Speeches, Interviews & Other Statements

Complete list of 8,000+ Thatcher statements & texts of many of them

1975 May 22 Th
Margaret Thatcher

HC S [The Economy] (Opposition motion)

Document type: Speeches, interviews, etc.
Venue: House of Commons
Source: Hansard HC [892/1637-78]
Editorial comments: 1605-1758. MT spoke at cc1637-54, 1661, 1674-75.
Importance ranking: Major
Word count: 14871
Themes: Conservative Party (history), Economy (general discussions), Employment, Monetary policy, Privatized & state industries, Pay, Public spending & borrowing, Taxation, Trade, Foreign policy (Asia), Housing, Transport
[column 1637]

The Economy

4.5 p.m.

Mrs. Margaret Thatcher (Finchley)

I beg to move,

That this House, being gravely disturbed by the total failure of the policies of Her Majesty's Government to curb the accelerating rate of inflation, calls upon Her Majesty's Government to abandon their damaging plans for further nationalisation, to take immediate action to cut public expenditure and to secure a reduction in the level of pay settlements, as essential parts of a programme designed to restore confidence and promote the economic recovery of the nation.

Mr. Speaker

I have to inform the House that I have not selected any of the amendments to the right hon. Lady's motion:

To leave out from ‘inflation’ to end and add ‘demands the urgent introduction of legislation to provide self-government for Scotland to ensure the living standards of the Scottish people through the growth and development of Scotland's oil and other natural resources’.

To leave out from ‘inflation’ to end and add ‘takes note with regret that neither Her Majesty's Government nor Her Majesty's Opposition have so far put forward any adequate diagnosis of the causes or remedy of the present inflation which would offer the nation the prospect of effective leadership in overcoming its difficulties’.

After ‘settlements’, insert ‘by means of a statutory prices and incomes policy’.

However, the motion is in very wide terms, and it seems to me that there could be a wide-ranging debate upon it.

Mrs. Thatcher

We are suffering from what the Prime Minister calls the gravest economic crisis that we have faced since 1931. It is different in its effect. It is different in its cause. But it is equal in its gravity.

In this country, the level of inflation that we are experiencing now, its persistence and its acceleration are new phenomena. In previous periods of history, periods of sharp price rises have been [column 1638]followed by falling prices and money has regained its value. We are bound to question now whether people will ever again regain their confidence in money as a store of value or whether a degree of inflation is now the normal state of affairs.

The degree of inflation that we have in this country at present is wholly unacceptable and must be reduced. As Thomas Mann, the great German novelist, said:

“A severe inflation is the worst kind of revolution … only the most powerful, the most resourceful and unscrupulous, the hyenas of economic life, can come through unscathed. The great mass of those who put their trust in the traditional order … the elderly who hoped to live on what they saved in the past—all these are doomed to suffer.”

The real causes of inflation are not economic. They are social and they are political. Inflation is caused first by Governments, through rapidly rising public expenditure beyond what the taxpayers can bear and, secondly, by groups of people who try to get more out of the economy than it produces.

With manufacturing production virtually static—and the latest index is 105.1 compared with that in February 1974 of 106.8—it is not surprising that we have accelerating inflation and, in addition, that we are increasingly having to finance Government expenditure by borrowing from abroad.

A year ago many democratic countries were experiencing similar inflationary symptoms. I know how difficult it is to make comparable international comparisons which are genuine. I remember one of Harold Wilsonthe Prime Minister's speeches at the beginning of the autumn election campaign, when he said: “Next time someone tells you that Britain has the worst record for cost of living increases, tell them to get up to date. Tell them that while in the United Kingdom the rate of inflation has slowed down compared with a year ago—in Canada, America, France, Italy, Belgium, Denmark, Sweden and Switzerland it has speeded up.” That was at Bury on 26th September.

Of course, the up-to-date picture is now very different from that of only seven months ago. In the last few months since December the OECD countries as a group have inflated at a rate of less than 10 per cent. per annum. In Britain over the same four-month period the figure was 27 per cent. and, as the Press have already pointed out, the Healey figure for the three [column 1639]months to April was 34 per cent.—almost exactly four times the 8.4 per cent. of which we heard during the election campaign, calculated on the same basis.

This dramatic slide in Britain's position in the international inflation league table is a very good illustration of how our situation and performance have been worsening, while in other countries the opposite has happened. The facts about our neighbours’ sucesses are becoming more and more well known. Japan had grave problems. It had a 30 per cent. wage inflation last year and it has now got the level of settlements down to half that level this year. And all that without any change in unemployment worth mentioning. It has one of the lowest unemployment rates in the world. Italy's catastrophic visible trade deficit has almost been eliminated. France has cut inflation from about 15 per cent. last year to about 10 per cent. per annum this year. In Germany the oil crisis put up prices scarcely at all. In 1974 they were only 1½ per cent. or so up on 1973, and the rate is already back to where it was before the crisis—that is to say, the German rate of inflation is about 7 per cent. a year, the sort of increase we get in a two-month period here.

Other countries, therefore, have been able to meet and to tackle the problem successfully. Of course there has been a price to pay—a check to growth and, lagging behind it as always, a rise in unemployment in some countries, though not in all. But it is abundantly clear that almost everywhere the natural forces of expansion are working their way through again, and in many countries the underlying situation is so sound that reflationary measures are being taken, a course of action that could not be contemplated here for the reasons set out by E. Dellthe Paymaster-General in his speech in Stoke on 20th May—set out and spelled out, if I may say so, extremely well in a speech which could almost have been made from this side of the House. One just hopes that the Government will act upon the sentiments then expressed.

While the situation is improving elsewhere, here it is still getting worse. But the successes of our neighbours show that inflation can be tackled and substantially reduced. That means that there are no excuses for the different pattern of [column 1640]events that we have experienced here. We could have acted last year and we did not. It would have been difficult, but far less so than to correct the situation we face now. Indeed, the Bank of England itself pointed out in its excellent commentaries, at which we always look very carefully—[Interruption.] I rather thought Denis Healeythe Chancellor of the Exchequer was greatly in need of the facilities provided by the Bank of England, first for his overseas borrowing and possibly later as a printing press. The Bank of England said:

“It is … likely to be more difficult to bring about a deceleration of inflation now that prices are rising at 20 per cent. a year, than when they were rising at 7 per cent. or 8 per cent.—a rate which some years ago used still to be regarded as excessive. The rate of inflation could then be appreciably reduced by a relatively short period of more moderate growth in money wages and salaries.” But not so now, and it goes on to explain why.

The Government have constantly vilified my right hon. Friends for suggesting that it would be better to take a little action earlier than to leave it and to have to take a lot of action later. But the Government in fact left it, and now we are facing a position in which they will not be able to go on very much longer before taking action.

There were no magic remedies which the other countries took. They took the necessary steps, which are all recorded and set out. The situation in France has been extremely well documented and the situation in other countries is known. The levels to which they have reflated are known. There are no magic solutions, no panaceas. But each of them faced reality, each of them took determined action, explained to the people what was necessary and managed to get the people to follow them and to join with them to win the battle against inflation.

I turn to the question which I know would be raised if I did not deal with it, the question of unemployment. It is often said that we have not had such a severe rate of unemployment as has been experienced in other countries. In fact, on the figures the seasonally adjusted rate of unemployment is already up to 3.6 per cent, which is above that experienced by some of the other European countries. But at least they are on [column 1641]the way to tackling inflation, while we are on the way still to higher inflation and higher unemployment.

Japan, of course, is a different case. It has always had a totally different attitude towards these matters, and a very good one. The companies have always looked after their workpeople during difficult periods and the workpeople have stayed with the companies. Consequently the rate of unemployment there is only about 1.6 per cent.

Denis HealeyThe Chancellor has already warned of the possibility that by the end of the year we might have 1 million unemployed in this country.

Mr. Sydney Bidwell (Ealing, Southall)

Surely we can draw the conclusion from what the right hon. Lady has said that by and large the employers in Britain have not looked after their workpeople, have not sustained the spirit of co-operation that it has been possible to achieve in other countries. That is what is urgently needed here, and the right hon. Lady has a major responsibility for existing attitudes.

Mrs. Thatcher

I am grateful to the hon. Gentleman. What the lesson of Japan shows is that there is two-way co-operation. The workpeople have been willing in the battle against inflation to restrain wage claims, and the companies have been willing to look after them during that period. The point is that it was two-way co-operation, and I would be the first to say that that is the only way to tackle inflation. It cannot possibly be done without the co-operation of those who are employed and the co-operation of the unions.

