HC Deb 03 November 1987 vol 121 cc783-800 3.31 pm
The Chancellor of the Exchequer (Mr. Nigel Lawson)

With permission, Mr. Speaker, I should like to make a statement.

I am laying before the House today an autumn statement which, as usual, contains first, the Government's outline public expenditure plans for the next three years and the expected out-turn for this year; secondly, proposals for national insurance contributions next year; and, thirdly, the forecast of economic prospects for 1988 required by the Industry Act 1975. The forecast, of course, takes into account the likely effect of the recent worldwide falls in equity markets.

I turn first to the expected out-turn for the current financial year, 1987–88. The public expenditure planning total now looks likely to amount to £147½ billion, or around £1 billion less than was allowed for in the last public expenditure White Paper. The main reason for this shortfall is higher capital receipts by local authorities and new towns. Total spending on programmes, apart from this, is expected to be broadly in line with plans. Taking account of miscellaneous items not included in the planning total, the net shortfall on the expenditure side is likely to be slightly in excess of £½ billion.

On the receipts side, total tax revenues are likely to exceed the Budget forecast by almost £2½ billion. This buoyancy reflects higher than forecast economic growth, greater than expected profitability, and an oil price above the $15 a barrel assumed at the time of the Budget. At that time, I set a public sector borrowing requirement for 1987–88 of some £4 billion, or 1 per cent. of GDP. As a result of the higher tax revenues and lower spending, I now expect the PSBR for the current financial year to be only £1 billion, or ¼ per cent. of GDP: the third successive year of significant undershoot. Privatisation proceeds have, of course, made an important contribution to this year's low PSBR. But even if there had been no privatisation proceeds at all, it would still be the lowest PSBR for 17 years.

I turn now to the public expenditure plans for the next three years. Since 1982–83, public spending, both including and excluding privatisation proceeds, has been declining as a proportion of national income. There is likely to be a further substantial reduction this year, which will make this the longest sustained fall in public expenditure as a proportion of national income since the early 1950s.

In July, Cabinet reaffirmed the objective of ensuring that public spending as a share of national income continued to fall and, in particular, did not exceed the ratios published in the last White Paper. The plans that I am about to announce secure that objective.

New planning totals have been set at £156¾ billion for 1988–89 and £167 billion for 1989–90—increases of £2½ billion and £5½ billion respectively over the totals previously published.

For 1990–91 the planning total has been set at £176 billion. For the later years, I have judged it prudent to set aside larger reserves within the planning totals than I have done previously.

The reserves will, therefore, rise from £3½ billion in 1988–89 to £7 billion in 1989–90 and £10½ billion in 1990–91. The planning totals also incorporate an estimate for privatisation proceeds of £5 billion a year, which is unchanged from the last White Paper.

As I have indicated, these plans mean that public spending, excluding privatisation proceeds, will continue to fall as a share of national income. From nearly 47 per cent. in 1982–83, that share has come down to around 42½ per cent. this year, and by 1990–91 it will go down to 41¼ per cent., the lowest since 1972–73. The new proportions are lower, for each year, than those published in the last White Paper. This progress has been founded on our success in reining back the rate of growth of public spending.

In the 1960s and 1970s public spending grew by around 3 per cent. a year in real terms. In our first Parliament the real rate of growth averaged 2¼ per cent. a year; in our second Parliament it was just under 1¾ per cent. a year; and in the succeeding four years—the current year plus the three survey years — the real growth of public spending is planned to be around 1¼ per cent. a year, which is well within the prospective growth of the economy as a whole.

But while public spending as a whole is growing more slowly, the substantial reduction in public borrowing, which this Government have brought about, has, by reducing the burden of debt interest payments, made more room for programme spending. Coupled with steady economic growth, this has enabled the Government to provide additional resources for a number of priority services. In each case, the figures that I am about to give represent increases over the plans published in the last public expenditure White Paper.

First, health. An extra £700 million is being provided for the National Health Service in England in 1988–89, and an extra £800 million in 1989–90. On top of this, the Health Service will benefit from additional resources from the cost improvement programmes and from land sales. All this will enable the National Health Service to continue to improve services.

Secondly, law and order. Provision has been made for the substantial increase and acceleration in the prison building programe which my right hon. Friend the Home Secretary announced to the House in July. This will provide 4,200 extra places by 1993. Provision for local authority spending on the police has also been increased significantly.

Third, education. Provision for local authority current spending has again been increased substantially. In addition, an extra £60 million a year has been provided for the improvement of school buildings. Spending on the universities will be increased by £115 million in 1988–89 and by £130 million in 1989–90. There will also be an additional £45 million in 1988–89 and £65 million in 1989–90 for science.

Gross provision for housing investment is being increased by nearly £400 million next year. This will not only sustain the rising trend of spending on local authority renovation, but will provide additional resources for housing associations, much of it to be used in conjunction with private finance.

Provision for urban development corporations is being increased by £65 million next year to help tackle the problems of the inner cities.

There are also substantial increases in provision for social security spending, which has been increased by £1 billion for 1988–89 and £1.9 billion for 1989–90. This is partly because the take-up of benefits is likely to be higher than was previously envisaged. It also takes account of the uprating of benefits announced by my right hon. Friend the Secretary of State for Social Services last week, including the cost of compensating income support claimants for their average contribution to rates.

Spending on defence is to be increased by £230 million in 1988–9 and £490 million in 1989–90.

The additions to planned capital expenditure, for the public sector as a whole, amount to some £1 billion in each of the next two years. About half of this is for the nationalised industries, principally for the large-scale investment programmes of the electricity and water industries.

