asked the Chancellor of the Exchequer if he will make a statement on the operation of the policy of applying cash limits to the nationalised industries.

asked the Chancellor of the Exchequer if he will make an assessment of the effect on the public sector borrowing requirement of the terms on which subventions are given to nationalised industries as regards earmarking of funds for capital and current expenditure.

Ordinary market disciplines do not apply to the raising of finance by industry in public ownership. The amount of external finance, therefore, has to be determined by the Government. The limits set for each industry are derived from their medium-term objectives and take into account their investment programmes and their ability to generate finance for such investment internally. Government finance is not generally hypothecated to particular purposes.

I thank my right hon. and learned Friend for that statement. Does he think it surprising that chairmen of the various nationalised industries should undertake expensive and extensive political campaigns, apparently in conjunction with the relevant trade unions, to force the Government to relax their policies on public sector spending? Will my right hon. and learned Friend confirm that in the case of British Railways, 1 per cent. less in wage increases could provide funds for a 5 per cent. increase in investment?

I agree with my hon. Friend. Such campaigns are not only surprising but deplorable. I do not believe that the money obtained by nationalised industries, from whatever source—whether through what they charge for their products or from elsewhere—should be spent in that way.

Is my right hon. and learned Friend aware of the growing concern about the practice of giving large amounts of taxpayers' money to nationalised industries without any policy guidelines or restrictions being set by the Government? That money could be used for excessive wage settlements. Does my right hon. and learned Friend share that concern?

I share the concern that money given to nationalised industries should be used sensibly. It is precisely because of our efforts to ensure that that happens that some nationalised industries are uncomfortable with our policies.

I am sure that the House can do without the Chief Secretary's homilies addressed to the nationalised industries about what he calls political activities—considering that they are being politically assaulted in the most absurd and ideological way. Does the Chief Secretary agree that in the light of the experience of last year—and, to some extent, this year—in which he has had progressively to change EFLs for different and important nationalised industries, he has set the target at a ludicrously restrictive level? Is not the only effect of doing this to drive up prices faster in the nationalised industries than anywhere else? Indeed, last year prices increased by 22 per cent. Why does not the right hon. and learned Gentleman reconsider his EFL policy?

The right hon. Gentleman cannot have it both ways. He cannot criticise us for having unrealistic EFLs and then criticise us for changing them. It is a strange sort of assault on the nationalised industries that increases planned investment from £4·5 billion in 1980–81 to £5·2 billion in each of the next three years. Many private concerns would like to experience that sort of assault.

As every household and every company in the private sector separates clearly the money that it borrows on capital account from the money that it borrows on current account, does my right hon. and learned Friend think that it would help if that were done much more visibly and clearly by nationalised industries? If that were done much more ostensibly, would it not help the British public and members of this honourable House to evaluate the performance of the nationalised industries' capital programmes?

I agree that we could usefully make the distinction clearer. However, full figures for public corporations' current and capital expenditure are shown in the national income Blue Book. It may be that we should bring the distinction more to the fore.

Is it not a fact that the Government have been refusing nationalised industries opportunities to indulge in profitable capital investment? Does not that inevitably make the task of the nationalised industries more difficult? Does the right hon. and learned Gentleman agree that by following this policy the Government are indulging in a vendetta against nationalised industries?

I find it a strange sort of vendetta that increases by 15 per cent. the amount of money available to the nationalised industries. The answer to the first part of the hon. Gentleman's supplementary question is "No". In the investment of nationalised industries over the past decade there is no evidence to support the suggestion that genuine investment that can be productive has been starved by Government rationing.

asked the Chancellor of the Exchequer, whether he has any proposals to reduce the rate of interest in the near future.

asked the Chancellor of the Exchequer when he next proposes to take steps to reduce interest rates.

It remains our objective to allow interest rates to fall further, but only as and when circumstances permit. United Kingdom interest rates are now lower than those in most other industrial countries.

With the advantage of hindsight, does the Chancellor think that his tight money policy, which pushed up interest rates and attracted short-term foreign funds into an overvalued sterling, was largely responsible for the drastic domestic collapse of the British economy?

