ADDRESS IN REPLY TO HER MAJESTY'S MOST GRACIOUS SPEECH

HL Deb 25 November 1976 vol 378 cc26-122

3.12 p.m.

Debate resumed on the Motion moved yesterday by Lord Wallace of Coslany— namely, That an humble Address be presented to Her Majesty as follows:

"Most Gracious Sovereign—We, Your Majesty's most dutiful and loyal subjects, the Lords Spiritual and Temporal in Parliament assembled, beg leave to thank Your Majesty for the most gracious Speech which Your Majesty has addressed to both Houses of Parliament."

The Earl of GOWRIE

My Lords, the noble Lords, Lord Wallace of Coslany and Lord Pitt of Hampstead, who yesterday moved and seconded the Motion for an humble Address, regaled us and did us proud; and I should like to begin by congratulating them both. One of the many problems of political life in this House of Parliament—and we have seen a few in recent days—is that we on these Benches are continually confronted by that strain in the Labour Party which represents a persistent and engaging optimism about human affairs and a passionate and loyal commitment of this country's institutions. Sir Harold Wilson's creations, it seems to us, wilfully deny us the unacceptable Tribunite faces of Socialism for us to get our teeth into, so to speak. If the Government of this country were able to choose policies which appealed to the likes of the two noble Lords, we should have a better Government indeed. I am afraid that my speech will be even less optimistic than that delivered to another place yesterday by the Prime Minister. Yesterday's party and pageantry is over and we revert now to the bleakest prospects for our country that anyone born during or after the last World War can remember.

Next week we shall be debating foreign affairs and defence, but I think I need to remind the House that Britain's domestic economic crisis heads the agenda of our two most powerful Western allies, the Federal Republic of Germany and the United States of America. In my view, they will not be reassured by the certainty that the political concentration of this country will be upon Scotland in the next year, particularly in view of their more than academic interest in the future of North Sea oil. The rural and industrial poor of America, many of them black and many of them suffering far greater poverty than, thank goodness! exists anywhere in this Welfare State of ours, will not be overjoyed to discover that virtually the first task of Mr. Jimmy Carter, whom they squeezed into office by a whisker will be to save our enlightened social democracy from sinking. The well-trained and enlightened workforce and management of Germany, who share a fear and dislike of the Soviet Union which seems remote to a lot of our people here, know very well that it is their taxed deutschmark that, with the dollar, is keeping the Western defences in being.

It is one thing for them to subsidise the British Army—though I, for one, find that a deep humiliation—but it is quite another for them to subsidise British food, medicine and social security. I am one of those Tories who came to political consciousness in the 1950s and for whom, therefore, habits learned at the feet of the noble Lord, Lord Butler, and in the shadow, so to speak, of Lord Keynes, die very hard. I believe that the provision of good social security—good, and not simply grudging—is essential to the survival of the mixed economy. But I do not believe, my Lords, that it should survive almost entirely on other people's money. It should surely be paid for out of the profits of a productive industry; and, with all its other troubles, industry can never be productive so long as undisciplined monetary behaviour at home and the frantic need to attract money from abroad lead to the kinds of interest rates which we have to suffer at the moment in this country. What is particularly depressing is the harm which the continuing British economic crisis is doing to the Western alliance, and the bitter knowledge that our funds of good will, like our credit—which at the end of the last war stood so high in the world—are now all but exhausted.

This afternoon I do not wish to dwell at any length on the causes of the crisis; nor do I, in any arrogant or Olympian manner, want to try to distribute blame. We have debated these matters often enough over the last four years. In any case there is not, in my contention, anything very mysterious or mystical about our decline. Every householder and every small business knows the perils of living beyond one's means. The last Conservative Government, quite rightly in my view, were politically committed to economic growth. They underestimated both the degree of recession and the lack of industrial confidence which had been brought about by Mr. Roy Jenkins's admirably but, I would suggest, very painfully balanced Budget of 1969. They felt obliged to release much more credit than was good for the economy, though not indeed enough to secure a healthy industrial, as against a service sector, response. With hindsight—and I say this in all humility to the noble Lord, Lord Kaldor, whose maiden speech we are awaiting eagerly—we should perhaps have kept the selective employment tax (horrid device though we felt that to be) in operation rather longer.

The Heath Government also objected morally, and felt vulnerable politically, to unemployment rising above 600,000 or 700,000. We also shirked, as, for reasons which seem to be much puzzling, the present Government are shirking altering the unrealistic way in which this country provides unemployment accounting. Accordingly, and with imported inflation swelling domestic inflation, and with domestic inflation and the dash for growth swelling each other, we who were then in government instituted a system of wage controls whose very success—that is, until the "miners' Election" blocked it—obscured the great damage which the balancing price controls were doing to industry and commerce. And, of course, the oil price rises strengthened the hand of the miners at the very moment that they weakened the hand of the then Government.

Then, as we know, Labour came to power. The cornerstone of their policy was—and so, I understand, it remains still—a concordat with the leaders of the larger and more powerful trade unions. In a way that I again find very puzzling, but which I must leave it to future historians to unravel, it was as if the idea of the ungovernability of Britain which the Conservatives, as it turned out somewhat foolishly, campaigned upon, took hold of Mr. Wilson's first Cabinet like an infection.

It seemed as if they really believed that the trade unions, which, in spite of intense opposition to the Conservative Industrial Relations Act, were with only one exception not only co-operating with the Government but actually furthering the counter-inflation policy, required all attempts to control inflation to be abandoned if there was not to be a general disaster. I would ask: what sort of disaster was the Government thinking of—a General Strike, a revolution on the lines of the Paris communes of a century ago, or what? So the Government at best panicked, and at worst, for electoral purposes, connived and allowed wages and social benefits to rise. Simultaneously—and this, in my view, is not to be forgiven—they continued the already dam aging controls on prices, compounding them with food subsidies and the like.

The Government are not magicians, so how did they do all this? They did it by inflating the currency by up to 30 per cent. in one year, which was the highest inflation for over 200 years. They did it by borrowing between £500 and £600 for every single household in Britain, which is certainly the greatest debt in our recorded history. They did it by instituting a level of taxation, by the back-door of inflation's effect on tax thresholds, which has driven the ordinary Labour voters of Workington and Walsall into the arms of my right honourable friend Mrs. Thatcher.

Noble Lords on all sides of the House may at this point be thinking to themselves: This is all very well, but is this fellow not talking about water under the bridge, about the admitted failures of the last Conservative Government and the admitted failures of the Labour Administration between February 1974 and July 1975? —the last date being when a new realism overtook the Social Contract and a commendable policy of self-policing wage restraint was brought into effect. I am afraid that while the water may have flowed under the bridge, downstream we are still paying for its pollution. In the name of the Social Contract, we have fouled our Statutes by enshrining restrictive practices and sectional interests on a scale unknown even in the heyday of private property and the rule of the agricultural landlord.

If the net result of this were to be a sharp increase in productivity, or a fall in the levels of unemployment, or repayment of some at least of our debts or the strengthening of the Atlantic Alliance, then it might conceivably be worth it. But what is the net result?—interest rates of up to 20 per cent. on the wealth-creating and employment-generating sectors of the economy. Up to 20 per cent., my Lords, and a credit squeeze instituted last week as well! So those who can command capital would do better to lend it out at interest than to invest it, and those who are still patriotic, or foolhardy, enough to invest it cannot get it. No wonder the Prime Minister warned us yesterday that pay curbs would have to continue, and that both prices and unemployment would continue to rise.

But in the familiar way of the Prime Minister's predecessor (and I must say that we had hoped for a change for the better in this respect, at least) external circumstances—that is to say, an expected downturn in world trade—were speedily blamed. If the price of the Social Contract has been high borrowing to fuel high social spending—and I stress at this point borrowing for social expenditure, not borrowing for investment—and if the price of so much borrowing abroad has been the effective denial of capital to business here at home, then we have all got to face up to the unpalatable fact that the Social Contract has failed. Indeed, it has not only failed; it is positively fuelling the very unemployment which it was designed to alleviate.

The other cornerstone of the Government's economic policy is improvement of our situation through exports—our old friend export-led growth, which we have heard so much about from all Governments over the last 10 or 12 years. In theory, the devaluation of our currency due to the Social Contract or rather, to be fair, due to the high-spending high-borrowing policies which I have outlined, and the camouflaging of true economic costs by the Social Contract, should at least be able to stimulate exports and put us well on the way to recovery. Unfortunately, this theory is beset by both a snare and a delusion. The snare is another old friend, the "J" curve, which operates fiercely in an importing, value-adding, exporting economy such as ours. The first part of the cycle guarantees that the last part will be much less competitive than it might be. The delusion is that it is possible to turn a successful exporting industry with so very wide a range of goods as we manufacture in Britain, without a lively and steadily growing home market. Czechoslovakia, just to take one example, might be able to export mining equipment or cheese to the advanced Western economics. But there is no way that she could successfully compete in luxury cars, or such fashion products as women's clothes.

If your Lordships think that I am being over-pessimistic on the exports front, may I just ask you to consider this. The strength of the deutschmark at the beginning of this year caused German manufacturers to be very gloomy about their prospects, and to put a lot of pressure on their Government because German cars or machine tools or washing machines were becoming the most expensive items in their class in any country in the world. But this gloom has proved misplaced, in spite of continuing revaluations of the currency, because as people in the Western World prepared to slow down the degree to which they turn over consumption, they also put a higher premium on quality and reliability. I am glad to acknowledge, with the Government, that our incidence of strikes is down, but, unfortunately, the speed and reliability of our deliveries of exported goods is down as well. Costs, as I hardly need to remind your Lordships, have also soared. That is one reason why I believe that this House was wise to ensure the saving of the Felixstowe dock, and to contribute to reducing the damage of the Dock Work Regulation Act.

In sum, then, my argument is that the twin policies of the Social Contract—that is to say, voluntary wage restraint in return for high Government spending, subsidies and union-inspired legislation—and export-led growth have both failed. They have failed because the price has been too high: high spending leading to high inflation; high inflation leading to high borrowing; high borrowing leading to high rates of interest; high rates of interest leading to low profits, low confidence and low investment, all of which generate high unemployment and more high spending, so that the whole dismal cycle turns in on itself once more with the destructive power of a whirlwind.

In the few moments which remain to me, I am obliged to answer the question: Where, then, do we go from here? We must get the rates of interest down. This means that, somehow, we have to persuade our creditors that we have an economic programme viable for longer than a couple of months at a time. The budgetary control of the Chancellor of the Exchequer comes from a horror comic. In the February White Paper on Public Expenditure the Chancellor projected cuts in projected expenditure. In July the sterling crisis, which our rate of inflation not merely made likely but guaranteed, brought about real cuts, but still in projected expenditure. This week the Cabinet has at last been arguing about actual cuts in actual expenditure. The International Monetary Fund will see to it that real cuts will be made. The resulting unemployment—and let us not get away from the fact that there will be increased unemployment—must on humane as well as on economic grounds, be compensated for by a reduction in interest so that the private sector can take up some of this unemployment.

We may have to institute, in co-operation with the Bank of England, some form of "favoured son" treatment. "Favoured son" treatment where in vestment is concerned is necessarily unfair. But one way or the other, by foul means as well as fair, these rates have got to come down. We must at the same time scrap the National Insurance "hike" on employers. As to reassuring our creditors on a longer-term basis, this is not so much a matter of what The Times, with gloomy relish, describes as letting the mad axeman loose in the Treasury, as providing a planned and orderly running down of public expenditure programmes for a five-year period at least.

For the same reasons and with the same effects in mind we must reduce direct taxation—corporate first and private soon after. This will mean sharp increases in indirect taxation—sharper even, I would guess, than those which we believe will come in December. Since this will in effect provide short-term import controls on consumer items, the Left should at last be pleased. We must prepare here it is nice for me to be able to agree with both Mr. Jack Jones and Mr. David Basnett—for the orderly phasing out of the present incomes policy and, of course, for the damaging and wasteful subsidies that form a part of it. Indeed, we should not be hesitant to pay high wages in the key manufacturing and energy sectors of the economy. It is central and local Government that must go without until we are earning enough money to increase again direct taxation.

We have learned that there is a higher level of political tolerance for unemployment of over 1 million than we ever dreamed and we must use this moment to change our system of employment accounting, or at least provide figures for hard-core and fluctuating unemployment side by side. Slowly but inexorably we have to change from a low paid, high benefit economy to a high paid, low benefit economy. We must think in terms of the £10,000 plus a year industrial worker, but one who pays for all of his food and clothing, most of his medicine and quite a lot, even, of his children's schooling. His taxes will provide for the elderly, for the disadvantaged, for the hard-core unemployed and for defence. His savings, his union dues and his life insurance will provide the investment that we need and I believe that he will demand to get a decent return on them. He will require. therefore, management of high calibre and, therefore, high reward to ensure such high return.

If we have the courage and confidence to make this shift, to develop a late-century participatory capitalism, I believe that our creditors will have the courage and confidence to allow us to make it at an orderly and humane pace—a programme, let us say, for three or four Parliaments at least. In my opinion, they will let us do so at a pace which will help us to eliminate the poverty trap by enacting Lord Barber's valorised negative income tax schemes so that the working poor do not, as they do now, subsidise with high taxation the tax-free benefits of the non-working poor. This is the only way, I believe, to diminish the furious unrest and tension at present building up over this issue, a fury which bodes ill for the liberalism which informs Cabinets of both political persuasions in this country. But to make the shift I am speaking about we need a Government which have courage and confidence in themselves and which are not blown hither and thither by external events and internal forces—at one moment by the leaders of the labour unions, at another by the International Monetary Fund, at another by their own political Party. In a year or two it may be cheaper for our allies to abandon us and let us go under. We must make a change before then.

3.36 p.m.

Baroness SEEAR

My Lords, we on these Benches wish to give a welcome, albeit a qualified welcome, to the legislative programme outlined in the gracious Speech. We welcome particularly the fact that the gracious Speech and the legislative programme is much reduced in length this year. We hope that never again shall we be presented with the need to put over 60 pieces of legislation through both Houses of Parliament, with the indigestion and consequent bad temper that marred the latter part, at any rate, of the last Session. It is plainly impossible for any Legislature to deal adequately with a legislative programme of that size. The fact that the programme this year is so considerably reduced can only be a matter of congratulation.

It is not only that the size of the programme is reduced which gives us some satisfaction. We are also very glad to see that at last the Government have ceased to pursue the unqualified doctrine of the Manifesto—that in fact the Government have realised that they are the Government of the United Kingdom and not the midwife of the Manifesto. This at least means that we are able to concentrate on the things which matter to the country as a whole in 1976, rather than on the things which appeared to matter to the drafters of the Manifesto some time in 1974. We also give a welcome, albeit a qualified welcome, to certain measures being brought forward in the gracious Speech.

We on these Benches campaigned for devolution long before devolution was the accepted programme of either the Conservative or the Labour Parties. Of course we are glad to see that at last the Government are prepared to take the steps which should have been taken at least 20 years ago and which, if taken then, would have meant that the perils which threaten this country as a result of the growth of nationalist Parties would not be upon us as they are today. While we welcome this programme we are bound to say that if the programme for devolution goes forward without provision for proportional representation in the election of the devolved Assemblies, then indeed the claim that the Government are a democratic Government will be shown to be false. The political dangers that would result from Assemblies which were elected without regard to the real wishes of the people of this country, only with regard to the power of particular groups to get them selves elected, could indeed be a serious threat to the United Kingdom as a whole.

Along with welcoming devolution, we also welcome the clause which says that Her Majesty's Government intend that we should continue to give help to the developing countries—the countries in greatest need. It may look to some of those who are financing us that that is a pious hope, but let us at least continue with it. I suggest that it is little less than hypocrisy if the Government say that they intend to give help to developing countries and then make it extremely difficult for the people from the developing countries to come and study in this country—the best kind of help that this kind of country can give to the developing countries—because once again we under stand that the question of discriminatory fees for students coming from overseas is on the Government's programme.

Having campaigned for many years for industrial democracy we are glad to see that this also is included in the gracious Speech. All I would say about that is that doubtless we shall debate it on many future occasions, and we hope that it will be democracy and not unionocracy which, from all the rumours that are coming to us from the Bullock Committee it sounds as if, alas! may well be the case. While welcoming these elements in the programme, the fact remains that there is too little sign in the gracious Speech that the Government are proposing to give the concentrated attention to the one question with which we ought to be concerned throughout this year—or rather the two questions. Devolution today we have no option but to deal with, but apart from that, surely all our abilities, our resources and our time should be devoted to trying to face and to solve the problems created by the horrors of the present economic situation: the horrors of unemployment, the horrors of inflation, the horrors of our balance of payments.

Behind these three and of more importance than all of them there is the failure of our industries to produce goods that we can sell: the low value that we get, the low return that we get from the resources that we devote to industry, be they resources of manpower or be they resources of money. The others are symptoms: it is here in our inability to get a good return from the resources that we devote that is the real cause of all our troubles. It is to this question more than anything else that the energies of Her Majesty's Government and the energies of both Houses of Parliament should be devoted this year.

Of course there are important references in the gracious Speech to our economic situation, and it is to this that I now wish to turn. We on these Benches have never said that what is needed at the present time is a wholesale slashing of Government expenditure. Of course we believe that there has to be a reduction in Government expenditure, but while it was true in the summer that this did not appear to be the right policy it is even more true at the present time when there are undoubted signs that the world recovery is not likely to get under way anything like as fast as was hoped six or nine months ago; and if the world recovery is slower than has been predicted, then a wholesale slashing of Government expenditure at the present time could do nothing but bring disaster both to this country and to the countries with whom we are trading. So we do not say "cut and cut and cut"; what we say is that the Government should look very closely indeed at the pattern of their own spending.

Here I should like to make a distinction. Running perhaps a little against the tide of much of the criticism at the present time that is made about Government expenditure, we must not be caught in the trap of thinking that the provision of services is always in itself non-wealth producing. The fashionable cry that we must be concerned only with the production of goods and we must eschew the provision of services is a fallacy and a fallacy that we should underline, just as we would not say from these Benches that the product of the public services is any less wealth producing than the product of the private sector where that is in fact well used, the resources well used and the goods turned out in an economic and effective way.

So we do not make the distinction between the public sector and the private sector, and we do not make the distinction between the provision of services and the provision of goods which is too frequently made at the present time. Where, however, we do make the distinction, where we believe that economies should come, is, above all else, where the Government are taking far too large a share in the economy as a whole; the attempts which the Government are making to intervene in every quarter of the economy; the belief that if anything is wrong with an industry then the way to get it right is for the Government to go in, either to take it over or to direct what happens. Over and over again we have wasted money and resources because the Government have insisted on taking a hand when, in fact, although it might look cruel at the time, in the long run it would be far better if the Government left the economy to develop in its own way. Indeed, it may well be that at the present time we should do far better to trust more to Adam Smith's hidden hand than to rely so much on the hamfistedness of Her Majesty's Government.

If the Government would withdraw and would in fact do better those things which Government alone can do, and would leave to forces outside Government the job which industry has to do, then indeed we should begin to make progress. If the Government would look again at the size of the bureaucracy which they have established, not to provide services, not to provide teachers, doctors and nurses, but to provide administration, which very often produces nothing at all and is little more than a burden on the economy, it is there that we should like to see the cuts made—not in services that are needed, but in an over-large bureaucracy, ever-swelling both at town hall and at Whitehall levels. It is there we should like to centre our criticism of the way in which the Government are handling the economy.

