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Sir William Clark (Croydon, South) : Will the right hon. and learned Gentleman explain how his formula would work for foreign banks? What would be the lending ratio on the funds that such banks held here and their funds abroad? How would the right hon. and learned Gentleman stop foreign banks continuing to give credit throughout the country?
Mr. Smith : I do not think that foreign banks would take an irresponsible view if approached by the Government. I do not see why they should. I object to the view advanced by Conservative Members. Who are they to say that such banks would not co-operate with an elected Government trying to implement their policies? The more I listen to such arguments, the more I despair about the sense of responsibility of the Conservative party. No idea that does not come within the narrow vision of Conservative Members is considered, even when it involves insulting the whole of the banking community at home and abroad.
Several Hon. Members rose --
Mr. Smith : The hon. Gentleman should have a word with the Chancellor because I think that he is trying to send a signal to that man when he proposes interest rates of 15 per cent. On the whole, the Chancellor does not want people to borrow. I conclude that he is opposed to these controls and the possibility of them not on grounds of practicality but on grounds of dogma.
Mr. Nicholas Budgen (Wolverhampton, South-West) : As a lawyer, will the right hon. and learned Gentleman tell the House to what extent he supports unlawful administrative directions to the banks, and to what extent that should be allowed and extended?
Mr. Smith : Out of a sense of reasonableness and of national duty and a desire to co-operate with the elected Government. I am astonished, once again, that the concept of common good and civic purpose is so lacking among Conservative Members. I shall give way to a distingushed representative of it.
Mr. Norman Tebbit (Chingford) : I am grateful to the right hon. and learned Gentleman, who has given us such an entertainment. Why does he believe that the banks would be more co-operative with a Labour Government than the trade unions, which the Labour Government owned--or was it the other way round?
Mr. Smith : I am recommending action by a Conservative Government because there happens to be a Conservative Government in power. They are busy telling me that they do not want to co-operate and that the banks will not co-operate with them. When we have a Labour Government, I can assure the hon. Gentleman that we shall ask for the co-operation of all sections of the community in our economic and social policies.
Several Hon. Members rose --
Mr. Smith : No, I have given way many times already, to the point at which I shall take a disproportionate amount of the time available for debate. I hope that hon. Members will understand if I do not give way again.
Column 695The Chancellor should take the opportuniity to make it crystal clear that there will be no tax cuts in his next Budget. That would be a prudent and timely signal to the Community and to the markets. He should also use the autumn statement, which we shall have shortly, to propose regionally targeted public investment to tackle some of the skills deficiencies and regional disparities which not only impair the working of the economy, but are the source of inflationary influences. He must know that skills bottlenecks and south-east congestion are as inflationary as they are otherwise undesirable. He should act to tackle them.
There are alternatives, but they are not recognised, and we saw this vividly in the debate today from the reaction of those on the Conservative Benches. There are none so blind as those who will not see. The country yearns for an alternative--not just in the content of policies but for a better style of government. It does not want government by leak or innuendo or by signing agreements that are repudiated before the ink is dry on the paper. We need a Government who say what they mean and mean what they say. I can understand that the Conservative party finds that an odd description of its Government. We need a Government who honestly say what they mean and honestly mean what they say. After a decade of hype and tax-subsidised advertising, a Government nurtured in their own propaganda have difficulty in distinguishing fact from fantasy. That is true in economic affairs and regrettably true across the whole range of Government policies. It is the overwhelming reason why they are so speedily forfeiting the confidence of the entire nation. 5.4 pm
commends Her Majesty's Government on its economic policies, which have led to faster growth of output, investment, and manufacturing productivity than in any other major European country in the 1980's ; applauds the Government's determination to defeat inflation by maintaining tight monetary and fiscal policies ; and welcomes the continued underlying strength of the supply side of the economy, evidenced by record levels of business investment and new business start-ups, and an unemployment rate that is well below the European Community average.'.
The right hon. and learned Member for Monklands, East (Mr. Smith) made, for the most part, a rather jolly speech in which he contrived to say practically nothing, except to reveal that the Labour party's conditions for joining the exchange rate mechanism of the European monetary system consist of devaluation on Britain's part and a commitment to inflation on the part of all the others. I am quite sure that, were there to be a Labour Government, the first of those conditions would readily be fulfilled, but I have to warn him that the second is most unlikely.
I shall be addressing the issues, which will be something of a contrast with what the right hon. and learned Gentleman said. There is one striking difference between this Government and the Labour party. It did not have the guts to defeat inflation, and we have. It does not have the guts to tell the British people what it takes, and we have.
