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Mr. Denzil Davies (Llanelli) : The Chancellor made what one could describe as a knockabout speech. He failed to answer the central question why, after 10 years of Conservative rule, with the present Prime Minister in charge, Britain has the highest inflation rate in western Europe, has by far the worst balance of payments deficit of all the industrialised nations and has the highest interest rates among all our main industrial competitors. For that sorry state of affairs only one person can accept the blame, and that is the Prime Minister. She is very fond of blaming everyone else inside and outside of the Government. She cannot, in fact, blame the trade unions for this sorry state of affairs. The public sector, high rates of income tax, the dreaded public sector borrowing requirements--or what she used to describe as the frontiers of Socialism--have all gone. All those dragons from the past have either been slain or at least caged. The blame lies with her policies and, indeed, those of the two Chancellors who have held office in the past 10 years. When the Government came to power in 1979, they made the control and the reduction of inflation their main target. One way they would do that--a point that was made recently in an article in The Sunday Times --would be by increasing the supply of British goods by improving the supply side of the economy, and by controlling and reducing by monetarist means the money supply. They would increase the supply of goods and reduce the supply of money and thereby try to get inflation down.

The Prime Minister's first Chancellor, the present Foreign Secretary, was certainly able to reduce the supply of money. However, in doing so--I accept that that was combined with a world recession--he diminished Britain's industrial capacity and its ability to increase the supply of goods.

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The right hon. and learned Gentleman, the present Foreign Secretary, is a mild man, but when it came to reducing the money supply he was a veritable rottweiler. With his tight monetary targets --we all have examples in our constituencies--he managed to mangle large sections of British manufacturing industry. A number of industries disappeared, never to appear again.

There were some productivity gains, but the price that was paid in productivity gains was far too low in respect of the industries that were destroyed.

The right hon. and learned Gentleman then went to the Foreign Office and the present Chancellor took over. I would not describe the right hon. Gentleman the present Chancellor as a monetarist, but at least he is reported to understand monetarism. If he does understand monetarism, he will also understand its limitations--especially in an open financial system, such as is the British economy. The contradiction in monetarism is that, although it is thought to be, and is, a Right-wing financial ideology, one of the best countries in which it could be practised would be the German Democratic Republic, because a command economy is much more capable of controlling the money supply than an open economy.

During the Chancellor's period in office, he has kept missing his monetarism targets, changing his monetary targets and relaxing his monetary targets. In fact, over the years he has considerably increased the supply of money in the economy, so that today what is called "broad money"--he never mentioned that in his speech, because now his target is "narrow money"--which is notes, coins and bank deposits, is probably running at the rate of 20 per cent. or more. On top of all that we have had the tax- cutting Budgets--especially the one two years ago--which have flooded the system with even more money.

However, the trouble by then was that the supply of domestic goods had been so curtailed as a result of the policies of his predecessor in the first four years that the increase in the supply of money, which the Chancellor engendered, has left us with high inflation rates and an horrendous balance of payments deficit, because that was the only way in which the goods could match the money in the economy.

So a Government, who started off 10 years ago determined to increase the supply of goods and reduce the supply of money, now find themselves in the extraordinary position, through mismanagement, of having reduced the supply of goods and having increased the supply of money.

What is to be done? The Chancellor is in a corner. He is caught between the foreign exchange markets, domestic inflation and the hang-ups of his neighbour next door. I am sorry to say that the person who does not understand monetarism is the Prime Minister. The Prime Minister thinks that she understands monetarism and she wants to be a monetarist, but then she recoils from some of the harsh consequences of monetarism. She brings in professors from America or gurus. I thought that the Chancellor dealt very well with Tim Congdon, but the Prime Minister did not look very happy. The Chancellor could not see her face, but she did not like it. She was not too happy at that point in the Chancellor's speech. I do not believe that she does understand monetarism, and I have some sympathy with the Chancellor in having to deal with her in that respect.

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As I think I have said before, I do not believe that old-fashioned credit controls or, indeed, new-fangled deposit controls, imported from America by Professor Walters, can solve the problems. In the end, if the policy is just about monetarism, it will be about high interest rates. Our complaint is that the policy should not just be about monetarism.

I believe that there are alternatives, although they would not have a dramatic effect. The House knows very well, sadly, through debating the British economy over the past 20 years, that there are no immediate panaceas, and certainly not in fiscal or monetary policy. We need a substantial restructuring of the British economy to solve our real problems. There are some things, however, that can be done without relying entirely on a monetarist policy and on high interest rates.

It is no secret that the Chancellor wants to join the exchange rate mechanism of the EMS, but the Prime Minister will not let him. It is difficult for me to say this, but the right hon. Lady should now stop being silly and should allow the Chancellor to go to Europe and negotiate entry into the EMS. She should let him go quietly on Sunday afternoon. He could join the other Finance Ministers in some West German spa town and he could negotiate entry into the EMS and a realignment of currencies. I believe that that is what he wants to do. The Treasury is right. However, the right hon. Gentleman's next-door neighbour prevents him from doing so.