Further information about these and other changes is contained in the printed "autumn statement" which will be available from the Vote Office as soon as I have sat down. Full details, together with information on running costs and manpower, will be given in the public expenditure White Paper early in the new year.

I turn now to national insurance contributions. The Government have conducted the usual autumn review of contributions in the light of advice from the Government Actuary on the prospective income and expenditure of the national insurance fund, and taking account of the statement on benefits which my right hon. Friend the Secretary of State for Social Services made on 27 October.

The lower earnings limit will be increased next April to £41 a week, in line with the single person's pension, and the upper earnings limit will be raised to £305 a week. The limits for the reduced rate bands will also be increased. The upper limit for the 5 per cent. and 7 per cent. bands will be raised to £70 a week and £105 a week respectively. The upper limit for the 9 per cent. rate for employers will be raised to £155 a week.

The taxpayer's contribution to the national insurance fund — the so-called Treasury supplement — will be reduced from 7 per cent. to 5 per cent., but this will not require any change in contribution rates. Thus, the main class I contribution rates will once again remain unchanged at 9 per cent. for employees and 10.45 per cent. for employers.

Finally, I turn to the Industry Act forecast. Growth this year looks to be turning out at 4 per cent., compared with the 3 per cent. growth I forecast at the time of the Budget. This is well above the trend of the steady upswing which began in 1981, and faster than any other major economy. Strong growth in domestic demand has been more than matched by the rapid rise in exports. Manufacturing industry is doing particularly well, with output rising by 5 per cent. This strong performance has led to a substantial fall in unemployment, which is now more than 400,000 lower than a year ago — the largest annual fall on record. Indeed, unemployment has been falling faster in the United Kingdom than in any other major country.

As I forecast at the time of the Budget, inflation in the fourth quarter of this year is likely to be 4 per cent. I also see no need to amend my budget forecast of a modest current account deficit of some £2½ billion, or about ½per cent. of GDP. Looking ahead to 1988, the prospect is for a continuation of the steady growth with low inflation that we have now enjoyed for over five years. As I have already indicated, the full forecast I am publishing today takes into account the likely implications of the recent falls in world stock markets in so far as it is possible to do so at this early stage.

This is clearly a time when economic forecasting is a more than usually hazardous business. But what is clear is that the strength of the British economy, and of our public finances, puts us in the best possible position to weather any storm. And that strength will also enable us to play a full part in the international co-operation which is more than ever needed today.

Subject to the uncertainties to which I have just referred, the economy is forecast to grow next year by around 2½ per cent. With North sea oil output now declining, this implies 3 per cent. growth for the non-North sea economy as a whole. Domestic demand should continue to expand, though at a slightly lower rate than this year, with consumer spending and investment growing at a similar pace. Business investment is likely to be particularly strong, rising by 5½ per cent.

With the United Kingdom continuing to grow faster than other major countries, and the oil surplus declining, there is likely to be a further small increase in the current account deficit, to about £3½ billion, or ¾ per cent. of GDP. Inflation may rise a little next year, reaching 4½ per cent. in the fourth quarter, by which time it should be on a downward trend again. The defeat of inflation remains at the heart of the Government's economic strategy. With continuing healthy growth in 1988, unemployment should continue to fall.

The progress and prospects I have described demonstrate once again the soundness of the policies we have followed over the past two parliaments. We will continue to pursue these policies in our third. Despite the recent deterioration in the world economic climate, the prospect I am able to offer the House is one of further sustained growth and steadily rising living standards, with inflation low and unemployment continuing to fall. We have brought this about by promoting enterprise, sound money and strong public finances. And that is what we will stick to.

Mr. John Smith (Monklands, East)

This is the usual sort of confidence trick that we expect from the Chancellor. In the first half of the public expenditure part of his statement he boasted about how he was reducing public expenditure, while in the second half he boasted about how he was increasing it. I ask the Chancellor to answer precisely whether this comes about because he has had to adjust his spending plans by the 1.5 per cent. increase in inflation, with the result that, although there are apparent increases in the programmes, there is no new money above the money that was originally planned to be spent. The difference in the apparent increases is accounted for entirely by the inflation factor. As we look through the plans for individual programme spending, does not that become clear?

There is a 5.7 per cent. increase in health and social services. Allowing for 4.5 per cent. inflation, that is a 1 per cent. increase in cash resources. The National Health Service needs much more money than that to cope with more old people and technical improvements, so the increase proposed is wholly insufficient even to maintain present services. Is the Chancellor aware of the anger that will be caused among those who work in our National Health Service, and who believe in it, even if the Chancellor and his Government do not?

Is the Chancellor aware that, with a 4.6 per cent. increase in the budget for education spending proposals, they are effectively frozen in real terms? There is a proposal for some extra expenditure on school buildings and universities, but does that not mean that the main educational budget will effectively be cut? So much for all the rhetoric about education during the election and since.

On the matter of social security, why did the Chancellor not remind us that this is the Government who only recently, although they claim to have created a successful economy, felt obliged to recommend a freezing of child benefit? Is it not the case that in his proposals there will be a £300 million cut in income support so that the poorest in our community are not being specially benefited but are being specially targeted?

On the matter of housing, is it not clear that, despite some proposals for expenditure increases, the Government have failed to take the one single step that would encourage house building or house improvement all over our country—lifting the arbitrary 20 per cent. ceiling on spending on capital receipts by local authorities? Why have they not done that?

Where is there a reference in the statement to the Government's drive to regenerate our inner cities? There is not a word in it about the inner cities. There is merely a figure of £65 million for housing as part of the urban development corporation programme. The small amounts being injected for inner city provision are dwarfed by the loss of money in rate support grant and the increasing and continuing decline in regional industrial assistance. Therefore, we find that the Government's plans for inner cities consist of the rhetoric of regeneration and not its reality.