Under Labour, inflation averaged 15 per cent. Excluding the distorting effects of mortgage interest
Column 696payments, the lowest it ever reached when they were in office, the lowest that it ever reached, was 7.7 per cent. Today, on the very same measure, it is 5.8 per cent.--lower than they ever achieved, but still too high for us.
Mr. Harry Ewing (Falkirk, East) : I am grateful to the right hon. Member for giving way so early in his speech. When he became Chancellor, inflation was half what it is now. As he has been Chancellor throughout the period, does he accept any responsibility for the doubling of inflation during his period as Chancellor of the Exchequer?
Mr. Lawson : What I am not going to do is take any lectures about inflation from those on the Benches opposite, when inflation was 15 per cent. on average. It went up to 27 per cent. and the lowest underlying rate that the Labour Government ever achieved was higher than the rate that we have today.
To hear the right hon. and learned Member for Monklands, East talk, one might suppose that it is something new that our inflation rate is higher than that of our competitors. In fact, the only thing that is new is that the gap has narrowed. Over the whole of the period that we have been in office, United Kingdom inflation has averaged just half a percentage point more than inflation in the European Community as a whole. It is perfectly true that the latest figures show that the gap has temporarily widened to 2 per cent., largely because of the distorting effect of mortgage interest payments. Without them--and to make a fair comparison, one has to look without them because of all the other Community countries, only the Republic of Ireland includes them in its index--without them, therefore, to have a more truly comparable basis, the gap would be around 1 per cent. Compare that with the last Labour Government, when British inflation--[ Hon. Members-- : "Oh."] Oh yes, they do not like it. British inflation averaged no less than 4 percentage points above that of the Community as a whole.
Inflation remains the greatest single threat to our economic wellbeing at the present time. It has to be the priority of economic policy to get it down. And let there be no doubt about it : under this Government that is the priority.
Mr. George Foulkes (Carrick, Cumnock and Doon Valley) : What political significance does the Chancellor read into the fact that only two of his Cabinet colleagues have turned up to support him in this important debate?
The main issue that we have to debate today is this : how are we to bring inflation down? The right hon. and learned Member for Monklands, East spoke for more than 40 minutes without once answering this central question. Not once did he say how a Labour Government would bring inflation down. He muttered a bit of wishful thinking about credit controls, designed, no doubt, to steal some clothes from the real shadow Chancellor, the hon. Member for Dagenham (Mr. Gould). I will come back to him later. Otherwise there was nothing, absolutely nothing.
So what has Labour got to contribute to the debate? What, when it comes to the point, does it really want? Interest rates, it has said on occasion after occasion, are too high and should be lowered. I see that the right hon. and learned Gentleman is nodding now. We are running a
Column 697Budget surplus. The Labour party is busy dreaming up ways of spending it. The pound, the Labour party has made clear, is too high, so it thinks, for our exporters. They would like to see it lower. In other words, what it boils down to is lower interest rates, a lower Budget surplus--indeed, probably a Budget deficit--and a lower pound. That is Labour's recipe. That is not just what it is urging now. It is what it was urging in 1988 and in 1987, too. It is a recipe not for lower inflation but higher inflation, as, indeed, it always has been when the Labour party has been in office.
One thing is absolutely clear. Had I taken the Labour party's advice in 1987 or 1988, inflation would be far higher than it is today. The plain fact is that Labour has no credible policies whatever for dealing with inflation--not one. No wonder it received little mention in its 88-page long policy review.
By contrast, the Government's policy and position is absolutely plain. We already have the tightest fiscal policy in Europe. And by raising interest rates to 15 per cent., I have made it abundantly clear that we will continue to take whatever monetary measures are needed. Of course, I well understand the difficulties this causes to people with mortgages and to many farms and small businesses. I wish it were not necessary--but it is necessary. And unlike the right hon. and learned Member for Monklands, East, we do not seek to deceive the British people into thinking that there is some softer option. What we have seen over the past couple of years has been a fall in personal savings and a rise in borrowing and spending on a wholly unprecedented and unexpected scale. It has certainly not been Government borrowing or spending. That was always the story under Labour : let Government spending rip, and force the private sector to pick up the bill. But under this Government public spending is under control and, so far from indulging in heavy borrowing, we are paying off old debts on a substantial scale. No, what we have seen has been borrowing and spending by private companies and private individuals. Nor, incidentally, has it just been for consumption. Again, that was always the story under Labour. But over the past seven years investment has been growing twice as fast as consumption. The plain truth is that there has been a step change in private sector behaviour in this country. In part, this reflects the fact that people and companies are now free to lend and borrow whatever they like. When we came into office, people still had to queue up to get a mortgage. In part, too, it reflects the fact that people no longer need to keep adding to their savings to maintain their real value. In the 1970s, the last Labour Government forced the people of this country to fight a losing battle to keep up with crippling inflation. And, at the same time, they made sure that there was no real return on savings at all. I would like the Leader of the Opposition to listen to this, because that is what the last Labour Government did. They wiped out the savings of pensioners. If ever there was a great betrayal, that was it. That world, thank goodness, has gone for good. After 10 years of Conservative Government, people no longer need to keep piling up savings just to stay in the same place.
