HL Deb 31 July 1980 vol 412 cc1048-63

3.35 p.m.

The MINISTER of STATE, TREASURY (Lord Cockfield)

My Lords, I beg to move that this Bill be now read a second time. In doing so, perhaps I might start by saying that the financial privilege of another place has the incidental advantage that your Lordships are not required to examine this Bill in detail. It is a long and complex Bill, although not as long as the Housing Bill, which has recently occupied so much of your Lordships' time, and not as complex as some Finance Bills in the past have been. Nevertheless, if any of your Lordships wish to raise specific points on the Bill I shall be happy to deal with them when I come to reply to the debate.

The traditional approach to the national finances was for the Government's expenditure plans to be published, usually in January, although the date was variable, and for the Budget to be presented in March or April. This meant that Parliament was asked to agree in principle to plans for expenditure before it was known how that expenditure would be met or what level of taxation would be involved. This divorce between publication of expenditure plans and of the taxation measures needed to meet them also gave rise to the suspicion, which may or may not have been well founded, that in the past expenditure had been approved without any very clear idea how that expenditure was to be met.

There has, therefore, been pressure over the years that the plans for expenditure and taxation should be presented together so that they could be judged together. This year, for the first time, the public expenditure White Paper was published on Budget Day. This happy coincidence, as my right honourable friend the Chancellor of the Exchequer described it, was due mainly to the time needed to review expenditure plans fully. Nevertheless, it was a development on the lines frequently advocated in the past and it was welcomed by the Select Committee on the Treasury in their Second Report for the present Session. I hope your Lordships will have found it of assistance, too.

Perhaps I might turn from these technical matters to wider issues of economic policy. We made it clear in our election manifesto that the ills of the British economy were many and deep seated, and nothing short of a complete change in direction could put the economy right and set Britain back again on its feet. Such a complete change in direction will take time to effect the cure. We have made this clear repeatedly ever since we took office. Nor can a fundamental change of this kind be made at all easily. In the debate in your Lordships' House on 13th February I described the road ahead as a hard and stony one. And so it has proved.

During the long years of relative decline in the United Kingdom's economic performance, attitudes of mind and patterns of behaviour have been built up and have become entrenched. Inflationary expectations have been created. The view has grown and has taken deep root that people are entitled to an ever increasing standard of living without earning it through increased output and higher productivity. There is the ever present fear, particularly among organised workers, that if they are reasonable in their pay demands and pay proper regard to what their company or industry can afford to pay, some other group of workers will steal a march on them. All these attitudes must be changed. In an ideal world they could be changed overnight, but of course we do not live in an ideal world and we know that it will take time for the attitudes to change. That is why we recognise that it will equally take time for our policies to succeed: but succeed they will.

There are of course those who are opposed to change because they feel that the Government's will will falter and they will be allowed to slip back into the illusory comfort of the bad old ways. But the Government's will will not falter. There is no viable alternative to the Government's policies. We propose pressing ahead with them to success. As my right honourable friend the Prime Minister said on Tuesday in another place, there will be no U turns.

At the centre of our policy lies the battle against inflation: this requires strict control of the money supply and this in turn means that we must set strict limits to the level of Government expenditure and reduce the public sector borrowing requirement. I have explained the connection between these matters in your Lordships' House on a number of occasions and it is unnecessary for me to do so again.

One of the most important innovations in this year's Budget is the publication in the Financial Statement of the medium term financial strategy. The importance of the publication of such a strategy is two fold. First it underlines the Government's determination to pursue their policies to a successful conclusion. Secondly, it defines clearly what the objective is and enables progress towards that objective to be monitored. For the current year the target range for the growth in the money supply was set in the Budget at 7 per cent. to 11 per cent. By 1983–84 under the terms of the medium term strategy this will be reduced to 4 per cent. to 8 per cent. While of course there are time-lags to be taken into account and there is no precise one-for-one relationship between changes in the money supply and changes in the rate of inflation, nevertheless the implication of these figures for the future downward path in inflation is clear.

In the six months immediately before the election, the money supply grew at an annual rate of 13 per cent. The figures for banking June which were published on 17th July indicated that for the six months to this June the money supply was growing at a rate of just over 10 per cent. per annum. This represents real progress.

