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interested in the commercial future of our country but rule out price--the dominant factor in selling our goods--we are being absurd. Price is crucial.

Mr. Janman : Throughout the lifetime of the last Labour Government output per person in manufacturing industry increased by 5.8 per cent. Between 1987 and the fourth quarter of 1988, it increased by 10.8 per cent. --nearly double what happened throughout the period when the last Labour Government were in office.

Mr. Sheldon : Interventions of that kind are pretty useless. The hon. Gentleman should not make such an intervention in a serious debate. He should understand that we are considering imports and exports. Manufacturing exports have declined ; manufacturing imports have increased. That has led to our country's prospects being put in serious jeopardy. If our prices are higher than they ought to be, we shall sell fewer of our goods.

That has happened in my constituency. One third of the medium-sized firms in my constituency have disappeared. Companies in Germany, Japan and all over the world closed their doors to our exports. We could not live with 17 per cent. interest rates and a $2.40 pound. I fear that a number of them will not be very comfortable with a 13 per cent. interest rate and a $1.70 pound. It is a ruinous combination. The Chancellor of the Exchequer ought to be ashamed of presiding over it.

As for European monetary union, just by chance I happened to speak with three directors of the German Bundesbank. They had the same message. They want European monetary union so that bankers will be able to control the monetary aggregates. That is similar to what the Chancellor of the Exchequer wanted in 1977. He wanted a law to be enacted that would give power to the Bank of England to decide the levels of monetary stability. The Minister of State, Treasury at that time, my right hon. Friend the Member for Llanelli (Mr. Davies), replied to the debate. The Chancellor of the Exchequer wanted legislation that would enable the bankers to do even more than the Bundesbank allows.

We nationalised the Bank of England in 1945. We were determined that bankers ought to be subordinated to democratic direction, which means Government direction. Of all the privatisation measures announced by the Government, no mention has been made of denationalising the Bank of England, and for a very good reason. The Treasury sometimes takes a different view of economic policy from the Bank of England. The relations between the two are sensitive, as they should be. However, when the Chancellor of the Exchequer decides on the policy, it is the Governor of the Bank of England who has to implement much of it, and it is the Treasury that decides. At one time, the Treasury had an inadequate knowledge of the markets and of the operations of the Bank of England. Its knowledge has improved greatly in recent years. The eyes and ears of the Bank of England are always important, but they do no play quite the same role as they did a decade or more ago.

Those who see dangers in European monetary union are not anti-Europe ; nor are they pro or anti any other kind of grouping. However, we feel strongly about the dangers of domination by bankers. In a more integrated

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Europe there is a threat that, in the absence of political agreement, the power of the central bank might become dominant. Irrespective of whether there ever was a bankers' ramp in the pre -war years, the control of our economic policy cannot be left in the hands of those who are unaccountable and who, moreover, have been known to display certain prejudices that are not identical to those that might be expressed on either side of the Chamber. More than all that is the question of economic power. Bankers cannot be given that kind of authority.

Those who say that it works well in Germany should not assume that a transplant is always successful. The institutions of different countries owe so much to coventions, history and social relationships that they cannot readily be transferred from one country to another--still less from one country to a supranational authority. Those who say that we should have our own representative on the board of the central bank--a supra-European Bundesbank--must accept the reality that that person would be a banker, too, and, like those he joined, would rapidly come to the view that all the important economic decisions are best taken by bankers.

It is for that reason that, however fast one may wish to move towards greater integration in Europe, the transfer of economic power cannot precede common political agreement and common political power. There are no short cuts. Those who seek an easy way into economic and political integration within the Community are wrong on a number of matters, but on this matter I believe that they are dangerously wrong. There has been so little reference in the Budget debates to that important question that I thought it right to include something about it.

The right hon. Member for Old Bexley and Sidcup (Mr. Heath) said that the Chancellor of the Exchequer is a wise man ; he does not know what to do, so the best thing is to do nothing. I am a little less charitable. Another back-handed compliment is that I believe that the Chancellor is a clever man. He has succeeded in pleasing his party for six years, but I believe that he has failed in his long-term economic policy.

5.57 pm

Mr. Julian Amery (Brighton, Pavilion) : I, too, congratulate my hon. Friend the Member for Richmond, Yorks (Mr. Hague) on his good maiden speech. It is traditional for a maiden speaker to refer to his constituency. My hon. Friend brought his constituency into the Chamber. I could see the hills, the dales and the valleys. For a few minutes in this otherwise rather dry debate, I enjoyed the pleasures of Richmond. I was also touched by his advocacy of the importance of looking after senior citizens, one of whom I now am. I hope that we shall hear more from him in the years to come.

As the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) recognised, the Chancellor of the Exchequer's room for manoeuvre is limited. The fight has to be against inflation. Like all literate and numerate commentators, he recognised that fact. There may come a day when a Budget could reflect what my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) advocated. It sounded to me rather like the Yellow Books that Keynes wrote for Lloyd George when prices were falling, but the time is not yet. Had we had a Budget that reflected those views, I suspect that there would have been a run on the pound of a pretty sensational dimension.

