ECONOMIC GROWTH AND PUBLIC EXPENDITURE

HL Deb 26 April 1967 vol 282 cc530-90

2.40 p.m.

LORD BYERS rose to call attention to the problem posed by the estimated increase in public expenditure for 1967–68, to the present slow economic growth in the economy and to the resultant adverse effect on the investment potential of the private sector; and to move for Papers. The noble Lord said: My Lords, we on these Benches have tabled this Motion to afford the House an opportunity of discussing what we believe to be one of the major economic issues facing the country to-day; namely, the very marked increase in the amount of money which the Government propose to spend in this financial year, amounting to about £660 million, at a time when we expect very low or slow economic growth. The consequence of this proposed expenditure, even if we get the 3 per cent, growth rate guessed by the Chancellor, means that there can be very little additional investment in the private sector, because the increase in our resources will have been mopped up by the Government.

May I make it clear that we do not take the view that there should not be any increase in State expenditure. We must confess that we are among those who from time to time urge particular proposals on the Government which involve spending more money. Indeed, in the present year I believe that the increased expenditure includes provision for some improvement in pensions, which is a desirable aim and which I think all of us would support. Nevertheless, we should ask ourselves: are we justified in permitting the State to monopolise the additional resources of the nation when, if they were shared equitably between the public and the private sectors, there would result a far greater increase in our national wealth?

Generally speaking, I think most people agree that it is the private sector which lays the golden eggs, and it is the public sector which makes the omelettes. Some of the omelettes are very tasty, and we like them, but some of them are quite wasteful of the eggs which are contained in them. The irony of this situation is, I think, to be found in the Chancellor's view that he must keep up public expenditure this year because private enterprise has cut its capital investment programme. This seems to me to be absolutely illogical.

The Chancellor stated in his Budget speech—and he is right—that it is very important to keep a proper balance between public and private expenditure if the country is to sustain reasonable growth. That is in column 989 of Hansard of another place for April 11 this year. Then he went on to say that "public expenditure will rise rapidly this year," but that he did not regard this as a cause for alarm because private investment was declining. He implied that in these circumstances we were all very lucky that he was at hand with this large public expenditure programme to take up the slack. Then he went on to say that when private investment "recovers"— this is a good one!—public investment will make way for it.

There are two main points here. One is that the reason why private investment is declining is that the brakes were slammed on to the full by the Prime Minister on July 20; and the second is that high public expenditure one year and low the next, with private enterprise doing the opposite, is not striking the sort of balance which is good for the economy. Noble Lords will remember that the Chancellor made a point of saying that public expenditure would have to be "reined back", as he called it, in good time as private investment increased or recovered. If the Government really believe in a mixed economy—and I think they do—then I think we need a balance which is achieved by a proper sharing of the resources each year. We need selective encouragement, especially in the fields of import saving and exports, to get some sort of reflation going in these fields in the private investment sector.

As to the growth rate itself, surely it is vital, and I think it should be the top priority for this country to-day, to see that by every possible means we get a sustained high growth rate. The Chancellor hazards a pretty guarded guess that a 3 per cent, growth rate will be achieved and this, he estimates, will increase the gross national product by £1,000 million. O.E.C.D., on the other hand, at the end of last year predicted that there would be a nil increase in British economic growth in 1967, compared with 4½ per cent, for Common Market countries as a whole.

The National Institute predicted a 0.3 per cent, growth for 1967; the London and Cambridge Economic Service predicted a 0.34 per cent, increase; the London Business School predicted a 0.4 per cent, increase. The Economist Intelligence Unit was more optimistic, and gave a figure of about 1.5 per cent, over the last nine months of the year; and the London and Cambridge Economic Bulletin gave a rate of growth of 2.5 per cent. I do not know whether the Government have the views of Professor Richard Stone, of the Department of Applied Economics at Cambridge, where I understand they are building a computer model of the economy which ought to give some indication in this field. At any rate, all the estimates I have quoted are below Mr. Callaghan's view that we are going to get a 3 per cent, growth, which in my view is the minimum needed if we are to sustain any stability in our economics. I wonder whether the noble Earl the Leader of the House, who is to reply, could give us some background to this figure of 3 per cent., which seems to be so important from the point of view of the economy.

The Economist goes so far as to say that: If a modern industrial country follows the right fiscal and other policies "— the policies of the Economist, presumably— with incentives to investment, to exports, to much more efficient utilisation ol labour, to mobility from stagnant industries to growth industries, to risk-taking and daring, it can achieve an annual growth in productive potential considerably above 3 per cent. But it then says: If it does none of these things, the automatic growth in productive potential is likely to be nearer to nought. This is a figure which I think the O.E.C.D. are still putting forward. The Economist goes on to say: the tragedy of the 1967 Budget is that it gives new incentives to none of these things and this is the year when private industrial investment is going down.

The N.E.D.C. said in no uncertain terms to the Chancellor that if public expenditure was allowed to go on rising, particularly at a time of little economic growth, then private investment would suffer. This in turn, they said, would be bad for Britain as a whole. This is precisely what has happened. I do not think this is an argument of public expenditure versus private expenditure. It is an argument for getting the balance right, because I believe that through the right balance we shall get the stability which this country needs.

We have at the moment a projected 10 per cent, decline in private investment, an 8½ per cent, increase in public expenditure, and very little chance of getting anywhere near the Chancellor's 3 per cent, growth rate. I do not believe that we can go on like this and avoid inflation. The change in balance obviously cannot be done overnight, but at least we ought to recognise that a proper balance is needed and we should try to get the economy into this right balance as early as we can. I believe that leaving it until next year, as the Chancellor intends, is going to be too late.

There are certain areas of public expenditure which I would say require a new examination, and I should like to harp once again on the necessity of trying to save money through greater efficiency and through a reduction of wasteful spending. We on these Benches have been pleading for many years for a system which at least tries to cut out waste before the money is committed, instead of leaving it to the grand inquest of the Comptroller and Auditor General. I know that this is difficult, but I believe that we are lagging very far behind other countries in what might broadly be described as the area of the National Audit. There is a very good book written in the last two years by Mr. E. L. Normanton—and no doubt the Government are familiar with it—on The Accountability and Audit of Governments, in which the practice in other countries is clearly set out.

I would say that we are way behind many of the leading countries in the world. I am convinced that one day there will have to be an organisation in this country, answerable only to Parliament and independent of the Executive, which will have the task not only of seeing that public money has been spent as it was intended—and in this field I think we are pretty good in this country—but, what is much more important, of building up a fund of experience in how money should be spent to get the best value before the spending takes place. There is far too much waste for this reason in this country to-day. I think this organisation could pioneer procedures which would avoid what happened in the cases of Ferranti and Hawker Siddeley, or what appears to have happened in the building of an atomic power station recently. If the experience were there in a unit independent of the Executive and answerable only to Parliament, I believe we could save tens of millions of pounds every year, if not more. What is needed, I believe, is the constant policing of estimates and commitments.

Such an organisation could be charged with carrying out efficiency audits, and not only of Government Departments and local government. In this connection, there is an interesting report in the Guardian this morning about the National Union of Public Employees in which it is pointed out that wages in local government are really kept down because of the inefficient way in which manpower is used in local government. All this is bad for the worker, bad for the ratepayer and bad for the country. There is tremendous scope for an efficiency audit in local government. Businesses that want to get Government contracts should be prepared to submit themselves to an efficiency audit to see that they are in fact using their manpower properly. This is a perfectly normal procedure in the United States, where consulting engineers go into the various businesses which they intend to use if they tender successfully in order to satisfy themselves that the standard of efficiency is high enough to do the job properly. I believe that in this field there is a tremendous scope for saving. There is now a spending of something like £11,000 million a year by the Government, and if my mathematics are right 1 per cent. of that is over £100 million. It should be possible to get a saving of this order of magnitude, or even more, if we really organise ourselves to do it.

My Lords, the second field for examination which I should suggest—and here I am on very dangerous ground—is the reconsideration of certain complete policies. I will mention only a few. It would be folly, I think, to cut expenditure on our road programme, because this makes a direct contribution to improved distribution of goods and services: it helps us in our exports, and so on. The planned expenditure, as I understand it, is something like £250 million a year for the next three years. I would suggest that we ought to look once again at the question of imposing tolls on our motorways, on both those that exist now and the new ones. This, I believe, would bring in something like £80 million. I know that the motoring organisations would be up in arms—I cannot see the noble Viscount, Lord Brentford, here—but I think that after a time they would simmer down if we could create a revolving fund which would take some of the weight of expenditure on the vital road programme off the Chancellor of the Exchequer.

The second area is obviously defence, and I want to ask the Government this question. When are we going to see some genuine savings in defence expenditure, and not just paper savings—not just savings a long way in the future? In the last few weeks there have been a considerable number of conflicting statements on our policy East of Suez. I hope that fairly soon we shall have an announcement from the Government giving us an estimate of what actually can be saved in the defence field, with particular reference to Malaysia, Singapore and East of Suez, with the exclusion of Hong Kong.

The next point I should like to make concerns the Health Service. It is a brave man who proposes savings in this field, and I do not want to be misunderstood. I must confess that in the House of Commons I was a leading exponent of the opposition to the "bob on the bottle" introduced by Mr. Aneurin Bevan when he was Minister of Health, but I am worried about the way in which the bill for the Health Service—and this also goes for education, about which we on these Benches are equally concerned—is escalating so rapidly the whole time. I am afraid that in the absence of real, underlying economic growth in this country, there will one day be panic measures, and savage cuts thoughout the whole of the Health Service and the Education Service. This is why I think it is vital that we should have a proper plan, a proper programme, which does not go rapidly up one year and is then savagely cut back the next year to allow private investment to take up the slack. This is what comes out of the Chancellor's speech, and it worries me a great deal, because what is needed in such services as health and education is some form of stable, regular increase in the whole programme, and not that it should suddenly go up and then suddenly have to be cut back. This is the equivalent of "Stop-Go" in a narrow sector of the social services.

Therefore, I would say that it is vital, in good time, to examine and re-examine areas in which genuine savings can be made, so that the programmes as a whole, both in health and in education, are not suddenly put into jeopardy by a wave of savage cuts. I am not proposing, for instance, that in health we should necessarily go back to paying for prescriptions, but I would rather do that (particularly because we are now, I think, close to providing compensation in the way of social services to large families and those below the poverty line; and we should certainly have to compensate pensioners) than suddenly put the Health Service in jeopardy right the way through. I think we ought to be looking regularly for genuine savings that can be made in order to get some sort of stability into the system.

Another emotive and delicate matter is the money spent on overseas development and aid. We on these Benches are very much in favour of this country carrying out its moral obligations to less fortunate territories and people overseas, particularly—and I stress this—in social welfare and in education, and I would suggest no cuts or alterations whatsoever in that aspect of it. But I should like to make two points. The first is that one sees from the Estimates that a great deal of our help appears to take the form of loans. I would ask—and there may be a technical answer to this question, and a good one, but it occurred to me when looking through the Civil Estimates the other day—whether it is necessary for all this money to be put up in actual cash. For instance, could we not, through the Government, offer guarantees to certain areas overseas which would enable them to raise money from regional or international institutions? These guarantees could take the form of the Government standing behind the repayment of interest and the schedule of repayment of the debt when the debt has to be repaid over a number of years. In the case of specific projects, I believe that the provision of money in this way, perhaps by the World Bank, guaranteed by the Government, would certainly mean that the projects themselves would be very carefully vetted by the technicians, the technologists, of the World Bank, to make quite sure that they were viable.

In the same way, I would ask the Government this question. In the territories overseas where there are specific development projects, could not more be done to encourage British firms to operate in those areas by supporting them with a financial guarantee from the British Government, which would enable them to raise the necessary funds both locally and from world institutions? It seems to me that it is in this field that we might have some temporary relief from the strain (which is, I think, over £200 million) without in any way jeopardising the fabric of what is essentially something we ought to be doing; namely, helping people in overseas territories.

Finally, I want to refer—and here I feel I am following the noble Lord, Lord Oakshott, in his Question to-day—to what I regard as the shocking waste involved in .the whole machinery of the selective employment tax. I want to plead with the Government to look at this again. I was extremely disappointed to see that the Chancellor of the Exchequer just pushed it on one side in the Budget. I should have thought that we had had enough experience now to realise that we have been going absolutely along the wrong avenue in the past year. Here we have a system in which £1,130 million is collected by Government agencies and then, I think, £990 million is paid out a little later on by a different Ministry. The waste of man-hours in this must be tremendous. Just think of the figures! The accounting here is not done in hundreds of milions, but in thousands of millions. Looking through the Estimates one finds some remarkable examples.

