Mr. Lawson : Higher interest rates have already had a marked effect on the housing market, which is overwhelmingly the principal engine of consumer credit in this country. And the effect will intensify in the new year, as building societies introduce the higher rates for existing borrowers who have hitherto largely been shielded from the rates that new borrowers are already paying.
I have to warn my right hon. and hon. Friends that this will not make us popular. But, as a Government, we have never shirked taking unpopular measures when these are needed. And this is needed now, to defeat the scourge of inflation, which is precisely what it will do. Nor, incidentally, are credit controls any alternative. Having created the most dynamic economy this country has known by our progressive abandonment of Socialist controls, the last thing we want to do is to go back to that dead end. But even if it were thought desirable, it would not work.
Nowadays, 80 per cent. of all household borrowing is on mortgages. So nothing could be effective that did not cover mortgage lending, too. And to be really effective, as well as equitable, contrary to the bizarre scheme dreamed up the other day by the Leader of the Opposition, it would have to cover existing borrowers as well as new borrowers.
Moreover, all the well advised would readily be able to avoid United Kingdom controls, for example by borrowing offshore--unless, of course, it is suggested that exchange controls should be reimposed at the same time.
The truth of the matter is that interest rates are a singularly well- directed instrument of policy. What the hon. Member for Dunfermline, East totally failed to realise in his earlier remarks is that unlike in 1980, when the company sector was in poor shape and the household sector was a net saver rather than a net borrower, today the company sector's finances are unprecedentedly strong, while the household sector has become, for the first time ever, a substantial net borrower. So it is on consumer spending, and not corporate spending, that higher interest rates will have their principal effect.
Mr. Lawson : The hon. Member for Dunfermline, East seemed concerned about the regional balance so I trust that he will listen to this. Even the regional impact of higher interest rates is well directed. For it is in the south of England that borrowing has risen most, and it is also in the south of England where mortgages in excess of £30, 000, the limit of tax relief, are most prevalent. So it is in the south that higher interest rates will have their greatest impact. The plain fact is that there is no alternative to the use of interest rates to keep the economy on course ; and it works, which, of course, is why all other well-conducted
Column 594economies rely on it--most recently the United States, which only yesterday, like us, raised its interest rates to their highest levels since 1985.
And what of the current account of the balance of payments? [Interruption.]
Mr. Lawson : It is important to recognise, first, that a current account deficit is not like a company running at a loss. It is more like a company that, though profitable, cannot finance its investment programme entirely from its own resources, and has to raise funds from the market to fill the gap. A country in a similar position will draw on the savings of the world, which has been greatly facilitated by today's global markets.
Unlike the United States today, however, or the United Kingdom in the 1960s and the 1970s, the present current account deficit is not the counterpart of a capital inflow to finance a budget deficit. On the contrary, we have a substantial budget surplus, which I-- [Interruption.]
Sir Peter Tapsell (East Lindsey) rose --
Our present current account deficit is the counterpart of a capital inflow which is financing a purely private sector deficit : the gap between private sector savings and private sector investment. And this gap in turn has arisen, not so much because private sector savings have fallen, but because private sector investment has risen to some 16 per cent. of GDP, the highest figure ever.
Sir Peter Tapsell rose--
This does not mean, of course, that the current account deficit is sustainable indefinitely. But what it does mean is that it will in due course correct itself, as personal savings rise again, not least in response to the higher level of interest rates and the end of the great housing bubble. And meanwhile, it is readily financeable. Our reserves stand at record levels. Our net overseas assets are second only to those of Japan. The world has confidence in us. And sterling is strong-- [Interruption.]
Mr. Lawson : As I was saying, our reserves stand at record levels. Our net overseas assets are second only to those of Japan. The world has confidence in us. And sterling is strong. Moreover, I am determined that it shall stay strong for the indefinite future-- [Interruption.]
Those with long memories will know that there is no such thing as a balance of payments crisis ; there is only a sterling crisis. And that there is not -- [Interruption.]
In short, as we win the battle against inflation, the balance of payments will take care of itself.
Finally, the hon. Member for Dunfermline, East sought to make a great song and dance about the inaccuracy of Treasury forecasts. The Treasury forecasts in March, in particular, were indeed inaccurate, as, equally, were all the outside forecasts that were made at that time. But I think it is worth pausing a while to see what we got wrong in the forecast. Certainly we underestimated the growth of total consumption. We forecast that it would rise by 3 per cent. : it now looks as if it will have risen by 1 per cent. more--4 per cent.
