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Mr. Bruce Grocott accordingly presented a Bill to restrict the granting of honours for political purposes : And the same was read the First time ; and ordered to be read a Second time upon Friday 7 July and to be printed. [Bill 150.]
Government Economic Policy
Mr. Speaker : Before I call the right hon. and learned Member for Monklands, East (Mr. Smith), I must announce to the House that I have selected the amendment in the name of the Prime Minister. In view of the late start to this debate I propose to limit speeches to 10 minutes between 7 and 9 o'clock, but I ask those hon. Members who may be called before then to bear that limit in mind.
Mr. Nicholas Bennett (Pembroke) : On a point of order, Mr. Speaker. You have not announced whether you intend to call the amendment standing in my name, which is supported by 24 of my colleagues, or the amendment tabled by the Democrats. I recognise that there are a number of amendments to the Labour party motion and that it may not be possible to call all of them, but I seek your guidance. You will recall that in the unpublished and unbroadcast part of a radio interview some 10 days ago, the Leader of the Opposition, when asked about his economic policy, said, "I am not"--
Mr. Bennett rose--
Mr. Michael Brown (Brigg and Cleethorpes) : On a point of order, Mr. Speaker. I recognise that you have decided to select the amendment in the name of my right hon. Friend the Prime Minister only. During the debate, however, will it be possible for the 25 hon. Members who have signed the amendment in the name of my hon. Friend the Member for Pembroke (Mr. Bennett), should they catch your eye, to refer to the speech recently given by the right hon. Member for Llanelli (Mr. Davies) regarding the views of the Leader of the Opposition and his views of that right hon. Gentleman's economic policies?
Mr. Speaker : The hon. Gentleman is an old parliamentary hand and he will know that the debate is confined to the Opposition motion and the Government amendment. He must keep his speech within those confines.
That this House deplores the confusion and disarray of the Government's economic policy, the record balance of payments deficit, the rising rate of inflation and the damaging level of interest rates ; notes with concern the continuing neglect of the real economy and the failures to invest adequately in education and training, research and development, and the regions, which undermine Britain's prospects of success in the single market of the European Community after 1992 ; and calls upon the Government to give urgent priority to such supply side investment in order to reduce the balance of payments deficit and begin to create a strong, balanced and competitive economy for the 1990s.
When he presented his Budget in March 1988, the Chancellor of the Exchequer exhibited a sublime degree of
Column 248self-confidence. His Budget gained fulsome praise from the Prime Minister, who said that it was "brilliant". She was not in any way inhibited by the fact that she had sabotaged his exchange rate policy a few days before. The House will recall the Chancellor's confident boast, given in his wind-up to the debate on the Budget resolutions, that Britain was
"experiencing an economic miracle, comparable in significance to that previously enjoyed by West Germany and still enjoyed by Japan."--[ Official Report, 21 March 1988 ; Vol. 130, c. 109.] In presenting his Budget, the right hon. Gentleman said : "the present upswing, unlike almost all its predecessors, has not led to any resurgence of inflation".--[ Official Report, 15 March 1988 ; Vol. 129, c. 994.]
The Chancellor, warming to his task, said in the wind-up to the Budget debate :
"we are now talking about getting it down from something between 3 and 4 per cent."--[ Official Report, 21 March 1988 ; Vol. 130, c. 110.]
As for the balance of payments, there would be
"no difficulty in financing a temporary current account deficit of this scale".--[ Official Report, 15 March 1988 ; Vol. 129, c. 994.] But the self-confidence and the self-congratulation proved to be short-lived, because it was based on blissful ignorance, the sort of ignorance demonstrated by a man on the top of a ladder who does not know he is about to fall off. The so-called temporary current account deficit soared to more than £14 billion and has been sliding relentlessly further into the red ever since.
Inflation, described by the Chancellor in a phrase that will haunt him as "a temporary blip", has doubled to 8 per cent. So, today, far from talking about temporary blips, the Chancellor prefers to warn us, as he said in his OECD speech of last week,
"against people who are impatient for quick results".
That was his message to the OECD Ministers in Paris.
