HL Deb 10 April 1968 vol 291 cc332-44

2.55 p.m.

LORD SHACKLETON rose to move, That this House takes note of recent developments in the economic situation. The noble Lord said: My Lords, in rising to move the Motion standing in my name on the Order Paper I can assure your Lordships that although my speech will be concerned with some of the subjects in the speech of my right honourable friend on the Budget, it will not be as long as his was on that occasion; nor, I fear, will it be anything like as brilliant as his was. But I shall attempt to continue further the debate which we had in this House in January. That was in the context of the public expenditure cuts announced by my right honourable friend the Prime Minister in another place on January 16.

We now debate the economic situation in the context of the Budget Statement of March 19. The sequence is a logical one, and in my speech I shall attempt to produce the framework of the decision which the Government have now taken. Although some of our critics have sought to throw doubt on the point of the logical order of events, the Government were clear at the time of devaluation that the measures then announced would not suffice to make a success of the operation, and that further measures would be needed to release resources. But given the relatively high level of unemployment then prevailing, and the inevitable uncertainty about the timing and magnitude of the response of exports and imports to the new parity, we did not wish to engineer this release before the additional demand for exports, and for import substitutes, had started to come through. Our intention was to act during the course of the ensuing months, first on public expenditure—since cut-backs in that field necessarily take time to become effective —and later on private consumption. We have seen the unfolding of that strategy with, as I indicated at the beginning, the public expenditure curbs of January 16, and then, three weeks ago, with the severe restraints on consumer spending embodied in the Budget.

The character of this strategy was, as I have indicated, expounded at great length and with great clarity by my right honourable friend the Chancellor of the Exchequer, and I would only wish to restate in rather summary form the economic basis of the Budget Statement. That Statement, I would emphasise, was formulated in fact before the momentous Washington Conference of Central Bank Governors that took place on the eve of the Budget, on March 16 and 17. My noble friend Lord Beswick will have something to say about this Conference, in the setting of the international situation, when he comes to wind up our debate this evening. I would merely observe here that although the shape of the Budget was decided, as I have said, before the Conference, it will, by fostering the strength of sterling, contribute powerfully to the task of restoring the stability of the international monetary system and guiding the development of that system along rational lines.

The purpose of the Budget is to help create conditions at home for the achievement, as soon as possible, of a balance of payments surplus of the order of £500 million a year. This surplus which must be sustained over a period of years, is required to enable us to repay heavy overseas debts, to rebuild the reserves and to provide a margin against temporary vicissitudes. We all know of the desperate consequences of even a temporary vicissitude on the international monetary situation. To achieve this surplus is a formidable undertaking, but it is not one by any means beyond our reach. Other countries in the recent past—France, Italy and Germany, are prominent examples—have successfully accomplished large adjustments in their external position when circumstances require it. What others have done we can, and must, ourselves do.

The prospect facing the Chancellor in contemplating his Budget was that the growth of one important component of demand on our national resources, namely, public expenditure, would show a sharp slowing-down in the coming twelve to eighteen months—this slowing-down reflecting the firm action taken by the Government in recent months to which I earlier referred. On the other hand, personal consumption—which is the dominant element in demand, accounting for more than half the total —would, on best estimates available to the Government, show an appreciable rise of about 1 per cent. a year in real terms between the second half of last year and the middle of next year. This late of increase, moreover, would have been accompanied by a pick-up in industrial investment and in stock-building. It was clear that the increase in demand from these sources taken together would not leave enough room in the economy for the required increase in production for export and for import-saving. Personal consumption would therefore have to be cut back sharply if we were not to face the prospect of a renewal of inflationary pressures and could not hope to secure an improvement on the necessary scale. The Chancellor's judgment was that it would in fact be necessary to impose a cut-back in consumption of about 2 per cent. a year—a cut-back from the rise of about 1 per cent. which would probably otherwise have taken place.