I think we should bear in mind that the Chancellor said last year that the object of this was to increase the cost of labour in services and to reduce the cost of labour in manufacturing, with a view to geting a better use of manpower. What has happened? Your Lordships' House pays £7,000 a year, according to the Estimates, in S.E.T. I should like to know in which category, on behalf of whom, is this sum paid? I am not asking anybody to feel guilty about this, but it is a remarkable thing that somebody, somewhere in this place, is logging down the individual payments and adding them up to £7,000 a year. I should have thought that somebody, at least in this House, would have taken the trouble to see that we have not more and no less people employed than we need for the efficient discharge of our duties. Are we to suggest that certain people on whom we pay S.E.T. ought to go to a development area and help make "one-armed bandits"?

The point I am making is that this is a waste of manpower. The Commons get landed for an even larger bill. The Treasury, according to the Estimates, pay £92,000 a year. All this must be logged up and, probably, in the case of the Treasury, paid back. I do not know whether the Prime Minister knows it, but the Cabinet Office is charged £25,000 a year. I should like to know what is going to happen when he finds out. Even the Paymaster General costs the country £32,500 a year in S.E.T. I am not being personal, but this is adding insult to injury. The Ministry of Labour seems to be "caught" for over £1 million. No doubt this figure includes S.E.T. payable on the people the Ministry think necessary to make the refunds and the premium payments which are the unhappy lot of the Ministry of Labour. Can one go any crazier than this? One finds the same thing in the Military Estimates. The Staff College have to pay—and Heaven knows how much extra work there is for civilians and soldiers in totting this up and then, probably, getting it back!

My Lords, the main point is that the balance between public expenditure and investment in the private sector, in our view, is wrong at the moment. There cannot be an abrupt change, but we ought to be looking to try to get this change in balance right. By having a more selective approach to our economy and investment grants and other things, we ought to see whether we cannot get better value for money, a better balance in the economy and a better use of manpower. And as an example of the bad use of manpower, the selective employment tax stands on its own. My Lords, I beg to move for Papers.

3.4 p.m.

LORD WINDLESHAM

My Lords, in the first major debate he has initiated since he became Leader of the Liberal Peers the noble Lord, Lord Byers, has chosen a Motion which goes straight to the heart of what must surely be one of the most fundamental problems facing the Government to-day. From these Benches we should like to congratulate him, both on his choice of subject and (if I may do so without presumption) on his speech in moving it. Of course, the Government can say that their policies are always going to be criticised by Opposition Parties and capital made, or at any rate sought, for reasons of Party political advantage. But the growth of public expenditure, has been under severe attack from outside the arena of Party politics since the increases so vividly described by Lord Byers—approximately £660 million—have become known.

The Governor of the Bank of England, Sir Leslie O'Brien, speaking to the Finance Houses Association on March 2, 1967, described "the accelerating rate of growth of public expenditure" as "the most worrying portent for the future". Then the chairman of Britain's largest industrial Company, Sir Paul Chambers, told stockholders at the annual general meeting of I.C.I., on March 30 this year, that: The extent to which millions of pounds of taxpayers' money are being used on expanding centralised Government controls and on maintaining inefficient and uneconomic activities, is not fully realised. It is inflationary and is in sharp contrast to the efforts being made in industry to increase the productivity of its manpower at all levels. Earlier in his speech, Sir Paul Chambers had said that while everything in the private sector of the economy was subject to a deep freeze, one factor, and one factor only, had been allowed to go on rising. That is Government expenditure", he said, which is beyond all doubt the main cause of inflation". And the President of the C.B.I., Mr. A. J. Stephen Brown, in Liverpool on March 9, pointed out that local government spending was racing ahead even faster than central Government spending.

My Lords, I quote these sources to show that this is not just a Party matter, but one of real concern to a large number of people who occupy responsible roles in the economy.

It might be argued, as it was by the Financial Secretary to the Treasury in another place on March 20, that these increases in public spending are the result of new policies, and it is the policies which have led to the increase in the number of civil servants and the expenditure incurred by the Government. If this were entirely true it might, I suppose, be possible to debate varying evaluations of the economic or social benefits resulting from these policies, and compare them with the harm done by Government-caused inflation in a period of otherwise total standstill. But as a complete explanation this simply will not do. It can be accepted on all sides of the House that over the last fifteen or twenty years there has been a fairly constant tendency for our system of public administration, and its cost—local as well as national—to grow in ways which may not reflect a deliberate policy by the Government of the day at all.

In my view we suffer from an over-centralised system of administration, in some aspects highly inefficient, and invariably slow to analyse itself and introduce new types of technique which could transform routine operations. For a vivid example of this from the other side of the House I would refer your Lordships to the experiences of the noble Lord, Lord Bowden, which were recorded in a debate in this House on March 2, 1966, on the subject of computers, when he had some very pertinent things to say. It is extremely difficult for anyone outside the Government or the public service to get a really accurate impression of current practice. I am sure the noble Earl the Leader of the House, when he comes to reply, will correct me if the general picture that I have pieced together is, in his view, misleading.

At the centre of the system is the Treasury. For historical reasons it is the Treasury which must authorise all public expenditure proposals before their submission to Parliament. Each year the Treasury sets out, vigorous and determined, to prune and control public spending and impose limited budgets on Departments. Each year unanswerable reasons are produced by the Departments why they must have a higher budget; that costs have risen, and that for policies to be implemented more money must be obtained. In between these annual rituals, piecemeal decisions on public expenditure raise their seductive heads.

The Plowden Committee on the Control of Public Expenditure, which reported in 1961 (Cmnd. 1432), described what Lord Plowden and his colleagues called the traditional system in these words, which are to be found in paragraph 8 on page 5: In the traditional system in this country, as it developed in the nineteenth century and has continued through the lifetime of successive Governments to the present day, the tendency is for expenditure decisions to be taken piecemeal. The individual Departmental Minister asks the Chancellor of the Exchequer for the money he needs for a new proposal of policy. If the Chancellor is content, and the new proposal is agreed by the Cabinet, the Minister can then proceed. If, on the other hand, the Chancellor says 'No' the Minister may appeal to the Cabinet. Discussion among Ministers is likely to centre on the merits of the particular proposal in relation at most to a general background of the financial situation, rather than upon competing claims on the present and future resources of the country which are represented by the aggregate of the spending policies of the Government. There are exceptions to this, notably in the handling of public investment; and at the time of the year when the Estimates are being examined the general financial background is usually brought out more sharply than at other times. But in general over the whole of public expenditure throughout the year the system is one of piecemeal decisions. The old restraints, which, as Lord Plowden and his colleagues pointed out in their Report, consisted mainly of a public opinion and Parliament deeply hostile to the whole notion of public expenditure by Government, have long since disappeared. Meanwhile the scale of public expenditure, and the purposes to which it is put, have ensured that the traditional sanctions are quite ineffective in present-day conditions.

My Lords, the Plowden Report was followed in 1963 by a White Paper, Command 2235, in which public expenditure was projected forward by five years, so that the then Government's policies and programmes could be seen in relation to prospective resources. In paragraph 3 the White Paper said that forward surveys of planned expenditure in relation to future resources had been in use since 1961, or in partial use, when they had been foreshadowed in the then Chancellor of the Exchequer's Budget speech. These forward surveys had now become an established part of the Government's machinery for the appraisal and control of public expenditure. In addition changes have been made in the form of the Estimates, Appropriation Accounts and Exchequer Accounts to bring them into a closer relationship with the National Income and Expenditure Accounts. Attempts have been made to set financial targets for the nationalised industries, and from time to time the Treasury has extended the financial authority that it has allowed to other Ministries. But despite these changes, and the progress made, few people would claim that the traditional system described by Lord Plowden's Committee is dead and buried to-day. It is by almost general consent an old-fashioned, clumsy and makeshift system. It is one which, moreover, is in conflict with some of the underlying principles of financial decision-making and management accounting. It is one which, at all levels of public administration, perpetuates the distinction between the administration of policy and the control of expenditure, And finally, it is one which takes very little account of the value of what is actually obtained once the initial expenditure has been authorised.

In support of these criticisms I should like to refer to the very impressive evidence given to the Fulton Committee on the Civil Service in December of last year by a former senior civil servant, Mr. J. H. Robertson. In paragraph 72 of his evidence Mr. Robertson wrote: …the present system of financial control and audit by Parliament through the Treasury and the Comptroller and Auditor-General is diametrically opposed to modern principles of financial decision-making and management accounting…. These are based on the concept that the control function in an enterprise is concerned with steering and measuring its performance, not with piecemeal decisions and haphazard inquisition. Mr. Robertson went on to make out what, to my mind, is a convincing case for integrating administration and financial control at all levels in the public service, arguing that day-to-day control of expenditure must be transferred from specialist financial staffs to the managerial staffs who are actually concerned in the administration of policy. In paragraph 75 he had this to say: The present system of detailed financial control by Parliament and the Treasury means that the cash system of accounting has still to be used in accounts of Government expenditure. The Crown is given specific sums of money to spend on specific objects. The purpose of the accounts is to show that these sums have been spent faithfully by the servants of the Crown on the objects for which they were voted. It has never been the purpose of the accounts to show that the Crown was getting good value for the money it spent. Parliament has not historically been interested in that. Well, the time has surely come when Parliament must get interested.

What, then, needs to be done? We on these Benches are quite clear about the urgency of the question which has been raised this afternoon by the noble Lord, Lord Byers. We, too, want to see growing programmes for hospitals, roads and other public services—and we mean to get them. To do this we have to show how it can be done. Greater selectivity in social welfare is, clearly, one way of getting a better balance between benefit and cost. We shall await the results of Mr. Patrick Gordon-Walker's survey in the summer with great interest. The noble Lord, Lord Byers, itemised four or five other headings under which specific savings might be made in a number of Government spending programmes. Nevertheless, I would argue this afternoon that a more fundamental approach is required to the whole problem of Government spending in relation to the existing system for the control of public expenditure.

Last year, in its Election Manifesto, the Conservative Party pledged itself to a war on waste in Government. The proposals then made for a completely new approach to the control of public expenditure are now being taken a significant step further. Last month a special unit was set up by the Leader of the Opposition, Mr. Heath. This is headed by Mr. Ernest Marples (whose achievements in housing, at the Post Office, and in road and rail transport need no elaboration), assisted by the former Director of the Conservative Political Centre, Mr. David Howell, and a small, full-time staff.

The terms of reference of this unit are central to the Motion we are debating this afternoon. They are as follows. First, to make recommendations as to how to improve the speed and effectiveness of decision-making in Government. Secondly, to make recommendations as to how better value for money can be obtained in the public sector. Thirdly, to make recommendations as to what changes are necessary in systems, controls and techniques in the public sector, especially in respect of Treasury control, so that the improvement of efficiency is continually a process of management. Fourthly, to make recommendations upon the application of "best practice" in modern management throughout the world to Government in Britain. Fifthly, to make recommendations on the changes necessary in the recruitment, training and deployment of staff in the public sector to achieve these aims, including the creation of suitable opportunities for the innovator. My Lords, it is innovation that is needed, not only in traditional ways of doing things, but in traditional habits of thought, which are harder to change.

It is easy to think of financial controls as restrictive. In a sense of course they are; but they need not necesarily be dampening and negative. There are other and better ways than the arbitrary and disruptive method of cutting back estimates which those responsible for their preparation sincerely believe are the minimum expenditure necessary to get the job done properly. Not only is practice ineffective, in that it can often be got round by a whole series of arguments, but it can also do great damage to confidence, resulting in frustration and cynicism inside a Government Department, just as it does in a business organisation.

There are now alternative and more sophisticated ways of bringing public expenditure under control. I will mention only two. The first is the device of the formal cost reduction programme, and the second the use of the Government's purchasing power to save money and induce technological change. The cost reduction programme is an innovation that should be examined by the Government very carefully. I look forward to the time when every Minister, as the political head of his Department, assumes personal responsibility for drawing up each year a formal, written programme for the reduction of costs. In order to prepare this programme, a systematic review will be undertaken, in terms of relative priorities, of all spending activities for which his Department is responsible. Major expenditures will be subjected to rigorous scrutiny in terms of cost and benefits. Low priority activities will be identified, and proposals made for their elimination or curtailment or for their replacement by less costly alternatives. Specific saving goals will be itemised, and independently verified when achieved.

