HL Deb 28 November 1989 vol 513 cc314-414

3.8 p.m.

Debate resumed on the Motion moved on Tuesday last by Lord Holderness—namely, That a humble Address be presented to Her Majesty as follows:

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

The Paymaster General (The Earl of Caithness)

My Lords, on this fourth and final day of the debate on the Address we shall debate economic affairs. It is entirely appropriate that we should do so. Without a strong and sound economic base we cannot implement many of the policies which the Government have proposed, which your Lordships have discussed in the previous three days' debate and which will improve the quality of life for our citizens. There is no end to the list of good causes and schemes on which more money could be spent, but unless the head rules the heart when it comes to the economy, disaster is inevitable.

One only has to compare two events. The Labour Party in the 1970s promised a time of plenty for all and spent money as though it was going out of fashion; but it soon ended in tears, with the country bankrupt. With inflation out of control and the infrastructure of the country neglected, everyone from the pensioner to the new-born infant suffered. Contrast that with the sound economic policies of this Government where investment has increased massively in real terms in priority areas, living standards are at record levels and the quality of life has substantially improved.

Only two weeks ago I had the pleasure of repeating the Autunmn Statement to your Lordships. We announced extra expenditure in some of the areas in which your Lordships have special interest, knowledge and concern. There is more for the health service, more for road and rail services, more for education, more for housing, more for the disabled, more for the arts, more for the environment and more for law and order.

But the key to these welcome increases and the difference from those in the early years of the Labour Government is that this time they are affordable. They are not financed by printing money or a lax fiscal policy. They are within the figures set last year for public spending as a percentage of GDP, and encouragingly that percentage continues to decline.

The overall objective of this Government's economic policy is to reduce inflation and so create the conditions necessary for sustained economic growth. To this end the Government have maintained firm financial policies which have established a sound financial framework. At the same time we have followed micro-economic policies aimed at improving economic performance through creating an environment which encourages and rewards enterprise and initiative. We have freed industry from unnecessary regulation and removed large areas of the economy from public control. The tax system has been reformed so that it no longer smothers enterprise but encourages it.

The results have been as dramatic as they have been welcome. We have heard nothing but gloom and doom about Britain and the British economy from the Opposition, who, alas, seem keen to run their country down. So it is worth repeating some facts about our economic performance in the 1980s.

Putting the performance of the British economy into a world context makes it easy to fully appreciate the turnaround in the past 10 years. The UK grew more slowly than all of the other major European countries all through the 1960s and 1970s. In the 1980s we have grown faster than any of them. In the 1960s and 1970s we were at or near the bottom of the European investment league. In the 1980s we are top. Productivity in the whole economy has grown faster than in any other major industrialised country except Japan since 1980; and in manufacturing we have beaten even the Japanese. Again, during the 1960s and 1970s we were languishing near the bottom of those leagues.

Putting the performance of the British economy into a world context makes one thing abundantly clear: the remorseless decline in the fortunes of the British economy has been reversed. The British people are now wealthier than they have ever been before and British business has been investing more in the future than it has ever done before. It is the policies pursued by Conservative Governments under my right honourable friend the Prime Minister, Mrs. Thatcher, which have brought this about.

However, your Lordships will recall that during the Autumn Statement I said that it was right that the economy should pause for breath for a short period and warned of the difficulties ahead before it resumed its steady, upward, non-inflationary growth. There are two reasons for that. The UK economy has enjoyed an average growth rate over the seven years to 1988 of 3.3 per cent., which is over half as high again as the average under the last Labour Government. But the last two years of this period, 1987 and 1988, saw a rate of expansion which was unsustainable. GDP increased by around 4½ per cent. in both 1987 and 1988—the first time output has risen by more than 4 per cent. in two successive years since 1960. But domestic demand over those two years was rising at a rate of over 7 per cent. per annum. The result was an increase in inflationary pressures and the emergence of a substantial current account deficit.

The rapid expansion of demand was entirely due to private sector spending. Public spending has been growing only very slowly. But the growth in demand was not a consumer spending binge. While consumer spending increased by around 12 per cent. between 1986 and 1988, business investment increased by around 30 per cent.

Once the re-emergence of inflationary pressures became apparent in the summer of 1988 the Government acted to tighten monetary policy by raising interest rates. As a consequence, demand growth has slowed in 1989. But the momentum of the economy had turned out to be considerable. This is a reflection of the increased confidence which sound economic policies have fostered, and a credit to British industry which had been stifled for years.

This continual growth was remarkable given the stock market crash of October 1987. A world recession was thought to be imminent and as a consequence money supply was eased. It is no good pretending that Labour would have done anything different, for at the time the honourable Member for Monklands, East, Mr. Smith, said that a cut in interest rates was necessary. Indeed, we were criticised for not going far enough. We were not alone; all major countries did the same. But it has compounded the problem by increasing inflationary pressures throughout the industrialised world. For the reasons that I have given there was greater strength in the economy than anyone could judge at the time and so it proved necessary to tighten monetary policy further during the course of this year. Nevertheless, despite the forecast slow-down of GDP to 1¼ per cent. next year we are still forecasting an average growth in the four years to 1990 of over 3 per cent. —higher than we predicted in 1987 and, remember, half as high again as under the last Labour Government.

Let me stress that we consider that inflation is currently too high. Inflation is an economic and social evil. Many saw their life-long savings eroded rapidly by the high inflation rates of the 1970s. We cannot let that happen again. That means that the immediate priority of policy is to reduce it. We are using all practical levers to this end. The key lever is monetary policy, and the essential instrument of monetary policy is interest rates. We shall keep interest rates as high as is necessary for as long as is necessary in order to reduce inflation. Of course high interest rates are painful. We all know just how difficult times are for those with a mortgage and a young family. But none of your Lordships will forget how high inflation eroded salaries, pensions and savings. Interest rates will come down but savings eroded by inflation cannot be replaced easily. Of the two choices, it is easy to see why we on this side of the House take the view that we do. We shall not sell out to higher inflation as a political expedient.

The RPI inflation rate reached a peak of 8.3 per cent. in May, and in October—the most recent month for which figures are available—it stood at 7.3 per cent. That is lower than the lowest rate ever achieved by Labour between 1974 and 1979. A rate that was a cause for celebration for the Labour Government because it was low by their standards is a cause for concern to us because it is far too high for our standards.

The noble Lord, Lord Williams of Elvel, would have been thrilled to have the rate at the figure that it is now when he was chairman of the Price Commission. During his tenure of that office the average rate was 10.3 per cent. and varied from 7.4 per cent. to 16.5 per cent. The current rate is likely to stay about 7 per cent. for some months to come, given the way in which retail prices are measured in the United Kingdom. But during the course of 1990 we expect to see inflation starting to come down to an annual rate of 5¾ per cent. in the fourth quarter of next year.

We should also see a turn-around in the current account deficit as domestic demand slows. With the home market so buoyant, and capacity utilisation at high levels, 1988 was a disappointing year for exports growth. The UK's volume share of world trade in manufactures fell, after a run of years in which we had held our own. But export performance in 1989 has been much better. In the first 10 months of 1989 exports of manufactures were 11 per cent. up on the same period a year earlier and it seems likely that we will see an increase in our share of world trade this year. There is every prospect of a further year of strong export growth in 1990. With little or no growth in domestic demand next year imports growth is likely to fall off quite sharply. The invisible balance is also likely to improve as a result of an improvement in the services balance. Thus from a projected deficit of some £20 billion this year on the current account we forecast a deficit next year of £15 billion. That is still too high but the trend is very much in the right direction.

It is worth while reminding your Lordships that this deficit is not a government deficit. Indeed the Government are in surplus due to a tight fiscal policy. That has brought and is bringing enormous benefits to this country. While Labour were in power propped up by the Liberals total public sector borrowing amounted to £120 billion. We expect to have paid off £30 billion in the three most recent years. That implies savings of nearly £3 billion a year in debt interest costs. That is of enormous benefit not only to ourselves but to our children and grandchildren who will reap the rewards.

But the Labour Party policy review would put all this at risk. Despite a lot of words very few definite policies have emerged. Nowhere does the policy review explain why corporatism failed so disastrously every time Labour practised it. Nowhere does it explain why it will work in the future. The reason is simple. The plain truth is that corporatism was and is a delusion doomed to fail and disappoint the best of good intentions. However we have been able to glean some idea of what Labour proposes. We shall move from a relatively low tax rate country to a high tax rate country with an investment income surcharge for many including pensioners. It looks like the minimum the top rate of tax will be is 60 per cent. as opposed to 40 per cent. now. However, everyone will pay more including the basic rate taxpayers—just as they did before.

And what would Labour do in the present circumstances? We know that the Leader of the Opposition said he did not know. However, others have been making contradictory remarks about public expenditure, applying the ineffective and discredited palliative of credit controls and altering the present arrangements for mortgages. When it comes to the key matter of inflation it is clear that Labour does not give it the priority we do, for the leader of the party, Mr. Kinnock, has said that his policies will lead to higher inflation. How much more will it increase for those policies that have not yet been announced?

It is no wonder therefore that the noble Lord, Lord Williams of Elvel, has had to word the Motion in his name in the terms that he has. But what it says is old hat. We have heard it all before. My generation was promised better opportunities. Some, alas, believed the promises of a strengthened manufacturing base utilising the new opportunities of modern technology. We were all misled and those who believed found that the promises were not fulfilled. What good did the Industrial Reorganisation Corporation and National Enterprise Board do for British industry? Let us take the motor industry as an example. What was the benefit of the subsidising of out-of-date, smokestack, environmentally polluting industries? It did not work then, and it will not work now.

Lord Taylor of Gryfe

My Lords, at least one of the contributions that they made was to save Rolls-Royce and Ferranti.

The Earl of Caithness

My Lords, the Industrial Reorganisation Corporation did much to support industries that should not in our view have been supported.

Noble Lords


The Earl of Caithness

My Lords, to prove the point that I have just made, under this Government manufacturing output is up 12½ per cent. since 1979. Yet under the white heat of technology of the last Labour Government it was lower at the end than at the beginning. I trust that your Lordships will bear these facts in mind when it comes to a vote later this evening.

Before turning to Europe, I must inform your Lordships that among other measures to be laid before you this Session will be a Bill to extend the powers which enable governments to finance some of their activities through trading funds. I look forward to presenting it to your Lordships in due course.

I turn now to Europe. The Motion of the noble Lord, Lord Jenkins of Hillhead, requires us to consider the Community and in particular the fiscal side. What the Motion is really saying is that we should not argue as robustly and openly to protect our interests and beliefs as we have been doing and that we should agree more with the Commission's proposals. We have done what we have because we have a vision of Europe; one that is forward looking and prosperous; one that is able to offer high standards of living, freedom of choice and freedom of action; and one that is fit to compete with the rest of the world. But this Europe must develop according to principles we have stood out for in the Community and which are now widely shared. These principles include subsidiarity—the idea that only those things which cannot effectively be done at national level should be done at Community level —mutual recognition of each other's standards and practices with the minimum of harmonisation, which is the approach behind the 1992 programme, and promotion of a Community which in its outward relation with the rest of the world is liberal and open, not centralised and protectionist.

Let me give your Lordships just two examples of what we have achieved, first, on the removal of fiscal frontiers, in other words the cumbersome and inefficient process of levying excise duties and VAT on goods at the point at which they pass from one country to another. The Commission's original approach to this problem was to propose a country of origin system with a complicated and bureaucratic clearing house. We have pressed strongly for a more flexible approach and I am pleased to tell your Lordships that finance Ministers have now agreed to retain the principle of the existing destination system.

Secondly, I am glad that the UK has been able positively to influence the second banking directive and its supporting solvency ratios directive. These measures are now based on the principle of mutual recognition of basic prudential standards between member states.

Without the long hours that many of us have spent in the last two years in Brussels and elsewhere in Europe, there would be even more bureaucracy, more government and Commission interference and greater costs to industry. The Community would have become even more isolated and more of a fortress Europe. We shall take forward our guiding principles in our discussions on economic and monetary union, to prevent undue centralisation of bureaucracy, to promote greater accountability, and to agree a system which produces convergences on the best inflation performance in the Community, not merely the average.

The Motion of the noble Lord, Lord Jenkins, also calls on us to give our wholehearted participation in the European Community. That is just what we have done. The single market programme set out about 300 measures designed to bring down barriers and to ensure that the Common Market is a genuinely free market. These are supposed to be implemented by the end of 1992. Again the UK has taken the lead. Of the 68 single market directives which should have been implemented by now the UK has the best record with only three unimplemented. That is a record of which we all can be proud.

Those of your Lordships who might have forgotten 1979 would do well to read the valedictory letter of Sir Nicholas Henderson to Dr. David Owen, the then Foreign Secretary, which was published in the Economist in 1979 and which described the sad state of the country then. Over the past decade this Government have liberated the economy from socialist controls, controls on pay and prices, controls on foreign exchange and controls on dividends. We have freed the taxpayer from the dead weight of subsidising loss-making nationalised industries and have returned many to profit and to the private sector where they belong. If we had continued to subsidise those industries at the rate that Labour was subsidising in 1979 the cost to the taxpayer this year would have been £5 billion.

Most importantly, this Government have also refused to be deluded into believing that one can spend one's way out of economic problems. The country and its industry are in better shape to face the difficulties, challenges and opportunities in the years ahead. It is because of our economic policies that we shall provide greater wealth to our citizens. We shall minimise the central bureaucracy that stifles initiatives and we shall achieve for all of us a better quality of life.

3.29 p.m.

Lord Williams of Elvel rose to move at the end of the Address to insert "but regret the failure of Your Majesty's Government to propose measures to strengthen the manufacturing base of British industry so as to reduce the current deficit in the balance of trade and to generate the resources required to secure lasting improvement in the quality of life."

The noble Lord said: My Lords, I beg to move the amendment standing in my name on the Order Paper.

I shall endeavour this afternoon to do three things. First, I shall reiterate, and, I hope, demonstrate, my continued view that the Government's economic performance since they took office in 1979 has been, contrary to their own assertions, a disaster. Secondly, I shall argue that the current strategy is badly flawed. I shall show how and in what particular it is flawed and say in what corrective measures we should be engaging. Thirdly, I shall seek to draw to your Lordships' attention some of the consequential effects in the general area of what we would call the "quality of life" of the serious economic position into which the Government have led us.

I hope that noble Lords will forgive me if I do not spend too much time on the speech of the noble Earl, Lord Caithness. I did not think that he believed what he was saying. I mean no disrespect as the noble Earl knows. However, I am afraid that I have listened to too many speeches on these matters justifying first one policy and then another. They were dutifully read out by various Treasury spokesmen in our House not least and latterly by the noble Lord, Lord Young of Graffham. Having suffered those speeches, all I shall say to the House about the noble Earl's effort—and I emphasise the fact that I say it in the friendliest possible spirit—is that the voice is that of Jacob but the hands are the hands of Esau.

Over the years we have listened to these rather wearying speeches from Government Ministers claiming economic miracles. We have been treated to many lectures. For instance, we were taught that the service sector would take up the running in keeping our balance of payments in equilibrium as manufacturing ceased to be a major factor in the post-industrial economy. When that failed to happen we were told how the yield from our enormous overseas assets would provide dividends to cover the gap. Unfortunately, due to the liabilities which we have incurred in financing our current deficit, the net annual yield is neither here nor there in terms of our current account. We were then told—and the noble Earl has told us again today—that the balance of payments deficit lies in the private sector and not in the public sector—in other words, it is all our fault; it is not the Government's fault but it is ours.

In its time each new theme was acclaimed as being the ultimate wisdom, and each one had its day; but such is the way of things each in turn has been shown to be without substance. There is only one theme whose passing I really mourn. That was the heroic assertion made two or three years ago that the balance of payments deficit was the sign of a strong economy. I used to enjoy that because, in all innocence, I used to ask noble Lords on the Government Front Bench whether, if the balance of payments deficit was a sign of a strong economy, the balance of payments surplus that we were running during the early 1980s was a sign of weak economy. It used then to be fun to watch their faces. We in Opposition in this House do not often have much fun but those occasions were splendid.

Let us look for a moment at the Great Economic Miracle. The noble Earl has proclaimed it again today. We must ask exactly where the miracle is. Is it a miracle of overall economic growth? I take issue with the noble Earl's figures. During the period from mid-1960 to the end of 1969 the economy grew at an average 3.1 per cent. per annum. That was not too bad. During the 1970s—taking a period of identical length from end-1969 to mid-1979—the economy grew at an average of 2.4 per cent. per annum. That was not so good but still tolerable. However, during the 1980s —again a period of identical length from mid-1979 to end-1988, and, having risen to all the self-congratulatory speeches from the Government Front Bench, your Lordships may think one of maximum growth—the figure comes out at 1.9 per cent. per annum. That is the worst performance of the three periods.

Then is the miracle one of productivity? Yes, because manufacturing productivity has done very well. After a good period during the 1960s and, we must accept, a bad period during the 1970s, it is now back on the long run trend growth line observable over almost 40 years of an improvement of 3.1 per cent. per annum. However, total economy productivity, which rose some 27 per cent. in the 1960s and some 20 per cent. in the 1970s, rose by only about 12.5 per cent. in the 1980s. There is nothing particularly miraculous about that.

What about inflation? The noble Earl spoke of inflation and referred to my chairmanship of the Price Commission. Again the figures are nothing to write home about. If we put our inflation rate in the international context—and the noble Earl was most keen to do so—we find that since 1985 we have been running at about 30 per cent. above the average OECD inflation rate. That figure is slightly higher than the rate by which we exceeded the average OECD inflation rate during the three years 1978 to 1980. The gap between us and the OECD average is now beginning to widen.

But if the record on those counts is not too good, the record on the balance of payments is absolutely disastrous. Who in their right mind would have forecast that a balance of payments surplus of nearly £1 billion in 1978 (which accommodated a deficit on oil accounts of £2 billion) could possibly have been turned into a deficit of £14.5 billion 10 years later, and that when the oil account was £2.8 billion in surplus? That is a turn-around of £20 billion in 10 years. That really is a miracle—one of almost unbelievable incompetence.

Almost worse than the fact itself is the Government's attitude. At least in respect of inflation they admit that something has gone badly wrong. The same is true of economic growth; at least they recognise that it has practically come to a standstill. We now have official confirmation of the fact that we now enjoy—if that is the correct word—the slowest growth rate among the top 10 industrial countries and the second highest inflation rate behind Australia.

But the real conundrum is that the Government do not appear to admit that there is a balance of payments problem at all. The deficit projected for this year is £20 billion. Apparently next year's figure will still be around £15 billion, in spite of the continuing and accelerating sterling devaluation and a projected nearly nil growth rate.

The Government do not admit that that is a problem as long as the deficit is financeable. But it is only financeable through short-term borrowing. No one is lending to us long term because of the low yield available on long-term instruments. Why is there a low yield available on long-term instruments? Precisely because the Government insist in redeeming long-term debt. It is that which brings down the yield on long-term instruments. That policy serves only to produce a yield curve of maximum returns at the short end and minimum returns at the long end. The result is the accumulation of very short-term debt. It is precisely this Government's policy which is putting us at the mercy of the hot money merchants.

Any banker or businessman knows that it makes sense to cover a loss, particularly a short-term loss, only if there is a clear and sensible strategy for stemming and reversing that loss. Anything else is merely a step in the Rake's Progress. Merely to say that the deficit is financeable and leave it at that is the worst form of irresponsibility. Incidentally, it is a clear recipe for ensuring that it ceases to become financeable rather quickly.

For reasons that I shall give I shall now assert that any strategy for turning around our balance of payments deficit must—and I repeat the word "must"—be based on the resurgence of the manufacturing sector of our economy. It is the failure of the Government to comprehend that simple proposition that makes their whole economic strategy unworkable. That is plain to anyone who pays even passing attention to the figures.

Let us take the year 1988. Then our balance of payments on current account, before the balancing item, showed inflows at £168 billion and outflows at £182 billion. Of those totals, visible trade accounted for approximately £81 billion in exports and some £101 billion in imports; and of those totals £65 billion on the export side and £80 billion on the imports side were in manufactured or semi-manufactured goods. In other words, exports of manufactures account for nearly 40 per cent. of balance of payment inflows and imports of manufactures for some 44 per cent. of outflows. There is quite simply no way whatever that any remotely conceivable surplus on services, dividends, interest or tourism can make up the deficit. The magnitudes are just too great.

It is well known that since the early 1960s apart from a slight improvement in the 1970s, exports in manufactures have been increasing their share of the gross domestic product by something of the order of 2 per cent. per annum. Imports have been increasing their share of the gross domestic product roughly in the order of 6 per cent. per annum. Nothing we have heard in the past few days either in the Autumn Statement or the gracious Speech gives us any encouragement whatever that those two vital long-term trends will be reversed. However, reversed they must be if the economy is to be brought back into equilibrium at anything other than a truly horrendous rate of unemployed resources, and that includes unemployed people.

Therein lies the whole problem of the British economy. Not only do the Government fail to attack or recognise the problem, the fact is that they have exacerbated it. The ravages of 1980 and 1981 have left us with a manufacturing base which simply no longer has the capability to produce many of the goods which we demand. When could we last buy a camera or a hi-fi which was not imported? Where are the equivalent British exports which are conquering the world? They do not exist. They do not exist.

There is an alternative. In the short term, we must abandon the policy of using high interest rates as the sole counter-inflationary mechanism, since that is the quickest way to reduce manufacturing investment which we should be building up. It really should not need the chairman of Lloyds Bank to remind the Government that the use of credit controls will supplement and complement that policy by making it more effective and hence reducing the level of interest rates at which the policy will bite. Special deposits with the Bank of England, hire purchase controls, checks to ensure that mortgage lending is strictly for housing only and not for buying new wall-to-wall television sets are all measures which are possible and which should be on our agenda.

Secondly, and also in the short term, we should be eager—and not just reluctant but eager—to negotiate early entry into the exchange rate mechanism of the European monetary system so as to give our manufacturing exporters the exchange rate and price stability they need. To be sure, there will be a negotiation on the conditions of entry. No government would just jump in blind. We wish to see a consensus on a growth strategy throughout the Community; we need to enlarge central bank swap facilities to accommodate the entry of sterling, which, after all, is the second most highly traded currency in the Community after the deutschemark; and we must enter at a sensible rate. Above all—and this is the important policy change which we need and need even outside the context of our entry into the exchange rate mechanism—we must promote greater resources for regional development. It is vital to ensure that the single market spreads prosperity throughout Europe and avoids creating overheated and congested growth zones surrounded by underdeveloped and under-invested areas of neglect.

Those three policy changes—greater flexibility in monetary policy, early negotiated entry into the exchange rate mechanism and enhanced regional policy—are immediate requirements if we are to start on the long haul back to manufacturing based prosperity. In the longer term, equally significant policy changes are required. For goodness' sake, we must move up the league in investment in civil research and development instead of moving steadily down it. We must give assistance to companies of whatever nationality which have operations here to carry out their research and development here. We must achieve that not only by direct encouragement but by changing the technological climate. We must be excited about space, nuclear fusion, the high speed train and instant information transmission instead of treating them as risky ventures in which the private sector may or may not wish to involve itself but which are not for the public sector—that is not our scene. We must train and retrain our management and workforce, men and women, and learn to adapt to new methods of working as the new technologies take hold. We must inspire them with enthusiasm for those new technologies.

All those things can and must be done if we are not to continue the descent into the status of a banana republic. None of them can or will be done by a government whose all-consuming god is the god of market forces. They all require a degree of co-operation between government and governed which is quite foreign to current Conservative ideology. For that reason and that reason alone, I feal that those measures cannot be implemented with any credibility or conviction until either the party opposite reverts to its old, and I believe stronger, philosophy or until it is removed from office.

However, there is one further requirement for what is no more and no less than the necessary re-industrialisation of Britain. Since 1986 and the ratification of the Single European Act our fortunes have been and are inextricably bound up with those of our European partners. Therefore, we must define our attitude towards the EC in a manner which best serves that objective of re-industrialisation. We must ensure that the single market and social Europe also succeeds and flourishes. Today more depends on the economic and democratic vitality of Europe than even before. If we are to assist the growth of democracy in the East or the alleviation of poverty in the South, then Europe must prosper and succeed.

The policy which I am advancing rests on the premise, which I believe to be properly founded, that it will not be possible to redress our balance of payments problem, which is where our national economy is at its most precarious, without a government-inspired renaissance of industry's manufacturing base. However, I also argue that without such a redressment and renaissance, we shall not be able—and here I join with the noble Earl—to afford the improvements in the quality of life which your Lordships have debated over the past few days.

Apart from the privileged minority, we shall not be able properly to educate our children. We shall not be able to look after our old people. We shall not be able to care for the sick and disabled. We shall not be able to afford decent transport systems. We shall not be able to house the homeless. We shall not even be able to keep the rats off the streets of London. If your Lordships think that I am simply harping on old issues, you should know that these old issues are very much alive. If your Lordships doubt that, perhaps I may give an example of an issue which I thought had been buried forever by the post-war welfare state but which has now re-emerged. I refer—and I am ashamed to do so—to the number of our fellow citizens who are now reduced to begging.

Some 40 years ago the Attlee Government set the basis for the modern welfare state. They believed—and I will say that this personally inspired me as a young man—that hardship and deprivation should be banished from the land and that nobody, whatever his or her class or race, should be forced into the humiliation of begging for a living. If we succeeded then, we have failed now since we have allowed this Conservative Government to destroy that vision.

In May of this year a poll was conducted by MORI on that very question. The question was asked; in the last six months have you been approached by someone begging in a public place? We should not be too naive about that. There are people who actively choose such a life, for whatever reason. However, it comes as something of a shock to read that no less than one quarter of the national sample of 2,000 said that they had been approached by a beggar in the past six months. In London no less than 41 per cent.—that is two out of five —said that they had been so approached. A quarter of our population is 15 million people; 41 per cent. of the population of London is about two million people. That is what I mean about our quality of life. It is not just the ozone layer, hospital waiting lists or testing our children at seven. It is the basic provision of the necessities of life for all our people.

We thought that battle had been won. But we now find that we have to fight it all over again. This time we will fight not just for a temporary improvement, which can be reversed again without difficulty by the party opposite, but for a lasting improvement. I should hate to think that I had not made our intentions perfectly clear. The battle is joined; it will be hard, but we intend to win it and win it we shall.

Moved, as an amendment to the Motion, at the end of the Address to insert "but regret the failure of Your Majesty's Government to propose measures to strengthen the manufacturing base of British industry so as to reduce the current deficit in the balance of trade and to generate the resources required to secure lasting improvement in the quality of life".—(Lord Williams of Elvel.)

3.50 p.m.

Lord Jenkins of Hillhead

My Lords, I rise to speak to and indeed support the Motion in the name of the noble Lord, Lord Williams of Elvel, which he moved in a most powerful speech. Your Lordships will notice that I also have an amendment on the Order Paper which I propose to move after his amendment has been decided this evening but to which, for the convenience of the House, I shall devote part of my speech, as did the noble Earl, Lord Caithness, in opening.

In my view a most welcome development would be the growth of a little humility on the part of government spokesmen about the management of the economy. There was little sign of that in the speech of the noble Earl this afternoon. It is part of the presumptuous Manichaean doctrine of this Government that, just as we heard last night on "Panorama" about the appalling democratic turpitudes of almost every European government from Spain to Germany and France to Italy, so in this country we are presented with a picture of dark ages, whether under the Macmillan or Heath governments, or the Wilson or Callaghan governments, until a new enlightenment seized the nation in 1979 since when everything has been brilliantly managed.

In some mysterious fashion, however, this brilliant management has now succeeded in producing the following combination of circumstances: an inflation rate so high that it prevents us, according to the Government, alone among our Western neighbours, from joining the exchange rate mechanism; the prospect of nearly flat growth, verging on a technical recession, which will probably mean some slight growth in unemployment again; a balance of payments deficit which, even with this flat growth, will be at the massive and previously unimaginable level of £14 billion a year; interest rates which are cripplingly and isolatingly high; and a distinctly shaky pound on the foreign exchange market.

Mr. Lawson's method of departure earned respect, but there is no doubt that he left a mess behind. It will require some very tight navigation by Mr. Major to get the economy back on to a tolerable track in time for even a 1992 election. In these circumstances there would be nothing to be ashamed of in a little humility. Steering the complicated economy of any advanced country is a fairly thankless task. No Chancellor of the Exchequer or finance Minister should expect to score more than about 50 per cent of favourable marks. Indeed, if he earns plaudits too quickly he will probably find that they turn to ashes in his mouth.

