House of Commons Hansard Debates for 24 Oct 1989

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his country's corner that his counterpart in Wales has put up, and that shows in the statistics. The census of employment from 1984 to 1987, on which all Government statistics are based, the crucial barometer, showed that every area of the country had an increase of people in employment. Among the highest was Wales, with more than 4.3 per cent., and even Ireland had an increase of 1.4 per cent. The only part of the country that saw a fall in the number of people in employment was Scotland, where there was a fall of 1.2 per cent. Admittedly, the Secretary of State for Wales does not have the burden of a Conservative party chairman who wants to do to the Welsh Conservatives what has been done to the Scottish Conservatives. I have sympathy for the Secretary of State for Scotland. It is not easy to speak both for the nation and for the hon. Member for Stirling (Mr. Forsyth) any more than it is easy for the Chancellor to speak for the Government and the Prime Minister's adviser. However, a choice has to be made. After 10 years of the Government's policies and economic miracles, we have a balance of trade crisis, a crisis of inflation, a crisis of confidence and a crisis of credit. If the confidence cannot be restored, the Chancellor should go.

7.31 pm

Mr. John Biffen (Shropshire, North) : The Opposition motion is drawn widely. It deals with the economy and the issues that they believe should be part of the developing political conflict over the coming year or so. I shall not say much about that because, within the time constraints, it is important to deal more exhaustively with a more narrow topic.

The policy of my right hon. Friend the Chancellor, through high interest rates, is showing signs of success. No doubt it will have its difficulties and carry its unpopularities, but that it can succeed I have no doubt. As the debate has proceeded, it has become plain that the exchange rate mechanism is a handy diversion for those who want to concentrate on other aspects of the broader areas of conflict. Those on both of the Front Benches and the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) are united in an impressive trilogy of commending early or measured membership. As a devotee of free exchange rates, I do not share that view, but to take part in the spirit of things, I thought that I would discuss some of the conditions that it is suggested should be attached to our prospective membership.

One can hardly find a business man who, dealing with the European Community, does not complain of the advantages of one sort or another that his competitors have in their operations. Therefore, the search for level playing fields, as is the expression, so that we operate within the exchange rate mechanism on terms of equity and equality with our partners is not only widely desired outside this place but should commend itself immensely to hon. Members.

It is clearly explicit in the Government's view that there should be the free movement of capital within the Community, and a chance to see how that operates, and that our inflation rate should come down to approximately those of Community partners. That is a fair start to the level playing field approach, and I doubt whether the right hon. and learned Member for Monklands, East (Mr. Smith) would much dissent from that. The Government's position is reasonably clear, although I suspect still

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tentative. There is nothing wrong about that, and continuing debate in these matters is healthy. There is a certain amount of vigorous newspaper speculation and we can live with that.

However, the right hon. and learned Member for Monklands, East had a chance to make more clear the approach of the Labour party to the level playing fields so that we can be in a fit state to take on this new challenge and responsibility. His speech saw a delightful occasion that will be etched in our memories of the dying days of this Session--the fraternal relationship that he struck up with my right hon. Friend the Member for Henley (Mr. Heseltine). I got a little worried that my right hon. Friend would be asked to address a fringe meeting at the Labour party conference next year, which would have all the frenzy and evangelical excitement that was generated within the Conservative party, because there was such a clear rapport. They agreed on going in at a lower exchange rate and on a great deal of industrial planning as the means of preparing the country for the enterprise. It was clear after a while that there has been a vacuum in the policies of those on the Opposition Front Bench. The team there is stuffed with right hon. and hon. Members of the utmost quality, but of ideas and policies there was a certain absence. After tonight, we know that they follow the Henley school of Socialism.

One central factor in this is that we have a trade deficit. My right hon. Friend the Chancellor argues that one should not get too emotional about these matters. A different view is taken by the Labour party and my right hon. Friend the Member for Henley, who are anxious about the sums of the trade deficit and presumably the compensating capital inflow. Therefore, I suspect that they believe that the present exchange rate, which is a factor in that, is not an acceptable exchange rate in which to secure membership of the exchange rate mechanism. I believe that a great many people take that view. To join a kind of exchange rate link dominated by the Germans when we have a record trade deficit, 40 per cent. of which is accounted for in trade with that country, is a rather heroic undertaking. Once fixed, the whole of domestic policy will be aimed at the struggle to compel and to cajole British industry to perform within the new disciplines.

