THE ECONOMIC SITUATION AND INDUSTRY

HL Deb 26 November 1974 vol 354 cc1267-388

4.11 p.m.

Debate resumed.

BARONESS SEEAR

My Lords, many of the points under discussion this afternoon were raised in the debate on the gracious Speech. Many of the points which I wished to take up have already been raised by the noble Lords who have spoken before me, and in view of the long list of speakers I will endeavour to be brief and will comment at length only on certain matters which have not been gone into either by the noble Viscount, Lord Watkinson, or by the noble Lord, Lord Beswick. Since the debate on the gracious Speech we have of course had the Budget. In the debate on the Queen's Speech, we on these Benches expressed anxiety about the expressions which have been made by certain—I accept a minority—members of the Government which, maybe wrongly, cast doubt in many people's minds on the Government's commitments to a mixed economy.

I can well believe that the noble Lord, Lord Beswick—who is patently a sincere believer in the mixed economy—found our strictures at that time perhaps unreasonable. In view of the comments which were made in many circles I do not think that for those not in close communication with the noble Lord. Lord Beswick, it was at all unsuitable to raise this point. However, in the Budget speech the Chancellor of the Exchequer reaffirmed the commitment of his Party to a mixed economy. I can understand the noble Lord, Lord Beswick, thinking that this anxiety on our part was unnecessary, but I do not agree that it was. However, we take it that the Chancellor spoke for the Government when he gave that reaffirmation which was undoubtedly welcome. In giving this confirmation of belief in the importance of a thriving private sector, we accept also that he went some way—but in our view by no means far enough—in giving the encouragement that is necessary if there is to be a recovery in the private sector.

Some of the things which he did at that time have undoubtedly increased liquidity. We can argue, as the noble Viscount, Lord Watkinson, has already—and with many of his points I would entirely agree—that not sufficient has been done and that what has been done is not sufficiently clear. It has to be clear, I would remind your Lordships, not only to the great leaders of British industry, who are in close contact with the people who are drawing up these plans, but with the large numbers of small industrialists whose total work contributes very substantially to the total economic effort of the country. It is not good enough if it is clear only to the leaders of the CBI. They have a big task in seeing that up and down the country the information and new impression which is intended to be created is conveyed. The position was not made sufficiently clear to get it over to a large number of people who need more fully to understand. Not only was it not made sufficiently clear, but what was done was not, in our view, adequate; nor have the Government yet met a number of the deep-seated problems which we shall encounter in moving in the direction of recovery. The mood has not been generated—rightly or wrongly, and there is a big psychological element in this—to encourage the investment which, as is agreed on all sides of this House, we must have.

I want to look at one or two points—much has been said already about this—in connection with the greater encouragement of investment. For months we in this Party have been pressing for inflation accounting, particularly, although not only, in relation to profits. I fully understand that interest exists on all sides of the House in the question of inflation accounting, but we regard this as a matter of great urgency. We are told that the Government are waiting for the Report of the Sandilands Committee. While it is right that they must wait while that Committee is considering its Report, is it not possible to speed up the findings of the Committee? Is it not possible for the Government to give us some idea as to how soon, and in what ways, they believe that inflation accounting can be put into practice?

Along with this matter is the problem of moving to educate the public. The noble Viscount, Lord Watkinson, has said much about this matter, but to begin educating the public on what true profits are and why profit is necessary is indeed badly needed. With perhaps one or two exceptions I well believe that the people with whom the noble Lord, Lord Beswick, is in close contract need no education in this regard; but I can assure him that up and down the country, even in quarters where the matter ought to be much better understood—I refer to some students with whom I come into contact, and perhaps also to some of those who teach them—the real meaning of profit is not understood. When this education comes from the official Opposition, or even from these Benches, it is suspect in many quarters. But if it came from the Labour Party, clearly and in simple words, then I believe we would begin to get over to the rank and file people in this country (the ordinary taxpayer, the ordinary consumer) just what the function of profit truly is and in what way a new system of accounting can help in the proper estimate of profit in relation to taxation. This, I would urge, is a matter of the greatest urgency and importance.

I come now to the question of wages, prices and the social contract. Of course, we should all like to believe that the social contract by itself will do the job that needs to be done. Nobody, certainly no Liberal, is happy with the idea of statutory policies. For all that, in the circumstances of to-day, and in the circumstances of this year, we made it clear in the General Election—and we do not retreat one iota from what we said then—that some control is needed over prices. We reaffirm this. But to have control over prices with no ultimate control over income simply does not make sense. I listened with great interest when the noble Lord, Lord Beswick, was speaking, because I thought I detected a hint in his speech that he might be looking—possibly in the last resort—in the direction, if not of an inflation tax, then perhaps of some method through the tax system of syphoning back those payments made in wages and income which are in excess of a reasonable norm, even if he does not use the rather suspect and unpopular word "norm". I can understand the noble Lord's desire to avoid that term. But it must be plain that in the interest of the public as a whole, as well as in the interest of industry—which means in the interest of the public as a whole—some limit must be set on the amount which is paid out in wages. In those cases—and it is happening, let us be frank, if only in a minority of cases—if the social contract is not adhered to, then in the public interest the Government are under an obligation to take some action to curb inflation caused in that way.

Reading the Chancellor's Budget speech one saw, however reluctantly (and I entirely accept that it is reluctantly) that the Chancellor, and presumably the Labour Party, appeared to be accepting that unemployment, rather than a control over pay, might have to be the price that would be paid if the social contract was not kept. We, for our part, say it should be the other way round: that some control over pay, some limit, should be introduced before the harsh and wasteful price of unemployment is extracted in its place. However, my Lords, what one sees happening at the present time is what we from these Benches always warned would happen if one attempted to control prices but not to control pay.

It is quite plain from the White Paper, Review of the Price Code, that an attempt is to be made to have some influence on pay through the instrument of prices. I warn that in the White Paper proposals there are two very real dangers. The first is that the complexity of the new proposals is bound to spell their failure. Surely, my Lords, we learned from the income policy of the Conservative Government, particularly under Stage 3, that when there is a great deal of complexity in controls of this kind it leads to a whole range of unanticipated and undesirable by-products which are not foreseen by the people who are putting forward the schemes but which are extremely dangerous in their side-effects. The simpler the scheme the less danger there is of really harmful side effects; and in the complexities of the Price Code which is foreshadowed in the White Paper I see just the kind of dangers which will lead to these unanticipated side-effects, not to mention the amount of time and effort that is to be devoted in industry to finding ways in which people can work their way through the exceptions and the loopholes which inevitably develop as the scheme becomes more complex.

The second point I would make about the proposals is that in so far as there is in them a hint that, through control over prices, an influence will be exerted by way of control over pay, this will not work. The idea that fifty years ago would have worked—that the place at which to control pay is at the negotiating table between the employer and the trade union; that that is the place where the employer, in his own interest, resists excessive claims—no longer holds water for very important sectors of industry. In some sectors this can still work, but in many the employer, confronted with an excessive wage claim, is presented with the choice between not being able to deliver the goods, to the point at which bankruptcy faces him, or giving way to the claim for a wage increase; and in those cases, without a doubt, the employer will give way to the wage claim. It is relying on a broken reed to believe that one can expect the employers to be the people who will implement the social contract. This has nothing to do with the fact, which might not unreasonably be used in their defence, that they were ever party to that contract. But that is not the main point: the main point is that their economic circumstances will not allow them to be the instrument for imposing pay controls. If the Government are going to control prices, then in one way or another it falls to the Government to ensure that the pay side of the equation is also held within reasonable limits.

My Lords, so much has already been said on these matters that I should like to pass from the question of prices and cash to the all-important question of people—people and relationships at work. The noble Viscount, Lord Watkinson, has already referred to certain aspects of this side of our problem. In the last three years we have lived through the unhappy history of the Industrial Relations Act, followed by its repeal and replacement by the Trade Union and Labour Relations Act. The Trade Union and Labour Relations Act was very largely a rejection of the Industrial Relations Act, rather than a positive affirmation of a new and constructive policy. I do not wish to fight old battles, my Lords, but I would say that it was understandable in the circumstances that that should be the nature of the Trade Union and Labour Relations Act. May I take your Lordships back to the famous but never-used Donovan Report, in which a very great many constructive suggestions were made about improved systems of industrial relations in this country and improved institutions for coping with industrial relations. In the main, the Industrial Relations Act did not follow the recommendations of the Donovan Report, but neither does the Trade Union and Labour Relations Act of 1974.

It is not good enough to leave a vacuum in this area. Is it not now possible to put 1971 behind us and to look again at the Donovan Report in the light of all that has happened since that Report was published in 1968? Of course it needs up-dating; of course we cannot go back and take those recommendations just as they stand. Nor do I think we should; but there were constructive criticisms and constructive proposals which we could look at again today with great advantage. It is time now, not later on, to start to build anew in this field, because however good relationships are at factory level—and that these are of the first importance I would not deny—there still has to be a framework for industrial relations as a whole in this country. This has to be a framework acceptable to both sides and acceptable to the community as a whole, which is so directly and personally interested in the way in which industrial relations work in this country. What I am really saying is that the Trade Union and Labour Relations Act, understandable though it is in its reaction against the 1971 Act, simply does not begin to be an answer to the needs of industrial relations of this country, and the Government now have a chance, with their majority, to go ahead from here with a really constructive programme, looking again at those proposals.

In addition to the framework of industrial relations, which we need, we also need developments on the side of closer participation. I am a little tired of this word—it means something different to every person who uses it, it seems to me —but we must work together more closely and have a greater involvement of all parties in industry, with a much greater respect of each for the other. I take up and very much support the idea that in the circumstances of to-day the starting place should be in the National Economic Development Council, where the interested parties are gathered together. But this is only the starting place. We need, at the level of the plant, to mobilise all sections of people working in industry (and I deliberately say "all" and not "both") into a far more constructive partnership than we have had until now. I very much hope that we shall not be doctrinaire about this matter. I hope we shall not take the line that the only kind of involvement is where the trade union appoints the people concerned to the joint commitees. This is not said in any way in an anti-union spirit—not in the least—and there are many circumstances in which direct election of employees is the right way in which to do it. There are many facets to the improvement of relationships at the place of work which we have to develop—sharing in responsibility; sharing in decisions; sharing, indeed, in profits—if only because the confrontation of all with the problems which have to be faced in making industry successful is the best way in which all of us can be educated in the difficulties which we are up against. So when we move, let us move fast as a matter of urgency in that direction.

However, this is not the only side of the problem of people. This may perhaps be regarded as my King Charles's Head, because I know I rarely speak without making some reference to it, but the noble Lord, Lord Beswick, referred to the poor return on investments that we have experienced in this country over recent decades. There are many reasons for this, but a very important one is the poor use we make of people. In turn, there are many reasons for this, but not least is the fact that we simply do not pay enough attention to manpower planning and to gearing ourselves up in terms of training to ensure that we have manpower trained for the jobs which need to be done. We now have the Manpower Services Commission with the Employment Section and with the Training Services Agency. We already have alarming figures of unemployment and it is threatened that these figures will get worse.

We know that, because of oil and other changes in the economy, the pattern of industry is bound to change and that we have the extraordinary fact that, while we have serious unemployment to-day, we also have acute shortages of labour. It is a ridiculous situation. We know, too, that, when the upturn comes—as come it will—acute shortages of labour will occur in all manner of places. Is it too much to ask that the Manpower Services Commission should tell us by regions—with dates when that Report comes in—what are the shortages of labour and what it is to do about them? It should forecast what the anticipated shortages of labour will be when the upturn begins and say what it is doing in anticipation of them. A scheme could be brought into being to-day to ensure that while people are unemployed (and this has been recommended by the OECD and from other quarters) such periods of low industrial activity and unemployment should be used to prepare for recovery. My Lords, money invested in this will be money very well spent and will ensure that money invested in other directions will be very much better spent.

4.32 p.m.

LORD NELSON OF STAFFORD

My Lords, I should like to add my welcome to the Motion proposed by my noble friend Lord Watkinson. It is an extremely timely debate which he has stimulated, as the whole economic situation is deeply disturbing to us all. What a deterioration there has been since a year ago! Then we had improving productivity, increasing industrial investment levels and rising exports, all of which gave grounds for encouragement. Events since then are well known to us. They include the 300 per cent. increase in oil prices to which the noble Lord, Lord Shinwell, referred. Many of these events were outside our control, but some were within our control and to-day this country is faced with grave difficulties.

The deficit on the balance of payments, the position of sterling, the level of the Financial Times Index are all indicators of a very unsatisfactory position. There is a need for everybody to be aware of this situation so that all can play their part in finding an early solution. I think that the apparent inability, so far, of the people of this country to pull together to meet the situation which now faces us is extremely disturbing. It is a situation which threatens plans for improving the conditions of all aspects of our national life and even the standards we have already achieved. I would agree with the noble Lord, Lord Beswick, when he says that in these circumstances there is no room for slanging each other. It seems incredible that we cannot sec the need to put on one side our differences and unite to maintain something we all want to see—a sensible, decent and secure life for all people and the maintenance of existing standards for ourselves and our children.

In this respect, I am very glad that my noble friend Lord Watkinson referred to the serious position of pensions which is right before us to-day. The present trend, if allowed to continue, will increasingly affect everyone, particularly those on low or fixed incomes who can least bear the hardship. Having said this, may I dissociate myself from the conclusions of the recently-published Hudson Institute Report—not that I wish in any way to give it publicity, but I so much disagree with the pessimistic forecast which it makes for this country that I must say so. I believe that, given the right measures and a united effort by the whole country, the position is retrievable and is retrievable relatively quickly. I believe that we can put ourselves into a sound economic position even before the North Sea oil revenues give us further economic strength.

My Lords, the first thing I was taught when starting life in industry was that neither an individual nor a corporate body could for long live beyond its means without disastrous results. This is what we as a country seem to have been doing and I agree very much with the references that have already been made to the need for our wealth-producing industries to be really profitable—and by really profitable I mean that they should be so after taking into account inflation and that they should have a real solid cash flow behind them. There are three points which I would add to those which will be brought forward in this debate. I believe them to be of great importance, and the first and most important is the need to raise productivity levels and so create the wealth necessary to pay for what we want. I am very glad that the noble Baroness, Lady Seear, referred to this point. The second factor is the need for increased exports to enable us to pay for those things which we must import or which we want to import into this country. The third factor which bears on both these questions is the difficulties and problems of finding a satisfactory basis for industrial relations.

My Lords, I refer first to productivity—and by productivity I mean the per capita output of our productive industries. I suggest that this is at the heart of our present problems and that increased output from our factories is vital to their solution. I see no reason why this cannot be done. I have worked in and visited many of the factories of our competitors around the world and I see no reason why our productivity should not be as good as theirs. However, it is not. One only has to look at the figures to see that for oneself. I do not think that this is a question of exhorting people to work harder: it is a question of working more effectively and making better use of manpower, the plant which already exists, and the factories which already exist. It is a question of better use of materials, of cutting out waste, of reducing lost hours, of organising better work flow and improving quality. All this means increased productivity and a better use of the capital which we already have invested in our industry. In this respect, we should give consideration to more shift working and that means creating social conditions which will make this acceptable.

There must be an elimination of lost working days. It is a terrible thing—if one looks at the figures—to see that from January to September this year 11 million working days have been lost due to disputes. Last year over the same period it was 5.5 million working days. At the same time this increased productivity could mean increased wages for the workpeople concerned which one would have thought would be very acceptable under the present conditions of hardship. It also means increased output without adding to unit cost and therefore to inflation. It seems to me that a 10 per cent. increase in productivity right across our productive industries is achievable as a practical possibility. It is not asking for more than is being achieved elsewhere. In Germany, France, Belgium, Holland, Sweden and Japan. their figures are better than a 10 per cent. increase on ours. It is quite possible to achieve this, so I am not suggesting anything that is a flight of fancy. And. my Lords, what wonders this would work !—there would be more goods for disposal, more exports and less imports, a better balance of payments, an improved position of sterling and a lower overseas debt, which is an important factor at present high rates of interest. Finally, there would be a restoration of confidence within our investing institutions.

I accept, of course, that this is primarily a matter for employers and employees; but this is not quite enough. We need a change in the attitude of mind and that change, as your Lordships know only too well, is a very difficult thing to achieve. It has to be inspired by a determination to overcome our present difficulties, putting on one side differences of secondary importance, and I believe that the Government and all of us can help in this. Surely we can all agree as a start that the first priority is to bake a bigger economic cake and all work to this end. We can then debate at length, if necessary, how the cake should be carved up; but let us all agree on baking it and out of this will come the ability to do the things we want to do.

My noble friend Lord Watkinson quite rightly referred to the need for higher industrial investment in order to increase productivity. I very much agree with him but, without belittling anything he said, I should like to suggest that there is a reverse side to this coin, which is that if we achieve higher productivity this would itself lead to higher investment. It would lead to conditions which attract investment—better output and utilisation of the plant, quicker returns, a better cash flow and so on. I believe, therefore, that if I were to pick out a single element in our present situation I would say to your Lordships: let us make top priority this matter of increased productivity. I would suggest that the "Think Tank", "Neddy" (to which reference has already been made), the "Little Neddies", the TUC and the CBI. with their member associations and unions, should all be asked in the months immediately ahead to concentrate on this particular problem. I believe there would then be a great response.

I now pass to my second point; namely, that we should do everything we can to increase exports. Let us face it, the export market is not as easy as it was and it is not going to be as easy in future as it is now. I think that increasing our exports should be the second priority. My noble friend Lord Thorneycroft, head of the British Overseas Trade Board, will be following me in this debate and no doubt will be able to speak fully about this matter. I should like to make three points on this subject. First of all, I think that our public investment—and I am referring here to the nationalised industries—should be directed to those areas which can contribute most to our export performance. I was concerned three and a half years ago with an expanding programme from the British Steel Corporation. This unfortunately came up against problems of public expenditure then and was substantially reduced. To-day this country is importing steel. Our competitors, particularly Germany and Japan, went ahead with their investments and they are exporting, still and taking maximum advantage of the world shortage of steel which exists at the present moment. This is a position which I suggest must be avoided in the future.

While referring to the nationalised industries, I should also like to draw attention to the fact that to-day the nationalised industries are a major influence on our exporting productive industries. Their purchasing policies determine the development programmes and products of many of our main exporting industries. Their policies determine the consistency of work loading and flow of work in our factories. They are the source of the operating experience, which is what our customers overseas wish to see and buy. These are all essential elements in selling to overseas customers. I admit that industry receives a great deal of help from the nationalised industries, but I think it could receive still more and I would suggest to the Government that they should make it absolutely clear to all those who are leading our nationalised industries just where their role lies in this particular activity and that they have a responsibility to assist exports in every possible way consistant with their own interests.

The noble Lord, Lord Beswick, referred in his opening speech to the proposed planning agreements. In talking about the nationalised industries, I should like to make the point that unless and until these industries themselves produce stable and firm plans over the same period of time which is being asked of private industry, it will be quite impossible for the majority of private industry to produce plans of their own. I make that as an aside since reference has been made to planning agreements.

Reverting to exports, may I draw attention to the fact that defence equipment has always been a major exporting field for this country, particularly in sophisticated goods with an excellent value-added conversion factor. I do not know whether your Lordships quite realise that as regards the Government's proposals for the nationalisation of the aircraft and shipbuilding industries—though perhaps they may reconsider these ideas—on the assumption that these proposals go ahead all sales of major material in this field will in future be under Government control. This will involve ships. aircraft, guided weapons, guns and tanks: all these will come from concerns in public ownership. To my mind this raises a very serious point, to which I should like to draw the Government's attention. It is that during the transition period it will take some time for these things to be put into effect. There is a period of uncertainty in the months ahead as to who is to take responsibility for major contracts to he entered into, all of them involving very knotty questions the results of which will spread over many years ahead on such matters as price levels to be adopted, escalation clauses to be included, guarantees to be entered into and cost escalations to be settled. I see great danger in such a period of uncertainty as to who makes these decisions and carries responsibility for them. This could affect a major area of our exporting industries. Incidentally, it is not only a question of what is done in this country and whether we are satisfied or whether your Lordships are satisfied, but it also involves the question of whether the customer is satisfied that he is dealing with somebody who has authority to carry through what is intended.

On this matter of exports, may I say one further word as one who has been very much engaged in exporting around the world, and that is the problem of convincing customers that they have confidence in Great Britain, whether they can rely on firm deliveries and prices of products from this country. These are things that keep coming up over and over again, and it is not easy to answer them. I think we have to recognise that our image is not a good one in this respect and that our reputation over this has not been good. We all know how difficult it is to recover a reputation once it is lost; and, believe me, for those who have not been exposed to this, it is a matter which I think they would find quite distressing when they learn how bad it is. Therefore I say let us all recognise that export is the lifeblood of this country, and let all of us, in industry, in Government and in the media, ensure that our image, as presented to our customers around the world, is a satisfactory one.

In conclusion, my Lords, I should like to make a short reference to industrial relations, because without satisfactory industrial relations all that has been said and will be said tumbles to the ground. Productivity will only rise if industrial relations arc good; exports will only rise if industrial relations are good. Every industrialist knows the importance of satisfactory industrial relations in his factory. There is nothing worse than gazing at empty workshops and idle machinery. No company, no enterprise, can survive without a satisfactory relationship with its workpeople. There are some cases of bad relationships; they receive a lot of publicity, we hear all about them. Let us also recognise that there are many areas of good industrial relations where problems are settled. Many problems are settled day in and day out to the satisfaction of all parties. So it is not by any means all bad.

Having been concerned with this problem for many years, and discussed it with many leading trade unionists, I should like to agree with my noble friend Lord Watkinson that this is a problem which can be solved. I am convinced that improvements can be made in the present situation; I am also convinced that this is best done in the workplace with the workpeople and their local management in each individual factory. Over the years I have had much experience of operating works committees, sharing views and exchanging information, and I endorse what has been said in this Chamber this afternoon that very satisfactory working arrangements can be achieved at workshop level and can be effective.

In my own concern we also have a national works council, which augments the work which is being done by the works committee, where the executive heads of the company discuss broad matters with the national trade union leaders as a supplement to the main discussions which take place on each shop floor. I assure your Lordships that both these arrangements work very satisfactorily. May I also stress that industrial relations are very much dependent on keeping a proper balance of power. This shifts, shall we say, from one side to the other. At the moment it has gone too far to the other side. There are two points which strike me most forcibly.

In the first place by making the State such a major employer in so many establishments—and we are going to increase that as present ideas proceed—we are putting the Chancellor of the Exchequer behind those particular enterprises. No longer does the threat of bankruptcy hang over unreasonable demands; no longer can management say, "If you press this the firm will go bankrupt" because it is known it will not. We are now in danger of adding a further weight in this particular direction by having the Government. it appears, as a bank of last resort whereby even private companies may call on the Government for assistance. So once again the fear of bankruptcy and loss of livelihood through excess demands is not there—

LORD SLATER

My Lords, I am grateful to the noble Lord for giving way. As one who has had much to do regarding labour relations in a Ministerial capacity, may I ask him whether he would agree, or I have attempted to get top management to agree, that if managing directors, instead of depending so much upon "No. 2" and "No. 3" in line for reports on production, spent one day per week on the factory floor where the work is being done, and entered into conversation with the workpeople on the floor, production probably would go up by leaps and bounds and better relations would stem from that?

LORD NELSON OF STAFFORD

My Lords, I am glad to say that I find myself in entire agreement with the noble Lord's question. It is a principle which I have practised myself all my life, and I confirm what the noble Lord says: it can make a very big contribution to just the problem about which we are talking. Referring again to balance of power, we have seen in recent years a vast improvement in our social security provisions against hardship. I think that we may now be in danger of carrying this rather too far when we find these facilities arc being used virtually to sub-sidise or support strikes. Believe me, the figures show that this is exactly what happens. Ever since these measures were introduced, strikes have increased and lengthened in period and I think this is an important element in the balance of power to which I referred. Therefore in drawing up the industrial legislation on which the Government are now engaged, I hope they will keep very much in mind this question of the balance of power, and I hope they will keep very much in mind the point to which the noble Lord opposite drew attention, that we are dealing with people on the shop floor. It is people that matter, not procedures.