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We have to recognise, like it or not and whatever the causes, that the fight against inflation must take priority. That is intellectually understood, but we in this country do not have a gut feeling about inflation in the way that the Germans and others have. That is natural, and the markets know it. Our rhetoric on this subject is therefore suspect. The markets want to know where the beef is. Determination to keep up interest rates until inflation has been tamed is the most important proof, and the key. My right hon. Friend the Chancellor has said it loud and clear, and his commitment and that of my right hon. Friend the Prime Minister is the best gauge that it will be the answer.

There is, perhaps, a longer haul ahead of us than some observers think. I think that we might find the situation at the end of the year more uncomfortable than we expect. Monetarist high priests such as Friedman have always made it clear that the consequences of their policy would take quite a long time to come through. We may find that that is the case. The question is whether we can do more to meet the problem of inflation.

I should like to ask a question which rather follows on what the right hon. Member for Ashton-under-Lyne has just said. Since the general election, my right hon. and hon. Friends have taken credit for past privatisations, brought forward the privatisation of water and electricity, and talked about the railways and coal as possible targets. As the right hon. Gentleman said, there is an important omission. It is curious that nobody has talked about restoring to the Bank of England the independence which it had before 1948. It did not have complete independence. Like the Archbishop of Canterbury and the Lord Chief Justice, the Governor of the Bank of England was appointed by the Government of the day but, once appointed, he was very much his own man. The same is true of the Federal Reserve Bank in the United States and the Bundesbank in Germany. Would not a return to that arrangement be a strong guarantee that no British Government would return to an inflationary path?

My right hon. Friend the Chancellor of the Exchequer has broad shoulders as well as breadth in other respects, and on him rests a heavy responsibility for both fiscal and monetary policy. It is a great burden, even for him. Is there a case for separating the two? Fiscal policy--taxation and the rest-- is political in character. But it could be argued that monetary policy is professional. If we commit ourselves to what my right hon. Friend the Prime Minister calls honest money, there cannot be much difference of opinion about what it is. Should we go back to it? Should we try to institutionalise our counter-inflationary policies by giving the Bank of England greater independence?

I ask those questions in the context of our fight against inflation, as they are the only things that I can think of which might add to the clear commitment of my right hon. Friends the Chancellor and the Prime Minister. Long as I hope to see them reign, they cannot be eternal--much as we might like that. I do not use the word "we" in any facetious sense. Ought we not to be thinking about the longer term? Is it possible that greater independence allowed to the Bank of England might help us in the international sphere? It is inevitable, and right, that we will have a lot of discussion about a possible European currency, a possible European reserve bank or a possible European central bank. The Delors committee reports in June. I do not think that decisions will be taken at once. The matter is bound to be controversial, but I wonder whether it is

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possible that the depoliticising, if I my use that horrible word, of our monetary policy, by moving responsibility for it from the Treasury to the Bank of England, would help co-ordinate monetary policy in Europe.

There is a school of thought, which I rather favour although I am not sure that I am right, that we ought to make the European currency unit, the ECU, legal tender in parallel with our own currency. Such a move would involve considerable professional problems. If it were adopted in all Community countries, it would call for consideration at a very professional level.

Would such a change help to depoliticise the Bank of England in a wider context? We have meetings of the Group of Five or Seven--would it help in deliberations with the other banks concerned? It would certainly align us with the two giants--the Federal Reserve Bank and the Bundesbank.

In the old days, the Bank of England had a great reputation. It was enhanced, if anything, in 1931 when we went off the gold standard. The general view of pundits in the City was that the heavens would fall in. But not at all--they did not even dip. The Bank of England went on to create the sterling area ; and sterling became a reserve currency which, within two or three years, was accepted by all countries in the world. I shall not go into the details of what the Bank did, but what it did was little short of a miracle by the standards of those days. No other bank in Europe has that experience. Even the Federal Reserve Bank, which inherited a currency, has never created a new one. It was quite extraordinary.

Mr. Robert Sheldon : It was Winston Churchill who brought Britain back on to the gold standard as a result of the Bank's involvement. The right hon. Gentleman is saying that the Bank just corrected its previous mistake, which was a grave error that led to some of the country's many problems during the early 1930s.

Mr. Amery : I would be happy to discuss with the right hon. Gentleman whether Churchill was right to make the pound look the dollar in the face. I am talking about 1931 when we were forced, rightly, to go off the gold standard and the Bank of England picked up the consequences which many people thought would lead to world collapse. That did not happen. The skill of the Bank of England made a currency, which was backed not by gold but by the reserves of the other members of the sterling area, a world currency which was accepted and, until the 1960s, remained a world currency. No other bank in Europe, and not even the Federal Reserve Bank, has the same experience. Do we still have the expertise to do that? Maybe some of the expertise has been hived off to the Treasury. My right hon. Friend the Chief Secretary to the Treasury will have that in mind. Could any Government happily delegate control of monetary policy? I can see that it would be awkward to surrender such control--it would be awkward for my right hon. Friend the Chief Secretary and for my right hon. Friends the Chancellor and the Prime Minister. I am asking questions, not making proposals. The return of inflation, which we thought we had got under control, suggests that the time has come to ask these questions. If I am right, the time has also come to ask the Government to consider them seriously.

