HL Deb 11 February 1981 vol 417 cc204-14

3.4 p.m.

Lord Banks rose to call attention to the need for action based upon the right honourable David Steel's A 10-Point Programme for Economic Recovery as a framework within which new policies may be developed to encourage investment, control inflation and reduce unemployment; and to move for Papers.

The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. I begin by thanking those noble Lords who have indicated their intention of taking part in the debate this afternoon. Their interest in this Motion is much appreciated, whatever their views about it may be.

My right honourable friend Mr. David Steel was led to put forward the 10-point programme because he was very conscious of the need for an alternative national economic strategy to that now being followed. He felt, too, that there was a need for a widely agreed national economic strategy. The 10-point programme was prompted by alarm at the effects of the Government's economic policy and by concern about the possibility of a reaction against it: a swing of the pendulum which might take us further towards the nationalisation of all the means of production, distribution and exchange.

It may well be that a political realignment is necessary to secure maximum support for such an alternative economic strategy. That is certainly a very topical subject; we read about it in the newspapers every day. However, I do not intend to pursue that subject this afternoon, though I am very much tempted to do so. Today I am concerned principally with the 10-point programme itself.

I said that it was prompted by alarm at the effects of Government policy. When we consider the Government's economic policy we find ourselves in something of a dilemma. We have to decide whether we are going to criticise what they say they will do, or whether we are going to criticise what they actually do. The Government said that they would cut taxation, reduce the growth of the money supply, reduce the public sector borrowing requirement, cut public expenditure and allow the private sector to expand. Yet in practice they have done the very opposite. They have increased the burden of taxes. There has been a rise in the real burden of taxation overall.

Two simple examples will perhaps help to illustrate that. In this year, 1980–81, a married couple with two children will find that if they are on half average earnings, 14.4 per cent. of their income will be taken in tax and national insurance. Last year the figure was 12.6 per cent. If they are on twice average earnings, the figures are 28.5 per cent. this year as against 27.7 per cent. last year. If you compare those two sets of figures, you will see that not only has the burden of tax risen but that it has become more unfairly distributed.

The money supply has been growing at about 21 per cent. The Government's target was between 7 per cent. and 11 per cent. The public sector borrowing requirement this year will be some 50 per cent. more than originally predicted. Despite harmful expenditure cuts, expenditure from the consolidated fund for the 10 months to January of this year is 24 per cent. higher than last year, as against the Government's prediction of 20 per cent. Those were the figures in the newspapers this morning. Far from expanding, the private sector has been allowed to contract, with bankruptcies and a frightening level of unemployment.

In their medium term strategy which was published almost a year ago the Government said that there was a link between money supply and inflation, but they pointed out that it was erratic from year to year. They can say that again! They said that there was a time lag before the effect was felt. Can we then expect, as a result of what has happened to the money supply this year, to see higher inflation in, say, 1982–83? Despite everything, it is true that the inflation rate has come down, but at what a cost. The private sector has contracted. Output is down. The manufacturing base has been reduced and unemployment is up. High interest rates and a high exchange rate, plus world recession, plus the Government's deflationary policies, have brought this about.

It may be questioned whether I am right to speak of "deflationary policies" in view of what I said a minute ago about the Government's failure to control the monetary supply, to cut expenditure or to restrain the public sector borrowing requirement. I believe that I am fully justified. Melvyn Westlake set out the position very lucidly, I thought, in The Times on 22nd January. This is what he wrote: According to OECD calculations, the cumulative impact, between 1979 and 1981, of the restrictive fiscal measures deliberately adopted by the Thatcher Government are equivalent to some three per cent. of Britain's nominal gross domestic product. Against this, the recession has had a counter-effect, pushing up Government spending and borrowing and thereby causing some matching relaxation in the budgetary balance. This expansionary effect is reckoned to be equivalent to about 2½ per cent. of nominal gross domestic product by 1981, compared to 1979 ".

So there is an overall deflationary effect, and Melvyn Westlake went on to say: But, while the relaxation in the budget balance, caused by the recession, is tending to offset the deliberate tightening in fiscal policy, this is happening at a lower level of income and employment than would have been the case had policy not been tightened. This is why attention should focus on the Government's fiscal stance. It is this that is the instrument of policy, not the actual budget outcome ".

