THE ECONOMIC SITUATION

HL Deb 20 July 1977 vol 386 cc300-410

2.55 p.m.

The LORD PRIVY SEAL (Lord Peart) rose to move, That this House takes note of the economic situation. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. Last Friday, I repeated in this House the Statement on counter-inflation policy made in another place by my right honourable friend the Chancellor of the Exchequer. The House recognised that the debate we shall be having today would provide the opportunity to discuss, not only the economic situation at large but also the substance of that Statement. Indeed, as noble Lords will remember, I undertook to answer more fully today the points that were put to me then. I hope that noble Lords will forgive me if I discharge this obligation towards the end of my speech this afternoon. I should like first to try to provide a context, both for our debate today and for my right honourable friend's measures.

The House will be well aware that the country has come through a difficult year; but one has only to compare our situation now with our situation a year ago to recognise how well we have coped with unprecedented difficulties. In the face of these difficulties, the Government have remained committed to a consistent strategy designed to put our economy into a position in which it can sustain growth, and we are now much better placed to achieve our objectives. A year ago the exchange value of the pound had fallen sharply, and foreign Governments were reducing their holdings of sterling. The external deficit for official financing over the first six months of last year was over £2.5 billion. At home, the Government were finding increasing difficulty in financing their own deficit. The money supply was rising, and, of course, our critics said that it was out of control.

It is true that we were making great progress in bringing down the rate of inflation, and, indeed, had halved this rate within 12 months—a success which could have been achieved only by the universal acceptance of the £6 a week pay limit. But, although we had done so much to control the domestic sources of inflation, we had none the less still to adjust to the delayed effect of the wages explosion of 1974–75 as it came through into import prices. Furthermore, world commodity prices were rising; and, as if that were not enough, we had to suffer the effects of poor harvests at home and abroad. These factors together delayed by a year or so further progress in checking inflation. This year has been very hard on people who already faced the need to adjust their consumption to the 5 per cent. fall in national income which followed the sharp rise in commodity prices three years ago.

Perhaps most disappointing of all was the hesitation last summer in the growth of world trade and in our own production. The convalescent condition of the economy was again apparent during the financial crisis of last autumn. But in many respects our position today is better than it has been for several years. The reason for this is that the Government have adopted the strategy which offers the country the surest way out of its difficulties, and have not been deflected from this strategy by the difficult conditions of the past year. Our strategy has been, and remains, to go for sustainable growth—sustainable because it does not attempt to outrun the progress we make in world markets. That progress is dependent on getting our inflation down to levels no higher than those general elsewhere among industrial countries, and on giving priority to growth in our manufacturing sector—growth which itself depends upon increasing efficiency.

We have resisted the urgings of what I may term the isolationists, who would risk cutting our industry off from most of the world's markets. We have also rejected the pleas of those who would stimulate the economy with an inordinate expansion of the money supply. Our economic measures over the past year have each played a part in a consistent strategy for sustainable growth.

In order to achieve our objectives, we have developed a number of techniques. Targets have been set for the growth of the monetary aggregates and measures have been taken where it has appeared that they would be exceeded. As a consequence, they have not been exceeded. Similarly, new systems for limiting and monitoring public expenditure have been introduced. They have worked well and the public sector borrowing requirement has been, and remains, well within the agreed limit.

The beneficial effects of the Government's economic measures are apparent in the improvement in our prospects today. The financial crisis which clouded our prospects last year has been resolved. Minimum lending rate, which was 15 per cent. at its peak last autumn, is down to 8 per cent., 4½ points below the level when we came into office in February 1974. The exchange value of the pound has been steady so far this year after its recovery towards the end of last year. Our official reserves are nearly three times what they were then. The threat of disruptive withdrawals of sterling has been removed by the agreement with the Bank for International Settlements. I accept that confidence is a fragile commodity, but it has returned to the financial markets. It is also returning to the investor. The latest official survey of manufacturers showed that they intend next year to invest at least 20 per cent. more in real terms than this year.

Our strategy requires that we should switch our resources into the trade balance and that growth, therefore, should be led by exports. Only when our trading position is stronger shall we be able to sustain a rise in living standards. Our slow recovery from the recession has, as intended, been led by exports. Our exports rose by volume by 7 per cent. from the first quarter of 1976 to the first quarter of this year. In the latest three months for which figures are available, export volume was 3½ per cent. greater than in the preceding three months. Exports of services have been expanding even faster and our favourable balance on invisibles was 36 per cent. greater in current money terms in 1976 than in 1975.

We are, in addition to this, now beginning to reap the great benefits of North Sea oil. In about two years' time production will be equivalent to our total consumption. The effect of these factors on our current balance of payments has been to bring it back into surplus and there can be no doubt that we shall achieve the favourable balance which we forecast for next year. Indeed, we may achieve it this year. After that, we may expect to remain in surplus for many years. The effect of this is to remove a factor which for too long has restricted the capacity of our economy to grow. We are on the threshold of a period when we shall have much more room for manoeuvre in planning our advance. The Government's timely introduction of the petroleum revenue tax will ensure that a fair share of the financial benefits from the oil will be available for national purposes. They will not only enable us to pay back the debts which we have incurred in recent years, but also provide a means of strengthening our industries.

With financial stability and the balance of payments returning to surplus, we have a real opportunity to develop our economy to the point where it can provide more jobs. Unemployment has not increased as much as many people feared last year, but it remains distressingly high. The Government's selective measures for alleviating unemployment are currently providing jobs or training places for some 300,000 people; and on 29th June new measures to help the young unemployed were announced in another place.

We are not going to be satisfied with our performance, however, until we are able to maintain our economy at a higher level of employment and production without running into problems of increased inflation or financial crises. It is increasingly recognised that the surest way of doing this is to improve the efficiency of our industries and their ability to compete. Full employment implies that we win back our lost share of the British market for steel, cars and other products and that our exporters win a large share of other markets. Anything which raises our costs without effecting a corresponding increase in productivity merely prejudices our chances of doing this.

The decisions announced last Friday by my right honourable friend the Chancellor of the Exchequer—and I repeated his Statement in this House and was questioned on it—represent a further step in the development of our consistent strategy. These measures will add a stimulus of £l¼ billion to the economy in the current financial year and £1¼ billion in a full year. Most of this was foreseen, however, in the March Budget proposals; the rest amounts to £¼ billion this year and will be financed from the contingency reserve and does not represent any unforeseen addition to the public sector borrowing requirement.

The effect is to stimulate activity to the maximum extent compatible without our strategy of long-term sustainable growth. Anything more at this stage would prejudice our fight against inflation and the stable financial conditions vital for resumed industrial growth. My right honourable friend the Chancellor reaffirmed the determination of the Government to keep within the limits set for the monetary aggregates and to maintain existing cash limits for the generality of Government expenditure, only making adjustments to take account of the new measures.

It has been possible to stimulate the economy to this extent because of several recent economic developments. The current external account is back in balance somewhat earlier than we had expected and the public sector borrowing requirement and the monetary aggregates have been well within the ceilings set for them last winter. The scope available to the Chancellor has been used to set the best possible conditions for moderation on pay. In particular, the new tax thresh-holds and help on milk and school meals give grounds for confidence, particularly among the lower paid, that abiding by the 12 months' rule and moderate pay settlements will not mean a further fall in living standards in the short term.

I should like now to turn to some questions raised by noble Lords at the end of last week. The noble Baroness, Lady Seear, asked on Friday what sanction would apply to firms which ignore the Government's recommendations for earnings. In general, the same sanctions will apply that have been in operation for the past two years. They have worked well. When it has been necessary to consider invoking them the firms concerned have generally been able to rescind excessive pay settlements. The Price Code will operate on profit margins over the coming year. Excessive settlements made by ignoring the 12 months' rule will be discounted in calculating profit margins. Furthermore, the Government will continue to take account of firms' records over pay policy in awarding Government contracts or considering industrial assistance.

The noble Lord, Lord Byers, raised the question of pay policy and occupational pensions. The TUC guidance for an orderly return to collective bargaining, which the Government fully endorse, provides for two exceptions to adherence to the 12 months interval between settlements. One of these relates to occupational pension schemes and provides that improvements in these should be negotiable at any time after 31st July 1977. This removes limitations on such improvements to pension schemes which have applied since the £6 pay policy was introduced two years ago.

The noble Viscount, Lord Amory, raised the question of continued control of the money supply. I should like to reassure the noble Viscount that the Government's limits on domestic credit expansion and sterling M3 remain, and the Government are determined to see that they are observed. The whole balance of my right honourable friend's Statement was designed to ensure this. The degree of stimulus given to the economy is the maximum consistent with our monetary limits. These limits allow for the real growth which we want to see. If they are taken up in inflationary pay settlements, there will be less growth and more unemployment. The curbs on Government expenditure together with the limit on the public sector borrowing requirement ensure that the room for growth within the limits is not taken up by Government spending.

The Government have set out bluntly the real choices open to the country. They have recommended the course which offers by far the best prospect of economic success. The Government's measures announced last week are another step along this course. They are consistent with this course. They provide for the wishes expressed in another place, for greater emphasis to be placed on raising tax thresholds and they do this in a way which is fairer for families. The Government are always ready to listen to constructive suggestions, and I would assure noble Lords that we will—and I will—listen with particular interest to any constructive proposals over pay and inflation which may be put forward today. My Lords, I beg to move.

Moved, That this House takes note of the economic situation.—(Lord Pearl.)

3.11 p.m.

The Earl of GOWRIE

My Lords, the noble Lord the Lord Privy Seal said that the Government were engaged—and I am quoting him—in a persistent strategy in their war against inflation, and that they have a persistent strategy, too, for sustainable growth. The noble Lord also told us that confidence was returning both nationally and internationally. One of the best films made in Britain in recent years was Monty Python and the Holy Grail, the film which did to the Middle Ages what I have always felt should be done to the Middle Ages. As those of your Lordships who have seen the film will remember, fairly early on King Arthur and his knights, who cannot afford horses but who make hoof clopping noises with their hands, approach a massively fortified castle. On being challenged by the defenders, they announce that they are the Knights of the Round Table and that they have come to take the castle. "Pull the other one!" yells the sentry from the battlements.

My Lords, I do not know whether "Pull the other one" is a Parliamentary expression; but I am afraid that the phrase floated into my mind as I listened to the speech of the noble Lord the Lord Privy Seal when he stoutly maintained that the Government were well on course and that naturally a return to free collective bargaining was compatible with the spirit of the Social Contract and the special relationship of the Labour Government with the trade unions.

It so happens that I share the increasingly conventional and unexceptionable view that, over anything more than a year or so, statutory incomes policies—and since July 1975 we have, in effect, had a statutory policy—actually do more to fuel inflation than to contain it. I believe that the cosmetics of these policies—price controls and the like—distort real costs in an economy, and that, in the end, real costs have to be paid somewhere and by somebody.

I therefore believe that the effects of such policies distort competition and incentive—in a word, differentials—and that, in the end, this distortion is also very costly. People become angry when their differentials are eroded and then want them restored more rapidly than is consistent with good incomes planning. One need not claim to be much of a prophet to say that events have borne out these misgivings, and that all these damaging and expensive things have come to pass. So your Lordships might expect me to rejoice in the present economic situation, taking it to mean the collapse of the Government's incomes policy—and let us not pretend that this is a lame duck, for it is a dead duck—and in a shift away from the distortions which I mentioned a moment ago towards the so-called monetarist counter-inflation policy. Now we are all agreed what a monetarist counter-inflation policy is: it means that you set yourself targets—you being either the Chancellor or, as in the case of Germany, the Central Bank—for the amount of money in notes and credit you will allow your economy to have at its command. You set them at a rate which allows for a single figure rate of inflation, or close to it—let us say, between 9 per cent. and 12½ per cent., and you stick to them. Properly applied, this means that wage claims won or conceded may not be able to be paid. Practically applied—applied in the real world—it means a tight incomes policy in the public sector where the Government, and therefore effectively the Bank, is the employer. In the private sector, it means the method of resistance to inflationary wage claims can be one of only two: there can either be bankruptcies and consequent unemployment, or there can be a passing on of the true wage costs to the consumer. In short, a monetarist policy means a return to the facts of life. Incidentally, anyone would think that Mr. Healey had been spending a dirty weekend recently at that expensive hotel in Selsdon Park.

While I am not averse to the discomfiture of the Government—and egg on the face is always a lovely thing to look at when you sit on these Benches—I do not in fact rejoice in the economic situation as we presently see it. In this short speech, I shall try to say why. In the first place, the Government have not accepted the consequences of the collapse of Phase 3 negotiations in any way which will give confidence at home or abroad. It amazed me that the noble Lord the Lord Privy Seal made no mention of the collapse of these negotiations. Yet the consequences were made clear in the Committee and Report stages of the prices Bill in your Lordships' House last week. What the collapse of the Phase 3 negotiations on wages means at present is a return to the disastrous period between March 1974 and July 1975 when we had a prices policy but no incomes policy to go with it.

I may have to be a little technical for a moment, but it is important to get this down in detail because our economy will be in even worse trouble if the Government do not answer the anxiety and try to dispel it. Although nominally voluntary, the limits on pay agreed between Government and TUC in 1975–76 and in 1976–77 are enshrined in law. They are enshrined in law through the Remuneration, Charges and Grants Act 1975. Section 1 of that Act establishes the limits as being those set out in the July 1975 White Paper—that is to say, the guidelines on pay set by the TUC Special Congress, with some modifications. Section 3 relates these limits to the operation of a price code. Some balance therefore exists between prices and incomes and the balance—and this is the important point—is enshrined in the law. This Act was continued for last year by an order which altered Section 1 to make it refer to the July 1976 White Paper and the TUC guidelines laid down within it. Both the 1975 and the 1976 guidelines contained set figures for pay and reinforcement of the 12 months' rule.

I understand that a White Paper has appeared this afternoon, but, from my quick perusal of it, it is not precisely clear how it affirms the 12 months' rule or makes it binding upon the TUC and, more important still, it says nothing at all as to how any such 12 months' rule might be delivered or enforced. The TUC, I acknowledge, delivered itself of pious hopes yesterday, and all honour to its piety. But how do you statutorily enshrine a pious hope? We on this side may also be forgiven a certain scepticism over the appearances, disappearances and now, it seems, the reappearances of Government White Papers.

It would be intolerable for the Price Commission to be able to restrict the profit margins of industry and impose a freeze if there is not corresponding statutory endorsement of the 12 months' rule. There was no mention of that in the Chancellor's Statement last week and none in the speech of the noble Lord the Lord Privy Seal today. However, the Chancellor did mention another and equally intolerable imposition on industry. It is now clear that the new Price Commission Bill is to be transformed into the Government's only effective statutory weapon on pay restraint. What a nightmare for industry! The Government were quite unable to answer my noble friend Lord Boyd-Carpenter last week, when he wondered what would be the position of those firms which do have the money to settle double-figure wage claims.

My Lords, all this is surely no sensible return to cause and effect or to the facts of life in our economy. It is a return to the statutory control on prices and dividends without balancing statutory control on wages; either on the amount of wages that are to be paid or on the timing of wage claims. The last little caper of that kind that we enjoyed sent us to an inflation rate of just under 30 per cent. and nearly scuppered our currency; and the scuppering is what we are paying for in higher prices at the moment. The Prime Minister may have changed since that time, but we still have the same old Chancellor of the Exchequer.

Even those of us who are sceptical of the benefit of prices and incomes laws and their ability to control inflation, feel that if we must have them they must not penalise and distort pricing mechanisms in favour of pay mechanisms. Surely it is better for all pay-negotiating parties—for the shop steward and the manager as they negotiate face to face—to know the pricing consequences of paying too much too quickly.

Another reason why I do not rejoice at the collapse of the Stage 3 negotiations is that one of the many disadvantages of a prices and incomes policy is that you need one to get out of one. I fully agree with the Prime Minister when he said last February: I say to those who are calling for a return to free collective bargaining that in my own view that would be a return this year to free collective chaos, and I should not support that. Well, my Lords, what else is the Prime Minister doing but supporting it? What has now collapsed is not a wages policy simply, but the chance to abandon a wages policy in an orderly fashion. The building is crowded; people are alternately resentful and frightened; there are few exits and we need that good old British tradition, the well-planned and orderly queue to make use of them.

An orderly return to free collective bargaining is, of course, desirable—just as desirable as an orderly return to pricing mechanisms which reflect cause and effect in an economy and the role of profits where employment and investment are concerned. But what we are now witnessing gives little prospect of order. Senior members of the Government, of course, are old political hands and are full of bounce and bluster; but if they are the disinterested and patriotic men that I firmly believe them to be, they must be very frightened men indeed. If the return to normal wage bargaining is not orderly there will be another run on our currency, and we know what effect last year's run had on this year's prices. If it is to be orderly, and if foreign confidence is to be maintained, then both the Prime Minister and the Chancellor will have to be a lot more explicit about exactly what sticking to monetary targets means. At this late stage of the game—and it surely could have been avoided by the Government's handing out the nasty medicine first and the nice sweet afterwards, instead of, unbelievably, the other way round—monetary targets mean increased unemployment. On both counts, it seems to me, the Government are finished with the electorate and I also believe that they know it.

I now come to the position of the Liberals. The Government will continue in office tomorrow by courtesy of the Liberals, and so the Liberals are displaying their confidence in the Government. Why? It cannot be on the Government's record, as compared to that of the previous Government's record. Let me compare the two in the driest and least emotional way that I can. Since February 1974, prices have risen 80 per cent., earnings by about the same amount and M3, the money supply, from £33,000 million to £45,000 million. So much then for Mr. Healey's self-perpetuating myth that he is a lesser sinner in this regard than my noble friend Lord Barber. The simple truth is that the Treasury orthodoxies have changed. All Governments used to try to spend their way out of unemployment, for perfectly honourable reasons, but no Government will risk that on any considerable scale again. Incidentally, I wish that my noble friend would come here occasionally. He is a formidable debater and we need his work on tax credits now more than ever.

Again, since February 1974 the income tax paid per household has risen from less than £400 per annum to nearly £1,000. Since 1974, the pound is worth just under half of what it was, and the exchange rate of sterling is worth rather less than a third. Since February 1974, industrial output has risen by 0.9 per cent.—less than 1 per cent.—since the three-day week; and in giving that figure I am also giving the Government the benefit of the doubt because in The Times last week it was suggested that the fall was one of 1.2 per cent.

The public sector in that time has borrowed £12,000 million overseas and unemployment has risen by 800,000. That is really to say that unemployment has risen by more than the figure which my right honourable friend Mr. Heath found so unacceptable as a total figure that his Administration performed its famous U-turns to a prices and incomes policy. Most damaging of all, and most negative in their effects on our currency and purchasing power abroad, are the international comparisons; and these cannot be blamed on the Arabs, on Lord Barber, on the miners, on confrontation or whatever scapegoat is in fashion. Price rises in the United Kingdom since February 1974 are only 10 per cent. less than price rises in West Germany, the United States and France combined—and they have suffered the Western recession just as we have. Our present rate of inflation is 17½ per cent., as against the OECD average of 8½ per cent.

In the days of "swinging London" someone said they thought the English were Romans in the process of becoming Italians. We are now level-pegging with the Italians as the sick economies of the Western World. If the situation goes on, who is to say that we shall not also suffer the social and political stresses of present-day Italy? I have said in a book and I have said at this Box that the economic policies of the last Conservative Government were misconceived; but the truth is also that in almost every respect our bad record has been made much worse.

We all know that it is easier to criticise than to create.

Several noble Lords

Hear, hear!

The Earl of GOWRIE

Some of us know this more than others, obviously! It is a fair gibe for Governments to say to Oppositions of whatever complexion: "Would you do any better?" or "What would you do instead?". The answer to the first question is that we always have.

Several noble Lords

Oh !

The Earl of GOWRIE

We have not done well, but we have always done better. To take one instance alone, if you look at the rates of unemployment in this country since the last war, you will see that they have never been higher under a Conservative Government than under a Labour Government, and that is absolutely established.

The answer to the more difficult second question is that we would with caution, but with determination also, start the slow and sometimes painful process of letting the British economy correct and run itself. In case your Lordships think that I am being bland, let me say that I believe that under the Conservatives prices will rise but will also stabilise, that wages will rise but will also stabilise and that taxes will fall, but so also will entitlement to welfare benefits; that is, welfare benefits will be restricted to those in need of them.

Unemployment should also rise in the first 18 months, though no more sharply, I suggest, than it is rising at present, and then it will fall sharply as the stabilisation which I mentioned takes place. But, in my opinion, it will not fall below 1 million under any Government at any time in the next decade or so, unless the TUC is able to enforce wage controls without asking for corresponding price controls. That would be to ask too much of the TUC and, as I said earlier, I have every sympathy for their position.

I do not believe that under a Conservative Government the inflation rate will fall to 2 or 3 per cent.; that would require mass unemployment. But I am certain that it could level-peg with our allies and competitors. I know, of course, that stern monetarists in the House will disapprove, but I believe that we could live happily and prosperously by level-pegging with our competitors in single-figure inflation.

I am aware that I have given some hostages to fortune with these remarks, but it seems to me to be both more practical and more honourable to do so than to take a leaf from the Government's book and claim, as they are claiming, political power with comparable policies but policies which they do not politically believe. We know that Ministers have gone in for policies which they privately regard as being damaging, in order to buy TUC good will. Indeed, we know that there are still policies in the pipeline—nationalised industry subsidies, the prices Bill which is still before the House, and the like—which were formulated on the principle that there would be a Phase 3 pay agreement. It is fairly embarrassing when your figleaf falls off. It is even more embarrassing when everyone sees that there is nothing at all underneath it.

Not just the economic policy—all the Government's policies are in tatters. Bullock, devolution, direct elections—you name it, they have not got it! Everyone in business knows the importance of confidence, and everyone in the Armed Forces knows the importance of morale. I myself long to know what exactly it is that the Liberals think they are supporting. For months and months, both the Government and the Liberals have told us that the one thing that must not be allowed to occur is the collapse of the pay policy. Yet the moment it does so, they rush for shelter in the same Division Lobby.

