asked the Chancellor of the Exchequer if he is satisfied that his current instruments of control of the money supply are adequate.

The fundamental elements of monetary control are fiscal policy, that is, the public sector borrowing requirement, and the level of interest rates. Within this context, the Treasury and the Bank will shortly be publishing a consultative document discussing possible improvements to existing techniques.

In that consideration, are my hon. Friend and my right hon. and learned Friend aware that present interest rates have to take too much of the heat and burden of necessary monetary discipline? Is he further aware that there is a variety of techniques open to the authorities to widen the range of monetary control, such as the broadening of the range of public sector debt management? Will he consider a number of such options?

As I told my hon. Friend a moment ago, the Bank and the Treasury will jointly be publishing a consultative document shortly in which a number of these matters will be discussed. I have to tell my hon. Friend that the real and only way of getting the heat and the burden away from interest rates, to which he rightly alludes, is to bring down the public sector borrowing requirement. I hope that he will support us in our endeavours to do just that, by, above all, making further economies in public expenditure.

How does the hon. Gentleman reconcile what he has said with the speech he made a few days ago—reflecting, I am glad to say, the influence of the new economic adviser to the Treasury—in which he said that he is prepared to see the public sector borrowing requirement rise next year in money terms? That is sensible. We think that it should also rise in real terms. Does he really think that, in an area such as monetary policy, where it is impossible to define or monitor money in any real sense, it makes sense to change the whole system at a time when the Bank of England has said that the most important thing is firmness and consistency in present policies?

Firmness and consistency in monetary policy is exactly what we are carrying through. That is increasingly recognised in world markets. I am glad to have the approval of the Chancellor of the Exchequer—

A Freudian slip.

—the ex-Chancellor of the Exchequer—for my remarks on Monday about the public sector borrowing requirement. I well remember the damage that the right hon. Gentleman did when he was Chancellor. It is difficult to forget that. As I say, I am glad to have his approval. However, I do not think that his interpretation is correct.

The hon. Gentleman indicated that he is prepared to see the public sector borrowing requirement increased in money terms next year. Is he aware that that is the first time that any Government representative has expressed that view?

My right hon. and learned Friend the Chancellor of the Exchequer will be announcing the borrowing requirement for the coming year in his Budget Statement.

Would it not be desirable to introduce mechanisms directly to limit bank lending and domestic credit so that interest rates might be expected to fall rather further and earlier than now seems likely?

I am not sure what mechanisms my hon. Friend has in mind. The main mechanism for controlling bank lending is interest rate. Fundamentally bank lending may be controlled only by controlling borrowing. Any attempt to control lending directly will lead either to other forms of lendingoutside that control being increased, or to lenders other than those who are being controlled increasing their lending. We have seen that in practice with the supplementary special deposit scheme.

asked the Chancellor of the Exchequer if he is satisfied with the average level of wage increases.

I shall not be satisfied until wage and price inflation has been successfully countered. That is why I am determined to continue with firm fiscal and monetary policies.

Does the Chancellor realise that the Government in general, and the right hon. and learned Gentleman especially, have been responsible for creating a rate of inflation in excess of 17 per cent.? Surely the right hon. and learned Gentleman has no right to protest about working people attempting to protect themselves by wage increases against the current level of inflation.

The level of inflation is due to many causes including, not insignificantly, the high rate of monetary growth that we inherited from the previous Labour Government. One of the central propositions that must be understood in present circumstances is that no Government can guarantee any worker, or group of workers, the right to pay increases that protect them from the consequences of increases in the retail price index. No automatic linkage has been established. The pay increases that may reasonably be expected depend upon the terms that may sensibly be bargained in the context of the resources of the employing company or the resources of the public sector that is concerned.

Does my right hon. and learned Friend agree that greater incentives for profit-sharing schemes would lead to responsible wage settlements, because the work force would know that it would benefit from the success of the firm and would therefore be likely to show greater restraint in hard times?

I agree with my hon. Friend that anything that helps employees to understand the extent to which their real reward is linked to the success of the organisation employing them must be helpful. On the other hand, pay settlements that companies cannot afford must lead inevitably to higher prices, redundancies or bankruptcies.

