§ 3.58 p.m.
§ Debate resumed.
§ Lord Ezra
My Lords, I wish to express my particular appreciation to the noble Lord, Lord Barnett, for introducing the Motion that is before the House today. I do so on two grounds. First, because of the extreme timeliness of the question that he has put forward for debate; secondly, because he has exposed the issues with his customary moderation and constructiveness.
Having heard the noble Lord, Lord Barnett, introduce the Motion I was waiting with great interest to hear what the noble Lord, Lord Young of Graffham, would say on the subject. I must say that I was disappointed. I thought that he would address himself to the issues that had been raised, but instead of that we had, with his customary oratorical eloquence, a defence of current government policy. But that is not what we are debating. What we are debating today is that there has been a massive change in the world oil scene which has led to serious potential perturbations or advantages in different countries.
What we want to explore is the potential impact upon this country of that change; but we did not get that from the noble Lord the Minister. I hope that his noble colleague, when he replies to the debate, will give us the views of the Government on that subject because I presume the Government have addressed themselves to it. Such a massive reduction in our revenues, on the one hand, and the potential advantages to manufacturing industry, on the other, must presumably—without in any way wanting to infringe on what may go on in Cabinet—have occurred to the Government as a subject for consideration; and that is what we wish to debate today.
Therefore, if I may be permitted to do so, I should like to put this subject in its context following on the introduction that we have had from the noble Lord who tabled the Motion. Oil has played a dominant part in the affairs of the world, and particularly this country, since 1974. There were, first, the two oil shocks of 1974 and 1979, the latter of which introduced the most serious recession since the end of the war. In addition, so far as this country in particular is concerned, we found and then with great skill exploited the resources in the North Sea and we have now become one of the major oil producers in the world. This has gained us an enormous amount of financial benefit. We now have a situation where what is called the third oil shock has occurred with a massive reduction in the price of oil.
It was only a few weeks ago that oil was being quoted at about 25 or 26 dollars a barrel and it is now round about 16 dollars a barrel. We are entering the doldrums of the summer period—we shall presumably sooner or later get there in spite of this harsh weather—when oil prices are likely to decline still further for seasonal reasons. Therefore, 15 dollars a barrel is not unlikely and it could be even lower. So I 638 think that it is very proper that in this House, which is used to objective, intellectual deliberation, we should consider the possible impact of those developments and the various options which are open to us as a country.
I should like to group my remarks under two heads. First, I believe there is an energy impact from these developments and, secondly, a wider economic impact. As regards energy, we now have the problem to which the noble Lord, Lord Barnett, referred, that there is currently a world surplus of oil. We are a major oil producer but we know that our reserves in the North Sea are finite. Therefore, the question arises: what should we do about that situation? Should we go on producing at top rate with a prospect of adding to the lowering of price and, therefore, of our revenues? Or should we seek to limit, to some degree, that production? I have no doubt that we should be looking at ways in which we could, on the one hand, moderate the pace of production but, on the other hand, continue to stimulate the pace of exploration.
What we need to do is to have the maximum amount of future oil from the North Sea that we possibly can, and that depends on the exploration effort. However, it does not seem to be particularly to our commercial advantage to be maximising production at the present time. I realise all the difficulties there might be in this and I realise the position of both the oil companies and the Government. Nevertheless, I would be most obliged to the noble Lord, Lord Brabazon, when he replies, if he could give us the Government's thinking on this issue.
Not only is the energy impact related to oil: it is, of course, related to other energy sources. We as a country are blessed with the fact that we have a plenitude of energy sources at our disposal. The issue that we face in relation to these other energy sources is what view we take about the long-term position on oil prices and availability. If we were to believe that the present reduction in the price of oil is something that is to subsist for a very long period and that we could depend on adequate resources of oil whether from our own sources or elsewhere for that sort of period, then, of course, we would have to adopt a policy of cutting back on our other energy sources because there would be no point in wasting those assets.
On the other hand, if, as I think it would be prudent to believe, this could be a relatively short-term issue, and that when we move into the 1990s the situation could change, then I think we ought to make sure by our energy policies that we maintain our capability in the other energy sources. I have always believed that in the matter of energy over-insurance is better than no insurance. Therefore, I think we have to consider very carefully what we do in relation to the coal industry which is another major source of fossil fuel available to us.
As we heard recently in answer to a Question, the coal industry is now doing very much better. Productivity has improved and performance is moving ahead, but it is caught up in the slipstream of the massive reduction in oil prices. There is the risk that, if oil prices go much lower, on a purely short-term commercial basis it could pay the electricity industry in this country to switch significantly to oil generation rather than coal generation.
639 Having had some experience of these matters I would counsel caution before that was done. I would say that we ought to maintain a substantial quantity of coal going into the power stations, bearing in mind, on the one hand, the progress made in the coal industry at present and, on the other hand, the uncertainty about future supplies. Equally, we are now, due to the enterprise in particular of the Secretary of State for Energy, moving into a massive campaign for energy saving. I hope that that will in no way be diminished by the changes in the price of oil because, again, this is something of long-term significance and bound to pay us, almost whatever the price of energy. Therefore, I hope we can have an assurance in that connection.
Equally, we need to be assured that for other energy sources, particularly renewables, the effort will not be diminished. It has been my experience, stretching over many years, that in energy as in other walks of life there are short-term reactions and that if it appears that there is a surplus and prices weaken then longer-term efforts are diminished. I hope that will not be the case in the energy strategy of this country.
I now move to the wider economic implications and options resulting from the changes in oil prices. For this country there are minuses and pluses. What we obviously must do is minimise the minus impact and maximise the plus impact. The minus, of course, is that our revenues will be affected. According to the latest views of the Treasury, as reported in the newspapers, the estimate made last March of the net benefit from oil in the forthcoming financial year was of the order of £11.5 billion. It now estimates that it could be around £6 billion. So this is a massive drop. And it is not only that: of course, this also affects our overseas earnings on oil.
Your Lordships will undoubtedly recall that over the past three years we have only been able to show a surplus on balance of payments on current account through what we have earned on oil account. A substantial diminution in the oil earnings on overseas account is bound to call in question whether we can maintain that overall surplus. I think it would be useful to the House if the Minister could indicate to us the current Government thinking on this point. This indeed is a matter to which they surely must have addressed themselves. It is said that there will be a reduction of something in the order of £2 billion—it may be more—in our overseas earnings on oil in the coming year if present prices continue. What impact will that have on our overseas balance? I think that this is a fair question for us to ask.
I come now to the positive aspect of the matter, which is that the costs of oil as an energy source will be diminished and therefore it must be our endeavour to make sure that that effect works its way through the economy. One way it will not work its way through the economy is if the Government were minded to tax away the advantage. There have been rumours of what they might do in relation to petrol. I shall not be so bold as to ask the noble Lord, Lord Brabazon, to indicate to us what his colleague might do in relation to the Budget, but I should like to express the opinion that I think it would be quite wrong if the benefit that the economy is likely to derive from the oil price reduction were to be taken away by act of government 640 through increased taxation, because that would minimise this positive benefit.
However, in order to obtain the full benefit from the situation, in my opinion wider policy decisions need to be taken. I was present last night at the annual dinner of the Engineering Employers' Federation at which the Secretary of State for Energy was speaking. Obviously it is his opinion, but he expressed grave concern about the way in which our economy could develop if different policies were not undertaken. In particular he said that he could see Britain possibly becoming—I took these words down as he was speaking—"a low wage subcontracting service economy".
There is a risk of this happening, and your Lordships' Select Committee on Overseas Trade, over which the noble Lord, Lord Aldington, presided and to which I had the honour of belonging, drew attention to this risk, not with the intention of being gloomy but with the intention of indicating the difficulties ahead, in order to ensure that we pursue policies which avoid that dire situation. So it is necessary for actions to be taken at the present time, when we have the positive impact on general costs of the reduction in oil prices, to make sure that the benefits are carried through the economy.
When those of us who were pressing for rather more capital expenditure in the public sector were making our case, when oil prices were high, we were told that the impact would be inflationary. Now we have a much lower oil price with a deflationary impact. I would have thought that the time has come when we ought to give a filip to the economy by a combination of measures to add to capital investment in essential public sector areas, such as putting right the quality of housing—which we have many times debated—on the one hand, and suitable tax reductions on the other. Let us hope therefore that we can get a combination of those policies together with the benefit of oil price reductions which flow unimpeded through the economy.
The other important issue raised in the Motion that is put to us by the noble Lord, Lord Barnett, concerns the related questions of the exchange and interest rates. The exchange rate is something which has bedevilled our economy for some time. The evidence which we received in the Select Committee on Overseas Trade showed that there was a virtually unanimous view on the part of the industrialists who spoke to us that the fluctuations in the exchange rate were particularly debilitating. We are now in a situation where we could bring greater stability.
I shall repeat the arguments which we often hear from these Benches in favour of our going fully into the EMS, on which subject the noble Lord, Lord Barnett, has also expressed his opinion. I should like just to quote, if your Lordships would bear with me, the remarks recently made by Dr. Wilfried Guth, who is chairman of the Deutsche Bank, and a good friend of this country who was over here on the 11th February. He said:Britain would benefit by entering the full EMS at the present stage because the pound would fluctuate less and the burden of defending it when necessary would be shouldered by all the central banks within the system.If we could get a degree of stability in the pound at the present rate in relation to the other European 641 currencies, this surely would be a big advantage to the country. We now have an exchange rate with the deutschemark which is way below 3.50 (which was at one time quoted as being excessive). It is now in the 3.30s and this is bound to be a very great advantage.
In conclusion, I believe that we are presented with a very great opportunity through this change in the oil prices but it will only be converted into an actual benefit if we buttress what has happened with positive and determined policies.
§ 4.18 p.m.
§ Lord Soames
My Lords, I want very much to follow the line taken by the noble Lord, Lord Barnett, when he introduced this interesting Motion. I do so because I think it is important that in this House the international ramifications of our economic policies should be well considered. That is the topic on which the noble Lord concentrated—wisely and well, if I may say so. It is to that matter and to two of the points which he made much of that I should like to address myself this afternoon.
My first point concerns the volatility of exchange rate movements. In the last six years we have seen the exchange rate of the pound with the dollar vary from a high of 2.70 to almost parity and then again rising to the middle 1.40s. As your Lordships will know well, money is meant to facilitate the movement of goods and services. That is what money is about. But if we have totally uncontrolled swings in exchange rates, far from facilitating that, money becomes a malign influence. We have all seen that to our cost. We have seen it; the Americans have seen it. The question is, what sort of balance can we strike between, on the one hand, totally fixed parities as set out in Bretton Woods and, on the other hand, the totally floating currencies that we have seen since the demise of Bretton Woods?
If I may, I will be so bold as to quote to your Lordships a few words that I said three years ago, on 23rd March 1983, at col. 1114 of Hansard:There can be no doubt that the volatility in exchange rates … has been a malign factor militating against international trade. Violent changes in parities have been far greater, far more frequent, and far more uncoupled and disconnected from real economic factors than was ever anticipated a decade ago, when the disciplines of the Bretton Woods monetary system were jettisoned in favour of a floating rates system.Surely, whatever may have been the case in the past, it would now be in the interest of the United States, as it certainly would be for the rest of the world, for the United States Government to be prepared to take some measure of joint responsibility, along with others, for the level and structure of exchange rates. I am not suggesting that there should be any question of defending any particular rates; or of commitment to any substantial intervention. But simply the decision that the pattern of world exchange rates was to become a matter of shared concern and the implied acceptance by the major countries jointly that they no longer regarded it as desirable or inevitable that their authorities should be passive in the face of any exchange rate movements—that alone could not fail to make an important contribution to stability".Those remarks did not find favour with the United States Administration at the time. Indeed, I remember seeing President Reagan on television saying what the noble Lord, Lord Barnett, said that he had heard the Prime Minister say about the pound in 1981–82: the fact that the dollar was riding so high showed clearly how good were the economic and fiscal policies of the United States and his Administration. In fact, it had little to do with that, as noble Lords know full well. I 642 would just say that where the Prime Minister is concerned the reason why we had to keep interest rates up in the early 1980s was the level of inflation. It was the need to get inflation down which, alas, made it necessary for us to have such high exchange rates.
As I say, the American Administration, for a long time when the dollar was riding so high, made the world believe that they thought that it was "good news" (in inverted commas) that the dollar should be so strong. We are now seeing what it did to the dollar. We have seen how American industry could not cope with such a high exchange rate. We have seen built up a current account deficit such as had never been thought of before in the United States, and that in turn has built up a desire among industrial interests in the United States to see protectionist policies pursued. I noticed that most forcibly when I was in the States in the summer. There were something like 300 Motions on the Order Paper of Congress urging protectionism in various industrial areas. That was purely because the dollar was so high and so strong, encouraging a flood of imports.
We have now seen a change. The idea of having a meeting of the Group of Five in New York—the Plaza Meeting—originated with the United States Administration. It was they who suggested it. That must be going in the right direction. It has been effective. It has shown that it is possible for governments if they get together to act upon exchange rates. It is not something that one government can do alone. I doubt whether there has been all that much intervention. Speculators in particular have realised that it was no good trying to force the dollar up. That was not going to happen because the whole of the Group of Five and others were agreed that it should not.