With the present rate at which unemployment is rising here it is possible that we shall reach 1 million before the end of the year. Not merely is it rising at record rates for this time of the year on the seasonally adjusted figures, but the fact is that the Government have so little control over the situation at the moment that they cannot take action to deal with it.

They are powerless to do anything about the situation. Treasury spokesmen have made it clear that they dare not and cannot reflate. All they can do is to sit and wait for the world economy [column 1642]to expand, hoping that some of the increasing business will come our way.

I turn to the balance of payments. The Government's claim last year that they were making a good job of handling the economy rested on three claims. The first was that unemployment was falling. It is not. The second was that prices were moderating. They are not. The third was that the balance of payments was improving—which it is. There has undoubtedly been substantial improvement in the trade deficit this year, and since no other major economic indicator whatever shows any signs of improvement, we shall probably hear a good deal about that. According to a Treasury spokesman two days ago, for the whole of the last year for which figures are available the balance of payments gap was equivalent to 5 per cent. of gross national product, or to £68 for every man, woman and child in the country. We have been living well beyond our means, as the Treasury spokesman stated.

Now there is some improvement in the balance of payments and comment has come in the Press and from economists about the reason for it. Before we rejoice too much it is as well to analyse that reason and to see whether the improvement is likely to be sustained. A recent article from the London Business School said,

“The recent improvement in the balance of payments is being brought about by factors which may not be desirable in the longer run.” It refers to two things, the first being exports. It is not that the volume of exports is rising. That has fallen. The improvement stems entirely from the increased price. But that is not a healthy situation. The faster our export prices rise today, the smaller the quantity of goods we shall sell in the future. We are therefore in difficulty on the export side because the volume is not rising but the price is rising.

The second factor was imports. They have certainly fallen, and that has been partly brought about by manufacturers reducing the level of stocks, particularly the stocks of oil which, for reasons we understand, became very great and had to be reduced. The improvement is also associated with the slowing of economic growth and increasing domestic recession. [column 1643]

The London Business School forecasts also strongly suggested that such improvement as there may be in 1975 will not last. Whether or not the exchange rate slips, it forecasts a worsening current balance of payments over the years to 1977. Its conclusions only go to show that one cannot build a healthy lasting balance of payments on a foundation of declining production and runaway inflation. Even the cheer on the balance of payments front is therefore very muted.

I turn to a subject which Harold Wilsonthe Prime Minister forecast I might mention—public sector borrowing. Overseas holders of sterling are not only worried about the current rate of inflation; they are increasingly concerned at the borrowing situation inside the country, particularly the Government's own finances. They know that it can lead to a substantial fall in the value of their money.

At the time of his first Budget Denis Healeythe Chancellor aimed for a massive reduction in the public sector borrowing requirement, and I think we all applauded him for that. He aimed to have a public sector borrowing requirement of £2.7 billion in 1974–75. It now seems that he no longer cares very much about the public sector borrowing requirement because the acid test of his and the Government's attitude lies in the figures produced for the latest Budget. He set out to plan for £2.7 billion. By November the figure had risen to £5.5 billion. The out-turn was £7.6 billion for the last year. This year he planned for a further £9 billion, and since he announced that figure there have been numerous proposals for further expenditure in the last weeks. Already the papers are forecasting a rate of £10 billion before we go any further.

Of course, even the £9 billion was a figure in real terms, and if one adds to it the degree of inflation——

The Chancellor of the Exchequer (Mr. Denis Healey)

No.

Mrs. Thatcher

It must have been the figure in real terms. If not, on what terms was it based? [Hon. Members: “Answer” .] What level of inflation did the Chancellor build into it?

Mr. Healey

It assumed that inflation would be governed by a continuation of settlements at the current rate.

[column 1644]

Mrs. Thatcher

Which settlements and which current rate—the three months or the annual rate? If it is the annual rate of inflation, it is 21.7 per cent. If it is the Healey rate of inflation it is 34 per cent. Perhaps the Chancellor will tell us when he winds up the debate whether he still stands by a public sector borrowing requirement of £9 billion for this year.

Mr. Healey

Yes.

Mrs. Thatcher

He does? Well it is already too high. E. DellThe Paymaster-General had a great deal to say about it in his recent speech and I am amazed that a Chancellor who set out to have a public sector borrowing requirement of £2.7 billion 15 months ago should be so happy with his planning that the figure is now £9 billion.

He knows full well that this figure will be very difficult to finance by a mixture of the balance of payments deficit and personal savings. There is a danger that the gap between these two figures will be financed by other means. As the Paymaster-General so aptly put it the day before yesterday, when this happens the Government have “to borrow from the banks. … This is where the problems start. This method of finance enables the public authorities to settle their bills, but it tends to leave a corresponding flood of cash and bank deposits in the economy. It is known” —and this is a Treasury Minister— “figuratively as resorting to the printing press.”

As last year's borrowing requirement jumped from £2.7 billion to £7.6 billion in 12 months—an unforeseen increase of £5 billion—we are entitled to apply that kind of planning to this year. On the most generous basis, if one were to add not the same percentage figure but the same amount of increase to the public sector borrowing requirement, it would end at the fantastic figure of £14 billion. We know full well that at the level at which wage settlements are proceeding in the public sector, the Government are apt to be in considerable difficulties about whether their revenue will be sufficient to match their expenditure when it comes to meeting these claims.

I come to public expenditure. A fundamental reason why the Government are having to borrow so much is that they are spending too much. At present public [column 1645]spending amounts to 60p in the pound of national income, about 35p being taken up by making transfers and 25p by goods and services. But this figure of 60p is almost certainly beyond the tax capacity of this country. The Government's decision not to match their increased expenditure last year by increased taxation is evidence that they, too, realise that the population has nearly reached the limit of what it can take in increased taxation.

Mr. John Pardoe (Cornwall, North)

Does the right hon. Lady recall the time when as Secretary of State for Education she helped to increase the borrowing requirement of the Conservative Government, which they inherited as a minus quantity, to £4.5 billion? Will she say why the Conservative Government did not have the guts to increase taxation to pay for their profligate schemes?

Mrs. Thatcher

The hon. Member will remember that the Conservative Government had to announce its public expenditure cuts one month after the oil crisis had started, on 17th December 1973—cuts greater in real terms than those which the Chancellor has now announced. They are all on the record. I took the view, I believe rightly, that at a time when growth in the economy was going well and we were expanding, education should be a major beneficiary, and the nation did very well at that time. That is the view of my colleagues, too. We took the view that when we had to have cuts, education also had to share more in those cuts than it had on 17th December 1973. I notice that some of the cuts which were made, although they were greeted with howls of derision by the then Opposition, have never been restored, even though this Government have added some £20,000 million of expenditure to their plans over the current two years.

The present level of public expenditure is well beyond the country's tax capacity and the Government's decision not to match it by increasing taxation really reveals that. It is evident that the population has nearly reached the limit of what it will take in increased tax. One cannot go on increasing public expenditure in times of no growth in the same way as, or even faster than, when the economy was growing. To do that is to redistribute the nation's income from the people to the public sector in [column 1646]a way which the people and the private sector will not accept and which they will strain by wage increases to correct.

The Government have no alternatives in this deteriorating situation but to reduce public expenditure, first because they cannot get enough in tax and, secondly, because they will not be able to borrow enough on a sound financial basis and therefore may be forced to use the printing press. Of course, the Government challenge us about where we would make cuts, implying that if political decisions were to difficult we need not make any decisions to cut. But in the present deteriorating situation they will make them anyway. They have been listed in the Official Report on 15th April—£1,000 million that could be brought forward to this year but are not.

In the present deteriorating economic position we have no choice but to make some cuts and, like the Economist this week, I have no doubt that at least the Treasury is preparing a substantial contingency package for later in the year. As a start, Denis Healeythe Chancellor of the Exchequer could bring forward his £1,100 million in cuts, at present prices. I understand that effectively they will be worth only £900 million at 1974 prices. He could bring those forward and implement them now. Beyond that, all who have sat on the Front Bench know the processes that go on when there are Treasury cuts, and doubtless those on that Front Bench will have had experience of the process that goes on.

Those who were upstairs in the Public Expenditure Committee the other day heard evidence given in public by Joel Barnettthe Chief Secretary about how the Treasury goes about it. It would seem that times have not changed, and that the usual procedure has been followed. In practice, individual Departments are told to cut expenditure by a certain amount, and the choice of cuts is left to them, in the light of the state of current contracts and commitments and the costs of dislocation. Things are still the same, but the Chancellor of the Exchequer knows that below the Blue Book on Public Expenditure there is a Public Expenditure Survey Red Book which gives far more detail, at which I would love to have a look now. Below that there is a great sheaf of papers from each and every Department dealing with everything. [column 1647]

The Chancellor knows full well that when a direction goes out to cut expenditure it cannot be done just like that. Certainly, in my own Department one had to go through contracts pending, contracts signed, costs of compensation and cost of transfer payments to see where cuts could be made. There are certain places where one can cut, and then one is left with making cuts on things such as procurement. It is my suspicion that that is exactly what is going on now. If the Chancellor would give us access to those figures it would give us great pleasure to go through them and to see where cuts could be made.

