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danger that the sort of stimulation that Nigel Lawson was fond of giving the economy will have precisely the same effect again and the remedy will be interest rate rises.

The more the Chancellor's Back-Bench supporters talk about the possibility of tax cuts, the more they are likely to push interest rates up in the coming months. The markets will fear that fiscal policy will not take sufficient account of inflationary dangers and that monetary policy will have to do so.

Whichever way he turns, the Chancellor is caught. If the circumstances appear to be favourable for tax cuts--disregarding for the moment what we could and should be using taxes for--he may well find that he has to protect his back with interest rate rises. The price for political talk of tax cuts may well be further pressure for increased interest rates.

The real indictment of the Conservative Government goes much further than that. They allowed the recession to be longer and deeper than it need have been. The Chancellor keeps saying that Britain is leading Europe out of recession, but that clearly implies that Britain led Europe into recession. If being the first out is a mark of some virtue, being in so early, so long and so deep is a curious virtue for the Government to proclaim. The artificial boom that preceded Britain's recession--the work of Ministers in this Government--was the reason for the depth and length of our recession and for much of the hardship that it caused.

The Government will continue to pay the price for that in many parts of the country. My hon. Friends the Members for Eastleigh (Mr. Chidgey) and for Christchurch (Mrs. Maddock), who are sitting beside me, won their seats in Parliament partly because people were so angry about the way in which the Government had mismanaged the economy.

Mr. Wolfson : The right hon. Gentleman is arguing that the recession was unnecessarily long. With hindsight, does he think that the fact that we were members of the exchange rate mechanism for so long directly contributed to the depth of the recession ?

Mr. Beith : No. I accept that our membership became unsustainable for a combination of reasons, some of which were related to the way in which British economic policy had been conducted and others to pressures outside the United Kingdom. I agree with the Chancellor that the fact that we were in the ERM for that length of time was fundamental in the battle against inflation. Had we not been in the ERM, inflation would have been far worse now. As the Chancellor pointed out, other mechanisms had to be put in place fairly quickly once we left the ERM. The exchange rate mechanism is not the best way to reach a single currency and when we eventually reach one it will be by a different mechanism, but that is a subject for another debate and another day.

One reason why we were so long coming out of recession was that the Government failed to invest in a counter-cyclical way during the depths of the recession, so the weaknesses with which we are all familiar persisted. In the latest report by the World Economic Forum, Britain came last out of all 22 Organisation for Economic Co-operation and Development countries in the number of qualified engineers, in engineering sciences and in the quality of the work force, and second from last in the standard of compulsory education.

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In the United Kingdom, 25 per cent. of the work force have vocational qualifications, compared with 40 per cent. in France and 63 per cent. in Germany. In 1991, 62 per cent. of 16-year-olds in Germany and 66 per cent. of 16-year-olds in France had the equivalent of a GCSE in three core subjects--mathematics, science and the national language--while only 27 per cent. had gained those qualifications in England. We were 19th out of the 22 OECD countries in real growth in total expenditure on research and development, 20th on public funding for research and development and 22nd on private funding of non-defence research and development. We came last out of the 22 OECD countries for investment in infrastructure. Despite all that, the Government plan to chop another 10 per cent. off their capital expenditure programme for 1994-95.

During the recession years, we could have been filling some of those gaps. We could have engaged in investment that would have put people back to work, reduced the burden on the welfare benefit system, brought through income in taxes paid and shortened the agony of recession, while equipping us for the future. It will become increasingly difficult to carry out some of that investment when Government activity on physical infrastructure, for example, starts to compete with intensified private activity in the economy. In economic terms, it would have been much easier to engage in that investment then.

We are paying for the lost years of recession, which have left us between 6 and 8 per cent. below trend growth. One could say that that amounts to a £50 billion bill for the years wasted in the depths of recession. Meanwhile, in a consumption-led recovery, public borrowing is financing a trade deficit--73 per cent. of national income is spent on personal consumption, which is higher than during the Lawson years. That is a remarkable fact, which illustrates the way in which our economy has become geared to personal consumption and has moved away from business investment. The Government are not putting in place measures to boost investment or small businesses.

