8.59 p.m.
The Chancellor of the Exchequer (Mr. James Callaghan)
We welcome back the right hon. Member for Barnet (Mr. Maudling) to our economic debates after two years' absence. No doubt, the tissue has grown over the scars, but the memory still remains; and I shall refer to that during my remarks.
We have had an excellent debate and I have enjoyed it. It has highlighted, in the last four days, the economic problems on which many of us must focus our thoughts every day of the year and every hour. I genuinely welcome the reflection of hon. Members on the kind of problems with which we find ourselves having to deal. There is no doubt that there [column 204]is very great value indeed in a debate of this sort, both to expose new ideas and, if I may say so, to explode some fashionable fallacies.
The hon. Member for Glasgow, Pollok (Mr. Wright) and my hon. Friend the Member for Rhondda, West (Mr. Alec Jones) both made maiden speeches of very great distinction. The hon. Member for Pollok, with his great by-election victory, can no doubt be forgiven for believing that it marks a turning point in Parliamentary history; I think that most of us thought that of our victories in the past. Although he said that he approached the House with temerity, I must say that I have rarely seen it better disguised with the very considerable artless grace and distinction with which he clothed what he had to say.
The hon. Member for Rhondda, West, is an old friend of mine. We were delighted when he was nominated. We thought that he would get in—[Interruption.] We were shocked at the result. But I think that I can say that the Rhondda and he will be inseparably united for many years to come. He spoke from the depths of a very considerable knowledge of his own valley, and I should like to welcome him to the House tonight.
Let me now come straight to the Budget judgment. The right hon. Member for Barnet, with his usual candour and forth-rightness, said that he did not broadly challenge it, and I think that that is generally true throughout the Committee. There has been no general challenge of the nature of the judgment I presented to the Committee last Tuesday. This is also true of the right hon. Member for Enfield, West (Mr. Iain Macleod)—although, because of certain arithmetical discrepancies, it did not quite appear that way in the article he wrote in the newspaper. But, whatever the deficiencies of arithmetic, neither he nor anyone else believes that this is a year in which there should be much change from the general proposition I put to the Committee.
I do want to emphasise, however, what my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) said, because more and more people are coming to recognise the truth of his statement that economic management is a continuous process. One does not set the automatic [column 205]pilot on 11th April and then leave the ship to steer itself during the remainder of the year. We must make changes, not according to the calendar—or even according to elections—but according to the needs of the situation.
I would remind the Committee that there has been a continuing process over the last four or five months. In December, there was the two-year increase in investment grants, ending in December, 1968, with the specific intention of encouraging firms to invest straight away. In January, there was a reduction in Bank Rate. In March, there was another reduction in Bank Rate. In February, public expenditure figures were published, and in April the basic decisions on the Budget—one that is not a negative but a very positive decision is not to neutralise rising expenditure by raising taxation. All these are examples of continuing economic management. This Budget takes its place in the development of the economy, and during the coming year I shall make adjustments in fiscal and credit policy, if and when they are required. By their nature, they are not matters of which advance notice can be given.
But the economic result and intention of our policy is a surplus on our balance of payments and a steady run up to a higher rate of growth that we can sustain for a long period. That is the strategy that lies behind what we are doing. It is the Government strategy for the medium term. No one can look too far ahead, with possible changes in relationship with the community or in other ways. It is not possible to do that, but it is possible to look up to 1970, because entry into the Common Market, with transitional arrangements, would mean that there would be no great changes, I would trust, between now and then whatever the date of entry, if it came about.
So it is possible to ask what is likely to look like between now and 1970, and I agree with my hon. Friends the Members for Ashton-under-Lyne (Mr. Sheldon) and Berwick and East Lothian (Mr. Mackintosh) that the strategy is clear. Anyone can see it, and can understand what we are about or trying to get here. The strategy offers more solid grounds for real expansion than any other policy that has been put forward. The alternatives are, if I may say so, a rag-bag. [column 206]
We had a very clear statement by the right hon. Member for Barnet on the subject of devaluation. He gave the reasons. I do not propose to spend any time on it because devaluation does not enter into Government thinking as a policy. Therefore, I would be only elevating it to levels which it does not deserve if I were to deal with it in this debate. In my view, it is a flight into escapism. It is something which enables the country temporarily to avoid dealing with the fundamental problems with which the Government, indeed all of us, are struggling.
My hon. Friend the Member for Berwick and East Lothian, in an otherwise remarkable speech, ruled out half a dozen alternatives which he said would interfere with foreign confidence in relation to our entering the Common Market. What does he think this would do to foreign confidence? It is a policy which has no relationship to the kind of approach this country should make, quite apart from whether we would break faith with our creditors. We would still need to take the measures we have taken and to follow them through.
