HL Deb 30 July 1975 vol 363 cc1015-34

2.53 p.m.

Lord SHEPHERD rose to move, That this House takes note of the White Paper on The Attack on Inflation (Cmnd. 6151). The noble Lord said: My Lords, I am sure that during our debate today we shall hear several different views expressed. There is one thing, however, on which I anticipate almost universal agreement, and that is that today the main economic problem which this country faces is inflation.

Of course, there are other major problems and challenges. We need to stimulate industrial investment and productivity. We need more industrial retraining and to be able to move working people from dead-end jobs into work which has a positive purpose and a secure future. Formidable problems confront us in the fields of health, education and social welfare; in transport and housing policy, in energy use, conservation and the protection of the environment. Nevertheless, I repeat that the main problem is inflation. Unless this is reduced and controlled, we cannot hope to overcome the other problems which I have outlined, nor to meet the challenges which they present. A substantial reduction in the rate of inflation is essential if we are to achieve our other economic and social goals, to help create a society which offers equal opportunities to its younger members, security to its older members and a decent standard of living for all.

Inflation has been justly described as a cancer. Although I profess no medical expertise, when we talk of a cancer we are talking of something which corrupts healthy and living organisms, which saps vitality and which ultimately kills the object on which it feeds. We have such a cancerous growth now in our society which threatens ultimately to destroy the economic and social institutions of this country. These cannot survive for long a rate of inflation of over 25 per cent.

Our present rate of inflation threatens jobs. This cannot be allowed at any time, but more particularly at the present moment in the light of the appalling unemployment figures announced last week by my right honourable friend the Secretary of State for Employment. And let there be no misunderstanding on this score. Over the coming months we can only expect the figures to get worse before they get better.

Our rate of inflation is over twice that of our main competitors. It therefore destroys our international competitiveness so that we lose exports and import more. It reduces investment since businessmen are fearful of the future and unwilling to proceed with plans for expansion. It therefore damages growth—the economic growth we need if we are to enjoy a better standard of living and better social provision in such areas as education, health and housing, as well as defence, to which the House attaches so much importance.

Finally, inflation gnaws at the very roots of social cohesion. People become anxious about its effects and scramble to find ways of overcoming them. The strong and well-organised might be able to cope, but usually at the expense of the frailer members of our society, the old, the handicapped and the poorly paid. This can serve only to widen the divisions within our society and to breed envy, cynicism and fear. Eventually, even the strong will destroy themselves.

On 11th June, your Lordships debated a Motion on the economic and political situation put down by the noble Lord, Lord Byers. On that occasion, I said that the Government would take urgent new measures to deal with our economic problems as they became necessary and at a time that we judged to be right. That time has now come. The result is the White Paper, The Attack on Inflation, which we are debating today.

Doubtless there will be those on both sides of the House who will argue this afternoon that the Government's new measures are necessary because of the failure of the Social Contract. It is certainly true that the Social Contract has not succeeded as well as the Government would have liked, although I believe it has achieved more than many commentators, and the noble and learned Lord, Lord Hailsham, are prepared to grant. In particular, it has helped the Government to rebuild the proper and necessary relationship with organised labour.

No one, I think, would question the fact that the Government have done all they could to fulfil their side of the Social Contract. This has, I am sure, helped us in the new and grave situation which has now arisen, since it has enabled the Government to work out the policies described in the White Paper with the co-operation of the TUC. The Government came under heavy criticism for the time that was taken for the policy to be announced. But this time was used to secure the maximum agreement of both sides of industry for the provisions contained in the White Paper. There may be differences on points of detail. But we are all agreed on the overall objective and the general strategy to meet it.

I hope that none of your Lordships will underestimate the degree of consent which has been achieved. Such consent is vital in a democracy if we are to succeed with an anti-inflation policy of this severity which will affect everyone, directly or indirectly. I am sure your Lordships will agree that the time taken to secure this degree of consent was time well spent, since it provides for a far greater degree of confidence that the policy will be successful.

