ADDRESS IN REPLY TO HER MAJESTY'S MOST GRACIOUS SPEECH

HL Deb 27 November 1980 vol 415 cc205-314

Debate resumed on the Motion moved on Thursday last by Earl De La Warr—namely, That a humble Address be presented to Her Majesty as follows:

"Most Gracious Sovereign,

"We, Your Majesty's most dutiful and loyal subjects, the Lords Spiritual and Temporal in Parliament assembled, beg leave to thank Your Majesty for the most gracious Speech which Your Majesty has addressed to both Houses of Parliament."

3.30 p.m.

The Lord President of the Council (Lord Soames)

My Lords, after two full days' debate in this House it is now my pleasant duty to open the debate on economic affairs and, looking at the list of your Lordships who are intending to take part in this debate—and particularly looking forward to the maiden speeches by the right reverend Prelate the Bishop of Lincoln and the noble Lord, Lord Weinstock—I think we can all look forward to as interesting and stimulating a debate as we could have upon this subject.

I am sure that everyone in the House will be looking forward to the day when in discussing economic affairs we will be able to put a great deal more emphasis on spending the money which the nation has earned; when we can match our individual and social and political aspirations with the productivity and competitiveness needed to pay for them. But that day is not yet. For the moment we have to continue our fight against Britain's dangerous and damaging inflation. I am often told, it is often said, that inflation is too abstract a word to act as a call to arms, as it were, and certainly I deplore the tendency—and we on this side are sometimes guilty here—of arguing in public about the technicalities of monetary control and giving an air of arcane mystery to what is at bottom a matter of commonsense.

Let me put the issue as concretely as I can. In this country, we have been halving the value of our money every four years. That is not only putting off already overdue changes in the way we earn our living and our leisure as both developed and developing nations move towards a very different world which modern science allows us; it is also a direct threat to our present standard of living and our present social and political aspirations. It is a direct threat to our social and political stability and it is, along with the world recession, at the heart of the high and rising unemployment causing us all such grave anxiety and concern. So the Government's policies, surely, must have two overriding aims. Almost everything else is peripheral. The first aim is to continue to bring down domestically induced inflation—by which I mean that proportion of price rises caused by devaluation of the currency at home—and the second aim, and it is, of course, hardly separable from the first, is to encourage that fundamental change of individual and national attitudes and awareness which will enable British goods to hold their own in the competitive markets of the world.

We have never pretended that either aim could be accomplished without pain. Pain was likely to be felt in a number of ways: most notably in a rise in transitional unemployment as the tight money squeeze took effect and in a rise in the numbers of long-term unemployed as industry took the structural decisions which it should have taken years ago, or taken more gradually, but in the event preferred to postpone. We all know—there is no use hiding the fact—that there have been in this country restrictions on the use of labour which have kept our productivity down. There has been too much insistence on artificially high manning levels in a number of industries, or on preserving outdated job demarcations or in old-fashioned management techniques. The job losses hanging over Fleet Street are one example of the perils of postponing change and procrastinating. And who doubts today that it would have been wiser if the British Steel Corporation had started to run down in earlier years rather than waiting for what is inevitably a sudden rundown today?

So counter-inflation policies and the acceptance of industrial change were always liable to cause pain and damage—to borrow the words of the official Opposition amendment: to damage the social fabric—if only because the changes had been put off so long and now have to come so fast. Both the pain and the potential damage are made worse because we are having to pursue these overriding pains at a time of fierce world recession. There is no doubt about that. What is more, our failure over the years to grapple in a sustained and determined manner with the fundamental problems of the declining competitiveness of much of our industry has meant that we are bound to suffer more than those of our competitors who have remained more competitive; we are bound to suffer more when it comes to times of severe recession.

Then there is the exchange rate problem. In the difficult period of the early '70s, the exchange rate fell to compensate both for high inflation and more-than-index-linked wage increases. The exchange rate then reflected our declining competitivity. But in recent years since North Sea oil has come on stream our exchange rate has ceased to reflect the basic comparative weakness of our economy. On the contrary, the weighted average of sterling over the last four years has increased from 59 to 77 today, thus adding appreciable difficulties to many of our hard-pressed industries. This is the penalty of being an oil-rich country with a basically uncompetitive industrial base. May I give noble Lords a quote: We face the double plague of combined unemployment and inflation which afficts the rest of the Western world, but we are more vulnerable than many other countries, thanks to the decline in our manufacturing industry over the years, our pitiful failure to invest and the chronic weakness in our balance of payments". So said the present and new Leader of the Opposition as a Member of the previous Government in March 1976. One could say almost the same thing today. But there are important differences. In the first place, inflation is falling fast now in Britain, and in the second place North Sea oil has relieved our immediate balance-of-payments difficulties. At the moment then we have to get through a recession at home and abroad without inflating and without trying to spend our way out of it with money we print but do not earn.

Yesterday we had a debate on foreign affairs. Much of our economic wellbeing depends on our ability to adapt to the world outside. We sometimes talk as if unemployment or high prices occurred in a kind of policy vacuum created by Westminster and Whitehall. Of course they do not! About one-third of our gross national product is derived from the export of goods and services to the rest of the world. Activity in the United Kingdom is therefore crucially affected by activity elsewhere, and especially in the main industrial countries which account for so large a proportion of world trade. Output has been declining or, at best, stationary, in all the major economies. None has escaped the further deflationary effect of the second OPEC or energy crisis wherein prices have risen by about 130 per cent. over the past two years.

Few countries have resisted inflating—by which I mean that they reacted to the oil price rises by stretching the cloth of their currencies to fit the coat their electorates wanted to wear—and not the other way round. Thus we in the Western democracies have been exporting and importing and compounding our currency inflations since the commodity price explosion of well over 10 years ago. The result? Our appalling levels of unemployment in the West: 7 million out of work in the European Community (that is 6½ per cent.) and 7 per cent. in the United States of America. No wonder our standards of living are vulnerable to a country like Japan which has suffered the same setbacks and difficulties but which adapted to them with speed and dexterity. No wonder those countries that have adapted most successfully have today the lower rates of unemployment.

I mention this principally to counter the argument that the severity of the present world recession is alone responsible for our ills and lets us off the hook of the painful counter-inflation money squeeze or off the painful process of adapting to industrial change. Of course it has its effect on the pace that we can go. The argument that the recession allows us to procrastinate and postpone may be seductive, but it is frighteningly dangerous. Unless the present tension in the Middle East escalates out of recognition—and we must all do everything we can to ensure that it does not—the recession will come to an end. It has to end as the stocks of goods run down and demand—however fragile a flower—starts to push its way up above the earth again. The firms who will be successful then, and on whose success our prosperity will depend, are those who will have won through by taking the realistic steps: cutting the costs, facing up to over-manning, providing the efficiency in systems and in management.

We have had many reports, even from the hard-hit industries like clothing and engineering, of individual firms who, through the efforts they have made, expect to emerge from the recession leaner and fitter, to the lasting benefit of themselves, their employees and the country. Then there are the newer industries with growth potential who ask only of the Government that we bring down inflation and create a more stable economic climate in which they can grow.

Now, all these sectors are employing people at present and, even more important, will, if we continue to adapt and keep competitive, generate sufficient wealth to create much more employment in, for instance, the service sector. They too can help to fuel welfare services and that surplus of leisure without which, as I said in this same debate last year, civilisation withers on the vine. But this will not happen if we in the Government listen to the siren voices, chiefly but by no means exclusively on the Opposition Benches, which ask us to change course now; which ask us to insulate industry now by massive inflationary spending from the adaptations it is having to make and knows it has to make.

It would also be the sheerest folly to change policies on inflation at the very point when the rate is coming down—and hopefully with a certain momentum behind it. The siren voices urge a little more inflation; a little more procrastination; a little more comfort; a little more postponement. "The medicine is killing the patient", they plead. It is not just that we have a disease; the truth is that we have been on a spending binge. At the heart of our domestic economic difficulties is the simple fact that in the past 10 years with output, excluding oil, rising on average by less than 1 per cent. a year, we have, as a nation, increased our wages by 320 per cent. Over the same period, prices have risen by about 260 per cent.

So even if other things were equal or neutral—which they are not—we have still over the decade increased our wages not only out of all proportion to what has been earned by output, but by a full quarter more than the extra that we are paying in prices. But, as we know, events overseas ensure that other things are not equal when it comes to prices. Something has had to give. What has given has been the competitive position of much of British industry and the internal purchasing power of our currency. Until North Sea oil came on stream, it was the external purchasing power as well.

What has given is investment in manufacturing industry and the full employment policies which were common to both Conservative and Labour Administrations since the war but which under neither party, as the record of the previous Government also shows, has the country been any longer able to sustain when faced with a world recession. In that excellent speech which opened our debates on the Queen's Speech a week ago, my noble friend Lord De La Warr said (at col. 6 of Hansard on 20th November): It does not take an economist to state the fundamentals, does it? When the technical arguments of professional economists are put aside, with great respect, and although they are relevant, they are relevant mainly at the margin I submit, we are left with fundamentals: With common sense. Monetarism is at bottom only solvency: Reality. It is not realistic to engage in sophisticated arguments to demonstrate that we can always go on borrowing more and more money as a nation without paying for it in future inflation, future loss of output and future unemployment.

Do we want the next generation of school-leavers to undergo the painful experiences of this one? It is not realistic to suppose that unions engaged in their proper task of representing their members' interests can expect to receive automatic compensation in the annual wage round for price changes due either to external forces or to the wage cost factors which unions have themselves forced up. One of the fundamental changes in attitude we need is to move further away from the concept of all wages having to be index-linked and nearer to the concept of them being output-linked. It is not realistic to tailor spending to social needs rather than to the revenue available to fulfil those needs, and there has to be a limit to the proportion of the gross national product devoted to Government expenditure.

It is not realistic for industry to ignore the changed costs of energy or to hope that the Government can do very much to ease its adaptation to dear energy. The only way we could do so would be to add what would be in effect a covert subsidy to the gigantic overt subsidies which we are already making. As the recession eases and inflation falls, we must see that these are reduced, not increased. The coal industry; the steel industry; our domestic motor car, shipbuilding and aerospace industries, are now overwhelmingly in public ownership. Their deficits are absorbing nearly a half of our revenues from the North Sea.

Is it realistic to ask us to spend more or even to continue on that scale? Our precious oil revenues, which should be husbanded for investment for the future, are being squandered on the voracious demands of nationalised industries. Would it not, if we were to do so—

Lord Beswick

My Lords, would the noble Lord excuse me? When he talks about "voracious demands", and when he puts aerospace in that list of industries putting forward these voracious demands, what has the British Aerospace asked for? Would the noble Lord tell the House what they have asked for and what dividends and interest they have paid on that money?

Lord Soames

My Lords, what I was trying to say—and I regret if I did not explain myself well—was that the total bill this year for subsidies, for the external financing limits, of nationalised industries as a whole, is over £2 billion. This is not to say, of course, that there are not some who, either through efficiency or by having a monopoly and control over their prices, are not in fact making profits. Of course there are. I am talking, generally speaking, of the whole spectrum of nationalised industries.

Lord Beswick

One of the troubles today—

Several noble Lords

Order!

Lord Soames

No, my Lords; I believe that the noble Lord is going to speak and I think that answers the point that he made.

So we are left, my Lords, with what by some has been called "our dangerous experiment". How extraordinary, and at the same time how symptomatic it is, that the hard work of trying to tailor public expenditure to revenue—something which we all understand in our private lives—should be termed "a dangerous experiment" when applied to our nation's affairs. How can we look for a satisfactorily downward trend in interest rates if Government spending continues to rise disproportionately and we are in continuous competition with industry for credit?

I have talked a good deal about realism, and of course we have to be realistic ourselves— This above all, to our own selves be true". The present recession is very deep both at home and abroad. Recession adds to public spending at the very time when it is essential to reduce it both to beat inflation and to release resources to industry. There is the burden of redundancy payments; there is the increase in unemployment and social security benefits and the cost of increased industrial support. There is the cost of special programmes for young people who are, by any standards, collectively innocent of the bad habits, whether governmental, managerial or trade unionist, which have led to the difficulties we are in. There is loss of demand and loss of revenue. There is the vast burden of financing the nationalised industries, of which I have spoken; and where else can that money come from other than the private sector? Our strategy for reducing public spending has had to react to these things; but it is these very things that make it all the more imperative not to abandon the strategy.

Accordingly, some of the burden of public sector spending cuts will have to be shouldered by public sector pay. At a time when we must cut public spending, it would be quite wrong to expand it by subsidising high increases in public sector pay. Last year saw a considerable rise in public service pay. This was fair because we honoured the staged arrangements, the "post-dated cheques" which our predecessors bequeathed to us. At present, industry in both public and private sectors is beginning to settle at levels of wage increases below the overall level of price inflation; and this is a very substantial advance.

It is only right, and will be seen so by the country, that Government employees, whether at central or local level, should do the same. It is absurd to see a general incomes policy struggling for birth in this fact. Even if such a thing were desirable or workable, this is not it. There will be a spread of settlements in all sectors. As the experience of successive Governments has shown, the imposition of a precise figure for income, whether imposed by statute or by arm-twisting, does not last long and leads to inflationary catching-up awards. Refusing to go down this road, however, cannot exempt the Government from making an assumption of acceptable average limits to pay in the areas it funds directly and for which it has a direct responsibility. This is only a parallel, after all, in the public services with the financial framework within which the private sector has to operate when deciding what wage increases to give.

This financial framework is a tough one, and it will remain so. Strictness will have to apply not just while we are in the recession but as we begin to move out of it as well. On no account must we revert to our old bad habits once expansion comes—and we do see expansion, if not next year, then in 1982. Trade having weathered recession with great difficulty but remarkably well, we would see a strong trade performance as the world recovery develops. We would see growth in investment as company profits are restored, a rise in consumer expenditure as inflation falls and a rebuilding of stock levels to reflect all these things. But all could be lost again if we abandon earnings discipline or choose the chimera in this economy that everyone can, or should, be paid without regard to what is earned.

If pay is matched to successful productivity, then of course earnings will increase. If the nation becomes richer overall, then all will benefit and public servants should rightly have an honoured place at the feast—but if not, my Lords, not. Nor shall we be deflected from this essential realism by electoral considerations. As the Prime Minister said at the Guildhall: The worst betrayal the British people could suffer at the hands of this Government would be to seek a little more prosperity now by sacrificing all hope of future stability and prosperity. That is not our way". A last word about employment. If we could solve unemployment in any quick or painless way, of course we would do so. Unemployment at these levels is tragic in human terms, dangerous in political terms and wasteful and expensive in economic terms. It is horrible from whichever angle you view it, and I hope that no one is going to imply that any party has a monopoly of caring deeply about unemployment. The fact that it is already over 2 million and still rising causes us on these Benches every bit as much agony as I am sure it did to noble Lords opposite when, when they were in power, it reached 1½ million, with the trend still upwards.

The measures announced by the Secretary of State for Employment last Friday show the Government's concern not only to alleviate some of the worst effects of unemployment but, through the encouragement of training and work experience, to help the unemployed, and especially the young, to adjust to new demands. If we cannot bring down unemployment as quickly as we would like, then let us try to ensure that we are best placed to take advantage of the upturn when it comes—and it will come, as inflation is beaten down and the world pulls itself out of recession.

As noble Lords know well, it is for many reasons dishonest to make emotive comparisons with the 1930s. It is also dishonest to pretend that there is any lasting cure for unemployment other than the hard grind of bringing down inflation, getting the budget into better balance and adapting to industrial change. Our level of unemployment in this country reflects our long-standing poor industrial performance as well as world recession and the tight counter-inflationary squeeze. Thirty years ago the United Kingdom's share of world trade was one-quarter of the total; now it is less than 10 per cent. Thirty years ago our productivity was 40 per cent. higher than Italy's and 15 per cent. higher than in France or Germany. Today our productivity is lower than all the six original European Community countries.

This damage has been done, and done under successive Governments; and I would rather get on with the job of undoing it than trying to apportion blame. But even sticking to the present, I am bound to say that nothing has come from the Opposition so far—perhaps we shall hear it during this debate—and we have not heard of any so-called "alternative strategy" which suggests anything but short-term relief at the expense of long-term improvement. Reflation, import controls, a 35-hour week without loss of pay, increased subsidies, increased benefits, increased services, increased public ownership, increased public expenditure—these would not only run counter to the national interest now but they have done so over the years, and they did so when the party opposite was in Government; and I suspect that in their hearts they know it.

We are fortified in our own resolve by the knowledge that the previous Government, during the two years that they were under the IMF, paved the way out of the recession towards recovery. Unfortunately, they relaxed the fight against inflation, just as the policies which they pursued under the guidance of the IMF were beginning to bear fruit. They reflated the economy in 1978, just as I gather they are asking us to reflate it now. That cost the country a great deal, it did not win them the election and we are still, I submit, paying for that relaxation of effort. Do they really want us to repeat all that again?

It will be interesting to hear what the Opposition mean in the amendment by, reverse the financial and economic policies". Of course, there are areas where there is room for argument—some profound argument and some arguments of degree and emphasis. But reverse the policies? Do they want us to weaken in the fight against inflation? Do they want to see wage increases soaring again, as in their last years of office? Do they think that the country can spend its way out of its troubles? Would they want to see more public subsidies to ailing industries—and, if so, to which—with money that can come from an already hard-pressed private sector? Do they think that we are wrong to seek to reverse the trend of public expenditure growing as a proportion of our gross domestic product?

Did they learn nothing from 1974 to 1979? Of course they did. What they are doing—and it saddens us to see it—is to play on the very real fears and natural emotions of our people who are going through, and have to go through, a hard time in order to right the wrongs of the past, so that when the recession is over we may forge ahead, rather than start off yet again on the dreary downward spiral of losing out to our competitors.

For a brief time in my life I was ambassador in Paris. Some time before that, less than 30 years ago, the French were in a worse economic situation than we have ever been. They pulled themselves together and they pulled themselves out of it. So did the Germans. Now both of these nations are one and a half and two times better off than we are. And I am not just thinking in material terms: I mean also in terms of social policies, and in terms of the caring and tolerant aspirations that most of us share. There is nothing mysterious about the way. Everything depended on the will. No Government can force Britain into the paths of increased prosperity, but we can at least display our determination and our own conviction that the way is there to be taken. I hope that, if it comes to a vote tonight, your Lordships will agree we must follow this through and see that the prize—the prize of success and solvency—does not elude us yet again.

4.3 p.m.

Baroness Birk rose to move as an amendment to the Motion to add at the end of the Address ("but regrets that it contains no proposals to reverse the financial and economic policies which have resulted in increasing unemployment and grave damage to British Industry and to the country's social fabric."

The noble Baroness said: My Lords, the noble Lord the Leader of the House put the Government's case in a very much more felicitous and, in some ways, more persuasive way than many of his colleagues have done, certainly in another place. Nevertheless, the presentation, the wrapping, does not make very much difference to the content. Before I come to the last election, I must say that I do not start from a point where I believe that everything which my Government, or previous Labour Governments, have done has been absolutely right and perfect—of course not. All Governments make mistakes and there are all the other factors to which the noble Lord referred, and to which I shall refer in a moment, which also have a bearing on what we are doing in this country.

Nevertheless, to come for a moment to the general election, the Prime Minister assured the country that there would be no reduction in the social services, since the savings which were very much wanted, and which she stressed very hard, would be achieved by cutting out waste. I do not think that the proposition of cutting out waste can be denied by any of us. There was waste to be cut out and it should be cut out. But what we are now seeing—and I shall develop this later—is a very strong inroad into the social services.

The noble Lord said—I am not quoting his exact words—that what he found very distasteful, and what he disliked very much, was passions being worked up to persuade people to react in a certain way about the policies of the Government. In a way, I only wish that that were true but, unfortunately, it is not. You do not have to work up any passions to explain to an unemployed person what unemployment means. You do not have to do that if somebody's business is going bankrupt. It is what is happening now that so many of us are very concerned about—and, I would add, members of the noble Lord's own party.

During the same general election, Mrs. Thatcher, who is now the Prime Minister, also said that taxation would be cut to provide greater incentives, small businesses would be enthusiastically encouraged and industry would be given greater confidence. But what, in fact, did we get? This is really what our amendment is all about. We got discrimination against the poorest in our community, an increase in VAT which immediately put up the cost of living, a vast increase in idle resources, especially labour, and a sharp decline in international competitiveness through allowing the pound to rise until it is completely out of control.

This year's fall in output is 3 per cent., instead of the 2½ per cent. which was projected, and the expected fall for next year is 1½ per cent., although the CBI say that they expect it to be 2½ per cent. There has been a fall in manufactured output of l6½ per cent. since it peaked last year. Investment is falling fast and, since the abolition of exchange controls by this Government, financial institutions have bought more shares in foreign firms, while, as we know, imports have risen. Unemployment is not just high; it is increasing devastatingly. I think that the noble Lord and I are in agreement about that.

The noble Lord referred to the question of world recession and, of course, that has had a part to play. But there are certain other points that must be considered. Many of the policies carried out in other countries are similar to those carried out by this Government. But although other countries in the rest of the world are depressed, we are in a rather unique position in that we have high interest rates, a very strong currency, very high unemployment and very high energy costs. It is difficult to find anywhere else that has all those ingredients together, and that adds to our problems.

I have accepted that when the Labour Government were in power we did not like the idea of unemployment going up to 1½ million. Nevertheless, it was decreasing when the Government lost the election, and inflation was then at 9.8 per cent., whereas now, although it has gone down somewhat, inflation is still at around 15.4 per cent.

But one of the most important factors that we are concerned about—and I think that the noble Lord realises this—is the high level of unemployment. It is now standing at 2,162,874, which takes in men, women, boys and girls. So that figure includes adults as well as school-leavers. But even this is not, in itself, the complete story, because with the population of working age rising by 200,000 a year, and employment falling in the last year by 400,000, there should be an extra jobs shortfall of 600,000. But the official unemployment figures have increased by only 300,000, which is half that figure.

It seems that there was a certain amount of truth put forward in the article in The Times yesterday which asked whether we had got past the 3 million. As job pressures have worsened, men between the ages of 60 and 64 who have looked for work in the past have dropped out, because there is now very little chance of their getting work. Over the last two decades there was a rapid increase in the number of women working, but now many women are withdrawing their labour and not registering because they know that there is not much hope of getting a job, especially part-time work which is so very important for women with families.

The fact that women have come out of the labour market has had a severe effect on family budgets. Research in 1978 for the Royal Commission on the Distribution of Income and Wealth showed that the number of families living in poverty would be trebled if the wife were not working. If we add together those figures—the 400,000 unregistered, the over 2 million registered unemployed, those who have taken early retirement, the discouraged women, and the quarter of a million temporarily unemployed because they are sick or out of work for some reason—we reach a very much higher and a very unfortunate total.

The measure which the Government are to introduce to allocate £250 million for the training of school-leavers is to be welcomed. However, the problem is that it does not go far enough. In the context of the problem it is a small amount. What is very important is that more money should be allocated for adult unemployment. The number of adults who have been unemployed for a year or more is growing alarmingly all the time. Although I was interested to see in the debate yesterday in another place that the Secretary of State for Employment spoke, in a way with which one could only agree, about the need for technological training and skills, nevertheless very little has been done. A certain amount has been done by the noble Earl's Ministry, but not enough has been done to deal with this very important subject. Incidentally, the long-term remedies are a matter which is being discussed by a Select Committee of this House.

The nation is divided because of these levels of unemployment. The extent to which the knife goes in does not seem to be appreciated by noble Lords opposite and by their colleagues; nor do they appreciate the internal chaos which it is causing. Unemployment is now creeping southwards, but it is nothing like the unemployment in the North of England, Scotland, Wales and Northern Ireland, where it is up to 15.9 per cent. Overall, the figure is about 10 per cent. The figure is lower in the South but it becomes higher and higher as you go further North. I am sure that noble Lords who journey North must have noticed tremendous differences between North and South. They will have seen the boarded-up shops and the closed factories. They will have noticed an enormous difference in the geography and the landscape of the North compared with the South. There has been closure of steel factories and steel works. There is an aura of dilapidation and despondency. I am not going to draw economic comparisons with the 1930s, but there is this look about and attitude in many places where whole communities appear to have died. We find this impossible to accept, and certainly it is something we cannot support.

At a time when unemployment is rising in this way—I accept the noble Lord's words that he, too, finds it extremely painful—the position has only been made worse by Monday's mini-budget or package. I am not going to go into the most recent hassle over employers' national insurance. That has had a good airing in the Commons. The Government have become very accident prone over their announcements, or lack of announcements in Parliament, so we are all very well aware of what happened there. However, £3 billion are involved. There is to be national insurance tax amounting to £1 billion. If we look at the announcement about national insurance tax upon employees, this is extraordinarily unfair. It is a form of disguised income tax. In fact it is worse than that; it hits people who are not in the tax bracket. The Chancellor of the Exchequer said that he was inviting those in work to help those out of work. All I can say is that unfortunately it is an invitation to which you cannot reply that you have a prior engagement.

Then £1 billion is to be taken out of public expenditure. We are not dealing with cutting out the flab or cutting down the number of bureaucrats. We are getting right into the area of cuts in social services—cuts right across the board. We cannot pretend that this is not so. And where is so much of this money now going? We are in this terrible, vicious circle. In 1979–80 expenditure on unemployment benefits was £653 million. The projected estimate for 1980–81 is £992 million. So we are spending these enormous sums of money to keep people out of work. It is a crazy system.

Then there is the £1 billion oil tax. I can see that it has some advantages. The problem, though, is that it increases costs. A further point is that because of the tremendous volume of our unemployment figures the oil revenues are having to go into unemployment benefit instead of into regenerating industry. We should not allow these just to be blown away.

Furthermore, there is no guarantee that unemployment will come down. The noble Lord seems to think that this will follow as night follows day. High unemployment may for the time being mitigate high pay demands but it is also helping severely to weaken trade union power and discipline. Thereby it creates the worst possible conditions for embracing change and encouraging management and workers to work together constructively.

In addition, we are creating a generation of school-leavers who have not learned the work ethic and who are cynical about it. It is true that inflation is down, but that has got nothing to do with the money supply which is out of control. Demand goes down because of high unemployment and depressed industries. So, therefore, does the RPI and inflation. There is nothing magical about that. As soon as you start to reflate, pay and prices will soar because there is no agreement on pay policy. This is the crux of the Government's industrial policies, or lack of them. Fear and hostility do not form the basis for good industrial relations; but this, unfortunately, is the basis upon which the Government are working at the moment. It is one of the things which we want to see reversed. We want the Government to have more rapport with the trade unions and to build more bridges with them so that there can be talks about pay agreements and distribution.

Turning to the damage to industry, I am sure that the noble Lord has seen the letters which were published last week in The Times by Sir Alec Cairncross and other eminent economists, and the letter published on Friday last from Professor Sen. They put very much better than I can exactly how they believe that the policy is not working and that there are alternatives to it. Because of the list of speakers, there is not time to take this in sections and to argue about it.

People, not only the economists but industrialists and people right across the board, are depressed and worried about the Government's policy. And I am not speaking about ward meetings of the Labour Party but of people who are involved in all these things themselves and who are extremely worried and do not know where to turn because of what is happening. What is happening is that there is a high premium level on currency which takes the profit out of exporting and forces reductions in home market margins to meet import competition and this has a double effect on profits. Secondly, there is the lowest profitability ever recorded in British industry so there is no scope or possibility for renewal of the investment. Such money as there is unfortunately goes largely into redundancies, so we are back in the vicious circle. Then the already inadequate level of research and development at work for the future has to be cut as most businesses are now in what they call their "survival mode", and the high lending rate is far in excess of any achievable margin which enables them to invest, because so much of the borrowing is to pay interest on money that has already been borrowed.

As I said before, the North Sea revenue is now going to pay for social security and unemployment. Bankruptcies are running at over 475 a month and liquidations at 606 a month. It makes me feel, especially as the Prime Minister stressed the small businesses, that probably they would far rather be under the leadership of my noble friend Lord Lever of Manchester than in the position they are in at the present time.

I would take issue with the noble Lord the Leader of the House, who opened this debate, when he said that businesses and industries will be slimmed down and then, when the upturn comes, they will be ready to take advantage of it. This is not the view of many competent people in business, many of whom voted for the noble Lord's party in the election. Their view is that many businesses will be so damaged and destroyed that there will be nothing to build on at all. One does not come along on one day and find a marvellously revitalised and happy workforce and spanking new buildings and businesses; one has to work for it and one cannot let things decay to the extent that there is nothing on which to build. Where some close, they will never open again. A mill that closes in Lancashire will not open again; the imports will increase and the textile industry will still further decline.

The speech by Sir Terence Beckett at the CBI Conference was made because of the suffering he had been told about by people to whom he had talked; people who were actually in business, in industry, in commerce; but he then had to eat his words because he talked to those who are not suffering so much and who would probably leave the CBI if he did not retract what he had said.

Incidentally, on the question of money and taxation, the £1,560 million per annum which was remitted to taxpayers with incomes of over £10,000 a year gross in the Budget after the Government came into power could have been used more productively, possibly by the NEB, than to be given back to those taxpayers. I know it was a party promise, but now we are in the position where the Chancellor is having to make rather faint noises about the possibility of tax being increased in the next Budget.

It is impossible to talk about our industry or our social fabric without mentioning the rather special position of housing and cutting off housing, in both the public sector and the private sector. This was summed up very neatly and well by the President of the Royal Institute of British Architects writing in The Times yesterday, who said: This is not a matter of an industry wishing to continue in a style to which it has been accustomed. There is good evidence to show that programmes of housing and infrastructure have been cut far below proven social and economic needs and that the capacity of the industry to handle a more realistic level of work is now being permanently damaged … Unemployment in the industry has leapt by 50 per cent. in one year and construction workers now account for one-fifth of all the male unemployed". This is a terrible situation in regard to unemployment in the housing industry and it goes straight into the erosion of our social fabric, because it is adding the possibility of homelessness to everything else that people are having to bear at this time.

When people speak of the unemployed the words that very often trip off the tongue are "human dignity" and the effect on the dignity of the human being. But before we even get to the question of the dignity of the human being, which is very important, unemployment hits much harder and much more directly at the person. From researches done by the department of economics in Cambridge (which applied the same survey methods as were used in the United States of America) on the hidden effects of unemployment in Britain it was found that there was an increased incidence of stress-related deaths from heart diseases and suicides and there were more hospital admissions. In the United States, where they do not have the same form of health service as we have, this falls always and absolutely on the individual; here it falls on the individual and also on our National Health Service and the social services.

So the effect of this high and long-term unemployment is almost endless, both in economic and in social terms, whichever way one looks at it. There is more crime. I sit on a bench in a court in outer London and the probation officers tell me that with the upswing in unemployment among the young—not just the school-leavers, but the high unemployment among those who are under 25 years old—there has been more vandalism and more delinquency, and this trend is very noticeable as the unemployment figures rise.

We then come to the question of pensions and the old-age pensions. Also the short-term benefits have been cut by 5 per cent. By law pensions must rise with the rate of inflation. With regard to the 1 per cent., it can probably be argued that because 1 per cent. more was paid in one year it can be taken off the next year, but the Government will have to bring in legislation to do that, or do it by regulation. This seems to me to be entirely immoral, and it was also considered quite wrong by the Prime Minister when, in a television interview some time ago, she pledged that nothing like this would happen and that pensions would not be eroded in this way.

Noble Lords

They are not being eroded.

Baroness Birk

Well, my Lords, that is the way it was understood by most people, and I understand by some members of the Cabinet as well.

Lord Soames

My Lords, may I rise for just one second. I have spoken for a long time so I will not detain your Lordships, but I think it is important to get this right. The assurance which the Prime Minister gave, to which the noble Baroness has referred, was about pensions not being eroded but continuing to be index-linked. What this figure of 1 per cent. is about is this. This year there was misjudgment about the degree of inflation and therefore 1 per cent. more than the index linking is being paid, and the figure of 1 per cent. lower is to contain the figure within the index linking. That was the assurance given.