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6.9 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch) : I was fascinated by the suggestions of the right hon. Member for Brighton, Pavilion (Mr. Amery) that monetary policy could be cured by some administrative changes and that one of those changes should be that the Bank of England should be given an independence which it has not had since it was nationalised. As he began his argument, I thought that he would suggest that we should return to the gold standard at the same time. After all, it was only 10 years ago that Sir William Rees-Mogg, the smutty man in charge of the Broadcasting Standards Council, wrote a pamphlet saying that all our economic ills could be cured by a return to God and the gold standard. I am not sure that doing things by hunch, by guess and by God is the right way to deal with economic problems and I shall not follow the right hon. Member for Pavilion down the line of historical fantasy.

There is broad agreement in the country, if not in the House, that the 1989 Budget is the price that we have to pay for the 1988 Budget. That price includes listening to the Chancellor's words about lower economic growth, wage restraints, a balance of payments crisis, high inflation and more unemployment. Although the responsibility for the current mess, muddle and moronity in economic affairs lies entirely with the Chancellor of the Exchequer, I felt sorry for him as he delivered his Budget. As the blood drained from his face and his eyebrows drooped, I thought about the excrutiating pain he must be suffering--that haughty, ebullient, cocky, arrogant Chancellor, forced at the Dispatch Box to disport himself in such a diffident fashion, and produce such a demeaning, piddling little Budget which has made him the object of political scorn and economic contempt. As he sat down, I was reminded of the words of President Lyndon Baines Johnson, when he listened to a speech by Richard Nixon. He turned to the press corps and said :

"Boys, I may not know much, but I know chicken shit from chicken salad."

The Chancellor began his speech by talking about the enterprise culture and telling us about the Thatcher economic revolution of the past 10 years. Recently I have spent a great deal of time examining the Thatcher economic revolution of the past 10 years and comparing our economic performance with the country's economic performance during the 10 years preceding 1979. The results are quite interesting. Those who salivate at the thought of the Thatcher revolution claim that it has brought about a sea-change in our economic performance, but my analysis shows that the Thatcher revolution is an illusion, a mirage, and a will-o'-the-wisp that belongs to the media world of make believe.

The theory of the Thatcher revolution was to have been monetarist. In practice, it has been a mish mash of monetarism and

crypto-Keynesianism. At first the neo-monetarism theorists of the revolution told us that they would control inflation by controlling M3. When the evidence confounded the theorists, they turned to M1, and when that did not work they turned progressively to a variety of monetary indicators--M0, M2, M4, M5, PSL1, PSL2 and DCE. In the 1989 Budget the Chancellor has gone back to M0. Needless to say, none of those monetary indicators did what was claimed of them and M0 will not

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do what was claimed for it. In theoretical terms, the revolution has turned out to be Grecian tragedy and only the Chancellor's pride prevents him from admitting that.

According to conventional media wisdom, high levels of economic growth in the 10 Thatcher years have brought about the enterprise culture, better management and more hard work. According to conventional media wisdom, low economic growth is a thing of the past. Alan Budd, a Thatcher apologist and professor of economics, and director of the centre for economic forecasting at the London Business school, argued in volume 2, No. 2 of the "Contemporary Record" :

"The Conservatives could look back to 10 years prior to 1979 when GDP had grown at an average rate of 2.2 per cent ... Since the second quarter of 1981; GDP growth has averaged 3.4 per cent. a year."

Even the most stupid member of the stupid party can see the trick. Thatcher did not come to power during the second quarter of 1981 ; the Conservative Government were elected in 1979. The average rate of growth in GDP since 1979 is 1.8 per cent. rather than 3.4 per cent. and is less than in the 10 years preceding 1979. Professor Budd also ignored entirely the contribution of oil and gas production on the United Kingdom continental shelf to economic growth since 1981. The figures show that without oil and gas production virtually all the economic growth would have been wiped out.

In 1983, oil and gas production accounted for 6 per cent. of gross national product--twice the rate of economic growth for that year. On average, in the years 1982-87--the only reason I stop at 1987 is that I cannot obtain any figures for 1988--oil and gas production more than accounted for all the economic growth in Britain. We should remember that prior to 1979 there was virtually no oil and gas production in the United Kingdom.

So what kind of revolution is it? After 10 years there has been no growth other than that from a God-given source, and not even Thatcher can claim that she is God. Even sanctification will probably have to await her death. After 10 years we have just surpassed the level of manufacturing output that existed at the beginning of 1979. As North sea oil and gas revenues and production diminish, and a balance of payments crisis of super proportions hits us, the Thatcher revolution will be seen by the public and by history as little more than a chimera.

I read incessantly that one of the major characteristics of the enterprise culture and the Thatcher revolution is low taxation. It is said that Thatcher lets the people spend more of their own money, that the Tories are the party of low inflation and that Labour is the party of high taxation. I hate to say it, but it is a whopping great lie. The truth is the reverse. Thatcher takes more money from people and lets them spend less than Labour did. The statistics show that the Tories are the party of high taxation. [Interruption.] I hear the laughter of the hon. Member for Bridlington (Mr. Townend) who accompanied me to Tokyo. Apologists of the Thatcher revolution, of whom he is one, talk only about income tax and avoid all mention of VAT, national insurance, royalties and rates because the figures show that, after a difficult start, the Labour Government brought down taxation as a proportion of GDP. Whereas Labour took only 33.9 per cent. of gross domestic product in taxation in 1978-79, in the current tax year the Conservative Government are taking some 37.4 per cent. of GDP in taxes. In every year that the Conservatives have been in power, they have taken a

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higher proportion of GDP in taxes than Labour took in 1978-79. In 1984-85 the Conservative Government took as much as 39.1 per cent. in taxes. I remind the hon. Member for Bridlington that that is our money.