Progress on the monetary front has been matched by the reduction in the minimum lending rate which was announced on 3rd July. We realise the burden that high interest rates impose on businesses of all sizes and it is our firm intention, as I have said in your Lordships' House on a number of occasions, to reduce the rate of interest still further as progress is made in controlling the monetary aggregates and reducing inflation. But I think industry must also recognise that it has responsibilities—and indeed opportunities—of its own in this field. The job of management is to make profits, and, to the extent that adequate profits are made, companies do not need to borrow. The salvation of British industry lies not in Government intervention but in industry improving its own performance. In particular there is a massive job to be done in curbing cost increases and particularly increases in labour costs.

For the first time in two years, there has been a significant fall—of nearly one percentage point—in the rate of inflation. This was for June. For July—the figures for which will be published next month there will be a further fall, and a sizeable one, as the increase in VAT made last year comes out of the comparison. This underlines the point we made at the time that the increase in VAT produced a once-and-for-all increase in the rate of inflation, and so it will prove to be.

We have, therefore, had one reduction. We expect another in the rate of inflation. Of course one swallow does not make a summer, and nor do two, for that matter. Nevertheless, we must build on the achievements which have been made so far. We have at long last the opportunity of breaking inflationary expectations, which is so important in this field.

This is an opportunity we must not cast aside. If we succeed, and we are determined so to do, we shall have set our feet firmly on the path of a progressive decline in the rate of inflation.

While therefore there is progress to report on both the inflation front and the monetary front, the level of pay settlements and their consequential effect on employment remain a matter of real anxiety. The increasing emphasis we are now placing on this question does not in any way represent a change in policy or a change in our views as to the causes of inflation or of the way to deal with it. On the contrary, ever since we came into office we have stressed the importance of moderation in pay settlements and the need for settlements to be related to the company's or the industry's capacity to pay. We have consistently pointed to the dangers confronting both employers and employees if excessive pay settlements are demanded and employers concede them. Thus as long ago as 19th June of last year, a few weeks after we took office, I said in your Lordships' House: The employer who accepts an excessive pay settlement damages his own profits and puts the viability of his business at risk. The employee who insists on an excessive settlement damages the company for which he works and puts his own job in jeopardy".—[Official Report, 19/6/79; Col. 845.] And so it has come to pass.

One takes no pleasure from one's own predictions in this field coming true. But it is important to recognise that, given the pattern of wage bargaining which has emerged, what has happened to output, to profits and to employment cannot be said to have been either unfore-seen or unexpected. It was, on the contrary, the inevitable consequence of unions pursuing particular wage bargaining objectives and of employers conceding the increases demanded.

There have of course been other factors at work, such as the world recession—itself exacerbated by the rise in the price of oil—which have contributed also to the fall in output and the rise in unemployment. But our position has been made a great deal worse than it otherwise would have been as a result of our loss in competitiveness resulting from our failure to restrain the rise in our labour costs. Other countries have not been so foolish.

There is clear evidence that, so far as employers are concerned, the gravity of the situation is now recognised. Not only have some settlements been negotiated at very much lower figures, but the leaders of British industry are now talking in terms of increases in single figures in the coming pay round. The decisions taken in relation to the pay of Members of Parliament and Ministers and of the people covered by the various bodies dealing with top salaries in the public sector have all indicated a like determination on the part of the Government that settlements on the scale of the past year should not and cannot be repeated. Equally, those responsible for wage bargaining on the union side need to recognise that until output begins to rise again and productivity increases, there can be no increase in wages in real terms; that any attempt to match the increase in the retail price index is impossible of achievement; that settlements must be related to capacity to pay, and that excessive settlements will result in further losses in output and increases in unemployment for their own members.

We are very fully conscious of the burden unemployment imposes not only on the economy as a whole but, even more importantly, on the individual in terms of financial hardship and of frustration, disappointment and stress. It is for this reason, and not for any assumed political advantage, that we stress the need for moderation in pay settlements. In times of high unemployment there will always he a place for special measures, such as the Youth Opportunities Programme, the Job Release Scheme and the Short-time Working Scheme to help individuals and particularly to put them in a position to take advantage of employment opportunities when they occur. But the main thrust of our policies must be directed to the longer-term, to rebuilding the British economy on a sound basis to enable an enduring expansion of output to take place and thus to provide employment opportunities for all of our people.