But the big mistake was in our forecast of the growth of investment. We forecast that that would rise by 6 per cent. In fact, it now looks as if it will have risen by at least 12 per cent., an error of at least 5 per cent.
That is why overall spending in the economy has been so high, and why imports have risen so fast. Exports this year have been at all-time record levels, with the deficit entirely attributable to the sharp rise in imports.
I ask you, Mr. Speaker : would it really have been better if investment had risen by only 6 per cent. in line with our forecast? Would that have been better?
Mr. Faulds : It is extremely valid, Sir. As the only person who can benefit from this performance is the right hon. Member for Hertsmere (Mr. Parkinson), can we take the rest as read and proceed to the debate?
Mr. Lawson : Let me--although I know it is painful for the Opposition--take them back to the period of the last Labour Government. So far as I can recall, their forecasting record was consistently abysmal, but I have not looked it up recently, so let us suppose that in fact they had got all their forecasts exactly right, to the last decimal point. Let us just suppose that. Would that have made their lamentable economic performance one whit less bad, the explosion of inflation one jot less appalling, and the stagnation of living standards one iota less depressing? Of course not. What matters is not economic forecasts, whose fallibility I have always been the first to proclaim, but
Column 596economic performance. That is what matters. And the plain fact is that the performance of the British economy over the past five years has been outstanding.
During that time, economic growth has averaged 3 per cent. a year, with inflation in low single figures--a combination we have not known for generations. As a result, there are today more people at work in this country than ever before in our history, and unemployment continues to fall, as it has done consistently, ever since the hon. Member for Dunfermline, East predicted, in his characteristically forthright and mistaken way :
"The Government simply cannot reduce unemployment by present policies".
Since then it has fallen every single month. But you know, Mr. Speaker, it is a funny thing that time was when we heard about nothing but unemployment from the Opposition spokesman during an economic debate. That used to be the pattern. We have heard little about it today--nothing, as far as I can recall--and it is not mentioned once in the Official Opposition amendment. I wonder why. The plain fact is that we welcome the fall in unemployment, even if the party opposite does not.
And what about the nature of the growth we have been enjoying as a nation? I mentioned the rapid growth of investment this year--the biggest increase for at least 20 years. The hon. Member for Dunfermline, East tried to pretend that this was some flash in the pan--that it had suddenly happened this year. That is totally untrue. It is part of a consistent pattern.
Over the past five years as a whole, investment in this country has grown very nearly twice as fast as consumption, which is a very sharp contrast with the performance of the last Labour Government, when consumption, admittedly, grew fairly slowly, but investment scarcely grew at all.
So much for the economically illiterate cry of the hon. Member for Dunfermline, East that what we have is a short-lived consumer boom. That is what he said, and the whole House heard him. It is, in fact, the longest lived investment-led expansion the British economy has experienced for decades.
The only thing that is short is the period since hon. Members opposite first could bring themselves to recognise that the British economy was expanding at all. But then they are very slow. They have only now stumbled, I read, on the phrase "supply side Socialism", at a time when, for the first time ever, the supply side of the British economy has been transformed, with record productivity growth, record investment, sweeping tax reform, including the ending of penal rates on enterprise, a budget surplus with all the strength that brings, record profitability, and an economy freer of unnecessary restrictions and controls than at any time since the war. Not least by throwing out the Socialist impedimenta they now seemingly wish to bring back, we are well on the way to a supply-side miracle that has the admiration of the world. Compared with what we have achieved here over the past nine and a half years, and will continue to achieve, the slowing down of the growth of demand which is currently required is a simple and straightforward task.
As the Gracious Speech which we are debating today demonstrates, after more than nine years of office it is still this Government who are generating the new ideas and setting the national agenda. We can do so above all because we have the firm foundation of a strong economy and a sound economic policy, one which commands the
Column 597confidence both of the British people and of the world. That is why we will be victorious not just in the House tonight but in the country in the years to come.