But now what? The dollar has come down about 15 to 20 per cent. in relation to sterling since then. But I wonder very much whether it will have gone far enough and in time to put away all evil thoughts of protectionism in the United States Congress from now on. It would have been infinitely better had they acted three years ago. What will happen now? I suppose that the temptation is to say that it has been good, it has had an effect, the dollar will not soar again and we can all sit back and enjoy it. But this is the time, when things are comparatively stable, that details should be agreed among the Group of Five, or preferably the Group of Seven, as to how together they can act to ensure that it does not happen again.
That is what I would plead. What was originated in the Plaza Meeting and underscored again in the meeting comparatively recently in London should be made much of, as it were, and not be left to rest there. Surely we have all learnt of the damage that can be done to the world economy and particularly to developing countries by such dilatoriness in taking action.
That leads me to my second point, which is the indebtedness of developing countries. What has been proposed by Mr. Baker may be followed through and a lot of extra money may be found for the developing countries, but in no way will that resolve the problem. My thinking is this. There are enough factors as it is affecting the interest rates of the governments of the countries of the developed world without adding this problem. In other words, we should be seeking low 643 interest rates perhaps, but for different reasons. If interest rates ought to be high, we should not be trying to put them down merely because of the indebtedness of the developing world.
I wondered whether the developed world could not work out a scheme rather like the one that we have had in this country with developing countries on the line of a double taxation relief clause. If a bank lends money to Malaysia for a development project, Malaysia has to pay only 80 per cent. of the interest, because 20 per cent. is deemed to have been taken there in taxation. The bank that receives the 80 per cent. does not suffer because its corporation tax is consequentially reduced. Could that not be adapted in some way for the whole of the developed world to operate in regard to the indebtedness of the developing world? It would, of course, mean the taxpayer in the developed world suffering somewhat, but that will not be necessary if everything turns out for the best and the problem is resolved.
I fear personally that, far from being resolved, the difficulty is likely to get worse. I do not see how Mexico can conceivably pay 10 billion dollars in interest on its debt this year. It will have to borrow just to pay the interest. I do not think that this problem will go away on its own. If we leave it too late and it erupts, then that could be disastrous for the banking system of the whole Western world.
§ Lord Diamond
My Lords, I agree. As we are on the point about Mexico, will the noble Lord say what is his view of oil prices, as Mexico depends on high oil prices to pay the interest?
§ Lord Soames
My Lords, one does not fix the world price of oil according to the advantages or disadvantages to any one particular country. I do not wish to be drawn into that matter. I was not going to talk about it and, if I do, I shall go well over the top time-wise.
I wish to follow up what has been said by the noble Lords, Lord Barnett and Lord Ezra, about our becoming full members of the EMS by joining the ERM. There has been reference to a quotation of the chairman of the Deutsche Bank that I have not had the advantage of seeing. It is, however, obvious that what he said is right. The situation has never been so attractive as it is today. I must confess that I have been wrong in the past, in that I have always wanted us to join the EMS. We are in a better position to do so today than we would have been had we joined when I last suggested it. I honestly do not envisage a better situation than exists today with the exchange rate of the deutschemark in the area of 3.33, and sterling inevitably low, with low oil prices, but still holding its own with the dollar because the dollar is moderately weak.
I should have thought that in this situation, in which, despite the weakened oil price, we are holding our own with the dollar, we should really go in. I know 644 many people in important places who used to oppose this step but who now agree that they would like to see it taken. The only conceivable reason that I see against it is that we might be forced, in a new realignment of the currencies of the EMS, into a position in which sterling appeared to be being devalued. But then what was happening when it was coming down from 2.70 to parity at one dollar?
We should not now be frightened of this. It was a considerable political event when devaluation occurred under Bretton Woods in 1947 and again in 1967. But, to be quite honest, I do not believe that it should have been a political point—unless it could be proved that the reason for sterling coming down was incompetent economic policies. Perhaps that was the case then. It certainly could not be so now. I hope, therefore, that we seize this most valuable opportunity, with everything going in our favour, to join ERM. If not, we shall miss a very important opportunity.
My time is up. We are living in a world that is growing increasingly interdependent in trade, in commerce and in economics. The economic policies of one country can have an enormous effect upon the world as a whole. It is important that this should be taken into account to a proper degree by any British Government formulating their economic policies.
§ 4.35 p.m.
§ Lord Kaldor
My Lords, somewhat to my surprise I find myself far more in agreement than I had anticipated with almost all previous speakers on both sides of the House. In some ways, this is a very happy circumstance. In other ways, it means that many of the remarks that I have prepared for the debate could sound rather repetitious. I must try to avoid that happening.
Most people, it seems to me, are agreed that oil, for all the financial benefit that it gave to the balance of payments, has been a rather mixed blessing. It was not a pure benefit. Why do I say that? The reason is that there were all kinds of secondary consequences. It put the exchange rate very much higher than it otherwise would have been; and it made our manufacturing industries much less competitive than they otherwise would have been. It contributed very greatly to the decline—the relative decline and, to some extent, the absolute decline—of our manufacturing industries. Instead of having an export surplus in manufactures which traditionally was always a counterpart of our net imports of food and raw materials, our manufacturing trade went increasingly into deficit. This was possible because of the extraordinary revenue from the sale of oil.
Oil provides no employment whatever. It is a source of foreign earnings, but nothing else. It does not enable a Government to pursue full employment policies in any sense, and so avoid unemployment. Manufacturing industry does. I would much rather see Britain revived as a great manufacturing nation and a manufacturing exporter than become a great primary producer, however valuable a commodity oil is. If we had always been a primary producer, Britain would be a different sort of place from what it is now. It would not have large cities; it would not have large industries. It would not have the population that it now has. The 645 whole scene would have been different. It is therefore important that conditions should be created by which we can regenerate our manufacturing industries and put the country back on to the path of full, growing prosperity again.
From that point of view, various questions arise in connection with particular issues, already raised in the debate, such as our full membership of the EMS by joining the so-called ERM. I believe that the exchange rate that we now have is conditioned by our present structure of foreign trade in which oil, until recently, played an important role. Owing to the 50 per cent. fall in oil prices compared to a year ago, and the 33 per cent. fall in the last six weeks, oil will have a very diminished share. That has to be made up by other items. The overall surplus is very small. It can only be made up by reviving our manufacturing industries and making them more competitive, which, in turn, means price competitiveness as well as competitiveness in other ways. This, in its turn, means that our exchange rate, which looks very favourable by historical standards in respect of joining the EMS, is still considerably over-valued.
In order to obtain the kind of export surplus in manufactures that we need, the domestic use of imported manufactures has to be considerably reduced in relation to domestic products. At the same time, our export of manufactures has to increase, meaning that the foreign use of British manufactures must go relatively to others. In order to achieve that we need a very considerable change in relative prices. I know of estimates which say that from that point of view our exchange rate is still 20 per cent. over-valued; in other words, at present relative prices we need a 20 per cent. devaluation in order to get the kind of export surplus in manufactured goods that we would need if we did not have the benefit of oil.
The benefit of oil is now diminishing on account of the fall in the oil price, which was referred to earlier by a noble Lord.
§ Lord Soames
My Lords, leaving aside oil, does this mean that the noble Lord foresees the proper exchange rate of the dollar to the pound being about parity?
§ Lord Kaldor
My Lords, I have not worked it out, but I think it is possible that that is the numerical implication of what I said. I must have some notice of that question. On existing estimates of economies concerning the elasticity of exports and imports with respect to relative prices, that would be the kind of price reduction we would need in order to have a surplus in manufactured exports with a reasonably full employment level of output. Of course, it is always possible to obtain a surplus at a sufficiently low level of output. By creating sufficient unemployment and by diminishing domestic consumption we would reduce our propensity to import, and in that way we could obtain an export surplus. However, that is not what I had in mind.
It was clear to many of us during the post-war era that sooner or later our poor performance in manufacturing production would lead to a crisis which would compel a radical change in industrial and general economic policies. But just then North Sea oil came to the rescue. Everyone was prophesying that 646 something terrible would happen, and then North Sea oil turned up and nothing terrible happened. We carried on much as before, with comparative ease.
A lot has been written—some by your Lordships' Select Committee on Overseas Trade—of what will happen and how we shall adjust when North Sea oil runs out. The recent fall in the oil price means that this issue must be faced that much sooner. As a result of Mrs. Thatcher becoming Prime Minister, our economic progress was rudely interrupted. Between the second quarter of 1979 and the second quarter of 1981 we faced two disastrous years of economic decline. From then on the economy started growing again, but it is only fairly recently that our gross domestic product surpassed its 1979 level. In terms of manufacturing output we are still 6 per cent. below the 1979 level.
Mrs. Thatcher's policies have been dominated by two preconceptions which in my view are both false. The first is that inflation is the source of all evil. We all agree that inflation is a great evil: we do not agree that to cure inflation will work miracles. If we cure inflation, instead of improving the economy becomes more stagnant than it was before. The second misconception is that inflation is merely a matter of the money supply, and provided we can control the money supply we can control inflation. To control the money supply means that we do not have to print notes to cover our budgetary deficit, which again is a rather naive view.
Therefore, we followed policies of economies in expenditure and higher taxation irrespective of the economic situation, while the bank discouraged borrowing through high interest rates as well as securing highly overvalued exchange rates. According to the calculation of the International Monetary Fund, our exchange rate during that two-year period, measured by labour costs per unit of output in terms of common currency, was at least 60 per cent. overvalued.
As a result of these policies, in the first two-year period of office of the present Government manufacturing output fell by 17 per cent, and industrial production as a whole fell by 13.5 per cent. That was between the second quarter of 1979 and the second quarter of 1981. The GDP was 20 per cent. below its trend level. This took place before the depression spread throughout Europe and other countries, and I believe that our own balance of payments may have played an important causal role in what happened in the rest of Europe. In fact, with the sole exception of America in the two years following the Wall Street crash in 1929, I do not know of any instance in history when production, manufacturing output or a nation's income decreased so rapidly.
However, in 1981 the Government quietly abandoned these deflationary policies without any public announcement, and economic growth was resumed at the old trend rate. This means that after five years our gross domestic product is only modestly above its level of seven years ago; in other words, since Mrs. Thatcher came to office, over seven years there has been an average annual growth rate of 0.8 per cent. I do not think that there is any comparable seven-year period in British history which averaged an annual growth in domestic product of 0.8 per cent.
647 In terms of economic criteria, therefore, this has been the least successful Government.
§ Lord Wolfson
My Lords, I am sorry to interrupt the noble Lord, but can he indicate to what extent he thinks the second oil price explosion was responsible for the very large drop in manufacturing output, which did not occur only in this country?
§ Lord Kaldor
My Lords, it did not occur only in this country, but in this country it went very much further. I am afraid that I do not have the figures in my head, but nowhere was there a fall of 17 per cent., or anything like it, in manufacturing output in a matter of two years.
§ Lord Diamond
My Lords, I only interrupt the noble Lord because I do not want a single word of the noble Lord's wisdom to be missed, and it is not very easy to hear everything he says because of the arrangements here. Will he kindly say precisely over how many years the 0.8 per cent. increase in GDP occurred?
§ Lord Kaldor
My Lords, it occurred in the seven lean years between 1979 and the end of 1985.
As regards oil, I have just a few words. I am sorry I have spoken for 15 minutes, but I think I have a right to deduct the interruptions.
§ Lord Skelmersdale
My Lords, may I make a point to the House? I think it will be in the interests of all if I say that if everybody deducted the interruptions we would get into a fine mess by 8 o'clock. I hope that perhaps this habit will not be continued too long.
§ 4.50 p.m.
§ The Earl of Lauderdale
My Lords, in seeking to congratulate, and join with others in congratulating the noble Lord, Lord Barnett, on his choice of subject—and it is indeed timely—I must couple that congratulation with regret. He happens to have chosen the night of the annual dinner of the Institute of Petroleum. It means that a number of people interested in the subject are, or shortly will be, absent from this House, including myself. I hope that the noble Lord and others will accept my sincere apology for the fact that I was committed to hosting guests at that dinner several months ago. On the other hand, I was pressed very strongly to take part in this debate.
The contribution of the noble Lord, Lord Barnett, was as always bewitching and beguiling. In a sense one cannot but listen to him to one's own advantage. But on the subject of oil prices I had thought we would have rather more—and rather more constructive—suggestions to make than we actually got. So far as I could make out, what we were told was that for the sake of stability Britain and Norway should agree to cut back production and discuss it with OPEC.
I take it that the noble Lord, Lord Barnett, whose reading is always so extensive when it comes from the London Business School, does not always read the 648 information available in the oil industry's publications. In fact he might like to know that eight days ago Mr. Arild Rodland, deputy oil minister of Norway, announced that that was the very one thing that Norway was not—repeat not—going to do.
It may be worthwhile if I give a short snapshot of the state of the industry. In some 15 years the free world's energy demand as a whole doubled, and during the last five years the free world's proven oil reserves rose only about 7 per cent. You might therefore expect that to be a factor leading to higher rather than lower prices.
However, over the last 10 years productive capacity has increased to the extent of about 7½ million barrels a day, which is equivalent to about one-fifth of the total OPEC output. Energy intensity—that is the amount of energy used per unit of GDP—has risen something like 13 or 14 per cent. over the same period, and of course world-wide there has been extensive substitution.