In addition, the British economy has, under successive governments, acquired some in-built sluggishness of performance. There is no significant statistical evidence to suggest that this has been diminshed in the past decade, which makes the task of being British Chancellor a peculiarly intractable one. There would be nothing discreditable about admitting that, after a fairly good but improvident run for a few years, the economy now faces a distinctly rocky prospect. We hear nothing except Panglossian accounts of how perfectly everything has been done. I fear that the prospects for setting in hand the necessary cures are not reassuring while this complacent approach persists. One problem is that the Prime Minister is incapable of admitting error and this makes other perfectly sensible Ministers afraid to do so either lest they be accused of cracking the glossy shell of self-righteous complacency.

I have ventured to put down an amendment on a slightly different aspect of our affairs, which in no way censures the Government but urges them to recognise how inevitably in the modern world our economy is influenced by what happens outside these islands and to play a more effective hand in Europe. This is certainly not a plea for surrendering British influence, as the noble Earl chose to assume. On the contrary, it is framed in the almost desperate hope that at this crucial moment, when there is so much to play for in every part of Europe, we might still avoid making (for the fourth time since the war) the same mistake and cut ourselves off from the shaping of institutions which all previous experience tells us we will eventually have to join.

The Conservative Party is now being wrenched away from the European faith which it has embraced at least since 1961. It is choosing the worst possible moment in at least 40 years—there is so much flux and opportunity in both parts of Europe—to allow this to happen.

I remember that at the 1979 election, when I was in Brussels and president of the European Commission, I was enormously torn in my own mind as to what I wanted to happen. There were old affiliations but at the same time I believed that probably a change of government would be better for Britain's relations with Europe. That thought, in my position, was bound to be central to my thinking. Indeed, for a short time under the noble Lord, Lord Carrington, that did happen. But I could not begin to feel that way today.

I am not alone in being disillusioned about the Government's European performance. I was amazed at the noble Earl quoting Sir Nicholas Henderson's farewell dispatch which got into the Economist. Has he read Sir Nicholas's recent articles? Would he care to ask him to provide a fresh memorandum, and when it is done publish it under the imprint of the Government? That would be a very interesting experiment indeed.

Mrs. Thatcher sees herself as fighting a lone battle against a flattening federalism which wants to put us all into a melting pot and produce the analogue of a United States of America in Europe. In my view that is a tragically misplaced fear, because it is tilting at imaginary windmills in a way that does a great deal of harm to our fundamental national interests.

The Prime Minister is quite right, in my view, in thinking that Europe will always be different from America; Europeans in Europe, unlike those who made America, have not turned their backs on their countries of origin. They always will, and in my view should, retain a large part of their national identity. This is just as much a French or a Spanish view as it is a British view.

Mrs. Thatcher withheld one important part of the truth last night when she said—I am not sure whether or not this was a complaint—that there was a lot of nationalism in France. Yes, there is, and like much nationalism it can sometimes be selfish and obstructive; but the French have been skilful enough never to let it separate them from the main axis of European advance. As a result they have defended French interests and advanced French influence within the Community much better than successive British governments have done for British interests.

The French have made inconceivable the idea of a Europe without France. We have certainly not made inconceivable the idea of a Europe without Britain. Indeed, let us be in no doubt that more and more people in Europe are beginning to speak about precisely that, and deeply inimical to our interests that would be. That is because we have no other effective direction in which to go. If we had, we would have taken it long ago during the 40 years of semi-detachment and occasional rebuff. All that we could do is stand glowering at the edge, resentful, apprehensive and lonely.

I am increasingly struck by one other paradox in the Prime Minister's attitude. She lays great stress on a Europe of loosely co-operating sovereign states as opposed to a somewhat tighter institutional framework. Curiously, her proclaimed ideal is one peculiarly unsuited to her style and methods of operation. Co-operating sovereign states, if they are to achieve anything, manifestly can only operate on a basis of give and take, of compromise and of consensus—all of which are anathema to Mrs. Thatcher. There would be much more room for conviction politics and the belief that you are always right if more matters were settled by majority vote and greater power given to a parliament more partisanly organised. Nonetheless, we will no doubt resist any attempt to correct the democratic deficit in Europe with the same negativism that we are currently displaying on most other issues.

No one expects us or anyone else to rush headlong into a full federalism. The number of issues which need to be dealt with at a European level are quite limited. I am as committed to the doctrine of subsidiarity as the noble Earl said he was, but there are important, vital issues and money is most certainly one of them. The Community subjects itself to a vast internal handicap compared with its main competitors, Japan and the United States, by having 11 separate currencies instead of one. I believe that there is now a settled desire within the Community to advance along this axis. If we allow it to happen without us we will pay a heavy national price in the City of London and elsewhere. If ever there was an example of defending the shadow of sovereignty while allowing its substance to fly out the window it is to try to preserve the sacred independence of sterling. Sterling today is not a symbol of sovereignty; it is much more a cork on a deutschmark-dollar eddy.

I do not necessarily say that all the Delors proposals should be inscribed on tablets of stone. Apart from anything else, only saints are in general prepared to accord that status to the actions and pronouncements of their successors. However, I believe that if we are to put forward competing or alternative solutions we must find something which is a great deal more serious and constructive than the competitive currency scheme which Mr. Lawson put forward with a rather throw-away gesture at the beginning of September and which Mr. Major dusted down more painstakingly in early November.

That is not serious because it does not engage with either of the two main problems raised by having 11 different currencies. First, if you do a deal in another member state for delivery in two or three years' time you do not know what you will be paid in your own currency at the end of the day. That considerably reduces the meaning of a single market. Secondly—this applies particularly to individuals and small businesses—if you operate in a number of different currencies you pay substantial, unacceptable foreign exchange margins.

Competitive currencies simply do not engage either of those two problems and therefore appear to many in Europe as a proposal which is either uncomprehending or deliberately diversionary. In my view, incomprehension is the main part of the problem. To establish our position as a leading state, in a leadership position with a few others, within the Community we would have to give up very little of substance. It is more a question of style and language, and understanding that combination of self-interest and genuine idealism which, as in most fields of human endeavour, makes up other people's nations. Above all, we must give up that constant air of semi-detachment which guarantees semi-impotence.

If there is one lesson which stands out a mile from the history of post-war Europe it is that a country can only exercise full influence if it participates in all the activities in Europe. That has long been the case, but there are many signs that the moment for more acute choice may now be very near. In my view, we did not go through the long struggles of the 1960s and 1970s, pick ourselves up after two General de Gaulle rebuffs and fight through the referendum campaign to obtain a massive majority just to end up as a second-rank member of Europe, almost as though we had stayed in EFTA. We did that in order to play our full part, to exercise a contributory leadership role in Europe, to advance our legitimate interests, but also to strengthen and enhance Europe's position in the world. If we continue to stand on the sidelines we shall throw away a large part of that political investment of the past 30 years.

Lord Monson

My Lords, before the noble Lord sits down, will he kindly clarify one point? It is this. However valid the arguments for economic and monetary union may be, how does he justify the constant interference by Brussels in the purely domestic affairs of the nation states of the Community? Such purely domestic affairs have no international or cross-border implications and, above all, have nothing whatever to do with the achievement of a single European market in 1992.

Lord Jenkins of Hillhead

My Lords, I do not know exactly to what the noble Lord is referring. There may be cases in which there is excessive attention to detail by Brussels, though that can only have an impact if it is carried by the Council of Ministers. The Commission can do nothing on its own. I am concerned with our attitude to the main few issues: Europe's trading position in the world, its place in dealing with money, its place in political co-operation and, increasingly, its position in dealing with questions of ecology and the environment.

4.10 p.m.

Lord Hankey

My Lords, the noble Earl, Lord Caithness, has given us a very interesting and encouraging report on the British economy and I agree with a great deal of what he said. I was enormously impressed also by the interview which the Prime Minister gave to "Panorama" last night. It was an extremely able and effective performance. I congratulate the Government on what they have done. They have been quite right to lay emphasis on the importance of combating inflation. But there is no mistake about it; we still have a very long way to go. There is no reason why this country should still be poor compared with other industrial countries in Europe and outside.

I believe that there was much force in the points made by the noble Lord, Lord Williams of Elvel, when speaking to his Motion concerning the importance of manufacturing industry. I also listened with great interest to the points made by the noble Lord, Lord Jenkins of Hillhead. I now wish to go forward and offer some encouragement to the Government for them to proceed further. By now it should be obvious that this country cannot stand and prosper alone. It is no good standing outside and sniping at Europe. I believe that much more quiet and able diplomacy needs to be done in Brussels before we send the Prime Minister over to shoot at everybody. I do not think that that approach convinces many people. Much more quiet diplomacy might relieve many of the difficulties. The Prime Minister and her colleagues could then perhaps find the final solutions.

All this confrontation irritates our European colleagues and, worse still, it causes a lack of confidence in us and in the pound. We must have a stable currency and much the best way is now to anchor the pound to the European bloc by joining the exchange rate mechanism of the European monetary system. We would still have to take measures to maintain our rate but our participation would obviously inspire more confidence. I am sure that we would rarely have to impose such drastic interest rates as we now have which are harmful both socially to people who have mortgages and even more to business, which should be investing more.

Our position in a powerful bloc of countries like the EMS would inspire much more confidence both at home and abroad. There would have to be an agreement about the conditions of our joining the scheme. If there were some quiet diplomacy in this regard I believe we could make a very satisfactory arrangement. We need to avoid carrying existing interest rate policies too far if we are not to discourage industry too much. I would regard any further rise in the rate of interest with total and absolute sorrow and gloom.

This brings me to the supply side of the economy. I believe that the Government should be in just as close touch with the CBI as they are with the Bank of England and the City. The Government have done a fine job in setting enterprise free. We should have done it years ago. But I do not think it is quite enough. Perhaps I may be slightly indiscreet for a moment. I went to see Mr. Maudling, the President of the Board of Trade and a very good friend of mine, when I was Official Chairman of the OEEC. I told him that I was extremely interested in the efforts he was making to encourage British industry to export. I said "You must know by now which industries are going to make the grade. Perhaps I may be able to help you over in the OEEC". Reggie Maudling's jaw dropped a bit. He said "I should like you to ask that question again in front of my Private Secretary". He pressed a button and in came his Private Secretary. I asked the question again. The Private Secretary said "Oh, Sir, we leave all that to private industry".

It is of interest to recall what happened then. British industry declined in the next years in spite of all the encouragement which it received in general terms. When the Labour Government took over in 1964 they were horrified at the appalling deficit in our balance of payments. That was partly due to very disorderly behaviour by the trade unions, and it is of enormous credit to Mrs. Thatcher's Governments, in the plural, that at last these scandals have been corrected, most recently in the dock labour scheme ports. Our industries cannot compete unless they can work regularly and reliably and get their imports and exports flowing regularly and reliably. That is a precondition of industrial success. I believe it to be the duty of the Government to make sure that happens.

The Government have to face the need for doing things on the floor as well as on the top storey of the British economy. They have to come down to the nitty-gritty. They have to reconcile themselves to helping particular products and functions like the Channel rail-link, which should have government support if it is going to succeed. It should be pushed through without so much unreasonable delay.

The Prime Minister did an excellent job some years ago in helping to get contracts for British industry in the construction of a new university in the Arab world. The Labour Party made a colossal mistake in blaming her for this. Having been mixed up for years in trying to promote British exports, I can assure noble Lords that all our main competitors actively help their industries. Some of them are quite ruthless. We do not want to be ruthless or improper, but I honestly believe that we could and should do more both at home and abroad and be a lot less fussy about it.

If a firm needs more land or there are housing difficulties, the Government should be ready to hasten planning decisions, which are often intolerably slow. The problem is that if a company decides to set up a new factory, it takes two years or so to get the necessary permissions and get the factory going. Then the markets change and the project is not a success. It is tremendously discouraging to business. It wants help to move forward, and it should receive help. The Government have to reconcile themselves to taking a hand in these matters.

If there is a particular shortage of some skills which is holding back progress in an industry, the Government and local authorities should actively promote local training. The Government have done a great deal in this respect. It is a recognised function of the education system to produce what the economy needs at every level including in the field of research and science, which should not be allowed to fall behind.

I did not realise until I retired what colossal gaps there still are between government, university and schools and private enterprise. If the Government could do even more to step in and help to bridge these gaps, and risk getting their feet wet in the process, it would make a huge difference to our productive industry and to our education system which should feed it. The Government have done a great deal to meet our needs on the last point and I warmly applaud their education reform. However, I wish to see the administration at all levels get its feet wet and get them even more on the floor.

We have now entered a new age when the environmental consequences of what we do both at home and in industry are seen to be very important. But we must beware of industry being held up for foolish and ridiculous reasons. The Government will have to be firm about this, important and vital as the environment is to our wellbeing. But God preserve us from idiotic and unscientific environmental enthusiasts.

4.20 p.m.

Lord Boyd-Carpenter

My Lords, many noble Lords will echo the concluding words of the noble Lord, Lord Hankey, who, if he will allow me to say so, seemed to speak a great deal of good sense on a number of problems. But we shall be called upon tonight to decide on two amendments; that in the name of the noble Lord, Lord Williams, and that in the name of the noble Lord, Lord Jenkins of Hillhead. I should therefore like to comment a little on both amendments.

It seemed to me that the noble Lord, Lord Jenkins of Hillhead, either was not the author of the Liberal amendment or had not read it. His speech, characterised by the agreeable moderation with which his speeches are normally characterised, did not go anything like as far as the amendment on which he proposes to ask your Lordships to vote later tonight. Therefore noble Lords should have in mind what the Liberal amendment says. It calls on Her Majesty's Government, to recognise how illusory are the benefits of economic sovereignty in an integrated world". That is a tremendous proposition to ask noble Lords to pronounce upon because economic sovereignty covers practically all the major activities of a modern state. It covers not only currency but taxation, public expenditure and such related matters. To say that economic sovereignty in that sense has only "illusory" benefits and to suggest therefore that it would be right for the Government to hand over control of these matters to a European body is a very remarkable proposition indeed. Even if it had anything to justify it, it is not an action which could possibly be justified without a prior reference to the British people either at a general election or by way of referendum or both. It would be an immense and dramatic change in our position.

I am not very concerned with the complications of the doctrine of sovereignty but I am very much concerned with the question of whether a British Government would be able to look after, for better or worse, for richer or poorer, the British economy. If we forfeited our economic sovereignty to anybody else, noble Lords on the Government Front Bench would have to say, "This matter has nothing to do with us. You must refer it to Brussels". That would be an impossible position. Not only would it be impossible in principle but it would also be disturbing when one considers the record of the European Commission.

Noble Lords have only to consider the disaster the common agricultural policy has been and the failure there has been on the part of the European Commission to control it. It has been an enormous waste of money and has produced an enormous excess in agricultural production. It has produced surpluses which have literally had to be given away, in many cases to the Soviet bloc. At the same time it has seriously damaged the trade of other countries, particularly in the British Commonwealth, with which we used to deal and whose exports used to come here.

Even if one did not worry and regarded as academic the question of sovereignty, given the record on the common agricultural policy which has been a major matter of the European Commission, a matter which has absorbed, if that is the right word, a large part of the Commission's revenue, and bearing in mind the Commission's utter failure to get it under control and to check it, surely there is an overwhelming argument against submitting any more of our affairs to a body of such proved and demonstrable incompetence. Therefore, with great respect to the noble Lord, Lord Jenkins of Hillhead, that is the point of the amendment, as distinct from his speech, that the noble Lord is proposing apparently to ask your Lordships to accept later tonight.

I now turn to the amendment of and the speech by the noble Lord, Lord Williams of Elvel. As one would expect of him, it was far more reasonable in tone and in parts so much more persuasive. I noticed, as may have other noble Lords, one singular omission. For years speeches from the Opposition Front Bench and from the comparable Bench in another place have held forth at great length about the miseries and terrors of unemployment. But I think I detected in the noble Lord's speech only one rather passing reference to unemployment. Noble Lords may think that to be significant. It is an implicit admission that on that problem, about which many noble Lords opposite and many noble Lords on this side of the House were very much concerned, the Government are making steady and continuous progress. It is very much to the credit of the Government that this is so.

With regard to the issues raised by the noble Lord, Lord Williams, there are curious factors on both sides of the argument. There is—I give it to him at once—the enormous deficit on the balance of payments. If we had had anything like that figure of deficit on the balance of payments when I was at the Treasury we would have been horrified. There is also the level of inflation which, while a good deal lower than it was in many years of the Labour Government, is still—I know that my noble friend on the Front Bench will agree with me—far too high and is still higher than the level of inflation of most of our European friends. Therefore there are obviously, as always in these economic and financial debates, certain factors to be urged on behalf of the Opposition; and, as always, the noble Lord, Lord Williams, urged them with extreme skill, dexterity and adroitness.

I found it difficult to recognise the country which the noble Lord appeared to be describing. He said that the Government's policy for 10 years had been "disastrous". That was his phrase. It is difficult to go around the country and reconcile what one sees with a statement of that kind. One sees everywhere—or all but everywhere—a steady improvement in the standards of life. It is almost so big that it is difficult to recall what standards were 10 or so years ago.

Lord Diamond

My Lords, does that include the vast increase in the number of people sleeping rough?

Lord Boyd-Carpenter

My Lords, I shall come to that point in due course. Otherwise I shall only detain your Lordships unnecessarily long by breaking the flow of my argument. The fact remains that the great majority of people in this country enjoy a higher standard of life than they have ever enjoyed. Curiously enough some of our problems—for example, the problems of traffic congestion—are a reflection of this. The problems of traffic congestion are simply a reflection of the fact that enormous numbers of people who never dreamt of owning a car even 10 years ago now own one. There are indeed few families who do not have a car or a share in one. One sees it too in the enormous increase in holidays in the Mediterranean; the fact that people of quite moderate standing in life and in their jobs have holidays now at Marbella or at places in the sunshine of the Mediterranean. There has been an enormous increase in the standard of life. That has not been achieved by accident. It did not grow in the years before this Government came in. Surely it must be accepted that that is a considerable achievement.

I promised the noble Lord, Lord Diamond, that I would reply to his interjection. It is true that there are a certain number of people who, for one reason or another—perhaps one can analyse the reasons—decide to, as he put it, sleep rough. Indeed, the noble Lord, Lord Williams, referred to the number of beggers. I have had some experience of social security administration. I can assure your Lordships that our present social security system is a very elaborate, very expensive and very comprehensive one, but no system of social security can ensure that all those who are eligible to benefit from it in fact do so.

It is perfectly true that there are a number of people who would quite plainly be eligible for help in one way or another from the social security system who do not elect to seek it and who appear to prefer to sleep rough or to indulge in begging. I may say in the context of begging that it has the considerable advantage that all the receipts of a beggar are tax free, which is a benefit not otherwise easily to be obtained, There are a number of people who, for reasons of temperament and their own decision, apparently decide not to take advantage of our social security system. I give way to the noble Lord.

Lord Dormand of Easington

My Lords, I am most grateful to the noble Lord for giving way again. He says that the social security system is comprehensive and thereby by implication takes care of everything. Would he like to comment on the new regulations for the Social Fund? Your Lordships will know that the Social Fund contains a finite amount. When all cases of the social security department appear to have been dealt with there is no more money available, regardless of how bad a case is and notwithstanding that it would have been justified under the old regulations. Would the noble Lord care to comment on that?

Lord Boyd-Carpenter

My Lords, I recall the discussion that we had in your Lordships' House on this point. I am happy to comment on it. We were told by the Minister concerned—I have no reason to doubt his accuracy—that the amount provided was calculated to be sufficient, and as I understand it there was no suggestion that if that assumption proved to be wrong there would not be an improvement. Nor is there the slightest evidence, let me say to the noble Lord, that any of those who are sleeping rough, or otherwise not availing themselves of social security, are doing so because the money had run out under that fund. There is not a scrap of evidence for that.

It is a social phenomenon resulting from certain types of people who wish to go off on their own, often to get away from their families. I think this is so particularly in the case of young people. It is unfortunate. Social workers of some experience are always trying to deal with it. I was myself dealing with a case the other day when I managed to interest the social workers of a London borough in the case of a young man who was sleeping in Sloane Square Underground station—undisturbed, I may say, by any movement of the excalator. It is perfectly true that there are some people there, but let me say to the noble Lord that that is not a result of any deficiency in the social security system as administered by the Government.

While I am on the subject of social security I should like to come back—and come back again to the Liberal Benches—to the speech of the noble Earl, Lord Russell, last Thursday when he kindly and courteously referred to a speech that I had made on an earlier occasion. He referred to the fact that I had pointed out that our social security expenditure now is in excess of £50 billion a year. I have a reference—col. 216 of last Thursday's Hansard. He said, "Oh, but then you see some £30 billion of that comes from the contributory benefits and therefore of course no burden on the economy or the Exchequer".

Your Lordships will only have to think for a moment. From where do those contributory benefits get paid? They get paid from two sources—by deduction from the pay of workers, in other words, from the exactly the same sources as the great amount of taxation is derived. Indeed so far is this now the case that the national insurance contribution from a worker is deducted from his pay at exactly the same time and on the same basis as the income tax by the Inland Revenue and deducted before his employer hands it over.

If I may say so in parenthesis, I regret this. I think that the system as it operated in the days when I had some responsibility, when there was a card that had to be stamped, made people realise that they were getting a benefit—a good, subsidised benefit at that—for age, sickness, unemployment and so on, which now frankly they do not. But of course it is a complete illusion to believe that, because some £30 billion of social expenditure is the result of payments under the contributory scheme, that somehow is separate from the general burden of taxation. It is simply another form of taxation or, if your Lordships prefer so to put it, a question of an allocated tax.

This is relevant to the interjection just made. Social security expenditure is now at its highest level ever in real terms. This again—coming back to the noble Lord, Lord Williams—is the result and the product of an economy which for all its difficulties has succeeded in raising ever-increasing revenues. Those ever-increasing revenues, among other things, enabled the repayment to be made of quite substantial parts of the National Debt, thereby for the future reducing the interest charge on those sections upon the taxpayer.

When one is trying as the noble Lord, Lord Williams, was undoubtedly trying, to paint a gloomy picture of what has happened to the economy over these years, it is perhaps relevant to look on the other side of the account—at the fact that year after year the system has produced a large Budget surplus. It has included not only being able to pay for ever-increasing social security benefits but equally to redeem some part of the National Debt.

While I am referring to that I hope that I may be allowed to add one further plea in respect of expenditure. The noble Lord on the Front Bench knows very well how strongly some of us feel about the treatment of war widows and the discrimination at present exercised against the older war widows—those widowed before 1973—as compared with those widowed since. To many of us this seems a quite intolerable distinction, because if anything it is the older war widow whose need is greater.

When one is speaking, as I am, of the considerable financial advantages that have been secured under and by this Government one is entitled to ask that priority be given to wiping out this blot on our whole social security system. It is utterly wrong. It is indefensible. I have never yet heard a Minister or anyone else prepared to defend it. I beg of my noble friend to give some sympathetic reply.

The other problem that we undoubtedly have to face—and it is the major problem—is inflation. Here I have two comments to make. Inflation is undoubtedly being supported and stimulated by excessive wage demands. There is no doubt about that. It is a fact that in the public sector the Government have control. I quite accept that, rightly, now the Government have none in the private sector. Very wisely they do not seek to interefere with it. But in the public sector the Government have a duty to be very strict indeed in rejecting claims for unjustifiable wage increases. In our present economic situation, unjustifiable wage increases seem to me to amount to wage increases which are above the level of inflation. I hope that my noble friend will be able to give us some encouragement on this.

There are those who talk about dealing with inflation by increasing taxation. I am sure that that is a very great mistake. In a dictatorship no doubt it would work. But if we simply increase income tax the net result is that, because people's wage packets after deductions are reduced, they simply make an increased demand for higher wages. Therefore we get higher costs for industry.

There is a very strong case in dealing with inflation for reductions in income tax. If we reduce the rate of income tax, people's take-home pay is increased without increasing the charge which they make of their employers and thus the cost of the product. Therefore, from the point of view of dealing with inflation as well as from many other points, there is a great deal to be said for carrying out the good intentions which the right honourable gentleman the Chancellor of the Exchequer announced the other day of seeking to get down the rate of income tax.

The same goes for VAT. VAT is a bad tax, far worse than the old purchase tax which discriminated between luxuries and necessities. I was horrified to see that the EC is now urging that we should extend the scope of VAT and apply it to transport costs. Any better method of stimulating inflation than that I find difficult to envisage. I hope that Her Majesty's Government will very firmly reject it.

The handling of the economy is the major issue at home. Although there are problems and always will be, I suggest to your Lordships that Her Majesty's Government have handled, are handling and will handle this with skill and determination. I hope therefore that your Lordships, with the greatest possible courtesy but with equal firmness, will reject the amendment.

4.43 p.m.

Lord Donoughue

My Lords, this House has perhaps too few debates on the economy but I sense that this one promises to be different and I hope a little more memorable. Hitherto, certainly in my brief time here, our debates have followed a certain ritualistic form. The Government have always claimed that we were witnessing an unprecedented economic miracle—with a wave of the magic wand the failures of the 1960s and 1970s would disappear. I think that on this side the Opposition have been sceptical, suspecting that this was being done by mirrors and some massaging of the statistics. But we were accused of being Jeremiahs and of selling Britain short. I must say that we resented that suggestion from the Government Front Bench this afternoon. I am sure that as the noble Earl grows older—and he is certain to age rapidly with the events of the next two years—he will learn to do better than that.

The Government have today played the same tune but the Opposition are more confident. The realities are now clear and the differences from Conservative rhetoric are well established. The Treasury magician has retired, I suppose technically being constructively dismissed. His mirrors are cracked, his wand—and I hope he will not feel that I am reflecting on his manhood—certainly drooped long before he left the stage.

Today we can contemplate the economic realities without hype, examine the balance sheet of 10 years of Thatcherism and see the ruins of the economic miracle. What we see today and will see in the months ahead is a government completely boxed in. If interest rates are kept high to restrain inflation, to reduce imports, to support sterling—all areas of weakness—then they will bash the economy into recession. If interest rates are cut then sterling will surely collapse and is already in the process of doing so. Interest rates, we know, are the only instrument of economic management that the Government apparently recognise.

The depressing range of economic numbers facing us was well set out by my noble friend Lord Williams in his excellent speech. I shall just focus on a few points central to the dilemma in which the Government find themselves. Let me take inflation first, because it is the first priority by which the Prime Minister says that she will be judged. Well, she has reason to be nervous. The underlying rate of inflation, the rate that the Government or the Treasury would like to use because it excludes mortgage costs, is at its highest for seven years.

Britain's inflation, after 10 years of the Thatcherite revolution, is 50 per cent. above the EC average, 30 per cent. above the OECD average and double that of our main competitors, Germany, France and Japan. Nor could any monetarist opposite—assuming there are any that remain—believe that inflation will improve quickly. I do not believe the Treasury forecasts. After all, the broad monetary aggregates are still expanding at nearly 20 per cent.

Where is the economic miracle on inflation, or indeed on our currency? Sterling was the symbol of Britain's strength and pride, as Mrs. Thatcher boasted when it rose so high during the great depression of 1980 to 1982. Since this Government took office in 1979 sterling has fallen against the US dollar by 27 per cent.; it has fallen against the German mark by over 30 per cent.; and it has fallen against the Japanese yen by 53 per cent. That is no miracle; that is a massive devaluation.

I wonder what Mr. Lawson meant when addressing the Conservative Party conference this October he said: The Conservatives are not a Devaluation Party". They are. Governments of all parties are and have to be when they mismanage the economy.

The balance of payments deficit is of course the most staggering of all the numbers in the Government's balance sheet. The non-oil deficit as a percentage of the GDP at 4 per cent. is now and has been in recent years greater than at any previous stage in peacetime history. It is greater than in the notorious year of 1976 and the IMF.

The Government say that the deficit does not matter provided it can be financed. We have heard that again and again. I must say that my experience and observations are that it does not matter if it is a Conservative deficit but Labour deficits are denounced as evidence of betrayal and national decline.

As for financing it, of course it can be financed. It is being financed, as my noble friend Lord Williams explained so convincingly, by a flood of short-term hot money. The real question is, at what price is it being financed? The present price is astronomically high interest rates which cause desperate anxiety to young home owners and put British industry at a crippling disadvantage compared with its overseas competitors.

That trade deficit arises from two main causes. It arises partly from the excessive credit boom—this is nothing to do with wage pressure, nor is the inflationary problem basically one of wage pressure—generated to help win the last election. But at its heart is the destruction of British industrial capacity in the 1980s. As we all know, at its simplest the deficit represents the excess of demand for goods and services over supply. The Government have reduced supply to the point where UK manufacturing has the lowest share in GDP of any industrial country in the world. The noble Earl quoted the figure for the output of UK manufacturing correctly at 12 per cent. since 1979. That is a rise of barely 1 per cent. per annum. That pathetic average will worsen next year. It is not a case for pride but a demonstration of failure.