The first essential, as I have said, is to establish sound money which people can trust. Only in that way will longterm investment be possible, and only in that way can we devote our energies and resources to improving production instead of squandering them in dealing with the stresses and strains created by inflation. But while sound money provides the only secure foundation on which we can build, much more beside is needed. That is why our policies have been directed to providing both the environment and incentives which are essential if, once we are through the present transitional phase, industry can and will flourish and grow. Very substantial incentives were provided in our first Budget last year, when income tax at all levels was reduced. This year, despite the pressing financial difficulties we face, we have been able to go further, and our measures have been directed primarily to improving the conditions and climate under which business, and particularly smaller business, operates.

The new reliefs contained in the Finance Bill before your Lordships are directed primarily to small businesses, not least because this is from where much future growth will come. Thus, there is the new Venture Capital Scheme; the ending of certain restrictions affecting close companies; interest relief on borrowing to invest in close companies; the reduction in the rate of corporation tax on small companies; an increase in the VAT registration limits; and substantial improvements in retirement annuity relief. In addition, the 100 per cent. capital allowance will be given for the construction of small industrial buildings, and there are other improvements in industrial buildings allowances.

The Bill also contains provisions for the new enterprise zones, an imaginative experiment in injecting new life into what too often have been regarded as derelict areas. Seven enterprise zones have now been announced: in Northern Ireland, the inner area of Belfast; in Wales, in the Lower Swansea Valley; in Scotland, based on Clydebank; on Tyneside, parts of Newcastle and Gateshead; on Merseyside, Speke; in Greater Manchester, parts of the Salford docks area and the Trafford Park industrial estate; and in London's docklands, the Isle of Dogs. These enterprise zones have been greatly welcomed by the local authorities concerned. We think they have a real future and will point the way to where expansion can come in those very difficult areas.

But even in the present difficult year, our eyes have not been closed to wider considerations. The Bill also contains important provisions to help two particularly deserving sectors of our national life; namely, charities and the national heritage. I therefore commend the Bill to your Lordships, both because it contains important measures which are of value in their own right and because it is an integral part of the Government's strategy for putting the national economy back on a sound footing. My Lords, I beg to move.

Moved, That the Bill be read 2ª.—(Lord Cockfield.)

3.57 p.m.


My Lords, we are grateful for the manner in which the noble Lord, Lord Cockficld, invited us to accept the Bill and especially I welcomed his absolution if we did not discuss the Bill in detail. The clarity and earnestness of his restatement of policy excited my genuine admiration, but I shall not follow him in close detail because I have some thoughts of my own to offer for consideration. I shall try to be constructive, for while I was away from the workings of West-minister for four years or so, I confess that I came to think very strongly that too much time and effort were spent in Parliament in proving the other fellow wrong rather than trying to identify the truth. That is a criticism one could make more forcefully against the other House, but one notes with hope the development of the Select Committee idea there and one watches with especial interest, in the context of our financial policy, the current proceedings of the Treasury and Civil Service Committee of the Commons.

Let us face it; many good and responsible citizens of this country are beginning to question whether the old party processes of parliamentary democracy, now practised in a minority of the world's countries, are as well fitted as we thought as a machinery of government in the modern world. The noble Lord said our problems were many and deep-seated, and indeed they are, and in this highly sensitive and integrated world they are, I often think, too complicated for any narrow doctrinal solution.

The Prime Minister has said that there is no simple miracle cure for unemployment, and I absolutely agree with her. But the trouble is that this Government came to office believing that they did have a miracle cure for our economic ills, and judging from all reports, and from what the noble Lord has just told us, for all the sad experience of real people outside, they still convince themselves that that policy will succeed, provided that we are prepared to wait long enough and suffer sufficiently long.

Of course we have had the token concessions of the enterprise zones, and I am especially pleased about the fact that the Government accepted the strong recommendations of the NEB about INMOS. They have announced the aid to Dunlop, but unannounced were other decisions not to help in other cases, which will more than offset the benefit of these mini U-turns.

The Government insist, and insist again, that they do not believe in intervention.

