HL Deb 11 June 1975 vol 361 cc311-33

3.2 p.m.

Lord BYERS rose to call attention, in the light of the result of the referendum, to the need for urgent economic and political measures which will command the broadest national support and so enable the country to overcome its present problems; and to move for Papers. The noble Lord said: My Lords, at the outset may I say with what great pleasure we shall listen to the maiden speech of the right reverend Prelate the Bishop of Worcester. The origin of this Motion was a mixed one. Some months ago my noble friend Lady Seear expressed the view that the overriding problem in this country was to get the public to understand the seriousness of the economic issues which were facing us. In the past few weeks, many of us, on both sides of the House, have had the stimulating experience of addressing all-Party meetings from all-Party platforms in the referendum campaign. We sank our partisan policies for the time being, we eschewed controversy, and we were able to conduct, on this main issue of Britain and Europe, a campaign which, in my experience, was more educational than promotional.

The same conclusions seem to have been drawn by a number of people, covering a very wide spectrum of public opinion in this country. There has been quite a debate on this in the three weeks since I tabled this Motion on the Order Paper of your Lordships' House. The result of the referendum is now known. It gives us the opportunity of a new appraisal of our national priorities. It gives us the opportunity for a new start, and for a new impetus, if we can so organise it; and that is why I put down this Motion.

I should like to make it clear at the outset that this Motion is not a call for Coalition. I would not be an anti-coalitionist if I thought that a Coalition would be in the national interest. Coalitions have worked well in Europe, although I think a Coalition might be quite unworkable in this country unless there is a change in the electoral system to match votes to seats and to protect the moderates in politics from the militant Party caucuses which exist. But as I say, this Motion is not about Coalition so far as I am concerned. Of course that does not inhibit noble Lords and noble Baronesses who wish to pursue that line of country, but it is not mine.

My proposal is that we should seriously and urgently attempt to identify the relatively few major issues on which we ought to be able to obtain the broadest possible across-the-board support to put the British economy back on its feet; and having identified those issues, then to organise a broadly-based campaign to bring home to the public a better understanding of what has to be done.

If such an initiative is to succeed, the issues must be limited to those which are really paramount. The course of action must be clearly understandable. The issues must command broad-based support, and they must be put forward by those who, temporarily at least, are willing to forgo Party political controversy.

My Lords, as to the issues, I do not think there will be too great a disagreement on the diagnosis, but agreement on solutions will be much more difficult. In my view, our main problems are, first of all, inflation—running now at around 30 per cent.—and a continuance of a rate such as must surely be economic suicide; but, more important, are, I think, the political repercussions, because that rate of inflation invites totalitarianism of one form or another, and this is something against which we, proud of our democracy, should guard. Whatever the causes, there will, I hope, be agreement that this rate is far too high and it must be reduced smartly and quickly, as the Chancellor of the Exchequer indicated only a few days ago.

The second issue is unemployment, now close on the 1 million mark. This is both a social and an economic problem which has to be tackled. But I do not believe that it can be dealt with by refusing to face overmanning, or by propping up inefficiency. We must find more acceptable ways of providing meaningful and well rewarded jobs for people when they leave the declining industries or when they have to leave the lame duck firms. This means a massive and sophisticated programme of retraining—something much more imaginative than we have had so far. Money is available within the community and I should like to see people paid a proper wage while they are being retrained to get out of the declining industries and into the industries where their productivity will help the country much more than it has been able to do so far.

The next problem is one which I would describe as perspective. By this I mean that we must get things back to a sense of proportion if we are to identify realistic solutions. It is not easy to get accurate figures, but so far as I can make out, our total expenditure at the moment in the public sector—that is, central and local government and nationalised industries—is about 60 per cent. of the gross national product. If I am wrong on this, I should like to be corrected, because I have had great difficulty in obtaining these figures. In addition to that out-of-proportion expenditure, in my view, we are borrowing something like £9 billion at the moment, rising possibly to £12 billion by the end of the year.

Therefore I ask how long can we go on like this? How long can public expenditure continue to be more than half the GNP? How long can we go on borrowing overseas and still remain our own masters? This is something which worries me because bankers have an uncanny knack of wanting to secure their loans by insisting that the borrower changes his life style fairly radically. The longer we delay in getting things back to proportion, the more expensive will be the pound of flesh.

Therefore, my Lords, I say there must be some action that a Government can take to control inflation, to bring the economy back to some sort of stability and productivity. We should like to know what are the Government's intentions in this field? Here I venture on delicate ground. I do not propose to come forward with cast iron proposals because that would defeat my object in trying to get as much common ground as possible. Therefore we want people in different debating fora to put forward their views as to what can be done. But I feel that in this debate I ought to indicate the main areas where a solution has to be found in order to see what alternatives are open to us.

