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companies' equity in the market. Today, that figure of borrowing is down to 28 per cent. That means that industry has more money to invest and has more money to put into production.

The economy is buoyant and politicians on all sides should, occasionally, talk about the achievements of the country--not necessarily those of the Government. The economy has turned round. We should avoid talk of the Opposition and the Government. I accept that the Government have set the scene, but the economic buoyancy has been created by the country. My right hon. Friend the Chancellor told us that 1,200 new businesses start up each week. I accept that some businesses fail, but the net figure still stands at 1,200. That must be good.

Unemployment is down and the number of people employed is the highest that it has ever been. The Labour party has said that if it were in government it would operate credit controls. My right hon. Friend the Member for Chingford (Mr. Tebbit) has already said that the Opposition envisage some sort of social contract with the banks. That may be all right with the British clearers--one may have a reserve lending ratio if one wishes--but one cannot control foreign banks like that. What is their capital? It is easy to say what the capital of British clearers is and what the ratio should be, but how would one evaluate the capital of, for example, Chase Manhattan or the Japanese banks in the City? The credit control advocated by the Opposition is absolute rubbish.

One of my hon. Friends has already asked why a Government should prevent a citizen from borrowing money. Those who lend the money--banks or other financial institutions--will stop lending money when the bad debt ratio gets so high that they cannot afford to lend.

Mr. Tebbit : Does my hon. Friend agree that if such banking controls could be imposed in Britain it would be almost inevitable that banks in places such as Gibraltar and other places where we have had little problems with banking organisations would get into the credit market here and would lend to the most vulnerable people in that market on terms entirely outside the control of the Government's legislation to protect consumers?

Sir William Clark : My right hon. Friend is absolutely right. One would have a proliferation of what is known as offshore funds and Gibraltar could be the centre for such operations.

My right hon. Friend the Member for Chingford made an extremely good point when he discussed the car industry. He related the history of how that industry went down and how it has now been built up again. The car industry is part of the cause of our balance of payments deficit. My right hon. Friend is right that it will not be until 1990-91 that available cars will come on stream for sale here and for export. It is worth noting that 75 per cent. of our imports are accounted for by capital goods.

Under the Government our gold and dollar reserves are some £27 billion. My right hon. Friend the Chancellor told us that, last month, our exports went up by 13 per cent. That figure included oil, but if oil is taken out exports still rose by 8.5 per cent. Exports are at an all-time high. It is true that imports went up by just over 4 per cent., but they are flattening out.

During the past two years the policy followed by my right hon. Friend the Chancellor has resulted in some £17 billion of the national debt being repaid. In the same

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period nearly £4 billion has been saved in interest. I remind the House that that is equivalent to nearly 3p off the standard rate of tax. That saving will be made not only this year, but in coming years. However, my right hon. Friend should be wary of repaying too much of the national debt. If a future Government did not have the national debt--I am exaggerating slightly--it would be so easy for them to borrow money that a profligate Government would soon lead us into the high spiral of inflation.

The autumn statement will soon be published. As soon as that happens everyone will become a mini Chancellor of the Exchequer. Everyone will have his own ideas about how the next Budget should be formed. The hon. Member for Berwick-upon-Tweed (Mr. Beith) offered two suggestions : to negotiate to join the EMS immediately and to increase taxation. The Prime Minister and the Chancellor of the Exchequer have made it perfectly clear about our joining the EMS-- [Interruption.] I am sometimes worried by the Opposition ; they start laughing before they know what I am about to say. Opposition Members should listen to the facts before they distort them. My right hon. Friend the Chancellor has made it perfectly clear that we are the only country in the European Community that has complete freedom of exchange control. As soon as all the others have freedom of exchange control the playing fields will be level and, consequently, that might be the time when we should join the EMS. I do not believe that the Chancellor should rule out tax cuts in the next Budget. In common with the hon. Member for

Berwick-upon-Tweed, however, I would like a super boost to be given to savings. Last year my right hon. Friend increased the personal equity plans --PEPs--which are equivalent to new savings. I would like a tax-cutting Budget together with a savings Budget that would give an incentive to saving. I do not necessarily agree with my right hon. Friend that investment income should be at a lower rate because, as the hon. Member for Berwick-upon-Tweed rightly pointed out, that would affect people now. We want new savings and that can be achieved only by allowing contractual savings to be set off against one's income vis-a -vis the "Loi Monery".

