DEBATE ON THE ADDRESS

HL Deb 02 November 1978 vol 396 cc51-166

4.9 p.m.

Debate resumed.

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

My Lords, I was very entranced by the description of the noble Lord, Lord Thorneycroft, of his own credentials and his interests. Incidentally, I should think it would be better all round for him to be chairman of Trust House Forte than chairman of the Conservative Party. Speaking as an ex-Chancellor of the Exchequer, he shows such modesty and humility in his confessions of his failures that I already have an inferiority complex as I am not even a Treasury Minister who has had the opportunity to make any mistakes to which I can confess.

However, like the noble Lord, I, too, am starting on a completely non-controversial note. In the past year, because of the success of the Government's and the country's efforts to tackle inflation, the economy has been making progess and is on a more settled course of real improvement. Here, there are four key elements of improvement: the fall in inflation, the rise in national output, the rise in our living standards and the rise in industrial investment. These improvements did not come by chance; they are the direct result of a concerted strategy to tackle the country's underlying economic problems, and a climate of financial responsibility and confidence.

The Government are determined to hold fast to the course which has brought these benefits. The essential challenge remains: the double-headed monster of inflation and unemployment. Each is an old and well-known enemy but combined they constitute a new and powerful threat to our standards of life, and unless inflation can be cut out of the economy we shall be unable to make substantial progress towards greater productivity and full employment.

Three elements are critical in the battle to preserve our economic and social fabric against this onslaught: incomes policy, monetary policy and fiscal policy. The Government do not believe we can rely on monetary policy or monetary and fiscal policy alone without incomes policy to control inflation. Obviously, if people did not moderate their wage settlements, the Government would have to rely on monetary and fiscal instruments. But we believe this would be a tragic outcome. If we use these regulators alone to control the effects of a wages surge on prices, the cost will be falling output, bankruptcies and rising unemployment.

The noble Lord, Lord Thorneycroft, was in some doubt—and he put it to me twice, once at dictation speed—on the matter of whether the norm is to be a permanent feature of our society. Though as he rightly said, I have The Right Approach not only as bedside reading but under my pillow every night, he has certainly not returned the compliment and taken the Prime Minister's speeches as his bedside reading. We are not committed to a rigid norm. But, at a period when any increase above what is feasible economically and financially for the country is dangerous, there must be a norm, there must be a barrier beyond which people cannot go. The Prime Minister has shown tremendous courage in setting this up because it would be much easier to say: "Let us have a free-for-all". One hopes that, as time goes on, the knowledge that one group's increase can be to another group's tremendous disadvantage will play its part in the attitudes of our society.

I look forward with some curiosity—if at the moment without a great prospect of enlightenment—to the contributions to the debate which will be coming from the many noble Lords who are speaking from the other side of the House. Trying to establish what Tory counter-inflation policy is these days needs a larger than usual sample to get a statistically signific-cant result. I did admire Mrs. Thatcher's speech yesterday; for, having seen in the Press photographs of her decorating her house, she obviously carried her wallpapering expertise into the debate by endeavouring to paper over the cracks in her Party's multiple approach to economic policy. I hope she knows that deep cracks need infilling if the paper is to hold.

The difference between our policies and the Tories' is that this Government firmly believe we cannot abdicate our responsibility on incomes. We have therefore declared our objective and our determination to take action to secure it. But it is true that Government can play only one part in this. In a democracy, the consent and co-operation of workers and management is absolutely indispensable. But I am still convinced that a Government which failed to give a lead on incomes and relied on monetary restraint alone to clear up the mess must be faced with the ugly choice between draconian measures and ineffectiveness.

In the past three years we have shown how much can be done by co-operation on pay policy to an extent which many on both sides of the House—I think I am right in saying—could not have imagined in the summer of 1975. Here, the unions, which have taken and will no doubt continue to take a considerable amount of bashing, deserve a great deal of credit. Many of the union leaders have gone to the extent of shaking their own credibility in the eyes of their members. But we have seen results: the retail price index, the year-on-year rate of inflation, is 7.8 per cent. for this September. That is a quarter of what it was in 1975, and a half of what it was a year ago in September 1977. The monthly rise this September was only 0.4 per cent., the lowest this year. Naturally, we want to get it lower; but it shows the decline. Our inflation is now slightly below the average rate of our industrial competitors. Nevertheless, I readily admit that we still have some way to go to get our inflation rate down to German and Japanese levels. Therefore, the aim this year must be to halve the rate of earnings increase, so that inflation is held down. This is what the Government's 5 per cent. policy is about.

We make no claims that this policy is perfect, nor that there are not possible loopholes in it. We hope to improve it through ideas and initiatives from every source. On this point, there certainly is the national dimension as well as the Party political dimension. We are not a Government of closed and rigid minds, and the current discussions with the trade unions are fundamental. I recall that Churchill said: "Jaw, jaw is better than war, war", and while they are talking that is hopeful, not just for the Government and my Party but for the country as a whole.

There is no gain in achieving paper increases in pay unmatched by increased output. Here, we would be talking of confetti money. A nation, it is said, sometimes gets the Government it deserves, but a nation always gets the incomes policy it deserves. It is undeniable that, on average, we raised our money incomes by too much last year. Earnings generally rose by 14 per cent. in the 12 months up to this July. If this continues, it will be passed on in price increases and we shall be back with rising price inflation. However, without an incomes policy the outcome would have been much worse in the last round. I do not think there is any doubt about that.

If individual groups of workers use their industrial muscle to press for settlements greatly in excess of what can be justified, they do so at the expense of others. Even with productivi y deals—and here is an example of an opportunity for flexibility, and the Prime Minister made it quite clear he was talking about real deals and not phoney productivity deals—all a Government can do in the final analysis is set a standard of conduct, a pattern of behaviour. This is what we are doing.

Inflation is a social evil, it destroys the value of savings, it depresses the real value of money and it particularly hurts the lower paid. Inflation is an obstacle to growth and a cause of unemployment. Inflation frustrates the intelligent management of the economy. Inflation destroys our international competitiveness. If we pay ourselves more than we earn—unless we devalue the currency, itself a stimulus to inflation—we price ourselves out of world markets and out of jobs. Inflation makes investment less certain, more risky and less attractive. Fewer jobs in investment goods industries, and a reduction of capital equipment are the results.

Against the background of a stable currency we can increase our rate of real output. The level of investment of British industry must continue to increase. Current figures are good—but I agree that they are not yet good enough. We are only approaching the volume of investment in manufacturing industry achieved in 1970. Profits are essential in public and private enterprise. They create funds necessary for the future building up of our economy and the incentives to which the noble Lord referred. It is true that profits in the aggregate are not yet high enough to secure this, but profits must not be confused with profiteering, which is quite a different kettle of financial fish. Our productivity is not high enough, I agree with the noble Lord. This is the concern of management as well as workers. This is a dual problem. Equipment needs to be improved and the organisation and working practices of designers, managers and shop floor workers need improving. The control of inflation is a prerequisite of increased productivity and highly sharpened competitiveness.

The organisation and effectiveness of our selling at home and abroad must be better. With the exception of the period of this Government, we have been losing our share in the world market for manufactured goods. The broad achievement of the last four years in breaking the long trend of a fall in Britain's share of the world market for manufactured goods, is being maintained. Nevertheless this "nation of shopkeepers" needs to learn to compete again. Imports of manufactured goods, although not flooding in as in the 1972/1973 boom under the last Government, continue to rise faster than exports, and we have still not solved the problem of competing effectively in our home market. The country can only improve its trading position against the background of a stable pound. International factors enter into this. The economies of the Western world are inter-dependent and we must welcome the endeavours of President Carter to stabilise the dollar. I do not think it is insignificant that he has felt the need to include wage restraint and a voluntary wage norm in his package of measures.

For the past two years—this was a point raised by the noble Lord, Lord Thorneycroft—we have been selling overseas very successfully indeed, and over that period our currency has continued to appreciate. The noble Lord had some interesting comments to make about the European Monetary System about which he was good enough to warn me in advance, and, like him, I shall listen with interest to what other noble Lords have to say in the debate. It is a complex issue and my right honourable friend the Chancellor of the Exchequer yesterday tabled an explanatory memorandum, setting out the background. For my part, I propose to say no more than that my right honourable friend has played a constructive and realistic part in developing the ideas for a European Monetary System and I repeat the Prime Minister's observation that the House of Commons will wish to debate the issue before the Government reach their own conclusions on the matter. It is not something we can go into very easily without a great deal of examination.

The other side of this tremendous problem with which we are faced is, ofcourse, unemployment. Although last month unemployment was 90,000 less than it was a year ago, it is still far too high—as indeed it is in the industrial world as a whole—and we cannot forget that the world recession is still with us. Our special employment measures have had a substantial effect, first, in preserving the production teams and building the skills which British industry will need to call on as it continues to grow, and, secondly, in that a quarter of a million people are now benefiting from these measures, and the number is expected to rise substantially. This means that we have successfully kept employment and training high in relation to the level of output. This depresses recorded productivity averages, but builds industry's future capacity.

One change in these special employment measures was announced in the gracious Speech. A subsidy for short-term working will displace the Temporary Employment Subsidy. This change, which is agreed with the European Commission, builds upon measures in operation by some of our European partners and is a further improvement in the pattern of our support for employment during the progressive build-up of our national output and investment. Such measures are, of course, no substitute for the falls in unemployment we have been seeing over the past year and which we look forward to seeing in the future. These falls have occurred while our special measures were being held at about a constant level.

Real growth in the economy and pay rises are not the sole reasons why we have seen an increase in people's standard of living this year. Fiscal measures have also played a large part in increasing and maintaining the purchasing power of incomes. Our economic measures are also tools for social ends, and this we must not lose sight of. Average real disposable income is over 7 per cent. higher than a year ago, and there is more money for families. Child benefits go up again this month to £3 for each child, and they will go up further to £4 per child next April. The effect of these benefits, taken with the Government's raising of tax thresholds and the introduction of the lower initial rate of tax, are together worth a very great deal to the family whose breadwinner is among the low paid. The Government give priority to pay rises for the low paid. But, before any rise, the family man with two children under 11 on £50 per week will this month find his family income 11 per cent. higher in real terms than it was a year ago. And this month pensions will be 20 per cent. higher in real terms than when we took office.

Our efforts to build up and keep the social side of our policies are not without difficulties. But they lead towards a less ill-balanced society. The Tories propose a fiscal policy consisting of tax cuts and public expenditure cuts, but they become very vague as to where the expenditure cuts will fall. The noble Lord, Lord Thorneycroft, himself pointed out that more needed to be spent on education. It is perfectly true that we all want more spent on the things that we feel need it—on the arts, for instance. I should also like to see more spent on my particular area of conservation of historic buildings and ancient monuments. We should all like to see more for the Health Service; but the Opposition also insist at one and the same time that they want greater tax cuts and a reduction in the overall public sector borrowing requirement. It is clear that one cannot have big tax cuts and immoderate wage settlements. If wages get out of hand, the Government will be forced to take the unpleasant alternative of higher taxation or else must make such huge cuts in public expenditure as would result in rocketing unemployment and severe damage to the quality of life. How, in the absence of an incomes policy, the Tories would propose to use fiscal policy to fight inflation without depressing the standard of living remains very unclear, I must confess.

The truth of the matter, of course, is that public expenditure growth must be controlled and the Government have been and are controlling it. In fact, there have been a great many grumbles heard about this. There are priority decisions to be made on where the available resources for public expenditure are best applied, and these are socially crucial. Of course, reductions in direct taxes are needed and these the Government have been introducing. Of course, economic incentives matter enormously. They matter for middle and upper income groups as well. The Chancellor is well aware of this and is committed to reducing taxation as soon as circumstances permit; but I must also point out that such incentives matter even more to those lower down the incomes scale, especially where tax liability and social security entitlement have overlapped. That is the poverty trap area which we do not hear so much about from the Conservatives.

The Leader of the Opposition, in her speech in another place yesterday, laid great emphasis on monetary control as a counter-inflationary instrument, although I must say she appeared to wobble on what, for her, is the minefield of incomes policy. She did not quite take what I wish she had taken from the noble Lord, Lord Thorneycroft—what he called the "judicious mixture approach". She was quoted in The Times as saying that constraint on the money supply was the only thing that would ultimately hold inflation. I made a note, "jolly good", when the noble Lord, Lord Thorneycroft, talked about the "judicious mixture". We attach great importance to monetary aggregates and keep a watchful eye on the money supply. This is essential: we have no intention of letting it get out of hand, and it is within the target range we have set.

However, there is a difference between the Government's approach and that of the Conservatives towards counter-infla- tion policy. I am aware that the Party opposite is not of one mind, although I do not want to intrude too greatly into private grief, but I take it that we must rely on the Leader to interpret the policy. We know that monetary restraint cannot be the only means of control and therefore we have to have an incomes policy that works. For the Conservative Party, relying on monetary control is another way of saying that they would ration the amount available to employers to pay wages. In practice, that would mean that the squeeze would be on companies in regard to the number of pay packets they could afford to fill as much as on the amount that they put into those pay packets. It would also be a squeeze on investment, and would be a very un-discriminating weapon indeed. The big companies would be able to protect themselves to some extent, because they would not go down, or sink, if they had to hive off some of their subsidiaries, or some of their workers; although even they would not be able to protect all their workers. Interest rates would go up, hitting people with mortgages as well as those wishing to borrow for investment. Among the small companies, there would be bankruptcies and it seems that, in this case, the Party opposite would be in the postion of manufacturing lame ducks, although it does not appear to want to help them. The Government are proud of their record of help to small businesses, and more is promised in the gracious Speech. It was interesting that the CBI survey, published on Tuesday, reported optimism and increased activity among small businesses. I should have thought that the CBI would be extremely worried that the Tories appear to be against an incomes policy.

I do not think that I have misrepresented the Conservatives' counter-inflation policy, since my "guesstimate" is as good as anyone else's. The noble Lord, Lord Thorneycroft, made what I thought was a very valid plea for flexibility, and I am a great believer in flexibility. But the flexibility in the approach of different leading members of the Conservative Party has almost gone haywire. It has gone beyond the reason and the common sense to which the noble Lord paid such attention. At Brighton in October, Mrs. Thatcher offered realistic, responsible collective bargaining, free from Government interference. Mr. Heath, to his credit, differed openly and there are reports—I do not know whether or not they are true—which seem to have filtered through from the Shadow Cabinet, that others share his view.

The question is simple; it is whether realistic, responsible free collective bargaining, free from Government interference, is an option at the present time—and I am not talking about any long-term future. I agree with Mr. Peter Walker that it is not. I do not agree with Sir Keith Joseph and others who have spoken of cash limits in the public sector and determination of pay increases by the market in the private sector. It may be kind to be cruel in the short-run, but a situation which can only result in a tremendously heavy increase in unemployment over and above the present level of unemployment is something which the Government would certainly resist very strenuously.

In the Sunday Times of last Sunday, Terence Higgins, who was a Treasury Minister with the Party opposite, explored the role of cash limits very lucidly and I cannot do better than quote directly from what he said. He said that, Sir Keith Joseph and Sir Geoffrey Howe implied at the Tory Conference that cash limits can prevent excessive public sector pay claims. In fact, as a recent Public Expenditure Committee report made clear, the relationship is the other way about. Public service pay accounts for almost half the total expenditure covered by cash limits. If the Treasury's pay forecasts are invalidated by excessive pay settlements, cash limits will inevitably be broken". I do not think that I can improve upon that summing-up. Is the determination of pay increases by the market in the private sector any different from the first position of the last Conservative Government, and, if so, how is it different? I do not think I am alone in wanting to know some of the answers to this, particularly when, as the noble Lord put it—and I agree—the problems that we are facing are national ones.

What I think, though, is that our social ends are different. I believe that we want a different kind of society from that desired by the Conservative Party. The kind of society that we want affects the means by which we try to find it. We want a flexible position where we balance our economic needs with our social needs. It is clear that the need for restraint is something which the country supports. It supported it in the recent Gallup Poll, and even in the poll taken in a Midlands city the answer to the question whether people wanted the Government to set some limit was, Yes. Support was also clearly shown in the result of the Berwick by-election. So people are beginning to understand and accept what I would call the ethic of the importance of having restraint, in order to be able to enjoy very much greater flexibility in the future.

I wonder whether I may also quote something that I said in winding up the economic debate last year and which I think is still applicable this year. I said: The Government are trying to provide the economic, social and cultural balance that makes up a society that is compassionate and believes in the quality of life, but they cannot succeed without the participation of everyone".—[Official Report, 8/11/77; col. 147.] I think that the Government are showing determination: they are showing courage and I believe that we have the country with us.

4.36 p.m.

Lord ROCHESTER

My Lords, the gracious Speech proclaims a number of intentions in the economic and industrial fields that are admirable in their general sentiment, and we on these Benches certainly welcome them wholeheartedly, particularly in regard to the priority being given to the control of inflation and the reduction in unemployment. Our doubts centre around the question whether the measures contemplated to achieve these objectives will have the desired effect. Indeed, in some cases we are not altogether clear as to what the measures themselves actually are.

For example, as has already been recognised, the major issue of the day is undoubtedly pay policy. We know of the Government's 5 per cent. guideline but, judging by the rejection of that policy by the TUC and the present state of play at Ford's and elsewhere, this has already been pretty badly knocked about, and we have still to learn what, if anything, is to take the place of that guideline as the outcome of the discussions which, as the noble Baroness has just reminded us, the Government are now conducting with trade unions. We are particularly doubtful as to this Government's ability to make their pay policy stick, and we are opposed to sanctions to uphold it which are operated, as at present, in rough and ready terms, and which do not have statutory backing.

My Party is clear that any sanctions should be authorised by Parliament and, indeed, related to the crucial factor of productivity, so that if in collective bargaining in the private sector it does not prove possible to maintain the ratio of labour costs to added value in any enterprise, then the increase above that ratio should be taxed. Having said that, I must make it plain that we should like to offer our broad support to the Government in this field. We certainly feel that their policy is much to be preferred to that outlined to us this afternoon by the noble Lord, Lord Thorneycroft, particularly in relation to the point which the noble Baroness has just emphasised; the fact, as we see it, that no Government nowadays can escape from their essential role of intervening in this field of pay policy.

There is, however, apart from the short-term problem, the problem in the long-term. Here our feeling is that there really is need to establish some way which involves Parliament, perhaps through an extension of the Select Committee procedure, in determining wages and salaries generally. The time when this should be done is not, in respect of the pay round 1979–80, in July 1979. That would be in keeping with what has been the case for the last few years. The time is now, so that we avoid the situation in which we have found ourselves in recent years.

On the other major issue of the day, that of unemployment, as the noble Viscount, Lord Amory, reminded us in the debate which he initiated last July, improved productivity, as we see it, is again the key, for it is only that which will enable us to compete internationally—a point which was stressed by the noble Baroness—and create the new and lasting employment opportunities that are needed. In the gracious Speech there is a brief reference to the need for higher productivity, but there is precious little evidence that I can find of the fundamental changes that are needed to bring this about. We would, however, in this matter like to welcome the promise to encourage the further education and training of young people for skilled jobs in industry and also the additional help to be given to small businesses, which we must hope will in due course be reinforced by reduced direct taxation. We shall await with interest—and for my part, I must say, with a certain scepticism, bearing in mind the need to keep down unit costs—the outcome of the consultations that are now going on with industry concerning short-time working and its financing.

As to the proposed legislation to provide additional finance for the National Enterprise Board—a point that has not, I think, yet been mentioned—I think I may say that we on these Benches have open, even potentially receptive minds, depending on the use to which the money is put. For my part, I have come rather to admire the more entrepreneurial aspects of the Board's work, but I think I should give warning that in our view the time is fast approaching when a halt will have to be called to the granting of further help for volume car production at British Leyland.

I should like to refer briefly to the subject of so-called industrial democracy, for again it is not plain—to me at least—from the wording of the gracious Speech just what the Government here have in mind. There is reference to legislation under which employees and trade unions would participate in discussions on corporate strategy and to the fact that there should be provision in due course for employees to sit on company boards. We certainly welcome the fact that on this occasion employees merit a mention as well as trade unions; indeed, they are put first in order. My Party has for long had its own distinctive policy in this field: that employees should be members of their companies and that, along with shareholders, they should participate in the election of directors in a way which would mean that those directors would not, in a potentially divisive way, be representative some of shareholders and others of employees but rather that they would all represent both. My own view continues to be that it is essential that a consensus should be reached on this vexed question. On one point we on these Benches are absolutely clear: that any legislation on this subject must apply not only to members of trade unions but to all employees.

I hope that on the major industrial issues I have said enough to indicate our general reaction to the Government's intentions. My noble friend Lady Seear will deal later in more detail with the economic aspects of the gracious Speech, and no doubt she will take the opportunity to say something about a point which was stressed by the noble Lord, Lord Thorneycroft: the question of the European Monetary System. What I should now like to do is to return to a theme which has on several recent occasions been raised in your Lordships' House and to stress my continuing conviction—stronger than ever in the light of current events—that the economic and industrial stability that our country so desperately needs will not be achieved until we as a nation can reach a common understanding that it is in the interests of all of us to increase the size of the national cake rather than spend so much of our time squabbling as to how it is to be sliced up.

In my view—and also, incidentally, in the view of a number of other people having industrial experience and whose opinions I very much respect, not all of whom are Liberals—this involves a number of things. It means that people employed in certain key occupations that are vital to the immediate support of life should in future be treated as being above the battle, and that questions affecting their pay and conditions should be determined, not by a number of bodies, as at present, but by a single independent body in which all parties repose confidence. This body should be altogether distinct from the Advisory, Conciliation and Arbitration Service, which has other functions to perform, and its maintenance and its independence should be guaranteed by commitments entered into not only by the Government of the day but by Opposition Parties, which would include an undertaking that in all circumstances, and irrespective of incomes policies, the findings of that body would be implemented. This would be in order to ensure the continuity of policy which, with the abolition by successive Governments first of the Prices and Incomes Board and then of the Relativities Board, has in recent years been so conspicuously lacking.

There are many difficulties in the way of implementing this proposal, particularly some concerning the pay bargaining rights of trade unions and affecting the selection of the occupations which could be treated in this way. Moreover, I cannot for myself see that at present it is really realistic to suppose that the people concerned would all prove willing to forgo their right to strike, where they have that right, as a condition precedent for receiving this treatment. The assumption, therefore, would simply have to be made, as I see it, that in return for this privilege they would in future act responsibly. Whatever view may be taken on this point—and it is certainly a matter for debate—I am convinced that in the end we shall have to reach some such conclusion as this if our social cohesion as a nation is to be preserved.

Secondly, I believe it is high time that discussions were initiated between the Government, Opposition Parties and representatives of employers and trade unions designed to secure commitment throughout British industry to a specific proposition which should form the basis of an agreed code of practice that conditions should everywhere be established to enable negotiating procedures to be introduced in which both management and employees have sufficient confidence to see that they are observed. Under those procedures the aim should be to work towards a situation where, as now in Europe, in all disputes concerning the interpretation of the terms of agreements already entered into, and whether they affect individuals or groups, in the last resort they should be settled by arbitration which both management and employees would abide by.