It is not necessary to become dogmatic, unpragmatic or uncompromising in order to be true to your principles, but principles in politics surely, as in private life, you must have. The Left in Britain want a collectivised economy. They want it quite openly, and it is a perfectly honourable objective so long as you spell out—which I do not think they quite do—exactly what degrees of interference in personal and corporate freedoms col- lectivisation entails. The social democrats, in which I include the majority of Ministers, most Liberals and quite a few Tories, many of them in your Lordships' House, want a civilised but dirigiste State—a prices and incomes policy State, if you like—in which Governments act as regulators or referees in the permanent game between capital and labour. The Conservatives, in which I include myself, want a plural and, so far as possible, a not overly political society in which Governments accept their role and responsibility, but strive constantly to keep this to the absolute minimum. Incidentally, my old friend Mr. Peter Jay wants to square the circle between the Left and the Conservatives in this regard, and I must say that if he succeeds I, for one, will be with him. The problem of the present Government is that they have been forced by events, and by their own mistakes, into a parody of every position I have mentioned, while losing every vestige of communal support. I look forward to what the noble Lord, Lord Byers, has to say, but it seems to me that it would be kinder, both to the Government and to the rest of us in the country, if he and his Party were to let them fall now.

3.35 p.m.

Lord BYERS

My Lords, we in the Liberal Party have never been short of advice from any part of this House or another place, but, as the Leader of the House has said, this debate will inevitably centre around the Statement which was made last week by the Chancellor of the Exchequer, to which wide reference has already been made by the first two speakers. In judging the policy in that Statement, and whether or not it is worthy of support, one has to bear in mind a number of factors. The first is that the attempt to contain inflation, which we fully supported and do support—we think it is right—has played hell with differentials and has caused great frustration at many levels of industry. That we have to admit.

Secondly, we have to look at the alternatives which are open to us in dealing with this question. I listened to the noble Earl, Lord Gowrie, for what I have become used to; that is, Conservative enlightenment. He is one of the most enlightened thinkers and speakers in the Conservative Party, It was an excellent lecture. I particularly enjoyed the bit about how the Germans manage their pay policy. I was fascinated to hear the Old Moore's prophecy of what would happen under a Conservative Government—this slow process of an orderly return to a pricing policy and a free market economy, where everything would be balanced.

What I was listening for, and never heard, was the word "how". This is what we all want to do. This is what we have been talking about—the problems of re-entry. I believe we all know where we want to get. What we want to know is exactly what you can do, step by step, with a climate of opinion as it is today in this country. If the noble Earl wants proof of the paucity of his own policy, it came when he appealed for help to the noble Lord, Lord Barber. I can think of other quarters to which I would look if I were a Conservative requiring help. I am still not at all sure what is meant on the Conservative Benches by the slow process of an orderly return to free collective bargaining over prices and pay.

The other alternative, and it is one which we have supported, is the statutory pay policy. Speaking for myself, although I have not lost confidence in a statutory pay policy for a relatively short time, I do not think that the mood of the country, and particularly of the trade unions today, is now right for such a move to succeed. But there is undoubtedly a strong feeling in the country that there ought to be moderation in wage demands, and I think there is a genuine and growing fear of the consequences of a pay explosion.

Therefore, I come to the conclusion that we are left with a package which is not dissimilar from that which was outlined by the Chancellor of the Exchequer on Friday of last week. There are some teeth in that package, though not as many as we on these Benches would like. The real question is whether the Government will have the guts to make those teeth bite. There is the 12 months' rule. It is absolutely vital that that should be maintained. It will not solve all the problems, because if we are to get 30, 40 or 50 per cent. settlements every 12 months, that will ruin the whole concept of the policy. But at least the 12 months' rule must be held.

There are the cash limits within which the public sector will have to operate. I ask the Government whether they will be rigidly imposed, because, if they are not, that again will help to refuel the inflationary cycle. There is scope, I believe, for self-financing productivity schemes, but the Government must make certain that these are genuine, and are not abused as they have been in the past by a conspiracy between employers and workers.

There is much that could be done by means of fiscal incentives to bring in profit-sharing and value-added schemes. These need not be inflationary if they are properly designed. There is a great opportunity to keep the public fully informed as to how the battle against inflation is going, week by week and month by month. I hope that my noble friend Lady Seear will have something to say about that and about the way in which they are dealing with the problem in Germany.

The ultimate test will be the toughness, the imagination and the leadership which comes from the Government. If the Government show toughness, imagination and leadership and if our counter-inflation policy succeeds, they will certainly have my support. And if the Government succeed, I believe that they will deserve support from all quarters. This should not be a matter of controversy; the situation is far too serious for that. We ought to be aiming at consensus politics, as we did during the referendum. We ought to find out whether or not we can work together to put over to the country the need for moderation in pay policies and the need for higher productivity.

For a few minutes I want to turn to a narrower field of national recovery. I believe that over the years, with every good intention and in the pursuit of social justice, we have taken far too many incentives out of the economic system—incentives to growth, to productivity, to creating wealth. I believe that we have to put back those incentives in one form or another and that we must do so very quickly. We have failed to recognise the effect of our national policies on small firms which have declined substantially in numbers, thereby reducing the number of employers and the number of people employed. We are only just waking up to the effect of these policies on the problem of the decay of inner city areas where these smaller firms have been disappearing at an alarming rate.

As I have said before in this House, we have transferred too many of our human and physical resources to the non-productive part of the public sector, in particular to local and central government. That has been done over the last decade by Governments of all complexions. We have seriously reduced the incentives to greater efficiency and productivity across the whole economic field. We could change this pattern if we were determined to do so. The percentage of our gross national product which is now devoted to the public sector is far too high. This is not a case for savage public expenditure cuts but for positive redeployment to productive and essential services and industries, preferably new ones.

I have seen recent studies which point to the need to reassess the importance to the economy of the small business. Past Administrations have tended to regard small businesses as a nuisance. It has not been appreciated that the small business is not merely a minor cog in the industrial system but, with the right encouragement, the seed-bed from which the bigger and more efficient units will develop. Also, the small business is often a means of ensuring a competitive climate in the economy. I believe that we, and the Government in particular, should look at existing small businesses, at those wishing to develop and at those which might be brought into existence, with a view to removing as many obstacles as possible which are inhibiting the potential of those small companies.

First, may I look at the general problems and then at those which are peculiar to small businesses. All the recent studies which I have seen emphasise the need for extensive changes in the tax system, in particular a substantial cut in income tax. This is mainly for two reasons: first, to remove the disincentive to the potential entrepreneur who wants to feel that his efforts will bring him a decent reward and, secondly, to protect private wealth as a source of relatively small-scale, high-risk investment, since the private investor may lose the lot. If, on the other hand, he is on to a good thing he will make something worth while of it.

The Americans have managed to preserve this climate to the advantage of the national economy, although we and Germany have very largely lost it. In Germany and the United Kingdom the search for equality and levelling down has produced an alien climate. The United Kingdom has about 200 firms which can be classified as new, technology-based firms. Germany has even fewer. In both countries the figure for total annual sales is about £200 million. The United States has several thousand such firms, 47 of which have a combined sales figure of over 10 billion dollars a year. The reports to which I refer come down in favour of indirect rather than direct measures of support. They say that specific Government programmes are normally a poor substitute for a favourable indirect environment. A tax system, say the reports, which successfully motivates inventors, entrepreneurs and investors will mobilise much more technological entrepreneurship than any programme of direct Government assistance.

The Earl of GOWRIE

My Lords, before the noble Lord leaves that point, he asked me how. The noble Lord has just been reading it out. He has spoken of incentives, tax changes, small businesses, private wealth and the like. That is the right approach. It is simply that the noble Lord is in the wrong bed.

Lord BYERS

My Lords, I am not sure about being in the wrong bed; we have had no accusations of that kind levelled at us. If, however, that is the policy of the Conservative Party, would it not have been more enlightening for this House to have heard it from the noble Earl himself? One cannot get away with this. If that is the kind of speech which the noble Earl's Leader is to make tonight in another place, I should be very surprised if there is any chance of a Conservative Government within the next 18 months. I am glad to know that this is Conservative policy, and I shall return to it.

I believe it to be of significance that some of the Eastern bloc countries are now actively encouraging graduates to set up small businesses—restaurants, garages and small manufacturing units—in order to give employment to more people. That must be significant. Returning migrants to Yugoslavia are being encouraged to act in a similar way. With the savings they have built up overseas, they are being encouraged to build up small businesses and small units so that there will be more employers and more employees. We in this country urgently need to remove the obstacles to small firm development.

There are a number of measures which we could take. There is an innate obstinacy in the beaucracy against small firms, and this has to be changed. Far too many delays are involved in obtaining planning permission for business development. Only a mile away from the house in Surrey where we live there is a four year old firm with a £1 million turnover whose work is done in an old brickworks. The firm asked for permission to extend its factory, but after two months its application was turned down. This is the kind of action which I believe cannot be tolerated if we are to build up our economy. Initiative must be taken by the Government to create a check list of policies and practices which inhibit the formation of new firms, in particular those based on innovation, and which inhibit the expansion and development of existing firms.

May I make a few practical suggestions. First, all planning authorities must be told to examine all the applications they have in hand which affect businesses. If this means working five nights a week and trebling the number of their meetings, they must do so in order to make sure that they are not holding up anything which is worth while. Next, the Treasury ought to be told to advise the Chancellor on all the options that are open to him to stimulate new and existing small businesses, and in particular how to overcome the problem of the entrepreneur and the investor who establishes a business, makes a success of it and then discovers that anything which he makes by way of reward is taxed at 98 per cent. while his salary is taxed at around 80 per cent. It cannot be difficult for the Treasury to say, "This is how you overcome the problem if you want to do so. If you do not want to do so, we shall go on as now ". I dislike the suggestion that there ought to be new Ministries; probably there are too many of them. It is rather like suggesting that there ought to be a Royal Commission.

I believe that we should examine urgently whether or not a Minister should be appointed with sole responsibility for looking after the interests of small businesses and the self-employed. I believe that we ought to look at the small business administration in the United States to find out whether we can learn something from it. Also the small firms centres which in their own way are doing a good job, would be much better equipped if they had, working with the civil servants, people who had experience of running, or of working in, a small business. In other words, there would be the mixture of the business man and the civil servant. I believe that small businesses ought to be relieved of as much red tape and form-filling as possible. The burden of new legislation is becoming quite intolerable or is being ignored, and both those things must be looked at.

We could do more to bring the business schools and the centres of higher learning close to business. I think we should encourage big business to support the little spin-offs. I have seen with my own eyes on Route 128 outside Boston spinoffs from MIT and the Harvard Centre School, and I believe that this is now happening in the valleys round California where, with 250,000 dollars, one can start a technologically-based business and it will grow into something much bigger. There are many specific areas where Government policy and initiative could make an appreciable change in our economic structure. It could affect our employment potential and our future growth. We could make a start on this right away. I believe that what it wants is a new look, guts and common sense, and that is something that we have in full measure in this country.

3.51 p.m.

Lord ROBBINS

My Lords, the Chancellor's Statement last week fell into two parts: the one, the last half, consisted of a number of changes in tax rates and subsidies, the net effect of which he assured us does not seriously affect the general fiscal prospect which he unfolded at the time of the Budget; the other, the first half, outlined a series of alternative prospects of the economy as a whole according to how pay settlements in the future did not or did exceed, on the average, an increase in earnings of 10 per cent. These alternative hypotheses involved a stark and very salutory warning, and it is with that aspect of the Statement that I wish to concern myself this afternoon.

I should like to dwell for a moment on recent history. I do not find myself in so much disagreement with the noble Lord the Lord Privy Seal as the noble Earl, Lord Gowrie. I think there is no question that in the last few months there has been some improvement. Last autumn we were gazing into the abyss as regards the external value of sterling. Up to last week, at any rate, it was stronger. The balance of payments has shown some not inconspicuous improvement. There has been some revival of business confidence.

These relatively cheerful circumstances have a two-fold origin: external aid and greater internal prudence. External aid is obvious, though it is often forgotton. I was relieved when the Lord Privy Seal made a passing allusion to the support that we have received from the authorities of the BIS. Where should we be if it had not been for that support and for the IMF loan! Internal prudence has shown itself in the first instance as a curtailment of the prospective rate of increase of aggregate national expenditure. I agree with the Lord Privy Seal that there has been firmer control of the rate of increase of money supply and some limitation of public borrowing. I hope to high heaven that we can continue to cling to such a policy.

What about pay restraint? Doubtless pay restraint has played some part directly or indirectly in restraining inflation up to date. One has to be a very dyed-in-the-wool monetarist—although I think there is a great deal in the monetarist attitude—to deny all influence on the rate of inflation. But I am sure—and I think this has not been mentioned recently in your Lordships' House—that the main beneficial effect of pay restraint has been in preventing unemployment from being higher. If rises in earnings had been greater then unemployment would have been greater too, always assuming that the declared monetary and fiscal policy had continued to hold. But at the same time the policy has been a very blunt instrument. It has upset all sorts of established expectations and relativities. It has upset all sorts of persons; it has created quite glaring anomolies. I have always maintained from the beginning that it would be difficult to sustain it for long, and now this has come true and the outlook is menacing.

I should like to look for a moment at the Chancellor's most optimistic hypothesis of a rate of increase of earnings of not more than 10 per cent. This, he claims, would bring down the rate of inflation to something approaching the rates of our major competitors. I should like to know what figure he has in mind there—the average of the OECD countries? Or perhaps, more strenuous, Germany? I should like to know what assumption he is making concerning the rate of inflation elsewhere. When I asked the noble Lord the Leader of the House last Friday for some enlightenment on these matters he—wisely, in my opinion—refused to be drawn, and at this stage, in the absence of further information, I will only say this, that given earnings not exceeding 10 per cent. it will need a very substantial increase in productivity to bring our inflation down to that of our main competitors. But in any case it is difficult for me to believe that the 10 per cent. target will be achieved.

The Chancellor clearly attaches great importance to the 12 months' rule and the Lord Privy Seal touched on that matter in his most lucid introduction to this debate. The Chancellor asserts that the 12 months' rule should bring it about that many settlements will take place later on, when the rate of inflation may be lower. I wish I had not to make this confession, but I confess that I doubt very much whether this rule will hold in all its severity. To be restrained into maintaining settlements under Phase 2 until some time in the first half of next year while others are going ahead will certainly impose a degree of self discipline on those concerned which, frankly, it is not easy to expect with complete confidence.

Quite apart from that, however, the claims which have recently been made by important bodies range much higher than the Chancellor's first hypothesis. As your Lordships will observe, I was not born yesterday, and I have no doubt that some of these claims are preliminary flourishes before getting down to business. But, even so, assuming that those claims, which have been well publicised in the Press, are reduced by half, the inference is still something dangerously more than the 10 per cent. hypothesis of the Chancellor. And let us remember that the position will be very peculiar in that while inflation proceeds, perhaps if we are lucky at a declining rate, the rate of exchange will be supported probably, at any rate for a time, by an improvement in the balance of payments. At first, at least, the menace of a further fall, which certainly tends to sobriety on the part of both Governments and the labour market, will be absent. That restraining influence will be gone for the time being.

So supposing the Chancellor's first hypothesis is not realised, what then? The second and third hypotheses both point in the same direction. The rate of inflation will not fall to that of our competitors, and there will be danger of renewed increase of unemployment. Noble Lords should be under no illusion about this. The sort of claims, or even 50 per cent. of the claims, already made on behalf of powerful groups are quite incapable of achievement in real terms. The product is not there. The increase of money expenditure will overwhelm it. If the rate of increase of money supply is held constant, therefore, and if such claims are granted, there must be more cost inflation. I agree with the spirit of the question asked by the noble Lord, Lord Balogh, last Friday. There must be more cost inflation and unemployment. If the rate of public expenditure and monetary inflation increases, then there will be still more rises in prices.

What then, my Lords, can we do? There are some who argue, with considerable intellectual subtlety, for allowing sterling to appreciate while the going is good. It is true that such appreciation would tend to some reduction in the cost of imports and hence the cost of living. But the extent of the relief which we have to expect in that connection is, to my way of thinking, doubtful. After all, we are still inflating at a rate, roughly speaking, double that of our main competitors. Oil will help so far as the balance of payments is concerned, but the factor of internal cost inflation will work in the other direction. I cannot believe that reliance on possible favourable movements in the rate of exchange, although not to be ruled out in certain circumstances, will see us out of our troubles.

What then? The Trades Union Congress has repudiated an incomes policy, and it is not difficult to understand this attitude, much as one fears, as I fear, its possible consequences. But—I say this with all possible emphasis—the Government cannot afford not to have some sort of incomes policy without abandoning their declared object of economic stabilisation. They cannot afford not to have an incomes policy at any rate in the sectors of the economy for which they are responsible. So far as the private sector is concerned, so long as current monetary and fiscal policies persist there are market influences which should be some safeguard against some inflationary concessions, at least in labour-intensive industries. But where nationalised industries are concerned, like it or not, that is not so. There is an almost ubiquitous assumption that increases there much larger than is consistent with increases in productivity can somehow be financed from somewhere. But, my Lords, let there be no mistake: if this assumption is allowed to dominate the situation, and if recourse is had to increased borrowing and the printing press, then the whole future of stabilisation is in jeopardy. That is the chief danger which confronts us in the present situation.

It is not a hopeful picture, and I find it intensely distasteful at this stage in the debate to have to unveil it. But the prospect of an orderly dismantling of the controls of the last two years having collapsed, it is self-deception not to face the picture I have attempted to outline. We shall never get out of our difficulties if we do not foresee them but allow them just to overtake us.

4.8 p.m.

Lord McCARTHY

My Lords, my noble friend invites us to take note of the economic situation. My problem is that, having listened to the speakers so far, I am not quite certain that we have any agreement about what the economic situation is. My noble friend Lord Peart says that we are well placed to achieve long-term sustainable economic growth, having turned neither too far to the Left nor too far to the Right. If one may borrow a naval analogy dear to the Prime Minister, he seems to be saying "Steady as she goes". But the noble Lord, Lord Byers, is not so sure. He says that that could be the case, if the Government had enough guts. He went on to specify what having enough guts would mean, and I must say I agreed with a considerable amount of what he said, especially when he said that guts in these circumstances did not include a statutory incomes policy. I certainly think that that is so. The noble Lord, Lord Robbins, seemed to be more sceptical. "Steady as she goes", he seemed to be saying, "but which way are the boats?—because although there is some improvement, and we are back from the abyss, some of this improvement is due to pay restraint, and the outlook without pay restraint is very menacing; but, since we are almost certainly not going to get pay restraint, the outlook is very menacing.

I turn to the speech of the noble Lord, Lord Gowrie. His position seemed to be "pull the other one". He was sceptical about incomes policy, but he said that a free-for-all was disastrous. He seemed to be saying that we might need another period of incomes policy and indeed, if we were to have another period of effective incomes policy, I thought he said at one time that it was possible to conceive a statutorily enforced 12 months' rule. However, I may be wrong about that. The noble Earl was in favour of a nonpolitical society and he agreed with Peter Jay. The last time I read an article by Peter Jay he was in favour of workers' control, but perhaps that was a different article from the one to which the noble Earl was referring.

However, as was said, quite rightly, by the noble Lord, Lord Robbins, the noble Earl then turned to what the results of Conservative policy would be without really telling us what the Conservative policy would be. We still await that. The naval analogy for his position was rather like Chesterton's Ballad of the White Horse. I thought he told us— I tell you naught for your comfort, Nay, naught for your desire, Save that the sky grows darker yet, And the sea rises higher". It is a stormy night, but I do not think that it is as bad as all that. Indeed, it is not as bad as all that because most people seem to agree that, whether or not it is bad, or however bad it may be, really depends on how far we are in for a wage explosion.

In that respect, I agree most of all with the noble Lord, Lord Byers, who said that it depends very much on how much guts the Government have. I should say not just guts, but understanding. The first thing that the Government must understand is what the TUC is saying to them, or rather what the TUC has been saying to them for six long and weary months. It appears that now at least, and at last, they are beginning to understand.

The TUC is saying three things. First of all, that this year we shall not get a universal rate of settlement; we must wear differential rates of settlement. One of the main reasons for that is the highly precise and rigorous incomes policy that we have had during the previous two years. Secondly, the TUC is saying—I am not certain that the Government have heard about this matter—that it is no good trying to use pay policy in order to reduce real wages. Anyone who thinks that we shall get an earnings movement this year which is less than the movement in the RPI is in Cloud Cuckoo-land. That aspect is well evident.

Thirdly, the TUC is saying that if we accept those two aspects; the primacy of the 12 months' rule, and, as yesterday's TUC statement emphasised (and it was extremely useful to the Government) that the increases this year must be focused on the future, and protecting the movement in prices over the next 12 months rather than looking back to the past and trying to get back where people were in 1974, 1975 or even 1973, then it need not necessarily lead to a wage explosion. However, it will almost certainly lead—I am not sure that the Government appreciate this—to a movement in average earnings which will be substantially, although not very substantially, in excess of 10 per cent.

I appreciate why noble Lords opposite would not wish to face precisely what the TUC is saying and would not like very much to think back to the period which was most closely similar to this one. It was a disastrous period from the point of view of the Conservative Party. It was in fact the period of N - 1. It is my argument that, if we understand the policies that the Conservatives adopted in the period N - 1, the period when incomes policy largely depended upon the stance and example which the Government made in the public sector—that is the essence of N-1—and if we look back and appreciate the mistakes in the period N-1, and if the Government resolve to direct their courage to doing the total reverse of almost everything that was done in N-1, then the country has a chance.

In my view there are four lessons to be learned from the mistakes made during that period. First of all, the Conservatives in that period considered that everything could be done by standing firm in the public sector. Evidence since that time shows that throughout the period from 1970–1973 with the statutory freeze, the pace of wage inflation was being made throughout in the private sector. By and large, the levels of settlement and the earnings movements were higher in the private sector than in the public sector. Therefore, although the Government were doing battle on the foothills of the public sector, in the commanding heights of the economy inflation was running away. If the Government believe that they have nothing to do but wait until, say, November, when the local government workers come forward; if they do not think that it is just as important, indeed, more important, to ensure that there are not inflationary increases before November in Vauxhall, Ford, Chrysler or Scottish Road Haulage; if they do not appreciate that once again the pace is being made in the private sector and not in the public sector, then we shall make the same mistakes as we made in N - 1.

