Lords Sitting of 26 October 1977

Preamble
Reassembling after the Summer Recess, the House met at half-past two of the clock (Prayers having been read earlier at the Judicial Sitting by the Lord Bishop of St. Albans):
The LORD CHANCELLOR On the Woolsack.

LORD SCARMAN
The Right Honourable Sir Leslie George Scarman, Knight, OBE, a Lord Justice of Appeal, having been appointed a Lord of Appeal in Ordinary and thereby created a Baron for life, by the style and title of Baron Scarman, of Quatt in the County of Salop—Was, in his robes, introduced between the Lord Shackleton and the Lord Wilberforce.
The Duke of Portland—Sat first in Parliament after the death of his kinsman.
The Marquess of Linlithgow—Took the Oath.
The Earl Spencer—Sat first in Parliament after the death of his father.
The Viscount Oxfuird—Sat first in Parliament pursuant to the Peerage Act 1963.
The Lord Torphichen—Sat first in Parliament after the death of his father.

BUSINESS
2.41 p.m.
Baroness LLEWELYN-DAVIES of HASTOE: My Lords, with the leave of the House, my noble friend the Leader of the House will repeat later this afternoon a Statement being made in another place on the economic situation. For the convenience of the House, as soon as the Statement is begun in another place it will be announced on the television annunciators that the House will resume in five minutes. It is expected that this will be shortly after half-past three.
House adjourned during pleasure.
House resumed.

ECONOMIC MEASURES
3.37 p.m.
The LORD PRIVY SEAL (Lord Peart): My Lords, with the leave of the House, I will now repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:
"Economic situation
"Since the House debated the economic situation in July, the improvement in our financial position has been greatly strengthened. Confidence in Britain's future has been powerfully reinforced both at home and abroad. As a result we are now in a position to take further measures to improve the outlook for employment and to bring the growth of output on to its intended path.
"It is now clear that both in the United Kingdom and in the world as a whole the recovery in demand and activity is weaker than was expected in the summer. The latest meetings of the International Monetary Fund and of the Finance Council of the European Community have agreed that the industrialised world should take steps to stimulate demand and that Britain is in a position to join in this collective effort.
"The Government have made it clear that they aim at a steady and sustained expansion and are determined to avoid the risk of over-heating the economy with the damaging consequences for growth, inflation and the balance of payments which we saw four years ago. For this reason the decisions I shall now announce are part of a programme for economic expansion spreading over 18 months. Our main objective must be a continuing fall in the level of unemployment. In framing measures to this end the Government have been guided by four main considerations. The measures should be quick-acting, they should reinforce the attack on inflation and assist the industrial strategy, they should be fully consistent with our financial commitments for the current year and they should run no risk of over-extending our finances in 1978–79 or of unnecessarily prejudicing the possibility of further measures in the next spring Budget.
"Our basic economic strategy remains as I described it in my March Budget. I now see scope for measures within the framework of that strategy costing a little over £1 billion in the current year and £2 billion in the next financial year.
Income Tax
"First, measures affecting the next financial year 1978–79. The House decided this summer to commit the Government to increasing personal tax allowances each spring in line with the rate of price increase over the previous calendar year unless they sought explicit permission to do otherwise. I believe it is right that we should not seek to waive this requirement in the coming year. The Government therefore plan to raise tax thresholds for the next financial year as laid down in the Finance Act 1977. This is likely to require a 12 per cent. increase in personal allowances above the level set by the 1977 Finance Act, at a cost of around £1,200 million in a full year.
Public Expenditure
"In the summer the Government announced very substantial increases in child benefits for the coming year, measures to implement the Holland Committee's proposals on manpower and training, and a major increase in the number of children eligible for free school meals; together these increases in public expenditure will cost some £475 million at 1977 Survey prices.
"The Government recognise that exceptional difficulties are now faced by the construction industry. They have therefore decided to increase expenditure next year on construction by the central Government and local authorities by £400 million at Survey prices over and above the existing plans. The allocation of this additional amount between different programmes will be announced as soon as possible. The full effect of this decision will be to increase employment by some 30,000.
