House of Commons Hansard Debates for 12 Jan 1989

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time, at the statistics and at what Opposition spokesmen said--our growth was not only faster than that of our main competitors but faster than our productive potential.

It is true that, after the consumption-led boom--the Government have been making great play of it--that began in 1986, investment has risen rapidly, but the Government never say that investment fell by 5 per cent. in 1980 or by 10 per cent. in 1981. So there is a considerable amount of catching up to do. Despite the recent large increases in investment, we are still investing only 18 per cent. of our gross national product, compared with Japan's 30 per cent. We have a long way to go.

The other difficulty is the regional imbalance in the British economy. When the southern economy is in danger of overheating, as it is now, the northern economy is only just warming up. It was when the economy was becoming over-stretched that the Chancellor introduced his tax-cutting Budget last March. I know that the Treasury has argued that the Budget had little effect on demand, but there is no doubt--I very much agree with what the hon. Member for

Berwick-upon-Tweed (Mr. Beith) said on this point--about the psychological impact of the Chancellor's last Budget. It gave all the wrong signals. Add tax cuts to the record fall in the savings ratio, the massive credit expansion--triggered off by deregulation--the consumption boom and, last but not least, earnings rising faster than inflation, and we have all the makings of a dangerously overheated economy.

The Chancellor cannot say that he was not warned. Not only the Opposition alerted him to the dangers. A number of prominent economists, many City commentators and even the Bank of England were concerned but the Chancellor allowed his political obsession with tax cuts--almost his personal political manifesto--to overrule what should have been his priority as Chancellor--economic prudence. As the Select Committee report points out, the consequences of the Chancellor's gamble are now only too apparent. There is the rising inflation forecast by the Autumn Statement. Already, the OECD main economic indicators for December show that our inflation rate is the highest of the G7 countries.

When the Chancellor gave evidence to the Select Committee, he was pressed by the hon. Member for Berwick-upon-Tweed (Mr. Beith) to say whether the inflation rate would rise above 7 per cent. His answer was that we could make our own assessment. That was telling the Select Committee that he is expecting inflation to rise above 7 per cent. during 1989. That is a disturbing prospect, and there will certainly be great difficulties in getting it down.

Despite the Chancellor's remark to the Select Committee-- "the central purpose of the macro-economic policy is to get inflation under control"--

the Select Committee remains sceptical about the Government's recent record on inflation. As we point out in our report, the Government's

"goal of 3 per cent. inflation always remains three years from being realised."

So we have a serious inflationary problem.

The other problem highlighted by the Committee is the extremely large and rapidly deteriorating current account deficit. At the time of the last Budget, as hon. Members have pointed out, the Treasury was forecasting a £4 billion deficit for this year. The Autumn Statement's revised forecast is £13 billion, a figure which had already been

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achieved by November. The forecast for next year is an £11 billion deficit. In other words, our current account deficit has reached and is expected to remain at between 2 and 3 per cent. of GDP--a proportion similar to that of the United States, which has been criticised by the Chancellor.

It is worth noting the Select Committee's comment :

"As a proportion of GDP the 1988 deficit is not unprecedented, but a sequence of two annual deficits well in excess of 2 per cent. of GDP has not occurred since shortly after the war. We are not aware of any occasion since then in which the economy of any major trading nation has run a long series of deficits of this size without eventually encountering currency difficulties."

The Chancellor should be aware of our remarks.

As I have already argued, it is largely the Chancellor's fault that we are now in such a mess. We warned him about the dangers, and he failed to listen. Even so, it is the job of the Opposition to offer him constructive advice and I shall try to do just that. He could make a start by having the honesty to admit that the economy is seriously out of balance.

The Chancellor certainly has reaffirmed that the defeat of inflation is the Government's central objective, but, in his evidence to the Select Committee, the Chancellor was far more concerned to boost his own record on inflation and say how well he has done, and apparently to argue for changes in the way in which the RPI is calculated by removing mortgage interest rates from the index. However, on other occasions the Government are only too concerned to say how well they have done and to stress the fact that more than 60 per cent. of people in this country are house owners. That has a major impact on inflation. The Chancellor should remember that there are probably more home owners in Britain than in any other western European country, so it would be very badly received if the Government tried to remove mortgage interest rates from the RPI. The Chancellor was certainly far more concerned to argue the case for that than to explain how inflation might be brought down. The Chancellor is even more complacent about the current account deficit. He implies that somehow it is not a serious problem. If I understand it, his argument runs as follows : that in a world of international capital markets, without fixed exchange rates, some countries will have surpluses and others will have deficits, and we happen to be one of the countries that has a deficit. According to the Chancellor, that means that we are doing our bit for world trade and growth by running a deficit. The Chancellor considers that that is good for Britain too. On 29 November he told the House : "It is more like a company that, though profitable, cannot finance its investment programme entirely from its own resources, and has to raise funds from the market to fill the gap."--[ Official Report, 29 November 1988 ; Vol. 142, c. 596.]