I will come in a moment to the tax measures by which this cut-back is to be implemented. Before doing so, however, I wish to emphasise that, notwithstanding the severity of these measures, the prospect is still for a considerably faster rate of growth in the economy over the period ahead than has been recorded in recent years, and much faster than otherwise would have been possible without devaluation. Let me admit that the Government are very disappointed that much of their pans has been dislocated by the failure to attain the increase in production on which we had counted and of which we had told the country. We now estimate that total output—the gross domestic product in real terms—will expand from the second half of 1967 to the first half of 1969 by at least 3 per cent. a year. This compares with a rate of expansion of no more than about 1 per cent. between the second half of 1966 and the second half of 1967. Moreover, if exports perform better than we have allowed—and the prospects for world trade are reasonably favourable and the competitive cost advantage gained by our exporters from devaluation is considerable —then we shall be in a position to achieve, and in a position to afford, a faster rate of growth in production.

I should like to answer briefly those who have argued—I do not think many of your Lordships are among them—that the Chancellor has been too severe, that, in the current jargon, he has been guilty of "overkill". (They have enough jargon in the military field—it is a bit much when it spills over into other fields.) Some of these critics rest their case on the belief that productivity is likely to be growing faster now and henceforth than in the past, partly because, for example, of the Government's own many-sided efforts—I stress this, and progress is being made—to re-structure the economy and lift efficiency all round. Indeed, this could be so, and we earnestly hope that productivity will grow faster. But an improvement in the rate of productivity advance is not something that should, in our present critical economic circumstances, be counted on in advance. The right approach is to proceed cautiously, but to be ready to take the advantages of higher productivity if this is achieved. But if we are to move into a phase of substantial balance-of-payments surplus, as we must, the proportion of national output devoted to private consumption has to be reduced whatever the rate of growth. In other words, even if we could have risked assuming a high rate of growth in productivity and output in 1967 and 1968, it would not have removed the need for a tough Budget aimed at reducing, for the time being, the share of the national income taken by the ordinary consumer.

Given that action had to be taken on the scale I have indicated, the Chan- cellor had to make a choice of the right mix of taxes. Of course, individual tax increases will always be criticised, but I suggest that the onus is on the critics to say what they would have done in the place of any of the proposals which they criticise. In advance of the Budget, many people, including the Confederation of British Industry, urged the Chancellor to direct his measures mainly towards taxes on spending; and that is what he did. The general reaction of the country to the Budget has indicated that most people endorse this policy.

When taxation is discussed, the point is often made that direct taxation is progressive and indirect taxation is regressive; indeed, this has been very much the case in the past. Like many of these generalisations, it may not be as true in the present as it has been in the past. This is not the whole truth to-day. Perhaps what has changed the situation more than anything else is the fact that as incomes have increased income tax is no longer a tax of which the impact is felt only by the few with high incomes. It now falls on those with only average incomes, and even on those with incomes below average. It is also the case that our system of indirect taxes can be used very flexibly and selectively, so that its effect can be minimised on items which are bought by poorer people. It is evident from an examination of the increases which the Chancellor made that this was very much in his mind. Taking the increases in purchase tax, for example, the lowest rate which falls on furniture, clothing and household utensils, is increased by only 1½ per cent.; and the rates correspondingly on other items go up according to the degree of their importance to the wider section of the community and according to the particular type of purchaser. Thus we find that the rate on items like jewellery, furs, et cetera, is increased by 22½ per cent. This selective approach is also shown by increasing the tax on wines and spirits and leaving the working man's beer alone.

While tobacco and betting are not items of expenditure confined to the wealthy, most people would agree that they are objects of expenditure from which more revenue could be drawn in our present circumstances. I remember the late Sir Stafford Cripps describing these as voluntary taxes, which is not perhaps an entirely satisfactory description but it helps to indicate—and the noble Viscount, Lord Chandos, will remember this matter and probably criticised it at the time in another place—that there is some justification for it. To take another example, the increased taxes on motoring may be criticised on the ground that a car is by no means a luxury, but it remains true that only half the households in the country possess one. It is also the case that many of the goods which have been taxed, such as cars and washing machines, are durable goods; they do not need to be purchased every week. Therefore, for many people the taxes result not so much in lower standards of living as in an incentive to increase savings.