Mr. Nigel Forman (Carshalton and Wallington) : Does the right hon. Gentleman recognise that one implication of his critique of the policy during the recent recession is that, if his party had been influential in any way, it would have increased both public expenditure and public borrowing during those years over and above the levels which took place ? Is that the case ?

Mr. Beith : Yes, except for the last phrase. When the hon. Gentleman says "over and above the levels which took place", he ignores the effect of expenditure during a recession. One of the features of that which Keynes managed to convince people about, which no one has fundamentally denied since, is that expenditure taking place during a recession leads to economic activity and the payment of taxes ; it reduces the payment of welfare benefits ; and it could have increased the speed at which we got our public finances back to a sensible position.

A further criticism of the Government, in listing this indictment, is that they have at the same time forfeited our lead role in Europe to the detriment of London as a financial centre. The possibility of London being the centre for a European financial institution is destroyed by the opt-out position in which we have placed ourselves. We

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now have the Government in the absurd position of being willing to accept as President of the Commission someone about whom the best that can be said is that he is a federalist, but a less competent federalist than the last federalist whom they vetoed.

If there are any challenges to the competence of the proposed President-- and I make none because I do not know whether there are any--they are extraordinary grounds on which to prefer him to another candidate. That is another illustration of a Government who, for the purposes of satisfying those on their own Back Benches who are in fundamental disagreement with their views, are prepared to take steps in Europe that are damaging to Britain's economic position. One must add that the Government's tax policies have been deeply unfair as well as dishonest. They knew before the election that there would be a £28 billion public sector deficit, and they had the full opportunity to tell the nation if they thought that the only way to deal with that was by substantial tax increases--perhaps even not quite on the scale that they eventually turned out to be. We could have given them the credit for underestimating the scale of increases required. But there were not to be any tax increases--it was tax cuts that would be on the agenda at the moment the ballot boxes closed and the Conservative Government were returned. That was dishonest. There has also been the unfairness of the tax policies. According to the Institute of Fiscal Studies, the income of the richest 10 per cent. has increased by £30 a week as a result of tax changes in the past decade, while that of the poorest 10 per cent. has gone down £3 a week as a result of tax changes over the same decade.

It is a long charge sheet and the plea in mitigation will not get much off the sentence. The acceptable part of labour market reforms, the publishing of the minutes of the Governor's meetings with the Chancellor on monetary policy and the apparent toughness on inflation--I welcome all that, but it does not add up to much in comparison with the huge damage that has been done.

One is bound to ask, as did the Chancellor, especially this week : where would Labour take us ? Are Labour Members really committed to economic stability and a fight against inflation ? Will they act to encourage labour market flexibility ? Will they ever get over their readiness to accept monopolies--a characteristic where I think they have too much in common with the Government--usually, in their case, in the public sector and, in the Government's case, in the private sector ? The Government transfer monopolies from the public to the private sector with too great a willingness. Such questions will need to be answered in the coming weeks.

It is clear to us that certain crucial things still need to be done. We must improve our education system. We must invest in our infrastructure. We must promote research and development and small business. We must take a much tougher line on the effect of monopolies on our economy. We must take a lead in Europe. We must take wider measures than the Government have attempted to deal with long-term unemployment. We must invest in the people. They need long-term competitiveness, not another short-term boom with the inevitably deep collapse that would follow it.

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6.43 pm

Mr. John Townend (Bridlington) : The three main economic objectives of any Conservative Government should be low inflation, sound public finance and reducing the overall burden of taxation. If any of those objectives conflict, clearly low inflation and sound public finance must take precedence over reducing taxation. The Government's record on inflation has been successful. Since 1990, inflation has reduced from 9.5 per cent. to 2.5 per cent. Looking at wage increases, factory gate prices and spare capacity, inflationary pressures are subdued.