My Lords, I do not wish to take up too much of your time on this important debate, but I would like to make one further short point. We in industry are concerned very much in maintaining our competitiveness through the constant examination and pruning of our costs, particularly our non-productive costs, our overheads. I hope the Government. in the decisions they take, will also be taking the same approach to the steady growth in Government overheads which is becoming more and more a burden on productive industry. I hope that when they make decisions they will bear in mind the extra costs which will be involved, the extra overheads involved. I hope they will appply the same vigorous examination, the same vigorous pruning, which has to be done in industry if competitiveness is to be maintained.

4.59 p.m.

LORD THORNEYCROFT

My Lords, while we may differ a little as to the causes and remedies which may be applied, there must be many noble Lords on both sides of the House, many of whom have served in Governments of various political persuasions, who view with sadness—perhaps almost with dismay—something of the scene that we see about us. I would agree particularly with one theme which was struck by my noble friend Lord Nelson of Stafford, that while we debate here economics and industry, and while we may be said to lack money or, as the noble Lord, Lord Shinwell, said, oil at a proper price, we lack leadership and faith as a whole, and these things are sometimes much harder to find than the material subjects we talk about. I would make one Point to start with. I think it is worth while remembering that we are not the only country which is engaged in problems of this character. There are other countries in the world and some of their problems are reflected upon us, but some of them are doing rather better than we are. Some of them seem able to swim in these rough seas a little easier.

There are three I would mention—West Germany, Switzerland and the United States of America. They all have terrible problems; they all have many faults that we can no doubt see, but somehow they seem to be a bit more firmly on their feet and they have certain things in common. All of them believe pretty firmly in, and practice, the capitalist system. In all of them, not just in their Governments, profits are accepted as a normal feature of life. In all of them effective levels of taxation are at a lower level than they are here. In all of them industrial relations seem to be on a very secure basis, I think for different reasons—in Germany, because after the war we imposed a trade union system which we now wish we could impose upon ourselves; in Switzerland because in that strange small country (and I have chosen it because it is so different) there seems to be a sense of order and discipline which we miss; and in the United States because there a trade unionist passionately believes in investment, in productivity, in wealth. A trade unionist in the United States does not envy wealth; he sees it as something within his grasp and goes out with all the resources of his union to achieve it. Now I say they are doing rather better than we are and, if they are, perhaps we ought to pause and take one or two lessons from the experience of people who seem to be a little stronger than we are in what I admit to be a very difficult world.

I now turn to the domestic scene here. My Lords, 16 years ago I resigned as Chancellor of the Exchequer from a Government with whose economic policy I did not find myself in agreement. I felt some doubts as to its attitude to Government expenditure, and I and my colleagues of that time were regarded as practitioners of monetary control of the economy. I have often wondered over the years whether I was right, even on a very narrow selfish view. It seemed questionable whether one was really right to throw up what seemed at that time the rather glittering prizes of politics—they seem a little less glittering as one grows older, but at that time they seemed rather glittering—for causes which were not at that time proven. But I am hound to say, my Lords, as I look at the state of the country to-day, that I have no doubt whatever that I and my colleagues were right.

I believe that if the policies we then advocated had been followed, we would not have slithered quite so helplessly from one crisis to another, and, though we would have had most of the problems that confront us to-day, I firmly believe we would have been in a very much stronger attitude to meet them. I will not enlarge on that, but I would say that if one has taken any particular line in politics one is entitled, at a later stage, to comment a little on the alternative policies that have been pursued by both sides in this country, and to express one's view about them. In doing so, may I say I accept, too, that there is a big unanswered question here as to whether any political Party is really capable of handling the complex question of a modern economy in a democratic society. The temptation to sacrifice the long-term interests of the society for the short-term advantage of the electorate is overwhelming. This does not apply to one side of the House or the other, or to one side in politics or the other; it applies to all of us. All of us who have served in Governments of any political persuasion know that we have been subject to those temptations, and it would take a very bold man to lay his hand on his heart and say that he has never in any circumstances yielded to them.

My Lords, the sins, if I may call them that, of the Conservative Party—we all sin, and if I talk of sin it is universal in this matter—have been mostly in the field of macro-economics; that is to say, they have not believed in monetary policy on the whole. Many Conservative Administrations have believed in spending their way out of their difficulties, and Mr. Harold Macmillan was the archpriest of this, and Mr. Maudling and others have followed him. But in fairness, they were not alone. They were encouraged very often by opposition. It was not just the politicians; it was the trade unionists as well. There were very few voices raised in the media, such as the television, which said that these policies of expansion were wrong, and there were economists—some here are economists and they vary in their views—inside and outside Whitehall, who urged the virtues of these expansionist policies with all their hearts.

The "J" curve was their favourite. The "J" curve was based on the theory that the economy is rather like an aircraft; that as you move the throttle forward it goes into a steep dive but it picks up in a "J" form. I think generally just before the Election is the idea.

My Lords, in this simple faith I have seen Administrations of this country on three occasions drive the aircraft into the deck, and I refuse to be surprised when the animal or the machine has a certain tattered appearance. Therefore, I say there have been errors of that kind. If the noble Lord, Lord Balogh, really feels that he must interrupt, I hope he will keep his intervention to the minimum. The noble Lord indicates that he does not wish to intervene. That is very gracious of him.

I was just going to turn for a moment to a few sins on the Left. The sins on the Left centre around the movement of wealth by taxing the wealth and spreading it more widely in the country. This is, in itself, a rather admirable thing to do. All of us have some egalitarian tenets. None of us would tolerate a society in which there were a limited umber of very wealthy, and large numbers of very poor. The question is how far to push it, and the difficulty is the shortage of rich men. They are becoming museum pieces, collectors' pieces.

My Lords, I am not a very rich man. I work very hard, and I am paid a little for that. But in the unlikely event of any of your Lordships offering me gainful employment, 84 per cent. of anything you paid me would be taken from me, and if I invested the balance the interest I received would be taxed at 98 per cent. The trouble is that there is not enough meat left on this old carcase really to interest the Chancellor of the Exchequer. Therefore, my Lords, Governments have turned, and indeed they have felt compelled to turn, to companies; and here of course much more serious matters arise because here they turn to the very centres of wealth creation and one has to judge what the effects of their taxation policies really are. I am not going to elaborate at any great length on the wholly admirable speech which all of us had the privilege of listening to from my noble friend Lord Watkinson earlier in this debate. He speaks with great authority and, of all industrialists in this country, he has probably taken a bigger lead than any other in trying to improve relations between the shop floor and the management. The whole House and the country owe him a debt for what he has done in that manner.

If I might put it in simple and crude terms which are nevertheless understandable, a firm needs money as a car needs petrol. If any firm is to run successfully at all, money has to be put into it and the money has to be used, and eventually it has to come out in the form of profits. It can be borrowed from the bank; it can be borrowed from an institution such as the Prudential Insurance Company, or one can make profits and plough them back into the company. All these three methods are now much harder than they have ever been before, and the reason is that the Government have committed three errors. They have taxed industry much too high. They have let wages rip while they have held prices down. They have limited the growth of dividends that can he distributed, and done that by deliberate statutory control far below the level of inflation.

Those three measures have done such harm to industry that to-day real damage exists in the very centres of production and wealth which are most immediately and urgently needed in this country. And what is the situation? Most of us in companies are short of money, and if we are not immediately short of money we fear very much that we are about to be short of money, which is just as effective in controlling the actions we decide upon. The Lever Bank will be of little help to us. It may help in a few cases but it will be of very little help to most of us. Most of us are already borrowed to the hilt: we simply could not justify going in for further bank borrowing. Moreover, even if we did, we could not earn enough money to pay the interest on the loans. I am trying to put this in the simplest possible terms, but this is what is known and understood in boardroom after boardroom of this country.

Therefore, the Government have effectively ruled out more bank finance, because we cannot afford to borrow it. They have taxed our profits so that we cannot plough them back. And even then we are so caught between the increased cost of wages and the price control that the profits simply are not there. Furthermore, we cannot attract equity capital. It is a tragic thing to see the state of the Stock Market to-day: to see great companies which can be bought for a tiny part of their real assets. My Lords, you cannot run the private end of a mixed economy in that way, when great institutions like the Prudential will do almost anything rather than put their money into energetically conducted, well-managed manufacturing, companies, in the knowledge that those companies will neither be allowed to earn money nor, if they die earn money, be allowed to distribute it. So in boardroom after boardroom we sit around wondering what research and development we could safely cut or what activity we could close. That is what is I wrong in this country, and unless and until it is realised there is not the slightest chance of getting it on its feet again and standing up and facing some of these problems which confront us, which I may say we are well capable of facing.

I do not want to shock anybody but I should like to thank Mr. Healey—nobody else has thanked him—and to say that it may not have been a perfect Budget but it was a Budget in which Mr. Healey tried to do something for industry and made precious few concessions to the Left Wing. Knowing as I do something of the difficulties of Chancellors of the Exchequer and something of the difficulties of politicians generally, I think on the whole it was a pretty brave Budget. Obviously we want him to go further, and the message I want to give to the Government is that he must go further pretty quickly if we are going to pull industry out of the malaise it is in to-day.

What do we do? I am not dogmatic about these things, but may I say that I do not believe for one moment that a rigorous application of monetary techniques would be wise or sensible at this moment. I do not agree with the drastic measures which are suggested by Mr. Powell, or even with the much graver hints that were delivered by Mr. Healey in the course of his Budget speech. If somebody tried to apply the full rigours of monetary mechanisms to an economy in the state of ours, the train would go clean off the rails and I doubt whether we should get the railway running again in my lifetime. So it is not a question of being dogmatic on these things. At the other end, I do not believe it is possible to go on telling industry that somehow or another it is their responsibility to keep the social contract.

I was really amazed at the dialogue between Mr. Foot and Sir Kenneth Keith the other day—absolutely astonished. How on earth do the Government think that industry can keep to this? Management is already so weak it cannot stand up to a strong wage demand. Its customers are clamouring for deliveries which are already in arrears. Its cash flow is often in a disastrous condition. It has never been in a weaker position to withstand a wage claim—and it is being made weaker every day. So I would say to the Government and to the noble Lord, Lord Beswick, who asked about these points that it is no good appealing to industry to help in that way.

LORD BESWICK

My Lords, is the noble Lord suggesting that what we really want is Government action of the kind we had during the miners' dispute earlier this year?

LORD THORNEYCROFT

My Lords, I was coming to that point and I will answer the noble Lord direct. I know it is much easier to say what it is impossible to do than what one ought to do, and this is a fair point to take. The point I am trying to make to the noble Lord is this. I do not believe he would get very far by appealing to Sir Kenneth Keith, who has not signed the social contract, or even by appealing to Mr. Jack Jones, who has. Power is moving rapidly out of the hands of these men. Mr. Jack Jones was no more capable of controlling the situation concerning the Scottish lorry drivers than Sir Kenneth Keith could possibly have held that wage claim in Rolls-Royce.

May I urge all of us to look objectively and clearly at these matters. In my judgment, only the Government can act. It is beyond the capacity of others to act and the sooner the Government act the better. The sooner that they act the less suffering there will be, but the terrible paradox is that until the suffering is really terrible no Government will dare to act politically. This is the paradox of our democratic society in 1974.

When the Government act I have very little doubt about what they should do; I do not think that the solutions are difficult. Of course, they will not act now, but when the time comes I am reasonably clear about what they will do. Wages, profits and salaries will be controlled; there will not be a freeze; they will be indexed, probably a little below the level of inflation. Monetary techniques, not on the draconian scale advocated by some, will, of course, he used. Government and local expenditure will be cut, and local government expenditure in particular. I really do not believe that this country can afford the lush pastures of the Local Government Reorganisation measure, with vastly inflated staffs and the rest. Redundancy must be caused in some of those areas and we must not be afraid to state that term in the clearest possible way.

All other new expenditure must be cut, and I include the Channel Tunnel; and I state this in terms rather more clear than those which were addressed to us earlier this afternoon. It is just "out" given the state of the economy at the moment; so, may I add, are the nationalisation measures. All new Government expenditure which is extraneous to the crude necessity of survival in this country must be eliminated and if I may say so, eliminated fairly quickly. All the resources of Government will have to be concentrated upon survival. Legislation about the "frills" of living can be put aside or postponed to happier days.

It is not a question of the standard of living in this country not rising. The honest truth is that the standard of living of all of us (it is not just a question of the middle-class or the self-employed; it means also the trade unions) will be somewhat lower for a year or two, because everybody knows that we are living quite beyond our means at the present time. Surely it would be possible to state this in clearer terms. I realise that this cannot be done by the Government at this moment but it will be done, perhaps not by a Government of one Party but by a concordat. If there were to be a National Government or something of that kind, for my part, in existing circumstances, I should look to the Right and Centre of the Labour Party to lead it. I recognise that the Labour Party would pay a terrible price in the short term for that act of national service but, my Lords, the time will come. It is already later than we think.

5.25 p.m.

LORD GORDON-WALKER

My Lords, although I did not altogether agree with the reasons for which the noble Lord, Lord Thorneycroft, previously resigned from the Government, may I say how very much I admired the courage with which he did so. When I say that I did not altogether agree, I agreed to quite a considerable extent with the reasons which he then gave. I thought that he had much the better of the argument with the Prime Minister, who tried to dismiss him, as I remember, at a rather low level.

The noble Lord said that all of us—and I hope that he is right—have an clement of egalitarianism in us and that the great problem is how far to push egalitarianism. It may be that the noble Lord is right that the Labour Party pushes it somewhat too far, but I hope he will agree that very often the Conservatives do not push it quite far enough. Perhaps a kind of balance is achieved in the degree of speed with which we move towards egalitarianism. I should like to agree with him that the noble Viscount, Lord Watkinson, has given a very fine lead to industry. He is one of the industrial leaders who has shown most courage and, I think, most vision.

I agree with what the noble Viscount and other noble Lords have said about the gravity of the crisis which is facing us but—like all other noble Lords who have spoken—I do not take such a gloomy, downcast view of our prospects as the Hudson Institute. It is not worth taking up much time in trying to analyse the Hudson Report. It made some shrewd points but it has very serious flaws. Reading it through, it seemed to me that only too often the Institute thought up an argument and then found the statistics which would fit it. One of its methods was very curious. It was to apply to Britain certain French and American prejudices. It seemed to me to be one of the most grotesque propositions that I have ever heard, that if a certain number of your Lordships were removed from this House it would immediately reanimate and revivify the economy of Britain. Any report that can fall to that kind of level is not worth paying a great deal of attention to.

In so far as the report was relevant, it was not new. All of us know, broadly, the gravity and greatness of the challenge that faces us and the main lines of the challenge. In my view, one cause of our undoubted troubles is the pursuit still of rather old-fashioned policies. Just as generals are said to fight the last war, certainly economists and Governments are always fighting the last or the last but one depression. I was interested in what the noble Lord, Lord Thorneycroft, said about countries which were doing better than Britain, and it seems to me that Germany is one of them. The reasons why Germany is doing so well are, I think, very interesting.

First of all, Germany has no prices and incomes policy. It has no guidelines. it has no social compact. It has much higher wages than we have and much higher incomes. And yet, despite three or four revaluations of the Deutsch-mark, it manages to maintain exports and to go on building up its balance of payments surplus. That seems to be an impossible thing to do if one looks at the kinds of policies which we pursue and the results which we produce. The reason is very simple: Germany manages to make products which other countries cannot do without and which they have to pay for and buy at whatever price is asked. Therefore revaluation has very little effect upon German exports. If we could do even half as well as that we could transform our economic situation, and this certainly should be our aim. Not only must investment be of the right kind, as my noble friend Lord Beswick said, but exports have to be of the right kind if they are to be maintained in crises and so forth.

As everybody says, we need more investment both in public and private industry, provided that, as my noble friend said, it is of the right kind. In one respect I agree with the Hudson Report. It has always seemed to me—and still seems to me—that the city exports too much capital abroad and does not invest enough in British industry. Obviously one must not go from one extreme to the other, but it seems to me that they do not set the balance right in the national interest. The noble Lord, Lord Thorneycroft, said that no one thanked the Chancellor, and I agree that thanks have been obvious by their absence during this debate. I should like to thank and praise the Chancellor for what he did. It seems to me that, judged by the needs and difficulties of this country, the Budget was fairly good. It is impossible to get everything right or to do everything at once in a Budget. The noble Lords knows this from experience—I have watched him trying to do it.

It seems to me that two features of the Budget were particularly important: one was to ease the cash flow of private industry, and in the light of this I do not see how noble Lords—the noble Viscount, Lord Watkinson, for instance—can say that the Chancellor did nothing to restore confidence. This was an important factor and it ought to help to restore confidence unless people are resolved never to get their confidence back. It needs two to create confidence, just as it does to create a quarrel and so forth. It is not only the Government; it is industry and other people in the economy who must help to restore confidence. The demand for more confidence can become a kind of blackmail. Industry can go on saying, "You must give us more or we will not be confident, and then you must give us some more after that". That kind of blackmail is not the right way to set about restoring confidence. One should take what the Chancellor has done in this field as an important step towards the restoration of confidence and not be determined not to he confident.

Some people have said that the changes the Chancellor made are too complex and ought to be simpler. It is always possible to say this about taxation but in my experience—and, I am sure, in the experience of any Chancellor of the Exchequer—the choice is between simplicity and justice. It is very easy to have a simple tax which is completely unjust; if you are to have a just tax it has to be more complex. The more just it is the more complex it becomes. It is very easy to say that taxation should be simpler but one is also saying that it should be more unfair. Even the noble Lord, Lord Thorneycroft, who said nice things about the Chancellor, said that this measure did not go far enough, and other noble Lords have said the same. It seems to me that if the Chancellor had put more cash out to ease the cash flow of industry that private industry would soon then not be making a sufficient, proper contribution to tax revenue. It is no good saying that we are only giving industry back its taxes. This is true of every person in the country.

Of course the Government must take money away to do all sorts of things that have to be done. If you give too much back to old age pensioners, industry or whoever it may be, you are getting the thing out of balance. If private industry were not making its proper contribution to the revenue, to increase its cash position would be tantamount to a generalised subsidy to industry. That is something we must not have. Industry, as we all know and always proclaim, must stand on its own feet, and if things are made too easy for industry it will increase the tendency to import, decrease the incentive to export and lead to an over-easy concession to wage and salary demands. I agree that there is difficulty here but it is part of the duty of industry to manage, and if it is so weak that it cannot manage it must abdicate and somebody else must do it. Until that point is reached, it has to play sonic part in accepting the responsibilities of management which include not giving way too easily to improper demands for salaries and wages.

The second good feature it seemed to me about this Budget was the decision to abolish subsidies to nationalised industries. The losses made by nationalised industries were not really the fault of those industries; they were the fault of successive Governments, both Labour and Conservative, who fixed prices at artificially low levels and therefore had no alternative but to finance the consequent deficits. Any grave, large-scale subsidy of that kind must distort demand and must in the end be bad, and it seems to me right that the nationalised industries over a reasonable period of adjustment should charge economic prices and find or raise their own investment capital.

My Lords, the Chancellor of the Exchequer in fighting inflation always faces, as this one did, a grave dilemma. He has to sop up purchasing power in one way or another, and in this case to relax price control in order to help industry get more cash, and also to write down and reduce and in the end remove subsidies to nationalised industries. All these things put up prices. It therefore appears that they increase the inflation which the Chancellor is trying to reduce, but it seems to me that in the circumstances there is no alternative. It is only by putting up prices that you can check demand in the economy, reduce imports and release resources for investment and export.

We on this side of the House, and I think many noble Lords on the other side, agree that the last Conservative Government worsened the inflation by the enormous Budget deficits which they contracted, thereby enormously increasing the money supply. Britain in consequence has since had two distinct types of inflation, and this is what has put us at a disadvantage compared with many foreign countries. First of all, like all developed countries, we had the inflation that was due to the increase in import prices and in oil prices. But over and above that we had the inflation engendered by this enormous increase in borrowing and increasing the money supply by the previous Conservative Government. It will naturally be retorted—and I expect to be interrupted at this point but will interrupt myself—that at the moment the present Chancellor has contracted even greater borrowing requirements. It seems to me that if we do not understand this we do not understand altogether the economic problems we are facing: that there is a significant differance between the two cases. Mr. Barber resorted mainly to internal borrowing to finance domestic expenditure and therefore directly increased the money supply. My right honourable friend the present Chancellor borrowed mainly abroad to cover the increased costs of oil and that does not to the same degree increase the money supply. To a considerable extent this borrowing abroad is used to finance the oil balance-of-payments deficit which correspondingly reduces the money supply. It takes the money again out of the economy.

Of all our problems I think—and I suppose everybody agrees—inflation is he major one, and the Chancellor has done, as I tried to argue, about as much as he could to try to cope with inflation. But in the last resort the Government cannot by any device solve this problem of inflation. If people are determined to behave in a way that makes inflation inevitable, it will of course come about whatever the Government may do to try to resist the tide. Inflation and its cure—as my noble friend Lord Beswick said—depends primarily on the attitude of people. Nothing effectively can be done unless people in all walks of life, in all stages of industry and outside industry, fear inflation more than other economic ills. If they fear other economic ills worse than inflation, we shall go on having inflation. This is one of the great advantages that Germany has had in that it suffered two appalling inflations—and this takes many generations to forget.

The best that the Government can do is to help induce this kind of attitude. It seems to me that there are some signs, which I have detected in some of the speeches we have listened to to-day, of a beginning of a change of attitude. As the noble Lord was saying, there is some indication of a widening recognition that pressing excessive wage or salary demands, and giving way to them too easily, will drive firms out of business, or at any rate into heavy redundancies. I think it is beginning to be felt that both jobs and profits are more important than wage increases, which merely put up prices, which then undermine both real profits and real wages. We have been speaking about inflation accounting but that does not bring the profits back; it merely tells you what has happened to them.

Now in the background we have this ominous and bleak warning by the Chancellor that if wage and salary demands increase too much and are too easily conceded (because these things all go together) we should have no choice but to resort to deflation, with all its horrible, grim consequences. That seems to me to be a courageous thing for a Chancellor to say. I do not think any Chancellor, not even the noble Lord, ever said that quite so clearly before. When we look back on these grim and gloomy days they may be thought to be one of the turning points that began to bring about the change in the public attitude which can alone reduce inflation to tolerable and reasonable proportions. If we succeed in that, our economic recovery can be much more speedy than many observers here and abroad at present expect.

5.42 p.m.

LORD STOKES

My Lords, the problems of industry have already been discussed in some detail this afternoon by much more able Members of this House than myself, but I should like to speak from the particular rather than the general terms which tend to surround debates on the economic, industrial and financial problems which face this country. The analysis of the problems is, I think, well known to your Lordships. If one thinks about it, it should also be blatantly obvious to almost every man in the street. However, economists, politicians, sociologists and other experts analyse the problems ad nauseam in jargon-laden terms to such an extent that utter confusion often results. But to bring it down to basics, if a fairy godmother suddenly appeared on the scene and said that we can have only two wishes which will enable us to put right the economy, I think we would have to ask for something to help the inflation situation and, secondly, something to rectify the fundamental problems which hamper our export effort.

Inflation is, of course, the largest single problem of the moment, as we have already heard. No country has found a solution to it and far be it from me to try to compete in the solution-finding process. All I can say is that everything must be tried, because otherwise we are in danger of reaching such a situation where we shrug our shoulders at a 20 per cent. increase per annum in the cost of living, not realising just what that means. We cannot in all fairness ask our work people to limit their wage demands if prices are rocketing sky high. The noble Viscount, Lord Watkinson, referred to the effect on pensions but I wonder whether any noble Lords here have worked out just what a 20 per cent. inflation rate really means? If a clerk, for instance, starts work at the age of 18 to-day on a salary of £1,800 and, in order to keep apace with the cost of living, he receives a 20 per cent. increase per annum he will be earning a salary at the age of 30 in excess of £16,000 a year, at the age of 40 he will be earning £100,000 a year and over £500,000 if he is still alive by the age of 50. Noble Lords may smile, but this is the reality of the situation and it is imperative that all nations should use their brainpower to the utmost to cope with this insidious, incipient inflation.

I have only briefly touched upon inflation because I do not know the answer but with your Lordships' permission I should like to dwell on the second of the major points; namely, exporting. I think that as a nation we have grown complacent. I have seen intelligent people shrug their shoulders when talking about the £4,000 million deficit on the balance of payments. In fact, we have become so blasé that we have now decided to call it £4 billion because apparently that sounds a little less than £4,000 million. But whatever we call it, it spells disaster in the long term for this country. I believe this point needs ramming home, not just in this House but in the workshops and on the factory floors. There is absolutely no point in saying, "It is all due to oil". Of course a major part of it is due to oil, but that in turn hides a fundamental imbalance in our international trade.