I do not accept that for one moment. With the advantage of hindsight I would say that the relative movement of United Kingdom and other countries' interest rates during the first half of the year represented an endorsement of the fiscal stance that I adopted in the Budget.

Does my right hon. and learned Friend think that MLR serves any useful purpose? Does he have any proposals for abolishing it?

As I explained in my Budget Statement, it is our intention to enable market forces to play a greater role in determining interest rates. Discussions on further improvements in monetary control are well advanced. The Bank has issued the final draft of the detailed provisions. When these are put into effect we shall aim to keep short-term interest rates within an unpublished band. It may then be appropriate to suspend the practice of publishing the MLR.

As the Chancellor will still intervene on interest rates whatever may happn to MLR, what is the main factor in his policy on interest rates? Is it the exchange value of sterling, the behaviour of national income or the movement of monetary aggregates?

The factors that have an effect on interest rates are described in my Budget Statement. They are dependent primarily on monetary considerations. As the hon. Gentleman knows, we do not have a target for the exchange rate. We believe that that should be determined principally by market forces.

Does my right hon. and learned Friend agree that if the borrowing requirement were to be increased, that would lead inevitably to increased interest rates?

I agree entirely with my hon. Friend. That is the experience in other countries where interest rates are significantly higher than in the United Kingdom. One of the contributory causes is the extent to which borrowing in those countries is higher than it is here.

asked the Chancellor of the Exchequer how he assesses the value to the economy of investment in the public sector.

Investments in the public sector are assessed by the industry, department, or other public body which is making the investment, by comparing the costs and benefits using recognised investment appraisal techniques.

In making these comparisons, does my right hon. and learned Friend accept the essential difference between investment in industry and investment, for example, in the nation's transport infrastructure? Does he accept that, whereas cars, steel or coal can be imported from abroad if necessary, no one other than ourselves will modernise our transport infrastructure? Will he give me an assurance that this factor is taken into account?

That factor should be taken into account and is taken into account. That does not necessarily mean that any particular investment is justified. However, it is a relevant consideration.

Does the Minister still believe in his crowding-out theory—that increases in public investment will crowd out private investment in the economy? How does he explain to the British people that with nearly 3 million unemployed we cannot afford to build more houses to reduce the housing waiting list, we cannot improve the railways and we cannot improve our rapidly deteriorating water and sewerage facilities? How can he explain to the public that the resources are not available for more public investment?

I assure the hon. Gentleman that I lay no claim to the authorship of the crowding-out theory or of any other theory. However, if we increase public borrowing totals, the effect is to increase interest rates, which has an effect on the private sector. It is significant that the major call from industry in the past year has been for lower interest rates.

If one could take one specific example—

Ask a question. You are not writing for the Sunday Telegraph now.

—could I ask—[HON. MEMBERS: "Question."]

Order. I think that the hon. Gentleman is going to put his example in his question.

May I ask my right hon. and learned Friend whether he thinks that we are likely to obtain a good return on investment in electrification in British Rail, for example, so long as the average freight train crew on British Rail covers 11 miles a day?

My hon. Friend has identified one major problem in British Rail. I think that he will welcome the statement by my right hon. Friend the Secretary of State for Transport, which stressed the link between improvements in productivity and investment in electrification.

In her speech to the CBI, the Prime Minister said that nationalised industries should be assessed on their performance rather than on their promises. Why are the Government penalising British Gas, for example, by selling off its most profitable and successful part? Will the right hon. and learned Gentleman cease to blame nationalised industries and instead regard them as sensible outlets for investment during the present slump?

The justification for privatisation does not depend solely on the considerations that the right hon. Gentleman mentioned.

asked the Chancellor of the Exchequer whether he plans any new initiative to improve the economy.

asked the Chancellor of the Exchequer if he will make a statement on the progress of the Government's economic policies.

We shall continue with present policies to bring inflation down, and lay the foundations for sustainable economic growth.