When in the past noble Lords in this House have pressed the Government to remedy the situation, the first response was that manufacturing does not matter. Now we notice that the trade deficit apparently does not matter. But it does matter. The destruction of British manufacturing capacity meant that in the recent boom the British economy ran out of plant capacity to meet demand, and did so long before it ran out of labour capacity. The consequence of this economic mismanagement is that we now face a recession. That recession is deeper than the present Treasury forecasts admit. Indeed the Government's electoral ambitions cannot be successful without such a recession. The recession will bring all the immediate miseries of high unemployment. I say to the noble Lord, Lord Boyd-Carpenter, that the figure of 2 million unemployed, which we shall have by the end of next year, is nothing to be proud of. The figure would be higher if the statistics were representative. Many people on this side of the House care about that.

The recession will bring the immediate miseries of higher unemployment, bankruptcy and, perhaps as important, the longer term costs of the inevitable collapse of manufacturing investment. That is the prospect ahead, but it need not be so. The economy could be decelerated slowly to allow a steady readjustment over several years. That course is open to us and to the Government. We could have modest but adequate growth with a readjustment based on less personal consumption of imports compensated by more investment in the national infrastructure, education, transport and housing for the homeless. We could follow that steady policy until inflation stabilises and the trade balance improves. Such a policy would be made much easier by full membership of the European exchange rate mechanism which would bring the stability which industry requires. That was forcefully and convincingly argued by my noble friend Lord Williams of Elvel and the noble Lord, Lord Jenkins of Hillhead, in his remarkable speech. That policy could also be assisted by taking a most positive role in the construction of the single market after 1992 to keep Britain in the centre of European economic developments.

However, we know that the Government will not pursue that steady strategy because it does not fit in with the Government's electoral timetable. The late Chancellor got the economic cycle and the electoral cycle out of phase. The Government must have pre-election reflation by 1991. Therefore, the Government must have a sharp squeeze before then. They must have a recession in 1990 to create the spare capacity for that pre-election boom. Therefore, interest rates, the only instrument, must be very high and for a very long time. That is the price that we all have to pay. We cannot fully join the European exchange rate mechanism because of the Prime Minister's prejudices. We see the proclaimed economic miracle as a bubble, inflated by public relations hype, which is now pricked. Inflation is not conquered. It has been traded off for unemployment. At any given level of unemployment, inflation is no better than it was in the 1970s while the underlying rate of unemployment is worse. That is not progress.

The trade deficit is not conquered. As my noble friend Lord Williams pointed out, import penetration is now higher than in the 1970s. We note that in those bad old days when demand was too strong we ran out of labour and imports increased. Now, after the revolution, we run out of manufacturing capacity and imports increase. There is little difference except that both the deficit and unemployment are higher. I should say to the noble Lord, Lord Boyd-Carpenter, that people are better off, especially noble Lords in this House. But that was true in 1979 after the 1970s, in 1969 after the 1960s and in 1959 after the 1950s. That is true in every country of Western Europe and in every country of the OECD. That tells us nothing. However, if one looks at the relative figures and at the league table of national living standards relative to those of other industrialised nations, one sees that there is no relative improvement for Britain. Within Britain many of our poor are relatively worse off.

Lord Boyd-Carpenter

My Lords, in his interesting argument has not the noble Lord omitted the fact that between 1974 and 1979 there was no perceptible increase in the standard of living; indeed there was a measure of deterioration?

Lord Donoughue

My Lords, those figures are not acceptable to me. Their effect depends on how one presents them. One also has to look at the particular circumstances of that time. Next year, 1990, will expose these underlying economic realities. Industry, home owners and the unemployed will pay the price for past mismanagement. I believe it is possibly even shabby cynicism to create a recession in order to be able to create another artificial pre-election boom. Only a radical change in policies could produce a fundamental improvement in the true economic position of Britain. Perhaps only a change of Government will achieve that.

4.57 p.m.

Lord Diamond

My Lords, I count myself both fortunate and privileged to have heard the two opening speeches of the noble Lords, Lord Williams of Elvel and Lord Jenkins of Hillhead, which dealt so persuasively and, in my view, completely satisfactorily with the two major issues facing the country at the present time. Those two speeches together with the well informed speech to which we have just listened leave little more to be said. Nevertheless, having prepared a comment or two, I propose to burden your Lordships with them.

I wish to say a few words about the comments made by the noble Lord, Lord Boyd-Carpenter, during the course of his speech. I wish to support what the noble Lord, Lord Donoughue, said about the ridiculous suggestion that some credit is due to any government for the improvement in the overall living standards of the nation year by year. That is just as ridiculous as if the Prime Minister were to claim credit for the fact that all secondary students of age 16 are taller than all secondary students of age 12. Of course they are. By nature they grow each year. By nature the economy grows each year. It is very, very difficult, and has only been achieved twice during the course of the past 50 years, for the economy not to grow. Sometimes it grows very little; that is the point that we are concerned with.

So when the noble Lord, Lord Boyd-Carpenter, points to increases in living standards generally he is missing the point. He is missing the moral point. The important point is that under this Government the trend which has continued from the beginning of this century of a reduction in the inequalities between those who have and those who have not has stopped and has started to go the other way.

Proportionately the rich are now richer and the poor are poorer. I accept what the noble Lord said by virtue of his great experience at his ministry, and he will similarly pay some regard to my having spent an equivalent time as chairman of the Royal Commission on the Distribution of Income and Wealth from which I draw these conclusions.

The other point in the noble Lord's speech to which I wanted to refer cannot be as important as I originally thought because it now escapes me. If your Lordships will forgive me I shall turn to the two simple points that I wanted to make. They are, first, what is wrong with the economy and, secondly, what is needed to help to put it right.

What is wrong with the economy is that it is out of control. When I said that over a year ago and gave many instances, including in particular the record rate of bankruptcies which had been achieved in the early years of this Government and the record rise in unemployment, as well as many other instances, the noble Lord, Lord Young, who was Secretary of State at the time, did not accept ray view that the economy was out of control. Therefore I am compelled to survey what has happened over the 10 years that this Government have been in office and to see whether my view is correct. I suggest to your Lordships that the evidence is now incontrovertible.

Let us look first at the balance of payments deficit. The figures are well known. I simply ask the Government, did they plan this? Was it their intention that during the last four years the deficit on visible trade should rise by £3 billion, £9 billion, £11 billion and £21 billion? Is that what the Government intended? Was it their plan? Was the Chancellor of the Exchequer determined to achieve the highest interest rates in living memory with the hardship that that brings for home buyers and the hard going it creates for industry? Was that planned?

Clearly in all those respects the economy has been completely out of control, as is underlined by the fact that the Government have been compelled continually at short notice to alter their forecasts. As the months went by they kept altering what they had said even a short time ago. They could not control the situation, even in the short term.

There are two more examples which I must give which relate to the two top priorities in the Government's policies. There is no need for any doubts as to what they were. They were repeated again in the gracious Speech: My Government will continue to pursue firm financial policies designed to reduce inflation and foster the conditions necessary for sustained economic growth". Reducing inflation has been the top priority and sustained economic growth the next priority throughout this Government's 10 years in office. Let us see what has happened to those two priorities.

First, the Government have described inflation as being at an unacceptably high level. It is now at 7 per cent. I ask the Government, was that planned? Not so long ago—two years or so—inflation stood at half of today's figure. Was it the Government's firm determination to double it to the present figure? As we understand it the policy was to reduce inflation and to keep it down. That was the intention; the achievement was to double it. I repeat that I am talking about the one priority to which all other policies were subservient.

The second priority was sustained economic growth. We have all heard what is happening there. After some four years of approximately 4 per cent. growth overall, next year we face prospective growth of 1.25 per cent. The Chancellor has warned that it will not be an easy year. I ask the Government, is that how you plan sustained economic growth?

As to the reply which the Government may wish to give, inviting us to look at past years, I am delighted that that has been done today by the noble Lord, Lord Williams. It is quite absurd for the Government to claim some kind of economic miracle for their 10 years in office. Figures in the Monthly Digest of Statistics published by the Government show that, as has already been said, in their 10 years of office there has been average economic growth of less than 2 per cent. That is below the natural basic rate of growth for this country of some 2.4 per cent. which has persisted for more than 50 years. So they have achieved less than the normal rate of growth. Economic growth has been less than it would have been if it had been left to nature.

That has been achieved at the cost of an unacceptably high level of inflation, record interest rates, record balance of payments deficits, record numbers of bankruptcies and record unemployment. I invite the Government to show me the gracious Speech which promises all those record disasters and then I shall withdraw my allegation that the economy has been bumping along out of control.

There is one further record. Here I turn to my second main point, which is to suggest what could be done to improve the economic situation. I refer to personal savings—not for the first time. I invite your Lordships, first, to look at the facts. When this Government came to office individuals were saving 15 per cent. of their disposable income. They spent 85 per cent. of what they had to spend and the other 15 per cent. they put by. Last year that figure had dropped to 4.4 per cent.—a drop of 70 per cent. in the ratio of saving by ordinary people during the lifetime of this Government.

In the last five years the ratio of personal savings, in round figures, has been: 10 per cent., 9 per cent., 8 per cent., 6 per cent. and 4 per cent. It could hardly have been worse. Doubtless that has been due to vastly increased borrowing facilities offered by banks, building societies and financial institutions of all kinds and to the bombardment of individuals with easy spending schemes. In my view the Government have contributed to the creation of that ethos of the spendthrift by their negative attitude to the onslaught and by the manner of their tax reductions.

What is needed is a huge, long-term determined government campaign to encourage the perfectly natural habit of saving. It is in everybody's interest. An individual can put his savings to good purpose; companies can successfully seek more capital for expansion and innovation; governments can see the reduction in inflationary pressures which have been responsible for sucking in excessive imports and causing the balance of payments difficulties of which we are aware.

Perhaps I may now put the figures in context. If the savings ratio had not fallen and if people this last year had continued to save in the same way as they saved when the Government first came to office, the additional saving would have amounted to £32 billion. It is not possible to say with certainty what the final impact of that additional saving would have been, but clearly the majority of it would have had the effect of reducing the balance of payments deficit that we are discussing. The majority effect or impact would have been, directly or indirectly, on imports.

As we know, the visable trade balance amounts to £21 billion. The additional saving to which I have just referred would have been £32 billion—one and a half times as much. There can therefore be no doubt that that overall record deficit might possibly have been turned into a surplus, had the Government taken steps to encourage the maintenance of personal savings.

In every way, a return to more normal saving habits could do nothing but good, whether in terms of pressure on the economy, pressure on the pound or pressure on prices. I say to the Government: rather than raise the interest rate, raise interest in saving.

5.12 p.m.

Lord Rees

My Lords, it is a great pleasure for me to follow the noble Lord, Lord Diamond, since both he and I have in our times had some responsibility for public expenditure, which nearly always has a bearing on our debates on the economy. However, he advanced three propositions, with two of which I most violently disagree.

The first proposition was that the trend towards equality and greater diffusion of wealth has been halted. Of course, I defer to his knowledge as chairman of the Royal Commission on the distribution of wealth, but I wonder whether he has taken account of the considerable diffusion of wealth among our fellow countrymen that has resulted from, for example, the sale of council houses at very reduced prices. That has probably done more to build up a class of property-owning fellow countrymen than anything done by any Administration of which he was a part.

The noble Lord then said that no government should be given any credit for an increase in the standard of living of a country. I find that a most extraordinary proposition. In one sense, I wish that it was true because the corollary would then be that a government could disclaim any responsibility for the management of the economy of this country. I feel that at times too much of our debates at both ends of the Palace of Westminster are devoted to a sometimes sterile analysis of our economic position. Some politicians and commentators have persuaded themselves that economic well-being is the basis of electoral success. That has not always been so, not even in post-war years.

The noble Lord then came to a point on which I find myself in some agreement with him. He referred to the savings ratio of this country. I certainly agree with him that more measures should perhaps be taken to encourage saving among our compatriots. The question that I should like to ask should perhaps be directed to the noble Lord, Lord Williams of Elvel, who will wind up the debate for the Labour Party. However, I should like to know whether the noble Lord believes that the high rates of personal taxation which have always prevailed when we have had a Labour Government in this country, and particularly when there has been a special discriminatory tax against investment income, have encouraged saving among our compatriots?

The noble Lord concluded his powerful contribution by saying that the economy is quite out of control. Let us accept that inflation is still uncomfortably high, certainly uncomfortably high for a government who have made—and, I believe, rightly made—sound money as the basis of economic advance and who were, until last year, remarkably successful in achieving that. Let us accept that the trade deficit is also uncomfortably large. Since I do not want to be drawn into arcane analysis of statistics, I shall simply say that there is a certain doubt about how valid and accurate the trade figures are. I shall also make no point about last month's trade figures because I recognise that that question, like other economic questions, must be judged over a span of months, if not years, rather than weeks.

However, let us also recognise that the sharp decline of stock markets across the world in the autumn of 1987 might reasonably have been thought to presage an economic recession. It was therefore legitimate against that background—and that view was shared at the time by the spokesman for the Labour Party, at least in the other place—for the then Chancellor to ease the monetary constraints. Since then—this is not confined to this country alone—confidence in stock markets has not completely revived, but it was more debatable whether the then Chancellor should have introduced such a robust Budget in 1988. With the advantage of hindsight, which is always the privilege of Opposition parties, the Chancellor might have introduced a more modest Budget, but it must be recalled that the tax reliefs in that Budget bore no relationship to subsequent expansion of credit.

However, the monetary measures subsequently taken and the austere tone of this Chancellor's Autumn Statement, which I applaud, suggest, at any rate to me, that the necessary correction will take effect in 1990 without tipping the country into recession. I do not regard a reduction of the increase in our GDP from slightly over 4 per cent. to slightly over 1 per cent. as something to applaud, but that certainly does not amount to recession by any test that I recognise as valid. The measures taken will enable growth to resume at a healthy rate after 1990.

It should also be pointed out that analysis of the recent increase in the trade deficit tends to show that a great part represents the import of components to be used in the manufacture of exports and in an increase of capital equipment for industry, and that only a small part relates to personal consumption.

For those who talk about the destruction of British industry—and there has been a little bit too much glib talk on those lines even in this debate—I should draw attention to the Autumn Statement to which the noble Lord, Lord Williams of Elvel, for example, did not refer at all. There are two charts which bear close scrutiny and study by noble Lords. One is the share of business investment in the gross domestic product. That is chart 2.8 on page 48. It shows that, as a proportion of the gross domestic product, business investment between 1987–88 and 1989 was at a higher level than at any point since 1965.

Again, if one looks at the chart about profitability it shows that the net real rate of return on non-North Sea industrial and commercial companies rose further in 1988 to the highest level for 20 years. That does not suggest to me that British industry or the industrial base has been destroyed.

In the long timescale of history, if not by the more fevered standards of electoral politics, the events of this year and next year will, I believe, be seen to have been a mere hiccup in a period of liberalisation and sustained growth in the British economy. Such a hiccup must be set in its true context. I shall not weary your Lordships with reminiscences of the state of the economy in 1979 but I hope to be forgiven if, like the noble Earl, Lord Caithness, I emphasise the underlying strengths of the economy as I see them at this moment in time.

There have been eight years of sustained growth of 3 per cent. or more. I admired the adroit way in which the noble Lord, Lord Williams of Elvel, handled the statistics which were the basis of his speech, but it was noticeable how selective he was in the periods from which he drew his conclusions. Of course the decade since 1979 may not have shown quite the economic miracle to which we could pardonably lay claim.

I see that the noble Lord, Lord Bruce, wishes to intervene. Perhaps he will first allow me to conclude this passage. Of course the first three years were devoted, as I remember very vividly because I was in the Treasury at the time, to trying to redress the balance and put the economy into some kind of order after the extravagances of the previous Administration. I give way to the noble Lord.

Lord Bruce of Donington

My Lords, I am most grateful to the noble Lord for having given way. He accused my noble friend Lord Williams of Elvel of being selective in his quotation of statistics. Surely in view of the fact that the Government have been in office for 10 years—not eight—it is quite legitimate for him to draw to the attention of the House the record over the 10 years.

While we are on selective quotation of statistics, does the noble Lord agree that the figures quoted in chart 2.8 on page 48 of the Autumn Statement refer not to manufacturing investment specifically but to business investment, which is slightly different?

Lord Rees

My Lords, the noble Lord is quite entitled to make both points. I spoke about the selective choice of periods and it was to correct the decade, of which, as I said, the first three years were rendered a little rough or tough at the Treasury by the need to redress the gross errors that had taken place in the previous seven or so years.

As regards the second point, the noble Lord is absolutely right. Indeed, the chart is headed: "Share of business investment". But I do not share the romantic attachment to industry as such of some of the spokesmen on the Opposition Front Benches. It is right and proper that we should hope and strive for a powerful industrial base, but if we are to judge the economy as a whole, we are quite entitled to take into account, for example, the service industries, which I am bound to say Labour governments did not favour very much; indeed, at times they introduced discriminatory taxes against them.

Perhaps I may proceed somewhat to emphasise the other points of strength. We now have a portfolio of foreign investments which is, I think, surpassed by only two other developed countries. Such have been the benefits of the abolition of exchange control, which was so bitterly resisted by the socialist Opposition. There has been a considerable reduction in public debt, which is a unique phenomenon in post-war Britain. Even the noble Lord, Lord Jenkins of Hillhead, to whose speech I listened as always with great attention and interest, only achieved a balanced budget in 1969. That was an achievement which I always applauded in public and continue to applaud, and an achievement which was not sufficiently recognised by his then socialist colleagues.

For those concerned with British industry, on which noble Lords opposite have concentrated very much, I point out that we now have one of the lowest rates of corporation tax in the developed world. That is a remarkable change from the position which obtained under any socialist government that I can recall in post-war Britain. We have a more rational personal tax structure which I believe the people of this country appreciate. In the Autumn Statement there has been forecast a modest increase in public expenditure which will do precisely what the Opposition amendment suggests; namely, increase the quality of life in this country, whether it be in the field of arts or the National Health Service. With profound respect I commend the noble Lord, Lord Williams of Elvel, before he comes to wind up, to apply himself for just a moment to the Autunm Statement from which he will glean much evidence which no doubt will encourage him and may even lead him to withdraw his amendment. As a former Chief Secretary I must admit that I envy my successors the resources which are at their disposal and I admire the dexterity with which they will surely apply them.

Finally, as my noble friend Lord Boyd-Carpenter said—and there has been considerable silence on this subject from the Opposition Benches—there has been a notable and steady reduction in unemployment. Indeed, another chart to which I respectfully draw the attention of noble Lords on the Opposition Benches shows that there are more people in employment now than there have been for a few decades.

If I may venture one criticism, which I am afraid is not novel, I hope that within months and not years we shall participate fully in the exchange rate mechanism of the EMS. It will be no panacea but it will provide a buttress for the pound and an external discipline which most governments need, as Mr. Delors found, for example, when he was Minister of Finance in Paris. I hope that the conditions stated in Madrid will not be used as a delaying tactic. I believe that we shall benefit from joining and that we shall do no particular favour to the other members of the Community if we do.

I conclude by turning to the position of the socialist Opposition which asks to be accepted as a credible alternative government. On that basis I believe that we are entitled to probe more closely their economic policies. How, for example, would they deal with an increase in inflationary pressures and any extravagant increases in credit? Apparently they are sceptical of monetary remedies. If that is so, we may ask what fiscal or other measures they would propose.

The noble Lord, Lord Williams, referred to certain measures of credit control which he culled from a statement of the chairman of Lloyds Bank. I have a profound respect for the chairman of Lloyds Bank, who has a far greater experience of banking than I am ever likely to command. But it seems to me that if we were to do so we should be going back over ground covered not once but several times under several Administrations since the war of both Labour and Conservative complexions and I doubt whether those measures of credit control would be any more successful now, when we have a more sophisticated and open economy, than they were in earlier years.

I may say that fiscal measures, too, would not seem entirely appropriate since we have such a considerable fiscal surplus. But what fiscal measures would the noble Lord, Lord Williams, in fact propose or will be disclaim any reliance on fiscal measures? Again there has been a deafening silence about the tax policies of any future Labour Government if, against my hope and expectation, there were to be one. We know that they propose a top rate of 50 per cent. together with a national insurance charge of 9½per cent. But what basic rate, which affects so many more of our fellow countrymen, would they propose? I believe that they are proposing to reintroduce an investment income surcharge. What measures of capital taxation would they suggest? For example, would they introduce a wealth tax?

Such measures only draw capital away from the private sector. If the noble Lord is serious about the regeneration of British industry, other than British industry in the public sector, then he must think very long and hard about measures of capital taxation to which I know the more foolhardy members of his party might wish him to commit them. What about VAT? Would they retain a single rate? If so, at what level?

Finally, in defiance of the country's obligations to the other countries of the European Community, would they reintroduce exchange controls? The noble Lord is looking a little puzzled. In totality, we wish such measures as they advocate—to use the phrase of the noble Lord, Lord Diamond —to bring the British economy into control, to rebuild the industrial base, and to continue the move to a more equal distribution of wealth.

As I recall, the noble Lord, Lord Williams, moved away from a recondite statistical analysis to a portentous conclusion based on a rather impressionistic view of the number of beggars in Great Britain. Of course there will always be pockets of hardship to which we must be sensitive. However, I invite him to take a look outside the metropolitan areas at the country as a whole and to state honestly whether he believes that the wellbeing of our fellow countrymen has declined over the past 10 years. Let us get down to the facts of life. Let us move away from an over-sophisticated debate based on analysis.

I hope that I may be allowed to conclude by lapsing into Latin. I hope that I may be forgiven if my pronunciation does not accord with that of most noble Lords. Si monumentum requiris circumspice. If you want evidence of the successful economic policies of this Government, just look around and judge the economic wellbeing of the vast majority of our fellow countrymen.

5.31 p.m.

Lord Stoddart of Swindon

My Lords, I should like first to congratulate my noble friend Lord Williams on his maiden speech from the Front Bench as the Deputy Leader of the Labour Party in the House of Lords. I am sure that we should all like to congratulate him on what was an excellent speech which dealt in detail with the failures of the present Government. I am not sure that I can agree entirely with him as regards his remarks on the EMS but I shall read what he said very carefully indeed.

The noble Earl sought to show that the record of this Government, on matters of inflation, of economic growth and so on, was very much superior to that of the Labour Party when it was in government between 1974 and 1979. But he is not comparing like with like. During the period of the past 10 years this Government have had the benefit of £80 billion worth—that is, £80,000 million—of North Sea oil. Frankly, any government that could not have done better than the present Government under those circumstances needs the utmost censure.

It is quite true that the standard of living in this country has improved over the past 10 years. By God, my Lords, it would have been strange if it had not improved with £80 billion of additional revenues going into the economy and into the Government's coffers. But we have now reached the situation where things do not look so rosy. We are faced, as we have been told, with a massive deficit on our overseas trade. Interest rates are almost, although not quite, at a record level. Inflation is now running at 7.3 per cent. The Government disclaim all responsibility for this. Indeed, throughout their term of office, they disclaim responsibility for anything bad that comes along. They blame somebody else: the European Community; the Americans; the wage earners; the salary earners—anybody but themselves and the policies that they have been pursuing.

I was a member of the Select Committee on Overseas Trade. The Government were warned, not by Labour Members alone, but by the noble Lords, Lord Aldington and Lord Ezra, that the economy would be in trouble at about this time. We warned the Government that unless they put more resources into rebuilding our manufacturing potential, into education and training, we would reach a balance of payments problem of massive proportions; and so we have. It is a great pity that Mr. Lawson did not listen to what the Select Committee said instead of sneering at it at that time. Had he done so, the economy might be in very much better shape. Unfortunately, Mr. Lawson—who has now left us, having created such a mess—never listens to anyone. Indeed the problem that we now have of inflation is largely of his own creation.

I must remind the House that it was Mr. Lawson who very foolishly in his 1988 Budget removed double mortgage interest tax relief. I agreed with that, but he gave people six months to adjust. And what did that do? It created the most massive property boom that we have ever had which pulled up credit and largely brought about our present problems. Let us make no mistake about it. It is not high wages that are causing the problems. As the CBI has already noted, higher wages in the private sector are covered by additional productivity. It is the enormous release of credit into the economy that has caused our problems of inflation and the balance of payments deficit.

We need to deal with the problem of credit expansion other than by interest rates. There are methods that can be used which do not require great bureaucracy. For example, there is no reason why the banks should not be required to place special deposits with the Bank of England for a given time. There is absolutely no reason why the Government should not put pressure on money lenders to stop them bombarding the population week after week and day after day with invitations to borrow more and more. Indeed, there is no reason why the Government should not insist that the credit card companies should require more than 5 per cent. to be paid off the bill every month. Those are some reasonable suggestions the administration of which would not involve a great bureaucratic machine. But at least they would help to bring down the rate of inflation. That is hurting not only home owners—who at this time are perhaps the least important—but also industry, which must have lower rates of interest.

I now wish to turn to the amendment standing on the Order Paper in the name of the noble Lord, Lord Jenkins. To a large extent I find myself in agreement with the noble Lord, Lord Boyd-Carpenter—or perhaps he is in agreement with me! I read the amendment most carefully and wondered at it. It states: To move at the end of the Address to insert: but call on Your Majesty's Government to recognise how illusory are the benefits of economic sovereignty in an integrated world"'. First, I did not know that we had an integrated world. During the 60-odd years that I have been around I never noticed that. But would the noble Lord, Lord Jenkins, or any of us tell that to the United States of America, Japan, Switzerland, Sweden and other countries which appear to manage very well and retain their economic sovereignty? I do not believe that they would agree that the benefits of economic sovereignty are illusory.

Secondly, the EC is a closed society which erects barriers against third world countries with baleful effects on world trade and on those countries. It is the so-called benefits of British membership of the EC which have proved to be illusory rather than economic sovereignty. What are they? In 1988 there was a trade gap of £ 16.3 billion; that is £13.9 billion on visible trade and £3 billion on invisibles made up largely of taxes to the EC. Food costs to the average family are £13 per week more than they would need to be if we were buying food at world prices. Our fishing industry is ruined and the fish stocks of the North Sea are depleted. Our farming community has been decimated and the environment has been injured as a result of an excess of nitrates on the land. Those benefits—I say that in inverted commas—are not illusory; they are actual.

Undoubtedly, all that is bound up with the demand from certain quarters, some of which should know better, that we join the ERM immediately. That demand is absurd and stems from the fact that some sections of industry, the City and others see it as an easy option and a panacea for all our economic ills. That is not so, and it never will be so. If we are to succeed and deal with our economic problems we must pull ourselves up by our own boot straps. That has always been the case, and it remains so.

The present problems—in particular high interest rates—stem from the fact that the previous Chancellor of the Exchequer adopted a policy of shadowing the deutschmark, thus keeping the exchange rate artificially high instead of allowing it to float in accordance with good, free market Tory policies. It would have reached a proper level with the deutschmark so that we could export more goods to them and they could export fewer goods to us.

That argument is not new. At the time of the referendum the then Labour Government set out their proposals in their document entitled Britain's New Deal for Europe. At page 9 appears the following paragraph which is worth reading and remembering: There was a threat to employment in Britain from the movement in the Common Market towards an Economic and Monetary Union. This could have forced us to accept fixed exchange rates for the pound, restricting industrial growth and so putting jobs at risk. This threat has been removed". But we are still talking about it. The same conditions apply now as applied then. The same results will now flow from entering the ERM unprepared and at the wrong time as those predicted in the document.

Has the EMS been as beneficial to the countries which are a part of it as has been claimed? We ought to examine that question. Have France and Italy done better in the EMS than we have done outside it? One of the reasons this Government have been able to claim that they are doing so much better than those in Europe is that those in Europe have been doing so badly in the EMS. I should like to quote some figures to your Lordships. For example, taking 1980 as 100 per cent., wages in the United Kingdom have risen by 32 per cent.; in France by 9 per cent.; in Germany by 15 per cent.; and in Italy by 14 per cent. France, Germany and Italy are inside the EMS and part of the exchange rate mechanism. Britain is outside and appears to be doing much better than those other countries inside.

Let us look at another indicator. Unemployment has also been spectacular compared with that of any other EC country. The figures show that in Italy at present unemployment is 11 per cent.; in France 9 per cent.; and in the United Kingdom 6 per cent. Therefore, again, we find that in terms of unemployment those countries inside the EMS are doing worse than is Britain outside. As I tried to explain earlier, we could do a great deal better, but being a member of the EMS is not a panacea for all our ills. We should understand that and not force the pace.