My argument is that the overall restrictive effect of what Melvyn Westlake describes as the Government's "fiscal stance" has produced, together with world conditions, a reduction in the rate of inflation at an unacceptable cost in lost manufacturing capacity and high unemployment. Hence the need for Mr. David Steel's alternative strategy set out in the 10 points.

The Times on 3rd January said of the 10-point programme: It amounts to a policy of economic intervention without significantly increased public ownership and of modified reflation. Mr. Steel argues for close co-operation between Government and industry along the lines practised in France, Germany and Japan; for a long-term incomes policy which relates wage increases to economic success, for partnership in industry and greater help for small businesses ". I think that is a fair description of the kernel of the programme. The first item in the programme is a modest expansion of the economy. I see that the Trades Union Congress is arguing for an expansion in the economy of £6,200 million. The CBI have put forward a package of measures which they think the Government should adopt, which would cost £1,300 million. I have no doubt that the right figure is probably somewhere between those two. If I suggested £3,000 million, I have no doubt that the Government would say that that would be very inflationary and that if it were put into practice prices would be pushed up. But what about the £3,000 million-plus, by which the public sector borrowing requirement has exceeded the Government target in this year? That does not appear to have sent inflation soaring.

I should like to suggest three ways in which we might apply this modest reflation of the economy—this modest expansion of the economy. First, I would do it by means of reducing the national insurance charge, which has nothing to do with national insurance, but is just a tax on employers. Secondly, I would seek to restore the cuts in social security benefits which have been made. Thirdly, I should want to see an increase in investment in the capital infrastructure of this country, and tremendous stress is laid in the 10-point programme on the capital infrastructure, because there has been a continuous decline over recent years. The spending of the Government on our national infrastructure, which in 1974 was 5.2 per cent. of the gross domestic product, is now down to 2.1 per cent. The fall in Government investment in 1974 was 6.5 per cent.; in 1981 it was 19.3 per cent. Britain suffers from ageing capital stock, particularly its industrial equipment and communications structure. The 10-point programme calls for North Sea oil surpluses to be routed to the recreation of our capital assets, thus providing employment now and protecting the future.

So a modest expansion of the economy is the first point in the 10-point programme. The second is lower interest rates. An immediate drop of three points in the minimum lending rate is suggested and, of course, high interest rates have been a potent factor in wreaking havoc upon productive industry. The programme calls for lower interest rate loans for new businesses and an extension of the "Granny Bond" principle through a new index-linked savings bond by means of which the British people could invest in Britain's industrial future. I would hope that it would be possible to arrange that such a bond would give a yield in addition to maintaining the value of the basic capital. I would hope that it might be an index-linked bond with a 2 per cent. real return.

Lower interest rates would of course help to bring down the exchange rate which at its present high level is another burden upon exporting industry. The United Kingdom's industry in the last three years has had its biggest effective loss ever, and the full effects of that have not yet been seen. A reduction in the exchange rate would create a suitable opportunity for the United Kingdom to join the European monetary system. I should like to stress that we see this 10-point programme very much in a European context and we would very much hope that common European policies on these economic matters could be devised.

Perhaps this is the moment to say, too, that we see the situation very much in an internationalist context, and that is why we oppose restrictive measures and protectionist measures and it is also why we support the implementation of the Brandt Report. With a modest expansion of the economy, lower interest rates and a lower exchange rate, incomes would no longer be held down by the threat of bankruptcy and unemployment and a lower exchange rate would tend to push up prices. Therefore, a long-term incomes policy is an essential part of the strategy. This would not be a hasty, temporary expedient produced on the brink of disaster, but an incomes policy with an institutional framework laid down by Parliament, with the machinery to provide for Government, unions and employers to arrive at a consensus on the general level of pay increases for the ensuing year, and that they would submit to Parliament.

