5.11 p.m.
Mrs. Margaret Thatcher (Finchley)
I beg to move, to leave out from “House” to the end of the Question and to add instead thereof:
“supports Her Majesty's Government's belated commitment to reduce the disastrous rate of inflation and their acceptance of the need both for strict cash limits throughout the public sector and for a substantial reduction in the level of pay settlements; regrets, however, Her Majesty's Government's prolonged failure to reduce public spending and to promote the prosperity of the private sector; and deplores their decision to increase indiscriminate subsidies and to proceed with further measures of nationalisation, which are damaging in themselves and inconsistent with the conquest of inflation” .
I have listened carefully to what Denis Healeythe Chancellor has said. It is a great pity that he was not saying it 15 or 16 months ago. There was not a shred of evidence throughout his speech to suggest that he realised that he had been in charge of the economy of Britain and that it was he and his policies that had brought us to this pass and to this White Paper. The policies we are debating today reject and falsify the whole basis upon which the Labour Party fought two General Elections.
Let me repeat what the Chancellor said during those two elections. On 23rd September 1974 he said:
“Inflation … is currently running at 8.4 per cent.”
The same day he said:
“We have in fact succeeded in doing very well on our own this year—I have cut the inflation rate I inherited by half.”
Later he said:
“If the social contract is maintained we can get inflation down close to 10 per cent. by the end of next year” —
that is this year—
“and into single figures the year after.”
Another member of the right hon. Gentleman's Government, Michael Footthe Secretary of State for Employment, said:
“I trust that we shall never see a statutory system of wages restraint in this country again. I am bitterly opposed to the idea that you can settle wages by some high and mighty authority from London, be it Downing Street, the Pay Board or anything else.”
The Chancellor said at the close of his speech today that history will not forget. History will not forget the attitude of the Labour Party during those two General Elections. [column 77]
I find it difficult to adjudge whether this is a voluntary or a statutory policy. It seems to have all the structure of a statutory policy but to have certain of the supports removed at the last instance. It is interesting to note that had the Chancellor taken some action a great deal earlier we might never have had the level of inflation we now have, the level of public expenditure we now have or the level of unemployment which we shall face this winter.
Inflation is now over 26 per cent. at an annual rate, while the three-month rate, or the “Healey half-truth” , is running at 48 per cent. Until now the Chancellor was noisily denying the need for any action. Now he is noisily asserting the need for action on his own policies. It is interesting to observe that the previous starting point for counter-inflation policies was when the level of inflation was far lower than it is now. In 1961 action was taken because it was thought that the level of 3.2 per cent. annual inflation was too high. In 1968 the figure was 5.3 per cent., and in November 1972 we took action when the figure stood at 7.6 per cent. Now we have got the rate up to 26 per cent. before taking action.
It will be easy to say in some respects that we have been here before, because this is the sixth post-war pay policy starting with that of Sir Stafford Cripps. But we have no previous experience of rates of inflation as high as this, let alone getting them down by 15 per cent. in one year. The true rate of inflation is a lot higher than 26 per cent. since that is the retail price index rate. But this rate has been reached at a time when we have had price control operating for three years, when food and housing subsidies have been increased and when the latter actually doubled in two years. Of course, such subsidies have not solved the housing problem. This rate of inflation has also been reached at a time when profit margins have been squeezed to a dangerously low level.
The real rate of inflation is very much higher than 26 per cent. The public might not be bearing the cost in prices but it is bearing the cost in another way. It comes either in taxes or in borrowing, which itself can increase the inflation and start the pound sliding, which again puts up prices. [column 78]
The Chancellor inevitably goes towards the relationship between inflation and unemployment. I think that often deliberately he has confused people on this issue. Economists and politicians may vary in their views about the causes of inflation but most now agree that the more we delay before dealing with it the greater unemployment will ultimately be. The Chancellor has delayed. He has constantly pursued a short-term policy which is against the long-term interests of our people and of jobs in industry. We should have had a much lower level of unemployment than we shall now experience this winter if the right hon. Gentleman had not done so. In spite of all the noises the right hon. Gentleman is making, and one would imagine that he is not responsible for the unemployment figures, there is nothing he can do now to prevent those figures from rising substantially this winter—rising to far more, I fear, than the 1 million level which he prophesied. I understand that he is going around talking in much larger terms now.
