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Mr. Smith : I have changed my mind. I shall not report to the National Federation of Self Employed and Small Businesses ; I shall send Hansard as a good example of the lucidity with which Conservative Members approach some of the problems of small businesses. Small business men will not find that tirade very convincing because they have to accept the reality of the 14 per cent. interest rate that the Government have inflicted upon them. Sir William Clark (Croydon, South) rose--
Sir William Clark rose--
The Chancellor's problem is not just in deciding what his policy should be but in making sure that it is adhered to. In that circumstance, he is not comforted by what the Prime Minister said in her interview in the Glasgow Herald when she held out two possibilities for people who were retiring from the Government. She said :
"They can have a great career on the Back Benches. They get respect there, you know."
I do not know whether the Chancellor will follow that happy route. The signposts along that route are Old Bexley and Sidcup, Shropshire, North, Henley and--I say this almost with some affection--Chesham and Amersham. Those are the signposts to the road to self-respect. The Chancellor may not find them all that beguiling.
Sir William Clark rose--
Sir William Clark : I am grateful to the right hon. and learned Gentleman. He is criticising the Government's policy on investment in manufacturing industry. Would he be kind enought to tell the House what is the Labour
Column 257party's policy to accelerate investment in manufacturing industry? Does it require an injection of taxpayers' money which will lead to increased taxation, or not?
Mr. Smith : One of the things that we should not do is to run a high interest rate policy which makes it almost impossible for people to invest in manufacturing industry. If the hon. Gentleman takes the trouble to read our policies with the care that I am sure most of his researchers are busy doing so at the moment, he will find the answers to the questions that he raises.
What we are debating here today is the confusion and disarray in the Government's economic policy. [Interruption.] Conservative Members find it entertaining if someone disagrees with his Front Bench. I say one thing back to them--Old Bexley and Sidcup to you. The fact is that there is confusion and disarray in the Government's economic policy. A child could see that. Their short-term tactics are as muddled as their strategy is inadequate. That is why today, on behalf of a troubled nation, we call them to account.
"congratulates Her Majesty's Government on its economic policies which have led to output, investment, and manufacturing productivity growing faster than in any other major European Community country in the 1980s ; applauds the Government's firm anti-inflationary stance, and the action it has taken to exert further downward pressure on inflation ; and commends the Government's supply side policies which have brought industry's profitability to a 20 year high, led to record rates of new business growth, and seen the creation of nearly three million new jobs since 1983.".
The first thing to be said about the speech that we have just heard from the right hon. and learned Member for Monklands, East (Mr. Smith) is that it bore no relation whatever to what is happening in the real economy. The one thing that it did bear a close resemblance to was every other economic speech that he has made over the years. However, I have to say, in a spirit of great affection, that the trivia element was even higher than usual. In fact, it was pretty nearly 100 per cent.
It is remarkable how, whatever the economic circumstances, whether inflation is rising or falling, whether unemployment is rising or falling, whether sterling is rising or falling, whether he professes to be concerned about the threat of recession or the dangers of overheating, up the right hon. and learned Gentleman pops with the same solution--more public spending on training, research and development and investment.
Now let me try to find some common ground. I cannot accept the right hon. and learned Gentleman's assumption that these things have merit-- [Interruption.] These are serious matters and Opposition Members should listen to what I have to say. I cannot accept the right hon. and learned Gentleman's assumption that these things have merit only to the extent that they are paid for by the taxpayer, but I entirely agree that we want to see more training, more research and development and more investment. That is precisely what we are seeing at the present time. Expenditure on training is rising fast and is now running at well over £20 billion a year. Spending on industrial research and development has also been growing steadily year after year. In 1987, the most recent year for which figures are available, industrial research and
Column 258development was more than 30 per cent. up in real terms over the comparable figure for Labour's last year in office-- that is what has been happening--while total civil R and D, as a share of GDP, is well above the European Community average. Those are the facts. As for investment, that too is at its highest level ever and still rising fast, with manufacturing investment particularly strong. Indeed, total business investment in the United Kingdom now represents the highest proportion of GDP ever recorded. Whereas under Labour, total investment scarcely grew at all, in the 1980s under this Government we have seen investment growing substantially faster than consumption and faster than in all the other countries of the European Community.