Then there should be a monitoring body to watch how the general guidelines are applied and to deal with special cases. There is also the question of sanctions. What sanctions would there be behind the policy? There are many possibilities in that area. For example, there is Professor Meade's suggestion of compulsory arbitration; there is Mr. Aubrey Jones's suggestion of giving the power to the monitoring body to deny in a price increase an unjustified excess over the standard pay. But we regard a system of industrial partnership as an essential part of the incomes policy; we believe it to be the necessary background. We should like to see the introduction of a statutory system of employee representation, as other industrial countries, such as the Federal Republic of Germany, have; not necessarily on precisely the same lines but something similar.

We regard profit-sharing as an essential element of incomes policy, as one means of helping to identify the interests of capital and labour. There will be, I am sure, widespread support for the emphasis which the 10-point programme puts on the expansion of the small business sector. Among many other things a Cabinet Minister for small business is called for. I am sure that the CBI were right when they called this week for a rationalisation and co-ordination of all Government agencies providing help for small business.

I think I have said enough to give you the essence of the 10-point programme put forward by my honourable friend Mr. David Steel. A number of the specific proposals—I have not attempted to cover them all—will commend themselves to people in all parties. The underlying economic strategy may not secure quite such widespread support, but I believe that there may well be a majority in the country who would rally to such an economic strategy. With a different voting system we could be sure that a majority in the country would in an election secure a majority in another place. Political developments at the moment open up interesting possibilities. It may well be that even under our unfair and distorting electoral system a way will be found before very long to translate a majority in the country for a programme on the general lines of the 10-point programme into a majority in Parliament. My Lords, I beg to move for Papers.

3.22 p.m.

Lord Glenamara

My Lords, as a relative newcomer here, I must confess that I thought it rather odd that the rules of procedure can be used to debate a Motion of this kind. Nevertheless, I live and learn. Could I say to the noble Lord, Lord Banks, that we are grateful for this opportunity to debate the economy again. Could I say at the outset that I regard the Leader of the Liberal Party as one of the most engaging people in politics today, but at the same time I have to say that his new deal for Britain, in my view, contributes not a single original idea to the debate on Britain's future. The themes—and they are no more than themes, though we are grateful to the noble Lord for filling in a few of the details—appear to have been culled straight from Labour's Manifesto for 1980 published a year ago, and as such, with a few divergencies such as joining the European monetary system, they are quite acceptable to me and my colleagues; we make no complaint about them at all, or about most of them. It is as though the Leader of the Liberal Party had jotted down a few inoccuous headings for the chapters of a book, but of course the publisher would require very much more detail than that, and so I believe would the electorate.

The Leader of the Liberal Party, I think, has fallen for the old thing that political managers used to believe in; that too much policy is a handicap in winning elections, as well as being a hostage to fortune. Not that that need trouble the Liberal Party, of course. I take the view that this view is out-of-date. Certainly the situation today demands that coherent, well-thought-out, rigorously costed policies should be put forward, not simply pious generalities. The Leader of the Liberal Party's proposals range from bigger and better Select Committees to a Bill of Rights.

Predictably, of course, the whole thing is topped, or rather tailed, by proportional representaion. The bit about proportional representation is preceded by the words "above all"—above dealing with unemployment, above all the other things, alter the system so that we can get elected, change the rules, elect a Liberal Government and you will get a national approach. I have never understood why you can only get a national approach with a Liberal Government. Why not with a Labour Government? Why not with a Conservative Government? I suppose I have sat in hundreds of Cabinet meetings. I quite honestly do not recollect a single occasion when, faced with a problem to which there were two answers, one of which was good for the country and bad for the party and the other of which was good for the party and bad for the country, the Cabinet did not decide without hesitation in the national interest. So, I am quite sure, does a Conservative Government. I really must say that I find this self-righteous assertion that only the Liberals would follow a national strategy insufferable. I think self-righteousness is probably the worst sin in a politician or in a political party.

