THE BUDGET AND PUBLIC EXPENDITURE

HL Deb 02 April 1980 vol 407 cc1347-454

3.1 p.m.

Lord BYERS rose to call attention to Her Majesty's Government's Budget and public expenditure proposals and their likely effect on the social, economic and industrial life of the nation; and to move for Papers. The noble Lord said: My Lords, I beg to move the Motion that stands in my name on the Order Paper. We put down this Motion so that your Lordships' House could have an early opportunity of commenting on the Budget while it was fresh in our minds, and I should like to begin by congratulating the Chancellor of the Exchequer on two aspects of his Budget policies. The first is one which my colleagues and I have put forward for many years; namely, the need to establish a medium- to long-term look at the economy, and to set some targets which we shall strive to achieve over that period. Even if we do not get things absolutely right, I believe that it is better to have something to aim at, rather than to stagger backwards and forwards on a yearly basis. We can at least measure in broad terms the success or the failure on the way.

The second feature of the Budget on which I offer limited congratulations to the Chancellor is the package of policies and reliefs designed to help small businesses. This at least is a good start, and coupled with the enterprise zones it should enable a good deal of impetus to be injected into some of the inner city areas and induce new firms to start up and existing ones to expand.

As a member of the council of the London Enterprise Agency naturally I am keen that this opportunity should be grasped by all concerned in it, and especially by those large, socially responsible companies in the private sector which are even now helping small, innovative firms to stand on their own feet. I believe that the enterprise zones scheme, limited as it is in scope, may well help us on the way.

But, my Lords, I ask, why has the Chancellor to be so half-hearted in his encouragement? Why, for instance, is the registration limit for VAT to be raised by only £3,500, instead of, say, doubling that figure? And why could not the Chancellor have been bolder on capital gains, in a way which would encourage investors to disengage from some of the equities of large companies and put the cash into the smaller ones, on which the future of this country, to a very large extent, depends?

I believe that the incentives are far less than they should have been for real encouragement in this area of small businesses; but I believe, also, that the real obstacle to small business survival and expansion is the very high rate of interest. It is an amazing thing, but I get the impression—I hope I am wrong—that both the Chancellor and the Prime Minister are almost complacent about the rates of interest which are being charged at the present time. It really is absurd to stress the importance to the economy of industrial revival while at the same time to permit the stranglehold on business of overdrafts at 20 per cent. per annum.

I ask therefore why we cannot reexamine this situation and possibly look at the French system of establishing selective interest rates. After all, the banks could stand it. I understand that French banks lend money for agricultural enterprises at about 4 per cent., and for industrial projects which can show that their development schemes will promote employment and productivity, money can be raised at rates varying from 8 to 12 per cent. It would make a tremendous difference in this country if we could get an approach of this sort. I believe that this should be encouraged, and it would be far preferable to imposing a windfall profits tax, because it would be the way to generate efficiency and reduce unemployment, which is what we want to achieve. I shall not dwell further on small businesses and their problems because my noble friend Lord Mackie of Benshie will deal with this question later in the debate.

We agree with the Chancellor that the principal enemy of this country is inflation, and we shall support any policy that is likely to bring it under control. However, it is at this point that I express some doubt on the overall strategy of the Budget, largely because one of the most important features of the inflation-generating mechanism has been completely ignored; namely, the high-wage settlements which are divorced from both improved productivity and efficiency. In our view, we cannot simply leave pay policy in limbo; it must be taken into consideration.

We agree with everything that the Chancellor said about the evils of inflation. It must be conquered, but I do not believe that this will be achieved if we ignore the part that high unearned pay settlements play in pushing up the cost of living. I believe that we should have another look at how we can achieve a sensible and just remuneration for our workforces. I fully understand the distrust of the sort of inflexible pay policy which we have had over the last few years, and in particular the distrust that there is of the pay freeze. I think that the real difficulty is how to get out of a freeze at the end of it, other than through an uncontrollable explosion in wages; this is the problem.

But it is by no means the only policy open to us. I suggest that the first requirement in pay policy is a far better system of informing and educating the public about pay claims in very clear, simple and absolute terms. I wish to goodness! that we could get away from these wretched percentages. I should like to see used cash figures, instead of the misleading percentages that we have had recently. I believe that people should be told the cash figures that are involved in the claim. We should be told what the cash response of the employers would mean. We should be told the effect on the firm involved of implementing a pay claim, as well as the effect on national inflation figures and on the targets which have now been set for us to achieve in order to bring inflation under control.

I believe that we need a modest, but realiable organisation, capable of analysis and interpretation at a very early stage of pay negotiations. In addition, we need some form of standing conference of representatives of employers, trade unions, political parties and the Government to discuss the trends in growth, productivity, pay inflation and other basic factors affecting the economy, so that we can provide an informed backcloth against which pay settlements can be seen and can be judged. I say this because public opinion plays a very important part in the final solution of a pay claim such as we have witnessed in the steel strike.

Education and information is only part of the solution, but I consider that there is much that can be done by employers and employees working together, as indeed they do in Japan. I should like to see many more corporations in both the private and the public sectors taking up the three to five-year look adopted by the Chancellor. What I have in mind is the abandonment of the haggling confrontation in favour of agreed targets of achievement over a period much longer than one year; agreement on the productivity which can be achieved and which can then be related to the additional pay which this productivity could generate; and the argument could be about what is going to happen not in a particular pay round, but for the corporation and the company over the next three to five years.

At this point I want to say that I think the Chancellor is somewhat myopic about share-ownership and profit-sharing. I welcome what he has done; of course I do. But he appears to regard it as some minor irrelevance, whereas we who negotiated its introduction with the last Government under the "Lib-Lab Pact" regard it as a formidable tool for increasing profitability and for ensuring that the workforce has a vested interest in that profitability, and therefore a vested interest in a strike-free stability in the corporation or the company. An imaginative share-ownership scheme would be far less constraining than the improved terms (which we welcome) which were announced by the Chancellor. It would be far less constraining because it would have as its aim the incentive to make profits; an incentive to eliminate industrial disputes, and many other advantages. I am all in favour of the incentives which have been given for people to hold shares, but I should like to see individuals holding many more shares in the undertakings in which they are working.

I do not believe that profit-sharing and share-ownership should be regarded as something in the same category as a Christmas bonus. It should be looked upon as a really important vehicle for sustained growth in the unit in which people are working. Even loss-making corporations, like the BSC and British Leyland, faced with a slimming-down process, could produce a programme for improving productivity, achieving profit and then sharing that profit equitably among all those, management and workers, who have contributed to it. I believe that the share-ownership and profit-sharing rules as we have them now may well have to be substantially improved if we are to use share-ownership and profit-sharing as a means of reducing inflation.

Next, I wish to say something about expenditure cuts. I agree that public sector spending has got out of hand and that it must be brought under control, but what I think offends common sense is the blunt instrument approach; the unselective nature of the cuts. Added to this, there is the almost religious belief that there is some magic in a public sector borrowing requirement of £81/2 billion. Considering the appalling Treasury record of forecasting, I cannot see the reason for this fetish about a particular figure. I think it is fantastic to be locked in because you really believe that you are going to get as close as £81/2 billion. We are going to get nothing like it; it will be £1 billion either side, probably, or £500 million either side. The Lord Chancellor says, "Which side?" This is the point; but I believe it is worth while taking a slight risk for another £500 million at least, instead of risking the severe unemployment which adherence to this particular figure may well produce. Some tolerance around that figure is, I believe, essential; just as there is a need for greater scrutiny and for selectivity in the cuts, and so on.

I am not going to venture into the social services field, because that will be dealt with by my noble friend Lord Banks; but it makes me hopping mad to contemplate, for instance, the closure of a magnificent professional institution such as Farnham Park Rehabilitation Centre, of which I have particular knowledge, at a saving of about £100,000 to £200.000, when we are going to spend £25 million on assisted places in the educational system. This is what I call the blunt instrument approach, and it just is not good enough.

My Lords, before I conclude I want to mention one point about the Budget and about occupational pensions, in which some of your Lordships will know I have a special interest as chairman of the Pensions Information Centre. This may be regarded as slightly technical, but I should like to get it on the record because, in reducing public expenditure, one of the Government's policies, incorporated into Clause 5 of the Social Security (No. 2) Bill, is to cut back the unemployment benefit of people who retire and draw an occupational pension before the age of 65. The effect is to cut the unemployment benefit by 10p for each 10p by which their occupational pension exceeds the figure of £35 a week. The effect of this could be to discourage some people from making proper provision through their occupational pension schemes, and that would mean that they were more dependent on the State. The fact is that many of those who are drawing unemployment benefit while they are in receipt of an occupational pension are doing so in order to earn the credits necessary to enable them to get the full State retirement pension when they reach the age of 65. I would hope that the Government would be able to confirm that these credits will continue to be earned, both in the case of a man whose occupational pension is high enough to reduce the unemployment benefit and also in the case where the pension is high enough to eliminate unemployment benefit altogether. I should be grateful if we could have the Government's views on that point.

My Lords, my last point is to express my very deep regret that the Chancellor should have dropped the lower tax band of 25 per cent. on the first £750 of income. This was a measure which we extracted from the Labour Government under the "Lib-Lab Pact" and which at that time was hailed as a progressive move in the right direction. Now we have reverted to the, I consider, retrograde idea whereby the initial impact of tax for many people, some of them not very well off at all, is going to be 30 per cent. of earnings. I think that is a mistake. I believe that the Government have become the prisoner of their own inflexibility. We may well find that the restrictive figure of the public sector borrowing requirement at £81/2 billion, coupled with strict adherence to monetarism, will cause much unnecessary suffering without producing the desired result. My Lords, in that case there will be an inevitable U-turn, and that U-turn will make a session on the skidpan look like child's play. I beg to move for Papers.

3.17 p.m.

Lord WELLS-PESTELL

My Lords, we on this side of the House are grateful to the noble Lord, Lord Byers, for giving not only ourselves but the whole House an opportunity to remind the Government of the consequences of the acts that they have undertaken recently in their proposals. I do not presume for one moment—and I never have—to be able to speak for the man in the street, any more than I can speak for the vast majority of people. I only know what those around me and those whom I meet think at the present moment. I sometimes wonder whether the Government realise the deep feeling that is being generated against them among quite large sections of the community, including the daily newspapers, as to the outcome of their policies. It was brought home to me most vividly last night, while I was seeking to keep out of the heavy downpour of rain at one of our open underground stations. Standing next to me was a man I had never seen before and am unlikely ever to see again. He looked at me, then he looked up at the sky, and then he said, "Think—all this and Mrs. Thatcher too!" He went on to say that he lived in her constituency, and he was finding it very hard, although he had been there for years, to get anybody to admit that they had voted Conservative. My train came in, and that was the end of the conversation; but I think it indicates how an ordinary person is feeling at the present moment.

It is perfectly true that the Government have had to put up with quite a hit from this side of the House, and it would not be the first time that the noble Lord, Lord Cockfield, has been called in to shoulder his responsibility to defend the Government's actions, It is the duty of the Opposition to oppose, but to oppose when there is justification to do so. I believe that there is considerable concern in the country, and I think it was demonstrated beyond all reasonable doubt when the Southend East by-election result became known. Surely that must be a pointer to the Government as to what people are thinking. It may be that they are not thinking rightly; nevertheless, it is thinking that cannot be ignored.

In less than a year the Government have, in our view, succeeded in marching us down the road towards the conditions of the 1930s, in the sense that we are facing, and not overcoming, a serious depression, with the resultant fear that it strikes in the hearts and minds of ordinary people, who always bear the brunt of trade recession and retrenchment. We on this side have always felt that there is a deep divide between the philosophy of the Conservative Party and that of the Liberal and the Labour Parties. The policy pursued by the Government is primarily concerned with profit and financial gain, flavoured occasionally, I admit, with a little compassion for the masses.

I am not suggesting for one moment that there is anything wrong with the profit motive or with financial gain, but I believe that it becomes injurious to the life of the people when it has the supreme importance that it is being given at the moment. For us and, I believe, the Liberal Party, it is the quality of life and human values which really matter. It may well be that people in our community who are in a position to make a far greater contribution than they are making at the present moment will have to make that contribution for the benefit of those less fortunately placed. I do not think that anywhere in history is Conservative Party policy recorded as squeezing the rich, who I believe can afford it; in my view the Conservative Party will have to look at that situation and get people in this country who are in a position to make a far greater financial contribution to do so.

The Chancellor of the Exchequer talks about "cutting our cloth according to our means", but we would do well to ask ourselves why the purse is empty. Malcolm Dean of the Guardian, whom I know personally, wrote in the Guardian on 26th March this year:

Of the £3,500 millions handed out in tax cuts in the first budget last June, about 40 per cent. of that went to 51/2 per cent. of taxpayers. For the £30,000 a year man, this meant a cut of £4,000 in his tax bill, and for the £20,000 a year manager a reduction of £2,000 a year". One cannot give £40 a week tax-free bonuses to £20,000 a year executives and expect anything to be left for the really poor people in this country. I gather from what I have read recently that the Chancellor believes he will have large sums of money, something like £2,500 million, from his fourth Budget, and something like £3,500 million from his fifth Budget—if he survives that long—which could be used to repair some of the devastation he has caused in the public service or, to put it at its lowest, as an election bribe by giving tax cuts.

The Prime Minister quoted in May 1979 from St. Francis of Assisi, "Where there is discord, may we bring harmony ". Let us face the fact that all she has succeeded in doing at the present moment is to bring harm. The figure added to the salary tax assessment of a man earning £10,000 a year with an 1800 cc company car for his private use will mean that he will pay an extra £15 a year in tax, while the rest of us—most of your Lordships and people of limited means who live in country areas and who cannot do without a car—will be paying another £10 a year on our road fund tax, not to mention the increase in the cost of petrol.

All I am asking is—and I do not want to be critical in the sense of being aggressive about this—that the Government should look rather more closely than they have looked recently at the plight of a large number of people in this country and say to those who can afford it that they cannot expect us to give them what we have already given them. There was no justification for giving away £3,500 million in tax relief to people who in the main could have done without it. If any Government spokesman says that they did it so that they could encourage people to produce more or to work harder, there is no evidence at the present moment that it has had that desired result—if that was the desired result in the first instance.

I am concerned, as your Lordships are aware, with the family. There are at least five measures which together place a heavy financial burden on the family. There is the ending of the old electricity discount scheme, which helped no fewer than 4,500,000 people, as opposed to the Government's new policy which will help 350,000 people—about one-thirteenth of the number helped by the last Government. It could be argued that some of them perhaps did not need it. One cannot always be certain that whatever is proposed is being properly applied. But the difference between something like 4,500,000 and 350,000 is over 4 million, and I cannot believe that if 4 million people needed it just over a year ago they do not need it now. There is the heavy increase in rent and rates; the increased cost of school meals; the withdrawal by some authorities of educational maintenance allowances, which will result in children leaving school earlier, and that is precisely what we do not want them to do; and the ending by some authorities of the necessitous clothing allowance.

About 9 per cent. of our people, the poorest of all, receive supplementary benefit, and the new rates next November will mean that 3,250,000 people will be better off. However, what I am concerned about is the 1,750,000 people in receipt of supplementary benefit now who will be worse off. The child benefit is going to be increased by 75p, which would be well below the inflation rate even if it were paid now. It was said to your Lordships yesterday, I think by the noble Lord, Lord Banks, that an increase of something like £1.20 or £1.25 was necessary to keep pace with inflation. It is a matter of some comfort to us that a number of Conservative Members of Parliament have precisely the same feelings, and we on this side of your Lordships' House shall be interested to see whether they will take some action in the matter.

1 think I am right in saying that just before the election, when the Prime Minister was asked whether there would be any increase in prescription charges, the answer was in the negative. Before the year is up they will have gone up 500 per cent. Although elderly people do not pay and children do not pay, there is a vast number in between in need of regular medication who will have to pay that money.

I am concerned, as no doubt will be a number of noble Lords, with the position of unemployment. It is a shocking thing to say—and I would not say it if I did not believe it"—but it would appear that it is the Government's policy to create a substantial pool of unemployed. I have to ask the Government whether they realise the effect of prolonged unemployment on the person concerned and on the family. May I say that we on this side of the House have been much closer to unemployment than any noble Lord on the other side of the House. We know its effects. Some of us have experienced it. We know how soul-destroying it is, how demoralising it is; how the status of the man withers because even his own children sometimes get taunted by other children that their father cannot be any good because he cannot find or hold down a job. At the present moment, we have many thousands of people who have not worked for over 12 months. It is really necessary to do something to stop what can be the most devastating thing that can possibly happen to a family.

I am really appalled that the Government have decided that unemployed people should not receive the earnings-related benefit. As I understand the position, they have paid for that; they have paid for that in their National Insurance contributions. National Insurance contributions went up in order to provide for an earnings-related benefit. By what right do the Government decide that they are not going to continue that particular provision? I wonder what we should think if, having contributed to something with a view to getting a certain thing in return, we were suddenly told that we were not going to have it. It does not seem to me, to put it at its highest, the right way of doing things.

It has been said that there are some who feel that the creation of unemployment could be a deliberate design to force workers and trade unions into accepting ultimately, when work is available, a lower wage structure. I say that there are some who think that. I do not claim to think that; I cannot think that anybody would sink that low. But we have had experience of this. We have had experience in the 1930s, when it was not a case of two men chasing one job but of a dozen men chasing one job—and the result was that wages went down and down.

My Lords, I want to say a word about housing. I want to ask the noble Lord the Minister—and perhaps this is not a fair question to put to him; for it is not his field and I would accept that one cannot always have all the replies one wants—whether it is true that the Government are considering ending council house building by 1984 and cutting the housing budget from £5,372 million to £2,790 million—a reduction by 1984 of £2,582 million in four years. If that is so, what about the Conservative Party policy: "A home of your own."

My Lords, I want to say a few brief words about education, because in a newspaper which I understand is very acceptable to Members of the other side of the House, I read that 59,000 teachers over the next three years no longer will be needed, with a large number of children being unable to gain admission into our primary schools. It makes a farce of the discussion on education that we had in this House a short time ago, when speaker after speaker drew attention to the inadequacy of our present educational system, to the fact that we could not provide sixth formers with the kind of training they needed in certain fields and how important it was that we had the right people in the early stages of education. Yet 59,000 teachers will disappear in the next three years.

I want to say a word about strikers. I have no time for unofficial strikes and I do not believe that there are many behind me who have time for unofficial strikes; but one of the things that I think is of supreme importance in this country is that we have always recognised the right of people to strike if they want to. Sometimes the strikes are well founded; at other times, they are not well founded; but we recognise the right of men to do this and we have seen this as part of democratic freedom in a democratic society. We have said: "All right, if you come out on strike we will not give you, the breadwinner, any help; but we will see that your wife and your family do not suffer." And now the Government are contemplating reducing by £12 a week anything to which they are entitled. Can one honestly say that this is a right thing to do in a democratic society?—to punish the wile and children because the husband and father has exercised his democratic right. I would ask the Government to think again about this; it is not too late. I think that it is a malicious thing to do.

My Lords, strikers rarely claim family benefits. It may be said: "If they do not claim, what are you worried about?" It is the principle that matters. I hope that we shall never forget that principles are important in our society and in our own lives. That last available figures that I could obtain were for 1977, when only 14.7 per cent. of those eligible to receive benefits took them: and, in some years, only 7 per cent. of all strikers applied for benefits.

My Lords, I think that the only other thing that I want to say is this. I want to ask the noble Lord why the Government did not seek to recover some of the money that the banks have made as a result of Government policy. The minimum lending rate, as the noble Lord, Lord Byers, has said, is high. The banks are charging over the minimum lending rate and they are affecting big business as well as small businesses. I believe that the figures of bankruptcy for this year, when they become known, will shock a good many people. In 1979 the National Westminster Bank, before tax, made £4441/2 million; the Midland Bank £3151/2, million; Lloyds Bank, £276.6 million, totalling over £1,000 million. We do not know what Barclays have made because they are not declaring their figures until the end of the month. Certainly the year before last they made £373.3 million. There is likely to be something like £1,400 million which the banks have made as a result of Government policy. I would have thought that the Government would do what they have done with some of the other firms, the utility companies, and take some of that money. If they would do that, it might help them to make better provision for some of the people in our midst who really need (shall I say?) greater help than is given.

I want to appeal to the Government to look again at some of the things they are doing, because in the last analysis it is the mass of people who are responsible for producing. I have never in my life produced anything that could be sold. In a sense, I have lived, like so many people in the community, on the efforts of other people. It is not people in your Lordships' House, in the other House or in other places, who are really producing the wealth. I am referring to the production of things that are sold. It is on production that we depend for our exports, and very often—as we see at the present moment—those who produce are the people who, in a situation of crisis, are treated much worse than they should be.

Viscount MONCKTON of BR ENCHLEY

My Lords, before the noble Lord sits down, he and I normally think alike on many things and we often speak against our parties. But I hope that the noble Lord will agree that the number of teachers must have some bearing on the number of children being born and coming to school age. The generation after us have not bred as well as my generation did. The other point I would have thought was true also is that those of us who leave work, whether it be by strike or for any other personal reason, can afford to do so for about 12 weeks on our tax reclaim. Both of these points should at least be thought about.

Lord WELLS-PESTELL

My Lords, I do not want to enter into a debate with the noble Viscount. He is perfectly right. The number of teachers whom we need in this country will depend on the birth rate. But one has to bear in mind that, at the present moment, schools are being closed. There will come a time in the not I too distant future when there will not be schools for the youngsters and the juniors. I was complaining of this.

3.43 p.m.

The MINISTER of STATE, TREASURY (Lord Cockfield)

My Lords, the House is grateful to the noble Lord, Lord Byers, for tabling this Motion, which gives us an opportunity of looking both at the strategy underlying my right honourable friend's Budget and also the detailed proposals that he put forward last week. It is true, as the noble Lord says, that the battle against inflation lies at the heart of the Budget strategy, and we are grateful to him for his support in this matter.