My right honourable friend the Prime Minister described the decision of the TUC General Council to support a voluntary incomes policy as "historic". Indeed it was, and the recent decisions by such other major unions as the mineworkers and railwaymen to support the White Paper are evidence of the groundswell of support which it is now securing.

The White Paper is therefore a positive and genuine attempt to have government by consent in what is perhaps the most difficult and personal area of policy—that concerning a man's pay and his own standard of living. The problem then is the total problem of inflation. In this White Paper the Government propose that the whole country should tackle it not just in one area, but in its totality. As I have said, unless we do this, there is little prospect of our being able to achieve our other policies. Our target is to cut the year-on-year increase in prices to 10 per cent. by the end of next summer, and below that by the end of 1976. Just as inflation has no one cause, no one manifestation, and no one effect, so it has no one cure.

The Government propose, in the White Paper, the following total package of measures to achieve that target. First, there is the pay limit of £6 per week, which is a maximum figure, not an entitlement. Some have questioned whether such a limit is really necessary. After all, in 1973–74 much of the increase in prices was due to rises in the price of world commodities, particularly oil. In the past 12 months, however, the situation has changed. Commodity prices have eased, and very high pay increases have been the main reason why prices have increased as much as they have, and why they have risen so much more than those of our competitors.

The main thrust of our attack on inflation at the present time, therefore, must be pay restraint, since pay increases must be moderated if we are to meet the target we have set ourselves. To get inflation down to 10 per cent. over the next year requires a vigorous compliance with the £6 pay limit. The TUC have agreed with this. I have already told the House of the great efforts which the Government have made to ensure that we can meet this target by agreement and by consent.

Annexed to the White Paper is the guidance which the TUC have invited negotiators to apply to their pay negotiations over the next year. The Government welcome this guidance, calculated, as it is, to achieve our common target, and welcome the real effort to proceed by consent, in the common interest, which it represents. The guidance is framed so as to be simple and comprehensible to everyone, and to call for sacrifices in proportion to people's ability to bear them. It is intended to be fair, and to be seen to be fair.

The pay limit will be an extra £6 a week for adult workers, except for the final stage of the achievement of equal pay for women, and certain prior commitments which are defined. There will be no special cases. The Government are asking Parliament, in Clause 1 of the Remuneration, Charges and Grants Bill, which has just been introduced, to relieve employers of contractual obligations to give remuneration in excess of the limit. To keep it simple, and to ensure that it meets the 10 per cent. target, the £6 limit must be a simple addition to earnings: it should not carry through to overtime or shift premiums. It will be applied pro rata for part-time workers and juveniles.

As I have said, it is a ceiling for wage increases, not an automatic entitlement. It will be more helpful to the lower paid, and call for progressively more sacrifice from those who already have higher incomes.

Lord GEORGE-BROWN

My Lords, will the noble Lord forgive me if I interrupt for one moment? Could he quantify that? When we have worked the £6 through what does the noble Lord reckon will be the addition to our present inflation?

Lord SHEPHERD

My Lords, the basis of the £6 is that we should cut our inflation to 10 per cent. by—

Lord GEORGE-BROWN

No, my Lords; I am sorry but that was not the question I asked—the misunderstanding may be my fault. I asked what is to be the total amount which we will add to the inflation we have this year by paying our workforce on the complicated structure which the noble Lord has mentioned—£6 and something else? The noble Lord must have quantified this. How much will it add to this year's inflation?

Lord SHEPHERD

My Lords, the purpose of this policy is to cut inflation, not to add to it. But there may be something behind the noble Lord's question which I have not fully taken on board. If the noble Lord will permit me to complete my speech, I shall then carefully consider what he said and ask my noble friend Lord Beswick to deal with it when he makes the reply for the Government—

Several Noble Lords

Oh!

Lord SHEPHERD

I do not see why I should not ask my noble friend to do some difficult things from time to time. I have said that this is a ceiling for wage increases and not an automatic entitlement, and it will help the lower paid. Where incomes are over £8,500 there will be no increase whatsoever. The Government know that these features give rise to complications in some cases. We know that the flat rate will mean a disproportionately higher addition to wage costs in some sectors of importance to the consumers.

