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Autumn Statement

3.31 pm

The Chancellor of the Exchequer (Mr. John Major) : With permission, Mr. Speaker, I should like to make a statement. Cabinet agreed the Government's expenditure plans this morning. I am now able to inform the House of the public expenditure outturn for this year ; the plans for the next three years ; proposals for national insurance contributions in 1990- 91 ; and the forecast of economic prospects for 1990 required by the Industry Act 1975. The main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I sit down. The printed Autumn Statement will be published next Wednesday.

Tight control of public expenditure remains a central element of the Government's economic strategy. In the past seven years this has led to a sharp fall in the ratio of public spending, excluding privatisation proceeds, to national income. This fall has made it possible to improve dramatically the Government's finances while still making substantial reductions in tax rates. The ratio of public spending to gross domestic product was nearly 47 per cent. in 1982-83. In the current year, it is likely to be 38.75 per cent., significantly below the level expected at the time of the last Autumn Statement. For the next two years the plans I am announcing today show ratios of 39 and 38.75 per cent. Those are unchanged from the ratios published in last year's Autumn Statement, and permit a cash increase in general Government expenditure in 1990-91 of around £5.5 billion. By 1992-93 the ratio is expected to fall further to its lowest level since the mid-1960s.

For the current year, the outturn of expenditure is expected to be about £168 billion--£1 billion higher than the original planning total. This partly reflects a lower level of privatisation proceeds, but its principal cause is massive overspending by local authorities on both current and capital account. As the House knows, new arrangements for the finance and control of local authority expenditure in England and Wales are being introduced on 1 April 1990. This year's outturn shows how necessary those new measures are. Central Government spending remains firmly under control. The plans for the next three years have been set on the new definition of the planning total which the Government announced in July last year and which was welcomed by the Treasury and Civil Service Select Committee. This includes central Government support for local authorities, but excludes their self-financed expenditure. The composition of general Government expenditure remains unchanged. For 1990-91, the new planning total has been set at £179 billion and, in the following two years, at £192 billion and £203 billion respectively. Within that, the estimates of privatisation proceeds are unchanged, at £5 billion a year. There are also substantial reserves, rising from £3 billion in 1990-91 to £6 billion and £9 billion in the following two years.

The new plans also show continued real growth in spending on the Government's priorities. Thus, between this year and next, spending on the National Health Service in the United Kingdom will rise by £2, 400 million. Taking account of income generation and cost savings, that is equivalent to a £2,600 million increase in resources,

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or 5.5 per cent. in real terms. These plans will finance the improvements in the management of the service outlined in the National Health Service review. They provide more than £200 million extra for hospital building and other capital expenditure next year ; and they will finance continuing growth in services for patients. They are the clearest possible evidence of the Government's practical commitment to improving the care available in the National Health Service.

There will be substantial increases also for investment in transport. Spending on national roads is planned to double between 1988-89 and 1992- 93. Extra financing of £400 million to £500 million a year is being made available for the railways and London Regional Transport, including upgrading the services on Network SouthEast and the London Underground, to relieve congestion and improve safety, and for rail services for the Channel tunnel. In total we have added £1.8 billion to the planned spending on transport in the next two years. The plans provide an extra £250 million over the next two years for a new initiative to tackle homelessness, to be announced today by my right hon. Friend the Secretary of State for the Environment. Central Government support for the provision of new homes by housing associations will more than double from £800 million in 1989-90 to £1,700 million in 1992-93.

My right hon. Friend the Secretary of State for Social Security has already announced real increases in benefits which will help 1.5 million families and 500,000 long-term sick and disabled people. There will be a further increase of over £500 million in the total resources available for higher education in 1990-91 compared with this year. It will provide for the continuing growth in the number of students, which has risen by 30 per cent. since 1979, and is now at a record level and it will cover the cost of the Government's proposals on top-up loans. There is provision for more environmental research, including the new climate change centre and the doubling of our contribution to the United Nations environmental programme. About £1.5 billion has been added to planned capital spending by central Government and public corporations in 1990-91. That represents a real increase of around 10 per cent. compared with 1989-90.

