HL Deb 15 December 1976 vol 378 cc903-24

3.39 p.m.

The LORD PRIVY SEAL (Lord Peart)

My Lords, with the leave of the House, I shall repeat a Statement, being made in another place by my right honourable friend the Chancellor of the Exchequer, about the further measures which the Government are taking to promote the nation's economic recovery and to achieve the fastest possible return to a high and sustainable level of employment. May I apologise to noble Lords for the length of this Statement. However, it is an important one and I hope that your Lordships wil`l understand the reason for its length. The Statement is as follows:

"In order to avoid excessive strains next year, when the economy will still be operating well below capacity, the measures will cover the next two years. They will form part of a mediumterm programme for national recovery to ensure that the 1980s offer us the prospect of an economy fully restored to balance, with high levels of output, employment and real wages and an industry which is vigorous, expanding and profitable. Further elements in this programme for national recovery will be contained in my next Budget and in the next phase of the industrial strategy. Reduction in the Public Sector Borrowing Requirement The latest forecast prepared before the measures showed a PSBR of £10½ billion in 1977/78 and £11½ billion in 1978/79. These forecasts embodied unrealistically favourable assumptions on several important points. Even so the PSBR figures were unacceptably high and the immediate objective of the measures which I am announcing this afternoon is to reduce the public sector borrowing requirement to about £8. 7 billion in 1977/78 and to somewhat less in the following year—on present forecasts I expect a figure of some £8. 6 billion. So the reduction in the PSBR would he nearly £2 billion in 1977/78 and nearly £3 billion in 1978/79. Expressed as a percentage of GDP, the PSBR will fall steadily from 9 per cent. in the current year to about 6 per cent. in 1977/78 and rather over 5 per cent. in 1978/79. These objectives are calculated on the basis of the economic prospect as I now see it.

To achieve these objectives, the Government are proposing adjustments to current plans amounting to£1½ billion in 1977/78 and £2 billion in 1978/79. I am therefore announcing specific measures this afternoon which amount to some £1½ billion in each year. In addition, the Government will make a further fiscal adjustment of about £1½ billion in 1978/79. It is too soon to say what form this further adjustment will take.

It is of course impossible to forecast with any confidence at the present time what will be the condition of the economy in 1978/79. The extent to which further fiscal adjustment might be needed cannot be decided at this stage. If the forecasts at the time show the economy growing from the beginning of 1978 to the end of 1979 at a rate of more than 3½ per cent. a year, the Government intend to make a further fiscal adjustment in the 1978 Budget—of between £½ billion and £1 billion, depending on the buoyancy of demand and the state of the world economy at that time—to ensure that with those higher growth rates domestic conditions do not prevent us from giving the necessary priority to exports and investment. Expenditure or Taxation The fiscal adjustment in both years will come mainly from savings in public expenditure rather than increases in taxation. This is for two reasons. First, although the level of our public expenditure, as a proportion of GDP. is no higher than in some other industrialised countries, it has grown much more rapidly in recent years than our industrial output, and our industrial output itself is relatively low. Second, and perhaps this is not unconnected with our low level of industrial output, people at work are already highly taxed on their incomes, and face a further drop in their living standards in the coming year. I do not believe it would be right to burden them with the lion's share of the fiscal adjustment which is now necessary and inadequate financial incentives to work and to invest could put our economic recovery at risk.

Savings in public expenditure must therefore produce by far the greater part of the adjustment needed. On the other hand, the savings needed are on nothing like the draconian scale suggested by some outside commentators. I think that there has been a growing consensus among responsible economists that savage and indiscriminate cuts of up to £5 billion would do irreparable damage both to the structure of our social services and to the prospects for employment. They would imply a massive and immediate contraction of demand which is the last thing British industry wants to see at present. Public Expenditure The White Paper which we published in February this year set our medium-term strategy for public expenditure.

In accordance with this strategy, we are holding expenditure in this financial year within the planned level by the rigorous application of cash limits, by new arrangements for regular consultation with the local authorities, and by refusing to accept new commitments which would breach the contingency reserve. In carrying out the 1976 public expenditure Survey we have already made certain adjustments so as to keep within the February White Paper plan for each year, as modified by the measures I announced in July.

