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Mr. Calum Macdonald (Western Isles) : Tonight's debate is very significant. It opens the final act in an unfolding drama--the steepest drop in the reputation of any Chancellor of the Exchequer since the war.
Just seven months ago, the Chancellor was the toast of the City, the yuppie and the Tory Back Bencher. Tonight, his fair-weather friends on the Back Benches are sitting in sullen silence when they are not stabbing him in the back. Every prediction and boast that the Chancellor has made has been shown by events to be worthless. The Chancellor says that these are the problems of success. We see that the British economic miracle of which he boasts has been exposed as a blip in his imagination.
Let us examine the nature of the success that has given us so many problems. First, let us take inflation. The Government are presiding over an inflationary spiral unparalleled in Western Europe. Britain's inflation is now the highest of the top seven industrial nations. At 6.4 per cent. and rising to 8 per cent., according to a recent Phillips and Drew prediction, we are falling behind France, Italy, Germany, Japan and the United States.
It is simply not the case that British growth in the past couple of years has been exceptional. It has been part of a spurt of similar growth enjoyed since 1987 by other European economies, among them Spain, Portugal, Italy and even Ireland. Those economies are traditionally considered to be smaller, weaker and possibly even backward.
I do not want to stress the comparison between the British economy and those other economies. Whereas those economies will continue to grow next year by 3 or 4 per cent. according to EEC forecasts, we in the United Kingdom face yet another painful slump as the Chancellor gambles on a recession to correct his past errors. If we want to marvel at a real economic miracle, or an economy with a greater claim to an economic miracle, we should look at Italy whose economy is forecast to grow at a higher rate than ours both this year and next year. The difference is that it is growing at that rate with lower inflation and a trade deficit of less than 2 per cent. of GDP compared with our deficit which is already heading for 4 per cent. of GDP.
Every boast and claim of the Chancellor has been successfully discredited. The Government should not take
Column 643refuge in their boast about the budget surplus which was achieved only through their cruel meanness towards the benefit claimants and old-age pensioners who alone have lost £4 billion since the Government stopped linking their pensions with their earnings. Even the Chancellor's proud boast that this is a tax-cutting Government is rejected by his friends when the total of the direct and indirect tax burden remains
"higher than at any time under the last Labour Government." That is not my opinion, but the judgment of Sam Brittan, writing in the Financial Times.
Taxes, including social security contributions and rates, are equivalent to 38 per cent. of GDP, which is higher than in 1979 and higher than at any time during the period of the last Labour Government. Even the money supply, the favourite indicator for monetarists everywhere, is now growing beyond the Chancellor's prediction and at the same rate as in 1972 under the very Government that this Government so much deride. As for the balance of payments, the trade deficit is now £14 billion or £15 billion. There is no economic miracle. Instead, we see the return of the same old British disease, and it is returning with a vengeance.
Mr. Macdonald : No. I have only 10 minutes and I shall press on. The Government's entire strategy is now in complete disarray. The much-vaunted economic miracle is sadly just another old-fashioned consumer boom, a Barber boom mark II. That judgment is not confined to Labour Members and political allies of the Labour party. It is arrived at even by the Government's friends. Lord Rees-Mogg made the same point in an article in The Independent.
Now is the time for the Chancellor of the Exchequer to introduce a mini Budget to restore investment in neglected roads and railways, in training and in education. Without investment in basic economic assets, the country can have no future. Of course, the Chancellor of the Exchequer does not like mini Budgets. During his Budget speech, he boasted that the Government kept to one Budget a year. The right hon. Gentleman argues that interest rates are the only feasible economic tool worth using. It could be said that each interest rate increase is for the Chancellor of the Exchequer a mini Budget. Until last week, we had had 12 interest rate rises in the year. We now have the 13th and the rate is 13 per cent. In the words of President Reagan, when it comes to interest rates, it appears to be a case of making it one more for the Gipper. Surely the time has come for the Chancellor of the Exchequer to follow the path of his equally erring predecessor, Lord Barber, out of the Treasury into a quiet and undeservedly well-paid sinecure in the City.
Mr. Matthew Carrington (Fulham) : One of the themes that has run through the debate is inflation, and many of us remember the times of high inflation and the tremendous hardships that that brought. The argument has been less about the disease--I think that we all realise the evils of inflation--and more about the nature of the possible cures that are available to us. To take the analogy of my right hon. Friend the Member for Old Bexley and
Column 644Sidcup (Mr. Heath), how many different types of golf club does my right hon. Friend the Chancellor of the Exchequer have to tackle the problem?