In the light of that situation I am not convinced by the arguments about the Price Commission. I am certainly not convinced that we do not need the Price Commission. The great weakness of the Price Commission as regards controlling inflationary settlements in the private sector is that, as I understand the role and the powers of the Price Commission—I should like to be corrected if I am wrong—there is really nothing that they can do unless people put up prices. Recently I have been told of a large employer in the car manufacturing area of the private sector, who has already told the unions that the company is prepared to offer 15 per cent. There will be no bother with the Price Commission because the company does not intend to put up its prices for at least six months. Those will be the commanding heights of incomes policy in the next 12 months. That is the first lesson that the Government must learn.

The second lesson is that in the public sector the Government must act consistently. There must be no return to the ludicrousness of N - 1, when the Government began by doubling the doctors' pay claim to 30 per cent. and then, three months later, refused dustmen 10 per cent. There must be no return to the situation in which they conceded the electricians 15 per cent. a few months before they sought to drive the postmen below 8 per cent. That kind of inconsistent, cynical approach to pay in the public sector was the death of that policy in 1970–1973 and it will be the death of this Government. The Government must have a consistent policy in the public sector. If there are to be payments above whatever norm the Government specify for the public sector on grounds of productivity, labour shortage or to deal with negative differentials, then the Government must spell them out in their own White Paper. They must seek to justify any increases in the public sector over and above the general norm, by reference to these principles. Unless the Government have principles and seek consistency in the public sector, they will end up just as indefensible in the face of the miners' strike as the Heath Government did in 1972.

The third moral or lesson to be drawn from N - 1 is more difficult and more likely to be challenged. We must link settlements in the next 12 months to the pattern of price increases. One of the greater and rarer lunacies of N - 1 was that it was based upon the assumption that as prices went higher so wages should increasingly go lower. Each time someone put in for a wage increase they received less on the fantastic ground that prices were getting higher. There must be nothing like that this year. We must try to do better than that.

We must try to do better by reintroducing what noble Lords may consider to be two dirty words "threshold agreements". We must return to the principle of threshold agreements. As there is so much resistence to that at present, I think that the easiest way to explain it to the House is to relate it to the central problem which has been mentioned already by most speakers and especially by the noble Lord, Lord Robbins; namely, the problem of maintaining the 12 months' rule.

The point about the 12 months' rule is that we are focusing exclusively on one end of it. We are bothering far too much about whether people jump the queue. Of course, it is bad if people jump the queue, and of course it produces problems if they jump the queue. However, what is just as important is that when people reach their place in the queue they are prepared to sign a 12 months' agreement. If when people reach their place in the queue they say, "We are not prepared to sign more than a six months' agreement and if the movement in earnings is going up the spout six months after our agreement we shall come back for renegotiation" that would be just as disastrous from the point of view of inflationand the 12 months' rule.

But if the Government accept the TUC's point in relation to real wages, it would be possible in the public sector to sponsor a series of offers, particularly at the beginning of the wage round, in areas like local government where the employers could offer a settlement which was to keep pace with the movement in the Retail Price Index over the year as a whole. I am not suggesting that if the Retail Price Index moves by 12 per cent., employers in local government should offer 12 per cent. That would hitch up the wage inflation process at the beginning of the round.

Let me illustrate that by taking the Chancellor's figure. If employers were to offer 7 per cent. or 8 per cent. in a particular area of the public sector, depending on how far there was drift, they would also have to say that a trigger would come into operation when the Retail Price Index moved beyond that figure. If noble Lords want a name for this and a distinction to N - 1, I would suggest that a device of this kind might be called "X + RPI", where X represents the size of the primary increase. I believe that only by such a policy do we have the slightest chance at the beginning of the wage round, without a series of extremely damaging strikes in the public sector, of achieving something like the Chancellor's figure.

People will say, "What about the history of threshold agreements with the previous Government?" The answer to that is very brief. Threshold agreements were introduced in the wrong way, at the wrong time and took the wrong form. They were introduced in the wrong way because they lay on top of an extremely rigid statutory entitlement and were not negotiated. They were introduced at the wrong time because that was a time when we could not calculate what was likely to happen to the RPI in the next 12 months. People who know more about this than I do tell me that, apart from the wage complement, it is relatively easy to do now. They were introduced in the wrong form—and this is the most important point—because they were a flat-rate increase, and such an increase busily disturbed every differential in the country.

The fourth and final lesson that we can learn from N - 1 is the attitude which the Government should take if their policy deteriorates. This is not just a lesson from the N - 1 period; it is very much a lesson which the Government can learn from the Mark One period of the Social Contract—the first year of the Social Contract. We must not pretend that all is well if the policy is not working. We must not do what the Heath Government did in the long summer of 1972 after their defeat at the hands of the National Union of Mineworkers and before they worked themselves up into a statutory freeze in October. We must not wait and dither through a long summer. Similarly, we must not do what the previous Secretary of State at the Department of Employment did in 1974–75. He consistently stated that particular settlements, which we all knew could not conceivably be said to be within the policy, were broadly within the terms of the Social Contract. We must not pretend that things are other than they are, and we must not say, as the Department of Employment did in that period, that we do not want to breathe down the necks of negotiators or that we do not want to know exactly what is going on. We must not do that, partly because we want to sound warnings but also because we want to put down rumours.

No doubt noble Lords will have seen a report published in The Times this morning of a settlement in Longman's Green where the union is claiming increases of up to 30 per cent. for particular grades. The employer is saying that that would involve 10 per cent. on the wage bill. Those are the kind of rumours that breed rumours, that feed into the negotiation process and produce inflation.

I am really trying to say that things need not be as bad as Chesterton suggests if the Government use the good will of the TUC, act with fairness and consistency in the public sector, give guidance to the private sector, monitor the results of their policies, and watch their instruments. Indeed, the couplet I would use is not so much Chesterton's as that by Louis Macneice: The glass is falling hour by hour, the glass may fall for ever, But if you break the bloody glass, you won't hold up the weather".

4.27 p.m.

Viscount MASSEREENE and FERRARD

My Lords, I was very interested to hear the noble Lord the Leader of the House tell us how the present Government were getting Great Britain out of her economic difficulties. However, with respect, we must remember that to a great extent the present economic difficulties are due to the present Government. The noble Lord was very buoyant about our reserves, and of course our reserves have improved. But the noble Lord must remember that the majority of those reserves comprise "hot" money and a certain amount is IMF money from our recent loan. A great deal of money is deposited by the sheiks and that money can be withdrawn just as easily as it has been placed. Therefore, I do not think we should be too buoyant about that.

The latest package from Mr. Healey, which he announced last Friday, is fairly small fry; it is a bit of a mongrel. It is really the result of a certain amount of largesse subject to the discipline of the IMF. It is largesse, I suppose, to build up for a spring or summer Election. However, I shall not waste more time on Mr. Healey's package. I do not know how many packages he has produced, but he must have delivered a great number. As my noble friend Lord Gowrie said, the Social Contract appears to be dead. If we could have—as the TUC, I understand, is hoping—an orderly return to free collective bargaining, nothing could be better. But can we have an orderly return? Times have changed; we had, of course, free collective bargaining for hundreds of years before the pay policy. The public sector now owns so much of industry that I wonder whether free collective bargaining is really 100 per cent. possible. It would be all right if the Government could be firm with the nationalised industries and not allow them to run away with wage claims. However, if not, I have my doubts about an orderly return to free collective bargaining. As my noble friend, Lord Gowrie said, how can we have a statutory price control, according to the Price Commission Bill with which this House has just dealt, if we do not have statutory control of wages? We cannot—it would be complete nonsense.

We live in an age of misnomers, cant and hyprocrisy. The Social Contract should not be called a social contract. If it was social, it would embrace the whole country and everyone would be behind it; but it is not. It is a family agreement. It is an agreement between the trade unions and their child, the Labour Party. The unions provide all the finance for the Labour Party, and the unions control the Executive of the Labour Party. Therefore, it is a family agreement. You cannot call it a national agreement. The so-called social contract would have succeeded but for one reason. If only the unions had not asked for more and more public expenditure it would have succeeded, but with the unions asking for more and more public expenditure it did not have a hope of succeeding.

The noble Lord, Lord Byers, and my noble friend Lord Gowrie mentioned the question of Government expenditure in the public sector, and I should like to say a few words about this. Government expenditure is terrifying. In the last four years—that is, more or less, the life of the Labour Government—this country has borrowed (and people do not seem to know this) £25,000 million, and quite a lot of it from abroad. So far as I am aware, the National Debt has been running for nearly 300 years, and four years ago it stood at £30,000 million. The present Government have therefore, in four years almost doubled a National Debt which took 300 years to accumulate. That should go in the Guinness Book of Records!

I think that some noble Lord said that the public sector has now risen to 60 per cent. of gross national product. The public sector provides for every family in this country £1,000 per annum on every man, woman and child. They are the figures I have been given, and so far as my research can go I believe them to be accurate. Surely it is irresponsible to borrow these vast sums of money to finance current expenditure. If you are to finance capital expenditure which will bring you a return, that is one thing, but a lot of this money has been borrowed to finance current expenditure.

The steel industry in America is not so happy, but I read today that the nationalised steel industry in this country may run into a loss this year of £250 million. There again the poor old private sector, the wealth-producing sector, 40 per cent. of the GNP, will presumably have to make up this loss through taxation paid through public funds. Here you have the reason for very little private investment in industry. It is owing to the complete lack of incentive, as we have heard this afternoon, because of the public sector taking so much of the GNP in tax. We should follow the rest of the industrialised world and not have a tax higher than 50 per cent. Our taxes go as high as 98 per cent., which is a complete and utter absurdity. Something else that is wrong is that when people first start paying tax they are taxed far too highly. It amounts to about 40 per cent. That is far too high for somebody who is earning a low income and has just graduated to become a taxpayer.

I do not want to go on criticising. I think the noble Lord, Lord Byers, said one should try to be constructive. I am now going to try to be constructive, but of course a Socialist Government will not take any notice. However, I will try to be constructive. Here again I must come back to Government expenditure. We could start here in this House, and in another place, by not having nearly so much legislation in the next Session. We set up these hoards, these commissions, these inquiries, and of course they need more staff, more civil servants, and more bureaucracy. We could start here and in another place. The other place has the lead in these matters, but we could start by cutting down on legislation. I suppose we shall soon have a board to decide what toothpaste to use! We are appallingly overgoverned.

It is extraordinary that in 1939, when we were a first-class Power with the greatest Empire in the world, Central Government, Whitehall, had only 100,000 civil servants. Today Central Government have 764,000 civil servants, and we are only a collection of tiny islands. What the devil are they all doing? Well, I know what they are doing because I am pestered by them. If we include local authorities, the numbers must run into millions. I have a friend who has been trying to start a fish farm on some land I own. The Highland Development Board want it. The noble Lord, Lord Byers, mentioned planning permission. The planning department for their own ego, I suppose, turned it down on some absurd little reason, such as that it is the wrong type of tree to screen it, or some such nonsense. This must be stopped. Bureaucracy is destroying all small business and private initiative.

I agree that when you come to cut down the Civil Service you have the problem of the human clement, which is very important. All Governments have found this extremely difficult to do. I have great admiration for many people in the Civil Service—not all of them, mind you. We could surely start by perhaps earlier retirement, and a limit on recruitment. If you take the London docks and the redundancy of dockers, which the noble Lord, Lord Aldington, dealt with so well, could not we apply something like that to the Civil Service where there is overstaffing?

Of course we then come to the indexation of pensions. It is monstrous that everybody in the public service when they retire should have their pensions tied to the rate of inflation. I have one or two friends who are embarrassed by this. They tell me that they are receiving more from their pensions than when they were fully employed. It would save the public sector a great deal of funds if we could come to some other arrangement over that.

The noble Lord the Leader of the House was bouyant because he knows that the oil is coming, and it is starting to play a decisive part in the economic fortune of this country. But this Government, and future Governments, must be very careful how they use the oil revenue. I say to them: For God's sake do not fritter it away on the social services, or on universities, which we do not want. I do not include hospitals here, because they are in a different category. But I ask that the revenue from oil should not be frittered away, but should be used on buying the most up-to-date machinery, so that industry can be completely retooled where needed—and then we may be able to stand on our own feet. I am afraid that this oil bonanza will not help the moral fibre of the British people. It would probably have been better for the British people had they had to work out their own salvation without the oil, though that would have been very hard on some people.

In summing up, I should like to say, as other noble Lords have said, and as no doubt others will say in the debate, that we must cease spending so much of the nation's wealth on the public sector, otherwise we will not maintain our standard of living. This cannot be maintained by bolstering up jobs and industry artificially with borrowed money. That is the road to ruin. Furthermore, we must give more incentives to those who wish to work. In the Healey package the Government have taken a penny in the pound off income tax, but that is miniscule, and hardly worth talking about. Many honest men who are hard workers suffer great frustration when they see many scroungers receiving as much, or nearly as much, as they do, the difference being that these scroungers receive the money by way of national assistance and various other benefits. When it comes to people receiving free handouts there must be a greater money gap between those who want to work and those who do not—and there are quite a few people who do not want to work.

I feel that I have spoken for long enough, but finally, I should like to say that if public sector spending could be cut by even 5 per cent. it would make a worth while difference. I do not think it is impossible to do this, though no Government ever seem to try to do so. I can only recommend that action to the Government, and urge them to do away with index-linked pensions for retired public servants, which are unfair and are a great cause for annoyance to the private sector.

4.43 p.m.

Lord SHEPHERD

My Lords, I hope that the noble Viscount will forgive me if I do not follow him in what he had to say. I am not an economist. If I were, I think I should have doubts about putting forward my thoughts, particularly in the light of the letter which Mr. Joe Haines wrote to The Times two weeks ago, in which he said that, if every economist admitted his error in his predictions, there would be no economists in post, but no doubt there might be more people in work. I am glad that the noble Lord, Lord Robbins, acknowledged the advances and improvements that have come about since July of last year, and that he did not in any way question the general approach of the Lord Privy Seal in a speech which, I thought, was right for the occasion, because, although we naturally concentrate upon the problem of pay, the economic situation embraces many other facets of great concern.

Many of the economic difficulties of this country are very deep-seated and will, I believe, be changed only by a radical approach. I have often wondered why countries like West Germany emerged from the war and from devastation to establish one of today's strongest economies. There are a number of factors here, including their discipline, their ability to organise. I suppose that, at the end of the war, after Bretton Woods, their exchange rates were set at a favourable level, as compared with the countries that were victorious.

One of the real reasons for Germany's development has been a consistency of economic policy on the part of successive Governments. Despite political overtones within the German democracy, there has been a broad acknowledgment of what was required to turn Germany into a strong industrial manufacturing country. If one were to consider why, in this country, investment has, ever since the war, been poor as compared with Germany, one would find that this has been due to inconsistencies and changes of policy by successive Governments. Although I have enjoyed adversary politics, which I believe form an essential core of our Parliamentary freedoms, I consider that the major political Parties should try to find a broad consensus of view for the economic and industrial planning and development of this country. Unless we have that, I do not believe that we can expect the investor, whether from outside or from within an organisation, to pledge the money.

So I hope that within the next 12 months (the first three of which I think will be difficult) we can try to find a general consensus of view as to what is the right approach for our industries and our industrial development. The noble Lord, Lord Byers, was quite right when he said that the debate should be about "how", and not "how does it happen?" or "what causes it?".

I should like to put three suggestions to the Government. They are based upon recent experiences. I hope that the Lord Privy Seal will give careful consideration to a suggestion which I made to the previous Prime Minister, that there should be in the Government a senior Minister responsible solely for overseas trade. I do not envisage a large Department in support of such a Minister. But, over the past 12 months, I have been aware of many serious and large-scale projects which could well have been ours had we been able to give to the consortia seeking those contracts the degree of Governmental support upon which a French company can, in similar circumstances, always depend. I believe that there ought to be a Department for overseas trade, relatively small in numbers, made up of people with commercial and business experience and entrepreneurs, along with civil servants, and headed by a senior Minister with direct responsibility and entrée to the Prime Minister, so as to be able to break through the tangled web of conflicting Government Departments. So I hope that we can do more in terms of supporting our companies when they are going for large-scale contracts.

Secondly, my Lords, I think we need to look particularly at investment. Investment has been relatively poor ever since the war. I touched upon some of the reasons for that a few moments ago. But I believe that we ought to have within the Government, or just outside it, some organisation which would have sufficient funds available to give a degree of security to the commercial banks when they are required to make loans for commercial and industrial development in respect of which the risks are perhaps a little more than would be entertained by what might be called the commercial judgment of the bank. If we were able to give a degree of security to the banks, I believe that much larger sums of money would be available for projects to which there is attached some degree of high risk.

I personally believe, certainly at this very moment, that if we are to get the sort of developments that are needed for the next 20 years, we must look beyond the straight gilt-edge projects, to some of the more exciting and more far-seeing ventures, which certainly the United States are always willing to pledge. I would ask the noble Baroness to say, when she winds up, what is the position today of the Accelerated Projects Scheme. I believe this was a scheme which came into being in August 1976, under which some £640 million was found for rationalisation and for new investment, but where the total cost to the Government was of the order of some £61 million. It seems to me that this is the way we should seek to find the money, not solely out of Government but utilising the normal resources of the banks and the City by giving some Government security where it is necessary.

On pay policy, I do not see the conclusions of the Government and the TUC as a collapse of policy, although I think I share with the noble Earl, Lord Gowrie, a sense of disappointment that the third phase, which most of us saw as a re-entry into free collective bargaining, is not to involve a tighter régime than is now being proposed. But I believe we should have faith in the TUC so far as the 12 months' period is concerned. The noble Lord, Lord Robbins, wondered how it would hold when, perhaps, some who may have settled at a lower rate then see others getting higher rates later. That is exactly what happened, of course, in 1975 and 1976. Many of the settlements at the beginning of that period were of the order of 10 and 12 per cent., only for those who had entered into those agreements to see, at the end of that period, that settlements were of the order of 25 and 30 per cent. But the 12 months' period remains firm by the TUC, and therefore I have a degree of confidence that the TUC and the trade unions will see this through. I am fortified in this conviction because, although one may be very disappointed that the Trades Union Congress were not able to make recommendations as to what the figure of settlements should be, they did not make such recommendations because they knew in their hearts that, whatever recommendations they made, they were unlikely to be fulfilled. Therefore, they sought to make a declaration in an area in which they believed they would command the support of the trade union movement.

But, my Lords, if the 12 months' rule is broken, then undoubtedly a very serious situation will arise; and I agree with my noble friend who spoke earlier, that the Government must be quite forthright in expressing their view, when there is any break in the agreement, whether it is in the 12 months' period or whether it is by way of a settlement that is far too high to be justified. I think my noble friend was right in saying that where the Government went wrong in 1974 and 1975 was that we sought to gloss over what was going on in the hope that others would not in fact notice it. But the trade union movement does know what goes on; and one of the great difficulties is that if there is not specific guidance from the Government then many of those on the shop floor and in the fields of negotiation will feel that whatever has been said is really of very little value.

My Lords, I want to ask my noble friend the Lord Privy Seal only one thing. I do not ask for an answer today. It was touched upon by the noble Viscount, Lord Massereene and Ferrard, and it concerns the position of our Civil Service. I think my noble friend is like myself. When I held his post in the Civil Service Department, I took the view very strongly that we should not single out the Civil Service for treatment which we were not prepared to impose upon the general workforce of the country. I think the Government need to take an early decision as to what to do about pay research, and certainly there will be demands from the unions for the bringing back of that procedure; but I hope that the Government will make it very clear publicly that, whatever may happen elsewhere, the Government, as an employer, will maintain the sort of policy that the Chancellor set out in his Statement last Friday. I believe that if the Government are clear about that, then it will give a great deal of moral support to the private sector, which, quite naturally, is going to be confronted with a very difficult time in its own form of negotiations.

Some companies will be able to claim, quite rightly, that there is not enough money in the till to pay large increases; but there are many other companies which have done very well during the last two years because of pay policy, and the pressures on them will be very great indeed. Therefore, while we call upon the private sector to hold the line and we look to the trade union movement to honour the commitment into which they entered only yesterday, it is for the Government themselves to set a very clear example, and a very fair example, to their own employees, and certainly to keep the country as much informed as possible about the way in which the policy enunciated last Friday by the Chancellor is being carried through.

4.58 p.m.

Lord ROBERTHALL

My Lords, I hope the noble Lord, Lord Shepherd, will forgive me if I do not say anything about the interesting specific suggestions which he made during his speech, but I hope to say quite a lot about incomes policy and, of course, therein to touch on the very wise words of Lord Shepherd. We have had a number of views expressed about the prospects of the economy. I think the most optimistic was from the noble Lord the Lord Privy Seal, who quite rightly pointed to the improvements in the situation and, I think, glossed over the big dark cloud on the horizon. The noble Earl, Lord Gowrie, felt some gloom, but as I understood him he thought there was nothing the matter with the country which 18 months of Conservative Government would not set right. The noble Lord, Lord Byers, was moderately optimistic if the Government stood firm.

What I think has been notable in our debate is the number of hypothetical statements that have been made. We are getting very near to saying, "If we had some ham, we could have some ham and eggs, if we had some eggs!" I thought that that particularly applied to the very interesting speech of the noble Lord, Lord McCarthy, who held out considerable hopes for the future if—and if, and if—the Government will do this or that. I should feel more confidence in his prescription if I thought that he were in a much more strategic position for guiding us.

To my mind, the most striking thing about the Statement that we heard from the Chancellor of the Exchequer on Friday—which is the background, the occasion, for our debate—was that he began by saying that the mastery of inflation was the pre-condition for doing anything about unemployment; and later on in his speech he urged all those connected with wage negotiations to show a policy of moderation about a norm of 10 per cent. To my mind that is back to where we were 30 years ago. When I first went to the Treasury, Mr. Attlee's Government had just issued a White Paper about the menace of inflation both for the balance of payments and for the social structure, which was a danger to the full employment policy on which we were just embarking.