Does the right hon. and learned Gentleman accept that the Government have a prime role to check the disastrously high average rise in earnings in their capacity as the largest employer in the United Kingdom? To that end does the Chancellor agree that the Government should not be led astray by any findings of the Pay Research Unit indicating pay rises for civil servants that go beyond what the country can afford?

The activities and reports of the Pay Research Unit are designed to illustrate, so far as may be done, the facts that are relevant on one side of the equation. I agree with the hon. Gentleman that the other relevant issue is the amount of cash available to the public sector, in whole or in part. As those employed in the private sector must recognise the balance between the security of their employment and the scale of wage increases that they can obtain, so those in the public sector must understand that beyond a certain point higher pay must mean higher rates and taxes or fewer jobs.

Is it still the Government's view that, provided the money supply is kept under control, high wage settlements do not cause high inflation?

That is not and never has been the Government's view. It is a matter of elementary analysis that in the short run a firm monetary policy does not prevent high pay settlements which lead to higher price increases as organisations struggle to recover the cost of high wages. In the aggregate, and over the medium and long run, the ultimate penalty is the reduction of employment and the reduction of jobs.

asked the Chancellor of the Exchequer if he is satisfied with that proportion of public expenditure cuts that have resulted from savings rather than increased charges to the public.

Much the greater part of the public expenditure cuts reflected in my right hon. and learned Friend's Budget Statement last year and our White Paper on public expenditure in 1980–81 comes from reductions in gross public expenditure rather than increases in charges. However, as explained in the answer I gave to my hon. Friend on 18 December, the proportion of public expenditure reductions found from increased charges will depend in part on decisions by local authorities.

While my right hon. and hon. Friends will be pleased with that answer, is the Chief Secretary aware that many of us think that there should have been far greater cuts in public expenditure as opposed to the large cuts in some areas which have been imposed on the public? For example, the increased charges for school transport is effectively a tax on those who have the misfortune to live away—

Order. The hon. Gentleman must not argue a case. He must ask a question.

Will my right hon. Friend ensure that in future the Government cut back on their own expenditure, especially the large Civil Service expenditure?

I hope that my hon. Friend will not be disappointed when the White Paper on public spending for 1980–81 is published in March.

What progress is the right hon. Gentleman making in his discussions with the Prime Minister on the proposed new health charges?

I think that the hon. Gentleman is becoming rather over-anxious. The issue will be the subject of consideration in the public expenditure review, which will be published in due course.

What charges does the right hon. Gentleman think should be increased still further?

I have nothing to add to what I have already said on the matter.

asked the Chancellor of the Exchequer what effect he thinks the absence of economic growth is having on the rate of inflation.

Low productivity has certainly aggravated the problem of inflation. While firm monetary control is essential for the reduction of inflation, improvements in industrial performance would help in this process.

Does my right hon. Friend agree that there has been too much emphasis so far n restricting demand and not enough emphasis on increasing supply, which would surely make a greater contribution to reducing inflation?

No, I do not think that that is so. There is much evidence of demand in the United Kingdom that is all too readily supplied by imports rather than home production.

Does the right hon. Gentleman accept the statistics published about a week ago by the Central Statistical Office, which reveal an increase in industrial productivity of 11 per cent. in the last two years of the previous Labour Government and a collapse of any productivity increase in the first year of office of the Conservative Government? How does he explain that?

That is a myopic reading of the statistics. Anyone who considers the record of the economy when the right hon. Gentleman was Chancellor will draw the conclusion that it was manifestly mismanaged.

Will my right hon. Friend offer a further explanation of the answer given earlier this afternoon by my right hon. and learned Friend the Chancellor of the Exchequer to the effect that there was more than one cause of inflation? Will he confirm that it is the Treasury's view that there is only one cause of inflation as opposed to the consequences of inflation?

It is the view of my right hon. and learned Friend that monetary factors are the main cause, but there is certainly no question but that there are other ancillary factors that can exacerbate the influence of monetary factors.

Does the right hon. and learned Gentleman realise that his anti-inflationary policies amount to little more than old-fashioned deflation?