If an exchange rate view is taken as part of the exchange rate mechanism, that is an essential piece of levelling to provide the appropriate groundwork for our membership of the mechanism, but it should not be a rush job. It cannot be secured on the early terms suggested by the Select Committee and endorsed by the Liberal party--it gets worse as one reads through this litany of enthusiasts. We have to ask ourselves to what end this enterprise will be undertaken. As a nation of tradesmen, shopkeepers, yuppies and entrepreneurs, we often think that life is all about economics. I do not believe that stage 1 of the exchange rate mechanism, leading to economic and monetary union as elaborated in the Delors plan, is just an economic enterprise. It has political objectives to create a much more centralised western European Community than I think is appropriate for the Europe of tomorrow, which has to be related to the great changes taking place in the Warsaw pact countries and the Soviet Union, which will require a much more flexible response on our part. By all means look at the economic implications of the level playing fields, but never be so concerned to go around with the digger that one fails to set one's eyes on the far further, more fundamental and more

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challenging political objective of trying to create for the next generation a much happier set of European institutions than we have now.

7.40 pm

Mr. Alex Salmond (Banff and Buchan) : I shall argue, in terms of the amendment that my hon. Friends and I have tabled, that neither a policy of penal interest rates nor the rather old-fashioned deflationary credit squeeze proposed by the Labour party is appropriate to the Scottish economy. As we note in our amendment, the argument applies also, for example, to the north of England, Northern Ireland and Wales. Within the monetary union of the United Kingdom we have, as the deputy Prime Minister reminded us last week, one monetary policy for the entire country-- regardless of whether that is appropriate for all the constituent parts of the United Kingdom. Sky-high interest rates are clearly misplaced in a Scottish context. The most that can be said about the state of the Scottish economy at the end of last year is that it was undergoing a painfully slow recovery from the oil price recession of 1986--a recovery which has been aborted by a succession of interest rate rises. The industrial production figures for the first quarter show a further sharp fall of over 2 per cent. following the 1.3 per cent. fall in the final quarter of 1988. Two surveys, prepared by the CBI in Scotland and the Fraser Institute, confirm that recession has arrived in the Scottish economy. No one--not even the absent Minister of State, Scottish Office, with his tremendous experience of advancing hopeless arguments in a deadpan manner--could argue that the Scottish economy is overheating. Everyone accepts--including the Minister of State, who did so in a Radio Scotland interview on 18 July--that the objective of high interest rates is

"to cool the over-heating in the South East."

I think that we can safely assume that the Minister was not talking about the south-east of Scotland.

It is uncomfortable to endure a high interest rate policy when an economy is overheated, but having to endure it with an economy that has barely come out of the fridge adds significant insult to substantial injury. That was commented upon by the hon. Member for Motherwell, North (Dr. Reid). The hon. Gentleman should bear in mind, however, that to be told by the Labour party that the alternative is to implement a credit squeeze is advice which defies explanation, except in the sense that the right hon. and learned Member for Monklands, East (Mr. Smith) is displaying all the excessive zeal of a convert to monetary rectitude.

The Scottish economy requires neither high Tory interest rates nor Labour's credit squeeze. The damage caused by high interest rates is severe. Interest rates in Scotland are at least 5 per cent. higher than the rate which could be justified by domestic economic conditions. The cost is substantial to home owners, council tenants and Scottish industry in terms of additional borrowing costs amounting to about £200 million per year. The cost to Scottish farmers is about £50 million and for the hard-pressed Scottish fishing industry it is about £7.5 million. The Government owe a substantial explanation to all those individuals, industrialists and farmers.

I was interested when the Chancellor of the Exchequer said that high interest rates were not of major economic significance. That will come as interesting news to those being forced out of business by the policy of high interest

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rates. The Government must explain what possible contribution will be made to the defeat of inflation, which is generated in the south-east of England, or to overcoming the United Kingdom balance of payments difficulty by wrecking the finances of, for example, the fishing industry in the north-east of Scotland. What contribution will be made to the defeat of inflation by implementing such a policy in an area of the United Kingdom which manifestly does not need it? Much has been said about the exchange rate mechanism. I think that on balance the United Kingdom should join it, but I wish to add one word of caution. Sterling is a major international investment currency. It is highly visible and highly volatile. The United Kingdom's domestic economy is chronically weak and poorly balanced. Sterling's entry into the exchange rate mechanism will turn a system which is currently deutschmark dominated into one with a dual polarity. There is at least as much chance of sterling destabilising the exchange rate mechanism as of the ERM stabilising the price of sterling. The ERM offers no panacea for the United Kingdom's economic problems.

Since the war, successive Administrations have applied a variety of solutions to the endemic balance of payments problems. Withdrawal east of Suez, dashes for growth, freezes, squeezes, stop-go, indicative planning, the floating of the pound, entry into the EC, social contracts and compacts, monetarism with M3, monetarism without M3, Lawsonism and shadowing the deutschmark--all these policies have been tried and all, without exception, have failed. I was interested to hear some hon. Members express concern about the Bundesbank taking control of United Kingdom economic policy. In defence of the ERM, I should have thought that in view of the litany of failure that I have described the Bundesbank could scarcely do a worse job than the United Kingdom Treasury or the Bank of England.

