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We have all received stacks of those letters. People all over the country have received such material and, along with the tax cuts, these letters create a spending climate. [Interruption.] I must state that I have never paid a penny in interest on a credit card nor have I responded to the invitations from the National Girobank. The effect of all this is that tax cuts began to fuel consumer spending before the money was in people's pockets. They had that effect before the cuts fed through into pay packets and the effect has continued. Alongside that, there was an abandonment of any real monetary strategy. The only monetary target now referred to is M0, which does not even involve the bank loans or other means of consumer credit. That is a recipe for inflation by anybody's reckoning. That is classic text book, demand-led inflation. Too much money is chasing too few home-produced goods. That problem will now be compounded by the Chancellor's measures feeding through wage bargaining. The Chancellor is trying to be a post- Keynesian by downgrading demand management to something which he believes is not an essential responsibility of Government. In fact, he has turned himself into a pre-Keynesian by ignoring the effect of fiscal policy on demand in the economy. We are now paying the price for that, and what a price. There have been crippling increases for home buyers, especially those in the south-east, who, because of high house prices, have had to lay out very large sums of money and are committed to the hilt. There has also been a further twist to next year's inflation spiral. I do not know how the Chancellor can say that that is not inflation as other countries understand it. In this country it is Government policy hugely to increase home ownership and in this country home ownership depends on mortgages. Therefore, for many people inflation is drastically affected by the level of house prices and interest rates.

Along with all that there is a potentially serious restraint on investment, especially in smaller businesses. The right hon. Member for Chingford referred to the chairman of GEC. They both speak from the vantage point of being members of the largest companies who, as a result of their exchange rate activities, are best able to insulate themselves from these problems and whose cash flow is the most comfortable at the moment. However, many medium-sized and smaller businesses and many innovative businesses are facing the greatest difficulties in investment in the present circumstances.

There will be short-term upward pressure on sterling which threatens the competitiveness of manufacturing industry. The Chancellor's forecasts are suffused with optimism. I believe that there will be a much larger trade deficit than the Chancellor predicts, that there will be lower output growth than he hopes for and that all this could actually take us to a sterling crisis. It is such a dangerous mix that, rather than be advised from the Opposition Benches to resign, the Chancellor might do well to take that job in the City now and not be around when it all comes to the boil. The Chancellor is arrogantly unrepentant. The key passage in the Gracious Speech states that public expenditure will continue to fall "as a proportion of national income, thus providing scope for further reductions in taxation, as and when prudent."

Presumably the Chancellor thought that major tax reductions were prudent in the spring which does not say

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much for his grasp of prudence. He is like someone convicted of driving through red lights who causes a serious accident and who says to the court, "I'll do it again whenever I think it's prudent to go through the red light." That is the message in the Gracious Speech. What measures could the Chancellor take now to have some effect on the crisis which would make him less dependent on interest rates? First, he could make it quite clear that there will be no income tax cuts next spring unless there is a major turn-round in the economy which none of us, not even he, is now predicting. If he finds any scope to cut the burden of taxes, he could look to employers' national insurance contributions and offer some relief on savings. If he feels it necessary, there are some areas in which he could make useful changes.

Secondly, he could take urgent measures to boost savings. It is evident that high interest rates by themselves have not prevented us from having a very bad savings ratio. He should stop dropping hints about means testing pensioners' benefits. That leads people to believe that saving is not worth while. I am sure that Conservative Members find, as I find, constituents coming to them saying that they have saved all their life but now find that the little bit in the bank stops them getting help even to insulate the loft, let alone receiving benefits being received by people who in reality are better off than them. Many of my elderly constituents have told me that. The Chancellor is creating a spending climate which does not support saving. He should reverse that and go further by looking for new tax reliefs which offer opportunities to people whom the personal equity plan scheme will not reach. There are opportunities for a much wider range of personal savings designed to shift that adverse savings ratio.

Thirdly, the Chancellor could call in the credit-giving institutions to discuss how credit expansion can be restrained so as to avoid the necessity for cumbersome, uneven and inequitable credit controls. I am no enthusiast for credit controls and I share some of the Chancellor's misgivings about their effectiveness. However, it must be said that credit controls which have some uneven effects might in some circumstances be better than none at all even if their effect was incomplete. However, that is not a measure I would like the country to adopt if we can possibly avoid it. Let us start talking. Let us see the Chancellor and the Bank of England talking to the banks and credit-giving institutions about the kind of nonsense that I read to the House earlier and the high pressure to borrow and spend. Otherwise those institutions may find themselves talking to the Chancellor about cumbersome and highly inconvenient credit control arrangements which the Chancellor may have to devise as an emergency measure.

