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Clearly, well-informed sources in the financial sector and the engineering industry as well as the former Chancellor of the Exchequer believe that we are inescapably heading for a hard landing.

The three important points made by my right hon. and learned Friend about rebuilding the economy take on even greater relevance. If we are to climb out of the recession it is important that manufacturing and, in particular, engineering companies have the resources to do so. My right hon. and learned Friend the Member for Monklands, East spoke about the need for a regional policy. What is a regional policy and how does it apply? One important aspect which affects my region, the north-west, is proper transport links. We have had various reports about the progress of the Channel tunnel, but we now know that it will be finished. What will be the consequences for the regions?

In the August edition of the National Westminster bank Quarterly Review --I presume that hon. Members will accept that it is not a particularly biased journal--Derek Palmer, who works for the CBI, wrote :

"the 70 per cent. of United Kingdom residents who live outside the South East will be very much on the periphery"

when the Channel tunnel is completed. He went on :

"instead of the proposed London to channel tunnel high speed rail link, there are strong arguments that a high speed line to Glasgow via the North West and Birmingham would give greater benefits." That is what the experts are saying about the needs of regional policy.

Mr. Palmer went on to compare our position with that of West Germany. According to him,

"West Germany invests three times as much in rail transport as we do. It is planning a 2,800 mile network of 150-170 mph inter city express services including 500 miles of new line."

Nothing like that is happening in this country. The regional infrastructure that we need if we are to take advantage of any upturn in manufacturing simply will not appear--and that is just one small aspect of policy.

The second of my right hon. and learned Friend's important points concerned research and development. I have compared the amounts spent--as a percentage of gross domestic product--by both Government and private sector in the United Kingdom, France, the Federal Republic of Germany, Italy, Japan, Sweden and the United States. The United Kingdom is bottom of the list bar two and equal with one. That hardly suggests the sort of Government action that we must expect if we are to experience a revival of the manufacturing and engineering industries.

My right hon. and learned Friend's third point concerned investment in training. What is happening to that? Again, let us compare our progress with that of West Germany. I have figures from the engineering industry training board--they were published in July 1988, but the position has not changed much since then. In 1987-88, 8,273 people were undergoing apprenticeships as craftsmen and technicians ; in 1979, the figure was 21,000. In West Germany, the apprenticeships in industrial metalworking trades alone amount to 179,000. There are 62,000 apprentices in industrial electrical trades, 184,000 in metalworking trades and crafts and 65,000 in electrical trades and crafts.

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Clearly ours is no recipe for an industrial revival : we have not the regional infrastructure, the research and development or the trained people. What do the Government offer? They offer youth training schemes, which between them produce qualifications for only 25 per cent. of those who take part in them. The Government have failed to take any appropriate action to help manufacturing, and their failure has imperilled the entire economy. It has placed the trade by which we live in grave difficulty. That will ensure that they lose office in the next election, and deservedly so.

8.22 pm

Mrs. Teresa Gorman (Billericay) : In one of her perspicacious and incisive speeches, my right hon. Friend the Prime Minister once said that, whereas architects live in infrastructure, most of us live in houses. A similar comment could be made about economic debate in this House.

Politicians deal in economic theories and dogmas of one kind or another, while the rest of the world has to pay the mortgage and keep the businesses going, in the teeth of fluctuating interest rates which make it extremely difficult for them to compete or to plan ahead. I think that it is good for some of the people who listen to "Today in Parliament" on the radio to hear some sympathy from some of us--who enjoy relatively secure incomes, although we may have mortgages to pay--and from economists in their ivory towers who pass on their theories to us ; to say nothing of the Treasury officials, who are even more cushioned and feather-bedded than the rest. We tell these people that they must grin and bear it, because we are going to chase our economic theory of the moment--in this case monetarism--or we tell them that we must switch to yet another theoretical device, the European monetary system, which will somehow solve all our problems. The Labour party is, of course, a captive of the economic theories of Karl Marx : it is stuck with the Socialist idea that not only money but every aspect of the economy can be manipulated to make it work. At present, Conservative Members are in the grip of monetarist theories of the Chicago school of economics, which believes that controlling the money supply and using interest rates to regulate inflation--which, as we all acknowledge nowadays, is caused by Governments--can somehow make the economy and the money supply turn out all right in the end.

