THE ECONOMIC SITUATION

HL Deb 26 January 1977 vol 379 cc512-614

4.50 p.m.

Debate resumed.

Lord O'BRIEN of LOTHBURY

My Lords, this is the first occasion on which I have ventured to offer your Lordships any comments on the economic situation of our country. I do so with some trepidation, partly because I no longer have access to those special resources which enabled me for many years to see blindingly clearly the shortcomings of Ministers of both Parties and the inadequacies of their policies. Having listened to the three splendid speeches by the leaders of the respective Parties in the House, I realise that my 50 years in the City of London does not enable me to match the colourful histrionics with which they combine the wisdom that they utter. Therefore, for the time being as we are in a quiet period I shall do my best. Of course, it is only the remote possibility that someone will disagree with something I say which may raise the temperature a little.

My Lords, the background against which we are conducting this debate is strikingly different from that of only a few months ago. Present euphoria is as great as depression was then. Can so radical a change in sentiment be healthy when in reality so little has altered? Changes simply in sentiment are not of course to be underrated. They take pressure off policy-makers, restore their freedom to plan calmly and sensibly and gather support for their plans. However, the change in sentiment must have real substance. Can we claim this when all we have had is yet more massive external borrowing from the International Monetary Fund, and more recently from elsewhere, the bare bones of a possible solution of the problem of the reserve balances, some better news about North Sea oil and some more encouraging trade figures? Little though all that is, perhaps it marks the turning point in our fortunes.

We must be thankful that the sterling exchange rate has stabilised and that the pressures on it are now upward. Much good flows from that. The new Basle arrangements to facilitate the phasing out of sterling as a reserve currency have also helped to improve market sentiment. I welcome these arrangements. A reserve currency is a privilege for a strong country and a burden for a weak one, and we have been in the latter category for far too long. Nevertheless, my Lords, we should not underestimate the difficulties, never mind the cost, of divesting ourselves of this role. Those difficulties will not decline as the wished-for improvement in our economy manifests itself.

The strength of the gilt-edged market prompted by the fact and expectation of falling interest rates certainly greatly eases the authorities' tasks in the monetary field. Funding of the public sector borrowing requirement now proceeds apace but, of course, at rates of interest which will burden us and our heirs for many years to come. However, at least the money supply is under control and, indeed, the efforts of the authorities in this field have been more successful for some time past then they have been given credit for. I hope that we shall never fail to pay continuing attention to this indispensable basis for a sound money. If that makes me a monetarist, I am happy to declare myself as such and ask those of contrary view to survey the wreckage created by printing money both in this and other countries over recent years.

I speak with feeling because of what happened in 1972–73 when I was actively concerned in such matters. I have good reason to know that the excessively large expansion of the economy then generated owed its origin to deep governmental concern about the high level of unemployment and to pressure from the Trades Union Congress to adopt expansive policies to reduce it. No one needs reminding of the consequences of those policies, although the lesson has obviously not sunk home everywhere. Every right thinking person must deplore the suffering and indignities which unemployment brings and the waste of capacity which it entails. However, as many countries besides our own have demonstrated time and again, expansionary policies alone are a very temporary and imperfect cure which contain the seeds of still greater inflation and unemployment.

Perhaps the improved figures for external trade provide the best basis for present optimism. They show that the long-awaited growth in the volume of exports has at last begun. True, the figures are for one month only. But I am reminded of how long we had to wait for such a turn round after the 1967 devaluation, how we despaired of it ever coming and how massive and prolonged it was when it did. Let us hope that history is now about to repeat itself.

However, to speak of hope implies passive acceptance of whatever the future may bring. That will not do. All policies must now be actively tailored towards making it more likely that goods and services in increasing quantities are produced and sold for export. As I see it, this means on the one hand that a further period of strict income restraint must be negotiated while, on the other, incentives to effort must somehow be increased. The potential clash between these two objectives, both equally important, is obvious. An incomes policy, combining the necessary overall restraint with some restoration of the differentials which have been so much eroded in previous phases, will be difficult to devise and to negotiate. Nor will this be made easier if the Chancellor fulfils his evident desire to reduce the present punitive levels of direct taxation by shifting the burden to indirect taxes with the consequent effect upon prices.

I conclude therefore—and I think I conclude it despite the taunts which the noble Lord the Leader of the House passed across the Chamber rather than down the Chamber—that there must be further cuts in Government expenditure. That presents its own difficulties, I know, but if we retreat every time a difficulty appears, our overall problem will remain with us and get worse. I have great sympathy with the social arguments against severely cutting public expenditure. There are examples on all sides of worthy services and projects starved of funds which make one feel very uncomfortable indeed. But I can repeat only what many others, including the Prime Minister, have said. We must create wealth before we redistribute it. For too many years we have devoted ourselves to the latter with insufficient regard to the former. From now on there must be a better balance or we shall all become progressively more impoverished.

The economic argument against public expenditure cuts has hitherto been that to do so would simply add to the already high level of unemployment. If expenditure and direct taxation are cut at the same time, the net effect on demand and hence employment would be small and certainly worth risking for the longer-term benefits we would be seeking. Moreover, severe pruning of and constant watchfulness over public expenditure is essential if the enormous public sector borrowing requirement is to be reduced to reasonable levels in the years immediately ahead. Unless it is, we shall not reduce interest rates to a level which will encourage industry to borrow in a market where there is room for it to do so.

I am sure, my Lords, that the world at large, which has hard-headed economic reasons as well as reasons of sentiment for wishing us a better and more prosperous future, has been reassured by the Chancellor's letter of intent to the International Monetary Fund. There must have been universal relief that he firmly turned his back on the siege economy protected by general import controls and that he was willing to commit himself to the restraint of public expenditure and of domestic credit expansion. The fact that the IMF will be monitoring these commitments for a year or two at least has, I am sure, been a major cause of the better atmosphere now prevailing in the foreign exchange and other markets.

Here I should like to interpolate another word arising out of the speech of the noble Lord, Lord Thorneycroft. I must say that I was saddened to hear a distinguished former Chancellor of the Exchequer talking about the bankers, "being in the hands of the bankers". Noble Lords must know that the International Monetary Fund is not a bank. There is hardly one member of its board who has the faintest idea how to run a bank. It is an international organisation which we helped to create. The members of its board are the spokesmen of the countries represented, the members of the International Monetary Fund, and they express only the views of those countries. It is the Governments of those countries who have made the stipulations through the IMF for the borrowing we have taken. I hope none of us will ever forget that. As a lifelong banker, I think that there is too much of this nonsense of what the bankers do to us.

The slow growing economy which the Chancellor envisages—and I believe it will probably grow a little slower even than he thinks—may not be very exciting but it offers a better prospect of reducing our still exorbitant rate of inflation. This task above all we must pursue relentlessly until reasonably stable prices have once more been achieved. Until they are, inflation will continue to undermine all our other efforts.

Perhaps at this point I may take up the theme of the noble Baroness, Lady Seear, about North Sea oil, good news of which has of course contributed to present optimism in the markets. The experts say that the foreign exchange we shall need to repay public sector borrowing abroad and to redeem reserve sterling balances will prove to be a relatively small charge against the immense benefits we may now expect from North Sea oil. One must hope so. A much greater danger, I fear, is that this radical but relatively short-lived improvement in our circumstances will tempt us to shut our eyes to our deep-seated problems which, if left unattended, will remain to hold us back long after North Sea oil has come and gone.

Our chief lack seems to me to be a reasonable consensus of opinion about the aims of our economy and how they are to be achieved. Without that, it is impossible to devise a coherent industrial strategy and to pursue it steadily. I believe, myself, that we are nothing like so divided and envious a society as some publicists like to make out. But while such people are in such positions of power and influence, it is difficult for any one of us, even the Prime Minister, to unite the nation. What we need more than anything is a major increase in the present abysmally low productivity in many of our major industries, combined, of course, with an appropriate increase in the wages related to it.

Most people, I feel sure, believe that a mixed economy is the best assurance of freedom of choice and indeed of individual freedom itself. Only a tiny majority want to nationalise everything. Why cannot we unequivocally turn away from such people and co-operate in rejuvenating the system we have? If they would, the trade unions could do so much to help themselves and all of us. I would welcome the workforce being more closely identified with the management of industry. But having had my first look at the Bullock Report, I am bound to say, heaven forbid that this should come about in the ways proposed in the majority Report!

I believe that our industrial leaders would be right to fight against the implementation of these ideas with all possible vigour. Great store though I set upon the continuance of income restraint for the foreseeable future, I question whether any third phase would be worth while if the trade union price for it were to be Bullock. I was reassured by Lord Oram's reply to the noble Lord, Lord Taylor of Gryfe, and I hope indeed that this does not come into the issue. It is because of this as much as anything that I end somewhat on a pessimistic note, feeling that the greatest force in our economy today is misdirected and likely to remain so. Against this, it is difficult to be greatly encouraged by the more favourable developments, some of them of a superficial character, of the past few months.

5.6 p.m.

Lord JACQUES

My Lords, on the 6th February 1974, the noble Lord, Lord Robbins, made one of his notable speeches in this House. More than anything else, that speech told us what was going to be the story of the succeeding three years through which we have just passed. I would, because of that, like to make three brief quotations from that speech. At column 797 of the Official Report he said: …we are confronted now with what unquestionably is the gravest economic and political crisis in the lifetime of most of us now living. He went on at column 800: This Government"— that is the last Conservative Government— inherited from their predecessors a balance of payments surplus of something of the order of £1,000 million. Before the oil trouble began, the deficit on current balance of payments account was approaching the order of £2,000 million, a switchover which surely is a matter of very great anxiety indeed. The final quotation, which I think is the most important of all, is at column 803, where he said: We certainly shall need to borrow extensively if we are not to go back to wartime austerity. How shall we persuade people to lend more to us if internal chaos continues? Those quotations tell us briefly the story of the succeeding three years. Let us be reminded that that speech was made one month before Labour took office.

The noble Lord, Lord Thorneycroft, said this afternoon that one of the best things we could do would be to take ourselves out of the hands of the lenders so that we make our own policies. I entirely agree with that sentiment, but I would point out that the need for extensive borrowing was pointed out by the noble Lord, Lord Robbins, one month before we took office. Perhaps the lesson from this is that if we want to avoid extensive borrowings in the future we should avoid having Conservative Governments who will get us into such a damned mess.

It has become fashionable to be critical, and even cynical, of the Social Contract, and that is not confined to Members of the Opposition Parties. It has now become fashionable among some trade unionists themselves. I note that one of the candidates for Jack Jones's job has made it his election platform. The Social Contract was the alternative to the chaos which the noble Lord mentioned. Without that Social Contract we should have had real chaos, because in the present circumstances a free-for-all would inevitably lead to chaos resulting from strikes.

It is of course true that as a result of the Social Contract the workers have a smaller take-home pay in real terms. For example, last year to December the wage rates increased by 11.7 per cent. but the retail price index increased by 15.1 per cent. On all the figures available, it is clear that they have a smaller take-home pay in real terms than they had before. But what has not been said as emphatically as it ought to have been said is that that would have happened in any case. If there had been a free-for-all there would have been far greater inflation and, as a result, there would have been a greater fall in the value of money.

Let us not forget that the trade unions have great influence over the money wage but little influence over the real wage and that consequently there would have been that fall in the standard of living whether or not we had the Social Contract. The fall has come by voluntary agreement rather than by the chaos which the noble Lord mentioned. Certainly, if we had not had the Social Contract we should have had far greater unemployment, with all its human misery and economic wastage, because it would have been necessary to curtail credit and expenditure on a far greater scale than has been the case with the Social Contract.

Our credit-worthiness would have been undermined if we had had chaos instead of the Social Contract and we should not have been able to borrow money. In other words, we should have been unable to have the temporary subsidy which is maintaining the standard of living at its present level. In addition, the Social Contract has had side advantages which I think appeal to noble Lords in all parts of the House; it has involved an understanding that the less well off—the lower paid, pensioners, unemployed and so on—should receive some protection; and I refer of course to people for whom most, if not all, of us have real sympathy.

On the question of balancing expenditure on the one hand and employment on the other, there is great scope for differences of opinion. In my view the Government had their sums right before the last package. In a way the package, which was forced on us, was unfortunate because I believe the sums were just about right before then. However, I do not believe that the package will make a great deal of difference to employment. Those who suggest that there should be greater cuts in expenditure largely fail to tell us what expenditure should be cut; the nearest the noble Lord, Lord Thorneycroft, got to it was when he said there should be a ceiling on the Civil Service, which is not a cut but a hope for the future. The noble Baroness, Lady Seear, made some attempt to say what sort of cuts she wanted. We should look sympathetically at any cuts which would not materially increase unemployment, but anything which would increase the human misery and economic waste of unemployment should be avoided at all costs, even if it means some inflation, for unemployment is an even greater evil than inflation.

When we come to the question of the control of credit, this Government have an excellent record, as some noble Lords have pointed out. During the whole of their term in office the growth in M3 has been less than the growth in national money incomes, so that all the time there has been a downward pressure on prices. This has been in sharp contrast to the record of the last Government. I will give the House two figures: in 1973 the increase in M3 was 28.2 per cent., that in a period when the RPI was increasing at only 10.6 per cent. In 1976, three years later, with the Labour Party in office, M3 was increasing at only 13.5 per cent. while RPI was increasing by 15.1 per cent. We used the credit to keep down prices whereas they used it to push up prices.

The present Government have done certain things for which they have never received the credit they deserve, and one is their record in industrial relations. We, too easily forget that if investment in a plant is to be worth while there must be some assurance that that plant will be used adequately. If the plant is stopped, either for long periods or frequently because of industrial disputes, that investment will either be at a loss or we shall continue to use the plant long after its useful life, simply to try to get the money back even when the plant should have been replaced by something more up to date. Thus, industrial relations is of the first importance.

This Government have tried to improve industrial relations in three ways. First, not only by the Social Contract but in a general way they have tried to do this by discussing matters before decisions are taken, and on occasions compromising, and that in itself has completely changed the atmosphere. Secondly, they have already promoted greater participation by workers—by the Trade Union Act and Employment Protection Act—and workers have been given a bigger say by being able to seek information about future developments, about the financial situation of the employer and about the question of redundancy. That has been a start on participation by the workers. Thirdly—this is frequently overlooked—the Government have created the independent Advisory, Conciliation and Arbitration Service which, by its visits to plants, its conciliation machinery and its arbitration facilities, is avoiding scores of industrial disputes every week of the year. It has done more for industrial relations in this country then any single act by any other Government. My noble friends should take pride in that work and noble Lords opposite should acknowledge the work which the Government have done in this respect.

As has been said, the number of days lost last year was the lowest for 10 years and the number of stoppages was the lowest for 20 years, largely as a result of what this Government have done. The Government have also taken steps to anticipate the possibilities of shortages as the economy redevelops. In particular, they have helped to finance materials—machine tools and the stocking of such materials—to ensure that they will be there when they are wanted. On the employment side, the Government have financed the continuation of apprenticeships which would have been discarded but for Government assistance. They have provided a contribution for collective apprenticeship schemes, and I suggest it is time they took one step further. In some trades we already have in some part of the country a shortage of skilled labour. It is time the Government said, "We are not only making our contribution to a collective apprenticeship scheme. We will insist by Statute that that scheme is put into operation in each of the various trades". That is the only way to ensure that in future, when we need it, we have an adequate supply of skilled labour, and the sooner that action is taken the better.

I come to the question of taxation. By stock allowances and 100 per cent. depreciation on plant, profits which are reinvested in a business are virtually free of tax, so much so that the corporation sector of the community is contributing less to the Exchequer as a percentage of total revenue than in any other comparable leading country. Two years ago, in 1973–74, corporation tax contributed 12.9 per cent. of the total revenue. In 1975–76 it will contribute only 7.9 per cent. That is lower than in any other comparable country. I believe that we have now reached the time when we should look at the corporation tax to see whether or not the corporate sector should produce a little more than it will this year.

On income tax, we have a somewhat different story. In 1973–1974, income tax contributed 51 per cent. of the total revenue; but two years later, in the current year of 1975–76, it has contributed 52 per cent. I suggest that that is getting to the point when it is too much. There is a need to give some relief, particularly to the lower paid. That should be the first essential. There is a need to inject into our income tax system some incentive—incentive to work, incentive to earn bonus, incentive to seek promotion. I think that that is something which the Chancellor ought to look at very hard.

I come now to VAT. Here, the Chancellor wants to take a very hard look. In order to pave the way for our entry into the EEC, the Heath Government accepted VAT hook, line and sinker. It is a most wasteful tax and it is an inflexible tax and the sooner we examine it, the better. It is wasteful because we spend a lot of money collecting it and we then spend a lot more refunding it. For example, we tax the manufacturer and he passes on the tax to the wholesaler. Then, when we tax the wholesaler, we allow him to deduct the tax which he has paid to the manufacturer. The labour which was used in checking the manufacturer's tax is now used to see that the wholesaler does not deduct too much. Then the whole thing starts again when we get to the retail stage. The wholesaler passes on the tax to the retailer and the retailer can deduct the tax that he has paid to the wholesaler from the tax that he will pay. The same machinery that was used to check the wholesaler's tax is now used to ensure that the retailer does not deduct too much of the wholesaler's tax. On the face of it, it is madness. It is only fair to say that there is a theory behind this. It is that because the tax is based on the cost of the added value there will be an incentive to keep down the added value. Let me say that, in practice, that incentive is negligible. It is not worth the price that we have to pay in conducting such a wasteful tax.

The tax is also inflexible. It is inflexible because it is inflicted at the final, retail stage. At that stage, there are millions of transactions and consequently there is a curtailment of the possibility of using several rates of tax. Each retailer sells a wide range of goods and it would be quite difficult for the Revenue to make him charge different rates of tax on the assortment of goods that he sells. However, at the wholesale level, that would be quite easy because the goods are handled in bulk. As in the case of purchase tax, one can have as many rates as one likes if the tax is levied at the wholesale rather than the retail rate. I suggest that, in order to get over this wastage and lack of flexibility in the value added tax, we have to do only one simple thing: introduce an element of taxation at source. At the wholesale level, where formerly we inflicted value added tax, we should raise the rate of value added tax—that is, we should charge a higher than normal rate only at the wholesale level. We should do that in order that the retailer pays a higher rate on his purchases instead of paying a lower rate on his sales. So far as everybody else is concerned—the hairdresser who is not a retailer or the garage repairer who is not a retailer, for instance—they would have paid the higher rate but, since they would be charged tax on their sales, not being retailers, they would get the higher rate deducted from the tax that they had paid.

So, by introducing that element of taxation of retailers at source, one would do two things at once. First, one would get rid of 70 per cent. of one's collection points. Secondly, because one would not be inflicting the tax at the retail level but rather at the wholesale level, one could have as many rates as one liked as we had under purchase tax. That is a reform that would increase the flexibility of VAT as well as considerably reducing the cost. I gladly give way to the noble Earl.

The Earl of GOWRIE

My Lords, I am most grateful to the noble Lord and we attend to his first speech from the Back Benches for many years with great interest. I should like just to ask him whether he is not aware—and he seemed to refuse to be aware in Government—now that he is freer, that the inflation rate is itself a form of taxation? It is no good reforming VAT or corporation tax or any of these taxes in a wholesale structural manner until the rate of inflation is reduced.

Lord JACQUES

My Lords, the rate of inflation has nothing to do with it. This can be put into operation no matter what the rate of inflation. It does not matter whether it is 3 per cent., 13 per cent., or 23 per cent. This is just a little propaganda on the part of the noble Earl. Also, may I add that this reform of VAT is not something that I have just thought up? I put it up to the Heath Government before VAT was implemented and I was informed by officials that the decisions were political and that the tax had to be applied strictly in accordance with EEC rules and that there could be no variation even though it would produce the advantages that I have suggested.

In conclusion, may I say this? Whether we attain our target of 3 per cent. unemployment by 1979 based upon sustainable growth will depend largely upon both sides of industry. It will depend upon our ability not merely to produce and to sell but also on our ability to deliver on time the goods that people want to buy from us. The Government can only pave the way for that: I suggest that, on every score, this Government have done that admirably.

5.28 p.m.

Lord CAMOYS

My Lords, in venturing to make my first speech in your Lordships' House, I should be grateful for any forbearance which your Lordships may feel prone to give to those who take that step—indeed, the kind of courtesy which was often extended to my late father and for which he was always grateful. In what I have to say I shall draw upon my experiences as a banker, perhaps in spite of the noble Lord, Lord Thorneycroft, and even though I fear that I shall be neither as eloquent nor as authoritative as the noble Lord, Lord O'Brien, nor as thorough as the noble Lord, Lord Jacques.