Thirdly, and in my view most important, in order to meet the needs of all engaged in industry and for the benefit of the country at large, similar discussions should be aimed at establishing activities sponsored jointly by employers and trade unions and generously financed by the Government. Those activities should aim to meet the needs for society at large to gain, and particularly for management and employees to share, an understanding of some of the basic economic facts of life: how a business is actually run and the relationship between productivity, pay, prices, investment and, particularly, em- ployment, all directed towards cooperation in fulfilling the basic purpose of industry, namely, the production of goods and services for the benefit of the community as a whole.

I well know from painful experience that the joint participation of management and trade unions in such activities and in helping to establish and ensure the observance of the negotiating procedures I have been advocating, will demand both changes in management attitude and courageous trade union leadership, but in my view it is only if we can learn to work together in ways such as these that we shall be able to solve our basic economic and industrial problems.

4.54 p.m.

Viscount WATKINSON

My Lords, I propose to restrict my remarks to the gracious Speech to inflation, pay and employment. I would say to the noble Baroness who spoke for the Government that I thought (if I may dare to say it) she had some good clean fun in talking about what the Conservative Party did or did not do, but she was a bit short on saying what the Government could or would do, and perhaps I may say to her that in my view the economic situation has no Party politics.

What is the economic situation at the moment? Well, let us give the Government credit for this: just as we seemed to be making progress against inflation and unemployment the whole policy now seems likely to go on the rocks over the mess about pay policy; and yet, as the noble Baroness herself admitted, and as my noble friend Lord Thorneycroft set out at much greater length than I need do, our position in the industrial league is still disastrously low and the industrial outlook is menacing—more menacing than I have seen it in 50 years in business and politics. Who bears the blame? I think really it is time that somebody said that the Trades Union Congress bears most of the blame for this, and I thought my noble friend was just a little too kind to the trade unions on this point. Many trade unionists I claim as friends, although, sadly enough, most of my friends seem to be heading for retirement, like myself, and I agree with my noble friend that in my day trade union leaders could and did deliver. It seems sad that today trade union leaders—and they form the TUC—should reject the policies that have in fact made most of their members better off in real terms, in the last 12 months at least. I think that should be clearly said. I find it quite incredible and unbelievable, and it is sad for me to have to say, that new union leaders seem to have to learn again all the painful lessons of the past. Again we find being trotted out this astonishing misconception that if you limit prices then in some mysterious way you do not have to do anything about pay. I would only say, as I have said many times to people like Mr. Jack Jones and Mr. Hugh Scanlon, who sadly enough are no longer leading their particular unions, that if you want a recipe for greater unemployment and for long-term industrial disaster then confine industrialists to even lower profits than those to which they are confined at the moment. They are far too low for future investment, for better employment; cut them further and that is a real recipe for disaster. I thought that the TUC had at least learned that lesson, but once again they are trotting out the old silly saying that we should cut prices and not worry about wages.

However, not only the TUC are to blame. I think the Government—and I am sad about this—totally misjudged the situation and should have sought much wider debate and discussion, in whatever forum is appropriate—and I certainly would not rule out Parliament in this regard—before they embarked on the 5 per cent. guidelines or indeed any guidelines at all. If they had gone into that discussion I think they would have learned very plainly that a more flexible approach was the only one that was likely to make any sense at this particular time. They have now compounded their troubles by making a total and thorough mess of sanctions and they will find that with Fords and with one company after another. So I do not think the Government come out of this with any great credit at all.

I personally support the necessity to combat inflation and I certainly support the belief that if we do not have some reasonable limits on pay, if we have pay increases of 30 per cent. as we had earlier in the life of this Government, then any hopes of curing or even coping with inflation are totally illusory. I think the 5 per cent. norm was suddenly conjured out of the air with very little discussion, so far as I know with either employers or trade unions. Wider discussion might have led to a more practical and more viable policy.

The trouble is that pay policies are inevitably very complex and I really wonder whether the TUC and the Government have done their long-term homework on this problem. As an example of how difficult it is, the CBI has been working on this problem for four years and even after four years in Britain means Business 1978, which is our current statement on industrial policy, which we shall be publicly debating at the Dome in Brighton next week, we are inevitably tentative about what had to be done. But at least we have tried to put something on paper; at least we have tried to bring some coherence to what is becoming a totally incoherent situation.

There is one proposal that I should like to mention here because it deeply concerns Parliament. I do not know whether our conference next week will overturn these proposals—conferences seem to have the habit of doing that these days—but none the less our present proposals are that there should be an economic forum linked closely to Parliament which each year, after public debate and discussion, would publish an independent forecast of what the nation might be able to afford in terms of pay and also indicate the monetary background against which the forecast must be placed. I must say that I hope Parliament will take some interest in this—and I say Parliament and not Government, or not Opposition if you like, because I think it is high time that Parliament, our own House and the other place, should be more deeply involved in a matter which concerns the wellbeing and livelihood of every one of our citizens. We cannot go on as we are now; and yet there is no easy way out of our difficulties, there are no single sentence solutions. Both Parties tried the legislative solution; both failed, and, in my view, would fail again. So that is not a runner.

Perhaps in an ideal world you might say "Well, free bargaining in a market economy, subject to market forces". But I have to say this, and I think most of us know it, and I think particularly many of my old trade union friends know it. Free collective bargaining as understood by the political activist offers only conflict and confrontation with an early recourse to the strike weapon. This cannot be in the national interest, nor in my view is it generally desired by people on the shop floor. So that, as understood by the Left Wing activist, is not a solution either. We need more flexible and freer bargaining; of course we do, and, as I have said before, if Government's position had been more flexible they would not be in the trouble they are in now. But such bargaining must be responsible and must take full account of the national interest.

Here one is forced back to the complex of policies with which, for good or for ill, perhaps the best brains in industry, in the CBI, have been struggling, as I have said, for four years. It is certainly a lesson to me, and I hope perhaps to trade union leaders and the Government, that it took 56 pages of our document The Future of Pay Determination—and I wonder how many trade union leaders or even members of the Government bothered to read it—to set out only some of the dimensions of the problem we have to solve.

So my Lords, there it is. I would make one last point, and an important one. Recent arguments about what kind of pay bargaining are, in my view, arguments about quite illusory choices. As my noble friend said—and how right he is—any British Government now or in the future will have to use every form of carrot and stick if it is ever to spur the lazy British people to a more sensible practice, to end the belief that somehow they won the last war and they do not ever have to try any more. If any Government are going to succeed in that they will have to use monetary policy, tax policy, production policy, and the lot; all will have to play their part if we are to win through and fight and beat inflation. Perhaps here we should discipline ourselves by realising that, even if we were to achieve the famous 5 per cent. on pay, it really would do nothing to slow down our slide to the bottom of the industrial league. If we want to rise again then quite different policies have to be considered. I make no apology for saying again to your Lordships what I ventured to say in the last debate we had on pay and productivity, and that is that unless we can get back to a high output/high earnings policy we cannot prosper and we cannot make progress upwards again.

It is worth reminding the trade union leaders, and perhaps worth reminding the organised employers, so to speak, that they gave an undertaking some three years ago at Chequers which we have all been singularly bad at implementing. It was agreed then—and I am only quoting from the public communiqué and not from any private source—that the performance of British industry since the war under successive Governments has been steadily deteriorating in comparison with the performance of our competitors. I do not think anybody argued about that. We then said—the trade unionists and businessmen who were present there said—that we would endeavour to transform a declining economy into a high earnings/high output economy based on full employment. Unless we do that, we really have no hope at all.

Although I personally hope that the present Government will not be seen to be too banged about by the trade unions—because I do not think that it is right that any Government should be dealt with in that way—none the less, whatever happens on this 5 per cent. argument, whatever happens in this so-called fourth round of pay restraint, unless we can get back to increased output, increased efficiency, a new feeling of drive and efficiency in industry, all we are going to do is perhaps to stop ourselves from going bankrupt and live on the bonus of North Sea oil as long as it is there. I wonder whether the present Government have the will any longer to take this line. Perhaps a new Government would have a better chance. I believe so anyway, and so perhaps the sooner we have that the better. But in the meantime we have to go on with life and work. I must say, in conclusion, that, whether it is now or whether it is under a new Conservative Government, which I think would bring a new impetus to industry, unless we can solve the problem of how to get better output, better earnings, at lower cost, we can go on arguing about pay until we are black in the face and it will not do us the slightest good at all.

5.7 p.m.

Lord KALDOR

My Lords, I agree with all previous speakers that, so far as the immediate situation is concerned, inflation is the most serious danger—the threat of inflation that would inevitably follow the collapse or the abandonment of the Government's incomes policy. I think I would add—I am sorry that Lord Thorneycroft is just leaving—a second danger which is almost equally serious, and that is if by some incredible folly we were to join the European monetary system. However, I do not think the second danger is as immediately pressing as the danger of inflation which would arise if incomes policy broke down. In the matter of incomes policy, the present Government have succeeded better than any previous Government, and the matter has been equally tried by Governments of both Parties. They have succeeded better in maintaining an incomes policy for three years in succession, and have thereby brought about a gradual and steady reduction in the rate of inflation, from the 25 per cent. to which it was boosted in 1974 by the automatic operation, the triggers, of the threshold agreements which the Labour Government inherited from the previous Government, to the present below 8 per cent. rate.

During all this period the basic weakness was that the incomes policies agreed on or pronounced on were temporary measures, temporary emergency measures and pronounced as such, and they have not been replaced by more permanent institutions and instruments. In every one of the three years a norm was announced for the coming year, with nothing said of what the long-term policy was to be. It was not put forward as a step towards a new system which would replace decentralised collective bargaining with a more reasonable method of reconciling conflicting claims. So far as one knows, there has been no serious discussion with either the employers or the unions on the question of replacing the present type of collective bargaining with something which would be more consonant with the national interest.

It is not so surprising, therefore, that many trade unionists now feel that three years have been long enough, that it is time to return to free bargaining again, and in this I am sorry to say they received unexpected support from the most unlikely quarters. They want to return to free bargaining without taking into account that on each occasion when it occurred in the past it was accompanied by a wage explosion. I have no doubt whatsoever—and I am glad that the noble Viscount, Lord Watkinson, is of the same view—that it would be so accompanied again. The only certain long-term achievement of the Government has been the improvement in public understanding of the connection between wage increases and price increases. The trade unions may not be ready to replace collective bargaining by a more planned or centralised system of incomes determination, but, there is no doubt that the country, the great majority of the voters and, indeed, the great majority of workers, are ready for it. How else could we interpret the strong support shown in the opinion polls for the Government's 5 per cent. limit?

The noble Lord, Lord Thorneycroft, asked whether the Government really intend that there should be a 5 per cent. limit for ever or some other percentage fixed limit. My answer to him is, No, but they do not intend a return to the free for all, either. That, unfortunately, the Conservatives have not made clear—in fact, they have made it very far from clear in this debate.

The trouble is that, while the country is largely united in the matter of inflation, both on means and on ends, the political Parties are disunited. As recent events have shown, there is no consensus within either of the two great Parties, let alone between them. Sound judgment on this issue is bedevilled by two misconceptions. On the one hand, there are those who believe that large wage increases can be had without price increases because they could or would be paid out of profits. There is no need in your Lordships' House to waste much time on refuting that particular heresy. On the other hand, there are those—and they form a far more vocal and articulate group—who believe that it is not the excessive increase in wages, but the excessive increase in the money supply which alone causes inflation. Those who hold that latter view—a view which is advocated by such traditional serious organs of the Press as The Times—who for the moment seem to have gained the upper hand among Members of the Party opposite, especially in the other place, suffer from a lack of understanding of the connection between money and prices in an advanced economy such as ours with such sophisticated financial institutions.

Whatever may have been the case in the 19th century, it is certainly not true today that the money supply, however narrowly or however broadly that concept is defined, is under the direct control of the monetary authorities or that such control, even if it could be achieved, would exert a powerful influence on the level of wages and therefore on the level of prices.

On the matter of controlling the money supply, no less an authority than the Governor of the Bank of England stated in his recent lecture that the control which the Bank can exercise is of an indirect and not a direct kind. While he believes in monetary targets as an expression of the aims and objectives of policy, the method by which the desired objectives are pursued consists of influencing the demand for money, not directly controlling the supply. He said, if I may repeat what may now be a familiar passage in his speech: Given the level of the national income and excluding temporary influences we"— that is, the Bank of England— work on the theory that interest rates are the main determinants of the demand for money". However, he went on to describe how difficult it is to predict the level and structure of interest rates at which the stock of money the public wants to hold will be brought into equality with the stock the authorities would like to see them hold.

The qualification "given the level of the national income" is important. What the Governor is saying here is that the amount of money people wish to hold will vary with the national income. He definitely does not say that the level of national income will vary with the money supply. There is nothing in his speech to support the extreme monetarist view according to which monetary policy can be used to impose a kind of cash limit on how much business firms can pay out in wages or in dividends or for the purchase of goods and services of various kinds which they use as inputs. The Government, true enough, can impose, and have imposed, cash limits on their own departments. But, the monetary authorities are quite incapable of imposing cash limits on private industry.

There is no way in which the Ford Motor Company could be told through the banking system that it is allowed to spend £5 million a week on paying out wages and no more. There is no way in which the Ford Motor Company could be prevented from obtaining the cash necessary to pay more, however far monetary stringency is carried. Those who take the view that it could be so restricted happily think that free collective bargaining can be safely restored and that nothing untoward will happen, provided that the right instructions are given to the Governor of the Bank of England. Indeed, that opinion was expressed only yesterday in speeches in the other place. Yet, that view is naive in the extreme. In my opinion it is asking too much to subject the country to another period of experiment just to prove to Members of the Party opposite that they have fallen victim yet again to a false ideology or to a phoney philosophy.

I realise that those who do not believe in the monetary explanation of inflation owe it to others to explain how it all happened, why inflation has accelerated so much in all the Western countries in the last decade; and also why the incidence of inflation has been so different between different countries. I should like to say a few words on this matter especially because—as I hope to show—it has some bearing on the question of the consequences of our joining the European Monetary System.

Some countries such as Germany and Switzerland managed to get rid of inflation almost completely in the last few years while others—and these include France, Italy or the United States—have not been able to do so; in fact, they continue to have inflation either at steady or at increasing rates. I have not included our own country only because, although our rate of inflation is very large and threatens to become very much larger, it has, during that period, reduced the rate of inflation to a greater extent than any of the other countries.

The answer to the first question—why inflation has become of an endemic nature in the capitalist world—has a great deal to do with the growing concentration of economic power and the rise of large multinational corporations, which are much less exposed to competition and therefore are under no compulsion to pass on the benefits of large cost savings in the form of lower prices to their customers. This in turn has serious consequences on the outcome of wage bargaining. Indeed, this matter was publicly aired in connection with the recent Ford dispute, when it was pointed out that, if a company makes £140 million additional profit in a year, it is not right that it should offer its workers only £10 million to £15 million of it in the form of increased wages—even if a greater increase would not be justified from a national point of view.

But the question is: how did this situation arise in the first place? I cannot develop this theme here; it is very complex. But, if I may, I should like to draw your Lordships' attention to an extremely thoughtful and scholarly paper on the subject by an American economist, Professor Scitovsky, which has just been published in Economica. So much for the causes of a general acceleration of inflation.

On the second question I think that the explanation is simpler; the pressure for wage increases varies very much with the growth in real incomes per head. The pressure becomes much weaker when real incomes are rising faster, and becomes stronger when real incomes are stagnant and falling. The rise in real incomes for industrial workers depends not only on the growth of production and productivity but also on changes in the terms of trade; that is, in industrial prices relative to food prices. For example, in this country in the latter part of the 1950s, around 1959—just when the noble Lord, Lord Thorneycroft, was Chancellor—inflation was virtually eliminated, despite the fact that there was a very high demand for labour and that registered vacancies exceeded the number of unemployed. There was very low unemployment in that period. I do not think that that result was due to the excellence of the noble Lord's particular policies. It was due to the very large improvement in the terms of trade in the second half of the 1950s which reduced the cost of living. With this element of fall in the cost of living, particularly in food prices, the pressure for wage increases naturally abated very considerably.

Turning to more recent times, those countries which had large surpluses in their foreign trade and which had strong balances of payments—such as Germany, Switzerland and Japan—were able to derive a large benefit through improvement in their terms of trade, which was brought about by the repeated up-valuation of their currencies, just as countries with repeated devaluations, had to put up with a deterioration in the terms of trade, which gave a boost to inflation.

But real income per worker depends not simply on the terms of trade but on productivity, which in turn depends very much on total production and total employment. All these things move together. It is for that reason that I regard anything which threatens to lower total production and, therefore, to lower consumption in this country as so dangerous. For example, if in the present situation we entered the European Monetary System and did so for reasons of prestige—on which the noble Lord, Lord Thorneycroft, put so much emphasis—or for a mistaken belief that this is the way to achieve greater monetary stability, by the very nature of that system we may be compelled to follow far more restrictive economic policies. We may be compelled to do so in order to maintain the parity of the exchange rates within the grid. Although these policies may cause rapidly growing unemployment, they will at the same time necessarily reduce real disposable income to the wage earner. For that reason they will make inflationary pressures not less but more severe, thereby necessitating still further restrictions.

I do not agree—and I think that I must say so quite openly—with the Prime Minister and the Chancellor when they announced that, if the 5 per cent. limit is abandoned, they will resort to far more restrictive fiscal measures in order to counter-balance the inflationary trend. Those restrictive measures will not counter-balance anything. they will cause a further compression of real incomes which will make the pressure for wage increases greater, and not less. No less an authority than the famous Professor Milton Friedman described in his Nobel lecture the relationship between unemployment and inflation as one of positive correlation, not a negative one; that is to say, the higher the unemployment, the greater the rate of inflation. I submit that the causation goes from unemployment to inflation and not from inflation to unemployment.

For these reasons, joining the EMS may thus cause us to get into a downward spiral while the more fortunate members of the system benefit from an upward spiral which has been partly activated by our downward spiral. The upward spiral will be the mirror image of the downward spiral. I submit that I cannot see anything worse from the point of view of the long-term future of this country than such an eventuality if it really happened.

5.28 p.m.

Lord ROBERTHALL

My Lords, I hope that it is not too late to begin by joining in yesterday's congratulations to the mover and seconder of the gracious Speech. I thought that the speeches were moderate and I enjoyed them very much. The Speech itself held no surprises. I take it that the objective of the Government is to keep the temperature calm and steady. It seemed to me that the Speech was designed to do precisely that. I do not propose to touch on it generally. I have been asked to say a few words about the European Monetary System on behalf of Sub-Committee A of the Scrutiny Committee. We discussed this the day before yesterday and we all agreed that the details of what is in the scheme, let alone the attitude of Her Majesty's Government towards it, are still much too uncertain to put us in a position to make any report to your Lordships. However, we are trying to keep the position under close scrutiny.

When the gracious Speech dealt with home affairs it began by saying, quite rightly, that the great problems before us were those of inflation and unemployment. I propose to confine myself to those two subjects, as a number of speakers have done already. On inflation, I shall not attempt to follow the noble Lord, Lord Kaldor, in those very intricate speculations in which he indulged. I think that anyone who has not read the Speech and perhaps looked up the references would be very rash to do that. But I agree with him—and I think with the noble Viscount, Lord Watkinson—that we are in for quite a marked expansion of wages, perhaps another wage explosion. From that point of view the situation looks very gloomy. The social contract is on the scrap heap. Perhaps one ought to say that half of the social contract is safely on the Statute Book, and the other half on the scrap heap.

Is the policy then in ruins? In the present situation I myself see some grounds for optimism. Your Lordships have often heard debates on the different remedies for inflation. Whether they be incomes policies or monetary policies, or a mixture of the two, it has become increasingly obvious for some time that the credibility of either of these remedies depends on finding a Government who are able and willing to carry out and enforce either of these policies. It has become increasingly clear that the trade unions are in a position, if they do not like a Government policy, to bring our economic life to a standstill and that in the end we are not likely to see a Government prepared to go on with that policy. It follows from this that until the Government have public opinion firmly behind them it does not matter what policy they put forward, it is either going to last a short time, as did the last experiment, or collapse as did Mr. Heath's.

That is where I see a certain amount of improvement. The noble Baroness, Lady Bacon, told us yesterday that in her part of Yorkshire people were now getting very concerned about inflation and thought that it was clear that it was high wage settlements that were the cause of it, and that these ought to be modified. Whatever we may think about the way that the Government introduced their present policy—and the noble Viscount, Lord Watkinson, was pretty severe with them—there is something new. The Prime Minister announced his policy in the teeth of the opinion of the trade unionists. They rejected it. But he stuck to his guns and he has done what ought to have been done long ago, and that is to say to the trade unions, "All right, you have got the power now. You say you are against inflation. If you don't want to do it my way, what is your way to do it?" That is a step in the right direction. I do not think they are going to come up with very much. In fact, they have suggested, as several speakers have said, that it ought to be done by controlling prices.

Mr. Sam Brittan, a little while ago in the Financial Times, held up Mr. Moss Evans as the best monetarist we have. I am looking forward to Mr. Sam Brittan now acclaiming what an improvement on monetarism the policy of controlling prices will be, because then, instead of slowly squeezing the economy and getting bankruptcies and unemployment in that way, you just clamp down on prices and get all the bankruptcies and unemployment straight away. That is a real short circuit. It is only by attempting to bring home to the community as a whole the necessity for some kind of an agreed policy and the necessity for supporting the Government that we are likely to get anywhere.

In this connection I should like to say a good word, if it is not impertinent, for Mr. Heath. If he thinks it a matter of national importance and that a particular policy is the way to handle it, he is absolutely right to say so. We shall never solve this problem while it remains a Party matter. It is only with the whole of public opinion that we shall solve it. Any Government in power would be glad if they had not said too much in opposition (as we tend to do now) against the policies which we know perfectly well from our own experience, and that of other countries, they would have to follow when they came to power.

In the rest of my speech I should like to say a few words about unemployment. Here I am afraid I do not feel at all optimistic. This represents the great weakness in our economic system, and I do not see any signs of improvement. As some of your Lordships know, I was economic adviser to the Government in the early days of the full employment policy and had a good deal to do with the advice which they got. In those days we did not pay as much attention as I now think we should have done to what we meant by sustainable full employment.

The late Lord Beveridge (Sir William as he than was) wrote a book about full employment, with the help of Mr. Kaldor (as the noble Lord then was). He analysed the problem and laid down a sort of maximum of 3 per cent. made up of some people who were unable or unwilling to work at the going rate, some moving from one job to another, and some who were in a declining industry and took some time to be trained and brought into expanding industries. In the 1950s we did rather better than the 3 per cent. We had more like 2 per cent. unemployment. I gradually came to the conclusion that we overdid it; that there was rather overfull employment at 2 per cent. But I came to the conclusion that the best indicator was the movement of the index of industrial production, because as output expanded in an expansionary phase you reached a point where this index flattened out, and that obviously was because of bottlenecks in the system, and as people could not find the goods they wanted from home production they got them by imports or by holding back exports. I thought that the target then ought to have been nearer to 3 per cent. than to the 2 per cent. that we were working on.

It became evident in the ensuing years that the basic structure of the economy was altering so that the point at which we ran into trouble became a less favourable one. Mr. Jenkins, who was a successful Chancellor of the Exchequer, tried to flatten out the economy at between 600,000 and 700,000 unemployment—a much larger figure than we had had. Mr. Heath and Mr. Barber got it down below that, but at the cost of the most extreme inflationary pressure. But it was very disquieting at that time to notice how the index of industrial production was flattening out well before one would have expected. Now we have something like one and a quarter million unemployed, which would have been considered inconceivable in the days that I am talking about. I am sure that the noble Lord, Lord Thorneycroft, with whom I had the privilege of working—although I am afraid we did not always see eye to eye—would in those days have been aghast if we had got anywhere near, not one and a quarter million but 600,000 unemployed.