I believe that all of us here are aware that this country has to live by exporting. We have to export to earn the money to fund our imports of basic necessities. Your Lordships may concede that I do have some experience in this field, and I know, along with many other people, that exporting is not fun and it is certainly not becoming funnier in current times. We are up against problems of intensive overseas competition with other companies which are suffering from the same problems as ourselves. We are up against the everlasting problem of failing to meet our delivery dates and we are up against the problem of escalating prices which seem to escalate just that fraction more than do those of our competitors.

Unfortunately I believe that a lukewarm attitude towards exporting has developed over the last few years. I am sorry to say that this lukewarm attitude has been visible in all sectors of activity. For too long the pound was considered sacred. Then we had devaluation followed by the floating pound which certainly gave a boost to exporters; but this advantage has now been significantly eroded. We were grateful for such an advantage when we had it, but now we have a problem in that finance for exports tends to involve a tedious negotiating situation and, despite excellent assistance from the Export Credits Guarantee Department, I would remind your Lordships that for the big companies the finance required for overseas trading is offset against their overdraft facilities in this country. No wonder people turn to the easier and softer home market.

This minor moan about export finance is not really why we do not export enough. I believe the two main reasons why we do not export are industrial relations problems and the investment situation in the United Kingdom. These are inter-related because although we need more investment it is just as vital to be able to use the investment that we do have, and anything up to 15 per cent. of our productive capacity to-day is being wasted through utterly unnecessary industrial stoppages. If we had this additional production our export performance would be transformed. In my own company alone we should have been able to work to our normal achievable scheduled output and to increase our exports by some £70 million a year. That is simply the experience of one company, which I am sure must be reflected by many others throughout the land.

I do not believe that the vast majority of these stoppages owe their origins to such matters as defective grievance procedures, nor to low levels of pay, unfair systems of payment, the monotony of work, nor indeed, to ham-handed management. Equally I do not believe that many stoppages to-day are concerned with honest matters of basic principles or with the correction of injustice. Too many stoppages, in fact, occur long before the agreed conciliation procedures have been exhausted, and a change of attitude on this single point could bring about untold benefits to our export situation. I am convinced that the majority of stoppages are caused in pursuit of short-term advantage or narrow self-interest without consideration to the long-term damage to the interests of the strikers themselves, and I think we all have personal knowledge of the damage they do to our reputation overseas.

I think we need—more perhaps than anything else in this country at this time—an honest and total exposure of our economic situation and the true extent and reason for all the industrial disruption that we have. A united call is needed from the country's leaders—including politicians, industrialists and trade union officials—so that there can be a renewed and dedicated effort by all of us to pull the nation up by its boot-straps out of the economic morass into which we seem to be inexorably sinking. Work has always been a four-letter word, but in recent years it has shown signs of becoming a rather soiled and sordid four-letter word. The plain fact of the matter is that only by a determination to work harder can this country survive. We have got to lick this strike problem. Until that is done, we must put out of our mind the prospect of any further increase in leisure time at the expense of the working week.

We are now witnessing the spectacle of a nation which, as a matter of divine right, is demanding automatic protection against inflation with virtually a total disregard of whether such pay increases are in any way related to increases in effort or in production. That is the path of national suicide. If shop floor power is devoted exclusively to that objective we are, indeed, in a sorry state. I am by nature an optimist. I still believe that if the true facts of the awful consequences of drifting, as we are, are made crystal clear to everybody, it is still not too late to create a new sense of industrial selfdiscipline and responsibility, through which the possibility of making a very quick buck out of strike action or the pursuit of other selfish interests by small minority groups will be subordinated to the needs of the nation.

My Lords, may I now turn to the other problem which has hampered our export drive—the lack of investment. The attitude of the United Kingdom, both of Government and industrialists, unfortunately has not changed with changing times. I think there has always been a parsimonious attitude in this country which, encouraged by penal taxation, has tended to utilise existing equipment and resources to the utmost on a "make-do-and-mend" basis, compared with the "scrap it and start again" attitude so prevalent in the United States. Perhaps it is a feature of living in a congested island. In the United States, when they have a technology leap, American firms can build new factories on new land at little cost. In fact, they can knock down one factory and put up another, housing the more modern equipment. We cannot do that, nor are we encouraged so to do by Government restrictions in the form of Industrial Development Certificates.

My Lords, Japan and Germany often are held up as examples. I know it is "old hat" to say that although we won the war we lost the peace which, in this case, is epitomised by the fact that both Japan and Germany were able to start Off after the war with green field sites for new factories. May I remind your Lordships that a lot of our current production is produced in so-called shadow factories, built as emergency measures prior to the last war. Few of these have been modernised since then. One may rightly blame industrialists in the past for not having been aggressive enough in overcoming obstacles put in their way by successive Governments, in the form of restrictions on investment or changes in legislation relating to such investment—investment grants, investment allowances, back to investment grants, the old cycle. However, I think your Lordships must concede that the background has not been conducive to investment. There has been a lack of consistency and continuity in Government policy. I have only to remind your Lordships that the motor industry alone suffered seventeen changes of Government policy from 1960 to 1970. This made planning well-nigh impossible, and produced a stagnant market. No wonder the industry in the past had little confidence to invest substantially in the future. I join with others this afternoon in welcoming the measures recently introduced in the Budget, including the strengthening of the FFI. But more than this still needs to be done. I think the noble Lord, Lord Thorneycroft, has highlighted better than I can some of the liquidity problems facing practically every country and industry to-day.

In conclusion, may I highlight two particular points: first, we must work together to get a greater sense of personal responsibility in the broader national sense, coupled with greater dedication to the creation of wealth rather than a selfish preoccupation with how that wealth is divided. Secondly, let us accept and understand the enormity of the £4 billion annual deficit, which by no means can be eliminated by North Sea oil alone. Our salvation is to export more, and to export it competitively. That means that we must channel a greater proportion of our limited financial resources to support those engaged in exporting and in import substitution, thereby ensuring the maximum possible return of such limited funds as we now have available to us in this country.

5.55 p.m.

LORD BOWDEN

My Lords, I feel very diffident in speaking in this House after so many men who know industry so much better than I. For that reason, I wonder whether I may be forgiven for mentioning briefly the effect that the present rate of inflation is having on the sector of the economy that I know best; namely, the universities. I can say quite simply that no university in this country will be able to pay its way after about this time next year. It is probable that at least a dozen universities will he unable to pay their bills until the end of this current academic year, next July. Problems of the very greatest legal nicety have to be solved before a chartered body like a university can call in the Receiver. But I have little doubt that the necessary legal action will be taken, perhaps even in this House, within the next year unless the Government are able to help in some way. I am glad to say that the Secretary of State is to receive a delegation early next week to discuss the matter as he sees it.

My Lords, I do not raise the question of universities as a particular hard case. I simply say their position is not unrepresentative of that of many other bodies, like the National Health Service, local authorities—and local education authorities in particular—and a large number of bodies, all of which, like universities, spend the greater part of their budget on salaries and wages, and who cannot afford to dismiss people, nor to continue to pay them. They face the inexorable calamity with all the skill and enterprise of a rabbit fascinated by a stoat.

There is no doubt at all that inflation has been the cause of a tremendous amount of our trouble. Before we go further we must say that, were it possible to eliminate inflation, undoubtedly this would solve our problems. The greater part of world inflation was caused by the action of President Johnson, who made up his mind to finance the Vietnamese war without raising taxes. He did so by printing enormous amounts of dollars which were spread all over the world. Because of the position of the dollar as a reserve currency President Johnson was able, at one and the same time, to debase the currencies of almost the whole civilised world, a privilege denied to any single individual since the time of the Roman emperors. I would remark that the Emperor Diocletian, confronted with a major problem of inflation, introduced a most elaborate system of prices and incomes control which was enforced with all the rigour of the Roman law, including the death penalty for offenders. In spite of this, it was a complete failure. There is a long and ancient history of price and income policies and, so far as I am aware, none has ever worked.

Let us consider what inflation has already done. I want to try to persuade your Lordships that the reason it is so damaging is not that it is of itself harmful. After all, inflation cannot remove a single machine tool from a factory, nor can it destroy any of the raw materials which we find in the earth and upon which we depend. Inflation has made it impossible for industry to work. I propose to discuss briefly what I believe to be the primary reasons.

May I begin by saying that inflation was exacerbated here in about 1973 by the efforts Mr. Barber made to support the achievements of President Johnson, achievements also referred to by the noble Lord who sat down a moment ago. He, too, printed an enormous amount of money. A great deal of it went into the property market. It was intended to support industry, I have little doubt, but that is where is went. As a result, an ordinary Englishman living in his house in 1973, earned more by doing so than he did in taxed incomes. In other words, the total increase in the book value of the 18 million houses in this country was greater in that year than the alleged value of the Gross Domestic Product, a quite inconceivable achievement which no one could have foreseen, and which led to the same illusion of easy money which wrecked the American economy in the 'twenties. But while this extraordinary bonanza was in progress in the property market, industry was being destroyed by the same process, as the noble Lord. Lord Thorneycroft, has already pointed out. Our system of accounting does not allow a man to replace his machine tools as they wear out, but only, in effect, to depreciate them to what was their original historic cost. Because the price of new machines is rising so fast the company accounts which have been prepared these last 20 years throw little or no light at all on the state of the productive capacity of British industry. This is an almost unbelievable result, but it is nevertheless true. The Philips company has been producing properly adjusted accounts for nearly 20 years. This leads me to say that the work of the Sandilands Committee is of enormous importance.

But though it has been very damaging to ignore replacement costs or make use of historic costs in our accounts, the effects of inflation on the stock and work-in-progress in factories was totally disastrous, and ordinary firms were taxed for the privilege of maintaining themselves in being. If I can use an analogy, they were taxed as a householder would be were he required to pay income tax on the appreciation in the value of his house every year. No wonder British industry has suffered.

In this last year, of the total profits declared by British industry. I think nearly two-thirds can be attributed to the totally fictitious profits which are due to accounting the increase in the value of stock and work-in-progress as profit. Of the remaining one-third, more than half is removed if you allow for replacement costs of machines, and only about 15 per cent. of the total declared financial profit of British industry is in fact real. British industry has learned over a period of years to declare large profits and go bankrupt at the same time. As noble Lords have said, people have been extremely reluctant to invest in British industry. and the reason of course is simply this. If you do so you are bound to lose money by it. if you compare your return with that you would get from investing in gilt-edged, corporation stock or anything else you care to name.

This brings me to a very important point. The real interest which has been paid on shares has in fact been negative for many years, and by this I mean that the return on capital has usually been less than bank rate or the return on gilt-edged stocks. About 200 years ago Adam Smith remarked that capital accumulates because of the interest which it earns, and he threw away as a sort of aside that if interest ever became negative capital would disappear. He thought it inconceivable that such an eventuality could ever come about, but in the last decade we have watched the rate of interest become negative, and we have seen capital gradually disappear from British industry. It is a very frightening fact. The Financial Times Index stood at 100 in 1935 and it now stands at 168 or thereabouts; and at a time when the actual value of money has declined at least five-fold, one can say that the value of British industry has declined to a real value of about 30 at 1935 prices; in other words, industry has gone down in value in 40 years. and in 1935 we were by no means satisfied with the state of industry or its prospects.

I think a great deal of this is due not only to inflation but to its interaction with the accounting system and fiscal system which has dominated British life for so long. That is why I am so glad the Sandilands Committee is considering the whole process of inflation accounting, and why I am so glad that the Chancellor of the Exchequer made the concessions he did in his last Budget. I myself have given evidence to the Sandilands Committee, and I concluded after talking to them that their terms of reference do not include the possibility of considering what I believe to be the only real remedy for the financial catastrophe with which we have been confronted for so long. The remedy was first suggested 300 years ago; it was very much canvassed at the time of the inflation which succeeded the Napoleonic wars; it was urgently recommended by Alfred Marshall when he was Professor of Economics at Cambridge, and it was strongly supported by James Maynard Keynes. In other words, it is an idea which has been much discussed and has a very honourable ancestry. It is what is technically called indexation. We already have a great deal of it in this country, although we have never learned to accept it by that name. Your Lordships may remember M. Jourdain who found he had spoken prose for 20 years without knowing it. Our situation is not unlike his.

The first and simplest example is the idea of cost-of-living bonuses. They are widespread in England, and in almost every country in the world. You will find that in America, for example, all Government pensions are indexed quite precisely in terms of the cost of living. France and Canada, have done the same. We have cost-of-living bonuses in this country; we sometimes call them threshold agreements. But if the price of bread and cheese has gone up, in England the salary increases which arc awarded are clawed back by the Treasury, because they levy income tax on increased salaries. Furthermore, a man can move from one income tax bracket to another as a result of the inflation in his salary, which was given to him, let us remember, to make it possible for him to eat as well after the rise in prices as he did before. In Finland and in Canada the levels of income tax are indexed, as wages and salaries are, in accordance with the increase in the cost of living.

Now I come to the most important of all these forms of indexation. The British Treasury has for many years deluded people by offering for sale to them Government bonds, in the confident expectation that when the time came they would be able to pay them back in depreciated and devalued currency. Ordinary citizens who have trusted in the probity of the Government have been defrauded. There is no other way to describe what has happened to people who bought, let us say, 2½ per cent. Consols 25 years ago, when they stood at 98; they now stand at 16, and the man who sells them will be paid out in depreciated currency, and has therefore lost 90, perhaps 95, per cent. of the purchasing power that he invested in them.

The next stage in indexation comes when this scandalous process is stopped by the indexation of Government bonds. Your Lordships will remember that this year the Chancellor has announced that a few small bonds worth £500 each are to be indexed and made available to old age pensioners. This is the first timid but nevertheless very important concession to the idea that a man who lends his money to the Government should be able to buy something with it when he gets it back. Indexation in this sense has been tried by the countries I have mentioned, France, America, Canada and Finland. But we have not succeeded in taking it to what I regard as its right and proper conclusion. This has been done, so far as I am aware, in only one country in the world, Brazil.

I mentioned this matter last time I spoke in a debate of this kind in this House. I have not myself been to Brazil, and I therefore speak only from my contacts with, for example, the Brazilian Ambassador; and last week I listened, in the Stock Exchange of all places, to a lecture delivered by the Finance Minister, who about 10 years ago, introduced the reforms to which I am about to refer. I have no idea—and this is a matter of very great importance—whether the full rigour of the Brazilian system could be introduced into a democratic society like our own. I would not wish to say either yea or nay to the proposition that it can be. I do not understand any particular reason why the Brazilian system should not be adapted and used in this country, but I beg you to believe that I am not, by implication, saying that we need to have a dictatorship before we can be saved. I beg your Lordships to accept the fact that since indexation was introduced into Brazil it has had a most dramatic effect on the whole economy of that country.

South American countries by the score have for years suffered from appalling inflation. In about 1964 inflation in Brazil rose to between 80 per cent. and 100 per cent. That was when the reforms were first introduced. Since then, in the decade that has passed, inflation has been dramatically reduced by a factor of five. It is now about 20 per cent. I believe it has risen lately as a result of the rise in oil prices, but to what extent I do not know. The Ambassador told me last week that it was still less than 30 per cent. He also told me, and this is most important, that in his opinion the system they now have operating in that country allows them to cope with an inflation of 20 per cent. with no more difficulty than we find in coping with one of 5 per cent., and we can handle 5 per cent. tolerably easily.

It is a fairly complicated subject and I do not understand it clearly myself, but may I briefly explain what I believe to be the principal features of the Brazilian system. First of all, they have decided that money is not, of itself, to be the standard of value. The standard of value is a purchasing power which is defined in some such way as was proposed by Marshall—in terms of the price of wheat. In Brazil, if a man borrows money from a bank, he has to pay for the privilege, and the payment has two components. There is an interest rate, which is negotiated by the bank, and there is a component which represents the depreciation in the value of money, and that is defined by the Government. If you borrow for short term, the Government announce a figure which is binding for six months, but if you borrow money on the long term then the actual depreciation in the value of the money is determined retrospectively by the Government and is announced and made obligatory on all lenders and borrowers in the country. These two components are added together to decide the charge which a man has to pay for the loan, but they are kept separate in the whole of the accounting process thereafter.

If one indexes money in this way, one can do an enormous number of things which come very straightforwardly and easily. The most important point I can make is that this system was introduced into Brazil, a country that does not have a tradition of very highly educated and skilled accountants, and they have been able to cope with it. I am quite certain, therefore, that although it sounds complicated as I describe it. it must be fairly straightforward and simple to introduce and use. Money is indexed, and this is a fundamental thing which our own accountants have not considered, and which seems to me to be outside the terms of reference of the Sandilands Committee.

THE EARL OF DUNDEE

My Lords, may I ask the noble Lord a question? I am very interested in what he is saying. Ts it not the case that all of these financial reforms in Brazil to which he is referring were introduced after the fall of Goulart in 1964, and carried through by a military dictatorship?

LORD BOWDEN

My Lords, this is a point that I made. I simply cannot say whether similar reforms could be introduced into this country without such a stimulus. I have already said that I think it is very probable that most of them do not in fact demand the dictatorship which imposed them in Brazil. I think that it was coincidence rather than cause and effect. But this I simply do not know, and it is most important to find out.

Company assets are indexed, so that the idea of asset stripping, so familiar in this country, is impossible. Stock and work-in-progress are indexed. The country has three separate indices, one of which is the index for the cost of living, which applies to wages, rents and so on. The second is the index for commodities, which applies to stock and to work-in-progress. Thirdly, there is the index for Government bonds, which avoids the appalling scandal, which I referred to a moment ago, by which our own Treasury defrauds the gullible public which invests in them.

So we come now to the total effect of these reforms. When they were introduced, the economy of Brazil was suffering from all the troubles which beset us at the moment: a total cessation of investment, a stagnation of industry, a collapse of confidence and a tremendous and feverish speculation by everyone with any money to spend, hoping to recover what they could before disaster struck. Ten years later inflation has been cut to a quarter, the gross domestic product is rising at 10 per cent., which it never did before, and the position of everyone, both rich and poor, has dramatically improved.

The World Bank, under McNamara, claimed that, as a result of these reforms, the gap between rich and poor in Brazil has increased. I discussed this very important point with my informants last week, and they told me that the World Bank figures were taken in 1961–71. and 1971 was only two years after the reforms really started to take effect. The figures were dominated by the troubles which occurred in the five years before the I reforms were introduced. Secondly, a very considerable amount of the real wages of the poor people were not in the form of wage packets, but in the form of cheaper food, cheaper rents, and so on, which did not appear in the official statistics. Thirdly, and this is interesting, for the first year or two after the reforms, Brazilian industry boomed so dramatically that any competent engineer or manager could command a salary which, so I was told, was considerably greater than that earned by men in similar positions in the United States. In the last three years the wages of the poor have increased, the supply of managers has improved, and therefore the disparity is not as bad as it was.

LORD DOUGLAS OF BARLOCH

My Lords, may I ask my noble friend whether it would not be a great deal simpler to stop the inflation?

LORD BOWDEN

My Lords, I agree, but if only we could have stopped President Johnson fighting the Vietnam war, we should probably not have been troubled with it. Much as we deplore it and hate it, we have to live with it, as best we can.

The fundamental point is that the Brazilians have achieved what I can best describe as the equivalent of a gold standard in other words, a standard of value which is based on purchasing power, and which has been sought by economists in this country and elsewhere for hundreds of years. It is crude, it is bound to be imperfect, but, as Marshall himself said one hundred years ago, a single. precise, and absolutely fair system of value is not available and it is inconceivable that it could be. In Brazil, as in other countries, wages are inflated, or indexed, in accordance with the cost of living. One of the incidental results of this is that the trade union leaders have very little to do, because the greater part of the wage increases which they are negotiating come their way anyway and they only have to argue about differentials, the slight change of wages at the margin.

Furthermore, of course, the selling prices of manufactured goods are indexed. In this country we have indexed some things and not others, and I do not believe any economy can survive if half is indexed and half is not. You cannot, as we do, index wages and then not allow industry to index its prices. What has happened now, for example, is that the threshold agreements which we have negotiated so far cost altogether about £2,000 million to implement. Industry is allowed to pass on only half of that in excess prices, and therefore half, about £1,000 million, has had to be taken from the depleted resources of British industry, which is another drain on its limited capital resources.

I think this matter is so important that I will repeat the request, which I made the last time I spoke about it in this House, that we must study indexation intensively. It may or may not work in this country, but we have already introduced an enormous amount of indexation. I believe it is not possible to survive if we do not index everything, if we index anything. In other words, we should welcome that part of the Chancellor's last Budget in which he allowed concessions on the value of stock and work in progress. They seemed to me to be a crude first approximation to what might come about quite automatically if these commodities had been indexed as they are in Brazil.

I believe our present discontents are due to a combination of inflation (which very much to our regret we cannot cure) and a series of very arbitrary fiscal rules and accountancy procedures which are totally at our discretion were we to choose to change them. The unfairness, arbitrariness and the scandal which are due to our present system, vastly exceed, in my view, anything that could be produced by any reasonable alternative. I remember discussing this matter twenty years ago with a Cabinet Minister whose wife had just inherited a farm. He told me that he had made nothing out of the farm at all. He lived in the farmhouse rent free, and that was all it had ever done for him. But we worked out that the appreciation in the value of the property had been the equivalent of £10,000 a year in his pocket. He said, "I am no better off because I am still living on the same farm." I said. "Supposing, instead of inheriting a farm. either you or I had attempted to earn money in industry. In order to increase one's capital assets by by £10,000 a year one would have to earn, say, £50,000 before tax which corresponds to about £100,000 profit in the firm before corporation tax.' It seems to me that a fiscal system which says that to live on a farm and earn nothing is the equivalent of earning £100,000 a year in a factory is nonsense. These bizarre and intolerable results flow from this extraordinary combination of an inflation, which we cannot stop, and a series of fiscal policies and accounting traditions which we could perfectly well change.

I very much hope that the Sandilands Committee will recommend—I am sure it will—a better system of accounting than we now have and that the changes which it proposes will be regarded as a first step towards the liberation of our economy from the otherwise inevitable and disastrous effects of inflation combined with the practices and policies which we have wantonly and arbitrarily inflicted upon ourselves.

6.24 p.m.

THE EARL OF DROGHEDA

My Lords, I think that we all thank the noble Viscount, Lord Watkinson, for having initiated this debate. Certainly there is no more distinguished figure in industry and in politics, who has given up more selfless time in helping to solve the problems of management and in bringing about better understanding, than he. He has played a very active role in the councils of the CBI and the British Institute of Management, and we are all fortunate to have heard him to-day. I should like to apologise to him for the fact that I shall not be able to wait till the end of the debate because I have an inescapable commitment this evening where I have to act as host. I would also tender my apologise to the noble Lord, Lord Balogh, for thus not being able to hear his reply. I shall look forward to reading it, not that I expect him to reply to anything I personally have said. But I am sure that he will make some interesting comments on the subject of indexation in Brazil, which I was fascinated to hear about in the speech of the noble Lord, Lord Bowden. It may be that this is the answer to our problems, but I have the feeling that North Sea oil might beat it by a close head.

My Lords, the whole world has been plunged into a desperate crisis by the sudden realisation by the oil producing countries of their tremendous power, and by their cynical exploitation of that power. On top of that, the United Kingdom has its own domestic crisis which arises largely, I am afraid, from the mistaken policies of the previous Tory Government. It would be folly for me to engage in any sort of recrimination, but I think that to have destroyed the Prices and Incomes Board which they inherited, and then a year later to create two different bodies—one to control prices and one to control incomes—and to hand these over to the Labour Government when they came into power so that they happily can dispense with the Wages Board while the Prices Board remains in being, seems to me to be one of the great catastrophies of our time. I am sure that if the supervision of the prices and incomes had remained under the control of one body we should not be in anything like our present mess; but that is not particularly relevant any more.

The question is: what is to be done? I think that the crisis of this country is graver than most of the other countries of the West, possibly graver than them all. You have only to see what has happened to the value of the pound during the last year. There was a small table in one of the newspapers the other day which showed falls ranging from 20 per cent. to 7 or 8 per cent., and I think it appreciated only against the Italian lira. We had a masterful analysis of the whole position by the Chancellor of the Exchequer. I fully agree with the noble Lord, Lord Thorneycroft, in what he said about the Budget speech. The Chancellor told us that, leaving aside the added burden of the higher oil prices of some £2.5 billion, there would be a deficit on the balance of payments account for the calendar year 1974 of over £1 billion after allowing for net invisible earnings of about £1¼ billion.