The Government deserve congratulations for many of the measures which have been taken in connection both with the IMF credit agreement and with the preliminary agreement to fund the official sterling balances. But, inevitably, there remains areas of concern. The three areas of concern on which I should like to focus attention are public sector borrowing, monetary targets and direct taxation. To take public sector borrowing first, the sterling capital market has for reasons that we all know about been saddled with an immense Government funding operation. Any number of articles have recommended new types of Government debt, such as floating rate debt, general price indexed debt, foreign currency, or even oil price indexed debt. Any one of these could prove less costly than the type of debt now being issued. By continuing to stick to the principle of issuing long dated high coupon debt we are, in my modest opinion, adopting the strategy of highest risk. If inflation falls, if interest rates fall, the real cost of servicing the debt will greatly increase and a real burden I suggest will be placed on the public sector for some time to come. This burden will have to be met either by higher taxation in the future, or by a cut-back on spending elsewhere.

I am acutely aware that the task of managing the gilt-edged market is a highly complex matter, but I venture to suggest also that the cat and mouse game of keeping the market guessing as to when new stock is to be issued brings uncertainty and undermines stability. I have often wondered therefore whether it would be possible to experiment with a system of auctioning Government securities similar to that which is done so successfully in America, hopefully using a new type of security, at least from time to time.

In his Statement in another place the Chancellor of the Exchequer surprised nobody in revealing the IMF's desire to have this country adopt a domestic credit expansion target, a target which is essentially a lender's protection device. If the Government are drawing on their foreign currency reserves, the rate of monetary expansion must be reduced to meet domestic credit expansion target. Conversely, if foreign currency reserves are accumulating, monetary expansion can be expanded within that same target. It is therefore during those periods when the Government are drawing on the IMF credit that monetary policy must be stringent—and this is of course a sensible precaution for the IMF.

However, it is the rate of money supply expansion rather than domestic credit expansion that is an essential for the determination of the rate of inflation. If the Government do not announce a clear money supply target, the fear is that the rate of inflation may become a function of foreign exchange intervention, which is of course wholly unpredictable. For example, an inflow of money into the United Kingdom would increase the reserves and allow a correspondingly greater increase in money supply. This could still be within a given domestic credit expansion target, but one which might then maintain, if not increase, inflation. This I find disturbing at a time when I think we are all agreed that our strategy should be to reduce inflation, to keep it down, to increase the country's reserves, and to reduce the very high foreign debt. My fear is that to have a domestic credit expansion target without a clear money supply target may have in the future a potentially damaging and unsettling effect.

The Chancellor of the Exchequer and the Prime Minister have on several occasions stated their determination to create the right conditions in which British industry can make its proper contribution to the national welfare. For example, the Chancellor stated that he wished to improve the tax treatment of employees who live in this country but who work abroad on increasing exports. In itself this is to be greatly welcomed, but the Inland Revenue Consultative Document, which suggested how this should be implemented, would indicate that probably only 25 per cent. of those travelling abroad on export business would so benefit. That is very disappointing. While it is essential that our exporters should not be disincented by very high taxation, in my opinion it is equally important that our skilled craftsmen and our managers elsewhere in the economy should not be disincented. The health of the economy, of our industry in particular, of the level of imports as well as of the level of exports, depends inter alia upon this. I suggest therefore that the levels of taxation themselves must be tackled, and I will try to demostrate why.

A departmental manager (defined as being head of a production department, with about 100 employees, of a sizeable company in the metal processing industry) would in 1975 have earned less after tax in this country than in any other industrialised nation, and less than in Greece, Brazil, Mexico, Singapore or Iran—and only more if he had lived in Portugal. The effective rate of tax on the manager earning £20,000 per annum gross in Austria is 42 per cent., in Germany 41 per cent., in France 21 per cent., and in this country 52 per cent. So far as marginal rates of tax on earned income are concerned, this country regrettably leads the international league. In Germany and America the top rate is 55 per cent., in Canada 60 per cent., in Sweden 70 per cent., and in this country 83 per cent., as has been mentioned earlier by noble Lords. Another example is that an American executive with an income of 40,000 dollars keeps three and a half times as much of every extra dollar of income that he earns as does his British counterpart. I submit that that is a terrifying comparison.

It would be serious enough if this state of affairs were to apply only to those at the very top of industry. It does not. In comparison with France, Germany, and America the net annual take-home pay of the employee in this country, whether with two children or more, is worse at each level of gross salary from £4,000 to £25,000 and above. Comparing purchasing power in real terms in 1976 and 1972 produces an equally worrying picture, as Sir Kenneth Bond has demonstrated so well. The purchasing power of the skilled manual worker at GEC is down 10.5 per cent., of the functional manager down 18.5 per cent., and that of a senior group managing director down 32.5 per cent. The working people, to quote the noble Lord, Lord Peart, have indeed made a major sacrifice.

A different aspect of the same problem is how the university graduate has opted for the security of the public service rather than for the challenge of industry. In 1965 less than one graduate went into the public service for every three into industry. In 1974 the ratio was about one to one. It is therefore not surprising to find that in 1975 there was a sharp increase in the net outflow from this country of administrators, managers, professional and technical workers—many in my own age group and many of whom I know. It is probable that the figures for 1976 will be even worse.

I know that it is sometimes argued that there is no need to worry about senior management since, it is apparently argued, they do not work only for money and they will not leave this country anyway. Such argument I suggest is both wrong and dangerous. Junior, middle and top management will continually take the risks which are an inherent part of their responsibilities only if they can be rewarded for their successes. If they are not successful they expect to, and do, lose their jobs. There is little or no reward for doing their job the better in this country.

The manager is therefore less and less willing to take risks, less and less willing to work that bit harder, to see his family that bit less, in order to improve productivity and win orders. The good and energetic manager may well throw in the sponge, and only the less energetic stay behind. The more senior the manager, the more energetic he should be, the more he should inspire his team, the more he is needed here if he is so inspired himself. Without significant reductions in direct taxation I am doubtful whether British industry will make the contribution that we all desire.

Every Government over the past 15 years have found the management of the economy an almost insuperable task, and it would be an impertinence on my part to suggest that simple solutions are available. What I have tried to do is to outline some of the problems as I see them as a banker and to suggest, in a way which I hope has not been unduly controversial, some possible remedies.

5.39 p.m.

Lord NORTHFIELD

My Lords, I should like to say what a delight it was to listen to the noble Lord making his first contribution here. My own was so recent that I almost shared his anxiety in making this first speech. But I should like to assure him that one thing in both Houses of Parliament that I have always felt to be the case is that people who come to speak in these Chambers from direct personal experience in a profession, earning their living day to day in one of the great professions, are always the people who are listened to most attentively. I would venture to hope that the noble Lord will come here often and that he will, with his own quietly impressive form of delivery, bring us back to earth from time to time with his own personal experience close to the ground.

My Lords, the last debate we had on this issue was on 4th October, when all was foreboding, alarm and even despair. At that time there had been an accelerating run on the pound, a movement of funds from London, when it appeared that the money supply was out of hand and would help to stoke up inflation again. I recall, in that debate, urging the Government, for my part, to keep their nerve. I asked them to keep to their balanced strategy and to face a two-year slog until the oil revenue begins to give a balance-of-payments surplus and some consequent room to manoeuvre in the economy. Above all, I was exhorting the Government to agree that there are no short-cuts to economic paradise, and least of all by slashing £5,000 million from public expenditure—an action which might well have pleased some foreign opinion and noble Lords opposite but would have caused another million unemployed, would have wrecked confidence in industrial investment as a result, would have smashed wage restraint, and unleashed violent inflation all over again.

I also recall the contribution to that debate of the noble Lord, Lord Thorneycroft, and particularly what he said at column 835 of the Official Report. The noble Lord reminds me of a quotation from Mark Twain—a lovely quotation which I think is a marvellous one to be able to tell after dinner when somebody has romanced a little and has gone on and on—when he said: The older I get the better I remember, whether the events occurred or not". The noble Lord reminds me of that in his romancing. What could be said of him is: The older I get the less do I remember inconvenient matters". This is very true of him. After all, here he was saying, "Leave us alone; stop legislating"; and there, sitting next to him, was the arch-architect of the Industrial Relations Bill, which he avidly supported, which was the most bigoted interference with what should have been voluntary activity in our society and which wrecked industrial relations for five years. What a colossal nerve of Lord Thorneycroft: after all that, and after all that he did in that period, to come here and start lecturing us about interfering in voluntary activity or things which should not be legislated about! I thought he was hardly at his best this afternoon.

The point about the noble Lord, Lord Thorneycroft, in that debate is that he was in fact espousing those £5,000 million cuts which were being suggested by The Times. He said so himself, as I say, in column 835. He has no right to come here today to say "What you have done, of course, is to follow our advice". Not at all; what the Government have rightly done is to refuse to follow his advice—and heaven help us if we had not done so! The cuts which the Government made—and I join with my noble friend Lord Jacques in being slightly sorry that they had to make them—have not had the effects that the noble Lord's cuts would have had. They are cuts of £1½ billion in public borrowing requirement in order to satisfy the IMF, but creating, not collapse; only—sadly, but only—an extra 30,000 unemployed; and with compensating job creation measures and special investment measures that will actually create more jobs than are lost by the cuts. That, I say to noble Lords, is a total rejection of the philosophy put forward by the noble Lord on the 4th October. It is an alternative package which is in no sense on the lines suggested by the Opposition in that debate.

Of course, my Lords, this action has earned the respect of the IMF—and a hard-headed lot they are. The noble Lord, Lord O'Brien, said they are all politicians. They are pretty hard-boiled ones. It earned the respect, too, of the United States Secretary of the Treasury at that time, who said: This is a responsible and"—— mark his words— a sustained approach which represents a sound and realistic strategy for the United Kingdom rather than a one-year transitory effort". That is what the Conservatives would have had—a great smash of £5,000 million and hope to goodness it all came out right. No; this is a long-range effort fully in line with what the Government had in mind; designed to hold the economy; and pushed a little further down the road than many of us would have wished for by the IMF.

In contrast to the noble Lord, Lord O'Brien, I personally confess quite bluntly to being an optimist now—a guarded optimist. I would not let the present situation run away with me; we are not out of the wood: but at least I am a guarded optimist given the pointers in the economy today. Look, for example—I choose this almost at random—at last Saturday's leader in the Financial Times: Cheerfulness in markets…the sudden change in the mood of the markets…statistics…now tend to be interpreted optimistically…fears about a further precipitous drop in the exchange rate largely removed…the visible trade account will be markedly better…able to add considerably to the foreign exchange reserve…Particularly welcome is a resumed increase in the volume of exports, which is needed to take up idle productive capacity". Then, most important: …the money supply figures for the month to early December which, like the December trade figures, suggest that earlier gloom was much overdone". That is not me; that is the Financial Times. Then there is a very happy note, that the money supply and…domestic credit expansion for the present financial year will fall within the limits officially laid down. I am an optimist. I believe there are pointers all around that we are just beginning to see the end of the tunnel.

In seeing the end of the tunnel I come back to that point about the strategy that was being urged by the Opposition. I hope that we are now going to bury once and for all this clamant demand for further striking, slashing cuts in the public service borrowing requirement. I only hope that, if I cannot convince the Opposition, their own right honourable friend Mr. Reginald Maudling will do so. Thank goodness for Mr. Reginald Maudling in the Tory Party at this time! He started the counter-attack on his own Front Bench on this issue, and he is pursuing it with some vigour. In the debate in the other place on 21st December he said that monetary theories are of little value (I am not quoting; I am paraphasing) as a guide to action because we are suffering from cost-push inflation based on new, modern social factors. In other words, what he said was that we i are in a totally new historical situation, where the trade unions are feeling the power of their position and are learning to use it (I have said this before in this House) and for a period this has been to some extent undisciplined. They are having to learn the hard way; but this is much more of an explanation of our present troubles of inflation than things about monetary supply. Monetary supply can feed the trouble, but it cannot cause it; and that is the issue, Mr. Maudling said.

He returned to the attack on the 22nd January in a letter to The Times which I thought was a brilliant letter. It is one of the letters which pleased me more than anything I have read in the last 12 months. He said that this is what The Times, the £5,000 million slashers—he could have said "the Conservative Front Bench"—believe: Keep unemployment up, stagnation going, investment down indefinitely until the workers have learnt their lesson, until the trade unions stop demanding too much money, and give up restrictive practices. This, in blunt language, is what you really mean…in the modern world it is profoundly wrong, because it will not work, and in the process of failure it will disastrously divide the nation". My Lords, how much I agree with Mr. Maudling! The Times package is a cry to go back to the wilderness of monetary control, and a hope that by throwing people out of work and wreaking the worst on them they will suddenly learn the discipline of the old days. It is just not on today. I am hoping that at least we can bury this strident demand for cuts of a scale to create another I million unemployed and a 10 per cent. further fall in our national production, and all the other things that may wreck the Social Contract and might well wreck the social fabric as well.

My Lords, I end by saying that my reasons for quiet confidence are these. If you list the things we can now see appearing around the corner they are very impressive. Another 2½ per cent. of our resources are going into exports compared with 1973. Symptomatically, what is the Sunday Times running now? Continuous features about export success saying, "Write in and tell us how you are doing it! We will publicise it." This is the new spirit in Britain. As the noble Lord, Lord O'Brien, said, and as Sir Alec Cairncross said in The Times, these things do appear after two or three years of devaluation, and we are right now to expect these things to come through in great export successes.

There is a firm hold on Government spending and cash limits. I am a sufferer as a chairman of a public body. I know how hard it is to get money out of this Government. The others were much easier. We are at the end of the growth in local authority manpower and spending. There are new rigours in the whole local authority spending field after the violent expansion created by the Conservative Party's reform of local government. We have invested £10 billion in three years, through the Government, in basic productivity industries like coal, electricity, railways, oil and steel. The £600 million investment in steel is the highest in Europe. We are beginning to see results. We must see results for investment on that scale.

We have had indications from the Chancellor about forthcoming incentives, and I very much agree with the noble Lord who made his maiden speech that this is now the next stage of our revival—greater incentives for middle management. The Chancellor has promised this in the forthcoming Budget. There is industrial peace on a scale which was never dreamed of five years ago and, above all, I think the most striking thing is that wage restraint has held this year despite the totally unexpected strains that have appeared since the last negotiations. There has been every incentive for the trade unions to repudiate this year's Social Contract. Because devaluation has forced up the cost of imports, food prices are much more than was expected when the Social Contract was signed. There have been cuts in food subsidies which were never expected. There have been higher indirect taxes and there have been relaxations on dividends and profit made in Mrs. Shirley Williams's announcement of last summer. None of these things was expected by the trade unions when they signed the Social Contract. The fact that they have held to it and have seen standards of living going down, nevertheless, I think is a miracle and one for which I think we should be particularly grateful to the trade union leaders.

Output growth has resumed. Oil imports are now bound to fall and we are not spending so much on buying oil rigs from abroad. The catalogue is important and immense, and I will not weary your Lordships with the rest of it. Above all, we now have the prospect, almost for the first time in my political life, of a balance in overseas payments this calendar year, together with a prospect, hardly able to be denied, of a £2,000 million or £3,000 million surplus in 1978. This will give new room to manoeuvre in the economy which all of us have dreamed about through the many weary years of our economic history of the last two decades.

My Lords, looking ahead, I cannot avoid being guardedly optimistic, sharing some of the satisfaction shown in the stock market, shown in the Financial Times, shown by all the pundits and commentators, that we are moving into a new period when we can be quietly confident. I have only one final thing to say about this situation. I hope that the Government, given this new prospect looming up, are not going to be caught unawares and that they will have plans ready about how, when that turnround comes, we are going to get down the present totally unacceptable level of unemployment. When we can see a glimmer of surplus in the balance of payments, we can begin to expand again without worrying too much about the immediate impact on the import bill. We ought to be ready, when that time comes, with measures that we can afford to risk to take to get down this totally unacceptable level.

I come therefore to one particular thing that I want to say to my noble friend who is to reply to this debate and who represents the Department of the Environment. When she comes to look at the prospect ahead, with the possibility at least that the turnround is on its way, I hope that she will fight for some guarded approach to the present policy of a review of the growth of the new towns in this country. The Minister has announced that he is to review the new towns. In present times of economic stringency he is not sure that we can go on building our new towns on the present scale. I beg of my noble friend to convey to him that he should not make cuts which, in a year's time if we have turned the corner, will look like a nightmare that we have brought on ourselves and which we bitterly regret.

If it is true that we are spending too much on our new towns, then tell us! Tell us we must have a 10 per cent. cut across the board perhaps; and then leave us alone to get on building our new towns. We are prepared—and I speak, I am sure, for many new town chairmen—to find in this mixed economy in which I passionately believe a new system of partnership with private enterprise. I do not want to come with a begging bowl to the Treasury for every penny that I want to spend to build in my new town the great romantic city centre which we have designed on the edge of a lake; to build new housing of designs that no other new town has tried, with their romance and vision of the future. I do not necessarily want to have to come to the Treasury for money for all that. I want to be left alone to go to private enterprise and into partnership with them in order to build it. But I cannot do that if I am told that my new town is to be slashed, its population targets cut and all the hope, enterprise and confidence are to be reduced to nought. I say: "Leave us with our population targets. Say that we must make do with less money from the Treasury; but, for the rest, leave us alone to get on with the job". In the 1980s, if I am right in my optimism, we will be ready to make a new surge in our new towns with all these new, imaginative things; we shall be out of a period of absolutely no growth and in a period of, at least, some growth. The exercise of cutting on the scale being rumoured at the moment will seem like a bad dream which we ought never to have wished on ourselves.

I hope that the slight optimism that I have ventured to express today will get through to the Department of the Environment, among other people. Although I pulled the leg of the noble Lord, Lord Thorneycroft, I agree a lot with him that all Governments legislate too much. His own Government did so; mine does. That is the modern world. But the rest of us can say: "Leave us alone for a little while to get on with some important jobs, where we will not come with the begging bowl all the time; and we will show that this mixed economy which we have, and which I passionately believe in, can be a great success if we all work hard at it".

6 p.m.

Viscount AMORY

My Lords, the noble Lord, Lord Northfield, will forgive me if I do not follow him in many of the interesting points that he has raised. With respect, he seemed to me rather gleefully to erect a number of rather dubious cockshies and, with the greatest enthusiasm, then knock them down. Another reason why I do not follow the noble Lord, Lord Northfield, is lest I might find myself suddenly congratulating him on his able chairmanship of the Rural Development Commission. It would be slightly off our subject today to do that! I agree with him wholeheartedly in his peroration in anathematising the tendency of all Governments to over-legislate. So we can agree at any rate on that. I also want to support him in what he said about the most thoughtful maiden speech of my noble friend Lord Camoys. The expert knowledge of Lord Camoys in banking will make a most valuable contribution to our debate. I join with the noble Lord, Lord Northfield, in hoping that we shall hear him often in the future.

The whole House enjoyed the brilliant speech of my noble friend, Lord Thorneycroft, including those elements of good-natured badinage. In reply to the mild reprimand given by the noble Lord, Lord O'Brien of Lothbury, I am authorised by my noble friend Lord Thorneycroft to say that, as a former Chancellor of the Exchequer, he joins me with appropriate humility in disclaiming even the most elementary expertise in banking, and recording our deep respect for bankers and for the IMF, of which in sequence we were both members.

Over the past two or three years, perhaps with tiresome repetition, I have expressed the view that we shall not overcome our economic difficulties until the political Parties agree on a few crucial economic policies to which all others must be subordinated, not just on aims but on the means by which those aims are to be realised. I rejoice that, in spite of the interventions of a few extremists, the immediate economic efforts of the Government and the Opposition seem to be edging towards one another, I believe, for sound pragmatic reasons. If we compare our current economic position with that of six months ago, or even of three months ago, though our overall position remains extremely serious, some progress in the short term at any rate certainly can be identified in several directions. I go that far with the optimism expressed by the noble Lord, Lord Northfield.

What are the directions in which progress has been made? I thought that the noble Lord, Lord O'Brien of Lothbury, summed up many of them very succinctly. In each of our periodic debates on the economy, our speeches are coloured by the most immediate economic worry of the moment. On the past two occasions that was the alarming drop in the value of sterling, and on every occasion in the past few years the sombre background has been the inexorably rising level of unemployment. Sterling, after its calamitous and humiliating fall, looks like being in the short term certainly mor stable, and perhaps over the coming months it may recover at any rate part of its loss over the past year. Its better face is due presumably mainly to the IMF credit and the recent cover which has been obtained for some of the short-term sterling liabilities.