But, as interest rates blip higher and higher for longer and longer, is it any wonder that people are losing confidence in Conservative economic policy? With interest rates moving to 14 per cent. perhaps higher, with soaring borrowing costs threatening investment in industry and risking overkill and recession, is it surprising that people are becoming impatient for some results? But whose expectations was the Chancellor really trying to calm?
On the day the right hon. Gentleman announced the latest increase in interest rates he was addressing the Tory women's conference. He was reported in The Independent as having opened his speech to the Tory women by saying as follows about the timing of the interest rates :
"I had two conflicting thoughts. I thought it was a rather tactless time in the middle of the women's conference. Then I thought--where else could I look for such mature, intelligent, responsible support?"
They heckled him. I think the Chancellor has a problem with Tory women-- [Interruption.] --because there is another place, not too far from where he lives where there is not much in the way of mature, intelligent and responsible support for him. The Prime Minister, in an extremely revealing interview in the Glasgow Herald told us about the nature of her relationship with her Chancellor of the Exchequer. She said : "Nigel is a very good neighbour of mine, and a very good Chancellor. Geoffrey is a very good Foreign Secretary. I am not going any further. You know I have to do reshuffles from time to time. I hate them. Why?--because I have a very good Cabinet. But I know that there are young people who have to have an opportunity, as others had it. I hate them."
Column 249I think she must mean the reshuffles.
"I have to work myself up because I know that I have to do them. I hate them."
And then, ominously :
"So will they."
Good neighbourliness is highly relevant to the confusion and disarray which lies at the heart of Government policy, and, on that subject, my sympathies are, to some extent, with the Chancellor of the Exchequer. After all, when he picks up the telephone and wants to get through to No. 10, it must be rather disconcerting to be told, "Walters here. Would you like to speak to Griffiths?" It is not clear who the real Chancellor of the Exchequer is. We have here the nominal Chancellor of the Exchequer.
Although he and the Prime Minister are neighbours, he should take account, as many of us who are aficionados do, of the theme song of the "Neighbours" programme which we hear twice a day on BBC television. The song goes :
"Neighbours--everybody needs good neighbours.
Just a friendly wave each morning helps to make a better day. Neighbours need to get to know each other.
Next door is only a footstep away.
Neighbours--everybody needs good neighbours.
With a little understanding, you can find a perfect blend. Neighbours should be there for one another.
That's when good neighbours become good friends."
The Chancellor of the Exchequer may be a good neighbour, but Walters and Griffiths are the good friends. Time after time, in the management of his policy, he has been up-ended by the Prime Minister's own intervention.
The Prime Minister wants some quick results, as Britain's inflation rate soars to 8 per cent. and the ludicrous target of zero inflation looks ever more absurd. To avoid the verdict of the judge and jury, the Chancellor has resorted to the lame excuse of the international trend, his flimsy international alibi. At the Organisation for Economic Co-operation and Development he talked about G7 inflation. What on earth is that?
The phrase is intended to give the impression that inflation is a national contagion that no one can avoid, the mere fact that one is alive means that one will catch it and that it does not have much to do with the Chancellor. It is instructive to look at the inflation rates of the other G7 countries. Japan has 1.2 per cent., the Federal Republic has 2.7 per cent., France has 3.4 per cent., the United States of America has 5 per cent., Canada has 4.6 per cent. and Italy has 6 per cent. The average is 4.4 per cent., while Britain has 8 per cent.
There is no such thing as G7 inflation, but there is British inflation, which is not externally caused. Neither oil nor other key commodities have risen spectacularly in this decade, as they did in the 1970s. The resurgence of inflation is domestically driven and caused by the Government's mismanagement of demand, their foolish credit boom, their own utility price increases and the Tories' inflationary "own goals," to borrow a phrase favoured by the Confederation of British Industry.