It is a great disappointment to me that I think the incomes policy has collapsed. I feel that it is nearer the dead duck which the noble Earl, Lord Gowrie, said it was. At any rate, I think it is going into cold storage, at the best, for some time. When I went to the Treasury, the main priority in all our minds was the maintenance of full employment. We all had in mind the horrors of the inter-war period. It seemed to us that the great social priority was to achieve full employment. But I think we saw then, as the White Paper showed, that there were dangers in it arising from the change in the bargaining position which follows from full employment. I myself urged throughout my time at the Treasury, and have done so ever since, the importance of an incomes policy. I must confess that it is a sad day for me to see it as I think it is, if not in ruins in a very shaky state.

My Lords, what can we learn from this? In advocating an incomes policy, I have come to think there are four factors. The first is a pre-condition—which I think we did not properly impose in the 'fifties—to get a clear definition of what we mean by "full employment". We all set the unemployment figure too low. Every Government was tempted to crowd it a bit—you have an easier Budget; it does not look so difficult. I think we set ourselves an impossible task in trying to run the country on 1½ per cent. or 2 per cent. unemployment. That was a failure of analysis, and I have as much responsibility for that as anybody else. Leaving that aside, the three things that you want are: a norm, some method of dealing with anomalies and differentials, and some form of sanction.

A norm is no problem at all. If you want stable prices you have a 3 per cent. norm and you adjust that according to what you think you can get away with. The present Government are suggesting a 10 per cent. norm which would have seemed dreadful in the 'fifties because that corresponds to something like a 7 per cent. inflation. But all our competitors have some of the same troubles.

I do not think the problems of differentials and adjustment are as serious as they are made out to be. It is clearly necessary to have some method of adjustment because if a person feels that he is treated unfairly he feels bitter about it; and if you generate enough bitterness of that kind the policy is going to break up—as did, I think, the first attempt, that of the then Mr. Selwyn Lloyd. Clearly the £6 limit for everybody set up great tensions, but they are exaggerated. When we come to sanctions, this is where the policy has broken down.

Incomes policy people like me are not totalitarians; they do not want to have everything rigidly fixed. But if the community as a whole wants to have these great good things like a high level of employment, and fairly stable price levels, it is not unreasonable that there should be some means of dealing with the recalcitrant minority who try to get away with something better. But it is clear that we have not succeeded in that at all. Why has the incomes policy, as I think, practically collapsed? I admit that the 12 months' rule is important and both the noble Lord the Leader of the House and Lord Shepherd stressed that. It is something from which I do not want to derogate too much. But I agree with the noble Lord, Lord Robbins, that there are considerable dangers of a pay explosion—and in this respect I think that all the hypothetical qualifications with which those noble Lords who have spoken surrounded their modified optimism are noteworthy.

In my view, the incomes policy has collapsed now because it has ceased to have credibility. Any policy that has not some form of sanction loses its credibility. I was more optimistic about this last year than I am now. I thought then that the TUC were showing very great strength of mind in opposing settlements which were outside the guidelines. There is no doubt in my mind that no union, however powerful, is going to get very far if it cannot rely on the solidarity of other workers. If the TUC are not going to support a strike it will not get very far. My own view is that nobody now believes that the present guidelines are not going to be breached by one or other of the powerful unions and that, once this happens, other powerful unions will not be forced to do the same for themselves. To take a hypothetical case, if the miners happen to get a big settlement, then the electrical industry workers would get it. That is what is meant by the lack of credibility: if you do not believe you are going to stop a particular group of workers from getting away with it, it is not likely that you will stop the others.

I feel very discouraged about this situation. I do not think that the monetarists—if there are any in the House; and I was not sure whether the noble Earl, Lord Gowrie, was a monetarist or not, but as he wanted only very temporary pay policies we must put him in that class—would be wise to dance for joy. To do him justice, the noble Earl was not dancing for joy.

Those who hear the bell toll for the Labour Party now can be pretty sure that it is going to toll for them, too. We are in an awkward situation. What have we now? Something like 1.4 million unemployed and at least a 17 per cent. rate of inflation. I remember when people believed in the Phillips curve and thought 2½ per cent. unemployment was going to give us price stability. The fact is that nobody knows the amount of unemployment which is necessary to give a particular degree of price stability, and the great word now is "expectation". That means just the same as "credibility". There is a problem of credibility if you use monetary policy: will the country put up with the amount of unemployment you may have to use? There is a problem of credibility with an incomes policy: will the Government be able to stop people getting away with it?

I do not intend to make a long speech and I shall not pursue this further. As you can tell, I am a disillusioned optimist and I feel that we have a great many illusions to shed. The first is that Parliament governs the country. In the field of industrial relations, it does not have the power. This Government have not the power to have an incomes policy. Consider 1974. Mr. Heath inherited a deflationary situation, he thought that it was going to settle inflation for him; but as soon as unemployment began to go up he ran away from it. His supporters knew that they were going to lose their seats and so he turned completely round to a policy of expansion, then an incomes policy. The miners challenged him; he went to the country and the country did not support him. So there one Administration tried both policies but was not allowed to pursue them.

I agree very much with the noble Lord, Lord Shepherd, that the TUC showed a great deal of restraint and good sense when it refused to give empty promises to the Government on an incomes policy because it knew that it could not deliver the goods. The fact that they felt they could say that gives one more confidence in the 12 months' rule. But I still think that there is great political weakness in this country, in that, in a number of respects, there is no body that can deal with the trade union situation. Although the country as a whole does not like the unemployment which would go with a monetary policy, it does not like inflation either. We have had something like five years of stagnation and, until we take a good look at our basic political structure, we shall not get anywhere.

Viscount AMORY

My Lords, before the noble Lord sits down, I wonder whether he can cast his mind back 20 years to the time when, for two or three years, I had the honour of having the noble Lord as my economic adviser. Just now, he used the phrase, Ask not for whom the bell tolls; It tolls for thee". I have been trying to think back: it may be that because the noble Lord is a kindly person I cannot remember him saying that to me at the time, but I rather wish he had.

Lord ROBERTHALL

My Lords, if I may make a brief reply, the noble Viscount inherited a very deflationary position in the early stages. I thought I gave him some cause for apprehension in the later period of his Chancellorship.

5.15 p.m.

Lord KALDOR

My Lords, like the noble Lord, Lord Roberthall, my speech will also be largely devoted to the problem of an incomes policy. There is a great deal in what he said with which I agree. There are other matters with which I do not agree. I hope he will forgive me that, instead of trying to set these out directly, I will let it emerge in the course of my remarks.

We are here today to note, mourn or celebrate—as the case may be—the end of the present incomes policy; or if we wish to interpret the Chancellor's Statement and give it the most favourable construction, we are at the end of a phase; namely, the beginning of the end of this incomes policy rather than the end of the incomes policy. In either case, it is the end of the fifth experiment in incomes policy which this country has had since the war. Of the previous four, two were under Labour Administrations and two were under Conservative Administrations. I have little doubt that we shall have a sixth, whichever Party is in power.

It is a suitable occasion therefore to consider why successive Governments, both Labour and Conservative, were led to adopt an incomes policy, and why these policies were abandoned, normally after their second year. First, I should like to say that they were invariably introduced without due preparation or due consideration. That is to say, they were introduced in haste under the pressure of circumstances and avowedly as a temporary expedient. They were all of a very simple kind with very little flexibility. The Heath formula of 1972, or the Jones-Healey formula of 1975, or the modified Healey formula of 1976, were not so different from each other. They were all intended to provide a breathing space, to give time to develop more permanent and flexible arrangements; time for the development of institutions that would allow rival contending groups to negotiate with each other in an orderly way, in order to settle the question of how the national cake is to be divided in different slices; to settle this question instead of allowing the outcome to be determined by a trial of strength of various groups. But it was never possible to develop such arrangements, so that as growing anomalies forced the abandonment of the simple rigid formulae which had no flexibility, there was nothing much to take their place.

It would be wrong, however, to suggest that each experiment left nothing behind. In the first place, the various factors determining prices—of which labour costs are only one—became more widely understood by the public, such as the role of import prices or Government taxes, and so on. More important, each time an incomes policy was introduced, the public's general understanding of the problem improved. This is shown by a succession of remarkable Gallup polls. Prejudices and jealously guarded traditions were weakened, and a degree of social responsibility shown by most organised groups—regrettably not by all—became more prominent. Slowly and gradually I believe that a consensus will emerge on the proposition that new ways must be found to settle the question of relative earnings—this is what it is all about—based on principles which are regarded as just and fair by the great majority of citizens.

In some ways, the incomes policy of the last two years has been a great deal more successful than its predecessors. It was well-nigh universally observed and it was, contrary to what the noble Earl, Lord Gowrie, suggested, essentially on a voluntary basis. It was because the great majority of trade unionists, in the summer of 1975, recognised the pressing national need for such a policy. It succeeded in bringing down the rate of increase in earnings from 26 per cent. to 14 per cent. in the first year, and from 14 per cent. to 9 per cent. in the second year. When I speak of 9 per cent., I am using the official Treasury prediction. There are no figures available beyond April, when it was 10.9 per cent., but the Treasury predict that at the end of July the year-on-year figure will be down to 9 per cent.

Lord ROBERTHALL

My Lords, is the noble Lord referring to earnings or to wage rates?

Lord KALDOR

Earnings, my Lords; but whereas in the first year the rate of increase in prices fell as much as earnings—they both fell together, halved from 27 to 13 per cent.—in the first year of the policy, in the second year the rate of inflation actually accelerated from 13 to 17½ per cent., while earnings continued to go down from 13 per cent. to 9 per cent.

In judging the results, or the lack of permanent results, of this last experiment, two special factors must be borne in mind. The first is that the previous statutory incomes policy which was introduced by Mr. Heath ended with a bang and not a whimper through a preposterous, but no doubt unintended, fault in its construction. Through the mechanism of the threshold, which was triggered 12 times during the statutory period of Phase 3, there was a wholly unnecessary and a wholly avoidable acceleration of inflation by 10 per cent., according to the best experts on this matter, compared with what it would have been otherwise. That could have been avoided if threshold agreements had not been introduced. It could have been avoided, even if they were introduced, if the particular form of those agreements had not been calibrated in such a way as to attempt to secure for the wage earners a wholly unattainable increase in real wages of 5 per cent. in six months—which has never happened before in the history of this country.

I am not in disagreement with my noble friend, Lord McCarthy, that in a suitable form threshold agreements may have an important role to play; but we must be very careful next time not to have the kind of threshold agreement which has the very opposite effect of automatically enhancing the rate of inflation well beyond the point that it otherwise would have reached. It was that, more than any other factor, which put Britain so far out of step with other countries, and we have been more or less out of step ever since. Of course, the Heath policy was followed, like all earlier policies, by an inevitable free-for-all on wages, of adjusting anomalies, and so on. But all this pushed up the rate of increase in wages by a further 5 per cent. only to an annual rate of over 25 per cent. It was pushed up to 20 per cent. by Phase 3 of Mr. Heath's incomes policy.

The first handicap of the new policy was that, starting from such a high rate of inflation, the difficulty of bringing inflation down to single figures in two years proved to be too great. The target was much too ambitious. The second big handicap was that real wages were reduced in the second year of the policy. We do not as yet know by how much, but it was probably by considerably more than 5 per cent.—and that depends on many things, such as tax deductions and so on. However, we know that earnings will have risen by 9 per cent. and prices by 17 per cent., which is a gap of 8 per cent., so the fall in real earnings will be of that order. This, of course, was contrary to the expectations of the wage earners, the trade unions and the Government, on the basis of which the undertakings as regards pay increases in the second year of the policy were given.

An incomes policy was never conceived as an instrument for reducing real wages—in that I fully agree with my noble friend, Lord McCarthy. It is an instrument for slowing down the rate of inflation caused by excessive increases in money wages. But that need not cause real wages to be reduced more than they otherwise would be. The whole case for an incomes policy is that, taking the community as a whole, nobody gains through everybody being paid higher money incomes and, on the other side, paying higher prices.

I freely admit that in the circumstances of 1976 the balance of payments could have been improved without a cut in real wages only if there had been an increase in total real output. Such an increase did in fact occur in most other European countries—I think the average I have seen was about 4½ per cent. But in Britain the gross domestic product increased, if at all, by only a very small amount. I have no quarrel with the figures produced in this respect by the noble Earl, Lord Gowrie.

With an unchanged output, the attempt to improve competitiveness and the balance of payments inevitably entailed a fall in the share of wages in output. Except in wartime, when the reduction in real consumption is best achieved by comprehensive rationing, there was never any precedent for the standard of living of the working classes, which normally improves year by year, to suffer a big fall, as has been suffered in the current year. That fall was not due, as many people suppose, to worse terms of trade. In fact, our terms of trade have remained virtually unchanged since the second quarter of 1975. The real reason has been that with growing unemployment, stagnant output and a lower deficit in the balance of payments, the resources available for consumption are shrinking and the fall in real wages is just a reflection of that factor.

The danger is that this process will continue unless the Government succeed in reversing the current adverse trends facing the British industry. For despite all the sacrifices, despite all the successive devaluations and all the improvements in our cost-competitiveness in relation to other countries, our manufacturing industry is definitely not holding its ground. It is no good blinking that fact. Foreign manufacturers are increasing their grip on our home market, import penetration is rising the whole time and we continue to lose our share of exports in the world market. Our entry into the Common Market meant that the tariff protection, which British industry previously enjoyed, was either completely abolished, as it was in relation to some of Britain's keenest competitors—notably, Germany—or else it was greatly reduced in relation to other competitors, such as Japan, simply because the common external tariff of the Common Market is much less protective than the previous British tariff which it replaces. All this meant that our net exports of manufactures, meaning the net excess of exports over imports, continued to fall.

On a 12 months' basis—and I look hopefully at the figures month by month, to see whether there are any noticeable improvements—we are still in the situation that our imports of manufactures grow at twice the percentage rate of our exports of manufactures. Over-capacity and over-manning are growing throughout industry. Industrial investment is very low indeed, as was said the other day by the Opposition spokesman in the other place—and that was about the only thing he said with which I was fully in agreement—because profitable investment opportunities are totally lacking. They are lacking because the demand for the products of British industry is falling and not rising, and because it is expected to shrink and not to increase. That is the reason why investment is low. And so the process of the de-industrialisation of Britain is not halting; it is accelerating the whole time. In these circumstances we face the prospect of a continued shrinkage in real income, which I regard as the worst possible background for getting rid of inflation.

So long as some industrial countries, notably Germany and Japan—there are very few of them—are able to maintain very large surpluses in their trade in manufactures, not only with the world as a whole but with other manufacturing countries, it is virtually inevitable that Britain, who, together with the United States of America, is at the losing end of this game, shall suffer. To halt or reverse this process, it will be necessary to find some way of reducing the flow of imports from Germany and Japan to a level that can be matched by our flow of exports to those countries. In that way alone can we increase our real income sufficiently to allow the standard of living of our workers to rise again, and so achieve what I believe to be the precondition for a longer-term solution of the inflationary problem.

As to the immediate outlook in the next 12 months or so, very much will depend on the size of the settlements in the first few months after the end of this month. If they are very big, then all the others will be very big. Also, if they are very big, then the impatience to break through the 12 months' rule will be very much greater. In this respect, I am more alarmed by the claims of the doctors than by anything threatened by the miners, the railwaymen or anyone else. In 1970, it was the 30 per cent. increase, demanded and ruthlessly pressed by the BMA, which led to the stampede to double-figure settlements in the latter half of the year. The doctors' dagger was aimed at Labour, but it struck the succeeding Tory Government. If the doctors attempt again to press impossible claims, with the same brutality and the same total disregard of the national interest, history may well repeat itself.

If I may be allowed just a few minutes more, I should like finally to deal with a question which must be in many people's minds, because it has been touched upon but not properly dealt with; namely, are these incomes policies really necessary? There are those who believe, with more or less conviction, that they are futile and unnecessary; that wages can be held down by regulating the market demand for labour. This in turn, on the monetarists' view, entails something very simple—sticking to satisfactory targets for the money supply. I have no time left to explain why I believe these doctines to be utterly wrong. Although this is never understood, the Government, or the monetary authorities, have only an indirect influence on the money supply through their power to vary the terms on which credit is granted to business and other borrowers.

But assuming that this power is exercised to the full, it is of the utmost naïveté to assume that they exercise any direct control over the movement of prices and wages. All that the Government can do is to make borrowing so difficult as to force financially weak firms into bankruptcy, and the financially weak firms are very often those small firms which the noble Lord, Lord Byers, wishes very much to encourage. It is only as a result of such bankruptcies that monetary policy can exert an influence on the demand for labour, and if it does the loss to the business community is far greater, and far more acutely felt, than the gain which would take the form of an unemployment-induced moderation in wage claims.

There is a widespread belief, for which there is no empirical support in the postwar statistics for this country, that there is a so-called "trade-off" between the level of unemployment and the rate of wage increases. Since the size of wage settlements is determined in key sectors—and those are the sectors where jobs are secure, whatever happens in the labour market as a whole, even with large-scale unemployment—there is little reason why such a trade-off should exist. Even the archpriest of monetarism, the formidable Professor Friedman, has now abandoned that idea and introduced the very opposite idea in his recent Nobel Memorial Lecture, which appeared in this country only about two weeks ago but which your Lordships can easily get hold of, that, on the contrary, the trade-off between wage inflation and unemployment is negative, not positive. The more unemployment there is, the faster will be the rate of increase of money wages. For once, he reached this conclusion not from the first principles of basic economic theory, but, with commendable honesty, by studying the evidence. He looked at half a dozen countries since the war, and found a clear correlation which showed that there is a positive slope and not a negative slope, to the so-called Phillips curve, and therefore wage inflation is all the greater the more unemployment there is. Whether or not Professor Friedman's latest views are true, in my opinion monetarism is doomed to failure because it could succeed, if it succeeded at all, only by ruining industry long before it succeeded in making labour more submissive.

5.40 p.m.

Lord CAMOYS

My Lords, it is daunting indeed to follow such an experienced and distinguished Member of your Lordships' House as the noble Lord, Lord Kaldor. I shall have to resort to speaking from the viewpoint of a banker and grocer. I mention the latter in particular because I am involved in a business which is typical of the size and kind to which the noble Lord, Lord Byers, referred so eloquently and about which I am sure my noble friend Lord Gowrie is equally sensitive. Also I should like to applaud the suggestion that was put to the noble Lord the Lord Privy Seal by the noble Lord, Lord Shepherd, concerning the quite urgent need for more Government help on large international projects. I travel a great deal in both the Middle and the Far East. In both places it is sad to hear of the numerous occasions when no British company even puts in a tender or makes serious inquiries about obtaining work. Therefore I reiterate that the noble Lord's suggestion was very constructive.

I believe that the Government are to be congratulated on accepting that at present there could be no meaningful Phase 3 of incomes policy. An incomes policy of the recent type cannot be regarded as a permanent solution to inflation, since it produces too many strains, too many anomalies and too many injustices to allow it to survive. Instead, the Government rightly have resorted more to monetary policy, cash limits and market forces. That they have done so is no more than being realistic.

In addition, I should like to take this opportunity to congratulate the Government for allowing the issue of variable rate Government stock. I spoke about this question some months ago in your Lordships' House, and I believe it to be a big improvement. May I, however, point out that in my opinion the instrument is not very sophisticated at this stage, even though it has sold well. I continue to believe that it is necessary to add further sophistication to both the Government and the private sector debt markets along the lines of indexation, the combination of minimum coupons with variable rates, as well as the auction of debt instruments. Our debt markets, particularly in the private sector, are in need of revival; certainly that will be the case if we are to see economic growth resumed.

The role of the convert, in particular his style when communicating to established members of his new faith, and indeed to those of the faith which he may have relinquished, is never easy, and I fear that the Chancellor of the Exchequer is no exception. In his Statement, the Chancellor missed the all-important opportunity to influence expectations in the manner that he should. Far too little robust emphasis has been placed on the certainty—here I echo the noble Lord, Lord Robbins—that large wage settlements will result not only in more inflation but also in deeper recession, even higher unemployment and even less investment. Far too little was made of the disastrous effects of another year with inflation anywhere near 10 per cent., and to reflate next year on the basis of that kind of inflation rate will be very risky indeed. Monetary guidelines were, of course, mentioned, but in my opinion it would have been more effective to reiterate the target itself of 9 to 13 per cent. I had hoped for that reiteration in the Statement itself.

Little or no specific guidance on wage increases has been spelled out, so far as I am aware, for each individual part of the public sector. More important still, the country should have been told very bluntly that on fundamental grounds—and, I admit, in an ideal world—we cannot afford any increase in earnings without matching increases in productivity. It is the total lack of mention of the need for higher productivity—that is, until the noble Lord the Lord Privy Seal referred at least to the need for more efficiency—and the apparent lack of commitment to the restoration of real differentials that is most depressing. To quote one commentator, "We are relatively poor because we are relatively unproductive".

I readily admit that, due to previous policies, our economy is in a very difficult position. Our Government are faced with the very difficult task of breaking away from an appalling record of unemployment, inflation and almost nil growth in national production. Certain omissions in recent Statements have, I fear, not helped. The first relates to the lack of further, even modest cuts in Government expenditure and in the level of the public sector borrowing requirement, and to the continuing punitive levels of direct taxation on all levels of management and skilled labour. Until resources are released into the private sector and unless incentives are recreated, I can see no reason to expect in the medium term the higher productivity and new investment, which I am sure we are all agreed are so vital to a fall in unemployment. Of course there are risks in such a policy, but surely it is necessary for the Government to look at the medium term, not just at the short term.

The second omission relates to exchange rate policy. A monetary policy, combined with strict cash limits, unless linked to an exchange rate policy, is rather like a two-legged stool—certainly not one upon which I should like to sit. Unannounced and without Parliamentary discussion, as we now know, the Government took a decision to repeg sterling to the United States dollar. The recent Statement makes no mention of exchange rate policy, but presumably the Government and their advisers have decided on a policy and how to change the rate from time to time. With an inflation rate which is still 10 per cent. higher than that of America or Germany, and unfortunately likely to remain higher than both, indefinite maintenance of the present dollar exchange rate would be an absurdity, in my opinion, unless the Government are willing to countenance a further increase in unemployment.

Yet if monetary policy has to take the strain later this year or next, as I think it may, then higher interest rates here could allow the present rate to prevail for longer than is healthy. It is unfortunate that the Government have not chosen to reveal their policy. To withhold this information from those whom it would help to make more successful commercial judgments is, at the least, wasteful. At the risk of venturing into a controversial area, I should like to suggest one possible policy that is consistent with a spirit of disclosure.

