asked the Chancellor of the Exchequer what are the main factors on which he bases his assumption of average growth rate for the years 1981 to 1984.

The Chancellor of the Exchequer has asked me to apologise to you, Mr. Speaker, and to the House for his inability to be present in the House this afternoon as he is attending an International Monetary Fund interim committee meeting in Hamburg.

As to the figure stated in the financial strategy being simply an illustrative assumption, does the Chief Secretary realise that it is a crucial assumption in relation to the public sector borrowing requirement target? What will he do if that assumption is unfulfilled? The right hon. Gentleman made a comparison between 1973 and 1979. Is he aware that, taking into account his planned reductions in public services, that rate of growth will require twice the rate of business output that was achieved during those years? How will he achieve that?

It is true that there is a real significance in the assumptive implications of this figure, in respect of both taxation and public spending. The realism is underlined by the fact that it is no more than the average rate of growth that was achieved between 1973 and 1979. As in all matters, the House and the Government should be cautioned to take these matters as they arise, year by year.

The House is well aware of the right hon. Gentleman's contempt for the medium-term financial plan. Will he answer some questions? First, the plan is revealed by the evidence given to the Select Committee by Treasury officials to be grossly over-optimistic and not overcautious as was stated earlier. The Government are expecting a continuing fall in the output of manufacturing industry and in public expenditure, so any increase can come only from private services. Which private services will increase to that level? Will they be bingo parlours and luncheon vouchers?

I am unashamed in my agnosticism about economic forecasting, and it is an attitude that I commend to all parts of the House. There are no grounds whatsoever for the right hon. Gentleman to use the word " contempt ". It is that kind of language that devalues him and debate in the House. I do not believe that it is generally assumed that the financial plan is grossly over-optimistic. Indeed, a number of commentators have suggested that in respect to North Sea oil it is under-optimistic.

I apologise to the right hon. Gentleman. I shall replace the word " contempt " with " distaste and mistrust ". The right hon. Gentleman said that he had chosen the figure for the rate of growth because that was the rate of growth in the last five years. Is it not the case that in the next four years the Government are proposing to follow a fiscal and monetary policy that is far more restrictive than that followed in the last five years? Indeed, the right hon. Gentleman has boasted of that in every debate that we have had in the last 12 months.

I am pleased to accept an apology from the right hon. Gentleman, if only because it is such a rare occasion.

Does my right hon. Friend agree that one of the most important points about such assumptions is that there they are aggregate assumptions, and that within those totals, through policies which result in greater efficiency in certain sectors of the economy, one might see substantial growth offsetting other sectors, which would inevitably be in decline?

That is right in that there is much more to economics than macro-equations. There is also the whole impact upon personal motivation by Government policy.

asked the Chancellor of the Exchequer to what extent his policy to reduce interest rates will be affected by changes in United States prime rates of interest.

The Government's policy remains to allow interest rates to fall, as and when this is consistent with the requirements of domestic monetary control. Since my right hon. and learned Friend's measures last November, there has been a marked slowing down in the rate of growth of sterling M3.

I congratulate my hon. Friend and my right hon. and learned Friend on that achievement, but does my hon. Friend agree that the rate of interest that currently prevails in Britain depends to a considerable extent on the high level of prime rates of interest in the United States? Will he therefore concede that it is vital for the Government to continue to pursue their strategy of controlling public expenditure and sterling M3 in order to achieve the reduction in the rates of interest which we all recognise is desirable?

I agree entirely with the second part of my hon. Friend's observation.

Since the Chief Secretary, at least, is an agnostic in terms of monetary religion, and since he does not believe, and does not in fact know whether the Government's monetarist policies will lead to a reduction of inflation, what is the purpose of these monetary policies and high interest rates, which are merely destroying large sections of British industry?

The purpose of these policies is to bring down inflation. They will bring down inflation, and my right hon. Friend, far from not believing that, was among the first right hon. and hon. Members, on either side of the House, to emphasise the importance of monetary policy on the course of inflation.