The Chancellor of the Exchequer is certainly entitled to credit for his success in the handling of both these negotiations. Regarding the current trading balance, though subject to sharp ups and downs, it seems to be moving in the right direction from an alarmingly high rate of deficit. North Sea oil is likely to help that movement further over the next few years. But we must be careful not to mortgage that benefit from North Sea ail two or three times over. In regard to the balance of payments, whatever the hopes are for 1978, for 1977 we are not yet out of the wood, as the noble Lord the Leader of the House mentioned in his speech. We must not forget the need to build up strong enough surpluses to enable us to repay the enormous debts which we have recently incurred.

Another feature which over the past two years has been really alarming has been the colossal level of the Chancellor's deficit and, consequently, of the public borrowing requirement. The figure of £11,000 million or £12,000 million, or thereabouts, for a country in our economic situation is a frightening one. I think I see the noble Lord, Lord Balogh, in his place, and I seem to remember in a previous debate the noble Lord saying that that sort of figure was not unduly high as a percentage compared, I think he said, with Germany and Japan. However that may be, we are bound to compare our current creditability with those countries. We are simply in no position to be adding to existing obligations on this scale when we have to borrow to service the new debt. The Chancellor has fortunately been able to sell a lot of new Government stock over recent months, though at a high interest rate. Whether the Government can hope to continue to borrow from the non-banking sources at that rate when the level of business activity recovers, I do not know. Nor must we be tempted into thinking that so long as the Government can fund their debts, then all is well from an anti-inflationary point of view. Successful borrowing does not completely neutralise the effect of a highly inflationary deficit policy.

The servicing of the National Debt is rapidly becoming a formidable long-term obligation in itself. I have read somewhere that the interest on the interest on the National Debt itself now amounts to nearly 1 per cent. of the national income, though I will not stand by that computation myself. On the whole, it looks as if the Chancellor this year will get through with somewhat less borrowing than seemed likely a few months ago. That is good.

The next heading I should like to comment on is the money supply. The Chancellor and the Bank of England have rightly kept a tight hold over the control of money supply, and that is an absolutely essential prerequisite to overcoming inflation. When we come to the current rate of inflation, the position is extremely disappointing. It is running now a about 15 per cent. and edging up slightly at the moment. It seems as if the single figure rate that the Chancellor confidently predicted lies obstinately in the future, and even the Chancellor seems less ready now to make predictions when it will be attained. We must not deceive ourselves that in relation to our international competitors a rate of 15 per cent. is profoundly unsatisfactory. Inflation must still be regarded as the chief and most dangerous enemy, and any relaxation in our efforts to treat it as that will be fraught with disaster. On Phase 2 in the wages restraint policy it seems that is being generally adhered to so far, which is a great gain. There is no question about that in my mind. What is sadly true is that any general reflation in demand at the present time would increase the rate of inflation, weaken our balance of payments and postpone the growth of soundly based economy.

My Lords, why have I said so little about the deplorable level of unemployment? Not because it is not agonising to contemplate—to have so many deprived of the chance of working and at a time when so much needs doing. It is humiliating, heartbreaking and tragic for them, and bad for the country. It is for one reason alone that I do not speak further on that aspect. I do not myself much believe in the creation of new jobs by specific central action. One can easily in that way create a hundred new jobs and then find that in the process one has lost 150 existing jobs. The improvement in unemployment will come, as we all long for it to do, when our full range of economic policies is right and is pursued with single-minded vigour. Then, my Lords, the improvement will come and there will be a sustainable growth in employment. Confidence then will create the jobs.

When one turns to glance from the present to the future, it is difficult to attach too much importance to the necessity for another year of incomes restraint. In my opinion, an incomes policy remains absolutely essential. The holding of Phase 2, and an agreement on Phase 3 lower than the current rate in the increase in the cost of living, is essential. If that does not happen, the rate of inflation will rise again. Nor can we disguise the fact that it will mean a further drop in real incomes. What has already happened with regard to the value of our currency and the rate of continuing inflation makes that unavoidable. Our standard of living has fallen slightly and must fall further.

I have paid one or two compliments to the Chancellor of the Exchequer for the short-term progress in certain directions, and one respects the efforts he is now making to hold, and perhaps to curtail, the aggregate of Government expenditure. It is vital that he continues an extremely tough policy there. Most of us realise the impracticability of achieving substantial cuts in public expenditure overnight; and the Chancellor started late. One sector in which he should not have made recent cuts, as he did the other week, was that of defence. The recent cuts are quite indefensible and must be reversed, however great the pressure upon him from certain colleagues who may have their heads permanently in the clouds. If we go on cutting our defence expenditure, how can we set an example to our colleagues in NATO? If one were asked how one would get the required savings otherwise, I should like to assure the noble Baroness who is to reply that she has only to write to me and I will gladly give her a list of suggestions to close that gap.

The Chancellor will be entering shortly his pre-Budget purdah and "going broody"; so that any advice we have to give him must be given quickly, or his ears will be closed. He should approach his task with three main aims: first, to maintain the attack on inflation without respite, and, secondly, to restore and increase practical incentives to effort, enterprise and investment. That must mean lightening the burden of direct taxation right across the board, because practical incentives are dangerously weak in the United Kingdom now, as against our international competitors. That is absolutely unquestionable, and it must go far to explain our relatively lethargic performance. The Chancellor's third aim must be to release financial resources from the largely non-wealth-creating sector to the private sector, on the output of which we depend for earning our national living. The growth of bureaucracy at all levels is stifling our national vitality and pre-empting and consuming a larger and larger proportion of our national income.

In my opinion, this will be even worse when devolution has taken place. How can we reasonably expect a rising standard of living in such circumstances? A limit to the total numbers in the Civil Service, employed directly by Government, as I think my noble friend Lord Thorneycroft suggested, would seem to be a good starting point. In passing, may I record my personal conviction that the protracted Christmas and New Year holidays this year were a serious psychological blunder. Tens of thousands of people must have reacted by feeling that if such protracted holidays are considered in order there cannot be much to worry about in the state of our national economy. Much harm, I believe, has been done there.

In conclusion, the Government, by their recent efforts in the international field, have succeeded in buying time, even if at considerable cost. Too often in the past we have made little or no use of time bought. On the contrary, we have been inclined to relapse further into a kind of complacent, if querulous, lethargy. This simply must not happen again. It is tragic that some powerful voices, which should know better, I think, are still saying that a further reduction in real incomes is "unacceptable" and "unthinkable", and that whatever increase there may be in the cost of living must be compensated in full by higher incomes. Such voices must belong to people who are out of touch with the real world in which we live and in which we have to earn our living.

The greater part of the nation has suffered a small reduction in its real income to date. Some sections have suffered a much higher rate of reduction, including some of the middle ranks of earned income. To say that any further fall is "unthinkable" is to play with words. Nothing can prevent its happening in the short term, whether or not it is unthinkable; but whether it happens in the long term is entirely up to us, as a nation, to decide. Our future standard of living will depend not on what we want but on what we can earn, and make the effort to earn, in the markets of the world. In The Times of 16th December last appeared these words: In an environment hostile to the creation of wealth, wealth will not be created". I urge the Government and noble Lords opposite to ponder on those words.

6.18 p.m.

Lord LEE of NEWTON

My Lords, may I join those who have congratulated the noble Lord, Lord Camoys, on the success of his maiden speech. One learns to get the atmosphere of your Lordships' House, and I thoroughly enjoyed it. I am quite sure that noble Lords in all parts of the House shared that enjoyment and that we look forward to hearing the noble Lord on many future occasions.

I confess to being troubled about the possible consequences of the cuts in public expenditure which were made recently by the Chancellor, but I suppose they were the logical consequences of our dismal failure, as a nation, to create sufficient wealth to sustain the previous level of such expenditure. Indeed, over many years now, our overall production of the type of goods which word markets require, as well as the dwindling level of individual productivity in oar manufacturing industries, has failed to keep abreast of those of the majority of our industrial competitors. Consequent upon those failures has been a constantly falling share for Britain of world markets and a real fall in the living standards which we enjoyed, compared with those of at least a dozen other major industrial countries in the world.

The noble Baroness, Lady Seear, referred in passing to the coming of North Sea oil. I have a certain interest in this—it was my old stamping ground when we first made these discoveries—and I agreed with her when she said that, if we are not very careful now, there is a danger that we will rely completely on the coming of that oil and will look upon the improvement in our balance of payments which will follow as an excuse for tolerating our dismal failures in our industries. That would be a very major tragedy indeed.

Last April, while opening a debate on training for skill, I remember mentioning the danger of heavy unemployment accompanied by shortages of skilled people. The indicators now show that this condition has come about and, although I suppose it is a little early to know the effect of the new training arrangements, it is very disturbing to read that figures which will be placed before the Institution of Production Engineers this month will show that more than one-third of degree places in production and industrial engineering in our universities and polytechnics are now empty. Indeed, I was reading that one of the officials of that Institution said: It is increasingly felt that some universities and polytechnic courses would not be able to run without applications from abroad. We are always very happy about the services we can offer to our overseas friends, but when all is said and done the majority of them go back home. That is what it is all about. If we are now to see this falling away of the desire in young men and women to learn the higher skills and technologies in engineering, then I do not see how we can get out of the problems which face us.

Today, the Joint Manpower Services Commission and the NEDO committee, representing all sides of industry and Government, have reported that Britain's economic recovery could be jeopardised by an acute shortage of skilled engineering workers. The Government are under certain criticism, from the public service unions and others, for seeking to divert labour into the manufacturing sector, and while there is heavy unemployment one can well sympathise with those concerned. Nevertheless, I believe it to be utterly essential to the wellbeing of our nation that a far bigger manufacturing sector should be created, and a far larger programme of training for skills than ever before in our history should now be mounted.

I do not know whether my noble friend who is to reply can say whether there has been an increase in the number of young people who are being offered day release or block release. I do not want to go through them again, but I remember giving some figures last April which showed what a puny effort we were making in this respect, as against the figures which one could quote for Germany, Sweden and other industrial nations of that type. We know that unless we can now get that increase in skilled labour, we cannot possibly hope to make great inroads into the level of unemployment from which we now suffer.

I know that in a great many industries it is the skilled man who employs the unskilled man. At one time in engineering, for every skilled man we employed we could find a way of employing at least three unskilled people. The skilled man created the work for them. What a travesty it all is, what a shame it all is, that, while we are worried sick about how we can solve the problems of unemployment, there is a massive shortage of the very skilled men who could cure that unemployment problem for us, had we had the foresight long ago to create the conditions which I am talking about.

I confess to being extremely worried that the coming of the new technologies means that manpower is not needed in the same numbers as once were necessary. I also confess that I do not know whether complete world recovery would give us the answers. Certainly while we continue to lose our share of world trade it will not. Therefore, it may well be that we will have that kind of problem on our hands. Whether the coming of a shorter working week or more shift work—meaning that existing capital goods, such as lathes and so on, can be worked around the clock, are the answers—I do not know. But certainly we shall have to begin to analyse matters of that type.

As other noble Lords have said, 1977 will probably see a fall in our living standards somewhat larger than that which we have known in the last two years. Indeed, we are now paying the price for the free-for-all of years gone by, when we insisted on paying ourselves increases of a size which were far in excess of what were justified by any increase in wealth production. Although I know that there were many other causes which contributed to the heavy inflation, general increases around 30 per cent. while the economy is stagnant cannot fail to bring about that level of inflation. It has been generally recognised in this debate that two years of incomes policy have assisted in bringing down the rate of inflation to about a half of what it was, but the economic problems of the day, including the fall in the value of our currency, have prevented us from lowering inflation to that of many of our competitors. In these circumstances, it will be extremely difficult for the Government, and for trade union leaders, to maintain a worthwhile incomes policy which includes a restraint on increases which would send the rate of inflation back again to the level of two years ago.

It is significant that a number of highly responsible trade union leaders, to whom the nation is heavily indebted for the courageous lead which they have given, are now talking about relaxing the incomes policy. My friends, Mr. Jack Jones, Mr. David Basnett and my noble friend Lord Allen, have talked in recent days about an orderly return to collective bargaining. Indeed, Mr. Jones added last Friday: "A return to a free-for-all would result in a wages explosion". He went on to say that the next stage of the incomes policy should be less rigid than the present phase. I happen to agree with the latter point, but I must confess that it seems to me to be a contradiction of the statement about an orderly return to collective bargaining. An orderly, or a disorderly, return to what we had prior to the present incomes policy would be a return to chaos, and I should like to hear what kind of mechinery my friends have in mind to ensure that we do not return to that kind of chaos.

Noble Lords who have done me the honour to listen to my views on other occasions, may have gleaned that I am not the greatest admirer of free collective bargaining, even in the sense in which I had to take part in it, where unions in a given industry argued that their employers could afford to pay more, while, of course, the employers argued that they had for long been living on their losses. It was all very like the haggling in a Middle Eastern bazaar, and it was based on the use, or the threat of the use, of individual power with the weak going to the wall. However, by the time we went over to an incomes policy, even that method had deteriorated to a travesty of collective bargaining in which everybody waited for the strongest unions to get a high settlement. Then, irrespective of the internal position of their own industry, nobody would dream of settling for less than that which was regarded as the going rate.

I agree that the next phase of the incomes policy should be less rigid. I confess that there has been a lessening of the gap between some of the lower paid workers and the higher paid, but there is still a considerable number of low paid people whose position is bound to worsen while payments are fixed below the level which is necessary to compensate for a 15 per cent. rate of inflation Indeed, for the rest of us to expect them to endure that position reminds me of a famous old cartoon made by the late Will Dyson during the 1931–32 period of the 10 per cent. cuts. In the cartoon a ladder was placed down a well. The obviously wealthy man on the top step of the ladder was saying, "In the interests of the nation we must all take one step down", but the chap lower down the ladder had his nose and mouth just above the water. We can all imagine what would have happened to him if he had taken one step down! It would be wrong to ask low paid people to continue to serve us while each year their position is being further worsened by a higher rate of inflation than can be compensated for by any increases that they may receive. In the new approach to the incomes policy we shall have to look at their position.

Although we have proved in the last two years that it is quite possible to function successfully on a basic sum per person in industry, I should like the problem of differentials to be faced now by allocating a global sum to each industry, with which it could negotiate and determine its own differentials. The noble Viscount, Lord Watkinson, who many years ago followed me at the Ministry of Labour, may well remember that we discussed this matter in the Ministry and that the higher civil servants and, indeed, the Minister, were quite sure that we could never allocate money in this way. We have proved how wrong they were.

Every speaker in the debate who has mentioned the incomes policy has very rightly referred to the great success of the last two years which has been achieved by the application of a basic rate. I do not need to explain this to noble Lords. I believe that we have now reached the stage when this policy can no longer serve us; it has outlived its usefulness. If we could allocate a global figure to each industry and then say. "You can return to your collective bargaining system within that global figure; you can negotiate your differentials and put right the anomalies which undoubtedly have been created during the last two years of flat rate incomes", it would result in a less rigid approach to the incomes policy.

I have heard the suggestion made that we should restore incentive payments. I am not a great admirer of incentive payments. For one reason, those who are not on a payment by results scheme cannot benefit from increased payments due to incentives, no matter how hard they work. There are millions of people who could not possibly benefit in that way. Secondly, the more backward industries stand far more chance of introducing new methods than do the more efficient industries. Therefore they are penalised for their efficiency. In consequence, I do not go along with incentive payments. May I also mention that my experience leads me to believe that they leave open too wide a door for backhand payments, especially for poaching skilled labour when it is in very short supply—as is the position now. Yet, as I have said, it is quite clear that we cannot leave as it is the flat rat e system that we now have.

For my part, I have never looked upon incomes policy as an instrument for depressing living standards. During an emergency it has to be used in that way. I have always looked upon incomes policy as a far more sensible way of distributing that portion of GNP which can be distributed in incomes to all kinds of people. I should prefer to do that rather than resort to threats of strike or lockout. I believe that as we move towards more technologically advanced industry we should move towards a more technical way of determining how to distribute the incomes which we all require. I see that today Mr. Michael Young, the Chairman of the Consumer Council, has said that he would like to see a wages standstill until August 1978, with income tax cuts, price controls and so on. If one looks at the sheer economics of it all, I suppose that it makes a lot of sense; but we have to take into account that there have been two years of restrictions. Much as I want to see prices governed by incomes, I do not believe that we can go quite to the point that Mr. Young is suggesting.

I share the guarded optimism which has been expressed in the debate. I know that the coming discussions between the CBI, the TUC and the Government will be extremely difficult, and I hope that they will look at one or two of the suggestions which I have made. I believe, with the noble Viscount, Lord Amory, that we really must maintain the incomes policy. I believe this to be utterly and completely essential if the great gains we have already made are to be sustained in the future.

6.37 p.m.

Lord ROBBINS

My Lords, it is a great privilege to follow the example of certain earlier speakers in congratulating the noble Lord, Lord Camoys, on a speech which was at once expert, easy to understand and persuasive. I am sure that I speak for all noble Lords when I say that I hope he will frequently enlighten our debates with his contributions.

I do not dissent from many speakers in expressing a sense of relief at the present position as compared with the position when we discussed these matters shortly before Christmas. At that time our discussion was under the shadow of a falling pound and uncertainty about the nature of the international assistance which would be forthcoming. Now we have a firm loan from the IMF, and arrangements are adumbrated to take care of the sterling balances and, perhaps, to put them on a different footing. The danger at present, so far as I am concerned, is that a state of euphoria should develop in which the continuing difficulties are ignored and the future dangers neglected. I shall not accuse any Member of this House of being in such a state, but one or two remarks which have been made seem to me to err a little towards overemphasis of the bright side of the picture.

Let me look first at the terms of assistance. I think perhaps I differ slightly from the noble Lord, Lord Thorneycroft, in this respect in that I welcome the assurance that our policy in the next two years will be the subject of a survey by the officials of the International Monetary Fund. If I may say so without offence, I have rather more confidence in their expertise than in that of many former Governments of this country. I also welcome the insistence of the International Monetary Fund on explicit conditions, especially the fact that the loan will be doled out at intervals according to our good behaviour. I agree with the noble Lord, Lord Thorneycroft, that this is in a sense rather humiliating but nothing—and I repeat, nothing—that has happened in the recent past would have justified any other stipulation on the part of the representatives of the IMF.

I confess to some reserves, which were elaborated with great technical skill by the noble Lord, Lord Camoys, about that part of the requirement which emphasises domestic credit expansion rather than giving an assurance about the future of M3. I think we need both and while I believe that in time of deficit the domestic credit expansion criterion probably permits a closer control, I think that when we go into surplus—and it may well be that we shall go into surplus within the next two years—it may quite easily prompt a neglect of continuing internal conditions which may spring from continuing inflation. But that is minor. The main thing is that we shall be in friendly co-operation with one of our main creditors in this respect.

As to the substantial acceptance of the promised control of public borrowing I confess to thinking that the officials of the IMF, who are really not credulous people, have been very good natured. Some of the savings—and I hope the noble Lord, Lord Northfield, would agree with me in this—are eyewash. How often, discussing the nationalisation Bills of the last Session, did we not hear passionate protestations from the Front Bench; I remember the noble Lord, Lord Melchett, in particular beating his breast and, not with oaths and curses but with great emphasis, asserting that nationalisation payments were mere transfers. Personally I think things are far more complicated than that, but if you accept that point of view then surely the sale of British Petroleum shares falls into the same category as regards the effect on aggregate expenditure

For the rest, the savings, although in some cases they are real and important, are obviously the result of political compromise and show a disappointing attempt to get to the real roots of what there is of waste and of expenditure. In this respect I welcome very much the observations which were made by (if I may say so) my noble colleague Lady Seear. I thought she made interesting and useful contributions in that respect, and with others I regard the cuts in defence expenditure rather than more cuts elsewhere as being detrimental to our own national safety and to the stability of the Alliance. But that of course was not the business of the IMF.

As to the support of the sterling balance position, I am sure that is in a way reassuring but I do not think we should delude ourselves into thinking that it was prompted by any intense admiration of the record. Sterling is weak on capital account when sterling has been mismanaged, as it has been by successive Governments. But the world has something to lose by a collapse and it is that, and not simply our ill-luck (which is sometimes invoked) which has prompted them to make this arrangement. So self-congratulation can surely be a bit overdone. The plain fact is that we have been saved pro tem. from a terrible economic disaster by further borrowing from abroad, which eventually will have to be paid back, and by people's unwillingness to see a sudden breakdown of what has hitherto been one of the central elements in international finance. Relief rather than complacency should be the order of the day.

