ECONOMIC AND SOCIAL POLICIES: INDUSTRIAL STRATEGY

HL Deb 13 June 1979 vol 400 cc617-705

2.51 p.m.

Lord MELCHETT rose to call attention to the priorities required in our economic and social policies, and to the need for an industrial strategy which has the full support of both sides of industry; and to move for Papers. The noble Lord said: My Lords, as this is the first opportunity that I have had, may I congratulate all the noble Lords on the Government Front Bench and, in particular, the noble Viscount, Lord Trenchard, on their new responsibilities. I certainly wish them well in their efforts to improve the quality of life for all the people of this country. Whether they will succeed in this it is of course too early to tell. I think that it is fair to say that there is something of a mood of euphoria among the vast majority of your Lordships' House because of course the vast majority are Government supporters. Indeed, after yesterday's announcements, the mood seems to be rather more one of shell-shocked euphoria. I hope that in this debate we can gently remind the Government of some of the harsher aspects of life in this country.

The Motion that we are debating is a wide-ranging one, but I want to concentrate on the particular point made at the end of the Motion: the need for an industrial strategy which has the full support of both sides of industry". As my right honourable friend the Leader of the Opposition said in another place yesterday, one of the most glaring ommissions from the Chancellor's Budget speech was the lack of any reference to the Government's industrial strategy. I hope that the noble Viscount will be able to make good that omission in your Lordships' House today.

I said that there were harsh aspects of life in this country. Nothing is harsher than the misery and poverty caused by unemployment. Many noble Lords have experience of periods in our history when unemployment has been far higher than it is now. The two and half years that I worked in Northern Ireland, where the level of unemployment is over twice that of the rest of Great Britain, have given me an all too clear idea of the horrors involved. We on this side of the House must of course accept that we were in Government during a period when unemployment was at an intolerably high level. We would claim that we did much to reduce the potential problems, particularly in the poorest regions of the United Kingdom, and for young people; but we would be the first to acknowledge that we did not do enough.

If this country's past record is not as good as it should be, what does the future hold? It seems to me that the future looks extremely bleak. As we have seen repeatedly in the past, and particularly over the past few years, this country is extremely vulnerable to world economic conditions. The recent shortages of petrol in many Western countries have drawn attention sharply to a problem that threatens us with a continuing period of international economic difficulties. North Sea oil will not isolate us from those difficulties, nor from the world-wide increases in oil prices, as the Government have already made clear.

We enter what threatens to be a new round of difficulties over oil with a level of unemployment that is already depressingly high. In addition, this country, along with the rest of the world, faces the much-discussed micro-chip revolution. I know that the impact of micro-chips on the level of employment is the subject of much debate; but it is certainly clear that, besides the investment needed to introduce this new technology, investment in new jobs is also desperately needed. Of course, it is not simply a question of investing in new technology. We also have to invest to safeguard our position in the future. It is widely accepted—even by the Prime Minister, from what she appeared to be saying in France recently—that the Government have a major role to play in ensuring that at least part of the revenue from North Sea oil is used to develop alternative sources of energy for the future.

We on this side of the House see unemployment, and the helplessness and poverty that go with it, as the major social evil. It is already too high, and all the immediate signs are that it can do nothing but get worse. I hope the Government disagree with this gloomy view, but I am sure they accept that we face massive changes in the immediate future. Many, many new jobs are going to be needed. Jobs will be needed in public services and in service industries—to which my noble friend Lord Parry's Motion on the Order Paper quite rightly draws attention.

I want to concentrate my remarks on manufacturing industry; but before I leave the public sector, may I ask the Minister a question about yesterday's Budget? The Budget speech is, as usual, long and detailed and I do not intend to raise many detailed points about its proposals today. Your Lordships will want to study what was said with varying degrees of approval and horror. Howe-ever, I hope the Government accept what I have said so far about the evils of unemployment, its already unacceptably high level and the gloomy prospects at least for the immediate future.

If so, it must be fair to assume that the Government, in framing their Budget, looked very closely at the effect it would have on jobs immediately as well as rather more theoretically in the longer term. As noble Lords know, we have grave doubts about the longer-term prospects of success of the course noble Lords opposite have set out on; but I hope the Minister will be able to tell us something about the short-term effects of the public expenditure cuts announced yesterday. We were told that massive savings could and would be made this year. How many public sector jobs will be lost this year as a result?

There is general agreement on all sides of the House on the importance of manufacturing industry for this country's economic prospects. Indeed, I think one of the most hopeful changes in attitude over the last few years has been the increasing recognition of that importance, but I suspect that one of the fundamental differences between those on this side of the House and the Government is our belief that the Government have a major, positive part to play in revitalising British industry. We believe that the problems and changes ahead, some of which I have briefly mentioned, can only be overcome successfully without massively increased unemployment if the Government plan for those changes, if they play a major role in implementing those changes and if they intervene positively to cushion the effects of change and to improve our ability to meet the challenges ahead. And we believe the Government must do this in a way which commands the full support of both managements and trade unions.

Maybe I can briefly illustrate this by giving three examples of the last Government's industrial policies. The last time I took part in a debate in your Lordships' House about industrial policy, we were discussing the problems of the aerospace, shipbuilding and ship-repairing industries, and the last Government's proposals for dealing with those problems—proposals that were, to at least some of your Lordships, fairly controversial. I hope we can now look at the results of those efforts through slightly less partisan eyes, and I should like to say a word about British Aerospace in particular.

Here was an industry where in fact both the last two Governments, Conservative and Labour, agreed that rationalisation of the two major companies would be desirable. The last Conservative Government tried to achieve this by agreement, and failed. We saw nationalisation as the best and indeed the only solution. What has been the result? I read recently that British Aerospace is, keeping us in Division One of the world plane-making league"— that output is soaring, that British Aerospace is now clearly beginning to feel the benefit of the merger of private companies, that its order book is "crammed" and that, the figures of success speak for themselves". I did not read this in a Labour Party campaign guide, but in the Daily Express of 29th May. Indeed, even in the Conservative Party's campaign guide I could find only one mild criticism of the performance of British Aerospace—and just at the moment the authors may be regretting noting that while British Aerospace's export performance was good, imports had also increased: namely, DC-10s for Laker Airways and British Caledonian. Of course, my noble friend Lord Beswick, under whose chairmanship British Aerospace has done so remarkably well, secured a considerable coup, with Laker Airways' help, when British Aerospace joined the European Airbus project as a full partner.

I have already mentioned the much-discussed effects of the micro-chip revolution. What all sides seem to be agreed on in this complicated new field is that the importance of we in this country developing the capacity to produce the tools of this new technology ourselves is overwhelming. I think it is now widely accepted—though perhaps it was not so widely accepted during the election campaign—that the lead in this has been very successfully taken by the National Enterprise Board. Noble Lords will be aware of the NEB's subsidiary company INMOS, developing integrated circuits, including micro-processors. Some noble Lords may have seen a recent television programme about Systime Limited, one of the NEB's successful associated com- panies. That company made the point that in this field of computers and electronics they have found it quite impossible to attract from private sources the capital investment they need for longterm development. Indeed, one merchant bank had apparently written to them saving that private investors would only be interested in investing in companies with a proven track record and good prospects of an immediate return on capital.

As my third example of positive Government intervention in industry in recent years, I should like to mention a less publicised aspect of the last Government's industrial strategy, the sector working parties and the schemes of selected financial assistance to particular industries that flowed from them. While it is not quite as topical as micro-electronics, paper and board manufacture is an important industry in this country, employing over 60,000 people and importing 3½ per cent. of the United Kingdom's total import of goods. In 1976, when, under the NEDC's industrial strategy, the paper and board sector working party was set up, many mills were only working at 70 per cent. capacity. Waste paper provided 49 per cent. of the United Kingdom's raw material needs, representing a saving of £500 million in foreign exchange. In 1976, the then Government set up a £23 million selective grants scheme to encourage the installation of waste paper-using plant and to improve recycling technology. By 1978, the paper and board sector working party was able to report that the industry had weathered the recent recession better than most of its European counterparts and had developed waste-based grades which can compete successfully with corresponding timber-based grades. By January 1978, there had been 65 applications for the £23 million scheme, involving help of about £13½ million towards a total capital investment of about £59½ million. This capital investment should lead to an increase in consumption of waste paper of around 370,000 tonnes. Those who take an interest in the efforts of voluntary organisations to collect waste paper may be interested to compare that increase in consumption of 370,000 tonnes per annum with the total of about 200,000 tonnes of waste paper currently collected by voluntary organisations in a good year.

The 1978 sector working party report makes it clear that much remains to be done to secure the future of this industry; but it is also clear that the selective assistance scheme has gone a long way towards achieving its objective. Indeed, the total investment generated by all the 15 selective assistance schemes, with an outlay of some £215 million in grants, is now over £1,000 million. In addition, under the Accelerated Projects Scheme and its successor, the Selective Investment Scheme, assistance of over £150 million has been given to 220 projects, costing a total of over £1,300 million.

I very much hope, despite some vague but ominous statements in yesterday's Budget speech, that the Minister will be able to reassure those involved in the industries affected that these schemes will continue, particularly as all the schemes I have mentioned are operated under Section 8 of the last Conservative Government's Industry Act, and as they generally have the support of all sides of industry, and indeed have often been introduced in response to requests from sector working parties representing all sides of the particular industry concerned.

This Government are pledged to act in a way that brings new jobs into existence. No one argues with that, but we do question whether it is right to destroy existing jobs before new ones are created. The Government are also pledged to increase profits; but profits are not an end in themselves. This country does not need profits regardless of how they are earned and what is done with them. We do not need profits earned from destroying our housing stock or our environment, or regardless of the cost to individual workers. We do not need the sort of profits earned from the property boom created by the last Conservative Government; nor do we need profits that are invested in property speculation or asset stripping or those that lead to an export-fuelled expansion in personal consumption. We do need capital invested in new industries and new technology, like the NEB's investments in microelectronics, like British Aerospace's investments in the European Airbus and like the investment in paper manufacturing plant which uses waste paper encouraged by the Selective Investment Scheme.

I have tried to concentrate my remarks on some particular aspects of our social and economic priorities and, in doing so, I have left many vital issues on one side. I have not touched on the disastrous effects of inflation and yesterday's Budget's likely consequences in that area. No doubt my noble friends, and my noble friend Lady Birk in particular, will deal later in the debate with many of the points that I have not been able to take up.

In another place, the Secretary of State for Industry said on 21st May that the Government would not recreate the conditions that led to the property boom in 1972–73. But we have had no word of explanation from the Government as to how they intend to achieve this. On this side of the House, we have no doubt that any Government needs an industrial strategy, based on the maximum support possible from management and trades unions, that ensures that this country receives the greatest possible benefit—in terms of wealth created and jobs provided—from manufacturing industry. We believe that any Government need, through planning and public investment, to play a major part in such a strategy. And we urge the Government, on behalf of the many people threatened with unemployment, not to destroy existing public sector or private sector jobs until they have shown, if they can, that their policies will ensure that people like the merchant bank that refused to invest in Systime will do the job in future as well as the NEB has done it in the last few years, because that is what yesterday's Budget is gambling on and, on the basis of all our past experience, it is a reckless gamble that will not pay off. My Lords, I beg to move for Papers.

3.12 p.m.

The MINISTER of STATE, DEPARTMENT of INDUSTRY (Viscount Trenchard)

My Lords, we must thank the noble Lord, Lord Melchett, for providing an opportunity for what will, I am quite sure, be a most interesting debate. I hope that he can commiserate with me standing here for the first time, as I discovered before the debate that he, too, had not actually moved a Motion and certainly not in Opposition from the Front Bench. So that your Lordships are in the hands of the greenhorns today and I hope that we may have your tolerance. Like the noble Lord, I shall concentrate on industry, on our policy towards industry and on the acceptability of that policy. I shall not deal to any extent with the wider aspects which were introduced by my right honourable friend the Chancellor of the Exchequer yesterday in the Budget, nor in great detail with employment policies and the consequences of the Budget on our social policies, because your Lordships will have an opportunity to raise those next week on the 19th, in the debate to be introduced by my noble friend Lord Cockfield, and on the 20th, in the debate to be introduced by the noble Lord, Lord Spens.

I agree entirely with the noble Lord, Lord Melchett, that industry, and the policy towards industry, is the nub of the matter. It is because our industrial performance has been so very poor that it must now be apparent to all concerned that change, and major change, is necessary. The policy of this Administration is to create conditions conducive to the recovery of British industry, to the reversal of decline and to growth. The term "industrial strategy" to us—and, indeed, the noble Lord confirmed it savours too much of the belief that Government can run industry better than the people engaged in it. Our policy will be to encourage all the talents that exist in the country and, furthermore, to provide conditions in which it will be more possible to bring in talents of which we are short at the present time.

In 1975, the previous Administration introduced their White Paper An Approach to Industrial Strategy, and they used these words: The Government emphasises the importance of sustaining a private sector of industry which is vigorous, alert, responsible and profitable. It intends that the public sector should exhibit the same qualities". The words are all right, and that quotation represented one of many statements of the last Administration which purported to give industry top priority. In reality, I feel that those statements turned out to be mainly lip service. As I go through these subjects, I shall deal with some of the noble Lord's points in relation to his belief in intervention, but let me first look at what has happened overall as a result of the last Administration's industrial strategy.

The noble Lord agreed—and I am glad that he acknowledged the fact—that our industrial decline is continuing. More and more people know this, although before the election it was the claim of those opposite that things were, in fact, improving. The truth of the matter, behind the £3,500 million revenue from North Sea oil, is that we are still declining. There were a few signs of greater activity and improvement in 1978, and some of them are shown still to exist today in surveys which are carried out. But these stemmed, in the main, from the greater money supply made available in 1978, to which my right honourable friend the Chancellor of the Exchequer referred yesterday.

I am afraid the sign that we had at last (and welcome news it seemed to be) recovered rather less than 1 per cent. of our pitifully low share of world trade in 1977 seems, as we see it from the Department of Industry today, to have stemmed from the period when sterling fell, and fell drastically and suddenly, in 1976. This produced a temporary competitiveness which our industry in the export field was able to exploit. However, the advantage was almost totally set off by increased imports, and the situation that we see now is one where continuing inflation at a higher rate than in the majority of our competitor countries, together with a slightly stronger pound, have made our industry much less competitive again. I hope very much that we are wrong but all the indications on confidence about future orders suggest that our shares of markets, both of this market and of our export markets, will drop further in 1979. The decline is continuing. How could it be otherwise, with productivity figures such as we have been putting up?

Let me quote a few of them. These are on an indices basis zeroed at 100 for 1975, and the last figure that I shall give will be for the fourth quarter of 1978, which is the latest available. If I were to zero them on 1976, they would look worse from this country's point of view. On the basis of 1975, the United Kingdom moved from 100 to 105, Canada from 100 to 116, Italy from 100 to 120, France from 100 to 122, Germany from 100 to 117, Japan from 100 to 131 and the United States —which, of course, starts at a very high level of productivity—from 100 to 111, which is still double our rate One cannot say that the industrial strategy overall has been successful. I have paid visits to two regions of very high unemployment: the North-West and the North-East. Both sides of industry in those regions know very well that the decline is continuing and that jobs are being lost more quickly than new jobs are being created. Of course this is partly due to world conditions, which the noble Lord mentioned, but we have to face the fact that in too many sectors—in both the public and the private sectors—we are simply not competitive.

This is why a change is necessary, a change of emphasis away from trying to run things to one of creating conditions which will encourage all the brains and all the talents in the country—conditions more similar to those in other countries which have outpaced us, conditions more closely correlated with successful periods in both our own and other countries' histories. We reject the philosophy that we in Britain are unique and that things which work elsewhere will not work here. My right honourable friend the Chancellor of the Exchequer—and I hope noble Lords will read his speech in full—quoted some dramatic statistics relating to the degree to which France and Germany, starting in 1964, have passed us and left us way behind.

Let me deal simultaneously with the changes that we plan to make and their acceptability. We believe that all of these changes will be acceptable to all those working in industry. First, we shall aim for higher productivity and higher real wages. We believe that this will be acceptable. We shall aim to catch up with those many countries which have passed us and left us far behind. I believe that this will be acceptable, too. We have lowered our direct taxes, which have been uniquely high at both ends of the scale. I believe that this will be acceptable. We are determined in this way, and through the conditions which we shall create, to encourage growth which will reduce unemployment; and I believe that this will be acceptable.

We believe that these things cannot be achieved without investment and that investment cannot be achieved without repairing our appallingly low level of profitability. The noble Lord introduced some good, popular stuff about speculators, but I am talking about the profitability of manufacturing industry. The noble Lord is concerned about that, and so am I. Our profitability in the manufacturing sector is far lower than it is in other European countries. It runs, in real terms, for manufacturing industry, at around a 3 per cent. return on capital, and the risk is that it will decline. We shall lighten the burdens on industry caused by the spate of legislation passed by the last Administration. We believe that all these policies will be acceptable to all those who are interested in the success of industry and, indeed, in the recovery of the country. We do not believe that they can be challenged except by those who are more interested in political theory than in real and practical ways to encourage recovery and growth. May I ask those who made remarks in relation to yesterday's speech by my right honourable friend the Chancellor of the Exchequer—remarks which were made quickly, certainly before I had had time to read his speech—to read it very carefully? If they do so, I believe that it will be very hard to find that his speech is not acceptable, in all its main provisions, to those who work in industry.