The two remedies that have been most cogently argued by Opposition Members as alternatives to the path chosen by my right hon. Friend the Chancellor of the Exchequer are the old remedies of higher taxes and a credit squeeze. We remember the remedy of the credit squeeze from the 1960s and 1970s. Higher taxes have a serious effect on the economy. We remember the experimentation in high taxes which started after the 1964 general election, when direct taxes were raised to an extremely high level to fund a massive increase in public expenditure. Those taxes cut growth in the economy. They caused a wage-price spiral and increased the expectations of many people who did not regard what they were earning as a gross figure, as economists told them that they should, but took the more rational view that the sum that they received after paying tax was more important.
Higher taxes have two effects on the economy, both of which are bad. The problem is made the greater because of the way the Government spend the taxes that they raise. Consumer spending is increased because of the redistribution that may occur through indirect taxation and Government expenditure.
Credit controls are a much more interesting experiment, and the Opposition have been suggesting that they are a potential alternative to raising interest rates. We have tried introducing credit controls on many occasions in the past. Indeed, they had a certain ability to work in the economy as it once was. I am talking of the time when the economy was much more closed than it is now. My hon. Friend the Member for Horsham (Sir P. Hordern) said that when we had a closed economy we could restrict the ability of domestic banks to lend. We could put political pressure on them. We could even put laws into place to stop domestic banks being able to provide the credit that was demanded by domestic consumers especially. If we were not careful, credit controls cut credit to industry. That meant that we ended up with many exceptions to the controls. We found that the exceptions started to outnumber the opportunities for restricting the availability of credit to such an extent that the controls ceased to be effective.
We now have an open market. No longer do we have the ability to stop those who are denied credit from one source obtaining it from another. The credit can be found from overseas from foreign banks, which may be active in our domestic market, or through the various financial intermediary mechanisms that are now so sophisticated that even the domestic mortgage market is increasingly financed by money that originates from outside the United Kingdom. We have an open market and credit controls would be an impossibility. Indeed, they would have no chance of working without the imposition, or reimposition, of exchange controls.
Exchange controls had ceased to work to any real extent when they were abolished in 1979. They were a problem for tourists who wished to leave the country to travel and spend money overseas, but they had ceased to be a problem for any company that wished to raise money overseas. Similarly, they had ceased to be a problem for any foreign company that wished to raise sterling in this country. Any method of exchange control that was introduced had to have many loopholes if it was to circumvent the real demands of the international market.
Column 645We have had some comments about the problems that may be created in the City and the benefits that the City may derive from high interest rates. It is worth remembering that the City, or the financial sector, employs over 1 million and generates over £5 billion in net earnings. The development and growth of the City is something that we should and need to protect. That is one reason why exchange controls should not return.
Exchange controls lead on, perhaps, to the other solution that is sometimes suggested, which is the manipulation of the exchange rate. That manipulation is now an impossibility, if only because the volumes that are traded in the international market are so large. It has been suggested that we should push down our exchange rate or fix it against other currencies. That is fine at an instant in time, but it is difficult, as we have seen with the rise in United States base rates, to predict what will happen to other currencies. It is rather like looking at the bird in "Alice's Adventures in Wonderland" that turns its head and stares at us. We may think that we have one solution, but the other countries against whose currencies we have fixed sterling may manipulate their currencies away from sterling. The real problem is house mortgage lending and the leakage from it. The leakage in 1987 was about £14.6 billion, which was half the total sum raised in the house mortgage markets and about three times the rise in consumer credit. It is that leakage which has led to consumer spending, which to a large extent has led to the balance of payments problem that we now face. How best do we control the leakage? My feeling is that the leakage itself is not that much of a problem. If we examine the asset base that underlines the leakage and the borrowing that the house mortgage market represents, the gearing for the borrowing is only about 17 per cent. That is still a relatively low level, although I quite accept and understand that on an income basis the strain on the income ratio is actually higher and more serious. However, that is a short-term problem rather than a structural problem. If there were a higher ratio on the asset base, there would be a more serious problem.
The real difficulty arises from the low savings ratio. Our savings ratio is a highly questionable figure. Many areas of dispute have arisen over the accuracy of our savings ratio figure, if only because the figure is calculated by subtracting one very large number from another and is therefore subject to the inherent volatility and uncertainty of those two numbers. I suspect that we would all agree that the personal savings ratio is too low.
One of the major challenges facing the Government is to raise the personal savings ratio. High interest rates are a start and I believe that they will push up the savings ratio-- [Interruption.] I beg the House's pardon for the frog in my throat. It must have been caused by the comments made yesterday by the hon. Member for Copeland (Dr. Cunningham) about the frogs that left the marshes as they were drained. I should like to see measures taken to increase the savings ratio and to encourage personal savings.