Mr. James Molyneaux (Lagan Valley) : The Chancellor will be well aware that, from 1979, the Treasury received strong support from my party for the doctrine that an annual inflation rate of even 3 per cent. was unacceptable, simply because such a rate halves the value of money within rather less than 25 years. A former occupant of this Bench, Mr. Enoch Powell, was less than successful in preventing the Government from diluting another tenet of economic fact, that inflation is caused by Governments and not by trade unions, employers, bankers or business men.
Over the years, the real culprits have been Governments. In their earlier years, the Government appeared to understand that fact well. Only as a kind of afterthought did they depart from the true faith and begin to babble about wage increases and the like. Although it was always clear that the Chancellor was taking risks with inflation and that, in part--but only in part--his risks have created the present situation, in the end, the real offender will probably turn out to be an obsession with the exchange rate of sterling.
I have not been persuaded that any of the suggested remedies or alternatives to interest rates would succeed in halting and, eventually, reducing inflation. I do not deny that high interest rates can have a painful effect, but roaring inflation on the scale that was experienced in the 1970s would be infinitely more painful to a far wider range of people, including in particular the poorest in our society.
Whatever may be the remedial measures that he has chosen, the Chancellor and his right hon. Friend the First Lord of the Treasury will have my party's full support in resisting the seriously flawed advice of Lord Cockfield. Only a week ago, that outgoing Commissioner asked :
"Why should trade and industry in Europe be denied the immense advantages of a single currency simply to preserve the sovereign national rights of finance Ministers to mismanage their affairs?" My answer to his Lordship is that the sovereign national rights of Finance Ministers rank high on our list of priorities. I trust that other right hon. and hon. Members share my conviction.
We are not debating constitutional issues, but, for Treasury control, the threat is real enough. In the debate on the European Communities (Finance) Bill on 27 October 1988, the hon. Member for Newham, South (Mr. Spearing) used a telling phrase. He said : "Powers that we think lie with Whitehall are moving."--[ Official Report, 27 October 1988 ; Vol. 1461, c. 521.]
To any Britisher, that is a chilling phrase.
Lord Cockfield's impatience demonstrates that he knows the truth of that phrase. His complaint is that the powers are not moving fast enough. His bribe to the Treasury is that, if sterling were linked to other European currencies, we would have assistance in forcing sterling down. The Cockfield outburst is of particular interest to the regions of the United Kingdom. If his intention is to deprive the Treasury of what he called sovereign national rights to raise revenue, it follows that the Treasury will
Column 598have to surrender its right and, in the case of the regions, its duty to allocate moneys to benefit those parts of the nation that have suffered greatly through the encroachment of the European Commission into most aspects of decision-making in member states. One of my reasons for opposing entry in 1972 was that membership would have the effect of tilting the map table of the United Kingdom towards the south- east, resulting in all the counters sliding towards that corner of England. That belief was not denied then and cannot be denied now that the prediction has been fulfilled. The Government are justified in compensating the regions of England and the other regions represented by the parties situated below the Gangway. I know that I shall be told that the EEC specialises in dispensing charity in the form of regional funds. It would be more accurate to say that, thanks to the determined efforts of the Prime Minister, the nation gets some of our own money back through various channels, schemes and devices.
Would any right hon. or hon. Member concede that the gentlemen in Brussels always know best? Can they really judge the needs of a given constituency better than the Member elected to represent that constituency in this House? I trust that whatever our disagreements in this debate we can at least firmly resolve to preserve the "sovereign national rights" of the Chancellor of the Exchequer and his Treasury colleagues to act in the best interests of the United Kingdom, after taking into account the advice which has been tendered and no doubt will be tendered today.
I trust that the House will feel that I have made a reasonable case for sympathetic consideration to be accorded to the financial needs of the regions. As one would expect, the Gracious Speech avoids inter-party argument over what was called by a former Prime Minister, the "governance of the United Kingdom". But we do the United Kingdom no service if we ignore the political and constitutional considerations which have emerged since the dissolution of the last Parliament. The general election results do not endanger the integrity of the United Kingdom, but real danger could arise from a perception that those results are being ignored. Such a perception should be, and I hope will be, treated with great sensitivity because if it is not, real or imaginary grievances will build up to resentment over the remaining years of the present Parliament to such an extent that there will be a feeling that something has gone profoundly wrong with our common Britishness.
This is not the occasion to propose new structures, but perhaps a pointer may lie in the reference to Northern Ireland in the Gracious Speech which reads that the Government will continue
"to give elected representatives greater involvement."