Mr. Eric S. Heffer (Liverpool, Walton) : On a point of order, Mr. Speaker, I have been a Member for a long time, but I wish to know whether I am allowed to ask the Chancellor of the Exchequer a question. He is making a long statement. Am I allowed to ask a question and, if not, when can I ask him a question?

Mr. Speaker : Surely the hon. Member does not need to pose that question. If I call him later, he can ask the Chancellor a question then.

Mr. Major : The new plans include the money central Government provide to support local authority spending. The Government's proposals for aggregate external finance in 1990-91 were announced to the House in July. Measures have also been announced which will ease the transition from rates to community charge. The cost to the taxpayer of these measures will be nearly £700 million in 1990-91, with further substantial sums in each of the following two years.

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Capital grants and credit approvals will provide central Government support for local authority capital expenditure under the new arrangements. The new plans provide support for a sustained programme of school and college building and modernisation, for local authorities to contribute to the homelessness package, for transport projects, as well as capital spending on other local services, including local roads and environmental improvement.

As in the past, these improvements have been possible only through a rigorous selection of priorities, substantial gains in value for money, and a very welcome reduction in the burden of debt interest. They have been found within an affordable level of total public spending. Overall public spending excluding privatisation proceeds is expected to grow on average by 1.75 per cent. a year in real terms throughout the period between 1988-89 and 1992-93. This was the rate of growth projected in last year's Autumn Statement and we have stuck to it. Over the 1970s, a decade of high borrowing and high inflation, as well as high public spending, it grew not by 1.75 per cent. a year but by 3 per cent. a year.

The Government's new plans demonstrate their continuing commitment to two vital principles : first, to maintain firm control over total spending ; and secondly, to increase efficiency in order to provide more resources where they are most needed. I should like to congratulate my right hon. Friend the Chief Secretary on his skilful and successful conduct of the public spending round.

I turn next to national insurance contributions. As the House knows, we have now implemented the reform of employee contributions announced by my right hon. Friend the member for Blaby (Mr. Lawson) in the Budget. From last month, two of the three step increases in contribution rates have been abolished. This means that employees who get pay increases taking them just above these steps can no longer lose more in higher contributions than they gain in extra pay. And the initial step at earnings of £43 a week, where people first enter the contribution system, has been more than halved. These measures have reduced contributions by up to £3 a week for nearly 19 million employees and are of particular help to many employees on modest incomes ; they have also removed some important disincentives. The usual autumn review of contributions has been conducted 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 made in October by my right hon. Friend the Secretary of State for Social Security.

Next year, the initial class 1 contribution rate payable on earnings up to the lower earnings limit will remain at only 2 per cent. This means that a payment of only 92p a week will buy entitlement to the basic pension and other contributory benefits for those who earn just enough to pay contributions. On additional earnings, up to the upper earnings limit, the rate will remain unchanged at 9 per cent. For employers, the main rate will also be unchanged at 10.45 per cent.

The lower earnings limit will be increased to £46 a week, in line with the single person's pension, and the upper earnings limit will be raised to £350 a week. For employers, the upper limits for the three reduced bands will be increased broadly in line with prices. I am also publishing today the economic forecast required by the Industry Act 1975.

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It is clear beyond doubt that the economy has greatly strengthened over the last decade. We have experienced eight years of strong and sustained growth with inflation at moderate levels. This has brought an increase in employment of about 2.75 million since March 1983 and a sustained rise in living standards.

However, it is also clear that in the last two years, 1987 and 1988, demand, and with it output, rose at a rate which exceeded expectations and could not be sustained. That became apparent in increased inflationary pressures and the growth of the current account deficit.

These pressures had to be reduced and monetary policy was tightened accordingly. The effects of this tightening are already apparent in recent retail sales figures, and the turnaround in the housing market.

