HL Deb 13 February 1980 vol 405 cc168-79

3.8 p.m.

Lord KALDOR rose to call attention to the implications of the industrial, financial and monetary policies of Her Majesty's Government for economic growth, the standard of living, the level of employment and the country's potential for self-defence; and to move for Papers. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. In the last two years we have had a number of debates in this House on Britain's frightening economic situation and prospects. The majority of them have been on the initiative of noble Lords on the opposite side of the House. I found these debates most valuable and illuminating. They have shown that there is a far greater consensus of opinion on the extremely critical situation of the British economy than I expected. There was a fair degree of agreement, also, on the most alarming features of our situation; notably our unsatisfactory performance in relation to our competitors which shows itself in a faster rate of growth of competitive imports—that is, imports which compete with domestic production—than in our exports.

This adverse trend in our export-import balance of manufactures is of very longstanding and was only temporarily reversed by two world wars and by the policies introduced before and after the Second World War. It has much accelerated in the last decade, so that if it had not been for our unexpected good fortune in becoming a major oil producer at the very time of a manifold increase in the price of oil, we should now be in the most catastrophic situation.

The over-valuation of the pound which began in October 1977, and was greatly accelerated after the last election, threatens to telescope into a few years the final collapse of our industries which might otherwise have taken a decade or more. Last year manufacturing imports rose by 16 per cent. in volume while manufactured exports rose by only one-tenth of that, or 1.6 per cent. The situation was worse than in the year before, but even in the year before imports rose by 15 per cent. and exports by only 2 1/2 per cent. We still have a surplus of exports over imports, but only just; last year it shrunk to 5 per cent. of our exports, having the year before been 12 per cent., and I expect that 1980 will be the first year in British history when Britain becomes a net importer of manufactured goods. All the figures I have quoted do not reflect the present high value of sterling. As soon as the annual improvement on the oil account ceases to offset the large annual deterioration in the balance of payments, Britain will face bankruptcy, and on present forecasts this can happen fairly soon.

There can be no dispute that the advent of this Government marks a break with the past which is little short of a revolution. This is true, even though the true extent of the change has been masked from public view by the fact that the previous Government in their dying days themselves became victims of the same intellectual miasma which afflicts the present Government, a fact of which the noble Earl, Lord Gowrie, more than once reminded us. What exactly is the nature of this miasma? The money supply, which was virtually an unknown quantity throughout the post-war period, has come to occupy the centre of the stage; it is endowed, in the view of our present Ministers, with an almost mystic importance. For reasons that nobody could explain or even tried to explain, it is assumed to be the main factor responsible for inflation, and this in turn the source of all other evils, and so the Government tell us that until that battle is won it is futile to think about anything else. As the noble Earl put it at the end of a recent debate, when your overriding objective is a negative one, which is to reduce the rate of inflation, it is difficult for your positive, visionary or exciting policies to come to the fore.

The grave danger is that the Government will fail completely in their declared chief objective on account of the naivety of their beliefs and that, in the process of trying, they will greatly aggravate the evils from which we have been suffering for many years. You cannot cure inflation without having some idea, based on reason and not on mystical belief, of the causes of inflation, the forces behind it and the mechanism through which it is transmitted. The fact, to which one noble Lord called attention the other day, that you have never had inflation without an increase in the money supply, says nothing about the cause and effect; it is perfectly consistent with the money supply playing a purely passive role by constantly accommodating itself to the rate of inflation determined by other causes. And to anticipate critics, I would add that in a credit money economy, where money largely consists of instant claims on non-existent cash, it is inevitable that the money supply should be accommodating. It cannot be otherwise because the banking system could not survive without it.

