THE ECONOMIC STRATEGY: BUDGET STATEMENT

HL Deb 19 June 1979 vol 400 cc836-955

4.14 p.m.

The MINISTER of STATE, TREASURY (Lord Cockfield) rose to move, That this House takes note of the economic strategy of Her Majesty's Government as set out in the Statement made by the Chancellor of the Exchequer on 12th June. The noble Lord said: My Lords, it is perhaps unusual for your Lordships' House to be discussing the Budget, but this is an unusually important Budget. It is arguably the most important Budget since Lloyd George's Budget of 1909–10. It was that Budget of Mr. Lloyd George's which launched us down the path of ever increasing Government expenditure and ever increasing taxation to match it; and which was to lead with gathering momentum to the economic decline which is now beginning to stare us in the face. My right honourable friend's Budget breaks with that unhappy tradition. The time is ripe to make a new start.

The long record of relative economic decline in this country is too well documented to require repetition. There have of course been interludes of greater prosperity; the 1950s were one such period, and people now look back nostalgically to that era. But the last five years have seen an acceleration in the decline. True, other countries have suffered difficulties in the last few years with slower growth, higher inflation, and higher unemployment. But on all counts our record was worse, and in some instances much worse, than that of our main competitors. But it was not until my right honourable friend the Chancellor of the Exchequer dealt with the situation in his Budget speech last week that anyone realised the extent to which the situation had in fact deteriorated since the onset of last winter. No single event could have underlined this more clearly than the deficit of £1 billion on the balance of payments in the first four months of the present year.

It is clear that the path along which we have been travelling offers no solution to our difficulties; on the contrary, it can only hold out the prospect of further decline. If nothing were done, we should find ourselves facing a situation not simply of relative decline, but of decline in absolute terms. It is very easy to argue that this country is rich in those intangible things usually described in the phrase "the quality of life". Because these matters are not statistically measurable they do not appear in the statistics of the national income. It is equally seductive to argue that change means upset and that a quiet life is to be preferred to the strains and stresses of progress. But there is no real choice here. The events of the last winter demonstrated that our people are not content to accept a stagnant standard of life. They expect something better today than they had yesterday, and better tomorrow than they have had today. The social and economic stresses which would arise if we had to face a lasting decline in our standard of living would be very great. Nor would our situation in the world at large enable us to survive as an oasis of genteel decline. We are immensely dependent upon world trade; and despite North Sea oil we still need to export to live, and export depends upon price competitiveness and the quality of the goods we produce.

It is often claimed that the origins of our present troubles go back a long way. That is a debateable point. But what is not open to argument is that over the years we have suffered in increasing measure from Government intervention in all aspects of our economic life: from an extension of the public sector at the expense of the private; from too much Government expenditure; and from too much taxation. All of these are connected. Each feeds upon the others; each exacerbates the damage that the others do.

At the heart of all these developments lay a touching but misguided view of the State as a benevolent and all-powerful entity. Such an approach overlooks the simple, but self evident fact, that the State consists of nothing more than the individuals who make it up. There is no reason at all to suppose that the individuals who make up a Government, or a bureaucracy, are endowed with greater wisdom, greater ability, or even greater benevolence than the general run of humanity. There is certainly no reason to suppose that they can manage the affairs of companies more efficiently than the full-time managers of those companies. There is no reason to suppose that they can produce more efficiently, invest more wisely, or make a better job of pay bargaining than those in industry whose job it is to do these things. The growth of the public sector at the expense of the private sector is more likely to lead to a fall not a rise in national production.

The attempts made by Government over the last 30 years or more to manage the national economy were based largely on the theories of Lord Keynes. It is true that Keynes gave us great insight into the way the economy works and the contribution that he made to the development of economic theory was one of immense importance. But it does not follow that because one knows how something works therefore one is capable of controlling how it works. We understand what causes the tides to ebb and flow but this does not mean that we can control the tides. Indeed, we cannot. Experience has shown that these attempts over the last 30 years to manage the economy have done more harm than good. They assumed, on the one hand, that inflation was due to excessive demand and, on the other hand, that unemployment and recession could be cured by pumping money into the economy. But increases in taxation designed to cut excessive demand have tended to depress output; the subsequent reductions in taxation to stimulate demand have led not to a revival in output from our own industries but to increased imports. This is what we saw clearly last year.

The excessive level of Government expenditure has had two damaging effects. It made control of the money supply particularly difficult and it has, therefore, been a powerful factor contributing to inflation. Secondly, it has resulted in an excessive burden of taxation. This, in turn, had led to many of the problems with which we are so familiar: lack of incentive, an unwillingness to invest and to expand, the erosion of differentials and a general and widespread feeling that hard work and promotion are not worthwhile.

Until recently, it was always "expenditure" which took the lead in the formulation of policy. Expenditure is always popular. It enables politicians to pose as fairy godmothers. There are powerful and vocal lobbies in support of every conceivable kind of expenditure. Governments have therefore determined their expenditure first and then regarded it as their duty to raise the revenue to match the expenditure. Of, if their nerve failed or their supporters revolted, they took refuge in printing money. In the last few years, people have come to realise that this is a fool's paradise. People are in revolt against the excessive taxation involved in excessive Government expenditure: and, equally, they are in revolt against the inflation which stems from printing money to finance excessive expenditure.

The trail was blazed by Proposition 13 in California. Mr. Jarvis, who was responsible for Proposition 13, was not in fact the first in this field. We had our own John Hampden more than two hundred years ago. And in more recent times the other place in two successive years refused to grant the Government of the day the taxes which the Government were demanding should be levied. The message from our own people during this last election—and this applied to people at all income levels—was quite clear: taxes were too high and must be reduced. There has been a revolution in public opinion on these matters and this is a change in attitudes that no Government can ignore. In the past, as I have said, it was expenditure that dictated the level of taxation. In future, it will be the level of taxation which people are prepared to pay which will dictate the level of expenditure.

I now turn to the positive elements in the Government's economic strategy which are designed to extricate us from the troubles I have described—or perhaps it would be more accurate to say, "designed to help us extricate ourselves". While Government can, given the right policies, do a great deal to help, in the end it is effectively only the individual who can act; and solutions can be found only if people themselves set out to find them.

The first element in the Government's economic strategy is to deal with the menace of inflation. We are determined to re-establish sound money. Without sound money, people cannot plan ahead and they will be reluctant to undertake the investment on which both the progress of the economy and the creation of new jobs depend. On an annualised six months' basis, inflation had already exceeded 12 per cent. in April and was likely to go on rising. The money supply was growing in the second half of the year at an annual rate of 13 per cent. and it was clear from the May banking figures that its growth was still above the target range of 8 per cent. to 12 per cent. The public sector borrowing requirement, originally estimated at £8½ billion for last year, came out at £9¼ billion and, for the coming year, had action not been taken, it would have reached £11 billion. The trade figures for the first four months of the year, published just before Budget day, showed, as I have said, a deficit on the balance of payments of £1 billion, even allowing for a considerable surplus on invisibles.

That, therefore, was the picture as it existed on Budget day. Clearly, action had to be taken, and was taken. There was immediate action by way of raising the minimum lending rate and continuing the "corset", and more fundamental measures in reducing the target range for the money supply, reducing Government expenditure and, with it, reducing the public sector borrowing requirement. There is a great deal of inflation built into the system as a result of the errors of judgment and of policy of the previous Administration. It is only by vigorous action of the kind taken in the Budget that we shall succeed in squeezing out this inflation.

The second element in the Government strategy is to change the emphasis from the management of demand to the encouragement of supply. Prices as everyone knows, depend upon supply and demand; but, equally, the level of output depends upon supply as well as demand; the level of employment depends upon supply as well as demand. However laudable the motives may have been, experience shows, as I have indicated, that emphasis on the management of demand has produced a long-term downward trend in output and employment and a long-term upward trend in prices. The abandonment of demand management of this kind, commonly referred to as "fine tuning" removes one of the more damaging influences on supply. The other measures we are taking—the reduction of direct taxation at all levels—to which I shall refer in a moment—the reduction in the share of resources pre-empted by the public sector to leave more room for the private sector, which is the sector which creates wealth—which creates jobs—and the enlargement of freedom of choice by the individual. All these are designed to encourage supply to grow and thus create more output and more employment.

One of the facts of economic life which must be faced is that the great majority of people are unable by reasons of ability, aptitude or temperament to provide their own employment. This has been true throughout the whole of industrial history: it is just as true today as it was at the dawn of the Industrial Revolution. Most people depend upon other people to organise production and provide them with employment. These people upon whom others thus depend are the "entrepreneurs": without them there is no production and no employment for the great majority of our people. It is of immense significance that in the United States in recent years two-thirds of all new jobs have come from firms employing fewer than 20 people: and no less than four-fifths of such new jobs have come from firms less than five years old.

The level of taxation in this country, the form which taxation, and particularly capital taxation, takes, and legislation in other fields, particularly the employment field, have all tended to make the path of the entrepreneur in this country a hard and stony one. The biggest contribution to creating new jobs in this country will come from the creation of new enterprises, and the great majority of new enterprises start by being small enterprises.

We have already made a start in tackling the problems to which I have referred. The reduction in the rates of tax at all levels will be of real help and encouragement to the smaller businesses. Perhaps I may say that in the United States, which has such an impressive record in the generation of new employment by new and small companies, the top rate of tax on earned income is 50 per cent. only. No one expects that the measures that we have taken and shall continue to take will transform the British economy overnight. But, if a change in direction is to be made—and such a change is long overdue—a start must be made. We have made that start and the effect of the improvements will be cumulative as time goes on.

The third element in our strategy to which I have already referred is the reduction of direct taxation at all levels and a switch from direct to indirect taxation. As my right honourable friend the Chancellor of the Exchequer said, the reductions in direct taxation are the keystone of our policy. The disincentive effects of an excessive level of direct taxation are felt throughout the whole of the economy and at all income levels: they affect the unskilled worker as well as the skilled, middle management as well as top management, the professional man as well as the business man. Without the reductions in direct taxation that we propose, there could be no hope for an expansion in the supply side of the economy which is essential for the achievement of higher output, higher employment and a higher standard of living.

Few people realise the scale of the increase in the income tax burden over the past few years. In 1973 the income tax yielded just over £7 billion. This year, had we taken no action, it would have yielded over £23 billion, an increase of well over three times. No wonder taxation, and particularly income tax, was one of the major points raised time and time again in the course of the election campaign.

A switch from direct taxation to indirect taxation—that is, from taxes on what people earn to taxes on what they spend—was long overdue. The old, well-tried and accepted principle was that 50 per cent. of taxation should be raised from direct taxes and 50 per cent. from indirect. The origins of this principle can be traced back at least as far as Mr. Gladstone, who in his Budget speech of 1861 said: I am … as between direct and indirect taxation perfectly impartial".—(Official Report, Commons, 15/4/1861; col. 584). Perhaps I might also say that he went on to refer to direct and indirect taxation as "two attractive sisters". I am afraid that in these less chivalrous days they would more likely be referred to as the "two ugly sisters". Noble Lords may also care to be reminded that in the same Budget speech, Mr. Gladstone went on to say: I should like very much to be the man who could abolish the income tax. I do not abandon altogether the hope that the time may come".—(cols. 585/6.) Alas! he was to be disappointed.

As recently as the 1970 Budget the Inland Revenue taxes which, broadly speaking, are direct taxes, accounted for 54 per cent. of the total taxes levied in the Budget and other taxes for the remaining 46 per cent. This coming year, had we taken no action, the Inland Revenue taxes would have accounted for 60 per cent. of the total. If we look at the income tax alone, in the 1970 Budget it was 39 per cent. of total taxation, while this year it would have risen to 46 per cent. The change in these proportions was not deliberate. It was largely the result of inflation which increased the burden of direct taxation because thresholds—at all levels—were not adjusted sufficiently; while at the same time the real burden of indirect taxation was reduced because the increases in specific duties did not match the fall in the value of money. The changes we now propose will reduce the income tax to 40 per cent. of total taxation levied in this Budget, and that figure is marginally more than it was in 1970. No one therefore can claim that the switch we propose is too great.

There is one further point of importance I wish to make. In his Budget speech, my right honourable friend the Chancellor of the Exchequer made it clear that what was done in this Budget to reduce direct taxation was a first step; and that his long-term aim should be to reduce the basic rate of income tax to no more than 25 per cent.: and in dealing with the yield of the increase in the VAT, he said that this would provide scope for further direct tax reductions in future years.

I now want to deal with the effect of the increase in VAT on the price level. Let me start by reminding noble Lords that immediately after the October 1974 election, the party opposite introduced two Budgets in quick succession—in a period in fact of five months—and these Budgets put up the retail price index by 4¼ per cent. What is more, while we are proposing to reduce income tax so that overall people are better off, the party opposite increased income tax so that people ended up by being worse off. If there is anybody who is in no position to criticise us on this score. it is the party opposite.

It is of the greatest importance that people should look at the Budget proposals as a whole and should take account of the reductions in direct taxation as well as the increases in indirect taxation. Let me illustrate this point by a simple example. If we had a zero rate of inflation and there was then a switch from direct to indirect taxation of the same amount of revenue the retail price index would still go up, but it would be patently absurd to claim that this was inflationary or that people were worse off as a result. Clearly they would not be. The measures taken in the Budget change the price level once and for all. They do not in themselves increase the underlying rate of inflation.

The retail price index tells only half the story. The level of people's net income after tax is just as important as the level of prices they have to pay. The reductions in income tax more than make good the price effects of the indirect tax changes. But, even more importantly, as the benefits work through the economy they will lay the foundations for longer-term improvements in the standard of living. It is only by these longer-term improvements that we can lay the basis for a sustained improvement in the standard of living of the country as a whole.

It is argued that trade union negotiators do not think like this and that, if the retail price index goes up, they will seek compensation without regard to the reductions in income tax their members will enjoy. I do not believe this argument. It is tantamount to saying that union negotiators are obsessed with the retail price index to the exclusion of all other considerations. I do not accept that trade union negotiators take so narrow a view as this. On the contrary, I believe that union negotiators, in common with employers and with the public at large, do take into account all the factors in the situation and that they do understand the importance of their members' standard of living as opposed simply to movements in the retail price index.

We believe that negotiators in industry, employers and unions alike, will bargain responsibly with full regard to the consequences of their actions for their companies and for their members. With strict control over the money supply, and a fiscal policy which is consistent with the monetary policy, the employer who accepts an excessive pay settlement damages his own profits and puts the viability of his business at risk. The employee who insists on an excessive settlement damages the company for which he works and puts his own job in jeopardy. These are the simple facts of the situation.

Progress, whether in the field of economic growth or in social or personal values, is a struggle which needs the constant challenge of new ideas. In 1952 when he faced an economy similarly debilitated by years of socialism, my noble friend Lord Butler of Saffron Walden, whom I had the honour to serve, took as his theme the idea of "expansion" which he said—and I am quoting from his autobiography: was capable of achievement only if the fresh winds of freedom and opportunity were allowed to blow vigorously through the economy". The Budget he introduced then ushered in a period of prosperity which lasted longer and produced a bigger rise in the standard of living in this country than in any other period in the post-war era. We face the same challenge today. We bring to this challenge the same ideas of freedom and opportunity, coupled with the new ideas of individual responsibility, rather than reliance on the State, a new emphasis on the growth of supply rather than on the management of demand and a greater understanding, born of much hard-won experience, of the forces on which economic progress really depends. These new ideas, this new approach, will take time to bear their fruit, but bear their fruit they surely will. I beg to move the Motion standing in my name on the Order Paper.

Moved, That this House takes note of the economic strategy of Her Majesty's Government as set out in the Statement made by the Chancellor of the Exchequer on 12th June.—(Lord Cockfield.)

4.46 p.m.

Lord BRUCE of DONINGTON

My Lords, the House will be grateful to the noble Lord, Lord Cockfield, for the very clear way that he spoke to the Motion. I must say that the terms of the Motion gave me some little cause for surprise, because the Motion invites the House to take note of the economic strategy of Her Majesty's Government". After reading through the statement by the Chancellor of the Exchequer on Budget Day, I was not aware of there being anything equivalent to "strategy" in it. I do not want to indulge in semantics, but "strategy" implies a plan; and plans of any kind are eschewed by the Party opposite. For reasons that will emerge as I proceed, I really cannot credit the statement of the Chancellor of the Exchequer with the accolade of calling it a "strategy". In fact, as I shall endeavour to show, it is something altogether different.

I thought that as the noble Lord proceeded through this speech he was not quite as confident as he was when speaking to the House on 16th May last, when he had the opportunity of addressing your Lordships on a very similar theme. do not want to cast any reflection at all on the abilities of the noble Lord, upon his powers of expression or indeed his authority, but perhaps his having less certainty today is due to the fact that since he last spoke to the House the Financial Tunes Index on the Stock Exchange has dropped by 49.5 per cent. We are told that the people on the Stock Exchange are wise folk and that they are fully capable with the financial advisers, investment analysts and economists at their disposal, of arriving at what is euphemistically termed "a balance judgement". On that basis I venture to suggest that, even though the thumbs may not be down, they are in a rather less horizontal position in regard to the items that have been proposed by the Government.

The noble Lord, Lord Cockfield, made much of the point that his party believed in reduction of taxation. It was therefore curious to see at page 31 of the Financial Statement and Budget Report which was issued that, after all the Budget is considered, there have been total increases in taxation of no less than £425 million. So it seems a little odd that he should be claiming as a virtue a desire to reduce taxation when, in totality, the Budget has increased it. Thereby, on his own admission, he must be contributing powerfully to inflation, to which I shall refer at a later stage in the remarks that 1 have to offer to your Lordships.

I shall deal now with the whole guts of the Budget. I do not wish—and, if I did, I should detain your Lordships for too long—to endeavour to dwell upon every aspect of the Chancellor's speech, which although brief and very clear, occupied a far greater amount of time than I propose to take.

Lord COCKFIELD

My Lords, I am very sorry to interrupt the noble Lord, but as we are dealing with a question of fact perhaps I might make this point with reference to the figures that he quoted. The table on page 31 shows that the net reduction in taxation for the current year amounts to £1,155 million—over a billion pounds tax reduction. The figure that he quoted is the forecast for a full year, but before that full year expires there will be another Budget, and my right honourable friend the Chancellor of the Exchequer made it perfectly clear in another place that the increase in VAT will provide scope for further reductions in direct taxation.

Lord BRUCE of DONINGTON

My Lords, I am obliged to the noble Lord. Nevertheless, I am taking advantage of the forecasts issued in his own document which show a total extra burden for a full year of £425 million. Much water may flow under the bridges before the next Budget. Many U-turns may be accomplished. There are a number of factors of which noble Lords opposite, and their right honourable friends in another place, may have to take some account, not excluding the balance of trade at that time, to which I shall refer later. If I may, I shall return to my main theme which is the principal tax changes.

As I have said to your Lordships, it will not be possible within the time for which I wish to detain the House to deal with the many aspects of the Chancellor's Statement upon which I should have liked to touch. I am, however, fortified by the knowledge that there are several of my noble friends behind me who will most certainly be touching on many aspects where I do not venture at this stage to tread. Also, the House will look forward with particular interest, I am sure, to the first intervention by my noble friend Lord Miles who will be making his maiden speech today.

The main burden of the Budget lies in the switch from income tax to value added tax, with income tax down by £4,540 million in a full year and VAT up by £4,175 million. I pause at this stage to return to some matters that I had an opportunity of discussing with your Lordships the last time I had the honour to address you. I pointed out, since the Government are very anxious to establish the legitimacy of what they have done, that they had no mandate to increase VAT, save that given to them on page 14 of the Conservative Party's Manifesto which stated: We must therefore be prepared to switch to some extent from taxes on earnings to taxes on spending". I wonder whether the ordinary general public, who were subjected to the debate in the election campaign, were aware that there was to be this massive increase in value added tax. We ourselves queried it in the course of the election campaign, and made the suggestion that, if returned, the Conservative Party would double the rate of VAT. Our statement was thereupon immediately denounced by the Chancellor of the Exchequer as being a shameless lie. Who has proved right in the event? That is exactly what has happened, give or take the odd percentage point. However, the Chancellor of the Execequer justified that by saying, as he did in an article on Sunday in a most distinguished newspaper with which I am sure all your Lordships are familiar, the News of the World: These cuts mean that if you take all the tax changes together practically everyone should be better off in the rest of this year". In the course of his Budget Statement, he cited the case of the average man—a very weird animal—and sought to prove that he would get some 70p more per week, even after VAT had been taken into account, on an income of £100 a week or thereabouts. He sought to derive from that the supposition that, by and large, the amounts paid by the British public in VAT would be more than compensated for by the changes in income tax. In the other slightly modified version, which must have been a Freudian slip by the Chancellor, he put it a little differently in the other place. He said: I shall be leaving people with more money in their pockets with which to pay the increased VAT".—[Official Report, Commons, 12/6/79; col. 251.] I think that that expresses the position very clearly. He will be leaving money in their pockets with which to pay.

But if we are to analyse exactly how that will affect individual families, may I venture to draw your Lordships' attention to last week's edition of the New Statesman. On page 854, an article by Mr. Peter Kellner endeavours to analyse the effect and moreover states the assumptions on which the writer's argument is based. It takes into account the results of the latest Government family expenditure survey, showing the approximate incidence of VAT and expenditures over various income ranges. Mr. Kellner comes to the conclusion that a pensioner couple on a State pension of £31.20 a week would, on the Budget proposals, gain some £73 per annum. I congratulate Her Majesty's Government on achieving that result for those people. We should have liked it to be more, but we accept it.

But when we come to the low-paid family on £55 a week, we find that it loses £21 a year; a manual worker's family with an income of £90 a week loses £23 a year; a white collar worker's family with an income of £6,000 loses £32; a manager's family with an income of £10,000 a year loses £65, a director's family with an income of £25,000 gains £1,477; and that very rare animal—I do not think that I know one—the person who earns £40,000 a year, will gain some £4,705 per annum. That is the totality of it. On that basis, we are invited to say that these tax changes will provide the mainspring and the incentive for the British people to be galvanised into increasing productivity and into exercising more ingenuity and enthusiasm. In fact, the impression all the way through is that private enterprise is bursting to be rid of the bonds that have been round its neck, that it is anxious to proceed and that this magnificent—dare I say it, bonanza? No, I dare not—this switch of taxation is going to accomplish it.

What are the incentives? It seems to me, and it may seem to your Lordships, a little odd that the greatest benefits should go to those with the very highest incomes. Are we to infer from that that it is precisely those with the highest incomes who have been the most laggardly of all and who therefore need the greatest possible incentive? Are we to assume that the average manual worker needs no incentive and that therefore he is the sole repository of human virtue? If the incentives of the Budget mean anything, if bribes have to be offered to them on this scale, they are an expression of complete no confidence in the entire management structure of British industry. I reject it as a completely unworthy thought in connection with the leaders of many of our successful industrial concerns.

Lord HAWKE

My Lords, before the noble Lord leaves that point, may I remind him that a great deal of British output is produced by small, proprietary firms. These are the people who will now benefit. At present, if they back a loser they go bankrupt, but if they back a winner the Government take all. Those firms will benefit greatly by this Budget.

Lord BRUCE of DONINGTON

My Lords, I am obliged to the noble Lord. I shall come to the position of the small enterprise in a few minutes, but for the moment I prefer to develop the theme that was raised by the noble Lord, Lord Cockfield. In addition to the ordinary financial inducement which the Budget has sought to give to the individual, there can be no doubt that the party opposite are profoundly concerned—it is made quite clear in their Manifesto and in their publication The Right Approach, which I do not propose to read to the House—that profits must be considerably increased: that if there is no profitability and businesses are not run in a profitable manner, then our position will be far worse than before and there will be no money for investment. If profits are too low at the moment—so low that investment is very difficult, or there is no incentive to invest—why is it that the Chancellor proposes to lift dividend controls? But if provision is made for putting so much into reserve, so much into dividends and so much into redevelopment, it would seem that profits are not too low—that already there is scope for dividends to be considerably increased. This sounds a little odd, and it is even more odd that—

The Earl of ONSLOW

My Lords, while the noble Lord is on this point, will he tell us what the percentage figure for profits was 10 years ago and what it is now, and also will he be slightly more accurate with his figures? Double 12½ is not 15; it is 25. And double 8 is 16, not 15. The Financial Times index comes out at 49 points, not 49 per cent. Will the noble Lord tell us what the figure for profits was 10 years ago and what it is now, and, as I say, will he be more accurate with his figures?