I think of a family known to me, three of whose members were in employment 18 months ago. For 16 years, the husband was in a good job with a good salary ; now he is out of work because the company's business was money and it no longer had a job for him. The firm that apprenticed his young son has had to get rid of him because of monetary constraints, and his daughter tells me that present monthly interest on her mortgage is what she used to pay in a quarter. Those people are in severe difficulties, largely because of our constant addiction to one monetary theory or another.

When in the grip of one of these theories, politicians tend to believe that there is no alternative. My right hon. Friend the Member for Blaby (Mr. Lawson), however, touched on one alternative : he said that he had spoken to the Prime Minister some time ago about the prospect of

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privatising, or at least making independent, the Bank of England, and he presented the idea that banks should not be manipulated by politicians.

There is an alternative to our entry into the EMS, with all that that might entail. The involvement of a Euro central bank and a Euro central currency would in itself lead to inflation ; the European Community inflates everything that it touches, as we have seen with the common agricultural policy. The alternative is a free banking system in which the Government would no longer intervene with money supply, and would allow the value of money to be decided by the markets. We should then no longer be in the grip of an obsession with some dead economic theory.

I should have thought that by now it was generally accepted that Governments who tinker about to stabilise either industries or money inevitably end up in some sort of crisis. Conservative Members have abandoned the idea of monopoly control of industries ; we believe in the creation of free markets. We have shown that it works--in steel and road transport, for instance--but we seem to baulk at the idea of doing the same with monetary policies. We are following the traditional line that the Government know best and that, somehow or other, we can organise money to stabilise the economic system. Yet we know that the ups and downs of past years--high interest rates and low interest rates--have all been produced in response to political demands. Our present circumstances, in my view, prove the need for deregulation of our banking system.

Instead of concentrating on yet another panacea--in this instance, the EMS and the eventual establishment of a central bank--we should think in terms of denationalising, or perhaps demonopolising, the Bank of England, and making it just another bank in competition with the other European banks-- which themselves should be free to set up banking institutions in the various European countries, and to circulate their currencies in competition with one another. The idea of having competing currencies has also been touched on by the Government in recent times. It would mean that people who did not quite trust their own Government to keep up the value of their money, would be free to move their money into other currencies, and this would exercise some form of discipline.

The purpose of free trade in money is to impose on monetary and financial agencies a much-needed discipline by making it impossible for any of them for any length of time to issue the kind of money whose worth could be devalued. Inflation is a product of Government policy. It would be impossible for us to have inflation if there were competing currencies and if banks were responsible for their own decisions and their own financial policies. If any bank lent more than it should, the value of its currency would automatically be devalued. People would become aware that the bank was too free with its money. They would then move their savings or their business activities to banks that followed more prudent policies.

If we decided to invest in, say, deutschmarks, the value of that currency would rise. In turn, that would restrain its use because people would look for a cheaper alternative. These currencies would then gain strength from that confidence, and this would eventually lead to some parity of value.

The balance of payments problem would not exist if there were a free market in currencies and free banking. We do not worry about the balance of payments between,

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say, Lancashire and Yorkshire. We would not need to worry about it, either, between Germany and France, or between France and Britain, or between Britain and Spain if there were a free market in currencies within Europe and if the central banks of the European countries were denationalised.

Britain could lead the way by means of its own internal monetary policies. We could decide to have competing currencies in this country. We could remove our legal tender laws which prevent that from happening and decide that the Bank of England should no longer be subject to Government control, that it should stand or fall by its own economic decisions.