"The Government have also decided on certain smaller increases in public expenditure programmes for next year. They are increasing the overseas aid programme by £20 million. They are increasing the law and order programme by £9 million to provide additional resources for police cadets,
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civilian support, police vehicles and equipment and also for the prisons and the community service schemes. There will be additional provision in the social field to help the disabled by a further increase in mobility allowance next year and to ease the strain on hard pressed health authorities. There will be provision to enable schools to take on some more teachers to meet the needs of children in deprived areas and for small additions to the budgets for science and the arts. Allowing for these decisions and the measures announced in the summer, public expenditure next year is being increased by £1 billion at 1977 Survey prices.
"The public expenditure survey will be completed and the usual White Paper published around the turn of the year. This will also incorporate any further adjustments in the expenditure figures, such as any changes resulting from discussions with the banks about the refinancing of export and shipbuilding credits.
"Beyond these decisions on income tax and public expenditure in 1978–79 I have left myself freedom to make further changes in the 1978 Budget according to developments in the economy and particularly the prospect for inflation. If economic and financial circumstances permit, I intend to make some further reduction in the burden of personal taxation. For example, as I explained in my Budget Statement last March, there is a strong case for reducing the poverty trap by progressively raising the personal tax thresholds until they stand clear above the levels of the main social security benefits. There is also a strong case for introducing a reduced rate band of tax.
"However, there can at this stage be no assurance that the economic situation will in fact permit a further net reduction in taxation over and above the major reliefs which I am announcing this afternoon. The scope for any further move in this direction—and a reduced rate band of tax, in particular, could be very expensive—will depend crucially on the development of the economy between now and next April, and above all on the trend of pay settlements, measured against the Government's guidelines.
IMF standby
"I now turn to certain aspects of our overseas financial position. In our present circumstances, it would clearly be wrong for us to take up any further drawings on our standby with the IMF. We will therefore not take up at the end of November the special drawing rights 310 million which then becomes available. The Managing Director of the IMF has been informed of this decision. Our full drawing rights under the standby will, of course, remain intact. We intend to keep the standby in place until its expiry at the end of next year, and mid-term discussions with the IMF on our economic strategy will shortly be taking place as envisaged in our Letter of Intent.
Exchange Control
"The change in our financial situation also makes possible some adjustments in exchange control. First, I am making certain changes intended to help maintain or increase the overseas earnings of the financial services sector. For this purpose, I am relaxing somewhat the rules governing the amounts which insurance companies, banks and merchants are allowed to retain in foreign currency for the purpose of their businesses.
"Secondly, I am further liberalising the rules permitting non-resident controlled manufacturing companies to borrow sterling for investment in their business in the United Kingdom.
"Thirdly, I have decided to relate more closely to current money values the rules governing travel abroad, cash gifts and the basic allowances for emigrants. For example, the foreign currency facilities which can be obtained from authorised sources without reference to the Bank of England are being increased from £300 to £500 per journey for holiday travel and from £75 to £100 a day within a £3,000 maximum for business journeys. Details are contained in a Treasury Press notice which is being issued today.
Small Firms
"As the House knows, my right honourable friends the Chancellor of the Duchy of Lancaster and the Chief Secretary and my honourable friend the Parliamentary Secretary, Department of Industry, have been studying the
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problems of small firms. This study is still continuing, but I am now able to announce its first conclusions—mainly but not exclusively for changes in taxation.
"It is argued that the taxation of business transfers is an inhibition on the growth of small firms. The 30 per cent. business relief for capital transfer tax will be increased to 50 per cent and it will be extended to deferred charges on forestry. There will also be a relief of 20 per cent. for minority holdings in unquoted companies. These additional reliefs will be limited to transfers of up to £½ million. I have also decided to increase the threshold for liability to capital transfer tax from £15,000 to £25,000. These changes will apply to transfers after today. The total cost will be £10 million in the current year, £65 million next year and £100 million in a full year.
"To encourage businessmen to retain their profits in the business, I have decided to increase the threshold for the apportionment of trading income of close companies to £25,000. This will cost up to £5 million next year and £20 million in a full year.
"The Government will also be considering before next year's Finance Bill certain further tax changes which could be of substantial help to small firms.
"Very briefly, there are two proposals to encourage new businesses—the possibility of carrying back losses in the early years of an unincorporated business to set against the owner's other income in earlier years; and allowing relief from capital gains tax where a loss is made on a loan to a business. Then there is the possibility of tax facilities to help farmers and perhaps other unincorporated businesses plan their investment programmes.
"In addition, the Chancellor of the Duchy of Lancaster will be announcing a number of other measures costing about £½ million for the current year and £2½ million next year, which will help smaller firms to increase investment and employment. Further details of the improvements in the treatment of small firms are set out in a Press statement by my right honourable friend the Chancellor of the Duchy of Lancaster:

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copies of that and other Press notices are available in the Vote Office.
"I now turn to my fiscal proposals for the current year 1977–78.
Tax
"We can now be confident of substantial head-room below the ceiling which I set for the public sector borrowing requirement this year. It is important that we should take advantage of this head-room by measures which are quick acting and which have a maximum effect in bringing unemployment down as soon as possible. The measures should also, if possible, reinforce our attack on inflation and our commitment to the industrial strategy. This points strongly to the speediest possible reduction in income tax.
"I have therefore decided to bring forward the 12 per cent. increase in the main personal income tax allowances which I have just undertaken to make next April in accordance with the Finance Act 1977, and to implement it straight away. The Inland Revenue are making a major effort in order to make possible this further cut in income tax for the current year. I wish to place on record my appreciation to all the hard-pressed staff concerned.
"In order to make room for the additional work the Government have decided to exempt from tax for the current year, 1977–78 only, the increase in National Insurance pensions and in other social security benefits which will come into effect next month. The cost will be £40 million.
"This further raising of tax thresholds means that the single personal allowance will be increased by £100 to £945; the married allowance will be increased by £160 to £1,455; there will be a consequential increase to £510 in the additional personal allowance; and there will be a similar percentage increase to new totals of £1,250 for the single age allowance and £1,975 for the married age allowance. These reliefs will have effect in the normal way from the beginning of the present fiscal year. The cost will be £940 million in the current year.
"These further increases in personal allowances will take around 900,000
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people out of tax. This is in addition to the 1·2 million people already taken out of tax by this year's Finance Act.
"I hope that it will be possible for most wage-earners to receive the benefit of these reliefs in their first pay packet after 22nd November, and for the remainder in their first pay packet after 6th December.
"Thus, most people can expect to receive a tax rebate in their pay packet before Christmas of some £20 for a single person, and £35 for a married man. Thereafter, the relief will be worth approximately 65p a week for a single person paying basic rate tax, and £1·05 for a married man.
"Further details of these measures are included in Press notices being issued today.
"These reliefs will represent a significant further addition to take-home pay in the current pay round. For a married man on average earnings they will be the equivalent of an addition of £1·74, or nearly 2¼ per cent., to his weekly gross pay. When we add in the effect of the tax reliefs in my spring Budget, this figure rises to the gross equivalent of some £5 per week, or nearly 6½ per cent. This is, of course, in addition to the 10 per cent. average increase in gross earnings which is provided for under the Government's pay guidelines. The overall total of some 16½ per cent. contrasts with an increase in retail prices which is now well on course for single figures in the first half of next year. It means some increase in living standards in the current pay round. I look to those responsible on both sides of the negotiating table to give full weight to these considerations in reaching settlements during the remainder of the round.
Help for pensioners
"I do not think it is right at a time when working people as a whole are receiving a cash rebate on this scale before Christmas to do nothing similar for those who have retired. The 2½ million pensioners who now pay tax will, of course, benefit from the measures I have already announced. However, the majority of pensioners do not pay tax. The Government have therefore decided to pay a special tax-free bonus

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of £10 to pensioners in the week beginning 5th December. The cost of £100 million will be met from the contingency reserve.
Procedure
"The Government will introduce early in the next Session a Finance Bill and the necessary Resolutions to implement the proposed tax reliefs for the current financial year. The proposed reliefs for capital transfer tax and other changes affecting small firms will be provided for in the Finance Bill following the spring 1978 Budget.
The Economic Prospect
"These measures will raise the public sector borrowing requirement to a figure now estimated at some £7½ billion in the current year and to about £7 billion in 1978–79. Both these figures are within the Government's ceiling. They are consistent with keeping growth of the monetary aggregates in the current year within our financial commitments, and with a similarly firm control of monetary growth in 1978–79.
"The measures are estimated to raise domestic output by about ½ per cent. in the first quarter of 1978, rising to about 1 per cent. in the first quarter of 1979. On the conventional arithmetic, this could produce an increase in employment in these quarters of 30,000 and 170,000, and lead to a reduction in unemployment, compared with what it would otherwise have been, of some 20,000 and 110,000 respectively. But I have to say again that the prospects for the economy as a whole depend crucially on what happens to inflation. I am publishing today a further half-yearly economic forecast, as provided under the Industry Act 1975. This forecast assumes an average earnings growth of 10 per cent. in the current pay round, consistent with the Government's guidelines. On this critical assumption, the growth of domestic output could strengthen significantly over the next 12 months to a figure in the region of 3 per cent. Growth at this rate would be rather above the trend growth of productive potential. As the House will know, the timing and scale of unemployment movements has proved extremely difficult to predict—witness the encouraging figures published yesterday. But growth at this rate, if we can
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sustain and build on it, will turn the trend of unemployment firmly downwards.
"Within this overall rate of growth, there should be a considerable recovery in real take-home pay and personal consumption. The rate of price increases could continue to fall to a level, by the end of next year, not far above that of our main competitors.
"By contrast, however, if pay settlements edge up towards, say, 15 per cent., and the rate of inflation moves back into double figures, we are likely to be faced not only with slower growth next year, but also with less scope for fiscal relaxation. Thus, we are now at a turning point. If we falter now, we can lose the ground we have gained in the last 12 months and find ourselves once more wrestling with high inflation, slow growth, and rising unemployment. I believe the measures which I have announced this afternoon will help the British people to choose instead a better course—to build on the gains they have already won, and to achieve a sustained reduction in inflation together with a steady growth in jobs, in output, and in living standards."
My Lords, that concludes the Statement.
3.59 p.m.
Lord CARR of HADLEY: My Lords, may we first thank the noble Lord the Leader of the House for repeating the Chancellor's Statement to us. I am sure that he and the whole House will understand that it would be difficult, and indeed foolish, to try to comment in any depth on the proposals we have heard, and perhaps one day of our debate on the Address, in a week or two's time, may give us the opportunity to do that. But may I make some preliminary comments, and ask one or two questions.
First, may I say how warmly we welcome from these Benches the improvement in Britain's financial position which has made this relaxation possible. At the same time, I think we are entitled to remind the Government that this financial improvement, which is so welcome, is entirely due to the fact that, at long last, over the last year, and on the orders of

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the IMF, the Government have been pursuing policies and taking the actions which we from these Benches, in both Houses, have been pressing on the Government now for a number of years. Had those actions been taken earlier, the sufferings of this country and the loss of the standard of living in this country could have been much less than they have been.
According to a report in The Times of 5th October, Mr. Healey told a meeting at the Labour Party Conference that if one's object is to increase employment opportunities quickly then that is where income tax scores very high, especially if done in certain ways. My Lords, we agree very strongly. Therefore, we welcome very strongly the income tax reductions announced today. But why, must we also ask, not much sooner? And if indeed there is, as we believe there is, this close relation between a very high level of income tax and a very high level of unemployment, why is it that Mr. Healey is still content to have a level of income tax, even after these reductions, which is very much higher indeed than was the case when he became Chancellor nearly four years ago?
I have a second, more specific, question about income tax, about which I am not quite clear. I do not understand how the Chancellor can estimate in October what in fact will be the cost of the indexation of the allowances required under the 1977 Finance Act by next April. I think the noble Lord told us that there is a 12 per cent. increase, and that the Chancellor was going to bring it forward now. May I ask this; Is 12 per cent. the degree of indexation which is required at October, and might there therefore be a further addition required next April; or is 12 per cent. some projection of what is likely to be the figure next April? If it is the latter, does the Chancellor undertake to make good if, when next April comes, the 12 per cent. in fact appears to be insufficient to index the allowances, as I believe Parliament decided earlier this year?
Turning to the other measures, may I say that I welcome the extra help for the construction industry. It always seemed to me peculiarly lacking in economic effect and peculiarly damaging
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to impose all the constrictions and reductions on the construction industry which Government policy has imposed over the last year or two. Coming to overseas affairs, we certainly welcome the relaxation in the exchange control regulations which were mentioned. Whether they go far enough will, I think, be a matter which we shall have to consider more deeply. We certainly welcome the help, immediate and, still more, projected, for small firms and new enterprises; and particularly we welcome the proposed changes in the capital transfer tax. But we warned the Chancellor and the Government of these ill-effects on small businesses and new enterprises when he introduced that tax in 1974. Indeed, I was at the time the "shadow Chancellor" in another place, and I spent a lot of time warning him and urging on him the need to make the changes which now, nearly four years later, he is at last making—and, again, we cannot repair the damage which has been done by his ill-considered policies in the meanwhile. We also welcome, of course, the tax-free bonus to pensioners, which is another little repentance. There has been a return to good Conservative policy in this respect, and we certainly welcome it.
In the social field, I think that, so far as one can judge as such, the measures are welcome, but I really must sound some warning—of course, they must be looked at rather more closely—and say this. We on these Benches believe strongly that, now that we are at last painfully reducing both the size of the public sector borrowing requirement and the burden of direct taxation, it would be utter folly to add to public expenditure to an extent which would need a reversal of either or both of these policies; and if the increased public expenditure projected for next year should require either an increase in the public sector borrowing requirement again or in direct taxation, I must warn the Government that we shall attack them very strongly from this side.
My Lords, as I said at the beginning, these measures require further thought and further debate. May I repeat that we welcome much that appears to be contained in them because they are made possible by the very welcome improvement in our financial position. But, although the financial position of our country has

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improved, the underlying industrial position—in other words, the position of the real economy—is still extremely worrying, and our balance of payments would still be extremely worrying were it not for the very welcome and valuable contribution from North Sea oil. Until the Government really address themselves to that position I do not believe this country will be moving out of its difficulties, and least of all will it be on the verge of any golden era. You cannot have a successful business or country if the financial position is unsound, but you can have a sound financial position and still have an unsuccessful economy or business. So I hope that the Government will follow up these measures with really concentrated thought on what is needed to release the impetus of efficiency and output in this country.
4.7 p.m.
Baroness SEEAR: My Lords, we on these Benches should also like to thank the noble Lord the Leader of the House for the Statement which he has given us this afternoon, and, certainly, to congratulate him on the main points that are in it. We of course welcome the taxation reductions. They are not unexpected, but very welcome when they come. We have long believed that the level of tax was far too high, and this preliminary curtailment of tax is something which we are very glad to see. We must regret (though we can understand the reason) that it has not been possible at this stage to introduce a lower first tax band. We still consider that to move from a position of no tax to 35 per cent.—to the full standard rate—is very regrettable indeed. It is a great discouragement to people, and it keeps the poverty trap where it has always been. We hope that the Government will give high priority to finding ways in which there can be a lower level at which the first band of tax begins. We fully understand that part of the difficulty is that the Inland Revenue have to make constant adjustments to match the Government's constant new thoughts on how to deal with the economy, and that that is very hard on them. Indeed, we should like to convey to them how readily we realise the strain put on the Inland Revenue by bringing about these changes; but we hope that any reluctance on their part will not mean that we cannot
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move towards a reduction in the level of the first band of tax as soon as possible.
We would congratulate the Government on getting what appears to be just about the right balance as to the amount of extra purchasing power which is being released and the encouragement for employment which that brings about, and on having resisted the temptation, which must have been strong, to go for a bigger reduction at this time. That would have been extremely popular but also extremely dangerous.
The hope that we can go for a 3½ per cent. growth rate is a hope that we welcome, but with some trepidation. We in this country have not, over any period of time, sustained a 3½ per cent. growth rate and, before the Government move into further reductions, even in the spring, we would urge that they monitor extremely closely both the degree of growth which we are in fact getting and, of course, as the Leader of the House has said, the extent of pay increases. We could easily get into the position which arose when the Conservative Government went for a 5 per cent. growth rate and failed to monitor adequately—presumably this was the reason why they did not take corrective action soon enough—that that growth rate was not being achieved. That contributed to our moving back into a high inflation situation.
There is in the present situation a real danger that this may happen with an expectation of a 3½ per cent. growth which we may not get and a tax reduction which, with the 10 per cent., even if it is kept to 10 per cent., means 16½ per cent. against a hoped-for 3½ per cent. growth rate. Can we be assured that there will be the closest watch put on all these indicators so that we know whether we can afford to have greater relaxation later? While these relaxations mean an increase in employment, any return to inflation will be incomparably worse for the employment situation and not to be compared with any small improvement which the present policy may achieve.
We would also welcome the help being given to the small firms. As I think is well known, this has been one of the major concerns which we from these Benches have been pressing hard on the Government. While other Parties may

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say that concern for the small firms has always been a high priority, neither of the two Parties which has been in Government has succeeded in doing very much for the small firm in the past. We are glad that this message has got over and that steps are being taken, partly because the percentage of small firms in this country is already far too low in comparison with our competitors and also because the small firm is an instrument whereby unemployment is very effectively mopped up. On that we would agree; and more power to the Government's elbow to do all they can for the improvement of the position of the small firms!
The help to the construction industry is welcomed. We wish that it could come sooner. Perhaps I did not quite get this point clear, but I understood the noble Lord the Leader of the House to say that this would not have much effect until after Christmas. Is it not possible that it could be of more immediate assistance to the construction industry? Is it too much to ask that Governments of any complexion should stop treating the construction industry, a very vital industry in this country, as an instrument for dealing with the country's economic problems? The ducks and drakes that have been played with the construction industry make it extremely difficult for that industry to meet the policies when Governments return and wish them to get under way again. May I give, inevitably from me but sincerely, a word of warning that is already coming from the construction industry: When the recovery starts there will be a shortage of skilled trades. May I ask the Government now, as a matter of urgency, to ask the Training Services Agency in the Manpower Services Commission what they are doing to ensure that the skilled men are there when the recovery in the construction industry starts? This needs to be done yesterday!
Lord ORR-EWING: My Lords—
Lord PEART: My Lords, it is traditional to reply first to the Opposition, and also to our Liberal colleagues. May I say to the noble Lord that I am grateful for his praise. No doubt he found it difficult to criticise. Many of the points I have put forward on behalf of the Chancellor will, I think, be welcomed not only by the
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Tory Party and the Liberal Party but by the British people. That is important. I think we are at a turning point and I am not going to be pessimistic. I was asked about the 12 per cent. Is it a projection of the retail price rise over the 12 months to December 1977? This is the indexation span specified by the 1977 Finance Act. I would only say to the noble Lord, Lord Carr, that Tory Governments were never very successful. I can go back four years when they failed to deal with pressing problems and it was a Labour Government who had to come back and do things. There is no question about this. I do not apologise for what we announced today. The fact is that noble Lords opposite know that they cannot criticise seriously.
I am grateful for the words of the noble Baroness who spoke for the Liberal Party. I agree with her on many issues. I think she is right and fair to raise the matter of the small firms. I myself have always thought that the small firms should have careful help, especially in development areas. I know the contribution they make and how often they grow and provide employment. Many of us have read the Bolton Report; but we have acted. Here is an example where we are not doctrinal in any way but just anxious to get the economy going. I know that we have the support of the Liberal Party on this. I take note of what the noble Baroness said about the construction industry, and whether the start could be advanced. I will convey the strong views that she has put to my right honourable friend the Chancellor of the Exchequer. If something can be done, I will try to have an announcement made when we debate the gracious Speech. We will have an economic debate there; and no doubt noble Lords will be able to further the points they have raised today. If I do not cover every question, I will also try to answer them in that debate.
Lord ORR-EWING: My Lords, could the noble Lord the Leader of the House clarify one or two points? Toward the end of the Statement the Chancellor said that all this amelioration of our very heavy taxation depended on an average earnings growth of 10 per cent. He will also remember that the guideline that the Government have given is that there should be a basic wage increase in industry plus

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a productivity deal, quite understandably, to encourage us to become more productive in industry when productivity is at a very low ebb. It was suggested that a 6 per cent. basic plus a productivity deal would be acceptable. Now he is saying that this is a gross earnings increase—that was the phrase, I believe, in the last page of the Statement—10 per cent. in earnings. Is this a misunderstanding? Perhaps he could clarify this. This would mean, with a productivity bonus on top of 10 per cent. basic, earnings increases nearer to an average 15 per cent. This will make it very difficult for the Chancellor to honour his obligations.