In particular, there is the problem of resuming more normal processes of pay determination once we have succeeded in getting inflation under control—what is called the "re-entry" problem. This is a matter to which great attention will need to be given during the next few months. But our target is this dramatic reduction in the rate of inflation. For that we need one common approach, easily understood and easily monitored, to bring home to all of us the dramatic nature of what we have to do, and the simple, observable fairness of our plan. This is a simple, but essentially fair, plan for our people.

The Government accept the responsibility for applying it in those cases where they are themselves the employer. The operation of pay research in the Civil Service is therefore suspended, and the Government will ask the relevant review bodies similarly to comply with the pay limit in their recommendations.

Turning to those sectors where the Government are not themselves the employer, the White Paper sets out the sanctions which we shall use to ensure that the same limit is applied. This is clearly necessary if the common approach is to be fair and seen to be so. In the public sector, the chairmen of the nationalised industries have already undertaken to observe the limits. But we have also made it clear that the Government will not finance excessive settlements in the nationalised industries—whether through subsidies or by allowing extra borrowing or increased charges. We do not need any additional formal powers to do this. The existing sanctions are sufficient and we shall not hesitate to enforce them in particular cases should this prove necessary. Excessive pay awards in these cases, therefore, will lead to lost jobs.

So far as the local government sector is concerned, for some groups—teachers and police—the Government are already directly involved in pay settlements. Where national settlements affecting local authority employees exceed the limit, the Government will not provide rate support grant on the excess. In the case of excessive settlements by individual local authorities, we are inviting Parliament to provide powers to reduce grant paid to such authorities by the whole amount of such settlements, and not just the excess. This is set out in Clause 4 of the Remuneration, Charges and Grants Bill.

We have also made it clear that we can, and will, if necessary, offset the cost of excessive pay increases by using the powers which exist to control the borrowing of individual local authorities. These are the sanctions. We hope and expect that they will not need to be used, and we shall be discussing in the new Joint Consultative Council and the Convention of Scottish Local Authorities, not only the observance by local government of the pay limit but also the scale of staffing of the local authorities.

In the private sector, the Government have no direct control over pay. But other Government powers exist, which we have made it clear that we shall use if there are any cases in which private employers do not observe the pay limit. Most importantly, there already exists a legal price control over most goods and services produced for the home market. We shall go to the heart of the problem of inflation by taking steps to prevent excessive pay settlements from being passed on in higher prices.

Applications to increase prices will have to be accompanied in future by details of any pay settlement underlying the application and, where the Secretary of State certifies to the Price Commission that a settlement exceeds the limit, the whole of that pay increase will be disallowed for price increases. Since this sanction goes further than the existing price control powers, we are inviting Parliament in Clause 3 of the Bill to provide the necessary additional legal powers. In addition, the Government will not give discretionary assistance under the Industry Act to firms which have broken the pay limit, and the new National Enterprise Board will also take these considerations into account. Moreover, the Government will also have regard to an employer's observance of the pay limit in their own purchases of goods and services.

My Lords, I now turn to prices. For a start, the Government will, of course, maintain the strict price controls already operating. Beyond this, and in addition to the sanction through the Price Code against pay increases in excess of the limit which I have already mentioned, the Government are taking a number of specific steps. In particular, we shall be discussing with the CBI and the Retail Consortium how to stabilise certain prices which are especially important in the family budget.

Successful action presupposes stabilising the costs, notably the wage costs, which these prices reflect. But once it is clear that the pay limit is being effectively observed, we aim to ensure that prices for such goods do not rise by more than about 10 per cent. over the next year. Next, food prices and rents are particularly important in times of inflation, and keeping them down is particularly important for pay restraint. The White Paper explains that, in order to help low income families and pensioners during the period of this policy, the Government will slow down the phasing out of food subsidies.