Mr. Ioan Evans (Aberdare)

Before the hon. Lady gets to the point, is she going to itemise the places where she thinks the Government should make cuts, in view of the fact that earlier her Front Bench colleague was demanding additional social services expenditure and her party is demanding an increase in defence expenditure?

Mrs. Thatcher

I understand that the process is already under way. I was looking at The Guardian of 4th May dealing with cuts in education. According to reports—and I know that the Government can neither confirm nor deny unless they make a statement—the exact process that I have indicated is already under way. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) gave a number of examples of cuts when he spoke on the Second Reading of the Finance Bill. It would take a long time to go through them all in detail. If I may precis them it will be quicker.

He said we would bring forward into the current year as much as possible of the £1,100 million cuts planned for next year. He said that there are some things we cannot afford and that it would be better for us to recognise that. He said that sometimes the Government seem to go about public expenditure in the wrong way; they never seem to ask, “What can we afford to spend as a nation?” , only “What must we spend and what must people be made to pay for? What must we borrow abroad or print?”

We would reduce now some of the £2,000 million being spent this year on subsidies for council rents, food and [column 1648]nationalised industry prices. All this is in the Official Report. The hon. Gentleman might not know that housing subsidies have doubled in the past two years. They have gone up tenfold in the last ten years, and have done precious little to sort out the housing situation. It would have been far better if the Government had saved that money and used it to follow our proposals at the last General Election. I note as I see him sitting there that in a letter——

Mr. Douglas Jay (Battersea, North)

rose——

Mrs. Thatcher

May I just finish and then I shall be perfectly willing to give way, although I have a long way to go. [Hon. Members: “Hear, hear.” ] I am glad that hon. Members think I have a long way to go. I wish to refer to a letter of 11th April about houses from the hon. Member for Manchester, Ardwick (Mr. Kaufman) who is an Under-Secretary of State at the Department of the Environment. He was asked about the cost to the public purse of purchasing council houses and providing financial assistance to house purchases, and he said:

“On our estimates, the net cost of a new council house in its first year of occupation will, on average, amount to about £700, i.e. loan charges and management and repair cost of about £1,000 per annum and £300 per annum for unrebated rents.” He went on at the beginning of the next paragraph,

“Turning to the private sector, the estimated amount of benefit received, on average, by mortgagors in England and Wales in 1973/74 was £101.” So that it is very much cheaper, certainly in the earlier days—although the hon. Gentleman made a different comparison in later years—to help people to purchase their own homes than it is to have these massive council house subsidies.

My right hon. and learned Friend Sir Geoffrey Howethe Member for Surrey, East went on to tell the Government what we would not do with some of their expensive schemes. We would not carry through the Petroleum and Submarine Pipeline Bill which will create a borrowing requirement of £900 million. We would not nationalise the aircraft and shipbuilding industries at a cost of £550 million. We would not [column 1649]carry through the Community Land Bill which would mean employing 14,000 administrators at a cost of £660 million a year when put into effect. We would not endlessly dole out money to enable nationalised industries to run into bigger and bigger debts and we would not, out of spite, cut out pay beds from hospitals at a cost of £40 million. Part of the problem——

Mr. Jay

Does the right hon. Lady also recall that the previous Conservative Government took decisions in favour of immense expenditure on Maplin, the Channel Tunnel and exceedingly extravagant motorways in London all of which have been cancelled by the present Government?

Mrs. Thatcher

As the right hon. Gentleman knows, the Channel Tunnel would not have been heavy on public expenditure. It was the rail link that would have involved the expenditure. In the early years Maplin would not have cost very much. I accept that in the later years it would have done. What was the other point?

Mr. Jay

The motorways.

Mrs. Thatcher

We cut the motorways severely on 17th December 1973. I remember that future expenditure on motorways was severely cut then. We did not hesitate to make cuts when they were necessary. It is quite a different matter to increase public expenditure during the period of growth that we were experiencing then in the period of virtually no growth such as we are currently experiencing.

It is important to stop further nationalisation measures coming forward. They are far more expensive than anything the right hon. Gentleman mentioned as having been cut and they place tremendous burdens on the Exchequer in future years as well as adding a great deal to the public sector borrowing requirement. Many of those measures were announced after the Budget measures. For a Government whose chief objective is to fight inflation the question is not whether the Chancellor is to make further cuts in public expenditure but how long it will be before he announces them. [column 1650]

I turn now to the social contract and wages.

Mr. J. Enoch Powell (Down, South)

Before the right hon. Lady leaves the question of the public sector borrowing requirement, having indicated that in her view £9,000 million is a grossly excessive figure, may I ask whether she can give some guidance as to what, in the view of the official Opposition, is the acceptable, safe, size this year of that net borrowing requirement?

Mrs. Thatcher

It would be that size which could be financed without resorting to the printing press. Neither the right hon. Gentleman nor I know that amount. If we succeed in getting down public expenditure, that amount in any event would be less. The right hon. Gentleman knows that full well.

The motion also refers to the effect of the social contract. I have dealt with the monetary route to higher inflation but that is only part of the story. We are also suffering at the same time from the failure of the social contract to curb wages and prices. If we take as an illustration the period before the social contract, 1964–74, because it gives a much better average, we find that prices rose at the same rate as earnings, less about 3 per cent. which was the average increase in productivity.

We have therefore some means of calculating the expected rise in prices from the increase in earnings with a suitable time lag. We now turn to look at the figures for the past year. They speak for themselves. When the Government came into power the increased cost of living year on year was 13½ per cent. Wage increases were running at 14 per cent. They were approximately the same. Now the wage rate increases over the year are 32 per cent. while prices have risen over the year 21.7 per cent. I am taking the annual figure. This means, taking the criterion I have given, that many of the wage increases for the past year have still to work through into prices. These are social contract wage increases. This is the past 15 months.

The Prime Minister (Mr. Harold Wilson)

The right hon. Lady will be aware that many of the increases last summer were the result of actions taken by her Government. The Pay Board had [column 1651]already started the reference on London weighting allowance. It had to consider the nurses, the teachers and the postal workers. The railway arbitration restructuring was already on. Many of those came last summer so that, taking year on year, the right hon. Lady must take responsibility for many of the things her Government started.

Mrs. Thatcher

Is Harold Wilsonthe Prime Minister saying that many of the wage claims now are below that figure? Many of them coming in the next wage round are well above it. They were already rising towards the end of the period. Those wage rates have still to work through into increased prices.

If we find, as we do, that the increased wage rates will soon be reflected in the same figures for prices less about 3 per cent., we find that the social contract becomes an engine for creating inflation not for curbing it. The second guideline automatically allows wage rates to rise as much as the cost of living. In theory if they rise no more than that we might get the rate of inflation down by 3 per cent. a year, if that were held to absolutely. We know that it is not held to absolutely.

Second, we know that that is an absolute minimum and that the other guidelines often add things so that the wage increases permitted by the social contract are well above the minimum. We find that the social contract becomes a method—as its guidelines are at present—of increasing the rate of inflation still higher. That is why a number of us, myself and some trade union leaders apparently, say that the guidelines must be altered if we are serious in our wish to tackle inflation.

Mr. Ron Thomas (Bristol, North-West)

When the right hon. Lady is talking about wage rates would she make it absolutely clear that she is talking about the minimum wage rates? If she is, and I suspect that that is the case, the impact of a 30 per cent. increase in minimum wage rates is far less on unit costs of production because the majority of workers in most industries are already receiving above the minimum.

Mrs. Thatcher

Wage rates are up by about 32 per cent. Average earnings are up by about 27 per cent. to 28 per cent. [column 1652]—still well ahead on the year-on-year level of increase in inflation. That means that they still have to work through. It still means that the terms of the social contract, even if its clauses are adhered to, will be an engine for creating inflation because the minimum which it permits is the increase in the cost of living for the past year. When we add the amounts which can be gained under the other guidelines, reforming pay structures and so on, the hon. Gentleman knows full well that the maximum increase will be well above that. Also, the contract permits people absolutely to recoup the very tax increases which the Chancellor asked them not to recoup but which the guidelines say they may. Therefore, we are locked into a circle in which the contract has become not a device for reducing inflation but an engine for increasing it.