Membership of the exchange rate mechanism would restore confidence to economic policy, provide some stability for the pound, and take some pressure off interest rates. Whether we like it or not--thanks considerably to the mismanagement of the economy over the past 10 years and the reduction in Britain's manufacturing capacity--sterling is rapidly ceasing to be a world currency. It is still trying to behave as if it were a world currency, but it is rapidly becoming a regional one.

Most of our balance of payments deficit in manufactured goods is with western Europe. In fact, most of our balance of payments deficits altogether are with western Europe. The world currencies today are the deutschmark, the yen and the dollar. I am sure that the Chancellor enjoys himself when he goes to the G7 meetings but, with all respect to him, he is really a bit player on the world stage. It is the yen, the dollar and the deutschmark that count. We should recognise the fact, at last, that sterling is a regional currency. More than half of our trade is with the EEC and that proportion will increase as 1992 approaches.

If this were not such a dogmatic Government, the Chancellor could also reverse some of the income tax cuts that he so foolishly put into effect two years ago. He should make the income tax system progressive again. He should introduce further rates and raise some money in taxation to balance his policy between monetarism and a fiscal policy. Of course, he will not do that either. If he did that, pressure would be taken off interest rates and industry.

None of that will happen. Interest rates may well have to go up again to stop a run on the pound. There will be a recession. Whether one calls it a hard or a soft landing, the only way that inflation can be brought down by monetary means and high interest rates is by creating a recession. Unemployment will rise and British industry will again pay a heavy cost. We are back where we were

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when the Government first came in, with policies to reduce the money supply which, in turn, reduces the supply of domestic goods. There will not be much improvement in the balance of trade. In a very careful statement, the Chancellor appeared to indicate that it will take some time before the balance of trade improves. Ten years have gone by since the Government came to power--10 years of great opportunity, of very favourable international conditions on inflation and on commodity prices and of great opportunity at home in terms of £75 billion in oil revenue. However, those 10 years have been wasted. The Prime Minister can blame no one but herself for that.

7.9 pm

Sir Ian Gilmour (Chesham and Amersham) : I agree with the right hon. Member for Llanelli (Mr. Davies) that we should join the EMS at the right exchange rate. I understood him to say--I may have misheard him--that the Government have reduced the supply of goods. I do not believe that he could possibly have meant that, because although we all have some criticisms--at least I do--of the Government's economic policy, I do not believe that anyone can seriously say that they have reduced the supply of goods.

I am sure that we would all agree, however, that the consumer boom got out of hand last year. Since mid-1985 the growth in consumption has been 6.1 per cent. a year--far greater than in any other period. Although that growth was conspicuously set off last year, it would be a grave error to say that it was merely a short-term problem or a short-term blip. It is much more deep-seated than that.

The right hon. Member for Llanelli referred to the monetarists of earlier days. There is a view going round that the monetarist experiment of the early 1980s was a great success and that all would have been well if my right hon. Friend the Chancellor had continued with such policies and maintained a firm control of the money supply. That view has been argued recently by Mr. Tim Congdon, who has been making some good forecasts. That argument does the Chancellor a serious injustice and I am happy to defend him from it. The fall in inflation in 1983 to 4.5 per cent. could hardly have been the result of controlling the money supply one or two years previously, because M3 rose 16.5 per cent. in the year to the second quarter of 1981 and 14 per cent. in the year to the second quarter of 1982. In any case, the years of alleged monetarism were far from being the halcyon days now depicted. I do not believe that anyone would reasonably want to return to them and my right hon. Friend is right not to do so. Between the second quarter of 1979 and the second quarter of 1986, total output grew by an average of 1.25 per cent. a year and unemployment rose by 2 million. Inflation did fall, thank heavens, to 2.5 per cent. in 1986, but, obviously, that was not the result of controlling the money supply, because the money supply was not controlled. During the years it grew at an average of 14 per cent. a year. I think the right hon. Member for Llanelli possibly misunderstood that point.

Whatever mistakes the Chancellor or the Government may have made recently, my right hon. Friend was certainly not guilty of abandoning a successful monetarist

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policy. All that has happened has been to advance, by about two or three years, a crisis that was going to occur anyway.

As I have endlessly pointed out, economic growth can never be permanently sustained unless the growth of domestic demand is appropriately balanced by a growth of exports. Unfortunately, over the entire post-war period, long before the Government took office, there has been a persistent weakness in the ability of British industry to compete successfully. By the end of the 1970s it was already clear that if we continued to lose market share-- particularly in our own markets--a critical point would soon be reached. That problem was masked for a bit by North sea oil, but certainly not now.