The mismanagement of demand has made worse the most serious problem of all : Britain's worsening balance of payments deficit. The 1988 Budget combined foolish and unfair tax cuts with an unsustainable credit boom and dramatically aggravated Britain's emerging external deficit. Sadly, that deficit is no mere temporary blip. Since 1982, Britain's non-oil current account has been in deficit and has grown worse every year except 1985. That
Column 250long-running trend of deterioration, concealed for a while by North sea oil, is at the heart of Britain's balance of payments deficit. However, the Chancellor refuses to acknowledge the problem. He has seriously and consistently underestimated its scale. Absurdly, Treasury Ministers claim that the deficit is a sign of success. The Chief Secretary to the Treasury does so regularly. By implication, the growing surpluses of Germany and Japan are evidence of economic failure, and their expanding role as the world's foremost creditor nations must be a lamentable national humiliation for them. Alternatively, the Treasury likes to present the deficit as yet another temporary event : a short-term result of excessive demand and a temporary misalignment of demand and supply in the economy. But the deficit is a long-term structural problem that will not be cured merely by the easing of domestic demand.
Since the Chancellor fails to understand the cause of the deficit it is not surprising that he cannot accurately forecast it. In 1988, we were told that it would be £4 billion and it was £14 billion. This year, the Chancellor says that it will be about the same, £14 billion, but so far this year we are heading for a new record deficit of more than £17 billion. When he replies, will the Chancellor explain why the European Commission, the International Monetary Fund and the OECD have all forecast a further record slide into the red this year? The OECD's latest forecast, available to the Chancellor in Paris last week, reportedly predicted that Britain would run record deficits this year and next.
What is the explanation for that discrepancy, given that the OECD forecast must be agreed with the Treasury? I trust that the Chancellor, this afternoon, will tell us the Treasury's revised forecast for the balance of payments this year. Clearly the figures that he gave the House in his Budget statement not so long ago are no longer credible in the House, at the OECD or in the financial markets.
The forecasts are important because they reveal how long high interest rates will be needed to attract the hot money flows which the Chancellor wants in order to finance the balance of payments deficit. High interest rates are not merely a device to curb inflation, but the price we must pay for living beyond our means. We are having to pay the Lawson risk premium, the speculator's ransom, required to attract capital into sterling and finance the balance of payments deficit. That price is rising, as the market's confidence in the Government's economic policy falls.
The Government have failed to tackle the weakness of Britain's economic fundamentals : the burgeoning balance of payments deficit and the resurgence of inflation. Those are facts which no amount of hype about Thatcher miracles can conceal from the currency markets or the electorate. The Government's dependence on higher and higher interest rates is more and more a sign of policy weakness and evidence of confusion and disarray, rather than a firm policy resolve.
A good example of that confusion and disarray arose at Prime Minister's Question Time on 23 May, when the Prime Minister, in answer to a question from my right hon. Friend the Leader of the Opposition, clearly implied that, at 13 per cent., interest rates were adequate to curb domestic demand. The evidence of a slowdown in the credit boom is growing, if not yet fully conclusive.
Column 251However, 13 per cent. was not enough to satisfy the currency speculators and failed to buy off their anxieties about the British economy.
Here revealed is the self-inflicted contradiction of the Government's economic policy. The Chancellor has chosen to rely on high interest rates as a universal economic panacea, but interest rates are a double-edged sword. They are a weapon that cuts both ways : raising the exchange rate and curbing demand. Those two objectives can conflict, and that is precisely what is starting to happen in the British economy. As demand begins to fall away, high interest rates threaten overkill and recession. However, the Chancellor still needs to attract that hot money to finance his external deficit.
Mr. John Townend (Bridlington) : If he disagrees with the present rate, would the right hon. and learned Gentleman be good enough to tell the House what the appropriate rate of interest should be at the present time?
Mr. Smith : I do not agree that the only weapon that we should use should be interest rates. As we have made clear on numerous occasions, there are other methods-- [Interruption.] I shall give way to the Chancellor if he will tell me what he thinks the appropriate rate should be. Not only is this House interested in whether he thinks they should be higher ; even more importantly, does the Prime Minister think that they should be higher? The markets never know whether the Chancellor, the Prime Minister or Sir Alan Walters speaks for the Government.
Mr. John Redwood (Wokingham) : If the right hon. and learned Gentleman believes that the credit boom is slowing down, why is he recommending credit controls? Is he aware that credit controls and the exchange controls that they would require are illegal under the EEC arrangements which are being put in place for 1992?
