|Previous Section||Home Page|
Dr. Bray : The Chancellor was smirking when my right hon. Friend gave the errors, which are confusing in their presentation. To take the Chancellor's interpretation, the forecast balance of payments deficit in 1988 was £4 billion and the error was £3 billion which is a long way short of the actual error. The right hon. Member for Worthing (Mr. Higgins) should not imagine that the Treasury forecast bears much relationship to the model. The model publication has been delayed. It was promised for yesterday, it had not been delivered when the Chancellor rose to speak and I do not know whether it has now been delivered.
Mr. Sheldon : I am sure that my hon. Friend will make his own comments, and his views on statistics are well known and important. Statistics are not the only guide, but they are an important one, and the Chancellor should have learnt an essential lesson. How has he reacted to the £14 billion? Market forces would have led to the falling of the pound. He has reacted by an interventionist policy not to help but
Column 1027to harm British industry. At the time of the Budget, the pound stood at DM3.07 and now it is at DM3.22, and the index of sterling against other currencies is higher now. So once again it is cheaper to import and harder to export. So much then for manufacturing industry. The Government have not considered the matter according to that sector of our economy, as they should.
As a result of that folly we have had a consumer boom. The euphoria of a rising standard of living has given way within months to the misery of a declining one. The Chancellor of the Exchequer has reduced taxes and put up interest rates all in the same year. He did not even have the excuse of the need to win a general election. There is one lesson--not a very difficult one--that the right hon. Gentleman might have picked up from Lord Keynes on demand management. One does not reduce taxes on the rich in the middle of a spending boom. Those people who said that the tax cuts were smaller in economic terms overlooked the psychological effects of a Budget. There was a combination of tax cuts with high house prices, which led to a euphoria. It was a created euphoria activated by the Chancellor. In his Budget statement, he said :
"We have thus secured an enviable, virtuous circle in public finance : lower borrowing and lower tax rates create both the scope and the incentive for the private sector to expand."--[ Official Report, 15 March 1988 ; Vol. 129, c. 996.]
That is what it was intended for. Lower borrowing and lower taxes create both the scope and incentive for the private sector to expand. He encouraged the private sector and it went ahead and expanded ; it spent and spent. That was the result of the Budget.
Our problems today concern essentially manufacturing industry. We do not trade very much internationally in services, but we trade enormously in manufactured products. If we were a country like Switzerland, we could manage with a large service sector, but we have 56 million people to look after and we cannot do that unless we sell a large part of our goods as well as our services. The Chancellor of the Exchequer, with his City background, has not paid sufficient attention to that.
Those 56 million people depend on the large hinterland of a flourishing, productive economy. The Chancellor has taken pride in the financial strength of Britain arising from the North sea oil economy, which has assisted in the move from a manufacturing economy to a rentier economy in which we live off the overseas investments. There is a need for training and education and a need to avoid the harmful effects of stop-go. The danger for much of our industry is that there has not been that much of a go. There has been a very large stop, and there is a very large stop now.
I make no apology when I speak on these matters for referring to my constituency, which lost 30 per cent. of its industry in those fateful years 1979-81. It was a prosperous town with many small and medium-sized firms, the largest of which employed 500 people. We lost one third of those companies in those two years. There was a wide range of medium-tech industries such as one finds in every country of the world, including Japan, the United States and Germany. Those industries were destroyed. When we come to advance, those companies will not be there so we will have some capacity constraints. Those companies were ruined by the combination of 17 per cent. interest rates and the $2.40 pound. The 17 per cent. interest rates finished them off at home and the $2.40 pound made exports almost impossible and resulted in imports.
Column 1028Those are the lessons that we must learn. We must never find ourselves in that situation again, so we must re-create a larger manufacturing economy. No incentives are too great to restore that. If the Chancellor of the Exchequer ever has money to spread around, this is where is should go.
When a manufacturing company buys a machine tool, it does not just obtain a new piece of equipment : it gets productivity, a growth in skills to operate the new machinery and a modernisation of the factory and workplace, and it helps to produce the kind of Britain that we shall need if we are to regain our place as an important manufacturing country. If the Chancellor of the Exchequer ever has money to spend, there is no better way to spend it.
It is ludicrous that capital allowances are 25 per cent. Each year, therefore, the depreciation allowed is one quarter of the reducing capital value. That is clearly absurd. The profit of the distributor selling the machinery is greater than that 25 per cent. so, when he comes to sell that new grummet press, for example, even after a week, he will not get back the amount of the depreciation that he is allowed. We therefore have not an incentive, but a built-in disincentive, to capital modernisation. The best investment decisions are made on the basis of the need for machinery, but one must never discount the incentive of a product made easier to purchase through sensible tax policies, providing benefits which can be used to the advantage of the company, the employee, the industry and the nation. We must ask how the Chancellor is dealing with the consumer boom. He declined any control on credit, on what I consider the hilarious foundation that it would not be fair to those with little financial knowledge because others would easily circumvent it and those with little financial knowledge would be left to carry the burden. That is to suggest that the Government are a paragon of fairness and equality. In the long run, I agree that there would be ways around them, but credit controls are not required for the long run. Action in areas such as hire purchase, banks and credit cards was required and could have been taken. Such a short-term measure would have had some immediate effect--largely psychological, but none the worse for that.