It is important to remember that within the exchange rate mechanism we should be required to keep the rate of exchange of the pound in relation to other countries within a margin of perhaps 6 per cent. That would merely give the Germans greater economic domination. The way to redress the problems of world trade is not to make Germany and Japan richer but to ensure that our goods are competitive in relation to theirs. The more we keep our exchange rate up against the deutschmark the more German goods will be sold in this country and the fewer will be sold in Germany. That is a fact and I believe it would be wrong to try to disprove it.

I sincerely hope that the conditions laid down not only by the Prime Minister but also by my noble friend, who laid down some conditions about our entry to the ERM, will be strictly adhered to—particularly, as regards my noble friend, the condition about regional aid, though I rather fear that even that condition might not benefit this country as much as it would benefit Greece, Portugal and Spain.

For all those reasons, though I shall naturally support with great alacrity the amendment moved by my noble friend Lord Williams of Elvel, I must say to the noble Lord, Lord Jenkins of Hillhead, that I shall not merely abstain but on grounds of sheer common sense I must vote against his amendment, which I believe is inimical to the best interests of this country.

5.50 p.m.

The Earl of Bessborough

My Lords, I found it difficult to make up my mind when to speak in this four day debate because nearly every aspect of government can be included in foreign affairs, or, perhaps international affairs. That applies especially to the global environment and the saving of the planet on which my right honourable friend the Prime Minister spoke so effectively at the United Nations in New York on 8th November and to which my noble friend Lady Trumpington and the noble Lord, Lord Shackleton, referred yesterday.

Economic affairs, the principal topic today, are closely related to foreign policy. I have chosen to speak today because what I have to say is concerned principally with the EEC —the European Economic Community. I was glad to hear in the gracious Speech that the Government will continue to work with the European Community partners to complete the single market, to enhance economic and monetary co-operation, to reinforce budgetary discipline—that is very important—and to play a full part in multilateral negotiations designed to liberalise international trade. I greatly welcome what my noble friend Lord Caithness said on those subjects at the outset of the debate. I interpolate here that I certainly do not want a change in the leadership of this country.

I also very much agree with what my right honourable friend Mr. Douglas Hurd, our new Foreign Secretary, said in the debate in another place last Friday about pushing forward the single market. I welcome also what my noble friend Lord Brabazon said in our debate on foreign affairs.

At the same time, although I cannot possibly vote for either of the amendments with their implication of no confidence in the Government, I must admit to having some sympathy with that proposed by the noble Lord, Lord Jenkins of Hillhead, on economic sovereignty. I do not doubt the sincerity of my right honourable friend the Prime Minister in her general attitude to the sovereignty of our national Parliament. However, I feel that unlike her other highly successful policies in the past 10 years—reducing inflation, sustaining economic growth, promoting enterprise and facilitating the growth of employment—in some respects she has been unduly concerned about the loss of national sovereignty.

I have to agree, despite what my noble friend Lord Boyd-Carpenter said so cogently, that economic sovereignty can perhaps be thought of as being no longer so realistic. That is so not only because of our membership of the EC but also because of our membership of the United Nations, of the International Monetary Fund and, indeed, of NATO and of the WEU, the economics of defence being also highly relevant.

If one considers Japan's manufacture of motor cars which we purchase—even if they are built to a considerable extent in this country—and also the very large percentage of electronic products, especially chips, 78 per cent. of which come from Japan, South Korea or elsewhere in the Far East, one cannot help being rather concerned. We must accept that we are now rapidly becoming an integrated world—a global village—although necessarily and desirably retaining many of the cultural and traditional features of our kingdom as, indeed, do other EC member states. I believe, as I think, does my noble friend Lord Thomas of Swynnerton, in a Europe of diversity, which he stated so well in his very able paper which he produced for our studies group.

As regards the European Community, I have always been, to some extent, in agreement with the views of the noble Lord, Lord Jenkins, with whom I served in Brussels, Luxembourg and Strasbourg. Every year for the past 10 or 11 years, I have made speeches on the importance of our full participation in all the activities of the Community including joining the exchange rate mechanism of the European monetary system. I was most interested in what the noble Lords, Lord Williams and Lord Donoughue, said in that respect. I know that entry into the exchange rate mechanism may cause problems and that the timing of our entry is all important. However, we must join the ERM if we are not, as many have said, to miss the bus a second time.

Coming near to 1992 and the single European market, I was particularly struck by a Channel 4 television programme on that subject screened, I believe, two Saturdays ago. I do not know how well that programme was researched, but those of your Lordships who saw it will, I believe, have been left, like myself, feeling slightly uneasy, especially about the fact—in contrast to what the noble Lord has just said—that other member states all seem to be greatly benefiting through being full members of the EMS. They boast about it. I was fascinated to learn, assuming the programme was properly researched, that business has boomed in Spain since it joined the Community and that in Italy, an enthusiastic member, the Fiat conglomerate is also booming. I hope that my noble friend Lord Belstead whom I warned that I should raise this issue may be able to comment. We know that the Federal Republic of Germany—one witnesses the strength of the deutschmark today—and the French are enthusiastic members and endorse the whole concept of economic monetary union.

In that connection, I agree very much with my honourable friend the Member for Chichester when he spoke on 2nd November in the debate in another place on European monetary union. As my honourable friend said, we are paying significantly more than we need to in interest rates because we are not members of the exchange rate mechanism. I also agree with my noble friend Lord Rees in regard to the ERM, as I do with the comments of the noble Lord, Lord Rees-Mogg, in his recent article on this subject in the Independent.

In view of what is happening in Eastern Europe it is even more important that the present 12 states of the Community integrate even further before we consider admitting certain Eastern European states who may apply for membership, much as we shall eventually welcome them when they have become democratised.

The Channel 4 television programme asked whether we in Britian were not at the bottom of the pile. Were we being too slow and reluctant to be fully co-operative and competitive with Continental member states? I was very surprised to hear this. It seemed to contradict all my briefs on the subject. I wonder whether my noble friend will have any comments to make on the programme. It seems that exports from the other member states I have mentioned are surging. Even in high technology, the French, who used to admire us in this respect, seem to be drawing ahead of us, whether it be in atomic energy—which generates 80 per cent. of their electricity—or with their high speed train, the TGV. to give only two examples. There are others which have already been mentioned this afternoon.

There seems no doubt that we appear to some to be falling behind in these areas. Even the Dutch seem in some respects more advanced than ourselves. Germany, I believe, spends more in applied scientific research and development, while we appear to be cutting back on funding. Again, perhaps my noble friend will have a comment on this. Some of our industries seem to be disappearing and apparently many more small firms are going into liquidation this year than last. I should like to hear the answer to that.

In that context I am glad that the Government are taking action in regard to training and the youth training scheme, but, according to my information, more people go to business school in Germany than here. I hate to say all this because I recognise that the present Government, having been in power for 10 years, have greatly improved our productivity, our standard of living and the prosperity of many people. For this we must congratulate my right honourable friend the Prime Minister as well as her right honourable colleagues.

However, I feel that in regard to the EC we should go a little further than the gracious Speech, which, although it refers to economic and monetary co-operation, does not yet seem to accept the stabilisation of exchange rates through the ERM or a wider use of the European currency unit, which we do already recognise in our Treasury bonds.

I personally see no reason why we should not ultimately agree to the establishment of a European central bank. If we do not accept it we are bound to become isolated. Frankfurt will take over; the deutschmark will become even stronger than it is now in relation to sterling and we in Britain will be left out on a limb.

I am greatly encouraged by the fact that I share some of these thoughts not only with the noble Lord, Lord Jenkins, but also with some of my noble and right honourable friends who may no longer be in the Government. I think particularly of my noble friend Lord Carrington, who believes that the European Community is the linchpin of the new Europe, and, of course, my noble friend Lord Cockfield; also, I guess, the former Chancellor of the Exchequer, my right honourable friend Mr. Nigel Lawson. I refer also to my right honourable friend Commissioner Sir Leon Brittan, who has spoken powerfully in the same sort of sense, as did my right honourable friends Mr. David Howell and Mr. Michael Heseltine, whose book entitled The Challenge of Europe recently won the Bentinck Prize as the best of some 30 volumes on Europe and 1992 published this year submitted to the jury of which I am the UK member.

I think I have said enough to make my views absolutely clear. I know it is not only my distinguished noble friends and my right honourable friends whom I have mentioned who must agree with a good deal or at least a certain amount of what I have said, but some others in your Lordships' House and in another place as well: the Confederation of British Industry and even—as we now know particularly this afternoon—certain leading members of the Labour Party, including the Deputy Leader in this House and even, I think, the TUC. I am sorry the noble Lord, Lord Murray, is not here to endorse this. He was a great supporter of Europe when the noble Lord sitting opposite me and I used to go to Brussels.

I only hope, reflecting on Hamlet's most famous soliloquy, which we all know by heart, that, the native hue of resolution", in our relation to Europe will not be, sicklied o'er with the pale cast of thought", or that enterprises of great pith and moment With this regard their currents turn awry, And lose the name of action". We must be resolute. I agree with a very great deal—indeed with most—of what our Government have done in the past 10 years, but I am still a little unhappy about our economic stance as members of the EC. I shall be most interested to hear what my noble friend Lord Belstead, our Leader, has to say on some of these points in addition to what my noble friend Lord Caithness has already said in his very effective opening speech.

6.8 p.m.

Lord Blease

My Lords, before I speak to the main subject in this debate, perhaps I may first warmly welcome and support the words in the gracious Speech concerning Northern Ireland: In Northern Ireland, my Government will maintain its support for the enforcement of the law and the defeat of terrorism. They will continue to encourage the greater involvement of locally elected representatives in the affairs of Northern Ireland, to improve the economic and social wellbeing of the Province, and to work within the framework of the Anglo-Irish Agreement". Perhaps I may add that I was also pleased to note the recent reply of the Minister, the noble Baroness, Lady Hooper, who spoke for the Government in the debate on Thursday last.

I have listened and read with interest the speeches delivered in this House on the Address in reply to the gracious Speech. I am in a dilemma, like many other Lords who have risen to speak, in that there have now been 92 speakers who have, in my opinion, collectively argued with positive and thoughtful reasoning about the political problems and the parliamentary challenges that currently confront the Government and the people of this United Kingdom. From all sides of the House speeches have been direct and of a high calibre in parliamentary terms. I compliment my noble friend Lord Williams of Elvel on a powerful and indeed moving speech. Equally, we heard a succinctly delivered speech from the noble Lord, Lord Jenkins of Hillhead.

If the Government are listening they will surely find some points in the various arguments that have been presented. There have been arguments that should influence major changes in the direction in which the Government are pursuing their policies. Those changes are in the best interests of the manufacturing industries in this country and the people working in them.

However, I should like to make four specific points which are absent from the gracious Speech. First, there is no reference to the provision of important regional and economic social development measures throughout the United Kingdom. Secondly, there is no reference to the urgent need for suitable educational and training programmes for 16 to 18 year-olds. Thirdly, there is no reference to the enhancement of management skills at regional level. Fourthly, there is no reference to the necessary input of adequate facilities for research and development. It is at these regional levels that the Government's changing agenda has had dire consequences for local manufacturing and working people.

Yes, I think we can say that there has been widespread chopping, changing and confusion, with serious crippling results for local communities. It appears to me that the Government have a great amount of unfinished business which is crying out for action in the regions. I should add in this context that I speak of the regions in accordance with the 12 defined areas stipulated in most government official indices: that is, Wales, Scotland, Northern Ireland and the nine English regions.

I do not wish to oversimplify the complex economic realities of the peripheral areas of the United Kingdom, or for that matter the peripheral areas of the European Community, of which the United Kingdom is one. It is obvious that positive forms of legislative, fiscal and economic intervention are needed to prevent the rapid spread of the economic-cultural malaise of the North-South divide.

Measures are also required to counter the cumulative causation whereby the rich areas become progressively richer and the poor areas progressively poorer. Surely it is not necessary for me to remind the House that such trends in the regions of any country are politically dangerous, even in a parliamentary democracy. In that connection, it gives me no pleasure to point out that figures published last month indicate that there are two regions in the United Kingdom which have a lower average weekly household income than that for Northern Ireland. In the North region the average weekly household income is £197.61. In Wales the figure is £207.20. In Northern Ireland it is £207.81. Those are the three lowest of the 12 regions of the United Kingdom.

Those figures compare with the figure for the Greater London area of £311.29 and for the South-East of £302.74. Indeed, that shows that in the North of England there is a disparity of one-third in the average weekly household income compared with London. I could give other figures but I want to refer to another aspect in regard to regional development. I refer to the unemployment figures, capital investment and commodity prices, all of which provide difficulties in regard to the outer regions of the United Kingdom.

I accept that within any national economy which is subject to centralised control of taxation, which is progressive in nature, and with a common system of social services, welfare benefits and educational provision, it is expected that there will be net transfers of revenue from taxation to the different regions of the economy. The scale of such transfers is greatly influenced by the relative prosperity of the different regions and hence their ability to contribute to tax revenue. In this respect, Northern Ireland is like any other region of the United Kingdom, and clearly if data were available for the other regions in the same way as for Northern Ireland that would be straightforward to demonstrate.

However, while there is a cash input to the regions there is an outflow which is not always easily measured; that is, of skilled personnel and the flow of capital through central services of banking and other agencies. Therefore, there is not a one-way traffic at all times to the regions. My view is that if the totality of the community of this United Kingdom is to prosper the regions equally must prosper. There must be no such thing as the North-South divide. Notwithstanding the importance of these net transfers, it is clearly of great concern if they create forms of dependence or have the consequence of undermining the capacity to produce goods and services competitively. I shall deal briefly with that aspect as I continue my speech.

There seems to be widespread agreement that perhaps one of the key considerations in attempting to improve the economic capacity both of individuals and of the regions—indeed, of the whole United Kingdom economy—is the great gaps in the provision of appropriate education and training for 16 to 18 year-olds, so many of whom leave the education and training system at the age of 16 without any qualifications or knowledge of industry. That is particularly true of Northern Ireland. It is a matter of urgency that needs to be pressed hard with the Department of Education in Northern Ireland and with the Northern Ireland Office.

There is a further point that could be true in relation to some of the other regions of the United Kingdom. It is a matter which arose from a report of a special conference dealing with Northern Ireland which looked at centres for literacy and numeracy in the area and the important contribution they make to enabling young people to improve their skills and abilities. In a school in one area, out of 297 children only 13 obtained a suitable grade on leaving. That school is in a depressed area. Because it is depressed, one cannot get the teachers and the necessary expertise. Facilities are not made available. The area therefore becomes further depressed and slips further down the ladder.

The report stated: What the children need is confidence in their own ability for the future and a sound basic education. These kids are not stupid. What we do we do to improve motivation and education for these children and also to help them educate themselves and give them hope and a wider vision to prepare them for a life of work. There is a lot of talk in Northern Ireland about the best 27 per cent. of our school population". We welcome the fact that they reach those heights and are able to move into other areas of the United Kingdom, and elsewhere, to obtain employment. In the school population of Northern Ireland 27 per cent. of the pupils at the bottom of the ladder leave without any recognised qualification.

What I am saying about the Northern Ireland situation is equally true of many areas in the North of England and elsewhere. When dealing with economic matters such a situation should be remedied because we depend on young people for the future of our country. It is certainly argued—and there is substantial evidence to support it— that throughout the United Kingdom economy, including Northern Ireland, management skills are relatively under-developed and that far smaller numbers of managers than in many other developed countries have had exposure to systematic training and education.

In particular we have far fewer managers who are graduates than is the case in many of our major competitor countries in Western Europe, the United States and Japan. I wish to quote from the Economic Report issued in October and published by the Employment Institute. I shall quote it in full: In the 1960s and 1970s the British economy suffered from a series of 'stop-go' cycles, as every expansionary phase ran into problems of trade deficits and inflation. In the 1980s, following a severe depression, the economy enjoyed a longer than usual upswing. But inflation has reappeared as a major cause for concern and the balance of payments has never looked worse. So, have we cured the 'British disease', or merely enjoyed a temporary remission? How vulnerable are the jobs now being created to the scissors of technical change and import penetration? This Economic Report, by Christine Greenhalgh and Mary Gregory of Oxford University, investigates these issues. Based on the findings of a research project commissioned by the Employment Institute, the Report shows that: 'The British disease stems from a combination of poor workforce skills and slow application of design and technology. Upgrading the quality of British products remains an urgent priority; cost reductions alone will not suffice. Manufacturing matters, because this sector is the source of the vast majority of innovative products. Manufacturing matters also for jobs; despite providing a falling share of total employment, manufacturing's demand for services and intermediate products generates jobs in other sectors'. The authors conclude that extra spending in the fields of vocational training, research and development and greater support for innovative producers is urgently needed if Britain is not be relegated to Europe's second division of low wage, low quality producers after 1992. Finally, I wish to quote from a statement dealing with the economic situation in general but particularly as regards Northern Ireland. It is a statement made by Mr. John Freeman, an official of the Transport and General Workers' Union. The principle that he refers to concerning Northern Ireland can be related to all other regions of the United Kingdom. He states: If the manufacturing base of Northern Ireland is so demonstrably weak, there is a clear imperative to seek ways to improve its competitiveness and to restructure ailing industries. In this region there is a great probability for successfully bringing together Government, industry and trade unions to diagnose the difficulties and plan solutions. While this form of corporatism is regarded as outmoded in Britain, it is worth remembering that nearly every single European economy is managed in this way. The Irish Republic, currently experiencing an annual growth rate of around 5 per cent. sees both trade unions and employers as important social partners of government". Other countries within the EC also have a similar arrangement.

This debate has heightened my feelings that it is difficult to understand the values and principles of an Administration which so strictly limits action and finance for proven community needs and yet is so wasteful of human resources. For those reasons and with the view that our manufacturing base in the regions should be greatly assisted, I support the amendment put forward by the noble Lord, Lord Williams of Elvel.

6.25 p.m.

Viscount Caldecote

My Lords, the gracious Speech contains many valuable proposals for legislation which are much concerned with the quality of life. I welcome them all. But, as my noble friend Lord Caithness emphasised in his opening speech, that concentration on the quality of life has to be paid for and can only be paid for by the resources generated by wealth creation, the principal source of which is manufacturing industry.

Although I agree with the emphasis that the noble Lord, Lord Williams of Elvel, places on manufacturing industry, I will not support his amendment for two reasons. First, because strengthening the manufacturing base is not achievable simply by passing new laws. It is largely a matter of changing attitudes in government, in financial institutions and in manufacturing industry itself. Secondly, and more important, I will not support the amendment because if, by any mischance, the party of the noble Lords opposite came to power, it would inevitably put paid to enterprise and risk investment by its devotion to high taxation, regulation and interference with industry.

However, that is not to say at all that all is well with industry. I rather regret the impression that my noble friend Lord Caithness sought to give in his opening speech that all is well. For instance he referred—as did my noble friend Lord Rees—to 13 per cent. growth in investment in industry. But unfortunately past investment has not led to a corresponding higher output, which is what really matters. Nevertheless, by contrast to the record of the Labour Government, the Government have a splendid record of achievement in rekindling the spirit of enterprise in industry and commerce; in the reform of the trade unions and the sweeping away of damaging restrictive practices; in privatisation and in many other ways, all contributing to greater competitiveness in industry. Equally meritorious is the determination of Her Majesty's Government to control inflation although it has not yet been fully achieved.

All those are necessary conditions for enduring prosperity with the objective of providing the means whereby every citizen has the opportunity to lead a full and satisfying life. But they are not sufficient conditions. There is one glaring problem that remains which is holding back the progress we want to make towards sustainable —I emphasise "sustainable"—economic growth in which all can share. I am referring to the continuing huge deficit on overseas trade in manufactured products which is now running at an annual rate of £25 billion based on the figures for the past six months.

Of equal concern is the reluctance of Her Majesty's Government to state clearly that they recognise that this deficit is a major contributory factor to our present economic problems—not least in the relation to the long-term control of inflation—and therefore that the highest priority shall be accorded to increasing the output of competitive products by industry.

Surely the logic is clear enough; it is crystal clear. As some people say, inflation is not solely a monetary phenomenon: it occurs when the total spending power in the economy exceeds what the economy can produce. The monetary aggregate M4, which includes deposits in building societies and the like, is now regarded as useful and as probably the best indicator of purchasing power in the economy. Over the past 10 years it has been growing at an average rate of about 15 per cent. per annum. At the same time, over the same period, as the noble Lord, Lord Diamond, pointed out, the savings ratio has fallen dramatically.

Over the same period the volume of output of manufacturing industry has grown by 12 per cent., as the Secretary of State for Trade and Industry mentioned in another place recently and as my noble friend Lord Caithness mentioned today. But 12 per cent. over 10 years is equivalent to less thn 1.25 per cent. growth per annum in contrast to a 15 per cent. growth per annum in the M4 monetary aggregate, which measures purchasing power. Is it any surprise that there has been intense inflationary pressure and that inflation is now so unacceptably high? Can it be denied that, if we had produced a higher volume of competitive products more in line with increased purchasing power over that period, inflationary pressure would have been far less?

What is the Government's response to that point? In essence the response is, first, that manufacturing output is at record high levels and that over the past two years has grown at more than 5 per cent. per annum. That is true but it compares with a growth of 17 per cent. per annum in M4. Our competitors have done better. Our share of the exports of manufactured products produced by the principal manufacturing countries has fallen since 1980. We still have a long way to go.

Secondly, the Government also fairly emphasise that in the 1980s the productivity of United Kingdom industry has increased faster than any other major industrial country and profitability of manufacturing industry has also risen to the highest level for some 20 years. They are all fair and good points and encouraging ones. But the fact is that both productivity and profitability rose from unacceptably low levels—they were way down the scale of our competitors—and performance in competitor countries has forged ahead also in these respects. Overall, United Kingdom manufacturing industry is doing better, and so it needed to. But it is making little progress relative to our competitors. This, combined with the rapid increase in purchasing power, has resulted in a huge deficit in overseas trade in manufactured products.

The substantial evidence is that this huge deficit is the cumulative effect of a long-term trend. For the past 20 years, exports expressed as a percentage share of GDP have been rising at an average rate of 1.1 per cent. per annum compared with imports at the rate of 3.5 per cent. of GDP per annum. It is impossible to reverse such a long-term trend quickly. It is not just the short-term effect of importing capital goods for investment, as some Ministers have suggested, for capital goods account for only some 6 per cent. of the current account deficit. Radical change is needed in priorities and in the attitudes to manufacturing industry. There is no quick, easy solution to these complex problems, so the sooner we set about finding a solution the better.

The fact is that over many many years we have spent too much on consumption of wealth and on raising the standard of living, which is quite different from the quality of life, and we have invested far too little in the creation of wealth. The reasons go far back into our history. They are rooted in the democratic process also, for, with an election every four to five years, it is the natural wish of politicians to please the electorate by consumer-led booms with high growth in demand. That is relatively quickly achievable by expanding credit—the go phase—but it is a rather slower process, as we are now finding, to control when excessive demand appears. Then the stop phase comes in.

On the other hand, investment in manufacturing industry, in design, development and marketing of new competitive products and creating efficient capacity to make them, takes much longer to become effective than changes in monetary affairs. Closing down capacity can be done relatively quickly even though it is painful and expensive. So the stop-go aspect of the United Kingdom economy produces a huge disincentive to long-term sustained investment and it has a damaging downward spiral effect on our manufacturing industry base. It is the failure of successive governments of all parties to solve this problem which is at the root of our present difficulties.

Sustainable economic growth with due regard to maintaining the quality of life is certainly a laudable objective but we shall never achieve it if growth in the creation of wealth by manufacturing industry falls behind. It is interesting to note the different Japanese attitude to these problems. Mr. Morita, the chairman of that great electronics company Sony, said in an interview recently: Our job is to make our products obsolete before our competitors do so". The chairman of Toshiba, an electronics company with a turnover of £16 billion, found that the rising yen halved his profits in one year. What was his reaction? It was not to cut costs, as would happen all too often in this country, but to note that he must raise expenditure on new product development in the ensuing year in order to recover his compeitive position and increase his output again.

It surely cannot be denied that growth of output of competitive products by manufacturing industry is wholly beneficial. Although, because of the need for greatly increased productivity, that will not of itself create many jobs, it will create real wealth as a base for expansion of all other activities—of the service and leisure industries, of environmental protection, of education, health and care for the aged.

In achieving such growth, efficiency and rising profitability are necessary both to attract essential investment and as a resource to pay for it. But profits are a means to an end of sustainable growth, not an end objective in themselves. Again, if through an increase in output of competitive products the huge deficit on current account was drastically reduced, can it be denied that there would be no worry about the falling value of the pound increasing inflationary pressure, as we see today?

To increase the output of manufacturing industry to the extent that is needed will be a long haul. The sooner we get started on that road the better. In the meantime, inflation will have to be reduced by short-term action to control the money supply. But we should recognise that whatever method is chosen, it is dealing with symptoms of the malaise and not the basic cause, which is our failure adequately to sustain the creation of wealth in the long term through first halting the decline and then increasing our manufacturing base. We must recognise too that high interest rates, however necessary they are—this method or some other means of controlling credit is necessary—are damaging to manufacturing industry for they deter investment for the longer term. The first step is to accept that the strengthening of our manufacturing base is an essential condition for sustainable, non-inflationary economic growth. The second step is to harness the knowledge and experience of people in industry, in finance and in government to determine the best way to achieve the objective of increasing the strength of our manufacturing base and its output. It is an elusive objective to us, it has been elusive for years, but it is not elusive to the Germans, who operate in just the same marketing conditions as we do.

There is no time today to go into any detail about the way forward. It is primarily a task for industry itself. The best companies need no encouragement, but many more must raise their performance to that of the best. Government can, and must, help too. I just give one or two examples of how that can be done in addition to the obvious needs in the fields of training and civil research to which other noble Lords have referred.

I understand that discussions on the future of the Export Credits Guarantee Department are proceeding. To expand exports often involves substantial risk with marginally acceptable potential reward, paticularly in the large, long-term projects with which ECGD helps. The ECGD provides a means of spreading over the whole economy the risk which cannot be carried by a single firm. Any proposal to reduce the scope and value of the service provided by the ECGD on the grounds of saving money must be fiercely rejected. We should look only at increasing its effectiveness to help our industry to export more and grow in its output.

We should look too at our merger and take-over policy. Competition is good, but again it is not an end in itself. Its purpose is to speed the creation of wealth. Should not we also look, when we are examining the disirability or otherwise of mergers and take-overs, at the effect that the merger will have on the output of goods in a manufacturing company? Again, the CBI has asked for reductions in corporation tax. In response I hope that the Government will point out to them that the best way of reducing the tax they pay is to invest more in product design, development and marketing. But the Government could give still greater incentive by granting a bigger tax refief in return for such higher investment.

These are just a few examples—I could give many others—where the Government could help, but much more can, and must, be done with determination to achieve our clear objectives of strengthening our manufacturing base.

My noble friend the Leader of the House, who is to reply, will have to deal with many questions that your Lordships have raised today. However, I implore him to answer two questions in the light of the Secretary of State's expectations that there will be only a small increase in manufacturing output in 1990. The first question that I hope my noble friend will answer is this: do Her Majesty's Government agree that more rapid growth in output of competitive products in manufacturing industry is essential to the long-term prosperity of this country?

Secondly, will Her Majesty's Government do everything possible to help in strengthening the manufacturing base, and in stimulating an increased output of competitive products consistent with bringing down inflation? With the assurance that positive answers to those questions would give us, we could go forward united in the determination to solve our long-term economic problems.

6.43 p.m.

Lord Ezra

My Lords, I am very pleased in this important debate on our economic affairs to be following the noble Viscount, Lord Caldecote. He is a person of great eminence in the manufacturing sector, his particular experience having been in engineering. We should take serious note of his analysis of our situation. I intend to follow in some of the directions to which he has pointed.

It is instructive before suggesting some of the steps that we might take—which other noble Lords have done, and I intend to follow suit—to consider how it is that we have got into the present difficulties. Difficulties they undoubtedly are because the Chancellor of the Exchequer himself has said that we are facing a difficult year. I have tried to contrast the circumstances surrounding the economic recession of 1980–81 with the difficulties that we are facing—perhaps not a recession, but a near recession— in 1989–90 and possibly 1991.

As your Lordships will recall, in 1980–81 the whole world was suffering. The cause of that suffering was the enormous oil price increase—the second within a few years—that took place in 1979. We all suffered and went through the worst recession since the war. But there is a major distinction between the reasons and the circumstances surrounding the recession of 1980–81 so far as this country is concerned and the difficulties we are going through now.