In order to achieve the new PSBR targets to which I have referred, we have now decided to reduce public expenditure programmes further by £1 billion in 1977–78 and £1½ billion in 1978–79 at 1976 Survey Prices. The details are being circulated in the Official Report and are available in the Vote Office"— and in our case, my Lords, in the Printed Paper Office—

"but I will now describe the main further changes which are being made to the programmes as they emerged from the Survey.

Once again we have avoided mechanic-cal cuts across the board and have not reduced the main social security benefits, although we arc concerned about the narrowing gap between them and the income of those in work. The cuts will therefore fall elsewhere. The Civil Service So far as the Civil Service is concerned, we intend in addition to the economies already announced, to obtain further economies of some £30 million next year and £10 million in 1978–79. "Local Authority Current Expenditure Local authority current expenditure is now more strictly influenced by the central Government through the recent reduction of the main Rate Support Grant for England and Wales from 65½ per cent. to 61 per cent. in 1977–78 and the corresponding reduction for Scotland. We are not re-opening those settlements. Capital Expenditure and Construction But there will be a reduction in housing capital programmes. Without these adjustments there would have been a substantial overspend on housing. The reduction now decided will offset most of the likely excess next year and will contribute a saving of £300 million in the following year.

New construction will be suspended or curtailed in several other central and local government programmes, including roads, other environmental services, school building, Government accommodation, and capital spending by the Water Authorities. This will save about £270 million next year and over £300 million in 1978–79 Community Land Act Borrowing approvals will be reduced to achieve a slower build-up of land acquisitions under the Community Land Act, producing savings of £35 million in each year, although the total amount to spend will still rise substantially. Food Subsidies The planned programme for phasing out the Government's food subsidies will be accelerated and will be completed in 1977–78, saving £160 million in that year and about £60 million in the following year. This will add less than ¼ per cent. to the RPI over 1977–78. Education Besides reductions in school building, to which I have already referred and which will not affect basic needs, the programme for current expenditure on education will be reduced by economies in the administration of school meals, by deferring the operation of Section 9 of the Education Act 1976 dealing with school milk, and by other minor savings, making a total of £20 million in 1977–78 and £30 million in 1978–79. Nationalised Industries Under the new treatment of the nationalised industries on which we have consulted the Expenditure Committee, we shall in future be including in public expenditure only Government finance for these industries, rather than their investment programmes as such. We intend to agree with the nationalised industries action which will reduce the level of Government financing by £110 million and £130 million in the next two years. As well as economies in spending there will be increases in revenue, notably a gas price increase which the Government are asking the British Gas Corporation to effect from April 1977. Regional Employment Premium As I told the House in July, the Government want to move progresssively towards a more selective approach to assistance for industry. It is doubtful whether the regional employment premium now fulfils the original purpose of attracting employment to the regions. We therefore believe that it should now give way to more selective measures and it will be withdrawn by Statutory Order early in the New Year, saving £150 million next year and £170 million in the year after. I shall be describing in a moment other measures in the industrial field designed to assist employment and investment. The Defence Budget In an exercise of this magnitude, spending in support of our external policies must inevitably play its part. Despite the big cuts which we have already made in defence expenditure, we cannot achieve the necessary reducetions in public expenditure and the public sector borrowing requirement without a contribution from the defence budget. We are looking to defence for further savings of £100 million in 1977–78 and £200 million in 1978–79. Overseas Aid There will be reductions in the provision for overseas aid which, until now, has been almost entirely protected from expenditure savings. The Government have taken this decision with great reluctance. The savings will be £50 million in Survey prices in each year. Export Credit The refinancing by the Government of fixed rate credit for exports and ship-building imposes a major charge on public expenditure and the PSBR which threatens to exceed previous forecasts. Partly to deal with this, I have asked the clearing banks to finance from their own resources an additional £100 million of fixed rate sterling business in each of the next two years and I am glad to say that they have agreed to do so. We believe that by funding medium and long term export credit in foreign currency instead of in sterling we can reduce the burden which export credit imposes on public expenditure, the PSBR and the balance of payments. We arc therefore taking steps to encourage the use of foreign currency financing and to control the rate at which new offers of fixed rate sterling finance will be approved by the Export Credits Guarantee Department. All these measures will reduce expenditure on refinancing and together produce a net saving of £100 million in 1977/78 and £200 million in 1978/79, below that shown in Cmnd.6393.