I shall start with public expenditure. My Lords, as politicians we all know that the basic problem for a Government is that everyone will call for cuts in public expenditure so long as those cuts do not affect their interest or any interest in which they have a social, economic or other concern. For every cut proposed there are always 20 proposals for additional expenditure. These are the facts of life. We have been in politics long enough to know that this is so.

Having said that, I believe that we ought to be able to identify cuts which can be effected and on which it would be possible to obtain agreement in the short term. The first step would be to look at Government expenditure which is new, and which could possibly be avoided or deferred. Running at millions of pounds at the present time, the obvious candidates here are the use of public money for investment in new or existing ventures. I do not think it makes sense when our cash resources are so depleted to lock up tax money or borrowed funds in the private sector of industry on behalf of the Government when alternative financial policies could be pursued.

I will mention only three examples. First, there is North Sea oil. Why do we take an equity stake in this when full control can be achieved and revenue secured by fiscal means? The amount of money to be involved over the next few years is absolutely astronomical and the Government are locking themselves in to provide this cash, which I believe should be found in other ways. If the Government want to have directors on the boards of the North Sea companies, they can always do it; they do not have to have a 51 per cent. shareholding in order to get their own way. Secondly—I merely mention this and do not argue it—there is British Leyland. Why take an equity stake in this when a Government guarantee should enable cash to be found from non-Governmental sources? If the plan for resuscitating British Leyland is good enough, the money can be raised as it could have been raised for the Channel Tunnel, backed by a Government guarantee. There is no need to lock up taxpayers' money in this sort of venture. Thirdly, there is shipbuilding and ship repair. Why get involved in this at all at the present time? Some of these companies are profitable. Some of them have been to see us to demonstrate how profitable they are; others need better order books. These orders will come when the climate of investment improves and when Britain appears to be stable and capable of giving delivery on time.

My Lords, what it does not need, and particularly now before we have solved our problems of inflation and unemployment, is nationalisation. I ask again: Why introduce measures like the Community Land Bill? I was horrified to see that this is going to tie up about 14,000 civil servants. Why go in for that sort of thing at the present time? Are there other measures which will swell the number of unproductive employees, measures which could be dropped or postponed?—not all of them; for we have passed some useful measures like the Social Security Benefit and Childrens Bills. Can we not run down the whole list and see whether all of them are necessary in the context of the problems we face at the present time of gross public expenditure? I believe that an announcement by Government that they were saving millions of pounds by dropping certain policies, and saving tens of thousands of unproductive workers by postponing or forgoing certain legislation, would give great confidence. It would do more than anything to create the image of a country determined to put first things first.

I now come to the next delicate area; that is, wage settlements. I do not think it can be denied that pay settlements of 30 per cent. to 35 per cent. are grossly inflationary. It must appear mad to people abroad to think that one of our greatest unions, and one for which we have great respect, is contemplating a national strike to get more than 27½ per cent. What image can this give of Britain from the overseas point of view? These wage settlements force up prices; and, what is more, they give every excuse for all sorts of people to put up prices around the villages and towns and elsewhere. Certainly they are in breach of the Social Contract, as I understand it. The situation is exaggerated, because the miners were treated as a special case, rightly or wrongly; but having been treated as a special case the classic, inevitable and predicted result has been that many other unions are insisting on being regarded as special cases. Here, again, we politicians know the difficulties even if we do not know the solutions.

If these high pay settlements are critcised, we are accused of union bashing. But no one who sees the inflationary effects can stand silent in the present situation. So where does one start? The trade union negotiator, in my view, is in an impossible position. He is elected to get the best pay settlement possible for his members. If he is soft and ineffective he will be replaced because he is not doing his job. I think it is unfair to look in that direction for restraint; although I pay tribute to those union leaders who have stuck out against high settlements in the present circumstances. I think the House will be grateful for their attitude. There is much influence which former trade union leaders, many of them in this House, could bring to bear in a national campaign to conquer inflation. They command great respect in the trade union movement and the national interest needs their help at the present time. The fault is certainly not only with the unions. There are too many employers who think that their organisations are special cases, and who make excessive settlements for the sake of industrial peace. These are just as inflationary as if they were awarded to the miners or the railwaymen.