According to the Chancellor, it is therefore right and proper for Britain to continue to rely on the rest of the world to finance our current account deficit.

I wish it were possible to take as relaxed a view as the Chancellor. Unfortunately, despite the welcome increase in investment over the past year, it is not just a question of graciously allowing the rest of the world the opportunity to invest in our industries. The DTI figures on imports by commodity show a major increase in consumption goods as well as foreign manufactured goods. The latest OECD report on the British economy pointed out that imports of manufactured goods have increased far faster than exports throughout the 1980s and that import penetration into the

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British economy remains high. Therefore, it is clear that our deficit reflects much more excess demand and underlying structural weaknesses than the welcome benign effect of a foreign investment programme in British industry.

As the Select Committee report and the OECD economic outlook point out, substantial risks are attached to running a deficit for any length of time. International capital flows are only too volatile, and if confidence goes there is likely to be sharp downward pressure on the exchange rate, which the British authorities would not be able to control. The overseas assets about which the Chancellor has so often boasted and which represent one of the few tangible benefits of North sea oil will be used up if we continue to run a balance of payments deficit of such a scale. Corrective action has to be taken sooner rather than later, not only on the balance of payments but on demand and inflation.

The problem is that the Chancellor is operating with too few instruments. We are not arguing that a Labour Chancellor would not use interest rates-- of course he would. We are saying that an excessive reliance on interest rates carries considerable risks. The Chancellor admitted to the Select Committee that high interest rates could hurt small businesses. Equally important, by contributing to an over-strong pound, they can also harm the prospects of exporters. Last but not least, they hurt home owners. Reliance on interest rates alone runs the danger of bringing the economy to a grinding halt if applied too bluntly, or, if applied too laxly, of leading to a catastrophic loss of confidence in sterling. So more instruments are needed.

On the monetary side, the Government should consider the possibility of at least temporary consumer credit controls. I accept that things have changed, but there is a case for obliging lending institutions to make special deposits and for imposing some limitation on bank loans to the personal sector. At least that would be a clear signal to consumers. I agree with the encouragement of savings. As we say in our report, the Government should be looking more seriously at that issue.

Sir Peter Hordern : Does the hon. Gentleman recall the time when there was a restriction on private credit that was not extended to companies? What used to happen was that company treasurers would borrow money at the corporation rate and lend it on the money market to private consumers at a rate which produced a considerable return. It is not possible to distinguish between private restriction and company restraint.

Mr. Radice : I accept that things have changed, but it would not be impossible to operate short-term credit controls. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, they are needed for short-term arrangements. We are not considering long-term arrangements. They at least give a slightly broader balance of instruments with which to operate.

The Chancellor has forsworn the use of fiscal policy, except in the medium term. He is wrong. He should say now--before the Budget--that, because of demand, he will not cut tax rates this year. I do not think that he will agree, but there is a strong case for restoring the 60 per cent. top rate band. It would at least help to finance the raising of tax thresholds, which all of us would probably

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agree are necessary. Measures along those lines would also give a signal to the market that the Government are serious about controlling demand.

Another problem with the Chancellor's policy, with its over-reliance on interest rates, is that the exchange rate cannot be used to redress the current account deficit, unless there is a collapse in confidence, leading to a collapse in sterling. The problem is that, with the Chancellor's high interest rate policy, the pound is now as uncompetitive as it was in the great 1980-81 recession. In 1989, with no rising oil prices and no oil exports at the same level to bail out the balance of payments, the only way for the Chancellor to improve the balance of payments is to operate on imports--that is, if he uses only interest rates--by slamming on the brakes through higher and higher interest rates. A less inflexible exchange rate policy would at least have the advantage of making exports more competitive and thus improving the balance of payments. The truth is that, if the Government are to take action on excessive demand, bring down inflation, and bring the current account into balance again, they cannot operate on the basis of a single instrument. They must use all available weapons-- monetary, fiscal and exchange rate--if they are to bring the economy into balance. I fear that there is no sign that the Government are aware of that point. On the contrary, what was so depressing about the Chancellor's speech was the lack of concern that he showed for the problem of inflation and for the current account deficit, and his repeated insistence on relying entirely on interest rates. It does not bode well for the Government's chances of bringing the economy into balance again. 6.52 pm

Sir John Stanley (Tonbridge and Malling) : The hon. Member for Durham, North (Mr. Radice) will not be surprised to know that I do not wish to follow his criticism of the Chancellor's overall economic strategy.

