The Prime Minister (Mrs. Margaret Thatcher)
The Leader of the Opposition marked the end of the parliamentary term before the Summer Recess with a motion of censure and he has marked our return with another. That is his privilege and I make no complaints.
The nation will find little validity in his diagnosis and no comfort from his hypothesis. He complained, first, that we were not spending enough and then that taxes were too high. He seemed to see no relation between the two. He complained about strict monetary policies and then said that the Government were too lax. From what the right hon. Gentleman said, no one could ever accuse him of having honest financial policies. The weaker his arguments, the stronger his rhetoric.
I welcome the opportunity not just to expose the hollowness of those arguments but to explain why the policies we are following are the right way to create more jobs; do provide the right framework for a competitive industry; and will lead to economic recovery.
I can go along with almost every word the right hon. Gentleman uttered about the scourge of unemployment. Yes, it is a social evil. Yes, it is particularly soul-destroying for the young, who are bound to feel that they have been trained for a world that does not know how to use their talent. Yes, it is a sentence too often passed on those who have done nothing to deserve it—a sentence that is passed sometimes by those whose industrial behaviour damages the whole economy and destroys other people's job prospects.
We Conservatives at once acknowledge those matters, but believe that it demeans debate to try to pretend that compassion and concern are the property of only one party in the House. The Government of the right hon. Member for Cardiff, South-East (Mr. Callaghan) had unemployment almost twice as high as that of the Government of my right hon. Friend the Member for Sidcup (Mr. Heath), and four times as high as that of the Macmillan Government. Does that prove that he was twice as uncaring as my right hon. Friend, or four times as heartless as Mr. Harold Macmillan? Of course not, and I do not believe that that sort of comparison enhances respect for the sincerity of the House.
Mr. Jack Straw (Blackburn)
If the Prime Minister is so anxious not to make comparisons between the compassion of one Government and another—[Hon. Members: “Reading” .]—I am reading from one of the Prime Minister's speeches—why did she say at an election meeting at Darlington on 23 April 1979:
that is, the Labour Party—
“are the party of unemployment. We are the party of opportunity.”?
The Prime Minister
I said that because it was a good thing to say, and I would gladly repeat it. I understand that the Leader of the Opposition does not wish to accept what we accept—that everyone in the House recognises that [column 882]unemployment is a scourge. We believe that we are following policies that will best reduce unemployment and find a way to more jobs.
The right hon. Gentleman pointed out that, while unemployment has been rising sharply around the globe during the present world recession, it has been rising far more sharply in Britain. That is sadly all too true, but it has been true for years. At the depth of every recession, we in Britain have been more stricken than the majority of our international competitors with the curse of increased unemployment.
The steadily growing weakness of our national performance, apparent over many years, suffered further because of three years of excessive pay increases, culminating in the 1979–80 round, in which earnings rose by more than 20 per cent. in a year. To a large extent, that reckless jump in wages—at a time when output did not grow over the period—reflected the cashing of the postdated cheques that the right hon. Member for Cardiff, South-East scattered around him in his attempts to escape from the winter of discontent.
The Leader of the Opposition has on other occasions described the programme of fresh measures that he would like the Government to introduce and to which his motion refers. His recipe is to spend more, borrow more, tax less, and turn a blind eye to the consequences. He wants all that and he wants a reduction in interest rates. Indeed, the political editor of the New Statesman, a journal closer to the right hon. Gentleman's views than mine, pointed out that he had depicted only the rosy bit of the picture while ignoring the costs—higher inflation and lower living standards.
Let me deal first with the effect on employment. We shall hear a range of different estimates of the impact on employment, prices, inflation and interest rates of any package of reflationary measures that is put forward. But on one point there is wide, international agreement—that the problem of unemployment, on its present scale in this country and in Western countries generally, cannot be solved or even greatly alleviated by a reflationary package on any feasible scale. As the right hon. Member for Cardiff, South-East, once put it:
“The cosy world which we all thought would go on for ever, where full employment could be guaranteed by a stroke of the Chancellor's pen, is gone” .