One only has to cast one's mind hack to the winter of 1978–79 to see the appalling evils that inflation produces in our society: industrial strife and disruption; falling output; soaring imports; excessive wage demands, which were bound to store up trouble for the future; and the disgrace of hospital supplies disrupted, schools closed and the dead unburied. These were the fruits of an inflationary society. Not even the Labour Government who were then in power sought to defend such a situation.

Our first task therefore—and it remains the pre-eminent task—is to strike at the roots of this inflation. Only if we can destroy inflation can we stop it destroying us. Only in this way can we restore cohesion and peace in our society, reduce industrial disruption, restore the old-fashioned but enduring qualities of enterprise, initiative and self-reliance and thus pave the way for higher output and ultimately a higher standard of living for all of our people. I have never attempted to disguise the fact that the maladies from which we suffer entail a difficult and painful cure. In speaking in the debate in your Lordships' House on 13th February, I said that the road we needed to travel was a hard and stony one.

If, as is manifestly the case, our problems flow in such large measure from inflation, then it is inflation that we must first and foremost deal with. As with so many problems, the effects are plain for all to see: the causes are not so obvious and are often shrouded in mystery. For this reason, it is natural that people should clamour for the effects to be dealt with, for that is what they see. It is all too easy for politicians to bow to this clamour for they then appear to be taking action, and action which people understand. This is the origin of demands for prices and incomes policies; for control over dividends; for limitation of profits; for import controls; for industrial strategies and national plans. All have been tried and all have failed.

We believe that the right course is to seek out the causes of the problem and to tackle it at source. The trouble with economists is not so much that they differ from one another—if they did not what sport would there be for the rest of mankind? The difficulty is that they succeed in presenting perfectly simple ideas in a form which baffles comprehension by the ordinary man. Most people would accept it as self-evident that if the total of goods and services available to be bought remained constant, and we were all suddenly endowed with twice the number of pound notes we had before, then if we leave on one side the people who would bury their pound notes in the ground or use them to light their cigars, the effect of this dramatic increase in the number of pound notes would be to drive prices up; and, ultimately, one would expect prices to double in the same way as the number of pound notes had doubled. It is only by applying such erudite terms as monetarism to this simple proposition that economists succeed in disguising from people that they are only being asked to believe that if twice one is two, then twice two is four.

Of course, in the modern world the situation is complex with all the problems of paper money, credit creation through the banks and so on. There are problems in deciding on an appropriate measure of the money supply—indeed, different countries use different measures. Equally, there are problems in exercising control, particularly in the shorter term, as the fact of publication of the consultative document on monetary control indicates. But these are problems of financial engineering; they have no bearing on the validity of the principles involved.

It is because the money supply is the critical factor in determining the level of inflation that it is crucial both to set monetary targets and ensure that the money supply is kept within the specified range. When we came into office the money supply, measured in terms of sterling M3, was growing at a rate of about 14 per cent. per annum—well above the target range set by the previous Government. The money supply continued to grow at that rate for a period of four months after the June Budget last year; but in the following four months, assisted by measures taken in the June Budget itself and by the further measures taken in November, the rate of growth fell to an annual rate of 10 per cent.

There is a wide range of measures of money supply other than sterling M3. Currently all these other measures are showing a lower rate of growth and the narrow measure, M1, has actually shown a fall over the last four months. So far as the coming year is concerned, the target range for the period to mid-April 1981 has been set at 7–11 per cent.; as the intention is to bring sterling M3 down to the centre of that range. This itself involves a further substantial slow-down in the underlying rate of monetary growth.

Setting monetary targets is not, of course, the end of the matter. It is essential to ensure that they are observed and this in turn means that every effort must be made to ensure that the targets do not come under excessive strain. The one area—and indeed the only area—that the Government can directly control are their own operations and therefore their own expenditure. The money the Government need to borrow—the public sector borrowing requirement—is the measure of the demand the Government themselves impose on the money supply. And it has been the excessive level of the PSBR which contributed so much in recent years to an excessive rate of growth in the money supply and hence in the rate of inflation.

The central part of the Budget strategy. therefore, is to bring down the PSBR. This coming year it will be reduced to below 4 per cent. of the GDP—about the same figure as in 1977–78 when, all too briefly, the IMF succeeded in imposing a measure of discipline on the Labour Government. Long term, the PSBR must come down further: but the reduction from 51/2 per cent. in the last year of the Labour Government's life, to 43/4 per cent. in the year just ended and now to less than 4 per cent. this coming year is a good start.

The noble Lord, Lord Byers, attacked the figure of £8 billion on two grounds: first, he said that there was a potential margin of error in the figures, and, secondly, he said the figure might well and properly have been set higher. Obviously, so far as the first point is concerned, all estimates or forecasts have a margin of error in them, but that margin can go just as well one way as the other, and that argument would point just as firmly to taking the lower figure as to taking a higher one. So far as his second point is concerned, I noted with pleasure that he applauded the Government's efforts by way of publishing medium-term financial targets. Those financial targets indicate that we propose over this period of years reducing the PSBR from just over the £9 billion that it was last year to a figure of.£21/2 billion in 1983–84. If you want to reduce the PSBR, you do not start by putting it up. What you do is to bring it down, and that is what the Government propose doing.

So much for the part the Government can and will play. But a very heavy responsibility rests upon the private sector too—and this does not just mean management; it means workers as well. Excessive pay settlements—and both sides of industry must shoulder responsibility for this mean that companies need more money to finance their activities. With firm control over the money supply this drives rates of interest up so that when employers complain about high interest rates they need to recognise their own responsibility in this matter. Equally, when union leaders complain about high interest rates they need to recognise their responsibility too.

The effect of high interest rates is that some companies will be unable to finance their activities at the inflated level of pay settlements they have agreed or which have been forced upon them by union negotiators. The result must be a fall in the level of activity, a fall in the level of employment and, at the extreme, insolvency for the company and redundancy for the worker. This is a simple matter of cause and effect; and no amount of rhetoric can alter it. Water does not flow uphill and no amount of talking, no fiery speeches, no demonstrations—not even strikes—will ever make it.

When the noble Lord, Lord WellsPestell, refers to certain people, accusing the Government of creating unemployment —a charge which is totally and completely untrue—I would remind him of the responsibility that rests upon the shoulders of union negotiators, because if, in fact, they secure settlements which are in excess of what the companies concerned can afford, what they are really doing is negotiating unemployment for their members. This is one of the major sources of the present level of unemployment.

It is not surprising that in the difficulties we face many people like the noble Lord, Lord Byers, turn to incomes policies. Essentially their argument is this: if, they say, people insist on behaving in a stupid and self-destructive fashion, then we must make them behave reasonably: if they cannot see the light themselves, we must make them see the light. Experience, however, shows that such an approach does not achieve a fundamental or lasting change in attitudes. So long as the curbs remain, resentment builds up and when the curbs are lifted the pent-up waters surge over the dam or, if the curbs are not lifted in time, the pressure of water bursts the dam, as happened in the dark winter of the dying days of the Labour Government. The rising prices from which we are suffering now are a reflection, to a considerable degree, of the pent-up wage demands which followed the breakdown of Labour policy. There are, of course, other prices to be paid for incomes policies in terms of rigidity and lack of flexibility in the economy.

We have tried repeatedly in this country to work incomes policies. We have tried innumerable variants. Some of them which the noble Lord himself is now suggesting are very reminiscent of what happened in 1962 with Neddy, which was set up as a body on which the three sides could meet and which would educate people as to the effect of the economy. We had of course the experience of the Prices and Incomes Board, and indeed I think it is fair to say that no country could have struggled more valiantly than we have to make such policies a success. But the simple truth is that we did not succeed, and the conclusion which must be drawn is that such policies cannot be made to succeed.

There is a specific point which the noble Lord, Lord Byers, raised, in con- nection with the restriction of unemployment pay in the case of people who are over the age of 60 retiring on occupational pensions. As the noble Lord himself indicated, the restriction applies only to the excess of the pension over £35 a week. This means that a person in this position with an occupational pension will still be £35 a week better off than a person without such a pension, even taking into account the gradual withdrawal of the unemployment benefit. There could not, therefore, be a disincentive to people to enter occupational pension schemes. I am happy to confirm that a pensioner who registers for unemployment can still claim credit to preserve future benefit entitlement, even though the new restrictions would prevent him from receiving unemployment benefit.

I have been talking so far about the overall strategy of the Budget. Within this overall strategy, the Budget has two major objectives, First, it sets out to help industry, to free the economy and to remove distortions; in short, to further our policy of encouraging the supply side of the economy. Secondly, within the limited resources available, it has given priority to the poor, to the needy and to families.

I start with the economy and with industry. We have since coming into office taken many important steps to free the economy and to remove distortions, and the Budget takes us further along this road. There are two particularly damaging distortions which we propose dealing with. First, there is the level of payments which strikers have been able to claim from public funds. There may be a democratic right to strike. There is no democratic right to expect the victims of your strike to pay you for going on strike. We propose dealing with that. The present situation is one which the public have rightly resented. Secondly, we propose dealing with the freedom from tax of unemployment and sickness benefit, when the fruits of working have always been taxed.

While there is no room this year for reducing the general level of taxation, we propose a large number of measures to help the smaller businesses, and I am glad that these were welcomed by the noble Lord, Lord Byers. I will refer to a few of them: tax reliefs and other relaxations to help the new enterprise zones; special reliefs for the new factory workshop schemes; a reduction in the rate of corporation tax on small businesses; the ending of apportionment of trading income for close companies; relief for the cost of raising loan finance; the removal of tax obstacles to demergers; reliefs to encourage investment in small companies through the venture capital scheme; and reliefs to encourage and improve share option schemes and profit-sharing schemes.

We have also been able to provide special relief for those companies whose stocks have been drastically reduced by the steel strike or other special causes, who would otherwise have had to face a "claw back" of stock relief given in previous years. This is no negligible relief; it will cost the Exchequer £210 million this year and £125 million next year—a total of £335 million. And, of course, what the Exchequer loses industry gains, so that industry will be better off to the extent of £335 million as a result of this new relief.

We have not, however, been able to provide any general relief for industry. We realise that the finances of industry are under considerable pressure, but, in part at any rate, this is due to excessive wage settlements and the remedy here rests in industry's own hands. But there is another reason why we cannot do more this year. Further tax relief reductions would simply increase the public sector borrowing requirement and that would drive interest rates up further. We recognise that the present level of interest rates is a severe burden for industry, and the best service we can do for industry is to ensure that interest rates come down. That means reducing, not increasing, the public sector borrowing requirement, and that is what our policies are designed to do and will do.

The changes which we have been able to make in the capital taxes are also slanted in the direction of encouraging initiative and enterprise. The increase in the exemption limit for the capital transfer tax to £50,000, the new"rollover"relief which avoids a double charge to capital gains tax and capital transfer tax when a business or other property is transferred by way of gift, the new £3,000 capital gains tax exemption—and I am interested that the noble Lord, Lord Byers, thought that the figure should be higher, although I sense that the noble Lord, Lord Wells-Pestell, thought it should be lower—are all designed to help the small business which has often suffered greatly from these taxes, although of course they will help other people as well.

Before I leave the question of the economy, I would say this: Governments cannot run industry; they have neither the knowledge, the experience nor the expertise to do so. What is required is the minimum degree of intervention by Government, not the maximum. Industry must be left free to create wealth and he given the encouragement and the incentive to do so. But this freedom carries responsibility with it. The leaders of industry must accept that it is not just their freedom but their responsibility to create the wealth on which the future of the country, and our hopes for a rising standard of living, must depend. There have been many debates in your Lordships' House on the need to increase output, to reduce costs, to improve productivity and to improve labour relations. The message which has gone out from those debates is of even greater relevance today.

I will now turn to the social side of the Budget. We simply cannot, in a year as difficult as this, protect everybody from the results of inflation. But within what resources are available the Budget, together with the other measures taken by the Government, has set out to protect the position of the poor and the needy, and families in particular. In the case of the income tax, where we simply could not afford full indexation for everybody, we have nevertheless been able to increase the thresholds in line with prices, and this has kept the poorest out of the tax net. Tax reductions for the married are larger than those for single people. For one-parent families, the threshold goes up in line with the threshold for two-parent families.

There has been an improvement in FIS in real terms; the average payment is up by no less than one-third. Child benefit is being increased to £4.75 a week per child. This goes to all families with children, and will be of particular help to those not in receipt pf social security benefits. The additional payments to single-parent families is going up by 50p to £3 a week. The rates of supple- mentary benefit are being increased in line with the expected rise in prices, so that they are fully price protected. Additional help is being given to FIS recipients and to those on supplementary benefit with children under five who are faced with rising fuel costs. This will be an automatic entitlement of £1.40 a week, equal to £72.80 a year, and it covers all fuels.

There are two other areas where, in a difficult year, we have nevertheless been able to make progress. They are charities and the national heritage. We wish to encourage people to help others and nowhere is this more important than in the field of charities. The Budget contains a number of proposals to help charities. The exemption from CTT for charitable gifts, for example, is doubled to £200,000; the period for deeds of covenants is reduced from the familiar seven years to four years; and relief for higher rate tax will be available within a ceiling of £3,000 a year. All these changes should provide a valuable stimulus to charitable giving, and I am sure they will be welcomed on all sides of your Lordships' House.

Concern for the national heritage is also one of the things that transcends party boundaries. There is an important and indispensable place for museums and art galleries. But the great virtue of the British national heritage is that it is a living heritage. People should be able to see great houses as essentially dwelling places, with the living breath of people still in them, not as cold and dusty museum pieces. It is for this reason that we have greatly improved the provisions which will enable the owners of such houses to set up maintenance funds for their preservation and support, and we have extended the ambit of these maintenance funds. Public access is, of course, a necessary condition of these tax reliefs, and this represents a reasonable and well-accepted bargain between the owners of the property, who have of course to shoulder the burden of maintenance, and the public at large.

This Budget is the second step along a road which will take us from the failure of the 'seventies to the new hope of the 'eighties. The policy of the previous Government was one of gritting their teeth, shutting their eyes and hoping that North Sea oil would rescue them from disaster. North Sea oil has come. It has not solved our problems, and by itself it will not and cannot do so. The onus rests upon the Government to provide the right monetary, fiscal and financial environment, and to go on doing so. That responsibility we have shouldered and will continue to shoulder. It is the responsibility of the Government, too, to pro'ide the conditions under which individuals can give of their best: where there is encouragement and reward for work, for promotion, for enterprise, where industry can prosper and grow, can become more efficient and in the process create more wealth for the nation and more employment for the people. And having created these conditions, it is for the Government to step aside and leave the people free to get on with the job. We have already taken the first steps along that path. We need to take many more and, as time and opportunity offer, we shall do so.

Lord BLEASE

My Lords, before the Minister sits down, would he not agree that his reference to the wage-bargaining role of trade union officials was partisan and narrow? Would he not also agree that wage bargaining can be positive and dynamic and that it can contribute to pushing forward the frontiers of productive investment, technological innovation and real wealth creation?

Lord COCKFIELD

No, my Lords, I do not agree with the noble Lord. I have made it abundantly clear that excessive wage settlements can have only one result: to reduce the level of activity and thereby to reduce the level of employment. This is one of the facts of life that union negotiators, and employers as well, need to keep continually in mind.

4.16 p.m.

Lord DAVIES of LEEK

My Lords, I am sure that the whole House listened with pleasure—and sometimes not—to the noble Lord who has just spoken. Nevertheless, at the end of his speech he, too, got into the realms of poetry; I thought he was ending with a sonnet. He was telling us what the Government were going to do. At first during the debate we were told the Government were not going to touch industry, but the policies the noble Lord has mentioned have to be put across to industry and must influence it. All intelligent men and women will agree that by rioting, shouting or screaming about the situaton we cannot change what is happening in society and in the world.

The noble Lord's own Government, despite accusing the Labour Government of depending on oil, must well remember that after they came to power after the general election the balance of payments showed a deficit of £3,300 million after benefiting to the extent of £6,900 million from North Sea oil and gas. It is no good pointing at the Labour Government over the treasure of North Sea oil and gas. North Sea oil and gas saved the present Conservative Government from a major catastrophe during this last period. Some of us on both sides of the House have been saying that more interest should be taken in another side of industry—in invisible exports like insurance, shipping and tourism. The question is: What has this Budget done about that?

I am not going to accuse the Government of being dishonest, but I am going to accuse them of being misdirected in their theory of monetarism. There are scholars and journalists of financial standing who decry monetarism. One must not worship at the shrine of monetarism and hope to escape. To be fair to the previous Conservative Prime Minister, Mr. Heath, he gave all the incentives possible to British industry to invest, and he himself decried the fact that British industry, having been given the opportunity by a Conservative Government, which should have encouraged investment at home, did not invest at home. This is the real fact, no matter how quietly, and sometimes in a funereal fashion, the noble Lord, Lord Cockfield, spoke. He must recognise that his was one of the most one-sided speeches that has been made so far today. Naturally he would do so because he was put there to do it.

Imports of manufactured goods rose by 18 per cent. during this period. The annual rate of inflation has doubled since the Conservatives came to power. It rose from 8.4 per cent. to 17.2 per cent in December 1979. These are statistics from the Government's own sources. I want to put those facts on the record. I am not going to speak for too long—I shall try to finish in 10 or 15 minutes—but it is an important subject that needs to be tackled.

First, this Budget was the most leaked Budget of the century. Before the Budget came out, I knew all about it by reading the financial columns of the Financial Times and the Observer. If security is so sure inside the Cabinet, I want to know why it was that financial journalists, and the best newspapers, were able to give the most accurate forecast of a Budget that I have listened to during 36 or 37 years in Parliament.

Let us not bother about all the television discussions about Friedman. They tried to deal with cowboy territory in which there were no rearmament and no nuclear bombs being produced at a cost of billions of pounds. They tried to put this philosophy to a sophisticated society as though monetarism was the answer. It was stupid to attempt such an exercise. We live in the real world, not cowboy territory. Let us examine the subject of monetarism. An increase in the quantity of money, although not the sole cause of inflation, is a necessary condition of it. When the quantity of money is prevented from growing as rapidly as price rises, credit becomes progressively tighter. That is axiomatic. Stock Exchange prices fell and industrialists reduced the rate of investment in modern plant and equipment partly because they see recession deepening on the horizon around them. I do not think anybody can contradict that.

I contend—and there is academic scholarship and much journalistic opinion to support this point of view—that the link between the size of the public sector borrowing requirement and the behaviour of the quantity of money is very erratic. I should like the opinion of the noble Lord, Lord Cockfield, on this point, because he speaks with great erudition. If he does not tell me in the House, perhaps he will tell me around the corner afterwards.

That brings me to the point made by the noble Lord, Lord Byers, about inaccurate Treasury forecasts. The Treasury would not accept that this relationship was erratic, and call in aid algebraic convolutions and calculus to arrive at so-called mathematical precision, without allowing for the effect of the Kingdom of Heaven and the things they cannot control. This point is put beautifully by Schumacher:

In the vast modern towns the urban dweller is more isolated than his ancestors were in the countryside. The city man in a modern metropolis has reached a degree of anonymity, social atomisation and spiritual isolation that is virtually unprecedented in human history". I am seeking to make the point that the growth of bureaucracy in modern society is a danger to the evolution of economic theory and to the evolution of good living. I once heard Nye Bevan say that bureaucrats have a tendency to move people around as though they are dealing with bits of paper. He was right, and we must get rid of that attitude.

Let us consider growth and the quantity of money, which relates to another fundamental point made by the noble Lord, Lord Cockfield. Such growth depends on the size of the balance of payments deficit on current account, and this determines the extent to which foreigners are prepared to finance. I consider that to be an accurate appraisal. I wish to ask what the present Budget has done to that factor and the borrowing requirement. This depends on the desire in the private sector for gilt-edged securities and on the joint policy of the Government. Perhaps the Minister will explain what he feels gilt-edged securities will do in this coming period.

Modern methods of control by the banks and the banking system, the financing of borrowing requirements by the banks, can be largely instrumental in enabling the expansion of credit to be greater than it should be. The Government in their present difficulties should have penetrated into the coffers of bank profits. Some of those profits could have subsidised the cuts which have been made in children's education. If this nation wants to be great in the future in this electronic world, the world of automation, our children must understand the kind of world in which we live. However, they will no longer be able, in the numbers we require, to enter the sixth form colleges and to benefit from the type of education provided by the polytechnics and the technical colleges. The money could have been obtained to subsidise that quite legitimately from some of the banking profits— and it would not be robbery.

The Chancellor of the Exchequer has deliberately resorted— and he has done so on advice because he is not a wicked human being; he has done so because he knows no other way—to the creation of a slump. We appear to be able to provide full employment only if we re-arm or if we prepare for war or are at war. Many of us remember 1938. Many of us lived through the miseries in Wales when the population faced massive unemployment. We saw eyes brighter and smiles broader on the faces of Welsh housewives when work was created, because every day the nation was getting nearer to war. Judging by what is being said in the Press and the speeches which are often made, mankind once again is working towards the recrudescence of the cold war. We follow behind the United States presidential elections like a lot of scared rabbits, instead of making our own decisions. All these factors influence the economy.

Perhaps I may beg your Lordships indulgence to take another five minutes. A reserve army of unemployed suited the old economics. We must shake ourselves out of that attitude. Both sides of the House must get together to try to shake ourselves out of it.

