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Mr. Fields : As capitalism fails, not only in Britain but internationally, workers will come to the only logical conclusion : that the solution to the problems lies in the Socialist transformation of society--a democratic system of society--in which the talent, energy and resources of people cast on to the scrap heap by the Government's economic policies are put to the common good, and in which wealth creation is channelled to improve the conditions all people in society, not the spivs who are represented by this bankrupt, politically corrupt Government. The Opposition wholeheartedly oppose the Government policies and look forward to the day when we see them out of office, with an elected Labour Government carrying out Socialist policies on behalf of the people.

7.25 pm

Mr. Nicholas Budgen (Wolverhampton, South-West) : I suppose that there are still some who believe that the control of inflation should be the judge and jury of the Government's policy. Therefore, we looked to the new Chancellor's speech for some signs of his attitude towards inflation. Three factors in my right hon. Friend's speech may give us cause for some encouragement at this time.

First, it was significant that my right hon. Friend argued against inflation, not on the narrow economic ground that, for instance, it makes investment decisions difficult--it certainly does that--and not merely that it causes difficulty in wage negotiations, although it certainly does that. He argued on the social ground that inflation is felt most deeply by the poor. Perhaps my right hon. Friend has the advantage of origins which make him feel that point deeply. He faces taking a risk in favour of growth or being more cautious and anxious to contain inflation, and he demonstrated that his gut instinct would be more inclined to reduce inflation.

Secondly, his analysis of the causes of our present difficulties was rather heartening. Of course, my right hon. Friend the Member for Blaby (Mr. Lawson) believes--no doubt honourably--that our present difficulties arise from a single mistake. He says that all the great industrial

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nations reflated after the crash in October 1987 and that he, with all other Chancellors, was inexorably and inevitably driven to follow their mistaken advice. However, our present Chancellor puts it rather more widely. He says that there was excessive expansion of the economy over about two years. He points to the excessive retail sales and to the high level of house prices during that time. For him the problem is much bigger and will require much stronger action than was envisaged by our right hon. Friend the Member for Blaby.

The third factor in my right hon. Friend's speech should encourage those of us who believe that inflation should be substantially reduced. The last time when people saved in large measure--that is, when the savings ratio was about 15 per cent.--was between 1974 and 1976. Of course it is true that there was a high rate of inflation then, but there were also circumstances of grave political instability. Any sensible person would say to himself or herself, "My goodness me, I must have a bit of spare cash in my deposit account because I can't be exactly sure what's going to happen over the next couple of years."

There are, of course, grave disadvantages for those of us who are party politicians when we see political disturbances or our party doing badly in the polls. Ironically, there are also economic advantages for those of us who wish to see people saving more and who wish to see control of the money supply. If people say, "My goodness me, the Tories might lose the next election. My goodness me, there could be circumstances of great uncertainty ahead," they save more. They are less inclined to borrow a bit more or to buy a more expensive house, and to that extent credit is reduced.

Therefore, there are three factors that should enable us to give a couple of cheers for the new Chancellor. However, I withdraw the third cheer because I still find it impossible to understand what the Government's exchange rate policy is. It seems that we believe in markets when the markets hold up the value of the pound, but we do not believe in markets when they bring down the value of the pound. That is rather like believing in democracy when one wins an election, but not believing in democracy when one loses.

The difficulty is that no one can say that the British people are firmly opposed to inflation. There was no popular outcry between 1986 and 1988 when it was quite obvious to anybody who took even a passing interest that credit was far too lax and the money supply expanding far too fast. Indeed, we were extremely popular during that period. It is not the process of creating inflation that is unpopular, it is the process of checking it that is unpopular. Everybody enjoys the binge but complains afterwards that the Alka-Seltzer tastes unpleasant. Therefore, while we are administering the Alka-Seltzer, it is important to try to reduce its unpleasant taste if possible. One way in which that can be done is to point out that a disagreeable consequence of a period of lax credit is that the exchange rate is likely to fall. It will not fall principally as a result of the words of the Leader of the Opposition. Indeed, I cannot believe that he is betraying his country if he happens to point out that there are few advantages from a lower exchange rate against the deutschmark.