All that is a clear sign of a healthy and vigorous economy, one far removed from the picture painted by the right hon. and learned Gentleman, who simply demonstrates how hopelessly out of touch the Labour party is with the reality of life in Britain today.
Mr. Chris Mullin (Sunderland, South) : According to figures supplied to me yesterday by the Department of Trade and Industry, manufacturing investment in the north-east--the area that I represent--in 1987, the latest year for which figures were available, was 53 per cent. of what it stood at in 1979. How does that square with the economic miracle?
Mr. Lawson : What I will tell him is that not only is it above and rising fast, but manufacturing output, which he considers of such importance, fell under the Labour Government and has risen substantially under this Government. That is the difference between our records on manufacturing.
What we have heard today from the Opposition is in no sense a new phenomenon. I recall, as some other hon. Members may, the censure debate on the economy that was mounted by the Opposition in January 1985--the last occasion on which interest rates were increased to 14 per cent. In that debate the Leader of the Opposition said : "We know that the Chancellor of the Exchequer wants a high growth rate. We know that he wants a low inflation rate and we know that he wants everybody to go busily about their business. But given his record, that is not really on."--[ Official Report, 31 January 1985 ; Vol. 72, c. 421.]
Mr. Lawson : The right hon. Gentleman says that that is right, but it is wrong. It is wrong in every particular. Since January 1985 British business and industry have had four of the best years that they have ever known. Since January 1985--I am taking about the particular things to which the right hon. Gentleman referred in 1985-- [Interruption.] If the right hon. Gentleman wishes to get to his feet he can.
Since January 1985, growth has averaged 3.5 per cent. a year, inflation has averaged 5 per cent. and unemployment has fallen by more than a million--so much for the right hon. Gentleman's predictions.
Mr. Kinnock : In the course of doing all that, the Chancellor of the Exchequer--unforgiveably--has given us policies that result in a massive and possibly incurable balance of payments and balance of trade deficit. One of the reasons why he has managed for a part of that time to restrain inflation is that the balance of payments and dependence on foreign manufactured imports restrained inflation. Now that the Chancellor is having to revert to his policy of reliance on interest rates, inflation is shooting up and will go up further than even he wants.
Mr. Lawson : What is abundantly clear is that, four years after the 1979 debate, we can see that the right hon. Gentleman was wrong about growth, wrong about inflation and wrong about unemployment. In four years' time we shall see precisely that he was wrong about everything that he says today.
The plain fact is that, over the past five years, Britain has created more new jobs than any other European country, and we have more people in work today than ever before in our history. No wonder the right hon. and learned Member for Monklands, East did not say a single word about unemployment in the whole of his speech--a subject about which we always used to hear so much. The right hon. and learned Gentleman's speeches used to be about nothing else, but now we hear not a single word about unemployment.
At one point, the right hon. and learned Gentleman referred in a most emotional way to the question of small businesses. Let me mention just one more indicator of the new-found strength of the British economy--a strength that has spread from the south of England to the midlands, to Wales, to the north and to Scotland--and that is precisely the pace of new business formation, which last year achieved a record rate, net of closures, of more than 1,300 new businesses a week. That is what is happening to small businesses, and it is a far cry from the picture painted by the right hon. and learned Gentleman in his speech. That figure is net of liquidations-- 1,300 more businesses each week.
If the right hon. and learned Gentleman wants to make speeches about industrial decline, he should have reminded the House of the state of British industry in 1979 after five years of Labour Government. That was indeed an example of how not to run an economy. Industry was unproductive, unprofitable and strike-ridden--crippled by Government controls and interference, and often only propped up by state handouts, all financed by penal rates of taxation-- [Interruption.]