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Mr. Thomas McAvoy (Glasgow, Rutherglen) : I want to comment first on the behaviour of Conservative Members during the speech made by my hon. Friend the Member for Dunfermline, East (Mr. Brown). I do not normally make attacks on Conservative Members because that is usually a waste of time and is non-productive. Today, however, we saw a concerted and disgraceful attempt by Conservative Members to disrupt my hon. Friend's speech. That was clearly a tremendous compliment to my hon. Friend because it showed that Conservative Members feared his effectiveness in exposing their economic mismanagement and the Chancellor's incompetence displayed in his Budget speech. At one point this afternoon, Mr. Speaker urged the Front Benches to set the lead. The Government Front Bench set an example by smirking and sniggering during the organised disruption of my hon. Friend's speech. That suggested foreknowledge of what was about to happen. Many people feel that the Government would stoop to any level to silence criticism of their record. I know that the Chancellor of the Exchequer does not like it, but his track record merits repeated examination. His Budget forecast the trade deficit at £4 billion, his Autumn Statement forecast £14 billion, and after the latest figures who knows what the ultimate figure will be--certainly not the Chancellor who is supposed to be in the economy's driving seat. Imports have flooded into Britain, increasing by 12 per cent. this year while in contrast exports have risen by only 1.5 per cent. The Chancellor has increased demand far beyond the capacity of our industry to supply that demand. Those bottlenecks reveal the lack of investment in industry and training that has occurred under this Government. The lion's share of the deficit lies in Britain's manufacturing. The balance of trade in manufactured goods fell sharply into deficit in 1983 and has continued to deteriorate. That reflects the disastrous and dogmatic approach of the Government in 1979 towards manufacturing industry when they pursued their monstrous economic dogma and slaughtered manufacturing industry in this country.
The Chancellor's only response to the deficit has been to raise interest rates again and again. Home buyers and industry are hardest hit by the interest rate rises. The average mortgage payer faces a monthly increase of £30. That should be contrasted with the £12 a month in tax cuts. Even people regarded as the Government's friends, like the CBI, have responded. At the recent CBI conference industrialists warned that high borrowing costs were strangling their companies. They even passed democratically a resolution complaining that the level of interest rates has damaged the international competitiveness of sterling.
Another criterion by which we can judge the Chancellor is inflation. Inflation is now 6.4 per cent. and rising. The Chancellor has admitted that it may reach 7 per cent. in the next seven months irrespective of any other independent forecasts. As hon. Members have rightly stated during the debate, the United Kingdom's inflation level is among the highest of our industrial competitors. Charges for water and electricity are being pushed up in preparation for give-away privatisation and we have seen the onward thrust of inflation as the result of the Government's policies. The mortgage rate increases are the biggest single contribution to the rise in inflation. No wonder the
Column 647Chancellor would like to remove mortgage rates from the retail prices index. That is another case of Nero fiddling the figures while the country suffers.
Let us be clear. The rise in the inflation rate has been stoked by the Government. If we consider the balance of trade, interest rates and inflation, it is obvious that they have all been a disaster for the Chancellor and hardly merit the description of brilliant. The Chancellor strutted on to the parliamentary stage on the day of the Budget as the hero of his Back Benchers. What a contrast now. The jury is indeed out on the Chancellor and the forewoman of that jury is waiting for the opportunity to announce the verdict, and is desperate to carry out the sentence.
The Government's strategy gives no hope to the unemployed and it accentuates the north-south divide. We have levels of unemployment in Scotland well above the national average. The Government are doing nothing to give hope to us or to the more deprived areas of England. The tragedy is that ordinary people are suffering and the Government refuse to act, purely and simply to try to preserve their fig leaf of economic credibility.
The events this year have been a watershed in the public's perceptions of the Tories' handling of the economy. The Government continue to make comparisons with the Labour Government, but they forget to mention that they have had the benefit of North sea oil and the massive income from selling the nation's assets even at knock-down privatisation prices. The Government have used those benefits to bribe the electorate to achieve election victories, as all Tory Governments have done in the past.
The reaction on the Conservative Benches to my hon. Friend the Member for Dunfermline, East shows that they understand that they have reached the end of the road. An old cliche states that when the going gets tough, the tough get going. The country is getting it tough, but the Chancellor should be going, right out of No. 11 Downing street.
Mr. Ian Taylor (Esher) : The speech opening the debate from the hon. Member for Dunfermline, East (Mr. Brown) would have gone down well in a debating chamber if the audience had no knowledge of economics or economic policy. Sadly for him that was not the case today, and I suspect that that is why he did not give way when some of us tried to help him understand the statistics that he was abusing. He simply failed to admit that the economy is intrinsically extremely healthy. It is not only Conservative Members who state that. The most recent survey from the OECD highlighted the supply side impact on the economy of the Government's policies which have been most important in our progress since 1979.