The Government's fiscal position is also very strong. I now expect this year's fiscal surplus to be about £12.5 billion, equivalent to 2.5 per cent. of GDP. That represents a very tight fiscal stance by any standards.

Both tax yield and expenditure are higher than forecast at Budget time, but lower proceeds from privatisation and the very high take-up of personal pensions mean that the public sector debt repayment will be slightly below the Budget projections.

Looking at the wider economy, as always, a great deal inevitably depends on the actions of companies and individuals. So there is bound to be uncertainty about the speed with which the economy will adjust to the present tight stance of policy. Our forecast is that growth in domestic demand will be a little over 3.5 per cent. in the current year--a sharp, but inevitable, slowdown from over 7 per cent. recorded in 1988.

Non-oil GDP is expected to grow by 3 per cent. this year. GDP growth as a whole for the current year looks like turning out at 2 per cent., a little below the forecast published at Budget time. This results from lower than expected North sea oil production, which is taking longer than expected to recover from the several serious accidents of the past two years.

Business investment is likely to increase by 9.25 per cent. this year, giving a total of over 40 per cent. in the three years to 1989. This is the largest-ever rise in business investment over a three-year period and is two and a half times as fast as the growth of personal consumption over the same period. This has inevitably contributed to strong import growth and a higher current account deficit in the short run. Notwithstanding this unwelcome effect, the resulting increase in productive capacity will help to sustain the growth of output and in due course bring the deficit down. Looking ahead to 1990, our tight fiscal and monetary policy will have an increasing impact both on household spending and on company spending, which typically reacts later than the personal sector. Investment should continue to grow, but it will do so more slowly. The slowdown in the economy means that GDP is forecast to increase by only 1.25 per cent. in 1990. This will bring the average growth in the four years to 1990 to 3 per cent. a year.

As domestic demand slows, import growth should moderate. At the same time, the strong rise in exports, which has been one of the most welcome developments in 1989, is forecast to continue. Non-oil visible exports are expected to rise by over 11 per cent. this year, the highest rate since 1973, and we expect a further substantial

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increase next year. As a result, we now forecast that the current account deficit will fall from some £20 billion in the current year to about £15 billion in 1990

We will also see a further reduction in inflation. The headline measure of retail price inflation has already peaked at over 8 per cent. in May and June this year, and has since come down a little. Following the recent rise in mortgage rates, it will remain high for some months, but our forecast is for it to fall to 5.75 per cent. by the fourth quarter of 1990, and I expect to see it fall still further after that.

Our main priority must be to bring inflation decisively down, and keep it down. To achieve this, the economy must slow down for a while. This does mean that 1990 may not be an easy year, but the economy enters the 1990s in incomparably better shape than it entered the 1980s. The supply side reforms of the last decade have left business and industry better able to handle both the short-term difficulties before us and the longer-term opportunities to come. I have no doubt that we must stick to the policies that have turned the economy around, and that we are determined to do.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) : On a point of order, Mr. Speaker. It directly involves the statement.

Mr. Speaker : If it directly involves the statement, it cannot be a matter for me.

Mr. Beaumont-Dark rose--

Mr. Speaker : No. I will not hear the hon. Gentleman now. Mr. Beaumont-Dark rose--

Mr. Speaker : Sit down, please. The hon. Gentleman must contain himself. He knows perfectly well--

Mr. Beaumont-Dark rose--

Mr. Speaker : No. Sit down, please. If the hon. Gentleman catches my eye, he will be able to ask a question on the statement.

Mr. Beaumont-Dark : When will you hear it?

Mr. Speaker : When question time arises after the Front Bench spokesmen.

Mr. Beaumont-Dark : It is about this matter.

Mr. Speaker : Order. I will not hear it now.