It is therefore scarcely surprising that 1984 saw a free world output fall of some 20 per cent., and the reversal of OPEC's fortunes surely demonstrates that the power of market forces is there and real, and it is futile to deny them or oppose them. We had a quotation a little earlier by the noble Lord, Lord Barnett, from the economic adviser to, I think, the National Westminster Bank. Perhaps I have the identification wrong. Anyhow, I noticed that Dr. David Lomax, the economic adviser to the NatWest Bank, did, in the February issue of The International Review, say:The events of the past 12 years have indicated that for oil producers to take advantage of their short-term market power to hold the rest of the world to ransom sets up market forces which are ultimately against their own interests".I find the Opposition policy on all this baffling. There are calls for cutbacks in British and even Norwegian production. But let us just consider British production. We are invited to cut back when this production already provides some 6 per cent. of the gross domestic product; we are invited to cut it back when it is 8 per cent. of our total exports; we are invited to cut it back when at any rate hitherto it has produced 8 per cent. of our total revenue; we are invited to cut it back when the industry provides something like 10 per cent. of the non-housing private capital investment of this country; we are invited to cut it back when it contributes about £20 billion a year to the balance of payments, or did so in 1984.
Then I come to the classic remark of the noble Lord, Lord Kaldor, which I heard with interest—perhaps it is unfair to single it out out of context, and I apologise to him if I am doing that—that oil has produced no jobs. Of course, he was talking in the context of the danger of Britain being a primary producing country, and this would not be to our advantage. But let me say finally that it is proposed that we cut back oil production when in fact there are 100,000 jobs that have been created out of this industry since the continental shelf began to be developed.
We are really being invited to cave in and behave as full members of a wholly-restrictive international cartel which has already plunged the world into a depression, and to do so when that is a producers' cartel and we are consumers as well as producers.
649 We are also asked to cut back production at a time when the first victims of a falling oil price are exploration and development budgets. These are the first sufferers in operational cash flow margins. I was interested to notice that the noble Lord, Lord Ezra—whose views one always listens to with great respect—mentioned that if we were to cut back production we must do it in such a way that there was no disincentive to further exploration investment. This of course is part of the dilemma.
Indeed, we are invited to make this cutback when Petroleum Information told us only the other day that United Kingdom sector drilling activity already shows a slight falter. It is doing so when Danish and Netherlands appraisal and development drilling is up, and when in Norway, Germany, France and Ireland it is stable.
Finally we are invited to cut hack when the present fall in price is likely to affect the development of any field under 100,000 barrels. The brokers, Capel, the other day estimated that an 18 dollar a barrel price would imperil developments on the United Kingdom continental shelf amounting to production of 20 million tonnes a year, or 400,000 barrels a day, and if the price came down to 10 dollars it would imperil about 600,000 barrels, or 30 million tonnes a year.
That is the context in which we are invited to cut back. It is worth mentioning that on these calculations—and the oil industry has been busy doing its sums, and all the analysts in the City and elsewhere have been doing likewise—there are three fields which are now picked out as likely victims for deferment of development; namely, the Eider, the Ettrick, and the T-Block. Cutting hack means cutting Britain's 6 per cent. share of the world market. If we cut that out, anyone who thinks it would not be taken up by somebody else must be living in Mad Hatter land.
We are not told how this cut is to be accomplished, let alone accomplished fairly. A 10 per cent. cut across the board would be monstrous because no two fields are alike. In no two fields are conditions even similar for the recovery of capital invested. The impact could only be uneven, and of course the effect must be—and the noble Lord, Lord Ezra, was implying a reference to this—an appalling blow to investment confidence. No amount of new state investment banking, in which the noble Lord, Lord Williams, who will speak later, is likely to be interested, will alter that.
The price fall and the risk to exploration budgets raise a question (to which the noble Lord, Lord Ezra, alluded in a sidelong fashion) whether the Government are prudent in trying to milk the oil industry by taxing it upstream and downstream alike: upstream discourages production and downstream hits the motorist and, through the motorist, the motor industry at large.
The Treasury demand for exact quantification of benefits from easements of tax that have been sought is a permanent rod on the oil industry's back. With your Lordships' permission, it is worth quoting an extract from a letter sent by the United Kingdom Offshore Operators' Association recently to the Treasury which illustrates the difference of approach between industry and Whitehall. In that letter the association wrote: 650UKOOA sees this as a challenge to get the long term fiscal climate right, so as to encourage the search for these incremental opportunities (many of them subtle, requiring intensive technical effort). It is, to a degree, an article of faith [within the industry] that the benefits will flow—there is not a large inventory of identified opportunity waiting to come forward in response to an adjustment of fiscal terms".The letter continues:The Government side appear to have a much shorter term focus, searching for a stock of already identified projects and attempting firm cost/benefit quantification which we regard as unrealistic and inappropriate".There is a difference between Whitehall's grasp of the situation which is a mathematical grasp and the industry's grasp of the situation which is imaginative and entrepreneurial.
We were told about the benefit to the economy arising from this price fall and it would be superfluous now to quote again the London Business School which I should have quoted had there been more time and had it not had adequate attention from speakers already. It is generally common ground in this debate that the net effect of the oil price plunge may be neutral or marginally beneficial. One thing is quite clear: that there is a considerable balance of opinion in the City which believes that there is nothing to be alarmed about. I quote the opening words of the latest business forecast by the Charterhouse group which states:The fall in oil prices will reduce cost and price inflation and contribute to a general lowering of interest rates".We have been told not once but many times over by the Opposition that our whole policy has been an absence of policy. We are told that we have squandered the produce of the benefits of the continental shelf. The fact is that the public sector borrowing requirement as a share of GDP has been reduced and this year's figures are encouraging (as witness today's Financial Times, the right hand column of the front page). We have repaid much overseas debt inherited from our predecessors—no names, no pack drill, for everybody knows who they are. We have acquired overseas assets now standing at a postwar record of more than £73 billion bringing in a yearly income of £3 billion, something that will stand us in very good stead when, or rather if—for it is not yet certain—the oil runs out. Oil has been described as a finite resource. It is finite only in the sense that as one goes further it gets more costly. The same is just as true of coal, but there is plenty of it and there is even more gas to be had, so to describe our hydrocarbons as a finite resource in absolute terms may be a mistake.
I find that the Opposition do not have much of a policy to propose when, ignoring the fact that we are consumers as well as producers, they argue that we should somehow get in among OPEC and do so with Norway, who will not play anyway. The muddle and the confusion in the name of preserving our resources that has emerged from those Benches and even once or twice from the bishops too—we sometimes expect them to intervene on the wrong side—reminds me of an old lady I once met canvassing near John O' Groats. She was 95 and when I went to see her she said, "A terrible thing happened the other day". I asked, "What was that?" She said, "A socialist came to my door". I asked, "Whatever did you do?" She said, "I listened and there was a long spiel. When he had 651 finished I said, 'Young man, all these long years, and I am 95, I have heard the wind blow but I have never seen it yet'".
§ 5.6 p.m.
§ Lord Parry
My Lords, in the late 1940s in another place, when a Labour Chancellor of the Exchequer had spoken at some length on the problems that he was facing in re-phasing the British economy from war time effort to peace, he gathered his notes together at the end of his speech and left the Chamber. The late great Sir Winston Churchill was heard to mutter, "There, but for the grace of God, goes God". Had he been in the Chamber this afternoon he could only have said, "There, but for the grace of God, goes the Kingdom of God or the Tory Party at Prayers", because everybody who has spoken so far from the Government Benches in this debate has left the Chamber and the noble Earl, Lord Lauderdale, has apologised because he is to leave shortly, having made a robust defence of his Government and having made a straightforward lobbying speech on behalf of the oil industry.
The debate initiated here this afternoon by the splendid speech of my noble friend was intended to raise the economic situation of this country, the price of oil and its effect upon that economic situation, the exchange rate and the way in which we might somehow achieve an improving economy for Great Britain at a time of great difficulty for it. In fairness, some Members of the House on both sides had addressed themselves totally to that issue.
When the noble Lord the Secretary of State for Employment sat down at the end of his little speech I thought that he was giving way to my noble friend Lord Hatch of Lusby. There could only have been one other explanation: that he had fainted. But he walked from the Chamber immediately afterwards and I was relieved at that because he is a nice man. I will give way at any time when he comes back, as I am sure he will, for he has apologised, when he wants to finish his speech; when he wants to come to the positive matters of this issue that we face.
When I rose in this Chamber to make my maiden speech some 10 years ago I spoke about the oil industry. I spoke about it in the context of the development of the great port of Milford Haven. I was able to quote from the words of the then Sir Harold Macmillan who had said that Milford Haven was about to become a major European oil port. It was an optimism that we all shared regardless of politics and we saw in it an opportunity to benefit from the sobering experiences of Suez, from the fact that France had been brought to within 24 hours of its economy grinding to a standstill for lack of oil, and because we knew that it could be possible to organise oil around the Ten so that we had a constant supply of it here to fund our industry. We knew that our industry had to contract because we could not continue after imperial preference had ended to pose as an economy that had the benefits of a worldwide supply of markets and an internal supply of fuel.
I do so agree with the noble Lord who formerly headed the coal board. If at the time of that 652 redevelopment of the disposition of our oil industry in Britain—indeed in Wales, in the harbour of which I have spoken—as much attention had been given to, and as much capital had been invested in, the rephasing of the coal base in this country, then we might have had a policy that could have gone forward with the search for oil in the North Sea and in the Celtic Sea, which has not been mentioned so far, and with a redevelopment of our coal base which was more adequate than ever, despite the great efforts of the noble Lord who has spoken.
This country then found itself in a position where it had almost wantonly and willingly become dependent upon oil. Finding its own supply in the North Sea, it then proceeded to buy itself (what was the phrase?) a breathing space. However, having provided the breathing space, it did not go on with rephasing the other aspects of its economy in order totally to benefit from it.
We now have a situation which some of us predicted. During the three elections in which some of us fought, it was part of the exchange that there could come a time when the oil producers elsewhere in the world, fearing the emergence of Great Britain as a primary, front line, oil producing country, could then adjust their prices and their productivity in order to undercut our own. That is precisely what has happened.
I checked for a moment while we were debating here, and it is indeed what has happened. We now have a situation where we are caught in our basic economic policy and at the mercy of those exchange rates. The Celtic Sea will now probably find its investigations postponed. It will mean that another hope for the redevelopment of the productive base of the economy will be lost or at least postponed.
I want to say this. Although many times in this House I have argued that part of the recovery of Great Britain must be based on a service development of our economy, even tourism led, I have never seen it as a panacea. I have always believed it to be a nonsense to claim that tourism and the service sector could support this country on its own. It has always been essential that we should be investing money in those areas of Britain that for very long have been neglected.
I want to say a word about the imbalance within the British economy, about the fact that for a very long time indeed the real export of the peripheral areas of this country has been the best of its young people. It has always been a terrible problem in the part of the world in which I live, in which I have spent my life, that we have exported our young people because we have been unable to create employment there.
Indeed, when the oil industry came to the Milford Haven Estuary it enjoyed an investment of public and private capital. It was then respectable for the oil industry, developing as in the North Sea, to take £800 in every £1,000 of its development from the public purse. We did not hear much criticism then of the mixed economy and the mixed investment. When that oil industry took that money and developed that major port, we all thought that we were securing for 50 years a new opportunity, a new employment, and a recharging of the economy of Wales—and of course of elsewhere, in Scotland and indeed throughout Great Britain itself.
653 I agree with the noble Earl, Lord Lauderdale. I think he misunderstood what my noble friend was saying. I think, if I did not misunderstand him, he was implying that a modern oil refinery employs very few people, but obviously the product of the oil refinery and the product of the oil industry sustains a great many. No one could argue with that. But where are those people today? Those people are working today in Holland, Malaysia and elsewhere because the oil refineries that were built, at great public cost and with great private expertise, are today discharging their skilled labour who are being re-employed by competitors of this country, sometimes within the very companies that had their oil refineries in Great Britain.
I merely wanted to inject into this debate my concern that when we talk about the benefit of the oil industry to the economy of Great Britain we also lay quite firmly the fact that the contribution that it has made has been sustained by a very large public contribution. Indeed, the licences granted in the North Sea were originally of so much benefit (and that was under a Labour Government) to the developing companies whose expertise we needed—and, there is an expert on the Cross-Benches—that the first act of an incoming Conservative Government following an election was to renegotiate those licences and to change the terms by which they were developed.
All this goes to say in this debate this afternoon that we have become so dependent on the basic price of oil and the index—which is what was talked about in relation to the exchange rate; the real index value—that we cannot make this a party political issue. We cannot look on this debate as being about something that can be changed simply by a change of Government. That is because the whole business has defeated continuing Governments of this country for the last 25 years. During those 25 years the oil complex on Milford Haven has been built and has all but died. Through Milford docks today we are exporting the remains of the oil tanks of the Esso refinery, which was the first refinery to be built in Milford Haven in the post-Suez period.
We are dependent on oil. But it is absolutely essential that notwithstanding our dependence upon it we realise that there are other things happening in the economy. It would be quite wrong of me to imply, certainly for party political purposes, that there are not optimistic things happening within the economy of Wales. We have seen a great many service developments. I have to say that there has also been a tendency for us to believe that high technology can get us out of our difficulties on its own. It cannot do that, either. There have been clouds and sunshine in "Silicon Valley". There have been great difficulties. I think many of us are disappointed in the ultimate achievements of the high technology industry, but of course the product of that technology, reapplied and properly concentrated, can still give us hope.
It is absolutely impossible for anyone, whatever his or her political commitment, to stand up in this House and to convey the impression that, because there is a percentage improvement here or there, or because the figures can be presented in such a way, one can say that our employment situation stands better now than it did. It is impossible for anybody to do that. The lesson of the post-war years has been that no government 654 have been able to solve the creeping paralysis of unemployment, and that attempts to do it have very often accelerated the rate of fall-out.