Let us examine the swingeing petrol taxes imposed by the Budget. I do not believe the policy has been thought through. I do not think anybody sat down and thought, "What will be the effect of this massive increase in petrol prices? Let me tell your Lordships. I do not know whether those who are in the business will agree, but I believe that the result of the petrol taxes will in the long run undermine the Government's proposals to help small businesses. Furthermore, the 15 per cent. VAT is wicked tax, which is slowly destroying the British theatre. If one asks, "Why talk about the British theatre in a Budget debate? ", let me tell the uninitiated the answer. British tourism earns more money than the export of our motor cars. We are making London the biggest rip-off in civilisation. For example, in our hotels one can pay £ 5.20 for a melon and £13.50 for salmon. Not all the visitors who come to this country are millionaires. We want ordinary people to see the decent way of British life. It is time that London hoteliers pulled their socks up and stopped being so greedy.

What has the Budget done? It has destroyed the British theatre in which my granddaughter was daft enough to join Equity and go on the stage. God knows! I think she has had 12 weeks' work up to now. What is the result? We have 15 per cent. VAT; and for any visitors coming over here the British stage and the theatre, which is the finest in the world, will be undermined and ruined by this VAT. Was there any discussion with Equity before the Government put the 15 per cent. charge on the British theatre? It may sound a small point but I think I am accurate in saying that tourism in Britain is one of the biggest dollar and other foreign currency earners that we have. Surely those who drafted the Budget should have thought about that in the transition period.

One other point. The truth is that the Budget, too, is undermining the great bonanza markets—the hypermarkets of Britain. In 1974 there were 77 superstores in England and Wales. The Co-op. had nine of them and a little later it was about 20 per cent. The superstores were on the fringes of towns and in Caerphilly the first one—Carefour—was built on cheap land. At the weekend the whole valley—and it was true of the Rhymney Valley and other valleys—erupted, with little cars running down to the supermarket which could give cheaper prices. What is going to happen as a result of the petrol increase? The hypermarkets and the big stores are already feeling the draught, and only the other day in Merseyside one was closed down.

Car-borne shopping from the supermarkets has been a great social phenomenon. At one time every weekend the whole of the Welsh valleys seemed to be motoring down the narrow roads towards Caerphilly to the great hypermarket. These hypermarkets have opened on the edges of big cities, on cheap land and are able to sell goods in some cases 10 or 17 per cent. cheaper. But of course the attractiveness of car-borne shopping wanes as petrol prices increase. Superstores are no longer the money spinners they were. Some of these are still small businesses and they are not encouraged.

There are high interest rates and high local rates, and although the noble Lord spoke about high wages no mention was made of the influence of local government on the housewife. I have just paid my water and sewerage rates for a garage which has no sewerage in it at all, and it is about four times higher than it has ever been before. What about the ordinary families and the cottages and the houses which people are buying at 17 per cent. mortgage rates through building societies? All this is of vital importance. This nation of shopkeepers will end up as a nation of shoplifters, and there will be riots unless we can do something about it.

The Chancellor framed his Budget to help the City. As I said at the beginning of my speech, I wish that we gave more consideration to the brilliant work that is done in our offices in London by people who deal in invisible exports—shipping and insurance. I want to make an appeal. The noble Lord, Lord Shackleton, sent me a note about the world commodity centre when we had a short debate the other night. Despite all the difficulties, I hope that the Conservative Government will sincerely look in depth into the problem of setting up here in London a world commodity centre. I have spoken for 17 minutes and I think that is long enough.

4.34 p.m.

Lord THORN EYCROFT

My Lords, I think the House is indebted to the noble Lord, Lord Byers, for initiating this debate, and it is certainly indebted to the noble Lord, Lord Cockfield, for an eloquent and penetrating speech about some of our problems, to which I think the whole House listened with deep respect and enjoyment. The noble Lord, Lord Davies of Leek, asked me why the Budget appeared in the Observer newspaper. If I could answer him, naturally I would, because it would be a matter of courtesy in this House to reply where one can, but I do not know. Like Mr. Harold Macmillan, I was brought up in an age where the pound floated and before Cabinets started to leak, so it was not done in those days. I am hound to say that I found it rather helpful. So I make no complaint, and I do not think the noble Lord did either.

I think the noble Lord, Lord Davies of Leek, would agree with me that this Budget is original at least in one sense, that it was actually a Budget. That is to say, it dealt with both income and expenditure, and it is a very rare thing to find a Government actually dealing with income and expenditure in the same speech. I was delighted that in his Motion the noble Lord, Lord Byers, coupled these two matters together. Indeed, if one wants to go to the kernel of the Budget it seems to me that Cmnd. 7841, the expenditure paper, at paragraph 10 on page 5, deals with it most succinctly. If the House will forgive me I will read just a few lines: The Government is determined not merely to halt the growth of public expenditure but progressively to reduce it. The reduction achieved in 1980–81 is only the beginning of a trend which provides for a level of public expenditure in 1983–84 about 4 per cent. lower than the expected out-turn in 1979–80…expenditure in 1982–83…will be 11.5 per cent. (nearly £9 billion in 1979 survey prices) "— that is constant prices"— lower than planned by the previous Governmerit". I think that really goes to the very root of what the Government are about. If you like your liquor straight, they will tell you that the growth in money supply sterling measured in percentage M3 will be 6 per cent. in 1983–84 compared with the much higher figure today. Personally, I prefer the rather cruder housekeeping language of the noble Lord, Lord Cock-field, in this. The fact is that very substantial steps to reduce expenditure, marking a really sharp change in national policy, have been introduced in this policy today, and however one may express it, these changes are, I think, brave, dramatic, controversial, painful and right. The background is a debt which is estimated at £4,500 per household in this country. The interest payable on that debt is more than we pay in housing, more than we pay for all the defences in this country. Between 1974 and 1979 we were paying more in interest on our debts than we were in pensions to the people of this nation. If the policies outlined by the noble Lord, Lord Cockfield, are implemented in 1983–84, that position will be reversed and we shall be spending more on pensions to the elderly in this country than we are paying in interest on our debts.

What then is the strategic object of the Budget? I am not going to talk about the detail; I am only concerned with the strategy, and I do not want to make a long speech. I think the noble Lord, Lord Cockfield, put his finger on it. It is an attempt to reduce and to curtail inflation, for inflation degrades society. It shakes the confidence of the investor; it erodes savings; it discourages thrift; it sucks in imports; it cuts deep into the social services of this country; it encourages powerful unions to abuse their privileges and their immunities under great pressure in the circumstances in which inflation puts them; it sacrifices jobs. Inflation is an evil thing in society. It is more than an economic thing; it is something that goes to the roots of the way people live in society together.

I am not concerned to argue technically about inflation; there are others better qualified than I to do that. But I would say that inflation is concerned, however you look at it, with the amount of money that is going about and the amount of goods that are available. A policy to deal with inflation must inevitably be a policy which has something to do with spending less and producing more, and in very simple terms that is the basis of the Government strategy. The object of this Budget is to spend less, and there is considerable uproar when you spend less. Everybody will agree in general principle that you should spend less, but when you come down to the detail you are bound to be under very powerful attack for every individual item you put forward.

An object of the Budget is to cut the public sector borrowing requirement. It is all very well saying, "Do not be pedantic about it; it is capable of misjudgement in estimating what it is going to be ". All that I accept, but to say that the public sector borrowing requirement is irrelevant in some way to inflation is, I think a proposition that nobody who thought about it very seriously would put forward. Another is to reduce interest rates, for the interest rates, as noble Lords on all sides have said, are the most punishing burden on any man starting up or expanding in a business. And, above all, to encourage production. These things cannot be done overnight. What we are dealing with is a trend which has been going on for more time than that of the last Government: it has been going on in this country for ten or fifteen years. I would not hesitate to say that many men, perhaps many Members of your Lordships' House, have made a notable contribution to the general way all that has gone. It is not something sudden; it is a long-term deep-seated growth. The idea that you can take a situation of that kind with all the graphs running against you and suddenly get them all running the other way in a matter of months is an illusion.

So as we move forward there will be some who howl that we should go faster. We are under great pressure at the moment to go faster on what is called the Employment Bill, dealing with the unions, and may I say that the pressure to go faster is not coming just from old-fashioned Conservative voters; a great deal of that pressure is coming from trade union members themselves. When you see what the steel workers have suffered recently without ever being asked whether they wanted to engage in it, one can see that they would like in some way or another to see the Government move faster. Well, we are under pressure there to go faster. Others urge us to go slower. They say that we are too impetuous in cutting back expenditure, that we should go more cautiously, less abruptly, less fast in trying to switch from direct to indirect taxation, and encourage incentives and all the rest. I do not blame the Government for any of these things. It would be impossible to go down this road except under constant attack from both directions. For my own part, I must say I compliment the Government. I compliment the Prime Minister and the Chancellor of the Exchequer in particular for the courage and the caution with which they advance along what is, I know, one of the most dangerous and difficult roads any Government could choose.

There are three strands to the policy. The first is the cutting of spending. May I say I am delighted to see increasingly entering into that debate the cutting of numbers too, because you really do not cut spending effectively unless you can reduce the massive overhead which has been built up in both central and local government. I increasingly see the pressure that is being brought to bear to try to cut down the numbers. It does not mean massive redundancies. It does mean that central Government departments and local authorities should refrain from seeking to re-employ new people for everyone that disappears. If they would only do that over a not very long space of time that would make a quite remarkable difference.

Another strand of the policy is to remove the disincentives to production. Thus the reductions in the last Budget in direct taxation, rather criticised by the noble Lord, Lord Wells-Pestell, are nevertheless I think right. And may I say they were not limited just to the rich; many thousands of skilled workers benefited. Many thousands of skilled workers have got to go on benefiting if we are going to get production and incentives really going—I think of the capital gains tax, and dealing with the powers, the privileges and the immunities in the unions.

We have just seen the unhappy event of a national steel strike. May I say that when we talk about it we should do so with restraint and some compassion and understanding for the men who work in the steel industry. Indeed, that industry has a proud record. Some of your Lordships will remember Lord Douglass, for many years an honoured Member of this House, a very great leader of the steel unions. All our hopes are that after this the good relations which have always existed in that industry will build up again, and management and the unions will go forward with the immensely difficult task they have to re-establish that industry. So there is creation of opportunities.

The noble Lord, Lord Cockfield, gave a list of the inducements and help being given. I would only mention one, advance factories. I was up in North-East Lancashire the other day and every advance factory that falls vacant today is snapped up at once. So do not let anybody say there are not new things growing in this country; new things are growing. They will take time to develop. There are great difficulties in front of everybody: there are great difficulties in front of small business. But there is quite a good package, referred to in what Lord Cock-field said to us today, of help and incentives to small people starting up and beginning to employ people again and build up the economy of some of these areas which are desperately in need of it.

So, as I say, these are the main strands. But the main theme must be the pulling back of inflation, the balancing of the economy, the increase in wealth. I want to say only this in conclusion. I do not see any alternative to what the Government are doing. There is the alternative which has been tried—and, if I instance the last Labour Government, I have already indicated that they are not the only people to have tried it; they were spending much too much. Mr. Healey now says that he wants to increase the public sector borrowing requirement by another £2 billion.

I do not think that anyone could believe that increasing the public sector borrowing requirement by £2 billion, with all the increased debt that it envisages and the interest payments that would have to be made—and rates of interest will inevitably go up the more we borrow—can be an answer. There are other answers, and some of them are not to be dismissed too readily. There is Mr. Helfer and Mr. Wedgwood Benn. I see that the noble Lord, Lord Davies of Leek, is smiling at me. However, let me say that there is a type of wild logic, at any rate in the policies that they pursue and for which they argue, in the kind of corporate system that they seek. They deal with wages because Mr. Benn fixes the wages; they deal with prices because they would fix the prices; and they determine the imports because they keep imports out. As my noble friend Lord Cockfield has said, they deal with all the symptoms of inflation without ever touching the causes.

However, those are the alternatives on offer. I do not think that either of them, or—with great respect to those who want a centralist position—anything in between them, will really provide any very useful solution to our problems. Therefore, I commend the Budget. I commend the men and women who have the courage, caution and good sense to put it forward. It will not solve all of our problems, but it may create a framework in which we can, together, fight our way out of some of our difficulties.

4.52 p.m.

Lord MONSON

My Lords, first let me apologise to the noble Lord, Lord Byers, to the noble Lord, Lord Cockfield, and to the House for the fact that I shall, unfortunately, have to leave before the end of this debate because of a very longstanding engagement. Because of the constraints of time, and in view of the very long list of speakers, I shall take the opposite course to that of the noble Lord, Lord Thorneycroft. I do not intend to deal with the Budget strategy, although I do have my own views on that. Instead, I should like to comment upon some of the Chancellor's tactics. The first—and here I should like to take up what the noble Lord, Lord Byers, said—is the abolition of the reduced rate band of income tax. Obviously where there is a standard rate of 30 per cent., a reduced rate only slightly lower at 25 per cent. is a nonsense. The answer is surely not to revise the reduced rate upwards so as to amalgamate it with a standard rate, but to revise it downwards.

As I pointed out in a letter published in The Times three weeks ago, and as the Liberal Front Bench spokesman pointed out in the Commons last Thursday, no other industrialised country has a starting rate of tax as high as 30 per cent. or indeed as high as 25 per cent. The average is under 20 per cent. and in France. for example, it is only 5 per cent. If the reduced rate in this country had been lowered to 20 per cent., and if at the same time this band had been narrowed to the first £400 of taxable income, as opposed to the first £750 that applied up until the end of last month, the Exchequer would have been only £54 million worse off as a result, in a full year. Had an extra 5p tax been put on to a packet of 20 cigarettes, not only would that £54 million have been covered, and more than covered, but enough extra revenue would have been generated to enable the child allowance to be lifted from the £4.75 proposed in the Budget to £5 a week. I shall return to the subject of child allowance in a moment.

However, let me revert to the question of reduced rate bands. It is noteworthy that they are nothing new in this country. Indeed, a few years ago there were no fewer than three reduced rate bands. Tax started at Is. 9d.—that is to say 8.75 per cent.—on the first £60 of taxable income. The next £150 was taxed at 21.25 per cent. A further £150 was taxed at 31.25 per cent. and the balance was taxed at 38.75 per cent.—in other words 7s. 9d. in the pound. The interesting point is that that state of affairs prevailed at the beginning of the 1960s, when the Conservative Party was very firmly in the saddle. So obviously there is no inherent incompatibility between reduced rates of income tax and Conservative beliefs.

The second matter that I want to deal with is capital gains tax, where I think too much has been done for the speculator, and far too little has been done for the serious medium- and long-term investor. I do not see how the more favourable tax treatment accorded to traded options in the Budget will help the regeneration of British industry. Against that, a failure to distinguish between short and longterm gains, or alternatively to introduce indexation or tapering, is a serious blow to the long-term investor. The noble Lord, Lord Cockfield, was kind enough to reply at some length to a letter that I had written him on the subject and in doing so he pointed out the administrative expense inherent in trying to make this form of capital taxation rather less rough and ready, and more fair. None the less, upon further reflection I still think that the answer is to introduce indexation, and to cover the higher administrative costs by raising the rate from 30 per cent. to 40 per cent. I do not suppose that many of us, whether as individuals or trustees, would object to paying 40 per cent. tax on a genuine gain, provided we did not have to pay 30 per cent. on a paper gain that might, in real terms, he no gain at all, or even a loss.

Thirdly, I should like to deal with stamp duty on house purchase. I am not too concerned about the apparent meagreness of the concessions here, because I suspect that the law of supply and demand would have ensured that larger concessions overall might well have led to even higher house prices, thereby cancelling out most or all of the benefits of such concessions. However, merely to raise the existing thresholds—as the Government have done —perpetuates some of the existing injustices and anomalies. Let us take the case, for example, of two families buying almost identical houses on the same estate. The first family pays £35.000 for its house and the second family, by virtue perhaps of having specified a few additional kitchen fitments, pays £35,100. Family No. 1 will pay £525 in stamp duty, under the Government's proposals; and family No. 2 will pay no less than £702. In other words, the additional £100 purchase price attracts an effective tax of 177 per cent.

Anomalies like that could be remedied if stamp duty were levied at, for instance, 2.5 per cent. only on that part of the purchase consideration which exceeds a figure in the region of £20,000. The noble Lord, Lord Cockfield, was kind enough to let me know that in such an event the precise figure above which duty would have to be levied in order that the same amount of tax should come into the revenue, would be £17,000. That would mean that most, although by no means all, of those paying less than £25,000 for their houses, would pay just a little hit more in stamp duty. Those paying between £25,000 and £85,000 for the houses would pay less; and all those paying from £85,000 upwards would pay more. Meanwhile, the progression would be a much smoother one and there would be no anomalies or inadvertent injustices. I urge the Government to look seriously upon some such scheme the next time round.

I now turn to the proposal mentioned in particular by the noble Lord, Lord Wells-Pestell, to relieve taxpayers of part of the burden of subsidising those who decide to come out on strike. This is something that I can support unreservedly as I have often pointed out that Britain is the only country in the world to act in this Alice-in-Wonderland fashion, not excluding the Socialist-orientated Scandinavian countries. In those countries loans are made to strikers, certainly: but gifts, no. This is really an issue that should be evaluated in a calm and rational way. I sometimes think that those who become so hot under the collar about proposals of this nature—not so much in this House as in the other place—are really mentally living in the Victorian era. In those days, men, of course, did come out on strike in order to be able to buy clogs for their children, instead of their children going around with bare feet. If that were still the case today, obviously we should take a very different attitude towards this proposal. But nowadays people are far more likely to come out on strike in order to try to raise the money to replace a 21-inch colour television set with a 23-inch colour television set. Of course they have every right to withdraw their labour; of course they have every right to come on strike. But they should not expect the other taxpayers to support them financially while they do so.

There is also the national interest to consider. I never expect people to behave in a way contrary to their own economic self-interest, except perhaps in time of war. It is perfectly understandable that, if people are paid almost as much for coming out on strike as for staying at work, they will be all the more inclined to be ready to strike at the drop of a hat. This may make perfect sense from the striker's point of view, but it does not make sense from the point of view of the country's economic recovery, and, therefore, I do not see why the country should go out of its way to support it.

On the other hand, I am entirely with those who are complaining—not only from the Labour and Liberal Benches but also from the Government Back-Benches in another place—about the child allowance having been raised by considerably less than the rate of inflation. I pointed out earlier that an additional 5p duty on a packet of cigarettes would finance a rise in the child allowance to £5 as well as allowing part of the lower rate income tax band to be salvaged. It is probably too late now to do anything about the tobacco duty.

However, we ought to remember that in his Budget the Chancellor deliberately and understandably omitted to budget for any reduction in Britain's contribution to the EEC Budget. If, as might be hoped, we secure a reduction of £650 million—and I cannot see any self-respecting British Government settling for less—then we might legitimately expect £250 million of that to be applied to raising the child allowance fully in line with inflation; in other words, to £5.20 a week; the balance might best be spent in reducing the employer's national insurance surcharge, thereby stimulating both production and employment.

Many have accused the Government of bad faith over the child allowance, and many more accuse them of bad faith over the proposal to eliminate earnings-related unemployment benefits. Indeed, this point was made particularly strongly by the noble Lord, Lord Wells-Pestell. I am sure that the noble Lord was right in this, although I think we should not forget that for many years now the term "national insurance" has been just a little bit bogus. What is paid in bears not much relation to what comes out. For the most part national insurance is a crude form of additional taxation.

Be that as it may, there are surely strongly pragmatic arguments as well against what the Government have proposed. Among the many vices anglais are a predilection for overmanning, excessive conservatism with a small "c", resistance to change, resistance to moving, and so on and so forth. How much more obstructive and resistant to greater efficiency and rationalisation people will be if they think that such rationalisation will lead to a very sharp fall in their standard of living, once the sum they receive by way of redundancy money runs out, in the event of such efficiency measures bringing about their own redundancy.

In conclusion, I fully support the Government in their attempts to make people face the facts for the first time in years, after the profligate 1960s; to make them realise that money does not grow on trees; to make them understand that there is no such thing as Government money—that it is all taxpayers' money—and that there "ain't no such thing as a free lunch" as the saying goes. One day they may even succeed in convincing Labour Front Benches that when a Government cut direct taxes, they are not giving anybody anything at all; they are merely allowing people to retain a higher proportion of their own hard-earned money.

None the less, the inculcation of economic reality is not enough. Good housekeeping though absolutely vital, is also not enough. We need a little hope; and certainly the prospects of an inflation rate still in double figures in three and a half years' time is depressing in the extreme. We need to see a little more light at the end of the proverbial tunnel. The non-interventionist philosophy of this Government is doubtless right, but we need rather more inspiration. It is this, I hope, upon which the Government will be concentrating in the months to come.

5.5 p.m.

Lord BALOGH

My Lords, we are all grateful to the noble Lord, Lord Byers, for having introduced this debate. Although the Budget is still in one's mind, it is rapidly disappearing among the new difficulties and new problems. We must also thank Mrs. Thatcher for having produced a perfect monetarist experiment which will stand out—almost like an experiment in physics—to be judged by where it leads. I have no doubt where it will lead, but then perhaps Mrs. Thatcher and I differ on that question too.

I shall talk only about three aspects of the Budget and even then in a rather restricted way. The first aspect concerns the tax changes and especially PRT; the second is the attempt to weaken union bargaining power as a substitute for an incomes policy; finally, there is the fervent belief that a complex, flexible and very complicated economy can be managed by influence on one sole aggregate—the money supply—which cannot even be defined very accurately. On any restriction substitutes for money itself appear and, therefore, it is impossible to say, without knowing the velocity of circulation, and so on whether or not a measure has succeeded in being restrictive. The longer the noble Lord the Minister spoke, the more despairing I became about his own economics.

Turning to the first theme concerning PRT, I must congratulate the Minister unreservedly. He has accomplished something which must be very difficult to accomplish, because I could not do so. I could not do so because the official advisers to the then Government were so terrified of the possible results on North Sea exploration of increasing the rate of PRT to the extent that I judged necessary, that it was given up. In the last few years it has been the Treasury—especially Sir Leo Pliatzky—who painted the blackest picture of the consequences of the activity in the North Sea if there were ally increase in taxation, which was less than is proposed now.