Mr. John Townend : Will the hon. Gentleman be good enough to explain why he and his colleagues systematically vote against every tax reduction that the Government propose? In view of the fact that this year there is a Budget surplus of almost £14 billion, if he were in power, would the hon. Gentleman reduce taxes--a measure that I would support--and which taxes would he reduce?

Mr. Sedgemore : I will set out my taxation policy at the end of my speech if I have time. It is incorrect to say that we have opposed every tax reduction that the Government have made. It does not help an argument in the House for somebody to stand up and make a cheap debating point on the wrong premise. When I studied logic at university I learnt that if one moves from false premises to using false logic, one invariably reaches false conclusions. I invite the hon. Gentleman to study Aristotelian syllogisms and he might be able to make a reasonable intervention.

I was talking about the high proportion of taxation that the Conservative Government have taken in respect of GDP. The figures show that in every year in which the Government have been in office they have taken away a higher percentage of the gross earnings of a married couple with two children when the husband is on average earnings and where child benefit is treated as negative income tax. In 1978-79 only 35.1 per cent. of the average family's earnings was taken in tax, but in the current year, 1988- 89, the Government are taking away 37.3 per cent. I am not sure how the hon. Member for Bridlington will justify that.

Moreover, it is much worse than that. John Hills of the London School of Economics has just shown in a pamphlet produced by the Child Poverty Action Group called "Changing Tax" that the Government's cuts in direct taxes have been paid for entirely by cuts in the generosity of benefits. That is another way of saying that the poor are subsidising the rich. According to Hills--I do not think that anybody has challenged his figures--the bottom half of the population has lost £6.5 billion through the failure to uprate benefits since 1978-79 and £5.6 billion of that has gone to the top 10 per cent. of income earners. In other words, the Government have used the benefits and tax systems to target relief on the rich. What sort of miracle is that of which any Government can be proud?

I shall deal now with the national debt and Government borrowing. Inherent in the idea of the enterprise culture--I read it again and again--is the notion that the Government have achieved a miracle by more than balancing the budget and by replacing the public sector borrowing requirement with the public sector debt repayment. That miracle may appeal to the daughter of a Grantham grocer, but if one examines the historical data one can see that it is a miracle that is rather commonplace. If one examines the definition of a miracle, one will see that it cannot be a miracle if it is commonplace. In 1969-70 Labour had a budget surplus or a PSDR of £1 billion when Roy Jenkins, now Lord Jenkins, was Chancellor of the Exchequer. Budget surpluses or a PSDR also existed in 1947-48 and 1948-49 when times were hard. When the Chancellor said in a speech last year "For the first time for at least half a century we have a Government in this country that are engaged in repaying the national debt"

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he was not telling the truth.

In that respect, he reminds me of Bernard Shaw's "Major Barbara" of whom it was said :

"He knows nothing and he thinks he knows everything. That points clearly to a political career."

I sometimes wonder who carries out the Chancellor's high level statistical research. It could be that one of the major problems of the British economy is that Miss Pamella Bordes has a Treasury pass too. Somebody who does not understand the way in which this place works is producing the Chancellor's statistics.

The miracle of the PSDR palls even more when we realise that Socialist Governments in Sweden, Denmark, Finland, Norway and Australia have budget surpluses. When the country desperately needs investment in infrastructure, education, science and industry if it is to remain competitive, why do we want to repay the national debt, particularly as it is now at historically low levels in relation to GDP? As my right hon. Friend the Member for Islwyn (Mr. Kinnock) said, it is our surplus and it should be used to meet our needs. I shall now deal with savings and investment in the Thatcher revolution. In the enterprise culture and as part of the Thatcher revolution, we are encouraged to save, or at least so we are told. Again, the facts show that the reverse is true. The enterprise culture and the Thatcher revolution have encouraged people to spend, spend, spend and borrow, borrow, borrow. The statistics show that they have well and truly created a loads of money consumerist mentality in which nobody saves at all.

If we define borrowing as negative saving, which is what the Government do, the figures show that when Labour was in power between 1975 and 1979 the personal sector savings ratio averaged 11 per cent. The latest figures show that it is down to just over 1 per cent. The decline in savings--savings are essential to investment unless it is assumed that all our investment is to be done by foreigners--seems to be terminal.

The Thatcher revolution in investment seems to have been still-born in one crucial area of the economy. Surely it is a very small miracle that has left manufacturing investment in 1988 still below the 1979 levels. In 1979 at 1985 prices, £10,136 million was invested in manufacturing. By 1982 that figure had plummeted to £6,360 million. In 1988, at £10,013 million it was still lower than in 1979. Let us turn to the one big area that always brings a smile to the faces of Conservative Members, the ability of the Government to control inflation relative to everybody else. It is axiomatic to everybody who believes in the theory of the Thatcher revolution that Britain has low inflation. Again, as my right hon. Friend the Member for Islwyn said, the figures suggest that the Chancellor is Mr. Inflation himself. The man who promised us zero inflation now has a rate of inflation of 7.5 per cent., which is the highest of all the major industrial countries. It is higher than in America, Canada, Japan, Germany, France and Italy and 50 per cent. higher than the EEC average.