The Government will also give further assistance to local authorities so that rents on average do not rise faster than prices generally. The powers to enable us to do this are contained in Clauses 5 and 6 of the Remuneration, Charges and Grants Bill. As my right honourable friend the Chancellor of the Exchequer has emphasised, this rent subsidy will not be payable after 1976–77. It is a special subsidy, for one year, to help meet the needs of our anti-inflation policy.

We will redouble our efforts to ensure that better information is provided to consumers, through the establishment of more consumer advice centres, and by speeding up the programme of price display and unit pricing.

We should have liked to go further. We should have liked to begin this new attack on inflation with a total freeze on prices for a period. But we have to recognise the economic facts of life if we are to deal with them. Nearly three years of strict price control mean that there is no slack to take up between costs and prices. And with big increases in pay and other costs now in the pipeline, an immediate price freeze could only mean even less investment, new bankruptcies, more unemployment—working, in fact, directly contrary to our objectives.

In terms of the nationalised industries' prices, these are in many cases very sensitive to pay increases, so that it is particularly true of them that pay restraint will lead to an easing of cost pressures and so to a lower rate of price increases. However, we shall continue our policy of phasing out nationalised industry price subsidies to reduce the public sector deficit which is also important in our total attack on inflation.

My Lords, much has been said about public expenditure. The White Paper explains the new measures which the Government are taking to control public spending. These are necessary to deal with the effects on inflation itself on public spending; to ensure that the demands it generates, on resources and public funds, do not undermine the other measures we are taking to get inflation under control; and to enable us to get that movement of resources into exports and investment which is essential if we are to combine growth with full employment; that is, if we are all of us to make the most of our skills and labour, and enjoy the fruits of doing so.

At a time of rapid inflation and big changes in relative prices, we cannot continue to rely solely on the present system of planning and control in volume terms. It needs reinforcement in appropriate services by control on the amount of money which the Government pass out in the year ahead. To do this, the Government will introduce a more extensive system of establishing cash limits on certain public expenditure programmes. This will mean that, apart from programmes where cash limits are clearly inappropriate—such as social security benefits, which must depend on the rates approved and the numbers qualifying for them—any tendency of one element in a programme to increase unduly will normally have to be reconciled with other priorities within that same programme.

At the same time, our arrangements for the monitoring and control of the expenditure of local authorities and nationalised industries in particular, are being improved, for example through the new Consultative Council. In addition, the Government are reviewing public expenditure in the medium term, with a view to continuing the reduction of the public sector borrowing requirement which was initiated in the Chancellor's Budget in April. The Chancellor then took measures to reduce the borrowing requirement by about £1,200 million in 1976–77. This would mean public expenditure next year below its level this year. He also made it clear that, beyond next year, there was at best only very restricted room for overall growth in public expenditure. We must leave room for exports and investment so that we are able to take advantage of an upturn in the world economy when it comes.

But I must emphasise that we shall not be provoked into making panic cuts. Noble Lords opposite are calling for such cuts, many of which—for example, the rapid phasing out of food and rent subsidies—would merely aggravate the problem of inflation. Others would increase unemployment, since there is no problem of excess demand in this country today. On the contrary, we have far too many unemployed and many of our factories are working well below capacity. We shall take our decisions deliberately and carefully, in the light of our regular reappraisals of public expenditure programmes and of all the relevant factors. The 1975 Public Expenditure Survey is now in progress and the results will he published in due course in the usual White Paper.

My Lords, I should like in conclusion to say a few words about the reserve powers mentioned in the White Paper. The measures outlined in the remainder of the White Paper carry the broad agreement of the TUC and the CBI. Despite reservations on particular points, both agree on the objective and the general strategy to meet it. We believe that the whole country wishes to join in a united effort to conquer inflation by consent and by agreement. But there will be measures to strengthen the policy. These are contained in the Remuneration, Grants and Charges Bill, the Second Reading of which will follow this debate.

The Bill supports the policy in three areas: relief from contractual commitments; selective reductions in rate support grants for offending local authorities; and disallowance of excess settlements under the Price Code. We very much hope that the very existence of these measures, combined with the support of the great majority of working people, will be sufficient to ensure that the policy is a success, and that our target of reducing the rate of inflation to single figures by the end of next year is met. However, if compliance with the policy is not forthcoming, the Government have made clear in the White Paper that they would not hesitate to introduce a legal power of compulsion.