What does the right hon. and learned Gentleman think of the remarks made yesterday by the right hon. Member for Sidcup (Mr. Heath) about the disastrous social consequences of the Government's monetarist polocies—[Interruption.]—especially the social cuts, with over 2½ million unemployed, which could breed racial hatred and juvenile crime? When even an ex-Tory Prime Minister tells us that some public spending cuts are more damaging than the savings justify, is not it about time that even this Tory Chancellor changed course and tried to regenerate the economy by means of more public investment instead of less?

I was proud to serve as a member of the Administration that was led by the right hon. Member for Sidcup (Mr. Heath). I still share entirely the same objectives as the right hon. Gentleman. However, like many of my right hon. and hon. Friends, I have drawn quite different conclusions as a result of my experience.

On a point of order, Mr. Speaker. I am inquiring whether the use of the phrase "nut case" by the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) when he referred to the right hon. Member for Sidcup (Mr. Heath) the ex-Prime Minister, is in order.

Order. I do not believe that the hon. Member will find that word in the list in "Erskine May".

rose—

Order. We do not want any proof of anything at all. If the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) wants to say something, I shall call him.

I was only seeking clarification as to whether my right hon. Friend the Member for Sidcup (Mr. Heath) was a nut case.

Order. We must try to maintain parliamentary standards in this place. I deprecate such terms.

Leaving aside the crude abuse by Conservative Members about the right hon. Member for Sidcup (Mr. Heath), was not the speech which the right hon. Gentleman made yesterday the most damaging indictment of Government economic policies?

There are many signs—in the opposite sense to what the hon. Gentleman says—that recovery will be shortly under way. If one wishes to look for the causes of redundancy, I found some interesting examples when I visited the West Midlands, including the hon. Member's constituency, last week. I found that most businesses in that area were complaining at the increased redundancies following from the planned increase in expenditure by the West Midlands county council and the consequential rate increases.

Does my right hon. and learned Friend agree that it is important that when investments in the public sector, particularly in its infrastructure, which only the public sector can undertake, offer an economic rate of return, it is important that they should not be artificially held back by the effect of the recession on the PSBR?

As my right hon. and learned Friend the Chief Secretary has explained, that is why there has been a 15 per cent. increase, for example, in the projected capital spending, in real terms, on nationalised industries. To take one example, that is why British Telecommunications is expected, even in the public expenditure White Paper, to be spending more than £2 billion in each year up to 1983–84. That can hardly be described as a policy of holding back public sector investment.

Which of his policies does the Chancellor of the Exchequer feel has been most successful so far?

Centrally, it is the policy of reducing the rate of inflation, which has fallen by 10 per cent. in the last 12 months—

Tell us what it was when the Conservative Government came in?

—alongside a 5 per cent. reduction in the interest rates. I am content to go on listing such examples for some time.

Does not my right hon. and learned Friend agree that his call in a speech the other day for no more than a 5 per cent. increase in pay and salaries next year would do much for the economy? Is he now moving towards a form of voluntary incomes policy?

No, Sir. The experience of successive Governments of both parties has directly led to a rejection of that approach. It is clear that it is necessary for us to continue to improve our competitiveness and to reduce unit labour costs. For that purpose, moderation in pay settlements is essential in all parts of the economy. I was delighted that last week, in a broadcast commentary on my speech, the right hon. Member for Stepney and Poplar (Mr. Shore) accepted that high pay settlements could have much to do with creating unemployment.

May I come back to the original question? It is plain to me that the Chancellor of the Exchequer has no plans and will not announce any new initiatives to improve the economy. With regard to his Birmingham speech, is it not the case that he is envisaging not anything to do with a more orderly way of trying to relate pay and prices together in this country but an unprecedented reduction in real earnings during the coming year?

The right hon. Gentleman knows well that over the last three years, when there was no matching increase in output, real personal earnings rose by 17 per cent. or 18 per cent. while the income of the corporate sector fell by 25 per cent. In those circumstances there must be a matching change in the opposite direction, and as part of that, if we are to secure a reduction in unemployment, there is an overwhelmingly strong case for pay moderation. I should be grateful if the right hon. Gentleman would endorse in this House the plain proposition that unduly high pay settlements mean unduly high unemployment.

asked the Chancellor of the Exchequer when he now expects to see a substantial improvement in the economy.