I support the courageous strategy and policies of the Government—I congratulate all my right hon. and hon. Friends on the Treasury Bench—but does my hon. Friend agree that high interest rates are damaging to commerce and industry, particularly to new smaller businesses? Will he consider implementing a form of differential interest rate for commerce and industry, which I understand is practised by many countries with which we trade and which are our major competitors?

In a sophisticated financial economy such as ours, there is no practical means of insulating one sector of the economy—because there would inevitably be arbitrage—even if it were desirable to do so. We must concentrate on monetary measures which enable us to reduce interest rates generally. That is one of the main purposes behind the medium-term financial strategy. With regard to interest rates in Britain particularly, my hon. Friend knows that interest rates throughout the world have risen by as much as they have risen in this country over the past 12 months.

The Chief Secretary has wisely and publicly repudiated the crude theory on which Government policy was previously based. What changes will be made in that policy?

My right hon. Friend has a philosophic disposition, and his speeches reflect that, but that is no excuse for an observer as percipient as the right hon. Gentleman wilfully to misrepresent them.

asked the Chancellor of the Exchequer what is the latest published increase in the tax and price index.

The tax and price index rose by 176 per cent. in the 12 months up to March 1980.

Will the Minister tell the House whether he agrees with the comment by his Department, in a press release dated 18 April 1980 concerning the tax and price index, that it is accurate only once a year, namely, from Budget to Budget? If that is so, how can it possibly be used by either employers or trade unions in collective bargaining arrangements that take place throughout the pay round, which lasts from November to July? In those circumstances, is it surprising that no one makes use of this so-called tax and price index?

I do not have before me the document to which the hon. Gentleman refers, and I hope he will excuse me from giving a specific answer on that point. With regard to his more general point on the tax and price index, I believe that this index is valuable alongside the retail price index, just as it has been valuable to have data published by the Institute of Fiscal Studies, all of which are designed to try to provide some clearer public education in the movement of prices.

On the 1 o'clock ITV news programme, Mr. Sidney Weighell said that his members were expecting to get a 20 per cent. pay increase because they want to keep their standard of living at the same level as a year ago, and that the retail price index had gone up by 20 per cent. Will my right hon. Friend send a telegram to Mr. Weighell and all the other people on his executive to tell them that if they need to keep their standard of living at the same level as last year they require only 17·6 per cent.?

Perhaps a few remarks from this Bench will obviate the public expenditure necessity of sending a telegram. I think that negotiations between Mr. Weighell and British Rail are best left to the appropriate people, namely, the management of British Rail, but it is undoubtedly true that productivity must be a major factor in whatever wage settlements are concluded.

Is it not clear from what has been said today that the tax and price index has lacked credibility from the word " go "? It would have been better if the Government had concentrated on the retail price index, to which wage bargainers in industry pay attention and which would have some effect on inflation if it were kept down.

That is a somewhat narrow reaction. The major embarrassment of the tax and price index is that it was an innovation, and because it was an innovation it was deeply repugnant to many on the Labour Benches. It is true that the retail price index, by virtue of its long existence, is much greater in the whole nature of public debate on these matters than any other index.

asked the Chancellor of the Exchequer if he will make a statement on his discussions with the Inland Revenue Staff Association on tax fraud relating to between £5,000 million and £11,000 million of untaxed funds from the black economy.

My right hon. and learned Friend has not yet had any such discussions, but we have seen the recent statements made by the Civil Service unions on the black economy.

Do they accept the figures in the question?

The figures are slightly speculative, as I am sure the Civil Service unions would be the first to acknowledge. I refer the hon. Gentleman and the House to some of the later work that has been undertaken by the Central Statistical Office, which suggests that the black economy may be running at 3½ per cent. or less of gross domestic product. Of course, we are not complacent about that figure either.

I accept that the real antidote to the black economy is a substantial reduction in direct taxation, but will my hon. and learned Friend nevertheless take on board the fact that this is a serious problem? At the very least, does he expect any information to be fed back by the additional social security inspectors who are to be appointed, so that action can be taken against both employers and employees?

No. We expect to have better information from the revenue departments, which are naturally alert to this problem. I am sure that we shall take positive action in the light of anything that we discover through them.

Is it not time that the Government had a better informed view of this problem, especially as indicators are now being given by people who have expertise in the matter and since the Government have made such a fuss over the question of social security fraud, which is piddling in comparison with the huge amounts involved?