Of course, it is true that the Bank of England has a monopoly on the issue of bank-notes; in theory, the Chancellor of the Exchequer could tell the Bank of England that this year so many notes and no more shall be printed, but that is true only in theory. In practice, the supply of bank-notes cannot be fixed in advance any more than the supply of other forms of credit money. This is because the Bank of England, as I am sure noble Lords to occupy the position of governors of that institution who are here today will confirm, also has another function; that of being lender in the last resort. The function of the Rank of England is to keep the banking system afloat, just as the main function of an admiral is to keep the fleet in being. Faced with a conflict, therefore, the Bank must always issue the notes that would prevent our major clearing banks from becoming insolvent.

If that were not so, why did Sir Geoffrey Howe, being such an ardent believer in monetarism, allow M3 to grow from the time he took office at a rate in excess of his own target? And why have a target rate of growth of the money supply at all? Why not have a zero target or even a negative one? Surely, from the Government's point of view, there is everything to be said for getting inflation over as quickly as possible so as to be able to concentrate on all those constructive, visionary and exciting policies about which the noble Earl was talking the other day.

So why all the hesitation? The unfortunate fact is that Ministers talk of British inflation as if it were an isolated phenomenon caused by our national policies, that it is a phenomenon caused by, or due to, excessive spending and not by the rise in costs due to increased world commodity prices, particularly the price of oil, and of the wage increases which are fed by the increase in costs and prices, which in turn boost these increases. In fact, Ministers do not admit that there is such a thing as cost inflation, except in the very special case when it is the result of deliberate action by the Government. Increases in the cost of living caused by a rise in VAT or in the price of public utilities or in the rates of interest, according to the noble Lord, Lord Cockfield, as he told us the other day, have a deflationary not an inflationary effect, despite the fact that they raise prices and hence wages, and thereby induce faster growth in the money supply.

The Government's proclaimed strategy is to cure inflation by reducing the PSBR and to do so primarily by cutting public expenditure and, secondarily, by raising indirect taxes and interest rates. These help to keep the exchange rate of the pound high and thereby contribute to a lessening of cost inflation. But they also cause a demand deflation, in real terms or in terms of wages, owing to lower exports and higher imports as well as the effects of the fiscal measures they have taken to reduce the PSBR, and hence they lead to a fall in output and employment. This in turn necessitates a further round in expenditure cuts, since with lower economic activity and a diminished tax base the PSBR is bound to become larger.

The Government's cure for higher unemployment and falling production is therefore more public expenditure cuts and more taxation to keep the PSBR from rising. One has the strange feeling that one has been through all this nightmarish sequence before. Indeed, speaking personally, this is where I came in as a young man. The situation reminds one of that awful summer of 1931 when the then Chancellor, Philip Snowden, made a desperate attempt to remain on the gold standard, and on receiving the notorious May Report, insisted on a set of savage deflationary measures as a cure for the ravages of deflation. Faced with a prospective Budget deficit of £170 million—the term PSBR had not yet been invented—the Chancellor of the Exchequer proposed a 10 per cent. all-round cut in all kinds of pay, from that of judges' and top civil servants', down to that of the naval ratings and the unemployed, coupled with an all-round increase in taxes of all kinds. The attempt wrecked the Labour Government and led to a naval mutiny in Invergordon, which caused a suspension of some of the cuts. The present Government have, very wisely, guarded against such dangers by substantially raising the pay of both the armed forces and the police at the very moment they came into power.

The Labour Government of Ramsay MacDonald broke up because his Ministers were not willing to accept the cuts. But when the party of noble Lords opposite was returned to power in October, with the largest parliamentary majority they had ever had, lo and behold! within a few months the nightmare of cuts was over. The sacred cow—the gold standard—having been sacrificed, the Tories' age-old dream of a general protective tariff (which they first advocated in 1904) extending to all manufactures was introduced, after an emergency Bill, late in 1931 and early 1932, which meant an ad valorem import duty of 33 1/3 per cent. on steel and chemicals, later, in 1935, raised to 50 per cent., and on other manufactures of between 20 and 30 per cent.