Why is it? It is not because politicians do not want to get rid of unemployment; they would love to get rid of it if they could. It would be nice to think it was because they had worse advisers and worse Ministers, but I do not think we can indulge in that, however gratifying it would be. It seems that we are now suffering from much more severe structural weaknesses than we used to have—of the kind Lord Beveridge analysed—and, to put in a nutshell, I think the economy has lost a great deal of its power of adaptability. In other words, we live in a changing world with forces coming upon us from inside and outside but we cannot make the necessary adjustments to them.

I spoke about the flattening out process, and we have this large amount of unemployment. The Government are worried—as the noble Baroness, Lady Birk, reminded us—and if we expand now our imports will go up and our exports will be held back, this at a time when there are complaints of shortages of skilled labour in all sorts of places. One need only walk round London and see all the advertisements for people. It does not make sense that we should have so many people out of work, yet nevertheless be unable to get them to make the sort of things which at present we insist on importing. That must be because we have lost so much of the power of adaptability.

I do not have time to elaborate on this subject, a subject which has been discussed many time in your Lordships' House; it was discussed in the last Session especially in the debates introduced by the noble Viscount, Lord Trenchard, on industrial relations, and those introduced by the noble Viscount, Lord Amory, on productivity. There are many reasons one could point to. For example, there is the influence of social security payments and what is called the poverty trap—the gap between what one earns and what one gets on social security—and while I do not say people do not want to work, it must be a factor in their minds when they are looking for jobs if they will not be very much better off by taking them. An enormous factor is undoubtedly the attitude of the trade union movement, which throws great obstacles in the way of any improvement in productivity or any redeployment of our resources. I believe the fact that so many of our resources are now in the non-manufacturing sector compared with the past is making the problem of adjustment more difficult. The task of managers has become excessively difficult, and managers here must spend much more of their time on things that in other countries are taken for granted.

Whatever the cause, it seems to me that the real explanation of why our unemployment problem is so intractable—I accept that the international situation has a little to do with it, but it is only a small part of the whole—is our lack of adaptability. I do not know what we are going to do about it. It is a complex problem and a slow one to resolve. I appreciate it is all very well to diagnose it—we can all give our own diagnoses—but how we solve the problem is a different matter. It will have to be solved, and here I agree with the noble Viscount, Lord Watkinson. To me, the attitude of the country is very like that expressed in the title to the film "Stop The World I Want To Get Off". We know the world will not stop, and anyway, how could we get off?

Some people advocate protectionism, but that would be like putting us into a part of the species that cannot cope with the environment any more. Unless the protectionists can explain how, under that system, we would recover our adaptability I cannot see any argument for what they advocate. Then there is the question of work sharing, and again if those who talk about work sharing were prepared to share the wages at the same time and say, "We want more leisure and less material goods", I could see it might be a logical solution, but that is not said; the claim for work sharing is associated with a claim for much higher wages. I feel, therefore, that we are in a bad way. Somehow we must recover our willingness to change and adapt. I can only say that I feel very gloomy and I fear that I am not likely to see it in my lifetime.

5.46 p.m.

Lord HAWKE

My Lords, I wish at the outset to inform my noble leader, Lord Thorneycroft, that I greatly enjoyed his speech. He is the only former Chancellor who ever did the slightest good for me and in consequence I have always had a soft spot in my heart for him, though I must tell him that the good he did was only a small one. It is obvious from the tone of this debate that the two great economic problems of the day are inflation and unemployment, and of course different people have different views about their cause. The general public has no illusion as to the cause of inflation; they believe it is due to higher wages, rises in pay. They see that every time the miners get more, the prices of coal and electricity go up; that every time the railmen get more, railway fares go up; that every time the busmen get more, bus trips cost more, and so on down the line. Wives in particular are the losers every time because by and large men do not pass on to their wives the full amount of their rises in pay sufficient to pay for the extra housekeeping. Indeed, most people in this country would like a pay freeze, provided of course it did not apply to their own pay.

When one comes to consider remedies, controversy rages in the way controversy raged over the centuries in the Christian Church, and just as furiously. Some say there should be a Government incomes policy and some even say it should be statutory. Others say the Government should not interfere. But we cannot get away from the fact that the Government are ultimately responsible for a very large proportion of the wages and salaries paid in this country. Some say free collective bargaining is sacred, while to other free collective bargaining means free collective blackmail and is a dirty word. Some want free collective responsible bargaining, but others ask who is to say what is responsible—who is to be the referee?—and point out that one cannot possibly have responsible bargaining unless somebody is there to referee; and I do not know who that is to be except the Government.

Then there is the fashionable school of monetarism which says that, through money control, all things are possible. The noble Lord, Lord Kaldor, from my old college, dealt with that subject thoroughly and I agreed with most of what he said. In any case, to the ordinary layman it is not quite as simple as it looks. If one has a very tight monetary policy, everybody starts collecting debts faster and faster and it is the little people who go to the wall—they go bankrupt—and the big ones survive, until of course they in turn go bankrupt either through lack of money or as the result of crippling strikes.

I have never found the theory of wage control through money control very plausible, remembering what happened in South America 30 years ago. There, the utilities were in the position that their fares and rates were very strictly limited by the Government. They could not borrow money because there were no lenders. But the unions never ceased to demand more and more wages, and the result was, first, that capital expenditure went, then renewal expenditure; finally, even maintenance expenditure was cut, with repercussions on safety. Eventually, as these things had to be kept going, the Government had to step in with the money.

In other words, if there is any money coming in, one cannot, by central monetary policy, stop militant unions laying their hands on it. The fact that there is so much controversy over causes and remedies shows how difficult the problem is, and I think that it would be churlish not to give the Government credit for trying hard to stand up to their principal paymasters, though I think they have been too inflexible. For instance, it would have been much wiser if, instead of having a complete 5 per cent., they had set an overall limit on the total pay of any one industry or factory, a proportion of which had to be devoted to restoring differentials.

I believe that the solution to the problem ends up in being concerned with the relations of the unions with the rest of the community. The other day when I was playing golf, one of the four was a member of the Amalgamated Engineering Union. While chatting about this and that, he said he thought the unions had done a great job for the working man but had become too big and powerful and were now trying to run the country, which was wrong. Incidentally, he approved of free collective bargaining, provided the unions could be prevented from being greedy. Those were his words, and I think that most people in the country would agree with them.

It seems to me wrong that the Labour Party—one of the two great Parties of the State—should have to rely so much on trade union money, and I should like to see that remedied in the same way as I should like to ensure that the Conservative Party did not have to rely to the extent it does on corporate subscriptions. There should be a system of State grants to any credible political Party, and that should be their sole means of support, at any rate so far as corporation subscriptions are concerned. It is a matter for argument whether individuals should be allowed to subscribe or belong. After that, when Parliament sees its authority being whittled away and usurped by unions, it then ought to be possible to have an all-Party approach to the problems of reform of the unions by providing for cooling-off periods, secret ballots, and all that kind of thing, which would give the individual trade unionist a better chance of standing up to militant minorities. At the same time, it should be possible to provide something which the Liberal Party appear to want to do; namely, that certain employments should be freed of strikes by means of arbitration and so on. That is very desirable.

The Government themselves have contributed considerably to inflation by allowing the pound to sink so low and by adopting a programme which involves them in borrowing immense sums of money, thus keeping the price of money very high. These two factors reacted on the cost of living and bred extra wage demands. After all, when one compares the price level on the Continent—in the EEC—with our own, there does not seem any justification for the fact that the pound should have to be so low in order to help subsidise our exports.

When we turn to the other problem—unemployment—we find that something very rum is happening. Everywhere we find that there are unacceptable numbers on the register, yet when one wants a man to do a job one cannot find him. In my part of the world the papers are full of openings for people. Admittedly most of them are skilled, but there are the comparatively less skilled jobs as well, and people do not seem to want to take up these jobs. A builder told me that if he goes to the labour exchange he will be sent the names of ten men. Five will turn up for interview, two will accept the job, one will turn up on the day, and he will pack it up after a week. A furniture removal man told me the other day that he was short of a driver. He went to the labour exchange and he was sent only one man. He invited the man to sit down to hear about the job, but the man said, "It's not worth my while sitting down unless you guarantee me £78 a week." That is the attitude of a great many people on the unemployment register. They are very choosy, and with a little bit of tax-free "moonlighting" they can sometimes do very nicely on unemployment pay. To sort this out without causing hardship to the genuine job-seekers will be difficult, but the crux of the matter is whether the taxpayer is justified in supporting those who could fill vacancies but do not want to do so because they do not like either the type of work or the hours of work. If we make up our minds on that point, we can clear many people off the register.

One knows that there are bureaucratic difficulties about employing older men. First, they do not always fit into the career structure of the firm which might like to employ them, and there is also the company pension scheme. I am not very learned in these matters, and it may be that there is a Government scheme to cover this point, but, if the fact of not fitting into the company pension scheme is preventing older people from being employed, the problem should be looked at; it will be much cheaper for the taxpayer to get those people into employment with some possible Government assistance rather than keep them virtually unemployed, particularly as they are very often the best workers in the community.

Finally—as I have mentioned previously—the menace to our industries from far Eastern competition grows greater. We cannot possibly compete in this country, or indeed in Europe, with the goods produced by the new light engineering industries of the Far East. These are goods which are built with cheap capital and cheap labour. The industries are manned by remarkably cheap labour, and if anyone does not work flat out the whole time he goes straight back to the rice-field and there are ten people willing to take his place. We cannot compete with that kind of thing in England or in Europe, and we shall never be able to compete with it. The EEC is working at the problem, but if we want to maintain a balanced industry in Britain, or in Europe, we shall have to forget the ideas about free trade which suited us very well when we were the cheapest producers in the world but which are irrelevant to our position today.

5.59 p.m.

Lord SHINWELL

My Lords, my noble friend Lady Birk occupied some time seeking to defend the general policy of the Government as outlined in the gracious Speech. I found it interesting but also, frankly, superfluous, because it appeared to me from the speech delivered by the noble Lord, Lord Thorneycroft, and the subsequent speeches on the general policy outlined in the gracious Speech that, so far as your Lordships' House is concerned, the Government's policy did not invite a serious criticism. Serious criticism might develop in another place from what is described as the Left Wing, but so far as your Lordships are concerned the policy outlined is non-controversial, I would almost dare to say innocuous. It certainly should not excite passions in the hearts of noble Lords opposite.

The debate began on a quite congenial note. The noble Lord, Lord Thorneycroft, appeared amiable, almost jovial. His speech this afternoon was in marked contrast to the speech he delivered the other day at the Conservative Party Conference, when he tore the Government's policy to pieces and, having done so, threw the pieces into the waste-paper basket. I wonder whether the by-election in Berwick and East Lothian has created a new climate. At any rate, no one could raise any objection to what the noble Lord said, except that towards the end of his speech he was inclined to disparage, not so much the activities of the existing Government but our efforts in the past 25, 30 or 40 years, at any rate since the end of the last war—a lack of efficiency, a reduction in productivity, a general malaise in industry and the like. However, he forgot to remind us that our country has gone through two great wars, and at the termination of both we were bankrupt. Of course, it may be argued that Germany was in a similar position, except that after the last war we continued to indulge in military expenditure. We maintained large forces. On the other hand, Germany forgot all about military adventures and military organisation, and focussed the attention of her people on the need for industrial development.

The first speech delivered in the course of this debate which was significant, specific and addressed to the relevant issues, not only before your Lordships' House but before the country, was delivered by the noble Viscount, Lord Watkinson. He directed attention to the need for an effective pay policy—and, indeed, this is what the debate is all about, if not in your Lordships' House then throughout the country. On the delivery of an effective pay policy depends our economic future. It is associated with the stabilisation of prices, with monetary policy, with productivity, with employment or unemployment and the like—I could go through the whole gamut in order to make my point as clear as possible. It is pay policy that we have to consider. I find myself, perhaps for the first time, in almost total agreement with many of the observations we heard from Lord Watkinson, and for a very good reason.

As Members of your Lordships' House are aware, I seldom use any notes; nor do I intend to use any on this occasion, but I happen to have in my possession—this is somewhat unusual—a Cabinet paper marked "Secret". But 30 years have expired, and therefore I cannot be accused of any violation of Section 2 or any other section of the Official Secrets Act. This is a Cabinet paper dealing with—what do you think? It deals with a national wage policy. And who was responsible for it? I say with my characteristic modesty—myself. It was produced in 1946 by the then Minister of Fuel and Power. What does it do? It coincides almost completely with every item we heard from the lips of the noble Viscount, Lord Watkinson, and to some extent, although somewhat with faint heartedness, from that eminent economist, my noble friend Lord Kaldor. It asks for a national wages authority, composed of the most eminent people in the country from industry, from the trade unions, from the universities, from the City of London and from elsewhere, with independent minds, presumably, ready to analyse objectively the issues involved. But it did more than that: it demonstrated beyond any possibility of doubt that the principle of collective bargaining was outmoded.

Now I come to the vital issue. Why this euphoria about collective bargaining? Why this free-for-all? Why this liberation of the enthusiasms and the passions of the proletariat? And why did the Government decide to put a stop to it; to cry, "Halt! We have had enough", and direct the attention of the general public, not to the personal and private interests either of employers, on the one hand, or the workers, on the other, but to the interests of the country in general—not forgetting, incidentally, the consuming public; a very important category indeed. Why did they do that? It was because it was obvious that collective bargaining was simply a shambles, a jungle, a mish-mash; something that was bound to lead to misunderstandings and complexities, complications and irrelevancies. The Government therefore decided, for the first time—I repeat with emphasis, for the first time—on effective and determined leadership by invoking a norm and declaring that those who went beyond it would suffer, on the workers' side, by increased prices which would erode the advantages derived from increased wages; and the employers would suffer because of increased prices of materials, equipment and ancillaries and would make fewer profits than before.

Here I digress for a moment. In the present dispute in which the Ford Company are vitally concerned, we have been told by the trade union leaders, without being inspired by the shop floor, that one of the reasons for making what appears to be excessive demands for increased wages and the like is attributable to the profitability of the company. So there we have it. If high profits are earned by a company, say the trade union leaders—or some of them at any rate—then the workers should share. But let us look at the other side of the coin. Do we therefore understand that in the event of low profitability the workers must accept a reduction in wages and longer hours of labour? Is that the position? We can have either one or the other. Profitability in any particular firm may be due to a variety of reasons. It may have nothing to do with productivity on a high level or remarkable efficiency; it may be due to skill and understanding of financial finesse. A whole variety of ingredients might be embodied. But I merely digress there.

I come to the point. I support the Government's 5 per cent. policy because of what has been described as a possible wages explosion. We see the beginnings of it at Ford and we have it at Chrysler and what is obvious, shop assistants, nurses (and rightly so) and consultants (and rightly so) and public employees, gas men and the like whose services are of the utmost importance will also demand higher wages—and why not? Why should the increased wages and better conditions go to those who are strengthened by the fact that they are in a stronger position as regards industry and output than to some others who are weaker, as, for example, the miners? Why should the miners be demanding £135 a week at the coal face? Of course, they deserve it. I have seen them working there. It is Bedlam, pandemonium; and few men can sustain it for long. Yes, pay them! But if they are to have higher wages, what is the result? The men on the surface will want higher wages, the tradesmen below, the electricians, carpenters, transport workers and the like. They will want higher wages—and why not? And we will have the wages explosion that the country is anxious to avoid. And if we have it, is it necessary to read all the economics treatises and the books suggested by eminent economists, for example, like the noble Lord, Lord Kaldor, this afternoon: that somebody in America has written another book on economics. It is not Mr. Friedman, I understand—and that will satisfy the noble Lord, Lord Balogh.

Incidentally, if I may indulge in another digression, why are we in this trouble in view of all that has been said and done by eminent economists for the last 30 or 40 years? They knew all about it; they still know all about it. We had an example this afternoon of somebody who knows all about it. What does it amount to in the long run? Could we not have in exchange a little common sense about this business? Would that not help? I mean by common sense that to understand this is as clear as the noonday sun: that if we are to allow wages to rise unnecessarily, against the wishes of the employers, against the interests of the employers and, particularly, against the interests of the consuming public, then, if that happens, our economic future is in jeopardy. That is just common sense. It requires no economic training or analysis to understand that.

Now here is the document, a national wage authority dealing with the need for more efficiency and higher productivity. The direction of labour: to put it here or there according to the needs of the country; not to have too many engaged in irrelevant occupations but to have them in occupations which contribute to industrial development. That is the idea submitted to the Cabinet in 1946; and rejected. Why? There are only two survivors of the original Attlee Cabinet—I say the "original" Cabinet; for some came in later, in 1948, 1949 and 1950. The two survivors are George Isaacs, whom I saw recently, (unfortunately, in a wheelchair) and myself, not yet in a wheelchair. I am trying to avoid it as best I can.

A noble Lord

You are doing very well.

Lord SHINWELL

My Lords, they are the two original survivors of this Cabinet. But who were the people who opposed this? It is significant, very significant. Ernie Bevin, the great trade union leader, and George Isaacs, the leader of NATSOPA, two trade union leaders, opposed it. Why? Because, they said, it would not be in the interests of the trade unions. Exactly. That is why. The Government's norm, the 5 per cent., in their opinion is not in the interests of trade union members. Here I want to indulge in what will be my final word on this subject, although I have got so much to say. It will be this: I think it was the noble Lord, Lord Roberthall—although it may have been another noble Lord—who criticised the Government's handling of the problem. So have I. But not in public; I thought it inadvisable to do it in public. I do not think that it was wise on the part of the Government to make the announcement without further discussion. If it had been left to me, I should have met the TUC and gone on meeting them, and not only meeting them but meeting the individual trade union leaders and then doing all the propaganda work available and the analyses in order to discover what the shop floor was thinking about. Then I would have made the announcement—and then, with some flexibility, with a little understanding what the public needs were. That is what I should have done; that is what the Government should have done. The Government rushed into it on impulse—perhaps rightly so in the circumstances—and now we see the result.

We have had collective bargaining since the beginning of this century. I have taken part in it; I was an official of a trade union, the Seamen's Union. I have had to negotiate time and time again. What has been the result? First, we had the need for obtaining recognition of trade unions and that was accomplished through legislation. Let us not forget that. Some trade union leaders said: "We want nothing to do with politics. Governments, keep out of it"—then they came along, day by day, asking Government to do this, that and The other. However, we obtained recognition and when we did that, largely as a result of legislation and the decision of some courts of law—although many times the decision was against us—then collective bargaining ensued. There is your precious collective bargaining, my Lords. Look at the result. Look at the economic malaise that we have; look at the disputes among the trades unions themselves. See the attitudes of the people on the shop floor. Listen to the wives of some of the men and consider the dire effect on the consuming public. That is collective bargaining.

Let us try to get an effective wage policy—if necessary centrally controlled—not necessarily without some flexibility, with some understanding of the need for differentials and the like. Of course, that is a possibility. I think it was the noble Viscount, Lord Watkinson, who told us that the CBI are having a conference shortly where they are discussing various items associated with pay, industry and the like. Indeed, I think I had an invitation to attend, if I wished to do so. One has to pay one's own expenses—that was a change!—so I thought I had better not do so. However, in any event if they are going to have discussions I advise them to try and get hold of this Cabinet paper. All they have to do is go to the Cabinet Records Office and ask for it. There is the whole of your policy, Lord Watkinson; put that into operation. Insist on that; ask for effective cooperation among the people. Never mind about politics, shibboleths, and all the rest of it. By effective co-operation, analysis and understanding develop a policy which if it is accepted, even in part, will help us on the way not to ruin, chaos and misunderstanding, but to success.

6.23 p.m.

Lord MACKIE of BENSHIE

My Lords, for obvious reasons it is always very painful to follow the noble Lord, Lord Shinwell. With all the weight of my 50-odd years upon me, I will endeavour to exhibit some of his common sense and vigour. I should like to refer to some matters in the gracious Speech about which I think I know a little. I do not want to talk about the European Monetary System and I do not want to talk like an economist. Like everyone else, I have been much afflicted by them. The only good thing is—and I know that a noble Baroness will be listening to me—that some are much better than others and easier to listen to.

However, they all seem to think that the monetary system, the cleverness of the Government, has everything to do with the prosperity of the people. I do not think that anyone can really consider that the system of government, of trade unions and of monetary organisation in Germany is at the basis of their success. The basis of their success since the war lies in the application of the people at the work-bench, at the hard work of the salesmen and at the thought of long hours of work put in by executives. We have to think of Government policy releasing the energies of the people, if not entirely ordering them in the way the Cabinet Paper of 30 years ago seemed to suggest.

We have in the gracious Speech several worthy measures in which I am interested. One is the proposal that they reinforce the monetary support for the SDA in Scotland, the body for Wales and the NEB. Here I must declare an interest: I am the chairman of a small company manufacturing glass. It employs only 170 people but is growing. It grows at the rate of 20 per cent. a year. We make quite a lot of profit and we are proud of it. We have been helped in the Highlands by Government agencies. It is a very good partnership for the Government to provide capital and, in the case of the SDA, a factory for a small, growing business to rent without interfering with management and allowing a partnership between public and private enterprise which we have experienced. This is a decent and good proposal. Many of the other measures which are proposed are worthy if not entirely relevant.

When we come to small businesses the Government are avoiding grasping the nettle. If one considers the motor industry, it is interesting that BMC swallowed up all the profitable specialist motor businesses. They thought that with the advantage of scale—as they called it—they would make them more profitable. The reason for selling businesses, small or large, built up by an able man during his lifetime is normally because of the high rate of personal taxation. He works all his life building up the business but he cannot enjoy the results of it because until he sells for a capital profit he is not able to enjoy the money that he has ostensibly made. Until we reduce the rate of personal taxation to 50 per cent.—which is still enormous—then big business is going to swallow up enterprising and successful small businesses time and again, not because they can make them more efficient but simply because the tax system is unfair to the man who has built up that business.

It is also a fact that the energies of our young executives on whom we depend greatly are directed in the wrong way and are badly influenced by high taxation. It often pays them much better to consider how big their pension is going to be than it does to consider how much money they can earn by working harder. This is a poor way to energise a country.

I was talking to a friend of mine today who is in the export business. His son was coming home from school for half term when my friend received a sudden call to go to the Middle East. He said: "I swithered whether it was worth it". But he is going to do his duty and go to the Middle East. A wife, faced with this situation, could say to her husband: "You will not earn any more, they will take it away in tax", and then he is going to fail in his duty. The Government should grasp this nettle. The noble Baroness, talking about it, said: "As soon as possible we will reduce taxation". The Liberal Party have said quite often that we know that to talk of a reduction in taxation is talking nonsense in general terms in this day and age. What we want is a transference of taxation from earning to spending so that we can start the process of the release of energy of the younger and indeed the older executives and of individuals, who form the basis of success of companies in this country.

I should like to talk now about agriculture, which was mentioned in terms of the reform or alteration of the Common Agricultural Policy. Agriculture in this country is one of the most successful industries. If, in terms of productivity, every industry had performed as well as agriculture has, we would not be in the mess we are in today. A lot of allusions are made about agriculture and the CAP. One of them is that we have only to reintroduce the British system of deficiency payments into the CAP and all will be well, the public will get the benefit of over-production, and we shall be in a happy state. That is an illusion.