There is one narrow but important aspect of the Autumn Statement--overseas aid--about which I have two points to register with my right hon. Friend and his team. The first concerns the Chancellor's extremely welcome and imaginative debt reduction initiative for the poorest sub-Saharan African countries. I warmly congratulate my right hon. Friend on conceiving the scheme and on successively negotiating its acceptance by members of the Paris Club. It was no mean achievement. The whole House has reason to be grateful to him for that.

It comes as a surprise to see the Treasury's projections of the public expenditure over the next three years that is due to arise from the Chancellor's debt reduction initiative which is now in place. Given the level of indebtedness of the countries concerned and, therefore, the attractiveness of the scheme to them, one would have expected a fairly quick and significant build-up of public expenditure.

On looking at the figures, it appears that there will be no public expenditure under the scheme during the 1989-90 financial year. In the 1990 -91 financial year, there will be a bare £2.5 million. In 1990-91, United Kingdom expenditure under the scheme will amount to only £14 million. Of course, that money is to be spread among all

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countries in sub-Saharan Africa. That is a disappointingly slow rate of build-up. I should have expected something much more significant.

It is a matter of concern that, on our own estimates, in three years from now, the countries concerned will benefit to the tune of only about £14 million. I hope that my right hon. Friend the Chief Secretary will at least give a brief explanation of why the expenditure provision is so small and why the build-up rate is so delayed. I hope also that he will give the House an assurance that, through the IMF and the Paris Club, the British Government will do everything that they can to try to maximise ways in which cripplingly indebted countries are able to benefit from the Chancellor's debt reduction initiative.

I now deal with a second, more fundamental issue--the overall provision of overseas aid. Although the Government's general performance is extremely creditable in the main range of social issues, not least in respect of the National Health Service, despite the Opposition's carpings, that is not entirely true of their provision of overseas aid. I intend and imply no criticism whatever of my hon. Friend the Minister for Overseas Development- -quite the reverse. In the 15 years I have been in the House, we have had no more effective and capable Minister for Overseas Development than my hon. Friend the Member for Bath (Mr. Patten). He is doing an outstanding job, but even he can only make such bricks as he can with the straw that is available. Set against the totality of the Government's public expenditure programme, the amount of straw that he has been given is relatively small.

I cite two instances. First, table 1.10 of the Autumn Statement shows that, in real terms, overseas aid is still well below what it was when we came to office in 1979, and also that, three years from now, that will still be the case. That is not a happy situation. Second, I am unhappy that the proportion of our gross national product that we devote to the overseas aid programme should have pursued a steady downward course while the Government have been in office. In 1979, the proportion was 0.51 per cent. It has steadily fallen. In 1987, the latest year for which we have figures, it had fallen to 0.28 per cent. According to Overseas Development Administration figures, that 0.28 per cent. is below the proportion spent by every other major western European country and also most smaller western European countries.

It is no answer to say that GNP has been expanding. Of course we all greatly welcome and applaud that, but, if GNP has been expanding, and therefore, our wealth has been increasing, one would have hoped to achieve, at least as an minimum, a constant proportion going towards least-developed countries and to those in the greatest need in sheer human terms. It is regrettable that we have not been able to maintain a more constant level of the proportion of GNP that we devote to overseas aid.

When my right hon. Friend the Chief Secretary winds up, he will no doubt be equipped with a suitable defensive Treasury brief headed "Overseas Aid". That will draw attention to the fact that the published figures in the Autumn Statement show that it is planned that there should be an increase of 5 per cent. in real terms in the overseas aid programme over the next three years. I welcome that. However, let us have no illusions. Even an increase of that sort will not bring the overseas aid programme anywhere near what it was when the

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Conservative party took office in 1979. Nor is it likely to bring the percentage of GNP used on that programme up to the level of the larger European countries--or even many of the smaller ones. I hope that Treasury Ministers will continue to reflect on this matter, because all hon. Members are familiar with the needs that are made clear in stark human terms in the press and on television. We live in a world in which many people still suffer from starvation and semi- starvation, where many diseases are eminently curable with modest applications of basic health care and with relatively small sums being spent on producing small increases in the quality of diet and making cleaner water more widely available. At those basic levels, the need to spend more on overseas aid is paramount and compelling. This country has the means to utilise more expenditure on overseas aid. No other country has voluntary and charitable organisations with more professionalism, expertise and commitment than our own. Charitable organisations and their staff who work in Third-world countries are an enormous credit to this country. I am not entirely sure why, but people in this country to a greater extent than in many other countries seem to be prepared to make a commitment to serve, in some cases for many years, in some of the most remote, harsh and disease -ridden parts of the world. Again and again, individuals from this country give unsung, and often unheard-of, marvellous commitment to some of the most desperate communities in Third world countries. Therefore, we have the means, and the need is clear.