Baroness Birk

My Lords, I understood that perfectly well. But I think it is rather difficult to put that sort of argument over to the pensioner who is at the receiving end of this. It is a correct intellectual and economic argument, but I think socially it is very wrong and very bad and extremely unfortunate. Finally, the other day there was a leader, I think in The Times, about Britain being a nice place to live in. Well, it is a very nice place to live in. It is all right if you have a job and a house and a reasonable income. But the present economic and social conditions, I believe, are highly dangerous to a civilised life. Conflict and hostility are breeding fast in this country. It is a divided society. We are creating a reservoir of bitterness which will have devastating effects economically and socially. I really believe that the Government must bring their thoughts and their economic policies down to earth. Since I was at the London School of Economics—and it was difficult enough then—the jargon has been increased; economics have been elevated on the one hand to a science and on the other hand to a religion. It is neither. It is a tool by which we try to improve the quality of life of our people, and in order to do that we need a thriving and prosperous society. The sooner the Prime Minister gets rid of the gurus who put economics on the religious side, and as soon as some others stop talking as incomprehensible scientists, the better it will be. We must not believe that at the end of the tunnel of suffering everything is going to be born anew, as the noble Lord appeared to think, that we were going to burst out into sunshine. This is not going to happen. Economic decisions must always be looked at in their social context, and it is this that I really sincerely and firmly believe this Government have ignored, and I wish it were not true. If they continue to do so it will be not only at their peril but at the peril of our country.

The Lord Chancellor

My Lords, I hate to tell the noble Baroness, but she has not moved her amendment. Would she like to do so?

Baroness Birk

My Lords, I beg to move the amendment standing in my name.

Moved, as an amendment to the Motion, to add at the end of the Address ("but regrets that it contains no proposals to reverse the financial and economic policies which have resulted in increasing unemployment and grave damage to British industry and to the country's social fabric.").—(Baroness Birk.)

4.33 p.m.

Lord Byers rose to move as an amendment to the amendment after ("but") to insert (",whilst welcoming the fact that it contains none of the policies adopted by the Official Opposition, such as withdrawal from the EEC, import controls, further nationalisation and many others which, if applied, would result in permanent and irreparable damage to the British economy and standard of living,").

The noble Lord said: My Lords, I should like to begin by saying with what pleasure we are awaiting the speeches of the two maiden speakers. The noble Lord the Leader of the House in a very powerful speech, if I may say so, put the best face that he could on Government policy. He displayed an optimism which I only hope will be justified, but at the moment I cannot share it with him. There cannot be many Conservative voters at the last election who expected to see the country and its industries in the shambles in which we find it today. There is very real and genuine concern at what has been happening and very considerable apprehension about the future. The Government have adopted a blunt policy which they pursue with the inflexibility of a sledgehammer, and when this blunt instrument is wielded by a Prime Minister who is noted for her obstinacy, and who has a reputation for terrifying her colleagues, it is little wonder that people in all parties and all sections of society are wondering how long the country can tolerate this economic and social nightmare. I do not make this as a party point, but it is a very important factor in assessing the policies of the Government.

One measure of the inflexibility of this policy is the volume of pressure which has had to be exerted over so long to get the minimum lending rate reduced by two percentage points. Why have we had to wait so long for this to be done? Is this part of a coherent policy or is it merely a surrender to intolerable pressure? I ask: is there in fact a coherent policy or merely a series of monetary slogans, or is it perhaps Milton Friedman's Paradise Lost! I would like to know.

The primary aim of policy, on the part of all of us I think, is to reduce inflation. We cannot quarrel with that. But it is the means which the Government have adopted which we find are quite catastrophic and the unemployment resulting from their policies quite unacceptable. The Government assert the need to reduce the public sector borrowing requirement and say that they intend to do this by high interest rates, by strict control of the money supply and by public expenditure cuts. While there is a strong case for reducing the public sector indebtedness, cuts across the board in public expenditure can only be a recipe for disaster. It is the non-selective nature of the cuts which causes us so much concern. To reduce public expenditure by cutting out waste, by streamlining local and central Government, by reducing manning levels in the bureaucracy by early retirement and other ways, will make a very useful contribution to reducing these inflated budgets. But cuts in capital projects, cuts in essential services, result directly in a lowering of demand for products which are largely made in the private sector.

Public expenditure cuts have become the enemy of private sector viability and of private sector order books. Non-selective decisions by the Government are destroying the consumer demand on which the private sector depends for a living. A freeze, for instance, on house building badly affects not only the house construction industry, as the noble Baroness said, but it affects the manufacturers of components and everything that goes into the home, and this results directly in redundancies and short-time working in the private sector. Cuts in local education services can put printers and educational suppliers on short time. Every public expenditure cut needs thinking through to its ultimate effect on society.

I very much doubt whether we ought to be continuing with cuts to the extent which the Chancellor of the Exchequer has indicated. If we do, it can only mean more unemployment and more bankruptcies. I think we have got the non-selective nature wrong and I think we have got the balance wrong; I think we have got the total wrong. The Government say that public borrowing must be cut because the country must live within its means. I believe this is based on a fallacy. Of course the country as a whole must pay its way in the world, something that the high pound is making extremely difficult. But there is no reason why the Government should not borrow from their own citizens at a time of high unemployment and use the money for productive investment which will generate wealth and provide men and women with jobs.

I do not understand the argument that public borrowing must be cut if high interest rates are to be reduced. High interest rates are now one of the main reasons for falling national output, and every increase in falling output increases Government spending on unemployment pay and reduces receipts from taxation. High interest rates thus become a cause of public borrowing. It is a vicious circle which I believe we have to find some method of breaking fairly quickly.

The other side of the coin is the lack of urgency shown by the Government in encouraging new investment projects. I ask, what is holding up a decision to go ahead with the Channel Tunnel, financed by private enterprise, thus helping British Steel and many component suppliers to boost their order books? Surely we could do something of that nature, and a lot of other things, too. Why is so little being done to encourage the private sector to provide productive employment by investing in private and public sector housebuilding, particularly in the inner urban areas? There must be many other similar worthwhile projects which can be undertaken with Government encouragement at little public cost. I believe that it would pay the Government to subsidise certain rates of interest on loans for certain projects to get something moving and to create jobs.

I welcome what the noble Lord the Leader of the House said on pay in the public sector. I shall leave the question of incomes policy, in which we believe on these Benches, to my noble friend Lady Seear. But on the pay front I should like to ask why we hear so much about the need for low wage settlements and so little about the need for high wages in return for high productivity. The noble Lord touched on this matter, but this is about the first time that I have heard it referred to from Government Benches for months, and certainly it is not something which is generally preached about in the wage negotiations which take place.

Why do we hear so little nowadays about profit sharing? The Chancellor of the Exchequer did quite a good job on profit sharing in the last Budget, but we do not see that as an integral part of trying to get better productivity and higher take-home pay for the workers.

I believe that the truth is that, where public sector expenditure cuts are to be made, they should be selective and they should be done in the way least damaging to industry. The high interest rate fetish of the Government must be seen for what it is. It is a device which bankrupts part of the private sector, impedes the achievement of low cost goods, it adds millions to the borrowing requirement of local and central Government; and, added to that, the high interest rates attract foreign money which we do not want at present, and keep the pound high to the detriment of our exports. I do not believe that we can go on like this. There are too many danger signals around for us not to take notice of them.

I turn now to the Opposition amendment. Let me say straight away that it sums up very fairly our own attitude to the gracious Speech and we shall support it. However, in doing so we must not be accused of accepting in any way the official policies of the Labour Party—those in our view would cause almost as much, if not more, damage to the national economy. Withdrawal from the Common Market would be absolutely disastrous. Even the adoption of that resolution has already, I believe, done some damage to this country in Europe, and I regret it bitterly. Import controls and other protectionist devices, all of which invite retaliation, would seriously diminish our competitiveness. The pre-occupation with further nationalisation can only help to destroy the mixed economy.

It is to underline the dangers of Left-wing socialism in practice that we have sought to amend the amendment of the official Opposition. We hope that by putting that down on the Order Paper we make it clear that we totally condemn the major policies adopted by the Labour Party Conference of this year, while emphasising our very real misgivings at the way in which the Government are tackling our economic and social problems. But, having said that, I do not intend to move the amendment because I think that we should stick to the convention whereby a debate takes place on the amendment of the official Opposition, and I would not wish to disturb that practice. But, it occurs to me that, if I were to move our amendment and to press it to a Division, we should deserve the full support of practically every member of the Opposition Front Bench, all of whom, I believe, totally agree with what the amendment contains.

However, I hope that by supporting the Labour criticism of the Government's disastrous policies in the form of their amendment to the gracious Speech, and by putting on the Order Paper our considered view of the Labour Party's official policies, we have drawn attention to the appalling choice which faces the nation in the absence of a strong third party. In our view the nation cannot afford to be limited to Conservative monetarism, on the one hand, and Labour "Little England" protectionism, on the other. There is a third way and I think that we have it.

The Lord Chancellor

My Lords, the amendment in the name of the noble Lord, Lord Byers, not having been moved, the Question remains whether the amendment standing in the name of the noble Baroness, Lady Birk, shall be agreed to.

4.45 p.m.

The Lord Bishop of Lincoln

My Lords, I should like to make one or two comments relating to the subject of unemployment and I should like to do so against a certain personal background. I am a bishop who comes from a great rural diocese with, nevertheless, large patches of urbanisation where unemployment is running at anything from 8.5 to 9.5 per cent. Also, I am chairman of the Industrial Committee of the General Synod of the Church of England and I spent 10 years of my ministry as an industrial chaplain in one of our great industrial cities—Coventry.

If I do not speak about the extreme importance of the revival of our ecomony as a national priority, it does not mean that I do not recognise it as an absolutely fundamental priority for us all. Having said that, and having affirmed my belief, which I share with all noble Lords in that, I should like to go on to say that I have grave doubts—and they are not undocumented and I think that they are not unshared—as to whether we shall ever get back to the full employment, as we knew it for the first time in history, in the 'fifties, 'sixties and early 'seventies of this century.

With modern manufacturing and service industry developing as it is at present, and as it needs to develop to be competitive, I cannot see that it will ever need to employ the number of employable people in our land. After each recession, as this country has recovered, there has been, each time, a larger pool of unemployed people. Therefore, the crucial political, social and human question, and therefore the crucial ethical question, is what is to be the fate of those people who our industries, as we know them at the moment, are unlikely to ever to need to employ.

There is nothing new about that question in itself. However, I do not believe that it is yet receiving the political emphasis that it should surely command. I believe that we should be considering as a national priority far more seriously, imaginatively and accurately than we are even beginning to do, the business of the creation of whole new areas of work and ranges of jobs which need to be done, and I believe are waiting to be done, in order to take up the slack of those condemned to what Lord Beveridge called "unwanted idleness".

It was the Secretary of State for Employment himself who in 1978, I believe, said these words: We simply cannot afford to shy away from reality. There can be no speedy return to the historically low levels of unemployment experienced in the 1950s and 1960s. We need to begin considering longer-term issues and their implications for the sort of society we want to live in". I have been particularly interested recently in reading Work and the Community, which is a report on the Manpower Services Commission's special programmes by the National Council for Voluntary Organisations. I should like to quote from it because it states the following point several times: The requirements of most communities are inexhaustible, given the right working arrangements". I suggest that it is becoming increasingly clear that that is so. Only yesterday I was talking to one of our most able industrial chaplains working in one of our newly expanded industrial cities where the Churches and other voluntary organisations and the development corporation have set up structures to engage effectively with those of the Manpower Services Commission. They are discovering between them very considerable areas of work which need to be carried out, particularly with regard to the elderly, their housing, their circumstances, their conditions and their domestic lives. We all know that our older industrial cities and our inner cities are almost always in need of environmental improvement.

To turn to a quite different area, I believe that there is a whole mass of voluntary work needing to be done in the sphere of adult education. Richard Hoggart, as chairman of the Advisory Council for Adult Education and Continuing Education, has made the point that 3.5 million people are in need of literacy training and elementary personal and social education; he says that we need: enough fully-trained professional literacy tutors for each to be able to guide and support a group of volunteers". All over the country we would have experience of training workshops set up with the help of the Manpower Services Commission. We have one in my diocese which has been set up with the aid of the Churches and is under the management of a highly enterprising man. All sorts of markets and the need for all sorts of products are appearing. But it has also led to far wider matters of social concern in the development of a new department for handicapped young people and through that to contacts with their parents and families, and the whole range of social and counselling operations involved in that. I realise that the burgeoning of the field of the informal economy is in some circumstances a somewhat twilight world; nevertheless, it shows us what a field of opportunity there is, as also does the development of co-operative ventures all over the country.

Of course, the Manpower Services Commission was in part set up to engage with the community and voluntary organisations and to fund, assist and support the explorations in these directions. I think that it is doing a magnificient job in many places. But what is important is that the Manpower Services Commission came into being when unemployment was expected to be much less severe and prolonged than it has become and is still becoming. It needs to be seen as a very important on-going institution in our national life, geared to permanent activity. It sort of crept into the consciousness of most people. I believe it to be an enormously important institution in the future life of our country.

I take the Government's new measures to point in this direction and I very much welcome them, especially those concerned with the community enterprise programmes. I should like to emphasise that the capacity to service the community, to explore and to provide for alternative work, should be as widely known and used as possible; even more, that the principle of the necessity to our national wellbeing of exploring and developing the area of alternative work should be very widely recognised, accepted and taken up as a major political issue by those involved in our politics.

It is essentially a matter for local enterprise and initiative, and requires the agencies of the Manpower Services Commission to be highly flexible and sensitive to local needs, resources and aspirations. A very important spin-off, therefore, would be a vitalising and energising of local life, where hard times otherwise tend so easily to breed cynicism, apathy and a withdrawal from engagement.

We all know to our concern that unemployment falls very heavily on the young. I hope that our national crisis will come to elicit from us a more sensitive, imaginative and responsible understanding of the young, especially of the socially less well-favoured young, than is often the case. It is often suggested that their unemployment is somehow their own fault. They are often expected to have, or at least as a matter of course to acquire, attitudes, appearances and abilities that are natural to the culture of more favoured people, but which are not natural to them. Of course, we all need to come to our senses and to do our best to help ourselves as best may be; but, if those young people are sometimes felt to be exasperatingly slow and reluctant to pick up customs of others which are different to their own, let us at least recognise that it may be a not unreasonable, if unconscious, criticism of the world which the rest of us have made.

The Holland Report said: Unemployed young people are not failures; they are those whom others have failed". One of the opportunities, however hard to grasp, of the exploration and development of new areas of work would be new attempts to understand young people in this sense.

My last word must be about finance. The new ranges of work are, I believe, there to be discovered and done, but they may not be—and probably often will not be—wealth-creating. Such an extension of work implies a buoyant economy to finance it. If my thesis is valid at all and if the well-being, self-respect and social worth of millions of our people are to depend upon it, I believe that it adds a very powerful and not often noticed motive to all who are working to revive our economy—a powerful social, human and, therefore, ethical motive. It is that if the welfare and future of vast numbers of our people depend upon getting our economy to work better, those who are sometimes so slow over industrial relations in putting their house in order so that this may happen should find that a very powerful motive for the benefit of the increasing millions of their fellow men.

4.55 p.m.

Lord Thorneycroft

My Lords, it is a privilege to follow the right reverend Prelate and to have the honour of congratulating him upon his maiden speech. He comes to your Lordships' House with great qualities, drawn from the Coldstream Guards, from experience in India, with a great record in the Church and as president of the Footlights Club at Cambridge. If he had done nothing else, the latter might well commend him to your Lordships' House.

But in the speech that he delivered he spoke of the philosophy and the quality of life which underlines the real meaning of a debate of this kind. He made a very considerable and thoughtful contribution to that debate. I hope that we shall have the opportunity of listening to him on many other occasions. He also set an example in brevity.

I want to be brief, the more so as I have to be absent for a period later in the debate, for which I apologise. I want to speak briefly of three matters only. First, the economic battle upon which this country and this Government are engaged is, indeed, much tougher and much more difficult than even I had foreseen. I think that it is much better to face that frankly. Secondly, the Chancellor's Statement marked a new and important phase in that campaign. Thirdly, I see some ground for hope.

As to the field upon which we fight, that was not determined by the previous Labour Government; they may not have helped; they may have made mistakes—the lurch to the left and all that. But it is a waste of time just blaming one another in this House for the situation that exists today. The nature of our problems lies deep in the history of the last 50 years, and every party has contributed to it, as has almost everybody in this country.

We have built up standards and expectations which we are unable to support. We have contrived vast engines of expenditure. We have arranged wage systems which seem to ensure that we work as slowly as we can in order to earn the maximum in overtime. We have a banking system which is, indeed, a very great and admirable one, but which seems to fall substantially below the ability of its counterparts abroad in the provision of medium-term credit to small businesses. That is certainly something that needs looking at. We have a trade union system which was arranged to defend the weak, and which in recent years has been used to exploit the ambitions of the strong. We have wide areas of indexation, some arranged by the Conservatives and some by the Labour Party, all designed with the very best intention of cushioning people against inflation, but now contrived upon such a scale as to give a tremendous boost to the very ills which they were devised to cure. We have inherited Clegg and comparability, and both have done a great deal of damage to us in these past years. Last, but by no means least, we have passed large sections of British industry from private into public control, and seen them move from profit into loss.

I expect some of your Lordships must have read the book A Bridge Too Far; a brilliant description of the battle of Arnhem. They tried just a hit beyond the limit of what we could contrive. I am not an opponent of public enterprise. There is room for public and private enterprise in this country. But one of the tragedies of socialism was that we have nationalised an industry or so too many. The noble Lord, Lord Beswick, is going to follow me. We will not argue the figures here because he corrects the figures. I am going to take the ones based on the cash limits. They are slightly higher than those of the noble Lord, Lord Soames, but my figures would be on cash limits; a burden placed upon the fund raising of the Government of £3 billion, or three-quarters of the present revenue from oil. That is an enormous burden to assume.

You can argue the figures how you like, but there is the burden of this huge area of public ownership, of its financing of the new capital formation that is required and even now being disastrously squeezed. I would hope that the noble Lord will wait, as I want to keep this observation short.

Lord Beswick

My Lords, as I do not propose to deal with this in detail, may I ask whether the noble Lord would be good enough to say whether he approved the last Conservative political broadcast? If so, will he explain why it was that the instances they gave of new technology in this country were all from public enterprise?

Lord Thorneycroft

My Lords, at my personal request I wished the Conservative Party—it was not all from that—to pay particular tribute to the achievements in productivity in the public sector. I believe that unless we as a nation can come to recognise that both public and private enterprise have a role to play there is little future for us. What I am saying is that the public sector in this instance is an enormous burden. We therefore have to look coldly at the facts. These are the cumulation of events which face the Government and the Prime Minister. They have to be tackled not against the background of a rising tide of trade, or national accounts that are in balance. They have to be tackled against the background of a world recession and a debt level which makes the interest payments among the highest items of public expenditure.

It is like attempting to stop a ship with an enormous momentum on it from running on the dual rocks of hyperinflation and mass unemployment—struggling to slow that ship down. That is the situation, and that is why I say we had better face it. Whichever party was in power, whoever is responsible, these are much tougher problems than I at any rate had perhaps at one time realised. That was the backcloth of the Chancellor's statement.

About that statement I have one advantage. I know that I do not have a ready answer to our problems. I am almost in an isolated position in that. Everybody else has an answer to our problems. But I frankly admit that I have not. I do not want to say anything adverse to Denis Healey; he was my candidate for the Labour Party leadership and I wish him well, and I say to him it was a superb struggle and we were behind him all the way. His answer is that there is no problem: You put up the public sector borrowing requirement to £18 billion and you control the resultant inflation with a voluntary incomes policy, and he thinks we are home and dry. Well, I rather doubt it.

Sam Brittan in the Financial Times—and may I say how much I delight in the articles he writes—regards the whole thing as a tragedy. A dubious governor of the Bank of England; a sceptical permanent secretary; an irresolute Chancellor; and a Cabinet of old women. His remedy is basically, "Send for Sam". A simple progress to straightforward targets. In fairness to the Financial Times I am happy to say that it seemed to me that his editor had some doubts about it. But he at any rate knew where lie was going.

I am not an economist or a journalist. I am a politician. I am a rather old politician. I carry the scars of many battles, and many failures, let me say, in this particular struggle, and I know something about it. But when I looked down and saw the Chancellor from your Lordships' gallery, I saw something different. I saw a Chancellor who had won and lost about as much as Chancellors do win or lose in struggles round the Cabinet table about how much you can cut and how much you cannot, and it is never quite enough. I saw a man who was pursuing monetary policies which are basic and necessary but which, as Keith Joseph has said, are not enough. Pursuing fiscal policies; imposing cash limits on public sector and particularly on public sector pay—and about time! Over the last two years public sector pay has increased by about 50 per cent. You cannot go on along that road. The gap between the 6 per cent. that is mentioned and the 18 per cent. sometimes claimed, if you extend it over the whole field is £2½ billion.

In this field we are fighting for the jobs, the opportunities, the qualities of life which the right reverend Prelate was talking about just now. Insurance contributions on the employed, and, surprise, surprise, insurance contributions from the employers too. I do not think the employers were surprised. I think they must have been the only people who were not surprised, but everybody else seems to have been surprised about that as well. But what I saw was a man out fighting with every weapon that he had.

I do not know how many of your Lordships play chess. I do not play it very well. There is a delightful little book called Chess Openings for Beginners. If you read it carefully at night you ought to be able to defeat a 14-year-old grandchild the next morning, but after that the children begin to make circles round you. You cannot conduct economics upon that basis. I was delighted, as I looked down at the House of Commons, that they had abandoned the Ruy Lopez defence, and I saw very little of the Milton Friedman gambit. Every piece on the board was being used, and this is the economic battle that I know about. One uses the lot.

I think we might stop writing about economics on the basis of Chess Openings for Beginners. No economic theory actually works. If they did work there would be no jobs for economic journalists and no jobs for politicians either. The art of politics is to use the theories and the economic measures balanced and all moving in the same direction, and to keep the battle plan as flexible as you possibly can. That is the right thing to do.

That brings me to the hope. We have not stopped the momentum of the ship. It is still perilously near the rocks. But some of the indicators are moving in the right direction. Inflation is moving down. Interest rates are moving down. The pound is moving up. I am an industrialist and I perhaps would like it to be a hit lower, but I must confess a sneaking delight to see the pound moving up. There is no more satisfactory spectacle—and I know that the noble Lord, Lord Roberthall, will forgive me—than seeing economists standing on their heads. If Sir Terence Beckett is standing on his head at the same time it warms the heart of any normal man to see this spectacle. So I repeat, the pound is moving up. Wage settlements are moving down.

But hope should be based on something more substantial than economic statistics. It should be based on attitudes, and I detect today an attitude of realism. I detect an attitude of fortitude in adversity. I see criticisms that used to be, "Why are we cutting at all?" changing to, "Why are we not cutting enough?". That is a healthy change of heart and a realistic approach. I see anger that the burdens on those who are creating wealth should continually be increased by the claims of those who are not creating wealth. And as for those who say we must tackle inflationary expectations, I would say that one can do that in some degree by setting targets and making plans; but that one can tackle them best by actual achievement, by inflation rates that are really moving down and, above all perhaps, by the presence at No. 10 Downing Street of one of the toughest Prime Ministers I have ever been privileged to serve.

5.12 p.m.

Lord Beswick

My Lords, I offer my congratulations to the right reverend Prelate the Bishop of Lincoln. His freshness and the objectivity of his speech were wholly delightful and, with his background and, above all, his attitude, I join with the noble Lord, Lord Thorneycroft, in hoping that we shall see him contributing to our affairs very often.

I wish to begin by agreeing with something that the noble Lord the Leader of the House said, when he invited us to put aside what he called arcane mysteries of finance and get down to more simple phrases. I also agreed with him when he said that in his speech moving a humble Address, the noble Earl, Lord De La Warr, used some phrases which we might examine a little more closely. For example, the noble Earl said there was no such thing as something for nothing. In that I thought we had the basis of agreement, so let us look at it rather more closely.

If purchasing power is distributed without equivalent production, the result is inflation: Her Majesty's Ministers hammer home this point at every conceivable opportunity. Yet the sad, depressing and infuriating fact is that no other Government in peacetime have caused so much money to be distributed for so little work. All the unemployment benefits and redundancy payments mean purchaisng power without production. Families may say it is inadequate purchasing power and the redundancy payments may be said to be too little compensation for jobs lost, but the fact remains that largely as the direct result of Goverment policy, we are doling out thousands of millions of pounds for nothing produced in return. Every penny of those payments is inflationary.

Then there are interest payments which have gone up so alarmingly under the present dispensation, ironically as part of the policy to bring down inflation. Like most working-class children, I was taught the virtues of thrift. I went to the Co-op Penny Bank almost as soon as I could toddle and later, when I tried to learn about economics, I read Samuel Smiles and Adam Smith and I loved to savour the word "fructify". Money saved and invested would fructify, we were taught, and that the interest paid was the reward for helping produce more goods, more real wealth. But since this Government took office, never was so much invested for so little productive purpose. As my noble friend Lady Birk said, more and more borrowing is simply to pay interest on money that has already been borrowed.

I pointed out in exchanges with the noble Lord, Lord Cockfield, some five months ago that, given present interest rates, the whole of Government borrowings this year would go in paying interest charges on money already borrowed. The estimated borrowing requirement and the service of the national debt was just about equal at between £8,000 and £9,000 million. Since then, we are told, the borrowing will go up another £1 or £2 billion to pay idle, non-productive labour, but the main point still remains.

I understand from the Government survey that local government borrowings in the latest three-month period were £700 million as against £900 million in the same three-month period last year. That means that something like £130 million of the money borrowed in that three-month period will go on paying interest on money borrowed in the same period of last year, and no doubt most of the rest will go on interest charges on earlier borrowings. In the debate on the Finance Bill in July, I quoted from analysis by Mr. Christian Schumacher which showed that even during the 70s, 25 per cent. of the increase in public service expenditure was due to increased interest charges.

It is much the same story, and to an increasing extent, in industry, and I give an example. This week I had the annual report of a fine, well-run Birmingham company in art essential industry. They report a £31 million fall in pre-tax profits, but interest charges are up from £9.9 million to over £16 million. We hear a lot—and we heard it again today, told with great glee by some commentators—of the hundreds of millions of pounds paid to British Steel. But last year £183 million of that money was paid back in interest charges. Under current cost accounting, which is not applied to a large number of private sector industries, the National Coal Board for 1978–79 had a £178 million deficit, but of that sum £138 million was interest charges; and I understand there will be a 30 per cent. increase on that figure with the subsequent increase in interest rates.

There is a similar proportion of burden on small industries. Many will have read a letter to The Times from the managing director of a small company, 95 per cent. of whose production, we are told, goes in exports. He said that borrowings were 50 per cent. up on last year, but of those borrowings, out of each £100 no less than £50 went to pay extra interest charges, and he emphasised "extra". More and more industrial companies now report increased borrowings, not borrowing for productive investment but distress borrowing. Debt begets debt, and throughout central and local government and throughout industry, in our total economy, there is now an enormous volume of debt swilling about: not serving productive investment at all—little of it will fructify—but for the purpose of servicing debt already incurred. An interest rate of 14, 15 or 16 per cent. might conceivably be justified if the economy was expanding at that rate. But the economy is not expanding at that rate; it is now contracting. Almost every penny of that interest is something for nothing.

When I see, as we all do every week, the great spread of extravagant advertisements in the press inviting savings at current exorbitant interest rates, I sometimes wonder how much that advertising costs every year. It is almost all wasteful. It does not add anything to the wealth of the country. In a sensible society facing hard times that is where economies would be made. The building societies can say that they are directly helping to create more wealth. But what of the rest of the new money-lending industry? We now have the moneylending industry as an industry which serves its own purpose. With current interest rates we have made moneylending an end in itself. Samuel Smiles would turn in his grave if he could see how the monetarists have perverted the virtue of thrift.

If there is one thing that is clear from the statement made by the Chancellor on Monday, it is that the MLR as a regulator of the money supply has failed. It is, as my noble friend Lord Kaldor said in his evidence to the Treasury and Civil Service Committee, a particularly inept instrument for that purpose". Incidentally, I would suggest to noble Lords that they could all with advantage study the memorandum submitted by my noble friend to the Select Committee, and in particular, the paragraphs showing that during the war Britain was able to borrow at a fraction of the current cost. In the years after the war it was a matter of great concern when the interest rate went up to 3¾ per cent. yet we were investing more then. Our inflation rate was lower. Mortgages could be obtained for 3¼ per cent. in those days.

One potentially constructive item in the Chancellor's statement was the reference to a number of improvements in the control of money supply". If those improvements entail the rejection of the punitive interest rate, a direct control of the monetary base, and differential interest rates for essential industry and for exporters, then those improvements could be very welcome indeed. It is in this area that some new, imaginative thinking is needed. I said in the debate on the Finance Bill that in this context I look forward to the report of the Treasury Select Committee. I cannot say that my expectations, or hopes, of radical recommendations have been encouraged since last July, but we shall see. Maybe the Select Committee which this House set up this week to consider unemployment will have the courage to deal with this aspect of our problems. Certainly I say again that it is beginning to be recognised that in the vital area of industrial development our financial policy has an even greater part to play, or, shall I say?, greater sacrifices to make, or more radical changes to face than the management of industry.

That brings me to another favourite phrase of Ministers, used by the noble Leader of the House today: the need for industry to be competitive. They say that increased productivity is the means to that end. There is much glib talk today about the British worker being less productive than the foreign worker, and a good deal of it is on the basis of insupportable facts. If British industry was as bad as some people try to say it is, and as the noble Lord opposite said today, exports would not have held up as they have done in the last year.

There are many factors that need to be taken into account if we are comparing unit costs as between British and foreign manufacturers, but as we are talking of financial policy may I refer to one piece of experience that should be borne in mind and which is not totally unrepresentative. Incidentally, I hope that there will be an early opportunity to examine in rather more detail than is possible today the charge about the voracious appetite of public enterprise. If there is one thing that I regard as sick about the national atmosphere today it is the bigoted criticism of the industries which the country owns. The noble Lord mentioned in his list the example of Aerospace. It sold goods to the extent of £1,000 million last year. Sixty per cent. of that output went overseas. There was a return on net assets employed of 23 per cent. Yet the noble Lord gets up in this House and talks about the "voracious appetite" and the drain on public funds. That is the kind of thing that we must stop. It is the kind of thing that we must examine with a little more objectivity than was shown today.

I was going on to say that some years ago I shared responsibility—or I am prepared to accept full responsibility—for launching a project which would involve an expenditure over the years of some hundreds of millions of pounds. Research showed that the product would sell overseas, and experience indicated that we should have to quote in dollars. At that time the dollar rate was just under 1.90 to the pound. It has since moved, contrary to the level of prices, but almost wholly because of the financial policy adopted by noble Louis opposite, from 1.90 to 2.30 and 2.40. If one also takes into account the differential rate of inflation, there was a gap to be closed of about 30 per cent. if the same return was to be received on a given quoted price.

In the particular case that I have in mind certain offsetting steps were taken, but for exporters generally or indeed for United Kingdom firms facing foreign imports, that gap of 25 to 30 per cent. is opened up by Government policy. Increased productivity—yes. But if any Minister says that it is possible to think up improvements of 20 or 30 per cent. in two or three years, then he is open to the kind of criticism levelled at Ministers by the new Director-General of the CBI when he says that they know nothing of industry. In recent years it has been fashionable to "bitch" industry and industrial relations in our country, but I suggest that we should now be better advised to turn our attention on the outdated financial system. I hope that the Wilson Committee will be the beginning, not the end, of the search for really radical reform in that area.

I offer just one other thought. I believe that the morale of the country would be improved if Her Majesty's present Ministers gave up the pretence—as the noble Lord, Lord Thorneycroft, I thought, was endeavouring to do by shedding his clothing as chairman of the Conservative Party—that they have come down from some mountain with the tablets of truth. Governments have to govern, certainly. But no Government since 1945 can claim to have such widespread popular support that they can brush aside arrogantly possible alternative courses of action—certainly not this one!