High interest rates hurt industry, which finds itself competing with the banks who can now offer a better return than many investments in manufacturing industry. If we know that it will cost us 15 or 16 per cent. or more, that is obviously a disincentive to spend money on investment in machinery, but that does not affect credit card purchasers who finance APRs approaching 30 per cent. and are oblivious to the 1 or 2 per cent. above that.
Interest rates are feeding into the retail prices index through mortgage payments. There is an inflationary chain. High interest rates lead to RPI rises, which lead to wage demands, which in turn lead to what the Chancellor always forswore--exhortation. That is what we have today. There was a time when the Government said that wage demands were nothing to do with them. They said that they would control the money supply and, if firms allowed excessive wage demands, they would go out of business. It is pitiable that we now see the Government, who are responsible for wage demands, pleading with industry not to grant them.
The Chancellor of the Exchequer must bear in mind the fact that, although mortgage interest is included in the
Column 1029RPI, house prices are not. The enormous rise in house prices is one element of inflation ; there is no question about that. It affects everyone who buys a house with a mortgage. It affects everyone other than those who have paid cash outright or who have redeemed their mortgages. The Prime Minister knew the inflationary effects of her policies when she decided to buy her own house in Dulwich. She said that, if she had not bought it then, she would have had to move 100 miles out, because she could see that house prices were going to rise. That is an important element in inflation and it is not measured by the RPI, for reasons that we know and understand. The right hon. Member for Shropshire, North (Mr. Biffen) said in 1980 that we were in for
"three years of unparallelled austerity".
How right he was. I hope that we are not in for even a year of that. We paid the price then and the Government should have learned the lesson. If that lesson has to be learned again, the Government will rightly be accused of the damage that they have done to the country that we were sent here to serve.
Mr. John Townend (Bridlington) : I found the speech of the hon. Member for Dunfermline, East (Mr. Brown) illuminating, to say the least, because it confirmed what I and many of my hon. Friends thought : the Labour party is devoid of any policy at all. When asked twice by the Chancellor of the Exchequer how much the Labour party would increase spending if it were in office, he could not provide an answer. When asked twice by the Chancellor about the increase in the basic rate of taxation, he was unable or unwilling to answer. The only policy that he outlined was that there would be an increase in the higher rate of taxation. The Labour party is either devoid of policy or its policy is so out of this world that it is frightened that the ordinary man in the street will know what to expect if a Labour Government were elected.
I should like to spend a few minutes explaining to the House why, as a member of the Treasury and Civil Service Select Committee, I could not vote for its report. I objected to it on a number of matters of principle, particularly paragraphs 18 to 21, in which the Committee said that, when considering public sector claims on public resources, transfer payments should be excluded. That is nonsense. What difference is there on the effect on the economy of an increase in the old age pension and an increase in nurses' pay?
If transfer payments were excluded, the percentage of expenditure to GDP would fall and there would be pressure for increased Government spending. In paragraph 30 the Select Committee recommends that there should be more information about differential price increases. Again, I think that that is unnecessary. It would undermine the cash planning process and would be a first move back to planning expenditure on a volume basis, a practice which was used under the previous Labour Government when spending was completely out of control.
My final objection to the report is the recommendation that the Government should publish annual national and public sector balance sheets. That would be very expensive and time-consuming for the Treasury and there would be
Column 1030enormous problems in valuation. For example, the Chief Secretary to the Treasury asked the Committee, how we would assess the present market value of a prison. Furthermore, there would be problems with depreciation.
This year's Autumn Statement paints a picture of a sound economy which has some short-term problems due to the unsustainable level of growth which has resulted in the resumption of inflationary pressure and a rise in the balance of payments deficit. I do not believe that the Chancellor's Budget judgment was in any way responsible for those short-term problems. With a public sector debt repayment now forecast at £9.8 billion, as my right hon. Friend the Member for Worthing (Mr. Higgins) said, we cannot describe the fiscal stance as slack. With that size of surplus, the tax cuts were completely justified. It is always easy to be wise after the event, and the Chancellor has already admitted that he and other financial leaders in the industrial world over-estimated the dangers to the world economy following black Monday and the stock market crash. To prevent a worldwide collapse, they slackened the monetary stance and interest rates around the world fell. The world economy proved far more resilient than anyone imagined. In retrospect, interest rates were undoubtedly kept too low and growth went ahead at an unexpected level. That was particularly so in the United Kingdom where there was a large increase in private sector borrowing and private investment. We are facing a much less serious problem than we would have faced if there had been a slump equivalent to that in the 1930s. Therefore, I stongly support the Government's commitment to reduce inflation. The present high levels of interest rates are necessary. However, I do not believe that they will be enough on their own. They must be backed, if possible, by wage increases in the private sector that do not put up unit labour costs more than the very minimum so that our exports remain competitive. If that is to be achieved, the Government must set an example in the public sector wage negotiations this year. A large proportion of wage increases in manufacturing industry is recouped by increases in productivity, but that is more difficult to achieve in the service sector and practically impossible in the public sector. Indeed, it rarely happens.