The points the Leader of the Liberal Party has made, divorced as they are from any context of solid, carefully worked-out, carefully costed policy, such as the Labour Party has put forward in the document I have just quoted, the manifesto for 1980, are really utterly inadequate in the face of the dark and dangerous situation which is gathering in Britain today. There is nothing about how they would deal with the appalling problem of unemployment. There is no word about how they would reverse the downward spiral in the economy created by the Government. The document is simplistic and indeed naive. However, we can agree about Mr. Steel's initial premises: first, that Our economy is now desperately weak and vulnerable ", and, secondly, that Monetarist dogma has converted recession into an outright slump ". I take the view that the present situation is 80 per cent. Government induced and 20 per cent. due to world recession. I do not want to bore the House with a lot of figures, but there are some indices which should be emblazoned before the nation because they point to a truly horrendous situation, maybe to disaster. First, one or two in the real economy, and then three in the money economy. First, in the real economy: the most striking statistic of all is the unemployment figure, 2.42 million. Every forecast points to 3 million next winter. The Cambridge Economic Policy Group estimates that in 1985 it will be 4.4 million. At a meeting of NEDC last week, 4th February, Mr. Michael Shanks, chairman of the Consumer Association, forecast 5 million. At that meeting the Prime Minister was present with a Government team. According to the Financial Times, not a single one of the Government team rebutted the estimate of Mr. Shanks.

We are still getting the rather pathetic apologia from Mrs. Thatcher when she says "I regret"—and of course, like all of us, she does sincerely regret the unemployment; nevertheless she goes on to say that in a way it is not really a bad thing because industry is being made slimmer. I heard her say this on television recently; industry is being slimmed down; it is being made leaner. This is the theory of the "shakeout". It is being made fitter to compete when the turnround comes and the dark clouds roll away. This thing about the turnround is acquiring a sort of spiritual, almost messianic, meaning, something in the future, the turnround, when it comes. The 2½ million unemployed merely represent cutting out the fat. Mr. Nicholas Ridley, a Minister in the Government, said recently: The 2½ million are a useful reserve ". What arrant, what demonstrably untrue nonsense! But, my Lords, it is cruel nonsense.

When the Prime Minister sees—and she will have read about this in the paper this week—machine tools from British factories being auctioned and purchased by foreign buyers, including buyers from the United States, where they will be used to compete against British firms; when she sees the Consett Ironworks, on which that town has depended for generations for 90 per cent. of its labour, and other great industrial complexes being torn down and razed to the ground, even she must comprehend that what she is doing is cutting out our industrial muscle and not our industrial fat.

Manufacturing capacity, both human and physical, is not merely being massively under-used: it is being dissipated; it is being demolished; it is being sold off; it is being bulldozed and its foreign and domestic markets are being lost, probably irretrievably. I am very keen on history. After the harrying of the North by William I, the Anglo-Saxon Chronicle recorded that in the area between York and the Border "all was desolation". I think that a future historian writing about the industrial scene in Britain after the harrying of industry by Mrs. Thatcher will probably point out that from John O'Groats to Lands End all was desolation.

What did Mrs. Thatcher herself say when unemployment was a million lower than it is today? I quote her words: You "— referring to the unemployed— have no self-respect. You haven't even got the respect of your family if you somehow cannot earn yourself a living and them a living too. Sometimes I have heard it said that Conservatives have been associated with unemployment; well, that is absolutely wrong. We would be drummed out of office if we had this level of unemployment ". Now unemployment is a million higher than it was when she said those words. There is also the human problem too. So that is the first index.

The second index is industrial output, and the noble Lord, Lord Banks, has qouted some of the figures. In a country which by and large earns its living by manufacturing and selling abroad this is perhaps the most important and significant index of all. In 1980 industrial output fell by 7 per cent. over the previous year, and manufacturing output fell by 9 per cent. Industrial output is contracting more quickly—it is contracting faster than it did between 1929 and 1931. In those two years it fell by 10 per cent.—a slower rate than that at which it is falling now. As a result of that catastrophic fall, manufacturing investment is falling at the rate of 10 per cent. a year. The Department of Industry's own survey of the intentions of manufacturing industry estimated that there would be a fall of almost 20 per cent. in these two years.