Fourthly, the Chancellor could show some evidence that he is starting on some of the major long-term tasks that are woefully absent from the Gracious Speech. There should be real efforts about skill training, research and development, investment, improvement in labour mobility and an attack on the regional maldistribution in the economy. He should embark on tax and benefit integration, which will help to ensure that benefits are directed to those who most need them and ensure that they are taken up. He should address, like the right hon. Member for Old Bexley and Sidcup (Mr. Heath), the question of the European monetary system. The Chancellor is making it harder to get Britain into it at the

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moment. It was ironic that the Prime Minister's only stated reason earlier for Britain not entering the exchange rate mechanism was that the Germans might force us to press down more firmly on inflation than the British Government would want. That is an extraordinary argument for us to have been kept out of the exchange rate mechanism for so long.

Then I want to see the Chancellor attacking monopoly instead of creating more and more and transferring it from the public to the private sector virtually unscathed, as has been the Government's record. Attacking monopoly is one way of attacking inflation, because monopoly is one of the means by which unrealistically high prices are sustained.

I should like to see the Government embarking on many of the wider long- term measures that have economic importance, to which our amendment refers. We have tried to set out some alternatives, a task for which we are equipped. The official Opposition, on their own admission, got it wrong at the election. The hon. Member for Dagenham (Mr. Gould), in a paper which seems to have gained wider circulation than he intended, said :

"Before the last election we were vulnerable to the charge that by proposing to raise public spending as a means of reducing unemployment, we were ready to take risks with inflation and the balance of payments."

The hon. Gentleman is now engaged on a perfectly proper and honourable search for alternative measures to those that the Labour party advanced at the election. The problem that he faces is that they have no real ideological base. If he shifts away from the ideological basis on which the Labour party is founded, he will have some difficulty in finding an alternative. That is why I feel much more comfortable advocating policies based on the individual in a free society and in a free market, policies that build on the capacity of individuals to work together to build a fairer society and stronger communities and to obtain a cleaner environment, if those individuals and communities are given power and responsibility.

A primarily collectivist society is not a worthwhile or electable alternative. Ours is, and it is the only viable alternative to the most centralising and arrogant Government in modern British history. It is not just the Chancellor who deserves to go, it is the whole lot, some of them on the ground that they have allowed their Government to bring in measures in which they cannot possibly believe. I urge the House to support the amendment in the name of my right hon. and hon. Friends.

6.1 pm

Sir William Clark (Croydon, South) : I agree with the criticism made by my right hon. Friend the Member for Chingford (Mr. Tebbit) of the hon. Member for Dunfermline, East (Mr. Brown) that he made no alternative suggestion about how our economy could be improved. My right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) drew our attention to 1973. But, as has been pointed out before, after the U-turn, 1973 did not help our economy much at all. In fact, it subsequently led to our defeat. I am sorry that my right hon. Friend is not here, but he may have noticed that during his speech most of his support came from the Opposition rather than the Conservative Benches.

The Labour party's remedy is more taxation. That is always its stance. There is no question but that these were

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unexpected trade figures and they need more analysis because there must be statistical distortions. High imports, as my right hon. Friend the Chancellor has pointed out on many occasions, are caused not by the Government but by the private sector. There is tooling-up and restocking and last month's figures could have been affected slightly by the postal strike. However, having said all that, the figures are still high and some, including the City, are not sure whether our figures are accurate.

We cannot run the deficit too long, but, as has been pointed out, it is sustainable. At the moment, our gold and dollar reserves are approaching £30 billion and our overseas assets, which have been largely built up since 1979, are approaching the £100 billion mark. There is no crisis, as Opposition Members try to point out. The Opposition and the media have played up the matter, certainly the debate, out of all proportion to the facts of the case.

To a certain extent the deficit is being financed by money coming in from overseas and that shows that the foreigner, if not the Opposition, has confidence in Britain's economy.

Dr. Jeremy Bray (Motherwell, South) rose --

Sir William Clark : No, I shall not give way. We have been asked to be brief, so if the hon. Gentleman will excuse me I would rather not give way.

As has been pointed out, the latest increase in interest rates has slowed down high street sales. I agree with my right hon. Friend the Member for Chingford that the effects of the latest increase must come through the pipeline. Imports ordered today do not arrive for another two or three months and it is only then that we shall know the figures. There is no question but that the property boom has been stopped, but consumer spending has not. I agree that consumer spending has not been sufficiently curtailed. Consequently, the Chancellor was right to increase the base rate from 12 per cent. to 13 per cent.

It is all very well Opposition Members, and, indeed, some of my hon. Friends, criticising the Chancellor. It is easy to criticise with hindsight. If each of us knew yesterday what we know today, we should all be millionaires. It is easy to know the answer after the event. At the time of the Budget, as the Chancellor has tacitly admitted, future growth in the United Kingdom was miscalculated. Because of that, Britain is now suffering not the "stagflation" that we suffered under the previous Labour Government and successive Labour Governments but "boomflation". [Interruption.] It is easy for Opposition Members to smile and laugh.