Our troubles spring not from the abandonment of monetarism but from the fact that the Government never addressed the problems of industry's competitiveness. Although the Government have bashed the trade unions handsomely, probably their policies have made our competitive position not better, but worse. The first three years of the Government--1979 to 1982-- far from being halcyon days, look like a catastrophic mistake. Although we were continually assured that there was no alternative--I was glad to hear my right hon. Friend reintroduce that well-known phrase this afternoon--and that solid foundations were being laid for non-inflationary growth, what happened was that deflation merely dug a great crater from which our industry has been able to climb out only at a serious competitive disadvantage.

The combination of a collapse in demand and an over-valued exchange rate led to widespread scrapping of plant. For three years, investment in manufacturing was lower than capital consumption, so there was a fall in productive capacity. That must be one of the main reasons why, although the growth of output from 1979 until now has been exceptionally slow and unemployment has risen by nearly 1 million, we are now up against the limits of our capacity to produce, while inflation is climbing back uncomfortably close to the figure we inherited from the Labour party.

The main point is that the increase in import penetration is emphatically not a phenomenon that belongs to the past three years of consumer boom. It has been an almost continuous process during the past 10 years and before that. The rise in the proportion of imports of manufacturing to GDP from 14 to 18 per cent. between 1979 and 1985 was as large as it was between 1985 and 1989 when it rose from 18 to 22 per cent. One of the necessary conditions for continued growth is a cut in domestic demand. That is obviously right, because the deficit in our balance of payments is now at least 4 per cent. of GDP. At the same time, however, further growth of output is being constrained by lack of capacity.

At the moment, I cannot see from any constellation of policies now in prospect that the other necessary condition for continued growth--that net export demand will rise enough, if at all--will be fulfilled. It is not hard to see what should happen. The cut in domestic demand obviously should be confined so that the damage is limited to consumption rather than blighting the welcome recovery in investment in the past year, which at long last has got going. That cut in demand also should not frustrate the much-needed increase in net export demand.

Unfortunately, the instruments of policy which the Government have chosen-- high interest rates and a high rate of exchange--do not meet those requirements.

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Obviously, high and, possibly even higher, interest rates are particularly bad for investment. A high rate of exchange makes investment in exporting industries, as well as exports themselves, unprofitable. Moreover, high interest rates coming at a time when household indebtedness has been encouraged to grow to unprecedented levels causes severe, random and unmerited distress.

The best way to cut domestic demand was not advocated by the right hon. and learned Member for Monklands, East (Mr. Smith), for obvious reasons. It was, however, advocated by the right hon. Member for Llanelli. Surely the right club for the Chancellor now to take out of his bag is one to put up income tax. If income tax was increased, interest rates could be reduced without causing a loss of confidence in sterling. In due course there could be a reduction in the exchange rate with much less risk of inflation. Under those circumstances there would be a much better prospect of growth coming from exports and investment, in which case growth could be sustained.

I do not accept that the existence of a Budget surplus, as measured by the PSBR, means that one should not increase taxation. It is the state of the economy that matters and if a cut in demand is, by general assent, required --as it is--the mere fact that there is a surplus in the public sector accounts tells us nothing about whether the chosen instrument should be fiscal or monetary policy.

Mr. David Nicholson (Taunton) : My right hon. Friend knows that I listen to his speeches with great interest. How would an increase in income tax contribute to pay claims and pay settlements that are currently giving cause for concern?

Sir Ian Gilmour : I recognise that difficulty, but an awful lot of people who receive wages are also buying houses so it is no good thinking that high interest rates do not affect wage claims. The Government are looking ahead to the single market of 1992, but on present trends, it is likely to be a mixed blessing for the country. It is therefore vital that we should try to use the mechanisms of the European Community to develop a thriving and competitive industry. That would meet the needs of the hon. Member for Cumbernauld and Kilsyth (Mr. Hogg) and of those areas that currently have high levels of unemployment. It means playing an active role in the formation of Community policies and not seeking to turn it into a glorified free trade area. That is not what the Community is about and it would be directly contrary to British national interests.

The Government have, I fear, wasted a good deal of time since they cottoned on to the deterioration in our trading position. If they go on relying on their one club, they may find themselves in an electoral bunker as well as other ones. Moreover, their one club is particularly inappropriate since, for understandable reasons, the Government are extremely reluctant to use it. Therefore, the Government are in danger of going from a one-club policy to a no-club policy, as a result of which little would be done.

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I hope that the exchange markets and foreign Governments have gained confidence from what my right hon. Friend the Chancellor has said this afternoon, but it is high time that a new and better policy was brought in.

7.19 pm

Mr. Giles Radice (Durham, North) : I shall confine most of my remarks to the balance of payments deficit, for three main reasons : first, because the deficit is big and growing ; secondly, because it takes out of the Government's hands the power to run our own economy ; thirdly--here I agree with the right hon. Member for Chesham and Amersham (Sir I. Gilmour)- -because it reflects our failure to pay our way in the world.

