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Mr. Letwin: We cannot allow this golden opportunity to pass without asking the hon. Gentleman whether he would like to statefor the first time ever, I thinkwhether the Liberal Democrat party also has an exchange rate policy, and if so, what is the target exchange rate?
Mr. Davey: I am sorry to disabuse the hon. Gentleman, but in several speeches Liberal Democrats have explained our exchange rate policy. In the debate on the economic aspects of the Queen's Speech, my hon. Friend the Member for Truro and St. Austell (Matthew Taylor) set out our policy clearly, but so that the hon. Gentleman does not have to consult Hansard, I shall remind him of what my hon. Friend said.
About 18 months ago, the Liberal Democrats commissioned a panel of experts to consider what preparations the UK should makeincluding in respect of the exchange ratebefore putting the question on joining the single currency to the people. That panel proposed a range of values1.25 to 1.45 euros to the poundat which it thought that, if the UK entered the single currency, it would do so at a competitive rate.
That conclusion was published about a year ago, so it might now be out of date, but our aim in appointing the panel and publishing its conclusions was to start a debate in this country on what might be a sustainable long-term exchange rate for the pound against the euro. That is a debate in which we would be happy to engage and one in which we hope the Conservatives and the Government will engage as well, because it is extremely important that we start to influence our EU partners in terms of a sustainable rate.
Mr. Davey: Again, I refer the hon. Gentleman to the speech made by my hon. Friend the Member for Truro and St. Austell. Liberal Democrats have said that the very fact of the Government saying that they intend to join the single currency and putting the issue to the people will cause a market correction.
If the hon. Gentleman doubts that, I refer him to events that took place several weeks ago. After the Labour Government were re-elected, the markets assumed that it was more likely that the UK would enter the single currency and the pound-euro rate adjusted very quickly. Bizarrely, Her Majesty's Treasury and the Bank of England stepped in to stop a depreciation in the pound, even though that depreciation was welcomed by the manufacturing sector, agriculture and the tourism sector throughout the countryindeed, it was a depreciation that people had been seeking for some time.
Mr. Davey: Indeed, including people in the hon. Gentleman's West Dorset constituency. That was a valuable depreciation. That chain of events reinforces our argument that if the British Government could come clean and get rid of the ambiguity that surrounds their positionit is the only thing about their position that is clearthe markets would adjust. Then, we could begin a debate with the markets, with our EU partners and within the House on what would be a sustainable rate at which we might enter the single currency.
Mr. Letwin: I assure the hon. Gentleman that I shall not pursue this issue more than one step further, but it is important that we know the answer and we appear to be getting somewhere. If the medicine that he has just recommended did not, in his view, cure the patientin other words, if the statement of a target rate of entry did not produce an adjustment to that ratewhat other active steps, if any, would the Liberal Democrats recommend taking to manipulate the exchange rate?
Mr. Davey: The hon. Gentleman should talk to those of his colleagues who set the rate for sterling when we went into the exchange rate mechanism. They did not have measures to manipulate the rate; instead, the Government fixed a rate. Unfortunately, when fixing the rate, they failed to carry out proper negotiations with our EU partners and the other members of the exchange rate mechanism. Instead, in a move that caused great problems, they told our EU partners, "That's the rate we're going to go for."
To answer the hon. Gentleman, it is possible that the Government could take that line. If they did not think that the market rate was correctthat it was either too low or too highthey could set a rate by negotiation with our EU partners. Indeed, that is what several countries did in the run-up to the adoption of the euro in mainland Europe. They made clear their decisions as to which direction they wanted to take, so the markets glided into sustainable rates.