Neville Chamberlain became Chancellor and introduced the age of cheap money. He undertook the biggest conversion operation in history, reducing the interest on War Loan from 5 per cent. to 3 1/2 per cent.—which made it possible, for technical reasons that I do not want to explain here, for the long-term interest rates to come down generally; but it could not have been done without it—which is something which the present Government may do well to emulate as a progressive way, a reasonable way, of reducing Government expenditure, and which is so superior to their own miserable method of saving money through prescription charges, school meals, and school bus fares.

The Tory Government of those days were not monetarist; they were not sound money men. They were expansionists. The five years from 1932 to 1937 ushered in, under the umbrella, first, of the devaluation, and then of the high level of protection, the most rapid economic growth in British history, unequalled ever before or since, wholly based on domestic prosperity. Industrial production rose by nearly 50 per cent. in five years, and in 1937 it exceeded the previous peak of 1929 by one-third. Steel production, which fell from 9 million tons to 5 million tons during the depression years after 1929, had a phenomenal increase to 13½ million tons in 1937—an increase of 160 per cent., or a compound rate of increase of 20 per cent. a year maintained over a five-year period.

Perhaps noble Lords are ignorant of the fact that in 1937 Britain was the only country in the world, with the possible exception of Soviet Russia—one cannot be certain because they did not publish any figures—whose steel production exceeded the pre-depression peak; and it did so by no less than 35 per cent. Germany's steel output, despite Hitler's rearmament, had only just regained its 1929 level, while output of all other steel producers (including that of the United States) was well below the level of 1929.

If we had had the present team of Ministers in 1932, instead of dear old Stanley Baldwin and Neville Chamberlain, the steel industry, with a near 50 per cent. excess capacity in 1931, and large current losses, would have been castrated at the start, and we should never have been able to re-arm and face Hitler in 1939. Indeed, the shipbuilding industry was so emasculated, not on account of Government policy, but on account of the collective action of the shipbuilders, with the result that shipbuilding capacity at the outbreak of World War II was a million tons smaller than it was in 1930. Hence it was grossly inadequate to maintain our carrying capacity during the war, and if it had not been for the American Liberty ships and Lend/Lease, we should have been forced to our knees by the U-boats.

If anyone has any illusions about the competence of the present management of the British Steel Corporation, or indeed about the economic sanity of the present Secretary of State for Industry, he should read the article by Rowthorn and Ward in the latest issue of the Cambridge Journal of Economics, where they make a cost-benefit analysis with devastating implications on some of the recent decisions of BSC which followed the principles enunciated by the Secretary of State.

The present Government have a purely schizophrenic attitude to defence. On the one side, they proclaim that our defences are inadequate, that defence spending must increase, and that it must receive priority. On the other hand, they do everything to shrink and to reduce our industries which provide a true basis to our defence potential. It is an awful mistake to think that we can prepare for a war by stockpiling armaments without having the capacity to produce them. The last Israel—Arab war, I understand, used up armaments of all kinds in 14 days —tanks, guns and ammunition—at such a rate that it took the United States four years to replace the stocks which were nearly depleted in that war. So if it ever came to a war, do not believe, my Lords, that our present stock of armaments or our present armament expenditure will save us. We shall be entirely dependent on the capacity to produce while hostilities are going on—just as we were during the First War and the Second War.

The Government, I am quite sure, will not succeed in their principal objective of getting rid of inflation by the methods they now pursue. With a grossly overvalued pound and the net deflationary effects of their fiscal and monetary policies, national output is likely to fall from now on; and in our Cambridge calculations it will fall by as much as 5 per cent. a year. Unemployment may rise to 2 1/2 millions in a year or 18 months from now. The standard of living will fall. But the Government's principal objective—the reduction of the PSBR—will, I think, elude them. They will never be able to cut expenditure fast enough or raise taxes high enough to keep pace with the rise in the budgetary deficit due to the fall in employment and output. But that means that the borrowing requirement will rise, not fall, and according to their theory, money supply and inflation should get worse, not better.

