Mrs. Margaret Thatcher (Finchley)
I hardly expected the hon. Member for Liverpool, Walton (Mr. Heffer) and myself to agree on the future. However, I am very glad that I gave him nearly 10 minutes in which to make his speech, because I think that what he has shown is that if we ever have another Labour Government, they will not operate a mixed economy. They will operate the total Socialist State, which will be total State control and the end of all individual freedom.
I know that the hon. Gentleman and I disagree. We disagree openly and honestly. I believe that capitalism and democracy are inseparable. I believe that one does not get the one without getting the other. I believe that most people prefer capitalism because it gives them a better standard of living and it protects and preserves their freedoms. That is perhaps why whenever we have an opinion survey on the future of nationalisation it always returns the same results—the people do not want more.
We started this debate with a very long and detailed speech from Denis Healeythe Chancellor of the Exchequer. One or two things [column 148]about it were, of course, predictable. We knew that when Chancellor Schmidt was coming here yesterday, inevitably he would be quoted as saying that sterling is undervalued. I just thought, therefore, that I had better look back to see what the present Chancellor of the Exchequer said in the election campaign of February 1974 on “Election Call” . We all listen to our opponents on “Election Call” , and I recalled something that he had said. He said.
“Countries which have managed their economy sensibly, like Germany under a Socialist Government, have managed to increase the value of their currency.”
Perhaps the right hon. Gentleman will now take a few tips from Chancellor Schmidt, particularly those about profits, and not in terms of speeches but in terms of the action he takes.
Nothing I can say about the Chancellor of the Exchequer is half as damning as the judgement he passed on himself during the recent Labour Party conference, when he was reported as saying that the alternative to another loan would be economically savage and would produce riots in the streets. What an account of one's stewardship to say, after two and a half years, that there will be riots in the streets unless the capitalist countries bail one out!
I have felt at times today that there was not a sufficient appreciation of the seriousness of the economic position. Some people seem to be writing it off and saying “We have been here before” . I cannot remember when we have been so near to the end of our borrowing powers as we are now. People do not have to get into the hands of international bankers if they run their affairs in such a way that they do not need to go for loans. But the Chancellor has probably asked for more loans than any previous Chancellor has, and some have been in office rather longer than he. Indeed, the whole history of his stewardship has been of one loan after another.
We started off with a loan of $2,500 million which the Chancellor said was the biggest loan ever raised from international bankers. We went on to the increased swop facility with the New York Federal Reserve Bank. Then, still in July 1974, we went on to have a new facility from the Shah of Iran of $1,200 [column 149]million. Then the Chancellor drew the entire quota of the IMF oil facility. After that, in May 1976, he drew the first IMF tranche. Even all this was not enough, and we had to have another standby credit of $5,000 million of which an unknown amount has been used up. Now the Chancellor has gone to the IMF for the main tranche, leaving only a super tranche.
I wonder whether everyone realises just how near the end of our borrowing powers we are and how little we have left to support sterling. We do not know how much of the standby credit the Chancellor has used, though we know that he has admitted to over $1,000 million. We believe that more was used up in September. We know also that there will almost certainly be a foreign exchange liability, which has not been revealed, on the exchange equalisation account.
Adding all those figures together, I shall be very surprised if there is much more left out of the tranche which the Chancellor hopes to get from the IMF than about $1,800 million. If that is all that is left to support sterling—perhaps that is why the Bank of England withdrew support, because it can support only for technical reasons and cannot support the main value of sterling now—that is all there is to support our current balance of payments deficit, unless the Chancellor is already arranging loans on a Government-to-Government basis with other oil countries, and unless he is we are at the end of our borrowing. That is why we have absolutely no choice but to change policies.
I have felt also today that we have not given quite enough attention to what my right hon. Friend the Member for Farnham (Mr. Macmillan) termed the structural shift that has taken place from the productive sector to the non-productive sector. This was well set out in the Eltis and Bacon articles in The Sunday Times, and later in their books, showing that we can no longer go on tinkering with the economy but we have to look at the real structural changes which are needed.
I am the first to admit that some of the structural changes have been going on for quite a time. I am the first to admit, for example, that if the diagnosis [column 150]now is that we have more consumers of expenditure than we have providers, we must have a change of strategy which moves from those who consume expenditure to improving the chances and numbers of those who provide and create the wealth.
But that is not what the Chancellor is doing. Public expenditure under our Conservative Government was high enough, but it never rose above 50 per cent. of the gross national product. He has shifted it to 60 per cent., so he is going in a direction the reverse of the underlying strategy which is needed.
The right hon. Gentleman went back to some of the problems during our time, but the sterling crisis that we have now is nothing to do with the problem of our time two and a half years ago. When the right hon. Gentleman opened his Budget in 1975, sterling was at $2.30. It has suffered the most severe fall that it has ever had since then, and the right hon. Gentleman can only look to the policies that he has been following to try to explain that. He cannot squeal now about what happened two and a half years ago. This is the Chancellor's sterling crisis. Unfortunately, it is Britain's sterling crisis, too.