I remind the hon. Gentleman and the House that the first figure was given during the Administration of which he was a distinguished ornament by the then chairman of the board of Inland Revenue to the Expenditure Committee. At that time the number of staff at the Inland Revenue had reached an all-time high, so there is no precise correlation between the black economy and the number of people employed in the revenue departments.

asked the Chancellor of the Exchequer what representations he has received from small businesses regarding high interest rates.

We continue to receive a number of representations from small business men on the current level of interest rates.

Does the hon. Gentleman agree that there is no apparent mechanistic link between money supply and inflation, or between the public sector borrowing requirement and inflation? Is it not the deliberate and disastrous policies of the Government, who pay lip service to small businesses, that are producing the abnormally high rates of interest that are smashing small business after small business? What are the Government going to do about it?

As I said in answer to an earlier question, the rate of interest has risen throughout the world by roughly the same amount. The whole world is facing the same inflationary problems. It is interesting to note that when the Government first took office the rate of inflation, as measured by the six months' annualised increase in the RPI, but excluding seasonal foods—which is generally regarded as the best measurement of the underlying rate of inflation—was 12·2 per cent. It is now 16·4 per cent. That is almost exactly in line with the increase in inflation rates worldwide over the same period. Similarly, countries worldwide have sought to contain the increase in inflation rates by monetary policies that involve, for the time being, a high rate of interest. Our intention is to bring interest rates down for the sake of small businesses, and others, as soon as it is safe to do so.

In general, are interest rates positive or negative in real terms?

That is an interesting philosophical question. Whether interest rates are positive or negative depends upon the expectation of inflation, and expectations differ. If we measure the current short-term interest rate against the current rate of inflation, interest rates are negative at present.

Apart from high interest rates, it is clear that small businesses will be seriously affected by the 6 per cent. decline in manufacturing output next year, which has become apparent from the cross-examination of officials before the Treasury Select Committee. Will the hon. Gentleman explain how the massive loss of jobs from medium and large companies is to be made up by small businesses?

I do not know what massive loss of jobs the hon. Gentleman is referring to, but he seems to have a certainty about the future which some of us lack. However, small businesses would be much more adversely affected by a resurgence of inflation, which is what would happen if the policies advocated by Labour Members were followed.

As lower differential interest rates for business are clearly impossible, would it not be a good idea to introduce a lower domestic rate of interest as soon as possible?

That is what we are doing.

That is precisely the policy of Her Majesty's Government.

May I direct the hon. Gentleman's attention to the figures that were published on Tuesday showing the massive loss of jobs in the past seven months since the Government have been in power? Is he aware that his officials gave the view to the Treasury Select Committee that there will be a massive increase in unemployment over the next 12 months, and that no outside forecaster believes that unemployment will fail to reach 2 million within a year from now? Why is he so complacent about the consequences of his policies?

The real question is "Why is the right hon. Gentleman so impertinent? " Even if unemployment were to rise to 2 million, that would be a smaller increase than the increase in unemployment during his stewardship of the Exchequer.

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

The Financial Statement and Budget Report forecast published at the time of the Budget envisaged that the 12-monthly increase in the retail price index would peak at slightly over 20 per cent. in the second quarter of this year before falling to 16½ per cent. in the fourth quarter. I cannot helpfully expand on those forecasts.

Now that the inflation rate has almost certainly exceeded 20 per cent., does not that show that the right hon. Gentleman's speech in January in which he said that Britain was in for three years of unparalleled austerity is proving only too correct? In view of his latest speech on the movements in money supply and inflation, does he agree that, although it was an honest and courageous speech, it exposed the mumbo-jumbo of the Government's economic thinking?

If I wanted commendation for my speeches, I hope that the hon. Gentleman will not think me discourteous if I say that I should not look to him for it. If I had to comment on the nature of my speeches, I should say that they are trite and commonplace rather than courageous.

Is my right hon. Friend worried at the current level of the increase in the cost of public sector pay, which, with the help of Professor Clegg—about whom I shall not say any more—is touching 25 per cent.? Will he undertake that the Government will get a grip on the problem and ensure that this disastrous situation does not repeat itself in the coming year?

