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Mr. Lawson : But what we can say, and have said, is this. It is the Government's business to keep total spending in the economy on track, and to keep our economy free and open. That is what we said we would do, and the House can be quite sure that we shall do it. So long as we stick to those policies, inflation will come down, and we shall enjoy strong and sustained growth and prosperity into the 1990s. These are the policies which work. These are the policies which, when the time eventually comes, will once again be endorsed by the British people.

5.36 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : The Chancellor of the Exchequer presented a rosy pciture of the economy as he has seen it develop over the past few years. He did not mention the words "economic miracle" today, but he talked about soaring investment and the improvement in business. One had only to look at the whole of the House to understand that all hon. Members viewed his comments with complete scepticism and he should be aware of that.

The crucial question was asked by my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker). He

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asked a question that the Chancellor did not seem to understand, which was why we had to fight inflation twice. The meaning of the question was simple. From 1979 to 1981, the Government had brought inflation down at enormous cost to our manufacturing industry and with great devastation to jobs, investment and other industrial opportunities. Having done that, one would have thought that with all the disadvantages that flowed subsequently, that was one advantage that would remain. However, it did not remain and we saw the Chancellor's approach bringing inflation up again, giving us this problem for a second time. The Chancellor has not answered the question put by my hon. Friend the Member for Perry Barr. The other question that needs to be answered is that of Sir Alan Walters. He said, and it is worth having his exact words : "My advice has been for Britain to retain its system of flexible exchange rates and to stay out of the present arrangements of the ERM. So far Mrs. Thatcher has concurred."

It is no use talking about the future, because the future can be postponed indefinitely, year after year. The advice of Sir Alan Walters has been taken and, as far as we know, judging on actions not words, that is still the policy of the Prime Minister even though it may not be the policy of the Chancellor of the Exchequer. The Chancellor needs to consider his own position on that. After all, a number of people have been humiliated in the economic and political scene and they are in a position to insist that certain standards are maintained--standards that we in the House have long come to expect. Those are the standards that he should be pressing, one hopes with some certainty as to their conclusion.

We are seeing the final shudders of the Government's monetary convictions. We are now near the beginning of the post-Thatcher years. I recall with incredulity the naivety of the Government's early commitment to monetarism- -the way in which prices were going to obey the iron law of M3, the way in which workers would not be able to get pay rises in excess of productivity, the way in which the theory of "rational expectations" would prevent employers from paying more or becoming bankrupt. The only trouble was that not many people involved in manufacturing industry had been to the seminars held by Sir Alan Walters or to the earlier seminars of the Chancellor of the Exchequer. All this monetarist nonsense was believed and held to be an article of faith.

William Rees-Mogg, the former editor of a one-time important newspaper known as The Times , once held that there was a precise relationship which had shown itself over the past two centuries. He produced some bogus statistics to prove that nonsense. His latest offerings, somewhat altered, are still poured out in The Independent , for those who like to read these fairy tales. We can now see that the relationship between M3 and inflation appears as close as that between any unconnected variables. The monetarists search for the holy grail of the great monetary indicator in the sky which will restore the arrogant certainty that they once held.

A notable civil servant, whom I knew well, and who went on to distinguish himself in a number of roles--in industry, the City and the academic world- -once said :

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"To every problem there is a single solution

perfect in its simplicity

easy to apply

certain in its effect


Never have a British Government impaled themselves on so ridiculous a theory. There was much of a type of religious fervour behind such a belief. Why else could a Government believe that the near doubling of VAT would not cause prices to rise? Why else have we seen the twistings and turnings along M3, M1 and M0 and all the rest? No economic theory should achieve such a level of commitment. Such theories need to be judged on their economic and political convenience. The objectives of our economy should once again command the support of the whole House.

What are the objectives of our economy? In 1966, Lord Callaghan, then Chancellor of the Exchequer, explained the complications of economic policy by referring to what he called his "triple objective". I would choose quadruple objectives : high and sustained economic growth, which is very important ; low unemployment ; inflation under control ; and a satisfactory balance of payments. These are our basic objectives, and I do not suppose that those on the Treasury Bench would dissent, although they may wish to add others. Of those four objectives, low inflation is the easiest to achieve, if the other aims of economic policy are ignored. How to achieve it has never been a secret--just deflate the economy. Withdraw purchasing power in any way one likes and inflation will come down. However, people will be put out of work and a number of viable companies will be destroyed. There is nothing clever about it. One can deflate by raising taxes or reducing credit. Whichever way it is done, one creates a depression and inflation comes down.