This year the Government should do everything possible to keep public sector pay increases within the level of inflation. There have been large increases in recent years for the police, firemen, teachers, nurses and the armed forces. This year the Government must be prepared to accept short- term unpopularity and stand firm. Everyone accepts that the balance of payments deficit is too great and it cannot be ignored. However, there is a difference between our present deficit and other deficits since the war. In the past a balance of payments deficit has always been mirrored by a public sector deficit, and that is the position in America. At the moment we have a public sector surplus. Our trade deficit is completely a private sector phenomenon. It is the result of private sector investment--which will help us to increase productivity and produce exports in the future--private sector consumer borrowing and a rundown in private savings. There is a limit to the amount that the private sector is willing or able to borrow and we can spend our savings only once. Therefore, over a period, the deficit should rectify itself. However, it will persist for some time and the Government should take some action to try to increase the speed of its natural fall.
Column 1031I urged the Chancellor to take measures in the Budget to encourage savings. The Government should look at all the nations with which we have a significant trade deficit to see whether we have the same access to their markets that they have to ours. That should include not only trade in goods, but trade in services. The most glaring example is Japan. It has taken 20 years to get the Japanese to open their markets to Scotch whisky. During that time their exports of manufacturing goods have increased dramatically. It is still not possible for us to have complete access to Japan for our insurance industry, and South Korea still prevents the free sale of Scotch whisky. We need a tough, no-nonsense trade policy based on reciprocity.
Mr. Jim Cousins (Newcastle upon Tyne, Central) : In attempting to put those matters right the hon. Gentleman would not want to see a protectionist trade war which would inhibit Japanese external direct investment into regions like mine. Such investment has been significant in my area over the past five years. It must be extremely important to avoid a return to competitive protectionism. In that respect, his remarks are extremely unhelpful to the development of patterns in the world economy that assist in solving the problems to which he has drawn attention.
Mr. Townend : I am sure that my hon. Friends will be intrigued to know that there has been such an increase in investment in the hon. Gentleman's constituency, and I am sure we are all delighted about that. Obviously the investment environment attracts foreign investors. However, I do not think that what I have suggested would prevent that investment. We believe in free trade and open markets, but open markets must operate two ways. I believe that the Japanese only appreciate strength in negotiations.
I congratulate the Government on their public expenditure forecasts in the Autumn Statement. It has been a long time since expenditure in a current year was expected to be more than £3 billion less than anticipated. That shows that we have Ministers in the Treasury who believe in good housekeeping.
Mr. Robert Sheldon : I thought that the hon. Gentleman said that he voted against the report. This is very important. Having looked at the report, I cannot see that he voted against it.
Mr. Townend : I want to make it clear that I was giving reasons why I could not vote for the report.
The planning total for next year will stay the same as planned and the Government deserve to be congratulated on that. However, in the two following years the Government intend to loosen their grip a little and increase spending by a further 3 per cent. each year. Having abandoned their policy of keeping public expenditure level in real terms, the Government have set themselves a target of reducing public expenditure as a percentage of gross domestic product. Here again, they are to be congratulated on their success in bringing the figure down from 46.75 per cent. to 39.75 per cent. this year. However, it is worth putting that achievement into perpective. Under Harold Wilson's Government in 1964-65, public expenditure as a percentage of GDP was only 36 per cent. I often find it surprising to hear Opposition Members claim that we are spending far too little when we are still spending more than they did under Harold Wilson. I was a little disappointed, when I raised
Column 1032that matter with the Chief Secretary to the Treasury in the Select Committee, that he did not accept that 36 per cent. should be a target for the future.
I am worried that the impetus to increase spending might coincide with a period when economic growth is much slower as we try to level our balance of payments. Therefore, spending as a proportion of GDP will clearly rise.
I believe that the Government's policy is working. High interest rates are having an effect. The throttle is coming off the housing market, and once we get over the mad Christmas spend, consumer spending will drop. Provided that wage settlements do not explode, the economy should have a soft landing.
Government spending must be kept under control, but with a Budget surplus, I see no reason why, in his next Budget, the Chancellor should not continue repaying the national debt, while continuing his successful supply side policy of reducing taxation--proceeding to his ultimate aim of a standard tax rate of 20 per cent.