Before any hon. Member stands up and asks, "What happened under the Labour Government?" I can provide them with all the figures for the past 20 years. Every hon. Member knows that 7.5 per cent. inflation is historically high bearing in mind that it is Government-induced and owes nothing to oil price increases or a rise in commodity prices. It is fair to say--I want to be fair--that inflation blipped in 1986 at 3.4 per cent. However, as the figures show, it has never looked like reaching zero. In 1980 under

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this Government it was as high as 18 per cent. In fact, that was the average for 1980 but in 1980 on a year-on-year basis it touched 22 per cent. I am puzzled, as are all my hon. Friends, as to how the Chancellor is to reach zero inflation when he is pushing inflation up. He is pushing up mortgage interest relief and the cost of borrowing. He is supporting the privatisation of the water and electricity industries, the former of which is already pushing prices up by 43 per cent. and the latter of which will push up prices by 10 per cent. per annum.

On that subject, I believe that the Chancellor, like President Nixon, is such a conformer in duplicity that he now lends himself to what Lawrence Peter called the Nixon political principle : if two wrongs do not make a right, try three.

The Chancellor denies that this will be his last Budget. We do not know. I doubt it because the Chancellor, as we all know, wants to go to the City of London. The feelers have been put out by the Treasury and the advertisements have been placed. The entire Government progaganda machine has gone into action. I can inform the House privately that he has not had a single offer from the City of London. In practice, the City, like the country, cannot afford a clapped-out second-rate Chancellor whose luck has run out. To paraphrase a comment made by Adlai Stevenson about Nixon--and I apologise for the constant comparisons between the Chancellor and Nixon-- the Budget shows that the Chancellor is the kind of politician who would cut down a redwood tree and then mount the stump for a speech on conservation. It is a bad Budget by a bad Chancellor, so I hope that all hon. Members will oppose it.

6.30 pm

Sir William Clark (Croydon, South) : The hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore), with his usual panache, has made a speech, as always, that is offensive to the Minister about whom he is speaking. That is a pity because some of his points could be debated. He accused my hon. Friend the Member for Bridlington (Mr. Townend) of making a cheap debating point. That was priceless coming from the hon. Gentleman-- definitely a case of the pot calling the kettle black.

Like other hon. Members, I enjoyed the speech of my hon. Friend the Member for Richmond, Yorks (Mr. Hague). I could not help reflecting how different it was from the speech of my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath). My right hon. Friend's speech was well received by the Opposition, but he should sometimes make himself say something kind and good about the Government and our economic performance. His gratuitous insult to my right hon. Friend the Chancellor was inexcusable. When he was talking about exchange rates and interest rates, he said that my right hon. Friend the Chancellor wanted to bring them down, but was stopped. That reflects on the integrity of my right hon. Friend the Chancellor. Exchange rates and interest rates are an extremely important matter of principle for my right hon. Friend. Knowing him as I do, I am convinced that if he had been stopped from bringing them down, he would not be Chancellor today. He would never put forward policies with which he did not agree, so

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I am sure that my right hon. Friend the Member for Old Bexley and Sidcup will, on reflection, regret having made that remark. In 1979, the Conservative party made the following two pledges, among others--first, to reduce the standard rate of tax to 25 pence in the pound and, secondly, to abolish the earnings rule for pensioners. I am sure that my hon. Friends will join me in congratulating my right hon. Friend on being the Chancellor who has fulfilled both those pledges. Others of my hon. Friends have already said that the Budget will help the lower paid through the readjustment of national insurance contributions, but none of my hon. Friends has mentioned the help that my right hon. Friend the Chancellor has given to charity. It is a great step forward and should be commended. I am delighted that my right hon. Friend has not touched life assurance funds--the only long-term savings that we have in this country--as I believe that it would have been a mistake to make any changes in that respect.

The Opposition always sell Britain short, as did the hon. Member for Hackney, South and Shoreditch. Every speech from the Opposition denigrates the economy. The Opposition make three points--first, the overseas deficit, secondly, high interest rates and, thirdly, inflation. On the overseas deficit, I wonder how many of our imports are capital goods, how many are commodities and how many are consumer durables. I do not know how the Central Statistical Office works out such figures. One reads in various financial papers and journals that the CSO's margin of error is considerable. Consequently, when we talk of a deficit of, say, £14 billion, that figure may not be accurate and the deficit may be only £10 billion. The journals that I have read maintain that the estimated deficit has been exaggerated. The Treasury should, perhaps, spend some time dealing with that. Even if we take the figure of £14 billion, however, we should not continue to say that there is gloom and doom around the corner. One difference between this deficit and that of the Labour Government is that we have gold and dollar reserves of £29 billion to cover the deficit, so we can easily sustain it even if we do not want it to continue. I know that Labour Members do not like us to mention the financial position of the last Labour Administration. The Labour party asks for more public expenditure, but it conveniently forgets that when Labour was in office, especially after the meeting with the International Monetary Fund, the Labour Government cut expenditure across the board, including education, roads and the National Health Service. We all want to debate the economy, but hon. Members should not run down the economy and imply that there is a catastrophe around the corner. With hindsight--I emphasise that word--all hon. Members would agree that in 1988 the reduction in interest rates was too lax, although one must remember that it was preceded by the stock market crash and all the economic pundits were saying that there might be a recession around the corner. My right hon. Friend the Chancellor thought that he should boost consumption and he did so by reducing interest rates. Having seen that a world recession did not occur, some have criticised his taking remedial action. In my view, however, he should not be criticised but congratulated. This Chancellor is not afraid to take unpopular measures, rather than trying to buy votes. If economic policy deviates, action must be taken. It is all

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very well for the Opposition to criticise my right hon. Friend. The only time the last Labour Government took action was when the IMF told them to do so.