Although my right hon. Friend the Chancellor and his team are pilloried and criticised by the media--in many cases quite wrongly--no one in the House or in the country can say that the Government do not stick to their policies. There are no panic measures and I assure the House that there will be none in the future. We have been down this road before in 1985 when we had to increase interest rates. That increase was responsible for bringing down the rate of inflation. I am convinced that the medicine prescribed by my right hon. Friend is the right sort. My advice to him is, for goodness sake, do not change policy. It will work today as it worked in 1985.

6.39 pm

Mr. James Molyneaux (Lagan Valley) : For the benefit of the next speaker whom you, Mr. Speaker, may call, I shall be brief as usual and set a good example to him.

Leaders of minority opposition parties face the temptation of indulging in the luxury of irresponsibility in

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the sure knowledge that they will never be called upon to form a Government or serve in a Government. However, in response to what was said earlier, may I say that if we were ever to form a Government we could be depended on to be consistent. In response to what the Opposition spokesman said, let me point out that we would mean what we said.

The current minority Opposition party leaders can, if they wish, advocate policies which are capable of attracting short-term popularity without worrying about the need to be consistent. A new factor has entered into the equation and the two main forces in Parliament--Government and Opposition-- have somewhat relaxed the requirement to be consistent. The party which I lead has seen its consistency rewarded by being branded as inflexible and stubborn. We would plead guilty to such charges on the subject of today's debate. Ten years ago we welcomed the Treasury's conversion to the concept of the floating pound. I know that lip service is still paid to that concept. We have to ask why the Treasury and not the Government is trying desperately to control the exchange rate of the pound. Formerly, the manipulation took the form of artificially forcing the pound down to placate the Americans. This autumn we appear to be doing the opposite to please the Germans.

These contradictory policies seem to have given us the worst possible result, which is hardly surprising. Inflation has been fuelled by flooding the economy with fresh money and we are now crippling industry and business by raising the cost of credit. Unfortunately, it is, as usual, small companies and businesses which suffer most grievously. As a nation we do ourselves a grave disservice by blindly refusing to recognise that these troubles stem directly from a crazy desire to manage the exchange rate of the pound.

The Treasury simply has to shake off what is no more than a superstition that if the pound floats downwards the consequence will be higher inflation. The Treasury must refrain from cheering on its champion in his duel with the Bundesbank which should be seen as a totally irrelevant tussle and not a test of economic virility. I do not agree that any advantage would accrue from our joining the EMS. Our entry would not prevent wide fluctuations in our economy but would simply necessitate higher than average interest rates. The effect of that would be to punish non-exporting industries and companies, in particular. The Opposition spokesman, the right hon. and learned Member for Monklands, East (Mr. Smith), did not make it clear why, if we joined the EMS, we should expect European banks to take orders from the Treasury. It would, as usual, be the other way round and we would be subservient.

In recent weeks and days, and today in this Chamber, many have asked what the Chancellor can do to reduce inflation. I do not know whether his attention has been drawn to the advice tendered to him about two weeks ago by another Ulster Unionist, Enoch Powell, who in a speech at Milton Keynes said :

"The candid answer to that question is : nothing whatsoever'. The money splurge created by easy credit eighteen months ago cannot be counteracted by over-tight credit now. We simply have to sweat it out while the flood of new money, of which the creation was permitted and even encouraged by easy credit last year, in the endeavour to rig the sterling exchange rate downwards, will have worked its way gradually through the system into final prices."

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I would differ from the Chancellor, who seems to have taken a different approach. He seems to be waiting until interest rates have worked their way into the final prices.

It is depressing to see the recurrence of the industrial disputes of former times. We must face the fact that those are the consequence of inflation and not the cause. It simply will not do for all of us to set out on a course of industrial conflict and contemplate with bogus fortitude endless strikes and disputes. I trust that hon. Members, particularly on both Front Benches, will remember that it was precisely that misguided course which destroyed the Labour Government in the late 1970s.

6.45 pm

Mr. Terence L. Higgins (Worthing) : I shall begin by drawing the attention of the House to a mystery : who drafted the Opposition motion? Clearly it was not the shadow Chancellor, the right hon. and learned Member for Monklands, East (Mr. Smith), who made a number of interesting points in his speech, none of which appears in the Opposition motion. He began by saying that we must not forget the unemployed ; but that is precisely what the Opposition motion does because it makes no mention of the unemployed. That is scarcely surprising because, happily, the unemployment figures have been improving for a considerable time.

The shadow Chancellor went on to discuss at some length the European monetary system and its exchange rate mechanism. However, there is no mention of either of those in the Opposition motion. If hon. Members had hoped that he would elucidate the basis on which a Labour Government might join the exchange rate mechanism, they--particularly Government Members-- would have found his speech unilluminating, certainly in relation to the rate at which we would join.