The absence of favourable conditions for industry clearly proves that the last Administration's statements in relation to giving high priority to it simply amounted to lip service. The differentials for skill and responsibility have been steadily eroded, but they are being repaired. I am aware of the sympathy that both noble Lords opposite and noble Lords on these Benches always feel for those who are less well off in our society. Sympathy for the low paid is something that we must all have. However, I want to say very clearly that without this change of emphasis the decline will continue, and that will not help the low paid. Without differentials, without lower taxes for those who are building something new, we shall not reverse the industrial decline, we shall not produce growth, we shall not lower unemployment and we shall not move to a higher wage economy. So I do not think that that is the way to help the low paid.

Although this Administration does not believe that the concordat agreement between the TUC and the last Government was adequate to meet the problems of the time, it is also true to say that the fact that that concordat was published shows a much greater awareness of the need for change. My noble friend Lord Gowrie will no doubt be touching on these subjects in the debate next week and on the detail of the effect of the Budget on employment. The idea that the whole thing is about a struggle for a share of an existing-sized cake is gradually dying. I was glad to see that in a recent TUC report upon which they held a seminar, the TUC acknowledged this to quite a high degree. The report recognised that United Kingdom industry must adapt itself to the new technology at least as fast as its competitors if it is to enjoy economic growth.

This is a sound and encouraging approach; but I am afraid that I want to quote, as the best illustration of the difference between putting emphasis on the creation of new business as opposed to the division of existing business, the noble Lord's grandfather. I have long had a copy of Sir Alfred Mond's book Industry and Politics. In one passage of an important speech that he made in the 1920s, Sir Aired Mond said as follows: It is now nearly 50 years since two men got to know each other in business. With very little money they had saved they decided to start a new enterprise. Their capital was very insufficient; their optimism very great. They adopted a process entirely unknown in this country. They asked people who understood the industry to come into it, but they laughed at it. They fought and struggled. They founded that very concern to which the honourable member referred "— this was Philip Snowden I believe— which has given employment and looked after its workmen for something like 50 years, and that was the result of an enterprise which could never have been commenced under any Socialist system that I have ever known. Who would have been prepared"— asked Sir Alfred Mond— to take the risk which all the most experienced men in the industry said was an absurd risk to take? He continued: This is only one instance. Those two men were my father and the late Sir John Brunner. They did not work eight hours a day but 36 hours on end without stopping. They created work for themselves; they created works where thousands of people have been employed. One of the difficulties which I feel with regard to Socialism is that I do not see how you can make any progress. I believe that this is still true in many respects. Central intervention depends upon conventional wisdom. We have not been creating new ICIs for far too long a time and this is why we intend to pay yet more attention to encouraging conditions for the growth of small businesses. But it is vital that our large businesses should not all decline and that many of them, where decline is not inevitable, should recover and throw new offshoots.

So, my Lords, we must change, but we do not want abrupt changes in the many areas of Government and the many areas where the State will continue to play a part. We must maximise the wealth creating section of industry, and I believe this means that we must examine the scope for increasing the size of the private sector. We have stated that reviews are being conducted of all the nationalised industries, of the NEB, of regional policy and of all the bodies, which are sometimes called Quangos, which exist up and down the country. For the benefit of the noble Lord the Leader of the Opposition I might say that I had a very nice dinner last night with an excellent Quango —the Design Council—and I learned that in that case their members receive no salary and not even an attendance allowance.

I will deal with the noble Lord's question in relation to regional policy when, by leave of the House, I wind up this evening. But we are not going to have abrupt changes and my visits to the North-West and the North-East have made clearer to me than words can make the need for both national recovery and for a much greater degree of activity and growth in those regions. We shall not get it except in the context of a national industrial recovery, on which a regional policy must depend for its success. So long as nationally we are going down, we simply cannot put the matter right with a regional policy.

The relatively small, impoverished private sector of our industry is insufficient to support adequate social policies at the present time. I am the first to admit that many of our social policies are now inferior to those of other countries who have outpaced us in the growth of industry. We cannot support our existing social policies and the needs of the nationalised industries on such a narrow wealth-creating sector. In addition to creating favourable conditions and removing obstacles to the recovery of British industry, Government may be able to contribute, through the sector working parties that the noble Lord mentioned, to the diagnosis and deduction of other contributing causes to our malaise; that is, contributing causes other than the conditions and environment in which industry has been asked to operate in this country for so long. There is a long list of popular culprits, according to one's point of view. Just as with the medical analysis of certain very complicated and major diseases which affect mankind it is often concluded that the disease is multi-causal. It is easy so to conclude—perhaps it is even safe and non-controversial so to conclude: a bit of investment deprivation, some skill and design gaps, management deficiencies, labour deficiencies and the unique system which we have for our collective bargaining and industrial relations. A good, safe, multi-causal collection!

I believe however that the working parties have made a contribution and that we can encourage that contribution in terms of trying to find which are prime causes among the many contributors to our industrial malaise. The Department has enormous resources and is working actively in this direction.

With the leave of the House I shall be able to reply not only to this debate but to some of the points raised by the noble Lord which I have not been able to cover in 22 minutes. In relation to the short-term jobs question, I should straight away say that I cannot give him a worthwhile reply this afternoon in relation to the public sector. In my own sphere I have been examining closely what the effects of the Budget measures and of other measures will be in the short term. I am under no illusion. The situation is currently getting worse and our task has to be to arrest the basic growth of unemployment. The last three months' figures are not meaningful in terms of the general upward trend. So I cannot give the noble Lord an answer there, but we are concerned—and indeed even more concerned than he is—and we believe that until we have industry back on a growth path again the position cannot be improved.

I should like to make one point about his remarks on intervention, which he illustrated in a number of particular industries. There may be time this evening to come back to those, but think one overall comment should be made at this stage. I do not think it serves the purpose of diagnosis as to what is or is not a favourable system for industry to look for the upward performances and to isolate them. It leaves the question wide open as to what the progress of our aircraft industry, for instance, would have been in other circumstances. I do not believe that we have yet seen whether private investments in these high risk areas have been maximised in the past because the conditions for investment and for return on investment in this country have been so poor. So within the new atmosphere and the new context I believe that we must examine the degree to which we can increase the private sector and the whole wealth creation process.

In regard to regional policy and to the selective grant schemes, the noble Lord knew that I was going to say that they are all under review, but I want to assure him that I know that it was a Conservative Government who passed the 1972 Act. I know that there is an effect from a number of the schemes which have flowed from that Act, and a beneficial effect. As I have said, it must be integrated with national policies and the review is continuing. At the present moment on regional aid all that has been announced is a moratorium, which the previous Administration used in a time of extreme cash need. I should like to leave it there, my Lords, and to thank the House for being tolerant at this, my first rather inefficient performance.

3.39 p.m.

Lord ROCHESTER

My Lords, I should like from these Benches to join in thanking the noble Lord, Lord Melchett, for having introduced this Motion. It seems to me to be especially appropriate that one bearing such a name should be the person calling for an industrial strategy which has the full support of both sides of industry. I did not know that the noble Viscount, Lord Trenchard, was going to refer to the first Lord Melchett, but it was of course he who, more than 50 years ago, initiated the renowned Mond-Turner conference which had as its basic objective the bringing together of employers and trade union leaders to seek, through industrial co-operation, a common purpose in attaining a high production, low cost, high wage form of industry. I am sure that if the noble Lord, Lord Citrine, had been able to be with us today—for I believe he was actually present at that conference—he would gladly have renewed the tribute which he paid long ago to the lasting influence of the philosophy that inspired that conference.

I am very glad to be able to follow the noble Viscount, Lord Trenchard, and take this opportunity of congratulating him on his appointment. He comes to it with a great deal of experience of industry which I am sure will stand him in good stead. I do not suppose for a moment we shall always agree, but we wish him well, and I think I can assure him from these Benches that in so far as he and his colleagues find it possible to pursue a common industrial purpose of the kind to which I have just referred he can count on our support.

My Lords, the Motion calls attention to the priorities required in our economic and social policies, and we need first, therefore, to determine what those priorities should be. Because my experience, too, lies in industry, because the Motion refers to an industrial strategy specifically and because we are to have a debate next week on the Government's general economic strategy, I propose to confine myself, apart perhaps from one or two asides, to two policy priorities in the industrial field which, in my view, are urgently needed as the basic elements in a strategy having the support of both employers and trade unions. These are quite simply the conquest of inflation and an improvement in our productivity. If the defeat of inflation is indeed to be a part of our common industrial strategy, then it seems, to me at least, that there must be some minimal agreement as to the means of achieving that end.

To avoid misunderstanding, I will not on this occasion insist on the term "incomes policy" in describing the means I have in mind, though that for me is what it amounts to. Instead let me say that I believe there is need to establish agreed long-term procedures for the determination of wages and salaries, and indeed that it is imperative that the Government, employers and trade unions should reach some accommodation on this point. May I also make it plain that I am not now advocating the establishment of some norm to which employers and trade unions would have rigidly to conform, with or without Parliamentary endorsement. What I am suggesting is that in the joint statement by the TUC and the previous Government last February, in the CBI proposals for reforming pay determination, and also in the document entitled A Better Way which was signed by 12 trade union leaders earlier this year, there are the makings of a consensus on this point.

There are differences, of course, in the various approaches. The TUC opted for a national assessment each year by the Government and both sides of industry of our economic prospects. The CBI has advocated what they call a national economic forum which should be linked in some way to Parliament. The document A Better Way called for an annual forward look between the Government, unions and employers to consider the potential growth rate and other economic indicators. Such a limited convergence of views admittedly leaves a lot of vexed questions unanswered, but here at least there is some common ground on which, I suggest, we could build as part of an educative process that could lead to pay bargaining that would be more in keeping with the realities of our economic situation. Indeed, in this way society at large might at last come to see that sustained increases in pay which actually enable wage and salary earners to buy more goods and services without anyone else having to make do with less can only come from a rise in output per man.

That brings me to the second policy priority that I should like to put forward as a basic ingredient of any common industrial strategy, namely, the urgent need for improvement in productivity. I think it was in keeping with the wisdom and the experience of the noble Viscount, Lord Amory, that in the debate he initiated in your Lordships' House last July he pointed to low productivity as the most serious of our economic problems, because, as he said, it lay at the root of most of the others and was likely to prove the most intractable of them all. In particular, I believe that Lord Amory was right to relate productivity to employment in such a way as to show that he believed that, because of our need as a trading nation to remain internationally competitive, new job opportunities would have to follow, and could not precede, improved productivity.

That is indeed why—although it is clearly of great social importance, as we were reminded by the noble Lord, Lord Melchett, for employment now to be as full as possible, particularly among schoolleavers—an even higher priority, in my view, should be accorded to the creation of conditions in which more people find it worth while to start up their own small business enterprises, to move from one part of the country to another, to undertake training for skilled work, to take up positions of responsibility, and so on. Indeed, I personally feel that the reductions in the levels of direct taxation announced by the Chancellor of the Exchequer yesterday in his Budget statement are to be welcomed, and prefer the idea of increased rates of indirect taxation, particularly on those items that, although we may find them enjoyable to consume, can by no stretch of the imagination be classed as necessities of life.

I have suggested, my Lords, what should be the policy priorities for our industrial strategy. Indeed I believe that in theory there is already a great deal of support throughout industry both for the reduction of inflation and for an improvement in productivity. The difficulty arises in translating this support into concerted action, so that there is seen to be a community of interest in increasing the national cake before we argue as to how it is to be sliced up. In the Motion the use of the very phrase "both sides of industry" is, I suggest, an indication of how far we still have to go to get away from this concept of "us" and "them" and to develop instead the idea of a number of teams having joint objectives in view. I believe that a large part of our trouble is that so often industrial strategy is based on short-term political considerations and not on long-term commercial ones. Since I am trying this afternoon to be as uncontroversial as possible, I will resist the temptation to dwell on the extent to which this stems from what we on these Benches regard as a thoroughly unrepre- sentative electoral system, even though I believe that that has a lot to do with it. It is sufficient for the moment to say that, if ever we are to improve our economic and industrial performance, we shall one day have to accept solutions to our problems that are likely to prove most unpalatable.

At present, alas!, knowing that in the short run improved productivity will often result in fewer jobs being available within a particular industry, we prefer to retain jobs that are unproductive even though that will later lead inexorably to even fewer jobs. People in the Civil Service and in local government demand both higher pay and exemption from limitations on recruitment that industry has had to suffer for at least the last 15 years. If a remedy is sought for unemployment by the introduction of a shorter working week we are unwilling to accept the corresponding reduction in pay, but insist instead on working more overtime at even higher overall cost.

The fact is that, as a society, in recent years we have refused to accept that we cannot indefinitely go on consuming that which we do not produce. We have put off the day when we shall have to experience that uncomfortable truth for ourselves by borrowing. North Sea oil is the latest insidious pretext for declining to face up to the basic necessity of learning to live within our means instead of obliging our children to use so much of what they will produce in repaying debts that we have incurred. It may be that our immediate plight will have to become even worse before we learn.

I should like to try to end on as optimistic a note as possible, and I draw some comfort from the long-term educational programmes that many of our more progressive companies have embarked upon in recent years. The initiative for those has come from enlightened management, but those programmes have also depended greatly on the courageous response of certain trade union leaders and to them I should like to pay tribute. I am convinced that we shall not solve our basic national problems until we are prepared to face them together in joint action of that kind. If the debate this afternoon results in even a small move in that direction then, in my view, it will have proved to be well worth while.

3.54 p.m.

Lord BROWN

My Lords, I too should like to congratulate the noble Viscount, Lord Trenchard, on his appointment as Minister on the Front Bench. I hope that he will have a very successful career there because industry is so important to our country. However, I must confess to some disappointment with his speech because very little is known in the country at large about the type of industrial strategy that the new Government will follow. Perhaps it is understandable that we did not get much information from him today. I am not being over critical as regards that, but it draws attention to the fact that the Government are proposing to rely on large reductions in income tax as a way of re-inspiring British management to rescue industry from the low ebb to which it has fallen. I hope that they will succeed in that aim.

I hope that the reduction in income tax has the necessary result. However, I very much fear that it will not be enough. I recollect that when Mr. Heath took office he had extremely similar views and I think that I am right in saying that he reduced taxation by nearly £1 billion, which was quite a large amount of money at the time. But in the following two years the rate of capital investment fell by 7 per cent. a year. If the rate of capital investment can be considered as some sort of indicator of industrial enthusiasm, then I think that it demonstrates that the particular recipe now being put forward by Her Majesty's Government is regrettably unlikely to succeed. I think that we shall need more than that.

In considering which of the many subjects I might refer to this afternoon, I first turned my attention to an old favourite—namely, incomes policy. I do not want to be a prophet of doom and, as I have said, I hope that the Government succeed in their drive to revive our industrial prosperity. But I very much fear, as do other commentators, that by about next spring, we shall be in a situation where enormous claims for increased wages have succeeded; we shall have wage inflation and we shall be in real trouble. The Government's policy might have stood a very high chance of success if it had been accompanied by a statutory incomes policy with built in flexibility. I have spoken on this subject many times in this House in the past. I have decided not to speak on it again today because with the Government's current euphoria brought about by their monetary ideology, I do not think that comment on a statutory incomes policy would get me very far, but I shall no doubt return to it later. If Members on the opposite Benches feel that there is a contradiction in terms between a statutory incomes policy and a flexible one which will deal with differentials, then I shall be delighted to provide them with the latest edition of my views on this matter which prove that the two are not incompatible.

The second subject to which I turned my attention was that of participation—a matter upon which the noble Lord, Lord Rochester, has spoken. Incidentally, I too noted the Minister's comment on Sir Alfred Mond. I remember in, I think, 1927—and I was of mature age then—reading the announcements about the great meeting which took place in London; and subsequently I learnt of the grave anxiety and distress he caused to his colleagues in business for being a damn Socialist and for introducing such dangerous ideas at that time. So he may well have started businesses, but he was a wiser man than most of those who are starting new businesses today in that particular respect, and it is well to remember that he will go down in history for making a good start on the whole question of participation. However, I set aside making a contribution on the question of participation for the same reasons as I abjured making a speech on an incomes policy, because I believe that at this early stage of the Government's thinking—fresh from the views of the CBI, which has been against participation for so long, although it always seems to be able to say something "rabbity" about it in its responses to other persons' suggestions—the Government will turn deaf ears to anything said on the subject.

Therefore, I decided to talk on a more limited but very important topic; namely, product development. When one has heard economists, journalists, professors in universities and so on, talk about industry they used always to talk about manufacturing industry, capital investment, productivity and, in the last 20 years, marketing. They seldom talk about the design of the product itself. Indeed, I was reading the Financial Times before I came to the Chamber this afternoon and I read five accounts of companies' financial returns and not one of them mentioned what the companies made. One can look any day at the Financial Times and find that that is so—they are not interested in what they make. The point I am putting forward is that in recent years there has been enormous emphasis upon—help has been given and interest shown by companies in—increasing the rate of capital investment. Just to throw in a statistic, in this country we have increased the rate of capital investment in industry by 14 per cent. for the last 2 years—the highest increase in the rate of capital investment in industry of any country in Europe. One might bear that in mind when one looks back on the policies of the last Government.

However, the fact of the matter is that the design of the product is at least as important in competitive marketing as the price. Few people are commenting on this fact. If one looks at industry, one finds a grave organisational problem surrounding the whole business of product development.

The problem rears its head in this way. First, if we ask British companies what percentage of their total sales revenue they spend on product development, many of them do not know. Those who do will give figures which, translated into percentages, come out at .0345, and so on. That must be compared with what is going on in Germany, Japan and the United States, where such figures as are obtainable indicate that, on average, various types of industrial companies spend anything from three to 10 times that which the average British company spends. I believe that, above anything else, this is an organisational problem.