The Government created the depression--the three years of unparalleled austerity predicted by the right hon. Member for Shropshire, North (Mr. Biffen). We lost sight of two of the quadruple objectives. Unemployment rose to more than 3.5 million and there was a catastrophic fall in manufacturing output in particular. The balance of payments was kept in the black only because of North sea oil.

We talk a lot about North sea oil. Whatever we say here about it, we always underestimate its importance. It produced for us £100 billion in balance of payments and £70 billion of revenue. If hon. Members had had £100 billion to spend, whether in deutschmarks, yen or dollars, what would they have done with it? Would they not have spent it on trying to do something for our manufacturing industry, to keep the finest machinery and machine tools in our firms, to make use of the best electronic equipment from the far east and to ensure that we had the latest factories, equipment, skills, training and education? Would that not have been a sensible way to use that £100 billion of foreign exchange? What did we do? We went on a spending spree and allowed imports to rise. Now there is a major problem because we do not have that base of manufacturing industry. Ashton-under-Lyne is a microcosm of manufacturing industry. It is one of the areas that is most heavily engaged in manufacturing, even though it has lost a great deal. In 1979, there were 20,000 skilled engineers in Tameside and Stockport. They were members of the Amalgamated Engineering Union. In many parts of the country, one is not an engineer unless one is a member of that union.

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Those workers know the advantages of being a member. At present there are 5,000 skilled engineers. They have had five- year apprenticeships. Only a small handful of people now work through such apprenticeships. In the past, those highly skilled people were on the dole, yet now there is a demand for them. In the past, we had in Ashton-under- Lyne high levels of pay, employment and skills. The major cause of our present problems is the shortage of those skills and of factories. In two years I lost one third of the companies in my constituency. Medium-sized firms closed their doors because they could not stand a pound worth $2.40 and the high interest rates. They were caught between being unable to export and being unable to meet the competition from imports.

Mr. Oppenheim : If the Labour party now has all the answers to our manufacturing problems, can the right hon. Gentleman explain why manufacturing output fell under the Labour Government, whereas it has risen substantially under this Government?

Mr. Sheldon : The hon. Gentleman does not seem to have read the figures properly. Manufacturing industry in other countries has done extraordinarily well whereas we have failed miserably. Skills and training, to which my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) addressed himself in his magnificent speech, lie at the heart of our problems. At the end of the war, Germany was devastated. Its factories were smashed and there was little working machinery. The Germans had only skills. Give me people with knowledge of skills and technical training and I will swap that for any kind of economy based just on money. That is what the Germans had and what we do not have.

Our depression was monetarism in action. Unbelievably, the Chancellor recently said that the exchange rate was one of the two most important monetary indicators. Monetarism seems to embrace more and more economic indicators. Patrick Minford, one of the few unreconstructed monetarists, calls it a return "to the tea leaves". There is no certainty. Of course, we cannot have certainty. In this world, to search for certainty and a solution to our economic problems is to search for nonsense--they do not exist. We must look at a particular area and see what can best be done to meet demand. I am waiting for the Chancellor to talk about prices and wages as monetary indicators. When he does that, we will know that monetarism has finally been buried and the obsequies concluded. There will be few such indicators left out of this new interpretation of monetarism if the Chancellor has his way.

We have the reliance on interest rates. The Chancellor has waited 14 months to see a drop in demand. He wanted that drop in demand last year. He still has not got it. That is unbelievable. Whatever people say about stop-go, at least it produced the results which the Chancellor is trying to achieve. He wants the results that were available under stop-go, but he has failed miserably after 14 months.

With regard to inflation, the Chancellor seriously underestimated the effect of his interest rate policy. As the European Commission explained, our interest rates fed directly into inflation. Why are there so many wage claims now? The answer is that many people have bought houses and their mortgage payments have increased. Therefore, they are being squeezed far more than if they were

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experiencing a pay cut. To compensate for that, they make pay claims. The Chancellor's interest rate policy involves an element of inflation.

I want to refer now to the fundamentals of pay, prices and unemployment. We must always return to them. We may play around with theories, but in the end we return to those three fundamentals. We will need a growth strategy based upon the enhanced skills of our people and upon investment, as my right hon. and learned Friend the Member for Monklands, East said so ably. That alone will bring us lasting prosperity.