Mr. Cranley Onslow (Woking) : On a point of order, Mr. Deputy Speaker. Given the acoustics of the Chamber, I know that it is very difficult for you to hear sedentary interventions from the Opposition Front Bench, but if you watch the lips of the Leader of the Opposition you will see that he is continually trying to interrupt my right hon. Friend the Chancellor. Can you persuade him to shut up?
Mr. Deputy Speaker (Mr. Harold Walker) : Order. I like to think that I have learnt a lot in the Chair, but I have yet to learn lip-reading. It seems to me that noise is coming equally from both sides of the Chamber. We could do with less sedentary noise from all parts of the House. I should like to hear the Chancellor of the Exchequer.
Column 260fact that has been acknowledged throughout the world. It is an economy immeasurably stronger and more confident than it was 10 years ago.
Mr. Geoffrey Robinson (Coventry, North-West) : How can the economy be seriously presented in that way? After four years of the Chancellor's policies, which he calls good policies, we have under his Government record interest rates, record inflation and a record balance of payments deficit. What can be right about policies that have brought us to that point?
I come now to the question of inflation. I readily concede that we have not yet exorcised the spectre of inflation.
Mr. Lawson : That is the problem we face today, and it is a problem that the right hon. and learned Member for Monklands, East conspicuously failed to address in the whole of the length of his speech in any remotely coherent way. The deficit on the current account of the balance of payments, which he dwelt on at such length, is itself a problem only to the extent that it is a symptom of excessive domestic demand. Exports continue to do well, and over the past three months exports have been up 8.5 per cent. over a year ago.
No, it is the problem of inflation that the House needs to address today. Once we master that--as we can and will--the British economy is set for an even better decade in the 1990s than we have known in the 1980s.
The rise in inflation that we are experiencing today is a worldwide phenomenon.
Mr. Stuart Bell (Middlesbrough) : The Chancellor says that inflation is the major issue that faces the House, which is true, but is he saying that he has no policies at all for the next few years to reduce the balance of payments deficit?
Mr. Lawson : The reduction of excessive domestic demand will itself cause in due course an improvement in the current account of the balance of payments. I have made that clear time and time again. The rise in inflation that we are experiencing today is a worldwide phenomenon. Taking the seven major industrial countries as a whole--that is what the G7 are, as the right hon. and learned Member for Monklands, East seemed not to know-- inflation is now at its highest level for almost five years. Indeed, over the past six months the rise in recorded inflation in the United Kingdom has been only marginally greater than the rise in inflation in the G7 as a whole. That is only because, unlike most of the rest of the world, we include mortgage interest payments in our retail price index-- [Interruption.] The Opposition do not like the facts, but they are going to get some facts. On a genuinely comparable basis, inflation in this country has increased over the past six months by less than in the G7 as a whole.
The right hon. and learned Gentleman may care to know that, while admittedly our recorded inflation rate is currently some 3.5 per cent. above the G7 average--that is true--during the whole of the period of the last Labour Government, of which he was a member, the United
Column 261Kingdom inflation rate averaged 6.5 per cent. above the G7 average. If the right hon. and learned Gentleman wants to make comparisons, let him have the facts.
Nor is what we are seeing today, either here in this country or worldwide, in any sense a return to the levels of inflation that we suffered in the 1970s. Indeed, the current underlying rate of inflation in the United Kingdom of 5.9 per cent. as measured by the RPI excluding mortgage interest payments, is well below the lowest level ever reached in any month throughout the whole of the lifetime of the last Labour Government, let alone their appalling 27 per cent. peak, so I am not going to listen to any strictures from the Labour party about inflation. I am not interested in the slightest in what the Opposition have to say about inflation.