As a result of sitting on committees connected with the Department of Industry, the Minister's Department, I have had the opportunity of examining the structure of many British companies. In the last few years I must have seen 400, 500 or 600 briefs. One looks in vain at most of the company charts for the chief product designer, the chief R and D man, as a man near the top. Usually he is subordinate to the production people, or even, in some cases, the marketing people. I do not think that we shall begin to get this matter of product development in industry right until every chief executive realises that in addition to having immediately responsible to him the person who is in charge of manufacturing and the person who is in charge of marketing, he must also have immediately responsible to him a high-calibre person responsible for product development.

I do not think that we shall get anywhere on this until there appears on the board agenda at appropriate intervals the subject of product development, the figures as to how much the company is spending, and the forward projections of new products that are in course of being designed, and until the board looks at those and can assess them itself. All that is missing from the average company. When I was a Minister at the Board of Trade I used to visit industry two days every month for 10 months of the year over a period of five years. I must have visited several hundred firms. When I entered the front door I always asked to meet the man in charge of product development. Very often I was met by a sort of glassy stare. Eventually the chief executive would say, "Ah, you mean our research department?" I said that I did not really mean that; I meant the department responsible for developing and designing their products. Very often I was shown a chemical laboratory which was responsible for analysing incoming materials, or a physical testing laboratory responsible for testing outgoing manufactures, which had nothing to do with product development at all.

I am trying to put across—I hope in a very constructive manner—the suggestion that, through their Ministers in the Department of Industry, the new Government should place enormous emphasis on this whole question of product development. Under the last Government schemes were introduced offering substantial financial support in order to stimulate companies to pay more attention to this. I hope that this substantial financial support will continue and I hope that steps will be taken to draw the attention of manufacturing companies up and down this country to the enormous importance of focusing far more attention on product development than has heretofore been the case. I should like to end on this note. From my own industrial experience—which, although not wide, has been lengthy—I would take the view that £1 million spent on developing new products will be as valuable to any industrial company as £10 million spent on investment in capital equipment to make products.

4.5 p.m.

Lord McCARTHY

My Lords, I should like to begin by joining the noble Lords, Lord Melchett, Lord Rochester and Lord Brown, in congratulating the Benches opposite in general and the noble Viscount, Lord Trenchard, in particular on achieving office. I should also like to congratulate them on certain, what seem to me to be, attractive features, if not in their economic policy, at least in the way in which they derive their economic policy. For it seems to me that here we have a Government which, to some extent and in many crucial areas, derive their economic policy from books. I am in favour of that.

For example, I am told that if one visits the Secretary of State for Industry in another place, one finds that he carries around with him a book list, like someone who makes his living at giving people book lists. I am in favour of that. I am told that he passes on to unsuspecting visitors a book list which comprises such standard works as the Wealth of Nations; Capitalism, Socialism and Democracy; and, if not the Works of Galbraith, the chap in the Financial Times tells me a rather inferior IEA pamphlet on the Fallacies of Galbraith. I take that to be progress. However, I sometimes wonder—and this is a point which I should like to put to Ministers—whether they read these books through to the end; and not only whether they read these books through to the end, but why the book lists—to judge from the economic policy in general and the Budget policies in particular—are so unfortunately weak on labour economics. I ask whether they read the books through to the end because if one reads, for example, Adam Smith through to the end, one finds that he is not really in favour of joint stock companies. I do not know whether that means that this Government will introduce legislation repealing the Joint Stock Companies Act. Perhaps Adam Smith would not be quite so keen about unrestricted competition and the removal of Government intervention if he saw some of the multinational companies that exist and manipulate the market today.

Again, if one reads Schumpeter's work through to the end, one would realise that it contains an excellent chapter—which I would advise noble Lords to read—about the almost total lack of an aggressive entrepreneurial risk-taking function in modern big business. It is very largely because of that and because he had come to the conclusion that there was very little chance of it reviving, that he thought that, sorry to say, increasing Government intervention was probably inevitable.

However, as I say, I really want to urge the Government to widen their book lists in the area of labour economics. Looking at the Government's policy in relation to the labour market and in relation to pay policy in the next 12 months or so, it seems to me that they do not appear to have read anything later than Marshall's Principles. I am not sure whether they have got through the chapter on social costs. I do not think that they have grasped the fact that most people who have done any work in empirical labour economics in the labour market would say that the critical thing that one must understand about the working of the labour market these days is the notion of coercive comparisons. It is the notion of orbits of coercive comparisions which is the fundamental reason why, without some kind of policy on pay, we face the virtual certainty of a pay explosion. I sometimes tell students that the world is divided into those who have read Ross and those who have not read Ross. Ross was the first labour economist to discover and to analyse the notion of coercive comparisons.

He argued that the bargainers in collective bargaining are concerned to satisfy political, almost quasi-moral, notions of coercive comparison, because people in collective bargaining compare themselves with others in collective bargaining, particularly certain groups in the bargaining process. One contains the inflationary consequences of collective bargaining by trying to work within the realities of the orbits of coercive comparison, and not, by not understanding them, unnecessarily upsetting them. The trouble with the Government is that in their attitude towards the labour market they appear still to believe in a curiously naïve version of the employment effect. They believe that by creating some kind of terror in the labour market, a terror of unemployment, some effect on the level of wages will be caused. The trouble with the employment effect is that it is not like the rain; it does not rain on the just and the unjust, it rains on the just. It affects new entrants, it affects "last in first out", it affects those who might agree to accept voluntary severance or redundancy, and it does not affect the great majority in the labour market who are bargaining to maintain their coercive comparisons.

Since the time of Ross and those who first developed the notion of coercive comparison, this country has passed through a period which has reinforced the effect and importance of coercive comparisons. They have widened their importance. Orbits of coercive comparison have widened largely because of the high rates of inflation from which we have been suffering for the last 15 years. The force of coercive comparison has been strengthened partly because successive governments have become increasingly committed to notions of comparability in the public sector—one way of accepting coercive comparisons—either by ad hoc pay review bodies but periodically by standing pay review bodies. They have been institutionalised and structured by the development of a sequential annual wage round.

I know that people will say that these forces of widening, strengthening and institutionalising the notion of coercive comparison have themselves been made more difficult to master by the development of incomes policies. This is absolutely true. As a result of the development of incomes policies we now face forces of coercive comparison which are significantly stronger than they were 15 or so years ago. It is possible to argue that we have now made one great orbit of coercive comparison of the entire labour market, both the public sector and the private sector, so that any significant, above-average movement in any one part of that labour market forces coercive comparisons through the whole of the labour market. But I suggest that this is an over-simple view. It is not the existence of incomes policies which has created coercive comparisons, it is the fact of coercive comparisons, particularly the powerful effect of coercive comparisons in the public sector in this country, which has made incomes policies inevitable. On those occasions when Governments have sought for various reasons to move away from incomes policy, they have found themselves sharply returning to it.

We have other conclusions to draw from the last few years. One thing that we can learn from them—and I could give historical examples of this if I had time—is the profoundly disturbing effect on the wage round of significant, well-advertised increases at the beginning of the round, or even at the end of the previous round, such as, for example, the increases which have already been announced for many groups in the public sector, or the increases that the Ford Motor Company negotiated last year, or the increases that were negotiated in other parts of the public sector. Early, large, high settlements at the beginning of the round are a profoundly disturbing thing.

The second thing we have learned over the past few years is the disturbing consequences of significant and sustained differences in the levels of settlement in the public and the private sector. These can be escaped in any one wage round. In any one wage round it is possible to suppress the level of settlements in the public sector and get away with it, or to allow the public sector to move ahead while the private sector lags behind. But significant and pronounced differences in the levels of settlement in either the public or the private sector in any one round will have consequences on the general level of settlements. They will produce problems for Governments—the kind of problems that they are producing for this Government at this moment.

It is in this connection that I should like to ask the Government a number of questions arising out of the Chancellor's speech yesterday, because there is buried away in that speech a reference or two to what the Government propose to do in the field of pay policy next year. The problem is that these references raise almost as many questions as they settle. The first reference comes in column 241 of the Official Report of the Chancellor's speech, where he said: It is important for that to be fully understood by all those concerned with wage negotiation. We shall be more than willing to consider better methods of ensuring that financial responsibility on the part of the Government must be supported by responsibility elsewhere. He continued: People must understand and accept that the only basis for real increases in wages and salaries is an increase in national production. Higher pay without higher productivity can lead only to higher inflation and unemployment. It is important for that to be fully understood …". He goes on: on both sides of the table, and on both sides of the House, certain limitations must be recognised: This is the nearest we get to a policy for pay in this Budget. in the public sector, what the ratepayer and taxpayer can afford; in industry, what the customer is prepared to pay, what the firm needs to invest, and what the pressure of competition demands; and, throughout the economy, the limits imposed by the need to control the money supply". That is to suggest that there really are two areas of pay, the public sector and the private sector, and that no real common policy, and certainly no common targets, are to extend across both those sectors. Of course, the facts are that there are three sectors we have to consider. We have to consider two sections within the public sector: the public service sector and the market part of the public sector, or what is sometimes called the nationalised industries.

The Chancellor returns in column 246 to what I take to be statements about the public service part of the public sector.

He says: On pay in the public services, while we will honour the commitments to the universities and the health authorities entered upon by our predecessors, in general we shall limit the adjustment of the cash limits so that substantial offsetting economies will have to be found. The need for substantial economies applies equally to local authority expenditure, where the Government's contribution is made through the rate support grant. As I said three weeks ago, we shall take account of pay settlements in calculating the increase orders for the rate support grant, but we shall make a significant across-the-board reduction from the total so calculated. He adds: These figures may have to be increased when we know the cost of further pay increases and will be finally determined in November, before the increase orders are made". I have read that carefully several times and I have four questions I should like to ask about it. There is reference to the funding of certain settlements in the National Health Service. My question is, does that funding apply to all settlements in the National Health Service this year? Does it apply, for example, to the whole of the results of the doctors' pay review body, including the consultants' contract, including the payments due of 15 per cent. or so next April? Does this funding extend across the whole of payments in the National Health Service, not simply for the remainder of this round but also for the round which will begin in the Autumn of the year? If that is so, my second question would be, is that to be carried out also in other parts of the public service sector or is it, as it appears to be in the Budget, to be rather different so far as local government is concerned, or so far as central Government is concerned?

If it is not the case, and if the funding is only partial and affects only certain decisions already taken, or if it does not cover the next wage round, then have the Government any instructions to offer. for example, area health authorities as to how they are to cover the consequences of unfunded settlements? In other parts of the public service sector the Government have suggested that the way to cover these is by cutbacks in staff, but whether cutbacks in staff are possible or not depends on a whole range of factors of which one cannot be certain at the centre. There-fore one must ask: if a local authority or a local health authority or some Quango employing authority considers that it cannot cover its pay commitments in the next 12 months by cutting back staff, are any priorities to be issued to those poor people on how they should cut back services? I can tell the Government that if no guidelines are issued, those authoriities will ask what the guidelines are.

The remarkable thing is that in the quotations so far I have not been mentioning the nationalised sector. The Budget is curiously quiet about the market part of the public sector; the only mention I can find is a quotation from the Chancellor's speech which refers only to the energy industries. It says: In the area for which my right honourable friend the Secretary of State for Energy is responsible, savings of over £320 million are being made this year in the finance for BNOC and the electricity, gas and coal industries. And here it comes: The industries have been asked to avoid so far as possible increases in fuel charges beyond those required to meet the cash limits announced by the previous Government".—[Official Report, 12/6/79; col. 247.] The importance of that statement will not be lost on the House because, when one is talking about pay in the market part of the public sector, one cannot control the level of pay increases by cash limits. One cannot control them by saying one will not increase subsidies or do something about restricting the borrowing rights because many nationalised industries are in the position of paying almost anything they would wish if only they could pass it on in prices.

I am certain that, if they were prepared to make certain adjustments to their pricing schedules, London Transport could avoid a tube strike next week. The Post Office Board have had a letter from the Post Office Engineering Union asking them if they will give the Post Office engineers the same wage increase as has been given to Sir William Barlow, of about 25 per cent., because that is about the PLU claim. The Post Office could pay wage settlements of that level if they were allowed to adjust their prices. I am not saying they would; I am saying they could. Similarly, the dispute in this round involving the Electricity Council, which has not yet been settled, could be settled very easily in a capital intensive industry if the Electricity Council were made aware that the Government had no policy for price increases in the public sector, if they were necessary to buy off a wage increase.

I am simply asking whether that is the case. Is it the case that employers in the market part of the public sector, who in the past have had to submit their price increases to bodies like the Price Commission and who have been subject to instructions and warnings and pressure from Ministers, are now to be relieved of all that pressure so long as they feel they can pass it on to the rest of us in their quasi-monopoly positions and that the Government will have no objection? That is the nub of my question.

Now, I come to the private sector, because it is here that the Government are saying the strangest things of all. I have quoted from the Budget Statement where the Government appear to be saying that so far as the private sector is concerned, the only limit is the sky—the sky mitigated by the threat of a loss of jobs. Are we therefore to be told that if the Ford Motor Company can mark it up, it does not matter? Are we to be told that in regard to road haulage, which is a domestic industry and which can easily enough pass its increases on to the public, the Government have no view? Are we to be told that in engineering—and, after all, the engineering dispute is not over yet; the unions are asking for an £80 flat rate for craftsmen—the Government have no objection so long as the Engineering Employers' Federation are satisfied and do not believe an increase will have an escalatory effect on the coming wage round?

Let us consider the facts. On the Government's own evidence, the retail price index is due to rise by at least 16 per cent., and probably significantly more. As a result of the Government's own acts, increases of between 20 and 30 per cent. have already been given to doctors, members of the Armed Forces, beneficiaries of the Top Salaries Pay Review, the Civil Service Pay Research Unit grades and so on, and of course we have the results of the Clegg Standing Commission due on 1st August. If one were to ask any bargainer—I say this with no sense of joy; I find it profoundly disturbing—in the light of those facts what he would regard as the going rate in this year of free collective bargaining, he would reply," The claims will be between 30 and 40 per cent. and the settlements will be about half that". That is what the natural going rate would be if the future resembles the past in that situation, and what one does about the money supply, tax remissions, fiscal policies and VAT will have no effect whatever on those realities.

Therefore, my question to the Government is this: am I right or am I wrong? And, if I am wrong about the national wage round, do they mind? If I am right about the national wage round, are they terrified? The fact is of course that the Government have a policy, or at least they have a policy in reserve. The Government will not tell us today that if I am right and we should have a wage round of this size because we have no attempt at an incomes policy nothing whatever will be done, because she-who-must-be-obeyed has told us we cannot guarantee that there will be no statutory incomes policy in the period of an entire Parliament. I accept that and I am glad it has been said. My question, however, is this: have we any guarantee that there will not be a statutory incomes policy in this wage round or in the next wage round or within this period of the operation of the House? A great friend of the Government, a man who has frequently urged people to vote for them, Samuel Brittan, wrote at the end of what I thought a rather unfair article on the Budget in the Financial Times this morning: It is difficult to avoid the impression that the Budget has been almost deliberately drawn up to vindicate those in the Treasury who confidently expect a wage freeze next autumn followed by a return to pay controls". All I would say about that is that one cannot have pay freezes of that kind. All pay freezes we have ever had in this country, and most pay freezes in other countries, have come at the end of the evident collapse of well-meaning attempts to achieve voluntary restraints. That way, they are far more acceptable. To produce a statutory incomes policy on day one when on minus day one one has been arguing for a free-for-all, is something which I think the country would find it very difficult to accept, particularly of course if it came in the middle of a wage round.

My final comment on statutory incomes policies is that one cannot say one will not have a statutory incomes policy indefinitely; one cannot say, "We are going to have a wage freeze until we tell you otherwise". One has to say how long the freeze is for, how one is going to command it and what institutions will be created. I support the Motion because I believe that before one gets into disastrous situations like that, it is an essential priority of any sensible economic policy that one should have rather more to say about the level of pay than that kind of thing.

4.30 p.m.

Viscount ROCHDALE

My Lords, first may I congratulate my noble friend Lord Trenchard on his appointment to the Front Bench and on the very great responsibilities that he has acquired in connection with industry. All other noble Lords who have spoken have congratulated him and I should certainly wish to do so myself. May I also congratulate the noble Lord, Lord Melchett, on introducing the Motion. When the noble Lord used to sit on this side of the House he was always most courteous when he spoke about such matters as shipbuilding or Northern Ireland, and he was so helpful when one raised points with him, and so I very much hope that I shall in some way be able to follow that degree of courtesy. I hope that the noble Lord, Lord McCarthy, will forgive me if I do not follow him in his very interesting address on pay policy. No one is better able to speak on that subject than he. I also wish to say how interesting I found, and how much I support, what the noble Lord, Lord Brown, had to say on product development, which is exceedingly important.

First, I want to refer to the wording of the Motion, which I find quite unexceptionable. Obviously we cannot do everything at once, and therefore quite clearly we have to determine certain priorities which need attending to first. Equally important, there is the question of unity within industry; the latter part of the Motion refers to that. Having said that, I must make the point that I am never quite sure how greatly I care for the growing use on all sides of the House, as well as outside the House, of the word "strategy" when applied to industrial and economic matters. This is not just a matter of semantics. It is more than that. I do not think that the use of the word is etymologically correct because, as I read the dictionary, the word "strategy" applies to the overall plan of a commander-in-chief in war within which his lower commanders are directed (I purposely use the word "directed") to carry out their tactical operations. Therefore if this is applied to industry, it implies that there is a central authority which is expected to direct industry to do certain things; and that to me is rather alien. I believe that too much direction from the centre of industry can be in danger of leading to a degree of mediocre, which I am quite sure is the last thing that the noble Lord, Lord Melchett, would want. I am sure that he is a perfectionist and that he wants to see perfection rather than anything which is mediocre.