The yearly rate of inflation will probably go up further before moderating next year. Nevertheless, there is a purpose in an incomes policy in this inflation-unemployment relationship. The first purpose is to reduce the level of unemployment from what it would otherwise have been. If the money supply is held tight and some take more of it, there is obviously less for the rest. They would fall into unemployment but for the existence of an incomes policy.
The second purpose of such a policy is to reduce people's expectations of future pay increases and thereby, hopefully, to have some effect on the rate of inflation. We would endorse both of those objectives. But an incomes policy is only a part of the fight against inflation. The Chancellor knows this. It is highly unlikely that most of us have lived through six incomes policies, several trade cycles and rising inflation without having learned some general economic lessons about the other steps which have to be taken simultaneously.
The one lesson that seems to be most important and which is most commonly agreed is that all economic policies must be operated in the same direction simultaneously—money supply, public expenditure, fiscal policy and incomes policy—so that they reinforce one another in [column 79]effect. I do not believe that it is sufficient to rest on one or even two factors alone. That is what the Chancellor is in danger of doing and is, therefore, in danger of having only half a package on inflation.
With that in mind we might go a little more closely into our examination of the White Paper and see how it deals with these several factors. I listened carefully to what the Chancellor said, but, in spite of the fact that he said a lot, he did not give us very much information. It was clear that every time he was cross-examined he had no idea about how these things would operate in detail. That is always the difficulty with incomes policies. Everyone agrees with them in general but they so often disagree with them in particular because they do not agree about what is fair. It is difficult to get the detail operating fairly. The method chosen by the right hon. Gentleman in this White Paper seems to make it specially difficult.
From the record both voluntary and statutory incomes policies appear to have had only temporary success. They have gone through an initial stage for a period of nine to 12 months, particularly if there has been a freeze, and they have seemed to work dramatically. They have then entered a second, much more detailed, phase in which they have been seen to be deficient and to lead to many rigidities in both the labour market and the prices area. They have been seen to create anomalies and differentials. They have then entered the third phase, after they have broken down, in which all the benefits of wage reductions, as far as inflation is concerned, seem to have been cancelled out and there is a tremendous catching-up period.
Therefore, it is now particularly important to go into a policy in such a way that avoids these problems when we come out. However, that is not what the Government have done. The £6 limit will play havoc with differentials both within groups and between groups.
There is also considerable conflict within the White Paper itself, let alone in the interpretation of the £6 limit. Paragraph 6 says, and the Chancellor repeated today:
“The £6 is however a maximum within which negotiations will take place; some employers may not be able to pay it.”
[column 80]
However, the White Paper refers us to the TUC document which is annexed and which, presumably, becomes, for the first time, an official document. In paragraph 1 it says:
“The General Council therefore conclude that there should be a universal application of the figure of £6 per week.”
That is very different from what the Chancellor said. Does the TUC understand that everyone gets £6 a week automatically, because that is what it says:
“a universal application of the figure of £6 per week” ?
Many people will expect that to mean exactly what it says, and they will demand £6 when otherwise they would not have done so. If that figure is demanded and paid in the textile and food industries, it will put up prices by far more than 10 per cent., because I gather that it is equal to approximately a 23 per cent. wage increase in those industries. It is not a question of what the Chancellor says but of the expectations that arise in people's minds about what this means.