Last year's Conservative victory has by many commentators been linked with what was called the landslide victory of Mr. Reagan. In fact I believe that Mr. Reagan had the support of 27 per cent. of the total electorate of the United States of America. Mrs. Thatcher did rather better—but not all that much. Her party received the vote of 33 per cent. of the total British electorate. Now that scarcely can be described as wholehearted, majority support. I would end by echoing what was said by my noble friend Lady Birk when she said something to this effect, that from now on Britain's future could best be served if a greater effort was made to avoid confrontation and to secure consensus.

5.30 p.m.

Lord Weinstock

My Lords, it is a great indulgence on the part of your Lordships' House to permit me to intervene with a maiden speech in a debate on such an important subject as economic affairs. The right reverend Prelate's speech will certainly not have disappointed the courteous expectations of the noble Lord, Lord Byers, and I shall try not to let him down too much. Happily, or unhappily, the customs and usages of this House make it very difficult for me to take up some of the points made by noble Lords on both sides of the House and by the noble Baroness, Lady Birk; controversial matters, or most of them, will have to wait for another day.

The noble Baroness, Lady Birk, mentioned economic gurus and economic religions. Of course, these days almost everybody seems to be an economist. In the Treasury and the Bank of England we have professional economists who are amateur administrators locked in debate with professional administrators who are amateur economists. With so many knowing so much in the field of economics, it really is quite extraordinary that for decades our country has been unable to get right almost any answers to the modern economic question of how to maintain growth without an untenable level of inflation. Perhaps the trouble is that economics is basically about human behaviour, and that is not always readily predictable. And, as the noble Earl, Lord De La Warr, said last week in moving the humble Address—it has been echoed already by the noble Lord, Lord Beswick, and the noble Lord the Leader of the House—it does not take an economist to state the fundamentals.

A measure of consensus about vital matters used to be thought necessary for British democracy to provide coherent and progressive government. There was for a time general agreement that inflation is a pernicious evil which it is any Government's primary duty to eradicate. That certainly was the view of the previous Labour Government, as it is of the present Conservative one. But when measures are taken with that object they meet with furious condemnation, not because they are anti-inflationary but because they are otherwise unpalatable. Surely, those who condemn should offer serious alternative remedies, or else they should suggest how our society can live with inflation without causing even greater hurt and injustice than the measures they find unpalatable.

The noble Lord, Lord Thorneycroft, in what I thought to be a human and wise speech, spoke of the failures of progressive Governments over a very long period, 50 years, and of the burden of responsibility which falls on them for the condition in which our country now finds itself. But the politics of the Western democracies and the overriding demand for growth and welfare have made their economies remarkably prone to inflation; and the massive cumulative increases in the price of fuel in the last dozen or so years has added a new dimension to their difficulties with which their financial, economic and political institutions have failed to cope. This is certainly not the least cause of the world recession, and that is the cause of most of the recession here at home with the excessive and damaging unemployment it brings in its wake.

It cannot, however, be denied that what was already bad enough has been made worse by the relatively low productivity of British industry and by lingering memories among overseas buyers of delayed deliveries in past years as a result of disruption in industry. If the noble Lord, Lord Beswick, needs statistical evidence of the statement that our productivity is lower than that of some of our principal competitors, I can assure him that it is readily available. Furthermore, if I may be permitted the aside, while wishing to say nothing against the nationalised industries I have to point out that the example of profitability to which the noble Lord referred, British Aerospace, resulted not from its public ownership but from its long period of private ownership before it was virtually confiscated by the Labour Government in 1977. Since we are on statistics, I will make the further point that if Mr. Reagan was elected by only 27 per cent. of the United States electorate, and if Mrs. Thatcher was elected with 33 per cent. of the British, according to my recollection the previous Labour Government was elected with 28 per cent. of the votes of the electorate, and that is not frightfully different from the position in which Mr. Reagan finds himself in regard to popular support.

With regard to these economic problems, the present Government did not create them; a recipe for their total cure is not quickly or easily available; and for the lay practitioner it is all too difficult to assess the progress we are making. The workings of our society have become extremely complex and difficult for ordinary people to understand, let alone to control. We rely more and more on experts, professionals, people of impeccable intellectual and dialectical ability, but unfortunately invariably remote from real life; and when we follow their nostrums we tend to create new troubles without solving the old ones, deluding ourselves that we are changing the real world merely by describing it in novel terms.

This is all bad enough applied to Government, but bureaucratism is an infectious disease and now private industry seems intent on going the same way. An example of this tendency is so-called inflation accounting, to which the noble Lord, Lord Beswick, made some reference. We are all concerned about the impact of inflation on our businesses. We know that the cost of replacing our assets is greater than the depreciation allowed at the usual rates based on historical values. The fact is that no one has yet been able to produce a generally acceptable system which objectively and universally presents the consequences of inflation on business accounts. Every attempt at such a system has been subjective, and neither universally applicable nor universally true.

Not so long ago a business could be run with a fairly simple set of books recording all its transactions. From these books could be prepared the annual accounts to be audited and presented to the proprietors. In more or less that form, these accounts could be supplied to the Inland Revenue for the relatively uncomplicated computation of tax liabilities. In respect of each year, we knew what our profit was and how much tax we would have to pay. No longer, my Lords! Now we have not only to record our transactions in the old meticulous manner in order to know what is happening, but to run another set of accounts calculated according to arbitrary criteria called "current cost accounting".

An industrial manager is preoccupied with the tasks of design, production and selling in a fiercely competitive world. He struggles to find the means to a condition of happy understanding with his employees, often in the face of obsolete and destructive attitudes; and accumulating social pressures lay ever-increasing burdens on him. It is not clear to him, nor indeed can I think it will be at all clear to your Lordships' House, how, faced with all this, statistical juggling can help reduce his costs or improve the quality and reliability of his products—for these are the things that really matter. It complicates his already over-complicated life.

Our managers are being brainwashed by academics and the high priests of the accounting profession into believing that the mumbo-jumbo of current cost accounting contains remedies to the problems caused by inflation. Their already excessive burden is going to be aggravated if the proposal of the Inland Revenue is accepted, that, instead of a tax computation, it will in future require a third set of accounts made up according to rules different from those governing the other two. Do those who have authority and influence in these matters really understand that managers will have to spend even more of their time and energy weighing up carefully the implicit effect on corporation tax of every separate commercial transaction? Do they understand that before you can consider taking an export order you will have to work out carefully the follow-through effect on your balance sheet, because that can determine how much tax you will have to pay and may well decide whether the order is worth taking at all?

Are we to go to our customers overseas and say, "Please do not give us a handsome down payment, however much we may need the money with the high rates of interest, because that will alter our creditors figure and may give rise to a tax liability"? Shall we say to them, "Do not treat us as main contractors because with current cost accounting we may not be able to afford the apparent consequences of showing sub-contractors as creditors in our accounts"? Are we to say at head office to our expanding operating units—and some of them are expanding£ "We cannot allow you to make this or that new investment because it has adverse tax consequences on our current trading which have nothing at all to do with that investment"?

It is surely not too much to ask that industry should be as far as possible left free of administrative persecution to deal with the problems it has to face in the ordinary course of its business. Why do not the accountants and the Treasury let us get back to a single set of books for both the tax authorities and the shareholders, paying a universal rate of mainstream corporation tax on the profits shown in a single set of accounts? Could we not abolish the present clumsy system of reliefs and allowances and make everybody pay mainstream corporation tax at a lower and generally acceptable rate while levying a higher rate on distributed profits? And let us, at the same time, write off the balance of obligations for dererred tax which still encumber company balance sheets. The tax revenue would be higher. You would remove the incentive to make business decisions aimed at minimising tax rather than maximising efficiency. And the cost of administration to the Inland Revenue and the companies would be greatly reduced.

The importation of complexity and obscurity into business accounts is, I fear, only one example of a general tendency. More than 25 years in manufacturing industry and even a relatively brief experience before that in the Admiralty, has taught me the benefit of keeping things simple. I suggest that it has been a great weakness that in one area after another we have tried to persuade ourselves that we can avoid facing up to reality. If we look straight, we can see that it is only through honest work and good products that we can build a strong economy. As the noble Lord, Lord Thorneycroft, said, there is no macro-economic magic; no election manifesto formula can deliver the living standards that our people are quite capable of earning for themselves.

My Lords, our people can do as well as any others in the world if they are free from distraction and from false prophets. Let the red tape be cut away, let industry deal with the facts, undoctored by the accountants, uncorrupted by the economists, and it will get on with what has to be done.

5.43 p.m.

Lord Harris of High Cross

My Lords, it is a privilege to follow a maiden speaker, the second maiden speaker in a single afternoon, and to welcome him to our counsels. I know that it would be the wish on all sides that I should extend to him our congratulations on his maiden speech both as to the manner and content. If I may say so, he at once seemed very much at home among us. The noble Lord, Lord Weinstock, comes to us with quite an exceptional reputation as one of our leading industrial managers and one of our most successful entrepreneurs. While we would not wish him to neglect his duties in the great world of industry, we would wish him occasionally, at any rate, to come to this House and give us advice and counsel from his wide experience and his most successful record.

The central issue between the Government and their critics is nothing other than the widely-shared anxiety about present unemployment and its future course. Again and again we return to the question; what is the alternative? In another place, the new Leader of the Labour Party put forward an alternative, echoed particularly from the Labour Benches so far in this debate, an alternative which, he said, had the great commendation of the backing of three former Prime Ministers. He mentioned Mr. Macmillan, Sir Harold Wilson and Mr. Heath. I want to ask today frankly, What sort of recommendation is that? I take no pleasure in this matter; but it is easier from the Cross-Benches, at any rate, to say that the policies recommended by these highly distinguished leaders of both parties are the policies that were tried again and again and failed in the past 20 or 25 years. They were the policies that are still commended by noble if nostalgic Lords as a consensus: the fine effort to advance and maintain full employment without inflation.

What would be the result of returning to something of those policies at the present time, as some are so sorely tempted to do? Aneurin Bevan used to say, "Why look in the crystal ball when you can read the book?" What I want to say is that the collective record of those three advocates of full employment without inflation might best be described as progressive stop-go. Your Lordships will remember that policy alternated between a credit squeeze to check incipient inflation and then an expansionary monetary policy to deal with the resulting unemployment. Over 20 years, the result was that this economy was launched upon a roller-coaster that rose to ever higher levels of unemployment and of inflation at every turn in the trade cycle. The record can be expressed something like this. In Mr. Macmillan's day, going back to 1962 or 1963, the cost of stopping unemployment from rising above half a million was an inflation rate of about 5 per cent. By Sir Harold Wilson's day, the cost of stopping unemployment rising above 600,000-odd was an inflation rate rising towards 10 per cent. Then we come in recent memory to Mr. Heath's administration when the fear of approaching an unemployment figure of, now, 1 million meant that inflation was launched, after the usual time lags, above 20 per cent. Every single time, on these three occasions, the monetary expansion had a greater effect in pushing up prices than it had in moderating the unemployment—which was its main objective.

The explanation in Keynesian terms—since economists have been abused and with more to come we economists should stand together—of this mounting inflation in trying to deal with unemployment is that people saw through what is called the "money illusion", the notion that money had a stable value. Thus when you had reflation, as soon as the Government was seen to reach for the money, expectation was stimulated that higher wages and costs could be passed on in higher prices. The TUC and the CBI did not need to worry too much about putting their own houses in order by increasing efficiency. They could rely on the Government to bale them out; so that their bad industrial habits have persisted. In short, the Keynesian experiment encouraged what the noble Lord, Lord Thorneycroft, referred to as the inflationary psychology which feeds upon itself.

The present Government's central aim, as I understand it, is to break this addiction to monetary inflation. In their medium-term strategy, the Chancellor in effect "signed the pledge" to refrain from recourse to the bottle—and it is not surprising that the Prime Minister is about as popular as a wife who hides the gin. But to talk of savage deflation is surely far fetched when, as the noble Lord, the Lord President has said, inflation is still just coming down from a level at which, continued for a decade, it would quadruple prices and reduce the value of money to 25 per cent. of its present level. The fact is that we have not had very strict monetary restraint and that is because of the difficulty the Government found in financing their borrowing over the first half of this year. M3, so far as we can tell, has risen at least twice as fast as the Government's target. It cannot be said that this economy is being constricted by some kind of monetary garotte. There is ample money around, plenty of money in circulation, to finance a higher level of employment and of trade as wages and prices are established at more moderate levels. Clearly, monetary policy, which has not been as strict as intended, has been reinforced by various other factors which I cannot go through at this moment, including the world recession, the strength of the pound, and so on.

The combined effect of the Government's monetary policy and these other factors has clearly been to break this inflationary psychology so that prices are now rising nearer 10 per cent. than 15 per cent. and still going strongly downwards into 1981 and the prospect continuing into 1982. If this progress is to be maintained, however, the Government had better make haste and assert their control over these monetary aggregates.

That is where we come to the need for Government to curb their own spending and borrowing. I find it easier to support the Government's objectives than I do to applaud their recent measures. It seems to me that the Government, by yielding to those who we are told have a high humidity count in the Cabinet, are making their own job more difficult, more painful and more costly in my view in terms of unemployment than it needs to be. If you maintain a protected and inefficient public sector of about half the total national economy, then you are imposing a disproportionate burden on the private sector to which we must look for our hopes for a resurgence of production and employment in the coming year or two.

So I urge the Government to maintain their strategy. I propose that they develop one further addition over the coming six months. Before the next budget, let them look through all aspects of central Government and local government services to try to identify those that could be financed by direct charges to the consumer. Let them aim at savings worth having at £5 billion or £10 billion because Government spending is now running at about £100 billion in a national income of about £200 billion. £5 billion to £10 billion should not be too much for them to try to save.

I believe that one merit of this more radical approach is that it would be likely to cause a certain amount of apoplexy among members of the Cabinet, and some of them could then be sent off to convalesce. They could be replaced by less paternalistic politicians who believe in trusting ordinary people to spend more of their own money.

It is time that we cheered up the noble Baroness, Lady Birk. Inflation is falling and interest rates—about which she made great play—have begun to fall and will fall faster. I would say to the right reverend Prelate that, as in all previous recoveries, we can be sure that unemployment also will fall. My argument is that unemployment will fall faster if production is stimulated by relief of industry and of workers from the still crushing burden of Government taxation.

5.55 p.m.

Lord Jacques

My Lords, I first join with other noble Lords in congratulating the right reverend Prelate and the noble Lord, Lord Weinstock, on their maiden speeches. I hope that both will find future opportunities to come here and give us the benefit of their knowledge and experience. I would say to the noble Lord, Lord Weinstock, that he and I have one thing in common: I like things to be simple.

On the occasion of the last gracious Speech, the Government set forth their economic policy which was said to be a forward-looking policy. In the debate which followed I said that it was 50 years out-of-date and based upon assumptions which were no longer valid. I was interested to see quite recently in the Washington Post an article by Galbraith, the Harvard economist, who said very much the same about Friedman and his policies. He said that Friedman would be a prophet in a world of free markets. But—alas!—in a real world on the international scene we had OPEC, and on the domestic scene we had corporate power combined with union power. In these circumstances, monetarist policy had become a design for combining unemployment and recession with continuing inflation.

He then cited Britain as the case. He said that Britain after 17 months of Friedmanite policies still had 16 per cent. inflation. He said that it had a decline in manufacturing output of 8 per cent. Little did he know that it is nearer 13 per cent. during those 17 months. He said that bankruptcies of small firms had doubled in 12 months and that our unemployment was now well in excess of 2 million. He believed that this experiment of the Friedmanite policies was being tolerated in Britain partly because of the British stiff upper lip but mainly because the blow was being cushioned by social security benefits. I would add that if the social security benefits are depleted, then that tolerance is very likely to be undermined.

At this stage I should like to follow up the question which was put by my noble friend Lady Birk arising out of the speech made by the noble Lord the Leader of the House. He said that in the past we had incomes policies but after each incomes policy there had been an explosion. I would add that recent research has shown that although there were explosions after incomes policies, the incomes policies together, even if one takes into account the explosions, slowed down the rate of inflation and slowed down the growth in money incomes. Nevertheless, the noble Lord said that there was always an explosion and that was not getting us anywhere. He pointed out that now we were getting a more realistic attitude, that wage claims were now somewhat less than the rate of inflation.

I want to put this question to the Minister, and I hope that he will reply. Would he not agree that in the course of time, when we hope that there will be fewer unemployed, when we hope that inflation will be declining, there will again be an explosion just the same as there have been explosions after incomes policies? If there is an explosion, are we to have this misery all over again with bankruptcies and high unemployment? If not, what is the cure? What cure have the Government in mind for dealing with an incomes explosion?

I believe that perhaps the greatest folly of the Government has been to persist in policies when they have been shown to be mistaken. For example, I would submit that the recent increase in the money supply is not so much in spite of the high rate of interest but, at least in part, because of it. When you have a very high rate of interest sustained over a period, you attract money from overseas and that increases the lending base of our own financial institutions. You strengthen the value of the already grossly over-valued pound; you make exports dearer than they need be and imports cheaper than they need be. Consequently you deplete stocks, sales and profit. Profit has always been a source of capital but in times of inflation it is an even greater source of capital, because you have to find the ways and means of replacing assets at a greatly increased cost. Consequently, many firms who expected to have a cash flow from their profits but found their profits depleted, were forced to the bank—and because bank rates were so high they had to borrow even to pay the interest.

The lower output reduced employment and it also reduced the Government's tax revenues. It increased the social benefits that had to be paid and consequently increased the public sector borrowing requirement. In addition, it increased the aid it was necessary to give to some of the nationalised industries, particularly British shipbuilding and British steel, who had to sell in the overseas market where the pound was so grossly over-valued.

The fall in the interest rate on Monday was too little and too late. Last week the Government stood almost alone: even their own financial supporters were critical of their attitude. This Government is the most dogmatic Government we have had in post-war periods. I am sorry that the noble and learned Lord who sits on the Woolsack is not here, but I would have suggested to him that when next he speaks of an elective dictatorship he should take the opportunity of quoting his own Government as an example, because it is the example par excellence.

Having got on to the noble and learned Lord the Lord Chancellor, I should like to make some references to the speech he made on Tuesday last, 25th November, when he reopened this debate. I might say I have given him notice that I would so do, and he has been kind enough to tell me he has an official engagement and regrets that he is unable to be here but will be quite pleased to read what I have had to say. I am concerned with the tenor of his speech, and nothing portrays that more than a paragraph in column 25, in which he says this: The purpose of Parliament is not the struggle between the parties, it is not the exercise of power, it is not the mutual hostility, it is not the class war, but its avoidance; it is the discovery through frank discussion of underlying identities of interests, the identification of common problems, and the discovery of mutually acceptable solutions". Oh that it were so, my Lords! But the gulf between theory and reality is so great that no engineer could ever bridge it. I am not questioning the theory: I am questioning the timing and the source. I am not surprised that that statement was made by Quintin Hogg—I would have expected it from Quintin Hogg—but I am surprised that the statement should have been made by a Minister of the present Government, which is accepted by moderate people in all parties to be the most dogmatic Government we have had in the postwar period. Indeed, in the opinion of most moderates in all parties, it is the Government which has put an end to political consensus in the post-war period. It is astonishing that such a statement should have come from such an officer in such a Government. In column 26 he says this: It is sometimes suggested that Government policy is dictated by some general theory. So far as I am concerned, at any rate that is not in the least true". But the noble and learned Lord must have heard almost every day how the general theory is being rammed down our throats. He must have heard how we have been told almost every day that there was no other method, no other solution. It is incredible that he should not be able to see that there has, during the past 18 months, been a Government policy that was based on a general economic theory.

In conclusion, I should like to say this—and here your Lordships will see that I have a great deal of sympathy with the noble and learned Lord, with whom I have enjoyed many clashes in the past decade. I believe that this country cannot prosper under dogmatism. I believe it can prosper under a flexible, tolerant and persuasive Government—a Government which would not tell us that there is only one way, but one which the noble Lord, Lord Weinstock, would tell us in simple terms would use all reasonable means to stabilise the retail price index and return to full employment. Notice the words "all reasonable means". Notice the absence of the word "inflation".

It would also be a Government which would be persuasive and would persuade that there is a close identity needed between the interests of the worker and the interests of the employer, whether that employer be a nationalised industry or a company. Such a tolerant Government would have a national economic forum, which would give guidelines on what I would call "standard wages". It would also recognise that the trade unions had a right to some free collective bargaining and it would allow them to be free to negotiate with the individual companies on investment to increase productivity, on conditions of labour and on profit sharing. The profit sharing in some firms might be part of the weekly wage and in other firms it might be an investment within the firm.

There is an infinite variety of ways in which it could be done, but there are two principles which must be observed. First, there must be a clear acceptance of the identity of interests of the worker and the employer and, secondly, there must be a clear acceptance of the reality that trade unions must have some scope for free collective bargaining.

Lord George-Brown

My Lords, will my noble friend forgive me for interrupting? I am fascinated always by what he says, and by the way he says it. He and I are very old friends and I regard him as one of the most radical thinkers on that side of the House today. May I ask him whether he would like to identify what he is now saying with the attitude that we were taking in 1965 and 1966, with the national plan and the prices, productivity and incomes board concept of those days?

Lord Jacques

My Lords, I have no hesitation in saying that this would be completely in line with what my noble friend has in mind. I followed the national plan with very great care, and served on one of my noble friend's regional committees, and I would say that it was very much in line. I would only add that I should like the approach next time to be a little more simple, with not so much involved.

But any incomes policy has to be an incomes policy. It must not be just a wages policy. It is long past the time when we should revise our corporation tax. The corporation tax should be related to capital employed, and it should be on an ascending scale so that it catches such profits as the bankers are making at the present time. If you allow the employers and the employees in any sphere to get inflated profits and inflated wages, such as are being enjoyed in the banks today, then you are asking for trouble in the future. Everybody else will want to catch up as soon as possible.

While the noble and learned Lord who sits on the Woolsack will sit and dream of a Parliament in which a close identity of interest is accepted, and mutually acceptable solutions are sought to all our problems, I will sit on this Bench and dream of the incomes policy which I hope will be permanent and flexible, but so fair that it is accepted by the vast majority of our people.

6.12 p.m.

Viscount Eccles

My Lords, it is a great pleasure to join the noble Lord, Lord Jacques, who always speaks with such charm, in congratulating the noble Lord, Lord Weinstock, on his maiden speech. We very much looked forward to what the noble Lord would say, because success is not in over-supply in this country and we all recognise that the noble Lord has made a great success in industry. Therefore, speaking for myself and my friends on this Bench, we hoped to be able to pick his brains and we were not disappointed.

He said several things which were of real importance. I join with him in deploring the way in which the economists, the academics and all the clever boys who can criticise but do not do anything themselves, have made our lives very complicated and have not always helped. I was at dinner last night with the noble Lord, Lord Harris of High Cross, where a good sprinkling of the best monetary economists in the country were present. At the end of the dinner, it was clear that nobody knew whether or not the money supply could be controlled, or whether there was any single approach to doing so. But there we are.

The other thing which the noble Lord, Lord Weinstock, said, and which was so true, was that we have all underestimated the severity of the world recession. It does not do any good to those who are out of work to obscure what has been happening in the world at large, mainly as a result of the enormous increase in oil prices, the issue of money to try to pay for that oil and the consequent inflation and unemployment on both sides of the Atlantic, and especially to obscure our own exceptional vulnerability to this world recession.

But I do not want to speak in general terms, because there seem to me to be two subjects which have been raised so far in this debate, which deserve a little closer attention. One of them is the exchange rate. Three or four speakers have said that the exchange rate is now almost out of hand and moving upwards. Another speaker—I think the noble Lord, Lord Jacques—said that the pound was absurdly over-valued, and indeed that is what you hear from quite a number of industrialists and the CBI itself. I do not believe it, and I do not think it wise to base our policies on the assumption that the pound must come down. In a free market, the rate is fixed daily by the number of buyers and sellers, and recently the buyers have outnumbered the sellers. After a modest reaction to this week's 2 per cent. cut in MLR, the buyers are back again and they are asserting their predominance.

There are three reasons for this. The first, a personal reason, is one which noble Lords opposite will not appreciate. It is the Prime Minister herself. One has had only to visit one of the financial centres of the world—I have been to only two of these, such as Zurich, New York or Tokyo—in the last few months, to find that the courage and determination of the Prime Minister, so in contrast to the flabby, soft world in which we live, attracts enormous attention. Whether we like it or not, personalities do count and policies do count in the view which other people take of us. Just imagine, my Lords, what would happen if Mr. Foot's predicted revolt against the Prime Minister came off and he managed to step into her shoes. Then you would see the pound go down all right, and a lot of other very good things besides.

The second reason for the strength of sterling is our favourable balance of payments. The earnings from oil are bound to increase and it is, at least, doubtful whether our manufactured exports will fall faster than our imports. So long as inflation does not take off again—in other words, so long as the Prime Minister and her Ministers are there—the foreigner will not consider sterling overvalued. If that is so, then what about the interest rate? We do not need the interest rate to prop up the pound. But it is difficult to know what should now be done, because no one knows exactly how much foreign money is still in London only because of the rate of interest that that money can earn here. One would guess not a formidable amount, now that the prime rates in New York—17 per cent. or more—are higher than our rates.

Your Lordships could, if you wished, instruct your bankers to sell British Government securities tomorrow morning and buy comparable bonds in New York, and you would earn rather more interest. Further, you would be sure of a capital profit, if it is true, as the CBI say, that sterling must come down. Then why are not more pounds being changed into dollars? Why do the Arabs not do it? The answer must be that the bulk of people who ought to know best, and who can look at this country dispassionately from outside, think that sterling is more likely to rise than fall. It is worth noticing the difference between the estimate of Her Majesty's Government, and of our economy and its long-term future, made by foreigners and the estimate that we hear from the Party opposite.

We should make the best of the great advantages which a strong pound brings to our economy. In the battle against inflation, a strong pound is a strong ally. Those who cry for a weak pound are ready to settle for dearer food and for all those other imports which enter into the cost of living. They are like a man who, having failed to keep fit, says he must have an easier job, and when he has it the whole process begins again.

If that is the right picture of the exchange, how quickly would it be safe to bring interst rates down still further? I do not think that we should be in a hurry. Although nothing like as important as wage and salary settlements, high interest rates have been a factor in the control of the monetary supply. Six months ago there was, or there appeared to be, more reason for keeping down borrowing in the private sector than there is now, so I think that the money supply argument, always a little dubious, is now a good deal less strong than it was.

On the other hand, concern over the public sector borrowing requirement is a very serious reason for caution. We inherited the PSBR from Mr. Healey, running at figures which his expenditure plans would have raised to something like £15 billion or more a year. That has been the root of the trouble in getting control of the money supply. If the public borrowing requirement could be cut in half—say, to £5 billion—then we could take all sorts of risks with reflation. Alas! the Government have to tell us that next year they will have to borrow a good deal more than £10 billion. That is a figure which would be much higher if we adopted the policies—we have not heard very much about them—which the Labour Party advocate at present. It is simply not true that by reducing the bill on unemployment by putting people to work you would not have to find far more money on the borrowing requirement. It sounds a good argument, but it does not stand up.

Unless the lenders next year find the terms offered for the new issues of Government debt attractive, there will be nothing for it but to print money. Suppose that the interest rate here falls so that the yield on new issues is well below both the domestic rate of inflation and the New York prime rates, is it really going to be so easy to cover this enormous borrowing requirement out of genuine savings? I find it shocking to hear Labour speaker after Labour speaker talk as though this problem did not exist. The Government are beginning to tackle it by the issue of "granny" bonds. As the Chancellor of the Exchequer said on Monday, they will have to go a lot further in that direction if they are going to be able to cover all the requirements for financing the debt.

Therefore we should approach the interest rate like the little cat in the Chinese story. Your Lordships may remember that this wise little creature spotted a fish, half hidden in shallow water, not wanting to stir up the mud and lose sight of her prize, she removed the obstacles very, very gently with little taps of her paw. That is the way we ought to deal with the interest rate if we do not want to lose sight of our prize, which is the defeat of inflation.

The difficulties and the distresses caused by high exchange and high interest rates are obvious for all to see but small indeed when set against the magnitude of wage and salary settlements. Hundreds of millions of pounds which might have been used for investment or for inprovements in public services are swallowed up in current payments. I have a deep interest in the maintained schools. It breaks one's heart to see the salary bill for teachers, administrators, school caretakers and the like mounting so high that it irrevocably stops the most urgent improvements in the education service. Think of it; 20 per cent. on the education salary bill is £1,000 million a year. What could we do with half that sum for the children? Therefore I have sympathy with those who call for a radical change in the method of fixing all wages and salaries.

I listened with great interest to what the noble Lord, Lord Jacques, said, but is it really practical? Experience has given no encouragement that we could fix a nationwide contract which everyone would keep. The Labour Party failed, although they were supposed to have the support of the trade unions. The speed with which we are going to emerge from this recession, and the strength of our industry when we get through it, depends on how willing people are now to share in the responsibility for the whole of the economy. There are signs that they are becoming willing. It is most unfair to say that all those signs stem simply from the fear of unemployment. That is what the Labour Party says because they do not want it to be true that some people might be thinking of their country before their own jobs and their money. It is an insult to the British people to say that it is only fear which makes them enter into more sensible arrangements.

Mr. Heath failed, and Mr. Callaghan failed, because sectional interests were put in front of the national interest. Can we do any better now? Hardly, as the Liberal Party's amendment says, if the Labour Party's prescription is to get out of the Common Market, to go in for more nationalisation and to spend more and to borrow more on Government account. That is a prescription for a small, isolated, inflation-ridden country. Those opposite, Mr. Wedgwood Benn, I suppose, at their head, who dream of a socialist island dream not of revival but of defeat. We have better hopes for our future than that. We can learn from this recession and are learning now, and we can work with the Prime Minister for a free society, responsible and prosperous, able and willing to help the disadvantaged at home and those countries abroad which are much less advanced than we are ourselves.

6.28 p.m.

Lord Roberthall

My Lords, I should like to begin by associating myself with the tributes paid to our two maiden speakers. We are very fortunate that what I think is turning out to be a most interesting debate is adorned by two such distinguished speeches. When the gracious Speech discussed home affairs, it began with the statement that the central aim of the Government was the control of inflation. I want to speak mainly about that. Several speakers, especially the noble Lord, Lord Thorneycroft, reminded your Lordships of the great variety of views among economists. When he spoke it struck me that if he had a little more time for reading he could always laugh because there are always opposed sides on every question. So one set must be standing on their heads all the time.

In that connection one of the things that now divide economists is not so much the desirability of checking inflation—I think very few economists would now argue that we ought to learn to live with it, because of the escalating dangers—as the differences about the methods of control and, broadly speaking, the differences between monetarist and incomes policies. I have never—at least since 1948—been in favour of incomes policy. I advocated it when I was advising the Government and I continued to do so, but as the noble Lord, Lord Harris of High Cross, pointed out, with his interesting statistics, each of the experiments of the past has ended in a higher rate of inflation than before and indeed some people have argued from that that an incomes policy makes inflation worse and not better.

At the beginning of last year I was forced finally to admit that an incomes policy did not work, which is of course the argument that is used against it and I think the Government had no option but to turn to the alternative, to monetarism. Nobody can say that incomes policy was successful after the events at the beginning of last year, so the other school must be given a chance. So far we must admit that it is having a reasonable effect. The rate of inflation is coming down. I hope that the noble Lord, Lord Harris of High Cross, is right in his predictions as to how it will go in the next year or two. The people who complain about high interest rates and recessions, especially if they are people who originally supported the present Government, I do not think quite understand that this is the way monetary policy works, with high interest rates and with a recession.

Before leaving that subject, I will only say that in one respect I think that people who advocated the incomes policy have turned out to be right, in that the cost of a monetary deflation is a good deal higher than it was thought to be by the monetarists at the time. I think it was the incomes policy advocates who said, "We do not know how much unemployment will be necessary to bring prices down, but we do not think it will be very much". That, at least, has turned out to be wrong.