I wish now to look ahead a little at the dangers which are not yet eliminated. It is important that a justifiable sense of the disappearance of, certainly immediate dangers, should not dupe us into believing that all our problems are now solved. First, there comes the mere fact of inflation. We are now told that it will continue at its present rate, at least until the summer, which is certainly somewhat different from the claim made some two years ago that it had already been reduced to less than 10 per cent., and if I may say so it shows an improvement in candour. We are promised reductions after that. But I wonder whether some of us are not coming to take inflation as a continuing process rather too much for granted. It is perhaps boring to talk about these things, but there are very tangible disadvantages and they deserve to be kept in mind.

Let us first remind ourselves of the arithmetic of the position. Even if we reckon at simple interest, inflation at 10 per cent. for 10 years would mean that the value of our money would be reduced by half. If it were above that and if we take compound interest into account the prospects are even more terrifying. I know it is unfashionable in certain quarters to express compassion for those who have retired on fixed pension or the accumulation of savings, but your Lordships must know many whose lives have already been darkened in this way by the fall in the purchasing power of the return on investments, which traditional wisdom would have taught them to regard as prudent investments. And, let us face it, at the present time with very high money rates of interest an investment which is not accompanied by capital gains has very often a less than zero return, and taxation on capital gains in the absence of indexation in that respect is virtually an annual capital levy. But let us leave the fixed incomes aside, heavily taxed as some of them are, as the opprobrious recipients of unearned income.

Look at the effect on business. Who can doubt the discouraging effect on investment of the present position? Borrowing at 13 or 14 or more per cent. may be all right if inflation is expected to continue. Then you can, of course, pay off what you have borrowed in depreciated money. But supposing inflation is going to come down, as we are promised it will, then the argument cuts the other way. I have no doubt at all that if public borrowing is suitably controlled the recent high rates will come down, but while inflation persists on anything like the scale which enters into conversation about these matters nowadays, unless there is some off-setting policy in the shape of relief of taxation this disincentive will certainly continue.

My Lords, all that would happen if we were the citizens of a closed economy, shut off from the world at large. But living, as we are, in open conditions, as the noble Viscount, Lord Amory, reminded us, inflation at the rate of 15 per cent. or 10 per cent. is considerably greater than that of our chief competitors. So that if we continue as we are, or even as we are promised to be, it will not be long before the competitive advantage due to undervaluation will tend to vanish. And I must say I do wonder what must be the effect on German or United States representatives—themselves the victims of a rate of diminution of the value of money which a few years ago would have been regarded as causing anxiety—when they are urged by our representatives to increase their inflation in order to get us out of our troubles. I agree with what the noble Lord, Lord Carr, said yesterday; he said that it was unwise to urge this point. I would substitute the word "naive" for the word "unwise".

So, my Lords, a great responsibility does rest on those who rule over us. Despite my reservations about domestic credit expansion, I think we can rely on the IMF to urge, and perhaps use pressure to see, that financial and fiscal measures are in the right direction. But much, particularly as regards production, depends upon the forthcoming discussions about pay. I confess that I am still sceptical about the idea of a permanent incomes policy. I think that such policies in the past have shown a tendency to break down and to cause all sorts of difficulties. But in present conditions I have no doubt that pay restraint is a matter of the order of the day, and what I fear is that it can easily go wrong. Why do I fear this? I fear it may go wrong in such a way as to upset the recovery which has already been achieved, because in present conditions if the average of basic rates is greatly raised, unemployment, which is deplorable, is likely to go up, and it may well endanger the settlements in which we are rejoicing today. There will be pressure for so-called reflation and that would certainly upset the conditions of the loan.

We must do all we can in other ways to reduce unemployment—retraining, increased mobility, anti-monopoly measures, and so on—but for goodness' sake do not let us increase the rate of increase of inflation! I am sorry that the noble Lord the Lord Privy Seal regarded as pedantic my question whether he regarded diminution of the rate of increase of inflation as deflation, or whether he regarded deflation, as it is commonly regarded by economists, as being a contraction of the money supply relative to the rate of increase of productivity.

I think we must face very candidly the fix we are in, and I feel a certain duty to speak in this respect because I must be one of the few people now living who played some part in the devising of the coalition White Paper on High Levels of Employment. Professor Meade is another one still living, and it is to Professor Meade, of course, that what there is of merit in the conception is ultimately due. I can solemnly say that, in the devising of that policy, among officials and among Ministers there was certainly no intention to maintain employment resulting from rates of pay greatly in excess of productivity. The intention in that context, with that back history, in which many of us have been wrong, the present speaker included, was to avoid unemployment due to positive deflation, such as we had in the 1930s.

It is quite clear that Keynes realised the dangers here, and even Beveridge—in a book about which I have many intellectual reservations—promised full employment at 3 per cent. unemployment and emphasised that the success of the policy depended upon wage increases not themselves breeding inflation. But that has been our danger recently. Nothing can be more certain than that if the rate of inflation is being reduced by control of spending excessive increases in pay must cause an increase in a total of unemployment already highly disquieting.

Secondly—and this is an additional complication, and here I feel in very great sympathy with the noble Lord, Lord Lee of Newton—I suspect that in the next round of discussions on pay restraint the problem of differentials and individual increases will have to be dealt with. So far as the present state of differentials is concerned, there really are very dangerous pressures building up. Quite apart from the absence of training, some, at least, of the shortage of skill, as compared to the super-abundance of less skill, has its origin in the present state of differentials. So far as individuals are concerned, the position is even worse. At the present day the only way open to many high-spirited and efficient young people, anxious to get on in the world and make provision for their wives and familes—not such a contemptible motive—the only way to get more than the overall percentage increase in many cases is by changing their jobs. Up to a point this can be overcome—and not dishonestly—by upgrading and reclassification, but only up to a point. The obvious limits are becoming very obvious to many of those whom we most need to keep. I do not think that they will be reassured by what they have heard in this debate. Many of them are asking themselves whether their future and that of their families lies in this country. However, to rectify all that in the context of general pay restraint will require some ingenuity.

Therefore, my Lords, although the problems that lie ahead are not so immediately alarming as they were before Christmas, they are still very formidable. We are not yet out of the wood. I wish that the Government, with all their good intentions, were more concerned with the solution of such problems and less with what I must regard as ideological irrelevances, which promote social division and prevent those bipartisan policies which in any less disorientated society would be the obvious way out of the dangerous position in which we till are.

7.2 p.m.

Viscount WATKINSON

My Lords, I should like to add my very sincere tribute to those many deserved ones which have been paid to the noble Lord, Lord Camoys. I hope that his lucid explanation of the technicalities of banking will not be denied us on future occasions.

When I put my name down to speak in this debate I was not of course aware that the Government would make a Statement on the Bullock Report. Therefore I hope that the noble Baroness and my noble friend in reply will excuse me if I am not present for the end of the debate I have a few unfinished matters to attend to on that subject. However, what matters—and this is very relevant to what has been said in another place today—is that we must get our industrial economic strategy right. We are all agreed on that. In his opening remarks the noble Lord the Lord Privy Seal made a strong plea to businessmen. That was a perfectly fair thing to do. I thought that my noble friend Lord Thorneycroft, in what I venture to say was a characteristically brilliant speech, put it rather better, but none the less they both agreed that what matters most to us now is to get ahead with some definable, practical and purposeful economic and industrial strategy.

That is very difficult because a great deal of controversy still surrounds the right strategy. This situation of political controversy always puts the business community in a very awkward position. I suppose that I should disclose an interest as the President of the Confederation of British Industry. Above all, businessmen want continuity of policy. They also feel happier, and thus are more likely to try harder, if they believe that there is something like a national commitment to an industrial strategy. Therefore, bodies like the CBI are right to take a central position on these matters. I only wish that it was shared more by the trade union movement. I have always maintained that they would do a much better job for their members if they took a more central position less linked to any Party.

It is sometimes said that bodies like the CBI and the TUC subvert the processes of Parliament. I do not believe that to be so; but in case there are those who still think so, I would say that the CBI's preferred way of discussing and negotiating on economic and industrial affairs with any Government—and this is relevant to the rest of my remarks—is through a body set up by Mr. Selwyn Lloyd, as he then was, as Chancellor of the Exchequer in a Cabinet of which I was a member. The National Economic Development Council has over many years at least shown a capacity to survive. Perhaps that is because it provides a forum where one can debate in reasonably non-controversial terms the kind of strategy which has lain behind the speeches of so many noble Lords today.

As I understand it, the Chancellor's autumn economic measures were part of the ongoing Government economic strategy, and the first attempt to isolate such a strategy and to name it as such was made over a year ago, at Chequers, at a special "Neddy" meeting presided over by the then Prime Minister. At that time a great many noble resolutions were advanced and our hands were put behind many desirable things. In fact, very little was done to translate those resolutions into actions. However, as a result of the Chequers meeting some 40 sectors of industry were selected for detailed study, and sector Working Parties were set up on which both trade unionists and employers were represented. The job of these Working Parties was to try to come up with firm ideas about what was wrong with their particular industry and what should be done by Government, employers and employees to put it right.

The next step—and it is a very important one—comes at next week's meeting of "Neddy" under the chairmanship of the Prime Minister. Here the Council will take note of the detailed and excellent reports of the working parties and will discuss ways in which they might be brought to fruition. Like many British bodies that work, this is perhaps insufficiently noticed. It is a new attempt to create a viable strategy which perhaps, as Governments come and Governments go, could be pursued to return our country to some sort of prosperity.

Those noble Lords who have listened to the speech of the noble Lord, Lord Robbins, do not need me to tell them that we must make this strategy work. Part of the desire of employers to make it work is because they know only too well that our inflation at the moment, instead of gaining on our competitors and making us more competitive, is all the time widening the gap between this country and its main competitors. We are going the wrong way again. A few months ago perhaps we all hoped that inflation would come down and that the gap would be narrowed, but that is not the case. Equally, over the last five years, sterling has still fallen by about 40 per cent. against other major trading currencies. I notice that the Chancellor has been saying that industrial profits are increasing. So they are. Perhaps we should discipline ourselves by remembering that in 1976 the return on industrial capital, adjusted for inflation, was probably under 4 per cent. and even this year, with a profit increase, it will still be no better than 5 per cent. or 6 per cent.

As we come up against the difficult negotiations for year three of voluntary pay agreement it is perhaps worth noting that since 1963 average earnings have increased only by about 18 per cent.; that is to say, the increase for the average earner has been about 18 per cent. although gross earnings have increased by about 300 per cent. That, together with a record unemployment figure, is what runaway inflation has done to us. How right noble Lords have been, and how I echo the remarks of the noble Viscount and my old colleague, Lord Amory, that if we do not cure this inflation—and we are not yet in sight of curing it—everything else that we try will crash to the ground, and more borrowed money or more anything else will not save us. So I do not hesitate to say tonight that to make this industrial strategy work is probably the most important issue now in front of the Government and in front of the country.

It is perhaps worth mentioning as one goes by that the very people who are expected to work it, the managers, are of course worse off than anyone. You have only to look around among your friends and colleagues to see managers who are up to 25 per cent. worse off in real terms than they were even a year or so ago, much less if you go back further. I do not think that those of us who wanted to try to make a success of this "Neddy" initiative have anything to apologise for. I would say that whether they be the members of the Economic Committee of the TUC, or the businessmen put on the Council by the Chancellor, or anyone else, they have a job to do and our country will not be a very pleasant place in which to live if they fail to do it.

Of course it would be easier, in my judgment, if we had a Government who had always believed in free enterprise, as we do on this side of the House, as the absolute mainspring of an industrial strategy. That of course makes it more difficult for some of us who believe that you have to believe sincerely in free enterprise if you are going to get the kind of result that you are looking for. But none the less, if the present Government now say, as they seem to do, that they want to support profit growth, increased exports, increased efficiency and a mixed economy, then surely it is not wrong for any of us to do what we can to make sure that something at last happens, and that we move away from the phase of talk and pious protestations in which we have all been involved and come down to the hard "nitty-gritty" of getting results.

Maybe this exercise on which "Neddy" is now engaged may show us a better way of getting those results than anything else that has yet been tried. Because it comes up from the shop floor of industry, people are talking about things they know, and the reports are certainly factual and hard-hitting. So it could be—I would not put it higher than that—that painfully and slowly, as perhaps we always do, we are moving towards some kind of strategy that would meet some of the problems that so many of your Lordships have talked about today.

This is—and I have to say this—why I find it so disappointing (or perhaps alarming would be a better word) that the Government again seem to show signs of doing one of those doctrinaire U-turns which have done industrial confidence so much harm in the past. This time it is above all on the critical subject of industrial relations. Surely, whatever our views and position in your Lordships' House we should have learned something from the damaging controversies that surrounded the Industrial Relations Act. Yet it could be—and I must say this—that the present Government could bring forward a Bill following the Bullock Report that could do a great deal more damage to the economy than did the controversy that surrounded the Industrial Relations Act.

Your Lordships will have taken note of the Government's Statement on the report of the Bullock Committee published today. It is only fair to say that both the Prime Minister, who said something on the subject earlier this week, and Mr. Dell in another place, endeavoured to try to leave the door to further negotiations open just a chink. But I think it is right to say—because we must not have misunderstanding between employers, employees, trade unionists and the Government at a time when I believe our situation is so critical—that so far as the 11,000 members of the CBI are concerned (and this is after the most intense consultation with its members that the CBI has ever held) the legal implementation of the majority Bullock Report as it stands, and as it has been presented to both Houses of Parliament today, is likely to make the co-operation on which the industrial strategy rests unlikely, if not impossible. So just as we were beginning to find our way through our difficulties we have this prospect of a spanner being thrown in the works, and a fight perhaps on an ideological issue which no one would win and which would greatly damage our country.

I know that this is not the debate in which to argue the merits of the various proposals, and I shall not do so. All I shall say is that employers—and I use the word advisedly, because proposals put forward some 12 months ago by the CBI were supported by the British Institute of Management, the Chambers of Commerce, and other bodies—have put forward legislative proposals which could lead to the appearance of many more directors on boards (there are in fact a good many already) who have come up through the company in which they have spent their working lives and are therefore truly working directors. There is this way through to industrial democracy if it is possible to discuss it in a reasonably rational atmosphere. If, however, the Government choose to short-circuit these promising initiatives by a piece of ill-considered and what would be regarded by many of us as largely political legislation, and which many of us would say was aimed at achieving a trade union take-over of a private industry, then I think we all of us shall have dealt ourselves a most damaging blow. I hope that wiser councils will prevail.

As I said just now, the Prime Minister in another place earlier this week—I do not quote him exactly, but I think I have the sense right—said that industrial democracy must arise from agreement on both sides. If those words are correct, and also what Mr. Dell said in another place on the desirability of full consultation before any proposals are brought forward, then we may be able to make some progress. However, I think it has been entirely right for employers, individual and collective—and the CBI is not alone in this; there have been many other employers' associations who have expressed similar views—to make their position plain at this stage in the hope that the growth of an industrial strategy, which all of us could put our shoulders behind, should not be impeded by misjudgements in this very difficult and sensitive area.

May I say one last thing. We come to a very difficult time. I listened most carefully to what the noble Lord, Lord Lee of Newton, said on this subject. I know how difficult Phase 3 is going to be. I know what pressures there will be on trade union leaders to do what many of their members want them to do, and not give us a third phase. I know how necessary is this strange thing called the Social Contract. I can never see anything in the Social Contract that could not have been contracted for quite outside the Social Contract, but that is a personal view and I know how difficult all this is. All I would say finally is—and I say it as straightly and as sincerely as I can—that you have only to listen to this debate to see how necessary it is that we should make our industrial strategy work.

The Lord Privy Seal himself said that this requires co-operation, support, effort and get-up and go on the part of employers. So it does. It also, of course, requires good will and co-operation from trade unions and employees generally. Is this a situation in which we ought to take our minds off the main task, by getting locked into some kind of confrontation on how many trade unionists will sit on how many boards by legal force for a somewhat unknown term of years? By all means let us have discussions on industrial democracy. We shall be very willing to put our proposals forward if it seems worth while so doing, which means that there would have to be some scope for discussion and not a demand to implement Bullock as such. If that can go forward, then let us hope that Bullock can be put a little on one side in order not to damage the main thrust of industrial strategy. I have said this tonight in the hope that the Government will listen, and in the hope that we may not be diverted from what ought to be our main task at a critical time for our country.

The PARLIAMENTARY UNDERSECRETARY of STATE, DEPARTMENT of the ENVIRONMENT (Baroness Birk)

My Lords, as the noble Viscount, Lord Watkinson, was courteous enough to tell me that he would not be here for the end of the debate, I feel it only fair for me to raise a point with him; I will certainly raise it in my speech at the end of the debate, but I feel I should do so now, while he is here. He said, "If only we had a Government who really believed in free enterprise." He rightly said at the outset of his remarks that while he was speaking as a Member of your Lordships' House, he realised that he was also speaking as President of the CBI. It seems to me that the implications of that remark, taken together with what he said about the feeling on both sides of the House for a viable industrial strategy, could be very damaging.

I wanted to ask him, and give him a chance to comment if he wished to do so, whether he does not agree that the Government's approach is a tripartite one, of Government, industry and unions. He quite rightly attributed it to "Neddy". The fact that those who have spoken and are speaking from the Government side of the House shows that we are completely concerned to have a mixed economy, a point that was extremely well put by my noble friend Lord Northfield, makes the noble Viscount's remark rather unfortunate, unless I misunderstood what he said. On the last point he made, which was very important, may I ask whether he would agree with the Economist last week, which said that they hoped whatever was in Bullock—and by then everybody seemed to know, except Ministers like myself—a dialogue would continue and that, if it did not, that would be because the employers would not continue it?

Viscount WATKINSON

My Lords, I am glad the noble Baroness has asked me that question and I apologise if I have in any way misled the House because it was certainly not my intention so to do. I equally apologise in that it may not be possible for me to return for the end of the debate; I normally do so when I have taken part in a debate and I will do my best to be here, but I have other problems and, indeed, the heads of the French patronat are here today as well, so it has been rather a difficult day.

As I see it, the position is that we had to say quite firmly that if it was to be the majority report of Bullock and nothing else, and that was the only thing that could be discussed, then frankly it would be difficult, if not impossible, for us to take part in those discussions. That is the will of our members, not my personal will; it is all fully discussed, and over a long period. It is right to say—and if there was any misunderstanding I say it again—that I judge from what the Prime Minister said earlier this week and from what Mr. Dell said in the supplementaries to his Statement, that the Government are willing to have discussions on a rather broader basis. If that is so, that is fine, and that, we have already said in a formal statement on behalf of the CBI, we should be perfectly willing to undertake.

However, I must make it totally plain—because this is the wish of the members; it is not the whim of the chap who happens to be President for two years—that it is the wish and determination of our members that they will not co-operate in the certain findings of the report which, if they were fully implemented, would for them, they think, mean the end of free enterprise and the mixed economy as we know it. That is an honest opinion with which one may agree or disagree and I think I am correctly reporting it. I am only hoping—I trust with some practical hope now, having studied what has been said in another place—that we may not be faced with that sort of ultimatum, at least until we have had a reasonable degree of debate and discussion. If so, we will certainly play our part in that. If I have not been quite clear—Although I know it is improper to keep on doing this and is discourteous to your Lordships—I hope the noble Baroness, Lady Birk, will ask me about the matter again, because I do not want there to be any misunderstanding about the position.

7.24 p.m.

Lord BRUCE of DONINGTON

My Lords, I congratulate the noble Lord, Lord Camoys, on the occasion of his maiden speech, which was delivered with a degree of intellectual perception, logic and serenity to which I am much intellectually inclined but, alas regret, to which I am temperamentally unsuited; but I sincerely hope the House will have the opportunity of hearing often from him in future. My Lords, the noble Lord, Lord Thorneycroft, will recall that, albeit for a short time, I was a contemporary of his in another place. I was delighted this afternoon to see him return to form in what I found to be one of the most delightful speeches in its lightness of touch to which I have had the privilege of listening for some time. It made me laugh, even in these grave times. I must reflect that the position has a certain mild irony in that I seem to recall that some 15 years ago he was "a little local difficulty ", and I had to reflect how large and powerful in the counsels of the Party that little local difficulty had become for pursuing in those days I believe a policy to which he is diametrically opposed today.