The only thing I am concerned about is that my party, the Committee and the country will get tired of these measures and try to push us into quick-term solutions which will return us to the troubles we have had and turn us from the course we are on. So long as I can, I shall fight for the policies we have laid down.
The growth rate itself can be sustained at 3 per cent., although I say to my hon. Friend the Member for Berwick and East Lothian that is not to say that I am satisfied with a growth rate of 3 per cent. and I hope that no one will be. This is not a figure just plucked out of the air but a careful provisional view of what we can do. I emphasise “provisional” because during the coming months the N.E.D.C. will be examining, in conjunction with the Government, future prospects for growth and the kind of policies we should follow. I do not wish to pre-empt its final conclusions which will be of great value to the Government.
What this does is to offer a base-line from which we can move. No one will be more delighted than I if we can get a faster rate of growth coupled with a continued and growing balance of payments surplus. I have been asked how [column 207]we reached this rate of growth. I was accused last time of reading a very dull economic lecture. This is backed by the best forecast which can be made. It is not based on any increase in the working population. The growth we hope to have will have to come from productivity itself because there will be little increase in the working population between now and 1970. It will have to come from increased output per head.
We have considered the prospects for exports. The trade figures were published after the Budget. The March export figure was a little below that for the first two months but, taking the first quarter as a whole, exports were 7 per cent. higher than the average for the whole of 1966. In the growth figure I have taken 6 per cent. as the increase for exports during the whole of the year. This, as we have secured 7 per cent. in the first quarter, is a pretty realistic figure to start on if we take account of the prospect of an increase in world trade.
We have taken action to reduce Government overseas expenditure. I have taken note of what the effects are likely to be on the balance of payments. Every £1 million saved on overseas Government expenditure enables a greater rate of growth to be achieved in this country. I have taken a view on the flows of outward and inward investment, including North Sea gas. All this is consistent with meeting our obligations and getting a 3 per cent. growth rate.
Now I turn to private investment. Once the economy is on the path of expansion, we calculate that, although private investment will fall this year, it will quickly recover and will be stimulated by the very knowledge of the prospects of a reasonable and sustainable rate of growth.
I say to some of my hon. Friends and to hon. Members opposite that I do not think they have taken enough account of the encouragement given by productive public investment to growth. Fifty per cent. of all investment is in the public sector and a large part of it is productive investment. Manufacturing investment accounts for between 25 and 30 per cent. of total investment. So the very increase in productive public investment itself will be self-generating in other directions. [column 208]
I doubt very much whether shortage of liquidity is holding up investment now. One of the reasons why I have stimulated savings through the new tax reserve certificate is that I believe companies are likely to be quite liquid during the latter part of this year.
Now I want to deal with keeping the growth rate going. I would not want to neglect any proposals that the right hon. Member for Barnet or anyone else puts forward, but the proposal for prior deposits, which is being run pretty hard, has been tried in a number of countries and eventually abandoned because, although one can control the amount of bank credit that is given to a home importer, what one cannot control is what is put down by the man who is selling import goods in terms of a deposit.
All sorts of arrangements can be made—we have people here who know the City of London very well—and, without going outside the law and the general conditions, I assure the Committee that I have no faith in prior deposits as a system for regulating the growth of imports.
Then there is the increase in incomes as another factor in growth. We have been pressed to say what we think the increase in incomes will be and I will give the figure. It is a difficult thing to do and when hon. Members opposite are so zealous in their pursuit of these forecasts, they should remember that. One of the difficulties of giving a figure is that everyone will assume that they will be entitled to it. Nevertheless, the Committee has pressed for it and the Committee can have it. I will give it as far as I can.
As far as we can see, our estimate is that if we take account of the deferred settlements that have been held up and are likely to come into force, taking a period of 18 months from last July to next December, the increase in wage rates may be about 6 per cent. That is not to say that everyone is entitled to a 6 per cent. increase but that is what we expect it will be under the deferred settlements which are coming about—and millions will benefit from them, which is frequently overlooked. This will be about the increase, overall. This will affect consumer spending because personal incomes will increase. [column 209]
By taking account of the natural revival that I expect in hire purchase, the expected increase in savings and some rise in imports, I hazard the view that total output will rise by 3 per cent. during the course of the year. That implies a somewhat smaller increase between 1966 and 1967. But, as I said in my sound broadcast, which was said to be wrong but was actually right, we do not measure these things except year by year. Over the next 12 months—say, April to April—I would expect output to grow by 3 per cent. on the previous year, or, taking December, 1967, over December, 1966, I would expect it to have risen by 3 per cent. and for that to be maintained in the succeeding years up to 1970.
I hope that that is clear because it is the rate of increase that matters. The point at which one starts is important but it is the rate of increase that matters and, as from this January, I can see it beginning over the year as a whole to increase at the rate of 3 per cent. a year, continuing into later years, and we can get a steady increase along these lines.