The difficulties we are going through now in Western European terms are in fact unique. I spend a lot of my time in Western Europe. I have been attending meetings in recent days in Brussels, Paris, Vienna and other places. I have had the opportunity of talking about the economic prospects of individual Western European countries. The consensus of the estimates is that they are looking forward in 1990 to a further year of growth.

The figures that are mentioned are something like 3 per cent. to 4 per cent. growth. Recession is not talked about at all. In the case of inflation, again figures of 3 per cent. to 4 per cent. are mentioned, with interest rates broadly of the order of 8 per cent. So far as the balance of trade and current accounts are concerned most countries are more or less in balance, with the one exception of West Germany, which has a massive surplus.

That is the broad European picture. It is unfortunate that all these figures are different—regrettably, in a negative sense —for Britain. We have a much bigger deficit on balance of payments, as we know; a higher inflation rate; higher interest rates, and so on. One must therefore ask the question, how has this come about? Why are we going in a different direction from our European trading partners? It is quite starkly different, in my opinion, based on the evidence that I have had in the last few weeks.

Here I come back to what the noble Viscount, Lord Caldecote, was just telling us. We are in the difficulties we are in at the moment because of the juxtaposition of two major factors. On the one hand there is the inadequacy of our manufacturing base and on the other there is the surplus of credit that has been created in the system over recent years. We have, in other words, had a situation of too much credit chasing too few goods. That to my mind is the fundamental reason for the difficulty we have got into.

The noble Viscount was absolutely right in drawing attention to M4. Many has been the occasion in recent years when we have asked the Government Bench what they were doing about the monetary aggregates to which so much attention was devoted in the early years of this Government but which progressively one after another were discarded as their trend seemed to come out differently from what the Government had expected.

The M4 indicator which is the broad indicator of purchasing power otherwise known as "broad money" raises a very serious problem indeed for this country. The latest figure I have seen indicates that in the year up to October last the rate of increase in M4, in broad money or purchasing power, was 17.2 per cent., way in excess of any other West European country. It is rivalled only by Australia—and perhaps this will give us some sort of comfort—whose rate of increase in the same period was 29 per cent. But Australia is the only other major OECD country with such a high rate of growth in purchasing power. Regrettably, in comparison with our major competitors, our manufacturing base has not increased at the same time by anything like the rate of that of other countries. The noble Viscount indicated the slow rate of growth in our manufacturing base. Of course we have had productivity increases and everybody concerned with those is to be congratulated. Unfortunately, the productivity increase is related to an inadequate base.

Obviously, the way to overcome the problem of the inadequacy of the manufacturing base is to invest more in industry. We have talked about that ad infinitum. No one would disagree, and there has been a fair amount of investment in manufacturing industry. However, I do not know whether your Lordships are familiar with the latest CBI forecast published in the newspapers yesterday. In relation to fixed investment in manufacturing, the following figures emerge. As regards 1989, there was a good increase over the previous year of 9.6 per cent. But the stark fact is that the forecast for 1990 is minus 0.1 per cent. The level of investment in manufacturing industry, as forecast by the CBI, will go down next year. That is a terrible thing to happen to us, a country which needs to expand its manufacturing base. The forecast for 1991 is almost as bad—0.2 per cent., virtually no increase. The CBI does not go into the following year.

This is something we must put right. If the argument advanced by the noble Viscount, which I fully support—that one fundamental part of our difficulties is the inadequacy of our manufacturing base—is accepted, then we must at all costs increase that base at present and not allow it to dwindle. It is dwindling because the market has contracted as a result of the measures taken by the Government and because the cost of money has gone up. Those two factors have led to the contraction in investment.

I fully support what the noble Viscount said about fiscal incentives. The time has come for the new Chancellor of the Exchequer to look at the various fiscal instruments he can use to correct the regression in industrial investment. The obvious ones to take out of the cupboard and examine are investment allowances. But others could be used. I am glad to note that in recent speeches in another place the Chancellor has made it clear that his policy is likely to be more flexible than hitherto. He has mentioned fiscal instruments as one way in which remedies could be introduced into the present economic situation.

I very strongly commend to your Lordships the need to correct this stark, sudden and dramatic reduction in the level of vital investment in industry. We know that it will happen unless something is done about it. I think this must be one of the most urgent aspects to be addressed. It is for that reason—and here I part company with the noble Viscount—that I shall certainly support the amendment put forward and so cogently argued by the noble Lord, Lord Williams of Elvel.

There are other aspects to be considered. I shall deal only with short-term measures because longer term measures have already been mentioned. I wish to support entirely what the noble Lord, Lord Diamond, said in his compelling speech about savings. Just as the rate of broad money has increased dramatically over the years, so has the level of personal savings declined. The noble Lord gave the figures. It is of great importance that the Government should encourage personal savings.

I was somewhat disturbed recently when I asked a Question about the Government's policy towards National Savings certificates. The noble Earl opposite answered the Question. I had always supported National Savings. I thought they were sensible; perhaps there was a tinge of patriotism about them. After all, they arose during the first world war. I found quite by chance—I was not advised by the National Savings organisation—that if I kept money in for more than five years I would receive a rate of interest which was about half what I could get anywhere else. Naturally I quickly removed the money and put it elsewhere.

Yet the Government apparently say that they support long-term savings by the private individual. Why, in their own savings movement, do they not encourage people who have kept their money in the account for five years? I should certainly have kept money there for another five years if I had been so encouraged. I should have expected some slight reduction, but not a halving. Therefore, I feel—and this is the second short-term measure I recommend—that the whole question of personal savings should be looked at by the Government. They should try to see whether some of the excess credit in the community could be siphoned off.

Then there is the exchange rate mechanism. I hope that so far the noble Lord, Lord Stoddart agrees with what I have said. I was entirely with the noble Lord in all he said about manufacturing. Along with the noble Viscount, Lord Falkland, we participated in the committee of the noble Lord, Lord Aldington, some years ago, to which reference has been made. However, I know in advance that the noble Lord will not agree with what I shall say next. First, I am glad that the Government have committed themselves to joining the exchange rate mechanism, so going beyond what they have been saying over many years. It became terribly boring hearing them say that they would join when the time was right. They have now indicated the conditions. I suggest that they take a further step and say that in principle we should be committed to joining the exchange rate mechanism on 1st July 1990.

Why do I say that? There are three reasons. First, that is the time when the first stage of the Delors proposals comes into force. That first stage is fully supported by the Government. The recent paper produced by the Treasury indicating its alternative to the second and third stages starts from the first stage. The first stage starts on the 1st July 1990; so we should get in then.

Secondly, it is one of the Government's major conditions for joining that our inflation rate should come down. The Government tell us that it will come down next year. All right, let us say that in principle, subject to untoward external factors, we shall go in for that reason.

Thirdly, the Government say, "We don't want to go in until other countries in the European Community withdraw their exchange control restrictions and allow the free movement of capital". There has been great progress already. I was talking to French, Italian and Spanish industrialists yesterday. Very little more has to be done to allow the free movement of capital from those countries. What little more there is to do will be accomplished by 1st July next year. So my third short-term proposal to the Government is, "You have said that you support stage one of Delors. You have said that you support entering the ERM, subject to certain conditions. On the assumption that those conditions are met by 1st July 1990, please say that that is the date when we are going to join". That is a specific, constructive proposal. Once the announcement was made (despite what the noble Lord, Lord Stoddart, tries so persuasively to indicate to us from time to time) it would strengthen the currency straightaway in advance of our going in. It would remove one real problem and enable us to concentrate on the others.

I was surprised by what the noble Lord, Lord Boyd-Carpenter had to say about the amendment to be moved by my noble friend Lord Jenkins of Hillhead. We all admire the great powers of advocacy of the noble Lord, Lord Boyd-Carpenter. He displayed them to the full on that occasion. But the fact is, as the noble Earl, Lord Bessborough, pointed out in his important statement, in the world in which we live today there is no such thing as economic sovereignty. Even the great United States of America has to accept that there is the rest of the world with which it trades, that it is in serious imbalance and that this is one of the factors which influences its fiscal and other financial policies.

No one can act totally independently of the rest of the world. As the world becomes closer knit, as we trade more and more together, as funds are transferred more and more easily and as all the restrictions on the movement of money disappear, so it is that in formulating monetary policies and fiscal policies in any individual country account must be taken of what happens elsewhere. The object of bringing us closer together in the European Community is to try to strengthen everyone's position by joining together as far as is desirable. I am not necessarily in favour of stages two and three of the Delors proposals but I believe that we should be arguing and negotiating about them from a position of strength from within, and that we should recognise the reality of the life in which we live, which is that our individual freedom of action among democratic, free trading Western countries becomes more and more limited almost by the hour. I believe that the Motion put forward by my noble friend and so cogently argued by him is one that is virtually self-evident. I hope that it will be correspondingly supported.

Let me end on what I hope will be regarded as a positive note. I have been in industry of one kind or another all my life since the end of the war. Without any question at all there is an enormous potential in Britain as regards manufacturing, innovation and development of enterprise. I have seen that time and again in the companies with which I have been associated, both in the public and the private sectors, not only in what they have achieved in this country but in what they have achieved abroad. I have been on the board of a company in a certain sector which has set up in America, in Germany, on the Pacific rim, in Australia and elsewhere. It has been very successful in those markets.

That success emanates from British enterprise, British skills and other qualities. The potential is undoubtedly there. What we need in this period of difficulty which all admit is there is for the Government now to take a flexible view as to the corrective measures to be taken. A number of us have suggested some of those measures. I have tried to add to them in one way or another. I believe that the great merit of this debate is seriously and objectively to look at the problems we face and try to identify and come to agreement on the measures which need to be taken to deal with them.

7.3 p.m.

The Viscount of Oxfuird

My Lords, in following my noble friend Lord Caldecote, whose speech was one of great authority, one feels somewhat like an apprentice. However, perhaps I may use a little time in this debate to re-focus your Lordships' attention back to some of the matters affecting trade and industry in the United Kingdom, and within the wider European Community.

It is popular in these times of mild economic recession to concentrate on the negatives and to ignore the enormous benefits that have already been accrued from a sustained and consistent policy of tight monetary control and a firm control of public expenditure.

I know that all of us on this side of the House bitterly regret the recent rise in inflation to what we all recognise are unacceptably high levels and are heartened by the determination so strongly stressed in the gracious Speech that all necessary measures will be taken to reduce inflation. This must be regarded as one of the principal tasks of the coming year.

The gracious Speech to Parliament last week emphasised our Government's commitment to work with our European Community partners to complete the single market in 1992. This is a commitment that I believe is warmly endorsed by most sectors of industry. This commitment, however, imposes upon our industrialists a prime responsibility, one from which I know from my own daily experience working with the engineering sector of British industry they will not shirk. To survive and prosper within Europe those of us working within industry must redouble our determination to improve all aspects of our productivity and to invest positively in those technologies and new processes which will set us apart from the competition.

The noble Lord, Lord Williams, lays stress in his amendment on the need to strengthen our manufacturing base. This is acknowledged, but we must not forget that a manufacturing industry that is fundamentally overmanned, as ours was, must go through a period of shrinkage in order to establish a firm foundation on which to build. That process is now over, but for us to move forward with greater speed all aspects of our productivity must be strengthened, partly, as I have said, by investment in new technologies but partly also by all of us working that bit harder.

A headline in today's edition of The Times states: Car unions given deadline for £200m engine plant". The article concerns General Motors and its new plant which will be established either in Cheshire or somewhere in West Germany. For six months negotiations have taken place to decide whether or not an agreement can be reached to end the threat of wildcat strikes. Perhaps we should work a little harder.

In addition to this, I wish to highlight two other areas where I feel that we within industry must concentrate our efforts if we are to move forward significantly. First, I wish to highlight the increasing need to deploy a significant resource into all areas of industrial training and retraining. When I spoke in the debate of my noble friend Lord Joseph on productivity I quoted from some of the published international comparisons. From these it is clear that many of our competitors overseas have succeeded in drawing away from us because they have been more committed to providing their industries with properly trained manpower in the right quantities and at the right time.

A second and probably even more important area is the need for us to concentrate even more rigorously than in the past on all areas of quality within British industry. We have heard much about the quality approach to management in the industrial sector. I certainly believe that this is one single factor that is very important. If we are to grow and prosper within the single European Community we must focus on quality. Total quality means concentrating on not just product quality but on the quality of every aspect of our performance within the industrial sector.

If the amendment of the noble Lord, Lord Williams, had been couched in terms suggesting the importance of total quality, there are many on this side of the House who might have followed him. If we are to prosper in Europe, as I believe we shall, it is that tradition of quality, stretching back to our industrial roots in the 19th century, that will be the key to our continued success.

We should recognise that that is an area in which we are already some way down the road. Having visited many leading British industries, I should like to acknowledge from my own experience the great progress that is being made and has already been made in that important area.

The gracious Speech also laid emphasis on our Government's willingness to play a full part in multinational negotiations designed to liberalise international trade. Those negotiations are to be welcomed as they can only be to the benefit of a strengthened and revitalised industry in Britain. Within that general framework there are many opportunities for sweeping away the featherbedding provided by a variety of national mechanisms prevalent in many countries of the European Community, and indeed the world, which allow weak and uncompetitive industry to cower behind tariff barriers and kindred distortions to free and unrestrained trade. Hence negotiation should be the order of the day and not recourse to anti-dumping actions under GATT, which in the end may only increase tariffs and subsequently costs.

In that regard, like my noble friend Lord Caldecote, I should like particularly to single out the efforts of our European Commissioner, Sir Leon Brittan, who has already done so much to sweep away the various techniques used by member nations of the European Community to shield unfairly some of their national enterprises from the beneficial effects of industrial merger.

We in the United Kingdom should be proud that it was our Government that stood in the vanguard supporting those important and reforming changes. It is indeed refreshing to note that when we are challenged, as we so often are, it is the United Kingdom which so often takes a lead in sweeping away the distortions to liberal international trade that have been so jealously fostered by many of the European nations which claim to be better Europeans than ourselves.

I have made it clear from my remarks that I am much encouraged by the gracious Speech and that despite our recent recessionary difficulties I believe that we are poised to take advantage of the significant progress that has already been made by a newly revitalised British industry. Our Government have committed themselves to fostering the conditions necessary to achieving sustained economic growth. We have heard a firm commitment to reducing the cancer of inflation. I am convinced that we as a nation, and more particularly we within the British industrial sector, have the will and determination to move forward and prosper no matter what the prognostications.

7.13 p.m.

Lord Taylor of Gryfe

My Lords, before I discuss the general theme I should like to deal with two particular points on which I seek an assurance from the Government. Both have a substantial impact on our balance of payments, which is a matter which has concerned us this afternoon. The first was referred to by the noble Viscount, Lord Caldecote, and is the present position of the Government in relation to their review of the facilities of the Export Credits Guarantee Department. I should like an assurance from the Government that as a result of that review British industry—and in particular heavy industry and the plant manufacturing industry which makes a remarkable contribution to our export activities—will not be disadvantaged against its competitors by any damaging change in the provisions of the ECGD.

The second matter is one which is close to my heart and also has some relevance to our balance of payments. Noble Lords may or may not be aware that this country spends £6.8 billion per annum on the import of timber and timber products. Correction of the balance of payments is not only a matter of boosting exports; it is also a matter of saving imports. The Government have changed the fiscal arrangements for forestry over the past two years. As a result the planting of trees in this country has fallen from 25,000 hectares before the fiscal changes to 13,500 hectares this year. That has a very serious impact on our future balance of payments. The effects will not be felt immediately because trees take a long time to grow. Nevertheless, I draw that point to the Government's attention in the hope that they will look once more at the fiscal arrangements which might encourage tree planting in this country.

I want now to talk about the general subject which concerns me. If the SDP in this House had the time and capacity to produce another amendment to the gracious Speech it would have read something like this: That the Social Democratic Party deplores the absence of any reference to a positive regional policy in the United Kingdom". There is no serious reference in the Speech to regional development. It is high time the Government realised that the North-South divide persists. It is a threat to Britain's national unity and is unhealthy and anti-social. I speak from the experience of Scotland and I can say that there is a threat to the unity of the United Kingdom when people in one part of the country feel seriously disadvantaged.

I shall quote one or two statistics to justify that claim. Real investment in the period from 1982 to 1985 fell by 5.4 per cent. in Scotland; in the United Kingdom as a whole it increased by 7.7 per cent. Personal disposable income in the South-East was £5,137 per head; in Scotland it was £4,292. Projections of the National Institute of Economic Research for the period from 1986 to the year 2000 expect growth in the South-East of 8.1 per cent. and in Scotland of 2.6 per cent.

Last year, 15,000 young people left Scotland and emigrated, most of them South of the Border. In 1975–76 the figure was 5,800. That is a very serious matter because, of the people who emigrated, 89 per cent. were between the ages of 15 and 44. Young people who are trained and learn skills in Scotland, benefiting from the excellent education facilities which we have, cannot find work in their native country. Although many of them would like to live in a country where the quality of life is so much superior to that in the South-East of England, there are no prospects for them and so they make their way South.

The cost of all that in social and economic terms is quite sizeable. Perhaps I may quote some figures which show the cost to the taxpayer of the congestion in the South-East. British Rail's subsidy to the South-East network is £205 million per annum. That subsidy to the network in the South-East, even with its inadequate services, is 28 per cent. of the entire national subsidy to British Rail. London Regional Transport receives another £295 million. The London weighting allowance for civil servants accounts for another £150 million. The Autumn Statement, which we heard recently, will put another subsidy of between £400 million and £500 million into transport, most of it in the South-East. There are 2,900,000 mortgagors in the South-East. That is 36 per cent. of the United Kingdom total, but they receive 42 per cent. of tax relief. The concentration in the South-East, with all its social consequences and its cost to the taxpayer, is something we cannot afford.

The recent Autumn Statement announced that a further £830 million should be given to London Docklands in the next three years. Noble Lords will not be surprised to see the headline in the Glasgow Herald which states that the amount of money that is put into this little corner of the South-East dwarfs the total amount given in aid to the whole of Scotland. Is it any wonder that there is a deep sense of resentment on the part of the people who live in that economically disadvantaged area? So the bill comprises British Rail and London Regional Transport subsidies, London weighting for civil servants and mortgage tax relief. With the high cost of housing in the South-East, the amount taken in mortgage tax relief (the figures that I gave were for 1985–86) will certainly increase.

There is therefore a strong economic case, apart from a social case, for taking positive action which will redress that balance. There is something wrong with society when local authorities in London must send children home because there are no teachers and then decide to subsidise housing in the South-East in order to encourage teachers to come down here when schools in Scotland are now being closed because of lack of numbers. There is something unhealthy when there are trained people in Scotland who want to work and live there, but who find that they must come and offer their services in a heavily congested South-East.

What is to be done? The Government changed their policy two years ago. They decided that they would target regional aid rather than have regional development grants. I regret to have to say that that has resulted in a dramatic fall in claims for regional assistance. It is time for the Government to examine whether their new strategy in regional development grants is working. The number of claims is falling substantially under the new regional assistance scheme as compared with the old regional development grants scheme.

The trouble with the Government is that they have begun to believe their own propaganda. So much has been spent by the department of the former Secretary of State for Trade and Industry, the noble Lord, Lord Young of Graffham, on creating enterprise groups and enterprise initiatives and on targeting enterprise; yet, when one looks at the figures, there is a substantial lack of enterprise achievement as a result of the cutting of regional aid.

At this hour in the debate, I simply draw the Government's attention to the fact that this serious social evil and totally uneconomic underutilisation of resources in the North is related to overheating in the South-East. I look forward to the Government revising their regional policy so that it may have a greater impact in redressing that balance.

7.25 p.m.

Lord Coleraine

My Lords, in his interesting television interview with Mary Goldring on Sunday, my right honourable friend the Chancellor of the Exchequer affirmed that his first priority was the control of inflation—to bear down on and to bring down the rate of inflation. I can well understand that noble Lords on the Front Benches opposite may perfer to target their amendment today on the manufacturing base and the trade gap. Were they to be in power again, we should surely be right to fear controls and high spending policies, bringing high and growing inflation followed by stop measures leading to the threat of recession and unemployment, avoided by intervention to secure the expansion of the manufacturing base to be measured as much in terms of the number employed as of volume of manufacturing production or productivity.

On these Benches, we must continue with the Government to be concerned with inflation. Having said that, I press the Government to take the view that the best attitude to inflation is not that it should be brought down or borne down on, but that it should be squeezed out of the system—a phrase of which we have not heard much recently. It is not enough to intend that inflation should be contained or brought down to an acceptable rate if that rate will ultimately debauch savings and the currency as effectively as an unacceptable rate. What is more, such a policy of limited measures will certainly not lead to the rate of inflation coming down enough to become broadly proximate to that of our European partners, which, I am told, is a necessary precondition of our adhering to the exchange rate mechanism of the European monetary system.

My right honourable friend's immediate predecessor, Mr. Lawson, was interviewed a few weeks ago by Brian Walden. I was particularly interested by what he said at the very end of the interview. Mr. Walden chided him with having boosted demand, to which the former Chancellor replied by pointing to the biggest Budget surplus ever. Mr. Walden pointed out that the money to boost the demand had entered the economy somehow. In answer to that, my right honourable friend said: Yes, it did—as a result of financial freedom and the great upsurge in confidence there was in the country, we got people borrowing on an enormous and unprecedented scale". My right honourable friend then contrasted the £4 billion of tax cuts in the Budget for which he had been responsible with the £40 billion of increased personal borrowing. It was the latter which fuelled the demand. Clearly, my right honourable friend took the view that that was to be compared with the natural disaster of October 1987.

Surely credit did not expand like a balloon because of a great upsurge in confidence so much as because there was availability of credit to finance a Gadarene rush into housing—a rush that had to take place before house prices went through the roof. It was not so much confidence as dreams of everlasting Christmas.

At some time after the stock market crash of 1987, in the easier monetary conditions then introduced, with the relaxed Budget following and with the realisation—or at least the hope—that world markets might after all have the ability to control sudden panics, there was that rush into house purchase. In my opinion that inflation of capital values got out of hand because of expectations that house prices would keep going up for ever. Those expectations arose in large measure because of the tax and other incentives to home ownership which constitute the undesirable and unstable framework in which the housing market operates and has operated for many years and under all governments.

That kind of capital inflation is a dangerous drug. In the past two years we have been shown that it carries with it the wholly undesirable consequence that in London, the South-East and other parts of the country those who buy their first homes are obliged to take on mortgages with colossal annual interest commitments because they must have homes or get on the home ownership rocket before it takes off. That was brought home only too clearly by Miss Goldring in her interview with the Chancellor when she said: There used to be a very steady relationship between house prices and incomes. It was something like three and half times earnings. The last few years, this jumped up by two-thirds. Now, it seems to me that you will need to have house prices falling, or at least static, for something like three years before you get back to what we could call normal". In reply my right honourable friend the Chancellor drew attention to what he called "changes in the equation". He said: I think there has been an increasing demand, an increasing expectation of home ownership, particularly amongst younger people; an increasing tendency to make greater sacrifices for home ownership, particularly amongst young people. It is now a national expectation to own one's own home in the way it wasn't 20 years or so ago. People are prepared to devote a larger proportion of their income, particularly since they now have larger net disposable incomes than before, to home ownership". I find that analysis and way of describing the sacrifices and gambles which young people have to take in order to get a foot on the housing ladder, however true it may be, both distressing and deeply disturbing. It describes the parlous situation of those who took the plunge and bought houses in the past two years. I shall not dwell on that matter in this debate. However, I find even more disturbing the fear on my part that the kind of situation that we have now will only persuade the Government, if they need persuading, that inflation in house prices is a desirable end on its own account. I have seen that case argued. I thought that I caught a whiff of it in the conversation between Miss Goldring and the Chancellor.

My right honourable friend seemed to be saying that the rise in house prices had got out of control but that prices were now stabilising; the present flat state of the market, though painful and distressing, was a sign that the anti-inflationary policy—the interest rate policy—was working and that for the first time buyer this was not wholly a bad thing. However, I had the feeling that the natural order of things, to which ultimately a return would be made, was one of increasing house prices and that only increasing house prices would once again float the new, more deeply financially committed generation of home owners off the rocks and launch the next generation.

What is more—I come back again to the specific reference of Mr. Lawson to the £40 billion of increased personal borrowing—the distortion of financial resources through artificial inducements to home ownership helped to trigger the expansion of credit and call down the present monetary policies and high interest rates. Those policies themselves tend to encourage excessive wage demands and then excessive pay awards on the path to recession and unemployment. Alternatively, they lead to profound and painful social dissatisfaction.

It is my firm belief that incentives to house purchase not only fuel capital inflation but also fall quite outside proper Conservative policies of fiscal neutrality and giving to everyone the right not to be subjected to social engineering in the exercise of free choice. They inhibit capital formation in other socially desirable directions than bricks and mortar. They provide a framework in which house renting cannot thrive and so they damage mobility. They also severely limit the tax base.

It is with a reference to the tax base that I end my remarks. There is no objective justification for the exemption of personal residences from the capital gains tax net. At the same time it would surely be inconceivable to tax homes as other capital gains are taxed now. I should like to think that a moment's reflection would lead to the conclusion that there is something wrong with capital gains tax. In my view the problem is that the tax ought to be an amalgam of nine parts a sumptuary tax imposed on capital spent as income with one part perhaps a tax on capital. However, it quite clearly fails to be anything other than a completely random tax on capital, incurred as often as not when investments are merely switched.

In my view the minimum that is needed is to replace the tax exemption on personal residences with a new regime involving the taxation of gains on homes, but allowing roll-over relief where the sale of one home is only a prelude to the purchase of another. Better and fairer would be a regime under which a person's capital assets, his home and his stocks and shares, were ring-fenced. Those investments would then only be subject to capital gains tax when they were effectively taken out of the ring-fence and available to be spent as income.

The chairman of the Stock Exchange recently made a strong case to the Chancellor for some such scheme to be introduced in relation to stocks and shares. I do not wish to comment now on that scheme except to say that I accept the argument that a capital gains tax on switching investments must be wrong. I add that a capital gains tax which is unfair as between taxpayers, which unreasonably distorts the housing market and personal choice and which contributes to inflation, needs a radical rethinking.

7.36 p.m.

Lord Dormand of Easington

My Lords, hardly a week goes by without one hears a boast from the Government, both in this Chamber and outside it, that they have enjoyed the confidence of the electorate for more than a decade. Even allowing for their poor showing in the opinion polls in recent months, the Government are entitled to claim some credit for having won three consecutive general elections.

However, it seems to many people that there is now another side to the argument. When the Government say, as they do constantly, that things were very bad in 1979, we have to ask: How long must it take to put matters right? If it has not been done in 10 years, then how long will it take? That is the question that many people are asking. I ask noble Lords to consider how old they were 10 years ago and what they were doing then. In my own case I must say that it feels like another age.

Nor is it only a matter of any decade. It has been a decade in which this Government had the blessing of literally billions of pounds from North Sea oil. That is a bonus which no other British government have enjoyed—certainly not in this century. This debate could be about the sheer waste of that money over the past 10 years. Indeed, many of the problems raised in the debate arise in part at least from the profligate spending of that heaven sent fortune. It is almost unbelievable that, with 10 years of absolute power and North Sea oil thrown in, this country, as has been said many times in this debate and no doubt will be said again before half past ten tonight, should now have a record balance of payments deficit, the highest interest rates in Europe and the highest inflation rate in Europe. Moreover, let us not forget, because I think they are in danger of being forgotten, the unemployed men and women of this country. Even with the fiddled figures—and they have been fiddled something in the order of 15 or 16 times—unemployment is higher now than it was in 1979.

There are a number of reasons for the present position but I believe that the most important of them was the policy of the last Chancellor of the Exchequer. Nigel Lawson—for whom I have a very warm personal regard—has been a disaster. I find it deeply puzzling why such an intelligent and experienced person should make such a fundamental error in expanding the economy when the country's industrial base has been so seriously eroded. That fact has been repeated several times already in the debate. I have come to the conclusion that the last Chancellor was so determined to reduce the tax rate—something he had advocated for many years—that he was prepared to take a risk which has produced so dire an effect on the country.

When the problem began to hit us, we were told that most imports consisted of capital goods necessary to rebuild our industrial base. The last two sets of figures show that that is not correct. Imports are largely consumer goods. Indeed, when I looked at the figures recently, the proportion of investment and production goods in the trade deficit was exactly the same as it has been for the past 20 years.

In the parlous state of the country's economy there are many deficiencies requiring attention. I wish to speak on two aspects which cause me concern. They are matters on which I believe the Government are making serious misjudgments. My contribution to the debate will not be a broad sweep concerning the economy of the country, on which we have had some excellent contributions. My contribution relates to two aspects of the nuts and bolts of the economy. Your Lordships may decide later that such comment is an under-rating.