The recent fall in the standing exchange rate has revealed the extent to which the pound has become suspect. One of the means of judging how far a currency should fall compared with another is to compare their relative inflation rates internally. If one does that with sterling and the dollar in the United States and the deutschemark, one finds some interesting results.
Let us give the Chancellor of the Exchequer the benefit of the doubt. Let us consider the figures since October 1974. During that time the internal value of the pound has declined by 28 per cent., while the internal value of the deutschemark has declined by only 9 per cent., and the internal value of the dollar by only 11 per cent. That shows how much better those countries have done with their internal problems than we have during the Chancellor's stewardship.
If one translates those internal inflation rates on to the value of sterling, one finds that the pound ought to buy DM4.88, but it does not. It buys only DM4.10. The pound ought to buy $1.94, but it [column 151]does not. Today it buys only $1.66. The difference is due to the lack of confidence of other countries in the Chancellor's policies. Were it not for the confidence factor and we were judging on the relative internal inflation rates, the value of sterling today would be higher.
The value of sterling is not higher not because of speculation, and not because of international bankers. It is because the overseas holders of sterling have taken a view not only of the Chancellor's past—that is bad enough—but of his future policies, and they have decided that his inflation targets are not going to be reached—and they have good justification for that, because his inflation targets have never been reached.
What is more, inflation has started to turn upwards again, as the right hon. Gentleman knows full well. The rate increased substantially last month. I do not know what will happen shortly—the right hon. Gentleman probably does—but I think he will accept that the danger now is of increasing inflation, not of reducing it. That is increasing inflation from the already high base.
The other view that other countries have taken is that the Chancellor's economic strategy is not going to work, and today he has given us absolutely no new strategy to replace it. Whatever the problems, the Government and the House——
Mr. Ioan Evans (Aberdare)
Will the right hon. Lady's speech help?
Everything that I am saying is well known. What we have to do is to face reality and stop running away from it.
Whatever the economic problems, it is the duty of the Government and, I believe, of the House to try to create policies that will restore confidence in sterling and, secondly, that are suitable and fit for the skills and aptitudes of our people. Those skills and aptitudes are as great as ever they were, but they are not being released in any way. We used to be the workshop of the world, but we are not now. We have the same skills, the same initiative and the same spirit, but they are not being given a chance to work because of the Government's strategy. [column 152]
I disagree with the hon. Member for Cornwall, North (Mr. Pardoe), who made one of the most cynical and depressing speeches that I have ever heard. I wonder why he stays in the House if he takes the view that there is precious little that we can do about righting the fundamental problems before us. The hon. Gentleman spent two elections fighting me and then went as far away as he could. Fortunately, I acquired none of his pessimism.
There is no point in facing the situation pessimistically. We must face it realistically and on the basis that we can put into practice policies that will cope with it. Tough speeches are not enough. If tough ministerial speeches could strengthen the money markets, the pound would be one of the world's hardest currencies. We need the open recognition that the Government's economic strategy has collapsed, and we need a series of measures that will restore confidence.
I turn to consider the Government's economic strategy. The problem has arisen from very high public expenditure as a proportion of the gross national product. Public expenditure is not high in relation to nothing. It is high as a proportion of the gross national product.
Of course it is far easier to have high public expenditure. It is unpleasant for Departments to have to cut it. I have been through a cuts process myself, and so I know what it is like. It is much easier to go on spending, spending, spending.
Every year 40,000 people leave the Civil Service, either to retire or to go to other jobs. We have had increases over the years in the Civil Service, but I doubt whether many people think that we have run a very much more efficient administration as a result—quite the contrary. The increased numbers do not necessarily seem to have given rise to increased efficiency.
We have had enormous increases in local government over the years——
The right hon. Lady is making a fascinating speech. [Hon. Members: “A very good speech.” ] The other day she wrote an introduction to a pamphlet by Lord Blake in which he pointed out that the last Conservative [column 153]Administration, of which she was a member, saddled the country—[Interruption.]
I am very grateful to the Chancellor. I did not hear what he said, but never mind.
I will not give way.
Order. The Chancellor of the Exchequer knows that if the right hon. Lady, whom I called to address the House, does not give way, he must keep his seat.
It seems to me that both the Chancellor and his supporters are saying that they do not like the increases in staff. Therefore, they cannot object to any reductions that take place through natural wastage. If they think that the increases should never have taken place, they cannot object to reducing the present numbers in that way, which is a very good way of cutting public spending. [Interruption.] I do not know what the wastage in the National Health Service is. I accept that it is about 9 per cent. The same comment might be made about that.
Natural wastage provides the means for a possible substantial decrease in public expenditure without one sacking. That is exactly the way in which it has been done in Australia and New Zealand. The people there took a slightly different view, which was that public expenditure had to be cut. The people knew it. It was reduced without a single sacking, by going through every Department. The standing of the Governments there in the opinion polls is up. So much for people who think that it cannot be done because the public will not allow it.