Similarly, public sector capital investment is planned to fall by £100 million a year in cash terms. That is a 3 or 4 per cent. reduction per annum for the next three years. So much for investing in Britain's future at a time of economic uncertainty.

On the matter of the nationalised industries, there is an elliptical reference in the statement to the electricity and water industries. However, we know that in just a few moments there will be a statement promising larger increases for electricity consumers. We know from the papers produced with this statement that the electricity industry produces a profit of over £1 billion. None the less, consumers will be asked to fund future capital expenditure to fatten up the industry so that the benefits can be reaped by those to whom it is sold after privatisation.

Is it not the case that the most important point about the national insurance proposals is that the Treasury contribution is to be cut further from 7 per cent. to 5 per cent.? That follows a cut in the previous year from 9 per cent. to 7 per cent. and compares unfavourably with the Labour Government's contribution in 1979 of 18 per cent. Therefore, we see the Government steadily transferring the responsibility for national insurance from the Government to employers and employees who have to carry heavier burdens as a result.

The Chancellor said very little about the real economy. In an exercise of complacency and self-congratulation, he told us so that all was basically sound with the British economy and that we could expect unemployment to fall. If growth is to fall from 4 per cent. to 2.5 per cent., where are the extra jobs to come from?

Does not the Chancellor concede that his published statement forecasts a £9 billion deficit in the balance of trade in manufactured goods by the end of 1988—the largest deficit in the balance of trade in manufactured goods by the end of 1988—the largest deficit in the balance of trade in manufactured goods in our history? Does he recollect that that same balance of trade was in surplus to the sum of £5 billion when the Government took office in 1979? How can the Chancellor be complacent about our economy when investment in manufacturing industry is still 7 per cent., less than it was in 1979 and when output has just reached its 1979 level?

What of future growth? How is future growth to be achieved with poor investment in manufacturing industry, a total neglect of research and development and no plans substantially to increase expenditure on education and training to improve the skills of our work force?

On the international front, all that we had was some talk about international co-operation. Has it not been the failure of the G7 countries—and of this Government as a leading member of that group—to take action over the past year or so that has led to the present international economic difficulties? Does not the complacency of the Venice summit look shocking in the light of subsequent events? Why did not the Chancellor take the opportunity to announce a cut in interest rates as a British contribution, not only to stimulate our economy but to help international co-operation? Why do not the Government take the lead in convening an early meeting of the G7 countries to plan an international strategy so that when the American situation is adjusted there is reflation in western Europe to take up the slack, strengthen our economy and provide international equilibrium?

Is it not scandalous, above all, that at a time when public expenditure ought to have increased significantly, not only because of the pressing social needs of our country but because such an increase is now economically imperative, this complacent Chancellor has one again missed an opportunity?

Mr. Lawson

I shall try not to detain the House for too long, but the right hon. and learned Gentleman has raised a number of points and I shall answer them. I know that he is new to his present job, but he seemed to find it difficult to grasp how—as he said—public expenditure could be reducing and increasing at the same time. The point is that it is reducing as a proportion of gross domestic product but that it is still increasing in real terms.

The right hon. and learned Gentleman tried to make out that the increase in real terms was, in fact, no greater than it had been before and that all that had happened was that the inflation forecast had changed. In fact, the increase in real terms over the period is now planned to be I per cent. a year, as compared with 1¼ per cent. a year last year, so that there is an increase in the real terms growth of public expenditure. The right hon. and learned Gentleman went on to say that there was no real growth—

Mr. John Smith

One and a quarter per cent.

Mr. Lawson

The right hon. and learned Gentleman got it wrong, and there is no point in admitting it from a sedentary position. He should not have got it wrong in the first place. The right hon. and learned Gentleman said that there was no real increase in Health Service spending. In fact, Health Service spending is planned to go up by more than 2 per cent. in real terms in 1988–89, and that is on top of the better value for money that we shall get through the cost improvement programme.

The right hon. and learned Gentleman said that there were no extra resources for the poor. In fact, there are substantial extra resources for the poor, through the family credit scheme and income support. He said that there was nothing for the inner cities, despite the fact that I said in my statement that there was an extra £65 million for urban development corporations to help with the inner cities. That is by no means all, because the vast amount of money—far more than the Labour Government spent—that we are spending on employment schemes goes were unemployment is greatest, and that is in the inner cities.

The right hon. and learned Gentleman said that there was nothing extra for regional assistance. I have to tell him that expenditure on regional assistance will be increased by £160 million in 1988–89, £104 million in 1989–90 and £50 million in 1990–91.

The right hon. and learned Gentleman mentioned the electricity industry. My right hon. Friend the Secretary of State for Energy will be making a statement after me, so I shall be brief. The plain fact is that it is childish to quote the figure for the profits made by the electricity industry without relating them to the vast capital employed and to the very low percentage of capital that they represent. As for electricity prices, not only did prices increase far faster when the Labour government were in office, but we have today the lowest domestic electricity prices in Europe. But my right hon. Friend will deal with that later.

The right hon. and learned Gentleman does not understand how the national insurance fund works. It is worth pointing out that, between 1979 and 1985—the latest period for which figures are available—pensioners' income increased by 18 per cent. in real terms, whereas when the Labour Government were in office pensioners' income increased by only 3 per cent. in real terms.

The right hon. and learned Gentleman said that I did not say much about the economy, but I said quite a bit about the economy, including the fact, which he did not understand — this figure is the most important in relation to employment trends, which will continue to rise—that the rate of growth in the non-North sea economy for 1988 is forecast at 3 per cent. But there will be a debate on Thursday and I greatly look forward to discussing the economy in greater detail then.