Taking one thing with another, we find that the inflation rate is accelerating sharply. An interesting table was published in the leading article in this week's edition of the Economist putting the rate in 1973 as 9 per cent., in 1974 as 16 per cent. and in 1975—on the same basis—as about 25 per cent. If we look at it year by year, from 9 per cent. one year to 16 per cent. the next year and to 25 per cent. the following year, and continue that forward in progression, it means that we shall rapidly be on the verge of hyper-inflation, unless the Government take serious steps to reduce it and to renegotiate the guidelines so that they positively cut down the rate of inflation. Unless that is done we shall have very little hope of tackling inflation in this country.

First, the Government have to reduce public expenditure. They may say that they do not want to do so—no one likes to do it—but they have to in the present situation. Secondly, they must renegotiate the guidelines if inflation is to be reduced. Thirdly, they must stop the schemes for nationalisation, which transfer more and more money from the private sector into the public sector and make it extremely difficult for private industry to continue operating and to undertake the necessary investment that they so need if we are to have industries fit for tomorrow and fit to give us rising standards of living.

Harold WilsonThe Prime Minister's policy has been to nationalise more, to spend more and to tax more and then to borrow more. [column 1653]When confronted by a really tough situation he is apt to waffle and retreat. Not for him is there the long-term strategy that would lead to flourishing, profitable industry, which is the only source of secure and stable jobs and the only way to rise in prosperity in tomorrow's world. He prefers the short-term expedients that might get him through the day without too much difficulty. That is the lesson of the last year or so.

If, like other countries, we had faced reality and had taken steps with the same determination as they did, inflation would now be falling instead of rising and we could look forward to falling inflation and falling unemployment. It would, perhaps, be too much to hope for tax reductions or real tax incentives to create wealth. That is not the way of a Socialist Government. However, at least we might have been able to pay our own way instead of being so dependent on borrowing from abroad, and we might not have leaned so heavily on future generations for repayment of our debts.

After we had been in office for a few months the right hon. Gentleman the Prime Minister asked my right hon. Friend the Member for Sidcup (Mr. Heath)—[Interruption.]—he is helping to win the referendum; the Government cannot rely on their own troops to carry out their work—this question:

“Last spring, when the Prime Minister had been in office for just a few months, I asked him a question, which he then evaded, and I ask him to answer it today. How many more years, if they were vouchsafed to him, would he have to be in office before he was prepared to take his own personal responsibility, and accept his Government's responsibility, for the state of the nation under his Government, as a result his Government's policies—and, above all, his and their responsibility for unemployment?” —[Official Report, 2nd November 1971; Vol. 825, c. 32.]

The Prime Minister has now been in office for over—[Interruption.] That was the point which the present Prime Minister asked my right hon. Friend the Member for Sidcup when he was Prime Minister. The present Government have now been in office during two periods amounting, together, to over 15 months. During that time inflation has become a record, unemployment is rising fast, borrowing is unprecedented and public expenditure is out of control. These are the results of Socialist measures and the Socialist administration led by the present Prime [column 1654]Minister for which he must take responsibility.

This is not a time to talk, talk, talk. This is a time for action. The Government are in a position to take that action if they have the courage and the determination. If not, the people will continue to suffer. 4.57 p.m.

The Prime Minister (Mr. Harold Wilson)

Before I reply to the speech made by the right hon. Lady the Member for Finchley (Mrs. Thatcher)—I hope she will forgive me if I do not follow her entirely—I want to remind the House of the background to this debate. I shall not follow her because I want to talk about the policies of the Conservative Party and my party, and not some of the other things she wanted to talk about.

It will be recognised that a week or two ago great concern—and this is the background to the debate—was being expressed at home and abroad about the state of the pound sterling. A great deal of this was, of course, related to anxieties about inflation, to which the right hon. Lady referred, as I shall.

However, first, I should like to take up the references the right hon. Lady made earlier in her speech to what is, and must be, the main determinant of the foreign exchange position; that is, the progress of Britain's overseas trade. I should like to ask the House objectively to review that progress.

In the fourth quarter of 1973 our visible trade deficit was £976 million; that is, an annual rate of over £3,900 million. I remind the House that the effect of the increase in oil prices had hardly been felt at that time. This was natural trade, not the increase in oil prices. Even so, by that time our trade balance on normal trade was heavily negative.

Therefore, we had nearly £4,000 million a year deficit, with hardly any effect from increased oil prices. The right hon. Lady will concede that even by her rather idiosyncratic notions of collective responsibility, she had at that time—[Hon. Members: “Oh.” ] I shall have something to say about this later. The right hon. Lady will concede, I think, that she had full responsibility as a member of the Government which had produced this situation in 1973, even though I am prepared to be now—as I [column 1655]was then—generous about the effects of the increase in commodity prices. That was the position—an annual rate of deficit, before the oil price increases, of £4,000 million.

On 9th November 1973 the Institute of Directors was told, on behalf of the Government of which the right hon. Lady was a member:

“There are two kinds of problems and they feel very different. There are the problems of failure and the problems of success. Today if only we could all realise it, we are facing the problems of success.”

So all right hon. Members of the Opposition, whether they sit on the Front Bench or have retreated elsewhere, have that phrase strung around their necks— “the problems we are facing are the problems of success.” That is what the right hon. Lady was associated with—a deficit of £4,000 million a year, before oil. I wonder what she considers, therefore, to be the position about the present balance of payments situation. Incidentally, the right hon. Lady quoted the Economist just now. It rather surprised me that she quoted the Economist, because within a few weeks of that “problems of success” boast all the quality Conservative papers, from the Economist upwards, were headlining inflation rates of 20 per cent. in 1974, and they were calling for an anticipatory election before we reached the 20 per cent. inflation which the right hon. Lady has been talking about. They were also warning at that time—I have the cuttings in front of me—of a heavy lurch into unemployment in 1974. So, £4,000 million a year, by her standards, therefore, was a problem of success—unless she wants to dissociate herself from that statement—and 20 per cent. inflation already committed.

Let us now judge, therefore, the country's current performance. I started by referring to the fact that this debate began because of the position of sterling. Let us judge the country's current performance against that criterion.

In 1974 as the full effect of the five-fold increase in oil prices worked through, this by itself imposed, on top of the Conservative's deficit, an extra cost of some £2,500 million on our balance of payments. Yet the balance on the rest of our trade, excluding oil, was better in every [column 1656]quarter of 1974 than the Conservatives achieved in the last quarter of 1973.

Therefore, we started from a prospect of a £6,500 million trade deficit; £4,000 million already reached without the oil surcharge, and an additional £2,500 million with the oil surcharge. In the first four months of 1975, this year, the country's visible trading deficit, when we include oil, has been £972 million, an annual rate of less than £3,000 million. That is a substantial improvement, including oil, on the last quarter of 1973, when the increase in oil prices had hardly begun to work through. In these four months of 1975 we have been in surplus on our non-oil visible trading account, in surplus compared with that multi-billion deficit we inherited, which, by Conservative standards, was just “a problem of success.”

The House will recall that my right hon. Friend the Chancellor of the Exchequer said in his first Budget more than a year ago: “as with the oil deficit, we cannot hope to eliminate the whole of the underlying deficit this year.” —[Official Report, 26th March 1974; Vol. 871, c. 285.] That was the inherited £4,000 million a year rate. But in the first four months of 1975 we have done just that, and it would be right for the House to recognise the magnitude of that achievement. I wish the right hon. Lady had said more about that instead of trying to depreciate it. Tory parties, we have noticed, are always somewhat cyclical in their readiness, rhetorically, to sell Britain short. The cycle starts on the day they get into office—[Interruption.] “Cyclical patriotism” , says my right hon. Friend the Chancellor.

Mr. Julian Amery (Brighton, Pavilion)

The right hon. Gentleman is speaking as though the rate of £4,000 million a year deficit was something which would have been continued through 1974, irrespective of oil. However, he will be aware that the Treasury forecasts against the background of the last quarter of 1973 as regards investment intentions showed that we would have been in balance early in 1975.

The Prime Minister

Something must have happened between the right hon. Gentleman seeing the forecasts which he saw the day after the election, four days [column 1657]before we came into office—there was that long delay—and over those four days, because the forecasts that we were given were very much worse than that, and they said that we should not be in balance even without the oil situation. That was the forecast we were given on coming into office in March 1974.

On top of what I have mentioned, there is the substantial surplus in our balance of invisible trade, which increased last year, and to all those responsible I paid tribute in my speech on Tuesday night. When account is taken of that, the deficit on our total current account so far this year has been £492 million; so our current account deficit this year, including oil, is running at a rate 25 per cent. below the rate in the last quarter of 1973, when the oil price increases had had no major effect. This is a significant improvement. I am surprised that we have not heard more about it from the right hon. Lady. Compared with the same four months last year, 1974, the current account deficit has been cut by over 60 per cent. We had no credit for that this afternoon.