I have been reading recently the debates which took place in 1945 on the nationalisation of the Bank of England. Those were very interesting debates in which, among others, Hugh Gaitskell, Bob Boothby and Nigel Birch participated. Bob Boothby voted with the Labour Government. He said :

"This Government or any other Government might one day want to go back to a Gold Standard, but if any Government ever committed such an act of insensate folly I should want to attack the Chancellor across the Floor of the House. Further, I should not want him to say that it was really the business of the Bank of England rather than his affair."--[ Official Report, 29 October 1945 ; Vol. 415, c. 116.] That is the danger. Bob Boothby and I were worried about the Bank of England. However, we should be more worried about the German Bundesbank. When the Bundesbank put up its interest rates, who questioned that? Was it right to do that? Was there no disagreement among the Bundesbank's board? Should not others be involved in the arguments? Should it at least be accountable to those whom its actions affect? My right hon. and learned Friend the Member for Monklands, East and my hon. Friend the Member for Dunfermline, East (Mr. Brown) are prudent and cautious people and they are right to lay down firm conditions on joining the European exchange rate mechanism.

Mr. Beith : Is the right hon. Gentleman setting an additional condition that before the Labour party can consent to Britain joining the European monetary system, it must be clear that the Bundesbank and any future European central banks will not be independent of Government?

Mr. Sheldon : I approve of the formula set out by my right hon. and learned Friend the Member for Monklands, East and I believe that he has got it right.

We must return to the major problems with pay, prices, and unemployment and achieve growth. Recently, we have been going down a cul-de-sac and we are now approaching its end. The disarray before us is just one sign of that and I believe that the end cannot come too soon.

5.53 pm

Mr. Norman Tebbit (Chingford) : As the first Conservative Back Bencher to speak, it would be less than polite of me not to congratulate the right hon. and learned Member for Monklands, East (Mr. Smith) on a most amusing speech. Conservative Members often laugh at Opposition spokesmen, but it is not very often that we laugh at an Opposition spokesman's speech. However, the right hon. and learned Member for Monklands, East, achieved that today, and he had some very good jokes. The right hon. and learned Gentleman took me back 10 or 12

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years. We all understand why the Opposition want a debate on the economy today--to offer them a chance to complain about high interest rates, high inflation and the trade gap.

When the Labour Government had exactly the same problems more than 10 years ago, the Opposition of the day wanted a similar debate. I believe that in those days the Opposition's speeches were even better than what we have heard today because they offered an alternative policy. However, the right hon. and learned Member for Monklands, East made some very good jokes. Indeed, perhaps Bob Monkhouse wrote his speech--it certainly was not written by an economist. The right hon. and learned Gentleman had nothing to say about what a Labour Government--should there ever be one--would do.

Other things, too, are different from what they were 10 or 12 years ago. If inflation had been 7.5 per cent. in those days, it would have been regarded as a triumph, not a disaster. In those days, our rate of inflation was not two, three or four points above the average of our competitors, but 12, 13, 14 or 15 points above. Of course, our trade gap was not so large then, but not all the mischief had come to pass in terms of the trade gap.

I know that Opposition Members do not like to be reminded of the damage done to our car manufacturing industry in the 1960s and 1970s. The repair work began in the 1980s, but it will not pay off fully until the 1990s. This year, some £6 billion or £7 billion of our adverse balance of trade is in respect of imports of motor cars. The House will recollect that I announced in 1981 that Nissan had decided to bring a car plant to Britain--a statement that was not universally well received. There were claims that it would never get beyond the stage of assembling the CKD kits in a screwdriver operation. That was wrong. The local content at Nissan's plant is now between 70 per cent. and 80 per cent. Production in 1990 will be 85, 000 vehicles and it will be 200,000 in 1993 with 50 per cent. for export. Toyota has announced its intention of following Nissan's example, not least because of some pretty nimble footwork by the Department of Trade and Industry and a great deal more realism, at any rate until recently, by some of our trade unions.

Citroen and Peugeot are expanding production here as is General Motors. I hope that Ford will do so as well, although there may be worries and doubts in Dagenham about that.

Mr. Rhodri Morgan (Cardiff, West) : Has it occurred to the right hon. Gentleman that all the foreign investment in the car industry will require remuneration by dividends, which will return to the country that provided the capital, and through the research and development content of those cars reverting to the centre where that research and development is carried out? Has the right hon. Gentleman considered the adverse effect on the balance of payments of those dividends and capital repayments?

Mr. Tebbit : Of course I have, and the hon. Gentleman should not be surprised about that. The hon. Gentleman forgets that the trade union movement did so much to destroy the indigenous British car industry and left it open to foreign companies to seize the opportunity to come to this country and replace it. I doubt whether the hon.

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Gentleman's constituents worry too much about some of the profits going out of this country when they have good jobs which would not otherwise have been available.

In the early 1990s, the £6 billion or £7 billion of adverse trade in motor vehicles will be steadily reduced, if not reversed. However, it takes a long time to repair the damage to our manufacturing industries from the late 1970s.