Sir Cyril Osborne(Louth)
rose——
Mr. Callaghan
I hope the hon. Gentleman will excuse me, but I have a lot to get through.
Whether we can get higher rates depends on making structural changes in the economy, removing the bottlenecks on skilled labour—remembering that the labour force itself will not increase—developing the regions and stimulating productivity. That is work enough to be done.
The Government have offered the basis. We have said that this is what we believe can be done realistically, with a steady rate of growth. As my hon. Friend the Member for Heywood and Royton (Mr. Barnett) said, for people to know that there is likely to be a steady rate of growth is in itself an encouragement to industry, even though people would prefer it to be higher than it is.
We are talking now about the base line of 3 per cent., which means roughly an extra £1,000 million a year in real resources, and when I hear some of the wilder comments which are made I sometimes wonder why it is that 3 per cent. growth means deflation and despair and that 4 per cent. growth means expansion [column 210]and exaltation. It is a queer sort of arithmetic which says that we are doing terribly badly if we get 3 per cent. and work for something more, but we are doing very well, and this is in accordance with what right hon. and hon. Gentlemen opposite have said, if we have 4 per cent.
To press the economy forward at a higher rate than its current potential would lead again to a crisis in the balance of payments. To increase the rate of growth beyond what I have laid down as a base line, we must increase the growth potential. There is no way out of that and no short cut. This brings me to the waste of manpower and resources in the regions, and the question I am asked about what we are doing there.
There is a waste of manpower and resources in the regions, in terms of unemployment. I am not very happy about the way in which we focus on a national average rate, whether it be 1 per cent., 1½ per cent., or 2 per cent., because it is misleading without closer examination. It can, and does, conceal, at whatever level the national average rate of unemployment is, great disparities between the regions. These disparities have been and can be disguised by a general reflation for a time until the balance of payments catches up with us again. What we need are structural changes in the economy and in the regions. My hon. Friend the Member for Rhondda, West referred in his maiden speech to the way in which South Wales has been badly hit by the rundown in coal mining, with pit closures, and, of course, there has been redundancy in the steel industry. This is true of Scotland, too.
This need for structural change in the economy of the regions can be papered over for a short time by a general reflation, but the real way in which it must be dealt with is by long-term measures and a combination of measures covering such things as roads, communications, bringing new industries in, and, as my right hon. Friend the President of the Board of Trade pointed out today, help to local authorities and more skilled training.
I invite my hon. Friends who come from these areas to pause and consider. Do they not see evidence of these things being undertaken already? They are [column 211]happening. They have not yet resulted in a substantial increase towards full employment in those areas, but these things must be done before the employment will come along. Furthermore, there is the added proposal to make a large subsidy to wages through the selective employment premium. That will have to be discussed, and I shall spend no time on it now. No doubt, we shall have separate discussions. But this is the way to tackle the problem of the overall level of unemployment, not by a general consumer reflation but by dealing with the problems of the regions and making them strong, not by papering over the cracks but by getting down to the fundamental issues.
I must now spend a few moments on the subject of public expenditure and taxation, both of which go together. We have undertaken a further review following that of last summer. It covers all fields of expenditure, and it covers our existing priorities. The hon. Lady the Member for Finchley (Mrs. Thatcher) seemed not to understand what reining back expenditure meant, so I shall explain it to her, if I may.
Public expenditure in all countries, at all times, increases every year. It never declines but always goes ahead, and the only question is the rate at which it increases. By reining back—I take hypothetical figures—I mean this: if it should have been estimated that public expenditure might increase by 10 per cent., reining back would mean that it would increase by something less than 10 per cent.
It does not mean an over-all cut. It means that the rate of growth is not as fast as before. In this process, all expenditure is under review, including home, defence and overseas expenditure. The review will have to take place in time to influence next year's estimates and to ensure that the review's results are reflected in expenditure for next year.
We said that economic recovery would take first place in relation to public expenditure, and if hon. Members have refreshed their minds with Table 12 in the Financial Statement they will have seen the tremendous growth in economic expenditure by this Government, expenditure designed to strengthen our economy. [column 212]But let us not overlook the great expansion that has taken place in our social services. I am proud of that, whatever hon. Members opposite may say.
I was a little astonished to hear the hon. Member for Pollok speaking of housing, schools and roads not developing. That is quite untrue, both in Scotland and in England. Housing has increased by 8.5 per cent. per annum every year, including the coming year, and in Scotland the increase is 10.9 per cent. Therefore, it is not housing that has failed to develop in Scotland. Education expenditure has increased by 9.5 per cent. every year from 1964–65 to 1967–68, and in Scotland it has increased by 8.1 per cent. I hope that the electors of Glasgow, Pollok did not elect the hon. Gentleman on the ground that education had not been developing. Health and welfare, including children's services, have expanded by 9.7 per cent. per annum, and in Scotland by 9.8 per cent. That is an increase of nearly 10 per cent. a year, and I hope that some of my hon. Friends take credit for that when they are being attacked by hon. Members opposite.