Great efforts have been made in recent years to forecast correctly the sterling exchange rate, for much has turned on this forecast. Commercial and financial companies concerned with the export of services as well as goods have had to spend valuable time and expertise upon deciding whether to hedge foreign receipts and sell them forward, or vice versa, and upon assessing the sterling value to be placed on overseas assets and liabilities. These problems, I submit, are not the proper domain of most business concerns, yet they have been taking, over the last few years, an increasing and disproportionate amount of time and effort. Now, at last, as a result of a strengthening external account, the authorities, through the Bank of England, have sufficient foreign exchange reserves—over 10½ billion dollars at the end of June, I think—to follow its own exchange rate policy and to reintroduce stability and predictability to this crucial international price.

There are already signs that we have an exchange rate which is closely tied to the United States dollar. However, what is really required is a longer term policy to be adopted which makes clear to the market what can be expected. The kind of disclosure which I have in mind—and there may, of course, be competing plans—would be for the authorities to announce a policy to depreciate sterling over an annual period in line with the depreciation of our money, sterling, against the dollar of the United States; that is to say, sterling would depreciate to offset the higher inflation in the United Kingdom when related to that in the United States of America.

Further, the authorities would announce a target rate of accumulation of foreign exchange reserves. The target could of course become the subject of Parliamentary debate. If the policy of adjusting sterling down with differential inflation led to a greater rate of reserve accumulation than target, then the authorities could either reduce the huge and burdensome foreign debt or—and I hardly dare mention this—liberalise exchange control measures. For a time I would obviously prefer the former. Such a policy, if disclosed, would introduce a degree of confidence and certitude much lacking of late. The announcement of the monetary target I mentioned previously has after all had similar force and has played a significant role in restoring confidence in the domestic context. I hasten to add that I am suggesting disclosure and not exposure. Certainly sterling should not be unnecessarily exposed when in a weakened frame. But today, when our foreign exchange reserves have never been higher, I believe a greater degree of policy disclosure would do nothing but good.

I have taken enough of your time. To summarise, while I welcome the conversion to non-Socialist measures which the Government have adopted, and while I congratulate the Government on the courage they have shown, and while I hope, along with others, that this courage may be sustained in the very difficult months ahead, particularly in the public sector, I remain worried, for the reasons I have stated, that the convert by his style has demonstrated too little conviction at this stage.

5.51 p.m.

Lord RHODES

My Lords, I should like to address one or two remarks to some of the comments made by the noble Lord, Lord Byers, about the small businessman and I should like to ask the Government a question: why is it that they persist in kicking in the teeth small businessmen who have retired, who have never had a "top hat" scheme or a golden handshake at retirement; who, because of their retirement have drawn their money out of the business and, when they draw it out, are mulcted of 15 per cent. more tax than everybody else? It is no use talking about the small businessman unless you encourage him in the right direction. Attend to this injustice and you will do more than anything to encourage the small businessmen.

I come now to my main point. If everybody in this House were asked the question, Do you think that our industrial base has been so far eroded that we cannot recover? I can imagine the mental processes that would go on! Most people would say, "Of course not". Then almost as soon as they had said that they would put a qualification to it and they would say "If we had the will, we could recover". But at the moment we have not the will to do it. In my opinion, we are applying some of our attention in wrong places. Mention has been made three or four times this afternoon of productivity. It was mentioned in a fine speech by the noble Lord, Lord Kaldor, and the noble Lord, Lord Camoys, mentioned it as well as one or two other noble Lords. I consider that productivity is the key to all our future actions.

The Government pay lip service to productivity, others say "Ah, do not let us have the productivity schemes because they were proved 'phoney' in the past". But all we need to do is to look at the newspaper of the day before yesterday or yesterday or this morning and what do we see? Split minds at work. Mr. England, the boss of the CEGB, says that there should be no Reyrolle Parsons contracts until there is rationalisation in the industry, but agrees to what the Government want provided they pay the CEGB compensation. Then there is the other one: a more humiliating spectacle I have not seen for a long time than the head of the steel industry on television last night. It was pathetic. He was talking about the prospects for the steel industry. Why do we not come clean about all this and say to the country, "We know that we have 44,000 people too many in the steel industry". Is it a productivity policy or is it a social policy? Let us be honest about it. Let us separate them, identify them, because they must be identified sooner or later. How many too many are there in the railways? A minimum of 37,000. The country is entitled to a decisive declaration by the Government—and I plead that they should give it—as to what they mean when they talk about investment and when they talk about productivity.

Alongside productivity, there must be an acceptance of the society in which we live. Anyone knows that there can be full employment in a Communist society. We could have full employment here if we had direction of labour on the same scale as they have it in Moscow. There has to be more understanding, more patience, more education and more sympathy one with the other to be able to sustain a democracy at this time, which is the most difficult time the world has ever faced.

The artificiality of population growth in the early part of the industrial revolution is another factor that has not yet been understood. Another problem that is not understood is the question of investment. Investment is of two types: the first is for productivity and efficiency and, by it, you are able to do, in a smaller space with a better machine, better work with less labour. If you can do that, you put your money in it. But today, with inflation, what do you find? You often find that you can make less profit after you have bought an expensive machine and are working it with one person rather than using an old, written-down machine in a craft industry with three people.

I will give a small domestic illustration. I want to heat my garage and my greenhouse. I asked for a price for it. It is so high that, despite the high prices of electricity and oil, it will take me 18 years before that installation begins to pay off. That is one of the deterrents. The second sort of investment is investment for capacity, but what is the use of investing for capacity unless you have efficient investment for productivity as a bone?

Sometimes I think that we are the Lord's annointed. I sometimes think that we have been blessed beyond all experience in the world. Look at what has happened to us. We had a big empire and we had imperial preference, and then we bartered away imperial preference for lease-lend. Then after that we experienced another windfall in that we cultivated our invisible exports and that helped us too. But all the time, as Lord Kaldor so graphically put it, we were dropping behind on our industrial base. Now we have got North Sea oil. One after the other, Ministers have told us time after time in the last 12 months that we can see the light through the tunnel and that everything is going to be all right in the '80s. The head of the steel industry says it too. Nature is going to do what successive Chancellors of the Exchequer have never been able to do; that is, give us an enormous surplus.

But what are we going to do with it? We made a start 12 months ago last November at Chequers. We started by asking 32 industries to give us their ideas about what their growth rate was likely to be. May I ask the Government where this has got to? Can the Government give us any encouragement as to what they are going to put this huge surplus of North Sea oil money into? At the moment, with our background and inability to make the best use of machines that are available, neither the Government nor private industry are going to benefit.

I have spent some time in Germany during the last month or two. Lord Shepherd made some remarks on this point, and so did other noble Lords. I want to give your Lordships one or two impressions. The Germans had a common cause. They wanted to make their social market economy work. They had been reduced to 62 marks per head. They had deep experience of inflation and of dictatorship. They did not want fragmentation into warring factions. They did not want a planned centralised collective economy. They opted for a balanced Welfare State and free enterprise. Hence their hard currency and their competitive edge. Their systems of participation have never been seen as a battleground for competing political and economic objectives. The centre of gravity, the whole power and meaning of participation in Germany, is in the works council system. As a result of this system, they are more practised in analysis of the business affairs of their companies. Furthermore, employee involvement in the two-tier system has never carried with it an intention to involve employees on a wide scale in management decision-making. The organisation of unions in Germany is on an industrial basis with all employees of a company being in the same union. Consequently collaboration is better and decisions are honoured.

Our honest and genuine search for a common cause has up to now eluded us. We do not generally have the advantage of the German works council system, which has deprived out employees of an opportunity to become aware of business affairs. An historic "adversary" approach has been common practice in our union affairs, and the time is now ripe for changing this emphasis. Instead of the aim being union dominance, it should be real partnership. We have to begin at the beginning and on a practical basis which gives some hope of actual improvement in the things that matter to us all. What is needed is a seed-bed in which understanding and collaboration can bloom. If a start is made with machinery to do this, which involves many more people than a few representatives, our efforts towards the desired objectives will be built on firm foundations. This may mean structural alterations in the unions, but, once there is widespread participation in companies, ways and means of making these changes are likely to evolve.

What I have in my mind is this. We are in a process where we are having to win men's minds if we have split minds as to whether the Western type of economy will succeed, we shall fail. If we can get the majority of people in this country to believe that what we are doing is right—which was the call of Lord Shepherd in his speech—and with collaboration on all sides, perhaps we may achieve a situation in which North Sea oil can really work.

6.8 p.m.

The Earl of LYTTON

My Lords, the noble Lord, Lord Rhodes, in the early part of his speech struck a note that warms the cockles of my heart, the problems of the small producer. I hope one day he will ask me to join in a debate on that subject. Today we are supposed to be taking note of the economic situation, and, more narrowly, the majority of speakers have focused on the incomes policy. That is the part which seems to me to put the finger on the pulse of what is wrong and what is difficult to cure. We are in a kind of memorial service, according to Lord Kaldor, for the abandonment of Phase 2, and at this moment of its demise I should like to congratulate the Government on having lost, or departed from, the £6 flat rate. It is the flat rate which seems to me to have brought about the destruction of differentials, so that part of the trouble now is a restoration of what has been destroyed by the flat rate.

Secondly, I think it is a matter for congratulations that the Social Contract has disappeared. The Social Contract, as I understood it, having consulted a number of Members of this House and the TUC, was an arrangement whereby wage restraint was accepted in return for more lavish expenditure in the public sector. The Government are now freed from that moral obligation to extend this expenditure at a time when expenditure is already too great, taxation too high and borrowing too expensive.

With regard to this question of wage push, of all the problems before us, I thought that this one was agreed until I heard what the noble Lord, Lord Kaldor, had to say. Not so long ago we had the then Prime Minister, Harold Wilson, saying, "One man's pay rise is another man's price rise" and prior to that Prime Minister Edward Heath saying, "One man's pay rise is another man's redundancy". I listened to Mr. Healey when he was interviewed on television after his Budget speech. The problem which his questioner felt was most deeply necessary to solve and the most difficult was that of wage push. Both Mr. Healey and his questioner seemed to think of nothing else and, in my view, that was properly so.

Earlier this year I was in California talking to professors at a university and other people. It was my first visit for 50 years. I was struck by the enormous enthusiasm for all things British, compared with 50 years ago when Californians seemed barely to think of the United Kingdom from one year's end to the other. I was on a television panel with four professors and I was asked questions which expressed their anxiety. First of all, they asked me: "Is America a dependable ally?" Of course, I answered as best I could. Then I was asked the question that affects us today; namely, "Is Britain a dependable ally?". Judging from the discussion both before and after, I think that what was at the back of their minds was: can Britain hold its wage push. That question has been asked of me from Los Angeles to heaven knows where. Everyone asks, "Can Britain do it?" In my view that is the problem upon which we are focusing today, and it is the Government's policy to tackle that problem. Most of the serious debating has focused on that problem and from my understanding of what the Liberals have had to say it is on that matter, in particular, that they base their collaboration with the Government. As regards that collaboration, I listened to the speech of the noble Lord, Lord Byers, with something near to enthusiasm. I thought that he made a splendid statesmanlike speech especially when, at the end, he asked whether there is anything which would prevent the Conservatives supporting the Government's policy in the vital respect of controlling wage push.

I thought that I was on a good wicket until the noble Lord, Lord Kaldor, quoted someone who said in effect "One man's redundancy is another man's price rise". He did not use those words, but I believe that that was the inversion of cause and effect. I do not know whether he meant that.

Lord KALDOR

My Lords, I was referring to Professor Milton Friedman who, I understand, has recently been quoted quite often in newspapers. The latest view of Professor Friedman is that wage inflation tends to be positively associated with unemployment. Therefore, the higher the rate of unemployment, the higher the rate of wage inflation.

The Earl of LYTTON

My Lords, Professor Friedman is a great name in economics—my name is not. However, I suggest that we do not follow Professor Friedman in this matter but follow the other people whom I have quoted, including the noble Lord the Leader of the House.

The noble Lord, Lord Shepherd, dwelt upon one aspect as regards controlling wage push. The noble Lord, Lord McCarthy, dwelt upon another aspect. In my view the two should be reconciled. As I understand it, the noble Lord, Lord Shepherd and others have said: keep your eye on the public sector, prevent a wage explosion there, and the rest will follow. If I understood correctly, the noble Lord, Lord McCarthy, said that that is far from the case. I am not sure whether the noble Lord, Lord Shepherd, heard what the noble Lord, Lord McCarthy, said, but the noble Lord, Lord McCarthy, went on to say that the private sector is more of a maverick than the public sector. That, at any rate, corresponds with my small fragment of experience.

I rather think that it was Henry Ford who started a breach in Mr. Heath's incomes policy before the miners finally destroyed it. Therefore, the whole matter must be contained, but how is it to be contained. That is the important question. I am sorry to say that with one exception the speech of the noble Earl, Lord Gowrie, left me gloomy and depressed. The one matter upon which he placed his finger absolutely correctly was that one cannot have a policy of free-for-all for incomes and a fixed price policy. The two do not go together and I suppose the Government know that as well as anyone else. However, apart from that matter I received no gleam of hope and, if I were to have any influence I should put my weight at this time along with that of the noble Lord, Lord Byers, behind a Labour Government. Even that policy is doubtful. I can see no alternative policy that will work. We are in a difficult position where everyone should work together if possible.

6.18 p.m.

Lord BALOGH

My Lords, the noble Lord, Lord Kaldor, and the noble Lord, Lord McCarthy, have shot most of my good foxes so there is very little that remains for me to hunt, not that I know how to hunt. This is not the first time that we have discussed the economic situation in an atmosphere of crisis. Indeed, if it were not so tragic, the situation would be monotonous and boring—the same arguments on both sides of the House and the same impotence in taking action.

We have also had five attempts, as the noble Lord, Lord Kaldor, pointed out, to try to mitigate or stop inflation by incomes policy. Those attempts ended in failure. Of course, their failure was made much of by the noble Earl, Lord Gowrie, although I did not understand his logic, because two of the five incomes policies, and perhaps the most unsuccessful ones, were initiated from his side of the House. Nor can one say that incomes policy must fail—a slogan which has been taken up quite vigorously by certain sectors of the Press.

One country where incomes policy did work is Austria. Austria has a commission which considers the possible increases in wages and then lets the corporation of labour decide about differentials. That is something which we never tried, or, rather when we did try it we did not carry it through under Aubrey Jones whose absence from this country I deplore. Austria, faced with German competition, not only did not suffer a decline in production last year but increased production. It had an enormous balance of payments surplus. Its inflation rate was one of the lowest, if not the lowest, in the world and perhaps that aspect can be taken into account by both Front Benches.

I agree very much with previous economist speakers on the detailed questions, so I shall turn to the long-term problems. Our basic problems are not at all of a short-term nature, and it is no good one Government and one Opposition Bench trading compliments or the contrary. It is a very long-term problem, which has been with us for at least 100 years, although some people say since 1866. I do not wish to enter into that very elaborate argument.

At the end of the War, when the British Government opted for freer trade, they took on a task the magnitude of which they did not realise. So long as our terms of trade remained favourable and our competitors were crippled by the war, devastated or fully absorbed in supplying their home markets, which were bare, the pressure on our exports and the penetration of our home markets was not destructive. Worse was to follow. Our share in the world exports of manufactures declined from just under 16 per cent. in 1960 to 8.7 per cent. last year. Our exports have been overtaken not only by the United States, Germany and Japan, but even by France. Even the last large bout of depreciation was unable to lift our exports sufficiently from the base point which they had reached.

I turn to capital goods. We are now importing the more advanced types and exporting the less complicated ones. In the growth industries at the frontiers of technological advance we lost out. Monetary or fiscal juggling such as was advocated by the noble Earl, Lord Gowrie, will not help us in that respect. Moreover, the international depression which coincided with the increasing dominance of the monetarist doctrine does not show any signs of a rapid improvement. In fact, after a "kick-back" last year we are now much flatter than ever before. The creditor nations steadfastly refuse to stimulate demand in the face of distressing unemployment. That bodes ill for our exports. Thus it is on an already basically unstable longer-run position that the crisis of the "third stage" of the so-called pay policy has supervened.

I believe that the mixed managed economy—the Keynesian economy—which suffered so much obloquy, has been very successful indeed. It produced a growth in prosperity unparalleled in the history of the world. We had practically 20 years without a serious set-back. We had however this fatal snag of inflation—fatal, not so much because it caused any economic distress, but because it weakened the coherence of the various classes and professions one to another.

I ask myself: what was the basic reason for refusing to see that?—because, after all, when one has had a dozen exchange crises and half-a-dozen crises of incomes policy something more serious has to be wrong than just a transitory fault. The professional economists have a great deal to answer for in this respect, because on the whole they based their advice and their pressure in the wrong direction. They have never accepted that there have been deep-seated structural changes in the economy, in particular the effect of massive concentration of economic power on the one hand through manipulation of the consumer and prices by a relatively few large-scale enterprises, and on the other through the rise of powerful trade unions. That completely destroyed the inherent balancing mechanism which never worked very well—as the noble Lord, Lord Kaldor pointed out, it worked through unemployment.

Coming simultaneously with the achievement of full employment, that concentration of economic power also resulted in strengthening the trade unions. A clash between the actual distribution of economic power and the distribution of income and wealth has arisen and must somehow be resolved peacefully if we are to prosper. This imbalance impairs the working of a mixed large-scale industrial system and must undermine the cohesion of society. Resistance against wage increases has been weakened. The law of the market—that is, the law of the strong based on sheer bargaining power—can lead only to a bitter confrontation and common ruin. The attainment of a balance without mass unemployment depends on making effective a sense of individual and group responsibility about policies for production, income distribution, management and the expansion of the public sector. I do not believe that by fiddling with incomes policies or wage policies we shall get there.

I know that these sentiments will not be easily accepted either by the weekly wage earners or by the professions—such as the new lumpen bourgeoisie of the doctors. Yet the whole problem seems really quite simple. If wages and salary demands are higher than the rate of increase in productivity and national real income, the demands for higher wages will not result in higher real incomes but in higher prices. In those circumstances, the old adage that someone's wage increase is another person's price increase is once more vindicated. It seems to me that as a nation we have forgotten the saying that we cannot get a quart out of a pint bottle. The vehement demands, backed by disruptive and nationally costly unofficial strikes, for abandoning the Social Contract and for the restoration of free collective bargaining have now been reinforced both by the professions and the manual workers. The linch-pin of the Government's policy has been severely knocked, though I hope that between now and the conferences of the TUC some more sage counsels will prevail.

The attacks on the Social Contract seem an almost complete repetition of the collapse of the previous attempts of 1950, 1961, 1967 and 1973. The abandonment of an incomes policy on those occasions resulted in disaster. Prices increased and the "freedom" of collective bargaining meant the full use of the power of the strong organisations to the detriment of the weak. It also resulted in a violent increase in costs and prices, the loss of international competitive power and the depreciation of the pound, which itself further boosted the upward spiral. A vicious circle ensued which left Britain weak and its material base undermined. Yet a drastic increase of investment is an almost absolute prerequisite of increasing productivity and income.

Nor was the much hoped-for balance in the labour market restored by free collective bargaining, although it is now hoped that the anomolies which have emerged as a result of the incomes policy will be resolved by free collective bargaining. What happened was that at each round incomes leapfrogged, leaving all discontented and riven in competitive factions. How often do we have to repeat this in order to learn the lesson? There is little doubt that the repetition of the previous lamentable sequences will produce identical distressing effects.

Lately prospects of the North Sea have been invoked as the saving of the country. I must here declare an interest as being a member of the Board of the National Oil Company. Before analysing the conditions for the oil-backed expansion to be self-sustaining, it would be instructive to glance at the much older discovery of natural gas and inquire into its effects on the British economy. Though much less important than the expected massive 100 to 150 million tons of oil per annum, it was by no means negligible. It replaced imports of one kind or another of £2,000 million per annum. If one asks oneself what its effect has been on Britain's industrial revival, or even the balance of payments, the answer is, very little indeed, if anything at all. Deficits in the balance of payments continued. This was due partly to our lack of competitiveness, and partly to the fact that the high profits earned to a large extent accrue to foreigners. The diminished competitiveness prevented us from taking a full share in producing the machines for the exploitation of gas, and the high profits earned by foreign companies of course are repatriated.

Until the creation of the British National Oil Corporation British firms did not get an adequate share in the licences or in the orders of the industry. An unremitting attention is required if in fact we are going to secure anything like the share in revenue which is now confidently expected. Nor must the fabulous expectations be aroused which would eat into the surplus, just as it had consumed the windfall finds of natural gas. It must not be forgotton that the whole of the increase in oil output represents only 5 per cent. of the national income, which can be easily wasted.

Moreover, can there be any doubt that people who went through the 1973–75 feverish inflation will, at the slightest sign of its recurrence, run for cover and create an explosion by trying to protect themselves, even if they did not want it in the first instance. Our problems cannot be solved by the closing down of loss-making enterprises. There is no precedent, however, for the cure of industrial inferiority without discriminating controls on imports.

If this analysis is at all accurate, the outcome of the battle for our economic independence and social peace is still quite undecided. The North Sea oil and gas give Britain a chance to heal an essentially old malaise due to increasing relative industrial backwardness and demands for higher living standards than correspond to its productivity. It should be clear, however, that it is a chance only and not a certainty. It must be backed by a public sector stimulus to the private industrial system, which now is in a difficult situation.

The monetarists now jubilating over the discomfiture of the Keynesian "fine-tuners" hold out for the country a miraculous escape route. Lay down (as we have) cash limits, stabilise the increase of the monetary circulation, control the hotch-potch concept of the PSBR, and all will be well. As the noble Lord, Lord Kaldor, has shown, all will not be well. How this sort of thing will work is through the creating of unemployment, and thereby creating discontent which will give renewed strength to the militants.

Its adherents, like the noble Earl, Lord Gowrie, do not explain why the loose British type of trade unionism, unlike the Swedish, German or American, should pay any attention to the rate of increase in monetary circulation in deciding on wage claims. Even that hybrid and totally artificial concept, the ratio of the gross national product at current prices to the volume of money, showed violent changes, thus paralysing efforts at stabilisation in the monetary situation. The real velocity of circulation, including speculation in commodities, property and shares, must have suffered much more violent fluctuations.

