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Mr. Beaumont-Dark : Will the right hon. and learned Gentleman agree that in his excellent speech the Lord President of the Council also talked about the need for wage restraint, which the Opposition parties seem to be doing little to encourage? Does he not agree with the hon. Member for Birkenhead (Mr. Field), Opposition Chairman of the Social Services Committee, that the Labour party's policy on wage bargaining and giving a minimum wage would cost 400,000 jobs and add 4.4 per cent. to industry's costs? How would that help industry? He should at least be honest and say what his policy is instead of knocking other people. What would he do?

Mr. Smith : I am quite happy to tell the hon. Gentleman, and I will do so. In the course of my speech I shall offer some suggestions for amendments to Government policy that come from the considerations of the Opposition. I must gently remonstrate with the hon. Gentleman. One is entitled to mock even people as great as the Lord President of the Council, particularly when they are giving us such useful messages. I am trying to help the House, as I am trying to help the people of east Surrey, to decipher the true meaning behind the somewhat Delphic statements, because these indicate a very important change.

An attempt is now being made to rewrite recent history. We heard the Chancellor of the Exchequer have a stab at it in his speech today. "Not everything is perfect," is now the line ; "there have been some mistakes along the way." I think that there is a tendency to seek to bury the last Chancellor's with him. I noticed that first when the new Chancellor was asked whether inflation would be his judge and jury. He said, "These are not my words." It was almost a case of "Don't watch my lips as far as this is concerned." It is now said that mistakes were made, but hon. Members will notice that most mistakes fall within the period of

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office of the departed Chancellor. I do not think that will do, however, because the present Chancellor of the Exchequer was an enthusiastic participant, as Chief Secretary to the Treasury, in the development of a great many of these policies. He was as guilty as any of the hype, the exaggeration, the gross inflation of the Government's alleged achievements.

Perhaps the best example came during that period of intense excitement which convulsed the Conservative party at about the time of the March 1988 Budget. Then they were telling us that Britain's economic miracle had become the outstanding reality of the decade, if not of the century. The right hon. Gentleman, opening the debate on 26 April 1988 on the Finance (No. 2) Bill, said that the Government's strategy had

"without doubt transformed the British economy.

[ Hon. Members :-- "Hear hear".] I am glad that I take the House with me, but I wonder if I shall get as ready assent for the next proposition to which the present Chancellor of the Exchequer drew attention. He said :

"During the 1960s we praised and envied the German economic miracle. In the 1980s the position has been precisely reversed."--[ Official Report, 26 April 1988 ; Vol. 132, c. 214.]

I notice that there is not quite so much baying from Government Members and that is an extremely wise position for them to adopt, because they may have noticed--it was reported in the financial news in The Guardian today--the report by Herr Haussmann, the German economics Minister, on the state of the West German industry : 3 per cent. growth predicted next year, 2.5 per cent. inflation, 7 per cent. rise in personal disposable income, 6.5 per cent. rise in consumer spending and, perhaps most important of all, a huge trade surplus last year of 148 billion deutschmarks, which in sterling terms is just over £50 billion.

What on earth do hon. Gentlemen mean when they talk about our having somehow surpassed the German economic miracle? The previous Chancellor did it as well. He said that Japan still had an economic miracle, but Germany's was in the past. Here we have facts that cannot be gainsaid and the present Chancellor, like the former Chancellor, should apologise for ever having dreamt of such fantastic ways of expressing the Government's policies, because the facts do not fit the hype.

Mr. Jonathan Sayeed (Bristol, East) : Does not the right hon. and learned Gentleman accept, however, that the German economy began from a start point far in advance of that of the British economy? The point is essentially that the Government, through their 10 years of office, have had to revitalise the economy, so deeply damaged by the Labour party, which had no interest in real investment.

Mr. Smith : I thought that the hon. Gentleman intended to chide me and give me facts to substantiate the notion of an economic miracle, but he departed from that. He said that the West Germans started from a better position at the beginning of the decade. For decades, the West Germans have been following consistently policies that have given long-term support to their manufacturing sector and have built up good public services. They have been following that path consistently, and the key to it--as I shall point out when I have an opportunity to

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proceed with my speech--has been investment. If we have a lesson to learn from West Germany, it is the crucial importance of that factor.

The Chief Secretary to the Treasury (Mr. Norman Lamont) : Does the right hon. and learned Gentleman consider it to be entirely without significance that the British economy, whether measured from 1980 or 1979, has grown faster than that of Germany, whereas in the 1970s it grew more slowly? Does he regard that as a point of interest?