It is important to get the issue of Professor Clegg into perspective. Many of my hon. Friends were fairly happy to fight on an election manifesto that had no commitment to disavow the Clegg recommendations. The real test is the extent to which settlements for the current pay round are manageable within the current cash limits. On that analysis, I think that there is some ground for modest hope.

Is the Chief Secretary aware that the innovation of the Government that is repugnant to Labour Members is their abandonment of their direct responsibility for promoting sensible policies on wages and prices? Will the right hon. Gentleman, who has been the architect of that, disavow the Government's policy before it is too late?

If one can translate that into everyday current political experience, it is an invitation for the Government to endorse a quasi-statutory control of incomes which collapsed, with all the consequences that are now being dealt with by Professor Clegg. Although we may not learn all that much in politics, I think that we have learnt that much.

Will my right hon. Friend continue to remind the House and the country that when the Labour Party was in Government it achieved a reduction in the inflation rate only when the Labour Government were forced to introduce the so-called monetarist measures that they now criticise us for pursuing?

I think that the right hon. Member for Leeds, East (Mr. Healey) was an imperfect monetarist. When I look at the Labour Party, I take sustenance from Lord Butler by accepting that he is the best monetarist that we have.

May I thank the right hon. Gentleman for what I think he intended to be a compliment? I remind his hon. Friend the Member for Hornchurch (Mr. Squire) that the rate of inflation was halved in the year before the Labour Government went to the IMF. Let him put that in his pipe and smoke it. Given the right hon. Gentleman's distaste, contempt or distrust of Treasury forecasts, why has he skulked behind the Red Book forecast for inflation at the end of the year? As an honest and imperfect monetarist, does he believe that the rate of inflation in the fourth quarter of this year will be as low as 16½ per cent.? Let him come out from behind the shelter of the Red Book and tell us what he really thinks.

I am complimented that the right hon. Gentleman should regard my remarks as a compliment. I know that he travels in stony territory and that it is hard to get compliments these days. I quote 16½ per cent. from the Red Book because it is published with the authority of the Government and because it is intended to contribute to public discussion and understanding. The House and politicians will get themselves into trouble only when they crucify themselves on these figures.

asked the Chancellor of the Exchequer when he expects to be able to give further details of future public expenditure on construction programmes beyond 1980–81.

I cannot give my hon. Friend any undertaking about when I shall be able to provide such information, because detailed decisions on the composition of expenditure programmes beyond 1980–81 have not yet been taken.

I understand that. However, with regard to table 5.2 of the public expenditure White Paper—which stops at the end of 1980–81—does my right hon. Friend accept, in principle, that medium-term targets are as important for construction planning as they are for monetary control?

I understand that point, and I know that the industry has expressed anxiety on this matter. Those considerations will be taken into account when we contemplate the next White Paper.

Although I accept that the Minister is, not unnaturally, reluctant to publish the figures for construction, are not the housing figures available in the Estimates? Do not they show a cut of £2·5 billion a year by 1983, most of it in bricks and mortar? Is not that a suicidal policy when 235,000 building workers are unemployed?

I readily confess that I cannot answer the hon. Gentleman's specific question, but I shall ensure that an answer is sent to him. There is no point in deceiving ourselves about the construction industry. If there is to be a cut in the rate of inflation, and if an interim price is to be paid for reduced activity, the construction industry, no less than other parts of the economy, will have to pay it.

In view of the forecast decline in investment in the construction industry, why are the Government deliberately understating North Sea oil revenues by £3 billion or £4 billion in current prices, and probably £7 billion or £8 billion a year in foreseeable terms? Is it not more important that those revenues are used to strengthen industry and investment in this country and do not go abroad in capital outflow and destroy our industry through a high-value pound?

Although that is a controversial question, it is none the less interesting and perceptive, I suggest that it goes a good deal wider than the public expenditure construction programme. The conclusion that I draw from the hon. Gentleman's observation is that it is unfair to characterise the medium-term forecast as some facile piece of optimism.

asked the Chancellor of the Exchequer when his consideration of the imposition of a special tax on the windfall profits of the leading clearing banks will be completed.

asked the Chancellor of the Exchequer when he expects to complete his consideration of a special tax on the windfall profits of the clearing banks.