Mr. Lawson : I am silenced. I have to tell the hon. Gentleman that it is not a question of fighting it twice. It is a question of fighting it all the time, whereas when the Labour Government were in office they never fought it properly at all.
One unexpected result of the new climate that we are in has been an unprecedented fall in the personal savings ratio between 1986 and 1988, which has meant an increase in spending, financed by borrowing, of over £10 billion. That is what the official figures show--
Mr. Favell : On a point of order, Mr. Deputy Speaker. The Opposition say that they want to hear what the Government's policy is. The occupants of the Opposition Front Bench, including the Leader of the Opposition, have done nothing but chatter and giggle. If they want to learn, they should listen. Will you tell them to behave themselves, Mr. Deputy Speaker?
Mr. Deputy Speaker : The right hon. and learned Member for Monklands, East (Mr. Smith), who spoke from the Opposition Front Bench, was heard in comparative quiet. I hope-- [Interruption.] Order. I hope that the same courtesy will be accorded to the Chancellor of the Exchequer.
Mr. Frank Haynes (Ashfield) : On a point of order, Mr. Deputy Speaker. When my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) was speaking, that lot over there on the Conservative Benches, those public school louts, put into practice what they had orchestrated before they came into the Chamber. When they did that, Mr. Deputy Speaker, you did not do a damn thing about it.
Mr. Lawson : As I was saying, the change in attitudes to saving and borrowing has gone hand in hand with a massive growth in living standards. It is that which has given people and companies throughout the country the confidence to use the new freedoms we have given them. So they have been investing and expanding on a massive scale. Indeed, the increase in investment over the last two years has been the highest since the war.
We can all see the results in our constituencies--new factories, new offices, new supermarkets, free enterprise at work. It is quite a problem, all this activity, is it not? Rising living standards, rising confidence, soaring investment--how many nights' sleep did the right hon. and learned Member for Monklands, East lose about problems of this kind when he was in office? After a decade of revitalisation, British business and industry are taking the opportunities this has offered and are rising to the challenge. Unemployment, I may add, has fallen sharply to well below the European Community average. It is very strange that the right hon. and learned Gentleman had nothing whatever to say about unemployment. Time was when he would talk about nothing else. Indeed, in his own constituency, unemployment has fallen by over a quarter in the past year.
New businesses are springing up at a rate we have never seen before in this country. Last year's figure was yet another record, with business start- ups, net of closures,
Column 699running at no less than 1,200 companies a week. Compare that with a decade ago, when there were more closures than there were start-ups. All this has meant that productive capacity is growing faster than it used to. But there is clearly no way in which it could expand as rapidly as domestic demand has lately been growing. So the difference has been made up from abroad, and shows up as a current account deficit on the balance of payments.
That is not, of course, the disaster that the right hon. and learned Gentleman has sought to portray. The right analogy is not with a company running at a loss. It is more like a company that, though profitable, cannot finance its investment programme entirely from its own resources and has to raise external finance to fill the gap. A country in a similar position will draw on the savings of the world, which has been greatly facilitated by today's global markets. [Interruption.] I hear the right hon. and learned Member for Monklands, East expressing scepticism. In a recent publication, the IMF said :
"inasmuch as they reflect private saving and investment decisions external imbalances should be seen as efficient and self-correcting."
But it is clear that a sizeable part of our current account deficit is due to domestic demand growing at an excessive and unsustainable rate, which needs to be corrected and is being corrected.
Mr. A. J. Beith (Berwick-upon-Tweed) : The Chancellor, in his conference speech, referred to the old and correct definition of inflation as too much money chasing too few goods. He said that industry had to produce the goods and that the Government's job was to see that there was not too much money. Does he think that he has discharged that obligation satisfactorily in his budgetary measures?