Lord POPPLEWELL

My Lords, before the noble Lord leaves his trade union bashing role, would he please deal with some of the much higher income groups and the very great advances they have received, some 30 per cent. and 35 per cent. and also expense allowances; and how they are able to adjust themselves? Would he deal with this on the same lines as the trade union bashing line that he is taking?

Lord BYERS

My Lords, the House will acquit me of trade union bashing. I was very careful to say that this is the risk that one runs when making any criticism of trade union settlements. Of course, I agree that if we are going to get a national plan with national priorities there must be moderation and—I do not know whether the noble Lord, Lord Popplewell, was listening—I have just criticised the employers for the big settlements that they have made. And I would also say that I do not think in the present context that some of the increases that we have seen in top salaries are at all justified. This is all part of the argument that I am trying to advance. If the noble Lord would allow me, it is a rounded argument, not one aimed at any one section of the community.

I now come to the point—and this would cover the noble Lord's point if he would give me a little attention and not go off the rails into a siding; he is an ex-railwayman—that I do not think there is any alternative to an incomes policy: not a wage freeze but some policy, stronger than the Social Contract and covering everybody which will limit pay increases to something of the order of 10 to 12 per cent. along the band of average earnings in this country, and certainly much less in the higher bands of income. To make a start on reducing inflation we must have a policy to try to get wage settlements down to something we can manage. I should like to see a definite embargo—not a voluntary one—on settlements taking place at less than yearly intervals. This idea that you get a settlement and then want another one in eight or nine months is an inflationary spiral which is building itself into the system. Why not try longer settlements than a year, as they do in the USA? Why not explore the idea of giving more fringe benefits across the board—better pensions, death-in-service benefits—instead of inflationary wage settlements at higher percentages?

More consideration should be given to the inflation tax which my honourable friend Mr. John Pardoe has put forward on many occasions. Mr. Jack Jones has suggested a flat rate increase. Could this not be inquired into as a matter of urgency to see whether or not it is a runner? Some forms of income policy must be considered, despite the trouble we have had in the past when we have ventured on to this very thin ice. We know it is thin ice and we have a lot of experience behind us. I believe that if an incomes policy were accompanied by a massive educational campaign conducted on an all-Party, all-interest basis it might have prospects of succeeding.

In my view the next area to which we have to look and which is equally sensitive, is long-term planning and business confidence. The result of the referendum gives us the chance we need to re-establish confidence within Europe that we are there for keeps, with all the ups and downs; in other words, we are there for better or for worse. It also gives us a chance to provide a basis of confidence on which British industry can plan ahead in the knowledge that they will not have the rug pulled from under them while they are doing it. It gives confidence in the world that at last we have a clear sense of direction. The main points of consideration here are the long-term planning and business confidence.

I think we ought first to consider whether or not it would be a good idea to give business a moratorium on legislation designed to extend the scope of Government intervention for the next 18 months or two years. Business must also be assured that the Departments with which they have to deal are sympathetic to the private enterprise system and that the Departments understand the functions of profit, dividends, liquidity and cash flow as the basis of competitiveness. It is important to avoid suggestions from responsible quarters that pension fund investments, for instance, may be taken out of the hands of the professionals in favour of people wedded to nationalisation. That sort of thing is normally denied, but by the time it has been denied the damage has been done to the confidence within the industrial world. I believe that such proposals cause uncertainty, and it is uncertainty that erodes confidence in long-term planning. In the same way, if a mixed economy is to serve the national interests then Ministers in charge of industrial Departments must share the long-term aims of the private sector and help them to get maximum efficiency and productivity.

Complementary to this is the substantially increased monopoly power of the trade unions over the last year or two. This is not union bashing; there is a vital place for both unions and employers in getting our economy back to stability and efficiency. But the balance has to be right. Whenever it appears that one side or the other is dominating Government thinking and policy it frustrates development and leads to fear and uncertainty—and uncertainty is the enemy of confidence. If we can make a new start we need an all-Party, all-interest forum at the highest level to identify and outline our national priorities, and I believe that we have the experience to mount an effective campaign. One possible forum which has been mentioned in many quarters is the National Economic Development Council. At the moment the impression we all get is that it is rather ineffective. I think it would have to be drastically reconstituted, with members sympathetic to the need to make the mixed economy work and to conquer inflation. I think it should have on it independent members who would look for the overall national interest at all times. I am certain that the proposal that it should have members of the professions on it is a good one. This is the sort of thing which ought to be done—a forum of some sort which will identify the issues on which the country has got to be informed; a massive campaign broadly supported which will enable us to put that over, and above all we must have an inspired sense of urgency.