We are aware of the concern of industry about the future of the cost escalation scheme which, as matters stand, is due to end in March 1977. We now propose that it should be continued for a further year. The necessary draft order will be laid before the House in due course.

Revised expenditure programmes for 1977/78 and 1978/79, taking account of these measures and of other adjustments made during the public expenditure Survey, will be set out in a public expenditure White Paper in due course. These decisions will reduce planned expenditure by a little over £1½ billion and £1½ billion in the next two financial years. Both figures are at 1976 Survey prices; in current prices they will be much larger. Measures to Help Employment and Investment On the other hand, we have decided to add to expenditure in two areas which we believe should have the highest priority—incentives to promote industrial investment and expansion, and measures to reduce unemployment.

There will be an increase in the resources of the National Enterprise Board and the Scottish and Welsh Development Agencies. A new selective investment scheme will be introduced to follow up the very successful Accelerated Projects Scheme. It will give help to manufacturing companies for major projects designed to improve capacity and performance. I will allocate £100 million to this scheme in the first instance. The money will be spent over a period of years; the rate at which it is spent will depend on how many good projects come forward for support. Further money will also be made available for additional sectoral schemes in support of the industrial strategy, and for other measures to help industry. Taken together, I have allocated £80 million in each of the next two years for these measures to help industry.

There will be an increase of £120 million in 1977/78 in spending on measures to reduce unemployment. New applications for the temporary employment subsidy are to close at the end of this month and for the job creation programme shortly after. We have decided to extend these two schemes to the end of April, and then to review their future along with the other new schemes which the Government have recently introduced. This additional expenditure will more than offset the impact on unemployment next year of the other measures which I have announced and will mean that the net effect of the whole package will be to reduce unemployment during 1977. Indirect Taxation To finance this additional expenditure on investment and employment, I must look for some contribution from the specific Revenue duties, which are fixed in money terms and are therefore continually eroded by inflation.

I have decided to use my Regulator powers to increase by 10 per cent. all the revenue duties charged on tobacco and alcoholic drinks. The increases will come into force for the Customs duties on imported tobacco at midnight tonight, and for the duties on tobacco products and drinks on 1st January. They will have no effect on prices during the Christmas and New Year holidays.

If fully passed on, these duty increases, taking into account the consequential increase in value added tax, will add rather over ½ per cent. to the Retail Price Index. They will raise the tax charge on a pint of beer of average strength by a little under 1p, and on a standard bottle of spirits by about 31p. They will increase the charge on a standard bottle of table wine by about 5p, and on a bottle of fortified wine such as sherry by about 7p. The tax on a packet of 20 filter cigarettes of average size will be increased by about 4p. The additional revenue raised will be £50 million in the remainder of this financial year and £280 million in 1977/78.

I believe the British people will accept that these increases in the cost of less essential goods are fully justified at this time, particularly when the proceeds are intended to create more jobs and more investment. Sale of B.P. Shares There is one further step which we propose to take to reduce the public sector borrowing requirement in 1977/78. Two years ago the Government rescued the Burmah Oil Company from severe financial difficulties, and as part of a package of support the Bank of England bought Burmah's holding of shares in the British Petroleum Company.

We now propose that the Bank should sell enough of Burmah's former share-holding in British Petrolum to leave the total of the Government's and the Bank's holdings at 51 per cent. as against the 48 per cent. held by the Government before the acquisition of the ex-Burmah BP shares. As the House will be aware, these shares are currently the subject of a legal claim by Burmah against the Bank of England. We are advised in the firmest terms that this claim is without merit but so long as it is being pursued it may prove an impediment to a successful sale. If this impediment is not removed, the Government will sell an appropriate number of their own BP shares and in due course will make good their holding by securing the transfer to the Treasury of an equivalent amount of the BP stock acquired from the Burmah Oil Company and now held by the Bank of England. Incomes Policy A central objective of Government policy is to continue the attack on inflation. To maintain a continued fall in inflation through to 1978 we shall need agreement between the TUC and the Government, and of the CBI and others involved, on how to pursue the attack on inflation while permitting greater flexibility in pay negotiation in the period after July 1977. I hope it will be possible for us to reach agreement on this in time for me to take account of the outcome in settling the levels of income tax in the next Budget.

lf, at the time I settle my Budget for 1977/78, I judge that without increasing the public sector borrowing requirement above £8½ 7 billion there is scope for tax reliefs and if, as I expect, a satisfactory agreement has been reached with the TUC and the CBI on the next pay round, then I propose to use the available margin to reduce the present burden of income tax which I believe to be too heavy.