Of course, there are still difficulties, not least the present industrial action organised by the Amalgamated Union of Engineering Workers in support of a claim for a 35-hour week. For British engineering workers to believe that they can produce in 35 hours what the Japanese and Americans take 40 hours and the Germans 37 hours to produce is unrealistic to put it mildly. If the 35-hour week claim is conceded, to meet the huge order books of firms such as British Aerospace and Rolls-Royce--both infinitely more successful now than in the 1970s--would require a jump of 10 per cent. in productivity or an increase in overtime working, at premium rates which would simply add to our costs, lose business, worsen our deficit and add to our problems. Yet that is what Opposition Members support.

Neither Bill Jordan nor Gavin Laird are so stupid that they do not know the consequences of the unions' demands. They serve their members ill by forcing on successful companies demands which would reduce the ability of those companies to compete overseas. This may be an appropriate moment to remind my right hon. and hon. Friends of the extraordinary tax treatment of the income which will be received by those on strike in this dispute. They will receive a benefit of £150 per week, which apparently is not subject to tax. Because it does not arise from employment and is not a dividend, it does not qualify for income tax. By anyone's standards, it must be income and should surely be taxed. I hope that my right hon. Friend the Chancellor will therefore ensure that it is taxed.

Mr. Harry Ewing : Will the right hon. Gentleman give way?

Mr. Tebbit : I am sorry, but I will not give way. Hon. Members have been enjoined to make short speeches and the hon. Gentleman will no doubt wish to make his own speech in due course.

As I said, not everything is the same as when the Opposition of the day forced debates on the economy more than 10 years ago. In those days, the Government took great pride in informing the IMF, under whose tutelage the right hon. Member for Leeds, East (Mr. Healey) became a monetarist--I am not sure whether he is still a monetarist, particularly in view of what the right hon. Member for

Ashton-under-Lyne (Mr. Sheldon) said a few moments ago--that the standard of living in Britain was being reduced and would continue to be reduced to deal with the economic problems facing a Labour Government. Today, the standard of living has never been higher. That has not been disputed by any hon. Member today, and I doubt whether it will be because it is beyond dispute.

Mr. John Battle (Leeds, West) : Will the right hon. Gentleman give way?

Mr. Tebbit : No, I will not give way. The hon. Gentleman may speak later. Hon. Members were enjoined to make short speeches.

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Prosperity and the availability of credit have greatly increased personal indebtedness. At the same time, however, my right hon. Friend has been paying off public debt and has a substantial negative borrowing requirement--again a change from 10 to 12 years ago. What is more, despite some claims to the contrary, I believe that my right hon. Friend the Chancellor is still a monetarist. [Interruption.] My right hon. Friend is not here, but I think that he would hold his hand up to that one.

There are many other differences. For example, we have just had our 37th consecutive month in which unemployment has fallen. During the past decade, Britain has acquired an extra £100 billion or so of privately owned overseas assets which, I remind Opposition Members, are generating a flow of income back to this country--exactly the opposite of what the hon. Member for Cardiff, West (Mr. Morgan) criticised about the Nissan and Toyota deal. Industrial and commercial investment are at high levels. Productivity growth and corporate profitability are strong. The drain on the public finances of many of those old money-losing laggards such as British Steel and British Leyland, to name but a couple, has ended. Indeed, those companies are now contributing.

British Telecom, for example, has not only held its prices--they are well below the rate of inflation--but, last year, returned more than £1 billion to the public purse in corporation tax dividends and interest, and it has a massive programme of investment of a kind that it never achieved when it was in public ownership.

In the 1970s, the official Opposition, then led by my right hon. Friend the present Prime Minister, set out alternative policies. Today the Opposition have declined to do so with, of course, two exceptions. We have been told about Labour's new-found enthusiasm for entering the exchange rate mechanism of the EMS. I find the controversy over British entry less than thrilling. I doubt whether being in or out would make much difference one way or the other. It certainly would not exclude us from taking the tough decisions that need to be taken and doing the things that need to be done to run a successful economy.

Labour Governments and Labour parties have always had to have some sort of mystical solution to economic problems. In the old days which I remember and, indeed, one or two Opposition Members remember, that mystical answer to all our problems was the prices and incomes policy--the social contract. We heard nothing about such matters today. Is there still to be a social contract in Labour's policy, or was that something else that they tried, found not to work and eventually junked? Alas, it has all gone into the waste bin. What is the new gimmick? It is industrial training, which is needed and certainly desirable, but I am afraid that the engineering strikes which the Opposition support will more than outweigh any possible gains from any conceivable programme of industrial training. What else have the Opposition to offer today? There are no import controls on offer--they, too, have gone. In the new-found enthusiasm for Brussels there will be no talk of import controls. Indeed, this must be the first debate of this kind in which the Opposition have firmly and officially denounced import controls as unnecessary and impossible. Good old Jacques Delors is having some effect somewhere at least.

