we shall have further debates in the future.

But may I say this about taxation?—because the noble Lord, Lord Shepherd, made a particular point of saying to my noble friend Lord Carrington that if we wanted to recommend reductions in taxation, we ought to say what things we were going to do without. I do not think we need say that, because it is far better to look to actual performance than to look forward to more doubtful hypothetical aspirations which we may have. The fact is that during our period of office from 1951 to 1964 we increased our expenditure enormously on social services. Pensions, in real value, were more than doubled. Single pensions went up from 30s. to 67s., and the pension for a man and wife went up from 57s. to, I think, 109s. We spent a great deal more on defence; more on schools; more on hospitals; more on roads; more on every kind of social service, and at the same time we did not have to increase taxation to pay for these things. We reduced taxation.

LORD BYERS

My Lords, will the noble Earl allow me to interrupt for one moment? This is very interesting, but does he remember Command Paper 2235 published by the Conservative Government on Public Expenditure, 1963–68, in which they forecast quite an increase in public expenditure? In paragraph 40 the Paper said: It is unlikely that a development of public expenditure on the scale implied will leave much scope for a reduction in the burden of taxation.

THE EARL OF DUNDEE

My Lords, that does not affect my point, that taxation had already been reduced. What we said, quite truly, was that we thought this further great expansion in the social services, particularly on education and university buildings, would place such a strain on our resources that we should not he able to make any reductions in taxation—exactly what the Labour Party said,too.

LORD BYERS

My Lords, may I ask the noble Earl whether, under the next Conservative Administration, we are going to get a reduction in taxation, or not?

THE EARL OF DUNDEE

My Lords, my noble friends, who have already taken up a considerable amount of time in this debate in talking on the subject, have said that the most important thing to do is to alter the incidence of taxation in order to stop the "brain-drain" and to give a better reward to the rising young executives who are so essential to the increase in productivity here. But I should certainly hope that, with an increase in production, it should be possible to carry out our social programme with a reduction in the total volume of taxation. The object of that is not just to give people more money: it is to increase our competitive power in the world. I think that is one of the reasons why industrial production has stagnated: that taxation now, with this increase of £600 million in the last fourteen months, has brought direct taxation to the point where it is an unacceptable handicap to industrial progress.

The noble Lord opposite laughs at that, but it is a very serious matter, and I think it is worthy of repetition: that, with this vast expansion of social services and of national product in these thirteen years, we did reduce taxation from 31 per cent. of the gross national product to under 25 per cent. in 1964. I think that is a legitimate answer to those who suggest that we cannot improve our position still further without imposing more taxes. The answer is that we have done it, and we can do it again.

LORD SHEPHERD

My Lords, could the noble Earl inform the House in a very few words what were the alternatives facing the Government in dealing with the balance-of-payments problem and the heavy import bill of which the noble Earl is aware, which caused the £756 million deficit in 1964, other than the use of taxation? Or would the noble Earl in fact advocate tighter controls, arbitrary controls, in regard to imports and general consumption?

THE EARL OF DUNDEE

No, my Lords. You cannot ask that someone who was not in the Government at the time and who has not had the advantage of seeing all the papers and knowing all the facts should tell you the best method of dealing with any particular situation. I do not believe that there need have been any crisis at all in the autumn of 1964. I know it has been exaggerated. Perhaps the memory of the noble Lord is rather short. Perhaps he has forgotten the White Paper of his own Government in October, which was published after they had been in office for several weeks and which said that there was no undue strain on resources and that there was no need for panic measures or for a "Stop-Go" policy. I think it was their own unnecessary insistence upon and their exaggeration of the imagined consequences of this deficit which in fact caused a sterling crisis to come about in November, and I certainly do not think a heavy increase in taxation was the right means of dealing with it. But I am not now going into the question of whether the import surcharge was, or was not, the wisest thing to do. My own opinion is that it was not; but, as I say, I was not in the Government, and I do not know all the factors which may have led Ministers to their decision.