I regret that my right hon. Friend the Member for Old Bexley and Sidcup did not mention one good thing about our economy. He did not mention our production, investment, standard of living and the profitability of companies being up and unemployment being down. Such things should be said by a leading statesman such as my right hon. Friend. Consequently, when he makes such a speech it does our economy and our standing in the world no good at all. In fact, the underlying strength of our economy is the envy of the rest of the world and I and most people are convinced--

Dr. Bray rose--

Sir William Clark : No, I shall not give way. I do not have time.

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We must also remember that inflation is down from 25 or 26 per cent., but, as my right hon. Friend the Chancellor said, it is creeping up and it will probably creep up a bit more. As he rightly points out, if we were to take the tax and prices index, the inflation rate would not be 6.4 per cent., but about 4.5 per cent. If mortgage interest was taken out, it would probably be down to just over 3 per cent. I mention that because Britain's inflation rate and RPI are often compared with those in Germany, France, and so on. If we are going to make such comparisons, they should be on the same basis.

Opposition Members talk about credit controls, but, as has been said, how would we have credit controls without exchange control? Should we reintroduce exchange control or hire purchase control? I remind the House that we have been down that path before but it led us only to the International Monetary Fund. Interest policy is one arm in the fight against inflation. We should not borrow to spend. However, as has been pointed out, my right hon. Friend could consider the position of those in the community who do not have to borrow to spend because they have money. The hon. Member for Berwick-upon-Tweed (Mr. Beith) touched upon the question of saving. The Government and the Chancellor have a first-class record on the business expansion scheme, PEPs, and so on but the savings ratio has gone down. One has only to look at recent statistics to see that.

I must ask my right hon. Friend the Chancellor : "Why cannot we encourage people not to spend the money they already have in their pockets?" I should like more and more pressure to be applied. My right hon. Friend the Chancellor introduced individual pensions which are a great boon to people and the business expansion scheme is a first-class success. If we could copy something like loi monory, we could give those in the middle income bracket the opportunity to save. I know that would cost money but my right hon. Friend is in a position that enables him to be flexible.

I, as most hon. Members know, am a low tax person. I like low taxes, the lower the better. There is one fact that has never been effectively explained to me. If my right hon. Friend the Chancellor of the Exchequer allows me, as he did in the previous Budget, to keep more of my earnings-- for which I was most grateful as were we all--and I then spend that money, that is inflationary. However, if I say to the Chancellor, "You keep it, you spend it for me" that is non-inflationary. I cannot see the difference between me spending the money and my right hon. Friend spending it for me. Although I have the greatest admiration for my right hon. Friend the Chancellor, I shall not let him spend any of my money if I can help it. The Labour party has now, belatedly, become the champion of the owner-occupier- -what hypocrisy. When the sale of council houses was introduced not one Opposition Member wanted it. Up and down the country, especially in areas with Left-wing councils, every obstacle in the world was put in the way of council house tenants buying their own houses.

There has been a lot of talk about mortgages. My right hon. Friend the Member for Old Bexley and Sidcup said that if mortgage repayments go up and the value of the house goes up, one can only pay the mortgage by selling the house. That is not so and I was surprised to hear him

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say it. If one has a mortgage and does not want to increase the monthly repayments, practically any building society in the country will give permission to extend the life of the mortgage. If it runs for 20 years it can be extended to 22 and the same repayment rates can be maintained. The increase in mortgage interest rates is only a temporary measure. I do not know when interest rates will come down. I would be surprised if they do not start to come down within six to nine months.

The danger signal for the future of the economy is high wage demands. That is something we have to watch carefully. It has been said that our manufacturing base is depleted and all we have heard is that it is the fault of the Government and that they have not invested or done this or that. Nobody has said that it was the activities of trade unionism that priced many men out of a job. That is why our manufacturing industry went downhill.

We have a budget surplus and public expenditure is under control. I am sure that we would all like to congratulate not only my right hon. Friend the Chancellor but my right hon. Friend the Chief Secretary on reducing public expenditure below 40 per cent. with the prospect of it going lower still. We take our economic pulse too frequently. Whenever an economic figure is produced we take the pulse and hear gloom and doom. One never sees the Opposition happier than when there is bad economic news. As my right hon. Friend the Member for Chingford said, the Opposition have not mentioned unemployment because it is coming down. It is something about which one should be pleased.

My right hon. Friend the Chancellor said that we were in a similar position in 1985. He took the necessary action then and has done so again now. When action is necessary--all fair-minded hon. Members will agree with this--my right hon. Friend the Chancellor takes the necessary decision whether it is difficult or unpopular. That is something for which the country should be extremely grateful. The Conservative party is certainly grateful.

The debate has been blown up out of all proportion. It is an important debate but my advice to my right hon. Friend is that we should not have any panic measures. Let us stick to the policies he has pursued over the past five or six years and I am certain that the economy will remain as prosperous as it is today.