The CAP works quite well. We must always have surpluses if we are to have a sufficiency of production. The question is: how do you control the surpluses? There are eight other countries in the EEC. Germany has had an entirely different policy from Britain's. When Germany went into the EEC at the beginning and when the Common Agricultural Policy was first formulated, she actually reduced prices to her farmers. Her support was greater than the average support in the EEC. France always had a policy of support for a very large agricultural population, and that was for a great number of reasons, including that of stability.

If we think that we can reform the thinking of the other eight peoples by bullying them, we should realise that that is not a sensible way to negotiate. What we must do is to make the CAP sensible. It is obviously wrong that we should be producing an enormous surplus of milk, turning it into powder and putting it into store, when the surplus is far beyond what is necessary for a carry-over into the next year. There is a great difference between surplus and sensible carry-over. What we have to do is to produce the milk in the most sensible place, and the most sensible place is probably in the Low Countries and also in Great Britain and in Ireland. Those are places where the climate is best suited for milk production. But before we do that we must get rid of the gross surplus which we have in the Continent.

I think that slowly the Germans will come round to the idea that it is only right and proper to reduce prices, but it is going to take time. At the present time the British farmer is receiving rather over 40 per cent. less for his milk. He is more efficient and he should be producing it. However, it will take time to regulate the Policy and to get reductions accepted by the Germans and the French, who are willing to pay high prices for food. They are able to do so because of their high industrial production. So I do hope that this great industry of agriculture will be developed, but it must be developed sensibly and we must have the Commission's plan of ironing out differences in the levels of prices. That means adjusting the green pound over a period of time, which I would suggest should be about four years instead of the five or seven years the Commission suggested.

These policies do entail the Government's grasping the nettle. They have got to decide that when prices come down on the Continent there has to be a levelling up here if we are to get expansion. It is a most successful industry and one which really deserves the support and encouragement of the country. They do everything that many other industries do not: they work long hours. The wages are low but they do not grumble—perhaps the wages are not quite as low as they appear on paper, but nevertheless this is an industry which is successful and which should be encouraged.

I should like to say one last thing. It is a purely political point, but one which I think ought to be made. The Government have now produced worthy intentions in the Queen's Speech, but I think that what Mr. David Steel said is entirely relevant and true: they may be worthy but they do not fit the needs of the situation. The Government are facing enormous troubles, which they recognise, and they are facing a trade union movement which has had all the advantages of co-operating with the Labour Government. Yet the majority of the big unions are backing wage rises which, if they come into effect, will undoubtedly lead to runaway inflation.

The Government have got to oppose this, and I really think that while the Lib-Lab pact was for the benefit of the nation and seen as such by the Liberal Party and, to give them their due, also by the Government, the Government's efforts now and the arrangements they are making with the Nationalists and others to stay in power are not of the same worthy order. I think they are for the good of the Labour Party and that we are now tailing along and the Government have not got the authority they need to deal with the present situation. I myself do not desire the outcome so ardently hoped for by the noble Lord, Lord Thorneycroft, and others, but I do think that we should have had an Election so that the Government, whatever their colour, together with Parliament, having gone to the nation could tackle the problems with the authority of a fresh mandate.

6.37 p.m.

The EARL of DUDLEY

My Lords, in a year that is likely to be remembered for an exceptional level of pontification, I think this is an occasion on which to be as brief as possible on the point about pay which I should like to make to your Lordships. I was interested to hear the distinguished speakers who preceded me come out so firmly with the view that earnings this year had shown some improvement. Indeed, the noble Viscount, Lord Watkinson, was at pains to say that the improvement was of such a level that he felt the demands of the trade union leaders were unreasonable and even, to him, incomprehensible. He must have later figures than are available in the publication which may be obtained from the Printed Paper Office, for the fact is that those figures reveal that all the mammoth increases in earnings over the past seven or eight years since 1970 have been all but totally eroded by inflation. Those increases amounted to something like three and a half times the 1970 level, and of that increase something like 2 per cent. remained in 1978 as real, disposable earnings. Another figure which can be found in the same publication—and it may surprise your Lordships, although the noble Lord, Lord Mackie, indicated one of the reasons why that figure may be there—is that output per head since 1970 (that is during the same period) increased by nearly 20 per cent.

Yesterday in another place the Prime Minister said that there were three legs of a three-legged stool in his counter-inflationary policy; one being incomes policy, the second monetary policy, and the third tax policy. I would remind your Lordships that the normal use for that utensil is to milk a cow, and in my opinion that is precisely what the Government are trying to get the British workforce to accept. You cannot expect the annual yield to increase every year unless you are prepared to feed the animal the right foodstuffs, and I submit that the increases in output which have been effected in the last seven or eight years have remained largely unrewarded. Against this background, I really must chide the noble Baroness for endeavouring to distract noble Lords, with a few of her own cracks about falling plaster and wallpaper, from the ruins of the Social Contract and the defects in design of her own incomes policy.

Against this background, I agree with the Leader of the Opposition that a 5 per cent. norm simply will not hold, and I believe that many employers will take the view that in this year of increased prosperity 5 per cent. is simply not good enough, and will pay more and damn the consequences. So my purpose in breaking silence tonight and in following my predecessors, with their great records of experience—I am very humble at the thought of doing so—is to appeal for that unrewarded 20 per cent. to be spread over the next two or three years and added to the accepted 5 per cent. This would mean that the norm would rise to somewhere between 12 and 15 per cent. and I believe that we can, in this more favourable climate, afford 12 per cent. or thereabouts.

I do not know whether the Prime Minister's friendship with the President, and his visit to the United States, has anything to do with his decision to wear the uniform of Stonewall Jackson. But I fear that it will do him no good and that what he will experience is a series of humiliating retreats from lost emplacements. It will be a loss to himself if, like Stonewall Jackson, he falls to the bullets of his own side, and also a loss to industry if it is permitted to remain in a long period of uncertainty while this battle of seven months, or whatever it may be, rages, and if it is left in suspense as to whether in the end sanctions will or will not be lifted and the norm raised. This would be the worst thing that could happen.

Uncertainty is very bad for business and I urge the Government—they must feel in their hearts that they are not on a winner, to put it in the most helpful terms—to reconsider their policies, to endeavour to turn these talks which are going on into a successful Camp David, and to find an acceptable solution which will enable the trade union leaders to feel that they can demobilise and redefine their understanding of free collective bargaining. For I know that all of us are agreed that no Government can successfully manage the public sector, for which they are responsible, without some form of policy which will inhibit the various factors of the gross domestic product, which could have an adverse effect upon the economy and increase the pace of inflation. They must manage the public sector responsibly and effectively and, because they must do that, any policy which they have to deploy for countering inflation must inevitably spread over into the private sector, as no discrimination that was inequitable in policies between the public and the private sectors could possibly be acceptable to the people of this country. With those words, I once again urge that this matter be not too long delayed and that we be given the answer for which so many of us are looking.

6.47 p.m.

Lord ARDWICK

My Lords, the essence of the Government's economic policy was laid down by the Prime Minister in another place yesterday in unambiguous and simple words. He said that overcoming inflation was the core of the Government's policy for sustaining economic growth, reducing unemployment and improving living standards. It is very seldom that a Government's policy is put so plainly and so starkly as that. The Government have abandoned the old road to expansion that led via inflation to devaluation and depreciation. They have also abandoned the idea that floating a currency is a panacea that enables nations to expand without fear for their balance of payments. In fact, disillusionment has grown as to the amount of progress that might be achieved independently by national Governments. As Mr. Healey has put it more than once, If we are to solve this country's problems, we need to take action on a world scale because no single country can lead the world out of its difficulties. Indeed, no single country can by itself solve even its own problems". That is what the Bonn Conference—a conference that had a modest success—was about.

The Government believe—and Mr. Callaghan said it again yesterday—that there ought to be no doubt in anyone's mind that monetary stability is better for world trade and the developing countries than the turbulence which the world has recently experienced. The Prime Minister was, of course, speaking in the context of the dollar and on a day when a major world effort was made to restore stability to the dollar. It is too soon to say whether the measures will achieve some lasting success, but the news today gives ground for hope and that would be a great turn for the better in this world.

The Prime Minister then went on to speak of the proposed European Monetary System and of his wish to see a durable scheme that would not force some countries unecessarily into deflationary policies, or others into high levels of inflation. He added that much work had yet to be done on this scheme. So it has, my Lords. The target was set for 31st October. Two days ago the Guidelines for the EMS were to have been completed by the competent Community bodies. I am the rapporteur in the European Parliament on the revival of the idea of the European Monetary Union, and I have my ear fairly near to the Brussels ground. I think that the competent bodies are still a good way from the completion of their task, and I doubt whether they are yet seriously into the concurrent economic studies which they are to make on the action needed to strengthen the economies of the less prosperous members in the context of such a scheme.

To those of us who are striving to achieve a more closely integrated Community, the news from Bremen four or five months ago was good news, to be warmly welcomed, but the communiqué that the European Council issued was disappointingly perfunctory. The phrases about "concurrent economic studies" looked as though they were an afterthought. Indeed, many financial pundits immediately claimed that this was just another attempt to get the dropouts—France, Britain and Italy—back into the Snake without any real provision to ensure that the creature was going to be less fragile than before. Bremen was generally regarded as something that had sprang out of the ground, something that had suddenly been conjured up by Messrs. Schmidt and Giscard—Herr Schmidt because he wanted to keep his relative competitiveness by taking all the other European currencies up with the mark, and President Giscard because he wanted an external discipline for M. Barre's rigorous economic policy.

There is a certain amount of truth in these suppositions. Both Governments would certainly be aided in this way. The scheme would probably be to their immediate advantage but, as the noble Lord, Lord Thorneycroft, pointed out, there is something more to it than that. It is something with much wider implications. Let us look at President Giscard's views as Finance Minister and as President. He has for many years been obsessively in favour of a fixed currency system. We must remember that France went back for a second time into the Snake and spent—what was it, a thousand million dollars?—trying to stay in, but in vain. As for Germany, nothing is more vital to her than the political cohesiveness of Europe. Here she is—a divided country with the Communist world beginning on her land frontiers.

Mr. Roy Jenkins said in his famous Florence lecture that the Community has three functions. It stands for a certain type of democractic society, as the applications for membership from the Mediterranean countries bear witness. It stands, too, for a political entity able to deal with a wide range of external relations. Its third function is to provide a central economic mechanism and it is in this third function that its weaknesses are conspicuous. If they continue, as Mr. Jenkins and, I think, many other people fear, the external cohesion of the Community—so vital to Germany—may be jeopardised. Indeed, the democratic nature of the Community could be threatened if in some countries inflation got out of hand and the unemployment rate soared upwards, too. When the noble Lord, Lord Kaldor, was speaking I was just thinking how anxious Germany must be to avoid his fears of deflation among the poorer countries in the System. The last thing that Germany wants is a Europe which is in economic difficulty and, therefore, in policital difficulty. So, if the weaknesses of the scheme which he mentioned are avoidable, I am quite sure that Germany will be ready to take steps to avoid them.

It was these considerations of the economic weakness of Europe that led Mr. Jenkins to revive the idea of the goal of economic and monetary union, in the belief this time that it would facilitate economic solutions and would facilitate economic stability. As he made clear, it is, of course, a distant goal. A union of this kind, with a single currency, would require the powers now exercised by nation States to be handed over to a central monetary authority and to a central political authority and would require a budget five to seven times that of the present one.

We are a long way off that kind of union. But at the same time as Mr. Jenkins's vision of the future the Commission proposed a practical programme. The general feeling in Europe was that you could never advance by one great leap to something like economic and monetary union—that you must do it in stages. What the Commission began to do was to prepare a pre-union stage, in the hope that when that was obtained it would be possible to look at the possibilities of full economic and monetary union. So it developed a five-year programme which did not envisage a single currency or immutably fixed parities. However, it did have a fixed but flexible and adjustable system in mind—a system from which there would be nine exit doors, not a system like the EMU from which there would be no exits at all. The Commission's thinking had been stimulated early last year by the European Council on the initiative of President Giscard and Herr Schmidt. So it was assumed, when Bremen happened, that Mr. Jenkins and Mr. Ortoli had ploughed the field and scattered the good seed on the land, and that now the Council was trying at Bremen to reap the harvest. But I think it was trying to reap it while the corn was still green.

I am wondering whether there is in the Bremen system any organic link with the good, constructive work that the Commission has done to try to get an advance at the same time on both the economic front and the monetary front. We shall soon know. In the meanwhile, I hope to introduce before the European Parliament next week but one, a report and a Resolution on this subject which has already been approved by the all-Party, all-nation Economic and Monetary Committee of the Parliament. The Resolution requires a system which contains the ingredients demanded by Mr. Callaghan and Mr. Healey—that is, that the zone of monetary stability should facilitate higher growth rates, with beneficial effects upon employment. It also speaks of the need both for the improvement of credit mechanisms and facilities and for a transfer of resources within the Community as a means of promoting self-help in the member nations.

It is far too soon to reach a definitive view about the proposed Bremen system. One can only discuss it in principle, since it is far from complete. I was extremely interested by what the noble Lord, Lord Thorneycroft, said earlier. I thought that he trod a little delicately around the economic and monetary system, but he suggested, if I am interpreting him rightly, that if the Government were to approve a system the Opposition would not harry them too much on questions of detail. If that is so, then I take it that the noble Lord shares with me the belief that a European system, with certain safeguards written into it, a system of fixed but adjustable parities, is a desirable alternative to floating and that that is Conservative Party policy. If I am wrong, I will give way and the noble Lord, Lord Thorneycroft, can correct me. I understand from him that that is the situation and I am very glad to learn it.

The proposal has already incurred remarkable opposition in this country. Who would have dreamed that the day would come when the noble Lord, Lord Armstrong, would be marching shoulder to shoulder with my right honourable friend Mr. Benn! There has been nothing more incongruous since Mr. Enoch Powell and Mr. Michael Foot joined in frustrating the reform of this Chamber. Who would have thought that Mrs. Castle and Mr. Biffen would be marching hand in hand? Who would have expected to see the new monetarists side by side with their rivals, the ancient order of unreconstructed Keynesians?

There are divisions, it seems, within every treasury and every central bank, as there are in every serious newspaper. The Times is hostile to the idea. The Financial Times are for it editorially, but if one looks at their columnists they are not always in agreement with what is being said in the editorial. There are important questions which nobody can answer with certitude—whether any adjustable peg system is feasible in the world today, or whether such a system could possibly be feasible with anything but the narrowest divergence among the inflation rates of the participating nations.

I ought to be able to cite the names of some impressive supporters of the EMS—supporters in principle, I mean, but at this moment, apart from Sir Jeremy Morse, I cannot think of many eminent people. They are keeping their heads down, but I am glad to learn that Conservative policy is as I hoped it would be. What I fear is that in this country public opinion is being allowed to drift further and further away from the European idea because of the absence of leadership, not just from the Government but in all Parties. We have to face the terrible situation that we are "in a spot" because there are no votes to be gained but only votes to be lost by anybody who adopts a conspicuously pro-European policy, and it is a difficult situation for leaders to be in.

It appears to me that many people who were once sympathetic towards the Community now feel that there are no advantages in belonging to it but only disadvantages. A form of xenophobia—"Europhobia"—is now occurring. It is feared that a gang of foreigners are bent on seeking their own advantage at Britain's expense by depriving us of our natural rights, that is, when they are not engaged in malicious pranks, in the name of harmonisation, with our bread, our beer, our ice cream and even the vinegar in our fried fish shops. Most of these bizarre stories are inaccurate, based upon a misunderstanding, or are exaggerated. I do not for one moment think that the excellent Press corps in Brussels are to be blamed for this. They understand the situation, but when their stories reach this country they sometimes fall into the hands of people who try to develop them but who do not have that inner knowledge of the strange and difficult workings of the Community, and so we get these distorted stories.

I am concerned about the general state of public opinion because, whichever Government are in power, this kind of hostile public opinion could obstruct any important constructive act that a Government wanted to make for the benefit of national and Community interests. And I fear, above all, that the kind of things that are going to be said during the direct elections may reinforce the prejudices of this nation instead of enlightening it. If the elections are not to do that, it will depend upon the Parties having some constructive proposals for Europe—not merely criticism of the CAP but some constructive proposals to provide a high tone of leadership.

7.3 p.m.

Lord HANKEY

My Lords, I am amazed at the wealth of experience and knowledge which speakers in your Lordships' House bring to bear on these questions. Listening to my noble friend Lord Ardwick and to the speeches we have already heard I felt it was quite remarkable and I wonder whether, if and when this House is reformed, we shall succeed in getting equal expertise into our councils? My noble friend Lord Thorneycroft made a most impressive speech based on a wealth of experience, and I should like to recall that no British Minister who went to OEEC ever left such golden memories behind. For many years afterwards he was remembered, to my certain knowledge.

Like my noble friend Lord Roberthall I am deeply concerned about the economic performance of this country and about its future. Having been closely concerned for some years with economic policies at OEEC and OECD, I shall try to be constructive and to see whether it is possible to draw conclusions from our sad experiences. If I cause pain to both the main Parties, I hope I shall be forgiven because I am going to try to be constructive.

Turning to the 5 per cent. guideline I should like to say first, with all respect, how much I admire the firmness which the Prime Minister brought to this. We have sadly lacked firmness, and firmness is very much better than gimmicks. But really something more than a 5 per cent. guideline is needed and something has to be done about differentials. The effect of Phases 1, 2 and 3 must be corrected because the country is seething with discontent about this. One only has to mention the motor car industry, the police, the army, the prisons, the Post Office engineers, the Health Service supervisors, and so on. It is almost universal. In a typical organisation which I know very well the junior staff are 8 per cent. down on their real pay compared with 1st January 1975 and the middle and senior staff are anything from 15 to 21 per cent. down. That is an intolerable situation.

I see much force in what the TUC and also Mrs. Thatcher have said about the 5 per cent. guideline. It is much too rigid by itself and cannot succeed in its pure form, probably not even with sensible and desirable concessions for the essential rise in productivity. I think we have to be extremely pragmatic about this, and certainly about differentials, but I do not believe this means that we can do without any guideline at all, at any rate not for the present.

This brings me to price control. The Left Wing of the Labour Party and the TUC in my view are wrong in urging price control as a cure for inflation. OECD experience shows quite clearly that price control is effective only in a marginal situation, in a sort of grey area, where there is a little inflation but not too much. With real inflation here now running at 8 per cent.—and it is a devastating rate in the long run; let us not be under any illusion about that—I think price control could not have any useful effect. It would ruin business, raise unemployment and still further discourage investment. Anyway price control was tried and found ineffective some years ago, though the high inflation rate then did not give it a chance. Possibly it would be useful in a "grey area", but I see no sign of a grey area now.

I now come to monetary policies. I think one must agree with Mrs. Thatcher and Sir Keith Joseph that monetary policies are extremely important. Indeed, the Labour Party have recognised that by trying to control the extension of the money supply, M3, in which they really have had a considerable success. It is high time, of course, because any more of the rates of increase that we had in 1972, 1973, 1974, 1975 and 1976 would spell ruin for the country. As Lenin very perceptively said, a high rate of inflation is the quickest and easiest way to ruin a country.

I think we have also been wrong to encourage local and other authorities to borrow abroad in order to finance expendi- ture which they could not otherwise finance at home. That policy certainly involves more money chasing the same amount of goods, and it cannot fail to be inflationary unless it ensures a very large increase in production and productivity. Of course, I perfectly well know that when one borrows abroad one increases the foreign exchange reserves, but I do not think that is generally an adequate answer.

So I really do not think that monetary policy can do the whole job of controlling inflation. By itself it might have to be too drastic. It could easily involve penal interest rates and drastic credit controls and would certainly have to be backed by fairly drastic fiscal measures. The effect on business and employment could well be very bad, as Mr. Heath has pointed out, and I really think we have to avoid knocking out big business in order to persuade the workers to be sensible and responsible. Some local influential Left-Wing militants do not seem to me to be in any danger of becoming responsible or sensible at all. I think they really want to destroy businesses, at any rate in the private sector, and we really must not give them a chance to do that. I shall come back to that presently.

So, I do urge your Lordships to agree that our country is in a state where all possible means have to be used to control the recovery of our economy in a wise, firm and careful way. This means, in my view, that there must be a guideline of some sort on the increase of pay based on the increase of production, of productivity and of prices. Inflation of the money supply and the extension of credit absolutely must be controlled by monetary policy as well, and, in my view, we are going to need all the means available, at any rate for a period until recovery is well under way. This time, I do think that our politicians and statesmen absolutely must avoid expanding demand by inflationary measures such as large annual budgetary deficits or borrowing requirements, which far too many people now take for granted. I am really surprised at the way even a Labour Government seems to put the blame on the trade unions for rising prices when they themselves have been very much to blame for causing the same thing by an unreasonable expansion of public expenditure at the cost of huge budgetary deficits and even borrowing abroad.

Both Parties have tried to pull the economy forward by the inflationary expansion of demand in the past and both Parties have failed. I do think we must learn by sad experience. I recall that the Heath Government tried to pull the economy forward in 1972 and 1973. The inflationary results wrecked their own Industrial Relations Act by causing vast problems over wages. The Labour Party's inflation was made worse by the oil crisis but was even more disastrous. We absolutely must learn from these grievous errors and the devaluations they have caused.

My Lords, I believe in any case that it is now no good trying to expand demand and pull or push the economy forward, because the trade union membership has been allowed to put the brakes on. We are losing an enormous amount of production and of markets through strikes and unofficial stoppages. If you try to drive your car forward with the brakes hard on, it gets very hot and the engine wears out and will soon stop altogether. That is where the British economy is today, in my view. I think any other view of our minor successes is sheer complacency. It is no good encouraging the British economy forward because almost any collective bargain or almost any contract can be broken under our labour legislation. We cannot keep delivery dates, we cannot keep factories running, we cannot maintain productivity or make effective use of any integrated industry like motor cars or shipbuilding. The Ford Granada and the Ford Cortina are made on the Continent, in Germany and Belgium. The British Leyland Allegro is made in Belgium. Even Minis are imported from the Continent. Foreign cars have about half our market. It is a dreadful picture. The perpetual unofficial stoppages are even more disastrous in their effect than the official strikes recorded in our statistics.

This brings me to free collective bargaining. A collective bargain which is not respected and kept until it has expired is really a collective swindle, neither more nor less. Our experience proves that you cannot run a modern industry on such a basis. On the other hand, if you make a collective agreement for a year and there is even 10 per cent. inflation, you cannot reasonably expect the workforce to keep to it without rising discontent. I do not think we have paid adequate attention to this fact. So either the Government should stop inflating the economy by their large budgetary deficit or else I think they should withdraw their objections to a measure of index-linking or threshold payments such as they have in the automotive industry in the United States. The agreements in the United States automotive industry are for three years. Index-linking is done every six months and a work stoppage costs the trade union 100,000 dollars a day. The system is much the same in the West Coast ports of America, to my certain knowledge. I am, of course, aware of the present difficulties in the United States, but I do not think they are due to that feature of the United States economy.