There may be some in the EC who realise that sterling's entry into the ERM will create substantial difficulties. There is no stable staging post between the present position and full monetary union. If it comes to that, the House had better bear in mind the Scottish experience of full monetary union within the United Kingdom. The Chancellor of the Exchequer has said that the Tory party has never been one of devaluation, although sterling has depreciated by 10 per cent. during this year alone. The right hon. Gentleman should ponder that the alternative within monetary union could be the Tory party becoming the party of emigration as capital and people flow to the high activity areas of the EC.

The position could be ameliorated by resource transfers and an active regional policy, but the Government have entirely undermined regional policy and the Chancellor of the Exchequer has set his face against it in a European context. In any event, Scotland's experience within the monetary union of the United Kingdom is that resource transfers almost always operate in the opposite direction--from the periphery to the centre. How else can we explain why, with 30 per cent. of the population, the south of England obtains 50 per cent. of tax relief--a subsidy of more than £1 billion in one area and a sum greater than the regional aid budget for the entire United Kingdom?

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The Chancellor of the Exchequer should know that there is an alternative to his policy of prescribing the wrong medicine for a disease from which the Scottish economy is not suffering. A Scottish pound within the European monetary system would allow for a monetary policy suitable for Scottish domestic requirements against a framework of European currency stability. In this context, I was struck by a remark made by Professor Tony Thirlwall of the department of applied economics at the university of Kent, which was reported in the Glasgow Herald last month. Professor Thirlwall stated : "I have always thought that if I was Scottish and lived in Scotland I would be a Scottish nationalist. Sovereignty is an appealing and attractive prospect for a people rich in history, culture and resources, both human and material. There are also reasons for believing that Scotland might be better off if it was able to pursue an independent economic policy in the fields of taxation, public spending and trade relations with other countries."

Professor Thirlwall is right. He has advanced an argument which grows in strength daily as the Government's economic policies are misapplied in Scotland.

7.48 pm

Sir Peter Hordern (Horsham) : We have learnt from the Opposition this afternoon that a central part of their policy is to devalue the pound against other currencies. I would think that they would seek to devalue it substantially given the large increase in public expenditure that they plan. I do not know what they believe that that will do to inward investment. It would certainly have a major effect on investment as well as providing a substantial spur to outward investment. Consequently, such a policy could only be followed by the usual run on the pound, which would have to be met by extremely high interest rates, the very thing which the Opposition seek to avoid. My right hon. Friend the Prime Minister clearly put it on record in Madrid that the United Kingdom should join the exchange rate mechanism when we have inflation under control and when capital controls in other European countries have been lifted. My right hon. Friend's adviser, Professor Sir Alan Walters, differs. He says : "My advice would be to retain the system of flexible exchange rates and to stay out of the present arrangements of the ERM."

The article from which I am quoting states :

"So far, Mrs. Thatcher has concurred."

Professor Walters's advice does not accord with what my right hon. Friend the Prime Minister said in Madrid, but I have not referred to all that the professor said. He added :

"Of course, I would not be opposed, at least not on economic grounds, to the development of a proper European currency administered by a European central bank preceded by absolutely fixed exchange rates."

That is so far from the position of my right hon. Friend the Prime Minister, let alone that of my right hon. Friend the Chancellor of the Exchequer, that I can assume only that the professor is playing the part of a licensed jester within 10 Downing street. That is not an unknown position. The president of the Horsham Conservative Association was once Lord Egremont, and it was a role which he played extremely well. However, Lord Egremont always played the role in private. He did not jest outside, as the professor is now doing. Whatever policy the professor is espousing, one thing is certain, and that is that he relies absolutely on interest rates. He does not appear to rely on anything else.

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I prefer the economic policy of Sir Alec Douglas-Home to that of the professor. At least with Sir Alec one could see the matchsticks and count them. But while the professor is busy digging among the entrails of MO and M4, it is uncertain, and hard to tell, what will happen. He could send up the storm cones in the Channel when things are going badly, and when things are going well light beacons on the downs and set the church bells ringing. But it is hard for the outside observer to guess exactly what the professor's policy is if he spends all his time delving among the entrails.

I regret the professor's entry into the public arena. If he is to hold his position as an official adviser, he should remain silent in the best possible tradition. I think that he sees himself as some kind of Rasputin figure, but it is high time that he was disabused of that view.

However, the question that the professor raises is one that we all have to answer. Although almost everybody agrees that interest rates play some part --I believe a vital part--in dealing with the economy, are interest rates alone sufficient? What about, as the Opposition suggested today, deposits with a central bank or hire purchase controls? Those arguments were effectively dealt with by my right hon. Friend the Chancellor and others by pointing out that that could apply only to British banks, so what about foreign banks? There is one other matter that I should have thought that my right hon. and hon. Friends would have held dear, and that is that there is something disturbing about referring to credit rationing by decree rather than to credit rationing by price. That surely brings us back to interest rates.

However, interest rates in themselves are not sufficient. The exchange rate is an additional and necessary weapon. We should align ourselves to the deutschmark and the ERM, and that is the Government's policy. In the best of all possible worlds we would have an independent central bank. In the old days we were tied to the gold standard, and that was regarded as the height of British sovereignty. In those days we depended entirely on South African, Russian and American gold, so we could hardly be called independent. That was not independence at all.