For the best possible reasons the Government now in office won the mandate of the people, probably for the first time since 1945, to change the direction of the British economy. From 1945 to 1951 the Attlee Governments, on a similar mandate, moved this economy towards public enterprise, public responsibility, social services and social security. This Government interpreted their mandate and proceeded to implement a policy that for the first time swung the economy of Great Britain away from that path and in a direction that they considered they were right to do, that they were mandated to do, and which some of their members would defend their Government for doing.
It is the duty of Opposition to criticise and it is the duty of Members on the opposite side to defend. However, do not let your Lordships' noble House, which is at its best when it rises above specious politics, try to convey the impression that there is not a great and real crisis in the economy of this country.
We accept the Secretary of State for Employment's own feelings of frustration because the unemployment figures are not better, are not improving more rapidly. However, crucial to what we are saying this afternoon is this. There must be a degree of recognition that the oil base itself has not been able to secure for us a big enough breathing space; that some of the policies which are fashionable, but are happily currently now going out of fashion, have contributed towards the present situation. What I urge is that this House gives the message that it understands that in the future there has to be a change from the sterile policy of absolute monetarism to one in which public and private money together, properly invested, seek to give a new phase of development which can be acceptable philosophically to us all.
§ 5.20 p.m.
§ Lord Wolfson
My Lords, as I am speaking at relatively short notice in this debate, which has been so eloquently and wittily introduced by the noble Lord, Lord Barnett, I shall be reasonably brief—a fact which I know your Lordships will welcome. I wish to apologise to the House that for family and personal reasons I may be unable to attend the late stages of this very stimulating discussion. I hope that your Lordships will forgive me.
Any major transition brings numerous problems in its train. We cannot underestimate their impact, but events are moving too rapidly to make a definitive judgment at so early a stage in a new economic cycle; for that is what we appear to be entering. I believe, however, that a sustained reduction in oil prices will have a positive and beneficial effect on trading activities in the western world, and, as a result, in the affairs of the third world, where renewed economic progress is a vital necessity. I am encouraged that there are so many expert views which have been quoted by noble Lords today to support that.
As several noble Lords have already, let us cast our minds back to 1974 and 1979, when we were faced with the two phases of the oil price explosion and the debilitating inflationary aftermath that so devastated 655 industries whose expansion had been predicated on stable energy prices. The rapid escalation of these costs was at the root of the structural upheaval that damaged so many manufacturing companies and the prospects for those employed. The serious instability of exchange rates dates from that period, and the noble Lord, Lord Soames, has made a notable contribution on this subject.
In contrast, we see now a most encouraging reversal of the oil situation, and we should welcome the return to more equitable levels of commodity and energy prices. Indeed, as oil is priced at 17 dollars a barrel in mid-winter one can anticipate a further decline in spring and summer, as the forward market is indicating. Of course, this will place further emphasis on existing short-term problems. Exchange rates will in time adjust to appropriate levels, but, as your Lordships know, many financial loans have been made on the unhealthy assumption that oil prices would never cease rising, with all the enfeebling effects that this would have had on the world economy. The debts in question are in reality no worse today than they were six months or even a year ago. It still requires international co-operation at the highest level to restructure and convert them into longer-term instruments of repayment.
It is, of course, a most difficult and delicate task; but with the goodwill that exists it should not be completely beyond the ingenuity of governments and others to bring this about, and happily there is a genuine desire to do so. We know from bitter experience that the world prosperity is indivisible. Once a number of unsound positions have been built up on inflated expectation, I believe that they are outweighed by the long-term advantages arising from the lower energy prices, which must benefit the same economies that suffered most from their rapid escalation.
It is significant that stock markets throughout the world are anticipating just such an improvement. Investors look ahead, and we must all hope that they are right. As a businessman, I believe that the United Kingdom economy has more to gain from lower energy costs than it has to lose from lower oil prices provided that the budget allows most of the process to come to fruition. This process will bring with it a lower level of inflation, and in turn, reduced rates of interest world-wide, including our own too-high levels. These positive factors can readily be appreciated. While it is true that taxation receipts from artificially high petroleum revenues will decline, as in the long term they would inevitably have done, receipts arising from improved trading activities will perhaps compensate in large measure. The new pattern that emerges should provide more durable and better balanced arrangements for the future, while the national budget would not have to cater for such a large inflationary factor.
The sterling exchange rate has adjusted in large measure to the new circumstances, possibly too much so, for the benefit of new oil prices has yet to flow through the system. The balance of payments will continue to derive considerable income from our substantial overseas holdings, which have been financed to a significant degree by investing the surpluses arising from highly-priced oil. I agree with 656 the noble Lords, Lord Barnett and Lord Ezra, that we should now consider joining the EMS.
I feel confident that businessmen will want to seize the exciting opportunities ahead. Lower fuel costs would make British goods more competitive both at home and overseas. With dynamic marketing, design and customer service we can add to our already substantial direct export performance, which is running at over £6 billion a month, one of the highest per capita rates in the world. I feel that we do underplay ourselves in many cases, and this is one of them.
Employment prospects should be enhanced, and this in itself is a most desirable potential benefit. As the noble Lord, Lord Ezra, has pointed out, the Government, in partnership with industry, might be able to consider an additional selective range of capital investment partly financed by equity capital, including that arising from privatisation issues and, as interest rates fall, partly from the bond market. I hope that future Budgets will differentiate clearly between capital investment and receipts and revenue items, which, of course, is normal business practice. Naturally, it is sounder to borrow for viable investment projects than for current expenditure.
The economy needs a shot in the arm, and I feel that lower energy prices will help to provide that stimulus. It could be a milestone in the search for better growth rates in world trade and investment. A good deal has been done to make company taxation competitive in world terms, and the overall package would be fortified by a personal tax infrastructure, particularly for lower and middle incomes, that would sustain expansion and encourage enterprise, as many of our leading competitors have done.
We could well be at the start of a challenging new phase in economic affairs. Whatever the short-term problems, the positive factors outweigh the negative ones, and we should be basically optimistic about the future. We must release human energies to create the wealth we require for the overall social needs of the nation. Britain is a highly talented and inventive country. We have the ability to succeed: we must have the confidence to do so. The more individuals are afforded the opportunity to have a direct stake in financial ownership, the more we shall prosper.
§ 5.30 p.m.
§ Lord Donoughue
My Lords, I should like to begin by thanking my noble friend Lord Barnett for his excellent opening speech, with virtually all of which I must say I agreed and where the analysis I think and hope has spared us some repetition this afternoon. I should particularly like to support what he said about co-operation: co-operation on oil production to secure stability in oil prices and co-operation on the exchange rates—and there I must say that I now feel we really should very seriously consider joining the EMS. But I have to confess—which, since it may breach the Official Secrets Act, I can do with more courage now that the noble Viscount has left the Chamber—that in 1978 Downing Street I then advised the Prime Minister not to join. But I now feel that in changed circumstances the balance of advantages certainly points that way.
657 As for the noble Lord, Lord Young, I feel that he produced one of his more trusty, tried and familiar speeches. We have tried, however unsuccessfully, to respond to that before. At the heart of the issues we are discussing is of course oil; and, frankly, nobody knows where the oil price will settle so there is absolutely no point in making firm forecasts based upon that. We expect that by the 1990s supply and demand will be more in balance and that the oil price will probably be stronger. But, looking over the next 18 months, that price could be anywhere between five dollrs and 25 dollars. My own guess is that it is likely to be nearer 15 than above 20.
The main question for the United Kingdom, of course, is whether that generally lower level of oil prices than hitherto is beneficial or, on balance, harmful. The whole thrust, I think, of much of today's debate, is that it must be helpful. After all, when prices rose that was bad and therefore when they fall it must be good. But economics, like life, is not always that simple. Marriage, indeed, may not be good for many people but it does not necessarily follow that divorce is automatically good for them if marriage is not. It depends what you were used to.
Obviously, in the long term, lower energy costs are helpful: they will stimulate growth and cut inflation. But, in the short term, I do not think we should ignore the complexity of the impact and I suspect that the optimistic consensus we have is perhaps a little too complacent. If we look at the impact on growth and inflation, the argument is that lower prices are wholly beneficial—which is almost certainly true in the Western world as a whole—but, if we look at the United Kindom, they depend very precisely upon the translation of these lower crude oil prices into refined petroleum product prices.
If we look at the reality of our world in Britain today, there has not been a great deal of that beneficial translation. Petrol prices are about 5 per cent. down, whereas the fall in crude oil prices would have justified a decline in petroleum prices of double that amount. If those prices do not fall further, then the benefits will not come fully through to the United Kingdom economy but will come through to the profit margins of the oil companies.
To that extent, the Chancellor is somewhat in the hands of the chairmen of the oil majors. In fact, so far, in terms of inflation, the damage from a lower sterling looks like being greater than the benefits from the lower energy prices we have had up to now, and I think a reasonable calculation would show that inflation would rise over the next 18 months by about one to one-and-a-half per cent. Perhaps one might also point out that, were the Chancellor to tax petroleum as has been discussed, those inflation benefits would be eroded accordingly. So, looking at inflation and growth, it seems to me that the prospects are promising but it would be wrong for your Lordships to assume that they are certain.
Turning to the current account, the balance of payments, I think the impact of lower oil prices is clearly damaging there. With oil forming 8 per cent. of our net exports, the reduction in oil prices so far at current exchange rates eliminates about half our recent oil surplus, bringing it down from just over £8 658 billion to around £5 billion. Were it to settle at 15 dollars, at current rates we should lose about a further billion and move into current account deficit. So that is certainly not a plus.
However, Government revenue is the area of the most interesting impact: that is the area which causes flutters in the breasts of the Treasury. I think it is generally agreed that in the year ahead the direct revenue loss will be around £4 billion. That is for the coming year. Those figures could improve but they could also deteriorate, and I think that the Chancellor next month really would be imprudent to give away in advance in his Budget revenues that he does not have. I am sure he will not try to do that because he will know that these days in the City there are commentators who can see through creative accounting.
There is an issue here, of course, of the compensations. Those losses are direct losses, and the argument is whether the indirect compensations are sufficient to cancel them out and perhaps to produce net benefits and whether the higher economic activity it is assumed we shall get will more than make up for the lost oil revenues. It is, of course, tempting to believe so because we all wish to take the more optimistic and positive viewpoint. And it may be right: nobody actually knows. However, I think it would be fair to suggest that the compensations might well be smaller, certainly in the first year, than the £4 billion it is assumed is going to be lost. Also they will be later. They will be later because of the time-lag effect on the economy. They will be smaller and later.
There is then the question of whether the Chancellor may be able to supplement those lost incomes through other revenues. We hear rumours of the increased petrol excise duty which I mentioned, and also rumours that have caused some trepidation in the area where I work (somewhat east of here) that there will be a windfall impost on the new City millionaires.
As regards petrol, I would say there is no way that that can raise enough. About 10p on a gallon will raise about half a billion, and we have to remember that if that goes on and prices go up and are passed on by the oil majors to the customers, then the anticipated benefits with regard to inflation will not come through.
As regards the tax on the City, if I may just pause to declare two interests—as an employer and head of a department paying the new salaries, I naturally have an interest in them coming down, but I am also personally a beneficiary, so it gives me pause—what I would say there is that many of us—and I am thinking not only of those on this side of the House but also of people in the City—do regret and dislike the enormous disparities of pay that are now arising. It is relevant to this debate, because I think it must be as discouraging to the management working at the sharp end of industry as it is to the unemployed to see such enormous rewards. That is, of course, why some of us support an incomes policy, which is one way in which one might approach the problem. I am myself puzzled by the Prime Minister's attitude to that and by her indignation. I am sure that colleagues on the Front Bench will point out to her that if you introduce international free market conditions, as in the City of London, you will end up with international free market pay.
659 In conclusion, I should like just to look a little to the longer term and ask the Front Bench opposite to do so, because in fact what we have experienced in recent weeks, as another noble Lord pointed out, is a foretaste of the future, of the time when oil revenues inevitably decline, with production—a time that will coincide with the end of asset sales. That is a major problem which faces this nation not many years ahead. What we have seen in recent weeks, and will see then, are three characteristics. I should like just to mention them and raise questions, because we shall then suffer, almost certainly, a lower exchange rate. Sterling is down against the basket about 6 per cent. since the New Year, and it will go down unless we have sky-high interest rates to hold it up, and I am sure none of us will want that. How do the Government suggest they will cope with the inflationary impact of that?
It is highly likely that we shall also suffer a higher public sector borrowing requirement. Without oil revenues of £7 billion to £10 billion now, without asset sales of around £4 billion, the current PSBR, in crude terms, would be approaching £20 billion. How would the Government avoid raising taxes in that situation, rather than making promises to cut them? We shall also, for reasons I have given, suffer a large current account deficit unless manufacturing expands to fill that gap.
I wonder whether noble Lords on the Government Front Bench would tell us if the Government agree with the recent statement that,There is no credible plan for the future of the British economy that does not accord a central role to a dynamic and innovative manufacturing sector.That statement made yesterday by the present Secretary of State for Energy is one with which I agree. It picks up a theme that we discussed recently in the excellent debate on overseas trade. Again, I wonder what noble Lords on the Government Front Bench have to suggest to bring that about, and whether they believe that the disposal of the British motor industry to one of our main competitors is a serious beginning to that process.
Sadly, in recent years we have seen our North Sea oil revenues, mainly though not wholly—there are overseas investments which, in my view, will have many benefits in the future—spent on paying for the unemployed. I wonder whether we can have from noble Lords opposite tonight, or from the Chancellor in the coming Budget, some reassurance that the Government are planning for a post-oil Britain.