I refer to training. I need hardly remind noble Lords that the lack of a suitably trained workforce is presently the biggest bottleneck in the industrial scene. But—I say this as an aside, but it is of considerable importance—it is a contributory factor to wage inflation. We know that businessmen will go to great lengths to obtain and retain suitably qualified personnel. My main criticism of the Government's plans is simply that they will not work. They are to rely on voluntary schemes under a privatised system. The employment training programme and the training and enterprise councils will probably succeed in some instances. But it is far too important a matter to leave to chance. Even at this early stage there is considerable evidence to show that such schemes will not work.

Two weeks ago British Oxygen refused to sign a further contract, claiming lack of government support. Computer companies representing 200 firms are to meet soon to decide whether to wind up the Computer Services Industry Council through lack of support. I have a number of further examples. However, perhaps a report commissioned by the training agency says it all: The scheme was launched in haste and uncertainty. There was no adequate information on why people left the scheme and the reasons given by those in charge of ET showed a poor understanding of the seemingly legitimate concerns of the client group whom they serve". I repeat and emphasise that that was a report from the training agency.

On 16th October the Guardian stated: A review of the Government's £1.45 billion Employment Training Programme has been launched by Ministers after its poor record in its first year". If time permitted I could comment on the considerable criticism being made of the quality of some schemes and of some trainers. It cannot be emphasised too much how important good quality trainers are. Yet the Government pay virtually no attention whatever to this aspect of the programme. It need hardly be said that adequate premises and facilities are of fundamental importance. I visit such places, as I am sure do other noble Lords. Apart from accounts which one reads, I know that there is a wide variation in what is provided. Surely, if we are to attain the standards about which we all speak, such provision is absolutely basic. That aspect too smacks of the haste which we see in all the Government's training proposals.

I fear that my remarks also apply to the training and enterprise councils. I shall therefore not repeat them except to say that the Government's obsessive belief in the ability of the private sector to provide what is required is even more misplaced when applied to TECs.

Whatever the criticism made of government's training schemes in the past, there was at least a degree of what I might call acceptable compulsion in getting industry to provide effective training. I say "acceptable compulsion". The Minister, or at least some of his colleagues, will recall that there was also a genuine desire on the part of many business people to "go the second mile" (if I may use a biblical quotation) in accepting that compulsion. I find it of considerable interest that the Government have in the past month agreed to the setting up of two' statutory training bodies. It smacks of the former system that the Government have been so much at pains to criticise. Those training bodies are for engineering and construction, perhaps the two biggest industries in the country. Is that not an admission that statutory bodies have a role to play?

However, we are now dealing with a voluntary scheme. We are entitled to ask the crucial question: how will the active co-operation of business and industry be achieved? We have not heard anything about how that is to be done.

By the very nature of things, there will be successes and failures under such an arrangement. With the challenges facing our economy, not least that of 1992, this country simply cannot afford failure in such a vital field. George Bernard Shaw once said, "You can get used to anything. Therefore you have to be very careful what you get used to". Truer words were never spoken. I become scared that we shall get used to second and third-rate training which does not even begin to match standards already being achieved by our competitors.

My second concern relates to research and development. Noble Lords will know that, like training, this is of fundamental importance to the progress and prosperity of our country. We wish to know in the clearest possible terms what the budget for research and development is to be for the next few years. I ask because it is an item which, although important, seems to be lost in the various sets of figures. According to the official review of government-funded R&D published on 25th October, there was a reduction overall from £4.8 billion in 1986–87 to £4.6 billion in 1987–88. For those who, like me, are very poor at quick arithmetic, that is a reduction of £200 million. The Government's policy seems to be to hold current funding as a proportion of national income. That seems a reasonable proposition, but it ignores a very important fact. I am sure that some noble Lords will be aware of it. I refer to the very considerable cuts made in research and development during the earlier years of this decade.

I have just referred to government-funded R? but of course R&D is also carried out within, and by, industry. Full surveys on expenditure on research and development in UK industry are carried out every fourth year by the Government. The last was carried out in 1985. I ask specifically whether the Government are carrying out a full survey this year, which is a fourth year. I hope so and I strongly request that a detailed analysis be made and published as soon as possible. My hope is that the shortfall in Government funding is at least being made up within industry, although I am pessimistic about that.

In a recent statement the Secretary of State for Trade and Industry gave the impression that he intends to cut the amount of money available. Having regard to the importance of the department, that means that we shall face the 1990s with fewer government resources for future technology than any other advanced industrial nation in Europe.

I am concerned also about the content of the Autumn Statement, referred to by another noble Lord. There was no specific reference to R&D. However, the implication appeared to be that it will take a back seat for some time. One also hears whispers that the amount will be reduced. I hope that the Minister will provide information about that. When I read that the Government have ended support for the fibre-optics R&D scheme, closed down the opto-electronics support scheme and the micro-electronics support scheme and are now trying to prevent a European collaborative programme in the most advanced technologies, I shudder for the future of those 21st century essentials. We face the 1990s with fewer government resources for future technology and new research and development than any other advanced industrial nation in Europe and most in the world.

According to the official figures given by the Chancellor in his Autumn Statement last week, the gross domestic product of the British economy grew by 5 per cent. in 1988. It is expected to grow by 3 per cent. this year. As a result of the Autumn Statement, the official forecast is that it will reduce to 0.75 per cent. in 1990. It is now obvious that it will take a long time for our GDP to match the level of our European competitors. I submit that, if we do not get right both the training of our workforce and the application of research and development, it will take even longer.

7.52 p.m.

Baroness Carnegy of Lour

My Lords, the noble Lord, Lord Dormand, criticised many aspects of the economy. As regards training, he said that what the Government have been doing appeared to be worthy of commendation but that he was not happy about the future. I remind him that the Government's previous politics on training were drawn at a time when many people were unemployed. Employers could not be expected to be involved in paying for that training. Now most of those people are in employment or are potential employees. It appears to be nothing but sensible that employers should be involved in putting their money where their mouths are, as they have been in Germany for so long and with great success. I hope that the noble Lord will persuade his party not to try to frustrate the training schemes that are being designed for Scotland, towards which it is showing some allergy.

I turn to Scotland. Sadly, the noble Lord, Lord Taylor, is not now in his place. He spoke of the North-South divide and drew the conclusion that "regional policy", as he called it, was the answer. I hope that he did not mean the old style over-encouragement of firms to go where they do not want to go. That has been tried extensively in Scotland and there are plenty of examples which demonstrate that it usually does not work. The Fort William pulp mill, with which the noble Lord was doubtless familiar, was an example: it is no longer there. It is important for the whole country, not least for Scotland, that location in the South-East should be made less attractive to business. However, I hope that it will be left to the market to decide how to respond. Firms, not governments are best equipped to decide what to do.

Scotland is not doing so badly. During the past two or three years, improvement has occurred at an accelerating pace. It is interesting to note that in 1987 Scotland's gross domestic product per head, excluding oil-related activities, was exceeded in the UK only by the South-East, East Anglia and the East Midlands. During 1988 manufacturing productivity in Scotland rose by 6.4 per cent. against a UK figure of 5.4 per cent. In 1988 Scotland's manufacturing exports rose by 7 per cent. in real terms as against 2 per cent. in the UK as a whole.

Enormous changes have taken place in the nature of our industries. That is extremely important because Scotland had a heavy dependence on the old heavy industries where productivity was low. In Scotland electronics now dominates manufacturing. It represents 16 per cent. of Scotland's GDP, its output being four times that in 1979. The industry employs 43,000 people—that is, 12 per cent. of the Scottish workforce. Interestingly, that is only 6,000 more than 10 years ago.

After several leaner years, whisky production, which is most important to Scotland, is again growing fast. In 1988 exports were up 13 per cent. and the improvement continued in 1988–89. The financial and business sector in Scotland is a great success story. Approximately £100 billion of investment funds are now managed in Scotland, including 10 per cent. of the UK unit trust market and 20 per cent. of the life assurance market. The noble Lord, Lord Williams, poured scorn on the contribution of service industries to the economy. I do not believe that the 183,000 people who work in the financial and business sector in Scotland will agree. Tourism, hotels and catering have also grown enormously. Ravenscraig's performance in producing liquid steel now compares well with the best in Europe.

Great changes in our industry and productivity have been made in Scotland. I do not know what the future will hold if the higher rate of tax is increased to 50 or 60 per cent; if the basic rate of tax is increased (I do not know whether that will happen under a Labour government); of if, as the Labour Party promises in its policy review, there is an addition to income tax to pay for an assembly tax. That assembly tax is now a commitment in the Labour Party's policy review.

The overriding priority for Scotland, as in the rest of the UK, must be that the speed and nature of growth in the country as a whole is such that inflation is contained. The noble Lord, Lord Dormand, accused the previous Chancellor of the Exchequer of expanding the economy when he should not have done so. He appeared to attribute that to the reduction in income tax. In a year during which there was £54 billion-worth of growth there was only £4 billion worth of reduction in tax. That does not appear to account for very much of the expansion.

Nevertheless, since the Stock Market collapse in 1987 it has become clear that there are now new inflationary forces at work in the economy. They are forces which keep spending going when traditionally it would have been expected to slow down. I believe that those forces must be recognised and understood by business, the unions, people at large and the political parties. To give an example, a number of noble Lords have talked about the costs of congestion. Travelling every week, as do I and many other noble Lords, between one of the least congested parts of the United Kingdom and the South-East, which is one of the most congested, one cannot but notice the growing contrast not just in the quality of life but also in the cost of living between an area which is congested and one which is not.

That congestion costs a lot of money is fairly obvious. Limited space and scarce land mean expensive housing or expensive commuting to where housing is cheaper. Traffic congestion is expensive in terms of time and petrol and adds to business costs. Widening roads to relieve congestion costs money and creates more congestion still.

What is less obvious is the effect of that expensive congestion in some parts of the country when it is combined with our continuing habit in the private and public sectors of national wage agreements. Such wage agreements allow for the higher costs in congested areas but they are paid to everybody, whether or not they live in congested areas. The noble Lord, Lord Stoddart of Swindon, said that fair wages do not matter as regards inflation because they are covered by productivity. However, when wages are increased for some people because of the congested area in which they live but are paid to other people in uncongested areas, they are not covered by productivity. It seems to me that that must be an increasingly inflationary trend.

We certainly must do something about congestion, especially in London. However, in the short term—and it can happen now—we must get away from national wage and salary agreements which are higher than they need be in some places because of the high cost of congestion in others. That creates unjustly high wages and salaries which are inflationary.

It is incumbent upon all our political parties to do better than they are doing at present on this matter. It is surely important to help people understand the trends and problems of inflation. I hope that this evening, instead of moving two reasoned amendments which have given rise to very interesting discussion, noble Lords opposite will support the Government and the gracious Speech because of the overriding importance of the issue of inflation.

8.3 p.m.

Lord Mountevans

My Lords, perhaps I may bring the debate down to a lower level because I propose to defend duty free. To defend duty free in the context of the single market is potentially to defend the indefensible.

The gracious Speech makes reference to Her Majesty's Government's commitment to the single market. The noble Earl the Paymaster General touched upon the single market in his speech. I am sad not to see him in his place at present because it would have been fun to recall the time three or four years ago, when he and I did some work on Sunday trading and duty free. Quite unlooked for, the noble Lord, Lord Boyd-Carpenter, rightly touched on the taking of package holidays—something in which we indulge in this country—as a yardstick of the nation's affluence.

I believe that I have several reasonable grounds on which to raise this matter; for example, the proposed abolition within the single market of duty free and its replacement by ever increasing tax paid allowances. The abolition of duty free in airports and on ships has been the subject of two major surveys, one by the Netherlands Economic Institute and the other by Coopers & Lybrand. I have dug up many pages of figures. I do not propose to use them this evening but I should like to point out that if duty free is abolished within the EC a modest estimate is that UK airport landing fees will increase by some 16 per cent. The worst estimate is that they will increase by 42 per cent. Air fares within the EC will increase by perhaps 1.5 per cent. A charter ticket or charter package—and I come back to the comments of the noble Lord, Lord Boyd-Carpenter—might increase by 5 or 10 per cent. Taking all those matters into consideration a package holiday price might increase by 3 per cent.

On their own, those are no great sacrifices and do not create any particular problems. I expect that the price of toothpaste has increased by 3 per cent. in the past year. However, we are not only looking at the abolition of duty free or at one factor in isolation, because within the concept of the single market there is also the proposal to impose VAT on transport. That would put 5 or 10 per cent. on the cost of air fares. Of course, there is the EC package holiday directive which would put 5 to 10 per cent. on the cost of a package holiday which already includes the air fare, airport landing charges and all the other matters that have been mentioned.

Outside the single market, there is the CAA's very laudable £600 million investment programme in air traffic control facilities. In all fairness, that sum must be passed straight on to the customer. We cannot expect the nation as a whole to subsidise our wish to travel by air transport. There is also the as yet unknown cost of the aviation and maritime security Bill which I believe will receive its First Reading in your Lordships' House early next month.

Suddenly the cost of travel, be it for business or leisure, will go through the roof if those figures are compounded or even if the lowest figure is taken in each case. That does not seem to be a totally happy thought as we approach European tourism year which starts on 1st January 1990.

I could continue in that vein but I am trying to push on because I believe that the debate has gone on rather longer than we had all hoped this evening. Thanks to the Government's policies over the past 10 years, we have a very good airport development programme both for privatised and municipal airports. One of the reasons for that is that British airports lead the world in maximising the income they can receive from a passenger through duty free sales. Funnily enough, that means that duty free sales—and defending the indefensible which I mentioned at the outset of my remarks—are a quite enchanting source of private investment in our transport infrastructure.

As noble Lords will know, private investment in our transport infrastructure is a subject fairly close to my heart, as it is to Lord Ezra's, who I am sad to see is no longer in his seat. I would hate to see the progress we have made in developing our airports sacrificed on the altar of the single market.

So far I have spoken about aeroplanes, but my comments also apply to shipping. I could give distinctive examples in the shipping industry which illustrate my point. At five o'clock this evening a ferry sailed from Harwich to Esbjerg in Denmark. Probably 50 per cent. of its passengers were Swedes, Norwegians or Danes transiting under the single market concept which I am discussing into EC countries and thus still being entitled to duty free. At certain periods of the year, that ferry runs on the freight load and the car deck. At other times of the year—especially the tourist season—it runs on the fact that it is full of passengers. We travel abroad and others come to visit us. We have a very successful tourist industry. So, at that time of the year it runs on fares and—if I can mix a metaphor—on diesel. However, in the winter that ferry really runs on duty free; that is, the ability for people to shop cheaply abroad.

I now refer to Geneva Airport which some of your Lordships may know. One alights from the aeroplane and is faced with a choice: one can either go to France or to Switzerland. Again, if we take the single market route, I can see enormous problems. As regards shipping, arguments are being advanced by some of our British ferry operators that because of the way in which the industry is financed and its dependence on duty free particularly in the off season, we may no longer be able to liberate the Falklands if we abolish duty free.

I could go on to speak of the international trains, which British Rail must announce under the Channel Tunnel Act next month, and the Eurotunnel shuttles. They are all, to a certain extent, dependent on duty free. Duty free becomes a vehicle for investment.

I think I should draw my remarks quickly to a conclusion. I am running foul of my lady convenor's golden rule that if you cannot say it in seven minutes you should not say it at all. Duty free is a pleasure. I carried out a straw poll in the guest room this afternoon. No one was failing to use duty free. People look on it as a pleasure. It is something that starts the holiday or the business trip. It smooths the hassle of going through immigration.

In theory, under the single market we shall have no immigration or customs controls. However, in a Written Answer in another place last month Her Majesty's Government reminded us of their belief that the Schengen proposal will not stand up in the timescale involved. Our German, Benelux and French friends will not be able to abolish the physical frontiers by the end of next year, which is the target they have set themselves. One has to ask how long it is going to take to sort out all the single markets.

I look to the Government for three things, one of which—again defending the indefensible—is perhaps impossible. My ultimate choice will be to defend duty free lest it be sacrificed in some smoke filled room a couple of years hence in return for an agreement on the support price of beetroot produced in France or something similar. Duty free is an industry to us. I am told that 20 per cent. of duty free sales are up-market Scotch. The Scottish whisky industry—as those noble Lords who enjoy the product will know—is very fragmented; it is a rural industry. If we lost that 20 per cent. of sales one might suddenly be talking about 5,000 people unemployed in a fragmented way all over Scotland. Distilleries only employ 30 or 40 people. As long as Her Majesty's Government continue celebrating—I agree we should celebrate—a 10,000 fall in unemployment in a given month, I can see terrible problems in a fragmented 5,000 unemployed suddenly being thrust upon Scotland.

If Her Majesty's Government cannot defend duty free, may I seek an equal field? I have deliberately stayed away from the proposed substitute for duty free—increased quotas of tax paid trade across borders. However, we know that although ideally there should be an equal field—there should be a harmonisation of duty and everything else—Denmark is seeking a derogation. We know that Ireland is seeking a derogation. We know that Her Majesty's Government or the Northern Irish have already put the Irish Republic in the courts because of the limits imposed upon the Irish Republic citizen going north to buy tax paid goods, not duty free. Will we get an equal playing field in the fullness of time? I have sincere doubts.

Finally—and I come back to airports' policy, the Government's achievements and deregulation—I would hope that whether they defend duty free or seek the equal field that I seek, Her Majesty's Government will remember their achievement in liberalising air traffic. Again we will lose out because we are so far down the liberalisation tunnel that there is not much scope for increasing it. If all these costs—the ones which relate to the single market and the ones which relate to domestic development—are suddenly put upon travel, I think we shall be in difficulties. Who will end up paying? I should take my hand out of my pocket, but it is your Lordships' pocket, it is my pocket and it is the customers' pockets.

At the end of the day both the people's elected representatives in the European Parliament and the civil service in Brussels should be reminded that duty-free is a little pleasure, a modest pleasure; it will not change the world. However, strike it out and I suspect that many voters will suddenly remember or begin to feel, that the Common Market is not all that they wished it to be.

8.14 p.m.

Viscount Massereene and Ferrard

My Lords, I shall be very brief. I have not spoken in the House on this subject for the past two years. However, I have decided to chip in for a moment tonight.

The most amazing man to me is the former Chancellor, Mr. Lawson. At one moment he was talking about growth, which he appeared to favour; the next moment he was putting interest rates up and up. I understand that that helps to keep inflation down. On the other hand, it has some rather unsatisfactory results. If interest rates are put up too high, you cannot have growth. If you borrow from a bank to have growth, the present bank rate has gone up so much as to make it quite hopeless. It takes us back to the late 1970s when interest rates were very high. The number of companies that went broke and the consequent unemployment were very serious.

The Prime Minister spoke about having a "property owning democracy". That is an excellent phrase. The more people who have property the better; I am all for it. However, the former Chancellor put up the interest rates so high that thousands of people who have been encouraged by the Government to buy houses—I understand you can now buy your council house for a third of the cost—are in great difficulty in paying the mortgage.

The new Chancellor, Mr. Major—now he has got a boost of£6 billion—should give a little of that to help these people, especially the young; perhaps a couple who have just married and find they cannot afford the mortgage interest. These people ought to be helped. I hope my noble friend the Leader of the House will dwell on that for two or three seconds.

The past three or four months have been an extraordinary time in politics in this country, completely without parallel. The majority of the £6 billion will of course go to hospitals and to health, which must come first. Some will go, I hope, to roads. Congestion on the roads of this country is becoming more and more serious and it will continue to do so if money is not ploughed into a solution.

There is a further point. Bearing in mind that we are indeed in economic difficulties, people would like to know where the new Chancellor obtained the £6 billion boost. In fact, for the past 10 years the Conservative Government have done extremely well by paying off a substantial part of the national debt. One never sees any thanks given for that. It has hardly been mentioned in the press. The Government deserve a pat on the back for that. However, presumably the Chancellor is using some of the accrued interest slightly to ease the brakes on the economy at the moment to help deserving causes, as I have pointed out.

Those were the two main points that I wanted to make, but I also wish to refer to the two amendments. The first amendment, tabled by the noble Lord, Lord Williams of Elvel, suggests that manufacturing industry in this country has been neglected, to put it mildly. I do not agree. I am joint treasurer for an organisation which is part of the National Association of Boys' Clubs. It is the Kent Association of Boys' Clubs. We gave a lunch to raise funds. It was successful and we made £6,000. Our guest of honour was Mr. Eric Hammond, chairman of the ETU. I had a long talk with him during which I mentioned the noble Lord's amendment. He said that he did not think it entirely fair. I did not want to get embroiled in a discussion on the unions because I had been talking on that subject for some years, but he said that there are—I am not using his exact words—some naughty boys. He said that in many cases the unions could improve in regard to helping industry. However, I do not wish to go further into that as it is a touchy subject.

The amendment tabled by the noble Lord, Lord Williams, also refers to the quality of life. I assume that by that phrase he means the standard of living. On the other hand, the phrase could easily be interpreted in other ways. It is a wide phrase. After all, one man's meat is another man's poison. To a certain extent industry is responsible for the environment. In fact, industry is being made to be far more careful in regard to pollution. The noble Lord covered both points in the amendment.

I cannot agree with the noble Lord, Lord Jenkins of Hillhead. I rather admired the speech of the noble Lord, Lord Stoddart. He was fairly hard on the EC. To a great extent I agree with him. While that is so, I am all for the right honourable lady the Prime Minister, who has made some very good points. It would be crazy in our present economic position to go dashing in, but if we go into the EMS we must do so from a position of great strength.

I have spoken for long enough. I am sure the Government will take the wisest course—one always hopes so—and that everything will end up satisfactorily.

8.26 p.m.

Lord Cobbold

My Lords, I am happy at the end of this debate to have the opportunity of supporting the amendment proposed by my noble friend Lord Jenkins of Hillhead. I agree with him that the role this country and this Government play in the building of the single market in Europe is crucial to the economic welfare of the country in the 'nineties. I also agree with him that there are relatively few major European issues and that one of them is most definitely the monetary system. It is on that subject that I wish to speak this evening.

I welcome the Government's commitment to stage 1 of the Delors Report. While recognising the timing difficulties of taking sterling into the exchange rate mechanism, I support the suggestion of a target date of 1st July 1990, as put forward by my noble friend Lord Ezra. However, I think we must look beyond stage 1. We must start to think seriously about the next stages in progress towards monetary union, for I do not believe that the full benefits of the single market in Europe can be realised with 11 countries. There is of course an existing currency union between Belgium and Luxembourg. I repeat: I do not believe that the full benefits can be realised with 11 currencies, 11 interest rates and 11 balances of payments.

The stage 1 EMS is a stepping-stone—a necessary stepping-stone but I am afraid perhaps also a slippery one. I do not disagree with the Government's view that stages 2 and 3 of the Delors Report are flawed. I see no reason why monetary union should necessitate binding Community rules on national budgetary policies imposed by Brussels. However, I believe that the Government's response embodied in the Treasury's recent paper An Evolutionary Approach to Economic and Monetary Union is less than adequate. It appears from the opening paragraphs that the Treasury has a very limited view of what it described as the objectives of monetary union. It lists only three; price and currency stability; lower transaction costs; and equal access to financial markets. It clearly does not share the view that a genuine home market for Europe's manufacturers and 320 million consumers can be realised only with monetary union.

There are other important objectives that are ignored by the paper. Monetary union, in fixing exchange rates, eliminates the need for a balance of payments between member countries, as in the case of trade between England and Scotland or Texas and California. Our present trade deficit with Germany would not have forced us to raise interest rates to current levels. Comparative advantage can be allowed to flourish as it never can fully in a multi-currency system. Reducing the proportion of external trade in a national economy reduces the extent to which the domestic economy can be buffeted by changes in the external balance; something with which we are very familiar in this country.

Another beneficial consequence of monetary union in Europe is that the proportion of trade with the rest of the world in the gross Community product is much less than the average in individual member countries. It is about 14 per cent.; a good deal closer to 12 per cent. for the USA and 9 per cent. for Japan. The lower percentage should permit more stable growth within the European "domestic" economy and an end to stop-go policies for this country that were so deplored by the noble Viscount, Lord Caldecote.

These benefits cannot be achieved under Delors stage 1 but only follow from monetary union and a single currency. The Treasury recommends an evolutionary approach. I have no problem with that. It rightly looks for a mechanism that will focus on the best performer in monetary management rather than on the Community average. It claims that freely competing currencies within an EMS free of all restrictions on capital movements will lead to, greater use of low inflation currencies at the expense of high inflation ones in both transactions and deposits". It may do so for transactions but is less likely to do so for deposits.

The reason is that within a managed exchange rate system like the EMS, there is a tendency for liquid resources to flow to the high interest rate, high inflation currencies which can undermine the domestic monetary policy of the recipient country. That is the problem identified by Professors Walters and Goodhart and the one that Mr. Lawson came up against when he was tracking the deutschmark in early 1988.

The stage 1 EMS, with unrestricted capital movements and with two major trading currencies—the deutschmark and sterling—will be a different animal and potentially less stable than the present deutschmark-dominated EMS buttressed by capital controls. It can work, but it will only work if everyone plays the game. A breakdown would be very damaging to the European economies and to progress towards the single market.

Let us suppose, as we all must hope, that it does work and that the Treasury's thesis that national authorities will pursue non-inflationary policies in line with the best in the Community is proved correct. Can noble Lords imagine that the "best in the Community" might be other than those of the Bundesbank? On present form the Bundesbank will inevitably be the de facto maker of monetary policy in Europe. Some would argue that it is already.

That brings me to the question of sovereignty and to the amendment moved by my noble friend Lord Jenkins of Hillhead. If the Government are prepared to see de facto dominance of monetary policy making by the Bundesbank, how can they argue at the same time that monetary policy making is a sovereign right of Parliament? There can be no doubt that Parliament has the sovereign right to raise taxes and to borrow money to finance public expenditure. But I am not sure that Parliament has, or should have, the sovereign right to lend itself money; to be both banker and borrower, or, in other words, to print as much money as it likes. Democratic governments do not have a good track record in money management. The temptation to print money for electoral purposes is hard to resist.

Therefore it is a matter of legitimate public debate whether the management of the money supply is better vested in an independent institution. I therefore welcomed the former Chancellor's recent statement in another place that he had put forward a fully worked out scheme for the independence of the Bank of England. That document should be published so that the subject can be freely debated.

I believe that an independent Bank of England would have a better chance of matching the discipline of the Bundesbank and therefore of giving this country greater credibility and a greater say in policy making and in day-to-day market operations in the evolving EMS of the nineties. What about democratic accountability? Is it possible for an independent central bank to be democratically accountable? The Treasury paper argues that at the European level this could only be achieved, by centralising the power of the Finance Ministers, requiring a European Finance Ministry and thus a European Government". That is the back-door federalism of which the Prime Minister complains. But there is a fault in the Treasury logic. A requirement for a European Finance Ministry and Government might perhaps be necessary with non-independent central banks, but is certainly not necessary if central banks are independent. The Federal Reserve system in the United States admittedly exists in a federal environment, but its forms of democratic accountability—regular reports to Congress and publication of minutes of open market committee meetings—could be transposed to Europe and to existing national and European parliaments. The mandate and objectives could be set by the Council of Ministers and an ultimate right of veto retained similar to the right of veto retained by the Secretary to the Treasury under Section 10.6 of the Federal Reserve Act. The subject needs to be properly debated. It is too important to be stifled by dogma.

A final word on how we might achieve a single currency for Europe. Here again the debate tends to be ritualistic. It needs some fresh air; it needs to be moved out of research and development and given to the marketing department. Can we not find a way of retaining our pounds, francs and marks? Given the political will I believe that this could be achieved by fixing exchange rates within the EMS at the appropriate moment at convenient whole number parities rather than at meaningless figures to six places of decimals.

The three key currencies in the stage 1 EMS will be the deutschmark, sterling and the French franc. The weightings of sterling and the French franc combined about equal that of the deutschmark. If France and Britain in the first instance could agree on bilateral monetary union within the EMS similar to that between Belgium and Luxembourg, they could fix the sterling-franc parity at 10 francs to the pound around which level the two currencies have fluctuated over the past 15 years, with the pound dropping through 10 francs only a few weeks ago. A common note and coin issue would then be possible with the franc equal to 10 pence.

To come into line with the deutschmark at a convenient level—which need not necessarily happen at the same time—would require a revaluation or a realignment of the deutschmark. A realignment is almost certainly going to be required anyway within the next two or three years, if not before. The next convenient rate for the deutschmark is 2.50 to the pound. That would fix the mark at 40 pence and four French francs, permitting a three-way common note and coin issue. For example, a £10 note would be interchangeable with a 100 france note or a 25 mark note.