My Lords, if I may conclude with a word about incomes policy, which is a central feature of interest at the moment, I should like to repeat, as I have said before, that we think that an incomes policy is a good thing. It is right; and, while it is very difficult to keep on saying that we support the Government when the results up to now of their policy have been apparently so disastrous, yet we certainly wish an incomes policy to succeed, and therefore we certainly are ready to do all we can to help the Government in this respect. We did not get much help from our opponents for our incomes policy when we were in. The trade unions were willing to co-operate on N.E.D.C., but not on N.I.C., on the completely incorrect ground, which they represented, that the National Incomes Commission was supposed to deal only with wages and not with other kinds of income. It was specifically stated, both in the White Paper setting up the National Incomes Commission and in the statutory instrument establishing it, that it was to deal with other kinds of income, as well as wages, and—

LORD SHEPHERD

Not prices.

THE EARL OF DUNDEE

I quite agree, but I do not think that was a sufficient reason for all our opponents trying to sabotage the thing and refusing to serve on it with us. We have not done that. We are trying to help, as far as we can. I would only say to the noble Lord that two speakers have given what they think are the conditions on which an incomes policy might be more likely to succeed. The noble Lord, Lord Robbins—and he will tell me if I am not quoting him aright—said that it would succeed more easily if there were only 97 ½ per cent. of the population employed instead of 98 ½, per cent., or whatever the figures is. Or perhaps he meant the capacity.

LORD ROBBINS

My Lords, I said between 97 ½ per cent. and 98 per cent.

THE EARL OF DUNDEE

The noble Lord was talking of employment and the noble Viscount, Lord Amory, was talking not of employment but of industrial capacity when he said 95 per cent. I do not know whether my conditions meant much the same as that or not. I have always said that I do not think an incomes policy will succeed unless a great deal more competition is introduced into our industry. I think that if we could succeed in introducing more competition, then an incomes policy has a good chance of succeeding. We all recognise that the present Government have not been at it very long; but, however long or short may be the time that they may continue, I think it is in the national interest for all of us to hope that the incomes policy will succeed, and to bend our efforts toward that end.

9.21 p.m.

LORD CHAMPION

My Lords, I must begin by thanking the noble Lord, Lord Carrington, for opening this debate in a balanced speech. I cannot thank him for having decided to put this Motion down, because I have to reply. He started by protesting at the fact that a Cabinet Minister was not to reply. He was kind enough not to refer to my shortcomings in this field—but I admit them straight away. I am neither a banker nor an economist; nor a great industrialist. But I think and hope that I bring some modicum of common sense to bear on the problem which is facing this country at this time.

I am not going to attempt to refer to every Member of your Lordships' House who has spoken in this debate to-day. It has been an outstanding debate. I must admit that debates in this Chamber often reach a very high standard; particularly a debate of this sort, and particularly when the noble Lord, Lord Carrington, has been able to stimulate so many of his banker and financial friends to come along here to-day and contribute to it. I shall not attempt to answer all the questions that have been raised. I believe, with the noble Viscount, Lord Amory, in the words that are usually found at the top of an examination paper: "Do not attempt to answer all the questions", or "too many questions." The noble Viscount suggested that one leaves a space on the side. Well, I have left a space in the margin.

SEVERAL NOBLE LORDS

On the Left!

LORD CHAMPION

That is right, on the Left, as they say. My Lords, the mere cataloguing of the names of speakers, and of the questions that have been asked to-day, and the debating points that have been made would show that if I were to attempt to answer them, the House would have to bear with me for very much longer than I feel they could tolerate at this late hour. To those noble Lords who are waiting for me to make some reference to them, but who would rather be elsewhere, I say "I do not mind a bit if you walk out." But I will, in so far as it is possible, try to deal with what appear to me to be the major points that have emerged in the course of the debate.

Inevitably and understandably, we have had a few Party points, some from the noble Earl, Lord Dundee, and some from the noble Viscount, Lord Chandos, whom I have heard in very much better form in the other place. I have heard him making fewer Party "cracks" and contributing something worth while to the council of the nation which this House happens to be. We have to put up with him, and occasionally I like very much to put up with him because he is entertaining. I agreed with the noble Earl, Lord Dundee, when he said that in the main the debate had been a serious attempt to help the country rather than to engage in pettifogging Party nagging. That is as it should be in this House.

I know that it is common form to wind up a debate by saying that every word that has been spoken will be carefully studied by the Government, and often this is intended to be just a comforting statement to those who are not mentioned in the course of the reply; but this is not the case to-day, because I am positive that many things have been said which are worthy of study by the Government, and they will be studied.