There is now increasing evidence that output has stopped falling. The prospect is for some recovery over the next year or so. Progress will largely depend on the extent to which we continue to improve United Kingdom competitiveness through more effective control of domestic costs.

Does not the Chancellor of the Exchequer realise that the further round of public expenditure cuts which he proposes could be self-defeating, even for the crazy economics of this Government? Will he comment on the reports that that is also the view of the Treasury? In view of recent developments, will he say whether he is revising monetary targets and at the same time proposing a return to high interest rates?

I do not know why the hon. Gentleman should imagine that I should want to do the last thing to which he referred. Announcements about monetary targets were made at the ordinary time and in the ordinary way. There is no truth in the suggestion that the case for reducing public expenditure is doubted in my Department. It is overwhelmingly clear from what is being done in other countries besides ours—for example, in Western Germany or Denmark—that there is clear recognition that unduly high public expenditure means unduly high interest rates, unduly high inflation and unduly high unemployment.

Since it is vital that the chances of substantial economic recovery are not vitiated by lack of competitiveness and excessive pay settlements, will my right hon. and learned Friend look again at the imaginative proposal for a wider economic forum which was contained in our manifesto at the last election? Can he say something today to give me and the House hope that we may act upon it?

I hope that my hon. Friend will appreciate that, for example, the discussions which we have regularly with the National Economic Development Council are directed to such an end. I am anxious to find every opportunity of extending discussion about the link between unduly high pay settlements and unduly high unemployment and to take every opportunity of extending the case for improving our productivity and competitiveness.

Will the Chancellor of the Exchequer reconsider the claim which he has just made, that the most successful part of his policy has been the reduction in prices and the bringing down of inflation? Does he not agree with the Treasury's figures, which show that he was responsible for pushing up the index by 11 per cent. in his first year of office and by 6½ per cent. in the second year? Therefore, is he not now saying that the most succesful part of his policy is reducing the damage in price increases which he has imposed?

The hon. Gentleman has got it precisely wrong. When we came into office the rate of inflation was rising fast and at the same time we were going through the consequences of the collapse of the last Government's pay policy, contributing to an explosion in pay settlements in the public and private sectors. It has taken us two years to overcome those handicaps, which we inherited from the last Administration.

asked the Chancellor of the Exchequer if he will make a statement on present levels of overseas investment by United Kingdom financial institutions.

asked the Chancellor of the Exchequer what was the level of portfolio and direct investment overseas by the United Kingdom financial institutions during the last 12 months, compared with the preceding two years.

Portfolio investment overseas has increased substantially since exchange controls were abolished in 1979. These investments will provide a source of valuable overseas income for the future. Figures for portfolio investment by institutions exclude banks, while complete figures for direct investment overseas are not available. Using available data, the information is as follows:

Does not the Financial Secretary accept that when real investment in this country is declining, the record level of investment overseas—now running at about £4 billion per year—shows how little faith the financial institutions have in the Government's ability to turn round the economy?

No, Sir. Apart from the hon. Gentleman's confusion between portfolio and real investment, he is also overlooking the fact that the increase in overseas investment bears no relation to the level of investment in this country, which is determined primarily by the return on investment. That is agreed by everyone, including the authors of the Wilson report, chaired by the right hon. Member for Huyton (Sir. H. Wilson).

Does the Financial Secretary agree that withdrawal of capital is much more damaging to British industry than any withdrawal of labour? Will he condemn the banks and other financial institutions for failing to invest in Britain and British industries? In the light of the figures, will he change his policy on exchange control?

No, Sir. I assume that the hon. Gentleman has in mind the announcement a fortnight ago by the mineworkers' pension fund that it proposed to take over at a cost of $265 million an American property company--Connecticut General Mortgage and Realty Investments. I suggest that he takes the matter up with the deputy chairman of the pension fund, Mr. Joe Gormley.