I should like to deal with the question of what exactly in my view should be the role of Government in the industrial field. I see it as two-fold. First, I believe that the role of Government should be to create the right national climate in which industry can operate to the very best advantage of all. But the climate must of course bear in mind certain factors. It must bear in mind the differences between various industries. It must bear in mind the differences between different companies within the same industry. It must bear in mind the different personalities of management and different management styles. It must also not overlook the very big effect that the international climate can have on the national climate. That is the first task—to see that the climate is as good as it possibly can be for industry to operate within.

The second role, as I see it, is the responsibility of Government to prepare, and if necessary enforce, what I think can be best described as a code of conduct with which industry has to comply. This is nothing new. We already have it in many respects. I have in mind, for instance, the kind of conduct that is embraced in the Companies Acts or in regulations relating to health and safety at work, pollution, employers' liability, compensation, and so on. There are a large number of other factors which Government must make sure are correct for industry and which they must be prepared to enforce. One matter that I feel should be included in any code is that which relates to certain trade union practices and procedures. I mention this here today only in order to balance the picture: I feel that the code must apply to the whole of industry. Judging from the Government's Manifesto and from the gracious Speech from the Throne, I assume that this is a matter that Her Majesty's Government are working on. No doubt we shall hear more about it later, and so I certainly do not intend to go into it now. Such are the two main points where I think the Government have very important roles to fulfil.

One of the priorities that I believe must be considered is the question of who should own industry. I do not want to become involved in discussions on whether an industry which is already State-owned should be sold back to private ownership, or whether an industry which is privately-owned should be acquired by the State. However, there are two points that I want to mention here, as I believe that they are most important. The first relates to what should be the motive behind any change of ownership of an industry. There is a view going around that if the present Government were to decide to dispose of a State-owned industry to the private market, that should be regarded as almost immoral. I have heard this said all too often, and I hope that no one will say it in the debate today—I am sure that they will not. The argument which I have heard describes this as an attempt to line the pockets of those who can afford to be involved at the expense of the present owners, who are the taxpayers, operating through the State. I consider that that would be a quite improper accusation to be made when we come to consider (as no doubt we shall) whether or not some State-owned industries are to he disposed of to the private market. I would urge your Lordships when considering this matter to try to recognise that any action or move of that kind would represent a sincerely held view that taking such a step would be better for the enterprise, to enable it to succeed and to perform its services to the best advantage of the public. I do not believe that any responsible British Government should consider, or would consider, disposing of a publicly-owned enterprise except on those most sincerely held, and in my view, moral grounds.

The second point in this concept regarding the question of ownership is that one must recognise—I do—that in exceptional circumstances the Government may well have to be regarded as a lender of last resort. That may be for special reasons. There may be very exceptional reasons why an industry should not be allowed to close down or why expansion which is absolutely essential—and I think the noble Lord, Lord Melchett, referred to an instance of this—can be done only by Government. But the important point that comes from this, I think, is that any case of change of ownership of an industry must be considered, not on any ideological grounds but on the individual merits of the case in question.

Lord BROWN

My Lords, may I interrupt the noble Viscount for one moment? He is making rather heavy weather of this point. I think the criticism which is being made is not the one that he hopes nobody in the House will make, but is this. Is it right to take a capital asset—for instance, BP—to sell it and to take the funds and spend them on current expenses? Any business which sold one of its factories in order to be able to spend the currency it obtained would be under severe criticism from the City.

Viscount ROCHDALE

My Lords, I take the noble Lord's point. I was not referring to any particular case, but I have heard this said, and it is important. The noble Lord has referred to BP. What the noble Lord has said surely bears out my last remark; namely, that every case must be taken on its merits. But I will make one other point on this, and that is that before any move is made in any such case one wants to consider what will be the effect on the people employed in the industry, because all too often the question of change of ownership has a disturbing and unsettling effect, and that may go a long way towards offsetting the advantages that the would-be changers have in mind.

That is all I want to say about Government, but it leads on to what I next want to say, which concerns the question of what goes on within an enterprise itself. Fewer directions by Government to an industry should give an opportunity for that industry to think, to plan, to create, to spend more time on product research (as the noble Lord, Lord Brown, said) and to do all the other things which are essential—and, maybe, to take additional risks. Nothing ventured, nothing gained! But, equally, there is a very important corollary to this. If industry is to be subjected less to the watchdog eye (I use that phrase with caution) of Government, it is important that three lines of thought are very clearly understood within industry. Before I say what those three lines of thought are, I would mention that there is nothing new in what I am going to say. They are well understood in industry, and, for the most part, I believe that industry does its utmost to pursue them. But they are important, and need to be repeated.

The first, of course, is that there can be no relaxation within industry in the sense of the responsibility that industry has, be it to its employees, to its customers, to those with whom it trades and has contracts or, last but not least—and this is sometimes overlooked, I think—to the neighbour- hood in which it is situated. The second point—and I think this has been mentioned this afternoon—is the growing importance of communications throughout industry. How an improvement is to be achieved must, I suggest, be left to the individual company to determine, whether it be by worker directors, by works councils or by one of the hundred and one other possible ways. But such communications must be thorough and they must be effective, and certainly this is not something that can be laid down in a sweeping way by Act of Parliament. Of course, really effective and convincing communications may not be easy to plan or to carry out, however.

That brings me to another point, which, as your Lordships will probably be aware, is something of a hobby-horse of mine. It is the enormous importance of really first-class young people going into industry. Your Lordships may remember that in December last I introduced a debate in your Lordships' House on that very point. I do not propose to repeat anything I said on that occasion, but the importance of our getting a higher proportion of really first-class young people to come in steadily to match up to the increased responsibilities that I see industry assuming is, to my mind, very great indeed.

That brings me back to the wording of the Motion, and to my final point. The noble Lord, Lord Melchett, talked of the need to have the full support of both sides of industry. Of course I agree with him: that is absolutely vital. A house or a kingdom divided against itself cannot stand, any more than an industrial company can. But I am convinced that agreement on that is far more likely to be achieved and kept alive on a company basis than on a wider, whole-industry basis. That leads me to express the hope that we may perhaps be working towards a time when, in any one company, we have far fewer different trade unions than is often the case today and are in that respect much more like our competitiors and our partners on the Continent. That, to my mind, is of very great importance, so that when it comes to discussions on company problems all concerned with those discussions, whatever they may he about, may feel themselves part of the company and may feel themselves involved with their own problems and affected by the consequences of their own discussions and decisions. In that way, they may generally get back to being a united company team, which is so important—a team in which all want to do their best not so much for themselves as for the company and all feel proud to belong to that company. If I may end on a slightly lighter note, I am sorry that in the course of his speech the noble Lord, Lord Melchett, did not suggest that there should be a marriage between the two sides of industry so that we can get away from the concept of two sides and have only one side in every company.

4.49 p.m.

Lord WILSON of HIGH WRAY

My Lords, I, too, should like to congratulate the noble Viscount, Lord Trenchard, on his appointment; and I should also like to express particular appreciation of what the noble Lord, Lord Brown, said about the enormous importance of product development and what the noble Viscount, Lord Rochdale, said about this matter of communications. Nearly 2,000 years ago a Roman philosopher said that the shoemaker should not go beyond his last, and I think that this is very much my own opinion. Very briefly, my career has consisted of leaving school at the age of 18, working in the family business for a year, spending three years at university and four years with a general engineering firm in South Africa before returning to my family business, and then spending six years with a nationalised industry, the Royal Navy, which was run on rather strict lines. So, I am afraid, my outlook is somewhat restricted.

I realise that the problems arising with a small firm employing about 200 people are infinitely different from those of (shall we say?) the National Coal Board, the Steel Corporation, British Leyland, Fords or large companies of that sort. I am afraid the only contribution I can make today is to say something about the way that we have tried to run our business in recent years and, I hope, have fulfilled to some extent the aspirations that the noble Lord, Lord Melchett, has put forward in his Motion.

What we have tried to do is to break down the "them and us" difference. We have about 60 people in the office and 140 in the shop. Some years ago there was a very distinct feeling between the shop and the office. What we set out to do was to break this down. We managed to form a share-of-production bonus which is based upon increased productivity. It is slightly different in the shop compared to the office, but it has worked very well. The actual conditions of work—with the exception of times of starting and of stopping work and, admittedly, the actual hours of work—are virtually the same. The holiday systems are the same. The entire firm is paid either by cheque or, to those who want it, by cash. They are always paid monthly except for the few people who wish to have a "sub" half-way through the month and who are given it.

This does away with all the problems of chaps going to the bank and being coshed and so on. There is a happy atmosphere in the firm. We are fortunate in that there is still quite a degree of job satisfaction; it is not really like working on the production line in a motor factory. There is, naturally, a tendency for us to get more automatic machines but the chaps are allowed to sit down watching their machines. When we had our centenary about 20 years ago we suggested throwing the place open, but one of the men was vociferously opposed to this for, as he said, "If our wives come in and see us all sitting down at the machines, we shall get into trouble when we get home and shall have to start whitewashing and papering and so on".

With regard to communications (which was touched on by the noble Viscount, Lord Rochdale), this is immensely important. In connection with our production bonus scheme, some of the younger men got the idea that if some people were working overtime they got more money than the others and that this detracted from the bonus. Our managing director got them together in groups of about 10 or 12 and spoke to each group for about two hours with models and charts showing how the cake was sliced and how this man got a particular bit of the cake and how others got other bits. It was a gruelling task. It went on for three or four weeks until he had seen everybody, and at the end of it he was flaked out—but he got the message across. This is absolutely vital: that somehow you must get the message across and get people to work as a team. My Lords, as I said when I started, it is so much easier in a small, self-contained firm, very often with sons following fathers and sometimes grandfathers, than it would be in a very large nationalised industry. I hope that the human element will be kept very much in mind and that those who are planning the future of industry will do their utmost to break down the "them and us" differential and get everybody in the concern— Which I think should be broken down into the smallest possible units—to feel that he or she is part of a specific unit which is doing a good job.

4.55 p.m.

Lord KALDOR

My Lords, at the risk of sounding repetitious, I too should like to offer my congratulations to the Members of the Front Bench opposite and to wish them success. They have been returned in a General Election with a decisive majority and they have a clear mandate. I should like particularly to congratulate the noble Viscount, Lord Trenchard, on his appointment. I hold his views in high respect even though I mainly disagree with them, as will be evident from my remarks today; but I am convinced of their sincerity. Many things may divide us but I do not think we are in different camps as to our ultimate purpose.

I think that this new Government is a notable one for a reason which has not so far been mentioned either in this debate or in the debate last week. It is that up to now Conservative Governments in this country were predominantly pragmatist, if I can use that term. Their one consistent principle was that they were for the preservation of the country's existing institutions more than for their reform. But whether they alternated with Liberal Governments, as in the 19th century, or with Labour Governments, as in the present century, their policies could best be characterised as one of pause for consolidation and not one of the reversal of major long-term historical trends.

This time it is different. This time we have a Right-Wing Government with a strong ideological commitment which is something new in this country—I say, "in this country" not in others. It is perhaps not entirely new because the Government of Mr. Heath in 1970 also appeared to have such an ideological commitment. Selsdon Man was a prelude, but it did not last long. The present Government, I am convinced, will persist in carrying out a policy based on the major tenets of their philosophy for a much longer period. The Chancellor of the Exchequer confirmed this when he said yesterday that what he is doing this year is only a foretaste of things to come.

For an economist like myself this provides a rare opportunity to test the validity of certain basic theorems or propositions about the working of a capitalist economy. We on this side can watch the unfolding of events as onlookers with no share in the responsibility for those events. But that does not mean that we can be indifferent about it. One can never feel indifferent watching an experiment which could prove to be a very costly one in terms of the nation's economic future. But, whatever uneasiness there may be in watching it, for us the experiment will no doubt be an exciting one to watch. If at the end of it all the propositions in which I believe will have been shown to be fundamentally false, and those of the noble Lords opposite fundamentally right, I can give an assurance now that I shall have the intellectual honesty to admit it.

I am thinking of two major tenets as forming the essence of this new philosophy. The first is what I would like to call, somewhat irreverently, the "apotheosis of inequality". This was best expressed in a remarkable passage, not in the Chancellor's speech, but a leading article in last Sunday's Sunday Telegraph which referred to the turmoil in the oil market. I quote: There is wisdom and even a kind of justice in allowing scarce and inessential commodities to become the preserve of the rich. I leave alone the question of whether oil is properly described as an inessential commodity. In a sense it must be in the eyes of the Government, since, as the Chancellor explained in his Budget speech yesterday, VAT is only levied on inessential commodities in this country, and VAT is certainly levied on oil.

The main proposition which is thus put to the test here is the inefficiency of British industry which caused our poor productivity record. I have made a number of speeches before on this subject to show that this poor record is at least 100 years old and in comparison with other countries the record was particularly bad since the end of the Second World War, as shown by the rapid shrinkage in our markets both at home and abroad. The facts are not in dispute, only the accusation. In the Government's view, it was mainly due to lack of material incentives of business leaders and of the main decision makers, and it can therefore be fundamentally remedied by both higher pay and lower taxes for those who occupy the top responsible positions.

The Chancellor referred to the fact—and I was glad to hear the noble Viscount, Lord Trenchard, repeating his remarks this afternoon—that whereas in 1953 our manufacturing, output was equal to that of France and Germany combined, now our output is only half as large as that of Germany and only two-thirds that of France. What I am afraid both the Chancellor and the noble Viscount failed to add is that the burden of taxation in these two countries, expressed as a proportion of the national income of the GNP, has been higher and is higher now and is rising faster than it has been or is in Britain. Of course, they can say that in those countries it is a different kind of taxation. In Germany and France they do not have 83 per cent. top rate on incomes but something appreciably lower. I am not in favour of high marginal rates, as any one who reads my books will know. But this has nothing to do with the problem as best shown by a comparison, not with France and Germany, but with Sweden and Denmark, two countries whose real income per head is higher than that of either Germany or France, whose productivity growth has consistently exceeded the productivity growth of either Germany or France, and whose top marginal rates of income tax are at least equal to, if not higher than, those in this country. I mention this to show the irrelevance of this whole issue of material incentives to our economic problems.

What the management of industry lacks, in my view, is ability, and not incentives. Our system of selection to jobs where important decisions are made (or, in a more important sense, not made) is archaic. It proceeds in the case of large companies by way of co-option which, as everyone knows, is the best method for ensuring that the lack of technical know-how, the lack of courage or leadership qualities, and the amateurish outlook, are perpetuated. It is well known that a group of second-raters always prefers second-raters to first -raters who would highlight their own inferiority.

I know that there are many people who believe that there is nothing wrong with British management. A national newspaper, which I hope is only temporarily deceased, has printed a number of leading articles shortly before it ceased publication pointing out that British management is as good as any in the world. The fault causing low performance, low productivity, according to that view, lies entirely with the British workers, either individually or collectively—either in their laziness and poor work performance, or because of the influences exerted by shop stewards, trade unionists and other disruptive elements. To me this is the same as saying that if in war you lose a succession of battles in which you have incurred heavy losses, this was not the fault of the generals; it was the result of the poor quality of the soldiers who allowed themselves to be killed on the battlefield before they killed the enemy. Perhaps a more apt variant of this analogy is to say, "We admit that at Passchendaele or in the Battle of the Somme in the First War the generals were not at their best—as our historians now say—but please do not believe that this is due to a lack of their innate ability, or to the system of selection. The generals were slackening and not giving their best because they did not receive sufficient material rewards." This is what the Conservative philosophy amounts to. It amounts to saying that if only we had the same sufficient material rewards, if only we had high enough salaries at the top, and low taxes, the technological revolution of the post-war period which brought such enormous successes in the engineering industries of Germany, France and Japan, and which accounts for the tremendous technological lead in the exports of Japan, in a succession of fields—first in optics and then in the field of cameras, then in the field of electronics, and in a whole succession of science—based products where we completely lost out to others; our management never tried to keep up machine tools of advanced design, but became at an early stage a selling agent of Swiss, German or Swedish manufacturers—all this would not have happened; it happened because of our system of egalitarian taxation.

I would say this is a very complacent view. Outside Britain there is a widespread view among businessmen and even among foreign economists, as was shown by the quotation I made in my last speech from the staff papers of the international Monetary Fund, that a major cause of our economic failure was the inability to keep up with the technical advance of industry and with the growth of the new science—based industries of other countries—and here I agree with the emphasis laid by the noble Lord, Lord Brown, on the lavishness of effort, attention and ingenuity devoted to product development in those other countries—and that this was due to the poor quality, the indifference and the amateurishness of leading figures in British industry. And, one should add, it is also to some extent due to their motivation, which—for reasons which I shall explain later—causes their attention to he increasingly concentrated on short-term gains to the neglect of long-run considerations.

The only way we could reverse our rapidly declining fortunes is by introducing a wholly new system of selection to the leading posts of both private and public enterprise. To bring about such a radical change is no easy matter but we cannot even begin to think about it until the belief in the magic powers of financial incentives has finally evaporated—as I am sure it will.

However, it also needs lots of other things. It needs a new system of company law that would make business less open to take-over bids and, at the same time, would make managements less afraid of the Stock Exchange and the day-to-day movement of share prices. It would dethrone the accountant as the important person in industry and enthrone the scientist and the engineer, as is the case in other countries. It requires an entirely different form of capitalism. I am not now talking about forms of Socialism but about varying forms or systems of capitalism.