Mr. John Smith (Monklands, East) : As the Chancellor of the Exchequer recognised in his concluding remarks, this is the last formal economic statement to the House in the 1980s--the decade of Conservative Government. Is not the bogus economic miracle that has been boasted about on so many previous occasions revealed as a hollow sham by the admission that the Chancellor was forced to make that in 1989 we have, at £20 billion, the largest balance of payments deficit in British economic history?

The steady deterioration in Britain's balance of trade has been matched by appalling Government complacency, perhaps best exemplified by the Prime Minister, who said of the first month in which a deficit of over £1 billion was announced--January 1988 :

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"we believe that last month's trade figures were a freak."--[ Official Report, 8 March 1988 ; Vol. 129, c. 184.]

The average for every single month has been substantially over £1 billion--£1.3 billion to be precise. So does a freak become the norm, just as, I suppose, a blip in inflation keeps blipping relentlessly on? With that appalling record in mind, let us examine what we were told in the Autumn Statement of November 1988. The balance of payments forecast was £14.5 billion. Sadly the outcome today is much worse, although the Chancellor had the sauce to present it as if it were a fall.

To arrive at the erroneous prediction, the Government had to argue that the growth in exports would substantially exceed the growth in imports--once again they were wrong. Imports have increased by 9.25 per cent., not 4.5 per cent. as forecast. Far from falling behind exports, imports are, sadly, continuing to race ahead. The theory was that, as interest rates bit into domestic demand, industry would effortlessly switch to export markets and thereby output and investment would not decline. Clearly, that has not happened. Our trading performance has continued to deteriorate. In the last quarter for which we have figures--quarter three of this year--we are further into the red than ever before.

No one doubts that high interest rates are hurting, but clearly they are not working. Was that not the message of the Confederation of British Industry's latest industrial trends survey which warned that nearly one manufacturer in three is expecting to reduce investment in plant and machinery in the next 12 months? It said that the level of orders and the growth in exports have begun to decline and the growth in output has come to a standstill. Is that not the non-complacement and accurate autumn statement on British business? Is it not abundantly clear that the balance of payments deficit is Britain's gravest economic problem? Why is that not recognised by the Government? Why can they not, even now, comprehend that our deficit is not some temporary mismatch of supply and demand, which matters little if it can be readily financed? Is not the truth that there is a fundamental structural weakness in British industry which has worsened sharply in the decade during which the Government have turned their back on it? Just as investment in manufacturing industry--which is different from business investment, the only investment figure that the Government quote-- is clambering back to just a few points above 1979 levels, up go interest rates to slam the process into reverse. Are we not back to the familiar characteristics of Tory economic mismanagement : stop, go and stop again? Does the Chancellor appreciate that in figures released this very day manufacturing output in 1989 has not increased at all, although the Organisation for Economic Co-operation and Development expects world trade in manufactured goods to rise by 8 per cent. this year? The House and, no doubt, the Select Committee will look with care at the public expenditure figures that the Chancellor announced. They are detailed in the tables that accompany the Autumn Statement. However, I draw attention to what I believe to be a crucial fact about public expenditure.

The real estimate of general Government expenditure in 1989-90--table A1-- is calculated at £187.4 billion. According to the Government's own table, that is only £1.7 billion up on the previous year. That is an increase of less than 1 per cent.--lower than in 1985, 1986 and 1987. No amount of guileful presentation can hide that fact.

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General Government expenditure has efectively been at a standstill in real terms during the last five years. No wonder that our public services, right across the range, are hardly being sustained, let alone achieving improved standards. No wonder that there is massive scepticism-- [Interruption.] I shall deal with hospitals in a moment. [Interruption.]

Mr. Speaker : Order. I ask hon. Members not to shout from a sedentary position. The Chancellor of the Exchequer was heard in silence. I ask the House also to listen in silence to the right hon. and learned Member for Monklands, East (Mr. Smith).

Mr. Smith : I do not doubt that the reiteration of these facts causes pain to Conservative Members. They must console themselves with the thought that it is the price of being Conservatives in modern Britain. It is when we know the truth about the present and the past that we are sceptical about the future.