I will not say anything more about the present, except that I believe the Government were right to bring down the minimum lending rate although I agree with the noble Viscount, Lord Eccles, that they ought to move cautiously. I think there was a certain contradiction, though, in doing that and in not cutting Government expenditure by associating that with further increases in taxation. Again I agree with the noble Lord, Lord Harris of High Cross, when he says that Government expenditure ought to be reduced but I think he suggested that the proceeds ought to go to the consumer. He may not have quite meant that but I think that would be more in keeping with the present judgment not to add to the present burdens of taxation of one kind or another.

I want to say a little about the future and mainly in connection with what the noble Lord, Lord Jacques, has said. I should like to begin by saying that I think it is unfortunate that we are talking so much now about U-turns. I think we are in danger of getting people to regard it as a point of honour to pursue courses that are no longer appropriate to the situation. I am reminded of something that one of my tutors once quoted to me from Emerson: A foolish consistency is the hobgoblin of little minds". It would be a foolish consistency to feel that you were nailing your flag to the mast if the mast is only an instrument of policy. It is all very well to say firmly when you are against inflation, and I think that is the principle to which the flag could properly be nailed, but whether it is going to be dealt with by one set of measures or another depends on circumstances. I think the noble Lord, Lord Thorneycroft, was rather in favour of this. He did not say it precisely but he suggested that we ought to keep an open mind about the actual measures.

The noble Lord, Lord Jacques, reminded us that in the past there have been attempts to check inflationary tendencies in order to get wages and prices down and they have had more or less success but have always been succeeded by new explosions. Suppose that the Government's policy is completely successful, that is to say that it goes on getting inflation rates down below the lower double figures, which it looks as though is going to happen now—down to some figure which they think we can live with. I do not suppose they will be so optimistic as to think that we can get back to the figures of former periods of full employment when inflation was never much more than 2½ per cent. But suppose they say that they will settle for 4 or 5 per cent.: they cannot then go on with the restrictionist stance. The aim of the policy is not to have a permanent recession or to check growth. They will be forced at that point to settle for somewhat more optimistic targets. If the law remains the same the Treasury will be compelled to give its estimates of growth and prices, and so on, and in all previous recessions a great deal of capacity has been piled up and there was a rather rapid increase in output. My own views about money suggest that there will not be any great problem with regard to reasonable targets.

I agree quite strongly with the noble Lord, Lord Jacques, that at that point there will be another wage explosion. What are the Government going to do then? If they stick to their present policy they will have to clamp down again and just when everybody is beginning to get new orders and employment is going up they will have to change. I think that will be a problem. Of course, if a Labour Government should happen to be in power at that time they will have a problem of inflation on their hands.

The noble Lord, Lord Jacques, said that he dreamed about an incomes policy. If I may say so, I think he should dream a little more realistically. What happened in 1979? The paper about the economy, the Government and trade union responsibilities is full of sensible things which had been said off and on over the previous 30 years—such as getting the price levels down to about 5 per cent., restraint in wage claims, increases in productivity, and a lot of wise words about strikes and picketing. What happened? In no time at all the TUC voted for a return to free collective bargaining. We had the strikes, we had the election, and I am one who thinks that it was the strikes which helped to cause the change in the Government and the present Government inherited a terrific wage burst, with which they are still struggling.

So my short point is that, while the trade union structure remains the same, it is not much good talking about incomes policy or hoping that we shall get away from either recession and unemployment or growth and inflation. The question is, can we do better than that? My own view is that there are only two ways to go, both connected with the trade unions. The first would be to adopt the logic of monetary policy and move back towards a really free labour market. That would mean removing all the legislation which has put the trade unions into such an unprecedented position of freedom from obligations that other people have. The alternative is somehow to persuade the trade unions to consider what their objectives are, to consider what small contributions they have made so far. They have on the whole fuelled inflation, checked growth. Now and then they agreed to incomes policy for a year or two; but, to repeat what has been said already, each round was worse than before.

The other point is that they would have to be in a position where they could deliver any undertakings that they made, which is just what they did not do in 1979. That would require reconsideration not only of their objectives but of how they are not contributing to them. Inflation is not good for the working man, low productivity is not good for the working man, and yet that is all they are offering him. It may be we cannot do this, but I would make one suggestion. The next time there are conversations between the Government and the trade unions about substantive issues, the TUC should be asked, "Why should we believe you if you give us any undertakings?" Take the Conservative Government when they came in. They would have been mad to say they were going to trust to an incomes policy. If the TUC had torpedoed the Labour Government, they were not going to do anything for a Conservative one.

I think there would be a strong argument for saying to the unions, "You did not carry out your share of the bargain when we made all these changes in industrial legislation. We will take the concessions away now and give them back only if you can show that next time we have a bargain of this kind you will be able to honour it". At any rate, it does seem to me that the conversations which I am sure will be inevitable between the TUC and the Government should be something the trade unions can themselves understand—hard bargaining, and a demonstration that not only can the Government deliver but the trade unions can deliver.

6.43 p.m.

Lord Kaldor

My Lords, I want to begin by congratulating our two maiden speakers; I regret that neither of them is here at the moment. One of them, the right reverend Prelate the Bishop of Lincoln, is by long tradition the Visitor of my College; his speech today, in its intellectual quality and sentiment, was such that I feel proud of that long tradition, and I am sure that goes for all other members of my College. In Lord Weinstock we have one of our few really successful industrialists. I regret that the traditions of this House do not allow a noble Lord to make a maiden speech on a controversial matter, and this restricted him to speaking on such wholly uncontroversial subjects as inflation cost accounting and corporation tax, and prevented him from giving any constructive suggestions on how we could improve the performance of the British industry. I hope he will do better next time.

If I may go back a little m time, some noble Lords may remember that I suggested several times last year that the centrepiece of the Government's economic strategy, the control of the money supply, however genuinely believed in by some people, is really only a facade or a smokescreen. The important consequence of the strategy was to alter the balance of bargaining power, to weaken the trade unions through the intensification of unemployment and through the loss of jobs, through factory closures and bankruptcies, and thereby to succeed in bringing wage settlements well below the rate of inflation; that is to say, to reduce real wages.

Since then the smokescreen has tended rather unexpectedly to disperse, on account of the explosive growth of the money supply, which reduced the whole of the Government's medium term strategy to shambles. On the other hand, the Government have definitely scored a certain success in the battle against the trade unions. How else could one interpret the extraordinary, in fact unprecedented, statement by Mrs. Thatcher the other day that she is not "declaring war on the trade unions." I think she is the first British Prime Minister ever to have made such a statement. But the ground which she and her Government have won is really ground recaptured, because inflation is still higher now than it was when the present Government came in. And it is no good for noble Lords like the noble Lord, Lord Roberthall, to say this was all due to the wage explosion. It was not. It was due to the Budget which increased the cost of living by 9 per cent. and contributed the larger part of the rise in the inflation rate from 9 per cent. to 21 per cent. Since then it has come down again.

But when you look at this ground won, at what a tremendous cost to their own supporters. I am not speaking about the workers, but their own supporters—the business community. The loss of profits and the increasing bankruptcies caused by the Government's anti-inflationary policy—even now not yet far-reaching enough to satisfy Professor von Hayek, one of the Prime Minister's protégés—are far more widely spread than the loss of jobs or even the cut of real wages among the workers. We now have over 2 million unemployed, rising at a steady rate of over 100,000 a month. That is a very creditable achievement, until one remembers that it is still less than 10 per cent. of the labour force; 90 per cent. of the workers are still employed, and for the 90 per cent. their standard of living has hardly begun to fall, if at all. Contrast this with the fate of businesses, where a loss of profits must extend to at least 90 per cent. of businesses; I do not think more than 10 per cent. remain unscathed from this tremendous depression—and the threat of bankruptcy hangs over many of them. No wonder the policy of the return to laissez-faire is not greeted in business circles or by such reputable organisations as the CBI with the acclaim which Ministers of the Treasury Bench had every right to expect.

On the money front, I must say things look pretty grim from the Government's point of view. The four-year strategy of steadily diminishing monetary targets ran into trouble from the start, despite repeated increases in the minimum lending rate, despite the brake applied through the corset; the growth of their own chosen target measure, sterling M3, continually tended to exceed the maximum target rate of 11 per cent. from the start. A lot of this was blamed on the corset which was regarded as increasingly ineffective and inappropriate, and was finally withdrawn in the second half of June this year. However, its withdrawal was followed by an explosive growth of the money supply the like of which has not been seen since the years when the system known as "Competition and Credit Control" was put into operation in 1971.

The Chancellor told a parliamentary committee the other day that the rate of growth of sterling M3 over the last nine months, up to and including September, was 19 per cent. in annual terms, which is eight per cent. more than the maximum rate permitted under the strategy. Since then we have had figures for October, and if those are added, the annual rate of growth of sterling M3 for the last nine months is no less than 21 per cent., which is 10 per cent. higher than the target rate. Furthermore, if we take into account only interest-bearing deposits—referred to as "ibels" by the cognoscenti—the annual rate of growth since February is no less than 38.5 per cent. a year. Moreover—and this is something that the Chancellor did not tell the committee—his figures conceal a sharp break in trend in June, at a time when the corset was withdrawn. For in the four months from February to June of this year, sterling M3 grew at an annual rate of 16 per cent.; but in the four months since June—June to October—it grew at more than twice that rate; namely, at an annual rate of 34 per cent. If we take interest-bearing deposits, the situation is much worse; they grew at 23 per cent. in the four months prior to the abolition of the corset, and no less than 56 per cent. in the four months since June.

At the moment there is nothing to limit the growth of the money supply, except the minimum lending rate and that, as your Lordships know, was reduced a few days ago which, and if I am correct in what I argued last year, will itself tend to decelerate the money supply somewhat, because high minimum lending rates have the effect of accelerating the growth of the money supply and not of holding it down. Indeed, the current rates of growth both of the "ibels" and of the money supply as a whole—56 per cent. in the one case and 34 per cent. in the other—are well in excess of those attained during the ill-famed years of monetary explosion under the chancellorship of Lord Barber. Had they occurred under a Labour Government there would have been a fantastic uproar in the media and in the City. And, if the noble Lord, Lord Cockfield—and I am sorry that he is not here present—is to be believed, we shall face a most terrible inflation in 18 months to two years from now, an inflation running to 30 or 40 per cent. a year. That seems to be the view of the noble Lord, Lord Harris of High Cross, also.

But I venture to suggest that when the time comes the noble Lord, Lord Cockfield, will be only too pleased to discover that he has been wrong all the time, and that inflation is not, after all, the automatic consequence of an increase in the money supply of from 18 months to two years previously.

What has been the cause of all this? If one listens to ministerial pronouncements, particularly those of the Prime Minister and her Chancellor, it is all due to the increase in the public sector borrowing requirement. Sir Geoffrey Howe made that point the other day with great emphasis not once, not twice, but at least four times in his evidence to a parliamentary committee of the other place. But neither he nor anyone else, so far as I can see, on the Government side, is prepared to look at the official figures. If they did so, they would discover that none of the monetary expansion, none of the domestic credit expansion, can be accounted for by the PSBR because the sale of gilt-edged securities to the public exceeded in the first half of this year the PSBR by over £1,000 million. So, the public sector deficit made the money supply growth less and not greater than it would otherwise have been. Even if we go back to three years previously, of the £27 billion total of the PSBR for the last three years, ending with the end of 1979, not less than £25.5 billion were covered by the net sale of gilt-edged securities to the non-banking public. So there is no source of money growth there.

The really worrying factor of the present situation is that the Ministers who are responsible for our affairs seem quite incapable of understanding elementary facts, completely incapable of familiarising themselves with the most elementary official statistics, and talk absolute nonsense. Instead, they keep on repeating, in a parrot-like fashion, statements which can be manifestly shown to be false on their own theories, and they are unable or unwilling to take cognisance of evidence which might force them to change their views.

The true cause of the fast increase in domestic credit expansion, and hence in the money supply, was not the PSBR, but what I like to call the PRSBR—that is to say, the private sector borrowing requirement, not the public sector borrowing requirement; and that, in its turn, has its origins in the business situation which causes firms on account of reduced profits, or the absence of profits, or losses, to become far more dependent on bank loans. The deficits of these business firms go up and up every time the Government make an attempt, which they do pretty frequently, to bring down the deficit of the public sector. So we are in the grip of a vicious circle.

In addition, many firms who are in a state of ignorance as to whether they will become insolvent, whether their cash flow will be sufficient to meet their essential commitments, not unnaturally seek safety in the possession of a liquid reserve which they secure by the simple method of "round tripping". I cannot expect all noble Lords to be familiar with that expression, but it means that they draw on their existing overdraft facilities from one of the big banks and re-deposit the money in another bank. Though the cost of borrowing is very high, the reward for lending is also very high; the net cost of possessing a liquid reserve is only the difference between the two rates which, luckily, the competition between the banks—which is very keen—keeps conveniently very small, and very often it is not only kept small, but it is negative: one can borrow at a lower rate than one at which one can re-lend to another bank. Whether it is one or the other, it is a very small price to pay for the security it affords to the businessman who knows that he can sleep soundly in bed and will not become insolvent tomorrow.

Of course, the Bank of England is bound to come up soon with a new gadget, whether it be lending controls, borrowing controls, base controls or interest ceilings. I could mention six different ways, any one of which would serve to damp down the rise in M3, but all of which could do so only at the price of increasing the cost of financial intermediation of British banks relatively to international, or what I would like to call, "extra-territorial" banks. It will mean, therefore, not that there will be less "round tripping" than there is now, but that it will be done with the aid of financial institutions outside the control of the Bank of England. The Government, when they suddenly abolished all exchange controls, achieved more than they realised. For they made the control of the money supply in Britain completely unenforceable, and I think that any expert would agree with that fact. The Prime Minister uses every occasion to admonish the nation for failing to keep within their income—which is a futile endeavour when that income is steadily shrinking as a result of the Government's own policies, and is bound to shrink further with every cut in spending, public or private.

The noble Lord, Lord Thorneycroft, used an analogy the other day—and I am sorry that he is not present—that a nation is not so very different from an individual family, that when a family earns £140 per week and spends £160, there is nothing for it but to cut its spending by £20. But I think that this analogy is quite false. The nation is like a very large family, whose members are engaged in rendering services to each other. In hard times there is no point in cutting down on such services; it is as if a family, being hard-up, decided not to do their own mending, their own house-cleaning or their own washing-up; whereas the sensible thing to do in the face of hardship is to do more of those things and not less; to do more of your own "make do and mend". Collectively, as a nation, we all take in each other's washing. So if I buy less from my neighbour and he buys less from me, and we both buy less from the shop around the corner, none of us will benefit and none of us will be in a better position to balance the books than we were before.

That the noble Lord, Lord Thorneycroft, made those remarks shows that the idea that in order to get rid of inflation the standard of living must come down, that wages must rise by less than prices, is something which spreads far beyond the hard core of ideologues in the Cabinet. Yet it is an utterly false idea. In fact, if the previous Government's incomes policy was unsuccessful, it was largely due to the fact that after a successful first year, in the second year earnings fell far more than prices, largely because of the antics of the IMF, the need to cut back the PSBR, and God knows what else; so that there was a big fall in real income. It was certainly not an intended part of the policy. This is what made the workers sour and what made it impossible to secure their continued co-operation.

Therefore, I regard our present situation as a very good one for getting rid of inflation, and to do so fairly speedily and fairly painlessly—if only our Ministers possessed the necessary know-how, which I fear they do not. If they asked me or some of my Cambridge colleagues how to do it, I would suggest something like a 6 per cent. average pay limit extended over the economy as a whole and not only in the public sector, preferably with the co-operation of the unions but enforced by statute if necessary. I would prefer to start with 8 per cent. rather than 6 per cent. for reasons that would take too long to explain. But I would accompany it with a guarantee of a sufficient fall in the cost of living through a cut in indirect taxes and the introduction of subsidies on essential goods, as we had in wartime, in order to guarantee a modest but steady improvement in real wages—say a 2 per cent. rise in real earnings per year by ensuring that prices fall more than earnings and not less. In our present position, with our large surplus of manpower, with our large surplus in productive capacity and with our strong balance of payments owing to oil, that should be a perfectly easy thing to accomplish; to secure a rise in real wages and a fall in money wages at the same time. That would bring inflation to an end in a very short time.

But the present Government are determined on the very opposite course. They are determined to introduce a succession of budgetary cuts and tax increases in order to reduce the PSBR—which is the economics of a madhouse, as one Minister is reported to have said. For every deflationary package serves to open the gap still wider, thereby necessitating a repetition of the process, in the course of which there is an accelerating downward trend towards lower production, lower employment and lower real income. We have been there before.

In the world crisis of 1930–32 a number of countries were seized by this monetary madness. In England it was Philip Snowden; in America it was Herbert Hoover and even his successor, Franklin D. Roosevelt, who thought that to cure the depression you needed balanced budgets at all costs. But none was more persistent and determined in pursuing this policy than Dr. Brüning the Chancellor of Germany in the last years of the Weimar Republic. In fact, of all the historical figures I know, I find that our present Prime Minister bears more resemblance to Dr. Brüning than to any of her predecessors in this country.

Dr. Brüning, just like Mrs. Thatcher, held very strong views on how to overcome the evils of the world, and a strong will to stick to the chosen path in the face of all obstacles and adversities, and was even in the habit of using the same expressions. His favourite words were that, "There is no alternative". How often have we heard that in the last two years. The Germans heard it all the time from Dr. Brüning. Like Mrs. Thatcher, he was also plagued by "wets". As we now know he had a "wet" Minister of Economics in the shape of Dr. Trendelenburg, who had all kinds of wonderful schemes of reflation prepared by his two Keynesian economic advisers. But Dr. Brüning kept on brushing them aside, saying, "You are not going to deflect me from my chosen path when I am only 100 metres from the winning post". However, he never reached the winning post, because at the end of May 1932 President Hindenburg dismissed him when unemployment reached 7 million, and there was an alarmingly rapid rise in the Nazi vote.

In his place he put Von Papen, a nobleman from Westphalia who was a gentleman farmer with some political experience. Being untainted by the monetarist creed, he adopted Trendelenburg's plans for reflation with enthusiasm; and the new plans of economic expansion, called the "Papen Plan", reversed the economic situation with dramatic suddenness, causing unemployment to shrink by 200,000 in September 1932 and a further 300,000 in October. But alas! Von Papen came too late. As soon as Hitler realised that his popularity was rapidly on the wane, and the Nazi vote fell by 40 per cent. in the December election, he hastened to gain power unconstitutionally through a coup d'état the next January.

The British people, thank God, are not like that. In the face of adversity, fomented by an abrasive Government, they do not fall victim to extreme ideologies such as Nazism or Communism. I learnt from my noble and learned friend Lord Elwyn-Jones on Tuesday that there is a neo-Nazi movement in this country which went on a march protected by more policemen than there were members. I do not think that on an election they would count for anything. I think that the vast majority of the people of this country are moving, intellectually, in quite a different direction. They are longing for an old-fashioned, non-ideological Government of gentlemen, which is their historical image of what a British Government should be, whether of the Right or of the Left. How fortunate we are on this side of the House to have a new leader who fits in so well with this national mood.

7.9 p.m.

Lord Boyd-Carpenter

My Lords, the noble Lord, Lord Kaldor, has a long and distinguished record of tendering economic advice to a variety of countries and Governments. Although, as I am sure he should be the first to acknowledge, the outcome of that has not always met with complete success, we were for that reason particularly interested to hear what advice he intended to give to Her Majesty's Government in the conduct of their economic and financial policy. It was therefore with great excitement that at the twentieth minute of his speech the noble Lord actually came to tender that advice, the previous 20 minutes, as I under stand it, having been a general recital of the woes of the community.

I must confess to a very great disappointment when that advice at last was tendered. As I understand it, it amounted to saying that he would impose as a first step a pay, or indeed an income increase, limit of, he said first of all, 6 per cent., and then his naturally generous nature overcoming him he raised it to 8 per cent.

Lord Kaldor

My Lords, would the noble Lord give way?

Lord Boyd-Carpenter

My Lords, if the noble Lord would wait just a moment I would be only too happy to give way, but it might save the time of the House if I just put the point fully so that he could then deal with it, as I am sure he will. The point I wish to put to him is this. That "acceptable" figure was 5 per cent. That was precisely what Mr. Callaghan and his Government, perhaps acting on the noble Lord's advice, attempted a year or two ago. Yet the House knows that was a complete failure. It did not stand up. It was broken to the right and the left, and was broken, rather interestingly in the light of recent events, by the Ford Motor Company then headed by Sir Terence Beckett, who awarded, I think I am right in saying, 20 per cent. It produced every sort of distortion, every sort of unfairness, and was followed by a wages explosion. Now if the noble Lord wishes to intervene I would be only too happy to give way.

Lord Kaldor

My Lords, I only wished to make one simple point. I mentioned 6 per cent. The 6 per cent. pay limit was put forward by the Government two weeks ago for the public service. I wanted to say that if you start from 6 per cent., make it general not just for the public sector, and I would go along with it provided it is coupled with a guarantee of an even bigger fall in prices. But learning from the same experience to which the noble Lord referred—the winter of discontent—we all agree now that 5 per cent. was a mistake, and if they had made it 8 per cent. the story and the events might have been very different. That is why I mentioned it again.

Lord Boyd-Carpenter

My Lords, I am very much obliged to the noble Lord because he has confirmed exactly my impression of what his point was. In the first place the Government have not announced a pay limit in the public sector of 6 per cent. They have announced, on the contrary, an overall provision for expenditure on pay.

The noble Lord is an economist. You cannot just say, "That is the same". That shows a really startling, in his case, obtuseness. It is of course profoundly different because it allows for a great deal of flexibility. Then the noble Lord apparently failed to distinguish between what the Government lay down as the amount of money they are prepared to provide in a sector where they provide the money, and the totally different proposition that he put forward tonight, which Mr. Callaghan unsuccessfully put forward a year or two ago, of seeking to impose that limit right across the board on profitable and unprofitable enterprises alike. Really the noble Lord cannot pretend there is not an overwhelming distinction between those two.

At least the noble Lord put forward, I would say to his credit, a proposal. That is to distinguish from the noble Baroness, Lady Birk, who I am sorry to see is not in her place, who in a speech of just half an hour put forward no constructive, positive proposal at all, and indeed was obviously so overcome by the inadequacy of her own argument that she required the prompting of the noble and learned Lord on the Woolsack even to move the amendment at all. But the amendment is in fact an extremely serious one, and I would like, with your Lordships' permission, to deal with it.

It calls on the Government to reverse their economic and financial policies. There are two propositions that I would like your Lordships to consider in this connection. First—and I apologise if it seems to verge on platitude—no Government in a democracy propose and carry through policies which can and do inflict difficulties and problems on many sections of society which are, of their nature, unpopular to many people unless that government are convinced that such policies are essential in the interests of the nation as a whole. None of us—those who have been in public life for a good many years—ever thinks that a Government would willingly court unpopularity. I hope that the noble Baroness will concede—I hope were she here she would concede—that a Government that does this must at least be wholly sincere in their belief that these policies are necessary for the restoration of the nation's economy.

The second proposition is that the continuation in this country, or in any of the Western countries, of parliamentary or representative democracy in this dangerous age depends almost entirely on having Governments which are prepared, if in their view the public interest demands it, to stand firmly against unpopularity and do what is right. If you have Governments in any of these countries which run away when public opinion appears disturbed at the immediate consequences of what they are doing, the end of that is the downfall of parliamentary and democratic government. That is precisely what we saw happen—and here again I pick up the noble Lord, Lord Kaldor—in the Weimar Republic, where the weakness and the cowardice of the social democratic leaders opened the door to Hitler and all the horrors that flowed from that. I hope that your Lordships will have both those considerations in mind.

Now let me deal with this request to reverse—

Lord Pitt of Hampstead

My Lords, will the noble Lord give way to me for one second?

Lord Boyd-Carpenter

Of course, my Lords. I am sorry, I did not see the noble Lord.

Lord Pitt of Hampstead

My Lords, am I to understand from what the noble Lord is saying that no Government should change their course even though they have found from the development of events that the course seems to be wrong? Must one merely accept that because the Government are sincere and are sticking to their course they ought to be given credit for doing so?

Lord Boyd-Carpenter

My Lords, if the noble Lord had done me the courtesy of listening to what I was saying he would not have made that intervention, because I was perfectly clear in saying that a Government should not be deterred from doing what they judge to be right by incidental unpopularity. Of course Governments change their policies if they are justified. Indeed, the very success of a Government's policy sometimes enables modifications and changes to be made. This is why I think the common jargon about U-turns is so confusing. What I was saying—and I repeat it for the benefit of only the noble Lord, Lord Pitt of Hampstead, because I think I was otherwise perfectly clear to the House—was that a Government should not be deterred, and if Governments are deterred by the threat of unpopularity from doing what is right, that is the beginning of the end of parliamentary democracy, and the opening of all the horrors—

Lord Kaldor

My Lords, would the noble Lord forgive me for a moment?

Lord Boyd-Carpenter

My Lords, if the noble Lord would forgive me, I have given way twice and there are many speakers tonight, and I really do not want to detain the House.

I come to the point about reversal of policies. If your Lordships reflect on previous efforts since the war to deal with the threat of inflation, and indeed often at that time, although we are spared it on this occasion, with the related threat to the balance of payments, it will be seen there is an unfailing pattern of the efforts being abandoned just too soon. Let us go right back to the tragic resignation and death of the late Sir Stafford Cripps when his policies were reversed; relaxation set in, and inflation and a balance-of-payments crisis followed. May I be in a party sense completely politically impartial over this and look at the time, for which I must admit to your Lordships I share a measure of responsibility, of the relaxations which the late Mr. Maudling made as Chancellor together with the then Prime Minister Mr. Macmillan in 1963 and 1964 when inflation had been beaten, had been controlled, but a premature relaxation lost what had been gained.

Take the even more dramatic occasion of the famous U-turn during Mr. Heath's Administration and the chancellorship of the noble Lord, Lord Barber, in 1972, when a splendid opening to the economic handling of this country's affairs was thrown away by a softening and reversal in the light of public clamour. Or take a final example, the action of Mr. Callaghan's Government, once the salutory discipline of the IMF had been removed in 1978–79, in producing a great relaxation which brought back inflation and all the evils with it.

Faced with that experience in the lifetime of all of us, it surely is taking a very grave responsibility indeed for any party or anyone, particularly speaking with the responsibility of those who speak from the Dispatch Box, to urge a reversal of economic and financial policies at this stage. It is true—and I take it we all rejoice in it—that the measures seem to be working. There is no doubt that inflation is falling; as I understand it, faster than the Treasury forecasts indicated. For whatever reason, it is the fact that wage settlements recently and in prospect have been reasonable. It is the fact that the signs show that the medicine is working. I do not pretend for a moment that it is not bitter and harsh medicine; it has produced the discordant howls of Mr. Len Murray and Sir Terence Beckett, somewhat out of tune, and I think Mr. Murray's have been the more sophisticated or the less unsophisticated. It has produced all sorts of criticisms, but it is working.

Its worst effect of course has been the position in respect of unemployment, but it is a mistake to suggest that any of these problems, including our high level of unemployment, is solely the result of these measures. To think that is to ignore the world situation and world recession. It is to ignore the fact that unemployment rates in, for example, Belgium and Ireland are higher than our own and that in most of our European partners they are not very far in distance from ours, despite, as the noble Lord said earlier, our particular vulnerability as an economy dependent on exports to a greater extent than anybody else.

What one must have in mind is that while the necessary measures, the harsh and bitter medicine, of course have contributed some effect, this has had to be administered against the background of the worst world depression since the war, and if one looks at most of the other advanced industrial countries, certainly in Europe, one sees many similar symptoms; bankruptcies, unemployment and the like. I therefore confess that I am a firm supporter of the Government and I regard—here I pick up what my noble friend Lord Eccles said—the determination, in particular of the Prime Minister, to carry these measures through until full success is achieved as absolutely vital to the future of this country.

Having said that, I will add at once that though I agree entirely with the objectives and general policy, I am inclined to be critical of some of the items of performance. There has been so far no mention today of the increase in the employers' national insurance contribution. The Chancellor of the Exchequer is a highly honourable man and I would not believe for a moment that he had attempted to conceal this. I am not concerned with that; I am concerned with the merits. I believe that to add to the costs of employing labour and to the overall costs of industry at this juncture is a mistake and that to take an additional £400 million out of industry by way of additional employers' contribution is an error of judgment.

I accept at once—if I did not, I am sure my noble friend Lord Cockfield would remind us of it in due course—that under the 1975 Act the ceiling for national insurance graduated contributions must be raised in accordance with the increase in pensions and that this would automatically raise the ceiling for contributions both by employers and employees to the £200 a week level which is being effected. While that no doubt should be done, it could, so far as employers' costs are concerned, have been offset by reducing the much criticised employers' surcharge on national insurance, and in that way the 1975 Act provisions could have operated properly and effectively from the point of view of the national insurance scheme, but on the other hand the net burden on employers need not have been increased. I regard that as a blemish.

I have only one other criticism and it is one I make with a certain diffidence, and that is that it seems to me that the cuts in public expenditure have not gone quite as far as they should. I know the difficulty; I was responsible for public expenditure on two occasions and I know how unpopular one is when one tries to make these cuts and how every sort of argument is raised by colleagues, whatever their degree of humidity, if it affects their department.

Having said that, one is bound in honour to make some suggestions. I understand that considerable reductions are being made, and rightly, in the Civil Service, but is it necessary now to retain the Civil Service Department or, for that matter, the Office of Manpower Economics? Is it necessary for our diminished Navy to retain three Royal Dockyards? Is it not possible to revert to earlier arrangements under which the Germans paid the greater part of the costs and maintenance of the British Army on the Rhine? I know that overseas aid is a sensitive subject, but can a country faced with the problems we face really continue it on quite this scale? There are still directions in which further reductions need to be made.

As my noble friend the Leader of the House said earlier, it is a happier situation for a Government to be able to spend money—in the words of the poet, "To scatter plenty o'er a smiling land"—but it must be the object of policy now, in the relatively early part of this Parliament, to take such a grip on the economy that wealth-creation is given priority and that we get back to the position in which we were in the 1950s and 1960s when all these expenditures were easy to provide for because taxation at over-lowering rates provided ever-increasing amounts because of the general expansion of the economy. The noble Lord, Lord Roberthall, will recall those days, and indeed he contributed greatly to the happy state of affairs that then ran.

Having made those two criticisms, I return to what is the nub of the amendment which raises the issue on which, if we vote tonight, we shall be voting; should these policies, now in sight of success, be reversed because the Government or the House has found the wind too high or the sea too rough, or should they be carried through to the success which is already beginning to appear over the horizon? I will leave on that question one thought with your Lordships, in words which were used just over 400 years ago by Sir Francis Walsingham: There must be a beginning of any great matter, but the continuing to the end until it be thoroughly finished leads to true glory".

The Minister of State, Department of Employment (The Earl of Gowrie)

My Lords, before my noble friend sits down, I would take this opportunity to say that, while I agree very much with his strictures about the speech of the noble Baroness, Lady Birk, her non-attendance here is due to a high fever and is certainly meant as no discourtesy to the House.

Lord Boyd-Carpenter

My Lords, with the leave of the House may I say how sorry I am to hear that. I am glad to say, particularly in view of what my noble friend has just said, that I did not criticise the noble Baroness for her absence, though I undoubtedly criticised her speech as I thought fit. I am sure that the whole House will wish her a quick recovery.

Lord Kaldor

My Lords, the noble Lord, Lord Boyd-Carpenter, spoke about the weakness of the Weimar régime, which led to the Nazis. I want to say that Dr. Brüning was very far from weak. He was every bit as strong as Mrs. Thatcher, if not stronger, and he increased unemployment in Germany through thick and thin by maintaining the same policy of retrenchment and by emergency budgets every six months to try to balance the budget, which he never could attain. He increased unemployment from 2½ million to 7 million in two years. I do not call that weakness. I think that it was a very strong policy, but it was a wrong-headed one; and that is what we were talking about.

