The Economy

§ Mr. Speaker

I inform the House that I have selected the amendment in the name of the Leader of the Opposition and those of his right hon. and hon. Friends. In addition, under the powers given to me by Standing Order No. 35, I have selected for a second Division at the end of the debate the amendment in the name of the right hon. Member for Plymouth, Devonport (Dr. Owen) and those of his right hon. and hon. Friends.

A very long list of right hon. and hon. Gentlemen wish to take part in the last day of the debate on the Queen's Speech. May I again appeal for brief contributions so that not too many are disappointed?

§ Mr. Roy Hattersley (Birmingham, Sparkbrook)

I beg to move, at the end of the Question, to add:

But humbly we regret that the Gracious Speech includes no proposals which can reasonably be expected to reduce the level of unemployment, revive manufacturing industry and utilise the full potential of the income temporarily gained from the exploitation of North Sea oil. Yesterday during his statement to the House the Chancellor of the Exchequer invited us to take advantage of today's debate to discuss the autumn statement. It was not an invitation which we needed or which he was entitled to make, but I propose to accept it. Of course, I begin with a re-examination of the central plank of yesterday's manifesto, the sale of British Gas to finance temporary tax cuts.

In reply to my question yesterday the Chancellor insisted that the sale of British Gas simply brought tax cuts forward. I have the quotation here lest he should choose to deny it today, as he denied it yesterday afternoon. What the Chancellor said could mean only that, on his own assessment, without the sale of British Gas there would be no tax cuts next year and probably none before a general election. The tax cuts are to be financed by the sale of British Gas. The Chancellor ought to know, as I believe the country knows, that a policy of selling assets to raise revenue is one which no respectable or responsible private company would contemplate for a moment.

I ask him again the questions that he failed to answer yesterday. After the sale, how would he propose to make up the losses in annual revenue previously obtained from those assets? When the sale has financed a couple of years 576 of tax cuts, how does he suggest that those temporary tax cuts will be sustained? When I asked him that question yesterday he mumbled a generalisation about the sale of other assets. May I therefore ask him specifically if what he hinted at as the afternoon went on is true? Is it the Government's intention to sell into private ownership the water industry? [Interruption.]

If the Government claim that the water industry should be sold to a private monopoly and that that private monopoly should control the price, supply and quality of something as basic as the water, the Chancellor had better tell us now whether he agrees with those Members in the backwoods behind him who are urging that that should happen. He must know that if water is sold into the ownership of a private monopoly few restrictions will be placed upon it to protect the consumer, for that is the pattern of privatisation. It will be the pattern of privatisation of British Gas as it was the pattern of privatisation of British Telecom.

If obligations were placed on the new private monopoly the selling price would not be as great as the Government need and will demand. What will happen with gas and with water will be exactly the same as recently happened with British Telecom. Vast profits have been made but enormous price increases have been imposed in an area where British Telecom has a monopoly and can exploit consumers.

The Chancellor denied all this yesterday. I see him nodding because he intends to deny it again today. When he makes a forecast or offers statistics, I think of those famous words from Through the Looking-Glass: 'When I use a word,' Humpty Dumpty said in a rather scornful tone, 'it means just what I choose it to mean'", with which he fell off the wall. That view was expressed in less generous language by the Daily Telegraph today; it made the same point about the Chancellor's veracity in language which I would not dare to use. It described his statement as

a combination of dodgy accounting and electoral cynicism". Despite all the talk about expansion, growth and success, what we are to have over the next year or two years is an increase in consumption financed by temporary tax cuts paid for by the sale of British Gas. On his own figures, which again the Chancellor denied yesterday, there is a predicted growth over the next financial year in gross domestic product of £6.4 billion while consumption is to rise by rather more—£6.5 billion. At the same time imports will increase at twice the rate of exports and interest rates will be kept high by the Chancellor as an item of policy by which he can keep something like the present exchange rate. The net result must be a continuation of the damage to manufacturing industry which has characterised all that the Government have done for six years.

I know very well that the Chancellor and the Secretary of State for Trade and Industry derided the report by the House of Lords Select Committee on Overseas Trade, but Government policy and the Chancellor himself vindicate what that report said; it warned that if we are to avoid a major social and economic crisis attitudes towards trade and manufacturing have to be radically altered.

Let us look at the real state of manufacturing industry about which the Chancellor made some boast yesterday and about which the Prime Minister made equally unlikely claims a week ago today. The real facts of manufacturing industry are these. For four years in a row net investment in manufacturing has been negative. Total manufacturing 577 investment is 20 per cent. lower than it was in 1979. Output is 6 per cent. lower than in 1979. The balance of manufactured trade has changed from a surplus of £5 billion in 1978 to a deficit of £4.7 billion.

The Government's attitude towards manufacturing trade has not changed at all despite the claims made by the Chancellor and the Prime Minister. All that has changed in the Chancellor's attitude towards manufacturing industry is his language. He no longer insults it as if he were a knight on the Tory Back Benches. He pretends that he is concerned about its welfare, but he and the House know that manufacturing industry remains crippled by high interest rates. The Confederation of British Industry was right to describe the autumn statement in one simple sentence: nothing in it for manufacturing industry except £250 million of extra costs". Month after month and year after year we have tried to convince the Chancellor of the Exchequer that while manufacturing industry and the construction industry founder, unemployment will remain at a level which should be unacceptable in a decent society.

Despite the central continuation of the Government's proposals and plans to which I have referred, and despite the continuing destruction of manufacturing industry, the hon. Member for Stockton, South (Mr. Wrigglesworth) told everybody who would listen to him yesterday that we are witnessing a U-turn. That is what the hon. Gentleman and other Social Democrats were intended to believe from the Chancellor's statement. The Chancellor assumed that they would be easily satisfied, but I suspect that he did not believe that they would be quite as rapturously satisfied as the hon. Member turned out to be.

Last year, during the debate on the autumn statement, the SDP fell in behind our demand for a £5 billion boost, to be spent in the public capital sector. This year the Government propose 10 per cent. of that amount to be spent on construction of one sort and another.

The change in the Government's position, as I shall demonstrate in a moment, is far more a matter of presentation than of substance. The truth is that the argument for public sector capital spending advocated by the Opposition, the CBI, the TUC, a large number of Conservative Back Benchers, and by some right hon. Members in the Cabinet has actually won the day. There is now a virtually unanimous consensus that the Government should be spending more on public sector capital. What the Government announced yesterday afternoon was very little indeed, said in order that they could not be accused of doing nothing.

The basic economic policy remains, and it involves a writing off of 3.5 million men and women who are unemployed. They have been written off because they are politically expendable. Although, no doubt, the wets in the Cabinet will seize on the announcement as a sop to their consciences, the minuscule increases in housing renovation and hospital building will finance virtually no jobs. I have it on the authority of the Prime Minister. [Interruption.] The hon. Member for Harlow (Mr. Hayes) may laugh at that authority. Some of his hon. Friends around him may take the Prime Minister more seriously than he does.

On 10 December, the Prime Minister told me that the cost per job through increasing infrastructure can vary from £35,000 to £55,000 a year. Let us take the position in the middle. Let us assume that the Prime Minister was 578 right and that a job financed by investment in construction costs £45,000. If the Prime Minister was right, what the Government announced yesterday and what was heralded as a U-turn by the SDP will produce 11,000 new jobs. The infrastructure proposals, the capital works, will produce one new job for every 3,000 men and women unemployed.

If we are witnessing a U-turn, it is a U-turn of a very strange shape, and it should be described in a little honest detail. The Chancellor certainly will not do that. This year there has been some reflation. The Prime Minister has denounced reflation. She promised that there would be no reflation, but there has been reflation. It has come about not by intention but by incompetence.

Social security payments were increased by £1.2 billion above the original estimate as inflation is higher than anticipated because of the mismanagement of the exchange rate by the Chancellor in January.

Mrs. Elaine Kellett-Bowman (Lancaster)

Is the right hon. Gentleman saying that he begrudges the increase given to the pensioners and others?

§ Mr. Hattersley

I am saying that if we had been in power we would have paid them the full increase that they were promised, rather than a few measly coppers.