These rates are not unrealistic and locking the three key currencies together within the EMS in this way would create a de facto European currency and would preserve three key monetary units. In my opinion, this would be far more attractive to the public than, for example, the rather anonymous ecu. That is only one suggestion among many possible ideas. My call is for the debate to be opened up and for this country and this Government to play a constructive part in it. To call for progress towards a single currency in Europe it is not necessary to be a federalist—back door or front door. It is only necessary to believe in the vital importance of the single market for the economic welfare of this country in the 1990s.

8.39 p.m.

The Earl of Onslow

My Lords, the noble Lord, Lord Cobbold, has touched on the whole basis of the difficulties of the exchange rate mechanism. On these rather scruffy bits of paper which I call my notes I have something to say to which I shall return later. The noble Lord also spoke about inflation, the Bundesbank, the Japanese Bank and the Federal Reserve.

I have a list of what all these have in common: Diocletian, Henry VIII, Pizarro, Barras, General Galtieri, the noble Lord, Lord Barber, Mr. Denis Healey and Mr. Nigel Lawson all increased the money supply. Diocletian did so with disastrous effects. Constantine then brought it back under control and there was no further inflation in the Byzantine empire for about 1,000 years. Henry VIII debased the coinage. Pizarro discovered silver in Peru and flooded the European market with it, with consequent inflation. Barras produced the assignats in the French revolution, with consequential inflation. We all know what General Galtieri did with his money supply and how it led to inflation in Argentina.

The noble Lord, Lord Barber, has been accused by my right honourable friend the Prime Minister of increasing the money supply. There was a slight increase in inflation in the early 1970s. Mr. Healey did the same and Mr. Lawson, I suggest, did the same as well. He tried to shadow the deutschmark in 1987. He was worried that the exchange rate would rise above three deutchmarks to the pound. Money was printed, inflation followed and house prices increased. People thought that because house prices had increased—they increased to an enormous extent in the South of England, where I live—they could then go out and buy things. Credit expanded and inflation followed.

It must follow that if one wants to keep inflation under control the money supply must be kept under control. I do not think it is possible to trust any politician, be it my right honourable friend, the noble Lord, Lord Callaghan of Cardiff, or anybody else. They all want to get back to Number 10 Downing Street.

Lord Callaghan of Cardiff

No, no!

The Earl of Onslow

My Lords, they like being in Number 10 Downing Street. They like being in office. They like the red boxes. So the temptation to bribe the electorate is totally, completely and utterly irresistible. I make no party political point. They have all done it. I can see my noble friend Lord Boyd-Carpenter grinning in happy reminiscence of it. The corollary of this is that we should have an independent, privatised Bank of England with a mandate or a royal charter requiring it to control the money supply. In that way the noble Lords, Lord Boyd-Carpenter and Lord Callaghan, or the future Countess of Finchley will not be entitled to fiddle with the money supply to try to get themselves back into office.

Lord Callaghan of Cardiff

My Lords, I must make it clear to the noble Earl, if he has not already realised it, that the advantage of being a former Prime Minister is that one is treated with the same respect as one had when one was Prime Minister but that one does not have the red boxes. One has all the advantages without any of the disadvantages. On the noble Earl's major point, will he take it from me that, having thought a great deal about this, I find a great deal of truth in it. I do not think that either the United States or the Federal Republic of Germany is any less democratic than the United Kingdom because it has an independent central bank.

The Earl of Onslow

My Lords, that is exactly the point I was coming to. To encourage an independent central bank with a duty to control the money supply would be extremely useful.

It is interesting to note that Australia, Spain and the United Kingdom have had the laxest monetary policies and have consequently the highest interest rates. Those interest rates produce high mortgage rates and high inflation. If they had a strict money supply, perhaps the value of their currencies would have gone down and the value of imported Japanese televisions and so on would have gone up. I cannot see people writing to their local Members of Parliament to complain about the increase in the price of video recorders. I know perfectly well that they write to their local MPs to complain about the increase in the cost of mortgages. I am arguing for a serious attempt to control the money supply.

At home I have an extremely pretty 18th century tithe barn. That tithe barn will hold a certain number of bales of hay. If I fill it to the roof with bales of hay the cost of storing bales of hay is enclosed in the tithe barn. If I put in one bale of hay the cost of storing it goes through the roof. The money supply should be treated like a tithe barn. It should be used to fill the tithe barn to the top. It should not be used for one bale of hay just to get somebody back to that smart address not a million miles away from here.

I have completed one part of my speech but noble Lords will now have to listen to another part. It is interesting to note that when Mr. Attlee was First Lord of the Treasury 7.5 per cent. of people's income was collected in income tax. Under my right honourable friend Mrs. Thatcher, 20 per cent. of people's income is collected in income tax. In 1950 income tax started at 99.8 per cent. of average income. It now starts at 37.5 per cent. of average income. At the same time people are entitled to supplementary welfare payments. This produces a rather unattractive poverty trap.

Our present tax system is highly regressive. A married man with an income of £14,000 a year, £1,000 of mortgage interest relief and no perks pays 23.3 per cent. in tax and national insurance contributions. A man on £50,000 a year who receives an additional £20,000 of pension fund payments and other perks, £10,000 worth of shelter and £3,000 mortgage interest relief will pay 15.7 per cent. A man with an income of £150,000 who receives £50,000 of perks and £80,000 of shelter will pay 12.1 per cent., including national insurance contributions. Those are not your average Ken Livingstone, Karl Marx, Bernie Grant imagination figures from the funfair somewhere down the Walworth Road. The figures are produced by the Institute of Economic Affairs, which is not unknown for being slightly on the side of my right honourable friend the present First Lord of the Treasury.

It is perfectly possible to abolish all perks and have a flat rate of 20 per cent. income tax for everybody. This would include national insurance contributions. It would increase Treasury income and be a much fairer form of taxation. My noble friend Lord Coleraine touched on this point in greater detail than I have because I have tried to ration myself to 10 minutes. The same applies to capital gains tax. At the moment capital gains tax is applied to approximately 30 per cent. of all taxable capital gains. Of that, 70 per cent. is on houses. If everything were taxed fairly across the board, all of these taxes could come down to 20 per cent. I do not think that anybody would object to a 20 per cent. rate of tax. The Treasury would earn more income. A good many accountants would have to become gardeners and gamekeepers because there would be less for them to do in the accountancy world, which charges vast fees. We would have a much fairer system of taxation.

My contribution to this evening's debate is this: please may we have a fair system of taxation and complete control of the money supply by an independent Bank of England?

8.50 p.m.

Lord Annan

My Lords, I apologise for not being in my place when the noble Earl, Lord Caithness, opened the debate. I had to attend a statutory meeting at Cambridge, and I could not get out of it.

It is now nearly 25 years since I first took my seat in this House, and the spectacle of the country's economy for an historian such as myself is bound to look somewhat sombre. What a short time ago it was that the Prime Minister told us that she wanted to turn the country round. And yet here are all the old signs of the fundamental weakness in our economy appearing again—the interest rate at 15 per cent. in an attempt to control inflation, and growth beginning to fade away as a result, and the balance of payments in a catastrophic state: this after a decade of North Sea oil at its peak.

What is the root of our troubles? The Leader of the House, perfectly understandably, asks us, in responding to the gracious Speech, to concentrate each day on a different topic. But every topic affects the economy, and none more so than our foreign policy. Ever since the war we have been obsessed by our status as a great power. We enter into commitments all over the world, and perfectly reasonably the chiefs of staff demand that they be given the resources to meet those commitments.

No one should blame Mr. Attlee and Mr. Bevin for insisting immediately after the war that Britain should have its own independent nuclear deterrent. They did so at a time when the American Secretary of State, Jimmy Byrnes, was bitterly hostile to this country and was hoping and trying to make a deal with the USSR so that the two great powers could rule the world together. But that did not last long, and in 1948 we were united with America in resisting the communist powers' attempt to destabilise regimes throughout Europe and the world which were favourable to the West. From that time on there was never any need, in my judgment, for Britain to have its own independent nuclear deterrent. So long as America provided a nuclear shield the USSR was deterred from any military adventures in the West. But we have spent enormous sums on our own nuclear defence.

I was reading recently the memoirs of the noble Lord, Lord Barnett, in which he recalled that in 1975 Mr. Wilson slipped through the Cabinet what he called a little bit of modernisation of our nuclear weapons. It was not cash limited. The noble Lord, Lord Barnett, was then Chief Secretary to the Treasury and yet he had no inkling of what the cost was. Six years later, when he was chairman of the Public Accounts Committee, he found that the cost—that little bit of modernisation—had exceeded £1 billion.

Our insistence on having our own nuclear deterrent is one of the causes of our economic troubles. I sighed when the noble Earl, Lord Arran, said that the speech of the noble Lord, Lord Zuckerman, had failed to move him. The advice of the noble Lord, Lord Zuckerman, as a scientist is not to be neglected or despised. Neither is the advice of the noble and gallant Lord, Lord Carver, as a soldier. The noble and gallant Lord, our most brilliant soldier since the Second World War, has said time and again that it is our nuclear weapons that distort our defence spending. Is the mind of the Cabinet impenetrable on this point?

The story of expenditure on nuclear weapons is only a part of the cost of foreign policy decisions. If we go back in time we can see Mr. Gaitskell's decision to rearm and send troops to Korea; the Conservative commitments in the Middle and Far East which led to the Suez debacle; the commitment of Mr. Wilson when he became Prime Minister to an East of Suez policy. All these are examples of our inability to recognise that our power is limited.

It is limited because our production and our economy are inadequate to sustain them, and that was the message of Sir Nicholas Henderson's valedictory dispatch from Paris. No item of public expenditure has risen so gravely under the present Government as defence. We appear to spend less on defence than France or Germany, but that is an illusion. That is because our GDP is so much smaller. In fact, we spend a higher proportion of our GDP on defence than France and Germany.

The great achievement of this Government in the first five years was to bring home to us that our stature in the world, and the level of the welfare state, depend on the productivity and marketability of our business. But in the last few years the Government have taken their eye off the ball. The gracious Speech contains very little to encourage one to believe that the Government are still giving these objectives top priority. There was one sentence to the effect that the Government will continue to develop training and enterprise councils. I was glad to see that. But should not industry be compelled through a levy to train its workforce, as is the case in both France and Germany? Why not lighten corporation tax to enable it to do that?

I sometimes wonder whether the Government are really in earnest about helping the revival of British industry. Only a short time ago the noble Lord, Lord Young, used to come to the Dispatch Box week in and week out and tell us that the level of manufacturing capacity was irrelevant. What mattered, he said, was the production of wealth, and service industries could take the place of manufactures.

My mind went back to the days when my old colleague at King's, Cambridge, Lord Kaldor, invented his selective employment tax, which your Lordships will remember was designed to drive hairdressers out of business and induce heavy industry to employ them. I am bound to say that I was as sceptical then of hairdressers working in steel mills as I am today of the belief of the noble Lord, Lord Young, that American blue-rinse matrons visiting our country will spend as much money in hairdressing salons as would have been earned by selling our manufactured goods in America.

In improving the standard of training, higher education has of course an enormous role to play. Is it yet playing it adequately? At last some universities are following the lead that the noble Lord, Lord Butterworth, set at Warwick University and are introducing courses in management at undergraduate level in subjects such as engineering and economics. Are the Government satisfied that the polytechnics are concentrating totally on vocational training? But conversely are the Government spending enough money on promoting the kind of research that industry needs? It is widely believed that the Government are at present reducing the funds for research. If the Government cannot trust the research councils to spend public money profitably, then let them set up some other agency to do it, but do not put us at a disadvantage to all our competitors.

Then again have the Government considered that one of the disadvantages that British industry faces is its inadequate capacity? It is lack of capacity that so often makes us unable to compete with those on the Continent, and of course with Japan. Industry cannot increase its capacity with interest rates at 15 per cent.

Are the Government really sure that the market alone is the best incentive to force business to become more competitive and to reduce inflation? It is not only the old guard, Left-wing Keynesians who think that some control of credit is needed to reduce our propensity to import more than we export. That powerful speech by the noble Lord, Lord Ezra, this evening dealt with this. Indeed, many of the speeches that were made tonight drove home this point. I hope that the Government will have some new thoughts on the control of credit.

I dare say that the noble Lord the Leader of the House will say that such intervention is against the policy of the Government. I think myself that what the last 50 years have shown is that doctrinaire theory, of whatever political persuasion, always ends in tears. The best Chancellors of the Exchequer are those who juggle with the balls, catching now one, and now the next, as they show signs of coming down, and if one gets out of balance then he reaches forward to throw it up again. The management of the economy of this country is an art and one needs the arcane devices of the necromancer to succeed. There have been some very successful Chancellors of the Exchequer: Lord Butler was one. The noble Lord, Lord Jenkins of Hillhead, was a notably successful juggler and it looked for a time as though Mr. Lawson had the art at his fingertips, but I do not think that he foresaw the credit explosion.

There is one last essential recipe for greater economic success. Let me echo everything that the noble Lord, Lord Bessborough, said earlier this evening. Britain must become a wholehearted partner in the European Community. I cannot tell noble Lords how depressed I was on the second day of the debate to hear the noble Viscount, Lord Eccles—I am sorry that he is not in his place at the moment—finding excuses for us to delay and going back again to the idea of an EFTA, a loose body of free trading partners. The noble Viscount is a particular hero of mine. I believe that he was the best Minister of Education since the war. I say that because it was he who—against the advice of his civil servants—insisted on promoting technical education on day release for school-leavers.

However, the noble Viscount belonged to that administration which turned down the proposals of the Messina Conference, the conference which led to the Treaty of Rome. We stood on the sidelines then. We sent an official from the Board of Trade to observe. We are standing on the sidelines now. If we do not join the EMS and act as a willing partner, the City will find that the centre of finance will move irrevocably to Frankfurt. One of our greatest assets, our financial services, which account for so much of our invisible exports, will wither and decay. The price of our remaining on the sidelines will be a body blow to the economy.

The Prime Minister has astonishing virtues. Whatever her opponents say, she is bound to go down in history as one of the three most remarkable prime ministers of this century. She is entirely right in telling us that we have to earn our way in the world. But she could also go down in history as responsible for the second catastrophic refusal of Britain to join the leadership in Europe. We cannot change the Community from the outside. We must work with it and in it. If we remain insular and isolated, the economy of our country will be dealt a blow so severe that it will take a generation for it to recover, if indeed it ever does.

9.3 p.m.

Baroness Seear

My Lords, as I have read and reread the gracious Speech and have listened through four days of debate—not, let me say, to every single speech but to a considerable number—it has come over with increasing force that there is the sharpest contrast between the admirable objectives laid down in the gracious Speech and the means to carry out those objectives described in it.

Again and again one sees that what is desired to be done is highly admirable. Then we look for the way in which it is to be achieved and we wonder however the Government can think that this is an adequate programme. I am sure that through our minds have run those familiar lines from an old hymn, "What I say and what I do in my poor world are always two". That seems to be the motto of this gracious Speech.

Let us look at some of these objectives. I could take many of them but I have picked three major ones. I have asked how, in terms of the Speech, it is intended to achieve them. The gracious Speech states: My Government will continue to promote improved relations between East and West— no one is likely to disagree with them about that— and to work for further progress on human rights". When we are attempting to influence other people, example is a fine thing. It would surely have helped if we had found examples in the gracious Speech of attempts to deal with some of the defects in our own system of human rights. What an opportunity it would have been to incorporate the European Convention on Human Rights into the laws of this country as we from these Benches have attempted again and again to do.

Then, how about the human rights of the people of Hong Kong? I see no mention of what is to be done about them in the gracious Speech. Promoting human rights at home in our own policy would surely be a fine way of influencing human rights elsewhere.

However, it is not only to those kinds of human rights that we have to pay attention. As we rejoice in changes that are taking place with dazzling speed in Eastern Europe, and as we see people from the Eastern European countries coming over into the West and gazing with admiration and envy at what they see, are we certain, unless we do more to put our own house in order, that we have so much to offer them that that admiration will hold?

Let us remember how disillusioned that great writer Solzhenitsyn became when he came to know us better and corrected some of the illusions that he had about us in the past. Will people from the Eastern European countries be so greatly impressed when they see men and women, boys and girls sleeping in the cardboard boxes in what is still one of the wealthiest cities in the Western world? Would it not have been most appropriate to incorporate into the gracious Speech some programme for dealing with the great gap that has been growing between the rich and the poor in this country, if only because we want to show that Western capitalism has something to offer other than the goodies in the shops in Berlin and other than the opportunities to take home better drink and better chocolate?

I see nothing in the gracious Speech which is likely to improve those standards and to convince those people of that. After all, they have had a security of a kind and an acceptance of responsibility of a kind, however much one totally deplores the doctrines involved. I and my party have never flirted with those doctrines. But, at the same time, if we want them wholly to collaborate with us, wholly to reject their past and to accept our way of life this is an opportunity to improve that way of life and to give a greater element of conviction to them when they come to see us.

The gracious Speech states that the Government will give: encouragement and support to the remarkable changes taking place in Poland, Hungary and now in East Germany". No one could disagree with that. The gracious Speech further states that the Government: will work to ensure that these take place within a stable Europe". If we really want to ensure that these changes take place within a stable Europe, how are we most likely to be able to ensure that that happens? Will it be by standing outside and hectoring the people in that stable Europe, or will it be by going inside and arguing with them when we do not agree with them? It is most unlikely that we should agree about everything. But we should argue from the inside, as a leading member of the Community, and not from the outside. We should not criticise and argue from the outside. The attitude taken by the leadership in the Government reminds me so much of a phrase from a little known minor poet: "Lead kindly light, thank God I am always right. How long, oh Lord, will all the rest be wrong?" I suggest that that is no way to ensure that we incorporate and encourage the developments inside a stable Europe.

This is the greatest opportunity that we have had or are likely to have to take our part inside the Community to shape the world that is coming upon us with such alarming speed with the changes that are taking place in Eastern Europe. It gives us an opportunity that we have been seeking for a long time. In view of the changes that are taking place in the East, the French are far more likely to welcome collaboration with us and to look for it than they have been in the past. We have a political and an economic opportunity. We say that we want a stable Europe. We are one of the great European powers, but are we behaving in a way which will enable us to develop that power and to bring about that stable Europe that we say we wish to see?

I shall now turn to a further objective, and one which we have discussed most today. However, as the noble Lord, Lord Annan, said, all the subjects that have been discussed interrelate. Although the debate is spread over four days it is in fact one debate. The gracious Speech states: My Government will continue to pursue firm financial policies designed to reduce inflation and foster the conditions necessary for sustained economic growth". What do we find in the gracious Speech to encourage us to believe that the Government will bring about what they say? Will they bring about the: financial policies designed to reduce inflation and foster the conditions necessary for sustained economic growth"? Again and again in the debate today and on previous days the point has been made that one of the speediest ways in which not, of course, to cure inflation but to take a real step towards curing it would be to enter the exchange rate mechanism. So many noble Lords have spoken about that matter, that I do not wish to elaborate on it now. However, I support very strongly the point made by my noble friend Lord Ezra when he asked the Government to give a date and to show the people of Europe that they are committed. That, in itself, because of the certainty it would bring, would probably have an immediate effect on the level of inflation. However, one cannot say that it certainly would have such an immediate effect.

I am sure we all agree that reducing the level of inflation is one of the most important things we can do. But how about the sure foundation for economic development? What is there in the gracious Speech which encourages us to think that the Government have policies that will achieve that objective?

I forget whether it was the noble Lord, Lord Coleraine, who talked about the importance of encouraging personal saving. He was not alone in doing so. One of the absurdities of our present arrangements is that we have grossly distorted the incentives for saving and directed them into particular areas, areas which are not necessarily those to which they should be directed. We give great encouragement to people to put their money into houses and into pensions. We do not give anything like comparable encouragement to other forms of saving. Yet surely that is not too difficult. The Institute for Fiscal Studies has suggested ways in which it could be done—ways of achieving what it is now so fashionable to call a level playing field for different types of saving.

There cannot be a very strong economic argument for favouring one or two types of saving against all others. If we want to revive and to develop the habit of saving which we once had, surely we should look at every aspect of the way in which we encourage people to use such surplus money as they have and direct it into one kind of saving or another. That should be examined very carefully. Yet there is nothing in the gracious Speech which suggests that we shall look at different ways of encouraging saving and making sure that saving becomes a habit in this country.

If we want a really good economic future we need to develop a system of industrial relations which will work effectively under conditions of full employment. That will be far more important if we return to full employment, and we are seeing the need for it already. The Government have relied on unemployment for peace in industry. In areas of the country to which full employment has returned we are already seeing the old problems of pressure on wages and possible strike action returning. What is there in the gracious Speech to lead us to suppose that the Government have any plans for creating a system of industrial relations which will work on a sustainable basis?

The only mention of industrial relations in the gracious Speech is the suggestion that there will be further trade union legislation of a hostile kind. The only speaker who raised the issue was the noble Lord, Lord Irvine of Lairg. But it is of the greatest importance. We on these Benches encouraged and continue to support some of the earlier reforms of trade union law which the Government introduced. They were overdue and necessary; they have been valuable. Now we want to move in the direction of encouraging responsible trade unionism with which we can work and continue to work, as in Germany they have encouraged trade unionism which has helped to develop, not hinder the economy. Further legislation would put that back. We had a great opportunity to take a step in the right direction. There is nothing here.

As other noble Lords have said, another big gap in the Speech concerns training and education. We still do not realise how far behind our competitors we are. I have made speeches about training with boring frequency in your Lordships' House. Yet, knowing that we are short of labour, knowing that we are under-trained in relation to our competitors, what do we have in the gracious Speech? Nothing, except reliance on the new training and enterprise councils, the very people who in the past have failed to train.

In legislation which has just passed through your Lordships' House we have made it more difficult, not easier, to give training to the 16 to 18 year-olds. That is the age group which it is vital should be of primary concern to people training and developing skills and knowledge. Yet, although our competitors do so much in the form of training for that age group, we in our employment legislation have said that those youngsters will now be free to work any hours, any shifts, including night shift. Does that reflect an appreciation of the importance of training for that group? There is nothing in the gracious Speech to suggest that we shall take any action whatsoever beyond leaving it entirely to the training enterprise councils to develop the kind of skilled labour force that we so urgently need.

As if that was not enough, we need a major expansion of the number of people with higher education. That is not necessarily higher education of the academic kind. The Government have been told that by people who have the greatest knowledge of that area. The Council for Higher Education in Industry, which includes some of the best known industrial names in the country, has recommended that there should be such an expansion.

What do the Government do? They introduce in the gracious Speech the idea of loans for people going into higher education. I accept that there is a case for saying that people who move into extremely well paid jobs and earn far more than the taxpayer who has supported them through their university training should make some return for what they have received. But to introduce loans before people go into higher education is to discourage the very people whom we need if we are to achieve the required expansion.

If one asks any sixth form master or anyone close to youngsters, he or she will say that it is already well known that the under-represented groups in higher education are women and children from the working classes. The position of women has improved, but it is still not as good as it should be. There is no doubt that loans will discourage both those groups. Quite apart from the opportunities for youngsters—the human side of the issue—it is a gross waste of the ability that we need to tap. Yet loans for youngsters going into higher education are the only contribution to the badly needed expansion of that sector that we find in the gracious Speech.

This year, 1989, will go down in history with 1848, 1789 and 1688 as one of the great years of European history. It presents us with challenges and opportunities such as we have not faced since 1939: what an inadequate response to those challenges and opportunities!

9.22 p.m.

Lord Bruce of Donington

My Lords, this has been a long and interesting debate. The House will be relieved to know that I do not intend to go over the ground that has already been covered so very admirably by my noble friend Lord Williams of Elvel. After he had spoken on the question of the adverse balance of trade and the position of manufacturing industry, there was little more to be said. I admired the way in which my noble friend let down the Government so lightly. They hardly wilted at all.

However, I detected in the course of the debate a degree of consensus in the House which I had not sensed in this last 10 years. There were the usual ritual obeisances to the party line by the noble Lords behind the Government Front Bench, but hardly one of them had a substantially good word to say for the way in which government policies have developed. They praised the Government for their political perspicacity and then searched their own brains for some detail in order to support their general sentiment. Alas, they could not find anything. I noted particularly that in the latter constructive part of his speech the noble Lord, Lord Coleraine, put forward substantial portions of my own party's policy towards manufacturing industry. It is a little early at this stage to ask him to send an application form for membership down to Walworth Road, but he might at least have a word with his noble friend Lord Rees.

In the earlier part of the debate, I was sorry to hear the noble Earl, Lord Caithness, begin his remarks with the accusation that his Government had been left a bankrupt country by the Labour Government which left office in 1979. I should not have minded that so much except that in his speech winding up the debate on the Finance Bill I thought that the noble Earl referred rather sneeringly—I do not use too derogatory a term because the noble Earl has a very considerable amount of personal charm which we all appreciate—to the fact that the last Labour Government went cap in hand to the International Monetary Fund. That was something that he deplored and thought entirely reprehensible.

I do not want to tread on too many corns but a certain myth must be exposed and I should like it done once and for all. The fact of the matter is that in the years 1976 and 1977 officials in the Treasury overestimated the public sector borrowing requirement by £4 billion in 1976 and £3 billion in 1977. Those figures were communicated officially I suppose to the IMF. In point of fact it was not at all necessary to go to the IMF.

In fact what happened was that the then Labour Government took only one half of the facility to which they were entitled and the whole of it was repaid before that government went out of office in 1979. I put that matter quite plainly and shall tell the House to what it is preferable. I use very measured terms which are meant very seriously. I suggest that that course of action was more honourable and more proper than running to the Sultan of Brunei in January and February 1985, as a result of which 5 billion dollars passed across the exchanges in support of the pound, followed in some mysterious circumstances by unusual permission to acquire Harrods being given to the person holding the power of attorney for the Sultan of Brunei. I say that going to the IMF was possibly a little preferable to that.

If the noble Lord objects to what I have said I suggest that when he comes to reply he tells the whole House when he proposes to publish the DTI report into the whole matter. That demand comes from not only our side of the House but many quarters, including from behind the noble Lord. Should he deny the truth of what I have said or the inference that I have derived from it, perhaps he will tell the House when the DTI will be permitted to publish the inspector's report into the whole affair. I warn the noble Lord that we shall return to this matter.

Having said that, I come to the debate proper.

Lord Hailsham of Saint Marylebone

Hear, hear!

Lord Bruce of Donington

I am glad, my Lords, that my intention has the approval of the noble and learned Lord. I trust that I shall not disappoint him. The fact of the matter is that there is already a wide consensus in the House as to what is wrong with the economy. That has been a thread running through practically all the speeches.

It is a fact that the operation of free market forces has not worked for the benefit of the United Kingdom. It simply has not done so. It has led to short-termism and to a flurry of financial activity purely to make money out of money across the exchanges. Noble Lords know perfectly well that 40 times the amount that is necessary for the purposes of normal commercial or trading transactions crosses the exchange daily. Money is being made out of money. That has produced a situation in which it is more profitable to indulge in short-termism by the buying and selling of whole companies at a profit or loss than to invest in manufacturing industry.

I shall inflict only the following figures on noble Lords. Compared with 3.3 per cent. of the GDP being devoted to manufacturing investment in 1979, the figure is now down to below 2.5 per cent. and has gone far lower in the intervening years. There has to be an organised policy of investment in British industry. I do not say anything that is particularly revolutionary. It was stated in the coalition White Paper of 1944 that where private industry or the banks do not invest in manufacturing industry it is a proper function of the state to enter into that enterprise. That is exactly what we propose to do through the various agencies that we have proposed. There is nothing revolutionary about it; it was in the Government's White Paper on full employment in 1944.

Combined with a more far-reaching endeavour to promote research and development, education, science and the various adjuncts that are so desperately required by industry, these are some of the immediate steps that should be taken. Unfortunately they will take a long time because matters have gone too far.

However, this country can prepare itself for such action by British society adopting a new attitude on the British economy. It must be clear to most people by now that the days of confrontation are over and that the only way in which we shall promote a truly British enterprise is by the most urgent co-operation between those who have the capital facilties and those who provide the labour and managerial skills. It is no coincidence—as the report of the Select Committee published over a fortnight ago indicated—that the Japanese, who run their affairs on the basis of achieving a consensus between government, capital, the trade unions and people generally, can achieve three times the rate of growth achieved in the United Kingdom. That is not, as it was stigmatized in the debate, a return to obsolete corporatism. It is the beginnings of democracy, because democracy is the collective control of power. We have to struggle towards it in exactly the same way as the Eastern states are struggling at the present time. The Eastern states are struggling and succeeding in throwing off the dictatorship of the apparatchiks.