I regret that I cannot share even the moderate degree of optimism which has been expressed in certain quarters of the House today, and indeed more particularly on my own side. I will illustrate the cause of my anxiety by referring to a segment of our affairs, a very important one, in which I have been more intimately involved this last year and a half. I refer of course to our trade with Europe, and I am deeply worried about it. I well recall the time—I do not want to reopen the subject of referenda campaigns or anything of that kind—when it was anticipated that we would be going into the Common Market. There were two White Papers on the subject which I read diligently and which I am sure your Lordships also studied. In those, the consequences of going into the Common Market were discussed and the enormous possibilities were set out and, on those, final judgments were made. I do not for the moment query the good faith behind the judgments that were made and I do not wish in any way to reopen the old "in or out" argument; we are in, and that is that, and now we have to do our very best as a nation in the circumstances in which we find ourselves.

I recall that one of the principal reasons on which Mr. Edward Heath placed considerable emphasis was the massive opportunity it would give to British industry—how it would sharpen the whole competitive edge of British industry and how it would present new opportunities for initiative, enterprise and drive in entering into what he described in the White Paper as a new mass market for Britain. He realised, as indeed Sir Harold Wilson realised at a later stage in almost identical terms, that there would be certain initial disadvantages. There was the dislocation in our pattern of trade. It was anticipated in advance of course that by joining the Common Market, and in particular in participating in the Common Agricultural Policy, this would mean a switch of food supplies from Europe as against the remainder of the world which would have some effect on our balance-of-payments situation with Europe. All those things were taken into account and the last White Paper indicated that the foreseeable disadvantage to the balance of payments, the foreseeable adverse effect, would be of the order of £175 million. That was the figure in the last White Paper.

What has in fact happened? We are running a deficit with the Common Market of some £2,000 million. Again, I am not endeavouring to establish this as a case for not entering the Market or pleading it as a mistake that we did; I am merely talking of the facts and unless we talk of facts as dictinct from myths we are unlikely to get ourselves out of the present situation. Why has the confident prediction of a maximum disturbance of £175 million turned into a massive deficit of £2,000 million? It cannot be due to the oil price rises; those have affected European countries equally. They have been affected just as much as we have. The answer really is that instead of Europe becoming a mass market for Britian's goods, Britain has become a mass market for European goods, which is something that was not anticipated. Why? This is where some myths have to be dissipated and some facts substituted, because there is a sort of intellectual incest between the Conservative Party and the newspaper proprietors which eventually turns prejudices into facts until they become convinced that the myth is something that exists.

Why is it? The facts are obvious for anybody to see. Sir Frederick Catherwood talked about it two years ago and I ventured to enlighten your Lordships on this point 1½ years ago. I was almost howled down in the middle of a debate on entry into the Common Market. The fact is that, since the end of the war, this country has been £20,000 million deficient in investment in plant and machinery. That is the fact and, if any further facts are wanted, in the last 20 years this country has invested in manufacturing industry 40 per cent. less than was being invested in the Federal Republic of Germany and some 34 per cent. less than in France. This has happened over the last 15 to 20 years.

The excuse is immediately this and it is where the myth comes in. It is a self-perpetuating myth to which the newspaper proprietors subscribe and which they take for granted. It is that it is because the tax and social security burdens upon British companies are at a higher level than in the Federal Republic of Germany. That is not so. I listened to the noble Lord, Lord Camoys, when he was giving some of his figures this afternoon, but I have some even more up-to-date figures which come from a source which, if I may say so, is slightly less politically suspect than the source from which the noble Lord may have derived his figures. They come from the research department of the Swedish Employers' Confederation in Stockholm. These are not people who are committed to the basic tenets of social democracy, let alone socialism. They reveal that British wages are now the lowest of any industrial nation and they produce the figures in terms of total hourly labour costs, including social charges, in manufacturing industry. In 1964, if our index figure was 100, West Germany at that time had wages which were 19 per cent. higher and France only 3 per cent. higher. In 1970, West German wages were 45 per cent. higher than ours and France's were still 3 per cent. higher. In 1975, West German wages had risen to 76 per cent. higher than those in Britian and in France they were up by 28 per cent. So where has the money gone?

Lord HARMAR-NICHOLLS

My Lords, may I ask a question?

Lord BRUCE of DONINGTON

My Lords, if the noble Lord will excuse me, I should like to develop my argument and then come back to him if I may. We have heard for the past 20 years, and I have heard it for the last five years in this House, that the reason why no investment has been made or why we are behind in investment is uncertainty, undue interference by Government, lack of productivity. It has never once been said in defence of the under-investment in manufacturing industry that there were any technical obstacles in the way. Nor has it been said that there were not the abilities or that the need was not there. All that has been said is that the Government have not created the conditions under which investment would be profitable. That is exactly what has been said and it is the first myth.

The other reason for the poor performance in industry lies in the way in which industry is itself organised in this country. I do not speak of the most efficient companies. If the cap fits, it can be worn. There are very efficient companies but, if one investigates companies and reads the reports that are made upon them from time to time, one finds an under-utilisation of capacity in factories of as much as 50 per cent. This is not due to the particular economic conditions under which we are suffering at the moment but to the way in which the work is organised in the factory. One comes across factories that have layouts or work schedules that make incorrect allowances for machine time as against running time; one comes across cases of priorities being interrupted and of orders being switched. The people at the point of production know all about this, but there is an obstinate refusal to acknowledge that there is any kind of inefficiency in British industry.

I listened with interest to the noble Viscount, Lord Watkinson, and he increased my gloom because of what he said in amplification of what his Director General had said on television the other night. The Director General said that the Bullock proposals would lead to a "major battle" which would sour relationships in industry. He asked, How can we possibly continue to co-operate in the industrial strategy if we are in fact battling on how we involve everyone in companies? This is even before the report has been published. It is even before anybody has had time to consider it. It means that British industry is taking up an embattled and defensive position which has nothing whatsoever to do with the needs of the nation but is purely in defence of property rights.

As we have been told, we live today within a mixed economy, and I accept what my noble friend said just now and I believe it myself: if we are to preserve individual liberty in Britain, individual liberty must have its economic base and, to have an economic base, there must be private enterprise in Great Britain. It must be encouraged wherever possible. This is more particularly true of the small firm where the inventiveness, the ingenuity and the drive now really belong. That much I believe. But when the Chairman of the CBI endorses his Director General in his tense, tight-lipped ultimatum of the other night, then I am very fearful for the way in which the British economy will work.

Returning to Europe, it is not only a question of increasing exports to Europe, but of reducing our own imports and substituting our own imports and substituting our own manufactures. But noble Lords could go into many shops and ask for British goods and find out that it is very difficult to get delivery from industries which are not in any way affected by strikes or industrial disputes, which are in the main, when they occur, confined to the larger firms.

This is the position today, and unless it is really faced there can be no escape from it. The only way in which we can operate satisfactorily is by both sides—and by that I mean the CBI as well as the trade unions and the political Parties—approaching the whole industrial problem in a much more constructive spirit, without taking up our prepared and embattled positions. There is no question about it. I believe that a reason for the success of the German economy, which very often is held up as an example to us of the way that we should go, is not only that they have a higher rate of capital investment in plant and machinery as compared with ourselves, but also that they have established a new industrial relationship within the individual plants and factories themselves. They have established a degree, only a degree, of industrial democracy. But from mixing, as I and my colleagues do, with colleagues from Germany, France and other countries in Europe, I am bound to say that if we in this country over the past 10 years had had a degree of genuine industrial and creative co-operation derived through the formal machinery created by the State in order that there should be consultation and participation at plant level, our fate would have been very much different from the one which we have endured for the past five years.

So I hope that we are going to try to get rid of some of the old illusions that everything that happens to industry is the fault of everybody other than industry itself. It should be salutary to remember that only on one occasion, and that very briefly in the year 1971–2, have British goods been uncompetitive in the world market. For every time since the war price has not been the problem with our goods abroad, except in only one brief period, from 1971 to 1972. The problem has always been poor delivery, bad sales service, and in many cases bad salesmanship, salesmanship not allied to productive performance and programming, selling recklessly on the basis of delivery dates that were not kept and were not even feasible when the original contracts were entered into.

It has nothing to do with the exercise of skills by British workmen or their technologists. It has nothing to do with the quality of British goods when they are finally produced. It has everything to do with the way in which British industry is organised and with the spirit in which it is organised, and with the spirit with which people work together. I repeat that in many of our big firms this is undoubtedly the case. There are some which are very efficient; if the cap fits it can be worn. But unless there is a change of heart by the noble Viscount, Lord Watkinson, and his colleagues on the CBI, then I foresee breakers ahead.

7.43 p.m.

Baroness WARD of NORTH TYNE-SIDE

My Lords, I have been very interested in listening to this most important debate. It is always a great pleasure to hear speeches made at an important time in our national history by people who have a real knowledge of the subject about which they are talking. So I have been fascinated by being here today and listening to a great number of speeches. I have very little that I want to say, but when Her Majesty's Government are doing everything they can to help with the economy, I wonder why, for instance—having asked a considerable number of Questions on this subject—the Fay Report on the Crown Agents has not yet appeared. I wonder sometimes whether Her Majesty's Government and the appropriate Minister have ever exercised any pressure in cases where reports should be ready. From what the noble Baroness who has always answered my Questions has said from time to time, I have assumed that the Fay Report has been practically ready to be brought forward, yet we still have not had it. I have asked so many Questions that Her Majesty's Government must have become rather bored with them. But it is very important that reports of this kind should be produced and argued about, and I should like to know from the noble Baroness whether she can now tell me when the report is likely to be presented.

I turn now to the second matter that I should like to raise. I was looking forward to hearing the noble Lord, Lord Balogh. I wrote to him in the traditional way saying that I intended to make one or two comments tonight on the policy of both the noble Lord, Lord Balogh, and the noble Lord, Lord Kaldor. I was very interested when the view was being put forward from my side of the House that there is a great change now in the policy which is being put forward by Her Majesty's Government, which I think we were all very pleased to hear about. I listened to the noble Lord, Lord Balogh, the other night on the "Panorama" programme. I must say that I think that his policy is not very good for this country. I understand that for quite a number of years Her Majesty's Government were being advised on Treasury matters by both the noble Lord, Lord Balogh, and the noble Lord, Lord Kaldor, and I wonder whether the noble Baroness who is to reply to the debate can say whether those noble Lords are now out of that position, because to hear that they are would give me and a great many other people very great pleasure indeed. I do not approve of their policy.

I know that it is extremely difficult to raise personal matters about Members of your Lordships' House, but I always used to get into trouble in another place when I wanted to ask questions which I was not——

Lord BROWN

My Lords, may I interrupt the noble Baroness to ask whether she prefers Milton Friedman to Lord Kaldor and Lord Balogh?

Baroness WARD of NORTH TYNESIDE

Would the noble Lord mind repeating that question?

Lord BROWN

My Lords does the noble Baroness prefer the economics of Professor Milton Friedman, as translated by Mrs.Thatcher and others in the Conservative Government, to the economics of Lord Kaldor?

Baroness WARD of NORTH TYNESIDE

I very much appreciated the very interesting statements which were made by, I think it was, Professor Friedman. I did indeed support his policy, but I was not going to talk about that. I was rather alarmed in relation to the noble Lord, Lord Balogh; I did not like his policy. He did not seem very good even at debating it. I thought to myself that I should not like to think that Her Majesty's Government, or indeed this country, were being advised by both the noble Lord, Lord Balogh, and the noble Lord, Lord Kaldor, about financial matters. I hope that when the noble Baroness replies she will be able to tell me whether now, as I hope is the case, they are no longer advisers to Her Majesty's Government on financial matters, because it is on financial matters in particular that our future depends. I thought that I should raise that matter because I was so disappointed, after finding that I was to follow the noble Lord, Lord Balogh, to hear suddenly—he did not tell me—that he was not going to speak, because I might then have been able to have another go at him.

I have very few points that I want to make, but there is another that I should like to raise. In my part of the world unemployment has always been a very difficult and heart-breaking subject. When I first went into another place in 1931, 84 per cent. of the employable population were unemployed, and I have never forgotten that any more than they have ever forgotten it. So, naturally, I take a great interest in having the right policy, both now and for the future, for our country and also for my part of the world. The other point I wanted to raise is in connection with the cutting of expenditure. It seems to me that I have spent a lot of time recently watching TV—and I have enjoyed it. I always enjoy listening on TV to people who have something to say; whether it supports me or disagrees with me, I do not mind. I have been disagreed with so often in my life that it has no effect at all.

On Monday night I watched the BBC 1 "Panorama" programme on prisons, and it really did worry me very much indeed. Those people who try to provide some educational and interesting subjects for people in prison to listen to, and to ask questions about, have suddenly heard from one of the people who carry out the teaching that even the small amount of money that goes to help on that side of prison life has been cut. My Lords, I am not one for "women's lib." at all. I believe in equal opportunities for women. I am very proud of women and all that; but I am not really a "women's libber". However, I am going to say that I sometimes think that on detailed matters women have a better understanding, and to me it seemed absolutely appalling that the money spent on giving these people who are, quite rightly, in prison some educational advantages, and on giving them some lectures which it was hoped would interest them, was to be cut. I believe that if women had been asked about that they would not have agreed to it; and I hope that, if they can, Her Majesty's Government will restore that money. It seemed to be a very small amount of money, and I think that if one is going to try to help those who are in prison to lead a better life, perhaps, then one would not want to cut the kind of things which give them some interest during the time they are in prison.

My Lords, I think I have come to the end of what I wanted to say. I would have had a great deal more to say if the noble Lord, Lord Balogh, had been here; but as he is not here I cannot do anything about it. I hope he reads the debate, however, though I am sure he will not read what I have said. Nevertheless, I have said what I wanted to say. I wanted to make only a very short speech. All of us are desperately interested and hopeful that we in our country will get out of this deep depression and that unemployment will fall. Many noble Lords who have spoken today are not optimistic. I am neither optimistic nor pessimistic, but I hope that as a result of the debate today and of all that has been said, the next time we have an economic debate we shall have gone very much further towards getting over our difficulties.

7.54 p.m.

Lord TAYLOR of GRYFE

My Lords, at this stage in the debate it is extremely difficult to say anything that is original; and there is unanimity, I think, on all sides about the excellence of the debate, the standard of the discussion and the general temper which has prevailed in this House in discussing what is a matter of national importance. We have had speeches from the former Chancellors, we have had distinguished economists, we have had an important contribution from a former Governor of the Bank of England, and added to that we have had an excellent intervention by a maiden speaker, Lord Camoys. I am only sorry that some people who are intent on abolishing the House of Lords are not present; they might have been deterred from winding up the House of Lords, for I feel that the basic problems of our economy have been faced courageously and in many cases objectively.

At this stage of the debate when we are all getting tired I think it is as well to recap the beginning of the debate in which the Leader of the House indicated the achievements of the Government: the great achievement of the Social Contract, bringing with it a substantial reduction in the number of industrial disputes; the improvement in the balance-of-payments situation which will rapidly recover and presumably move into surplus next year; and even the Economist confesses that our inflation rate will get down to single figures next year. As many speakers have said in the course of the debate, all these achievements are inclined to encourage us to feel a little smug and self-satisfied, but all the problems of this country really derive from our poor performance in productivity. And while the noble Lord, Lord Robbins, spoke about many of the problems being created by mismanagement of sterling, basically it is an economic problem; and if we look at the performance in terms of productivity the House will realise that until that problem is solved and until we achieve something like competitive terms in productivity then the basic problems of our country will continue.

I will not bore your Lordships with long statistics but will simply quote the "Think Tank" study of the motor industry which found that in Britain it took 65 per cent. to 100 per cent. more manpower to assemble identical cars than it did on the Continent. I am quite sure that the noble Lord, Lord Bruce of Donington, will tell me that that is due to lack of investment, but it is not really, because given the same manning levels for the same piece of capital equipment, output was lower in Britain in some cases by as much as 50 per cent. So long as that state of affairs prevails this country will find it extremely difficult to achieve reasonable health in the economy.

I am sorry the noble Lord, Lord Bruce of Donington, is not present because he posed the question: Why has there been a lack of investment? It is said in some quarters that industry has gone on strike; that it is not the workers who have gone on strike, it is industry which has gone on strike in terms of investment. But, to be fair, I think that if we look at the investment picture we shall see that reluctance to invest has been due to a variety of circumstances, not least the high cost of borrowing, not least the total uncertainty of an inflationary period. If you have inflation running at 20 per cent., who is going to invest in anticipation of profits some years ahead, with not least the fact that we have a vast reserve of under-utilised capacity already? Who is there with a factory which is operating at 50 per cent. of its capacity who is going to be induced to invest in new plant?

Then there are other constraints on investment. It is one of the problems of our time that workers facing an unemployment figure of 1,400,000 inevitably become protective and they hold on to their jobs. An interesting example of this took place near my own home two weeks ago. The Chrysler Company decided to recruit 1,500 additional workers—a very happy circumstance because only two miles down the road Babcock and Wilcox were laying off an identical number. It matched. The members of the Transport and General Workers Union at Linwood immediately protested against the employment of any additional workers in their factory because they wanted to protect their jobs. They said to the management, "We will only agree to 1,500 additional workers being recruited if you guarantee that we shall be in employment two years from now". Perhaps the attitude is understandable in a period of high unemployment, but it is the protective atmosphere of "We must hold on to our jobs", which is also a constraint on investment because investment if it is going to be sensible is bound to reduce unit costs and may consequently cause redundancy in the short term. I say that this attitude is perhaps inevitable, as anyone who has suffered unemployment will realise why they want to hold their jobs. It is a perfectly natural reaction, but this should be kept in mind when discussing Bullock. I know that my noble friend Lord Bruce of Donington assures me that workers' representation on boards will inevitably release creative forces which will improve the performance of the particular industry. But if you look——

Lord BRUCE of DONINGTON

My Lords, if my noble friend will forgive me, I said nothing of the kind. I said that it would offer the opportunity for creative forces to be released. It depends on exactly what are the circumstances in which it is achieved, on exactly what spirit exists on all sides. I did not place any touching faith in the sense that you establish the form and automatically get the results. It brings the opportunity—nothing more or less than that. I hope that the opportunity will be taken advantage of.

Lord TAYLOR of GRYFE

My Lords, I accept what my noble friend has said. It depends on attitude. That is exactly what I am saying: that it depends on the attitude in relation to the company whether it is going to be a protected atmosphere or whether in fact the workers on the boards are going to support decisions which may put even their own jobs at peril. This is a natural reaction, but it is an important factor in our calculations.

There is a general agreement that the public sector borrowing requirement must be cut—and we have given this contractual assurance to the IMF but we must not minimise what that means. I was delighted this afternoon to hear the sensible contribution of the noble Baroness, Lady Seear, who tried to get down to detail as to how that could be achieved in terms of improvement of management performance and efficiency and so on. But cutting back the PSBR has sense only if we are able to switch the resources from that sector into industrial performance or into export performance. It has no meaning otherwise. Simply cutting back means increased unemployment and hardship for lots of people. We must achieve a switch of resources and that is the job of Government. I do not believe that this can be left entirely to the market mechanism. We must accept the fact that the Government are involved in the economy. A great deal has been said today about "Stop messing us about." I can understand that sentiment. I know what it means to industries which are worried by the weight of legislation. I know that in the Chancellor's speech he withdrew the regional employment premium with hardly a ripple in industry, although I know industries where it will cost three quarters of a million pounds a year to lose REP. I spoke to some of the managers in these industries. They say the same thing: "We are almost punch drunk with the amount of legislation which has come through affecting our industry in the past few years."

I think it is a good thing that, while devolution is debated and discussed at great length, there will be a breather in the whole area of additional legislation. At the same time, the sentiment of, "Stop messing us about" has a kind of ring about it: "If you leave us to ourselves and allow the market mechanisms to operate, inevitably we will muddle through." I do not believe this for a moment. We must accept that we are living in a mixed economy, with all that that means—and it means State involvement. I am not suggesting that the State should intervene in entrepreneurial decisions, but I believe that the State and industry have got to work together—call it "planning agreements" if you like—with appropriate safeguards to confidentiality. I believe that they must work closely together not simply because we are in that kind of economy in which some kind of planning is necessary, but the State is directly involved in some areas of our economy that are vitally important to our economic welfare. The State is directly involved in the nationalised sector which, in its investment programmes, has a colossal effect on the welfare of many of our major companies. The electronics industry and the telecommunications industry are almost entirely dependent upon the investment programmes of the Post Office. British Insulated Cables and other companies are substantially affected by the investment programmes of British Rail; and similarly the entire power plant industry, as we have seen in the last few weeks, is almost entirely dependent upon the decisions of the CEGB.