As for public sector finances, while I would be the first to admit that the Government can be justifiably criticised for letting the Budget deficit rise so quickly and so high, they have now grasped the nettle and are courageously sticking to a policy which will broadly balance the Budget by the end of the decade. It is encouraging that recent forecasts show that the deficit is coming down more quickly. I strongly support the Government's policy of financial rectitude. As a result of that success, the economy is growing, and unemployment is coming down. Despite the fact that long-term interest rates have risen slightly recently, the immediate prospects and, indeed, the medium prospects look favourable. But it is when we come to reducing the level of overall taxation that we see that the Government have not achieved their objectives ; indeed, the opposite is the case.

Unless we are prepared to take some tough decisions, that will not be achieved in this Parliament. If we stick to the policies laid down in the Red Book, as the Chancellor said, the overall increase in the burden of taxation will be more than £16 billion in this Parliament, which is equivalent to 8p on the standard rate. To fight the next election with that scenario is not acceptable to me or to many of my colleagues on these Benches.

It is highly hypocritical of Labour Members to attack the Government for increasing taxation when, in every economic debate, they always want us to spend more. Whenever we suggest cuts in spending, they are opposed to them. They even criticised the defence review announced last week for being Treasury-led. That is hypocrisy.

We must ask ourselves how we got into that situation. In the autumn of 1992, after we were swept out of the exchange rate mechanism, it became clear that the deficit would rise by £1 billion a week, to some £50 billion in the ensuing financial year. At that time, the Government decided not to reduce spending, despite pressure from many of us on the Back-Bench finance committee suggesting that they should cut spending. At the same time, Labour was opposing any cuts in spending.

In the 1993 Budget, the Government decided that they had to deal with the deficit, but they were not yet prepared to cut spending. Once again, Labour opposed any cuts in spending, and demanded more spending. In the last Budget, I was delighted that the Government at last decided to cut spending, and we had the first reduction in my lifetime of the control totals. That was done by the strategy of not allowing Departments to spend the contingency reserve.

I welcome that start, and I congratulate the Chancellor on being the first to have the courage to grasp the nettle. However, he must be even tougher and concentrate on

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fulfilling our manifesto commitments, because we have seen from Labour today what we can expect if we do not do so.

That means that we will not be able to cut taxes before the next election unless we are prepared to make substantial cuts in public expenditure. At least an additional £5 billion should be cut from the existing control totals this year, and another £10 billion next year, so that we are in position and have the window of opportunity to bring taxes down at least to the overall level that they were at the 1992 election.

Naturally, Labour Members ask where we should make the savings. If they sit back for the next few minutes, I shall tell them. First, we should reduce the Government's overheads. Wherever one looks in the public sector, whether it is at Government or local level, one still sees overmanning, waste and inefficiency. Whereas the recession forced every private company, however large or small, to cut its overheads to survive, the public sector has been almost immune. The civil service White Paper introduced this week is a start, but it is too little, too late. I have a feeling that it has been watered down by the mandarins.

The scope for manpower savings is illustrated by what has happened in the nationalised industries which have been privatised. British Telecom has reduced its work force by 29 per cent., British Gas by 18 per cent. and Powergen by 35 per cent. The public sector, like the private sector, has invested a lot of money in computerisation and information technology, but it has never squeezed out the manpower savings that the private sector has done in that area.

Wherever we look, there are examples of waste. The Inland Revenue has just built a new training centre. Perhaps it needed a training centre, but did it need an indoor heated swimming pool ? The NHS offices in Leeds, with their pools and fountains, are the most expensive and extravagant offices in the city, and were opened when there was a surplus of office space at knock-down prices. The British Library has already cost £450 million. Even in this building, secretaries' desks and filing cabinets will be sold at auction next week and new ones brought in.

Mr. Brian Wilson (Cunninghame, North) : Will the hon. Gentleman give way ?

Mr. Townend : No, because many hon. Members want to speak. The Government spends £20 billion on overheads. If they cut that by 5 per cent. for each of the next three years--that is very reasonable when compared with what has happened in the private sector--they will save £3 billion a year.