I do urge your Lordships to agree that the worst thing you can do to a man in this field is to limit his earnings and prevent him from profiting by his training and his skill, devotion, hard work and initiative. It is no wonder that every section of our workforce in both the private and public sectors is filled with indignation. Why not make it compulsory to respect collective bargains until they expire and admit a measure of indexing? Surely it would be better for everyone and for productivity. You cannot run modern industry on collective swindles. Index-linking might have a slight inflationary effect, as is often alleged, but if we got a large increase of productivity because there were less strikes—it could very well pay off. In the long run, I think we have to recognise that our wage levels and our productivity will both have to rise to European levels, and this is something we ought to plan to achieve over the years, because in no other way can our country be regarded as the equal of our partners on the Continent.

I am not blamng our great trade union leaders for the present muddle in our industry. I think Parliament is to blame for passing laws which, by giving trade unions almost complete freedom to break agreements and contracts, make it impossible for even the best trade union leaders—and we have many of them—to secure compliance on the shop floor with the collective bargains they negotiate. Take the case of the Chilean aero-engines. They were bought by the Chileans some years ago. They came over here in 1974 to be reconditioned by Rolls-Royce. When the time came for them to go back to Chile the Allende Government had been thrown out, and one of the trade unions—I think it was the Transport and General Workers' Union—at East Kil-bride blacked those engines because it did not like the Chilean Government. Do your Lordships realise that the 1974 Act, with the 1975 Act, says that an industrial dispute can arise out of any "matter" at home or abroad? The demise of Mr. Allende had nothing whatever to do with the Chilean contract, but those engines were held up, left out of doors for four years and could not be moved until this summer. I hope they have now gone back to Chile.

To make it all worse we dish out refunds of income tax and various social security payments to strikers or their families regardless of whether the stoppage is in breach of substantive or procedural agreements. I recall that the terrible Ford dispute, which has, I believe, caused losses of over £200 million already, started while the existing agreement was in force. I find that totally inexcusable. So the fact that we dish out these monies from official funds under various headings deprives the trade union leaders with any strike funds at their disposal of any real power to control an unofficial strike. I find that entirely wrong. In my view, no one should get any public money for action in breach of agreements. I know that that would be difficult to do, but it is what we must achieve.

Let us remember the Swan Hunter imbroglio. The boilermakers and outfitters quarrelled and went on strike about differentials, the enormous Polish order was lost and Swan Hunter had great difficulties in meeting its debts. The men who were going to be dismissed as a result of this collective idiocy were promised redundancy payments of up to £10,000 each. Hardly a feather in the cap of those responsible for our labour legislation, was it?

I think that it is also time to recognise that it must be made much easier for an employer to dismiss an inefficient employee or an employee who misbehaves. The 1975 legislation is very one-sided on the subject. I recently met a doctor who said that, in the strike last month, in the office attached to the hospital where she works and where doctors prepare their operations and cases, the fuses were taken away by one of the supervisors and the doctors had to work by oil lamps. I find that absolutely inexcusable. There cannot be any excuse for it.

I have a long connection with Sweden and I am very struck by the fact that the system our Labour Party has introduced here at the instance, I think, of their Marxist wing is more or less what the Swedish Communists tried to get and were not allowed to have by the Swedish TUC. We said in this House that this legislation would produce chaos throughout industry. We said that it would be a bully boy's charter for the Left-Wing militants, and so it has indeed turned out. Your Lordships will remember that it was passed only over our House's dead body by the use of the Parliament Act and I should think that the other place is not very proud of it. It has truly put the brakes on hard against our production and I urge that it must bs altered.

I recall that the Marxists do not allow anything like this to happen in their own countries, where strikes are entirely forbidden even when agreements come to an end. The Marxists use this system only for destroying the economies of other countries. If one reads the works of Admiral Gorshkov and Marshal Sokolov, the naval and the former military commanders-in-chief in the USSR, one will see that subversion of the enemy's economy, while delicately not spelt out, is a major feature of Soviet strategic weaponry.

To sum up, I urge both the main Parties not to reject any means—and I repeat, any means—by which our economy can be controlled and got going again. The country is still heading dangerously close to the rocks. The oil money which will not last forever is being largely wasted to prop up a system which is basically rotten. But it will take some years, five or 10 years, to reform the system, to reduce the budget deficits, to take the brakes off our industry, to make sense of the hopelessly over-complicated tax and social security systems which now remove most of the incentives to work. During the essential period of reform, we shall need some sort of incomes guideline, I am quite sure, and probably some temporarily severe monetary policies as well. I should like to see the National Economic Development Council or some economic forum such as my noble friend Lord Rochester mentioned, used to bring these various elements in our economy together in an atmosphere where they can discuss the essentials of our recovery without too much politics.

I believe that there is underlying all this pre-Election talk a very considerable measure of agreement about what in fact has to be done, although I know that some of the matters which I have raised today are pretty controversial. We need responsible politicians of all the main Parties to be involved, because, in fact, we must recognise that either of the main Parties can wreck any reform. The politicians must face up to this unpleasant fact. I also want to say to the Conservatives: If and when you come to power, please, for goodness sake, do not abolish the National Enterprise Board, because, in my experience, Governments always have to retain a power of rescue and direct influence in the economy while, of course, avoiding mere political interference, such as NEDO has so vigorously complained of. This is particularly important in the silicone chip microprocessing era which we are just entering. If British industry fails to get in on the bandwagon there, God help us!

So, I say to both Parties, for goodness sake be pragmatic and do not be theoretical or ideological on any of these matters. You will need every means within reach to get our economy going again, because it has gone a long way in the wrong direction. If we do not, after the next Election, and right soon, take proper steps to set this county on its feet, then I foresee that in 10 years' time it will be the biggest slum in Western Europe. Which will our statesmen choose?

7.26 p.m.

The Earl of LAUDERDALE

My Lords, the speech from the Throne recalled to me the words of those who rise from a banquet, loquacious before the hungry about the good things to come. The debate, focusing on inflation and unemployment has scarcely penetrated beyond line 2 of a speech which ran to 112 lines. I want to push on to line 8 and its reference to North Sea oil. Apparently, the Government's interest, to judge by the Speech, is confined to the revenue to be squeezed out rather than the long-term energy basis for our recovery to which there is no reference whatever. In the past year the offshore has given us some excellent news and no doubt the Government will claim the credit. The good news is of truly significant finds of heavy—as distinct from light—oil West of Shetland. But the past year has also given us some less good news and in my habitual non-controversial style I propose to draw attention to this in a largely interrogative way.

First, there is surprise and anger among both the independent and the multinational companies about the antics of BNOC, commonly called "Benoc". There has been almighty confusion about the handling of our natural gas surplus of a kind to discourage research and development on the subsea gasefication of coal which can lead us to far greater supplies of energy when the oil runs out. No fewer than four means of getting it up in the form of gas have already been identified. We read of a new tax squeeze in prospect on the industry to raise the Government take. We hear warnings that BP must now be taken under full public control, despite Government assurances 18 months ago that this would not happen. Further, we read of a resolution passed at the Labour Party Conference proposing the outright nationalisation of North Sea resources. Those are bad enough, but worst of all is the virtual collapse of exploration drilling in United Kingdom waters.

In October last year there were no fewer than 26 exploration rigs drilling where nobody knew if there was oil or not. There were 26 in October last year and this year, what is the figure? My Lords, it is seven. Seven as against 26—a disastrous collapse and decline over a year. Of those seven three are drillings on licences that go further back than the fifth round and four are on fifth round licences issued 14 months ago. Compare that with the fact that the Dutch area has seven rigs and it is a much less exciting area, with less attractive gas resources to go for. Likewise, the Irish area contains more exploration rigs in its area of very uncertain prospects considerably less promising than we have in the North Sea. Why, therefore, has North Sea drilling collapsed?

Buried in the middle of the gracious Speech is a tantalising promise that the Government will "continue" to make information on public policy more readily available. This is where my non-controversial and interrogative approach comes in. Emboldened by the promise of more information, I have a number of questions to put.

With regard to the Government's chosen instrument, BNOC, why is it that only now—14 months after the last round—have the bulk of the licences been confirmed? Why is it that BNOC has actually discouraged wildcat drilling by blocking farm-outs to the minor companies? There is the case of Siebens who only got their farm-in on 3/28 East of Shetland after being squeezed of a further 15 per cent. equity by BNOC. As for Zapex, they were simply excluded from a farm-in on 3/29 in favour of Chevron, although Chevron, a major, offered a smaller slice of equity than Zapex. Why have BNOC either deliberately, or else by clumsiness, literally created an atmosphere of malice and distortion in their relations with Mesa Petroleum on the development programme for 11/30 in the Moray Firth? Why is it that the industry is now saying that BNOC's motto must be "All that is not compulsory is forbidden"?

How have the Government honoured the assurances that were given over and and over again in debate in this House and in another place that BNOC would be treated as a thoroughly commercial enterprise, despite being the Government's adviser in this area? Are the two roles indeed compatible? One may well ask that, especially in view of the very special treatment given to BNOC in Round 5 on at least four quadrants—29, 31, 26 and also 27/4. That favouritism suggests that in its application BNOC was using access to private information which it was privileged to have from Esso's data on block 30/17. The industry ask why it was that BNOC was given a special private allocation of awards on 205/10 and 206/6, West of Shetland outwith and after Round 5, without these being offered to the industry as a whole. Why is it, the industry asks, that these applications by BNOC in private, under the counter and behind closed doors, were so successful? Why were they pressed so hard, if not in the light of privileged information that BNOC had received from BP's and Conoco's experience on neighbouring blocks, 20/68, and 206/7.

Again, the industry ask—and I also ask, as usual uncontroversially and simply seeking the light—why was there a private award to the British Gas Council after Round 5 for another block in the Irish Sea which was not open to the industry as a whole? Cannot the Government understand that examples of this behaviour shock, anger and frustrate the industry on whose enterprise and independent investment successful exploration depend?

It has been said that, if politics is the art of choosing between the disastrous and the unpalatable, BNOC and the Government between them have set a new standard by choosing both. Indeed there is no dunce like a mature dunce. Listen to what BNOC is now getting involved in, trying to play with downstream marketing of oil in a market that is highly technical and difficult and certainly not a market for amateurs. Of course, anybody with 14 million dollars a day can buy one million barrels a day; but to refine and market at profit is quite a different matter. It will be difficult enough for BNOC not to lose money in marketing its 51 per cent. share. Why then are the Government's entitlement to take a further 12½ per cent. of its royalties in crude being added to that difficulty, so that BNOC will have an even greater volume of crude to refine and market? If in the coming year BNOC loses no more than 10 cents a barrel when the oil price is roughly 14 dollars a barrel, it will be out of pocket to the tune of about 50 million dollars.

The industry asks what is the Government's gas policy? To absorb the expected 6 billion plus cubic feet of natural gas available in 1982 will involve a United Kingdom economic growth rate of 8½ per cent. a year. The volume simply cannot be absorbed in the economy as we now see it. The Gas Council has take-or-pay clauses of one sort or another in its supply contracts which have the effect of causing it to take the maximum of the expensive gas from the Frigg area, which was fixed at somewhere around 1.60 dollars a barrel and from the Brent field at around 1.20 dollars a barrel while to a large extent closing off the cheaper gas at 60 cents a barrel which it contracted to take a long time ago from the Southern fields. That is the kind of tangle in which Government policy has got itself involved. Not only are they doing that but, instead of exporting the surplus, they have actually refused permission to Shell and Esso to go ahead with a pipe project to take the surplus of their gas into the Dutch system.

On gas policy, the Government are so conservationist that, as I understand it, they have refused to allow the flaring of gas from the Ninian and Brent fields so that crude can be piped dead along the pipeline to Sullom Voe while awaiting completion of the gas separation plant next year—this, at the cost of delaying crude oil deliveries necessary for the balance of payments, of which the Government are so proud.

Why is it? Can it be that the Government are frightened of weakening the British Gas Council's monopoly? Can it be that the Government have an ideological reason? Can it be that they realise that, if they once market gas overseas, it is bound to set a new and international price for gas in this country? Cannot the Government understand that this highly restrictionist conservation policy does two things: on the one hand, it discourages exploration, and, on the other, it discourages research and development, which will be badly needed very soon on the gasification of undersea coal reserves. We shall urgently need to draw on these 15 years hence when the North Sea oil has virtually run out.

In the scant reference to oil in the Queen's Speech there thus lies buried a picture of enterprise inhibited, of private capital discouraged, of British minors and the independants being penalised. The House may be interested to know that some companies have actually closed down or have virtually done so. Trans-Ocean (Houston) has reduced its staff from 18 to 2 in its main office in London. Home Oil from Calgary have gone away altogether.

Mesa Petroleum are smarting from the unfriendly treatment that they have received. All this is happening when the known North Sea reserves of about 23 billion barrels of crude oil and 175 trillion cubic feet of gas are not sufficient to last more than 20 years at the outside. This neglect, this dunce-like behaviour, is taking place at a time when anyone who studies it seriously can see that a decade hence the European energy problem may well be even worse than the problem in the United States is today.

In this House and elsewhere we have had such strange answers on all this as to recall George Orwell's cynical comment that political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. The Government have now promised fuller information. The promise will be judged by the quality of the answers to this debate. It is high time that the Government came clean on their oil and natural gas policy and answered these questions properly. They should realise that there are no secrets that time brings not to light eventually.

7.41 p.m.

Lord BALOGH

My Lords, I must congratulate the noble Earl on a brilliant exposition of the large foreign company's case. It is very interesting that in every case on which he touched he preferred foreign profits to domestic take. I shall not follow him in this way. We have been having these amicable quarrels—

The EARL of LAUDERDALE

My Lords, would the noble Lord allow me to intervene? I am much obliged to the noble Lord. We are accustomed to exchanges of this kind of bouquets. I did not of course refer to profits but I did refer to the desirability of exploration. I will be fair to him and I will not interrupt him again.

Lord BALOGH

My Lords, I am very grateful. Unfortunately, as I was not told that oil policy would be discussed in detail, and I did not get permission to talk on the subject on which I am still in quasi-Government service, I cannot reply. May I look at the general position however. After so many disappointing years one can see something light in the tunnel. It may be extinguished later on, but at the moment it is not too bad. We have— and this is of the utmost importance—achieved a substantial increase in real wages and I hope that this fact will be emphasised over and over again by Ministers, for there is a notion around that great cuts were suffered by wages and that these cuts will have to be restored. It seems to me that the Opposition might have enlarged on that constructive line rather than make only destructive and, in my opinion, completely contrary remarks.

The Prime Minister and his economic team are, in my opinion, much to be congratulated. However we must not jubilate. Their achievements, important as they are, have not yet been consolidated. In our debate earlier this year on the impact and use of gas and oil I pressed the opinion that first of all we must make certain that a due share accrues to the nation and not to foreign oil companies, and that this benefit from the oil ought to be devoted primarily to a reconstruction of British industry to make it competitive and face some of the debts which have been accumulating, mainly after the abortive boom engineered by the noble Lord, Lord Barber. The Opposition thoughtlessly and recknlessly attacked our plans to increase the take on oil. They did this at a time when all but the whole of that take had been absorbed by the weakness of the non-oil current balance, a consequence of the inexorable flood of imports. The hoped for reorganisation of British industry has hardly even begun.

Taking one thing with another, it must be obvious that a number of prominent wage claims which have been put forward are violently unrealistic in the sense that they cannot be sustained in real terms for the simple reason that you cannot get a quart out of a pint pot by altering the marks on the pot. I marvel at the total irresponsibility of the Opposition as so eminently shown up by Mr. Heath and now hastily fudged over, and also of some of the trade union leaders, in once more advocating and demanding the end of the incomes policy just as they abandoned the Social Contract last year—the one great social achievement which might have reconciled stability and full employment.

We have had five attempts since the war at mastering inflation by restraints on incomes: in 1948–50, 1961–62, 1966–67, 1971–73, and the last one which expired just this year, 1975–78. They all ended in impatient demands for the restoration of what was called "free" collective bargaining. In consequence, we have had over a dozen exchange crises and the retreat from a sensible incomes policy was punctuated by reconsideration of policies of public expenditure cuts ending in the rise of the Friedmanite instruments of witchcraft, cuts in public sector borrowing requirement and domestic credit expansion, cash limits and all. These are now recommended by as balanced and sensible a person as Mr. Terence Higgins as the "new" Tory policy. Yet they have broken in the hands of both Tory and Labour Governments with regular repetition. The reason for these recurrent failures has been the total refusal, which has been demonstrated by the noble Lord, Lord Thorneycroft, to analyse the deep-seated structural changes in the economy, in particular the massive concentration of economic power into the hands of relatively few large-scale enterprises on the one hand, and the rise of powerful trade unions, on the other.

Coming simultaneously with the achievement of full employment in the 1950s and 1960s, this concentration of power resulted in a strengthening of the trade unions, on the one hand, and it allowed the manipulation of prices, on the other. A clash arose between the actual distribution of economic power and the distribution of income and wealth. For us to succeed this clash must be resolved consciously and peacefully. I must say that the speech made by the noble Lord, Lord Hankey, is just the sort of thing which would engender hostility and create divisions in the nation. 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 utter common ruin. The attainment of a balance without mass unemployment depends, in my view, on making effective a sense of individual and group responsibility about policies for production, income distribution, and management and expansion of the public sector, especially of the social services. If that is not understood we shall never get anywhere.

The noble Viscount, Lord Watkinson, who quite sensibly has departed home, wishes to have a free market for prices and a planned solution involving either a NEDO or some other organ so far as wages are concerned. But this will not do. Group responsibility and individual responsibility demands obligations on both sides of the two bargaining powers. I must confess I do not understand the strange alliance in this matter between Mrs. Thatcher and Mr. Moss Evans, Mr. Clive Jenkins and Sir Keith Joseph. They all seem to believe that wages have very little to do with inflation. Their Gaelic song surely accords ill with the would-be BBC accent. I have of course always had difficulties with my English pronunciation. What is one to do as a newcomer to the language when Chol-mondeley is pronounced "Chemley" and what is spelled "free collective bargaining" sounds in fact like "licentious sectional blackmail" to the detriment of the poor, the weak and the sick?

The much hoped for balance in the labour market has not been restored by the periodic restoration of free collective bargaining. It has turned out to be a war of all against all; nor were wage differentials rendered palatable by free collective bargaining. What in fact happened was that each round of incomes leapfrogged, leaving all discontented and riven into competitive factions. The ineluctable conclusion which emerges from this boring recurrence of our economic misadventures is that, with the growing concentration of economic power on both sides of industry, the equilibrating mechanism of the 19th century which even then worked very badly has finally broken. An incomes policy is a permanent requirement—that must be learned—and not an emergency contrivance. On this basic point I absolutely agree with the noble Lord, Lord Kaldor.

I know that these sentiments will not receive due regard or even acknowledgement either among weekly wage earners or among the professions, yet the whole problem really seems quite simple. If wage/salary demands are higher than the rate of increase in productivity and national real output, the demands for higher money wages will not result in higher real incomes but in higher prices, and our foreign balance will be endangered. Under these circumstances, the old adage that someone's wage increase is another's price increase is one more vindicated. The Prime Minister's stand on this question must inspire respect even among his opponents and it demands loyalty from his followers.

There are, however, two fields where I would reiterate the cautionary tales which I have previously adumbrated in a boring manner in your Lordships' House. The first is that in advocating and administering incomes policy there should be no special arrangements for special vested interests. The rot of inflationary pressure began when in 1968 the doctors received a rise which, however justified it may have been, was felt to be unjust by the majority of workers and established a minimum norm. The special review bodies then proliferated and with their proliferation the situation worsened. They dealt with each case as they saw it and the devil take the community. On the other hand, I feel it is futile to hope that Ford workers will accept less than 5 per cent. when their chairman has received an annual increase equivalent to many years' total wages. If professional people or those with high incomes do not believe in noblesse oblige, they ought at least to listen to sagesse oblige. This principle has not been practised in respect of the increase in top salaries.

The second problem concerns our international economic stance. My friend and pupil, Mr. Roy Jenkins, seems to be oblivious not merely to economic theory but also to economic history. He has launched upon a propaganda campaign for monetary unification in Europe before a unification of living standards and policies has taken place. In a situation of unequal partnership the weaker partner—that is, Britain—is bound to suffer and the closer the union the more it suffers.

Herr Schmidt and M. Giscard have espoused this madcap idea in an attenuated, "sneaky" way. I have incurred the displeasure of my noble friend the Minister of State for foreign affairs by characterising Herr Schmidt's proposals as the inverse of Clausewitz's famous dictum, "The European monetary system is the continuation of the drive towards conquest and dominance by other means". Inasmuch as the scheme will tend to mitigate the rise of the German deutschmark and the Swiss franc which is due to the flight from the dollar into those currencies, it will inevitably exert upward pressure on our own currency and that will lead to a nagging loss of reserves as we try to keep up with the Germans.

The noble Lord, Lord Thorneycroft, characterised the decision on this question as a question of politics. The point is, however, that politics can cost too much and politics, when they over-rule the basic principles of economic prudence, will be very costly indeed. The Germans refuse to expand their GNP and imports on the one hand and refuse to create and sell deutschmarks against dollars because of fears about the rise in their money supply. Yet their rate of inflation is below 3 per cent. and they have vast open and concealed unemployment problems.

The monetary impasse from which the world suffers is due to the peculiar, indeed unprecedented, position of the desert Arabs on the one hand, and to the wilful refusal of the Germans and Japanese to cease exporting their unemployment; last month's German surplus was over a billion dollars. In consequence, we are threatened with a setback in the trade of the rest of the world. The moneymongers of the world have been preaching at President Carter to "save the dollar" through cutbacks, misery and unemployment, caused directly through the Budget or indirectly by raising the rate of interest. Unfortunately, they were able to panic him into severe deflationary measures. Do they not realise that it was the United States deficit which kept the rest of us going? The "improvement" in the United States balance of payments will inevitably exert a serious deflationary pressure on the rest of us, especially as the larger part of that deficit is due to the import not of oil but of manufacturers. The Friedmanite rot has spread so far and wide that savagely deflationary measures are greeted by a Stock Exchange boom. It is to be feared that the United States recovery will be stopped or even reversed.

Concerted action to achieve expansion without inflation is possible only if the main trading nations come to an agreement about expansion, otherwise weare bound to get both a bitter struggle for markets and protectionism, whatever is said now. The one hopeful aspect of the situation is the acceptance by the American unions of an orderly packet spelling out a social contract.

The pressure on our exports would be bound to worsen our domestic situation were we to enter the monetary system pledged to maintain the present unrealistic rate of exchange which will stimulate the United States' exports and hinder our own. We should be entering a system far worse than the gold standard, the liberation from the shackles of which was celebrated by Lord Keynes at Bretton Woods. Yes, much worse. Under the rules of the gold standard the creditor countries had to contribute to the readjustment of the balance of payments. They automatically became "inflationary", expanding income and increasing prices. Thus, the creditors contributed to the readjustment of the original imbalance by increasing imports and absorbing potential exports.

In the European system of so-called stability, both the creditors and the debtor countries would deflate in the name of anti-inflation, thus prolonging and deepening the agony of the latter. It is no answer to say that there will be an intervention fund from which we could borrow and to believe that we can get ourselves out of our problems by doing so. The further we sink into debt the more prolonged and acute will be the stunting of our prosperity. We ought to do our utmost not to increase a monetary fund or swap arrangement but to reactivate the so-called scarce currency clause of the Bretton Woods Charter which provided for restrictions on the exports of persistent creditors. The creation of the European bloc would make such changes much more difficult, even if it did not outlaw completely changes in exchange parity. British Governments, both Labour and Conservative, have not been eager to devalue or tolerate depreciation and have lately "uncapped" sterling despite the fact that the upward pressure on sterling did not originate in a current surplus but in a flight of money from the United States.