The shadow Chancellor talked at considerable length, and with a degree of innovation, about credit controls, of which there is no mention in the motion. "Credit controls" is not quite the right expression because apparently a Labour Government, if one should ever come to power, would encourage the banks not to expand the amount of credit. In an intervention the legality of this matter was raised. We must consider carefully the responsibility of the banks to their shareholders. If we were to have credit controls in the strict sense, the banks would have some defence against their shareholders saying that the banks were not doing as well as they might for their shareholders. However, the idea that this might be done through back-door persuasion raises difficult questions.

However, as a number of my colleagues have pointed out, such an idea is completely out of date because in a system of open economies without exchange controls it is simply impossible to achieve that degree of control, or even persuasion, over the international banking community. If nothing else, there would be no means of preventing overseas banks which had no base in this country from refusing to give credit to a person in this country who wanted a loan. Therefore, a mystery surrounds that matter.

I shall turn to broader issues and put the debate into context. It is clear that we are suffering from a hangover from the stimulus given to the economy as a result of the stock market crash in the autumn of 1987. Finance Ministers throughout the world took the view that in order to prevent a world recession it was necessary to stimulate

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each individual economy. At that stage no hon. Member, with the exception of my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), who I do not see in his place, objected to that. That stimulus did not extend to the measures which the Chancellor put in the Budgets, both the one following the crash and the next one, which have produced the largest fiscal surplus we have ever had. Unfortunately, no hon. Members perceived the extent to which Britain's economy was already accelerating. After a long period of sustained growth we must bring that growth down to manageable limits. Essentially, that is the problem facing the Chancellor of the Exchequer.

I do not accept that by using the instrument of interest rates the Chancellor is, in a sense, a one-club golfer. He is also using fiscal policy on a massive scale, and that sets the framework within which monetary policy is operating. To borrow a corny analogy, he is using a rate of interest putter but in the context of having previously used a fiscal policy driver. The effect of his actions in those respects is to slow down the economy in a satisfactory way. In a good article, the Economist this week draws attention to the fact that retail sales in the three months to September were only 1.25 per cent. higher than they were a year earlier, which is the smallest increase in the last seven years over a 12-month period. On the other side of the equation, output is rising at about 4 per cent. so the overall result is that output is rising faster than demand is rising.

That is important for the balance of payments, and combined with the natural overrun when the economy is slowing down--of stocks building up at each level of production and at the point of retail sales--one has reason to believe that the balance of payments situation will come right. The figures today, unacceptably high though they are, give reason to suppose that the peak may have been reached and that, for the reasons I have given, matters are likely to improve in the future.

It has been important for the Chancellor to act by way of interest rates. Some people, including my right hon. Friend the Member for Shropshire, North (Mr. Biffen), have asked whether interest rates are being used for domestic internal inflation reasons or for international sterling reasons. While there are occasions when those two objectives cannot both be achieved by interest rates, I do not believe that to be the situation now. The domestic and expansion of credit issues to which I have referred, and the fact that higher interest rates keep sterling at a higher level than would otherwise be the case, work together to bring inflation under control. As that is, rightly, the Government's overall objective, the measures on interest rates which the Chancellor has taken have been appropriate. Concern has been expressed about the fact that the object of the exercise must be to put a downward pressure on demand and that that, in turn, is bound to have an adverse effect on profits in a situation in which, as the Chancellor pointed out, profits are at their highest level for 20 years. That means that the normal effect of a downward pressure on demand and a building up of resistance to inflationary wage settlements will take a considerable time to work through. It is important for us to bear that in mind.

I share the concern of my right hon. Friend the Member for Chingford (Mr. Tebbit) about the situation facing the engineering industry. He referred to the claim for a

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35-hour week, the shortest that would exist in any country. I remind my right hon. Friend--I had experience of this issue some years ago in Europe--that when people in Britain say they want a shorter working week they really mean that they want to be paid at a higher rate for doing more overtime. When, in any other country in Europe, people say that they want a shorter working week, they mean what they say.

It is important that inflationary wage claims of that sort should be resisted. Otherwise inevitably, and especially in the engineering industry, the repercussions of more profitable firms granting such increases are felt by other parts of the industry, and the effects in the west midlands and elsewhere are traumatic. That would be bound to have an effect on unemployment, a subject which, although it is not mentioned in the Opposition motion, was described by the right hon. and learned Member for Monklands, East as an issue that we should not forget.