In comparison with 1979, we now have a shrunken state sector ; a public sector budget surplus ; less interference in industry ; fewer regulations and controls ; lower personal and corporate tax rates and fewer tax-induced distortions. The restoration of the market economy has been supported by a reduction in trade union restrictive practices and the deregulation of the labour and financial sectors. That is an extremely good record, of which we can be justly proud. It has had some very important net effects. For example, Opposition Members have not noticed that
Column 648investment in this country is ahead of consumption. That is a key indicator. Manufacturing investment in the past 12 months has been up 18 per cent. Productivity is high and likely to stay high. It is important to analyse imports in the latest trade figures because imports of capital goods rose 4 per cent. during the past three months, and that increase in investment shows that the continuing increase in productivity is likely to be secured.
If it is true--I concede that it is--that in our economy consumption has run ahead of domestic supply, who is borrowing more and saving less? It is clearly not industry. Industry has restored cash balances. There was a net real rate of return for industry of just over 9 per cent. in 1987, the highest for 20 years--a significant factor which should be taken into account when considering the impact of interest rates. In 1987, according to the latest figures, corporate savings were £46 billion out of a total of £69 billion of trading profits--a remarkable percentage.
Therefore, industry is not likely to be as damaged as it was before by higher interest rates. It may be that they will cause industry difficulty with its exports because of an increase in the value of sterling, but higher interest rates are more likely to force companies to restrain their wage increases and in those circumstances they will not find their export opportunities damaged. Some Opposition Members would find it instructive to look closely at the policies of Ludwig Erhardt in Germany in the 1960s when he pursued policies that had a similar virtuous effect on German exporters. It is also important to note that industry is hurt several times more by a 1 per cent. increase in wages than by a 1 per cent. increase in interest rates, something that I hope industrialists will bear in mind if they ever try to complain to the Chancellor about his current policy.
Secondly, is it the Government who are borrowing too much and spending too much? The answer is no, because the public sector surplus is £10 billion and there is a declining trend in public expenditure as a proportion of national income. That gives expenditure programmes greater flexibility without an increase in total spending because of the reduction in debt servicing costs. That is an important point, which again seems to have escaped those Opposition Members who have spoken today.
Thirdly--here I accept that there is a difficulty--there is the private sector. In the past three years the personal savings ratio has fallen from 10 per cent. to 4 per cent. That fact alone has led to a 2 per cent. per annum rise in consumption. I understand that, as my hon. Friend the Member for Fulham (Mr. Carrington) said, the figures may be unreliable and Tim Congdow has recently done some interesting work on the personal and corporate savings ratios. But there is no doubt that the Government's overall thrust should be to tackle the increase in personal consumption.
I support the use of higher interest rates. That policy is also supported by Professor Alan Budd, whose recent work has shown that in the short run high interest rates nowadays bear more heavily on consumption than on investment. He also demonstrates that income tax changes unequivocally bear more heavily on consumption than investment, but they take a long time to do so and to do a deflationary job. Therefore, the Government's interest rate policy is the right one.
Several Opposition Members bemoan the fact that the Chancellor cut the highest rates of tax, thus stimulating the economy in the long term. But even if one assumes that the
Column 649£1 billion that was raised from tax cuts went entirely in consumption this year, it would have had only a marginal effect on the current balance of payments problem. Opposition Members have things completely out of perspective. I wish that they would try to look at the figures in the right context.
There is another weapon that the Chancellor can use and I hope that, given the time that interest rates will take to bite properly into personal consumption, he will be able to look at this at the next Budget. Like other right hon. and hon. Members, I am referring to savings.
It is especially important when trying to encourage personal savings to promote investment in risks--in other words, equities. Let me be controversial and ask the Chancellor to look closely at whether we should allow the £30,000 mortgage relief to be available on share investments as well. Let me ask the Chancellor to look closely at the personal equity plan and dramatically to change the limits that are currently imposed on it. Will the Treasury consider profit-related pay and, instead of making it possible to have a cash bonus, make those bonuses payable in shares, particularly in shares in the company for which people work?
I have recently written a pamphlet "Fair Shares for all the Workers" urging employee share ownership schemes. The House will be glad to know that I do not have time to read it out, but I hope that they will avail themselves of the copy that is in the Library. Employee share ownership schemes are an important way not only of increasing the access to capital investment by the British people, but of giving them a greater commitment to the success of the company for which they work, and I commend them.
Saving encouragement should be used to bring the personal sector in line with the prudence shown by industry and Government. The economy is fundamentally sound. We have a problem with personal consumption and that has caused a difficulty on the overall balance of payments. But it is clear that we have a Chancellor who is prepared to take the right action when the statistics show that it needs to be taken, and who will not throw away the tremendous developments that Britain has made since 1979 in freeing the economy and giving the British people not only a pride in their country but an ability to participate in it through the wider share ownership and other schemes that the Government have introduced.