6.15 pm

Mr. Peter Shore (Bethnal Green and Stepney) : I do not think that the country or the House has got out of proportion the seriousness of the present economic crisis. I use the word "crisis" deliberately. I am sorry that the Chancellor of the Exchequer is leaving the Chamber because I wanted to tell him to his face that, apart from the bluster, he made an unconvincing and extraordinarily complacent speech which failed to address any of the real problems facing Britain today. He soothed his feelings by drawing upon the analogy with 1985 when there was a surge of inflation and which, by principally raising interest rates, he brought under control during the succeeding 12 months. The problem facing the Chancellor now is far greater than the problem in 1985.

In 1985 Britain was running a balance of payments surplus of the order of £7,000 million to £8,000 million. This time we are running a deficit of what looks like being £14,000 million. In the history of post-war efforts to deal with the periodic balance of payments crises, I can think of

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no Government that has relied upon simple interest rates to correct a profound imbalance in our current account and trading position. Believe me, we are in a state of profound imbalance at present. For the Chancellor simply to say that there will be no change of policy and that he will be sticking to what he is doing now, which is relying simply upon what the right hon. Member for Old Bexley and Sidcup (Mr. Heath) described as the one iron solution--using his golfing analogy-- is unconvincing and inadequate. For him to say, as he did, that in time the current account will correct itself is to miss the whole problem that will face Britain not just now but in the future. We will be wrestling with the balance of payments problem from now until the next general election and probably beyond. It will be a number of years before we can begin to get things right after such a severe and damaging current account deficit.

One point on which the House is generally agreed is that there is clearly an excess of purchasing power in the economy. It is that which is putting an upward pressure on prices and the massive pressure, to which I have alluded, on the current trading account. With imports rising at 12 per cent. this year and exports at only 1.5 per cent. and with consumer expenditure rising by 11 per cent. this year and 9 per cent. last year there can be no doubt that excess purchasing power is sucking in imports and diverting exports away from the export to the home market.

What has produced this surge in purchasing power? Three factors have contributed. First, there has been a continuing fall in the personal savings ratio. Since 1979 it has fallen from 12.6 per cent. of personal disposable income to a mere 5.4 per cent. last year and, I believe, the figure will be even lower this year. In 1987 savings fell by no less than £4,000 million. Although I have yet to see the figures for this year, I am sure that there will be the same rate of decline.

Secondly, there has been a massive growth in indebtedness. I shall put aside house prices because they account for a large part of the personal sector indebtness. Nevertheless, since 1979, in real terms, outstanding consumer credit has risen from £16.7 billion to no less than £39.8 billion. That is an enormous and, in many ways, major new factor in the total British economy increase in debt. Since the end of 1986 to this summer, outstanding consumer credit has grown by just over £8,000 million. In addition, there were tax cuts worth £4,000 million in this year's Budget, which further increased purchasing power from June.

Thirdly, there has been an increase in income over and above the rate of inflation, although I hesitate to put a number on that latter factor as I have not seen it properly analysed. The decline in the savings ratio together with the growth of indebtedness and the tax cuts produced an increase in purchasing power of almost £16,000 million this year. In those circumstances, it is no good the Chancellor patting himself on the back for prudence in having achieved a more than balanced budget ; a negative public sector borrowing requirement. The truth is that the effects of that have been more than wiped out by the massive personal sector borrowing requirement. What has been gained in public expenditure restraint has been thrown away in an orgy of private sector borrowing and expenditure. The consequences for the current account are clear and have already been discussed.

I wish to emphasise the gravity of the current position. In 1974 Britain did not have a drop of its own oil and the

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OPEC cartel quadrupled the price of the oil that Britain had to import. There was also a serious problem arising out of the three-day week that operated during the first quarter of the year. Apart from that year, when the British economy was reeling, Britain this year has the biggest trade deficit that it has suffered certainly for the past three decades, and possibly since before the war.

The Chancellor, who has mouthed many strictures of the United States for its large trade deficit, must now recognise that Britain's deficit, as a proportion of gross domestic product--it stands at no less than 3.5 per cent.--has actually surpassed that of the United States. The prospects for next year are not much better. The Chancellor speaks of a reduced deficit to £11,000 million, but even that is challenged by most independent economists.

The Chancellor must face the fact--even if he is not prepared to admit it in public--that there has been a gross failure of economic management and forecasting during the past year. We recall with incredulity what the Chancellor said only eight months ago when he replied to the Budget debate :

"The policy that we have been pursuing has already brought economic success. This country is now 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.]

Such a claim is simply laughable. What the Chancellor has not begun to realise--and it is a fault that he shares with many Conservative Members-- is that both Germany and Japan achieved their enormous economic success through export-led growth, accumulating balance of payments surpluses, high investment and low unemployment. Seldom has there been a greater flight from reality or a more hubristic statement than that made by the Chancellor on 21 March. Now, Nemesis has followed and the Chancellor's judgment has been devalued and deflated, not merely in this House but in the country and in the markets.