I hope that before we debate next year's Autumn Statement--we do so each year in the comparatively extraordinary affluence, comfort and ease, of western Europe--Treasury Ministers will give further consideration to what constitutes a proper level of commitment to those parts of the world that are so singularly less fortunate than our own.

7.4 pm

Mr. Jim Cousins (Newcastle upon Tyne, Central) : The speeches of my hon. Friend the Member for Durham, North (Mr. Radice) and the right hon. Member for Tonbridge and Malling (Sir J. Stanley) brought a necessary note of humility into our proceedings. They both drew attention to the position of the world economy in conjunction with our own. That must give Conservative Members grounds for concern. Even if we were to accept that the Government are experiencing a period of short-term transitional difficulty, we should also have to bear in mind that the world economy is undergoing a period of great transitional difficulty.

The problem of world debt has been alluded to. There is the problem of grappling with the American deficit together with the problem of not returning to an era of protectionism, into which a Conservative Member slipped so easily during the debate. Dealing with the short-term difficulties in the world economy together with the difficulties in our own economy will make the task of Government extremely difficult.

I add to the note of humility one of charity. It has often been said--I have said it myself--that the Chancellor has only one policy instrument, short-term interest rates. That is not fair to him. He also has a prices and incomes policy disguised as an exchange rate policy. Now the exchange rate is for internal consumption rather than external

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consumption. We must proceed with the exchange rate policy on its present terms until the prices and incomes in our ecomomy are beaten down. If the consequence of that is a sustained balance of payments deficit over many months or years, we must put up with it and trust that the world economy, despite its own difficulties, will see us through. I doubt whether any hon. Member believes that that is a tenable or serious policy.

In conjunction with that, we have the Chancellor's interest rate policy and its effects on our economy. This is a curious time in which the party runs together with the headache. We are running two policies side by side--the Chancellor's boom and the Chancellor's slump. We shall experience a long war of attrition until we find out which will come out on top. That is a matter of guesswork, perhaps even for the Government.

There is doubt about whether the Government's policy is truly counter- inflationary. A policy of raising short-term interest rates, which imposes on the 8.5 million owner-occupying, mortgage-paying households a dramatic cut in their standard of living, is not counter-inflationary. Those people need no lectures from the Government about a dependency culture because they are not part of it. They belong to households in which the partners are young and often both economically active. They will attempt, by individual and collective action, to combat the effects of the Chancellor's policy. That will be shown in wage disputes and earnings drift as people seek to push their earnings ahead even if their wage rates are stationary or held down. That will have all sorts of effects in an economy in which the stock of skills is dwindling and the labour market is tightening because of demographic trends.

The Government have chosen owner-occupiers to bear the brunt of their policies. As I have said, they are young, economically active and command a great share of the dwindling stock of skills. They are in age groups where demographic trends support their attempts to combat Government policies. You will discover that relying on short-term interest rates alone is not counter-inflationary, but inflationary. You will be forced back to the side of the Chancellor's policies which ignores the balance of payments consequences as you use the exchange rate as a substitute for a prices and incomes policy. It is a period of much difficulty for the Government, and they should not ignore what they are doing.

The Chancellor deregulated the financial markets, but according to his policy that deregulation was to be accompanied by fiscal neutrality through the tax system so that the savings and investment market would not be distorted by the tax system. The Chancellor abandoned his policy of moving towards fiscal neutrality, the consequences of which are to be seen in the monetary aggregates, where M0--the figure to which we are supposed to pay attention--is 50 per cent. outside its maximum target range. M3 is at 20 per cent. inflation per year. Building society lending is a critical component of the difficulty in which the Government have found themselves, but banks and building societies have brought into existence a group of people whose expectations you will not be able to meet and whose living standards you are now attacking. Building society lending is rising at 24 per cent. a year as a direct result of the Chancellor's deregulation of financial markets and not pursuing a policy of fiscal neutrality.