The other side of this is that we must believe that the Government really intend to give the support to manufacturing industry and the private sector which they promise in the gracious Speech. But how much, and what indeed does this really mean? We should like to know a great deal more about the promise to support the private sector. It is not very encouraging that one of the first things we are told is that the Government are going to confirm the decision taken last July to increase the contribution of employers for National Insurance. We are not saying that at this stage the Government should go back on that: it was a decision taken last summer. We believe it was a mistake that such a decision was taken, but let us demand that there are no future charges of this kind on industry.

The burdens on manufacturing industry are all too high at the present time. If further burdens are added, what additional investment can Government expect industry to make? What additional employment can Government expect industry to offer if every person employed is an ever increasing charge on industry? If the Government would give a guarantee that there will be no further additional charges of this kind; that the burden laid on industry, which has been one item after another in the last three years; that this is the end of the road so far as the additional charges on industry are concerned, that indeed would do a great deal to encourage the industrial sector.

We need also to have some assurances from the Government that, in the rearrangement of taxation that we believe may well be coming, something will be done to relieve the burden of taxation on individuals in industry who, after all, have to take the mammoth share of wealth creating. This should be done to encourage the people who, as managers, have to make a special contribution at the present moment, and also to encourage people in the skilled levels of industry.

My Lords, may I again ask the Government to look at the possibility of not continuing, as they have done over the past two or three years, with flat rates of income tax. How absurd it is that the ordinary worker, as soon as he starts to pay tax, at the present time moves into a marginal rate, when social security contribution is included, of over 40 per cent! How can we expect to get the effort required from industry, to get output, production and productivity to go up, when at all levels, from top to bottom, the burden of taxation is so high? Surely it cannot be impossible for the Government to reconsider the idea of a graduated tax system, so that the marginal rate of tax, which is the biggest possible encouragement for people to keep out of employment, can continue as it is at the present time. Encouragement for industry and manufacturing requires the creation of a climate in which people in industry feel that their efforts are far more fully appreciated than they are today.

There is one clause in the gracious Speech which suggests still the grudging attitude towards people in the industrial sector that has been all too common over recent months and years. I refer to the clause on occupational pensions. I absolutely agree that where people are drawing a pension or, rather, are not working, and they apply for unemployment benefit, that they should not be able to draw unemployment benefit unless they are genuinely looking for employment. The point is that they should be genuinely looking for employment. It has nothing to do with whether or not they have an occupational pension. I suggest that that clause in the gracious Speech will once again make people in industry with occupational pensions feel, "Here are the Government yet again attacking us".

Why not say that the Government will be more strict? Why not say that the National Insurance administrators will be more strict in seeing that at all levels, be they the possessors of occupational pensions or not, people will draw their benefit only if they are genuinely seeking employment? In that case a number of the people who have been drawing unemployment benefit and who happen to have occupational pensions will be ruled out, but so will others who are not really seeking employment. It is that, and not the insistence on the occupational pension, which the Government should be attacking in the gracious Speech.

My Lords, there should be encouragement for industry. So we get to the root of the matter, the root of the matter being, as I said earlier, that we are not getting the return we ought to be getting on the resources we devote to industry. That is where the weakness lies. Until we overcome it and compare more favourably with our competitors in that regard, we shall only be able to attempt temporarily to manipulate the problems of unemployment and inflation, because they depend on a better return.

We on these Benches do not believe that the kind of action needed in the economy today is going to be the product of one Party and one Party alone. We believe that in this country there is a widespread demand for a common understanding between Parties as to what is needed to get the economy out of the trouble in which it finds itself. People are frightened, and people have good reason for being so. They have lost the belief that any one Party can solve the problem. I am not suggesting coalition. I am suggesting that there are grounds for people in all Parties to get together with an agreed programme for the recovery of the economy. If that had been done in the gracious Speech, the result throughout the country would have been resounding applause.

3.55 p.m.

Lord PEART

My Lords, the House will not expect me to follow the noble Earl, Lord Gowrie, and the noble Baroness, Lady Seear, in agreeing with every part of their interesting speeches. I am tempted to make a debating speech after the last speech. I heard talk of Adam Smith, wedded to Liberal principals. Surely the Liberal Party believe in intervention now in industry, which was the theme of the noble Baroness Lady Seear. The noble Baroness wanted more help for industry. Surely it is a correct policy to give aid to development areas. Is it not right also to have a deficiency payment for farmers and to allow the State to protect them in certain circumstances? I would like to hear this developed by Liberal Party spokesmen who still believe in Adam Smith. However, I must not go too far.

Several noble Lords

Hear, hear!

Lord PEART

My Lords, I very much welcome this opportunity to discuss economic and home affairs, as we shall be doing for the rest of today and when our debate resumes on Tuesday. It is right that, having spent eight weeks among the legislative trees, we should now stand back to see the wood. I shall be speaking mainly about the economic situation this afternoon since, unless we can get this right, all the rest of our policies set out in the gracious Speech must be in jeopardy. That is why the gracious Speech lays such emphasis on continuing the attack on inflation and gives the highest priority to the Industrial Strategy.

I make these points at the outset to leave the House in no doubt of the seriousness with which the Government view the present economic situation—which we have never attempted to hide from the people of this country. We inherited a serious situation. Let there be no mistake that we are determined—and we have the resolve and determination—to overcome our difficulties. This was made abundantly clear by my right honourable friend the Prime Minister in his speech yesterday in another place.

My Lords, we debated the economic situation as recently as the 4th October. But since then much has happened and I should like to give a short resumé of the position. I think it is fair to say that the economy is in the doldrums for the present. We have now had four months of little growth in output, with only a hint in the latest month's figures that we may be starting to move upwards again. One important reason for the check to our growth has been the change in the world economic climate. Before the Summer Recess, the main worry was that the world recovery might be proceeding too fast, with serious consequences for world inflation. On the figures now available, it is clear that growth has slackened markedly since the first quarter of the year. In addition, a number of countries—notably France and Italy— have introduced tough measures of restraint. The resulting mood is one of uncertainty as to the strength of the upturn in the world economy, and there is a risk of rising unemployment in many of the industrial countries, including the United Kingdom.

As far as the situation is this country is concerned, registered unemployment in October was 1,305,000, or 5.5 per cent. of all employees, seasonally adjusted and excluding school leavers. That is far too many people and a serious situation for any Government to face. But it would be worse without the measures the Government have taken to alleviate the position, making over £500 million available since the 1975 Budget to create or keep open 500,000 jobs or training places.

Although there was a welcome fall of 80,000 in the total number unemployed on unadjusted figures in October, vacancies also fell—although they are still 15 per cent. above their level of the end of last year. Short-time working is now right down to the levels we had in 1973. However, it is still too early to say whether we have passed the peak in unemployment, and certainly there is a need to maintain the momentum of growth in output in order to provide productive jobs for all who want them.

Exports provided the impetus to growth at the end of last year, and the beginning of this year, and despite some levelling-off in the summer, the prospects remain good. Manufacturers report increased orders, and exporting is now more profitable on average relative to production for the home market than it has been in the recent past. But the balance of payments is still not right. We have had a deficit of around £1,500 million in the first ten months of this year. True, export volumes in the latest three months were up slightly on the previous three-month period and more than 10 per cent. up on a year earlier. But imports rose over the year, too, and the continuing deficit is serious.

The depreciation of sterling over the year has, of course, had a major effect in this area, although the rate is much the same today as it was at the end of September. This depreciation has meant that our imports now cost more, while our exporters have been given more room to manoeuvre on the price that they charge for their products. While there has not been a rapid improvement in our trade volumes, the advantages to our domestic industry are likely to be sustained, and we must do all we can to ensure that our manufacturers make the most of the opportunities now opening up to them.

But, my Lords, it is not just a question of exporting more. Import substitution is also vital. The development of North Sea oil is perhaps the most dramatic example of this. But the area for which I was previously responsible, agriculture, also has an extremely important contribution to make. I know the noble Earl, Lord Ferrers, will agree with me here because he passionately believes in the industry, and I support him very much on this.

The gracious Speech, therefore, contained an assurance that the Government will continue to encourage the expansion of food production in this country. This reflects our firm adherence to the policy laid down in the White Paper which I introduced to Parliament some time ago, Food from Our Own Resources. The priorities for import-saving which were set out in that document remain fully valid and will continue to guide the Government's agricultural policy. It was against this background that my right honourable friend the Minister of Agriculture took positive steps to help farmers affected by the drought when he announced specific measures of assistance on 5th October. They were designed to help farmers overcome the worst effects of the drought and maintain the basis for further expansion in the future, and demonstrated the Government's concern for the wellbeing of the industry.

May I say that a Labour Government need never apologise, and I do not see why I should, as a former Minister, for what we have done in this field, which normally seems to have been the prerogative of the Conservative Party. We rescued agriculture immediately after the last war. I used to sit behind my Minister, Tom Williams, who later sat in this House. His Agriculture Act of 1947—which was interventionist, I say to the Liberals, a system of assured markets and guaranteed prices—rescued the industry and virtually created a social revolution in the countryside; and no Tory Administration, or indeed Liberal Administration, would dare reverse the basic principles which are still in many ways enshrined in our present agricultural legislation. So when we talk about imports and balance of payments we lay great stress on the role that farmers and farm workers and others play in the countryside.

Turning to the future, we have, of course, the annual review of agriculture and next year the price-fixing negotiations for the Common Agricultural Policy. We shall continue to seek improvement in the operation of the Common Agricultural Policy, as I did myself when I was negotiating. We shall seek to do this in Brussels and Luxembourg. The main problem is to avoid the waste of resources involved in over-production. We want effective support for efficient producers, without the surpluses which arise where prices are set too high.

There are particular problems in the milk sector, as noble Lords know, where our overriding aim is to see prices set at a realistic and reasonable level. This would reduce the burden of surpluses, but it is not inconsistent with our own plans for expansion of our dairy industry in line with the White Paper. We consider that milk production should take place in those countries best suited to it, and that includes the United Kingdom. Our policy towards milk illustrates our general approach to the Common Agricultural Policy, which is to seek a better use of resources. This is not an empty phrase. We have been working steadfastly for this and shall continue to do so. Consistently with this, the Government will continue to take full account of the needs and interests of our own farming industry, which, as I have indicated, can play such a vital role in our national economic effort.

Obviously, my Lords, our payments deficit will not disappear overnight. Until the effects of the sterling depreciation, a growth in our manufacturing output and North Sea Oil have all worked together to bring our overseas payments back into balance, there will be an external financing problem. Our reserves can cover the repayment of borrowings under the stand-by credit arranged last June, but unaided they would be hard put to it both to provide the necessary cushion against contingencies and to bridge the financing gap on our current account. Therefore, we have applied to the International Monetary Fund for a total of 3.9 billion dollars. May I say to noble Lords that getting this money will not be the end of our problems. Over and above the current account deficit there is the overhang of the sterling balances. We have been discussing with the IMF mission the Government's own views of what the 1977 economic outlook requires within the framework of our existing policies. These discussions, as noble Lords know, are still going on, and it would be premature to make any announcement about them today. The House will, of course, be informed of their outcome at the earliest possible moment.

For the time being, I would just say this. There is no question of the Fund forcing on us, and against our will, policies which could weaken our economy. This would be contrary not only to the interests of this country but also to the interests of other countries, who have no wish to see an economically weak and feeble United Kingdom. When I hear people talking about our contribution to defence in Europe, I make no apology about the British presence in Europe and our contribution to NATO. I was rather surprised at some of the references that were made about that. When I think of that period after the war, which was also mentioned, it was not a period when we were wealthy. Our economy was under great strain. We had lost our exports. We had to reorganise our manpower. Men like Ernest Bevin, fortunately, had prepared plans for after the war in the labour field. It was a period of great challenge and a social democratic Government did it.

Returning to the subject of the IMF application, I may be asked what the Government will do. What the Government will do is to make those adjustments which both we and the IMF consider necessary to strengthen our mixed economy.

I now turn to monetary growth. In recent months this has been higher than the guideline figure of 12 per cent. for the financial year as a whole. As your Lordships know, minimum lending rate was raised by 1½ per cent. in September and by a further 2 per cent. to 15 per cent. on 7th October, since when it has fallen slightly. The higher interest rates illustrate the Government's determination to curb growth in the money supply, so that an inflationary increase will not undermine the counter-inflation policy and the Government's overall strategy. Only last week we took further measures to help restrain the growth of the money supply, while reducing the external financing problem, by reintroducing the supplementary special deposits scheme and withdrawing the facilities whereby United Kingdom banks were providing sterling finance for third-country trade. But let us not exaggerate our problems. Over the 12 months to mid-October, M1 has grown by 12.9 per cent. This increase is large, but not so large as that seen in 1972 and 1973, and in fact not out of line with the rate of rise of prices over the same period.

The problems for monetary policy are closely linked with those of public spending and borrowing, to which the noble Earl referred. I agree with him there. The Government must ensure a balance between the need for finance of the private and of the public sectors without an inflationary increase in the money supply. This was one of the aims of the July measures—to reduce the extent of the public sector borrowing in the 1977–78 financial year, to allow a greater flow of financial resources to the private sector over that period, without putting additional pressure on the growth of the money supply. These measures will result in a reduction—a reduction in real terms—in public spending plans for the next financial year, compared with this year and not just a stabilisation as set out in the February White Paper. And our longer-term aims are that public expenditure will fall as a proportion of national output over the period up to 1979–80, as growth in gross domestic product takes place.

A very important development in this field has been improved methods of control. I referred to them in my speech in October. The Government are now monitoring expenditure much more closely, examining all voted expenditure in detail every month and, for each cash block, comparing it against expected profiles. Also, all additional expenditure must now be approved within the contingency reserve. These arrangements will help to maintain a strict control over expenditure levels and are a much better means of ensuring that the targets set are achieved. Indeed, public expenditure and the borrowing requirement this year are running more or less along the levels planned. So far so good: some results are already showing through. However well the new methods of controlling public expenditure work, I must emphasise that changes in the prospects for economic activity will affect the projected public sector borrowing requirement, since tax receipts and benefit payments depend on the level of incomes and activity.

In July, the Chancellor forecast a borrowing requirement for next year of £9 billion on the basis of the economic prospect as he then saw it. Since then, as I have said, we have seen a pause in the growth of output, a sharp rise in interest rates, and a further depreciation of the pound which is likely to affect the prospects for inflation. The Chancellor has said that these changes may affect the forecast of the borrowing requirement in the next financial year, although the figures noble Lords may have seen in the Press are journalistic speculations about the amount of the change.

We shall, of course, continue to keep public expenditure and the size of the borrowing requirement under close review. And we shall take whatever measures we consider necessary to keep the situation under control. But to make massive and immediate cuts in public spending will hardly help the situation we are now facing, with unemployment still up at 1.3 million and growth at well below the rates we need.

Finally, and perhaps most important, my Lords, has been the attack on inflation. Here, despite what has been said, we have achieved considerable progress, although, as I am the first to admit, much remains to be done. By July, the annual rate of inflation was down to 13 per cent., about half what it had been a year previously. This was of course in large part due to the universal acceptance of the £6 pay policy under the voluntary guidelines promulgated by the trade union movement. Since then, the effects of the depreciation of sterling and of the increase in food prices and the reduction in Government subsidies have led the annual rate to rise to 14.7 per cent. But the underlying rate of inflation is certainly far lower than it was last year. Although there is little prospect of the rate declining over the next few months, the current pay round, under which over 2½ million working people have already settled, should ensure a further reduction next year.

For the future, as mentioned in the gracious Speech, the Government are determined to continue the attack on inflation so that we do not risk losing the tremendous gains of the past 18 months. As my right honourable friend the Prime Minister made clear yesterday, this will include, in the Government's view, the need for a further voluntary agreement on incomes for 1977-78. We shall aim to continue our attack in close consultation with the Trades Union Congress and the Confederation of British Industry so that we reap the full benefits of the spirit of co-operation which is increasingly the hallmark of our industrial relations.

These, then, are the main strands of the development of our economy recently, and the pointers which we have available for the immediate future. Our strategy in this situation is to get the economy back into balance and to improve our industrial performance. These are the overriding priorities, which our immediate policies must serve. We need a rate of inflation which is at or below those of our competitors overseas; we need sustained growth in exports so that we may pay our way abroad; we need an improvement in the efficiency of our industry, and an expansion of our manufacturing sector. To achieve this we need better use of both men and machines, as well as higher investment. That is why the Government recognise the importance of a healthy private sector of industry making healthy profits. Such profits stimulate investment and encourage expansion. There is nothing wicked or sinful about them provided much of them are ploughed back as an investment for the future.

In present circumstances, we cannot encourage consumption, private or public. This would suck in yet more imports, at the expense of investment and the balance of payments. The Government and the nation as a whole have made it clear that we are prepared to accept some further reduction in living standards in order to cut our borrowing and invest in the future of this country. Only in this way will we be able to achieve the balanced economy we want; with an external balance in our overseas payments and with an industrial productive capability which is large enough and efficient enough to support the demands for higher standards of public and private provision. I believe that this will take time. There is a lag between introducing an economic policy and seeing its benefit. This is enormously frustrating. In my view, it is not the overall strategy that worries the people, but the time it takes to make progress.

The main instruments for uniting the nation behind the policies I have outlined are the Industrial Strategy and the Social Contract, which is still criticised. These are the main examples of the Government's policy of co-operation rather than confrontation. The tripartite involvement of the Government, CBI and TUC in the Industrial Strategy should help to increase our overall industrial capability and efficiency. The Social Contract, encompassing the pay agreement, has been and continues to be the most important plank of the counter-inflation policy. The Government are maintaining and will maintain the priorities embodied in it, in close consultation with the trade unions.

The need to make progress through co-operation rather than confrontation; through participation rather than exclusion has been, as I have said, the keystone of our industrial policies. Co-operation is essential at all levels—essential in companies and factories no less than at the national level. Hence the Government's commitment to a radical extension of industrial democracy in the private and public sectors of industry and commerce, to get effective participation by workers in decision-making and a more acceptable basis for increasing industrial efficiency through decisions jointly arrived at by workers and management.

I cannot, of course, anticipate what may be contained in the Report of the Bullock Committee, which we expect to have at the end of the year. And indeed I should emphasise that the Government have not and will not take firm decisions before the Committee has reported and before the necessary consultations with both sides of industry have taken place. But I can say that the proposals which we shall bring forward will be aimed at establishing a structure for industrial and commercial enterprise which will accord better with the modern conception of their role in the community. They will amount to a major industrial and social reform.

I should like to refer briefly to my new responsibilities as Minister in day-to-day charge of the Civil Service. As I have said, the keynote of the industrial strategy of this Government is that greatly increased industrial production and productivity are essential to the solution of our problems. We must not overload the industrial and export base by applying too much of the wealth thus created to the consumption of goods and services rather than to investment and reinvestment in production.

But I am deeply concerned that what would be a sensible and rational debate about the kind of society we want (for instance, the right balance between the private and public sectors) appears in danger of degenerating into a shrill, hysterical attack on those who work in our public services, which I happen to believe—and I speak as someone with many years' experience of Government—are among the finest in the world, both centrally and locally. Whipping up passion and prejudice in this way, as some editorial pundits and columnists seem to be trying to do, does untold damage to the cohesion and purpose of our society. In my own area of responsibility, I am particularly disturbed at the ignorance and malice of some attacks on the Civil Service.