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However, to give the impression that it is within the power of Governments to hold up the exchange rate is to give the impression to the rest of the country that--if I may take the Alka-Seltzer analogy further--the Alka-Seltzer will be even more unpleasant than it is. Of course it is necessary to encourage people to save and to explain that at least personal borrowing must be reduced, but if we were to give the impression that it is also our wish heavily to squeeze manufacturing industry to a greater extent than is necessary by holding up the exchange rate--which I argue is not possible anyway, but even if it were possible and we intended to do it--we would be telling people that the squeeze will be more difficult than it would have been and that the consequences for unemployment would be much greater.

Surely we are entitled to say, "All right, we believe that there has been an excessive expansion of credit for a couple of years, sadly, that the increase in the money supply will inevitably work its way through into price levels and one likely consequence is that the exchange rate--the pound--will fall against other currencies," because at least that means that some manufacturers will be able to take up demand from foreign countries. They will be able to export to a greater extent, even if they find that their home markets go dead. Surely we should be able to give that necessary message if we are to sustain the political will to fight the inflation that was created in the past.

It is silly to pretend that the British people dislike inflation. Between 1986 and 1988 they have seen all the symptoms of rising inflation going through its first euphoric phase. I have never found anybody who has said, "My goodness me, it is a terrible thing--my house has gone up in value by 30 per cent. this year." As far as I can gather, everybody believes that inflation is caused by the other person's wage increase and, in spite of the great work done, I am bound to say--

Madam Deputy Speaker : Order. I must now call the next hon. Member. Ms. Primarolo.

7.36 pm

Ms. Dawn Primarolo (Bristol, South) : It is not Alka-Seltzer that the Government are administering to the population of Britain and especially to its workers, it is arsenic-- [Interruption.]

Madam Deputy Speaker : Order. The hon. Lady needs to be heard.

Ms. Primarolo : The arsenic is proving terminal for a great many workers and the pain that they are experiencing is not the pain that leads to recovery : it is the pain that leads to certain economic death.

I wish to approach the debate from a slightly different angle. I wish to interpret and concentrate on the definition of "economics" as

"the way society distributes its goods and benefits to the population"

and within that,

"the rewards that leads to and the needs it fulfils."

Using this approach, we can take a broader look at the impact of the Government's economic policies and in so doing, we must consider the social and human consequences of those policies and whether they are morally defensible.

I do not believe that is is morally defensible that there are beggars in our large cities across Britain. I do not

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believe that it is morally defensible that we see people sleeping on kerbs in cardboard boxes in alleys in London, lying beside cars that cost between £20,000 and £40,000. I do not believe that an economy that produces those levels of inequality is working properly.

Because of the time limit, I shall touch only briefly on the issues that I wish to cover. First, when judging the Government in economic terms, there has been much talk about the industrial base and our manufacturing industries. Let us consider mergers and the Government's paralysis when faced with supporting and defending our economic base and manufacturing industries. Let us consider DRG, a Bristol-based firm where thousands of people's jobs are being traded as if they were houses on a Monopoly board in a hostile bid financed by junk bonds. People's lives are being traded as if they were cattle, without any power to influence the decisions that are being taken. As a consequence of that bid, 200 engineering firms are expected to close in Bristol alone, let alone the consequences for other parts of the country. Where is the economic sense of that in terms of our future industrial policy? Where are the views that say that we are defending our economic base?

I turn now to the major question of the inequalities in our society. About 69 per cent. of the population believe that Britain is more unequal now than it was 10 years ago. In that period, the Government have deliberately increased the inequality in our society. They have widened the gap so that the top 10 per cent. of the population have received increases of 41 per cent. while the bottom 10 per cent. have received only 1.7 per cent. Where is the economic justice in that?

There has been much talk about borrowing. The Banking, Finance and Insurance Union produced a report entitled, "Hard times for the poor as the credit gap widens." It said--this is a surprise--that there are two worlds in our divided society--the haves the have-nots. When the haves go to banks when they have financial problems, they are provided with new services and credits. However, if the poor fall on hard times, they are denied that credit. They are forced to the moneylenders and loan sharks. That is another arcane medical treatment that the Government want to impose on the British people--using leeches on the poor.