As for our trade position, confidence in Britain was fully underlined today when we published figures showing the biggest-ever monthly increase in our foreign exchange reserves.

As for manufacturing, the plain fact is that under this Government manufacturing output has increased. Under the Labour Government, manufacturing output declined. But it is not just a matter of quantity; we must also consider the quality. The right hon. and learned Gentleman must have seen the transformation that has occurred under the Conservative Government in manufacturing productivity, profitability and efficiency. If he does not believe me, he need only listen to the CBI, which knows much more about manufacturing industry than he does.

To my surprise, the right hon. and learned Gentleman contested some of my forecasts. At this early stage in his long career as shadow spokesman on the economy, I advise him not to get into the prediction game. That was one of the many mistakes made by his predecessor, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). As a warning to the right hon. and learned Gentleman, I shall read a prediction made by the right hon. Member for Sparkbrook in January this year, in what he obviously thought was a major speech to the International Equity Dealers Associaton. He said: A tax cut made this March would inevitably lead to conpensating action immediately the election is over. That necessity would face whatever Government was in post. Even were the Tories to win, they would reimpose higher taxes and make public expenditure cuts so deep that even the Conservative Party would be reluctant to support them. The House can judge whether that is what I have done today.

Several Hon. Members


Mr. Speaker

Order. I fully understand the interest in this important statement. I remind the House that there will be another statement after this and that it will be impossible to call hon. Members to speak on that statement who are called to speak on this. Furthermore, there will be a debate later this week.

Sir William Clark (Croydon, South)

I congratulate my right hon. Friend on his consistency in pursuing a realistic and practical approach to the management of our economy, which has brought it into a position whereby he has withstood not only an oil crisis but a coal strike lasting a year and the recent fall in equities. It ill becomes Opposition Members to talk down our economy when everyone knows that it is one of the strongest in the Western world.

I urge my right hon. Friend to be sparing in increasing public expenditure. We welcome the drop in the proportion of GDP from 47 per cent. to 42.5 per cent., and next year to 41.25 per cent. Would it not be a good idea to have a public expenditure target of about 40 per cent. of GDP, because the objective of our economic policy should be to have a nil, if not a negative, public sector borrowing requirement? I urge my right hon. Friend to ignore the anger and envy of the Labour party.

Mr. Lawson

I am most grateful for my hon. Friend's remarks. I have little doubt that, in time, we shall reach the target of 40 per cent. of GDP. We are gradually reducing the proportion of GDP which is accounted for by public expenditure, and that will continue. I should point out that, with the PSBR down to £1 billion in my latest forecast, we are very close to a zero PSBR. Many people in the United States today wish that they had pursued similar policies.

Several Hon. Members


Mr. Speaker

Order. I ask those hon. Members who are fortunate enough to be called to ask questions, not make speeches.

Mr. A. J. Beith (Berwick-upon-Tweed)

Is the Chancellor aware that these proposals will not go far enough to counteract the effect of the stock exchange falls, still less to deal with the funding crisis in the National Health Service, schools and universities? If growth is only 2.5 per cent., what does that mean for the Chancellor's forecast about reductions in unemployment? The great missing feature from this statement is an indication of what will happen if the United States, Germany and Japan do not make the adjustments which the Chancellor believes they should make. Is he not rosily optimistic about all that? Is not the lucky Chancellor really pushing his luck?

Mr. Lawson

I forecast a 2½ per cent. growth in the economy for the year, but jobs are more closely linked to what is happening in the non-North sea economy than to what is happening with the North sea, which is highly capital-intensive and does not employ so many people. I forecast a 3 per cent. growth in the non-North sea economy, which will mean a continuing fall in unemployment as well as a continuing rise in the number of people in work.

We shall debate the international scene more fully on Thursday, and I am sure, Mr. Speaker, that you would not wish me to discuss it at length now. I shall do everything that I can to impress upon my opposite numbers overseas the measures that I believe are necessary. It is because Britain's economy is so strong that Britain's voice now counts in the world whereas it did not under the Labour Government.

Mr. John Townend (Bridlington)

I congratulate my right hon. Friend on moving us towards a balanced budget. Does he agree that it is still vital that we continue the pressure on public expenditure because if we have to face a world recession revenues will fall off at a time when expenditure will increase? May I suggest that he sends a copy of his statement to President Reagan to show him that if he followed good Thatcherite economic policies he could reduce the budget deficit at the same time as reducing taxation?

Mr. Lawson

I agree with my hon. Friend that it is necessary to keep up the pressure on public expenditure and to keep it falling as a proportion of total economic output or gross domestic product. That is what the plans in the autumn statement will secure. As for President Reagan, I am sure that he is an assiduous reader of Hansard.

Mr. Robert Sheldon (Ashton-under-Lyne)

Is the right hon. Gentleman aware that his statement does not seem to have taken full account of what has happened in the world economy during the past two weeks? Does he accept that his most important responsibility is to avoid the recession that may be coming to this country? If he accepts that, does he not agree that the greatest boost to confidence that he could give would be to announce a drop in interest rates?

Mr. Lawson

As I see it, I have a double responsibility: to avoid both a recession and a resurgence of inflation. As for economic prospects, I said in my statement that at this juncture economic forecasting is an unusually hazardous business. I am sure that the right hon. Gentleman, with his knowledge, would be the first to agree. Fortunately, this is not the forecast on which the Budget judgment will be based. As he well knows, that will be based on the forecast that is made in February. By that time it will be possible to have a far clearer picture of the likely implications of what has happened in the stock market, of various developing events on the world scene, and the reactions of various Governments to what has happened. However, at this point I have given the House the best forecast that I am able to give.