In this context there are also important questions, which I shall want to consider with the TUC and other interested bodies, concerning the interrelationships between changes in earnings, social security benefits, pensions and rates of direct and indirect taxation. Taxation of Overseas Earnings There is one aspect of taxation which I intend to start considering at once. I believe it is important to find ways of improving the tax treatment of employees who live in this country but who work abroad on increasing our exports. The people I want to encourage are those at the sharp end of exporting—the business of selling British goods overseas—as well as those who contribute to our overseas earnings by working for a period overseas, for example, in construction projects. I have therefore asked the Inland Revenue to issue a Consultative Paper which will outline proposals to give to anyone who works for a period abroad the reliefs which are at present allowed only to those with separate jobs abroad. The proposals would also modify the rulesgoverning the allowance of expenses incurred abroad. I have authorised the Revenue to seek the views of interested bodies, with a view to legislation in next year's Finance Bill. Domestic Monetary Effects I have already described the targets which we have set for the PSBR of £8½ 7 billion for 1977–78 and £8½ 6 billion for 1978–79, in order to create monetary conditions which will encourage investment and growth and will help to control inflation. We are expressing the essential monetary targets in terms of domestic credit expansion rather than money supply, since we agree with the IMF that this will be more appropriate than a target for M3, during a period when we shall be giving top priority to putting our balance of payments right.

Domestic credit expansion will be kept to £9 billion in the year up to 20th April 1977 and £7½ 7 billion in the year ending 19th April 1978, and I expect a further reduction in the following year to £6 billion. The growth of M3 which will accompany domestic credit expansion at these rates will depend on a number of factors, especially progress on the balance of payments. For 1976–77, again on a banking month basis the growth of sterling M3 is likely to be between 9 per cent. and 13 per cent. It is too early to give an estimate for 1977–78. But our target will now be in terms of domestic credit expansion and not M3.

Because the public sector will be making a smaller demand on savings in the next two years, these DCE targets should provide sufficient room for industry's essential needs. The targets will be reviewed after six months to ensure that this is so. I hope, too, that the IMF agreement and the measures I have announced will enable us to see interest rates fall from their present exceptional levels while keeping control of the monetary aggregates. This reduction in interest rates may be slow at first, but should move faster as the balance of payments and the rate of inflation both improve. We shall, however, need the existing range of credit controls for the present, perhaps with technical adjustments to special deposits arising from success with gilt sales.

To sum up, the Government's measures amount to a total fiscal adjustment of £1½ billion in 1977/78 and £2 billion in 1978/79. In addition, the public sector borrowing requirement will benefit from the reduced cost of debt interest resulting not only from the lower borrowing requirement, but also from the lower level of interest rates which I am confident that these measures will help us to achieve.

Dr. Witteveen, the Managing Director of the International Monetary Fund, has told me that he supports both the economic strategy which I have described and the measures the Government are taking, and is prepared to recommend acceptance of my request for the standby arrangement to the Executive Directors of the Fund. I have arranged for copies of my letter to him applying for the standby to be made available in the Vote Office "—and in our case, my Lords, in the Printed Paper Office—" this afternoon.

Before the Fund Board meets there will be a meeting of the Group of Ten countries, who stand ready, under the general arrangements to borrow, to provide the Fund with the useable currencies it needs for large drawings if its own available currencies are inadequate. I am confident that, in a matter of days after the end of the year, the operation w ill be complete and the reserves replenished.