When the Government came into power in October, 1964, it seemed to us that the greatest task before us was to try to deal with the problem that had dogged every Government for many years past—namely, the balance-of-payments problem. The position was particularly acute at that time because of the size of the deficit, which at the end of 1964 stood at £756 million on current and long-term capital accounts, of which £534 million was the deficit on visible trade. The size of this deficit brought sterling under heavy pressure. The noble Earl, Lord Dundee, seemed to think that this had little to do with it, but, of course, it had. The very fact that this tremendous deficit existed was known to everybody interested in sterling and in its strength and parity with the dollar.

THE EARL OF DUNDEE

My Lords, I do not want to argue this again, but the Prime Minister himself said on November 23 that there was no crisis as a result of this deficit and that the crisis had come later owing to confidence factors.

LORD CHAMPION

My Lords, this deficit surely had something to do with it. If not, I just cannot understand the working of the minds of the financial pundits. Certainly it would have affected mine, if I were a foreign person playing in the sterling market. The size of the deficit brought sterling under heavy pressure and whether this was aided by statements of members of the Government, I am not now going to argue. It has been argued ad nauseam in debates in your Lordships' House and elsewhere over the past year. The fact is that heavy pressure existed and had to be resisted. This meant unpleasant short-term measures, which, coupled with the determination to deal with this short-term problem, have been reasonably successful, judging by the strong inflow of short-term funds since September last. Almost every speaker has paid tribute to this.

But we knew at the very outset that defensive short-term measures could not solve the long-standing balance-ofpayments problem. Some of the measures that we had to adopt have come under fire to-day, but some noble Lords have praised them and some have even said that we have not gone far enough. The noble Lord, Lord Carrington, said that he thought we had gone much too far in reducing the outflow of capital and commended to us the speech of Lord Cromer last Monday. By means of a severe exchange control and of the corporation tax, which will come into force next year, we have brought about a situation which has stopped some of the outflow of capital in overseas investment. I regard this as an undesirable necessity, but a necessity in the prevailing conditions of this country. It is one that ought to be reversed as soon as conditions permit, for in the long term the earnings on such investment can be important in relation to the balance of payments. Indeed, I would say that we have lived in this century on our outpouring of capital in the last century.

The noble Lord, Lord Sinclair of Cleeve, said that in the circumstances existing it appeared as though in the short-term we had stopped a further outflow of capital, and we agree with him. But I would say that as soon as possible we must reverse what we have done in this field and start to invest abroad, so that we shall he secure in future again and have something coming in which will help us in the balance of payments in the long-term.

LORD ALD1NGTON

My Lords, this is a very important statement. Is this a statement of Government policy, that they are going to reverse the hostility of their tax system to investments overseas? Because if they are, that is what we have been pressing for from this side of the House for some time. It is this point which we have all been trying to drive home. We have not been complaining about exchange control in the short term, but about taxation policy in the long term.

LORD CHAMPION

My Lords, what I was saying was that this whole business of trying to damp down investment abroad must come to an end as soon as possible. I was not making a Government statement as to a date when this will happen, and I was certainly not talking about revoking the corporation tax, which is a tax that is operating in many parts of the world, and I see no reason why we should attempt, at this stage at any rate, to reverse our decision in this connection.

Some of the short-term measures we have introduced have had a mixed reception to-day. The noble Lord, Lord Byers, asked: Is the economy overstrained still? And so did the noble Lord, Lord Robbins, whose speech I thought, was outstanding. He feared that we had created, and there was existing, a feeling of euphoria: that we are not really being hurt as we ought to be hurt (at least, that is what I understood him to say), and that this is something to be guarded against; that we have to use the short-term measures to hit people and bring about a situation in which we shall be able to cure the short-term difficulties which clearly we face.

LORD ROBBINS

My Lords, with deep respect. I did not accuse noble Lords on that Bench of creating a feeling of euphoria. I deplored the euphoria prevalent on the Stock Exchange.

LORD CHAMPION

I must admit that I misunderstood the substance of what the noble Lord said. I thought he was referring to the euphoria that exists, to some extent, in the country; and, of course, it does. We are inclined to-day to feel: "Well, we have got over the major difficulties. No great problem exists. We shall end it all by the end of 1966, and from then on life will be comparatively easy again." This is something against which we must guard, and this is the point that I was trying to make. It is essential that we must not be prophets of gloom, but we have to ensure that somehow we turn the hose on the overheated sections of our economy. That is what we have been doing.