What are those who oppose our joining the ERM talking about when they talk about sovereignty? They mean the right to let sterling go where it will. That is not policy ; it is an abnegation of policy. It is to allow companies to pay their people as they will. It is for the Government to accommodate any wage increase, no matter how large, including directors' salaries, just as they come. It is the sovereignty to let things slide. It is called "keeping our options open", but it means a one-way track leading downwards towards certain inflation.

We should have joined the ERM 18 months ago and at the same time given clear warning that we would align sterling to the deutschmark and that high wage increases unrelated to productivity would end in disaster because the Government would not bail them out. That was an opportunity that we missed at the time. It is necessary now to explain that the pound will be aligned to the deutschmark and to join the ERM.

It is necessary to set a standard. We do not need to go any further than to join the ERM. I am against a common currency, a European central bank and all that sort of nonsense. But joining the ERM is not painless, nor is it an alternative, but it is a necessary additional weapon--a standard for all to see.

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We are committed to reducing inflation. Only one person is directly responsible for the economy and that is my right hon. Friend the Chancellor. He should be given every possible support, and he deserves it. We cannot have the professor with an official position apparently second-guessing, and we cannot be ambivalent about tackling inflation. We should be allowed to wave goodbye to the professor and to let him go on writing his memoirs.

I have one final word about the serious statement at Madrid. That was regarded as a commitment which we cannot, with honour, go back upon. It was a commitment and a contract. We sometimes seem in relation to Europe to spend all our time counting the pennies and examining the small print. That is a lawyer's view. I have no doubt that that is all very necessary, but it is not in itself sufficient. Western Europe is changing fast, just as eastern Europe is changing, and we must be part of it. Western Europe is in flux, but it is moving and we should join it in order to keep the balance of power in our interests. Otherwise the train will leave the station while we are still counting our change.

7.55 pm

Mr. Thomas McAvoy (Glasgow, Rutherglen) : I am sorry that the right hon. Members for Chingford (Mr. Tebbit) and for Worthing (Mr. Higgins), who attacked the members of the Amalgamated Engineering Union, are not here to listen to what I have to say. AEU members have taken action with the genuine intention of reducing their working week. It is the height of hypocrisy for the right hon. Member for Chingford, with the number of jobs that he has, to attack people who are trying to reduce their hours. The more the right hon. Gentleman reduces the hours that he works in the House, the more jobs he takes on outside. The same applies to the right hon. Member for Worthing. I should like to hear how many jobs he has outside the House. While I waited to speak, I could not help recalling the atmosphere in the House when the Chancellor presented his Budget in 1988. I recall how the Chancellor was the hero of his Back Benchers as they cheered every concession made for the better-off in our society--among whom, of course, they count themselves. The Chancellor must regret his overuse of the word "prudent" that day because, as he was warned by the Labour Front Bench spokesman, he was sowing the seeds of the recession that the British economy is now facing. In addition, he also had the accolade--if that is the right word--of being described by the Prime Minister as "Brilliant, brilliant, brilliant." Later, she stabbed him in the back, undermining his strategy by using the phrase, "You can't buck the market."

Because of disagreements, the Prime Minister would now like to make her brilliant Chancellor semi-detached, or even consider him as a future Leader of the House. After all, that is the position in which she placed the latest Cabinet Minister who had the guts to disagree with her--replacing him with a toy poodle who, in his first major role as Foreign Secretary, has been publicly humiliated by his Prime Minister.

The Government and the Chancellor claim that there has been an economic miracle, but let us look at the record. September's balance of payments deficit of £1.6 billion completes the most disastrous quarter in our history. The deficit for the first nine months of 1989 is the worst ever, at more than £15 billion, and suggests that we are heading

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for an annual rate of more than £20 billion. The Chancellor's forecast of a massive £14 billion deficit has already been exceeded. Industry and employment have been mentioned. The level of imports, in both value and volume terms, is at a record high. Britain's performance in manufacturing continues to deteriorate, with September seeing the highest level of manufactured imports ever at more than £8,000 million.

I take no joy or satisfaction from those figures. It would be irresponsible and counterproductive for anyone to gloat over the position in which Britain finds itself. It is the British people who are suffering from the present situation, and Labour Members are conscious of that. Conservative Members will try to say that any criticism of the Government is tantamount to treason and that in the interests of the country we should remain quiet. That attitude can only be described as the last refuge of those trying to avoid the consequences of their own actions. It is precisely because we have the interests of the people at heart that we are exposing the folly of the Government's policies and calling for a change of direction. The behaviour of the Chancellor and the Prime Minister in relation to the public conduct of the dispute between them has been nothing less than grossly irresponsible. They have indulged their baser instincts, not caring about the damage being done to the perceptions of a united front in running the economy. It cannot be credible for the Prime Minister's personal economic adviser to be making public pronouncements undermining the Chancellor of the Exchequer, especially when the adviser claims the endorsement of the Prime Minister. The Chancellor and the Prime Minister should cease their war of the ego trip and act in the interests of the country. We all believe that the Chancellor is ready to go and that he is staying on only so as not to damage the economic credibility, as he sees it, of his Government. It is getting to the stage, however, when any damage to the Government's policies--eventually the country suffers or benefits from those policies--involved in his going will be as nothing compared with the damage done by the Prime Minister's economic adviser, especially when she seems to be using that adviser in a war of attrition against her own Chancellor.