Mr. Smith : There are some signs that the boom in demand is slowing down--and I am not surprised. If one takes £50, £60 or £70 a week out of people's incomes by means of increased mortgage payments, they cannot spend the money on goods produced at home or imported from abroad. But if there is a need to control demand, it should not be met by further increases in interest rates. It should be done by credit controls. Before the hon. Member for Wokingham (Mr. Redwood) departs too far from his former friends in the No. 10 policy unit, he had better read what they are sedulously leaking to the press day after day--that they are considering forms of credit controls as an alternative to the Chancellor's reliance on interest rates. I would not presume to give the hon. Gentleman political advice about his future career, but there is no need for him to stick his neck out too far on this subject.
The confusion between the Prime Minister and the Chancellor over interest rates and monetary policy merely exacerbates the inherent conflict within the Government's foundering economic strategy. No. 10, as the hon. Member for Wokingham reminded us by implication, is returning to monetarism and wants to avoid any further rise in interest rates. The City catches wild rumours that the Chancellor has resigned, but the Treasury line remains that interest rates will stay as high as necessary for as long as necessary. Is that still the Government's policy?
In all this confusion and disarray one searches in vain for the medium-term financial strategy, that wonder of modern economics in which the Chancellor would repudiate day-to-day management of the economy, disparaging it as flying by the seat of one's pants, in favour of medium-term targets. But the medium-term financial strategy has turned out to be just another temporary blip in the history of modern economics. The medium-term financial strategy has been aimlessly drifting in ever decreasing circles until it has finally disappeared up the Chancellor's own monetary targets.
Recently, the Chief Secretary to the Treasury bravely attempted to resuscitate the medium-term financial strategy when speaking to a conference of small businesses, called "Small Businesses : The Quiet Revolution". He told the conference--I quote from his Treasury handout--
"Government policy now operates in a medium-term framework which gives individuals and firms the confidence to plan ahead." He was speaking on Wednesday 24 May, the same day on which interest rates rose to 14 per cent., the tenth such jump in borrowing costs since last summer. That is the medium-term plan to give small businesses confidence with which to plan.
I shall tell the Chancellor, who seems sceptical, what the small businesses said about his 14 per cent. interest rates. The National Federation of Self Employed and Small Businesses received the news with dismay, commenting that each percentage point increases the cost to industry by an extra £250 million. The federation complained that small businesses will be hit hardest, and went on to say that they were the pawns in the Government's move to defend the pound. So much for the medium-term financial strategy and the confidence it engenders.
I asked the National Federation of Self Employed and Small Businesses to give me an example of what it meant, which it did, calling it "Real Example No. 1". It concerns a company in Gwent, a supplier of equipment to the heating and plumbing industry. Its owner borrowed £25,000. His repayments on 19 May, when he first took out the loan, totalled £343 a month. This year, on 18 May 1989, his bank statement showed that the repayments had gone up to £552.44. He is also suffering from bad debts on the part of his creditors, because they, too, are being squeezed. If interest rates rise to 15 per cent., as the federation says seems likely, his repayments on the loan will have doubled. So much for the medium-term financial strategy and for encouraging small businesses.
The truth is that higher interest rates are a costly and ultimately futile attempt to restore confidence in the Government's failed economic policy. They will hurt British industry and British families, and especially home owners, whose mortgage misery is caused by a tax this year on home ownership--the price of the Chancellor's earlier mistakes.
Sir Peter Hordern (Horsham) : Since the right hon. and learned Gentleman is so much against high interest rates, as he openly told the House, may we take it that the Opposition's policy is a return to hire purchase controls
Column 253and to a reduction in the exchange rate, as is openly avowed by the hon. Member for Dagenham (Mr. Gould)? Is it Labour Government policy to devalue sterling against all other currencies and to reimpose hire purchase controls?