I shall.

Will my right hon. Friend take the opportunity to pay tribute to the continuing high level of invisible exports emanating from financial institutions, whether by direct investment overseas or by general trading, without which our trade situation would have been infinitely poorer over the years?

My hon. Friend is absolutely right. I gladly pay that tribute.

Has no one told the Financial Secretary that in the past year investment by pension and insurance funds abroad exceeded the total for the preceding five years? Does he really believe that under this Government industry is so strong and healthy that it can afford that haemorrhage? If he does believe that there is that much spare capital around, will he and his colleagues at least stop insulting the House by stating that public sector investment crowds out private sector investment from a limited number of funds?

As a result of the abolition of exchange control there has, of course, been an outflow of investment overseas. That is a clear consequence. However, there has also been a substantial capital inflow. Hon. Members on the Opposition Benches are as opposed to outflows of capital as they are to inflows, and their concept of the country as a seige economy is as politically unattractive as it would be economically damaging.

Is not the capital inflow a direct result of raising exchange controls, because it gives the foreign investor confidence that if he puts his money into the country he can get it out if a Labour Government come to office?

My hon. and learned Friend is right. That is certainly one factor; another is confidence in Government policies.

Is the Financial Secretary aware that not all those who pay their subscriptions to the National Union of Mineworkers are over the moon at the prospect of the pension fund being used to prop up an American property company, especially when, not many years ago, during the property boom under the previous Tory Prime Minister, the mineworkers' pension fund was used partly to finance the Cedar Investment Trust, which collapsed with about 30 other banks, and most of the money was lost? Does he understand that some of us are, therefore, against such an investment?

I understand that the hon. Gentleman against most things introduced by any Government at any time, not least against measures introduced by a Government whom he normally supports. The pension fund proposal is supported not only by Mr. Joe Gormley the deputy chairman of the fund. As the hon. Gentleman well knows, half the management of the mineworkers' pension fund is made up of representatives of the NUM. With his close links with the NUM, the hon. Gentleman is uniquely able to take the matter up directly with them.

asked the Chancellor of the Exchequer what has been the total of United Kingdom net contributions to the budget of the European Economic Community since United Kingdom accession, expressed as a percentage of public expenditure.

A little over a half of 1 per cent.

Does not that figure, which represents rather less than one-eightieth of what we spend on social security, demonstrate the utter falsity of the picture so seduously fostered by the Labour Party and its accomplices in this matter in other parties that our contribution to the budget represents an intolerable and crushing burden on the British economy?

I would rather put it another way. The small size of the—[Interruption.]—percentage is a reflection not of the small size—[Interruption.]

Order. I ask hon. Members below the Gangway not to conduct private conversations during the answer.

Thank you for your protection, Mr. Speaker.

What is the rationale of giving almost as much aid to the nine richest countries of the world as we do to the 120 poorest?

The hon. Member will be well aware that the Government have addressed themselves constructively and successfully to the problem, unlike the Government whom he supported. As a result of the 30 May agreement we have secured a substantial reduction in our net contribution. Indeed, as a result of the restructuring proposals put before the Community by the Commission following the mandate that it was given in that agreement, we intend that further progress should be made.

Is it not a colossal cheek for the Opposition to moan about a fairly modest agreement when, unlike the Prime Minister, they did nothing to reduce it when they were in office? Is not the sum about one-fifteenth of the total that they expended on wasteful and useless nationalisation of industries such as steel?

It is unfair to say that the Labour Government did nothing. To use my hon. Friend's word, they moaned.

Could not the Financial Secretary, to the benefit of the British people, better spend the £400 million, which, as a result of his unsuccessful negotiations, we are to pay to the EEC this year, and the £500 million that we are to pay next year?

It is the greatest impertinence for the right hon. Gentleman to call the negotiations unsuccessful. They were highly successful. They substantially reduced the net United Kingdom contribution—something that totally eluded the Government of which he was a member.

asked the Chancellor of the Exchequer when he next plans to meet the United States Treasury Secretary; and what he proposes to discuss with him.