I am told by people who know more about it than I do, that the 1975 figure is not likely to be particularly different. Therefore, I think that in the short term our problems are going to be absolutely fearful. We can take comfort from the thought of North Sea oil, although the problems of exploitation are far from fully solved. I expect that the House will hear something from the noble Lord, Lord Balogh, about the oil position. But we have to remember that every country has to a greater or lesser extent the same problem of making its payments come into some kind of balance. It is a great risk that they may all do something to put the shutters up, and that cannot help our country which is so heavily dependent upon overseas trade.

I hope the Government will reflect that they must give every possible encourage- ment to the earners of foreign exchange through exports. Most of these companies and undertakings are in the private sector, and therefore the Government must restore confidence to the private sector. Briefly, I should like to suggest one or two steps which could possibly help a little. There is a great fear among the business community of a world slump developing, and in relation to the outside world it is vital that the Government should make as much use as they can of the various international organisations which exist to prevent a worldwide slump from developing. I think that this country should be in the forefront of international co-operators. The Chancellor made a very helpful contribution at the recent meeting of the IMF, and I expect that Lord Balogh will have something to say about the proposals made by Dr. Kissinger not very long ago in relation to oil, the recycling of money, et cetera.

In relation to Europe, one has to say from the point of view of industry that the uncertainties arising from the Labour Party's divided views are an added source of concern. The bitterly hostile attitude of the TUC towards the EEC has never really been convincingly explained. There is no doubt that industry, both private and public, is wholeheartedly in agreement that this country must remain within the EEC—and these people know a little what they are talking about—and the Foreign Secretary said very recently that the experience of leaving the EEC now would he pretty traumatic. Whatever finally happens, it seems to me tragic that on top of everything else this cloud of uncertainty should have to hang over our heads—and we, I am sure, need Europe more than Europe needs us.

At home, the Chancellor of the Exchequer, in his Budget, did quite a bit to restore liquidity to the private sector, but the incidence of the relief which he gave was very uneven, and the fact remains that profitability is far too low. There must, I am certain, be some further modification of the price controls as they are outlined in the recent White Paper. Industry simply cannot generate the cash needed to carry on. Obviously there are companies that can do so, but as a generalisation that is not far from the truth. I am sure, too, that there will have to be a substantial and permanent reduction in the level of company taxation. The Government cannot take over the whole of industry—I am sure that not even Mr. Benn would want that to happen—and so long as they do not take it over it must be viable. So I hope that Lord Balogh can give us a few words of comfort on that front as well.

Then, I think it would be interesting if he could say something about the state of the stock market, because the depths to which the index has fallen—and the index paints a rosy picture of what has happened to the shares of a great many companies—are pretty frightening. As long as we have a private sector, I should like to think that other Ministers besides Mr. Harold Lever, who is occasionally referred to as the acceptable face of socialism, recognise the need for the stock market to be in a reasonable condition and the fact that its present lack of health is a cause for serious concern. The whole financial sector, and with that the property sector, must have confidence restored to it. I expect many of your Lordships will have seen in The Times to-day a letter from Mr. Ian Fraser, who wrote in an official capacity, although I have forgotten the name of the committee of which he is chairman. He spelt out, as indeed did Lord Thorneycroft, many of the adverse factors with which investment managers have to contend at the present time. To this list one could add something which I believe to be very fundamental indeed: namely, the numerous uncertainties now surrounding the property market, which in normal times provides a sort of base for the securing of advances and for underpinning a very large part of the whole financial sector.

I am told that by the third quarter of this year total bank lending through property companies amounted to something near £3 billion, and, officially, of that the London clearing banks accounted for under £1 billion, which was only about 6 per cent. of their total advances. But much of their lending to other financial institutions in the 1971 to 1973 boom ended up with the property companies, and also a large part of the £1 billion or mere which the clearing banks have recently had to recycle to the secondary banking sector. Obviously, there are other people here far better qualified to speak than I myself on this subject, but I am sure that until the Government clarify the position regarding commercial rent reviews and the powers being given to local authorities for compulsory acquisition, property at valuation will be pretty meaningless. Property is therefore going to remain largely illiquid and this can work its way right the way through the whole system in a catastrophic manner.

Finally, my Lords, I should like to say one or two words about the social contract. In my humble opinion it is a very fine concept, although I thought that in the TUC's document there was a bit too much attention given to rights and not quite enough to obligations and duties. When it comes to translating the contract into practical wage increase terms, the document is fairly imprecise. The Economist this week gave a table wage increases negotiated since the contract was published, and most of these increases appeared to be well above an acceptable level.

In his Budget speech the Chancellor said, if I may quote him: The most important single factor in determining the rate of inflation in the next year will then be the rate at which earnings rise. If settlements can he confined to what is needed to cover the increase in the cost of living"— which I suppose is some indexation—— we can reasonably expect to see a decrease in the rate of inflation in the coming year". — [OFFICIAL REPORT, Commons, 12/11/74; col. 249.] I hope that this will go on being said. Indeed, I think it is likely that for every settlement negotiated above the figure quoted by the Chancellor there will have to be other settlements negotiated below that level; otherwise, the inflation must proceed. I am quite sure, my Lords, that there arc a lot of trade union leaders who want very much indeed to see the social contract made credible, and I think that employers must work with them to resist unrealistic demands.

Even if the contract is religiously observed, I doubt whether we shall in the long run be able to afford it. That still remains to be seen but Ministers must, I am sure, speak out more and more forcibly about this matter. Some may have to swallow some of their prejudices, but they must do everything in their power to help and uphold responsible private enterprise, and to generate a sense of urgency about fuel consumption and about the duty not to go on unofficial strike—all the things which are so vital to the wellbeing of the country at this time. We are all in this situation together and we do not want to build a new Jerusalem out of a heap of ashes.

6.41 p.m.

VISCOUNT AMORY

My Lords, I should like to begin by assuring my noble friend Lord Drogheda that if he will be good enough to give me a power of attorney I shall be delighted to listen to the noble Lord who will reply to this debate on his behalf. I shall no doubt find myself much improved by doing so.

My Lords, we have had a first rate opening speech from my noble friend Lord Watkinson and we have, as we would have expected, listened to a courteous, responsible and thoughtful reply from the noble Lord, Lord Beswick. I think that they have together set just the right tone for the debate. Later, we heard a speech from my noble friend Lord Nelson, who was speaking from absolutely first-hand experience of these problems, and a powerful and persuasive speech from my noble friend Lord Thorneycroft. He told us about his resignation—an absolute disaster at the time, but every cloud has a silver lining because it led to my appointment. I particularly liked what my noble friend Lord Watkinson said about the need of solutions not only being accepted but, whenever possible, developing from the grass roots upwards. I agreed so much, too, with the noble Lord, Lord Beswick, when he said that we cannot afford to spend time slanging one another, though that is something that, fortunately, we are not very inclined to do in this House in any case.

I will not waste your Lordships' time talking about the gravity of the situation, because I am sure that every Member of this House is conscious of that. Unfortunately, I am not so sure that the same is yet true of all members of the general public. Many, I think, are thoroughly bemused by a plethora of statistics, percentages, billions of pounds which simply cannot be taken on hoard in that form, and exhortations, and they have become almost constitutionally immune. It will be sad if this means that we have to wait to learn our lessons not by receiving advice or warnings but by feeling, and that until we actually experience unpleasant things we shall not be fully conscious of the dangers that surround us. That would be a great tragedy. Emerson said that the British see more clearly on a cloudy day and I think that that is probably true, but the question is worrying: how cloudy does that day have to be?

Connoisseurs of Budgets may well hold the view that post-Election Budgets are on the whole better, or at least less execrably bad, than pre-Election Budgets. Out of three I have one of each kind to my record—I will not say credit—and I will not of course hear ill spoken of any of my three offspring. At least there will be general agreement, I think, that this third Budget of Mr. Healey's is far better attuned to the realities of the situation than his other two, and that his general aims have on this occasion been in the right direction. All the three Party Manifestos at the last Election started by testifying to the urgent importance of curing inflation, but the Labour Manifesto then seemed to me to go on to foreshadow all kinds of expensive measures which, at best, seemed to have no relevance to the problem of curing inflation and would clearly be likely to aggravate it.

The questions now of dominating importance are surely, first, whether this Government mean to make the cure of inflation their top priority to which all other policies will be subordinated, and whether, if they do, they are prepared to adopt the necessary policies to attain that end. Last July I wrote a letter to a newspaper—a thing I hardly ever do. I ventured to prophesy that, until the political Parties could reach some measure of agreement, not only about the end—the curing of inflation—but also about the means to that end, our situation would continue to deteriorate. said that if we could reach a measure of agreement on the means, the problem was still perfectly manageable but that I believed that if we continued to fight political battles on rather crude traditional lines we might find that Parliamentary democracy would be in grave danger. I still feel this most strongly. I detect in Mr. Healey's recent Budget some first signs that a measure of agreement between the Parties on what must happen may be in sight. Such a degree of consensus does not go very far yet, but let us hope that it can be developed. During the last Election, Mr. Wilson seemed to be denigrating the plea for national unity put forward by Mr. Heath, but since the Election Mr. Wilson has been appealing for that same sense of national unity.

My first detailed criticism of the Budget is that the warnings about the standard of living are still, I think, too muted: words like, "it is not likely that we can expect any general increase in our standard of living over the next few years" are simply not clear enough. The fact is that, as my noble friend Lord Drogheda said, we have been living beyond our income by at least 7 per cent. per annum, and we have been living on borrowed money. These facts surely mean not only that our relative standard of living will not rise, but that, inexorably, it must come down in the years immediately ahead; otherwise, bankruptcy will stare us right in the face. Such a reduction in our standard of living must continue until we re-achieve national solvency. Anything short of that is sheer self-deception. At present, as a nation, we are mortgaging our future at an alarming rate and this is something which we have no right to do.

My Lords, turning now to three or four points upon which I should like to commend the Budget, first, there was the Chancellor's recognition of the danger of continuing big deficits on public expenditure. The deficit he has budgeted for is of course an alarming one in itself, but the Chancellor seems conscious of the dangers of continuing at that rate. Secondly, I welcome the recognition of the importance of our balance of payments; it is a welcome return to previous orthodoxy which in the past few years has been sadly ignored.

Thirdly, I welcome his intention to ensure that the products of the nationalised industries will not in future be subsidised. Both Parties have been guilty of this error which, in the case of energy, is particularly culpable. I trust that we shall see being dropped for ever the practice of artificially holding down the prices charged by nationalised industries and then every five years or so writing off huge sums of capital.

The fourth point I should like to mention is the partial reversal at the eleventh hour of the practice so disastrously started in the March Budget of "clobbering" the finances of industry. I shall not speak at length about that matter because it has been so well dealt with by almost everybody who has spoken to-day. Companies are currently paying huge sums of tax on inflationary profits which have no existence in fact at all. As a result, they have quite inadequate funds available to provide the extra working capital required by inflation and for the replacement of assets, let alone to finance expansion. The method chosen by the Chancellor of the Exchequer (by tax deferment) does seem rather complicated. It will however permit companies to retain rather more of the profits which they earn and that will undoubtedly help them; but although the figures sound large, the help, if inflation continues, will not by itself do the trick. The intention to relax somewhat the quite unrealistic profit restrictions will clearly have to go much further or the funds for industrial investment will simply not be generated.

In my opinion the case for the deferment of advance corporation tax is unanswerable. This would simply amount to the recognition that the original decision last March had turned out to be a policy exactly opposite to that required by the situation. I beg Ministers and their supporters, when they urge industry glibly to increase the rate of investment, to examine a few simple examples of the results in present circumstances of new investment expenditure. They will find the rate of return—after corporation tax and after allowing for the increase in working capital required because of inflation—to be such as can seldom produce any return at all for shareholders in the foreseeable future. If heads of businesses really had to justify every project separately, they would not make any new investment at all. This is a thoroughly unhealthy situation, and unless it is corrected in some way it carries with it quite disastrous consequences for the future.

My noble friend Lord Watkinson referred to the fact that a number of supporters of the Party to which noble Lords opposite belong have been "sounding off" against the Chancellor of the Exchequer giving subsidies to industry. As I understand it, the need of industry to-day is not for capital loans at subsidised rates. Indeed, many companies feel—as has been said—that it would be thoroughly imprudent to increase their borrowings at all, because the total of borrowed capital is quite high enough already as a proportion of their total capital. What they do ask is to be allowed to generate through profits more capital for ploughing back, and to be allowed to keep for that purpose more of the profits which they succeed in earning by means of reduced taxation. It is surely true to say that bank borrowing is not generation of capital, because it has to be repaid. Capital can only be truly generated in industry from profits, though it can be obtained also by longterm raising in the equity market. I gather the Chancellor's realistic declarations about the need for more liquidity in industry and for industry to be allowed to retain rather more of its profits was received with rather glum silence from his supporters in another place.

Local government next year will be faced with increases in expenditure to which, rightly or wrongly, they are already committed, together with expenditure incurred as a consequence of the Report which the noble Lord, Lord Houghton of Sowerby, is to make in due course about the teachers, which will go far beyond what they can possibly raise on that narrow base which is afforded by rates. This is bound to involve the Central Government in paying much larger grants. Further, we have to remember that the increase in old age pensions in real terms, so highly desirable in itself——though we do not yet know in detail how the increase will be funded—is likely to prove inflationary in itself.

But the question on which the hopes of mitigating inflation in the short term must depend, I suppose, is on the efficacy of the social contract. I think it is a mistake to denigrate the principle of the social contract. My noble friend Lord Watkinson went a long way to identify himself with the view that that would be, a mistake. I certainly would not wish to denigrate it, hut I should like to see it going much wider, because, of course, at present it is simply between the unions and the Government. If it is to he effective, it must he in a much wider field than that. But however precarious this particular agreement seems and however great the chances are that it may founder, if we have to depend on a voluntary incomes policy alone some kind of social contract is essential; but it must be of the widest possible kind. My own belief is that a purely voluntary incomes policy is unlikely to succeed. Breaches and rejections are likely to cause its breakdown, and what then, my Lords? I am pretty sure that whatever incomes policy we have will require buttressing in some way, either by the laying down of guidelines or by other statutory sanctions approved by Parliament. I believe how. ever that absolutely detailed control of incomes and prices is not practicable. One danger of the social contract is that, as with other guidelines in the past, though it is meant to represent limits within which settlement can be made, so often in the past the top limit has become the minimum and settlements in practice become that limit, plus something extra. I am sure the Government are aware of the danger, but in my opinion it is a very real one.

I believe that the monopolistic power of the most powerful unions has made untrammelled free wage negotiations impracticable. There will have to be some guidelines imposed from time to time by Parliament. I listened with great interest to the noble Lord, Lord Bowden—I see he is not here at the moment—when lie talked about indexation. I had always felt that the danger with indexation was that to a very large extent it seemed to provide a built-in provision for continuing inflation, a kind of acknowledgment that the disease itself is acceptable. Nevertheless, for reasons that the noble Lord, Lord Bowden, described, I expect that this practice will, in fact, extend. But no cure will work until some way is found of eliminating that expectation of continuing inflation which is the real trouble to-day.

If the Government ask us as members of the Opposition what our attitude is going to be, we shall tell them, I hope, that we believe passionately that if our economic problems are to be overcome, it can only be by the development of a real spirit of national unity. Therefore, so long as the actions of the Government encourage such a spirit, and are in line with it, we shall I trust give them our positive support with the complete subordination of purely Party interests. But any needlessly controversial or divisive actions which the Government think fit to bring forward we must oppose vigorously, because that would destroy that spirit of national unity.

The storm signals are flying in every direction; an immense national action is required to cut back our consumption and increase our earnings, and we have to improve our national performance in so many ways. It is still roughly true that in much of manufacturing industry we employ three people to do what many of our competitors do with two—that is just an illustration of how serious the position is. The Government must have the courage, therefore, to tell the nation that we cannot afford in present circumstances many of the improvements on which we have been banking; that we must face up to measures of austerity, and the Government themselves must give us a lead in such measures of austerity and economy as are clearly necessary. Sacrifices must be shared—of course they must. That is the basis of any effective national policy. No section of the nation must try to protect itself at the cost of the rest. When our country fares ill, then in the oft quoted words of John Donne: Send not to know for whom the bell tolls—it tolls for thee". After all, we are all members of one nation.

So let us continue to work our Parliamentary system; it is the best system that has yet been found anywhere in the world. But in so doing let us remember how, in the days of the War, Parties found the means of temporarily subordinating their own purely Party policies to permit combined action for the nation's survival. That is what we must do again.

7.3 p.m.

LORD BERNSTEIN

My Lords, I ask for your indulgence as I have to leave before the end of the debate to keep an engagement made some time ago. I also ask for your sympathy. Following two ex-Chancellors of the Exchequer, not to mention all the other distinguished people, makes a Back-Bencher feel a little more disconsolate than when he agreed to speak. I should like first of all to add my compliments to the noble Viscount, Lord Watkinson, on a speech of great clarity. The CBI will be thankful for his special pleading. The noble Viscount talked about the dirty word "profits". I have been a member of the Labour Party since I was old enough to think. I know that in the Government and in most of the Labour Party they acknowledge that profit for businesses honourably made and properly spent in redevelopment is acceptable and worthy of respect. I hope we do not see any more headline statements along these lines in future speeches in the House of Lords. Another point made by the noble Viscount was that he did not think that the Prime Minister appreciated what the City had done. In to-day's Financial Times—and fortunately my noble friend Lord Drogheda has left his place.

SEVERAL NOBLE LORDS

No, he has not!

LORD BERNSTEIN

I thought he had gone.

The Financial Times said: Remembering that the City's performance in recent years has in many senses been of such a kind as to leave a lot of people thinking that it has much to answer for—one thinks, for example, of the secondary banking debacle—ministers might be well advised to refrain from inviting us to see ourselves as being greatly in its debt. If the intention is to improve its public image, it may well prove counter productive". The noble Viscount also said there were people who wanted a capitalist system to collapse. In yesterday's The Times there is a letter from a man for whom I have the greatest respect, Mr. Roger Grierson, a banker of great standing who has done much for the present Labour Government and the Conservative Government in the past. He says—and I am cutting this short— … when the present troubles subside (and provided they do not cause the capitalistic system to disintegrate entirely), there will not once again be an unseemly upward chase after equity shares by those who think they have missed the boat". He does not put the blame of possible collapse on the social contract, the trade unions or anybody else. He places it on the capitalist system itself. I as one of many in the Labour Party do not want it to collapse.

We have to consider whether we have a society of which we can be proud—and I am not partisan in this although I must say there has been a great many partisan speeches to-night, but there has been in the past a profligate society of takeovers and shedding and so on. But I will forget all that. There must, however, be some dignity in the behaviour of the people, whether in the City or elsewhere. There is no reason why we should not be thankful to the City of London. Last year the City of London in general invisible exports brought in over £704 million (of which 55 per cent. came from insurance). That is something to the credit of the City and there is no reason why we should not respect them for that.

The other point which has been made to-day, which I want to clear away, is the question of national industries. The Chancellor's decision is a big step forward not only because the consumer will have to pay, as he should (he can economise if he cannot afford to pay) but because of its contribution to the dignity of those who work in nationalised industries. Nothing is more demoralising than working in industries which have to have Government subsidy. The last debate we had here on the economy took place in your Lordships' House three weeks after the present Government were returned in February. Now we have another debate about two weeks after the present Government are returned to power. I wonder what this debate will profit us. Are we to be so non-partisan that we must not look back to where we all went wrong?

We should do this. The noble Lord, Lord Thorneycroft, raised this, to his credit, but he did not tell us what the Government should do. His attack on the past Conservative Party and Lord Watkinson's CBI speech have to be read together. This I will do with special interest to-morrow. The Chancellor of the Exchequer and the Chancellor of the Duchy of Lancaster analysed their reasons for the Budget which we are not supposed to discuss here but which is the living ghost of this debate. I have found different views from those of the noble Viscount and those of some noble Lords. Perhaps I mix with the wrong people, or maybe, because of my business interests, I mix with the right people. I have found that intelligent industrialists accept the logic of the arguments that led to the Chancellor's Budget which he has recommended in the other place.

My Lords, we no longer live in an ivory tower. We, that is, this country, Europe and North America, are no longer the Blessed People with the automatic right to the world's wealth or a major part of it. Your Lordships surely realise the changes that have gradually but with increasing speed changed our lives. The changes did not start with the last Conservative Government or the present Labour Government.

The noble Viscount, Lord Watkinson, mentioned the media, but did not develop his point. I should like to take it up, but with perhaps a different approach. Your Lordships know about instant and universal communications—but perhaps I should explain. The man on a camel or the man in a hut in the centre of Africa or on a Caribbean island has a transistor radio and can hear within minutes what is going on in the world. The Western countries were known to them but were seen only through the caretakers of its wealth and raw materials. They now listen to radio. They hear about the weather and the prospects of more dung for food or an extra ration of fertiliser. They have long known of sickness but now they know that although they are, or were, poor it was not so ordained.

I need not tell your Lordships about the reputation of horse traders. Perhaps your Lordships know that the cunning and wiles of a camel trader put them in the sade. A camel trader on his camel in the desert with a transistor radio at his ear can now within a moment or two know what is happening in all parts of the world. The camel trader has probably sent his sons to the London School of Economics or the Harvard Business School and together they realise the effect of international shortages and prices of, say, coffee, cocoa or oil and they act accordingly. Those in sugar producing countries know in minutes the effects of the failure of the sugar beet crop and what this could mean to them.

I do not think the people in private industry realise what has happened. Also, do not think they realise the benefits to private industry in the Chancellor of the Exchequer's Budget which have been understood by what is called "The City". The Chancellor has recognised the international problems. He has tackled the problems of monetary flow and, in my view, has made a most serious effort to prevent a world slump. Given a chance, I think he will succeed. We, like other countries of the late Blessed People (and some who were never equally blessed), are in the middle of a recession and the Chancellor has also to tackle an inflationary problem—you have but to see to-day's report in The Times of what has happend to Chrysler in America. His Budget is without gimmicks, with only one dramatic area; that is the benefit to industry of about £1½ billion. It is not a stop/go Budget. It is not a headline Budget. It is solid and chiefly designed for the times in which we live and to help the business sector and encourage investment.

Is it not a grave reflection, a sad one, that the City does not appear to understand what the Budget contains and what it will mean to business? The penny has not dropped yet. I think it will when they have discussed it with their income tax advisers. In addition to this tax reduction and the money from the Lever Bank (which the noble Lord, Lord Thorneycroft, says will not be taken up, but I should like to wager with him that it will be taken up) there is to be a relaxation of the Prices Code. But, my Lords, has not enough been said to show that this is a working Budget? People have talked about what we have to do. We have to work, eliminate waste—and there is plenty of that in this country; manpower has been mentioned—and improve our agricultural output.

Businessmen should stop talking themselves into a deeper recession. The Prime Minister said publicly that the Government believe in the private sector efficiently run. The Budget demonstrates this. It surprises me that it is not apparent and that there has been no appreciation of the serious attempt that has been made to give aid to British industry.

7.15 p.m.

EARL FERRERS

My Lords, in discussing the economic situation I should like to refer this evening to one specific part of industry; namely, the agricultural industry which I suggest is as important to our national wellbeing as is urban industry. It provides the food we require, it saves our imports and it saves our balance of payments, and it has a very important part to play in our national economy. Over the last few months the Chancellor of the Exchequer has been urged vigorously to do something in his Budget for industry to ease the cash flow and to encourage investment. He responded to this call and in his Budget put some £1,600 million back into industry—or, as my noble friend Lord Watkinson would say, he has let £1,600 million remain in it. But my noble friend Lord Amory said that post-Election Budgets are normally the best. I should like to refer to what the Budget did for agriculture, for, my Lords, in fact imposed upon agriculture a heavy system of capital taxation which I venture to suggest will alter entirely and detrimentally both the structure and the efficiency of the industry, and the effects of this have gone almost entirely unnoticed by those who are not directly involved in the industry.