Indeed, I am inclined to agree that inflation will certainly continue apace because" the rise in unemployment and the fall in real wages is bound to increase the militancy of the unions to a degree that is not likely to be offset by the abrasive attitude of the Government. Of course, when it comes to an all-out confrontation nobody can be certain of the outcome. It is possible that, unlike Mr. Heath's Government, this Government will succeed in bringing the working classes to their knees.

But everything else (except, perhaps, the strength of the pound) points to the conclusion that inflation is likely to get worse, and not better. The rise in recorded wage settlements is increasing month by month, and if allowance is made for the side provisions, in the form of comparability and cost of living increases, then the true rate of increase in earnings is running around 20 to 25 per cent. a year now. With falling output and falling productivity, this points to a prospective rise in costs and prices of at least that order or more. As the current account deteriorates because of falling exports and rising imports, some day net capital flows will be reversed—they will go out instead of coming in—in spite of high or even higher interest rates, and when that happens inflationary forces will receive a powerful new impetus.

My Lords, I earnestly believe that the present policies of Her Majesty's Government will lead to a progressive deterioration of our situation, as measured by the wellbeing of the average citizen as well as by the capacity of the nation to produce weapons for her own defence. The sooner this is recognised and the sooner the Government are brave enough and manly enough to do the necessary U-turns, the better for our future. My Lords, I beg to move for Papers.

3.32 p.m.


My Lords, I am sure that the whole House will be grateful to the noble Lord. Lord Kaldor, for having introduced this Motion. I do not for myself feel that there is need to dwell on the last part of the Motion, for we may all readily agree that if only we could solve our basic economic and industrial problems then the economy would grow, the standard of living and the level of employment would rise, and we should be in a better position to defend ourselves. As to the Government's policies, I suppose that a great many of us, anyway, would agree that inflation remains public enemy number one, and that the Government are right, therefore, to make a reduction in the rate of increase in inflation their primary objective. We on these Benches further accept that there is a need to reduce public expenditure, although, as we have made plain more than once already, we wish this could be done in a more discriminating and, in particular, a rather more gradual manner than is at present the case.

Our main criticism of the Government—and here I find myself in some sympathy with the noble Lord, Lord Kaldor—is indeed their seeming reliance, to the exclusion of all else, on controlling the money supply, and the indication that that policy is in practice proving ineffective. Nine months after they took office we seem to be moving rapidly into a deep recession, by no means, admittedly, all of the Government's making. Unemployment continues to rise and job vacancies to fall. Despite the revenue coming from North Sea oil, we look like having a large balance of payments deficit both in 1980 and in 1981. There is a mortgage rate of 15 per cent. and a minimum lending rate of 17 per cent., with no indication of any reduction. Together with an over-valued pound, high interest rates are making our goods increasingly uncompetitive abroad. The other evening I was having dinner with the chairman of a large company which has contributed greatly to our export trade—not, I should perhaps add, the company for which I used to work. He was deeply concerned about the effect that current levels of interest were having on the profitability of manufacturing industry in general and of exporting companies like his own in particular.

To continue the unhappy story, rises in prices and wages continue at levels greatly exceeding the increase, if any, in national productivity. A most damaging steel strike has been going on now for six weeks, and the Government still stand back. We are told that if people insist on increases in pay which a firm or industry cannot afford, market forces will operate, companies will go bankrupt and jobs will disappear. Of course, that is true so far as it goes. The trouble is that in real life the people who suffer are not those who, by then, have carried off the swag, but weak and innocent bystanders, such as pensioners and young people. In the complex, interdependent society in which we live, this Government, like any other, will in my view have to intervene in the end. Indeed, in the public sector they already do, as employer or paymaster. I believe that they will soon have to do more, because even if by some objective test of economic theory it were possible for the Government wholly to justify their present policies—and may I say that I have some sympathy with the ultimate objective that they have in view—in a democracy they will still have to persuade a sufficient number of people so to act that those policies actually prove effective.