As regards the real economy I should like to quote only three figures. First, let me deal with inflation. In May last year it was 21.9 per cent. It is now about 15 per cent., which is still 50 per cent. above what it was when the Government came into office because at the time of the general election it was 10.3 per cent. Everybody wants to see a fall in inflation, but not at any price. The fall in inflation from 21.9 per cent. to 15 per cent. does not reflect any improvement in the economy: it is due entirely to two facts: (a) to the fact that we have 2½ million unemployed; and (b) to the fact that the Government have put enormous pressure on company profitability. It represents no improvement in productivity and no improvement in production, both of which are plummeting. Secondly, we have the minimum lending rate. It is still at 14 per cent. and a crippling burden which industry has to bear. Nearly all firms have to borrow in order to survive. Without survival there is nothing. The first rule of all is to survive. With the drop in inflation the real cost of borrowing is, of course, rising. Thirdly, there is the level of sterling. It is 17 per cent. above the level when the Government came to office and quite out of line with movements in relative costs. Minister after Minister has in terms ruled out any initiative to try to bring the rate down.

Every index, every forecast of every index, and every trend of every index etches another line in the deeply disturbing picture of our country. There is no glimmer of light anywhere in spite of the contortions that Government spokesmen go to in their efforts to prove that there is. A visitor from outer space would certainly say to us, "How on earth have you got yourselves into this ghastly mess in two short years?" The answer, of course, is quite simple; and it is that we have a Government, and a Prime Minister in particular, who in 1979 looked at Britain and said, "The patient is suffering from some malady or other". Then they went off and consulted their professor friends and diagnosed the wrong illness, the wrong disease.

The Prime Minister believes—and we must assume that all her Ministers believe it or they still would not be there—that Britain has suffered from demand inflation throughout the 1970s; and all their policies are based upon that wrong diagnosis. For example, there have been the most draconian and self-defeating public spending cuts which, as the noble Lord said, do not distinguish between asset-creating capital expenditure by publicly-owned industries and, for example, money which is needed to pay the salaries of the Civil Service. They are all lumped together, as I pointed out in the debate last week. We have had savage increases in fuel charges, which go far beyond increases warranted by the costs of the fuel industries, which also are self-defeating. There are increases in the tax burden. The noble Lord mentioned this point and I can give the figures: the tax burden has increased by just over 10 per cent. since this Government came to office. We have very high and sustained interest rates which have imposed an intolerable burden on industry. That is the medicine which the Government have been administering since the general election.

But, of course, the malady was not that at all; the malady was not demand inflation. As Mr. Douglas Jay pointed out in a recent debate in the other place, if that had been the malady we should have enjoyed a period of high profits, high employment and high production throughout the 1970s. Of course, exactly the opposite was the case. The malady was very largely not demand inflation but cost inflation, and during the general election the Prime Minister specifically excluded any action on what is by far the biggest cost of all: wages and incomes. She said, "We shall restore free collective bargaining", and, apart from the misuse of cash limits to impose a norm in the public sector, she and the Government are still sticking to that.

Mrs. Thatcher got it wrong—a fact which is now all too obvious—but, of course, she is too entrammelled in her own theology ever to admit it. As a result she has, with all the energy, the considerable energy, of which she is capable, administered the wrong medicine ever since, and the medicine that she has administered is a very old-fashioned nostrum called "deflation". The label on the bottle is "deflation". It deserves a place in an economic Culpepper's herbal, if ever there is one. She has put all her energies into deflating demand instead of into holding and reducing costs. It was as certain as day follows night that this would cause unemployment and would cause falling production, which in its turn would produce falling investment. As those of us who remember the 1920s and 1930s know too well, deflation has a momentum of its own. It feeds on itself; it is cumulative; it is a downward spiral; it is a kind of nuclear reactor which generates its own fuel.

Of course, this medicine called deflation has reduced the rate of inflation—of course it has. But the logic of the Government's theory is that the inflation rate could be brought down to zero by putting everybody out of work, and that is rather like saying that to eat rather less improves your health, therefore to eat nothing at all would make you perfectly healthy—reductio ad absurdum. But somewhere between reductio ad absurdum and the situation as of today there must be a point at which even the Prime Minister would have to stop the downward spiral. Today unemployment is 2.4 million, and that has produced an inflation rate of 15 per cent., and there is a close correlation between the two. Somewhere between that and my reductio ad absurdum there must be a point at which she or her colleagues, if necessary, must call "enough". What is it? May I ask the Minister who will follow me, what is it? Is it 3 million, 3½ million, 4 million or 4½ million? Could I have the Minister's attention?—because this is the core of what I am saying. Is it 3 million, 3½ million, 4 million—

The Ministry of State, Treasury (Lord Cockfield)

My Lords, as the noble Lord addressed himself to me, may I say that he had my attention throughout.