Does this sound too far-fetched and removed from the realities of governmental life? Formal cost reduction programmes were started in the United States Department of Defence in the Autumn of 1962. In the fiscal year 1963, the verified defence cost reduction programme had cut 1.4 billion dollars from defence costs; in 1964, 2.8 billion dollars; in 1965, 4.6 billion dollars, and in 1969 the estimated savings will be 6.1 billion dollars. All this is on defence costs only, excluding the space programe, in which further savings have been made.

As a result, in 1964 the President extended cost reduction and management improvement programmes to cover all governmental operations. By directive, each department and agency head is required—a strong word—to put into effect and assume direct supervision of a formal organised cost reduction programme. By September 1 of each year every department and agency head must report to the President on the cost reduction goals he has established for the current fiscal year and for a minimum of one further year ahead. I have obtained a copy of the Bureau of the Budget Circular A.44, which sets out full details of the scheme and the headings under which department and agency heads are required to report to the President. If this document is not already known and familiar in Whitehall, I hope that the noble Earl the Leader of the House will ensure that it receives the study it deserves.

Secondly, there is the use of the Government's purchasing power to save money and improve performance. Here, the key must be better methods of Government contracting. The Government should apply their purchasing power to induce technological change by encouraging such techniques as "value engineering". There should be a further sustained movement away from the traditional cost-plus or fixed-fee types of contract. Too often these result in lagging timetables and overrun in costs. Here, in passing, I might remark that the Government's misguided notion of "reasonable profit" is leading them in the wrong direction. Post-costing, which, following the Bristol-Siddeley affair, is now the fashionable approach, only encourages the verification of what has actually been spent. It does not provide the incentives which can reward good results by sharing the profits on the original contract price with the Government. Nor does it penalise bad results in terms of performance, delivery or cost.

In conclusion, I say to the Government that the great lesson of their failure since 1964 has been the "13 wasted years" of Opposition spent in not doing their homework. Now, after two and a half years, they are waiting on Royal Commissions and Committees of Inquiry into the Civil Service and Local Government, and no doubt we shall be hearing from the noble Earl the Leader of the House something about these two bodies. The Government are looking into the working of Parliament, and even into the working of your Lordships' House. But what indication is there that they have any real appreciation of what is involved in reforming the management structure of government? A far more vigorous and radical approach, taking into account the managerial skills which now exist, is needed if public expenditure is to be restrained, and the public is to get value for money. As I have shown, on these Benches we have positive proposals which we are ready to see put into operation now. What is the Government's solution?

3.26 p.m.

LORD SAINSBURY

My Lords, I should like, if I may, to concentrate what I have to say largely on the subject of public expenditure. Government spending is usually assailed on three separate grounds. First, there are those who hold the doctrinaire view that all increases in public expenditure are undesirable and all increases in private expenditure are virtuous; secondly, there is a body of opinion which accepts the need for raising the level of Government spending but criticises the Government's order of priorities; and thirdly, there are those who concentrate their attack on the Government's alleged failure to get value for money.

The doctrinaire view I do not regard as valid grounds for criticism. While I agree that the right balance between public and private expenditure, as between consumption and investment, is difficult to achieve, I consider this doctrinaire attitude entirely out of tune with the modern world. It was this attitude of mind that, in my opinion, was largely responsible for inadequate investment under Conservative Chancellors of the Exchequer in housing, in education and in a modern road transport system.

There can be no real argument about the general desirability of a high level of public expenditure. The only valid grounds for debate are whether the money is spent in accordance with the right order of priorities and whether the Government are getting value for money. It is on these grounds that the Estimates for 1967–68 do not appear unreasonable. It is a very common political habit to say that the Government of the day are spending too much public money, and at the same time to criticise the lack of houses, schools and hospitals, the slow progress in building new motorways and the shortcomings of our social services. Most of us, even in your Lordships' House, are at times guilty of this inconsistency. But it is not enough to criticise the amount of money spent. The critics are also under an obligation to suggest where the savings could be made.

Where would the critics make the cuts? In defence—although the largest single item in the Estimates accounts for less than 3 per cent. of the anticipated increase of £660 million? Would they reduce grants to local authorities, with the consequential effect on the rates? Would they save the £93 million increase in health and welfare services? Perhaps they would. From 1951 to 1955 Conservative Governments steadily reduced the share of the national product devoted to the Health Service. In 1963, the last complete year of Tory rule, the share of the national income spent on health was still no greater than in 1950.

The fact is that under recent Conservative Governments the share of our national wealth devoted to social services, health and welfare was very much smaller than in some other comparable countries. For example, in 1962 we devoted approximately 4 per cent. of our national income to current public Health Services, compared with 4.8 per cent. in Sweden and 4.6 per cent. in Denmark. If you turn to social security cash benefits, in 1960 the figure for Great Britain was 6.4 per cent. of our gross national product. The comparable figure for West Germany was 10.4 per cent., for Austria 9.2 per cent., for France 8.3 per cent., and for New Zealand 7.2 per cent.

Even during the last two and a half years our relative position has not improved very much. According to the Government's own estimates there are 500,000 children below the poverty line. I am sure that noble Lords on all sides of the House would agree that this should not be allowed to continue. I hope that promised Government action will not be unduly influenced by critics of public spending or by administrative difficulties.

I would also point out to noble Lords who favour our entry into the European Economic Community, and particularly noble Lords on the Liberal Benches, that should we join the Common Market in the near future we shall find that our expenditure on social services is lower than that of our partners.

In any case, we must keep this figure of £660 million in perspective. In current terms, it represents an increase of 8½ per cent., but at constant prices it amounts to no more than 5 per cent. Spending in the last three years has increased by less than 4¼ per cent. per annum and therefore the Chancellor of the Exchequer is within his target. Even the Conservatives, according to their White Paper on Public Expenditure, published in 1963, foresaw an annual increase of 4.1 per cent. between 1963–64 and 1967–68.

LORD BYERS

My Lords, may I ask the noble Lord whether he is really saying that we can afford to do this if we do not get the 3 per cent. growth?—because this is cardinal to the argument.

LORD SAINSBURY

I agree with the noble Lord. Increased expenditure on the social services must largely be dependent on growth; but the will to spend on the social services must also be there.

LORD BYERS

If the noble Lord will permit me to interrupt again, we are not trying to undermine the will: we are trying to show the way.

LORD SAINSBURY

Perhaps I may continue. Increases on the present scale are far from unprecedented. If one wanted to make a Party point, one could turn to 1960–61, when the Conservatives were in power, and when ordinary Government expenditure increased by 10.3 per cent. To make a further Party point, over 22 per cent. of this increase was devoted to defence, compared with an increase in the current Estimates of less than 3 per cent.

The Government are frequently criticised for not getting value for their expenditure. This is a charge that can be made, to some degree, against all Governments. With the Ferranti case fresh in our memory, and the Bristol Siddeley case even fresher, who is in a position to throw stones? Only perhaps the Liberal Party, who have not had to undertake the responsibilities of Government for many years. It is easy enough to criticise the overburdened Civil Service, not always adequately provided with the tools for the job, just as it is to blame the shortcomings of local government. In my opinion, what has to be realised is that in the case of both central and local government the complexity and magnitude of their task has increased since the end of the war.

At the present time, as has been already said, and as all your Lordships know, a Royal Commission is considering the structure of local government in relation to its functions; and there is also a Royal Commission, under the noble Lord, Lord Fulton, which is considering the structure, recruitment, management and training of the whole Civil Service. Surely this is the way to go about such a complex matter, and not to act without full inquiry in depth. It is easy enough to say "act" in such a complex situation as the structure and function of local government. And the reform of the Civil Service is an even more complex matter. I am sure that we all await with eagerness the Reports of the two Royal Commissions, as they may set the pattern which we should all desire for a more up-to-date administrative machinery.

Even if one ignores the strong social justification, the Estimates could still be defended on economic grounds. Most economic authorities agree that we should have some reflation during 1967, but that it must be gradual, and not lead to too great an increase in consumer demand. I believe that, in our present circumstances such reflation can best be generated in the public sector. If the Government had decided not to increase expenditure, it would merely have slowed down recovery. As the Guardian said recently: Public spending is the only major expansory force in the domestic economy at present. To cut Government spending without putting anything else in its place would therefore merely force production even lower and lead to still higher unemployment. No doubt the critics would reply that if private investment were stimulated, Government expenditure could safely be cut. However, in my own opinion, private investment is unlikely to grow rapidly unless consumer spending is increased, and the time for a substantial increase in consumer demand has surely not yet arrived.

My Lords, before I resume my seat I should like, very briefly, to deal with the oft heard suggestion that public investment is in some way inferior to private investment. I would ask the supporters of this theory to reflect whether expenditure, for example by the Industrial Research Council on technological advance in industry, or investment in ports and roads, is less productive than investment in bowling alleys, betting shops or bingo halls. I am well aware of the importance of private investment, and I am more than a little disturbed at its decline, but we must remember that public investment has an equally important role in the economy. May I say, my Lords, in all humility, that dogma is a dangerous thing. It has been defined as an arrogant declaration of opinion. I believe it is as wrong to be dogmatic about the balance of public and private expenditure as it is to be dogmatic about the role of public and private enterprise in a mixed economy.

3.42 p.m.

LORD HAWKE

My Lords, I have for long ceased to find it profitable to cast across the House pre-selected statistics, because each side can always cap the other, but I thought the noble Lord, Lord Sainsbury, put up an Aunt Sally, which he proceeded to knock down, that really does not exist. Nobody denies that public expenditure is very necessary to-day, with the Government running something like a quarter or one-third of the economy. But what the noble Lord, Lord Byers, has argued—and it has been argued by my noble friend on the Front Bench—is that just at the moment Government expenditure is going up and up and the economy is stationary, and the result is that their share is increasing the whole time, which leads to stagnation and lack of growth.

The Government have produced a White Paper (Cmnd. 2915) called Public Expenditure: Planning and Control. I do not know whether it has ever been produced before; I did not see it until to-day. Whether it is a sign of guilty conscience or not, I do not know, but, at any rate, it explains in some detail what Governments have always done, which is to plan ahead for the long term and the short term, and as the years go back the programme rolls forward. But there is one phrase in this White Paper which fills me with considerable trepidation and alarm. It is in paragraph 71, where they say: main services will be expanded on a scale which can be accommodated within the nation's resources and taxable capacity. I do not like that phrase "taxable capacity". Those are precisely the type of words which I am sure were used by the aristocracy in France in the pre-Revolution days to decide how much more money they could screw out of the unfortunate peasants. We all know that the unfortunate peasants eventually revolted; and I think we might revolt, too.

We are all Keynesians these days, or most of us are, and we believe that the economy can be regulated to a great degree by the control of Government expenditure, both in the long term and in the short term. But I think that the mistake that the Government have made since the war has been that they have attempted to control the economy by manipulation of the long-term expenditure, when in reality they ought to have done so by the short-term expenditure. After all, if you want to reduce purchasing power in this country, you do not do it by postponing building a power station that is going to take five years to build in any event. If you want to create purchasing power you do it by putting some money into the mothers' pockets through family allowances, or by increasing old-age pensions; and, vice versa, if they have too much, you take it away by that method. Control by long-term expenditure is the mistake which has run through Government economic policy since the war. The result is that their steps to reflate and deflate have always taken much too long. They have often preached this subject of having a flexible National Insurance contribution, but nobody has really done it. They have merely put it up the whole time in order to balance the charges. Nobody has ever brought it down to create purchasing power; and that is probably a step that ought to be taken at this moment.

In the short term, there are various forms of Government expenditure which I personally believe could be considerably cut. There is our old friend the prescription charges, the abolition of which did so much to knock the pound when the Government first came in. I do not believe it is proper to provide cheap meals for all school children; the money should be given to the parents of those who need it. Other noble Lords have pointed out the absurdities of S.E.T. That is many millions put on to the cost of running the country. And people tell me that the number of non-medical staff in hospitals now has to be seen to be believed, as compared with many years ago.