§ 5.42 p.m.
§ Lord Vinson
My Lords, I hardly like to say it, but I too must apologise in advance because an inescapable appointment means that I may have to leave before the end of the debate. But at the rate we are going, all may be well. The Government are indeed to be congratulated on their clever use of interest rates to bring about exchange rate stability during this unprecedented period of falling oil prices and they have kept interest rates up for good reason. For the past two years, we have been told by the foreign currency dealers that sterling would remain extremely volatile until oil prices had fallen or stabilised. To a 660 large degree, this must have happened and oil prices cannot now be far off their bottom level, so with any luck we can begin to look forward to a continuing period of currency stability and, with it, lower interest rates—all perhaps cushioned by joining the EMS. One just hopes that currency dealers will not scratch around to find yet another reason for sterling still not being out of trouble.
So all credit to the Government for maintaining sterling at approximately 1.40 to the dollar, while allowing it to drop slowly against other currencies with which it was hitherto over-valued—a point so well made by the noble Lord, Lord Ezra. This has enhanced our export prospects, particularly those of our manufacturing industry, and because most raw material prices are quoted in dollars it has stabilised import prices and through that, we hope, inflation.
However, the continuous use of high interest rates as the primary mechanism of controlling inflation is a mixed blessing. In economics, it is a mistake to be too categorical. But there is one absolute truth in economics, which is that there are very few economic hypotheses that look wholly watertight 10 years after they are fashionable. We all learn from our experiences.
I happen to be one of those people who believe that high interest rates are, in themselves, a motor of inflation. High interest rate levels, and the international policies that are fashionable and that dictate them, have insufficient critics because, sadly, we live in a lenders' world. Most of the organs of influence—the institutions, the City and the banks; I happen to be a proud director of one—actually benefit from high interest rates. It makes the margin between borrowing money and lending money more substantial. It is altogether more profitable. So it is not surprising that the contrary view is seldom put.
And can you altogether blame those institutions which have funds to lend if, at a time of very high real interest rates, they invest them in risk-free government bonds at 11 per cent. on the street, rather than in risk-prone wealth-creating industry at 5 per cent.? Indeed, this reverse yield gap must lie at the base of our poor Western world investment performance. I believe it to be true that the voice of the borrower is little heard, and it is certainly ill-represented in the corridors of financial power.
For all that, I am sure that it is indeed the Government's intent progressively to lower interest rates and get us back on to the virtuous money cycle of lower interest rates, lower mortgages and lower RPI, all helped by a lower oil price. We have indeed a golden opportunity.
Of course, one wholly accepts that interest rates in this country are, to a significant degree, inescapably conditioned by those in the United States. We are suffering from an international interest rates war and it would be sensible of the Government to join wholeheartedly with Germany and Japan in examining mechanisms that could, quite properly, be used to begin to stroke down international interest rate competition. Meanwhile, apart from those few and unrepresentative United Kingdom firms that are sitting on a mountain of cash, our smaller companies operate—however much the Government would wish 661 them well—under an extremely harsh financial climate of very high real interest rates.
I am chairman of the Development Commission, England's rural development agency, and we deal currently at first hand with some 20,000 small firms. It is firms like these—the little men—that really suffer, and suffer in silence, when interest rates are excessively high. They quietly bleed to death, while their cash life blood is drained out of them to meet the interest charges on their inevitably high borrowings.
However, I am not being quite fair to the institutions, because the other day I heard a senior manager of the Halifax Building Society say that in his view the cost of mortgages was at an unsustainable and unsupportable level for the first-time borrower, who out of desperation had to take out a mortgage but simply could not afford it. I shall never forget the day when, as managing director of a company, one of my best men, a really good citizen, came into my office and burst into tears. He said to me that he simply could not afford to meet the rise in his mortgage and he must have a wage increase. It is not surprising that this country's most intractable problem—that of inflationary wage push—remains with us when mortgage rates are so high and, for whatever fiscal good reason, they are unprecedently high in real terms today.
High interest rates support and continue inflation in many other ways. To the builder who, not unreasonably, takes a year to build and sell a house, the present cost of money adds 15 per cent. to the cost of that house on top of the normal costs of bricks, mortar and land. It is not surprising, then, that the interest rate sensitive areas of the economy, particularly building and construction, have useful spare capacity.
Lower interest rates would mean higher activity in this sector, and it is a sector that can rapidly and effectively employ the United Kingdom's unemployed—another good reason why the quicker the interest rates fall, the better. Meanwhile, to the shopkeeper turning over his goods every four months, the cost of money at present levels adds 5 per cent. to his prices, before even beginning to cover his own expenses and to make a profit.
Last, but not least, for our industrial companies, when attempting to compete in overseas markets, to give six months' credit on the sale of goods will cost them 6 per cent., while it will cost similar Japanese companies only 2 per cent., giving the Japanese an immediate price advantage of 4 per cent. on the financial arrangements. Some argue that interest rates are insignificant in relation to labour costs and are thus not important. I can only say that I believe this shows a profound misunderstanding of the opportunity cost of borrowed money.
In conclusion, there is another overriding reason to hope that we shall see a rapid decline in interest rates now that oil prices have fallen; namely, that one of the real success and growth area of employment in the economy is in self-employment and small businesses. These are not of course by themselves likely to be the exclusive economic salvation of this country. We need as many medium and large sized companies as we can get. But there is little doubt that the vitality of both the Japanese and the German economies is due to the 662 prosperity of a buoyant and efficient small manufacturing sector.
In Japan, they have low interest rates and a tax regime giving rapid cost recovery; or to put it in the jargon, accelerated amortisation. In this country, we have very high real interest rates and have just moved to a tax regime of retarded amortisation. Hardly a way to emulate Japanese success. Let us hope that in the forthcoming Budget the Chancellor will recognise the predicament of this sector in particular.
It is not unreasonable to anticipate—thanks to the fact that oil prices have now fallen—that we shall enter a period of greater currency stability and with it the opportunity for the Government to lower interest rates. I am sure that they would wish to do this sooner rather than later. High interest rates are grit in the wheels of economic recovery. By lowering interest rates as quickly as possible. the Government could begin to put us on to a virtuous cycle of lower costs and lower wage demands. They could crown in this way the success of their anti-inflationary policies to date.
§ 5.52 p.m.
§ Lord Hatch of Lusby
My Lords, on 3rd December last, at the end of our debate on the report of the Select Committee on Overseas Trade, the noble Lord, Lord Young, had this to say in answer to the noble Lord, Lord Weinstock, and myself. Speaking first to the noble Lord, Lord Weinstock, he said:The noble Lord gave us a lecture on economics which I must confess that I did not follow, but I shall read Hansard. The point that disturbed me was immediately approved by the noble Lord, Lord Hatch, and so I shall read both speeches with considerable worry!"—[Official Report, 3/12/85; col. 1291.]The noble Lord did not answer the questions I put to him this afternoon at the end of his speech; nor has he answered the speech that I made during that debate. Nor has any noble Lord representing the Government ever answered the consistent queries that I have been putting forward and the policy that I have been proposing as an alternative to the policy of Her Majesty's Government. It is a pity that the noble Lord, Lord Young, is no longer present, but I am glad to see that the noble Viscount the Leader of the House is with us. No doubt if the noble Viscount feels it necessary he will speak on behalf of his noble friend. But that is the responsibility of the noble Lord, Lord Young. He made the opening speech, and I did not see any necessity to warn him that I would be picking up what he had said at the end of the debate on the Select Committee report because I assumed that he would be with us for the rest of the afternoon.
The principal issue that is raised by this debate is not whether the reduction in the price of oil is going to stimulate the economy of this country and the economy of the world but whether the opportunity which the reduction in the price of oil gives can be taken. This was precisely the issue which I put forward in the debate on the Select Committee report and which the noble Lord, Lord Young, did not find himself able to answer at the end of the debate. So I shall put it to him again—or, rather, I shall put it to Members of the Government—perhaps in simpler terms.
My fear—and the whole thrust of what I have to say is based on this fear—is that though the Government 663 have been telling us (telling us in front of the Select Committee, telling us in this House and telling us in the other place) that the time would come when the economy would turn and that the Government could only provide the conditions for the turning of the economy, and though that opportunity has now come, the policy of this Government has been such, I suggest, that they have deprived the industry of this country of that opportunity to any great extent. I shall say why.
The Government's policy as I understand it and as I have laid it out before—and it has never been questioned by the other side—rests on a number of theses. The first is that if we control the money supply inflation will drop and there will be an opportunity for economic growth. The money supply has now been wildly exceeded, and the Government, without saying so, have dropped that test. They have discarded the test of the money supply, and no longer is it a plank in their policy. But at the end of that, before they dropped the test of the money supply, unemployment in this country had risen to between 3 million and 4 million, probably more than 4 million in real terms.
The second of the Government's planks was that they would free the private sector to invest and to produce, and so create wealth, and that they would reduce the burdens of the Government on the private sector. But taxation has increased under this Government by something like 5 per cent. since 1979, except for the very rich, and that burden of taxation has been borne by industry. What has been the result? We have had to squeeze out of the Government an admission, which we had this afternoon, that investment in manufacturing industry in this country is now 18 per cent. less than it was in 1979. They like to say that investment has increased, but when you pin them down to manufacturing industry you find that investment is 18 per cent. less than it was when they came into office.
As was revealed, I think accidentally, by one of the noble Lords on the Back Benches yesterday, who obviously did not know the answer when he put down the Question, output in manufacturing industry is 5 per cent. less today than it was in 1979. That is seven years ago. This is what happens when, as the Government would say, you free the private sector to invest and produce. Perhaps even more worrying, productivity is today declining in relation to our competitors. Unit costs in this country have gone up by 5 per cent., whereas those of our competitors have fallen over the past year by 1 per cent. to 2 per cent. That is not very hopeful for the future of British manufacturing industry.
The third plank in their platform was, "We must cut public expenditure". One has only to read through the evidence given by Ministers and officials to our Select Committee—"We cannot do that because our policy is to cut public expenditure as a proportion of GNP". Public expenditure as a proportion of GNP has gone up under this Government. It is higher now than it was in 1979. That policy has failed despite the fact that, in order to hide as much as they can of the reality, the Government have included in the reduction in public expenditure what they have received from selling national assets. This is not put down as revenue; it is put down as a reduction in public expenditure. Despite 664 all that, public expenditure is still higher as a proportion of GNP than it was in 1979. This, again, had to be squeezed out of the Government. It had to be squeezed out of the noble Lord, Lord Young, by my noble friends Lord Bruce and Lord Molloy. First, the noble Lord was going to try to conceal it. Then it was squeezed out and he had to admit that fact.
What has been the result of what they have done with public expenditure? One has only to talk to the people in our hospitals and to the people in the schools; to look at the roads and to drive on the roads; to look at the amount of public housing that has been started during those seven years; and to look at the transport system. The deterioration in all those aspects of our public life is the result of cuts in public expenditure.
The next plank in the Government's platform was, "We will roll back the state". That was their great rallying cry: "We will roll back the state and set the people free. We shall have a free market and market forces will determine everything". Free market forces may determine matters, except where it is in the interests or prejudices of the government for the government to intervene. I have not seen many market forces determine matters in the case of agriculture. I did not see market forces determine the future of Westland's. I did not see market forces enabling Ford to threaten to take over Austin-Rover. I have not seen that it is market forces that are giving General Motors the opportunity of taking over Land-Rover.
Those deals have been done behind the scenes without the market place being open to all contenders. As we have heard this afternoon, it has been claimed by a former Minister who was a member of the Government until 9th January that the General Motors deal was never even put before the Cabinet during the whole nine months of the negotiations. That matter was handled in a secret, hole-in-the-corner way while the assets of this country were being sold overseas.
§ The Earl of Lauderdale
My Lords, I am grateful to the noble Lord for his courtesy in giving way. Seven or eight minutes ago, the noble Lord said that he would repeat a question that he had put to the Government in a previous debate, and which he had tried to put again this afternoon, but which the Government had evaded. I am still waiting to hear what that question is.
§ Lord Hatch of Lusby
My Lords, I did not say that I was going to put a question. In the previous debate on the Select Committee report I put a theme and asked the Government to answer that theme. They have not done so. They did not do so when I challenged them on part of that theme this afternoon.
§ The Earl of Lauderdale
My Lords, I am trying to follow the noble Lord but I am not clear what is the question he is trying to ask.
§ Lord Hatch of Lusby
My Lords, I am not trying to ask any question. I am trying to get the Government to argue their case against the contrary case that I have been arguing for the past seven years. I have never got the Government to meet that case. Nor did I get them to meet it when their Ministers appeared as witnesses 665 before the Select Committee of which I was a member. I tried again in question and answer to get the Government to meet, not the case that I was putting, but that which a whole range of industrialists had put to the Select Committee. If your Lordships will read the report of that Select Committee and the evidence you will see what I am talking about.
There is one field of economic activity where the state has been rolled back and where the market forces do apply. As has already been mentioned by my noble friend Lord Donoughue, that place is the City. We are told that in the City there are six-figure salaries for people in their early 20s. That is where they will make their money. Although, to be fair, there are members of the Government who have deplored that situation, it still continues. That is what happens when one opens the field to market forces. It is no use moaning about it afterwards. If one is going to leave matters open to market forces, people will go into the City rather than into industry. As one industrialist after another told us, in this country young people will go into the City because there they will get two or three times as much as they will in industry.