However, there is something to be said here, and I offer my services to the Government free of fees. The PRT is a very bad tax. I never wanted it. It is a complicated tax which has been introduced because the Inland Revenue—of which, unfortunately, the noble Lord is no longer a member—did not understand that it would be better to have an excess profits tax rather than a single key tax with all sorts of very complicated exemptions. Inasmuch as the oil industry, and even the gas industry in the North Sea, are extremely complicated, and inasmuch as the profitability is not in the least connected with some objective, physical characteristic, the present system does not put the burden where it should be, as between the oil companies. A thorough review of the tax and its consequences on cash flows, et cetera, is indicated and should be undertaken as soon as possible. As the noble Lord has such persuasive powers I am sure that he will be able to do it.

I now turn to the second problem, the weakening of the trade union bargaining power in wage bargains by governmental action. Of course one can always say, like the noble Lord said, that it was not really the Government's action; it was the action of the trade unions which produced the difficulties and increases in unemployment. But this is a question of who began. There is no doubt that the beginning was made by the Government. They are very proud of it, and I do not see why they should deny it.

I do not believe that this method of controlling inflation is a good thing. It is not good first because it creates periodic quasi-class war situations in this country which we have no reason to suppose will help us out of our difficulties, which are very great. Secondly, it is aesthetically offensive to force people to withdraw labour instead of discussing it with them. In the end of course, as in the coal strike in 1972, I think it was our colleague the noble and learned Lord, Lord Wilberforce, who delivered the goods; now it was Lord Lever who charmed them into accepting splitting (not equally) the difference.

Why should one believe that this sort of incomes policy is a good thing whereas an incomes policy based on a continuous and thorough surveillance of the field is somehow creating enormous difficulties and rigidities? As if, for instance, rigidities had been eliminated by Lord Wilberforce or by Lord Lever. What happened was that they increased wages by a certain amount, and now there will be a row between the various trades unions' members as to differentials.

The noble Lord spoke slightingly about incomes policy. I do not think that he was right to do so. He ought to be, on the contrary, propagating the reasons for having an incomes policy. What is an incomes policy? It is a wage bargain. It is a wage bargain like any other wage bargain, except that it embraces the whole important labour field. This is important because the leapfrogging is thereby very much diminished. Leapfrogging as between professions and trades and as between industries has been one of the most important causes of inflation.

I was astonished that the noble Lord, who after all is an eminent economist (although he hides his light behind three bushels), has not mentioned the eminent success of Austria. Austria is the only country in Europe which has had, from the time of the Empire, corporate bodies which can be used for speaking for their members. There is a body for trade; a body for finance; a body for industry; a body for labour. What happens in Austria? Their unemployment is 2.4 per cent.; their inflation rate is less than 3 per cent.; their physical expansion was the highest in Europe. There has been one strike in the last five years, and that strike could not be expressed in the statistical year book because it had too few numbers.

It seems to me that one ought to learn. One also ought to learn from Japan. It is wrong to say that Japan has not got an incomes policy. It works like all Japanese things, sort of automatically. It is the only automaticity in economic life that I know of. All the others have disappeared. The problem is why should we have an incomes policy from a deeper theoretical point of view. I shall tell you. The sort of market which you are talking about and which Mrs. Thatcher is talking about does not exist any more. They did exist. When Alfred Marshall was a young professor in Bristol, when Jevons was a very young professor in London, there existed the sort of markets you are talking about; that is myriads of producers competing against one another and myriads of workers. But this does not exist any more. You have bilateral monopoly on the wages side and you have oligopoly on the goods side. This can be easily shown statistically, because despite the fact that we have unemployment we also have inflation. If there were myriads of producers competing with myriads of consumers, unemployment would mean that prices would fall and not increase.

From time to time you might ask somebody about—though four advisers all come from the London Business School so they probably have not read unorthodox works—oligopoly. It is an interesting subject to read up. Please read it up. It is very necessary to know about it and it would do the country a great deal of good. We really cannot spend every winter in the sort of situation in which we were last year. To be quite frank, I am as shocked by the trade unions as I am by the Government for having lent themselves to a vicious campaign against incomes policy last year and thereby made any continuation of a civilised policy impossible.

I now turn to the last point, and that concerns the balance of payments. This is one of those themes which really can best be discussed in a "looney bin" because it is in the framework of a "looney bin" that our exchange policy is conducted at the moment. We have benefited by some £6 billion from oil and gas. One does not quite know how much it is, because obviously the balance of invisible payments has to be debited with foreign profits and loans, and it is not complete; therefore, we do not yet know how much our net profit will be. Anyway it reaches into the billions. We had this tremendous injection of resources. Nevertheless, we are now piling up short-term debt, which is a fantastic situation. If the oil and gas would not flow and we wanted to maintain the present amount of amenity and industrial activity, depressed as it is, we would be running a deficit of between £5 billion and £7 billion a year. That of course would be impossible and there would be a large amount of unemployment and a depression of the standard of life as great as the Tories accuse the Labour Party of having caused.

Why do we do that? It is because we have an interesting theory, which we heard today from the Minister, that inflation is caused by the money supply. I have already mentioned that it is difficult to know what money supply is because of the substitutes for money like credit cards and so on. However, there is a further problem here: How does money become effective on the service and commodity markets? It cannot act, so to speak, like gravitation over distances; somebody must use the money to buy something. We have received between £2 billion and £3 billion from the Arabs, and this has been lodged mainly in short-term debt because our short-term interest is very high—it is terribly and enormously high—and so it has been lodged with the banks on short term.

Do the Arab sheikhs eat that money? Do they buy things with it? What in fact they do with it is to keep the main bulk of it—some of it of course is used to buy lovely English houses—stuck in the banks, and the Minister in his cynical superiority told me to look at the money that is not put into the sand. However, that is precisely where it is being put—into the sand, into the bowels of the banks never to come out—and as a result of that, because it is kept sterile in the banks, the volume of active money decreases; and if it is not brought up to the previous level again, there is net deflation, and what with oligopoly on the one hand and high rates of interest on the other, we are in our present mess.

I have, since the fatal Bretton Woods conference, been preaching higher investment, more investment, more rationalisation and expansion, but the new battle cry is not that; it is, Let us cut this off. Let us throw this away. Let us throw in the British culture. Let us weaken the base element of the young people". That is the cry, but why? I do not go as far as the so-called Cambridge Group of economists. I agree with their diagnosis in regard to dis-industrialisation; of course I agree with that, and how could one not agree with it? But what I do not agree with and find very orthodox—oddly enough, because in other ways I am much more conservative than they are—and what I find so odd, is that they want a uniform tariff. However, a uniform tariff is a half of devaluation, and we have tried devaluation twice already since the war and it did not succeed. So why should half of devaluation succeed now?

What we want are discriminating tariffs, or quotas preferably, with a supervised reorganisation of British industry and the possibility of withdrawing the protection if the reorganisation process does not attain a certain speed. That is how we can get out of it. We cannot get out of it by relying on the market. We have relied on the market for 150 years, and look where we are. I very much hope that this period will end soon and that it will not teach us that the only thing which history teaches us is that it does not teach us anything.

5.26 p.m.

Lord RENTON

My Lords, it is with some diffidence that I speak following such an experienced economist as the noble Lord, Lord Balogh, for I am but a simple lawyer and I have always found that economics is a strangely inexact science on which economists frequently disagree, as indeed the noble Lord himself pointed out. They seem to disagree even more than lawyers do on some legal matters. The noble Lord started by referring to Mrs. Thatcher and said he was grateful to her for her monetary policy. But lest monetarism should become a sort of football in the political-economic game, I would remind your Lordships that Mr. Denis Healey, when opening his Budget statement in another place in April 1978, said: Monetary policy will continue to play a central role in our attack on inflation". That is the place the present Government give to it as well, so I do not think there is much need for us to quarrel about monetary policy.

I wish to concentrate on what seem to me to be the two main causes of inflation and of our economic decline: first, excessively high Government expenditure leading to excessive borrowing at high interest rates and, secondly, wage increases unaccompanied by higher productivity, which send prices up and are often preceded by damaging strikes which interfere with production and do economic damage in that way. As my noble friends Lord Cockfield and Lord Thorneycroft pointed out, Government expenditure under the last Government was so high that, in spite of an immense tax burden, the public sector borrowing requirement reached 51/2 per cent. of the gross domestic product, and indeed reached the very large sum of £10 billion with accumulated interest payments of £3 billion.

It is perfectly plain that we could not go on like that, and again I refer to some words of Mr. Denis Healey, because in 1976, in his famous letter to the IMF, he said he did not intend to go on like that. The present Chancellor of the Exchequer has decided to do something about it, and it is a difficult exercise of judgment. If we study closely the way he is going to do it, we find that it will not be perhaps as tough as it might have been.

On page 5 of the Blue Book which is called a White Paper, we find, although the PSBR will come down by 4 per cent. per year over the next four years, that the debt interest, which was estimated in the financial year which has just ended at £3,300 million, will rise to £3.5 billion in 1980–81, will remain at that figure in 1981–82 and will not start to fall until 1982–83, coming down to £3 billion in 1983–84. Perhaps it would be helpful if my noble friend Lord Cockfield, when he replies to the debate, would be good enough to point out to what extent these figures include interest on money already borrowed, and to what extent, with a progressive. decline, they will include amounts which relate to fresh borrowing in the coming four years.

In any event, owing to the considerable size of the PSBR, the so-called cuts which the Chancellor is making do not justify the extravagant and scaremongering talk that we have had—though not, I hasten to add, in your Lordships' House today. Indeed, one could say with deep respect that the Budget has been "praised with faint damns" for the most part. However, we have outside heard extravagant talk about cuts in social services and in the standard of living, and I ask your Lordships to bear with me while we examine the effects.

Let us consider, for example, spending on the National Health Service. The figures produced by the Chancellor of the Exchequer show that spending on the Health Service will continue to grow at the same rate as was planned by the last Government—this is in real terms—and it will be a rate of 2 per cent. a year. There does not seem to be much hardship involved there, or indeed anything on which we could disagree, because that is what the previous Government also intended.

With regard to social security, the cost of that has grown by 50 per cent. in the last 10 years, largely because benefits were improved in anticipation of a growth in production which did not occur. Indeed, the other day the Chancellor called it "a striking example of the nation's capacity for spending money before it had been earned", which is one of the troubles with which we have been faced. Your Lordships might have expected big cuts on social services. But, no, my Lords.

In the financial year just starting social security will cost £20 billion; that is an average of £1,000 a year for every household, and it will account for one-quarter of the total public spending which is planned. So taking it in the round, there would not seem to be any reason there for allegations of lack of compassion or anything like that.

What about education? Some economies were undoubtedly overdue and were feasible, as was brilliantly pointed out by my noble friend Lady Young in our debate on the Education (No. 2) Bill. At the end of the speech of the noble Lord, Lord Wells-Pestell, my noble friend Lord Monckton of Brenchley asked the noble Lord whether the fall in the number of pupils, which we know will take place, would not justify a fall in the number of teachers. The noble Lord, Lord WellsPestell, immediately agreed: yes, it would be so; that would be justified.

However, may I give your Lordships the figures. The position is that in the next four years the number of pupils is expected to fall by 13 per cent. but spending on schools is to fall by only 6 per cent., and, thanks to a majority of your Lordships, there will be no charges for school transport beyond three miles. As has been said, there is scope for economies in education without interfering with teaching.

Your Lordships may know, because I have said so more than once, that I am particularly concerned about the mentally handicapped, and I am glad to be able to tell your Lordships that I have had personal undertakings from my right honourable friends the Secretary of State for Health and Social Security and the Secretary of State for Education that the interests of the handicapped will be safeguarded in their departmental spending programmes—in both departments. However, one must point out that much of the effective spending on behalf of the mentally handicapped (as in other matters) is undertaken by local authorities, and there is no doubt that the local authorities are hard pressed financially—some of them, at any rate—and we shall have to watch out to see what happens.

While speaking about the mentally handicapped, may I add that I am delighted by the various tax provisions in the Budget which will help them by enabling people to form charitable trusts and to take action in other ways so that they can part with their money knowing that it really will help the handicapped and other charities without the Government snatching it back. Bearing in mind the situation which the Government inherited at the last election, as well as the need to limit public expenditure, I therefore say that the various social services have been treated much better than might have been expected.

For some years we have been under-spending on defence, and I am glad that this is being put right. May I mention that following the debate in your Lordships' House three weeks ago we eagerly await the statement on the Home Defence Review, yet provision has not been made where one might have expected to find it—on page 83 of the Expenditure White Paper—for any increase on civil defence. I hope that that is not the last word on the matter. It is not a large sum that would be required in order to confer upon this country the necessary advantage of having a revival of civil defence.

Now I come to wage increases and their effect upon inflation. Is it not absurd that people who are in work, and who do not strike, should subsidise strikers, many of whom do not want to strike, by the payment of full supplementary benefits to their families and by immediate tax refunds made to strikers? I am glad that we now have a Government who are doing something—as has been said by my noble friend Lord Thorneycroft—with courage and caution to save the nation from what a former Labour Chancellor of the Exchequer called unnecessary and damaging disputes which are totally incompatible with our economic objectives". That was said by Mr. Roy Jenkins as long ago as 1969.

Industrial democracy and organised labour are phrases often used to describe trade unions. But, alas! their strike practices are sometimes completely undemocratic and, as has been shown by recent ballots, are forced on the members by the union leadership, sometimes contrary to their members' wishes. Then we have the phenomenon of mass picketing and secondary picketing, used for enforcing strikes so unpleasantly. These activities sometimes cause, and indeed I am sorry to say, seem to be meant to cause—because this is the natural result—maximum disruption to other workers as well as the loss of their employment. Successive Governments have asked the trade unions to put their house in order, but apart from vague promises and talk of codes of conduct nothing has happened. But now, thank goodness!, we have a Conservative Government, who are starting to deal with the matter.

In conclusion, my Lords, may I presume to utter a friendly word of humble advice to noble Lords opposite? I would say to them that for them there is no party advantage to be got out of this Budget—but no doubt they will continue to praise it with faint damns!

5.40 p.m.

Baroness GAITSKELL

My Lords, we are all grateful to the noble Lord, Lord Byers, for introducing this debate. Personally, I always enjoy his speeches, and I did so today. I very often agree with him; and not only is he a good speaker, but he is the least self-indulgent speaker in this House apart from myself. I am also grateful to my noble friend Lord Wells-Pestell for his absolutely marvellous speech. It was so restrained—a restraint which, in a way, I think he sometimes finds difficult. I must go on to my noble friend Lord Davies of Leek, who made a thumping speech which was full of vitality and which no one could fail to enjoy. There was also my noble friend Lord Balogh. Today I enjoyed his speech because he spoke a little in front of the microphone. I would have enjoyed it even more if he had a more intimate relationship with the microphone.

I do not feel quite so reverential to the Government as has appeared from some of the speeches which have been made. I am not an economist, and I shall be brief. The Chancellor has broken the record on long speeches, but the gulf between the Government and the Opposition has been widened. The Budget was tailored for the politically unsophisticated members of our society, and the ones who are generally uninformed about economics. It seems to me that, somehow, the Budget is full of promises and promises, which at the moment I cannot see being fulfilled.

In fact, they keep on warning us and putting off the time when these wonderful promises will come into effect. Monetarism proclaimed itself the miracle cure of all known economic germs, yet there was a prevalent nostalgia for the 18th and 19th centuries in the Budget speech. On the one hand, they have this monetarist platform, and, on the other, all their measures go back to the 18th and 19th centuries, where monetarism fits quite comfortably.

The Budget appeals to complacent people who do not believe in equality of any kind, or desire to take steps to achieve it in education or in standards of living. From this ingrained attitude, a slide towards blaming the poor is easy to come by. When people are poor it is because they are lazy. They are not clever or capable, so they are to blame, and it has nothing to do with Government policies. This attitude is due, not just to the fact that the Government have run out of ideas or because they have abandoned the Welfare State: it shows clearly that the Government have run out of compassion. That is the point I should like to stress. In our last debate on the economy some weeks ago I said that this Government were the most hard-hearted and the most short-sighted Government of this century. I should like to alter that just a little. Today, I think it is the most short-sighted Budget of the century, since the Budget proposals do not seem to have done anything to create jobs, only to raise hopes and make promises. I should therefore like to alter that dictum in that respect.

As I have said, the Government are short-sighted. Everything they are doing now is short-sighted. There have been a few proposals, and I shall dwell for a moment on one of them—the hounding of those people we call scroungers, and the fiddling of social security benefits. How low can the Government fall in dealing with things like that? I watched a programme and heard Reg Prentice explain the urgency of this matter. I hope Mr. Prentice is sitting comfortably. He was questioned about the savings he could make —the £50 million, apparently, which is involved in the fiddling by these dishonest people. The question put to him was, "How has that figure of £50 million been arrived at?" The answer was that the £50 million was a speculative figure!

How ridiculous can we become when talking about the scroungers? There are other such speculative figures, and the mind boggles at these mean, scavenging statistics. We should have a glance at the taxation evasion figures, and put them side by side with these figures given for fiddling.

We pride ourselves on being a very democratic country, and we are one of the most democratic countries. Why, then, do many Tories often ask the question,"Why are there so many people out of work when there are so many jobs to be filled?"Again, it sounds very reasonable. Usually, it is unskilled jobs that we are talking about. We have an example of double standards on this. The workers who do the unskilled work, which is often the dirty work, are the people we are talking about mostly. Should they have less choice than the clever and the more highly educated? This is where our democracy is not so democratic after all. It is only those who are more gifted and educated who have a priority for the jobs which are going. Surely the difference between a democracy and a communist State rests on this freedom of choice about jobs. People do not usually associate it with jobs, but, after all, communist countries boast that they have no unemployment. They have no unemployment because they force people into jobs, but, surely, we are supposed to be above that.

Nothing can ever convince me that throwing people out of work and increasing our unemployment numbers is going to bring us to prosperity. All the economists in the world can go on talking about this, but they will not convince me at all. I would quote the title of an article written by David Donaldson in the Sunday Times at the end of January. The headline of the article was: Why are the Tories continuing to discourage work, encouraging idleness and weakening the family?". These are not the things that they talk about when speaking politics. Is this the result which will be achieved by this particular Budget? Is it really because they have run out of ideas? I cannot believe that. Personally, I believe that it is because they have run out of compassion; and so, as I am not an economist, as this is a plain woman's speech on the Budget, I think I have said enough.

Viscount MASSEREENE and FERFARD

My Lords, the noble Baroness accused the Government of abandoning the Welfare State. Would she say that spending £20,000 million a year on social security is abandoning the Welfare State? As my noble friend Lord Thorneycroft has pointed out, that amounts to costing every family £1,000.

Baroness GAITSKELL

My Lords, if I may answer the noble Viscount, I am not a monetarist and I will not bandy millions with him. I think he is not right because the education service, the health services, the social security services—all these services really do not have enough money. The Government are not giving them enough money. To mention a figure of £20,000 million does not answer this problem at all.

5.51 p.m.

Lord NUGENT of GUILDFORD

My Lords, it is always a pleasure to follow the noble Baroness, Lady Gaitskell. She started her stimulating speech by proclaiming that she had no particular reverence for the Government or for Ministers. I understand that, and I think that her speech was in the vein that I should have expected from her. No doubt my noble friend on the Front Bench took note of the dialectical arrows which struck him from time to time. However, I shall have to disagree with the noble Baroness where she deplores the record of this Government and charges us with running out of compassion. Really, this is just not true. I would credit noble Lords and noble Baronesses opposite with as much compassion as we ourselves have, but I claim that we have compassion, and indeed we are aiming for the same results as they are.

What we have to look at is the situation that we picked up when we inherited government just under a year ago. We see the record there. Speaking of unemployment, which the noble Baroness particularly deplored and charged us with increasing, during the five years of the last Government unemployment was doubled. The noble Baroness, her noble friends and her right honourable friends, did everything they could to try to check that decline, to try to turn it back and to increase employment. They spent thousands of millions of pounds; yet they failed to do it. The challenge was to my noble friends, my right honourable friends and my party. When we inherited the Government, it was clearly hopeless to continue with the same policies that the noble Baroness had been backing. It really would have been fruitless to do that. Those policies had failed. It was up to us, if we were to justify the confidence of the nation, to use our brains, our conviction and our courage, to evolve new policies which, in our belief, would give a better chance of stopping unemployment, of reversing the decline, of increasing prosperity and getting employment increasing again. That is what I believe we are doing. It is a long and difficult task, as my noble friend Lord Cockfield has so lucidly described in his opening speech, because the initial steps are inevitably, in my opinion and in the opinion of the Government, those of controlling Government spending.

I would, if I may, turn back for a moment to thank the noble Lord, Lord Byers, for giving us the opportunity today to take part in this debate, a very interesting debate, and to thank him for his extremely stimulating opening speech. It occurred to me, as part of the dialectic, that it would be no bad thing to mention the great principle of his distinguished predecessor of the last century, the great Gladstone (the noble Baroness, Lady Gaitskell, was talking about the 19th century) who used to say, Let the wealth of the people fructify in the pockets of the people ". That is certainly the thought behind the mind of the Conservative Government today. We are never too small-minded to inherit the thoughts of great men of the past whether from that Bench or any other.

The reason I wish to welcome the Budget is that this is the first time for many years that the financial strategy of the Government has set out to end borrowing. My noble friend Lord Thorneycroft well made the point that the Budget and the Financial Statement of Expenditure appeared together. What a good thing to do! If you want to provide enough money to cover your spending, produce the two statements together. But Table 9 in the Financial Statement shows us that our public borrowing (PSBR) will be tapered off over the next three years to something very small indeed.