Mr. Thomas McAvoy (Glasgow, Rutherglen) rose

Mr. Higgins : I will not give way because I am under a strict time restraint.

I come to the issue of the exchange rate mechanism. I do not believe that being members of that would have made a significant difference in the last month or so because the Chancellor took the measures that he would have had to have taken even if we had been members of the ERM at this time. I doubt whether we would have received any more co-operation from the Germans, and it is clear that what happened in that connection had severe repercussions on us. Similarly, in terms of the longer term prospects for the exchange rate mechanism, let us not forget the argument for joining, which is that we would have a degree of currency stability within which various currencies would be held in relation to each other. I suggest that this is not the moment when it would be sensible for us to join because exchange controls in other countries have not yet been removed, and we do not know what effect their removal will have, when it occurs.

The French, despite all their misgivings--they are lagging 10 years behind us, yet they still say that we are not communautaire--are due to take off controls next July, and that would seem to indicate that it would be appropriate to join about next August.

One cannot predict these matters because, as we are well aware, situations can change and we cannot be sure at this stage what things will look like by that time.

However, whatever my views might be on stages two and three of the Delors report--there are variations of view about that--there seems now to be a strong case for us joining the exchange rate mechanism. I hope that at the appropriate moment, which is not now but which may be next year, such a step may assist our policy rather than act in the opposite direction. It was extraordinary that the right and learned Member for Monklands, East did not spell out the alternative. Nor is it mentioned in the motion. I suggest that overall, looking at the situation, the Chancellor responded appropriately in autumn 1987, and is responding appropriately now, to get us back to sustainable economic growth.

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6.56 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch) : History will heap plaudits on the right hon. Member for Worthing (Mr. Higgins) for having chaired the Treasury and Civil Service Select Committee which produced the report on the Delors issue and which said in paragraph 28 that we should join the exchange rate mechanism of the European monetary system at an early date and go on to work towards the creation of a common European currency. When those plaudits are being given, most people will have forgotten that the right hon. Gentleman voted against the proposal. But I shall not be churlish and remind him of that fact.

I wish to behave in the debate as a consensus politician, as I usually do, and to make it clear that I go along with the new economic consensus that is arising. It is not a monetarist or neo-monetarist consensus. Nor is it a Keynesian or neo-Keynesian consensus. It is shared by, among others, Sir Alan Walters, the chief economic adviser to the Prime Minister, all the way across the spectrum to Michael Boskin, the chief economic adviser to the President of the United States. That new consensus says that the Chancellor's fiscal and monetary eccentrici-ties can no longer be regarded as economic wisdom. Indeed, the Chancellor--to paraphrase Dr. Samuel Johnson--brings to economics the wisdom of the fool and the folly of the wise.

With the right hon. Member for Worthing, I have just spent a week in Washington. In private, politicans and economists there constantly asked me what was driving the Chancellor in his dispute with the Prime Minister. The simple answer is that the Chancellor is a fan of Damon Runyon and is very taken with that sexist male chauvinist pig of a character who, in "Take It Easy", explained his dispute with the women who lived nearby by saying :

"I do not approve of guys using false propositions on dolls, except of course when nothing else will do."

Many of the Government's problems stem from the fact that they insist that bringing down inflation is the one important goal and that everything can be subordinated to that. It is interesting that in America, Michael Boskin, the chairman of the Council of Economic Advisers, disputed this. When someone made a sotto voce comment in reply to his answers he said, "Do I detect some editorial comment there, because if you are telling me that one should subsume everything to the control of inflation, that is advice that I would never give to the President of the United States." He became agitated and went on to explain that no one in his right mind would give that sort of advice--yet it is what the Government and the Prime Minister are doing. The great and the good across the Atlantic say that it should not be done.

There are two other problems with inflation. One is the dispute between the Chancellor and the Prime Minister over how we should deal with it. The Prime Minister, egged on by that strange economic guru Sir Alan Walters-- every now and then he takes centre stage like some sort of demonic Rasputin --says that domestic monetary conditions are the critical factor. She says that they are tight enough not to have given cause to raise interest rates recently and not to give cause to raise them in the future. The Chancellor, by contrast, says that we must raise interest rates to keep the level of the pound up and import prices down.

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We must get to the bottom of this. The Treasury and Civil Service Select Committee meets tomorrow, and I suggest that we call Sir Alan Walters before it. We heard today that he is only a part-time economic adviser, not a civil servant, so there is nothing that the Prime Minister or anyone else can do to stop Sir Alan answering our summons and spelling out all the details of his disputes with the Chancellor. I am sure that the right hon. Member for Worthing and other members of the Select Committee, who are smiling benignly, will agree to my proposal.