Several Hon. Members

rose—

§ Mr. Hattersley

No, I shall go on to list all the other reasons why we have had the reflation that the Prime Minister promised we would not have.

The payment has been larger than the Chancellor intended because inflation has been higher than he prophesied. Inflation has been higher than he prophesied because of the catastrophe that he caused for the exchange rate in January. But that is not the only reason.

The external financing limits on the nationalised industries were relaxed by £1 billion, largely because of the miners' strike, which, the House will recall, was regarded by the Chancellor as a sound investment for the nation.

Local authority spending was £1 billion more than the Government planned. Local authority spending is always more than the Government plan, because the Government never expect to hold it down to their planning figure. The planning figure is always devised artificially low in the hope that the local authorities can be intimidated. The local authorities never are intimidated, so the Government's local authority spending plan is always out of line.

The cost of EEC membership was £500 million more than anticipated. The extra cost of EEC membership was alone virtually as much as the combined extra funds being made available next year for house building and renovation and hospital building.

§ Mr. Jerry Hayes (Harlow)

rose—

§ Mr. Hattersley

I do not want the hon. Member for Harlow (Mr. Hayes) to be over-anxious. He will have to wait with patience until the end of this entire passage.

The Government are spending £5 billion more than they intended on programmes. They have exhausted the reserves entirely with five months left to go. The Government—the Chancellor will correct me if I am wrong—have established the precedent of talking to the House about the sums left in the reserve. That is something that Chancellors in the past have never felt they had to do. In addition, the Government have exceeded the PSBR 579 target by £1 billion. All those things have added to this year's involuntary reflation, and that is not the only thing that has happened.

The policy of reflation—not the policy but the accident—which the Prime Minister promised would not happen while she was in Downing street has been supplemented by other factors. They are all factors of which the Government disapproved but over which they were unable to exercise any control. Wage increases have outstripped inflation. The American deficit has attracted British exports. The collapse of the pound, for which the Chancellor was responsible, temporarily helped those exports. Investment decisions have been brought forward to beat the Government's decision to phase out capital allowances. Those are the reasons why there has been a reflation this year, but none of them is likely to be repeated next year.

The Chancellor's intention is to hold next year's programmed spending below the level at which it stands this year. So those right hon. and hon. Members in his party who feel that he has abandoned the financial rectitude by which he has made his name can rest in peace. There has been no U-turn in the statement. There has been a sort of L-turn.

I will remind the Chancellor of what is meant by no U-turn. No U-turn means the continuing collapse of manufacturing industry, the continual deficit on our manufactured trade, the continual squandering of North sea oil revenues on unemployment rather than on jobs, and, above all, no U-turn means 3.5 million men and women still condemned to unemployment.

§ Mr. Hayes

It is always a great joy to see the right hon. Gentleman jumping through the hoop so well, but he has a nerve to stand there talking of honouring promises with the eloquence of Satan denouncing sin. After all, he was a member of a Government which actually robbed pensioners, by changing to the forecasting method, of over £1 billion. His Government also cut hospital expenditure by about one third. Is not the real reason why he is huffing and puffing at the Opposition Dispatch Box that his enthusiasm for putting his own economic policies before the electorate is the enthusiasm of a turkey looking forward to Christmas?

§ Mr. Hattersley

I am grateful for the opportunity to have a drink of water.

What I was talking about, and what the House will on all sides have to concentrate on sooner or later, is the level of unemployment which, as the hon. Member for Harlow ought to know, is a rather more serious matter than the intervention that he has just made. He will, I hope, know that Opposition Members and the country in general will not be fooled by the softening of the language of the Prime Minister and the Chancellor on these matters, but will be influenced only by a change of attitude and of policy.

The pathetic package presented yesterday by the Paymaster General will make no substantial difference to the level of unemployment. The first half of the statement simply repeated previously announced palliatives and cosmetics. Then we turn to the latest contrivances invented by Lord Young.

When Lord Young was appointed, we on the Opposition Benches said that his task was to obscure rather than to solve the problem. How right we were, as witness 580 the evidence of yesterday's package from the Paymaster General. With unemployment running at 3.5 million, he promised us that we are to have an expansion of unemployment clubs at which the unemployed can come together to discuss their problems. The unemployed know what their problem is. Their problem is the Government, a Government who base their job creation programme on a mistake and a slander. Virtually every one of the proposals outlined by the Paymaster General yesterday was based on the slander that things have to be done to persuade the unemployed to go to work.

That is the reverse of the truth. The unemployed want to work. The unemployed do not want advice on how to go about the business of rehabilitating their attitudes towards work. They want jobs. Those jobs could be provided by a massive investment in roads, railways, sewers, new schools and hospitals and, above all, new housing.

§ Mr. Patrick Nicholls (Teignbridge)

The right hon. Gentleman is obviously returning to the theme of blaming unemployment on the Government. Does he perhaps recall a speech by his hon. Friend the Member for Paisley, South (Mr. Buchan) in 1978, in which he accurately predicted the figure for unemployment as it exists today, said that it was due to demographic factors and added that any attempt to blame that on a Conservative or a Labour Government would be wrong?

What has changed since then, apart from the fact that the right hon. Gentleman is now on the Opposition Benches and is clearly likely to stay there for some decades to come?

§ Mr. Hattersley

The hon. Gentleman is to be congratulated on his perception, for I am blaming 2 million unemployed on the Conservatives. I am delighted that, after all these years, he has begun to understand that point. I propose to deal with the demographic point when I turn to the false claims made by the Prime Minister and others about how many jobs have been created in this country. If the hon. Gentleman will contain himself in patience, I promise the House that I will deal with that point exactly. At the moment, I am telling him and the House what we believe and what the majority of people in the country believe, that the best way to reduce unemployment is by concentrating available resources on public sector capital investment which, as well as reducing unemployment, will do jobs which, in the national interest, are in desperate need of being done.

The Government's report, published only yesterday, said that we need to spend £20 billion on public sector housing repairs. Yesterday, we were promised £230 million. The difference between these two figures is wholly consistent with the Government's record on public and private housing.

Speaking in this debate last Wednesday, the Prime Minister said that Labour could not hold a candle to the Government's record on housing. I thought that it might be worth a small comparison to see whether the Prime Minister on this occasion had made a boast that she could substantiate. Let me tell the House the figures on which, according to the Prime Minister, the Conservative record is such that we cannot hold a candle to it.

Since 1979, public and private housing stock has increased by 1 million. In their five years in office, the Labour Government increased it by 1.5 million, an annual 581 increase in housing stock 50 per cent. better than the Conservative record of which the Prime Minister boasted. I can use the Prime Minister's phrase from another debate: we did better every year than they did in any year.

Yesterday, the Chancellor could have begun to make amends for these six years of appalling levels of house construction. He could have provided money to build houses and to create jobs, but he did not choose to do so. No wonder the Paymaster General was shamefaced in his statement about unemployment, and no wonder he was confused during his performance on Newsnight on Monday, in which he claimed, as I understand even honest Ministers are required to claim, that the Government had achieved a growth rate of 3 per cent. It was pointed out to him that the real average growth since 1979 was 1.3 per cent. a year, to which the Paymaster General retorted, "You've chosen the period carefully". That was the lifetime of a whole Government.

§ Mr. Gerald Howarth (Cannock and Burntwood)

Before the right hon. Gentleman leaves the question of public sector capital expenditure, will he tell us, when the sewers have been rebuilt and the new hospitals finished, what happens to all the people who have been temporarily employed on all these social programmes? Secondly, will he tell the House where the funds are to come from? If from the taxpayer, will he tell the taxpayer by how much? If from borrowing, will he tell industry by how much its interest rates will have to rise to finance it?

§ Mr. Hattersley

Three points can be extracted from the hon. Gentleman's question. The first is on taxes, and I promise the House that I am coming to that. The second is on interest rates, and I promise the hon. Gentleman that we shall not maintain interest rates at uniquely high levels for a uniquely long period, which is the record of the present Chancellor. The third is what happens when we all have the decent house that we deserve, the roads are perfect and all the hospitals are in use. That is the process by which we generate some real growth. By investing in capital, one generates growth. By selling off capital, one does no more than promote the temporary consumer boom which is the object of the Chancellor's policy.