The stand-by arrangements this time cover a two-year period, so that we can make the necessary adjustment without imposing unacceptable strains on the Social Contract and the industrial strategy. In total we shall he able to draw up to nearly 4 billion dollars, of which 1½ 15 billion dollars immediately and over 1billion dollars more before the end of 1977. This, I am confident, will transform the external financing position in 1977. Sterling Balances As the House knows, the Government have been concerned to remove the pressures exerted on the sterling exchange rate by the overhang of the sterling balances. Considerable work has already been done on this problem in the Bank for International Settlements in Basle, where Central Bank governors have had constructive discussions over the last weekend. At the same time, the matter is also under discussion with the Treasury and the Federal Reserve in Washington. These talks have revealed a general desire on the part of those concerned to achieve a satisfactory arrangement for the sterling balances, and I believe it will be possible to reach an agreement before long.

I am also glad to be able to tell the House that during the period ahead and in anticipation of further drawings under the agreement with the IMF which will take place later in the year, I intend to strengthen the reserves with 500 million dollars which has been offered by the United States Treasury and the Federal Reserve in the form of swaps. In addition, the Bundesbank have offered the Bank of England a standby facility of 350 million dollars by way of further support.

The endorsement of our policies by the International Monetary Fund and the members of the General Arrangements to Borrow will relieve the pressures on sterling which have damaged our economic prospects in the last 12 months while the prospective arrangement for the sterling balances will help to reduce the risk of such pressures in future years. This should do much to restore the confidence on which all aspects of our economic performance critically depend.

Economic Prospects The Government are releasing today and placing in the Vote Office "—and again in the Printed Paper Office—" the first economic forecast published under the provisions of the Industry Act 1975, and this will give the House a picture of the economic prospects following the measures I have announced.

Over the next 12 months I expect a growth in total output of about 2 per cent., though this may be higher if our export performance improves further. The 2 per cent. increase in growth would include an increase of 5½ per cent. in manufacturing production, and 19½ per cent. in manufacturing investment. I do not see a prospect of a fall in unemployment; indeed, I fear there is likely to be some further rise, but a smaller rise than would have been likely without the adjustments I have described. If unemployment does rise, this will be the consequence, not of today's measures which in sum will increase employment next year, but of the lower growth now expected all over the world and of other factors I have previously described to the House. The current account deficit, which has totalled £1½ 7 billion in the first 11 months of this year is likely to fall next year and there is good hope of reaching a substantial surplus in 1978/79—perhaps as high as £.2–£3 billion. Given continuing moderation in the increase in wage costs, the rate of price inflation should start falling again next summer. The measures I have announced will add less than 1 per cent. to the Retail Price Index by the end of 1977.

Next year will be a difficult year of transition. I believe that the policies I have announced, reinforced by the next Budget and further progress on the Industrial Strategy, will ensure that it is a transition to a much more firmly based prosperity. Part of this prosperity will be due to the development of North Sea oil production, but our economic strength will depend critically on the use we make of the benefit this brings. We must use it not only to resume the growth in our living standards but also—and in the long run this is more important—to rebuild the capital base of our manufacturing industry. I believe the late 'seventies and early 'eighties should be a period when a steady increase of output, employment and living standards is combined with the repayment of our external debt. We shall at last be standing on our own feet, with an economy more healthy and efficient than we have seen at any time since the war.

It is in that belief that the Government have decided these measures, and that I commend them to the House."

My Lords, that concludes the Statement.

Following are the details of Public Expenditure Savings referred to:

PUBLIC EXPENDITURE SAVINGS
£million at 1976 Survey prices
Programme Expenditure 1977–78 1978–79
1 Defence Budget 100 200
2 Overseas aid 50 50
3 Food subsidies 160 57
4 Regional employment premium 150 170
Refinancing of fixed rate credits 100 200
Capital spending at CFEs* for industrial training 10 10
5 Nationalised industries† 110 130
6 "Road construction 75 50
7 Housing —20 300
8 Regional water authorities' etc. construction 75 130
Local environmental services: construction and other capital 50 50
Community ownership of development land 35 35
9 Courts —purchase of sites 2 —
10 Education —construction 22 11
Other education expenditure, inc. school meals 20 30
11 Health and personal social services—construction 10 20
Other NHS expenditure 5 5
15 Northern Ireland 5 10
Various Property Services Agency 27 45
Various Expenditure on the Civil Service 30 10
TOTAL 1,016 1,513
*Colleges of Further Education.
†Savings in requirements for Government finance.