The Single European Act has curtailed that involvement and influence of Members of Parliament in this House, and in local government there has been an erosion of the involvement of elected representatives. As a first step we must halt the drift and then as parliamentarians, hopefully together, carefully consider how we can reinvolve elected representatives in structures that will be of a pattern common to the component parts of this United Kingdom. 4.54 pm
Column 599misapprehension in believing that we have no say in the regional grants which are made by the European Community. We have always been able to deal directly with them and they certainly affect Northern Ireland. I would have thought that the right hon. Gentleman would have been prepared to acknowledge the considerable help that Northern Ireland has received from these grants, which have particularly helped its development and its industries. He cannot have any grumble about the arrangements that exist and I do not see that he should regard this as a basic challenge to the sovereignty of the United Kingdom, let alone the position of Northern Ireland. No one would regard the present position in Northern Ireland as entirely satisfactory constitutionally, but that is not a reflection on the European Community. Nor does it greatly help to underestimate what the Community does and is prepared to do in regional policy throughout the country.
I hope that it will not embarrass the Chancellor of the Exchequer if I say that I have considerable sympathy today with his position. Only a few short months ago he was the jewel in the Prime Minister's crown, even if it were pushed a little to the side. Now he is subject to criticism far and wide and largely from his hon. Friends who at the last Budget loudly supported what he was doing. Therefore, I have genuine sympathy with him in the vicissitudes that he is now undergoing. With his knowledge of financial history he will be among the first to agree that his predecessors since 1945 have, almost without exception, undergone the same vicissitudes. What interests me is not so much a condemnation of what the Labour party has or has not done, but how this present difficulty compares with others in the past. There may well be lessons to be learned from it.
In many ways the problems of the present position are on a higher level than ever before. The present position has arisen with unemployment still at 2.1 million. In November 1973, on the then means of calculating unemployment, it was just over 400,000. The Chancellor smiles, but it is not a matter for smiling. That shows one very different factor in the economy at that time. The scale of our present balance of payments deficit was unknown previously. In 1973 the deficit was £112 million whereas now it is already £12.43 billion. Both those factors emphasise my point that these events are happening on an entirely higher level than previously.
Similarly, we lost 20 per cent. of our industrial base at the beginning of this decade because sterling was allowed to rise far too high in relation to the dollar, as many of us said at the time, and our industry was destroyed. Much of our industry believes that it is in the same position today and that with the continuous increase in interest rates much of it is under threat and will be unable to survive. That undoubtedly applies also to many small firms, some of recent creation. That is a bigger threat than previously and all those matters must be taken into account.
At the end of the Chancellor's speech I found myself asking : "Is this a serious position or is it not? Is it serious or even critical or is it not?" The question is important because, whatever policies the Chancellor follows, he must carry the British people with him. Psychologically, the people of Britain are not prepared for a difficult position, let alone for a crisis. That is obvious from their attitude to consumer purchasing.
House ownership has been affected much more. It is no consolation to those who have taken the advice of the
Column 600Government and bought their own houses, and whose incomes have been so drastically hit by the increase in mortgage rates, to be told that the value of their houses may have increased. The logical deduction is that they can meet their mortgage repayments only by selling their homes, and for most people that would not be a satisfactory conclusion.
One reason for the acute increase in the price of houses has been the shortage of housing, caused not only by the actions of the Chancellor but by actions stretching back over the decade, with local authorities being unable to maintain the supply of houses, many of which have been sold, rightly, to private owners. Nor have construction firms been building as many houses, often because of the increase in interest rates. That has undoubtedly led to the enormous increase in house prices, which may be stabilised--I doubt whether it will be reduced--by the increase in interest rates. A pattern has been developing during the past few years, and it will take a considerable time to put matters right.
The Chancellor ended his speech by saying that it was a perfectly simple and straightforward problem with a perfectly simple and straightforward answer--put up interest rates. It is difficult to share his simplicity of mind, understanding of and approach to the matter. To me, it is much more complicated.
The Chancellor started by saying that there will be no change in policy. There was a noticeable silence among Conservative Members when he said that. The Chancellor has put himself in a very strict, tight box in which he has only one policy. He has insisted, to the disappointment of many in the country as well as in the House and perhaps in the City, that that policy will continue. In golfing terms, the Chancellor could be described as a one-club man, and that club is interest rates. But if one wishes to take on Sandy Lyle and the rest of the world one needs a complete bag of clubs. The Chancellor flatly refuses to have that. He has turned down any other measures to influence the economy.