The Chancellor should be made aware of the effect that his policies are having on people in Scotland, for example. In June to July 1989, unemployment rose by 1.8 per cent. in Scotland and by 1.5 per cent. in the United Kindom. In Strathclyde region--the central belt--it rose by 2.8 per cent. If one takes into account the Government's special measures to fiddle the unemployment figures, the unemployment rate in Strathclyde region would be 21.9 per cent. Strathclyde has published its own study of economic trends, taking employment into account. The Opposition have complained that no mention has been made of employment. Since 1979, manufacturing employment in Strathclyde--I continue to stress manufacturing employment because manufacturing is the wealth creator--is estimated to have fallen by 152,000 jobs, or more than 46 per cent. That is the economic miracle from which Scotland is supposed to have benefited since 1979.

In my own constituency, we have just had the latest instance of the damage caused by the Chancellor's one-club policy. At the Hoover factory in Cambuslang

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there have been more than 200 redundancies, which are directly due to the high interest rates policy. High rates have always damaged the domestic appliance industry. I can vouch for that as I worked at the Hoover factory in Cambuslang for 13 years and I experienced several periods when redundancies followed immediately from the jacking up of interest rates. I may have reservations about how Hoover is responding, but there is no doubt that the company is having to deal with a difficult economic situation which has been caused by the Government.

I shall quote one part of the statement from the Hoover management announcing redundancies. It said :

"The market place situation in the United Kingdom has continued to worsen significantly on an over-all basis."

Hoover is an important manufacturing company uttering what can only be described as a cry of despair about the state of the market place in the United Kingdom--the very market place which is the object of adulation by Conservative Members. In the judgment of that market place, the economy of the United Kingdom has continued to worsen. The statement also says that Hoover

"cannot predict the economic climate in which we will operate and obviously this has a very major effect on some of the assumptions and proposals that have been made."

What a position for a major manufacturing company to find itself in!

Mr. Morgan : Hoover is a major exporter.

Mr. McAvoy : Is that the best way ahead? Is that the best way to plan investment and to provide employment? Is that the best way to encourage British industry to respond to the challenge of imports, which are not always subjected to the same scrutiny and checks to which our exports are subjected? To depress our own manufacturing industry simply creates easier trading conditions for our competitors. The balance of trade figures have proved that yet again.

The report from the Confederation of British Industry says clearly that 19 per cent. of firms reported that the cost of finance was likely to limit their authorisation of capital expenditure over the next 12 months, and that figure was up from only 5 per cent. in April 1988.

I did not receive it in an envelope, but I happen to have a copy of the Tory brief for today's debate. It says :

"For the most part companies are in a far stronger financial position today than they were in the early 1980s. The resurgence of company profits has enabled firms to fund more investment". Let us look at the contrast between what we read in Tory propaganda and the reality that one sees in the statement by the management of Hoover, a major manufacturing industry in the United Kingdom and, as my hon. Friend the Member for Cardiff, West (Mr. Morgan) said, also a major exporter. The reality is wholly different from the propaganda in the Tory brief. It is significant that I am the first contributor to today's debate to have quoted from that brief--Conservative Members did not even trust or quote their own figures.

I could continue, but having waited so long to speak, I am aware that other hon. Members are waiting, so I will finish now. 8.4 pm

Mr. Julian Amery (Brighton, Pavilion) : In the short time allowed, I want to return for a moment to a point that I made in the Budget debate earlier this year. I suggested that it was time that the Government considered restoring

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to the Bank of England some of the old independence it had until 1948. I thought that that was a rather radical proposal for an elderly Privy Councillor to make, but nobody paid it the slightest attention. Perhaps, like tonight, other hon. Members were in the Smoking Room or elsewhere and the Press Gallery was empty. Since that debate, many rather eminent people, who are far more qualified than myself, have taken up the idea, not the least of whom is my right hon. Friend the Member for Guildford (Mr. Howell) who has written a powerful letter to The Times.