4.13 p.m.

Lord CARRINGTON

My Lords, this may be a mini-Budget but it is a maxi Statement to which we have just listened. Certainly we congratulate the noble Lord the Leader of the House on his stamina, if on nothing else. I have not had time to read properly the Statement which the Government were kind enough to give me before it was made by the noble Lord the Leader of the House because of its length. I think it would be very unwise to have many instant reactions to what the noble Lord has said. These are very complicated, very serious and very comprehensive measures which the Government have announced and I, for one, would like to study them in greater detail and at greater length than has been possible so far.

So much has already been said about what the right honourable gentleman the Chancellor of the Exchequer and the Government were going to do that I hope that the effect of what the Chancellor has done is not going to be blunted, and particularly blunted abroad. I, for one, am encouraged that in the Statement we are told that the International Monetary Fund support the policy which the Chancellor of the Exchequer and the Government are pursuing. I think every-body on all sides of the House will very much hope that what the Government have done is enough, and that this time the Chancellor of the Exchequer has got it right, because on the last four occasions he has got it wrong, and this is about the last time there is that he can get it right.

I think we can also say from these Benches that at any rate we welcome one part of what the Government are doing, because at long last they are following the advice we have been giving them over these last two years; that is, that it is essential to cut Government expenditure. Nobody particularly wants to cut Government expenditure; I think the result of what has been done in some cases is going to be very unpleasant, but the fact remains that Government expenditure must be cut. We have been telling noble Lords opposite and the Government this for two years. For two years they have done nearly nothing but spend more money.

The other thing we have been telling them I am not so sure about. I should like to read the Statement more carefully, but I am not so sure that in the Statement the other side of the coin is sufficiently taken care of, which is the expansion of our industry and base, and the giving of incentives to people to work harder so that that is possible. I notice in the Statement that there was a passage about incentives for industrial investment. We are told that that is to be done through the National Enterprise Board, but I do not find that particularly convincing. We are also told that there is going to be more money spent on helping unemployment. I would welcome that if I did not feel, perhaps, that what is suggested is more in the nature of a palliative than a long-term solution to unemployment. Both for incentives in industry and for the cure of unemployment we must concentrate on making it possible for private industry—and it is the private sector which creates the wealth—to invest. What they need is to be able to borrow money to do it at considerably less interest rate than at present is possible, to be allowed to make profits from which they can finance that investment, and to have confidence in the future.

My Lords, I am glad to think that the Government at long last have decided I that the subsidies they introduced quite wrongly in 1974, as a result of the 1974 Election, are to be terminated.

Then, one last thing I must say—and this is not a matter of detail. I hope the noble Lord is listening. I condemn wholeheartedly and absolutely a further cut in defence expenditure. If it were £100 million this year and £200 million next year on a basis of no previous cuts, perhaps that would be wearable. But the fact is that over and over again, since they have been in office, the Government have cut defence expenditure. This is the fifth occasion and, in my judgment, it is totally and wholly disastrous that they should do so again. May I ask the noble Lord the Leader of the House two specific questions about this. Have our NATO allies been consulted, as it is our duty to do, before these cuts have been decided upon? Can the noble Lord the Leader of the House tell me whether, in the judgment of the Government, these cuts are being made because the defence situation allows it, Russian defence expenditure is decreasing, and the difference between the Russian defence capability and ours is improving?

Lord PEART

My Lords, if I may just reply to the noble Lord, Lord Carrington, I welcome his very constructive support and I am glad that he welcomed the attitude of the International Monetary Fund. I agree with him that Government expenditure is a difficult problem. Cuts in expenditure will hurt. It is true that noble Lords opposite have argued for cuts in Government expenditure, but I have never found them very specific, even when I have pressed them on the subject. But T do not want to make a Party point on this.

I come to the question of incentives. Of course private industry must be encouraged, and I have always said so in this House. I believe in a mixed economy, but I do not think one should be too critical of the National Enterprise Board. It can be a useful instrument. Certainly the Development Agencies in Scotland and Wales are important for those regions. One should not be too critical of these. They can be powerful weapons. After all, we are all anxious to see manufacturing industry develop and produce wealth. We accept this, so we are at one there.