In politics, my Lords, as in industry, the prime test of leadership is whether you can get people to follow, and I should like now, if I may, to suggest two or three ways in which the Government could, I think, intervene. The first is in the matter of pay determination. I use that term advisedly, rather than "incomes policy", because if I say "incomes policy" everybody gets very excited, some people cheer and other people jeer. Your Lordships seem to be remaining pretty calm, but, then, we are noted for our nobility and wisdom, and many other exceptionally fine attributes. But I continue to believe that there is an urgent need for the Government, employers and trade unions to establish agreed long-term procedures designed to influence the general level of increases in wages and salaries. I am not now advocating some norm to which everybody is expected rigidly to conform, with or without parliamentary endorsement; but I am suggesting that recent events, and particularly the steel strike, have greatly strengthened the case for what the CBI call an economic forum and what the West Germans call concerted action. I do not much care what it is called so long as, from it, the public at large can somehow gain a clearer understanding of what the country can afford by way of increases in pay; and the need is urgent, otherwise it will be too late, even for the wage round after the present one.

Last July, in a Starred Question, I asked Her Majesty's Government whether they aimed to confer with representatives of employers, trade unions and other interested parties under conditions which might enable a better public understanding to be gained of the effect on the national economy of pay increases which were not matched by increases in productivity. In replying for the Government, the noble Lord, Lord Cockfield, said that Ministers were giving careful consideration to all the complex issues involved in setting up such discussions, and that they were anxious to ensure that whatever measures were taken were effective and successful. Now, six months later, and in our present parlous economic and industrial situation, I have given notice to the noble Lord that when he comes to reply I should like to know the outcome of the Government's consideration of this matter.

I do not wish to take it further than that today. I am not even going so far as to assert that the right basis for determining relativities is productivity in a particular plant, especially bearing in mind Mr. Samuel Brittan's view that, in a free market, relativity changes so as to be based rather on supply and demand for the particular worker concerned. It is sufficient for my present purpose that for the country as a whole pay increases should not exceed improvements in productivity.

A second area in which I suggest that the Government should intervene is in the contentious field of legislation affecting trade unions, where, following recent events and judgments, I believe that it is essential that an opportunity should now he given to Parliament to make clear what legal immunities trade unions should enjoy when, in the course of a strike, they induce, through secondary action, breaches of contract. Since, if we are going to solve our problems, it seems to me that we should offer support where we can to the Government of the day, I should like to add that for my part I have greatly admired the level-headed way in which the Secretary of State has acted in introducing the Employment Bill in another place, in first consulting with all interested parties and, most recently, in resolutely refusing to rush through Parliament inadequately considered measures simply to bring the present steel strike within their scope.

My Lords, so that in this matter I do not offer any hostages to fortune, may I add that I am committing neither my party nor myself to subscribe to all the clauses of that Bill when, before long, it comes before this House. Indeed, I have already got my eye on one or two clauses in the Bill. Nor do I suggest that, of itself, that Bill will improve industrial relations in this country. That is why I hope very much that once the Bill is passed the Government will think very carefully before bringing in further legislation in this field; for it is difficult to see how, in the climate of controversy that would then persist and at a time when, I fear, economic recession will have deepened still further, management and employees would be able to co-operate in improving our industrial performance as we so desperately need to do.

That brings me to my last point. I believe that, above all, the Government need to improve their lines of communication with the rest of us. With every month that passes, it becomes more evident that our problems are very deep-seated and that they interact with each other. The measures needed to solve them become more painful and give rise to greater dissension; and, increasingly, I doubt whether the present Government, any more than the last, will manage to grapple with them singlehanded. They certainly will not do so if they do not carry more people with them than they appear now to be doing. I do not suggest that the Liberal Party on its own would do any better, but at least we are giving a lead in declaring that there is a need for elements in all political parties to come together to tackle our problems—and to judge from the response to the recent Dimbleby Lecture given by Mr. Roy Jenkins, from the opinion poll recently carried out for The Times newspaper and from what I hear from many industrialists and others who are not identified with any particular party, that is also the message that the British people are trying to get across to us. I hope very much that we shall hear it and that we shall act on it in time.