Do not let us assume that the State can be left out of the discussions. The State is very much involved in a direct way. The State is also involved indirectly in a number of important decisions. I read the debates the other day in another place on the National Enterprise Board. Some people on the Left Wing of my Party expressed alarm that the NEB was not being aggressive enough. It can be said the NEB has behaved sensibly in their interventions in the field of investment. We must accept—and most Conservatives would accept—that it was doctrinaire nonsense to wind up the IRC. It looks to me like similar doctrinaire nonsense to promise to wind up the NEB if they return to power as they have promised.

We cannot contract out of the reality of a mixed economy. If we believe in a mixed economy, then we must expect that the State will be involved. Of course it will continue to be a balance. This is not an easy thing. It will be solved by pragmatism, rather than by comprehensive decisions covering every field. I believe that it might be sensible of many major industries to accept planning agreements or at least to discuss planning agreements, so that areas of State investment which affect forward planning should be commonly understood and underwritten by workers involved in the industries concerned. That is the way we must move forward.

I think, too, that in the nationalised sector we must take these great industries out of the debating Chamber of Parliament and try to get consensus policies on corporate plans for investment in these industries. I happen to be a member of the British Rail Board and rightly I am not permitted to discuss the affairs of that Board in this House. But if you take industries like British Rail, CEGB and some of the others, they require five to ten year forward planning. But there is no basis for live to 10 year forward planning if these are changes of Government and switches in policies and changes of Ministers and new emphasis every six months, or two years or five years.

We should try to do what the French do; that is, get acceptance of planning. In France they have frequent changes of Government. They are now working on their sixth plan, because the whole area of State enterprise is taken out of the area of political debate and people regard these great enterprises as national enterprises and act accordingly. Perhaps we can make a move towards consensus politics; at least getting consensus attitudes in relation to these great State industries. I am sure that no one on the Conservative Benches will start talking about denationalising these industries.

Let us face the fact that we are living in a mixed economy. Let us try to get our balance straight within that mixed economy. Let us define the areas of State intervention which are essential for economic survival and let us proceed on these lines. At this stage in the debate it is difficult to say something that is perhaps new, but throughout the debate I have felt that we have been moving towards some kind of consensus of economic policy. The IMF terms represent the strategy for this country for the next year or two and we cannot escape from that. Let us stop arguing about it and accept that as our commitment and see it through. We have got to see it through. Surely, that is the basis of consensus politics in our economic strategy.

My final remark is this. I am a member of the Labour Party and I am very conscious that within that Party there are—as is inevitable in a democratic Party—differing views as to the direction which this country might take. There is a view expressed not only in the Labour Party but beyond it in some of the fringe Parties, that what we are facing now is a collapse of capitalism and the collapse of the system, and therefore the sooner we wind it up and get rid of it, the better. I am a Social Democrat and that is why I am a member of the Labour Party. I believe that it is possible to continue to encourage the inventiveness and creativeness of private enterprise within a sensible system and in which the State plays an important part in defining our respective roles and responsibilities. I believe that the survival of democracy depends on achieving that balance. I hope that this debate will contribute to a movement in that direction.

8.13 p.m.

Lord BALFOUR of INCHRYE

My Lords, I undertake to be very brief and wish to speak only upon one aspect of the economic situation which has been debated this afternoon. The aspect I wish to speak about is one that has been dealt with in sombre terms by the Chancellor of the Exchequer and the Prime Minister; namely, unemployment. In spite of such things as the accelerated project scheme, the job creation programme and the temporary employment subsidy, unemployment is almost certain to be around 1½ million for the year 1977. Of one thing I am quite sure: that the vast majority of that 1½ million are fine men who seek only to do a fair day's work for a fair day's pay. I take issue with the propaganda (which I think is now dying down) of a few months ago in the Press which endeavoured to make out that a vast number of these unemployed were scroungers and men who wished to get the better of the community if they could.

Quite rightly, where there are abuses in in our public system of social security, these should be highlighted and dealt with in the most vigorous and rigorous manner. But it is a minority to whom this applies and not the majority, as people tried in certain directions to say not many months ago. The social security of 1977 gives material protection from want; but I think it is wrong and it is socially unacceptable for a man and his family on social security in some instances to be almost as well off as when he is in work. It is socially unacceptable, and I ask myself what can be done. Social security levels cannot be cut. No one has suggested that. There is only one answer: to widen the gap between social security and employment by higher wages. The Conservative Party are a high wage Party for those in employment, and a Party of compassion for those who are out of work. In the Party to which I belong our belief and our polices aim at incentives, rewards and lower personal taxation, so that high wages are individually earned in an economically justified climate. I leave it at that.

I come back for a moment to the 1½ million unemployed and wish to put forward to the Minister one direction in which I believe the Government might intensify their efforts. I would urge the Government not to over-concentrate our rather limited resources on youth and youth schemes only, at the expense of forgetting the older men of industry now unemployed and with poor prospects of ever getting work again without some special aid.

Youth training? Certainly. Youth job creation? Certainly. But in doing this do not neglect the middle-aged. Of course youth must be helped, and youth must be given credit for individual courage and the ability to forge ahead by their own initiative and spirit of adventure. But do not let us foster the idea in any youth that he can ever think that he is owed a living by the community without his own efforts. More of our resources and more effort should be turned towards the middle-aged.

I see that the EEC is going to give us £26 million over the next four years for retraining. I sincerely hope that the Government have taken into account the words of Professor Michael Fogarty, a Fellow of the Centre for Studies in Social Policy, in an article reproduced in The Times. He declares that research and experience have shown that the middle aged can learn new skills and often want a breakthrough into new departures for the rest of their working life. We have in Britain today 11 million men and women between the age of 45 and retirement age. There is need for practical steps on how to use this reservoir of experience, balance and service effectively, in works useful for the nation and giving those retained middle-aged restored help and pride. I would urge upon the Government the consideration of a recognised counsellor service, just as youth has it—a counsellor service to concentrate on this strong force rather than to hustle men of middle-age into retirement at the earliest possible time.

My Lords, my last words are these: to urge the Government, the CBI the trade unions and the local authorities to get together in recognition of all the value that men of middle age can give of their experience and judgment which this country certainly cannot afford to waste at the present time.

8.20 p.m.

Lord VAIZEY

My Lords, the recurrent economic debate in your Lordships' House underlines the frequent chops and changes in economic policy, and these chops and changes are obviously, in part, due to the infirmity of politicians. But to a great degree they are also due to the highly uncertain nature of the economic weather in recent years: sometimes the sun shines, sometimes it rains, and we have to change our clothes accordingly. For those of your Lordships who have been kind enough to read my articles over the past years of this Government, I have been something of a prophet of economic doom and gloom. I believe that we may now have turned the corner. I do not mean, of course, that henceforth everything will go well and smoothly, but I do mean that on the whole I would expect the news to get better rather than worse. It is in that context, therefore, that I should wish to judge the Chancellor's December measures.

Quite frankly, one point which has not so far been made today seems to me of considerable importance, and that is the election of President Carter. Whatever the rights and wrongs of the Nixon years, the capacity of Republican Administrations to seek and get timid—I do not say foolish, but timid—economic advice is very great. The man of the greatest stature in the last Administration was Dr. Kissinger, and he, whatever his other merits, had a profound lack of interest in world economic affairs. For eight years, therefore, America has done next to nothing to offer world leadership in economic affairs. Indeed, it has contributed greatly to economic instability by abandoning the Bretton Woods international monetary system which, for all its faults, did work. It has replaced that by the lack of system we have today. It offered no leadership in the massive deflationary effects of the oil crisis, and the price rises following those increases gave us the apparent paradox, from which we still suffer, of price rises and widespread unemployment. Above all, the American economy itself is chronically depressed, lowering world demand and creating unemployment in its trading partners.

The arrival of President Carter, with a first-class team of well-trained bankers and economists, offers our own Prime Minister at last the opportunity to make to a receptive audience the point which he has hammered home for years. I remember the very important speech he made when Chancellor in, I think, Istanbul at an IMF meeting, pointing out that the international economic system needs a fundamental revamping. The prospects of the contribution of oil to our balance of payments is clearly fundamental. It reduces imports as greatly as speakers have said. Quite frankly, I think we have tended to underestimate the impact of oil on our balance of payments. It is a fact that, had the internal combustion engine never been invented, this country would never have had a balance of-payments deficit since the war, because it is almost entirely the size of our petroleum imports.

In the present context of a new approach to an international monetary policy, which has been the keynote of President Carter's addresses so far, with the recent loans which we have received and the provisional settlement of the sterling balances issue, it seems to me we are living in an international climate which has been fundamentally transformed; and our economic climate will, I hope, be transformed in that particular context. That is the reason why I am optimistic: it has nothing to do with whatever Government are in power. I do think that something very important has happened in America; and as America is half the Free World's economy, what happens in America is very important. It is perfectly clear to me that the world-wide depression and inflation that we have call for a new international co-operative effort on the scale of the Marshall Plan—a call recently made by that outstanding European, Professor Ralf Dahrendorf, the Director of the London School of Economics.

The Marshall Plan, your Lordships will recall, was not just aid from rich America to poor Europe. It was marked by interdependence: it was a co-operative effort. Each country prepared a programme of reconstruction. They were all co-ordinated, and the central body (the OECD, as it was then) guaranteed their balance of payments. Within four years, the greatest boom the world has ever seen occurred. The initial investment made by the United States into the Marshall Plan was paid for time and time again by its vastly increased income and its large export earnings. Everybody was better off. Let that be the message for today. It seems to me that we need a new Marshall Plan. With a new President and a new team in Washington, and our own Foreign Secretary as the President of Europe at the moment, we have an unrivalled opportunity for international economic leadership.

In the presence of the noble Lord, Lord Robbins, I say with some diffidence that I am an unrepentant believer in the kind of economics that lay behind the Marshall Plan: that was, of course, Keynesian economics—now so much under attack. Nobody would be such a fool, I think, as to do what the Marxists do—appeal to a dead man, hoping to find the truth embodied in a book—but it seems to me that the Keynesian tradition, which I am delighted to see embodied here in the person of my noble friend Lord Kahn, has a great deal of truth in it. Let us be quite clear: economics is not an exact science and there are many roads to the truth.

As Keynesians, therefore, what do we say about the situation in which we find ourselves? First, the present level of unemployment is absolutely and utterly unacceptable, and I think the noble Viscount, Lord Amory, said things which were true, heartfelt and extremely important. I am highly delighted that they were said from the Opposition Benches in that very impressive way. Next, the only way of getting unemployment down is by getting spending up. Partly, spending is going up because of the growth of exports, to which my noble friend Lord Northfield referred. Partly, it is going down because of repeated cuts in public expenditure. I welcome this series of cuts, except for those in defence—and I agree with what has been said by other speakers about that. I shall come back in a minute to my reasons for welcoming the cuts; but it is an arithmetical truth that they will raise unemployment—indeed they are already doing so—unless outlays by the private sector rise.

In my view, that must mean cuts in direct taxes, and I am extremely glad that the Chancellor has promised those in his next Budget. Cuts in direct taxation, my Lords, are essential for the following reasons. The purpose of unemployment in the non-Keynesian economic system is to create enough unemployment to keep wages down. Frankly, I see no future in that. There is a very interesting and important article by my old friend Sam Brittain in the Financial Times which argues that very point. I do not think it has any mileage in it. You cannot now discipline the trade unions by keeping on raising unemployment. It is just not politically or humanly feasible, for the reasons put forward by the noble Viscount, Lord Amory. We have no alternative, I think, but to try to get an incomes policy accepted—something which the Keynesians have argued since the publication of the general theory.

I believe the abolition of the Prices and Incomes Board by the Heath Government was in the long run one of the most foolish acts of policy in post-war Britain. For all their faults, they were building up a body of case law and information of profound importance for the development of an incomes policy. In its stead, we now have the Social Contract. I am second to none in my admiration of Mr. Jack Jones, though his growing deification does suggest that he might need a boy to walk behind him to mutter occasionally, in a low voice: "Remember, Jones, thou art mortal!" I suppose that next year, when he gets here, we can all perform that function, provided we have not been abolished by then. But, let us be quite clear, my Lords, Jack Jones is not a substitute for a long-term incomes policy; and the Social Contract has meant for virtually everybody—except, let it be said, Jack Jones's own members—a serious fall in the real standard of living.

At this stage, I shall be personal, if I may. My wife and I and all our friends are perfectly ordinary professional people. We devote half our time to earning a living and half our time to voluntary public service. I can honestly say that at the age we are, when we ought to be at the peak of our earning power, we have suffered a very serious reduction in our real income. We are much worse off than we were 10 years ago, and what is true of us is true of all professional people. I make no complaints about that. The country has been going through a terrible crisis. We have made a significant shift to a much more egalitarian society which I, and, I believe, all noble Lords in this House welcome. But this situation cannot last. The present policies, as a number of noble Lords have said, will end in an explosion of wage and salary demands unless real incomes begin to rise soon, and that can happen only by the following means: first, the tax cuts of which the Chancellor has spoken; and, secondly, a long-term, planned and agreed incomes policy.

I said in the last debate, and I reiterate it, and I shall go on saying it for a good many years, that the great constitutional issue of the last quarter of the 20th century in this country is not devolution, or even Bullock. It is: who gets what at the end of the day? How do you divide up what has been produced? That is the great constitutional issue, and we have to devise a means by which we can settle it. So I welcome the measures which the Chancellor has taken. They have reduced public expenditure, but I think that the task before us at the moment is enormous.

The reason why we as a nation have had to cut public expenditure seems to me to be simple. Wage earners, and particularly salary earners, want more spending money and if it is not given to them by tax reductions they will get it by wage demands. Even from the Labour Benches, we can surely agree that not all public expenditure is necessarily good and desirable. The reorganisation of local government by the 1972 Act, and the reorganisation of the Health Service, have merely increased bureaucracy with sheer purposeless public expenditure. Why cannot some of our admirable civil servants apply their undoubted talents to the manufacturing and service sectors of our economy, where they are so badly needed? It is all part of the broader economic strategy, which more and more people on all sides of the House are coming to share. The industrial reconstruction which we need, the absolute first priority of the restoration of full employment and some agreement on incomes policy are, it seems to me, the tasks of this generation of economic policy-makers.

8.33 p.m.

Lord KAHN

My Lords, the text of my speech is conveniently taken from the headlines of this morning's papers. Why do we have to tolerate 1.34 million unemployed—5.7 per cent.?

Yesterday in another place, the Prime Minister said: As long as we are trying to squeeze inflation out of the economy, this is unfortunately one of the consequences that we must face."—[Official Report, Commons, 25/1/77; col. 1169.] I should mention that that statement was in answer to a supplementary question, the main Question being whether the Prime Minister would visit the Channel Islands.

Some forecasters predict 1.6 million unemployed by the end of this year. The London Business School is stated to see little prospect of much improvement in the rest of the decade. The question which I wish to put to your Lordships' House is: how does high unemployment squeeze inflation out of the economy? The question is whether a higher level of unemployment has a beneficial effect on the outcome of wage agreements, and the possibility, which is so important, of continuing with a reasonably successful incomes policy. It is a matter of personal judgment, and I think I can claim the support of the noble Lord, Lord Vaizey, though I am not so sure about my noble friend Lord Robbins. But what seems to me significant is that, unless I am mistaken, the only three professional economists who have spoken this evening are all convinced about the tremendous importance of continuing with a reasonably successful incomes policy, though I believe that my noble friend Lord Robbins would express some doubt about the number of years for which that might be possible.

I entirely agree with my noble friend about the tremendous difficulties which will now face those who are trying to negotiate the next phase of the incomes policy to come into operation on 1st August. There are difficulties much bigger than the ones which faced the negotiators last year and the year before.

I can be accused of being unfair to the Prime Minister, because, clearly, what he had in mind—partly at least—and what the Chancellor may often have in mind, is the behaviour of the quantity of money, and the association between the level of unemployment, as determined by the public sector financial deficit and the behaviour of the quantity of money, and the effect on the economy of differences in the rate of growth of the quantity of money. Clearly, this is not an occasion for debate between three economists and other Members of your Lordships' House about the monetarists' view, so I should like to apologise for being a little dogmatic, though of course any intervention will be welcome.

To my mind, a reduction in the public sector financial deficit is associated in a very erratic way with a reduction in the rate of growth of the quantity of money, and that reduction really means tighter credit and higher rates of interest. So that on top of the direct effects on demand of the excess of public expenditure over tax revenue, you have the indirect effect of a tighter credit system. Is this really what is needed for the health of the economy? The Chancellor of the Exchequer in his Letter of Intent to the IMF of 15th December last spoke of shifting resources into the export and investment sectors. What powers does the Chancellor possess to shift resources? In asking that question, I am following the lead of the noble Lord, Lord Taylor of Gryfe. The Chancellor cannot shift resources. What the Chancellor must do—and it is a very difficult task—is to create a climate of opinion which will induce industrialists greatly to increase their rate of growth of productive investment by bringing into the near future, instead of, as the Government are rather inclined to indicate, as a somewhat remote possibility, the time at which they will need additional equipment, and also the prospect of reasonable profitability.

Lord BROWN

My Lords, may I interrupt the noble Lord? Is he aware—I am sure that he is, but perhaps he would like to comment upon it—of the fact that in a scheme ending last year the Government, by spending some £90 million, influenced industry to bring forward into this year £650 million worth of industrial investment which would otherwise not have been invested until 1978 or 1979? This has not been taken much notice of by spokesmen on economic affairs, and I wonder whether the noble Lord is fully aware of that fact and will comment upon it.

Lord KAHN

My Lords, I am certainly aware that a considerable amount of money is being spent to subsidise investment, or is being forgone by way of free depreciation. Although I do not want to disparage it, except on the ground that it adds to public sector expenditure, the indications are that this is not a very fruitful way of persuading industrialists to put more finance into equipment. Surplus capacity involves very heavy losses, and the prospect of surplus capacity continuing for many years is a very high deterrent to productive investment. I need not go into the arguments why this country occupies the lowest place on almost every league table of the advanced industrial countries that one likes to imagine. One important reason, however, is that over the last 30 years or so the ratio of the productive investment of our GNP has been the lowest of the lot, apart from the United States. The rate of growth of our productive investment has also been the lowest of the lot.

If unemployment were at a very much lower level, it would be perfectly right to take steps to release labour and equipment against the day when it would be profitable to use it for the purpose of a higher level of productive investment, of restoring the standard of living and, over the course of years, permitting a gradual growth again in the standard of living. I agree entirely with the noble Lord, Lord Vaizey, that one of the great difficulties in negotiating an incomes policy is the fact that the real wage, particularly the real wage after tax in the case of the higher paid workers, has fallen so tremendously. Misinterpretation of Keynes's view has done much harm to the economy and to his name.

A level of 500,000—2 per cent. of the labour force—seems to me to be what should be aimed at. In the autumn of 1964 the number of unemployed stood at 340,000—1½ per cent. Ten days after the Labour Party victory of October 1964 the newly-formed Government issued a Statement on the economic situation, in the course of which it was stated that: Apart from the special problems of individual and a limited number of industries, there is no undue pressure on resources calling for action". Certainly the leopard has now changed his spots. Together with many other economists I had a feeling of deep foreboding when I read those words. In that document of 1964 the overall balance of payments deficit was estimated to be £700 million to £800 million. If ever there has been a case for releasing resources to improve the balance of payments it was then, and the situation was exacerbated by the temporary imposition of an import surcharge.

I admit that subsidies do a little good, but the simple fact is that the Chancellor of the Exchequer has no power to shift resources into export and investment sectors except by inducing industrialists to put their resources into the desired direction in the manner that I have indicated.

The question which I am constantly asking myself, and am constantly being asked, is why the people of this country have to put up with the immensely high level to which unemployment has now risen. There seems to me to be one answer and one answer only: it is the need to limit our balance of payments on income account. Lower unemployment means more production and bigger incomes. Higher imports mean a bigger balance of payments deficit on current account and more borrowing from our overseas lenders. However, our power of borrowing from overseas is limited by the willingness of these countries to lend. Their willingness to lend is as generous as it is because of the rapid rise in the flow of North Sea oil, without which I simply cannot dare to think where we should be today and where we should be in a few years' time. The great tragedy is that instead of suddenly descending upon us as a bonanza it is something which we have anticipated. Instead, therefore, of being a bonanza it will simply prove to be a lifeboat. I can see no other reason why we should have to tolerate the present tragic situation.

However, even if, reassured by the rapid increase in the supply of North Sea oil, overseas lenders are willing to lend us even more money, I must admit that I should not be in favour of borrowing very much more than we are going to borrow for the sake of having a rather lower level of unemployment. My great hope is that early in 1978, with secure knowledge about the way the flow of North Sea oil is going, a fairly clear idea about the behaviour in the following two years of our balance of payments on income account and the moments at which we should be in balance and should have paid off all our debts, the Government will pluck up courage to make a clear statement, which they will carry out, that the time has now arrived to get the economy going and to give the encouragement to industrialists which the economy so badly needs.