The noble Lord, Lord Sainsbury, talks about cutting grants to local authorities immediately resulting in an increase in the rates. It is by no means at all certain. Many local authorities are doing things which, looked at dispassionately, are somewhat of a luxury, and they could cut their expenditure. I personally would have a long, hard look at the very large number of boys and girls who are having a whale of a time at the universities, reading subjects such as economics, history and English for three years at the taxpayers' expense, subjects which they could read in the evenings while engaged in more profitable pursuits for the rest of the day. In the short-term field—there are many other examples—there are abundant opportunities for Government economy, without any increase of inefficiency in the economy. As to the long term, I pointed out the other day that I was very dubious about the long-term electrical power programme; the railway deficit is not being tackled as vigorously as it ought to be; and in some of the other nationalised industries, too, there is room for capital projects to be slowed down.

The noble Lord, Lord Byers, has worded his Motion fairly wide, and I wanted to say a few words on the Prices and Incomes policy. The Chancellor of the Exchequer has not many friends to-day, and he cannot expect to have me among them, after "soaking" me so heavily over the last two years. But I give him full marks for having the courage to maintain the squeeze for so long. I think it is essential. We all want growth without inflation. Experience has shown that this is most difficult to attain, except in a society where the growth is created by just the increase in population. The basic facts are that we all want more money for less work. The majority of us have to rely on our native genius to achieve that object, but a large minority have banded themselves into private armies called trade unions, and these, by putting pressure on the softer points in the community, can often find it comparatively easy to obtain more money for less work. Then the results achieved by the trade unions are spread all over the economy and the whole purchasing power of the economy is increased.

Out of every pound turned loose we spend about 3s. on imports, so the extra purchasing power has to be matched by more exports. When the present Chancellor took over, the position was that the purchasing power had risen beyond the point at which exports could carry the burden. All sorts of explanations have been heard, but no-one really told the truth about the situation, which was that the expendable income of the British people had got too large for it to be supported by exports, and it had to be reduced. This is, in fact, what has happened. We have heard a lot about the stabilisation of prices and incomes, and so on, but the exercise would not have worked at all unless the prices had gone up and the incomes had remained more or less stable, because the purchasing power of the country had to be reduced.

Government spending should also have been reduced at the same time, because Government spending equally calls for more imports, and in the long run, of course, the proper balance has to be obtained by more exports and fewer imports. I think we are doing extremely well in exports. I was glad not to hear the noble Lord, Lord Byers, deliver an attack on the efficiency of British industry, which I have heard him do before now. I think the amount of exports that British industry is putting out into the world is really miraculous, considering the high standard of living which the people of this country are enjoying.

I have always thought that our permanent import bill is higher than we can really manage, in the long term. We have this tremendous bill for buying the cheapest food in the world, and on top of this the present Government have now made all sorts of commitments to buy dollar aeroplanes, and so on. I do not believe that we can afford the two luxuries. We have either to make do with food that is not quite the cheapest in the world, or we have to make do with British aeroplanes. I think this question ought to be studied. I wonder how much difference £100 million spent in the shops on food here would make to the size of our import bill. Of course, £100 million is nothing to a Chancellor of the Exchequer. It is politically dynamite when it goes on food, but at every Budget a similar sum tends to go on beer and tobacco, or things which equally are essentials to the vast majority of people in this country. I think we ought to look at that aspect.

I see that there is now a growing demand for easing the squeeze on incomes. I do not believe that we can afford this, except in return for increased productivity—in the bag, not in the sky. "The trade unions are beginning to learn the facts of life, but they are in a difficult position. The whole object of their existence is to obtain more money for less work for their members; and if the existing executive officers cannot produce this there are always wolves in sheep's clothing yapping around their heels, people who are responsible to interests outside this country that are not interested in the prosperity of Britain but only in growing chaos. So at the present stage of development, whether the trade unions like it or not, they are much more able to keep their members quiet and the wolves at bay if the economy is not flat out—in fact, if it has a margin of unemployment, as it has at the moment. It is a great pity, but it is one of those facts that I think cannot be denied.

We have to try to increase our productivity and our exports, as well as to match any increase in the internal purchasing power, if we are to avoid a fresh devaluation of the pound. We have got away with it in the past with a steady inflation, but probably only because our chief competitors were doing exactly the same. In fact, some of them were inflating faster than we were, and it is doubtful how long we could go on at this game.

I wonder whether this objective of a large growth is obtainable without an unpalatable degree of inflation. There are some people, in trade union circles and outside, who reject any idea of a prices and incomes policy. They want what is called "free collective bargaining". That is a policy; but the bargaining must be really free. The present system is absurd. You have a "crack" at extracting more money from the community by collective action. You talk; and words fail, so you go on strike. If your action succeeds, you go back to work with more pay. If it fails, you go back to work with the same pay and a lot of overtime to make up what you missed.

If collective bargaining were really free, it would mean that wages could go down as well as up. In other words. the situation could start de novo, and you might not go back with the same scale as that with which you came out. Of course, every trade unionist would recoil in horror at such a thought, but that is the logical alternative to a policy of restraint. There is a third course, but it is one which none of us would have at any cost. It is that there should be so much unemployment that everyone would be only too thankful to have a job. To my mind there is no question that the best and most sensible course is the policy of restraint that is being, operated at the moment.

The other possibility, which I am sure is attractive to some people, though it would be quite disastrous to the nation, is that we should go on, with the pay going up 7½ per cent. a year, and let the inevitable crisis look after itself. If we do in fact have restraint people are entitled to ask: "What can we hope for out of it?" A number of years ago the noble Viscount, Lord Chandos, said that he would settle for a 2½ per cent. regular rise in pay every year for everybody. At that time I said that I thought that was a very good idea. I think we could manage something like that without a significant inflation—although I think there would be a little inflation; but I should prefer such an improvement in people's incomes to come from a regular reduction in taxation. This cannot come about if every increase in revenue is regarded as fair game for a scramble among the Ministers to boost their pet schemes, and if the mentality of the "taxable capacity of the nation" prevails in Whitehall.

4.0 p.m.

VISCOUNT MOUNTGARRET

My Lords, the scope of this debate initiated by the noble Lord, Lord Byers, is almost unlimited. The subject is, I believe, highly technical, and the general problem is one which in the main is best left to the technicians. There are, however, two aspects of public expenditure which I believe are very nearly unnecessary and would certainly contribute in a small way to some reduction in the gross extravagance which we all see daily by the Government of the day, and would certainly help to ease the problem to which the noble Lord, Lord Byers, has so admirably drawn our attention. I do not want to waste your Lordships' time by going into detailed facts and figures; I leave those to the technicians, as I say, and they are probably better dealt with in a specific debate on the subjects concerned. I hope very much that if my remarks have any substance at all they will be noted and subsequent action taken upon them.

The two points I have in mind are the payment of unemployment benefits, and—I am afraid to mention it again—the National Health prescription charges, which the noble Lord, Lord Byers, mentioned, as did my noble friend Lord Hawke. I suppose that in a way this is a swing at the Welfare State, which in principle is an admirable conception but, in practice, is expensive and sometimes unnecessary. I should like to deal first with the payment of unemployment benefits. There are many people in this country to whom the payment of these benefits is essential and absolutely correct. On the other hand, there are some people, I am afraid many of them, who could well do without them, and I believe it is undesirable that they should receive them. How many times have your Lordships heard or read of occasions on which fit, young, active men who are unemployed for one reason on another have openly admitted that they were quite happy to be unemployed because it did not pay them to get a job? To give an example, a man with four children and a wife who is not working—at least for the purposes of this illustration she is not working, although I am sure your Lordships will agree that most of our wives work jolly hard at all times—can draw a benefit of £9 16s. 0d. a week. If that man had been earning £15 a week before he was unemployed, he would get an extra benefit of £2, bringing his gross receipts up to £11 16s. 0d. That is 25s. more than the basic agricultural wage. If that is not enough, there are certain circumstances in which a man can get a supplementary allowance, which I believe I am right in saying is the equiva- lent of the old National Assistance. What incentive is there for people in this position to work when they may be able to get more by doing nothing? There must be something very wrong with our society virtually to encourage a section of the community not to work for their living.

I should like to take this a stage further. I feel that many people who draw these benefits may have sufficient funds on which to exist until they choose to find a job. I should like to quote my own personal example. When I voluntarily left the Army—there was no need for me to leave, but I did—unfortunately I was unable to find suitable employment. I could have remained in the Army until I found something, but I chose to leave. As the law stood, I was then entitled to unemployment benefit, and being a law-abiding sort of person I drew it. I must confess that the money came in very useful, but I doubt very much whether I would have been made bankrupt by the time I found a job if I had not drawn it, and it would have saved the unfortunate taxpayer quite a bit of money. In fact it was a ludicrous situation, because when I went to the Labour Exchange to draw the dole I went in at one door to collect the money, came out, and went in another door to try to find someone to come and "do" for me. I think it is a Gilbertian situation which should be rectified at the earliest opportunity.

I should like to see unemployment benefits stopped but National Assistance given to those who can show the need, up to a maximum of £10 a week regardless of the number of dependants, and a lesser sum, of course, for people who have no dependants. For each week after six months if a man is still unemployed there should be a reduction of 5s. a week in the assistance. I think one would soon see a remarkable change for the better in the unemployment figures, which would assist the economic growth of the country and help to cut down public expenditure.

LORD PEDDIE

My Lords, if I may intervene, is the noble Viscount seriously suggesting that the fact that a person who is unemployed can receive unemployment pay is a contributory factor towards the scale of unemployment?

VISCOUNT MOUNTGARRET

My Lords, I am sorry, but I did not quite catch the whole of the noble Lord's question. I am suggesting .that unemployment benefits should stop and be replaced by National Assistance, and I did suggest a maximum of £10 a week.

LORD BYERS

My Lords, why is it that the noble Viscount is blaming people who are out of work when the rest of us are blaming the Chancellor of the Exchequer and the Government?

VISCOUNT MOUNTGARRET

My Lords, I take the noble Lord's point absolutely. I am not blaming people for being out of work, but there are some who could be employed, who could get jobs if they so wished. There are many, as I have illustrated, who have been quite happy to remain unemployed because it sometimes pays much better to be unemployed and not work. That is the section of the community which I think ought to be considered.

LORD CROOK

My Lords, is the noble Viscount seriously suggesting the reintroduction of the means test which annoyed this country so much nearly forty years ago?

VISCOUNT MOUNTGARRET

My Lords, I am sorry, but I did not understand the noble Lord's question. Was he asking whether I was suggesting introducing a means test?

LORD CROOK

Yes.

VISCOUNT MOUNTGARRET

No, my Lords. May I continue and turn to my second point, the total abolition of National Health charges. I believe that the noble Lord, Lord Byers, was not in favour of a return to charges. I am, because it would help to reduce the heavy expenditure on prescriptions given daily by the doctors. It is a quite glaring example of how easy it is to fall victim to the temptation of getting anything, whether you need it or not, so long as you do not have to pay for it. I am entirely in favour of older people, say those over 55, having the benefit of an entirely free National Health Service. Their medical requirements tend to be more frequent than those of a younger age, and it would indeed be hard on their pockets to make them pay for all their prescriptions. But I feel that it is quite wrong for anybody who is younger and fitter, and possibly better off, to have free prescriptions. Why should they?

LORD SOMERS

My Lords, may I interrupt my noble friend. The people over 55 are not the only ones who suffer. What about the chronic cases who need constant prescriptions from the age of twenty or under?

VISCOUNT MOUNTGARRET

My Lords, the noble Lord is perfectly correct. I am generalising. There are exceptions to every rule, and each case must be taken on its merits. I do not think we are concerned with a detailed debate on the National Health Service. I am merely illustrating the general point. The noble Lord is absolutely correct, and I agree entirely. I am thinking of people who require a prescription for some ailment every now and again. Why should not they pay a reasonable sum for the benefit of this prescription? Let us put it at, say, £1 a time.

LORD CROOK

My Lords, if I may intervene, is the noble Viscount propounding the views of the Young Conservatives?

VISCOUNT MOUNTGARRET

if it were cheaper to purchase a bottle of cough mixture at the local chemist rather than go to the doctor for a prescription, it would not only save public money, but also a good deal of the doctors' time. Many doctors have a great deal of their time wasted. I know that they would welcome this sort of situation.

The fiddling excuses that many people dream up to go to a doctor's surgery to get a day off work, and possibly then go to the races, are unbelievable. The number of people who have become pill addicts, and believe that they cannot live without all sorts of pills, day and night, must be horrifying. If such people found that they had to pay for them at £1 a time, there would be a lot less of this sort of thing; fewer hours of the working day would be lost, and the "pill-ites" would not only feel, but would be, much healthier.