The case for separating the Bank from the Treasury is fairly simple. It rests on the belief that fiscal policy is essentially political, whereas monetary policy should be essentially professional. Fiscal policy is obviously political. It is concerned with taxing and borrowing and with which interests in our society we want to encourage at any time and which we want to restrain, whether in the private or the public sectors. All such matters are essentially political and that is the bread and butter of our normal debates in the House. That must be the responsibility of the Chancellor of the Exchequer of the day and of the Government. It could be argued--as I would argue--that when the fight against inflation has top priority, monetary policy should be professional and should be run to some extent independently, as it is in the United States and in West Germany, which has the Bundesbank. Of course, it should not be completely independent. Under the old system, the Governor of the Bank of England was appointed by the Government, like the Archbishop of Canterbury or the Lord Chief Justice, but once appointed he was very much his own man.

The question I asked in the Budget debate and which I ask with a little more insistence now is whether we should not again consider the desirability of moving towards that. Of course, one cannot do that at once. The Treasury and the Bank have become so mixed up that one cannot get matters back overnight to where they were. But should we begin to think about that? Should it be an item in our next manifesto? I do not know.

Certain advantages would follow from such a change. I do not for a moment doubt the sincerity of my right hon. Friends the Prime Minister and the Chancellor of the Exchequer in saying that the fight against inflation is their first priority, but the markets are suspicious of Britain. The British public do not have the same fear of inflation as the Germans have or as the public have in some other countries that have endured appalling inflation. Those markets are suspicious, but the change that I propose would be a signal to them of our determination to fight inflation and would show them that control of the currency was not wholly in the hands of the Government, but in the hands of a more or less independent Governor of the Bank. Such a development would also protect the Chancellor and the Government, whose position is rather vulnerable today. I am talking about such a reform taking place in the future, but let us look at the position today.

If I have read the Mansion house and Blackpool speeches aright, my right hon. Friend the Chancellor is saying that he has two weapons against inflation--the interest rate, which he says must be kept high, and maintenance of a high exchange rate. In effect, my right hon. Friend says, "We will not countenance devaluation." These are a couple of rather difficult horses to ride. If there were an attack on sterling, because of poor figures or some

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other unaccountable development, he would have no option left but to increase the exchange rate. This is a speculator's paradise. I wonder whether it might be more helpful for him to restore authority to the Bank of England and so keep the markets guessing which way we are going--to an increase in interest rates, or to a smaller devaluation? I have never been convinced that it might not have been wiser to let sterling fall a point or two rather than increase interest rates from 14 to 15 per cent. However, that is neither here nor there. It does not affect my argument.

There is another consideration. As we move towards a convergence of European currencies--we will--I wonder whether we would make more successful practical progress if the Bank of England enjoyed the same autonomy as the Bundesbank in Germany and whether between them they might reach agreement more easily than our Government do with a German Government who do not entirely control the Bundesbank. There is much that they could do in common. The deutschmark is the strongest currency, but the City of London is the biggest place after New York and Tokyo--in some respects it is bigger--where transactions are made. We also have extraordinary experience. Unlike any other country, Britain created a reserve currency of its own, the sterling area. We had a single reserve currency, sterling, and a single reserve bank, the Bank of England, but all the other independent members of the sterling area had their own currency and central bank and there was no attempt to dictate to them what their budgets should be.

There may be lessons to be learnt here in approaching the second stage of the Delors programme. I am convinced that we must join the EMS. I would like our inflation rate to come down first and exchange controls to be lifted by our potential partners. My good friend, Sir Alan Walters, has said that it is a half-baked scheme. He may be right, but if it is, let us get in and do some more of the baking ourselves.

8.12 pm

Mr. Denzil Davies (Llanelli) : There were not many memorable phrases in the Chancellor's speech, but I noted one. Alluding to the vast sums of what used to be called "hot money", which are now deposited in London--they need interest rates of 15 per cent. to keep them there--he described it as drawing on the savings of the world. The habitue s of the bankruptcy courts have been given another argument--"I was merely drawing on the savings of the world, my Lord"--when they are faced with having borrowed so much money. Indeed, the Chancellor needs to draw on the savings of the world. Today we were told--the statement was greeted with relief--that the balance of payments deficit this month was merely £1.6 billion, or an annual rate of almost £20 billion. Imports account for a quarter of all domestic spending, including spending on services, which in the main are not and cannot be imported. Inflation is almost 8 per cent. The bank base rate is 15 per cent. This is despite the Chancellor's cry that he is not a devaluer. In his Blackpool speech--my hon. Friend the Member for Glasgow, Rutherglen (Mr. McAvoy) referred to the splendid background briefing from Conservative central office--the Chancellor said that there was

"salvation in the rakes progress"--

a good phrase--

"of perpetual devaluation".

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The Chancellor did not say "devaluation" ; he said "perpetual devaluation". This is not the time to indulge in textual analysis, but I wonder what he means. Does he believe in a stepped devaluation into the EMS? We have had perpetual devaluation over the past year because the pound has depreciated in value by at least 10 per cent. against most other currencies. Unemployment will soon start to rise again as the recession begins to bite. Inflation will come down and unemployment will go up. Unfortunately, that is the structural problem that we have with the British economy. Yes, inflation can be reduced, but at the cost of closing firms and of rising unemployment.