The other problem with inflation is that everything that the Chancellor does to deal with it is inconsistent with what needs to be done to improve the balance of payments deficit. I suppose that the Chancellor, who is as capable of contradicting himself as he is of contradicting the truth, believes with Emerson that

"with consistency a great soul simply has nothing to do." Just as some people attempt to rewrite history, the Chancellor attempts to rewrite economics.

On 27 September this year the right hon. Gentleman made a speech--he referred to it again today--to the IMF and the World Bank. In it, he argued, as he did from the Dispatch Box today, that balance of payments deficits do not matter very much and are in any case self-correcting when the growth of domestic demand falls below the growth of output. I have scoured the western world in vain to find someone who believes that balance of payments deficits of £20 billion--4 per cent. of GDP--are self- correcting and do not matter. Even if that were true--it is not--the Chancellor's statement poses the question : at what level of output and employment would the balance of payments deficit be self-correcting? The answer must be that it would be self-correcting only at a level that involved a considerable recession.

I do not ask anyone to take my word for this. I am prepared to plead my own mediocrity--[ Hon. Members :-- "Guilty as charged."]--a lovely phrase that I used to hear in the law courts. I invoke some of the great figures of the Conservative party, beginning with the right hon. Member for Henley (Mr. Heseltine). I thought that the right hon. Gentleman made a delightful speech at that fringe meeting at conference. I saw him on television ; the mane was flowing, the voice was modulated, the adrenalin was running high, and he stood every bit like tomorrow's leader of the Conservative party. He scoffed at, he poured scorn on and he ridiculed the Chancellor's assertion that the balance of payments deficit did not matter and was self-correcting, and he begged the Chancellor to think again. There came a moment when the right hon. Gentleman's pellucid denunciation of the Chancellor became so brilliant that I began to feel sorry for the Chancellor, because, unlike Shelley, the right hon. Member for Henley not only pours venom out of his mouth whenever he speaks, he really can sting.

Recently I have been asking Conservative Back-Bench Members--I shall not name them because these conversations are confidential--whether they believe it right to say that these balance of payments deficits do not matter and are self-correcting. The standard answer that I have received across the ideological spectrum on the Conservative Back Benches is : "He may say it, but he certainly does not even believe it himself." I am looking at one of these Conservative Back-Bench Members--

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Mr. James Cran (Beverley) : On a point of order, Mr. Deputy Speaker. If the hon. Gentleman was looking at me when he said that, we have not had a conversation about that point today or this week.

Mr. Sedgemore : As I am in the mood to appeal to ex cathedra figures, I appeal again to Michael Boskin, whom I asked this academic question. I told him that there are arguments to the effect that balance of payments deficits driven by the public sector can be cut only by cutting the budget deficit. The counterposing argument is that balance of payments deficits driven by the private sector--the Chancellor's argument--are self- correcting. Quite rightly, the adviser to the biggest economy in the world opined that the second argument--the Chancellor's--involves the cateris paribus fallacy. All hon. Members will know that every fifth former is told not to fall into the cateris paribus fallacy which, in economic terms, runs as follows : one can produce a savings and investment equation which shows that under some conditions a deficit can start to be self-correcting ; but then, things would not be cateris paribus--income, output, employment, revenue and other variables would change.

So it is nonsense to say that a balance of payments deficit of this size is self-correcting. What can we do about it? I preface my remarks by saying that I believe that such is the scale of the problem now that we can deal with it--under any Government--only with a depreciation of the currency and with at least a mild recession. There is no point in Labour Members seeking to pretend that we can get out of the current mess without at least a mild recession. The problem is how to minimise the recession.

I began with a consensus ; another consensus is growing about what we should do. The City of London, industry and her Majesty's loyal Opposition, including me--the soon-to-be loyal Labour Government--all believe that we should join the exchange rate mechanism of the EMS at an early date as a prelude to working towards a common European currency. We believe that that will give us some external discipline and that it will steady markets and give us some protection against speculators.

I have suffered barbs and jibes from people who have accused me of changing my mind and said that I am not in a good position to start lecturing them on this. The politician who cannot change his mind as the world crashes around him soon becomes an irrelevant bore. Things have changed. When I was young I was brought up on the theory of comparative advantage and purchasing power parities which worked through changes in the exchange rate, driven by the current account, on the balance of payments and internal domestic price levels. All this has gone and is irrelevant to the modern world. I say that to those on the Left of my party and those on the Right of the Conservative party. We do not live in that world any more and exchange rates are not driven by the current account.