Even if the Government reduce inflation, will that have the beneficial effects on the balance of payments that you

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anticipate? That is blind faith unsupported by any policy. The Government have no industrial policy, but they do not want one. The Secretary of State for Trade and Industry told us at lunchtime, in the context of the GEC-Plessey merger, that the time for strategic planning had gone. There is no industrial policy, so you must rely on blind faith and hope that if inflation decreases the balance of payments will return to even-steven or surplus. There is no evidence for that belief. It may be that our economy, encouraged by your policies, will structurally produce balance of payments deficits because we lend long and borrow short and because we have become too dependent on dealing on world financial markets as a substitute--this point was made in the effective speech made by my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon)--for building our industry and economic activity.

My constituency is in a region that over the past two years has begun to benefit from the trickle in the consumer boom. One third of the increase in regional GDP is accounted for by wage increases in the education and health sectors and by an expansion of financial services. That is a dangerously narrow base on which to advance GDP, and that defect is reflected throughout the country. The Government have no industrial policy and no strategy for industrial growth. They are dealing in magic politics and believe that a reduction in inflation will solve the balance of payments deficit.

We need an industrial strategy that is linked to the financial markets. We need to make pension funds more responsible. They must have longer-term vision and be more accountable to the people whose savings they represent.

Madam Deputy Speaker (Miss Betty Boothroyd) : Order. I am sorry to interrupt the hon. Gentleman, but he has had his 10 minutes. The hon. Gentleman has burdened the Chair with many responsibilities this evening. When he catches the eye of the Chair on another occasion, I hope that he will speak through it to the Government.

7.14 pm

Mr. Anthony Nelson (Chichester) : I have never heard such a catalogue of economic crimes laid at the door of Mr. Speaker. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) returned us to a macro-economic discussion, following a most sensitive, compelling and sincere speech from my right hon. Friend the Member for Tonbridge and Malling (Sir J. Stanley). It is not a central tenet of Government economic policy that a reduction in inflation will lead to the balance of payments deficit disappearing. We hope that it will reduce and become a surplus, but there are other influences acting on it.

I should like to add to the tributes paid to my right hon. Friend the Member for Worthing (Mr. Higgins) for the capable way in which he chaired the interesting Treasury and Civil Service Select Committee. I note that its report was passed by the narrow margin of two votes, which shows how difficult it is to pass a Select Committee report that goes into not qualitative judgments of overall levels of public expenditure but rather narrow and esoteric points,

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although substantial in value, about transfer payments and their composition in general Government expenditure.

The Treasury and Civil Service Select Committee has, not for the first time, done the House a service by the way in which it took evidence from a number of economic advisers, including the Chancellor and the Chief Secretary to the Treasury. It has given us an opportunity to read the answers to questions that I am sure many hon. Members would like to pose.

Ms. Joyce Quin (Gateshead, East) : Is the hon. Gentleman aware that two members of the Committee who would have voted in favour of the report were busy in the Chamber taking part in the debate on shipbuilding? It was not passed with the narrow support that the hon. Gentleman suggests.

Mr. Nelson : I am delighted to hear that the hon. Lady would have supported this excellent report.

I am glad that the Government have been able to dip the overall level of expenditure below 40 per cent. of GDP. I believe that anticipated expenditure of £178 billion for the forthcoming financial year will maintain all the electoral promises that we made and continue the excellent spending programmes that the Government have increased, most notably those for health and education, which account for the largest market increases. The Government will bring about welcome improvements in the spending of the Department of Social Security and on roads and infrastructure.

My right hon. Friend the Member for Tonbridge and Malling devoted his speech to one major subject, so I shall deal with a matter to which in future the Treasury should be more receptive. The United States will not for much longer be able to put off tackling--in some ways progressively-- its massive budget deficit. In doing so, it will have to resolve the problem of defence expenditure. It has done so this year, but increasingly over the years it is inevitable that it will seek economies in its international defence obligations. It is better for Britain and other members of NATO to be prepared to spend moneys to maintain our common defence obligations in NATO and Europe. The Ministry of Defence will in future be asking the Government for substantial real increases in its budget to compensate for the American withdrawal and the economies in Europe and elsewhere on the various NATO fronts.

I should like to follow some of the persuasive and excellent remarks of my hon. Friend the Member for Horsham (Sir P. Hordern), who spoke of the level of savings and what should be done about them. It is alarming to read chart 2.8 in the Autumn Statement, which graphically shows the enormous reduction in the propensity to save. With an anticipated ratio of saving of 3.5 per cent. in the forthcoming year, we are returning to the levels of saving that were evident in the early 1950s. It is a question that has not, I believe, been answered either in the Autumn Statement or by the Select Committee.