Lord Glenamara

My Lords, I am very glad. Those unemployment figures will produce inflation rates of 12 per cent., 11 per cent., 10 per cent., 9 percent., 8 per cent., or what? Somewhere even the Prime Minister must call a halt to deflation. But the 64,000 dollar question is: what happens then? What happens when she, or someone else, pulls the lever and stops the spiral? Do the Government really believe and do the Liberal Party really believe that when she calls "stop" the rate of inflation can be kept at that point by adopting the old classical laissez-faire doctrine of free markets and free collective bargaining?—which failed in the 1930s and which will fail again in the 1980s. Do they really believe that all the auctioned machine tools will mysteriously fly through the air and return to British factories? Do they really believe that the bulldozed bricks of Consett Ironworks will fly up and that the workers will reconstitute themselves? Do they believe that 1,000 other demolished plants will come together again? Do they believe that our lost customers will suddenly return to the old firms which they used to patronise? Do they believe that once the inflation rate has reached their secret figure, the bits of Humpty Dumpty—shells, yoke, white, the lot—will fly together and Humpty Dumpty will fly back on top of the wall and sit there waving his Union Jack? Do they believe that?

So what happens when they stop the spiral? Monetarism has nothing to say about that, and that is the 64,000 dollar question. It will take more—very much more—than a Sunday afternoon exercise on the back of an envelope by the Leader of the Liberal Party to cope with that situation. It will take 10 or 15 years of resolute, courageous Labour Government, comparable with that of 1945 or 1951.

Several Noble Lords

Oh!

Lord Glenamara

My Lords, I thought that I would get that reaction from noble Lords opposite. Perhaps I could remind them of what Winston Churchill said in 1945. He said: The country is bankrupt and a Labour Government will never be able to run the economy ". It was, in fact, the most successful Government of the century.

Several noble Lords

Hear, hear!

Lord Glenamara

My Lords, it laid the foundations of post-war economic prosperity. An almost inexorable law has emerged in British politics since the war: whenever the country is in dire trouble—as it was in 1945, in 1964, with all the trauma of the end of the Macmillan era, and in 1974 with the three-day week and all that—it elects a Labour Government to get it out of the mess. However, this time the mess will be of gargantuan proportions. It will take at least a decade, maybe a generation, to clear up the mess left by this Government.

However, has it occurred to your Lordships—and I say this in all seriousness and I am not exaggerating—that it may be too late? If you want a really depressing half hour, take a large sheet of paper, and plot on it all the indices I have mentioned (and there are others) and their trends. They point to at least the possibility of the roof falling in, of economic collapse in this country. For example, how much longer can we sustain the utter folly of an annual payment of £l0 billion, and rising rapidly, to keep 2½ million people in enforced idleness when our factories are closing and our markets are being closed? How much longer can that continue?

The economic and financial consequences of the Government's policy are assuming the proportions of a nightmare, and the prospect is too horrible and too dreadful to contemplate. But whatever the situation, and I heard the late husband of my noble friend Lady Gaitskell say this, Labour stands ready and poised to take on the burden—and we are all proud to be members of the Labour Party and so are tens of thousands of people throughout the country—as it did in 1945 (and noble Lords opposite can whistle in the dark if they like) in 1964 and in 1974. Once more the Labour Party will serve the nation as it did then.

My final word is to the Conservative Party. If the Prime Minister is unwilling or unable radically to change her policies, and if she is so ensnared in her own theories and theology that it is unlikely that she can, the Conservative Party must change the Prime Minister. It has long experience in this kind of thing. It knows exactly how to do it. If it does not do so, it will be failing Britain, and the people of Britain will never forgive it.