I do not believe that we can go on drifting through the autumn, through the Party Conference period, without a real grip being taken on the affairs of this nation. We need leadership. I am suggesting that over a short period there could be a broad basis of support in the national interest in favour of doing those things which have to be done, no matter how unpopular they may be. My Lords, I beg to move for Papers.

3.25 p.m.

The Earl of GOWRIE

My Lords, the noble Lord the Leader of the House has most kindly consented that my name be exchanged with his on the list of speakers. I think it is the usual practice for the Opposition to speak before the Government, but he did so at short notice and it was all the more kind because I know that he has a meeting to attend afterwards and will have to leave after his own speech. I am most grateful to him.

Even though it is only a month since we had an important debate on the economy in the name of my noble friend Lord Watkinson, we must be very grateful to the noble Lord, Lord Byers, for putting down the Motion today. As he said, it gives us a chance to look at the situation facing our country in the light of the overwhelming majority in favour of our remaining a member of the European Economic Community. There is another overwhelming majority of Members of this House and another place who are delighted at that result—the only unabashed bit of good news, I would say, to come out of our national household in the past year. Those of us who remain, as I do, somewhat cynical about referenda, might say that the national result only reflects Parliament's true thinking on the matter of Europe at the time when my right honourable friend Mr. Heath took Great Britain into the Community in 1971. Be this as it may, I think few of us will want to withhold congratulations from the Prime Minister on the verdict he sought and obtained, just as I would imagine that few among our political opponents who support membership of the Community would grudge the Conservative Party and its leaders their unwavering quest for membership over more than a decade or on their success under Mr. Heath three years ago.

As the noble Lord, Lord Byers, said, in the referendum campaign we enjoyed a precious second of national unity with the leadership of all three Parties endorsing a policy central to the national interest as they saw it. So the noble Lord was right to ask whether this same spirit could not continue a little longer and help [...]s to prevent the destruction of our money and our democracy. We must make no mistake about this. Our situation now is as bad as it has been in modern times. It has become conventional, when one says this, to add "since the last war". I believe that the situation is worse because survival then was an agreed national policy and we had the leadership and the co-operation to ensure it. We were dealing, too, with an identifiable enemy, whereas inflation, it seems to me, is better compared with civil war.

Your Lordships will not expect me to be Marxist in my thinking, but I am Marxist enough to believe that human societies, if not human life itself, are of the earth earthy and that their soil is their economy. The soil of Western economies is money. Outside one's family and friends—and even the most jolly and gregarious people cannot manage an acquaintance of more than a hundred or two—one's dealings with people are in one way or another made possible by what a wise man called "the passage from hand to hand of cash". I believe this is true of most of our fellow citizens; it is certainly true of the relation of our country to other countries. The present rate of inflation is 25 per cent. per annum. Some put it higher, as I believe did the noble Lord who introduced the Motion, but very few put it lower.

Money that devalues by one quarter each year is more devisive of relationships between people than anything dreamed of in any political philosophy. It poisons almost all transactions that are not of an immediate personal nature—and as a married man I say it poisons even quite a lot of those. In this country we still give Governments, whether they are centre Left or centre Right, very considerable control over the general running of our economy, our national household. As the noble Lord, Lord Byers, said, this Government must act now to stop our money losing one quarter of its value every year. Parliament, which is still sovereign as we are constantly being reminded, has got to help them. I would prefer to use the word "help" than talk too much of coalitions. The noble Lord, Lord Byers, said that his Motion was not primarily a call for a coalition, and he went on to say that he himself was not an anti-coalitionist if it could serve the national interest and assuming that there would be reform in the electoral system. But he appreciates, and I think all your Lordships appreciate, that a coalition is a response, not to a general situation, however desperate, but to the particular situation of a Government failing to command support in the House of Commons, and Parliament not then being granted, for one reason or another, a Dissolution. So let us think rather of co-operation, not coalition.

Last month my noble friend Lord Watkinson, speaking of the referendum, said this, and I quote: If the vote is a firm ' Yes' to remain, as one must pray that it will be, then this could be a great watershed, a time when, with the great issue of our generation firmly and finally decided, the British people could be led to regain a sense of purpose and unity. The first part of my noble friend's prayer was answered. We must pray that the second part of it will be answered also. Although its outright majority is wafer thin, this Government for all practical intents and purposes still commands a majority in the House of Commons. It has had help and co-operation, in the national interest, from the Conservative Party over Europe. It has had help from the Liberals. It must now seek similar help and co-operation in the battle against inflation.