The Earl of GOWRIE

My Lords, would the noble Lord forgive me for intervening, as he has mentioned my name? I am not an unreconstructed monetarist. Far from it. Someone sceptical of the consequences of incomes policies is not, by definition, a monetarist.

Lord BALOGH

My Lords, if the noble Earl is not an adherent, then he gave a very good showing of it. This would overwhelm global fiscal or monetary controls unless they are reinforced by direct regulation of foreign exchange credit and investment. The accumulation of long-term foreign assets as the counterpart of building up short-term liabilities (which would be the consequence of loosening exchange control before a large surplus is built up) is to invite a drift to illiquidity and to hazard the repetition of the flight of capital. Even more silly is the suggestion of letting sterling rise as the recovery has been mainly psychological and could easily be reversed—I completely agree with the noble Lord, Lord Robbins, on this point—as it was of course on the impact of the trade union vote against the Social Compact.

Given our industrial structure, moreover, there is all likelihood that the sole favourable effect of appreciation, that is to say the keeping down of import prices and thereby exercising a pressure on the general domestic price level, would not function. We have already seen it. The Americans have had a slight decrease in primary prices which has already translated itself to the movement of the general price level. With us the same thing happened, and it has not translated itself to the price level. Indeed, what I find shocking is that the difference between the increase in earnings and the increase in prices, which is about 100 per cent.—8.4 against, I think, 16.2, or maybe the other way round, and in the decimal point—can only be explained by thinking that either we have lost in productivity or profits have increased, and I expect that both have happened. Even if the latter, the price competitiveness, was not a decisive factor in our difficulties, its influence must not be wholly ignored. The monetarists' escape route thus turns out to be a way to the brink of social strife.

The Chancellor has little room for manoeuvre. He will do well to ignore the siren voices which promise a painless miracle engineered by monetary juggling, and to reflect that the perils of a renewed (mostly wage orientated) intense cost-push is far more dangerous than a possible, but not very probable, menace of excess demand as a result of a more forceful drive to stabilise sensitive prices through subsidies, or finance of losses. Those who claim that all can be solved in the way in which the noble Earl, Lord Gowrie, indicated, are wrong.

This is the sort of analysis which led the chief guru of the Opposition Front Bench in another place, Milton Friedman, to whom reference has already been made, to pronounce like this on the most important question of the day in, I emphasise, April 1974: The world crisis is now past its peak. The initial quadrupling of the price of crude oil after the Arabs cut output was a temporary response that has been working its own cure. Higher prices induced consumers to economise and other producers to step up output. It takes time to adjust, so these reactions will snowball. In order to keep prices up, the Arabs would have to curtail their output by ever larger amounts. But even if they cut their output to zero, they would not for long keep the world price of crude at 10 dollars a barrel. Well before that point the cartel would collapse". This is the kind of economics which we get from the monetary school, so grossly admired by some of our more important politicians, female and male.

Our best hope lies in a strong reinforcement of the institutional structure dealing with prices and incomes. The present system of primarily stabilising profit margins has always been a trip wire, and not a help. Not having an impartial body for wage adjustments, on the lines of the National Board for Prices and Incomes, has prevented the maintenance of justified differentials.

It is the change in the structure of our economy—a long-term problem which will be with us for as long as I shall live—which demands no vehemency but conscious efforts to come to conscious compromises lest interminable collisions between the various classes of society should break into a worse situation. A permanent incomes policy, backed by an independent organ for adjudicating claims, with its attendant assurance for intensive reinvestment drive, is not a sufficient condition for the restoration of British prosperity. It is, however, an absolutely necessary prerequisite. It is to be hoped that this country, which has always found compromise solutions, will find a solution in that sense of our present difficulties.

6.41 p.m.

Lord CULLEN of ASHBOURNE

My Lords, I am in no way equipped to follow the noble Lord, Lord Balogh, or, for that matter, any of the celebrated economists who have spoken today. However, there is one good outcome of that; namely, that I shall be extremely brief and simple, though I hope not over-simple. While making full allowance for the effects of the recession in non-oil producing countries, there is little doubt that this country's economic performance, which has been deplorable vis-à-vis our competitors, has suffered grievously from the doubling of the money supply in 3½ years by the last Conservative Administration, followed by extravagance by the present Government. Perhaps, however, the abyss to which we have come so close has caused both the Government and the Opposition to do some radical rethinking, and a common sense and practical approach to our problems may be emerging. It would be wonderful if the two main Parties could find common ground over the basic principles necessary for the efficient management of our economy.

The noble Lord, Lord Shepherd, and the noble Lord, Lord Rhodes, have both made this point powerfully today. It was also a recurrent theme in the extremely interesting debate about a national recovery programme initiated by the noble Lord, Lord Hankey, last March. The noble Lord asked for a consensus between the two Parties, and, though my noble friend Lord Gowrie and the noble Lord, Lord Houghton of Sowerby, thought that this was not possible at present, in that debate the noble Lord, Lord O'Brien of Lothbury, claimed that signs of the making of a consensus were already visible. Since he has for many years been uniquely placed to judge the condition of our economy, I shall quote a passage from his very informative speech: The only way to achieve a real increase in the prosperity of our people lies in growth in the output of the United Kingdom economy. Growth from expansionary policies would, on past experience, be inflationary, short-lived and lead to the familiar grinding stop. Somehow, without the stimulus of sharp expansion, we must achieve a sharp increase in productivity and, if I may spell it out, that is in output per person employed. In far too many of our important industries, using virtually the same machinery as our competitors abroad, our productivity is dramatically lower than what they achieve. Lack of capital investment is not the trouble but inefficient work practices and a lack of common purpose".—[Official Report, 23/3/77; col. 546.] If such principles could be agreed and adhered to so that abrupt changes of direction did not occur each time a change of Government took place, let alone U-turns during the lifetime of a Government, we should stand a good chance of recovering our position in the world.

The noble Lord, Lord O'Brien, also said that the lesson of the post-war years was that the proper control of the money supply is a continuous and vital necessity. It is a relief that the Government, with perhaps some influence from the IMF, have now taken this on board. I am tempted to repeat a conversation on this subject which took place 10 years ago between two friends of mine. One was the managing director of an investment trust in the City, and the other was an MP. The MP was asked why politicians would not leave the level of the money supply to the Treasury, who would be well able to set the level as appropriate to the prevailing conditions. The Government could then direct their expenditure within those limits, in accordance with their policies, but would be unable to increase the money supply for their own political purposes. The MP replied: Don't be ridiculous. That is what it is all about. What a terrible remark, my Lords!

So let us hope that we have now achieved a consensus about the money supply, whoever sets the level. The next essential is to raise our productivity without priming the pump, and Government must resist those who say that huge wage increases must take place in order that previous living standards can be regained when it is abundantly clear that such increases cannot be afforded without equivalent—or greater—increases in productivity. This would only spell higher inflation, further unemployment, and more small businesses going to the wall; and it is in small businesses that the vast majority of people are employed. Surely the answer is properly monitored productivity schemes, with wage increases being dependent on the degree of achievement.

I realise that such schemes would not be applicable in all sectors, and that there will be special cases, such as the police and the nursing service, where the increased productivity of others will be needed for their support. But can we not make a real effort to set up productivity schemes in all appropriate industries, such as manufacturing industry? It is well known that our pay scales are low in relation to those in other countries. This is caused by our low level of productivity. These pay scales must be steadily raised, or even more of our best people will emigrate. But they have got to be earned. There is no other way.

In order that concerted efforts to increase our productivity shall succeed, I think that it will be necessary to grasp the nettle of unemployment pay and I hope not to get stung in raising this controversial matter. Those who have tried in vain to find work know only too well how miserable and how damaging to self-confidence is such an experience. To assist such people and their families is a must in any civilised country. But have we not got into a situation today when some people turn down jobs because they are as well, or better, off with unemployment pay, than with the pay, after tax and travelling expenses, of the job offered? Is there no way in which we can differentiate between those who are desperately seeking work, and those who would just as soon not work so long as their daily needs are provided by the State? Of course, it is only a minority that exploits the benefits that are provided, but should we not have a time limit for the provision of benefits to this minority, after which a reduction of benefit occurs?

I give place to nobody in sympathising with those who are unable to find work, but I am just as sympathetic to those who stand in a bus queue on a cold wet Monday morning to go to work, knowing that the exploiters are still in bed. We have, I believe, the best Civil Service in the world, and I cannot believe that a really fair system on some such lines cannot be designed. Perhaps there is such a system in existence, but if there is it is obviously not properly implemented.

In conclusion, my Lords, I am persuaded that we need to strain every sinew to increase productivity nation-wide. What I should particularly like to hear from the noble Baroness is whether or not Her Majesty's Government have yet formulated plans for effective productivity schemes, or whether they intend to do so.

6.50 p.m.

Lord GORDON-WALKER

My Lords, I congratulate the noble Lord on his brief (which is important at this stage of the debate) and very clear speech. I think he is a little optimistic when he thinks that we will get a consensus on the question of monetary supply. Listening to this debate, that was not the conclusion I drew. It seemed to me there were very strong differences of opinion. None the less, I am sure he is right that we need a reasonable degree of consensus, though we do not want a consensus which will abolish the differences between Parties and people. I think that, on the whole, in this debate we have moved some way towards the only means of getting such a consensus, which is to get an agreement on the analysis of the economic problems facing us. In my view there has been some progress in that direction; certainly I have changed my views a little while listening to various speakers.

The speeches made in this debate have confirmed my conviction that there are two things that you can say with fair certainty about an incomes policy. One is that by its very nature an incomes policy cannot last longer than two years; and the second is that when it comes to an end it creates very great problems of transition following upon its conclusion. An incomes policy is in some ways like a dam, behind which frustrated demand piles up. It does not disappear; it piles up. Even more important, since an incomes policy must be in uniform terms, either as a sum or as a percentage, this must erode differentials on the factory floor, in the office, among doctors and elsewhere; and jealousy about differentials is a much more potent cause of discontent than actual movements in the standard of living or almost anything else. Jealousy about differentials is a real cause of human discontent and anger; and experience teaches us that we cannot bridle this jealousy longer than about two years once we have launched out on an incomes policy, which produces this jealousy.

After two years, as it is now, we have in fact to let some water over the dam, and we must manage to do this, if we possibly can, in such a way that the countryside below the dam is not flooded. I think the experience of the wage explosion in 1974–75 has left us with perhaps an exaggerated fear, or certainty, of the effects of reflation after the end of an incomes policy. Because it has happened once, twice or even three times, it is assumed automatically that, when you bring an incomes policy to an end, there must be wild inflation and a free-for-all. But it seems to me that the circumstances today are somewhat different. For example, in 1974–75 everyone knew that the exorbitant pouring of money into the economy by the noble Lord, Lord Barber, about which the noble Lord has just spoken, made heavy, near future inflation inescapable, and that pay settlements of about 28 per cent., made in anticipation of inflation already in the pipeline, were inescapable.

Today, the situation is somewhat different. Practically all the forecasters agree that the rate of inflation will fall, not immediately but within the next 12 months, and this makes much more hopeful the chance of getting a fairly smooth transition (one will never get a completely smooth transition) to collective wage bargaining. The chance is enhanced because, as my noble friend Lord Kaldor said, this bout of incomes policy, based on agreement with the trade unions, has brought about a further instalment, and a very important instalment, of a wider understanding that undue wage increases are self-defeating because they produce inflation. Each time we have had an incomes and wages policy I think we have had some element of that education. This time, I think there has been a great deal more because the TUC came out so openly and explained the matter in terms which very many trade unionists could understand.

One question is what the Government can do to help in this, not quite so difficult a situation as sometimes in the past, but still a difficult situation. Personally, I am rather doubtful whether the use of indirect coercive measures, such as have been indicated by my right honourable friend the Chancellor, will be of use. I think they are going to be very counter-productive and will encounter (or would encounter if used), and indeed engender, resistance on both sides of industry. It is quite easy to say that you will use this sanction and that sanction—very often, I may say, given the Government for different purposes altogether— but I am not sure that that kind of sanction will work. I think it may encourage and challenge resistance.

I think the main supporting policy of the Government ought to be fiscal. I think they should keep a reasonable check on the supply of money. I do not believe that that solves everything—indeed, it creates enormous new problems—but to rely upon it among other things seems to me to be sensible. But the main action the Government can take lies in the fiscal field; that is, to reduce income tax. It is a very simple proposition, but I think there is a great deal of truth in it. I think income tax should be reduced mainly on lower incomes, but in fact at all levels. I think income tax has become much too high all round. There has been a start by my right honourable friend the Chancellor of the Exchequer, on which I congratulate him, and I hope he will go further in this direction in his next Budget.

If it is necessary, after you have reduced direct taxation, in order to keep money supply in check, then you should increase indirect taxes. It is better to increase indirect taxes and reduce direct taxes than to keep direct taxes at their present level. I think there is little doubt that the taxpayer, faced with the awkward choice of one form of taxation or another—he does not like any taxation, but faced with that awkward choice—would prefer indirect taxes, which seem much more invisible and which do not make him feel he is paying in the way that direct taxes come out of his pocket, out of his cheque book or out of his wage packet. People will prefer indirect taxes which they cannot feel and which are voluntary because, of course, they fall on objects, which means that if you do not consume you do not pay the tax. In that sense, they are voluntary taxes.

I think this present move away from an incomes policy should not be considered a defeat for the Government. My noble friend Lord Roberthall, who loves an incomes policy—he is almost in tears when it disappears—I think must explain how those countries do best in the world which have no incomes policy and never have had an incomes policy; Germany and Japan, for example. I know there are other explanations, other factors, and my noble friend Lord Rhodes gave a description (not an actual explanation, but a description) of what had happened in Germany. None the less, these two countries, to mention just them, which do wonderfully well, will have nothing to do and have never had anything to do with an incomes policy. There must be some truth about this. I do not mean that by abandoning an incomes policy we immediately become as good as the Japanese or the Germans, but many noble Lords have said, "It is a terrible thing; we must get back to an incomes policy"; but, then, we would again pursue a policy which is eschewed by the countries which do best in the world.

Lord KALDOR

My Lords, perhaps I may interrupt my noble friend for a moment. I believe he exaggerates the contrast between Germany and Japan, as countries which do not have income policies, and, say, Britain, which has one. I know a little about Japan and also something about Germany. In Germany the fact is that the Government are very much involved in the annual negotiation of wage settlements. The rate of increase in wages, whether it should be 7 per cent. or 8 per cent. in general in a particular year, is the result of a great deal of central negotiation. The same is true of Japan. I was in Japan two years ago when many columnists said that the Government must congratulate themselves because they managed to settle, in respect of the whole country, for a wage increase of 14 per cent. in a year in which prices went up much more than that. That is possible because in those countries the Governments can negotiate centrally and in this country they cannot.

Lord GORDON-WALKER

My Lords, I am grateful to my noble friend. It still seems to me true that that is not a wages policy and not an incomes policy. It is a substitute for it. It may work; it may break down; Japan may have trouble over that. I can understand that the people who think that that is the right way should advocate that here; but that is not to say that we need an incomes policy when Japan has not got one and Germany has not got one—although there are other advantages of single unions and so on. I do not think there is a strong case for the great merits and beauties of an incomes policy. I think that our longer-term aim, after we have achieved (as I hope we shall) a smooth transition to collective bargaining, should be to go the same way as those countries that have not got an incomes policy of our kind; to have a high-wage, high-productivity and high-investment economy. That is what these countries have and that is the real distinguishing mark. I think that the incomes policy during the last two years was probably right and necessary in the light of the problems that the Government found themselves faced with; but I must say that I hope never to see the reintroduction of an incomes policy into this country.

7.2 p.m.

Viscount HANWORTH

My Lords, at this time of night, I think your Lord-ships will be relieved to know that my speech will not last more than about eight minutes. It will not, probably, be one very acceptable to either of the major Parties. There is just one theme running through it and I think that in a debate of this length one should perhaps try to make only one major point.

Economics is an art and not a science, an art because future predictions depend upon the uncertain reactions of human beings. One is entitled to take a very basic and simplistic point of view because we should not be slaves to sophisticated economic theory where most experts disagree. More importantly, there is the question of the extent to which we might alter present economic constraints to provide what we want in a future society. This, I think, is what the Tribune group is trying to do, but, I would say, almost without regard to practical considerations. Its members' views are, in my opinion, largely emotional and, as such, dangerous because they do not know where their policies are leading.

As I see it, we cannot regard the economy as showing any real signs of recovery unless we can meet at least four requirements: first, to bring inflation under control; secondly, to decrease overseas borrowing to reasonable limits and to balance our Budget both at home and overseas; thirdly, to reduce unemployment; and, fourthly, to increase our gross national product. All these requirements are to some extent interrelated and it is often possible to rectify one at the expense of the other. That is what the Labour Government did previously so far as the overseas balance of payments were concerned; but they landed the new Conservative Government with potentially explosive wage claims after a period of wage control.

Considering that both Parties, in spite of fiercely opposing wage control, have had to adopt it and that neither have so far even begun to solve our problems, I think we should hear a little less about Party politics in this issue. I agree with what the noble Lord, Lord George-Brown, said in an article in an evening paper some fortnight ago. We have arrived at a point where this country is ungovernable by our existing, outdated political machinery. This was forecast by many a few years ago; the fact that it has occurred is not now admitted. It is no good taking the view that government by consent is democracy when, in fact, it is giving in to small activist minorities and is out of line with the wishes of the majority of the electorate. What was Grunwick but a blatant disregard of the rule of law and an attempt to influence an issue, whatever its merits, by mob rule and bully-boy tactics? As the noble Lord, Lord George-Brown said, the Government simply stood by and talked about the seriousness of the situation.

In the sense that they matter for this country's future, economics are not a question of economic theories; it is a question of getting people's attitudes to help with the road to recovery. What worries me is this: without a change in the views of our extremists or a determination to neutralise them and a determination among our workforce to put self-interest second to national requirements, we have no real hope of recovery. What I fear is that neither of these requirements will, or I might even say, can, be realised by our existing Parliamentary system. If not, the end is inevitable. It is autocratic government by the extreme Right or Left, at the outset. It matters little which.

Democratic government as we know it will not and cannot long endure under the present economic circumstances. I believe that many people will agree with me. Still I see little public sign of the changes which must be made. The Conservatives only seem to think of the next election and not of their continuing future; and we have not today heard from the Opposition Benches any really useful prescriptions to solve our problems. The Socialists, in disarray, are paralysed so far as making the long overdue reforms in their Party and their relationships with the unions is concerned.

In ending, I repeat, for at least the fourth time in this House, what I and others have said before: there is only so much GNP or national cake to be apportioned. Soaking the rich or taking the profits from companies will produce almost no improvement to anyone. The present situation is that those with bargaining power—and this was referred to in more than one speech today—get the best deal and always at the expense of others. Is this Socialism in any useful meaning of the word? I am forced to conclude that it is not. Much of it is simply power politics to which, for one reason or another or possibly unwittingly, some idealists subscribe. There are several possible solutions to the wage problem: that proposed by the noble Lord, Lord Brown, who sits on the Government Benches, is one; but there are many others. Yet the major Parties are power-less in the grip of outworn traditions; they continue to pursue self-interest on the road to doom or, at the very best, to an enormous decrease in spending money and free national facilities for all of us.

7.11 p.m.

Lord HOUGHTON of SOWERBY

My Lords, we have listened to a sombre speech from the noble Viscount, Lord Hanworth. It was not the first gloomy speech of the day. The earlier one was from the noble Lord, Lord Robbins, who has been in his place throughout most of the debate but has left the Chamber for a moment or two. I do not hold these gloomy views about this situation, though I must say that I think the debate would have been on a more authentic level had we had more representatives speaking in it from both sides of industry.

I am surprised to find myself the first speaker in this debate with long past and present links with the trade union movement. Where are the captains of industry telling us how they feel this situation affects their policies? My noble friend Lord Kagan is one of the few active industrialists, battling for exports in Europe, who comes back to your Lordships' House as frequently as possible to say what it feels like. In debates of this kind we are nearly always lacking noble Lords who are active on both sides of industry and who should attend to give us the benefit of their experience.

I hope that when we come to reform your Lordships' House we shall make room on the Bench of Bishops for the top brass of the TUC and the CBI on comparable terms of tenure and membership of this House, so that they at least can address your Lordships in Parliament and add to the great debate in the nation. Then we shall have the Lords Spiritual, Temporal. Industrial and Commons assembled in Parliament, which is probably the ideal representativeness of Parliament. Now—

Viscount MASSEREENE and FERRARD

My Lords, may I interrupt the noble Lord?

Lord HOUGHTON of SOWERBY

No. I have listened through a long period of this debate. The hour is late; I have a few things to say, if the noble Viscount does not mind. We have now come to the end of an incomes policy of which we have had numerous editions since 1945. As my noble friend Lord Gordon-Walker said a few moments ago, the kind of incomes policy that we have had has lasted for scarcely more than two years. I cannot recall any since 1945 that has gone into Stage 3. The period of two years is about as long as people can stand of the distortion, of the pattern of remuneration, of the differentials and relativities of various kinds.

I remember listening recently to a general secretary of one of our largest unions who was describing the number of different rates of pay within his union and the narrowness of the differentials between many of them. which were held very jealously by those concerned. It was a distinction of their position and status and an acknowledgement of the skill of their work; they cherished that and did not like this flat-rate business and other curtailments of the normal exercise of differentials in pay.

Whatever happens, the stage that we have reached now was not only to be expected, it was inevitable. Our anxiety now is as to what is going to happen. If we want any confirmation of the grounds upon which the membership of the trade unions feel unable to continue the present incomes policy, we have only to look at the news tape this evening to see that in the first 10 months of Phase 2 wages have gone up by 8.8 per cent. and prices by 16.3 per cent. That explains why Phase 2 has come to an end, and we can quite understand it.

We are now to have an orderly return to free, voluntary bargaining. What is that going to do for wages, for prices, for salaries and for contentment? What we are worried about is whether we shall have a leap from cuts in real wages to a boom in unreal wages, which is what happened in 1974. That explains in part why the internal value of the pound sterling of 1970 is only 40p today, despite the recession, two General Elections, a series of Budgets and some well-observed stages of an incomes policy.