Mr. Smith : During one part of the decade we had a spurt for growth which is coming to a halt, and we shall have a repeat of the stop-go policies. If there has been a successful decade and if we have been better than the West Germans--that is the burden of what the Chief Secretary and his colleagues have been saying--why do we have a record balance of payments deficit of well over £20 billion while they have a trade surplus of £50 billion?

The Government cannot wriggle out of that. They made an absurd and ridiculous claim and, now that the facts are revealed, they will not even admit that they made such a claim. The hype and

over-exaggeration has come back to haunt them, and so it should because they should never have attempted to mislead the public in that way.

Dr. John Reid (Motherwell, North) : In addition to explaining the conundrum of the miracle, will my right hon. and learned Friend answer a question that I would have asked the Chancellor had he permitted me to intervene in his speech? The Chancellor claimed twice that our share of world trade had risen inexorably in the last few years. But in that time our balance of trade surplus of £4 billion has grown to a deficit of £20 billion. Does that mean, in the logic of the Chancellor, that the better we do in world trade, the bigger our trade deficit will become?

Mr. Smith : I too have been puzzled by some of the Chancellor's claims. In the early part of the decade, our share of world trade, by volume or value, dropped. It may have stabilised in recent years, and I am not certain where it is headed-- [Interruption.] --and it may be at a lower level than when the Conservatives came to power. But I get the feeling, which I am sure others will have got, that a desperate attempt is being made by Conservative Members to clutch at a few straws that are about. But the major facts are there and cannot be gainsaid.

A major reason why the Federal Republic of West Germany has had consistent success is the importance that that country gives to investment in manufacturing and to public services, particularly education and training. The West Germans have by far and away the best record in the European Community on education and training, and that has stood them in excellent stead. We failed to invest in education and training in the 1980s, and we have inadequate ambitions for the 1990s.

Mr. John Townend : Will the right hon. and learned Gentleman accept that the attitude of education and universities to industry in Germany is far better than it is in England? Indeed, Sir Peter Parker said that, when he was at Oxford and Cambridge, he was the only one of his year going into manufacturing industry. He said that if more encouragement was given for people to go into manufacturing industry, rather than into the social services, the professions or the City, we would do much better.

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Mr. Smith : If the hon. Gentleman will bear with me, I will give him some detailed statistics on that. Perhaps the crucial difference between Germany and Britain is that the attitude of the Government there is different both to education and industry, and they encourage both to work together to improve the quality of the staff employed in West German industry.

Concern is being expressed by British industry about the level of investment. The CBI felt moved to submit a memorandum to the National Economic Development Council about what it saw as the real problem of investment now. I remind Conservative Members that this is at the end of this so-called fabulous decade. The CBI says :

"it is no exaggeration to state that the United Kingdom economy is at a crossroads. The twin problems of price inflation and a serious deficit on the current account of the balance of payments must be tackled, without tipping the economy into recession and against the background of a pitifully low level of personal savings, which account for no more than 4 per cent. of personal disposable income, down from 13 per cent. in 1980."

One gets the feeling that the CBI does not believe that it has been the most fabulous decade of the century. It goes on :

"If the objectives of reducing inflation and the current account deficit are clear"--

and the Chancellor said nothing about an ambition of eliminating the current account deficit ; indeed, I do not think he even mentioned it--

"so is the economic priority for 1990. It can be summed up in one word : investment."

The CBI goes on to express its concern :

"Yet all the indicators suggest that business investment, particularly in plant and machinery, is set to level off in the two years ahead and is in danger of falling back it is investment--in new plant, in training and in new products and services--which is the key, not just to economic growth but to growth without inflation." The CBI draws attention to what it calls "a worrying investment gap" between Britain and our principal competitors, and points out that fixed investment in 1988, the boom year, in Japan was £3,699 a head ; in the United States, £3,234 ; in France, £3,190 ; in West Germany, £2,946 ; and in the United Kingdom, £2,318, the bottom of the league for fixed investment in the best year that one could take for the Government. The CBI says :

"The threat to investment is, therefore, the most significant feature of the current economic situation."

Mr. Major rose--

Mr. Smith : I am sure that the right hon. Gentleman wishes to address that point, so I willingly give way to him.