The fact is that an economy in the grip of inflation cannot be permanently revived by printing more money.
If the right hon. Member for Ebbw Vale wishes some worldwide opinion to substantiate that, let me quote the chairman of the IMF, to whom the last Government had to go with cap in hand. In a recent speech this month, he said:
“At this stage in our progress it is essential not to relax the efforts to combat inflation but rather to press on with determination. Experience has amply demonstrated that sustained sound growth requires that inflation first be brought under control “
Around the world, many Governments over a wide political spectrum have come to the same conclusion, that higher and higher budget deficits are no solution to the problems of unemployment. The Governments of Germany and the Netherlands are seeking to reduce their budget deficits as a percentage of GNP. The Swedish Government have announced plans to put their deficit on a declining trend over the medium term. The recent Australian budget introduced measures to eliminate the federal deficit entirely next year. The Italians are seeking [column 883]cuts of more than £4 billion. Even the new French Government, in the face of accelerating inflation and money supply growth, have just frozen about £1½ billion of public investment projects for next year.
The fact is that savers, either at home or abroad, cannot be forced-fed with unlimited Government debt. Issues of Government stock have absorbed more than 90 per cent. of the sums raised in our capital markets in recent years. Since May 1979, we have already issued more than £25 billion worth of Government debt. Gross interest on public sector debt is estimated at nearly £15 billion this year—more than we are spending on defence, education or health. We can scarcely go on issuing public debt at the rate we have been.
The Opposition's proposals would cause a financial crisis and a sharp acceleration of inflation. There is no way in which we could finance them. If we tried to, we would end up losing control of our financial affairs.
Look what happened last time. For two and a half years after the February 1974 election Labour Members followed much the same policies as those which they and others are now urging on us. They encouraged public spending to shoot up. They responded to the first oil shock with extra borrowing at home and abroad. Suddenly, they found that they could not go on borrowing any more, neither at home nor abroad. The lenders had had enough.
The right hon. Member for Leeds, East (Mr. Healey) turned back from Heathrow and found himself obliged to summon the IMF to his aid—not because he wanted to, but because he had no choice. He and his Government had lost control, and neither exchange controls, pay controls, price controls, nor social contracts saved them from the consequences of spendthrift economics.
This Government have not pledged their international credit to the limit. On the contrary, we have redeemed a considerable part of the overdraft that our predecessors left behind. In total, we have reduced our official overseas debt from $22 billion when we took office to around $14 billion now, the lowest figure in real terms since the war.
The route of “Whitehall-led reflation” is denied to us as a remedy for the dole queue, not out of dogma or preoccupation with monetary aggregates but because it would not work.
There are three aspects to our financial strategy. The first is to maintain the financial discipline necessary to reduce inflation. The fixed exchange rate system, until it collapsed in the early 1970s, used to provide that discipline. It was generally accepted by all parties, as were the measures needed to maintain it. We cannot go back to that system other than on a worldwide basis, so we must impose our own financial discipline and that means that we must return to sound money.
“Inflation is a bonus for the richest and a heavy tax for the poorest” .
[Interruption.] That is the judgment of the Socialist President of France, and I agree with every word.
The second aspect of our strategy is to restrain the level of public borrowing. If we want to borrow more, we pay a higher price in interest rates. That damages the private sector as well as adding to our debt interest. Of course we would all like lower interest rates, but they are affected by international as well as domestic factors. Throughout the world interest rates are markedly in excess of inflation rates, unlike the last recession. The demand for borrowing [column 884]is such that lenders have sought and achieved high real interest rates. Nevertheless, it is clear that the countries with the lowest interest rates are those with the strictest domestic financial discipline and the lowest inflation. We do not get lower interest rates for long by borrowing and printing money. We get lower interest rates by controlling borrowing and inflation.
The third aspect of the strategy is the control of public spending. As the right hon. Gentleman reminded us, taxes are already high—but his policy would put them through the roof. The Government are presently involved in the annual process of reviewing the level of public expenditure for the next three years. We must exercise restraint, but we are not considering a lower total for next year than that published in the last White Paper. Indeed, the total will be higher. We have already agreed some increases—for example, the employment measures announced last July. We are resolute in the pursuit of the strategy, but accusations that we are inflexible in our tactics in the face of recession are wholly unfounded.