The breaking of the high degree of inflation that has been experienced in the United Kingdom over recent years will necessitate the sort of harsh measures that could be characterised as deflation but, in truth, they do not merit such an attack because they are dis-inflationary rather than deflationary.

asked the Chancellor of the Exchequer when he expects the rate of inflation to fall substantially.

The Government's firm fiscal and monetary policies will, over time, bring about a progressive reduction—

When?

The right hon. Member for Leeds, East (Mr. Healey) is easily amused in his non-responsible position.

I emphasise the words "over time". The policies will bring about a progressive reduction in the rate of inflation. Nobody was more willing to assert the necessity for time to elapse between the implementation of monetary policy and its impact on inflation than the right hon. Gentleman when he held a position of responsibility.

The sooner that is appreciated by wage bargainers, and the upward pressures on costs in the United Kingdom are relieved, the sooner we can look forward to a sustained reduction in inflation and a rising trend in United Kingdom output.

Who is really in charge of the Treasury—the right hon. and learned Gentleman or the Chief Secretary? Is it not the case that it is the Government who are largely creating inflation by the constant and substantial increases in prices and charges as well as in the present minimum lending rate?

I am sure that my right hon. Friend the Chief Secretary is happy to cede to me the ultimate responsibility for management of the Treasury. I am happy to say that, together with my other right hon. and hon. Friends, we make a happy and harmonious team. The House must understand that monetary policy, effectively pursued, is fundamental and crucial to the conquest of inflation. It must take time to take effect. This will happen more effectively and more easily once people understand the consequences for pay bargaining and unemployment of failing to heed such a message.

Is the Chancellor aware that, according to my right hon. Friend the Chief Secretary, it is not only money supply that is important? Can my right hon. and learned Friend now say what other factors have become more important recently, and why?

No factor has become more or less important recently. It has been central to the case that I have asserted that monetary policy is fundamental. It is not, by itself, sufficient if people do not understand the impact of monetary policy on the environment in which they are bargaining, and seek to press for pay increases that are beyond those which the employer can afford. That would introduce an element making it more difficult for prices to fall. That is one illustration of many. All inflationary expectations have to be effected down wards by the sustained application of monetary discipline, as the right hon. Member for Leeds, East (Mr. Healey) was often in the habit of telling the House. The facts have not changed. The fundamental economic principles have not changed. We shall continue to pursue those policies so long as it is necessary for them to prevail.

Is not the Chancellor aware that since the Government came into office they have put up prices by at least 8 per cent.?

Rubbish.

It is no good the Financial Secretary saying "Rubbish". The Government have consciously put up prices by 8 per cent. If the Government are really concerned about inflation they would not have done so. What action will the Government take to stop prices rising to 20 per cent. or more?

The figure advanced by the right hon. Gentleman, as he knows, is total and complete rubbish. If one looks at it as amatter of elementary statistics, the rate of price increases when we came into office was running just below 13 per cent. per year. The figure has not yet risen half-way beyond that to the figure suggested by the right hon. Gentleman.

The right hon. Gentleman might address his mind to the fact that a significant contribution to the retail price index increase will arise from the increase in minimum lending rate, as it manifests itself on mortgage interest rates. That is a consequence of the high size of public borrowing and public spending. I wel- come very much the prospect of the right hon. Gentleman's support in reducing excessive public spending and excessive public borrowing.

asked the Chancellor of the Exchequer if he is satisfied with the progress of the economy.

Of course not. It will take time—[Interruption.] Opposition Members are readily amused. It will take time, as the House should understand, for our policies to check the long-run decline of the economy.

Does the right hon. and learned Gentleman agree that there have been recent changes in two respects that might considerably affect what he has said? First, there has been the big fall in the number of notified vacancies that has occurred for the second month running. Secondly, there has been a big fall in the index of long-term indicators. Is that not further evidence that the right hon. and learned Gentleman's policies are adding to the economic recession? Is it not time that we had a U-turn? Will he deal specifically with the two points that I have mentioned?

Of course it is right that a reduction in the number of notified vacancies and a downturn in the long-term indicators are manifestations of the continuing decline in the economy. There are many causes for that, and many of those are of long standing. A most recent cause is the doubling of oil prices in the last 12 months. That will have effected a reduction of around 3 per cent. in the likely growth of our economy. There is no way that we, by the management of our economy, can, by injecting additional demand, manufacture additional job vacancies. They have to be manufactured by the skill and success of both sides of British industry.