Mr. Major : As the right hon. and learned Gentleman is saying much about investment--the underlying propositions about the importance of investment are understood as well on these Benches as on the Opposition Benches--may I ask him to remind the House which European country had the greatest growth in investment throughout the 1980s? Was it not this country?

Mr. Smith : I was about to deal precisely with that point-- [Interruption.] --because it is a misleading way of presenting economic statistics. The Chancellor claims that the Government have a successful record of investment. The Government always define it as business investment. They constantly say, as the Chancellor just said, "Do not worry about it ; we have a good record." One wonders why the CBI does not think that.

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I drew attention previously to an important article by Mr. Andrew Glyn in the Financial Times on 8 November of last year. That was recently picked up by Mr. Edward Streator, president of the American Chamber of Commerce (United Kingdom), who, many hon. Members will recall, was a former distinguished Minister at the United States embassy in London and a former United States ambassador to OECD. He, too, noticed the importance of that article and the difference between business and manufacturing investment. Ambassador Streator said :

"I would refer to the work done by Andrew Glyn of Oxford, who pointed out recently the stark contrast between material production where investment was still below the level of 1979 in 1988 and the services sector where the level of investment has practically doubled. In terms of business investment, gross fixed capital stock for agriculture and industry"--

and most of it is for industry--

"actually declined 8.4 per cent. between 1979 and 1988, while it increased 93.1 per cent. in the same period for services." He endorsed Mr. Glyn's conclusion :

"It would be a fantasy to believe that finance and business services can take over from manufacturing and generate the foreign exchange necessary to pay the import bill."

I hope that we all agree with that. That is the distinction. Manufacturing investment has languished, although overall business investment may have increased.

I will put that in starker terms for the benefit of the Chancellor, because he counts as business expenditure even expenditure on a car park outside a leisure centre or a metro shopping centre which has been built on the former site of a manufacturing enterprise. That is going on all over the country. Most of my hon. Friends have constituencies in which once there were productive engineering companies, but they have been knocked down, the sites have been cleared, and now leisure centres or large shopping complexes are being built. The Government say that such investment is as good as or perhaps even better than the previous investment. The crucial difference is that, when we had a bigger manufacturing sector, we made goods and sold them abroad. Now we have shops that import the goods that other people make, and we buy them.

Mr. Roger King (Birmingham, Northfield) : I am grateful to the right hon. and learned Gentleman, as he has given way many times. He will accept that the Ford Motor Company is one company that has invested heavily in the United Kingdom, with record investment currently under way. What advice, therefore, does he have for the tens of thousands of Ford workers who are being balloted at present on their wage agreement? Would he urge them to accept the wages on offer or to go for an ever-inflationary, higher wage increase?

Mr. Smith : I shall not give way again to Conservative Members. The hon. Gentleman's question was not relevant to the points that we were discussing. I shall leave the settlement of the industrial relations dispute between the Ford management and the workers to the negotiations in which they are engaged. I must remind the hon. Gentleman--because I do not think that he was here at the time--that in the latter months of the previous Government there was an economic debate in which the Opposition took what I can only call a highly irresponsible attitude to the situation at Ford. I shall not, therefore, take lectures on responsibility from the Conservative party.

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We know what the Government could do about investment. I must tell the House about the Autumn Statements--not only this one, but the public expenditure programme of the past decade. In the period 1978-88, in real terms, industrial research and development was cut by 30 per cent., regional development by 72 per cent. and export promotion by 81 per cent. How can a country with a massive trade and balance of payments deficit cut export promotion support for British exporters? The result is that as export markets open up in the Soviet Union and throughout eastern Europe, British companies could not be worse placed in relation to their competitors in the European Community. Year after year, the Government have cut back their support, especially for smaller businesses which have difficulty in maintaining an export service and an export initiative. Once again, the result is that, in the new trade routes which will open up in eastern Europe, Britain will be left at the back of the queue because of the activities of this Government.

Most bizarre of all in this Autumn Statement is the fact that expenditure on training is to be cut for the year to come by £110 million. If that was not enough, it is to be cut for the next year by £220 million. One of the Chancellor's elusive devices is to talk about priority areas in public expenditure. He selects some items of expenditure as priorities and he says that, although he is prudent about public expenditure, we can see how much more he is spending in the priority areas. If there are priority areas, it follows, as night follows day, that there are non-priority areas. Training is clearly a major non-priority area for the Government.