Perhaps I may here make a brief reference to the proposal for a national lottery. Although the Chancellor emphasised that he was not looking to this to make a significant contribution to the solution of his budgetary problems, and I do not propose to discuss it now, I thought it right to point out to your Lordships that, since we do not have the opportunity to debate each provision of the Finance Bill in detail, the Government would be very willing to co-operate in providing an opportunity, so that your Lordships may, if you so wish, express an entirely free view on a subject which must be a matter of controversy. It may well be that if that is desired a special debate on a suitable Motion could be arranged.

I believe that most people would agree that the Chancellor got all he could from indirect taxes on spending, consistently with graduating the increases so as to minimise the burden on items bought by the less well-to-do. But that only spreads the burden on the higher income groups up to a point. No increase in indirect taxation can mean very much to the very rich, because they are sheltered by their wealth from marginal changes in the tax on particular goods and services. I am stating this as a fact without attaching any moral or political judgment to it. The Chancellor therefore decided to introduce, for one year only, the special charge on investment income. We shall not want in this general debate to go into the details of this charge, but some noble Lords may wish to discuss it. I believe, however, that most fair minded people would accept it as right in principle that people with large investment incomes and large amounts of capital from which they are derived should be asked to make a contribution in our present circumstances.

Finally, I come to S.E.T. I am well aware that S.E.T. is not a popular tax, and the noble Lord, Lord Conesford, kindly commiserated with me for having to defend it on an earlier occasion. I admit that I had in those early days certain doubts about it, but I am really rather encouraged by the development of S.E.T. and by what it has achieved. I would ask your Lordships who criticise it to consider what was the alternative. Having raised as much as he fairly could from indirect taxes, from those with very large investment incomes and from shutting loopholes, the Chancellor needed another £150 million a year. He could have raised this by increasing the standard rate of income tax by 6d., or he could have increased S.E.T. by 50 per cent.

Those who criticise the increase in S.E.T. should say what alternatives there are. I realise that the direct posing of questions is not always fair, but I think it is relevant in this case. Some of the arguments and criticisms against S.E.T. have been extravagant to the extent that they showed little regard to the real facts. One thing that has been repeatedly said is at the collection of the tax is expensive. In fact, the estimated cost compares very favourably with the cost of collection of other taxes.

Then it is often asserted that the tax has failed in its purpose of producing economies in the use of labour in service industries and thus freeing labour for manufacturing. I do not know what is the evidence of those who make those assertions. Indeed, the employment figures for June, 1966, to June, 1967, show that employment in distribution, construction and miscellaneous services, including hotels, hairdressers, laundries and so on, has fallen by relatively more than employment in manufacturing. The underlying causes of any change in employment trends are inevitably complex, and there-fore it might be premature to claim that this is entirely due to S.E.T. But these trends are quite unlike anything that we have know in the past six or seven years. when the tendency has been for employment in the construction and distributive trades to increase at a much faster rate.

What is perhaps most remarkable is that the decline in employment in the construction industry has actually been associated with a very significant increase in output. In fact, productivity has risen by between 7 and 10 per cent. in the space of one year. One cannot say that S.E.T. is necessarily responsible for all of this, but I think it is fair to claim that productivity gains like this would not have been achieved without some stimulus.

Moreover, as your Lordships know, the Chancellor has invited Mr. Reddaway, the Director of the Department of Applied Economics at Cambridge, to conduct an inquiry into the working of S.E.T. The terms of reference have been published and I shall not weary the House with them now. In his Budget speech my right honourable friend said that the increases he had announced would not prevent any desirable recasting of the tax in the light of Mr. Reddaway's report and any other available evidence.

At the same time as the tax was increased my right honourable friend made further refinements. Not only has the effective rate payable in respect of part-time workers remained at the same level—12s. 6d. for a man and 6s. 3d. for a woman—but there is a new concession extending those part-time rates to all men and women over 65. This constitutes a positive incentive for employers to make use of part-timers and elderly people.