A civilised society needs administration and services; but there are limits to what it can afford at any time. Our strategy requires a cut-back of the Civil Service growth. These cuts are painful, and they imply that there will be in some respects a rougher justice for the individual in the administration of services. This is because we cannot afford the cost of the highly complex administration which would be necessary to treat every citizen as a special case. All the centrally provided services we have come to rely on will have to become more conscious of the costs of achieving their objectives, and so will those who receive them. This is all part of the price for restoring economic prosperity.

But I must emphasise that existing complexities and administrative costs have been a consequence of the response of successive Governments to the wishes of the electorate, and not the result of improper pressures from public servants to inflate their jobs. Those who blame the Civil Service, both in the Press and in this House, for past policies, have been getting dangerously close to sabotaging the administration of our public services by destroying the morale and dedication of our public servants and their relationship with the public they serve. Of course constructive criticism is always welcome, but I deplore some of the uninformed and malicious comment that we sometimes hear today.

In a way, these few words about my experience of civil servants sum up what I want to say this afternoon. To achieve success, we need the co-operation of all sections of the community, in the public and private sectors alike. Denigration of one particular group will certainly not help to achieve this. The challenge lies before us, calling for an ability to find out the general interest and skill in pursuing it. I am confident that we, the British people, can rise to it.

4.25 p.m.

Lord BROOKES

My Lords, I am grateful for a first opportunity to speak in this distinguished and necessary place, your Lordships' House. I will confine my remarks to matters lying within the parameter of personal experience which I believe to be of relevance to the present economic dilemma. Recently it was my duty to tour a group of advanced technology engineering factories in the South of Britain. They had wide diversification of products and equally wide diversification of terminal markets, but all suffered from a single common denominator of handicap: lack of skilled craftsmen. Expensive and beautiful machine tools were unmanned because skilled craftsmen could not be hired or kept.

In the process of making further and wider inquiries it became clear to me that this situation is not untypical of the national circumstance and therefore, in the economic interest, it is right to address our minds as to why. I believe that the root cause of this vital problem—not purely domestic and not purely domestic industrial problem—lies in the progressive erosion and dissipation of vital differentials over the last decade or more, an erosion exacerbated by the insensitivities of crisis-inspired national wage, controls or incomes policies and the further insensitivities and indeed idiosyncrasies of the tax tables. The effect of course—when all political speechmaking is of no consequence and when all statistics are of no consequence—is to throw into question the basic ability of high technology industries in this country to self-engender their own recovery regardless of world trends or indeed to sustain their position if and when world economic recovery occurs.

If we add to this situation the appalling light of the disillusionment and discouragement of underpaid, overworked and overtaxed British management in vital sectors of industry—who, by international standards, are the paupers of their profession—I suggest, without political prejudice, that we have, unthinkingly and without malice aforethought, contrived a situation in which excellence in terms of craftsmanship, design capability and leadership has been discouraged and denuded. It is on excellence that the employment of vast numbers of people is finally and inevitably dependent, yet we have discouraged and under-rewarded the pursuit of excellence and we are continuing to do just that.

It is pointless being negative about problems, but it is a negative and very false assumption to conclude that elitism is not of consequence on the shop-floor; it is every bit of consequence on the shop-floor as it is in any boardroom, and the man who stands by a Genevoise jig-borer knows what he is doing, is proud of what he is doing and knows what he is worth in this world, and I could instance many other typical examples. Thus, I believe that we must act positively towards the thinkers, the leasers and the skilled craftsmen—the creators of wealth and the creators of jobs—because jobs are born on drawing boards, made possible in tool-rooms, managed by people who know how to manage and sold by people who know now to sell.

They do not do it if they feel that they are living in a community in which they are unwanted and in some measure discouraged, if not in part despised. So I believe very firmly that I should with great respect commend to your Lordships' House the concept that Government, TUC and CBI should address mind, knowledge and resource to the conception of a national job evaluation plan. This is no remote or unknown philosophy. Speak to an industrialist or a trade unionist at any time over the past 10 years: there is a yearning for the benchmarks and the landmarks of a sane incomes policy with appropriate differentials. We have desperately needed these guideposts during the whole of my industrial career, and such guideposts or benchmarks should form the basis of continuing national incomes policies which, if they are to succeed, have to be seen to be just and must encourage and reward excellence.

I incline to connect with this problem the appalling tragedy of young unemployed people, whose minds and personalities are, I believe, scarred by a sense of being unwanted by the country and the society into which they have been born. I have had personal experience of that in the course of a relatively long lifetime. Yet here again is the resource of our ultimate wealth lying around and walking our streets neglected. I know that it will and can be said that there is a variety of Government and industrial schemes directed towards alleviating this problem, but I say with great respect that they are unreal and insufficient and that they lack meaning.

What better investment can we make than in attracting our youth to high added-value, high technology industries? Should we leave them where they are one more day, apparently to rot mentally and ultimately physically? There is no need for this. In the past I have had experience, under the urgencies of war, of recruiting vast numbers of unskilled men and turning them into skilled craftsmen within a short cycle of two years. Some of those men are today managing directors in British and foreign industry. They became that good.

Is it beyond our imagination or capacity to say again to the Government, the TUC and the CBI, "Take this need on board, combine in common cause, organise and finance so that every good factory in the country becomes simultaneously a place of work and a place of teaching"? This can and has been done without detriment to production and it will be found that craftsmen undertaking exquisite work take great pride in passing on their skill to others. If we were to put £100 million a year into such a project, and if the Government bore 50 per cent. of the cost, the employers 40 per cent. and the unions—which would wish proudly to take their place, I am sure—10 per cent., what better gilt edged investment could we make for our future? How could we do better than by investing in our people in order to give them the dignity and capacity that goes with skill and creation? My Lords, I thank you for a kindly hearing.

4.37 p.m.

The Earl of CROMER

My Lords, I am sure that the House would wish to join me in congratulating the noble Lord, Lord Brookes, on a really remarkable and outstanding maiden speech. The House is always ready and willing to listen to those who speak with authority and knowledge of their subject and speak from the heart, and I am sure it will look forward to any future occasions on which the noble Lord feels able to contribute.

My intervention this afternoon will be very brief because the noble Lord the Leader of the House has, I am happy to say, not only covered much of the material that I hoped, but was not sure, that he would cover, but has done so in a way with which I find myself very much in sympathy. In the debate early in October on the economy, the noble Lord said that he felt that, in a real sense, this was our last chance and we must get it right. I could not have agreed with him more. After that he deviated a little, I think adhering scrupulously to his Treasury brief, which did not come quite so much from the heart and was not quite so accurate. The noble Lord suggested—and it took the headlines in The Times—that the loan from the IMF would be used for the regeneration of industry. I wish I believed that to be true or possible. Let us be quite clear that, initially, nearly half the loan from the IMF will be used for the repayment of our existing short-term debt, while the rest will be used to support our reserves in a perfectly proper way. To think that this is some new aid to industry is a fiction, I fear.

The other point on which the noble Lord touched this afternoon—and I was very glad that he did so—was the IMF conditions and the attitude of Her Majesty's Government. I believe that it is of enormous importance that it should be understood and publicly known—and, for that reason, I hope that the noble Lord's speech will receive the maximum publicity—that the operation that is taking place is a series of consultations between Her Majesty's Government and the IMF. What will come out of them at the end will be an agreed policy between them which will have been initiated by Her Majesty's Government and then endorsed, improved and given the Good House-keeping seal by the IMF.

This is a very important factor in confidence because, if it were to be spread abroad that something had been imposed on the British Government and accepted grudgingly and unwillingly that would not help confidence. That is why one is worried to read in the Press commentators who use words like "political unacceptability" and so on. There is nothing more politically unacceptable than bankruptcy, which, to put things at their very worst, is the alternative. Of course, we are not bankrupt, but the restoration of confidence is the key objective on which I am sure we would all agree.

I believe that we must also bear in mind that over many years—and I can remember this when I was a director of the International Monetary Fund—we have heard screams of anguish from other member countries about the political unacceptability of IMF suggestions. Then, no one was more pure and righteous than Her Majesty's Treasury in the instructions that they gave us that this was nonsense. So we have to accept the same judgment for ourselves as we righteously—and properly—imposed on others for many years. The importance of these consultations cannot be exaggerated and I have every hope that they will go well.

There is another point which the noble Lord raised; it is partly the activities of the Chancellor of the Duchy of Lancaster on the sterling balances. In my opinion this is rather a red herring at present; it is not a relevant issue. Without labouring the point, I should say that the sterling balances are sterling which foreigners hold here and which they prefer to hold here. If we really wanted to make it difficult for foreigners to hold any sterling here we could do so, which would mean that we should have to pay in foreign currency cash for everything we import. Historically we have paid for many of our imports in sterling, and the sellers have been happy and content to leave their sterling here, and this is the origin of part of the sterling balances. Years ago the oil companies held big balances in sterling and actually had to sell dollars to buy sterling to keep up their balances.

So let us not be too hasty in this. The Prime Minister—I must not misuse his words—rather gave me the impression in a recent speech that this was a kind of White man's burden of the past. This is not true. We have had the use of the assets, and do have the use of the assets, while they are with us. One can pull down a shutter on our banking operations. Any banker can say, "I don't want to bank any longer, so you can take the deposits away." We can say that, but I am not sure that it is at all a clever thing for us to do. They can be embarrassing in the short time when confidence is lacking and people remove their balances, as they probably have been doing in recent months.

I suggest to those of your Lordships who are sufficiently interested in this subject that you look at the machinery we set up in 1965, when I was Governor of the Bank of England, which took care of this matter on a short term basis reasonably adequately. The position was overtaken by subsequent events and other developments and was rather relegated to the past. I do not think that we ought to hold out great hopes to the British public that if only we get rid of the sterling balances we would not have any more problems. I say this because the fact is that if we carry the IMF negotiations to satisfactory conclusions, as I feel completely confident we will, it will mean that our borrowing in total from the IMF, if we use it all, will be the best part of 6,000 million dollars. This would be on top of 2½ million dollars which the Government have borrowed in their own right in the last couple of years, and on top of a rather problematical figure—because there seems to be some attempt to make it difficult to find out what are the true facts—of borrowings in foreign currency by nationalised industries abroad, which have been encouraged by the Government.

In point of fact this is the Government, for political reasons, for balance of payments reasons, requiring quasi-governmental entities to pledge their commercial credit for something that they did not need to pledge it for, and in so far as the Government give a guarantee on exchange losses there is a build-up taking place of concealed liabilities which will have to be paid off. I think that it might be useful in some economic debate in the fairly near future if we could have more information about these borrowings. I say this because the figure now is very large indeed, and, first, I think it is a questionable practice for a Government to borrow second hand in this way. Secondly, and probably much more important, the interest burden of the aggregate of all these borrowings is quite frightening, to say nothing of the repayments which are to come fairly soon. Things catch up with us.

The noble Lord referred to the post-war financing arrangements that were made. If he cares to look at the figures for that he will find that, owing to the successive devaluation of sterling—each one so happens under Governments of this complexion—the amount owed in sterling today is far greater than the original loan, after 30-odd years of repaying it. This is the quirk of this kind of financing, and it is a fact of life which must be accepted. The only point I particularly wanted to make in this debate is that the gracious Speech can be looked at only in the context of the economic situation which exists at the moment and the immediate outcome of the negotiations with the International Monetary Fund.

4.45 p.m.

Lord KALDOR

My Lords, I have been a Member of this House for more than two years and this is the first occasion on which have been able to address your Lordships, and in accordance with custom I beg your indulgence in doing so. It is a tradition on such occasions that the speaker should avoid matters of controversy and that he should be relatively brief, and it is also a part of the tradition, I believe, that he should speak on matters that are within his field of competence. As an economist I find these requirements not easy to reconcile with one another, particularly in the present highly critical situation of Britain. However, I shall do my best by confining myself to an analysis of the origins of the present situation, and I will avoid the more controversial questions of policies or remedies. There is an unfortunate tendency in discussing our economic problems to lay an excessive amount of the blame on policies pursued in the recent past, and to over-state the extent to which it is within the power of Government to supply effective remedies by quick, or even drastic, adjustments of policy.

My purpose this afternoon is to put our present problems in a broader perspective, in a perspective that tends to get lost in the heat of debate, and I shall make only two points. The first is that whatever the ultimate cause or causes of our difficulties, they are all of very long standing and therefore unlikely to be remedied in a short period, whatever Party is in power. Britain is a densely populated country, depending on imports for half of her food and for very much more than half of her industrial materials. Her prosperity is entirely dependent on her ability to have a sufficient volume of exports to pay for the indispensable imports of food and raw materials. Ever since the last quarter of the 19th century we had difficulty in maintaining a sufficient balance of net exports of manufactures, and the immediate consequence of that difficulty has been that we have been able to grow only relatively slowly and have not been able to find sufficient effective employment for our labour force.

Few people realise that in the 40 years preceding the First World War Britain was one of the slowest growing countries in the world, and at the same time she was one of the largest sources of labour emigrating to other countries in search of work. This long-term difficulty was, I have no doubt, due to the industrialisation of a succession of other countries which deprived us of many of our traditional markets one after another, a loss for which we could find compensation through the development of new markets only precariously and on an inadequate scale. This factor inevitably resulted in a slower rate of growth than that of the countries which industrialised at a later stage, and thereby placed us under an increasing handicap in international competition.

In the last six years we have made a great effort, and our manufactured exports have increased in volume by no less than 40 per cent., or something like 6 per cent. a year. At the same time our manufactured imports have increased nearly twice as fast, with the result that our total production, as measured by the gross I domestic product, increased only slightly, by just over 1 per cent. a year.

My Lords, in the 13 years preceding the First World War we were in much the same position. During that period— the period 1900 to 1913—our exports increased relatively fast for those days. They increased by 46 per cent, in volume, or by 3 per cent, a year. But during that same period our gross domestic product increased by slightly under 1 per cent, a year, and our volume of domestic investment in fixed capital actually fell in the course of that period by no less than 30 per cent. The explanation then must have been the same as that for the recent period: our relatively good record in exports was outweighed by import penetration, chiefly from Germany.

My Lords, the second point I wish to make concerns the extraordinary and unique situation which has arisen in the world economy as a consequence of the four-fold rise in oil prices at the end of 1973. As a result of the sudden riches of the oil-producing countries they were quite unable to increase their expenditures in line with their incomes, and in the first full year, in 1974, they had a financial surplus amounting to 65 billion dollars. This 65 billion dollars necessarily had its inevitable counterpart in an equal deficit in the accounts of the other countries. Since then the surplus has diminished somewhat, but on the latest estimates of the International Monetary Fund it is still running, in the present year, at the rate of 40 billion dollars a year. It is inevitable that the other countries of the world should be in deficit for that amount; this is just a matter of arithmetic. If the world economy is to avoid strangulation through cumulative pressure to eliminate the payments deficits of individual countries by deflation, it is essential that the main burden of this deficit should be carried on the broadest shoulders, that it should be carried by the countries which have the largest reserves and the strongest credit. Any country which pursues internal policies which prevent it from carrying its due share of that deficit simply aggravates the problems of the other countries. Just as in a game of musical chairs, it is impossible for everyone to win.

In this situation it is most inappropriate for countries with a strong credit position to pursue such conservative financial policies as to avoid their share of the deficit, as the United States did in 1974 and 1975 and as Germany has done persistently since 1974. It is even more inappropriate, my Lords, for the credit-worthy countries, who alone have the power to recycle the so-called petro-dollar surplus, to force other countries to contract on the ground that they have reached the limit of their borrowing power, when any such action merely "passes the buck" to countries which will face the same situation in turn. The very notion that there is a limit, or an absolute ceiling, to the borrowing power of any particular country is incongruous in a situation in which the borrowing power of the whole host of countries is continually replenished by the automatic new lending of the oil-producing countries, of the order of 40 billion dollars a year. It is absurd to say that countries such as Spain or Italy, just because they were forced to borrow something of the order of 15 to 17 billion dollars to pay for their deficits in the last three years, have now exhausted their credit and cannot borrow any more. Countries, unlike businesses, cannot simply go into liquidation just because they make losses.

My Lords, shall the Western World go on playing this game of musical chairs until there is only one chair left? Will one country after another be forced to adopt severe deflationary measures because it can no longer cope with its external financing problem—the whole process being orchestrated by the International Monetary Fund, the very institution which was brought into existence at the end of the last war to prevent a repetition of the tragic events of 1929 to 1934? I was very glad to have the assurance from my noble friend the Lord Privy Seal this afternoon that the International Monetary Fund will pay due consideration to the special position of this country as a reserve currency, or for other reasons, and will not make any onerous conditions in connection with the new loan. But, then, we are only one country among many, and the kind of difficulty in which we are is by no means confined to us. In fact, it extends to almost all countries in Western Europe, and of course it extends to the so-called Third World.

My Lords, would it not be better to agree on arrangements which provide a seat for everybody; that is to say, to recognise that, so long as the petrodollar surplus exists, balance-of-payments deficits are unavoidable, and a continued flow of funds should therefore be put at the disposal of the different oil-consuming countries in amounts which appear reasonable in order to avoid needless economic contraction and suffering? One can but hope that, with the new Administration in Washington, wiser counsels will prevail before the economies of the Western World are fatally weakened. My Lords, I feel that, having drawn your Lordships' attention to these dangers, I had better resume my seat while it is still there.

4.59 p.m.

Lord TANLAW

My Lords, first of all I wish to apologise as I may not be able to stay on until the end of this interesting debate owing to a longstanding, previous engagement. We have heard two really remarkable maiden speeches this afternoon. The first was by the noble Lord, Lord Brookes, who gave us, I think, a very practical analysis of some of our economic ills and what it feels like to see them on the ground. We have heard from the noble Lord, Lord Kaldor, a theoretical analysis in depth of not only our economic ills but those which exist throughout the world at the present time. I think that both maiden speeches have added already considerable depth to what was already a high quality debate.

I wish to take up a point raised by the noble Lord, Lord Peart, before mentioning two details from the gracious Speech. He mentioned agriculture, and I agree with what he said. I think that any farmer or anyone involved in farming would agree with his words as to what the Labour Government did for the industry immediately after the war. I think the only differences between that Labour Government and this is that that was a real Labour Government, one which I understood, and the present Government are rather more incomprehensible to me sitting on these Benches. Let me reassure the noble Lord that I am behind him in his policy of self-sufficiency for British agriculture, but hill and upland farmers are still faced with serious economic problems created by high interest rates. This was raised earlier in the debate, but for hill and upland farmers there is no possibility of a fresh injection of capital into these businesses.

When you realise that the return on capital is 3½ per cent, to 4 per cent., and one interest rate is touching on 20 per cent., there can be no future for capital investment in this kind of industry. The noble Lord, Lord Peart, asked what had the Liberal Ministers done to try to assist in this way? I can tell him. On these Benches, as long as I have been in the Liberal Party, we have been putting forward the concept of a Land Bank, which allows farmers to obtain capital at a rate of interest that is balanced by the low returns they can get. This at least offers some encouragement for hill and upland farmers to put money into land. The present conditions of capital grants are clearly of no use at all, because you first have to find the capital before you get the grant. We in the Liberal Party have insisted that it is the wrong way round and for these long-term agricultural projects it means restriction of investment in land which has not had money or capital put in for many generations. Hill farmers need money at the rate of interest that they can afford, or the industry as a whole can afford.

My Lords, to return to the gracious Speech, I wish to follow a point made by my noble friend Lady Seear. She mentioned overseas aid, and I want to underline her remarks about the position of overseas students in this country. I hope the Government will realise or recognise the contributions that they make not only to institutions here, but the contributions they can and do make when they return to their home countries to our economy through exports. I am sure the Government will reconsider their view on this during the course of this Session.

There is another point which is an economic one. While I think the wording of the gracious Speech makes it clear that the Government have appreciated the need for a rural aid programme and the right kind of aid to developing countries, I wonder whether they have appreciated that much of this aid is still lying unused— aid already committed by the Government but which for one reason or another has not been given. I wish to give a thought to the noble Lord which is: is it worth considering whether should there be a time limit on tranches of aid offered or proferred to less developed countries? I give an example. If a developing country has been given a loan or is going to negotiate a loan for £1 million. unless the negotiations are completed within a reasonably short time the asset for which that loan is going to be used becomes useless, for the simple reason that costings have gone awry due to the fluctuations in sterling, inflation or interest rates that have been altered. Therefore the amount of goods that can he purchased may be greatly reduced from the original country by the loan monies negotiated. In the event, let us take a fertiliser factory. That factory cannot be built because the loan agreed and negotiated has not been given because the terms are still being worked out. As a thought, I put this to the noble Lord. Aid of all kinds should have precise limits in time, because unless it does, it becomes rather irrelevant, and is merely a figure used at international conferences to show how interested we are in assisting developing countries.

My Lords, I should like to go on to an omission in the gracious Speech. I am disappointed not to have seen any reference to an energy policy. I believe that in the next Session decisions are going to be taken that will profoundly affect the future of the energy pattern in this country between now and the end of the century. Its omission makes me worried, because I wonder what the Government have in mind. I think that in a way I see their dilemma. I am referring to the nuclear power station building programme. Personally, I have very severe 'doubts about the economics of this programme. I do not wish to mention any at this moment, but I think the Government have a duty to tell us, and to tell the general public, who are seriously concerned about the dangers and the safety factors and so on in such a programme. I am concerned about that, but I am much more concerned that the Government are going to enter into a programme which is very capital intensive at a time when, as every speaker so far has said, in one way or another, we have very little capital of our own to spend.

Secondly, even when these power stations are completed, I am not convinced, from the figures I have seen, that this will in any way reduce the cost of power to the consumer. I think it will greatly increase it—certainly in terms of electricity—and it will add greatly to inflation in 20 years' time. These are matters we can argue about, and which will be questioned from these Benches in the months to come. But in my opinion this should have been a capital programme that the Government could either postpone or consider cutting at this stage. Although I need more information, I feel that the whole programme could and should be scrapped. I should like to determine the Government view on this, and to hear them justify the thousands of millions of pounds that are going to be spent in terms of the delivered kilowatt price to the consumer.

I appreciate that there is a massive unemployment problem. Many speakers have proved sensitive about this, and all of us are conscious of it. Every day the Government must be conscious of it. Let us not, because we have unemployment problems, because we have a heavy electricity industry desperate for work, commit this country to a programme which our children and our grandchildren will regret. We have no right to do that. The Government should have mentioned something about this in the gracious Speech in order to give some indication of their thinking. As they have not, we from these Benches and I personally will be inquiring deeply into the Government's intentions and their energy policy.

My Lords, finally I want to welcome the mention of patents in the gracious Speech. I suppose I must declare an interest as a part-time inventor. I should like to mention to noble Lords the very real difficulties that exist for anybody, not only in large research organisations but in small research teams, or indeed part-time inventors who take up patents. The costs are rising enormously all the time. The protection which is being offered is being reduced because of the very complexities that the gracious Speech mentions. There is possibly a much more serious factor which could be mentioned in this debate. In this country it is my belief—and certainly the belief of the people I have met in a small way from my experience in the electronics industry—that there is a massive amount of original and highly inventive thought that is not being used.

This is, first, because of the jungle of legislation that is involved with patents, and the high cost of patent agents; secondly, there is difficulty for someone who has an idea raising capital to develop it. It is high-risk capital, as anyone knows in this business. I come back to interest rates: our inventiveness, which has kept us not only going for many years but ahead in many industries, cannot be maintained in the world with interest rates running as they are. On analysis, it is the small research teams and, indeed, some of the part-time individuals, which have made some of the greatest breakthroughs and contributions to British patents in the world.

I feel that these people are right up against it at the moment. They cannot move. They cannot raise capital. Their costs of patenting are getting larger and their protection is getting smaller because of the lack of co-ordination of international patent rights. They may give up very shortly, go abroad or, once again, are we going to see a British idea lost and taken away by either the Japanese or the Germans for the reasons which I have given? I am pleased to see that the Government are aware of this problem, and I hope that it is for that reason that this matter was mentioned in the gracious Speech. I should like to conclude by saying that am looking forward very much to listening to another maiden speech, that of the noble Lord, Lord Kagan. He must be the only speaker in an economics debate who cannot blame the Government of the day or, indeed, any Government, for a poor summer's trading. and I look forward to hearing what he has to say.

5.13 p.m.

Lord KAGAN

My Lords, speaking in your Lordships' House is art awesome experience. I approach it with humility and diffidence. However, the kindness, courtesy and understanding that I have encountered in your Lordships' House so far has helped me to feel much more at ease. I firmly believe that we live in the midst of a desparate contest for the soul of man. It is between democracy and dictatorship. Two philosophies are fighting for ascendancy. In democracy the Government are there for the benefit of the individual and their primary task is to safeguard his rights, and governments are periodically subject to the scrutiny and the will of the people. On the other hand, in dictatorships the State owns everything, decides everything, controls everything and the people are totally at the mercy of the State. I know what this is like from my personal experience. During the last War I spent two years in Stalin's Russia and three years in Hitler's Germany in a concentration camp.

The free way of life which this country enjoys is indeed not an optional extra; it is a condition for wishing to be alive. Only in a free country would I wish to raise my children. But sometimes I fear that the fortunate inhabitants of these islands are not always sufficiently aware of the blessings of freedom or of the horrors of losing it. In two World Wars our freedom was challenged: in the Kaiser's war and, above all, in Hitler's war. This nation accepted the challenge and, at an indescribable cost in loss of blood and treasure, secured the survival of its free way of life. However, the challenge to our way of life is still there. The contest between democracy and dictatorship is still not resolved; but because of the horrendous developments in military technology, because of the advent of the atomic bomb which has precluded the emergence of the military victor, the battle has been transferred from the military to the economic sphere. Global war, we hope, as an extension of politics, is ruled out.

The transfer of the contest from the military to the economic field is not in itself a change to be regretted. But the effort required to light the economic battle lacks the drama, the excitement, of war and therein there is a very great danger. My medical friends tell me that cancer is such a dangerous disease because in the early stages there is no manifestation of pain; once a pain comes the disease has taken its grip, and it is usually too late for the patient to be saved.

Similarly, in the economic sphere, despite the repeated warnings of the Prime Minister and other Ministers, and the high priority which we see given to the economy in the gracious Speech, the nation as a whole has not vet realised the seriousness of the position and the dangers which face it. If we lose this economic battle, the consequences could be no less disastrous than if we had lost the War militarily in 1945. If we become weak economically, we shall lose our independence and thus our voice in the councils of the nations. We are becoming increasingly aware of the danger of outside influence becoming strong enough to control our policies. Interdependence is one thing; dependence is another.

In the gracious Speech the Government are committed to play a full part in the activities and development of the European Communities. I well remember over ten years ago a visit to this country by a very eminent German politician. He is a Social Democrat; he resisted Hitler. It was during the great debate about the Common Market. His English host, an eminent politician, discussed with him particularly the economic implications of Britain's entry into Europe. The German at that point interrupted his host with uncharacteristic passion and said: Sir, surely the question of Britain's entry into Europe is important beyond all economic considerations. Hitler's overriding aim in war was to create a United States of Europe under the dictator's heel. Unless we wish to see Hitler win his war 25 years after his death, we have to build the British democratic keel into the European ship. It is a fervent prayer of all liberal democrats in Europe that Britain should join the European Community. But, my Lords, for a keel to be effective it has to be solid and it has to he strong. Our economy must become that or we will fail ourselves, we will fail Europe and we will fail the democratic world.

If the battle is now in the economic sphere then we should work in it, on the shop floor, in management, in business, in administration, research or training, because we are in the same responsible position as were the soldiers and officers during the war. Whether we do our work well or badly is important not merely in the context of our wage packets, our dividends or even our standard of living: it is far more important than that and may decide whether our chosen way of life can survive or whether we lose it. We secured victory in war; we must consolidate it in peace. Each and every one of us in industry is responsible for holding a sector in the economic front, which ultimately defends the frontiers of our challenged system.

In the gracious Speech we see that the Government, in their industrial strategy, are anxious to do everything in their power to facilitate success in the battle of production, and to help industry. In turn, all of us, regardless of narrow political differences, should support the Government in their efforts to help industry. We knew how to support the Government in crisis during the war. Surely we can do so again in peace. If the defence of our freedom against attack from dictatorship, whether from within or without, is our highest priority, is it not right to view our compassionate Welfare State, our compassionate society, as the most effective defence and as the most reliable weapon in our arsenal? It is not an accident of fate that our Parliament is free from any elected Member of either the Communist or Fascist Parties. I believe that in this respect we are unique in Europe, and that is due in my opinion to the existence of the Welfare State. We often subject the Welfare State to strong and exaggerated criticism. Of course it is costly, occasionally subject to mismanagement, and sometimes to abuse; but I believe that the pursuit of our social objectives was probably the wisest political decision that this nation has taken since the last war. Let us not weaken it or deride it carelessly or frivolously.

Here I should like to stress a few points. Dictatorship, as I have witnessed, breeds poverty, misery and despair. Hitler came to power—and let us not forget that he did so constitutionally: I think they had one-Chamber Government—on the back of the misery of the German people and of the indignity and despair of mass unemployment. That was the time of the Weimar Republic, unalleviated by social welfare, or the Welfare State as we understand it. I believe that had there been a Welfare State in Germany at the time to alleviate the misery, time would have been found to improve things within the democratic context. As a consequence, it is possible that Hitler would have failed to establish his terrifying terror regime. All dictatorships during this century have come as a consequence of helpless despair; that is the common denominator.

However, having said that, it is obvious that we need prosperity and we have to create the wealth to sustain this compassionate society and the Welfare State. All people who believe in democracy—and here I include. I believe, most Members of this House—believe and, indeed, know that a mixed economy is the most effective instrument for creating prosperity and wealth. It is the most effective instrument to release the talents and skills of the nation. It is the most effective instrument to make the best use of our material and intellectual resources. I do not think there is much argument about that.

We have tremendous advantages. We are one of the very few developed nations with abundant energy resources. We have oil, gas and coal. We have the components of economic success within our grasp, if we wish to reach out for them. We also have another asset: last but not least, we have the good will of our friends and allies in Europe and of friends overseas. They want us to succeed because this country is the most reliable and the most mature pillar in the democratic edifice.

For the mixed economy to function at its best, it must have the fuel of incentive. If we withdraw the fuel it will still work, but the mixed economy will perform sluggishly, reluctantly and apathetically. Indeed, why should we deny its incentive? If the workers and managements within industry are the soldiers in our economic battle, why deny them their just reward? In my view, if people make an extra effort, they are entitled to their just reward. No society in the world, on either side of the Iron Curtain, has operated successfully while ignoring that fact.

Having lived in the Soviet Union, I should like to cite a few interesting facts. Even the Soviet Union was bound to turn to judging its industrial performance by profitability. It is not a dirty word any more, and differentials for performance, skill and responsibility are far sharper there than in our society. They do not pursue an egalitarian society—equality of opportunity perhaps, but certainly not equality of reward for effort and contribution. I feel that the pursuit of the egalitarian society almost offends against human nature: it just does not work. In Russia and China, the differential between the wage of a top manager and the average shop floor worker is of the order of ten times. Then, because there is a peculiar system of shopping in Russia and because different workers and different classes of employees have access to different shops, it means that the higher you rank in the hierarchy the better shops you go to, the wider the selection and the cheaper the prices. Consequently, the comparison in actual spending power between the manager and the average worker means that the top manager, after tax, get 20 times the salary of the average shop floor worker. In this country it is five times, even in a company the size of Courtaulds or ICI.

My Lords, do they pursue these policies in the Soviet Union and in Communist China because their leadership is not Left-Wing enough? Or is it because they, too, have realised that in order to compete effectively in the economy they have not to deny incentives? Of course, as we know, Governments need revenue. I am not against taxation, but I believe that experts on both sides of the House accept that taxing spending encourages incentive, while taxing earnings erodes it. Taxing spending gives people a chance to part with their tax contributions through the channels of their choice. But the total amount of tax available to any Government is dependent not on the channels through which it is exacted, but purely on the gross national product—on the wealth which has been created. I therefore suggest with respect that perhaps we should pause to think again about our single-minded pursuit of egalitarianism.

I have always admired the unions for defending differentials. I think that is right and proper. But we should also guard the differentials for skill and for responsibility, and make them worthwhile. I have many times heard the argument that there are many people who work purely out of a sense of duty. I admire them but I find it difficult to emulate them. However, even if they do so, in many cases they limit their effort to the extent of their reward, and although they may live longer and more peacefully, can the nation afford the luxury of denying itself the contributions which they might have made with full incentives?

I, as an employer, have first-hand experience of what a handicap it is when I have to induce my own people to try hard and to accept responsibility, and have to admit to them that if they do so, although nominally they will get higher pay, proportionately it will be less and less as they are worth more and more to the company and, I believe, to the country. This is a serious handicap. I have taken up enough of your Lordships' time, and I should like to thank you again for your patience.

5.32 p.m.

Lord MOLSON

My Lords, I am sure your Lordships will greatly have enjoyed the speech to which we have just listened. We have had added to the more technical arguments which we heard earlier this afternoon a picture of the way in which the preservation of liberty, of a social democratic way of life, and of those things which we cherish in our life in Britain, are dependent upon there being an adequate and profitable economic system. We have also been reminded that where wholesale unemployment and economic collapse have taken place, as in Germany, they frequently result in the emergence of a dictatorship. I liked very much the analogy which the noble Lord drew between the task that now lies before us in the economic sphere, and that which we faced in the military perils a generation or more ago. We have, indeed, been fortunate in the maiden speeches to which we have listened. The noble Lord, Lord Brookes, emphasised the importance of skilled work people, and of course we are very glad indeed that in future we shall have the economic advice given—I hope, in public—by the noble Lord, Lord Kaldor, which has so often been given in the past to this and other Governments. I am sure that we welcome all three noble Lords for the contributions they have made to our debate.

The most important sentence in the gracious Speech is: My Government are pledged and determined to continue the attack on inflation". I feel that the Chancellor of the Exchequer, during the time that he has held office, has shown very considerable courage in his efforts to deal with the problems of inflation. I am inclined to think that, despite the difficulties which I fear he encounters from some of this colleagues, both in the Government and in another place, he has, on the whole, been following the right kind of policy. There was one lamentable lapse the other day, when he apparently did not disapprove of what he thought was the attitude of the British people—that they would rather go on borrowing money than suffer a decline in their standard of living. Economists of different schools emphasise different steps that have to be taken against inflation. Some attach most importance to wage restraint, others to a monetary policy of restraint, and others to a reduction in public expenditure. I think that there is coming to be some general recognition that not one of those by itself is a panacea against inflation. What is required is that all three should be followed simultaneously, because each one can help the other.

I said last year that I thought we enjoyed much greater freedom because the pound is not now pegged to any foreign currency, nor to gold. I said that the unpegged pound was not floating, as was frequently said, but sinking. I did not foresee how fast and how far it would sink, and I certainly do not welcome its having fallen as low as it has. I would, however, point out to your Lordships that this decline in the external value of the pound invalidates most of the arguments put forward by the Trades Union Congress and Left-Wing members of the Party opposite, in favour of import controls. A fall in the value of the pound acts as a very effective tariff. It also has the additional value, which no tariff would have, of facilitating our own exports, and it is encouraging to be reminded, as we were by the noble Lord, Lord Kaldor, of the very great increase in the volume of our exports that has taken place in these difficult times. Unfortunately, it is now necessary to export more in order to earn the same amount of foreign currency that, if the pound were higher, we should have been able to earn by smaller exports. This Government had not been in office long before they recognised the importance of wage restraint, with their Social Contract and their understanding with the Trades Union Congress. I welcome what they have done in that way, and, although it has not gone far enough to deal with our inflationary problems, they are to be congratulated on what they are trying to do.

In the second place, last week further strict restrictions were placed upon credit. Now, therefore, the Government have acted in the direction of both wage restraint and also monetary restraint. What is required now is a reduction of public expenditure. The public borrowing requirement will, I am quite sure, have to be reduced very substantially indeed, not only because of its importance in our financial relations with foreign countries but also for domestic reasons. The question that we must ask ourselves is whether the Government will have the courage to do what is necessary and also whether they will have the necessary authority over the Trades Union Congress and their own followers to make that policy effective.

Last year I ventured to dissent from some of my leaders when I said that I did not think that a sudden slash in public expenditure was either necessary or desirable. When the Conservative Government came into power in 1951 I had experience, at the Ministry of Works, of the building controls and I realise that it is wasteful to leave a school unfinished or a road uncompleted. I said, however, that if expenditure was not going to be slashed immediately the restraint upon expenditure would have to be very much more severe in the future and would have to last very much longer. I am quite sure that the new austerity will have to last well into the 1980s at least.

As things have turned out, the report of the noble Lord, Lord Plowden, has facilitated inflation. Anybody reading the noble Lord's report will be impressed by the wisdom of saying that projects should he looked at according to their real cost and not merely from the point of view of their financial cost. However, in a time of inflation the result is that a project, once started, is pursued to its completion without there really being any further Treasury control. It is indeed ironical that the official title of the Plowden report is Control of Public Expenditure. The Plow-den policy, which had much in theory to be said for it at that time, will have to be modified by strict cash limits. It will also have to be put into reverse. By that I mean that as we are living in an inflationary age and are warned on all hands of the slow rate of growth of our gross national product, we shall have to look ahead, in the Plowden spirit, to the 1980s and say that there are many projects which, on account of the increased costs which will exist at that time, we shall not be able to afford.

Therefore Plowden, put into reverse, will mean that the economies, which I am quite sure will be necessary for dealing with inflation at the present time, will have to go rolling forward right into the 1980s. Plowden must apply to deceleration as well as to acceleration. May I point out that in many respects it is quite possible for this to be done if there is the will. For example, the education programme should take into account the fact that a few years hence there will be 1 million fewer children in the State schools than there are today.

It is perhaps in the matter of housing that the most important economies can be effected. Subsidies there, even under Mr. Healey's last White Paper, remain completely uncontrolled. Housing was excluded from his general policy of limitation. In 1964–65, the cost per head of housing subsidies was £6; in 1975–76 it was £60. It had gone up tenfold. It is estimated that the total cost is £1,500 million a year and that the rents which are paid by council tenants represent only 44 per cent. of the cost of providing the house. Already we have more housing units in this country than there are households and it is estimated by the Department of the Environment that by 1991 there will be half a million more housing units in London than will he required for the declining population of this city.

I think that we should have a moratorium on housing starts. Over the next six or seven years it should be possible to phase out completely all housing subsidies although, of course, retaining the rebate scheme which takes into account the financial position of individual tenants. This would only be applying to housing the accepted and announced policy of the present Government of phasing out food subsidies. Mr. Crosland, when he was at the Department of the Environment, made a speech in Manchester in which he said, "The party is over" and he warned local authorities of the need to reduce their expenditure. An article last Sunday in the News of the World reveals the fact that the party is still a long way from being over. The expenditure of local authorities has continued to rise at a very great rate, with an immense increase in the number of officials, despite the fact that there has been a considerable reduction in the capital enterprises that are now being undertaken. I welcome again what the Government arc doing in that way at the present time, particularly the announcement made by Mr. Shore last week that the rate support grant is to be reduced to 61 per cent. But it will be possible to restrain local government expenditure only if cash limits are very strictly applied, even in the face of inflationary rising costs.

There is an additional problem to which I do not think any of your Lordships have referred today; that is, the serious outlook for our domestic finance. Each year loans are falling in which were contracted years ago at a rate of interest of 3½, 4, 4½ or 5 per cent., and these are now being replaced, every time they fall in, with new loans at 13, 14, 15 and even higher percentage rates of interest. This of course means that the service of the national debt and the service of municipal debts will soar in an alarming way over the coming years.

It is interesting that the noble Lord, Lord Kaldor, should have spoken in this debate. I have heard that he was the originator of the selective employment tax. I wonder what he thinks about the unselective employment tax which this Government are now introducing? It is an extraordinary anomaly that they should be increasing by, I believe, a thousand million pounds a year, or something of that sort, the employers' contribution to the insurance scheme while at the same time they are paying special subsidies to concerns to keep on men whose work is unremunerative. So we have this extraordinary position that concerns which are employing men profitably are having to bear an additional burden in the form of increased insurance contributions in order to subsidise other industries which are able to show that it is uneconomic for them to keep those additional people in work. My Lords, I have said that the Government are obviously sincere in their desire to fight inflation. I believe that, broadly speaking, they are taking the right steps in that direction. I wish them well. I hope they will have the courage to carry the policy of reducing, or containing, public expenditure to its logical and necessary conclusion and that they will obtain the necessary support from their own Party in doing so.

5.53 p.m.

Lord WALL

My Lords, much as I welcome this opportunity of addressing your Lordships' House for the first time, I must confess to wishing for another occasion. To be brief about our current economic problems is hard enough; to be non-controversial verges on the impossible. For like so many people in this country I feel very deeply about our present economic plight in which the country finds itself. But it occurred to me that it may be possible to draw one or two lessons from the past years which could command general support. I think we are agreed on our general objectives. What this country needs is a sustained economic recovery with a high and stable level of employment and a stable value for the pound, at home and overseas. I use these obvious words for they were in fact the language of Whitehall and especially of the Ministry of Reconstruction in the latter days of the war. Now, some 30 years later we can reflect a little unhappily on the limited progress we have made towards these desirable objectives. But I cannot believe that we have not learned something in these years.

First, there is the question of money. I learnt my economics in the late 1920s and early 1930s when the value of money was also a major question, but for a very different reason. Then we were troubled about the great deflation, just as we are now troubled about the great inflation. There are two things that I remember well from my teachers. First, while the Government may determine the quantity of money, it is the public that determines its value. The second is this: heaven forbid that we shall ever lose sight of the fundamental truth of the value of money! How true these things are today! At a time when the public in other countries might well have panicked out of money into goods the public in this country did a quite surprising thing. It increased its savings, thus demonstrating its faith in the value of the pound. The economic pundits give many esoteric reasons for this conduct, but I am inclined to put it down to sound common sense and faith, tinged no doubt with a slight feeling of uncertainty. The lessons here are clear. I think it would be unwise to take it for granted that the public will continue to behave in this way and therefore Parliament, the Government and the public service must show by their wise management of the economy that they deserve the faith which the public has shown in the pound.

To turn to the quantity theory of money, the lessons are equally clear. If any Government create money at a faster rate than the increases in the output of goods and services, prices will rise. No amount of subsidies, price controls or exhortation will stop it. It will burst out somewhere else, as it has burst out recently in the foreign exchange market. Thus a strong monetary policy has to be an integral part of any policy for economic recovery. I think this is a common issue. The external value of the pound is another matter and here I suggest there may be one new lesson to be learned. It is this. The pound is vulnerable not just to imports in general but to imports of manufactured goods—that is imports of added value. Many people still see the problem of imports as one of prices and raw materials and semi-finished goods, that is, the old terms of trade problem. That problem is still here. But more serious is that Britain is becoming increasingly an importer rather than an exporter of added value. And for a country which has always lived by adding value, and will continue to do so even when North Seal oil is on full stream, this is a serious matter indeed. But it is not new. It must be eight or nine years since Sir Ian Maddock—the retiring Government Chief Scientist—pointed out that the value per ton of imports of engineering goods was higher than the value per ton of exports of these same goods—a crude but effective measure of the problem. I suspect that this may have spread to other industries.

As your Lordships know, people import manufactured goods for four reasons: we are backward in technology, we are too dear, our quality is poor, or we cannot deliver on time. All four factors may have been at work, but I am inclined to believe that bad delivery dates may have been the most important. Too many firms—management and workpeople alike—seem to regard a long order book as a virtue in itself. It is not. You make profits and pay your way out of deliveries —not out of orders. This question of imports of added value is clearly tied up with the whole problem of our manufacturing industry, since manufacture must be made the main source of added value in this country. It is the state of our manufacturing industry which is the major cause of our unstable pound, both at home and abroad, as well as the high level of unemployment.

The lessons here are most difficult to draw. I believe it is becoming recognised that the problems of sterling—still less those of employment—cannot be solved only by an export drive. We have to tackle imports and especially imports of added value. I hasten to add that I am not thinking of short-term import restrictions. These are adequately provided for by the escape clauses in the IMF, GATT and EEC Regulations. I am thinking of the long-term problem of imports. We surely cannot allow the continued devaluation of the pound to provide temporary export bounties and temporary import taxes. Surely also the one thing we cannot afford is to go on subsidising our overseas customers. May I suggest that what we need is a firm programme for import substitution which is at least as powerful as the export drive and goes side by side with that export drive. Such a programme must involve the careful selection of those industries and those products which produce the highest added value.

In a penetrating study of the electronic industries of Japan and Britain, Dr. Frank Jones has drawn decisive attention not only to the large difference in the added value per worker between the two countries but to the fact that in too many cases the added value in Britain is being absorbed very largely by wages, thus leaving far too little for the renewal of plant and machinery and for remunerating capital, quite apart from new capital investment for expansion. Thus the capital investment supporting a Japanese worker is very much greater than that supporting the British worker. It follows that the selection of industries and products to relieve our import burden must concentrate both on high added value and on a high surplus after wages have been paid.

This vital point has been underlined in a recent publication by the Henley Centre for Forecasting. They estimate that to achieve a 5 per cent. annual growth rate this country has to increase the proportion of added value available for renewal and expansion from 22 per cent. to 28 per cent. Even then, we shall just be approaching the present level of France and Germany, and well below the 36 per cent. figure for Japan. The study by Dr. Jones of Japan and Britain suggests the short-fall of investment for renewal and expansion in this country is running at a rate of £10,000 million a year. This is a measure of the magnitude of the task we are facing in rebuilding our manufacturing industry. One cannot put right in five years the neglect of 70 or 80 years. The problem goes far beyond expansion of investment in plant or machinery, into recasting the attitude towards production in our schools, colleges and universities. Since 1966, the percentage of professional engineers employed in production has fallen from 9 per cent. to a mere 6 per cent. Of the graduates of the London Business School who went into manufacturing firms last year nearly all went into finance, marketing, consultancy and planning. Only 5 per cent. went into production.

I realise that the lessons we are learning the hard way about our industrial structure are bound to lead to controversy, so I tread warily. But it is generally accepted that as a country we have built up an excessive overhead cost and non-productive activities have grown to a level which cannot be supported by our productive activities. So we face the unhappy circumstance in which desirable social developments have to be curtailed because resources are no longer available. Fortunately, the vital role of the private sector in the search for high and stable employment and a stable pound is no longer a matter for dispute. The recent statements by my right honourable friends the Prime Minister and the Chancellor of the Exchequer, and by my noble friend today, are evidence of this. I welcome this since have spent much of my working life in the private sector of industry, mainly in manufacturing industry, and still do. The basic abilities of our workforce are undoubted. They can produce the necessary added value. The reasons for our failure to harness these abilities are complex, and are as much political as economic. But one thing is not a matter for controversy. Our total productivity as a nation is too low compared with our competitors, and it will be a major task to bridge the wide gap. My Lords, I thank your Lordships for listening so patiently to these obvious points. I make no apology for repeating them. In these days of over-sophisticated pontification about our economic affairs it is worth recalling that there is a wood as well as trees, and that the wood is a sound and lasting economic recovery.

6.3 p.m.

Lord ROBBINS

My Lords, it is a very special pleasure for me to have the honour of being the first to congratulate my old friend the noble Lord, Lord Wall, on the speech which he has just made. Although not contemporaries, he and I were nurtured in the same institution. If I were to hear criticisms in future of what occasionally goes on in that institution, I should like to point to the solid common sense of the speech which the noble Lord has just delivered as a vindication of the teaching which he and I received. I should also like to take the opportunity of congratulating other maiden speakers on this occasion who have all maintained an exceptionally high level of excellence in delivery and interest in substance. The noble Lord, Lord Brookes, brought his vast experience to bear on the problems of productivity and skill, and my old colleague the noble Lord, Lord Kaldor, made a fascinating excursion into more ancient and more recent economic history of this country. I also congratulate the noble Lord, Lord Kagan, on his inspiring speech delivered on the conflict between dictatorial and democratic ideals.

My Lords, perhaps I am almost alone in feeling that, with the one notable exception of the speech delivered from these Benches by the noble Earl, Lord Cromer, speakers have concentrated perhaps more on long-term problems than on the dangers of the immediate situation. Heaven forbid that I should underestimate the importance of the solution of the long-term problems of this economy! But it is my intense conviction that the solution of these long-term problems will be made much more difficult if we do not succeed in solving the problems which lie nearer at hand.

The present economic situation of this country is truly frightening. Inflation is still proceeding at a rate considerably above that which was promised and, indeed, as we have heard from the Front Bench, the rate of inflation is threatening to rise once more. Unemployment is high, and there is little prospect of it diminishing rapidly. The credits which earlier in the year were held as saving the situation have proved inadequate. The pound has plunged to levels unprecedented in our history. We have had to apply again for international aid. We have had what I must confess is to me the humiliating spectacle of highly-placed personalities pleading with the financial authorities of other countries who have pursued more prudent policies to increase their risk of increased inflation to help us with our troubles. How has this happened?

As I have just said, the debate this afternoon has concentrated on long-term problems of our inferior productivity. Heaven forbid that I should say or give the impression that I thought that, if our productivity were greater, our position would not be easier! Of course it would be. We had an interesting debate on matters of this kind in the summer, at which many very saddening comparisons were made and some causes indicated. I would not wish to call in question the general attitude which emerged from many of the contributions to that debate, or the additional contributions which have been made this evening. But I must tell your Lordships that, if the current rate of production in this country were doubled or increased beyond that, it would not cure a position in which our aggregate expenditure so greatly exceeds the most optimistic estimates of an immediate increase of production. The simple fact is that given our contemporary rate of production our aggregate expenditure has so much exceeded it, and the excess has been so much greater than that of our competitors, that what has happened recently has been inevitable. We have been sustaining our standard of life, in so far as it has been sustained, by borrowing from abroad, and this has become more and more difficult. But, my Lords, this is an old story. Some of us have been saying something like this for some time. It is even being said now by Ministers, as witness the speech of the noble Lord the Lord Privy Seal this afternoon. Indeed some attempts have been made to put it right. Although I confess that my sympathies with some Ministers, at any rate, are limited, I would not deny that there has been a considerable change of opinion in the last two years and that there has been a considerable change of policy in certain quarters. Unexpected support has been given to measures which certainly tend in the right direction.

The question is this: why have they been so unsuccessful? Why has the situation deteriorated? It is said with a good deal of plausibility, although I have very great scepticism concerning exact statistical measures in this connection, that at present levels the pound is vastly undervalued. Why is it then that with all the assistance we have received in the past, to which the noble Earl, Lord Cromer, drew attention, the position is so disquieting? Let me say a word first about what I hope your Lordships will agree is a pure fallacy; namely, the suggestion that what has happened recently is all a pure conspiracy, a banker's ramp and so on. I can hardly think of anything sillier in this universal discourse. If any of us here had money in a foreign centre whose exchange was free and whose policy we distrusted, would not we think of putting some of it in a safer place? Clearly, that is what has been happening to the pound recently. After all, the money which was deposited here, and from whose presence here we have profited in the past, was not ours. It had been lent to us on the assumption that we were safe guardians of its value. Why should we grizzle and grumble if that confidence is now discovered to have been misplaced. There is something frightfully ignominious about the frame of mind from which this sort of explanation springs.

The question, however, remains as to why there should have been this weakening of confidence. If we are honest with ourselves, I suggest the answers are not difficult to seek. I see them, at any rate, in three quarters. First, even if a contemporary comparison of costs should suggest that the pound is under-valued, we should recollect that the inflation here is still continuing, and is still continuing at a rate surpassing that of our competitors. Moreover, even if the incomes policy has been some help hitherto—and certainly would think it has been successful in avoiding more unemployment than has actually taken place—it is clear that there is going to be much greater difficulty in maintaining it next year. The fact that the unions feel that they have already made tremendous sacrifices, sacrifices which lamentably in the circumstances were insufficient, is certainly going to make the negotiation of an acceptable incomes policy next year harder than in the past. And, at the moment, one of the important factors on the financial side, the money supply, is obviously surpassing the Chancellor's target. It really is not a stupid foreign banker who entertains some hesitation about the future of this country in those circumstances.

Then, secondly—and here I am aware that what I shall say will be very distasteful to some of your Lordships—there is the general direction of domestic policy. I will not dwell on what the noble Lord, Lord Goodman, in this House called the "Himalayan irrelevance" of the legislation with which our Parliament has been congested recently. I would go further than Lord Goodman; I would say that it was not only irrelevant but in some respects positively detrimental. I do not wish this evening to revive past disputes. I will only say that I do not think that the incentive to leave money here has been increased by what has taken place in the last three months.

Finally, with all respect, I would enumerate the palpable unwillingness in the past of Ministers to face the facts of the situation and to brace themselves to tell the people the full horror of the situation with which we are confronted. How often, my Lords, have I sat through economic debates in this House in which the spokesmen for whatever Government were on the Front Bench; spokesmen for whom I personally had liking, even affection and respect, have made speeches in which, after some allusion to the difficulties of the moment, we have been given to understand that everything now was in splendid hands and further deterioration was unlikely, that a return to growth and prosperity was just round the corner. This was all delivered with such warmth and sincerity that I personally felt something of a cad for some private intellectual reserve in accepting their assurances. As for the pronouncements of those more intimately responsible than anyone in your Lordships' House, I forbear to expatiate. I will only say that since the present Chancellor claimed that he had already reduced inflation to below 10 per cent. I feel some mild uneasiness when he deals with figures. I most profoundly hope that he does not say anything of this kind to the highly expert persons with whom he is now negotiating.

Now we have gone to the IMF for a loan. But, again, let us be under no delusion that that means the end of our troubles. As the noble Earl, Lord Cromer, vividly reminded us, out of the loan for which we are asking we are due to repay next month some 1.6 billion dollars advanced us by the central bank loans earlier in the year. I doubt whether our present reserves, without an additional loan, amount to much more than the annual rate of current account deficit registered in the first nine or ten months of this year. Doubtless there are possibilities, and high hopes, obviously, in the bosom of the Prime Minister, of further assistance beyond the IMF money, assuming that to be "in the bag". But it should surely be clear to all reflecting persons that the position is not free from further danger, to put it mildly, and we have a long way to go before we are free from the most intense anxiety. But the IMF loan is not yet "in the bag". Important talks are still going on.

At this point, having regard to recent habits of important personalities—I will not say where—may I assure your Lordships of what I do not imagine that many of you would suspect about me, that I have absolutely no connection with the International Monetary Fund save that I was a United Kingdom delegate at its foundation. Therefore, while any modest remarks I may make may quite easily be wrong, they are not inspired by a pecuniary interest nor are they based on any communication either direct or indirect. Having made that clear, may I say that I hope that we shall consider seriously any suggestions which the officials of the IMF may make. After all, they have no personal pecuniary interest. They are not "Gnomes of Zurich" or "New York", or some other place; they are just custodians of their members' contributions.

The noble Lord, Lord Kaldor, rightly reminded us that the IMF was instituted in order to take care of deflationary situations. One of the great troubles of the years since the war is that, preoccupied as we were with the difficulties of the past, we did not foresee that in the future the dangers would be of the reverse order and that inflation rather than deflation would be the order of the day. At any rate, let us not forget that last time we were advised by the International Monetary Fund, at the time of Mr. Jenkins' Chancellorship, it was surprising how soon we emerged from our troubles, so that the incoming Conservative Government inherited quite a healthy surplus on balance of payments account. I do not think that the situation is so easy this time. What has happened in the last five years has lowered our standing in the world at large, and we have done all sorts of things which have made rehabilitation more difficult.

In considering these matters I think one delusion needs to be overtly dissipated. The current debate is not about deflation. Deflation is a state of affairs in which there is a contraction of spending below the current rate of production at constant prices, as there was a catastrophic deflation in the United States in the 1930s—a catastrosphic deflation which some of us, including myself, I am sorry to say, failed to recognise at the time. But we are miles away from that situation today. What we are talking about here, and in the rest of the Western World, is a diminution of the rate of increase in spending which, even in the most prudent economies, certainly exceeds what would have been thought to have been acceptable only 10 or 20 years ago.

The degree to which the value of money can be depreciated by, shall we say, a 3 per cent. inflation per annum is quite terrifying when you take account of the influence of compound interest. What we are talking about is a diminution of the rate of increase of inflation, and this is especially true in our particular situation. Inflation is still going merrily ahead. The rate of increase of money supply has moved upward again in the most recent period, and this is quite a different problem from coping with a diminution of the price level and a positive deflation. How to deal with the problem is very complex. I am not one of those who believe that a sharp diminution of the rate of increase of money is necessarily the best method. I believe in diminishing, limiting targets. I believe in cuts in borrowing, and I have grave doubts about the effects on incentive of the present structure of taxation, and still more the effects of increases of taxation. These are all matters about which reasonable men may hold different opinions, and certainly speculation based upon the rumours disseminated in various organs of the Press are highly inappropriate at this moment.

Finally, whatever our differences of opinion about the minutiae of appropriate policy, the general prescription for countries which are spending more than they earn must be, roughly speaking, the same. If we are lucky—and I pray to heaven that we are—we may get more assistance from abroad to mitigate the ardours and endurances of curbing the fall in the value of our money. But, in the end, the position can only be cured by a narrowing of the gap between spending and production. As I said earlier on, or at any rate hinted, we should be living in a fool's paradise if we think that in the near future production is going to increase so much as to make unnecessary painful adjustments in spending. Equally, anyone who thinks that the wished for result can be achieved by further "making the rich squeal" (to use an eloquent expression which I have heard attributed to a highly placed personality), had better have a look at the figures in the invaluable report of the Diamond Commission. The outstanding fact is that for the time being aggregate spending has to be reduced. While unfortunately all sorts of delusions are still current, I believe that the average man in the street is coming to realise this, and will not complain overmuch of those who have the courage and the candour to tell him the truth about it.

6.30 p.m.

Baroness BURTON of COVENTRY

My Lords, I am glad to speak following the noble Lord, Lord Robbins, because I too want to deal with a short-term aspect, although a rather different one from that with which he dealt. I was cheered when he said that he had some distasteful things to say, because I fear that I also have some distasteful things to say, and I only hope that I shall say them as effectively and pleasantly as he did.

Noble Lords who have sat here this afternoon have heard four excellent maiden speeches. I do not remember when we had four maiden speeches in the one debate and I certainly do not remember when we had four speeches of such variety. Listening to them, I felt that they all spoke with real knowledge, and the House can usually tell whether people have real knowledge. Because the hour is getting late, I will simply say that we look forward to hearing all four of them again, and I hope we will have many years here in which to hear them.

The area of today's debate is economic and home affairs. In the past, when venturing into any debate which had anything to do with economics, I have felt it necessary to apologise for not being an economist. Nowadays, however, economists seem to differ absolutely and completely one from the other, so perhaps no apology is necessary. That does not mean, having listened to some eminent speakers today—I am looking particularly at Lord Robbins—that I do not have a great deal to learn about the subject.

I wish to deal with three points, the second of which I have found easy. The other two have caused me much anxiety, and particularly the last one. All three are covered by a sentence in the gracious Speech: The achievement of our national objectives will be possible only if the inter-related problems of inflation, unemployment and industrial performance are tackled successfully". That brings me to my first point. I think that the Government, as a short-term measure, will have to cut public expenditure further. Nobody has wished to say this publicly, but if the cuts are seen to be relevant I believe that the public will accept them. What people do not want any longer—this was stressed by Lord Robbins—is to be given false comfort; they do not believe that everything will come right in the end if we go on as we are. And neither does the Prime Minister, as is evident from what he said yesterday.

We all know that this means hardship for everyone, except the rich; and we might remember that those on small fixed incomes have suffered more than most in recent years. Some of these cuts will come from what is termed natural wastage; in other words, vacancies will not be filled. Some may cause more unemployment. I am sure, however, that if the cuts are not made now, the increase in unemployment will be all the greater in the end. I believe that to be true, and I think we should say so. Lest anyone wonders what I know about unemployment, or if I know anything about it, let me say that in the 'thirties I worked in the Rhondda Valley and lived with an unemployed miner and his family. He was 42 years old and had been out of work for 12 years. I saw what unemployment really meant. Later I was unemployed, though not for 12 years, and as I had no money at all I was on the dole. Anybody who has suffered anything like that knows that the only way to realise what having nothing means is to have nothing. Having said that, let me say that I think we would all agree that even worse than not having money is the cancer in one's heart in feeling that there is no place for one in the community. I am saying this because I would not wish unemployment on any individual. Nevertheless, I believe it to be quite wrong to imply that if we go on as we are unemployment will decrease; I do not believe that would happen.

My second point, and the one I found easy, concerns the Prime Minister. I believe that our present Prime Minister is the one person to lead us out of the state of affairs we are now in. What is more, I believe the public think so. As I have gone about and talked to people, not of my political persuasion, I have found they trust Mr. Callaghan. They believe him to be a tough moderate. More important still, they believe that he says what he thinks, as he did yesterday. Having said that, let me go on to say that in my view a General Election at the moment would serve no useful purpose, which brings me to my third point, the difficulty in expressing it, and the fact that I have some remarks to make which may he distasteful to some people.

The third point I have to make is to ask what support the Prime Minister is going to have. After all, the recent by-elections were not favourable to his chances. My problem, prior to these by-elections and going back some time, has been to find a way to discover how my remarks could be helpful, could be temperate and yet could say something that was worth saying. Recent happenings here at Westminster have made this problem all the greater. I do not want to talk about lists or names, Communists or Marxists, organisations proscribed or permitted, but I feel that I must say something about what is happening in my Party because I believe that what happens there will determine the future of our country.

Anyone in politics knows that there can be a wrong time for saying the right thing. I hope I am not wrong in my timing, but I believe that what I have to say can be said only from this side of the House. At present the balance of power in my Party is moving to the Left, to the extreme Left. I would term myself a radical moderate but I realise that those who disagree with me might have a different nomenclature, and I do not mind that. I believe that one day the moderate element in my Party will find it has lost the day while it has been wondering whether to speak up or keep quiet. This is not an extremist country and it does not want extremist views, whether from Right or Left. I repeat that I think the country trusts the Prime Minister, but is not sure of all the people behind him.

What does the country see? What do we on these Benches see? We see a recent Annual Conference which was a public disaster for my Party and an insult to the Prime Minister. We see a National Executive Committee lending support, well publicised in advance, to demonstrations against the Government programme, which the public saw as a deliberate attempt to undermine the Prime Minister. We see the infiltration of constituency Parties so that moderate Members of Parliament may lose their seats. These three examples are fact, are publicised by the media and can be understood by all. I repeat to my noble friends—and I wish there were more of them here—what I have been saying for some time; namely, that this will continue. We will lose all moderate support in the country and we will not attract good moderate people to our Party.

Obviously, everyone has a right to his own opinion; the far Left has a right, but I too have a right. This is my Party as much as theirs, and I am prepared to fight. I wonder whether we would all agree that, in addition to despair and frustration, there seems today to be fear among people. The noble Baroness, Lady Seear, referred to that in her speech. There is fear in the country, widespread, genuine apprehension as to what would happen should the extremist element in my Party gain control. The real apprehension is that this will happen. There is fear in the other place, where Members of Parliament know that they are at risk if they do not support extremist views. There is fear among responsible members of unions who do not agree with wildcat strikes but dare not refuse to take part. There is fear among the best young middle management and many highly paid working people—a popular phrase nowadays. These people are dealing with their fear by leaving the country, not only for more money but because they see no future under a more extremist Government.

As long ago as June 1975 I referred in this House to the battle for men's minds which I thought my Party was losing. The winners at the moment would seem to be despair, fear and frustration. This is what I see as the background for what I am trying to say today. I believe that many members of the general public would agree with me. Why should I risk antagonising my noble friends and alienating my Party, and, in addition, why should I put my head on the block? These are not things that one does just for the sheer fun of it. What do I hope to gain?

First, I want to persuade those who agree with me to stand up and say so. I want them to realise that if they wait much longer they will have lost. I want to appeal to the unions. The TUC and the majority of its leaders have risked a great deal in supporting unpopular measures. Like any other Labour Member of Parliament, I know the work of the unions and what they stand for. I just do not believe that the ordinary, decent trade union member supports extremist views. However, it seems that we need a catalyst to make them stand up and say so and make themselves heard above the extremists. I do not want that catalyst to be the economic ruin of our country.

Moderate members of my Party can make a substantial contribution if they will make their views known in public. It is no use agreeing but saying nothing. However, I believe that the unions can do more than anyone. I think that they could change the climate of opinion, simply because they dominate the Annual Conference of my Party. Theirs are the votes that elect our National Executive Committee. Theirs is the strongest influence in the constituency parties. We all know that the Prime Minister has excellent relations with the trade unions and, equally, that the unions intend this to continue. If they agree that extremism poses a danger, will they help even more? We need all the help we can get.

In conclusion, I return to my second point. I believe that the people of this country see in the Prime Minister the one person who can bring realistic hope to us all. The country needs to see—and I emphasise the word "see"—strong leadership. It needs to see a refusal to allow extremists a voice and apparent influence out of all proportion to their numbers, a voice which continually creates the wrong impression at home and abroad. Let us have done with it. If we on this side of the House will stand up and support the Prime Minister, I believe that the achievement of our national objectives as outlined in the gracious Speech—the first under Mr. Callaghan—will indeed be the beginning of a real road to recovery.

6.47 p.m.

Lord AWKE

My Lords, what an interesting debate we have had! In 30 years, I cannot remember an occasion when there have been four maiden speakers in one debate—and what speakers! I shall not go into detail about all of them, but I should like particularly to welcome the noble Lord, Lord Kaldor, even though, he is not here, for I was a King's man myself. I was there after the war at the feet of Professors Pigue and Keynes. I have no doubt that their place has now been taken by the noble Lord, Lord Kaldor.

Unemployment has reared its ugly head in the gracious Speech and I want to say a word about that because I hate the idea that a man who is willing to work, can work and is willing to take a reasonable job should be unable to find one. I think this is a terrible situation, particularly as the noble Lord, Lord Brookes, pointed out, for a school-leaver. I read somewhere that the Government are thinking of appointing a Commission to examine the causes of unemployment. I thought that I might save a good deal of public money and time if I were to set out a few of the reasons which the House might agree might render such a Commission unnecessary.

First, there is what one might call automation. Some years ago, the trade unions were very worked up because they thought that an era was coming when mass automation would cause mass unemployment. Mass automation has not taken place. There are a lot of computers about but they do not seem to have increased unemployment very much. However, as time has gone on, improvements in machines and so on have been made, so that unemployment has been created by improvement in methods and machines. Then there is egalitarianism. We cannot have our cake and eat it. If we want everybody to be equal and, by vicious taxation and high inflation, we impoverish the better-off—and they are being very seriously impoverished—that naturally leads to unemployment. The better-off—and I do not speak of the very much better-off—are nowadays economising on all sorts of things so throwing people out of work. Examples are postage, rail fares, Christmas cards, Christmas presents, petrol, car servicing. All this reduced expenditure is creating unemployment.

Then there is the cost of employing and dismissing people. Nowadays, an employer thinks twice about taking on anybody because of the taxes on employment and the great difficulty and expense of dismissing anybody for whom he has no further need if that person has been with him for some little time. Also, there seems to be a general lack of skills. There appear to be many vacancies for people with some degree of skill. I wonder whether the official figures for vacancies really give the true position. I feel that many would-be employers do not go near the employment exchanges at all. I have seen in the window of my local employment agency lists of employers who want people, but all of whom must have a little skill, and I do not think that nowadays the schools are turning out pupils with these skills.

There is also the question of early retirement. I am not sure how far this prevails today, but there are people who retire early on pensions from their jobs and they have little hope, or no intention, of taking another job; and they all count in the figures. Mr. Jack Jones was reported as having admitted the other day that there is a degree of reluctance to work when the wages are not very much higher than the benefit which a man with a number of children would receive. His remedy was to increase the wages in all the other lower paid jobs, but that would create a great rise in prices all over the country. There are also the unemployables. Nobody knows exactly how many there are, but I have seen figures of a minimum of a quarter of a million, and there might even be half a million people who, if they are directed to jobs, never stay more than a week or two, and who are virtually unemployable.

So the massive figures which appear today are mitigated a little by these last factors. The classic cure for this kind of situation is deficit financing and cheap money. We have deficit financing with a vengeance; in fact, it is now counter-productive because it has made money so dear that cheap money—the other leg of the classic cure—is completely out of the question at the moment. At the moment the Government are pre-empting practically the entire savings of the nation, leaving nothing for industry. How many projects are there which can afford to start up with paying the bank, say, 18 per cent. for the money? There are not many, and the result is that employment is not created. It is a glimpse of the obvious, but it means that the Government must borrow less and let the price of money fall.

I believe that the holders of foreign balances are much more interested in whether sterling is likely to decline than they are in the actual rate that they are getting on their money, and if the Government borrowed less that would immediately create confidence and inspire them to keep their money here. Borrowing at present rates is absolutely ruinous. At 5 per cent. money doubles itself in 13 years, and at 10 per cent. it does so in 62½ years. For money at 15 per cent. I cannot do the sum, but at any rate the bill mounts up in the most alarming way.

But the whole problem is not only in this country; the price of money tends to be very high world-wide. Anybody who, for instance, studies the financial history of South America knows that lending or borrowing at more than a nominal amount is completely useless; there is no chance of there being payment back. Here the immediate effect of cheap money would be an immense boost to the building of houses, and directly houses are built they have to be fitted out. Nothing creates employment so quickly as the building of houses, and nothing would create the building of houses so quickly in this country as much cheaper money. If we reached this happy state of affairs we would have to be very careful to see that this time the Bank of England managed to keep control of the "whiz kids", because we do not want a property boom and fringe banks and all that. If the TUC had any sense it would emphasise cheap money as one of the points in the Social Contract—considerably more important than keeping up Government hand-outs, which can only mitigate unemployment whereas cheap money can create employment.

Of course we have the external as well as the internal deficit to deal with, and I am always lost in admiration for these people who seem to manage to count to the nearest pound every piece of cargo going in and out of this country; but, quite frankly, I very much doubt whether they have got it right. I should greatly like to know what allowance they make, for instance, for the swarm of foreigners now descending on Oxford Street, each of them carrying a large bag labelled "Marks and Spencer", who are all taking their goods out of the country. Obviously such goods are uncounted, but what do the statisticians allow for this? It must be a great many millions of pounds. Once upon a time the only statistics we received were those for the reserves, and we were a happier nation. Nowadays we get balance of trade figures once a month. The thermometer goes in and everybody takes the temperature of the nation, and we are all very unhappy. The Stock Exchange goes down, and the pound goes down. We would do very much better at the moment if we did not have these statisticians who permeate the Government machine.

When I voted for Europe I knew that before very long we should have a flood of imports from the Far East at prices with which it was quite impossible for our industries to compete. I knew that outside Europe we would have great difficulty in controlling this, but I thought that inside Europe we would have a much better chance. I thought that the Europeans would be much more realistic about this kind of thing. We are very quixotic, and we are the kind of people over whom might be erected a tombstone which read: Here lies England bankrupt, but they adhered to GATT to the very last. Unless we do something about this matter our industries will be picked off one by one. Already the textile industry is in a very bad way. I always believe that the Japanese will pick off our motor car industry if we give them half a chance, as they have done with our motor bicycle industry and with much of our radio and telephonic industries. It is a fallacy to think that if you squeeze peoples' pockets sufficiently they will not buy imports. What they do is to buy the cheapest imports. The more you squeeze them, the more they will buy from Korea, Japan, Formosa, China, Hong Kong, Malaya and Singapore.

The other argument is that everybody should discriminate against us, but by various subterfuges, the Japanese have been discriminating against us for years; and the same applies to the United States. If one of their industries is in danger they find a method which makes it more difficult for our goods to get in. I do not think that COMECON or Europe will stop our goods. I think that it is a fallacious policy. These views, coming from these Benches, are rather unpopular because they are being advocated at the moment by the extreme Left-Wing of the Labour Party, people who, perhaps quite unfairly, are being called Marxists. I have always believed that just because your opponents call a thing white, you must not immediately call it black. If your opponents have a good policy, pinch it.

The Conservative Party has always advocated tariffs to combat unemployment. It was not a very productive policy in the olden days because the Liberals were much more clever at convincing the population that a Conservative Government would mean smaller loaves, smaller cups of cocoa and all that sort of business, so the Liberals were able to stay in and keep their very cheap food, and were able to keep the wages down and please the manufacturers. But the Conservative Party has advocated tariffs, and they worked to some extent between the wars. I do not see why we should not do the same again, and take the policy of the Marxists. After all, I think it was General Booth who said, "Why should the Devil always have the best tunes?" But unless we do something about this we are going to find that our industries are being destroyed one by one, and more and more people are going to be thrown out of work. I only hope that we pluck up our courage to do what is necessary: if not, I hope Europe will do it for us.

7.1 p.m.

Lord VAIZEY

My Lords, coming at the end of this debate I find that many points which I wanted to make have already been made much better, particularly by the four noble Lords who have made maiden speeches this evening. All of them, in their own way, have made speeches of outstanding quality, and have spoken from great knowledge. I hope the House will permit me to refer particularly to my very old friend Lord Kaldor, whose lectures I attended for three consecutive years in the University of Cambridge. I once dropped a bound volume of the Economic Journal in the middle of one of his lectures, with the effect of an atomic bomb going off, but it did not deter Lord Kaldor from his customary 85-minutes lecture.

I hope, too, that your Lordships will pay particular attention to the extremely courageous and, I think, important speech of my noble friend Lady Burton, to which I shall be referring later in my own contribution. I think the noble Baroness is correct in saying that there is a widespread consensus in this country. It has been hidden, of course, by the debates here in the last ten weeks, which I hope are atypical; but there is widespread agreement about what is wrong with the economy. The inflation is intolerable; the fall in the pound cannot go on at this rate; unemployment is unacceptably high; and the relatively low productivity of manufacturing industry, as Lord Kaldor has pointed out, is one of the problems which has beset this country for several generations. I think the Prime Minister must be congratulated, as the noble Baroness pointed out, on his extremely courageous speech yesterday—a courageous speech in which he not only diagnosed what was wrong with the country but pointed out that in trying to put it right next year it was inevitable that inflation and unemployment would both rise. We are in, I think, for harder and tougher times, and it is just as well that we should acknowledge that that is so.

I think there is also widespread agreement about what should be done. Despite the arguments of a number of people on both sides of politics, I think most people would agree that the proper course of action at the present time is to restrict the money supply and to restrict the Government deficits, for these are public policy. It is perhaps too late, perhaps too little; I am not really in a position to say because, like Lord Robbins, 1 lack access to the official data, but I think it is right to say that, broadly speaking, the direction of policy adopted by the great majority of people, including the Government, is in the right direction at the present time. My only fear, my Lords, with the advice that has been given to us by our friends overseas and by some economic journalists, is that we shall perhaps go a little too fast on the road to recovery and, in so proceeding along the road of the restriction of the money supply and the restriction of the Government deficits, we shall make the level of unemployment rise to such heights that our social democracy itself comes into danger. It seems to me that the noble Baroness was perfectly correct in saying that what has been at issue throughout this Parliament has been the survivial of social democracy in this country.

My Lords, I am perfectly prepared to say that if we have come down with a plague of spots, that is a visitation from God; it is something which has happened to the British. But I must say that when you look around Europe and see no fewer than seven nations showing similar symptoms, some far more severe than here, I think a properly trained sanitary inspector would say, "Perhaps you ought to get the manholes up and look at the drains, because you have not got a visitation from God, you have got an epidemic". I think my noble friend Lord Kaldor was perfectly correct in pointing out that at the moment we have a world deflationary situation—combined, as Lord Robbins perfectly correctly pointed out, with a very strange price rise—in which there are something like 15 million unemployed in Europe. This figure is unacceptably high, and I hope that we shall seize the opportunity of Mr. Crosland's presidency of Europe and of Mr. Jenkins going to Brussels to do something about putting the world international monetary system into some sort of order. I believe that the breakdown of Bretton Woods and the regime of semi-floating rates that we have seen in the past few years have been, in effect, catastrophic, and that the most important task internationally is to restore the internatonal economic order.

That does not mean to say, my Lords, that it is not our own first priority in this country to reconstruct a British industry; and, as the noble Lord, Lord Hawke, has just pointed out, the issue of protection has been argued very clearly, and not least by Lord Kaldor in a more controversial way than in a necessarily non-controversial maiden speech, with some force. One may or one may not agree with the policy of protection—I do not happen to support it—but the point of arguing for protection at this particular juncture is the absolutely overwhelming need to reconstruct those industries which are collapsing because of the high degree of import penetration. Now you cannot reconstruct these basic industries, my Lords, without at the same time, in some degree, lowering the standard of living. Let us be perfectly clear that the present policies are an increase in inflation and an increase in unemployment as temporary expedients, it is hoped, in order that we shall come out, in 1978 or 1979, better off. Putting up protection would have exactly the same effect, of course, because it would cut off the supply of cheap imports which people want to have; so it is a reduction in the standard of living whichever way you do it.

The crucial issue here, so far as I can see, is whether or not the Social Contract will hold, and what is the attitude of the country to the continuance of the Social Contract. It is perfectly clear that no country has yet reconciled a policy of full employment with a policy of stable prices. Not even prosperous West Germany has succeeded in doing this. West Germany has a million unemployed, and it has also been repatriating its guest workers in order to have a lower rate of inflation. Other countries, with lower rates of unemployment, have higher rates of inflation. I am inclined to believe—indeed, I rather fervently hope—that it might be this country's way which, in the end, is likely to be the way which will be followed by other nations; that is to say, some attempt at a permanent voluntary incomes policy. I perfectly well accept that all previous policies have so far broken down. I regard as perhaps one of the most disastrous post-war actions of any Government the precipitate dismantling of Aubrey Jones's Prices and Incomes Board, which was beginning to build up a body of case law which the trade unions could appeal to and could understand.

My Lords, if we are not to have some kind of voluntary agreement on the way in which wages are regulated, then the only way to regulate wage increases is by very substantial levels of unemployment indeed; and if you do not want substantial levels of unemployment, if you think that substantial levels of unemployment are incompatible with the preservation of our social democracy in its present form, then it seems to me that you have to come round to some view about the continuance, for the rest of our lifetimes, of some form of Social Contract.

This, my Lords, is where I venture to return in this brief intervention to my noble friend Lady Burton—and what my noble friend said is extremely important, I think, to us all. One of the reasons why we want the Social Contract to survive is because it is in this area that the next great act of constitution building has to take place. This is much more important than devolution for Scotland and Wales, important as they are. The really important point is to keep the working class organised in trade unions within the political domain. Our European allies have managed to do it differently. In Germany, on the whole, trade unions for historic reasons have been weak. In France they are completely outside the civil policies; they do not take part in the determination of public policy except periodically when there is a revolution and the regime falls and then the trade unions lead a general strike which leads to the next régime. Historically, it has been the function of the Labour Party in this country to bring the trade unions within the domain of civil policy and ordinary political discourse. This has been an historic achievement and, on the whole, likely to be the factor which keeps democracy going in this country when it is likely to die elsewhere.

But that policy gives enormous power to the trade unions. On the whole, it is, hope, not patronising to say that they have used that power in the public interest fairly consistently; but I view with some alarm some of the extremist statements of the past year or so in some quarters of the trade union movement. I view with great alarm the statement by Mr. Jones that the pay policy will come to an end next year—and I hope it will not—and the threatened industrial action of the miners. Such actions are extremely irresponsible. Those to whom very great power has been given with the willing consent of their fellow citizens have a duty to use that power with restraint and integrity. I support my noble friend Lady Burton when she says that it is time for moderates, passionate moderates, to stand up and say that what is at issue is the survival of the democratic system based on consent.

7.12 p.m.

Lord SELSDON

My Lords, if anything I may say in the next few minutes causes offence to noble Lords opposite, then they should bear in mind that it is not directed at them but at their right honourable, honourable or less honourable friends in another place. By any stretch of the imagination it would be fair to describe the role of Government in a democratic society, the existence of which we wish to preserve, to be that of creating a fair climate in which its people can prosper. The Government which we are enduring at the moment have created the most unfair climate that the democratic world has ever seen and in no way is there any hope of the people prospering. That is the underlying feeling throughout the private sector and, I would suggest, even among civil servants and public sector employees—and I cannot often differentiate between them. There is something wrong. What is wrong is nothing that can be put right by fiscal policies or by comments about public sector borrowing requirements, it is a fundamental malaise.

I think that the hope I see is in the gracious Speech. I did not believe when I read it that there could he any hope. But on looking at the words I saw the recognition the Prime Minister had given on other occasions, although he has often been shouted down. The words I read were: My Ministers are convinced that the key to a better economic future for the British people lies in improved levels of industrial output and productivity, a higher level of industrial investment, and being more competitive thus securing a greater share of world markets. Throughout the land and in this House this will be accepted. But there is a fundamental, "but". The Government seem to believe that it is their role to create that prosperity; that it is the role of Government to generate wealth and to make profit. It is not the role of the Government to do that. The Government are fundamentally incapable of doing it. No Government in the democratic world has ever been able to create more wealth than it spends. Therefore, it is the role of somebody else to create that wealth; and that other person or body or group of people is inevitably the private sector, or the man who works and earns his living to produce the wealth in order that the Government may spend it in looking after the nation, in looking after the less privileged and in defence of the Realm.

This is where I see a fundamental fault in this current Government. It may be that the Government, through lack of political guts, failed to recognise when they took power that they were going to endure a period of decline of this nation which they should try to stop and not try to accelerate—for accelerate it, they did. If you look at Government borrowing, it has increased by 20 per cent. since this Government came to power and output by 2 per cent. In simple terms, the Government are spending 10 times more than the rest of the nation is producing. There are no signs that once you reach the level where the Government are spending more than 60 per cent. of everything which is created and having to borrow at the level that they are, that they can claw back.

When you reach over the mystical 60 per cent.—and it may be up to 66⅔ per cent.—you cannot stop the decline; you move from a democracy towards a State-owned command economy, painlessly, easily, without bloodshed, without problems; and before we know it, we look around and find that we are owned by the State. But nobody wants to be owned by the State. No one wishes to be owned by a bureaucracy—even the bureaucrats do not wish to be owned by a bureaucracy.

There is a lack of spark. Incentive has gone out of the nation. It has gone. Key figures and others in the Department of Trade and Industry, many of whom are entrepreneurs at heart, ask: "Where is the guts that built this nation?" They wish to help. There is no need to criticise public servants. They all wish to help. But something is wrong. The fault must lie in the direction of Government. It is Government which should direct bureaucracy. It is Government which should direct spending. But it is not Government which should direct the private sector to create. The Government should create a climate in which the private sector can prosper.

With the level of inflation at the moment there is no hope of the private sector prospering. Already those of my generation know that we will never live in a prosperous climate in this country and, worse, that our children may never have the chance to live in anything remotely approaching a prosperous nation because of the level of borrowing and the forward commitment to debt which is so staggering that Ministers in power today may say that the full effects will be felt long after they have gone; that it does not matter; there will be a change of Government; it will be somebody else's responsibility.

The responsibility of governing this country rests with the Government of the day and not with Governments past or Governments to come. All that I would say is that if one seeks to encourage investment and believes the words of the gracious Speech (which I believe) that that is the intention of the Government, they are going about it in completely the wrong way. You need, in order to encourage investment and prosperity in this nation, not regional development grants to encourage people to set up factories in odd regions. That has been disastrous. Take the case of Wolverhampton. Here one has seen prime, prosperous industries attracted away by short-term gain from Government funds to go North and one has seen the death of the machine tool industry and everything that was in the heart of industrial Britain.

Look at why people do not invest in this country! The noble Lord, Lord Robbins, and others, touched on this. It is nothing to do with currency. It is to do with the simple fact that people do not believe that they will be in a stable position, they do not know where they are going to be and do not believe that they can make an adequate return on their money. If it looks as though they may make an adequate return, the Government will try to take their business away from them. It is my job, and has been for 15 years, to try to encourage people to come and invest and set up in this country. I have succeeded on occasions and, as I have mentioned in this House, those occasions when I have succeeded have filled me with shame for I advised a company to do the wrong thing.

I believe now, if one is serious, that the underlying strength of this nation is greater relative to the rest of the world than it has ever been. This is not just a case of raw materials; it is more a case of good, international links, strong, well-managed companies who, little by little, are reducing their commitments to the United Kingdom. Many of our bigger companies now are earning 80 per cent. of their turnover overseas. While you say to them, "Invest in the United Kingdom", they reply, "Why should we? We can make more money for our shareholders abroad, despite the falling pound, despite the dangers of currency fluctuations, and despite the difficulties of dealing in foreign languages."

There will not be any investment in this nation until the basic climate is changed; until a man, his company, his friends, his associates, believe that it is right to work and that if you work you prosper, and if you work harder you prosper even more. There is not necessarily a need for immediate capital investment in industry. Many of our sectors we know are archaic, many are outdated; but we are already a cheap labour nation. We can produce with old machines better than anyone in the world because we have had old machines longer than anyone else in the world. We can work night and day if necessary, but we do not work any more at night. If you telephone an industrial company at 5 o'clock in the evening you find that the person at the switchboard has gone home because that person knows that there is no point in working any harder. You learn that with the levels of taxation, bureaucracy and form filling, and everything else that goes with it, it is not worthwhile working hard.

My own family tried to convince me that one should not work quite so hard. I work hard because of fear: I do not have vast amounts of money behind me or large estates to which I can retire; I know that I have to live from day to day, year to year, and in no way can I prosper in this country. I am just one example; there are many others, thousands, in all walks of life. I have given noble Lords this example before: the man who works very hard because his wife is ill or suffering. He needs the money and he will work all night. There is the lorry driver wishing to get married who will break all the rules and drive through the night and not declare his funds for tax. There are as many people as there ever were willing to take risks, but the climate for risk-taking has gone. If this Government, in the short life they have left, cannot start to change the climate, it will be too late. The delay in the up-turn of world economies can in a way be beneficial. If they had come now, our nation could have not met the demand and we would have sucked in imports, as happened before. The balance of payments would have become worse and we would have been in a disastrous position. We are already in a disastrous position. I have searched to find a word which is worse than disastrous; something related to it, I suppose, is death—death of a nation.

All I would say to noble Lords present is that somehow we must give back to our colleagues in another place the desire to listen to people in this country, the desire to use Parliament as Parliament was intended to be used, as a place where opinions change. Everything I have heard in this place or another place has convinced me that the Government do not listen and are unwilling to listen. A Government that do not listen do not have the right to govern.

7.24 p.m.

Lord REDESDALE

My Lords, it is always unfortunate following my noble friend Lord Selsdon because he makes such a powerful and articulate speech; he is the envy of us all. We have had a remarkable debate in terms of its quality today. It has been most thoughtful and moderate in every way. Up to now the quality has been unquestionable; from now on it is different although we will have the speech of the noble Lord, Lord Harris of Greenwich, who is such a fascinating speaker. Today we have had a mass of maidens; four maidens is quite something. Whether it should be called a "modesty of maidens" or a "vestal of virgins", I do not know. They have all been of great quality and quite fascinating.

The noble Lord, Lord Brookes, with his enormous knowledge of industry, gave us an exposition on the problems of retaining skilled craftsmen and skilled labour as a whole. We all learnt a lot from him. The noble Lord, Lord Kaldor, made a clear speech on the components of our crisis. He entranced us all. I only hope that our creditors will see the situation as clearly as he put it over today.

The noble Lord, Lord Kagan, movingly referred to his own experiences under two totalitarian régimes and reminded us of the importance of our freedom, and how lucky we are. We are very lucky to have him with us. His thoughts on incentives were music to our ears on this side of the House. The noble Lord, Lord Wall, gave us a thoughtful and informative speech. He emphasised the dangers of imported added value goods. We were all impressed also with the courageous speech of the noble Baroness, Lady Burton of Coventry.

My Lords, what is happening at the moment? There are a lot of rises in the pipeline. I was alarmed at the speech of the noble Lord, Lord Peart, because he painted things a little rosier than perhaps they are. He started with warnings but he went on and rather sold the case. The overall rise in our inflation rates is frightening. The wholesale import prices on a one year basis have gone up 29.7 per cent. If you annualise that, the current rate over three months has reached over 37.6 per cent. These are far higher figures than the noble Lord, Lord Peart, was prepared to admit. That is what we have to face in the future. The wholesale output prices, which are about to come, over one year are 16.5 per cent. above the previous year, and annualised are up to 18.9 per cent. What do we have at the moment? The noble Lord, Lord Peart, talked about the underlying inflation rate of 14 per cent. The retail price at the moment is 14.5 per cent., and in a Written Answer given in another place the other day it had gone up, on a three months' annualised basis, to 19.7 per cent.

Sterling has fallen by over 18 per cent. against the dollar since the start of 1976. The cost of our imports has risen sharply. We have heard about this from a number of speakers. The rapid rise in wholesale prices that I have mentioned will come through to the retail level in the first half of 1977 and will add roughly 3 per cent. more to the cost of living. We have heard about the underlying rate of increase of prices of roughly 14 per cent. If this is added, in the first half of next year we will have a 17 per cent. inflation rate. The wage agreement calls for only a 5 per cent. increase in wages over the 12 months ended August, 1977. Even with slippage due to staff regrading, and so on, and even with tax concessions that have been given, this implies an unprecedented fall in real, take-home pay of around 2 per cent. I believe it is actually 1.9 per cent.

From 1950 to 1975 there has only been one year where the real take-home disposable income declined, and that was in 1975, when it fell by .07 per cent. This is a frightening situation. What we have to consider is what is going to happen in the coming year. It is going to put enormous pressures on the wage agreement. I agree with my noble friend Lord Gowrie, who said that if it does not hold, it is a situation which may sort itself out in the future. What we have to face is the thought that the money supply is being held at 12 per cent. If you take away from that the 17 per cent. cost of inflation, you have a minus 5 per cent. factor on the money supply for next year. We are trying to get down money supply, M3; but if we do this too hard, it is going to produce many more problems because of its enormous deflationary effect. We will probably see a very unacceptable level of unemployment.

As I said, the noble Lord, Lord Peart, appeared to paint a slightly more optimistic picture than perhaps he thought he was doing. He started off with a warning but moved around in his speech to an optimistic tone. The Prime Minister has given us a warning of the seriousness of the situation, but the noble Lord, Lord Peart, said, I thought slightly complacently, that he thought we might have passed the peak of unemployment. I think that is a very hopeful way of putting it, and I see a much more serious situation coming along.

My noble friend Lord Gowrie mentioned the Bank of England's recently introduced special supplementary deposits scheme to reduce eligible liabilities. Obviously it aims to reduce borrowing and the overall M3 money supply, but the level of borrowing is now actually lower than when it was first introduced. It has been argued that it will also have a deflationary effect by reducing the velocity of money; but I am afraid it will have much more of a shattering effect, not so much on the larger firms but on the small firms.

A number of speakers, including the noble Lord, Lord Hawke, have talked about the cost of interest rates. It is going to be difficult for smaller companies to compete when there is a restriction on their borrowing power and at the same time there are high interest rates. I am afraid that many will go to the wall, and that will result in unemployment. Many of those companies make large contributions to exports, and we are cutting off our nose to spite our face if we put such constraints on the private sector and let the public sector—I will not use the words "go wild", but have a much freer rein. We seem to be in a situation where we are using such things as control of the money supply on too frequent a basis. We are faced with the special deposits we have just heard about and also, very shortly, with a mini-Budget. It is rather like watching the Chancellor of the Exchequer sitting in a car that is going into a skid and as it starts to veer one way he snatches at the wheel. We are seeing rather too much over-correction rather too quickly.

I rather agreed with the noble Baroness, Lady Seear, when she spoke of too much Government interference. We have seen that the more Government interference there is with the private sector, the less can be produced. During the last two years we have had a number of White Papers on public expenditure. As I see them, these are exercises in profligacy. It is rather like the Rake's Progress, and we watch the Hogarth print go on with the Lord Chancellor now having to borrow more money—

The LORD CHANCELLOR (Lord Elwyn-Jones)

The Chancellor of the Exchequer!

Lord REDESDALE

My Lords, I beg the noble and learned Lord's pardon. I always think of the remark he made when he rose to his feet with such indignation when somebody talked about £13 million as "a mere bagatelle". Talking of profligacy, I have a feeling that the way pensions are now running in the public sector, as compared with the private sector, is an example of what we ought to be considering. I should hate to think that the noble Lord, Lord Peart, who so kindly told us that he would not be able to be here at the end, felt that I am raising my voice in a shrill attack on the Civil Service. I am not; but I do think we should consider this point.

As the situation is at the moment, there is no Government fund and civil servants, through their contributions, are directly paying for current pensions. Since there has been a dramatic increase in the number of civil servants, the ratio of contributors to pensioners is therefore high but, to remain in balance at the existing rate of subsidy from the taxpayer, we shall have to see an increase in the number of civil servants each year of no less than 15 per cent. I hope that is not a shrill cry, but I find it rather an alarming thought. Of course, the other way to look at it is to put it on the basis of industry, but one should point out that that could mean a 100 per cent. payroll contribution. The Superannuation Funds Office does not allow a private insurance company to have an indexed scheme, and if you take a figure of 100 per cent. of payroll and also look at what happens with self-employed pensions, where there is a limit of 15 per cent., I think there is something a little unfair here.

The cost of the measures in the gracious Speech is also a little alarming. I warned the noble Lord that, with his permission, I should like to fly a kite. On a rough basis of costing—and it can only be a guesstimate from our side of the House, and we look to the Government to correct us—the cost of the legislation referred to in the gracious Speech would appear to be about £1 billion—not "a mere bagatelle", I would say. That is accounted for by, first, roughly £850 million over the Aircraft and Shipbuilding Industries Bill; with a mere £20 million for devolution, and industrial democracy comes at about £5 million. The one that really worries me and which is the hardest one to cost—so I may be in a vulnerable position by giving an estimate—is the direct labour Bill, because that could cost £125 million.

This forthcoming Bill worries us very much on this side and I think it warrants a little further comment. It has been fairly well established over the years that to use direct labour is an extremely costly way of doing things. It is wasteful and hard to control. I know that a number of noble Lords, for example, the noble Lord, Lord Pitt of Hampstead, would defend the system very firmly, but there are so many cases in which that method has proved to be more expensive than operating on a private basis. In Darnley, in Glasgow, for instance, two identical houses were built and the one that was built by direct labour cost 60 per cent. more than the other. I think I need do no more now than quote what was said by Bailie Dick Dynes, Labour Group Leader on Glasgow City Council, when he was speaking about one of the schemes: If we are going to get prices like this at Summerston then it is the unacceptable face of socialism we are talking about. It is going to be very expensive, and I hope we can get some reassurance on this. I should also be grateful if the noble Lord, in replying, could give us some indication of timing, when the Bill will come before Parliament and in which House it will start. I think it must be agreed that the costs are going to be high. Mr. Crosland recently said that the party was over for local authorities; but as far as this one is concerned, I think that with the direct labour Bill the Government are buying local authorities another round of drinks.

Returning to my guesstimate of £1 billion for the measures in the gracious Speech, to survive we have got to cut back on public expenditure. It does not look like we are doing it here. More is going to go over to the public sector and, as has been said by a number of speakers, it is vitally important that we should encourage and give incentives to those people who are going to be the wealth creators—our development engineers and skilled craftsment. We have a wastage there. The noble Lord, Lord Brookes, talked about this and about the importance of training. I would agree wholeheartedly on the importance of training. But then there is the bath-plug syndrome over training for skilled craftsmen: that the more you train, unless you retain them with incentives, they will go down the plughole—and you are keeping the taps running by training. Therefore the training is only just keeping up with the wastage. Therefore, we must look at the differentials for the skills so that the take-home pay is increased.

I have a report here which is interesting, in that it shows a number of cases and tries to analyse the cause of wastage. For instance, a baggage handler at Manchester Airport is a skilled machinist; in fact, I believe there is more than one. Then there is a pattern maker who can get more as a gravedigger. One can go on citing case after case. But it is important that we stop this wastage, and that can be done only by producing really attractive incentives.

A number of noble Lords talked about good housekeeping. We heard the noble Earl, Lord Cromer, talking about this, and about its importance in making our policies credible to the IMF. He made one very good point about the most politically unacceptable fact being bankruptcy. The noble Lord, Lord Molson, also mentioned good housekeeping. He so capably covered the subject and emphasised our need for strong financial control. I talked earlier about the need not to keep touching the controls, but to take a firm and decisive view of the economy at one point. It may be extremely unpleasant. Certain warnings have been given to us and these must be emphasised far more fully. It will be very unpleasant, but provided firm decisive action is taken at the start, and provided that the policy is stuck to and is not constantly corrected, we will start to get somewhere. But with constant over-correction, and with some of the courses which have been introduced—which take two years to work out we shall not be able to get out —of this skid.

7.42 p.m.

The MINISTER of STATE, HOME OFFICE (Lord Harris of Greenwich)

My Lords, this is a difficult debate to which to reply. It has been described, I fear not particularly accurately, as a debate covering both economic and home affairs. Inevitably, we have spent rather more time on the former than on the latter, and I shall spend a little more time on the second, particularly in relation to my own Department. Of course, these two areas are in many respects closely related and the amount of ground that they cover is substantial. I must therefore apologise in advance to the many noble Lords who have made points during the debate, which I shall not be able to deal with in my reply this evening.

But certainly this debate has been notable for one thing. I believe that one noble Lord on the other side of the House said a few moments ago that he could not recall an occasion when four noble Lords had made maiden speeches in the same afternoon, and certainly that is my experience. I think we were also particularly fortunate, because I am sure we all agree that they were speeches of exceptional quality. I should very much like to congratulate the noble Lord, Lord Brookes, and my noble friends Lord Kaldor, Lord Kagan and Lord Wall on having participated in the debate, and on having made what I think are commonly recognised on both sides of the House as outstanding speeches.

This has been a sombre debate, and rightly so, for the situation now confronting our country is serious and it would be the height of folly to pretend anything else. The noble Earl, Lord Gowrie, opened the debate with some Party knockabout stuff, which I am sure we all very much enjoyed. The only slight problem is that I am not totally convinced that, at this precise moment of our nation's history, good Party knockabout stuff is what we require. There is, I fear, a problem which faces all Opposition Parties, and it is that they tend to minimise the problems of becoming the Government Party. This is a criticism which my own Party, and many members of it, have accepted in the past, and they have underestimated the difficulties. I am bound to say, having heard the noble Earl and, in particular, the noble Lord, Lord Selsdon, who made a quite remarkable speech a few moments ago, that they both assumed that, in the happy event of a return of a Conservative Government, today's gravely difficult national situation would in some magical way be swept aside, and we would once again be on the happy, sunny uplands. That does not, I fear, accord with my recollection of the situation in February 1974 when the present Administration came into Office.

Lord SELSDON

My Lords, may I interrupt the noble Lord?

Lord HARRIS of GREENWICH

My Lords, I will gladly give way to the noble Lord in a moment, but I should first like to deal with one or two points which the noble Earl raised. He made two points to which I should particularly like to address myself, one in passing and the other as more of a matter of substance. He referred—and I will study his words with even greater care tomorrow when I read Hansard—to his deep sense of humiliation when the Federal Republic of Germany was invited to make some contribution towards the United Kingdom's defence costs in Germany.

The Earl of GOWRIE

No.

Lord HARRIS of GREENWICH

With great respect, my Lords, may I finish the point? I am bound to say that I do not find myself in total agreement with the noble Earl, and I am quite sure that the noble Lord, Lord Carrington, will not either, because he was Secretary of State for Defence when one of these offset negotiations was carried through. But that preceded the second statement made by the noble Earl, which was a strange reference to the painfully balanced Budget of Mr. Jenkins in 1969. I assume that the noble Earl meant 1970, because that was the Budget to which I believe he was referring. But what exactly is the noble Earl's criticism? Was he criticising the fact that it was a balanced Budget? That is a very curious criticism from the Opposition Benches at a time such as this. Certainly, it was balanced. Indeed, it was more than balanced. The public sector borrowing requirement for 1969/70 was negative. That might be a matter of some interest to the noble Lord, Lord Selsdon, who has been pressing us to take note. We repaid a debt of £550 million.

What was the achievement of the Government which followed? That Government raised the public sector borrowing requirement from minus £550 million to over £4,000 million in 1973/74; indeed, to £4,432 million. If that is an occasion for criticism of my right honourable friend, then I suppose we must accept it. But I should have thought that most people in the House would regard a situation of that kind in 1969/1970 as a matter for praise rather than for criticism.

The Earl of GOWRIE

My Lords, I am very grateful to the noble Lord for giving way. I find that I am always being accused of Party knockabout stuff, even though I spend a lot of time giving it to my own Party in the neck. I should like to correct the noble Lord on two matters of fact. What I was objecting to on the first question of the German contribution was not that the Germans are helping the Western Alliance, but that they are having to lend us money so that we should do so as well. The noble Lord may not agree, but that is a totally different point. The second point I made was that, in my opinion, the Conservatives underestimated the degree of recession which that admirably balanced Budget caused, and released credit far too quickly. If the noble Lord does me the courtesy of looking at Hansard tomorrow, I think he will find that that is so.

Lord HARRIS of GREENWICH

My Lords, I will gladly look at the noble Earl's speech tomorrow. But I am bound to say that, notwithstanding what he has just said on the second point, the implication of his statement was one of criticism; and it is certainly true that the Budget judgment was then confirmed by two succeeding Conservative Chancellors of the Exchequer. But the fact is—and it is very important to recognise it—that there was a degree of deterioration in the public sector borrowing requirement from 1970 to 1974, and all I am saying to the House is that it is desirable for us to recognise that neither political Party has absolute virtue on its side in this matter.

Lord SELSDON

My Lords, I should prefer to correct the noble Lord now, before he finishes his speech. If he cares to read Hansard tomorrow, he will find that I did not criticise the Government; I just urged them to listen. Will he also bear in mind that before he came to your Lordships' House I was very vociferous in criticising the past Government for exactly the same things. So that there is not much between us.

Lord HARRIS of GREENWICH

Good, my Lords. I will deal in a few moments with some of the other points made by the noble Lord—points on which I regret to say that he and I are in disagreement. If I may deal now with one point which the noble Earl raised on the German offset arrangement, I am bound to say that we disagree with one another on this matter. The position I am adopting is one which has been adopted in the past by Conservative Governments, and I am quite sure that at the moment it would be the position of a British Government of any political persuasion, that it is perfectly reasonable to negotiate offset agreements of this character.

When the noble Earl, Lord Cromer, rose to speak I assumed that he might be about to comment upon the speech of the noble Earl, Lord Gowrie. Before I refer to the speech made by the noble Earl, Lord Cromer, may I say that he indicated to me that, unhappily, he had to leave us. I said to the noble Earl that I intended to make one comment on his speech relating to his crack that devaluation has always tended to take place under Labour Governments. May I make two comments. First, I am very doubtful whether the noble Earl, with his knowledge as a former Governor of the Bank of England, really believes that any Government in the immediate post-War period could have avoided the devaluation of sterling and, even if they could have avoided it, whether this would have been particularly desirable. Secondly, the noble Earl's statement simply is not true. The fact of the matter is that in June 1972 the noble Lord, Lord Barber, announced his floating devaluation. Between then and the Election in 1974 there was a 12-6 per cent. devaluation of the pound against the dollar and weighted depreciation on Smithsonian parities representing a devaluation of 16.7 per cent. I am sure that the noble Earl will recognise the accuracy of that statement. No doubt the events of 1972 were far from his mind because at that stage he was out of the country.

The rest of the speech which I propose to make will fall into two parts. The first will contain a reference to some important pieces of Home Office legislation which will be introduced during the current Session and to the general crime situation. The second will contain some brief reflections on the problem of public expenditure which was referred to by the noble Lord, Lord Robbins, and many other noble Lords during the debate this evening.

First, so far as Home Office legislation is concerned, as the gracious Speech indicated, there will be a Bill to provide for the election of United Kingdom members of the European Assembly. Noble Lords will recall that the preamble to the decision on direct elections to the European Assembly signed on 20th September includes a "best endeavours" clause relating to the holding of these elections in the period May to June 1978. The exact period is to be determined by the Council after consultation with the Assembly, but each Member State will be free to decide its own date for elections within this period. And I must add this. It seems unlikely that the Council would reach a decision on this matter unless all Member States were ready to hold elections by the date in question.

It is not at this stage possible to say precisely when the Government will be able to introduce their legislation on the arrangements for direct elections. I am conscious that the Select Committee on Direct Elections, set up in another place, have recommended that early legislation should be introduced with a view to Royal Assent by February of next year. There are, however, a number of important issues on which the Select Committee have made recommendations—indeed, a Report has been published today—and the Government must take these into account in the preparation of legislation.

The second major Home Office Bill referred to in the gracious Speech is that dealing with the criminal law. This, in particular, will reform the law of conspiracy. The Bill will also increase many maximum summary fines, including those for offences against the anti-rabies legislation. Under the Bill magistrates will be able to impose fines of £1,000 on those people who smuggle animals into this country in defiance of the anti-rabies control. And as my right honourable friend the Prime Minister announced yesterday, the maximum summary penalties for offences committed by football hooligans will also be raised to £1,000 for those over 17. Also the amount of compensation which may be ordered by a magistrates' court will be raised, again to £1,000. The Secretary of State will be given powers to alter all these maxima, fines and compensation, by order, if the value of money changes, so that maximum fines may be kept in touch with the cost of living and with income levels.

The Common Law on forcible entry and detainer and the related statutory law will be replaced by new, specific offences of entering and remaining on property. The Bill will also implement the main recommendations of the Departmental Committee on the Distribution of Business between the Crown Courts and magistrates' courts, chaired by the late Lord Justice James.

I should now like to turn away from the programme of forthcoming legislation to discuss, as I did last year and, indeed, the year before in the same debate, the general crime situation facing the country. There has been this year as, indeed, in previous years considerable concern over the rise in crime generally, and violent crime in particular. The figures for last year, which were published in July, showed that there had been a rise of 7 per cent. over the previous year in the number of offences known to the police in England and Wales. This, although in itself certainly a matter of concern, is substantially less than the increase for 1974 when there was a rise of 18 per cent.

Certainly the crime situation remains serious, but in one major respect at least there has been a significant improvement. When I spoke in the same debate last year we were in the midst of one of the most vicious terrorist campaigns this city had ever known. In the month of November 1975, there were two car bombs, two separate bombs in restaurants, killing three people and injuring 35, and the month ended with the assassination of Mr. Ross McWhirter. Within a few weeks there was the operation which ended in the arrest of four people at Balcombe Street. Although there were a number of terrorist attacks early this year, for the past few months there have been no such incidents in Great Britain. This is due in large measure to the skill and courage of the police. We all owe them an enormous debt of gratitude. But I mustemphasise this. There can be no excuse for complacency. Those directing the terrorist attacks on our cities could restart their campaign at any time.

Another welcome development in the past year has been the remarkable improvement in recruitment to the police. Over the last two years the total strength of the police service in England and Wales has increased by nearly 8,000 men and women. The Metropolitan Police—in whose area obviously the problem of crime is most acute—has done particularly well. The number joining the force in the first 10 months of this year was over 2,000—more than double the number joining in the same period in 1974. After allowing for wastage, the force is gaining strength at an average of over 100 men and women a month. The strength of the force is now 22,126 compared with 20,633 two years ago.

The full effect of these recent increases has yet to be felt. Many of the additional officers are still in training, although already others have gone to augment existing divisional strengths. This has also made it possible for some experienced officers of the uniform branch to be used to augment the specialised branches, some of which have been particularly hard-pressed, without weakening divisional cover.

Outside London the situation has been equally satisfactory. Half the provincial forces are up to, or very close to, authorised establishments, and most of the remainder will reach establishment within the next few months. Only in some of the Metropolitan counties will appreciable manpower deficiencies continue, and even here there have been substantial improvements in recent months. Greater Manchester, for example, has increased its strength by 646 over the past two years, bringing its total strength up to 6,150, and the West Midlands has increased its strength by 461 over the same period.

I should now like to say a few words about the situation in our prisons. Since this subject was last debated in your Lordships' House on 5th July, the prison population has increased from 41,622 on 15th June to 42,419 at the end of October. This is the highest level yet recorded and represents an increase of some 12 per cent. over the past two years. However, within that trend, the proportion of prisoners awaiting trial or sentence has declined since the end of 1975. I think that this has been due in part to the Government's measures to improve the quality of bail decisions. Indeed, there has been a fall of about 13 per cent. in the number of receptions into prison in the first six months of 1976 of persons awaiting trial or sentence. On the other hand, the number of young prisoners has increased yet again since mid-June to over 2,200, a level some 40 per cent. higher than two years before.

In your Lordships' debate last July, reference was made to the comment by my right honourable friend the Secretary of State's predecessor in July 1975 that a prison population of more than 42,000 would mean that, "conditions in the system would approach the intolerable". However, since then some 1,200 extra places have been added to the system and the total capacity, after allowing for certain losses, is some 800 higher than it was then. Other places are under construction and by March 1981 the capacity is expected to have increased by about a further 4,600 places.

However, I accept at once that the prison population is too high. The present situation creates grave pressures within the system. At present some 11,000 men and women are having to live two to a cell, and another 5,000 men three to a cell. These are the statistics. But I am bound to say that I did not realise the painful reality of the situation until I saw for myself men living three in a cell in one of our overcrowded Victorian prisons. Conditions of this character, imposed on inmates and prison officers alike, are shameful. That is why my right honouraable friend and I are determined to do all that we can to bring the present situation under control.

We have, of course, as has been recognised at the outset, only a limited influence on the numbers sent to prison. This is a matter, rightly, for the courts. And they are rightly free from any form of Ministerial direction. Nevertheless, I welcome the enthusiasm which both judges and magistrates have shown for the new range of non-custodial penalties which have been made available, and particularly for community service. The Government are determined to encourage the use of alternatives to imprisonment, and to develop these as resources permit. The Bail Act, which recently received Royal Assent, is expected to reduce the number of remands in custody. And we continue to support the wider use of parole. Here there has been significant progress. The number of prisoners who are granted parole at some point during their sentence has risen from 40 per cent. in 1974 to 49 per cent. in 1975. And this number is still rising. This increase in the parole rate has been achieved without any significant increase in the failure rate.

Another interesting development is in the treatment of the habitual drunken offender. There are still far too many of these people clogging up our prisons. My right honourable friend the Secretary of State for Social Services has decided to set up three or four detoxification centres for three-year trial periods. The first of these was opened in Leeds in May this year. In an area where a detoxification centre has been opened, the police have power under Section 34 of the Criminal Justice Act 1972, which came into force in 1976, to take any person whom they have power to arrest for dunkenness to the detoxification centre where he is deemed to be in lawful custody. Although it is too early to give a considered evaluation of the scheme in Leeds, it has been well received by the police who see it as a positive contribution to rehabilitation.

Lord HAWKE

My Lords, I should like to ask how many places there are in the Leeds detoxification centre, because we are becoming a nation of alcoholics and I doubt whether enough places have been provided.

Lord HARRIS of GREENWICH

My Lords, the noble Lord is on to a good point because I am about to say precisely that—not that we have become, I trust, a nation of alcoholics. If the noble Lord will forgive me for saying so, I think that is a slight overstatement.

Lord HAWKE

My Lords, I said "becoming".

Lord HARRIS of GREENWICH

My Lords, I am not even sure that I would necessarily agree with the qualification that has been expressed. I think it rather overstates the size of the problem. Nevertheless, this is a serious matter and certainly it is desirable that we should proceed as fast as we can. The centre in Leeds is open and, as I have indicated, it is close to capacity at all times. Another centre will open in Manchester early in the New Year and a third in London later next year.

It is not for a Home Office Minister to tell the courts what sentences they should impose in particular cases, but both my right honourable friend the Home Secretary and I hold the view recently expressed by my noble and learned friend the Lord Chancellor that shorter sentences might be appropriate in some cases, particularly where prison is intended to deter, rather than where the offender needs to be confined for the general protection of the public. Prison sentences in this country seem to be significantly longer than in many other European countries, and our prison population proportionately higher. There is also no indication that this has made this country a safer place to live in.

I would like to conclude my speech with a few reflections on some of the wider problems covered during the debate, and particularly the question of public expenditure. I begin by stating one self-evident truth. In the next few years there will be a stringent limitation on public expenditure programmes. It will be the fiercest experienced by anyone present this evening. For as a nation we have to face this unpleasant truth. The present economic crisis is not only the most serious in our lifetime; it will require remedies far sharper and more profound than any we have experienced since the war. Public expenditure simply has to be kept under control; and at whatever cost. For if it is not, any prospect of bringing down the level of inflation will be lost. And if inflation is allowed to roar ahead, it will only do still graver damage to the living standards of us all. It will, indeed, damage the very cohesion of our society.

Most of our fellow citizens accept this analysis. But it means some uncomfortable consequences—again of a kind we have not experienced before. There has to be a significant change of attitude—among Members of both Houses of Parliament, councillors, the local government service, and, yes, in the Civil Service as well; and not least in my old profession of journalism. There will have to be a concerted effort to establish more modest expectations. The happy, carefree days in which the Press, or television, or an interest group or a group of politicians identified an urgent social problem and then built up a well-orchestrated campaign to demand immediate action—by a Government or by a local authority—are at an end.

If the need really is urgent, action will be taken only if there are accompanying cuts elsewhere; and this will be so whether at national or at local level. We are moving into a period in which, although serious public problems will be defined, we will often not have the resources to deal with them. Let me give one obvious example which relates to the Home Office. I referred a few moments ago to the disturbing increase in the size of the prison population. One way of keeping people out of prison is to extend community service. A number of these schemes were begun by the Party opposite when they were in power, on an experimental basis. The present Government gave probation and after-care committees the go-ahead to extend them over the rest of the country.

This is a vitally important development because, as I indicated earlier, in a significant number of cases people who were ordered to undertake community service, otherwise would almost certainly have gone to prison. The schemes now cover 74 per cent. of the population of this country and, in a few weeks, I hope there will be some further extensions. I should very much like to provide additional help for those probation areas which at the moment do not have them, or which feel that they have inadequate resources to extend this coverage of community service. But we cannot. The economic situation simply does not permit it. If schemes are to be extended probation resources will have to be redeployed in the areas concerned; and officers fulfilling another task will have to be switched to community service. I recognise that this is tough and disagreeable stuff for the Probation Service in this country; it is also unavoidable.

I have spoken tonight about the serious problems in one area of our system of criminal justice. Any of my colleagues could have given a similar catalogue of the difficulties faced within their Departments, because of the paramount need to hold down public expenditure. What are needed in the present grave national situation are two things—frankness and candour; and a determination not to retreat into a mood of resigned complacency. It will be only too easy in the period ahead to dismiss new and demanding problems with a sad shrug of the shoulders, and the assertion that nothing can be done because of the crisis. But when the need is genuinely serious and urgent, something can be done. Other programmes can be cut. The term "redeploying resources" is not a piece of pompous bureaucratic evasion. It can be done if we all, both nationally and locally, constantly ask the question whether we really have to continue with every existing service to the public. But reexamine our priorities we must—for the days of constantly rising public expenditure have come to an end. We simply have to hold it down if we are going to fight our way out of our present national difficulties. We have to face the fact bluntly that after several years of crisis there is a serious risk of doing grave damage to the self-esteem of our people. We have simply got to tackle the central economic problem now confronting us, and we must succeed. The alternative is too bleak to contemplate.

The LORD CHANCELLOR

My Lords, I beg to move that this debate be adjourned to Tuesday next.

Moved, That the debate be adjourned to Tuesday next.—(The Lord Chancellor.)

On Question, Motion agreed to, and debate adjourned accordingly.