I believe that the massive borrowing of the last five years is undoubtedly a major cause of our national decline. We may argue about how the figure is computed from year to year, and the economists say that it is impossible to be exact; but what is certain is that the total amount added to the national debt over the last five years is some £40 billion and that the annual debt service is now nigh on E81 billion a year—which certainly we have now got on our backs for the rest of our lives, and even the younger people for the greater part of theirs. This is enough to finance a complete Government service. This is the result of the Government covering their expenditure, where their revenues were not enough, by borrowing year after year. This, I believe, is the path to disaster. There is no difference at the end of the day between this Budget and our own little budgets that we made at home—those that the noble Baroness and I make, on how we manage to pay our way and avoid getting into debt. In the budgets one compiles when running a business, one does the same thing. If you start borrowing to cover current spending you are on the path to disaster. It is a rake's progress and you will be insolvent in a short time. In my judgment there is only one justification for borrowing, and that is if you have a productive project in which to invest which is going to make a return for you, which is going to make a profit so that you can pay it back and thereby create new wealth. The practice that Governments have slipped into over the years of borrowing enormous sums year after year is disastrous.

It has been astonishing to me—and, unfortunately, I was in a position, as Chairman of the National Water Council, where I had to be"neutral"because it was my responsibility to co-operate with Labour Ministers, and I could make no comment—that the financial experts in the national dailies and in the weekly papers made no comment on this at all. It is quite the worst financial sin that you can commit; you are bound in the end to destroy the whole house. We have gone too far down that path already. Whatever the economists may argue, undoubtedly the amount of annual borrowing is one of the main factors in increasing money supply from year to year and thereby fuelling inflation.

Lord DAVIES of LEEK

My Lords, if the noble Lord will allow me to interrupt, it is fascinating; I am fascinated by the national debt because it is the power of the tomb over the living. The only trick is that we pass on to the unborn the burden of our sins today, and one can do that in perpetuity. Those gladiators who want to go to war with Russia know that the only way that we shall pay for the war—none of us will be alive to benefit—will be by borrowing and printing money.

Lord NUGENT of GUILDFORD

My Lords, no. This Government policy sets out very clearly—I refer the noble Lord, Lord Davies of Leek, to Table 9 in the Financial Statement—that it is the Government's intention year by year, up to the year 1983–84, progressively to reduce the amount of this borrowing. They have set their target obviously very carefully. They are reducing total Government expenditure by 4 per cent. over that period. That is a good deal. Many noble Lords and Baronesses opposite have complained that what we are doing is harsh, but in my judgment the Government are doing it at a moderate pace. Compared with the cut which the Labour Government imposed in 1976–77 at the instance of the International Monetary Fund, which was a 6 per cent. cut, this figure of 4 per cent. over three years is really very moderate. It does not show a lack of compassion. In many ways, from the financial point of view, it would have been easier to have gone faster, but I believe the Government are right to go slower because the implications could be serious.

This Government's strategy is here set out and they have indicated that they are going to reduce Government expenditure to come within the nation's capacity in its annual revenues, at the same time reducing taxation to increase incentives. That is the way to reduce inflation and to reverse the decline.

The forecast in Table 9 is very conservative in its forecast of GDP, and I congratulate my noble friend Lord Cockfield on that. This year it is estimated at something like minus one, next year and the following year increasing by about 1 per cent. I hope that, in response to the policies we are following, we shall do a little better than that. If we do a little better the margin will grow; we shall be able to proceed a little faster in reducing taxes and in the amount of borrowing that we do.

Baroness GAITSKELL

My Lords, if the noble Lord, Lord Nugent of Guildford, would be so kind as to give way, he is leaving out something to which I should like a reply. What about the people who are being thrown out of work? Where does that question come in the whole of the Government strategy? They are throwing thousands of people out of work every month.

Lord NUGENT of GUILDFORD

My Lords, if the noble Baroness will allow me to proceed with my speech, I have a few words to say about that. In my judgment the Government are getting the horse and the cart in the right order. As the noble Lord, Lord Cockfield, said, it is no good just attacking the symptoms. One has to get at the causes, and one of the major causes of our decline is this vast Government borrowing year after year. That really is a disaster. Therefore, the Government are quite right to proceed to eliminate it.

Turning to the other side of the picture, I commend particularly the Government's measures to help small businesses. This is an area of huge numbers of businesses: in manufacturing, something of the order of between 70,000 and 80,000 businesses are classified as"small"in the Wilson Report; in the retail business the number runs into hundreds of thousands; possibly we are talking about half a million, taking the two together. Here is an area where there are possibilities of one extra man in each firm and our problems are well on the way to being solved—they would be even if it were one to every other firm.

I want to see also the start of a number of new small businesses, such as one man working on his own, employing one man, or working with his brother. That is the kind of beginning that we want to see spreading across the country, stimulated by a range of very valuable measures about which my noble friend has told us. The total value of these is of the order of £160 million a year. I do not doubt that it will have a most stimulating effect on young men and women who want to start up on their own.

In particular I should like to commend something not mentioned today, the special enterprise zones. I believe this idea was a gleam in the eye of my right honourable friend the Chancellor of the Exchequer, and it is a most imaginative one. There are in some of our major cities decaying areas that really need new stimulus to revive life there. The areas I am thinking of in particular are the docklands in London and in Liverpool. The docklands in London are of particular interest to me in my role as chairman of the London and Regional Planning Standing Conference, because we have been particularly concerned to try and check the outflow from London and get a revival in these decaying areas. The thought is that in these special enterprise zones, as they are called, areas of about 500 acres, rates and taxes and controls will all be reduced to the minimum so that any enterprising young or old person who wants to have a go there will have the maximum opportunity to do so.

These are imaginative ideas, and they will touch right on the point about which the noble Baroness and I are concerned, especially in these areas where unemployment is very high. It is very high in London, but in Liverpool it is infinitely worse. That presents a prospect of people starting new businesses in these decaying areas where nothing has been going on before. It will provide jobs for them and for other people. We may get the double benefit of a valuable contribution to relieving unemployment and creating new work at the same time as curing one of our very serious demographic problems in this country.

I conclude by congratulating my right honourable friends, the Prime Minister and the Chancellor of the Exchequer and my noble friend Lord Cockfield, on taking this stony path. We would all like to give all of the good things to everybody; we are just as compassionate as noble Baronesses and noble Lords opposite, but we know that those methods have failed. We have to take the more difficult path of dealing with the causes, and then in due course we shall obtain the benefits that everybody wants. I believe that if our people, both the employers and the workforce, will respond to the opportunities that the Government are giving, then we shall see those benefits that we all want so very much in the future, of rising employment, rising wealth and lowering inflation.

6.8 p.m.

Lord SPENS

My Lords, if my remarks appear to be somewhat disjointed to start off with, I hope to pull the threads together to make my points. Before the noble Baroness leaves the Chamber, may I say that I hope she does not think that I am a complacent person because I like this Budget. I think it is very exciting and I cannot quite understand how she can call it short-sighted, because there is not much joy in it today, but I think there is a lot of hope and encouragement for tomorrow. In particular, like the noble Lord, Lord Nugent of Guildford, I like the parts devoted to small businesses and the special enterprise zones. Small businesses are now becoming very popular. They even merit a heading in Hansard. If your Lordships will read the report of the Chancellor's speech in Hansard of 26th March, at col. 1485, you will see that the heading reads:" Specific Measures to encourage small businesses ".

I shall now go off at a tangent. Was it a useful coincidence that I received in the Budget week my copy of the latest production from the Institute of which the noble Lord, Lord Harris of High Cross —who I am sorry to see is not here at this moment, as he is down to speak a little later—is the Director. This is a booklet taken from a recent seminar about the role of the entrepreneur. It is a very interesting booklet, but I have not had time to do more than skim through it at the moment. I want to take three short quotes from it, two made by Mr. Nigel Vinson, the first of which is: Premises and the cost of money are the two key factors in entrepreneurial success or failure ". The second one is:

Entrepreneurial endeavour is like a pyramid. At the apex one in a hundred will survive if interest rates are at 20 per cent. At the base 50 out of 100 will survive if interest rates are at 5 per cent ". Then there is a quotation from Sir Arthur Knight (who I think is now chairman of the National Enterprise Board) which is as follows:

Industrially the next decade in this country is going to be determined for good or ill by the performance of the large businesses. The top 400 account for something like 80 per cent. of our total industrial production ". I go off at another tangent. Last week we Cross-Benchers had the opportunity and privilege to hear a most interesting speech on the implications of the silicon chip. While the speaker was not prepared to give us any time factor for what is likely to happen, he emphasised the point that the chip will bring about large decreases of labour employed in manufacturing industry. But he thought that there would be or should be large increases of new businesses and also in the repairs, maintenance and sales sectors of existing businesses, if the full benefits of the increased productivity that will come from the chip are to be realised.

So what does the Budget do about all this, my Lords? It is very sad that it cannot bring down interest rates at present. I know the reasons, but we are at the apex of Mr. Vinson's pyramid, and it will be terribly dangerous to stay there for too long. But there is hope and encouragement in the Chancellor's statement that he proposes that losses on equity investment in unquoted trading companies may be set off against income, and that the present conditions for the relief for interest paid on money borrowed for investment in or lending to a close company will be significantly relaxed. The Chancellor went on to say that this would provide added incentive for outside investment in small firms.

There is one small point which I ask the Minister to clear up for me, if he can, because I see from page 5 of the Financial Statement that this relaxation of the conditions does not go the whole way. It seems that the borrower will still have to have some material interest in the company in which he wants to invest. This is in the middle of page 5: … to allow relief for interest paid on money borrowed for investment in a close company to borrowers having a material interest, but who do not work for the greater part of their time in the company's business ". It is that phrase,

… having a material interest ", which seems not quite to be what the Chancellor said in his Statement. There are other good proposals for finance which have been mentioned and which I do not want to deal with here.

Mr. Vinson's other point was about premises, and I am glad to see that there is to be a three-year experiment in giving 100 per cent. capital allowances for new small workshops. I think that is an excellent idea. I hope it will encourage the speed with which the new small businesses will be able to be set up. However, it is here that I would remind your Lordships of the implications of the chip. Our speaker last week said that there would be increases not only in new businesses but—and he particularly stressed this to us—in the maintenance and repairs area of existing businesses and in their sales forces. That is not covered at the moment by this Budget, except—and this is the interesting aspect—in the enterprise zones. Capital allowances are given there not only for industrial property but also for commercial property. It is a marvellous idea and will enable the enterprise zones to be re-created very quickly. I realise that it will not be possible to give similar allowances throughout the country, but I suggest that the present definition of the industrial building allowance should be relaxed to cover these repair and maintenance workshops which we hope to see set up. In due time there ought to be more encouragement to firms to increase their sales forces. I think, as I said before, that the Budget is exciting. I wish that I had the time to go on to talk about other exciting parts of it. I congratulate the Government on this very good start to getting the country back on its feet.

6.18 p.m.

Lord WALSTON

My Lords, I start off with thanks to the noble Lord, Lord Byers, for giving us this opportunity to discuss this most important matter. I follow with apologies to both the noble Lord, Lord Byers, and to subsequent speakers that unfortunately, owing to a commitment that I entered into long before I knew this debate was to take place, I may not be able to remain in the House until the end of the debate. I can assure noble Lords who will be speaking later that there is no discourtesy on my part.

I am not going to damn this Budget with faint praises. I am not going to praise it with faint damns. I am going to condemn it but not because it is leading us along a rough and stony path. We all accept that in our present economic situation the path inevitably must be rough and stony. That does not matter —we are prepared to put up with that—as long as the path leads in the end to a place where we want to go. This Budget, I suggest, does not do that. The economic troubles from which we are suffering are twofold. One of them of course is inflation, there is no doubt about that. The second one and, to my mind, by far and away the most important one, is unduly low production throughout the whole of the country. I deliberately say, "production", and not, "productivity", because it is the total wealth that is produced within the country, whether by the whole labour force or the labour force minus a million or the labour force minus 5 million. That is what matters; that is what conditions the standard of living that we are going to enjoy, and that is what determines the amount of help we can give to others and all the expenditure that we can make, whether it be on social services, defence, capital improvements or whatever.

The Chancellor's first Budget recognised this fact and, as I understand it, had a two-pronged attack. It had an attack on inflation directed by what is loosely called a monetarist policy, and an attack upon low production, which was to be solved by incentives and by lowering personal tax rates so as to give people more incentive to work harder and produce more. Many of us, not only on this side of the House, felt that was an ineffectual weapon to get people to work harder. We did not believe that reducing the high tax rates for the £20,000, £40,000 or £60,000 a year man would make him work harder. It appears that the Government have now come round to our way of thinking because this Budget contains no incentive of that kind by reductions of any significance at all in the higher tax levels, or indeed in the lower levels. For that one must be grateful, but I would have hoped—in fact I would think it was essential if this Budget was to achieve what I consider to be its main objective of increasing total production—that they would have come up with some new ideas in order to encourage total production in our industries. Broadly speaking, what the Budget has done is simply to concentrate on monetary restraints. The Government appear to have become so hypnotised by inflation that they can think of nothing else: the curing and the conquering of inflation is the be-all and end-all of Government policy.

I would remind your Lordships that while we have lived, uncomfortably, with inflation for a good many years, the last Government were able to reduce inflation from something in the neighbourhood of 14 per cent., or, at any rate, a high figure, to below 10 per cent. They did have modified success in doing that, but I have to confess that they had no success in increasing production. That suggests, if no other reasons are put forward, that neither the curing nor the diminution of inflation is going to solve our problems. It is no good having a nil inflation rate by 1984 if at the same time we have 2 million or 3 million people out of work and the country is littered with bankrupt industries and empty factories; but that is where this stony path is leading us.

How can industry flourish when there is the present squeeze on profits and liquidity, and a bank rate which means that one can borrow money at 20 per cent. or more? How can noble Lords opposite—and they are far more skilled in industry and business management than are the majority of noble Lords on this side of the House—assert that that is the recipe for increased production? How can research and development flourish? After all, it is upon research and development, technology, micro-chips and so on that the industrial future of this country rests. How can individual companies increase their expenditure on research and development in the circumstances that obtain today, with the bank rates that obtain today? How can the wider forms of research and development from the Government-sponsored research institutes develop and produce more results for the whole of our industry when they are squeezed by the present cuts that are being imposed on them? How can we prevent the brain drain abroad, of which we used to hear so much in years gone by, of our best scientists and industrialists when they are denied promotion—as is the case in many research establishments today—and are unable to get the equipment they need because of the cuts that are being imposed? How can we expect them to remain in this country in those circumstances? Naturally they are tempted bit by bit to go overseas to those countries where these facilities are offered to them in greater quantities.

Surely we must agree that our first priority must be to stimulate industry. We have heard from the noble Lord, Lord Nugent, and from other noble Lords, of helping the small industries. I welcome that, but we cannot honestly say that these useful but minor incentives are really going to have a galvanising effect on our industry. A large part of them only take effect when a small industry is handed over from father to son with a reduction in the amount of CTT or CGT that has to be paid. And while these — what are they called?—special enterprise zones may have something to be said for them, I must say it comes oddly from noble Lords opposite and their friends in other places to find that special subsidies are being given to encourage businesses and industries, whether large or small, to locate themselves in areas which the natural economic forces have shown to be uneconomic and from which they have, of their own volition, moved away because they found they were undesirable sites. Is it right, and is it wise, to spend money in order to entice them back into those areas which free enterprise has decided are not suitable areas?

Lord NUGENT of GUILDFORD

My Lords, would the noble Lord give way for one moment? He seems to be addressing the question to me, as I-had commended it. The areas I am particularly speaking of in Dockland have ceased to be useful for the kind of dock work for which they were used before, because of the changes in the size of freighters and so forth. Therefore a massive redevelopment is needed, which is enormously expensive. But the start of it would be to establish some small businesses there which would begin to get people back again and thus justify the redevelopment. This is the problem and it is a very special one.

Lord WALSTON

My Lords, I know it is a very special problem, but I should have thought it was more consistent with what I understand to be Conservative policy to leave this sort of thing to private enterprise and not to have Government intervention in order to encourage industry to go where it would not otherwise go. But perhaps that is a rather detailed de- bating point. I would say, further, that regardless of the rights or wrongs of the special development areas, it is unfortunate that something of enormous importance to the overall regional planning of the country should, as it were, slip in through the back door under a different hat in the Budget, rather than being a special part of the whole regional development policy. However, I do not believe, whether it is successful or not, and whether it is right or not, that it can do any more than skim the surface of increasing the total production in this country.

As I have said, and as the Government by implication have admitted, tax incentives to individuals to increase production have proved ineffective. Tax incentives to industry can be of some help. I am not a tax expert. I could not and should not elaborate as to what these might be, but I would suggest, in view of the present rate of inflation, and indeed the future rate, that there would be considerable incentives to all industries if depreciation allowances were geared to the cost of replacement of the articles needing replacement rather than to the historic cost of what was paid for them so many years ago. In other words, although there are certain ways in which this can be done, at the present time, as I understand it, if you have bought a machine in the past for £10,000 and have to replace it now for £20,000, you do not have the £20,000 available with which to pay for it because your depreciation has not covered the inflated value.

That, however, is not of enormous significance. What is far more important is the lowering of interest rates, so that the liquidity position of industry of all kinds is greatly improved and facilitated. I am quite sure that the scheme, which I think the noble Lord, Lord Byers, mentioned, and which operates very successfully in France, of differential interest rates is something which should be looked at with the greatest urgency by the Government. Those industries which are considered important, and which in the years ahead will be important, will then be enabled to borrow at rates comparable to those at which their Continental competitors can borrow, rather than at the rates which, quite rightly, people who wish to buy a new television, a new deep freeze or even a new house have to pay.

I hope, too, that there will be a restoration to research institutes of all the cuts which have been made, because they must be regarded as the foundation of our future economic wellbeing in this country. Of course, we must have cuts in public expenditure; none of us can deny that. It is an easy thing to say. It is very much harder, as I know full well, to decide where those cuts should fall. But I believe it is absolutely vital, when we are deciding where those cuts should fall, that we should distinguish very clearly between public expenditure which is investment, and public expenditure which is on current account.

The noble Lord, Lord Nugent, very rightly made the point that, if you borrow to finance your current expenditure as an individual, as a business or as a country, you are on the road to bankruptcy. If you borrow in order to invest in something which is going to produce more wealth, then, if you are shrewd and wise, you are on the road to economic success. It seems to me that there has been no differentiation in the Government's attack on public expenditure between these two very different forms of expenditure. Surely, it cannot be sensible to cut our expenditure on our infrastructure, such as our roads, our harbours and our railways, which will take at least five years to fructify, at a time when we have idle resources and a million and a half unemployed; when we are not making use of those resources and that manpower but in five years hence, when recession will have departed—certainly, world recession will—we shall not be properly equipped with the infrastructure to cope with the increased economic activity which will come.

I now come to inflation. Of course, the disease has been rightly diagnosed, even though I do not believe that the disease is quite as lethal as the Government think. But that does not mean to say that the cause has been correctly diagnosed. I am not an economist and so here I tread hesitantly. But, as I understand it, there are broadly speaking two forms of inflation. There is the old classical inflation caused by too much money chasing too few goods. If you have that form of inflation and if, for one reason or another, you cannot sufficiently quickly produce more goods, then by all means restrict the money supply so that there is not too much money. They then come into equilibrium.

However, if your inflation is, as I suggest is the case today, due, first, to the enormous increase of energy costs over which we have no control and, secondly, to the enormous explosion of wages over which it appears we have no control, and to which I shall return in a moment, then simply restricting the money supply cannot have any effect whatsoever upon this form of the disease of inflation. Therefore, curtailing money supply blindly like that can have no effect in curing this disease.

I repeat that that does not mean that there should not be a curtailment of public expenditure, and private expenditure, too, where it is not for investment, but a blind restriction of money supply, particularly when it is coupled, as it inevitably must be, with these inordinate interest rates, can have only a very little and very slow effect upon curing inflation and will have a disastrous effect upon the economy as a whole. In fact, I believe that monetary restraints have the opposite effect from what is required, because we must do what we can to restrain the wages explosion; we have no control over oil and other things coming from overseas.

However, we have tried a wages policy. I am not as despondent about a wages policy as are other noble Lords who have spoken. I believe that it gave some results. It could, given time and skill—and a certain amount of skill was undoubtedly lacking last year or the year before—have some beneficial effects. But, above all, there must be co-operation, understanding and a genuine working together between organised labour, organised industry and Government, and the monetary policy is making that, if not impossible, then infinitely more difficult than would be the case without it, as it is at the present time. The whole of British industry's inventiveness is being stifled by this policy and the trade union movement is being antagonised by it, instead of being encouraged.

We have now come to the stage where there is a genuine world recession, where every country is suffering, and where we suffer perhaps not as much as we should as a result of oil. It might have been rather better for us if oil had not come at the present time, because it has cushioned the effects. But we are suffering together with other countries. What we must surely do now is to make sure that all forms of public and private expenditure that are not going to be productive, or are not going to yield a dividend, are restricted; that the cuts that inevitably fall on the whole of the community are distributed in such a way that the poorest sections of the community, and the potential future producers of the community, do not suffer; that there is a feeling of justice and of equity in the whole of the policies which we are being asked to follow and the whole country must be united behind them; and that we should take steps now to ensure that, when world recession departs, we shall be in a position to regain the markets that we have lost, to produce for our own consumption far more goods than we have been producing over the past decades and to export competitively with other countries to meet the demands which will grow when recession is over; in other words, to ensure that our industrial base is sound and that our industrial and labour relations are sound and happy. That must be our objective and I submit to your Lordships that this Budget fails lamentably to achieve that.