The Government refuse to invest in training, when £750 million is necessary for vocational training. They do not bother investing in people's houses, in the young, schools, social services, infrastructure and transport systems. Then they tell us that it makes economic sense to pawn the future to make a quick buck in the present. That is their economic strategy, and that is the strategy that both the Labour party and the people of Britain are rejecting. The Labour party is not alone in criticising the Government's strategy. The CBI has also done so. It produced a report, which was carried out on a regional basis. The one for our region is called, "Prosperity for the 1990s : South West's needs". It says that if we are to take advantage of future economic growth, we must have the infrastructure, the training, the houses and the transport systems to do so. We need to have investment now to ensure that our companies are producing in the future. The Government are not interested in that approach. They are interested only in making money for the people who have it now and in making sure that the people who do not have it continue not to have it.

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The Government deal in banal explanations such as, "If it's hurting, it must be working." That is a crazy approach to people's lives. The people whom it hurts are the very people whom it is not designed to benefit. It hurts people at the bottom of the economic scale because it is about transferring money to those at the top. Those at the top get the Alka-Seltzer while we at the bottom get the arsenic. That is not good enough. It is not necessary for us to have esoteric debates about whether the current occupant of the post of the Chancellor of the Exchequer --

Mr. Jacques Arnold (Gravesham) : Will the hon. Lady give way?

Ms. Primarolo : No, I will not give way because we are having to operate under the 10-minute limit and it is difficult to make a quick speech, especially for those who have been here all afternoon--unlike others.

The Government must do more than change the Chancellor. They must change their economic policy and require all their Departments to work as a team, which they do not do now. For example, the Secretary of State for Employment tells us that young people should not take training unless it is vocational. Then the Secretary of State for Social Services penalises young people by stopping their benefit if they refuse to take any job at any price, regardless of the effect that that has on their future.

People's lives are a misery. They are struggling to make ends meet and are being denied money from the social fund. They are being threatened with unemployment and bad housing. They can see the riches in a small section of our society developing and expanding beyond their wildest imagination, and the Government have the cheek to tell us that that is a sensible economic strategy. It is not. It is about division, inequality and unfairness, and about the Government's defeat at the next general election.

7.44 pm

Mr. Cranley Onslow (Woking) : The first point that I shall make is a personal one, but I hope that it is one with which the House can agree. We all know that politics is a game that is played with a hard ball, and inevitably, from time to time, players will get hurt. None of us, politicians or political commentators, should take sadistic pleasure when we see it happen. For that reason especially, and because he has served the country and my party very well for many years, I regret the hurt that last week's events must have inflicted on my right hon. Friend the Member for Blaby (Mr. Lawson). I believe that that regret is shared by every one of my colleagues. His speech today was all the more remarkable for that.

My next task must be to add my voice to the good wishes that others have already expressed to my right hon. Friend the Member for Huntingdon (Mr. Major) on his succession to the great office of Chancellor of the Exchequer. No one can deny his ability. He proved that again in full measure today. His own words said it all. With our right hon. Friend at the Treasury, the Prime Minister now leads a team that is as strong as it has ever been, and it will work together for policies in which we all believe.

The economy is fundamentally sound, we have a tight fiscal policy, the Government's accounts are in substantial surplus and our public finances are the strongest in the western world. That is an essential part of the war against inflation. However, so too is the use of interest rates. The

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Labour party likes to pretend that one can control inflation without using interest rates, but one cannot maintain the conditions for sound money unless one is prepared to raise the cost of borrowing. Money is simply another resource. If a Government want people to use less of it, they have to raise its price.