What are the results of the Government's seven-year economic policy? Manufacturing industry has been demolished. Above all, its capacity for recovery has been removed. That capacity has been reduced by at least 20 per cent., so that when the opportunities come—if they come—many industries will not be able to take advantage of them. Unemployment is at a record figure. It is above that of all our competitors. Inflation is much higher than that suffered by any of our competitors. Interest rates are at a higher level than ever before, and our competitiveness is decreasing. All that is in spite of the fact that this Government have had the benefit of massive oil revenues over that seven-year period.
We are now seeing what has been rightly described this afternoon as the situation we foresaw on the Select Committee. As the price of oil declines, we are seeing a projection of what we anticipated was bound to happen as the quantity of oil declined. Now we are seeing the price decline. We wait to see whether the Chancellor's theory as he put it to us holds good; whether, as oil revenues decline, manufacturing will automatically increase. We wait to see, but I doubt very much whether that can or will happen.
Where the Government are now challenged, as the price of oil declines, is in respect of their economic or industrial strategy. Again, we on the Select Committee tried desperately to find out what it was. In that respect we found that the Government were virtually completely bankrupt.
It would appear that the reaction of the Government to that new challenge is simply an hysterical sale of national assets; the destruction of our industrial future; the mortgaging of that industrial future in giving ownership and control to foreigners; and, as we saw the Prime Minister admit on Monday night, the priority of commercial profit before the interests of this country. Apparently the success of capitalism takes priority over British interests.
I could summarise all that in these words. We have blown North Sea oil. We have sold the assets. We are a society too anxious to consume and an economy too 666 reluctant to invest. I could make that summary but if I did so, it would be plagiarism because that is the summary made by the right honourable gentleman who was Minister of Defence, and a colleague of the noble Viscount the Leader of the House, until 9th January. He made that summary last week in New Society:We've blown North Sea oil. We've sold the assets. We're a society too anxious to consume and an economy too reluctant to invest".I do not need to claim authorship of that summary because it has been given to us. Neither can I be accused of being prejudiced. That summary was made by a former member of the Government who have conducted the policies in question.
At the same time, it is no longer any use the Government saying that there is no alternative. The CBI have put an alternative, the TUC have put an alternative, and the All-Party Committee of another place has put an alternative. The Labour Party also has put an alternative. There is a common thread that runs through them all, and it is that more Government initiative is needed to support industry.
I have one last point to make. I do not like the kind of roulette economy that we are now seeing in the City, in the mergers and take-overs. I was interested to see that the secretary-general of the Institute of Directors agrees with me in his comments last week. With regard to that merger process, one comment has been made this week that I should like to quote to the House. It will again show that I am not alone in one of the themes that I have consistently put to this House as an economic policy for this country. Sir Hector Laing of United Biscuits had this to say this week, in relation to the future of his company and what he is trying to do in the merger with Imperial:The future for all of us is in the third world where standards of living will rise quite rapidly especially with lower oil prices. I think there should be a British company capable of competing on the world stage".I agree. I have previously quoted, in support of that contention, one after another of the major industrialists and manufacturing leaders of our country as they appeared before our Select Committee.
I suggest to this House that although, as my noble friend Lord Barnett said, there are difficulties for some of the third world countries such as Venezuela, Mexico and Nigeria who are major oil producers, in other parts of the third world the lower oil price is an opportunity for expansion and we should be there. But this Government do not have the vision to see the opportunities which are lying in that half of the world where the market is closed.
Therefore, what are the elements of the policy of this Government so far as increasing our trade with the third world is concerned? They have cut overseas aid by 6 per cent. per year. They have reduced the budget of their own institution, the British Overseas Trade Board, and they have reduced the number of commercial attachés in our foreign and commonwealth offices abroad. We are way behind our competitors in government support for the expansion of industry in the world. The Japanese support their industry 40 times as much as we do and the French 20 times as much.
667 That is the theme which I have put time without number to the Government Benches. I have consistently put it forward in the Select Committee. Your Lordships have seen in the evidence of the Select Committee the number of industrialists and manufacturers in this country who support this view. We have not had an answer at any time from this Government. The Government have told us over and over again that there is light at the end of the tunnel. I suggest that there is no light at the end of the tunnel that the Government are holding out to us. It is a long dark tunnel which is leading to a black hole for the future of the British people.
§ 6.12 p.m.
§ Baroness Turner of Camden
My Lords, I welcome the opportunity this afternoon to participate in the debate on the economic situation. Other noble Lords have dealt in detail with the technical questions relating to the fall in oil prices and the matter of exchange and interest rates. I wish to address myself to what I see as some of the consequences of current government policies and I am emboldened to do so by the statement made earlier this afternoon by the noble Lord, Lord Young of Graffham. I do so because we are frequently being told—and we were told this afternoon by the noble Lord, Lord Young—that things are improving, that we are on the upturn, that it is simply a matter of staying with it as we are on the right road, that new, real jobs will be created and that popular capitalism, I think it is called, will see us through.
It is because I do not believe this that I should like to make a few observations this afternoon. Unemployment currently stands at a record 3.4 million people, of whom 1.35 million have been out of work for more than a year. All the indications are that these people would work if there were jobs for them to do. There is exceptionally high unemployment in two groups—those over 50 and school-leavers. One of the Sunday papers last weekend carried the story of a skilled professional man—unfortunately, a fairly typical case—who had been made redundant in his 50s. He and his wife pooled their resources, including his redundancy money, and set up a small business. That was absolutely in accordance with Government ethos. However, the small business had failed. I regret to say that there is a very high rate of failure among small businesses and no doubt high interest rates, as my noble friend Lord Hatch said, play a part in such failures. Clearly this is a major social problem, and almost everyone who has spoken in the debate would agree with that.
Last year the British Medical Journal published a series of articles entitled Occupationless Health. The articles commenced with the statement that Britain's young fear unemployment more than they fear the bomb. Among 18 to 19 year-olds the unemployment level last year was 26 per cent. More than half the unemployed under 25 have been without jobs for more than six months, a third for more than a year and 14 per cent. for more than two years. The article commenced with this quotation:It is only when you lodge in streets where nobody has a job, where getting a job seems about as probable as owning an aeroplane and much less probable than winning in the Football Pools, that you begin to grasp the changes that are being worked in our civilisation".668 That is a quotation form George Orwell's The Road to Wigan Pier written in the 1930s. Unfortunately, there are areas of our country where this is now once more true; and we had thought that those days had gone for good. In those circumstances, it is hardly to be wondered that when it is said that things are improving many people find this difficult to grasp. Indeed, the claim is greeted among many with incredulity. Even the economic forecasts are now that growth will slow down in 1986 to 2½ per cent.
The Government's answer to these problems is to claim that the answer lies in deregulation, increased competition and lower wage costs; and if only people would work for less we should be able to compete abroad and that would assist our problems. However, it seems to me that it is only one sector of the population that the Government are thinking about when they talk of lower wage costs. One sector the Government are plainly not thinking about are those employed on providing investment advice in the City of London: the prospect of the so-called Big-Bang in the City has led to incredibly high earnings for this class of person. Salaries of £150,000 a year and even as much as £300,000 have been referred to. Instead of golden handshakes we have the "golden hello" and "golden handcuffs". How this appears to the long-term unemployed, to the many millions on low wages, to workers at present covered by wages councils—but where the Government are considering emasculating wages council protection—can be readily imagined. It is bound to deepen the divisions in our society between those who have in abundance and those who have not.
In case it should be claimed by the Government—as it probably will be—that the Big Bang and all that follows from it is outside Government control and that they can do nothing about the explosion in earnings that has taken place, and is continuing to take place, I would point out that so far as concerns trade unions, the Government appear to be quite proud of their record of instituting controlling legislation. There are now substantial brakes put upon what unions may do and on what, in many countries, is legitimate trade union activity. The full panoply of the law has been introduced in regard to unions, together with powers to the certification officer to oversee what they do.
However, when it comes to financial services the Government apparently believe that the City can control and supervise itself. The Financial Services Bill envisages not control from outside as with the unions but a series of self-regulating organisations. Plainly this is totally inadequate and we shall perhaps have the opportunity of saying so when the Bill comes before your Lordships' House.
Moreover, the rash of mergers that has taken place, or is in process of taking place, has thrown up one practice which in other countries is simply not possible. I refer to the practice where a much smaller company can take over a much larger company on the basis of borrowed money and then can simply strip the larger organisation of its assets; including, of course, making the workforce redundant. The views of the workforce are not held to be of any worth at all, it seems, unless they assist a particular bidder. Indeed, it is not felt necessary for the workforce to be consulted. Yet, as I said earlier, the Government are apparently proud of giving unions back to their members and to 669 union members the right to decide on union executives and union policies. How much more important it is that the workforce should have some say on what happened in the event of mergers and takeovers that may affect their future employment prospects.
Finally, I should like to draw your Lordships' attention to an interesting article which appeared in the Daily Telegraph on 7th January. It is headed:City firms set for the Big Bang and challenge from the East.It says that Japanese banks are poised to seize chances and it sets out in some detail a number of very interesting facts about banking operations in the City. It says that Japanese banks in Britain now have £169 billion in assets compared with British banks which have £274 billion, and the assets of Japanese banks are growing. As I have indicated, the article says that the Japanese banks are poised to seize the opportunities that will exist when the London Stock Exchange is derestricted this year.
I cannot believe that all these machinations are in any way connected with the health of our economy. I believe very strongly that we need to have intervention in order to protect the interests of our economy and the workers in our economy. I am a supporter of an interventionist policy and I regret very much that so far as concerns the Government, they seem prepared to sit back and let things take their course. If they continue to do that, it is my belief that, irrespective of whatever benefit we may derive from reductions in energy costs, we shall find ourselves in a much worse situation next year and with unemployment problems of quite appalling proportions.
§ 6.20 p.m.
§ Lord Diamond
My Lords, it falls to me to try to pick out from the various comments that have been made some of the major themes on which we have centred and to which we should like the Government to reply. I must start at the beginning and say that, though we are grateful to the noble Lord, Lord Young, for coming when he could to deal with this debate—and we fully understand that he could not stay—I find it difficult to believe that his speech was a courtesy to the noble Lord, Lord Barnett, who introduced this debate, gave notice of it and made it clear in the wording of the Motion that is down on the Order Paper that what your Lordships would be invited to discuss and what the Government would be invited to answer were questions relating to policy on oil production, interest rates and exchange rates.
What did we get? We had the usual knockabout defence of the Government's economic policy, which was not particularly under challenge. The noble Lord, Lord Young, totally misinterpreted the mood of the House. When a Motion goes down on the Order Paper asking for Papers, we all know what will happen. The House does not divide, and the Motion is withdrawn. It is the wording which is used when it is desired to discuss sensibly and in a fairly non-partisan way problems which are thought to be vital to the country's welfare and which the Government do not seem fully able to grasp. I regret having to start in that way, and I hope that the noble Lord the Minister who is to reply will fill in the gap. It is a pity that it should be filled in at the end of the day (and we all understand that it is 670 much safer that way, of course) and that we did not have the opportunity of thinking over the views of the Government at an earlier stage.
I am bound to take issue with the Government on the constant repetition by the noble Lord, Lord Young of Graffham, of his highly selective statistics about increases in the number of jobs, and a variety of other things. I shall not say we have now got to the stage when we are bored, but I shall say that his words are totally non-persuasive. He forgets the figures that he has previously given to us. Today he told us how productivity was increasing. A very short time ago he gave us the figures showing how productivity in this country had slipped back in relation to our main competitors, who are, as we all know, Japan, Germany, the United States and France. Of course we know that.
When the Government were acclaiming their advance in productivity, they were making the bland assumption that every one of our competitors was going to sit on its haunches and do nothing whatsoever to increase its own productivity. Of course productivity goes up naturally year by year in every country as industry replaces and improves plant, manufacturing methods and management. The unfortunate thing is that, in the race in which we are all involved in order to make a living for our country, the United Kingdom finds itself slipping ever further backwards.
So I ask the noble Lord, Lord Young, to look at his figures in a more objective light, and to remember that he represents the Government. As the noble Lord, Lord Kaldor, pointed out, the increase in the gross domestic product for the whole period of office of this Government up to this last year has been at a fantastically low rate. If it did not increase in one year from such a low base, there would be something very peculiar about it; but overall we still lack the wealth that would have been produced if this country had merely gone on the basis of a normal and historical 2½ per cent. per annum increase in productivity. At this present day we are miles behind it.
I do not think that there is anything in what the noble Lord has said which gives us any comfort at all. He continually referred to these figures of new jobs created since 1981, and of course we are glad that new jobs have been created since 1981; but it would have been a little more objective and would have put the matter in context if he had told us that the new jobs created since 1981 are but a fraction of the jobs lost prior to 1981. They are only a fraction of them. There were 1¾ million jobs lost, and there were about ½ million or so jobs created. So we are still over 1 million jobs worse off. I am not talking about unemployment: we all know about the 4 million plus unemployed. In terms of jobs created we are still worse off than when the Government came into office.
I hope, of course, that the Government will do something about this, and that there will be some improvement; but I think it is pointless for the Government continually to come forward and repeat these figures. It gives us the anxiety that if the Government can be so complacent when the situation is obviously so bad, then what expectation do we have that they are really putting their minds to these difficult issues with a view to improving them?