I am afraid that I must hurry on, but perhaps I may just add a personal view— I would emphasise that it is a personal view—that none of this would he enough to prevent our continued industrial decline so long as we remain members of the Common Market. I think that, in the situation in which we now find ourselves, the forces are loaded against us to a high degree inside the Common Market, as shown by the enormous increase in the penetration of German goods into Britain as compared with British exports to Germany and the other countries of the Common Market. However many reforms we make and however fundamental those reforms are, they will he much too slow in their operation to offset our accelerating decline as a result of growing uncompetitiveness.

Finally, I should like to say something about the second major tenet of this Government, which is that inflation can be avoided simply by regulating the money supply and that this makes intervention in any other form unnecessary. The Government believe that the only kind of rationing which is called for is rationing of the money supply—everything else will fall into place. Let prices rip and let the unions try to do their worst: if the Government sit tight on the money supply and contain public expenditure by strict cash limits, come what may, there will he no inflation.

Inflation can be defined in many ways. You can define it by increases in the money supply itself; you can define it by "public sector deficit", and so on; but inflation in the ordinary sense is a continued rise in prices. In this latter sense I am sure that the monetarist view is a basic fallacy, and not even the monetarists would dispute that the continued rise in prices is "inflation". I am afraid that the financial policy of the new Government, as shown as a foretaste by the new Budget, will ensure that there will be plenty of it. Just as it is utopian to expect, as the Sunday Telegraph thinks, that we can go so far back in history as to make the use of motorcars an exclusive preserve of the rich, so I think it is utopian to expect that trade unions will take the increase in the cost of living lying down or that it is within the power of the Bank of England and the Treasury to prevent wages from going up merely by operating on the money supply.

It is equally utopian to expect that, in the face of substantial increases in labour costs, Government expenditure can be held down merely through the strict application of cash limits. Any such policy would soon come up against the breakdown of essential services, which would make the continuance of orderly government impossible. I was in the Treasury when cash limits were invented—we had plenty of discussion about them and their operation has proved to be a very useful tool. But it is a useful tool only if it is applied moderately—that is, maintaining a gentle pressure. If you try to use such an instrument in ways which require extreme, not moderate, pressure, it will break down.

I would repeat what has already been said by various speakers: that it is a naïvety to think that big industrial firms can be prevented from paying higher wages by depriving them of cash in some way. Who could prevent a firm like Ford paying 30 per cent. more to its workers if they want to? In an economy where money consists of an immense credit pyramid and not a commodity like gold, you cannot control the money supply because beyond a certain point any such control leads to the collapse of the credit pyramid—which is pretty well the same thing as the collapse of the capitalist system.

The only weapon at the disposal of the monetary authorities—and this is not just my point; it was emphasised in a recent speech by the Governor of the Bank of England—is to keep on raising the rates of interest in the hope that there is some rate which is high enough—perhaps 50 or 60 per cent.—at which sufficient economic activity becomes unprofitable or a sufficient number of business firms go into bankruptcy, to create a level of unemployment at which the resistance of trade unions is broken, partly because the nation will be in such a state of poverty that it will no longer be possible to afford social services such as unemployment pay, which undoubtedly stiffen trade union resistance at the present time. But nobody knows when, if ever, that point will be reached, or how much loss of production and employment and how much misery will be required. Will there be 3 million or 5 million unemployed? And nobody knows whether the political disorders that will accompany the rigid application of this policy will force its premature abandonment. Events in Glasgow in 1971—or it may have been 1972, I cannot quite remember—forced Mr. Heath to make a U-turn over the closure of the Clyde shipyards. Those events in Glasgow suggest that a retreat may be beaten in all this monetarism before the trial has proceeded long enough for everyone to become convinced of the full extent of its failure. The introduction of monetarism is, I regret to say, not solely the responsibility of this Government. I am afraid that the previous Labour Government, of which I have been a supporter, were also infected by it to an increasing degree ever since we uncapped the pound in 1977, which started a chain of fatal consequences which I will not enter into now.

But the forecast which accompanied yesterday's Budget in the little Red Book was of a 2½ per cent. fall in manufacturing output in 1980, a 4 per cent. reduction in fixed capital formation in the public sector, and no increase in capital investment in the private sector—whereas in the last two years the same document shows that there was an 8 per cent. increase in 1978 and a 6½ per cent. increase in 1977 of fixed investment in manufacturing industry. The 16 per cent. inflation in the third quarter has already been referred to. These figures show that the Government do not expect any early results from their strategy, and I think our best hope is that things will rapidly become so bad on the industrial front as to make inevitable a radical reversal of economic policies—in the international as well as in the domestic aspects—and that that will happen before we become too impoverished.

5.21 p.m.

Lord SOPER

My Lords, I would add my congratulations to Members of the Front Bench opposite and thank the noble Lord, Lord Melchett, for introducing this topic. It is noticeable that throughout the debate hitherto one aspect of priorities, the economic, has had exclusive comment vested in it; but the word "social", which finds its place on the Order Paper, I think permits another aspect to be considered, one of far wider concern than merely the economic considerations—if "merely" is the right word—to which the House has listened with such profit.

It is true that we have been concerned hitherto with the tactics, the priorities, in the realm of what should be done and the appropriate measures that should be taken. But this much overworked word "priority" surely also refers to the general strategy and background, to the philosophy as well as the practice of those measures which are themselves suitable for a situation such as that in which we find ourselves. In that sense, I would presume to talk in that larger field, while not attempting in any way to contradict some of the things which I understood in the economic part of the debate, and certainly with no intention of posing myself as an authority on these matters. Inasmuch as the Order Paper asks us to take note of the ultimate principles which should govern and enable economic and social activity, I believe it is only proper that somewhere in this debate some of these wider matters should be introduced, and I shall presume to try to introduce them.

It so happens that when such debates as this on which I feel inclined to speak, happen on a Wednesday, earlier in the day I have retired to a place called Tower Hill. There I have talked in the open air and have, so to speak, had a free run of what I intend to say later on and an opportunity to see how it goes in that environment. I would begin what I have to say tonight by telling the House one of the things which I am sure about, and which certainly was made known to me in no uncertain fashion in the liturgy which there is very generously shared with the speaker. I am convinced that many who listen to the debate in the House, or listen to the proclamations about the Budget, feel that there is a basic sense of inequality and unfairness that lies at the root of it. The theme to which I would address myself is that if we are thinking of incentives, it is the Socialist proposition, the incentive of belonging to a community, which is ultimately better than the incentive of self-aggrandisement, however enlightened self-interest may be baptised, and in that field the first consideration to which I would invite your Lordships to attend is the one of fairness or equality.

In the transfer of major emphasis from direct taxation to indirect taxation, I do not find an encouragement to fairness. It is perfectly true that you can give greater liberty to people if they have the wherewithal to dispose of that liberty in purchasing what they want. But, in fact, there is an underlying sense that indirect taxation visits itself far more unfairly on a community in which there are such wide varieties of economic capacity, and it is that which has already been expressed to me in no uncertain fashion. It is surely of the utmost importance, if we are to commend any fiscal policy and look forward with any anticipation to an improvement in our economic affairs, to create a general sense that if there are benefits to be seen they will be shared equally, and if there are problems to be faced and sacrifices to be made they also will be fairly distributed. I should have thought that that was one of the primary indications of a priority; one of the most impressive and important of all priorities.

I do not find it in the general distribution of the economic burden, and I certainly do not find it in the propositions which will inevitably invalidate some of the claims which can justly be made in local affairs by those who are underprivileged and those who are in various kinds of need. I do not believe that they will receive anything like the kind of generous consideration, the proper consideration, to which I believe they are entitled, with such large and menacing cuts in the appropriations and in the various amounts of money that will be available to local authorities—such diminishing amounts of money as were indicated yesterday.

Secondly, I heartily agree with what has just been said about the rediscovery, at long last, of what I think is a kind of pseudo-philosophy in the Conservative Party's proclamation in regard to its fiscal policy and the general conditions of the Budget. Is it not obvious that there has been a wide swing away from the sense of community activity to a large and growing emphasis upon the so-called virtues of private enterprise? Is not this ultimately a divisive programme, inasmuch as it establishes, maintains and creates a condition which can only be described as a class condition, which does nothing to ameliorate matters, particularly when the immediate effects of this policy as outlined by the Government will certainly be an increase in unemployment; and nothing divides the community like that which separates a man who has a job to do and something to give from a man who has nothing to do and cannot find anything to give. That is a class situation which I utterly deplore, and it is inevitable that the present governmental programme will ensure that there is a larger and growing community of people who are not wanted and have nothing to contribute.

Furthermore there is a very salutary phrase in a book to which I often refer, that men love darkness because their deeds are evil. This is, of course, an extravagance in one sense, because many of the things that are done in darkness are perfectly innocuous. Moonlight is a perfectly innocuous experience, unless you are moonlighting. But if you think of the capacity which is given to do things behind closed doors, particularly in a society which is committed to the concept not so much of what you earn but of what you can spend, is it not more than likely that it would be far better if more and more of our affairs were conducted in the open, than that they should be concealed until somebody blows the cover?

Without being cynical, there is a widespread sense among people with whom I am in contact that the increase in the private area of affairs is one which is fraught with much greater moral danger, because, however godly we may claim to be and want to be, it is much more likely that we shall be seduced into behaviour which is anti-social if we can get away with it in quietness and if nobody will know about it. I believe that one of the essential characteristics of the Socialism which I profess is that the more you do publicly, and the more there is in daylight, the more likely it is that ordinary people, those sinners, will be encouraged to be and will be more or less decent.

However, I intrude another concept into this debate. It is not irrelevant to remind ourselves that any economic programme to which we give ourselves and which is carried forward is carried forward against the backcloth of a world armed as never before, and also to remind ourselves that there is an indisputable relationship between any programmes for an increase in armaments and the economic structure which is needed to support them. In one sense, if it is true—as I believe it is—that about 60 per cent. of all the jobs in California are in the arms trade, then a general programme of disarmament in California would mean economic chaos, unless it were to be accompanied by a radical change in the economic system. Similarly, I notice that the only increase in public expenditure is to be in the arms trade or in the arms business; namely, in defence. It is obvious that if we cannot recruit men for the Armed Forces except by paying them more money, then that money has to be found somewhere.

What strikes me as being, even more ominous than the immediate burden of increased expenditure in the field of arms is the attitude of men like Arthur Koestler. I know that a great many people seem to think that he is by no means a polymath and that he ought not to he believed, but I have read his latest book, Janus, and what part of it I understood frightened me to death. He is of the opinion, out of his own convictions—and his convictions are based on a great deal of evidence—that we are heading for something like the disappearance of the human species. I know that that sounds almost stupid, but let us give it a moment's reflection. His idea is that there is a fatal flaw in some species which has caused them to disappear. The brontosaurus has gone; the sabre-toothed tiger has gone; and so has the mammoth. They gave gone because they had the inbuilt flaw that they were not able to adjust to circumstances. He says that our violence is like that and that it is even more lethal, because whereas a swarm of locusts will eat almost anything except another swarm of locusts, human beings are busy killing one another. I cannot participate in any debate on what is going to be the economic policy of this country unless I can see it within the general framework of this kind of ominous prospect. It is within that framework that once again I believe in the old concept that proliferated in the days of the French Revolution. I have talked about liberty and equality, and I believe that fraternity is the other member of that triumvirate.

What do we do? If we can create a sense of community, if we can obliterate, or at least reduce, the sense that we are living in an unfair society, with the various projects of Government visiting themselves very unfairly on the members of that society—if. indeed, we stand under the shadow of that ultimate conflict— then I regard the whole issue as coming down fundamentally to the simple question as to whether or not we are going to put our faith in the incentives that were promulgated in yesterday's Budget or whether we are going to set our sails towards that kind of community in which I believe there will be a much higher sense of dedication than can ever be produced in even a very imperfect society by the accredited, or so-called accredited, incentives of personal gain.

I am a Socialist. I sometimes feel a bit lonely in proclaiming a creed which brought me into the Labour Party and to which I hope to be faithful. But I make no bones about it. I see no point in conducting an inquiry or speaking in a debate like this about an economic strategy and about its priorities unless somewhere there is introduced the comment which I venture to make, however humbly: that we are living in a society which needs to be transformed, not reformed. We live in a society which, capitalistically, is on its last legs throughout the world. In that society, I believe that our only hope is to work as diligently as we can for the most proximate time when we shall create a community, have done with the nation State and create a world with no arms in it at all.

5.34 p.m.

Lord TAYLOR of GRYFE

My Lords, I extend my congratulations to my colleagues who have spoken in this debate and to the Front Bench opposite in the person of the noble Viscount, Lord Trenchard. We have a strange way of encouraging and congratulating people in this House. Seldom have I heard such a barrage of advice, criticism and questions as have been delivered from these Benches this afternoon to a Minister making his first appearance in an important economic debate.

I am sure that noble Lords will sympathise with me in following the noble Lord, Lord Soper. He has lifted the debate above the mundane issue of fiscal policies and raised the whole question of what are the aims of a good society. It is against these objectives that any economic policy must be judged. I believe that a good society is not simply one in which a lot of people are wealthy. I believe that a good society is measured by the quality of human relationships within that society and whether people feel a more fraternal relationship with their fellow men. If we are diverted from that objective and encourage greed and gain as a main motivation in human behaviour, then we destroy the prospect of a good society. To that extent I subscribe completely to the objectives which the noble Lord has expressed so eloquently this afternoon.

I support the Motion that is before the House because it raises two questions that are important: priorities and support from both sides of industry. We have all been conscious since the General Election of a new excitement in politics—of new trends and new directions. I think that this can be a very heady experience. I read in Hansard the debates on economic policy immediately following the General Election, in which we had Mr. Benn and Mr. Joseph debating capitalism versus Socialism, or private enterprise versus the State. But if we are not careful, we shall fail to recognise that we are living in a mixed economy and that a mixed economy is the only basis for a democratic government. You cannot achieve democratic government with a completely nationalised State. Nor can you look back to the old days of free enterprise and untramelled capitalism and hope that that will give the basis for a democratic society. Once, therefore, we get over the excitement of the election victory we should concentrate on what is possible.

The first thing that we have to do—the noble Viscount, Lord Rochdale, mentioned it this afternoon—is to take the nationalisation debate out of the ideological arena. I have never believed that the test of Socialism is the number of industries that we nationalise. The test of Socialism is the test of human relationships which Lord Soper indicated. I believe that we can be quite pragmatic about this. I earn my living in private industry, although I happen to be involved with the nationalised sector. There are large areas of industry which inevitably and naturally belong to the nationalised sector. It would be madness to interfere with these areas, which can be justified in terms of efficiency as well as in social terms. Do not let us, therefore, be too doctrinaire in approaching the economic strategy which the Government have in mind. Let us recognise, as the Economist did last week, what a valuable asset BNOC is in the present situation of oil supplies and the power that it gives to Government to influence oil direction and allocations in this vital international industry.

Let us recognise that the National Enterprise Board is not simply the creation of some doctrinaire Socialist but is an important instrument of economic policy. I have spent a good deal of time talking with and to the National Enterprise Board and, although our nationalised industries and parts of the nationalised sector can be criticised and corrected here and there, I am impressed by the good sense and good management of the National Enterprise Board. The man who is directing it is an experienced merchant banker who is using public funds to handle a portfolio of investments with great skill.

I remember when Ferranti was going to the wall and living in Scotland I have some interest in their substantial factories in Edinburgh. I talked to private institutions about taking over Ferranti. There were no takers at that time. It took the National Enterprise Board to enter the arena and nurse that important industry in the electronics field back to health. It will be no fun for the National Enterprise Board and we shall not retain good staff if we start taking from the NEB portfolio the things which are successful and leaving it to handle a collection of "lame ducks". So I appeal to noble Lords opposite and particularly to the noble Viscount, Lord Trenchard, who has experience in industry and in the City, to deal with these matters in a non-doctrinaire way. I welcomed his assurance this afternoon that they will build on the experience of NEDO and the NEDO working parties. There is a fund of information and experience there which can help us in solving some of the weaknesses in British industry which the sector working parties have examined.

I want to look for a moment at the election results again. They were remarkable election results. In Britain one used to be able to forecast election results according to the social categories spread throughout the nation—we could say, "That is a safe Labour seat, that is a Tory seat", and so on. The great divide of the last election was a regional divide. Scotland voted solidly Labour, as did parts of Wales. That was a new and important event in British politics, to which we must pay attention. We were in fact a divided nation and I noted in the Chancellor's speech yesterday that the whole question of regional policies is going to be reviewed and cuts will be effected. I agree that regional policies should be reviewed. I do not believe in total blanket applications of Government subsidies. There are some industries working in the North of Scotland associated with North Sea oil, who get the full regional benefits and subsidies, who have to be there anyway. They represent large multinational companies which should not necessarily be subsidised in that way. There are areas of regional policy which require examination because of this blanket application. At the same time we must realise that there are regional problems which will not be solved by a free market economy.

In Scotland in the last few weeks 900 people have lost their jobs in the British Leyland subsidiary at Prescold; 1,000 people have lost their jobs at the Goodyear tyre factory on Clydebank; 600 people have lost their jobs at Lawsons of Dyce in Aberdeenshire; 900 people are threatened with loss of jobs at the pulp mill at Fort William; already more than 1,000 jobs have been lost at Singers in Clydebank and we have the announcement today that the plan to transfer 6,000 civil servants out of London to Glasgow is now likely to be abandoned.