The rest of the world sooner or later has to emancipate itself from the virtually uninterrupted control of capital. There must be a compromise. I regret that this Government have not shown much ability or inclination to proceed even vaguely in that direction. Indeed, their philosophy as a whole was adequately summed up by the new Chancellor of the Exchequer shortly after his appointment. It should be adopted by the Conservative Party as a perfect and brief description of what it believes in. The new Chancellor said, "If it isn't hurting it isn't working". That is exactly what Toryism means: if it is not hurting it is not working.

However, Toryism is selective in who it hurts. It does not hurt the very rich or the very powerful. Perhaps sometimes unconsciously, but sometimes deliberately and wickedly, it hurts the underprivileged; the poor; the homeless; those on low incomes; the disadvantaged; and the sick and disabled. Always it is those in the lower income groups who are hurt during the conduct of its policy. Nor is there any reason to suppose that, in or out of the European Community and in closer or less close co-operation, we should be any better.

Like other noble Lords, I sometimes become a little weary when this country is accused of standing on the fringes of Europe; or of looking from an offside position; or of being out of the mainstream of Europe. What nonsense! Of course, there is already a two-tier group: those countries which pay and those which receive. Britain and Germany are those which pay; the remaining countries are those which receive. Those who were supercritical—including, regretfully, some of our Members—should tell those who criticise us from the international quango in Brussels for lagging behind that other countries would be well advised to put their money where their mouths are. I am thinking not only of France—the balance is even—but particularly of Spain and Italy, which are net recipients. How dare those people accuse Britain of not fulfilling the obligation that it made under the treaty? It has fulfilled them, and in fact overfulfilled them.

I was a little surprised to hear that those who believe in greater integration beyond joining the exchange rate mechanism did not lay down the fact that certain conditions must be fulfilled if Britain is to continue to finance the Community on this scale; also if it is to continue to endure the disadvantages of a common agricultural policy which over the past 15 years has been the biggest public scandal and even now involves a loss in fraud of at least £2 billion per year about which at one time the Commission did not appear to be interested.

We on this side of the House represent a party whose government originally participated in the European monetary system. That was in March 1949 when my noble friend was Prime Minister.

Noble Lords

In 1979.

Lord Bruce of Donington

My Lords, it was open at any time for successive Tory Governments to take the next step to join the exchange rate mechanism. I believe that we were wise in laying down certain conditions. I must apologise because occasionally I make mistakes, and I trust that I am not entirely alone in doing so.

Noble Lords

Hear, hear!

Lord Bruce of Donington

My Lords, this has been a very long and interesting debate and I have no desire to detain your Lordships any longer. This much I hope: that we may learn from it eventually. There is something to be learnt and something to be understood thoroughly from that growing degree of consensus which I have detected here this afternoon that something is vitally wrong and needs to be changed. After all, we are living in a time of change in which values are being upset all over Europe and new and unexpected events are taking place—and I hope to the world's advantage.

It will be a poor thing if we in this House, on whatever side we sit, cannot really begin to think again and perhaps question whether the values which have attracted us instinctively and to which we have stuck so zealously are necessarily the right values for the future of our country.

9.41 p.m.

The Lord Privy Seal (Lord Belstead)

My Lords, I have listened, as I always do, with interest to the speech of the noble Lord, Lord Bruce of Donington. However, I confess that I did not detect much reference in his speech to what I believe is the main thrust of the gracious Speech; namely, the proposals for legislation which I truly believe will be important for the quality of life of individual people. Thus it is that during this Session the Government are introducing Bills to control pollution, to strengthen food safety, to combat drug trafficking, to improve the National Health Service and to give a wider choice of broadcast services.

Whenever government or opposition put forward policies it always seems that the reaction of most people is the practical but rather inelegant demand that a politician should put his money where his mouth is. So I certainly attach importance, although I am not entirely sure that noble Lords on the Front Bench opposite did, to the fact that my right honourable friend the Chancellor of the Exchequer, in his Autumn Statement on 15th November, announced plans for more, indeed, much more, spending on important priority areas. Nonetheless, I emphasise that the Government are committed to firm control of public expenditure. This year's Autumn Statement shows exactly the same ratio of public spending to national income for next year and the year after as the 1988 Autumn Statement showed for those years when that Statement was published a year ago.

The present plans imply a continuing decline in the ratio of spending to national income to a level in 1992–93 which will be lower than in any year since 1965–66, a period of 27 years. However, within the totals there will be room for substantial growth in priority areas. The National Health Service for next year will have over £2.5 billion more in total resources, an increase of 5.5 per cent. in real terms, which will provide funds for the National Health Service review and continuing growth in patient services.

The plans also include over £500 million for the substantial measures introduced last month which will help nearly 3 million pensioners. A wide range of further improvements are being made next year to help less well off families and disabled people and £3 billion more will be spent on social security next year compared to this.

The Government's plans imply an increase in capital investment between this year and next of around 10 per cent., giving substantial increases for investment on roads, my noble friend Lord Massereene and Ferrard will be glad to hear, on railways, hospitals and housing. A new initiative costing £250 million over the next two years has been introduced to assist local authorities and housing associations to tackle homelessness. The capital programme of the Housing Corporation will more than double from £800 million to over £1,700 million in the next three years.

Five hundred million pounds more is to go to higher education next year which will continue the growth in student numbers which are now, I am glad to be able to say, at a record level, having risen by 30 per cent. in the past 10 years. There is a wide range of measures for environmental research and protection. We are doubling our contribution to the United Nations environment programmes. There is money for a new climate change centre and £100 million for aid to tropical forestry initiatives.

Those are just some examples from a formidable programme of spending. I was therefore surprised, to put it mildly, that the Opposition's amendment moved by the noble Lord, Lord Williams of Elvel, at the beginning of our debate, regrets the Government's failure to propose measures to generate resources to secure lasting improvement in the quality of life.

It is fair to say that the burden of most of the speeches from noble Lords on the Benches opposite has been that, whatever the Government are doing, more and more public expenditure is needed. However, I did not hear very much hint from the Opposition about how the Labour Party intends to pay for its promises. In view of the wording of the amendment I assume that the Labour Party's industrial strategy is the key. A strategy spelled out in another place was referred to in much the same terms by the noble Lord, Lord Williams, and again referred to by the noble Lord, Lord Bruce, in winding up. This strategy, it seems to me, would, in its turn, rely on more and more public expenditure.

The last Labour Government had an industrial strategy; yet manufacturing investment was no higher in real terms when the Labour Government of the 1970s left office than when they entered office. Manufacturing output actually fell. By contrast, this year manufacturing industry in the United Kingdom is more profitable than it has been for 20 years. Since 1980 manufacturing productivity has grown by more than 50 per cent.; a higher rate than any other main manufacturing country. Output has also reached new record levels this year. But, yes, I agree with my noble friend Lord Caldecote that we need continued growth in output by manufacturing industry. My noble friend made a powerful, though brief, case on that point.

In that context I take comfort from the fact that investment, at a difficult time, is now at an all time high and on the latest figures is continuing to increase. Those are some facts about the manufacturing base to which the Opposition amendment specifically refers.

My noble friend Lord Caldecote also asked if the Government would do everything possible to strengthen manufacturing industry consistent with bringing down inflation. I give an assurance to my noble friend that we will continue with those policies which have provided a framework for the very considerable recovery of British manufacturing during the 1980s. Most of the credit for this, of course, belongs to industry itself. But it can be claimed—and I do claim—that it has been made possible by government policies. After all, industry needed incentives to be restored, controls to be lifted and industrial relations reforms to be made, a point which the noble Lord, Lord Hankey, brought out in his speech. In addition, today we find rates of tax in industry and commerce among the lowest in the industrialised world. And, of course, we have removed the burden of widespread nationalisation.

I put it to the Opposition that if their concern for the manufacturing base mentioned in their amendment is more than rhetoric, then their amendment should endorse those policies.

A great deal was said about Ministers not facing the fact that the deficit is not as it ought to be. I stand here at the Box and say quite clearly to the noble Lord, Lord Diamond, to my noble friend Lord Caldecote, and to other noble Lords that the trade deficit is too high. However, before noble Lords become too happy about that let me briefly remind them how that has occurred. While it has been occurring manufacturing output and the volume of manufactured exports has continued to grow. Our share in the volume of world trade in manufactured goods is increasing this year. That is not the performance of an inadequate manufacturing base, which is the basis of the Opposition's amendment now before the House.

I maintain that the causes of the deficit lie elsewhere. The rise in the manufacturing trade deficit reflects very strong growth in domestic demand, which has sucked in imports, but only one-quarter of manufactured imports are consumer goods; the rest are either for production or investment. My noble friend Lord Rees was absolutely right in saying that the rapid increase in investment over the past two years will help to reduce the deficit in the future as new capacity comes on stream.

Therefore, the Government's main concern—and I think it is right that it should be—is the inflationary pressures which give rise to the deficit. That is why our main priority is to get inflation down. At 7.3 per cent. inflation is in fact lower than the best that the Labour Government managed to achieve during the 1970s; but it is much too high and we must stick to a tight monetary policy in order to expect to see a reduction in the inflation rate next year.

I therefore oppose the amendment tabled by the noble Lord, Lord Williams, because I believe that it does not—and I am not being complacent in saying this—in any way give due credit to the performance of British industry. Incidentally, it makes no mention at all of one of the benefits of what has been going on in this country, which my noble friend Lord Boyd-Carpenter brought out in his speech; namely, the great recovery in employment that we have seen throughout this decade. I believe that the amendment is unjust in the reference that it makes to resources needed for the quality of life in view of the Autumn Statement which, with great respect to the noble Lord, he hardly mentioned. Perhaps most of all I cannot support the amendment because I am yet to be convinced that the Opposition are determined about defeating inflation.

I regret that I cannot this evening answer all the questions put by noble Lords because there is not time; not least the interesting speech by my noble friend Lord Coleraine on housing matters and the very interesting speech which my noble friend Lord Mountevans made about duty free shopping with the Community, or indeed the plans of my noble friend Lord Onslow about further restructuring the tax system.

However, I shall try to answer one or two questions as quickly as I can. My noble friend Lord Bessborough made a point about his concern, gleaned particularly from a television programme, about United Kingdom performance compared with that of other European Community countries. I am happy to be able to say to my noble friend that I have to hand information on growth in gross domestic product and output per worker in manufacturing which shows that the United Kingdom's performance was better during the 1980s than that of other European Community countries. Of course, in regard to employment, the increased 2.75 million jobs during the past six years has been by far the best performance of any Community country.

My noble friend Lord Caldecote and the noble Lord, Lord Dormand of Easington, asked about civil research and development budgets. I should like to say that the United Kingdom government-funded civil R&D, as a proportion of national output, is in fact higher than it is in the United States. My information is that an additional £60 million was allocated to the science budget this year, which is up 8 per cent. on last year, and the science budget is now at its highest ever level—up 27 per cent. in real terms on 1979.

My noble friend Lord Caldecote and the noble Lord, Lord Taylor of Gryfe, asked about the ECGD review. The noble Lord, Lord Taylor, in particular asked for an assurance that industry would not be disadvantaged thereby. The Kemp Report on the future of the ECGD was published in June and, as I am sure the noble Lord knows, it recommended that the project group should retain its separate departmental status. We are now considering the report and no decisions have yet been taken. All I can do this evening is give an assurance to the noble Lord opposite and to my noble friend that I shall most certainly draw to the attention of my noble friend the points made by most noble Lords in this debate.

The noble Lord, Lord Blease, has done so much in the past for the economy in Northern Ireland. Nonetheless, he was critical about arrangements which were made for the training of 16 to 18 year-olds in the depressed regions. Both the noble Lord, Lord Dormand, and the noble Baroness, Lady Seear, also mentioned that age group. My right honourable friend the Secretary of State for Employment announced at the CBI conference on 21st November a new youth training programme from April 1990 which will have two very important main objectives. Every young person up to and including the age of 18 in future should either be in full-time education or in a job with training and by 1995 every young person by the age of 18 should have an opportunity to obtain vocational qualifications equivalent to five of the old-fashioned O-levels.

The noble Lord, Lord Taylor, complained about the treatment which the regions of the United Kingdom receive. That was also implicit in some of what the noble Lord, Lord Blease, said. I thought that my noble friend Lady Carnegy of Lour was absolutely right to point out that public spending in Scotland is really quite good. Spending is higher in Scotland, Wales and Northern Ireland than in England. Examples of the high level of public services provided in Scotland, Wales and Northern Ireland include such things as more roads, more hospitals per head of population and more educational spending per pupil.

I know that we now wish to reach a conclusion and I want briefly to refer to one or two other matters. We have a very important second amendment on the Order Paper in the name of the noble Lord, Lord Jenkins of Hillhead. At the start of today's debate the noble Lord, Lord Jenkins, the noble Lord, Lord Williams, and my noble friend Lord Rees expressed their interest in joining the exchange rate mechanism. However, my noble friend Lord Rees expressed the hope that we would not look on joining as a panacea.

I believe that my noble friend Lord Bessborough was absolutely right in saying that the timing is very important. I repeat that the Government have made clear that the United Kingdom will join the exchange rate mechanism when our level of inflation is significantly lower; when the objectives of stage 1 of the Delors Report have been achieved; namely, capital liberalisation, the freedom of financial services and the strengthening of competition policy besides real progress towards the completion of the single market.

Nowhere is our full participation in the EC demonstrated more clearly than in the single market programme. We have played an active and positive role in negotiating and implementing single market measures—over half of which are now happily in place—for completing the process and successfully building a single internal market in Europe which is, I absolutely agree, crucial. I also agree with my noble friend Lord Oxfuird that we should be proud that we have played our part in helping to frame Community directives on financial services; in negotiations as regards merger controls, and achieving key provisions in the second banking directive. In addition, the United Kingdom is at the forefront in implementing single market measures.

We have striven to ensure that as barriers have come down in Europe new ones do not go up. I say to the noble Baroness, Lady Seear, that we have done that from inside by negotiating with our partners in the Community. Meanwhile we are fully committed across a whole range of the Community's activities. On environmental matters the Prime Minister has given a clear lead in promoting global awareness and co-operation. We have been instrumental in bringing the Community's finances under control and in securing essential reforms in the common agricultural policy. Spurred on by your Lordships' Select Committee we have played an important part in ensuring that the problem of fraud against the budget is faced up to in the Community.

However, there is more to participating in the Community than that. At a time of the most dramatic changes in Eastern Europe, the political dimension of the EC is important as never before. In Britain we have always strongly supported the development of political co-operation in the Community, in order to give Europe the authority of having a united voice on a wide range of issues. But that authority requires a firm foundation; and for Europe, that foundation is the economic advantage of a single market.

Meanwhile, the gracious Speech reaffirms Britain's commitment to progressive realisation of economic and monetary union. In the United Kingdom's paper An Evolutionary Approach we set out our belief about the best way to achieve a practical monetary union without stripping away the parliamentary powers of member states. How right was my noble friend Lord Boyd-Carpenter to say that the amendment of the noble Lord, Lord Jenkins, strikes at the very heart of the running of a modern state, which would also inevitably be the effect of stages two and three of the Delors Report, with its permanently fixed exchange rates, a single Community currency, binding central rules on national budget policies and a system of central banks with sole responsibility for monetary and exchange rate policy throughout the Community. Yet it is that approach which is favoured by the amendment in the name of the noble Lord, Lord Jenkins of Hillhead.

On the afternoon of the State Opening my noble friend Lord Holderness, in moving the humble Address, recalled his enthusiasm when we joined the European Community and expressed his pride in the contribution that our country has subsequently made. My noble friend continued: If, as I suspect, most of us prefer to look forward to a closer partnership of nations rather than a federal Europe, if many of us look with apprehension on the later stages of the Delors proposals, and if we see great flaws in the social charter, then we have not only the right but the compelling duty to say so. There is more than one way forward in Europe, and I am anxious that my country should help to lead our European partners along the right one".—[Official Report, 21/11/89; col. 6.] Those were wise words, but they are words which are not reflected in the amendment of the noble Lord, Lord Jenkins, which clearly aligns itself with the approach of stages two and three of the Delors Report, an approach which was emphatically rejected in another place in the debate on 2nd November. Accordingly this evening I ask your Lordships to disagree with the amendment in the name of the noble Lord, Lord Jenkins of Hillhead, as well as with the amendment in the name of the noble Lord, Lord Williams of Elvel, and so approve the humble Address in response to tier Majesty's gracious Speech.

10.3 p.m.

Lord Williams of Elvel

My Lords, I shall, as is customary, be very brief. I have only two points to make. The noble Lord the Leader of the House accused me of not paying attention to the Autumn Statement. I did not realise that we were debating the Autumn Statement. I thought that we were debating the gracious Speech. If the noble Lord wants me to debate the Autumn Statement, I shall simply make one point. In the Autumn Statement real spending is not allowed to increase significantly; the increase in cash spending will be eaten up by inflation.

With regard to the manufacturing base, I mentioned in my opening speech that there was a stronger Conservative philosophy. I shall quote from yesterday's Independent an article entitled Hidden "Manifestos" of Contenders for the Conservative Succession. I shall quote from the report of a speech made by Sir Geoffrey Howe, the Deputy Prime Minister, on the fringes of this year's Conservative Party Conference: His friends were not surprised when he used the Blackpool conference fringe to cite the example of the Welsh and Scottish development agencies as models of the way in which inward manufacturing investment could be generated. What surprised many, however, was his statement that 'a strong manufacturing base' was required to overcome the current trade deficit: 'Manufacturing must be seen to matter'". I shall press my amendment to a Division. I ask noble Lords opposite to vote for their own Deputy Prime Minister, who was, after all, saying exactly what we on these Benches are saying. That is the strong philosophy of a Conservative Government. That is where it should be.

10.5 p.m.

On Question, Whether the amendment (moved by Lord Williams of Elvel) shall be agreed to?

Their Lordships divided: Contents, 83; Not-Contents 135.

Airedale, L. Graham of Edmonton, L. [Teller.]
Avebury, L.
Blease, L. Grey, E.
Bonham-Carter, L. Grimond, L.
Boston of Faversham, L. Hampton, L.
Bruce of Donington, L. Harris of Greenwich, L.
Buckmaster, V. Hatch of Lusby, L.
Callaghan of Cardiff, L. Houghton of Sowerby, L.
Carmichael of Kelvingrove, L. Hunt, L.
Carter, L. Irvine of Lairg, L.
Cledwyn of Penrhos, L. Irving of Dartford, L.
Cobbold, L. Jenkins of Hillhead, L.
Cocks of Hartcliffe, L. Jenkins of Putney, L.
David, B. John-Mackie, L.
Dean of Beswick, L. Kennet, L.
Diamond, L. Kirkhill, L.
Donaldson of Kingsbridge, L. Llewelyn-Davies of Hastoe, B.
Donoughue, L. Lockwood, B.
Dormand of Easington, L. Longford, E.
Ennals, L. Lovell-Davies, L.
Ewart-Biggs, B. McIntosh of Haringey, L.
Ezra, L. Mackie of Benshie, L.
Falkender, B. Meston, L.
Falkland, V. Millner of Leeds, L.
Foot, L. Mulley, L.
Gallacher, L. Nicol, B.
Galpern, L. Northfield, L.
Ogmore, L. Simon, V.
Oram, L. Stedman, B.
Perry of Walton, L. Stoddart of Swindon, L.
Pitt of Hampstead, L. Taylor of Blackburn, L.
Ponsonby of Shulbrede, L. [Teller.] Taylor of Gryfe, L.
Thomson of Monifieth, L.
Prys-Davies, L. Tordoff, L.
Raglan, L. Turner of Camden, B.
Robson of Kiddington, B. Underhill, L.
Rochester, L. Walston, L.
Ross of Newport, L. Whaddon, L.
Russell, E. White, B.
Seear, B. Williams of Elvel, L.
Sefton of Garston, L. Winchilsea and Nottingham, E.
Serota, B.
Shackleton, L. Winstanley, L.
Aberconway, L. Hailsham of Saint Marylebone, L.
Abinger, L.
Allenby of Megiddo, V. Hankey, L.
Arran, E. Harmar-Nicholls, L.
Astor of Hever, L. Harvington, L.
Barber, L. Havers, L.
Beaverbrook, L. Hemphill, L.
Belhaven and Stenton, L. Henley, L.
Beloff, L. Hesketh, L.
Belstead, L. Hives, L.
Bessborough, E. Holderness, L.
Birdwood, L. Hooper, B.
Blake, L. Jenkin of Roding, L.
Blatch, B. Johnston of Rockport, L.
Boardman, L. Joseph, L.
Borthwick, L. Lauderdale, E.
Boyd-Carpenter, L. Lindsey and Abingdon, E.
Brabazon of Tara, L. Long, V.
Braye, B. Lothian, M.
Brentford, V. Lucas of Chilworth, L.
Brookeborough, V. McColl of Dulwich, L.
Brougham and Vaux, L. Mackay of Clashfern, L.
Butterworth, L. Malmesbury, E.
Caithness, E. Margadale, L.
Caldecote, V. Marley, L.
Campbell of Croy, L. Marshall of Leeds, L.
Carnegy of Lour, B. Massereene and Ferrard, V.
Carnock, L. Merrivale, L.
Carr of Hadley, L. Mersey, V.
Clanwilliam, E. Monk Bretton, L.
Coleraine, L. Mottistone, L.
Colnbrook, L. Mountevans, L.
Colwyn, L. Norfolk, D.
Cork and Orrery, E. Nugent of Guildford, L.
Cowley, E. Onslow, E.
Craigmyle, L. Oppenheim-Barnes, B.
Cullen of Ashbourne, L. Orkney, E.
Davidson, V. [Teller.] Oxfuird, V.
Denham, L. [Teller.] Pender, L.
Dilhorne, V. Penrhyn, L.
Dormer, L. Pym, L.
Downshire, M. Quinton, L.
Eccles, V. Rankeillour, L.
Eden of Winton, L. Reay, L.
Ellenborough, L. Rees, L.
Elles, B. Reigate, L.
Elliot of Harwood, B. Renton, L.
Elliott of Morpeth, L. Renwick, L.
Elton, L. Rochdale, V.
Faithfull, B. Rodney, L.
Ferrers, E. St. John of Fawsley, L.
Forbes, L. Saltoun of Abernethy, Ly.
Fraser of Carmyllie, L. Savile, L.
Gibson-Watt, L. Seebohm, L.
Glenarthur, L. Selborne, E.
Goold, L. Selkirk, E.
Gray of Contin, L. Sharples, B.
Greenway, L. Sidmouth, V.
Gridley, L. Skelmersdale, L.
Grimston of Westbury, L. Stodart of Leaston, L.
Strange, B. Trumpington, B.
Strathcarron, L. Ullswater, V.
Strathclyde, L. Vaux of Harrowden, L.
Strathmore and Kinghorne, E. Vinson, L.
Teviot, L. Wedgwood, L.
Thomas of Gwydir, L. Whitelaw, V.
Tranmire, L. Wise, L.
Trefgarne, L. Wynford, L.

Resolved in the negative, and amendment disagreed to accordingly.

10.14 p.m.

Lord Jenkins of Hillhead

My Lords, I beg to move at the end of the Address to insert: "but call on Your Majesty's Government to recognise how illusory are the benefits of economic sovereignty in an integrated world, and urge that at this moment of flux and opportunity they should maximise British influence through full participation in all the activities of the European Community".

Although the rejection by the noble Lord, Lord Belstead, of economic and monetary union on any terms which might enable us to move forward with others tempts me to comment, I nonetheless judge that expedition would be more appreciated than argument at this time. I therefore propose that we proceed immediately to a Division.

On Question, Whether the amendment (moved by the Lord Jenkins of Hillhead) shall be agreed to?

Their Lordships divided: Contents, 71; Not-Contents, 132.

Airedale, L. Lovell-Davis, L.
Annan, L. McIntosh of Haringey, L.
Avebury, L. Mackie of Benshie, L.
Blease, L. Meston, L.
Bonham-Carter, L. Milner of Leeds, L.
Buckmaster, V. Mulley, L.
Callaghan of Cardiff, L. Nicol, B.
Carmichael of Kelvingrove, L. Ogmore, L.
Carter, L. Oram, L.
Cledwyn of Penrhos, L. Perry of Walton, L.
Cobbold, L. Pitt of Hampstead, L.
David, B. Ponsonby of Shulbrede, L.
Dean of Bewick, L. Prys-Davies, L.
Diamond, L. Raglan, L.
Donaldson of Kingsbridge, L. Rea, L.
Donoughue, L. Robson of Kiddington, B.
Ennals, L. Rochester, L.
Ewart-Biggs, B. Ross of Newport, L.
Ezra, L. Russell, E.
Falkender, B. Seear, B.
Falkland, V. [Teller.] Sefton of Garston, L.
Foot, L. Shackleton, L.
Gallacher, L. Simon, V.
Galpern, L. Stedman, B.
Graham of Edmonton, L. Taylor of Blackburn, L.
Gray, E. Thomson of Monifieth, L.
Grimond, L. Tordoff, L. [Teller.]
Hampton, L. Turner of Camden, B.
Harris of Greenwich, L. Underhill, L.
Hunt, L. Walston, L.
Irvine of Lairg, L. Whaddon, L.
Irving of Dartford, L. White, B.
Jenkins of Hillhead, L. Williams of Elvel, L.
Kennet, L. Winchilsea and Nottingham, E.
Lockwood, B. Winstanley, L.
Longford, E.
Aberconway, L. Hesketh, L.
Abinger, L. Hives, L.
Allenby of Megiddo, V. Holderness, L.
Arran, E. Hooper, B.
Astor of Hever, L. Jenkin of Roding, L.
Barber, L. Johnston of Rockport, L.
Beaverbrook, L. Joseph, L.
Belhaven and Stenton, L. Lauderdale, E.
Beloff, L. Lindsey and Abingdon, E.
Belstead, L. Long, V.
Bessborough, E. Lothian, M.
Birdwood, L. Lucas of Chilworth, L.
Blake, L. McColl of Dulwich, L.
Blatch, B. Mackay of Clashfern, L.
Boardman, L. Malmesbury, E.
Borthwick, L. Margadale, L.
Boyd-Carpenter, L. Marley, L.
Brabazon of Tara, L. Marshall of Leeds, L.
Braye, B. Massereene and Ferrard, V.
Brentford, V. Merrivale, L.
Brookeborough, V. Mersey, V.
Brougham and Vaux, L. Monson, L.
Butterworth, L. Mottistone, L.
Caithness, E. Mountevans, L.
Caldecote, V. Nugent of Guildford, L.
Campbell of Croy, L. Onslow, E.
Carnegy of Lour, B. Oppenheim-Barnes, B.
Carnock, L. Oxfuird, V.
Carr of Hadley, L. Pender, L.
Clanwilliam, E. Penrhyn, L.
Cocks of Hartcliffe, L. Pym, L.
Coleraine, L. Quinton, L.
Colnbrook, L. Rankeillour, L.
Colwyn, L. Reay, L.
Cork and Orrery, E. Rees, L.
Cowley, E. Reigate, L.
Craigmyle, L. Renton, L.
Cullen of Ashbourne, L. Renwick, L.
Davidson, V. [Teller.] Rochdale, V.
Denham, L. [Teller.] Rodney, L.
Dilhorne, V. Saltoun of Abernethy, Ly.
Dormer, L. Savile, L.
Downshire, M. Seebohm, L.
Eccles, V. Selborne, E.
Eden of Winton, L. Selkirk, E.
Ellenborough, L. Sharples, B.
Elles, B. Sidmouth, V.
Elliot of Harwood, B. Skelmersdale, L.
Elliott of Morpeth, L. Stodart of Leaston, L.
Elton, L. Stoddart of Swindon, L.
Faithfull, B. Strange, B.
Ferrers, E. Strathcarron, L.
Forbes, L. Strathclyde, L.
Fraser of Carmyllie, L. Strathmore and Kinghorne, E.
Gibson-Watt, L. Teviot, L.
Glenarthur, L. Thomas of Gwydir, L.
Goold, L. Tranmire, L.
Greenway, L. Trefgarne, L.
Gridley, L. Trumpington, B.
Grimston of Westbury, L. Ullswater, V.
Hailsham of Saint Marylebone, L. Vaux of Harrowden, L.
Vinson, L.
Harmar-Nicholls, L. Wedgwood, L.
Harvington, L. Whitelaw, V.
Havers, L. Wise, L.
Hemphill, L. Wynford, L.
Henley, L.

Resolved in the negative, and amendment disagreed to accordingly.

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

House adjourned at twenty-five minutes past ten o'clock.