The problem, and the problem with the document, is that the UK Government are not attempting to do that: there is no attempt to influence the medium-term equilibrium exchange rate for sterling and to ensure that our negotiations are built on past statements. Both last year and the year before that, I made that point in Committees that were undertaking a similar function to the one in which we are currently engaged. At that time, the Red Book seemed extremely complacent about the exchange rateworryingly sobecause the rate was causing such great problems. However, the Government's pronouncements in the Red Book seemed to deny those problems. I pointed out to the Government that it was against Britain's long-term interest to send documents to Brussels and Strasbourg stating that the current rate of exchange was not a problem.
When those negotiations take place, our European partners will be able to dust down those documents, which we think are of no concern, and will say to the UK Government, "Hold on. In 1999, in 2000, in 2001, you sent us a document which said that the exchange rate was not a problem. You said that it was not affecting your tradeable sector, your agriculture and your tourism." That would weaken our hand in negotiations. It is a very silly thing to do.
Mr. Barry Gardiner (Brent, North): Although I hesitate to support the hon. Member for West Dorset (Mr. Letwin), the hon. Member for Kingston and Surbiton (Mr. Davey) has still not answered the question about Liberal Democrat policy: if the markets did not glide into the appropriate exchange rate that he identifies as Liberal policy, what further active measuresif anydoes he suggest that a Liberal Government would pursue in order to achieve that effect?
Mr. Davey: Let me surprise the House by giving the hon. Gentleman a direct answer. He was not listening properly to my reply to the hon. Member for West Dorset. We would negotiate a rate. The rate would be fixed when we decided. That rate could be higher or lower than the rate obtaining in the market at the time. We should have to see what the rate would be.
The serious point is that this document, which we propose sending to Brussels and Strasbourg, will be of no benefit for the long-term negotiating position of UK Ministerswhatever the Government. We are saying to our European partners that we are happy with sterling so over-valued. That message will come to haunt us.
When the House votes on the motion, Members on the Liberal Democrat Benches will vote against it. The document does the Government no favours in the way that it sets out the UK's economic position for our EU partners. That will prejudice the long-term interests of this country.
Mr. Desmond Swayne (New Forest, West): My hon. Friend the Member for West Dorset (Mr. Letwin) was forensic in exposing the imbalances in the economy to which the Financial Secretary did not draw attention. I share one particular view with my hon. Friend: I am not too concerned about a trade imbalance, if it can be
I shall concentrate on a slightly different aspect of the Minister's remarks. She set out cogently the objectives of the processto maintain quality of life and what she called a high level of social protection. She drew attention to the Government's ability to spend, for example, £1 billion more on the health service as a consequence of the Budget.
The Government's chosen measure of that high level of social protection and high quality of life is the health service. That is reflected in the Prime Minister's words when he promised the people world-class public services. In other words, we must compare our public services with the best. In comparisons in terms of outcomes, we are way behind those in whose league we should be. The Government, however, have chosen to measure by input and throughput. The input measure that they chose was the average spend as a proportion of gross national product on, for example, health care.
The hon. Lady's £1 billion will not take us very far. The Government chose as a measure the average EU spend on health, but their method of measuring the average was a little awry. For example, according to the Government, the way to measure the average health expenditure of Belgium and Germany is to add the two together and divide by twonot a very precise measure of actual expenditure in those two economies on any weighted basis.
The other trick is to include the United Kingdom in that equation, so that our lacklustre performance brings down the average that is to be our target. If we removed those distortions from the Government's calculations, I suggest that to reach the level of gross national product spend that should be the Government's target if they adhere to the criterion of world-class public services, they would need to spend another £20 billion a year. To make that up would require much more than the £1 billion to which the hon. Lady drew attention. A 30 per cent. increase in income tax would be necessary.
The Government have ruled out the possibility of that additional resource coming from any source other than public revenue. The proportion of GNP spent by other European Governments on health is broadly the same. The difference comes from the additional resources that our economic partners get largely from private sources, which we continue to deny ourselves. On 26 June the Secretary of State for Health said in the Chamber that happily, health provision in this country is through a monopoly supplier in the form of the NHS, and so long as there is a Labour Government, that will remain.