How can this be done? The first thing I believe the Government must do is to spell out the facts of the national situation to the people and declare that arresting the decline of the value of money will have an absolute priority—and I mean by that a priority over all aspects of policy, however prominent in the Labour Party Manifesto at the last Election. I believe that such priority must even extend to what I would agree with the Government is the undeniable social evil of unemployment, because there are clear signs that the country is starting to recognise that galloping inflation will generate far more unemployment than the measures taken to halt it. We are now approaching the figure of 1 million unemployed but the fact that some part, and possibly an insufficient part, of the shakeout of Britain's chronic over-manning is taking place has, I think, blunted the political consequences for the Government of this figure. At the present rate, however, 2 million will be on the cards, indeed "getting their cards", at the end of next year. That would put Labour out for a generation. Much as I would welcome that, I feel that own goals make for a poor game.

For the moment the Government must point out, even as the Trades Union Congress is starting to point out, that neither Government nor employers in the private sector will be in a position to absorb the impact of the counter-inflation policy. Over the next three years, the British people themselves, over all sections of society, will suffer directly and in their own pockets from the present down-turn in national fortune. Everyone is going to be quite a lot poorer, and inflation has made very little further redistribution of the burdens of poverty possible. Nor can business profits be further tapped. Addressing the German trade unions, who have been settling wage claims at around 6½ per cent. in the last year, Herr Schmidt argued that: Today's profits are tomorrow's investments and the day after tomorrow's jobs and mass income. Next, the Government must put their own house in order. This is a cliché—a familiar cry—and I ask your Lordships not to believe that I am the kind of strict "Budget-balancer" who utters it with any relish. Like most politicians. I daydream about having a lot of other people's money to spend, and like them I believe I should spend it quite well. The public expenditure is £20,000 million higher this year than it was under Mr. Heath's Administration, itself no miser in this regard. As the Leader of the Opposition has pointed out, such an increase represents about £350 for every man, woman and child in the country. Almost everyone with any serious knowledge of Britain, here or abroad, acknowledges that our taxation has now reached the point where the law of diminishing returns is in operation. In a memorable phrase my noble friend Lord Aberdare has said that there are "too few rich left to soak ". Our standard of living, including in the great majority of cases our cherished social services, is now below the standards of our European partners, and even these reduced circumstances are being financed by the greatest borrowing in our history. Mr. Healey's requirement is now, I believe, running at about £9,000 million. Like an old-fashioned actor, the Chancellor "appears by arrangement" with Sheikh Yamani and the Shah of Iran. I do not blame him altogether for this, but I do blame him and his Government for not taking steps designed to reduce the risk that those to whom we owe money will call us in—and this time for a count of ten for the pound.

The cost of all food subsidies could and should go "at a stroke ". All members of society who are able to pay for services should be encouraged rather than prohibited from doing so. As a Conservative, I am in favour of encouraging the individual to pay his way and am prepared to do political battle for his right to do so; but as a citizen for the purposes of the present debate I urge the Government to consider the cost to the common currency of their political programme. The noble Lord, Lord Byers, I thought in the most reasonable and conciliatory manner, asked that the Government bring forward no new schemes for public expenditure, especially where fiscal devices could provide alternatives. He cited North Sea oil, British Leyland and the shipbuilding and repairing industries. Incidentally, I would guess that the presence at Energy of the former Secretary of State for Industry would have rather the same effect on the confidence of our overseas creditors as his presence at Industry had on the confidence of the business sector at home.

My Lords, it is in addition to the huge and inevitably contentious sectors of the economy that I have mentioned—British Leyland, shipbuilding, North Sea oil and the like—that the Government have added £2,500 million to direct expenditure and to the borrowing requirement in April alone. That was after an April Budget which had called for restraint! Pay-beds, the direct grant schools, the Petroleum and Submarine Pipeline Bill, the Community Land Bill, the Employment Protection Bill—all these are not only divisive but hideously expensive measures. One can accept the division between the Parties but not at this time, surely, the expense. That was the point that the noble Lord, Lord Byers, was making. I acknowledge that all Government programmes are expensive but we cannot afford enlightened policies, let alone unenlightened ones, until we have restored some credible value to our money. It is no use talking of social justice as the presiding genius of Government policy and of greater wage restraint. We must do what we can afford to do. There is an immense untapped desire in the hearts of the men and women of this country to do something out of their own pockets to help the country. If the Government will cut back just for three years, so, I believe, will they.