Mr. Terence Higgins (Worthing)

I welcome especially the Chancellor's success in reducing public borrowing, which will at least facilitate a further reduction in interest rates. However, does he recall that the House was persuaded to agree to an increase in Community own resources only on the understanding that there would be strict budgetary discipline in the EEC? As there have been recent suggestions that we should again increase resources to achieve the same objective and pay twice for the same thing, will he tell the House what assumption was made about the limit on own resources when framing his Budget statement?

Mr. Lawson

The assumption in the autumn statement is that the own resources limit remains at 1.4 per cent.

Rev. Martin Smyth (Belfast, South)

Does the Chancellor accept that we welcome the confidence with which he presented his statement? During the statement he allocated a sizeable increase to National Health Service expenditure in England, but the peripheral regions show a greater need. Will he confirm that sums have been allocated to those regions for their National Health Service expenditure so that we shall not have to make up such expenditure from our block grants?

Mr. Lawson

As the hon. Gentleman knows, the figures before me refer to England. My right hon. Friends the Secretaries of State for Scotland, for Northern Ireland—

Mr. Dafydd Wigley (Caernarfon)

And Wales.

Mr. Lawson

And for Wales, indeed — have block increases according to the formula. They are putting out statements today which, I hope, will answer the hon. Gentleman's question.

Mr. Michael Grylls (Surrey, North-West)

Does my right hon. Friend agree that it is important that it is understood, not only in the House but throughout the country, that a reduction in public expenditure as a share of the national income will give the best opportunity for the private sector to provide productive jobs for those people who are looking for jobs? That is what he is doing, and I hope that he will continue to do it.

Mr. Lawson

My hon. Friend is right. The Opposition's obsession with the public sector at the expense of the private sector is quite extraordinary. It was significant that in his question about investment the right hon. and learned Member for Monklands, East (Mr. Smith) made no reference whatsoever to the fact that I am predicting a 5½ per cent. real increase in business investment in 1988.

Mr. Austin Mitchell (Great Grimsby)

When the Chancellor started on his crazy walk of cutting the public sector borrowing requirement when he should have expanded it to bring down unemployment, he said that the reward would be lower interest rates. Now that he has got it down to what he says is the lowest level for 17 years, why are real interest rates at record levels and so much higher than those of our competitors? What excuse will he use for them next year?

Mr. Lawson

The answer to the hon. Gentleman is that unemployment is coming down and interest rates have already come down by half a point.

Mr. Ian Gow (Eastbourne)

Will my right hon. Friend re-emphasise the words in his statement that at the heart of the Government's economic policy is the defeat of inflation? Will he confirm that the word "defeat" means that his target is to secure stable prices? Is it still his aim that after 12 or possibly 13 years of Conservative stewardship there will indeed by stable prices?

Mr. Lawson

That is indeed the target. My hon. Friend is right. However, we have never at any time during the more than eight years that we have been in office been able to say precisely by what year we shall reach any particular point in the road towards that, let alone reach the destination. It would be rash to give a specific date for that now.

Mr. Peter Shore (Bethnal Green and Stepney)

If the economy is as strong as the Chancellor has suggested, and if the PSBR is forecast to fall to a mere £1 billion, surely this is an almost unique opportunity not only to assist the British economy but to contribute to the international economy during a period of some danger of recession, by expanding outwards in Britain, reducing unemployment and increasing the national wealth?

Mr. Lawson

I should have thought that we were more than making our contribution by virtue of the fact that we have the fastest-growing major economy in the world. What the right hon. Gentleman is suggesting would simply lead to a new resurgence of inflation, and that is something that I am not prepared to tolerate.

Sir Ian Lloyd (Havant)

May I congratulate my right hon. Friend on the broad strategy that he has revealed this afternoon and on its detailed application? He will be aware more than most that the long-term real future of the country depends, first, on the merits of its science base and, secondly, on the vitality of its technology. However, the figures that he gave us this afternoon revealed that he is prepared to spend only a mere 4.5 per cent. of the sum that he is allocating to social security on increasing the support for science over the next year, and a mere 3 per cent. of what he is proposing to spend on social security in the year following. Will he consider altering that balance somewhat more in favour of science?

Mr. Lawson

I know the consistent view that my hon. Friend has taken about the importance of science, long before that become the fashionable cry, and I pay tribute to him. However, I think that perhaps he misunderstood what I said and, if so, that is my fault. The science figure that I gave was the figure for university science. In fact, the total extra Government spending on civil science and technology in the autumn statement is an extra £200 million a year.

Mr. Ken Livingstone (Brent, East)

Surely the Chancellor accepts that if the American President and Congress accede to the complaints that he and other Conservatives have been making about the size of their budget deficit and move to reduce it without a corresponding increase in economic activity by the nations of western Europe and Japan, it will trigger the international recession that is now hanging so clearly over the world's economic scene? Therefore, as he claims that Britain is now the strongest-growing economy, will he not take the lead and come forward with major proposals for growth to avoid that recession before it takes us down?

Mr. Lawson

I am not quite sure where the hon. Gentleman has been. If he had been a close observer of the economic scene, he would have seen that we have had an unprecedented period of real growth. Last year we were the second fastest-growing major economy in the Western world. This year we are the fastest-growing major economy in the Western world. In 1988 we shall continue to grow faster than the average as a result of policies which include a steady reduction in the PSBR. Far from inflated public borrowing causing greater real growth, all it causes is a greater burden of debt interest and the likelihood of rising inflation. That is precisely what happened under the Labour Government, which, I assume, although I am not entirely sure, the hon. Member for Brent, East (Mr. Livingstone) supported.