Mr. A. J. Beith (Berwick-upon-Tweed) : This afternoon, the Prime Minister spoke of the Chancellor of the Exchequer's absolute priority. I am sorry to see the Chancellor being called away at the very moment that I refer to his Prime Minister. I wonder about the reason. Perhaps she has summoned him. I hope that the Chief Secretary to the Treasury will report my comments to him.
The right hon. Lady said that the Chancellor's absolute priority is to control inflation. As that is what she said, no doubt that is what his absolute priority will be. There was a stage when the Chancellor flirted with policies different from those of the Prime Minister, but that was not an entirely successful experiment. I do not know whether she is in the habit of reiterating strongly to him the way that she wants things done, but at the moment the right hon. Lady and the Chancellor are working to meet the same priority.
The Chancellor of the Exchequer reminds one of a doctor searching through a medicine cupboard, trying some medicines and throwing others away as being unusable. At the end of that long process, the Chancellor has lighted on one and says, "This medicine will work. If it doesn't work, you can take more of it. If it still doesn't work, you can take still more." The medicine is short-term interest rates. It is odd that the Chancellor is still attending to the same disease of inflation. He has run out of all the excuses that he was previously able to give for inflation's continuance. He can no longer say that world commodity prices are causing inflation, as was the case some years ago. Neither can he blame over-mighty, over-powerful trade unions. He cannot blame an outgoing Labour Government for the rate of inflation. It is a little difficult to blame even the Conservative Government who preceded the last Labour Government, which the present Administration often do. Blaming the Heath Government is a little difficult for them to do at this distance.
Mr. Nigel Griffiths (Edinburgh, South) : Certainly he cannot blame the last Labour Government.
Mr. Beith : The Chancellor cannot blame the period when my hon. Friends ensured that a Labour Government reduced inflation from 21 per cent. to 7 per cent. Neither
Column 1033can he use the monetary supply targets, because he abandoned most of them. He cannot blame the public sector deficit, because the Government have achieved a public sector surplus.
In years gone by, I listened to many sermons from Conservative Members, including the Prime Minister, when they said that once we rid ourselves of the public sector deficit, there would be no inflation. The Conservatives have now done that--they have cracked it. They have achieved a public sector surplus, but still there is inflation.
The Government contributed to that inflation with the Chancellor's last Budget judgments. I dissent from the right hon. Member for Worthing (Mr. Higgins) on this point. Where he is wrong about the Budget tax cuts is not in his analysis that, with hindsight, they may be seen as entirely acceptable in terms of the amount of revenue needed. One could even argue that they were insufficient in relation to revenue, because of the size of the surplus. But they had the effect of generating inflationary expectations at a particular time. In making that argument, I say also that that problem will not be solved by reimposing the tax levels that were earlier reduced. Those cuts had the one-off effect of giving people the knowledge that they would shortly have more money in their wage packets, encouraging them to have more credit at a time of considerable expansion in the credit market. That one-off effect undoubtedly led to overheating and contributed to inflation.
The Government also created unnecessary public sector price increases, which have added to inflation. The remedy that the Government choose, of higher short-term interest rates, increases inflation still further. No one can really accept the Chancellor's claim that one can consider inflation without reference to mortgage interest rates, because they are such a potent factor in inflation for home owners throughout the country.
Despite the Chancellor's prophesies and forecasts, the tables identified by the Select Committee show that the goal of zero inflation never gets nearer. It is always three years away that inflation is predicted to fall to 3 per cent. How many more years will it be before it falls to zero? The Chancellor has never cracked that one. He is not even believed by his fellow Ministers. In a statement the other day after a meeting of a Committee of the House, the Chancellor's right hon. Friend the Secretary of State for Energy reiterated a forecast of £40 billion outturn of electricity industry investment. That figure assumes a rate of inflation of 8 per cent. That has been reiterated today on the Secretary of State's behalf. It is possible to reinterpret those figures to mean that inflation is only 5 per cent. However, it is impossible to get it down to 3 per cent., let alone zero. Ministers are acting on assumptions about what will happen to inflation that are wholly different from the rosy ones made by the Chancellor of the Exchequer.
Let us consider the short-term interest rates, and examine whether their use will achieve the Chancellor's objective. From whatever standpoint one considers it, the Select Committee's report poses questions about the assumptions on which the Chancellor bases his strategy. One is whether credit is all that sensitive to interest rates. The burden of the letter that is alleged to have been sent by the Governor of the Bank of England to the Chancellor
Column 1034is that it is not, and that if the Chancellor engages in policies of the kind he adopted for his last Budget and creates further inflationary expectations, interest rates will not by themselves stop that process.
As well as being an instrument of limited effectiveness, higher interest rates are counter-productive. They have an adverse effect on domestic inflation because of their influence on mortgage repayments, and also a serious effect on industrial competitiveness and the balance of payments, by pricing British goods upwards in foreign markets.