What will the Government do in the public sector—in the Civil Service? Will they pay £6 to everyone? Will there be universal application of a £6 increase or will it be negotiated? From what the Chancellor has said, it appears that the £6 limit is not the upper limit in some public sector occupations because he spoke of excessive wage settlements. We cannot have excessive wage settlements if £6 is the upper limit. He speaks of an excessive wage settlement and then knocking it off current expenditure. Therefore, £6 is not, in fact, the upper limit.
It seems that there will be a considerable mess about increments. I am not surprised that the inquirer was directed to the TUC, because the only place, as far as I can see, where increments are mentioned in the White Paper is in the TUC document, and then it is in very difficult terms. It appears that some will get £6 plus increments, some will get £6 and no increments, and some will get £6 and part increments. It will depend on the age structure of those in a particular group. For example, with teachers, those who leave will be paid at the top of the incremental scale, but those who come in will be at the bottom. If, ignoring the £6 a week, the rest of the wage bill, with all the increments, is no bigger this year [column 81]than last year they will get the increment. If not, they will not. That will cause enormous difficulties because it is not only in the public sector that there are increments. After the last incomes policy round I said that if increments were to be exempted and I were a trade union leader I would start negotiating increments now. That is what a lot of them have done.
I gather that there are now 2 million people in the private sector who also have increments. However, if those people stand one beside the other, and one receives £6 and no increments and another £6 plus increments, they will not consider it fair.
There will be a great difficulty because of the way in which the Chancellor has gone into the policy and the level of inflation. The people who received a full 30 per cent. in July will be much better off than the people who receive only 10 per cent. in August, who will practically never catch up if the policy continues for more than a year, again with people working one beside another.
I come to the question of monitoring, enforcement and reserve powers. I begin to wonder what the Reserve Powers Bill does contain if the elected representatives of the people cannot see it when discussing this matter. Is the reason that it is too tough, or is it that it is not tough enough? We do not know the nature of the offence. We do not know the nature of the punishment. It is like saying to a person “You shall not know what the punishment is until you have committed the offence, and you shall not know precisely what the offence is until you have committed it.” It is absolutely absurd. In my view it is a complete contempt of and an insult to Parliament.
The reality is that the Government do not know what they will do about these powers. Paragraph 26 of the White Paper states:
“Legislation has therefore been prepared” .
They have drafted it and it is probably printed. However, Harold Wilsonthe Prime Minister in his reply to me—I am most grateful to him for letting me have it before the debate started—said:
“We shall continue to work on the details of that contingency legislation in parallel with the work which still is to be done on the [column 82]details of the voluntary policy announced in the White Paper” .
Therefore, the reality is that the Government do not know what they will do. They may be changing their mind, but I must say that throughout the whole of the White Paper it seems as though there is still a great deal of detail to be worked out. The Chancellor of the Exchequer did not seem clear about a great deal of it either.
Mr. Atkinson
The right hon. Lady seems to be telling the House ways in which success can be achieved by backing every horse in the race. Will she now tell us, having left the whole question of the £6, whether or not it should be higher or lower? Does she agree with the CBI and its advocacy of £5? She has pointed out quite rightly all the anomalies that are likely to arise, but does she want to avoid these anomalies and apply more rigorously all the power of the law whether it be against employers or workers? Is she complaining that there are no effective methods contained in the Bill? Does she agree with statutory policy? We should like to know.
Mrs. Thatcher
The Government got us into this economic mess and they must get us out.
Mr. Neville Sandelson (Hayes and Harlington)
Where do you stand?
Mrs. Thatcher
If the hon. Gentleman had heard what I have said many times, he would know full well that I infinitely prefer a voluntary policy to a statutory policy. That remains my own position. We would never have got to 25 per cent. inflation. We reached it because of the Government's attitude through two General Elections. They said that it was 8.4 per cent.—the “Healey half truth” . [Interruption.] It is a pity that I am not at the Government Dispatch Box instead of this one.