Mr. Lawson : It is a question not of budgetary measures, but of monetary measures. Why on earth does the hon. Gentleman think that interest rates are at their present level? He really should take a course of instruction.
As today's trade figures confirm, exports continue to do well--a sure sign of the efficiency and competitiveness of British industry.
In the third quarter of this year, exports were 13 per cent. up on a year ago and at a new record level. As demand in the economy slows down, that will in due course show up in a marked decline in the recent rapid growth in imports.
Meanwhile, interest rates will have to stay high for some time to come. But, painful though it may be, I have no doubt that they will do the job. Indeed, without high interest rates the job would be impossible. The evidence on this is there for all to see. For 10 years we have been prepared to raise interest rates whenever it has been necessary to do so to maintain sound monetary conditions. It is that willingness that has brought us success.
We have had high interest rates before. We had them in 1981 and we had them again in 1985. On both occasions they brought inflation down.
Mr. Lawson : I do not know, but I am glad that the hon. Gentleman asked me that. The right hon. and learned Member for Monklands, East said that he did not think that I would be quoting today from the CBI's latest monthly economic survey. Well, I will. According to the CBI's economic survey, there will be a marked improvement in the balance of payments next year.
Other countries have used interest rates, too, and that has brought inflation down for them as well. It has worked for Socialist Governments in France and for Conservative Governments in Germany. Indeed, it is only the right hon. and learned Gentleman and his right hon. Friends who seem to believe that they can cut themselves off from the real world.
I know that there is a seductive view that we could somehow escape from the need for high interest rates if we were simply prepared to let the pound fall and sit idly by. But I have to tell the House that this is a sheer delusion. In the first place, I have already explained why we need a period of high interest rates to bear down on inflation, by encouraging saving and discouraging borrowing and spending. In the second place, a lower exchange rate would raise the price of everything that we buy from abroad. It would also take the pressure off industry to control its costs, including its wage costs. Together, that could only add to the inflationary pressures in the economy.
But if we stick to the policies that I have described, what then of the prospect? It is already clear that the growth of total spending in the economy is slowing down. As higher interest rates work their way through, it will slow down further. That will gradually bring down inflation and, in time, it will bring down the current account deficit too.
The economy has already come off the boil, and will come off still further. That will take time to show up in the retail price index for the familiar reason that this statistic includes the mortgage rate. In time, though, even the RPI will reflect what is going on in the real world.
But, as I have said in previous debates, what matters most is not these short-run fluctuations but the long-term health of the British economy. Here I can at last find some common ground with the right hon. and learned Member for Monklands, East. The real issues are what is happening to productivity, to the quality and quantity of investment, to profitability and to training. Those are the big questions. I agree with the right hon. and learned Gentleman on all that. The difference is that we are bringing about real progress on all those fronts whereas the Labour party never did and never could.
Mr. John Garrett (Norwich, South) : The Chancellor must be aware that throughout the western world our competitors are investing heavily in public expenditure on education, training and communications. When will he look ahead and establish how Britain is to address those fundamental problems on which we lag so far behind our competitors?
In one of our earlier debates last year the right hon. and learned Member for Monklands, East said :
"I advise Conservative Members that it is extremely instructive to read OECD publications to discover what it says about the British economy and to compare that with what the British Government say".--[ Official Report, 14 January 1988 ; Vol. 125, c. 484.]
I duly had a look at the latest OECD survey of the United Kingdom and I found that it says :
"For the first time in three decades, productivity gains were ahead of the G7 average growth in labour productivity has been impressive, outstripping by a wide margin both the previous United Kingdom trend rate and the G7 average the division of nominal GDP growth between output and inflation was more favourable over the 1979-88 period than during the 1973-79 cycle suggesting that there have been policy induced improvements in supply performance."
I am most grateful to the right hon. and learned Gentlemen for directing my attention to that.
Mr. Lawson : The right hon. and learned Gentleman clearly did not because the OECD is saying that Britain's former economic performance has been transformed for the better since the Government of which the right hon. and learned Gentleman was a member was in office. That is what the OECD is saying and I am glad that he now agrees with it. Mr. John Smith rose --
Mr. Lawson : Not only has productivity in manufacturing industry throughout the 1980s grown faster in the United Kingdom than in any other major nation, but total investment over the same period has grown faster than in any other major European country, and business investment is a higher proportion of GDP than at any time since records began. Profitability is higher than it has been for the past 20 years, partly reflecting the much improved quality of today's investment. The quality of British management, too, has been transformed. Expenditure on training is rising fast and is now running at well over £20 billion a year. [Interruption.] Yes, of course, the base when we came in in 1979 was very low. Of course, the economy was in a bad condition when we came in in 1979. I agree with that. Of course, it will be a long job. There is no secret about that. Of course, there is a great deal further to go. There is no secret about that either. But it is only by persisting with the policies that we have been pursuing these past 10 years that we shall get there.