7.31 p.m.

Lord Mackie of Benshie

My Lords, I have listened to many good speeches and to many economists. I must say that the two speeches I enjoyed most were the two maiden speeches which I thought were quite excellent and which showed the catholic nature of your Lordships' House in that only here could one hear maiden speeches from the high priests of both God and mammon in one day.

We in the Liberal Party have put down an amendment criticising, rightly so, the actions of the main Opposition, the Labour Party, and yet we are supporting their Motion. Your Lordships know of course that a third party is always placed in an extremely difficult position. Our fears are such that we have to criticise the Government's actions. We are much more similar to the Government than to the Labour Party in our thinking on the way that the country should be run. We appreciate very much some of the commonsense remarks by the Prime Minister about our having to earn our living, and about pricing ourselves out of the market by high wages and low productivity. We agree with all that. We agree that public spending should be cut. But really we are infinitely perturbed by the state of the economy and by the confusion which is quite evident among practically everyone—certainly among the economists. The noble Viscount, Lord Eccles, has just said that he had been at a dinner at which each of the economists present gave a different answer and apparently total confusion reigned.

When one looks at inflation coming down from the level that it reached—regaining ground—and then at the change of course of the Government and at the enormous rise in the money supply, one begins to doubt that it is really the Government who are bringing down inflation. In fact I am sure that the enormous world recession is probably having more effect on inflation in this country than are any measures that the Government are taking, and certainly the inconsistency of the Government's actions must give us great reason to pause.

It is extraordinary to find in this House or in the other place the Conservative Party criticising the CBI. At one time they were the high priests of wisdom and practicality. Now we suddenly find that they are quite wrong, and they are equated with Mr. Len Murray. In fact comparisons are made to the discredit of the CBI chairman.

If one looks at what is happening to business, one must feel that something is wrong. It is all very well to look at the pound and say that it is strong. But the pound is strong for the wrong reasons. It is strong obviously because we have won the pools, we have found oil, and that keeps up our exports. Some of our imports are coming down only because we are not restocking raw material. But our imports of manufactured goods more efficiently produced abroad are still rising. That is why we cannot feel that we can support the Government in this regard.

I was very interested in what the noble Lord the Leader of the House had to say about slimming down in order to become fit and to take advantage of the situation when the recession has ended. He and I are perhaps more fitted to talk about slimming than are many of the better-shaped noble Lords in this House; but I must say about the noble Lord the Leader of the House, in his absence, that I thought he looked better when he was of fuller habit. One talks about slimming down, becoming fit, but that is not what is happening in small industry. The Government want to encourage small industry. I am engaged in a small manufacturing industry, in farming, and I may claim to know something about it. It is a company which I and my fellow entrepreneurs have built up in difficult circumstances. We are certainly slimming down in our company, but we are also putting our heads down, we are battening down the hatches. We looked at the coming year and we said, "It doesn't matter a docken"—or if your Lordships do not understand what a "docken" is, I shall say a "dock"—"about taking advantage of the pick-up when it comes."—it had started in America—"What really matters is survival."

When we looked at the momentum built up by the recession we felt that it would be very difficult for the Government to stop it because there was little doubt that most manufacturing industries were in very difficult circumstances indeed. Therefore I laid it down that when we were slimming down we would not plan, or keep capacity, to take advantage; our job was to make ourselves safe from a continuance of the recession. If we have a reversal of at least the policy of high interest rates, then many small firms in this country will have the money to take advantage, the money to grow. But what happens if it goes on as at present? It is perfectly simple, as everyone knows; it has been said several times in this House. One loses a bit of money and has to go to one's bank. The banks are quite good about this—they are well rewarded for it. One is supported by the bank and of course the interest rates make one worse off than before. I must say at this point that a 14 per cent. base rate means that one is still paying 16½ or 16 per cent. for money. When I started in business we thought it was a devil of a thing if one had to pay 5 per cent. So nobody can say that interest rates are coming down very far—though I know that they are rising in America.

I want to make the point very strongly that in the gracious Speech the Government refer to the advantages of pushing small industry, quite rightly, and they talk—though of course I have not seen the Bills—about reorganising the NEB, the Scottish Development Agency, and the other Government agencies. I hope that they are going to do something of a U-turn or at least change slightly on this matter, because I do not see how in our present situation it is possible to expand small firms without making use of these agencies. They have done excellent, valuable work in Scotland. It is extraordinarily difficult to see how these essential, growing industries can be given a chance except through the agency of the SDA, the Highland Development Board and, in England, the NEB. I hope that the Government will take all practical steps to see that industry receives aid through these agencies.

The gracious Speech also referred to the question of recruitment for industry—and this is really part of the same point. It is extraordinary that one can say that in this country industry has been damaged by the spread of university education. Of course one can argue the other way, but it is true that in the universities in this country to be a professional man is more highly regarded than to be a man who goes into industry. With the spread of university education, which we all know is right and proper, every highly intelligent child can go to a university. Because these children no longer go into industry and come up the hard way—and a very good way—through the shop floor and the technical college taking an HNC, in my view industry loses a lot of very practical people, and in small industries, certainly, they are not replacing them with the graduates who, previously, would have gone naturally into industry.

I think a lot of work needs to be done in the universities, and the Government need to encourage it, not only to bring home to the graduates the value of small industry and the interests in it, but also to bring home to small industry that they need that reservoir of intelligence. I think it could very easily be done, and if the Minister would give a small grant to Dundee University, of which I have the honour to be rector, we can set it up there, because it is a highly practical and technical university, and one of the best of the new ones. With that commercial, I will leave that point.

However, I think that the essence is that the Government cannot pretend that they are going to bring the country to prosperity if they neglect the manufacturing base; and the manufacturing base, while we must have the large units which can assemble the capital for the intensive new processes, depends on the emergence of good people from the small industries. We are way behind America and way behind Germany in numbers, and the Government must promote it. They cannot pretend that, with interest rates as they are and the situation that we have at the present time, they are laying a decent, long-term basis for prosperity. I hope they can change, but that is the reason why we shall be voting against them tonight.

7.42 p.m.

Lord Cobbold

My Lords, it is just on 20 years since I was directly concerned with these matters, and I have too much experience of the difficulties of judgment in the monetary and fiscal fields to believe that it would be wise for anybody so out-of-date to comment on the details of policies which are now being followed. In any case, I align myself very firmly with the noble Lord, Lord Thorneycroft, in not knowing the answers.

My purpose in intervening briefly this evening is to recall a few points from the 1950s, when I was directly concerned, which are perhaps still relevant today. Throughout the 1950s, my Lords, the Bank of England's main consideration was to emphasise the dangers of inflation and the uncomfortable fact that small amounts of inflation in single years would add up to large amounts of inflation over a long period of years; and that, indeed, is what has happened. In the 1950s the great difficulty was to get across to the public what inflation meant, or, indeed, to persuade the public that it was something which concerned anybody except the authorities.

This was in marked contrast with the position in Germany and in other countries where inflation had been lived through, twice in the memory of elderly Germans, with its stark consequences of complete loss of savings, social upheaval and insolvency of the state. In Germany in those years, from 1946 to the end of 1950, the authorities had only to warn of inflationary threats and there was immediate public response. In this country during those years, as in the United States and other countries which had not had the same experience, it was much more difficult to get the message across. The public were often more concerned about the dangers of deflation, from which at times we in this country had suffered more acutely.

One fundamental change between the 1950s and the present time is that inflation has risen over the last two decades to a point of real danger, and that the public has gradually come to understand what it means and to see it as the enemy which must be overcome. This change has made things a bit easier for the authorities. Another fundamental change, which makes things much more difficult, is the general expectation in the public nowadays that even if the inflation rate is brought down a good deal lower, as now hopefully seems to be in sight, prices will continue to move upwards and the value of money will continue to move downwards. This, I am afraid, has become a very general expectation in the public mind.

As I said earlier, I have been an outside spectator of these matters for 20 years, and I do not think it wise to make comments on details of policy at this moment. I remember very well the difficulties, even in those earlier years, of getting the right balance between monetary measures and action in other fields, and also in estimating how the figures would in fact turn out. I should like to conclude by quoting two passages from speeches which I made in 1959. Over those 12 years I began to feel very apologetic for banging on and on about the same subject, but I think some passages from those speeches have stood the test of time, and I should like, if I may, to weary your Lordships by quoting them.

The first is: We live in an age when there are few automatic checks on the creation of money and when official policy increasingly dominates the business scene. The influence of public policy and public spending has become relatively larger: the influence of private business decisions and private spending relatively smaller. Consequently the natural checks imposed by the ups and downs of market judgment, though still important, are less decisive than they used to be". The second—and I was speaking in 1959—is: It has to be proved over the next few decades that paper currencies, and indebtedness expressed in terms of paper currency, can, by the will of democracy and with the support of democracy, retain public confidence as a store of value. This will need continuous and determined efforts by the Governments and central banks of the free world. It will also require an ever wider understanding of the problem by the peoples of our countries, and a continued willingness to accept the disciplines without which the objectives cannot be won. And finally, it will require continued and ever closer co-operation internationally, for monetary illnesses, whether inflationary or deflationary, are uncomfortably infectious and have no respect for national frontiers".

7.48 p.m.

Lord Blease

My Lords, it gives me pleasure to join with other noble Lords who have paid tribute to our two maiden speakers for their very interesting and useful contributions to this important debate today. It is with a sense of sheer disappointment that I welcome the repetition once again in the gracious Speech that Her Majesty's Government will continue in its efforts … to create arrangements for the government of Northern Ireland that will better meet the needs of all its people". However, there will be other opportunities in this new Session to discuss the difficult problems of security and the issues concerned with finding an agreed constitutional form of devolved government for Northern Ireland.

I rise to comment on the five words—in my opinion, the five pitiful words—in the Queen's Speech which declare the Government's intention to foster its economic recovery"— that is, to foster the economic recovery of Northern Ireland. Whatever may be meant by the Government's "fostering", it is my deeply-felt opinion that the philosophy underlying the Government's economic strategy, and their political style, are compounding the other problems that we have in the Province.

It is not only from these Benches that the Government have been accused of failing to take account of the changing economic and political realities. The Government have been accused from among their own ranks of failing to see that the baby is preserved as the bath water is run off, of destroying a sense of unity in the face of adversity and of polarising the people of this country. I am, of course, aware that the Prime Minister has described as "fascinating" the now annual speech of the Lord Privy Seal, Sir Ian Gilmour, when he spoke on the subject of the Government strategy. Fascinating? I frankly think it is frightening.

I find it frightening because all my life I have lived in a community where economic polarisation and social deprivation have helped to fuel, first, the sparks of prejudice and community divisions, then the flames of social upheaval and the destructive fires of violence. I find it frightening because Sir Ian Gilmour and those who think like him have given us no cause to hope that there is a limit beyond which they will not allow the country to sink further into the social division which he claims to find so deeply disturbing. I find it frightening, and not at all fascinating, that for many of our leading industries it seems that already the baby has been flung out with the bath water and that the basic structures necessary for an efficient, competitive, industrial society have been wantonly cast aside for an inflexible political dogma.

I am very much aware of the vast historical differences which have led to the development of a more tolerant political culture here in this country compared with the political culture in Northern Ireland; and I would wish to add that such has been the goodwill and the efforts of the people and the Parliament of this country towards mine in recent years that one would try everything possible to prevent any forms of unbridled strife among the citizens here. But I have to say this. A philosophy based on the revival of outmoded and rejected concepts of difference is more than archaic; it is highly dangerous. There are many who believe, and many more who pretend to believe, that once we have obtained a severe dose of unemployment; when we have experienced the salutary effects of massive cuts in public spending on health and welfare, housing and education; when we have achieved a proper gap in living standards between those who have the power to manage affairs and those who are the managed, and that when these resurrected tenets of Toryism have been firmly enforced, then this country will, at long last, touch its forelock to Sir Keith Joseph on the Tory road to economic prosperity.

But may I ask this? Where is the evidence to support this theory? One can look back in the records and find actual quotations indicating Sir Keith Joseph's approach to some of these particular subjects in connection with the economic policies pursued by the Government. In Northern Ireland when I was in my 20s, we had 35 per cent. unemployed; we had appalling standards of health, housing and education and we had tremendous gaps between the rich and the poor. The same was true to a lesser degree in Scotland, Wales and Northern England. It took the common dangers of a world war to discover a common ground. It took a massive shift in political power in 1945 to remedy the social inequalities, to raise the horizon and the quality of life for the vast majority of the population of these islands. Today, whatever might be the strength of conviction of this high-minded and remote style of Government, the situation is less likely to produce the desired effect in terms of the rediscovery of the common ground and the conditioning social attitudes of those without jobs. Now in the 1980s, the unemployed consist of greater numbers of younger people. They are better trained and with higher standards of education. They are physically stronger. They have higher expectations and far less diffidence than the unemployed of 40 or 50 years ago. Young people are being blamed for the huge increase in vandalism and other forms of anti-social behaviour. There are demands that severe methods of discipline should be introduced.

It is my view that the most suitable discipline that the vast majority of our young people need is the discipline of regular and purposeful jobs. It is the discipline of work and not the indignity of the dole queue that gives a sense of wellbeing and the desire to share in the future together in this country. I should like to add that I do not share the views of one Northern Ireland politician who pronounced on the inevitability of violence in Britain. But only a fool would ignore the extent to which social and economic frustration can turn prejudice into hatred and violence. I would say that I do not wish in any way to see Britain become a prey to popular demagogues. That was why I warned of the dangers of single-minded, inflexible, high-handed, political régimes.

In this context, in seeking the common ground and the common good which I believe was the message which went out from this House on Tuesday last—and especially, if I read it aright the message from the Woolsack—I believe that it is reasonable to ask: What are the Government's measures to foster economic recovery in Northern Ireland; what are the social costs of the Government's policy? We hear a good deal of the present economic costs and the anticipated benefits. In my view, we have every right to believe that, even in direct financial terms, the cost of saving employment and of building houses may be less than that of allowing the growth of unemployment, of bad housing and of homelessness—a matter which was dealt with at some length by my noble friend Lady Birk in her opening statement. I am very worried that, despite all the Government's efforts to make constitutional progress in Northern Ireland, the effect of the political facts of rising unemployment, of cuts in housing, in health service and welfare benefits, as well as in education, could be to increase the polarisation which, in turn, will make even more difficult the path of political agreement.

Unemployment in Northern Ireland is chronic and in some areas male unemployment is now well over 40 per cent. In the 18-month period since this Government took office the dole queues in the Province have been increased by over 50 per cent. Production output has fallen dramatically in the 12-month period from June 1979 to June 1980, the period for which figures are available. The production of textiles fell by 25 per cent.; the manufacturing sector fell by 12 per cent. and construction output was down by 16 per cent. I have every reason to believe that the figures of output for the following six months will be even worse. There is no doubt that employment opportunities, industrial production and social wellbeing have deteriorated to a sorrowful plight during the past 18 months.

It has been said that the housing and unemployment conditions are the worst in Western Europe. It is a fact that the Government on taking office predicted difficult days ahead for the United Kingdom economy. But the Government also promised an upturn in activity, so the principle of the economic position has been established. Surely the Government have relevant information and data to hand now so as to tell us when they expect the upturn to occur. Indeed, I think the noble Lord, Lord Soames, hinted in his opening address here today that the Government were on course in this respect. They must have some data and some information to be able to make statements of that kind. Or perhaps they can tell us if we are to suffer still further industrial decline. We know to our sorrow of the adverse effects of the economy on the living standards or workers over the past 18 months. Surely we have the right to know what mechanism exists to ensure that the economic recovery of the Province is fostered. I think it reasonable to ask how Northern Ireland is to be assured of new growth, investment and jobs when the United Kingdom economy comes out of the present recession.

The Secretary of State for Northern Ireland has worked tirelessly for the past 18 months in talking with the political parties about constitutional matters. I would now respectfully suggest that he, and his ministerial colleagues, should give active attention to what the spokesmen and representatives of the industrial and community interests in Northern Ireland have to say.

Leaders of industry in the Province have publicly stated that the severe contraction of Northern Ireland's industrial base during the past 18 months has reached a critical stage. It has also been stated that it is extremely difficult to envisage that any real recovery perhaps is now possible. In the past, the job growth and productive employment have been "fostered" by balanced inputs of public spending. This element of public spending is now in retreat. The noble Lord, Lord Byers, in his speech today to the House also referred in the same context to the mixed economy and the public spending element generating growth in the context of Great Britain. Many in Northern Ireland are concerned to know how is private investment to be "fostered", encouraged or generated to promote this productive employment and job growth?

As I mentioned earlier in my remarks, the leaders of industry in Northern Ireland have in recent weeks made a number of public statements about the employment situation. Many of these are experienced and responsible public people, whose views and opinions I and others have learned to respect. Perhaps the Government could suitably help to "foster economic recovery" in the Province by actively responding to what has been said by some of these spokesmen, which includes the chairman and members of the Northern Ireland Economic Council, the chairman of the now deposed Northern Ireland Supplementary Benefits Commission, the leaders of the CBI in Northern Ireland, the president and members of the Ulster Farmers' Union, the Lord Mayor of Belfast, the chairman of the Northern Ireland Housing Executive, the chairman of each of the health and social services board and the many representative members of educational establishments. We must not forget the local leaders of the Northern Ireland trades union movement. These are the persons who have all been involved in the difficult work and policies pursued by this Government in Northern Ireland. In that respect they certainly include the effects on the whole of the United Kingdom.

I want to make this point clear. The Ulster people are not engaged in any special pleading. The record over the years shows that the people of Ulster have shouldered fairly the weight of the United Kingdom's burdens. What the Ulster people do expect is that parity of financial commitment should be consistent with parity of opportunity to maintain parity of living standards. The spokesman for industry and the community in Northern Ireland are saying with one voice "Reverse your crippling economic policies while there is something left to 'foster' and to conserve". I believe it in the best interests of the people of Northern Ireland to give my warm support to the amendment moved earlier today by my noble friend Lady Birk.

8.3 p.m.

Viscount Caldecote

My Lords, I think that this is a very timely debate, for we are at a very critical stage in moving towards a firmer base for the economy. Also, I am afraid it has become clear from this debate that noble Lords opposite still cherish the dangerous illusion that there is a softer option that we can easily adopt and get the same solution but get rid of all the pain and hardship. If we are influenced by considerations of that kind, of the hardship that is being suffered personally and by industry at the moment, and we make that famous U-turn towards a softer option, we shall throw away all that we have gained, as many noble Lords have already made clear tonight.

In effect, we shall retreat from defeating inflation, which must remain our absolute top priority. But if we continue exactly on the present course with our existing policies, added to the worldwide recession, that will do such enormous damage to industry that we shall reach the same unhappy result by a more tortuous path. Unemployment will continue to rise to unacceptable limits. We shall be unable to take advantage of the upturn when it comes. Markets will be lost forever and the social consequences will become unacceptable, leading to a return to inflationary policies because political pressures in our democratic society will force a major change of policy.

But there is a way between those two unacceptable alternatives. It is not a middle way. I do not advocate for one moment that we should abandon or in any way interfere with the Government's anti-inflation policy, any more than Sir Terence Beckett has done. But I ask for some slight modification to ensure that we shall reap the benefits of that policy in the end. There are many encouraging signs. Most of all, inflation is falling. It is now around 8 per cent. a year, based on the month by month comparison. Prices are rising much more slowly in spite of the apparent failure to control money supply. I leave to others much more expert in these matters to analyse this apparent paradox. Suffice to say that there does seem to be a growing feeling that the use of M3 to measure the money supply has been somewhat misleading and it is encouraging to see that greater weight is now being placed on the more practical and more understandable indication of inflation which is provided by the change in prices month by month.

So I should like to look at the situation from a manufacturing industry point of view. The reasons for the slower price rises and so for lower inflation are not far to seek. It all started with the more stringent money supply policy initiated by our new Government some 18 months ago, last year. I disagree with the noble Lord, Lord Beswick, that the high MLR has not been effective. The effect first became apparent early this year. I understand from my economist friends that that is not unusual; that the effects of a monetary policy take a year to 18 months to appear. The effects, as I say, became apparent early this year when savings became more attractive than consumption. The already high stocks of the retailers and wholesalers increased further leading to massive destocking by them and major reductions in the orders placed on manufacturing industry. Then competition for the smaller market started to operate successfully in the private sector and prices were thereby kept down.

At the same time, profit margins suffered drastically because costs were rising and prices could not be increased. To keep down unit costs, companies are closing factories and reducing the numbers of their employees. All this is extremely painful both personally for those who lose their jobs, and for industry generally. Much hardship is being caused. I have no doubt—and I believe it is the view of the vast majority of your Lordships—that this great upheaval in industry is essential for its future prosperity, and therefore on balance it is very beneficial. Probably we have to bear the pain for some time yet. But we must ensure that it is all worth while in the end, and that it will lead to the desired objectives of a more efficient, competitive industry on a lasting basis, an industry which can take advantage of the opportunities which will be there when the recession ends and demand improves.

If this is to be achieved, industry needs and must be given all possible help in the immediate future consistent with maintaining progress towards lower inflation. That help is needed now. It cannot be deferred and must not be deferred. It must have priority over all other considerations of convenience, established customs or dogma. Manufacturing industry can fairly claim to have already made major sacrifices and an important contribution towards lower inflation. There can be no let-up on that. I fully accept that there is much more for those of us who work in industry to do, in better management at all levels and in higher productivity, and in many other ways. But that takes time and there is not much time left if the industrial base of this country is not to be irreparably damaged.

My Lords, what should be done? Of course, interest rates should come down as soon as that is justified. We have had the first instalment. We look for more to come when the time is right and I believe that time will come quite soon, for with current inflation well under 10 per cent. and MLR at 14 per cent., at last we have a real rate of interest. But I would point out to the noble Lord, Lord Byers, that that is a very recent event. I think that is the rationale for the fall in interest rate recently, and not before—and not too much now. It is an argument for continuing that if we continue to make progress on reducing inflation, as we have done already. Surely the only factor preventing a lower MLR at the moment is the Government's requirement to borrow money to an excessive extent, and there is no need for me to labour that point.

There are, however, other factors as well as interest that are equally burdensome to industry's costs and cash flow. Taxes like NIS, leading directly to cost increases, must go quickly and be replaced, if necessary, by less burdensome taxes. Certainly, any idea of increasing employers' contributions must surely be abandoned without delay. We should look carefully, too, at ways of helping cash flow in times of falling profits: perhaps a temporary moratorium on payment of advanced corporation tax would be helpful for the next two years or so.

The strong pound is, of course, causing grave difficulties and problems in import competition and export prices, but it is also beneficial in restraining inflation and keeping down the cost of imports, food and the like to our people. In any case, whatever the balance, I believe we have to live with it, for the effect of lower interest rates, when they come, will be offset by the growing strength of the economy and the rising oil revenues. I think the experience of the last few days since the interest rates were put down shows that this is probably right, for the pound did fall for a few days but it is now back almost to where it was before the interest rates came down. The fact is that the strong pound is only inconvenient at our level of pay, which is substantially less than most of our competitors; it is only inconvenient at our level of pay because of our low productivity. If industry could improve its productivity by 12 to 15 per cent., it would go a long way towards restoring competitiveness in many industries.

So that must be our target and it is not unachievable after the present shake-out of over-manning which is taking place now; and when output increases and demand goes up, I believe we shall see really dramatic improvements in productivity. But we shall achieve those improvements only if we take advantage of present conditions to sweep away for ever all the customs and practices that have grown up in industry over past years and which restrict output and productivity.

Here I would take issue with the noble Baroness, Lady Birk, for though concern about loss of jobs is an important factor in industry, in helping to get lower pay settlements, better working conditions and the like, there is a new and better appreciation of all these issues spreading throughout industry. We can and we must sustain that trend by every means in our power, by better communications, effective incentives and firm management, to name a few. But we do need to moderate the exchange rate as far as can be done beneficially and without increasing inflation.

I think that urgent consideration should be given to reducing capital inflows by devices that have been successfully used, for example, in Switzerland and Germany. I should like to see also heavy taxes on dividends paid to non-residents. That would have the twin advantage that it would be a source of revenue and also enable other taxes more burdensome to industry to be reduced, as well as restricting the inflows of capital which are keeping the pound so high. Even if those proposals have only temporary effect, I think we should still look at them very carefully indeed, for what industry needs is help over the next two critical years while the inflation policy comes to full fruition. Therefore, any idea that those arrangements would soon be got round by clever financiers should not deter us from putting them into effect.

Another burden on industry is the steadily increasing charges by nationalised industry monopolies for energy and telecommunications. Such increases by these profitable monopolies must cease until industry can better afford them, particularly as those increases are usually justified only by the need to finance greater investment. But we desperately need the stimulus of that investment and the work it will bring to industry. So we must do our utmost to encourage a clearer understanding within the Treasury and the Government of the difference between capital and revenue. Here I agree most strongly with the noble Lord, Lord Byers.

To reduce revenue costs is virtuous and essential; to sacrifice profitable investment on the altar of cash limits in nationalised industries is suicidal and tragic. We must seek a way out by investment in the private sector, where there is plenty of money for good projects. We must abandon the dogma of treating such investment, even without a Government guarantee, as part of the PSBR. So my plea is in no way for abandoning the anti-inflation policy. In no way is it a plea for a cosy and comfortable path for industry; but I do plead for support for industry over the next two critical years while inflation is defeated, public confidence is restored and industry regathers its strength, ready to forge ahead in a new era. It will be a new era—let there be no mistake about it. Let us accept that; it serves no useful purpose to pretend otherwise.

In the next few years, many traditional industries will contract into very different shapes. Some with low added value will disappear altogether. Even those big capital-intensive companies in which profits are very sensitive to falling output will have to find more specialised niches where they can dominate their market. All through manufacturing industry new product design and quality, marketing and customer service, investment in the most efficient methods and up-to-date equipment will become ever more important in the future, when we shall be increasingly squeezed between competition from the third world, with their low prices, and high technology products from the other industrialised countries.

If we accept that scenario, as I believe we must, then investment in plant and new product development is essential now within the next year or two. We must be ready, when demand improves in 1982 or 1983; otherwise it will be the old, old story all over again—when demand increases, we shall have a flood of imports and we will not help the unemployment problem in this country one jot. All the sacrifices of last year, this year and next year will be wasted. That is why I put so much emphasis on help for industry in the immediate future, for investment will not come if manufacturing industry is fighting for its life, and no amount of financial juggling, monetaristic or otherwise, will alter that.

Though I believe that the deepest and darkest part of the economic tunnel is now not far ahead, we are not yet on the up slope and this is no time to relax. But inflation is coming under control; there is light at the end of the tunnel; there is a growing understanding of the relation between pay, competitiveness, jobs and prosperity and of the importance of new product design. The climate for enterprise and initiative is greatly improved. Many small companies are forming and others are growing which in due time will replace those which are closing and contracting elsewhere. But the last great hurdle still has to be surmounted: control of Government, expenditure, particularly of revenue expenditure. Only the Government can do that, and I have no doubt that under our determined and courageous Prime Minister, that will be done.

8.20 p.m.

Lord Spens

My Lords, I want to follow the themes which were mentioned by, first, the right reverend Prelate, who I see just coming back into his place—and I should like to congratulate him on his marvellous maiden speech—and, secondly, the noble Lord, Lord Mackie of Benshie, about small businesses. It is less than 18 months since I had the privilege of introducing a debate on unemployment, when I made a forecast that by 1984 there might well be 3 million unemployed. At that time, I do not think that many of your Lordships agreed with that forecast. But it is looking very much closer to what might happen now, unless—I said this then, and I say it again today—something is done about it quickly.

What worries me, at the moment, is that the Government do not seem to be treating the problem with the urgency which I believe it needs. For example, why was it necessary for the Secretary of State for Employment to wait until the beginning of this new Session of Parliament to announce the measures which he wanted to introduce through the Manpower Services Commission? In our Select Committee on Employment in the last Session we wrote to the Secretary of State as long ago as the beginning of August, suggesting that something should be done then. Yet we had to wait until November, until a political opportunity could be found, for the introduction of these new measures.

Then I am worried that it seems, from the Press notice from the Manpower Services Commission about these new measures, that the Commission themselves are only now just about to start looking at them. Surely that should have been done three months ago and everything should now be in operation. This lack of sense of urgency goes right down the field. At Question Time the other day I gave your Lordships an example of the length of time it appears to take for a youth opportunities vacancy to be dealt with by the Manpower Services Commission. I said that I knew of an employer who had been asked to be put on the list, as it were, at the beginning of August, but it was only at the end of October that he received the first pieces of paper which referred to his application. Admittedly, during that time he had been vetted, but to delay three months, when the Youth Opportunities Programme is supposed to get opportunities for school-leavers before Christmas, is much too long.

As another example of how this attitude creeps down to the lower echelons, we were horrified to hear in our Select Committee about the apparent reaction of certain careers officers who are taking the view that, because no vacancies are available in their areas, there is no point in their doing their job of giving careers advice. That kind of attitude is quite awful and I feel that the Government must start, and start quickly, giving an example from the top.

Certainly in the short-term we must accept that firms which are making these very large redundancies at the moment will not re-open the factories and mills which they have closed down. Therefore, there can be no hope of seeing any decrease in unemployment from that quarter. So how, having reached the bottom of the recession, are we now to get the unemployment figures down?

It seems to me that there are only two ways. One, which I reject straight away, is by recruiting large numbers of unemployed people into the public services. That would be unproductive, it would be expensive and it would not really solve the problem. The other way—and here I want to repeat what the noble Viscount, Lord Caldecote, said—is to stimulate existing industry quickly. I believe that that is something which the Government should be thinking about and should be doing now. But what is happening? We are still waiting for the planning circular for local authorities, which we were told about during the Second Reading of the Local Government, Planning and Land Bill. That planning circular is supposed to ask local authorities to broaden their planning procedures, in order to get more small businesses started throughout the country. But it has still not been issued by the Department of the Environment, so nothing is happening there.

I have often attacked the Acts on employment protection as a great disincentive to new small businesses taking on more employees. I know that the Acts have been radically amended, but the new businessman does not know in what ways, and I still have people telling me that they will not take on any new employees because they will never be able to get rid of them. Unless something is done, such as issuing quickly a pamphlet describing the rights and protections in those Acts, there will still be this feeling among possible entrepreneurs who want to get started up that it is not worth their while, because of the employment protection legislation.

My third point is a small one, but I did not see it mentioned in the debate in the other place yesterday about the national insurance contribution measures that were announced then. There is to be an increase in the Class 4 national insurance contribution for the self-employed. Admittedly the increase of 0.75 per cent. is not very great, but the Class 4 national insurance contribution is looked upon by self-employed people purely as a tax on their profits. They get no benefit out of it. They had been told by the Government that the whole future of the Class 4 national insurance contribution was under review, but what happens now? The rate is to be increased from 5 per cent. to 5.75 per cent. That will be for next year, so no results of that review are likely to take place until 1982—again, nothing that will stimulate the new businessman to get cracking and start up in business.

I want to draw your Lordships' attention to the 38th Report of the Development Commission, published a fortnight ago. Among its operations, the Development Commission funds the work of COSIRA, the Council for Small Industries in Rural Areas. The report sets out the scope of the commission's work which is, very briefly, as follows: Devising and implementing rolling programmes of small-scale factory or workshop building in rural areas … in order to increase or diversify employment opportunities. … Providing business management and technical advice, training facilities and a credit service to small manufacturing, servicing and some other businesses in rural areas. … Encouraging voluntary or self-governing bodies which, in the countryside and country towns, provide wide-ranging services. … Assisting pioneering and experimental schemes, including surveys of rural conditions …". This report gives very great credit to the ex-chairman of the Development Commission, the noble Lord, Lord Northfield, when it says that he developed the Commission into a de facto development agency for the rural areas of England. A fortnight ago I had the privilege of attending a meeting, called by Mr. Nigel Vinson, the present chairman of the Development Commission, with representatives from the rural community councils and from the various small industries committees. It took place in London. In the morning the meeting was addressed by the Secretary of State for the Environment. In the afternoon they got down to their own business. It was extraordinarily inspiring to hear about the fund of energy and enthusiasm that exists in the rural areas to get new businesses started. I wonder whether something like that ought to be set up for the urban areas as well.