We are all very happy—at least I am—at the demise of the Scottish National Party and that the discontent which generated the support for the SNP has now diminished. We are all delighted at that because we saw great dangers in the growth of nationalism, but if the Government ignore the importance of these regional problems they will have a resurgence of that kind of nationalism in Scotland and it could take very dangerous turns. So I suggest to the Government that they should not be too doctrinaire in dealing with economic problems. We have the danger of doctrinairism on the Left, but the Government have it on the Right. I ask them to give support to the serious regional policies to solve the problems which are emerging, otherwise we shall have a divided nation.

Viscount TRENCHARD

My Lords, may I just say that there is no intention of not having a regional policy. I will return to that subject when I wind up the debate.

5.46 p.m.

Lord PLANT

My Lords, this debate is about economic and social policies to influence our industrial revival. We are indebted to my noble friend Lord Melchett for initiating this debate the day after the Government, in another place, unveiled their economic and strategy policies for our survival. They cannot easily be separated. I want to speak for the man on the shop floor because he cannot separate what happened yesterday from what is going to happen tomorrow in relation to his job. Some may agree with the switch from direct to indirect taxation. I do not. But the workers will soon question the fact that the manager of a large company, including the chairmen of nationalised industries, will have a weekly increase of £60. My noble friend Lord Soper has dealt with this issue in a very effective and emotional way and I support him. The man on the shop floor will question the ease with which companies in future can invest monies abroad, which might be at the expense of extra jobs at home. The man at the desk will question the deliberate strengthening of the pound sterling, which will create greater difficulties in exporting and an adverse balance of payments. He will be concerned at the 14 per cent. bank rate: will his mortgage go up? Will this make it more difficult to change jobs and to move house at a time of the decline of some industries and the growth of others involved in new technologies?

I agree with many parts of the speech made by the noble Viscount, Lord Trenchard. Obviously we want to see the gross domestic product go up quickly and unemployment reduced but the situation is bedevilled, not only by extraneous issues but by the Government policies as well. We all know that the prospects for the United Kingdom and other countries in 1979–80 are overshadowed by the development of a complex crisis of oil supplies and price increases. It is wrong to think that because the availability of increased North Sea oil supplies shields the United Kingdom's balance of payments from much of the damage of high oil prices, the United Kindom is shielded from the wider implications of the crisis.

The danger now is the cost-inflationary push injected into our economies. We have moved from oil surplus and discounts to an oil deficit and surcharges. Prices are raised each quarter right down the chain of supply. Spot purchases are uncontrolled. This means to the worker an escalating petrol price, without the help of the Government also putting up the price of petrol by 10p per gallon. This hits the lowest paid worker, especially those who travel to work in the rural areas. It is not without significance that yesterday in Sussex there was no petrol at many garages, but it reappeared after 6 p.m. The insulation of the United Kingdom balance of payments from much of the impact and effect of the oil crisis has worked to strengthen the pound sterling exchange rate against other currencies, making us less competitive abroad. The irony is that the weak dollar may curtail American growth, which has been increasing to 4 per cent., and intensify trade competition, because the weaker dollar makes their manufactures very strongly competitive.

Many public sector workers are awaiting the Clegg Report on comparability with some interest. This is bound to have far-reaching social policy effects, since we are told there will be compensatory setbacks in public service manning and therefore conditions of work. The worker will be exhorted to produce more. The noble Viscount, Lord Trenchard, gave us statistics, that we are at the foot of the European productivity league. Why is this? The majority of European workers are backed by more up-to-date machinery and more investment than in the United Kingdom. Many of our workers are using out of date equipment as compared with the leaders of the productivity league. It is not the workers' fault, and it is nothing to do with lack of effort. In the past the Price Commission operated some constraint on any exaggerated passing through of cost inflation. Now market forces take their place, with an upward push from the Government. Can we wonder that the worker may be disposed to take a depressed view of Britain's economic prospects? The rate of economic growth would have been unlikely to avoid rising unemployment even without the advent of the new Government. We may have to face economic growth being no higher than 1 per cent. by the end of the year and unemployment rising, not a promising start for the new decade. It will be less so if the NEB is to be reduced in influence.

My noble friend Lord Taylor has mentioned the question of dispersal of civil servants from London. If what has been announced in the Press is true, that dispersal is going to be abandoned in order to save money, it will have its serious effects on the depressed areas to which those civil servants were being dispersed. This debate must point to some recovery, some new leadership, some extra co-operation. We must urge meaningful consultation with the TUC within a tripartite scheme. Consultation must mean something, not simply the conveying of decisions. It is good that at the last meeting of the National Economic Development Council the Government indicated to the TUC and the CBI that sector working parties or industrial strategy committees would continue on a tripartite basis. This is most satisfactory. That seems essential, not only for the prospects of growth but for our continuing survival.

This must go right down the line to the shop and office floor. Boardroom decisions should not be finalised until there has been adequate discussion with the unions concerned. Joint consultative committees must be meaningful. Leadership in this field must be given from the top. There is a great loss of productivity by movement and loss of skilled labour; in fact a greater loss because of this than by strike action. The causes of this should be urgently investigated. Probably the narrowing of differentials is part of the problem. Management in this country is patchy. Of course, management always think it is the workers' fault if things go wrong, and I am not suggesting that workers do not say it is management's fault. More managers ought to gravitate to management from the shop floor. I have been impressed with the management of the police forces in this country. I believe it is due to the fact that every chief constable in this country has pounded the pavements as a police constable. There should be more mixing and less segregation at our workplaces. Some managers do not know their work people, very rarely meet them. There is a gulf between them and that gulf has to be bridged. Workers must have a greater say in their own future, greater participation in the industries in which they work. There are managerial skills and leadership on the shop floor which must be discovered and nurtured. Our future depends on tripartite leadership. It also needs a fairer distribution of the wealth created by industry.

5.57 p.m.

Lord BALOGH

My Lords, the Motion which we have the privilege of discussing reminds me of a story about President Coolidge. When coming back to his sick wife he was asked by her what the clergyman had talked about. He said, "Sin". "And what did he say about it?", she asked. He said, "He was against it". I am very glad that my premonition that my noble friend Lord Melchett is against sin and for virtue has been fully confirmed by his speech. This perhaps cannot he said about the Budget and certain other statements which have been made on the Government side. I shall discuss only things which have already precipitated themselves in measures and decisions. I am not going to speculate. "Why", said Aneurin Bevan, "look into the crystal ball when you can read the book?" It is a red book, although it is blue in content.

The Budget and certain statements are dealing with two problems, one long term and one short term. The long-term problem is the de-industrialisation of the country which is proceeding apace and which I fear, as my noble friend Lord Kaldor has pointed out, is confirmed by the statistics published by the Government on the issue of the Budget. The short-term problem is that of inflation. They are concatenate in many ways, but the great difficulty is that curing the one may aggravate the other unless care and sophisticated methods of analysis are used.

The Government, and the noble Viscount, Lord Trenchard, himself, have placed inordinate faith in the restoration of incentives. Obsolescence, lack of non-priced competitiveness, quality control, regular dates of delivery, et cetera—all these seem to be paling away in the light of this terrific effort to increase the incomes of the upper ruling managerial class. Top salaries especially came in for this sort of douceur because the Board which was dealing with them made its report assuming, of course, the old tax system. The old tax system precipitated itself in the salaries of the private sector and that was then brought back into the public sector. Now we see, on top of the increase in salaries on the basis of the old taxation, a new tax system which is much more favourable to high salaries. A double gain.

Moreover, large loopholes were left for tax avoidance—not tax evasion, but tax avoidance. The general tax reductions combined with the increase in salaries are colossal. Have the Government totally forgotten the case of the Ford factory, where extreme demands were put forward on the basis—or at least with the help of the argument—that the chairman received a £40,000 increase in his salary? It is infamous to assert that all will have the same purchasing power after the Budget has been implemented. That is not true. As regards the poorest, they will have only the standard, which by the poverty trap is increased, and the rich will obviously have a double benefit.

The Chancellor was evidently taken in by the Prime Minister's primitive high-school economics, reaching back to Adam Smith's busy pinmakers and the oil companies. I shall read a quotation of the chief guru, Professor Friedman, on this question. He wrote in 1974: The oil crisis is now past its peak. The initial quadrupling of the price of crude oil after the Arabs cut output was a temporary response that has been working its own cure. Higher prices induced consumers to economise and other producers to step up output. It takes time to adjust so these reactions will snowball. In order to keep prices up the Arabs would have to curtail their output to zero. They would not for long keep the world price of crude at 10 dollars a barrel". It is now 20 dollars and in the open market 30 dollars. Those are the sort of economics to which we are treated.

If we take into account, in addition, the rising prices caused by VAT, we are sure to witness an increase in new demands. There is—and my noble friend Lord Kaldor dealt with this matter—a primitive belief in the availability of an unlimited number of entrepreneurs of the first class. However, we had very much lower taxes before the war, in 1961 and again in 1971. Those tigers of entrepreneurs did not materialise out of the cage of taxation. Nothing emerged in the way of restructuring British industry. I fear that the whole set-up will lead to a repetition of what occurred in 1972 and 1974. Indeed, the unions whose excesses caused the downfall of the Labour Government will hardly meekly accept savage cuts in their purchasing power through increased prices brought about by this Government.

I now turn to investment. The de-industrialisation which has taken place is due to the lack of up-to-date machinery. We have seen from the Red Book that investment will not increase; it will decrease next year. How does that help restructuring industry? There is obsolescent, but surplus, plant available and the British entrepreneurs have, up until now, not indulged in what in America is called" defensive investment "—investment needed to stand up against a more up-to-date competitor. Although investment is an essential ingredient for our emergence from our present situation there were cuts in investment stimuli. I agree with the noble Lord, Lord Taylor of Gryfe, that some supervision of the handling of regional douceurs is in order, but that does not mean that they have to be abolished or cut savagely again in a way which is not discriminating, but right across the board.

Finally, the City, and more perniciously the Bank of England, are once more intoning their chants advocating the abolition or relaxation of exchange control, together with low targets for the increase in money supply to be enforced by stiff interest rates. That is something which the Chancellor has now partially adopted. No combination of policies could be more harmful to the country. Stiff money not only has an impact on enterprise; it also has a very direct and painful effect on the service of our external debt. By the way, the choice of increasing VAT means that the EEC will receive tens of millions of pounds more as a result of the automatic financing, and that has been done at a time when the Prime Minister has given the most explicit assurances that she wants to decrease, rather than increase, the burden of the EEC.

Finally, and most important, foreign direct investment by British firms is detrimental to our prosperity. A firm's expansion is limited by managerial capacity as well as by other factors which set ceilings to its growth. The tendency of some of our largest firms to expand their foreign investment faster than their domestic one works—unless they are necessitated by foreign protective measures to safeguard British exports—to the detriment of the national income. Moreover, of course, foreign investment pays wages and taxes abroad and benefits the country by only a fraction of the added value, whereas with home investment reform and improvement the whole of the added value accrues at home. The whole philosophy in these respects aggravates the situation and carries the danger of violent strife. It aggravates rather than overcomes, the insufficiency of productive investment. It will not bring about the sort of restructuring of industry that we need to sustain civilised life.

From this vantage point the journalese jargon, which has such effect on the Bank of England, has been extremely dangerous. We have seen an appreciation of the currency partly as a result of the streaming in of Arab money and partly because of the effect on our balance of trade—until very recently—of the oil from the North Sea. But, of course, that has meant that non-oil sector competitive power has been that much weakened as a result of the high pound, and that belief in the virility symbol has prevented rational action.

Grievous as that threat is to our industry and financial revival, there is a further deadly possibility: the swelling of our reserves—about £22 billions—has not been "earned"; it belongs to foreigners and is mostly kept in liquid balances or, at best, in gilt-edged securities. To borrow short and invest long is the surest recipe for bankruptcy. In our case it is aggravated by the virtual guarantee of these balances by the international banking fraternity, through relending them to Third world countries. It is a situation frighteningly reminiscent of the "new era" of the 1920s, which brought forth the Great Crash and Hitler.

I have dwelt on the impact of the Budget proposals on prices and social strife. I now wish to say a few words on the chances of success of the tactics relating to monetary affairs. The outlook here could not be worse. The only sound monetary measure which the Chancellor contem- plates is the sale of BP shares. That, from a long-term point of view, is of course foolish, but in the short run at least it does not influence the money supply and does not effectively limit purchasing power.

However, an increasing number of central banks, including ours, base their policies mainly, if not exclusively, on keeping down the increase in money supply in order to check inflation. This attitude discloses a regrettable ignorance of the monetary structure. There is no strict connection between, on the one hand, the increase in foreign exchange reserves and the so-called money supply and, on the other, inflation. The vast influx of capital necessarily results in a fall in the velocity of circulation of the effectiveness with which money is used. Whether the Arabs or Western speculators keep their balances in building society deposits or in short-term gilt-edged securities, which are not counted in the money supply, or in bank balances, which are counted, does surely not matter: all are equally inert. Efforts made to shrink the total volume of money back to its pre-influx levels, as the central banks now seem to demand, raises the rate of interest and exerts pressure on investment which is just the opposite of what we should aim for.

An increase in money supply originating in an export surplus or increase in internal income is one thing. That caused by an increase in petro-dollar holdings—inert assets rather than money—is quite another. It is extraordinary that the subtle analyses of these problems, mainly by British economists like Denis Robertson and Keynes in the 1920s, seem to have been completely forgotten. They differentiated between the role of money as a store of value and means of exchange as between income deposits, business deposits and saving deposits, the latter further differentiated into convenience, speculative and truly inert savings deposits.

What we are now witnessing are displacements of stocks of money from one country to another, which are slopping around causing immense damage to confidence and to the investment process. Moreover, there is a further difficulty that the influx of money will push the exchange rate up, and so long as the banks regard the increase in money supply as the main basis for deciding policy, they cannot permit an increase in the country's central foreign exchange reserves needed to face the 1976-type of crisis. It forces them to allow a rise in the rate of exchange beyond the level of our relative competitive powers.

In the last three years the Bank has unfortunately combined the worst of both, letting the exchange rate rise and relaxing controls over the export of capital. In addition, it has put itself at the mercy of the treasurers of large pension funds and life insurance companies who, by the threat of withholding from the long-term gilt-edged market the bank deposits which they regularly receive, can blackmail the Bank into increasing long-term rates of interest to the deep detriment of our recovery.

The increase in the cost of oil supplies seems at worst 30 billion dollars, possibly less than 2 per cent. of the OECD gross national product. Intelligent management could deal with a problem of this order of magnitude. I do not believe that we shall be faced with an absolute shortage of oil. The desert Arab countries need to rely too much on good relations with the United States, both for internal and foreign policy reasons. At the same time it would certainly lessen discomfort if the Department of Energy were to work out with the oil companies a sensible way of rationing garages. That has not happened. Either yesterday or the day before the Minister totally refused to work out a rationing scheme, which would be introduced when the need suddenly arose, and to issue instructions, which should be issued now even if not implemented at once but left to the time when we get into difficulties. The oil supply situation is not yet dangerously tight. The problem is the uncertainty. It is this uncertainty which ought to be eliminated by good preparation in advance.

Moreover, it is very regrettable that central bankers and Western Governments are trying to reduce the deficit in their balance of payments below the Arab export surpluses. That is a hopeless undertaking because the Arabs cannot accept at present imports to the same extent as we need their oil. Therefore, any attempt to eliminate the deficit will only throw the deficit from one country to another. In the meantime, national income is falling and unemployment is increasing. It is this avoidable multiplier effect of the oil problem which might be. deadly. This has not been recognised at all by the Government spokesmen so far and no reference has been made to what sort of measures they are contemplating. The problem could be dealt with quite safely by increasing the safety net of the IMF and the BIS. But much closer attention has to be paid to unemployment At the moment the awful thing is that those international agencies which could help in this respect are also imbued by monetarist doctrines and as a result are unable or unwilling to take action. Therefore, I fear that both internally and externally we are in for a rather rough time and I hope that the Government will reconsider certain of the policies which have been criticised here today.

6.19 p.m.

Lord SEFTON of GARSTON

My Lords, first, I should like greatly to thank my noble friend Lord Melchett for introducing this debate. I should like to say how sorry I am that in some respects it follows the Budget by 24 hours. At the same time I should like to follow him in congratulating the noble Viscount, Lord Trenchard, on his promotion and to say that I am sure every Member of your Lordships' House is as glad as I was to hear the noble Viscount say that a regional policy would remain.

Every post-war Government since 1946 has had a regional policy. The fact that in 1979 we can greet with pleasure a change of Government and a restatement that a regional policy will remain in being indicates to me that perhaps we have not succeeded very well in the applications of those regional policies. And that is the truth. The real truth is that, after successive Governments with different policies, regional policy in this country remains intractable and the situation in, for instance, Merseyside as compared with the rest of the United Kingdom is considerably worse.

For this debate to follow the Budget means that it will be overshadowed by things that have taken place in another place. It will mean that naturally everybody who speaks will be questioning the viability of that Budget if it is to determine our long-term priorities and resolve our fundamental problems. I do not believe for one moment that a 23 per cent. cut at the top rate of taxation will immediately spark off the desire to reinvest in those places in this country where investment is needed so badly. I do not believe, as one Conservative journal suggested today, that we are about to see an inflow of tax exiles. When I think of some tax exiles I am glad that that is not going to take place. For the life of me I do not understand who would want Rod Stewart back in the country.

So we could pose the question whether or not the Budget is a viable proposition looked at from the point of view of our long-term problems, and I do not believe that it is. It is insulting to suggest that a cut in taxation will immediately make all our managers manage better, or that by turning off the tap of pounds and pence we can automatically turn on and off the entrepreneurial spirit which is yearned for so much on the Opposition Benches.

The MINISTER of STATE, DEPARTMENT of EMPLOYMENT (The Earl of GOWRIE)

My Lords, the Government Benches, not the Opposition Benches.