To sum up this part of my argument, I have to make another admission which most Members of your Lordships' House who are present will welcome, although some may not. I agree very much that our public expenditure in real terms is too high a proportion of our national income. I am thinking of the day when our resources are, as we may hope, once again fully employed, and of the importance of our having more resources available for raising the level of productive investment and for resuming a reasonable rate of growth in the standard of living.

In conclusion, I turn to an issue which is far more important than anything which I have said so far. What really matters far more than anything is the economic state of the world. I feel compelled to use the adjective "crazy". The present international depression may have been triggered off by multiplying the price of oil by five at the end of 1973, but in terms of quantities the annual loss of potential output is simply incommensurate with the real cost, which was a once and for all cost, of that rise in the price of oil.

Everything now turns on the rate of recovery of the advanced industrial countries; those advanced industrial countries which are in a favourable balance of payments position and have high monetary reserves. I am thinking particularly of the United States of America, Germany and Japan. Their finance ministers and central bankers are restrained by fear of increasing the rate of inflation, which in the case of Germany is very low, in the case of the United States is fairly low, but in the case of Japan is still fairly high.

I believe there is a basis for being hopeful that to a limited extent they will overcome their fears. This is a matter which is far more important of course for the non-oil producing Third World countries than it is for a country like ours. But there is reason to be hopeful, and I can illustrate it by quoting very briefly some remarks made on 6th January by Dr. Emminger, the influential Deputy Governor of the German Federal Bank, who indicated that Germany would assist the weaker countries' efforts to reduce their external disequilibrium. He said in particular that Germany would further expand its import capacity in 1977 and that in any case Germany was prepared to accept a deterioration in its balance of payments in order to assist other countries in overcoming their difficulties.

In conclusion, I should like to express a word of warm congratulation to the noble Lord, Lord Vaizey, for his highly imaginative and forceful speech, which is another reason why I resume my seat in a rather more optimistic spirit than that in which I rose from it.

8.54 p.m.

Lord PARRY

My Lords, it is daunting at any time to rise in this House, and it is particularly so to rise at this stage in this debate, and even more particularly to rise after so distinguished a batch of professional economists as those who have spoken immediately before me. Nevertheless, it is delightful to be able to trace through their professionalism the shared optimism which is cautious and careful and measured, and at the same time challenging to us all on both sides of the House, at whatever stage the debate might have reached. It seems that there is agreement that we are set to lift ourselves out of recession. We hope for, though we cannot rely on, resurgence of world trade. It seems that there is general agreement—and I have put down almost a shorthand list of the things which seem to be in agreement—that the best use will be made of any resurgence through a package strategy based on exports.

A deficit is not in itself significant. Planned deficits can be used actually to keep people at work, and I want to welcome all that has been said throughout this debate by those noble Members of this House who have identified themselves as being opposed to unemployment as a means of keeping the economy in balance. The human problem is so great that we cannot reduce the arguments to these mechanistic terms. In our time Governments on this side of the House have had to close horrendous gaps that they have inherited. During the course of doing so, they have lost electoral support and they are setting about doing that again with, I claim as a partisan, more courage than we sometimes receive credit for.

I will not go into itemised details, because at this stage of the debate I hope your Lordships will forgive me if I jump parts of my argument and say that the Government are carefully lessening restrictions which they had imposed. In itself this is an act of courage and of confidence. There is high unemployment, and despite the welfare structures high unemployment is unthinkable to us all. None of us welcomes it: on this side of the House we abhor it and we—or at least I—think of it as a disease endemic to the system rather than as a discipline upon it. I particularly welcomed the reference made by the noble Lord, Lord Balfour of Inchrye, to those people who are unfortunate enough to have to rely on the social security system when they would much prefer to be at work. As has been said, a significant point was also made by the noble Viscount, Lord Amory, in that regard, and I welcome that, too. We are left then with the shared horrors of high unemployment and the dangers implicit in this take-off situation in the continuing high inflation.

Cutting out a great deal of what I had intended to say, the main reason for my remaining in the debate is that I wanted to make the point that when we accepted the package of measures which seemed to be leading us through the difficulties that were so oppressive only a few months ago, we accepted with them some measures which were quite specific. For example, the phasing out of the regional employment premium had a particular effect in my own native county in Wales. Certainly none from this side of the House would deny the pain caused to individual firms. These are painful and difficult times. We do not live in an ideal world, and in common with the unemployed people who have lost their jobs and the means of sustaining their families, firms all around Britain have suffered the loss of the support of one of these withdrawals. All one can say is that the withdrawal was part of a package and other incentives remain. There are generous selective aids under Section 7 of the Industry Act and there are regional development grants.

We are particularly conscious in Wales where far too many of them remain, by the way, empty, of the value of the advance factory preparation. It is no encouragement of the argument to say that they remain empty, but I wanted to mention the fact that in removing these regional employment premiums we have in fact made other provisions within the Act. The dismantling of the premium was part of the general package of economic measures, and those measures are working. Everyone who has spoken today has paid tribute to some aspect of the package that is working. As the noble Lord the Leader of the House said so many hours ago, the value of the pound has risen; interest rates are falling; public expenditure has been cut, and although small firms particularly have cash flow problems, the shortage is more one of confidence than of cash. In fact, I am told that there is cash available from private sources, and I certainly know—although as a member of the Welsh Development Agency I am not allowed to discuss any individual items, and I accept the Addison Rules here at this point—cash is certainly available increasingly from public sources. Not only is cash available but advice is available, too. The Welsh Development Agency is making expertise available in the Welsh context to those firms which are feeling the effects of the squeeze we have talked about.

There is hard evidence, too, that the firms have more confidence than has been suggested earlier in the debate. The end of it has specifically shown more agreement than parts of the beginning of it. There is in Wales, for example, a great illustration of this point in the great Hoover enterprise in Ebbw Vale, which has accepted, even after the implementation of the package, the disciplines placed upon it and has looked at those very disciplines as offering a new confidence. Since the imposition of the package, that firm has gone ahead with extension plans which will be of great value in the Welsh economy, and it will be interesting to this House to know that a Member of it, Prince Charles, will in fact be associating himself with that expansion next week, on the 4th February.

The phasing out of the regional employment premiums has contributed marginally to this great problem of unemployment. If the noble Lord, Lord Kahn, had not quoted it—and, saving his presence, perhaps even though he has—it was a welcome statement of the Prime Minister in the House of Commons yesterday that while the latest figures should not be tolerated, he did not think it possible that they will be reduced for some time. This is an honest acceptance of the position, and it is also a statement of a belief the Prime Minister shares with other Members of his own House and this House, that unemployment is intolerable. But intolerable though it is, it is an argument that it would have been much worse if it were not for those jobs created.

I have here to take up Lord Amory's point; he is entering the Chamber and I welcome his presence while I make this point. In what was a remarkably welcome and reassuring speech, he made the caveat that he did not believe that individual job creation schemes were materially important over all. Well, the figure in Wales is 22,000 jobs actually measurably created within the period. When this is set against those jobs lost, I am sure that a man of the humanity of Lord Amory would accept that 22,000 jobs in this situation are to be welcomed.

Viscount AMORY

My Lords, if I may interrupt the noble Lord for one moment, the figures he gave are most encouraging and I was very glad to hear of such a very successful result. It is splendid when jobs are created. The point I was making was that one has to be jolly careful that in doing that you do not do something else which results in losing more jobs than are created. The case the noble Lord has mentioned, it seems quite clear, has been wholly successful.

Lord PARRY

My Lords, I am delighted that Lord Amory was here in order to make that response, in a characteristic manner, if I may say so. The Welsh Development Agency, for example, is spending—I say this as a layman and a member of the public, not as a member of the Agency—no less than £110 million on the M4, extending the motorway westward. I know it is a strange time of night to be dealing with detail, but it is very important. These four major sections not only add 31 miles of motorway during 1977 in an under-privileged road area of Great Britain, but they do something else. The Welsh Industrial Corporation pointed out recently in a symposium held in Cardiff that industry spreads out along a motorway extension, and there is evidence already of a strengthening of the South Wales economy by measures like this. Your Lordships will forgive me for citing Welsh instances. It is not parochial, but part of the general debate. I am delighted to have had this opportunity at so late a stage. When we finally resolve the arguments of the professional economists and argue about what the politicians do in disposing of the resources available, what matters to the economist and the politician is that the health of the country, its people, is made stronger as a result of their work.

9.6 p.m.

Lord MOTTISTONE

My Lords, in addressing your Lordships briefly, I should like to begin by extending my congratulations to the noble Lord, Lord Camoys, who I thought very skilfully said all the things I like to hear without apparently being controversial. I have just a few things to say which I think are important. It is very interesting, if you have the privilege of being one of the last speakers, to have a picture of the general thinking, and I must confess that my thinking goes along much more with that of the noble Lord, Lord O'Brien, and the noble Lord, Lord Robbins, than it does with, shall we say, the noble Lord, Lord Vaizey, or the noble Lord the Leader of the House. I do not think it is right for us to feel over-confident for the future with things as they are at the moment. I think that we are in fact in a sort of maze.

It seems to me that in the last 30 years, though this Government and earlier ones have done their best, we in this country have somehow lost our way. It is not just in economic terms, but in the cohesion of our society, in our willingness to work together; as the noble Lord, Lord Kahn, said, we are at the bottom of practically every league table, in production terms and that sort of thing. It seems to me that we are in this position because for a long time we have not thought out our strengths. Having thought about this a lot in recent times, because we really are in a poor way, it seems to me that our strengths—and we do not create the conditions to give them proper development—are what I would call the sturdy independence of the individual. We tend these days, for example, to try to create apparatus in which independence is denigrated. People are not encouraged to get on on their own and to prosper. They are expected to be supported, looked after, perhaps by a trade union or by a professional body. They are not encouraged to get on on their own, yet the strength of our people to my mind lies in that sort of characteristic.

The other thing that I feel we have lost sight of—and there is all sorts of evidence for it—is plain, straight-forward skill. Skill, at whatever level you care to choose, also seems to be denigrated. It is almost as though we had a deathwish, which is perhaps allied to this great wish for equality, that skill is not given the credit that it deserves at any level, whether it be on the shop floor, management or a board of directors. Their skills are not treated as being serious and important.

I do not want to take up the time of the House on the Bullock Report, which we shall have a chance to discuss on another occasion. That report suggests that people without any skill or experience should assist in the running of companies. The running of companies is a very skilful and difficult job and one which can be done only by those who have skill and experience. However, because it suits people to put things in a particular way, as does the Bullock Report—and one has not had time to do more than glance at it—one is led to believe that anyone can be on a board of directors provided that he is voted there by, for example, his mates.

I am the first to support any system which uses the talents, knowledge and experience of the workforce in any organisation that one cares to choose. I also support those who say that the workforce at all levels, including management, should have a much greater say in how their work is carried out. However, to take that sort of argument one step further and to say that people can do all sorts of jobs which they are not in any way trained to do, to me is ridiculous.

We must tackle the problem of how to get cohesion within our country quickly. It was nice to hear the remarks made by the noble Lord, Lord Vaizey. Let us hope that what he said will be true and that we shall see an economic leadership from across the Atlantic which we have lacked in the last eight years. Even if we do get such economic leadership from the United States, if we cannot recreate our own cohesion we shall not get very far and we shall not progress much further down the road of working together.

The noble Lord, Lord Taylor of Gryfe, said that the State should share the management of this, that and the other. We know about the mixed economy. However, when we come down to it, the State is not a body in itself; it is represented by a group of people. In the main it is represented by civil servants, and at a higher level by Ministers. On the whole, Ministers and civil servants do not know about the running of companies. Also, even if they do know something about the running of companies, they do not have as their main interest in life the successful running of those companies. They have a different interest. Their interest is in being good civil servants or good Members of Parliament. If they were good at running companies they would be doing that.

The concept that the State needs to share in the running of commercial enterprises needs a much more fundamental examination than it has received in many a long day. I honestly do not believe that this I country will get on its feet again until—particularly because of the nature of its citizens—somehow it can throw off the ideas of 50 and 60 years ago, which the theorists have thrust round our necks, and until we grant maximum freedom to enterprises throughout this country so that they can get on with the job. That will be the only way in which we shall get out of this economic tangle.

9.14 p.m.

The EARL of GOWRIE

My Lords, I also want to begin by adding my congratulations to those given for the maiden speech of my noble friend Lord Camoys. The maiden speech received, and indeed deserved, more than conventional congratulations. I use the term "noble friend" in more than a conventional sense. The noble Lord and I roomed together at Balliol College for more than two years, competing for each other's shirts and pinching each other's essays and girls friends. I think that I must have been the nett winner because, although we both got a degree and although we are both contentedly married to the proper girls, a large part of my wardrobe still bears the name tag "Stonor". It might be over punctilious towards the conventions of your Lordships' House if I now change these to "Camoys".

In those days, showing the admirable consistency which he has maintained, my noble friend was a Tory and I was something approaching a "Trot". Since then I have become a Tory and my noble friend has become a tycoon, and I offer that for whatever moral noble Lords may seek to find from it. To be serious, his contribution to our debate was most valuable, especially I thought when he dealt on the questions of the problems of graduates going into industry, and we most sincerely look forward to many more.

The speech of the noble Lord the Leader of the House, though he said enough for us to acquit him of any charge personally of complacency, shows I think that the Government feel that they are breathing again and indeed feel that the country's fortunes, and therefore perhaps their own, are brightening. It has been our job this afternoon to debate whether indeed this has been so. The many points which have been made I should like to take up, but I know that time is late and we are looking forward to what the noble Baroness has to say. I just say, when the noble Lord, Lord Vaizey, raised the question of his optimism being due to the election of Mr. Jimmy Carter, that the last Johnson Democrat Administration in America—and I think perhaps if I were an American I might well normally support the Democrats—exported their enormous Vietnam induced inflation to us and we are still suffering from some of the effects of that, so we must be a little bit cautious about the Democrats as well.

I also noticed that the noble Lords, Lord Kahn and Lord Robbins, and others, the Government, and the noble Lord, Lord Vaizey, too, talked about the importance of reflation in the world outside so that we should benefit from some of its effects; but when we talk about Germany and the United States of America and Japan we notice that these are, at their most Left, social democracies, and, at their most Right, Centre-Right Adminstrations. They have no socialism there, and it seems ironic that a political Party of which many members are committed to full socialism should be depending for the saving of their own bacon on firmly capitalist countries. We must learn lessons from that.

For my own part, I agree that things have got better to one extent; the extent that there is not now, and is not in the immediate future, the short-term future, likely to be another sterling crisis. For a country that cannot eat without importing food, and cannot enjoy any surplus, however modest, by the standards of its competitors without importing raw materials, that is indeed something to be cheerful about.

In the last year our currency nearly collapsed. It nearly collapsed because of the Government's policy towards inflation. The Social Contract, in short, was not working because any improvement in the rate of inflation achieved by the Government was relative only to the nigh on 30 per cent. achieved in its first year and a half of office. The currency did not collapse because our friends and allies abroad decided to save us. The noble Lord, Lord Robbins, was one of those who pointed out that this was not simply out of affection and sympathy but also to some degree of self-interest.

Of course we are all glad, whatever our politics, that the run on the pound was halted, and that part at least of the enormous debts we have incurred in order to save our currency is now being used to fund the sterling balances and run down sterling's function as a major reserve currency. But I think we may agree with the notable and all too rare speech here of the noble Lord, Lord O'Brien, when he said that there is some loss involved here and there is some cost involved here. It is not a cost we are going to feel immediately, but over the years we shall suffer as well from not having the sterling reserves.

Let us make no mistake also that there is nothing very glorious in being bailed out by others, and nothing particularly honourable in the barely concealed relief among senior Ministers that the IMF is now slowing down the rate at which socialist legislation of the kind that the Social Contract demands may take effect. The sterling crisis and the loans have forced the Government to adopt an economic policy much closer to that which we on this side of the House believe in.

In a notable and delightful speech my noble friend Lord Thorneycroft made that point. It is almost as if we could paraphrase Mr. Ernest Bevin—I think it was actually Lord Shawcross—and have the Government say "We are the Tories now". For such a policy to succeed and to provide not merely a breathing space but a chance for real economic and national renewal, it needs greater political conviction and greater political backing than in my view the present Government can continue to demand for very much longer.

The Prime Minister said that he does not believe that a General Election now would be in the national interest. I confess—and I think noble Lords will acquit me of being hysterically partisan—that, until the December measures, I think I would have agreed with him. But since the granting of the loans a new course has been imposed on policy and one which involves much less emphasis on the role of local and national government than is in line with Labour political thinking. It also involves a much more positive attitude to profits, to the reduction of personal taxation, to means-testing welfare benefits and to increasing indirect taxes than is possible for present Labour thinking—and, I would also say, in spite of the notable speech of the noble Baroness, Lady Seear, for current Liberal thinking, as it emanates from the House of Commons, anyway.

Although the Government's indebtedness has moved their policies rightwards in terms of our rather unsatisfactory and often inaccurate political jargon, it seems to me that nothing fundamental is changing the Government's attitudes to our economy. As Mr. Prentice said, this is a drifting Government driven hither and thither by various events and forces now by the leaders of the labour unions,—now by the International Monetary Fund and now by its own political Party.

In my opening speech two months ago on the economic situation I analysed quite closely—I daresay rather more closely than noble Lords opposite have done from the Dispatch Box—the contribution to our troubles of the last Conservative Government. But at least the Conservatives are showing themselves capable of showing some slight signs of learning from their mistakes. Take their attitudes towards a prices and incomes policy, for example. We have learned the hard way that the short-term stability you can buy—and you do not always buy it—with wage controls is, in the longer term, incompatible with all the qualities of a free society and a mixed economy. Take free collective bargaining, for instance; the profitability that generates investment and employment, the high wages that motivate both management and labour towards greater efficiency and productivity and the careful Government budgeting that keeps the inflationary expectations of an inflation-prone society within tolerable limits. We have learned that what you save on the wage control swings you are apt to lose on the profit-stifling and price-controlling roundabouts, and one could add that you lose also on the expensive and damaging policies you may require in order to sell your wage controls to powerful interest groups—in short, you may lose on a social contract.

Lord BROWN

My Lords, am I to understand that the noble Earl is really speaking in favour of the absolutely uncontrolled use of union power in wage bargaining? Is that his thesis?

The Earl of GOWRIE

Of course not, my Lords, and I will develop my argument a little later. You need incomes controls, for example, never more fiercely than when you are trying to get out of an in comes policy. I am arguing that when you get into an incomes policy you are storing up other difficulties which so far nobody has succeeded in solving, and I think noble Lords opposite will find that this year or early next year they will have intolerable problems on the same front;and I am trying to help them out with how they might deal with them.

Lord BROWN

My Lords, are noble Lords opposite in favour of entirely free bargaining or are they against it?

The Earl of GOWRIE

I am in favour of free collective bargaining, my Lords, but it is not so simple as that and I will develop the argument a little later. In the last three years, it seems to me, the Government have violated our national constitutional instincts—and I believe it is high time we translated these instincts into a code of practice or a Bill of Rights of some kind by putting on the Statute Book measures dreamed up by a particular group of union leaders. I make no attack on them personally. I find them sincere and patriotic men, but nevertheless these policies are the creation of a group of union leaders who do not necessarily command general union support. Mr. John Cousins seems to be picking up an impressive degree of support in his quest for Mr. Jack Jones's job and he has shown himself very unquiet about our progress towards the kind of corporate State which, if I understood them aright, the noble Lords, Lord Vaizey, Lord Lee of Newton and, I think, Lord Brown, would wish to see, in which the Executive——

Lord BROWN

My Lords, the noble Earl has absolutely no right to impute the wish for a corporate State to me nor, I am quite sure, to my noble friend Lord Vaizey. That is an unpardonable imputation of viewpoint to noble Lords on these Benches.

The Earl of GOWRIE

My Lords, any person on any Benches—and there are some on our own Benches here and in another place—who believes in permanent price and income controls is, in one way or another, advocating a corporate State. Otherwise, we are using the term in totally different ways.

Lord BROWN

Rubbish!

The Earl of GOWRIE

My Lords, what I am saying, and I should like to get on with my speech—the noble Lord, Lord Brown, was perfectly free to put down his name and to make his contribution in the normal fashion—is that we may in this way be making progress towards a corporate State in which the Executive, whether it be the executive in Government, the executive within the unions or the executive, even, of large corporations, makes deals together over the heads of Parliament and the rest of us.