Mr. Hawkins : I would go further and say that not only did a recession not occur, but that it did not occur because of the measures taken by Britain and the rest of the Group of 7. It is easy for people to say that my right hon. Friend the Chancellor over-reacted and that there was not a world recession, but there could have been one, as there had been after every other stock market crash in history. It was the actions of Britain and the rest of the Group of 7 that stopped the recession from coming this time.

Sir William Clark : I am grateful to my hon. Friend for making the point rather better than I could.

As my right hon. Friend the Member for Brighton, Pavilion (Mr. Amery) said in his excellent speech, it is obvious that the first priority is the control of inflation. That has meant that interest rates have risen, but that is a temporary and not a permanent measure and in the months to come the 13 per cent. base rate will come down. My right hon. Friend the Chancellor has cut consumer demand. When one considers house prices and trade and retail sales, one sees that his policy is having an effect. In effect, my right hon. Friend has told people, "If you want to spend, borrowing will be expensive." Consequently, expenditure has been cut. However, that does not affect the person who does not want to borrow for his spending. I therefore welcome the Budget measures on personal equity plans, workers' share option schemes and pensions.

As my right hon. Friend the Chancellor will enjoy an even greater surplus in the coming year, I should like him to repay some of the national debt in his next Budget. However, I have slight reservations about repaying too much of the national debt because some day there may be a profligate Government and it would be far too easy for them just to spend, spend, spend. I therefore offer that caveat to my right hon. Friend.

The rate of savings causes me some concern as it has reduced from about 14 per cent. of disposable income to about 4 or 5 per cent. although we do not know the exact figures. Again, I do not know whether the Central Statistical Office has got its sums right, but the trend is clear. In the next Budget we should give a definite boost to savings. My right hon. Friend has done so much this month for which we thank him, but next year I should like contractual savings to be allowed as a charge against one's taxable income. That would give a great boost to savings.

In 1979 there were 2.75 million shareholders in this country. Today, through the Government's economic policy and privatisation, we have more than 9 million shareholders--9 million capitalists. We should build on that, so that more and more of our fellow countrymen have something to conserve. Between now and his next Budget, next March, I should like my right hon. Friend the Chancellor to concentrate on seeing how we can increase the savings of this country and create more and more capitalists.

6.42 pm

Mr. Denzil Davies (Llanelli) : As has been said, it is now more than 10 years since the Prime Minister's first Government introduced their first Budget, and, almost 10 years later, all that the Chancellor of the Exchequer had to

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show last Tuesday for the Government's policies and efforts was a truly dismal and, in some senses, truly horrendous set of economic statistics and forecasts.

The Government, who have made the elimination of inflation the cornerstone of their policies, have had to admit that inflation will now rise to over 8 per cent. As has been pointed out, that is by far the highest rate among all the major western industrial countries. Indeed, over the past 10 years, inflation in Britain--under this Government--has been higher than that of most of our industrial competitors in the western world. Does the Chancellor, the Chief Secretary or the Prime Minister ever ask why all those other countries can apparently do so much better than Britain is doing under their Administration?

The deficit on the current account of the balance of payments is appalling. It is £14.5 billion this year and is forecast to be £14.5 billion next year, according to the Red Book. Again, that is by far the worst deficit of all the western industrial nations. Again, does the Chancellor or the Prime Minister ever ask why all those other countries, except possibly the United States--why all our competitors and trading partners in the EEC--can do so much better than Britain is doing under their Administration?

On the balance of payments, is it not surprising and worrying that, according to the Red Book, despite high interest rates and despite there now being an apparent reduction and a fall in growth next year to 2.5 per cent., next year the balance of payments will stay the same as it is this year--that is £14.5 billion--and that the deficit on manufactured goods will increase to £15.5 billion?

There may be many reasons for that--it may be our old friends the leads and the lags--but I suspect that one reason is that Britain's manufacturing capacity has so shrunk over the past 10 years that we are not producing the capital and consumer goods that industry and individuals have little option but to purchase, because they cannot do without them, whatever the cost. If that is the case--and I suspect that it may be--the future for this country, for our balance of payments deficit and for our industrial base is truly bleak and appalling.

Our interest rates are the highest in the western world and I believe that the Government--this will be shown in the next few years--have failed to arrest or reverse Britain's relative industrial decline when compared with the other trading nations of the EEC. All that is despite the fact that, over at least eight of the past 10 years--the first two years were more difficult--the Government have had the benefit of the most favourable economic climate of any British Government since the war. During the 1980s, most Governments in the western industrial world recognised the dangers of inflation and, because they all did so, the measures to combat it were politically easier to carry out than they had been in the 1960s and 1970s. As the Red Book clearly shows, over the past 10 years, from 1980 to now, commodity prices, especially of oil, food and industrial materials, have fallen substantially and steadily in real terms. However, they are now beginning to rise again.