Lord NOEL-BAKER

My Lords, before my noble friend sits down, may I ask him whether or not he agrees that world armament expenditure is a major cause of the inflation of which he has spoken? He has quoted the classical definition of inflation given by every economist since Adam Smith: too much money chasing too few goods. World armament expenditure has been running recently at more than £200,000 million a year. This enormous purchasing power in the hands of the members of the Armed Forces, of the workers in armament factories and the manufacturers of arms comes out into the market with no goods whatsoever having been produced.

Several noble Lords: Speech!

Lord NOEL-BAKER

May I ask my noble friend whether he agrees, as I said before, that this is a factor which can be cured only by the world disarmament measures which the Special Session of the United Nations put forward in 1978?

Lord WALSTON

My Lords, my noble friend tempts me to continue with the second part of what I wished to say in my speech, but out of deference to your Lordships I forebore. I would undoubtedly agree with my noble friend that the more that is spent on armaments which are not available for consumption the more inflationary pressure must rise.

6.41 p.m

Lord MACKIE of BENSHIE

My Lords, I will not take so long. I hope other noble Lords will not, either. I will be down, having said what I have to say, within nine minutes, otherwise your Lordships may shoot me! Everybody has praised the noble Lord, Lord Byers, my Leader on these Benches, for his speech, but I wish to complain bitterly about that part of it in which, with immense and succinct brainpower, he summed up the situation of small businesses, put in a word of praise and some excellent criticism, and then said, having said all that there was to say,"But of course my noble friend Lord Mackie will fill this out ". That is the privilege of leaders, from which we all suffer!

The next thing I want to do is very quickly to dissociate myself, and these Benches, from the advances of the noble Lord, Lord Wells-Pestell, who seemed to equate the Liberal Party with the Labour Party's thinking on these matters. I must say in all seriousness that we regard the poverty in this country, which forces the cuts being made in the social services, as the fault mainly of the attitude and policies of the Labour Party which have kept this country poor since the end of the war and which have lamentably failed to be put right by the Tory Party.

The noble Lord, Lord Balogh, instanced Austria as a country where an incomes policy has resulted in a successful economy. Japan, Germany and Austria are the three countries most often quoted as being successful, but nobody ever says that this is because of the vigour induced by the fact that they were beaten into the ground during the war and knew that they had to pull themselves up by their bootstraps, that nobody else was going to do it for them and that the world did not owe them a living. That is the attitude which we in this country have had, very largely, since the end of the war, and any corrective to that attitude must be good. It is an attitude which still obtains, as I perceived very plainly in the speeches made today, in the Labour Party. Anybody who looks at the evidence knows that this must be wrong. Before we get into a forward position we have to work for it. Nobody owes us a living! the whole country has got to work.

Having said that, I find that the attitude of the Conservatives is occasionally somewhat simplistic. We agree with them that we have got to harbour our money—that we cannot throw it about and that we cannot print it to correct every mistake that the Government make. But the noble Lord, Lord Cockfield, whose speeches I greatly admire, is a little wrong and needs a lesson in plain physics. Water can run uphill. If you syphon it, then (as every petrol thief knows) the water runs uphill. If you build a dam, it does not necessarily follow that the dam will bust; it will bust only if you know nothing about engineering, if you do not understand how you are building it, or if you rush it up in a great hurry as a panic measure. I will not go on with the metaphor for too long, otherwise I shall no doubt get it wrong.

A wages policy, as a panic measure, has been applied by both Labour and Tory Governments, but the Labour Party are not allowed to believe in it—the trade unions will not let them—and the Tory Party have not got around to believing in it yet; they are perfectly prepared to believe what the Liberals said 100 years ago, but they are not prepared to believe in any more up-to-date liberal philosophy until it is too late. There is no question, as the noble Lord, Lord Balogh, said, that in several successful countries policies which have been designed to control the rise in incomes, not to stop incomes rising altogether, have been successful and should be a useful adjunct to the crude control of the money supply. The money supply is an entirely different matter. The noble Lord, Lord Balogh, was quite right, he will be pleased to hear, when he said that there is a difference between the economies of 100 years ago and the controlled economy which we have today.

If I may return to small businesses, we welcome several of the measures. It will be very interesting to see how this enterprise area—a variation upon various other schemes which have been tried—helps. I am sure it will help many of the areas which are badly in need. But s mall business is facing an appalling situation at present. If you start to budget thinking that you need profit to cover, first, a 20 per cent. Inflation—it is no good simply making some money and inflation then swallowing it all up—and then you look at 20 per cent. interest and then you look at a reasonable degree of profit for manufacturing industry, which you need to put at 20 per cent. then you are really into an area of profit of something like 60 per cent. over costs, which is virtually impossible to achieve.

The small businesses of this country are in a condition of very severe squeeze. It is no good eventually conquering inflation if, in the process, the patient has died of lack of oxygen, or something of that nature. Surely that is what is going to happen. In addition, therefore, to the policies that they have announced, may I urge the Government to look at some method of getting risk capital to small businesses at a reasonable rate of interest.

The methods of saving in this country have altered out of all recognition, due mainly to long term foolish Government concessions on taxation, insurance and other matters. No longer do people let their money fructify in their pockets or in a small business, thinking that it will keep them in their old age. Instead, the Government encourage them to put it into insurance companies, which inevitably put it into some form of development which has nothing to do with manufacturing. It is no good asking insurance companies to take risks, since they regard themselves as the safe and siccar guardians of other people's money. They are not there to take risks. Therefore the Government should develop, probably rather better than the last Government did, lending agencies like the SEA in Scotland, the NEB and the Highlands and Islands Development Board, and they should see that they have a reasonable supply of money to lend at a reasonable rate—I think about 10 per cent. would be reasonable—to businesses which want to expand or to businesses which need to be saved. This is perfectly possible. It is being done through the European Investment Bank, but that is far too complicated a process. In the business of which I am chairman we borrowed some money from the European Investment Bank at a very good rate, 91/2 per cent. However, it took us six months' negotiations of a complicated character before we got it. We can go to our own bank and get that money in five minutes, but unfortunately at an enormous rate of interest.

The Government should examine whether they might lend to the European, Investment Bank and, secondly, should, supply direct to these bodies. That is the only way I can imagine of getting past the system and helping small businesses. I hope that they will take that action I. am now about to conclude my speech, after addressing the House for only eight minutes. I ask the Labour Front Bench in particular to note that fact.

6.51 p.m.

Lord ALPORT

My Lords, it is always a great pleasure to follow the noble Lord, Lord Mackie of Benshie. He brings to our debates the fresh air of the Highlands and good, canny Scottish wisdom. I know that the noble Lord will forgive me for not taking up his general argument. My remarks will be of a political rather than an economic nature. We have had a good deal of economics in the debate so far. There is only one fact that I have not yet heard mentioned in relation to economic theory and practice. That fact is that inflation is always in the interests of the debtor: that anybody who borrows money has an interest in paying that money back at a cheaper rate than the rate at which it was borrowed. The Government, as the greatest debtor in the country, have a vested interest in the continuance of inflation. The only problem is that when it gets out of hand and has social consequences which are thoroughly undesirable, it then becomes the Government's duty to try to mitigate those consequences:

I shall shortly explain why I am not competent to talk about economics. What was, to me, the most surprising thing about the Budget was the fact that it has passed into history without making any real impact on the political consciousness of the public. Mr. Callaghan called it "mean", the Morning Star described it as "vicious" and the Economist said that it was a "Dog Day's Budget." Its provisions for the most part comprise a selection of sensible and overdue modifications in the current field of national taxation. When it was controversial, as in the case of strikers' pay, it surely gave effect to the Conservative manifesto at the last election. There was nothing in the Budget to justify Mr. Healey's histrionics or Mr. Murray's extravagant condemnation. Perhaps the best comment was the fact that the pound lost a few cents on foreign exchanges and that the FT index dropped a few points, too.

So far as I am concerned, it is not the short-term implications of the Budget which are important. It is the Chancellor's commitment to a four-year programme of monetary policy which will, so far as I can see, compound the disagreeable effects—social and industrial—which, on good evidence, lie ahead of us from the current world recession. This has sent a shiver of fear down the backs of even the most hardened commentators. The Investors Chronicle put it this way: "Hell bent on recession", said its headline, and it went on: The Government is now so deeply committed to its own brand of monetarism that only a disaster will deflect it from the path it has embarked on. The most important element in the Chancellor's Budget speech was the announcement of a medium-term financial plan. Within four years the Government intends to cut the rate of growth of money supply by half, and the public sector deficit to a mere £21/2 billion from the current level of £9.3 billion. The costs of this strategy could prove horrendous". Some weeks ago I wrote a letter to The Times commenting on an address given by Sir Ian Gilmour in Cambridge. This letter seems to have contributed to inspiring the very able editor of that paper to produce a leading article, which seemed to say that, while those who thought as I did—in the Prime Minister's terminology the "wets" of the party—were the good guys whose hearts were presumably in the right place, we did not know anything about economics. Therefore, the bad guys who did know all about economics, who agreed with the Prime Minister, the Chancellor and Sir Keith Joseph, must be supported in their efforts to make our countrymen and women face the grim realities of a nation which is alleged to be decadent, workshy and economically dis- oriented. I suppose that is a terrible thesis, but if I had to choose between being a good guy and an economist, on the whole I would prefer to be a good guy. However, I do not think that really is the problem. I know, for instance, that Sir Keith Joseph, who for a couple of years was my PPS, is as compassionate as anybody in public life; and some of those who are categorised as "wets" can be extremely tough and ruthless when they think circumstances warrant it.

To me, what the basic controversy is about is whether, in the 1980s, those in power should allow economic theory and politics to dictate their political actions, or whether their political actions should be designed to bring about certain desirable, and indeed essential, economic consequences. To put the matter another way, the question is whether in governing Britain in the 'eighties, in the search for increased productivity, of which the noble Lord, Lord Walston, spoke, and the pursuit of efficiency in industry, in ensuring the co-operation of organised labour through the trade unions, in giving confidence and incentive to management and bringing about in the minds of the public generally a sense of purpose and optimism, economic theory should be elevated into being the mistress, or should be regarded as the handmaid of political action.

To illustrate my point, let me take organised labour and the trade unions. I remember that somewhere among Professor G. M. Trevelyan's sonorous studies of England in the eighteenth century, he notes that the English working class of that day expected to enjoy a higher standard of living for less work than their opposite numbers in continental Europe. Our trade unions differ in many important respects from those in Germany, Austria, the United States or anywhere else. The attitudes which today dominate their leaders and the rank and file derive from our industrial revolution generally and, more particularly, from the large-scale unemployment and economic insecurity of the inter-war years. Theirs is fundamentally a defensive psychology committed to safeguarding their members' standards of living, their security of employment, the demarcation of their responsibilities between unions, the pay differentials between the skilled and the unskilled. As we have seen so often, particularly sadly recently, all this is sometimes achieved regardless of the effects of their actions on the wellbeing of the public generally or on other workers in other industries in other parts of the country.

My Lords, the art of government, at any rate in a democracy, is the art not only of what is possible but, far more, the ability to persuade, and if necessary to compel, people to do what appears to the Government of the day to be right in theirs and in the national interest. Government is a matter for politicians who understand history, who should be trained to make allowances for the prejudices and reflexes of a nation whose memory is inherited from the triumphs, disasters and struggles of the past. It is not a matter for the ephemeral theories of some contemporary economist, even though he is a Nobel Prize winner.

Therefore, I ask your Lordships, is it wise, for instance, to suppose that what motivates the workers in Germany, France and the United States of America will make a similar impact upon the British worker in the South of Wales or in Yorkshire, or indeed in London? Is it wise, when the attitude of the trade union movement is conditioned by the spectre of unemployment in the 1930s to pursue as the kernel of the Government's policy—no doubt for the most immaculate reasons of monetarist theory—a constant nagging of industry with regard to overmanning, and a series of deflationary measures which are calculated to increase unemployment to 2 million and perhaps nearer 3 million in the lifetime of this Parliament, and thus to invite a direct confrontation with the trade union movement in areas which are best designed to exacerbate their fears and their suspicions?

Of course there are evil elements, and there are certainly irresponsible elements, in the trade unions. Of course it is vital that there should be a change of attitude in all sorts of respects to the industrial organisation of this country and to economic efficiency on the part of both management and workers. But do your Lordships think that this material and psychological revolution which we all seek is going to be brought about by the conscientious application of Professor Milton Friedman's ideas or the resurrection of Mr. Gladstone's free market economy in Great Britain of the 1980s?

My Lords, Professor Friedman's ideas are not new. It was the free market economy of the 19th century and the early 20th century which conditioned the character of the British working class movement and has left its legacy of fear, suspicion and class division to which our country as a whole, and the trade union movement in particular, are now the unhappy heirs. I have no right to claim to speak for anyone except myself—

Lord ROBBINS

My Lords, I am sorry to interrupt the noble Lord, but would he really contend that the frame of mind of the working people conditioned by the policies of Bismark was superior to the frame of mind of the working people conditioned by the policies of Mr. Gladstone?

Lord ALPORT

My Lords, I do not think that the attitude of mind of the working peoples conditioned by Bismark was attractive. It has led probably to two world wars, but that is a very different thing; and there is one thing that I would not say—I am sure that the noble Lord who has just interrupted me would join me among the "good guys" who are the"economic illiterates", as we are maintained to be. I am an easily identifiable "wet" or, more agreeably in the opinion of the editor of The Times, one of the good guys who are economic illiterates. I do not believe that any Government which, in the words of the Investors Chronicle (which is not the normal mouthpiece of "wets" like me) is—let me repeat,

Hell bent on recession and so deeply committed to its own brand of monetarism that only a disaster will deflect it from the path it has embarked on"? should be allowed to go along that path without challenge.

Flexibility, pragmatism, the ability to make a timely U-turn before disaster intervenes: these are the essential characteristics of a party Government which realises the fallibility of human judgment and the limitations of political power. If any Government want to get the best out of the British people they should not spend their time in depreciating, dividing, lecturing and nagging the people of this country; they should not commit them? selves four years ahead to a policy which could lead to disaster when historic experience flashes its warning signals.

In such circumstances, wise and sensitive political leaders should seek to mobilise that indefinable factor in the make-up of the people of Great Britain which transmutes indolence into effort, which makes personal hardship and sacrifice an acceptable contribution to its progress and success, and which feeds the confidence in themselves and in the community which surmounts the difficulties and dangers before which ordinary people quail.

What I am trying to say to your Lordships and to anyone outside this Chamber who may care to listen, is that what one writer called "the endless adventure of governing man" cannot successfully be determined by any narrow theory, whether monetarist or socialist or anything else. It requires an understanding of the historic forces which dominate a nation's attitude of mind and which, if properly handled, can mobilise those forces to ensure its success in the future.

No doubt those who think as I do have earned the epithet "wet". I remember that "Tory "was originally the abusive epithet for Irish Catholic brigands in the era of a different controversy. Perhaps time and events will bring about a similar transmogrification of that epithet which is now widely used in the Press as a term of abuse. The designation "wet" may in due course enter the political vocabulary of Great Britain to represent those who, in the old Tory Party, seek to maintain the historic decencies and practical wisdom in the conduct of national policy which it has always been our aim to achieve.

7.6 p.m.

Lord UNDER HILL

My Lords, I, too, should like to thank the noble Lord, Lord Byers, for initiating this debate. A number of different views have been put forward, but the debate will be notable if only for the speech of the noble Lord, Lord Alport, which I hope all your Lordships will read very carefully to ascertain exactly what he is proposing.

There are many issues on which I should like to comment, but I propose to take just three points before coming to the general situation. Yesterday we dealt at length with the matters of social security and therefore I will not comment on the proposal to link pensions in future with prices instead of the option between prices or earnings; but I am very concerned with the other proposal, which is to fix short term benefits five percentage points lower than the price increases. In effect, this means a cut in real terms for short-term benefits in respect of sickness and injury, invalidity, maternity and unemployment. Surely there cannot be any social justification for fixing these benefits at five percentage points lower than the price increases. If the noble Lord who is to reply to the debate says that it is done on economic grounds, then surely your Lordships will think that there must be other ways with which to deal with this matter, other than by attacking the sick and the unemployed, because that is what we shall be doing, and I am not being emotional when I say that.

I believe this will be the first Government in 50 years which, in effect, would have reduced the benefits for the unemployed. Perhaps I may say in passing, if it is suggested that there must be equality of sacrifice I can recall the election of 1931 and I can recall a particular political party's leaflet which was issued saying"10 per cent. cut all round", and there was the ladder. The only trouble was that when the man at the bottom moved down one rung he went under the water! Therefore when we speak of equality of sacrifice we must recognise that there are people who will be caught in the poverty trap.

This has been brought up in debate after debate in your Lordships' House, but I have never yet heard a sound answer from the Government Benches. Of course if it is believed that any cut in unemployment benefit—because that is what it really is—will force people to go to work, then frankly it is ludicrous to talk about men finding work when there is no work in industry for them.

I will also just briefly comment on prescription charges: these charges were 20p when the Government came into office and had been unchanged since 1971. We often hear about manifesto commitments. I looked at the Conservative manifesto before I rose to speak and I can see no reference there to an increase in prescription charges, and I believe that point was denied during the election campaign. So we find them up to 45p in July 1979, going up to 70p in April and up to £1 in December. To save what? In a full year £30 million. What is the justification? We were told yesterday by the noble Baroness, Lady Young, that 60 per cent. of the persons who have prescriptions will get them free. But again what about those in the poverty trap? These are the people who get caught every time. People really do not go to the doctors just for fun. If anyone feels that some do, I would point out that doctors do not prescribe prescriptions unnecessarily. I hope this matter is one which may be given further consideration.

Looking at the Government's White Paper, we find that overseas aid is to be reduced by 14 per cent. over the next three years. The White Paper states: Our ability to provide overseas aid is constrained in circumstances in which the overriding need is to strengthen our own economy". We find that expenditure of £794 million in the last financial year is to be reduced to £779 million, but in 1982–83 it will go down to £680 million. Are we in such a bad state that that is what we have to do? I recall the interesting debate—I think I sat through the whole of it—in which a number of your Lordships spoke on the North-South discussion and the Brandt Commission Report. It is not much use listening, it is not much use talking, if the first thing we do is to cut overseas aid. Somebody might ask where are we going to find it? There are two proposals I can make at once, and they have been mentioned already. First of all, the assisted places scheme, and, secondly, doing something with the banks' 55 per cent. profit. We could tackle those two things.

I do not want to comment on the rights or wrongs of defence expenditure, except to say that I find again in the White Paper that there will actually be increased expenditure of £1,000 million—I prefer to say one thousand million, because it is the real figure, rather than saying one billion, which does not sound such a lot—between this year and 1983–4. Surely defence expenditure is public expenditure. How are the Government financing that? I want to come back to the question of public expenditure before I conclude. In fact, the ratio of public expenditure to GDP is still below the average for all the nine EEC countries. This point has been made in previous debates, and the noble Lord the Minister when replying answered "Well, of course, Britain is poorer economically". But we are talking about a percentage of GDP, so it does not matter if one is economically poorer or richer. We are talking about percentage expenditure, and we are the lowest. I completely agree with the noble Lord, Lord Byers, who said that one of the criticisms of public expenditure is the blunt instrument the Government are using, and that the £8 billion is not a sacrosanct item.

The thing that worries me most about reading the White Paper and the Financial Statement is that by and large there are no sound plans to deal with economic recession. When we consider that exports were up only 2 per cent. on the previous year, but imports rose 11 1/2 per cent. and manufactured imports rose 15 per cent., then I must say, how long can this situation possibly continue, and are there any firm plans to deal with it? I have always disliked the general question of import controls, but can we possibly continue with a 15 per cent. increase in manufactured imports in view of the very slow and very small increase in our exports?

What are the Government's plans for coping with recession and industrial stagnation? The attitude seems to be that, if we tackle the points in the Budget, regeneration will come by just waiting for it. I would echo what other noble Lords have said; it is no use coping with inflation if in so doing we find we have ruined quite a number of our industries.

Again, I find from the White Paper that output of our manufacturing industry in 1979 was no less than 4 per cent. below that of 1973. These are the words in the White Paper: Private investment in manufacturing industry appears to have levelled off during 1979 after two years of relatively rapid growth". They are the Government's words, not mine. Yet we had a Budget which was to ensure that there was going to be a fair amount of investment coming into manufacturing industries. If the recession increases, as the Government forecast will be the case, surely there is inevitably going to be further loss of revenue, by reduced taxation because of lower incomes, and increased public expenditure because of the rise in unemployment and increase in unemployment benefit payments. So the recession will be further aggravated. I find from the White Paper that every one hundred thousand unemployed cost £110 million in benefits.

What I am going to say now may be out of date. Even if we are able to increase productivity—I agree with the noble Lord, Lord Walston; it is not so much a question of productivity as of the amount of production—even if we can increase production, surely we have got to pay attention to increase of demand. If I may give an example, we have problems of housing in this country; we have a large number of construction workers out of work. You can see in the White Paper how local authority housing is going to be almost smashed as the next three or four years go by. Suppose £100 million was spent on housing, surely this would increase tax revenue, curtail unemployment benefit, cause the suppliers of materials to employ more men. It may be an out-of-date argument, but to me this still seems to be the sensible way to talk about our economic planning—and I, along with other noble Lords, am not an economist.

May I say this in conclusion—and here I refer again to the speech of the noble Lord, Lord Alport. If we really want to get this country working there has to be a better understanding between the Government and the unions. The trade unions may have faults, individual groups in the trade unions may have faults, but you will not get over this by alienating the trade unions and the trade unionists. I repeat what I have said in a previous debate. This is not just a question of pay; it is a question of the whole attitude to men at work. Unless the Government really understand this they are going to find themselves in very great difficulty.

If we were a dictatorship it would be very easy to plan production and investment—very simple. But we are a democracy. We have consumer choice, which makes things very difficult. I believe it means we have to have some form of incomes policy. But you will not get that unless it is allied to other factors which would take the trade unions along with you. I believe the Government have to make a serious U-turn on this matter if they wish to get the co-operation of the people of this country.