As the House knows, it is to meet this eventuality that the Government have prepared legislation which can be applied to particular cases and make it illegal for an employer to exceed the pay limit. Although we hope it will not be required, the Government will ask Parliament to approve this legislation if that should be necessary.

My right honourable friend the Chancellor of the Exchequer has already described in another place the nature of the powers which we hold in reserve. First, the legislation would give the Government legal powers enforceable against individual employers who exceed the pay limit. Second, they would not provide for criminal sanctions on work-people in order to enforce the limit. Third, the Bill would provide for compulsory notification of intended wage settlements. Finally, it will enable the Government in cases of particular firms, or groups of firms, to reduce future pay to a level consistent with the White Paper. I emphasise "future pay".

May I end, my Lords, by asking a question. Granted that the measures outlined in the White Paper have ragged edges, that they will give rise to anomalies and make for a very difficult "re-entry" period, my question is: what alternative policy do noble Lords, or others who may be critical, have to offer which would command the same degree of consent as that set out in the White Paper, and therefore offer the same chance of success?

I have outlined the Government's policies for dealing with the main economic problem which confronts this country today. We must conquer inflation. Sacrifices will have to be borne. But there is a great prize to be won. We are confident that the measures which the Government propose, with the full-hearted backing of the working people of this country, will enable this prize to be won. My Lords, I beg to move.

Moved, That this House takes note of the White Paper on The Attack on Inflation (Cmnd. 6151).—(Lord Shepherd.)

3.23 p.m.

Lord CARRINGTON

My Lords, the noble Lord, Lord Shepherd, has, as usual, made a sensible and moderate speech and there is much in what he said with which everybody in the House will agree. But noble Lords opposite must not suppose that we on this side of the House have such a short memory: we can recollect the speeches made by the Party opposite in Opposition, particularly during the period of November 1973 to February 1974, and at two General Elections. Even the least cynical of us have to clean our spectacles and adjust our hearing aids to make sure that we are hearing and seeing right, or per perhaps seeing the right person. An enterprising person has compiled a list of Labour quotations about the economy, made during the past two years. It ought to be sub-titled, "Harold and Denis's Adventures in Cloud Cuckoo-land" In these pages there is certainly a good deal of material for those who do not believe in the consistency of politicians; there is a quotation for everybody's taste. They certainly show that the record of the Labour Party over these past two years is nothing to be very proud about.

Having said that—and the temptation to continue is almost irresistible—I shall leave it there, for there is in the Conservative Party, as well as elsewhere, a great deal of joy when a Labour sinner repents. It may be—and I shall elaborate on this a little later—that we on this side of the House do not believe that the Government have gone far enough in the measures they propose. It may be that we are uncertain about their capacity or their firmness of purpose. But there will be no one in the House who will not support the Government in what they are seeking to do, not any one of us who does not hope that they will succeed, for on that success depends the future of all of us, whether we vote Labour, Conservative, or not at all. Therefore, in the fairly brief remarks I intend to make, I should like to consider the attitude of the Government and the British people to the problems which face us, and I should like to make one or two reflections. I will leave to my noble and learned friend Lord Hailsham of Saint Marylebone the discussion on the question of legislation and back-up powers.

The first thing that we have to understand, humiliating though it may be, is that we have become a pensioner nation. I doubt whether we have lived so much on "tick" since the reign of Charles II. We have become used to living far beyond our means, and now, as every subeditor in Fleet Street is telling us, the sky is dark with chickens returning to their roosts. Unhappily, that psychology has penetrated very deep. It is surely symptomatic, as some commentators have pointed out, that we talk about the non-oil deficit on our balance of trade as though somehow it was an unreal statistic, a mere book entry, that it did not represent a real cut in our national standard of living. One might just as well talk about the non-wheat or non-banana deficit. The fact is that at the end of the day we have to earn enough ourselves—earn, not borrow—to pay for our oil, our wheat and our bananas.