671 The figure for the unemployed is over 4 million—because we now know that the claimants number 3½ million, and with the non-claimants added it makes over 4 million people who want work if it is available but which is not. If the Government are prepared to live with such a figure, then I am bound to say to the Government not that they are heartless but that they have their priorities wrong. They are still living in a time when their total and exclusive consideration lies in trying to keep down the level of inflation, and they are giving unemployment second place at most.
All I can say is that, after an enormous dip in the first two years and some recovery, we have now reached the stage when in a number of ways we are back to where we were at the start, which means five or six totally wasted years. I was referring to the actual achievement of the Government in comparison with what the noble Lord, Lord Young, from time to time tries, not very successfully, to stuff down our throats.
Perhaps I may turn now to the debate. The noble Lord, Lord Young, did not do that, but the rest of your Lordships have done so and it has been a very interesting and valuable debate. The noble Lord, Lord Barnett, is to be congratulated on choosing a subject which is timely, full of topical interest and so important for our people.
We all agree about one thing, which is that in terms of interest rates and exchange rates what we are seeking is stability. About two years ago, I think it was, I had the privilege from these Benches of raising a debate on that very topic. It was on one of our allotted days. We are all trying to achieve that, and the Government will not say what their policy is and whether they are with us or not. Previously they said that the matter should be left to market forces. They have not exactly said that they do not recognise their responsibility, as a government in that area, but I find it difficult to discover their policy when they are continually saying that matters should be left to market forces, as against my view that they feel that it is too difficult and so they just ignore it.
Of course some of these issues are difficult, but that is what governments are there for. We are all agreed about that; and nearly everybody agrees that one way to secure a measure of stability is to complete the ERM. The noble Lord, Lord Donoughue, made a most interesting speech and divulged his change of view. That must account for the fact that as I came into the Chamber I heard tinkling noises well above the roof. They were sounds of rejoicing!
I apologise for repeating this, but one cannot rub it in too often. The high rates from which we are suffering are historically record high real interest rates. The corollary of seeking to keep inflation down is that one can then keep interest rates down. With high inflation, interest rates are bound to go up; the real rate earned is negligible or a minus quantity, as it has been over recent years. But if the whole policy is directed to reduce the rate of inflation, the amount to be deducted from the nominal rate of interest is small. With a nominal rate of interest of 12½ per cent., or whatever it may be, and an inflation rate of 5 per cent., or whatever, the real rate of interest is enormous.
672 As has been pointed out from all over the Chamber, that is highly damaging. The noble Lord, Lord Vinson, made a number of important points about that. High rates of interest damage small businesses and new enterprise. How can a person start a new enterprise when he knows that, however good the idea, it has to show something like a 25 per cent. return before he can approach it? There are not many projects like that around. If a man has to borrow the money and pay that rate of interest, before he can rely on an attractive return he needs to have an extraordinarily valuable profit-making idea which, curiously enough, nobody else has ever thought of. That is not very likely. The high rate of interest is highly damaging to what the Government are doing in trying to encourage new enterprise and small businesses.
I come now to oil. It has been made absolutely clear that anybody who would plump solidly for an increase or a decrease in the rate of extraction in an endeavour to affect its price would be foolish. There are powerful arguments both ways which have been rehearsed by a number of speakers in the debate, including the noble Lord, Lord Soames. It is almost impossible for anybody outside the Government to have all the necessary information and advice to formulate a policy on oil extraction and what should be done to encourage or discourage it. I have no need to repeat all the arguments. My noble friend Lord Ezra made the points clearly.
I add only one point which does not seem to have been underlined by many noble Lords. To a simple person like myself, living for another day also has its attraction. There is no need to get all the oil out today; tomorrow is another day. The Government do not think about that. They try in every way to sell assets wherever they can find them and use the money to keep themselves afloat. The policy suggested by my noble friend is the only one that could successfully be followed, but it has to be approached tentatively. We cannot go to all the producers and say, "Please do this". The impact on different producers will be different. The approach must be through discussion and by a certain amount of leaning on various people. But that is all possible. It is all part of government, and that is what governments normally do. But there has been no sign, and a total absence of any sign in the speech of the noble Lord, Lord Young, that the Government have thought through the problem of oil production and decided what their posture should be. I do not know whether they have one.
I see that 15 minutes are shown on the clock. If the Government cannot satisfy me that they have a policy other than selling, I can only come to the conclusion that, inasmuch as they are doing everything that they can to get their hands on cash from wherever they can get it, that is also their policy for oil, and that does not spell a bright future for the country.
§ 6.36 p.m.
§ Lord Williams of Elvel
My Lords, I should like to join the noble Lord, Lord Ezra, in saying that this debate has come at a particularly opportune moment. Since November we have had a preview of what I would call—and I mean no disrespect to the noble Lord, Lord Aldington—the Aldington nightmare, in which declining North Sea oil production produces a 673 gaping hole in our balance of payments and government revenues. It is only a preview, of course, because in this case it is not declining North Sea oil production but it is rather a fall in the world oil price. But the effect, as a number of noble Lords have pointed out, is largely the same. And, as a number of noble Lords have also pointed out, the real damage will come not in 1986 but in 1987, when production will start to decline quite sharply. If the Treasury forecast reproduced in the report of your Lordships' Select Committee turns out to be correct, that damage will be compounded if, as the noble Lord, Lord Donoughue, expects, the oil price does not significantly climb back to where it was when Lord Aldington's committee reported.
In addition to those problems, the noble Lord, Lord Soames, raised what I think may well become a really major problem for all of us in 1987, which is the problem of international debt. I have been involved in international banking for quite some time and I still am in part of my activity. I agree with the noble Lord that we have to find some mechanism, particularly—as I think the noble Lord, Lord Diamond, pointed out in an intervention—with countries like Mexico, Venezuela and Nigeria, which are severely hit by the reduction in the oil price and whose debt will be insupportable compared with their gross domestic product if the oil price really does stay at its present level.
In face of all those problems, it is quite clear that the Government have to decide what they are going to do. It is useful to have this preview because it allows us to prepare action in time for the run of the main film, which I think will probably start some time in the course of next year. The Government, of course, may decide to do nothing on the grounds that the fall in oil prices on balance is good for Britain and that there will be, in the words of the Treasury evidence to the Select Committee, an automatic and inevitable adjustment process that will compensate for the loss of the oil surplus. Or they may decide that such an adjustment is not automatic and inevitable and that a new set of policies is necessary to deal with a new situation.
I confess that I was rather disappointed with the speech of the noble Lord, Lord Young of Graffham, partly because I had heard more or less the same speech made by the Chief Secretary to the Treasury in another place last Wednesday when replying to my right honourable friend Mr. Roy Hattersley. There is nothing particularly wrong in that. I should, however, like to ask the noble Lord, Lord Young, whether he will in future, if possible, give some statistics that start not at 1981 or 1982 but perhaps at 1979. I also ask the noble Lord if he will very kindly read the speech made on 12th July to the Financial Times Conference on the City Revolution by my right honourable friend in another place, Mr. Roy Hattersley, dealing with the Labour Party's attitude to Government borrowing. Finally I ask, perhaps somewhat frivolously, that, in quoting my right honourable friend the former Prime Minister in another place, he should get the quotation correct.
However, the burden of what the noble Lord, Lord Young, said shows that he puts himself fairly and squarely in the market forces school. He believes that there will be adjustment and that, once the conditions 674 are met, there will be an automatic process by which various things will happen which will make up for the loss of oil revenues.
The Opposition have three major difficulties with this view. In the first place, we believe that the noble Lord has an altogether rosier view of the underlying strength of the economy than we have. After all, industrial production, which includes North Sea oil production, has only just reached the level of the fourth quarter of 1979. Total investment is indeed at a record level but in real terms it is only 4.3 per cent. up on the 1979 figure. As a percentage of gross domestic product, it is running at a lower level than in each of the years between 1970 and 1979. The current rise in total economy productivity is still below the trend for the post-war period from 1946 to 1980. By comparison with our international competitors, we are doing much worse. In the league table of five countries—the United States, Japan, West Germany, France and ourselves—during the period from 1979 to 1984, we came bottom on growth of output, bottom on unemployment, bottom on growth in public investment and consumption, and next to bottom on inflation. And now France has pushed us to the bottom of that table as well.
Not only is our economy weaker than the Government claim but it is clear that the real beneficiaries of the fall in the oil prices are those countries that produce no oil. And those are, of course, precisely our main competitors, other than the United States, although the United States will have a substantial advantage because it is a major oil importer. West Germany, for instance, will see its already strong balance of payments made stronger and its inflation rate down to below 2 per cent., and some people think that it might be down to zero, with real output growth running at well over 3 per cent. or perhaps at up to 4 per cent. As for the Japanese, they are almost embarrassed by how well they will do, if, indeed, the word "embarrassment" is appropriate in the circumstances of that country.
Our third difficulty with these co-called market forces is that they have failed signally in the past to deliver the benefits that were claimed for them. My noble friend Lady Turner was very eloquent on this point. I shall not bore your Lordships with another recital of the failure of monetarism to live up to the advertisement that, by strict monetary control, inflation would be brought down without significant loss of output. I do not believe that that happened. I do not believe that 3.5 million unemployed—or whatever the true figure is—does not result in a significant loss of output. The latest failure, for which, of course, market forces are again responsible, is the restraint of real earnings of those at work. If the Government claim that that is a problem then it is a problem where their economic policy and their monetary policy have failed entirely to act. Again, my noble friend Lady Turner drew our attention, as did my noble friend Lord Donoughue to the imbalances that have arisen precisely as a result of the operation of market forces in this area.
The last reason why we do not believe in this whole market force approach is that it was clear from the report of the Aldington Select Committee that no one with serious industrial experience believed in the 675 automatic and inevitable adjustment process. The evidence to your Lordships' Select Committee was very strong on this point, the president of the CBI saying, for instance, that he did not accept the premise in any way. Nevertheless, we have to accept that market forces do operate internationally. The noble Lord, Lord Vinson, was interesting in his analysis of interest rates. The noble Lord joined the noble Lord, Lord Soames, in saying that international rates go across frontiers and that we live in the international community. We have to accept that the oil price has fallen. We have to accept that the trade weighted exchange rate has fallen.
The noble Earl, Lord Lauderdale, asked what Opposition policy was on oil prices and put the question, "How do you achieve any sort of stability?" My answer is simple. For some time now, the Chancellor of the Exchequer has—rightly, in my view—been sitting with the Group of Five to try to get some stability in the dollar exchange rate. This does not seem to be something that the noble Earl, Lord Lauderdale, objected to. I see no reason why some similar arrangement should not be made in the case of oil prices. If it is right to do it for money, why is it not right to do it for oil? The fact that the Government, at the moment, may not be able to do it is probably the result of their policy of handing over the rate of production of North Sea oil entirely to private companies and depriving themselves of the possibility of setting a proper depletion policy.
If the exchange rate conditions for an automatic and inevitable adjustment are there, are conditions for such an adjustment in domestic energy prices also there? My noble friend Lord Donoughue made an interesting point. He said that it was all very well to say that crude oil prices were coming down but that it was not necessarily true to say that this would be translated into domestic energy prices. Indeed, he quoted some figures of gasoline prices at the petrol stations that would lead one to believe that this is not happening. However, it is not only oil prices—fuel oil prices, gas oil prices, naphtha prices and gasoline prices—that have to come down to reflect the drop in crude oil prices but it is also the knock-on prices that follow through from those, such as electricity prices, gas prices and coal prices. I do not see any sign of the Government taking powers to reduce those prices in line with the oil price. Indeed, I thought that they were trying to push them up. That was the last I heard.
The exchange rate is one thing. I am sorry that my noble friend Lord Kaldor is not satisfied with the extent of the exchange rate devaluation. He would like a further 20 per cent. That may come, or it may not come. I am not myself convinced that the exchange rate will achieve the level that my noble friend would like. I believe that it might if the interest rate policy of the Government was changed. Here, we get a dilemma that the Government have to face—that the managing of the sterling-dollar rate is done through the differential between sterling interest rates and dollar interest rates. If they bring sterling interest rates down, as the noble Lords, Lord Vinson and Lord Diamond, argued they should, then they will have to accept that the consequence will be that the sterling-dollar rate will come down. That will, I think, have the sort of 676 inflationary impact to which my noble friend Lord Donoughue was referring.
Your Lordships will by now be clear as to where the views of the Opposition lie in this matter. We do not believe in automaticity or inevitability. We accept the analysis of your Lordships' Select Committee. Our economy is too fragile. Our institutions are too ossified. Our attitudes are too diffident. Above all, non-price competitive factors in terms of quality, marketing, service and product development are very much against us.
In short, we believe that a stronger set of policies needs to be applied. This is not the time to go into these policies in detail, but I believe that they are well summed up in a quotation from a NEDO paper which the noble Lord, Lord Benson, gave in his evidence to your Lordships' Select Committee on Overseas Trade. The noble Lord said that we need, first:continuity and stability of policy. Second, concentration of effort—that is to say, a package of different measures which are mutually reinforcing. Third, careful planning of long-term industrial priorities. Fourth, selectivity in industrial policy as opposed to blanket measures. Fifth, investment in human resources, in short a higher quality of technical and vocational education and training. Lastly, consensus and commitment at national and company level by all those engaged in the industrial process".I also find myself in agreement with the right honourable gentleman, in this case the Secretary of State for Energy, when he said to the Conference of Young Conservatives:Not everything can be left to market forces. If other governments stand shoulder to shoulder with their industries then we have no alternative but to do the same.I particularly liked his expression: "We have no alternative".