I now come to a matter which I know will be of concern to noble Lords, and particularly to the noble Lord, Lord Bannerman of Kildonan, and others who are interested in the Highlands and in development areas. My right honourable friend has decided to refund S.E.T. to hotels in certain rural parts of development areas. This should be a help in those places where tourism is a staple industry. Of course, devaluation increases the demands on this industry and it is right that it should be ready to meet those demands. The Government regard tourism as a very important foreign exchange-earning industry, and details of a scheme for helping hotel development will shortly be publishd in a White Paper.

Of course, this does not go as far as has been asked for by some people who want exemption for services which assist exports or invisible earnings. However, it has been recognised that a point comes when, if you make too many exceptions and exemptions, you endanger the structure of the tax as a whole. As I said, those who are not yet satisfied can bear in mind the willingness to reconsider this tax and how it is levied, in the light of Mr. Reddaway's report.

LORD BYERS

My Lords, before the noble Lord leaves that point, am I to take it from the tremendous defence which he has made of the tax that if Mr. Reddaway were to suggest the abolition of it the Government would not accept that recommendation?

LORD SHACKLETON

My Lords, I must admit that I was getting rather enthusiastic about the tax—more than I was on the last occasion. But I think I ought not to anticipate any decision of my right honourable friend. I should have thought that the report was unlikely to yield that result, and therefore, although the question was worth asking, it is not one that it is wise to answer.

I must apologise for dealing at some length with fiscal policy, and I must turn to the other side of the Government's Budget strategy; namely, the prices and incomes policy. This is perhaps one of the area that, for understandable reasons, arouses the most controversy and the most anxiety. Whether we are able to seize the opportunity for a more sustained and more secure economic growth depends not only on demand management but on our success in controlling costs. The two policies must be complementary. In our view, neither can succeed without the other. I hope that the majority of your Lordships, even if you may not agree with the methods, would accept this basic economic proposition, unless one moves to very different policies indeed.

Fiscal policy reduces demand and therefore the upward pull on wages. Prices and incomes policy both reduces demand—and the Chancellor took this into account when he was preparing his Budget—and restrains the upward push on costs. Moreover, if the opportunity to increase our exports afforded by devaluation is lost because rising wages put up labour costs, we shall face far worse consequences than restraint on incomes. The only alternative is still higher unemployment or a further economic crisis, with inevitable repercussions on world trade, the end result of which could be the threat of massive unemployment of a kind which was such a tragedy before the war and which mercifully we have not known since then.

Thus the primary purpose of prices and incomes policy is to maintain the competitiveness and economic growth of this country. The second purpose of this policy and the supporting reserve powers is to ensure the continuation of the fairness and equity which the Budget has so clearly sought to establish. As the Budget measures take effect, it would be wrong for those with superior bargaining power to be able to secure increases in spending power which the country as a whole cannot afford; and this would also add to the weight to be borne by those not able to protect themselves—for instance, old people and those on small, fixed incomes. It must be remembered that in the end the consumer pays for most wage increases, and we are all consumers.

My Lords, we considered very carefully whether the incomes policy we need could be fairly and effectively applied by wholly voluntary means or whether it would be enough to ask Parliament to renew the expiring parts of existing legislation in the summer. We have had to conclude that neither of these courses would be adequate in present circumstances, and we shall be bringing forward proposals for further legislation after the Recess. Noble Lords will have seen the White Paper. It remains the Government's firm intention to continue the development of the policy for productivity, prices and incomes to the fullest extent practicable on the voluntary basis, in consultation with the C.B.I. and the T.U.C., and all the statutory powers will be held in reserve and used only to the extent necessary when voluntary arrangements are not being properly observed.

Because of the need to secure restraint and because of the need for equity, the Government reject the idea of a "free-for-all" for incomes and prices. On the other hand, with prices rising as a result of devaluation and of the Budget measures it would be unrealistic to ask for another standstill, which in any case could not be maintained for more than a few months. A standstill would only cause unnecessary hardship to the low-paid workers, and would certainly not create—and I want to stress this—a favourable climate for increasing productivity, which is one of cur principal aims. The Government have taken the only rational choice in further developing the incomes policy.