The noble Lord himself has just repeated that. Yet they are in effect one of the most dramatically interventionist Governments of all time. The Government intervention with the MLR, the high exchange rates that follow largely from the high interest rates, cuts in public expenditure irrespective of the social and economic effects, are all forms of Government intervention. It is estimated that the increase in the MLR, the insisted increases in public utility prices, and the VAT increases alone caused a 6 per cent. to 8 per cent. increase in inflation; and that at a critical time in some of the wage negotiations.

Let me say at once that too often in our post-war efforts—and I have watched them now for many years—the efforts by Governments of all kinds to manage the economy have been ill-conceived. Too often it has been a question of an easy option. Too often it has been response to pressure groups of either organised workers or the organised employers. I accept that in more than one area of our daily life expectations were in excess of practical possibilities, as the noble Lord said, and we have looked to the Government or society to help when the problem really called for individual effort. I accept all that.

But to say that we have made mistakes in economic management, to say that there are lessons to be learned, is one thing. It is quite another to say now that as a society we give up the effort to manage our economy in a hopeful, positive and civilised way. Learning new techniques in social engineering may be difficult, but relying on the deflation of the 1930s and hoping that market forces will in some way rebuild our Britain is surely a doctrine of despair.

Market forces may well yield short-term profits in some areas, but that can mean—and the evidence before me suggests that it will mean—a shaky and a seedy society. Market forces mean that the Daily Herald gives way to the Sun newspaper and a "page 3" society. Market forces will seek to satisfy the lowest common denominator. The slick characters are the ones who prosper when the market forces have their full sway.

It has always seemed to me as a Christian that we should seek to strengthen what is good in society, as well as what is good in individual men. I was humbly impressed to read the other day that Pope John Paul had warned in Brazil: The persistence of injustice and its consequent menace to society exists when the distribution of goods is based only on the economic laws of growth and a bigger profit". The point that I make is that market forces will not give us the sound foundations which society needs, and the evidence for that goes back to periods before the present Government took over. No one would be silly enough to say that the present Government alone are responsible for trends that have already developed. But those trends were largely encouraged by those market forces which the Government now say will be the mainspring of our economy.

In a lecture given to the Royal Society of Arts last January—the noble Baroness, Lady Seear, will have special reason to recognise this—Mr. Christian Schumacher said that in the decade to 1978 rather more than half—more than half—of the economic growth in the United Kingdom came from the services sector; not, his detailed study showed, from healthy sport and leisure, but from money-lending of one kind or another, from insurances, from legal services concerned with crime and gambling, from car maintenance, from private security services to combat crime and vandalism. I suppose that one might add—although I do not think that Mr. Schumacher mentioned it—the enormous and extravagant expenditure in advertising to persuade people to buy what they do not essentially need or cannot afford, except on credit. According to Mr. Schumacher, of the public service expenditure, 25 per cent. of the increase since 1970 had gone simply to pay interest charges on money that was already borrowed.

Here again deliberate Government policy is aggravating the most decadent features of the past decade. It is not only the amount of borrowing, but also the cost of borrowing that is so damaging. The noble Lord, Lord Cockfield, will not mind if I repeat the fact that all the money that the Government borrow this year—all £9,000 million of it—will go to pay interest on money already borrowed. Mr. Schumacher summed up in his lecture by saying this: In short, most growth in the 1970s has been devoted to sustaining a deteriorating environment". My Lords, the 1980s are less than a year old, but the trend that Mr. Schumacher identified is accelerating. According to the publication which the Treasury quaintly call the Economic Progress Report, after allowing for special factors, they say: … output of the chemicals industry in March and April together was about 4½ per cent. below the 1979 average, while output of textiles, leather and clothing fell 11 per cent. Output of the engineering and allied industries, which tends to lag behind a cyclical movement, was 2 per cent lower". Those are the real wealth-producing elements in our economic life. Even more recent than the Treasury Report is the CBI survey, which says that 58 per cent. of companies expect to shed labour in the next few months, and 30 per cent. expect export orders to fall.

I know that it is becoming fashionable among certain economists to say that with North Sea oil we no longer need rely on other industries. We have a very long way to go before we can sit back and say that. I remember the late Dick Crossman saying to me that he had never been taught in a class larger than 12. We had great hopes then, fresh from winning the war, of giving every child the kind of opportunities that Dick Crossman had had. But now, with all the economic growth since 1945, we are talking not of reducing class sizes, but of declaring teachers redundant. So distorted are our priorities as I see them that we are proposing a fourth TV channel at the same time that we say that we cannot afford textbooks in the schools.