In closing, I should like to touch on the question of wages. It is my personal belief that behind our present troubles is a painful transition, a transition from a cheap food, cheap labour, high benefits and low investment economy to a dear food, dear labour, lower benefits and higher investment economy. That would take too long to argue now, I fear, but suffice it to say that I, like the noble Lord, Lord Byers, do not blame the unions for exerting conventional and legal pressure to obtain higher wages. They are exercising their natural and hard-won function in so doing. I do, however, blame those in the unions' political hierarchies who suggest to their members that these high wages can be combined with ever-increasing State benefits or even with the level of benefits that all Governments maintain at the moment. That fudges the issue and is wrong. If the Government reduce their own expenditure and cut back on their own programme for a time—and I recognise they will want to re-open their Manifesto programme later—and above all if they set the lead in their own public sector industries in resisting wage claims above Mr. Healey's national target of 12½ per cent., then I believe there will be a lessening of the intensity of wage claims. It certainly happened in Germany. The test of the Government's sincerity over inflation—and the eyes of their creditors abroad are upon them— will be over the rail strike later on this month.

The alternative to what I have suggested is an incomes policy. Not without cost to our own political harmony the last Government introduced one. It brought down that Government—but it also brought down inflation. Two years ago we had inflation tamed more successfully than France, and today we are taming it less successfully than Italy. We might reasonably have expected the Opposition then to co-operate in our national-interest, counter-inflationary policy. I wonder how long it will be before they, now in Government, ask us to co-operate in theirs. If they wish to avoid a statutory policy they must abandon the bulk of their programme. If they wish to retain their programme they must resort to the law over wages. In all sincerity, I do not envy them their decision. I believe that the former course would do the job more swiftly and less divisively than the latter. But one way or another, my Lords, the job must now be done.

3.41 p.m.

Lord SHEPHERD

My Lords, we have listened to two persuasive speeches. At least to the innocent ear they would indeed be persuasive, but I think that on careful reading one will see that when the noble Lords speak of divisive policies and the need to eliminate them it is only the policies which this Government were elected upon in 1974 that are involved. May I join first with the noble Lord, Lord Byers, in saying how much we welcome the intervention of the right reverend Prelate the Bishop of Worcester. I knew him in earlier days in Singapore. He is perhaps a little stouter but still very much the same figure and giving the same service.

I could indeed go a considerable way with the noble Lord, Lord Byers, so far as the terms of the Motion are concerned. But, as the noble Lord admitted, he was venturing on delicate ground and, as your Lordships would expect, there are a number of points on which we must part company. Despite the gravity of the economic situation—which we have never sought to hide—it is not necessarily true that with the referendum over there is an immediate need for a complete reconsideration of Government strategy. The noble Lord called for a new start, a new appraisal of our national priorities. This indeed would have been necessary had the referendum gone the other way. As it was, in a most welcome result, the Government's recommendation was emphatically endorsed, with the consequence that one of the main assumptions underlying our strategy has proved correct. I was personally very pleased with the referendum result. We can take heart from the decision of the British people on this matter of supreme national importance. In a clear and unmistakable way they have demonstrated their sense of responsibility and common sense. The turnout was high; the majority in favour was high, and the pattern was almost completely consistent over the countries, regions and counties of the United Kingdom.

So far as the economic situation is concerned, the referendum result improves the environment within which our policies operate and the likelihood of their success. The United Kingdom's trustworthiness and credibility remain strong: the development of its trade has not been interrupted, and its economic health remains a vital concern of our European partners. In my view, confidence in the future should therefore rise, both domestically and abroad, and investment plans can and must proceed now that a great deal of the uncertainty surrounding them has been removed. Thus there is no case for saying that, solely as a result of the referendum, there is a greater need for urgent new measures. These will, as ever, be taken by the Government only if they become necessary, and then no sooner and no later than we judge to be right. The noble Lord, Lord Byers, referred in some detail to the current economic situation. I shall therefore refer only briefly to the factors that he mentioned.

First, there is unemployment. Excluding school-leavers and adult students, the seasonally adjusted figure has increased rapidly this year to 854,000, or some 3.7 per cent., in May; and reports from the regions suggest that the numbers on short-time working in manufacturing in Great Britain were around 250.000. I suggest that we should see this situation in perspective. So far, the United Kingdom's record compares favourably with most of our major competitors. Of course, rates of unemployment are not strictly comparable between countries. But, comparing the latest three months for which figures are available with the previous three months, unemployment has risen by about one-eighth in the United Kingdom and West Germany, by over one-fifth in France and Japan, and by over one-quarter in the United States of America. As the pressure of world demand eases during 1975 higher rates of unemployment must be expected. The Chancellor of the Exchequer said quite clearly in his Budget Statement that unemployment is likely to reach 1 million, or some 4 per cent., by the end of the year. However, as the rising level of unemployment is closely associated with last year's downturn in world activity, we ought to expect the situation to improve with the anticipated recovery in world trade next year, provided that we are in a position to exploit it.