Even so, inflation is clearly too high and must come down--and it will come down as the measures that have already been taken work their way through. Those measures are a tightening of monetary policy through higher interest rates within the context of a substantial Budget surplus.
Over the past year, interest rates have been raised very substantially and the medicine is clearly working. The housing market, which was such a powerful engine of consumer borrowing and spending, has subsided dramatically with prices levelling off in some areas and in most of the south-east actually falling. At the same time, turnover has fallen markedly, too. Retail sales have shown little or no growth since last summer and the growth in the narrow measure of the money supply--M0--has slowed down sharply since last September and is clearly headed back towards its target range. That is encouraging, though I have to say that I will not be content until it is well within that range.
Mr. D. N. Campbell-Savours (Workington) : How can a small manufacturer of a particular product in Workington compete with a German manufacturer of exactly the same product when the interest rate paid by the business-man in Workington may well be far in excess of 14 per cent. and the German is able to borrow at perhaps 5 per cent.?
Mr. Lawson : I can tell the hon. Gentleman this--a small businessman in Workington or anywhere else in the United Kingdom has far more to fear from the rampant inflation that would follow from Labour policies than from any rise in interest rates.
Inevitably, there is a further time lag between the effect of tighter monetary policy on the growth of spending, which has now been evident for some time, and its effect on inflation.
In my Budget speech, I indicated that inflation was likely to rise for some months further to reach about 8 per cent. including mortgage interest payments, before falling back again in the second half of the year. Given the impact of higher oil prices, it is now clear that the peak will be slightly higher than this, and could well be reached quite soon. However, from the summer a gradual fall should take place as the policy has its full impact.
To repeat, the Government are determined to take whatever action is necessary to bring inflation down. Thus, although it is clear from the evidence of the domestic economy that spending--and, in particular, consumer spending--is slowing down at a satisfactory pace, I judged it necessary two weeks ago to raise interest rates by a further 1 per cent. in order to avoid taking risks with
Column 262inflation. I could not ignore the fall in the exchange rate which had occurred, and which threatened to undermine the firm anti-inflationary stance we have taken. That remains our position. There is, indeed, now a widespread and well-established understanding of the problems which currency depreciation brings in its wake. As the right hon. Member for Leeds East (Mr. Healey) said :
"Hard experience confirms the findings of economic research--that depreciation can no longer be treated as a soft option."
But that was said as long ago as October 1978. The Labour party has had plenty of time since then to unlearn this lesson ; and unlearn it it has. So we now have the spectacle of the Leader of the Opposition adopting once again Labour's instinctive devaluationist stance--arguing that sterling is overvalued and should depreciate substantially. We wholly reject this devaluationist and defeatist view, as indeed we always have done.
Mr. Kinnock : The Chancellor of the Exchequer told us that to prevent the pound from falling he had to intervene with 14 per cent. interest rates. Are we to believe that every time the Prime Minister makes an incautious remark in the House and causes a fall in sterling he will have to raise interest rates by 1 per cent.?
Mr. Lawson : If it is the case--and I do not know whether it is-- that my right hon. Friend's remark in the House had an adverse effect on the markets, it is because the markets wholly misinterpreted what she was saying.
I have already referred to the censure debate of January 1985. Let me repeat what I said in my Budget speech in March of that same year, 1985. In 1985, I said this :
"There are those who argue that if we stick to sound internal policies, the exchange rate can be left to take care of itself but significant movements in the exchange rate, whatever their cause, can have a short-term impact on the general price level and on inflationary expectations So benign neglect is not an option There is no mechanical formula which enables us to balance the appropriate combination of the exchange rate and domestic monetary growth needed to keep financial policy on track, but a balance still has to be struck, and struck in a way that takes no chances with inflation."--[ Official Report, 19 March 1985 ; Vol. 75, c. 785.] That is what I said then, and that is what we did then, and inflation, which had risen uncomfortably, duly came down again and did so without any adverse effects on British industry.