The Chancellor has consistently underestimated both the size of the deficit and the speed at which it has grown. In March 1988, he forecast a deficit for the year of £4 billion. At the time of the Budget he told the House that it would be equivalent to 1 per cent. of GDP and that he foresaw no difficulty in financing what he called a temporary current account deficit of that scale. By last November, in his autumn statement, he revised the forecast for 1988 upwards to £13 billion. The deficit for the year turned out to be £14.5 billion, £10 billion worse than the Chancellor had estimated in the 1988 Red Book.

As hon. Members well know, the forecast in this year's Red Book also gives a deficit for 1989 of £14.5 billion. As our Select Committee report stated, even to maintain a similar level of deficit in 1989 as that for 1988, the Treasury must rely on an extremely ambitious reversal in the behaviour of both exports and imports. So far, the monthly figures have been extremely discouraging. Taking the first four months' figures together and putting them on an annual basis, the deficit now runs at more than £18 billion a year. To put that figure in perspective, as a percentage of GDP it is well over 3 per cent. I think that the right hon. Member for Chesham and Amersham was right and that it is nearly 4 per cent. It is greater than the deficit in any other major industrial country. Contrary to what the Chancellor said in March 1988, the deficit is neither small nor temporary. Furthermore, there is no evidence of any country of a comparable size sustaining a deficit of that level for any length of time.

One view which has been sedulously encouraged by the Chancellor is that somehow the balance of payments deficit no longer matters in the way in which it used to in the 1960s. His argument goes something like this : by definition, all economies cannot be in surplus. Some will be in surplus and others in deficit. His argument runs that, in a world in which there are free flows of capital, which is very much the case at the moment, some countries will export capital and others will import it. His implication is that Britain will be an importer of capital.

Last year, the Chancellor advised the Select Committee, making up economic theory as he went along, that the countries with current account deficits would tend to be those in which the investment opportunities were attractive because they attracted mobile savings. He has also argued that we are constantly using the import of capital to re-equip British industry.

According to the Chancellor, by running a larger current account deficit we are not only doing the rest of the world a favour, but helping ourselves. The Chancellor also tells us that there is no reason why we cannot continue to

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run a large balance of payments deficit for a considerable length of time. What a wonderful world it would be if it were really like that. We do not need to be old-fashioned mercantilists to see that there are flaws in the Chancellor's argument. Of course there is a case for financing a temporary deficit, but if it is large and continuing, it will produce considerable dangers and risks. If we have to finance a deficit the size of ours, and continue to finance it over a number of years, we will virtually be putting the economy into the hands of the holders of sterling. A Chancellor with a deficit of that size is bound to shape his policy according to the currency markets. As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, it will mean that British interest rates will have to be at such a level that they continue to attract the holders of sterling. If we continue to run deficits at this level, our interest rates will have to be considerably higher than those of our main rivals. Therefore, we shall have to continue to increase the level of our interest rates. We have already seen the impact of high interest rates on mortgage holders and industry. How much worse could the position become? Our higher interest rates will undermine the investment plans of industry, particularly small businesses, and cripple the prospects of British exporters.

It is quite possible, indeed highly likely, that, despite the interest rate differential, the holders of sterling will lose patience with the British economy. If that happened, our fate would be totally in the hands of the market. A run on the pound and a precipitous fall in the value of the currency would follow, with all that that could mean for the British economy. The fact that there has been considerable official intervention in the market during the past month and that our reserves fell by more than £1 billion in May, is a sign that, despite the Chancellor's propaganda, the Government are acutely aware of the risks of their policy.

I agree with the right hon. Member for Chesham and Amersham that it is entirely obvious that our current account deficit is not some benign phenomenon but a symptom of serious structural problems which, for most of the 1980s, were masked by North sea oil.

How far are British goods over-valued? The Red Book shows that, during the past two years, there has been a significant loss of competitiveness. Sooner or later there will have to be an adjustment. Even more disturbing is evidence, during the 1980s, of a growing import penetration, particularly of manufactured goods. The figures are there for all to see. We can look at the latest OECD report and listen to what the National Economic Development Office has to say. A table in the Red Book must be extremely disturbing for the Government.

I agree with the analysis of the right hon. Member for Chesham and Amersham that the recession knocked out at least 20 per cent. of British manufacturing capacity. We failed to replace that capacity with enough of the newer industries and products which can compete successfully with our industrial rivals.

As the Director General of NEDO said in his March memorandum : "The range of products in which the UK is internationally competitive may be limited, and when demand grows as fast as in 1988 the goods British producers no longer manufacture competitively may have to be imported."

He goes on to state, in an extremely disturbing conclusion :

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"if we simply cannot produce the goods we are now importing, the relief of demand pressures will only slightly improve the balance of payments."

It is an extremely pessimistic conclusion. In short, we are in danger of becoming a nation which, year in, year out, imports more than it exports. Our present policies no longer seem to pay our way in the world.