I expect to meet him again at the Ottawa summit on 19–20 July. We shall no doubt discuss our own economies and some international issues.

Following the recent report of the Bank of International Settlements, when my right hon. and learned Friend meets Mr. Regan will he raise with him the question of American interest rate policy, and particularly the volatility rather than just the level of the rates, since that, after all, is a matter of tactics rather than strategy?

The volatility of American interest rates has been the subject of some discussion. The monetary control techniques introduced by the American authorities in October 1979 may have led to more interest rate movement, but so, perhaps, have other factors, such as sharp changes in real activity. We hope that as experience with the techniques grows the American authorities will achieve their objectives with less interest rate volatility. It is certainly a matter to be followed up.

Will the Chancellor tell Mr. Regan that the Milton Friedman policies that the Government have pursued are disastrous, and the Americans should not follow suit? Will he also tell him that as, increasingly in Europe, especially with the change of Government in France, interventionist policies are being followed, perhaps Britain and America should consider what Roosevelt did to get America out of the depression?

The hon. Gentleman would be unwise to draw many conclusions from the change in one Government in Europe. The communiqués of the Organisation for Economic Co-operation and Development and the IMF interim committee, for example, show that the policy of giving the highest priority to the fight against inflation and the securing and maintaining of proper economic control has the authoritative endorsement of both those international bodies. That is in line with our policy.

When the Chancellor meets President Reagan will he co-ordinate with him plans to restore investment in the Western economy and to expand public demand?

I aspire directly to negotiate not with President Reagan but with Secretary of State Regan, although no doubt I shall have the opportunity to exchange words with both. In neither case would I wish to endorse the policy of expanding demand and expanding investment for its own sake when, in most economies, and certainly in our own, it is the excess of demand as compared with the performance of the economy that is the cause of our troubles.

asked the Chancellor of the Exchequer whether he will make a statement on the progress made since 10 March in bringing down the public sector borrowing requirement.

The strategy for reducing the PSBR was set out in the Financial Statement and Budget Report and is being implemented, for example, in the Finance Bill.

Will my right hon. and learned Friend confirm that it will be an important part of the half-yearly review under the Industry Act later this year to ensure that the increased taxes in the Budget really have reduced the PSBR?

Certainly that is something which must be kept under review.

What does the Minister say to the charge that the public expenditure cuts are creating massive unemployment, which a former distinguished Prime Minister has said is breeding race hatred and crime? Will he explain what kind of improved life the people of this nation will face at the end of what that former distinguished Prime Minister described as these incomprehensible policies?

I do not believe that expenditure cuts are the cause of unemployment. The cause of unemployment is twofold. First, it is the world recession. Secondly, it is due to the fact that over a very long period we as a nation have paid ourselves more than we have earned. As for the future, I believe that the restoration of our economy on a sound basis will provide the opportunity for advance and the provision of jobs, which will be secure. It seems to me that that is much more ground for hope than to continue to spend money propping up inefficient industry.

How big a reduction in the PSBR can we expect as a result of the privatisation of BNOC and other measures?

It is not possible to give an estimate at this stage.

Is the Minister aware that the PSBR is composed almost entirely of all the money used for dole payments, redundancy payments and so on? A member of the present Cabinet indeed suggested that when there were 1·6 million unemployed the total amount of money spent on those matters was as much as £7 billion, so it must be nearly £15 billion now. One of the best ways to reduce the PSBR—

Order. The hon. Gentleman must ask a question.

One of the best possible ways to—[Interruption]—reduce the PSBR—

Order. I think that that is the hon. Gentleman's way of asking a question. But he must try to get a question into it.

Will the Minister confirm that one of the first ways of reducing the PSBR is to initiate a massive public works programme on the railways, the sewers and canals, and to introduce a 35-hour week without loss of pay, longer holidays, earlier retirement and measures of that kind which will—

Order. That is enough to get on with.