Mr. Pat Wall (Bradford, North) : It is a little over a year since black Monday 19 October 1987 and the stock exchange collapse which wiped about $2 trillion off the value of shares on the world exchanges in three days.
In the words of the Financial Times a couple of weeks ago : "At the time it looked and felt like an earthquake, an event that would change the economic direction of the world."
The spectre of another 1929, of a stock exchange collapse followed by a world economic slump, was propounded on both Left and Right in the House and outside.
Instead, paradoxically, we have seen a further expansion of the economies of the western world, with an average growth rate of 3.5 per cent. in developing countries which is expected to rise to 4 per cent. next year.
Column 650What is really interesting is that the doubts that were expressed 12 months ago still remain. The attention that today's debate has received demonstrates that, and rightly, because the problems that faced us some 12 months ago are far from solved.
The Chancellor is no longer the emperor of the world. Even within the Conservative party the critics and the doubters multiply. Among the more sober analysts outside the House, that trend is much more marked--indeed, it is exponential. During the Budget debate I hazarded the idea that the Chancellor would become known as the emperor without any clothes, and that is becoming more and more evident every day, even if it is not a particularly pretty thought.
Before the stock exchange collapse in 1929 the economic cycle had already begun to plummet, unlike in October last year. Production reached a peak in April 1929 in Germany, in June in America and in July in Britain. In America, manufacturing production dropped 20 per cent. between August and October 1929. The crash that followed was based on a tight money policy which led to a large number of bankruptcies. It led to the Smoot-Hawley Act of 1930, which provoked a world trade war. Protectionism, competitive devaluation and similar measures transformed the recession into a deep slump in which millions of people throughout the world suffered.
Sixty years on we have a different world with a more integrated economy. That was shown by the suddenness and universality of the October 1987 crash. On that occasion the group of seven countries attempted to learn from the experience of 1929 and tried to ward off the recession by pumping $100 billion into the United States economy. At the same time, particularly in this country, there were policies of increased Government spending, cheaper credit and tax handouts to the rich. There has been a reflation in all major Western economies, but nowhere more than in Britain where the Government have doubled the money supply over the past two years.
The fact that there has not been a similar increase in the production of capital goods and commodities has led to an increase in inflation. It is already 6.4 per cent. in Britain and 4.6 per cent. in America. With the exception of West Germany, it is rising in all the countries of the Western world.
The Chancellor said there will be no change. In fact, since last October the Government's policies have marked a fundamental change in the monetarist policies that the Government followed in the previous eight years. Continuing to reflate will lead to the same consequences as those which occurred in 1973 and 1974 when inflation in the OECD countries averaged 14 per cent. and reached 25 to 30 per cent. in some countries, including Britain. After a small change in policy towards inflation the Chancellor is now using the crudest of monetary weapons--a rapid increase in interest rates and a return to stop-go policies, which he has decried in the past.
The Chancellor faces a twin dilemma. There is stagflation--economic stagnation with high inflation--or a continuation of high interest rates which, as has been said, will lead to a fall in investment in productive industry, over-valuation of the pound, a fall in British exports, and an increase in our trade deficit.
The Chancellor talks as if Britain is an isolated island cut off from the rest of the world and as if it did not feel the effects of the American economy. In America the trade deficit is rising. It is over $170 billion and the budget deficit
Column 651is $135 billion. American interest rates are rising as our interst rates rise, and the strength of the dollar increases as the strength of the pound increases. However, there is still the danger, as there was a year ago, of an increasing trade war and restrictions on world trade which will lead to a world recession. That would have appalling consequences, particularly for Britain. Countries such as Japan will have to seek other markets in Europe, as will West Germany. Thirty per cent. of our manufacturing base has been destroyed and our productivity is one third to a half less than that of our major competitors. Manufacturers are already complaining about the lack of a skilled or trained work force.
With those problems Britain will face a desperate economic position. Those who want to talk about a market economy should look at the world in which we live with its booms and slumps which affect the lives of millions. There is a net transfer of financial resources from developing to advanced countries in excess of $30 billion per year. That is leading to appalling conditions in those countries. There are still 20 million people unemployed in the OECD countries, and in Britain at least one third of the population lives in poverty and at least two fifths have not benefited from the policies of the Government and have lower living standards.
We should not forget the social consequences of the Government's policies. In an editorial in The Sunday Telegraph Peregrine Worsthorne said that the Government
"fail to grasp the depth of outrage done to socialist-minded people by this Government ; far greater outrage than was ever done to Tory-minded people by any Labour Government. Just imagine what the state of Tory opinion would have been if a Labour Government had ever felt strong enough to introduce a swingeing wealth tax, abolish the public schools, nationalise the Oxbridge colleges, prohibit fox hunting, proscribe titles and turn Whites' Club into a GLC creche". He went on to say :
"There is no gratitude in politics. Those who have benefited from the Thatcherite revolution won't thank her if they see their gains eroded".