Last year, the total budget for the development corporation was £16 million. It has an administrative staff of 38 and it does a marvellous job. I believe it has now built up a wealth of experience which could be used as a stimulus.

We need catalysts in each area to bring together the various parts of the community which could help new businesses to get moving. At the moment I believe that a great deal is being done. A number of very large companies are working, greatly to their credit, in this way: the British Steel Corporation, ICI, Pilkingtons, Shell, Imperial Tobacco, et cetera. There is even now a new venture by the CBI. But they seem to be haphazard. They happen in certain areas where somebody has a bit of a public conscience and says that something has got to be done for the unemployed. I believe we need that stimulus everywhere. I should like to see it to reach each parish in the country. I believe that there are more than 10,000 parishes in England and Wales. If only we could get someone to act as a catalyst in each little area, art enormous amount could be done.

May I therefore throw out one final suggestion to the Government? Would it be worth-while thinking about some form of Queen's Award for Industry for the encouragement of these catalysts?

8.36 p.m.

Lord Lever of Manchester

My Lords, I detect in this debate a becoming and well justified note of modesty creeping into the economic argument. Granted it yet has not washed up on the Government Front Bench. But who knows? With time it may. The noble Lord, Lord Thorneycroft, in particular impressed me by posing the notion that Governments should not enter office with grandiose notions of overall strategies which will cure all our ills. This argument is welcome to me, for over the last 25 years I have watched a number of Governments entering office with enormous pretensions about how they, in contrast with the previous Government, would remedy all the defects from which our nation suffers. The truth is that these pretensions are not justified and must always lead to disappointment because there is a limit to the power that a Government have in our society to achieve the kind of social and economic engineering which is always boasted before office is achieved.

An economy is a very complex series of cross currents: always in motion, always unpredictable, except within very broad limits. What is more, it is an economy moving among other moving and unpredictable economies. So the role of Government, it seems to me, is most useful when they seek to identify particular problems with reasonable certainty and where they see a high degree of probability of acting benignly in relation to those problems.

I find myself not convinced by the general government strategy, and I have explained that in some detail. Tonight, however, I am going to address myself to one problem, not pretending that it is a cure-all but believing that it would make a useful contribution to our wellbeing if something were done about it; namely, the exchange rate.

Our exchange rate is undoubtedly, in my view, too high for the advantage of our traders and our country. When I was in the previous Government and we were approaching the EMS proposals, I well remember that it was then universally considered by the Treasury that we ought not to risk entering the EMS—I may say that was not my view—on the ground that at a rate of approximately 1.80 to the dollar we were in danger of being gripped at that hideously high rate when all the evidence was, according to the expert Treasury forecasts—the same kind of forecasting upon which Government inevitably has to rely—that we needed a decline in the pound by quite a useful amount. The only argument was by how much. So we did not enter the EMS. I am not revealing any Cabinet secrets. It was publicly forecast that we needed a decline in the rate of the pound on an estimate of our comparative declining labour competitiveness and cost.

What happened? The forecast underestimated the further decline in our labour competitiveness. It was too optimistic about that. But did the pound decline? No, it rose by about 30 per cent. or more against the dollar and not very far short against the yen, the Deutschemark and other currencies. What is the justification for that in anything like fundamental economic terms? There we had a universal view, which I did not entirely share. I did not share the view that we needed depreciation, but I am bound to say that I did not see any scope for substantial appreciation when we were discussing the question of entry into the EMS and we have appreciated 30 per cent. or more against other currencies since then, for which there is no conceivable justification on fundamental economic grounds and in recent months the pace of the upward movement has quickened. The effects of this on our export trade have not yet been fully felt because changes in the competitiveness of the rate take quite a little while to work through and they are masked to some extent by the import shrinkage which has taken place due to the serious depression.

Since our inflation rate, our labour costs, our general position does not justify this appreciation, why has it occurred? It has occurred overwhelmingly due to capital account movements and these capital account movements have occurred mainly for the following reasons. First, the more durable type of capital account movement is the portfolio change; the vast overseas mobile holdings of currency are always searching for a balanced portfolio for security and profit. They have looked around, there is a great nervousness about the American situation due to the fragile Middle Eastern situation, including the Carter blocking arrangements and apprehensions that the Americans might become involved in a Gulf war of some kind.

All this tends to make changes in the portfolio holdings of these hundreds of billions of dollars and other currencies which are held in mobile form by multinational companies, by international investors, and the like, always seeking a balanced portfolio. They look at Great Britain, they see that we have a nice safe Tory Government—none of these wild Labour chaps. We have a splendid depression which from their point of view is promising because it means that the balance of payments for at least the next year or two will show a temporary gain and then there is the oil which they have rather belatedly discovered, although it has been there for quite a while. In that political situation we have heavy portfolio changes which have contributed to sending the pound to an unjustified high level.

In addition to that, we have the more temporary nervous money in the capital account movements due to high interest rates and the like. For all these reasons we have too high a parity, which is an immense strain on our export trade, it is an immense strain on our import competition—that is to say it cheapens the imports—and altogether it produces a situation in which the exporters are in trouble, those combating imports are in trouble, people contemplating investment are in trouble, and the like.

I hope we are not going to hear again the insult which has added to injury during this depression of many worthwhile and efficient firms who are told, "Well, this slump is a splendid cathartic clearance out of the weak and the inefficient". That is of course total balderdash. Let us take the example of the impact of the exchange rate. Of course, it does not hit the night club proprietor or somebody like that. It hits right between the eyes the 30 per cent. change in currency accounting; it hits right between the eyes people like ICI who have been competing very effectively for years but who simply cannot cope with a parity change artificially engendered by capital account portfolio movements. It puts them in an impossible situation where they have to close their factories, in some cases never to open them again.

I am not sure what the Government position is on the high parity. I thought the noble Lord, Lord Thorneycroft, made his position quite clear; his was a sort of "macho" feeling—he felt more of a man when the pound was going up. It did not matter that it ruined ICI or that it ruined our export trade in 10 markets of the world. I greatly respect the noble Lord, Lord Thorneycroft, and would do much to make him feel young and strong, but I must confess that this is an expense to which I would not care to commit the industry and economy of our country, even for so laudable a purpose.

I am glad to see that the noble Lord, Lord Soames, has come to his seat, because I must say that today, in defending the general line of the Government, he was less than his usual ebullient and exuberant self. I was rather disappointed because when that kindly and intelligent head rises above the Dispatch Box I am expecting to hear something that will set my heart moving, encouraged by his speech, but in the end, despite it being the same kindly face, it was as if Santa Claus had descended and then, having reached into his bag of goodies, all he brought out was a rather stale Treasury brief. I do accept from the noble Lord that here and there the authentic voice of the noble Lord himself came through the lines, and I am very grateful for those few fresh words of stimulation.

However I must return to my theme about the Government's position, which the noble Lord touched upon and which I hope the noble Lord who is to wind up will touch upon. Do the Government think that this present high parity is desirable or do they say that it is inevitable? Can we not escape? May I quickly test those two propositions. First, is it desirable? The main argument seems to be, "Look how well the Germans and the Swiss did with an ever rising exchange rate". But their exchange rate did not rise because the Sheikh of Kuwait was nervous; their exchange rate did not rise because the King of Saudi Arabia had the wind up about the Middle East situation. Their exchange rate rose, year in, year out, because year in, year out, they established an industrial competitive supremacy.

Lord Soames

That is what I said, my Lords.

Lord Lever of Manchester

My Lords, a country which has achieved that can face the squeeze of a rising exchange rate. A country in our lamentable competitive position at the moment cannot face a 30 per cent. artificial rise in exchange rate, with all that that implies.

I mentioned the weeding out of the inefficient, but what about the reduction of investment that is taking place? Where is this great revival coming from? Supposing we are able to join the noble Lord in the pious hope that somehow or other we shall energise ourselves after the good hiding which this Government have given us: where are the sinews which are going to send this country forward? Does he really believe that this is part of the energising process that we now have a record low for over a decade in our investment level? I can assure him that it is almost certain to be lower next year. How shall we have the sinews when the upswing starts unless we do something now?

It really cannot be said that it is desirable for us to have this exchange rate. I do not believe that it is possible to mobilise any experienced exporting businessman who will support the proposition that our parity is desirable. It is usually possible to say that there is no opinion so outrageous, so foolish, so indefensible that you cannot get a number of economists to support it. I do not believe that is possible in the argument that the present exchange rate is desirable. If there are any great numbers of such foolish economists—and I boast that I know as many foolish economists as any Member of this House—I have not the pleasure of their acquaintance. The universal opinion is that a rate which has gone up 30 per cent. from a rate which it was universally agreed ought to go down, cannot be right for this country. It may be inevitable, but before I pass from this subject and come to the supposed inevitability of it, it has been said that it produces helpful effects on inflation and hence on wage demands and hence on our competitiveness. Let us just examine that for a moment.

In order for the effect upon wage demands to counter the adverse effect of the 30 per cent. appreciation you would need not merely a reduction in the acceleration of wages, you would need a 30 per cent. reduction in money wages, just to balance the adverse effect of the currency rise. It is an absurdity to believe that the trifling gain on labour costs remotely approaches the possibilities of balancing the damage done by the adverse effect of the currency rise. Indeed, the most optimistic of the Government's supporters would not even hope to claim that there would be a drop in monetary wages next year. Even if monetary wages remained as now there would be a dreadful loss of competitiveness, compared with the 30 per cent. impact of the currency on our competitiveness.

It would require an elasticity in wage response in this country unheard of in our history if you were really to make a gain out of this. Indeed I should remind the House that the situation today is bearing a sinister resemblance to that of 1926 when we attempted to ride high with the pound and rode industry down. It is all very well the noble Lord shaking his head. His close relation said afterwards, having fought a gallant battle against the policy of maintaining too high a parity for the pound, in his memorable words "I would rather see our British industry riding high than see the pound riding high and British industry in the dust".

Lord Soames

My Lords, I am grateful to the noble Lord. I was not denying that that was the situation in 1926; I was saying it is quite different today. I said in my speech, though I do not think the noble Lord noticed it, that this is the reverse of the coin of being an oil-rich nation. Our currency is so high very largely because we are an oil-rich nation. It makes our currency high, but it is based, alas!, on an uncompetitive industry.

Lord Lever of Manchester

Well, my Lords, so it was in 1926, except that we did not have the oil. What the noble Lord is saying so far as the oil is concerned is that as long as we have the oil it is inevitable that we shall have our parity at an uncomfortably high level, not because people trade with us in a way which makes it high, not because we are competitive, but purely because of capital movements. What I would wish to ask the noble Lord is, what happens if this inevitable passivity which he believes we have in relation to the parity sends the pound up to 2.60, 2.70, 2.80 or beyond? Is he going to come to the House and say it is inevitable, it is part of the price of having an oil discovery; that is, part of the price of having the oil is that our industry must be ruined. It surely is an untenable position for the Government to adopt to say that it is inevitable that our industry must trade on terms dictated not by economic fundamentals but by the political anxieties and the portfolio preferences of these vast mobile OPEC funds and their entourage, that British industry must take the rate and make the best of it, even though it is an impossible thing to do as it rises. That cannot be right.

The Government would have to act if the pound went higher because the ruin would reach unbelievable proportions. It is bad enough now, but if you had a rate of 2.60 or 2.80 you would literally paralyse the export trade of this country; you would literally be forced to abandon liberal trade, which allows imports in freely, if you had a rate anything like 2.80. It is bad enough now; it causes unemployment at around 3 million in prospect. What happens if it goes higher? Clearly we cannot accept the inevitability of it. Nor is there any need to accept the inevitability of it. There are a number of things we can do. I am sorry to take up so much time, but I am going to bring it to an end by saying what we might do.

First, deal with the interest rates. We have no business to have interest rates which add to the burden of parity on our industry. Belatedly—I welcome it—the Government have brought down the rate by two points. I have a certain understanding and sympathy with their caution in bringing it down; I would not want to say that I think 2 per cent. was the wrong amount at the first stage, because nobody can be quite sure of the reaction of the markets to a rate drop of this kind. I would possibly even agree that 2 per cent. was about right, provided it was dipping your toe in the water and not the final action or awaiting a long postponed action later on. The 2 per cent. drop has shown that in spite of the fact that our rates are now well below the American rate the pound is strong, and it is stronger than is healthy for us, and we can therefore very much welcome another drop in the interest rate very soon. It is idle to say, as the noble Lord says, that there is nothing we can do about it. Why cannot we take 2 per cent. off the interest rate? Do not tell me that we will release bank lending, that the interest rate has been keeping it down, because it has been soaring in spite of the interest rate. Do not tell me we need high interest rate because we need to keep the M3 under control, because the M3 has been since February running at the rate of 27 per cent. instead of the target rate of 7 to 11 per cent. I hope I have not exaggerated the figures. Shall we say it is startlingly above the target rate. Do not tell me that we have to keep the high interest rate in order to preserve the PSBR at the more modest level which the Government intended, because here, too, that does not correspond with anything that is actually happening.

So the first thing I say to the Government is, "You have shown the right judgment in bringing the rate down 2 per cent. and we are all waiting for the next move downwards, and may it be soon because that will have a useful effect". The pound has dropped a few cents as a result of this reduction. It is nonsense to say, as some of my noble friends have been saying and some noble Lords opposite have been saying, that the interest rate will not affect it. The interest rate has affected it; it has come down something like 10 cents from its peak. It is not enough, but a further drop in the interest rate would certainly affect it more.

The second suggestion I have to put is that the British Government have themselves attracted buying of sterling by offering gilt edged securities at bargain prices to foreigners. Foreigners have bought these securities and they have had a rate of interest—I have not time to calculate it at this late hour but it is a true return on their money of something like 25 per cent. in the last 12 months, anything between 20 and 25 per cent. because they have got the capital gain as well as the interest. Of course for them all this nonsense about the real rate of interest means nothing. They come in with dollars and they go out with dollars, or they go out with Swiss francs or Deutschemarks; they go out in one year with 25 per cent., sometimes more sometimes less, as a reward for their brief sojourn. The Government have invited this. They might at least have taken steps to ensure that these people bought their sterling direct with foreign currency rather than compel them in effect to bid up sterling in the market in order to buy their gilt edged.

Finally, I say what I would hope the Government will not do. I hope they will not listen to the argument for restrictions on the currency as a means of deterring the inflows. These are very tempting. They never work well. To the extent that they work they are more than outweighed by the effect of such restrictions on the currency, because what normally happens is that for quite a long period ahead the restrictions on inflows are treated by the money markets of the world as a certificate of an undervalued currency, a certificate that the demand for the currency is greater than can be supplied, and so by leads and lags and all other means of currency movement these restrictions are always more than circumvented.

My final appeal to the Government is: for goodness' sake do not stand there saying that the intolerable rate for the pound now existing must be accepted and that any future intolerable rate, however ruinous, must be accepted. They must realise that that is an intellectually bankrupt position. They cannot offer as their platform that they are ready if necessary to sacrifice the industry and economy of this country to the totem pole of an M.3, which has already been greatly exceeded without any aid from keeping the currency at a reasonable and workable level.

Lord Rhodes

My Lords, before the noble Lord, Lord Lever of Manchester, sits down, may I ask him whether, in his wisdom, he will elaborate a little on what he said at the beginning of his speech, namely, that we did not join the EMS because of the lower rate of the pound? What does lie think now about our joining the EMS with the high value of the pound?

Lord Lever of Manchester

My Lords, I am sure that the noble Lord will not think me discourteous if I say that I would be trespassing on the very considerable indulgence of the House if I did not reserve this conversation to a private moment with the noble Lord outside the Chamber.

9.1 p.m.

Lord Barnby

My Lords, I feel privileged to follow the noble Lord, Lord Lever of Manchester, who is a prominent economist, whose talent for fluency we so admire and whose contributions are habitually of great service to the policies of the party of which he is a member. Most speakers have addressed themselves to a fairly wide review of the philosophies and practicalities of economic policy with a contribution of statistics. I propose to confine myself to a similar subject. However, before I do so—even though he is not in his seat—I should like to apologise to the noble Lord the Minister of State for leaving the House before he makes his winding-up speech.

My aim is to emphasise the importance to this country's economy and defence of the minerals from the South African Republic. I do not think that the West pays enough attention to this matter. I know that Russia in her wide-ranging pressure throughout the world probably covets highly on her list of aims the obtaining of those minerals if she can. I feel that Russia should be opposed in every way and at every point. But, she recognises that the African Continent is today probably one of the best areas in which to exercise her policy of dissention and disruption. That is the policy which can bring the best results for her anywhere on the African continent. Her contribution to fomenting disorder is marked everywhere and in many of the ports of Africa. Her prize, there- fore, is the minerals of South Africa and I believe that it should be our policy to make every effort to deny her that prize.

The press has given plenty of catalogues of what those minerals are and their importance, but I do not propose to follow that. I would remind your Lordships of a speech made in this House in the recent defence debate on 8th May by my noble friend Lord De La Warr who so strongly emphasised the strategic importance of this matter. Curiously enough, public speakers when referring to South Africa often begin their address by expressing their abhorrence for separate development. That presumably implies their desire for a quick change in South Africa—that is, immediate black rule. Surely that would play immediately into the hands of Russia? Wise counsels would encourage gradual change. I believe and am confident that that is the aim of South Africa's present Government. They want time to be granted to them to achieve the legislation which will implement what they want. Many speakers seem unable to moderate the venom of their ideology, including the humanists and the "one wonders". They are all blind to the logic of this country's economic self-interest.

Our international aim should be to protect our interests in South Africa, our investments, our exports and the employment which they generate in this country Too many speakers are critical of the republic where lie these minerals. I believe that that is due to unfamiliarity with the ethnic and the economic problems that exist there. I ask for personal indulgence to support the plea that I am making with regard to recognising the importance of this problem.

My family firm was established in Port Elizabeth at the beginning of this century in order to conduct an export business. I have had close contact ever since. I missed the South African war by one year on the ground of age. I have met many of those who have played a great part in the evolution of that country. When I was very young I met Cecil Rhodes, Abe Bailey, Hoffmeyer, the legendary explorer Frank Johnson, General Smuts and Milner; and I can claim familiarity with several of that body which was called "Milner's babies".

My visits to South Africa have been numerous. I have studied the problem deeply and continuously. I fervently believe in the importance of this matter for the West. The importance to our industry and our defence of this country is manifold. My aim tonight was to bring this to your Lordship's attention.

9.10 p.m.

Lord Kilmarnock

My Lords, perhaps I should apologise for reverting to the subject of unemployment which a number of speakers have made their main theme this evening. At the outset I should like to say that I am not one who blames the Government in full for something which is, to some extent, the result of forces beyond their control. But I find it hard not to quarrel with the Government's response. The social costs of unemployment are those which—understandably, for they are indeed terrible—receive the most publicity. The broad effects in terms of apathy, depression, resentment, poor health, vandalism and crime, though hard to measure, are generally known and admitted.

One of the most alarming features to emerge is the extent to which people's identities are a function of their work, so that loss of job may well lead to disintegration of personality. It is, of course, perfectly understandable that integration with society would have to come from the workplace once the old rural community and extended family relationships have been broken up by the Industrial Revolution. I should like to pursue this point, but this is not the right debate. Therefore, I propose to turn to the financial costs of unemployment which I believe are less well known and which certainly have been less fully explored.

Conflicting figures have been quoted concerning the financial costs of unemployment to the Government. Mr. Healey suggested £10 billion in the Commons debate on this subject on 29th October, though this appears to refer to loss of output. Mr. Bean came up with a similar amount in the same debate, to which he added a further £7 billion that we pay in public expenditure in the form of benefits. The Manpower Services Commission issued some figures in its review of 1977, but I could not find anything authoritative subsequent to that. So I tabled a Question for Written Answer, and the noble Lord, Lord Cockfield, gave me very comprehensively what I asked for. I am sorry that he is not in his place because I should like to thank him for it. If I may, I should like to recommend the Answer to your Lordships. It appears in Hansard of your Lordships' House for Wednesday, 12th November 1980, and it occupies nearly seven columns.

I asked the noble Lord whether he would set out in tabular form the Government's best estimates of the average monthly cost to the Exchequer when an adult male worker on average weekly earnings becomes unemployed. Then I set out two categories of adult male workers; one was a single man and the other was a married man with two children. The answers, which appear in columns 1465, 1466 and so on, are that for a single man with no children earning the average weekly industrial wage, the loss of revenue to the Government is £283.27 per month and the total transfer payments—that is to say, the benefits—are £153.05. The total for the year is £4,832 approximately; that is to say, very nearly £5,000. When we turn to the financial cost of a married man with two children also on average weekly earnings, we come out with a loss of revenue of £254.10 and total transfer payments of £246.43, giving a monthly total of £500.52; that is to say, approximately £6,000 a year.

If we take a figure in the region of £5,000 a year and we multiply it by 2 million unemployed we come out in the region of £10 billion. So it might appear that Mr. Benn and Mr. Healey were, if anything, underestimating. Mr. Varley incidentally in another place yesterday afternoon also gave an estimate which was £6 billion in terms of benefits and lost revenue and £10 billion in terms of lost output.

It is only fair to mention here that the noble Lord, Lord Cockfield, in his Answer entered a caveat, and I should quote it. He said at column 1464: This is not typical"— that is to say, the monthly figures that I have just quoted— of the unemployed as a whole who tend to have lower than average male weekly earnings when in employment". Leaving aside the funereal light that this casts on the earnings of some 2 million of our fellow citizens, let us concede the noble Lord's point. But where does this lead us. Because as earnings-related supplement is phased out between now and 1982 all unemployed people will come to rely on the basic or flat rate plus supplementary benefit where required. Thus, although their previous under-average earnings may have some downward effect on the calculation of lost revenue given here, they will become irrelevant to transfer payments.

Furthermore, the 556,000 unemployed people who were living partly or exclusively on supplementary benefit at the end of 1979 are expected, according to the Supplementary Benefits Commission's Annual Report for that year, to rise to something like 1.5 million in 1982. So whatever we hand back to the noble Lord in response to his caveat, it seems to me we are shortly going to require him to put it back into the kitty.

I promised the noble Lord, Lord Cockfield, in private conversation, not to use these figures irresponsibly. I want him to help me to keep this promise. I should like to ask him when he comes to reply—he is not in his seat, but I hope he will read this tomorrow and perhaps will be able to write to me—whether he will settle for Mr. Varley's or Mr. Benn's figures, or, if not, whether he could offer us his own estimate of the aggregate cost of loss of revenue and transfer payments. I think this would be enormously helpful.

I am not suggesting that these are anything other than inevitable and necessary costs given present policies. Indeed, I shall shortly suggest some transfer costs which ought to be increased, but I am trying to get at the bottom of the true financial cost of unemployment for three main reasons. The first is to show, I think conclusively, that unemployment cannot simply be brushed off as a regrettable by-product of the crusade against inflation. Setting aside the social costs, the very magnitude of the figures precludes that. Indeed, it emerges that the very unemployment that has been tolerated, if not designed, as part of the anti-inflationary package is rapidly becoming one of the largest of all items of that public expenditure which the Government are committed to reducing.

The second reason is that these figures are the background against which any remedial action must be considered. The final reason for attempting to throw some light on financial costs is to raise the question of how they are to be met. It can hardly be at the expense of the other so-called spending departments whose Ministers are already at the limits of their endurance. The projected public sector borrowing requirement for the year has already risen to £3 billion above the original target and it will be embarrassing to take it any higher. So where else to turn?

Unemployment benefit is of course paid from the National Insurance Fund, and here is where the 1 per cent. rise in employees' contributions announced on Monday comes into play. As the noble Baroness, Lady Birk, pointed out earlier, and as the Guardian leader pointed out on Tuesday last, "People begin paying national insurance contributions at incomes lower than those at which they pay tax. The charge thus hurts the poor disproportionately." Quite true; but in addition it means that the lowest paid of all the workers in our society are being asked to contribute with a special levy to their unemployed brethren. This is a levy which will fall on them far more heavily than on those in better and more secure jobs.

At the same time, the basic flat rate of unemployment benefit goes up 5 per cent. less than the rise in prices, so the Government can save some money there too. Furthermore, the unemployed are to be denied the automatic graduation after one year to the higher long-term supplementary benefit which has been conceded to all other supplementary beneficiaries. If this graduation had been allowed, it would have done something at least to alleviate the appalling predicament of the long-term unemployed about whom everyone, including the Government, are showing such concern. Why was this opportunity missed?

Few will quarrel with the Government's aim to bring inflation down, but who have been drafted willy-nilly and without so much as a briefing to be the front line troops in this campaign? The front line conscripts are the poor, who are the least well-equipped to be there, and theirs naturally are the first and heaviest casualties. Is this really the right way to go about things? I wish to quote from the impressive final report of the Supplementary Benefits Commission—final, because it is to be merged in the new Social Security Advisory Committee—where it says in Chapter 1, paragraph 47: It may be that the Government will have to tell the nation that we must pass through a time of tribulation during which there will be general reductions in living standards. If these are to be borne by everyone—the well-off as well as the poor—then it may be acceptable that social security beneficiaries, protected by some assured minimum safety net, should bear their share of the trouble too … But to say that the rich must receive generous tax reductions and that pay and pensions must be index linked, while the poorest and politically weakest members of the community should bear cuts in living standards which richer people are to be spared—that is morally indefensible". It is also likely to be not only morally indefensible but politically disastrous in the not too long run and it is certainly economically unsound, for these are not only questions of elementary justice; they are also questions of elementary economics.

One rich man or one rich family can consume only so much before reaching satiety. The general level of demand for goods and services on which hang the jobs of many in manufacturing, marketing and distributing, depend on adequate purchasing power in the hands of the vast majority, who are not rich. Purchasing power must be spread over the whole population, including the unemployed. I should like to return to the words of the Supplementary Benefits Commission: It may be that the Government will have to tell the nation that we must pass through a time of tribulation". I suggest that this time has come. Unemployment is rapidly approaching the dimensions of a national emergency. How have we previously confronted and overcome national emergencies? By enlisting the energies, will power and consent of the whole nation.

The time has come, I say quite seriously, for the Prime Minister to go on television and talk to the nation, bearing in mind the pledge in the last Conservative manifesto— to reunite a divided and disillusioned people". She should explain the brute facts of the world recession, for which after all she is not responsible, rather than vaguely and plaintively invoking it as an excuse, as Ministers are wont to do. She should tell people that what we are experiencing is a fundamental shift in the pattern of world trade; that there is no immediate prospect of upswing or recovery—with respect to the noble Lord the Leader of the House, I do not know from where he drew such hopes and prospects—and that our share of any expansion in general demand that may eventually take place will be minimal until we have restructured our economy as part of a national effort in which, if living standards are to fall, as they inevitably will, everyone, including the Cabinet, the Civil Service and the "top brass" in nationalised industries and management in private industry, will take a fair share of the sacrifices. She should tell us quite straight that we are looking at hard times for 10 years ahead.

People often ask nostalgically, "What happened to the spirit that won the war?" The answer is that it has never since been called up out of the deep where it lies slumbering. We were once in the forefront of innovation and change and there is no inherent reason why we should not be there again. We have plenty of brains and ingenuity and we have thousands, if not millons, of people who are deeply concerned about our plight and would like to do something about it. The enemy in a world that is changing with bewildering rapidity is attachment to outmoded economic dogmas—a point made by the noble Lord, Lord Jacques—rather than to the real interests and real creative potential of this people.

There are two things that need to be done about unemployment. The first is to relieve it, to mitigate it, here and now, so that those who suffer it do not become hopelessly disillusioned with their country and those who govern it. The second is to reduce it—I cannot be sanguine that we can eliminate it—in the long run. Your Lordships' Select Committee en Unemployment, which was reappointed yesterday, is concerned with the second aim. It is charged to make recommendations on long-term remedies for unemployment. I see the chairman of the committee, the noble Baroness, Lady Seear, in her place, and it is hoped that the committee's report will be published about Whitsun; that is, in approximately six months' time.

It is obvious from its terms of reference that there must be a time-lag between the implementation of any recommendation that the Government may accept and the results. Any change in education and training, for example, will take time to feed through the system. As a member of that committee, and pending the Government's response, if any, to our proposals, I feel that it would not be correct for me to vote for the amendment of the noble Baroness, Lady Birk, much though I respect her judgment in social matters. Therefore, if the amendment is moved to a Divison I shall abstain.

Before sitting down I cannot refrain from reiterating my deep-seated fear. No proposal of ours for long-term remedies, no debate in this House, however concerned, however well-informed, will be of the slightest use if the social fabric of this country has already split asunder. And there is a very real danger of that happening, if the burden of these troubled times is going to be loaded disproportionately and intolerably on to the poorer members of our society, whether in or out of employment. No strategy can work with a divided nation. Once we become irreparably divided into two nations—and that division is not far off— no remedy devised by any of us will be of the least avail.

9.27 p.m.

Lord Rhodes

My Lords, I join with other noble Lords in congratulating the right reverend Prelate the Bishop of Lincoln on his speech. He identified himself with what is going on in the country in regard to unemployment, and we were glad to hear him. We were also glad to hear what the noble Lord, Lord Weinstock, had to say. The noble Lord, Lord Weinstock, will be a tremendous asset to this House. He has kept the flag flying for generators all over the world, particularly in the Far East, and it has needed some doing because practically every hid has a counter-bid from Japan 26 to 30 per cent. lower; and he has coped with it.

The cynics might say that what the Prime Minister does and what she talks about with such tedious repetition is due to the influence of a little man in Chicago. Some may say—and I have heard it said—that she is a kind of reincarnation of Macbeth who, after he had committed a murder or two, said, according to Shakespeare: I am in blood stepp'd in so far that, should I wade no more returning were as tedious as go o'er". To be fair, it must be remembered that when the Prime Minister came into office she was faced with the result of years of indecision, phoney productivity deals, blind eyes turned to overmanning. I have told your Lordships before about Harry Douglas, who, when he came to this House, spoke about the overmanning in the steel industry. He told me 15 years ago that there were 40,000 too many men.

Why have we waited all this time? All through the prosperity we did nothing. We are to blame. You do not need to single out people or parties; we are all to blame for it. Nobody took any notice. There were leapfrogging wage claims, and desperate attempts to preserve old and antiquated differentials. Somewhere at the back of my mind I have a quotation— Red sprays of ruined springs". Lord Hale, who used to represent Oldham, today had a Question down on unemployment in Oldham. People used to smile when the textile industry was mentioned. They used to think how inefficient we were, and how backward. Few industries are not suffering now from what is going on! I have tried to paraphrase an article in the Oldham Chronicle last week-end: Who today would give a categoric affirmative to the 64 dollar question as to whether our country has even a short-term industrial future that can work? We hope we have, but that hope is pinned to the fragile belief that a largely just and sane society could not allow itself to be destroyed by the accident of economic collapse". A tragic comment from a town with nearly 9,000 unemployed looking for 190 vacancies.

The Prime Minister started off on the wrong foot. She was too eager to gain the applause of the highly-paid. That was a tactical error that will need a lot of living down. Then, before her Administration got going she made another one—15 per cent. VAT, which contributed largely to increased wage demands and resultant inflation. Then we had free collective bargaining based on what an individual could afford to pay. It has not worked. Employers have a lot more than the odds just to keep going, in the hope that things were going to improve. It was always a nonstarter, because in this age of high technology, with continuity and shift working in many industries, where they work 168 hours a week, an employer weighs up which will cost him the least—a strike or giving in to a current demand for more wages. More often than not it is a case of giving in to a demand for more wages; and look at the spin-off that there is all along the line.

On Tuesday I came down through Birmingham and went to the Furniture Exhibition, which I had a pressing invitation to visit. Are they slack in the furniture industry? Not a bit of it! They are experiencing a boom. And who are they directing their adverts to? It is the people who have been paid redundancy money. There is a lot of money about and it is being spent. It must be remembered that redundancy money has to be spent before social security can be drawn.