As has been said, on top of those international advantages, the Government have had the enormous domestic benefit of a boost to their revenues and to the balance of payments through the oil surplus and the oil revenues from the North sea. Yet after 10 years of the most

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favourable industrial and economic climate, we were presented with dismal and appalling figures in last Tuesday's Budget.

When the Government came to power in 1979, they knew what they wanted to do and they knew what had caused Britain's economic ills. The radical Right, like the Ayatollah, had no doubts. Their targets were clear and simple. Some of us remember the rhetoric. The targets were the trade unions, the over-sized public sector, high public expenditure, the dreadful public sector borrowing requirement, high income tax and the appalling lack of monetary discipline and control.

The trade unions were the first to fall. Their power was broken ; especially, their power over collective bargaining in manufacturing industry has diminished. However, despite that, in the past 10 years rises in wages and earnings have consistently exceeded the rate of inflation. I accept that some of the difference and excess obviously comes from increased productivity, but not all of it. Despite the fact that the power of collective bargaining has been broken, much of that excess does not come from productivity.

Next came the over-sized public sector, which was diminished by privatisation. High public expenditure was cut, perhaps not by as much as some Conservative Members would have liked, but it was cut. The dreaded PSBR was eliminated, destroyed, slain and turned into a surplus, albeit a surplus that cannot be used. Despite all that, inflation is apparently going up to 8 per cent., the balance of payments is horrendous, and interest rates are crippling. All the bogeys have been shot down.

There were also high rates of income tax. Reduce them, so the rhetoric went, and British management would be galvanised and the supply side of the economy would supply. Income tax is now down to 25 per cent. and 40 per cent., but it has done nothing for Britain's supply side. It has worked wonders for the supply side of our competitors. The supply of BMWs and European imports has gone up considerably, but tax cuts have done nothing to the supply side of British manufacturing industry.

Since 1985, manufacturing imports have risen by 200 per cent. in value, and exports have risen by only 30 per cent. Next year, the deficit on manufactured goods will be £15.5 billion. Our share of world trade in manufactures has fallen consistently over the past 10 years. That deficit in manufactured goods is not a deficit with the sweatshops of Asia. Most of it is a deficit with other EEC countries--countries that pay higher wages and have a better provision of public expenditure. Many of them have a higher rate of income tax than we have. So much for the supply side.

Let us examine monetarism--the ark of the covenant, the reincarnation of everything that the Prime Minister learned in that little corner shop in Grantham. Rhetoric was high early in 1980, but, since then, there has been little monetary control--certainly not under this Chancellor. This Chancellor set up one monetary target, missed it, changed it, and then set up another. So it went on and on. Hon. Members heard tonight how it is called money GDP. It is about the worst target that could be chosen. One target after another has been missed. The Chancellor has

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zig-zagged between monetary flags like a giant slalomist. The only difference is that the game is to hit them and not to miss them, but he has missed them almost every time.

There is now no strategy left. The medium-term financial strategy is a joke and nobody believes it. There was an attempt to use an exchange rate strategy but, for whatever reason, it did not last long. All we have left are high exchange rates and the hope that, somehow, high interest rates will be able to free the Chancellor from the restraints on domestic inflation and foreign exchange markets. When the miracle has been achieved, a year before the election, the unearned surplus--it has not been earned, it has not been produced, and that is why it cannot be spent--will somehow or another be redistributed to a grateful electorate. I do not think that that will work.

The tragedy of the past 10 years is that much could have been achieved, but much damage has been done. It is a tragedy for which the British public will pay for a long time.

6.53 pm

Mr. Terence L. Higgins (Worthing) : Since the Chancellor made his Budget statement, hon. Members have heard several remarkable speeches. I am sorry that I was unable to be in the Chamber for the opening speeches this afternoon, as I was attending the funeral of a greatly respected constituent who was tragically killed in the Purley rail crash.

The Chancellor's Budget has been described as prudent and cautious. That is what it is, and it is appropriate in the present circumstances. Within the restraints of the present economy, he has got his priorities right. It is a Budget for pensioners. I was delighted that the Chancellor took the step of abolishing the earnings rule. Its abolition is long overdue. Against the background of changes in the demography of our country, in which the work force will clearly diminish in size as a proportion of the total population, that step is entirely appropriate. Taxes or other restrictions which are abolished rarely stage a comeback. However, if we merely change limits or increase allowances, all too often in a subsequent year we find that the improved position deteriorates. Therefore, the abolition of the earnings rule is welcome. On top of that, the Chancellor has made other changes to help pensioners. For example, he has reduced the limit at which extra help becomes available, from 80 to 75.

I shall refer to two other points in relation to specific taxation measures. The first is unleaded petrol. I certainly welcome that change, which is already having a perceivable effect. In his Budget speech, the Chancellor made an important point. He said that people have the impression that, if they switch to unleaded petrol, they cannot switch back to leaded petrol. We in this country are not in the same situation as that which obtains in the United States, where cars which are converted or designed to take unleaded petrol cannot be used with leaded petrol. There is no reason why people should worry about using unleaded petrol when their cars are converted simply because they fear that they may not be able to get unleaded petrol at a given time. It is important that some newpapers, particularly the Daily Mail , which has been campaigning on the issue, should get that point across. The change which the Chancellor has made will greatly increase the incentive to improve the environment.