Have we done enough? This is a Question which I think the noble Lord. Lord Byers, asked. There has been criticism that we did not damp down enough last year, and the result has been a continuing high pressure for labour, with unemployment in January at about 1.2 per cent., which is about the same as throughout the whole of the year 1965. We say that there are a number of factors operating here which do come as a surprise—for instance, the fact that, with output showing comparatively little increase over the past year, unemployment has remained at the same low point as in the spring of last year, in the circumstances, home consumption has continued to make an unduly high demand upon our resources. Hence our further measures which were announced on Monday last.

The noble Lord, Lord Aldington and the noble Viscount, Lord Amory, said that we should watch this carefully, and, in fact, perhaps do much more work for a greater degree of spare capacity, which, in my opinion, means a higher level of unemployment. That is something that might have to come, but I hope it will not. This is something that we shall have to try to avoid at almost any cost—and I say this having lived, as I did for a long time, in an area that felt the full effect of unemployment in the years between the wars. As I say, we might have to come to it, but I hope we shall not. Certainly we shall watch the position carefully.

Nobody can be sure how the restrictions that we have just put on will work out. The fact that we did not get it quite right last year merely drives home the point, early impressed upon me when I started an elementary study of economics, that it is not an exact science, but something of an art, and, perhaps nearer to the truth, just a guessing game. That is what seems to me to be the fact of the situation. We can try, but we have not yet managed to convert economics into anything approaching an exact science. Noble Lords who have made the point that perhaps we have not done enough, and there is still too much slack in the economy, can be sure that we shall watch the situation carefully, and we will not hesitate to reverse or stiffen our measures should the situation demand it.

A number of noble Lords have expressed doubt about the success of the policy on productivity, prices and incomes, both in the immediate and in the long-term aspects. Certainly no one in the Government embarked on this policy feeling that all we had to do was to get a few signatures to a document of intent and the problem would be solved. No Minister, and certainly not the First Secretary, with his trade union background, started by saying, with Shakespeare's Glendower: I can call spirits from the vasty deep or, if he had, he would certainly have been met by me with Hotspur's ego-pricking reply: And so can I, and so can any man, but will they come? No Government, operating in free conditions, have been able to call up this spirit successfully from the vasty deep of long ingrained habits and attitudes. But we just have to keep on trying. If we do keep trying, the slight signs of success now discernible may bloom into a general acceptance of the stupidity of going on in the old way of personal incomes outstripping the supporting productivity.

What are these signs? The first of these is, of course, that something is succeeding to some extent on the retail prices side. After a steep rise in the first half of 1965, partly as a result of taxation changes—as we have been repeatedly reminded by the noble Earl, Lord Dundee—the retail price index was up by only one point between April and October, 1965. In the two months following October there has been a further increase of only one point. The present position is that the movement of prices is not fully reflecting the increases which have taken place. We believe that this is in part due to the erosion of retail price maintenance, for which the Party opposite were responsible when they were in power; in part to the fact that manufacturers have shown a greater readiness to absorb cost increases; and also to the fact that the Government have been able to persuade others to hold existing prices, in some cases under dislike or fear of increases being referred to the N.P.I.B. I do not accept the theory that the holding back of these price increases is storing them up behind a dam which will burst eventually. I believe that many of these rises have been absorbed, rightly, within the industries where these price checks have been made and accepted.

But the most difficult part of our policy relates to wages and salaries. We have to admit that the index of hourly wages rose by 6.8 per cent. between December, 1964, and December, 1965, which far exceeds the norm of 3 to 3½ per cent. which we laid down and hoped we should not exceed. This is serious, and we make no pretence otherwise. There were, it is true, several reasons why the task of restraining incomes was particularly difficult in 1965. I will not ennumerate these reasons, some of which were given by my noble friend Lord Shepherd in his speech this afternoon. But several noble Lords have expressed doubts about this policy ever succeeding. We cannot be sure that it will, for we are up against habits and attitudes which, as my noble friend Lord Williamson said, are extremely difficult to change. It is also the case that we knew we were introducing the policy at a difficult time. Our first task was to reach agreement with management and unions on the aims of the policy, and on the machinery for carrying it out. Much of last year was spent in getting agreement on the fundamentals, and in this we were surprisingly successful.