The real reasons for the propensity for saving in this country to have fallen so dramatically over the past couple of years have not been explained. It is accounted for not wholly by the fiscal and other incentives that have been given to investment in property, but far more by the

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uncertainty about fluctuations in, and the actual level of, inflation which have led people to pull out of holding money and to put the money into goods and expenditure.

Mr. Dennis Turner (Wolverhampton, South-East) : Will the hon. Gentleman give way?

Mr. Nelson : No, because we have limited time. I hope that the hon. Gentleman will forgive me.

I believe strongly, for those reasons, that the Chancellor, in the run-up to the Budget, should consider carefully and radically encouraging new forms of saving. I say with some sorrow, that we should recognise that personal equity plans have been a flop, although they were a good idea, because the management costs and bank commissioning fees have not made them worth while. We should scrap that idea. Encouragement to personal investment and savings will never be effective or taken seriously until we give a straight tax break on the extent to which people can move a proportion of their gross earnings into personal savings without having to go through saving institutions or some form of trust.

As Conservatives, we should believe in the plurality of those investment decisions and the responsibility of the individual to make those investments. Providing tax relief can be constructive--as it has been in France and other countries--in a way that does not allow substantial abuse, we should be moving away from a system that has given total tax relief towards the purchase of homes, but no tax relief towards capital provision for the future. As we consider the future liabilities that we know we shall have to meet for an increasingly elderly proportion of people in this country, we should realise that the only way to enable people to meet their own requirements and not place too heavy a burden on the state is by encouraging more direct and simple personal incentives towards saving and investment. I hope that other Conservative Members will join me in applauding my right hon. Friend the Chancellor if he can do that in March.

7.23 pm

Mr. Stuart Bell (Middlesbrough) : I listened with interest to the hon. Member for Chichester (Mr. Nelson), but I do not want to spend time on personal equity plans and the taxation of savings. Each time we have these debates, there are references to the Labour Government of 1974-79 and to the inflation rates at that time. As my hon. Friend the Member for Dunfermline, East (Mr. Brown) pointed out, when Labour left office in 1979, the inflation rate was 8 per cent. and falling. If one compares that with the present inflation rate, it was not bad. As my hon. Friend the Member for Dunfermline, East said, the Chancellor has not had to deal with a 300 per cent. increase in oil prices or with an explosion in commodity prices. In the 1970s, high inflation led by oil prices, commodity prices and wages chased prices, which gave us massive inflation. That is not the case now ; we are living in a different environment.

Conservative Members have made many comments about Labour policies for the future. The hon. Member for Bridlington (Mr. Townend) referred to the Chancellor's questions about what our policies would be on taxation and on public expenditure. Hugh Gaitskell said many years ago that Labour was the party of high taxation, and that was the basis of Labour party policy. We believed in services and having the taxation to pay for them. We

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accept that we live in a different environment, but Labour is the party of fair taxation. That does not necessarily mean a high standard rate of income tax, but fair taxation throughout the economy.

The Conservatives have reduced several taxes over the years, such as the tax on investment premium income, which, like other taxes, has now gone by the board. There are many ways to redress the balance in our society without having a high income tax rate. The Labour party believes in a proper and appropriate standard of taxation--which does not necessarily mean a high income tax rate--and a proper balance in public expenditure.

The Chancellor and Conservative Members applaud the fact that we no longer have a public sector borrowing requirement, but instead a public sector debt repayment. It is not surprising that a Government who want to repay the national debt do not have a great deal of sympathy with those who are suffering as a result of high interest rates. The Chancellor said earlier that the interest rate increase policy was working and that that was why people were feeling the pinch.

If the Government are trying to repay the national debt as a matter of public policy, it is hardly surprising that they have no common sympathy with home owners, small business men and those who use credit cards for consumption, who are paying 28 per cent. APR. Many hon. Members, especially the right hon. Member for Guildford (Mr. Howell), showed some unease at the Chancellor relying entirely on a policy of regulating the economy by using interest rates. To give him some credit, the Chancellor said in an intervention that other nation states were moving away from credit controls. He mentioned Canada, the United States, France and Italy as going down the same road. In 1981, when there was a consumer boom in the United States, the United States Government withdrew credit cards from circulation and the credit consumer boom collapsed quickly. I am not suggesting that the Government should move to a programme of taking credit cards out of the system, but I caution the Chancellor against limiting his options in such a way that he seems to say to outside investors and those who are financing our balance of payments deficit by investing in our economy at 13 per cent., "Is that interest rate enough for you, or do you want more?" We may lose control of our own economy by reliance on a single interest file policy. The Chancellor mentioned the French, but I should be surprised if the French Government will relinquish a series of credit controls, including control of bank spending, to conform with policies such as those to which the Chancellor referred.