7.20 p.m.

Baroness SHARPLES

My Lords, the noble Lord, Lord Byers, has introduced a most excellent debate this afternoon with his customary common sense, and I thank him. This evening I shall confine my remarks to the extremely imaginative and courageous package of proposals which shows the determination of Her Majesty's Government to carry out their pledges to independent businesses. In doing so, I should like to correct what appear to be some misconceptions—and I am sorry that the noble Lord, Lord Walston, is not present—about the size of the independent business sector. It numbers 800,000 and it also employs 51 per cent. of the total number of workers not employed by the Government—in other words, more than all the large public companies put together.

I agree very much with what the noble Lord, Lord Spens, said: the most important proposal is that losses incurred by investing in independent businesses may be charged against income for tax purposes. It goes even further than many of us had dared to hope. It will encourage the flow of equity investment in independent businesses and, as time goes by, will revive the confidence and enthusiasm of this vital independent business sector. As in America, it will attract the savings of those individuals who are understandably nervous of investing in quoted public companies to which they can make no contribution, save their cash. It will now be possible for them to take a close interest and actively help independent businesses in which they choose to invest. I am told that experts are already thinking up ways of using this clause for tax avoidance; but they can be dealt with, and their activities will be far outweighed by the benefits which will result from encouraging this essential part of our economy which can contain unemployment and also generate a much needed upturn in our economy.

Various noble Lords have spoken of the experimental enterprise zones and I do not wish to elaborate any more as regards that matter. I shall only say that these will take time to produce results and also I expect that there will be opposition to them from some quarters. I do not believe that we should rest content with all that the Chancellor has done to improve the environment for independent businesses. There will not be swift results, which may disappoint many people. I should, however, very much like to congratulate the right honourable Lady the Prime Minister and the Chancellor for referring to the whole field of independent businesses rather than to those which are simply "small". This package of proposals is the first great step towards the ideal of an "equity owning democracy" at which I am convinced we should aim.

7.23 p.m.

Viscount HANWORTH

My Lords, as has already been said, this Budget is part of an overall Government strategy of curing our ills by a monetary policy and by reducing public expenditure, and it should in my view be seen in that context. The criticism of it made by the Opposition elsewhere follows the usual practice of trying to gain political advantage on matters which are of relatively little importance seen against the broader canvas of the Government's strategy. To be fair, the Opposition ought to acknowledge that in many cases efforts are being made to help the poorer sections of the community; and in the case of higher prescription charges I understand that two-thirds of those people who might be liable to the higher charges are exempted.

The nation's economic performance has been visibly declining for at least 10 years, and without North Sea oil there would have been a disaster. Fundamentally, the reason for this decline is simple: it is because the hardest thing is for a nation or company which has reached the top to remain there. The challenge of reaching the top is no longer there, and the necessity for making changes to meet altered circumstances is overlooked in favour of using tried methods. It can be said that in success are always the seeds of failure—and that trend has been going on for so long that we have now nearly reached the bottom.

When in 1958 I left the Army and joined industry, I remember vividly that, although the management dared not say so, they still thought that Britain made the best engineering goods in the world and that it was the customers' misfortune if they did not buy them. Worse still, management could no longer wave a big stick over blue-collared workers and they had not learnt even the first techniques of man management, leadership, or call it what you will—I wonder if they have yet met this challenge.

In that context communication has meant no more than exchanging memos, and consultation has been pushed beyond a point where it has badly affected efficiency. The problem facing any Government in Britain today is that there is not just one thing wrong with our economy, but at least six areas which urgently need improvement. As I said in a recent speech, I consider that bringing the unions round to realising the true facts of life and to reorganising their structure is perhaps the most important, but also the most intractable, problem.

Over the last decade or so Governments have tried all obvious methods to wrestle with our ills, and the last Government had certainly reached the end of the road and would have had to change direction even if they had managed to get some restraint on wage increases. Looked at against that background, with a country which in many respects is ungovernable, the present Government's strategy is probably the only way left of trying to deal with our problems and to bring home to everyone the realities of our economic situation. I wish their policies success.

However, I have some nagging doubts as to whether the probable additional increase in unemployment—and it will increase anyway—and the damage to industry which this policy is likely to produce, is wholly acceptable, or will in fact be accepted. Although I am sure that this nation will accept stern measures to improve the economy on a short-term basis, I wonder whether it will do so over the much longer period which the Government envisage. For that reason some people think that the Budget could usefully have been tougher. Much the same considerations apply to making reforms in trade union law.

Although on balance I accept the Government's present policy as probably the only means of trying to put the country on its feet, I do not believe that a purely capitalist, free enterprise, policy is sustainable in the long run. For example, free collective bargaining in the wages area always was the "law of the jungle" and some modified system must be developed. I hope that the Government will, during their term of office, try to lay the foundations for dealing with this and other problems in a way more acceptable to modern socialist trends—and I do not mean by that just to our socialist party. If the Government adhere to the extreme dogmas of their Right wing, I am sure that anything they achieve will be swept away in the not very distant future.

Finally, to pick up one point made by the noble Baroness, Lady Gaitskell, she said that she would never believe that we could benefit economically by increased unemployment. I agree. It is a basic principle that the more people who can work usefully for as long as possible, the richer the nation ought to be. Goodness knows, we cannot afford half the things that we ought to afford! In a recent debate I discussed the reasons why this did not work out in practice, and suggested that further thought should be given to this before automatically applying palliatives to our unemployment situation. I hope that the noble Baroness can take it up from there.

7.30 p.m.

Viscount MASSEREENE and FERRARD

My Lords, first, I should like to offer my apologies to the noble Lord, Lord Byers, who I see is not now in his place. Due to a slight mechanical defect in my car when driving up from the country, I arrived too late to hear his speech. It was a great disappointment to me because I have always reckoned him to be one of the best speakers in this House and to speak an inordinate amount of common sense.

I support the Budget. I have always been a monetarist, but I should like to say something about high interest rates. During the last five or six years in this House I have said that it is my opinion—and I agree that from the point of view of economists my opinion is worthless—that the squeeze by high interest rates is perhaps slightly outdated as regards the control of the money supply. Today public expenditure accounts for between 60 and 70 per cent. of the GNP. The Government control the Treasury, or perhaps the Treasury sometimes controls Governments—although I am sure not this Government. Of course, the Treasury controls the Big Five through the Bank of England. Nevertheless, if we want to reduce inflation, we must slash Government expenditure. This Government have made a very good start on what is a very difficult task. Over the next few years I should like to see Government expenditure slashed, not by 2 per cent, or 3 per cent. as at present, but possibly by 10 per cent. or 15 per cent., although that may be quite impossible.

As I said, I did not hear the speech of the noble Lord, Lord Byers, but from the speech of the noble Lord, Lord Walston, I understand that Lord Byers said something about applying different rates of interest in banking. I may be quite wrong about that, but from listening to the noble Lord, Lord Walston, that is what I gathered he said. I have always been very keen on this matter. A few years ago I said that we should have a very high MLR for wine, women and song, but that we should have a different rate of bank interest for exporting companies and agriculture. Apart from the dairy farmer, the average farmer only receives his income in the autumn through his harvest or when his lambs are sold. All farmers work on overdrafts; very few do not. They have no money coming in for 10 months of the year. It is very hard for them to have to pay 20 per cent. or 21 per cent. interest rates. There are similar examples in other industries, but the situation in agriculture is unique. Other nations allow people such as farmers and those wishing to start new businesses to pay a different rate of interest. I hope that the Government might consider that in future.

Although I am a monetarist—and I hope a humane one—and I completely agree with the Government in their policy, especially with Sir Keith Joseph, who is a famous monetarist, I must ask the question: Do we have the right conditions in the United Kingdom for monetarism? These huge labour "monopolies"—I suppose that is the right word for it (we can call them cartels, if you like)—have complete control over the employer. As your Lordships know, the unions are above the law and the 1974 Act put them further above the law. We then have the Protection of Employment Act and, of course, we have the Welfare State. The employer has no power to control wages, apart from going broke! The unions can demand anything they like. That is why was extremely pleased to see in the Budget—and the P.M. must have had great courage to do this—that the Government propose to deduct £12 from the supplementary benefit and other allowances payable to a striker, on the assumption that the union will make up that £12. Before the war the unions always paid their members if they were on strike.

I should like to give a few figures to show why the unions can well afford to pay £12 to their members who are on strike, and a good deal more. I now quote from the International Currency Reviews Survey. Between 1974 and 1978 the survey shows—and it was taken from 19 unions—that those unions received £439 million from members' subscriptions. Out of that they paid their members only about £62 million. What did they do with the rest? They spent it on administration. great luxurious offices and cars. As an example let me take NALGO. In 1974 NALGO's subscription income was £2,100,000. It paid nothing to its members. In 1979 its subscription income rose to £9,800,000 and it paid £84,000 to its members. What did it do with the rest? It spent £6 million on building sumptuous offices, and I do not know what happened to the remainder. However, I presume that some of it went on nice cars, good salaries and big cigars, but I can only presume because I do not know.

As another example let me take Mr. Clive Jenkins and his union. He proposes to increase his members' subscriptions by £6 in 1980, because he has sent round a circular letter to this effect. That will bring in an extra £3 million. The excuse, I understand, is that they want to purchase extra freeholds. If they cannot afford to pay £12 to their members on strike when they are among the richest organistions in the country, it is deplorable.

Lord WELLS-PESTELL

My Lords, would the noble Viscount give way for one moment? I had better declare that I am a member of ASTMS whom the noble Viscount described as Mr. Clive Jenkins's union. It is not. It is ASTMS. He must bear in mind, because I think he is exaggerating the situation, that ASTMS for example maintain a very large and effective college for training personnel and staff and so on. Some of them maintain convalescent homes. It is not all going in the direction the noble Viscount thinks. So far as ASTMS is concerned, I do not like the phrase but it is having an ongoing system of training of people in various sorts of grade.

Viscount MASSEREENE and FERRARD

My Lords, I thank the noble Lord for that information. I did not know that. It is an excellent thing. If unions were weak financially it could be wrong to impose this figure of £12, but I think that financially they are quite able to pay their members at least £12 weekly while on strike.

May I for a few minutes go on to one or two matters in the Budget. I am sorry to see that capital gains tax remains the same. I agree that you do not have to pay unless you have a gain of something over £3,000. But we really ought to alter the date of April 1965. By all means have a capital gains tax if you want it, but when we come to 2000 A.D. to still date back to April 1965 will be quite absurd. As we all know, it is a tax on inflation, and if we are inflating at a rate of nearly 20 per cent. the amount of capital gains tax would be absolutely enormous. I should like to see capital gains tax backdated no further than 10 years.

Regarding bank profits, I quite agree that they appear almost obscene. They are really very high. All the bankers I speak to agree with me. They are rather embarrassed about it. When Governments get money—perhaps not this Government, but other Governments—they are rather inclined to waste it. By all means let the Government tax the profits; but it is a great pity that instead of the Government taxing them some means cannot be devised whereby these excess profits could be paid out to start small business through the merchant bank subsidiaries. If something like that could be worked out it might be better than the Government taking it in tax. Even with the best will in the world, civil servants are inclined to be a bit extravagant with other people's money.

There has been great uproar about the £1 prescription for medicine. All I would say here is that I think it will improve the health of the country considerably. There will be far fewer coughs and headaches. Many of the people who like going round to see the doctor, perhaps because he has a good manner, will probably go to the chemist's shop instead. I am also a little worried about index-linked pensions for civil servants and some others. While I have great admiration for some civil servants, this year those index-linked pensions of civil servants are going to add £400 million to public expenditure. They have just had a 23 per cent. pay rise—which of course is higher than in private industry and in other nationalised industries. That will add about £640 million to public expenditure.

I was never in the Civil Service, but I thought that it was supposed to be an honour to be in the Civil Service and that you did not expect great remuneration. You got your OBE and then perhaps CBE, and then rose up and got a KCB, but I do not think you can really compare them to those in private industry; so I think that pay rise is excessive. Of course, if I were in the Government I should be only too anxious to keep in with my civil servants; so perhaps there is some object there.

I have spoken long enough. I support the Government—I hope that the noise of thunder is not the IRA—in their Budget. They are on the right course, especially with regard to strike benefit, provided they do not lose their courage but get the union legislation forward quickly. We have tried the softly, softly approach for 30 years, but it has not paid off and I think it must be done by legislation.

Lord MISHCON

My Lords, before the noble Viscount sits down, did he notice that the heavens themselves were rather amazed at his speech and sounded forth their reaction?

7.47 p.m.

Lord BANKS

My Lords, my noble friend Lord Byers has certainly provoked a fascinating debate today, and no part of it was more fascinating than the notable and courageous speech of the noble Lord, Lord Alport. I should like to say something about the basic economic strategy of the Government and just a word about its implications for social security. No one can deny that the immediate outlook is grim. The total level of taxation has been increased as a result of the Budget by £235 million; there is to be a cut in public spending at a time of increasing recession of £1,275 million; output is expected this year to be down by 2 per cent; owing to the abolition of the lower 25 per cent. income tax band the increases in the allowances will not take full account of inflation except for those at the very bottom of the scale; unemployment is expected to be up; inflation is expected to remain at its present level, between 16 per cent. and 20 per cent; and there will be a drop in real earnings.

But, say the Government, all will be well. The cure will be harsh, but, if the patient survives the cure, he will make a spectacular recovery and leave hospital loaded with presents in the shape of tax cuts. What is the cure? It has been explained to us this afternoon by the noble Lord, Lord Cockfield. It was explained by the Chancellor of the Exchequer in his Budget speech. it is to reduce the rate of inflation by reducing the money supply. There is a relationship, it is argued—erratic from year to year, but a relationship nevertheless—between money supply and the public sector borrowing requirement. Therefore, we must reduce the public sector borrowing requirement. This, it is said, will also bring down the very high interest rates.

My noble friends Lord Byers and Lord Mackie have drawn attention to the deleterious effects of these, as have other noble Lords who have spoken. The public sector borrowing requirement will be reduced by cutting public expenditure by 4 per cent. between 1979–80 and 1983–84; the gross domestic product is expected to rise by 1 per cent. per annum in that period; there will be, it is estimated, a £5 billion rise in revenue, half of which will come from North Sea oil; and the public sector borrowing requirement will be down from some £81/2 billion to £3 billion, and that will allow, at that time, tax reductions.

That is the happy scenario which has been outlined to us to give us encouragement in these difficult days. But there are some questions which must be asked about that strategy, some of which have been asked already this afternoon, and I think these questions would weigh with the noble Lord, Lord Alport, even if they do not weigh with the noble Lord, Lord Cockfield. First, what about the damage caused to the economy by the recession? The noble Lord, Lord Walston, referred to that.

What about the firms which will go out of business, caught between the Government's strategy on the one hand and wage demands on the other? They will not come back. We may be destroying an important part of our productive capacity. What about the levels of unemployment which this strategy will demand and the strains on our society which that can cause? We all in this House admire the ability of the noble Lord, Lord Cockfield, and the cogent and logical way in which he presents his arguments, but if I were asked to say what was missing, I would say it was the human touch, the consideration of how individuals react and are affected by the automatic, mechanical policies which he outlined to us.

What about the run-down of the public services, which is already noticeable? After all, we spent last year only 3 per cent. of our gross domestic product on the public services, whereas the EEC average is 41 per cent. What about the social divisiveness of many of the expenditure cuts? And what happens at the end? Supposing it all works out as we have been told. At the end do we keep this monetary restraint and keep at the level we have then reached for ever, or are we allowed to relax and, if we relax, do we commence the cycle once again? The Government strategy is based on a belief that if the money supply is reduced, inflation will fall; in other words, that inflation follows the money supply and not the contrary. I do not believe that theory—it could be right—has been proved, and therefore a great risk is being taken with the national economy to test a theory. It is also based on the belief that if you cut public expenditure you encourage private expansion, and I do not believe that is necessarily so. I think the effect can be precisely the opposite.

Would it not be more sensible to adopt a much more flexible attitude to the public sector borrowing requirement, and certainly not to decrease it in the face of a recession, and to seek agreement of both sides of industry for the operation of an incomes policy of the kind my noble friend Lord Byers outlined? The noble Lord, Lord Cockfield, said that curbs were resented in incomes policy as attempted and that pent-up demand at the end of the incomes policy destroyed the whole thing. We have had the kind of incomes policy which is put on for a year or two and then taken off, but we have not had an attempt yet to establish a long-term permanent incomes policy, and that is what we want. As to restraint being resented, there was a clear opinion poll verdict, when this matter was much before the public, in favour of restraint—in favour of an incomes policy—and there are undoubtedly resentments, too, caused by the operation of a free-for-all. Surely it is better to work incomes policy by co-operation and agreement than to seek to impose it by a combination of monetary policies and market forces: co-operation and negotiation rather than. bankruptcies and unemployment.

Regarding social security, the Chancellor, and indeed the noble Lord, Lord Renton, today, have spoken with alarm about the fact that one-quarter of the total expenditure today is on social security and that it amounts to £20 billion. But we should hear in mind that over one-half of that figure consists of contributory benefits financed from the National Insurance Fund, to which the Revenue pays only 18 per cent. of the cost. About one-half of those National Insurance benefits, or one-quarter of the whole, consist of retirement pensions, and pensions have not been increasing as a percentage of national average earnings. They are recognised to be too low, and the Minister for Social Security, Mr. Prentice, is on record as having said in the other place very recently that pensions are too low and should be a higher percentage of average national income.

In any event, retirement benefits are operated under the 1975 scheme, a scheme to which all parties agreed, and, as I recall, it was only those of us on these Benches who pointed out that the burden was being thrown on future years by the earnings-related pension, but that is scarcely a problem at the moment. So the pension scheme is proceeding very much as was anticipated and, it accounts for one- quarter of the whole of social security spending. A tax credit system such as we on these Benches advocate would give the opportunity for a simplification of the social security system, and no doubt that simplification and rationalisation would allow for some cuts in cost while still seeing that the essential benefits were provided. I am quite convinced that nibbling away at the present structure, which the Government are now embarked upon, is not the way to seek reform.

I welcome of course the improvement in family income supplement and in the mobility allowance, for example, announced in the Budget Statement, but I regret, as other noble Lords have done, that child benefit was not raised sufficiently to take account of inflation. We are told that this is too costly—that every extra 10p of child benefit costs £60 million—and that to bring it up to the level of £5.20 which is necessary to offset inflation would cost another £270 million. But we must regard this as equivalent to the cuts—the same sort of thing, in effect—as the increases in personal allowances, and they will cost the present Budget, I understand, £1,200 million. Thus, if £1,200 million could be found for that purpose, why could not £270 million be found for something which is really part of that process?

I regret the decision to break the link between pensions and earnings, but we spoke about that yesterday and I will say no more about it today. I regret the decision to break the link between short-term benefits—to which the noble Lord, Lord Underhill, referred—and prices, the decision that this autumn they will be increased by 5 per cent. less than the increase in the retail price index. These benefits are to be taken into tax. Will they be uprated in future, once that has been done—it will not be this year—annually for prices? Of course, if one increases supplementary benefit in line with the retail price index, as has been done, and if one increases short-term benefits by 5 per cent. less then one will increase the numbers on supplementary benefit, which is the very thing which we are supposed to be trying to get away from at present.

I said yesterday that I regretted the cuts in social security and welfare services, The welfare services make a direct demand on resources, but the social security cash payments do not. They transfer income, certainly to those more likely to spend, but the level of private savings is buoyant, and the fact that those people are more likely to spend rather than to save does not seem to me to be an important factor at present. Bigger investments are deterred not by a shortage of funds, but by economic considerations.

In conclusion, and returning briefly from social security to the main strategy, I should like to emphasise that it is not true to say that the Government in this country take a larger share of gross domestic product than do Governments in similar countries. It is lower than in any other EEC country. It is 42 1/2 per cent. in the United Kingdom at the moment, and 46 1/2 per cent. in West Germany, which is held up as the great example in these matters. Furthermore, it is not true to say that the Government's share of gross domestic product has been increasing in recent years. On the contrary, in 1974–75 public expenditure rose to 46 per cent. of gross domestic product, but, as I have said, at present it is 42 1/2 per cent. If one takes Government expenditure on goods and services, cutting out the transfer payments, the social security payments, one finds that the percentage is less than it was in 1973–74.

When we consider the recession which, as David Blake, the economics editor of The Times has pointed out, the Government have now taken on as part of their policy, we must bear in mind the facts that I have just mentioned, and we must make sure that we do not reduce the social security benefits which will help to ameliorate the recession for some of those who will be worst hit by it.

8.2 p.m.

Lord BRUCE of DONINGTON

My Lords, we on this side of the House are most grateful to the noble Lord, Lord Byers, for introducing the debate, and we are more especially grateful to the noble Lord, Lord Banks, who has voiced I believe a number of the sentiments that are shared not only by my own party, but also by that section of the Conservative Party which is called the wet section ". It is amazing what varying stages of humidity there are in the Conservative Party at this time.

I listened very carefully to the speech of the noble Lord, Lord Cockfield, which I found markedly similar to two other speeches I have heard from him on the same subject over the past seven or eight months. Therefore, I do not propose to refer in detail to his speech, which produced in substance various items which are incorporated in the Financial Statement and Budget Report 1980–81. I have observed, however, that the noble Lord is not prone to answer questions that are put to him, and is not prepared to examine very closely some of the factors that are laid before him by your Lordships, unless they happen to fit in with the particular theories that he holds. So we can deal with that aspect of the matter quite briefly.