I refer to the simple introduction of the capital transfer tax. I wish to confine myself not to the effects which this tax will have on those who pay it, but simply to drawing your Lordships' attention to the effect which this tax will have on the structure and the efficiency of the industry and on the ability of the industry to serve the nation. As we all know, the purpose of the capital transfer tax was to avoid the seven-year loophole by which people could pass their possessions to others without the payment of estate duty. As an exercise in the redistribution of wealth it can be, and is, argued by many that the closing of this deliberate and perfectly legal loophole is justified. I do not intend to enter into that argument. But one of the advantages of estate duty, whether one approved of the advantage or not, was that an owner, by seeking to avoid the payment of this tax on his land, would hand it over to the next generation. Therefore, one of the results, even if it was not one of the objectives of estate duty, was that it put into the hands of younger and more aggressive men the stewardship and management of land and farms and agriculture.

One of the results, even if it is not one of the objectives, of the capital transfer tax is that the certainty of paying capital transfer tax, as opposed to the possibility of paying estate duty, will mean that there is no incentive to an older generation to hand over the tools of the trade to a younger one; and this will result in an ageing population of farmers and landowners with a consequent lack of business virility which inevitably goes with it. I cannot believe that this is right or desirable either in the national interest or in the industry's interest, and it is certainly not the type of budgetary influence which any Chancellor would consciously wish to have upon any other industry.

This tax does not affect, as many people tend to think, only large farms and large estates; it affects the whole industry right across the board—the small farmers, the large ones, the owner-occupiers, the landlords and the tenants. As an example of how it can affect even the smaller end of the scale, I will take the case of a 200-acre farmer who is an owner-occupier—not a large farmer—with a rental value of £20 per acre and £100 per acre of working capital whose land could have been valued at £400 an acre in 1964 and £800 per acre to-day. Under the old estate duty system, if the farmer wished to hand this 200-acre farm over to his son he would have paid £24,000 in capital gains tax. There was all the incentive for him to hand over to a younger generation while he himself was still young, because if he survived the seven-year period there would be no estate duty to pay. But under the new system whenever the farmer hands over to his son he will pay not £24,000 in capital gains tax but over £78,000 in capital transfer tax, and the Chancellor has been silent on whether capital gains tax of £24,000 would be payable as well. What will be the effect of this on the industry? The incentive is to delay as long as possible paying the tax. The incentive is to discourage younger men being allowed to farm. The incentive is to encourage inertia.

My Lords, the Chancellor may argue that he has made concessions for full-time working farmers of under 1,000 acres. I hope that I have shown your Lordships that the reverse is the case and that he has put disastrously heavy burdens upon them. The effect is, of course, greater the larger the farming unit becomes and the inference, because of the Chancellor's concessions to farmers of under 1,000 acres, is that units of over 1,000 acres are sufficiently large either to be able to accept such a level of taxation or to merit it. At a time when economies of scale are evident in every sphere of industry and commerce, I suggest that we do this industry a massive disservice if we deliberately penalise the large and more economic unit. British agriculture has adjusted itself over the years to the changing economic climate. In 1962, about 15 per cent. of our land was farmed in units of 500 acres and above. Now, some ten years later, not 15 per cent. but 25 per cent. of the land is farmed in units of, over 500 acres, and nearly 10 per cert. of all our land is farmed in units of over 1,000 acres. I suggest that this is a fact of which we, as a nation, should be proud, and it is not one which, of itself, should require or invite deliberate reversal. It is this readjustment in farm size which has enabled agriculture so significantly to increase both its total output and its output per man, which virtually tops the list at an annual rate of increase of 6 per cent. It is this greatly improved structure which makes British agriculture a stout competitor within the Common Market.

The peculiarities of agriculture have been acknowledged for many years. It is a high capital asset industry with a very low rate of return. it is in recognition of this fact—and that land, unlike personal possessions, forms the raw material of an industry—that for the last 50 years agricultural land has been granted the 45 per cent. abatement for death duties. This specific and deliberate alleviation has now been removed by the Chancellor at a time when land values have increased, so that the combined effect of these two changes (one as the result of market forces and the other as the result of budgetary design) will carve even deeper into the capital structure of the industry. Owner-occupiers will have to sell part of their farms when they pass them over to the younger generation. The landlord and tenant system will he drastically eroded within a lifetime; and if there are those who see advantage in this, may I remind your Lordships that our landlord and tenant system is the envy of the Common Market, many of whose countries only wish that they had it themselves.

Tenants, too, will be disadvantaged. They will find not only that the benefits and protections which, as tenants, they have enjoyed will suddenly be removed from them but that they may be forced into becoming unwilling owner-occupiers and into a search for large-scale funds which they have not got, which they will find difficult to obtain and which they will find uneconomic to service. They will find themselves involved in a form of management at which they may not be proficient at the expense of that at which they are proficient.

So, my Lords, it is with woodlands. Because the facts of forestry life make forestry a very long-term business and in order to encourage owners to plant, death duties were not payable on a woodland when it passed from one person to another but only when the crop was felled and the value obtained for it. This was reasonable, but the Chancellor in his Budget has removed this concession, and now all standing timber will have to be valued when land passes from one ownership to another and capital transfer tax paid on the value of the standing timber. In the case of hardwoods such as oak and beech, which may take 200 years to mature, the mind boggles at the number of incidences of capital transfer tax which this type of crop will attract as it passes from one owner to another before it is felled and the cash value realised. The aggregate of capital transfer tax paid over the years on a woodland could well exceed the total value of the timber when it is felled; and, of course, the tax would have been paid by people other than the person in whose hands the crop is eventually realised and who have received not a penny from the crop.

My Lords, the practical result of this tax can only be highly damaging both to the woodlands and to the nation. It will be a direct incentive for an owner to fell as much timber as possible and realise the proceeds before transferring the property to another. At a time when Governments and all thinking people are concerned about the need for the protection of the environment, this tax, I suggest, will work in the reverse way to what is expected and required. My very real concern is that I do not believe that the Chancellor has realised this.

Of course I accept that agriculture should pay its fair share of taxation both from capital and from income, but if we wish to have an agricultural industry which is capable of supplying the food which the nation requires, which will save on imports and which can help our balance of payments at a time of real national need (and I cannot believe that anybody would wish otherwise) every incentive should be given to encourage investment, to encourage growth and to encourage wise stewardship.

However much the Chancellor's measures may be designed to aid the redistribution of wealth, what he has done in his Budget will have precisely the reverse effect of what is required. It will encourage smaller units; it will break down. and not build up, the structure of the industry; it will discourage investment; it will frustrate the influence of youth; it will result in a constricted and a weakened industry. So serious do I believe the long-term effects of this taxation to be, and so harmful both to the industry and to the nation, that I ask the Government to let the effects of the tax be considered by an impartial body such as an all-Party Select Committee. The Government have nothing to lose by doing this. If the Chancellor wishes it, the capital transfer tax can be introduced now, but the effects of it on agriculture could still be considered, even if it is already implemented, by an impartial body, to see whether or not it is in the nation's interest or whether or not it requires alteration. If the Government were prepared to do this, they would at least be giving themselves the opportunity to avoid a possible error, and it would certainly give to the industry the assurance that all the factors and possible effects would be properly scrutinised.

7.28 p.m.

VISCOUNT BLAKENHAM

My Lords, I do not propose to follow the noble Earl in the very strong case which he has made about the effects of the capital transfer tax on agriculture, although as a farmer myself I might be tempted to do so. However, I am glad that he made the case, because this is the first time that agriculture has been mentioned in this debate.

May I join with other noble Lords in thanking my noble friend Lord Watkinson for initiating this debate. I do not believe that anybody could he better I qualified. He has had a distinguished ministerial career, starting, I think I am right in saying, at the Ministry of Labour under the late Viscount Monckton. Since then, as we all know, he has become a leading industrialist with a very great achievement to which to point.

My Lords, these debates do not come too often—or perhaps I do not come here too often. What impresses me about them is the volume of experience which can be gathered in this House. We have had remarkable interventions from two ex-Chancellors of the Exchequer and two leading industrialists, the noble Lord, Lord Nelson of Stafford, and the noble Lord, Lord Stokes. And when one considers everything that has been said in this debate, I am afraid the story is one of really grim prospects facing our country to-day.

I intend to devote a few moments to what I think was described as the human side of the equation. As I see it, Government policy today, if it is to succeed, must depend for such success on the social contract. Whether it has been wise to place such complete reliance on this contract is a matter for argument. It is obviously a great pity that employers have no part in this contract which is solely between the unions and the Government. But I do not propose to follow the arguments for or against the contract because I think this debate should concern itself with the situation as it is to-day and not as it might have been. I agree with the remarks of, I think it was, the noble Lord, Lord Thorneycroft, and certainly the noble Viscount, Lord Amory, that the Chancellor's Budget was a courageous one. I think it is always courageous to change course and to face up to reality. Some people have said that the Chancellor's measures to assist industry were too little; others have been more optimistic. Whether or not they are enough they are certainly in the right direction.

But surely, my Lords, nothing is going to be of any avail unless wage claims are moderate, and the ball is fairly and squarely at the feet of those responsible for wage negotiations. The unions cannot claim that the Government have not carried out their share of the bargain. The Industrial Relations Act has been repealed, the Wages Board abolished and the higher pensions that were promised are now being granted. Can the unions in their turn fulfil their side of the contract? I am disappointed that no prominent trade union leader has taken part in this debate. Some recent awards are very discouraging, but I do not think this should give any delight to those who oppose Her Majesty's Government. The failure to contain wage demands will bring disaster to us all—rich or poor, young or old. Only those who wish to destroy the whole fabric of our society (and there are certainly some who do) should feel pleasure at the discomfiture of the Government on this front.

My Lords, the British are not imaginative. Too often they refuse to recognise calamity until it is right upon them. Even now, when the threat of large-scale unemployment and business collapse looks us straight in the face, there are thousands and thousands who blindly believe that something will turn up; that the world owes us a living and that in any case there is nothing that an individual can do which can help. Of course, nothing could be further from the truth. If the social contract is to work—and I am more optimistic perhaps than some speakers in the debate—each one of us must realise that for the next few years we cannot expect any improvement in our standard of living; in fact we must expect some decrease in our standard of living, and by unselfishness we can, as individuals, each contribute to the common good. "Grab all you can get" means the destruction of others and in time of yourself. So surely it is the duty of all who can influence public opinion—politicians irrespective of Party, the Press, television, the Churches, in fact all who are in a position to influence the minds of those who live in these islands—to get this very simple message across.

A heavy responsibility lies with the TUC, but I share the view of, I think, the noble Earl, Lord Drogheda, that the vast majority of our trade union leaders most sincerely wish to honour that agreement, though of course there are some extremists who do not. Can the TUC succeed? I believe that there is a chance that they can if they go all out to carry their rank and file with them. A union exists primarily to guard the interests of those who join it. Alas! too often the individual member takes little or no interest in the conduct of the affairs of his own union. Only by convincing the individual of the importance of the issues that affect him and his family can this lethargy be dispelled. Only by the rank and file being aroused and by individuals taking a passionate interest in what their union is trying to do for them can the activities of what I can only describe as the "wild men" who can most certainly be found amongst shop stewards and higher up in the union heirarchy, those who may call themselves Trotskyites or anarchists or communists, be brought under control. They are a minority, but they are dedicated people and their power to destroy society must never be underestimated.

I think it is true, as the noble Lord, Lord Beswick, said in a rather different way, that public opinion has not yet been mobilised. That is the greatest understatement of all time. I would go further and say that the nation is still half asleep. We may not at this moment be facing a war, but we are certainly facing economic collapse on a scale which a war could bring with it. Yet few people realise the urgency of each one of us making some sacrifice, according to our individual circumstances and ability, to prevent inflation running riot and our production machine seizing up.

The main responsibility for getting this message across must lie, initially, with the Government and with the leaders of both sides of industry. It has been hinted in some previous speeches that the desirability of a national Government is becoming increasingly obvious, but until we have one let all the political Parties refrain from partisan action and from Party dogma and combine as best they can to make the social contract function. My Lords, I remember going to Jarrow and to Bishop Auckland in Durham in, I think, 1936. I was 25 years old and I was working for St. George's Jubilee Trust. I shall never forget seeing the dole queues in front of the labour exchanges and the crowds of young people lounging at the street corners, many of them my own age, who, since they left school at the age of 12 years, had never known what it was to have a job. So I say, my Lords, that we must try to grab at this social contract, however frail a vehicle it may seem to be and realise that it is the only one we have at the moment and we must do what we can to make it work if we are to avoid the miseries of mass unemployment.

7.39 p.m.

LORD CASTLE

My Lords, I am glad to follow the noble Lord who has just spoken. I, too, was in Jarrow in the 'thirties, a few years before he was, and I was addressing my first indoor meeting, a crowded meeting of Labour supporters, and I was told at the end of the meeting by a local comrade. "Don't flatter yourself, Castle, they didn't come to hear you. they came for that cup of tea and to keep warm". Those are the kind of situations which made some of us on these Benches believe that there had to be a drastic answer and we talked in those days about the righteousness of clause 4.

Perhaps one of the penalties one pays for growing old—I am sorry, I mean growing older—is deterioration in oneself. But, at least, in clause 4 there was embodied the belief that the kind of capitalism we knew, whose cruelties we knew and whose cruelties older members of the other Benches knew, was self-destroying and that it would die unless it adapted itself to new and changing demands and society. Some people call it claptrap. However, my Lords, if I am to go by what was said by the introducer of our debate to-day it is now accepted on all sides—with various degrees of certainty—that the capitalism we grew up under is decaying, and one does not have to believe in the second coming of Karl Marx to accept the view that all the evidence that we have had in speeches to-day is that the system is inadequate for the world's needs at the present time.

In this debate I ventured to use some words which I had thought were to be peculiar to me. Instead of that, I have heard those words voiced on every side of this Chamber. But we know that the fatal illness of this system is the major fact—the overwhelming fact—of living to-day; it is an uncomfortable, uncomforting fact. It was referred to by the noble Viscount, Lord Watkinson, when he introduced the debate, if I remember rightly, as the revolution of our time. He must correct me if I am wrong, but he used, in the context which I would associate with it, the word "revolution".

VISCOUNT WATKINSON

My Lords, I do not want either to interrupt or to delay the noble Lord, but I must make it plain that what I was talking about was a revolution in methods on the shop floor to which both the TUC and the employers were committed.

LORD CASTLE

My Lords, I accept the correction, but I do not make a great distinction between these contexts. Human relations on the factory floor are part of a social system which I have tried to improve and which I shall try to bring about in the future with my comrades, with noble Lords on this side of the House. The consolation of seeing history at work is not very great to people who, we know, are to suffer very considerably in this change in our industrial methods. But the process of history is, we believe, at this moment evolving a new relationship, social and economic, in this country and the world. Of course the process of the history is not self-motivating, not self-generating; it needs a nudge now and again, from Parliament, from the trade unions and from the capitalists themselves who have abdicated as we have seen them do so frequently in the last few years. One does not have to be a Socialist to understand that, nor does one have to join me in rejecting the idea that all our troubles are merely due to the defects of our national character. From what has been said in the earlier part of the debate I think there must be unanimity in this House that that at least can unite us.

It seems to me, my Lords, that the challenge to-day is that we need—as calmly as we can, as unrestrainedly as we can, as unhampered as we can by previously committed policies—to work out a plan, a policy and an attitude of mind for the transition: the transition from, as I have said, the state of capitalism as we have known it in the world to a new order of society. What will eventually emerge I do not know. That is for another day. I believe that the most that we can aim to do for the time being is to fend off catastrophe. We have tried confrontation in industry; we have tried statutory controls of wages and prices. They have failed. What is needed now—this has been said earlier in different words—is the massive mobilisation of consent to what we have to do.

The gracious Speech a few weeks ago was intended to achieve that. The Budget was impregnated with the hope of achieving that. And the social contract, conceived in wedlock between the Labour Party and the trade unions, is intended to achieve that aim. I beg your Lordships to remember that if it figures so largely in this debate it is because it was the whole of the Labour Party's policy at the last Election. Everything in that policy—the social amelioration of better pensions, fairer rents, all these matters—was the politicians' part of the social contract. The policy was the earnest of the intention which my Party had to create a new air of confidence. Much has been said about confidence to-day, as if the only place it mattered was in the City of London and the boardrooms. I hope that noble Lords will agree with me when I suggest that it is just as important—and perhaps more so—that confidence in their future and their jobs is felt by the working class and the people in the factories.

The social contract is an attempt to counteract the dangerous erosion of faith in politicians and politics generally. We wish to convince our people that we here in Westminster are their friends and that, though the times will be tough and will require tough measures, we will keep our promise and will lay the foundations for a fairer future. Some of the contributions we have had from time to time have shown an ignorance and a perversity towards what the Labour Party said at the Election about the pending crisis. Certainly the talk of the social crisis did not attempt to minimise the darkness which was threatening us here and all over the world. No one who has studied the grass root fertilisers, the Election addresses of the individual candidates on the Labour side, would distort the campaign to the extent of denying that during the campaign we placed great emphasis on the threatening crisis.

Let me be fair; as if I would be anything else. All Parties drew attention in their Manifestoes to the great economic challenge facing us, but only our social contract spelt out a way of hewing ourselves out of the impending crisis. There are many Tories among my friends—even in this House—and many will freely admit that the Conservative Party failed in its appeal because it tried to spell out a policy for national unity without giving us any idea of what the programme of that Party contained, except, perhaps, a willingness to share the wormwood and the gall between the right honourable gentleman Mr. Heath and the honourable gentleman Mr. Thorpe—and anyone else who Mr. Rees-Mogg would like to nominate. But we know now that the electorate rejected this.

When Mr. Wilson became Prime Minister—and I must remind the House of this again—on the very day of his victory, my right honourable friend the Prime Minister made plain once more the gravity of the economic situation, and his hopes of counting upon the goodwill of everyone in dealing with it. Some of us were naïve enough to think that having conducted that Election campaign with a great deal of political honesty and much less in the way of verbal fisticuffs than we had been led to expect, we could unite the nation behind a call for putting survival first. I still believe that such unity can come. I believe that Mr. Jack Jones and Mr. Richard Brigginshaw—both of whom are Left-Wingers among the trade unionists—have made declarations which have shown how intent they are to educate and to lead their own members towards the same conclusions as have been expressed on both sides of the House to-day. Not all trade unionists have been equally encouraging.

My Lords, the most disheartening thing of all has been the Tory leadership. I have to say to all noble Lords that if the social contract fails, it will not be the fault of people in the trade unions alone; it could conceivably be the inadequacy of noble Lords themselves. They have not recognised that the Election mandate was not a mandate to play the old Party political ploys. The vote for national unity which the Tory Party obtained in the election was not merely a vote for Tory national unity but a belief that national unity could possibly be achieved that way. But it would be a disappointment to the supporters of the Conservative Party in the constituencies were noble Lords here or their associates elsewhere to fail to give the support to this idea which we ought to expect from them. I wish to refer to the Budget, but I am not certain to what extent one is allowed latitude in this House to do so.

THE EARL OF GOWRIE

My Lords, the noble Lord, Lord Castle, has total freedom to refer to the Budget.

LORD CASTLE

My Lords, your Lordships will remember reference was made earlier to the fact that there was some diffidence on the part of noble Lords to talk about the Budget. But in this House to-day there has been a recognition by some leading speakers on the other side that the Budget was a brave one. Those were the words of the noble Lord, Lord Thorneycroft. The noble Viscount, Lord Amory, spoke in similar terms, and he acknowledged the good that the Budget had done. But I direct the attention of noble Lords to the fact that in another place on that day, the Leader of the Tory Party said that the right honourable gentleman the Chancellor of the Exchequer has neither the guts nor the honesty to tell the House what the position is".—[OFFICIAL REPORT, Comrnons, 12 /11174, col. 283.] I do not believe that is suitable, temperate language of a kind which leading Members opposite would wish to use. They certainly have not used it this afternoon. One has to square the praise we have heard here for the Budget with the fact that the Leader of the Tory Party said: What a disgraceful performance by a Chancellor of the Exchequer; there is nothing in the Chancellor's Budget which will help us to create national unity". Those phrases are in direct conflict with all the protestations of goodwill which we have heard from the other side, and from the Cross-Benches.

Noble Lords should realise the extent to which the game of opposition for opposition's sake is being played in every debate. If one goes through Hansard and looks at the record of the debate of last Thursday, one sees that at a time when everyone is talking about some form of retrenchment, demands are made for the abolition of the earnings rule in old-age pensions, which would cost £175 million a year; there was a demand for half-yearly reviews, which would mean the employment of another 2,000 civil servants. These are the kind of peccadillos of politicians which arise in normal times, but not, I suggest to noble Lords, at times of crisis. Is it too much to ask that some noble Lords would wish to dissociate themselves from the kind of language—which is typical; other examples have been cited—which, unfortunately, is being used at this time and which is doing just the reverse of creating an atmosphere of unity.

LORD HARVEY OF PRESTBURY

My Lords, will the noble Lord give way? Is not the noble Lord being a little self-righteous, within a matter of four weeks after the General Election, when the present Chancellor of the Exchequer said that inflation was running at 8.4 per cent. per annum. Would the noble Lord like to comment on that?

LORD CASTLE

My Lords, noble Lords will excuse me for not being tempted by that particular one. I never was good at figures anyway. I would not know one percentage from another in a case of that kind. But I believe there is in the country a wish to dissociate from that type of intemperate comment at this critical time. I want quite seriously to suggest to noble Lords that they themselves have a unique function and a most valuable function which they can perform now. They have claimed that there is a persistent value in this House in having people like themselves who are not subject to the pressure groups of local constituency Parties, and that sometimes this House can rise above, and make its voice heard above, local caucuses. I accept that. It may be that your Lordships are the last of Parliament's real independents. It would be a good idea if some independence were shown by leading Conservative Lords on Opposition Benches, if they communicated to the right quarter their wish not to be associated any longer with perpetual opposition for opposition's sake. That is the way; that could be their contribution to the social contract, which is our only hope if we to avoid salvation through the Calvary of mass unemployment.

8.3 p.m.

VISCOUNT CALDECOTE

My Lords, we have never, I am sure, debated the economic situation in this House in graver times or in such difficult circumstances, when courage to face the real problems and determination to solve them was more urgent. We must, therefore, be more than usually grateful to the noble Viscount, Lord Watkinson, for his powerful opening speech, with which I am in full agreement, particularly those parts of it which mentioned the importance of fostering better personal relations in industry. Your Lordships might be interested to know that this morning I was in Birmingham, and there we were discussing possible ways in which we could improve communication in our company. We have carried out experiments with briefing groups at the factory floor level. These have been carried out most successfully; the results have been far beyond our expectations, and, best of all, perhaps, some of the managers who had been very sceptical of the possibility of success through this method reported that, though they had been totally against the idea of giving, for instance, an hour of company's time to that purpose, they were now fully convinced of the vital necessity of this kind of thing and the success being achieved through it.

I agree also with much of what the noble Lord, Lord Castle, said about national unity. I wonder whether he would speak to his right honourable friend in another place, the Minister for Industry, and try to persuade him to drop proposals for nationalisation which are so divisive at the present time. He talks about opposition for opposition's sake. Will he ask the Minister to drop nationalisation for nationalisation's sake?

LORD CASTLE

My Lords, the noble Viscount will recognise that the Labour Party had a majority of votes at the Election, or at least the most votes of any Party at the Election, for a policy which contained those proposals.

VISCOUNT CALDECOTE

My Lords, the Labour Party did not have a majority of votes at the Election, and I thought the noble Lord was making a case for national unity above Party consideration. If he was not, I do not understand what he was saying.

LORD CASTLE

My Lords, I did make a case, but I said national unity could not be obtained merely on Tory terms.

VISCOUNT CALDECOTE

My Lords, I do not think the noble Lord made a very strong case. I hope he will perhaps consider my comments and be persuaded to talk to his friends in another place.

My Lords, through our democratic processes we have chosen a mixed economy for this country, with industry partly owned by the Government and partly in private shareholders' hands. The great majority of wealth is produced in the private sector of industry, and therefore it is essential to look towards the private sector to create the wealth that we need, while keeping inflation Linder control. There are many facets of that problem, and many of them have been very adequately and competently dealt with by your Lordships to-day. I want to concentrate at this late hour on only two of them; first of all the big increases in pay which are being made for virtually no increase in the production of wealth.