The Government have no excuse. They can blame only themselves. They must do so because of a couple of horrendous economic misjudgments and the rapid deindustrialisation of Britain over the past 10 years. The economic error started in 1981 when monetary policy was tightened far more than was needed. As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, it has been estimated that about 20 per cent. of our industrial manufacturing capacity was destroyed at that time, never to be replaced.

In addition, when the Chancellor took office, he suddenly realised that perhaps the tools of monetary control in his hands were not as perfect as he had thought or as he had been led to believe, so he lurched in the opposite direction. He changed his monetary targets and abandoned some. In fact, he loosened monetary targets. On top of that, the election came along and it was necessary to bribe the electors with tax cuts, and substantial tax cuts were put in place. This caused a pent-up demand in the economy, with the result that British industry could not meet demand and imports flowed in. If the British economy and our industrial base had been as strong as that of the Germans or the Japanese, we might have been able to withstand even the Government's economic mismanagement. Unfortunately, we know that that did not happen. Over the past 10 years, we have witnessed the deindustrialisation of Britain. The Conservative party, in government or in opposition, has never had any real interest in Britain's manufacturing industry and its industrial base. Those of us--there are a few left--who between 1974 and 1979 sat on the Government Benches during economic debates listening to the then Opposition spokesmen speaking on economic matters could not help but realise their contempt for any attempt to rebuild, rejuvenate and help our industry. Any measures put forward were greeted with contempt and derision by them.

At that time, the present Chancellor, Leader of the House, Secretary of State for Trade and Industry, the Prime Minister and others were interested merely in a service economy, a financial economy, a rentier Britain living off foreign income and foreign investments, a tax-saving Britain. In a memorable speech, the present Leader of the House called for a low-tax Britain to bring back all the pop stars who had had to go to California because the British tax base was so high. That was an Opposition who were not interested in industry and who came into government with no industrial strategy. The

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attitude of the Conservative party to industry was completely different from that of even the Right-wing political parties of western Europe.

We had something called "supply-side economics". It is included in the Government's amendment. The Chancellor did not mention it. I do not think that one Conservative Member mentioned it. That phrase merely meant tax cuts for the rich. With a fistful of money, apparently the Government were going to invest, create wealth and rejuvenate our industry. That has not happened. I believe that the phrase was not even invented by the Tory party. It was invented by a rather loopy Right-wing American Congress man. Supply-side economics has not done the United States any good. Over the past 10 years of supply-side economics the United States of America has been transformed--if that is the right word--from one of the largest creditor nations in the world to the largest debtor nation. So much for Reaganite and supply-side economics in the United States. What has happened in Britain with supply-side economics? We have heard the figures for manufacturing industry. However, over the past 10 years there has been only a 12 per cent. increase in manufacturing industry output and that is little more than 1 per cent. a year increase. Manufacturing industry's share of gross fixed capital formation has fallen under supply-side economics from 18 per cent. in 1979--and that figure was far too low--to 13 per cent. last year. The share of manufacturing in the United Kingdom's gross domestic product is lower than in any other major country in the Western world. I accept that there have been some increases in productivity, but most of the fruits of those increases have gone to consumption instead of to investment. We must have lower interest rates to assist industry. I believe that we must join the European monetary system, but I do not believe that that is a panacea. However, it is necessary to have some kind of monetary discipline. The Chancellor would agree with me and he would have liked to have joined the EMS a year or 18 months ago to provide the kind of discipline which his monetary targets have failed to provide. We need a better balance between monetary policy and fiscal policy. If that means raising income tax, so be it. There must be a better balance between the two arms of Government economic policy.

Many of us have sat through debates on the economy and listened to discussion of monetary and fiscal engineering. We always debate macroeconomic matters. However, all the monetary and fiscal engineering in the world will not retard the dangers of the de-industrialisation of Britain which has been happening for the past 10 years. The Government do not have the will to stop that. They do not have the tools and they do not want to acquire the tools. It will be left to the next Labour Government to stop that

de-industrialisation and to try to rebuild our industry. That will be a major task.

8.22 pm

Mr. James Arbuthnot (Wanstead and Woodford) : It is always a pleasure to listen to the right hon. and learned Member for Monklands, East (Mr. Smith). In the past few days, I seem to have seen little else but the right hon. and learned Gentleman or one of his colleagues telling us how frightfully badly we are all doing. I had always thought that being a Scot meant being reasonably short on words but long on actions. Having listened to the right hon. and

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learned Gentleman as closely as possible today, I must say that his speech was the exception that proves the rule. It reminded me of the froth at the end of a strawberry milkshake--full of air, of little substance, rather sweet and sickly and unremittingly pink.

Mr. Graham Allen (Nottingham, North) : Such imagination!

Mr. Arbuthnot : How very kind!