Well before last July we had increased expenditure on special employment and training measures, particularly for the young. We increased the financial limits for the nationalised industries, for coal, steel and the railways, because their finances were affected by the recession. We raised the spending limit for British Telecommunications to help with investment and we increased our aid to British Leyland. Here I should point out that the help we are giving to British Leyland this year and next year will total almost £1 billion of taxpayers' money. We have given extra help to Harland and Wolff. Indeed, some would say that we have been too flexible in increasing expenditure in these ways and that we have done so at the expense of the private sector.
But, because of the pressure of the recession, we thought it right to show this flexibility within the limits of prudence. This has meant increasing not only the level of public spending but also the size of the public deficit. The deficit for this financial year, at £10½ billion, will as a result be some £3 billion above the figure indicated when our plans were initially presented in 1980. To accuse me of being inflexible is absolute poppycock.
We have implemented the strategy responsibly in line with what the nation can afford and what the exigencies of recession require. We have increased public spending, but not to profligate levels. Our public spending has been prudent and realistic and is still well below the level planned by the previous Government.
The right hon. Gentleman pointed out that manufacturing industry has suffered a sharp decline. The road to restoring jobs in British industry is improving competitiveness, better productivity, more moderate pay increases and better management—in other words, reversing those things that destroy jobs.
We are an exporting nation and we have to be competitive to work. The right hon. Gentleman's predecessor, the right hon. Member for Cardiff, South-East, acknowledged that as long ago as 1976. He said:
“Overcoming unemployment now unambiguously depends on our labour costs being at least comparable with those of our major competitors.”
Rarely these days does one hear the Opposition acknowledge the central importance of getting industry competitive again if jobs are to be retained and new ones created. The right hon. Gentleman paid lip service to those matters. [column 885]
To create jobs there are some steps which we can take and there are others which need to be taken by both sides of industry on the shop floor. First, we must restrain some of the costs which the public sector imposes on industry. The right hon. Gentleman and a number of other hon. Members frequently refer to the national insurance surcharge imposed by the previous Labour Government. Having imposed it, they would like us to remove it. So would I. However, that depends on the balance achieved between public spending and taxation and tolerable levels of borrowing.
We cannot continue to give free rein to local government to add and add to the burden of commercial rates. Some limit must be set. My right hon. Friend Michael Heseltinethe Secretary of State for the Environment has already announced legislative proposals to that end. Moreover, we have a duty as the Government to limit the cost of public service and administration. That is why we have stated that the extra cash available for their pay in the year ahead must be limited to 4 per cent., a figure that compares favourably with what will be available in many private businesses this winter.
We do not have a single, inflexible pay limit. On the contrary, there may be wide variations of settlement corresponding to a wide variety of circumstances. It is the total bill which falls to be met from tax on companies and individuals that must concern us.
Mr. Ron Leighton (Newham, North-East)
Does the right hon. Lady agree with the 38 per cent. pay increase awarded to the chairman of British Leyland?
The Prime Minister
The pay negotiations of the chairman and managing director of British Leyland are matters for the company. I am as concerned as the hon. Gentleman for the future of British Leyland. I believe that the previous Government appointed the right person to be in charge of British Leyland. We will leave him to endeavour to deal with the grievous problems facing that company.
We are also aware that our nationalised monopolies—themselves protected from the disciplines of the market—can impose the costs of their products on consumers or the taxpayer. That is why we place such emphasis on measures to introduce into the public sector the same commercial disciplines that the market enforces on the private sector.
Mr. Nicholas Winterton (Macclesfield)
The Prime Minister has rightly paid tribute to the private sector and the wealth that it can create for this country. However, does she agree that unfortunately some Government policies have placed additional costs on private industry? They make it uncompetitive while the Government have been encouraging it to be more competitive.