One is bound to question what will happen eventually if the market gets round to dealing with the curious fact that mortgage interest operates on a short-term basis, whereas borrowing money to buy a house is in reality a long-term commitment. How long will that situation continue? How long will the competitive mortgage market continue offering only short-term interest rates in house purchase finance? There is no obvious reason why it should do so, other than the traditional pattern of building society borrowing and lending policies.
From the home owners' point of view, I hope that the market will address that question and look for ways of relating home ownership to a long-term interest rate, which could be much lower--in the region of 9 per cent. Home owners would be much better off, but the Chancellor would be left naked and with no clothes at all. Short-term interest rates would cease to be available to him as his one instrument for managing the economy.
In addressing the effects of that instrument on the balance of payments, I am led to comment on our balance of payments deficit itself. The forecast trade deficit of £4 billion turned out to be in the region of £14 billion, and we must question the Government's assumptions about what will happen next. They claim that the trade deficit will be tackled by depressing domestic demand through high interest rates, so that industry will have spare capacity, and that that spare capacity will immediately be diverted to exporting more goods. The Government argue that the resulting increased price in foreign markets will be entirely offset by released capacity. I can tell the Chief Secretary to the Treasury that I do not know many people who believe that things will happen in that way. That is not a political criticism of the Government but an attempt at making an objective assessment of the viability of such a strategy. It cannot be guaranteed that excess capacity can easily be switched to export production, or that the size of the trading sector switched will be big enough to make a significant difference to our trade deficit.
If the Government's assumptions do not hold, the United Kingdom trade deficit will remain dangerously high, and overseas confidence will be tested. At present, it is attractive to put money into this country in sterling on the basis of current high interest rates, but if confidence is lost, the crisis will come. The Chancellor blames the statistics for a lot of this and says that they are all wrong. The Select Committee, too, was fairly critical on that point, but everyone in these arguments seems to be guilty of misusing statistics. The Chancellor increasingly talks as if the retail prices index already excluded mortgage interest rates. He is in danger of getting into the position that we got into on employment statistics, where nobody any longer believes the Government's unemployment figures because they have been changed so many times.
Column 1035It is in the general interest that we should have generally accepted statistics so that we can talk meaningfully about unemployment, inflation and public expenditure levels. When the Government increase health expenditure by 1.7 per cent. they should stop going around saying that they have increased it by 4.5 per cent., or at least they should explain rather more clearly that a lot of that increase is accounted for by projected savings in efficiency and by changes in the balance sheet of public assets by the sale of the health authority's present assets, to which the Select Committee attached some importance.
I am bound to ask the Chief Secretary again why he believes that public expenditure should decline as a proportion of gross domestic product. What is the ultimate objective of public expenditure declining year by year? That is the yardstick to which he has been instructed to work. I tried to find out during the sittings of the Select Committee what was the ultimate objective. Was it zero or was it some accepted plateau? He said that he did not think that there was a plateau. Where are we heading? Surely the argument about public expenditure is an argument about its merits, associated with an argument about what level might be unreasonable for the taxpayer or the economy to bear.
We now have a substantial public sector surplus and a situation in which industry can see where the serious gaps in public expenditure are causing difficulties. It does not seem reasonable to argue that we should go on reducing public expenditure year by year. The Prime Minister's argument used to be that public expenditure was crowding out everything else and causing inflation, thus having a harmful effect on the economy. Many businesses would now like to see some public expenditure crowding in. Certainly many businesses in London would like to see greater public investment in London's public transport system so that their staff can travel to work. In other parts of the country, industry would like to see some public expenditure on the infrastructure on which it depends--for example, links from the Channel tunnel to the north of England and Scotland. Businesses, usually pretty sceptical about unnecessary public expenditure, are increasingly worried that if some expenditure does not take place they will not be able to compete.
There is a growing sense that in some areas of public expenditure we are getting into public squalor. It is difficult to relate that to a target of constantly decreasing public spending as a proportion of what we as a nation can produce. Therefore, I invite the Chief Secretary to tell us when he replies what is the purpose of it all. As to the strategy that the Chancellor should adopt, we would argue that there are a number of things that he could do in the Budget which would reduce his dependence on interest rates as the sole measure and deal with some of the other matters that I have described. He should do more about savings, as I have argued in all our previous economic debates and, indeed, on the occasions when he has introduced measures that were supposed to encourage savings, but the Chancellor has had such a narrow conception.
Take the greatly trumpeted personal equity plans which were introduced two Budgets ago which were never cast in such a way that they would encourage a wider range of people to invest in industry. All the tax reliefs that they offered benefited mainly those with an existing portfolio who had not used up their other tax reliefs. Unless he gives some front-ended tax relief on the PEP schemes and
Column 1036extends their scope in some way, he will not attract a wider range of people into saving, and particularly into saving in industry. Unless he does give some reason for savings in industry, he will not get the level playing field either.