When I intervened in the economic debate on 7 June, I told the right hon. and learned Member for Monklands, East (Mr. Smith) that, although his speech on 24 October contained some amusing bits, that did not conceal the fact that it was fundamentally shallow and unconvincing. I am glad to pay him a tribute now, as he clearly took my criticism to heart. His speech last Tuesday had so many funny bits in it that he almost succeeded in hiding the fact that its policy content was too thin to show if one stood it sideways. Today's speech was little better, so I am sure that the right hon. and learned Gentleman will not mind if I try to tease out some of the few threads of Labour's alternative policy that he found that he could weave into his speech on 24 October between the jokes.

I shall start at column 684, skipping the first two and a half pages of comic invention. He said :

"the first requirement of an alternative approach is to adopt an industrial strategy that puts the promotion of our wealth-creating manufacturing industry at the top of the national agenda for recovery."

I hope that I am not being unfair if I say that this industrial strategy amounts to more publicly funded investment, more publicly funded training and much more public expenditure, although we have never been told how much more.

Then, in column 686, the right hon. and learned Gentleman made it plain, when he talked about raising more money by taxation, that he would be perfectly ready to do this. We know that the Labour party is committed to massive income tax increases that would affect 95 per cent. of the tax- paying public--not forgetting its proposals for an investment income surcharge. The right hon. and learned Gentleman then dealt with credit controls, an issue that has become such a central feature of what passes for Opposition policy :

"The Chancellor should seek to restrain the amount of credit made available by the banks. First, he should invite their co-operation in restraining lending."

He added that he believed that the banks would co-operate, but if they did not,

"the Government can require them to make deposits with the Bank of England, and that would have the effect of limiting the amount available for lending."

He went on to say that he did not expect that foreign banks would take an irresponsible view if approached by the Government. As my right hon. Friend the Member for Worthing (Mr. Higgins) said in his speech later in the debate--it is a pity that he was not more widely reported--

"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."-- [Official Report, 24 October 1989 ; Vol 158, c. 684- 715.]

If nothing else, there would be no means of making an overseas bank refuse credit to someone from this country who wanted a loan. What interests me even more is the fact that credit controls must mean credit rationing, and we have been given no sign of how a credit rationing scheme would work

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and who would get priority. What, for instance, would happen to mortages? We should nor forget that mortgages account for 85 per cent. of personal borrowing. If wealth-creating manufacturing industry is to have top priority, how are the firms to be chosen and what say will the unions demand in that choice ? It did not surprise me that, when the Leader of the Opposition was challenged about credit rationing by Mr. Hobday on Friday morning last week, he shot off at a tangent like a demented ferret, babbling about siege economies.

I shall return to the exchange rate mechanism, about which we have all heard so much. The right hon. and learned Member for Monklands, East told us last week that we should

"negotiate to join the ERM under the important and prudent conditions that the Labour party has outlined ."

The right hon. and learned Gentleman had to be prompted by my hon. Friend the Member for Northampton, North (Mr. Marlow) to remind us of those conditions, as he was again prompted today. What was his response on 24 October? He said :

They are conditions relating to proper swap arrangements between the central banks, a policy for growth rather than deflation, and consideration of the right point at which entry to the ERM should be effected." [ Official Report, 24 October 1989 ; Vol. 158, c. 684-5.]

He was immediately challenged by my hon. Friend the Member for Horsham (Sir P. Hordern) to say what size of devaluation that entailed. The right hon. and learned Gentleman dodged the question, refused to give way further, and put up a great cloud of smoke by engaging in a prolonged exchange with my right hon. Friend the Member for Henley (Mr. Heseltine). We saw the same sort of tactic today. The right hon. and learned Gentleman refused to give way. He accused those who sought to intervene of organised wrecking tactics, and rode off in another direction.

The Leader of the Opposition returned to the subject on Friday when he spoke of establishing serious conditions, and then negotiating those conditions for entry into the ERM, as something that the Government must do to assist the pound and the economy. That is a bit rich. In the first place, the "conditions" that the Labour party claims to have outlined are vague in the extreme, and virtually useless as a basis for any sort of negotiation worthy of that name. Even more to the point, the Government have already gone a long way down that road. The relevant terms of the Madrid summit are a commitment, and I think that the Government have the terms right. Britain will join the ERM when our Madrid conditions are met. Nothing has changed on that since last week. There is no question that we shall go into the ERM, but we shall not do so immediately, not even within the next month.