He ended by saying :
"Not only has she trampled on genuine ideals with deep roots in our national history but enjoyed doing so. In economic good times this did not matter. But if economic times turn downwards it could matter a lot."
The Government's economic philosophy is based on the belief that there is a choice between the bureaucratic state-owned economies of the East and the free-for-all market economy they preach. I believe that there is another choice--a democratic socialist choice--where the state intervenes in society, not in a bureaucratic way but democratically, with the full involvement of the producers and consumers in our society.
Mrs. Teresa Gorman (Billericay) : I wish to contribute to the debate from the perspective of someone who spent 15 years of her working life before coming to the House in business. I started a business from scratch and worked it up producing goods, selling them, importing, exporting, understanding the significance of the value of money, and buying and selling foreign currencies in order to trade. There has been much talk today based on political or economic dogma, whether it is Marxists who believe that one should control everything, including exchange, the Keynesians who believe that one can manufacture money
Column 652and create businesses out of that, or the monetarists who believe that one can manipulate the money supply to control the economy. I started my business in the early 1970s and lived through the horrors of the rampaging inflation experienced under the Labour Administration. Wilson's weasel words about the pound in our pockets not being devalued are carved on my heart because at that time I was heavily involved in importing bits and pieces and I suffered badly. I almost lost my business as a result of that economic interference. Therefore, I am no lover of Government interference in the economy. The tremendous success that our Government have achieved in righting the economy was predicted on the degree to which they left the economy alone. They reduced tax rates so that people could make their own decisions about what to do with their money. The Government abolished exchange controls, which was a brilliant move by my right hon. Friend the Chancellor's predecessor. It freed people to spend money in the world market as they saw fit. The golden thread that has run through our economic success has been lack of intervention in economic matters. It is for that reason that it troubles me that we have now taken to the "touch on the tiller" mentality, which is what altering the interest rate is about.
We are in danger of impaling ourselves on that dogma. It is extremely important to take stock of the effect that such an idea is having on our business community. Business is about producing and exchanging goods. In reality it does not matter whether it takes place with foreigners or within our domestic market. It is nonsense to suggest that exporting has some intrinsically greater value than does selling goods domestically. That is like saying it is better to sell in Billericay than in Birmingham, Bradford or anywhere else. It is a subjective judgment of what economics and the economy, the business world, is all about.
If I had to buy foreign currency to purchase goods abroad, the money markets would adjust their values accordingly. If I wanted to buy an Hitachi television set, that would be taken into account by those who deal in currencies. To create artificial values for currency is to interfere with the natural market process. To try to tie the rudder of a ship so that it can no longer steer between the rocks is very dangerous. The same is true of trying to control exchange or interest rates in the interests of balancing the economy.
The concept of the balance of the economy is absurd. It really does not matter whether, at any particular time, we export more than we import or vice versa. If the economy is left to settle, it will balance itself. The level of the exchange rate--the value of money--shows what the world market thinks about the way our economy is going. That is what should decide the issue. To try to control that pivot point create difficulties.
Why are we trying to control the economy? Is it because of inflation? We all know, because my right hon. Friends the Prime Minister and the Chancellor have said so often, that inflation is created by politicians, not by business men, the greedy consumer who wants to buy more goods, or even trade unionists. It is an artificial extension of the money supply. Only the Government, by reducing the difference between their expenditure and taxation, can do anything about that. Trying to manipulate people's buying habits--which, to some extent, we are doing by raising the
Column 653cost of money--will not succeed. We should allow exchange and interest rates to float and then the economy will balance. We have heard a great deal about the need to increase savings. It has been said that raising interest rates will somehow induce people to save more. Japan faced many economic problems during the 1950s. In an attempt to encourage savings, which I accept is an important aspect of a healthy economy, it exempted interest on savings from taxation. That had a stunning effect on the level of savings which, in turn, produced the capital on which the success of the Japanese economy since then has been based. In addition, the then Japanese Chancellor reduced and stabilised the rate of taxation to a flat rate of 30 per cent. Those are the sorts of measures that will bring the economy into balance.
I do not believe that manipulating interest rates is the way out of what we perceive to be a dilemma, although I do not think that there is a balance of payments crisis. We have a healthy economy and we have put more money into people's pockets. People naturally want to spend it, which in turn increases the domestic market. Of course, some of that money will be spent abroad, and there is no great harm in that. It is not a tragedy. The Japanese do not eat the money that they obtain from our buying their goods and services ; they do not stick it in a box under the bed--they spend it in Britain by investing in factories or buying our goods. They exchange it in the money markets for other currencies. It is absurd to suggest that there is something intrinsically bad about importing goods.