A large proportion of these increases come as a result of pressure from powerful trade unions, who are naturally anxious—and indeed it is their job—to protect their members from the effects of rising prices and inflation. In this connection, as other noble Lords have pointed out, the social contract is of prime importance, and it is therefore important to understand the significance of this agreement. As the noble Lord, Lord Thorneycroft, pointed out, it is an agreement within the Labour Party, between the Labour Government and the trade unions. On condition that the Government agreed to pass very specific laws, the TUC undertook to make recommendations to its members to apply certain principles in negotiating pay settlements. Notably there was a minimum interval of 12 months between major settlements, and any increases were to be restricted to an amount required to maintain the standard of living. But that was not all. In addition, there is reference to achieving a basic minimum pay of £30 a week, improved pensions, holidays, and other fringe benefits, and to the importance of containing unit costs through improved productivity agreements.

The social contract was never discussed with employers in industry, and the Government side of the bargain is almost totally unacceptable to them. It contains undertakings to nationalise further sections of industry, and to interfere in other ways. If put into effect those proposals would cause serious damage to industry, and have already led to widespread lack of confidence and declining investment. Many speakers to-day have said that we should support the social contract. I think they mean we should support the TUC side of the social contract, and with that I agree. We should support it because it is the best we have at the moment.

However, we should also be very clear what it really involves, what it really means. The fact is that even if these principles of the social contract are maintained in full in pay settlements, the outcome is still inflationary and at higher levels the effect of settlements is more serious still. For these reasons employers are making strenuous efforts to prevent settlements being made above the limits accepted and recommended by the TUC. Unfortunately, there are many unions, and sometimes groups of employees acting against their union's advice, who are using their bargaining strength to force employers into accepting higher settlements, under threat of strike or other damaging industrial action. In such an instance, the employer has to choose between giving in or accepting serious and often lasting damage to the business, and in most cases the balance of advantage for the employer is to settle at an inflationary level.

Nothing is gained by pretending that this is not the case with the present balance of power between employers and unions, and it is both unrealistic and totally unfair for the Government to criticise employers—as they did Sir Kenneth Keith the other day—for making inflationary settlements when they lift not a finger themselves while the negotiations arc in progress to help employers stand out against demands for inflationary settlements in the national interest; and, moreover, when the Government itself has not yet demonstrated that it can stand out against inflationary demands in those sections of industry which they control.

My Lords, we have heard noble Lords speak with great sincerity about their experiences in Jarrow before the War. I myself worked on the North-East coast for some years after the War, and I heard many sad tales of long unemployment among my friends. I have no wish to return to the conditions of fifty years ago, when the employer position of strength, relative to the employees, was both excessive and widely abused. Still less do I want to restrict the right of any man to stop working if he wishes. But it is time we faced the fact that the pendulum has swung too far and that the power of employees, often with union support, is now excessive and is being used in a way which is causing national damage and personal hardship on an increasing scale. With or without a statutory incomes policy we shall not, in my opinion, contain inflation at an acceptable level until the power of employees to inflict damage and apply pressure through industrial action is balanced more equally by a reluctance to take industrial action, because of the resulting hardship to those taking part.

To achieve this in our society will not be easy. This is not the time or the place to discuss ways and means of doing it, but the sooner we start making a genuine effort to achieve it the better. We have to achieve a better balance, a fairer balance, not a balance such as we used to have which is violently in favour of the employer, but a proper balance so that negotiations can go on in a situation where each side knows they will lose if they cannot reach agreement. Unfortunately, as part of the price that the Government are paying to the trade unions for support, almost every action that the Government are taking in the field of industrial relations and employment policy is increasing the bargaining power of employees, particularly trade unions, and so contributing to the increase in inflationary pressures rather than the reverse which is what we require.

I want to make my position perfectly clear on trade unions. They have an important and constructive role to play in large sections of industry, and I am not against them any more than I am against employers. Indeed, there are many instances when union leaders and shop stewards oppose industrial action, against the wishes of their members, when they deserve stronger support from management than they have often received. Those men have the interests of their members at heart no less, and very often more, than their more militant colleagues, for while the tough bargaining goes on so does the work, to the benefit of all concerned. I repeat that I am not against trade unions, but I am against either unions or employers having excessive power which can be used for selfish motives to the detriment and ultimate destruction of our society.

The second way in which we are encouraging inflation is by paying too many people too much for doing nothing. Again, I have no with to penalise nor to cause suffering to the old, the sick, or those who cannot work, or to those who want to work but cannot find any. There are many others who are perfectly fit to work and could get it, but prefer to be subsidised by the State in one form or another. There are two effects of that. First, the shortage of labour continues in many vital areas; and, secondly, continuously rising rates of pay have to be offered in attempts to fill the vacancies. That in turn leads to further inflation and pressures for higher benefits to be paid to many of those who justly deserve them.

In concentrating on these two problems, I do not want to give the impression in any way that they are the only factors creating inflation. There are outside factors such as oil, as the noble Lord, Lord Shinwell, mentioned, and I will mention another factor in a moment. But these two problems are very important and they are given too little attention, because they are emotive issues and difficult to handle. It is high time we made some serious effort to solve both those problems. The other side of the inflation problem is, of course, inadequate productivity, which will be solved only by concentrating on essentials—better training for the new skills required, greater incentives, higher investment and more effective communications in industry. The tragedy is that at present those essentials are taking second place in Government action to doctrinaire irrelevancies, such as workers' co-operatives and further nationalisation, both direct and indirect, diverting efforts, wasting resources, and eroding confidence in the vital private sector of industry.

In industry to-day there is widespread determination to improve efficiency and to make better use of human and physical resources, and confidence that we can do it provided that the Government will set the scene in the right way, and provided we can isolate and expose the influence of that small minority who want to destroy industry and esociety as we know it. The plain facts are that if we are to raise the standard of the poor, protect the old and the sick, and build the schools and hospitals within a free and compassionate society that we all want, Tory and Socialist alike, then all of us who can work must work harder and more effectively. Greater money rewards must go only to those who contribute to an increase in real wealth. For most of us that will mean no increase and for many a fall in the standard of living for several years ahead, while new wealth is created, invested, and not consumed.

Of course, that is a tough objective, and only obtainable over a period of strong leadership and self-discipline. Must we really go through the disastrous and painful era posed to us by the noble Lord. Lord, Thorneycroft. before we come to our senses and put our house in order? Surely it is wiser to have tough, difficult but worthwhile objectives, than to continue in the cloud cuckoo land that we are living in to-day, where we pay lip service to defeating inflation and go on paying ourselves more than we can afford, and more for creating the same amount of wealth. Unless we face these facts then, inevitably, we are set on a slippery path of mounting inflation which can end only in great suffering and the loss of our own cherished freedom, through having to put up with a much more autocratic and unpleasant form of government.

8.19 p.m.

LORD THOMAS

My Lords, I am sure the House is grateful to the noble Viscount, Lord Watkinson, for giving us the opportunity of airing our views on this important and very topical matter. What has struck me in a variegated career of nearly sixty years in practical industry, rising from the shop floor to various board rooms, is not so much the technical advances that have been made, but the psychological change that has come over industry itself. Human relationships have deteriorated enormously in spite of the vastly improved means of communication that we have enjoyed. When he gave shape to the British Broadcasting Corporation, the noble Lord, Lord Reith, chose as one motto: "Nation shall speak unto nation." The implication was that man could speak to man more freely, quickly and effectively. But what seems to have happened is that while the means of communication have proliferated, the things that are being said between man and man have not measured up to the high standard that all of us expect and think we deserve.

The change of attitude that worries me—and I do not mind being counted as one who is worried at the present time about the state of the nation—is this. After that first great war said to end all wars, everybody got down to it with a purpose and a co-operative energy to make more goods, do better jobs, get lower prices, improve themselves and help their fellow workers to make things better for each other. I know that we had some massive unemployment and the 1926 General Strike, in which many of us did communal jobs, driving buses rather amateurishly, and dangerously driving trains and the like, but once we got over that inevitable post-war bitterness everybody seemed to get down to it. Fellows earned their money and instead of prices constantly rising, as they have over the past couple of decades, prices came down and living standards went up. I remember that we even got down to making a car that cost as little as £100.

As a comparatively new Member of this noble House, may I be permitted to say that the level of debate and argument here is heartening to observe. I think it can be said without smugness or complacency that we set a standard for initially differing opinions arriving by interchange of views at a well-reasoned conclusion. I believe that the demonstrative violence that takes place in the public streets, perhaps the bitterness of conflict that takes place in what we here politely term "another place," is bad for relationships in industry. The factory floor is a very sensitive place these days. One of the experiences that I had in running a nationalised industry was that there is no real objection to having worker participation at board level. It need not be a main corporate board but certainly nothing but good, in my experience, comes from having a reflection of shop floor opinion at executive board level.

When I had the task of cutting the work force of BOAC from 24,000 to 16,000 way back in 1949, I instituted a system whereby trade union representatives went through board papers with executive board members a week in advance of each monthly board meeting. Those members of trade unions who attended were people like Ian Mikardo, Clive Jenkins, Anne Godwin, Harry Douglas and George Pargiter; indeed, there were several noble Lords on the Government Benches who participated in those meetings and made valuable contributions to turnings a horrid loss of about £8 million a year into a workable profit. They also agreed to deploying the work force in a way that reduced it by at least a third. So it is by a co-operative effort that industry can be made profitable and advanced and it is done by sensible co-operation between management and the work force.

Mark you, it is not simply the number of people employed in a particular organisation that is a once and for all yardstick of its value. Management has many other things to contribute. For instance, on the finance side, one of the factors that enabled BOAC to break out of the red and into the black was a matter of accountancy, and one has to trim one's methods of accountancy to the climate of the day. In those days I found that by depreciating the aeroplanes over a longer period we helped the profit and loss account very much indeed. Similarly, to-day industry can very largely help itself by really putting into practice inflationary accountancy. I cannot help thinking that in the number of round-the-lunch-table discussions that go on in the City of London, canteens and elsewhere up and down the country, there is a great deal of expectancy about what "they" are going to do. One thing has come out of the last Budget, namely, that there will be some easement on the taxation of work-in-progress and stock on the shop floor. Let us all take advantage of that.

My Lords, we have had an afternoon and an early evening of some very gloomy speeches telling all kinds of horrible things that will happen to us, but there is mach to be said for "those who help themselves get helped." I feel that if everybody from bench to boardroom said to themselves," Come on, let us stop bellyaching and get to grips with the situation," it would he effectively an improvement. What we need in this country is dependability and punctuality in industry. We have lost a great deal by the diminishing effectiveness of the Post Office services. Even so, while it is all right if the Post Office has not the manpower to give us a Saturday post, for heaven's sake! let them say definitely that there will be no post on Saturday, just as there is no post on Sunday; then we in industry can make our arrangements accordingly. But do let us have dependability and punctuality.

If I were asked to put in a nutshell what my practical experience lead me to believe, I would say that the power of organised and intelligent labour has increased worldwide, but there are differences. In America and some other places the motivating philosophy behind organised labour has been greed for higher standards of living, whether eating, housing, clothing or motor cars and television sets. Greed, to me, is an understandable emotion. It can be an incentive. What I fear has happened in this tight little island has been the motivation of envy—envy revealed in the deplorable habit of the withdrawal of labour in an attempt to beat down the amount of work put into the job and thereby destroying the efficiency of the operation. I am all for people who want more cake getting a goodly share of the bigger cake, but anybody who wants a big share of the small cake is doing somebody else out of any cake at all.

One other point, my Lords, As one engaged in industry day to day—perhaps no longer on a shop floor or even aggressively executive—I urge those who are engaged actively in industry to have very careful regard for their accountancy methods. In my young days I was trained to believe that prompt payment of bills was a virtue in itself. Today, I find there is a tendency for people to take as much credit as they possibly can contrive, and this, done nationally, means that the cash flow situation is progressively getting worse. It is all very well to say that more flexibility in the banking system is needed. That may be true up to a point, but borrowed money is expensive money and this is another matter in which we in industry can help ourselves and not rely so much on "them".

One of the many disturbing questions that one has to ask oneself about the economic outlook is assuredly the oil position, on which the noble Lord, Lord Shinwell, has remarked earlier. The business world at large seems to be held at ransom by the Arabian oil fields. When one sees in those arid lands thousands of stack pipes topped by huge flares of so-called "off-gas", burning day and night to no good purpose, one wonders that "off-gas", which contains much nutritional soil fertiliser element—nitrogen, at least—cannot be processed and the resultant by-product shipped to nearby India, Pakistan and Bangladesh to improve the much needed fertility for food production.

Are we, the civilised world, helping ourselves as much as possible at the present time? Or are we in Britain, for instance, placing too much complacent faith in our newly-found jackpot of North Sea oil and gas? We borrow money at enormous rates of interest to put up the rigs—quite rightly, because this source of energy has to be tapped but—are we being over-optimistic in expecting the outflow of oil to repay all our borrowings over any foreseeable period? What is to prevent Arab oil prices being lowered at source to a figure that slashes the margins on indigenous British oil when it comes on stream to a very low and economically futile figure? Have we blinded ourselves with the smoke screen of North Sea oil to the potentialities of nuclear power?

There was a recent time when the nuclear programme was to be the answer to all our energy problems; the panacea for all our shortcomings and economic malaise—oil, gas, coal, manpower, the lot. Our British technology then was far ahead, our scientific leadership was pre-eminent. But then we seemed to get into a morass, bogged down by decision making and internecine boffin rivalry, and so the programme got slowed down and the building of the nuclear stations was delayed. One of my most vivid memories is of the late Lord Chandos, Sir Edwin MacAlpine and myself, thirteen years ago, all stripping down to our barest underclothes so that we could squeeze into the innards of a reactor that was being built at Linate, about thirty miles or so South of Rome. That was put up by a consortium in which Britain, through the nuclear power group, played a leading part. That reactor has for many a year now been producing good, saleable electric power. Why have not we in this country made more progress in this most important field? Is it because we are so diligently searching for an ideal that the adequately good has been bickered over and got left behind?

In an economic debate of this nature it must be accepted, my Lords, that what Britain needs is more and more thermal energy: more available heat for melting materials, cooking our food, making us light and giving us bodily warmth. I should like to see us having regular thermal budgets and progress reports from the noble Lord in charge of the Energy Department, and to know how our nuclear and oil programmes are getting on towards freeing our hard-hit economy from the stranglehold of high cost coal-getting. I myself am convinced that the squabbling, bickering and violent demonstrating stems largely from the slangmanship which has polluted our politics. To-day, strife seems to be a popular and newsworthy commodity. Bad manners, low morals and exhibitionism make news. It is a long time since we had an international war, thank God!, but it is an equally long time since our young men, and young women, too, have been taught the lessons that discipline, communal living, the maintenance of courage and decency can bring. Would our national discipline in industry be better to-day if we had not dropped National Service? My generation was subject to corporal punishment at school— "Six of the best" was a meaningful and memorable deterrent to bad behaviour. Fines for lost time during apprenticeship taught punctuality; and comradeship in arms meant more than walking the streets with a placard to the accompaniment of yells and boos.

My Lords, let me conclude by saying that I recognise to the full and am distressed by all kinds of adverse factors nowadays—the stock markets, the weather, the increase in violence and a lot of other things, including pornography, which is symptomatic of degradation. But we have been through far worse times before. We have to-day far better tools to do the jobs we have to do; and so for heaven's sake let us stop bickering over ideologies; let us confirm our choice of a leader, and show that we support him with discipline. compassion and fortitude. In short, and to paraphrase a war-time aphorism, now that we have got the tools let us get on with the job. Let us make Great Britain great again and the United Kingdom really united.

8.35 p.m.

LORD TAYLOR OF GRYFE

My Lords, I am sure your Lordships will sympathise with someone who is normally called at No. 18 or No. 20 in the list in these debates because it is extremely difficult to say anything which is new, and at the risk of boring the House I want to say something which has been said many times in this House this afternoon; that is, to pay compliment to Lord Watkinson not only for introducing the debate on this subject but for the manner in which he introduced it and for the splendid example which he has given in his company in solving some of the problems that your Lordships have discussed somewhat academically this afternoon.

I am tempted to follow the noble Earl, Lord Ferrers, into the woodlands of England and the consequences of the capital transfer tax, about which I am sure he appreciates I feel deeply, but perhaps I should resist that temptation and return to the theme of the debate which was introduced by the noble Viscount, Lord Watkinson. First of all, as has been said by many speakers on this side as well as on the Cross-Benches, and inevitably on his own side of the House, there has been a fair measure of agreement about the kind of problem we are facing. I think we could go further and say that there is further agreement on the issues which he specified as being the major objectives of economic policy. He said that the maintenance of employment, the stimulation of investment, the development of exports and output per head were the four major objectives of economic policy which should be cultivated by responsible Government, and he rightly drew our attention to the major enemy in our midst—the enemy of inflation.

At this late hour in your Lordships' House the dangers, the menaces, have been so often repeated in the discussion that they tend to lose their impact, and we become slightly punch-drunk with all these assaults. But I think it would be worth while to spend a moment in returning to Lord Watkinson's contribution and the major issue of the debate, to consider how far the policies of the Government, based as they are on the social compact, can contribute to solving the problems he set. I do not go along 100 per cent. with the Hudson Report on the state of British industry and British social life, but I think we should be foolish to reject these projections and, by occasionally clapping ourselves on the back and saying, "We will be great again", and, "The future is not as bad as the doomwatchers would have us believe", to lull ourselves into a sense that it is going to be easy to emerge from these difficulties.

Any objective view of the situation, with our accumulated balance of payments problems and with the lost competitiveness of Britain, arises not simply from the lack of investment during the period of the Labour Government but from the lack of investment in British industry over a fairly long period, including the period of the Conservative Government. I do not make that as a Party point. But the mere fact that industry did not invest in re-equipment means that there is a lost competitiveness which will tell in the extremely difficult period that lies ahead. We in Britain are accumulating vast debts as a result of the balance of payments situation and the oil situation. We are meeting some of these debts temporarily by short-term deposits in sterling, many of them by oil. producing States; but these can he with. drawn quickly from the market, with serious consequences for the pound.

We are in an extremely vulnerable economic situation. In addition, we have the danger of the pay push inflation which further affects our competitiveness. Inevitably we have the possibility of a balance of payments accumulated deficit in the next five or six years which could amount to 10 per cent. of our national output, and in this kind of situation there is always the danger of devaluation.

This is the scenario. This is the situation we are facing. If we are to meet our export commitments there must be a cutback in home consumption. If the GNP is only so much and 10 per cent. of that is devoted to the servicing of one's oil debt and to the borrowings of the nation, inevitably there exists a pressure on home consumption. If there is this pressure on home consumption and if, as the Chancellor, I think, quite rightly, says, the nationalised industries have to be made to pay, this affects the energy industry, transport and so on. To meet the £1,000 million deficit of the nationalised industries presents a very serious situation so far as the home market is concerned. It is against that background that we must try to see whether the social contract can contain a situation in which we are asking people to consume less and to accept a reduction in their standard of living, while at the same time we are posing a great challenge to them to accept the situation and observe a social contract which will avoid some of the recent great disruptions we have had in industry.

It is generally agreed, my Lords, that until we have investment going again there is little hope for us in terms of competitiveness and in terms of the creation of employment. I am a member of an organisation in Scotland called the Scottish Council for the Development of Industry. For the past three years, at the invitation of the last Government, I was asked to go out to Europe, with the support of that body, to try to attract investment to the depressed areas, particularly Scotland. I was going to Edinburgh the other day for a meeting of the Scottish Council for Industry which is charged with this responsibility, and I bought a newspaper in the train at Glasgow and when I opened the pages this was the story: Six thousand workers out at Rolls-Royce demanding £10 a week across-the-board settlement; five thousand lorry drivers on strike demanding a 44 per cent. increase;". They received 40 per cent. Four thousand six hundred workers out at Hoover at Cambusland. This factory was one that we had been able to attract to Scotland to take up some of the slack from the more depressed industries. Four thousand six hundred workers were out there for several weeks. The sewage workers in Glasgow have been out for some weeks now and the sewage is pouring into the Clyde day in day out and is a great health hazard. Three thousand bus men are out on strike and the communications of the whole of rural Scotland are now at a standstill and children cannot go to school because the bus service is on strike. The teachers have decided on a three day strike each week and to sabotage the forthcoming examinations so that children in Scotland may not be able to take examinations in school this year.

My Lords, I do not recite these facts with joy or satisfaction, but I am saying that in the kind of critical situation we are facing we cannot attract investment from overseas to Scotland with that kind of prospectus. So, my Lords, in this critical situation I suppose that there may be two views in the Labour Party as to how to deal with the matter. First of all, there is the Marxist view which simply states that the reduction of investment by capitalists in capitalist industries represents the decline of the capitalist system which was forecast by Karl Marx in 1848 in the Communist Manifesto and that this is now coming true; and it states that what we have to do in that situation is to move in, take over and establish a Marxist State. This is a view held by, I suspect, a minority of Labour Party members, but it is a responsibly held view. However, the Labour Party and Mr. Denis Healey in another place last week committed the Party to believing in a mixed economy, and I believe in a social democratic solution to these problems. I believe in the creation of a mixed economy, but it places tremendous responsibilities upon the people. A mixed economy is inevitably an economy of balance, one which permits a degree of State intervention and which encourages, where it is necessary for the stimulation of economic activity, a degree of nationalisation. It is an economy which believes that the State has some responsibility for the direction and stimulation of economic activity.

I am sorry that so many noble Lords opposite have felt a little afraid of the National Enterprise Board, as though it were some cold hand of the State that would descend on our economy and prevent the kind of economic activity and growth that we desired. I hope that this is not so, but it will depend a great deal on how the political leaders who are initiating the National Enterprise Board see this instrument. It will depend, too, on their attracting to the National Enterprise Board people of high calibre, of imagination and of entrepreneurial skills. I hope that in the development of the National Enterprise Board the Government will not see if as a branch of the Civil Service, but will see it as an instrument for stimulating and reactivating the economy. I also hope that the large employers who will be discussing their planning agreements will not see this as an enemy, but as something designed to encourage economic growth and a solution of the problems which have to be faced.

A mixed economy requires this balance between nationalisation or State intervention and the important part played by private enterprise. The word "nationalisation" is another word that encourages a certain emotion when people discuss these matters. I regard nationalisation as simply a technique. It is justified if it does something better or more efficiently than it is being done under existing auspices, and there are many examples where nationalisation has been justified on that basis. I am not one of the members of the Labour Party who say that Clause 4 is an essential part of Socialist doctrine, and that total nationalisation as such is an essential part of our belief in dogma. There are areas in our economy where nationalisation is sound, good, proper and a better way of doing things and I think that the impact of nationalisation has to be judged on these terms.

As I see it, the social contract will make great demands on all of us, and we cannot expect trade union leaders or the mass of the people to accept some of the implications of the present economic situation which will probably involve a reduction in the general standard of life, unless we create a caring and compassionate society. We must take care of people who are less well-off and we must be prepared to make sacrifices for people who are poor, who are handicapped and who are in great need—and there are still great pockets of poverty in our midst. So in order to win the acceptance of the social contract, these social obligations are placed upon our society.

If we are to achieve economic salvation there has to be greater efficiency in industry, together with less overmanning. But people who are declared redundant as a result of the creation of more efficiency should not regard unemployment as a curse. They should rather look upon it as an opportunity for retraining and acquiring new skills, so that they can be more useful in society. Recently, the Honeywell Company in Scotland declared 1,500 workers redundant without any consultation whatsoever. People criticise trade unionists for carrying on restrictive practices and protecting their jobs and so on, but how do you expect trade unionists to react to that kind of irresponsible behaviour?

Therefore, on the part of employers there has to be a greater willingness to give the opportunity for workers to participate and feel involved. The noble Viscount, Lord Watkinson, and I have spent weekends at St. George's House, discussing these very problems and looking at companies which are already taking action of this kind; but it has to be done on a much more extensive scale. In addition, we have to try to encourage our trade union friends, and particularly those who are trying to ensure that the social contract is observed. It is a great pity that the trade union movement does not have the resources at its disposal to do the job which it ought to be doing in society. The average trade union official is, generally speaking, underpaid and overworked.