I have nothing to add to what my right hon. and learned Friend said in his Budget Statement.

The recent massive profits announced by the four leading banks and those of British Petroleum, which exceed £3 billion, exceed the total savings from public expenditure cuts. Is this the unacceptable face of capitalism? Will the Chancellor of the Exchequer urgently consider the TUC's call for a windfall tax on such obscene and exorbitant profits?

As a general proposition, one issue that divides the Chamber is that Conservative Members would like to see higher profits, in the interests of a healthy economy, whereas Opposition Members would like to see profits disappear down the plug hole. When such bank profits occur, partly as a side effect of Government policy, the question of special taxation measures relating to the windfall element will arise. It would be foolish to rush into hasty decisions which might have undesirable side effects.

Does not the Financial Secretary, with his well-known capacity for witch-hunting those on social security, realise that those profits are so exorbitant and unexpected that people will want to see whether this enthusiasm for taxation applies to the big boys as well as to the tiny ones? Will he consider taxing profits of £4,000 million when ordinary people are being grossly overtaxed?

I have already answered that question. The banks are taxed. In his Budget Statement the Chancellor made it clear that he would consider whether it would be appropriate to introduce a windfall tax on the windfall element of the banks' profits. It is absurd to talk about witch hunts. We are trying to ensure that the economy becomes healthier and that the balance between taxation and expenditure is right. We seek to diminish the public sector borrowing requirement, and that will be one of the main uses of revenue from North Sea oil. We also wish to bring down inflation. To talk in the emotive language that the hon. Gentleman has used is to demean the Chamber.

In view of the recent wage agreements negotiated by the clearing banks, does not my hon. Friend agree that there is a little bit of evidence to show that the clearing banks are a tiny bit monopolistic? Does he not think that it would be a good idea to look at that problem?

My right hon. and learned Friend the Chancellor of the Exchequer is looking at that problem. The pay increases that are being negotiated by the banks are a matter for them. However, they are fully aware of the consequences of unnecessarily high pay increases.

What is the Treasury definition of a " windfall "?

In this context, a " windfall " is something that accrues to one section of the business community, not as a result of its efforts but as a result of the side effects of specific Government policies. That is why we have a petroleum revenue tax.

Will my hon. Friend confirm that many of those windfall profits go back into industry and are of benefit to it? May I press my hon. Friend further about the differential rates which I earlier proposed? They may well be used by and be made available to industry. Is it not correct that many of the countries with which we compete—including some of our European colleagues—are adopting differential interest rates for the benefit of their industries?

Although I am not an expert on the subject, I understand that some countries have two-tier interest rates, with greater and lesser amounts of success. However, to shelter one sector of the economy at the expense of another would undermine the effectiveness of the Government's overall monetary policy. It would be subject to leakages, and it is highly unlikely that it would be effective.

Is not the Financial Secretary aware that the Government's failure to act demonstrates their fear of the City and of offending the Bank of England? Does he agree that there is no problem about taxing excess profits and that one could have an excess profits tax? If the hon. Gentleman were to introduce such a clause into the Finance Bill, we would support it.

There are considerable practical difficulties. If the right hon. Gentleman takes a little more time to reflect on the subject, he will, with his experience, appreciate that.

How does the Financial Secretary think that the public will react—in a climate of social security cuts, £l prescription charges and so on—when they see those bank profits? Does he accept that they arose as a direct result of Government policy and were not the result of demands for increased production? Does he further accept that even the Daily Mail found them unacceptable?

The right hon. Gentleman must be aware that bank profits tend to rise when profits in the rest of the economy are not doing well and when interest rates are rising. The reverse is also true. Bank profits tend to fall when the rest of the economy is doing well. One should look at the behaviour of bank profits and other profits over the cycle as a whole.

asked the Chancellor of the Exchequer what circumstances would persuade him to narrow the gap between minimum lending rate and the 7 per cent. interest currently paid into the premium bonds prize fund.

New, more attractive terms of the prize fund have only just been announced.