Last week I and a number of hon. Members asked the Prime Minister what protection an employer who was driven out of business because he upheld the Government's policy would have. His reply was:
“we would not hesitate to introduce the statutory powers” . —[Official Report, 15th July 1975; Vol. 895, c. 1263.]
Those statutory powers, from what the Chancellor of the Exchequer said, will [column 83]contain no protection whatsoever for the law-abiding citizen. Therefore, the Prime Minister's reply was thoroughly misleading. We understand that there is to be no protection for the responsible employer who, in carrying out the Government's policy, loses his business.
On the incomes side of the Government's policy, it seems that they have gone into it in such a way that it is bound to create problems—inflationary problems—at the end of the year. They have learned nothing from the past. It does not look like being for “one year for Britain” . It looks as if this policy will go on for several years with increasing detail, rigidity, control and increasingly catastrophic consequences at the end of it.
The Chancellor of the Exchequer asked me about public expenditure borrowing requirements and fiscal policy. I always find his arguments on this matter somewhat intellecutally ambidextrous. They were again today. In his estimation, it is always necessary to cut public expenditure. But it is always necessary tomorrow, never today. Why he can do tomorrow what he cannot do today is a mystery.
The Chancellor referred to the amount that we were borrowing when we were in Government. The Prime Minister made great fun of it during the February General Election campaign. He said:
“This Government has minted and printed in three years more money than all the Governments of this country … Record borrowing. In last year's budget Mr. Barber announced that he would have to borrow £4,400 million.”
That is comparatively modest compared with present levels.
“This was eight times the total borrowing by his predecessors to pay for the Napoleonic Wars, the Crimean War and the Boer War. For good measure you can include the War of Spanish Succession, the War of Austrian Succession, the Seven Years War” .
To meet this Government's borrowing requirement of £9,000 million, history has run out of enough wars. It sits ill in the mouth of the Chancellor of the Exchequer to castigate us for a much smaller borrowing requirement on an economy which was growing than he has had on an economy which is absolutely stagnant. The Chancellor knows that we [column 84]do not need to borrow as much if we do not spend as much, because we can cover a smaller amount of spending by taxation and get nearer to balancing the budget.
Let us look at the record mentioned by the Chancellor. In 1974–75 total public expenditure rose by 30 per cent., which was nearly half as fast again as the gross domestic product at current prices. This disproportionate increase in public spending was a sharp departure from recent trends, because—this is what the right hon. Gentleman failed to mention—between 1969–70 and 1973–74 public spending and domestic output had risen broadly in line. Public spending went up, but so did domestic output. The right hon. Gentleman has put up public expenditure substantially while output has remained virtually the same. His great increase—in 1974–75 it amounted to about 54½ per cent. of gross national product—was financed partly by greater borrowing and partly by greater taxation. So much for the facts.
Interpreting those facts, we find that there has been an enormous drain of funds and resources from people and companies into the Government sector. There has been a fantastic drain out of the private productive sector into the Government sector. That drain has occurred in both taxation and borrowing.
Although the Chancellor of the Exchequer is fond of saying that he will make the rich howl with anguish by increased taxation, it is not the rich who have howled with anguish but those on average wages who have constantly had to bear the increased level of taxes. They now equate them not in gross terms but in terms of net take-home pay. It is interesting to observe that a £6-a-week increase will be £3.57 net of standard tax with the increased national insurance contributions. People are now saying that they do not regard a social wage as a substitute for the wages in their pockets. They are not prepared to have taxation going up and up. If it does go up, they will try to recoup it in increased wages. They will not have their net take-home pay go down.
Not only has money gone from the private into the public sector through taxation, but money which companies have as they go into the beginning of [column 85]a recession, instead of being put into investment and re-stocking, is now being put into gilt-edged stock. The reason is clear. At present price levels, they cannot get a decent return on investment. Until profitability is restored, companies will not be putting more money into investment.