There was a time when Tory Ministers vied with Labour Ministers to claim a record number of houses built. We will remember Harold Macmillan and others, and figures of 300,000 and 400,000; they were bidding one against the other. Now we debate not how many houses we can build, but rather how we can sell them off.

I was amazed to see recently, in a footnote to a paper given by Sir Keith Joseph, that more houses were built in the second half of the 1930s than were built in the first half of the 1970s. That was bad enough. But this week I see that a Commons Select Committee report that the planned total of house building by 1985 will be 500,000 down on even the 1977 target.

What sort of society is this? When every teacher has a secure job with adequate equipment; when we no longer have to debate in this House the plight of the homeless; when we can afford to pay our nurses a proper salary; when every home in the land has its own bath, then, conceivably, the need for a new, positive policy to sustain and encourage wealth-producing industries will become less urgent. Meanwhile, the need is urgent in all conscience, and I should like to indicate what, in my view, that need requires. I would say (I hope in a nice sort of way) that it requires a different attitude from Her Majesty's Government. It means a recognition that they may not have a monopoly of the truth. It means giving up this obsession with monetary controls. It means accepting the fact that increasing the volume of goods—essential and saleable goods, certainly—is a more constructive way of fighting inflation than simply reducing the volume of money.

Some of us remember Montagu Norman's imperious precedent when he, too, saw salvation in deflation; and I was greatly intrigued to read a quotation given in an article reprinted in the Economic Journal in March 1971, by my noble friend Lord Kaldor. The quotation came from an internal Treasury minute in 1925 by Winston Churchill, who said of Sir Montagu Norman: The Governor shows himself perfectly happy in the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed". Sir Winston went on to say that the Governor may be right, but … if so it is one of the most sombre conclusions ever reached". Sir Winston's view was: I would rather see Finance less proud and Industry more content". As Lord Kaldor commented in that 1971 paper, we have had over 50 years' experience in economic theory since Sir Winston wrote that minute and I, for one, refuse to believe that we cannot now evolve a financial mechanism that encourages and does not cripple productive industry. Of course, I agree that we cannot print money, as was done in the Barber era, but it can be shown that a contracting economy involves printing money also. I see that in the calendar year of 1979 as compared with 1978, more money was in fact printed; and possibly the noble Lord will say what happens when we have declining revenue, on the one hand, and increasing expenditure on social security, on the other. What then happens to the PSBR? Moreover, my Lords, now that the corset control is ended and we are back with the Barber scheme of 1971 of Competition and Credit control, we might well remember the credit expansion and the printing of money which took place then —not to satisfy a booming industry but to service the property speculators. I would ask the noble Lord: What protection is there now against a similar speculative fever developing?

When, the other day, I raised the question of the damage which many claim is being done to industry by high interest rates and an artificially high exchange rate, the noble Lord doggedly read out the brief that all the trouble was due to the wretched foreigner and the equally wretched British worker. Of course we in Britain must do better. As one noble Lord opposite said, restrictive practices are bad, but operating at half-capacity puts up unit costs much more than most restrictive practices; and anyone who says that present exchange rates with present interest charges pose no threat to British exports, despite what has been achieved against that policy up to the present time, is, I suggest, carrying party loyalty beyond the call of duty.

In this matter of interest rates I am not asking for just a little U-turn with another 1 per cent. reduction. I believe we need something much more radical than that. I believe there are more sophisticated ways and means of controlling credit. But those foreign competitors to whom the noble Lord referred often have Government help with interest charges; and I understand that interest-free loans are available for their exporters. A colleague of mine in British Aerospace, with as good an export record as anyone in this country, drew up a scheme for an organisation similar to the ECGD, but with the responsibility and the means for ensuring adequate finance at reduced rates for appropriate export contracts.

A Government determined to tackle the present situation would carefully examine a scheme of that kind.