I do not wish, however, to over-estimate the Government's achievements. I have mentioned a 1.3 per cent. growth during the Government's lifetime. Without the gratuitous bonus of North sea oil, growth under this Government would have been barely 0.75 per cent. a year. Before the Chancellor begins to take credit for North sea oil, let me tell him that the only connection North sea oil revenues have with the Government's current economic policy is that the policy wastes and dissipates North sea oil by spending every penny on the cost of unemployment—larger numbers of benefits, lost tax revenue—instead of using that money to put Britain back to work.

Whenever we talk about putting Britain back to work, we are told by the Prime Minister, as we were told by the Chancellor yesterday, that there are in this country 675,000 new jobs which have been created as a result of Government policy. This is an attempt by the Government to switch the argument from unemployment to employment. For my part, it is a switch in which I am perfectly prepared to take part, because the assertion that this Government have created, or have caused to be created, 675,000 new jobs is simply not true.

Even within the rules by which the Prime Minister attempts to justify her contention, the figures are wrong.

582 Nearly 40,000 of those so-called new jobs are part-time—perhaps only a few hours a week. We know from the Government's own statistics that the fall in full-time jobs over the period is 100,000. We have 100,000 fewer full-time jobs than two years ago, and the 675,000 is therefore made up either of part-time jobs or the self-employed. I say "either" because none of us knows the figure for the self-employed. There is no statistical basis on which it is calculated. There is simply a guess made by the Government, and that guess increases every time they want to boast about how well they have done on job creation.

Even if we accept all this and believe—incredible though it may be—that 675,000 new jobs have been created by this Government, there are still 1 million fewer jobs in the economy than there were when they were elected. Do not let the hon. Member for Teignbridge (Mr. Nicholls) tell me that this is all due to demographic failure, to women coming back into the labour market and to a temporary bulge in the birth rate. There are now 1 million fewer jobs in the economy than in 1979, and that must be the result of economic policy.

§ Mr. Nicholls

The point that I put to the right hon. Gentleman a few moments ago is precisely the same as the one that I shall now put. I was saying that one of his own colleagues—a previous Labour Minister—accurately predicted the unemployment figures as they exist today. He said that it was due to demographic factors. The right hon. Gentleman must now tell us what has changed since then, other than the fact that it now suits him to say something entirely different.

§ Mr. Hattersley

Two questions immediately arise. If the hon. Gentleman, with his powers of perception and careful study of the speeches of Labour Ministers, knew that there would be an inevitable rise in unemployment, what were all those "Labour isn't working" posters about? Secondly, what is the demographic factor, the bulge in the birth rate and the pressure of women coming back to work that have lost 1 million jobs in the economy over the last six years? The hon. Gentleman should understand that that argument will not wash, and he does himself no service by copying the Prime Minister's peddling of this crude propaganda, because no one is any longer deceived by it. That is part of the Prime Minister's style, but it no longer deceives the country.

I promised to answer the question on taxes. Last Wednesday the Prime Minister claimed that Labour would increase the tax paid by school teachers, nurses and metal workers. She based her claim on a grotesque misquotation of what I had said. It was a misquotation so grotesque that it is only reasonable to assume that it was intentional. I cannot believe that the Earl of Stockton would demean himself by behaving in that way, but while I do not accuse the Prime Minister of telling a lie, I can at least tell the truth about the taxes for the three groups that she picked out.

She said that when Labour comes to power, school teachers, nurses and metal workers would on certain assumptions all be paying substantially increased rates of tax. That is simply not true. But we do not need to look into the crystal ball; we can examine the record for the three groups whom the Prime Minister chose to defend from high taxation.

Each of those three groups has been faced with the burdens of substantial increases in indirect taxation, but on 583 direct taxation each has suffered very considerable tax increases over the past six years. On the Prime Minister's assumption, a school teacher now pays £9 a week more than when this Government were elected, a nurse £7 a week and a metal worker £8.50 a week.

§ Mr. Lawson

Proportionately.

§ Mr. Hattersley

As I heard what the Chancellor in his ignorance said, I should tell him that that is in real terms and is now proportionately more of their income than they paid in 1979.

When the Chancellor asks such a question without knowing the answer, I wonder whether the Tory tax promises have been broken because of intention or simple incompetence. The figures that I have just given are the reality of the Tory tax promises. Having won twice on the promise of tax cuts, they have increased the national annual tax bill by £29 billion. They are now desperate not to fight the next election without the least pretence of keeping their word. They will therefore sell off British Gas and, in the Chancellor's own words, will use the money, to bring tax cuts forward. They will do so without knowing what will happen in three years' time to sustain their policy, without knowing how to make up the lost income from capital revenue, and without caring what happens after polling day.

§ Mr. Gerald Howarth

rose—

§ Mr. Hattersley

I do not know whether I ought to give the Chancellor time to read the papers, but my final word is that in working this stratagem and in believing that a short-term bonanza can buy them votes, the Chancellor and the Government grieviously under-estimate the nature and character of the British people. The British people are more sensible than that, are less cynical than that and understand these matters better than the Government imagine. That is why they will certainly have no truck with yesterday's confidence trick.

§ The Chancellor of the Exchequer (Mr. Nigel Lawson)

The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) today offered us another vivid illustration of the effectiveness of market incentives. His articles in Punch, for which he is handsomely paid, are always so much better than the speech he has just given us free of charge. If the right hon. Gentleman had his way and imposed his punitive taxes on those he calls "the bloody rich" who earn more than £20,000 a year, he would deprive himself of the incentive to go on writing his Punch column. We would all be the losers.

It would not just be Punch columnists who would be driven to consider early retirement if they found themselves punished by the taxes proposed by the right hon. Gentleman, but I understand that he also has a remedy for that—he will make it not worth their while to retire either. Once the pensioners' savings have been handed over to his national investment bank, the prospect of retirement on secure income will look very uncertain indeed.

I do not like to reopen wounds that have barely healed, but when the right hon. Gentleman was standing for the leadership of "that great movement of theirs" he said in his personal manifesto: 584 We must know the cost of our programme and be prepared to explain the way in which the bills will be paid". Quite so! We are still waiting for the answer. We listened to the right hon. Gentleman's speech, but we did not hear that answer once. We shall continue to ask for it.

By contrast, this is a Government who know their mind, a Government with a long-term strategy and the practical means of pushing it forward. The Gracious Speech admirably exemplified the strategy. The Government's aim is to follow the maximum of freedom within a framework of law and financial discipline. We believe in the freedom to earn and to spend, to set up businesses and to invest, to own the family home and a stake in one's firm and to trade at home and abroad.

These freedoms should be cherished in themselves, but they are also the foundations of prosperity. The Labour party thinks little of them. It subordinates them to the collectivist impulse. That is why after five years of Labour rule these freedoms needed strengthening and why the economy had lost much of its dynamic force.

The legislative programme in this Session has as its top priority the freedom of the individual to participate in wealth and enterprise. There is the legislation to expand the right to buy council homes. Some 870,000 houses and flats have already been sold to their tenants, and many more will follow as a result of the changes we intend to introduce.

The financial services Bill will mark a major step forward in the regulation of our liberalised financial markets, and the building societies Bill will increase competition to the benefit of individual savers and borrowers. The Bill to reform shop opening hours is another which will expand individual freedoms and at the same time contribute to economic wellbeing. All these measures, and many more, have one clear aim: to expand individual freedoms and make our country a freer and more prosperous place in which to live.

§ Mr. Eric S. Heffer (Liverpool, Walton)

Can the right hon. Gentleman explain to my unemployed constituents what freedom they have under this Government to earn and to spend?