Credit controls are the in thing now, but when we ask how they work the answer is not so much mystical as misty

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--indeed, it is thoroughly foggy. The right hon. and learned Member for Monklands, East now has another concept--a social contract not with the AUEW and NUPE but with Barclays and NatWest. They are his social partners now. He says that they will be more reliable and responsible than the old trade union leaders. I am sure that is so, but what would it amount to if it did work? It would mean that credit would be rationed not by price but by nudge and wink. How would the Government ensure that the right people got credit if it was rationed? They would need more controls. People would have to be told, "No, you must lend to him, but not lend to him, and if you don't do that we shall somehow do something nasty to you." You, Mr. Speaker, will remember the debates at the end of the Labour Government's period of office. Many hon. Members remember them. The Ford motor company was getting that sort of treatment, and it was one of the contributory factors to the downfall of the last Labour Government. Labour Members do not learn very much.

I am told, however, that the Labour party has now even abandoned changes in the tax system. The right hon. and learned Gentleman and his hon. Friends are fast boxing themselves in. I take it that the right hon. and learned Gentleman stands by his pledge that if we had a Labour Government we would never have an income tax rate of more than 50 per cent. I take it that that is so--the right hon. and learned Gentleman is a little quiet. I take it also that he backs his hon. Friend the Member for Copeland (Dr. Cunningham), the Opposition spokesman on the environment, who assured me in a television interview with my friend, if I may allude to him thus, the hon. Member for Great Grimsby (Mr. Mitchell), that the 50p would actually include local income tax. The right hon. and learned Gentleman is beginning to box himself in. I take it that he stands by his pledge that a Labour Government would not extend VAT, increase the 15 per cent. rate, or end zero rating. I am happy to allow him to intervene to say whether he stands by those pledges. All the past pledges on social contracts, import controls, high rates of tax, direct control over borrowings and so on have all gone, and the right hon. and learned Gentleman has put nothing in their place.

Today, in effect, my right hon. Friend the Chancellor once again said that there is no alternative. On today's showing, if there is an alternative, the Opposition are determined that it should remain totally shrouded in mystery. The right hon. and learned Member for Monklands, East was right to make the point that my right hon. Friend the Chancellor let that long unbroken expansion of the economy go too fast last year. Of course, those who blame him are almost without exception those who at the time wanted him to cut interest rates further and to raise public spending, too. Had they been in charge, we would have had a problem not of 7.5 per cent. but of nearer to 17.5 per cent. inflation.

There have been some changes over this decade--changes that I have described and they are very much for the better. One thing, however, is for sure--that when a long period of growth gets somewhat out of control and becomes a boom which is not sustainable in the long term, the same old unpalatable medicine is the only one that works, and that is interest rates. My right hon. Friend the Chancellor will undoubtedly take a bit of a pummeling

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today as he has done in recent weeks, and as he will do for some weeks to come, but as growth resumes and inflation and the trade gap fall, as they most certainly will, it will be my right hon. Friends the Chancellor and the Prime Minister who will have the last laugh- -and that is indeed different from what happened at the end of the 1970s.

6.9 pm

Mr. A. J. Beith (Berwick-upon-Tweed) : Perhaps it was too much to expect of the right hon. Member for Chingford (Mr. Tebbit), but surely it was not too much to expect that the Chancellor should admit that there is a serious problem and that this country's trade deficit is something about which he is at least embarrassed, because he should be seriously worried. People in the country would think rather more of Conservative Members if they conceded that, and tried to seek the co-operation of the country in doing something about it. I noticed that the Chancellor left the Chamber a little while ago, bundling up his papers and disappearing. I wonder whether he had a call from the Prime Minister in Kuala Lumpur and whether a press conference has been hastily arranged to reinterpret something that he failed to get right in his speech this afternoon. Whether in Kuala Lumpur dealing with foreign policy or in Downing street dealing with economic policy, the Prime Minister increasingly resembles a demented football manager who, not content with shouting reprimands from the dug-out, rushes on to the field waving her handbag and attacking the players, changing the rules as she goes along. That makes for an impossible position in which to discern any coherent economic policy.