The noble Lord said—and on this I take him up—that the Government's policy essentially was concentrated on monetary, financial and fiscal action. These are the parameters which the noble Lord, Lord Cockfield, set upon Government action itself. I have listened to these debates for many months now, and I think that it becomes clear from them, as well as from utterances in the other place, that the situation has now arrived where determination, resolve, steely resolve to do this, that or the other have become ends in themselves. It is as though determination to pursue a course has become a virtue in its own right, irrespective of where the course is likely to lead one. The noble Lord gives every appearance—which is amplified by his intonation—of following precisely the course that has been laid down for him. I remind the noble Lord that sincerity is not essentially a virtue. A homicidal maniac is perfectly sincere.

We know what the Government's policy is, or what its results will be. They have laid them out quite frankly, and we cannot complain about that. From looking at the Financial Statement we know that the prospect that the Government are offering to the United Kingdom, as a result of the application of their monetary, financial and fiscal action, is higher unemployment, lower manufacturing output, and lower investment. In the case of higher unemployment there was already the hint in news- papers supporting the Government that when this occurs it may be accompanied by means-tested benefits.

The first question I have to ask on the presentation of this vista, which the noble Lord, Lord Alport, described—correctly, in my view—as truly horrendous, is what has happened to the result of all these magnificent taxation incentives that were given in the Budget last year? We were told that by shifting the burden of taxation from direct to indirect taxes we were going to galvanise people into extra effort. Well, it is a little peculiar that so far all the Government are able to predict is a decline in output.

It was said that industry was being starved of investment because of public expenditure, which as the noble Lord, Lord Banks, has said, runs at a lower percentage of the gross domestic product than in most other countries of Europe. It was said that industry was being starved. But there is no evidence of starvation. Yet the vista that the Government hold up before us, of greater and greater restrictions on the public borrowing requirement, of greater slashes in Government expenditure, surely, by their own incentives, should be increased investment in the country, because this is the whole purpose, one assumes, for which the policy is being introduced. And what do we find? Investment in the United Kingdom is scheduled, as is shown in the OECD statement that I have here, to decline by between 7 and 10 per cent. during the current year, and the results projected over the four years are not particularly impressive. So all that the Government have to offer us as a result of all this is a decline, with the prospect at the end, in 1984—coinciding, miraculously enough, with a probable general election—of a massive tax bonanza (mainly, I take it, by income tax reliefs) which may or may not ensure their return in the 1984 election.

One other thing is made quite clear in the Financial Statement, and that is that the Government do not anticipate any substantial reduction in the EEC net contribution of £1,000 million during the next year, rising towards the end of the fourth year to something like nearly £1,500 million. Indeed, the question was put by the noble Lord, Lord Monson, as to whether, in the event of our obtaining a substantial relief of our net EEC contri- bution, the Government would relent somewhat and see that this sum, whatever reduction of the net contribution is achieved, is diverted without any effect on the public sector borrowing requirement to those sections of the community from whom the Government, in their current Budget, have so wantonly taken some of the benefits to which they are entitled. It will be interesting to find out the Government's reaction to that question.

But more shocking than that is the fact that the noble Lord made no mention in his speech of the possibilities or otherwise of recovering the £1,000 million described by his right honourable friend the Prime Minister as "our money". She has been parading this about for months now. We have had several phases in the action she is going to take. She blows hot one day; she blows cold the next. She is going to get it back; she is going to rap the table; she is going to lecture them; she is going to get the money back. Yet, the next day we have: No, she is not going to take any action except in co-operation with Europe. Is she going to do anything about it or not; and when are the results coming? It is no good the noble Lord replying, as is his custom, "Your Government did not get it back, anyway ". That is no answer at all. I want to know, and the House will want to know, what effective action is going to be taken. I would remind the noble Lord, whose party expressed astonishment at the previous existence of this deficit when they came to office in May, that the whole of the deficits for the five years preceding the election are set out on page 661 of his own party's campaign handbook if he cares to look it up. So their astonishment and their ingenuity in pretending that they did not know of its existence is, of course, a complete nonsense; but they do not anticipate being able to get any of it back.

The other thing that is implicit in the Financial Statement, to which the noble Lord, Lord Alport, referred and which was referred to by my noble friend Lord Walston, is that there is no indication of when the Government expect the inflation rate to come down. There is no indication at all as to what is supposed to happen. I remember that last year, when we were discussing the Budget, some astonishment was expressed from the Government Benches when I said (quite truthfully, in the event) that their predicted rate of inflation for the end of the year of 14 1/2 per cent. was more likely to be 20 per cent. So it is—and it is still going up. What relief in respect of inflation have they got to offer?

Nor does the Budget Statement or the speech of the noble Lord's right honourable friend in the other place give us any clue as to when high interest rates are going to come down. It is all very well for the noble Lord to say that these are a kind of penalty on firms which pay their workers above the going rate. That would have a superficial justification if the interest rates were confined to those firms; but I can tell the noble Lord that there are thousands of firms up and down the country—small firms as well—which are suffering very grievously from this high rate of interest, despite the fact that they have not encouraged the employment of labour at extremely high or extortionate rates.

Monetary control, fiscal control, financial control—does the noble Lord really think that anybody believes him when he says that high interest rates are inevitable? Is he saying that the Government, if they wished, could not themselves have the powers to reduce the interest rate, on the same lines as other countries? Is he saying that he is so scared of the Bank of England, which is supposed to be nationalised, so afraid of the Bank of England and the money market, that he is powerless to take any steps at all in reduction of interest rates? Perhaps he is. But if he says he is powerless to do this, then how is he going to ensure the control of M3, the money supply, anyway? That, of course, is central to the whole basis of the Government's policy—the control of M3. How is he going to do it? Or does he even know that he can do it? The noble Lord knows quite well, and I will not insult his intelligence, that there is no causal connection between the public sector borrowing requirement as such and M3. He knows that perfectly well; and, if he denies it, I will produce the computer calculations for him, and a whole lot of other things besides.

The noble Lord says that the control of the public sector borrowing requirement is crucial to his policy, even though it has no connection—no connection at all; no correlation; point nought, nought, nought, nought correlation—with M3, the money supply. Let us see. This question was raised in another place by a Conservative who knew perfectly well that by controlling public sector borrowing requirement you did not in fact control M3 at all. The Question was put to his right honourable friend the Prime Minister in another place on 7th February. Mr. Tapsell said: Is it not time to bring domestic credit expansion under more effective control by issuing directives to the banks and other main lending institutions to reduce their lending to within the declared Government monetary units?"—[Official Report, Commons, 7/2/80, col. 734.] That was a perfectly reasonable question.

It was a question which the noble Lord, Lord Alport, almost asked in the course of what I thought was a most constructive speech—one of the most constructive speeches I have listened to for some time. The Prime Minister replied—and these are her own words: If that of itself would work, we would be prepared to consider it. But there has been an enormous so-called explosion in financial technology, which means there are various ways of getting around lending by banks. Of course, that means that any such directive to the banks would largely be inoperative, because the lending would be transferred to other financial institutions ". In other words, the Prime Minister admits that the whole key to the policy put forward by the noble Lord—that of controlling M3—cannot in fact be carried out; or, alternatively, the Prime Minister herself is not prepared to carry it out.

So much for the nonsense about these so-called cosmetic efforts to control M3. They are merely an excuse by virtue of which the noble Lord, by associating the public sector borrowing requirement with public expenditure, seeks to have a mandate in order to carry out the other parts of his policy, a policy, to use their own words, of redressing the balance which has been so rudely disturbed since the end of the war so as to bring it back more and more to what it was before. These are the Government's policies.

The noble Lord says from time to time that there are no alternatives. In fact, when I listened to the right honourable gentleman Sir Keith Joseph when he was broadcasting, at the end of his somewhat lengthy cross-examination by economic commentators he seemed to rub his head wearily and say: "Well, there is no alterna- tive; all other plans had failed ". And the noble Lord has echoed it in this place—evidently not being entirely satisfied with the vision at the end of his tunnel, having a sneaking doubt that there ought to be something more; but there is no apparent alternative.

I think that when we come to talk about the re-establishment of British industry, when we come to talk about restoring output and increasing production, when we come to talk about national recovery in the broadest sense of the term, one thing is necessary above all else. One thing becomes the responsibility of Government which extends their vision, or should extend their vision, far beyond the narrow concept of monetary, financial and fiscal action. It should be the aim of Government to give the nation purpose. This is what the whole art of government is about. The noble Lord, Lord Alport, referred in as many words to that aspect of the matter.

We found in our experience in the war that a national purpose was not easy to obtain but was obtained very progressively and strengthened as time went on. That strength of purpose, aside from any other factor, aside from the acknowledged aim of achieving victory—for it was not a negative one of avoiding defeat but one of achieving victory—was sustained, above all, by a sense of justice. People who were in the war (whether in the forces or as civilians in the factories, or wherever they were) were sustained in their endeavours by a feeling that the Government of that day progressively established a greater measure of fairness and a greater measure of justice than people themselves had experienced in the pre-war years. We well know that over vast sections of the population rationing itself meant for millions getting meals adequate enough in one week, perhaps for the first time. So sacrifices were made on the basis of justice. This is where this Budget fails; because, when all the chips are down, we know quite well that the result of the taxation proposals will be to put more money into the pockets of people earning over £15,000 to £20,000 a year and that the social services will bear hardly on the bulk of the population.

The noble Lord has mentioned (and Sir Keith Joseph has mentioned) that there is no alternative. I think that there is. One has to establish a sense of purpose. But I think that the one thing that must be asserted—and I believe that many of my noble friends will agree with me—is the supremacy of Parliament over any sectional interest in the community. I use the phrase deliberately to cover trade union organisations as well as the banks, as well as the large companies, the multinational companies and everybody else. Parliament must be seen to be the final body that determines the destiny of the nation itself. It should be the function of Parliament to determine the parameters within which free enterprise can work. It must determine (I hope by consultation with the trade unions and other bodies) the approximate parameters within which free collective bargaining may take place; and at the same time—and I know that many noble Lords opposite would agree—Parliament must make quite sure that no profit interest however powerful, no multinational company however powerful, or group of companies or interests, acts other than within the parameters of the national policy. But, above all, such a policy, if it is to be successful must ensure—I mentioned it once and I repeat it with very deep conviction—that the spring that lies behind the efforts of our people is fundamentally the feeling that they are being dealt with fairly and justly.

Let not the noble Lord think that the British people can be driven or bullied by threats of unemployment, by the ruthless carrying out of their monetary policy which they hope will so sap the power of the unions that thereafter wage rates will be easy to depress. British people cannot be driven; but they can be led. I do not think that they have been well led for a long time. I speak as an individual; but I feel that the last peacetime Government to give really effective leadership to the nation—a leadership to which they responded, and during which period of time we achieved the greatest proportion of investment of the gross domestic product—was that of the Parliament of 1945 to 1950. Since that time, although parties have tried and leaders have tried (and I think everybody has been quite sincere in that) there has been lacking the leadership that we have required.

It may be thought that questions of fairness and justice are immaterial matters in the conduct of our affairs in the United Kingdom. I believe that they are central. For me, at any rate, they are. I well recall—and they have been a guiding light for me—the words of Thomas Carlyle of over 100 years ago, when he wrote: It is not to die or even to die of hunger that makes a man wretched. Many men die; all men must die. We all end up in a chariot of flame. But it is to be weary we know not why, to be weary yet unrelated, girt up in a cold universal laissez-faire. This is, and for ever remains, intolerable to all men that God hath made ".

8.30 p.m.

Lord COCKFIELD

My Lords, this has been a most interesting debate and it has brought forth a number of penetrating and interesting speeches from both sides of the House. I was, however, astounded that the noble Lord, Lord Bruce of Donington, started by claiming that insincerity was a virtue. I have long since ceased to follow some of his particular intellectual exercises, but that one seemed to be more unusual than usual. He has complained also that he does not always get replies to the questions that he asks. I am going to start therefore, despite the lateness of the hour, by explaining to him simply what is the connection between the money supply, the PSBR and the rates of interest. The rate of interest is the key to the level of the money supply. If the noble Lord, Lord Bruce of Donington, wishes to throw that key away as he has suggested, it is not surprising that he abandons hope of controlling the money supply. If the PSBR goes up, it follows that the Government have to borrow more money. They can only borrow more money at higher rates of interest. This lesson was abundantly demonstrated last November. If rates of interest rise, those rates of interest impose a burden on industry and cut down the demands for credit by industry, to match the increase in the PSBR. Therefore, an increase in the PSBR results not only in higher rates of interest; it results in damage to industry.

The next major point that the noble Lord raised was to suggest that we had abandoned hope of obtaining a satisfactory settlement of our claims in relation to our contribution to the EEC. That statement is completely unfounded. The Government remain firmly committed to securing a proper settlement of this problem. It is of course the position, as he has rightly pointed out, that the White Paper on public expenditure does not bring into account the amount of this settlement. That is entirely right because we can account for this settlement only when the amount of it is known, and it is in those circumstances that we shall then decide precisely what should be done. So much for Lord Bruce of Donington.

A large number of points were raised by other noble Lords. Lord Davies of Leek started by complaining that this Budget was the "leak of the century". I am sure then that no pun was intended. My noble friend Lord Thorneycroft replied to him to some degree, but I should like to make a serious comment on this. My own experience has been that over the years the economic commentators have grown much more penetrating in their analysis of the economic situation and it is not surprising in many ways that they come up with answers that are not all that different from those which the Government produce as well. This process is much assisted by the large number of bodies in the economic field that now produce forecasts, so that one can always compare these forecasts and draw a line through them. There is also, if I may be forgiven for saying this, a certain similarity between these forecasts produced by economic commentators and circulars from stockbrokers. They contain so many recommendations and prognostications that after the event it is always possible for them to pick out the one or two bull's eyes they succeeded in scoring.

A number of noble Lords, among them Lord Wells-Pestell and Lord Monson, raised the question of the earnings-related supplement and suggested that the proposal to abolish this supplement was not right in view of the fact that contributions had been made towards it. The position so far as the earnings-related supplement is concerned is in fact quite different from the position in relation to retirement pensions. With retirement pensions one builds up an entitlement over a very long period of years, ultimately of course over the whole of one's lifetime, and therefore the pension that one gets is directly related to the contributions one pays. That has never been the position in the case of the earnings-related supplement, which has always been financed on what is virtually a pay-as-you-go basis and entitlement to ERS in any calendar year is based on the contribution record over the last completed tax year before the start of that calendar year. In other words, it is a relationship between benefit and contribution in one year only, and in order to respect that entitlement we do not propose to abolish the benefit until January 1982, because entitlement throughout 1981 depends on contributions being paid in the current financial year.

My noble friend, Lord Renton, raised a point relating to debt interest. He asked why the debt interest payments in the White Paper did not fall more rapidly and how far they reflected payments on past debts. Of course, the bulk of debt interest reflects payments on the accumulated stock of debt and the interest rates at which that debt was issued. It takes time, therefore, to reduce interest payments as old debt is replaced by debt at lower interest rates and as public borrowing is brought firmly under control, and this is linked directly with the question of the level of the public sector borrowing requirement. The Government's policies to reduce the PSBR and interest rates will however reduce the burden of debt interest in time. It is projected already to fall after 1981–82 in real terms.

The noble Lord, Lord Spens, raised a very technical point relating to the proposal to extend tax relief for interest paid on money borrowed for investment in a close company. He suggested that there might be some difference between what the Chancellor of the Exchequer said and what appears in the Budget Red Book. In fact there is no difference, I am glad to assure him. The fact is that the relief at present depends upon two factors; namely, that the individual should have worked for the greater part of his time in the company's business, and, secondly, that he should have a material interest. It was only the first of these conditions that the Chancellor proposed to relax, and therefore it was only the first of them to which he referred in his Budget speech. The other condition, which he did not propose to relax, remains.

The noble Baroness, Lady Gaitskell, in referring to reductions in Government expenditure mentioned in particular spending on social security and on health. The position, I am glad to assure her, is that spending on social security is still expected to increase by nearly 4 per cent. between 1979–80 and 1983–84. So far as health is concerned, the commitment in our manifesto was not to reduce the overall spending on health below that planned by our predecessors. That promise has been honoured in the White Paper. My noble friend Lord Renton had already referred to this matter when he said that the Government's plans to reduce public expenditure took due and proper regard of those areas of great difficulty where there were strong arguments in favour of maintaining or even increasing expenditure.

The noble Lord, Lord Walston, claimed that the Government now accepted that tax incentives had proved to be ineffective. This is not the position at all. The position was explained very carefully by my right honourable friend the Chancellor of the Exchequer in his Budget speech. I will read what he said at column 1474 of Hansard of the other place on 26th March: The cuts "— he was referring to the cuts in income tax— that I made last year were an important start in reducing the oppressive burden of direct taxation. At every income level, taxpayers now retain a significantly larger share of their incomes, which they are free to spend or save as they choose. I intend to do more in the future, but at a time when output is falling and we are making further heavy cuts in public expenditure I cannot afford to protect income taxpayers fully from the effects of inflation. This, then, must be a year of consolidation ". There is no question in any way of retreating from the basic principles of our policy so far as income tax is concerned; it is simply that in the current year we have not been able to do as much as we would have liked to do.

The noble Lord also referred to what he claimed to be the problems created for industry by the fact that depreciation allowances for plant and machinery were on an historic cost basis. In fact that has long ceased to be true. As long ago as 1945, Sir John Anderson (Lord Waverley as he subsequently became) introduced the first initial allowances which were intended to be a supplement to depreciation, and to meet the problem caused by rising replacement costs. In the last Conservative Government my noble friend Lord Barber (as he now is) introduced the 100 per cent. first year allowances on plant and machinery. These now mean—to take the example given by the noble Lord—that if an industrialist replaces an asset which cost him originally £10,000 by a new one which cost £20,000, then in the year of replacement he gets full tax relief on the £20,000. Therefore, that particular point has long since been met.

The noble Lords, Lord Underhill and Lord Banks, raised the point about the unemployment benefit. There is of course no reduction in unemployment benefit. What has been done is that the uprating falls short by five percentage points below the full amount required to keep pace with the level of price increases. As my right honourable friend the Chancellor of the Exchequer explained at the time, none of these benefits comes within the tax net at present. He said: What I am now proposing takes account of the general agreement by successive Governments that they should ". It needs of course, to be borne in mind, in looking at the whole question of the taxation of unemployment and sickness benefit, that few people receive these benefits throughout the whole of the year. The ultimate objective therefore, as I explained in my opening speech to your Lordships, was to ensure that the person who received an income partly from work and partly from benefit enjoyed no advantage compared with the person who earned the same income throughout the year.

The noble Lord, Lord Underhill, and other noble Lords, raised the question of the level of public expenditure in this country compared with other countries expressed as a percentage of the gross domestic product. It is perfectly true, as the noble Lord said, that the percentage in this country is lower than in many other countries—one would expect it to be. This country is significantly poorer than most of the countries to which he refers. In particular, the GDP per head in Western Germany is about double what it is in this country. If we have double the income, we can afford a higher percentage of expenditure. That, after all, is the whole basis on which progressive taxation, which has been accepted in this country, certainly since the closing years of the 19th century, exists. I realise that noble Lords opposite always object to references to the 19th century. But it was Lord Harcourt in 1894 who first introduced the concept of progressive taxation in this country in the original estate duty. There is some reason to suppose that Lord Goschen, with the temporary estate duty, had introduced the germ of progressive taxation before Lord Harcourt. But that is a digression.

The fact of the matter is that for many years now progressive taxation has been accepted as the norm. There is considerable argument as to what the scale of progression should be. The concept of progressive taxation has been accepted as the norm. If one accepts progressive taxation, equally it follows that the richer country has a greater capacity to bear a higher proportionate level of public expenditure.

I am sorry that time prevents me from answering specifically any further points raised by noble Lords. I assure them that I always re-read the debates very carefully and pay very great attention to everything that is said. The fact that I do not refer to them specifically does not mean that I have ignored what they say.

I should like, in conclusion, to say that so far as the country as a whole is concerned the Budget has in fact been well received. Anyone who doubts that needs only to refer to the MORI Poll published in the Sunday Times last Sunday. The Budget has been well received because the measures contained in it are regarded as valuable in themselves and appropriate to the situation that we face. My noble friend Lord Thorneycroft—in a very powerful speech in which he analysed in great depth the philosophy underlying the financial and economic policy of Her Majesty's Government—said that really no alternative policy was available. The noble Lord, Lord Bruce of Donington, quoted my right honourable friend Sir Keith Joseph who had said much the same. This in fact is the simple truth of the matter. This point has been most clearly brought out in the debate in your Lordships' Chamber this evening. We are offered on one side a re-run of policies which have one quality, and one only: namely, that they have all failed. What we are offered is a re-run of those policies which have been tried repeatedly in the past by both Conservative Governments and Labour Governments. No income or pay policies have ever succeeded or ever produced the right answer. So far as the Labour Party is concerned we are again offered a re-run, except on this occasion it is a re-run of the disastrous policies which they followed between 1974 and 1979. That anyone could possibly advocate that we should do exactly the same, when one considers the state to which those policies brought this country, is difficult to imagine.

The answer was really given by the noble Lord, Lord Mackie, who said that he wished to dissociate the Liberal Party from the attitude and policies of the Labour Party. We have no alternative policy available: that is why we shall proceed with the policy to which we have set our hand. We are confident that this is the only policy which will enable this country to rebuild its fortunes. If I may use the words which appear in the Motion of the noble Lord, Lord Byers, I commend the Budget to your Lordships as an important step forward in safeguarding the social, economic and industrial life of the nation".

8.51 p.m.

Lord BYERS

My Lords, I think it would be your wish that I should resist the temptation to spend the next hour in trying to refute the speech we have just heard. I shall read it with great care and I think I shall be in communication with the noble Lord. But for tonight, and at this hour, I should like simply to thank all those who have spoken in the debate, and particularly the noble Baroness, Lady Sharpies, who made a very good four-minute speech. I hope that will be recorded. I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.