By creating a free market in money and in banking, we should be able to settle down to living our lives without constantly worrying about the fluctuating value of money, which leads to inflation, and fluctuating interest rates that are designed to correct inflation. In just the same way as we do not worry now about shopping for our groceries because we have a choice, or about shopping for our clothes because we have a choice, we should also have a choice in money and in banking.

8.32 pm

Mr. Jim Sillars (Glasgow, Govan) : When the dust settles on this debate, I think that people will find that the opening lines of the Scottish National party's amendment, which has not been selected, are most apt. A grave indecision on a major economic matter still lies at the heart of the Government. The Prime Minister has told us that advisers advise and Ministers decide, but we have yet to have a clear, rational explanation as to why the adviser was preferred to the decider on economic policy. That will come back to haunt the Government time and again.

When I returned to Westminster after almost 10 years it was like coming through a time warp. With the exception of a few electronic clocks, nothing had changed. The place had retained its wigs and garters, its delusions about its pre-eminent place in the world's democracies and its sad, tenacious hold on traditional patterns of thought, action and style from bygone days. Only one piece of the old jigsaw was missing from the time warp--an economic crisis. The past week has put the final piece of the jigsaw in place. It is just like old times again. Some time soon I am sure that we shall hear once again the erudite arguments which used to be swapped by the dual failures on both Front Benches about the J curve, or perhaps we shall remain entranced by the new contraption of the exchange rate mechanism, which will doubtless spawn an immense journalistic industry in the next 12 months. The right hon. Member for Guildford (Mr. Howell) already said that there will soon be 650 experts on the ERM in the House of Commons and I am sure that it will be talked about in all the pubs, clubs and golf clubs throughout the country. In reality, we are living through just one more episode in the saga of decline, relative to the rest of the world, witnessing the weakness and crisis of an English economy which at its core is essentially weak, and a political economy which is incapable of addressing that essential weakness.

The core weakness of the English economy is its lack of sufficient indigenous basic resources in relation to its population and a consistent failure to overcome that weakness by investing in manufacturing at a magnitude

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which would enable English society to buy in what it does not naturally have, add value and capture overseas markets--as the Japanese have done with an essentially core-weak economy. Faced with the challenge to invest the political economy concentrates instead on consumption, engineered to win elections over what are, in economic terms, remarkably short four-year cycles. That emphasis on consumption simply compounds the weakness and creates a series of crisis in the English economy.

Nothing new is happening now. In 1964, the Tories bequeathed an economic crisis to Labour. In 1970, after the white heat of the technological revolution had been doused before it caught fire, Labour handed an economy in trouble back to the Tories. In 1974, the deflated ball was passed back to Labour, and in 1979 Labour passed on a shambles to the Tories. For eight years thereafter there appeared to be a break in the cycle of failure. The Tories proclaimed it a miracle, and so it was--a miraculous and spectacular robbery of £78 billion of oil wealth from Scotland, a vast sum from a resource which gave them additional revenue and simultaneously covered up the growing crisis in the balance of trade created by the continuing destruction of the manufacturing base. The miracle is that they got away with it. Without that money there would have been no election victory for them in 1987.

Now that oil prices have been reduced and the camouflage removed, the real economy can be seen again--a bit different here and there but still essentially weak, because investment has never reached the level required to give it clout in the international arena. Now we are back in the usual crisis. The Tories have no answer, and when one analyses the speeches of the right hon. and learned Member for Monklands, East (Mr. Smith) and the hon. Member for Dunfermline, East (Mr. Brown) last week, one sees that Labour has no answer either. Both were witty and stylish, but their policies lack substance. The harsh fact is that if the English economy is to claw its way out of 150 years of decline it can do so only by sacrificing consumption to investment. That would require a combination of monetary and fiscal policy, of which tax increases would form a key part. The consequence would be a drastic cut in the standard of living for the hitherto boom areas of the south. Both Labour and Tories calculate that that is not politically possible, so the decline will continue.