These two points are mere drops in the ocean compared with countless other types of unnecessary expenditure. But it is the attitude, the frame of mind, that is important. It is an old saying, but a true one that: "If you look after the pennies, the pounds will look after themselves". If the Government—the present Government or, indeed, any Government—were seriously determined to stop or reduce the ever-increasing spiral of public expenditure by attacking the many instances in all directions, however small, they would be proceeding on the right lines and would earn for themselves nothing but praise, instead of everlasting criticism.

4.13 p.m.

LORD HANKEY

My Lords, I have listened with considerable interest to much of what was said in this debate about the control of public expenditure, because, having been for a good many years of the receiving end abroad, I now realise how extremely efficiently the Diplomatic Service is administered. We have had frequent demands to cut down our staffs and our allowances, and to eliminate or reduce services to the public; and on many occasions it has been extremely difficult to do that. To-day, however, I want to broaden my remarks on this interesting Motion of the noble Lord, Lord Byers. May I say, with all respect, with what great interest I listened to his initial speech?

I agree that there must be a balance between public and private expenditure. It certainly is necessary that the Government should provide all the essential infrastructure required for the development of the economy. That means better ports, roads, railways, schools, telecommunications and all the rest. In these days of rapid development, there is no real alternative to a considerable increase of public expenditure on all those heads. I agree with a great deal of what the noble Lord, Lord Sainsbury, said on this subject. But I think that the balance of the Budget ought to be regarded as an essential tool of any economic policy. It may be undesirable to decrease expenditure at a time when the economy is somewhat in the doldrums.

When one comes to analyse it, everything depends on economic growth. If the economy is expanding all the time, the relationship between public expenditure and the gross national product has a tendency to fall, which makes it much easier to finance schemes. Our trouble in this country has been that our economy has not expanded as it should have done, and that we have so far failed to find the secret of doing that without having inflation.

Obviously, we are at the starting point of another period in which we have to figure out how to solve this problem, and I should like to know how the Government propose to start the economy growing again. Surely it is time to start thinking about this. We have seen many examples of this sort of situation, even in the 'sixties. The Italians had a major recession in about 1963. They had a tremendous job to get started again; and they did it only by unbalancing the Budget. The French had a recession, I think slightly before that. They had the utmost difficulty in starting an expansion of private fixed investment—by which I mean mainly investment in new factories and investment by industry. If my memory serves me aright, the French Administration were not allowed to unbalance the Budget, and they undertook various other measures, some of them quite subtle. But they found it extremely difficult.

Do not let us forget that we ourselves suffered a recession after 1961. We had a tremendous job to restart the economy. If one looks at the figures of unemployment, one sees that they increased all through 1962, and went down only towards the end of 1963. We had an absolute Matterhorn of a graph of unemployment; and most harmful it was. I believe that this is one of the reasons why the Conservatives are now sitting where they are. So I would stress the danger of allowing unemployment to continue. We have a rather high degree of unemployment at the present time. Great resources of manpower and genius are being wasted. I do not in the least share the views of the noble Viscount who has just sat down. I do not believe that the British working man likes being out of work; he does not like it at all. He would like to be paid more, and perhaps may not always like to have to consider the expansion of the economy in that connection; but at least he likes to work.

I would point out, as a corrective of what the noble Viscount said, that unemployment insurance represents a considerable compensatory factor in the economy. When unemployment increases, if there were no unemployment insurance then demand would greatly decrease. The fact that unemployment insurance is paid to people who are out of work keeps up demand to some degree at a time when it would otherwise be declining; it is a compensatory factor in the economy which is valuable. Of course I agree that it must he properly administered.

I should like to say something more in this connection about incomes policies. It is obvious that an incomes policy is essential in order that we may have economic growth without inflation. On the other hand, if by an incomes policy you link the increase of incomes to the increase of production, and if you do not have any increase of production, then all you are doing is to stabilise incomes at a certain level. Just as, in my opinion, the British people will not stand for prolonged unemployment, I honestly do not think they will stand either for a prolonged stabilisation of incomes. They expect their incomes to go up: they have got used to it. I believe that an incomes policy can be successful only if the Government ensure that production goes up, too. This means resuming a policy of economic growth as soon as possible.

So what is the Government's policy as regards economic growth? We obviously cannot hear fully from them to-day on that matter. But I should like to hear from them which industries the Government expect to make the grade with economic growth, and which of them they expect to remain relatively stable. I should like to know which industries are expected to contribute most to our exports—because without an increase in exports corresponding to our industrial expansion we cannot expect to remain stable, especially as industrial expansion invariably requires larger imports.

In short, I believe that it is time that we had another Plan. I know that in some quarters this word has become a vulgar one, but I do not agree that it ought to be. We now have a new machinery in being for doing this. We are indebted to the Conservatives for the National Economic Development Council. We are indebted to Mr. Brown, or at any rate to the Labour Party, for the "little Neddies", which ought to be able to produce some sort of forecast for each industry. I believe it is essential to set this machinery in motion again, and preferably to do it in such a way that the people to whom we owe money abroad do not get frightened. I believe that industry itself needs to know more about how the Government view the position. This must be a two-sided affair. The Government must know what are the industrial plans—we know that they have fallen off—and industry can formulate plans only if it knows how the Government intend to conduct the economy.

I make no apology for referring again to a "Plan", because with the machinery which exists in these days of indicative planning a plan does not represent any sort of compulsion upon industry. It is industry which makes the plans, and it is the Government who see how they can be carried out and fitted into the requirements of the economy. Therefore the idea that planning represents more Government interference does not correspond to what actually happens in these days. I consider that the United Kingdom is greatly in arrears on this matter. Almost all the members of O.E.C.D., certainly in Europe, have plans or programmes; and the ones outside, including the U.S.A., as we heard from Professor Galbraith in his remarkable series of broadcasts, relies on the very extensive plans made by the great industries. Frankly, I cannot see how the Government can foresee the growth of demand unless they know a good deal more than we have been told that they know on these subjects. What is going to happen to private fixed investment? What will happen in regard to stock building? Only when one knows all these things is one entitled to say that the Government are spending too much in the public sector.

I do not think that we are entitled to criticise the Government on this head to-day. I do not think that we have the basic information necessary to launch a valid criticism. Perhaps we do not need to cut back on Government expenditure at all. Perhaps an increase, or at any rate the present level of Government expenditure, is needed in order to keep up the level of demand and to get our economy moving again. I do not think this is very wicked or ought to give rise to alarm on the part of the "Gnomes of Zurich" and others.

I should like to try to draw a general conclusion from the rather random remarks that I have made. The great work of Keynes was written at the end of a period of acute depression. I believe that if he had written his great work today, when excessive demand has been the feature of two decades since the war, he would possibly have stated it differently. I do not believe that it is any longer sufficient to control demand in order to control the economy. I believe that the time has come when the Government must face the necessity for interesting themselves in production and in the supply side also. They have done this on a good many occasions; they are doing so in the nationalised industries, in the aircraft industry, in the ports, and in several sectors of our economy. I believe that we have to face the necessity for the Government to take a real interest in this question and, what is more, to do so in alliance with the leaders of industry.

Furthermore, I believe it is necessary that the Government should take more active steps to protect production against light-hearted interference. If some of us were to create an affray in Piccadilly and hold up 10 buses and 700 motor cars, there would be no end of a fuss—we should certainly be on the front page of the Evening Standard, and even of The Times. But if 200 car delivery drivers put one of our great export industries out of production at a time when the economy is rocking to its foundations, they are merely exercising one of their constitutional rights, even if they are acting against the wish and advice of all their leaders, including some of the best trade unionists in the world. The situation does not make sense. We have to face the necessity for protecting the production on which the growth of our economy and the livelihood of our people depend against stupid, and light-hearted interference. I believe that it is just as important to insert some such new provision in our legislation as it is to provide against monopolies and cartels. In fact, I believe that in the times in which we live it is even more important.

I believe that it is also necessary to enable our great trade union leaders to have more influence on the situation in industry. How can one expect the trade union leaders to have any great influence if a man who breaks a contract against their advice and goes on unofficial strike immediately gets National Assistance? It does not make much sense, and there ought to be some better system. Many countries have introduced the idea of contracts being justiciable at law, and in the field of labour relations many countries have industrial courts. I do not think that it is an adequate answer for the Government to say, "After all, our industrial relations are not so had." They are not so good either, and I do not think we ought to play the ostrich in this matter in the way we have been doing.

I believe that we need to get a Report out of Lord Donovan's Royal Commission quite soon, and I should very much like to hear from the noble Lord when he expects to be able to make a Report, because I do not believe that this is a subject upon which the Government can take action, except in the mid-term between Elections, and I do not think the question should be left over for another four years. Something ought to be done about this matter—and it will be a very controversial and difficult subject—in the next year and a half. This means that we want a Report from Lord Donovan's Royal Commission at least in the next nine months, probably sooner. I realise that this is asking a lot, but I think we ought to press for it.

I suggest that a new approach is necessary in all these questions of industrial relations. The great leaders of industry are just as much a part of the government of this country, in so far as it has to occupy itself with the economic situation, as are the institutions of Westminster. The same applies to the trade unions. I should have thought that the President of the C.B.I. and the President of the T.U.C. ought to be ex-officio Members of your Lordships' House just as much as the Judges, the Bishops and, in practice, the great scientists. At least I know that a great many people would be very glad to see them here and to receive their advice in our debates. To sum up, it seems to me that in the long run an incomes policy will be acceptable only in a growing economy. Otherwise, although it may be good economics, it will, I am sure, turn out to be thoroughly bad politics. We have seen the signs and portents in the recent municipal elections, and I really do not think anybody can misread them.

Another point that I want to make—I meant to make it earlier—is that on all these issues of economic growth and industrial relations, I think we have to ask the Government to put our affairs in order before we enter Europe. If we enter Europe with our affairs in their present state of confusion, with what almost amounts to an economic and social civil war going on in parts of our economy, we may make a very poor showing indeed and come off worst, and that would not be to the advantage of the United Kingdom. Obviously, we have to enter Europe, and I am sure we shall, and that is another reason why I do not believe we have much time to tackle these questions, controversial as they are, with the care and determination which they deserve. So on all counts, economic and political, I feel that we must press the Government to ensure a real resumption of economic growth, to form a plan or programme for this purpose, and to give our people some assurance that compliance with incomes policies will be rewarded by a well-controlled improvement of the economy and of living standards.

LORD SALTER

My Lords, would the noble Lord allow me to ask him one question before he sits down? I hesitated to interrupt at the moment when my question was particularly relevant, because the noble Lord was engaged on a rather close argument. He appeared to make a rather adverse criticism of the Maynard Keynes doctrine. Would he not accept the fact that Maynard Keynes, having died, I think, in 1946, was therefore no longer able to adjust his doctrine to the situation which was then just beginning? Because it was just then that the period of inflation was beginning. I suggest to the noble Lord that the reality is that Maynard Keynes had given, elaborated and defended a doctrine designed to cure a patient suffering from low blood pressure, and most unfortunately, the time when that was applying was just when the patient was suffering from high blood pressure and not low blood pressure. That really is the explanation and, I think, the justification of Maynard Keynes for what I thought the noble Lord was rather inclined to comment on adversely.

LORD HANKEY

My Lords, I am most grateful to the noble Lord for giving me a chance to make a correction.

I certainly never intended to suggest that I did not agree with Keynes. I am an ardent admirer of his and I warmly agree—in fact, I thought I said so—that if Keynes had lived now he would have slightly restated his theory, in just the way the noble Lord has suggested. I warmly agree with the noble Lord.

4.33 p.m.

LORD CLITHEROE

My Lords, I am not going to follow the noble Lord, Lord Hankey, in his most interesting speech, which I am sure your Lordships were delighted to hear. I intervene, for two minutes only, to ask the noble Earl who is going to reply to this debate to deal with one topic which I think has not been much touched upon. It is quite clear that if our economy is to be made sound, and if our currency is to be made sound, we have either to spend less or earn more, or do both. Personally, I believe that we must do both of those two things.

But to earn more we must manage our business better, both in the public sector and in the private sector, and we must also work harder and more effectively. To achieve this, I believe that we must have the right incentives, and it is on this point that I want to question the noble Earl. It is my judgment that a considerable change in taxation is necessary to provide the proper incentives for talented men and women, whether they work with their heads or with their hands. This is one of the most vital factors in our economy at the present time. I should like to ask the noble Earl what plans the Government have in mind for dealing with this question of incentives, particularly as it relates to taxation.