Thus, the increase in our reserves was borrowed, not owned, and the uncapping meant that we lived on North Sea oil, if not on short-term borrowing. The politico-economic reasons for this attitude are quite clear: there is the disillusionment with depreciation as a solution to our trade problem and—connected but by no means identical with it—the growing realisation that depreciation in a situation of apprehensive anticipations might fire wage demands and thus nullify any stimulus to the balance of payments. One dangerous consequence of the EMS might be that our borrowing capacity would be increased through large swap facilities. This would encourage a defence of the parity at the cost of further indebtedness and further de-industrialisation. Thus we should exert such influence as we still have against the large swap arrangements, except for staunching an emergency, such as a mad confidence crisis such as lately visited the dollar. However, this should be done by the IMF and not within a narrow European system. We must beware of joining an anti-American bloc.

No rules should be laid down—as was done in Bretton Woods—to restrict changes in parity to cases of fundamental disequilibrium judged by some supranational organ. It must be left to the national Government to decide whether and how much of a change is justified. We must at all costs avoid a continuation of de-industrialisation on the basis of what amounts to the use of begging bowls. Therefore, we must face the possibility of having to remain outside. In that case, a decisive reinforcement of exchange controls will prove essential. A depreciation of sterling cannot alone take the strain. It is to be hoped that the present first signs of recovery will be consolidated. Without a new Social Contract, I fear that this is highly improbable. Those who attack the Prime Minister's stand for sanity have much to answer for.

8.3 p.m.

Viscount TRENCHARD

My Lords, the gracious Speech included the phrase: Building on the stronger domestic economy now established …". I cannot feel that in any long-term sense we have started on that road, notwithstanding the short-term points to which the noble Baroness drew our attention. We have been fortunate in the movement of raw materials and the terms of trade, but in terms of underlying efficiency and competitiveness we have made little progress. When speaking in Viscount Amory's debate on 3rd July I offered the noble and learned Lord, Lord McCluskey, a bet that two-thirds of the current productivity deals would prove, when the national figures were out, to be bogus. I hoped that it would not be so. He did not take the bet. He might have won it on a technicality if one includes oil, in which case probably only half is bogus, but if one takes manufacturing industry outside oil the increase in the national product is approximately one-third of the extra increase in wages over and above the 10 per cent.

In all long-term measures, our shares of market and our productivity, we have not made any worthwhile progress. My noble friend Lord Thorneycroft spelt out some of the British qualities and posed the question of why did we do so badly when we had such talents? I would put it slightly differently: why have we held our talents in a straitjacket? We have held our talents in a straitjacket because of our quite natural, and in many respects correct, obsession to beat public enemy No. 1—inflation. In order to do so we have applied incomes policies. In order to do that, and to make them stick, we have had 11 years of severe interference with prices and with dividends. We have devised a taxation system which could not be better designed to blunt incentive at both ends of the scale. These controls have been the price of the incomes policy to try to beat inflation. In my view they are the reason why the noble Lord, Lord Roberthall, was able to point to the nation losing its adaptability.

Now there are those of course who do not believe that the market system is sufficiently powerful to provide adaptability and to provide growth, efficiency and productivity, and they suggest that it is because modern economies have developed such large economic units—both companies and trade unions. Having spent my life in a fairly big company I have never found the power of bigness in the market place. A look at the profits of large and small companies in this country, and at the decline of them, and at the totally inadequate level of them, I think proves this point. Economists have long referred to the lack of perfect competition, and when one questions them one finds that what in fact they mean by perfect, and what the economic text books, I am told, say, is the kind of competition which used to take place when the text books were written; namely, the competition in the market place with prices changing by the hour. The fact that we now deal with international competition on a bigger scale and on a longer time scale does not in any sense mean that the principles of competition and the market place are not as strong as ever. They are different, and some economists have mistaken differences in detail, method, and timing for a change in laws which are still very powerful and which, in my opinion, alone can produce the necessary growth efficiency in peace-time.

Now we shall not have a system that really encourages growth until it is again possible to say that a company or an individual, either through efficiency or through good luck, has actually made a killing and kept the large part of it and invested in consequence. It may well be through luck that he has been able to do so, but the organisation of the conditions for wealth creation need to be designed for wealth creation itself. They should not be muddled with social policies. Social policies, policies of compassion, should be kept separate. If the concentration on wealth creation is for the purpose of wealth creation itself, we shall soon find that there is substantially more cash for social policies.

I would make the same comment on the references in the gracious Speech to the preservation of employment and to work-sharing. We must not get the emphasis on unit costs and on the growth of pro-dictivity muddled with short-time working, which, on the whole, individuals do not like, certainly other than for a very temporary period. If we keep the emphasis on efficiency and on wealth creation separate from social policies, it will not be long before growth has removed unemployment—not nearly as long as we may now feel. In the meanwhile, we must provide the outlets for those in the hideous position of being unemployed separately from the creation of efficiency in the wealth producing sector.

My Lords, as I see it we are in a national impasse. We have put our talents in a straitjacket and destroyed our growth because of the need to try to make a pay policy stick; and even after putting all those things in to try to make it stick, it is not sticking. Why do we want an incomes policy? We want it because, as the noble Lord, Lord Shinwell, has said, in his view, collective bargaining is in some areas outdated. As I would say it, trade union power, particularly in the United Kingdom, is too strong. Nobody loves an incomes policy for itself. The thought of setting up a national authority to get right a flexible incomes policy over the whole of a complicated economy simply boggles the imagination. It really is not possible. It interests me that when we talk of the possibility of joining a European International Monetary Union noble Lords opposite, and the noble Lord, Lord Balogh, particularly, say that this is a national problem; it is not manageable internationally. I would say that within a complicated economy it is not possible to set up a flexible incomes policy which will be compatible with a dynamic market growth economy.

I have sympathy with those who believe that money control alone is not specific enough in view of industry-wide pressures, not only in the nationalised sector but in the private sector, such as oil tanker drivers. It is not specific enough to stop the very strong pressing of inflationary claims, and it has little bearing on our problems of productivity. That is why I like the word which has been used by certain trade union leaders and commented on today, and which has also been used by the Leader of my Party. I like the word "responsible" collective bargaining. It must be said, I think, that it is clear that the public has some doubts as to whether we will get responsible collective bargaining; but only flexible and free collective bargaining can be flexible enough for a complicated economy. The public doubts on whether we would get it would be shared by many industrialists, and I, certainly, at times, have been faced with claims where I have felt that I have had to make the choice between going broke immediately or going broke slowly. The Rootes car company took the former course and, effectively, one British manufacturing concern was removed from the competitive car business.

There are those who say that British trade union power is not the cause of our inefficiencies and our inflationary claims, and they often quote the comparison of international strike statistics to show that they are not. As I have pointed out before, my Lords, there is a natural economic law which controls the number of days that employers, particularly, and to a degree employees, social benefits allowing, can take off on strike. A company, even a big company, may be able to take one strike in a year if it is particularly profitable. The international strike statistics have no bearing on whether our position is better or worse than other people's. Apart from the fact that many unofficial strikes do not get recorded, it is the balance of power before strike, the strike threat position in the unique British collective bargaining and trade union situation, that in fact affects our productivity and our companies' ability to resist inflationary claims. They are resisted in other countries, where they have managed to practise free collective bargaining with certainty less inflation and, at times, almost none.

It has also been said that this cannot have anything to do with it because our performance over the last 100 years has been so poor. But that 100 years fits with our totally unique British trade union position. We had the Industrial Revolution first, and made the most mistakes as a result of it. We created an atmosphere out of history, and it is very hard to shake off atmospheres of history; but as a result we compensated with legal immunities starting in 1871, 1876, 1906 and 1946, and lately again to a major degree, as has been mentioned in this debate. The noble Lord, Lord Kaldor, has on other occasions drawn our attention to the fact that our productivity improved markedly in the late 'twenties and particularly our performance in the 'thirties, and he has actually likened it to almost a second Industrial Revolution. Has this anything to do with the fact that, regrettably, we had a General Strike in the late 'twenties and that 3½ million trade unionists out of 8 million tore up their membership cards? We do not want that again. We want a balance: a balance such as exists in other countries. Those who say that management incompetence is responsible have to explain that period of high productivity, and also the war-time successes and the very good areas in the British economy where our productivity is internationally competitive—and they range through the City, through agriculture, through retailing, through much of the service industries and through a lot of manufacturing, mainly in the small factories.

We return to this word "responsible" free collective bargaining. Perhaps, in a sense, what Mrs. Castle was trying to recommend, but which was never tried, was responsible collective bargaining; and perhaps the noble Lord, Lord Carr, was after the same objective. I would say to the leaders of our trade unions that they did not like either, and a lot of industrialists criticised both, but why do they not go and look in more detail at why free collective bargaining works, without inflation and with (I would almost say consequently with) high productivity, in other countries, like Germany? Let them take the CBI leaders with them—but study it and study how the Germans create a responsible free collective bargaining structure. I will dwell on the word "responsible" for a second. All, or most of us, have thought, certainly over parts of our career, that we are entitled to more money than perhaps other people think we are entitled to. To get a system of responsible free collective bargaining is not just an appeal to use the absolute power responsibly—which they have—in some cases, but that they should go and see how power is balanced better in other countries.

My Lords, incomes policies seem to me to be a treatment for a symptom of the disease. They are the equivalent of trying to hold down the lid on a saucepan rather than turning off the cooker. Perhaps the cooker itself could be likened to the money supply; but the current which produces the heat is the unique British position in relation to the atmosphere, structure and law surrounding collective bargaining. That is why I believe that there are no greater differences in the Conservative Party than in the Party opposite on this highly complex question, but I believe that we have to seek a solution to the disease rather than to continue to try to treat the symptoms—which, in my view, will produce an explosion.

8.21 p.m.

Lord WALSTON

My Lords, we have listened now for five hours to many speeches of very great wisdom, of very great learning, on economic theory, on industrial beliefs, on the merits of free collective bargaining and so on. I shall not attempt to continue on that line of discussion, but I would ask your Lordships to consider with me for a relatively short time one particular industry in this country, not one of the largest but one which I think is of some significance for a variety of reasons. I am referring to the agricultural machinery industry, an industry which produces something in excess of £1,000 millions worth of products a year—and that, of course includes the agricultural tractor—and which exports something of the order of two-thirds of that at the present time, a record which on the face of it looks good.

But a couple of years ago it suddenly struck me, as I was showing some foreign visitors round my own farm, that the great majority of the new machines and the interesting machines which I had on my farm were of foreign manufacture. I did not buy those because I have any particular predilection for foreign machinery; I did not buy them in any case because they were cheaper than British machinery. I bought them in the main because there was no comparable British machine that I could find or, in certain cases, because the British machinery, although suitable, had a very long delivery date and I could not afford to wait.

I thought it would be worth looking in more detail at this industry to see whether mine was an experience peculiar to myself or if it was more widespread. Unfortunately, I found that it was widespread and that I was simply one example out of many of a similar kind. Between the years 1966 and 1976, excluding tractors, there was a growth in the United Kingdom market of 35 per cent. United Kingdom production of agricultural machinery during that 10-year period rose by no more than 5.8 per cent. Put in a somewhat different form, this means that whereas in 1966 import penetration was of the order of 18 per cent., by 1976 it had risen to 45 per cent.

If one looks simply at one of the most spectacular of the farm machines, the combine harvester, in 1976 imported machines accounted for 25 per cent. of the total import bill and accounted for 79 per cent. of the imports of total domestic consumption. It is worth remembering that the United Kingdom has, in this area of combine harvesters, only one manufacture and that is a multinational. There are rumours that that particular firm will shortly be removing its combine harvester manufacturing out of this country, in which case we should have none, whereas not so many years ago, in the years up to the beginning of the war, we were the world leaders in the manufacture of threshing machines of all kinds. We had a head start there, as, indeed, we had a head start within Europe in the years after the war, too, because we had the most highly mechanised agriculture in the whole of Europe—in fact, in the whole of the world, excluding the United States. Our agriculture machinery manufacturers at that time were world leaders. That we have lost to a very disturbing extent. As a result of this, whereas in those 10 years between 1966 and 1976 agricultural machinery (excluding tractors) exports increased four times, which may seem at first sight fairly satisfactory, it is not so satisfactory when it is compared with the imports of machinery which increased nine times.

If one turns to agricultural tractors, exports increased during the 10-year period by 3½ times and imports, admittedly starting from a very low base, increased by 23 times; in other words, the whole picture is one of a steady and very disturbing deterioration. What are the reasons for this decline?—because, if we could find out the reasons, we might be able to answer some of the questions which have been asked during the course of this debate. I would say straight away that we can cut out as a reason declining markets. As I have already pointed out, markets have been steadily increasing within our own country, within the EEC and within the world as a whole at something like the rate of 2 per cent. per annum; so it is not that. It is not cheap foreign competition, because in most cases we have a price advantage over most foreign competitors. It is not strikes, because the record in the agricultural machinery industry, with the regrettable exception of one or two of the very large multinational firms, has been virtually entirely strike-free, very largely because they are small firms, personal firms, with close contact between management and workers; so one cannot blame any of those reasons, which are often put forward for our poor performance.

The Department of Industry produced an extremely interesting and valuable study earlier this year on this whole situation. It sets out the picture in an extremely objective fashion. They suggest some of the reasons for this decline in our relative position. They attribute it, among other things, to the Conservative nature of the majority of domestic producers who, despite increasing specialisation, have shown little real growth and apparently little desire for growth. They also attributed it to the low level of research and development investment in particular in development engineer resources; 1.3 per cent. of the total expenditure of the industry is all that is devoted to research and development. They also attribute it—and this may be the most important reason—to the failure of the industry as a whole to penetrate the major markets of the Western World and, in particular, of the EEC.

Why should that be, my Lords? Is it a purely personal factor? Is it lack of desire? Is it self-satisfaction? I do not know, but in last week's issue of the Farmers Weekly there is an article on a very big demonstration of sugar beet harvesting machinery in Germany. The headline says: "But where are the British?" It points out the virtual complete absence of any British manufacturer of sugar beet harvesting machinery, although we have some good ones in this country. They were not there to demonstrate their wares to the combined buying force of the whole of the Continent. They quote a spokesman for Standens, one of the largest manufacturers of beet harvesting machinery, who said that German farmers were keen on complicated automatic row crop steering mechanisms, whereas Standens themselves preferred simpler guide skids to keep machines on the row. It may be that the manufacturers prefer this; but they are making machines for the farmers, whether German, French or British. Surely they must consider what their potential customers want. If they go on producing simply what they like to produce and not what their customers like them to produce, no wonder the markets are lost.

Ransomes, another firm specialising in this form of manufacture, said it had only just sorted out some technical difficulties with its two-row harvester. Previously the machine had not been available with a top-saving attachment. This was essential in Germany where about 90 per cent. of the leaf was conserved. That has been going on, my Lords, for years. The German, French and Danish manufacturers have realised this and have made the machines accordingly.

It is only now that one of the leading British manufacturers is hoping to perfect and have available perhaps next year the appropriate machine for market requirements. This is a sad story because we have the potential; we are skilful; we have a big home market; we have good engineers and craftsmen. We had until recently a leading world position. But now that has been lost. I suggest to particularly the noble Viscount, Lord Watkinson, and probably to the noble Lord, Lord Thorneycroft, that one cannot put the blame on lack of incentives and high taxation. If it were that, why would we have such outstanding successes in other industries, big and small? Why do we have world leaders in ICI, Marks & Spencer or Trust Houses Forte which go overseas and make profits for this country? They have the same taxation as all other firms; but they have a management—and I do not say this in any way flatteringly to the noble Lord, Lord Thorneycroft—and other successful firms have managements, who have energy, vision and want to go ahead and do things.

Viscount TRENCHARD

My Lords, I wonder whether I may interrupt? The firms the noble Lord has mentioned are, with the exception of ICI—and ICI's position in the chemical industry would need careful analysis—those where the numbers employed per unit are comparatively small. This is true for even a big Marks & Spencer's store. We are highly efficient in the service industries, retail and distribution and farming. I have said this in this House over and over again. The noble Lord, Lord Walston, is making out my case. I believe taxation has a big part to play in it as well.

Lord WALSTON

My Lords, I am afraid that I cannot understand the noble Viscount's argument; perhaps he could develop it to me later on, face to face. The point that I am making is that the taxation which is paid by the management, the senior members of the staff, the junior members of the staff and the firm as a whole, whether it be in farming, a small industry, ICI, Marks & Spencer or Trust Houses Forte, is identical to the taxation paid by the firms to which I am referring. Yet in one case there is great success for themselves and for the country; in the others there is something which is very close to abysmal failure.

There are many other examples and we all know firms, particularly small, modern, science-based ones. I was hearing about an electronic firm today which is expanding its production and actually exporting equipment to Hong Kong for loudspeakers which will be incorporated in their radios and televisions. It can be done in this country. We have the technology, capital and ability. We do not have the overriding disincentive; we cannot blame it on that. Where there is good management, where there is a desire to get up and go out and do things, we still can do it. We must not be unduly pessimistic about this. What we must do is to pinpoint such firms. I have taken one overall industry—which, admittedly and happily, has some happy exceptions—and pointed out the abysmal failure of that industry which is reminiscent of the even more abysmal failure of the motor cycle industry. Once in this country there were Douglas, Norton and BSA. That industry was once the pride of this country. That has gone, and if we are not careful our agricultural machinery industry and other industries will go the same way.

Lord MACKIE of BENSHIE

My Lords, what the noble Lord is saying is that there are exceptions to the rule; but because some people are resistant to infection it does not mean that the infection is not there.

Lord WALSTON

My Lords, it is a question of how many are resistant and why are they resistant to infection? There are many factors governing resistance to infection. I am saying that we should put the blame where it lies; do not let us try to find excuses by saying it is the Government's fault for high taxation, or it is the fault of the unions because of strikes, or it is the CBI's fault because of its intransigent attitude, or it is the banks' fault for not supplying capital or whatever it may be.

The fault lies essentially with the people who are running the industries. If they are incapable of running those industries, if they do not want to do so because they cannot get enough out of it or if they have not sufficient training, then the sooner they go the better—but not for the country. What we want is have other energetic and skilful people to take over. We must concentrate on the good people and our good industries and not try to lay excuses for the failures on other people's shoulders when the fault really lies with the industries themselves.

8.39 p.m.

The Earl of LYTTON

My Lords, at this time I am sure that brevity, even without wit, will be welcome. I have come up to support the Government in the matter of the 5 per cent. I may be deaf and I may have been absent for some of the speeches, but I do not think anyone else has accorded the 5 per cent. their support. The noble Lord, Lord Thorneycroft, said that capacity for manoeuvring abroad is determined by our strength at home. I believe that is the phrase he used, and I believe that everyone will accept that we are not strong at home and that the main trouble is inflation. Everybody on all sides of the House—and this was also mentioned in the gracious Speech—is agreed that inflation stands at the top of our difficulties. Not everybody, however, has underlined the fact that inflation has many causes in history and that it has been going on in varying degrees from the 14th century at least.

At the present time it is "wage-push" inflation which dominates the scene, even when the scene is varied by OPEC rises in price of a phenomenal character. It is wage-push that is the trouble. Mr. Wilson, when Prime Minister, put it tersely when he said that one man's pay rise is the next man's price rise. Mr. Heath, almost immediately afterwards when he was Prime Minister, said that one man's wage rise is the next man's redundancy.

Those two things mark a turning point in people's thoughts. The first saying, that wage rises are the cause of price rises, is something which even now is not accepted, even by very intelligent people such as Mr. Enoch Powell. He says that wages have nothing to do with the rise of prices. He says that wages are a consequence. One fears that an era is passing and that there is a hangover. With regard to the other factor, it is only very recently that it was widely accepted that you could have unemployment or inflation: you could choose between the two. Mr. Heath's pithy saying marks the apex of that thought and it is rapidly declining. Now inflation is generally regarded as a substantial cause of considerable unemployment.

These two factors, I am certain, are not accepted by the great majority of people in this country. It has been my task to teach people the dismal science. I taught some intelligent people and some who were exceedingly dull. I had to make it interesting and I remember there was one chap who slept in the front row, and at the end of the term he came to me and said, "Your subject is very difficult. It keeps me awake at night". It is not easy and if I have anything to suggest about this I would say that public relations should be developed in order that these very simple elements of economics can be made available to young people in a palatable and amusing form so that they get to know them—because they do not know them. They do not know what is meant when somebody quotes either of those two Prime Ministers and the phrases I have just referred to.

This factor of wage-push is widely accepted as a special disease of our own. During a visit to California in the summer before last, I was asked to address a number of different audiences, all of whom were interested in England. Many of them regarded England as home and all of them loved England—and they said: "Are you going to be able to control your unions? Can Thatcher hold the unions?" By that they meant: "Can they be stopped from asking for more money than is reasonable?" The fear of my questioners was that England was going down and that it was going down because it could not resist wage demands. Nothing has so underlined my feeling that that is at the top of our problems than the interest of friendly Americans that we should not go down and their belief that this was the cause of our trouble and the enemy we had to fight.

Now we come to the methods by which it is fought. For example, we have had among the important factors incomes control. Of course, these factors suffer from all the difficulties and crudities which people have pointed out; but what are the alternatives? I hear from time to time a strident demand for a return to free and responsible collective bargaining. I agree with the noble Baroness, Lady Birk, that the option is not on the table; and for this reason—the parties come to the table, but one of them is heavily armed with lethal weapons. When I say "lethal" I mean weapons that kill. They use these weapons. You can say, "For God's sake! get back to work and save people's lives"; but they are not impressed because they think they are not responsible. They believe it is the people who refuse their demands who are responsible for those who die. Let there be no mistake: there are many vital industries where a demand is made and industrial action is recklessly pursued notwithstanding the grave risk to human life. These weapons are held by one side only. They are prepared to use them; they do use them, and a few of them prefer that form of use. The other side has nothing but coffee. In these circumstances, I cannot see that "free and responsible" collective bargaining is an option and therefore I think that the noble Baroness, Lady Birk, is quite right in saying that it is not an option which is there for us to choose.

Secondly, we are urged to keep control of the money supply. I cannot help thinking that the Leader of the Opposition, according to her speech yesterday in column 29 of Hansard, does not believe that this is the only ultimate means of controlling inflation. It seems to me that the Government are controlling the money supply. When they control incomes they are controlling it at one of the most dangerous points, if spending goes to excess. It is a form of control, and the old type of monetarism—bank rate, open market operation and Heaven knows what; these are far cruder things, which cripple spending on productivity. Therefore I cannot see that that particular form is acceptable.

I have listened during this debate to try and find out what the Opposition are quarrelling about with regard to the Government's policy, the 5 per cent. I also refer to the obviously very important speech of the Leader of the Opposition yesterday in the other place. She said that 5 per cent. for nothing as the starting point seemed to her an ultimate recipe for inflation. Therefore she is not worried by the smallness of the limit, the offer of 5 per cent.: she is worried by the fact that it was made the limit or the guideline, so far as I can make out.