It was the present Leader of the House, when he was Chancellor of the Exchequer, who said that the essential condition for maintaining confidence is a Government determined to maintain the right monetary and fiscal policies. Nobody really knows what the monetary and fiscal policies-- especially the monetary policies--of the present Government are. The reason we do not know is the standing disagreement between the Prime Minister and Professor Walters, on the one hand, and the Chancellor of the Exchequer, on the other.

The Prime Minister and Professor Walters, who increasingly resembles Boswell to the Prime Minister's Johnson--interpreting her sayings and advising the world about whether she agrees with his various pieces of advice--do not want to buck the market. They do not want EMS entry and believe that interest rates should change in response to MO. Thus arose the dispute over shadowing the deutschmark, and the recent dispute over the Chancellor's £2 billion intervention to prop up sterling. On the other hand, the Chancellor wants a strong pound and believes that changes in interest rates should be aimed at supporting sterling. He wants to enter the exchange rate mechanism. The whole economy is suffering from the Prime Minister's Euro-prejudices. She is determined to keep us out of the exchange rate mechanism for as long as possible. I defy the Chief Secretary to tell us in his reply when, on any reasonable calculation, the conditions that the Prime Minister has set can be satisfied. Those conditions include getting inflation down to the level of our European partners, and not only achieving the removal of exchange controls, for which there is already a timetable, but waiting to see the effect of the removal of those exchange controls.

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When will we be able to join the exchange rate mechanism? Surely, according to those conditions, it will not be this side of the end of next year. However, Britain could benefit now from lower interest rates if we were inside that mechanism.

The immediate effect of this dispute is that no one knows whether changes in the money supply, narrowly measured, or changes in the value of sterling will be the trigger for changes in interest rates. There is therefore confusion and a loss of confidence in Government policy generally. When one adds to that the trade deficit, one is led towards a great exposure to risk --a risk for all borrowers, mortgage buyers, home owners and small and medium-size businesses. In such an atmosphere there will be more, not fewer, occasions when sterling is tested because of a loss of confidence. Therefore, the Chancellor has to resort to the interest rate weapon again. How many times can he use the interest rate weapon, and how far can he take it in response to the pressures which his policies have helped to generate? While confidence is low, interest rates will only rise. That is the grim message for the British economy and people unless we see some changes.

During the debate, the Chancellor has been teased about whether he is still a monetarist. Clearly, he is beginning to fail the monetarist test. When I questioned him on Thursday at his own Question Time, he was unable to answer the question whether the money supply or the pound is determining his interest policy. However, he had redefined his policy by the evening in a carefully worded section of his Mansion House speech, stating :

"We cannot allow the necessary rigour of monetary policy to be undermined by exchange rate weaknesses".

One can interpret that how one likes, but it seems to mean that the exchange rate and pressure on the exchange rate will determine further rises in the interest rate.

How can one have confidence in a Chancellor who, in the space of one week, has said that the largest trade deficit in our history is not a problem and that he would never devalue the pound after 10 months when sterling has fallen 1 per cent. per month? How can one have confidence in a Chancellor who says that the economy is simply catching its breath or that the Government's job is to see that there is not too much money, yet who was responsible for all the mistakes of last year's Budget and the compounding of credit expansion through his measures on mortgages? I refer, for example, to his decision to allow a period within which people could take out multiple mortgages, and which would end on a stated date, 1 August. Clearly, that had a vicious effect on the spiralling house market, which started in London, and then went throughout the country and which has only lately come to an end. It had a powerful effect on expanding the private money supply, which has been a major factor in the economy over the past year. One does not need to go through the grim figures of the trade deficit to recognise what a serious problem that represents.

We have sought to argue that there is an alternative to all this. That alternative requires, first, that we enter the exchange rate mechanism to gain the stability and discipline that it provides. It is my belief that even the announcement that we are determined to join at an early date and that the conditions that I have mentioned will not be used to prevent us from doing so would in themselves bring a degree of stability. If we are successful in that object and in entering the exchange rate mechanism and,

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even in the course of doing so, being enabled to have lower interest rates--because that would be the effect--we cannot leave it there.

One of the failings of the speech made by the right hon. and learned Member for Monklands, East (Mr. Smith) was that he seemed--it was not entirely clear--to be moving towards membership of the exchange rate mechanism. He did not appear to recognise that one cannot stop there. We need to have other counter-inflationary policies if we are to experience the lower interest rates that so many people want.