I was discussing the other day a proposition concerning the £10 million which is about to be returned to trade unions following the Industrial Relations Act disqualification. This might be put into some kind of educational foundation to encourage education among trade unionists, so that they could really do the job which they are now demanding and take a greater share and responsibility within industry. The average trade union official is so busy with his day to day duties on the shop floor that he is unable to make the kind of contribution he should be making in his industry. I hope that, either from this source or from some other, the Government will encourage greater investment in the trade unions so as to make it possible for them to recruit better trained trade union officials, and more of them, so that they might be better equipped to do the job they seek to do. If you compare the standard of educational support in the Swedish, German and American trade unions with those in the British trade unions, you can understand the impact which an educational programme has had on the philosophy of these unions.

I should also like the trade unions to be more vigorous in their campaign for the social contract. I know that Len Murray and Jack Jones, together with other trade union leaders, have made speeches and that circulars have been sent out to branches and so on. But when I compare the vigour of the TUC campaign against the Industrial Relations Act with their support of the social contract, then I am afraid that the support for the social contract falls by comparison. I should like to see a similar imaginative and energetic campaign being made by the trade unions for the general acceptance of the social contract—one that would be just as vigorous as the campaign that killed the Industrial Relations Act.

I apologise for having spoken so long, but mention has been made of the regrettable absence of trade unionists in this debate. I certainly regret their absence, because we have in this House many distinguished trade unionists. I also regret the absence of our friends on the ecclesiastical Benches, because, while we have been discussing at great length an economic problem and have been trying to devise economic solutions, I sincerely believe that the solutions are really moral ones and that what we are really talking about is how to develop within our society the sense of belonging to one another, and of being responsible to and for one another. I think that if we depart from purely materialistic and economic terms and present this challenge to the people, telling them that what is at stake is not £4 here or £5 there but some ordered solution to a great national problem in which we should all be trying to make a contribution—this is essentially a moral challenge—the people will respond. It is a question of doing good and doing right. If it is presented in these terms we may deserve to win through.

8.56 p.m.

LORD HARVEY OF PRESTBURY

My Lords, like other speakers before me, I should like to thank the noble Viscount, Lord Watkinson, for initiating this debate and also for the speech he delivered. I think the House will be in general agreement that he set a very high standard indeed. He set a good tone for the debate. Of course, he has had very wide experience in industry as well as in Government. I rather wish there were more Lord Watkinsons around to help us out in industry to-day. We should be very grateful to him.

I think the noble Lord, Lord Taylor of Gryfe, has just given us the best speech delivered from the Government Benches. It was full of good common sense which will be well understood by the people. I am glad to see that the noble Lord, Lord Beswick, has taken his seat. We are old friends; we are joint Vice-Presidents of the British Airline Pilots' Association; we spent 20-odd years in another place together; and now we are here. But I must tell him quite frankly that I was very disappointed in his speech to-day. If he really thinks that that will bring home to the British people the seriousness of our situation, then I believe he has another think coming. He has all the ability in the world as a debater. He is clear, lucid and to the point, but to-day he did not make his point about the seriousness of the situation which we are in as a nation. I say that with great respect. I do not wish to belittle his achievements or his ability. Nobody wants to be pessimistic in this situation. There is no doubt that the world is going through an economic crisis, caused largely by the oil situation of a year ago. But even so, Britain was not doing too well when that happened—even under a Tory Government we were not doing well. Only one country in Europe is doing worse than us, Italy—and that is not much consolation to us.

As I said earlier, the noble Lord, Lord Castle, was castigating us for not being united in the national interest. I am sure that everyone is entitled to go back just four or five weeks ago to the General Election. After all, the Labour Party (the Labour Government as it is now) had an opportunity then to ram home to everybody the seriousness of the situation, but they completely failed to do so. The noble Lord shakes his head. That is my point of view, and we shall see, because the spring Budget ——

LORD BOWDEN

My Lords, I hope the noble Lord will forgive me, but the very first words in the Labour Manifesto were, as I recall: The country is in a more dangerous situation economically than it has ever been. It could hardly be put stronger than that.

LORD HARVEY or PRESTBURY

My Lords, that may have been the preface, but then they went on to say all sorts of other things and turned the emphasis upside-down by nationalisation.

LORD BESWICK

My Lords, the noble Lord has not been able to answer that one very well. Would he be kind enough to point out any one thing that I said could not be justified?

LORD HARVEY OF PRESTBURY

My Lords, that is my whole point. The noble Lord did not say enough, as a spokesman for the Government to-day, in ramming home the seriousness of the situation. He made a very nice speech. That, no doubt, was very agreeable. But it was not to the point of the situation as I see it to-day. I hope I may be allowed to continue my speech, because I have a little way to go yet. I do not want to be offensive in any way, and I hope I shall he constructive in some of the remarks I want to make.

BARONESS LLEWELYN-DAVIES OF HASTOE

My Lords, may I say to the noble Lord, before he starts being constructive, that I think he misunderstood the speech of my noble friend Lord Beswick in just the same way as he misunderstood what all the major speakers said throughout the Election. It is a myth that we did not point out the seriousness of the situation. It is an equal myth that my noble friend did not outline accurately the economic situation we are now in.

LORD HARVEY OF PRESTBURY

My Lords, I accept the noble Baroness's reprimand. I will continue with my speech and perhaps I will come more to the point as I go along. I was going to say that the Chancellor's Budget in the spring of this year gave the impression of a Budget to buy votes. The noble Baroness shakes her head, but that was the impression; that was what happened. As I said earlier, during the Election the Chancellor said that inflation was running a 8.4 per cent. per annum. Perhaps the noble Baroness will deny that. He said it, and it was a wicked thing for a man who was still Chancellor until polling day to say to the electorate. On Friday, November 15, this month, the cost of living figures were published showing a 2 per cent. rise in a single month. What the Chancellor said during the Election campaign was politically dishonest. It must have misled millions of people listening to the radio and watching television. It was very wrong of him to make a remark like that.

I agree that the Chancellor's more recent Budget is in the right direction against considerable opposition on the Left Wing of the Labour Party. He showed courage. But has it gone far enough? I never thought the Chancellor was a mean man—I went to the House of Commons with him nearly thirty years ago—but to lower the exemption limit for investment income surcharge from £2,000 to £1,000, giving the over-60s £1,500, is wrong. Surely people should be encouraged to save rather than spend money on extravagant hobbies. They ought not to be penalised when they get into their sixties and retire. He talks about the redistribution of wealth and income. The warning is there for the spring Budget in a few months' time, as I read it. The gilt-edged market has dropped to new lows and the equity index is at its lowest point since August, 1957. It is very easy to sneer at the Stock Exchange and denigrate it, but if we are going to have a mixed economy, two-thirds free enterprise and the other third nationalised industries—and I am not against it, I am all for it: British Airways is an excellently run industry to-day, in spite of all the difficulties—we have to have a stock market. One of the problems facing us to-day is that rarely do we see a prospectus in the Financial Times or any other newspaper of a company wanting to raise money for new capital for new plant and equipment. We do not see it because nobody will invest. Confidence has gone, and that is the most dangerous thing of all.

I do not know whether the Government have realised that a great many industries have pension funds for the salaried staff and workers. They are usually run in parallel. A number of these funds are not going to be able to meet their obligations of paying pensions to the individuals. Equity shares have dropped to such an extent—they were known as "blue chips"—here and in the Commonwealth and partly in North America that pension funds will not be able to meet their obligations unless they can dip into their funds to make up the difference. Many companies, certainly the medium sized ones, do not have the cash flow to bring that about. This is a serious situation and people are worried. I have had questions put to me from men in their fifties who are looking ahead and wondering whether they are likely to get their pensions. Somehow we have to bring confidence back to the whole of industry.

I do not want to blame the Government for everything because the previous Government must carry quite a responsibility for many things which have happened in the past two or three years. When the first strike of the coal miners happened I felt that what should have been done was to double the mine workers' wages and to make them the élite of the industrial workers. The noble Baroness may laugh, but I felt that they should have been given £50 a week. Had they received that at that time, and had it been made abundantly clear to other unions—Mr. Scanlon, Mr. Jones and the others—that if they did not obey the rules of Phase 2 and Phase 3, then they were for it, the nation would have been behind the Conservative Government. But unfortunately, it was not done, and we are now paying the price.

I hope that the noble Lord who is winding up this debate will give us more information about North Sea oil. We read many things. Many people say that we will be caught out, we are borrowing money at a high price, and it will not pay off. Personally I hope it will, but I should like a reassurance from the noble Lord when he winds up. Will he answer one question; why is it in America—I was there some two weeks ago—on the motorways and elsewhere the speed limit is 55 mph and there is a similar speed limit in France, but we have a speed limit of 70 mph in this country? Would it not be good to reduce the speed limit to what it was a year ago? Is it a great hardship if one has to take another five minutes to drive 40 or 50 miles? The speed limit brings down the figures for casualties and the fuel consumption from between 10 per cent. or 15 per cent. Perhaps the noble Lord will confirm these figures when he winds up. It would be better to reduce the consumption of fuel and have more economical driving than to raise the price. Millions of people in this country to-day use their motor-cars for their work and going across difficult country.

If I may refer to Lord Castle's right honourable friend and wife for one moment—the Secretary of State for Social Security—we talk about national unity. I am delighted the mine workers will earn £5,000 a year plus; the bus drivers will earn £3,000 to £4,000 a year—and good luck to them, they have to work for it. But when we talk about the Health Service, and doing away with private rooms, those are the people who in two or three years' time will want to occupy private rooms. Why not?—they are working for it. In California at the beginning of last week I met medical doctors who told me that it was not just the young British doctors going to California but registrars and more senior doctors.

The Health Service in this country is being damaged considerably and I hope that the Government will look at this. If we want national unity this should be avoided in the next year or two. Put the country on its feet and then the Government will be entitled to take some of the measures which will antagonise many people. During the three-day week some industries—and I know one in the North-East—were producing, perhaps, 94 per cent. of their output. Surely there is a great opportunity here to get rid of some of the fat which is still in some industries. Of course it does not only apply to the industries. What about the local authorities? My noble friend Lord Thorneycroft in his very excellent speech referred to this. Do we hear of local authorities bringing in consultants to make themselves more efficient? Since the new system of local government has come in, the numbers have gone up, the salaries have gone up, and the whole thing is much more extravagant than it was a few years ago. Surely this ought to be looked at. The efficiency of local authorities has been increasing and the expenditure has been rising by 7 to 8 per cent. in real terms in each of the three years since 1971–72.

As the Economist pointed out last week, this was the year when Labour began to take control of most of the town halls in Britain—three years ago—but since then the costs have escalated. The money does not come down from Heaven; it has to be paid for. All the luxuries—parquet flooring, the swimming pools, and so on—we want; but can this nation really afford to spend the money we are spending in local government to-day? I question it and I think that this is a matter which the Government must address themselves to very seriously and very soon. If one watches the pound sterling to-day, or any other day, one sees it is weakening, and I fear the worst for the pound in relation to other currencies. I can find no comfort in the fact that the dollar has been weak for the last ten days—no comfort whatsoever—because the American nation has a great capacity for recovery. I do not think we have that capacity here, or the materials to do so.

We as a nation arc living well beyond our means. There is the proposed nationalisation of the aircraft industry which the noble Lord, Lord Beswick, has a great knowledge of: he has worked in it for many years. Is it the right thing to do at the present time? Could there not be a compromise, make it a 50/50 arrangement to retain the brains of this industry which are there? The industry has a marvellous export record, approaching, I think, £600 million this year? It has been increasing year after year with a smaller number of products. Could not there be an arrangement whereby it is half Government and half free enterprise? After all, there is a great deal of Government money in the industry; but we need men of enterprise who are going out into the world to sell the equipment.

The Labour Government unfortunately quibble—and it is their business——about whether or not they sell to South Africa. The French have no such qualms whatsoever. They will sell almost anywhere, take business away from us and keep their aircraft factories fully employed. Do the Government think that leaders of industry will stay when these industries are nationalised? Could we be told by the noble Lord whether it is the intention to nationalise the aircraft industry in this Session of Parliament, or is it being put off one year as has been suggested in the newspapers? I read on the tape to-day that we are not to have the Channel Tunnel project. That is good. We cannot possibly afford the luxury of a Channel Tunnel at the present time.

I should, however, like to ask what is the position regarding Concorde? Mr. Roy Jenkins in another place has for the last nine years—first of all as Minister of Civil Aviation—tried to kill it, but he could not do so because of the very strong agreement between the French Government and ourselves. This aeroplane is performing well. Do not let us underestimate what the Concorde is doing. Here is something which is paid for. We have had the benefit of technology, metallurgy and avionics, and a great overspill of technology to other industries. I should like to ask the Government whether they have ever considered bringing in Boeing as a third party?

I mention Boeing because there is this great aircraft concern on the West coast of America. On the share index Boeing shares are the same to-day as a year ago. Noble Lords may well ask why. They have got rid of many people; they have first-class management; they build good aeroplanes and they have diversified. If Boeing could be brought into a consortium with the French and ourselves then this aeroplane could go ahead. But we have to show courage and go ahead with phase 2—an aeroplane that has another 600 or 700 miles range, can carry another 60 or 70 passengers, from Frankfurt to New York and the longer flights out. Do not let us give it up. The country should make many sacrifices before we sacrifice Concorde. It will sell. In fact, every nation will have to have it in due course once the aeroplane is in operation. The labour is there. We have high unemployment. Let us keep these men busy on something we think to be good.

My Lords, we are in for a difficult year regarding our membership of the EEC. Reading between the lines, Mr. Callaghan and others in another place probably want to stay in. The British public now see that we can buy sugar cheaper from Europe than we can from the Commonwealth. In a recent poll I think that 54 per cent. of the British people thought we should stay in. But I think the Government will be in some difficulty and I hope we shall not bring disunity to the nation over this affair. It should be resolved fairly soon.

My Lords, I do not want to overestimate the seriousness of the situation. I think it is generally recognised. But I believe it would be an example to the nation if Ministers—they would not like it—were to take a voluntary cut of even.

5 per cent. in their salaries. They may wince at this but it is not a very large cut and it would be a tremendous example to the nation. On the tape to-night we have seen that the right reverend Prelate the Bishop of London is not accepting an increase of £500 a year. Knowing the right reverend Prelate, I am sure that he was not responsible for putting that on the tape. Surely a 5 per cent. cut would have a dramatic effect on the nation and ought to be thought about, because the nation must be stimulated into acknowledging the seriousness of the situation. Nobody has suffered yet. When wages are 5 per cent. ahead of the cost of living nobody is really being hurt—at least, I hope they are not.

People must realise that unless we take cuts in some respects we shall not recover and be the leading nation that we can be. This great nation, with a population of 55 to 56 million people, has a technology which is second to none, an abundance of coal, oil and gas to be harvested and good communications. I believe that if we could create the right spirit (it is no good talking about the Dunkirk spirit because something much more than that is needed) among the people of our nation, we could be back on our feet within two or three years. I hope that the Government will take this lead. I have not meant to cause any offence by what I have said. I have only tried to be constructive.

9.15 p.m.

LORD DAVIES OF LEEK

My Lords, at this late hour I will try not to go into the teams of minutes. However, I was delighted with the appeal at the end of that tirade by my noble friend Lord Harvey of Prestbury. We were certainly knocked around the room and it was not quite in keeping with the general trend of the debate to-day. But that does not matter. All I want to know is, what is this kind of logic? Let us have unity, they say, but as soon as anybody on this side of the House puts forward to speakers opposite an alternative point of view one is faced with disunity.

I agree with my noble friend about "lush local government". Nobody protested more than I did about the reorganisation of local government. We pointed out that it would cost millions. We pointed out that it would mean the alteration of boundaries and the changing of names and addresses. It was one of the most foolish things that was done in this transitional period, and it was completely unnecessary. We did not introduce that reorganisation, but now we are asked to ram it home. In the name of heaven, this nation is getting tired of having things rammed home. Anybody would think that we were dealing with a nation whose IQ was about 60. I travelled only this weekend through Cardiff and Caerphilly in South Wales and went shopping with my brother in Carre-Four which is one of the biggest hypermarkets in Europe. I heard the women there talking about prices. There is no better economist than the British housewife. I do not mind professors talking, but sometimes professors ooze with intellectuality and lack wisdom. The average British housewife brings a fund of native wisdom to her housekeeping. I do not mean in the higher echelons of economics where they use the differential calculus to prove that two and two make four. I am pointing out the basic things, and I am tired of an appeal being made to ram things home to our people. They know—and, by God, they know well enough what has been happening this weekend with terrorism! All these things are rammed home and our message should be that between us we can solve these problems. We should not throw down to our people a kind of "grey" atmosphere.

My Lords, I was delighted to hear my noble friend Lord Taylor of Gryfe talk about compassion. We need compassion but we need also, as the noble Lord says, more consultation. To take the example of dismissals, I know that often the workers are not consulted. I listened with interest, too, to the noble Lord, Lord Thomas. Once again we hear this ululation for corporal punishment and the same kind of spirit that we had with national service. I want that, too; but just to deal with corporal punishment does not solve the problem. All the corporal punishment in the world would not solve Britain's business problems to-night, and it is the problem of business that we are discussing to-night. Corporal punishment has got nothing to do with it.

The appeal made by my noble friend Lord Taylor of Gryfe for an agreement that over the next generation or so we must work together for a mixed economy is a worth while appeal; that is why I was pleased to hear the contributions to the debate of the noble Lord, Lord Nelson of Stafford, and the noble Lord, Lord Thorneycroft. I listened to both speeches with interest and they were of value to me. I think that the implication of both speeches was that we must create a working partnership between the publicly-owned industries and private enterprise. We should therefore be prepared to look at public ownership as we intended to look upon it when it was created. The noble Lord, Lord Beeching, closed the railways. It was, to use an RAF expression, "a piece of cake" to close the railways in Wales, Scotland and the Midlands. There are places now more remote than they were in 1830, where bus services are only once a week, yet huge lorries swing through these villages and the social cost of road transport has never been fully worked out by the economists. The Road Research Laboratory has not given enough attention to it. The British housewife and the British industrialist are carrying notional expenses. I still believe that the railways could have been used more than they are even with the car and with lorries and containers carrying from local railway station to local railway station. I am not saying that you can abandon the lorry and that type of transport; it has come to stay. But an intelligent co-ordination of both these modes of transport should have been evolved rather than closing down marvellous pieces of capital which were built and which would have served us to-day.

The noble Viscount, Lord Blakenham, said that the trade union movement has the ball at its feet. For heaven's sake stop this blacking of the trade union movement all the time. The ball is at the feet of all of us and that means the businessman, the enterpriser, the chairmen of big concerns and the people, and to seek out the trade unionist and accuse him of England's troubles is a complete misnomer, as the analysis of the noble Lord, Lord Bowden—and I am cutting out 90 per cent. of what I was about to say about that—proves conclusively. I was delighted to hear—and here I shall support him—the important point about woodlands and agriculture, raised by the noble Earl, Lord Ferrers. I hope that the Government will take the chance tonight and that a serious reply will be given to that, and that the constructive ideas suggested by the noble Earl will be looked into, because whichever Party is in power British agriculture, a healthy agriculture, is as vitally important as a healthy industry.

I come to my last four or five minutes—I have been speaking seven minutes up to now. I want to pay a tribute to our merchant adventurers. We have them to-day. The noble Earl, Lord Cork and Orrery, and myself have recently come back from the Far East. We had the opportunity of meeting representatives of industry at embassies, ICI and elsewhere—young men full of enthusiasm trying to get orders for British goods of all types, pharmaceuticals, of which I know something, the car industry, lorries. A tribute should be paid to these men working in the most difficult period overseas because, if I may use a slang phrase, the "grub stakes" of the average British worker in any firm which exports depend on the initiative, enterprise, nous and common sense of the merchant adventurers we send out to these parts of the world. Often they are forgotten, but they are just as important as the men on the shop floor and the managing director in his swivel chair in the office.

Here I come to a nasty piece; this is on investment. It is no good ducking this one because we have not put the tools in the hands of the men with the machines. In our White Paper The Regeneration of British Industry (bear with me now for another two minutes) paragraph 3 reads: In 1971, investment for each worker in British manufacturing industry was less than half that in France, Japan or the United States"— that was not the fault of the British trade unionist— and well below that in Germany or Italy. In spite of the measures to encourage investment taken since then, it has still lagged behind indeed, it was significantly less in 1972 and in 1973 than it was in 1970. Moreover, when it comes to making effective use of our manufacturing equipment, we are less successful than most of our competitors. Because there has not been the demand for investment in manufacturing industry here, funds that could have been used to improve and modernise British industry have been deployed elsewhere. In the last ten years the rate of direct investment by British firms overseas has more than trebled. When I get the opportunity, as I hope I will, because I have put my name down for a debate on multi-national firms. I will go into that subject in greater depth and will not trespass on your Lordships' patience to-night. But the fact is that the investment which should have been put into British industry has not been going into it. I will give one example.

I do not like to mention firms because I do not want to "knock" them, but there are firms which are investing more money overseas now than they are investing in our own country. Let me give the illustration of the General Electric Company, which in the last five years has increased its ouput overseas by 56 per cent. and in the United Kingdom by only 2 per cent. Then there is ICI, which since 1969 has reduced its work force in the United Kingdom by 13.000 workers but has increased the number employed abroad by 15,000. There is a reason for that: is it the unhealthiness or the sickness at home, or is it the urge to invest abroad at all costs? That is a difficult problem to answer; probably it is a bit of both. But I am asking big industry and big investment to look once again at Britain.

My last point is that as a barometer of prosperity the City of London and the Stock Exchange are no barometer at all. The City has been investing too much in land speculation and too little in tough British enterprise, perhaps for less interest but where it would have helped to make Britain great. I will illustrate that if I am lucky enough to come out of the ballot on multi-national firms. promised to be brief, my Lords, and much as I should like to extend this talk I will control myself and sit down.

9.28 P.M.

LORD GRANVILLE OF EYE

My Lords, at this very late hour I will be extremely brief. In fact, I wish to make reference to only one point which has been raised by many speakers in this most interesting debate. But I would first like to pay my tribute to the noble Viscount, Lord Watkinson, not only for the part he plays in British industry to-day. but for the speech with which he introduced this debate. which I believe will read as well as it sounded, and also for his patience in sitting through this mammoth debate.

The point to which I wish to refer and which has been mentioned by several speakers in the debate to-day is about this word "confidence", and how we can restore it in the industrial policy of this country to-day. I am not a pessimist, I am not a doomwatcher, but wherever one goes in industry there is a feeling which amounts to a lack of confidence, and whenever this country has been in a really bad crisis we have in some way had to recreate national confidence to get us through. Many speakers have rightly praised the Budget of the Chancellor of the Exchequer. I think it was a good Budget and in many ways it has helped us to get over a period of depresion and a lack of confidence which existed in March; and there was a serious ebb in confidence which coincided with the introduction of his first Budget. We have to get those last six months back again. The absolute Government priority to-day, if we are to get off the ground at all, must be to create confidence once again in industry in this country. The priority of the Government must be to appeal to all sections. in terms of the broadcast of the right honourable gentleman the Prime Minister, to strive for national unity in the best sense of the word. Unless we can do that everything else is unreal, and even these debates are academic.

My Lords, we all know the priorities—they have been referred to in many of the excellent speeches to which we have listened to-day—productivity, increased exports, dealing with the adverse balance of trade with the EEC (which is £2,000 million) and getting a permanent basis for industrial agreement. But there are many people—and not only in industry—who think that Parliament and Government are out of touch with the realities of the situation. It is up to us to prove them wrong, but we may not have much time.

9.32 p.m.

THE EARL OF GOWRIE

My Lords, inflation is not a phenomenon restricted to economics; it can apply to speeches as well. I promise to keep the verbiage supply as tightly in control as I can—as tight as the noble Lord, Lord Beswick. would wish the money supply to be. I rather doubted whether I should have had the nerve to speak at all this evening.

Mention has been made in the debate about the Hudson Report, or should it be the Seine Report, on our economic future. I had the good fortune to spend the last 10 days idyllically on the Continent, but the sunny calm was shattered when I read in an airmail edition of The Times that most of our economic ills were due to the presence of hereditary Peers. I hope that the compilers of that rather depressing generalisation were fully aware that the continued contribution of hereditary Peers, for good or ill, is very largely due to the efforts a few years back of the Secretary of State for Employment. It was he who put a spoke in our plans to phase ourselves out.