Mr. Smith : I have made it clear so often that I tire of repeating it that my objection to higher interest rates is that the Government use them as the only weapon of policy to restrict demand. I have argued that there should be alternative credit controls, and that they should not be dismissed dogmatically. Indeed, one of the delegates at the Tory women's conference spoke out to that effect, and the hon. Gentleman, like some of his hon. Friends, should be careful that he is not outflanked by a change of policy under which the Government introduce some form of credit control- -
Mr. Robert Hayward (Kingswood) : The right hon. and learned Gentleman has been on his feet for precisely 20 minutes. As this is the first economic debate since the publication of the Labour party's review, will he make clear what his party would do and what the cost of its programme would be?
Mr. Smith : I gave way in an excess of generosity, thinking that the hon. Gentleman would involve himself in the controversy in which I was engaged with the hon. Member for Horsham (Sir P. Hordern). However, if he will contain himself, I shall develop the points in our motion.
Mr. Nicholas Bennett rose --
Mr. Smith : The markets' judgment of the Government's economic policy and the resulting fragility of sterling cannot be reversed by high interest rates alone. Such rates are a recipe for further industrial decline, as soaring borrowing costs become an intolerable burden on British industry. Real confidence will be restored only when the Government start to tackle the fundamental problems of the British economy and stop indulging in what The Daily Telegraph recently called
"rhetorical self-indulgence abroad accompanied by an
ever-burgeoning culture of economic self-gratification at home"-- something with which we have grown familiar over the weary 10 years of this Government.
Real confidence will return, as those on all sides of industry know, only when we in Britain invest in the supply side of the economy with the same relentless determination as West Germany does. If we are to boost our industrial capacity and trading performance we must invest, as our motion states,
"in training, research and development, and the regions", and especially in manufacturing industry. Only investment can build the strong and competitive economy that Britain needs to meet the challenge in Europe after 1992.
Despite the Government's receipt of £78 billion in North sea oil revenues--one statistic that the Government seek to smother : we never hear the apologists in No. 10 drawing our attention to the existence of North sea oil revenues--we have massively under-invested, especially in the manufacturing tradeable sector of our economy. Investment in the manufacturing sector has only just crawled back to the level achieved by the last Labour Government, and the cumulative loss over 10 years amounts to about £18 billion of investment forgone. We
Column 254have squandered North sea oil and have failed to invest, while our major rivals without that unprecedented windfall have raced ahead. In that excess of self-indulgence which characterised his 1988 Budget speeches, the Chancellor arrogantly compared Britain's so-called economic miracle with that of West Germany. He was so disparaging as to refer to the West German economic miracle in the past tense. We have heard that the West German economy is sclerotic, arthritic and hidebound and somehow much less efficient intrinsically than the bounding, vigorous economy that characterises the United Kingdom.
Let us look at our feeble performance compared with West Germany's investment record in manufacturing, research and development and training. The share of GDP invested in manufacturing in West Germany in the eight years from 1980 to 1987 is more than 50 per cent. higher than for the same period in the United Kingdom. Is it any wonder that West Germany's share of world trade since 1980 has gone up from 19.9 per cent. to 21.5 per cent. while that of Britain has fallen from 9.7 to 8.1 per cent.? Is it surprising that our deficit in manufactures with West Germany has grown from the £2 billion that the Government inherited to the £8.5 billion that it is now?
I looked through a list of figures comparing British investment with that in West Germany, and I shall select a few. West Germany spends £432 per employed person on research and development compared with only £265 in the United Kingdom. Over 70 per cent. of engineers in West Germany have recognised qualifications compared with 40 per cent. in the United Kingdom. The figure that I find the most shaming of all is that only 30 per cent. of our work force have recognised qualifications equivalent to at least one O-level, compared with 70 per cent. in West Germany.
Let us look at West Germany's investment in machine tools. In 1987, it spent £3 billion on machine tools, compared with £670 million in the United Kingdom. West Germany now installs as many new robots every year as the total number of robots in place in Britain. Overall, machine tool purchases have increased by 100 per cent. in West Germany against a rise of only 10 per cent. in the United Kingdom. That is what is happening in West Germany. What is happening here? I hope that the House will not feel that it has to rely on any kind of biased statistic on a matter as serious as this. That is why I shall quote what the Engineering Employers Federation said two days ago in the Financial Times. It said :
"The federation predicts the negative trade balance in all engineering products will worsen by 30 per cent. from a deficit of £8.9bn in 1988 to £11.6bn this year."