I can think of no more certain way to bring about economic disaster, if not collapse, than to carry out the policy recommended by the hon. Gentleman. He will recall that somebody who is not unsympathetic to the cause of general reflation estimated that if £4,000 million were spent on reflating the economy the effect would be to reduce unemployment by only 100,000, without taking into account the extremely dangerous consequences for interest rates and our monetary policy that such a policy would entail.

asked the Chancellor of the Exchequer what recent representations he has received about the level of stamp duties on house purchase.

Suggestions for reductions in stamp duty on house purchase are regularly received from both private individuals and representative bodies, especially during the period when Budget proposals are being prepared.

Does my right hon. and learned Friend agree that there is no more justification for this tax on home ownership than there was for the tax on newspapers or on cheques? When my right hon. and learned Friend the Chancellor starts his regular discussions with me about his next Budget, will he give rather more priority to reducing the levels of stamp duty than he did in the last Budget?

My hon. Friend will recall that we substantially increased the threshold for stamp duty and general stamp duty levels, and therefore reduced the incidence of stamp duty on house purchase in the 1980 Budget. I am sure, however, that my hon. Friend's representations about the 1982 Budget will be taken most seriously by my right hon. and learned Friend the Chancellor.

asked the Prime Minister if she will seek powers to control the advertising expenditure of the nationalised industries.

It is not my present intention to do so. Most nationalised industry advertising is of an ordinary commercial kind. The exceptions can be pursued through other channels.

Has my right hon. Friend noted the disgraceful advertising campaigns mounted by the British Gas Corporation and British Rail, which clearly have political rather than commercial objectives? Is she aware that the British Gas Corporation's present campaign will cost £2 million? Does she agree that that is an unacceptable use of taxpayers' money and will she take steps to claw back that amount through the cash limits system?

I share my hon. Friend's distaste for some of the non-commercial advertising of both British Rail and British Gas, neither of which is commercial and which we believe in both cases was politically directed. My right hon. Friend the Secretary of State for Transport has made his views known to the board of British Rail and my right hon. Friend the Minister for Consumer Affairs has made her views known to British Gas. I believe that this is a wrong use of public money.

Will the Prime Minister explain how she intends to advertise the sale and hiving off of the Royal ordnance factories to the private sector when they are the most important component of the logistics of our Army today? Are the Government seriously suggesting that the private sector of the arms industry can be trusted to keep our Army supplied if the hour of need comes again?

A considerable number of firms in the private sector supply defence requirement to our Armed Services. There would be nothing unusual in adding to that number.

Does my right hon. Friend agree that, although it is entirely right for British Airways to advertise for custom against other airlines, it is entirely wrong for it to use money to campaign for a fifth terminal at Heathrow and in doing so to be clearly against Government policy, as the Secretary of State for Trade has clearly stated that a fifth terminal should not be built at Heathrow?

The vast majority of advertising is commercial and is not only justified but necessary to get the business into the nationalised industries. I agree with my hon. Friend that anything other than commercial advertising is most undesirable.

Does the Prime Minister accept that on the way here on the wretched railway line from Sheffield to London there are huge advertisements in the fields, painted in black letters on a white background, proclaiming "Choose Corby. It works"? Will she inquire who put those advertisements there—there are at least three of them—telling people to go to Corby because it works, when every hon. Member knows that the people of Corby are out of work and that the Government are doing nothing to put them into work?

Corby is an enterprise zone, and it seems to me that that is a legitimate advertisement.

the Prime Minister if she will list her official engagements for Thursday 2 July.

This morning I presided at a meeting of the Cabinet and had meetings with ministerial colleagues and others. In addition to my duties in the House, I shall be having further meetings later today, including one with a delegation of Members of the Indian Parliament led by their Speaker.

Will my right hon. Friend spend a little time considering the plight of those ratepayers in the Metropolis who will shortly receive supplementary demands? Is it not grossly iniquitous that London ratepayers should be required to subsidise the public transporting of millions of tourists who visit the City each year as well as hundreds of thousands of commuters from outside London who earn their living in the City? If the Government do not have the powers to stop these supplementary demands, will my right hon. Friend try to expedite alternatives to the rating system, which is a rotten iniquitous system?