The second example concerns the balance of trade. Quite rightly, everyone joins in praising the efforts of our exporters; we had a debate about it the other day. But do not let us decieve ourselves, because while the value of our exports has gone up by about 1 per cent., in volume terms they have fallen by 28 per cent. in the first two quarters of the year—faster than the fall in world trade. The figures look superficially better than that because prices have risen so rapidly. But we are gradually pricing ourselves out of world markets with an inflation rate running two, three and sometimes four times as high as that of our competitors. Of course do not let us talk ourselves down; but, equally, do not let us run away from the truth about ourselves.

The other day, the Daily Mirror set out a number of these truths in some frightening tables which showed how our own industrial performance compared to that of other countries. For example, British industry is the most overmanned in Europe and our nationalised industries, in particular, lag far behind their competititors on the Continent. We waste men and machines by producing much less with the same labour and capital input as countries like Germany and France. One result is that while we suffered our worst balance of trade deficit last year, the Germans had a surplus of about the same magnitude as our deficit. There are many reasons for our bad economic and industrial performance—Governments, management, unions and so on. But I cannot help thinking that another important reason is the growth in the Government sector in comparison with the private sector.

The wealth of this country—and of any country—depends almost entirely on the production of what the economists call tradeable services. It is the tradeable services which have to pay for the non-tradeable services, the services which Governments get involved in providing. In the 1960s the non-tradeable portion of our economy increased more quickly than in any other major Western developed country. Our Government took on more and more, and spent more and more. That has been particularly true over the past year, at the same time as our real wealth has been cut back.

Against that background of a nation earning too little and a Government spending too much, two deeply significant changes have taken place, and I lay no claim to originality in pointing them out. First, there has been a shift of power within the community. In an increasingly sophisticated and technological industrial society, small groups in key sectors of the economy can, if they wish, insist on the rest of the country paying them over the odds for the service they provide. And, because government represents the will of the whole community, the national mandate, whatever policy it pursues, it will find itself in conflict with sectional groups and sectional mandates as soon as it tries to act in the interests of the whole country. Therefore, the power exercised by relatively small groups has a considerable effect and impact on the authority of Government. It affects any Government's ability to carry through an economic policy which seeks to do more than just meet the claims (on inevitably limited resources) of the most powerful groups.

Two facts have made the situation even more difficult than it would otherwise have been. The growth of the public sector has removed many of the commercial sanctions against excessive pay demands, and the success of militancy has blunted the efforts of the moderates which were in any case much too limited. We have not yet had an answer to the question posed in February 1974. There has also been a shift in world economic power towards the producer countries at the expense of the consumers, markedly so in the case of oil. It is probably sufficient to note that the world recession that followed the October 1973 war, the energy crisis and the increase in prices, are thought to have reduced the industrial output of the developed countries by one-fifth below previous trends. But while one part of our problem is caused by world factors, I believe that it is wrong and self-deluding to talk now as though we are facing a world crisis which it is beyond our capacity to resolve on our own. We are in a real sense facing our own crisis, brought on by our own action and lack of action. After all, every other major industrial country faced the same potentially dangerous inflation rate as us, but unlike them we lacked the political will to deal with the causes of inflation.

In the 12 months to February 1974, prices in this country went up by 13 per cent.—about the average of our competitors. But in the 12 months to April this year, prices went up by 22 per cent.—and, of course, the figures have become much worse since then. While our rate of inflation got worse, in other countries it abated—Germany down, Japan down, Denmark down. It is surely therefore fair to say that their problems have become less severe because of the policies which their Governments have pursued, and that our problems have become more severe for precisely the same reason. To those who say, "Yes, but unemployment has been higher in those countries", I would only say this: We have had the inflation and now we are getting the unemployment. "Inflation", as the Prime Minister has said—and I agree with him—"is the father and mother of unemployment".