The plain fact is that monetary policy is and always has been the only means of curing inflation. This means setting interest rates and holding them at the level needed, and for the time needed, to do their work. This is the weapon which has been tried and tested in the past. It is the weapon on which all the other major economies necessarily rely as they, too, struggle with the forces of inflation. As I have already pointed out, it is once again having the desired effect.
I accept that effect is not painless. As a result there are always those who seek to peddle some easier alternative. As we have heard from the right hon. and learned Member for Monklands, East today, the Labour party's magic cure is credit controls. I have to tell the House that this is purest fantasy. To listen to the right hon. and learned Gentleman, would imagine that the bulk of household credit comprised hire purchase or credit cards. That is another example of how totally out of touch the Opposition are.
Of total household debt, some 85 per cent. is on mortgages. The total of credit card and hire purchase
Column 263lending--the two together--amounts to only a little over 5 per cent. of household debt, so it is nonsense to imply that introducing controls on hire purchase or credit cards would do anything significant to reduce the growth of consumer credit, or to allow interest rates to be one whit lower. In any event any such controls would be simplicity itself to get around.
As for direct controls on bank lending, these proved increasingly ineffective in this country even before exchange control was abolished. Today they would simply provide a field day for foreign lending institutions. But of course it is only natural for the Labour party to hanker after the ration book and the queue, which for the Opposition is not so much a means to an end as something to be desired for its own sake.
There are also other, more sophisticated nostrums to which the right hon. and learned Gentleman alluded--neither of them, I have to say, in any way new--and which are currently being touted in the public prints.
Monetary base control was something we looked at very carefully when we first took office. The arguments were set out fully in the 1980 Green Paper on monetary control. I remember it well because I was Financial Secretary to the Treasury at the time, and had particular responsibility under my right hon. and learned Friend the present Foreign Secretary for that Green Paper.
Despite its theoretical attractions, monetary base control has severe practical difficulties, which is perhaps why no major country has adopted it. After full consultation and public discussion we decided not to proceed with it, and that remains the position today. Moreover, in essence monetary base control is another way of generating the level of short-term interest rates needed to curb inflation. It is in no sense an alternative to high interest rates. The other proposal much aired of late is that we should over-fund--which in present circumstances would mean refraining from using the Budget surplus to repay the national debt. Over-funding was not a device that in fact we used in our first two years, which were so critical in the battle against inflation, but for a time thereafter it did play a part in policy ; but it produced increasing distortions--the so-called "bill mountain"--in return for little practical benefit, and was accordingly dropped as an instrument of policy some four years ago. It is an illusion to suppose that over-funding can, of itself, tighten monetary conditions, since money drained out of the system by selling gilt-edged securities over and above the Government's strict funding requirements has to be put back into the system elsewhere.
In short, there is no substitute, and never has been any substitute, for the use of short-term interest rates. To use a hallowed phrase, which I hear Opposition Members uttering from a sedentary position, there is no alternative. The only thing is that they would never have the guts to carry out a policy of this kind if they were ever discharged into office.
The right hon. and learned Member for Monklands, East went on at great length about his confusion over the Government's economic policies, and about alleged differences within the Government. Let me take this opportunity to make the Government's position perfectly clear. Our overriding objective is to bring inflation back down. To do that, we will keep interest rates at whatever
Column 264level is necessary for as long as is necessary. We will maintain our existing funding policy and our existing monetary techniques, and we will not allow the firmness of our monetary stance to be undermined by a depreciation of the exchange rate. These are the policies that have successfully brought inflation down in the past, and will do so again.
That is where we stand, but where does the Labour party stand on these vital issues? Where does it stand? I have given a full statement of our position and our policy, and we heard nothing at all about the Labour party. [Interruption.]
Mr. Salmond : Has the Chancellor considered the impact of his high interest policy on areas of the country that are not overheating? Does he believe that at present the Scottish economy is overheating? If it is not, why should Scottish manufacturing industry, farmers and fishermen pay penal interest rates resulting from the inflationary problems being generated in the south-east?