I turn to the National Health Service, about which claims are made by the Chancellor of the Exchequer. He says that there is to be an increase in resources amounting to £2.6 billion--£2.4 billion, plus cost savings of £200 million. Is it not correct that, of this amount, £1.2 billion will be accounted for by the general Government deflator, that £500 million will be accounted for by the additional National Health Service deflator, that £200 million is accounted for by supposed savings, not yet achieved, that £250 million is the cost of the National Health Service review and that about £500 million may be available for increased patient care? I should like the Chancellor to go through each of those points and tell me whether they are correct. People are familiar with claims being made about additional resources having been made available to the National Health Service, although it seems to them to be declining every time they need to make use of it.

I should also like to ask the Chancellor about his homelessness package of £250 million to be spent over two years. Is it not correct that that is likely to provide about 5,000, or perhaps at a stretch 10,000, new homes? Is that an adequate response when we know that there are 100,000 extra homeless persons each year--that is, people accepted on to local authority housing lists?

On education, may we have an assurance from the Chancellor of the Exchequer that education expenditure this year will be sufficient for him to come to the House next year and say that no children are being sent home from school because there are no teachers to teach them? The Autumn Statement shows that, compared with last year's forecast, output is down, the balance of payments is worse and inflation is up. What is worse, for the year to come, output will fall from 2 per cent. to a meagre 1.4 per cent.--one of the lowest predicted rates since the last recession and in marked contrast to our competitors. But, in spite of the slowdown, according to the Government's predictions, the balance of payments deficit will remain in double figures--still the worst performance among the major industrial countries--and inflation will remain high, well above the level in other major industrial countries. The price may well be paid by those who become unemployed as a result.

I fear that this is yet another revelation of the extent to which our economy is being mismanaged, whoever is the nominal Chancellor of the Exchequer.

Mr. Beaumont-Dark : On a point of order, Mr. Speaker.

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Mr. Speaker : If the hon. Gentleman is seeking to ask a question--

Mr. Beaumont-Dark : I am raising a point of order. Until you have heard it, Sir, how can you rule me out of order?

Mr. Speaker : When an hon. Gentleman raises a point of order, he should not say he wants to ask a question about the statement. By definition, that is patently not a matter of order. I shall take the hon. Gentleman's point of order.

Mr. Beaumont-Dark : We are all meant to be hon. Members of the House ; some are more honourable than others. On such an important statement, Front-Bench spokesmen have the statement an hour before, and other hon. Members have it a quarter of an hour before. As we are all elected Members, on such a statement why should some of us be trusted and some not? Why cannot we all have the statement at the same time? Why are they to be trusted more than us?

Mr. Speaker : I am sorry that the hon. Gentleman feels that he is in the latter category. It has always been a convention that Front-Bench spokesmen have received the statement in advance and Back Benchers do not have that privilege. I wish that they did.

Mr. Major : The right hon. and learned Member for Monklands, East (Mr. Smith) raised a whole series of points and I shall deal with them. I must say that he has a considerable capacity for gloom, and I really wish that he would not paint down the performance of British industry. In his gloomy package in which he sought to paint down British interests, he overlooked entirely that growth is continuing, investment is continuing, inflation is falling and the trade gap is narrowing. Apparently all those points escaped the right hon. and learned Gentleman.

In regard to the detailed points that he raised about whether or not there is a standstill in public services, I draw his attention to the increase in capital expenditure on public services of £1.5 billion next year on roads, housing, education, health, rail and the urban development corporations. I remind him that, under the last Labour Government, capital spending fell and it has risen very dramatically under this Government.

In regard to the National Health Service, of course the factors that the right hon. and learned Gentleman mentioned are incorporated in any increase in public expenditure, notwithstanding that there is an increase in real terms of 5.5 per cent. The right hon. and learned Gentleman cannot stomach the fact that on revenue and capital year after year we increase the resources available to the National Health Service.