The question now is whether a similar fate awaits the British economy. How are we to put right such a massive deterioration in our economic affairs? We must increase exports and reduce imports, but to achieve that two things are necessary. First, there must be a reduction in domestic purchasing of goods and services. Secondly, we must ensure that British products are priced competitively in domestic and world markets. The Chancellor's only answer to both those requirements is to raise interest rates--which, as we well know, have already risen from 7.5 per cent. to 13 per cent. That has inflicted great pain upon house purchasers, especially first-time buyers, and there is no sign yet that there has been any significant change in the level of purchasing power. Of course, at some level of interest rates there will be a check on consumer expenditure. There will certainly be a squeezing out of the inflationary forces in the economy. No one should doubt that, if an interest rate policy is pursued ruthlessly enough, it will deal with inflation. The problem is the price that we shall then have to pay.

Those hon. Members who have already spoken properly reminded the House of the appalling damage done in 1979-80 when a massive, strongly applied interest rate policy--leading, as it did, to a massively overvalued exchange rate and a very high pound--led to the annihilation of 20 per cent. of British manufacturing capacity within two years and to a doubling in the number

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of unemployed to more than 3 million. Surely we should all be desperately anxious to avoid that. I do not refer only to the Opposition because anyone in his senses would not want to repeat the appalling experience of 1979-80.

The trouble with an interest rate policy is that it does not help us to become competitive. It will not lead to the successful transfer of resources into the export market while the pound is forcing up the price of our exports. The CBI's recent survey on British trade prospects drew attention to precisely that point. It expressed concern about the competitive pricing of British products, not simply about the lack of supply.

During the two years since June 1986--and I hate to use a jargon term, but it is the accepted measure of international

competitiveness--the IMF's relative normalised unit labour cost index has shown that the price of British goods relative to those of other countries has risen by more than 16 per cent. In other words, there has been an upward valuation of 16 per cent. before this latest rescue operation on the pound and before the raising of interest rates has had time to take effect.

What the Chancellor--indeed, all of us--should be considering is how to reduce purchasing power in the United Kingdom without crippling the competitiveness of British industry. There are many ways to discourage borrowing--although I know that the Chancellor does not like them--without relying on higher interest rates. They may be imperfect, but credit controls, special deposits and other devices are available if the Chancellor has the will to use them. There is also a strong case for raising taxes. Despite the immediate adverse effect on the retail prices index, there is a great deal to be said for reconsidering the levels of VAT and Excise duties--assuming that we are still free agents in adjusting the level of such taxes and that they have not already been harmonised or frozen at their present level by agreement in the EEC.

There is a larger lesson to be learnt from this year's crisis. Is it not extraordinary--this point was made by the right hon. Member for Old Bexley and Sidcup--that, when more than 2 million people are unemployed in the United Kingdom, we are experiencing this massive excess of demand over supply? There is an unused resource of human beings, but we are experiencing a massive demand inflation. I believe that the chickens have come home to roost. They are not simply due to misjudgment this year and last year, but they are the failures of economic management during the entire period of Conservative Government. I hope that I am not making simply an old point, because I want people to think about this.

I have mentioned already the loss of capacity in 1979 and 1980, but the fact is that in every year since 1982 when we began, in the Chancellor's words, "to recover", investment in manufacturing industry failed to reach the levels of 1978 and 1979. Therefore, it is not surprising to find that the output of Britain's manufacturing industries has been less in every year between 1980 and 1987 than it was in 1979. That was the effect of that earlier disaster and the subsequent lack of adequate investment. Until this year, we had a smaller output to meet the surge of demand than we had even in 1979. There should not be much surprise that demand has outstripped supply in British industry this year.

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The final lesson that we should draw relates again to our trade deficit. It is not just the way in which it has proceeded this year, but in 1983, for the first time in our history, we had a minus balance in our trade in manufactured goods. Since then the situation has worsened year by year. In 1986 our trade deficit in manufacturing had risen to more than £5,000 million, in 1987 to more than £6,500 million and so far this year has reached £9,700 million. That is an annual rate of about £12,000 million in manufactured goods, which until 1983 we produced ourselves and were always in surplus. This is a worrying situation. Of course, the deterioration in our trade position was masked from 1979 to 1986 by the massive output and benefit of North sea oil, which yielded some £120 billion worth of productive wealth in both import saving and exports of oil. Deterioration in our trade has now reached a point where, notwithstanding North sea oil, a massive and unprecedented deficit has been allowed to accumulate. It is anticipated that this year it will be £13,000 million to £14,000 million.

It is not, therefore, only the grievous errors of this year that need to be put right by new actions and policies, but there is a desperate need for new and realistic policies to ensure the growth of real wealth in our society and a sustained increase in investment in research and development and in education and training for our work force. To achieve that, we shall need not just a new Chancellor but, I fear, a new Government.