On this basis, therefore, including invisible earnings, the non-oil current balance has been transformed from a deficit of £784 million at an annual rate in the last quarter of 1973 to an estimate surplus at an annual rate of £1,506 million so far this year.

Mr. Powell

Will the Prime Minister, in addition, point out that the record of his Government would be even better if on the same basis he would allow for the very large deficit with the EEC?

The Prime Minister

I hope to come to one or two points about that shortly, in relation to the export figures, if the right hon. Gentleman will bear with me.

There is another fact which is relevant. I have been quoting so far monetary figures. If we take export and import volumes, the House can take some encouragement from recent trends. At a time when the volume of world trade has surely been declining we have done well in maintaining the volume of our exports. This must suggest that our share of world trade over these past months has been maintained, and possibly increased. On the other hand, import volumes have been falling steadily in every quarter since the end of 1973. [column 1658]

Taking particular markets—I can respond to the right hon. Member for Down, South (Mr. Powell), as this is the next bit of my speech anyway—in 1974 the EEC took more than one-third of our exports, more than the rest of Western Europe and North America put together, and in the most recent three months the value of our exports to the other members of the EEC increased by 4 per cent. on the previous three months at a time when exports to North America fell by 5½ per cent. and to Australia, New Zealand, South Africa and Japan, taken together, by 9½ per cent.

I should like to come to OPEC markets. As I understand it, this is not part of the Common Market debate this afternoon. The House will agree that it is particularly important to turn the OPEC countries' monetary surpluses into extra trade with us. The opportunities are clearly there provided we can shift the necessary resources into exports. These countries are estimated to have imported goods and services worth around $40 billion in 1974, an increase in volume of around 40 per cent. on the previous year. We have tried to respond—our traders, exporters and industrialists.

Last year our performance in these markets was a bit disappointing and we appeared to be losing market shares and not taking full advantage of increasing opportunities. My right hon. Friend the Secretary of State for Trade, who has visited many of these countries in recent months, has reported that while our goods at present fully meet requirements on price and quality—let no one discount that—they fall short on availability and delivery performance, a point to which I shall come later.

More recently, however, the figures have been rather better. In the three months February to April, exports to oil-exporting countries were 27 per cent. higher than in the previous three months and were 111 per cent. higher than in the same period last year. We must do everything possible to ensure that this upward trend continues.

I am not claiming these export figures as problems of success, or even achievements of success. I am citing them as a tribute to British exporters, and British industry, and everyone at every level and on both sides of industry, because I believe [column 1659]they deserve the praise of this House. I believe these are an essential component in a fair and balanced picture of how Britain is meeting the challenge which hit us so hard 18 months ago. And not our exporters only. The House will know of the help now being given to exporters by developing direct intergovernmental arrangements; by seeking to involve public corporations and Government agencies in support of large-scale projects; by helping with the vital training needs of these countries; and by various more specific measures to help exports such as the schemes for cost-escalation cover, for help with performance bonds, and for the provision of pre-shipment finance, which are particularly directed towards OPEC markets.

The House will be aware of the opening up of the Soviet market to our exporters. Senior Russian Ministers are now talking of the prospect as being even better for our exporters than was envisaged when the trade agreements were signed in Moscow three months ago. Even better than that, there has been an encouraging quickening of response to these opportunities by British exporters, ranging from some of the largest firms in the country to quite small businesses.

Of course, it can be said, and will be said—I thought that there was a hint of this in the speech of the right hon. Lady—that the improvement in import volumes, or the reduction in import volumes, reflects the level of production in British industry. It is a fact that the world as a whole is suffering from the deepest recession since the 1930s. I mean the world as a whole. This affects us all. This warning was given during the last General Election by leaders of all major parties. It cannot now be in doubt that it has happened. But it is also a fact that in terms both of unemployment and of declining industrial production, other major countries have suffered more than the United Kingdom.

Mrs. Elaine Kellett-Bowman (Lancaster)

Is the Prime Minister aware that male unemployment in my constituency is double what it was in the equivalent period a year ago? The figure for female unemployment is also double. The figure [column 1660]is now over 7 per cent. This unemployment exists in a part of the country which the Prime Minister is supposed to know. What is he going to do about it?

The Prime Minister

The hon. Lady is right to say that. If she will bear with me while I deal with the point raised by her right hon. Friend, I shall say something about some of the problems in her area and the surrounding areas.

The Leader of the Opposition challenged me in a convoluted set of questions, and referred to “her” , “him” and “the Prime Minister” . It was fascinating to listen. She challenged me about unemployment during the period in which the Labour Government had been in office. Earlier in her speech she said that unemployment in Britain was now above that of some of our overseas neighbours. She ignored the fact that when the Labour Government came to office we were told how serious unemployment would be as a result of what the Conservatives left behind. Let us forget that. What she said this afternoon does not correspond with what her right hon. Friend the Member for Leeds, North-East (Sir K. Joseph), mentor and Svengali, said about unemployment today. [Hon. Members: “Where is he?” ] He was here. He has now probably gone to the BBC to fill in what he said at lunchtime today.

Today the right hon. Gentleman referred to today's unemployment figures. He said that the figures were thoroughly misleading, and had been so for years, in measuring the slack in the economy, and that the published unemployment figure greatly exaggerated the number of people available, willing and ready for work, and, on the other hand, it greatly understated the number of jobs for them to do. So he went blathering on and on about the statistics. This was his conclusion—[Interruption.] I want to see the Conservative Party more united. It might then produce a coherent policy.

After a certain amount of analysis, the right hon. Gentleman said there were about 400,000 job vacancies. He compared that figure with the number of unemployed. The interviewer, who was called Mr. “H” said:

“And in percentage terms how do you judge unemployment?” [column 1661]The right hon. Gentleman replied:

“Well, the official figure is that we have got 3.7 per cent. unemployed and my figure, taking everything into account, is that we have got about 1.6 per cent. unemployed. It gives a very different reality.”

The right hon. Lady always waits before she speaks in the House. Quite rightly, she takes her time. I suggest that she should sort out this matter with her right hon. Friend, who, we are told, is her personal, private “think tank” . Perhaps we shall hear whether what the right hon. Lady said this afternoon is the view of the Conservative Party on unemployment, or what her right hon. Friend said——

Mrs. Thatcher

What does the right hon. Gentleman think about the Government's statistic of 3.6 per cent.? I did Harold Wilsonthe Prime Minister the compliment of using Government figures throughout.

The Prime Minister

I shall come in a moment to what the right hon. Lady said about the unemployment figures in her article in the Sunday Express, when she depreciated it. I replied to her when she did that in February. I do so now. These are the figures accepted by successive Governments over the past years. I accept them. The right hon. Lady, in her article in the Sunday Express, did not accept them. Today, for other purposes, she accepted them, but her right hon. Friend did not. Perhaps she could take a little time off to sort it out with her right hon. Friend.

Before referring to this fascinating broadcast I said that in the latest three months production had not fallen as much in this country as in other countries. The right hon. Lady did not concede that. Compared with last year, Japan's production has fallen by 20 per cent., and that of the United States, Germany, Italy and France by between 10 per cent. and 15 per cent. In Britain, by contrast, production has fallen by only 4 per cent.

At this point—bowing to the hon. Member for Lancaster (Mrs. Kellett-Bowman)—I should like to say a word about certain associated industries.

As hon. Members representing Lancashire, Yorkshire and other areas know, the textile industry is going through one of its most virulent cyclical depressions, like so many in the past, not unconnected with violent swings in raw materials [column 1662]prices. This depression is, in fact, the most violent which has hit some of the industries, areas and businesses concerned since 1931, and it has, of course, worldwide repercussions.

The Government have given the most urgent and careful study to the problem, and I hope, with permission, to make a statement tomorrow about the action which we propose. For reasons which I shall more fully explain to the House tomorrow, which in our view are decisive, I shall not be announcing controls on imports. But I shall be informing the House of other action we propose to take which will be of more direct help to the industry and more appropriate to the nature of the problem.

There is reason to begin to hope——

Mr. Peter Hordern (Horsham and Crawley)

rose——

The Prime Minister

I shall deal with this matter in detail tomorrow. Perhaps the hon. Gentleman will try to catch the eye of Mr. Speaker then. I should now like to continue with my speech. I have already given way three times. I do not know why the hon. Gentleman cannot wait for tomorrow's statement.

Mr. Deputy Speaker (Mr. George Thomas)

Order. There must be only one hon. Member on his feet at a time.