I know that, naturally, the noble Lord has a great interest in defence. He was a distinguished Defence Minister so I can understand his concern. But nothing can be sacrosanct in this case. If we had a lot of defence in a weak economy we would be a weak nation. It is only by having a strong economy that we can create a strong defence. I agree with the noble Lord that we must have adequate defence. He made comparisons with the Soviet Union. Of course, we cannot compare ourselves as an individual nation with the Soviet Union; one must compare NATO. The noble Lord is quite right to ask about consultations. I have a feeling —I do not know, but it may well be so—that NATO may be a little critical. But we will have consultations. After all, we play a leading part, and I assume that consultations are being held either formally or informally. In any case, we recognise that there is a NATO problem and that there is concern. I accept that, but in this critical situation I believe we have to make a cut.

Baroness SEEAR

My Lords, we on these Benches would like to thank the noble Lord, Lord Peart, for repeating the Statement. As the noble Lord, Lord Carrington, said, we have not had sufficient time to study adequately a Statement of such length. There are matters which we welcome in the Statement, not least because the Government have decided to do certain things which we on these Benches have been pressing them to do for a considerable time. There are items which we welcome: there are omissions which we regret; there are other items which we would question. We welcome the cuts, and the fact that the Government have not been persuaded—not that we thought they would—by some siren voices to adopt cuts of draconian proportions. This, we believe, at the present time would have been very dangerous indeed; it would have plunged us and indeed some of our trading partners into increased deflation. The cuts, in our view, are in total probably about the right size, but obviously one says this tentatively.

We welcome in some respects the way in which the cuts have been allocated. We, too, have urged for a long time that subsidies in food and housing should be reduced; we believe that they are wasteful in their incidence, and are not the best way in which to get value for money. We welcome the suggestion of increases in gas prices. We welcome, too, the fact that there have not been great cuts in the Social Services, though there might have been room for some in some respects. Perhaps indexed pensions might have been looked at and a ceiling put there, which would save considerable expenditure. It cannot have been the intention of the Parliament which passed that Bill that the payments made under that heading should be as substantial as they are at the present time.

We welcome the decision that there should be more discriminating use of assistance to industry, and, of course, we welcome the idea that there must be a move into wealth-producing industry. But here we would add a word of warning. Help to industry is not going to be of any use unless we direct our help to those areas which will add the greatest value. We have for far too long helped industries which have only a short-term future ahead of them. If we are really going to face the unpleasantnesses in the present situation, the most unpleasant that we have to face is the need for drastic restruc-I turing of industry. We have to see that we get a better return on the resources of men and money put into industry. Far too much money has been spent in the past in bolstering up industries for a short period of time, with the result that further measures have to he taken later. We hope that this discrimination will be very great and that the Government will have the courage to tell their social partners that some areas of industry cannot be bolstered up any more.

We also welcome the increases in the alcohol and tobacco tax. For my part, I do not feel that they are sufficient. I think there is something shameful in putting so small an additional charge on tobacco and drink when we are cutting defence to the extent that we are, having repeatedly cut defence. What sort of country is not prepared to defend itself in order that it can go on indulging in the bottle and the pipe? Still more do I think it shameful, or equally in another way do I think it shameful, that we should be economising by cutting our miserable overseas aid. I agree that there is something curious in offering overseas aid out of our overdraft; that gifts to other people out of one's overdraft are somewhat phoney gifts. But so small has our effort been in that direction that surely we could have saved our overseas aid, even if we did have to economise on our Christmas hamper.

It is, I think, a pity that there is no reference in the Statement to the possibility of much greater development of indexed bonds, which could produce money to meet Government expenditure out of the considerable savings which are made at present. If industry expands, as we hope it will, there w ill be even more opportunity for indexed bonds, the return on which would not cost the Government a very great deal, year in year out; they would be a great encouragement to people to continue to save.

Lord PEART

My Lords, I thank the noble Baroness for her courtesy in allowing me to make my earlier reply. Broadly, I have the impression that the Liberal Party supports most of the cuts. One can argue about the size of various cuts, but in principle I think there is an aware-ness that the strategy which runs through this Statement is realistic. Here and there there are criticisms. The noble Baroness mentioned overseas aid. I am sure that if we had not cut overseas aid, we should have had a clamour elsewhere to cut it in present circumstances. After all, we shall still be giving quite a lot of aid to overseas countries. I know, of course, that every cut is distasteful.