6.33 pm

Mr. Terence L. Higgins (Worthing) : It is traditional to debate economic affairs on the final day of the debate on the Loyal Address, but the tradition, too, is that my right hon. Friend the Leader of the House replies and comments on matters of concern to the House. I shall begin by raising two points to which I hope my right hon. Friend will respond. I believe that in many respects the accountability of the Government to the House has improved in the past decade. The Select Committee system, which is departmentally related, has been established, and we have introduced the Estimates Day procedure. Most recently, the Government have accepted that an agency set up under the Next Step proposals should be accountable directly to the Public Accounts Committee through its own accounting officer. However, there is a considerable danger in that the House and its Committee system have been put under pressure because of the amount of documents coming from the European Economic Community. This is putting a tremendous burden on the Scrutiny Committee, which is so admirably chaired, and carries out such important work. Therefore, I hope that we can consider --preferably through improvements in the Scrutiny Committee's work and that of the departmental Select Committees--the way in which we achieve effective accountability of the EC to the House.

Secondly, the Government have recently reorganised their affairs and split the Department of Health and Social Security. That raises the question whether there should be a corresponding division of the Select Commitees, because to a considerable extent the system of Select Committees is departmentally based. Of course, this is a matter for the House, not for the Government, but my right hon. Friend the Leader of the House has an important role to play, and

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I should welcome his views. Because of the high percentage of expenditure and responsibility which falls on both the Department of Health and the Department of Social Security, there is a case for a corresponding division of the Committee. Having said that, I should add that it is clear that the existing Health and Social Security Committee is already engaged in studies covering the two Departments. It would be unfortunate if that work were lost. Perhaps, too, it would wish to consider whether the Department should have been split in the way it has been. I believe that it would be appropriate to make clear at an early stage--even today--that the Committee should eventually be divided but leave the amendment of Standing Orders until a later date when the Committee has concluded its existing work.

The Treasury Select Committee is proposing to take evidence tomorrow on the economic policies contained in the Chancellor's Autumn Statement. However, without pre-empting in any way the report that will be produced, it is appropriate for me to make some comments today.

It is quite extraordinary that the Opposition Front Bench spokesman made such a speech today. I believe that there is little benefit in going back over the record of the Labour Government, because it is a diminishing asset in political terms. Many of my constituents who now vote are not old enough to remember anything about it. It is extraordinary that, far from adopting a policy of happy is the party that has no history, the Labour party appears to be in the position of happy is the party that has no policy. The policies proposed by the right hon. Member for Bethnal Green and Stepney (Mr. Shore) of special deposits and credit controls belong to a bygone age. The system now is far too open--in 1992 it will become even more so--for it to be considered that credit controls or special deposits would be an effective way of dealing with our problems.

I supported the Chancellor in putting up interest rates last week. It was the right thing to do. I am rather more doubtful about his presentation of that matter, because he is inclined to say, "Short-term interest rates are the only weapon which has been available." It has been suggested that this is a sort of one-club golfer approach to the problem. I am worried about analogies to golf, because in the first match that I played in my constituency I received a prize for the highest score at any one hole. Be that as it may, it is much easier to play golf with just one club if one can determine the shape of the course. My right hon. Friend is not dealing only with interest rates, because they must be considered within the framework of fiscal policy. He is wrong to underestimate the importance of that policy and that has led to some confusion. Although the Opposition complain about the size of the tax cuts in the last Budget, the combination of the present level of taxation and public expenditure means that we are now running a massive budget surplus. That is also bearing down on inflation and it is important to economic management. We are not faced with the problem of too much public borrowing--a problem that has beset us for many years--because the Government are now making massive debt repayments. The problem, as pointed out by many hon. Members, is that there is too much private borrowing to pay for consumption. In that context, the increase in the rate of interest will undoubtedly have an effect. It may not deter the person who intends to buy a washing machine with a credit card because, in many

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cases, those interest charges are already extortionate, but it will affect those who are borrowing on mortgages and therefore it will affect their ability to consume.

I believe that the measures that the Chancellor has taken will affect the general level of demand and bring us back on course. The problems of forecasting make it difficult to predict the rate of economic growth and I am sure that all hon. Members would accept that. Therefore, our present economic position is not as envisaged. We face problems with the savings ratio. People are not only borrowing too much, but they are saving too little. I know that my right hon. Friend will be making a review of the economy ahead of the next Budget and I hope that he will consider incentives for saving. They deserve review. In that context, I have considerable doubts about whether he is right to press ahead at this time with some of his proposals to change the taxation position of life insurance companies. Life insurance policies are an important feature of our savings structure and it would not be appropriate to alter their tax position now.

It is important to stress that the present pattern of interest rates is not what it used to be. The Chancellor is using short-term interest rates to determine the way in which the economy operates. None the less, the longer- term interest rates are significantly lower and the yield curve is unusual. For industries the longer-term interest rates are more important than the short-term interest rates.