Mr. Frank Hooley (Sheffield, Heeley)
The right hon. Lady seems to have over-looked the fact that when there was profitability in the years 1971, 1972 and 1973 investment in manufacturing industry went down and the Conservative Government did nothing about it.
Mrs. Thatcher
But 1973 was a particularly good year for investment. It was increasing. Next year will be a very bad year for investment.
The hon. Gentleman knows that there are two problems. The first is that the profitability of industry has gradually been reduced over a number of years. Secondly, it is not always possible to get back the investment on new technological undertakings because of over-manning. This is one problem which we have to a greater extent than on the Continent. We put in new machinery, but often we still have the same numbers of people as on the old machinery.
Unless the Government are prepared to reduce public expenditure there will be no room whatsoever for manufacturing industry to take advantage of the improvement in trade which will come within a year. All the money is going into Government spending at the moment. As soon as industry wants to take advantage of rising trade, it will withdraw its money, it will restock, and it will need still more for working capital, leaving a gap in Government financing. The Chancellor knows very well that the danger is that in about a year, unless he has made full reductions in public expenditure, he will have to finance it by printing. That is why it is vital to make cuts in public expenditure now.
The White Paper makes two points about public expenditure. First, it increases food subsidies by £70 million and rent subsidies by £80 million. Those two increases, not reductions, are in areas where we were hoping to get rid of some of the distortions in the market. I am always puzzled why the Chancellor of [column 86]the Exchequer thinks it right to get rid of distortions in nationalised industry prices by putting them up at a time when he is increasing distortions in rents in the housing market. Unless we get some sense into housing finance, we shall never have people properly housed. The more we put on these subsidies, the more difficult it will be.
The Chancellor of the Exchequer did not say how this subsidy would be dealt with in rate support grant settlements. I am not sure whether the £80 million covers in full the costs which local authorities will have to meet. However, there is no mechanism under rate support grant settlements for distributing the £80 million according to the cost to each local authority. Therefore, there will be times when that extra rent forgone will have to be borne by the ratepayer.
Having listened to what the Chancellor said on cash limits in the public sector, I cannot escape the conclusion that the Government have not gone into this matter very far and do not know how it will work. They have already been working in some areas—for instance, in the University Grants Committee—for some time, and I fail to see some of the alleged difficulties. I only hope that the cash limits in local government will apply to the total of local authority expenditure and not only to rate support grant totals, because people must have some protection from considerable rate increases at a time when their incomes will be curtailed substantially.
On the public expenditure side, if expensive schemes like the Land Community Bill—which will cost between £360 million and £400 million per annum and involve the recruitment of 14,000 extra officials—and petroleum nationalisation go through, it will hardly seem that the Government are serious about reducing public expenditure in the short, medium or long term.
But the sector on which we rely for exports and most of our jobs is the free enterprise sector, and that is the one which has received such cursory treatment from the Government.
Mr. Healey
Will the right hon. Lady answer the question which all of us on this side of the House want answered: how big an increase in the RPI, and how large an addition to unemployment, [column 87]would she tolerate as the inevitable consequence of the further public expenditure cuts which she wants to be made this year?
Mrs. Thatcher
The right hon. Gentleman does not seem to understand that the increase in the RPI has occurred under his stewardship—the biggest increase involving the biggest guilt in history. The increase in unemployment has occurred under his stewardship. He was using the same arguments a year ago as an excuse for not taking action. Had he taken action, we should not have a 25 per cent. inflation rate nor over 1 million people unemployed. It is his fault; he is the guilty man.
Mr. F. A. Burden (Gillingham)
Is my right hon. Friend aware that on 26th July last year the Chancellor of the Exchequer stated that the measures he had taken the previous day would reduce unemployment by between 10,000 and 20,000 this year and increase employment by between 100,000 and 150,000?
Mrs. Thatcher
It would be best if we believed precious little of what Denis Healeythe Chancellor of the Exchequer said at any time.
Mr. Healey
Answer our question.