Mr. David Shaw (Dover)

Does my right hon. Friend agree that to control public expenditure of some £150,000 million to within a few hundred million pounds is a major achievement for any Government? Can he possibly explain to a new Member such as myself why it was not possible during the 1970s for the Labour Government to do that?

Mr. Lawson

It is a remarkable tribute to the improved control procedures that we have put in place over the years that we are able to control public expenditure in the way that we have within the year and, having made plans, we can then stick to them. As for why that did not happen under the Labour Government, I do not think I have time to go into that interesting story, but I advise right hon. and hon. Members to read Lord Barnett's book.

Mr. David Blunkett (Sheffield, Brightside)

Can the Chancellor of the Exchequer explain how the proposals for social security increases accord with the statements made by the housing Minister that there would be money available under the proposed Housing Bill to fund the proposed increases in rents in the market economy? The proposals that we have heard this afternoon covering inflation and the modest amount towards the 20 per cent. of the rates to be paid by those on benefits do not leave any money available to take account of increased housing benefit. Therefore, those proposals will result in benefit being further taken from those already receiving it and transferred from those in need to the profits and pockets of the private landlord.

Will the right hon. Gentleman further explain to the House why, if he is willing to intervene to prevent a disorderly market, as he explained to us last week, and is willing to intervene with public expenditure to prevent a disorderly society, with increases to the police and the prison service, that he is unwilling to intervene to prevent further distress to be caused in our inner cities and to our unemployed by increasing rather than decreasing public expenditure?

Mr. Lawson

As I have said, public expenditure is increasing, although it is not increasing as fast as the economy as a whole, in order to allow more room for the private sector and the wealth-creating sector to expand. That is the policy that we are pursuing and on which we were re-elected by a decisive majority earlier this year. It is a policy with which we shall continue.

As for social security spending, I announced massive increases in that spending. I announced an extra £1 billion in 1988–89 and an extra £1.9 billion in 1989–90. A substantial part of that is increased housing benefit. In the housing figure that I gave, money is also included for the housing action trusts, which are part of the new policy on housing to which the hon. Gentleman referred.

Mr. Richard Holt (Langbaurgh)

Does my right hon. Friend accept that his statement will be welcome throughout the country and no less in the north-east of England where the Government's policies were exemplified last night with the night shift at the Nissan plant increasing production, increasing exports as a result of that production and increasing by 350 the number of people employed. It is because of those policies in the north-east that the Conservative party is the only party that is growing in the region.

Mr. Lawson

My hon. Friend is right and the reinvigoration of the economy of the north-east is currently one of the most exciting developments in this country. Although I do not want to refight the election campaign that caused the Labour party so much distress, I must say to Labour right hon. and hon. Members that the plain fact is that if they continue to show themselves to be so out of touch with what is happening on the ground they will never get within a mile of winning a general election.

Ms. Hilary Armstrong (Durham, North-West)

The Chancellor should know that his hon. Friend the Member for Langbaurgh (Mr. Holt) has been misleading him and that the people of the north will view with great distress and great sorrow the statement that he has made today. May I also remind the Chancellor that the people of the north voted overwhelmingly for the Labour party? Perhaps he needs to read the statistics of the general election.

May I remind the Chancellor that the cuts in the regional development grants to the north-east are about 78 per cent.? If the right hon. Gentleman is truly serious about offering proper hope of future development to areas such as the north-east, he should consider that every authority in the north is asking whether he will address those particular cuts and restore to regions such as the north-east the sort of support and structure that will enable those regions to invest properly in the manufacturing industries and to bring proper new hope to the north.

Mr. Lawson

It is a complete fallacy to assume that the amount of economic activity in any part of the country is solely or even mainly dependent on what is paid in regional development grants. What matters is the prospect for industry of profitable investment and also industry's confidence in the future. That confidence has been transformed under this Government. But since the hon. Lady mentioned regional assistance, let me quote the figure again. This autumn statement shows that, for 1988–89, we have increased our provision for regional assistance by £160 million.

Mr. Neil Hamilton (Tatton)

Although it is not apparent, I hope that my right hon. Friend is feeling just a little bit smug this afternoon. Is he aware that he is basking in the envy of finance Ministers throughout the developed world for being able to make such a statement this afternoon? I especially welcome the virtual disappearance of the public sector borrowing requirement. However, will my right hon. Friend confirm that the debt interest that the Government must pay gobbles up about half of the revenue from income tax and that, therefore, it is vital that we continue to keep the lid on borrowing and reduce the amount of money that we must pay for debts incurred by previous Administrations?

Mr. Lawson

I think that I liked the rest of my hon. Friend's question rather more than his opening remark. I believe that my hon. Friend is right about debt interest. One of the problems from which the United States is suffering at present is that, as a result of the policies that it has been pursuing since 1979, debt interest, as a proportion of GDP, has doubled whereas in this country it is declining. That decline, coupled with the real rate of growth of the economy, is one of the reasons why we are able to spend more money on priority programmes.

Mr. Seamus Mallon (Newry and Armagh)

The Chancellor of the Exchequer laid great emphasis, and rightly so, on the increase in manufacturing industry in the past year. Will he pay regard to the fact that the north of Ireland is the only region where there has been a decrease in manufacturing industry and where, at present, there are more people unemployed than are employed in manufacturing industry? Will he impress upon his colleagues that, unless unique steps are taken to redress that imbalance, the problems of the north of Ireland in relation to the general economy and, in particular, manufacturing industry will increase?