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The other point is the exclusion of any increase in the price of drink and tobacco. Hon. Members understand what the impact on the RPI would have been if the Chancellor had increased those duties. However, there is a case for taking tobacco out of the retail prices index. It is a cost of living index, not a cost of dying index. It is quite absurd for the Chancellor to be inhibited from taking that action simply because of the effect that it would have on the RPI and the likely consequences of wage settlements.

It has been suggested that the Budget is cautious and prudent because last year's Budget was a misjudgment. I simply do not believe that to have been the case. In the light of the stock exchange crash, along with many other Finance Ministers, the Chancellor took measures to stimulate the economy by monetary means. Of course, that had the desired effect. As was pointed out, a world recession was avoided. The timing of these matters is difficult, but, on the fiscal side, it is quite extraordinary for Opposition Members to say that the overall tax reductions last year were too big, when the outcome of the year was a massive surplus of unprecedented proportions. I am not clear whether they thought that we should have had fewer tax reductions last year and an even greater surplus this year.

My constituents are somewhat puzzled by the surplus, if only because they have never seen anything of its size before and are a little worried about why it has not been distributed. Some points need to be made about that. If greater taxation reductions or further increases in expenditure had been made, it would have inevitably put more purchasing power in consumers' pockets, when, quite clearly, the Chancellor's intention is to exert downward pressure on inflation rather than stimulate the economy. It is important to stress that the surplus has arisen not because of increases in tax rates or cuts in public expenditure but despite reductions in tax rates and increases in public expenditure. Therefore, it is not a case of the surplus being accumulated in some adverse way. It has occurred despite improvements in tax and spending.

As I understand it, Madam Deputy Speaker, I am subject to the 10-minute limit, so I shall make a passing reference--

Madam Deputy Speaker : Order. The right hon. Gentleman may speak until 10 minutes past seven.

Mr. Higgins : I shall try not to take that long, Madam Deputy Speaker. Having thrown away my notes for the part of the speech that I thought I should be unable to deliver, I shall make no effort to recover them.

The surplus is, in part, the product of the proceeds of asset sales. The Treasury and Civil Service Select Committee has been inclined to argue that those proceeds should be treated as a means of funding the public sector borrowing requirement, rather than as a means of reducing public expenditure, or as revenue. Now that we do not have a public sector borrowing requirement, we need to rethink the position, because the proceeds of asset sales increase the overall surplus. To some extent, the cash raised by the issue of shares in privatised companies is being used to pay off Government borrowing in another form.

Even if I am allowed to speak rather longer than I expected, I think these matters are rather technical to be dealt with on the Floor of the House. However, I hope

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very much that the Treasury and Civil Service Select Committee will be able, having taken evidence, to elucidate these matters in a subsequent report.

The Chancellor's fiscal stance is a tighter one than we have had previously, reinforcing his overall stance on interest rate policy. It is very difficult to think of ways of using the surplus, in terms of extra Government expenditure or tax cuts, that would not increase the inflationary pressure. If there are any such means, we shall no doubt hear suggestions about them, but they are difficult to find. That is the reason for the policy of repaying the national debt. In many ways, the consequences are favourable--for example, the shape of the yield curve, longer-term interest rates having been driven down, with benefit to manufacturing industry and commerce.

The Chancellor says that he proposes to return eventually to a balanced budget. It looks as though we shall by that time have paid about £30 billion of the national debt, resulting in a saving of about £3 billion in interest payments. The question is whether this can be used in a non-inflationary way. It is important to stress that, had that commitment remained, there would have been a transfer from one group of people to another--mostly domestic, but perhaps some overseas. Those resources may now be put to use, allowing for some variation, depending on whether the people receiving the new resources have a propensity for saving greater than that of those who were getting the interest payments. The result will be increased, genuine choice--and that is welcome.

The unexpected, extremely large surplus raises matters that can be dealt with in economic theory, but we in this country have not had any practical experience of a surplus on this scale. One aspect of the matter that creates very serious problems is the Government's statistics. I hope that the Chancellor will soon announce the improvements that he proposes to make in that regard.

In addition, the evidence that the Treasury Committee received from the head of the Government's statistical service was extraordinary, in that it seemed seriously to underestimate the impact of inadequate statistics on markets. However, I shall leave that on one side. I hope that we shall see some improvement in forecasting models. My right hon. Friend the Chancellor has always been very sceptical about forecasting models. Normally, a balance of payments surplus would be forecast if there were a fiscal surplus. However, with a fiscal surplus on a massive scale, we had the reality of a massive balance of payments deficit. That raises some very serious questions about the model and about the way in which such forecasting should be revised and reformed. Perhaps we shall have to take into account the impact of the overall borrowing--Government, private and corporate--rather than simply Government borrowing.

Finally, when he made his Autumn Statement the Chancellor was on something of a tightrope. He was using interest rates to try to get the economy back on course, following a period, as he rightly pointed out, of a very rapid inflation rate, overall, of some 4.5 per cent. per year--a rate which, clearly, could not be sustained indefinitely. The danger for a Chancellor on a tightrope is that, on one side, he can fall off into a recession, whereas, on the other side, he can fall off into a situation in which confidence is shaken internationally, the exchange rate collapses, and we get inflation. I believe that the Chancellor is still on that tightrope and that he will remain there until the situation

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