It is the same in local government. One has only to compare the cost of services per head in Islington with those in Wandsworth, or look at what my local Labour county council does, to see that there is an enormous amount of waste and overmanning. Salary costs of local government--excluding teachers and police--are £20 billion. If we cut those by 5 per cent. for three years, we will save £6 billion. In Scotland, we are still spending far more per head of population than in England. The figure for local government grants in Scotland works out at £1,020 per person, while in England it is £691. In the NHS, £800 is spent per person in Scotland and £635 in England--26 per

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cent. less. The figures for education are the same. It is not fair and not necessary, and those costs should be reduced to the English level by the next election.

Overseas aid has a budget of £2.3 billion. We all agree about giving money away when we have it, but we are in debt as a Government and as a country because of the balance of payments deficit. We could quite fairly save £0.5 billion a year for three years in that area. There has been an explosion in legal aid. We have taken some action, but my constituents were appalled when they read that Iraqi business men have been getting more than £1 million in legal aid. We should abolish legal aid for anybody who is not a citizen of this country. The fastest growing cause of expenditure is without doubt social security, yet there is enormous abuse and fraud. Last year, we discovered £558 million in social security abuse. Anybody who knows anything about what is happening in this country and who talks to ordinary people knows that that is just the tip of the iceberg. Greater effort must be made to reduce fraud.

In my view, too much of the social security budget is going to dishonest people who are working in the black economy, to the workshy who have elected to live off benefits instead of getting jobs, and to those who irresponsibly have children knowing that they can expect the state to house and keep them. Not enough of the budget is going to those who are really in need--the old, and particularly old-age pensioners who are just above the income support level. They cannot get housing benefit, which includes rent and repairs, because they are living in houses which their spouses have left them, and the cost of repairs is bearing down heavily on them.

I welcome the initiatives by the Secretary of State for Social Security to stop abuse as he has done in the past couple of weeks, and to close loopholes whereby foreigners coming here on holiday can claim benefit. I cannot for the life of me understand why we excluded visitors from the Republic of Ireland from that. Ireland is just as much a member of the Community as France or Germany, and I detect the malignant hand of the Foreign Office.

Many millions of pounds could be saved by contracting out and more market testing. For example, we could save about £80 million a year if we abolished the NHS stores department, except for a small unit which could do all the negotiating and buying, and left the warehousing and the handling of stock to the private sector. It is interesting that the Welsh Office is progressively doing this, and there is no reason why the rest of the country should not do the same. Just because we are talking about the health service, it does not mean that savings cannot be made, and that there is not inefficiency and overmanning.

As public sector wages are the biggest element in our costs, it is vital that we keep a firm hand on them. I urge the Government to stand firm in the dispute with the signalmen, because numerous public sector unions are looking out for what will happen.

The statement on defence last week was very heartening

Mr. Wilson : Will the hon. Gentleman give way ?

Mr. Townend : I am sorry, but many hon. Members want to speak. I must get on, because I might be asked to sit down if I am not finished by 7 o'clock.

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It was heartening that the Secretary of State for Defence could find so many areas of waste and overmanning that he was able to provide the Treasury with initial figure savings without cutting the front line. When I heard my right hon. and learned Friend say that it was costing £300,000 to train a musician, and that there were many other examples of savings which could be made without any detriment to the armed forces, I asked myself why the savings could not have been made before.

People such as myself have been making speeches in Budget debate after Budget debate about the bloated overmanning and waste in the public sector. I found it a little disappointing that, at a time when communism has collapsed, the Ministry of Defence made more savings than it was asked for, and then went on a little spending spree. I should have thought that, in view of the size of the Budget deficit, the whole lot should have gone back to the Treasury.

I accept that there are considerable cultural problems to overcome if the Government are to be successful in their endeavour to cut spending. By and large, senior civil servants and heads of Departments are not likely to help Ministers to cut the size of their Departments because their status in the mandarin hierarchy depends on the size of their budget and of their work force. Indeed, many Ministers have no wish to see their Departments slimmed down. Many Ministers do not have the will to fight their civil servants, and some of them do not have the ability--not having had business experience--to force through savings and cuts in the work force against the wishes of senior civil servants who are trying to protect their bureaucratic empire.

Last year, I was lobbying Ministers to reduce spending, and I was told several times, "You have to appreciate that it is politically more difficult to cut spending than to increases taxes." Having seen the results of the local elections, the by-elections and the European elections, I hope that my right hon. and hon. Friends realise that that is not true. The Tory party is nothing if it is not the party of low taxation.

Market testing and contracting out have not been applied with the same enthusiasm throughout the public service, and that must be done. To achieve that cultural aim, we must look to the Prime Minister. In the Cabinet, only three people have no vested interest in keeping their budgets up--the Chancellor, the Chief Secretary and the Prime Minister.

I hope that my right hon. Friend realises the political danger we face on taxation, and I hope that he will launch a crusade to cut waste, inefficiency, fraud and overmanning throughout the public sector, including local government. He should receive the maximum support from Ministers. It should be made clear that those who succeed in the endeavour will be promoted, and those who do not succeed will be asked to make way for others.

It must be made clear to permanent secretaries that those who do not co- operate will not get the traditional knighthood. The Prime Minister should consider appointing a Minister in every Department whose sole job would be to improve efficiency and cut waste and spending. If the civil servants are not prepared to co-operate, those Ministers should be able to bring in accountants and company doctors from the private sector,

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who have had experience of cutting overheads in this terrible recession, which industry has survived so well and so efficiently. It is not too late for us to achieve our manifesto commitment on taxation if we act this year, but it will be too late if we wait for another 18 months.

Several hon. Members rose

Madam Deputy Speaker (Dame Janet Fookes) : Order. Before I call the next hon. Member to speak, could I point out that between the hours of 7 and 9 there will be a limit of 10 minutes on speeches. 6.59 pm

Mrs. Helen Liddell (Monklands, East) : I am very grateful to you, Madam Deputy Speaker, for calling me to speak in this debate, especially as it is such an important one and falls in the final week of the Session.

This has been a tragic Session, marred by the death of my predecessor, John Smith. I am extremely conscious of the eloquent tributes that have been paid to him from both sides of the House at the time of his death and at his subsequent funeral and memorial services. I, of course, remember him as a constituency Member, and the people of Monklands, East made it very plain that they saw John Smith very much as their own Member.

They were extremely conscious of the fact that they had in their midst the man who they believed was going to be the next Prime Minister. They too are conscious, as I am, of the unfinished business of John Smith, not least of which was the establishment of a Scottish Parliament within the framework of the United Kingdom, and that even more important unfinished business-- the election of a Labour Government at the next general election. When that day comes, it will be our lasting tribute to John Smith.

When John Smith made his maiden speech before the House, he asked hon. Members to take into account

"the diffidence which I feel in attempting to follow in the footsteps of so fine a predecessor."--[ Official Report , 10 November 1970 ; Vol. 806, c. 243.]

I am sure that hon. Members recognise that my diffidence is even greater, as I must follow in the footsteps of someone who went on to lead my party.

Throughout the communities of Monklands, East, John Smith was respected and admired. The side of John Smith that came out so strongly after his death was the warmth, commitment and enthusiasm that he felt towards ordinary people. It is in that spirit of dedication that I wish to continue to work for the people of Monklands, East.

The parliamentary by-election that I have just come through was a bruising affair, which concentrated on one issue--the local council. That concentration offers a lesson to all of us politicians, be we in government at local or national level or elsewhere, because it demonstrated the importance of taking into account the fears and the sense of grievance of local electors. Now that the by-election is behind us, it is important to take into account the need for a time of healing within the communities of Monklands, East.

Many in the constituency felt besmirched by some of the negative publicity that attached to them. I say to the House that they are decent, honourable and hard-working people. The constituency spans a number of small communities, 12 villages, the town of Airdrie and a substantial part of Coatbridge. Those communities were the cauldron of Scotland's industrial heritage.

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The men and women of those communities went to work in the textile industry, in coal mining, the iron and steel industries, shipbuilding and in motor manufacture. In the past 15 years, those industries have disappeared. Those communities, which measured themselves by the contribution they could make to the wider economy, now suffer from a lack of morale and of no longer feeling wanted.

It is incumbent upon all of us who are concerned about the future of our economy to take into account the real needs of such small communities, where there was a great emphasis on acquiring skills and education. I know that only too well, having been educated there, as was my husband. The people of those communities want their children to go out into the world with the best possible background, be it obtained in the formal educational structure or through the acquisition of skills.

One in four people in Monklands, East are out of work, and young people account for one third of them. One in five are on benefits. It is also a tragedy that, in all the statistical analysis of health and sickness in Scotland, Monklands, East breaks all the records. It is a constituency that has been visited by poverty and unemployment. Much can be done by the House and the wider community to help encourage the regeneration of such communities--there are many like them, not just in Scotland but throughout the United Kingdom. I want to see more jobs brought to those communities, bearing in mind their strong, proud heritage. A number of small industrial sites are located within the constituency, but not too many large ones, although a number of such sites throughout north Lanarkshire would be very attractive to inward investment--not least, of course, the former steel plant at Ravenscraig.

The constituency offers a number of opportunities for the siting of small businesses. My hon. Friend the Member for Dunfermline, East (Mr. Brown) mentioned the need to encourage small businesses, and I have a particular interest in that, because I have a particular desire to see new skills and new opportunities brought to the constituency that was good enough to elect me on 30 June. Many opportunities for small businesses in Scotland are not taken up. In the 1980s, for example, if Scotland had had the same level of business start-up as the south-east of England, where we are today, we would have created 195,000 more jobs. Even if we had imported the death rate from that decade, which was all too apparent in the south of England, Scotland would still have been 36,000 jobs ahead of the game. That is an attractive statistic to those who are concerned about attracting jobs to Scotland, and in particular to communities such as Monklands, East.

We must do more to encourage small businesses and put fewer obstacles in the way of establishing them. Many men and women who are now seeking an opportunity in their middle years, who have perhaps lost their jobs as a consequence of the recession, wish to put their skills and expertise to much greater use in the small business sector.

Other communities in other parts of the world attract such small business most effectively. The state of Massachusetts, for example, has become the hotbed of new business start-up in the United States because of the marriage between its business community and academic institutions. I would like to see that same partnership developed in the west of Scotland and throughout it.

In Bavaria, the banking system has changed banking arrangements to make the raising of capital for small

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businesses that much easier. Many people who wish to start up small or medium-sized enterprises in Scotland are confronted with the traditional Scottish bank manager, who is scared of risk. Risk is endemic to small businesses. We must recognise that, before we achieve success, we may have to take into account the possibility of failure.

We cannot brook too many failures in a community that so desperately needs jobs and hope. It has so much to offer. The skilled artisans, who made sure that there was a future for people like me by offering us educational opportunities, as well as offering other opportunities to everyone, regardless of their background, are entitled to pass on to the next generations the kind of communities that they worked hard to build.

Those are the communities among which John Smith worked, and they are the communities that I dedicate myself to serve. I am very grateful to the House for its courtesy in listening to my maiden speech. I hope now to go on and continue my parliamentary career in serving the people of Monklands, East as John Smith did.

7.8 pm

Mr. Mark Wolfson (Sevenoaks) : It gives me particular personal pleasure to follow the maiden speech by the new hon. Member for Monklands, East (Mrs. Liddell). It was an impressive introduction to the House. The hon. Lady talked eloquently and movingly about the people of her community, their hopes and their aspirations. She linked what she said about their desire for new skills and new opportunities with her own experience. We know from the election that she is a bonny fighter and we wish her well in the House. I hope that we shall hear much more from her in the years to come. It is appropriate to mention that, for several years, John Smith was my pair in the House. All my contacts with him were a pleasure due to his humour, integrity and friendship and I, too, felt a sense of real loss at his tragic death.

I firmly support the motion before the House and congratulate my right hon. and learned Friend the Chancellor on his approach since taking on that difficult and important job. In his speech, he dealt in a pragmatic and sensible manner with the current position of the British economy, its outlook and forecasts on it. By comparison, the performance of the shadow Chancellor was disappointing. He told us nothing of the Labour party's policies but simply made broad generalisations. I genuinely wanted him to say how, for example, the Labour party intends to enable, encourage or command the City to take longer-term decisions about industry. I accept that that problem exists, but changing it needs a concrete approach and we heard no concrete arguments from the shadow Chancellor.

The position of the British economy today bears no relation to the picture painted in the shadow Chancellor's speech. We have achieved good results : low inflation, low interest rates and a mortgage lending rate of less than 8 per cent., which is the lowest for more than 25 years. Those achievements have a positive effect on individuals' home budgets.

I agree that there are areas of difficulty and deprivation. Much has already been said about unemployment, which is and will remain a key economic and social issue in the years ahead. In national terms, it continues to be important

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and I appreciate that it can be a personal tragedy for individuals who are directly affected. I agreed with hon. Members who focused on the concerns of young unemployed people at the start of their working lives.

However, the right hon. Member for Chesterfield (Mr. Benn) pushed out some unreal proposals to deal with unemployment. He described how unemployment had been dealt with during the second world war, when we took measures to provide the armaments that the nation needed and, in doing so, ran up an enormous national debt. Thank goodness that America was there to assist us in dealing with that problem. We could not run the economy like that today and it was unrealistic to argue that we could.

The only way in which we can safeguard jobs is to ensure that we have a thoroughly competitive economy. That is why I firmly support the Government's actions to ensure that we are not burdened with the paraphernalia of the social chapter, which would only increase costs for British industry struggling to compete with the vigorous and ever-growing economies of the Pacific rim. High costs of manufacturing are now a growing problem for Europe. It is a major benefit to Britain that we have a lower- cost economy than the rest of our European partners. We need to keep it that way.

My view on the exchange rate mechanism has been changed by hindsight. I accept that there were benefits in our membership, particularly its effect on inflation. It ensured that we squeezed inflation down to levels that have not been experienced for many years. I am pleased, however, that the Government have said that they do not expect to rejoin the ERM in the foreseeable future. We should not lose the control which we now have over our economy as a result of being out of the ERM. The effect on Britain of a future ERM-type organisation, let alone a single currency, would be much more damaging in a larger Europe. I strongly support the enlargement of the European Union but it must mean that the opportunity to get all convergence criteria moving in the same direction at the same time, with the measurements necessary to achieve a single currency, is much less likely to happen.

If we decided to go for a single currency, we would endanger the unity of individual nations and put the European Union under a strain that might lead to its break up. Some of my hon. Friends might welcome that, but I would not. I want a European Union that gives us the benefit of a wide market but it must be loosely organised on the basis of a strong market rather than tying member states too closely to each others economies.

It is important that the electorate appreciates that, although the Government have embarked, quite properly, on a ever-tighter control of public spending, we have none the less continued to increase spending on social security, education and the national health service. As last week's statement spelled out, we are attacking areas of bureaucratic overspending, such as those in the back-up to the armed services. Dealing with those is long overdue.

I applaud the Government's actions in that respect and encourage members of the Treasury Front Bench to continue the line that they are following. I see and hear positive responses from many people in my constituency, which suffered heavily during the recession, that the outlook and opportunities for them are improving week by week and month by month.

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7.17 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : It was with a great deal of pleasure that we heard the maiden speech of my hon. Friend the Member for Monklands, East (Mrs. Liddell), who took over a seat from an hon. Member whom we held in the highest regard. The way in which he departed from us made us feel even more poignantly the loss that we suffered. The fact that we could give my hon. Friend such a clear vote of confidence in taking over from him means that we shall listen to anything that she has to say to us in future with great care and interest.

The Government have committed three disastrous errors. Many of us expect Governments to take a certain amount of time to learn the problems of government. But this Government have been in office for 15 years and still have not learnt much. The first disastrous error was on monetarism ; the second was to waste North sea oil ; and the third was the introduction of the poll tax, which did so much to assist the decline of local government.

We suffer from the problem that the growth of monetarism did much damage to manufacturing industry. My hon. Friend the Member for Dunfermline, East (Mr. Brown) was right repeatedly to point out the need for that type of investment.