Mr. Budgen : Is there any sign that if there were a distortion in the tax system in favour of some form of saving, say in a particular kind of share of or something like that, it would increase overall saving, or would it merely make those favoured forms of saving more attractive and bump up their market value?
Mr. Beith : There are two options open to the Government at the moment. One is to remove all tax incentives which distort the savings market. I know that that is what the hon. Gentleman would favour. That would lead him to do what I know the Prime Minister does not want to do, which is to remove mortgage interest tax relief, which attracts savings into housing. The other is to try to balance the picture by ensuring that savings in industry, and certainly those on a fairly limited scale affecting a wider range of people, can be at least as attractive as investing in the bricks and mortar of a home. Some offsetting of existing distortions for which there are other justifications seems reasonable in those circumstances unless the Government are to change tack entirely and go for the complete removal of all tax incentives that affect saving.
The other part of the hon. Gentleman's question is perfectly fair. Will it increase overall savings? More sensibly directed incentives to savings could increase overall saving by attracting people who are not now saving. Clearly there is bound to be some shifting, but there could be a wider effect. But to do that, it would also be necessary to change the Government's approach to things such as targeted benefits. If the Chancellor goes on saying, and Ministers go on ensuring, that to have a small amount of personal savings precludes one from any form of benefit after retirement, a culture against saving is built up. That is one of the current disincentives to saving about which the Government should be more worried. I must not deal so deeply with each individual item that I keep other hon. Members out of the debate. The Chancellor should also take some informal steps to cool the credit explosion. Formal credit controls are not an attractive way to go. They would be extremely unfair and it would be a pity to have to achieve a reduction of the overall level of credit by penalising those most dependent on credit and least able to look for alternatives. That is why I said previously that the Bank of England and the Chancellor should start to call in and talk to the credit institutions and ask them what they are going to do. They should ask them to cool off the vast pressure of ludicrous letters that go out through computer mailings trying to induce people to engage in credit that they cannot afford. The possibility that the alternative would be fairly uncomfortable credit controls might concentrate the minds of those involved.
The Chancellor should drop the public sector price increases, such as those for electricity--they are demonstrably not required for the electricity industry's investment programme which has been so hugely overstated. He should make prudent use of the fiscal surplus for investment in those areas in which he could increase industry's competitiveness. He should take early steps to get into the exchange rate mechanism of the EMS
Column 1037to give us some stability and that downward pressure on inflation which is the Prime Minister's reason for not joining the EMS. She does not want to be tied into German policies which bear down heavily on inflation. Why she does not is rather difficult to understand, but that would be the logical step to take.
Then we come to what should be done about personal taxation. The Chancellor is presented with an opportunity in his next Budget to sort out some of the mess of national insurance contributions and taxation for the low paid. He would earn some respect if he made some serious tax reforms in that area, given the freedom that the surplus gives him which previous Chancellors, and indeed the Government in previous Budgets, may not have felt they had. There would be scope for changes in that area which would not represent a massive tax cut programme of the kind that would have damaging economic consequences. It is that combination of greater prudence and a greater sense of social justice which many British people, including many who supported the Conservative party at the previous election, feel is desperately needed.
I have tried to set out positive ways in which there could be an alternative to a strategy which is based on some dangerous assumptions, and I commend them to the House.
Sir Peter Hordern (Horsham) : The debate opened with my right hon. Friend the Chancellor agreeing that the published statistics were deficient. As the debate went on it was clear that the statistics of the hon. Member for Dunfermline, East (Mr Brown) were also deficient.
The hon. Gentleman said that he would outline the Labour party's policies for dealing with inflation and other important matters. I know that they were not spelt out overtly, but both he and the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) alluded to them, I think unconsciously. The hon. Gentleman said that it was important to act directly on prices. I think that I know exactly what the Opposition would do if they were re- elected. They would try to reactivate Mr. Solomon Binding. The hon. Member for
Berwick-upon-Tweed (Mr. Beith) said that it was not necessary to go in for a full-scale prices and incomes policy ; all that was necessary was for the Governor of the Bank of England to call in the leaders of the credit institutions and have a word with them. So Liberals would not go in for such a full-blooded affair as that to which the Opposition are still wedded in terms of a prices and incomes policy.
Two principal concerns emerge from the Autumn Statement--at least, they concern Conservative Members. The first is inflation, the second the balance of payments. Of those, the first is by far the more important. The solution to the first is the key to solving the second. I hope that my right hon. Friend the Chancellor is right and that the rate of inflation will peak in the next few months before falling to lower levels. One thing is certain : high interest rates are an essential weapon in combating inflation. In contrast with what other hon. Members think, I do not think that there is an alternative in the form of rationing credit, not because I believe that the techniques of doing that would be inadequate or even that it might be unfair as between one person who received credit and another.