§ Mr. Lawson

They have the same freedom as they have had under Governments of this country for many years, but I shall come in due course to unemployment. First, I wish to deal with privatisation because the right hon. Member for Sparkbrook dwelt at some length on the privatisation programme, which is central to the process that I have described. It is without precedent in this or any other country and it has been steadily gaining momentum. Right hon. and hon. Members on the Opposition Benches wish that privatisation would go away, and I understand their feelings. They recognise that it is a policy whose time has come. It is popular with the whole country and increasingly it is being emulated abroad—in Canada, Japan, Germany and even in Socialist France and Sweden. It is a policy whose economic rationale is not in doubt.

I could not be more pleased that the right hon. Member for Sparkbrook selected this aspect of our programme as the target for his attack both yesterday and today. In doing so, he displays all the flair of a General Cardigan leading the Light Brigade into the valley of death: identify the enemy's strongest point and then send in your most lightly armed troops. The best that the right hon. Member for Sparkbrook can do is to complain, as he did today, that the 585 proceeds might be used to finance cuts in taxation—a curious example of trying to maintain that two rights make a wrong.

The privatisation programme will continue and accelerate because of the benefits it brings to the nation in the form of increased enterprise, increased efficiency and increased employee and individual shareholding. The decision to privatise British Gas stands on its merits. The fiscal judgment is quite another matter, and one that I shall justify to the House in my Budget speech next year. There can be no doubt about the outstanding success of privatisation so far.

We have transferred 20 per cent. of the state sector of industry that we inherited in 1979 into public ownership in its truest sense. All of those companies are doing well. In all of them the commitment to the future, the commitment to success, is stronger than ever before. The employees have demonstrated their commitment in no uncertain terms. Over a third of a million employees in nationalised industries have so far taken advantage of the opportunity to invest in their own company. And from British Aerospace, the first sale, onwards we have been attracting first-time investors to the stock exchange. The massive British Telecom issue alone acquired on flotation 2 million individual shareholders, of whom 1¾ million remain shareholders of BT. Half of them had never before in their lives held a share.

Opposition Members have now taken to saying that privatisation is all very well, but what will we do for an encore? That was the burden of the right hon. Member for Sparkbrook's speech today. He also dealt with this point yesterday. I hate to disappoint him but there is no possibility of the privatisation programme running out of steam. British Telecom has paved the way for British Gas, and British Gas will pave the way for other candidates. And so it goes on. I could remind the House that the current cost value of the assets of nationalised industries is still over £90 billion. But I will make a promise to the right hon. Gentleman. He asks me what I will do when the privatisation programme is complete. This is my promise. If he is still shadow Chancellor at the end of the next Parliament, which his question presupposes, I will tell him the answer then.

In the meanwhile, let me put an immediate question to him. Which privatised companies would a future Labour Government, if there were to be one, renationalise, and on what terms? Would they renationalise British Telecom, British Airways, British Aerospace, Britoil, the British Gas Corporation? Would the right hon. Member for Sparkbrook care to answer that question? I should be pleased to give way to him. [HON. MEMBERS: "Answer."] The right hon. Gentleman is coy, he is shy, he does not know what to say. But we shall continue to ask him the question so that he has time to think up an answer and tell us precisely which of those companies he would like to renationalise, and on what terms, because the nation and the House have a right to know.

The charge that privatisation does long-term damage to public finance is absurd. Privatisation reduces the need to borrow and thus the burden of debt interest. Moreover, members of the Opposition—right hon. Members in particular—appear to forget that private sector companies and their shareholders pay tax. As their performance improves, the more tax they will pay. It is equally absurd to argue that the Government's scope for cutting taxes depends upon privatisation receipts.

586 The route to a sustained reduction in tax rates lies, as I stated very clearly yesterday, in firm control of public spending against a background of continued economic growth. My statement yesterday demonstrated that we are maintaining, and shall continue to maintain, that firm control. We are clearly achieving steady economic growth.

As usual, however, the right hon. Member for Sparkbrook seeks to have it both ways. His own plans would involve a massive inflationary increase in spending and borrowing, yet he talks of fiscal irresponsibility at a time when the public sector borrowing requirement, even if there had been no privatisation proceeds at all, would this year be the lowest as a percentage of gross domestic product that it has been for 14 years—yes, lower even than in 1981–82 when the Opposition howled about the stringency of my predecessor's 1981 Budget. It is lower even than that.

§ Mr. Stuart Bell (Middlesbrough)

Will the right hon. Gentleman give way?

§ Mr. Lawson

I would rather give way to the right hon. Member for Sparkbrook, but I will give way to his monkey.

§ Mr. Bell

I must ask the Chancellor to withdraw that remark.

§ Mr. Deputy Speaker (Mr. Harold Walker)

Although the expression was clearly discourteous, it is not an expression that I ought to require the Chancellor to withdraw. It has been used in a previous debate. Does the hon. Member wish to pursue his intervention?

§ Mr. Bell

The Chancellor referred to a public sector borrowing requirement of £8 billion. Is it not a fact that £1 billion of that £8 billion is due to the diminution in oil revenues? Is that diminution clue to the exchange rate for the dollar or because we have entered a period in which oil revenues will diminish?

§ Mr. Lawson

I did not wish to upset the hon. Gentleman as he knows I like him, but I thought it was appropriate and he would enjoy it if I used a remark that Mr. Aneurin Bevan used about Mr. Selwyn Lloyd. In answer to the question, the reduction in oil revenues is as a result of the exchange rate against the dollar being different from what was envisaged at the time of the Budget.

Rolling back the frontiers of the state sector of industry has meant increased opportunities for private ownership. In the same way, our policy of restraining public expenditure means increasing the freedom of working people to keep, spend, save and invest their own earnings.

My statement to the House yesterday demonstrates the Government's continued success in restraining the growth of public spending. I was able to announce that expenditure has been contained within the cash totals that we set ourselves last July; that spending will be held broadly constant in real terms over the next three years; and that as a proportion of national output it will continue to decline, as it has in each year since 1982–83.

I also draw the attention of the House to a new feature in the autumn statement—the charts, which show that those broad trends in public expenditure are not significantly altered even when privatisation proceeds are left out of account.

587 By the end of this financial year public spending will have been falling as a proportion of national output for three successive years. That is the longest consecutive decline since the 1950s. Yesterday's plans show that it is set to fall further over the next three years. That is already, I believe, making a major change to the performance of the British economy, creating room for enterprise and initiative. It will cause a still greater change in the years ahead.

The right hon. Member for Sparkbrook spoke about taxation. Certainly, proper restraint in public spending is central to the success of economic policy. It is central to the growth of enterprise, to the expansion of the wealth-creating sector and to the creation of lasting jobs; central to rising living standards and to the control of inflation; and central to reducing the burden of tax—on incomes, where it stifles initiative and risk-taking, and on employment, where it destroys jobs, directly and immediately.

The right hon. Member for Sparkbrook made his usual remarks about the growth of tax revenues since 1979. As I remarked in a sedentary intervention, and I am sorry that it was a sedentary intervention, Mr. Deputy Speaker, he seems to go on finding it astonishing that, as the economy grows and earnings rise, so do individuals' tax bills in money terms.

The reason for the difference between the two Governments is this. Under this Government, real take-home pay has risen for people at all points on the earnings scale. For a married man on average earnings, that means a real increase in take-home pay of some 13 per cent. since 1979, compared with only a half of 1 per cent. under Labour. And what of the lower paid, for whom the right hon. Gentleman professes such concern? Under Labour, at only half average earnings, a man's take-home pay rose a little more—by some 4 per cent. Under this Government it has risen by 12 per cent.—three times as much.

§ Mr. Hattersley

Is the Chancellor glad or sorry about the phenomenon that he has just described? He told the City of London, assembled for a banquet, that wages were rising too much.

§ Mr. Lawson

The important point is that our unit labour costs do not rise too much. That is the point that I have made time and again.

The Government's tax reductions have not been confined to income tax. We have abolished the national insurance surcharge—Labour's tax on jobs. Altogether, we have reduced taxes on employment from 14 per cent. to about 9 per cent. of total tax revenue.