Has my right hon. and learned Friend made any systematic studies or analyses of the probable effects of import controls on the economy?

The question of import controls is a matter that has been frequently canvassed by my hon. Friend and others. The conclusion arrived at by successive Administrations—if one addresses one's mind to it as a central recommendation—is that it is likely to be counter productive, to lead to retaliatory action and that for Britain, with such a large dependence on international trade, it is least likely to be a successful prescription.

As it is now seven months since the Chancellor's incentive Budget, does he yet detect any signs of industrial revival resulting from those incentives?

I am quite confident that, had the economy continued under its previous management, the confidence on both sides of industry, especially management, would have been significantly less than it is today. Without the consequences of the substantial reductions in personal taxation, especially at middle and higher levels, morale in industry would be a great deal worse than it is today.

Does my right hon. and learned Friend accept that there is a danger of economic progress being impeded by an exchange rate that is endangering many export orders and bringing about a position where we are losing our domestic market share?

The exchange rate can have a number of effects on the competitiveness of our goods and services. The matter raised by my hon. Friend is one of the factors, but not the only one, that justifies our decision to abolish the remaining aspects of exchange controls.

Will the right hon. and learned Gentleman explain why he did not tell the electorate eight months ago that if a Conservative Government were elected the country would be in for three years of unparalleled austerity—to quote his right hon. Friend the Chief Secretary? Why are we to face three years of unparalleled austerity when these are the first three years in British history when we are completely independent in terms of our major source of energy and when the increase in oil prices will bring us immense benefits, both in revenue and the balance of payments, which none of our competitors will enjoy?

As always, the right hon. Gentleman is capable of exaggerating benefits that he fancies he sees. He must know that the increase in oil prices world-wide—although it has some effect on us in a helpful direction, for the reasons that I have already stated—retards and depresses the market, in which we have to sell as much as any other country. In the campaign that we fought at the last election we made it entirely clear to the country that we were facing economic conditions more serious than at any time since the end of the war. We made it plain also that the task of reconstructing our economy was a task for a decade. We do not intend to be deflected from the difficult and harsh measures that are necessary.

rose—

Order. It is not fair to Back Benchers if Front Benchers rise twice to ask supplementary questions. I try to treat every hon. Member alike, and I hope that the right hon. Gentleman will accept my advice in the spirit in which it is given—but it is certainly given.

indicated assent.

asked the Chancellor of the Exchequer what is the United Kingdom contribution to the calculated one-twelfth expenditure by the European Economic Community for January 1980.

Pending clarification of the interpretation of the relevant legislation, member States have agreed that VAT contributions this month and next should be made on a provisional basis related to contributions to the 1979 Community budget, as amended by the third supplementary budget. Thus, we have paid—I hope that the hon. Gentleman will be pleased that I am able to give the figure to the nearest pound—£70,362,438 in respect of VAT contributions for January. In addition, we have contributed £105,268,401 this month in respect of full payment of levies and duties.

Does not the Financial Secretary agree that, large though those sums are, they represent approximately half the quantifiable benefits received in return? Would not any attempt to retain a short-term net change in this imbalance, by accepting an EEC common oil policy—or Cop—spell long-term disastrous consequences for the finances of the United Kingdom?

The Government are well aware of the problem of the grossly exorbitant size of the United Kingdom's net contribution to the Community budget. They are making strenuous efforts to achieve a substantial reduction, and have already achieved a great deal more than their predecessors ever did. There is no such thing as a common oil policy.

As the CAP is the major element in the European budget may I ask the Treasury to make it quite clear that there will be no price increase at this year's agricultural price-fixing meeting because any price increase will mean that we will have to pay more into the budget?

The agricultural price negotiations are, of course, a matter for my right hon. Friend the Minister of Agriculture, Fisheries and Food. However, I should have thought that the right hon. Gentleman was well aware that we are foremost in pressing for price restraint in Community policies.

In the light of the figures the Financial Secretary has given, can the hon. Gentleman say exactly what the Government's policy is with regard to our net contribution? From the reported remarks which the Lord Privy Seal made in Paris, does it not seem that the Government are already giving way on the demand that we should pay nothing at all as anet contribution to the EEC?