In the meantime, over many, many years, the Scottish economy has suffered greviously from being handcuffed to this weak English economy especially when, after the first and second world wars, centralisation--meaning London control of policy and a loss of indigenous control--became the order of the day north of the border. In a recent document, "Scotland's Economy", the Scottish TUC puts it well. It says :

"We start with the dimensions of the crisis. Norway and Denmark both have populations of roughly the same size as Scotland. At the beginning of the century Scotland possessed a far more productive economy than either. Output per head was more than 50 per cent. higher. Now the position is reversed. Scotland's GDP per head is only 89 per cent. that of Denmark and 76 per cent. of Norway's." The document also tells us :

"Scotland's industrial workforce today is only 58 per cent. of what it was in 1972."

Although the STUC hoped that it would not be read as such, and has tried to massage the time scales to

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concentrate mostly on the past 10 years, it cannot hide the consistent hammering and debilitation of the Scottish economy under both Tory and Labour regimes. In reality, the document is an indictment of both. The message that roars from its pages is that Scotland needs to be free if it is to flourish.

All economists of whatever school now agree that the English economy hangs on the brink of recession. The Government's policy of high interest rates is deliberately designed to force it as near that brink as possible without going over the edge and losing even minimal growth. History shows, however, that policies designed to deflate the English economy deliver a killer blow to Scotland's economy, because yoked as we are in a political and economic union which Labour defends as vehemently as do the Tories, we have no choices north of the border. Cooling off down here puts us into deep freeze. We are told that all the present agony of interest rates is to cool off the overheated south of England, but we do not have any experience of overheating in Scotland.

Of the top 10 unemployment black spot areas, Strathclyde, Fife and the Western Isles occupy three places. They represent more than half Scotland. While west Sussex has an unemployment rate of 2 per cent., in Strathclyde it is 12.9 per cent. and in Scotland as a whole it is 10.4 per cent. Those are the fiddled figures. In reality, unemployment is much higher. In Kinning park, Govan, the unemployment rate for men is 29.6 per cent. and the overall rate is 22.6 per cent. Not even in the world of the unreal, which describes Downing street today, could anyone argue that those figures represent an overheating which demands a squeeze by means of an interest rate of 15 per cent. The lesson to be drawn by the people of Scotland from this Tory crisis and from previous Labour ones is that the union in which we now are is redundant and damaging. Only when we move from this union to the new union of the European Community--which will enable us to make key decisions on monetary, fiscal and investment policy--will Scotland, which has an intrinsically strong economy, fulfil its potential.

8.43 pm

Mr. Anthony Coombs (Wyre Forest) : One of the less edifying spectacles of the past two days has been the gleeful anticipation of many Opposition Members, waiting for the market to crash, the pound to plummet or a crisis to occur. Nothing more clearly demonstrates the hypocrisy of their so-called interest in the health of the economy than their profound disappointment that none of those things has happened. The markets have firmed up and the pound has been recovering. The reason is quite simple. Despite temporarily high interest rates and speculation about our entry into the exchange rate mechanism, and even despite the Chancellor's resignation, the markets recognise that the economy is underpinned fundamentally by a very strong backing.

I could quote statistics which have been mentioned today on the record of manufacturing exports, the record of sustained growth and increases in the standard of living which seem to have eluded the hon. Member for Bristol, South (Ms. Primarolo), but I will quote first three factors to emphasise my point. First, British industry is spending on training and investing in its work force £18 billion per year, which represents £700 per year for every man,

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woman and child in this country. What is more, that figure is expected to increase by a further 50 per cent. this year. Secondly, only last week in my constituency Brinton's, the biggest carpet manufacturer, announced a locally based investment programme of £41 million over the next five years. That does not seem to demonstrate a lack of faith in our economic policies or in the strength of the economy. Thirdly, only yesterday an article in The Independent stated :

"The underlying strength of the economy--as measured by bank lending, declining unemployment and manufacturing output is robust." Of course the Gallup poll shows a fall in consumer spending. That is the intention of high interest rates. The housing market has at last been corrected from the over-high levels that it reached. More important, the CBI survey, despite showing some slowing down in investment intentions, still forecasts a growth rate next year of between 1 and 2 per cent., which demonstrates that although growth is slow, it will not stop altogether and there will be the soft landing that the Government have targeted.