4.35 p.m.

LORD LEATHERLAND

My Lords, I did not put my name on the batting list to-day, because I expected that at least twenty noble Lords would desire to speak. But for the honour of this House, I should not like it to go out that only half-a-dozen or so Members had opinions which they thought were worth putting before the House and before the country on such an important question as this.

Incidentally, I am delighted that two or three noble Lords have called into this debate the name of Maynard Keynes, because I have the pleasure to be one of the trustees of a Keynes Professorship Fund, whereby in memory of Keynes the University of Essex brings over from the United States each year some eminent professor of Keynesian economics, to give us the benefit of his wisdom for at least a year. I know members of the Keynes family and I feel that there is something in what the noble Lord, Lord Salter, opposite has said: that had Keynes lived until this day there might not have been a fundamental change in his outlook and policies, but there might have been some modification to suit the modified conditions of to-day.

The main thing I want to do is to try to dispel the idea which seems to have floated around the atmosphere that our private investment is waning away almost to vanishing point. Our public and our private investment is not waning away; it is increasing rapidly and has been doing so for years past. If I may quote from the Central Statistical Office's Monthly Digest for March, we have these figures of our total capital formation: in 1961, £4,600 million; in 1962, £4,700 million; in 1963, £4,900 million; in 1964, £5,800 million; in 1965, £6,200 million; in 1966, £6,587 million. This shows that an enormous amount of our national wealth is being devoted each year to capital formation. If noble Lords suggest that too much of that is going into the public sector and not enough into the private sector, then let me quote the figures for the private sector, too. In 1961—

LORD HAWKE

My Lords, I am not quite sure, but, speaking from memory, I think the figures which the noble Lord is quoting include the financing of stocks. In other words, as the value of stocks goes up, those figures automatically go up with them.

LORD LEATHERLAND

My Lords, according to the sub-divisions which I have here, the financing of stockholdings does not appear. Naturally I stand to be corrected, though I should have thought that the authorities would include a column for stocks if they appeared. But that would not affect the general trend which I am trying to establish, and the general trend is up and up, all the time and all the way.

Let us look at the private sector of capital formation. The noble Lord will recall that in recent years there has been a deliberate reduction in stockholdings as a matter of national policy. But in 1961 the figure in the private sector was £2,700 million, in 1962 it was £2,700 million and in 1963 it was £2,700 million. There is certainly something static about those three statistics, but, as that was back in the bad old days or whatever we used to call it, I shall not comment any further on that. Then we move to 1964 when the figure was £3,200 million, 1965 when it was £3,400 million, and 1966 when it was £3,486 million. We are not dissipating our wealth in preference to spending it on capital formation. Both in the private and the public sectors we are increasing the amount of money which, year by year, we devote to capital purposes; and, of course, that is right.

That is all I want to say about that subject, except that I want to look at the year which is to come. I have been looking at the years which have passed. I know it is stated in authoritative Government publications that in the coming year there may be a reduction of 10 per cent. in the capital formation in the private sector. But I think a good deal of that will come, not in manufacturing industry but in the distributive and the service industries; and here I should like to quote from Economic Trends of the same month, March, 1967, under the heading, "Private Investments". It says: Investment in the distributive and service industries in the fourth quarter"— that is, of 1966— continued the moderate decline since the peak reached in the second half of 1964. Investment in manufacturing industry, which had not changed much since the beginning of 1965, dropped back in the fourth quarter. The latest C.B.I. inquiry suggests that fewer firms than in October now expect a fall in investment over the next year"— that is, the next twelve months. My Lords, we have been suggesting that there might be a calamitous fall-off in capital formation in the private sector, but that explanation tends to minimise that possibility to some extent.

The same trend is indicated in a further publication, Economic Report on 1966, which says: Investment by manufacturing industry slackened towards the end of 1966, but over the year as a whole was only 1 per cent. below the high level reached in the preceding year. They then go on to say that a 10 per cent. fall had been suggested, and continue: In the latter inquiry however, most firms' forecasts could not have taken into account the increase in investment grants announced in December". So although we and people outside are gaining the impression that investment in the private sector is ceasing or falling away very drastically, and even though there has been an official estimate of a probable 10 per cent. fall off in that sphere during the coming year, that 10 per cent. is qualified by those two references which, being interpreted, mean that a good many manufacturers are now revising their figures.

My Lords, some of the fall-off in investment is not due to national economic policy, is not due to any action or inaction by the Government, but has been due to the inability of British manufacturers of plant and machinery to provide the plant and machinery ordered by big British firms at the appointed date. Year by year I have read the Annual Report of the Chairman of Imperial Chemical Industries Limited, and I know that a few months ago they were unable to bring into operation some very expensive, very modernised plant which they had ordered because the manufacturers of that plant had failed to keep their delivery dates; and we have had the same kind of thing in the machine tool industry. If productive industry cannot obtain these additional and modernised tools that it is seeking, how can one expect it to expand its capital investment in the year to come? Part of the 10 per cent. reduction, as I say, is likely to disappear altogether; part of it may be due to matters of national policy, and part of it may be due to the inability of the manufacturers of tools and machinery in this country to provide the plant to consuming industry by the dates they have promised.

When we compare the amounts which are devoted to the public sector and to the private sector respectively, we have to bear in mind that a good deal of the money which goes to capital formation in the public sector is really going to be of direct, first-hand help to the private sector. The biggest capital consumer in the public sector is electricity. Where would private industry be if sufficient electric power were not provided by the expansion programme to meet the requirements of factories and mills? One of the next biggest consumers of capital in the public sector is the gas industry. The gas industry is a marvellous example of successful State enterprise, but I do not want to argue that now. I merely want to say that it is undergoing an enormous expansion and modernisation. Therefore it is necessary to spend the money on it; and a good deal of this increased efficiency in the electricity and the gas industries will result directly in increased efficiency in ordinary manufacturing industry—and probably in some reduction of costs as well.

May I now leave that? I really congratulate the Conservative Party to-day on this newly-found zeal of theirs for economy and for cutting down State expenditure, particularly as, during the famous 13 years, State expenditure went up gradually year by year, except, I believe, in the year when Mr. MacMillan cut £50 million off (with the help of Mr. Thorneycroft, I believe) and added £100 million against that £50 million cut the next year. I am glad to hear, too, of the proposal by the noble Lord, Lord Windlesham, for increasing the number of civil servants in this country, which seems to be contrary to customary Tory philosophy. He was not going to call them civil servants; he was going to call them innovators. But he was going to bring them in, all the same; and if you bring in your innovators, then you increase the pay-roll of Whitehall Departments.

LORD WINDLESHAM

My Lords, if the noble Lord will excuse me, I think that hardly does justice to my argument. If he looks at what I said in Hansard to-morrow he will see that I was discussing methods, and not people.

LORD HAWKE

My Lords, I do not think any of the noble Lord's remarks are doing justice to the arguments at the moment. Our complaint is that public expenditure has gone up with a "whump", not gradually.

LORD LEATHERLAND

I do not understand the word "wallop". I do not know whether it is a Parliamentary expression in your Lordships' House, but we will see about that. The noble Lord, Lord Windlesham, got on to a more constructive point when he said that one of the Conservative organisations outside this House was going to set up a special committee to consider how we could get better value for our money. They have the Ferranti episode, of which they were the authors; they have the Bristol-Siddeley episode, of which they were the authors; they have this power station, which is going to cost perhaps £15 million more than it ought, of which again they were the authors; and they have the TSR 2, the cost of which rose from £100 million to £500 million and it then had to be scrapped, of which again they were the authors. They have tried to console us by saying that Mr. Marples will be on this special committee. I remember how Mr. Marples's great exploit in road-making on the Ml resulted in long stretches of that road having to be pulled up and relaid soon after it was originally constructed. If the object of that particular Tory committee is to ensure that the Government get value for money, those are a few of the things they might look into.

But there is something dangerous in this move by the Tory Party. If the Tory Party is suggesting that the Government do not get value for the money they spend, who are the wicked people who are exploiting the Government? Surely it is the big capitalist firms in this country who are charging more than they ought to charge—the Bristol-Siddeley and the Ferranti cases being examples. So I do not know how deeply they will probe this question of value for money.

The noble Lord, Lord Windlesham, told us about the cuts which are very effectively being made in the expenditure of the United States Government, but he did not go on to tell us that even after those cuts have been made our expenditure per head in this country is considerably lower than it is in the United States when you have combined the Federal and the State expenditure. Of course, everybody wants to reduce unnecessary State expenditure. We have made several efforts to do so since we have been in power. We wanted to do away with very expensive aircraft-carriers and to replace them by modern aircraft. That move was opposed by noble Lords opposite. The Government are exploring the possibility of cutting down our expenditure in several overseas theatres. I am quite sure that that move will similarly be opposed by noble Lords opposite.

Of course, we all want savings; but what has emerged from this debate, I think, is that neither the Liberal Party, through the noble Lord, Lord Byers, whose speech interested me very much, nor the Conservatives, through their official spokesman, the noble Lord, Lord Windlesham, have given us a single example of a particular spot at which the money could be saved. I suggest, therefore, that they have not been as useful and constructive to the Government as they might possibly have been had they gone into more detail. It is true that the noble Lord, Lord Windlesham, told us he would put tolls on the motorways. That is one thing. It might bring in some money. Did the noble Lord not suggest that?

LORD WINDLESHAM

No.

LORD BYERS

I did.

LORD LEATHERLAND

I thought it sounded more like a Liberal policy—curb the liberty of the motor-user wherever you can. But whereas that might bring in some money, it would also hold up a lot of traffic; and whether it would be worth it in the long run I do not know, because the hold-up of traffic in in this country is already costing the economy £500 million a year.

LORD BYERS

My Lords, if the noble Lord has had any experience of travelling in countries where tolls are properly organised, in the United States and on the Continent, he will realise that it just is not true. There is no hold-up at all. All these things are automated now.

LORD LEATHERLAND

My Lords, I was a member of a county council which built a tunnel under the Thames. There are tolls there; and I can assure the noble Lord that there are hold-ups there.

LORD BYERS

The noble Lord is now apologising for his responsibility.

LORD LEATHERLAND

We built that tunnel on the orders of the Conservative Government of the day. These things have to be done; just as the noble Lord's Party very often do what the Tories tell them.

My Lords, we have not had definite, constructive proposals about saving money from either Party spokesmen this afternoon. We heard one from the noble Viscount, Lord Mountgarret. The Tories and Liberals have said that they wanted more flexibility in the welfare services. We had an example of it from the noble; Lord I have mentioned. He wants to; make nearly everybody pay for their; medicines; he wants to abolish unemployment pay; he wants each case to be considered on its merits. Surely that would mean far more civil servants, for there would have to be a means test—although he said he did not want a means test. But he wants unemployed people to go to the National Assistance Board and there would have to be an investigation into their means.

As an extra man in the batting list, I have really trespassed on your Lordships' time too much. But I conclude by saying that I think it is the general desire of all Parties to try to find some way to cut down State expenditure. I hope my own Party in Government will be able to make very substantial cuts in the Defence forces overseas within the next month or two.

4.52 p.m.

THE LORD PRIVY SEAL (THE EARL OF LONGFORD)

My Lords, I am sure that we are all grateful to the noble Lord, Lord Byers, for initiating this debate with such a strongly-argued and stimulating speech. We have listened to a number of other very interesting contributions, including that of my noble friend Lord Leatherland, who has just spoken. I have come down prepared with a fairly full Government statement in reply to the Motion on the Order Paper, and I hope not to detain the House for much more than half an hour; but if I tried to reply adequately to all the points, including for example the far-reaching and penetrating speech of the noble Lord. Lord Hankey, I should detain the House not for one, but for two or more hours. In other words, here at least I can agree with the noble Viscount, Lord Mount-garret. I am afraid that in all other respects I can only say that it is many years since I heard a speech from which I dissent so totally. But at least I can agree with him that the scope of the debate has become unlimited. I shall try to confine myself on general lines to the Motion and pick up points as best I can as we go along.