In regard to the public sector borrowing requirement, about which both noble Lords who preceded me have spoken, of course commentators are right to express concern about this. The Chancellor made it clear in his Budget Statement that it is impossible to bring about a sustained and progressive improvement in the balance of payments if the public sector deficit increases sharply as a percentage of gross national product. It is for this reason that he took the necessary painful measures so that in 1976–77 there are good prospects of a borrowing requirement significantly lower as a proportion of gross national product than last year's.

As to the problem of inflation, my right honourable friend Mrs. Shirley Williams spoke of it today as "cancer". Our current rate of inflation is twice that of almost all of our main competitors There is no doubt that this is now mostly due to wage and salary increases. These are rising substantially faster than prices, and the results are now beginning to come through. The Government have repeatedly stressed the damage which will be caused if inflation continues at its present high rate. It is damaging to industrial confidence and investment. It undermines our international competitiveness. It endangers jobs. And, my Lords, there can be no misunderstanding: it cannot continue this way. I shall have a few more words to say about this in a moment.

But the situation is not all gloom. We have made encouraging progress in recent months in reducing the size of the current account deficit, despite the depressed world trade picture. In the three months from February to April the deficit was as much as 60 per cent. lower than in the previous three months. As the noble Lord, Lord Byers, warned, one must avoid putting an optimistic gloss on short-term statistics. It is indeed true that part of the current improvement is due to special factors, such as an adjustment in the level of oil stocks. But there is no doubt that there has been a strong underlying improvement in the current balance. We are now well on the way towards achieving the improvement of at least £1 billion over 1974 that was forecast in the Budget speech.

How then, my Lords, are we to deal with this situation? The noble Lord, Lord Byers, said in his Motion that he is not calling for a Coalition. I agree with him that at the present time such a call would not serve the national interest. Indeed, I feel that such a call is not only irrelevant to our present situation but dangerous. I very much support the views of my right honourable friend the Prime Minister that a Coalition in peacetime is basically a recipe for weak Government precisely at the time when strong measures are called for.

The noble Lord talked about forgoing Party political controversy. Perhaps some of this controversy is unnecessary, but I do not think that we should deceive ourselves. We cannot escape the fact that divisions between the Parties on the solutions to our economic difficulties are wide and sincerely based. We have heard about some of them from the noble Earl this afternoon.

I do not believe that these differences can be papered over by any false Coalition. The political Parties ensure a robust debate on the major issues and are the vehicle by means of which economic and social goals are achieved. I think it was Disraeli who said in 1846: Above all, maintain the line of demarcation between Parties, for it is only by maintaining the independence of Party that you can maintain the integrity of public men, and the power and influence of Parliament itself ". Politics is about issues—the great issues of State—on which it is both irrational and unreasonable to expect unanimity. There is no absolute truth in these matters. Normally, they are questions of priorities.

To take one example—reductions in public expenditure about which we heard much from the noble Lord, Lord Byers, and the noble Earl, Lord Gowrie—we can have clear, or nearly clear, unanimity, but in the present economic circumstances some such reductions are necessary. However, enormous differences of view would be bound to emerge not only over where these cuts are to be made but over their total size. In my view, there would be no sound basis for a coherent Budget strategy.

Is it realistic to suggest that politicians from all the Parties could today agree on a programme of public expenditure cuts? My Lords, I cannot help but recall the debate which we had on defence some weeks ago. I then made a case for balancing defence needs and our ability to contribute to NATO with our economic capabilities and resources. That issue was completely avoided by every noble Lord who spoke on the other side of the House—and naturally avoided. Their entire case was for increased public expenditure.

One can, however, understand that at the present time there should be a strong yearning for an end to argument, for some form of consensus and for a firm lead from politicians of all persuasions to point the way out of the crisis and to put forward the kind of measures, however unpalatable, which are required. Indeed, the noble Lord, Lord Byers, pointed out that the referendum campaign has demonstrated that men of differing views can work together on a matter of supreme national importance.

I have a measure of sympathy for the calls for a continuation of co-operation of this kind, provided that it does not entail the discarding of our basic—and I stress "basic"—political beliefs.