We have obviously focused on interest rates because as my right hon. Friend the Chancellor said, the Government have regarded them as an essential tool of monetary policy. Ever since the Macmillan committee of 1931, through the short-term interest rate control of the 1950s to the interest rate controls of the past few years, the role of interest rates in affecting demand in the economy has always been the subject of some debate.

As the hon. Member for Fulham (Mr. Carrington) rightly pointed out, there has always been a conflict between their internal role in reducing the aggregate demand through consumption, thereby reducing inflation, and their external role in increasing the exchange rate which decreases inflation but makes the elimination of the balance of payments deficit more difficult through the falling value of the pound, especially as in recent times balance of payments deficits have often been a manifestation of increased excess demand in the economy rather than rising prices.

Against that background, I wish to make two points. First, if demand in the economy is to be properly regulated, interest rates must operate in the right fiscal and monetary environment. On Friday, I was pleased that the Chancellor said that the economy is not regulated by interest rates alone. Although he was right to raise interest rates to bring down inflation--it worked in 1984-85 and it will work now--that is more effective in the context of monetary supply control. It is significant that, over the past three years, the broad-based measure of money in the United Kingdom has risen by 100 per cent. while in Germany it has increased by only 45 per cent. and there is evidence, particularly in Australia and Spain, that despite high interest rates, if the broad level of monetary growth is not contained, it will result in increased inflation.

I hope that the Treasury will consider renewed targeting of monetary supply. If an independent Bank of England--as mentioned by my right hon. Friend the Member for Blaby (Mr. Lawson) and my hon. Friend the Member for Billericay (Mrs Gorman)--would help, I would be quite happy about that. Interest rate policy is far more effective if fiscal policy is tight as it is at the moment. More important, interest rate policy works if it is realised that in the long term, and possibly in the short term, it cannot be used to buck the foreign exchange markets.

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Secondly, our obsession with entering the exchange rate mechanism is bogus. The exchange rate mechanism is, as the new Chancellor of the Exchequer said today, a contrivance and not a recipe for problem-free economic management. As my right hon. Friend the Member for Blaby said, there are two strands of thought on the role of the exchange rate in anti-inflation policy, but anyone who thinks that simply joining the ERM will be a panacea for inflation-free economic growth is living in cloud cuckoo land. It is clear that, so long as the relative rates of inflation within different countries in the exchange rate mechanism are different, our entry into the ERM will be impractical.

The Germans have recently wanted to revalue against the existing members of the exchange rate mechanism. That was emphasised by the chief economist of Paribas, who is otherwise in favour of our joining the ERM, when he said :

"Sterling cannot conceivably join the ERM before the second half of 1990, when there could be a distinct slow down in United Kingdom inflation."

That was borne out today by the Financial Times , which said that, far from converging, the economic policies of member countries of the ERM are diverging, if one considers their ratio of debt to GNP or their budget balances or deficits, all of which are growing further and further apart and may lead to problems for the stability of the ERM in the longer term.

I find it hard to stomach the hypocritical and somewhat dishonest attitude of the Opposition. We did not hear much of the economic policy of the right hon. and learned Member for Monklands, East (Mr. Smith), apart from the fact that it would involve some sort of industrial strategy. The Opposition say that they want to encourage saving, so why did the hon. Member for Islington, South and Finsbury (Mr. Smith) say last year that we should reduce interest rates to deter savings and increase inflation? Why did the Labour party not cost its proposals, which will cost £40 billion, increase inflation to 27 per cent. and rob savings of their value? In its policy review, it proposes to abolish the business expansion scheme. How will that push savings into young companies? How will savings be encouraged by a wealth tax, a capital value tax or a tax on unearned income over £3,000 per year? Yet all those ideas were put forward in Labour's recent policy review.