It is no good for the right hon. Gentleman to imply, as he sought to do this afternoon, that taxes are higher under this Government than they would have been under a Labour Government. No one in his right mind would believe that. No one will believe that the Labour party would have cut the basic rate, increased thresholds by 20 per cent. in real terms or abolished the national insurance surcharge, which it introduced. No, it would have put up taxes. It would have had to, to finance its profligate and unsustainable spending plans. There is, of course, an alternative, or so Labour Members think. They could have tried to borrow their way out of trouble. They had plenty of experience of that in the disastrous years up to 1976.

588 If—heaven forbid!—I had set the PSBR this year at 9¼ per cent. of GDP, as the right hon. Member for Leeds, East (Mr. Healey) did in 1975–76, we would have had a PSBR this year of £33 billion. No wonder the Labour Government had to go cap in hand to the International Monetary Fund. The contrast between the 1970s and today could not be more marked. The benefits of our policies of encouraging enterprise, initiative and individual freedom are now very clear.

We were told that giving economic power back to the people—shareholder power, members' power within the trade unions—was a foolish gamble. Nothing could be further from the truth. For many years in this country we suffered from a hardening of the economic arteries. New business formation was slow; industrial relations were disastrous. The country could be, and regularly was, held to ransom by small groups of workers in positions of real or imagined industrial power. All that has changed.

The number of strikes in British industry during the first nine months of this year was the lowest since well before the war. The whole trade union movement is undergoing a sea change in attitudes. The legislative measures that we introduced have now shown their worth. The unions have been given back to their members, and the members are telling their trade union bosses that they want to work and want their companies to succeed.

The old "them and us" divisions within British industry, which bedevilled industrial relations for so long, are breaking down gradually. I have no doubt that the dramatic expansion of employee share ownership has been a major contributory factor. There are now around 1,000 all-employee share schemes in existence, involving around a million employees. There were just 30 such schemes when we took office in 1979. The initial value of shares distributed under all those schemes is now over £1 billion, and the number of employee shareholders continues to grow day by day.

Last year's Finance Act allowed companies, for the first time, to establish discretionary share option schemes. They have seen an even more explosive growth. I can now tell the House that, a mere 18 months after the legislation, the number of approved schemes has just passed the 1,000 mark.

Throughout the 1970s the Labour party talked and talked about industrial democracy, but it did nothing. We have acted to bring about the most direct and influential form of industrial democracy that there is. Perhaps that is slightly unfair on the right hon. Gentleman. Perhaps during its last term of office the Labour party was encouraging other forms of ownership—co-operatives, for example. Certainly the figures show that there were almost 300 co-operatives in the United Kingdom when Labour lost office. And the number now? More than 900. That growth in co-operatives, which I wholeheartedly welcome, is yet another aspect of the revival of the small business sector.

We have been suffering during the 1980s from the lack of new business formation in the 1970s. It will take a while before we can see the full effect of what has happened to encourage their growth, but we know that the benefits are on the way. Look at the growth of new businesses. Business start-ups outstripped failures by 36,500 last year. That is a net addition of 100 new businesses for every day of the year—a sharp acceleration in the rate of new business creation, which was already at a high level from 1980 to 1983.

589 The Government are assisting that process in every way they can, because it has been demonstrated throughout the world, particularly in the United States and Japan, that countries with a strong, small business sector are best able to adapt to changing economic circumstances and to maintain high levels of employment.

§ Mr. Michael Grylls (Surrey North-West)

Will my right hon. Friend give way?

§ Mr. Lawson

The business expansion scheme has made a particularly important contribution to the revitalisation of small businesses in the past three years.

The latest results we have for 1983–84, the first year of the scheme, show that 715 companies raised BES finance of more than £100 million, from about 20,000 investors. Although the following year's results are not yet complete, we already know of more than 500 companies that have again raised BES finance totalling more than £100 million. The final figures for 1984–85 will almost certainly show a substantial increase over 1983–84, the first year of the scheme. Much of this money is going to small-risk enterprises, as the scheme intended it should. Business expansion scheme money is only part of a huge growth of the venture capital industry during the past five years. In 1979 a mere £10 million of venture capital was invested in this country. Last year it was more than £300 million. This is true seed corn investment and the key to the jobs of tomorrow.

It is a great pity that the right hon. Member for Sparkbrook has not noticed this development. If he had, he might have saved himself the embarrassment that his proposal for a national investment bank has caused him. The right hon. Gentleman wishes to create a state-owned fund run by out-of-work bankers and union bosses, backed by money siphoned out of the pension funds—a political slush fund. He wishes to find investments which the rest of the financial community have failed to spot.

There are those who say that this is a return to the old game of trying to pick winners, but that is an unfair criticism of the right hon. Member because he has made it clear that: it's almost impossible for the Government to pick winners". The national investment bank would be in the business of picking losers. I have every confidence that it would find them, and lose the pensioners' money in the process.

§ Mr. Grylls

My right hon. Friend the Chancellor has rightly stressed the importance of the capital venture market and its growth in the successful creation of new firms. The business expansion scheme has been successful. Will my right hon. Friend consider whether people could take advantage of the BES to invest in their own companies? I know that that is a problem but consideration of the matter would fit in with the Government's other policies and such provision would be helpful and popular.

§ Mr. Lawson

I intend to look into that and other aspects of the BES in the light of the Peat Marwick report. If there are to be changes, I shall announce them in next year's Budget.

At the outset I stressed the twin themes of the Gracious Speech—maximum freedom within a framework of law and financial discipline. The results of that strategy are already impressive—steady growth of output and declining inflation. The right hon. Member for Sparkbrook has once again been through his list of selective statistics 590 in an attempt to denigrate that success. The right hon. Gentleman spoke about the performance of manufacturing output and referred to the report of the House of Lords Select Committee on Overseas Trade. It is worth demonstrating the quality of the report's reasoning. I am not saying that all of its conclusions are wrong but on the whole it does not form a helpful contribution to the debate. In paragraph 72 the report states: But sustainable growth has not been possible and will not be possible without a favourable trade balance in manufactures". That is bad luck on the United States with a trade deficit on manufactures—no growth for the United States. It is even worse luck on the world because there is no way that the world can achieve a surplus in manufacturing.

Paragraph 87 of the report states:

The committee have received devastating evidence from the Association of British Chambers of Commerce (ABCC) on decline in our manufacturing industries … between 198C and 1983 they estimate that assets and capacity of manufacturing industry fell by 24 per cent". The figures given are for only one company, and they are wrong. The share of manufacturing in total output has fallen in the United Kingdom, but although some capacity has been lost in manufacturing, much new capacity has been created. There is no clear evidence to show a loss of capacity between 1980 and 1983. However, manufacturing investment last year and this year combined has risen in real terms by more than 25 per cent.

I agree that the share of total United Kingdom output of manufacturing has fallen, but that is nothing new—it has been a feature of the past 25 years. It is not peculiar to the United Kingdom. The same has happened in most other major industrial countries, such as Germany and the United States. What matters is manufacturing's future, which depends pre-eminently on its productivity and profitability. In terms of productivity, growth and profitability alike, manufacturing industry under the Government has done far better than it ever did under Labour. Total national output is well ahead of what it was when we first took office and has been growing for almost five years now at an average of 3 per cent. a year.

The right hon. Member for Sparkbrook also seems to be concerned about our investment performance. Despite the world recession, the level of total fixed investment in the United Kingdom in 1985 looks like turning out some 9 per cent. higher in real terms than when we first took office. How does that compare with the Labour Government? They just about managed to achieve an increase in fixed investment of 1 per cent. They are in no position to preach about capital investment.

What about the important matters that the right hon. Gentleman chooses not to discuss? The inflation rate next year is likely to be not merely better than that achieved by the previous Labour Government; it is likely to be little more than half the best figure they achieved in all of their years in office.

Of course, we all recognise that we cannot be satisfied with the way in which the economy is operating when we are faced with unemployment at its current level. Unemployment is a human and social problem of the first importance—to say nothing of the waste. But it is a cruel deception to say that by borrowing and spending more the Government could cut unemployment overnight. If that were true, there would be no unemployment in Europe or anywhere else today. There is nothing easier for a Government than to borrow and spend other people's money. The answer to the problem of unemployment lies 591 in the firm pursuit of anti-inflationary policies, and continued strenuous and painstaking efforts to improve the flexibility of our markets, especially the labour market.