Next year, there should be a substantial correction to the balance of payments of over 1.25 per cent. of GDP, which is one of the largest corrections ever. I should have thought that the right hon. and learned Member for Monklands, East would have welcomed that. The right hon. and learned Gentleman was wrong about exports, which are continuing to grow. Our forecast is that exports and manufacturing output will continue to grow next year.

Interest rates, contrary to the right hon. and learned Gentleman's suggestion, are working. There has been a slowing down in activity, which is necessary to bring down

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inflation. Monetary policy is playing a key role in that slowing down, and will continue to do so in the forthcoming months. Manufacturing investment has been speeding ahead successfully. It rose by nearly 11 per cent. in 1988, and, although final figures for 1989 are not available, yet again it showed considerable and strong growth.

We expect the homelessness package to provide at least 15,000 new lettings. My right hon. Friend the Secretary of State for the Environment will give full details of the package later this afternoon.

As I said earlier, there will be a substantial real increase in resources for higher education, which will assist the education process all the way down.

Mr. Terence L. Higgins (Worthing) : Does my right hon. Friend agree that in any Autumn Statement it is important to combine prudence with the right sense of priorities? Is he aware that it is important that he has achieved the same ratio of public expenditure to national income as was predicted last year for the period that we are about to enter? Does he accept that increased expenditure on the National Health Service is much to be welcomed? Does he agree that he has selected the right combination to manage the economy since a tough monetary policy is being backed up by a massive surplus and a tight fiscal policy?

Mr. Major : I entirely agree with my right hon. Friend. If one is to maintain a prudent budget, the importance of declining public expenditure as a share of national income is self-evident. In this year's public spending round, we have sustained precisely the ratios forecast in last year's Autumn Statement. For the new year three of the forecast, the ratio will fall yet again. We have certainly met my right hon. Friend's strictures on that point. In my judgment, the majority of people in Britain and in the National Health Service will give the increases a warmer welcome than the right hon. and learned Member for Monklands, East. My right hon. Friend was entirely right to draw attention to the twin capacity of monetary policy and fiscal policy to bear down on inflation. I give him a clear undertaking that we shall continue to use both.

Mr. A. J. Beith (Berwick-upon-Tweed) : Does the Chancellor recognise that his attempts to pull rabbits out of hats will not fool those who must consider the figures in detail or those who must use them to try to hold together declining public services? Does he recall last year's promised increase of 4.5 per cent. for the Health Service, which turned out to be 1.5 per cent. and was insufficient to cover extra inflation in the Health Service or the range of demands on it?

Does the Chancellor accept that the figures that he quoted for transport will not build the two lines through central London for which the previous Secretary of State for Transport argued and will not fund the high-speed rail links that the north and Scotland need to the Channel tunnel? How many houses will be built as a result of the package that he announced today?

What has happened to the medium-term financial strategy, which was always quoted in previous statements? Does the Chancellor now accept his predecessor's view that some stronger external discipline, such as full membership of the European monetary system or an independent central bank, is needed?

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How does the Chancellor expect industry to expand on present interest rates? As his predecessor's forecast of the trade deficit was so wildly inaccurate, does he expect us to believe the forecast of £15 billion? Does he realise that he is presiding over an economy that is on the edge of recession and therefore needs prudent public expenditure, or does he still hold out to Conservative Members the hope of tax cuts in his first Budget?

Mr. Major : There were so many inaccuracies in the hon. Gentleman's introduction that I can scarcely list them all. We are certainly not in a position of recession. We are forecasting further growth, although slower than before. The slowdown in growth is necessary if we are to bring down inflation and ensure that there is a return to the steady and sustained growth that we have had for the past eight years. We are not prepared to let inflation get out of hand. Although that means slower growth next year, it is necessary for that to happen before we return to the levels of growth that we have seen in the past two or three years.