Secondly, does he think it is right, while giving £9 million to improve law and order at a very crucial moment in this country when the police forces are in desperate need of reinforcement, encouragement and better pay, to give £20 million—more than twice as much—to overseas development? Is this really the right priority? Ought he not to look at this again and perhaps reverse those figures? Lastly, why is it when we were told solemnly from the Government Benches of both Houses that as soon as the economy permitted they would honour their obligations to NATO and to the President of the United States by increasing defence expenditure by 3 per cent. in real terms, nothing is said in this Budget? The noble Lord has assured us that this is not a doctrinal Budget. Is it not aimed more at votes in a forthcoming General Election?
Lord PEART: My Lords, I do not think so. It is a sensible Budget to meet problems which are there and it has been welcomed in parts by the Leaders of the Front Benches. There is no doubt about the praise for this and what we are doing. The Tories naturally argue that it would have been done by them in any case. But we have done it. On the one point about the 10 per cent., I am not sure about that. I have tried to verify it but what I have said is, I think, the correct position. The noble Lord raised questions about police expenditure. This is in addition to what has already been given previously. It is something positive and I think it will be very welcome.
On NATO, I think I should leave that to the debate. It is not mentioned in the Chancellor's Statement. I understand the views of the Opposition on this. They
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I feel strongly about it. No doubt we shall be able to discuss it in the debate on the gracious Speech.
Lord BALOGH: My Lords, does my noble friend not think that relaxation of exchange control on the basis of hot money flows is rather hazardous, as was shown in 1951–55 and 1959–61 et cetera? When shall we learn that we should distinguish between real improvement and seeming improvement?
Lord PEART: My Lords, I agree that there is improvement. I am not as learned on economic matters as the noble Lord. I believe that the policy and strategy of the Government in this Statement is the right one for this country. It may be true that we have to be careful about exchange control, as the noble Lord mentioned.
Lord HARMAR-NICHOLLS: My Lords, is the noble Lord aware that the sluggishness in industrial development at the moment is less due to the supply of funds than it is to do with the general feeling that employment regulations make it almost impossible for management to manage? He mentioned in the Statement that the Chancellor of the Duchy and the Treasury were looking into these matters together. Have they the power to look into this question as to how much employment regulations are the cause of quite a bit of the unemployment that we are facing?
Lord PEART: My Lords, I would not necessarily accept that, but I will look at the point and have a word on this matter with my right honourable friend the Chancellor of the Duchy.
Lord JACQUES: My Lords, may I ask whether the measures which have been outlined will have any substantial effect on the number of civil servants?
Lord PEART: My Lords, I would say, No. The cuts in Civil Service expenditure which we announced last year will still be made. As I have always said from this Box, the Government attach great importance to keeping a tight control on the costs of administration.
Viscount ECCLES: My Lords, the noble Lord mentioned the small increase

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for the arts. May I ask him two questions on that? First, will he recognise that there are certain national institutions which are in great financial difficulty at the moment, and if there is to be a small increase they should share it? Secondly, on the £400 million building grants, will any of that go to arts and libraries? That not only would promote building labour employment, but would give employment to artists who are out of work.
Lord PEART: My Lords, I am not sure about the second part of that question. I was under the impression that it would affect the construction of any building including schools and hospitals. Indeed, if they are essential buildings in the field of the arts, I see no reason why they should not be included. Again, I will certainly raise this issue with the Chancellor; it is an important point and I think it will apply. Mention was made of whether national institutions would be able to share. I will be quite frank; I am not sure. I will look into it.

UNFAIR CONTRACT TERMS BILL
Returned from the Commons with their Amendments to the Lords Amendment not insisted on.
4.23 p.m.
Baroness LLEWELYN-DAVIES of HASTOE: My Lords, with the leave of the House, I beg to move that the House do now adjourn until five o'clock for the Royal Commission.
Moved accordingly, and, on Question, Motion agreed to.
House adjourned during pleasure.