Labour Members talk about incentives and support for manufacturing industry. Will they explain why when the last Labour Government were in power output in manufacturing industry fell? What will be the effects on labour costs of Labour's proposed payroll tax and the less acceptable parts of the social charter? How will incentive be improved by decapping national insurance contributions and increasing the top rate of income tax to over 50 per cent., when we know that doing the opposite has not only increased yield and incentive but has made the tax system more equitable and fair? Labour Members will find it impossible to answer those questions.

Like the economy that the Labour party left us in 1979, Labour Members are bankrupt. They are bankrupt of ideas, competence and credibility. Their concern for the health of the economy is bogus--and so is their motion, which I urge the House to reject.

8.52 pm

Mr. Austin Mitchell (Great Grimsby) : I shall not attempt to follow the hon. Member for Wyre Forest (Mr. Coombs), because the degree of his confidence is in exactly

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inverse ratio to the degree of his understanding. Over the next few months, he will have to maintain that balance if he is to retain his sanity.

I do not want to comment on the fun that we have been seeing in the Fuhrerbunker or the hatred at Hatter's castle over the past week. It has been a touching spectacle, with the brave little woman getting on with the woman's work of trying to dominate the world, but being upset by emotional men throwing menopausal spasms all over the place.

I should not want to comment on that domestic drama. However, I should like to comment on the advice given by Professor Alan Walters, because much of the argument rests on whether his advice is accurate. Professor Walters was saying, first, that the pound needs to come down and, secondly, that we should not join the exchange rate mechanism. That advice is correct, because the pound is overvalued in real terms, even according to 1986 figures, by about 17 per cent. against the deutschmark, and by 45 per cent. according to 1976 figures. It will be difficult for British industry to prevail, to compete and to send exports to the EEC. Our main problem is that 75 per cent. of our deficit is with the EEC. It will be difficult to compete against imports in our home market.

Professor Walters seemed to be saying that the EMS is a monetarist joke that imposes on us an externally determined exchange rate decided by our competitors, whose interest it is to ensure that sterling is overvalued. It puts us back in the old sisyphean trap of struggling to maintain an externally determined exchange rate. If we enter the EMS, sterling will be a guy rope holding the deutschmark down. The main problem with trading in Europe is that Germany is maintaining its huge industrial expansion and surpluses by keeping the deutschmark undervalued. If the ERM becomes a means of maintaining that undervaluation, it will lead to what it has led to in France and Italy--deflation, depression and a rise in unemployment. It seems to me that Professor Walters's advice is correct. The interesting question is why the Government do not accept it. Britain's industrial base is threatened because of the folly of the Government's economic policy. For the first four years of their term of office we had massive deflation, which closed about a quarter of our manufacturing capacity and led to a loss of 28 per cent. of manufacturing jobs. If that deflation is followed, as it was, by a massive expansion of credit, a balance of payments deficit on the scale that we are experiencing is inevitable, because British industry cannot cope with the ensuing demand from the credit explosion.

How do we now deal with that problem? The only way is to get the exchange rate down. The Americans, faced with a smaller deficit in trade, talked the dollar down by about 40 per cent. That requires lower interest rates, so we can use the exchange rate to return the competitive advantage of British industry and to tax imports effectively. We secure that by lower interest rates, which help to counteract inflationary consequences. Any inflationary consequences will be comparatively minor because there would be an improvement in unit costs, but we will also need to counter inflationary consequences with social co-operation.