It says :
"Aerospace products will be the only significant UK metal-using manufacturing sector to remain in the black in international trade this year, Mechanical engineering, for the first time in recent years, will slip into the red, moving from a positive balance of £166m last year to a deficit of £1.6bn this year, the federation estimates.
The engineering industry last had a positive trade balance, of £2.8 billion, in 1982. Last year the deficit more than doubled from £4.2 billion in 1987."
That is the sad tale of what is happening in a crucial part of our manufacturing sector. No wonder our balance of trade and our consequent balance of payments deficit are frightening.
Column 255Kingdom, of 14.5 per cent. At present, investment in British industry is at a record level. The right hon. and learned Gentleman talks about increasing investment. The only way that he would bring that about is by increasing taxation and putting public money into industry.
Mr. Smith : The hon. Gentleman does what all apologists for the Government do. He seeks to confuse investment in the manufacturing sector with investment in business overall. He includes in his figures investment in casinos, leisure developments and the like. I have concentrated on investment in the manufacturing sector. The hon. Gentleman knows, and the Chancellor will not dispute, that investment in the manufacturing sector has just recently crawled above its 1976 level.
Mr. Phillip Oppenheim (Amber Valley) rose--
Mr. Smith : I have given way repeatedly and I must get on. Instead of following the example of successful competitors the Government continue the decade-long neglect of our manufacturing industry, the internationally tradable sector of our economy. That is the fundamental fault in the British economy and the fundamental flaw in the Government's policy. They compound this error, which is right at the heart of the matter, with confusion and disarray in the day-to-day management of the economy, especially on the demand front.
Before March 1988 the Chancellor was shadowing the deutschmark at the level of DM 3 to the pound. That was until the Prime Minister brutally overruled him, as she pointedly reminded him recently. More recently, the Chancellor has been assuring markets of his firm intention to raise interest rates as high as is necessary for as long as is necessary. No doubt he will seek to make that clear again today and the markets will ask, as they ask every time he says it, whether the Prime Minister agrees with him. Two weeks ago in an answer at Prime Minister's Question Time the right hon. Lady cut the feet from under him and precipitated a currency fall which in turn brought another increase in interest rates. Hardly a day goes by when we do not have a further indication of dissent and confusion in that border zone between No. 11 and No. 10 Downing street.
Mr. Tim Yeo (Suffolk, South) rose --
On the No. 10 side of that zone there are some influential lodgers. There is Sir Alan Walters, the real Chancellor of the Exchequer, and the monetarist guru Professor Brian Griffiths. They are there to torment the Chancellor, and as he gets through and speaks to them, he no doubt remonstrates with them for conspiring against his policies. I do not envy the Chancellor in his difficulty in seeking to make some sense of the policy to which he is committed. He ought to get support from the Prime Minister once the Government have decided upon their economic policy. This country cannot have its economy managed by constant warfare between Nos. 10 and 11 and all the consequences that have flowed from that in recent months.
Mr. Ian Taylor (Esher) rose --
I thought that I had been making clear almost to the point of repetitive boredom the Opposition's commitment to tackling the fundamental problem of Britain's economy, which is the supply side problem. I am making clear not only our disagreement about the incompetent demand management that is practised by the Government but our disagreement about their excessive reliance on interest rates as the only weapon. Can we get that clear?
I should like all Conservative Members to deal with the policy. I should like them to start explaining why we invest less than West Germany. I should like them to tell us why they do not speak up for small businesses, which complain so vociferously about the effect of higher interest rates. [Interruption.] Perhaps the next time that I meet a representative of small business I will tell him that the hon. Member for Dover (Mr. Shaw) laughed when I raised this matter.
Mr. David Shaw (Dover) : Will the right hon. and learned Gentleman accept from a small business man that the Labour party policy for the small business man has been a total and utter joke throughout the party's history? The Labour party has never had any policy to help small businesses and its 1979 and 1983 manifestos had nothing in them about small businesses.