I listened to the noble Lord, Lord Thorneycroft, and I thought that he was totally against any kind of percentages whatsoever. I thought that he denounced percentages as a false way of setting about the matter. He asked a special question—and I think he said it at dictation speed—which had a relationship to that matter. The noble Viscount, Lord Watkinson, was not bothered by percentages. He was bothered by the fact that it was 5 per cent. So there is, I think, a difference of emphasis. If I compare that with what the Leader of the Opposition said, I cannot see why they are troubled about it not sticking. All they have said will make sure that it does not stick.

As to that, it has been said in another place, in the speech from which I have been quoting, that the present Prime Minister did the same thing and made the same devastating criticism of Mr. Heath. That is true, and I must say that I deplore this tit-for-tat of denouncing as impossible what the other side is trying to do, in the gravest of situations that we have faced in peacetime during our lifetime. So I welcome the fact that at least one Member of the Opposition, Mr. Heath, has stood by what he said before and stands by this. It is a crude form of thing, but what can we do? I listened to the word "flexibility" and I am left with the impression that it is a kind of holy water sprinkled by a good man on a handful of propositions that have failed in the past.

8.52 p.m.

Baroness SEEAR

My Lords, I must first apologise to the House for the fact that I was not in my seat at the beginning of the debate. Before I knew the date when Parliament would reassemble and when this debate would take place, I accepted an invitation to speak in the north of England and that is why I was delayed in getting here. To make amends at this late hour, I intend to chop in half what I had intended to say, which I think will carry favour with the House, if nothing else that I say this evening does.

I should like briefly to reaffirm my Party's support for the idea of an incomes policy. Of course, we do not think that an incomes policy by itself is the answer. We believe, as I think the Government believe, in a multi-pronged approach. You have to attack the problem of inflation from a number of different angles, but an attempt to control the increase in pay is certainly one of the ways in which it needs to be done; all the more because, despite what the Government are saying about the success which they have achieved up till now, that success has to be viewed in context.

The fact of the matter, as the noble Lord, Lord Balogh, said, is that earnings increases last year were much in excess of what increases in productivity justified. Therefore, there is every danger that, left to itself, pay will increase to the extent that it will have an adverse effect on the overriding importance of controlling inflation. All the more so because—and this is a point which has not been made this evening—the extent to which inflation has come down has, in part, been due to a fortunate change in the terms of trade. As a matter of fact, whenever either Party in Government scores something of a success in controlling our economy, it is more often due to what has happened to the terms of trade than it is to the wisdom of Ministers on either side of the House, and this has happened again.

The Government's "success" in getting inflation down to under 8 per cent. is not unconnected with the good fortune for this country—but, of course, the bad fortune for overseas countries, not least developing countries—that the terms of trade have been in our favour and adverse from their point of view. So that underlines the need to keep control of pay. I would, however, go along with the critics who say that it was a pity that there was not wider consultation in advance. If there is to be wide consultation, may I once again urge that this should be extended more widely than merely to the TUC and the CBI, and that the voice of practising managers who have to operate pay policies inside the plants—and that, after all, is where it matters—should be heard in discussions about pay policy, and about the variations of pay policy which undoubtedly will be required.

Unfortunately, the noble Lord, Lord Balogh, is not here, and I believe it is contrary to the practice of this House for Members of Committees to defend their own work against attack from other Members of your Lordships' House. But when the noble Lord, Lord Balogh, said that the top salaries recommendations had been outside the requirements of pay policy he was, if I may say so, speaking as a member of the Top Salaries Committee and, I think, speaking not having checked his facts adequately. If he will look at the most recent report, he will find that on an annual basis the recommended increases at the top salary level were well within the pay policy recommendations. If he wants any confirmation in less Parliamentary language than that which I am endeavouring to use, he had better go and talk to the chairmen of the nationalised industries and find out what they have to say about the extent to which pay policy was, in fact, more than applied in their regard. That is a digression, but I felt that I could not leave that statement uncorrected.

Having said that, I want only in the rest of what I have to say this evening to attempt to put the problem that the Government are facing, and with which they are attempting to deal in the gracious Speech, in a slightly different context. It seems to me that the heart of the problem lies in the fact that the immediate problems lead Governments—and I believe that any Government would probably be tempted to do what appears necessary to deal with the immediate problems facing us, which are of the greatest political difficulty and often have very considerable social consequences—to take steps which make it more difficult to get out of our longer-term economic difficulties. I believe that this is the very heart of what we are up against; that the more we try to adjust to the present situation, the more difficult we make it to cure our underlying illness. If we could take this as the heart of the analysis, we should then ask to what extent the gracious Speech measures up to the challenge and how we are to overcome the conflict between the short-term pressures, which are very real, and the long-term needs. This is really what it is all about.

What are the long-term needs? The noble Viscount, Lord Watkinson, made the point most eloquently and absolutely rightly, when he was stressing the need to get British industry on a level at which it can compete effectively. In order to do this, where do we want to be? We want to focus our resources—and everybody really agrees with this—in those areas where there is high added value, and out of that high added value to pay for the services which are labour intensive, both public and private, which are in demand everywhere. That surely is the sensible objective; to concentrate our resources on high value-added. It does not matter whether or not a large number of people are employed, provided that they arc generating the wealth with which to pay for the labour-intensive services. That is where we are trying to be. But what does this require? It requires flexibility, it requires restructuring of industry, it requires all those measures which one needs to take to get a high level of productivity. If we are to do this, we have to do almost the exact opposite of what, in order to deal with the present level of unemployment, we are forced to do. That is the heart of the problem, and it is a very difficult one. I would only say that skill in dealing with it must lie in trying to isolate those actions which we can take which help in both directions and to give the highest possible priority to those things which will help in the short term and also move us in the right direction in the longer-term.

I should like to draw attention to two points in the gracious Speech which I think can be said to be movements in that direction—where one can help in both the short term and the long term, unlike so much else in which the short term need contradicts the long term objective. The first is the point made about skilled men. I make no apology about the fact that I have spoken many times in your Lordships' House about the importance of increasing the supply of skilled people in this country. Up and down the country companies are saying that they cannot get the skilled people they require. With unemployment running at the level that it is, it is an absurdity that there is a shortage of skilled people. Can we not make it of the highest urgency to deal with the supply of skilled people?

There are a number of things which need to be done. Training and retraining is one. I do not wish to speak about that now, as we have spoken about it on many other occasions and there is general agreement that this needs to be done. We also have to look at the issue of differentials. It is perfectly true that the level of pay that skilled men are getting in many cases is not enough to attract and is not enough to retain. Devoted though I am to the idea of an incomes policy, I should like to suggest that where it is quite clear in a local area that companies are unable to recruit skilled people at the going rate and that the local skill centres and the local job centres between them are unable to produce the skilled men required, this should be a legitimate ground for breaking the 5 per cent. It is easy to establish. If you cannot get them—and the skill centres and the job centres bear out the contention of the employers that at the rate that is being offered it is not possible to get these people—then this should be a ground for saying that you can pay above this level.

If this is not done, what happens? Not only do you not get skilled men but also one must remember that skilled people create work for the semi-skilled and the unskilled. They follow on after the skilled men. At the moment, I am concerned with one enterprise which is working in the export trade and they simply cannot get technicians. I believe that they might be able to do so if they could pay above the odds laid down by the incomes policy, but they try to conform to the incomes policy partly because they are, in part, supported by Government money and partly because they believe that they ought to do so. But this is defeating the objectives of the concern and it is defeating the challenge to inflation, because if you are not able to produce the goods, since you do not have the skilled men, you are also stopping the recruitment of the semi-skilled and the unskilled who are out of work in that area. The reason is that if the skilled men were there they could also employ more semi-skilled and unskilled men.

Can we also mobilise public opinion and the trade unions as a matter of the greatest urgency to ensure that the creation of skilled people goes on apace? It ought not to be possible for the kind of thing to happen that has been happening for months in ICI at Wilton, where it is a matter of obtaining artificers upon whom the work of that part of ICI depends and upon whom, therefore, employment in that area depends. What is the company wanting to do? It is wanting to retrain its own redundant staff for the artificer's job, but it is being stopped from so doing. Surely this is something against which public opinion ought to be mobilised, because if we do not get the skilled men all the other things we are speaking about go down the drain.

We must maintain the differentials of the skilled. I am sure that I shall not be misunderstood if I say that, with this in mind, I have had some hesitancy in supporting the approach that is once again being made towards the lower paid. "The lower paid" is far too wide a term. "The lower paid" includes the low paid family man. It also includes the young man or woman who is still living in the parents' home and who is often not paying very much to Mum or Dad. It is absurd to increase the rates of pay of "the lower paid", including these 18-year-olds who are starting at adult rates of pay, in order to help the family person.

In my view, the Government have taken the right steps in increasing child benefit, because poverty lies where the low paid have children, not where the low paid are living at home. It is ridiculous to support "the lower paid" as a general category on grounds of need, as though all people who are described as "the lower paid" have the same kind of need, for this is very far from the truth. If you improve the position of "the lower paid" within a 5 per cent. pay increase, then you will narrow the differentials of the skilled man still further. And that way lies disaster.

The second area where I think we can move in both the short term and the long term in step rather than in conflict is in relation to the small business. The Government—prodded, I may say, but prodded successfully by my own Party in the days of the pact—have done a good deal for the small business and the self-employed. The noble Baroness may laugh, but I could give her chapter and verse if I had time to do so. However, I promised not to speak for very long. Nevertheless, the small firm contributes economically; it contributes to the fight against inflation and it contributes to the problem of unemployment. If the small business can take on the extra one or two people, and if this is done on a large scale throughout the country by a large number of small businesses, then we shall begin to crack the problem of unemployment. As we all know, we in this country have allowed the small business sector to fall far too low in comparison with our competitors. The small business is a seed bed of ideas; it is a source of training; it is a way in which youngsters can be given good standards much more easily than in some of the larger concerns. If we went out of our way to promote the small business, I believe that we should be helping in both the short run and the longer run.

The final point I should like to make regarding the gracious Speech—and this is of the same order as help to the small business—concerns the reference to the collaboration between the Government and local authorities in inner city areas. The collaboration between the Government and local authorities is no doubt very good, but may I draw the attention of your Lordships' House to the fact that a very great deal of extremely good work by voluntary bodies and by companies is going on in relation to the problem of the inner cities.

The idea that it is only Government and local authorities who can do these things really makes my Liberal blood boil. Support for the great variety of voluntary activity and voluntary initiative for dealing with these problems of the inner cities is again a way in which we can help, both in the short term and in the long term. Will the Government please pay a great deal of attention—although these voluntary efforts are not referred to in the gracious Speech—to ways in which such efforts can in fact be helped and supported?

9.8 p.m.

The Earl of GOWRIE

My Lords, if I am rather difficult to hear today it is partly because I have a bad cold and partly because I have been left literally breathless by the misrepresentations from the opposite side of the House, particularly from the noble Baroness, Lady Birk, as to the position of the Opposition on pay. I intended to deal with this at the beginning of my speech at some length, but it is getting late and the reason why I feel I can hurry over it is not that I think it unimportant or that I think the Government's misrepresentations are any less acute but because, without wishing in any way to announce a new pact or to embarrass her, the noble Baroness, Lady Seear, has given a very intelligent, rational and detailed gloss on some of the objections that we have to a formalised incomes policy at the present time. But I think the more serious objection in political terms that we have is that it is being said that we are in some way in opposition to a 5 per cent. limit.

As I shall argue later, if everybody settled their wages at a 5 per cent. increase it would have an effect on wage inflation of only some 2 per cent., the rest being taken up in genuine output of, say, 3 per cent. That would be a very satisfactory state of affairs. What we are objecting to is that the 5 per cent. limit is not an incomes policy. It is not a policy; it is a statement of intent by the Prime Minister and I am prepared to applaud it and so are many people on this side of the House and in the country in the Conservative Party. But what we simply will not stand for is that this should be promulgated as an act of policy when it has not been put through Parliament, when there is no intention (rightly in my view) to make it statutory, but where sanctions will continue to be applied unfairly, and I would argue unconstitutionally, on the employers' sector.

It is fine for the Government—and we are entirely in accord with this—to make clear what general levels of wage rises are possible and what are desirable and what the consequences might be if those levels of wage rises are not achieved. It is absolutely wrong for the Prime Minister to believe that he can do Government by a kind of Despatch Box fiat. "Here I stand" he says, but in what way is he standing, on the National Health Service, on Ford's or on anything else? The short answer is that it is impossible for him to stand at the moment and I have every sympathy with him. But he should not hoodwink us or the country into thinking that a formalised incomes policy is being applied which in some general way should be supported. The fact of the matter is that since 1974 both Parties have come quite close together, not in their political rhetoric but in their agreement about what kind of sanctions are possible should a formalised incomes policy be unobtainable or should such a policy break down. It is not that mad monetarists are at loose in either Party or in the Treasury; it is simply that no one has thought of sanctions other than monetary sanctions with which to discipline powerful trade union organisations.

If we read the speech made by the Chancellor, Mr. Healey, at the Mansion House recently we see that he made remarks such as: That is why, during the last three years we have sought, and will continue to ask employers and trade unions alike to work with us to achieve responsibility in pay negotiations … That is why we will keep the economy on the path of monetary stability and will be announcing next month the first roll forward of the monetary target and the process to be repeated next spring". He goes on to say: The essential instruments are monetary control with appropriate stances on fiscal policy and interest rates". It goes on and on in this vein and most of your Lordships will probably have read that speech. If we correlate that speech carefully with our policy document in The Right Approach—and I will not take up time by reading it out in detail—we find very much the same; perfectly ordinary and responsible and reasonable sentiments uttered. I will give one quotation from The Right Approach. It says: In order to bargain realistically negotiators on both sides of the table must be well informed, so that the authorities must be as open as possible in their preparation and presentation of economic policy and of the calculations which underlie it. They have to explain the way in which monetary targets have been fixed and their implications for output and inflation and for cash limits. There are obvious dangers involved in enunciating a general target or norm for pay bargaining"— and the noble Baroness has given some gloss on that.

It also says: Yet in framing its monetary and other policies the Government [a Conservative Government here] must come to conclusions about the likely scope of pay increases if excess public expenditure or large-scale unemployment is to be avoided, and this estimate cannot be concealed from the representatives of the employers and unions whom it is consulting". I made my maiden speech in this House almost exactly 10 years ago, and, therefore, I am rather a middle-aged chicken, but I must say that I really was somewhat shocked to hear what are essentially House of Commons propaganda techniques and misrepresentations being used in a rational and serious debate on the economy.

We are winding up a debate on economic affairs, but as we do so this evening we must not, I think, forget that foreign and economic policy are inextricably linked. May I say how much I enjoyed and appreciated the speech of my noble friend Lord Trenchard, which underlined this. One of the biggest threats to our economic wellbeing comes not simply from the pay and prices debate or the controversy on monetary supply but from the present political upheaval in Iran. The course of history is at the moment effectively determined by diminishing energy resources, by their uneven distribution, and by the political health of the countries who control them.

I am very glad that my noble friend Lord Lauderdale made a swingeing speech on the oil issues raised by the gracious Speech. Of course, this may change or be superseded by other governing forces, in time, but at present it is our reality. Nothing has depressed me more in recent weeks than the stream of criticism directed at the Iranian régime. Much of this criticism is in detail well-founded, but I must say it is puzzling to me to hear it based upon issues of human rights when the alternative régime we hear about would set the clock back, especially where women are concerned, for hundreds of years. I think the broad effect of a collapse of the Iranian régime would be of the utmost danger to the West and engender a new recession here, without, so far as I can see, there being many compensating improvements within Iran itself.

I must be fair in political terms at this point and say how much I respected and welcomed Dr. Owen's strong stand on the issue on television the other week. I understand a Motion has been tabled in the other place for the purpose of cancelling the royal visit to Iran mentioned in the gracious Speech. While we would all wish the visit to be cancelled if the security situation at any time dictated that it should be, my own view is that for this Motion in Parliament to go forward at present would have a damaging and demoralising effect on our relations with Iran at a critical time in her history, and I hope that the Foreign Secretary shares that view.

In that context I think it is depressing that our debates on economic affairs, not only in Parliament but in the media and in the trade unions, are progressively insular. We are fond of quoting Donne to the effect that no man is an island, but nowadays we should perhaps add that no island is one either. Your Lordships are rather better at looking ahead of you than are the Members of another place, perhaps because you do not have electors behind you. Mention has been made in this debate, but not as we would expect in the gracious Speech itself, of whether Britain should or should not join the European Monetary System when it comes into force in the New Year. I was certainly most interested in and attentive to the speeches of the noble Lords, Lord Kaldor and Lord Balogh, in that regard—the old firm at work again. The speech which I wholeheartedly endorse myself, and not just because he is my boss on this occasion, is the speech of my noble friend Lord Thorneycroft.

The point surely, and it is my noble friend's point, is not whether this is the ideal scheme for currency stabilisation within the Community or whether it is immediately beneficial to Great Britain; still less is it the level of acceptability or otherwise of the scheme to this or that faction within the Labour Party. The point is that it looks as if once again Britain will not be a prime mover of decisions which will irrevocably affect her. Like a transfixed Eve, but not, alas, with the figure, Mr. Healey is gazing at the super-Snake with awe and fascination. The awe is caused by the knowledge that if we did go in we would be subject to economic disciplines beyond the reach of day-to-day Party political management. We would find it difficult, for instance, to inflate our way out of political troubles caused by unemployment or to create short-lived pre-electoral booms and consumer spending. Both Parties would suffer thereby. The fascination is the other side, almost literally, of the coin because the burden of the Government's pay policy now falls on employers who are being leaned on or penalised in various ways if they make settlements out of line with the pay norms. Membership of the EMS would surely have the effect of maintaining the value, though not, of course, necessarily the present value, of the pound and so prevent industry from being compensated for high wage settlements by competitive devaluations. It would therefore act, in my contention, as something of a miniature pay policy in itself.

It does so happen that I myself am in favour of joining the EMS, first because, as President Carter is painfully learning, exchange rate stabilisation is a sine qua non of counter-inflationary policy. May I, while I am on that matter, point out to the noble Baroness that when President Carter announced that his counter inflation policies where going to be directed against wages, the dollar fell out of the sky and when he raised interest rates it firmed very rapidly.

Secondly, I am in favour of joining the EMS, because I do not believe that economic affairs can be considered in terms of domestic politics any longer. They are surely in the forefront of contemporary diplomacy. My own views are neither here nor there and in any case, as a Party politician myself, I sympathise with some of the misgivings about what is essentially a German and French directed scheme. But that is exactly why I am worried that this politically weak and vulnerable Government may obscure the necessary political debate on the issue.

In a democracy the political is surely part of the educative process—and the noble Earl, Lord Lytton, had something to say about that—the battle for the hearts and minds of men. That is why I share the feeling of my noble friend Lord Thorneycroft that we may be losing another opportunity to shape a Europe that will inevitably continue to shape us. We would all welcome the views of the noble and learned Lord, Lord McCluskey, on this matter when he comes to speak in a few moments. We shall not hold it against him if he airs his own views, just as I have aired mine, and divorces himself, if only for a second, from the Treasury Box. But we cannot debate economic affairs intelligibly and dodge this issue, and we cannot really postpone it.

In three vital areas of economic life—energy resources; the provision of services, including financial services; and agriculture—Britain has long been and remains an outstandingly successful and prosperous country. Although the noble Lord, Lord Walston, had reservations about our handling of agricultural machinery, I do not think that as a distinguished farmer he had much to criticise about our agricultural productivity. These successful areas take the strain of our standard of living. Our great weakness surely is that there is tied to this successful economy, what I, as a lover of Italy, sometimes think of as our industrial mezzogiorno: a manufacturing wasteland that we cannot afford to do without in terms of employment or overseas earnings, but whose steady and long-term decay has spawned most of the evils from which we suffer. It has spawned, for instance, fierce inter-union competition for decreasing shares. We constantly talk about the unions as if the confrontation was between them and bosses or managers, but most union competition is inter-union. It has spawned the closed shop and a political economy which sways in the wind of a handful of constituencies, most of them suffering themselves from industrial decay. These unsuccessful sectors of the economy help to corrupt and damage the successful sectors.

Capital transfer tax, for instance, is designed in terms of social justice, as a palliative to workers in the unsuccessful sector. Yet surely capital transfer tax, more than anything else, will destroy the efficiency of our agriculture within a generation or two unless drastic changes are made. High marginal rates of taxation are likewise a response to a situation rather than a dynamic in themselves. Very few of our competitors go in for them or believe that in some way they improve productivity. Of course, these rates of taxation, many of which have been mentioned by my noble friends on this side of the House, are responsible for all sorts of tensions in the work place. For instance, the tension when the chairman of an important industry, in order to get a small percentile net raise in wages, has to have his gross pay increase measured in thousands of pounds.

The newly nationalised industries are not nationalised in the sense that they are more responsive either to Parliament or to consumer needs—witness the attempts in the gracious Speech: to strengthen the consumer voice in relation to nationalised industries". They are nationalised either because of the political problems inherent in their being allowed to collapse—the lame duck syndrome—or because, as with the partial nationalisation of North Sea oil, they are threateningly successful.

I hope that even noble Lords opposite will accept that what I am trying to say is essentially positive. Thanks to our energy position—and it is not just the windfall of North Sea oil; it is also our traditional energy source of coal—we are in a potentially favourable situation. We could recover much strength in the last years of this century and, again, we could gain time in which to develop the industrial and other economic capacity with which to face a threatening new millennium. As a matter of historical record I should say here that some of the leading European minds at the end of the last millennium thought that the last trump would sound on New Year's Day 1,000, so we are at least a little more optimistic than they were.

We are politically much more stable, much more soundly based than we think. We have progressed from an 8 per cent. rate of inflation in 1973—a nasty rate of inflation indeed—to 8 per cent. in 1978 by way of close upon 30 per cent., under this Administration, in 1976. How nasty it was and how nasty it indeed still is. Yet giant pythons did not roam the streets, as Private Eye predicted, and with unemployment still around the 1.5 million mark, tragic though that figure is, Britain's governability is not seriously in question. What we lack—and my noble friend Lord Thorneycroft, who opened the debate, bore this out—is any kind of target, objective, encouragement or hope for the future. I accept the sincerity of the measures in the gracious Speech, even as I accept their essential decency. The indecent proposals, be they an extension of the decayed public sector or constitutional changes, like doing away with the Second Chamber of Parliament, or new fiscal irritations, are safely tucked away in the plain brown wrapper at Transport House.

But I am depressed by the sense that this gracious Speech is one more stage in what I think the noble Lord, Lord Rothschild, called "the systematic and orderly management of decline". Why should we accept decline? There is no inherent reason for it to continue, just as there are, of course, inherent historical reasons for it to have occurred. Nevertheless, the decline will go on, at least until we discard tired political assumptions and discredited economic ideas.

Take, for instance, the debate, which I mentioned at the beginning, about incomes policies as against monetary policies as a method of controlling inflation. The Government have said that their policy pivots upon a wages policy—on the 5 per cent. norm—and the Prime Minister has said that he will go to the stake or the country on that norm. Very well. It is true that taking an average across the economy, if everyone settled for 5 per cent. on their wages, wage inflation in this country as against other factors would account for some 2 per cent.: the difference being swallowed by the general rate of growth of output. That would be an excellent idea and we would all subscribe to it.