Lord SEFTON of GARSTON

My Lords, the Government Benches. I have not yet got used to the transposition, not that it is important because in fact I do not think that for very long the Government Benches will be showing much government, because I believe that this Budget just earmarks the road to a complete lack of control of our economy. I believe that a reliance upon the free enterprise system that has been in existence for so long in this country, and has been in existence at such a heavy cost to this country, will fail as a Government policy.

We are told from the other side that what should happen if we allow free enterprise complete freedom is that we shall rise to the dizzy heights of success and generate that much wealth that the whole of this country will be better off. Well, the story is there. It has been seen before, and at a period when free enterprise systems in this country ran rampant with no Government control at all, and we finished up as an almost bankrupt nation. The period before the last War was such a period. We had the situation where free enterprise could do pretty well what it wanted. We finished up with 3 million unemployed, and in a situation where economically we did not have the strength to fight the last World War. We finished up in a situation in 1940—and the noble Lord on the Front Bench opposite shows amazement—with the private sector of our economy actually taking steps to close coalmines because we had lost markets in France, and at a time when this nation depended on the production of coal for its very existence. That is a fact of free enterprise.

When the Government suggest that the release of this amount of money into the private sector will generate investment, nobody believes it. Everybody really believes that there is a great possibility that instead of generating that investment what it will do is bring in the necessary flow of imports which, once again, will force the Government to have a cut back to stop that overheating of the economy which for so long and so often in our history has been responsible for causing some of the worse problems in our society.

Let me make a forecast, and let us see what will happen. Certainly, the money will be free, and certainly the Government will in fact free exchange controls, and certainly money will be able to move across boundaries, and the private sector will be able to invest where it thinks fit. Where will that be? In Scotland, or Wales? In Merseyside, or the North East? No, it will not. It will be where free enterprise sees the most profit. It is not long since the great exponents of free enterprise were saying quite clearly that it may not be patriotic but at least it is good business if we sell sterling. How long will it be before we hear some great baron of free enterprise, some investor on The Stock Exchange in London, saying that it may not be patriotic but it is good business to invest somewhere else other than the United Kingdom, and using the money that will be freed by this Government.

If we look at the question of regional policy, I said before—and this is not a party point—the truth is that regional policy has failed to achieve an equitable and fair distribution of the resources of this nation. What we are going to have now is a reappraisal of the regional policy that will probably look at the subsidies being paid out to certain special development areas, and to certain areas of this country where it is recognised that major problems exist. I do not think in that reappraisal that many Ministers will give time to consider the real problems of the regions that exist in the South-East, because if we look at the problems in the South-East we get another story. It is not generally supposed by the population at large that subsidies are paid out to London and the South-East of this land. But the truth is that subsidies are paid out of the national exchequer day in and day out in order to perpetuate a system of life in the capital of this country which in any civilised community would be considered intolerable; a situation where ordinary human beings think that it is normal to travel 2 to 2½ hours a day gathered together in tube trains. They think that that is a normal life.

The reason for this is that the economy in the South-East of England has become so overheated that it is a major cause of the lack of fairness in the distribution of our resources. If we take, for instance, what we do in regard to the people who have to work in London, we find that on average they are paid out £400 a year in wage weighting in order to compel or to persuade them to work and live in London. When we look at where those people work we find that there are two main generators of economic activity in the South-East. One is the headquarters of all the national and international organisations, and the other is government. No one would quarrel with the idea that the seat of government and the headquarters of national and international companies, generators of wealth, should be together in one place. But is it necessary that in this day and age, in addition to the seat of government, that we should have government departments competing for scarce resources against the private sector that the government wish to make efficient? If the idea that Government Departments, with their demands on labour, materials and resources, damage the siting of the private sector in London is considered outlandish, why is it that the private sector, in terms of finance, insurance and printing, is beginning to move from London?

Forty years ago it was pointed out in the northern parts of this country that one of the greatest problems facing the nation was the maldistribution of resources, in that the regions were being neglected, and that the free forces of the economy would ultimately determine that most of the commercial and economic activity of the nation would centre south of the Midlands. People did not think it was true. They thought they could solve it by the injection of a few pounds in places like Merseyside and the North East. Motorways were constructed in an effort to solve the problem. But those attempts failed, and they failed because all governments refused to consider the simple fact that economic forces are some of the strongest elements in our society today and will move to where they see it best to move.

Take the argument which took place in my party against the Common Market. People in my party subscribed to the view that we should not join the EEC because to join would damage our economic prospects. My argument against that was that whether or not we joined, economically Europe was becoming united and we should suffer the consequences. That is the case. We can be in or out, but we cannot stop that economic trend, no more than Cuba could stop the simple economic consequences of being an offshore island of America. If we had not joined the EEC we should have been an offshore island of Europe with no say in our destiny, because economic forces would have jumped the Channel. Is that danger still there because we joined the EEC? Of course it is; and when the Financial Times began to print its other edition in Frankfurt it recognised the fact that already the move was starting.

The shift that started in the northernmost parts of the United Kingdom and concentrated around the seat of power in London, denying to the people in the northern parts equity and justice, will not stop because there happens to be a national boundary formed by the English Channel. Of course it will continue into Europe, and when I ask for a reappraisal of our regional policy I do not ask for it just for the benefit of Merseyside or the North West; I ask for it because I really believe that the propagation and carrying out of a regional economic policy on proper lines will be the salvation of this nation. No longer can we afford to go on trying to make this nation efficient or go on trying to produce resources from this country which will help us in an international battle for survival, if we continuously and completely ignore the potential that exists North of the Midlands. We have been ignoring it. We go on ignoring it at our peril.

The subject we are debating today is not only priorities in the economy in regard to industry; we must also discuss priorities in regard to the social life of the nation. And when the people in districts which have percentage rates of unemployment running at 40 per cent. see the situation in London, where vacancies exist to such an extent that manpower on London Transport is 4,000 short, they will not for long put up with the situation of being considered the people who are paying the price for this regional imbalance. The imbalance is there and, by and large, it is there because there has been too great a concentration of economic force and might in the South East, and it is about time, for the good of the nation, that that redistribution took place. But it cannot take place on the basis of a Government coming into office and, within a matter of days, determining that the decentralisation policy of transferring jobs in the Civil Service from the South East to Scotland was badly thought out and should be scrapped just by a whim, or, as one speaker said, because Tory ideology seems to be that all the solutions to our problems can rest with free enterprise.

This country became one of the strongest economic forces in the world at the start because of free enterprise. That day has gone. If anybody thinks that in the future free enterprise can be left to determine the priorities in our social and industrial life, he is living in a dream world; and if this Government continue with their policy they will find out very shortly that that is a real fact of life.

6.37 p.m.

Lord MOTTISTONE

My Lords, I wish at the outset to thank the noble Lord, Lord Melchett, for introducing this Motion, and I am sure the House will agree with me when I hope that this means we shall see more of him now he is freed from the burdens of Northern Ireland. I also congratulate my noble friend Lord Trenchard on his appointment—not that I have not already done so—and his colleagues on the Front Bench. I congratulate him on some points he made in his speech, in which he said that already, although he has barely been in his job a month, he has visited the North-West and North-East to find out for himself what is actually going on on the ground. That is extremely commendable and perhaps is an indication of an approach which will appeal to the noble Lord, Lord Sefton of Garston, with his very understandable and strong regional views.

To paraphrase briefly the remarks of three noble Lords, Lord Melchett seemed to say that the Government had a major part to play in revitalising industry; Lord Trenchard said the Government intended to create conditions for industry to revitalise itself; and relevant too was the remark of my noble friend Lord Rochdale, who said that the word "strategy" was misused because it meant direction from the centre. One wonders whether perhaps the last Government, who coined the phrase "industrial strategy", really knew its meaning, because there often seemed to be in their case a wish for the Government to tell people what to do. I suggest that we really must get away from the grandiose idea that Auntie knows best and will tell industry how to behave. Surely we have learned that such an approach of centralism is sterile; I suggest that the trade unions have discovered that there are limitations to central control, and in industry that is a well known fact.

It seems to me, therefore, that the main function of Government—I am not tackling here those vast enterprises which Governments themselves control but am talking strictly about their relationship with private industry—and the main area in which they can help is by providing facts—putting the facts before the people—something which industrial companies are increasingly finding not only necessary but valuable, and they are making great strides in that direction in relation to their own problems and efforts. I believe that a Government who think in terms of providing facts and then letting people get on with it are really tackling the problem the right way round. Here I should like to take up the point made by the noble Lord, Lord Sefton of Garston, to the effect that free enterprise was splendid in the last century but has now had its day. It seems to me that we have been bashing away at centralised control through Socialism for at least the last 50 years, in varying degrees, and that has not been very successful either. We really must tackle the problem in a way which uses to the greatest extent what might be described as the advantages of the Government's abilities, but we must also allow people as much freedom as possible to develop in their own way.

I suggest that the most important points whieh were made by my noble friend Lord Trenchard (and which have come out in the debate) are the need for increased productivity and increased investment. To me these seem to be the immediate, inescapable needs. The statistics which my noble friend quoted are probably well-known to us all and they underpin the fact that it really does not matter what system of government we have; we must get on with increasing our productivity, or we go to the wall. There is every indication that directions from the centre, Government strategies, and the like, do not achieve their object. We might add to that—though I have not heard much mention of it in the debate—the need to encourage the setting up of new and exciting businesses. These will of their nature usually be small and, again because of their nature, given the right encouragement, I would expect that they would be spread all over the country. By no means would they centralise themselves in the South-East of England. I know of a really exciting enterprise developing in Cornwall——and that is sufficiently remote from the heart of the Empire, if I may use such a phrase. At the moment I cannot remember exactly what this is, but it involves a well-known new product, and I hope that I think of it before I finish my speech.

Perhaps here I am stealing a little from the debate to be held next Wednesday, and I think that the last Government were aware of what I have in mind, as are this Government. I refer to the need to give every encouragement possible to small enterprises, so that we can work towards reducing the appalling unemployment which faces us at the moment. I had hoped that my noble friend Lord Trenchard would have said a little about what is being done to help small businesses, even if that is not within his purlieu; or perhaps I missed the point when he made it,

The other point which I believe to be a key one—and which was touched upon by the noble Lord, Lord Rochester, and, with grim forebodings, by the noble Lord, Lord McCarthy—is the problem of the best way of settling wages. I seriously consider that this is fundamental. The question may not be strictly within the purlieu of the debate, but I believe that it is fundamental to the progress that we can make in increasing productivity and in other areas. Here I would refer to the ideas put forward by the CBI in its book Pay—the Choice Ahead, a copy of which I have with me and which I would strongly commend to your Lordships of all Parties or of none. Following much thought, the book produces a pattern. As the noble Lord, Lord Rochester, said, there are surprising similarities with the concordat which the last Government and the TUC put together last February. There are surprising similarities in thought—though perhaps they are not so surprising after all, for it is said that great minds think alike, and I would not say that the TUC did not have great minds, though perhaps I would question that view in regard to the Party opposite. The point is repeated in another way in the pamphlet entitled Better Way, written by eminent, senior trade union officials.

This is a moment to be grasped for those who are concerned with this matter, and I am delighted to see my noble friend Lord Gowrie on the Front Bench, because he is the grasper so far as we are concerned. This is the real moment to grasp and to tackle these vital, key points which are similar in all three documents and which show a similar line of thinking. I should have thought that the Government could do well to progress that trend—and to do so as speedily as possible.

I cannot resist referring to the speech of the noble Lord, Lord Soper. He always strikes at the core of matters and perhaps at the core of our hearts, too. While going entirely down the road with the noble Lord about the need for greater fraternity, it is my thinking at the moment that there are people who are overwhelmed by the concept of fraternity with all the people in this country, let alone with all mankind. They find it too difficult to grasp, and it is unfair to suggest that they should try to grasp it. There is little in history to show that people have ever actually achieved it. It seems to me that the thinking is more towards small units than towards big ones. This matches up with what I was saying about the development of small firms. Incidentally, the substance I was talking about earlier is fibreglass. Perhaps the Hansard reporter can insert that in the right place. I hope that your Lordships will forgive me for making that intervention at this point. It is probably cheating, but we shall see.

To return to the point that I was making. I believe that there is a tendency—we saw it in Scotland and Wales and in all the caper that we had in the last Parliament—for people to want to have smaller bodies to which to owe allegiance and within which to have true fraternity. That is one of the reasons why I find what might be called the true Socialist ideal so difficult, and have done so ever since 1947.

In conclusion, I believe that the Government have a really stern task before them, and I hope that they realise this: I am sure that they do. I think that they have started well—though obviously there are some noble Lords who do not—in their exciting venture to transform the sluggish low productivity scene in this country, and I wish them very well in their endeavours.

6.48 p.m.

Baroness BIRK

My Lords, first may I congratulate the noble Viscount, Lord Trenchard, with whom in the past I have had some friendly arguments across the Floor of the House. I also wish to congratulate other noble Lords who now occupy the Government Benches. Judging from what was said by the first two or three speakers in the debate, it seemed that it was more to do with genealogy than with priorities—the genealogy of my noble friend Lord Melchett. He did not raise the matter, but it seemed that almost everybody else did at that stage. I began to feel that I should be most deprived at the end of the day, that I should not be able to participate in this particular race. I feel some sympathy with the noble Viscount, Lord Trenchard, while I say "hurrah" and "hooray" to the noble Viscount, Lord Rochdale, and the noble Lord, Lord Mottistone, for speaking from the other side of the House and at least introducing some debate on the question of priorities, to match what sounded to me at any rate like an extremely high-grade university or WEA seminar from my noble and extremely able friends seated behind me.

One of the great problems in our society is to create the wealth to enable our social priorities not be be eroded. Here I very much agree with my noble friend Lord Soper. I must also say, rather tetchily, that it is an awful experience having to wind up a debate after he has spoken, because he always says what I intend to say and he does it infinitely better. Nevertheless, it was said, and said so well, by him. I appreciate very much, as I think we all do, the Government's concern with industrial performance in this country, which we all have to admit has been bad. In sharing the desire to improve productivity—and there is no doubt that it must be improved—it is not a difference in the objective we are talking about, but how we in fact achieve it; and in talking of our economic and social policies it is essential we get the right balance between these two ingredients in our society. This means getting the language of priorities right, since this is the social context in which we must examine our economic policy.

The noble Viscount, Lord Trenchard, and also the noble Viscount, Lord Rochdale, were very concerned, not just about Government intervention but about Government intervention in industry; and I think the noble Viscount, Lord Trenchard—and I have heard him put this in a very articulate manner before—feels that industry should be left very much to itself to get on with things. I agree with my noble friend Lord Taylor of Gryfe and with my other noble friends that we are living in a mixed economy, and really the days are long past when large industrial corporations could operate without Government intervention, especially in cases where they are monopolies or semi-monopolies. In fact, I am sure the noble Viscount will immediately agree that a number of large businesses, including Rolls-Royce, would not be on their feet today if it were not for the subsidies and the money they had received from Government. So to talk about cutting this off entirely and to talk about a separation between the private and public sectors, with a rapidly shrinking public sector, cannot do any good. Whatever point of view you take, whether it be a capitalist or a socialist point of view, a mixed economy means a mixture. The question of incentives, which loomed large in the Budget statement yesterday by the Chancellor of the Exchequer, is of course important in its economic priority. The reaction of the City to the Budget measures is still, I think, very equivocal and rather uncertain, because I noticed that by lunchtime the Financial Times index had dropped by 12.3. But when we are talking about incentives, we must consider how far these tax cuts, together with the VAT increase and cuts in public expenditure, will achieve the objective—and here the human element is all-important. The absence of social justice is unlikely to get the co-operation of people who are not the recipients of some of the really massive handouts to the well-off, compared with those to people with average and low incomes. I am certainly not going to use a lot of figures but, quite rapidly, on an income of £20,000 one's tax goes down from £8,686 to £6,705, whereas if you are making only £100 a week, which is around the average earnings, one's tax goes down £3.30 a week. Furthermore, this of course leaves out of account the fact that nobody really knows all the motivations which go to encouraging or discouraging people from working.

In a quite interesting few minutes on "The World at One" today, Sir Arthur Bryant, the chairman and managing director of Wedgewoods, which employs 12,000 people, and who is a very bright, smart and tough "cookie"—I know him, and had dealings with him in the conservation area when I was a Minister at the Department of the Environment—said, when speaking of the tax concession side, that he would of course be very pleased to have this extra money in his pocket but it would not make any difference to how hard he worked, because of his interest in the job and in the result, and he thought that this applied to many other people. What worries me is that while I think this is true of certain people at this level the effect on people lower down the income scale will be that it is very inequitable, and will produce a sense of social injustice which, if it sets in, will bedevil any hope of industrial progress. Sir Arthur Bryant also pointed out that so far as their export trade is concerned—and Wedgewoods are very big exporters—he felt that the Budget would be of no help at all because the minimum lending rate of 14 per cent. would act as a very definite disincentive to investment. These fears have already been voiced by some other industrial chiefs, who are also concerned with the question of increased unemployment—as my noble friends behind me have pointed out.

My noble friend Lord Kaldor referred to the problems of management, and it is absolutely true that when we are talking about industry we have to take into account the fact that there is a considerable amount of bad management and that our technical advance is not as great as it should be; and, on the notion of coercive comparisons, I think my noble friend Lord McCarthy made the definitive statement so far as I am concerned. But the problem with this package is that, as my noble friend Lord Sefton and other noble Lords have said, it will lead to union trouble greater than any we have so far seen, even this year. When moderate leaders like Tom Jackson, the chairman of the TUC, express their disquiet, it is extremely worrying, because I believe that after the honeymoon period is over—and the euphoria that there have been the tax cuts which were promised and have been given by this Government—working people will be looking at prices rather than taxes, and wage demands will be based on the current prices. Certainly they will be when their wives go out shopping and find that prices have gone up and that the tax concessions, which at the moment will still be going to the husband, are not going to make all that difference.

I am also concerned about the deep divisions, not just between management and workers, which is bad enough, but between workers and workers. This would be an even worse ingredient in a complicated society. The noble Lords, Lord Rochester and Lord Wilson, talked about the "them and us" concept. What I have found missing so far—I hoped to see something about it in the Budget statement—are plans for some form of participation or industrial democracy, which does not just rely on a number of workers on the boards of companies but means participation all the way through. I must be fair and say how very pleased I am, as I am sure my colleagues are, that pensions have gone up, but there is, I think, an immediate problem—and here I share the anxiety of Age Concern and Help the Aged. They are very worried about what happens between now and November, when VAT will be up but pensions have not gone up. This is very important since VAT covers such things as pots and pans, household goods, adult clothing: things which, today, are considered necessities. Again, something which I am afraid counter-balances this when we get to the young people and children is the cancellation of the increase in child benefit of 50p a child, which is really going to hit poor families with children.

With VAT at 15 per cent. and inflation forecast at 16 per cent.—and it will probably be higher—I certainly agree with my noble friend Lord Plant that to have assassinated the Price Commission in the way the Government did immediately on taking office was a grave error, because if you are going to try to get responsible free collective bargaining, which the Government are evidently making for and which means the end of any incomes policy, then you must offer some comfort on the prices side. What the Price Commission did was to act as an informed scrutineer for price increases by major companies. Although the actual interventions were not numerous, the fact of its existence and the use of the notification procedure offered some measure of protection apart from any direct intervention. The merging with the Office of Fair Trading and the Monopolies Commission is, I think, a grave error. Already we are seeing an upshoot in prices. Bread might have gone up by one penny but it is doubtful whether it would have gone up by two pence if the Price Commission had been in operation.

The cuts in public expenditure are very serious and are certain to increase the number of unemployed. Cutting the rate support grant increase order by £335 million means that local authorities must cut their own expenditure or put up their rates. Cuts in current aid will mean that housing will suffer. It will affect the inner areas. I remember sitting on that side of the House putting forward the new partnership scheme from the Department of the Environment when the now-Members of the Government were Members of the Opposition and com- plained bitterly that we were not allocating enough money to these schemes. We were conscious of not being able to squeeze out more money at that time. In the revitalising of cities like London and Liverpool and where the inner areas have run down and where one should try to pull them up again for their economic and social advantages this cut is an extremely serious one. The Manpower Commission cuts will also add to the unemployment of young people and the social services will suffer.

This is where I am concerned about the social priorities which it seems are already being eroded one by one. The cuts in education from the centre, and particularly the abandonment of the pilot scheme grants for 16 to 18 year olds is extremely bad and important. Together with the reduction in capital spending and the reduction of current grants to universities and colleges, this means that there will he a very severe drop in educational standards. This is not just because of the central cuts but because there will certainly be educational cuts by the local authorities; and this can only lead to larger classes and to a decline in the quality of education. Our future lies in education for the young and also for the adult community; because our social policies in the future are going to be as important, if not more important, than our industrial policies. There will be more leisure as technological processes increase and there will be more need for both full-time and part-time educational programmes for people so that they can live in what will be an entirely different society. We have not yet started on that. I do not think that any government has yet started to come to grips with the tremendous problem of the future which is very shortly going to be on us.

The noble Lord, Lord Mottistone, talked about small businesses and made the point my noble friend Lord Brown was making that people do not remember the financial result but know the name of the product. When we talked about that, it reminded me that what we badly need to do in this country is to encourage craftsmanship again; because here we are losing out very much. Another area where, socially, the Budget is going to hit hard is in the health charges. To put up prescription charges over 100 per cent. is going to be a tragedy in some cases and a great burden for those, certainly 40 per cent. of the population, who are not exempt from health charges. Since today people who see their doctor often need two and sometimes three prescriptions, this is going to be a very heavy increase in their cost of living.

I go back to economic policy to say a word about the concentration on private industry and the dislike of the NEB and public money put into private industry. I cannot believe that the Minister, who has worked in a very large private sector industry, can believe that those employed in advising the nationalised industries or the NEB are drawn only from the corridors of Whitehall—he might feel that they are dusty corridors—and have no experience of industry. In fact, commercial, financial and administrative skills can be gleaned in many ways; and many of the people who are involved in the nationalised industries and also in the projects into which the NEB has put money are people who have had experience in the very private sector which the Government wish to encourage.

The final point is that what I am concerned about is the quality of life in this country. Before the Election and during the campaign, the new Minister for the Arts rashly said that the arts would not receive any cuts if cuts were needed. In fact around £5 million has been cut from the arts, which is a very thirsty and starving area into which we as a nation do not put as much as we should. Even we as a Government did not put in as much as I think ought to be put into that area. Again, we are going to get another diminution of the quality of life.

The country, but not the Members of this House, who do not have a vote, voted for this Government and voted for this package. They did not think that some of it would be quite so tough; but they voted for the tax cuts. The people are now getting what they voted for. We shall have to see how they like it and the ways things turn out; but what I am concerned about is the quality of our national life. It is precious and embraces not only productivity and industry but also our environment, both physical and aesthetic; it embraces how we look after the old and the young; it embraces our educational system; and it embraces a vision of the future that must always take account of the way society has to adapt itself to new situations and inventions and, above all, that people's needs and motivations are not solely material. Unless we accept this and keep it in mind always, whatever happens within the economy, we shall turn into a soured and divided society.

7.8 p.m.

Viscount TRENCHARD

My Lords, many of your Lordships are experienced in summing up after a debate of this length. This is my first time and I started to make notes with the intention of taking on board nearly every point that was made to me. Those notes arc behind me on the Bench. I should have loved to speak for three hours, and be thoroughly courteous and argue the points, but I have discovered that one must discard the vast majority of them. I apologise to those noble Lords who contributed if I do not mention their points. I will read Hansard and my Department will read Hansard carefully, and some of the specific questions that, for instance, the noble Lord, Lord McCarthy, asked will be followed up; and my noble friend Lord Gowrie has I know taken note of them.

I am in the fortunate position that there are these two debates next week—which are perhaps better timed—on some of the wider economic factors and on the employment factors, because that will have given us all time to digest the Budget further. There is a clear difference of philosophy, as we all know, between us on the degree of interventionism that is necessary. I take what the noble Baroness has just said, that we live in a mixed economy. We on this side of the House feel that it has become a bit mixed up. Our review of the situation will essentially be from a sincere angle of trying to maximise efficiency in order to create a bigger national cake, without which the social priorities—I will not say are not worth discussing—are certainly going to be damaged.

It was interesting to me that noble Lords on the other side of the House who criticised this aspect or that aspect of the private enterprise sector of the economy seemed to feel that Government should somehow intervene and should put matters right. Product development is important, and in a lot of cases it is not up to scratch. Regarding management, they seem to feel that we should fix all the wages and fix all the prices. Also, that we should direct the flow of oil and, if I understood him correctly, the noble Lord, Lord Kaldor—in a new field to me—wondered whether the Army should come into the equation.

The Government's philosophy has been quite clearly put by my right honourable friend the Chancellor of the Exchequer; it is the Government's job to get the government part of it right first. I do not think that my right honourable friend over-emphasised that, and I think that today I suggested that there were quite a large number of other factors which were wrong with our industry. We feel, however, that we must get our own part right first, and we feel that there is a connection between other faults and the atmosphere in which industry has conducted its business for so long in this country.

We feel that a greater degree of competition, and a greater degree of reward for success, will stimulate efficiency. I agree that there is a problem as to the speed of response. However, I believe on this occasion and in the degrees that my right honourable friend has outlined, that we have quite a lot of spare capacity in the economy as it stands today, which is different from previous occasions which have been mentioned. Some of that capacity is fairly modern, if we get the conditions right and play our part and help the working parties, as I have said earlier, in diagnosing which are the primary faults elsewhere, we shall get a speed of response and recovery of British industry and the British economy.

Regional policy has been referred to by many speakers including the noble Lords, Lord Taylor of Gryfe and Lord Sefton of Garston. The importance of it has been mentioned and I have already intervened quickly on this matter. We are determined that our regional policy, taken together with our national policy, shall be as effective as that of the last Administration. The two have to be taken together. I also said it is going to take a while before we reverse the upward trend in unemployment which is taking place at the present time. Let me come to the whole area of fairness, of equality and of compassion which the noble Lord, Lord Soper, introduced and which the noble Baroness, Lady Birk, took up. Let me deal with some of the facts and some of the thoughts about whether the measures announced in the Budget yesterday are unfair and are likely to provoke jealousy, confrontation and the like. The noble Baroness mentioned the rates of inflation; but we have to recognise that on an annualised basis in the past six months up to April—during the last Administration—inflation was again running at 12.3 per cent.

My right honourable friend the Chancellor of the Exchequer spelt out very clearly the effect on the retail price index of the Budget measures per se. He showed and calculated clearly the effect of the Budget measures both in the increase of the cost of living and in more money left in people's pockets. I hope that before the economic debate next week noble Lords will read and re-read that carefully. If we take the low-paid worker earning £60 a week, the Chancellor showed that he was substantially better off as a result of the Budget per se. The fact that inflation is running away is something which we have inherited from the last Administration and is part of the great problems which we now face.

I hope also that noble Lords will take account of the moves on pensions—and I was glad to hear the noble Baroness acknowledge those—and of age allowance in relation to income tax. I hope it will be remembered that VAT does not apply to quite a large number of essentials of life, and I hope that noble Lords will look at other social security measures which the Budget mentioned with be forthcoming. After this Budget, society in this country will still, in relation to tax, be more equal than others in leading competitor countries. So we are talking in relative terms, and our whole contention has been that the national cake is getting ever smaller and it will continue to decline. We should take note of the conditions that exist in more successful countries. We are still a more equal society. VAT taken over the whole range of goods, so my right honourable friend told the other House yesterday, is still less than in the majority of European countries.

One simply does not have time to answer the myriad of points that have been raised under this heading, but from my 30 years' industrial experience I have found that employers or bosses—and I have had a good number—who appear to be the hardest and strictest about commercial priorities of business, in the end served their employees very much better than those who stressed all the time the need for enlightened policies, welfare and the rest. It is very easy to criticise those who stress the basic, hard facts of life, but if we do not get those hard facts of life over and the trend of the economy reversed, it really is no good talking any more about social policies.

The noble Baroness and others have criticised—which is very easy to do—the decreases of tax for top salaried people and the size of the increases they individually get. She queried whether in fact "top people" worked for money to any degree, and she quoted the case of a friend. I think we all need motivation. We all have different kinds of motivations. I have had two careers and certainly I was motivated by trying to build up a better standard of living for my family. That is why I went into business, not having inherited a lot of wealth but a lot of wisdom from my forbears—at any rate, I hope that I inherited some wisdom: it was there for me to inherit.

I have seen what motivates "top people". I have seen it in small businesses and large businesses. It would be terrible if we were all motivated by wishing to take a share in running the country, the economy or what-have-you. I believe that the incentive to do better for one's family and to try to ensure that they start at a new level and that they use their money, one hoped in a good way—some will not: they will lose it is one of the basic motivations of mankind. Of course, once one has got involved one goes on; but we believe that the incentive to improve oneself and one's family has lifted standards of living in other countries well beyond that of this country and is still doing so, expecially in the private sector.

My Lords, a word on management, which was mentioned by the noble Lords Lord Kaldor and Lord Balogh, and also, I think, by the noble Lord, Lord Plant. May I at this point thank the noble Lord, Lord Kaldor, for his very kind remarks at the beginning of his speech. In fact I should like to thank all your Lordships for your kind remarks. You all had a "go" at management. I have to agree, I think, that management is on the list of culprits—and I described a long list of them in my opening statementb—but I want to say again that I believe that one of the best ways to improve management is to improve incentives and to make sure that if an employer can get a much better engineer to apply new skills from Holland or Germany (which I have often been in the position of wanting to do) he can in the future actually ask such a man to come and live here for three years without taking an enormous decrease in his standard of living.

The noble Lord, Lord Balogh, mentioned investment. I have covered the fact, and would accept the point made by the noble Lord, Lord Taylor of Gryfe, that investment in recent years has been surprisingly good. It is not as good as it ought to be and there are bad areas, but if you take the actual growth of our economy as well as the actual level of investment it has not been too bad at all. The areas where it is bad do need extra incentive and the promise of extra profit or of a reasonable return on capital if those investments are to be attracted. Perhaps I could take in this respect what the noble Baroness said about the Price Commission. I think the price increases she mentioned to start with were those that were held up before the Election and were almost certainly inevitable—

Baroness BIRK

My Lords, if the noble Viscount will allow me, the example I mentioned was bread, I understand that in the pipeline it was probably 1p, but when the Price Commission went the demands from the bakers were accepted and it went up by 2p.

Viscount TRENCHARD

Well, my Lords, I know a little about profit levels in the bakery industry, and they are certainly not above the average I have been speaking of. We shall never get the investment in the backward areas while manufacuring industry has real profits which represent a 3 per cent. return on capital employed. All objective studies on prices have shown that the effects of the Price Commission have been minimal. I think it was the noble Lord, Lord McCarthy, who asked whether the Ford Company should be free to mark up its prices. Another speaker asked whether the prices of engineering goods would be put up. There really is pretty stiff competition in the motor car industry and also in engineering. Indeed, as noble Lords in the regions will know, engineering is one of the areas where unfortunately, unemployment is growing and where order books look dismal for the rest of the year.

I should like just to mention productivity once again. I do not think there is any one cause for the lack of it, but I cannot agree with the noble Lord, Lord Plant, that it is a matter of investment in the main and that there is nothing to be done in relation to the use of our existing plant. There are far too many studies which have been published and which are available, and there is a lot of information regarding the development of industry which shows quite clearly that, even where we use the same equipment, in many cases we are simply not competitive in the area. This is true even in multinational firms with the same management standards. That will need diagnosis and I hope to help the work of the sector working parties to try to get at the prime causes.

I must ignore all the other detailed points that have been made. Clearly, I still have not got the experience of winding up to know which points one should or should not keep on one's list. My final point really is this: Many people listening to this debate would assume that the industrial strategy of the last Administration had been a great success. Although there have been admissions at times that things are not as good as they ought to be and there have been acknowledgments such as those made by the noble Baroness that the creation of wealth is very important, the content of the debate has nevertheless all been on more help for the regions or more help for this or that social policy.

I should like to end by asking your Lordships to consider where the standard of living in this country would now be without that £3,500 million balance of oil and where unemployment would be. I am not an expert on this and perhaps my noble friend Lord Cockfield next week will go more fully over the economy. The level of sterling, if I may say so, incidentally, to the noble Baroness, is at the moment at record levels, in contrast to the Stock Exchange which she mentioned; but if we had a £3,500 million deficit on our balance of payments, where would sterling be? Where would inflation be—20 per cent. or 25 per cent., without taking into account this Budget? Where would unemployment be—2 million? It rose from 640,000 to 1,300,000 and while world conditions have been difficult, we cannot hide behind those world conditions. We have done much worse than others.

This is the central point, and this is why I am proud to be a member of an Adminisstration that has had the courage to do the unpopular things and to open itself to easy criticism. I hope and believe that the realism of the British people, who sense more and more how badly we are doing, will accept what is really necessary and will realise that if they do accept these policies we shall gradually pull up and catch the countries that have passed us, and that it will benefit all in this country, including all the lower paid and the pensioners. I thank your Lordships.

7.30 p.m.

Lord MELCHETT

My Lords, may I thank very much all noble Lords who have taken part in the debate on the Motion which I moved earlier today. I only wish that I could have heard all the learned and stimulating contributions from my noble friends behind me, before I had to sit down to try to compose my own contribution. May I also thank the noble Viscount, Lord Trenchard. If that was the performance of a greenhorn. I dread to think what he will be like when he has had a little more experience. I also thank the noble Earl, Lord Gowrie, who sat and listened to much of the debate this afternoon.

I was interested to hear my great-grandfather being invoked by the noble Viscount at one stage, and I am very grateful to my noble friend Lord Brown for springing to the defence of the family honour. But I could not help being reminded of the fears, which I think some people at least have, that Ministers in the present Government are simply implementing policies that have been tried in the past by previous generations of Tory politicians, and not with great success. I was particularly struck, as I think were many other people, by the Chancellor's phrase in the Budget speech yesterday about putting more money into people's pockets, so that they could pay the increased value added tax. I hope that that phrase will live with something which my noble friend Lord Soper said, about this being a switch from what you can earn to what you can spend.

To some extent, this has been a debate about things which we could not discuss. My noble friend Lord Brown had a list of subjects which he did not think the Government would be open to yet, at any rate; and my noble friend Lord McCarthy had a list of books which he did not think Government Ministers and their advisers had yet got around to reading, at least to the end. I hope that the noble Viscount will forgive me if I say that this has been a debate where he has not yet been in a position to give us many of the answers for which we asked. There was one answer which I was particularly disappointed not to get. He said that the Chancellor had carefully spelled out the effects of the Budget on the cost of living, as indeed he did; and carefully spelled out the extra money he had left in people's pockets, as indeed he did. Why did he not spell out, and why did the noble Viscount not tell us today, the effect on the number of jobs that will be lost because of the Budget measures? With that said, I beg leave to withdraw my Motion.

Motion for Papers, by leave, withdrawn.