My right hon. Friend was right to take action last week on the interest rate, given the balance of payments figures. If he had not taken such action it is likely that the exchange rate would have declined. That would have meant that the substantial exports that are already in the pipeline would have produced less. In the short term, that would not be a favourable state of affairs. Therefore, the tactical decision taken by my right hon. Friend was appropriate. We do not know how long my right hon. Friend will need to sustain interest rates at their new level, but in the context of last week's announcement, my right hon. Friend's action was correct.

For the long-term future of industry a crucial aspect is not simply interest rates, but wage settlements. Such settlements give cause for concern and of particular concern is the fact that the retail prices index includes mortgage payments. I was surprised when my right hon. Friend referred to that. If one wants to understand the danger in specific terms, one should consider what happened with the Ford pay settlement the other day. That settlement is a certain number of percentage points above the RPI and the RPI happened to jump at the time that that settlement was negotiated. It did not jump because of the underlying rate of inflation, but because of the increase in mortgage interest rates. Of course we shall not see a corresponding reduction in the pay of Ford workers if the mortgage interest rate comes down. Therefore, the inclusion of mortgage interest rates in the RPI causes a ratchet effect. As mortgage interest rates go down as well as up in the normal course of events, we must consider whether it is appropriate to include them in the RPI. For that reason I was interested in the comments that my right hon. Friend made. Mr. Harry Ewing rose --

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Mr. Higgins : I shall not give way as I always get worried when Privy Councillors go on too long. In any event, I am about to conclude.

The overall position that the Chancellor has adopted on interest rate policy is correct. The current fiscal framework, which shows that we have a massive surplus compared with previous periods, is the appropriate one for the present time.

It is odd that the Opposition appear to be arguing that we should have an even bigger surplus because there were too many tax cuts in the Budget. As the late Iain Macleod always said, Labour Governments put up taxes and Conservative Governments reduce taxes. That is the correct strategic approach. Obviously we shall need to review taxation in the context of the next Budget and I look forward to my right hon. Friend presenting it.

6.45 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch) : The right hon. Member for Worthing (Mr. Higgins), the Chairman of the Select Committee on the Treasury and Civil Service, of which I am a member, talked about accountability. The way in which it works is like this : he drafts the report and then uses his Conservative majority--some of them are here--to get it through. If the next report expresses what the right hon. Gentleman has said this year, we shall have a report of such sycophancy that some of us shall be asking Alice to pass the sick bag.

When I heard the Chancellor today all bubbly and bright, when I thought that he would have a hangover, I was reminded of the aphorism of Alexander Pope in his epistle to Dr. Arbuthnot :

"Take it for a rule

No creature smarts so little as a fool".

I note that the Chancellor has just left the Chamber.

When the Chancellor goes to meet his maker--perhaps if the Prime Minister has any say in this matter it will not be too long hence--I believe that his row will not be with the modern poets so much as with the philosophers of antiquity. Frankly, I doubt whether Aristotle, the logician and the great creator of the syllogism, will ever forgive the Chancellor of the Exchequer for what he has done this year.

When the Chancellor of the Exchequer first came to office he gave us a breathless syllogism. It was irredeemably strong, irreducibly simple and ineradicably true. He said, "All countries of low inflation are competitive. All countries which are competitive do not have a balance of payments problem. Britain has low inflation and does not have balance of payments problems." Here was a syllogism that scintillated. He united Aristotle with the classical economists, the Keynesians, the neo- monetarists and even the new Tories from Marxism Today. But--there is always a but when con artists are concerned--somewhere along the line someone forgot to tell the Chancellor that for a conclusion to be not only deducible from its premises, but correct in its application to the world which it purports to describe, its premises must be capable of empirical verification. Deduction and induction must at some stage during the argument synthesise.

The Lawson fallacy has been to move from false premises to false conclusions by suspect processes of logic. I believe that the purpose of this debate is to teach the

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Chancellor not only a few lessons in elementary economic theory in practice, but a few lessons in elementary logical analysis. I begin with a succinct premise born of dispassionate analysis with which I believe every hon. Member would agree given the events of the past year. It is a simple one : "The Chancellor of the Exchequer, the right hon. Member for Blaby (Mr. Lawson), is an economic illiterate". Does it really matter if that is so?

I do not wish to place too much faith in economists. I am rather inclined to the view that Sir Kenneth Berrill, the former chief economist to the Treasury, gave me over a pint of beer at Sunningdale one day. He said that the difference between a scientist and an economist is that scientists sometimes get it right. Nevertheless, I believe that the Chancellor's ignorance in economic affairs is gross, excessive and offensive.