Public sector expenditure has led to an enormous public sector deficit. The Chancellor knows this. He was warned time and time again that the attitude he took towards that deficit would in the end unhinge his whole economic strategy, and that is exactly what it has done. Because it was so large, he has found great difficulty in financing it. It was easy at first. There was a large balance of payments deficit, which helps with financing the public sector borrowing requirement. The Chancellor will [column 154]now find that very much more difficult, and he knows full well what has happened. He cannot finance his deficit at ordinary rates of interest. Therefore, he is having to put up the interest to a prohibitive rate of 15 per cent.—a rate that will put the rest of his economic strategy in jeopardy.
The right hon. Gentleman's strategy has been based on the idea that this year we must keep a high deficit, we must not flinch from public expenditure cuts next year, but that they are not, by God, to take place this year. I wish to emphasise that the strategy is based on a high deficit this year, and that next year there will be public expenditure cuts. At that time more will be put back into the private sector, and the recovery in the private sector will take up the slack in the public sector. That is his general strategy.
However, the Chancellor now finds that he cannot finance the deficit, except by imposing a minimum lending rate of 15 per cent. That 15 per cent. figure is in danger of aborting the whole economic recovery on which the strategy depends. The right hon. Gentleman knows that. Firms cannot afford to invest if they have to pay 15 per cent. for the money. Products cannot command their price in the market and manufacturers are left with them.
The right hon. Gentleman knows that if one is to be successful one has to make certain kinds of investment. First, one has to replace obsolete machinery. By doing that, one may well create unemployment problems because the new machinery does not usually require as many people to man it as the old. But if investment is to stop it will be fatal. There must be enough resources to enable investment to take place in expansion in order to take up the slack. We need substantial industrial recovery. The Chancellor has now stopped that process by putting up the rate to 15 per cent.
Let us look at the situation cumulatively and examine the other damage inflicted by the Chancellor on the private sector. He complains about unemployment. So do I. All my life I have only had the product of my work to live on, and I can understand what it must be like to be out of work. I do not accuse anybody anywhere in the House of wanting unemployment, but the present policies have resulted in unemployment. [column 155]
The Chancellor of the Exchequer has aggravated a situation of rising unemployment by putting a tax on jobs in the form of a payroll tax that will cost another £1,000 million. The right hon. Gentleman admitted that in the first year it would cost 60,000 jobs. The Select Committee on Public Expenditure said that it would cost 150,000 jobs in the private sector. The right hon. Gentleman then adds a further burden in the form of a lending rate of 15 per cent. I am told on the best calculation I can get that it will put another £700 million on to the existing industrial base over and above what industry was paying on 11 per cent. That money could have gone into investment. Therefore, we shall lose that investment and the jobs that go with it.
Let us examine the problems that are being created by the Chancellor. In financing one's working capital, one has to increase stocks if one is to expand. The Chancellor may say that even though the minimum lending rate has risen to 15 per cent., one can get it off one's income tax. But I must point out that the intermediate problem is that of cash flow. That will put many of the smaller businesses on which so many people depend for their jobs in serious difficulty. Furthermore, it will have a damaging effect on those who pay mortgages. Indeed, I understand that it will involve a further £200 million for those who will have to pay for mortgages at the increased rate. It will also have a highly damaging effect on the housing and construction industry, which is another area in which one could achieve an expansion of jobs.
We have reached the position in which an interest rate of 15 per cent. is in danger of aborting the very economic recovery on which we depend to take up jobs in the public sector. When one has to cut expenditure, one cannot afford to go on at this rate of public expenditure because one cannot finance it. Unless one cuts it, one will be able neither to finance this programme, nor to achieve economic recovery. That is why the Chancellor's whole economic strategy is in ruins and why the country now does not have a strategy. Unless we do something, not only to cut public expenditure but later to change taxation levels, we shall have no [column 156]chance whatever of having a standard of living anything like that of our competitors.
One thing is obvious. The people will not finance 60 per cent. expenditure by taxation levels. They already think that taxation levels are far too high. Already, at every level, whether it is what the unskilled man earns, what the skilled craftsman earns, what the manager earns or what the person who is retired has in addition to his pension, there are complaints about the tax levels.
How people can go on saying that they want more public expenditure I do not know. What they are saying is that they want the Government to take more out of the pockets of the people so that the Government can decide how it shall be spent. People will not be left with a choice. That does not seem to be very much in people's interests and they do not think so either. Of course we would all say that the Government must cut their public expenditure. They have no choice. They cannot go on borrowing. People will not go on paying more tax. They will not go on paying 15 per cent. for very long. The Government have no choice and that is the message which it has been difficult to get across.
James CallaghanThe Prime Minister talked about the long march. The last time he was in a position of authority in the Treasury he talked about “Steady as she goes.” We were then “Steady as she goes” on a disaster course and we devalued. This time we are on the long march, but we are on the wrong road. The further we go down that road—15 per cent. is no incentive for economic recovery—the worse it will be for sterling and the worse it will be for Britain.
This Chancellor has presided over the worst economic decline we have seen in the post-war period. Because of these strategies there is only decline ahead and that is why we shall vote against the Government tonight.