The Prime Minister

It would be helpful if the hon. Gentleman would wait for my statement tomorrow.

I was referring to the fact that the world depression has hit this country far less hard than most other countries. I gave the figures.

There is reason to begin to hope that some of our major trading partners are, or shortly will be, moving out of the worst depth of their own recession into a period of expansion. Following the measures taken by the United States, Germany and the Netherlands, France has now introduced a reflationary package though on a more modest scale and directed primarily to next year.

Other factors which should help to promote recovery—I mean world recovery, including our own—include what appears to be the completion of the downward adjustment of stocks in the United States and the continued rapid growth of imports by the oil-producing [column 1663]countries. Because of this and, indeed, the most recent action taken only today by Germany there seem to be good reasons for hoping that the recovery in world trade will have got under way by the end of this year and will be accelerating next year. As my right hon. Friend the Chancellor has said, by the standard of previous cycles there will be nothing exceptional to be surprised about if we were to see a growth of world trade in the range of 10 per cent. to 15 per cent. during the next year. But, and here I agree with the right hon. Lady, all these possibilities, improvements and achievements once again underline, as she said, the need for us to maintain and improve our competitiveness and to be able to fulfil export demand during the resurgence in world trade and demand, when that comes, as we now have reason to think it might come very quickly. This is partly a question of ensuring that the resources are there and industrial capacity is there, recalling how lack of capacity affected our exports in 1973 and 1974. Indeed, what we hope to do for the textile and associated industries is related to seeing that the capacity does not go out of production, because it will be needed when world trade recovers in the next few months.

Still more, it depends on the fullest co-operation of all our people in bringing down the rate of inflation at least to a level comparable with that of our competitors. The fundamental issue—there is no disagreement between the two Front Benches—is that of industrial costs.

As I said in an intervention to the right hon. Lady, the outcome last year was distorted by action which had to be taken, perfectly fairly and which we supported, to deal with special cases left over from the period of statutory incomes control. The Conservative Government, before leaving office, were committed to special action on the London weighting allowance. I always felt that they agreed with what had to be done with the long-overdue settlements in respect of nurses, teachers and postal workers. I do not think that the Opposition ever dissociated themselves from that. Of course, the biggest single item in increased wages and costs over last autumn was the thresholds with which they left us. I do not think that anyone doubts that. Indeed, they [column 1664]have in some cases been written into permanent income agreements further on. I am not complaining about that. However, I do not want them to throw at us the consequences in the wages index of things with which they left us when they left office.

Having said that, it is the fact that the overall level of wage settlements has been too high. The TUC made no bones about the gaps in the observance of the guidelines in the very tough statement which the General Council issued yesterday.

Many commentators at home and abroad, many critics, friendly and otherwise, are urgently demanding statutory control over wages and other incomes. Some of us have expressed our views or suggested that a statutory policy is not the way out of our difficulties. I will quote:

“We had that before … I think we have a similar experience to what one or two other countries have had: you can put on and operate a freeze for a comparatively short time. You can even have one stage out of the freeze but, when it comes to the second stage out, if you are careful you have to put in so many exceptions and variations that you get such a high permitted guideline that it can in fact produce inflation which it is meant to curb. You also get … a lot of rigidities introduced and you, if you are not careful, do not manage to get the people where the jobs are. So you can operate it for a short time, but no country in the world has been able to do it for very long.”

That is a sound statement. [Interruption.] It may have sounded a little long-winded. Those are not my words, even though long-winded, although they are a carbon copy of the words that I used in a television interview a week last Sunday. Almost word for word the words that I have quoted against statutory controls were the words of the right hon. Lady in her television interview a week ago. So both of us agree, and I believe that practically the whole House agrees with what we have both said.

But rejection of a statutory policy—if that is what these words mean, as they must—carries with it an acceptance—here I think we are in agreement again—of the need for greater voluntary restraint and greater voluntary acceptance of the kind of settlements that the country can afford within our democracy.

Above all, it means more concern to be shown by some who are in a position to [column 1665]exercise their industrial and financial muscle and more regard on their part to the fact that every penny which they take out in excess of what can be afforded by the country prejudices the interests of their working comrades who cannot assert the same degree of industrial power. At the same time, it directly penalises pensioners and others unable to help themselves, in addition to harming our fight for exports and economic recovery.

The challenge that all of us in this House have to face, against the background of these statements by the two main party leaders, is how to achieve this within a democracy, within a system of voluntary collective bargaining, without sending trade unionists or anyone else to gaol.

In the past week or two, ideas have been put forward, commended, attacked and mulled over throughout industry.

There have been a number of proposals. There was my own, which happened to be the first, for consultation with the CBI and the TUC. I suggested—I meant it seriously—that the Government, the CBI and the TUC should aim to agree on the best forecast of the national product that we could. Against that forecast of GDP and against the background of our joint determination to reduce inflation and to make the necessary provision for exports and investment, I should like to see more consultation on the right division between essential public expenditure, on the one hand, and the total of private consumption, on the other, and on the allocation between spendable personal incomes of all kinds and the profits which are required for investment. When such a system was fully working, all of us should then be able to consult on this every year and to monitor the outcome at regular quarterly intervals. But there is no reason why we should not start this process soon.

When I said that 10 days ago it was immediately welcomed by the Director General of the CBI and the General Secretary of the TUC. I hope that we shall see these ideas further discussed at the next meeting of the NEDC, which I shall be chairing.

There was also the suggestion put forward by Mr. Jack Jones this past weekend, when he said that attention should [column 1666]be paid not so much to percentages as to cash approach. Again, ideas of that kind are welcome and deserve full consideration. His argument—others have said it—is that if £X a week is required in an annual settlement to maintain the living standards of those who are hardest hit, there is no reason why the percentage that the increase bears to their incomes—the lower paid—should go right through the whole of industry and society. That raises the whole question of differentials, because where there is insistence on exactly maintaining differentials in percentage terms, this inevitably increases the gross pay differential in cash terms.

Yesterday the CBI put forward its proposals. Other trade union leaders are doing this. There was the statement by the General Council. I believe that what we are seeing today is a genuine realisation—the right hon. Lady in her broadcast called for this as much as I am calling for it—in almost every section of our society of the need for a joint endeavour to overcome the evils of inflation.

I turn now to the proposals put forward by the Opposition in their motion, as elaborated in the speech that we have just heard.

They began by expressing their disturbance about the failure of Government policies to “curb the accelerating rate of inflation” . So far as industrial costs are concerned, including incomes of all kinds, clearly, from what we have heard the Opposition have nothing to propose, apart from fiscal changes which have been discussed and voted on in long days and nights of debate over the past few months on the Finance Bill, and so on. But I will come to one or two taxation questions later.

We read an advance copy of the right hon. Lady's speech in the Press. which published with great authority all the main points. In this advance forecast we were told that the right hon. Lady was going to tell us—I thought she did—that what was needed was that the “commonsense majority should be encouraged to tackle militancy at its source.” That is fine. Most of us agree with that. I am delighted that the right hon. Lady agrees that there is no difference between us on mindless militants who [column 1667]threaten the very future of their jobs and the jobs of others.

We made that clear in the massive investment assistance to British Leyland, when we said that the performance of the corporation would be strictly monitored and that co-operation, in terms of both industrial peace and manning and productivity problems, would be an essential part of that performance and a criterion judged by us for continuing help.

I have also made clear our position in relation to Chrysler. If the right hon. Lady, or the right hon. Gentleman who is to wind up, has in concrete terms any more clear ideas for strengthening the voice of moderation against the clamour of militancy, the House will wait to hear them.

All we know from yesterday is that the Conservatives are against what we have done in the case of British Leyland and other concerns. Indeed, 50 of them are even more against than the official leadership. In our view, all of them show far too little concern for the industrial and social consequences of the unemployment which would inevitably have followed had we not acted, for example, in the cases of Leyland and Ferranti. Their attitude would render us still more dependent upon imports and lose the nation essential exports.

To me it seems to recall a philosophy more than once expressed in the House by members of the previous Government, I think about 1971, in those halcyon, anti-lame duck years which preceded Rolls-Royce and Upper Clyde, when it was even suggested that the country would do better to run down our steel industry, if not to do without it altogether, and rely on imports, without saying where we would get the necessary exports to pay for our essential steel imports.