In conclusion, the balance of payment deficits matter. Sooner or later they must be brought under control and we shall need a responsible policy on demand, which we do not have at the moment. I agree with the right hon. Member for Chesham and Amersham that we need to ensure that our goods are not over-valued. I agree with my right hon. Friend the Member for Llanelli (Mr. Davies) that we ought to join the EMS. As my right hon. and learned Friend the Member for Monklands, East said, we will need more rigorous policies on the supply side.

If the Government fail to act on the balance of payments they will hand over control of the British economy to the holders of sterling. As the Chancellor well knows, they are rapidly losing confidence in the Government's handling of the economy. As my right hon. and learned Friend the Member for Monklands, East said, they are uncertain who is running the economy. Once they lose confidence in the economy, they will force on our Government and economy an adjustment in a way and at a time that could be harmful to the long-term prospects of the British economy.

7.29 pm

Mr. William Powell (Corby) : The right hon. and learned Member for Monklands, East (Mr. Smith) is a jolly fellow and he hugely enjoyed himself this afternoon. He always exhibits some of the most engaging characteristics of his profession as a barrister. He has to the fullest degree the forensic skills and the analytical abilities that we would expect in a man of his profession, but, like me, he has spent far too much of his time defending criminals, and to defend criminals one has to have destructive analytical abilities. There is no necessity to put together the patient, constructive policies that are needed when holding the office of Chancellor of the Exchequer, to which the right hon. and learned Gentleman aspires.

Of course, the right hon. and learned Gentleman is a wise man, too. He knows perfectly well that he does not want to saddle himself with any of the flotsam and jetsam of the policies that emanate from the party on whose behalf he speaks. He is determined to commit himself to nothing on the future policies of a Labour Government. It was, as always from him, a class performance. He roared with laughter through most of it, and he will be taken no more seriously in the House than outside it.

I want to return to the themes of the speech of my right hon. Friend the Member for Woking (Mr. Onslow). The questions that he posed, to which we shall not get an answer today, are those from which the Labour party will be unable to run away. If the wishes of the hon. Member for Cumbernauld and Kilsyth (Mr. Hogg), who looked forward to the prospect of the return of a Labour Government, are to be fulfilled, the questions posed by my right hon. Friend the Member for Woking will have to be answered. I hold the hon. Member for Cumbernauld and Kilsyth in considerable affection, but he was clearly wrong about one thing--the imminent return of a Labour Government. At best, that is three years away. Anyone

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who imagines that a general election will be held in two years' time, or in just over two years' time, with any prospect of the Labour party winning it, is living in cloud-cuckoo-land. At best, the Opposition can hope for one about three years from today. If we have one before then, we shall not have another Labour Government in three years' time--that will be in seven or eight years' time, a very long time for the hon. Gentleman to wait. Meanwhile, real problems will have to be confronted by the party that he represents.

It is always nice to hear the right hon. Member for Llanelli (Mr. Davies). We hold him in considerable respect and affection. This decade has been a testing time for him. He has had to come to terms with some of the unpleasant and unfortunate aspects of his party's policies. As defence spokesman, and now as a commentator on economic affairs, he is always robust and independent--and he can afford to be, because his prospects of office in any future Labour Government have long since disappeared. So, from the Back Benches, he can give us the benefit of his wisdom and his commentaries on the policies being advocated by his party's Front Bench spokesmen, and very revealing they are, too.

Fundamental policy questions will have to be answered because they will be asked again and again. The right hon. and learned Member for Monklands, East said that interest rates were too high. He seemed to support a policy of high interest rates--but not quite as high as they are now--to be combined with credit controls, the nature of which he was unprepared and unable to spell out.

Mr. Allan Rogers (Rhondda) : In his lengthy six-minute preamble, the hon. Gentleman has dwelt on the trivia spoken by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) and by everyone else who has participated in the debate. He has given us a wonderful commentary, but as he is a supporter of a Government who have been in power for 10 years, will he comment on the Government's handling of the economy instead of discussing this destructive trivia?

Mr. Powell : The point made by the hon. Gentleman which will be noted most keenly was his reference to the trivia in the contribution made by the right hon. and learned Member for Monklands, East. The Labour party will have to answer questions. What level of inflation is acceptable? What level of interest rate would the Opposition support? What level of public borrowing do they regard as sustainable and acceptable? What level of taxation? Are we to return to the days of restrictive practices, of overmanning and of secondary picketing? All these questions, asked by my right hon. Friend the Member for Woking, will not disappear.

Unfortunately, the hon. Member for Durham, North (Mr. Radice) is not a historian. He is an economist who has forgotten his history. What has happened in the 1980s has been the product of what happened in the 1970s, by the end of which this country had been brought to its knees. The nation, the House and the Labour party know that. In the 1980s we have had to begin the process of reconstruction. I, like many of my right hon. and hon. Friends, have seen it in my constituency. The Corby steelworks was closed by the Labour party, which brought my constituents to their knees. In the course of this decade

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we have had to rebuild and have done so extremely successfully. Employment has never been as high as it is now ; nor has investment. Factories are being built all the time, and training is taking place.