Foreign currency is no longer primarily a medium of exchange. It is an investment vehicle that provides speculative opportunities. That is why $175 billion crosses the exchange markets every day--one third of it in London. I defy anyone to tell me what those speculators say about sovereignty. They do not care a damn about sovereignty or about what right hon. and hon. Members say. In the modern world, many politicians who preach sovereignty as a noble, democratic ideal are often engaged in base, populist politics.

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I congratulate my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) and his colleagues on going to Germany to talk to the officials of the Bundesbank and to France, to talk to the members of that country's Government. They engaged in something close to negotiations about the way in which Labour would join the ERM if it were returned to power.

As British society views the sarcophagus of Thatcherism and looks over its dead bones, it is time for the Labour party to take up the reins of Government with fresh ideas, new hope and some vision.

Mr. Deputy Speaker (Mr. Harold Walker) : I remind right hon. and hon. Members that speeches should now be limited to 10 minutes' duration.

7.11 pm

Mr. John Browne (Winchester) : I enjoyed the speech of the right hon. and learned Member for Monklands, East (Mr. Smith). It was extremely entertaining and interesting. Although he did not provide specific details of future Labour economic policy, he gave some interesting pointers.

For example, he said that a Labour Government would bring in credit controls. That would stifle growth and enterprise. But who is to say that politicians are better equipped than entrepreneurs, business men and professional bankers to decide whether a certain loan is worth while in terms of growth, productivity and enterprise? Who is to say that politicians are better able to choose new products, penetrate international markets and internationalise product lines? Politicians cannot do that and political business experiments have in the past proved disastrous and went completely out of control. As the right hon. and learned Gentleman and my right hon. Friend the Member for Worthing (Mr. Higgins), Chairman of the Treasury Select Committee, both asked, who will umpire and control foreign banks on the basis that they exist in England?

Another interesting point arising from the right hon. and learned Gentleman's speech is that we would see political rather than market direction of investment. That would mean bolstering sick and dying industries and companies at the cost of healthy ones. That would initially lead to inflation. Under a Labour Government there would be at least a populist drop in interest rates until inflation took hold. The right hon. and learned Gentleman mentioned an "appropriate" rate for sterling for joining the ERM. To me, that means devaluation, again in favour of British industries and companies that are either ailing or very sick.

In all those policies, we glimpsed the prospect of a return to old- fashioned hyper-inflation. That prospect is not new to the international foreign exchange markets, which regard it as a potential threat to the value of sterling. They view any threat to this Government as a threat to the value of sterling. I term it the "Thatcher factor". The Thatcher factor accounts for between 5 per cent. and 20 per cent. of the spot value of sterling on the exchange markets--at least on an initial basis. If the Prime Minister is under threat for any reason--perhaps because of internal arguments or hyped-up articles in the press--the pressure on sterling increases relentlessly. When German

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interest rates rise by 1 per cent. we raise ours by 1 per cent.--but it is not enough because people continue to criticise the Government.

I notice that the people who are most violent in their criticism of the Prime Minister and her economic policy are those who immediately complain that interest rates are too high. Interest rates have had to be raised to defend sterling. The Thatcher factor should be borne in mind by people who, as my right hon. Friend the Member for Guildford (Mr. Howell) said, talk down sterling and our economy. To over-criticise has an enormous downward effect on sterling. The result is that people have to pay higher interest rates on their loans and mortgages. We must take that into account when making speeches, because it does none of us any good.

Any Government guiding our economy, with its history of inflation and its declining, relative productivity, must walk a tightrope. They must achieve disinflation without creating deflation.

It is an extremely sensitive tight rope because it involves the psychology of the consumer. To cite a hypothetical example, say that a family with a joint income of £20,000 keeps £12,000 of that net of tax. Say that they have a house valued at £50,000, which is increasing in value by 20 per cent. a year-- [Interruption.] Opposition Members may laugh, but houses in many constituencies are worth at least that.

I venture that house prices in many areas are so high that many newly married couples cannot buy a home. My hypothetical family start to spend their £12,000 as though they had £22,000. They save nothing for a rainy day, thinking that they could always mortgage the house. That results in tremendous property-induced inflation of the money already available. That is not measured in terms of M3 or the money that is already in circulation. On top of that, the inflationary psychology is to spend as much as possible. If the Government changed their philosophy and house prices started to tumble, that family would spend their £12,000 as though it were £6,000--and we would have an enormous slump on our hands.