The hon. Gentleman's suggestion that there is a standstill in public services is a parody of my statement today which provides an extra £350 million in capital for roads, £190 million for housing, £100 million for education, £120 million in capital for health, £250 million for urban development corporations and £195 million for rail services. Clearly, the hon. Gentleman did not hear me mention that the homelessness package will provide an extra 15,000 homes and that my right hon. Friend the Secretary of State for the Environment will make a further statement about the details later today.

On transport, the increase in capital over the next two years is £1.8 billion, which, even in the hon. Gentleman's wildest imagination, cannot possibly be a standstill.

Sir William Clark (Croydon, South) : Does my right hon. Friend agree that his reaffirmation of his tight fiscal and monetary policy will be widely welcomed not only in the House but in the City? Does he agree that this year's public expenditure and next year's are the same proportion of GDP, which means that we are on target? For too long, the Opposition, and often the media, have been talking down sterling and our economic performance. They never once give any credit for our achievements. It was interesting to watch the reception that the Opposition gave to my right hon. Friend's statement. They were glum. If the Autumn Statement had been a bad statement, they would have been jumping with glee, as everyone knows. Let us not for one moment put off our strict monetary and fiscal controls until we have conquered inflation. There is no question but that the whole country will be grateful for that.

Mr. Major : I give my hon. Friend a categorical assurance that the reduction of inflation remains the Government's central and main priority, and that will continue. My hon. Friend is entirely right about public expenditure. We have maintained the target which we set ourselves on the ratio of expenditure to national income. That, too, is important as part of the counter-inflation policy. The reception that the Opposition gave the Autumn Statement speaks for itself. For them, bad news is often good news, and their glumness is self-evident.

There will be real improvements in services. They are eminently affordable because of the growth and improvement in the economy in recent years.

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Mr. Robert Sheldon (Ashton-under-Lyne) : Is the Chancellor aware that the most serious point in this serious economic statement is that the balance of payments is expected to be £20 billion this year and £15 billion next year, which is higher than the estimate in last year's Autumn Statement? Is the right hon. Gentleman aware that, to sustain this, he will have to attract money from overseas at high interest rates, thereby damaging manufacturing industry? Will he ensure that some assistance is given to manufacturing industry, possibly by increasing investment allowances?

Mr. Major : I do not underestimate the difficulties of the trade gap. The most serious problem that we face is undoubtedly inflation, and it will remain inflation. The right hon. Gentleman will have noticed the dramatic reduction in the trade gap, which we forecast, of well over 1.25 per cent. of GDP--one of the largest reductions year on year that we have seen.

Mr. David Howell (Guildford) : My right hon. Friend has public finances under excellent control. His calm presentation is in pleasant contrast to the gabbled pronouncements of the right hon. and learned Member for Monklands, East (Mr. Smith). I realise that the other half of his Budget, on revenue, will not be formulated until February or March. However, when he comes to formulate the tax side of his Budget, will he bear in mind that a large surplus is not necessarily an undisguised blessing and that he should be thinking about a balanced Budget? Will he reject the advice of some Opposition Members and others who argue--for their own sake, I suspect--that there should be substantial tax increases to create a large surplus in the Budget when a balanced Budget would be the most necessary and desirable?

Mr. Major : I am grateful to my right hon. Friend for his opening remarks and also for the first budgetary representation I have received. As my right hon. Friend will know, our policy has been for a balanced Budget in the medium term, although, in the short term, we need to retain a strong fiscal position.

Mr. Peter Shore (Bethnal Green and Stepney) : In spite of the Chancellor's comment about the reduction in the trade gap this coming year, is it not clear that the additional deficit of some £15 billion will result, together with the deficit over the past three years, in a cumulative current account deficit of £50 billion, equal to one half of the total net assets earned by this country over the centuries in its dealings with other nations? Is that not evidence of a serious loss of competitiveness in British industry and British trade? What proposals does he have for dealing with that loss of competitiveness and what are his assumptions about the exchange rate in the coming year?