We have a crisis in training which does not seem to have penetrated the Chancellor's mind ; he scarcely mentioned it once in his speech today. In case it is thought that I am seized by a sense of exaggeration to criticise the Conservative party, I shall quote from objective commentators on these matters. Perhaps I should not say "objective commentators", because I shall quote from the proceedings at a conference of the Institute for Economic Affairs. I do not claim that the conference was objective, but it is interesting to consider what was said, as described in the Financial Times on 15 January 1990. The article said :

"Mr. David Lomax, group economic adviser for the National Westminster Bank, spoke for many at last week's IEA conference in describing the standard of vocational training and education up to school-leaving age in the UK as appalling' and the Government's performance on education and training as execrable'. Another speaker, Mr. Walter Eltis, director general of the National Economic Development Office, pointed out that 90 per cent. of 16 and 17-year-olds in Japan and the US are in full-time education. In Britain this applies to less than 50 per cent. of 16-year-olds and only about 30 per cent. of 17-year-olds".

I hope that the Government will take account of the fact that he also cited research showing that

"an upgrading of 1 per cent. of the labour force from unskilled to skilled can boost productivity by about 2 per cent."

The work of Professor Sig Prais for the National Institute of Economic and Social Research is possibly even more interesting. He went through a number of issues of industrial importance and looked at the training record of parts of British industry. In an article on 11 January, he pointed out :

"The essential difference between Britain and Germany lies in the proportions with intermediate qualifications,

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such as apprenticeships, City and Guilds certificates, or secretarial qualifications. He pointed out that 60 per cent. of the German workforce had such qualifications, compared with only 30 per cent. in the UK."

He then went through various areas in which we are losing out. He mentioned kitchen furniture in which, as we all know, British industry is losing out. He mentioned clothing manufacture, and I hope that the Chancellor will pay a little attention to this. The professor found that in clothing manufacture 80 per cent. of German machinists had completed two or three- year examined courses. In the United Kingdom plants, the survey did not come across a single machinist with such a qualification. If we do not train our people, and especially our young people, what chance do we have of competing against the country with the best education and training record in the European Community, if not the world?

Mrs. Maureen Hicks (Wolverhampton, North-East) : Will the right hon. and learned Gentleman give way?

Mr. Smith : No, I must get on. I have given way frequently. The case for training is unassailable. When we cause people to be trained effectively, we do not create only an important economic asset. The difference between a successful and an unsuccessful economy is the investment in human resources--in training our people so that they can beat the competition. The Chancellor might also reflect--and this aspect is mentioned far too little--that an intelligent anti-inflationary policy would release labour bottlenecks by training people, reskilling them and upgrading their skills so that unnecessary inflationary impulses did not come from that sector.

Perhaps most importantly, the case for training is one of personal opportunity and of giving our young people the opportunity that young people in other countries already have. I know that the Government always say that we should look at the increase in jobs over a particular period. However, many of those jobs are part time and low skilled--what the former Chancellor of the Exchequer once called "low-tech, no-tech" jobs, which he thought were quite suitable for our young people. Young people in other countries are having their minds stretched, their ambitions enlarged, their skills developed and their personal happiness increased at the same time as their economy is being strengthened while our Government do nothing.

It is no wonder that we heard on the radio this morning from the chief inspector of education in Bedfordshire about the shambles in which the schools in his area find themselves. We can go right through the infrastructure and find examples of the Government's neglect. In the past decade, they have persistently been indifferent to the manufacturing sector and have persistently neglected the public services.

Most disturbing of all, as we consider the development of our economy at the end of the decade, is the feeling that we are adrift and that the Government do not seem to have any policy or strategy in crucial areas of economic interest. What is the Government's exchange rate policy? Has fighting finally ceased between No. 10 and No. 11? Is it true, as the former Chancellor told us, that the Conservative party would never be a party of devaluation, or is it true that the rather more surreptitious policy of the present Chancellor is to allow the pound to slide gently downwards?

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What is the Government's strategy on inflation? How can they have a sensible counter-inflationary strategy when they have interest rate increases which provoke mortgage increases and are bound to be reflected in wage claims? They have also let loose a series of Government-caused price increases in the economy from electricity, transport and water through to other areas. What is their strategy to promote investment and to deal with the investment gap, to which the CBI rightly draws attention? Is there still a medium-term financial strategy? Those who study the history of the Conservative party must have been curious about the fact that medium-term financial strategy, which was the rock on which Conservative economic policy was based, was not even mentioned in the Chancellor's speech. I suspect that we no longer have an MTFS--a medium-term financial strategy--but an STES--a short-term electoral strategy.