But no one thinks that this will actually happen. In the first place, as I said, the policy is not a policy in law, and it would be dubiously enforceable even if it were a policy in law. In the second place, the previous stages of the wages policy have damaged differentials to such a pitch that a 5 per cent. fixed norm would in many cases effectively constitute a freeze and the relative improvement in output, which the Government have proudly noted, effectively precludes a freeze at the present time. Here surely is the lesson of Ford. The Government say 5 per cent. The management says 12 per cent., but is prepared to have its arm twisted to 16½ per cent. The shop stewards say 20 per cent. plus, but it is my fervent belief and my hope that the workforce will in the end settle somewhere around 16½ per cent., or would if they were allowed to ballot secretly. Left to themselves the company and its workforce would probably originally have settled, without that damaging base norm, for between 12 and 16 per cent., let us say 14 per cent. That is not good, but it is better than what we shall get in the end.

The workers at Ford know very well that the position of the company lies in their favour, but the workers at Vauxhall, at any rate in the Luton division, know that the position of their company is less favourable and they have, in effect, shown willing at least to settle accordingly. Nor is this only the case in the private sector. No one in the country believed that a NHS settlement could be achieved at 5 per cent.; as my noble friend said there was a token resistance, during which, disgracefully—and the noble Earl, Lord Lytton, mentioned this—a number of patients lost their lives, and which ended, rather ominously I thought, the day after a by-election, with a settlement of 15 per cent. So without that norm of 5 per cent. the 15 per cent. might well have been 2 per cent. or 3 per cent. lower. Again this is not good, there is no cause for rejoicing, but it is better than what we are obtaining now. And for all this (and the really punishing instances, I would claim, are still ahead of us) we shall most likely suffer a renewed bout of interference in pricing, in profitability, in investment and hence in recovery. The noble Viscount, Lord Watkinson, had a good speech to make about that.

The Government's desire to reduce inflation is not in question, but they will not wish to cut more spending in an election year and so they will have to put up interest rates and increase indirect taxation on goods. Why should they not save themselves the stored up aggression which will greet this manoeuvre and get it over with now? I am prepared to wager a bottle of good Scots whisky—there is something about the noble and learned Lord, Lord McCluskey, that seems to attract gambling—that this will happen by the end of April at any rate, so why should he not help his own political Party by suggesting that it be done now?

This argument between wage interference and monetary weapons is surely a bogus dilemma. It was not as if we had the 5 per cent. pay policy on offer. Policing such a policy through employers poses enormous difficulties for them in negotiations. Nor is it as if the Government have made any declaration as to what they anticipate will follow a year of 5 per cent. Will the noble and learned Lord tell us how differentials are to be restored even supposing that the majority of settlements are made at around 5 per cent.?—and I do not accept that they will be, much as I wish that they would be. Is there any target, any encouragement, any restoration of incentives in sight?

At the beginning of the debate on the Address seconding the Motion, the noble Lord, Lord Bruce of Donington, spoke sadly, and I think movingly, of the high hopes that he felt as a young Member of the first truly Socialist Parliament in 1945. Under the pressure of war, the leadership of Winston Churchill and the guidance of such great men as Clement Attlee and Ernest Bevin, my noble friend Lord Butler and Lord Beveridge, we created a society which was able to cope with the exigencies and troubles of war. In 1945, under the pressure of sincerely held but, to my mind, damaging political views the first properly Socialist Administration not only did not dismantle wartime controls but added to them. In 1951 a Conservative Administration took over and administered, in the main I think rather successfully, this rather recent and rather green social democracy. Nevertheless, all that time, under both Parties, we have seen a persistent playing down, an undervaluing, of all the ideas inherent in wealth creation. We have been concerned with distribution, with justice, with equity, and we have been, at any rate in Parliament and at the centre of political life, anti-materialist in our thinking. I believe that this is honourable and fine in intention; but it is not honourable and not fine to expect that we can somehow enjoy the luxuries of anti-materialist thinking and at the same time enjoy the luxurious standard of life of an advanced Western social democracy. Whoever is in power in the next few years, these attitudes will have to change. I agree with my noble friend, Lord Watkinson, that it would be better that they should change under the direction of people who at least believe that such change is overdue.

9.35 p.m.

The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)

My Lords, as I have listened to the debate I believe that the main themes which emerge from it are the underlying problems of the economic performance of the country, including productivity, the containment and reduction of inflation and the evils of unemployment. It is perhaps a pity that the House is now so bare because in the speeches which preceded the last one I detected a good deal of wisdom and freshness towards the end of the debate.

The debate has been marked by some remarkable alliances, including that between my noble friend Lord Shinwell and the noble Viscount, Lord Watkinson, who is still with us, when they found themselves on exactly the same side. The noble Lord, Lord Walston, referred to the wisdom of some of the speeches which had preceded his, but I think few of those could rival his for thoughtfulness and depth and the quality of his information. I thank the noble Earl, Lord Lytton, for the support which he has recently given us, but with this qualification, that when he refers to the United Kingdom I should prefer that he does not call it England. I particularly welcomed what Lord Walston said about directing attention to the responsibility of management, in a way that was largely missing from many of the speeches in this debate.

I want to welcome specifically the remarkable speech of the noble Lord, Lord Thorneycroft. He stood before us in sackcloth and ashes, displaying an attitude of penitence and humility that delighted us all as much as it surprised us. What I welcome is not the content of the speech, with which I did not entirely agree, not with it all, but the tone of it, and I hope I can emulate him in some respects by trying to follow that tone. I do not think his message was entirely dissimilar from the message which appeared in a leader in the Economist on 28th October 1978, from which I quote this small part: The philosophical argument over incomes policy quickly degenerates into semantics unless one believes (as the Economist does not) either that pay norms are always harmful or alternatively that they never are; the debate is meaningless detached from the context of one country at one moment of economic and political time". I do not think that is very different from what Lord Thorneycroft said. I do not think it is very different from what the Government are saying, because we do claim perfection; we do not claim that there are golden rules and we believe we do practise what the noble Lord called for, a judicious mixture—I shall have to develop that—of incomes policy, of monetary controls and of fiscal policy.

Criticisms are made because, for example, the 10 per cent. policy did not in fact hold wages to 10 per cent. But that is like saying the 30 mph speed limit does not hold people to 30 mph. If one has no restriction at all, where does one end up? And if the out-turn is that we give a guideline of 5 per cent. and we end up with an out-turn of 7 per cent., I think many people will be satisfied with that result.

Something else before I leave the remarkable speech of the noble Lord. He said, I think seven times, to the Government, speaking with a great deal of experience, "Don't do this, don't do that and don't do the next thing", and I concede there was much wisdom in all those "don'ts", but one cannot run the economy by not doing anything. The Government must, in the context of what the Economist said, at this time, at this one moment in economic and political time, do things; the Government cannot run away by simply saying, "We don't do this and we don't do that". If Mrs. Worthington does not put her daughter on the stage there is no-one on the stage.

The Government are not afraid to admit that their policy is not perfect. I need not specify the main features of the policy, but criticisms of particular imperfections have been made here and in another place, on television and in the Press. I would be dishonest if I did not acknowledge that some of those criticisms have force. Indeed, if we knew of a better policy that would work at this time and in this context, that would command acceptance in the country, would fight inflation and would contain, or perhaps reduce, unemployment, then we should adopt it. But we do not. And having listened to the variety of views today, I do not believe anybody else does either at this time in this context.

We recognise that the present policy is not a very comfortable one for the Government or for the nation. We recognise that it places some firms, some negotiators and indeed some members of the public in a difficult position and places many in situations where they must make unenviable choices. But the Government's policy is one that has been practised consistently and with success since it became plain that extraordinary measures were indeed required to reduce inflation from the spiralling peaks of early 1975. I believe that the Government are learning from their experiences and indeed from their mistakes; and the Government are certainly endeavouring to improve their policies as they go along.

I need not rehearse all the figures. We have been reminded more than once that in the past 12 months we have come down from an annual inflation rate of 17 per cent. to one of 8 per cent. The Government's firm pay policy has played a part in achieving this. I shall come back to the point made by the noble Baroness, Lady Seear, about the part played by the favourable terms of trade. Certainly, the Government's firm pay policy has played a part, and it must be recognised, it must be shouted from the rooftops, that, with inflation actually falling and with the Government's pay policy in force over the past 12 months—and in Phases 1 and 2 before that; but certainly over the past 12 months—real living standards have been rising, and rising as a result of gains in real wages supplemented by tax cuts (the fiscal measures I have mentioned) and improvements in child benefits, pensions, and other social benefits.

I should not want it to be thought that the Government are complacent about the United Kingdom's inflation rate as it now is. It is certainly about the average for industrial countries, and considerably better than the inflation rate in some. But it is also higher, and significantly higher, than the rate obtaining with some of our major competitors. I mean West Germany and Japan. I acknowledge that, unless there is an improvement in productivity, or a reduction in the growth of money earnings, unit labour costs in the United Kingdom will continue to grow too fast, and inflation will once again move upwards. For that reason, the increase in earnings in the coming pay round must be substantially lower than it was in the past. The Government have to listen to all voices and the representations of all the different interests, but at the end of the day it is the clear responsibility of the Government to indicate the level of growth in earnings which it considers appropriate and consistent with preventing an increase in the rate of inflation—or possibly achieving a decrease—and the Government cannot shirk that responsibility. Indeed, I do not know who says that they should.

We have been referred more than once to this very interesting document, The Right Approach to the Economy. The noble Lord, Lord Thorneycroft, referred me to page 16, and I always intended to quote a short passage from it. What it says is as follows. I shall read only one sentence, but I hope that I do not do the whole passage an injustice: Yet in framing its monetary and other policies the Government must come to some conclusions about the likely scope for pay increases if excess public expenditure or large-scale unemployment is to be avoided, and this estimate cannot be concealed from the representatives of employers and unions whom it is consulting". I do not think that there is a great chasm between that way of putting the matter and the way that the Government put the matter. When we talk about free collective bargaining, we must remember that everyone would like to see responsible free collective bargaining, but who puts in the element of responsibility? In our present time, and in our present context, the Government put in the element of responsibility; and the Government do so by saying: "This is what we think we can afford". The Government indicate the figure, but simple verbal persuasion is not enough—it is not seen to be enough—and we believe that we have to back it up in the ways that the present policy involves.

So that is the real basis of the 5 per cent. guideline to which the Government have committed themselves. It is not, I believe, wholly inflexible. Even within the 5 per cent. there is some measure of flexibility, although I acknowledge, as the Government plainly do, that a guideline tends to become a target, or a virility symbol, as is sometimes said. May I make the following point which I do not think has been made in the debate. The usual criticism made of the 5 per cent. is that it allows only for a small increase, but historically—and one does not need to go too far back into history—the annual rate of pay increases was substantially less than 5 per cent. and people managed to make their adjustments and hold their differentials, or alter them. So we believe that the present guideline provides a measure of flexibility and will allow some restoration of differentials where the erosion has caused a real problem. Again, self-financing productivity schemes, if they are honest, will operate, as in the last pay round, in order to allow further flexibility. Apart from these aspects of the policy, special treatment is provided for the very low paid. That is set out very clearly in the White Paper and in Government Statements, and perhaps I need not detain your Lordships with that point at this time of night.

The noble Baroness, Lady Seear, made the perfectly valid point that during the time when inflation has been coming down, the terms of trade have in fact been in our favour and have made a significant contribution to the reduction in the rate of inflation. I have to acknowledge that, and I am happy to do so. But it would not have been good enough had we simply stood back and said, "Luckily the terms of trade are in our favour, so we can forget about incomes policy." So we have to recognise that there are all these factors working together, and that by allowing complete and irresponsible freedom in relation to the raising of incomes we could have thrown away the advantages that were conferred upon us by the favourable terms of trade to which the noble Baroness has drawn attention.

I do not want to engage in a slanging match about the proposals which have come from the Opposition at different times, and the splits, as it were. So far as I can see in this House the noble Lords opposite are united by only one thing, and that is by an irresistible urge to issue challenges to me to engage in risky gambles with them. Without trying to make capital out of these divisions, the Government cannot indulge in the luxury of splits. The noble Earl asks me what divisions. He forces me to tell him what they are. I do not want to go into it in any great detail, but let me quote from what the noble Lord, Lord Carr, said on 8th November, 1977, in this very same debate. I quote from column 40 of the Official Report of Tuesday, 8th November, 1977, and your Lordships will forgive me if I quote at some little length. He said: My Lords, the fourth fundamental problem to which I wish to draw attention is the need for pay restraint". I shall read short, my Lords. Pay restraint is vital, therefore, both to our long-term objective of raising our standards of living and also to our need to cut inflation. In the short run, the Government must be firm in maintaining their 10 per cent. guideline as the maximum permissible increase in earnings and they must do so not least in the public sector of the economy. I want to take this opportunity of assuring the Government that they can count on the support of the Opposition in seeking to achieve this objective". What on earth has changed between 8th November, 1977, and 2nd November, 1978, that causes noble Lords opposite to depart from that firm and encouraging support for Government policy?

The Earl of GOWRIE

My Lords, it is the difference between guidelines and policy. What we are objecting to is the way a policy is applied through sanctions. The sanctions have not been legitimated.

Lord McCLUSKEY

My Lords, the Government have made a choice. The Government have decided, in this context, what their policy must be, and I believe that we would have the support of the noble Lord, Lord Carr of Hadley, were he here, that we must firmly stick with it. Our ears are not closed to representations, from whatever quarter they may come, but at the end of the day it is the Government which have to decide and have to endeavour to see that this policy is enforced with all means at their disposal. What we are reasonably certain of, my Lords, is that there is widespread support in the country for the policies which the Government are now proposing in order to contain the evil of inflation. We believe, furthermore, that that evil is now widely recognised, and we believe that it is very important that all people who are concerned with the future of the country should do their best to make the public aware of what are the issues. Indeed, that is, in a sense, the great value of this debate, that it helps towards the growth of public understanding.

Perhaps I may say a word or two about the precise criticisms of the Government. What I think the critics of the Government are saying is that the Government are doing too much, not too little. The suggestion, in other words, appears to be that the Government should not add to their present policies but merely subtract from them. They should withdraw the 5 per cent. guideline, as it were, and rely upon what the Prime Minister called "the other two legs of the stool". I would have thought that people in the country—and they have as much right to views on these matters as have the divergent economists—would laugh at the idea that the Government are doing too much. Some, indeed, like the noble Lord and the noble Baroness on the Liberal Benches, think that the Government do not do enough. They want the Government to have some kind of statutory pay policy. I believe that to be unrealistic, because I do not think that is an option which is open to us, even if it were desirable in this context and at this time.

So what the Government are attempting to do is to use persuasion, and to back that persuasion by every means at their command, including the use of sanctions and cash limits, as well as the control of the money supply and fiscal measures in so far as these prove to be necessary and helpful. Of course, the Government prefer an incomes policy of the kind they are endeavouring now to enforce because that, more than any other policy, leaves it open to the Government with the support of Parliament, and to negotiators, to make limited choices. The alternative weapons of monetary control and fiscal control even if effective—and doubts have been cast on the effectiveness in this debate—are cruder and blinder and much more likely to lead to harm which is not under the control of responsible Government. I say they have been criticised. They have been criticised by the noble Viscount, Lord Trenchard, and by the noble Lord, Lord Kaldor.

So if the Government were to seek to rely on monetary and fiscal measures that would not only have the kind of consequence which others in this debate have pointed out; but we believe that that kind of reliance would have a much greater effect on those who work in the public sector and who are liable to find themselves more severely hurt than those who work in the private sector. The Government can enforce a cash limit in the public sector and that can have consequences there, but the Government cannot, as I think the noble Lord, Lord Kaldor, pointed out, enforce a cash limit on Ford. It cannot be done. That becomes a differential policy and, therefore, an unfair policy.

I listened with interest to the speech by the noble Viscount, Lord Watkinson. I think that he differed substantially from the noble Lord, Lord Thorneycroft. He sought to lay the blame on the trade union leaders, whereas the noble Lord, Lord Thorneycroft, felt that the trade union leaders were not given enough power in relation to those whom they led. But I want to draw the attention of the House to a document which was published yesterday—or, rather, it appeared in the financial press yesterday—the CBI Quarterly Industrial Survey and Report and the noble Viscount, Lord Watkinson, is a distinguished ex-president of the CBI. That survey is moderately optimistic and concludes that the prospects for continued growth in manufacturing investment are still good across industry. It also argues that lack of price competitiveness is affecting the export orders of many companies. I quote from that document: …the need to curb increases in labour costs is therefore paramount". It says that pay settlements must be agreed at "more reasonable" levels and be accompanied by better productivity. I believe that we are indebted to the CBI for publishing the survey and report yesterday, for their confidence and for their support. As the Prime Minister pointed out yesterday, industrial investment is now moving ahead and the last recorded figures for new plant and machinery were 10 per cent. higher than a year earlier. As regards the distribution and service industries, investment is more than 12 per cent. higher than a year earlier; and industrialists forecast that the increase will be maintained into next year.

I want to acknowledge the consistency of the noble Lords and noble Baronesses on the Liberal Benches. They have consistently stuck to their belief that a statutory pay policy should be put into force; but it is fair to ask those Members of that Party how the Party would wish to see a statute formulated and which guideline or guidelines they would propose. I am thinking not just of the long term but of the short term. And how would they expect such a statute to be administered? And, furthermore, whether such a statute could remain in force without any reasonable expectation of receiving the general backing of the people in the country. I believe that the Liberals have indulged in the luxury of making a proposal of this kind without facing up to the history of this kind of measure and without facing up to the difficulties of putting it into effect.

There was much in the speech of the noble Lord, Lord Rochester, with which I am happy to agree. I welcome the broad support that he and his colleagues offered to the Government and, in particular, their preference of the Government's choice of options over those offered by noble Lords opposite and their right honourable and honourable friends in another place. I was asked specifically to try to put some meat on the bones of the remarks about industrial democracy which appeared in the gracious Speech. At this time of night the proper thing for me to do would be not to attempt to add anything to what my right honourable friend the Prime Minister said in another place, but your Lordships will find the passage in column 40, volume 957, No. 1, of Commons Hansard for 1st November 1978.

Both the noble Lords, Lord Rochester and Lord Kaldor, made a case for the development of permanent machinery for regulating pay. I believe that the noble Lord, Lord Shinwell, was advocating something of that kind, too. No matter how attractive such an idea may be on paper or in elegant and objective discussion, one still has to find the cooperation of people in the country before that can be put into effect. The Government cannot by decree set up a board which will then regulate and everyone will sit down and obey it.

Let me turn to the matter of income tax. I do not want to take up time on this because, although it has been mentioned by the noble Lord, Lord Mackie of Benshie, the noble Viscount, Lord Trenchard, and others, the Government have moved to the position that the burden of income tax is too high. This has damaged the incentive to work throughout the economy both at the highest and the lowest levels. What happens both in Government and out of Government in many debates is that we, to some extent, convert one another. We are prepared to concede that the Government have moved in this direction and I do so. Of course, the Government in recent Budgets have cut income tax substantially. Indeed the tax cuts which have been made—some £6 billion in the past two years—include substantial reliefs for those paying the higher rate of tax. If examples are required, I shall be happy to give them to any noble Lord who cares to write to me.

One other remark I want to make about pay policy is that I believe there is a vital difference between the rigidity of the pay policy which failed in the spring of 1974 and the Government's present incomes policy. I believe that on that occasion—and I consider the judgment of the country would be the same—at some point leadership became confrontation, and that is what happened to the pay policy. There was confrontation. What we have now is a situation where responsible Government Ministers found, as they found at the Labour Party Conference among other places, that those whom they were leading were not exactly in step and close behind them; then it was their duty to consult with them instead of fighting them. That is precisely what we are doing now. I hope—I cannot promise; I do not know—that these consultations, both with the CBI and with the Trades Union Congress leaders, will take us some considerable way towards finding ways and means of reconciling their desires, and the desires of many who support them, with the duty of the Government to keep down inflation.

A good deal has been said about unemployment and I want to say three things about it. First, although unemployment has risen considerably over the past four years, in fact one finds that over this period it is the increase in the labour force itself, not the fall in numbers employed, which accounts for the rise in unemployment. The rise in unemployment has been of the order of 800,000 in the four-year period between the spring of 1974 and June of 1978. But over that same period in effect another 800,000 people have come into the market looking for jobs. The numbers of those actually employed—including the self-employed and those in Her Majesty's Forces—has remained almost constant.

Secondly—and I am looking at a much shorter period—there has been a steady fall in unemployment over the past 12 months. The third point—without trying to elaborate it in great detail—is that what the Government can do about unemployment, apart from general measures, is to introduce particular schemes. At the moment there are no fewer than 11 separate schemes which have assisted a total number of 260,000 people towards employment. That is the Government's record, of which we can be justly proud.

I was asked by the noble Earl—tempted, I should say—to divorce myself from the Treasury Box and announce my own views on the European Monetary System. I did in fact announce certain views on the European monetary system when I spoke in a debate just before the Recess, but I would say to the noble Earl that if I, as a Minister of the Government, were to start to divorce myself from the careful words prepared at the highest level, I should soon find myself divorced from the very high office which I am privileged to hold as a Minister of the Crown. So let me give you the careful words. The European monetary proposals, upon which so many able speeches have been made, are indeed highly complex. As the noble Lord, Lord Roberthall, said, they are still in the process of discussion and development. My attitude tonight must be that of one who listens and takes note rather than that of the substantive commentator. There are as yet in fact no final proposals to present or to comment upon. I think that is as far as I can go, but we can recognise that the overall objective of currency stability is one that it is worth undertaking a good deal to attain. We acknowledge that: that is why we go to these meetings very positively.

Many of the currency fluctuations which we have seen have been, in real economic terms, pointless. Some speculators have profited but the world as a whole has lost. The experience of the past few years has shown that there are also real economic forces behind the divergences in currency values. The greatest of them has been the divergence in rates of inflation; so wherever you start in this particular maze, you always come out of the door marked "inflation".

The noble Lord, Lord Thorneycroft, said in connection with the North Sea oil resources that nothing is being spared for investment and repayment of debt. I do have to repudiate that. As he will probably recall, on 30th October Her Majesty's Government repaid nearly one thousand million dollars to the IMF before it was due; and that was the second early repayment this year of IMF draw- ings. A sum of one thousand million dollars was repaid in April, so in this year the total repaid ahead of schedule is two billion dollars. Therefore I cannot accept that particular criticism; nor can I accept the other one; namely, that we are not using our existing resources for investment. He will perhaps now recall that the gracious Speech contains a passage reading: Legislation will be introduced to provide additional finance for the National Enterprise Board and for the Scottish and Welsh Development Agencies". So I think these points are effectively answered.

In conclusion, I believe that this has been a valuable debate, even if perhaps little was said, certainly in the earlier part of the debate, that had not been said before. I think perhaps its value as a debate is that it helps the growth of understanding and I hope, if that is right, that people will be less easily misled by the irresponsible and the agitators who make claims or pursue objectives which are not in their long-term interests. Nothing is going to work, either in the short-term or in the long-term, in relation to the matters we have talked about—inflation and productivity—without the consent of the people in the country. That consent must be based upon a sound public appreciation of the very matters we have been discussing. If this debate has contributed to that, it has been well worth while for us and for the country, and the Government will be well pleased.

Lord STRABOLGI

My Lords, on behalf of my noble friend Lord Harris, I beg to move that the debate be now adjourned until Tuesday next.

Moved, That the debate be now adjourned until Tuesday next.—(Lord Strabolgi.)

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

House adjourned at four minutes past ten o'clock.