Mr. Lawson : If the hon. Gentleman knew anything about the Scottish economy, he would know that the Scottish economy is doing extremely well at the present time. Scottish business-men are extremely satisfied with the policies of this Government, and Scottish business and industry are scared stiff of any hint of separatism, which the hon. Member supports.
After two long years of agonising reappraisal, the Labour party has at least come up with a voluminous policy review, but it has absolutely nothing to say on the key issue of inflation--nothing at all. One of Labour's economic advisers, who apparently asked not to be identified, explained to The Independent newspaper on the day the economic section of the policy review was published : "they've no idea what to do on inflation."
Indeed, everything the Opposition advocate would simply ensure, just as it did when they were last in office, that inflation went through the roof-- massive increases in public spending, with no idea of how to pay for them ; a new tax on saving, with national insurance contributions levied on savings income ; lower interest rates--we have heard this from them today-- and, of course, devaluation. All these would send inflation soaring through the roof, and what defences would they erect to stem the inflationary torrent which all this would unleash? Higher taxes, perhaps? That is what the hon. Member for Newcastle upon Tyne, East (Mr. Brown), an Opposition Treasury spokesman--and I see him nodding--told us on television last week. That is very interesting, but, curiously, we heard nothing about that from the right hon. and learned Member for Monklands, East today. Perhaps we shall hear more.
According to the Leader of the Opposition, in his very interesting interview with Mr. James Naughtie, Labour
Column 265would resort to price controls, credit controls and import controls. So much, incidentally, for Labour's commitment to the single European market and 1992.
As the right hon. Member for Llanelli (Mr. Davies)--and I am glad to see him in his place--a Treasury Minister in the last Labour Government, so aptly put it the other day :
"The Labour Party idea that you should have credit controls is rubbish. There is no way you can control credit except by controlling the price of credit, and the price of credit is Bank Rate. The Opposition front bench, in short, is all over the place."
Mr. Denzil Davies (Llanelli) : If the right hon. Gentleman wishes to advance an argument about credit controls versus interest rates, that is all very well, but will he now answer a question? Why, after four years with him as Chancellor of the Exchequer, does Britain have the highest rate of inflation, the worst balance of payments deficit and the highest rate of interest throughout the industrialised world? Why can other countries do so much better than him and the Prime Minister?
Mr. Lawson : I do not want to be unkind to the right hon. Gentleman, who has made a constructive comment on the Labour party's policies, but what he said is simply not true. We do not have the worst record by any means in the industrialised world. In a number of ways, we have the best record in the industrialised world.
Mr. Lawson : I will tell him, if he likes, of a member of G7, not merely the OECD or the EEC. On a comparable basis, the Italian rate of inflation is higher than ours. Italy's rate of inflation is 6.7 per cent. and ours is 5.9 per cent., and that is a fact.
Mr. Lawson : The performance of the Labour Government was so lamentable that they were chucked out of office. If the right hon. Gentleman wants to stand on the performance of the last Labour Government, Conservative Members would be happy for him to do so. Mr. Graham Allen (Nottingham, North) rose--
We have learnt a little bit more, as was clearly revealed in the Naughtiegate tapes, which we now have available and from which I will read only a brief extract :
"Kinnock : I'm not going to--"
[Interruption] Labour Members should listen to the pearls of wisdom from the leader of their party. It goes like this : "Kinnock : I'm not going to sit here and be bloody quizzed on the alternatives. He's the Chancellor of the Exchequer I'm not going to be bloody kebabed talking about what the alternatives are. We're not in control of it.
Naughtie : Why don't you say that in as strong terms as you want to?
Kinnock : But wait a minute. Opposition leader asked what he would do. Opposition leader says, to cut a long story short, we don't know.'"
Of course, there we have it. [Interruption.] They do not know, and they know they do not know.