An incomes policy is inevitable under such circumstances; but it is bound to be rough and ready. We are not yet sufficiently mature to be able to settle the difficulties of differentials without arguments and strife. In many ways it is a pity that the present Government did not resurrect our attempt to do something about it with In Place of Strife, which was withdrawn in July 1969 when the then-Mr. Wilson and the then-Barbara Castle had the mat pulled from under their feet by the ex-Prime Minister.

A noble Lord

Hear, hear!

Lord Rhodes

My Lords, that is right. The noble Lord would not be sitting on that side of the House if it had gone through. He would be sitting over here. Free collective bargaining without an incomes policy is like bringing on your fast bowler without a stumper. But I am glad that the Government have at last come round to acknowledging the need for guidelines, at any rate, by settling on 6 per cent. for the public sector.

My Lords, I must cut what I have to say because it is getting late, but there are two or three items of a constructive nature that I want to put to the Government. I say to the noble Lord opposite who seems to have moved from his place on the Front Bench that there will be a chance for him to answer these points in a few minutes without his discussing them now while I am talking.

Lord Boyd-Carpenter

My Lords, he is in very good company.

Lord Rhodes

My Lords, we have done a lot of talking about small businesses. There has been more tripe talked about small businesses than there has about the economy—which is saying a lot. But they have neglected one of the most potent parts of what would go towards establishing and developing small businesses. Do noble Lords realise that corporation tax is having a very deterrent effect on small businesses? I will explain why. A small business has to pay corporation tax on undistributed profits. If you brought in the simple condition that they did not need to pay corporation tax on undistributed profits, that would furnish the necessary finance for several small businesses that I know to employ more people almost at once.

I promised my noble friend Lord Hale that I would refer to the subject of textiles. I have a recurring nightmare. It comes every so often and it is always the same: my looms are running empty and my work people are looking at me and wanting to know what I am going to do about it. In the 40 years when I developed my business I never ran one hour short time. My father and I walked from where I live now and called on every mill between Saddleworth and Huddersfield, 12 miles, and when we got to Huddersfield Station my father was in tears and said: "Nobody seems to want us, lad." That has remained with me all my days. In all those 40 years we never failed to see anybody who came up the lane to look for work. Anybody who has never been unemployed knows nothing about it. They do not know the despair, or the reduction in morale.

After World War 1, I had to have a hobby because I was badly wounded and I had been an athlete before then. I started choirs because that was something with which I could get in touch with the ordinary people who could do things. I used to go round and knock on doors and ask: "Is your Jack in?" Jack would be in. "Will he come to the choir?" Silence! Why would he not come to the choir? It was because he had only one pair of trousers—and those were patched. It is no laughing matter, my Lords. The two nations that the noble Lord, Lord Kilmarnock, was talking about a few moments ago did not mix. That was one of the first big social problems that I was confronted with as a young man, trying to bridge the two, and I eventually did it; but we do not want that happening again because this time it will not be accepted with the same sort of acquiescence as it was last time.

The Government have been badgered and pressed by all sorts of people engaged in different industries to bring in import controls. Personally, I do not want to see controls across the board. I think that would be a retrograde step and unfortunate. Being a member of the committee upstairs on the EEC and having under my surveillance what is going on in the Common Market about this matter, I have given a lot of thought to it. The enforcement of quota arrangements is left to individual member states. I am being as brief as I can, my Lords. Our Customs and Excise people do not have anycne engaged solely on textiles. I am quoting from Customs and Excise information supplied to me. The EEC have only four men on fraud detection and, considering the amount of fraudulent entry of textiles into this country, that really is ridiculous.

Through the representations that we have been making lately through the Ministries, at last something is being done and a directive is being addressed to departments from the Commission in Brussels to really take up more strongly the question of fraudulent entry. The Minister will recollect that. I am now entitled to say, after a lot of inquiry and work that has gone into it, that a country which will become a member of the EEC in the comparatively near future, has done a feasibility study into the computerisation of Customs and Excise work on imports. I have been told so often that it is not possible, and: "Oh, we can't disturb what is going on"; but this is now a practical proposition.

The primary objectives are the collection of customs duty on imports and foreign exchange controls. A major process is the clearance of dutiable items from the arrival in the importing country. It is estimated that one Customs officer can make six clearances an hour: in other words, 10,000 in a year. A fairly busy court handles 60,000 manifests a year, so six men could handle clearances at an average port. You might have a dozen in the country and it would not be too many men to spare. Hence it is possible to do the job, and clearly it is a smaller problem for a country to bring in this system than to have VAT, which has a much higher transaction load. Input can be transmitted to a central computer for a country's statistics overall limit controls by classification.

What I am saying is this: if you can identify it for dutiable purposes you can identify it for country of origin and for fraudulent entry. If that were done I am certain it would take a lot of the steam out of the pressure that is being applied to the Government at the present time for import controls.

I have spoken for too long, but I will finish on this. A week last Thursday night I went to a prize-giving and I had several from the sixth form tackle me after it was over. They asked: "what is happening to our manufacturing and industrial base?" I had to give them what I could as a palliative. On Sunday my doorbell rang and there was a young man, an engineering graduate from Cambridge, who is now a graduate apprentice in Manchester doing only two and a half to three days a week. He feels he is an embarrassment to the management and an embarrassment to himself. He wants to know whether there are better chances overseas. It is difficult to advise at the present time on what is the best thing for a young man to do.

We do not yet know what to do about differentials and what people are worth to society. There must be a lot of toleration and understanding in the near future, in the way that we behave to our unemployed. Treat them courteously. Do not treat the unemployed as many of the men who have been disabled in Northern Ireland are being treated—that is, with a rubber stamp. We must treat in a civilised manner our people who are suffering from unemployment, and work all the time to bring them back into society.

9.51 p.m.

Viscount Massereene and Ferrard

My Lords, the noble Lord, Lord Rhodes, who has just sat down, blamed the Prime Minister for lessening the tax on the highest paid executives in this country, who have been paying the highest tax in the world. If the Prime Minister had not done that, we should have had a drain of our executives out of the country. We do not want to lose any more.

I cannot agree at all with the noble Lord, Lord Lever of Manchester, who said that he dislikes a strong pound. In my opinion, a country which wants a weak currency is a decadent country. The reason why some exporters want a weak pound—and you cannot blame them—is for the reason that my noble Leader gave. In the last 10 years, wages have increased by, I think, 367 per cent. In that same period, productivity has increased by only 10 per cent. That is why some exporters want a weak pound. But Japan, Germany, America and all the other countries also have a strong currency, yet they can export all right.

I remember the first time I went to America in the mid-thirties, when the rate was five dollars to the pound. That was just after our depression. But we could export with five dollars to the pound. We had a strong currency. Up to 20 years ago, this country always had a strong currency. At the height of our power, we had a strong currency. We have had a strong currency for 200 years. It is only during the last 20 years or so that we have had a weak currency.

We have heard a lot of gloom today, but I should just like to point out a few of the advances which the Prime Minister and the present Government have made. For the first time for many years, we have a very good balance of payments. Your Lordships may say that that is due to the oil, and of course to a certain extent it is. Nevertheless, it is an achievement. We are also having lower wage settlements and inflation has come down. As I said, we have a strong pound, which I am all for. So I sincerely hope that the Prime Minister will stick to her guns—I am sure that she will—and will not pump too much money into the economy, because she is on the right road.

The only slight criticism that I might make—I am probably wrong about this—is that I think the Government have over-estimated the effect that high interest rates have on curing inflation in modern times. They cure it a little, but you must remember that public expenditure is £80,000 million. God almighty! When I was a young man, the whole Budget was only £800 million. Does the average person understand what £100 million is? That is getting near to 70 per cent. of the gross national product, so a high interest rate by itself cannot do the trick. One has to be ruthless, though selective, in cutting down public expenditure. I said this in the last speech which I made when we had a debate on economics. Indeed, I have made this point several times. With due respect, I believe that the Government have only been nibbling at the problem of curing public expenditure, although do understand that it is a very difficult problem for them. I imagine that the high mandarins of the Civil Service are very difficult to get past. I appreciate the Government's difficulties.

There was the Clegg Commission on pay comparability. The Government had to carry out those recommendations, which did not help them. Very high salaries and wages were awarded by the Clegg Coin-mission. The Government have also had to adhere to their election pledge to put up pensions. Conservative Governments always do adhere to their election pledges.

High interest rates have had an adverse effect upon small businesses. The problem is that to a certain extent, perhaps to a small extent, the high interest rate has added to public expenditure as it has caused unemployment. We must be fair about that. Unemployment means that there is a greater demand on the social services.

In that same speech I drew attention to the index linked pensions of civil servants and public employees generally. The bill for index linked pensions stands at the moment at £2,435 million. Owing to inflation this year, this is shortly to be increased by another £387 million. That is not the Government's fault. It is a legacy from the days of Mr. Heath; he probably did not realise the implications of that measure.

If we look at the pension commitments of state boards, last year British Steel ran at a loss of £540 million and had to pay out £92 million in pensions. In all, £4,000 million is paid out in pensions if you count local authority employees, the Post Office, et cetera. I am not counting the increase in old age pensions and other pensions which amounts to another £3,000 million. That was an election pledge which has to be carried out. Owing to that extra expenditure it has been extremely difficult to bring down inflation.

The index-linking of public servants' pensions must stop. The private sector is fighting inflation and producing the wealth to subsidise this pampered section of the community, which is extremely unfair on private sector employees. We cannot do anything about the index-linking of public servants' pensions this year because of the law. But next year surely we could bring in a Bill for a more equitable scheme. The present 8½ per cent. contribution by civil servants to their pensions is not really enough. I do not necessarily say that we ought to scale down the pensions of the lower grades in the Civil Service, but when we look at some of the higher grades it really does become absurd. For instance, although I know that judges are not civil servants, owing to the index-linking of pensions, High Court judges are going to get an addition to their pensions this year of over £2,500. If I were a retired High Court judge, I should be rather embarrassed about that. I think we must do something about this next year, otherwise the fight against inflation will be almost impossible.

Perhaps for just two or three minutes I may now return to the subject of small firms. Small firms have suffered and also farmers. I know several who have gone broke. If small firms are going to expand and prosper—and in the Queen's Speech the Government say that they are going to help small firms—the greatest help they can have would be low interest rates. It depends what a firm is manufacturing, but if they are manufacturing goods which take quite a time to make they must have credit if they do not have a high working capital. It is the same with farming; if you are a grain farmer or a sheep farmer or a fruit farmer you must have credit to tide you over until your harvest comes in or your lambs are sold.

I should like to say something about tax. With regard to the extra £1,500 million that the Chancellor has to find to stop the public sector borrowing requirement from going through the roof, I do not think it is really wise to take quite a large proportion of that tax from the oil companies because I understand at the moment they are carrying 80 per cent, tax, and if we overdo it that will surely cut down on exploration. I wonder why the Government could not have taken some of that tax from the big four banks. If we think of their profits owing to high interest rates last year, this year presumably they will not be any lower. They are bound to be over £2,000 million, and I think the Government could take some tax out of that.

Before I conclude, just to sum up, what is the Prime Minister to do? She only really has the choice of two options. She can either follow her post-war predecessors and pump the money into the economy, when of course we should only go back on to the old seesaw again—if I may call it that. As your Lordships know, if you create jobs artificially by printing more money it is the quick way to ruin. I remember well that I did not endear myself to my Front Bench when Mr. Heath and Lord Barber launched into their consumer-led boom and, of course, printed far too much money; I complained about that. It was certainly a wrong policy. I am quite sure that the Prime Minister is a very courageous lady and I am sure she will stick to her path; I am quite sure she will not weaken, and I sincerely hope she does not, because the policy will take some time to come to fruition. In the end it is the only course that we can take.

If the public really want sound money, they must be prepared to combat inflation. We must shake off the post-war British disease that the world owes us a living because the world certainly does not owe us a living. Also public sector workers must accept their share of the burden, which so far has been borne mainly by the private sector. To conclude, I will say that the Prime Minister is a very patriotic and courageous lady, and I sincerely hope that she gets the help she deserves.

10.7 p.m.

Lord Balogh

My Lords, it is very difficult to follow the last two speakers, but I shall do my best in very difficult circumstances which your Lordships will understand. One thing which encourages me to continue, however, is certainly my pleasurable duty to congratulate the noble Lord, Lord Weinstock, on a really brilliant and at the same time deep and witty speech. I hope we shall hear him very often on the matters we are discussing today.

I now turn for a moment to the introductory speech of the noble Lord the Leader of the House, though I am sorry to say he is not here; perhaps that is very lucky for him. He was depicted in the popular press as a "wet". My hydroscope however, during the debate could not discover an iota of damp on him; indeed it must be thought, ail things considered, that a very good drying machine which made such a good job the other day with Sir Terence has been at work very successfully again.

My noble friend Lord Lever and my noble friend Professor Lord Kaldor have dealt with the actualities of the situation in the exchange market and in the whole economy in depth which I could not parallel, and therefore I shall restrict myself, perhaps to the boredom of your Lordships, to certain fundamental considerations which underlie the policy of the Government and which have got us into the position we are now in. Before I do anything of the sort, I want to emphasise that it is extremely silly to relate the present situation in this country and the world to a slump which is, so to speak, sent by God. God does not make depressions; they are made by humans. What is absolutely clear is that the break with the methodology which we had in the 30 years after the Second World War, and which enabled us to keep unemployment below 3 per cent. throughout the giving up of that methodology and policy, has caused this situation which will continue so long as these methods are applied.

Of course, as an economist, I welcome the Prime Minister's increasingly strident assertions that there will be no turning. I think that the Treasury "Gang of Five" which has done such a remarkable job in the last 18 months, will not be able to find an alibi for failure on the basis that the implementation of the policy was hesitant. I am confident that sooner or later even the noble Minister will not have the gall to come here to teach noble Lords his assumed effortless superior knowledge which is, in fact, increasingly turning into something akin to the Emperor's clothes.

The much boasted triumph of the Government of having improved the rate of inflation and the balance of payments has, of course, been accomplished at an enormous price. At this point I should like to say a word about the relationship of oil to the general problem. The increase in the oil price looks very high, but when we discuss it in terms of the national income of the OECD countries it is trivial. It is roughly 3 per cent. or maybe 3.5 per cent. altogether; that is, it is equivalent to one year's progress at the, sort of rate of expansion to which we were accustomed up to 1978.

The unemployment caused by the Government's policies represents a multiple of the loss caused by high oil prices. Indeed, how could one expect anything better from a Government who decide policy on the hypothesis that a fundamental causal relationship exists between money and prices and that that relationship is sufficiently stable and reversible in two directions to be usable for strategic policy purposes, in particular in checking inflation and it is not merely a necessary but a sufficient instrument for regulating prices and incomes?

In fact, policies inspired by monetarism have proved to be, as we insisted all along, a failure and capable of influencing inflation indirectly only through mass unemployment caused by old-fashioned restrictive policies savagely administered. It is no coincidence that most industrial countries are now suffering from this. In all of them the reaction against Keynesianism has brought about a policy which can only lead to catastrophe.

If inflation were caused by an excess of demand over supply, if too much money was chasing too few goods, then the policy of monetary restriction and fiscal deflation might work, and it especially might work if we also had markets with a market clearing price system. However, we do not have that and Hayek, that great guru of monetarists wrote a letter to The Times in which he said that there is no, and cannot be any, cost-induced inflation. That gives the game away. It means that they are really thinking of old-fashioned 19th-century markets which are here and there even now in natural products—both raw materials and foodstuffs—but which do not exist, of course, in a manufacturing world. This conclusion robs all their views of any relevance to the present situation.

Market forces have been replaced by market power. This change is fatal to conventional economics. It is, of course, fatal to the view that harmonious equilibrium can by itself be found both on the labour market and on the market for commodities. Monetary, global controls can in this framework keep prices and incomes steady by causing uncertainty through mass unemployment. This is the most fatal effect on our present and future national prosperity.

One hears from time to time, from people who like to repeat platitudes, that one has to squeeze inflation out of the system, as if it were a sponge full of water out of the water. You can squeeze it and, lo and behold! the water is replaced by air. But our sponge is not out of the water; it is in the water. It is true, of course, that you can squeeze the sponge in the water, but as soon as the pressure eases it will again fill up with water.

I want to say most emphatically that the present policy will lead us into a situation in which balance can be maintained and inflation avoided only at the cost of having a perpetual labour force unemployed. It is the clearest vindication of the Marxist view of the reserve army and it is extraordinary that this should not be realised by the economists who have been touting this insane doctrine and by the politicians who have accepted it.

The measures which now seem to be contemplated by the Government instead of easing the demand situation, which is tight, are doing exactly the opposite. They are squeezing demand further, as if one could rule a situation in which there is insufficient demand and idle real resources by exacerbating the present situation even further. We need an orderly and civilised way of influencing income, but that cannot be achieved without a balanced policy package, a package far beyond the mere determination of wages. It must embrace general social and financial policies and prevent inflammatory grants of huge proportions to hide salaries. If anybody thinks that free collective bargaining will bring about a balanced structure of wages according to the market, whereas incomes policy leads to distortions, he must be a Rip van Winkle.

It is astonishing that so many intelligent and well-meaning people embrace a faith which purports to be able to regulate a system as complex as the British economy by one single indicator which also purports to be a target. It is not difficult to see why this faith was embraced. It absolves personal responsibility. Policy is dictated in a mechanical way by a sort of computer. There are further considerations about the money supply itself which would prevent any sane person from using it for policy-making purposes.

It is that the money supply itself is a fluctuating entity because of the substitutability of other things for money. If you squeeze a type of money, then another type of money is introduced. When the Germans lost the war and the German mark deteriorated cigarettes and bully beef were used as money. This can happen in a much more moderate way in London when, for instance, the deposits were controlled you got immediately deposit certificates which were not controlled. As both noble Lords, Lord Kaldor and Lord Lever, pointed out, you have now got no control whatsoever because the banks can operate abroad where British controls cannot reach them.

I should like to say now one more word about the problem of oil. Nothing is more typical of the Thatcher régime than the mismanagement of the balance of payments. In a situation in which our costs are increasing faster than those of our competitors the external value of our currency has risen by two-thirds. When the noble Lord, Lord Lever, said about one-third, he was only thinking of the last year. The appreciation from 1976 to date is from 1.56 dollars to 2.35, 36, 37; that is to say, by almost double.

We are told by the Government and the Governor that it is beyond the power of the Government and the Bank to influence the external value of sterling and keep it at a level which is compatible with competitiveness. I have never heard such nonsense in my life. For 250 years we were on the gold standard and the Bank of England did precisely this. That the Governor of the Bank should say such nonsense is astonishing. Especially astonishing because I always considered him as one of the outstanding Governors in the last 100 years. But it is absolutely absurd to talk like this. Not only was the Bank doing what he described as impossible, but of course the European monetary system is based on fixed currencies, and so was Bretton Woods.

I always held that the IMF was not sufficient to ensure smooth working. I never was satisfied with its structure, and all the safeguarding clauses were abandoned, but nevertheless it was functioning, and not only functioned but it gave a pretty happy time to the world's economy for 20 years. Then the Governor comes and tells us he cannot regulate the pound. What is the reason for this nonsense? The reason is that the new theory, on the basis of which the Government are deciding on economic affairs, says that the increase in the volume of money itself creates inflation. This means that the theory completely disregards the role of money as a store of value. It is a means of exchange but it is also a store of value. At the moment the function as store of value is far outreaching its function as a means of exchange.

As the noble Lord, Lord Lever, pointed out, enormous quantities of loose money are lying around and surging from one market to another, causing all sorts of difficulties. Of course, one could keep them away from Britain. Certainly one could, like the Swiss, have a tax or, like the Germans, forbid the issue of securities denominated in the home currency. Altogether it could be dealt with, but it would be an acknowledgement that the theory does not work, that the whole concept of the supply of money is nonsense and that we are drifting further and further into an impossible situation. It is inconceivable that the increase in Arab money had no restrictive effect on the circulation, the velocity, of money. Mind you, the velocity data issued by the Government is not the true velocity but only the income velocity of money, a technical but important point which perhaps somebody will consider.

As was to have been expected, Treasury Ministers and the Government have joyfully taken up a completely phoney analysis which purports to prove that we need to accept a fall in manufacturing as the only way of benefiting by the discovery of oil, and assert that the present insane level of sterling is an equilibrium rate. This reasoning is based on the false hypothesis that the level of national non-oil production income remains unchanged but that only its composition alters. En fact, the present shrinkage of the national product has been due to a deliberate policy which is not only inevitable but contrary even to orthodox rules. I see the noble Lord, Lord Byers, making some sort of sign; I assure him I am nearing my last paragraph. He might have pointed out whatever he has in mind to other noble Lords when they were speaking.

Lord Byers

I have done, my Lords.

Lord Balogh

For some reason the noble Lord has pointed it out to me, my Lords. Professor Freidman, the fount of monetarism, has had to concede in a letter to The Times that inflation was codetermined by a number of factors, which concession underlines his recommendations. He is sensing failure now, but as he is a consummate wriggler-out; he wishes to dissociate from and disavow the British policies by blaming the Bank and the Treasury for the recent crass failures of those policies which of course are based entirely on his teachings. This is as good an indication of his fears as any. Von Hayek, in his turn, blames Friedman for the failure of Thatcher. There is yet hope for sanity. To misquote a famous statesman: England is not going to save herself by monetarist exertions, but might, I trust, save the West by her deterrent example.

10.28 p.m.

Lord O'Brien of Lothbury

My Lords, noble Lords on the Opposition Benches and their colleagues in the other place talk often of the virtues of complete equality in our society. I wonder what they are going to do about the fact that the noble Lord, Lord Rhodes, has a stentorian bellow which commands attention whereas I have only a fluting tenor, if that is not too flattering a description, which pleads for it, and pleads for it at the end of a very long day. I regret that due to a previous engagement which I could not get out of, I came here in the late afternoon. The loss was entirely mine. I missed the opening and early speeches and I missed the maiden speeches of the right reverend Prelate the Bishop of Lincoln and the noble Lord, Lord Weinstock, both of which I am sure were distinguished. I congratulate them on having broken their duck and I am sure both of them will make distinguished contributions to our deliberations in the future.

I wish to say emphatically that I support the Government in their fight against inflation. There can be few people, either in your Lordships' House or elsewhere, who do not think that the fight against inflation should be the primary aim of policy at this time. There may be differences of opinion as to how it should be fought, but that it should be fought is I think generally accepted. In general, I support the policies that the Government are following in order to fight inflation.

I do not believe that it is possible to fight inflation without deflation, and I defy anybody to point to a democratically-ruled economy which has fought inflation successfully without deflating. It is a disservice to all of us for people to stand up and say that there are simple, painless ways of getting rid of inflation. Inflation is a disease which we brought on ourselves—not entirely, but in large part we have done so—and when disease has to be fought the process is often painful. It does no good trying to say that we have a painless solution.

Whereas I support the general policies of the Government, in so far as they are announced, I have criticisms of the way in which they have been implemented. Like all Governments, they have made mistakes—a lot of small ones, but to my mind two whoppers, as well. One of these is in the field of the real world and the other one in the dialectical field. The one in the dialectical field is perhaps the less important, but it is important, nevertheless.

The noble Lord, Lord Balogh, has decried the idea that the money supply is at all important in this context, and so has the noble Lord, Lord Kaldor. In my day we used to call them the terrible twins. I suppose that we are not allowed to do that now that they are with us in the House of Lords.

I am by no means one who believes, as apparently that amiable guru Milton Friedman does, that you have only to control the money supply and everything comes right. But I believe that unless proper attention is paid to the money supply, other policies cannot put things right. However, one needs other policies besides control of the money supply. Of course I accept that control of the money supply is extremely difficult, that money changes, fluctuates in velocity and type, with substitute moneys, and one hardly knows how to keep one's hands on it to control it. But that it must be controlled, or that attempts must be made to control it, I am quite certain. Of course, in the face of distinguished economists who think to the contrary, it is possibly rather bold of me to make such assertions. But, happily, we have economists of every colour. We can always find some good economist who says that something must be done, if there is another one who says that it is no good doing it.

My criticism and my opinion is that the Government attach themselves too strongly to the extreme school, and as I see it unnecessarily so. Having accepted that the control of the money supply was necessary, there was really no need to say that it was the only thing that it was necessary to do; you just had to get on and do it and see what results you obtained. In fact I would have recommended to the Government that it would have displayed more political finesse if they had praised Mr. Healey for the manner in which he had resolutely sought to control the money supply, if they had applauded what he did, and said, "We intend to carry on with your good work, and leave it at that". Then I think they would have avoided the abuse of hard-hearted monetarists, because they would have been doing just what the previous Government did. That was the mistake in dialectic, as I see it.

But there was a much more serious mistake in relation to public expenditure. We know there are people who think that public expenditure is the best kind of expenditure and should never be cut. I think we can have too much of a good thing. The Government felt at the beginning of their period of office that public expenditure must be cut. They made a great deal of noise about cutting it but, at the end of the year, Sir Keith Jospeh said, with that great frankness and integrity which is so harmful to his political image, "A year has been lost". Indeed, a year has been lost—with consequences which, I think, have been very harmful.

In failing to keep down the public sector borrowing requirement, the task of those who had to fund it in the gilt-edged market has been unnecessarily large; the rates of interest which have been required successfully to fund this huge amount have been higher than they need to have been; and I think that industry has been pushed out of the market for capital. Its profits have been eroded by the excessively high exchange rate, caused in part by the very high interest rates; so that the private sector (on which we all depend in the end) has suffered at the expense of the public sector. I agree very much with what my noble friend Lord Lever said: that the exchange rate is damagingly high. I do not agree with what the noble Lord, Lord Balogh, said, that it is perfectly easy to get it down; I think it is a very difficult task. Although I would not presume to offer myself as another candidate as the outstanding governor in the last 100 years, I am sorry to hear that the present one is talking nonsense. I should not have thought that he was. But be that as it may.

Inflation is coming down and, although the money supply may not have been controlled as much as we might have hoped, we have, in fact, a pretty deep recession. The high level of unemployment, the constant sales in the shops where people cannot sell, the flat housing market, all point to the fact that we have an under-employed economy in recession. That, after all, is the object of a deflationary policy; but, having got it, even though various elements of the policy may not have worked quite as well as one wanted, one should pay regard to the fact that one has it. I still hope that the public sector borrowing requirement and Government expenditure can be further reduced in order to leave more room for the private sector on which we all depend—and the Government's latest measures to try to secure that end have my support.

But when we get rid of inflation, as many people have said, what are we left with?—a very under-employed economy. And how are we going to revive it? How are we going to revive it without reproducing the evil that we have just exorcised? The noble Lord, Lord Lever of Manchester, has said in the newspapers that what is wanted is more investment in industry. This is undoubtedly correct. But let us not forget that Mr. Heath in 1971 was seized of the same point and that that was the basis for the massive reflation of the economy which he then brought about. And what happened? Industry did not invest; the money went in other directions; the money supply was inflated and inflation ensued.

What happened then leads me to believe that if we can see the connection between a reflation of the economy, an increase of the money supply and inflation, we ought to be able to see a connection between the reverse; that if we want to cure inflation we must go in the reverse direction, starting with the containment of Government expenditure and the containment of the money supply and, therefore, the containment of inflation—which is what is now occurring.

So it is not easy to get increasing investment by industry unless industry has confidence in the future. Industry has been bedevilled ever since the war by sharp shifts in Government policy, so that they never thought they had a long run ahead when they could invest with confidence. As we know, much of the most important investment matures only after five or six years, so industry must have some assurance of a reasonable period ahead if they are going to invest the vast sums now involved. I wish we could have Government which did not chop and change so enormously, partly as a result of developments in economic management, partly as a result of changing political philosophies.

But even if we could get a more stable governmental background to add to the confidence of industry, what then? We rebate, and industry becomes more prosperous and more confident. Does labour then co-operate to ensure that we have the necessary productivity, price competitiveness and quality of goods? The other day I was talking to one of the leading Japanese industrialists on this subject, and he said, "Of course, the trouble with you is that you have not got what we have in Japan—the recognition between workpeople, management and owners in industry that they have a common destiny, and that they all profit by pursuing that destiny to the best of their ability. Your people are so divisive, so destructive. If only you could get together—labour, management and owners—and realise that you all prosper or you all suffer together, then you might get ahead."

I was one of those who deplored the recommendations of the Bullock Report, but that did not mean that I did not think that labour had a much bigger part to play in ensuring that industry was efficient. I said in a speech here a year or two back that if only we could have a strike by labour upset because management was not using the best possible machines, or because management was consenting to overmanning or insufficient productivity, then we might be getting somewhere. It is too much to hope that the leaders of our labour unions might get this message and seek to put it across to their members in their members' own interests? Because I really think that if they cannot do that, then all the other devices we have, or think we have, to try to improve our industrial position will prove insufficient. Government are not strong enough, shareholders are not strong enough, management is not strong enough. It is the labour force which has the strength, and if only they could move in the right direction instead of the wrong direction, it could make a tremendous difference to our future.

10.43 p.m.

Baroness Seear

My Lords, to my great disadvantage I missed the maiden speech of the noble Lord, Lord Weinstock, from which I know I would have learned a very great deal. So may I congratulate him in the certain knowledge that it was a very useful speech indeed? May I also congratulate the right reverend Prelate for what I think was a really inspiring speech, an extraordinarily informed and incisive speech, for which I think the whole House will be grateful. The trouble with speaking at this time of night is threefold: first, the speaker is nearly asleep; second, the audience in your Lordships' House wishes it was asleep; and, third, everything worth saying has already been said. I propose to cut down very considerably what I had originally intended to say.

However, briefly, we find ourselves with the kind of Conservative Government that we have not been brought up to expect. The great party of pragmatism which has boasted that it does not go into principles is saddled with dogma; and, unfortunately, two of its dogmas are shackling its efforts to tackle the real, basic needs of the economy. The dogmas are the monetarist dogma, and linked with it, though it is not necessarily logically linked with it, is the belief that public spending must be cut down at all costs and regardless of where the economies can be made.

The second dogma is the belief that the market will do the job. Other noble Lords have already referred to this. It seems extraordinary that this 18th century idea should have reared its head again. We on these Benches of course have for a century had a commitment to market economics. But nobody can believe that we are operating with a market at the present time. Many of the most important transactions are simply not controlled by market forces at all, either on the side of the supply of goods or, above all else, the supply of labour. The idea that the increase in employment will have an automatic effect on the reduction of wage claims assumes a perfect market in labour which is as far from the truth as could be. It is true that labour claims are falling at the moment; but I do not believe that this is directly due to employment; it is far more due to the fact that a great deal of wage negotiation has moved to the level of the company, and companies are now in such a deplorable condition that it is crystal clear to all—including those with whom they are negotiating—that there simply is not any money to pay out. So, if we can get rid of the dogma and look at what the real issues are, perhaps we would make more progress.

The first point that I want to make has to do with dogma of general resistance to Government expenditure. Surely where we want to get, and to get as fast as we can, is a re-structuring of industry and moving into high technology. This requires that Government should be prepared to spend money, not wasting it, as their predecessors did, by backing up industries which had no future whatsoever, but to come out boldly—as they are trying to do—and to say, harsh though it may be, that those industries have not a future but the Government will do everything in their power and will spend money to develop the new technology.

It is said that in information technology there is a world market of £50 million. If we do not get into that soon, that market will be gone to our competitors and we shall never get into it. To delay in investing in this kind of industry because of a dogma about public expenditure at the present time seems to me to be so short-sighted that it is hardly possible to believe that the Government really can take this point of view.

The second type of investment for which it is true the Secretary of State for Employment has said in a recent speech there is to be an increase in training, a £250 million additional expenditure on training, is investment in people. Other noble Lords have talked about the level of unemployment and the cost on the one hand and the deplorable human waste on the other.

I wonder whether even now with the additional £250 million which is coming forward we really have the measure of what we need to do in spending to invest in people for the economy that we wish to see emerge as we come out of the recession and as the re-structuring takes place. Together with other members of your Lordships' Unemployment Committee I was recently in Germany. In Germany, 90 per cent. of youngsters leaving school get either full-time education or vocational training. Even with this £250 million, we are still a very, very long way away from anything of that kind, and we are going to need it.