At the same time, Britain appears to play the ball the correct way while other countries play their own game. British industry, particularly the private sector, is suffering in many instances from unfair competition. What is the Prime Minister's answer to those two questions?
The Prime Minister
I have dealt in the last few minutes with a number of industrial overheads. They occur because of Government expenditure—both national and local. I stated that it was our duty to restrain those overheads. One cannot demand far more public and local [column 886]spending, as the Opposition do, and then complain that the overheads on British industry are too high. One cannot have it all ways.
If we are to restrain the overheads of British industry, we have to restrain local and public spending. In the end it is private and creative enterprise which produces the wealth on which we all rely. I am only too happy to say that we must restrain spending. We need support, when we bring measures to the House, for these restraints.
As my hon. Friend will know, we have gained considerable contracts. The Government have operated behind private companies when we have been negotiating contracts overseas. We have achieved a very great measure of success. Foreign Governments stand behind their companies when contracts are negotiated. On occasion, they add aid to those contracts; so do we. We are operating on a similar basis and winning contracts in the teeth of international competition. We should be very proud of that.
As for the textile problem, I said at Cancun that, in spite of the difficulties faced by our textile industry we still enable our people to have open markets. We still enable textiles from developing countries to enter this country. We warned the developing countries that we, too, have problems and that we shall have to negotiate a fairly tough multi-fibre arrangement this year.
We are trying to restore a sensible difference between the cost of getting young people fresh from school and the cost of those with many years of work experience in our youth employment package. Where the costs are nearly the same, the young do not get a look in.
Much will continue to depend on the response of individual firms and employees. Earlier this month, the vice-president of the Ford Motor Company of Europe said:
“Our standards say it should take something like 20 man-hours of labour to make an Escort. In Germany they do it with 21 hours, in Britain it takes 40 hours.”
That has been the measure of our problem in some industries.
Whether a particular set of policies will enhance or erode our ability to compete is the acid test of whether those policies will attack unemployment at its root. We are prepared to be judged by that test.
In the first six months of this year, the combination of sharply improved productivity per man hour and moderated pay settlements gave us virtual stability in the unit cost of labour for the first time in a decade. The number of disputes over the last two years is lower than in any comparable period since the 1940s.
Together with the main industrialised countries, including Germany, we are exporting the highest proportion of our national output—28 per cent. That is compared with France at 21 per cent., Japan at 15 per cent. and the United States at 13 per cent. Despite all the difficulties this year, our exports are running at over £1 billion a week. Large new orders are being placed all the time. This is the way to get extra jobs back into the economy.
The right hon. Gentleman mentioned engineering orders. Does he not know that engineering orders are up 9 per cent. by volume over the level at the end of 1980? In addition, our industrial and commercial companies, which had a £1 billion deficit in the second half of 1980, were in surplus to the tune of £1 billion to the first half of [column 887]this year. Further, manufacturing output was up by 2 per cent. in the three months to August. These are the signs of recovery and hope.
What worries me about the right hon. Gentleman's approach and about much of the advice that we have been getting in recent months from not only the official Opposition but the party below the Opposition Gangway is that their advice most dangerously overstates the freedom of manouevre available to any Government who are determined to behave responsibly.
I do not believe that we shall serve our constituents if we seek to feed them a diet of illusion. The greatest betrayal that we could perpetrate on those who are now paying the price of easy answers in the past will be to try to give them easy answers once again. That is a betrayal of which the Government will not be guilty.
Of course we all want to bring down unemployment, but only the Government's policies will do so. Sacrifices there will have to be. Expectations may not all be fulfilled. Manufacturing output is rising and our exporters are winning orders. I believe that underneath the surface, and beginning to break through is a spirit of enterprise which has lain dormant in this country for too long. Under the Government that spirit is springing to life again. Therein lies the assurance of true recovery. That is why I call upon the House to reject the Opposition's motion.
Several Hon. Members
Order. Among those who will seek to catch my eye in this debate will be eight Privy Councillors. If those right hon. Gentlemen are called, I think that they should apply to themselves the same discipline as I ask from other Back Bench Members.