Increasing interest rates causes many difficulties for the business community. Big businesses may well have large savings, but small businesses are almost always working on overdrafts. Before my right hon. Friend thinks of raising interest rates again, I ask him to consider the basic policy of the economist Hayek, whose views I greatly respect, which is to allow the exchange and interest rates to float.
Mr. Nigel Griffiths (Edinburgh, South) : Today, in the face of another devastating and effective critique of the Chancellor's strategy, the right hon. Gentleman's credit ran out. It was foolish of him to claim that the Opposition motion does not refer to inflation when it specifically regrets
"the way in which current policies have pushed up mortgage rates and other prices and charges".
Some of us had previously only suspected that the Chancellor was an economic illiterate. If the recent price rises do not constitute inflation, the Chancellor must explain what does.
The truth is that the term "inflation" is now as embarrassing to the Government as the term "unemployment" has been hitherto. It will have come as no surprise to the House today to hear the Chancellor attempting to modify the definition of "inflation"--no doubt the first of many--so that he could achieve a reduction in the same way that the Government changed the methods of recording unemployment to mask its real level.
If the Chancellor is right in saying that the real level of inflation is less than the Treasury figures because mortgage rises are included, how will he explain that to the millions of families in London who are now paying £20 a week
Column 654more for their mortgages than they were at this time last year? How can he say that that is not inflation? For the 100,000 home owners in Edinburgh, and almost 1 million throughout Scotland, the rise in mortgage rates since the Budget has burdened them with an average monthly increase of £30. For thousands of home owners in my constituency and others, the rises so far this year have added £1,000 to £2,0000 to their annual repayments. The next mortgage rate increase will be a direct result of the Chancellor's 1 per cent. increase last Friday. That will deal a crippling blow to hundreds of thousands of home owners. The Chancellor will add another record to his collection--the record number of mortgage defaults, although in fact he already holds that record.
The Chancellor will live to regret his failure today to take action to help mortgagors. Many of the poorer home owners cannot live with that. Indeed, it is not only home owners who have suffered since the March Budget-- tenants have had to bear rent increases of more than 8 per cent., almost twice the March rate of inflation, and electricity price rises of 9 per cent. That has also hit industrial and commercial competitiveness. The householders who have been hardest hit by the price rises that the Government have forced on consumers are the 10 million senior citizens who spend a higher proportion of their income on fuel than do the remainder of the population. One of the 14,000 senior citizens in my constituency telephoned me this morning to comment on the latest pronouncement emanating from the Parliamentary Under-Secretary of State for Health, who said at the weekend that fuel costs were low and that state benefits meant that old people should have no problems keeping warm. This latest advice is part of a series of advisory notes, including advice to pensioners to start knitting to beat the winter chill and to sell their assets so that they can take out health insurance in the private sector.
Like the Chancellor, the Under-Secretary is out of touch with reality. As Age Concern has said today, the reality is benefit cuts, with senior citizens waiting months for any cash help. The reality is that the Help the Aged's winter warmth line has received more than 1, 000 calls in the past 10 days from people who cannot afford to heat their homes. The reality is that pensioner couples should have had in their hands every week £18 more from this Government to spend on their fuel bills, but the breaking in 1980 of the link between pay and pension rises has allowed the Chancellor an extra £5 billion this year alone. Last Friday the Chancellor said that from next October £200 million of that would go back to the pensioners.
Today, the Chancellor had the chance to state how he would use the remaining £4.8 billion that he has taken from the pensioners to help them. However, as we know, the Chancellor has already given that money to help those on top earnings. He has not invested in our senior citizens or in industry. Indeed, the right hon. Member for Old Bexley and Sidcup (Mr. Heath) said that industry was destroyed in this country in the 1980s--and all to no purpose. It is no wonder that the Chancellor declined to take any interventions today, especially from his hon. Friends. He knows that, however cogent the arguments and no matter how scathing the criticism of him by the Opposition, it is nothing to the criticisms coming from his own side. He knows that when his right hon. Friend, the former Prime Minister, criticised the Chancellor's "insensitivity to other members of the Community", he
Column 655was referring to the EEC, but it is equally true that the Chancellor is insensitive to the needs of our own community. The nine increases in interest rates since the March Budget have made it impossible for the business community to finance investment by borrowing. The millions of men and women languishing on the dole know the real price of the Government's economic failure. The Chancellor has recently received some bad news and some very bad news. The bad news came in the widespread criticism of his policies by his right hon. Friends the Members for Guildford (Mr. Howell) and for Brentford and Isleworth (Sir B. Hayhoe). The very bad news is that he now has some support from the City--from those very people who less than a month ago he was castigating as making forecasts that were even more inaccurate than his own.