Mr. Major : The right hon. Gentleman defines the wrong cause when he refers to the size of the trade gap. The substantial problem is the level of demand, rather than the extent of competitiveness. The fact that British industry is competitive at the present levels of exchange rate is more than evidenced by the tremendous growth of exports in the past year, which most certainly would not have occurred if that were not true. If the right hon. Gentleman cares to look up the figures, he will see that the growth in our exports far exceeds the growth in the level of world trade. Like the right hon. Gentleman, I am keen

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to see the deficit reduced, although I draw to his attention the fact that we have perhaps the second largest net overseas investments in the world.

Mr. James Kilfedder (North Down) : Can the Chancellor of the Exchequer assure us that ample funds will be provided for the security forces and the Royal Ulster Constabulary in Northern Ireland in the fight against terrorism, as such terrorism must be extirpated regardless of the financial cost?

Mr. Major : I am grateful to the hon. Gentleman for making that point. We all have great admiration for the work of the security forces in Northern Ireland, and they will continue to receive our full support.

Mr. William Ross (Londonderry, East) : I understood the Chancellor to say that there would be an increase in expenditure from £168 billion to £203 billion over a relatively short period. If the Government really have the defeat of inflation as their first priority, will the increase be met out of taxation or by a decrease in the sums available for the repayment of the national debt? If the second option is chosen, how will he prevent inflation in future years, when those huge sums seep into the general economy?

Mr. Major : The hon. Gentleman may have misheard the figures. The increase in expenditure on the general Government expenditure measure next year will be £5.5 billion, and he will observe that we have a strong fiscal surplus.

Mr. Neil Hamilton (Tatton) : Is my right hon. Friend aware that Conservative Members view with equanimity his statement that 1990 will not be an easy year because the corollary is that 1991 and 1992 will be very difficult years for the Opposition?

May I welcome the fact that reports in the newspapers about the Autumn Statement are belied by what my right hon. Friend has said in the House this afternoon? Matters are by no means as gloomy as some representatives of the media would have us believe. However, does he agree that the Government should continue to reduce the proportion of GNP that public expenditure takes? It is only by doing that that the supply side reforms which have done so much to produce high growth over the past 10 years can be continued.

Mr. Major : My hon. Friend is entirely right that it remains our medium-term objective to reduce public expenditure as a proportion of national income. My hon. Friend can be utterly sure that we are determined to get inflation down further, and that will be a significant part of our economic policy for the future.

My hon. Friend referred to matters trailed in the newspapers. The situation is by no means as gloomy as some of them portray. Growth will continue. There is no recession. Investment will continue. Inflation will fall and the trade gap, too, will fall.

Mr. Heffer : Is not the right hon. Gentleman speaking with two voices? On the one hand, he tells his hon. Friends that he is doing his best to cut public expenditure, while on the other hand he has made a mini U-turn by deciding to listen to some of his Back Benchers and the Opposition Front-Bench spokesmen and proposing to increase public expenditure in certain directions.

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Would it not be better if, in increasing public expenditure on housing--which I fully support--the right hon. Gentleman agreed that the only bodies that can deal with homelessness are the local authorities, and that they ought to be given greater help in doing so? Should not the money be directed to local authorities--and increased--to help those in local authorities to deal with homelessness, the greatest scandal that the Government face?

Mr. Major : The hon. Gentleman does me an injustice by suggesting that what I say to Opposition Members differs from what I say to my hon. Friends. But I am bound to say, "If you can't ride two horses, perhaps you ought not to be in the circus." Our policy is to cut public expenditure proportionately to national income, and that certainly leaves the opportunity for public expenditure increases on priority programmes. That has been our policy--and has been carried out as our policy--for a considerable number of years.

The hon. Gentleman asked about homelessness. I am very pleased at the package that my right hon. Friend the Secretary of State will be announcing this afternoon. Local authorities have a role, but not, I think, the only role, and the direction in which the resources are to go is the best direction that will produce the best result for the homeless.

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