I share the view of my noble friend Lord Gordon-Walker that we have grounds for believing that what happened in 1974 will not happen now. We are three years older, we have had more experience of this long and anxious period of adjustment to these conditions. One matter I am hopeful about this time is that the resumption of normal pay negotiations will put productivity, output and efficiency back into the argument. I heard Sir Charles Villiers, chairman of the British Steel Corporation, whose own industry is in serious difficulties, offer a somewhat cautious welcome to the opportunity of again getting productivity into the pay negotiations. This is badly needed and was neglected during the period of the Social Contract. It was too automatic. The entitlement was stressed and underlined by the TUC that this was not really negotiable, this was not subject to the ability of the industry or the enterprise to pay. It was an entitlement, a manna from heaven bestowed upon a struggling mass of people who wanted their wages made up to meet increased prices.

If we are going to make a virtue of necessity—which is always a good thing—employers and the unions themselves have a duty to examine very closely indeed the contribution which increased productivity, greater output and efficiency can make to meet claims upon resources of increased pay. That is all we have to do: support the money by the resources, by the output the exports and the efficiency. We all realise how narrow a margin of improvement is needed in order to do that.

Another thought in our minds is that a great deal will depend on how the biggest employer in the country, the State itself, representing a third of the total workforce, is going to behave in the whole field of public services, nationalised industries and so on. Any employer who is responsible for a third of the total workforce in this situation cannot shirk its responsibilities and I believe they are very heavy indeed.

I listened earlier with great care to my noble friend Lord McCarthy. He and I have both had experience of the consequences of artificially holding back the level of remuneration in the public sector while the private sector surged forward, and then having to see how the gap that had been created could be filled. My noble friend dealt with the railwaymen and I dealt with the teachers; but by the time I came on the scene in 1974 the gap to be made good was 32 per cent.—£420 million added to the teachers' wages bill in one year, with subsequent additions in 1975. That is the awful consequence of artificially holding back the public sector while others go forward, and then having to try to bridge the gap in one fell swoop. Not only is it dreadful for the Chancellor of the Exchequer but it can lead to very serious unrest in the public sector itself.

During the whole time of the inquiry that I conducted into teachers' pay, the teachers in Scotland were on strike because 8,000 lorry workers in Scotland had had a settlement of an undisclosed amount—later revealed to be 40 per cent. The posters that I met when I went to Scotland were all asking whether teachers were worth more money than lorry drivers. That is the kind of thing that can happen; and the teachers in Scotland did not go back until the inquiry was completed, which was a period of several months.

The point here is that if the Chancellor's judgment of what the economy can safely stand is correct, and if it is not more than 10 per cent. for the country as a whole—all of us, everybody—then what has he to say about the public sector? I think this is going to be a very grave decision for the Government to take. Will the Government be clear and firm that, in the public sector as a whole, pay increases will not exceed the figure laid down for the country as a whole? If the Chancellor does that without a very careful approach to the staff interests concerned and with full understanding of how he proposes to apply the principle, then he is bound to encounter quite a lot of trouble.

There is one feature of the present situation which helps the Government, and that is the 12 months' rule. That must be stuck to. The Trades Union Congress want it stuck to, the Government want it stuck to, and it should be stuck to. Come what may, I think the 12 months' rule must be maintained; otherwise another floodgate can be opened. If that is so, the Government will have a little time to consider, in conjunction with all the interests involved, how they are going to deal with the public sector and how they will proceed to get co-ordination and hold the balance fairly, as between one section and another, with 7 million employees. One thinks of such explosive elements in this situation as the doctors, the mineworkers, the railwaymen, the engineers, and so on, all of whom occupy positions of great strategic importance in national affairs. But there must be some reconciliation somewhere along the line because few settlements of any importance can be reached in isolation. Time does not permit me to go further into this: it is a detailed matter to examine the possibilities of the treatment of the public sector situation which my noble friend Lord McCarthy began to outline in his speech. Certainly it is highly interesting and very important.

I should like to turn to a matter which so far as not been much stressed during the debate. My noble friend Lord Rhodes devoted more time to it than anyone else. I refer to the so-called "industrial democracy" side of this matter. That cannot be overlooked. I have long held the view that there will be no real health and prosperity in Britain until both sides of industry, are enthusiastic about promoting the welfare of the mixed economy. We must endeavour, I think, to blur, even if we cannot immediately remove, this divisive situation between the two sides of industry, which are often politically divisive as well and which undoubtedly lead to a pull against maximum enterprise and efficiency. If my noble friends Lord Rhodes and Lord Gordon-Walker want the clue to the situation in West Germany, it is that the ideological struggle is no longer on the shop floor. That is the explanation. Having had works councils in Germany in the private sector as well as in the public sector for as long as we have had the Whitley Council system in this country—that is 60 years—they have built up an expertise and an understanding of the working of industry which qualifies them for membership of the supervisory boards.

I hope that my noble friend who will reply to the debate will be able to say where the Government have got to now in their consideration of the Bullock Report. There was a commitment by the Government to produce legislative proposals during this Session of Parliament, and we all know the Government keep their promises; commitment after commitment is fulfilled. I am now going to ask my noble friend to come clean and answer the question: "Where has Bullock got to?" It is important that we should know, and it is part of the new strain we are going to put on both sides of industry to meet this new situation.

In conclusion, I shall say only this. My noble friend Lord Rhodes and the noble Viscount, Lord Hanworth, both expressed some doubts as to whether our system of democracy could survive the strain of conditions in the world and in this country today. I am pretty optimistic about that. I see no real sign that our institutional life is going to break down. I do not believe for a moment, notwithstanding the power now resting in the hands of the TUC and of the unions generally, that if they understand what they are doing and face the situation, they will do anything which would destroy the effectiveness and the authority of our institution of Parliament. Nevertheless, I think it is true that it will rest with all of us in the next few months to decide whether Britain is going to move forward to a period of fresh confidence and prosperity or whether we are going to sink into being a kind of stricken country, gasping for oil. That may be our fate if we cannot make progress in the other direction.

7.29 p.m.

Lord KAGAN

My Lords, it is always a great pleasure to follow the noble Lord, Lord Houghton. I find it easier to admire him than to emulate him; so I hope that your Lordships will put up with my rendering. My noble friend the Lord Privy Seal has given us so able an account of the improvement in our financial position and has pointed to the opportunities ahead; but the noble Lord, Lord Byers, has really identified the root cause of the problem in our economy. As my noble friend Lord Houghton said, we in industry feel it; the root cause is our taxation system. To attempt to run successfully, without incentive, a mixed economy which is relying heavily on the private sector, is as futile as attempting to achieve a happy marriage without love. It cannot be done.

All Governments, regardless of political colour, have, through the instrument of the Treasury, evolved a system which conveys one message to industry: For effort, excellence and risk, you will not be rewarded, but we will pretend to reward you. Because pay after tax, particularly at a higher level, is pretended pay, whether it be the highly-paid miner or the highly-paid executive in industry. An inevitable response of an intelligent people—and I believe that our people are intelligent—is: If you pretend to pay us, we will pretend to work. If you give us 50p in the pound, we will give you 30 minutes' effort every hour. It figures. This is the simple explanation of our lack of performance, and all else follows from it—low productivity, slow or no growth.

As the noble Lord, Lord Byers, urged us, we must take a hard look at our tax system. We have to change from taxing earnings to taxing spending. Those countries which collect their revenues through taxing spending—and I am afraid that they include the Communist countries—have found that taxing earnings erodes incentive, while taxing spending increases incentive. It is as simple as that. Why on earth successive Governments have not come to grips with these facts is very difficult to explain. Given the release of energy and drive which such a change of policy would inevitably bring about, the wealth would be created to sustain and expand the Welfare State and the resources would be created to expand the public sector, which we have to do if we want to stem unemployment. For we cannot contract into a better future. We must expand into it.

We have the talents, we have the skills, we have the know-how and now, with the help of North Sea oil, we have the resources. Why not give the workers and entrepreneurs of this land a reason for trying? They will not fail the country. There has never been a better time than now. North Sea oil is enabling us to have a healthy balance of payments, it is enabling us to pay off our debts and it is giving us a great credit base; and may one mention the fact that it was the vision and wisdom of a Labour Government which did more than anything else to encourage North Sea oil?

The noble Lord, Lord Byers, pointed to the importance of small industries. We have them in Yorkshire, and we know them well. They are labour-intensive, they require comparatively little capital investment, they are flexible and they respond to market demands and opportunities, effectively and quickly. They are, as the noble Lord, Lord Byers, so eloquently put it, the seed bed of talent and the creator of innovation. The small business of today is indeed the big business of tomorrow. But how well the noble Lord described the problems—buried in bureaucracy, filling in forms one does not understand, waiting for planning permission and suffering delays which frustrate, and yet they have survived. But they deserve better.

May I give one example to your Lordships. One-fifth of clothing in the world is bought on the basis of need, and four-fifths is bought on the basis of want; in other words, fashion. Young British designers and entrepreneurs have recently captured a dominant share in world markets in this field. This could not have been done by the great organisations. But as soon as they grow to middle size, they are advised by their tax advisers to sell up or join big companies. The reason is taxation. Unless they sell out, they cannot seek rewards, or can only look to a future where they pay up to 98 per cent. taxation. So they retire at 35 or 40, and their talent is lost or diverted.

These are very labour-intensive industries. Here you can have rapid expansion of jobs, particularly for the young, and if we do not create jobs for the young we shall put at risk the very fabric of our society. Unemployed youth feel rejected by the system and they, in turn, tend to reject the system, our values and, in many cases, our morals. The increase in unemployment is the best opportunity to recruit adherents for the opponents of social democracy. This is, in my view, the cause of the disturbing growth of the National Front, and these young people are a God-sent opportunity for all those who want to recruit for whatever extremism it may be, whether of the Right or the Left. So may I very warmly support the appeal of the noble Lord, Lord Byers, that the Government should fundamentally come to grips with incentive in industry.

7.37 p.m.

Baroness SEEAR

My Lords, I should like first to congratulate the noble Lord, Lord Kagan, on a most excellent liberal speech and thank him for his appreciation of the speech made by my Leader, my noble friend Lord Byers. The noble Lord the Lord Privy Seal began by comparing the position today with the position a year ago. I should like to ask your Lordships, in a moment of imagination, to cast your minds forward a year to the position that we may be in in 12 months' time. As is so often said, a week is a long time in politics, but a year is a very short time in the life of the nation.

As I see it, we are now at a parting of the ways. Either we shall go forward along the difficult rocky path up which the Government, having undergone a belated conversion—but all conversions in the right direction are welcome—have been climbing for the last 18 months, trying to cure inflation, trying to make progress on the balance of payments and, perhaps above all, firmly controlling the monetary supply, or we shall turn back. We shall then fail to control pay increases and, as a result, we may be pressed into giving way on monetary policy. If that happens, it is goodbye to the improvements in the balance of payments, except in so far as we squander the proceeds of the oilfields in order to hold our own, and that would be a very short-term form of survival. So, as I see it, this is a moment of the greatest importance; a real moment of decision as to which way we are going. Because it is so important and because, in some senses, it is a race against time, even in six months' time the position, if we have held it, will be easier still to hold, although we should not be seduced into thinking that time is necessarily on our side.

There are encouraging economic indicators. There are also some disturbing rumblings on the horizon. The world recovery is not going as many of us had hoped. If it does not proceed and if at the same time we lose our grip on what is happening here, then our plight in 12 months' time—and that is no time at all in historical perspective—will be even worse than it was in the summer of 1975 when I remember that the noble Lord, Lord Shepherd, said so poignantly, because he was handling that very difficult situation, "The British people looked over the abyss and turned back". But if they go into the abyss now, the recovery will be far more difficult than it was in 1975. So this moment is of supreme importance. That is why I propose, in the brief time available to me this evening, to speak about the short-term measures rather than the long-term needs.

Much though I agree with what has been said, in particular by the noble Lord, Lord Balogh, and the noble Lord, Lord Rhodes, to the effect that we are confronted with a long-term problem, this is not a situation which has recently come upon us. Changes are needed in industrial democracy, and also—and pre-eminently—we need a restructuring of industry. However, that is a long-term issue, and what we have to do now is to focus on the short-term, provided that we do nothing in the short-term which makes it more difficult for us to take the steps which we need to take for our long-term recovery. Those two aims must be held in focus.

In the short term, what have we the right to ask the Government to do, and what should be the attitude of the Opposition Parties? For despite the jeers from the Tory Front Bench, we still are an Opposition Party. We are entitled to ask the Government to stick firmly to the policy which was laid down last Friday, to stick to the 12 months' rule and to hold the line at an overall 10 per cent. If the Government will stick to that policy, they will have the backing not only of the Liberal Party but of all people who realise that this is a moment of very great historic importance—a moment like those in 1940 when people were prepared to say that Party was of relatively little importance in comparison with the odds which were confronting us then. The Government should stick to what they have said.

What does that mean? First, it means that, in their dealings with the people that they themselves employ in the public sector, the Government will not flinch from enforcing the 12 months' rule and that they will see that, overall, the earnings rate does not rise above 10 per cent. To be completely topical, the Government should tell the doctors—as is so often said, many of my best friends are doctors—that they cannot have the kind of pay claim for which they are asking. The Government should tell the doctors that they can have 10 per cent.; that if they like to share it out so that some sectors of the medical profession get mere than others, that will be up to them, but that they cannot have more than 10 per cent. If we give way there or in the case of the dustmen, the miners or anybody else, there will be problems. The Government must stand firm, and, if they do, all people of good will will stand firm behind them.

The Government must also monitor the increases in the private sector. I am sorry that the Government's White Paper and their Statement last week did not include a promise to use fiscal measures if, overall, it is found that earnings increases are rising faster than the lines laid down overall by the Government. I do not see why the Chancellor has drawn back from this. In his Budget speech earlier this year the Chancellor said that if there were a pay deal he would reduce the level of tax. All we are asking the Chancellor to do is to say that if earnings get out of hand he will claw back, through fiscal measures. What, logically, is the difference between saying that there will be a concession on tax if pay is controlled or, if pay is not controlled, that then it will be clawed back? The commitment which the Chancellor made in the Budget is entirely in line with what those of us who have asked that at the end of the day there should, if necessary, be fiscal sanctions, are asking for. Although I hope that the Government will think about this again, if such a commitment cannot be obtained the Government ought to use all the advantages that they have to make the handling of this difficult policy as easy as can be, without making any concessions—for concessions they must not make.

Let us remind ourselves that 10 per cent., in terms of growth rate, is far too high. In today's situation, because of what has been happening to prices we know that it is quite unreal to pretend that we can get less. Even so, it is an inflationary settlement, but there are ways in which the Government, while sticking to this policy, can make it less difficult to apply than otherwise it might be. Some of these ideas were incorporated in the Government's Statement, while others were not. There are ways in which people can genuinely feel that their position is being improved, without increasing inflationary pressures.

To the extent that improvements are made to occupational pensions instead of being put into the wage packet, there is a long term improvement for the individual without an inflationary consequence. Similarly, the genuine productivity deal is not inflationary, because there is an increase in goods or services to match the additional money paid out. The Government ought not to be afraid of productivity deals if they institute a monitoring system to make sure that those deals are genuine. Also, the Government ought to encourage the employers to stiffen their backs. I know that this is difficult but it has to be done. Indeed, it is difficult for everybody—for the Government, for the trade unions and for employers—not to give way on productivity deals, which are simply a means of collusion between employers and trade unions to drive a coach and horses through the 10 per cent.

The same applies to profit sharing. I regret that the Government did not see fit to put into their Statement encouragement for profit sharing schemes. Surplus profits paid out after success has been achieved—after the goods have been made, costed, which is very important, and sold—can be paid out without the inflationary risks that are incurred if they are paid out before the goods have been made costed and sold—or not sold, as the case may be.

I go along with the noble Lord, Lord McCarthy, in his suggestion that we should revive the idea of threshold payments. The noble Earl, Lord Gowrie—I do not want to turn this debate into a Party political battle, because it is far more important than that—referred to the contribution of Lord Barber. I have always thought that Lord Barber was singularly unlucky because of the timing of his policies.

I think my dates are right. I believe that the worst mistake which Lord Barber made—perhaps the noble Earl, Lord Gowrie, has forgotten this—was early in 1972, when the TUC came along with the idea of threshold payments, before the pay increases took off in a big way. I do not know who was advising the noble Lord, Lord Barber, at that time, but he turned it down. He turned it down at that psychological historic moment when it is just possible that if it had been accepted then we would never have had the huge take-off. Why were those huge pay increases put in? Because everybody was afraid that if they did not get their pay claim in first at an extremely exaggerated rate, prices would overtake them. The fact that they got them in before prices overtook them made it absolutely certain that prices would rise to a phenomenal extent. If the threshold suggestion had been accepted then there is at any rate a chance that those astronomical increases would have been held in check.

I know that the threshold agreement arrangement has many perils and many difficulties in it. It has to be handled with great care and certainly threshold increases should not be consolidated into the basic rate because that is one way in which it leads to a tremendous take-off. But 10 per cent. does not mean that people can have it as a starting point; it must average 10 per cent. of earnings, and that means that one must start lower. That lower figure—and the noble Lord, Lord McCarthy, suggested about 7 per cent.—will sound extremely low in the face of price increases running at 17 per cent. The only hope that this will make sense to people is if they can be given a guarantee that, as prices rise, there will be a quid pro quo in threshold terms. But the arrangement would have the great advantage that, if we could get an acceptance of 7 per cent. plus a threshold promise, over these next important five or six months, wages would not be accelerating faster than prices. They would follow on; they would not anticipate. This would reduce the global amount paid out, and it is the global amount paid out that leads to uncontrollable inflation. So I beg the Government and the TUC, through the Government, to look again at the threshold idea.

Above all, I beg the Government to do something which I urged two years ago should be done. It all depends now on how well the rank and file in the country understand the problems that we are up against. The TUC are saying that it is in no position to control pay. It is being honest about this; it is in no condition to control pay. What will control pay is the good sense of ordinary people and the energy of ordinary people if they can be galvanised into going along to their branch meetings and preaching common sense to the people who represent them. The best chance of that happening is if people who already understand the position better than they did three years ago are kept really up to date with what is happening.

I understand that in Germany the Government take a great deal of television time—or rather they take television time with great frequency, because one does not want long lectures—to show people what is happening in terms of pay, prices, balance of payments and the essential economic indicators. They keep on plugging it so that the people can watch it as they watch the football pool results and the other sporting events that they follow to see how matters are going, so that the public can monitor progress or the lack of it. This really could be done and it would pay enormous dividends.

I should also like to see an all-Party campaign stumping the country to get the economic truths over to people up and down the country. We did it on an all-Party basis, for the European referendum, explaining the facts to the people; why can we not do the same thing now? Why cannot all parties go out during the Recess, laying the facts before the people and putting over the message of what is at stake. The Government can do a lot by the visual presentation on television of what the economic indicators are saying, continually bringing the information up to date so that they get their message over to the rank and file in whose hands success will lie. I implore the Government to think seriously about the ways in which this could be done.

These are the things we ask the Government to do: what is it reasonable that the Government should ask the Opposition Parties to do? Surely the least we can all do is to support the Government if they will stick to the policies they have laid down. It is not for me speak for my right honourable and honourable friends in another place, but I am pretty certain that I am right in saying that the Government will have our support if they will stick to their policies, but that we cannot, in loyalty to our own principles and also to the needs of this country, support them if they run away from their own policies. I am sure that this is being said in another place and I am sure that I am right to say it here. We will give them that support and we know that in the country as a whole there is strong support for this policy to succeed.

Unlike so many other speakers I am not sorry that we have not got a fixed norm and a tied-up social contract. I think the weaknesses of that system are apparent: the norm becomes the minimum and it takes concentrated power away from the rank and file, to which it should return. I believe it is a healthy thing in a democracy which should be pluralist and in which decisions should be widely spread, that decisions should not all be concentrated in settlements between the TUC and the Government. Let those decisions be made where they ought to be made, but let the Government keep the ultimate control. So long as they determine to do that, they will have our complete support.

7.57 p.m.

Lord CAMPBELL of CROY

My Lords, the House has the benefit of a unique assembly of knowledge and practical experience in economic affairs, and among the speakers today there have been at least three noble Lords who have been official advisers to Governments on economic affairs. Other noble Lords who have spoken have applied their minds and ability, recently and over the years, to the apparently intractable problems with which our country has been afflicted. I have found the debate stimulating to listen to, and I hope the Government will carefully consider the many comments and suggestions which have been made from all parts of this House.

This is a seasonal debate on the economic situation and it comes fortuitously a few days after this year's July "mini-Budget"—the Chancellor's Statement last Friday. That Statement was not only budgetary in announcing changes in the Finance Bill and other measures in the Government's attempts to influence the economy; it also was the public admission of the breakdown of their pay policy. In other words, the obituary of the so-called Social Contract. In elegant paraphrasing the Statement amounted to this: There will be no Phase 3, despite all that has been said by the Prime Minister and the Chancellor of the Exchequer. Whatever their other shortcomings may be, the Prime Minister and the Chancellor must surely qualify for awards of "Oscars" in their capacity to play outstanding roles in putting on brave faces for the disastrous outcome of policies which they had closely espoused.

Today the Lord Privy Seal was more frank with us here, but in his opening statement I detected a hint that the Government are being too optimistic and the noble Lord, Lord Robbins, pointed this out. For let there be no mistake, last Friday's Statement, carefully and soothingly couched in dulcet prose, effectively proclaimed the failure of the Government's own chosen policy for this period. Their own hopes and intentions have been completely frustrated. On the 22nd February in another place the Prime Minister said that a return to free collective bargaining would be a return, this year, to free collective chaos. But within five months a Statement last Friday by the Chancellor included the words: The effect is to facilitate a phased return to normal collective bargaining". A further event occurred yesterday which has shattered any remnants of credibility in the Government's concept of a further contract, social or otherwise. The Economic Committee of the TUC announced that it would give no general or specific guidance to unions on the level of pay settlements. Its action is to be limited to using its influence to see that unions slick to the 12 months' interval. That is a reflection also upon the distorting effects of Phases 1 and 2. They have caused bitter feelings over differentials.