Conservative Governments have obviously had contempt for manufacturing industry, especially Nigel Lawson, when, in a speech at the Mansion house, he scorned the valuable work done by the House of Lords Select Committee in pointing out the importance of manufacturing industries. The service industries were held to be the great wave of the future--they were going to provide the great prosperity.

However, service industries are not alternative to manufacturing industry ; they are a natural consequence of manufacturing industry. One needs efficient operations to service machinery and so on, but, less obviously, the City of London owes its eminence to manufacturing industry.

What are the big financial centres of the world ? They are London, New York, Tokyo and Frankfurt, and they became financial centres only as a result of their manufacturing industry. It was because Britain in the last century was a manufacturing nation that London was created as a financial centre ; it is only because America became the next big industrial power that New York was created as a financial centre ; and it is only because of their industries that Frankfurt and Tokyo have become financial centres.

Whoever heard of Tokyo as a financial centre before its industry, in the post-war world, became the power that it subsequently became ? Whoever heard of Frankfurt before it became an industrial centre ? But Frankfurt will now be the main Community centre for our financial institutions, and we are losing the battle for financial centres in a number of ways, because our manufacturing industry is unable to support them.

I strongly welcome the existence of our City of London ; it is very important, but we must understand the underlying strength that comes from manufacturing industries.

As for the service industries such as health, education and transport, they rely on the wealth creation that comes from manufacturing industry. Manufacturing industry is the substratum of all those other advantages that we obtain from service industries. That wealth creation comes from our factories--from the skills and abilities of those people who work in them.

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I accept that, when jobs are needed, only some of them will be found in those factories. There will not be an enormous increase in employment opportunities as a result of the greater concentration on, and the greater understanding of the need for, manufacturing industry. I accept all that. However, the output from manufacturing industry is all-important. That output creates, not so much the jobs as the wealth, and from that output, from that wealth, we can create the service industries--we can create educational opportunities, health services and all the other facilities that we require. Services rest on the backs of manufacturing industry. We want a sensible acknowledgment of the wealth creation possibilities. That will provide the means for us to employ many more people in the public and the private service sectors. That is the principal way that we shall get people back to work--through the service industries, by getting people to work in restoring our infrastructure and repairing the decay in our cities, in a sensible programme of reconstruction, paid for by a new, firm industrial policy. Our recent productivity increases have resulted mainly from investment for efficiency rather than from investment for efficiency and the expansion of output. If one invests simply to obtain efficiency, one will reduce employment. One needs to invest both for efficiency, which is important, and for an expansion of output. That is why our manufacturing base has not expanded in the way that those of other countries have. We need today a new understanding of the importance to our country of manufacturing investment. That should take place in this country and in our industries.

Many years ago, in 1961, there was the bank rate investigation of a Governor of the Bank of England who had advised the sale of sterling and commented :

"It may not be patriotic but it makes sense."

My hon. Friend the Member for Livingston (Mr. Cook) has commented on one aspect of patriotism today. The wish to invest in our country is an aspect of patriotism. Of course there is a need to invest overseas in certain areas, but patriotism means that we should try to improve our manufacturing processes, our manufacturing industry and our employment opportunities here in Britain. Those matters should be paramount.

We need to encourage people to invest. The Government can do something about that immediately, by increasing capital allowances. The present 25 per cent. rate for capital allowances is ludicrous. I have argued repeatedly that is not an investment incentive but with with an investment disincentive.

Everyone knows that many items of capital equipment actually depreciate by more than 25 per cent. a year. That is especially true in the first year. The profit made by the sellers of a piece of capital equipment means that it will not be worth 75 per cent. at the end of the first year--that may be the profit that is made on it. If one buys a piece of capital equipment for £1,000, there are not many cases when, if one tries to sell it, one will receive £750 for that piece of capital equipment at the end of the first year.

So we are dealing, not with an investment incentive, but an investment disincentive. That is something that the Government can change straight away.

The other great error was over North sea oil. It was a great pity. We had a wonderful opportunity. I minuted the Chancellor of the Exchequer, Denis Healey, in 1977 and told him, "If you do nothing with this money, it will just be spent on consumption. If we do something for

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