The hon. Gentleman will recall that what we have achieved so far is—[HON. MEMBERS: "Nothing."]—a wide measure of agreement. Our gross contributions to the European budget should be reduced by about £350 million as a result of taking all the wraps and conditions off the totally useless mechanism that was negotiated by the previous Administration. What we are now seeking is for as much as possible of the remainder of that gap to be made good on the receipt side of the budget, whether by a receipts mechanism or in some other way. There is some margin of manoeuvre. There must be in negotiations. But I can tell the hon. Gentleman that there is very little room for manoeuvre indeed.

Will my hon. Friend beware of the obvious pitfall of accepting promises with regard to the regional policy fund or, indeed, the social fund, which can be altered at a stroke, rather than actual cash benefits which all the British people can see?

I can assure my hon. Friend that when we are offered a solution to this problem, as I am confident we shall be, we shall certainly examine the small print to make sure that the sort of things of which he is afraid do not occur.

asked the Chancellor of the Exchequer what plans he has now for reduction in public expenditure.

asked the Chancellor of the Exchequer whether he will make a further statement on public expenditure.

asked the Chancellor of the Exchequer when he now expects to publish the public expenditure White Paper.

Further decisions on our review of public expenditure will be announced in due course. We expect that the public expenditure White Paper will be published in March.

While welcoming the Government's recognition that total public expenditure in real terms must be cut substantially, and that, therefore, the 1980–81 White Paper must be scrapped, may I ask my right hon. Friend to give an assurance that the forthcoming White Paper will have a full economic analysis of the normal kind which covers the whole area which the White Paper embraces?

An economic analysis will certainly be published with the White Paper, and I hope that it will satisfy my right hon. Friend.

What is now the primary aim of Government policy on public expenditure and the PSBR? Is it to force down interest rates or is it to make room for further tax cuts?

Clearly, over the lifetime of this Parliament, it will be our policy to trim public spending to enable both reductions in taxation and a fall in interest rates to take place.

Is it not apparent that the £8·3 billion target for the PSBR this year will be exceeded? Can my right hon. Friend assure us that that will be taken into account in reducing the scale of the PSBR next year? Further, can he assure us that reports in some newspapers last weekend, which stated that he said that the objective was to secure a £2,000 million reduction in planned expenditure programmes by the end of this Parliament, underestimated the scale of his personal ambitions?

Perhaps we can leave my personal ambitions to one side so as to enable me to deal with the£8·3 billion PSBR forecast for the current year. I cannot comment as to what will be the outcome figure, but I can assure my hon. Friend that that outcome figure will be very much present in the mind of my right hon. and learned Friend the Chancellor when constructing both his budget and the public spending proposals.

Did not the Chief Secretary say last weekend that the Government were now considering proposals to ignore inflation with regard to unemployment and social security benefits as well as child benefits? Does not that mean that this year there will be a deliberate cut of about 18 per cent. in those levels, with a further cut next year and so long as inflation continues? That is something which no British Government have done since 1931.

It is certainly true that the Government are conducting a wide-ranging review of public spending. But nothing that is being contemplated in that review merits the interpretation which the hon. Gentleman has just placed upon it.

Is it not clear that the British people must fear the Conservative militants and fanatics, and that if the Government continue with their policy of cutting public expenditure, not only will there be de-industrialisation but the people will end up in dire poverty? Is it not about time that Conservative Members faced the fact that the Government's policy is leading to utter disaster?

I am happy to assure the the hon. Gentleman that we Conservatives are Nature's moderates. However, we are also Nature's realists with regard to economic planning. The fact is that we inherited a public spending programme that was wildly in excess of any likely economic performance by this country.

Can my right hon. Friend say whether the public expenditure White Paper will deal with the effect of index-linked public sector pensions and whether it will make any recommendations to deal with that problem?

Those are obviously the kind of issues that are under review, but in no sense can I anticipate the outcome of that White Paper.