There are already signs of success. There are about 600,000 more people in work in the United Kingdom now than there were when we were returned to Office in June 1983. Opposition Members are always infuriated by this statistic. They try to claim that these jobs are not real jobs. They imply that self-employment, which has grown explosively in recent years, and women's jobs, are somehow less valuable to the community than other types of work. We reject that view. Our labour markets are responding to changing social patterns. Many married women want part-time employment outside the home. For many people, as they bring up children, that is just what they need to balance the family budget and allow them sufficient time at home. I see no reason to sneer at them for doing so.

Changes in employment behaviour are part of the increased flexibility we need if the economy is to continue to grow.

§ Mr. Hattersley

The Chancellor has got the script wrong. He should not say that there are 675,000 more jobs. He should say 675,000 new jobs. That is not true either, but that is the propaganda line that he should be taking.

§ Mr. Lawson

The right hon. Gentleman seems to have as much difficulty listening as he does understanding. I said that there are about 600,000 more people in work, and that is true.

§ Mr. Hattersley

We want more jobs.

§ Mr. Lawson

There are more people in work. Hansard will record that very clearly.

Unemployment has recently started to show welcome signs of a reduction. Last month's small fall was further encouraging evidence that the prospects for the second part of this Parliament are considerably better than for the first. The Government intend to maintain the same policy framework that has produced the impressive results for output, inflation, investment, balance of payments, productivity and employment that I have already described. That is the framework set out in the medium-term financial strategy, and in my Budget next year I shall again set out the guidelines for the medium-term financial strategy.

Many hon. Members are still anxious about the international financial scene. They see growing protectionism and the persistent problem of international debt as two clear risks to the generally favourable world scene. The Government are trying to resolve those problems. In the past two months there have been two significant developments. First, the group of five meeting, which I attended in New York on 22 September, produced the so-called Plaza agreement, which addressed itslf to the threat of protectionism. The United States Administration showed their concern about the high level of the dollar and their determination to act to correct it. A concrete and practical agreement was reached collectively to take the necessary action to secure adjustments in the exchange rates between the dollar and other major currencies.

The results of that meeting are there for all to see. Since 22 December the dollar has depreciated by 14 per cent. 592 against the yen, by 8 per cent. against the deutschemark and by 3 per cent. against sterling. Further action will be needed, not least to reduce the huge fiscal deficit in the United States and to remove obstacles to the free operation of financial and other markets in Japan. The threat of protectionism has thus receded slightly. There has been a change of mood in the United States Congress and there must now be a far better chance that if protectionist legislation is proposed it will not be put into effect.

The Plaza agreement has shown the potential for increased co-operation among countries which follow the same economic strategy.

§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

How can the Government hope to solve America's problems when America shows no willingness to solve its own problems? The United States had a $15 billion deficit in one month and now has a total deficit of $200 billion. The Americans want the rest of the world to solve their problems because they will not impose the financial stringency which my right hon. Friend the Chancellor considers to be the hallmark of Government policy. Why is it right for the Americans to continue spending while sterling and our interest rates are kept high to help them when they will not help themselves because they fear the consequences?

§ Mr. Lawson

I hope that my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) will be able to catch your eye, Mr. Deputy Speaker, and develop his arguments later in the debate. In all seriousness, the threat of protectionism is not just America's problem but the world's problem and it is right that we should combine to combat it.

The United States Treasury Secretary, Mr. Jim Baker, has launched an important new initiative to deal with the threat of international debt. He has proposed a new role for the World Bank and the regional development banks. Those banks would be provided with additional capital to support increased lending, but that lending would be linked to, and conditional upon, sound and realistic economic policies in the recipient countries. Her Majesty's Government fully support this initiative, which offers a sensible way forward for countries in the grip of severe financial difficulties. I believe that it makes good sense to develop the role of the World Bank in this way.

Let me make one thing clear. It cannot and should not be for Governments to determine the attitudes of commercial banks towards the prospects of debtor countries or to tell them what decisions they should take. Those decisions, the level of individual banks' exposure to particular borrowers and the management of the banks' portfolios, must remain theirs and theirs alone, within the proper constraints set by their supervisory authorities. Both those international developments will be welcomed by the House. They increase the chance that we shall continue to enjoy a combination of steady growth and falling inflation unknown in this country for a generation.

We are now close to the mid-point of this Parliament. Since the British people returned us to office with an increased majority at the last general election the Government have amply justified their confidence. Inflation has averaged 5½ per cent. per year, economic growth has been running at 3½ per cent. per year, and manufacturing output has risen by more than 3 per cent. per year.

593 The House will wish to know how I see the prospects for the second half of this Parliament. I am afraid that I have to disappoint the Opposition and say that the prospects are rather good. I hope that hon. Members can grit their teeth and get over that. Inflation is now firmly on a downward path and should be under 4 per cent. by the middle of next year. The CBI's latest survey reports that cost pressures on industry are the weakest for 20 years and the outlook for prices is the best since the 1960s. Inflation is firmly under control, and steady growth will persist. There is no sign of the long-heralded downturn on the horizon, provided that we continue to pursue cautious, sensible financial policies in combination with our other measures to encourage enterprise.

The measures that we shall be bringing before the House this Session represent a broadening and a deepening of the strategy that we have followed for the past six years. They will move us steadily and resolutely towards greater prosperity and a better society in which, within the law and within the overarching framework of financial discipline, each individual can exploit his or her talents to the full.

§ Dr. David Owen (Plymouth, Devonport)

I beg to move, at the end of the Question, to add:

But humbly regret that the Gracious Speech contains no evidence that the Government seriously plans to tackle Britain's most fundamental problems; believes that further action is needed to stimulate manufacturing industry through a cut in interest rates and a more competitive exchange rate via sterling's entry into the exchange rate mechanism of the European Monetary System; and calls on the Government to seek a reduction in unemployment through selective capital investment, a fair and durable incomes strategy, lower employers' National Insurance contributions, and an expansion of the community programme and skill training. The amendment draws the attention of the House to the Government's failure to tackle the most fundamental problems in Britain.

On the first day of debate on the Gracious Speech, the Prime Minister devoted the latter part of her speech—that was the part that the newspapers highlighted—to law and order. In her speech the Prime Minister embarked on a course that I hope the Government will not pursue—I am glad that the Home Secretary did not pursue it in his speech—which appeared deeply to polarise the Government and the Labour party. The Prime Minister tries to paint the Conservative party as the party of the police and the Labour party as the anti-police party. There are enough genuine divisions in British politics without seeking to exacerbate a division over the police force.

The debate on crime revealed the seriousness of the position. The figures for violent crime, crime involving firearms and arson are all now at record levels. This betokens a sense of decline not just in the inner cities but in the values of this country, and that is causing much concern. The declining social scene revealed by the raw crime statistics must be placed beside a record of serious economic decline.

Had the House debated this Gracious Speech in 1950, Britain would have been the third richest country in the world, with an average standard of living exceeded only by the United States and Switzerland. We were then a relatively strong economic power. Britain is now 19th in the industrial league table and we are now in the third league of industrial nations. In 1985, six years into this Government, Italy has surpassed the average standard of living in Britain. On present trends, despite the 594 Chancellor's optimism, it is likely that by the early 1990s Spain will have a higher average standard of living than Britain. In the next two to three years East Germany may surpass us.

That is the background of our economic decline—of Toxteth, Brixton, Handsworth and Tottenham. They are scenes of violence which when seen from abroad on TV are not totally dissimilar—though we may not like to face it—to some of the scenes of violence we have seen in South Africa. We must view the realities. The Chancellor may not like to hear it, but one of the characteristics of his period in office is his blithe disregard for the social consequences and the scarring of generations to come resulting from appalling unemployment.

A clear divide is beginning to emerge in British politics. It is certainly not a divide which cuts straight across the House, but cuts deeply into the Conservative party. It is personified by the Chancellor and the Prime Minister, who clearly believe that the next election can be won even with high levels of unemployment, and that the crucial thing is to address the aspirations and dreams of the predominantly Conservative electorate—those in work—for whom it is thought the most crucial thing is to cut the standard rate of income tax, give them a higher standard of living and create the sort of consumer boom at which the Conservative party is a past master.