What the Chancellor hopes to do is somehow to get by until the next election, stagger through the months ahead, in the hope that when she blows the whistle for the next election--and he hopes desperately that this will be the case--the economy will not appear in too unfavourable a light. That is what Government economic policy is all about. What the Chancellor said in his evidence to the Select Committee was very revealing, the Select Committee which once again gave us such an interesting report. Sometimes it is in the evidence rather than in the conclusions of our colleagues who sit on the Committee that one finds the interesting nuggets of information. The most interesting to me was when the Chancellor described--and he volunteered this ; he was not led into it--managing the British economy as "surfboarding on a fairly heavy sea".

It is revealing that the Chancellor sees himself as a surfboarder. All Chancellors have some sort of image of themselves. The lately departed Chancellor, although a former naval person, seemed to think from time to time that he was an aviator : we were treated to his notions of soft and hard landings. Unfortunately, he took some advice from the Opposition and left the plane rather hurriedly. His predecessor had a slightly different image. One sometimes wondered whether he knew if he was the shepherd or a member of the flock--alive or dead--but his image was much less dynamic.

Now we have a surfboarding Chancellor. In his mind's eye he is a sort of bronzed figure in Bermuda shorts, riding the waves, practising to take on all comers at the next Commonwealth Finance Ministers' conference. But is not the reality also revealed by that imagery? Surfboarders are not much in control of the essential elements ; they are at the mercy of winds, waves and hidden currents. That is what is happening now. The Chancellor is moving from wave to wave, not sure if he is heading for the beach or the rocks and in perpetual danger of suffering what surfboarders call a "wipeout". In his case, I suppose I might say--and I ask the forgiveness of the House in advance--it is a major wipeout.

That is no way to run an economy, either in imagination or in reality. We end the 1980s disorganised, uncertain, confused, not knowing what the Government's policy is--and I speak for the nation because it is a worried, perplexed and disturbed nation. That is one of the things from which Ministers seem, at their peril, to be happily insulated. They believe that variations in public opinion are merely temporary and that all will come right,

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as it did--did it not?--in 1985 : inflation came down and they went on to win the election, and it will all happen again.

Ministers are in for a very rude awakening because the people are beginning to realise that things have gone badly wrong in the British economy, and that we are slipping behind our prinicipal competitors, particularly as we face the challenges of 1992. They know, despite the hype, that the Government have been responsible for some major mistakes in the 1980s, and they know that those who made the mistakes should not be given the responsibility for guiding our affairs in the 1990s.

5.13 pm

Mr. Terence L. Higgins (Worthing) : At the beginning of his speech, the shadow Chancellor told us that he would give us some indication of Labour party policy. My right hon. and hon. Friends may feel that they have waited in vain for some such revelation, so we must adopt the approach of the right hon. and learned Member for Monklands, East (Mr. Smith) and see what coded message we can divine from his speech.

The core element of the right hon. Gentleman's speech was the reference to ambassador Streator's remarks. If we take that, the coded message is very clear : the next Labour Government would reintroduce a selective employment tax. Apart from that, we gained very little idea about what the Labour party might do in the present economic situation.

As this is the first occasion when the Autumn Statement debate has been televised, I begin by thanking my right hon. Friend the Chancellor for his commercial for the Treasury and Civil Service Select Committee's report. The report is a serious contribution to this debate and, as has already been pointed out, in many ways the evidence contained in it is as important as its conclusions. The report deals with public expenditure and with general economic aspects of the Autumn Statement. The first matter, part I of our report, is probably best debated when we consider the White Paper, so I shall concentrate on the general economic aspects of the problem. I stress once again that the report of the Committee was unanimous and that its conclusions deserve careful consideration. In many ways the evidence of my right hon. Friend the Chancellor was the heart of the matter. He analysed in considerable depth the causes of our present problems while at the same time fully accepting collective responsibility for the policies pursued by his predecessor. We would expect that of him.

That said, however, we now face serious problems of inflation and the balance of payments, although it is important not to underestimate the achievements of the economy under the previous Chancellor's guidance, not least the reductions in taxation, the substantial increase in living standards, the massive and unprecedented reduction in the national debt and, as my right hon. Friend rightly pointed out, the huge increases in priority areas of spending such as the National Health Service.