Again, I gather from what the Opposition have said on the subject this afternoon that they are ideologically opposed to the principles of NEB, but then, I remember that they were ideologically opposed to the creation of IRC. They fought the IRC Bill with all-out opposition day and night, as back-door nationalisation. That same ideology caused them immediately they took office, on doctrinal grounds, to scrap IRC without a moment's [column 1668]consideration, a decision which I believe, to be fair to them, they later came to regret. Certainly, the whole nation had cause to regret it when we had to face the industrial problems of 1974 with nothing but the Conservative 1972 Industry Act, for which—I do not want to be churlish—we are grateful. Opposition ex-Ministers who normally sit below the Gangway or on the back benches are significantly absent, but I am sure that they are proud of that 1972 Act. I should like to know whether the new Tories on the Front Bench are proud of the 1972 Industry Act. They will have plenty of opportunity in the present situation of being able to approve recommendations under the Act which they so wholeheartedly supported in 1972.

Whatever the answer, I am sure that most hon. Members on both sides of the House will agree that, apart from the overriding short-term problem of inflation, our competitiveness as a nation over many years, under successive Governments, has been undermined by a total inadequacy of industrial investment, both to create capacity and, above all, to advance modernisation.

It is not only a question of the amount of new investment. I fear that what has been significant about Britain's performance under successive Governments—this is not a party point—is that even when we have had a higher rate of investment the physical return on that investment in terms of productivity and real earnings was much lower than that recorded in many other countries. The NEB will play a major rôle not only in raising the rate of investment but in revising, too, the physical return on that investment.

More than 30 years ago the war-time coalition Government of all parties in their White Paper on full employment accepted the Keynesian doctrine that where investment of all kinds was insufficient to maintain employment the State must step in with capital spending programmes. With Keynes the emphasis was on roads, bridges, the draining of swamps and the rest. The NEB concept is an updating of what we all agreed in the 1944 White Paper. [Interruption.] Will hon. Gentleman, even those who have just emerged on the Opposition Front Bench, listen seriously? The NEB concept is an updating of what we all agreed in the [column 1669]1944 White Paper. The NEB concept is designed to maintain and increase the volume of investment, certainly with the idea of safeguarding employment, but the difference from the macro-economic approach of Keynes is that the NEB has the special facility of being an instrument for channelling investment directly to where it is most needed in terms of productivity, employment and an improvement in our national competitiveness—where it has not been going up to now.

Keynes, who was concerned only with the general level of employment, had no more to offer as his answer to unemployment to a skilled toolroom fitter than the prospect of a job as an unskilled labourer building a road. The NEB is concerned to give the skilled man, and his mates, in industry more power to his arm and more power to his skill by modernisation. We do not see the rôle of NEB as a people's dispensary for sick businesses. It will be the instrument through which the Section 7 and Section 8 powers of Mr. Chataway 's 1972 Act will be carried through, on an agency basis, at the request of the Government, and with appropriate accounting arrangements. It is the right agency to do it. Its main purpose is modernisation and expansion.

Perhaps the best opportunities will come with existing companies where there is a strong management anxious to expand and a willingness to see NEB finance for the company's investment programme or to form a joint venture to carry out a particular project. In all those joint ventures the willingness must be mutual; it cannot be forced.

The Opposition's views in the House and outside on this NEB proposal for public ownership, including the Aircraft and Shipbuilding Industries Bill are well known. They are fundamentally doctrinaire and totally ignore the fact that what we are doing we set out unequivocally in two manifestos in two successful General Elections last year. The same is true of their opposition to public participation in North Sea oil—and ultimately Celtic Sea oil. Ideology apart—and I always allow for that when studying the views of right hon. Gentleman and right hon. Ladies on the Conservative benches—some of their arguments are economically unsound. For example, they talk about checking the swelling public expenditure on nationalisation. Surely they under[column 1670]stand that there is no additional direct demand on resources by purchasing existing shares by stock. Although there may be some secondary effects on demand because some holders of shares will choose to sell some of the compensation stock in order to spend the proceeds, this is unlikely to be substantial. There is no difference between the transfer of resources in a measure of this kind and the transfer of resources when a big merchant bank buys up a small firm in the ordinary process of the market.

Even where the Conservatives are prepared to concede that there is a case for action—they were the nationalisers of Rolls-Royce, and we went along with them after due consideration—they reject the right of the community to take an appropriate share in the equity and control. Yet what they resist is happening every day in private industry and in the City of London. Few prudent merchant banks, investment banks or big investors would agree to provide a majority share in the capital of the business without ensuring an adequate share in the profits and an adequate voting power to ensure control. Only this morning I read in the newspaper of an important national bank which has taken greater control of one of its subsidiaries, which had been losing money, by taking an increased shareholding so that it had the effective control. One of the most distinguished figures in the whole history of the Conservative Party—Lord Aldington—presided over that operation.

That is happening in private industry, and that is what we are asserting in the case of NEB on behalf of the community, and it is what we are asserting no less in the case of the two major industries, shipbuilding and aircraft, which for years have largely subsisted on Government aid and Government orders.

Mr. Nigel Lawson (Blaby)

As the Prime Minister is saying that there is no difference between the NEB taking participation in a company and a private merchant bank taking participation, is he saying that the NEB will conduct its operations solely and exclusively according to commercial criteria?

The Prime Minister

It will conduct its operations according to commercial criteria and in accordance with the [column 1671]instructions given to it in the Bill at present before the House. The hon. Member for Blaby (Mr. Lawson) used to be very progressive in these matters when he was City editor of the Sunday Telegraph before he became a Tory politician. He would have understood in those days that anyone who takes a lot of the risk capital is entitled to a share in control whether it be public or private.

Let me explain the difference between the two parties in historic terms. This year is the 150th anniversary of the first passenger railway, the Stockton and Darlington. The motto of that company, which I have translated from the Latin, was “Private risk, public benefit” . That was the philosophy in 1825, and the hon. Member for Blaby has just about caught up with it. The Conservative approach to these matters, whether in Government or in Opposition, is based on the principle “Public risk, private gain” . The public take the risk of the adventurous or difficult situations, and then there is a private profit. It is the taxpayer that pays the losses; it is the shareholder that gets the gain.

For these reasons I reject the Opposition's claims that investment in North Sea oil is, in effect, non-productive expenditure. That, again, is a transfer of control and part of the profits from one set of owners to another, from private owners to the community as a whole.

Mr. Kenneth Lewis (Rutland and Stamford)

They do not make any profits.

The Prime Minister

I am prepared to make an agreement to exclude all the shores of Rutland from the Bill dealing with North Sea oil.

Their arguments about the cost of community ownership of land betray a similar confusion of thought. The finance of transfer of land to public ownership does not make a net additional demand on national resources. What it will mean is that the development profits created by the community will remain with the community. When our proposals for community land are fully operational—they will take effect over a five-year period—it is expected that the costs will be fully covered and recouped on disposals of land. [column 1672]

Finally, I come to the Opposition's panacea—this is referred to in their resolution and in the right hon. Lady's speech—on cuts in public expenditure. After listening to the right hon. Lady I am still no clearer on the exact areas of expenditure where she would make cuts which would have some meaning in support of her argument. I must press the right hon. Lady a little further. I hope that she will be more forthcoming than she was in her speech. I must deal with an important contradiction, as I see it, in her philosophy. The right hon. Lady's motion attacks inflation—very right and proper. She proposes to attack inflation by cutting public expenditure—no doubt arguing that that will reduce demand inflation. Of course, everything that she said about unemployment suggests that demand inflation is the last thing from which we are suffering. But nearly every area of public expenditure which she has said she would like to cut, some of which have been emphasised publicly by her Front Bench colleagues, would increase price inflation and would, therefore, risk more income inflation.

Let me give one example. Before the Conservatives fought the February General Election last year they were against food subsidies. In October they were equivocally in favour of them. The right hon. Member for Lowestoft (Mr. Prior) distinguished himself in this matter. First he was against food subsidies, and then he said that he would propose to keep them if elected.

Apparently the right hon. Lady now wants to eliminate food subsidies. From what she has said I gather that she also wants to end rent subsidies. Indeed, that was endemic in her attack during the last election, when she attacked the whole concept of local authority housing, except for her proposals that local authority housing should be confined to ghettos uniquely inhabited by the old, the sick, the disabled and what she calls “special cases” , whatever that means. I remember that Aneurin Bevan a generation ago rejected the concept of council estates inhabited exclusively by elderly people peering, as he put it, through curtains at their neighbours' funerals. We thought that that was the end of the argument when he said that. Aneurin Bevan failed to foresee the emergence of the right hon. Lady and her latter-day [column 1673]Bourbon supporters. The right hon. Lady must realise that if we are to end rent subsidies there will be an increase in the cost of living.