To do that, a tighter fiscal policy will be required at least initially and there are two ways of doing that. The first would be by the Government's favourite method, which is to slash public expenditure. However, that is the last thing that one should do if there are--as I believe there are-- important things that could be done to improve our competitiveness by spending money on research, on training and on some of the things listed in the Opposition motion, with part of which I agree. If we begin to cut such expenditure, we will remove our ability to do anything about the trade deficit. We must therefore look to taking money from the economy by other means. That is why we have argued that the Government should, if they are able to achieve lower interest rates through EMS membership, remove the ceiling on employees' national insurance contributions because that would remove a significant amount of money from the economy. At the same time, the Government should carry out a number of other tax reforms, such as removing mortgage interest relief at the higher rate. It is absolutely crazy to give the largest housing subsidy to those who are on the highest rate of tax. It makes no sense. Those two measures between them could have a significant counter-inflationary effect. There should also be an announcement that next year's Budget will not be a tax-cutting Budget. The pledge that the rate of income tax will be reduced to 20p in the pound should also be abandoned.

The Chancellor dwelt heavily on savings, but he has still not devised an instrument that would provide a good tax incentive for saving. Paradoxically, high interest rates by themselves do not provide a sufficient incentive to save. The Chancellor must involve more people in saving. At the end of his Mansion House speech he said that people seemed to have lost the habit of thrift. Why does he not set about encouraging thrift with something more ambitious and exciting than the limited personal equity plan schemes?

Mr. Tebbit : I wonder how far the hon. Gentleman will go down that road. Does he accept, for example, that allowing dividends and investment income to have a lower rate of tax than is standard would be desirable, or is he thinking of a bureaucratic system, rather than something that could make people feel that it is worth their while to save and invest?

Mr. Beith : The trouble with the right hon. Gentleman's suggestion is that it would give an uncovenanted benefit to very many existing shareholders without attracting more people in. That is why I have argued that we should build on what the Chancellor has already done with PEPs. We should front-end that scheme. We should make sure that tax relief is available at the point of entry. We have had

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that argument in previous debates, but I believe that we would have widened the range of people saving through that kind of scheme. We have also argued that funding policy should be changed. It is interesting that the Chancellor devoted about a quarter of his Mansion House speech to saying that the Government could not go back to overfunding but then, in the small print, admitted, in a quiet way, that that would be done, in a limited way, month by month, over the rest of this year.

In present circumstances, it does not make sense for the Government to be repaying debt so heavily and thus maintaining a large gap between short and long-term interest rates. If interest rates are supposed to make industry leaner, tougher and fitter, why is the impact concentrated on smaller businesses which pay higher interest rates? Why are they, and not those businesses that have access to long-term interest rates, bearing the burden?

The House enjoyed a good speech by the right hon. and learned Member for Monklands, East, but he missed the opportunity to spell out more precisely whether the Labour party would be prepared to join the EMS at an early date. Both parties are trying to accommodate disagreements about whether to join the EMS by setting out conditions to determine when they might join. I have argued that that is true of the Prime Minister's conditions, and it remains true of the conditions set out by the right hon. and learned Member for Monklands, East and it is certainly true of the additional condition set out by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), who chairs the Public Accounts Committee, who suggested that an independent Bundesbank was an obstacle to British membership of the EMS. There will continue to be an independent Bundesbank, and if we had more central bank independence in this country there might have been more effective discipline than there has been here for the past 20 years.

Mr. Alex Salmond (Banff and Buchan) : Does the hon. Gentleman have any conditions for his policy of joining the exchange rate mechanism?

Mr. Beith : I believe that this country's interests would have been best served if we had been in the EMS some time ago and it is worth negotiating our way into it now. Any Government will negotiate their way in. I am arguing about the conditions set by the other parties, because they appear to be designed to be obstacles to entry, or intended to appear so to at least some of their supporters. The right hon. and learned Member for Monklands, East speaks as an enthusiast, but there are hon. Members who do not share his enthusiasm.

Mr. Christopher Gill (Ludlow) : Will the hon. Gentleman give way?

Mr. Beith : No, I am trying to be brief and I have given way twice.

EMS is not the only area of disagreement. I listened with great interest to what the right hon. and learned Gentleman said today about credit controls because he has almost entirely moved away from them. Initially, we thought we were being offered controls on credit cards, then there was the possibility of special deposit and controls on new mortgages, which were spelled out quite

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clearly by the hon. Member for Dagenham (Mr. Gould). Now we are being offered something resembling a proposal which these Benches argued for more than a year ago--that the Government could seek the co-operation of banks and financial institutions to restrain their lending.

More than a year ago we argued that the most helpful approach would be for the Government to encourage institutions to restrain high pressure advertising of credit. That could have been done. The Governor of the Bank of England has gone some way towards doing that since then because the pressure that has been put on people to obtain credit has been ludicrous and is inconsistent with the Government's arguments.