Further to the right hon. Gentleman's answer to the supplementary question of my hon. Friend the Member for Salford, East (Mr. Allaun), is it not clear that further reductions in public expenditure will come from reduced social benefits, from failure to uprate benefits and from direct reductions in social benefits and pensions? Will not such cuts fall disproportionately and crucially heavily upon claimants and pensioners? Should not the right hon. Gentleman make that quite clear to the country?

I do not deny that there is a wide-ranging review of public spending policy. In those circumstances, all programmes must be subject to investigation. Any final decision must be a balance of social and economic judgment, dictated primarily by political considerations.

asked the Chancellor of the Exchequer how many people in employment he hopes will be taken out of the income tax net during 1980.

The numbers for 1980–81 will depend on the level of the tax allowances for the year. I ask my hon. Friend to wait for my Budget Statement on that.

I recognise that the Chancellor cannot anticipate his Budget. However, will he bear in mind that many people at the lower end of the pay scale are receiving relatively less than those receving social security benefits? Is he aware that, in order to make it worth while for them to work, they will have to be offered substantial tax reductions, or, if possible, taken out of the tax net?

My hon. Friend makes an entirely valid point, which I had in mind when I raised the tax thresholds substantially last year. He underlines that it should not be overlooked that those on low pay—as much as anyone else in the country—have a powerful interest in the reduction of excessive public spending, if we are to move towards a sensible tax structure.

Since the Chief Secretary has said that we are in for three years of unparalleled austerity, will the Chancellor make clear that there will be no reduction in capital taxes in the next Budget? It will not be fair if the owners of capital get the benefit. Does he not agree that all members of the community should suffer from this "unparalleled austerity".

I shall not anticipate my next Budget Statement in any respect. The right hon. Gentleman should bear in mind that if the structure of capital taxation is one of the matters affecting the supply side of the economy—as Lord Lever believed it to be when the previous Government were in power, and as many people now believe it to be—it is a legitimate matter for consideration.

asked the Chancellor of the Exchequer what representations he has received regarding the level of interest rates.

I have in recent months received a number of representations on the current level of interest rates, in particular from business men and home owners.

Is it not true that the high interest rates prevailing under the Tory Government—and the intention to raise them was not included in the Tories' election manifesto—are causing grievous difficulty both to home owners and to small businesses, and are resulting in an increase in charges across the board? Is this not one of the most inflationary measures undertaken by the Government? When do they intend to reduce interest rates to help home owners, small busi- nesses and local authorities, all of whom are paying through the nose as a result of the Government's actions?

The reason why interest rates are so high is twofold. First, we inherited a money supply that was wholly out of control. We had to take measures to bring it back into control. I hope that the hon. Member for Keighley (Mr. Cryer) will support us in that. The second reason is that we have inherited a public sector borrowing requirement that is far too high. Despite the reduction we made, it remains too high. That is why we are determined to get the PSBR down, and I hope that the hon. Member will support the Government in that because of his concern for small firms, which are having to bear the high interest rates.

Is the Minister satisfied that the retail price index deals adequately with the consequences of the rise in mortgage interest rates when there are four building society investors receiving a higher income for every building society borrower who is paying a higher mortgage rate?

Whether the RPI as at present constituted deals adequately with mortgage rates is a nice question. However, it is a matter for the RPI advisory committee. It is not for the Government to interfere with the constitution of the RPI.

Does not the Minister accept that the building societies have said that, even if the Government now bring the minimum lending rate down, they will need to retain the mortgage lending rate at its present level? Is it not a fact that that level has been primarily determined bythe increase in inflation generated by the Government's actions?

That is not so.

I gave the reason for the increase in interest rates to the hon. Member for Keighley (Mr. Cryer). It is our hope that interest rates can be brought down as soon as it is safe, consistent with monetary growth. Mortgage interest rates will, in the long run, follow the course of interest rates generally.

Will the Minister say whether his Department has made any representations to the clearing banks, which are not satisfied with taking 21 per cent. from small businesmen, such as myself, but are also putting up their charges generally? Is he aware that the charge for each cheque presented is now 17½p.? Surely this is unnecessary.

I am sure that the hon. Gentleman is not suggesting that the Government should interfere with the level of bank charges, or with the level of every price or charge levied by any institution. If he wants that degree of detailed interference, he is betraying the honourable name of Liberalism.