It seems to me that if we take the actual Motion, three main questions can be extracted. Certainly they were all in the minds of various speakers at various times and certainly were in the very decisive and convincing speech of the noble Lord behind me. If I may take these questions in turn, they seem to me to be these: First, is the growth of public expenditure under control? Secondly, is the total expenditure too large? There is of course the theoretical possibility that it might be too small. I do not think that anybody here argued that, but it could be so. Thirdly, within the available resources, is the balance and direction of the programme about right?

I propose to take each of those three questions in turn. First, it is reasonable to consider the effectiveness of the Government's control of expenditure. I will try to say something about the new methods of control suggested by the noble Lord, Lord Byers, and the noble Lord, Lord Windlesham, although I have not had time to consider very carefully the precise proposals they made. But before coming to their techniques I should like just to lay the main facts before the House with, I think, considerable grounds for confidence.

In 1965 the Government undertook to contain the growth of total public expenditure to an annual average of 4¼ per cent., at constant prices, over the period 1964–65, on one side, and 1969–70 on the other. That is the target the Government set themselves. The increase in total public expenditure in the coming year, 1967–68, as compared with 1966–67, is, admittedly, somewhat higher than this. At constant prices, it is about 5 per cent.; that is, higher than the 4¼ per cent. which the Government set themselves. But it is surely reasonable, in relation to the 4¼ per cent. commitment, to look at the rate of increase over a somewhat longer period than one year. I would therefore take the annual average over the three years since we have been in power, the period which starts with 1965–66 and which goes on to 1967–68.

Taking the Estimates in each case, the rate of increase in total public expenditure, at constant prices, over the period to date works out at about 3¾ per cent. per year, which is of course somewhat lower over the three years than the rate of increase which the Government set themselves. So over the three years of Labour rule the rate of increase in expenditure is somewhat lower than the target. I do not think anybody looking at those figures could argue that the Government had lost control of the rate of increase of public expenditure. I think it was the noble Lord, Lord Hawke—although I may have misheard him—who said that what worried him so much was the increase of expenditure "with a wallop". Was that the expression?

LORD HAWKE

The noble Lord was delving into his memory about the past and pointing out that the Conservative Government increased Government expenditure a little every year. I said that what we are grumbling about was not the gradual increase, but that it had gone up with a "whump".

THE EARL OF LONGFORD

It was neither a "wonk" nor a "wallop", but a "whump". Unless "whump means something slow and small, the noble Lord was quite wrong, because in fact the increase over this period has been less than in the Conservative years, which I suppose he takes as either "non-whump" or "anti-whump". The average increase in those years, 1962–63 on the one side, and 1964–65 on the other side, the last three Conservative years, was 4.9 per cent. increase; whereas in our three years the rate has been less than 4 per cent.

These things should provide the statistical background of our discussion, and indeed my noble friend Lord Sainsbury brought out most of these points very clearly. The 4¼ per cent. commitment was of course undertaken against a background of a rather more optimistic assumption about the rate of growth than that which now obtains. I will have more to say about growth to the noble Lord, Lord Hankey—not so much as he would wish, bearing in mind that we had a debate on growth not long ago, and no doubt we shall have another before we are all very much older. The Chancellor of the Exchequer made it clear in his Budget speech that he has put in hand a thorough review of public spending, concentrating on 1968–69, but also looking further ahead. In this, he will be looking for substantial moderation in the rate of increase of public expenditure. It would not be right to say that we fixed ourselves to this 4¼ per cent. on some assumption about growth and have entirely refused to look at it again when growth has not gone forward as fast as we wished. The Chancellor is having another look in the light of present prospects of growth.

The background of this review is the need to leave more room for an increase in private sector demands 1968–69. In that situation the rate of growth of public expenditure which we regard as acceptable in the coming year when private expenditure is not high would not be appropriate if continued in 1968–69. The current review of public spending may therefore lead to some downward revision in the growth of expenditure programmes. This all should be quite clearly in front of the House when your Lordships consider the Government's performance and plans. If anyone questions the Government's capacity to restrict expenditure, they could do worse than look at our record on Defence spending. The Government decided in 1965 to restrict Defence expenditure in 1960–70 to the same level as it was in 1964–65 at constant prices, and there is every reason to believe that this will be achieved. But, in fact, that would mean a reduction of £400 million on the plans for Defence expenditure which the Government found when they came into office.

Taking that as the statistical background for the discussion of Government control, perhaps I could say a word (though I have not had quite as much time as I should have wished to prepare an answer) about the suggestion of a national efficiency audit. This would carry out a function which, as we see it, is properly a part of the Government's own task: to see that the resources used by the public sector were used to the maximum advantage—that, I gather, is the purpose of the proposed audit. This cannot be sensibly divorced from the Government's job of management. The Government are, however, fully alive to the need (this brings in not only the noble Lord, Lord Byers, but the noble Lord, Lord Windlesham) for the use of all these modern techniques—organisation and method; cross benefit analysis; critical path analysis; network analysis, and output budgeting. The last one is in full use in Defence and the others are being introduced as appropriate, so I hope that the noble Lord, Lord Windlesham, will be somewhat consoled when he hears how many very up-to-date techniques are being used or considered.

LORD BYERS

My Lords, may I ask the noble Earl a very important point? I quite accept that these techniques are open to the Government, and I am very glad indeed to hear that they are being used. But the point where every Government fail is where they say that the whole matter of policing expenditure and setting up machinery which is responsible only to Parliament is a matter for the Government. No Government are prepared to surrender this autonomy, and it is only when they do surrender it to an independent body which would be responsible only to Parliament that I believe that we shall get the right policing. This is the crux.

THE EARL OF LONGFORD

My Lords, I am afraid I cannot say any more than I have said, but I am quite certain that I disagree considerably with the noble Lord, Lord Byers—

LORD BYERS

Every Government does.

THE EARL OF LONGFORD

Well, my Lords, I will not make the obvious remark that all Parties expect to be in Government. I should like to point out that the Treasury was reorganised under the Conservatives (this applies to what was said by the noble Lord, Lord Windlesham) following the Plowden recommendations, in order to promulgate new and better management techniques. I hope that the noble Lord, and indeed your Lordships' House, is not under the impression that things have been going on in the old, sweet way without any study of the most modern methods.

I should also point out, in regard to firms taking Government contracts, that all firms on Government lists are already subject to examination on technical and financial soundness, and the Government are actively examining ways of using Government purchasing power to encourage industrial efficiency. There have been some very serious miscarriages, and, as the noble Lord, Lord Leatherland, pointed out very well, the Conservatives are not in a position to throw stones. But we can all agree that none of these methods is ever perfect. No Government are ever completely up-to-date. I think we must all study every possible suggestion, and I should not like to give the impression that what has been said to-day will be completely disregarded. But I do not want to give the noble Lord, Lord Byers, the impression that the Government are going to abdicate from their responsibility for the ultimate management of the national expenditure.

My Lords, the second question is whether the proposed total of public expenditure is too large in any case. I strongly distrust anybody who dogmatically asserts—I do not think we have heard it to-day in this House but we used in times past to hear it—that there is one maximum ratio of public expenditure to national income, and that if you go beyond that, disaster awaits you. It is not easy to discover how expenditure in relation to the national income in this country compares with the same relationship in other countries, but I have asked for figures, which are offered me with some confidence. According to O.E.C.D. figures, the percentages of taxation and National Insurance contributions to national output in 1964 were slightly in excess of those in the United States, but considerably below the percentage in France, Germany, Italy and the Netherlands. The noble Lord, Lord Hankey, who knows that country so well, may be aware of these points.

Some calculations by the National Institute of Economic and Social Research have suggested that the United Kingdom devoted a lower proportion of its national product to social cash benefits in 1960 than most of the Western European countries, though again it was somewhat higher than in the United States. I hope that nobody will carry away the idea that in this country we are clearly spending more in relation to our national income on social services, for example, than our leading European competitors.

As has been said by various speakers, including the noble Lord, Lord Sainsbury, and the noble Lord, Lord Leatherland, when we come to this question of expenditure we are apt to view it in different ways at different moments. In our debates here, week after week, month after month, year after year, and whichever Party happens to be in power, the speakers belabour the Government for not doing enough for some particular subject. It may be education, penal reform, Scotland, or whatever may be the subject under discussion. The Government's virtue tends to be judged by the amount they have spent, or are prepared to spend. I would count it for righteousness, for example, in the case of the Conservatives that in their 13 years in office the money spent on education—with, admittedly, a rising child population—was, at the end of the period, rather more than three times what it was at the beginning. It was a very enormous expenditure, but I hope I shall always give them credit for it.

Many delightful tributes were paid last week to our Government for more than doubling the Arts Council grants in the last two years. I suppose that no Government ever had such generous treatment from the House of Lords as we gave last week. I will not say that that was the only reason—one reason, no doubt, was the special virtues of Miss Jennie Lee—but one obvious factor was that the Arts Council grants were more than doubled in two years. So expenditure is not always regarded as a sign of viciousness. I do not think that we need to labour that aspect of the matter this afternoon. The truth is that Government spending at something like the present level—I do not say precisely the present level—is a fair reflection of the social and economic outlook of our time.

That does not mean that we who are in Government can escape very difficult decisions when we try at any particular moment to decide on the proper division of resources between the public and the private sectors, or to strike the right balance between demand and the resources of the economy as a whole. The noble Lord, Lord Byers, laid a lot of stress on the need for balance and I entirely agree with him; but in the last resort this is the balance that the Government have to strike, and those who are not in the Government must praise or blame. The neutral Budget which the Chancellor of the Exchequer produced a fortnight ago is significant here. He judged—and this particular judgment of his seems to have been pretty widely accepted—that, despite the prospective growth of public expenditure in 1967, the growth we are focusing on to-day, there is no need for any net increase in present levels of taxation. I do not think that any speaker seriously suggested that we ought to have increased taxation. That is because in the judgment of the Chancellor of the Exchequer the total demands of the public and the private sectors, taken together, are not excessive. So there is nothing imprudent in allowing public expenditure to grow somewhat faster than the expected increase in national output.

I may remind your Lordships that the same kind of reasoning was evident in the last Government's White Paper on Government expenditure in 1963. They were planning to increase the proportion of the national income devoted to public and social spending. It was not the principle, but the application of it, which seemed to me to have gone wrong. Unfortunately, our predecessors failed to prevent the total level of demand in the economy from rising too high. Hence the balance-of-payments deficit in 1964 and all the tears and sorrows which have followed.

I have been dealing with a rather complex economic argument; but here is a simple and familiar one, which has been put before us by my noble friends Lord Leatherland and Lord Sainsbury: if public expenditure is too high, how would the critics set about their reductions? The noble Lord, Lord Byers, in his own mind, achieved a reduction of £100 million through his national efficiency unit. I do not think anybody is going to accept from the noble Lord that this is going to be done simply by a stroke of a pen. I cannot see how this saving is to be conjured out of thin air.

LORD BYERS

My Lords, I think that the noble Earl is being unfair by saying it is "conjured out of thin air". If he will read the book which I recommended, he will see the work that has been done in America and Germany, and the tremendous savings that have been effected. The noble Lord, Lord Windlesham, drew attention to the cost-reduction programmes. These are things which are on the record of history. They have been achieved.

THE EARL OF LONGFORD

My Lords, frankly I think that any Government that could make a saving of £100 million as easily as that, by setting some civil servant to read a book, would already have done it. Nothing would have been more popular. I am afraid that I do not regard it as a simple matter; and let me say plainly to the noble Lord, Lord Byers, that I do not think it can be done simply by telling us to read a book about it. The noble Lord has made one speech, and will have a chance of making another; so may I go on with the argument? I do not accept from the noble Lord that he has shown us how this money can be saved, but if he can show us, of course, we shall be delighted.

If there are going to be savings, where are they to come from? In another place, there was some disposition on the part of the Opposition to suggest that there could be considerable savings on the social services. I do not think that that has been argued this afternoon, except by the noble Viscount, Lord Mountgarret. I hope that I am not being in any way offensive to the noble Viscount if I say that I imagine his Front Bench will repudiate him as rapidly as possible, and that already the public relations officer in their Central Office is briefing the Press that the noble Viscount is not a fully representative figure, as yet, although no doubt his time will come. I fear that he will be indignantly and hastily repudiated by his own Party. That does not mean that we do not like to listen to such speeches, because we must all speak our minds in this place.

To-day we have not had from either; Front Bench any large proposals for saving money, unless we believe that the national efficiency unit will do the job. But the noble Lord, Lord Byers, made another proposal that I should like to look into. Again I cannot believe that it has not been thought of, but I myself had not thought of it, and therefore I feel that I should look into it. He suggested that we might save money on the loans to underdeveloped countries by providing guarantees instead. I will look into that point, and into other detailed points he made.