For, in truth, as the noble Lord, Lord Kaldor, pointed out, the Thatcher experiment, as it has been called, adds up to a very extraordinary catalogue. The Conservative Government came to power in 1979. They have been given tens of billions of oil revenues (leaving aside the proceeds of privatisation), and have left industry either no better off or, in the case of manufacturing industry, worse off than when they started. They entered office knowing, as we all knew, that those billions were about to roll in, and promising to reduce the burden of taxation, and yet, after six and a half years and all those billions, only a small and privileged minority are paying less tax. They undertook to reform and improve the welfare state, and yet, in spite of those same billions, they have reduced the average public capital spend in real terms by over 15 per cent. and brought our social services to near collapse both in physical stock and in personnel morale. It is an astonishing record.
Bonanzas like the North Sea only happen once. Such a piece of good fortune will not come our way again, and we must now start the melancholy task of picking up the pieces and clearing up the mess after the party. This is why this debate has been so opportune, since the time to start is really now. I cannot resist saying that I very much suspect that it will be for our side of this House to take on that task. Heaven help us with it, because the legacy will be horrific.
§ 6.53 p.m.
§ Lord Brabazon of Tara
My Lords, we are all grateful to the noble Lord, Lord Barnett, for having 677 moved his Motion this afternoon, and a very intersting debate it has been. Having looked at the Motion on the Order Paper and seen that it was to do with the fall in oil prices, my mind went back to 1974 when they dramatically quadrupled in one year. I was reminded that at that time we also had a coal strike and a general election looming. Things are better now.
The noble Lord, Lord Barnett, suggested that we should perhaps open talks with OPEC and restrict output, as did the noble Lord, Lord Ezra. Yet it is precisely the fact that the North Sea has developed in a free market that has led to its success. Government imposed cuts in production would damage the confidence on which the development was based and the propsects for oil production in the 1990s. The noble Lord, Lord Ezra, suggested that somehow we could moderate production and stimulate the pace of exploration. I find it difficult to see how the oil companies could find a government-imposed ceiling an encouragement to expand their exploration activities, and my noble friend Lord Lauderdale gave a very powerful speech arguing against any such cut-back. My noble friend also reminded us of some of the benefits which the revenue from North Sea oil has brought us, such as a reduction in the PSBR and an enormous increase in our overseas investments.
The noble Lord, Lord Barnett, followed by nearly every other noble Lord who spoke, advocated that we should join the exchange rate mechanism of the European monetary system, and several of those who spoke admitted that they had been recent converts to this theory.
§ Lord Diamond
My Lords, is that all that the noble Lord is going to say about oil? Will he not give us any idea of what is the Government's policy with regard to oil production? Is the noble Lord saying that the Government will just stand by and let it rip, or what?
§ Lord Brabazon of Tara
My Lords, I have said what we intend to do, which is to leave production as it is at the moment. I was referring to those who spoke about the possibility of us joining the European monetary system. The noble Lord, Lord Barnett, said that to join was not a matter of political ideology; it was a decision to be taken on hard practical grounds. I could not agree more. Indeed, if noble Lords look at the speech of my right honourable friend the Economic Secretary on 29th January in another place, they will see that he used virtually the same words: The Government's position is unchanged; it is a matter we keep under continual review.
The noble Lord, Lord Ezra, said that my noble friend Lord Young of Graffham had not discussed the wider economic implications of falling oil prices in his opening speech. I submit that in fact he discussed them in some detail. To summarise, he said that the overall impact on output and inflation, as the noble Lord said, should be broadly neutral or, if anything, slightly beneficial. The noble Lord, Lord Ezra, also asked me about other energy sources. On Monday we had a Question on the encouraging coal production figures, and the noble Lord urged caution about whether the Central Electricity Generating Board should burn more oil. I agree that the Central Electricity Generating Board should be cautious in this matter. 678 Of course, if it did decide to burn a great deal more oil, that would only put up the oil price again.
The noble Lord also asked whether the Government's campaign on energy saving would in any way be diminished by the fall in the oil price. The answer to that is certainly not. I think I said at Question Time the other day that the savings which could be achieved were some £7 billion a year. That figure might indeed be reduced a bit, but a very significant saving could still be made.
My noble friend Lord Soames spoke powerfully of the growing protectionist forces in the United States. I am sure the House would agree with my noble friend on the dangers of such forces. A new GATT round is due to start towards the end of 1986. It is one of the Government's aims in those negotiations to offset the pressures for protectionism in the United States. My noble friend also spoke of the indebtedness of the third world, and particularly of the problems facing Mexico and the other oil producers, as did my noble friend Lord Wolfson and the noble Lord, Lord Hatch. The indebtedness of the oil producers is indeed a problem, but I should point out to noble Lords that overall the debt of the oil importers is around twice that of oil exporters.
The noble Lord, Lord Kaldor, claimed that the Government's economic policies were underpinned by the fallacy that inflation is the root of all evil. It is not the root of all evil, but it is the root of a great deal of evil. The noble Lord dismissed the Government's achievements, but I think that many noble Lords would not be so dismissive of a policy that has brought inflation down to an average increase of 5.1 per cent. since June 1983.
§ Lord Kaldor
My Lords, did the noble Lord compare this figure with what happened in other countries? It is true that our inflation has come down a lot, but it has come down everywhere. We were not, so to speak, all alone in this.
§ Lord Brabazon of Tara
My Lords, it has indeed come down and it must come down more in this country. The noble Lord, Lord Kaldor, and many other noble Lords including the noble Lord, Lord Parry, also spoke about our manufacturing base. The House of Lords Committee on Overseas Trade said that our manufacturing base was so weak that it could not fill the gap when the oil ran out, and various noble Lords this afternoon have echoed that sentiment, including particularly the noble Lord, Lord Hatch. However, that is to ignore the facts.
Over the last five years manufacturing industry has been transformed. Following seven years of stagnation manufacturing output has increased by 13 per cent., and has now enjoyed the longest period of uninterrupted growth since 1971. Export of manufactures grew by 11½ per cent. in 1984 to reach an all-time record; a record that was beaten by a further massive 8½per cent. growth last year; and since 1981 our manufacturers have increased their share in the volume of world trade. My noble friend Lord Wolfson said that we too often underplay our performance on exports. I quite agree with him.
Profitability of manufacturing industry, bogged down for so long, has recovered and is now at its 679 highest level since 1973. And investment has recovered. It was stagnant under the previous Government. It has increased so far by 26 per cent. since its trough.
§ Lord Hatch of Lusby
My Lords, will the noble Lord give way? He has been giving these figures. We have heard them all before from the noble Lord, Lord Young. He always starts from 1981. Why not go back to 1979 when this Government took over? Is it not the case, as I stated in my speech—and as has been proved reluctantly by noble Lords on the Front Bench opposite during just this week—that manufacturing output is 5 to 6 per cent. below what it was in 1979, and that manufacturing investment is 18 per cent. below?
§ Lord Brabazon of Tara
My Lords, it is perfectly true to say that between 1979 and 1981 there was a dramatic fall. The noble Lord has probably forgotten that we had an oil crisis at that time, when the price of oil doubled—or was it trebled? I cannot remember. That recession took place all over the rest of the world as well. It certainly was not only in this country. Output also declined under Labour. As I remarked earlier, it has revived rapidly since 1981. I would rather look to the future, and see what is happening now, than continually go back to 1979.
§ Lord Brabazon of Tara
My Lords, I am not going to give way again. I have given way often enough as it is.
The revival of manufacturing is seen perhaps most dramatically in the increase in productivity. Manufacturing industry suffered from inefficiency and overmanning for decades, but since 1981 productivity has increased by an incredible 33 per cent.; an average growth of 6 per cent. a year. I have to tell the noble Lord, Lord Diamond, that productivity in the whole United Kingdom economy in the years 1980 to 1985 has grown at an average of 2¾ per cent.; better than the l½ per cent. of France, the 1½ per cent. of the United States, and the 1¾ per cent. of Germany. These are not indicators of a depressed manufacturing sector.
There is no room for complacency, however. Manufacturing output is expected to continue its steady growth this year, but its wage costs are rising three times, or more, faster than those of our major competitors. The noble Lord, Lord Barnett, pointed out today's earnings figures, which have just been released, of an increase of 8.9 per cent. I believe the increase in fact to be an underlying increase of 7½ per cent. However, that is still more than it need be. I would remind noble Lords that a 1 per cent. reduction in real wage increases could create over 100,000 jobs. With wage restraint and flexible working practices, the future of manufacturing industry would look very good indeed.
The noble Lord, Lord Donoughue, asked what would happen when the oil ran out, and what planning the Government were doing. It is first worth noting that most recent estimates suggest that the United Kingdom will continue to be self-sufficient in oil until 680 at least the mid-1990s, if not to the turn of the century. we are peering into a fairly distant future.
As oil production declines we expect to see a gradual return to a more traditional pattern of trade. As the noble Lord said, manufacturing will play a key role here. I have already spoken of its achievements since 1981, and the dynamism he spoke of has already shown itself. But I must take issue with him on the need for a plan. The Government's approach is to encourage the economy to operate more efficiently: to remove obstacles to growth. This is worlds removed from the planning put forward by the party opposite.
The noble Lord also talked about City salaries, as was mentioned by the noble Lord, Lord Hatch, and the noble Baroness, Lady Turner of Camden. Indeed, there are some cases of very high salaries at the moment. I cannot resist quoting just a small item from today's Times, which the noble Lord may have seen, regarding yesterday's PSBR figures, and indeed the figures which were out earlier this month, and how they caught the analysts in the City on the hop:By making the analysts look foolish twice so far this month with their forecasts, the mandarins are making a point about high City salaries far more subtly than the rumblings from No. 10".I suggest that in fact market forces there will prevail, and that in due course City salaries will become more normal.
The noble Lord, Lord Hatch, accused us of, I think he said, reducing expenditure on roads since 1979—these are 1979 figures; let us get this clear now—and reducing figures on spending in the National Health Service. He is quite wrong. Since 1979 capital spending on motorways and trunk roads has increased by a quarter in real terms, and on the health service capital spending is up by 21 per cent. in real terms. I have more figures here which I could show the noble Lord afterwards, perhaps.
The noble Baroness, Lady Turner, spoke about small businesses, or a particular small business which had failed. Of course, one has great sympathy with that sort of incident, as I am sure the whole House has. But it has to be remembered in the story of small businesses between 1980 and 1984—the latest years for which figures are available on the basis of VAT registrations—that there were about 140,000 more business starts than stops; an average of 550 a week. Nineteen eighty-four was a record year with 700 net starts a week. The noble Baroness said that she would like to go back to an interventionist policy. I submit that those policies were a disaster, and I personally hope that we do not do so.
The noble Lord, Lord Williams of Elvel, decried market forces. But he also quoted the case of the economies of the USA and Germany. Does he share their distaste for market forces? Even France has become more market orientated than in the earlier days of the present administration over there.
I should like to end by reminding the House of a few key facts about what the Motion calls our "economic situation". Over the period 1983 to 1985 the United Kingdom topped the growth league of major European Community countries despite the coal strike. Over the previous decade we were bottom of that league. In 1985 the United Kingdom is expected to have grown faster than any other country in the 681 Community and the United States, an achievement unimaginable in the time of the previous Administration.
§ Lord Diamond
My Lords, I am grateful to the noble Lord for giving way. He has challenged me on figures, and it is a courtesy I much appreciate that he should allow me to respond. He is talking about 1985. May I ask him quite specifically: is he prepared to contradict what the noble Lord, Lord Young of Graffham, told me on 29th October 1985, that in 1985 there had been a rise in unit costs—which is what matters in productivity—in this country of 5 per cent. compared with a fall in Germany of 3 per cent. and in Japan of 6 per cent.? So the margin was widened by something like 8 to 11 per cent. in one year.
§ Lord Brabazon of Tara
The noble Lord, Lord Diamond, is talking about unit costs. They have gone up compared with our competitors and those were the figures that I was talking about when I urged restraint on wage settlements. That is not the same as productivity. Productivity has risen by the figures that I mentioned.
We all regret the present level of unemployment. I do not think that there is anyone who regrets it more than my noble friend the Secretary of State. In his speech he gave a long and full explanation of the measures that the Government are taking to counter it. But that does not mean that we should denigrate other more positive aspects of the British economic performance since 1979. The Government have kept downward pressure on inflation, have freed up markets and the economy has responded. The economy will continue to respond.
§ Lord Barnett
My Lords, it only remains for me to say a personal thank you to all noble Lords who have spoken in this debate. They have already been referred to by the noble Lord the Minister in his winding up and by my noble friend Lord Williams of Elvel in what I thought was an excellent speech, as did many of my noble friends in the debate today.
The only thing with which I disagree in the Minister's winding up was his reference to his noble friend the Secretary of State for Employment when he said he gave a "long reply" to the debate on one aspect of it. I hope on reflection that the Minister will think about his brief reply. I understand and appreciate that he could not tell us what the Chancellor will say next month. But I hope that he will appreciate that much of today's debate was an excellent one as everybody will agree, especially all those who took part in it, and that speeches from Ministers from the Front Bench in this kind of debate, which is not overtly party political, would be better for being a more serious contribution to our discussions. I know that the noble Lord has not been here, but he will read some of the contributions that have been made, especially by the noble Lord, Lord Diamond, and some of my noble friends commenting on the way he dealt with the serious subject. I hope on reflection that he will realise that he did not fully reflect what needed to be said in what is a serious matter. It remains for me to thank noble Lords for references to my contribution and I now beg leave to withdraw the Motion for Papers.
§ Motion for Papers, by leave, withdrawn.