It will take time to reduce inflation, and it will take time for other Governments to remove the controls that prevent the free movement of capital in many European countries ; France is very much an example. Mr. Mitterrand should be concentrating very much on removing those controls instead of dreaming up new and unnecessary treaties of Rome in some sort of geopolitical effort to forestall forces at work elsewhere in Europe. Meanwhile, I am sure that we must be careful not to let these matters become out of proportion or to constitute some sort of totem issue. I entirely agree with those who say that the ERM is not a soft option or a panacea. Membership must be a discipline or it will be pointless, but it must be an acceptable

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discipline. That is why it is vital that we should adhere to the straightforward and sensible terms that we have set and insist that they are met before we join.

In all this, the people of the United Kingdom will expect us to defend their interests. If we do not stand up for ourselves, who will? That brings me back to the Leader of the Opposition. At one moment he is under control, playing the part and sticking to the script, at the next he has gone bananas. That is exactly what happened last Friday morning on the "Today" programme when the right hon. Gentleman set out to talk the pound down, to make it plummet, and to do everything in his power to damage the economy for his own short-term political gain.

The Leader of the Opposition said recently that the Prime Minister puts her pride before her country. Everyone knows that that could not be further from the truth. What is true is that the Leader of the Opposition will be remembered as a man who will do anything, say anything and unsay it for political power. He puts his ambition first and his country nowhere. That happens time and time again. 7.54 pm

Mr. Graham Allen (Nottingham, North) : There has been some speculation that the former Chancellor of the Exchequer resigned because of the actions of the Prime Minister or Sir Alan Walters. That is not my view. The former Chancellor of the Exchequer resigned having read the Treasury's economic forecast for next year. It is one thing for a Chancellor to carry the economic can when he is in charge of economic policy and another to be the fall guy for someone else's economic policy. The Treasury forecasts that were prepared for the Autumn Statement were available for the Chancellor to see. There was no need for a crystal ball--he read the book and got out from under. Much of the forecast information was probably available in the summer recess ; all that was needed was the opportunity artificially to up the stakes on his excuse--Walters--and get out with as much political kudos as he could muster.

Of what was the ex-Chancellor of the Exchequer frightened? What do the Treasury forecasts predict? As they are not available to Members of this place, the nearest that we can get is the London business school survey, which was published yesterday and which predicts slow down, poor growth, deceleration in output, rising inflation, falling investment and increasing unemployment--welcome to the Treasury, Mr. Major! In addition, there is a world record trade deficit, the highest inflation in industrial Europe, the highest interest rates of any of our G7 world competitors, a devaluing pound, a reducing share of global manufacturing and money market hysteria which makes lemmings seem laid back. That situation, plus the Treasury's forecast of further deterioration into recession, explains with clarity why the ex-Chancellor of the Exchequer baled out when he did. Parliament has been a mere spectator. Oddly enough, the debate shows why we need a more democratically elected second Chamber. It underlines once again that the House is failing in its constitutional duty of holding the Government to account. That is more evident and more desperately necessary in economic policy than in any other area. No statement on the economy has been volunteered to the House by the Government since before the Summer recess. No emergency debate was granted after that recess

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despite the magnitude of the crisis. It has been left to the official Opposition to use one of its Opposition days to drag the Chancellor of the Exchequer to the House. In years to come, this week will be remembered as a constitutional rather than an economic crisis.

Where is the Prime Minister in all this? We all know that the right hon. Lady lacks confidence in the House. That is evidenced by the few occasions when she makes statements, compared with the number of times her predecessors did. Unquestionably, the Prime Minister holds the House in contempt, but we are told now that the bunker mentality has gone so far that when the Cabinet met last week it did not even discuss the exchange rate mechanism, the European monetary system or the crisis involving the Prime Minister and the Chancellor of the Exchequer.