Economic management is a delicate business. In October 1987, there was a stock market crash. The Government, together with others, pumped a lot of liquidity into the system. Fortunately, at that time our economy was growing faster than most others. Therefore, there has been a much greater inflationary impact on our economy. We are now paying the price for it with high relative real interest rates. High interest rates are tough. They are a blunt instrument, especially on first-time buyers. The main aim is to reduce inflation. However, they have some beneficial side effects. First, they benefit the saver. As my right hon. Friend the Member for Guildford said, we must help savers. I understand that there are about six lenders for every borrower in a building society.

High interest rates also encourage businesses to reduce excessive wage increases and to invest in increased productivity, rather than merely add to productive capacity.

I address now the question of whether we should join the exchange rate mechanism of the European monetary system--and if so, when. Many supporters of the ERM see it as a panacea to protect sterling, despite inflationary and disruptive economic policies at home. I believe that it is no panacea and that wildly fluctuating exchange rates are an

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international problem--not only a problem for sterling. Fluctuating exchange rates are caused largely by a crucial flaw in the Bretton Woods agreement of the 1940s. The flaw was that when the United States of America dominated world economics, it had a huge surplus. It was built into the treaty that to run a deficit was an economic sin. To run a surplus was fine. There was a crucial and inherent imbalance in the Bretton Woods agreement.

Now that the United States is in deficit we hear a different story. It is said that the Germans and the Japanese are doing terrible things by having a surplus. This points to a structural matter that we must get right, and we need to do that urgently. We must make sure that it is seen as evil economically to run a surplus just as much as it is to run a deficit. They have to balance out on an international basis. Someone's surplus is someone else's deficit.

In that context I see the exchange rate mechanism and even the EMS itself as something of a cartel ; even a deutschmark cartel. We have decided that the world has tremendous international problems on exchange rates. Let us form a club of European nations and we will sort it out among ourselves and leave the rest to stew. It is not inherently bad to do what the EMS is doing but it should be done on an international rather than on an isolated, European basis. Therefore, the United Kingdom should not join the full exchange rate mechanism until, first, all members have free movements of foreign exchange and capital with no foreign exchange controls. Secondly, we should not join until the single European market of 1992 has been achieved with a free flow of goods, services and labour. Thirdly, we should urge the denationalisation of the central banks of all the member nations.

In the United States there were many largely autonomous states. Yet they accepted the US dollar. It was largely successful. It was gold-linked in its earlier days, which had an enormously positive effect on its original success.

Mr. Deputy Speaker : Order. I remind the House that arrangements have been made for hon. Members to be warned in advance about the termination of the 10 minutes allowed for speeches.

7.21 pm

Dr. John Reid (Motherwell, North) : I listened to the Chancellor's speech with a mixture of frustration, anger and amazement. I was frustrated by the complacency that he continues to show, angered because he was not prepared to accept any responsibility for the mess that we are in, and amazed that he still appears to believe in what he is saying and, more important, in what he is doing.

We have heard that the balance of payments deficit continues to grow and now stands at an annual rate of £20 billion, the highest in the United Kingdom's history. Over the past year interest rates have risen inexorably. They have been raised 11 times and now stand at 15 per cent., twice the rate of those in our major competitor, West Germany. The average British mortgage has gone up by £88 a month and in Greater London it has gone up by £162 per month. We have heard that 380,000 home owners are more than two months overdue with their mortgage payments, and that the economy is tottering on the knife edge of a recession and that investment--never high under the Government--is starting to fall.

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What was the Chancellor's response? He told us that the gap in inflation between us and our major competitors has temporarily widened ; it is another blip. The Chancellor has had more blips than Heathrow air traffic control. He told us about rising living standards and rising confidence and said that exports continue to do well. Presumably that is why we have a projected deficit of £20 billion. He said that "in time" inflation and interest rates will come down and that the balance of payments will be self-correcting. To misquote John Maynard Keynes, "In time we are all dead economically and otherwise."

The Chancellor was complacent and insubstantial. He said nothing about training or skills or about the need for a flexible response to the present crisis. He was so removed from reality when he talked about rising expectations, living standards and confidence that I expected his peroration to end with the words "and they all lived happily ever after." A Japanese financier on "Newsnight" last night and the British public realise that we are tottering on the cliff edge of a recession. Why in God's name does the Chancellor not realise that?