I now come to the question of whether, within the total resources regarded as available for the public sector, we have our priorities right between one form of expenditure and another. Naturally I think that we have. That in itself may not impress your Lordships. I cannot coerce anybody who differs, but let me make it plain to the House where and how our emphasis differs from that of our predecessors. Your Lordships will recall that the 1967–68 Vole on Account showed a prospective increase in Supply expenditure of £660 million. Of this £660 million, only £33 million is accounted for by defence—that is the money equivalent of an actual fall in constant-price terms.

I concede that the expansion of civil expenditure programmes was also part of the policy of the previous Government, but what I want to bring to the House is the shift of priorities which has occurred during our period. If we take total expenditure, we find that the Conservative forecast for the annual increases from 1963–64 to 1967–68 was 4.1 per cent. That was what they regarded as a reasonable increase. If we take Labour's period of office, we find that the increase is slightly lower, at 3.8 per cent. What is interesting is that under Labour the increase in defence expenditure is much less than was planned for by our predecessors. Our increase has been 2.6 per cent., whereas the Conservatives were thinking of a 4 per cent. increase each year. We have got the increase a long way below what it would have been with the Conservatives. On the other hand, with us the increase in the social and economic expenditure has been much greater—5 per cent., instead of 3.5 per cent. My Lords, these simple facts and bleak statistics reveal a change in values, a new emphasis on priorities. I think it only right that noble Lords should make up their minds about whether they approve this policy.

Before I conclude, I must say a word or two about growth. Perhaps the noble Lord, Lord Hankey, will forgive me if in this particular debate I do not say as much about this subject as I should have done in a general economic debate, and also about our incomes policy and regional policy, all of which the Government regard as fundamental. I think that the Government's aim of putting right the balance of payments can surely be accepted as the most fundamental contribution we can make to the achievement of a satisfactory level of private investment. The whole evidence of experience over the past decade shows that this is the only effective way of ensuring sound and sustained growth, from which follows an adequate demand and adequate investment. The elimination of the balance-of-payments deficit will give industrialists the confidence that they can plan for long-term growth without the ever-nagging fear that their plans will be disrupted by some future balance-of-payments crisis. Here, at least, I am sure that all the fair-minded Members of the House—and that means all Members of the House—will agree that the Government have made very satisfactory progress.

We all know about the great improvement in the balance of payments since last autumn, and the new-found strength of sterling. In the fourth quarter of 1966 we achieved a surplus, on current and long-term capital account combined, of £121 million—by far the best out-turn since 1959. Other figures have been given, and are in the minds of all your Lordships. The overall deficit, which was halved in 1965, was almost halved again in 1966. Reserves have been on a strong upward trend, and international confidence in sterling has been greatly strengthened. We are all aware of these facts. But if we are talking about the contribution to growth, this is the first essential. This is where we can begin to move forward. But until this was right it was hard to make progress

A number of reasonable questions were put by the noble Lord, Lord Byers, about this 3 per cent. The noble Lord is a highly successful businessman, and I also have served in business. We are both aware that no business, and no Government, can be absolutely sure about the growth of the business, or the national growth, over a particular period. But the Government have reached their own conclusions, on which they are prepared to stand and which I am here to transmit to your Lordships I think that Mr. Callaghan has shown himself a brave Chancellor. No honest and brave Chancellor is going to announce a figure of this kind unless he honestly believes in it. If for no other reason, I am sure he would be deterred by the fact that it would catch up with him extremely fast. So we must accept that 3 per cent. is the best figure that the Government, with all the advice open to them, can arrive at.

But there may be some slight confusion here—even, possibly, in the mind of the noble Lord, Lord Byers. It is not certain that the amount of production in 1967 will be 3 per cent. higher than the amount of production in 1966: what is said is that by the end of 1967 production will be 3 per cent. higher than it was at the end of 1966, which is a very different thing. We are not saying that the total year-on-year comparison would be as high as 3 per cent. This does not apply to all the estimates quoted by the noble Lord, Lord Byers, but I am under the impression that in one or two places he was quoting estimates comparing the total production in 1967 with the total production in 1966. At any rate, this is the figure, and if I am spared and appearing at this Box some time next year it may be that the House will have the chance of either confirming or ridiculing this particular point.

The noble Lord, Lord Hankey, wanted to know whether another plan was being drawn up. The actual phrase being used at the moment is that "a document is to be prepared" which will set out the Government's thinking on these matters. Various documents, as the noble Lord knows, have appeared recently. Certainly there is no question of abandoning the concept of planning. This simply does not begin to be considered. But the phrase given to me is that "a document is to be prepared" setting out the Government's thinking.

The noble Lord, Lord Clitheroe, asked about incentives. But I am sure that, with his great experience at the Treasury, he will not expect a Minister in the House of Lords, so soon after the Budget, to say anything new. I should perhaps say a word or two about the selective employment tax. I appreciate that not only the noble Lord himself but others have been inclined to mock the method of collecting this tax as somewhat cumbersome and expensive. But because the tax is collected as an addition to the National Insurance stamp, and existing mechanism is used, the administrative cost of collection compares favourably with the cost of collecting other taxes. So that this particular argument of the noble Lord about the tax (and I will not go into all its merits this afternoon), that it is an expensive method of collecting money, falls to the ground.

LORD HAWKE

My Lords, perhaps I might mention one point. The noble Lord is talking about perfectly straight-forward cases. But there must be many cases where a firm has to put on a stamp for some of its employees and not for others. The checking of that will be a tremendous task for the Civil Service.

THE EARL OF LONGFORD

I am giving the overall expense, as it is given to me. But I shall be happy to go into details with the noble Lord afterwards, if necessary with experts. I am advised that it is not so expensive as some other methods of raising taxes.

LORD WINDLESHAM

My Lords, before the noble Earl reaches his peroration, may I say a word? I have listened carefully to the whole of his reply, and I hope he is not going to take too lightly the proposals made by the noble Lord, Lord Byers, and myself—quite independently—on cost reduction. It is the opinion of many people outside politics, some of whom have given evidence to the Fulton Committee, that there is an area of substantial saving, between 1 per cent., and, on some estimates, as high as 5 per cent. Will the noble Earl give the House an assurance that he personally will ensure that these proposals, and the evidence brought forward this afternoon, receive consideration?

THE EARL OF LONGFORD

I will certainly give the noble Lord an assurance to that effect: that anything that has fallen from him and from the noble Lord, Lord Byers, will be carefully considered. But I hoped that he had followed what I read rather quickly: namely, a list of these new techniques which are being used or studied. Frankly, the number of them rather surprised me. It is obvious that there is a great stirring of minds on this matter, and therefore I do not pretend to the noble Lord that he has said something this afternoon that will alter the thoughts going on. Nevertheless, I assure him that anything that has come from him and from the noble Lord, Lord Byers, will be carefully considered. But to suggest that it would be possible to save 5 per cent. on the national Budget by looking into these things more efficiently, is, if I may offer a personal opinion, just misleading the public. I must say plainly that, while the noble Lord was talking of 1 per cent., it has gone up to 5 per cent. in the course of my remarks.

LORD WINDLESHAM

What I said is that I have seen estimates varying between 1 per cent. and 5 per cent. I have not argued that 5 per cent. can be achieved. I would tend to agree with the noble Earl. But this is not to deny the fact that people who have looked into this subject carefully have produced estimates of between 1 per cent. and 5 per cent. There is also the evidence of what has happened in the United States.

LORD BYERS

My Lords, perhaps I might clear up this point now, and then I shall not have to do so in my reply. I have refreshed my memory. What I said was that Government expenditure is now over £11,000 million. A saving of 1 per cent. would mean a saving of over £100 million. The noble Lord, Lord Windlesham, pointed to the American experience, which is documented and which shows that 1 per cent. is achievable. We did not say that we should get 1 per cent.; but we think it is within the realms of reality—and more—on the American experience.

THE EARL OF LONGFORD

I do not accept the American experience as binding. For all I know, they were that much worse to start with. We have already introduced a great many reforms, and a great many were introduced in the time of noble Lords opposite. Personally, I should be sorry to read headlines tomorrow which say: "Opposition Peers say 1 to 5 per cent. economies available". I think that if such headlines were to appear, noble Lords would be misleading the public. That is my opinion. But let me repeat that what has been said by the noble Lord, Lord Windlesham, and by the noble Lord, Lord Byers, will be studied with great care.

Since the noble Lord expected a peroration from me, I will not altogether deprive him of that pleasure; but I will partially do so by taking words from someone much wiser than myself.

I would myself say that the Government have already been laying the foundations of higher standards by giving priority to community services which were for so long neglected. Houses, schools, hospitals are all being built at record rates. Road building this year will be 25 per cent. up on last year. Our opponents attack us for spending more money on these projects, which are essential for creating an environment fit for our people to live in. They attack us, too, for spending more money on the social services they starved for so long. My unaided genius would not have arrived at these words. They flow from my revered Leader, the Prime Minister, and I commend them to the House as my last words to-day.

VISCOUNT MASSEREENE AND FERRARD

My Lords, the noble Earl asked how the Government might save. I did not hear the speech of the noble Viscount, Lord Mountgarret, but surely the Government could save by a more selective social service. The other day I heard of a retired bank manager who was drawing unemployment benefit. There is no doubt that there are a great many people who do abuse the social services, and I am quite sure that if these people could be prevented from doing so—and there are tens of thousands of them—the more deserving cases could get more. I should like just to make that point. I am quite sure that if the whole fabric of the social services was really investigated, and with better accounting and better management, great savings could be made without any hardship, and probably with even more benefit for the more deserving cases.

THE EARL OF LONGFORD

My Lords, I do not think the House will wish me to make a further speech. I suggest that the noble Viscount discusses these issues with his Leader, or Acting Leader, and informs us on the next occasion whether he can speak for his Party.

5.32 p.m.

LORD BYERS

My Lords, it was good of the noble Viscount, Lord Massereene and Ferrard, to give us a second summing-up speech. I do not propose to do that, but I should like to thank all noble Lords who have taken part in the debate. We started with a small cast; it was added to as we went along, and I am very grateful to noble Lords who intervened. We have certainly had an appreciative audience throughout.

I hope the noble Earl, Lord Longford, will accept the fact that there are experiences in countries overseas from which I think we can benefit. I certainly do not want to go on the Record as having said that, by reading a book, the country can save 1 per cent. of the gross national product. I think that this really would be fantastic. But there is a field quite outside critical analysis, and all these other methods we normally use, in the sphere of national audit, where I think there is a great deal to be learnt from overseas experience; and perhaps we may contribute a great deal to other countries.

I must say that I was absolutely surprised at what the noble Earl said about selective employment tax. He said it did not cost very much more than any other tax. If that is so—I do not want to re-argue this point—why are there so many more civil servants involved in the refunds and repayments and the calculations? I thought I had seen a figure that something like 14,000 had been taken on—it may have been 4,000; but at any rate certainly thousands of civil servants have had to be taken on. Therefore I do not think that our case falls to the ground.

THE EARL OF LONGFORD

My Lords, I did not give the figures, in order to save time, but the extra administrative cost of operating the tax is 0.75 per cent. of the net revenue, and this compares favourably with the cost of collecting other taxes, for which the figures range from 0.86 per cent. to 2.03 per cent. So this figure is, in fact, at a low level.

LORD BYERS

My Lords, I can only imagine that the noble Earl is talking about the actual collection. If it includes refunds and repayments, I must say that it is extremely surprising, and very gratifying.

LORD CONESFORD

My Lords, may I put one point? As I understand the noble Earl the Leader of the House, he says that this tax is collected at a comparatively cheap cost to the Government. But, of course, he takes no notice of the cost to the unfortunate taxpayer and the cost, which is not charged at all in the case of other taxes, to the charities.

LORD BYERS

My Lords, I am grateful to the noble Lord for reminding me of that. Certainly there is this tremendous burden to industry and to all who have to operate it. But no doubt we shall have other opportunities of discussing the matter, when we discuss the Budget, and so on.

I thank the noble Earl for the care he took in preparing his anwer, and in having the answer prepared, to what I consider to have been a most interesting debate. With more thanks to noble Lords, I ask for leave to withdraw my Motion.

Motion for Papers, by leave, withdrawn.