Without agreeing to it, we have seen the development of a twisted presidential system in which Parliament and the Cabinet can be disregarded and in which no written constitutional checks can be brought to bear. Where President Nixon's Erlichman, Haldeman and Dean could be exposed, an impotent and decorative House of Commons cannot even gain access to Powell, Ingham, Griffiths and Walters. The Mother of Parliaments, like the mother in "Psycho", sits as an ancient and obsessively preened skeleton-- permanently in the dark.

We criticise the City of London for being distant and irrelevant to the "real economy", but we in this place must demand to be more than an irrelevant sideshow to the real political life of the country, which we have allowed to gravitate wholly to the Government and the press conference. That is an issue to which the Labour party must give a great deal of thought.

In the short period that remains to me in this debate, I should like to dispel some Tory economic myths peddled by the Prime Minister and her yes- men. Those myths were nicely summarised by the Economic Secretary to the Treasury when he replied to the Adjournment debate which I raised on the state of the economy on the first day following the summer recess. I am sure that he will forgive me if I use his script as the basis for some comments.

First, he talked of generating "sustainable economic growth" over the past few years. Where is that growth? The growth that we have experienced has been generated by consumption. During 1988, the gross domestic product grew by 8 per cent. while production increased by only 5 per cent. An article in today's edition of the Financial Times tells us that there has been a rise of 23 per cent. in the number of business failures since the same period in 1986. Insolvency practitioners say that that is the tip of the iceberg. Perhaps that is the iceberg to which the former Chancellor of the Exchequer, the right hon. Member for Blaby (Mr. Lawson) referred.

The head of the Price Waterhouse insolvency arm says :

"The situation is now worse than in the run up to the two previous recessions."

Market forces have not delivered investment to Britain. There has been a collapse of manufacturing and we have seen massive investment abroad. Short -termism has strangled British enterprise.

The Government then talk of "a supply side revolution." At least there is some truth in that. There has, indeed, been a supply side revolution. For 100 years we have largely supplied our economy from home production.

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Now our supplies are coming increasingly from abroad. That is indeed revolutionary, but it is commonly known as a balance of payments crisis.

The Government spokesman went on to say that manufacturing productivity is growing. Manufacturing as a percentage of GDP is falling and the reason for the growth in productivity is due entirely to the bankruptcies in the period 1980-82. Inefficient manufacturing companies were eliminated from the calculations so that average productivity rose. In cricketing terms, the Conservatives have taken all the bowlers out of the batting averages and declared that the team now has a higher average. In that statistical essay, the Chancellor, who I understand is a cricketing fan, appears as the blue bearded wonder.

Then the man from the Treasury said :

"Businesses are at the most profitable for 20 years."

The surge in profits stems from an economic boom generated primarily by credit-financed consumer spending, which has worsened inflation. The outlook for profit growth is for a sharp downturn as economic growth slows and costs rise. Industry has taken advantage of the improved profits in order to one-time profit-take rather than to invest in their businesses and ensure continued growth.

The Government have also referred to "unprecedented prosperity". If they are referring to the unprecedented consumer spending of the past five years, which has been credit driven, including mortgage borrowing, they are correct. However, all the surveys show that such a period is about to end and turn into a long period of slow economic growth, high inflation and Britain having the highest interest rates in Europe. The chickens are coming home to roost and many are deeply affected by the salmonella of decayed monetarism.

Mr. Jaques Arnold rose --

Mr. Allen : The reference to decayed monetarism was not an invitation to the hon. Gentleman to intervene.

Then the man from the Ministry said :

"investment has grown more than twice as fast as consumption, a clear sign that British industry has confidence in the future".--[ Official Report, 17 October 1989 ; Vol. 158, c. 118-119.] That is one of several Government entries in the British Statistical Institute's whopper of the year contest. Consumption is measured in billions and investment in millions, but by measuring the increase in percentage terms, the picture can be reversed. For example, a 10 per cent. increase in investment is completely overshadowed in real terms by a mere 2 per cent. increase in consumption. There can be no greater compliment to the central office public speaking courses than that Ministers still keep a straight face when delivering such statistical distortions. The CBI surveys tell a completely different story. Business investment has collapsed due to high interest rates.