The right hon. and learned Member for Monklands, East mentioned the need to improve education. That was another of his light-hearted points, because every measure that has been brought forward to improve the quality and standards of education in this country has been opposed in the House by the party that he represents. Given this opposition, this "Mr. No" attitude on the part of the Labour party to any proposal designed to improve matters, the country is entitled to take note that these people are not serious about their ambition to govern.

I want to draw two matters to the attention of the House. I remember talking last year in Germany to senior executives of that country's biggest bank. I asked them what advice they were giving to their clients about placing investment. They said that there were three places in Europe in which to invest : the corridor between Munich and Stuttgart, the greater Paris area and the whole of Great Britain. They were telling their clients that the most promising place in which to invest was the whole of Great Britain. My hon. Friend the Member for Beaconsfield (Mr. Smith) referred to the Bosch investment in south Wales, and there are many other similar examples in the regions. The need for such investment in the regions has already been mentioned.

I close with another telling statistic. Shortly before he died, that great Conservative Franz Josef Strauss was in this country, analysing the difference between the German and British economies. He said that the average hourly wage in West Germany which an employer has to pay is DM31, half of which goes on wages and salaries and the rest on social insurance costs of one sort or another. The equivalent figure in Great Britain is DM21, an hour. Our competitive advantage over Germany is considerable and we must not lose that opportunity. Any glimmer of a policy that we hear from the Opposition is designed solely to destroy that competitive advantage, not to reinforce it. As long as that is so, they are not worthy of the confidence of our people.

7.39 pm

Mr. D. N. Campbell-Savours (Workington) : Unlike the hon. Member for Corby (Mr. Powell), I do not wish to indulge in a harangue directed at hon. Members on the other side of the House. I wish to do as the Chancellor suggested and try to establish where there is common ground and whether we can proceed, perhaps not altogether with alternatives that I regard as ideologically acceptable, but on lines that the Government might be willing to accept in principle. We can agree that last year's current account deficit was £14.7 billion, which is 3.2 per cent. of GDP, and that we have a projected deficit this year of between £17 billion and £18 billion. We can also agree that we face a rapidly deteriorating balance of trade. Import penetration has doubled since 1970.

The Government publishes a booklet on United Kingdom overseas trade statistics, from the various sections of which one can glean the statistics about finished and semi-finished goods. One can select headings such as glass, footwear, domestic electrical goods, furniture, sports goods, beer and coal. I found today that there are even statistics about condoms, on which Britain has a

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substantial trade deficit, a major part of which is due to our European partners. Exports rose 10.1 times over the period 1970-88 and in the crucial area of consumer items exports rose 9.6 times. In the same period, imports rose 35 times. All the figures are identified in the overseas trade statistics.

The Government believe that they can offset some of the deficit by way of invisibles, although they now have to admit that there has been a substantial reduction in the invisible balance over the three years since 1986, from £8.5 billion in 1986 to £5.9 billion in 1988, so the Government can no longer depend on that area despite the substantial investment which took place overseas following the abolition of exchange controls.

How can we reduce the manufacturing deficit? I have a constructive proposition for the Government which does not necessarily require major ideological compromise. It depends on the private sector and I hope that the Government will seriously consider it. We should have a sectoral approach to the restoration of the manufacturing economy and it should be achieved by pump priming--what Walter Eltis, director-general of the National Economic Development Office recently referred to as "product loss areas". I am sure that the Minister knows what that means.

I wish to consider an area that I knew many years ago as an example of where this could work. Before I came to the House I was a clock manufacturer and one of my interests in clock manufacturing, over and above my commercial interests, was to examine what was going on in the electronic quartz clock movement market. I came to the House in 1979 and within two years the only British manufacturing plant of electronic quartz clock movements in the whole United Kingdom was in Wishaw, in the constituency of my hon. Friend the Member for Motherwell, South (Dr. Bray) and it faced closure. The factory was owned by Smith's Industries and I and my hon. Friend the Member for Motherwell, South went to the Department of Trade and Industry to argue the case for sectoral support. We did that on the basis that it was the only remaining quartz clock manufacturer in the whole of the United Kingdom, but Ministers turned us down. At the time, about eight years ago, I told the Minister that if that firm closed, within a few years the whole market would be dominated by electronic quartz clock movements made in Germany, Switzerland, Japan and France. As a result of checks that we have made in the past few days I can now tell Ministers that every quartz clock movement in the United Kingdom, except for those fitted to Metamec clocks which are made by a firm in Norfolk which produces its own movements but only for its own finished products, is now imported from the continent. The manufacturers are Ahttori from Japan, Jungans, Hannart, Staiger and Kienzle from Germany, and those firms totally dominate the United Kingdom market. Anyone who goes through the trade statistics in the way that I have suggested will find that that has happened in many sectors of British industry.