My Lords, I am not so foolish as to think that all our troubles are to be laid at the door of 16 months of Labour Government. Of course they are not—any more than they are to be laid at the door of the previous Conservative Government. They are compounded of a number of different factors—some quite outside our control, some inherited and difficult to eradicate. And, of course, the Conservative Government made mistakes. I hope indeed that when we are returned to Office we shall have learned from those mistakes. It is right then that we should contemplate what the Labour Government have done in the last 16 months, which has in my judgment contributed substantially to the worsening of our situation in the hope that they, too, will learn from the mistakes which they have made.

What have they done in these last 16 months? First, there has been a massive increase in public expenditure. Total public spending this year will be over £53 billion, £20 billion above the level of expenditure in 1973–74. This represents a 21 per cent. increase over 1974–75 and a more than 60 per cent. increase over 1973–75. While public spending has increased at this calamitous rate, production has been static or has actually fallen. The output of British industry is now lower than it was during the three-day week. What is more, the oil crisis has cut the value of our stagnant and falling production by 4 per cent. So there has been a yawning gap between what we produce and what we spend. The Government have had to bridge that gap by running up a horrific borrowing requirement of more than £9 billion, and quite possibly as much as £12½billion. Even if the Government are successful in borrowing rather than printing the money to finance a deficit of that size, the money they attract will only be diverted away from industry and from such things as house building. I know that whenever one talks about public spending and Government borrowing being too high, one is usually attacked for wanting fewer new hospitals, fewer new schools and fewer social services. But the truth is that at the moment we have this hideously bloated level of public spending, at the same time as hospitals, schools and social service programmes are being hacked to pieces. The Government have not been pouring out money on a greatly improved National Health Service or education service. No, my Lords, the money has gone into subsidies, into paying for the massive wage increases which were blessed by the Social Contract, and into meeting the increased prices that the Government's own policies were making inevitable.

We have massive public expenditure, but we are not building more hospitals. We have vast food and rent and transport subsidies, but prices are going up by 25 per cent. We have—as a growing number of even Left-wing commentators are prepared to admit—the very poor, in effect, subsidising the better off, because of the refusal to concentrate help rather than spread it indiscriminately. This is the mad world we live in now, and restoring sanity is going to be a painful business.

My Lords, two things have occupied the Labour Party since they assumed Office. First, there was the Social Contract about which the Leader of the House had something to say. I shall not have much to say about it. It sounded all right, but it was not. But as it is dead and buried, perhaps we had better leave it there. Secondly, there was an industrial policy which argued that what was wrong with the British economy was that it had not had a sufficient dose of Socialism. Most observers would argue, a good deal more persuasively, that what is principally wrong is that it has had far too much. But the Labour Party were concerned, as perhaps never before, with the question of the ownership of industry, harbouring what to me is the curious notion that State control somehow leads to dynamism and efficiency—an idea not wholly rational to those of us who have some contact with nationalised industries.

And so industry has had to endure not only heavier taxes, a tightening of the Prices Code, a squeeze on profitability and hence future investment, and a Government which would not give a strong lead on wages and even expected employers who were not themselves a party to the Social Contract to police it, but also the biggest nationalisation programme since the late '40s. Even at this moment we are debating in this House the Industry Bill, which will do a great deal to weaken our mixed economy and nothing whatever to help check inflation. If we are going to make a success of a mixed economy, then the Government have to reassure industry and commerce about their intentions, and must enable sufficient profit to be earned to invest in the future. Without confidence or money, how can industry survive; and if industry does not survive none of us will survive either.

We on these Benches have been putting the general case for some time. We have called for public spending cuts, and your Lordships may remember that one of our last acts in Government was a reduction of £1,200 million in public expenditure. We have urged the Government month after month to reduce the size of the borrowing requirement. We have urged them to be bolder and more vigorous in trying to restrain wages, and we have told them time and again that our mixed economy simply cannot survive any more attacks upon its foundations.