I think that it is true to some extent, but only to some extent, that a wages policy would be easier to operate if the pressure on demand for labour were lower. We are hoping that our recent measures will take off a little of the pressure, particularly in the over-heated areas. But we do not want to go too far, for it is part of our policy to cure our economic ills by increasing productivity. This means reducing restrictive practices, and considerable unemployment is not conducive to an acceptance of a reduction of these practices. This is something we always have to bear in mind. We might cure some of the difficulties facing us by forcing unemployment up to 4, 5 or 6 per cent., but that would only create other difficulties. And one of them would be that no trade union would be happy about removing a restrictive practice if at the same time the members of that union had to fear unemployment as a result. Restrictive practices were the child of unemployment. They followed this fear of unemployment, and it was thought that the best way to ensure that employment would always be there was to create a restrictive practice which now we are seeking to remove entirely. Noble Lords have said this to-day, and I support them absolutely.

Despite a working lifetime of trade union experience I have a feeling that eventually this policy will succeed, but we must never let up in our advocacy of it and I am bound to praise the work of my right honourable friend the First Secretary. He has kept hammering away at this from the day of the signing of the joint Declaration of Intent in December, 1964. This is just what has to be done, and my right honourable friend has kept pounding away, if I may use a word which was effectively used elsewhere on Monday last.

Just how right he is to do this was, I think, highlighted particularly by the noble Lord, Lord Carrington, and also by the noble Lord, Lord Byers. They pointed to the fact that, while we understand when a crisis takes place, and we appreciate that there have been recurring crises since the end of the war, the ordinary man in the street does not have a clue. I have often found this to be the case when going down to the people in the country. Up here, either in your Lordships' House or in another place, I have felt that I was existing in a condition of crisis, but when one goes down to the country one finds that life is pursuing its ordinary, placid course and there is no feeling in the people there that this is something which must be tackled. Our big problem is how to get the story over and the necessity for ensuring a productivity, prices and incomes policy. We must try to ensure that everybody knows something about this and will appreciate the consequences of it and take the necessary actions to ensure that it is the success that it simply must be if we are to cure our long-term balance-of-payments difficulty. It is something we have had for so long, but we just cannot go on for ever living with a balance-of-payments difficulty. We have to get the balance right, and it must be right on our side.

Something has been said about some of the actions that we have taken lately. I do not want to say much about them. Investment incentives and the setting up of the Industrial Reorganisation Corporation are measures designed for the longer term, but I will now refer to the Industrial Reorganisation Corporation. On a Variety of grounds noble Lords have criticised the White Paper and what it proposes to do. Some have said that the present institutions in the City are enough to obtain the necessary concentrations without the State dabbling in this field; that it will bring about subsidised competition with private enterprise, and is, and will be, a backdoor into nationalisation; that it may make life difficult, if not impossible, for those enterprises which have to cover their costs and show a profit. My Lords, as I see it, and as the Government see it, the facts are that although British industry has giants like Shell, Unilever and ICI, it has not in general got companies of a comparable size to those in America, and even some Swiss, German, Japanese and Dutch companies have the edge on us in the scale of operations.

There is also the fact—and I am sure this will be known to noble Lords present—that there- seems to be a tendency on the part of many British companies to diversify, rather than to concentrate, so that the competing unit of operation is often much smaller than the size of the company would seem to indicate as being the best size. We have to accept as a fact that if we are to compete successfully we must get the scale of operations right; and upon the scale of operations depends to a large extent the rate of technological advance.

We have some doubt—and this is the reason for this White Paper—whether the City can entirely do the job that we want done here. We aim not only at the mechanics of mergers where it appears desirable in the national interest that there should be mergers, but someone has got to work to persuade the people concerned; and this will be, we say, a major part of the job of the A clear declaration about the whole thing has been made by the First Secretary. He has made the point—and he has stressed it—that it is not the purpose of this exercise to nationalise by the back door.

On the point that it makes life impossible for those enterprises which do have to cover their costs and show a profit, the White Paper makes it quite clear that the Corporation will not put money into ventures which have no prospect of eventual prosperity, because the Corporation will be able to make the case for the viability of the projects. In most cases that will be taken care of by the ordinary machinery of the market. We think that the fears expressed about this proposal are exaggerated. It is bound to contain some risks, but we think the risks worthwhile in the interests of the country. This is the case that we put.