My Lords, there are two points in the White Paper which deserve particular emphasis. The first and main point is productivity. The Government wish to encourage agreements which genuinely raise productivity and efficiency, thereby helping to stabilise or reduce prices. Genuine productivity agreements and major reorganisations of wage and salary structures which can be justified on productivity and efficiency grounds can be accepted, and indeed are to be encouraged. The appointment of my right honourable friend as First Secretary of State and Secretary of State for Employment and Productivity reflects the Government's concern to do everything possible to encourage the rapid increase in productivity which is so essential in the interests of exports and import saving. It will help once again to re-emphasise that this policy is one for productivity prices and incomes.

The policy is also intended to continue to give full weight to the interests of low-paid workers—those who genuinely are low-paid—but not of those workers who in the past have secured increases in pay through automatic preservation of traditional differentials when increases have been agreed for workers on the minimum rates. Low-paid workers will be able to benefit up to the ceiling where their claim satisfies the appropriate criterion, and there can be above-ceiling increases for them within a settlement which overall does not exceed the ceiling. I realise that this question of differentials is a difficult and delicate one, and I also realise that some of my noble friends in particular may feel that they would wish to explore the ideas rather more fully. But we shall have the opportunity to do that when the Bill comes before your Lordships' House; and I realise that I can give only the the briefest outline of the policy.

My Lords, as regards prices, there is bound to be a rise as a result of devaluation and flowing from the fiscal changes of the Budget. There will also be some other increases which will be justified under the criteria for price increases, which are contained in the new White Paper. But one of the objects of the Government's policy for prices is to prevent unjustifiable price increases, and the Government will exercise a rigorous scrutiny under the extensive early-warning arrangements of proposed price increases. These early-warning arrangements will be extended; and the Government will keep general watch over retail prices, also.

The prices and incomes policy is an important element in the Government's strategy for transforming the balance of payments from a deficit to a substantial surplus. It is not an easy policy to pursue, offending as it does many of the long-established notions of our industrial and commercial system. But the Government are not putting reliance on this or, indeed, on any other single aspect of policy. Prices and incomes and fiscal policies have to be made to work together and to complement each other. In fact, a background of fiscal restraint combined with equal sacrifice by all except the very poorest is by far the best environment for the effective operation of a prices and incomes policy.

I wonder from time to time what the Opposition would have done. I do not think they can deny that a shift from consumption to exports is needed, but we should like to know how they would have both achieved it and maintained it. They certainly did neither while they were in office, and we are still suffering as a result. They allowed public and private consumption to go uncontrolled in each Election year and our competitiveness to deteriorate in every year.

One alternative to the Budget measures well loved by some Members of the Opposition, but I think perhaps not all those on the Opposition Front Bench, is the idea of a sudden, massive and absolute cut in public expenditure. But while decrying the total of this expenditure they have opposed the majority of the detailed cuts we have already announced, and they have even added a lot of expenditure plans of their own, including a return to East of Suez. I now have the Liberals with me! The truth of the matter is that, as a proportion of national income, our public expenditure is not out of line with that of other advanced countries. Large-scale absolute cuts would simply mean a more niggardly provision of public services than most of our neighbours have, and sudden cuts would in the long run be downright wasteful. Another alternative put forward is that instead of a reliance on increased taxation there should be a reliance on increased savings. But this would have been a dangerous choice. We cannot predict the future course of savings with accuracy, especially when a cutback in the standard of living is necessary, and a heavy reliance upon this would not have measured up to the needs of the situation.

My Lords, I would suggest to your Lordships that the Budget fulfils our economic needs, but at the same time the increases in family allowances and the selective nature of the tax increases themselves should help to ensure that those of our citizens who are most vulnerable are affected least by the impact of the necessary increases in indirect taxation. We must face the fact that the measures contained in the Budget are essential, and it is our contention that they are fair as well. There are no alternatives if we are to contribute, as we must, to the overriding objectives of a surplus on our balance of payments which is the basis of our own prospects of a rise in the standards of living and a rise in our contribution to the alleviation of poverty in so much of the world. I beg to move.

Moved, That this House takes note of recent deevlopments in the economic situation.—(Lord Shackleton.)