Before we extol the merits of Lord Stockton, I should mention that I remember spending many years as a prospective candidate decrying the 13 wasted years of Tory misrule. Lord Stockton was then known by the rather different name of "Supermac". He could have taught even the Chancellor of the Exchequer a thing or two about how to manipulate the economy to produce a consumer boom prior to an election.

The Chancellor will not lecture us any more about the public sector borrowing requirement, and M3 will again be what it is for most people in this country—a motorway. The monetarist statistics to which we have had to listen and the lectures from the Prime Minister on the fiscal probity of this Government are a thing of the past. We are now beginning to see a relaxation of the fiscal stance in order to produce the same candy floss consumer boom that we experienced from Conservative Governments through the fifties and early sixties. The only problem then was that Reggie Maudling got his timing wrong.

Our criticism of the Chancellor of the Exchequer is not that he has relaxed his fiscal stance; we have been urging him to do that for many years. It is not that he has relaxed his public sector borrowing requirement; we have also been urging that for many years. What we criticise is that the direction of the relaxation is not towards resolving our deep-seated economic problems; it is not to use the assets from sales to build up other assets; it is not to use the proceeds from British Gas to try to rebuild the manufacturing sector which was savagely destroyed as a result of the exchange rate policy pursued by the Chancellor when he was Financial Secretary to the Treasury and by the then Chancellor in 1980–81.

The Government intend to use those assets to massage the electorate. The truth about the Chancellor's strategy, which is of course wholly identified with the Prime Minister, is not that it is an economic strategy—it is an electoral strategy. The Budget he is preparing will never again be called a Budget for jobs; it will be a Budget for votes. Towards the end of the year the rate of 595 unemployment will probably move down slightly. That is possible, and I certainly hope that towards the end of 1986 and in early 1987 we will see a real fall in unemployment. I will rejoice if that is the case. However, if we are looking to the Government to mount a Serious attack on unemployment and to face the devastation that has occurred in our northern industrial towns; if we are looking to them to try to restore, revitalise and regenerate the inner cities or for hope for young school leavers that they will not spend three or four years without a job; or for investment in higher education and science and in the skilled training which is the only real asset we can build up for the next century, we will look in vain.

The Government are not seeking to restore the real strength of the economy or to prepare for the day when the oil revenues start to decline. That is the real indictment of the Chancellor and the Prime Minister. It is as if they do not wish to face the reality of economic decline. It is as if they do not want to use the fortunate circumstances of the present, when we still have quite substantial oil revenues. Looking at their policies for privatisation, one finds that it is not as if they are prepared to analyse the real purpose of privatisation.

We have yet to see the legislation which the Secretary of State for Energy is to produce. Will we see a real regulation which will try to protect the consumer from the monopoly power of British Gas? The Chancellor says yes. I hope that he is right. Will we see a freeing up and a creation as far as possible of competition? Of course, the trouble is that to do that would reduce the attractiveness of the sale of British Gas. There is a dilemma here and I hope the consumer interest and the competitive and strong economic interest triumphs. We will ask, "Where is that money going to be spent?" Is it going to be spent on improvements to the infrastructure that are still demanded by many of the outside critics of the Government, whether they be the CBI or British industry, or is it going to be spent, as the Chancellor hints and as Tory Back Benchers appear to want, on a reduction of the standard rate? There is even a division of opinion about whether or not it should be used to take more people out of taxation.

A deep and almost moral argument will go on in the country over the next couple of years. The Chancellor of the Exchequer and the Prime Minister have misjudged the views of even the traditional Conservative voter. The Chancellor will find in the south of England just as much as in the midlands and the north a sense of deep anxiety among the people about how we ought to be diverting our resources. Even those with a job who are reasonably well off will question the case that they should be made slightly better off while they see millions of their fellow citizens without a job. The Government have a particularly cynical and rather too market-oriented view of their fellow men and women if they believe that votes are going to be bought at the next election in quite the same cynical way as they were bought in the fifties and early sixties. [AN HON. MEMBER: "Bought by your party."]

Not many people would argue that votes were bought by the 1979 Government. They were lost by that Government, not bought. Whatever else was being done in 1979, votes were not being bought. The 1979 election defeat stemmed more than anything from the fact that "Labour was not working". That was the headline, and a very effective attack was made on that Government 596 because unemployment was then over 1 million. Did anybody believe in 1979, even those Conservatives who voted for the Government, that unemployment would rise to 3.5 million—or 4 million if we take the true, adjusted figures? Not many people thought that. If many people had thought that that would be the consequence of voting for the Tories, they would have hesitated.

Perhaps it is perfectly open and reasonable to argue that the Chancellor and Prime Minister are right, that the people do not want to be warned of economic decline or to face Britain's real position in the world. Perhaps they do not want to face the realities of crime and drug addiction in our midst or the despair and disillusionment that exists in all too many families up and down the country. Perhaps the Government believe that votes can be bought and that all that is necessary is to generate again the candy floss society, putting the emphasis on private affluence and allowing public squalor to continue.

The Prime Minister has made a major political misjudgment. I shall relish the ensuing political argument, because I believe that it is about time that we said to the people, "Your responsibility is to forgo those tax cuts." Those who have work and who are reasonably prosperous should tell the Government, "We want you to invest for the future because we are worried that oil revenues will start to decrease in the early 1990s." I do not believe that oil revenues will decrease as quickly as some people expect, and there will still be substantial gas reserves. But people have become more conscious of the vulnerability of our economy in the medium and long term, and with it the standing of Britain in the European Community and the world. A growing body of Conservative voters will find the style of the Chancellor and the Prime Minister deeply unattractive, and we will relish the challenge of gaining their votes.

§ Mr. Tim Yeo (Suffolk, South)

Does the right hon. Gentleman recognise that British voters know that our economic problems and the causes of our decline are rooted in the excessive trade union power which the Government of which he was a member fully supported, and in the investment measures which his Government fully supported? Those matters must be resolved if we are to reverse our economic decline, and the fact that the Government have started to resolve those problems is reflected in our present high investment and the fact that growth is increasing while inflation is decreasing.

§ Dr. Owen

Great mistakes have been made in the economic management and government of the country through the 1950s, 1960s, 1970s and 1980s. If none of us has the capacity to learn from some of those mistakes, whichever Bench he or she sits on, heaven help Britain in the next century. I have certainly learnt from some of the mistakes which I helped to make, and I am not ashamed to say so. Furthermore, 64 per cent. of the members of the Social Democratic party were not previously members of any political party, Conservative, Labour or Liberal. It is a wholly new political force. When those members listen to some of the sterile debates in the House and outside, they wonder whether we will ever learn or whether we will ever think afresh and anew. Is the Chancellor prepared to learn from the experience of 1980 and 1981?

§ Mr. Lawson

Yes.

§ Dr. Owen

He says, "Yes," and I believe that he is right to say that inflation will be kept down. But what 597 mechanism is he using to keep down inflation? The present high interest rates will devastate manufacturing industry even further. Another mechanism is the unrealistically high exchange rate. Apart from his prejudice towards the idea, he does not want Britain to join the EMS because he knows that the present rate is far too high. Britain needs a competitive exchange rate if its manufacturing industry is to prosper.

§ Mr. Lawson

Inflation would increase.

§ Dr. Owen

The Chancellor is right. If we reduce the exchange rate to a realistic level for our manufacturing industry, inflation will be affected. That is a great worry. We should not go into the EMS above about 72 to the basket of currencies; it is currently running at 79 and I would prefer it if we could go in lower. It would be much better to enter the EMS at a rate that we can hold and sustain. I believe, too, that a stable exchange rate would be of inestimable help to British industry. One way to reach a more realistic exchange rate would be to reduce our extraordinarily high interest rates. But the Chancellor will not do that because he is afraid that it might increase inflation. It appears that he is prepared to pay almost any price to keep inflation down.