But the best case for this Corporation, I think, was put by the noble Viscount, Lord Chandos, to-day, when he said that what prevents mergers taking place is not a lack of money but rather that the heads of firms do not like the look of one another. What a cynical observation: not that the national interest matters, but that the head of one firm that is talking about merging with another just does not like the look of the face of the opposite number who might be coming together with him! What nonsense! The noble Lord, Lord Aldington, shakes his head, but this is precisely what the noble Viscount said, and he said it with a serious air.

LORD ALDINGTON

And it is quite true.

LORD CHAMPION

If that is the case, surely this provides the justification for somebody stepping in and saying, "We think you ought to merge", and persuading them to do it, over and above dislike of one man for the face of another, because it is the right thing in the national interest.

LORD ALDINGTON

If I might defend my noble friend (he asked me to apologise to the noble Lord that he has had to leave), the noble Lord has used derisory words; but it is a fact that personalities in mergers are very important to the success of management; and that is the point my noble friend was trying to make.

LORD CHAMPION

If he was making that point, he made it so badly that I did not understand it, and I am sure no one else did. What he said was pretty clear to us who were listening.

To turn to investment incentives, the subject of the other White Paper, the reaction has, I think, been generally favourable. There have been some criticisms, some dissenting voices. This was inevitable in circumstances in which we have proposals which discriminate in favour of a broad section of the economy. The Government think it right to use these tools. This is one of them, which will enable us to give special emphasis to manufacture and the needs of regional development. The new scheme is designed to do three things: to distribute Government incentives in a more effective way; to concentrate the benefit where it will do the most good to the balance of payments, and, thirdly, to give more punch to the Government's regional policy. The new incentives will be more effective because the benefits will be certain, and in due course given more quickly. There is a great deal more that I could say about this, but time will not permit.

The noble Earl, Lord Dundee, talked about our failure in National Savings, and a failure nationally to save as much through the normal methods as has been the case in the past. I agree, and I do not like this a little bit. I am wondering whether the Government ought not at this time to be carefully considering whether there ought to be some alteration in the savings certificate method, and whether the rates of interest are such as to attract savings in the direction that we should like to have them. There is, of course, a tremendous amount of saving going on. My noble friend Lord Cohen of Brighton this afternoon made it quite clear that his society had got more money than they could do with flowing towards them. These are savings. We should like to see some of these savings coming directly into the service of the country through Government institutions.

I have spent a fair amount of time this evening dealing with some of the difficult aspects of our economic policy and our economic life. I have to end on a more optimistic and hopeful note. But I must not try to create a state of euphoria in regard to our economic position, because of the necessity of trying to get people to accept productivity, prices and incomes policy. But sterling has made a remarkable recovery. I do not see why we should not say this. At the end of 1965 it was above parity with the dollar. It was a long time since it had been previously. Exports last year were up 7 per cent. in value and nearly 5 per cent. in volume, the main increase coming in the third and fourth quarters of the year. We are hoping that the trend will continue. There has been a marked slowing down in the value of imports—this was a pleasant feature of the year 1965—and it was only 1 per cent. above 1964. The visible trade deficit in 1965 is provisionally estimated at about half that of 1964.

We have made considerable progress towards our goal of being in balance by the end of 1966. But to get really in balance as a result partly of undesirable restriction and deferment of desir- able public expenditure is not our simple and sole aim. Our aim is to achieve the targets set out in the National Plan, and to that end this Government will continue to bend their efforts.

9.59 p.m.

LORD CARRINGTON

My Lords, I have made one speech; I do not intend to make another. I rise only to thank those noble Lords who have taken part in this debate, and to congratulate in particular those who have been courteous enough to stay behind and listen to the speech of the noble Lord, Lord Champion. I wish particularly to thank the noble Lord, Lord Champion, for the courteous, careful and painstaking way in which he has answered this debate. The noble Lord is so disarming that it is impossible, even if one tries very hard, to get angry with him.

However, I will say this. I have the gravest doubts that he is right when he assures your Lordships that members of the Government and the Civil Service will study very carefully the Hansard Report of this debate. I do not think for a moment they will. I will give him this undertaking: when we have our next economics debate I will have read this debate through, and I shall be very interested to see whether the forecasts made on this side of the House are right, or whether the rather more optimistic forecasts made by the noble Lord in his closing words are right. In the meantime, I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.

House adjourned at ten o'clock.