The right hon. and learned Member for Monklands, East and his right hon. Friend the Leader of the Opposition have no policies to deal with the problems facing the world. Both are turning gently on their kebab sticks, trying to remember the answers of the 1950s to the problems of the 1950s. They have no idea that the world has moved on, but they have suggested three solutions.

First, the Opposition believe that the problems could be solved by the return of a Labour Government, with their history of successful management of the economy and a relationship with the International Monetary Fund which became so close as to border on the indecent. Secondly, they suggest a return to virtually fixed exchange rates through the exchange rate mechanism. As many hon. Members have already pointed out today, the problem with that is that our European competitors have yet to abandon exchange controls. Thirdly, the right hon. and learned Member for Monklands, East seems to have suggested the return of credit controls. I was not sure whether he was actually backing gently away from credit controls, but in the absence of any other sensible solution one must assume that a leopard does not change its spots and that what the Labour party said two weeks ago remains its policy today.

The true voice of the Opposition has been revealed in all its glory. When they do not like something, they decide to ban it. If they do not like it, they want to make it illegal. If someone wants to borrow money, even with the present high interest rates, the Opposition will put a stop to it. Socialism throughout the world is in retreat. The only people left who agree with the Opposition seem to be Herr Honecker and Fidel Castro--and one of those two has resigned. The Opposition have no policies apart from the ephemera of credit controls, which they know could not work without the reintroduction of exchange controls.

Let us consider the experience of our competitors in Europe. My right hon. Friend the Chancellor of the Exchequer quoted from the Organisation for Economic Co-operation and Development economic survey of the United Kingdom. I shall quote from the OECD survey of France :

"As in many other OECD countries, the instruments and mechanisms of monetary policy in France have changed considerably as a result of the spate of financial innovations and the reform of financial markets. The complete removal of credit controls in January 1987 helped to make adjustment in the Banque de France's official intervention rates on the interbank market the main instrument of monetary policy."

Germany does not use direct controls on credit. Spain has controls on bank ratios, but they have not been a success and Spanish interest rates are virtually the same as ours. Italy has credit controls, but it also has an uncompetitive banking system. The Italian controls on credit barely work. The more competitive the banking system, the less effective exchange controls will be. Italy has tried the persuasion method of credit controls, which the right hon. and learned Member for Monklands, East sought to wish on us today, but the Italians had virtually no success with

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that. Even the banks in Italy ignored it. To suggest that foreign banks would take any notice of such suggestions from the Italian Government is bordering on the laughable.

Credit controls do not work unless there are exchange controls. Would the Opposition renounce the possible reintroduction of exchange controls? If they refused to do that--and we are approaching a time when a Labour Government might conceivably be elected--there might be a run on the pound of a kind never seen before except the run on the mark in the Weimar republic. We might end up going to the shops with a wheelbarrow full of money, only to find that the wheelbarrow is worth more than the money it contains. If the right hon. and learned Member for Monklands, East is now prepared to renounce the reintroduction of exchange controls, however, I have a slightly different vision from that of the wheelbarrow--the vision of a Labour Chancellor as a butterfly collector busily chasing the butterfly of credit with a small butterfly net of credit control. As he wanders around falling desperately over his own feet, he will want to use the blunderbuss of exchange controls, although he promised his mother he would not use it. I fear that if a Labour Government were returned to power we should see a return of exchange controls and the economic disaster that that would entail.

8.29 pm

Mr. Pat Wall (Bradford, North) : One of the Chancellor's most endearing characteristics is his lack of any overweening modesty. He best expressed his view of his achievements at the 1988 Conservative conference, when he said :

"The people understandably feel more confidence about their future than they have for decades.

Everywhere a new spirit is alive--a new confidence, with factories humming, new businesses starting up, busy cranes dotting the skyline."

He received the typical spontaneous standing ovation at the Conservative party conference led by the Prime Minister, but, possibly even at that time, he was not supported by Sir Alan Walters. He added :

"The growth of the British economy will go on and on."

Last year the Chancellor probably wrote his speech on the back of half a dozen seaside postcards in his hotel suite. This year, there was the unedifying spectacle of his scuttling back to his constituency to rewrite his speech, which contained less imagery and self-congratulation. No doubt he again received a standing ovation, but he certainly would not have had the support of Sir Alan Walters. It is interesting to look at the economic figures over the period of the right hon. Gentleman's Chancellorship and of the Government's time in office. The right hon. Gentleman said that British factories were humming. In the recession of 1979-82, manufacturing production in Britain fell by 32 per cent. As several of my hon. Friends have pointed out, at least 20 per cent. of industry was laid waste. Only in 1987 did manufacturing output regain its 1979 level. In that period, manufacturing output rose by 38 per cent. in Japan, 25 per cent. in America, 16 per cent. in Italy, and 12 per cent. in West Germany. From 1979 to 1988, economic growth in Britain was only 2.1 per cent. a year, which was the slowest in any nine-year period since the end of the second world war, to end wars.

The key to that crisis and the situation that we now face is a lack of investment. At 1985 prices, in 1979, investment

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