Today, the Chancellor had two opportunities. One was to announce an investment programme for training and for industry, to stop almost limitless credit eroding our home economy, to take action to reduce interest and mortgage rates and to help businesses and people. The other was for the Chancellor to help himself by giving a convincing defence of his financial strategy. He has failed, and the country is paying for his failure.
Mr. Nicholas Bennett (Pembroke) : The hon. Member for Western Isles (Mr. Macdonald) said that Conservative Members were sitting sullen faced and were fair-weather friends to the Chancellor. I wish to place on record the fact that I support the Chancellor in what he is doing now, as I did in March. I do not believe that the Chancellor has it wrong in having to temper the economy slightly because of the large balance of payments deficit. Some of us are determined to defend the Government's record, believe that we have it right, and that the economy is still strong.
Of course, the Labour party has a considerable problem. My hon. Friend the Member for Esher (Mr. Taylor) said that the hon. Member for Dunfermline, East (Mr. Brown) knew no economics. He certainly knows no economic history, because those Conservative Members who remember the last Labour Government will recall the appalling record left to us in 1979. We will take no lectures from the hon. Member for Dunfermline, East or from his right hon. Friend the Member for Leeds, East (Mr. Healey, who has been noticeable by his absence from every economic debate since he left office as Chancellor of the Exchequer in 1979.
All the indicators as to the prosperity of our economy show just how well off people are. Since 1979 the man on average earnings has had a 27 per cent. increase in his take-home pay, after taking account of price rises. A man on half average earnings is 20 per cent. better off in real terms and pensioners, whom the Opposition often use as a pawn in their campaigns, are 25 per cent. better off. One has only to look around Britain today to see the prosperity. Some 67 per cent. of people own their own homes, which is a larger percentage than in any other European country. That is the mark of wealth creation and the wealth of interest in home ownership that ordinary people have. I am delighted that this party has been the party for a home- owning democracy in spite of the objections from the Opposition, who when we started to sell council houses objected and said that the tenants
Column 656would not buy them. Yet eight or nine years later 1 million tenants own their own homes and have a stake in our society. The Opposition have complained about the increase in mortgage rates, but only a few weeks ago they were complaining about the increases in house prices. They should make sure that they look at both sides of the coin. Of course mortgage rate increases are not welcome to any of us who own our homes and who know about the problems of our constituents.
Labour Members have complained about the north-south divide and the fact that house prices in the north are cheaper than in the south. They then complained, however, when house prices started to go up. Now that we are taking measures to ensure that house price increases slow down, as they are doing, they complain about that.
The Opposition have also complained that, in recent months, working people have had a certain amount of money taken from their pockets. Of course everyone regrets that mortgage rates have gone up, but we should also remember that the Labour party has voted against every tax cut since 1979. If it had had its way, we would have a tax rate of 34p in the pound. For Opposition Members to complain about people having to pay extra in mortgage interest is rich when they have objected to any cut in people's income tax rate since 1979. Those cuts have put money in people's pockets. I find it astonishing that Opposition Members can look us straight in the face.
The Opposition have complained about inflation. I concede that the inflation rate has run between 6 and 7 per cent. and that is unacceptably high, but there is not one month in this Parliament when it has come within a mile of the Labour party's record when it was 9 per cent. at its lowest rate. How dare the Opposition lecture us about inflation when, in five years, the Labour Government never got the inflation rate down to anywhere near what the Chancellor of the Exchequer has achieved.
Concern has been expressed about the effect of interest rates on small businesses. I have grave concern for the small businesses of my constituency and the family farms which suffer when mortgage and interest rates increase. The Labour party has failed to recognise, however, that 80 per cent. of the increase in the balance of payments deficit has been caused by demand from the consumer. Therefore, it is obvious that if interest rates, which affect the mortgage rate, are increased, that has a quicker and more effective dampening effect on consumer demand than any other measure.
Today business liquidity means that industry is much better able to stand up to an increase in interest rates than it ever was when the Labour party was in office. Opposition Members should consider their party's record before they lecture us.
The hon. Member for Dunfermline, East called for top taxpayers to have their tax cuts taken away. That policy equals cutting off one's nose to spite one's face. Opposition Members have not noticed that all the evidence, international and national, suggests that, when taxes are cut, the tax yield increases. That is true in this country where the top taxpayers, instead of paying 24 per cent. of the total tax yield, now pay 29 per cent. That is true of the far east, Japan, and the United States, and of every country where taxes have been cut. Conversely, in Belgium and Ireland where taxes have been increased, the tax yield has fallen. That is a recipe for disaster.