The Chancellor is right to be worried about inflation. Anyone who believes that we can increase it lightly is wrong. But on the other side of the equation is our tremendous wasted capacity. I am referring not only to the 3.5 million people unemployed, but to our incapacity to rebuild our manufacturing industry, which is essential if our prosperity is to be guaranteed into the next century. Of course, we can and rightly do support other industries. I welcome the modest measures to help tourism and the service industries, but time and again the Government ask manufacturing industry to pay the heaviest price.

I would like employers' costs to decrease further, which is why the SDP advocates a reduction in the national insurance contribution. I do not like the fact that the employment measures—some of them desirable—announced by the Paymaster General yesterday must be financed by industry. Everything should be done to help to keep down unit costs and to keep Britain competitive—[Interruption.] The Chancellor may laugh, but one of the most worrying signs is the extent to which Britain is losing its competitive edge—something to which the CBI drew attention recently. It is no use comparing Britain now with the Britain of the past; if we compare ourselves with our Western competitors, we can see that we are losing our competitive edge.

I hope that the Chancellor will not repeat in 1986 the folly of 1980 and 1981: that to hold inflation down he will not saddle British industry with a long period of uncompetitive exchange rates and too high interest rates. If we have to pay the price of slightly increased inflation, I am prepared to pay it. The alliance will discuss the necessity for an incomes strategy to grapple with the problem. Private sector pay is increasing at about 8 per cent. a year—

§ Mr. Yeo

That is going back to the incomes policy of the 1960s.

§ Dr. Owen

No, it is not going back to the 1960s. We should try to learn from some of the mistakes of those incomes policies. We must try to retain competitive market pressure in the private sector, but, with an 598 understanding to bargain within a certain range, competitive bargaining can be highly advantageous. That is what happens in many European countries. The "concertation" among unions, management and Governments in many western European countries has been beneficial in allowing them to expand, to reduce unemployment and to have a proper regard for the consequences of extremely high wages in some key sectors.

The key is to justify high wages through productivity. It is no use the Chancellor continuing without a sensible incomes strategy for the public sector. As grievances abound and unfairnesses multiply, we shall need an incomes strategy that embraces the public and private sectors. I do not wish to return to statutory controls; we know the difficulties and anomalies that they create. But to ignore the need for an incomes strategy, as the Government have tried to do in some areas, and then arbitrarily interfere in the sector which they most closely control—the public sector—is a recipe for division and for inefficiency. Market forces have not yet controlled the movement of wages from the private sector.

The Chancellor will ignore what I am saying, because he will not take risks with inflation, do anything serious about unemployment or markedly reduce interest rates. He is prepared to continue with our present high exchange rate. But I hope that he will realise from the comments that have been made on his announcement yesterday the unease that exists, not just in the City but in industry generally. His autumn statement was not received with great acclamation. "Creative accounting" is the nicest criticism used about it. I saw the description "dodgy" used in one newspaper that normally supports the Conservative party. We all know that the Chancellor is dodgy when quoting statistics and making predictions. He has an unparalleled record of failing to anticipate the facts, whether on unemployment, inflation or especially interest rates. He is wrong as frequently as he is right.

However, the Chancellor is right to claim credit for some things. As my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins) said yesterday, the economy is not altogether bleak and there are some good signs. But our underlying weaknesses, whether social or economic, are not being tackled. All the signs are that the Government are heading for a rather cynical election ploy. They believe that, if they can put more money into the pockets of their traditional voters, their dissatisfactions will disappear and the Conservative party will be returned, it hopes, for a third term of office. The Government underestimate their own supporters and the morality, altruism and generosity that still exist in the British people.

We now see Conservative wets, like the Secretary of State for Energy, adopting privatisation. It seems to be a necessary move in the struggle for the leadership of the Conservative party. The Secretary of State for Defence is privatising the dockyards against the recommendations of the Select Committee on Defence and the Public Accounts Committee. Such proposals are of little value to the real economy but everything of value to the dogmatism that seems to be a necessary part of aspirations to Tory leadership.

The Chancellor appears to have no such aspirations and, watching the Government Benches when he speaks with his usual rudeness to most of his hon. Friends, I know that there is no need for any of us to fear that he is a candidate for the leadership. However, we fear that his 599 period of office will hasten the decline of the British economy and exacerbate the social tensions that already exist and to which the Government should be addressing themselves.

§ Mr. Edward Heath (Old Bexley and Sidcup)

The Gracious Speech is a comprehensive survey of Government policy, but the way in which we debate it allows it to become compartmentalised. We take each aspect of it separately for a day. However, in his closing words, my right hon. Friend the Chancellor moved on to the international sphere, certainly in as far as it affected economic affairs. He pointed to two important developments in the past few months, both of them undertaken by Secretary of the Treasury Baker in the United States.

In the past two months, there have been four major developments—the two mentioned by my right hon. Friend, plus the arrangements for the summit which is to take place shortly and the movement of my right hon. Friends the Prime Minister and the Chancellor and the Government further away from dogma and into pragmatism. All four interlink. I have become more and more impressed by the fact that in the 1980s we see that all of these aspects are irretrievably interlocked and one cannot deal with any one of them without dealing with the others.

The summit is of vital importance economically because of the burden of defence expenditure on the United States and its allies, as well as on the Eastern bloc. For that reason alone, let alone the danger of the arms race, it is in the interests of both East and West to reach a solid agreement about the limitation of arms. Therefore, it is not enough to wish the President well when he has his dialogue with Mr. Gorbachev in Geneva. What is required is a firm decision at that summit, by both men, on the principles of the limitation of arms, on which they will then embark. That is absolutely essential in the interests of the West.

Having agreed on the principles, the President and Mr. Gorbachev should then delegate to advisers, trusted not only by themselves but by those also taking part in the negotiations, the working out of the detail of the agreement that they wish to reach. This happened in 1963 with the first test ban agreement, the first of the post-war agreements between the super powers, and the one in which Britain was involved, the succeeding agreements of the non-proliferation agreement, the agreement on no testing on the sea bed—when I was Prime Minister—and the first and second SALT agreements.

We shall never get an agreement on these intricate matters with 150 officials sitting around the table in Geneva. We shall get agreement only by the principals settling the basis and then detailing those who will work them out. In 1963, Averell Harriman represented the President. He was trusted in Moscow because he had been ambassador there during the war. Lord Hailsham was asked by the Prime Minister to represent him, and he was trusted by the Americans because he has an American mother. Mr. Gromyko was was asked by the Russians because there was nobody else, and he was always there. In 14 days, those three worked out the first test ban treaty, which was signed in Moscow. I went there with Lord Home. That is the importance of a summit and that is what 600 should and, I hope, will happen on this occasion. However, I must confess that I have little confidence in it doing so.

That brings us to the international economic situation. Some 29 per cent. of the United States budget, and 13 per cent. of our budget, is devoted to defence. Even with a loyal ally, there is a difference. The burden is simply immense, and has led to the large American budget deficit that has already been mentioned. That requires high interest rates, which in turn produce an uncompetitive dollar height. That means that a vast trade deficit is accumulated. In addition, the developing world has to pay high interest rates, and the burden on it is already intolerable. Therefore, there is a direct connection between the military and political budget and the economic situation in the United States, with a high budget deficit, a high trade deficit, high interest rates and the impact not only on the developing countries but on us in Europe and the rest of the world.

What will happen about those factors? In the light of what I have said about the summit, I cannot see that there will be any basic change in those aspects of the United States economic situation. The economy is wavering there and we shall not see substantial growth in it. Therefore, we all face the problem of the difference between the President and the Congress and what can be done about the budget deficit. As long as that remains, there will be high United States interest rates.

Therefore, it was an important development when the Secretary of the Treasury called the five together to try to find a way to reduce the strength of the dollar. My hon. Friends would term this as devaluation, and therefore deplorable. However, we should welcome it if the United States decides that it can devalue the dollar. That is the only way to try to deal with its trading position. By dealing with that, one can deal with protectionism. When sterling went down at the beginning of the year from $1.30 to $1.05, did anybody condemn my right hon. Friend the Chancellor for devaluation? No, nobody did.