According to the Economic Secretary, the Budget surplus is an achievement unequalled in the past 40 years. Basically, it means that Government income is higher than Government expenditure, which means that the Government have either overtaxed, perhaps by accident or perhaps to depress demand, or they feel that they cannot spend their revenues in the areas crying out for public expenditure because of the inflationary consequences of

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doing so, so they use that money for prematurely repaying debts to the money market where it can swill around looking for short-term capital gain.

Time has caught up with me so I must wind up my remarks. In the past few years, the Conservative party has successfully perpetrated a number of other economic myths. They need to be nailed and I shall take pleasure in performing that public service in the months ahead. 8.3 pm

Mr. Matthew Carrington (Fulham) : As my right hon. Friend the Chancellor of the Exchequer said, there is no doubt, contrary to what the hon. Member for Nottingham, North (Mr. Allen) was alleging, that the United Kingdom's underlying economy is strong at the moment. We need only look at one element of that economy to see how strong it is. At the moment, industrial investment is still running high and the corporate level of profitability has been running at record levels over the past 20 years. That is a combination of facts which leads us to suppose that industrial investment is likely to be sustainable in the medium term and perhaps in the long term. But it is equally true that we face two major problems in the economy, and both are closely related. One is the inflation rate and the other is the balance of payments deficit which is running at far too high a level. Both those problems must be controlled in the same way--by the rise in interest rates. Interest rates are, in reality, the only way of controlling inflation.

As my right hon. Friend the Member for Worthing (Mr. Higgins) said last week, credit controls on lending institutions would fail. They would certainly fail in the absence of exchange controls being reintroduced, because anybody wishing to borrow under those circumstances would simply go to some bank which was not subject to those credit controls. As my right hon. Friend the Member for Guildford (Mr. Howell) said this afternoon, the Labour party's underlying policy in introducing credit controls and restrictions on bank lending through special reserves and reserve deposits is inherently to suggest the reintroduction of exchange controls. No one welcomes high interest rates, because of their effect on people with mortgages and on small businesses. However, it must be said that the damage that they do to large businesses is much less, since, even with the change in the overall corporate borrowing level in the past year, larger businesses tend not to be net borrowers. They tend to be cash-rich, which means that the present level of interest rates tends to favour them.

But the damage caused by high interest rates is less than the damage caused by inflation, as has come out clearly in the debate. The danger of high interest rates is that they have to be maintained for too long, in which case the damage that they do to individuals trying to find the money to pay for their increased mortgages becomes much more serious. People can always finance a short deficit on their mortgage payments, but it is much more difficult if the deficit lasts for any length of time. Inevitably, interest rates have an effect on the exchange rate and, inevitably, the two are not necessarily working in the right direction.

There is a strong argument that the level of interest rates in the economy is too high for domestic inflation purposes, but is only just high enough for exchange rate purposes. That in itself leads to a problem which may well

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exacerbate the slowing down of the economy to the point where it would be difficult to control a soft landing. We must hope that interest rates, for exchange rate purposes, can be brought down before too much damage is done to the domestic economy.

Industry needs a stable exchange rate so that it can plan and market properly for export orders. In the long term, that can be achieved only by bringing the fundamentals of the United Kingdom economy into line with those of our major trading partners, which in practice means the major countries in the EC, particularly West Germany.

That is a highly desirable goal which it has been argued would be achieved by our joining the exchange rate mechanism of the EMS. The long-term goal to join the ERM is highly desirable, but to be able to do so and to make it work, we have to bring our economy into line with the other large economies inside the ERM, principally with West Germany.