One clear fact which nobody argues about in connection with the future of employment is that there will be no future employment for a large number of unskilled people. We simply cannot afford not to invest in training for youngsters and also for the unemployed who could so easily be re-trained. May I beg the Government to make a very special effort to tackle the many immobilities which prevent people who are capable of learning skilled work getting into skilled work. Some of it is sheer old-fashioned conservatism of the non-political kind. It is quite plain that people can learn new skills far more quickly than traditionally has been said to be the case. Yet we know that in many parts of the country people who have done training in Government training centres are not acceptable, that apprenticeship schemes are still restricted by age of entry and that there are immobilities built into the operation of the labour market and the use of skill, for which we are going to pay a very high price as soon as industry begins to recover. In the development of new industry and investment in skill, surely any economy is false economy. There is a world of difference between cutting back wasteful consumption—we all know there is a great deal of that and of wasteful bureaucracy, as has been said—and cutting back essential investment in either technology or manpower.

Then there is the enormously important question of what we are going to do about pay when we begin to move out of recession. It is true that pay claims are coming down. The Government have set their face against any kind of incomes policy. But what is the point of simply allowing pay claims to come down because we are in the depths of a recession, when we know perfectly well that the minute we begin to move out of that recession the demand for labour goes up? If you still accept the so-called free collective bargaining—which is not free collective bargaining at all—you will be back in the old cycle of excessive pay claims, accepted because of shortage of labour, accepted because employers want to get their businesses going again and it pays them in the short term to pay what is demanded rather than go without the labour. What is the point if, after all this pain and travail, we shall move back into exactly the same kind of wage inflation we have had in the past?

Surely, unpopular as they have been and with all the difficulties of past incomes policies, we really have to find some answer, as soon as recovery sets in—and indeed before then, because it is crystal clear that we need it now: we have half got a pay policy because of the public sector, and that is bound to influence what happens elsewhere, and the minute recovery begins the need for it is going to be very strong indeed. It is true that some of those previous pay policies have not been very successful, but if we had left in being the old Prices and Incomes Board under Sir Aubrey Jones, instead of its being abandoned by the previous Conservative Government, by now it would have established a reputation and people would have had confidence in it. We would have been able to use it and we would have been in a position to cope with changes in wages when the time came for recovery. It is exactly something of that kind which we need to have.

There are a great many difficult changes which the Government are making. There will be more difficult changes they have to make if the recovery is to be both real and lasting. I think that in all the things that have been said in your Lordships' House this evening, emphasis has come from one noble Lord after another on the need for a different spirit, on the need to get people together, to get an understanding of what the problems really are and to be able to get consent for the changes that need to be made. The things that need to be done cannot be done without consent. The Government do not mean to be divisive—I believe that—but in fact they have been divisive.

As the noble Lord, Lord O'Brien, has just said—in view of the switching from one Government to another, the uncertainty that industry has encountered—really, is it not possible to get some sort of cross-party agreement, to get discussions going between employers, unions and across the parties? It is much too serious to continue on a party basis. There has been far too much criticism, even in your Lordships' House today, of the efforts of the Government. I believe that the Government are desperate to do the right thing. The difficulty is to find what to do and how to do it. It cannot be done on a single party basis. It can be done only on a basis of consensus, both at national level and at the level of the plant.

The noble Lord, Lord O'Brien, spoke about the rejection of the Bullock Report. I agree with the rejection of that report, but I do not believe in doing nothing on the basis of trying to get very much better participation and understanding at all levels in industry. It really is the eleventh hour, because the changes are so urgent, and failure at this point will be failure from which it will be extremely difficult to recover. We cannot go on without a greater degree of collaboration at all levels. When will the Government make some approach to other groups, so that we can collaborate?

Lord Kilmarnock

My Lords, before the noble Baroness sits down, may I ask her whether it was a slip of the tongue when she said that the world market for information technology was £50 million? Is it possible that she meant "billion"?

Baroness Seear

My Lords, I thought that I said "billion".

Lord Kilmarnock

I am so sorry, my Lords, I wanted to get that clear for the record.

10.56 p.m.

Lord Bruce of Donington

My Lords, I rise to support the amendment which is on the Order Paper in the name of my noble friend Lady Birk. I should like initially to thank the noble Earl, Lord Gowrie, for informing the House that the absence of my noble friend so quickly after the conclusion of her speech was due entirely to illness. She was, in fact, suffering a temperature of 102° while she was addressing your Lordships.

I should also like to take the opportunity of offering our felicitations to the right reverend Prelate, with whom I have a slight but tenuous connection, in that one of his predecessors before the war was kind enough to confirm me in the Church of England in the little town of Donington, 10 miles north of Spalding, from where I derive my name. I promise the right reverend Prelate that I will not endeavour to suborn his political support on that account, and I hope that the House may have the opportunity of hearing him frequently.

I should also like to congratulate the noble Lord, Lord Weinstock, on his maiden speech. Being something of a maverick in the accountancy profession myself—one of a fairly substantial minority—I can only endorse what he had to say about some of the mumbo-jumbo that has crept into the accountancy profession over recent years, and he expressed sentiments that are very much in accord with my own. It is conventional on these occasions for maiden speeches to be non-controversial. All I can say to the noble Lord, in expressing our appreciation of listening to him, is that if he was non-controversial today, then we should very much like to hear him when he is in the full flight of controversy. It will be a most interesting experience for the House.

The amendment that my noble friend has put down today is one of an essentially moderate nature which, as the House will realise, very much suits my own moderate temperament. It does not seek to thrust any dogma down the throat of the House. All it seeks is a reversal of existing Government policies, which in the current situation must be thought to be a very moderate demand indeed.

I marked with interest the way in which the noble Lord the Leader of the House opened the debate. What his speech lacked in its usual rumbustiousness, it certainly made up with charm and a certain degree of disenchantment, I detected, with experts. He eschewed the vague economic theories and he did not very much care for technicalities. He confined himself therefore to a speech which was extremely pleasant: an affirmation which we expected from him, knowing him so well, of complete loyalty to the dogma enunciated by his Prime Minister, and altogether very agreeable to listen to. But this disenchantment with economists was not confined to the noble Lord the Leader of the House. Lord Thorneycroft, in a moment of his customary frankness, said he was convinced that no economic theory actually works, a sentiment which was echoed by the noble Viscount, Lord Eccles, who also expressed a considerable distaste for economists, in that they do not arrive at unanimous decisions.

This is a very refreshing change. I can only assume that this disenchantment with economists must have come about because the noble Lords either were present when the noble Lord, Lord Cockfield, addressed the House on 31st July or probably had the extremely pleasant and educational experience of reading his speech in Hansard the next day. On 31st July the noble Lord said: At the centre of our policy lies the battle against inflation". Yes, we have heard that before. We would agree with him. It is obviously the centre of policy. This requires"— he said— strict control of the money supply …". A little later, by way of a valediction for the success of his Government up to that time, he said this: In the six months immediately before the election, the money supply grew at an annual rate of 13 per cent. The figures for banking in June which were published on 17th July"— this was 14 days before the noble Lord delivered himself of his very learned observation— 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".—[Official Report, 31/7/80; col. 1050.] Imagine, then, the noble Lord's dismay when he heard his right honourable friend the Chancellor of the Exchequer give evidence before the Select Committee quite recently, when it was revealed that after taking into account all the distortions—the release from the corset and the other technical factors of which the noble Lord the Leader of the House is now so impatient but which obviously meant a very considerable amount to the noble Lord, Lord Cockfield—the money supply had in fact risen by double that rate: to something like 24 per cent.

One can understand a certain disenchantment on the rear Benches behind the Front Bench with the expertise of those who affect to control the money supply when, instead of being held at that figure, or anything near it, the money supply promptly obliges by doubling. I will not enlarge upon that point because when the noble Lord, Lord Cockfield, re-reads the speech that was made by my noble friend Lord Kaldor he will receive all the instruction that he requires in order that we shall not be bothered with technicalities like that in the future.

The other thing which characterised the speech of the noble Lord the Leader of the House was that the progress which was to be accomplished would not be without pain and doubt. He can say that again! Similar sentiments were uttered by the noble Lord, Lord Boyd-Carpenter, who uttered such sentiments on 31st July last. He reiterated today his sentiment that the medicine would indeed be bitter. Nevertheless, his faith in the noble Lord, Lord Cockfield, and the remainder of the Gang of Four in the Treasury remains completely unshaken. I shall refer to that a little later.

I will not deal at all with the question of the level of the pound or interest rates. It was a little unfortunate perhaps that, for perfectly proper reasons, the noble Lord, Lord Cockfield, was not in his place when my noble friend Lord Lever addressed the House on that point. He should read it tomorrow and then he will receive a long overdue instruction—

The Minister of State, Treasury (Lord Cockfield)

My Lords, I am sorry to interrupt the noble Lord. I was here throughout the speech delivered by the noble Lord, Lord Lever of Manchester.

Lord Bruce of Donington

My Lords, I must apologise to the noble Lord immediately. With his usual modesty he must have effaced himself below the level of the Table. He certainly was not visible to me, and I deeply apologise. That would probably explain his absence later because undoubtedly after listening to—if I may say so—the brilliant and quite conclusive speech of my noble friend Lord Lever, some undoubted revisions would have to be made to the Treasury brief which the noble Lord will shortly be informing us about. I do not have to deal with those points any more.

I accept the point of the noble Lord that the battle for inflation is the real battle. Noble Lords on that side of the House and the noble Lord, Lord Boyd-Carpenter, have made much of the point that inflation is being brought down. Well, when the Government took office the retail price index annual rate was 10.3; it is now, 18 months later, standing at 15.4, having been driven to a much higher figure by the actions of the Government. So it is an achievement after 18 months to bring the rate of inflation down to a figure which is 50 per cent. higher than it was when they took office! If that amounts to an achievement, then some drastic revision will have to be made to the interpretation of "achievement" in the Oxford English Dictionary. It does not sound much like an achievement to me. So, after 18 months of policies pursued with steely determination, with the lady not for burning, with all those other attributes of resolve and sincerity, what do we have? A rate of inflation 50 per cent. above what it was when they took over. At what cost? What has been the cost to the people of this country? Or, as I shall show, some of the people of this country.

First, there are 150,000 more homeless and the numbers on the housing list today have risen to 1,200,000. There is a need for housing all over the country and yet there is unemployment in the building labour force on an unprecedented scale. But there has been some indication from the noble Lord, Lord Thorneycroft, and indeed from the noble Lord the Leader of the House, that what we want is commonsense economics. The ordinary people may not think that that is common sense, that there should be all this need for housing, that there should be labour available to build it, and yet the housing position should be worse.

The other thing that has been achieved, the other cost that has been incurred, is unemployment up by 890,000 during this period of time, and as my noble friend Lady Birk has already said, following her perusal of an article in The Times of yesterday, the figure may in fact be nearer 3 million. The gross domestic product has come down 3 per cent. this year and is predicted to go down by a further 1½ per cent. in the year 1981–82. Manufacturing output has gone down by 10 per cent. and it is projected that it is going down by a further 4 per cent. in 1981–82.

Grave damage has been done to the social services, services from which a very large number of people derive very significant benefit; for some of them indeed the ordinary comforts of life in their old age and sickness depend upon these social services. There has been a string of bankrupt firms on an unprecedented scale. There have been cuts in overseas aid, upon which the future trade of this country, aside from its international reputation, depends. And there has been, as the noble Lord, Lord O'Brien, said, the same old drop in investment, or certainly a lack of adequate investment. These are the costs, if I may say so, of 18 months of Conservative rule.

The noble Lord, echoed by many of his friends, notably once again the noble Lord, Lord Boyd-Carpenter, said, of course, there is no alternative to this: we are used to the old stop-go. Indeed, the noble Lord, Lord O'Brien, pointed out with every justification that over the years since the war there has been continued trouble owing to switches of Government policy through the tightening of credit and through its release, all kinds of capital expenditure cuts and things of that kind.

But the circumstances are totally different. Those stop-go policies resulting from overheating of the economy in one way or the other had their origins in precisely the fact that all the way through that period we had balance-of-payments problems. They are carrying out precisely the same policies even though, owing to North Sea oil, there is now no balance-of-payments problem at all. That point does not seem to have sunk in. It does not seem to have sunk in that there should now be a policy of expanding the public sector borrowing requirement, or expanding public expenditure, providing that home savings make a significant impact into its otherwise inflationary effect—a point dealt with very adequately by my noble friend Lord Lever; now is the time when there should be public expenditure, and, if necessary, to meet the point of the noble Lord, Lord O'Brien, investment in industry itself. Ever since the end of the war, partly for the reasons of stop-go due to balance of payments difficulties, but partly due to the reluctance of capital to take risks, there has been a chronic under-investment in this country which for the past 40 years has bedevilled the whole of the industrial structure of the United Kingdom. The time has now come, and indeed is long overdue, where investment should be made, and the public sector expenditure should therefore be expanded.

It need not be expanded to the point beyond that proportion of the gross domestic product that is customary in other parts of Europe; it need not even be made equal to it, but it most certainly should not be reduced in any way. The noble Lord, Lord Soames, referred to these massive sums being paid out, and he implied being bled out, of the economy by the nationalised industries. He referred to £2,000 million. Is the noble Lord aware that in the German Federal Republic they spend more than that on the state railways alone, in spite of the fact that the public sector borrowing requirement expressed as a percentage of gross domestic product is higher in Germany than we in fact have here? But, although there have been costs, there have also been gains. I shall come back to that, particularly drawing to your Lordships' attention once again the reference to "bitter medicine" by the noble Lord, Lord Boyd-Carpenter, and also the remarks that fell from the lips of the noble Lord the Leader of the House not without pain and doubt.

It is not all sections of the community in the United Kingdom that have lost in this relentless process that has gone on over the last 18 months. The banks have gained; the finance houses have gained and dare I mention?—without invoking Standing Order No. 29 of the House which happened on the last occasion—that the farmers have also been protected against the worst ravages of the Government's policies, and likewise property. There really has been no equality of sacrifice.

The noble and learned Lord the Lord Chancellor in the course of his speech said at column 31 on 25th November: Before the twenty-first century dawns, we owe it to ourselves and to one another to build together through free institutions such as ours a human society so harmonious, so self-disciplined, that even those who began by doubting our intentions or ridiculing our aspirations will find themselves unable to deny the splendour of our achievement". Those are very admirable sentiments with which no one on this side of the House would for the moment dissent.

But if we are to aspire to those heights—and we ought to aspire to them for we are, despite all our troubles, a very great nation—we must still ensure the establishment of conditions of justice in which all the steps that we are going to take are carried out. It is all very well to talk of bitter medicine when you take none yourself. It is all very well to talk about hardships, when you endure no hardships yourself. The burden has to be justly shared and my complaint against this Government is simply that in the march of their progress along this dogmatic policy to which there is no end—and as regards which the Treasury say at the end of 1981 inflation will be down to 11 per cent., or almost exactly what it was when this Government took over—it has been the wealthy who have been preferred against the sick; it is property that has been preferred over the poor; and it is agriculture generally that has been preferred over industry.

Those are not the circumstances in which a proper advance can take place. There has to be a change of heart. Already there are signs in the party opposite, both here and in another place, that this facade of unanimity behind the dogma is beginning to crack. Some of the "wets" are even getting drenched. We shall wait for this process to continue and we sincerely hope, as indeed the noble Lord indicated when he commenced—so reinforced by the noble Lord, Lord Thorneycroft—that ultimately common sense will prevail and this country will be rid of the worst Government since the Administration of Lord North. I beg to support the amendment.

11.20 p.m.

Lord Cockfield

My Lords, this has been a wide-ranging debate of great interest, and a number of distinguished speeches have been made. I am sorry that the noble Baroness, Lady Birk, who moved the amendment, is not well and has to leave us before the conclusion of the debate. She moved the amendment in a speech of great sincerity and conviction, and if we disagree with her it is because we disagree with the logic of her argument.

The debate has been greatly enhanced by two maiden speeches, from the right reverend Prelate the Bishop of Lincoln and from the noble Lord, Lord Weinstock. They both bring a rich experience to bear on our problems, one a spiritual experience and the other a temporal one. It is very fitting and appropriate that this should be so. Our present troubles are the product of a decline in values as much as of a decline in economic performance.

I want to start by referring briefly to the world recession and the problems that it creates for the British economy. As my noble friend the Lord President said in opening the debate, all the world's major industrial economies have suffered from sharply falling output and steeply rising unemployment. The same point was made by my noble friend Lord Thorneycroft and by my noble friend Lord Eccles. It is surprising how little was said about this by noble Lords opposite; indeed, the noble Lord, Lord Bruce of Donington, was apparently unaware of it altogether. However, in fact, it represents one of the most important problems we face and has made the task of adaptation and change so very much more difficult.

We can, of course, take no comfort in the fact that other people face adversity as well as ourselves. But we do need to recognise that if we suffer more than other people, it is because we as a nation have failed more than other people. It has been a constant theme in your Lordships' House that this failure goes back a very long way. Be that as it may, the simple fact is that as late as the 1950s the United Kingdom still had the highest per capita income in Europe. Today, of the members of the EEC, only Italy and Ireland stand below the United Kingdom, and that, indeed, is the answer to the noble Lord, Lord Bruce of Donington, when he says that countries such as Germany spend so much more on public services than we do—they are equally so much richer.

The problems that we face arise from this long-term failure of output and productivity to grow in line with that of other countries. This has been compounded by a persistently high rate of inflation. All countries have suffered from inflation, but just as our record on output has been worse than that of other countries, so too has our record on inflation. We believe that poor productivity and high inflation are linked, and that each exacerbates the other. But even if this were not so, even if our poor record on productivity was not made worse by a propensity to high inflation, there is no reason why we should want to add the hardships and misery caused by inflation to the problems and disappointments caused by low output. Nor in a civilised society should we be prepared to tolerate it.

The fundamental reason why inflation exists is because people demand more than they produce, and rather than stand up and tell their people that they cannot consume what they do not produce, Governments pander to their electorates by printing money, thus hoping to delude them into believing that their demands have been met. It is this determination to consume what we do not produce which lies at the heart of our troubles. One does not need any erudite economic theory to prove this. It is a simple and self-evident truth, and that is why I put it in such simple terms for the benefit of noble Lords opposite.

A Noble Lord

Come on! We went to school too!

Lord Cockfield

This excessive demand on the output of the nation comes primarily from two causes. It comes from wage claims in excess of increases in productivity, and it comes from excessive Government expenditure. It is these excessive demands, and their accommodation by an increase in the money supply, which produce inflation. Our experience, indeed the experience of all countries, is that if money is printed to accommodate additional demand the effect is not to increase output but only to increase the price level, and correspondingly, if Governments refuse to increase the money supply to accommodate excessive demands, then the effects appear not in the form of price increases but in the form of increased unemployment and high rates of interest.

The tragedy of the United Kingdom economy in the last 12 months, and one of the major causes of our present ills, has been the enormous rise in earnings unmatched by any corresponding rise in output or in productivity. This has made it much more difficult for us to cope with the problems caused by the worldwide inflation. However unpalatable it may be to say this, only too often union leaders have used their industrial power in a way which has had the effect of creating unemployment for their members or for other people.

The other major factor creating pressure on the money supply is the excessive level of Government expenditure, and attention has been drawn to that in a number of speeches this evening. There will, of course, always be unsatisfied needs. One can always identify deserving causes on which money ought to be spent, but the simple truth is that the more the Government spend the less there is available for other people to spend, and the more that the people spend the less there is for Governments to spend. This is why the Government have been determined to cut their own expenditure and are equally determined to ensure that similar disciplines apply to local authorities and to the nationalised industries.

We recognise that in a recession a higher level of spending on unemployment and other benefits is inescapable, and that the deterioration in trading conditions will also increase the financial demands of the nationalised industries. In some directions, moreover, we recognise that expenditure needs to be increased. Thus, the plans announced last week by my right honourable friend the Secretary of State for Employment for extensions of the special employment measures will cost an extra £250 million a year.

In these circumstances, the whole burden of adjustment cannot be made on the expenditure side, and if the public sector borrowing requirement is to be contained at a level consistent with our plans to bring down the rate of inflation, then we need to find additional revenue as well. The measures the Government propose taking were spelled out by my right honourable friend the Chancellor of the Exchequer in the Statement he made on Monday.

There is another aspect of the necessity for these reductions in expenditure and increases in revenue which needs to be stated. I said earlier that on the basis of our static or declining output, the more that is taken by people themselves, the less is left for Government to spend. The very high wage settlements of the past year have represented an attempt by wage bargainers to obtain for themselves a higher proportion of the total national output, and to the extent that they have succeeded—and to some extent they have succeeded—they have made reductions in public expenditure and measures to increase revenue inevitable. That is the real answer to the pleas made by the noble Baroness, Lady Birk, the noble Lord, Lord Jacques, and others on the Benches opposite for increased expenditure. The simple truth of the matters is that there are no resources to meet such increased expenditure. One cannot escape from this cruel dilemma, and cruel it is, by printing money; all one will succeed in so doing is piling the agony of inflation on top of disappointed expectations.

A number of noble Lords opposite also wondered what will happen when the economy turns up again in a year or two. I share their confidence that the economy will turn up again. But they were concerned with what would happen to wage bargaining in those circumstances. There is a clear answer to that. If we maintain financial and monetary discipline, we will reduce the rate of inflation and keep it on a downward path. Wage bargaining depends in large part on expectations of future inflation. It is our determination to secure success here and that will ensure that a wage explosion does not then take place.

The preferred solution of many noble Lords opposite—the noble Baroness, Lady Birk, the noble Lords, Lord Jacques and Lord Kaldor, among others—is in favour of an incomes policy. Their faith and steadfastness in support of policies of proven failure calls forth one's admiration for their faithfulness but not for their ability to learn from experience. Every one of those policies ended in failure, the last one ended in disastrous failure for the party opposite, and one can only express surprise that they have forgotten that particular lesson so soon.

I turn to the question of the exchange rate. In the short term, our problems have been greatly exacerbated by the rapid rise in the exchange rate. This has created serious difficulties for our exporting industries and it is to their great credit that they have succeeded as well as they have. But even here it needs to be remembered that in the last two years, three-fifths of our loss of competitiveness is due to the fact that our labour cost increases have run far ahead of those of our competitors, and only two-fifths is due to the exchange rate.

I listened with both admiration and amazement to the revelations made by the noble Lord, Lord Lever of Manchester. He lifted the corner of the curtain and allowed us to see for the first time the real reason for the debilitation of the British economy. It was clearly his policy to accommodate excessive cost increases and to try to compensate for losses of competitiveness by a policy of progressive exchange rate depreciation—

Lord Lever of Manchester

My Lords—

Lord Cockfield

May I just complete what I wish to say? The noble Lord spoke for 23 minutes, and I am endeavouring to answer him in about two. That policy ended up with an exchange rate of 1 dollar 55½ cents to the pound, and had the IMF not been called in to rescue the then Administration, I have no doubt that the pound would have disappeared from view altogether.

Lord Lever of Manchester

My Lords, however terse the noble Lord is in replying to my over-long contribution, I hope that he will be accurate and not make statements which are so inaccurate as to be wholly without warrant. At no point have I been a supporter of a policy of accommodating to labour lack of competitiveness by devaluation. When the noble Lord says that it shows that he is financially illiterate, or has not listened to what I have said, or has not understood it if he listened to it.

Lord Cockfield

My Lords, I think that the noble Lord ought to read his own speech, and he will find that the clear implication of it was that the pound should be reduced in value to meet a loss of competitiveness. That is precisely the policy which was followed by the Government of which he was so distinguished a representative.

Lord Lever of Manchester

My Lords, the noble Lord must not repeat that. It is quite untrue to say that at any time I have advocated the devaluation of the currency to match a failure to achieve labour competitiveness. What I urged today was that we should not have an artificial inflation of the currency out of control of the Government, due to no fundamental economic factors, but brought about by portfolio movements of hot Middle Eastern funds.

Lord Cockfield

My Lords, the noble Lord is perfectly entitled to place whatever interpretation he wishes upon his own words. I am perfectly prepared to accept the interpretation that he places upon them. It is a great pity that he did not make that clear in his original speech, and the inference to be drawn from his words was absolutely clear. The record of the Labour Government in this matter speaks for itself—I repeat, it speaks for itself.

The present strength of the pound is primarily a reflection of our possession of North Sea oil. That is a matter which is not within our control. We cannot affect the impact of North Sea oil upon the exchange rate of the pound, and we need to bear in mind the fact that, but for the revenues derived from the North Sea, there would be no moneys to pay for the benefits which noble Lords opposite wish to increase, nor would there be any money to finance the deficits and investment requirements of the nationalised industries. So while the possession of North Sea oil creates problems in one direction, it is also an enormous benefit to the British economy in another; and we cannot have the benefit without the difficulties that it brings with it.

Lord Lever of Manchester

However high the rate goes.

Lord Cockfield

Or, if I may say so, if the noble Lord wishes to raise the point, in the case of the Government of which he was a distinguished member, however low the rate went.

High interest rates have also tended to push up the exchange rate, but there has been a significant narrowing of the differentials in the last few weeks as interest rates elsewhere have risen and interest rates here have fallen. This has given some measure of relief. The problems we are facing are essentially problems of the speed of the change of adjustment which is needed. Here, again, we are paying for past neglect in allowing our costs to escalate and in failing to take corrective action in time.

Despite all these difficulties, real progress has been made. The objective of our policy has been to bring down the rate of inflation, and that has been achieved. From a peak of 21.9 per cent. in the summer—a lower peak than existed in the time of the previous Administration—the rate of inflation as measured by the retail price index is now down to 15.4 per cent.; and the Industry Act forecast which was published on Monday envisages a further fall to 11 per cent. by the end of next year. But for the nationalised industries, the reduction in inflation would have been much greater, both this year and next. Prices in the shops have risen much less than the 15.4 per cent. by which the RPI has risen. Thus food prices have risen by only 11 per cent., clothing and footwear prices by 8 per cent. and household durables by 9 per cent.

There are encouraging signs, too, that realism is returning to pay bargaining. Employers are realising that they no longer have the automatic escape route of increasing prices to recover excessive rises in labour costs; and employees, very often ahead of their official or unofficial representatives, are realising that excessive settlements mean even more jobs lost. Pay settlements in single figures will represent a big step forward. The public sector needs to play its part here, too, and my noble friend the Lord President has explained in detail what is our policy on these matters.

There is no escape from these disciplines if we are to ensure that the public sector does not pre-empt a continually increasing share of our total resources to the detriment of the private, wealth-creating sector. In these circumstances, with a substantial fall in the rate of inflation (a fall which will continue); a falling level of pay settlements, which carry with them a fall in industry's requirements for working capital; with firm action taken to restrain the rise in the public sector's borrowing requirement; and with a fair expectation that the growth in the monetary aggregates will decline in the new year, my right honourable friend the Chancellor of the Exchequer decided that the time had come when minimum lending rate could safely be reduced, and this has now come down to 14 per cent. This will of course be of real assistance to industry, and it will also reduce the cost of borrowing for the Government themselves.

A firm monetary and fiscal policy is a necessary condition for overcoming inflation, and overcoming inflation is a necessary condition for establishing a firm basis for the revival of industry. But it is not by itself a sufficient condition to ensure that expansion takes place. In addition to the measures we are taking to place the economy on a sound basis, we need also to take measures to encourage the development of enterprise by removing restrictions and improving incentives. We have taken a large number of steps in this field, which together will greatly improve the climate in which industry will operate.

The task to which we have set our hands is no less than that of turning round the British economy after a hundred years of relative decline, a decline which has accelerated over the years. This is a daunting task but it is the only way we can discharge our duty to the weaker members of our society, the only way we can provide employment for our people, the only way we can provide a better standard of living, the only way we can finance an adequate level of public expenditure. There is much talk in these days of compassion; but compassion without the means to give effect to it is a hollow virtue, a sounding brass. Our determination is to reconstruct the British economy so that the means will be there. The job has been left so late that it can no longer be done in the fine weather; we are having to do it in the worst recession- ary storm which has blown through the world since 1931. But the job must be done. We are determined to do it. We have the policies to do it and we have the resolution to carry those policies through. I ask your Lordships therefore decisively to reject the amendment to the humble Address.

The Lord Chancellor

My Lords, the original Question was, That a humble Address be presented to Her Majesty in the terms appearing on the Order Paper, since when an amendment has been proposed in the name of the Baroness Birk. The Question that I have now to put to the House, therefore, is that the said amendment be agreed to.

11.47 p.m.

On Question, Whether the said Amendment shall be agreed to?

Their Lordships divided: Contents, 38; Not-Contents, 84.

CONTENTS
Balogh, L.	Lever of Manchester, L.
Beaumont of Whitley, L.	Lockwood, B.
Beswick, L.	Oram, L.
Blease, L.	Peart, L.
Brockway, L.	Pitt of Hampstead, L.
Bruce of Donington, L.	Ponsonby of Shulbrede, L. [Teller.]
Byers, L.
Collison, L.	Rhodes, L.
David, B. [Teller.]	Rochester, L.
Davies of Leek, L.	Seear, B.
Delacourt-Smith of Alteryn, B.	Segal, L.
	Simon, V.
Donaldson of Kingsbridge, L.	Stewart of Alvechurch, B.
Elwyn-Jones, L.	Stewart of Fulham, L.
Evans of Claughton, L.	Stone, L.
Hale, L.	Strabolgi, L.
Houghton of Sowerby, L.	Strauss, L.
Irving of Dartford, L.	Taylor of Blackburn, L.
Kaldor, L.	Underhill, L.
Lee of Newton, L.	Wells-Pestell, L.

NOT-CONTENTS
Abinger, L.	Ferrers, E.
Airey of Abingdon, B.	Gainford, L.
Aldington, L.	Geoffrey-Lloyd, L.
Avon, E.	Gisborough, L.
Belstead, L.	Gowrie, E.
Bessborough, E.	Grimston of Westbury, L.
Boardman, L.	Grimthorpe, L.
Boyd-Carpenter, L.	Hailsham of Saint Marylebone, L. (L. Chancellor.)
Brabazon of Tara, L.
Carrington, L. (A Principal Secretary of State.)	Harris of High Cross, L.
	Home of the Hirsel, L.
Cathcart, E.	Hornsby-Smith, B.
Chelwood, L.	Kemsley, V.
Cockfield, L.	Kimberley, E.
Colville of Culross, V.	Kinnoull, E.
Colwyn, L.	Lauderdale, E.
Cork and Orrery, E.	Lindsey and Abingdon, E.
Craigmyle, L.	Long, V.
Crathorne, L.	Lyell, L.
Croft, L.	Macleod of Borve, B.
Cullen of Ashbourne, L.	Mancroft, L.
de Clifford, L.	Margadale, L.
De La Warr, E.	Marley, L.
Denham, L. [Teller.]	Mersey, V.
Digby, L.	Monckton of Brenchley, V.
Duncan-Sandys, L.	Monk Bretton, L.
Dundee, E.	Mottistone, L.
Eccles, V.	Murton of Lindisfarne, L.
Elliot of Harwood, B.	Northchurch, B.
Enniskillen, E.	O'Brien of Lothbury, L.
Faithfull, B.	Orkney, E.
Falkland, V.	Orr-Ewing, L.

Radnor, E.	Spens, L.
Reigate, L.	Strathcona and Mount Royal, L.
Ridley, V.
Rodney, L.	Strathmore and Kinghorne, E.
St. Aldwyn, E.
St. Davids, V.	Thorneycroft, L.
Saint Oswald, L.	Tranmire, L.
Sandford, L.	Trefgarne, L.
Sandys, L. [Teller.]	Trenchard, V.
Selkirk, E.	Weinstock, L.
Sidmouth, V.	Wolverton, L.
Soames, L. (L. President.)	Young, B.

Resolved in the negative, and amendment disagreed to accordingly.

On Question, Motion agreed to: the said Address to be presented to Her Majesty by the Lords with White Staves.