Column 1038I say that it would be impractical because London is now a world financial centre whose existence depends upon the free transfer and flow of funds between one part of the world and another. It would not be possible to mount any effective system of controlling credit in one country, such as the United Kingdom, without giving up the advantage that we have as a financial centre. It does not make sense to throw out the whole trading system in order to impose controls which, in any case, would not work.
It is right to distinguish between this and previous inflationary bouts, which those who have been in this place for some time will well recognise. First, I refer to the enormous surplus in the public sector. No one can get away from that--it is a signal achievement, for which my right hon. Friend is responsible. It is not just the sale of assets in the public sector which has achieved this effect ; it would have happened in any event. There would have been a surplus of £4 billion without the sale of public sector assets.
Nor have corporations and businesses in any way failed. They have a large savings ratio ; they are investing at record levels ; and, as my right hon. Friend said earlier, their earnings on capital are at the highest level for about 20 years. The whole problem appears to reside in the private sector, and it is on that that we must concentrate our attention. This is what distinguishes our position from that of the United States, where there is a large public sector deficit. The trick is to encourage savings in the private sector. High interest rates will certainly have that effect if they are high enough, but this is an opportunity to broaden the entire level of savings.
I do not accept, as the Opposition do, that it was wrong to reduce taxation in the last Budget--how much further does one have to reduce the national debt? It is extraordinary that the gross debt interest is forecast to fall from £17.75 billion this year to £15.5 billion in 1991-2. It is clear that those who want to keep tax rates high want to do so not for economic reasons but for some sort of moral reasons. The people, apparently, may not be trusted to act responsibly with their own money so it must be removed from them. That is entirely in line with Socialist policy : people are not allowed to be entrusted with their money--a form of the nanny state. I hope that my hon. Friends will agree that it should be no part of Conservative policy to take more revenue than is strictly necessary to pay the state's expenditure.
There is another argument against higher tax rates. The right hon. Member for Ashton-under-Lyne slid pretty quickly over the fact that he was responsible for high rates. When he was Financial Secretary in the last Labour Government tax rates were 92 per cent. So we should not take any lectures from him about taxation levels--
Mr. John Battle (Leeds, West) : How would the hon. Gentleman respond to the answer given to the hon. Member for Hornchurch (Mr. Squire) this week, which showed that taxation, including direct and indirect taxation, is now higher under this Government than it was in 1979?
Sir Peter Hordern : I should be delighted to explain. The Opposition cannot grasp that earnings in this country have appreciated considerably, so people are vastly better off.
Column 1039Of course they have gone through higher rates of taxation, but they are conspicuously better off than they were a few years ago ; statistics prove that.
I wonder whether it is right to concentrate on savings by lending money to the Government to reduce the national debt, or to concentrate on house purchase, on which the tax concessions operate now. There has been a revolution--the formation of a property-owning democrary--but that is confined to the home-owning democracy. In virtually every area, the Government have taken power from the state, from local authorities and from institutional landlords and handed it over to the people. But one great institution remains--the investing institutions, which are mainly pension funds. Their beneficiaries are seldom, if ever, consulted.
One reason why the savings ratio has fallen so low is that companies have waived their contribution in recent times because of the pension funds' good performance. Employees are far too dependent on their employers for their retirement benefits. We should now consider spreading the property- owning democracy still further.
Mr. Budgen : Is that really true? Surely the problem about the dramatic fall in the savings ratio is the vast increase in borrowing, not any great reduction in saving. The savings ratio appears to be a figure based only on savings, but is it not a net figure?
Sir Peter Hordern : I picked this out of the Autumn Statement--I do not have the reference now--but one of the reasons for the fall in savings is the fact that institutional investment has fallen, from employers' contributions--
Mr. Cousins rose --
Sir Peter Hordern : I should like to give way, but many other hon. Members want to speak.
I propose that we spread the property-owning democracy much further and allow mortgage tax relief to apply to all who save additional sums up to the same level of £30,000. I mean this as an alternative for those who do not have mortgages on their homes. There are many examples of people being unable to buy homes because they are too expensive, or because of circumstances peculiar to them, but the encouragement of savings is necessary at present, and would be good in any event. It would also be helpful to have savings concessions in the same way for elderly people who have paid off their mortgages. In many respects--home ownership, education, trade union rights--we have broken institutional power and returned it to the people. Pensions, too, are an important institution, and they are far too dependent on short-term performance. Our democracy would be much healthier if ownership were spread to the roots and we could get away from the dependency culture that institutional pensions breed.
There would have to be additional investment. It would not be possible to allow people to switch from existing investments to the tax relief scheme, and investments would have to be held in private individuals' names. These investments would not be managed for them but would be held in shares and units in equities which could be bought or sold. That would be particularly apt now. It would help to enfranchise the investment market.
Bank borrowing by the private sector amounted to £49.8 billion in the first three quarters of 1988--more than
Column 1040the whole of bank borrowing in 1987 and virtually double that in 1985. We must try to achieve a more permanent and lasting shift into savings than is possible through the building societies or even by lending money to the Government.