Mr. Lawson

I am conscious of the problems of the Northern Ireland economy and in so far as public expenditure plays any part, the hon. Gentleman will no doubt be aware that public expenditure in Northern Ireland is approaching £3,000 per head compared with £2,000 per head in England and about £2,500 per head in Scotland. I am well aware that there are acute problems as a result of the political difficulties and troubles in Northern Ireland and the fact that Northern Ireland perhaps has more than its fair share of older industries. Clearly the future must lie in the development of newer industries, and my right hon. Friend the Secretary of State for Northern Ireland is keenly aware of that.

Mr. Nicholas Winterton (Macclesfield)

While I commend my right hon. Friend and the Government for the extremely prudent way in which they have dealt with our economic affairs, which heralds well for the future, might I ask him to give to the House as part of his announcement further details about what additional resources will be allocated to roads because they are running into the ground? Secondly, will he consider future additional resources for the hospital service? Bearing in mind its outstanding success in treating more patients and in the advance of medical science, that service will need more than he has announced in the allocations this afternoon.

Mr. Lawson

The amount of extra spending on transport in 1988 will be £60 million of which a significant proportion will be on bridge maintenance, one of the most important areas of the road programme which needs attention. The increase of £700 million for the National Health Service is the biggest increase ever announced for that service.

Mr. James Lamond (Oldham, Central and Royton)

If everything has been going so well for the last few years as the Chancellor would have us believe, and since he has managed to claw back more in taxation this year than he thought he would and spent less proportionately on public services, so reducing the public sector borrowing requirement to one quarter of 1 per cent., why was it necessary just a month or so ago, before the crash on the stock exchange, all of a sudden to increase bank rate by 1 per cent., which was a savage blow to manufacturing industry?

Mr. Lawson

Manufacturing industry is doing extremely well, as has been borne out by CBI surveys carried out since the increase in interest rates by 1 per cent. on 6 August. It was necessary to do that at the time because of the overall financial situation in the economy and the risk, had I not done that, of a resurgence in inflation. Subsequently the position has changed and I felt it right to reduce interest rates by½ per cent. The hon. Member ought to accept the views of industry itself as to what the state of industry is. Industrialists are unanimous that it has never been healthier than it is today.

Sir Brandon Rhys Williams (Kensington)

Does my right hon. Friend agree that the attainment of his highly satisfactory forecast must depend to a considerable extent on the maintenance as far as possible of satisfactory business relationships with our major trading partners overseas? To prevent the resurgence of economic nationalism and protectionism which did such terrible harm before the war, will he wholeheartedly endorse the British Government's commitment to the completion of the internal market in the Common Market by the target date of 1992?

Mr. Lawson

We are giving high priority within the Community to the completion of the internal market in its true sense, that is to say, breaking down the barriers to trade. Of course, the main danger to protectionism comes from the United States and, in particular, the United States Congress. I should like to pay tribute to the President of the United States who has made absolutely clear his determination, in so far as it is within his power to do so, to veto any protectionist Bill which comes from Congress.

Mr. Dick Douglas (Dunfermline, West)

Will the Chancellor reflect a little on the state of the British economy? Has not the level of growth been unevenly spread? While there has been growth in service jobs and in manufacturing in the south-east and the midlands, industry, particularly manufacturing industry, has decreased in the north. Left to the so-called free play of the market, the north and Scotland will continue to decline.

Will the Chancellor say what the increase in defence expenditure means in real terms? Will he also give us further insight into his thinking on the international sphere? I do not believe that any thinking person predicts a slump like that of the late 1920s and 1930s if international Governments coalesce and take meaningful and purposeful decisions. The right hon. Gentleman cannot expect the President of the United States to resist protectionist activities unless he gives this House and international economic consultants an idea of his thinking.

Mr. Lawson

As for the wider economic issues to which the hon. Member rightly attaches importance, it would be better if I discussed those in the economic debate on Thursday.

Defence spending is planned to fall very slightly in real terms over the period ahead. On jobs in manufacturing and elsewhere, it is important to distinguish between what is happening to output and to jobs. Output in manufacturing is growing faster than output in the rest of the economy. Because it is becoming more and more capital intensive, the growth in jobs, which is happening in both sectors, is faster in non-manufacturing industry.

As for unevenness throughout the economy, it is encouraging that the fall in unemployment over the past year — the biggest fall ever recorded — has occurred throughout the United Kingdom.

Mr. Jerry Hayes (Harlow)

While I warmly welcome my right hon. Friend's statement and particularly his skilful management of the economy, may I ask whether he appreciates that unless the Treasury resources in full National Health Service pay awards many health authorities will suffer dire financial consequences?

Mr. Lawson

Obviously the figures that I have quoted for the National Health Service include money for the pay awards that have been made. But there is also tremendous scope for getting better value for money out of the Health Service. That is what we are determined to do to provide a better service to the patient.

Mr. Dafydd Wigley (Caernarfon)

Does the Chancellor accept that Government expenditure on regional assistance, even allowing for the increase of £160 million and the two subsequent increases, is still in real terms 30 per cent. below what it was when they came into office? In view of the persistent levels of unemployment of about 20 per cent. in many areas in Wales, Scotland, Northern Ireland, the north-east and the north-west, should there not be greater capital expenditure than the £1 billion increase which he announced to relieve unemployment in those areas?

Mr. Lawson

I am not sure where the hon. Member gets his figures from. The real increase in spending on the Health Service under this Government since 1978–79 has been 31 per cent. As for regional policy, I have already announced increases in spending and have repeated them several times today.