Mrs. Thatcher
I live for the day when the Chancellor of the Exchequer will be answerable for his economic sins in both inflation and unemployment.
Mr. Healey
The right hon. Lady must be aware that she has dodged the central question. No one in the country will give the slightest regard to the frivolous humbug to which she is treating us unless she answers our simple question.
Mrs. Thatcher
No one in the country will give any attention to what the right hon. Gentleman says after his forecast of an 8.4 per cent. inflation rate. We now have a 48 per cent. inflation calculated on the Healey three-monthly rate. If we look—[Interruption.]——
Mr. Robert Adley (Christchurch and Lymington)
rose——
Mr. Deputy Speaker (Mr. George Thomas)
Order. The right hon. Lady is entitled to be heard. I realise that we are accustomed to interruptions, but there is a difference between reasonable inter[column 88]ruptions and sustained and sustained interruption which prevent speaking.
Mrs. Thatcher
What bothers me is that I do not believe that what the Chancellor of the Exchequer has said will have much success in tackling inflation. His arguments are the same as those he used a year ago. Other nations were taking action simultaneously at that time in four fields. That is what the Chancellor of the Exchequer is not doing, and it is one reason why the Government's policy is only half a package. The key elements in the strategy of other nations were: first, wage restraint, which the Chancellor is proposing now; secondly, prices in general were not controlled, which greatly helped to preserve profitability; thirdly, public spending programmes were cut back. In the major OECD countries there has been no real increase since 1973. Some increases are being planned now but in the context of a healthy reflation from a much lower inflation base. Fourthly, monetary policy was tight. In Germany, the inflation rate is down to between 6 and 7 per cent.
Mr. John Cronin (Loughborough)
Is it not the case that the Cabinet of the Government of the right hon. Member for Sidcup (Mr. Heath) in which the right hon. Lady served agreed in 1973 to a 24 per cent. increase in money supply, which was a record in peace time, and that that excess money supply was used not for productive investment but for property speculation and other undesirable financial objectives?
Mrs. Thatcher
As far as I can make out, under the present Government the money supply has increased by about 20 per cent. in the last two months. [Interruption.] Obviously the Government are switching from one indicator to another. M3 is not a proper indicator at present. It is much easier to control the money supply in a period of depression than it is in a period of boom—and we are going into a quite severe depression.
Mr. Thorpe
As the right hon. Lady said that, in her view, this was only half a package which she did not think would succeed, are we to take it that the Opposition will be voting for or against, or abstaining?
Mrs. Thatcher
I hope that I have said enough about the weaknesses of the [column 89]incomes policy, about which the House is not allowed to know, for the right hon. Gentleman to realise that we shall realise that we shall reserve judgment on the package. We shall ask the country in a year or two what it thinks of it when the country knows how it works in detail, which is a great deal more than the Chancellor of the Exchequer knows at present.
The recipes used by other countries have included all four of the methods to which I have referred. As a result, their economies are in a reasonably healthy condition and are ready to take advantage of the upturn in world trade which will come soon. We agree with the Chancellor's immediate objective—the rapid reduction of inflation—but insofar as we have been able to examine his methods we have reason to doubt whether in the longer term they will do the job, and we fear a reflation on top of an inflation which has not been properly quelled.
The Chancellor's longer-term strategy remains clear. It is progressively to increase the area of Government control over industry through more nationalisation and by buying up shares in profitable companies. It is to get more Government control over the pay packet and savings through the typical Socialist method of increasing taxation on both. This is not the way to create wealth or to further the prosperity and well-being of Britain.
The pronouncements of the Chancellor of the Exchequer during election periods and since—I quoted some of them at the beginning of my speech—show that he has never yet found the truth for the hour. Unlike a previous politician, he was prepared during the election campaigns to sell the truth for the hour. Now he has found a half truth well after the hour has struck. Against that record the responsibility for the level of prices is his. This policy is not a wholehearted attack on inflation. When it is, we shall support it.