Mrs. Teresa Gorman (Billericay) : Will the hon. Gentleman give way?

Mr. Beith : No, I must draw to a conclusion. I have given way several times.

The right hon. and learned Member for Monklands, East has moved rapidly on credit controls because I suspect he realises that most of those advocated are nonsense. They will not work, and they are likely to bear heavily on those most dependent on credit, rather than those who have the discretion and the ability to seek credit elsewhere if controls are introduced.

A lot of ambiguity about fiscal policy remains. Will it need to be tightened and, if so, how? What about exchange rate policies? Does the Labour party want sterling to fall? If so, how far?

The motion is full of good stuff ; I agree with every word of it. It makes some good suggestions about the steps that we need to take in, for example, training and research, and its analysis is accurate as far as it goes. However, it reminds me of a school maths book. The teacher's copy has all the answers bound in the back, but the pupils never have access to those copies. On the Order Paper we seem to have the version without the answers in the back. I refer particularly not to long-term issues, but to the immediate economic management of the economy and how we deal with the precise problem which Labour has placed before the House today--the effect of interest rates on our economy. High interest rates are very damaging. If we join the EMS properly, we can get interest rates down ; but if we do that we must take other steps to ensure that inflation is under control. The absence of any discussion of those issues in the motion calls into question whether the Labour party has addressed those problems at all.

6.24 pm

Sir William Clark (Croydon, South) : There is one danger for the economy in this debate and that is that there are too many people speaking gloom and doom about our economy, whether in the media, the press or the Opposition. They are talking down sterling and that does not do the country any good. We have to show confidence in our economy, and I hope that I can prove that to the House. We have had ups and downs, but the underlying basis of our economy is sound. The right hon. and learned Member for Monklands, East (Mr. Smith) made great play of the so-called rift between No. 10 and No. 11 Downing street. This lie must be nailed. If there were a rift, in my opinion--I am sure that my right hon. and hon. Friends will agree with me--in no circumstances would the Prime Minister go along

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with a policy with which she did not agree. Nor would the Chancellor of the Exchequer. Therefore logically, there can be no rift.

Sir Alan Walters, who is a part-time adviser to the Prime Minister, holds the position of a senior civil servant. He should conform to the same rules and regulations as a senior civil servant, and he should not make public statements or write articles for the public to read because it confuses politicians and the markets. It is essential that we have stability in the markets and no confusion.

Mr. Ian Gow (Eastbourne) : I have been following my hon. Friend's argument closely and I wonder what substance future speeches by the right hon. and learned Member for Monklands, East (Mr. Smith) will have if the professor follows that period of restraint that my hon. Friend has recommended.

Sir William Clark : That is an interesting point. I shall let my hon. Friend answer that for himself when he makes his speech. The Opposition motion rightly draws attention to our present high interest rates. As my right hon. Friend the Chancellor said, all countries have recently put up interest rates. We have had to increase our rates, and are in front in that respect, because our economy was growing too fast and had to be slowed down. High interest rates have curbed spending, which is now on a plateau and will come down. High interest rates, as hon. Members have already said, have stopped the property boom and have helped to keep up the price of sterling. Consequently, they have helped to ease inflationary pressure on imports. It has been said that high interest rates help the saver, but I shall return to that.

The Opposition motion talks about the 7.6 per cent. inflation rate. As a politician, I have no right to be cynical, but I think that the Opposition have a nerve to criticise a rate of 7.6 per cent. when they were clever enough to get it to 27 per cent. Consider the effect that that had on pensioners and people with small invested incomes. It is disgraceful that, within three years, their savings were decimated.

The Opposition talk about hardship for home owners. That is a conversion ; some years ago they did not like home owners. For example, they talked originally about taking away houses from those who bought them under this Government's successful sale of council houses. Now they have changed their minds because they know that there are millions of votes there. Let us make no mistake--a Socialist Government would still give priority to council housing. Owner-occupiers have independence, and the Opposition do not like that.

The Opposition criticise the Chancellor for using high interest rates alone to control the economy, but they overlook the fact that public expenditure has been controlled. I welcome the fact that the Exchequer is not taking as much of the GDP as it did in 1979. Such public expenditure control is another way in which the inflation rate has been made to come down.

The Opposition criticise the level of industrial investment, but this year it is up 15 per cent. Companies are more profitable. If one considers the tax structure of companies today, it is clear that corporation tax is much lower than it was under Labour. Let us consider the liquidity of companies. In 1980 bank borrowing by companies represented some 45 per cent. of those

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