The details of the Government's proposals are well known, but some of us have doubts—and serious doubts—about whether the Government are going far enough. I am not saying that their policies, resting as they will to a great extent on the increase in unemployment, will not succeed in reducing the rate of inflation to 10 per cent. by next years. They may well do that, if they can be made to stick; and I very much hope that they will succeed. Incidentally, I wish the noble Lord, Lord Beswick, the very best of luck when he is answering the question put by the noble Lord, Lord George-Brown. What I question is whether we should not have set ourselves the more ambitious target of trying to eliminate inflationary expectations in the course of the next wage round. Even in pursuing the Government's chosen target, there will have to be an overall cut in personal incomes for the first time since the war. I am a little surprised that the Government did not ask for a slightly larger cut with the prospect in return of our being able to move forward again—admittedly cautiously and slowly—rather sooner than we shall be able to do under present plans.

What the Government are really saying now is that we have several years of hard slog ahead of us. I think that it may have been both politically and economically more sensible to ask people to give rather more in the next year for Britain, on the understanding that the end of that year would offer a much brighter future. The British people, when faced with facts, given honestly and frankly, are quite prepared to accept the consequences—far more so, I think, than many politicians realise. I do not believe that our difficulties will be cured until we have a national realisation of the problems we face and of the consequences of failure, and until we have a national resolve to succeed. A heavy responsibility therefore falls upon the Government. To seek to please and to appease one section of the community at the expense of the other will make this all the more difficult.

In a very unhappy phrase in the Labour Party Manifesto at the last Election it was said that, there was no meeting point between the Labour Party and those who have a different philosophy. I do not agree with that for one moment; for all of us are, above all, interested in the survival of this country. Of course, we are not going to agree about everything, but I should have thought it was not impossible for the Government to lay down a system of essential priorities which most of us, apart from extremists, would accept. Of course, it means sacrifice on the part of the Government, and I accept that. It means that they will have to sacrifice some of their Socialism and some of their nationalisation plans, or at any rate to postpone them. But unless we achieve a measure of national cohesion, it will not be possible to do those very disagreeable things which all of us know are going to be necessary.

Baroness WOOTTON of ABINGER

My Lords, the noble Lord has asked whether the Labour Party will sacrifice part of its nationalisation programme. What sacrifices are to be made on the other side?

Lord CARRINGTON

My Lords, we should be perfectly prepared to listen to any suggestions about sacrifices which the noble Baroness would want us to make, but since we are not in the Government it would be extremely difficult for us to sacrifice anything. I am not suggesting that anybody should govern other than noble Lords opposite. We know that public expenditure must be cut: we all know that. We know that our standard of life is going to fall and that life is going to be difficult for the next two or three years; and we know that there is going to be more unemployment. How much better it will be if we can survive it by means of an agreed system of priorities which we all recognise to be fair. Nothing is going to be solved by anyone if we are going to stick by our own Party dogmas. I am not sure that at this moment the great majority of people of this country really understand the gravity of the situation which faces us, and I do not know that one can entirely blame them for that. Recent wage increases have not only cushioned a large section of the community against inflation, but they have actually made some people better off. If that situation were founded on reality rather than fantasy, there could be no complaint. But the day of reckoning is coming, and it is up to all of us to give a lead in bringing home the realities of our position.

I do not believe that the character of the British people has changed in these last 30 years. An element of that character has always been an inability to realise until the last moment how serious things are, but when awakened to the reality to respond with common sense and resolution. Sometimes I wonder whether, when faced with a challenge and a bit of austerity, given leadership and a sense of purpose, the British people do not enjoy life even more than they do in times of prosperity. So we have to be honest with people. We must tell them that sacrifices are necessary and spell out to them what the fight against inflation will mean for every family. We must trust in the sanity and responsibility of our people. Adlai Stevenson once said: "The average man is a great deal above the average". We, as politicians, have a special responsibility to show that we also think that the nation above all is the important thing that rules and guides our actions.

My Lords, there is a great deal at stake: our prosperity, our place in the world and perhaps—it is not too fanciful—even Parliamentary democracy itself. Let us place our trust in the basis of democracy, the common sense of the citizen. If we do that, we stand the best chance of beating inflation before inflation beats us.