Hon. Members referred to the massive balance of payments deficit of £15 billion, and it is hardly surprising that it has been taken up by manufactured goods coming in from abroad. Since 1979, we have so run down the manufacturing side of our economy and placed such reliance on services that it was inevitable that, with the overheating of the economy, goods would then come in from abroad.

My hon. Friend the Member for Dunfermline, East referred to Middlesbrough, my constituency. About 50,000 jobs were lost in Middlesbrough from 1979 to 1981, while the present Foreign Secretary was Chancellor of the Exchequer. Jobs were lost in steel, chemicals, shipbuilding and foundry work, and those jobs will never come back to

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Teesside. We have the urban development corporation, which will have a budget of £172 million, and it seeks to lift the area, but 50, 000 jobs cannot be re-created.

Mr. Julian Brazier (Canterbury) : Would the hon. Gentleman like to mention a single major industrialised country where large numbers of jobs have not been lost in the steel industry or in shipbuilding, in countries that have such a capacity?

Mr. Bell : Jobs have been lost in many western nations. There are about 28 million unemployed in the OECD countries at present. That is a great tragedy, both for our country and for those which followed in the tracks of the Government in 1979. It was a great misfortune for the 50,000 people of Middlesbrough who were working but who are no longer working, and in that sense an entire generation has been wiped out.

My hon. Friend the Member for Dunfermline, East referred to the Prime Minister's walkabout on that sacred site in Middlesbrough. I did not know that it would be referred to today, but I went down there last Friday. I found the site still empty. Now and again the Prime Minister has meetings at which she insists that something be built on that site between now and the general election ; I have no idea why it should be on that plot specifically.

We are witnessing an indictment of the Government's policy on manufacturing industry. The consequence of years of running down manufacturing industry throughout the country is that, with the consumer boom, exports are not keeping pace with imports and manufactured goods are coming in from abroad. We have a destabilised economy that is not balanced in any way.

The Chancellor made the best speech that I have heard him make in five years, and I say that in all humility. One of the unforeseen consequences of the excellent performances of my hon. Friend the Member for Dunfermline, East has been that they have obliged the Chancellor to lift his game. He has been obliged to take the House of Commons into account more and to give us a speech that was interesting and illuminating--although it was not sufficiently illuminating to tell us whether he proposes to take the advice of the Bank of England that there should not be tax reductions in this year's Budget. The Chancellor would not give any indication of what exchange rate policy should be, and I thought that very sensible of him.

Last year's Budget combined reduced interest rates with reduced income tax. The reduction in the income tax on higher salaries from 60 per cent. to 40 per cent.--a reduction of one third in one go--created a climate for the consumer boom that brought imports rushing in and, in effect, destabilised the economy. At the time, we applauded the Chancellor's reduction of interest rates. That policy was right and proper, but the Budget gave so much back that it created a climate for spending. The mistake that the Chancellor made then gave rise to our present problems. According to newspaper reports, the Bank of England has advised the Chancellor to follow a tight fiscal policy as well as a policy of high interest rates, and on this occasion perhaps he will take that king of advice. The hon. Member for Chichester referred to the lack of saving in our society. I am reminded of my visit to the

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United States last year, during which I saw a bumper sticker which simply said, "I am spending my children's inheritance." Under the present Government and the present Chancellor, we are squandering the inheritance of the British people. Lower taxes, reductions in services, poorer education and a poorer infrastructure all mean that we are not investing in future generations. I wonder where our economy will be when oil revenues begin to fall and all our heirlooms are sold.

7.33 pm

Mr. Nicholas Budgen (Wolverhampton, South-West) : I want to explain why I support the policy of high interest rates. The first question that hon. Members ask as they watch many of their constituents going through agony is whether there is an alternative. In our previous debate on the economy, many of my right hon. and hon. Friends said that they wondered whether we should have either some form of selective control on lending or some direction of lending--a return to the old days before the banks became very much freer, particularly in London. My hon. Friends concluded that there was no possibility of relieving their constituents' agony in that way.

In this debate, the idea that has emerged is one that has long been favoured by my hon. Friend the Member for Horsham (Sir P. Hordern). My hon. Friend will forgive me for saying that he is one of the most influential of my hon. Friends. When he advances an argument--I regret that on this occasion I concluded that I disagreed with him--it should be properly argued. My hon. Friend says that there is now a strong case for the introduction of a British loi Monory, which he says would alter the savings ratio in a helpful way. There can be no argument but that the savings ratio has fallen substantially--from 14 per cent. in the late 1970s and early 1980s to 1.3 per cent. according to recent figures. It is important to appreciate that the savings ratio is a net figure ; it is the difference between saving and borrowing.