Nevertheless, we must analyse why many of these problems face us again. Opposition Members seem not to understand that we must fight a constant war against inflation, rather than winning a battle and that being the end of the matter. There are lessons to be learnt from the experience of the past two years, and the Committee's report seeks to show that.

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Mr. Beith rose --

Mr. Higgins : I hope that the hon. Gentleman will be brief, because I believe that Privy Councillors should speak only for a maximum of 12 minutes.

Mr. Beith : The right hon. Gentleman will have to work on the language of his ministerial colleagues, who still talk about "exorcising" inflation. If one exorcises something, it has gone for good. Is there no difference between the way he views this matter and the way they view it?

Mr. Higgins : It is a difference of rhetoric rather than of substance.

As I was saying, there are some lessons to be learnt. First, it is absolutely essential to improve our economic statistics. This is a constant burden that successive Chancellors have faced and the measures now being taken should help in that respect. Secondly, the forecasts in the past two years have been seriously misleading in underestimating the extent of the upturn in the economy ; there is also some danger that they are now underestimating the downturn, and I hope that my right hon. Friend will take this into careful account.

Over the past 10 years, however, we have progressed fairly steadily from very simple monetarism to a degree of pragmatism, and I hope that when my right hon. Friend comes to make his Budget speech he will set out clearly his analysis of policy and what he believes should be done. I have always believed that the right approach is an eclectic one that takes into account the views of those who may be described as monetarists and the views of those who may very loosely be described as Keynesians. There is some danger that we shall underestimate the importance of the money supply in the present approach to economic policy.

As the chief economic adviser to the Treasury said, the recent totally unprecedented fall in the savings ratio combined with an unprecedented rise in the investment ratio has caused serious problems. My right hon. Friend's approach to the rate of interest must be supported because it is right. At the same time, however, there is some confusion when we talk of monetary policy. At present, there is a concentration on the price of money--the interest rate--and insufficient attention is devoted to the quantity of money. The report tries to bring out that point. I have serious doubts whether the present approach to funding policy and control of the money supply is right. Of course, it is much easier when one has a budget surplus to deal with the problem by a policy of fully funding than it is with a budget deficit, when one must fund the deficit by borrowing from the non- bank sector.

I commend strongly to the Chancellor the important passages in our report, particularly paragraphs 83 and 87, where we urge him to consider the whole issue of funding policy. The present policy is to sell bills to buy gilts, and the opportunity for controlling the broader monetary aggregates is being ignored. I hope that he will consider the matter carefully before he delivers his Budget in a few weeks' time. That is one lesson that we must learn from the experience of the past couple of years.

The other problem--wage settlements--has only recently reasserted itself as a problem. It is wrong to say, as those with a simplified monetarist approach do, that so long as we control money supply we need not worry about wage settlements. I have gone through various cycles of so-called incomes policy, opposing successive Labour Governments who went from no incomes policy at all to

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the most rigorous statutory policy and then, on the Government side, promoting everything from no incomes policy to a statutory incomes policy.

As the subject is coming up again, it is important to remember the lessons of the past, and in particular the very dangerous doctrine associated with the idea of productivity and comparability. Of course, overall there is a relationship between productivity and wages. That relationship may or may not be inflationary, but it is dangerous to argue, as I sought to point out at Prime Minister's Question Time a few days ago, that if productivity in a firm increases, it necessarily justifies a comparable wage increase. The relationship is not automatic. It depends also on what is happening on the demand side of that company's output and what it can charge for its products.

If a relationship is established and if other firms decide to award comparable wage increases, that is unquestionably inflationary. There is an important distinction to be made. In the private sector the Government set the framework and private negotiators for unions and employers must work out the answer. They must bear in mind the effect that those wage settlements will have and the repercussions on unemployment of comparable wage settlements. I hope that the trade union movement will remember the lessons of 1979-80 ; over the past 10 years trade unions seem to have realised what was happening. Despite my right hon. Friend's determination to bring inflation under control, and despite the fiscal and monetary policies that he is adopting, inflationary wage settlements will have a most serious effect on unemployment. It is the impact of those settlements, not the Government's policy, which needs to be taken into account and where the fault will lie if that unfortunate position arises. That is what is happening in the private sector. In the public sector, as my right hon. Friend implied in his speech, the Government have a responsibility to adopt a sensible pay policy because that has a direct impact, first, on the size of the budget surplus or deficit and, secondly, on the distribution of resources between pay and services and physical resources. It would be a total abnegation of Government responsibility not to take a serious attitude to inflationary pay settlements in the public sector.