Is it not in the national interest to restore areas that are critical to specific industries? I have mentioned only the clock industry. Is it not wise to examine what has happened in that area in the way that the National Economic Development Office used to do under the Labour Government? Working parties used to examine and define the area of loss and then set out with the National Enterprise Board and other organisations to try

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to promote the redevelopment of investment. Today NEDO has 16 working groups, but they only make recommendations. They advise manufacturing industry, whereas previously they were in a stronger position in terms of investment decisions.

At very little expense, the Government could set up an industrial reorganisation corporation. Only civil servants would be involved and they could identify, in the same way as NEDO did in the 1970s, product loss areas where there should be manufacturing to substitute for imports. They could identify sponsors in the private sector. In the case of clock manufacture, they could go to a company such as Metamec which has experience of movement manufacture in the United Kingdom and say, "We want to re-establish a foothold in this market because almost 100 per cent. of the market is dominated by imports." The company could be offered substantial sectoral grant support of perhaps as much as 50 per cent.

I add no rider that it should be a regionally based industry, because I understand that the Government want to rely on more market-oriented policies to develop the regions. My proposal is simply that the Government adopt a sectoral approach with substantial grant aid to re-establish our position in markets that are subject to heavy import penetration. The sectoral sponsors would raise the other 50 per cent. of the capital necessary to set up the plants. They could put up perhaps half the 50 per cent. by borrowing, which might be a requirement of the Government. The companies could go to the markets to raise money for sectoral developments and might even float on the stock exchange in the same way as Eurotunnel, whose offer was speculative.

Market penetration targets could be set by the industrial reorganisation corporation with the private sector sponsors. Apart from the grant assistance to get the companies off the ground, there would be little further public support. The enterprise would be totally privately controlled with no state interference apart from endeavouring through the corporation to establish some sort of target arrangement for markets. The Minister may say that that will not work. I talked to Metamec today about it. The company's managing director, Mr. Herbert Hanna, told me that the company tried to do that three years ago and had to put up all the money. It spent £2 million developing a plant to produce the movement that I have mentioned, but because of the absence of a United Kingdom sectoral grant the company simply could not compete.

Sectoral grant is available in West Germany, which also has research and development grants and grants from the local authorities and the La"nder Parliaments in Germany through regional industrial committees. The technology went in but Metamec was not able to effect the model changes necessary to keep pace with German advances in technology.

Mr. Hanna told me that if a private sector offer were made to him, substantial grant was available for putting down the equipment, and he had to go to the market to raise a quarter of the capital required, it would have an almost immediate effect on Britain's market for clock movements. He said that within a matter of months the company would be hiring another 250 people in the Norfolk area. He knows that all that the British market wants is a cheap movement that works, is reliable and is internationally competitive. We are talking about tight competitive conditions where Kienzle can sell a quartz

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movement into the United Kingdom market for as little as 85p per unit. Mr. Hanna said that Britain would otherwise inevitably fail to get back into that area of the market.

It is not only in the clock sector that that can take place. I have identified a series of sectors in which the market is almost entirely dominated by imports. The market for trainer shoes is almost entirely dominated by imports, except for high quality products such as New Balance, which has a factory in my constituency. Why cannot we produce such goods here in the United Kingdom when everyone knows that, as the hon. Member for Corby (Mr. Powell) accepted, labour is cheaper in the United Kingdom?

One can cite the wire and cable sector ; major parts of the chemical industry ; photographic materials ; cameras ; watch movements ; hosiery ; the white cloth used by most cloth manufacturers when they print their fabrics ready for the market ; video equipment and personal computers, which invariably carry a British name such as Amstrad but which, when one looks at the back of the machine, have been made in Japan, Korea or some other country in the far east. In office machinery and data equipment import penetration stands at 93 per cent. In man-made fibres it is 38 per cent. ; in instrument engineering, 58 per cent. ; in electrical and electronic engineering 49 per cent. ; and in the boot and shoe and leather goods trade it is also 49 per cent.

If Britain adopts a sectoral approach, based on private sector investment in the way that I suggest, the Government's ideological position will not be compromised. That is the only way to interfere directly in manufacturing industry to reduce substantially the trade surplus. We cannot rely on market factors any more. We need positive intervention.

7.51 pm

Mr. David Shaw (Dover) : My constituents want me to thank the Government and my right hon. Friend the Chancellor for the successful way in which the economy has been managed. They remember the way in which the economy was managed by Labour. Now we have lower inflation and people such as pensioners have benefited. Now we have lower unemployment and the young and the school leavers have benefited. Now that Britain has the highest employment in its history, women have benefited, with more job opportunities than they ever had under Labour. Now we have higher wages from which nurses and other deserving people have benefited, as well as all wage earners. In other words, we have all benefited from the Government's policies. It is true that interest rates are not at the level that we would like, but they have increased in all major industrialised countries. In those countries inflation has been increasing. For example, Dr. Richard Rahn of the United States chamber of commerce has shown that inflation in the United States of America has risen from 5.1 per cent. to 6.4 per cent. The United States Federal Reserve has tightened its monetary policy still further, even to the point of risking recession. Britain has no choice but to stay competitive and to squeeze out inflation by increasing interest rates. The Government have been right

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to push the regrettably necessary policy of higher interest rates in order to achieve a more successful economy during the 1990s. The Opposition make much fuss about the current account deficit. That is strange, since foreign currency assets in Britain are at an all- time high, equivalent to some 10 years of deficits at the current level of deficit. Why do Labour make so much fuss about that deficit? It may be to hide their own mistakes. Labour killed our manufacturing industry during the 1970s, when low productivity was encouraged and when low investment was necessarily accompanied by low profits, as any Opposition Member must realise. Without high profits there cannot be high investment.