Will the Minister at least spend a comparable sum on advertising index-linked retirement certificates— which currently yield 20 per cent.—to that which he spends on advertising premium bonds, which yield 7 per cent.?

We shall certainly take account of the hon. Gentleman's remarks and see whether we can boost the sales of other forms of saving certificates.

asked the Chancellor of the Exchequer if he is satisfied with the development of the money supply in the first quarter of 1980.

asked the Chancellor of the Exchequer if he is satisfied with the progress of the achievement of his monetary targets.

Recent figures suggest that the underlying rate of growth of sterling M3 is now well within the 7 to 11 per cent. target range.

Now that these figures appear to be much more optimistic, when will they have an effect on the rate of inflation?

As my right hon. Friend the Prime Minister has pointed out on a number of occasions, there is a well-established link between falls in the rate of growth of the money supply and falls in the rate of inflation. That is not mechanistic. There are variable time lags, but on the whole these lags tend to be about two years.

Obviously these figures are highly encouraging. Does my hon. Friend agree that the early implications suggest that the Government's strategy has laid the foundations from which we can look forward to perhaps the most urgent requirement of industry and the most useful thing that we can do for it, namely, a gradual reduction in the cost of borrowing money?

I entirely agree.

Is the hon. Gentleman aware that the Chancellor of the Exchequer told the Select Committee the other day that 2 per cent. must be added to the published figures of money supply to account for the distortions of the corset since the Government took office? Is he aware that in that case the Government have not met their monetary targets at any time in the last 12 months? That being so, why should anyone take the slighest notice of the fantasies in the medium-term plan?

As I have pointed out, there has been a sharp deceleration in the rate of growth of the money supply since my right hon. and learned Friend's measures last autumn. In the past five months, even taking into account the acceptance leak to which the right hon. Gentleman refers, the rate of growth of the money supply has been running at 9¾ per cent. a year.

Is the Minister aware that the Government's economic policy will mean many more days of action among workers who must defend their living standards against Government policies?

I can think of nothing more futile, and nothing more contrary to the interests of the working people of this country, than so-called days of action to which the hon. Member refers.

asked the Chancellor of the Exchequer if he will make a statement on the progress of discussions he has had for the creation of his proposed enterprise zones.

My right hon. Friends the Secretaries of State for the Environment and for Scotland, Wales and Northern Ireland are currently consulting the local authorities named in the Government's policy document. The Government will make a final announcement about sites in the summer.

Is it not a measure of the interest in this proposal that local authorities up and down the country are clamouring to be designated as enterprise zones? In view of the substantial and exciting opportunities that these enterprise zones offer, will my right hon. Friend ensure that as soon as the sites have been selected every means of communication to business and industry is used to bring the opportunities home to those who make investment decisions?

The answer to both parts of my hon. Friend's question is " Yes ".

Is the Minister aware that unemployment in the Northern region is approaching 140,000 and that, in effect, that was once the national figure? If the Tyne-Wear area succeeds in getting one of these enterprise zones, would it not be more appropriate to rename it a resuscitation zone?

I had hoped that the hon. Member would be rather more charitable in welcoming this innovation.

asked the Chancellor of the Exchequer when he will meet the Governor of the Bank of England.

My right hon. and learned Friend expects to meet the Governor shortly.

When the Chancellor meets the Governor, will he discuss with him the Bank of England's own evidence from its financial model that the public sector borrowing requirement has only a small effect on the level of interest rates? Indeed, a change of £1,500 million affects interest rates by only 0.2 per cent. What will the Chancellor say to the Governor about that evidence?

In his evidence to the Treasury Select Committee a few days ago, the Govenor of the Bank of England stressed the importance of getting the public sector borrowing requirement down.

asked the Chancellor of the Exchequer what are the fiscal implications of the existing make-up of the retail price index.

The retail price index measures the rate of change of the prices of the goods and services that households buy; this necessarily includes price changes which are due to changes in indirect taxation.

The retail price index is sometimes referred to as the cost-of-living index. Does it make sense that drink and cigarettes, which some people claim contribute to dying rather than living, should be included in the cost-of-living index?

The composition of the retail price index is not directly under Government control, but the point is made.