Finally, I want to say a word about the balance of payments referred to in depth in the Committee's report. Although I recognise, as the Committee does, that this is a matter of serious concern, I believe that the measures that the Chancellor has already taken on fiscal and monetary policy will be adequate to put the balance of payments right, though not immediately. If the Government try to correct the imbalance hurriedly, the cost will be too high, as our concluding paragraph says. Over time the position will improve. As to foreign confidence, the trend in the balance of payments is vital, both on the import side where one can see clearly that domestic demand is declining--which is likely to have an effect on imports--and externally on exports, where the fall in the exchange rate has been helpful. I believe that it is adequate to put the matter right. We may be reasonably certain that my right hon. Friend's policies will succeed.

I had a concluding passage about surfboarding, to which the right hon. and learned Member for Monklands, East has already referred. It was a memorable phrase. I do

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not think that undercurrents are important in surfboarding, nor does it follow that a surfboarder does not know the direction in which he should go, or can go. It may be necessary from time to time to tack. To go straight into the wind may be a mistake, but I believe that my right hon. Friend's skill will be adequate to get us home safely to port.

5.25 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : The right hon. Member for Worthing (Mr. Higgins) is to be congratulated, as always, on the work that he does in bringing certain matters before the House following actions by the Chancellor of the Exchequer and others responsible for the economy. I disagree with the right hon. Gentleman about the importance of money supply, but that will come as no surprise to him. I noted that the Chancellor did not deal with that in discussing monetary policy, nor did he mention the balance of payments, to which my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) referred in his splendid speech.

On this occasion I am prepared to be generous to the Chancellor. These are early days. He is the first Chancellor of the Exchequer of this Government without responsibility for a largely blameworthy past. Of course, he was Chief Secretary to the Treasury, but that is not the same as having responsibility for so many economic decisions that were taken while he was at the Treasury. Some of the nonsenses of monetarism cannot be laid at his door. I had hoped that we might speak less of those today, but the right hon. Member for Worthing brought up a murky past which reminds us of the certainties that the Government once had.

I am prepared to accept the limited responsibility of the Chancellor of the Exchequer for those matters and, even more important, for the squandering of North sea oil, the only real chance the Government had to do valuable things which they failed to do. At that time there was a belief, breathtaking in its naivety, that pay demands had nothing to do with inflation--a view that even the Prime Minister does not share now. We had the associated nonsense that doubling VAT would have no effect on prices, which was effectively disproved when the RPI went up to 21.9 per cent. in May 1980. When the Government talk about their splendid record on prices they should remember that the RPI was 21.9 per cent. in May 1980, a year after they took office. So there is something to be said against the Government on inflation, even at a time when they thought they had it completely right.

Rises in inflation under the Labour Government were a consequence of the quintupling of oil prices when virtually all our oil was imported. The 21.9 per cent. inflation under this Government was entirely home-manufactured. It was brought about by a Government who, to quote a phrase, did not understand sixth form economics. Clever as they are, they are the modern equivalent of the wisest fools in Christendom. I always think that a country pays a heavy price for trying to teach parties how to govern. They subsequently regret the commitments that they enter into without the benefits of a Civil Service machine ; and the country regrets them even more. In this regard I must applaud my right hon. and learned Friend the Member for Monklands, East and my hon.

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Friend the Member for Derby, South (Mrs. Beckett) for not promising more than they can deliver and for laying the foundation for a responsible and reforming economic policy. The Government have had 10 years and it is sad that they have not learnt all that much. In the famous Financial Statement and Budget Report of 1980, the Red Book, the Government mentioned some of the problems that they faced. In it they disclosed their medium-term financial strategy. The book is a prized possession of mine and bears the signature of the right hon. Member for Blaby (Mr. Lawson). In it he states : "high nominal interest rates are a deterrent to investment." That is what we have now. He continued :

"If interest rates are to be brought down to acceptable levels the PSBR must be substantially reduced as a proportion of GDP over the next few years."

However, the PSBR is now negative : we have a PSDR. Does that mean that there is no problem about high interest rates any more? Of course there is.