In 1976 there was a surplus in motor cars and accessories because that account and the balance of trade in it ran well. By 1979, when the Labour party left office, there was a deficit in motor cars and accessories because the amalgamation of companies such as British Leyland failed. Labour's industrial policy had failed. The Industrial Reorganisation Corporation and other Labour policies on planning the economy and industrial markets had failed.

Now, in 1989, it is likely that a major improvement in the balance of trade in manufacturing is on its way. We have new car plants. Nissan is producing record levels of cars. [Interruption.] If the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) wishes to intervene, I shall be delighted to give way to him.

Mr. Brian Sedgemore (Hackney, South and Shoreditch) : I was just thinking that it is possible to argue a case chronologically. The hon. Gentleman was talking about the so-called devastation of our manufacturing industry between 1975 and 1979 and then he leapt from 1979 to 1989. Would he care to work through the figures from 1979 to 1981?

Mr. Shaw : I am delighted to point out that one of the Government's great successes has been to reduce employment in manufacturing industry by some 2 million people, leaving manufacturing industry in a much more efficient state than it was under Labour. Hon. Members must accept that 5 million people in Britain are now producing more than were 7 million in manufacturing industry under Labour. That is success. British industry has higher productivity now than it did under Labour. [Interruption.] I am confident that I am driving my points home because of the reaction of Opposition Members. We heard earlier about the Labour party's new policy document, but the one group of people who were not prepared to talk about it was Labour Members. It was my right hon. Friend the Chancellor who had to dissect the document. I note that the Labour party's new policies take us back not to the 1970s, but to the 1960s. I remember that in the days of Harold Wilson the Labour party was long on promises and short on answers. That certainly seems to describe today's new policy document from the Labour party.

The Labour party now promises us low interest rates. It believes that we can isolate ourselves from the rest of the world. It believes that if the rest of the world has high interest rates we can somehow have low interest rates. Many years ago King Canute tried to hold back the waters but he failed, just as those who try to hold back the waters of high interest rates in the rest of the world will fail. [Interruption.] I have already given way to the hon.

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Member for Hackney, South and Shoreditch. I shall be delighted to do so again if he has anything useful to say, but he did not previously so it is probably not worth giving way to him again. Increased public expenditure is still being put across by the Labour party as being the answer to our problems. We do not have the problems that the Labour Government had. We do not need cures for increased public expenditure. They did not work in the 1970s. The Labour party did not have the money to increase public expenditure in the 1970s. It is amazing that the Labour party should still believe that public expenditure can be increased and that interest rates will remain low. How can we issue more debt to finance increased public expenditure and yet reduce interest rates? If someone has to borrow money, they have to pay high interest rates. That market fact cannot be bucked. The Labour party's policy is a contradiction.

I regret that the hon. Member for Islington, South and Finsbury (Mr. Smith) is not here today. I often listen with interest to his speeches. Earlier this year he said that we must have lower interest rates and a more stable and competitive exchange rate. If interest rates are lower than market conditions require, foreigners will not hold pounds and we would have to devalue. Therefore, low interest rates, cannot, as he says, go hand in hand with stable and competitive exchange rates. Indeed, stable and competitive exchange rates cannot go together because if an exchange rate is stable it is unlikely to be competitive and if it is competitive it is not likely to be stable. The more one examines Labour's policies--

Mr. Tony Worthington (Clydebank and Milngavie) : Will the hon. Gentleman repeat that?

Mr. Shaw : I am sorry if the hon. Gentleman, like many Opposition Members, cannot follow the economic facts of life. The more one examines Labour's policies the more one finds that they are based on the mathematics of wishful thinking. It is a very special version of mathematics, taught only at the Walworth road school of policy review.

The Opposition claim they have a new economic policy but the right hon. and learned Member for Monklands, East (Mr. Smith) again and again refused invitations earlier in the debate to outline Labour's proposals. Why did he decline to tell the people of this country about them? We must conclude that it was because those policies are not capable of being argued in rational debate on the Floor of this House. That point was proven when the Leader of the Opposition ran away from his BBC interview on economics. What kind of a man runs away from an interview on economics? The Opposition claim that they now understand competition and the market, but I do not believe that they have an economic policy that can compete with that of the Government. I shall support the Government amendment in the Lobby tonight.

8 pm

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