Mr. Teddy Taylor (Southend, East)

In presenting his excellent White Paper, which is a tribute to his good housekeeping, did not my right hon. Friend the Chancellor find it acutely depressing that, of the £800 million increase in overall public expenditure by comparison with the January White Paper, £520 million was an upward revision of our contribution to the EEC, with further upward revisions planned for next year, the year after and the year after that? Will the Chancellor explain why there was a massive miscalculation in January of about 52 per cent. for this year?

Mr. Lawson

The main reason is that we have secured a smaller proportion of the spending on the common agricultural policy than we had originally estimated. I share my hon. Friend's concern at the problem of Community expenditure. That is precisely why the Government, and in particular my right hon. Friend the Prime Minister, are so determined to get a proper reform of the common agricultural policy and a proper budgetary discipline introduced into the Community.

Mr. John Garrett (Norwich, South)

Will the Chancellor clarify the real percentage increase in university funding over the next few years? Is it not the case that it will not in any way match the reduction in university funding over the last four or five years and so universities will continue to be run down and well qualified students will once again this year and next be turned away from their doors?

Mr. Lawson

I do not have to hand the figures that the hon. Member has asked for, but I assure him that universities will not be run down if they are run properly.

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

Does my right hon. Friend accept that there is a growing respect, not just in the House but, more important, outside, for the coolness and expertise that he has shown in dealing with many of the problems that have recently arisen? Does he also recognise, however, when praising manufacturing industry, that there is a potential nutcracker effect in the rising cost of commodities and the burgeoning power of the pound, or weakness of the dollar? If the pound continues to rise by 5 cents a week, that very competitiveness will act to dampen down manufacturing industry and exports, which the country sorely needs.

Mr. Lawson

My hon. Friend represents a constituency in Birmingham, which is one of the hearts of manufacturing in this country. [HON. MEMBERS: "Used to be."] It still is. Let me say to him first that, while various pluses and minuses can be drawn from the events of the past few weeks, commodity prices are not likely to rise much in the present circumstances. Secondly, manufacturing industry has to control its own costs, and it has done so very remarkably. If my hon. Friend looks at one of the charts in the "Autumn Statement", he will see that this year our unit labour costs have risen less than those of our major competitors for the first time since 1983.

The weakness of the dollar is not a matter under my sole control, although, under the terms of the Louvre agreement we are seeking as great a degree of stability as possible. British industrialists, who speak to me a great deal, are more concerned about our rate of exchange with the deutschmark and other European currencies. Nowadays Europe is a much bigger market for British industry than is the United States.

Several Hon. Members


Mr. Speaker

Order. I must bear in mind that we have a further statement and an important debate, in which there is great demand to speak from hon. Members. I shall allow two more questions from each side of the House, but I shall give preference in the subsequent debate to hon. Members who are not called to ask a question on this statement, if they will remind me.

Mr. Robert Litherland (Manchester, Central)

When making the education allocation, will the Chancellor take into consideration any future pay claims by the teachers, or has he already fixed a rate of 4 per cent.? Does he not agree that a fixed rate would lead to disruption in schools?

Mr. Lawson

The teachers have been awarded a massive pay increase averaging 16 per cent., and that is fully taken into account in the figures. As for next year, the interim advisory committee on teachers' pay has been given an overall cost envelope of £300 million for the total cost of the increase.

Mr. Michael Fallon (Darlington)

Does my right hon. Friend accept that no tribute from the Conservative Benches can adequately reflect his masterly stewardship of public finances? Can he trump his autumn statement by reaffirming the Government's commitment to the longer-term reform of public expenditure and, in particular, a fairer allocation between different parts of the United Kingdom and the different income groups within it?

Mr. Lawson

I am grateful to my hon. Friend. I do not believe, however, that it would be entirely appropriate to trump the autumn statement on the very day that it is being published.

Mr. Doug Hoyle (Warrington, North)

Why is the Chancellor so pompous and so out of touch with manufacturing industry? Does he not realise that manufacturing industry is complaining about interest rates that are twice those of our competitors, about inflation far higher than theirs and about electricity prices that are already higher than theirs, even before the swingeing increases to be announced shortly?

Will the right hon. Gentleman tell us what will be the effect on our exports to the United States of any attempt to reduce the United States deficit? While he may get his statement through with the majority that he has behind him, does he not realise that the fireball who has been appointed as Conservative party chairman will have considerable difficulty in selling this dubious prospectus to the country?

Mr. Lawson

The hon. Gentleman ought to have a chat with his own Front Bench about the United States budget deficit. While he is still singing the old tune of bigger and better deficits, his Front Bench has now been converted—at least in regard to the United States—to a smaller one. That is what they are saying this week, anyway; perhaps they will change their minds next week.

As for the hon. Gentleman's remarks about my hon. Friend the Paymaster General, I can think of no better recommendation for a Conservative party chairman than that he should be a Treasury Minister.

Mr. Phillip Oppenheim (Amber Valley)

When considering Government borrowing policy, will my right hon. Friend cast his mind back to the advice that was given to him on 19 October 1984, exactly three years before black Monday, that he should emulate the Americans and boost the budget deficit and borrowing? According to that advice, the vitality and success of the American economy relied solely on high borrowing.

Does it surprise my right hon. Friend that that advice, which was given in Cardiff to a group of Welsh salesmen, came from the Leader of the Opposition? Does that not adequately represent the total bankruptcy of Opposition economic policy?

Mr. Lawson

It does, and that advice was given on many other occasions by the Leader of the Opposition and other members of the Opposition Front Bench. It is the good fortune of this country that the Government rejected it, both at the most recent general election and at the previous one.

Mr. Tam Dalyell (Linlithgow)

On a point of order, Mr. Speaker.

Mr. Speaker

Order. I shall take points of order afterwards.