There is little doubt that in the current wave of feeling sweeping through the country people feel—[Hon. Members: “Oh.” ]—should we not recognise it and face it? The only thing that we do not intend to do is to be pushed off our course by it. When I am asked about the standard of life of our people, and people feel that it is not improving, let me put this point for consideration. An average increase of 30 per cent. in social expenditure on schools, education, social security, health and welfare and housing must represent an improvement in the standard of life of the people.
The Conservative Party today called for more social benefits and more expenditure at the same time. The hon. Member for Finchley did it.
Mrs. Thatcher
indicated dissent.
Mr. Callaghan
The hon. Lady called for more social benefits and lower expenditure. That is all she wanted. But what a brass neck from a party which wants to increase expenditure all the time—Aden, Malta, the TSR2, and what about that £500 million aircraft carrier the right hon. Gentleman was going to give us? It is a [column 213]little absurd to pretend that in this world today one can talk about both increasing expenditure and cutting taxation, but the Conservative Party manage to have it both ways all the time.
I want to say something about rates of taxation, because they have come up more than once. A society must recognise its exceptional people, but they do not work only because of income. If rates of taxation are crippling incentive at the moment it is a little odd that they are now 91 per cent. at the top level, that when the right hon. Gentleman opposite left office they were 89 per cent., and that that has apparently made all the difference between incentive and being crippled.
What is more important is that it is not the marginal rate but the effective rate which matters. We are asking people to accept restraint on their wages at £10 and £12 a week. When we remember that the effective rate of tax on a £15,000 a year man is 53 per cent., this is vastly different from the picture painted so often in this Committee.
The Budget measures have been generally well received in so far as they relate to widows, single women with dependants and relief from the Selective Employment Tax. There is great and general concern about children living in poverty. This arouses very strong emotions. A survey has been conducted by my right hon. Friend the Minister of Social Security. There will be a debate on this topic on Thursday. Poverty among children covers a great many aspects. Those in this group need to be cared for.
There are many groups in this country who need to be cared for. I am very conscious of this. The elderly are writing to me and asking that they should be cared for. We have undertaken a review of priorities which will have to be concluded, and both groups will have to be taken into account in our future financial arrangements. As far as a general increase in family allowances is concerned, to give another 10s. a week would cost £160 million net. That is why it is important that we should be able to deal with poverty where it really exists.
So that Members are not debarred by the terms of the Money Resolution from proposing reliefs from the Selective Employment Tax through refund from Votes, the Government will move a [column 214]Money Resolution wide enough to cover refunds of the tax. It follows that it will be unnecessary for Members to propose selective reductions in the rate of the stamp and the general Amendment of the Law Resolution has been drawn to exclude this and certain other type of amendments which can be achieved in other ways.
I conclude by returning to our general strategy. The greatest burden in putting the country right has been borne by the ordinary worker: let there be no doubt about that. The question now is: shall we give a powerful and indiscriminated thrust to demand? This is what the right hon. Member for Barnet did last time. He went to the Conservative Party Conference when he was proceeding on a pretty cautious path and there was a rather ageing Young Conservative there who invented a terrible slogan— “Stop dawdling, Maudling” . He is now the hon. Member for Bromley (Mr. Hunt). In my view, that slogan brought its retribution. It was one of the worst which could have been invented.
What did the right hon. Gentleman do? Between that conference and the next Budget he pumped between £500 and £600 million net into the economy. [Interruption.] If I am challenged on that. I will tell the right hon. Gentleman what I said on 14th November, 1963, when I told him of the difficulties which he would be in. I stated:
“His answer” to all these difficulties
“is that he hopes that sterling will not be an embarrassment. So do I.” —[Official Report. 14th November, 1963; Vol. 684, c. 362.]
With afterthought, I wish that I had put it even stronger. But he put in post-war credits, higher tax allowances, free depreciation, lower Purchase Tax, social benefits, the lot. Two years later we had a record balance of payments deficit, and we had to clear up the mess. The right hon. Gentleman had an ambitious growth target, but he did not strengthen the industrial structure to support it, nor did he act on our overseas position. Indeed, he allowed capital to flow out of the country.
The Government aim not simply at getting the economy on a satisfactory growth path but at keeping it there. Then, as our long-term policies for strengthening [column 215]the industrial structure bear fruit, we shall raise it. That is the policy we offer. No other has been put on view.
Question put and agreed to.
Resolution to be reported.
Report to be received Tomorrow. Committee to sit again Tomorrow.