We cannot allow the Chancellor alone to take the blame because the Prime Minister is just as complacent. At the Tory party conference in the middle of yet another interest rate crisis and with a chance to address the nation she took the opportunity to give us a cookery lesson. She told us, "You can't get a souffle to rise twice." As a cook she should also understand that we cannot get a wholesome economy out of a half-baked recipe. She should be even more familiar with the old cuisine adage that too many cooks spoil the broth. Perhaps the right hon. Lady would like to put us all out of our misery by telling us which chef is responsible for the economic stew that we are in. Is it the resident and much-vaunted chef at No. 11 Downing street, is it the part-time pastry cook in the basement of No. 10, Mr. Walters, or is it old Mrs. Beeton herself, the Prime Minister? As they say in Private Eye editorials, "Surely we have a right to know since it is us who have to eat the damned product in the last instance."

Nowhere is that product more painful or unpalatable than in my part of Britain. The remedies designed to cool down an over-heated south-east economy are unpalatable enough in the south-east, but they are excruciatingly painful in a Scottish economy that has been, at best, lukewarm. Much of the industry in my constituency and my country has been industrially destroyed and is only just starting to revive. That is why when the Prime Minister comes to Scotland she is willing to talk about almost anything except the effects on Scotland of her economic policies. She came to Edinburgh and told us about the Bible and came to Glasgow and told us about Adam Smith. She came to Perth and told us about that well- known Scottish folk hero Julius Caesar. She said in what must be the most deranged piece of political rhetoric that I have heard for many years :

"If Julius Caesar were to land on our shore today he would have no hesitation in saying, I came, I saw, I invested.' "

I cannot believe that any of the Prime Minister's speech writers put that in, so she must have put it in herself.

Mr. Robert Sheldon : That cannot be true.

Dr. Reid : It is perfectly true ; I double checked it.

I am tempted to observe that if Julius Caesar were to land on our shores today he would be amazed at how rapidly things could deteriorate since his time. If he were

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able to afford the poll tax and could get a safe ferry across the Channel and find a seat on a crowded north-bound commuter train, I am sure that he would turn back at Watford Gap because economically the north of Britain has declined tremendously over the past 10 years. I shall give some statistics. In Scotland the effect of the Chancellor's mismanagement has been nothing short of disastrous, not just in mortgage payments, hire-purchase charges or investment, but in jobs. Recently in my constituency the firm of Terex, a thriving go-ahead company with a history of investment, was forced to make redundancies. It publicly laid the blame directly at the door of No. 11 Downing street and interest rate charges.

The story is the same throughout Scotland. An economy which was bruised, battered and bludgeoned for 10 years was on the verge of revival but has been pushed back into the quagmire. Is it any wonder when every 1 per cent. rise in interest rates puts an additional £40 million burden on the shoulders of Scottish industry? The 10 rises in base rate in the last 12 months mean that by 1990 Scottish business could face an extra £250 million in borrowing costs.

Mr. Cran : Will the hon. Gentleman give way?

Dr. Reid : Time is limited.

Is it any wonder that the latest figures from the CBI--and the Scottish CBI is the equivalent of the fifth column of the Conservative party--show that in the second quarter of this year investment in plant and machinery is down by 15 per cent. compared with the previous year and that investment in building is down by 11 per cent. on the previous year? Such facts speak volumes about the lack of industrial confidence in the Chancellor's handling of the ecomony. The contention that we now have a leaner, fitter economy in Scotland at least is a propaganda myth by someone who cannot distinguish between slimming and starvation.

We do not need a crystal ball. I shall quote from one of the books that we can consult. It is from "Cambridge Econometrics" and it says :

"(In Scotland) the bubble bursts in 1990 and both employment and output growth starts to lag behind the United Kingdom average for the rest of the century Most sectors of Scottish manufacturing are forecast to under- perform United Kingdom counterparts resulting in 70,000 job losses. Scotland's population is forecast to fall a further 132,000 by the end of the century and consumer spending per head is projected to remain a consistent 6.6 per cent. below the United Kingdom average."

Every other statistic supports those projections. Regional industrial assistance, worth £242 million three years ago to Scotland, is worth only £15 million this year, and will be worth only £100 million in the next two years. Scotland has gained only 2 per cent. of the jobs created in Britain between 1983 and 1988. Earnings in Scotland have fallen behind. In 1978, a Scottish male earner was earning £7.30 a week less than his counterpart in the south-east. In 1989, he was earning £49.70 a week less. The rate of investment in 1986 in Scotland was £641 million less than it was in 1979. That is a fall of 17.8 per cent., compared to a United Kingdom fall of 3.1 per cent. Rarely have I heard a more damning statistical indictment of the Chancellor's performance.

In the midst of all this, what have we heard from the Secretary of State for Scotland? Not for him the fighting of

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