Lord HARMAR-NICHOLLS

My Lords, many people in this country will be very disturbed at his ruling out so completely, as the noble Lord the Leader of the House appears to be doing, the possibility of a Coalition under any circumstances. This country is in a position where the unions do not trust the Tory Party and where investors and management do not trust the present Government with their approach. Yet both have to get together in order to meet the problem. To rule out completely the possibility of a Coalition, as the noble Lord appears to do, will disturb many people in this country. Coalition is part of the democratic Parliamentary system and ought not to be ruled out in such categorical terms.

Lord SHEPHERD

My Lords, I rule out Coalition in the present circumstances. I could never possibly rule out for ever, or under any circumstances, the need for a Coalition. To conclude this view, I would only say to the noble Lord that a Coalition of political leaders is nothing unless you can have a Coalition among the grass roots of all the Parties concerned, because, without our Parties—the roots—we in Parliament are nothing.

I think that we should consider all the suggestions which have been made in this debate and which are being made outside. At this time of grave economic problems, it must appear to many people that what passes for what we refer to as political debate between the Parties is no more than petty bickering—fiddling while Rome is burning. I have said that the Government are naturally ready to listen and respond to constructive suggestions, whatever their source may be. The noble Lord himself referred to his own Party's proposals for an inflation tax. Clearly we must consider this.

It seems to me that the real issue for the Government and for Parliament is how we retain the co-operation and confidence of all sections of the community. I believe that this must go further than our contacts with the TUC or the CBI. We must find ways and means by which we can consult our people, particularly at the factory floor. There are two areas of Government policy to which noble Lords themselves have referred. I will deal with only one of them because I think that it is fairly misunderstood; namely, the question of the planning agreements. These are working very satisfactorily indeed in France and Italy, and I should have thought they would have gone a long way towards meeting the case that the noble Lord, Lord Byers, has made on many occasions for the need for greater worker participation. We have seen them as an opportunity for Government, management and unions to discuss together their common problems, to understand better their respective viewpoints and to share fully in planning for the future. However, these are subject now to bitter political argument and suspicion within industry.

If I may turn to wages, which is clearly a matter that is very much in the mind of the noble Lord, Lord Byers, these are having a very significant effect today upon our rate of inflation. We on this side of the House believe that the best course open to us is the Social Contract. We have admitted that the Social Contract has not fully come up to our expectations. Undoubtedly there are abuses by certain sections of the community. But for those who may sneer at the Social Contract something else must be found to take its place. Therefore, the Government very much welcome the recent statement by the TUC that the Social Contract needs to be looked at afresh and that it ought to be brought into line with our present needs. It is the hope of the Government that the TUC will be able to make suggestions to us that will result in an agreement not only with the TUC but also with the CBI as the representatives of industry.

This can be a useful debate for the Government. We shall listen to what noble Lords may offer in the spirit in which the noble Lord's Motion has been moved. I personally would take up the suggestion of the noble Earl, Lord Gowrie, that what we need today is to find ways and means by which all of us can cope. I think if I had any criticism of politics today it is that we are perhaps too dominated by the media; that we tend to have to react too quickly to some new statement or some new proposals, often without having an opportunity of knowing fully all that is involved. I am sure that one thing of which we can ourselves be guilty is our method by which we have Statements delivered in your Lordships' House, whereby the person on the Front Bench opposite is required to react to a fairly comprehensive Statement with only a relatively few minutes' notice. But, my Lords, this is a debate to which the Government attach great importance. We shall listen with great care to what is said and take it into our future consideration.

Lord ALPORT

My Lords, before the noble Lord sits down, early in his speech he referred to the fact that one of the reasons why there were unlikely to be common interests between the two Parties here was the example of the disagreement over certain aspects of defence. But am I not right in saying that the Government's defence policy was carried through the House of Commons with the assistance—and the loyal assistance in that case—of the Opposition? So does that not mean that the whole of the noble Lord's argument stands on its head?

Lord SHEPHERD

Not at all, my Lords. I was speaking from my own memory of the debate in your Lordships' House and it was to that debate that I was referring.

Lord DAVIES of LEEK

My Lords, I apologise to my noble friend for intervening. Before he abandons his speech will he please note that some attempt should be made to get a Social Contract between the bewildered housewife, the old age pensioner and prices? In the two constructive speeches that have been made from the other side of the House, there has been no effort at all to talk about prices; and it is no good scoffing because that is where a Social Contract is needed. At 47p for a cauliflower, God help us!

Lord SHEPHERD

My Lords, I hesitate to reply to my noble friend, because I think we are at risk of continuing a debate when there are other noble Lords who have their names on the list. So perhaps my noble friend would excuse me from replying.

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