I agree with my hon. Friend that it is absolutely wrong that London ratepayers should have to subsidise tours taken on London Transport by tourists or many other people who come into London but who do not belong to London. There is already a grant of about £105 million from the Government, and in addition a large grant from the GLC is financed through the rates. I believe that most people will strongly object to paying large increased amounts for people who come from outside the Metropolis.

Has the right hon. Lady yet had a chance to study the speech of the right hon. Member for Sidcup (Mr. Heath) and his suggestions that the policies of mass unemployment over which the Prime Minister presides help to breed crime and racial tensions? What does she think of that speech?

I did, of course, see reports of my right hon. Friend's speech. I note that most of my fellow Heads of Government at the European Council agree with the policies that we are pursuing. [Interruption.] It is extraordinary that Opposition Members should interrupt, because they were not present. Many of the Heads of Government are pursuing the same policies, and most of them agree that lower inflation will lead to more jobs. The question is not about the scourge of unemployment—we all agree that unemployment is a scourge—but rather what effective remedies can be found. We believe that we are going the right way to finding them.

How does the right hon. Lady think that her colleagues in Europe can understand a policy which the right hon. Member for Sidcup describes as "incomprehensible"? Does not the Prime Minister understand that she must answer to this House? What does she think of the right hon. Gentleman's statement? Following what the right hon. Gentleman and others have said on this subject, do the Government intend to proceed later this year with further public expenditure cuts which will lead to further unemployment, further racial hatred and further crime?

The Heads of Government in Europe understand the policy, because many of them are pursuing identical policies. In other words, their top priority is to reduce inflation as a means not only of getting inflation down but of establishing a firm base to secure competitive industry and good jobs in the future.

Not enough.

The right hon. Gentleman may say "Not enough", but we are trying to reduce public expenditure——[Interruption.]—so that more finance is available for the private sector—[Interruption.]

Order. I cannot hear the Prime Minister's reply, and, as I said earlier, we must try to maintain parliamentary standards.

That is precisely why Opposition Members find the policy incomprehensible—because they will not listen.

Will the right hon. Lady now say what President Mitterrand said about her policies?

President Mitterrand was the one person who was out of step—[Interruption.] The right hon. Gentleman may not like it, but that is the case. As I reminded the right hon. Gentleman yesterday, President Mitterrand proposes to increase his deficit to an amount equal to 3 per cent. of GDP. Most of us, who already have deficits beyond that amount, could not possibly consider that policy. Our deficit is already 4½ per cent. of GDP.

Does my right hon. Friend agree that the parliamentary rabble opposite have no recipes for Britain's economic revival? However, bearing in mind that we have an unprecedentedly large margin of spare capacity in men and material generally, and especially in the construction industry, is it not now possible to consider certain non-inflationary measures to revive the economy that would not lead to an increase in inflation?

I would dearly like to increase the proportion of public spending on public investment. Many of us would, because we think that that would be a far better way of spending some of the money than putting a good deal of it into increased pay. The fact is that the more that goes into increased pay without increased output the less there is to spend on public investment and the less there is available for more jobs. More pay without more output means more unemployment.

Is the Prime Minister aware that the selective expansionary proposals of the right hon. Member for Sidcup (Mr. Heath) are recommended by many people in many parts of Britain, not least by the electors of Warrington—[Interruption.] If some hon. Members spent some time on the doorsteps of Warrington, they would discover that fact—[Interruption.]

Order. The House must listen to points of view that it does not like. That is what it is all about in this place.

Does the Prime Minister accept that many people believe that there is an alternative and that there is a case for selective expansionary investment in Britain that has nothing to do with the hotch-potch of extravagant inflationary expansion peddled from the Opposition Benches?

Unlike the right hon. Gentleman and others who propose the creation of inflation on top of inflation, I happen to agree with John Maynard Keynes, when he said—[Interruption.]

Order. I do not know why the House is so excited this afternoon. I remind hon. Members that the clock is moving on.

I happen to agree with Keynes. He said:

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose".