THE ECONOMIC SITUATION

HL Deb 26 January 1977 vol 379 cc472-500

2.57 p.m.

Lord PEART rose to move, That this House takes note of the economic situation and the measures announced by the Chancellor of the Exchequer on 15th December 1976. The noble Lord said: My Lords, I well remember being asked, within a few days of becoming a Member of this House, to make a Statement on the condition of the pound. I said then that I felt as if I had been thrown in at the deep end. Since then, largely because of your Lordships' kindness and patience with me, I feel that I have learnt—if not to swim, then at least to tread water. The financial indicators which form the background to this debate give me the confidence to feel that I have my feet much more on solid ground, because, my Lords, the contrast between the state of the short-term financial indicators now and their state then could hardly be greater.

I do not wish to dwell on the dismal news that confronted us then, but noble Lords will be only too aware of the strengthening of the foreign exchange position; the steadying of the growth in money supply; the fall in interest rates, and the easier position with regard to the financing of the borrowing requirement.

In short, my Lords, all these indicators help to confirm that the strategy being pursued by the Government is the right one. The conclusion of the stand-by Agreement with the IMF indicated very clearly that our economic strategy has the confidence of our friends overseas. No one will dispute that. This has been reinforced by the new arrangements concerning the sterling balances. These offer the promise of a much more stable basis for the management of the reserves and for control of the exchange rate from now on.

My Lords, it would be churlish not to acknowledge this improvement and to give credit where it is due. But I would caution your Lordships against any premature sense of relief, particularly in the light of yesterday's unemployment figures. The Government refused to be panicked by the difficulties of last year; and for the same reason we refuse now to relax our determination to retain a firm grip on our financial position. The maintenance of this grip is essential if we are to protect our basic economic strategy, and I stress the importance of keeping the Chancellor's measures in the context of that economic strategy. It is designed to improve the industrial performance of this country by expanding its manufacturing base.

The lead here must not come from an artificial consumer boom. It must come from growth of exports and productive investment. The Government cannot, of course, achieve this by themselves. It must be a collective effort calling for a response from all sections of the community, and I do not think any noble Lord would dissent from that. The role of the Government is to create the conditions within which enterprise can flourish. Our main weapons are the Social Contract, the Industrial Strategy and our firm control of the country's finances. The first two of these will pay their greatest dividends in the longer term. The purpose of firm financial control is to protect our longer term strategy from short-term financial difficulties. Our mechanisms for maintaining that control have been radically improved; I referred to these in a previous debate. We have seen new departures in the form of cash limits, which have allowed us to ensure that public expenditure follows more closely to planned levels than has ever been the case in the past.

I turn to the Chancellor's measures. The other side of that coin—the determination of the planned levels of public expenditure—was the purpose of the Chancellor's measures of 15th December. Those measures had to satisfy two main criteria, in addition to taking their place as part of the general strategy. The first was to re-establish the confidence of overseas investors in the ability of this Government to control public expenditure, the money supply, and the exchange rate. The second was to convince the IMF that we had the determination to adhere to our basic strategies. These strategies were and are designed to bring the economy into internal and external balance over the next two or three years.

I have stressed that the Chancellor's measures were designed to prevent financial problems from destroying our economic strategy. However—and it is important for noble Lords opposite to remember this—the measures were also designed to avoid damage to the strategy on their own account, for if we had listened to the demands of some noble Lords, and their friends in another place, we should have done serious carnage to our strategy.

First, we risked losing the confidence of working people in the Government, as expressed through the Social Contract. Noble Lords who emphasise the risk of losing the confidence of overseas investors often tend to forget the importance of retaining the support of those who live and work in and for this country. Secondly, we risked losing the confidence of much of our own manufacturing industry by precipitating a further massive deflation; such deflation would throw many thousands more out of work and many industrial and commercial concerns would never recover from it.

The measures—the package—were designed to achieve a balance. Inevitably the major criticisms of the Government at that time were that they had got the balance wrong. This is clearly a matter of judgement and I respect the opinions of noble Lords who take an alternative view. But I do not respect the views of those who call for greater public expenditure savings and then criticise the Government when they attempt to implement specific individual savings. Time and again I have challenged the Opposition on this, but they have never come clean on the matter; I hope that the Opposition spokesman in this debate will specify it. I invite him to do so. I repeated the Chancellor's Statement in this House in December. I can remember noble Lords criticising the Government for failing to make further cuts in public expenditure, but at the same time they called for increased expenditure on defence.

In Birmingham last week, the Chancellor pointed out that the same people who were calling for further public expenditure savings, were demanding a radical extension of the selective investment scheme. This extension would greatly increase the Government's need for financial and manpower resources. A further disgraceful example can be drawn from the behaviour of the official Opposition during the Committee stage in another place of the Social Security (Miscellaneous Provisions) Bill; despite continually insisting on public expenditure savings, the Opposition Members of that Committee voted against measures designed to save £60 million in 1977–78.

It is time noble Lords opposite made up their minds; let us hear that from them today. Do they want further public expenditure cuts or do they not? And if they do, where would they intend to make them? To those who say that the Government's policy is inconsistent, I say that the basic strategy of the Government has remained constant. At the same time, we have acknowledged the need to make adjustments in order to protect that strategy from short-term financial problems. That is what we attempted in July and again in December. We do not claim superhuman vision. We have made the best assessments that we can in the light of the evidence available to us.

I must add that the criticism of inconsistency, so often heard, does not come well from noble Lords opposite. It was their Government who, in 1972–73, initiated a grossly irresponsible consumer-led boom. That act itself bears much of the blame for our present troubles. And now, while we are emerging from the deepest recession since the war, the same noble Lords call on us to plunge the country back into deflation and slump through savage cuts in public expenditure. Many noble Lords may criticise the December package for failing to create adequate incentives through changes in the tax structure. I say straight away that I sympathise with the feeling behind this criticism. The Chancellor has taken some steps in this area, and I shall come to them later on. He has also pointed out that the successful negotiation of a further round of the pay policy—and I have no doubt that the negotiation will be successful—will help to create conditions for a reduction in income tax.

Criticism of the Chancellor's package—and indeed the package itself—can be judged only by results, the results so far are extremely encouraging. In the first place, as I mentioned earlier, the IMF has expressed its confidence in our strategy by its agreement to a loan of no less than £2,300 million. Noble Lords will agree the importance of achieving this expression of confidence in this country's ability to bring its economy back into long-term balance.

In addition, there has been the so-called Safety Net Agreement which should remove the destabilising effect of the sterling balances, which in the past have hung like the Sword of Damocles over our exchange rate. The Exchange rate itself has strengthened and, indeed, gained ground. The rate today is 1.7193 dollars and the strength of the market has been widely commented upon. Investors have shown a far greater interest in Government securities. Sales of gilt edged stock have been tremendous over the last few weeks and this has eased many of the Government's short-term financing problems. The public sector borrowing requirement for this financial year has already been more than met. Interest rates have begun the gradual downward movement which the Chancellor predicted—and this, of course, will make it cheaper for industrialists to undertake vital investment in manufacturing industry, investment which this country so sorely needs.

The subject of money supply has rightly been mentioned by noble Lords opposite; money supply, on the broad M3 definition, contracted in the last banking month. There is now every likelihood that the increase of the sterling component for this year will be well within the Chancellor's prediction of 9 to 13 per cent. Moreover, we have every expectation of staying within the ceiling for domestic credit expansion which we proposed to the IMF.

The Government attempted to strike a balance between the need to maintain confidence both at home and abroad, and early indications are that we have got it right. I know that there is a long way to go, but I know also that noble Lords who fear that the package will not succeed will not mind, in the long term, being proved wrong. I have never said that noble Lords opposite would wish the country to stagnate whatever Government was in power. I can understand that they believe that their approach is right but I think that they have been proved wrong. That is another argument.

Before I turn to the prospects for the longer term, let me emphasise that this Government have no intention of being lulled into complacency by the recent improvement in our financial indicators. On the contrary, our difficult experiences of last year have shown only too starkly how precious a prize internal and external financial stability is. The Government are determined to maintain a firm grip and not let this prize slip away through any premature weakening of our resolve.

Looking to the future in the medium term, I have to say straight away that we are not out of the wood yet. This year, like last year, will not be one for the faint-hearted. The shape of the problems that remain with us were set out in the Treasury forecasts, which were published at the same time that my right honourable friend's measures were announced. In the second half of this year, our gross domestic product is likely to be only 2 per cent. higher than it was in the second half of last year. Consumer expenditure is likely to decrease by 2 per cent. and public expenditure will be down by 3 per cent. Yesterday brought very bad news in the form of the publication of the unemployment figure. I stress that the present level of unemployment is appalling, particularly for those personally involved in this social tragedy and, as the Prime Minister has said, there is little chance of any reduction for some time.

In total, private investment is likely to show very little change in level although I should add that within that total private and manufacturing investment may be up nearly 20 per cent. This latter figure—being one of the more encouraging parts of the forecast—was one which attracted most doubt and criticism. I sympathise with those who argue that this figure is extremely difficult to predict, since it represents the aggregate of many different decisions by individuals. However, a small rise in manufacturing investment did occur in the second and third quarters of last year. So there is some ground for believing that a significant increase in this investment is on the way.

It will be a little while longer before we can resume the spectacular advances in the attack on inflation which we saw in the first half of last year. The Treasury forecast shows that retail prices still have to absorb the effect of the fall in the exchange rate last year. In effect, this means that we are still absorbing the effects of our past inflation of domestic costs. The exact effect on prices will, of course, depend on what happens to the exchange rate later this year. Bat I have to say that I see little prospect of any marked decrease in the rate of inflation during the first half of this year. Thereafter, progress should resume. Indeed, there are many who say that we will make much faster progress than the Treasury have forecast.

May I now turn to the way in which the Government respond to these problems? As regards financial control, I repeat, this will not be a year for the faint-hearted. The Government are determined to press on, to stick to our basic economic strategy and allow it time to work, and there are already encouraging signs that it is doing just that. In the first place, the confidence expressed in us by the IMF and overseas Governments should allow us to retain financial stability and protect our economic strategy. The West German Chancellor, Herr Schmidt, made an interesting point when interviewed on the television with my right honourable friend the Prime Minister the other night. He said that the mere existence of the Basle "safety net" should ensure that it is never used. That is important.

I turn to the Social Contract. I have every confidence that the Social Contract—the expression of the confidence of working people in their country and in their Government—will be strengthened and renewed. Negotiations should soon begin on the next round of pay policy and this will improve the prospects for industry by ensuring a further period of stabilising costs. Noble Lords opposite are often too ready to pour scorn on the Social Contract and its achievements. They forget that it has contributed towards a tremendous improvement in industrial working relations in this country. Our record of days lost through strikes has changed beyond all recognition from the dark confrontation days of the Industrial Relations Act. We lost fewer days through industrial disputes last year than in any year since 1967. These are real achievements and should be praised. This represented one-seventh of the hours lost in 1972; and to those who say that this is solely due to the level of unemployment, I can only point out that our friends across the North Atlantic have higher unemployment and a worse strike record. And this improvement is, of course, in addition to the great success of the Social Contract in ensuring widespread acceptance of pay policy.

Furthermore, the Government will stick to the industrial strategy. Already we have seen a greater willingness of the participants to break down barriers and work together. In addition, as the Chancellor pointed out in his speech in Birmingham last week, there is growing evidence that the industrial strategy, in its formal mechanisms, can do and has done much for the individual firm. Let me repeat two of the Chancellor's examples. First, the Foundries Sector Working Parties saw the opportunity to turn spare capacity in the industry into export potential. Second, the Iron and Steel Sector Working Party pointed out that the many different standards and specifications in steel production were a major cause of bottlenecks. Initiatives are now being taken to rationalise them.

My Lords, in my view, this quiet, unheralded work by those engaged in the formal industrial strategy will bring tremendous dividends in the long term, and it will play a substantial part in promoting the industrial regeneration which we all wish to see.

In addition to the major planks of the economic strategy, the Chancellor has taken further measures to assist and promote recovery during the coming year. For example, tax relief on stock appreciation, combined with free depreciation for tax purposes, means that any manufacturer who ploughs his profits back into the business need pay little or no corporation tax. Industry has been given priority for bank borrowing, and this is in addition to the lower interest rates and wage costs which flow from other parts of the Government's strategy.

Further proof that this strategy is working can be gained from a look at the trade figures. In 1974, the current account deficit was more than £3,300 million. It was halved in 1975 and reduced again last year. Since the oil price rises took effect in 1974 Britain has proprotionately done better than average compared with other industrial countries like France and the United States in reducing its balance of payments deficit. Of last year's deficit of £1,500 million, only £500 million was attributable to the second half of the year. The Chancellor has been able to assume that the balance of payments will move into surplus in 1978, and, further, that a substantial surplus of perhaps as much as £2,000 million or £3,000 million may be achieved in the financial year 1978–79.

My Lords, I make no apology for ranging beyond the specific measures that the Chancellor introduced on 15th December last year. It is, I think, extremely important to see them not as a departure from our economic strategy but as a means of protecting our strategy from the vagaries of financial markets. This is why the theme of my speech this afternoon has been two-fold. First, while these measures are important, and their effect is to be greatly welcomed, they must be seen in the context of our basic economic strategy. Secondly, although in the medium term difficulties will undoubtedly arise, there is already considerable evidence that our strategy is working and provides the only real hope for our economic recovery.

But before I finish I must make one fundamental point. The Government cannot achieve an economic miracle on their own. They can only create the conditions and attempt to inspire a collective response from the community. Many have already answered this response. But it is inevitable that those who respond do so, at least implicitly, on the condition that the rest of the community responds equally. Working people have made great sacrifices, and will be asked to make further sacrifices in the year to come. As the Chancellor has pointed out, they cannot be expected to continue in this way unless there is evidence that the nation is achieving its objectives.

This means they will look for some improvement in the unemployment situation, and that can only come about if industry plays its part and creates new jobs; and that in turn depends upon them making use of our favourable external competitive position; our more stable financial position, and our stabilising wage costs by investing now in new machinery. As the Prime Minister has said: Industry has got a lot more profitable during the last 12 months. It has got a lot more funds to invest if it will do so. Its got to take its faith in its hands now and switch over to products that the world needs.

My Lords, this country's economic future—and I believe we have the potential to achieve an extremely strong economy—depends on the expansion of our manufacturing industry. To our friends in industry I say this: You know that we must work together; you know that we have created many of the conditions necessary to give an incentive to expand; you have a stable financial position, decreasing interest rates, stable wage costs, and a tremendous competitive advantage because of the present value of sterling, I say this to our industrialists who are patriots in the best sense, who work to achieve a success in the economic field: I urge you to take up the challenge, express your own confidence in the country's future in the most tangible way, and play your part in fulfilling the hopes and expectations and aspirations of your fellow countrymen. And to the rest of the community I say this: Have confidence in the manufacturing sector of this country. Maintain the self-discipline you have shown up to now and do not be deflected in your resolve by short-term news, whether it is good or bad. In this way, acting together, we can ensure that this country can succeed.

Lord ROBBINS

My Lords, before the noble Lord sits down, I should like to ask a question, the answer to which I think will very greatly clarify the debate which follows. In the course of his observations he twice used the term "deflation". May I take it that by "deflation" in this instance he meant reducing the rate of inflation? So far as I know, most educated persons use the term "deflation" in the sense of an absolute reduction of the money supply, or a reduction of the money supply relative to the rate of growth of production.

Lord PEART

My Lords, I am sure that the noble Lord is being a little pedantic. He is going to make his contribution very soon, and I have no doubt that he will make a valuable contribution. I will wait to see how he elaborates his contribution and no doubt we will have a discussion. My Lords, I beg to move.

Moved, That this House takes note of the economic situation and the measures announced by the Chancellor of the Exchequer on 15th December 1976.—(Lord Peart.)

3.24 p.m.

Lord THORNEYCROFT

My Lords, I should like to say a few words in reply to the Lord Privy Seal. When it was suggested that I might speak in this debate I went, as is my custom, to the House of Commons Library and I said to them, "I want to be briefed about the package." They asked, "What package?", and I said, "Mr. Healey's package", because I like them to realise that though we live at the end of the corridor we know what is going on in the world. They said, "We have a number of Mr. Healey's packages", and I must say that at that moment my resolution began to waver a little. I had the thought of rows and rows of these packages. But I settled for the Christmas package, and I gather from the speech of the Lord Privy Seal that that is the particular Healey package to which we ought to address ourselves.

I propose to waste no time whatever in examining the past history or the past errors of the Labour Party on this matter. Mr. Healey said that they had got it wrong. Well, all right; it is his verdict. I think that we might leave it at that. What is important is that we should try to get it right, or at least a little more right than it was before. I would say in answer to the Lord Privy Seal that he is right; that what is good for the nation is good for the Conservative Party. I happen to think that the reverse is probably true, too, but that is perhaps a more controversial assertion to make across the Floor of the House. But certainly there can be no Party in this House, and no Member of your Lordships' House, who can get any pleasure at all in any defeat for our joint interests as a nation. It is in this rather more conciliatory mood than I thought the Lord Privy Seal was adopting at certain moments, that I approach this debate.

My Lords, the package undoubtedly has some faults and, no doubt, some of my noble friends will be expanding on the faults; I might even touch on a few myself. But it has referred to three things which the Conservative Party has pressed for a long time. It cuts public expenditure. It lays emphasis on the control of the money supply. It holds out, or at any rate the Chancellor of the Exchequer holds out, the prospect or the hope of reductions in direct taxation, and in return for this we have the IMF loan and we have the arrangements for underpinning sterling. I should like to observe that we could have had the arrangements for underpinning sterling a year ago if we had introduced a package of this character.

For the Socialist Party to cut expenditure, to praise the control of the money supply, to talk about the reduction in direct taxation is, to say the least, an important political event. The old days of squeaking pips and of howls of anguish have somehow disappeared from the scene, and I think that probably on all sides of the House we are glad. Eighteen months ago, with employment at 800,000 it was said by the Government that cuts were unwise and unnecessary. Now, with unemployment at 1½ million or thereabouts, and rising, we have during this year in a combination of tax changes and cuts effected a figure of some 4½ billion sterling. That is an amazing change of policy.

I am not one who always quotes his own speeches—I think that that is very boring—but I did tell the Lord Privy Seal the last time that we were debating this matter that this is what he and his Government would do. He was a little sceptical of my advice; nevertheless, undoubtedly it has happened. I do not flatter myself that it was due to my advice that it was done, and I am bound to ponder why this conversion has taken place. There have been great conversions in history—I instance St. Paul. Mr. Healey is quite different from St. Paul.

One asks oneself: What brought the Government to this position? I understand, my Lords, why they dropped the policy they had before. That I do understand. Call it the industrial strategy, call it the Social Contract—I do not mind what you call it; I understand why they dropped it, and I am glad. After all, sterling had depreciated by one-fifth, unemployment had doubled and inflation was running at twice the rate it was forecast to run at in October 1974. Such a policy (shall we say?) deserves a little examination, to say the least of it, and a Cabinet looking at it all impartially might be, I can see, disposed to drop it. Yet the change did not really come, I think, from deep political conviction. The Lord Privy Seal was present in the Cabinet and knows a little more than I know, though not much more, about what happened in the Cabinet. I am happy to say that these things are now so delightfully, wisely and brilliantly reported that I sometimes think that one knows more from outside than one would know if one was in fact sitting round the table, where one might have dropped off from time to time; but one has a vivid account of it, and I do not think it was from conviction.

Mr. Norman Atkinson, who is a trusted member of the Labour Party—they trust him with all their money; he is the chap they really rely on—said: The socialist content of the Cabinet has been totally destroyed". I do not know whether that is absolutely true—it may be a slight exaggeration—but it would indicate that some change has taken place somewhere or another. I did not quite see that small flow and continuity that the Lord Privy Seal was talking about, and I feel I have a few friends in his Party in the other place who share a little my point of view. Nor did it happen because the Lord Privy Seal wanted to join the Tory Party. We would be very happy to have him, as a matter of fact; I think he would be a very good member of the Tory Party; but for the moment, I think, he does his own job so delightfully that we would rather he stayed there for the present. Nor do I think it was the arguments of the noble Lords, Lord Robbins and Lord Roberthall, brilliant though they have been. I must tell noble Lords that, however ably they have argued, I do not believe it was the intellectual content of those arguments which just swung the Labour Cabinet over. My Lords, I am afraid it was brute necessity. They were desperate for the cash. If they had not got the cash we would have been "bust", and the only way they could get the cash was to change the policy. That, in fact, is what has really taken place.

My Lords, why does the package look a little odd? I am trying to defend this package: I want to make that plain. I really am. I am here to help, not to upset it; I really am. To my noble friends behind me I say: Why does this package look a little odd? First of all, it had to be so framed that the Labour Party could never vote on it. That was an obsolute necessity. Those of us who have had any hand in the management of political Parties can understand the point. It is not easy to peel money off public expenditure and never really have a clear vote in the House of Commons as to what is happening, but this, with brilliant care, they actually achieved. Secondly, it had to concentrate on capital expenditure rather than the more obvious subsidy expenditure on services, like subsidies for housing, rents and the rest. The geriatric wards might suffer, but not the people who paid rents in the council houses. This makes it look a little odd at first glance.

Then, of course, it had to have a desperate drive at defence. It was utterly wrong and I condemn it, but I am a politician and I see exactly why it was done. The only hope of carrying the Left-Wing was to slam defence. The Lord Privy Seal was there. He and I both know, because I have read the reports in the papers and he was in the Cabinet; so we know exactly the way the argument developed, and the attack on defence was put in as a sop in that direction. But still the operation was done, the package was introduced; and if the operation was not done as well as we might think it could be done, I must say that if you bring in a witch doctor to do a highly sophisticated surgical operation you do not want to criticise the details. The fact is that the patient is still alive; that is the miracle of it. And I would say—and again I would agree with the Lord Privy Seal—even a certain return of confidence in the world is to be seen because it is known that we are beginning, at least making some start, to get policies somewhere near reality.

My Lords, where do we stand now, and what ought we to be trying to do? I want to say just a word about the role of the Cabinet and the Lord Privy Seal, and I hope it will not be considered too controversial if I say that a Socialist or Labour Cabinet is different from a Conservative Cabinet. I hope I will carry the House broadly with me in that. I must say I always knew it was, but I never really knew it quite so vividly until I had read Mr. Richard Crossman's diaries. Dick Crossman, may I say, was a friend of mine, as he was of many people in this House; and, whatever anybody may judge of him as a politician—and he may have been more of a journalist—he was a delightful man.

He wrote two volumes which, to my mind, are really important constitutional documents. Anyone who reads them will realise that what happens in a Socialist Cabinet is something utterly different from what happens in a Conservative one. He tells you day by day, week by week, of the battle and the struggle—not so much about what is right, but how on earth you can get away with it with the National Executive Committee and the Liaison Committee of the trade unions. I must say I sympathise with them. I had never realised the agonies through which members of a Labour Cabinet really had to go. The idea that the Social Contract is something new is not true; it was always going on. It had a good Christening ceremony, but it was going on just the same. It was the system which carried Mr. Healey through eight of his Budgets, but not, I think, through the ninth, which I am going to deal with in a moment.

Now I like to quote members of the Lord Privy Seal's own Party—I think they do it better than me—and Mr. Reg Prentice put it rather well in the House when he said: I will be brutally frank with him"— he was referring to the Chancellor, and this was on 21st December— and say that I hope that studying will not mean finding out what the TUC will put up with and just doing that".—[Official Report, Commons, Vol. 923, col. 523.] It is a remarkable concept, really, of what the Cabinet has had to do. But not this time. I want to reassure Mr. Prentice on this. The Christmas package marked a really important change, I think. If the responsibility of the Cabinet up till that moment had been to the National Executive Committee and the Liaison Committee of the trade unions, from now on it was a responsibility to the International Monetary Fund. The role had changed. The role had changed to a body of men who still had an almost impossible task, but it was a different task. It was the task of reconciling the inexorable demands of the bankers with the clamant political claims of the trade union movement. Believe me, that is a very difficult thing to do, but that is—and I think the House ought to recognise it and have some sympathy and understanding for it—the role upon which the Lord Privy Seal is engaged and of which the Labour Party Cabinet has to think.

My Lords, I suppose we ought to be grateful—and I think we are—to the International Monetary Fund for bringing us a little closer to reality. I want to consider: where, from that base, do we now advance and, having regard to what I have said and all the difficulties, where can we sensibly urge the Government to advance? May I say what my first objective would be?—and I say it with due respect to the IMF. My first objective would be to make this great country independent of the loans and of the conditions imposed by the people from whom we borrow money. I really think this—and I feel that this would be shared by every Party in this House. I am not saying that we do not need to borrow money. Borrow money, yes; but not right down "on the rims" as we have been borrowing, to a point where you have to accept the almost detailed terms of those from whom you are borrowing the money.

I admit that it can be said against me that if we were there now it might be a more socialist policy that was being pursued. But I would still prefer that it was the policy of a British Government and not the policies of international bankers, however distinguished, that we follow. I believe that I carry a very large section of the Labour Party with me in saying that; as well as the Conservatives and, probably, the Liberals, I hope, as well.

What advice would I give any Party for the months ahead? My advice, quite honestly, would be that they should do as little as they can. If they could stop legislating, it would really help. The noble Lord the Lord Privy Seal indicated that he was going to ask me for policies. I know that in the House it is great fun. I ask him for policies and he asks me for policies. I am an industrialist. It may be improper, but I am going to talk for a few moments as an industrialist. What I am going to say I believe would carry millions of trade unionists, all the managements probably in this country and most of the boards of directors. They would say to the politicians: "For Heaven's sake stop messing us about! We may not be perfect. We may not have got everything right. There may be great flaws in the trade union movement—and I dare say there are; and there are certainly great weaknesses in management—but we would say to the politicians that with all our weaknesses we still think we would do the job better than you."

I will refer to one instance, to the noble Lord, Lord Watkinson. I am not talking about him as head of the Confederation of British Industries but as he was, as the chairman of Cadbury Schweppes and the achievements of that firm in building up relations between management and the shop floor. Those were not achieved by an Act of Parliament. Those were achieved by men of good will, good sense and great experience and sitting down together and working out between themselves. So my advice is this—and I do not want to anticipate a Statement which we may hear shortly. Do not start now thinking that by an Act of Parliament, by imposing trade union nominees on boards or any other tricks of that kind, you can suddenly improve the industrial situation. You can damage it very considerably.

I would say just this much more on industry to the noble Lord the Lord Privy Seal. It is this. If we fail in industry, all fails—because growth is the only basis upon which anybody in this country can get the employment, the hope and prosperity that we all need and which all Parties desire to see. Therefore, we do have a common ground, I think, in trying to be very jealous that we do not damage either the trades union movement or the directors and their boards, which are very critical. You cannot run these things except with boards. People talk as though boards were a soft option. In these days, a board of directors is not a soft option. They are the most desperately difficult places of discussion that you could find. We would say, "Leave us alone on that".

There is another "don't". The package does a good deal of damage to the construction industry. Do not introduce Bills to increase direct labour by the local authorities on top of that. You do two things with it. You both damage the construction industry still further, which is silly; and you increase the cost of local authorities, which is bad. Why kick the ball through your own goal twice?

My Lords, I would ask the Lord Privy Seal who is a man of good sense—and I am sure that he will try in those difficult Cabinet discussions—to stop some of the nonsense. It is the stopping of the really silly things in the months ahead that would help us as much as any particular piece of legislation. On the positive side, on taxes, I welcome the fact that there is an indication that we may see a reduction in direct taxation. Certainly, there is room for it. At the lower end it is an impossible position, it really is. I think the whole House recognises that. I do not talk about scroungers. When a man loses his job and perhaps his daughter is out of work then I think that is enough without saying that he is a scrounger.

I am against that kind of tiling; but I think the system is wrong. I think that to make a man lose his social benefits, pay the costs of getting to work, at the lower end, the highest level rate of taxation in Europe is a silly way of approaching things. At the other end, the marginal rates are crazy in this country; 83 per cent. on earned and 98 per cent. on unearned. You cannot be that "way out" from everybody else in the world. If we reduced the lot to 50 per cent. it would cost 2 per cent. of the public revenue. These taxes are there for political purposes only. They have been there for so long; and I know that this is not the only Party that has kept them. But they have kept them a bit higher. These are political taxes and have nothing to do with the realities of a fiscal policy.

I have done these things; so may I give a bit of advice to Chancellors of the Exchequer? If they are going to operate on that end, there will be a row. For Heaven's sake operate property and have the row; it is no good doing it in various slices. Bring them right down; and you have no idea of the room for manoeuvre in the Treasury on all kinds of things. It is enormous, once you get that one out of the way. On incomes policy, the noble Lord the Lord Privy Sea said that these talks have to take place. They are going to be very difficult. I see that Mr. Murray has said that he would probably make it a condition that we reduced unemployment; but this is a kind of "cart before the horse" argument. Unless we can get some sensible arrangement about wages, unemployment is going to go up and not down. That is the real danger. Moreover, the policy itself has cut deeply into deeply-held positions about differentials, productivity arrangements and all that. The ideal incomes policy today would be a zero award; and then apply all the money to restoring differentials as quickly as possible. I am not saying that would be easy to negotiate; but I think we must recognise the reality, the difficulty and the necessity for getting the best arrangement that we can.

On policies on spending—and the noble Lord asked about spending—the cash ceiling is absolutely right. I would suggest another ceiling, a ceiling on civil servants. I have some experience in business and I am not one who believes in dismissing people all over the place. That is terrible. The first thing to do is to put a ceiling on new employment. If the Government would put a ceiling on the numbers of civil servants it would have drastic disciplines on the type of legislation that would be introduced. It would make everybody think very hard every time on what that legislation would cost in terms of new civil servants. I seriously commend to the Government an attempt with the Civil Service Department to get hold of it, to put a ceiling on the total numbers involved. I think that they would find that that alone, without other savage cuts, would start to reduce costs very substantially.

Finally, my Lords, on monetary policy. I think that perhaps it has been a revolutionary change, this package. I see some signs; and I am not quite sure that the authorities know what has happened to them. I do not know whether some of your Lordships heard Mr. John Brew the other day on the wireless. He is a member of Grieveson, Grant & Co., and he was comparing the attitude of the Treasury to monetary policy to a famous American physicist who kept a horseshoe hanging up outside his laboratory. His friends said, "Why do you keep that thing? Do you believe in it?" He replied, "I do not believe in all that superstitious stuff; but they say that if you keep it there, it works even if you don't believe in it". It is rather an apt description of the Treasury at the present time.

Then, the attitude to sterling. At the moment it looks sometimes as though one group of civil servants are busily engaged in preventing the British from getting any money out while another group of civil servants are anxious to prevent anybody from abroad from bringing any money in. I doubt whether both positions are particularly tenable or defensible. I am not saying that all this ought to be spelled out. I am saying that a state of mind ought to be created in the country that people feel the authorities know what they are doing even if they do not say what they are doing. If the Prime Minister cannot do it—I understand he is now in charge and Mr. Healey is in a more subordinate position, or perhaps I should say a different relationship—then I suggest that the Governor of the Bank of England should make some statement. Perhaps the noble Lord, Lord Balogh, wishes to intervene, but I would rather he did not make a statement at this stage for I have reached the end of what I want to say.

The Government have taken an important step. Do not let anybody imagine that the Christmas package was a rational continuation of existing policies: it was a very deep change. Success is a common interest to us all and we should all go forward seeking to build on that package. We are interested in power in politics. I am chairman of the Conservative Party and I am interested in power for the Conservative Party. But it is no part of my duty to see it climb to power over the ruins of a nation.

3.52 p.m.

Baroness SEEAR

My Lords, in the speeches this afternoon and in the tone of the Government since December there has been an air of euphoria, an air of optimism, that today we are over the hump. I want to ask this afternoon why we have this feeling, whether it is justified, and whether, as I believe, the optimism is far from fully justified, and what we ought to be doing in order to have grounds for real optimism. The reason for the optimism that is claimed is of course first and foremost the IMF loan. It is a pretty sorry state when we build so much hope and enthusiasm on the fact that we have found that other countries are prepared, pretty reluctantly, to back us rather than see us go broke. It is of course excellent that we have not gone broke.

We had better look the facts in the face. We have been saved because it was too difficult to let us go broke, not because anybody has the greatest confidence in our ability to run our own affairs adequately. The fact that the IMF put conditions of supervision on the loan that they have given is something to give us considerable thought. We are optimistic because of the net put under the sterling balances. Of course it is true that this means there will be less risk of hot money and all that follows from hot money problems. But do not let us exaggerate what has happened because of the net put under the sterling balances. The sterling balances in any case are greatly reduced in size from what they used to be. We have to ask ourselves what will ultimately be the liability on the Government seven years from now for the funding of the sterling balances? The idea that we are completely out of the wood because other people have put a net beneath the balances is by no means established.

We should also reflect that it is a sad day that we are no longer able to be a reserve currency; a sad day that an activity which has brought a great deal of wealth and prestige to this country has now passed. To an extent it has temporarily saved us and therefore it is something to be glad about, but it is not something of which to be proud that we have had this net put beneath the balances. Of course behind the air of optimism is the knowledge that North Sea oil is coming on stream rather faster than was originally expected, and the belief that once the oil is streaming into this country at a good pace our economic difficulties will be over. Yet, that oil could prove a delusion and a snare as well as a temporary relief. It could make us feel that all our troubles are over and that there is no need for us to take the drastic action which we have to take.

We must make the resolution that we have to treat North Sea oil, when we have paid off the debts we have incurred out of the North Sea oil proceeds, as a kind of Marshall Aid with which to re-equip our industry. Then we shall not fall again into the problems that we have been experiencing over recent years, otherwise, North Sea oil will lull us into a complacency into which we all too easily can fall—as we are seeing this afternoon—a complacency which will mean that our final situation is worse even than today's.

What plans are we making to see that the North Sea oil revenues are used to the best possible advantage? The best possible advantage can only be in the reequipping of industry. To what extent are we working out the problem as to how much this is to be in the hands of Government and decisions made by Government? To what extent is it going to be possible for industrialists themselves to take advantage of the benefits flowing from North Sea oil? Again, the Government are priding themselves on the fact that hey have control over money supply. This is excellent and we have been pressing for it for a very long time. We pressed for it at the time the Tory Government so badly lost control over money supply. One cannot help reflecting that a Government which are perpetually lecturing industry on the need to be more efficient should at last have discovered the principle of cash limits, a principle which could have been discovered very many years ago and should have beer imposed very many years previously.

Our temporary recovery at the present time, the idea that we are now well set on the path of permanent recovery, and that there is relatively little that needs to be done except to go full steam ahead, are doubtful propositions. This afternoon we are supposed to be reconsidering the economic measures which were originally announced here on 15th December. Of those measures, I should like to say this. I agree with what has already been said from the Conservative Benches that they did not involve sufficient cuts in the number of persons employed in the public sector. There is not sufficient evidence of a real move of resources into manufacturing industry and out of the public sector. The Government pay lip-service to this of course. Everybody is saying that this is what needs to be done. But what really was being done and what really is being done?

The noble Lord the Leader of the House asked those of us who say that there ought to be a reduction in the public sector to be specific. I am going to suggest one or two areas in which we might with advantage look to find some real economies so that it will be possible to reduce the number of persons in the public sector by putting a limit on recruitment, and other ways in which we can cut expenditure on the public sector which has to come out of the taxpayers' pocket and out of industry's earnings. One area we can look at with considerable advantage is the administrative side of the Health Service. Perhaps the Government will find the following view easy to accept, because they were not responsible for the extraordinary reorganisation of the Health Service which was put upon us by the Conservative Government. I do not know anybody who has any knowledge of the Health Service who denies that there are too many levels, too many administrative layers.

We are all concerned to ensure that the Health Service gives patients proper treatment. But proper treatment does not require the levels of administration that we have got—and those levels are extremely expensive. The noble Lord the Lord Privy Seal was asking for suggestions on how money might be saved. I would say to him that in an Answer given in another place the other day it was made clear that the regional level cost £31 million a year, that the area level cost no less than £76 million a year and that the district and governing bodies cost £65 million a year. I simply cannot believe that there are not economies that could be made in public expenditure out of that £31 million, plus £76 million, plus £65 million—and that is only one area. Who is going to say that a single patient in any hospital in this country would suffer, that a single doctor or a single worker at any level in the hospitals would be worse off, if economies were made in that way and if a further reorganisation were carried out? I noticed only this week that consultants, who had something to do with the reorganisation of the Service, are protesting at the distortion that has taken place since that new scheme was put in.

Now I return to the unpopular, but necessary, attack on the indexation of pensions in the public service. These pensions come out of the taxpayers' pocket; it is a level of pension improvement that no private sector can supply. I speak as a person who, to my surprise and somewhat to my shame, realises that eventually I shall myself benefit from a public service pension, but I consider, as must do many people in the public service, that it is quite outrageous for there to be full indexation for those pensions and for those alone. That is a cut in public expenditure which could perfectly well be made.

Then again, my Lords, there is a whole area of housing. I am not saying that we are over-housed; I am not denying that improvements in housing are important for both social and economic reasons, but I am saying that there is an abundant volume of evidence—and the noble Lord the Lord Privy Seal will know to what I am referring—that up and down this country money is being plain wasted in the housing sector—and I repeat, plain wasted. Evidence has come forward from many areas which demonstrates that to be so. Surely we can give priority to this and make a real and full inquiry into the ways in which this waste in the housing sector can be stopped. The noble Lord the Lord Privy Seal asked for suggestions on areas where economies might be made, and I have given him some.

I would ask this: although lip service was paid to improving the position of wealth-producing industry, did those measures in December do anything like help in this direction? First and foremost, why attack the construction industry once again? The construction industry, by Government after Government, has been made the victim of economic manipulation, yet as soon as we move back into any kind of recovery the construction industry needs to get under way. You cannot continually cripple that industry in the way it is being crippled at the present time. It hits not only the large concerns. I know large concerns which are saying they will not deal in this country any more, neither with the Government nor with contractors in this country. They are seeking—and it may be a good thing from the point of view of exports—to put all their efforts overseas because they cannot trust the kind of contracts that are entered into here.

It is not, of course, only a matter of the large concerns. There are many small businesses in the construction industry, and small businesses, as we have said again and again in your Lordships' House, are a very good instrument for mopping up unemployment throughout the country, in many areas where there are pockets of unemployment, large or small. If, as you are doing, you bankrupt a large number of the smaller construction firms, you are cutting away an opportunity of employment for a large number of people who badly need it. So one must condemn the further attack that was made in December on the development of the construction industry.

Of course, it is not only this which concerns industrial development. Industry needs to have confidence in industry, and confidence in Government. It needs to be sure that Government will pursue policies on which it can rely. In particular, as the noble Lord, Lord Thorneycroft, said, it is anxious about the incomes policy that is going to follow when the present phase comes to an end. How can industry have any confidence to develop unless it can believe that Government have control over this vital element in inflation? In my view, the Government have been given some very good advice again this week by the Consumer Council, which pointed out—and this was echoed by the noble Lord, Lord Thorneycroft—that by far the best incomes policy would be to have cuts in taxation and a zero norm. I wonder whether the Government really have the courage to do what they know to be right, and to say that it is along these lines that we ought to be developing.

In addition to that, we need, and industry needs, to see cuts in personal taxation. I personally in your Lordships' House have again and again urged the nonsense of the high level of taxation for those who first come into tax. It is not 35 per cent.: it is over 40 per cent. It is crazy that people should move from a nil tax rate to a 40 per cent. rate—because it is 40 per cent. if you include social security contributions. No other country does that. What on earth is stopping the Government? Why they did what they did in the first place I cannot conceive. But they could have altered it months ago. It could have been altered in the December package, and it would have made a very big difference, both as regards the purchasing power and the attitudes of people inside industry.

I would say that it is not only at the lower level or the higher level that we need to look. It seems to be the mood at the moment to say: "You must do something about the people at the lower level and about those who are paying 83 per cent. marginal rate. "But it is the people in the middle for whom I should like to speak—those who have been grievously hit and on whom we very greatly rely and, indeed, on whom the future of this country rests. These are the younger people who have got to develop their careers, who have to be able to feel that it is worth while acquiring new knowledge and skills, to take risks in building up their experience, to be able to feel it is worth while to stay in this country because they have reasonable prospects here. If you continue to cramp these people in the middle as badly as they are now already cramped, then you are asking for trouble in the longer run because you are killing the geese that are going to lay the golden eggs in a decade's time. It is for the people in the middle that I would particularly ask that there should be some real concessions on the taxation front.

The matter goes deeper than that. Industry needs to have confidence in Government. I wonder whether we in these two Houses here realise in what bad odour politicians and Government stand, in the eyes not only of industry but of ordinary people up and down the country. It is a very serious problem today. The great mass of people no longer trust politicians. I know, of course, that politicians were always fair game for criticism; but there exists a widespread and deep disbelief. I meet it—for I have a very wide range of contacts—at a pretty high directorial level; I meet it among students, among the rank and file and among people like the taxi-drivers who drop us at the door of your Lordships' House. This is dangerous. It is very serious indeed, and something has got to be done so that people as a whole, and people in industry in particular, are again able to have a trust in Government—I repeat, a trust again in Government. Industry wants stable policies from Government. It is my profound belief that you will not get this trust back in industry; and without that trust there will be no industry and no development.

My Lords, it is useless for people like Mr. Clive Jenkins to come on the radio and abuse industry for lack of patrotism because it does not invest. It does not invest because it has no confidence and no trust, and what are you going to do to restore it? I believe that you will not restore it unless you develop an economic strategy which has all-Party support. I am not talking about Coalition. I am talking about the need to get rid of adversarial politics on the economic front, so that people in industry have a longer run in which to develop their own strategies.

The trouble, as we all know, is that the industrial time-scale and the political time-scale are different, and again and again people in industry have embarked on a programme only to find that the Government have altered their economic strategy, and they are left carrying the can—and carrying the can they are. So that we want a more stable economic policy, backed by all-Party agreement. Is it not possible for Opposition Parties to be in on "Neddy" discussions? Can this really not be done, so that people can feel that what we are building up is a national economic strategy and not just a Party economic strategy?

Then, my Lords, we want more sincerity in the way in which the Government talk to people in this country. There is, if I may say so, a very great deal of double-talk. The word "sacrifice" is very often used. "Sacrifice" is a great word. But is it quite right to talk so often about the sacrifices that people have made in the last two years on the wage front, when we know perfectly well that what we are doing is making up for the orgy of pay increases that we had in the first year of the so-called Social Contract of the Government? In the first year of this Government's Administration, earnings went up on average by 31 per cent. between the beginning of January 1974 and the beginning of January 1975. Of course, if we all pay ourselves 31 per cent. when we are producing growth rates of something like 2 per cent., there has to be retrenchment later on. But when was it accurate to describe as a sacrifice a pulling-in of the belt after a great orgy?

Again, the Government talk incessantly about the Social Contract. Let us have a Social Contract. We do not have a Social Contract. We have never had a Social Contract. It is neither social nor a contract. It is an agreement between the Government and the trade unions. I am not saying that there is anything wrong with an agreement between the Government and the trade unions. But let us call a spade a spade. It is not a Social Contract; it is an agreement which does not rest on a contract; it rests on the realities of trade union power. Fair enough, my Lords. But that is not a contract and it is not social. If "social" means anything, it means that you have to involve all sections of the community. That is not what you are doing, and until you do that you will get no real response from industry, because industry will have no confidence that you are anything more than the mouthpiece of the trade union movement.

Again, the word "democracy" is used. A very respected member of the Cabinet talked—this is, of course, an internal matter—to the Labour Party about the importance of democracy, and the respect that all members of the Labour Party ought to have for democracy. But this means, does it not, taking into account the interests of all the people, not just one section of the people? The Government are now going to have a very good opportunity to show whether they really mean democracy when they use the word, or whether this is yet another bit of double-talk. You will have the opportunity in reviewing the pay policy. You will have the opportunity in the way in which you handle the recommendations on industrial democracy. My Party cannot be accused of not caring about industrial democracy, but industrial democracy cannot and should never mean the determination by the trade union movement, against the will of other sections in society, as to how industry is to be run.