I take note of what the noble Baroness said about indexed pensions. This has been raised in many circles, and it is something which inevitably the Government will have to look at very carefully. I have noted the point. With regard to Defence and the taxes on alcohol et cetera, I note what the noble Baroness has said. No doubt we will have a debate later, after discussions through the usual channels, and we will be able to elaborate our different points of view further. For the moment, I am grateful to the noble Baroness for her welcome in principle to the Statement.

Lord BALOGH

My Lords, after these lengthy contributions, may I ask my noble friend a simple question of principle? Does my noble friend think that it is sensible to base a policy on an indicator, the borrowing requirement, which inextricably combines consumption, investment, the sale of assets and transfer payments into totally irrelevant mess?

Lord PEART

My Lords, it is a short question. I am sure that my right honourable friend the Chancellor must have had very good economic advice. No doubt the noble Lord, who is a distinguished economist, takes a different view, but the Chancellor felt otherwise.

Lord AVEBURY

My Lords, the noble Lord, said in reply to my noble friend, that no area could remain immune, including overseas aid, about which she was particulary asking. I agree with her that the cuts there are mean and despicable. But I did not hear the noble Lord say anything about the trunk road and motorway programme in his Statement.

Several Noble Lords: He did.

Lord AVEBURY

In that case, I apologise. Could the noble Lord say how much they are being cut?

Lord PEART

My Lords, the figures are £75 million in 1977/78 and £50 million in 1978/79.

Lord GLADWYN

My Lords, as I understand it, the standby credit has to be repaid in a maximum of two years from now. How far are the Government relying on revenue coming from North Sea oil on order to meet their obligations?

Lord PEART

My Lords, I did mention that they would help over the next two years and later. But it would be impossible for me to be specific.

Lord BOYLE of HANDSWORTH

My Lords, may I ask the noble Lord the Leader of the House this question. Did I gather from the Statement that it is part of Government strategy that the incomes policy must be continued in some form during the next two years? If so. is the noble Lord the Leader of the House aware that in the view of many of us this is an absolutely integral part of the Government's strategy; however difficult it may be, it simply must not be lost sight of?

Lord PEART

Yes, my Lords, I thought I made that clear, and that is the policy.

Lord LEE of NEWTON

My Lords, is my noble friend aware that while we are glad to hear of the assistance to manufacturing industry there is at this moment a far too small manufacturing base to sustain this nation, and that even now we are threatened with having redundancies in some key sectors of manufacturing? Especially heavy electrical engineering, and areas of that kind, are threatened now with very substantial redundancies.

Could I follow up the point made by the noble Lord, Lord Boyle. I do not know whether my noble friend can say what steps are being taken in conjunction with both trade unions and employers in the sector of incomes policy. He will know that the announcement he has made will put a great strain indeed on that incomes policy. Would he agree that we now have to get a much more modernised type of policy which takes care of differentials, and which ensures a flow of labour into the most vital sectors of manufacturing? Unless we can get that kind of a policy for our incomes, particularly where we are now inhibited in the amount we can give, we may have to think of totals within which negotiations can take place in given industries, and that they must not exceed those totals. Within that, they can do their own negotiating so far as differentials are concerned. I hope that the Government are thinking in those terms.

Lord PEART

My Lords, my noble friend mentioned the problems of manufacturing in the engineering industry, which he knows so well. I accept that there are problems and I think that what we are seeking to do, to concentrate and put an emphasis on manufacturing industry, is the right strategy. On incomes policy, I would accept that there may be strains because of the nature of these measures; but this is a matter which we shall be discussing with the TUC. We have already had informal talks with the TUC and others, and the CBI, and there will be strains, but it has got to work.

I do not want to restrict discussion but I hope that noble Lords will feel that it would be at some stage opportune for us to debate this. I do not say immediately. When noble Lords have read carefully the papers which are in the Printed Paper Office, this will help. I see nobody wishing to speak in the discussion, so may I conclude.