The mechanism for achieving that is rather complicated. The problem is that the ERM is effectively a deutschmark parity mechanism. Only one currency, the deutschmark, is heavily traded within the ERM, making the ERM a monopolar parity arrangement. That is relatively easy to sustain against the international currency transactions in volumes which will be dealing inside those markets. Inevitably, that will change as France removes its exchange controls. At present, the French franc is not widely traded outside the French banks, but it must be expected that when it is, pressure will be put on the ERM. If the United Kingdom joins the ERM, there will be two heavily-traded currencies inside the parity, which will lead to serious problems. If there are three heavily-traded currencies, with the French franc inside the parity, we shall run the risk of blowing the ERM wide apart. There is one simple reason for that. At present, currency dealers have no idea which way bank intervention will operate in their currency. If there is a parity arrangement and dealers know within which band of parity a currency is being held, they will be able to trade currencies against each other. Foreign exchange dealers and currency dealers will know exactly where intervention will come from and will trade on a one-way ticket. It would not be possible to sustain the present simple ERM if we joined it. One of the major constraints is that at present the Bundesbank dictates the monetary policy of member states through the ERM. It does so effectively, but I doubt whether it could do so if sterling were in the ERM.

I was intrigued when my right hon. Friend the Member for Blaby (Mr. Lawson) said that suggestions had been made in the Treasury that the Bank of England should be constituted with its own charter--presumably modelled on the Federal Reserve in the United States--to enable it to control the money supply independent of political decisions. That has some attractions, even in isolation, but I am afraid that it is the attraction of copping out on political decisions. It should be possible to run monetary policy sensibly and prudently without establishing the Bank of England as a separate entity.

It is sensible to consider that suggestion as a way of resolving the inherent problems of the ERM. If the Bank of England and the Banque de France could have a relationship with a more moderately constituted Bundesbank, so that the three central banks of the major EC currencies could operate monetary policy independent of political decisions, they could run monetary policy in such a way as to produce stability of monetary policy

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across the EC which would enable the ERM to work. That is a fundamental change towards which we should perhaps move more rapidly than we are moving towards European monetary union.

8.12 pm

Mr. George Howarth (Knowsley, North) : I listened with great care to the opening speech of my hon. and learned Friend the Member for Monklands, East (Mr. Smith). He isolated three important elements of policy which have a direct and important effect on manufacturing industry which poses the greatest problem in our economy. No one can take lightly the fact that our economy, which has historically been based on trade, has a balance of payments deficit in manufactured goods amounting to £20 billion. No matter what Conservative Members say or think, they cannot escape the scale and depth of the problem represented by that statistic. The House must accept that, no matter what is happening on the stock exchange or which way the currency is going, if manufacturing industry, from which wealth is created, is not healthy, the rest of the economy cannot be healthy and our aims cannot be achieved.

My hon. Friend the Member for Bristol, South (Ms. Primarolo) made an important and specific point about what is happening in the financial sector. She expressed anxiety about the effect on her constituency of a takeover bid for the DRG group of companies. That will also affect my constituency, where a factory is about to be taken over. There is no manufacturing or industrial logic to the takeover, which bears out the point made by my right hon. and learned Friend the Member for Monklands, East. The only reason for it is that the organisation making the bid wishes to reduce productive capacity in that industry. That is the direction that the economy is taking but it will not produce the goods and services that we need for the future.

I wish to concentrate on the Government's performance in the three areas mentioned by my right hon. and learned Friend. Before I do so, I wish to comment briefly on a point made by the former Chancellor of the Exchequer, the right hon. Member for Blaby (Mr. Lawson). Bank Briefing of August 1989- -hardly a Left-wing journal or centre of revolutionary ideas--said :

"While it is usual for the company sector to move into deficit in this stage in the economic cycle, a second year of deficit would be exceptional."

Today, the right hon. Member for Blaby, who with his experience in the Treasury is presumably better informed on these matters than most hon. Members, conceded that in his view we shall have that second year of deficit during which company finances will be in even greater difficulty than this year. That was an important revelation. Let us be clear that our economic prospects in the manufacturing sector are no great shakes.

A further matter for concern is the future of the engineering industry. I am interested in that industry because I spent the first 10 years of my working life in it and I am sponsored by an engineering union. In The Engineer of 28 September 1989--again, hardly an organ of the Labour party-- John Pullin, writing an article entitled "Battening down the hatches", stated :

"Engineering industry is heading for the downturn, and appears to be cutting back on investment in people, products and processes--the principal tactic used in the deep recession of the early 1980s."

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