After 1974, when the Government had allowed inflation to get out of hand by failing to assert the measures and medicine required, in order no doubt to stay in office, inflation soared to 26 per cent. I believe that at that time many people in this country who were better off were prepared to accept formulae which allowed the lower paid to receive the highest percentage increases. That was the Jack Jones principle. But this has now gone so far as to stifle effort and initiative. If qualifications, skills and the taking of responsibility go unrewarded amd apparently unrecognised, the country as a whole will suffer. What benefit is there for the lower paid if the fruits of their labour are not fully or properly directed and utilised to provide the needed goods and services. Many recent industrial disputes have been over such differentials. This must be remedied in the course of future adjustments. If there is confidence among those concerned, the skilled and those who take responsibility, I believe that it can happen gradually.

My noble friend Lord Gowrie, in a speech which went straight to the heart of the problems, pointed out that great determination will be needed by the Government in the next few years. He also pointed out that progress could not be dramatic, whatever kinds of Government are in office. The noble Lord, Lord Robbins, gave us words of caution which I believe were very relevant. The Government themselves will be involved in the proposals they put forward and they will be involved soon, because they will be negotiating settlements in the public sector. They must set an example in this. The noble Lord, Lord Shepherd, pointed this out, too. They will also be subject to pressure for increases in public expenditure, no doubt for good causes, and they will have to resist that. What the Government are now proposing in principle is one thing; whether they will have the strength and the will to carry it out is another. To assume that they can curb the size of pay settlements and the rate of inflation by simply announcing a vague formula is highly dangerous.

Turning to the private sector, we have discussed the new Price Commission system put forward by the Government in their Bill, an attempt to control increases in prices; so I will not go over that again. But the latest White Paper, which has come out this afternoon, puts forward the means of applying sanctions in cases of settlements which go beyond certain figures in the private sector. These sanctions will apply to firms if they do not observe the 12 months' interval. That was foreshadowed by the noble Lord, Lord Oram, in the debate on the Price Commission Bill two days ago. The other means which the Government have put forward in the private sector is withholding public contracts or industrial assistance from firms which do not observe the 12 months' rule.

My Lords, if a firm is not concerned or interested in either of these, public contracts or industrial assistance, there appears to be no visible sanction, and those firms will be under great pressure from their unions; they could be subjected to paralysing strikes. If the unions know that there is no sanction, they will no doubt in those cases put on the pressure. The noble Lord, Lord Roberthall, referred to this and drew our attention to it. So I must point out that the proposals announced by the Government last Friday and in the White Paper today are very haphazard in their application and their impact. The noble Baroness, Lady Seear, also referred to this, in the role which she described as being still an Opposition Party. My noble friend Lord Gowrie pointed out, and the noble Earl, Lord Lytton, agreed, that it is not practicable to try to enforce price controls and at the same time to have an uncertain and ineffective policy on pay controls.

The failure of the Government's policy is, of course, the most immediate factor and cause for concern in the economic situation. This is because there is general agreement, I believe among all of us, that first priority must be given to reducing the rate of inflation. In viewing the economic situation as a whole, I grant, of course, that some of the difficulties have arisen from the world recession and for other external reasons. But many of the difficulties of the last three years have been of the Government's own making. There was no need for the annual rate of inflation to rise to over 20 per cent., and it would not have done so if the Government had taken the necessary measures in 1974. I would remind the House that this has led since February 1974 to prices rising by 80 per cent., taxes on income by 146 per cent. and unemployment by 160 per cent. Abroad, the value of sterling has been reduced by over one-third. There is little comfort to be gained from retaining some competitive ability in exports simply from the continuous tall in the value of the pound. The disadvantages are too serious.

The Government should concentrate on creating a climate in which industry can recover and prosper. This entails motivation of the individual, too. Effort and success must be encouraged. The country must be relieved of the present deterrent rates of direct taxation which now assail the average earned income, and I was glad to hear the noble Lord, Lord Gordon-Walker, saying this forcefully during the debate. New investment must be encouraged. Profits being earned by companies should be one of the aims of the unions. In the United States and other countries which compete with us, unions take a company to task if it is not making a sizeable profit. A reasonable profit is an indication that a company's products or services are needed and are saleable at the prices at which they are being presented. As a country, we have suffered immensely from profits being branded as a nasty word. In certain political glossaries "jobs" is a good word, "profits" is not. I suggest that a salutary slogan in the political education of all Parties in this country would be "Profits mean jobs".

Lord BALOGH

My Lords, the noble Lord said that investment ought to be stimulated. At the same time he said that there should be strict limits imposed. How does he reconcile those two objectives?

Lord CAMPBELL of CROY

My Lords, I said that investment should be encouraged and I have just been talking about profits. The main source of new investment should be from the profits being made by companies. I am glad that the noble Lord, Lord Balogh, has moved his position in the Chamber so that he is no longer a bishop!

The noble Lord, Lord Byers, as usual spoke powerfully in the debate. I naturally agree with that large part of his speech on incentives, expeditious treatment of planning applications for industry and the treatment of small firms. I say that "I naturally agree" because that was also a summary of part of a Conservative document called The Right Approach. We are indebted for that plug; I trust that it will lead to wider circulation and reading of that document.

Lord BYERS

My Lords, I hope that the noble Lord, Lord Campbell of Croy will allow me to correct the record. It has been the Liberal Party's policy since 1929. It is in the Liberal yellow book.

Lord CAMPBELL of CROY

My Lords, I hope that the Liberals will be able to translate what was written in 1929 to the circumstances of today, which are very different. However, I was wondering before the noble Lord, Lord Byers, spoke, how he would address himself to the current matter before us; namely, Friday's Statement. As a Party, the Liberals have most strongly advocated a statutory incomes policy. In the Liberal-Labour talks which have been going on during the past five weeks on the renewal of the pact, it has been publicly announced that particular importance was to be attached to Phase 3, and that was confirmed in an article in The Times only today. However, there has been a news item in the past few hours to the effect that the proposed co-operation between the two Parties may continue on only a day-to-day basis. The noble Lord, Lord Byers, made clear today that he personally is in favour of a statutory or semi-statutory incomes policy only for a short period. He said that "re-entry" was the only practical prospect. I think that he personally is being realistic.

Baroness SEEAR

My Lords, if the noble Lord, Lord Campbell of Croy, had not written his speech before I spoke he would recognise that I dealt with the point he is making. I urged that the Government should, in fact, use fiscal controls which are a form of statutory policy, and a form which is entirely acceptable. I said that the Liberal support would last as long as the Government stuck to their guns, and would be withdrawn when they did not.

Lord CAMPBELL of CROY

My Lords, if I understand the noble Baroness, Lady Seear, correctly, she is proposing that there should be a continued statutory incomes policy. The Government are addressing themselves to withdrawing from an incomes policy and considering what the noble Lord, Lord Byers, has described as "re-entry". I referred to the remarks of the noble Baroness, Lady Seear, but I had construed them differently. I thought that she was referring to the gaps in the present proposals; that is to say, what should happen to companies in the private sector which could not be influenced by what the Government have suggested. In other words, they were not breaching the 12 months' interval and were not concerned with assistance under the Industry Acts or with public contracts. That was the gap to which I thought the noble Baroness, Lady Seear, was referring. I did not think that she was suggesting that a statutory incomes policy as a whole should be continued. What she has said is most interesting, and we had better study her words and see where the Liberals go in their talks with the Labour Government. There must be many Liberals, both in this House and elsewhere, who find it extremely difficult to reconcile keeping the present Government in office with their principles and their official policies of only a short time ago. The noble Baroness, Lady Seear, more or less ended her speech by saying much the same thing, and that the Liberals would withdraw if the Government did not stick to certain policies.

The noble Lord, Lord Shepherd, made an exceedingly interesting proposal. He said that there should be a new Minister and a new separate department which could deal with particularly large overseas contracts; and that the Minister, with direct access to the Prime Minister, would be able to ensure, where there were high risks involved, that the Government were able to give support, that decisions were taken more quickly and that financial and credit arrangements were available. The noble Lord spoke of the competition with the United States of America and France and said that, unless we have facilities of this kind, we may lose business. I hope that the Government will look into that matter. I apologise to the noble Lord, Lord Peart, for taking longer than I expected, but I have been interrupted on a number of occasions.

The Lord Privy Seal in opening the debate spoke of the coming years when we shall have a surplus on our balance of payments. The reason for that—there is no disagreement among us about it— is North Sea oil. We should also remember the large part played by the earnings from invisibles—the international services provided by Britain, most of them operated from the City of London. Therefore, I hope that there will be no complacency about the prospect of this surplus in the future. North Sea oil will last for only a limited time. That time must be used to enable the rest of British industry to reach a healthy and thoroughly competitive state.

The noble Lord the Privy Seal also claimed that the Government have halved the rate of inflation. It should never have reached the figure of nearly 30 per cent. It should never have been allowed to get anywhere near that mark. Halving that figure was not a triumph; it was a necessity. During 1973 the average rate of inflation was 10 per cent. Everyone then was worried about that. Now it is the Government's aim to achieve about that figure. They will be lucky if they succeed. I hope that they will succeed. I hope that they will succeed in bringing inflation down to a single figure. However, to do so they will have to discard their present apparent over-optimism and face up to the gaps and defects in their latest proposals. If they simply sail on into what the Lord Privy Seal described as a wages explosion, they must expect to forfeit both confidence and office.

Lord McCARTHY

My Lords, we have heard two speeches from the Opposition on this issue. Will the noble Lord, Lord Campbell of Croy, tell us what incomes policy the Opposition favour? We have had no statement about that at all.

Lord CAMPBELL of CROY

My Lords, no, not now; but I should welcome another debate.

8.18 p.m.

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

My Lords, I shall not attempt to answer all the points raised in this long debate; nor cover all the subjects mentioned; nor indulge in the higher realms of economic theology with participants with whom I do not think I would win the edge. I shall deal briefly with what I believe are the issues at the heart of the economic policy and its survival. It was fascinating that, of all the speeches made, there were only what I would call two conservative Conservative speeches from the Opposition Front Bench. My goodness, what bricks they tried to make out of straw!

As regards the noble Lord, Lord Campbell of Croy, I felt rather shy about intervening in what seemed to me to be an argument between him and the Liberals throughout his speech. The noble Earl, Lord Gowrie, made some extraordinary remarks, again unlike his usual style and approach. He said that to see egg on other people's faces was not a lovely thing to see. The egg on our faces is quite invisible and in fact our invisible exports are what he should be talking about. I agree with the noble Lord, Lord Byers, that his appeal, "Come back Lord Barber all is forgiven", seemed to be the high point of his speech. I point out that in this diatribe which he and his partner the noble Lord, Lord Campbell of Croy, joined in against the Government, they failed—as my noble friend Lord McCarthy pointed out—to put forward one positive proposal, one hard solution, one semi-soft solution. Nothing, not even a soft-centred chocolate, arose from all this.

I restrained myself from interrupting the noble Earl, Lord Gowrie, when he said how distressed everyone in business was about the situation—of course they are. But what happened when there was talk that there might be a General Election?—the share index in the City dropped immediately. So it does not really look as though the businessmen and the people in the City are very anxious for an Election or anxious for the return of a Tory Government.

Having dealt with the sort of political football that is involved in this, I should like to dwell on the main, urgent and destructive problem that we face. Every speaker has of course discussed inflation. However, we must not forget—and this has been mentioned by my noble friends, particularly by my noble friend Lord Gordon-Walker—that the voluntary incomes policy has worked for the last two years. It was voluntary and what is very important is that it operated in a free society which is quite different from an authoritarian society where the Government can determine arbitrarily what everyone should receive and should do.

The noble Viscount, Lord Hanworth, was very concerned that a democratic Government could not endure this. Something about which we are all concerned is that some solution should be found to this, even in the short-term—and the noble Baroness, Lady Seear, is quite right when she spoke about the short-term at present being the most important—so that we can retain our democratic structure in this country. The unions have stuck to their side of the bargain which turned out to be worse for them than they had thought at the beginning. Whatever one feels at the moment, one must accept that and look back not in anger but in gratitude.

Practically everyone has lost real income in the last year. Possibly pensioners have been the best protected, and it is interesting that here the unions—in particular the Transport and General Workers' Union led by Jack Jones—were in the vanguard of pressurising the Government for that group of people. After Phase 2 no one wants to issue false prospectuses, but there is no doubt that the result of this bargain is that the worst of inflation is over. My noble friend Lord Balogh compared the working out of incomes policies under different Governments—and I shall not repeat what he said—and was quite right in saying that this has probably been the most successful.

Yesterday the TUC Economic Committee made it quite clear that it intends to return to collective bargaining. However, the TUC General Secretary, Len Murray, made this important comment: There comes a time when people have to be trusted, and we believe that our people can be trusted to take into account all the broader considerations. We do not believe our people are going to go mad. I would expect every group, whether doctors, miners or anybody else, to honour the existing policy and the 12 months rule". Those are hardly the words of a wild man; they are the words of someone who, together with his colleagues, is trying very hard to hold the line. I agree with my noble friend Lord Kaldor, who was supported by the noble Baroness, Lady Seear, about the terrible danger—not only idiocy—of what the doctors are at present doing. They are not simply asking for a high increase but are setting out—and they know what they are doing—to breach the 12 months' rule. It is perfectly true that that is what wrecked a previous incomes policy and, if this breach is made, that is what will happen this time.

It is quite true that high claims are being put in and more will follow. Nevertheless, I still believe that there is a strong underlying sentiment in the country—and I include individual trade unionists—in favour of reasonable settlements. As the Guardian pointed out this morning, claims are one thing and settlements are another. Part of the procedure of the negotiation, whether one is acting as a lawyer, an accountant or a trade unionist, is to start from a high position; the other people start from a low position and somewhere in the middle they try to find a mean.

An opinion poll taken just after the Chancellor's Statement at the end of last week showed that about 70 per cent. of the public thought that the Government's guideline of 10 per cent. maximum rise for average earnings was either justified or even too high. That is an index of present public opinion and it indicates a very strong support for the Chancellor's target. That supports what the noble Lord, Lord Byers, said when he referred to the feeling in the country. The noble Lord, Lord Roberthall, was right when he said that widespread public support is essential for this policy. But I believe that the trend is in the right direction.

We are now getting back to the process of collective bargaining when there are extremely good prospects that the inflation rate will fall sharply in the next few months. I believe that the noble Lord, Lord Robbins, answered his own question when he said that our present rate of inflation is of the order of double of the OECD average. Given a 10 per cent. rise in average earnings we hope to halve the present rate of inflation. I agree that that still leaves a range in which it would be unwise to attempt precision, but at least it is something at which to aim. If this not only sensible but self-interested view prevails, inflation can continue to descend. But if this expression of public opinion and the advice of the General-Secretary of the TUC is ignored, then there is no doubt that we shall be in terrible trouble and, as my noble friend Lord Balogh emphasised, wage rises will be absolutely self-defeating. That has been referred to by every noble Lord on all sides of the House. It will not help the housewife if her husband gets a large increase in pay and she is paying even more to keep the family fed and clothed.

We have had some discussion on prices but no one in this debate has called for strict controls. I think it is realised that the trouble with that is that if there are no limits on cost—and labour is a very large part of costs—there can be no effective control. However, the White Paper which was published today makes it clear that the Price Code will be retained—for those noble Lords who did not manage to find it, it is at paragraph 12—and used as a sanction where firms breach TUC guides on the 12 months' rule. That was stated last Friday and is repeated. We must try to work out these sanctions within our own democratic society.

The noble Baroness, Lady Seear, in a speech of tremendous firmness, asked why the Government have not promised to claw hack excess pay rises through fiscal measures. I think that she, herself, answered the question because the Chancellor has already warned that should we be faced by a pay explosion, further fiscal measures would be necessary. However, one hopes that that will not be so.

Further—and this is in our favour at the moment—we do not have the same expectation of the violent rise in international prices as that which took place in 1973. Nor do we have the threshold pay increase that, a few years ago, helped to convert rises in our import prices into a domestic inflationary spiral. My noble friend Lord McCarthy referred to the possibility of settlements giving an X per cent. plus the change in the RPI. He is right that we learned a great deal about the dangers of such arrangements under the last Government. He put forward a possibility that we should want to look at very carefully, but, as my noble friend Lord Kaldor also pointed out, before we again make settlements of this kind, even with the improvements suggested by my noble friend, we shall need a great deal of convincing. A further point in our economic favour is that there has been no profligate increase in the money supply. I can reassure the noble Lord, Lord Camoys, that the Government ceilings for money supply and public sector borrowing are quite unchanged.

Finally, the measures announced last week—the tax concessions which relieve 1¼ million people of the burden of income tax; the increase in child benefit rates; the lower duty on petrol; the exemption of many more poorer families from school meal charges; the winter fuel scheme and the milk subsidy—all help to take the heat out of demand for more paper money. The living standards of lower income families will probably be maintained this year without any increase in wages at all. Even those on average pay will probably maintain their living standards with rises of only 5 per cent. or 6 per cent. This is of course provided that there is no renewed bout of inflation.

It is no good dodging the problem which has been referred to again by my noble friend Lord Shepherd, and I think almost every Peer who has spoken, of our had record of productivity. The country has suffered from a low rate of economic growth for many years—my noble friend Lord Balogh said for almost a century—and so has lost a substantial share of the world markets for manufactured products. The only answer—and it is not very simple, although the words are simple—is an improvement in industrial efficiency. The existing plant needs to be used more effectively. Investment has to be increased to replace plant which is becoming obsolete, but industry can be expected to expand only when it has confidence, which means when it can sell more products at a profit. We on this side do not consider that "profit" is a dirty word when it is increasing the benefit to the community and creating wealth.

My noble friend Lord Shepherd asked me about the accelerated payment scheme. The accelerated payment scheme and its successor, the selective investment scheme, are, I understand, alive and doing well. Recently 140 applications representing projects costing over £600 million have come in, of which, as the noble Lord pointed out, only one-tenth comes from the Government. If I can find any more detailed information I shall write to him.

It would be naive to expect this essential investment if companies are uncertain about their future and if they are uncertain about the level of their costs for next year—which they would be if they were expecting to spend a greater proportion on wages rather than plant. The noble Lord, Lord Cullen of Ashbourne, emphasised the necessity for productivity per man-hour to be increased. I would remind noble Lords that what we—or at least I—are talking about is the whole area of the work force, which includes management as well as workers. If we do not increase that, and if they do not have this element of confidence and certainty, and if they are expecting to spend a greater proportion on wages rather than plant, this then starts once again the downward spiral of less efficiency, fewer sales and higher unemployment, which is a completely self-destructive cycle.

There has been a great deal of talk about the need for incentives. We all know that incentives are necessary for everybody. The Chancellor recognised this in his tax concessions and we accept that rewards should and will come, but they cannot all come right away. This applies right across the board and for everybody in the country. They will only come through increased efficiency. My noble friend Lord Kagan, in what we are coming to recognise as his characteristically relevant contribution, followed the lead given in the Chancellor's Budget speech in pointing to the need to improve incentives and reduce marginal rates of income tax. The Budget has made a start in that direction both for those at the bottom of the tax range and also for those higher up. But we have to explore carefully how far and how fast we can proceed and, again, it depends on how the economy is reacting.

My noble friend Lord Balogh put forward very persuasively the case for a permanent institution to resolve the inevitable problems of prices and incomes. Some such institution may be the best way of dealing with these problems, but I think he will agree that we are not yet at the point where such institutions would receive the necessary acceptance. However, it is right that we should at least he thinking about these ideas.

In the real anxiety over our economic problems it would be a pity to forget the other ingredients in our society which are still so much admired abroad, even though we may not be among the first league of great powers. I think we can carry masochism a bit too far in an effort of intensive self-analysis. We are a civilised, compassionate society. We have social and cultural objectives which cannot be altogether expressed in purely economic terms. But the rub is that this has, I think, led us—excluding, of course, the participants in this debate—to give economic success less importance than it merits in other countries.

If economic, social and cultural objectives were not so closely interrelated this would not matter. But we are not going to be able to achieve a better quality of life, whether materially, culturally or socially, unless we improve our economic performance. We also need to evolve a way of settling wages, differentials, and incomes which does not depend on brute strength and whatever is the power to your bargaining elbow. This is the hard truth and this is why, if we ignore the requirements of our economy, we do it at our peril.

There is a growing awareness of the importance of national economic success, as my noble friends Lord Gordon-Walker and Lord Houghton of Sowerby pointed out. We have learned from the experience of inflation of the past few years. But, whatever people's aspirations whether they be for a second car, a holiday abroad, more hospitals, more houses, more theatres, or even the saving of Mentmore, people are, I believe, starting to accept that we must devote far more of our energies and efforts to achieving economic success. It is essential, as the noble Baroness, Lady Seear, forcibly pointed out, to try to see the way—and I do not think that this is very easy—that one spread the awareness of this so that people believe it applies to them and not just to other people, and that it is for their own good and their own benefit.

As Socialists, we want to see improvements in a greater number of things which require public expenditure. Nevertheless, we have to get the balance right between what people want on their own behalf what we can afford, and what should be spent to improve the quality of the services to the community. I cannot go along with the noble Viscount, Lord Massereene and Ferrard, in his wish to cut down expenditure by doing away with such trivia, as I think he called them, as the social services and the universities. I do not think that he got much support from his own side.

Viscount MASSEREENE and FERRARD

My Lords, I did not say anything of the sort. The noble Baroness has quoted me quite out of context. I said that I hoped that when the oil revenue came in it would not all be spent on social services and new universities. It is far more important to spend it on new machinery and tooling up our factories. I have had a factory.

Baroness BIRK

My Lords, I think that when the noble Viscount reads Hansard tomorrow he will see that he used the words "such trivia". Never mind, it is quite right; we do not always agree with each other.

Viscount MASSEREENE and FERRARD

My Lords, I think the noble Baroness will find that she is wrong.

Baroness BIRK

My Lords, it is difficult to get this reconciliation—I do not mean between the noble Viscount and myself—between the balances in the economy. It is harder still in the present economic climate. But I believe that we have the native ability, we have the potential, and if we have the communal good will to make up our minds to crack the crisis, I believe we can do so. If we do not, the future is completely bleak.

On Question, Motion agreed to.