Nor will high interest rates frustrate this process. Throughout the time I have been Chancellor, it has proved necessary for our interest rates, in both nominal and real terms, to be well above the average of our main competitors. Yet that has not prevented us from having a faster rate of economic growth, and of investment, than any of them. What destroys business is not high interest rates, but Socialist controls and bureaucracy --plus, of course, the inflation that is inseparable from Labour.
Mr. Lawson : Nor has the party opposite changed. The only thing it cannot agree about is what brand of red tape to use. They know that the red tape which is in vogue at the moment is called credit controls, but they cannot agree on what they mean by credit controls. All is total muddle and confusion.
According to the hon. Member for Dunfermline, East (Mr. Brown), and I quote from a recent transcript of a radio broadcast :
"What we are not talking about is control over people's mortgages, but there is genuine concern about the amount of plastic cards and plastic credit in the economy, and credit has been rising very fast."
That is what he said--this despite the fact, incidentally, that some 85 per cent. of household borrowing is accounted for by mortgages, and only some 5 per cent. by credit cards, for which, in any event, other forms of credit could readily be substituted.
Within two days, however--it only took two days--the hon. Member for Dunfermline, East was firmly put in his place by his hon. Friend the Member for Dagenham, who told Mr. Brian Walden :
"We are not talking about familiar aspects of credit control, the hire- purchase restrictions, limiting credit cards and so on : these are not big elements."
Quite right. He went on :
"But what we are saying, is that if there is a problem in managing the degree of credit growth in this economy, it has to be at the margin when new mortgages are being granted."
The truth comes out, but there is a deeper truth and that deeper truth is that they have not the faintest idea what they are talking about.
Of course, the right hon. and learned Member for Monklands, East is rather cannier than his hon. Friends the Members for Dunfermline, East and for Dagenham. He says as little as he possibly can about what he would do, but he appears, as we heard earlier, to be in favour of leaning on or otherwise curbing the banks. That is what it amounted to. But, as Mr. Gavyn Davies, who was an economic adviser to the last Labour Government throughout its lifetime, wrote in last weekend's The Sunday Correspondent :
"I trust no one is suggesting a return to this sort of thing. It would be entirely pointless in an environment free of exchange controls, since UK borrowers could simply take their business to foreign banks."
That is the truth of the matter. That is what the last Labour Government's economic adviser wrote. It is only the naivety of the right hon. and learned Member for Monklands, East, who has not a clue. Nor, incidentally, can the right hon. and learned Gentleman derive any comfort from the German or French practice of reserve asset ratio requirements, which are simply techniques for generating the interest rates needed to conduct monetary policy.
Mr. John Smith : As the right hon. Gentleman has introduced into the debate an economic adviser to the last Labour Government, may I ask him about the present economic adviser to this Government? Does he agree that the European monetary system is half-baked?
Column 703he was in the country at the time--that Sir Alan Walters is a part-time adviser and his views on the EMS are not the views of the Government. I hope that is absolutely plain.
To return to the question of inflation, the plain fact is that the Labour party has no policy to deal with inflation today, any more than it had one when it was last in office. Over the past 10 years it has been on the wrong side of every single one of the big issues which divide the two parties-- whether inflation could be brought down without a prices and incomes policy, whether economic growth could be secured without the stimulus of a Budget deficit, whether the investment we so badly needed could be secured without holding interest rates down and so taking risks with inflation, whether Britain's productivity could be improved without Government intervention in business and industry, whether unemployment could be brought down without a massive public spending spree, whether Britain could survive without the protection of exchange control, whether the economy could keep growing when we lost half our oil revenues overnight and whether the Government could perform their proper function without endless recourse to mini-Budgets. On all the issues--on every single one of them--I put it to the right hon. and learned Member for Monklands, East and the House that we have been right and they have been wrong. On all of these issues, every one of them, we have told the British people the truth.
Every time we have been asked to say precisely where growth would come from, to say precisely where the new jobs would be, to say precisely when inflation would come down, to name precisely the industries which would pick up the slack left by North sea oil, every time we have said that of course we cannot do that because ours is a free economy. It is individuals and businesses which make the decisions, not the Government. Indeed, it is only if individuals and businesses are free to choose that we can hope to have a successful economy.