The right hon. Lady referred this afternoon in her quaint way to speeches that were made in the last election. Indeed, she was good enough to quote some of mine. Of course, to do all that they promised in the election—and the right hon. Lady played a leading part in this—would add more than 3 per cent. to the rate of inflation. The immediate elimination of all subsidies to the nationalised industries beyond the rate at which they are already being phased out would only add further to the difficulty. As regards the nationalised industries, we are following exactly the proposals that were announced, as the right hon. Lady has fairly said, on 17th December by Mr. Anthony Barber, as he then was, the then Chancellor of the Exchequer.

Was the right hon. Lady saying this afternoon that her party would cut house building? Would they reduce the assistance given to local authorities for the house building programme, assistance which has led us in the first quarter of this year to increase public sector completions by 28.9 per cent. compared with the first quarter of last year, enabling us to increase new starts by 24.4 per cent. over the same period? I should have thought that on the evidence of their October election speeches they would cut house building.

But what about mortgages? What about that 9½ per cent.?

Mrs. Thatcher

Before the Prime Minister goes much further, he said that if we cut subsidies it would involve putting up prices. Yes, it would; but will Harold Wilsonthe Prime Minister tell us what his suggestions are for bringing the nation to live within its means, when E. Dellthe Paymaster-General, on 20th May, pointed out that the nation was living beyond its means? One of the ways of doing so is to reduce subsidies and to put up prices. Hugh Gaitskell acknowledged that in 1951 and Rab Butler did it in 1952. The result was that we were out into growth again in 1953.

The Prime Minister

All that is really very touching, but what I am trying to say to the right hon. Lady is that we are [column 1674]being criticised by her party for carrying out the Barber announcements and making the nationalised industries pay their way. The figure that Mr. Anthony Barber quoted of £500 million turned out to be a much larger figure when we took office. We are now taking the odium for that, and for rents and rates, as a result of what he announced on 17th December. This is a matter for the whole House, of course, but it is particularly a matter between the right hon. Lady and myself at this moment. Of course, it is a matter between us in public.

The right hon. Lady did not have the generosity to say how much the balance of payments situation has improved——

Mr. Reginald Eyre (Birmingham, Hall Green)

rose——

The Prime Minister

No, I am concerned with the right hon. Lady. I do not want this both ways—I do not want it with the hon. Gentleman. I am concerned with the right hon. Lady.

I ask the right hon. Lady about mortgages. I understand her embarrassment. What about that 9½ per cent.? Was this the face that launched a thousand Tory canvassers on every owner-occupied estate last October, to promise. first, a reduction in the rate from 11 per cent. to 9½ per cent., and then, as the light of battle entered her eyes, to do it by Christmas? The mortgage subsidy, she promised would certainly reduce the living costs of the families concerned—and indiscriminately across the board—but, far from providing the immediate action she has now called for to cut public expenditure in the terms of the motion, it would have meant, on one estimate, increasing Government expenditure by £180 million net of tax. The building societies talked of £300 million.

Mrs. Thatcher

No.

The Prime Minister

It would have put up Government expenditure by £180 million, and the building societies' estimate was £300 million. Is the right hon. Lady still supporting that? If that is so, I hope she will stop talking about cutting public expenditure.

Mrs. Thatcher

We had this out during the General Election. The building societies supported my figure and the Housing Research Foundation's figure and accepted that it was very much [column 1675]cheaper to have a 9½ per cent. mortgage to help people purchase their own home than for the council to build a home at a comparable price.

The Prime Minister

Of course, that is what one would expect. The building societies are in the mortgage business. It seems that the right hon. Lady thinks that the whole country should be exclusively within the mortgage business and that we should cut the provision of council houses. She has made that clear.

I ask the right hon. Lady another question. Would her party cut defence expenditure? Of course it would not. In fact, Conservatives want more expenditure and not less. They voted against the Defence White Paper and in favour of an open-ended commitment to defence, unconfined by any views about the level of public expenditure involved, in 1975–76.

We have had such learned expositions built up for this debate and it seemed that the right hon. Lady was going to tell us, when she finally decided to speak, everything that we needed to do to deal with expenditure. I want to ask what it all means. We have cut defence—indeed, the right hon. Member for Farnham (Mr. Macmillan) voted against it—so do not let us hear Conservatives talking about public expenditure.

Mr. Maurice Macmillan (Farnham)

rose——

The Prime Minister

No, I cannot give way. I have given way enough. I have now gone on for nearly as long as did the right hon. Lady and I want to conclude.

The Government have cut £300 million in defence spending this year and will cut £380 million next year. The Conservative Party's policies will mean not a cut but an increase in expenditure.

What do the Conservatives intend to do about the social services and health? Do they intend to cut those services? They are always asking for more expenditure in that respect. Furthermore, they ignored our advice on an earlier occasion that in present circumstances we could not afford to relax the earnings rule. That action alone will mean additional expenditure of £145 million within three years.

[column 1676]

Mr. Eyre

rose——

The Prime Minister

I am sorry; I cannot give way. I have given way as often as did the right hon. Lady in her speech, and she was very generous, too. I am trying to put some questions to the Opposition. I have stated the Government's policy. I am trying to deal with the evasions of the Conservative Front Bench on the motion which they have put before the House and which I am asking the House to reject.

Will they explain their policy on the tax credits scheme? According to the last Conservative Chancellor of the Exchequer, that would mean an extra £2,300 million on the public sector borrowing requirement. How is that to be raised? Is it intended to bring in the money by means of taxation? Will it mean reducing take-home pay? What about the right hon. Lady's pledge to abolish local authority household rates, and also to transfer teacher's salaries to the Exchequer?

The right hon. Lady's proposals would cost the Exchequer £1,500 million and involve that kind of borrowing requirement. It would mean another 4p in the pound in income tax or another 5 per cent. on VAT. This is why she was so edgy this afternoon on the question of Maplin and the Channel Tunnel and all the other expenditure commitments to which she was committed. I know that she can say that she was not committed to those pieces of expenditure—or that, although she was committed at the time, she is not so committed now. But she cannot live the rest of her life in a posture of rejecting any guilt by association with the then Conservative Prime Minister. The right hon. Lady tabled the motion that is before the House and it is right that it should be answered. It is right that these hollow pretensions should be exposed to the House.

I am asking the Opposition to confirm that their policies will involve the spending of far more money than the sums involved in our proposals. The reductions in expenditure proposed by the right hon. Lady would be offset, in part, if not in whole, by large increases in public expenditure for which the Tories have been asking ever since the Labour Government came to power. [column 1677]

It is significant that we have heard nothing this afternoon about the Conservative Party's basic economic philosophy. We have heard nothing about monetarism or about unemployment. We have made the situation clear in successive Budget speeches and debates. There has been no matching performance by the right hon. Lady. We surely should expect her to know the answer to these questions. One of the functions of the Opposition is that they should have an alternative policy to put before the country.

We understand that there has been a shift on the question of monetarism. We know what that means in the mind of the right hon. Member for Leeds, North-East—the right hon. Lady's Rasputin, who has been kennelled up for this debate so that we are unable to ask him about his policy. We have at least had the benefit of the right hon. Lady's views as set out in the Sunday Express. In that article she discounted the problem of unemployment by saying that the figures did not mean very much.

I have gone on for two minutes longer than the right hon. Lady's remarks and I wish to conclude, although the House will know that I have had a few more interruptions than the right hon. Lady had to contend with.

We have heard a lot from the Conservative Party in recent weeks about the Cabinet's agreement to differ over the Common Market. I have explained the reasons, and that episode will end with the referendum. But the Conservatives' agreement to differ with their previous Government—with themselves—is a continuing phenomenon. When there is a little more time in which to do so, I shall draw to the right hon. Lady's attention the generally accepted doctrine on collective responsibility laid down by a Conservative Prime Minister, the Marquess of Salisbury—a doctrine which she preaches every day of her life.

Mr. Maurice Macmillan

Oh!

The Prime Minister

That is what happens when a man has been a distinguished Cabinet member and is sacked from the Tory Front Bench.

I now wish to conclude my remarks. Those on the Opposition Front Bench now seem to dissociate themselves from everything the previous Tory Government [column 1678]did, when they were members of that very Government. I do not know of any precedent in maritime history of rats leaving the ship after it has sunk. [Laughter.] Well, it is original. It has never happened before, so it must be original.

Mr. Eyre

What about some leadership, Harold?

The Prime Minister

The hon. Member for Birmingham, Hall Green (Mr. Eyre) no doubt cast his vote in February and he must take the responsibility. I did not have a vote in that election. Certainly the policies put forward by the Leader of the Opposition this afternoon were no recipe for getting the country out of the crisis which all of us have emphasised the country is facing. In my view, they would be a recipe for a permanently weakened Britain in a divided and unjust society. I ask the House to reject them by rejecting the motion.