Lord BRUCE of DONINGTON

My Lords, I am very grateful to the noble Earl, who could not have been listening to me. I said 49.5 "points:. I did not say "er cent". I will give the figures to the noble Earl. They were 536.2 on 16th May and 486.7 two hours ago on the tapes. The difference is 49.5 points. I did not say "per cent". If, on the other hand, profits are high at the moment, or are likely to become high, what incentive has been given to invest them at home?

I want to return to the question of inducements and incentives because Mr. Edward Heath referred to this question in very apposite terms in August 1972 when speaking to the Institute of Directors. The noble Lord, Lord Cockfield, will probably remember the occasion because I believe that at that time he was the adviser to the noble Lord, Lord Barber—the Chancellor of the Exchequer as he then was. There is a certain familiar ring about what Mr. Heath said, which was: When we came in, we were told that there weren't sufficient inducements to invest. So we provided the inducements. Then we were told people were scared of balance of payments difficulties, leading to Stop-Go. So we floated the pound. Then we were told of fears of inflation. And now we're dealing with that. And still", Mr. Heath said, you aren't investing enough". What guarantee is there in any way that these marginal inducements which have been offered to higher management—and they are marginal, as I have already shown—what certainty, or even what chance is there that as a result of the extra incentives and inducements, investment will reach what the Government consider to be a desirable level in all the circumstances?

Lord ALDENHAM

My Lords, may I suggest that the noble Lord should read an article which appeared in the American magazine Fortune on the success over the last year of what is known in California as Proposition 13, where the reduction in direct taxation led to the creation of 500,000 more jobs in the region and to an enormous boom in prosperity for all? There has been considerable comment in the Press—

Several noble Lords: Order, order!

Lord ALDEN HAM

—and I think that that article should be read.

Lord BRUCE of DONINGTON

My Lords, I am grateful to the noble Lord, who will find that I shall deal with this matter. I have given way several times now. I do not wish to detain the House for too long, but the noble Lord will find that very shortly I shall come to the point which he has made. I repeat: What reason has this House, and what reasons have noble Lords opposite, for any degree of confidence that the con. cessions which they have made to capital —because that is what it amounts to—are going to result in increased investment? I say that, incidentally, in the light of their own forecast in the Red Book that until the first half of 1980 there will be a decrease of one-half per cent. It does not look, does it, as though people will be immediately galvanised into investment?

The Chancellor has also provided many escape routes, if they should become necessary, because he has eased up very considerably on exchange control. Out of the new bonanza of profits and incomes, it is now going to be possible to invest overseas. Also, there is no longer going to be a requirement that two-thirds of earnings overseas shall be remitted to this country. And I see that it will now be possible for private individuals, out of sterling, to acquire houses overseas up to a value of £100,000. What happens if these doughty entrepreneurs decide, in the tradition that follows their conduct under the Heath Administration, not to invest? These remarks are not fanciful.

I now propose to give the opinion of the City column in the Daily Telegraph which, as your Lordships will recall, is almost the House journal of the Conservative Party. This is what appeared in the City column of the Daily Telegraph on 21st May: The attempt to create a new work ethic may not succeed. There may not be enough potential entrepreneurs left to take up the challenge. The extra wealth in the hands of the high income earners"— that is an interesting admission that the benefits are going to the high income earners— may simply go into speculation again". The noble Lord, Lord Cockfield, will have had some experience of that. He will remember the experience under Chancellor Barber where £5,000 million of newly created credit went into speculative property and into fringe banks; and as one of those who believes in restriction of public expenditure he will remember that no less than £1,400 million had to be found by the Bank of England to bail them out of their difficulties when they went bankrupt.

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

My Lords, the noble Lord is being highly contentious and has altogether altered the tone of this debate. He asked a rhetorical question and I propose to answer it with another: where does the noble Lord think that the large corporate and union funds were, except in property, during that period of time?

Lord BRUCE of DONINGTON

My Lords, I thank the noble Earl for his intervention but it is entirely irrelevant to my argument. I am not concerned with who owns it, I am merely concerned with what happened, and there is no point in endeavouring to exculpate the former Chancellor from this act of monstrous folly—

The Earl of GOWRIE

Or those who invested.

Lord BRUCE of DONINGTON

— this act of monstrous folly which was made by those who are supposed to know best: Her Majesty's Government Ministers at that particular time, not of course, excluding their advisers. So where is the certainty that this money will find its way into productive investment? The answer is that the Government do not expect it to anyway, and it is so incorporated in their own forecast.

A noble Lord asked me a question about small businesses. So long as small businesses come within the category of net tax benefits, to which I have referred earlier when I endeavoured to show that the family of a manager earning £10,000 a year would lose some £65 per annum, quite frankly, I do not think that the existing Budget will offer them much assistance. What I will say, as indeed has already been echoed to the hilt by the National Association of Small Businesses, is that the increase in the minimum lending rate by 2 per cent., giving them a 16 per cent. interest on overdraft, is likely seriously to restrict the activities of small businesses. So when we come to consider small businesses I trust that this will be taken into account.

All the incentive about which we have heard so much but about which the Government themselves are not sure, takes place within the context of inflation which. in the 12 months to May 1979 was running at 10.3 per cent. According to the philosophical document of the party opposite, on page 24 of The Right Approach We read: The first essential in economic management is the conquest of inflation". Just so. Now perhaps we may examine what has happened since the party opposite took office. On the basis that all Government expenditure is essentially inflationary we must initially remind them that they immediately put up the pay of the Armed Forces; they immediately put up the pay of the police; they immediately announced another £400 million on defence, and only a short time ago they raised the pay of doctors, dentists, judges and higher civil servants to a total tune of £260 million. So there is 900 million increase in expenditure to start with, and that from a Government who believe in a reduction of Government expenditure.

So the first thing the Government did when they came to office was to abolish the Price Commission, much I have no doubt, to the regret of the noble Lord, Lord Cockfield, who for some time was one of its distinguished leaders. There were immediate consequences. Straight away a large loaf of bread went up by 2p. Then we had the familiar rise in other prices. On the 25th May there was a rise of 1½p on a pint of milk. In the autumn we shall have a rise of between 10 and 15 per cent. in the fares on British Rail, and we are told that there will be further rises in January 1980, bringing it up to 25 per cent. Postal charges are due to rise by a penny in July. Prices of some clothing may go up by some 20 to 30 per cent. because of the effects of the multi-fibre agreement. I am not blaming Her Majesty's Government for all this; I am merely saying that these arc rises and are inflationary. Coal is going up by £2 to £3 a ton on 1st July; electricity charges are going up by 4 per cent., and of course it is now speculated whether, as a result of the increase in the minimum lending rate, mortgage charges may not presently be forced up because the current ordinary bank rate of 2 per cent. above the MLR is now running at 16 per cent. and building societies are finding it increasingly difficult to compete with those large rates and to get more money in.

Then of course we have the Budget VAT increases which will be at least 3½ per cent. Allied to those there will also be an effect upon the insurance premiums, because the bills that now come in in respect of past claims will obviously have to reflect the increased VAT charges. Then we are promised a devaluation of the green pound by some 5 per cent. in the interests of raising farmers' prices. We have certainly not yet heard of any concrete proposals for the reduction of farm prices level obtaining in the Community, but doubtless when Mr. Walker has finished his present exchanges with his EEC counterparts we shall then be able to judge the results of his endeavours, which I take it will be conducted with the utmost friendliness and we shall have none of the aggression of Mr. Silkin. It will all be done in dulcet tones, and I have no doubt that Mr. Walker will return with some result there.

The cut in local authority expenditure will ultimately mean an increase in rates. Moreover, the Government have not taken any account of corporate power. There is a popular supposition in this country that there is a competitiveness engendered by consumer preference; that there is a consumer power in determining price levels. Those of us who have studied this matter for a long time know that not to be true, and if their Lordships opposite take the opportunity of studying the Maldague Report produced for the EEC Commission in 1975/76 they will find that in modern times large corporate power determines its own price levels. That is probably the reason why, out of the 50 most prosperous companies in Europe, no fewer than 25 arc British, and in circumstances where over 60 per cent. of the gross national product of this country is generated by 100 companies one would have thought that perhaps some study would have been made of that.

There is also a potential addition to inflation in the fact that the admitted rate of inflation of 17½ per cent. will also cause an increase in the stock appreciation relief for corporations next year, because they will be able to make a greater claim to reduction of corporation tax. All these things are going to be inflationary and my guess is that inflation will be up to 20 per cent. by the end of this year.

The effects of the Budget and of the Budget Statement and of the so-called strategy on unemployment have not been dealt with in any detail, except the vague threat, of course, that if wage claims are put too high by those who desire to avail themselves of the material incentives that are to be offered to the rest then unemployment may result. But there is a rumour which is adumbrated in the Press that the Government already have a paper showing that unemployment is likely to rise to 2 million before the end of the year. When the Government reply to this debate I will be glad to know whether there is any truth in that, whether in fact the document does exist, because it was reported in some detail in the Guardian of 17th June.

At the end of it all, therefore, this so-called strategy, where are we? We are at the position which is adequately set out out on page 11 of the Budget report, which shows gross domestic product down by 1 per cent., consumer expenditure down by 1 per cent., Central Government expenditure on goods and services down by 2½ per cent., private sector investment down by 1½ per cent., export of goods and services up by 5½. per cent., stock building down by ½ per cent., imports of goods and services up by 1 per cent., manufacturing production down by 2½ per cent. So this is going to be the position up to mid-1980, despite all the galvanised efforts which we are supposed to experience during the forthcoming months. Our attitude, therefore, to this Budget is that the appeals to the British people contained in it are far too narrow. They are based on an assumption that the only thing that will put the British economy right is monetary inducements being offered to either entrepreneurs, on which the greatest possible emphasis is placed, or to the workers themselves. Well, I am not sure about this. I cannot help feeling that the principal task of Government, of whichever party, at this time, in view of the state of the nation's affairs, is to give a lead towards the unity of the nation as a whole, to produce policies that are not provocatively divisive, as I believe and my noble friends believe this policy is going to prove to be.

This is not really an economic strategy at all. I am fortified in this by the remarks that were published by Mr. Adam Raphael in the Observer on Sunday. The Observer, I believe, is a respectable newspaper. After reporting on his conversations with Back-Benehers and Ministers as to what the general mood of all this is, he says this: The argument then is now or never. If the Government does not seize this opportunity now it will never have another chance. To charges of haste, risk and insecurity, Treasury Ministers cheerfully plead guilty. One told me one Treasury Minister, that is— that even if the whole edifice came down in ruins the Government would have at least pushed things so far that many of the tax changes would be impossible to reverse". It is a grave allegation that a Treasury Minister should speak in this way. There are a number of Treasury Ministers, of course. There is the Prime Minister, who I am quite sure would not talk to Mr. Raphael; there is the Chancellor of the Exchequer, who I am quite sure would be the soul of discretion; there is, of course, the noble Lord, Lord Cockfield, himself, who I know quite well would not dream of talking to the Press in any circumstances. But that does leave the rest. I wonder which Treasury Minister it was, because it does seem to me that he has formed a very accurate view of the situation.

My Lords, this is not a Budget which contains the elements of any strategy for Britain's recovery. It is a Budget which pays off the Government's obligations to its corporate backers and very little more than that. It does nothing to ensure a unity of purpose vital to the national wellbeing. It does nothing to contribute to the future of Great Britain.

5.27 p.m.

Lord BYERS

My Lords, I should like to begin by expressing the hope that in this new Parliament 40 minutes—or 31, for that matter—will not be regarded as par for the course for any Front Bench speaker in any debate in this House. As one of those, perhaps the principal one, who had these clocks put in this House, I should like to offer the noble Lord, Lord Bruce of Donington, a new prescription for his eye-sight and his spectacles. I welcome this debate on the Budget not least because it gives the House an opportunity of hearing the maiden speech of the noble Lord, Lord Miles, and we can look forward to that in. I hope, about 15 minutes time.

The Liberal Party has for a number of years put forward the view that rates of direct personal tax had become far too high and that they were a major disin- centive to the extra effort needed from management and from the workforce. The Liberal Party had some influence on the Labour Government to reduce direct taxation during the operation of the Lib-Lab pact, and the corollary of that policy, which we fully accepted, was that the burden of taxation should shift towards an increase on expenditure. Therefore, in principle we welcome the new policy outlined by the Chancellor to reduce direct personal tax and to replace it by an increase in indirect taxation.

I must say to the noble Lord, Lord Cockfield—if I may remove his attention for a moment from the statistics which he is no doubt compiling—that it is a bit thick to blame Lloyd George and the Liberal Government of 1906 for the economic decline of this country in 1979. May I remind the noble Lord that among that great Cabinet of 1906 was Winston Churchill, who was a strong radical in those days. In fact he believed wholeheartedly in many of our policies. He told me so in 1947. He said that when he met Franklin Roosevelt in the middle of the Atlantic to sign the Treaty they both agreed on free trade as the very great issue on which politicians ought to agree. He also said, "I joined the Liberal Party on the issue of free trade, and I joined the Conservative Party later for many reasons, most of which I have completely forgotten". But let us not forget that the Liberal economic and social policy of that particular period gave new life to millions of people by changing the burden of taxation towards direct taxation, which was needed at that time, so that we could pay pensions to millions of people, so that we could do things for people in the public sector. This is a matter of degree; at one part of the century you need a certain emphasis and at another part of the century you need a different one.

Before I comment on the main proposals, I want to say a word on economic strategy, and here for once I follow the noble Lord, Lord Bruce. I do not think that this Budget amounts to a strategy at all. I think that the proposals might be regarded as a tactical, manoeuvre or a change of course, but, an economic strategy requires much more than that: it requires more than a hint that this is a first step and more than a hint that there are some more goodies on the way. From a Government at the beginning of what could be a four or five year term of office I believe that it requires a positive declaration of what the Government will strive to achieve over that period and the conditions which they believe must prevail if the policy is to succeed.

If the public and if business at all levels could see what the long-term plans are and if they could feel confidence in them, there would be a far better hope of realising them. Clearly the Government would have to make it clear that changes in world and domestic conditions might have to lead to adjustments in policy. But, if the plan was basically sound those changes would not be total upheavals and sudden U-turns. That is what frightens me. Those are the things which strangle initiative and undermine commercial decisions.

I would commend to the noble Lord, Lord Cockfield, a Hansard Report which was produced last September on Politics in Industry—the Great Mismatch. It was produced under the chairmanship of Sir Richard Marsh and those involved were the noble Lord, Lord Armstrong, myself, Mr. Aubrey Jones and others. We discovered the tremendous effect which sudden changes in political decisions and political policies had on the long-term plans of industry and business. The mismatch is really quite remarkable. That is why I believe that business and industry want to be able to see what the Government have in mind for at least a period of four years, even if it is only a rough plan, and to that extent I agree with the noble Lord, Lord Bruce of Donington—this is not a plan. We believe that the Government would be wise to adopt a real economic strategy and take the country into their confidence at an early opportunity.

As to the specific proposals, the boldness of the Budget is to be admired, but if this is the first step in a four-year strategy, I very much doubt the wisdom of giving such large reductions in personal tax and such a severe rise in VAT in the first stage. The reduction in direct personal tax and an increase in tax on expenditure would in any event have been divisive. Let us face it, a change of this magnitude will be divisive and we accepted that in the Liberal Party. But to increase take-home pay by thousands and tens of thousands at the top end of the income scale, and by a pound or two a week for the low income groups is bound to be extremely provocative and divisive.

To have achieved the proposed rates over two or three years of both direct and indirect taxes, that is the 60 per cent. top income tax rate and the 15 per cent. VAT, would I believe have been more sensible and more generally acceptable to the country. Moreover, it would have given an opportunity to see whether we are right in thinking that lower direct taxes result in greater output and greater productivity and whether they are likely to reduce the vigour and level of pay demands. We have had no proof of that yet, and I certainly hope that it succeeds.

On the subject of pay and incentives, I believe that the Chancellor has missed a golden opportunity to boost incentives still further and to reduce the extravagance of pay claims by not improving the scope of employee shareholding and profit sharing schemes. The present arrangements are far too modest and there is evidence that a share in the business and in its profits improves efficiency, productivity, and, what is more, job satisfaction.

This Budget is a gamble. I sincerely hope that it succeeds, but I believe that the Government should have contingency plans ready in case it does not succeed. In those contingency plans there should be a place for an incomes and prices policy, perhaps not as rigid as we have had in the past, but at the very least there should be a system of establishing the true facts about incomes and pay so that accurate comparisons can be made. Last winter, in my view, there were far too many lies and inaccuracies being published about what was, in fact, take-home pay in one industry or one firm or another. I hope that we would try to get accurate pictures of what we really are having to deal with and not be told on one occasion that the take-home pay is £60 only to discover that in fact it is £85. Those are the type of things which undermine any policy and any system of equity.

While I am dealing with this subject I should like to point out to the noble Lord, Lord Cockfield, that I hope the Conservative Party will not lay claim to a monopoly as regards small firms. That is a policy on which we require consensus. The Labour Administration did a great deal for small firms in the last two years of its life. At the request of the Liberal Party it put Harold Lever in charge of the small firms section, and he did a great deal for it. Peter Shore through the Inner Cities did a great deal too, We were able to obtain from Mr. Healey and other Ministers about seven or eight important concessions. We do not want to boast about it; we do not want to take the credit for it: let us all work together, because I believe that through the small firms we shall increase employment in a remarkable way.

Another and probably the most important ingredient of an economic strategy is the method of arresting and reducing inflation. If the tax cuts result in extra effort and productivity in our manufacturing and service industries, particularly in middle management and in skilled trades, that must help to restrain inflation to some extent. But, the major problem is to get over to organised labour and indeed to management that wage increases which are not earned can only raise prices, stimulate inflation and, if the wage earner still demands unearned wages because prices have gone up, the vicious spiral will never be stopped. That is the real problem for which all of us have a responsibility.

The arrest or reduction of inflation cannot be the sole responsibility of any Government. We are all in the game together and anything or anyone which reduces the effectiveness of people's effort in the private or in the public sector inevitably puts up costs and makes the arrest of inflation more difficult.

The relatively new practice of taking industrial action or striking in support of a wage claim as a weapon of first resort rather than of final desperation, must cost the country tens, if not hundreds of millions of pounds in loss of efficiency and higher costs. The same can be said of taxi drivers causing other vehicles to waste vast quantities of fuel in traffic jams. The same can be said of the disruption or the loss of efficiency which arises when parts of the Civil Service are brought out on strike or take industrial action. Who is to take a grip on these problems and save the country from these appalling self-inflicted wounds? It cannot be done by the Government alone. That brings me to what I believe to be the most important issue facing the country at present. It is fundamental to our national recovery and it could be fundamental to our national decline. It is the constitutional issue which has been vented in the Press in the last few days. The type of democracy which we have built up in this country so carefully is based on the acceptance by the community of certain principles and certain values. If those are discarded or undermined our whole democratic system is at risk. The most important principle is that Parliament is supreme and that subject to certain constitutional safeguards in which this House must play a part, the Government of the day, if they command a majority in the Commons, are entitled to put their policies into effect. That is now being challenged by one of the most important institutions in our democratic system—namely, the TUC. If it seeks to challenge this fundamental principle, how can we expect lesser people and lesser organisations not to follow suit? This is the direct road to anarchy. By all means let us uphold the right of any person or institution to seek to persuade by argument and peaceful means to change any policy of any Government, but the TUC and sonic of its leaders have gone much further than that. Mr. Drain has said: We shall seek to change the Government's mind if necessary by industrial action". That is anarchy and it must be resisted in all quarters. Mr. McGahey was rightly slapped down by Joe Gormley for calling for a massive campaign to bring down the Tory Government on the Budget. The fact that such an atittude could be expressed shows how important it is for the rest of us in all Parties to defend our constitutional practices.

Mr. Len Murray, for whom I and other Members of this House have the greatest respect, tells us that the proposals in the Budget could lead to action by the unions, possibly extending to industrial action. These are very serious words. The trade unions must not think that they can stop the Government from implementing their Budget in favour of measures approved by the TUC. What self-respecting Government could accept such dictatorship from any quarter? Let us suppose that the CBI tried to do it to a Socialist Government; it would still be totally unconstitutional and undemocratic.

Therefore, if the TUC and the trade unions use their undoubted power—and it is undoubted power—against any policy they dislike, we shall never achieve the stability that industry in this country needs in order to bring about the recovery which could be within our grasp. I welcomed what was said by Mr. Callaghan at the weekend in the strongest, most forthright terms, and we should support that sort of policy. We cannot afford to abandon the principles and the values upon which our democracy has been built. Those who attempt to do so will undermine any economic or social strategy and send the country into a decline from which it will be very difficult to reverse the trend towards a decline in our living standards. Therefore, on that note, I hope that we can return to dealing with the Budget in a sensible way, by argument—but not by the threat of force or industrial action.

5.41 p.m.

Lord MILES

My Lords, a few years ago a celebrated American scientist, Vannevar Bush, a member of President Roosevelt's think tank, made the following pronouncement: The greatest event in the world today is not the awakening of Asia, nor the spread of Communism —vast and portentous as those events are. It is the advent of a new way of living, due to science; a change in the conditions of work and the structure of society which began only recently in the West, and is now reaching out over all mankind". He then continued: We have now entered an age when the surplus value of which Karl Marx [so gaily] spoke will consist not of the fruits of labour but of labour itself —great reservoirs of men and women with time and opportunity to enrich their lives and the lives of their families with a multitude of horizon-stretching possibilities". I have here a piece of silicon weighing 5 ounces. This is a very common metal, but from this piece alone about 30,000 chips can be made and cut. In fact, this piece is one-fiftieth of an inch thick and has over 200 marked out on it ready to be cut. It is a tiny system with its circuits, and in its middle just one piece of silicon one-eighth of an inch square. That is a very big one because now they are down to one millimetre, inside which the whole system operates. I find this very difficult to describe. Perhaps we could get men like Vivian Bowden and Lord Rothschild to explain it to us in short sessions in one of our Committee rooms. I would describe it as a memory bank, able to collect information, to store it and file it and then to dispense it at the speed of light, either as printed or spoken text, or visually as view data, and which when properly programmed must inevitably direct and operate vast areas of our industrial, commercial and domestic life.

Therefore, I believe that we must be prepared to hear a Prime Minister of either Party pronounce: "Our Party, Mr. Speaker, is proud to have increased the leisured classes in this country by three quarters of a million in the past five years, and we look forward to doubling or even trebling that number". The only problem to be sorted out—and it took me a long time to compose this rather literary sentence—is whether, in their maturity, when they are really going full-steam ahead, the micro-electronic systems and all that spring from them will be made to provide adequate income for the leisured classes, the millions, which they must inevitably create. I assure noble Lords that the English will find no difficulty in using leisure. I see it around me as I come into this Chamber; the first thing I noticed was a propensity to leisure. The English will take to leisure as the West Indians took to cricket.

As I see it, the present and oncoming situation is no longer a matter of confrontation between management and unions. It will be a colossal confrontation of management, plus unions, plus everyone who is not in a union to meet the challenge of unthinkably rapid technological advance. We thought that the new industrial revolution was more or less complete. We have had nuclear fission, the contraceptive pill, transplant surgery, penicillin, the laser, carbon fibres and the old-fashioned computer that fills half a room. But most of us left out of account this micro-electronic revolution that was bearing down on us—the biggest revolution of all. We had the chance to get in on it, even to initiate it; but we missed the boat. Japan and the United States beat us to it, and we must now be content to pick up as many as possible of the appetising fragments that fall from their tables.

The trouble is that we are less prepared to meet this great industrial challenge than we have ever been before in our history. On 21st March, 1887, 92 years ago (this is the fruit of more research upstairs where we have a marvellous library), Thomas Henry Huxley, one of the very greatest Victorians wrote in The Times: We have already entered upon the most serious struggle for existence to which this great country was ever committed. The latter part of the century"— he was talking about the late 1890s— promises to see us in an industrial war of far greater magnitude than the vast conflict which overshadowed its opening and from which we only emerged by the skin of our teeth". That was the Napoleonic wars. He was of course referring commercially to the entry of Germany and the United States into the world market-place. We are now up against a bunch of much hungrier fighters: intelligent, ruthless, ingenious, disciplined and labour-intensive, with nothing to lose but the chains of their far-Eastern poverty and pitiful standard of living. They are saying: "Now, it is our turn". As if Japan, Korea, China and the Philippines were not enough, we now have our American cousins about to steamroller the world's automobile markets with their brilliant new Chevrolet X car, priced at only 4,200 dollars, about to be distributed all over Europe from a new trade centre in Antwerp. Only the fact that we continue to drive stubbornly on the lefthand side of the road will, for a brief spell, spare us this further torment.

To all this I suggest—as all of us who are concerned about these matters must suggest something—a moderately heartening solution: the maximisation of our incomparable inventive skills from which all work and all wealth spring; the tightening of belts, the shedding of all superfluous national fat, the readiness to abandon all thoughts of higher material living standards and, above all, the determination to bind up as many wounds in the body politic as we possibly can.

There were and are many hopeful signs that we were on the way to doing this: the invasion of television by regional accents— "When the Boat Comes In", "Hazell"; Black Country dialect, North Country, Geordie and so on—all going down into the roots of our national being; the serious exploration of working-class themes also on television; pop dress, recent fashion for jeans, not even new ones but made out of bits of old ones stuck together —that is a sign!; a great music movement originating in a Liverpool cellar which has spread all over the world and which brings glory to our Exchequer and to our artistic life; and, in my opinion, the immensely difficult but brave and imaginative attempt to unify our education system; then, by the same token, the upper classes (if I may use this terrible expression) moving downwards, as it were, to meet their fellow human beings. This is all happening: supermarket shopping, the do-it-yourself trade, painting, carpentry, home gardening, home cooking, washing up, university kids, as I well know, and hospital students working in bars, launderettes, hotels, theatre bars. All these are tokens of the coming together of the classes, which was happening all too slowly, but which was happening, and which could not have happened, I think, in any other country but England.

When I was having Communion the other day in our village church our vicar, this charming chap, said, "It is our little communal feast" —that is what he called it. As I knelt there I thought, "communal feast", and then I said "community", and then I said "communicate", and then I said "communism". I felt why were the Marxists allowed to get away with the word "communism". This is communism. Indeed, at the end while we were taking our bread his golden retriever came in from the vestry and knelt there, and I nudged the vicar and just said, "For God's sake, give him a couple of wafers".

So what I am talking about is something akin to Communism which only we could ever have thought of, or evolved, which is still possible tied together, as it were, by the cord of Christian compassion which has short-circuited church dogma and which runs like a steel thread through the roots of our society, and most of all perhaps at the counters of OXFAM where people of all classes meet to fit themselves out in other people's clothes. This is a marvellous thing in Dunmow and in Bishops Stortford. When I turn to this side I should like to mention that by this time you have weighed up my height, which is 6' ¼". My wife is stock size, and any parcels that were left out in the Lobby labelled "Confidential" would be proudly used. We are not too proud to use decent worn out clothes. I should not have come begging, but I know you will understand that.

However, this is a revolution indeed. It is not going to be easy, but then it was not meant to be easy. As our friend John Donne told us 350 years ago: This life is a business and a perplext business, a warfare and a bloody warfare, a voyage and a tempestuous voyage". And he added in his own words: Don't think that it's going to be any easier if and when you get to Heaven, because it isn't". My Lords, thank you sincerely for giving me such an attentive and sympathetic hearing. I only once met an audience fuller than this—it was more solid, and as receptive and gracious—and that was when some 15 years ago I ventured to give a performance to a misguided audience, but a very gifted audience, in Wormwood Scrubbs.

5.53 p.m.

Lord BOYD-CARPENTER

My Lords, it is a pleasure as well as a privilege to be given, by chance, the first opportunity of congratulating the noble Lord, Lord Miles, on a triumphant first night. His speech was a fascinating one. Your Lordships have been disagreeing this afternoon and will continue to disagree about a great many things, but I would feel that we must be unanimous in saying what pleasure it gave to all of us to listen to that speech with the very wide scope that it had, with the charm which exuded from it, and the clarity of thought which illumined it. It is most encouraging to think that after a triumphant first night a whole series of further performances is to be hoped for. We have all had a great privilege this afternoon, and I certainly for my part enjoyed it enormously.

I should also like to congratulate, however belatedly, my noble friend Lord Cockfield on his appointment, and at the same time congratulate the House on this. It is the first time for some years that this House has included among its membership a Treasury Minister. I mean no discourtesy to those who in the previous Parliament had the difficult job of replying to debates on economic and financial affairs here to say that in the past we have missed that. No performer, however able, is really in a position to answer a serious debate if he is not in the Department responsible for the policy which that debate is about. The best of briefs have their limitations, as those of us who have had to speak to them from time to time know only too well. Actually to have it (I hope my noble friend will not mind the phrase) from the horse's mouth is a much more satisfactory way of dealing with these matters, particularly because in your Lordships' House there are noble Lords who speak with great authority on almost every subject, and it is unsatisfactory if our debates have to begin or end with a Minister who has nothing more to support him than a departmental brief, and some official advisers deliberately put at a most remote and invisible distance.

I congratulate too, if I may with due humility, my noble friend on his admirable speech. I am particularly glad to follow him in this debate because of the reference he made to the handling of a somewhat similar situation in 1951. The noble Lord and I are probably the only two Members of this House here today who were officially involved in dealing with the somewhat similar situation which the Churchill Government had to encounter when it came to power in October 1951.

The noble Lord was then a Commissioner of Inland Revenue. I believe he was the youngest official to attain that high rank since the records of that department have been kept. In parenthesis, some of us hope that the records of that department do not go back too far. I happened to be Financial Secretary to the Treasury under the noble Lord, Lord Butler of Saffron Walden. We had a similar situation with which to deal. We had a situation in which there was considerable depression; a lack of confidence; government expenditure running high and largely out of hand; over-government; most of the wartime controls still preserved; a discouragement, a malaise, which were eroding the economic basis of our society.

I have said before, and I hope the House will allow me to say again, that I think my noble friend Lord Butler has never had the credit to which he is entitled for the job of work that he did in the early part of the 1950's, from 1951 onwards. Nevertheless, it remains the fact that he reduced taxation; that confidence returned, that unemployment fell, that production rose; that the standards of life of all sections of our society rose. Indeed, so successful was he that it was possible only a few years later for the Prime Minister of the day to use that famous expression, "You've never had it so good".

The experience which the noble Lord and I share of that traumatic time in 1951, and of the way in which it was faced, may be of some help to the House in considering what is the right thing to do in this situation. Indeed, at that time we had one worse handicap; as we had no North Sea oil, we had a balance-of-payments problem on top of everything. It is the historic fact—and even the noble Lord, Lord Bruce of Donington, cannot dispute it—that the steps taken to restore confidence, to restore incentive, to revivify the economy by my noble friend Lord Butler actually worked, and that this country enjoyed thereafter the most prosperous period that it has had since the middle 1930s. So I naturally view what Her Majesty's Government arc now doing with the greatest of confidence. The Budget that we are debating makes a basic change of direction in the management of our economy. It gives priority to the creation of wealth rather than to its distribution. It involves giving great importance to incentives.

The noble Lord, Lord Bruce of Donington, in the course of a speech in which, I hope he will allow me to say, he sometimes perhaps confused length with weight, asked: what are these incentives? I do not think it is very difficult to answer that. The basic incentive is to say to a man or woman, "If by working harder, by doing overtime, by training yourself for higher skills, you earn more, you will be able to keep more of what you earn. You will be able to provide your wife and family with a better standard of life as the direct result of your own efforts and skills". That is the basic incentive that makes a free enterprise society tick and it is that vital incentive which is lacking at the moment.

Lord Bruce—at this stage I began to feel a little nervous about the state of his blood pressure; I am a great admirer of his and I have known him in the House of Commons for many years—was full of what I think was synthetic indignation about the alleged reflection on higher management that they needed any tax reductions by way of incentives. Does the noble Lord not appreciate that higher management in this country has borne levels of penal taxation unequalled through-out the world? It is not a question of saying, as the noble Lord tried to suggest, that they were inefficient and needed stirring up. It is a question of the fact that they have been subjected for years, and particularly by the Government whom he supported, to the most powerful dose of disincentive that any section of men has been subjected to in any free country in the world. Indeed, to take, as in the case of some of them who have high earnings and a modest amount of investment income, 98 per cent. of their total income by way of tax is not taxation as I understand it but confiscation.

It is really no use Lord Bruce trying to suggest that there is something quite infamous—he used the phrase "provocatively divisive"—in remedying a state of affairs which does not exist in any other country in the world. It so happens that at the time of my right honourable and learned friend's Budget I was attending a business meeting in Switzerland; the Swiss businessmen with whom I was speaking, so far from feeling any great enthusiasm about the Budget, were slightly shocked that a tax rate on higher earnings of 60 per cent. was still being preserved. They regarded that as excessive and, as the House knows, that is a rate which is above the level ruling among our main competitors. Therefore, the whole issue on which Lord Bruce worked himself up into such a passion, calling it provocatively divisive, is not an alteration that puts us out of line but one that brings us into line with the general practice of advanced industrial countries. Indeed, it does not even go quite so far as that; further reductions in subsequent Budgets will be necessary before that can be done.

Is that provocatively divisive? Are our people really so jealous and mean-minded that they would regard the alteration of a system of progressive taxation which has got completely out of hand and has become penal as provocatively divisive? I do not believe that is so. I do not believe that the fact that people earn large sums of money for hard work is, except among a few professionally jealous people, regarded as something wrong. Certainly, noble Lords opposite cannot suggest that. It was they who fixed the salaries of the heads of the new public bodies which they created, like the BNOC, at very high levels indeed. Was it divisively provocative to fix the salary of the chairman of the BNOC at £35,000 or whatever it was? The people of this country are more adult, more civilised and more tolerant than one might have thought from listening to Lord Bruce, and they do not think that rates of taxation which go beyond the ordinary need to raise revenue, which are plainly politically motivated and which have a confiscatory effect are a sensible method of conducting the taxation of this country.

Lord MISHCON

My Lords, I wonder whether the noble Lord would be fair to the argument that, as I understood it, was adduced by both noble Lords, Lord Bruce of Donington and Lord Byers. It was not a complaint about a reduction in taxation but a complaint about an unbalanced reduction in taxation which was provocative to those at the lower end of the wage scale, who would also receive incentives but who were going to get very little benefit, whereas those at the upper end were going to get great benefit.

Lord BOYD-CARPENTER

The noble Lord must be a mind reader because that was precisely the point I was coming to, with particular reference to the noble Lord, Lord Byers, although he does not appear to be in the Chamber at the moment. I think the answer to the noble Lord's perfectly fair point is this: first of all, the high penal rates at the top end of the scale are wholly unjustifiable in themselves, and the rectification of them does not necessarily involve justifying rectification of other, less serious, imposts at other levels. Secondly—and this is far more important—tax levels like that on key people damage the economy as a whole and therefore damage the interests of all. If able men insist on working abroad because abroad they are entitled to keep a larger proportion of what they earn, they do not suffer. They may indeed benefit. It is the community as a whole which suffers. It is the people earning much smaller rates of pay lower down the scale who perhaps suffer the blow of unemployment and who certainly suffer from the reduced strength of the national economy.

That brings me to Lord Byers' criticism —perhaps a rather typical one from the Liberal Benches—in saying, "It is a good thing to reduce high levels of taxation, but you should have done it more gradually, in a series of Budgets". It is that kind of argument which I think explains why the Liberal Party is where it is today, because it indicates a failure to grasp the seriousness of the national position. Read, for example, Sir Nicholas Henderson's valedictory report from Paris or the powerful words of the Permanent Secretary to the Treasury in his note to the Permanent Secretary to the Department of Industry only a month or two ago: The startling and disturbing conclusion is that we have been accumulating prospective losses of real resources at a rate faster than the growth of national income". The truth of the matter is that the situation will not wait for the gradualism which Lord Byers suggested. The time is a time in which, though action, I accept at once, brings risks, the risks of not taking drastic action are far greater. There is perhaps an analogy in the medical sphere. If somebody is suffering from a progressive disease, the physician treating him may have two alternative courses; he may treat him with pain killers and sedatives so as to make his decay less uncomfortable, or he may decide to resort to drastic surgery to restore him to full vigour. That analogy is, I believe, very close to the position of the Britisheconomy. I repeat, one cannot read those terrible words in Sir Nicholas Henderson's despatch—I am sure all noble Lords have read them—without being extremely disturbed by the progressive decay of our national economy.

Therefore, the answer to Lord Byers and Lord Mishcon is that if action is to be successful to restore the vigour of our economy, then it must be taken at once. There is no time. We cannot wait, and I am perfectly certain public opinion in this country realises that. Indeed, I think that one of the rather depressing aspects of the excitement, the sense of shock, which the Budget has caused is the cynicism about politicians that that shock suggests. It is apparently regarded as almost indecent for a newly-elected Government actually to do what, when they fought the election, they said they would do. We see in that direct sincerity of approach very much the hand of the Prime Minister. I need only quote Mr. Anthony Wedgwood Benn as a fairly impartial witness; that it was precisely that sincerity and conviction of the Prime Minister's which produced the quite remarkable response from the British electorate.

My Lords, I hope that the Government will go on in this way, and I hope that they will be very vigorous indeed in their attack on public expenditure, which we have heard very little about so far. As I have mentioned, I went through this in 1951. In fact my own job was directly related to public expenditure. Belive me, my Lords, I know how difficult it is. I know the problems which face one. I know, too, that one will not be able to reduce the volume of public expenditure unless one removes functions from Government; and those must be functions that are not pure waste but functions that are quite useful. Government must judge whether they are useful enough to entitle them to be charged on taxation at a time when the reduction of expenditure by the public sector has to be achieved.

There are painful and difficult judgments in front of my noble friend and his colleagues. I agree that they have made an excellent start. I believe that no one mourns the Price Commission. I hope the Government will make sure that the staffs there who no longer are required are not just redeployed in Whitehall, but that savings are made in that direction. There are a number of other bodies at which the Government must look. I know that the Manpower Services Corn-mission does a very useful job, but the numbers employed by it have multiplied enormously in recent years and there must be room for reductions there if the Government are prepared—as I hope they are—to accept some of the disadvantages that those economies will produce.

I must not detain the House, although there are quite a number of other examples of areas in the Government field where economics can be achieved and, I suggest to your Lordships, really must be achieved if the shift of resources from the public to the private sector which, as I understand it, is the basic part of the Government's policy is to be successful. I commend to them only that they look very closely at the National Enterprise Board. Just before the election, this House, with a manifest lack of enthusiasm on the part of many of us, passed the Industry Bill, which equipped the National Enterprise Board with the right to spend up to £4,500 millions of public money. It is fair to noble Lords on the Bench opposite to say that they undertook not to make any commitment to that pending the general election. I should like to hear from my noble friend who is to reply what is happening in this regard. Is there really any need to retain the National Enterprise Board at all? If there is, I hope that my noble friend will assure me that what the Public Accounts Committee in the last Parliament asked for—namely, that the board's accounts should be vetted by the Comptroller and Auditor General and the Public Accounts Committee—will be granted. But I must confess that should be far happier if the organisation were wound up and its staffs, too, redeployed to useful work.

There are many other examples, and the Government will need to be very hard and very vigorous in their efforts if they are to be successful in dealing with them. But it is my view— and I commend it to the House with due humility—based a little on a certain amount of experience at the Treasury and in a similar situation years ago, that this is a new beginning; that it offers perhaps the last opportunity for us to get out of the steady decline, relative and absolute, in our standards, to energise our economy and to stimulate our people, so that this country, which has been through so many difficult times in the past, shall once again be able to surprise its friends and dismay its enemies by one of those last-minute recoveries which historically we have staged from time to time.

It seems to me that on this occasion we have left it rather late. I believe that the Government's enterprise and the strategy—I emphasise the word "strategy" —that lies behind the Budget and is embodied in it, are right and offer our last chance. But it will need—and I commend this to my noble friends on the Front Bench—courage and determination. There is an apt quotation from the book of Joshua to which I would refer them. It is a passage which was in the first lesson read in churches in this country last Sunday, describing the scene—and perhaps this is a little appropriate—when Moses had been removed from the leadership and the duty of leading the people into the Promised Land had devolved upon Joshua. His directions from the highest authority were brief and to the point: Only be thou strong and very courageous".

6.16 p.m.

Lord KALDOR

My Lords, I hope that I shall be forgiven if I begin my speech by echoing very much the words of the noble Lord, Lord Boyd-Carpenter, in two respects. First I wish to congratulate the noble Lord, Lord Miles, upon his extremely charming and at the same time subtle, sophisticated maiden speech. It was admirable for its brevity and for its wit, and I hope that we shall hear more of the noble Lord in the future. I should also like to associate myself fully with the noble Lord in congratulating the noble Lord, Lord Cockfield, upon his appointment as a Front Bench Treasury Minister. Lord Cockfield is aware of course that we have known each other for a long time, in varying contexts and at different periods. There was a time when he was head of the Statistics and Intelligence Section of the Board of Inland Revenue and I was a member of the Royal Commission on Taxation. He wrote an absolutely admirable paper on the taxation of capital gains, which was reproduced in full as an annex of the minority report of that Commission, which set out fully the correct principles of taxing capital gains and which indeed formed the basis of the 1965 legislation.

Later it appeared almost as if we were coxing and boxing in the Treasury. He was appointed to the same position to Mr. Barber as I had previous occupied under Mr. Callaghan and subsequently under Mr. Healey. In that capacity he elaborated the famous tax credit scheme which I much admired for its ingenuity even though I was unable to support it in that form. But at that point we parted company, because I failed to achieve the ultimate distinction of being a Front Bench speaker for the Government. However, it is a matter which I do not regret. I feel that the constraints that it imposes on one's freedom of expression, to have to defend whatever the Government do or propose to do, must be particularly painful for an economist, and that is something which one escapes by not being a Minister. On the matter of direct taxation my views are on record. I published a book on the matter nearly 30 years ago, entitled An Expenditure Tax, and this idea was recently revived, both in the United States where it received much publicity, and in this country where last year it formed a major recommendation of the so-called Meade Committee on tax reform. I could hardly criticise that part of the Budget which reduces the top rate of income tax to 60 per cent. on earned incomes. I repeatedly recommended it in my book. It was also given expression in the minority report, and I had also urged this in various reports to foreign Governments. Indeed, I recommended that the top rate of income tax should be no higher than 45 per cent.—which is still a great deal lower than the 60 per cent. now. Anything above that should be by way of a tax on spending, by an expenditure tax on a progressive schedule of rates on the total personal spending of the taxpayer.

However, the Government choose to make that desirable switch from the taxation on earnings to spending by increasing VAT, which is highly regressive and not a progressive way of taxing spending. That action stands condemned on the grounds given by Thomas Hobbes, one of the greatest English philosophers when he said: It defrauds the Commonwealth to encourage the luxurious waste of private men". In this Budget the tax remission to a millionaire or to a man with £50,000 a year is well over £6,000 a year—enough to allow him to get a second Rolls-Royce.

I heard just now from the noble Lord, Lord Boyd-Carpenter—and no doubt we shall hear it from many other speakers on the other side—that all this is small beer: a small price to pay for the enormous advantages which efficient entrepreneurship and risk-taking can bring us, the lack of which has brought us to the situation which has been so well described recently in the report of Sir Nicholas Henderson which the noble Lord quoted, and there are also some other reports in the same vein. May I in return recommend the noble Lord to make a study of the speeches of Joseph Chamberlain which are available in the volumes edited by Julian Amery. In those speeches he will I find exactly the same sentiments expressed in almost the same words as were put to us recently by Sir Nicholas Henderson. This was in 1902. When the noble Lord, Lord Cockfield, said that the Lloyd George Budget of 1909 was the beginning of the end, the beginning of the decay of this country, then I am afraid that I can only suggest that he consults the economic historians.

The worst period in British economic history from the viewpoint of relative decline of falling behind other countries, was in the 80s and 90s of the last century and in the Edwardian age. That age, as the noble Lord, Lord Cockfield, knows, saw a rate of income tax which was not progressive; it was not 30 per cent. or 25 per cent. but only 3 per cent. a year. It remains to be seen about the £6,000 a year now given to the £50,000 a year man, who certainly has many ways to avoid the formal 98 per cent. tax (or the 83 per cent. rate on earned income). I do not need, nor have I the time, to enumerate the large "assiette" of loopholes to tax avoidance that the British tax system permits to people in that position.

Lord BOY D-CARPENTER

My Lords, on that point is the noble Lord really justifying a high penal rate of taxation on the ground that by various devices this can be avoided? Would he not rather agree that the other evil of taxation at this level is to stimulate devices, respectable or the reverse?

Lord KALDOK

My Lords, I regret that the noble Lord has not read my works on the subject, for this is exactly what I have said, not once or twice but on many occasions, and with a great deal of emphasis. A high nominal rate of taxation necessarily leads to all kinds of evasion and avoidance devices; you get to the situation of taxing more and more on less and less, and you end up with paying 100 per cent. on nothing.

I must get on, because I cannot speak for too long and I have a lot still to say. What I want to say is—and this comes by way of criticism of Lord Cockfield's intervention concerning the present Budget and the burden of the present Budget—that everyone earning under £10,000 a year will be worse off. The man on average earnings, which according to the latest figures is £92 a week, will pay additional tax in income tax and VAT combined equivalent to 2 per cent. of his present taxable income. A man on two-thirds of the average income, now on £61 a week, will get no benefit whatsoever from the income tax rate reductions because the first reduced rate band of 25 per cent. was the only rate in the whole tax schedule which this Budget has not reduced. He will be out of pocket to the tune of 2½ per cent. of his income or £1.50 a week.

I know that the Chancellor of the Exchequer in his Budget Statement said the opposite, as did the noble Lord this afternoon; but they are both wrong. They are juggling with figures. The Chancellor of the Exchequer said in his speech that the average family will be £1.30 better off. This is not so. He forgot that we live in a period of inflation. In an inflationary period income goes up and there is an inflationary fiscal drag which makes heavier the real burden on the same income. A man earning £92 a week this year earned £81 a week last year and the cost of living was 10 per cent. lower. The low wage earner who gets £62 this year will not have a real gain of 75p a week as against last year, because to make a comparison you must take into account that his last year's income was not £60 a week but only £52 a week, and the percentage of income paid in income tax and in indirect taxes is larger now under this Budget than it was on the same man in last year's Budget.

As the noble Lord, Lord Cockfield, well knows, in times of inflation you cannot measure the changing burden of taxation by comparing the change in taxation on the same money income. Indeed, this was recognised both in the Rooker-Wise amendment and in the enlarged tax free allowances introduced this year which in the event will be sufficient to compensate the income tax payer for the envisaged increase of 17½ per cent. in the cost of living between last year and this year.

If we compare like with like then everybody under £10,000 a year will be worse off, the size of the loss, as a percentage of income being all the larger the lower the income. So from the point of view of its distributive effects, the Budget proposals mean robbing the poor to pay the rich. In all these calculations I have taken into account the fact that the proposed changes in income tax operate for the whole of the financial year, for the 12 months which started last April, whereas the changes in VAT operate for only 40 weeks. But this means that unless the next Budget reverses these changes in some way, the redistribution of income from Peter to Paul will be worse in the second "full" year than in the initial year.

I must correct the noble Lord, Lord Cockfield, on the figures that he quoted from the Red Book, Table 16, page 31. He gave a misleading figure and did not read the small print at the bottom in footnote (a). I would advise anybody who has the table at hand to look at it. I am sure that the noble Lord has a copy so may I ask him to take a look at it. The £1,150 million net reduction of taxation includes £866 million which were given by Mr. Healey under the Finance Act 1979 under the Rooker-Wise amendment.

Lord COCKFIELD

My Lords, if the noble Lord will forgive me, he must pay regard to the fact that it was this Government which had to find the money out of which those increases in allowances were paid.

Lord KALDOR

Of course. But I am merely contending that it is not true to say that this Government reduced taxation. Any reduction in taxation in this year's Budget, let alone in a full year, is apparent and not real. The Rooker-Wise amendment only provides for a 9 per cent. increase in prices. If one takes account that the increases in prices will be 18 per cent., even after deducting 4 per cent. VAT and after indirect taxes, it would still be 14 per cent., and the increase in prices more than wiped out the apparent reduction in taxation in money terms. The whole of the £1,155 million to which he referred—and he interrupted my noble friend Lord Bruce in saying this—is totally and utterly phoney. That is how my figures and those of the Chancellor can be reconciled.

The statisticians and the economists of the Treasury would never have allowed this Government to pass the figures which are shown in Table 3 of the same Red Book containing the outlook to 1980. That table shows that consumer expenditure in real terms will fall by 1 per cent. this year as compared to last year. It is impossible for this to happen, as everyone knows, unless the real disposable income of the great majority of the population is reduced. The two main contentions of the Chancellor, that the economy must be "squeezed" in order to get rid of inflation, and that top people must be made better off in order to induce them to work harder and become richer, in themselves imply that some people must be worse off. Those people must be the poor people. This is simple arithmetic and it cannot be otherwise.

This is the first time in history that a British Government—indeed any government I know of—have published an official forecast showing the expectation of a negative rate of economic growth. It is the first time that a forecast is published which not only shows a smaller increase in output but shows an actual fall in output. Manufacturing production is expected to fall by 21½ per cent. At the same time the Chancellor emphasises in his speech that this fall in production will not reflect "a shortage in demand" but a "growing series of failures on the supply side of the economy".

I should like to say, unexpected though it may sound, that in a specific and in a somewhat unusual sense I am inclined to agree with him. It is not that we are short of resources, whether of manpower, plant or equipment: there is plenty of spare capacity. But British industry is increasingly less capable of producing goods which buyers prefer to foreign made goods, whether in the home market or abroad. This must be either because the goods are too costly or, as seems to me more important, because they are inferior in quality and design. And what is more important still, it is because in a growing range of new products which are fruits of new technology, we are nowhere at all. We are not producing them at all. We are not producing the machine tools which the Germans, Swiss and Swedes can make. We cannot produce the cars which the French, Japanese or Germans can make, and I can multiply such examples.

The only things in which we continue to excel are the few products which are hand-made and which depend for their reputation entirely on the quality of workmanship or craftsmanship. Those who so often run down the British workman for his laziness, for his "couldn't care less" attitude would do better to bear that in mind. This is the case with Rolls-Royce, which is still considered the best motor-car in the world. This is not because it has the most advanced design in engineering. Far from it. But it is the only car—or one of the very few cars—manufactured in the world which is entirely hand-made. Because the workers who make this car put it together so conscientiously the car is of such high quality.

Unfortunately, a car made in this way is so highly labour intensive that the market for it is necessarily the privilege of the very rich. We know that even after this Budget there will not be enough of the very rich in the world to enable us to make a living by selling Rolls-Royce cars. To pay our way we need to be on a par with other manufacturing countries in mass produced goods. For this we lack the technical know-how and the gap is becoming greater year after year. The latest and, to my mind, the most sorry piece of evidence of this is that our biggest British owned car manufacturer is forced to copy a car designed by a Japanese firm because this firm does not have the capacity any longer to design a car which is as good as, or better than, its foreign competitors. This increasing gap in know-how reflects the failure of our system of higher education; and, even more, our system of selection which I talked about in my last speech, which makes our ablest and best trained people avoid like anything a career in industry.

I was pleased to learn that this year we had a remarkable number of firsts in the Cambridge Economics Tripos, and in the opinion of experienced examiners the standard of the undergraduates tends to improve year after year. There is no sign of decadence in Britain so far as the innate qualities of the young are concerned. But of the 15 Firsts in economics, I gather that only one plans to enter industry, and in this case it may be due to family connections. The others refuse to do so—perhaps because they know that they will be bossed by people who are their inferiors, that their knowledge, ability or originality will not be enough to get them to the top position and that their life will be one of continued frustration. If there is decadence here, it is not in the people of Britain but in the social élite, in the ruling classes who govern the system of selection in private industry and to a certain extent also in the public sector—in Civil Service and in the public sector generally. Decadence, if I may use Nietzsche's famous definition, is a failure of one's instinct to go for the right solutions in order to get out of a bad situation and adopt instead what he called "die nachteiligen Mittel"—the false cures which make the situation worse instead of better.

By that definition not only Britain but the greater part of the Western world is in a state of decadence, as shown by the revival and virulence of the belief in the magic powers of monetary controls which found expression in the late 1920s in the widespread desire of governments, the Germans, the French and not only the British, to seek a cure for inflation—the inflation of 1929 was nothing to talk about, nevertheless they were tremendously worried by that inflation—by measures designed to repress consumption in the belief that this alone would "squeeze the inflation out of the system".

These policies led to the unprecedented crisis of capitalism in the early 1930s, to Hitler and to the Second World War. We can only hope that on this occasion the outcome will not be so tragic. But the tone of the speech of the Chancellor last week, and that of the noble Lord this afternoon, was strongly reminiscent of what was said by Dr. Bruning, by Herbert Hoover and by Philip Snowden in his Budget speech. There can he few people in this room— perhaps the noble Lord, Lord Croham, is one—who actually listened to one of Philip Snowden's Budget speeches nearly 60 years ago. There is one common recurring theme in all those speeches: we must first suffer agony to be able to make a clean start.

The Chancellor, after saying that the threat of absolute decline had become very real, went on to say, and I quote: that is a prospect which I am not prepared to accept". However, as far as the near future was concerned, he then went on to accept it, as shown by the forecast which he published simultaneously with the Budget.

Can his policy be really described as "Reculer pour mieux sauter"? The longer import penetration is allowed to go on, the longer the fall in our share of the world market continues and the bigger will be the gap in technology and efficiency between British industry and that of other countries. If past history is any guide, once an absolute decline begins it will inevitably gather momentum. Only radical measures of an entirely different kind can be expected to bring the decline to a halt and to reverse it.

6.42 p.m.

Lord MONSON

My Lords, it is my great pleasure to be the first from these Benches to have the opportunity of congratulating my noble friend Lord Miles for his tour de force, a most witty, wide-ranging, stimulating and powerfully-delivered maiden speech, the quality of which I fear I shall not be able to emulate.

I think we all appreciate the magnitude of the legacy inherited by the Chancellor and the consequent problems he has been faced with, compounded as they are by the recent OPEC price increases. I fully realise the precarious tightrope he has had to walk. For that reason, and because in any case, unlike the noble Lord, Lord Kaldor, I am not really competent to talk on macro-economics, the public sector borrowing requirement and so on, I do not intend to comment upon the Chancellor's strategy. I must, on the other hand, question some of his tactics. I certainly would not go all the way with the former Chancellor, Mr. Healey, in claiming that Sir Geoffrey had, if I have got the quotation right, misunderstood the psychology of the British people". But I think that perhaps there is a grain of truth in that assertion. Let me give an example. It was almost universally agreed by economic commentators that the fourfold increase in oil prices at the end of 1973 would necessitate an average 5 per cent. cut in living standards among the peoples in the industrialised world in order to restore equilibrium, after which living standards could start to rise again in line with increasing productivity.

I do not know about other industrialised countries, but we all know that this did not happen in Britain. Most people's real incomes did not fall by as much as 5 per cent. What is more, they have since then risen faster than the growth in productivity would justify—hence double-digit inflation and all our other economic ills. In a way, this is quite understandable. It is risking electoral suicide for any political party to tell the electorate to their faces that there must be a fall in their real incomes, however small, however temporary and however much necessitated by external influences beyond this country's control.

It would appear that the proposed cuts in public expenditure are a more subtle but still courageous means of achieving the correction that every informed person if he is honest with himself, irrespective of his political affiliations, knows to be necessary but what every informed person equally knows, and what the general public do not know, is that there was a section of the public whose real incomes did drop by the stipulated 5 per cent. and by very much more than 5 per cent. I refer to those in the middle and higher salary brackets. Those in this category who did not have access to a flexible expense account or who did not have the benefit of an inflation-proofed pension—the value of which is literally quite immeasurable because such a pension could never be obtained commercially at any price, on any terms—and who did not have any other "perks" to sustain them saw their real incomes falling by an astounding 34 per cent., according to one source; that is perhaps a conservative estimate. This situation came about partly as a result of the freeze on higher salaries which was requested—some would say ordered—by the TUC in general and by Mr. Jack Jones in particular, and partly because of a failure to index the higher rate tax-bands against inflation.

So it must be clear to any fair minded person that the 25 per cent. rise in so-called "top salaries" is not only long overdue but only goes part of the way to restoring the recipients' real incomes to the levels prevailing at the beginning of this decade, even taking into account the Budget tax changes. Yet because of inadequate public relations work by the Government —inadequate propaganda if you like, but truthful propaganda in this case—this is not all at evident to the public in general and to militant trade unionists in particular. The Government must have known what the effects would be upon uninformed people of reading that "top salaries" were going up by 25 per cent. one day and that "top" tax rates were being cut to 60 per cent. the next; and yet they did little or nothing to get the true state of affairs across beforehand. If they had done so, the reaction of the public would have been very different, the British being a fair-minded people.

The Government may complain that there was insufficient time to acquaint the public with the true facts in advance of the Budget. Very well, but given that the standard rate of VAT was to be almost doubled to 15 per cent., would it not have been psychologically preferable to have lowered the top rate to 70 per cent. only, as an intermediate step this time, completing the process next year when there will have been time for the public to become better educated and informed, while still going ahead with altering the intermediate rates, which are less newsworthy, in line with the Budget proposals?

I fully endorse the Chancellor's wish to see the return to this country of pop stars, racing drivers and other sportsmen and, above all, of doctors and scientists. This would boost morale as well as helping to boost the economy. But even with the temptation of a top earned income rate of 60 per cent., I wonder whether they would really wish to return if there were political turmoil here as a result of rampant inflation, some of it Government induced. Naturally one is aware of the argument that, "There is never a good time to cut top tax rates and so it might as well be done now as later"; hut if we are to come into line with Continental top rates tax, which seems reasonable enough, should we not also come into line with Continental countries on the treatment of expenses?

There are more company cars in Britain in proportion to the population than in any other European country. Would it not have been a good idea if the Chancellor had increased the notional income for tax purposes deriving from the use of a company car in line with inflation as regards the smaller cars but to a greater extent as regards the larger petrol-thirsty cars, so as to encourage fuel economy? There would then have been a useful headline—useful from the image-building point of view, that is—" Chancellor clobbers company cars" as a counterbalance to the headline "Chancellor slashes top peoples' tax".

To revert to the VAT increase, one can partly see the force of the argument that maintains that as we are going to have 13 per cent. inflation this year at any rate as the result of the Chancellor's legacy, then an extra 4 per cent. will do very little more harm if other matters can be put right in the process, especially as inflation will then be expected to fall back again to 13 per cent. in 1980. The snag in this argument is the question of inflationary expectations. People will simply not believe that inflation will fall back to 13 per cent. next year but suspect rather that it will climb to 20 per cent., as it did during the last Government's tenure of office. This likelihood is accentuated by the fact that the much-mooted new retail price index, adjusted for post-tax incomes, is not yet ready. I cannot myself quite understand how this post-tax income RPI is going to work, given that different people have different marginal tax rates, but perhaps that is by the way.

The fact is that most people had mentally braced themselves for an increase in VAT to 12½, per cent. Had that figure been the one chosen, they would have grumbled a little but not for too long and, on balance, I think they would have regarded it as fair. Most people had also steeled themselves for higher excise duties on tobacco and alcohol, which after all are much cheaper in real terms than they were a few years ago, as indeed is petrol. It is worth reminding ourselves that our petrol is virtually, if not actually, the cheapest in Europe. If these duties had been raised, with the possible exception of diesel fuel (there is a case for saying diesel oil is already too highly taxed, given that diesel engines are more economical on fuel than petrol ones) and if the standard rate of income tax had been cut to 31½ per cent. only—I know that it is an untidy percentage, but it cannot be helped—as an interim measure, with the idea of reducing to a 30 per cent. tax rate next year, I believe that there would have been no need to raise the standard rate of VAT above 12½ per cent. Indeed, there might have been something left over for such desirable measures as increasing the death grant. It has been pointed out in the Press that VAT alone, on the cost of the average funeral, exceeds the death grant by fully 50 per cent., which is surely a ridiculous state of affairs.

Another desirable move would be to cut tax on the lower rate band of income tax from 25 to 20 per cent. The figure of 25 per cent. is an extraordinarily high marginal rate for low income earners. It would be very expensive to do this across the existing £750 lower rate band, so my preference would be for a reduction in the width of this band to £500 only. A 20 per cent. rate applied to this band would give the average wage and salary earner an extra £12.50 per annum or 24p a week. But the lower paid worker—those earning in the region of £35 a week full or part time, which includes a good number of women and young people—would gain up to £25 per annum extra or 48p per week.

If it is argued that these alterations would still produce a shortfall, then the remedy would surely have been to raise the so-called "luxury" rate of VAT to l6⅔ per cent., because this "luxury" rate applies to dispensable goods, not to essential services, such as repairing leaks in people's roofs caused by the ravages of last winter. A single rate of VAT may be simpler, but we should remember that many, if not most, continental countries have two or more rates of VAT.

Finally, I should like to commend for your Lordships' attention an article on the City page of the Daily Mail of 14th June, which set out a scheme devised by a leading merchant banker whereby the Government would offer for sale to the public not BP equity—in other words, BP ordinary shares—but a new BP convertible loan stock with a low initial coupon. It is claimed that this would bring in an extra £737 million to the Exchequer, over and above what would be received if BP equity were to be offered instead, as has been proposed. Without going too much into the figures, the case seems to me unanswerable and I hope that the Chancellor will examine this proposal very carefully, as no doubt he intends to do.

The Chancellor has taken a brave gamble and I am sure that we all wish and pray that it works out. I still think that it would have been better if the proposals had been framed so as to attract rather greater popular support. My own soundings, for what they are worth, reveal that a very large number of people, many of them lifelong Conservative supporters, are bewildered and dismayed by the Budget; in particular, by the rise in VAT to 15 per cent. Our hands are, of course, tied, but it may still not be too late for the other place to take some remedial action in Committee.

6.53 p.m.

Lord HARRIS of GREENWICH

My Lords, I intend to make a fairly non-partisan speech today, which probably means that I shall incur the displeasure of virtually all sides of the House, but I think it is appropriate to do this in a debate of this character. I thought once or twice, during the speech of the noble Lord, Lord Cockfield, that I should not succeed in this objective, particularly when he made his allusion to Mr. David Lloyd George's Budget of 1909. I think that it is slightly overstating the case to suggest that this country went to the dogs on the day when that Budget was introduced. I am not sure that the noble Lord would seriously suggest that this country would be a far more agreeable place in which to live if we had neither an old age pension nor national insurance. Therefore, as I said, I parted company with him when he made that allusion. I suppose that there are some in Germany who would take the view that Germany went to the dogs when Bismarck introduced social insurance in Germany in the 19th century, and there are certainly many in the United States who take the view that America has seen nothing but ugly days since the introduction of the New Deal by Franklin Roosevelt. However, having made that reference, and having assumed at the time that the noble Lord, Lord Byers, would join me in defending Mr. Lloyd George's Budget, I now pass on to the substance of the Chancellor's proposals.

I should like to say this at the outset. I think that the Chancellor was faced, when he introduced his Budget, with an exceptionally difficult economic situation. We have to look first at the balance of payments situation. The balance of payments situation has been deteriorating and deteriorating rapidly. In the first four months of this year, as the noble Lord. Lord Cockfield, rightly said, we had a current account deficit of £1 billion, notwithstanding the very substantial revenue that we receive from North Sea oil. The inflation level, too, has been rising and that was before the Budget was introduced. The sharp and continuing increase in the level of world oil prices is threatening to worsen still further the prospects for any recovery in world trade. All this makes it virtually certain that we face a year of economic stagnation at best, and no prospect whatever of reducing the level of unemployment; possibly, indeed, it may well be the reverse. That, then, is the situation that confronted the Chancellor, just as it would have confronted a Labour Chancellor if Mr. Callaghan had been elected Prime Minister.

Before I go any further, I should just like to say this. I have found some of the comments on the Budget not only unpersuasive but a great deal less than fair. Given the gravity of the situation that I have described, it is quite certain that a Labour Chancellor would have had either to introduce substantial cuts in public expenditure or to increase taxation, or—far more likely, of course—would have had to use a combination of both. The public expenditure plans of the Government of which I was a member until January this year assured a level of economic growth which seemed optimistic at the time and which we now know to be quite unattainable. Thus there would have had to be swingeing cuts in those programmes at a level which many in the Labour movement would have regarded as intolerable. But a Labour Chancellor would have had no choice.

It is simply impossible to contemplate a public sector borrowing requirement of £11 billion. A borrowing requirement of such dimensions, and even of the £8 billion which is now assumed, simply fuels the fires of inflation. It creates the gravest problems for the Treasury in the gilts market but, still worse, drives up British interest rates, with all the very serious consequences that that has for the level of investment in British industry.

I would just remind the House, in passing, that in 1970 the borrowing requirement was not £11 billion, £8 billion, half that figure or even zero. We were, in fact, repaying debt when Mr. Jenkins was Chancellor of the Exchequer, which is an indication of how sadly our economic affairs have deteriorated in the last decade. So I repeat that a Labour Chancellor, if he had introduced a Budget last week would, in my view, have announced heavy cuts in public expenditure, and I believe that he would have been right to do so, just as I believe that the Chancellor was absolutely right to do so in his Budget statement last week. I shall return to this issue in a moment, because I believe it is absolutely central to the argument which we have been having in this House today.

But, before doing so, I want to discuss briefly the other steps which I believe a Labour Chancellor would have been compelled to take if he, rather than Sir Geoffrey Howe, had introduced the Budget last week. I believe, as I have indicated, that he would have increased taxation. Indeed, I think that he would have had no choice but to do so, given the level of the borrowing requirement and all the other factors to which I have referred. I do not believe for a moment that he would have chosen to increase the rate of direct taxation. He would probably have raised the level of value added tax, but not to the same extent as Sir Geoffrey Howe did last week, and I think—although I cannot, of course, be certain—that he would probably have imposed substantial increases in the case of petrol, alcohol and tobacco. That being so, there is no doubt that a Budget of such a character would have driven up the cost of living index. It would have had precisely that consequence. As I have indicated, the only way in which that increase in the cost of living index could have been avoided would have been if the Chancellor had decided to increase direct taxation, and, for the reasons which I have given, I do not believe that he would have considered it, even for a moment.

The question that inevitably follows is whether the present Chancellor was correct in taking the risk—and it is a risk—of finding room to make substantial cuts in direct taxation at the expense of putting up value added tax to 15 per cent. It is foolish to underestimate the problems inherent in this approach. Nevertheless, I must make it clear that I believe the Chancellor was right to take this decision. I think that the direct taxation levels in this country are con- sidered by the overwhelming majority of our fellow citizens to be oppressively high.

We cannot ignore the evidence of the rapid growth of a "black" economy in this country, with people opting out of the tax system altogether. It leads to a society lacking some of the standards of morality which we have come to regard as to some extent our own. There has, I am afraid, been a very substantial deterioration in the last few years, and I have no doubt at all that one of the central reasons for this deterioration is the level of direct taxation in this country.

In addition, I consider that the marginal rates of taxation, both for the most well-to-do and also for those at the lower end of the taxation scale, have been absurdly high—the highest by far in the European Economic Community. If I may say so, it seems to me to be going just a little bit too far to suggest that everybody else in the European Community is wrong about this and that we are the only people who are right—all the more so when we have by far the worst economic record. The belief that it is wholly objectionable to move some of the weight of taxation from direct taxation to VAT would, to take one example, not be shared by the Social Democratic Parties of the Federal Republic of Germany or of Denmark. Neither would contemplate for a moment a movement in the reverse direction.

Nor, in my view, is there any evidence that the people of Britain are utterly opposed to a move in the tax burden from direct to indirect taxation. Indeed, this issue was, in my view absolutely rightly, argued at some length in the last general election campaign. Although, like the noble and learned Lord the Lord Chancellor, I am not a believer in the doctrine of the mandate, I think there can have been few people in this country who were not made aware of the proposals of the party that has now formed the Government of this country. It may be that the level of VAT is a reasonable matter to argue about, but that the Conservative Party in the election put forward this matter with great clarity is not a matter about which there can be any dispute.

As I have indicated, the increase in VAT which the Chancellor announced will undoubtedly have a significant effect on the cost of living index, and this is a matter which we have to take seriously; but there are two things which have to be said about it. The first relates to the effect of this increase in VAT to 15 per cent. Unlike the noble Lord, Lord Monson, I think there is a great advantage in having a single rate of VAT rather than two totally different levels. One has to consider the ease of administration so far as taxes are concerned. We have to take seriously the effect of VAT on the cost of living, but I repeat that I think its effect will be once-and-for-all.

Secondly, the cuts in direct taxation and the increase in social security benefits will protect completely to a very considerable extent—I noted, of course, what my noble friend Lord Kaldor said about this—a number of people and, in some cases, a number of other people. One can have an argument when it comes to the margins. Nevertheless, one has to take this into account in calculating the arithmetic of the Budget.

However, people will not be protected from the consequences of this increase in VAT if, when the pay demands of this autumn are calculated, only the increases in VAT are taken into account by the negotiators and not the very substantial changes in direct taxation which have already been announced. If that were to happen, it would be a very serious matter for us all: for consumers, for industry and for trade unionists, many of whom would lose their jobs as a result of the raging inflation that would ensue if very substantial wage increases were conceded.

Having referred at some length to the question of taxation, I should like to come back to the question of public expenditure. I believe that in the last 20 years, the proportion of our GNP which has been devoted to public expenditure has increased sharply, but, paradoxically, I wonder how many of us really believe that the quality of these services has improved to the same extent. There are certainly some examples; of that there is no doubt at all. The provision which has been made for the old has improved notably. And until a few years ago one could have added that there had been very substantial improvements to our network of trunk roads. However, apart from examples of this character, I am afraid that the answer to the question which I posed is a pretty bleak one. There has undoubtedly been this massive growth of expenditure, but the quality of the services provided has in many cases at best stagnated and in many other cases deteriorated.

We have to ask ourselves why this should be so, and the answer is a pretty uncomfortable one. Under the Governments of both parties there has been a growth of huge bureaucracies, at the level of both central Government and local government, often to administer policies which have been ill thought out and with the full resource implications either ignored or minimised by the enthusiasts for change. There are, unhappily, many such examples.

Taking first the Parliament of 1970 to 1974, the obvious example is the reform of local government and the reorganisation of the National Health Service. An example to take from a Labour Government is the Children and Young Persons Act 1969. In addition, there has often, I am afraid, been a complacent approach to staffing levels. From my own experience as a Minister, let me give one example of what I mean. I remember reading a letter from a Member of Parliament's constituent drawing the attention of that Member to the fact that a newly-opened probation hostel had at that stage precisely 11 people staying there. To service those 11 people in the probation hostel there were seven members of staff. Some of those, admittedly, were part time, but 11 people were being serviced by seven. So I made some inquiries. To put it mildly, it seemed to be excessive. I was told that my Department was powerless to act because a sister Department had agreed to these staffing ratios so far as the hostels for which they were responsible were concerned and that a commitment had been entered into by my own department that we would honour this undertaking.

I could, I fear, give other examples of this kind of approach to these lavish staffing ratios which have been cheerfully accepted by Adminstrations of different political persuasions. Sometimes one is able as a Minister to do something about this foolish deployment of resources; sometimes, when a number of other Departments may be involved, one is not. I think there is only one way in which this problem can be dealt with, and that is if the Government as a whole are determined to prevent waste. That is why I welcome, without hesitation or qualification, the indications we have had that the Government are prepared to force down the numbers employed in the public services and to re-examine in particular the need for the Civil Service to carry out some of its present statutory responsibilities.

I believe that severe reductions are necessary for a whole series of reasons. First, I consider that the wasteful deployment of staff is objectionable in itself. It leads to a heavy and totally unnecessary burden of public expenditure. Secondly, one has to look at another consequence of this policy—and again this criticism is directed at Governments of both political parties. All such Governments have found it far easier to cut capital programmes than to reduce the swollen staffing levels in the public services. As a Minister, I became deeply concerned at the consequences of that policy.

I should like to give two simple examples from my former department. First, there is the wretched position in our prisons—the victim, time and again, of savage public expenditure cuts. All I can say to the House is that in recent months we have seen the consequences of a policy of that character, not only in the wretched conditions being imposed on both staff and inmates but also in the beginnings of very serious control problems, one of which the present Home Secretary is now forced to deal with. Secondly, so far as the police are concerned, there were the heavy cuts which I had to make as a Minister. I did so because at that time it was necessary to cut public expenditure in some way, but making cuts in the police capital building programme in spite of the quality of police buildings in some parts of the metropolis is, in my view, having an effect upon the efficiency of the police. Certainly I believe that the condition of many of our police stations in London is in fact one of the reasons why the wastage of experienced officers, and particularly of people who have served for two years, is so serious.

In the present economic situation which I indicated I believed was facing our country, I think there is a clear necessity to reduce the overall level of public expenditure. That being so, I think that urgently needed capital programmes of the character to which I have referred can only be proceeded with if even more significant cuts are made in the lavish staffing levels which exist in some parts of the public service. This will necessitate a careful analysis of priorities and a decision about those areas where it will he necessary to reduce the responsibilities of both central and local government. It will certainly not be easy, but in my view it must be done.

I shall end on the same note as I began. In this country at the moment we are, I believe, facing an exceptionally serious economic situation. I believe the Chancellor of the Exchequer had an unenviable task when he introduced his Budget last week, and his difficulties in the future will be even more formidable. So far as his Budget judgment is concerned, I can only express the hope that his assessment of the situation will prove to be correct. I hope he will succeed, for success is what this country most urgently needs.

7.15 p.m.

Viscount AMORY

My Lords, to begin with I should like to add my congratulations to the noble Lord, Lord Miles, on his maiden speech, which I heard was a charming one but which unfortunately I missed.

My noble friend Lord Cockfield dealt with the whole subject so effectively this afternoon that I do not think I need detain your Lordships very long. The noble Lord, Lord Harris of Greenwich, began by saying that probably his attempt to be impartial would lead to the deepest dissatisfaction in all parts of the House. I should like to congratulate the noble Lord on the beautiful balance of his speech, which means that I think he made a jolly good one!

I want first to express my strong approval of the Chancellor of the Exchequer's proposals for a substantial switch from the direct taxation of earnings to the indirect taxation on spending. This is wholly in line with the economic policies of my party as put before the electorate in our election Manifesto. It also brings us—and I think the noble Lord, Lord Harris, mentioned this—more into line with other industrialised countries whose economic performance is far better than our own, and one of the reasons for that better economic performance may indeed be their better devised taxation system. This switch is long overdue and even when made, as the Chancellor of the Exchequer said in his Budget speech, it will still leave us with rates of direct taxation higher rather than lower than those of our European competitors. I hope over the next few years it may be possible to carry this switch still further from direct to indirect taxation. What the noble Lord, Lord Bruce of Donington, calls "bribes" we call "leaving a little more of their own money in the pockets of the taxpayers".

I am not a monetarist in the sense that I believe it is feasible to control the economy by money control only, but I do believe that the control of the money supply is an absolutely essential ingredient in any Government's economic policy. I believe that Mr. Healey latterly thought so too. I believe the trouble with Mr. Healey was that his efforts to control the money supply were rendered nugatory by his other economic policies. Therefore I welcome the Chancellor of the Exchequer's determination to exercise strict control over the money supply and not to attempt to spend his way out of our economic difficulties. Noble Lords will forgive me for once again quoting the statement of the Leader of the Opposition at his Party Conference in 1976. He is reported to have said: We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists". Resort to the printing press is no way out of our current economic difficulties.

Like many others I was disappointed at the amount that it has proved necessary to increase VAT. That is a reflection of the current commitments that the present Government have inherited; but as the Chancellor of the Exchequer said, our system of VAT with its zero rating over quite a wide sector of the field is in fact less regressive than most people think, and in fact less regressive than VAT as it is practised on the Continent.

As regards public spending in total, the present level represents too high a proportion of our GNP, leaving insufficient room for the private sector. Where should the Government look for savings? I am confident that it is all round the periphery of public expenditure. During the last 10 years peripheral expenditure has grown enormously and it is in that sector that cost effectiveness is most dubious and value for money most questionable.

The noble Lord, Lord Soper, who is not in his place today, in his attractive speech last week, the sincere speech of a sincere Christian Socialist which it is always enjoyable to listen to, referred to what he called "that overworked word 'priorities'". With great respect, that word cannot be over-used. It is the key to government. As a French statesman once said, "To govern is to choose". When resources are limited priorities are essential. The difficult task is to select economies which do least damage to essential services, but I believe that that is not an impossible task.

In a debate we had nearly a year ago, as the noble Lord, Lord Rochester, generously mentioned in his speech last week, I ventured to say that I considered our present deplorably low level of productivity is by far our most intractable economic problem. I am afraid that is still so. I also said that while we all long to see an improvement in employment, higher sustainable employment will only follow as a result of correct economic policies and cannot precede them. That I am convinced still remains true today. Mere palliatives in job creation will prove illusory. Profits in manufacturing industry are today dangerously low; I believe 3 per cent. in real terms has been quoted as the current rate. This is, of course, grossly inadequate to provide the level of innovation and new investment that we so urgently require.

About the exchange relaxations I am not wildly enthusiastic. I can see they are desirable, but I think I myself would have preferred a lower rate of interest on sterling deposits, or a more rapid repayment of external debts, if resources were available. But what would our exchange rate be today, my Lords, were it not for our temporary bonanza from oil? It is a sobering thought. I regret the increase in the level of interest rates by 2 per cent. and I wonder slightly whether that was really necessary. I admit I have no technical information and so am probably wrong. I hope it may he reduced again before long. It hits smaller businesses hard. Short-term hot money is not worth having at present rates. It is a pity that some system of differential rates cannot be devised. On the other hand, I am convinced that a policy or anything like a policy of continuous reduction in the value of our currency is no sound basis for a thriving export trade. The only sound basis is competitiveness resulting from vigorous productivity, and when we achieve that we shall be able to look the world in the face again.

Listening to some of the criticisms by the Opposition of the Budget I find them still apparently actuated by a philosophy which I fear may be a cause of many of our failures. This is the notion that we can spend what we like to meet good social needs regardless of what we are earning. Sadly, it cannot be said too often that the creation of wealth must come before its dissemination or enjoyment. With the prospect of world trade slowing down and of inflation rising the road ahead looks a hard one. I agree with the noble Lord, Lord Harris of Greenwich, there. But achievement and success can only come from increasing the wealth-creating power of our economy with incentives for effort innovation and competitiveness as strong as they can be made.

I suppose this Budget in arithmetical terms is deflationary, though cost inflation, unfortunately, is expected to continue to rise quite fast. That is due to money incomes rising faster than productivity, which makes the short-term outlook for higher employment sombre indeed. It is also due in part of course to rising oil prices, but there the balance is difficult for a layman like myself to compute. But I welcome this Budget because I believe it faces up to some hard truths with realism and courage, and in the long run I believe it will prove a step towards that improvement in our national performance for which we all yearn.

7.26 p.m.

Lord HOUGHTON of SOWERBY

My Lords, I believe that for this House to have a debate on the Government's economic strategy is a somewhat rare occasion. Certainly I do not recall in the five years' of my membership of your Lordships' House any debate of this kind, and I welcome the innovation, if that is what it is. I think probably we owe it to the presence on the Front Bench opposite of the noble Lord, Lord Cock-field, as a Treasury Minister. I certainly endorse what the noble Lord, Lord Boyd-Carpenter, said about the value of having in this Chamber Government spokesmen with ministerial responsibility. I think the Labour Government treated this House rather shabbily in that regard. With full respect to my noble friends who had to cope with many difficult situations without the ministerial experience and authority behind them, I think it is a welcome change, and I hope that on another occasion we can have a debate of this kind.

It has, of course, been made the more fascinating and attractive by several highlights in the course of the debate, one of course being the maiden speech the noble Lord, Lord Miles. He has been the star of the afternoon. I thought when he came to your Lordships' House he might expect us to provide him with drama. Well, we do not usually do that; we provide the scenery. But the noble Lord brought his own drama with him, and a few props in his pocket, which I think added to the interest of the occasion. The noble Lord, Lord Cockfield, I thought was rather like an Inland Revenue Daniel brought to judgment by the noble Lord, Lord Kaldor. Of course, I have known the noble Lord almost from his youthful entry into the Inland Revenue many years ago, and when he was private secretary to a chairman of the Board of Inland Revenue the noble Lord's orderly mind and precision of manner was in sharp contrast to the racy humour of his chief who was the chairman of the Board of Inland Revenue during part of his time. I welcome him to the Front Bench opposite.

My Lords, when the noble Lord, Lord Byers, said that the approach to this change might have been done more gradually the noble Lord, Lord Boyd-Carpenter, said that the situation did not permit of this, it would not wait, it had to be done speedily and drastically. Well, I think it depends on the reactions of the nation. This, after all, is the test, and this Budget for its success relies to a very large extent upon a favourable response from all sections of the community. Therefore, one of the reactions that we have to watch very carefully is that of the nation's workforce, because it is upon them, their diligence, their efficiency, their response to this Budget, that the economic benefit which we are to get from improved performance depends. That, of course, largely bears upon the way that the trade unions will behave in the next few months.

The noble Lord, Lord Byers, said that Parliament must be supreme, and I think that we all agree with that. But if the country is going through an exceptionally difficult period, with grave decisions required of Parliament and Government, it would be as well if we cease to be quite so complacent about the authority of Parliament and the representativeness of Government. On matters of taxation and finance we are virtually a single chamber Parliament. It follows that the elected Parliament, which is sovereign in these matters, should possess full democratic authority for what it does. If Parliament is to be supreme and if its supremacy is to be upheld beyond question, then Parliament must be more fully representative than it is at present.

This Parliament, although newly elected, is no more representative of the votes cast by the people than the last one, the one before or the one before that. While Labour was in office we were constantly reminded that the Government were in power on less than 40 per cent. of the total votes cast in the previous election. This Government have improved on that but are still in office, with a very substantial majority in the House of Commons, on 44 per cent. of the total votes cast. More people voted against this Government than voted for them. So the authority of the Government to introduce these drastic measures representing a significant change of direction, which is their claim, rests upon 44 per cent. of the votes of the electorate. I think that from any point of view of democratic representation that is not a very impressive or strong position to be in. The most that can be said about it is that we are used to it. A minority of the total votes and a majority of the seats is almost the invariable outcome of our present electoral system, and we take it.

Today we are asked to take note of the Government's economic strategy which contains revolutionary changes in the distribution and balance of taxation. If we ask what authority they have to bring forward changes of that magnitude and gravity from the point of view of the nation's future, we shall receive the answer that it is what the Conservative Party said that it would do, and having been elected that it is what it intends to do. However, that seems to me to be merely a conventional answer. One of the great advantages that we are told we derive from our existing system is firm Government. That was not so in the last Parliament, but it is certainly more so in this Parliament, or so it seems. Nevertheless, under our existing electoral system the firm Government of today can be under some serious challenge from forces in society which are looking to their own actions to repair some of the omissions in our electoral system.

The will of the people is not for expression only once in five years; public opinion is present all the time. However, what is much more important—and this has a bearing on the reference that my right honourable friend Mr. Callaghan made over the weekend, which was referred to by the noble Lord, Lord Byers, this after-noon—is the strength of extra-parliamentary power in society at present. The opinion of some bodies can put very heavy pressure indeed upon Parliament and Government. However, when collective action can become a powerful force of resistance to Government policy and to Acts of Parliament, then serious trouble may arise.

I believe that we are far too complacent about our belief in the supremacy of Parliament in our very troubled situation and restive society. We cannot afford to be complacent. We certainly cannot allow, under any system, organised obstruction or organised resistance with political aims as a means of bringing about change in Government policy. Parliament would be much stronger if it produced a more representative situation. It is reform that we want and not overthrow. If we are to carry through dramatic changes in political philosophy and economic direction it will be necessary for Parliament to have greater legitimacy than it has at present. Irreversible decisions may be taken without proper democratic authority. Decisions taken by Government under threat of being reversed at the first opportunity may well sap the stability of our parliamentary system.

In my view parliamentary action affects the people far too closely today to be taken for granted. We must watch the coming months with some anxiety and trepidation to see whether the trade union movement will understand its relationship with Parliament. There is the opportunity next week, for any noble Lord who cares to take it, to listen to the authoritative voice of the Trades Union Congress. Many noble Lords have had handed to them during the course of today a notice of a meeting of the House of Lords All-Party Industrial Study Group on Wednesday of next week at which our guest speaker will be Mr. Tom Jackson, the chairman of the TUC. It will provide a welcome opportunity to meet a person of his authority in the trade union movement face to face and to hear what he has to say under the heading, "The Trade Union Movement and this Government". There will also be an opportunity to ask whatever questions we wish.

I should like to conclude with a reference to a matter which I think has a considerable bearing upon trade union opinion, and that is the position in view of the Budget of those who are in the top salary brackets—the top echelon of management. The noble Lord, Lord Kaldor, referred to the people in the £25,000 and £30,000 a year bracket who would be receiving enough in tax relief to run a second Rolls-Royce! I looked the other day at a company report—a company of which I am a very modest shareholder—and it revealed that the chairman of the company received £47,000 in 1977 and his pay was increased to £66,000 in 1978. That is an increase of about 40 per cent. at a time when the trade unions were having difficulties about a 5 per cent. or even a 10 per cent. pay rise. Five out of the nine directors of this company were also uplifted into very high salary brackets of between £35,000 and £62,000 a year.

There are probably exceptional circumstances about a company which has not made an after-tax profit for five years and, although it has now turned the corner, which has not declared a dividend for this year or one for the past five years. Yet these monstrous claims are being made upon the nation's resources by directors of a company who can just help themselves. All the share holders are asked to do at the general meeting is to fix the remuneration of the auditors—not the directors—which is chicken-feed compared to the level of pay of the directors. At this level the chairman of this company will receive a tax cut of £12,000 a year, and his is part of the £666 million which this Budget will take off the backs of those who are paying in the higher tax brackets at present. This looks disproportionate to the benefits that are being granted much lower down.

Some people say that this Budget gives money to you with one hand and takes it away with another. Over the weekend I read that some say that it takes the money out of the wife's handbag and puts it into the husband's pocket. However, many people will find that the one hand will give them little, but that the other will take quite a lot away. In these circumstances, people will look at how the better paid in industry are faring under the Government's policies.

Therefore, I plead for moderation now in lifting top salaries when tax reductions are so substantial and so immediate. I also ask that companies should phase out many of the fringe benefits and the "perks" that have grown up under the heavy level of taxation up to now. Surely the Government can claim that they are trying to give those in the top income brackets a really fair deal: and we are entitled to a fair deal in return. Those who take these responsibilities should show that they are able to bear them without continuing the grasping hand on the nation's resources, which is evident in the illustration which I have just cited. If the Government do that. it will go a long way towards persuading the trade unions to look at the present situation realistically. They have the muscle and the power. As my noble friend Lord Harris of Greenwich said, if it is used and used militantly and aggressively, the nation will face a very grave situation. The Government must do their level best to avert an attitude of that kind developing in the trade union movement.

7.44 p.m.

Lord AUCKLAND

My Lords, first, I should like to associate myself with the tributes paid to the noble Lord, Lord Miles, on his quite fascinating and rather original maiden speech. It so happens that both he and I have a love of the City of London. We are both intimately concerned with the City of London, chiefly through the Livery companies. His access to this House will be very widely welcomed, not only by your Lordships, but also by his own distinguished profession. I should also like to congratulate my noble friend Lord Cock-field on his very important appointment and on the extremely erudite speech with which he opened this long debate.

It is not often that I venture to be rash enough to take part in debates of this kind, for much of it is well outside my sphere. But this is a very unusual Budget. It is a Budget of originality; it is a Budget—I think by common consent—of boldness. As has already been said, whether or not it succeeds depends on a number of circumstances. However, I think that we are entitled to ask ourselves this question: If this particular Budget had not been introduced, with all its possible shortcomings—and every Budget over the ages has had shortcomings—what could have been put in its place? We have tried the type of Budget where indirect taxation has been mulled, like an aching tooth treated by oil of cloves, and direct taxation made very high. Now we have turned it the other way round. The noble Lord, Lord Houghton of Sowerby, is a very experienced person on taxation matters. I remember many years ago listening to his BBC programme called, I believe, "Can I Help You?" The noble Lord, with all his wisdom, pointed out that it is possible that in the very high income brackets in some companies there are irregularities. That is something which one hopes the Inland Revenue will jump on now that these very deserved increases have been made in the top income brackets.

I think that the Government have their priorities right. From reading of countries abroad and of what they pay their top executives compared to what we have tended to pay ours net, it is quite obvious that ours were falling behind. We expect the highest possible standards and the highest possible achievements from these people in return for the extra money that they are getting. From knowing something about British industry and com- merce, and particularly the world of insurance in which I work, it is my belief that we shall get these benefits in kind from those who are receiving the increases.

One of the troubles with a Budget of this kind is that at any rate some of the media—and I hate to castigate the media too much for it seems almost a universal game nowadays to do so—have given the impression that they have gone to town on this Budget before really studying its contents. This is a Budget which needs, even by those who are experts in this field—which I certainly am not—very careful study and examination, not only of the large print but of the small print. Mr. Tom Jackson is a man for whom I have a great respect; I listened to him last Sunday morning on the radio programme "One man, One Voice". He is a very distinguished person and he seemed to be making out that this Budget was entirely against the interests of the lower paid and the trade unions, and that everything went to those with top salaries. I am certainly not in the latter bracket; I am very much in the former bracket. Speaking for myself, I do not expect to benefit very much in kind.

Criticism has been made, for example, of the extra pay to Her Majesty's judges and to doctors and consultants. It so happens that yesterday, through the kindness of one of the sheriffs of the City of London, I had lunch with Her Majesty's judges. Needless to say I did not discuss pay rises or other matters of considerable topical importance. We discussed many more mundane things. Judges and doctors have one thing in common: they have to take decisions; in the case of doctors, decisions of life and death, and so far as judges are concerned they have to take decisions which may affect the future in the long term not only of a man or woman who is before them but of their familes. Therefore, I think that for this kind of job a high rate of remuneration is deserving because, after all, in this country we have a system of justice and a system of medicine which I believe are second to none, despite inevitable flaws in some quarters. One will get this in any society.

That leads me to put one question to my noble friend Lord Gowrie—whose presence on the Front Bench will he very generally welcomed—of which I have given him notice, and it concerns prescription charges. This is not an occasion to debate prescription charges per se but, as one who has served on a hospital committee and who has considerable interests, non-financial, in the health and hospital field, I wonder whether the exemptions from prescription charges could not be looked at again. I am not suggesting that the increase from 20p to 45p in our present economic climate, despite what some of my friends and acquaintances in the pharmaceutical industry say, is extortionate. Indeed, I think that if certain other classes of people were to be excluded they might have even been raised marginally higher, with certain conditions put on how the prescriptions should be issued. I know that there are a number of chronic illnesses which are exempted or at least partly exempted from these charges. For example, diabetes is one.

But there are other conditions such as asthma, pituitary gland trouble, and certain conditions like that for which patients in list have pharmaceutical products. They are not like those who get valium or some similar preparation because they are feeling depressed and this will put them right after they have, for instance, had a row with their family. I am speaking of medical aids which are essential. I wonder whether my noble friend could take that point on board, obviously not necessarily for this Budget but for future consideration. There are a number of people who are what one might call semi-chronically sick who still find these charges rather higher than is comfortable. And the amount of revenue which is to be gleaned from these charges as at present imposed is not, as I understand it, sufficient to make the improvements in our Health Service that we, and this Government in particular, desire.

I revert for a moment to the lower paid workers. I mentioned just now doctors and judges in the higher income bracket. What thought has been given to the nursing profession and to the professions ancillary to medicine? Here there is a great need for a special study group to be set up for the lower paid workers who, so to speak, work round the clock. After all, a 17 year old untrained typist in the City of London can probably pick up £3,500 a year whereas her sister, who is probably working night duty at a hospital for something like three months in the year, receives gross half that salary. I think that the Government have a golden opportunity now to set up a study of some kind for these particular people in our community who are there literally to save lives. If something can be done about this, I think the Government will derive much credit.

My right honourable and learned friend is to be congratulated on having produced a Budget which is just about as fair all round as most Budgets can be. It is a Budget which puts money into the pockets of those who do not always want to involve themselves in luxury spending. Let us look for a moment at the new value added tax rates, and see the pictures of those rushing out to the stores to buy music centres and other things. Could they not make do, as I do, with a 15 year old record player which gives very good sound? And I happen to be a music lover myself. Let us get this into proportion. This Budget will help families who want to feed their children properly and clothe their children properly. For those who want to purchase music centres and other such luxuries, delightful as they are, they will have to pay more. We cannot have it both ways. In this Budget we have a start which will make things tough in the short term, but if in the medium and long term we can have some kind of harmony between industry and commerce, management and unions—it is probably expecting a lot—we can really get the nation back to some kind of prosperity.

7.59 p.m.

Lord BOWDEN

My Lords, the hour is late, I must be brief, and I should like to confine my remarks to one major topic. First of all, I must congratulate the noble Lord, Lord Miles, on his perfectly splendid maiden speech. I hope that he produces many more of the same kind that we can all enjoy and that will teach us all so much. The point I want to discuss is one which was made by the Chancellor in his speech and has not been referred to so far this evening by any one. It is that, in consultation with the accountancy profession, he proposes to try to devise a system of taxation which will make due allowance for inflation. In other words, he is apparently going to try to learn to live with inflation until such time as he can cure it. It seems to me that this is quite extraordinarily important.

I have been obsessed with this topic for something like 20 years. One reason I mention it—I hope I may be forgiven for doing so—is that at one time I was in charge of a fairly large engineering school in Manchester in which we had the largest and best department of machine tool design to be found anywhere in the country. It was therefore very much my interest to know what would happen to the young men we produced when they left university and went out into industry. I convened a meeting of 20 or so of the main machine tool manufacturers in the district. They came to my office, where we had the meeting, and told me that they had altogether about 15,000 employees and we talked about their problems.

I asked, "What sort of dividends are you paying on your stock?" and the answer was 10 or 15 per cent. or something of that sort. I then asked, "What would you be paying were you making proper provision for maintaining your productive facilities in the state in which they should be?" and they replied, "None of us would declare a profit at all and most of us would declare a loss". They then went on to explain the reason for that; of course I knew it and that is why I had convened the meeting. That reason was that when a machine tool wore out in a factory, the firm concerned could replace it only by another machine which cost as much as the original did when it was first bought, and that is not enough in terms of inflation. That is what is called "historic cost accounting". I said "In other words, the profits you are paying "—remember, this is nearly 20 years ago—" are wholly fictitious and are created entirely by bad accounting. What will happen to the machine tool trade of this district?" and they all replied, "It will go bankrupt and it will be followed into bankruptcy by the rest of Manchester's manufacturing industry".

There were 15,000 men in the trade then. When I last did a survey, there were 492 left, and every single firm represented round my table on that occasion is now out of business. About six months ago I went into that enormous machine shop which used to be called Metropolitan Vickers. I went round with the managing director and I told him, "The first 20 machine tools I have seen are all 20 years old and furthermore every single one of them was made by a local firm which has since gone out of business". He agreed, and I then asked him where the next generation of machine tools would come from, if ever he bought any. His reply was, "They will have to come from Italy or Japan because nowhere else can you get them cheaply."

This is the effect of what I call unsound accounting on one particular industry. It has been totally disastrous and has done more than anything else to destroy it. The machine tool trade has been accused of bad design, of old-fashioned management, of inadequate initiative and so on, but it was destroyed primarily not by those things, which one can identify, but by the insidious effects of the Government's policy of imposing historic costs on manufacturing industry.

Professor Stamp of the University of Lancaster did a survey of the effects of inflation at 3½ per cent., as it then was, form 1951 to 1965. He found that in real terms it meant that ordinary firms paid out about 50 per cent. more in dividends than they had actually earned because in times of inflation all firms over-estimate their profits. As an incidental result of that, in 1965 the Treasury did a major survey of the total value of all the capital in British manufacturing industry at that time, and compared it with the best estimate they could form of the value of the capital of British industry in 1952. There had been a major effort at investment in British manufacturing industry in those 13 or 14 years, but nevertheless the total capital at the disposal of British industry was less at the end of that investment period than it had been at the beginning because of the insidious effects of what I can only describe as a capital levy, the very existence of which seemed unknown to the Treasury at the time.

I cannot discuss this matter in detail because it is extremely complicated. The Times, may it rest in peace, once described it as "arcane", and the Financial Times more recently described it as "boring". The details are both arcane and boring but the consequences are devastating, and I only hope that, now that various committees of accountants are studying the matter, the Treasury will treat their results very urgently and quickly and will apply them. I could give other examples of firms which have been ruined by bad accounting; perhaps I may take the most spectacular case I know—namely British Leyland. In its last surviving year before it was finally bankrupt, British Leyland made a total loss of £45 million, but, because of the way in which the accounts were cast and the fact that in those days the appreciation of stock would count as profit, it was alleged to have made an actual profit of about £40 million. It had to pay out its losses and that finally bankrupted it.

It was often thought that the extraordinary difference between the profits which firms make and the profits which they are forced to declare under our very curious system of accounting was well understood, but it cannot have been, because in 1974 Mr. Healey in his spring budget increased corporation tax to 52 per cent. and included, as a source of tax, the appreciation of stock. It became apparent by the autumn that British industry was bleeding to death and he had to pass an emergency budget in the autumn of 1974 which removed the appreciation of stock from the balance sheet and kept it in a suspense account, where it was until only last year. This is administrative folly of a magnitude at which one can only gasp and it has been concealed from the public eye because of its obscurity and the fact that it is primarily accountants who are concerned with it.

I have been interested to look at the accounts published by some of the great firms, which are now encouraged to produce two sets of accounts, one based on historic costs, as is legally required of them, the other based on the corrected versions which are themselves based on the work of Sir Francis Sandilands and his committee. It is disconcerting to discover that, say, ICI—I am taking ICI as an example, for it must be one of the most reputable, highly organised and sophisticated firms in the country—made a profit of either 19½ per cent. or 5.6 per cent last year—or was it the year before? In other words, there is a factor of nearly four, certainly more than 3 to 1, between the profits which it is supposed to have made and on which it will be taxed and the real profits which it thinks it made if it made appropriate allowance for the maintenance of its capital and for the effects of inflation on its stock.

It is inconceivable that any industrial organisation can survive when it does not itself know much less the Government, whether it is making a profit or a loss. As for the average figures for British industry as a whole—I got them from a Treasury report—it is said that, from 1967 to 1974 the average profits made by British industry rose from 13 to 17 per cent; in fact, if the accounts were done properly, they would show that they dropped from 10 to 4 per cent. One can perhaps tolerate a difference between 10 and 13 per cent. but nobody can conceivably contemplate a system of accounts which produces the net result that British industry is said to have made four times as much profit as it really thinks it has. There are many large firms which either made profits of £40 million, £50 million or £60 million or alternatively had to dip into their reserves to pay their dividends.

This is a matter of crucial importance. It is a matter on which British industry depends for its very survival and it is of course a matter in the light of which the fiscal policy of the Government should be determined. So, when one contemplates the possibility that industry may have been bleeding to death over a period of 20 years or more because of the way that British industry is required by the Treasury to do its accounts, one concludes that the reform in the accounting system is a matter of desperate urgency. In talking to the accountants concerned—Sir Francis Sandilands and Mr. Douglas Morpeth and his collaborators—I find that they are fascinated by it as a problem, but most members of the profession are concerned with ways of surviving the present system—fiddling it, if one prefers the phrase—rather than with trying to reform it in such a way that these anomalies, these absurdities and this ridiculous nonsense, do not occur. That may be why the three great firms of accountants—Deloittes, Peat Marwick and Mitchell, and Price Waterhouse—each recruited more graduates last year than Rolls Royce, British Leyland and ICI put together. The real need these days for qualified, able men is not in the manufacture of goods, but in devising techniques for evading tax in its more obviously extreme form. I am not for a moment suggesting that these people are being dishonest. They are not. They are trying to wade their way through, say, the 1972 Finance Act as amended, or alternatively even the 1977 Finance Act as amended. Those Acts are extraordinarily obscure. There are opportunities for making a fortune by, for example, renting cars instead of buying them. This is the kind of decision upon which the prospects of a company depend—not its success on the shop floor. Unless and until we can devise a system which makes it possible for industry, as is essential for survival, to keep its capital in proper shape, to keep its plant in proper shape and to avoid handing out vast sums to the Government and to its own shareholders, it seems to me that we can have no hope at all for British industry.

It was Keynes who said in about 1920 that in times of inflation Governments can confiscate secretly and arbitrarily a large part of the wealth of their citizens and this is one of the ways in which they do it today. This subject has now been under discussion for 30 years to my certain knowledge—and probably much longer. I do not think that it really mattered very much when inflation was at 2 or 3 per cent., although, as I have said, companies were paying out far more than they should have been, but, now that inflation is rising to 10 per cent., and even 20 per cent. is forecast, it is vitally important that something be done immediately, lest industry be bled to death despite all the concessions made by the Government from time to time to avoid taking away its last shred of capital. In my experience, such concessions are never satisfactory.

The Ford Motor Company tried when negotiating with its workmen to persuade them that the very large profits it was said to have made were unreal, but the men's representatives said, very reasonably, that the Government accepted them, the shareholders accepted them, "Why should we uniquely be taught to believe that they are untrue?" On this basis the Ford Company was finally forced to concede a wage increase much larger than it could really afford. Thereafter, the rest of the private sector followed suit. After that, the public sector felt, very reasonably, that if 15 per cent. was the going rate, that was the kind of award that the dustmen must have. So it is probably true to say that those vast piles of rubbish in Leicester Square less than six months ago arose primarily because of bad accounting and a failure on the part of the Government to spur the accountants into action.

I have come to the conclusion that unless the Government take the initiative and drive these reforms through they will never be implemented. The reason for this is that there is so much vested opposition to change. No major company would like to admit that its profits are so much less than those it has been forced to declare. For example, ICI would be appalled to have to say that its profits this year were 5 per cent. and not 19 per cent. as its balance sheet says. Any firm which did that would be taken over because its shares would collapse on the Stock Exchange.

So, to begin with, most businessmen are against this reform. In turn, the accountants are against it because, although accounts are much more subjective than accountants care to admit, there is still a fantasy of precision about them. The extreme Left-Wing of the Labour Party would be against any change on the grounds that they hope the capitalist system will collapse. After all, it was Lenin who said 50 years ago, "The best way to destroy the capitalist system is to debauch the currency and create an inflation." The shareholders would be bitterly opposed to any change in the system which made it evident that profits were not as great as shown.

So we have a situation in which a most extraordinary alliance of very disparate people, which can best be described as a most extraordinary hotbed of cold feet, is in effect preventing essential reforms which will have to be taken at the initiative of the Government if they are to have effect at all and which must be taken in some way lest industry as a whole bleeds to death. I have spoken about this matter in the United States. I was at the business school in Los Angeles not long ago and I was told that the Americans fear precisely the same problem because their system of accounting is based on ours. They also told me that the United States Steel Corporation declared a dividend last year almost exactly four and a half times as big as it had actually earned, and this they said, was the beginning of the end for United States Steel. So this is a matter of desperate importance, arcane, obscure and complex though it may be, and I cannot tell your Lordships how pleased I am to find that the Chancellor is seized of it and apparently determined to do something about it. I hope that he and the noble Lord who opened the debate will take the matter urgently in hand and do something about it.

Lord KALDOR

My Lords, will the noble Lord permit me to ask him two questions before he sits down I do not really disagree with the main drift of his argument, but would he not agree that a company which borrows money and keeps up its gearing through an inflation gains as much through the depreciation in the value of money as it loses in other ways? That is the first question. The reason why British industry has suffered—and American industry, too—on account of historical cost accounting is not so much historical cost accounting as the fact that, in the Anglo-Saxon tradition, businesses do not borrow, are not loaned up and are not geared up as are industries on the Continent. In Germany during great inflation industry benefited enormously because the inflation wiped out all its debts. I quite agree with the noble Lord that all our ablest people from the universities go into the accountancy profession, but is this because it is so necessary to have the best brains for tax fiddling? Is it not rather—which is my suspicion—in order to be able to produce figures for the Stock Exchange and for the financial Press, showing better and better results year after year, six months after six months, and quarter after quarter? I believe that the tyranny of the accountant is indeed one of the worst features of the way our economy is run. I think that the tyranny of the accountants has more to do with the importance of the Stock Exchange than with tax affairs.

Lord BOWDEN

My Lords, in the first place, it is true that this matter of borrowing money is important. Having quoted ICI from memory, my impression is that, in their adjusted accounts, the largest single item of profit was due to borrowing money at a time when the rate of inflation was greater than the nominal bank charges. It seems to me insane that the largest chemical plant in England should earn more by borrowing money than by making chemicals. To that extent, the noble Lord is right. As to whether the accountant prepares documents for the Stock Exchange or for the tax collector, or even for the House of Lords sitting in its judicial capacity and trying to understand accounts submitted to it, I cannot say. All I can say is that it seems to me deplorable that there should be more prestige, more money and much more general acceptability in becoming an accountant than in becoming a production manager or, as a noble Lord reminds me, an engineer.

I remember going to a meeting of a company with which I had become associated. I shall never forget that the chairman came in and said: "Please remind me what is the product of this factory". As far as he knew, it might have been cardboard boxes or television sets; it was something that went out of the door and was sold. But he could not have cared less about the production problems, or the initiative and ingenuity of the people who made the product. All he was interested in was the balance sheet. I am afraid that he and the accountants are only too typical of much in British industry today.

8.22 p.m.

Lord GRANTCHESTER

My Lords, as the president of the Value Added Tax Tribunal, I am not in a position to comment on the political aspects of the Chancellor's statement. Therefore, I shall be very brief because I really only want to raise two matters which are now relevant in the background of the statement, matters of the administration of the taxes. Before coming to those two matters, may I associate myself with the congratulations expressed by the noble Lords who preceded me to the noble Lord, Lord Miles, in relation to his maiden speech.

As I understood the position before I listened to one or two speeches this afternoon, it is the intention of Her Majesty's Government to reduce the burden of taxation on income, profits and gains and, in the near future, to adjust the burden of taxation on capital assets, but to increase the rate of taxation on consumer spending. Value added tax is the tax on consumer spending which is involved, being charged on supplies of most types of goods and services. At the same time, the strategy involves an effort to simplify the collection and recovery of all types of taxes.

Value added tax was introduced in 1972 as a simple tax to replace purchase tax and selective employment tax. Being introduced as a simple tax, initially the accountancy profession evinced little interest in it and, at the rate then and later in force, all except the largest of traders felt that the cost of employment of an accountant to prepare their returns for that tax was not justified. However, this position is now changing. The rate of tax is substantially increased and many cash traders are having to turn to their accountants to guide them through the technical changes which have been made or shortly will be made in the tax to give effect to various EEC directives. The EEC proposals to amend the basis of charge on secondhand goods is an example of the way the tax is becoming more complicated.

In the circumstances that value added tax is increasing in complexity, it might be a convenient moment now to reconsider the desirability of maintaining two separate revenue departments, both answerable to one Minister. We alone of the EEC countries maintain this distinction. Originally Her Majesty's Customs and Excise managed the administration of duties on goods which could be examined, touched and tested; whereas the management of other taxes assessed on accounts showing income, profits or gains and on property valuation was entrusted to the Inland Revenue. Accordingly, the latter were concerned with accounts; whereas the former were concerned with specific goods.

The introduction of value added tax and the entrustment of its management to Her Majesty's Customs and Excise has blurred the old historical distinction; but now VAT is assessed on accounts and supporting documents and rarely do the Customs and Excise see or are able to examine the relevant goods. At present the two departments act independently and exchanges of information about individual traders appear largely to be confined to cases of suspected serious fraud. In the main the Inland Revenue work from accounts certified by the tax payer's accountant whereas the Customs and Excise employ a system of control visits in order to check the taxpayers' uncertified valued added tax accounts with his books and documents. It might be a more effective system of collection of the tax if the system of control visits by revenue officers was extended from merely value added tax to other taxes as well and if the system of having accountants preparing traders' returns was extended, or could be extended, to the preparation of traders' value added tax returns as well as their corporation and income tax returns.

In addition, it is possible that a merger of the two departments might result in a saving of administering the taxes in addition to the savings which are expected to result from the proposals outlined in the Chancellor's statement for simplifying the taxes. My suggestion on this aspect is that such a merger or almagamation should be considered not immediately but in the near future to see whether a more effective and cheaper system of collection and enforcement of the taxes would result.

The second administrative point which I would raise on this occasion, I raise because this House never sees the details of the Finance Acts. Valued added tax is a tax, as I have stated, on the ultimate consumer of goods and services and the consumer bears the burden in the price which he pays for those goods and services. For this purpose, except on a retail sale, the consumer has to be supplied with an invoice which states the tax charged on the relevant goods or services as part of the amount which he pays to the trader. But it is the trader who collects the tax, who must account for it to Her Majesty's Customs and Excise and pay it over in due course.

However, although the burden of the tax falls on the ultimate consumer, the statutory provisions at present in force do not give the consumer any express right to challenge a charge for tax made upon him except in the case of "do-it-yourself" builders. I suggest that this point might with advantage to the individual be clarified, especially now that the rate of value added tax has been substantially increased. The tribunals entertain appeals relating to tax from individuals who can establish that they have been charged with a specific amount of tax, even though they are not liable to account for that tax to the commissioners. The commissioners at present accept that the tribunals can exercise this jurisdiction. But it is open to challenge on the wording of the Finance Act 1972 and we would welcome the provision which confirmed the right of the individual consumer to challenge a decision as to the chargeability of goods or services which he takes, even though he is not the person who in fact accounts to the commissioners for that tax.

In view of the attitude that the tribunals have taken, the number of appeals would not be substantially increased by the introduction of such a provision in the Finance Bill. This matter is a facet of the wider principle of which your Lordships will approve, that the liability of an individual to pay or to bear an amount of tax should be capable of speedy and inexpensive review before an independent court or tribunal sitting in public which issues a reasoned decision on the substantive matter in contention between the individual and the Revenue, howsoever arising and regardless of the nature of the power under which the Revenue is purporting to act. My Lords, thank you for this opportunity of raising those administrative matters.

8.33 p.m.

Lord HATCH of LUSBY

My Lords, may I begin by associating myself very warmly with the tributes that have been paid to the maiden speech of the noble Lord, Lord Miles. This is not just in a conventional way because I shall be referring to a part of his speech during the comments that I make.

I should like to congratulate the Government on introducing this debate, on having the courage of their own philosophy and putting it into practice. It seems however that there is a greater interest on this side of the House in their philosophy and strategy for the economy than there has been on their side of the House over the past few minutes. If I am right—and I hope that I shall he corrected if I am wrong—the philosophy of the present Government stems from their view of this country as a country of roped-in entrepreneurs struggling to get free from their Government chains in an atmosphere of competition where it is the Government that are trying to prevent that competition taking place, and that there is a political arm of our country which is holding back the entrepreneurial skills and the productive resources of this country. In its turn, this is the way in which they see the world community as a whole.

So, quite rightly with that view, they have put into effect a Budget which is based upon the concept that they have of this country and of the world. To do them credit, they put this policy clearly before the electorate at the recent election, with two exceptions which I must mention in parenthesis. Already my noble friend Lord Bruce has pointed out that the suggestion that was made from this side during the election campaign that VAT would be doubled was termed a shameless lie by the present Chancellor of the Exchequer. Perhaps the noble Earl who is to wind up would like to explain that. Secondly, it was the present Prime Minister who categorically denied that prescription charges would be raised. With those two exceptions, I congratulate the Government on putting their philosophy into practice in the Budget.

What does it consist of, my Lords? It consists of cutting the development land tax to the benefit of landowners and property speculators; of cutting the top income tax by 23 per cent., in addition to substantial salary rises for the élite, the monetary élite of the country. May I say to the noble Lord, Lord Monson—although he is not in his place at the moment—that when he was referring to the understanding and fairness of the British people if this had been explained to them in better propaganda terms, I take issue with him on that because in my view the majority of British people, if this issue were put to them, would want a change in the system despite the fact that, as he says, the top income bracket has fallen behind in its comparability. But, so far as we are concerned, it is our intention and belief that the gap should be closed.

So, one goes on to the encouragement of private education, private pay beds, the relaxation of exchange control—which is a particularly important point in what I have to say further—the removal of dividend control and the asset-stripping of the nationalised industries. Of course that enables the party opposite to have a self- fulfilling prophecy that the nationalised industries are a failure; and when they are a success you take away the success so they are bound to be a failure.

On the other side, there is the cut in the education of our children; prescription charges are raised; VAT has risen to 15 per cent. The inflation level in the Budget debate last week was originally at 16 per cent., but it rose before the end of the week to and estimate of 17½ per cent. before the end of this year. Council housing has been reduced; there are cuts in subsidies to employment; mortgages are dearer and scarcer, and there is that squalid little cut of £50 million in foreign aid, cutting away without any effect on the Budget. Just because this is a formality, every department must cut £50 million off what is provided for the starving of the world. That is underpinned by a sense of charity—the old feudal concept of charity—that social services must provide a buffer for the poorer paid. Remember, my Lords, the 5 million workers and their families who are outside the tax bracket and who still have to pay 15 per cent. VAT and have to pay it—let me say directly to the party opposite—on many children's clothes. It [...]is often said, and was said right through the election, that children's clothes were exempt from VAT. They are not. You send a child to secondary school, you send a child who is above the physical limits, and it does not matter whether the child is going to school or not: you will still have to pay VAT on his clothes. This is the philosophy and, I repeat, an honest philosophy honestly put into practice in this Budget. It was described in a saying attributed to John Maynard Keynes at one time: Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of motives, will somehow work for the benefit of us all". But we have been here before. We all remember 1970. The same things were being said and the same things were being done; and I want to challenge the noble Earl who is to wind up to answer this question. From 1970 to 1972 the same policies were being followed. I am not saying that every detail was the same, but it was the same philosophy that was being put into practice, in the same way and in the same type of Budget. What happened? I give noble Lords opposite this credit: they believe that this Budget is designed to work through into an increase in production in British industry and British manufacturing. This is, after all, their central aim and I give them credit for believing it. But why do they believe it? I ask the noble Earl to answer this specific question—I think we have a right to receive an answer: Why do they believe that what failed in 1970 to 1972 is going to succeed in 1979 to 1981?

I want to spell this out. Between 1970 and 1972 the number of manufacturing industries in this country fell from a rough figure of 88,000 to a rough figure of 87,000. I do not think you will challenge the figures. They fell by a thousand in those two years. Let me say, although he is not in his seat, to the noble Lord who interrupted my noble friend here on the question of small businesses: these were failures to small businesses. Did any of your Lordships read the advertisement of Mobil last week which whitewashed the reputation of the great multinational oil companies? That had a message for you. It showed that in the last year—the year of competition, the year of competition between the oil companies, the year of price cutting—1,500 small businesses went out of business. Why?—because they could not stand the competition. That is what competition brings, and presumably that is what noble Lords opposite want. I suppose they would call it "squeezing out the inefficient". But when that is done also squeezed out is the British grocer. How many noble Lords who live in the country have seen the village shop being replaced almost everywhere by the great combines—by Spar and Mace and so on? They may be small shops: they are still being taken over.

Let me give a further example of what happened the last time this policy was put into practice. This is even more serious and it refers to what I said about the relaxation of exchange controls. You say: "Put money in people's pockets and they will invest it in industry; they will become more entrepreneurial and more competitive". What happened last time? Between 1970 and 1973 British investment in Western Europe rose from £129 million to over £620 million. British investment in North America rose from £184 million to £510 million. Domestic capital formation in this country rose from roughly £20,000 million to £21,500 million. In other words, the money that was available to be invested went five times as often to Western Europe and to North America as it did to industry in this country. That happened when that was done before. I am asking the noble Earl to answer me directly: why do you think that what happened between 1970 and 1972—and I am specifically saying 1970 to 1972—is not going to happen between 1979 and 1981?

My noble friend Lord Bruce gave a quotation from the City editor of the Daily Telegraph. Let me complete the quotation for him, because the City editor was taking this Budget and saying: "Here are the risks that are being taken. They are the risks of investment going abroad, the risks of unemployment, the risks of inflation." Then at the conclusion of his article he said this: If it does not succeed, attempts to compensate through wage increases will produce inflation, bankruptcy and slump". That is the prospect we are facing if the Government do not succeed. I am asking again: As you did not succeed last time and as you worsened, or presided over the worsening of, British manufacturing industry when you applied this policy last time, why do you think that these disastrous results of inflation, bankruptcy and slump are not going to follow again this time as they did the Government of Mr. Edward Heath in 1970 to 1972?

Further, let me say this to my friends as well as to noble Lords on the other side: I do not believe that this time there will he any U-turn. I do not believe there will be any taming of the shrew. This time we are dealing with a different kind of person. It is a terrifying thought, when one thinks back to what we used to say about Selsdon man; nevertheless, believe me, it is not just a thought but a certainty. My noble friend has pointed out that a week after the Budget there are already some faint hearts being exposed among members of the Party opposite. There are reports in the week-end Press of comments that are being made within the Conservative Party. It reminds me of my favourite poet. John Keats: I saw pale kings and princes too, Pale warriors, death-pale were they all; Who cry'd—'La belle Dame sans merci Hath thee in thrall!'". Let me say one word in particular to the noble Lord, Lord Byers, to whose speech I listened very carefully this afternoon. I believe either that I misinterpreted him or that he misinterpreted the facts, because although this is the prospect that we face it is our duty on this side to show the people of Britain what are the practical consequences of the philosophy which they have voted for, although not a majority—nevertheless noble Lords opposite have a mandate and nobody is going to try and argue them away from that mandate—and it is our duty, because we hold a different philosophy, to show what are the practical consequences to the people of Britain of putting that philosophy into practice.

But let me say to the noble Lord, Lord Byers—and I ask him to correct me if I am wrong—that I have the impression that he was suggesting that the TUC was threatening to use industrial action in order to bring down this Government, or in order to change their policy. That is not the case. There have been a very small number of trade union leaders who have made that suggestion. They have been repudiated. Joe Gormley went on television immediately and repudiated the man in his union who had suggested it. That is not the policy of the TUC. It has always been repudiated by the TUC and it is repudiated by those of us on these Benches.

Lord BYERS

My Lords, before the noble Lord goes any further in misinterpreting what I said, I actually mentioned McGahey and Joe Gormley. I said it was right that he should have been slapped down. But Len Murray, for whom I have great respect, has said that this will lead to industrial action. This is an invitation to trade unions to take industrial action. Mr. Drain. who is on the Executive Committee of the TUC, has said that if necessary they will change the Government's mind by industrial action. This is unconstitutional. It cannot be tolerated in a democracy.

Lord HATCH of LUSBY

I am sorry, my Lords, but I just do not accept that interpretation. When Len Murray says that he can see the possibility of this leading to industrial action, I agree with him. I do not agree with anybody who says, "We shall take industrial action in order to change the political complexion of this Government, or indeed to change the policy of this Government", and Len Murray has not said so. What Len Murray has said on behalf of the TUC is that he can see the possibility of this happening, and so can we. We do not want it to happen, but if you get 2 million unemployed, if over the next year you get a 1 per cent. reduction in production, and if you get inflation at 20 per cent., anybody can see the possibility of industrial action. But I reaffirm that no noble Lord on this side of the House will ever support industrial action for political purposes. nor will the TUC.

Lord BYERS

My Lords, may I just get this absolutely right with the noble Lord? The point is that if a person in Len Murray's position as the leader of the TUC does not condemn the possibility of industrial action, you are inviting individual trade unions to take that industrial action. That is where the anarchy comes in.

Lord HATCH of LUSBY

My Lords, I still do not accept the interpretation of the noble Lord and I am absolutely certain, having known Len Murray for a very long time, that he has no sympathy whatever with the use of industrial action for political purposes. But let me return for the last few minutes to what should be the alternative to the philosophy which has been put forward. I know that a number of noble Lords have criticised me in the past for speaking for too long. I would just ask them to see how many interruptions there are in my speeches and add on that time. I have only a moment or two left but it is imperative to say what is our alternative, and I say it very simply and in over-generalised terms.

Noble Lords opposite and their friends in the other place have talked about rolling back the State, because they see the world and the country in the way which I described. We do not see the country in that light, neither do we see the world in that light, and I want to point out why. A number of figures have already been given, but let me emphasise the point that I have made in previous debates in this House. In this country, 1 per cent. of the manufacturing companies account for half of the output, half of the employment and over half of the industrial assets and visible exports of Britain. They are the people who are principally concerned with price determination. They are the people who are continually absorbing the small businesses about which we hear so much from the other side, and they are part and parcel of the multi-national empires which today are redetermining the economy of the world and, to a very large extent, the political direction of the world.

What we are saying—and your Lord-ships will Lind this out when we come to the next wage rounds in a few months' time—is that it is the multi-national Fords who will be giving the large wage increases, irrespective of what the Government of this country say or desire. All we are saying is that in this world of the big corporations, the big business interests, you need a set of institutions which represent the ordinary people to control the activities of such institutions, if there are to be reasonable prices, if inflation is to be kept down, if there is to be reasonable employment and, above all, if we are to have what is essential for the future of our country—a restructuring of industry.

I am not saying that the State, as it has been characterised and mythologised as an impersonal institution, is the only kind of institution which can represent such interests. I think that we on this side have to redefine the State. We have to find new means of public ownership. We have to invent new institutions with greater public participation. We have to discover the means of fairer distribution and of improving the quality of life. But you cannot do that if you emasculate an organisation such as the National Enterprise Board. Let me again ask the Front Bench opposite why it is necessary for the National Enterprise Board to go into the production of titanium? It is because private enterprise will not take the risk. Why is it necessary for the National Enterprise Board to go into microelectronics? It is because private enterprise will not take the risk. This is where I want to come to the issue that was raised by the noble Lord, Lord Miles. Are we to allow the nuclear industry to be free from public control?

I suggest that these are the alternatives, because we on this side believe that it is the duty of a political party to create institutions in which people participate in the control of the environment in which they live, and this has to be done through public institutions. Again, I emphasise that we have to find new forms of institutions within what has come to be known, too loosely, as the State. Those institutions are essential if people are to preserve their freedom. If you destroy those institutions, as this Budget is trying to do and as future Budgets threaten do to, then you are undermining the strength of genuine democratic participation by the people of Britain in the future of their own country.

8.59 p.m.

The Earl of ONSLOW

My Lords, perhaps the comment of the noble Lord, Lord Byers, on the length of Front Bench speeches might be echoed by myself as a comment on the length of some Back-Bench speeches. The noble Lord, Lord Miles, will in future be listened to with respectful attention and wry amusement if all his speeches are as witty and as erudite as was his maiden speech today. What a contrast to the archaic and, with respect, snobbish and class-ridden speech given by the noble Lord, Lord Bruce of Donington. The noble Lord, Lord Hatch, was right and brave to state his view on the mandate. He was right about his duty, as he saw it, but I think that his interpretations were wrong.

It would be worth while to point out that what has created the standard of living that we enjoy in this country has been liberty, property and free trade. I am sure that diffidence tinged with shame is not an inappropriate attitude to adopt towards the British economy at the moment, especially as, when one or two economists are gathered together, four or five answers seem to appear from the same set of figures. Unfortunately, however, the relative decline in the British economic performance since 1945 cannot be ignored. Therefore it tends to show that the old methods of Keynesian-Butskellism must be discarded. The noble Lord, Lord Byers, was right again when he commented on the different tax needs of 1900 compared with the tax needs of today. Walpole also made that discovery, and so did Pitt. They produced a reverse in tax needs because there was a reversal of historic circumstances. Both produced economic prosperity.

What is wrong with our economy is well known. Renault produce, per man with a similar plant, over twice what British Leyland produce. British Steel needs many times the number of men to produce a ton of steel that Japan, Korea or Germany need. Motor bicycles—not exactly a high technology industry but one where we were once supreme—are now hardly produced here at all. The television industry—we invented television—kicked up the most awful fuss when the Japanese wanted to establish a factory over here.

The movie goes on for a long time. Luckily, there are major exceptions to this saga. Rolls Royce Engines were State-aided and nationalised by a Conservative Government, not for reasons of doctrine but because it seemed to be the right thing to do at the right time. I would recommend that attitude as opposed to dogma. Then there is British agriculture, which is superb. The City of London, at its best, is better than any other financial market in the world. The retailing and manufacturing of food is of high quality. We even export large quantities of spaghetti to Italy.

I could suggest two things to Sir Geoffrey which would help us to help ourselves towards a high wage, high production economy and which would raise the standards of the British Steels and the British Leylands of this world to the standards of agriculture and the City. First, may I deal with real productivity agreements in the public sector. By this I mean not the kind of recently negotiated agreement produced by the Post Office and the Post Office Union which was rejected by a ballot. Mr. Jackson admitted it to he bogus. What I mean is a productivity scheme where the sky is the limit as regards wage increases, provided that cash limits are rigidly imposed and maintained.

It has been held recently—and Lord Harris of Greenwich underlined it—that public sector employment productivity has fallen, and the quality of service has fallen with it. Therefore it is not surprising that Alan Fisher's NUPE members strike. But if Alan Fisher wants large numbers of unionists in his union to be kept there by high and unrealistic manning levels, it means, as night follows day, that they will remain low paid. If they remain low paid, they will work idly and badly, with a high labour turnover and discontent.

Part of the trouble is that a union leader needs large numbers of members for reasons other than protecting his members. I would suggest to your Lordships that the main one is the card vote. Thus it could be in the true interests of Mr. Fisher's NUPE members for there to be fewer of them, and much better paid, but Mr. Fisher himself would then lose clout at the TUC conferences and the Labour Party conferences.

Furthermore, we must divorce in our minds the need to create employment and the need to save jobs in dying industries, or overmanning in the public service. The job of the British Steel Corporation is to produce steel, not to save jobs. The job of the National Health Service is to cure the sick and to tend the dying. The National Health Service is not a mopper-up of the unemployed. The creation of jobs by means of the economic climate is for the Government, for industry and for the skills of the people. If we keep these two distinctions clear in our minds, then wealth and new jobs will be created. Others have done it, and have done it very successfully. We do not have to look more than about a hundred miles across the Channel to the Low Countries and Western Germany.

My last point is this. Now that the Chancellor has relaxed the top rate of tax, he must hit at perks. I could not agree more with the noble Lord, Lord Kaldor, the noble Lord, Lord Houghton of Sowerby, and the noble Lord, Lord Harris of Greenwich, on this point. Perks were just acceptable in a high or confiscatory tax society but not in a sensibly taxed one. Perks and the black economy go hand in hand. You shade the difference between breaking the law and twisting the law and you shade the difference between public and private morality. It is easy for the self-employed to get away with some things but the salaried person on PAYE cannot get away with them. This is had. I think that things like help with school fees, "top hat" pension schemes and mortgage relief above the standard rate of income tax should all go, and the sooner they go the sooner will people get a good wage for a good job done. It is this Government's aim to do that.

Do not let the moans, the carping and the bellows of past failures, or the class consciousness of some members of your Lordships' House who sit opposite, deter Her Majesty's present advisers. They will need our support. The world economy is not in a happy state at the moment and they will really need strong nerves. Danton was not of the same ideological persuasion as either the noble Lord, Lord Cockfield, or Sir Geoffrey Howe, but he did in another context say, "De L'audace, encore de l'audace et toujours de l'audace!" Let Sir Geoffrey Howe and his Treasury Ministers please remember that, both for our benefit and theirs. If they succeed—and we all hope that they will—they will deserve our thanks and our praise. If they fail, God help us! The days of unemployment of 1,300,000 will then be remembered with affectionate nostalgia as a time of peace, social harmony and prosperity.

9.8 p.m.

Baroness SEEAR

My Lords, at this time of night my most acceptable contribution no doubt would be to say nothing. I should like first to make my apologies to the noble Lord, Lord Miles, and to express my very great regret that I was at a committee in the House at the time when he was making his maiden speech so I cannot in sincerity congratulate him, but I can offer my apologies and say how much I regret that I missed what on all accounts was a most brilliant performance.

With the general direction of the Budget and its underlying intentions we on these Benches have much sympathy. For a long time we have been urging the shift from direct to indirect taxation which is embodied in this Budget. What one sees, of course, is the monetarists in charge. This is the application of a monetarist policy and with monetarism there is a very considerable intellectual attraction. It is an intellectually tidy theory. On the other hand what the monetarists have never told us is how they deal with the social and political consequences which they themselves admit, in the short run at any rate, are inevitable in the application of their theories. The Chancellor of the Exchequer has himself said that unemployment will rise and there is no doubt that is so, and it is inevitable that we shall have a high rate of inflation. Neither of those two facts gets any more pleasant by being repeated as if familiarity with the ideas will make them acceptable. The fact is that it is common ground between us all that this is going to happen and it has been common ground on all sides that these are the two overriding menaces which have threatened our country over the last decade. So we cannot accept complacently the idea that we shall have increased unemployment and rising inflation.

Of course, the Government supporters are saying that these threats can be held in check by the operation of the laws in which they believe as good monetarists. The noble Lord, Lord Boyd-Carpenter, told us how employers would resist pay increases and that in that way, aided by the fact that there would be unemployment and so the trade unions would not have the power to press for higher increases, it might be possible in some degree to hold both inflation and unemployment in check. It is at that point that I feel I am Alice entering Wonderland, for I do not believe that these simple mechanisms will work—not because people will not want them to work or because there are evil men around who will try to make this scheme fail, but because the complexities built into the real situation will make it incredibly difficult for it to succeed. I want the Government's strategy to succeed. I want it because the price of failure is as hideous as it is high. Perhaps they are putting a brave face on it—I do not know —but I believe they are grossly underrating the difficulties which confront them.

For example, I do not believe that the trade unions deliberately want to make political capital out of the situation, but I believe that pressure from their rank and file will be so great. I do not believe that they will be held back by the threat of unemployment because it is in the nature of the situation that the trade union leader will look at the situation of the man who stays in work with greater attention than he will look at the problem of the man who loses his job. This was said by a leading trade unionist on the radio only this morning. These are the pressures upon him.

In the same way the employer of course wants to resist an excessive pay claim, but the noble Lord, Lord Boyd-Carpenter, and all the Government Front Bench know perfectly well that there are sectors of industry in which it is simply not in the power of the employer to resist these pressures. There are sections of industry —and BOC is a good example—where if the employer really stands up to high pay claims he will be out of business. The price is too high for them to be able to pay it. So I implore the Government not to rely on these simple seeming natural forces to control the rise of unemployment and inflation and I beg them go out of their way to use all the persuasion, all the devices that they have to get the public on their side in support of this policy.

I think in some ways they have already made it rather difficult, but I am not going into that because other speakers have done so. We are where we are at this present time. What are the things that they can do? I know that the Government have said that under no circumstances will they have a pay policy. We on these Benches still believe that they are wrong, but I am not going to try to persuade them this evening, to argue in favour of a statutory policy though I would be prepared to do so. But at least can we not have an advisory body which will give information and guidance so that negotiators on both sides really know the facts of the situation, and not only the negotiators on both sides but the rank and file behind them?

I have said again and again in your Lordships' House that we in this country have not done anything like enough to educate ordinary people as to what is involved, what the connection is between pay increases and inflation. It has been getting through here and there but we could do a great deal more. I understand that the Germans, with all their noninterventionist approach, have done a great deal more to educate their public to understand in detail what is involved and do not just leave it to natural economic forces to bring about the right result. You have got to win ordinary people over to your way of thinking, what needs to be done; it has got to be made very clear to them.

The noble Lord, Lord Cockfield, has worked in this field so long that perhaps he has forgotten how little so many people, educated people as well as those less well educated, understand about how these things really do work. It really does need a positive effort and an advisory institution which could give information, advice, guidance and publicity about questions of pay. Otherwise these natural forces will not hold inflation in check.

Then, my Lords, can the Government not fall over backwards to get people to understand, to take action to make it apparent that what they are trying to do is going to benefit everybody and not merely certain sections? They reject, and I believe in many cases they genuinely reject, the idea that they stand for one class, for the rich, for the better off. The tragedy of it is that it does not matter how sincerely they believe that if other people do not accept that it is true. Perhaps the more sincerely they believe it the more difficulty they find in recognsing how necessary it is to carry conviction, that they are not just a class party. There are certain things which they could do straight away, or at any rate make a beginning in doing. Could they not at least consider indexing child benefits? The advantages of the tax changes have been in the upper grades. I know that it was necessary to do something pretty substantial. I would not have gone straight for 60 per cent. myself. But as it stands there is no doubt that it is easy to represent it as a Budget for the rich. Some of the sting could be taken out of this if at least those with large families were assured that their income was going to keep pace with rising inflation.

Of course it is true—I have tried to make this point on a number of occasions —that the poor in this country are not so much those who are low paid but the low paid, and even the less low paid, with heavy family responsibilities. The previous Government went a considerable way in improving child benefits but those are going to be seriously eroded by a 17½ per cent. inflation rate. If people could be told in the next two or three months that child benefits would maintain their purchasing power then it would do something to show that the Government are thinking about all sections of the community and not only, as they will undoubtedly be accused of doing, thinking about the better off.

Then, cannot the Government go out of their way to bring more people into the advantages of success in industry? I know that there are schemes in the refinancing of nationalised industries to sell shares to employees. More, surely, could be done in this direction. In the 1978 Finance Act, as a product of the Lib/Lab Pact, there was inserted encouragement to firms to bring about employee share-owning schemes through an allowance of £500 per employee. That is a small amount. Could the Government not look at that clause in the 1978 Finane Act to see whether a larger amount could not be made available so that, as productivity increases, as the success which we all hope for results from the measures the Government are taking, it will be clearly seen that an increasing number of people are going to benefit by increased productivity in industry?

I know that it is true that in the long run these benefits will spread to more and more people, but it will not be seen in that way. It would be seen in that way if straight away a larger number of people in industry were to benefit from the increased profit that comes through increased productivity. Again, I impore the Government not just to say: "Bullock is dead. Let's forget everything that has to do with the term 'industrial democracy'." There is something that used to be called the Fifth Directive. Our successful competitors in Europe have not forgotten and are forging ahead with these schemes.

In the interests of getting a much wider range of people to realise that the benefits of a prosperous industry are their benefits and not only the benefits of the investors and the proprietors, can we not ask the Government to produce their own programme and their own proposals for the involvement of all levels of industry in the enterprise in which they are employed. If they do not like the Bullock schemes, surely it is sensible for the Government, while they have the opportunity, to produce their own alternative. These ideas, whether one likes them or not, will not go away. Surely now is the opportunity to pre-empt schemes which one would much dislike to see when the day comes—as it certainly will—when this particular Government are no longer in power.

Finally, may I echo, so that it will have all-Party support, the proposal put forward by the noble Lord, Lord Houghton of Sowerby, and the noble Earl, Lord Onslow, about the question of perks. We all know why perks developed as they did in this country. Twenty years ago I remember hearing the personnel director of Unilever say: "We have done our damnedest to continue to pay people in money and not in kind, but already the tax system is making it almost impossible for us to do it." No sensible employer likes paying in kind: it is an extraordinarily unequal way of paying and a way which, in my experience, gives the employer the minimum amount of gratitude from the employee who always assumes that the perk is a right and who looks at the money in his pay packet and says, "That is all I get".

I believe that if the Government were to approach the CBI now and to say to them, "Can we not over the next four years phase out perks and pay people in money because you now can pay them in money and they can keep it?", there would be quite a considerable response. We are the only country in which it is now assumed that every executive down to a pretty low level gets a company car. That cannot be right. Money is a wonderful invention; there is nothing like money. Pay people in money—nobody has ever improved on it. This is the moment to do it. The reasons why we got off that line are all well known and that course has led us to turn into a nation of tax fiddlers. A very noble Member of your Lordships' House said to me not very long ago, "I reckon that my standards are reasonably good, but they are nowhere near the standards that my father had". I believe that if noble Lords were to put their hands on their hearts a very great many of them would agree with him.

To summarise therefore, this is a chance that the Government can take. What a difference it would make if the Government were to come forward with indexed child benefits; a great increase in employee share owning opportunities; a sensible scheme for industrial democracy; and a planned abolition of perks. If they were to do that they might claim that they were beginning to speak for one nation.

9.24 p.m.

Lord McCARTHY

My Lords, I should like to begin by begging the indulgence of the House on three separate but I think related grounds. First, this is my first appearance on the Opposition Front Bench and the first occasion on which I have been asked to speak not just for myself but for my Party—an activity which requires not only tactical skill and catholic sympathies, but sometimes second sight. So I beg indulgence for that. Secondly, I am speaking at the end of a long debate in which I am the seventeenth speaker. I have sat here for most of the day and I find that virtually everything which is worthwhile has been said. Therefore, I must beg your Lordships' indulgence if I do not say anything very new or very different, and if I simply repeat what has been said by others. Thirdly, I beg noble Lords' indulgence because I am increasingly confused by this debate. I think that our visitors in the galleries, particularly if there are any foreign visitors, must be increasingly confused by this debate, because we constantly appear to be stressing matters about which we agree and then matters about which we disagree, matters about which we are united and then matters about which we are disunited. It must be very difficult for visitors—it is certainly very difficult for me—to see exactly what is the difference between us.

Therefore, briefly—and I do not want to keep the House very long because it is now very late at night—I want to try to pick my way through, first, our agreements and then our disagreements. Virtually all speakers have agreed about the central nature of the problem. The central economic problem is that of an uncompetitive economy. The central problem is that the British economy is not competitive in the European markets or in world markets.

Lord KALDOR

My Lords, or anywhere.

Lord McCARTHY

My Lords, or anywhere. Ours is not a competitive economy. I think we agree that the reasons go a long way back in time and that they do not relate centrally—how could they?—to what this Government have done, or even centrally to what the last Government have done; though all Governments may have played their part and different Members have placed the critical date at different periods in the past. I thought that the noble Lord, Lord Kaldor, was saying that it went wrong some time in the 1870s; I think that the noble Lord, Lord Cockfield, said that it was something to do with Lloyd George. Different people have put different periods on it.

I should like to join all those who have congratulated the noble Lord, Lord Miles, on his maiden speech. He seems to put it somewhat more recently. That is probably right because he is a very up-to-date character. I am particularly pleased to be able to congratulate him. I first saw the noble Lord, Lord Miles, in 1941 in the part of lago. The part I particularly remember him in though is at the London Palladium, leaning on a cartwheel as the uncrowned King of the Chilterns. All I can say is that he improves. I am sure that we were very glad to hear him today and we hope that we shall hear him many times in the future. But I think that we are all agreed that the problem goes back a long way and that it is about competitiveness.

However, we are also all agreed that whatever the long-run problem may be, the central and immediate problem is that of relative rates of inflation. It is the fact that in most years since the war—and certainly in most years since the 1960s —we have been unable to maintain rates of inflation which compare with the rates of inflation of most of our competitors. That is the central immediate reason for our lack of competitiveness. There are many other reasons, but certainly we shall do nothing about the problem of competitiveness in the immediate future until we do something about the problem of inflation. Therefore, the problem of inflation and the problem of competitiveness interact and are the central problems of the British economy.

I think we are also agreed that some solutions are not available to us, that they really do not fit any more. Much has been made on the other side of the House—and I have no desire to seek to set this aside—of a statement made recently by the previous Prime Minister about the fact that we cannot simply expand our way out of our problem. I accept that. I think even the Left in the Labour Party accept that. Even the Cambridge School accept that. Even the National Economic Review has a slightly more complicated solution to the problem than a simple 1960s reflation.

The Government—and I am glad to see this—also accept that there is no way out in a simple application of the full rigours of monetarism. The Government may be more monetarist than the previous Government, but they are not as monetarist and consistently monetarist and as far-reachingly monetarist as some of their late supporters. I see that they have already lost the archpriest of monetarism, Mr. Samuel Brittan, who tells them they are only a short way from a wage freeze because they will not bring out sufficiently radical, sufficiently long-distance, hard objectives in terms of the public sector borrowing requirement and the money supply.

I take it that the Government have rejected that, and I am glad to note it. In this context too it is not surprising that on this side of the House we agree with some of the actual Budget measures. Many of them have been retailed to the House by the noble Lord, Lord Bruce of Donington. We accept the increase in personal allowances, particularly those for the old. We accept the removal of taxation from widows' pensions. We accept the increases in retirement pensions. All these kind of things we accept. There are elements in the Budget that we accept. We accept that it is no time to change corporation tax, company taxation or capital transfer tax; and we accept that it is more than time to demand a speedy and radical review of the British contribution to the European Economic Community Budget. All these things we agree about.

So what do we disagree about? I think three central issues. We disagree about the attitude which the Government take to public expenditure. I disagree most fundamentally with the hopes which the Government set upon the reduction of public expenditure; with the role which they think can be played by reductions in public expenditure. We object to, and we disagree with, the extent and nature of the tax changes. Again we disagree, and I particularly disagree, with the hopes, the expectations, which the Government have for what I regard as marginal tax changes. We disagree, and we are fearful —and here I should like to echo virtually everthing that the noble Baroness, Lady Seear, has just said—about what seems to us to be the Government's almost total disregard of the problems of an incipient pay explosion. Frankly, the present pay situation in this country terrifies me. I wish it terrified the Government, and I hope to hear tonight that it does. These are the three things about which we disagree.

Let me say a word about the attitude to public expenditure. It is not that I think that the Labour Party are saying that at this time there ought to be vast and substantial increases in public expenditure. It is not that the Labour Party are saying that through the expansion of public expenditure we can solve our problems. As has been said by speakers on this side of the House, by the noble Lord, Lord Harris of Greenwich, it is in fact quite clear that if we had had a Labour Budget at this time we should have had significant reductions in the overall rates of public expenditure. Some on this side of the House might say that that was wrong, but that is I think what we would have had. The real difference between us is the role which the Government appear to think is going to be played by reductions in Government expenditure.

The Government seem to me to have all the wrong reasons for reducing Government expenditure. For example, they want to sell off assets. They think that this will help them to reduce the public sector borrowing requirement; but they also do not really believe that the State should own profitable assets. They seem to us to think that only junk is fit for the people to own. This is the kind of difference between us.

Secondly, the Government seem to me to want to cut public expenditure because they have some vague idea that the level of public expenditure at this moment is holding back the advance of the British economy. I have never really believed in the Eltis Bacon argument that at some time in the past—to do them credit, they said it only in about the mid-seventies— the rate of increase in public expenditure was holding back the growth of the British economy, but it seems particularly foolish to argue that that is the case today.

We also oppose their attitude towards cutting public expenditure because it seems to us that they are looking at it—here we come to their policies in relation, for example, to the rate support reduction and to cash limits—as a kind of backdoor way of dealing with the problem of inflation and in particular the problem of wage inflation. They seem to think that by being tough over public expenditure they can somehow terrify or outface or back down the public sector trade unions. This seems to us to be a totally wrong way of going about public expenditure cuts.

Finally, their attitude to public expenditure seems to us to be dictated not by the needs of the case or the need to try to provide efficiency in the use of public funds. It is true that a great deal of public expenditure, particularly in the days when the present Secretary of State at the Department of Industry was the last of the big spenders and sat in the DHSS spending money like mad, was wasted; and after all it was a Labour Minister, the late Member for Grimsby, who said, "The party is over". A great deal of money has been wasted in public expenditure in the past and we on this side of the House have no reason to argue that there has not been waste, that there should be waste and that waste should not be eliminated. But that is not the approach of the Government—at least not their only approach—because the final reason why they wish to reduce public expenditure is related to the second objection we have to their policy—namely, that they want to remit direct taxation and in order to make room for their tax cuts are doing things to public expenditure which we think are totally unjustifiable.

So I come to their tax cuts. Noble Lords will know, since they have listened to this debate, that most of us on this side of the House would admit that this is an appropriate moment at which to make direct tax cuts. But it is the extent of the tax cuts, their distribution, the unsocial distribution of the tax cuts—I shall not go into that because it has been fully covered by my noble friends—and, above all, the things which are claimed for those tax cuts that, frankly, we on this side find impossible to give any credence to at all.

I am not trying to be difficult, but I find it very difficult sincerely to believe that noble Lords opposite actually believe the things they claim about their tax cuts; that they really believe, for example, that excessive rates of income tax, in the words of the Chancellor, bear a heavy responsibility for the lacklustre performance of the British economy. Of all the things that have been said in your Lordships' House in this debate about the complexities of the reasons for that lacklustre performance, to say in the words of Jeremy Bentham that excessive rates of income tax bear a heavy responsibility is nonsense on stilts. I do not think they really believe it.

These are the kinds of reason why we oppose what the Government are saying on public expenditure, the extent of their cuts in public expenditure and what they are saying about tax cuts. But we also oppose what they are saying in relation to tax cuts not only because they are doing it in order to make tax cuts to those to whom they said in their election Manifesto they would make tax cuts, but because they find that they have to do so via an increase in value added tax. It seems fantastic to double the rate of value added tax at this moment in the wage round, at this point in the problem of inflation in this country. I am not saying that a Labour Chancellor would not have increased VAT; I do not know. There is a trip in taxation. One per cent. or 2 per cent. can be passed on, but 8 per cent. is a figure that is quoted in bargaining terms. Eight per cent. is a psychological figure which cannot be pushed under the carpet. If one adds to that the other increases, such as the 7p increase on petrol, the Government are putting themselves in a position, and will be putting employers in a position as bargainers this winter which I find quite incredible.

These are the kind of points that we are raising in the debate. These are the basic differences between us. I look, for example, at the present level of inflation and at the problems for the next wage round. I should like to say a few words about this before I sit down. I said earlier that frankly I found the situation terrifying. The first point to make about the Government's position—and it is quite amazing—is that I cannot remember reading a Chancellor's speech which did not contain a statement about the anticipated rate of inflation. The facts about the anticipated rate of inflation had to be dug out from the Red Book and thrown across the floor of another place. And then it was admitted, "Yes, that is perfectly right—in the Red Book it does say 16 per cent. But of course we have subsequently been told that by November the rate will be 17½ per cent., and we have since learnt that by September 1980 it will be 13 per cent.

One simple question I wish to ask the Government spokesman to answer when he replies is: how will it come about that the rate will be 13 per cent. by September 1980? What level of wage movement are we assuming? I ask this because there is no level of wage movement given in the Red Book or anywhere else. The Government do not go in for prophesying the level of wage movement in the economy —not publicly. What level of wage movement is it assumed will produce 17½per cent. by November and 13 per cent. by September 1980? How is this to come about? If I were being unfair—and I am never unfair—I would say that there is a wage freeze in the pipeline. But I do not say that because I do not think that that is the case, and I do not think they have worked it out that far. It might be better if they had.

To sum up, we are saying that, despite similarities in the analysis, there are three crucial differences between us: the level of public expenditure and the hopes for reductions in public expenditure; the level of tax reductions and the hopes for reductions in taxes; and the attitude to the pay explosion. We believe that these three elements in Government policy will have to be modified in the future. It is difficult for the tax policies to be modified. It is difficult for the public expenditure policies to be modified. Therefore in conclusion I would join the noble Baroness, Lady Seear, in asking the Government to think again about their policy on pay. This is the one area where they could move. A little while ago we were told that their idea for a general forum was going to be abandoned. Now, if we believe what we read in the papers, it is not going to be abandoned; it may in fact be dragged out and used. I hope that the Government mean this. I hope that the Government are about to move away from insisting on these simple certainties: that tax incentives galvanise management; that cash limits terrify trade unions; that indirect taxation has no effect on wage bargaining; that m times v equals p times o, and if it does not it damn well ought to! I believe that the time has come for the Government to think again and to think more constructively: if this debate can have some small effect on that, then it has been worth having.

9.45 p.m.

The MINISTER of STATE, DEPARTMENT of INDUSTRY (The Earl of Gowrie)

My Lords, I, too, should like to start by offering my congratulations to the noble Lord, Lord Miles, who has appeared in a number of roles but never yet that of a Lord; he seemed to take to it extremely well. It is conventional that one should not be controversial in a maiden speech and it was a splendid initial gesture of controversy to make one's maiden speech on a Budget debate. Because the noble Lord had the nerve to make this move, I want to take up one point of issue with him. He talked about how men with regional accents were making marvellous pop music and bringing glory to our Exchequer. One of the contentions of my noble friends and myself is that it is indeed splendid but that, alas! too often it brings glory to someone else's Exchequer; and we are going to try to do something about that. On a serious note, I was bowled over by the noble Lord's maiden and it will certainly be a difficult act to follow.

I should like also to congratulate the noble Lord, Lord McCarthy, on his first appearance at the Dispatch Box. I sometimes think that the reason I have been appointed to the Department of Employment is because of the presence of the noble Lord, Lord McCarthy, and the noble Lord, Lord Wedderburn, in this House. However, that may be either overestimating their forensic skills in debate or underestimating mine. I do not know. We shall see when we come to industrial relations matters later in the year.

My Lords, let me begin by briefly outlining the areas where, like the noble Lord, I feel that there is considerable agreement about our Budget strategy. By "agreement" I do not mean economic consensus in this House or, still less, in the other place where the gladiatorial principle in British politics is still, thank goodness! alive and barracking. I am referring to agreement on both sides of industry and among ordinary men and women up and down the land.

My Lords, I think the agreement is that our relative, or indeed, absolute decline, is now showing. People travel enough to be able to make qualitative comparisons with other countries. But you do not need to go abroad to notice it. You see it in the decline of standards in the Welfare State, in municipal housing, in the Health Service and in education. You see it in the extent of import penetration. I believe that most people are aware of the country or origin of the goods that they buy. You see it in the terrifying differential between the numbers of unemployed and the numbers of vacancies for skilled workers—and I shall have something more to say about that in the employment debate tomorrow—and you see it, above all, in the way people calculate the odds of their being able to translate greater effort into greater reward, usually rejecting them. If there is one single element in this debate that I would reject it is the idea that in some way feelings about high rates of taxation are restricted to a small handful of Conservative company directors. That could not be further from the case. It is universal.

If we are to make a change we have to start with money; because money is the root not merely of all evil but of the supply side of the economy. Money may supply our irrelevant and irreverent fripperies, our snobberies and our attempts to cut a better showing than our neighbours and all the usual moral negatives which we traditionally apply to it; but it also supplies us with standards for health and for education and the little surplus of leisure without which men are condemned for ever to root about in the mire of their immediate consuming needs.

Nothing makes me personally angrier and nothing has done more damage to this country than the constant moralistic attack on money values which has been the stock in trade of our usually affluent ruling class over the last 50 or so years. I think this is the treason of the clerks with a vengeance. People in universities—and I worked in a university for 10 years myself—in Parliament, in local and national Government, in the pulpit, in the media and in all the professions—relatively well-paid professions at that—are constantly denouncing the necessity to strive and compete and scrabble for a living— one's own living but, more important, that of the country. I believe, contrary to what a number of noble Lords have felt, that people in the real world know that that is all nonsense, that it is elitist and remote. Yet its constant repetition breeds an immense cynicism, the spiv values of the fast buck, the black market, moonlighting, company perks, having a bit on the side.

One of the great things about VAT is that it really is rather difficult to dodge. It redresses the balance between those who pay and those wo do not pay their taxes. If I may adapt an old phrase used on the radio when I was growing up by Wilfred Pickles, we have to start by saying, as he did to Mabel, that we must put the money on the table. We have to get money matters out into the open in order to get them out of the way.

The stock criticism of the Budget is that the additions to the RPI of the one-off increase of VAT will fuel the flames of wage inflation and that therefore—if I may change my metaphorical gears—we shall have an icy winter. I remember the marvellous occasion in this House when the noble Baroness, Lady Seear, described the RPI as a kind of totem pole around which that noted jogger, Mr. Roy Hattersley, used to puff his way before breakfast. This is of course a free society and any group or groups which wish to take industrial action are at liberty to do so. I passionately believe that behind the political—as against the athletic—puffing and huffing there is no serious aim to engage in disruption of the kind of which the noble Lord, Lord Byers, was rightly frightened, and certainly there would be fierce resistance to the idea of blowing the house down.

I believe that this Budget demonstrates to people that the Government mean what they say. We went further on tax reductions and on the reduction of public spending than many commentators anticipated, and yet we only went as far as we said we would. We also mean what we say about cash limits in the public sector and monetary targets in the private sector. So negotiators know perfectly well that what happens to employment depends partly on the response of the private sector to the new opportunities it is being given and partly also on what we call responsible pay bargaining—bargaining which takes the tax cuts into account and does not seek the kind of pay rises which can only result, whoever is in power, in people being laid off.

If I were a union leader, I should furiously resent the repeated assumption in the Press and in Parliament that my members were idiots. People have a shrewd idea as to what their companies can afford in the private sector, and in the public sector—and here I agree with the noble Baroness, Lady Seear—it is the Government's business to make it clear what overall limits the country can expect to afford. In the private sector, trade union negotiators have to negotiate in the light of what the company can afford to pay. We all know that. In the public sector, too, negotiators must conduct negotiations within the limits of what the taxpayer and ratepayer can afford. As we said in the Manifesto, we will want to reconcile the traditional method of pay bargaining in central and local government with the cash limits used to control public spending. Industrial action could of course be taken against the cash limit imposed on any one area; but I doubt whether a series of such actions could get off the ground because of the widespread agreement up and down the country that Government spending is not only too high in itself, but is debilitating our general chances of recovery.

I shall now try to deal with the individual points that have been put to me. Your Lordships will be able to tell by the varying shades of pain and anxiety on the features of my noble friend Lord Cockfield whether in fact I have got my sums right; he had worked on the Budget from the beginning. I should like here to echo what has been said by other noble Lords who have given an indication of their pleasure at having a full Treasury Minister in this House.

The noble Lord, Lord Bruce, quoted a New Statesman article purporting to show that the net effects of the Budget measures were unfavourable at certain income levels. There appears to have been some confusion, mainly in the Press, about the net effect of the Budget measures on personal disposable income. The figures which the Chancellor quoted in his Budget speech were in fact quite accurate. The article from which the noble Lord, Lord Bruce, quoted from the New Statesman took no account of the statutory indexation of the main personal tax allowances provided for in the April Finance Act, which did receive all-party support. The article also ignored the fact that the public will only pay higher indirect taxes over the remaining 10 months of this year, while the Budget cuts in income tax would be back-dated to the beginning of the financial year. But in order to get a true picture of the impact of the Budget as a whole on personal disposable income it is necessary to average the tax reductions over 10 months as well; the Chancellor did in fact make the basis of his calculations quite clear in his speech.

I should like, if I may, to deal together with some of the points made by the noble Lords, Lord Hatch of Lusby and Lord Bruce of Donington, because they made fighting, political speeches. I think the sum answer to the question: "It has all been tried before and this is not a path we should go down again" is really that it has not all been tried before. That was a very simplistic account of the 1970–1974 Government. A great deal of that Government's programme cannot be written off, as the noble Lord, Lord Hatch, appeared to do, as a failure. At the end of the Heath Government's term of office the inflation rate was identical to the inflation rate at the end of the last Government's term of office; so if there was failure let us say that it was reasonably evenly distributed. I think the real answer is that in 1973, when the Heath Government were in office, income tax in this country yielded just over £7 billion a year. This year, had we taken no action in this last Budget, it would have yielded over £23 billion. It is absolute nonsense to suppose that this kind of distortion passes ordinary people by.

Lord KALDOR

My Lords, if I may intervene, this is the second time these figures have been quoted—£7 billion and £23 billion a year in income tax. Surely it makes no sense to quote such figures without taking into account the change in money incomes from which these taxes are taken. The national income in money terms is now something like £140 billion, and in those days it was £50 billion; so if you relate the tax receipts to the incomes on which the taxes were levied, you get an entirely different picture.

The Earl of GOWRIE

My Lords, the noble Lord has mistaken my point. He is talking about absolutes viewed, as it were, from above. I am talking about the effects of distortions—and we all accept that inflation is highly distorting—on ordinary people, their lives, their expenditure and pay packets. I would say this to the noble Lord, Lord Kaldor, and to the noble Lord, Lord Hatch: people do now have a greater understanding of inflation. The noble Lord, Lord Hatch, must not believe everything he sees in the Daily Telegraph. We on this side like the Daily Telegraph, but we certainly do not believe everything we see there.

I am sure about "La Belle Dame sans Merci" that the noble Lord, Lord Hatch, mentioned in his speech: I enjoyed that. His speech, I thought, rather suggested the lines: Still warble, dying swan; Still tell the tale, the enchanting tale, The tale of pleasing woe". I thought that the noble Lord got a certain amount of zest—and that applied also to the noble Lord, Lord Bruce—out of the woes that he anticipated lay ahead for us. Under the last Conservative Government the gross national product did increase. I am prepared to concede that world conditions may have been more favourable, but certainly there was a net increase which was about 2½ per cent. higher than that of the outgoing Government.

I was also puzzled in the speech of the noble Lord, Lord Bruce, when he said that the Government do not take into account corporate power. He has a very strange idea of the workings of capitalism nowadays. Capitalism, like everything else, is socialised to a very considerable degree which, as someone affected by the investment of corporate and pension funds in my own business life, I have good reason to know.

The noble Lord, Lord Hatch, accused the Chancellor of saying that he would not double VAT. We should be a little careful about quoting in an economic debate remarks which were made in a political context. I do not know what the Chancellor actually said, but it was clear to us who worked in the background on the Conservative economic policy that our hope was to take VAT to 12½ per cent. The differential was created by the level of the PSBR which we found, and I think Mr. Healey has conceded that.

Various noble Lords have made considerable play with this being, in some way, a rich man's Budget and have said that, even if we are intellectually right to reduce the top rate of taxation from 83 to 60 per cent., it will appear as a colossal handout to the rich. I really cannot accept that anybody paying £60 out of every £100 that he earns—and I stress that word "earns"—in taxation could be described as receiving a handout. It simply is not a portrait of the real world which, in my view, people relate to. We have on record, but I shall spare the blushes of noble Lords by not reading them out, remarks by Mr. Healey, by Mr. Callaghan, by Mr. Lever—now Lord Lever, I am glad to say—and by Mr. Joel Barnett, about the fact that something would have to be done about the high marginal rates of taxation in this country, and we are only addressing ourselves to a very wide consensus about this.

Important points were made by the noble Baroness, Lady Seear, on this issue. It is depressing that when you take 1.3 million people out of tax altogether, all the excitement in the Press is about what you are doing to the other, the upper marginal rates. We have tried to balance the equation and we will trumpet the fact loudly.

I come now to the speech of my noble friend Lord Boyd-Carpenter, which I much enjoyed and which had the authority of an ex-Financial Secretary to the Treasury behind it. He welcomed our basic change in direction in the course of our economy. The words "basic change" are absolutely relevant to some of the criticisms which the noble Lord, Lord McCarthy, made. We do not look upon one Budget, its tax cuts and increases in indirect taxation, as a generator of an immediate surge of productivity in the country. No Conservative spokesman—and it would be a very rash Conservative Member of Parliament—has given any indication of that. What we arc committed to is a change of direction and we have always said that it would take a number of years to achieve. Happily, we feel that we have enough solid support in the country and enough of a mandate in the House of Commons to have the necessary time to make a significant change.

The noble Lord, Lord Kaldor, said that we were not effectively increasing in real terms the salaries of people under £10,000 a year. I have to inform the noble Lord that I have taken advice, and the advice is that he is wrong, though I say that with great respect. The thresholds were increased by double the amount proposed in the April Finance Act. This was designed to give particular benefit to those of the lower income groups and its effect was to remove 1.3 million from tax who otherwise would have been liable later. The reduction in the basic rate from 33 to 30 per cent. ensured that everyone obtained a real reduction in income tax liability. There is, of course, some voluntary element in VAT and I would point out that about 50 per cent. of people's purchases and expenditure is not liable to VAT.

Obviously we should like to see a bigger direct tax reduction than we have been able to make, and my right honourable friend the Chancellor has specifically said that our long-term aim is to get the basic rate down to no more than 25 per cent. Because we appreciate the importance of middle management and highly skilled workers, the threshold for the higher rate was raised from £8,000 to £10,000. This exempted from the higher rate charges nearly half the people who would otherwise have been liable.

On the point noble Lord, Lord Kaldor, made about VAT being regressive, again I shall spare his blushes, or the blushes of an old pupil of his, in that the outgoing Chancellor, Mr. Healey, has, in a Written Answer in Hansard, pointed out that VAT is progressive rather than regressive. Well, "you pays your money and you takes your choice".

Lord KALDOR

My Lords, in the light of his remarks, I wonder whether the noble Earl will allow me to say something. What I said was that two-thirds of average earnings represents a certain position on the income scale. I do not know what percentage of the working population is below two-thirds of average earnings. Under this Budget, however, a man on two-thirds of average earnings pays more tax—to the tune of 2½ per cent. of his pre-tax income—than he did last year. That takes everything into account. It takes into account the fact that personal allowances were raised by 18 per cent., not by 9 per cent. as they were by Mr. Healey in the April Budget. It takes into account also that that man pays tax on less than £750 of income to which the reduced rate band of 25 per cent. applies. And that is the only rate which was not reduced in the Chancellor's Budget. Furthermore, it takes into account that according to household survey studies, that man still spends perhaps a little less than 50 per cent. of his disposable income on goods subject to VAT. Therefore I was right, not wrong, in saying that, if you take the fiscal drag into account and eliminate it, the burden of taxation on the lower income band has been raised, not lowered, and that the impression given in the Budget is misleading.

The Earl of GOWRIE

The noble Lord has made his point very clearly and he has made it twice. My advice is that he is not right. However, I shall go back and look at the matter again, and perhaps we can return to it, as it is a detailed affair.

The noble Lord, Lord Monson, the noble Lord, Lord Houghton of Sowerby, and my noble friend Lord Onslow, as well as the noble Baroness, Lady Seear, spoke about fringe benefits and perks. Certainly we have made a start on car leasing. I was in considerable sympathy with some of the points that were made. As the noble Baroness said, we all know why this happens—pay controls and high taxation inevitably mean some payments in kind. The difficulty is that there would have to be some kind of political consensus before people stopped paying in kind. The balance of taxation would not have to shift wildly between one party and another. Since it seems that the party opposite is coming to a credible and coherent philosophy about public expenditure—or, shall I say, to a more credible and coherent philosophy—there may be a chance of that happening, but until it happens it will be difficult to get it out of the system altogether.

As an ex-Minister in the last Government, the noble Lord, Lord Harris of Greenwich, made a courageous speech. He said that the Government of which he was a Member would have had to introduce swingeing cuts in public expenditure had they been returned to office, and that they would have been right to do so. It has been a pleasant debate, but it would have been even more pleasant if we had been able to take the books and the figures and present our own rival and alternative Budgets. However, the noble Lord, Lord McCarthy, together with the noble Lord, Lord Harris of Greenwich, would have to admit that the Budget which would have been brought in by Mr. Healey or his successor had the last Government been returned would have had as dire consequences for the wage round as he was predicting for our Budget. This is because there would have been considerable increases in taxation without even the benefits of our direct tax cuts.

I join with my noble friend Lord Amory in regretting that the minimum lending rate had to go up. The reason for the increase was that the money supply was running above the target range of the last Government, that there were big increases in bank lending to the private sector and that the public sector borrowing requirement was much above target. Having unfortunately had to put up MLR is an earnest indication of our seriousness about inflation and an earnest indication of our practical monetarism, if I may put it that way. I remember a wonderful speech from my noble friend Lord Amory in which he said what a dark day it was for the British economy when my noble friend Lord Thorneycroft had to resign as Chancellor, but he ended his speech by saying, "Every cloud has a silver lining, and on that occasion it was that I became Chancellor"—which was one of the moments in your Lordships' House which I have most enjoyed

We listened to the noble Lord, Lord Houghton of Sowerby, with great care and I am delighted that it is he who is bringing Mr. Tom Jackson (for whom I have a great deal of respect) to this House. I only wish that I was a member of that august committee and could be there myself. I hope that the noble Lord, Lord Houghton, will pass on to our trade union Peers in this House that they might attend and contribute a little more often than they do. I think we are still looking forward to the maiden speech of the noble Lord, Lord Scanlon, and I shall certainly be present when it comes.

My noble friend Lord Auckland was helpful on the subject of there being too many instant reactions to the Budget. Like all Budgets it will have to work through and we shall have to see what modifications are needed next time. I will certainly look at the points with regard to prescription charges which the noble Lord made.

In my view the noble Lord, Lord Bowden, was neither arcane nor boring but he was certainly somewhat over my head for a quick answer. We are aware of the problem of inflation accounting and in fact in column 257 of the Chancellor's speech he deals with our awareness of the problem.

I wish to close by saying that several noble Lords opposite, including the noble Lord, Lord McCarthy, have expressed very serious concern about the prospects for the year ahead. While it is clearly right to take a sober view of a bad situation it is equally wrong to go on to prescribe instant measures with supposedly instant results. This is precisely what has been wrong with much of postwar economic policy. We see a political or a social problem looming and we immediately alter the whole course of our policy in order to accommodate it. We on this side of the House have never claimed possession of any "wonder drug". The task of setting the economy back on the right path is a difficult one and the problems we have inherited are deep-seated. Indeed, we have not sought to deny that during the process of adjustment we may have considerable short-term costs in the form of lower output and employment. Unless firm action is taken now, however, it is clear to everyone that the situation will deteriorate even further. We saw enough of the likely trend of economic developments in the dying months of the previous Government: rising inflation, the money supply going into rates above target range, public sector borrowing well above forecast—Mr. Healey has admitted that—and the balance of payments in disarray. Reversing those trends as well as trying to set our own course for the economy poses a great challenge. It poses a challenge both to the Government and to the British people. The Budget has made clear the opportunities that lie before us if we can succeed, and the dangers should we fail. We are confident that the country is beginning to understand our message and will respond in a manner that will help to set us on the right road.

Lord McCARTHY

My Lords, before the noble Earl sits down, I wonder whether he will tell me whether he intends to answer the questions that I asked in the debate last Wednesday about the Government's policy in regard to the public sector, the private sector and the nationalised sector, which I thought he was going to answer today.

The Earl of GOWRIE

My Lords, I shall be making our opening speech tomorrow on employment issues and I was going to deal with pay policy at that time. If it is the wish of the House that I should go on now I do not mind, but it seems to me that we have had rather a long debate and I have already been on my feet for 29 minutes.

Lord HATCH of LUSBY

My Lords, the noble Earl has answered a question I did not ask. I was waiting for him to answer a question I did ask. I did not want to interrupt him before the right opportunity occurred. The whole thrust of what I was saying was that between 1970 and 1972 under the Heath Government, before the U-turn, British manufacturing industry declined; the number of British manufacturers declined and investment went abroad. What reason has he to think that the same policies followed this time will not have the same consequences? And if they have the same consequences, what is his policy then?

The Earl of GOWRIE

My Lords, one of the ironies of this approach—and it is not unique to the noble Lord; I have read many arguments going down the same road—is that it was pressure on the Heath Government about the levels of unemployment, which were then some half of what they are now, that caused a set of expansionist policies which many people blame if not for all at least for a considerable part of the inflation we suffer. I do not say whether they are right or wrong in laying the blame on the then Chancellor for the inflationary consequences of that expansion, but the expansion was specifically directed to cure unemployment. I think what we are now arguing is that the consensus about demand management of that kind has broken down and that almost all Governments—they do not have to be violent monetarists—are agreed that it is not the way that it can be done. It certainly was widely felt by members of the party opposite when they were in Government that it could not be done that way; they had trouble with their Left, as the noble Lord admitted, on the issue of public expenditure. The short answer is that we know a bit more now, on all sides, and we are going to follow the same essential policies, the same thrust, but with greater knowledge and greater caution.