I shall deal first with economic forecasting. When I was 16, my economics tutor at school said to me "Sedgemore, in the hands of a professional, economic forecasting is a dangerous business. In the hands of an ambitious politician, it gives rise to self-delusion, followed by deceit, ending up in catastrophe." The Lawson catastrophe is surely living proof of what a wise old owl my tutor was. Let us first consider the Chancellor's forecast for the balance of payments deficit. Assuming that the outturn will be £16 billion--my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) is always too kind, and I think that it will be more than he said--that is not 100 per cent., 200 per cent. or 300 per cent. wrong ; it is 400 per cent. wrong.

Let us suppose that the chief economist to the National Westminster bank goes to his chairman, Lord Boardman, at the other end of the corridor and says, "Mr. Chairman, your Lordship, I've got my economic forecast for the year, and here it is, but I must tell you that the margin of error is plus or minus 400 per cent." Let no one tell me that that chief economist would keep his job. What worries me, as I look at the Government Benches, is that not a single Conservative Back Bencher--except perhaps the right hon. Member for Old Bexley and Sidcup (Mr. Heath)--feels any guilt, shame or worry that there is a 400 per cent. margin of error in the forecast which has serious repercussions for the economy.

The matter is worse than that. When the Chancellor came to office, he forecast zero inflation in some years' time. I do not know how many mathematicians there are in the House. If there are any, they will know that the difference between zero inflation and the current rate of inflation is not 100 per cent., or 1 million per cent., or 1 billion per cent. ; it is an infinite per cent. What can one say of a Chancellor who, on proven mathematical formulae, gets it infinitely wrong?

Let us consider the cure for inflation. Many cures for rising prices have been put forward by economists through the ages. As far as I am aware, the Chancellor is the first person in human history to say that the only cure for rising prices is to push prices even higher. That must be the own goal of the century. Let us imagine that England are playing West Germany at football and that Bobby Robson--one of the greatest failures of our time, as the Chancellor will be proved to be by history--comes into the dressing room and says, "Lads, this West German side is damned good, but when the players become over-confident they become vulnerable. Here's the game plan. If they don't

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score in the first 10 minutes, we'll put the ball into the back of our own net. Then they'll become over-confident and vulnerable." I do not want to be unfair to the Chancellor because he has an answer to my criticism. I shall paraphrase his answer, but it is an honest paraphrase. He says, "When I push up prices by pushing up the cost of borrowing and when I push up mortgage rates so that Sedgemore, who paid £464 in November 1987, now pays £505 and in January of next year will pay even more, I am actually lowering prices and only the mad, the bad, the sad and prats like Sedgemore believe that I am doing otherwise." When the Chancellor says that when he gives us poison in the short term he is really giving us medicine in the long term, he reminds us of Father William in "Alice in Wonderland"--I am sure that all hon. Members have read that book, although they are not all mathematicians :

" You are old, Father William', the young man said,

And your hair has become very white ;

And yet you incessantly stand on your head--

Do you think, at your age, it is right?'

In my youth ; Father William replied to his son,

I feared it might injure the brain ;

But now that I'm perfectly sure I have none,

Why, I do it again and again.' "

It must be because the Chancellor's brain has gone

missing--"Spitting Image" has got it wrong--that interest rates have been put up again and again.

I shall again paraphrase what the Chancellor said on television last week about the relationship between wage pressures and inflation. He said , "I shall reduce wage pressures by increasing them through higher mortgage rates and higher inflation." I used to think, being a gentle man, that despite the fact that I sometimes came to verbal blows with the Chancellor, he was a lovable, Rabelaisian roue . But the more I think about it now, the more I believe that he is a devious and sinister Schiller-like figure and, like the gods, I begin to despair. As Schiller wrote,

"Mit der Dummheit ka"mpfen Go"tter selbst vergebens."

That is, against stupidity, even the gods struggle in vain. When one considers the balance of payments, which has been a major issue today, the gobbledegook not only from the Chancellor, but from his chief economic adviser, Sir Terence Burns, becomes even worse. Sir Terence gave evidence to the Select Committee on the Treasury and Civil Service last week. I shall paraphrase what he said to me. "When the statisticians correct the figures, things may not be as bad as they seem." That is economics on a wing and a prayer. Last week, the Chancellor said--I shall again paraphrase --"The balance of payments deficit is a sign of the success of our policies. All I need to do is to make a few adjustments." That is economics by hunch, by guess and by god. I prefer it by somebody else.

Last week, the Chancellor said on radio--I am paraphrasing--"I'm so happy with things as they are that I'd willingly give up my job and make money in the City." That is more honest and that is the economics of blue funk. The Chancellor is the first economist in history to insist that the only cure for the balance of payments is to raise interest rates.

At the Treasury--there are a few Treasury officials sitting in the Box-- there used to be textbooks on the walls. I am sure that the textbooks did not say that the only way to deal with a balance of payments crisis was to raise interest rates. In the textbooks that I read, the authors used to give many options. They said, for example, that there could be currency depreciation, devaluation, import

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