There is another area of our affairs in which, I suggest, the Government's philosophy of a free-for-all within their monetarist rule is probably mistaken; namely, that covered by wages, salaries and incomes. Here, surely, economics and equity alike call for a positive and an overt, not a covert, Government incomes policy. Most of us would agree—I certainly do—that total incomes cannot be allowed to outpace the total national product without leading to trouble. I would agree that the Government's deflationary squeeze is already having some effect on settlements. But it is not an effect which can be squared with any sense of fair play or of civilised priorities, or, indeed, of sound economics.

We noted in the House the other day the 14 per cent. BBC settlement compared with the ITV two-year agreement of 45 per cent. plus. The press report of 500 young people, some with degrees, queueing up for eight £32 a week jobs attracted much attention. Some may look at that as evidence that the monetarist free-for-all is working. But in the Daily Telegraph in which I read that report I also read, two columns away, that ITN had accepted a deal which gave cameramen £13,000 to £20,000 a year. Elsewhere, a newspaper was offering 24 per cent. in response to a 30 per cent. claim; while at The Times they were claiming 35.2 per cent. Conceivably, we may have a society in which the unemployed can afford to stay at home and read The Times and look at television, but I doubt whether it is going to be a very stable society; and. maybe, with the benefits of North Sea oil some people will be able to do rather better than others.

One is able to quote these disproportionately high figures because the claims are openly argued by responsible trade unions, but I suspect that behind that trend which Christian Schumacher spoke about, and in the same areas of which he spoke, there are less publicised increases which make a cynical mockery of the 14 per cent. for nurses or similar figures for engineers in hard-pressed engineering companies. Incredibly, this morning there is a press report that the Bank of England —which, as the noble Lord himself has said, and has repeated today, has argued so forcefully for pay restraint—has shown their faith in restraint by their agreement to a pay increase averaging 24 per cent. It is 24 per cent. average, so some conceivably get rather more. How does the noble Lord square that with his declaration of restraint? Is it not possible for us to try again for some fairer agreement on the incomes front?

I should like to say something, if I may, about the PSBR. The noble Lord repeated his belief that control of borrowing was necessary; but would he not agree that, although we understand what he said, it is difficult to identify the evidence and the supporters for his policy? I read very carefully what the Wilson Committee had to say. I failed to see support there. I gather that even Mr. Friedman disapproved, and we shall await with interest what the Select Committee have to say. May I suggest that we should test the PSBR figures not by their size but for their purpose. It should not be a matter of how much but for what, that should determine whether we agree with the borrowing requirement. Of course, borrowing to sustain inflated bureaucracies is wrong. Administrative inefficiencies like the new structure for the National Health Service or the top-heavy structure of local government—both, incidentally, the product of Conservative Governments —certainly ought to be tackled. Borrowing to support wasteful administration is one thing; but to lump in with that the expenditure of money intended for productive investment, and on which a proper return can be expected, is a different matter.

Nothing angered or frustrated so deeply the chairmen of essential and profitable publicly-owned enterprises than to have their proposed investment offensively denounced as a drain on national resources while investment in a probably much less essential private company was hailed as a triumph for the economy. I would ask again that the PSBR be scrutinised in future less for its size and more for its purpose.

I referred to publicly-owned industries and I hope that we might have one day in this House a full, unprejudiced and constructive debate on the constitution of these organisations, their relation to government and the role they play in our economy. This afternoon I would say only this. Some countries like the USA do not like public enterprise and do not set up publicly-owned industries; some countries like, say, France set them up and support them. Only in Britain do we set them up and forthwith seek to demoralise them with criticism, usually inaccurate, mostly unfair and always damaging to the national effort. Let us not undervalue the contribution of public enterprise, of public spirit and public service. Most of the great achievements of British history have come from the public spirit and patriotic pride—the spirit that motivated our noble friend Lord Hunt and his team when they mastered Everest. It has a far greater potential for good than fashionable market forces.

My Lords, I have tried to suggest that, given goodwill, we could together find a more hopeful means of employing our human and material resources; of encouraging our productive investment on a much larger scale than the enterprise zones and a new attempt at an agreed, permanent, not temporary, incomes policy. We shall, as practice requires, give this Finance Bill a Second Reading. Before we see another Finance Bill, is it too much to hope that we shall all pay heed to what Sir Winston Churchill said 55 years ago, and seek to ensure that our policies may then leave the moneylenders less proud and the real wealth producers more content?