Not only did the Government get it wrong, but they got it diametrically wrong. That was their mistake and they continued with it year after year. Those of us who repeatedly attempted to bore the House knew that it was crucial to get that message across. We have finally done so because the new Chancellor of the Exchequer did not even mention that subject. We applaud him for that. The monetarist nonsense and its consequences have been scrapped, but unfortunately we now have the poll tax, the one-club activity and the scorning of the big balance of payments deficit. All those remain. However, the Chancellor of the Exchequer has no black marks against him yet. He may be regarded as tardy, but if that were shown to be a consequence of well-laid plans we might be persuaded that the results were worth waiting for. He is on trial ; that is not a bad position for him to be in. When he presents the Budget we shall know how to assess his activities.

The Chancellor of the Exchequer has an abominable inheritance : inflation, a balance of payments deficit and decaying public services. All those exist while everyone is fighting for the ear of the Chancellor. We must hope that he has realised that there is only one way out of the crisis, which has been held in abeyance for 10 years. The crisis did not come about until the advantages of North sea oil had been squandered and the country was once again forced to look the same recurring problems in the face. This sad aspect is like that in one of the stories of the brothers Grimm. The good fairy gave us the oil and the wicked fairy made us abuse it.

Abuse is probably the right word. We are now near the time when we can seriously question whether it might have been better not to have had North sea oil. France, Germany, Italy and Japan had no oil and prospered in the 1980s. If we had not had the oil we might have been forced to realise earlier the reality facing us. That cushion enabled the Government to ignore the pleas of our companies which shed a quarter of our manufacturing industry--one third in my constituency. Those included small and medium- tech firms which were forced to close by the 17 per cent. interest rates and a pound worth $2.40. We faced such disaster in the first two years of the Government. My town lost a great deal of its manufacturing industry and suffered unemployment levels such as no one expected.

What is the Chancellor to do? First, and most importantly, he must show that he is in charge of economic policy. He must be more than just a tenant of his next door

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landlady. To do the minimum to demonstrate that, he must engage her prejudices head on. Any increase in mortgage relief will write him off completely. For too long we have entertained nonsense about absurd encouragement of overpriced housing. We tax almost anything. Anyone living in expensive accommodation is not only free from tax but receives a subsidy to go for a larger and better dwelling. Industry cannot get the finance it should because the investing public realise that unnecessarily expensive housing is the best investment of all. There is no schedule A tax to pay on imputed rents, no capital gains tax on main residences, mortgage relief and now the poll tax. Can anything more be given?

If from No. 10 we hear the word that there should be an increase in the limit in mortgage tax relief, we shall know that the right hon. Gentleman's effective Chancellorship is coming to an end. Future economists will conclude that we have some obsessional neurosis about this and I am not sure that they will be entirely wrong. That is what the Chancellor should not do, but what should he do? He must take action to reduce the bonanza of tax-free pension schemes for the well-to-do. That will earn him the appreciation of those who call out for the minimum of fiscal sense. Assistance for industry and training will earn him essential bonus points. My right hon. and learned Friend the Member for Monklands, East was quite right to put this matter at the centre of his urgent call for action.

Ten years ago in Stockport and Tameside--I am associated with the two areas because they are linked--there were 20,000 skilled working engineers. Last year, there were 5,000. We have created that shortage of skills. It was created by people who retired early and will not go back to work. The Chancellor can do something about this. He may not recall this but he can learn about it : at the beginning of the war the same skill shortages existed and, in an emergency exercise, the Government set up a Government training scheme. People were paid to take a six-month course to learn basic engineering skills. I was then an apprentice and I remember seeing such people. We scorned them because they did not have the skills that we thought that we had. However, they did a useful job and, as time went by, they were able to replace some of the skills of the other people. I am not saying that that is a model, but it is an example of what could, and needs, to be done if we are serious about this problem. I have one other plea for the Chancellor's Budget. Setting capital allowances at 25 per cent. is unreal. If I buy a machine tool costing £1,000, the Inland Revenue will say that it has depreciated to £750 at the end of the first year. The assumption is that I can readily sell the machine tool, which I bought at £1,000, for £750 at the end of a year. That is absurd. Few machine tools can be sold on the open market for that price. If the dealer's margin is generous, it cannot be sold the following week at that price.

I urge the Chancellor of the Exchequer to look at the trade press to see how much secondhand machinery fetches. In a company which needs to be not too distant from the technological frontier, it is right that it should not be disadvantaged in that way. There should be some incentive for such an investment rather than the reverse. As my right hon. and learned Friend the Member for Monklands, East said, there is no discrimination between

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