My hon. Friend was right to draw attention to paragraph 2.30 of the Autumn Statement, which identifies the fall in employers' contributions to pension funds in recent years as one of the factors in the decline of the savings ratio. I shall not elaborate that point, which my hon. Friend made very well. I am sure that he will agree that it is not the figure for saving but the figure for borrowing that is wrong. Up to November last year, the increase in bank borrowing was 27.3 per cent. higher than in the previous year. It is that figure which has had a distorting effect and has reduced the savings ratio and it is that figure which needs to be changed. I do not think that my hon. Friend's proposal would have the dramatic effect this year for which he hopes. Furthermore, it would introduce yet another distortion into the tax system. One thing for which my right hon. Friend the Chancellor will be remembered with admiration when he comes to retire from his high office is his reform of corporation tax. In that case, he was able to apply his belief in fiscal neutrality. The measure was criticised somewhat at the time, but it has been an outstanding success. My right hon. Friend also believes in fiscal neutrality in relation to the taxation of private individuals, but, for various political reasons, he has not proceeded to apply it to private taxation. Nevertheless, the introduction of a new distortion would make it more

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difficult to introduce fiscal neutrality at some stage in the future. In this instance, it would be an entirely unnecessary distortion.

For the sake of argument, let us assume that the Chancellor goes away from today's debate saying, "I do not want to introduce a distortion, but the lads are in such disarray and so hate watching their constituents go through agony that I must do something, even if it mucks up the tax system." Even if that happened, the measure would not come into effect until the end of June. High interest rates may have to continue into June or July, but by the time interest rates are likely to come down the broad mass of the public will only just be starting to notice the distortion.

Once the distortion has been introduced and everybody has been told that the new Jerusalem is at hand--Back Benchers will go round constituency associations saying that the new savings measures are the most wonderful thing ever, in the exaggerated terms which I have come to realise are inseparable from politics--it will be impossible to withdraw it, even when interest rates have fallen. I would respectfully suggest to my hon. Friend the Member for Horsham, who, as I say, is so influential, that I hope he will not lead our colleagues astray on that matter.

Sir Peter Hordern : I am most grateful to my hon. Friend. He speaks about a perfect world, where there would be fiscal neutrality and no relief for mortgage interest, but I must ask my hon. Friend what happens when an irresistible force meets an immovable object. When my right hon. Friend wishes to introduce fiscal neutrality in mortgage tax relief, he comes up against the Prime Minister. I regret to say that the Prime Minister in this instance is absolutely immovable. My argument is not addressed solely to the need to find tax incentives on savings and equities, and the advantages which I believe will accrue from that. I also want to try to carry on the process of democratisation which we have seen with the freeing of trade unions and the housing market.

Mr. Budgen : I believe that my hon. Friend will agree that his argument would be very much stronger if it were possible to change the law on taxation at the very moment that interest rates go up, but it cannot be done until the end of June, and it is probable that the agony will already be being eased by then.

As to my hon. Friend's wider point about the political forces that have governed the Chancellor of the Exchequer, I can only say that I have always observed that one of the great charms of politics is its unpredictability, and leave his general argument at that. I suspect that the second question that my hon. Friends will be turning over in their minds is whether the Chancellor will over do it. Will the squeeze be kept on for too long? Will this agony be made much worse and unnecessarily worse? All we can really say about that is that there is no evidence from the Chancellor's track record that he has pursued the defeat of inflation with any mindless and excessive zeal. A Chancellor who has enjoyed the advantages of 5 per cent. inflation per annum throughout his entire period of Chancellorship cannot be described as a sound money bigot. He says that he was successful in 1985. It is true that in 1985 inflation as recorded by the, in my opinion, rather inadequate RPI did go up to 7 per cent., and for a brief period interest rates were increased to 14 per cent. However, it was not the 14

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per cent. that got him out of trouble, but two other factors. One was that petrol, oil and other commodity prices dropped sharply and the other was that sterling appreciated. As soon as those two happy horsemen came to his rescue, the money supply was allowed to increase once again.

We live in an electoral cycle. It will be possible now to have a bit of agony. It will not be possible, because the lads will not stand it, to have a great deal of agony in a year or 18 months' time. Therefore, for all those reasons I hope that my hon. Friends will give the Chancellor their support.

7.43 pm

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