My Lords, in times of crisis perhaps we should all he grateful for a little light relief, such as was supplied by the more absurd bits of the Hudson Report. A inure rewarding pleasure is the chance to wind up from these Benches a debate initiated by our new recruit, my noble friend Lord Watkinson. Those of your Lordships who, like the noble Lord, Lord Balogh, and myself, whether in high or low capacities, attended Balliol College will remember that there were theatrical events known as "Smokers". They paved the way for the golden decade of satire of the '60s, now a little frayed about the edges.

About 15 years ago my noble friend was Minister of Defence and I was assigned to portray him at one of these events. Happily, I cannot remember any longer what military enormities I committed in his name. Even more happily, he never heard them. But when the Government undertake to study his speech to-day, I hope it will be no mere form of words. Clearly argued and original though it was, it is only part of a sustained campaign waged by my noble friend, whether Conservative or Labour Governments are in power, to defeat ignorance and confusion about British industry and the economic facts of all our lives. Now that the crisis is no longer a dark possibility, but is starting to break on us, we need his sense and sensibility more than ever.

My Lords, it would be invidious for me to pick out any other speeches in a long and good debate, but I cannot resist mentioning the superlative Parliamentary performance of the noble Lord, Lord Thorneycroft, by no means comforting hearing to these Benches all the time, I must also mention what I should have thought would be an unanswerable case—I shall very much look forward to seeing what fist the noble Lord, Lord Balogh, makes of it—on the effects on agriculture of capital transfer taxation made by my noble friend Lord Ferrers. Then there was the speech of the noble Lord, Lord Taylor of Gryfe. I would just say to the noble Lord, Lord Castle, whose speech I actually enjoyed, because I think we are sometimes short of swashbuckling speeches in this House, that he should read the speech of the noble Lord, Lord Taylor. It contained the authentic tone of national unity, of moderation and what that means to us on this side of the House.

My Lords, after such good speeches I am just going to make two short points of my own. All your Lordships will have seen the miraculous first photographs taken by the astronauts of our world in its entirety. Science and technology have shrunk the globe to a scale which makes the economic interdependence of its inhabitants comprehensible at a glance. But at the same time we are all fiercely in the grip of ancient and competing ideas and impulses. The more we agree on a general analysis of our idealistic and material needs, the less we agree on how to attain them. The British economic crisis, it seems to me, is at heart a world crisis, and the world crisis is at heart a tragic, a needless struggle of competing nationalisms in the Middle East. If we could clear up the Palestine question, the advantages to the oil producing nations of recycling and therefore investing their wealth would be so overwhelming as to be obvious to them.

Instead I fear that the betting must be on war. I know the Middle East well and have spent a lot of time there. I hate to say this, because I have never been given to apocalyptic or even particularly pessimistic utterances in your Lordships' debates. But as Mr. Samuel Brittan wrote in the Financial Times last week, It is difficult to believe, that they"— the OPEC countries— would not try to convert their financial power into a political and military form. It would be surely better to have a concerted discussion of these problems fairly soon rather than wait for a dangerous showdown later. My Lords, if there is another war in the Middle East, and God forbid that there should be, the Western world will be thrown into a devastating conflict between the claims of economic interest and the claims, often themselves conflicting, of political morality. The most immediate and important thing we can do to defeat our global economic crisis, is to hammer out a common policy between Europe and the United States in response to the Middle Eastern question. We need a grander alliance even than obtained at D-Day, thirty years ago. For the breakdown absolutely of an already neurotic Western monetary system will make us vulnerable again to totalitarian solutions, whether they come from Right or Left.

There is, of course, nothing new in this viewpoint, and I do not doubt that the Government are better aware of the dangers than I am, since they, of course, are better informed. Where I oppose the Government, and where I do so with real urgency and perhaps a little bitterness, is in their allowing Labour Party politics, provincial politics if you like, to get in the way of a determined Western political response to these dangers. Dr. Kissinger makes initiatives. Mr. Callaghan is principally concerned with renegotiation of our terms of entry into Europe, which is in any case, or should be, an ongoing affair. This might be forgiveable if the majority of the Cabinet had serious doubts about the wisdom of our maintaining the European connection, or even thought that we could withdraw. Yet we have it on Mr. Callaghan's authority that they do not. My noble friend Lord Drogheda made this point. The object of the whole exercise appears to me to be to march the British people up to the top of the hill and then to march them down again. That kind of exercise is associated in folklore with another hereditary Member of your Lordships' House and not with the British Foreign Secretary.

There is a world outside Europe which is posing the greatest threat to the European values which we share and which we helped to form, since we lost the East of our Continent to Stalin. Should not the minds of our people be concentrated on our efforts to preserve these values, and not on the factional bicker ings of any political Party? The dangers without are the political volatility of the energy supply, and its greatly increased cost. Without recycling, increased costs alone will generate not economic activity but recession and though a great deal has been said, and ably said, in this debate about inflation, in my view not quite enough has been said about slump. Wage inflation, which is the danger within, rolls along in horrid tandem, and fuels recession by destroying the value of money.

On the home front I am a little more optimistic than I have been so far in my speech, but only a little. Not only the Chancellor's Budget but also the TUC response to it has been encouraging. But mark you, my Lords, it is a case of the Grand Old Duke of York once again; march them up in the spring, and march them down in the autumn. It surely would have been quicker to ride round the mountain in the first place.

The trouble, it seems to me, with the social contract is not just the danger of its being broken, but that it is, in present circumstances, inflationary even while it is being kept. Again, my noble friend Lord Drogheda made the point. It is the same trouble—so I say this in no partisan spirit—as with the threshold agreements under stage 3 of our counter-inflationary policy. Indeed, I have always argued that these threshold agreements have kept the social contract in being—an overblown rose by another name. External circumstances inflated stage 3, and external circumstances are inflating the contract.

Mr. Len Murray himself has uncomfortable words on this. He wrote: The General Council have in no way altered their belief that a wide-ranging and permanent system of price control is an essential part of the policy of ensuring that living standards are maintained. This is not to say that prices will not rise. Indeed, as real personal incomes generally would only be maintained, prices will be rising at roughly the same rate as wages. But we are living through a world crisis of inflation and recession. How on earth can real personal incomes be maintained? It is not a question that they must be cut, or should be cut: it is a question that they inevitably will be cut in one way or another. They will be cut through prices, or through levels of employment, or through the provision of social services, or through the deterioration in the quality of social services, or through cuts in facilities such as heating, or lighting, which we take for granted. I was, I must say, appalled to see our own Houses of Parliament floodlit just the other day. They would deteriorate through cuts in aggregate of the little things that make life civilised, or at least tolerable.

My old Department, the Department of Employment, tells us that wage rates rose 22.8 per cent. in the 12 months to October. When this month's wage rate index is published in December, the rate will be even more alarming, because it will reflect the three triggerings of threshold agreements which are the prolonged death rattle of stage 3. Mr. Healey has been congratulated for his courage in pointing out that the failure of the social contract would bring a rise in unemployment. Mr. Jack Jones has said the same thing, and also with courage. But we must not, any of us, deceive ourselves: what really needs courage, what really needs saying, is that the British people are faced with a cut in their already inconsiderable standard of living, and that in one way or another, whatever way we account it, the majority of people will suffer this cut in the next few years. Both my noble friends Lord Thorneycroft and Lord Blakenham made this point with great experience and authority.

This is the reason why my right honourable friends called for a Government of national unity at the last Election. They did so because the political facts of life in this country make it very difficult for a one-Party based Government to preside over cuts in our standards of life; and my noble friend Lord Amory made that point. I believe that noble Lords opposite will soon find this out, even if they do not already remember the exemplary but universally resented budgets of Mr. Roy Jenkins before 1970. This is the reason why we believe the social contract must have a cutting edge in the form of a statutory wages policy underlying it, even if the sword remains in the scabbard so long as the idea of the contract commands consent. But if there is indeed a worsening of the international, and particularly of the Middle Eastern situation—and who may say that there will not be?—the present Government will have to perform their U-turn on wages control just as we did.

My Lords, can we not learn in this country from each other's political mistakes? Let the Government admit that the social contract must be contracted as well as observed; that our people must produce more to consume less, as the noble Lord, Lord Taylor of Gryfe, said; that the conservation of energy is at the present time almost as important as its exploitation. I take the point made by the noble Lord about speed limits. Above all, let the Government forget dogmatic and provincial politics for a while and take their place in the national councils of the West to identify and then defeat the common danger. If they show this kind of courage, they will meet with the same generous and unpartisan spirit from the Opposition side of the House as informed every line of my noble friend's speech when he opened this illuminating and much-needed debate.

9.46 p.m.

THE MINISTER OF STATE, DEPARTMENT OF ENERGY (LORD BALOGH)

My Lords, we have had a long, exhaustive and exhausting debate with a formidable array of talent and experience and with the heaviest guns of the Conservative Party being displayed—enough to intimidate a junior Minister, however aged. In our debate this afternoon we have had the privilege of listening to two former Chancellors of the Exchequer, a former Foreign Secretary, two former Ministers of Defence, current leaders of major industrial undertakings and other speakers who have distinguished themselves in public and political life. I fear that not even the combined intellectual effort of our distinguished speakers can readily resolve our economic difficulties. I have tried to note the points raised and I will endeavour to answer some of them, bearing in mind the number of speakers and the lateness of the hour.

I fear that I cannot accept the impression, which has been expressed in the wide-ranging and excellent speech of the noble Earl, Lord Gowrie opposite, that we have had a restrained and balanced discussion. I must of course exclude the noble Viscount, Lord Watkinson, from my strictures. He at least had the honesty to admit that the patient was failing and fairly sick when we took control again last March. But the remedies he suggested for the sick patient, and which his right honourable friends left to us, are limited in approach. He identified, I think, four areas: investment, employment, wages and exports, as well as people. But his arguments on the first three were innocuous and insufficient; and he ducked the fourth and most important factor, the people. I wish he had taken the example of the noble Viscount, Lord Amory, in his admirable balanced approach, although I might disagree with him in his proposals and propositions. But I fear——

VISCOUNT WATKINSON

My Lords, I do not wish to interrupt but if the noble Lord is going to quote me he ought to quote me accurately. I did not talk about wages. I talked about output per head. which is a rather different matter and is not inflationary.

LORD BALOGH

I do not think that I have misquoted the noble Viscount.

VISCOUNT WATKINSON

The noble Lord did.

LORD BALOGH

If this debate had an impact, I am sorry to say it is my impression that it will have been negative rather than positive. Unity cannot be taken as agreement with other parties, and victory cannot be had on those terms. The general tenor of the speakers seems to have been that of Oliver Twist asking for more without specifying how they were going to use it, and not specifying the policies which are necessary in order to bring about the sort of consensus of opinion which often in this House I pressed for in the previous Government's time and to which I never got a really agreeable or even an acceptable answer. If someone from Mars or from the moon, or a modified Rip van Winkle, had listened to our debate and to the speeches of the noble Lords opposite and of their honourable and right honourable friends—those which did not attack their own leadership—he would assuredly have received the impression that the Party opposite had handed over to us a thriving economy, having achieved an economic miracle, only to be interrupted in their good work by the mistakes of an Election. But, my Lords, this was not the case. We had the three-day week, we had strikes, we had an immense deficit and we had a vast foreign debt. We are suddenly told we are living beyond our means. But when did we begin to live beyond our means? Was it under us? We handed over to the Party opposite an economy which was not thriving. It was not thriving, that I will admit. We had unemployment, but not more than we had when we received it back, burdened with debt, burdened with policies which had to lead to catastrophe.

VISCOUNT AMORY

My Lords, would the noble Lord allow me to interrupt him for one minute? I am sure he does not want to be unfair, but I cannot recall anything in any of the speeches made this afternoon which would indicate the view that a thriving economy had been handed over to the Government six months ago.

LORD BALOGH

My Lords, except for the noble Earl. Lord Drogheda, there was not a single reference to what had happened under the Conservative Government—not a single reference. What was referred to were the terrible defalcations of the present Government, who were handed an almost impossible job.

LORD THORNEYCROFT

My Lords, may I interrupt the noble Lord? As a matter of fact, the noble Earl, Lord Drogheda, said exactly the opposite. Rightly or wrongly, and somewhat to our embarrassment, he drew rather particular attention to some of the failings of the Conservative policy. Whatever the merits of the matter, I think one ought to criticise a noble Lord at least accurately over his speech.

LORD BALOGH

My Lords, the noble Lord seems not to understand my English. That is entirely my fault, of course. I just said that except for the noble Earl, Lord Drogheda, there was no mention of the failures of the Conservative Government. Now is that what Lord Drogheda said or not? Please answer.

LORD THORNEYCROFT

My Lords, I do not really want to pursue the matter with the noble Lord. I may well have misunderstood him, and if so I naturally apologise; but not only the noble Earl, Lord Drogheda, but my noble friend Lord Amory and I myself went out of our way; in an extraordinarily nonpartisan manner, to explain some of the errors on all sides of the House which have led to this situation.

LORD BALOGH

My Lords, I may have misunderstood the noble Lord, too. When I look at the speech of the noble Lord, Lord Nelson of Stafford, for example, his suggestion was that public investment should be cut back. What would he say if, for instance, electricity investment was cut back and we then had cuts in electricity because of consumption rises above production? Then, as to the steel shortage that he mentioned, who cut back the steel programme? It was Mr. Heath. The problem is that we do not understand each other across these Benches, and we ought to understand each other; we want to understand each other, because it is absolutely essential that we should understand each other. At the moment we certainly do not understand, and to a very large extent this is the case because the majority of the Party opposite, as has been shown very recently, are returning to the Selsdon principles now adorned even by a lady. I think that we have tried out these principles. Indeed, the noble Lord. Lord Thorneycroft's policy which he has explained led to his resignation was tried out. It is not that it was not tried out. That policy which he advocated in 1957 and which led to his resignation— "the little local difficulty", as Mr. Macmillan called it, with which it ended—was in fact adopted in 1970–71, and led, as we know very well, to an abrupt reversal and an increase in unemployment.

VISCOUNT WATKINSON

My Lords, I am sorry to interrupt the noble Lord again, but may I just say that my friends on this side have tried to conduct a very non-partisan and very balanced debate, as the noble Lord who opened for the other side was kind enough to say. May I just ask the noble Lord to be so kind as to answer some of the very pertinent points raised in the debate and not to take us through a diatribe on Party policy which my friends on this side have seriously tried to avoid in this debate because we wanted to make a constructive contribution.

LORD BALOGH

My Lords, I am very sorry if the noble Viscount thinks his speech was balanced and that mine is unbalanced. What I can say is that, if that is an unbalanced speech in response to a balanced speech, I must have mis- understood the arguments of the noble Lords opposite. As I said, the noble Lord, Lord Thorneycroft, has really given us a very interesting insight into his resignation, but he has not continued to analyse the problem of what kind of end that policy will have. What he wanted is clearly a cut-back—or again I may have misunderstood him—a sharp cut back in Government expenditure and a very sharp increase in monetary restriction. What kind of effects does the noble Lord think that that kind of policy would have on the unemployed and on the employed trade unionists who are fighting for their livelihood?

We have seen that unemployment and inflation increased when that policy was tried, and it was an utter failure, yet noble Lords opposite cannot be persuaded to give it up. The whole array of noble Lords opposite have even to-day supported this policy. It was especially very sad to me that the very great advance made by my right honourable friend the Chancellor of the Exchequer in meeting some of the problems of British industry was not acknowledged at all, or hardly so—

SEVERAL NOBLE LORDS

Nonsense!

LORD BALOGH

My Lords, it was said that it was insufficient; it was said that it was not the right thing to do: indeed it was said that what we ought to do was to cut Government expenditure far more. It was said that we should decrease at the same time the taxation on corporations, and the very ingenious way in which my right honourable friend came to the aid of industry and of a mixed economy—how often has he said that we want a mixed economy and a thriving private sector was ignored by noble Lords opposite. Yet noble Lords opposite take no notice of that. They then say we are pursuing a policy of further nationalisation, of unnecessary nationalisation and of unnecessary planning. The noble Lord, Lord Stokes, in speaking about his problems, again attacked industrial unrest as one of the greatest problems in his field, as regards exports. He said that exporting was "no longer fun"; but we have been suffering from a curtailment of exports ever since the Second World War. We have never had the export-led boom we ought to have had, and surely what has happened has been that whenever there was an upswing we found ourselves with an insufficiency of investment.

The dearth of investment money is no new problem. It is an old problem and, what is more important, it is not that we have really lacked investment. My noble friend Lord Beswick gave the figures; and what has happened is that what investment there was was not efficient enough. Why was that? This is the problem, on the solution of which we all depend. But was it suggested. for instance, that managements could be somewhat responsible for the sort of investment policy pursued since the war in this country? Was there anybody who said that he might, by omission or commission, have contributed to these problems? There may have been, but I did not hear such an admission.

We believe in a mixed economy, but not at any price, and certainly not at the cost of returning to Selsdon policies. A great many people, including many colleagues of mine, have been decrying the social contract. In this debate, too, we have been told that it was only a one-sided contract and that it had been broken. First, I should like to ask whether any of the noble Lords opposite have mentioned top salaries. There has been no suggestion, so far as I recall, that the increases in top salaries should be halted or that somebody should begin with the sacrifice which is necessary if we want this country to thrive. Noblesse does not seems to have——

LORD HARVEY OF PRESTBURY

My Lords, would the noble Lord give way? His memory must be very short, because a few moments ago I suggested that Ministers should take a 5 per cent. cut in their salaries—and business men.

LORD BALOGH

My Lords, I myself have suggested that, but I have not heard the chairmen of companies suggesting that their salaries should be cut.

LORD HARVEY OF PRESTBURY

My Lords, I said the whole lot.

LORD BALOGH

My Lords, I am terribly sorry, for instance, that even the noble Baroness, Lady Seear, who is always penetrating and whose opinions I agree with to a very large extent, was led to describe our whole economic policy as lying with the social contract. We must ask for an alternative. In the last 35 years of history in this country we have proved the bankruptcy of every other possible means.

When they complain that the social contract has not worked, of course it did not work fully. In the last year or so it was put under a terrific strain. The real national income available for the nation, far from increasing, as it has done every year since 1945, has abruptly fallen by something like 7 per cent. in the past year. A democratic system has been put before an ordeal never experienced before; that is to say, the adaptation of a general fall in purchasing power of the nation as a whole—real purchasing power of the nation as a whole—and the consequential need for redirecting industry. Only if patience and good will prevail can we cope with this situation, which puts an enormous responsibility on both sides of industry. It is no good noble Lords on the other side of the House asking that it should be the trade unions who begin. I hope we shall succeed in this novel social engineering. If not, obviously our situation will be very serious.

VISCOUNT CALDECOTE

My Lords, before the noble Lord leaves that point, I wonder if he can tell the House whether he believes that if all the terms of the social contract, so far as wage restraint are concerned, are carried out to the full, that will satisfactorily restrain inflation?

LORD BALOGH

My Lords, by itself obviously it will not. The social compact is the fundamental condition for our success. Anything which is said against it, any doubt thrown at it, which is self-perpetuation, is of the utmost danger to the existence of this country. Our situation obviously is very acute; but I must beg to differ from a number of noble Lords on the other side of the House because there was absolutely no differentiation made by noble Lords between the oil deficit and non-oil deficit.

The oil deficit was mentioned but of course not in any analytical fashion. Obviously there is an oil deficit which is due to the fact that the Arab countries' income has rapidly increased and that they cannot spend it. In that case—and I do not think that anybody can doubt that is the case—the oil deficit has been caused by the enormous increase in income, and the very much lesser increase in expenditure and capacity to expand foreign expenditure of the OPEC countries which include, Venezuela, Nigeria, Indonesia and other non-Arab countries. If we tried to balance that part of the deficit which is due to the fact that the Arabs are unable to accept it, what will happen is exactly what happened after 1929, when the Germans tried to transmit reparations to an unwilling world. I mean that we shall be the Germans and the OPEC countries will be the rest of the world which was unable to accept German reparations. I entreat noble Lords opposite to accept this very important differentiation, otherwise we shall not be able to cope with the situation, and obviously their influence abroad among their friends is very great. The Germans, for instance, have at points attempted to maintain the export surplus in the face of this tremendous collective deficit towards the OPEC countries and our situation will be growing deflation, growing unemployment and a crisis.

So far as the non-oil deficit is concerned, perhaps your Lordships will be interested to hear that it was running at about £1,000 million at the end of last year, the fourth quarter of 1973, and has now been reduced to about £400 million. I am not saying that £400 million is a fleabite, but it is half of what it was when we took over and it is still, fortunately, falling. I do not think that this achievement has been either appreciated or acknowledged by noble Lords opposite.

There is another cause of our difficulties. This comes from the fact that the slowness of our advance has added to the problem. Men's expectations have been increasing: the performance of the economy has been much better since the war. It ought to be acknowledged that our economy was not more sluggish after the war than before the war; it was less sluggish, though sluggish it was in terms of other countries.

Now here again I wonder whether noble Lords opposite have taken in the fact that what has happened is not so much that investment did not increase, but that the efficiency of investment has not increased very much. Those who blame alternatively the competence of the Government and the unfairness of foreign competitors should reflect on their own omissions and commissions.

Before I turn to the points on the National Enterprise Board I would answer the noble Lord, Lord Orr-Ewing, about the FFI. The resources for expanding FFI capacity have already been secured. There will no doubt be administrative procedures to go through, though these should be minimised by building on existing institutions. In principle companies can put in their applications to the Institution immediately. It is very interesting that this was not realised. Planning agreements have been criticised, but what is interesting is that countries like France and Italy also have had planning agreements for a very long time. In America there are no planning agreements, but publicity given to their own affairs by American companies is incomparable with that which we vouchsafe even to investors. Therefore, I should have thought with regard to the planning agreement that discussion and dialogue between the rather large companies and Government should be welcomed on the other side, not criticised.

VISCOUNT WATKINSON

That is what I said, my Lords.

LORD BALOGH

My Lords, on the National Enterprise Board, do your Lordships on the other side of the House not regret that the IRC was abolished at a stroke in 1970? Ought not we to have had a Government board or corporation to intervene when intervention was necessary? Ought there not to be an exchange? Ought there not to be a parachute for firms who suffer from disadvantages, especially in a situation such as at present when we have to adapt our industrial structure to a thoroughgoing and enormously difficult readjustment to a new situation induced partly by the high price of energy? I think that I have answered the point of the noble Lord, Lord Shinwell, regarding the problem of oil exports.

Before I finish I should like to say a few words about North Sea oil. The report to which reference has been made decries the importance of North Sea oil. I would not follow it in this argument. Our oil is low in sulphur. It is very near to the consuming markets; therefore it will command a very high premium. Here again, of course, the previous Government retarded its activation because it underestimated the importance of the finds and therefore did not make sure that British technology and British productive capacity could be adapted to the new growth point of the economy which happens to be, happily, in the North of England and Scotland. The British National Oil Corporation which is to be established will have, we hope, a 51 per cent. participation. This does not mean nationalisation of oil companies but participation in existing licences. It seems to me that this will be very much in the interests even of the companies themsleves. Indeed, the Corporation might play a role in the conservation policy about which my right honourable friend the Secretary of State for Energy will have something to say in the near future—as he will, also, about measures for energy-saving.

My Lords, if I may sum up, we have been handed a very difficult situation by the previous Government and now we are trying to make the best of it. We have been belaboured by the Opposition both here and elsewhere—perhaps here in more gentle tones than elsewhere. What noble Lords opposite have not learned is that the balance of social and economic forces has changed and that we must adapt our institutions to this new balance of economic and social forces. I sincerely hope that Britain, which has been a leader in social innovation, will once more save herself by adopting the kind of policies which we are now trying to make work successfully.

10.19 p.m.

VISCOUNT WATKINSON

My Lords, we have had a very good debate. May I express my very sincere gratitude to those noble Lords who have made such excellent speeches. I hope I have listened to them all. Also, may I express my very sincere thanks to the noble Lord, Lord Beswick, who kindly opened the debate for the Government and who was good enough to go to a great deal of trouble to answer some of the points which I put to him. I am very grateful to him for doing that. I would only say, if I may, about the noble Lord who has just wound up that I think he missed the sense of the debate a little and we will leave it at that. Once again, however, may I express my very sincere thanks to all those other noble Lords who, I think, made a much better contribution to the debate than I did and kept it at a very high tone. My only hope is that perhaps this evening we may have done a little to move our country a bit more towards that unity without carping and criticism which we know we have to achieve if we are to survive. I am very grateful for that. I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.