I wish that I felt that all that is necessary in the control of inflation is high interest rates. I felt in 1988--and I still feel strongly--that to control inflation our currency should be closely linked with the European currencies, particularly the deutschemark. The comparison is not exact, but one has only to look at the effect of coupling the Hong Kong dollar with the United states dollar. If that had not taken place, the Hong Kong dollar would have fallen through the floor. The rate of interest in Hong Kong is lower now than it is in the United States. That direct link has done a great deal to stabilise the position in Hong Kong.
I do not suggest that we are in a similar position, but to link our currency directly with a strong currency, such as the
deutschmark--since Germany's inflation rate is 2 to 3 per cent. and interest rates are 5 per cent.--would be of immense benefit to this country. I do not refer to any political advantage that might be obtained by those means. I believe that it is a practical weapon that could be used to combat inflation. The use of that weapon has already been far too long delayed. We need an external discipline as well as the interest rate weapon to deal with inflation.
The argument has been conducted so far in altogether too academic terms. The instrument for keeping sterling tied to the deutschmark would still be interest rates. Industry and business would know that the direct result of allowing wages to increase to an uncompetitive level would be higher interest rates. They would know that for certain ; they would not have to guess what the Chancellor intended to do.
Practical experience, as opposed to theory, suggests that existing investments overseas have to be hedged now. People's perception of the strength or weakness of a currency is usually the same. There is far more activity now in the foreign exchange markets than there would be if there were a formal link between sterling and the deutschmark and the European Community as a whole. When people--usually academics--complain that that would place an impossible strain on foreign exchange and that the Bank of England could not intervene with sufficient reserves, the truth is that if there were a formal link between sterling and the deutschmark there would be nothing like the amount of business being done as is being done now. As for setting up a central bank within the European Community, I think that my right hon. Friend the Prime Minister was absolutely right to deplore the Socialist idea that a central bank must be established. However, if we were part of the European monetary system, that would be the effect. I do not believe that there needs to be a formal institution, set up by the Commission or the Council of Ministers. However, the practical effect of the United Kingdom joining the EMS would be that funds would be drawn to the strongest currency. It would not be long before, for the sake of practical convenience, European Community bankers combined to form a suitable means of conducting monetary and economic policy, which would turn out to be very much like a central bank. Progress towards monetary union will be made within the EEC. It is very much better that we should be part of that process than outside it.
Column 1041What on earth are we afraid of? The objections to the United Kingdom joining the EMS have been concocted by lawyers. They say, "Oh, you can't have that. Look at the small print. Look at the danger of having a central bank." With respect to my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), it is a lawyer's trick. Where would the Victorians have been if they had tried to start their industrial revolution with lawyers? It would never have got off the ground. We must have far more confidence in ourselves than now seems to be the case. We should join the European monetary system, and the sooner the better.
Mr. Giles Radice (Durham, North) : I congratulate my hon. Friend the Member for Dunfermline, East (Mr. Brown) on his excellent speech, the third in a row. However, before he leaves the Chamber, I am afraid that I cannot similarly congratulate the Chancellor. His speech was a characteristic mixture of insouciance and complacency. He gave absolutely no sign that he is aware of any of the economic problems, or of the fact that the economy is seriously out of balance.
I congratulate the right hon. Member for Worthing (Mr. Higgins) on his skilful chairmanship of the Select Committee. We are a diverse bunch of people. He keeps us together very well, in the circumstances. I congratulate the right hon. Gentleman on assisting us to produce a valuable report for the House.
The Select Committee report reveals that the economy is now seriously out of balance in three interconnected ways. First, demand is still rising too fast ; secondly, inflation is too high ; thirdly, the current account is now in very substantial deficit.
On demand, it is ironic that, after a number of years in which our growth rate was behind that of our main competitors, the Select Committee should now be warning of too fast a growth rate and advocating action to restore balance. We all applaud economic growth : it makes possible increasing living standards, it brings down unemployment and, provided that the Government make available the necessary investment, it can lead to improvements in vital services. That is why I welcomed, when I spoke in the debate on 25 October, the fact that, since the deep and disastrous recession of 1980-81, the British economy has grown steadily throughout the 1980s.
I drew attention also to the welcome increase in labour productivity that has raised the productive potential of the British economy and therefore enabled the British economy to grow more quickly. Whereas it used to be said that we could grow at only two thirds the rate of our main competitors, it is safe to say now that we can probably grow at about the same rate, without running into balance of payments difficulties.
What, therefore, has gone wrong? The problem with the British economy is that the Chancellor failed to take control of the situation last spring, despite obvious signs--I do not agree with the right hon. Member for Worthing on this point--that the economy was growing too fast and in an unbalanced fashion. By March last year--I invite the right hon. Gentleman to look at press comment at the