One reason why I doubt whether interest rates will have the desired effect is that it has not come home to the people of Britain that this is a critical position about which action must be taken. Interest rates will continue to increase to 14 per cent., and perhaps to 17 per cent.--the highest level under this Government--with all the consequences of damaging investment in our industry. The pound will rise so high that our exports will be damaged. The problem with the balance of payments is caused not only by consumer imports, because we no longer have an industrial base to supply our consumers, but by the loss of exports.
Mr. Cash : I would not wish to do that. Does my right hon. Friend agree that the argument about the quality of British industry relates not only to the Treasury but to what industry itself produces? One of our greatest problems is the fact that British industry has not responded to the challenges that have been offered to it during the past 10 years.
Column 601is why I started my speech by saying that present events are happening against the background of problems at a much higher level than they were on each previous occasion on which a Chancellor has faced such vicissitudes.
What is the solution to the problems of British industry and its capacity for exporting? We must not forget that, even when industry is efficient and produces quality goods, its exporting capacity is damaged because of the currency rate.
The Chancellor did not mention the fact that, our interest rates having been increased, the Americans are following--
It is important to ask how much the Americans will have to increase their interest rates to deal with their problems. The Chancellor seemed to be comparatively happy with the American problems. But I doubt whether anyone would wish to be in Mr. George Bush's position now, let alone the position that he will occupy in January, with a budget deficit of that size and a soaring balance of payments problem. It is a terrifying thought that we are entering a currency and interest rate race with the Americans.
Although the Chancellor does not wish to agree with me, I believe that the position is critical. He wants to tell the country, "Keep your nerve and everything will be all right." That is incorrect. To get the country to respond to the measures that must be taken it must be told that the position is critical. The Chancellor must become a full-set-of-golf-clubs man and must use measures in addition to interest rates. For example, I see no difficulty in reducing the credit that is provided. The City believes that and all the experts agree. One can deal with any form of credit if one has the will.
Mr. Neil Hamilton (Tatton) : We are all grateful to my right hon. Friend for being here today and for the consolidating effect that his speech has had on the Conservative Benches. In the absence of exchange controls, which existed when he was Prime Minister but which do not exist today--nor, given his enthusiasm for Europe, would he wish to reintroduce them--how could he make those credit controls effective?
Mr. Heath : Through our banking system--certainly for ordinary credit card holders and consumers. I shall be told that that affects only 5 per cent. of credit, but in these circumstances 5 per cent. is important. The availability of credit is increasing quickly, and the Chancellor cannot dismiss the fact lightly. Most credit card holders would not have a clue what interest they pay on their cards. Some of them might be aggrieved if they knew the rate that they must pay. Credit is an important factor in consumer purchases, which the Chancellor has said he wants to reduce.
The Chancellor said that we have an enormous budget surplus. That is true, but for years we have urged that that money be directed to the infrastructure, which does not cause great import demand and is only the first stage
Column 602towards consumption. But the infrastructure has been neglected. The south is overcrowded and the north is not, because regional policy has been deliberately neglected.
The country must be warned that it will take a considerable time to resolve the problems. We cannot use only higher interest rates, because when the rates start to take effect we shall have a smaller industrial base, higher unemployment and, because of the level of our currency, our exports will have disappeared. That has been the process in the past and there is no reason to doubt that there will be a repetition of that process in the next few months.
My last comment is about Europe, which has already been mentioned. We must take action over Europe. We cannot go on with a situation in which so much misinformation is being provided to this country about the European Community. Of course there are opponents in the Opposition and on the Government side, but we are indissolubly linked to the other members of the Community by treaty and by the Single European Act, which was ratified by the House. Our job is to make it work. That is what the other member states expect of us. In the worst situation, in which we are not prepared to go along with 1992, the others will go themselves.
Let us look at the position of the Chancellor and the Governor of the Bank of England about establishing a European central bank and a European single currency. My right hon. Friend the Chancellor knows that these things are inextricably bound up with one market. [Interruption.] With respect to my right hon. Friend, I shall argue it out with him at any time.