My theme, in short, is that the rest of us might even be prepared to put up with this kind of high level wheeling and dealing, at least for a time, if it did any good or showed results. But I think we must ask ourselves what is the net result of three years of Labour Government and the closest relationship between the Labour leadership and the leadership of the trade unions since the Labour Movement was founded. What, in short, is the net result of the Social Contract? It is 15 per cent. inflation which, I acknowledge, is an improvement on 30 per cent. inflation, but this is three years after Mr. Heath's admittedly imperfect prices and incomes policy had reduced a 12 per cent. rate to about 8 per cent., or rather better than par with our competitors. It is a weighted fall in the value of the pound against other leading currencies of 25 per cent.—a quarter—since February 1974. So there is no chance in real terms of taking advantage of so huge and rapid a devaluation.

As Mr. Brittain pointed out in the Financial Times this morning, the terms of trade in 1977 are still about 20 per cent. below their level in 1973, reducing the real value of the nation's output by about 5 per cent. The net result is rates of interest which still make it more profitable to lend to Government than to invest in industry. Is the unemployment consequent upon that, I would ask the noble Lords opposite, a product of my noble friend Lord Barber's imperfect control of M3, as the Prime Minister said yesterday? The net result is unemployment worse than at any time since 1948. Some of that unemployment—I acknowledge not all—is the inevitable product of such a rate of inflation. The net result is the greatest debt in our history, whether in peace or war, and the mortgaging of North Sea oil not to re-equip outdated industrial plant, which would be sensible, but to subsidise bread and to prepare for the staffing levels which, if the devolution Bill goes through, will be required among civil servants. So, in my contention, the largest plank of the Government's platform—the Social Contract—is rotten and we cannot afford not to replace it, expensive and painful though that inevitable job will be.

My Lords, I close by saying that there is no mystery in my mind as to what we should do about our economic situation now that the loans have given us a little breathing space; there is no mystery because it is what we are going to have to do, whether we like it or not and whether or not it accords with our particular political philisophy. We are going to have to reduce our rate of inflation in the next 18 months or two years by a half at least, and even this, as some noble Lords have implied, may be too little. We have got to get our rate of inflation on a par with those with whom we compete. This means that we are going to have to resist the temptation to ease unemployment, itself, as I said, partly the consequence of our inflation, with palliatives which in the end will increase it.

The Prime Minister, to his credit, has recognised this. We have got to do so in order to bring down our rates of interest. We have got to increase indirect taxation and reduce direct taxation. In my view, we have got to run down wage controls. Of course there will be a queue for the exit, but we must run them down in order to abandon price and profit controls. It would seem to me that life under Labour and under the Tories is going to get a lot more expensive in Britain, and our welfare benefits must therefore be selective, directed less towards entitlement and more towards need.

Our blue collar workers (if I may put it that way) are going to get richer. Our white collar workers are going to get poorer, and that is something which my noble friends are going to find unpleasant, and in my view they had better start facing up to it. In my contention, the new Conservatism will perforce be that of Lord Randolph Churchill rather than of Mr. Arthur Balfour or of Mr. Stanley Baldwin, and I, like my noble friend Lord Balfour of Inchrye, am firmly a high wages man. But of course high wages means that those receiving them will have to pay for the benefits that they now receive as of right.

We are going to have to abandon an effective devolution, not necessarily because we do not want one but because we cannot afford it. We are going to have to tolerate the continued deterioration of such public services as the railways and, much more seriously, as universities and hospitals. All of this suffering—and it will be real suffering, my Lords—is not because we are all Tories now or because we are anxious for vast slashes in public expenditure. It is not because public expenditure has suddenly become unfashionable among some professional economists. All of us in Government, or in politics, or in Parliament, can think of items in this country—from Heathrow Airport to the London traffic situation, from the historic houses and museums (which I know the noble Baroness looks after) to the horrifying slums which are still with us, from old age pensioners to one-parent families—which need increases in public expenditure. But we are going to have to cut it because we have been indulgent towards our inflation, more indulgent than our competitors have been.

In order to spend we must make, as noble Lords have said, and in order to make we must grow. I fear that the enormous disquiet about the Government's attitude towards Bullock, for instance, is an indication that no real change has been made and that change is needed, and very quickly.

9.33 p.m.

Baroness BIRK

My Lords, it seems several light years ago since my noble friend opened this debate this afternoon, and I will do my best to spare your Lordships—and I am sure that you will appreciate it—detailed comment on all the comments that have been made, and will try to be as economical as I can in my reply. First, I should like to add my congratulations to those of all other noble Peers to the noble Lord, Lord Camoys, on his maiden speech. He made such a substantial and well informed contribution to the debate. I also wish to congratulate my noble friend Lord Jacques. I do not know whether one can be a "maiden" twice, but he has now made a maiden speech from the Back-Benches this afternoon. It was, I think, his first speech since he retired from the Front Bench, and what a lively, informed and excellent contribution it was!

So far as the noble Baroness, Lady Ward of North Tyneside, is concerned, I am afraid that on the point she raised about the Paper I will have to write to her. But I do not think that I am her personal answerer of Questions. The matter which she raised was probably answered, or not answered as the case may be, by a colleague. So far as the noble Lords, Lord Balogh and Lord Kaldor, are concerned, I am extremely sorry to tell the noble Baroness that they are no longer working for the Government, and we are at a very great loss because we do not have their services in any field whatsoever. So I hope she will bear up in her grief, which I am sure is what she really felt.

Baroness WARD of NORTH TYNE-SIDE

Give me a hankie!

Baroness BIRK

My Lords, the noble Lord, Lord Thorneycroft, in what was, I thought, an extremely lively speech which set a very nice mark on this debate, made us feel that the country was as lively and as virile as he sounded when he made his contribution; but he was also aware, as were other noble Lords who spoke, that like all other advanced countries (if I may just gather together some of the strings of this very long debate) we are limping painfully out of the worst recession since 1933, and our difficulties have special characteristics deriving from our own particular position. We have been fighting our way out of a massive balance-of-payments deficit and an even more dangerous rate of inflation, which has been recognised by all noble Lords who have spoken. These produced exchange crises and the need to procure vast sums to finance us during the period of deficit.

The noble Lord, Lord Thorneycroft, among his extremely friendly remarks, I thought, towards Government policy, criticised the Government for getting into the hands of the bankers. I think the noble Lord, Lord O'Brien, rather took that one on by refusing to accept that the IMF were bankers. All I would say is that the only alternative we would have had was massive deflation and even higher unemployment, and I really do not think that is what the noble Lord would have wanted. The Government have tackled these problems, and we now have, as I see it, a financial shelter under which the industrial strategy, which is really the all-important core of what we are discussing, can work—the IMF loan; the sterling balances, the safety net; the 1.5 billion dollar loan from the commercial banks, and the December measures. The Social Contract has brought down the rate of inflation sharply, and although we are all aware that at the moment it is not going down but is at a standstill, nevertheless it was responsible for doing this, and our investment in North Sea oil is beginning to pay off.

The Government are continuing to control the supply of money, as Lord Camoys agreed, and the Government's target is now set in terms of domestic credit expansion. In spite of the major adverse change in our terms of trade since 1973, due mainly, as I think my noble friend Lord Vaizey pointed out, to the rise in oil prices, we will be paying our way by the end of the year and hope to have a substantial surplus in 1978. Already our greatly improved prospects are being reflected in the dramatic turn-round in confidence in the financial markets, and I think we have all read and seen that, fortunately, this week. This gives us, as I see it, the financial shelter for what is the point on which we have to work, which is the creation of wealth. I believe we now have the right framework for wealth creation, which is so badly needed, and will be able, I hope, to tailor it accurately for export, which the noble Lord, Lord O'Brien, stressed so strongly.

When that recovery begins, I think the problem could be that the turn-round could be more rapid than anyone is suggesting or expecting. If I may take the analogy of the drought situation in the summer, when I was responsible for taking the legislation through your Lordships' House, the idea that within a few months we would have an over-abundance of water was almost unbelievable; but in fact that was the situation, and we certainly must be ready. We do not regard oil as a substitute for industrial reorganisation, but I think I must say, even in what has been an extremely pleasant debate with very little, if any, venom on either side, that if noble Lords opposite had been able to continue their policies of 1970 and 1971 in this respect there really would not be much oil money for the nation today.

As to the noble Lord, Lord Kahn, and his extremely interesting and distinguished contribution to this debate, though I was very encouraged to hear his underlying optimism I nevertheless felt he was rather dismal in regarding North Sea oil as something so far anticipated that it is only a lifeboat. The noble Earl, Lord Gowrie, I am afraid brought forth that old shibboleth, "mortgaged up to the hilt" which is really quite untrue. The prospective contribution from North Sea oil, as the figures published last summer showed, is several times higher than any debt we have contracted. It seems very difficult to knock that idea on the head which comes up every time North Sea oil is mentioned.

We are not playing down the difficulties in the period ahead; but the Government's reliance on the Social Contract and the industrial strategy is absolutely right. What is needed, and what we are trying to work towards, and what was in the Prime Minister's Statement recently, is a sustained tripartite effort, with Government, workers and management working together to protect and improve our standard of living and pay our way in the world. It is the "pay our way in the world" which is the core of it all. There is general agreement that the revival of industry—and, above all, the export industries—must be the first priority. It is, after all, only through the regeneration of industry—which I think has probably been mentioned by every speaker this afternoon and evening—that we can get back to sustained full employment. To do this, what is going on so far as the Government, the trade unions and industry are concerned, is that the Government are playing their part. We have had the December measures, but this is only a beginning, and we will then have a spring Budget.

The noble Viscount, Lord Amory, I thought in a good phrase, put his finger on what was mentioned by several noble Lords, the burden of direct taxation. He talked about lightening that sharply. Although the Chancellor of the Exchequer will not anticipate any further what he has in mind following the speech he made recently, and I think he would hardly welcome it if I did so myself, nevertheless the prospects there are recognisably more optimistic.

The Government are very aware of something raised by the noble Lord, Lord Thorneycroft, and the noble Baroness, Lady Seears; that is, the size of the Civil Service both central and local. Cuts have meant considerable agonising and a very sharp appreciation—and, if I may say so, not before time—of the cost effectiveness of the Civil Service. I do not believe—and I do not know whether the noble Lord, Lord Thorneycroft, when he thinks about it really believes—that the ceiling is the answer. What we must do is to try to reduce the demands made on the Service. In that way, we can reduce the whole thing. When we come to local government service, the noble Baroness, Lady Seear, was absolutely right when she referred to the Local Government Reorganisation Bill and the National Health Service Reorganisation Bill. Those two pieces of legislation expanded the personnel, particularly on the administrative side, in an absolutely ludicrous and, as we have seen economically, an unfortunate way.

Before leaving that, I may point out that it is difficult (unless one is prepared to add gratuitously to the high level of unemployment), to transfer from one sector, the public sector. I think it was the noble Lord, Lord Mottistone, who mentioned that if only these people could go into manufacturing or industrial areas. But it is difficult to do that until industry starts to be expanded. All that you do then would be to create redundancies and add to unemployment. I assure him that it is something to which many of us and I, personally, will have given considerable thought.

We introduced the accelerated project scheme which provided £85 million in assistance, £640 million of total expenditure. This was followed by a new selective investment scheme with an initial allocation of £100 million. We have, as noble Lords will know, specific industry sector schemes, for example, for ferrous foundries, machine tools and clothing. My noble friend Lord Taylor of Gryfe reminded us of the discouraging climate that there has been for industrial investment. But now with the lowering of the rates of interest there has been an upturn.

Many of those people who rather casually equate public expenditure with waste or unreasonable height, forget how much goes into investment projects for the future. If we look at Rolls-Royce now, we see that that was a suitable case for Conservative nationalisation, and it is working. We also have to look at the projects undertaken by the NEB. This is not a case of full Government nationalisation; this is where the public sector is helping the private sector and putting life into industry, helping to expand our exports and keep people in employment. It was for this reason that I raised particularly a point with the noble Viscount, Lord Watkinson, when he said if only the Government believed in free enterprise. How one can do more than the Government are doing in a mixed economy is beyond me.

It is also significant that the Wilson Committee which was set up by the Government to look into finance in the City, last week gave as its first priority ensuring that the necessary funds for industry are available in the right manner and at the right time. All this shows that the crux of the problem has been readily recognised. This really is an important first, second or third step. The Government and both sides of industry are working together in sectoral working parties to highlight the strengths and pinpoint the weakness of British industry. The noble Lord, Lord O'Brien of Lothbury, was absolutely right in his comments on "Neddy" and why it has been successful. Besides showing where investment is needed, these are helping to improve the use of existing plant and machinery.

Then we come to the question of productivity, which has also been touched on often this afternoon, and poor productivity is right at the heart of our industrial problems. We have to face it that neither private nor public sector can be excluded from criticism. There is scope, I believe, for maintaining public services at a lower cost by improving efficiency and also for making private industry more competitive. There are those who blame the workers, there are those who blame management; but what is important is not to find blame targets without looking energetically for ways to right them. It is no use paying lip- service to industrial partnership without backing it by action.

I do not propose to discuss the Bullock Report this evening—there will be other opportunities inside and outside Parliament—but, nevertheless, since it has been brought into the discussion I was extremely glad that at the end of our short interchange the noble Viscount, Lord Watkinson, said that the CBI wanted to enter into a dialogue with the Government and the unions over this. I believe that you cannot get real co-operation and understanding and a real working together between industry, the unions and Government, unless there is participation in the policy-making; otherwise adversary relationships will be protracted with the workers on one side, management on the other and the Government trying to create an industrial bridge from straw. This will have no substance at all.

When the noble Lord, Lord Mottistone, says that these workers are not skilled or equipped to serve on boards, I would point out to him that there are quite a number of other people on boards—and I have knowledge of this myself—who also are not equipped to serve on boards. They are often not very good or professional, either. Unless you give people the responsibility and are prepared to help them and train them to take it on, we do not get anywhere. I am afraid I am not going to give way to the noble Lord. One of the things I have learned this afternoon, which was the most valuable thing I have learned from the noble Lord, Lord Thorneycroft, is how graciously but firmly to refuse to give way. I am going to practise it tonight.

In the same way as the Bullock Report began by explaining that after 100 years the discussions and arguments over political democracy are now in the realms of industrial democracy, we have, I think, to face the fact that, even if very often it is quite subliminal, there is a very large "class" impact entering into our discussions and feelings on this matter. "Upstairs, downstairs" is very relevant to the underlying motivations behind all the rational comments and arguments that will be made. All I hope is that we do not get into a confrontation situation similar to that which arose over the Industrial Relations Act.

While the Government can create, or do their best to create, the right conditions—and I have briefly and very sketchily outlined some of them—it is industry which must take advantage of them. The best British firms are already competing successfully. The noble Lord, Lord Thorneycroft, was absolutely right when he quoted Cadbury-Schweppes as an example. Unfortunately, too many of our companies have either mediocre or downright poor records. I think it is significant that many of the surveys I have seen regarding low productivity, industrial disputes and bad delivery dates all too often refer to companies which reveal bad labour relations. Long-outmoded plants—my noble friend Lord Bruce of Donington put his finger very forcefully on that point—and insensitivity to workers' needs usually reflect low calibre management at all levels, and particularly at the top. That is where we still have a very great weakness in our country. Many of our problems, I believe, could be solved if we could attract capable management. Here it is quite wrong to believe that financial incentives are the only, or the complete, answer. It goes far wider than that.

Many noble Lords have spoken of the needs of incentives for middle management, and a great deal of truth has been spoken about that. The Chancellor has shown that he is concerned about that, and has also pointed out that something needs to be done about incentives at the bottom as well as at the top and in the middle. I was very pleased to hear the words of the noble Lord, Lord Thorneycroft, about the needs and the very real hardships of the people who are either below the poverty line or just inside the taxation net. They are proportionately very much worse off than the rest of us, including my noble friend Lord Vaizey, and professional people.

I would not say for one moment that everything the unions do is right or that the Social Contract is quite perfect. Obviously, there are faults and imperfections. I think it is going too far to say that it is not social and it is not a contract: we are then in the area of semantics. What we must keep remembering is that the union leaders have done something quite remarkable. In the national interest they have accepted a drop in real wages. They have courageously put sectional interests aside so that the rate of inflation can fall. One has to see this in the context of what in fact is their job. Their job is to get the best pay and the best conditions for their own workers. If one freely gives up something it is not really a sacrifice, because if you see it as being in the national good to be prepared to do something, it is an impertinence to call that "a sacrifice", because one is then being patronising about the reasoning behind the action. So it is not true that the Social Contract has failed. On the contrary, the Social Contract has been a very great success. Without it, goodness knows where we would have been!

The fact that there is sometimes irresponsibility and things go wrong is no different from saying that all management is not good, all management is not perfect, and there are a lot of badly run firms. But, to be fair, many noble Lords have paid tribute to the unions and the Social Contract, and my noble friend Lord Robbins (I call him "my noble friend", although he sits on the Cross Benches) rightly stressed that the next pay round will be absolutely crucial. That is why it is essential that we should not go into it in an atmosphere of confrontation, brought about by discussions on industrial democracy. So I think it is up to all of us to try to keep the discussions as cool as possible.

I should now like to say a few words on unemployment. All noble Lords have agreed how shocking it is. I was a little confused by the noble Earl, Lord Gowrie. I am quite certain that he could not possibly be in favour of unemployment. But the policies that he put forward, as I understood them, would result in the future in an even higher level than we have at the moment. But it is cheap and unworthy to say—and I am delighted that it has not been said in this House—that the Labour Party is "the natural Party of unemployment". What has been so clear today is the horror and dislike of it on all sides of the House. The noble Earl looks so beseeching that I will give way, although I may have another lesson from the noble Lord, Lord Thorneycroft.

The Earl of GOWRIE

My Lords, while enchanted by the noble Baroness about my noble friend Lord Thorneycroft and giving way, she mentioned me. The burden of my speech was very simple. Unemployment is not to do with policies; it is largely to do with inflation. There is some unemployment which is not, but the bulk is. The Government are not paying enough attention to the state of the currency, to the state of our money. It is as simple as that.

Baroness BIRK

But, my Lords, inflation is the result of policies, and what we are trying to do is to work out the policies which will reduce inflation. No alternative viable policy has been put forward except—for want of a better term—the monetarists' policy, which would involve far higher unemployment. There fore, if the noble Earl is saying that unemployment is bad and inflation is bad, there is no difference of opinion between us. But what I am saying is that we have this high unemployment. We hate it and are very conscious of it. We realise that the only way of dispersing it is by expanding industry. The noble Baroness, Lady Ward, was quite right when she stressed the very high unemployment in the North-East, and said that it is always that area of the country, and Scotland, which suffers so much.

I agree with the noble Lord, Lord Balfour, that one should think not only of the young people but also of the older people, and that most of those who are unemployed want to do a fair day's work for a fair day's pay. It was a great delight, in a debate of this length on such a wide subject, not to hear those uninformed and very disagreeable slogans about scroungers all over the place, and many noble Lords went to great lengths to explain the difficulties which they feel most of the unemployed are in.

Unfortunately, we are not alone when we talk about unemployment. The United States has a higher rate of unemployment and, unfortunately, it appears to be a characteristic of many parts of sophisticated Western society. I do not think that now is the moment, but it seems to me that in the future we shall have to look at quite different patterns of both work and leisure in this country, and in other countries, to fit into a technological context and a different way of life. But, as I said, I do not think that this is the moment for that kind of futurology. Neither is union power unique to Britain; for example, Scandinavia and Germany have strong trade union movements, as also has the United States. I was delighted to hear the international context in which the noble Lords, Lord Kahn and Lord Vaizey, discussed our problems, because they gave our economy the extra dimension of internationalism, which is absolutely essential if we are to see it in the right context.

Finally, my Lords, to be self-critical and to eschew complacency is right, but fo determine ourselves into a masochistic tervour of economic gloom is to sell Britain short. Britain still has high living standards and a tolerant, kindly society which is greatly admired abroad. We now face our economic difficulties with firmer prospects and confidence that we shall succeed.

Our social and cultural objectives, which are very important to a great many of us, cannot be sustained or economic failure. Ours is a concerned, compassionate society in which social as well as economic stability is an essential ingredient, and we should be proud of the social product of a great deal of our public expenditure. Therefore the incentives for economic growth extend beyond the realms of pure—or even impure—economic motivations. They are essential to the preservation of what is best in our society and the only way in which we can provide a better life for all sections, all age-groups—for all our people.

On Question, Motion agreed to.