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The hoo-hah of the last week and the dramatic resignation of the Chancellor should be used as an opportunity, or perhaps as a smokescreen, not to say "We shall carry on with our policies", which will be disastrous and ruinous for British industry, but as an opportunity to change and accept the advice that Professor Walters offered in the first place.

8.56 pm

Mr. Jacques Arnold (Gravesham) : I cannot help noting that here we are yet again with an Opposition debate on the economy. In view of the events over the past few days, I should have thought that we would be seeing a full-scale motion of no confidence in the Government. Would it be uncharitable to wonder why? Could it be that such a motion would have to be moved by the right hon. Member for Islwyn (Mr. Kinnock), and could it be that on the subject of the economy he fears that he might be kebabbed?

We have heard many learned speeches on the exchange rate mechanism. The one message that is clear is that it is not a comfortable infant's cradle in which we would be cared for by a nice cosy German nanny. We should have to keep within the allotted exchange rate band, but we would not have the weapon of the exchange rate to keep within that band. Therefore, increased reliance would be placed on the interest rate weapon.

Today, we rely heavily on interest rates, as every hon. Member knows. With home ownership running at about 70 per cent. of the population, householders and business men in our constituencies are coming to us with complaints about the pain that has been created by interest rates. The opinion polls reflect that concern.

At the end of the day, the objective is to limit credit. That has been done by price rather than by rationing. It is clear that the Opposition's policy is to rely on the latter. Credit cards and personal consumer borrowing make up only 15 per cent. of total borrowing, and even the Opposition recognise that. In his Walden interview, the hon. Member for Dagenham (Mr. Gould) said : "We're not talking about the familiar aspects of credit control, the hire purchase restrictions, limiting credit cards and so on--these are not big elements."

They are concerned not about that but about the 85 per cent. of personal borrowing that takes the form of mortgages.

The Opposition would introduce rationing of mortgages. That would hit those who are trading up. The message is clear to the electorate : if someone is thinking of moving to a better home for their family, they should be prepared to go cap in hand to a bureaucrat and, even then, they will probably not obtain the increase hoped for. The hon. Member for Dagenham let the cat out of the bag when Brian Walden asked him if those restrictions would inevitably hit young couples. The hon. Member for Dagenham said, "Yes." Since that Walden interview the right hon. Member for Islwyn (Mr. Kinnock) and the right hon. and learned Member for Monklands, East (Mr. Smith) have trampled on each other in the rush to the microphone to say that that is not Labour party policy. The right hon. and learned Member for Monklands, East said last week--

Mr. Neil Hamilton : Will my hon. Friend give way?

Mr. Arnold : No, I must finish in 10 minutes.

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The right hon. and learned Member for Monklands, East said that he would invite the banks to co-operate in the restraining of lending. When he was twitted about the likelihood of their complying, he asked a question of my hon. Friend the Member for Amber Valley (Mr. Oppenheim) :

"Is the hon. Gentleman saying that the banks would refuse to co-operate with a Government who sought to place some limit on lending? Which banks is the hon. Gentleman making that accusation about?"--[ Official Report, 24 October 1989 ; Vol. 158, c. 687.] I would answer that question by telling the right hon. and learned Gentleman to look at the hoardings being put up by Lloyd's bank. It has a splendid poster which says :

"Where can we get a loan for a decent holiday?"

I can think of no more financially irresponsible and immoral question than that, which is trying to influence consumers to borrow for a holiday.

Why would the banks co-operate voluntarily with a future Labour Government when the trade unions--the Labour party's own paymasters--would not co- operate with the last Labour Government ? Why would the City co-operate with a Labour Government when, in Labour Weekly, the right hon. Member for Islwyn described the City as "the army of brokers, jobbers and other quaintly named parasites." Even if we were to assume that British banks would fall into line and that the Bank of England would oblige foreign banks with branches in London to comply, how would the right hon. and learned Member for Monklands, East control overseas banks and get them to comply in the absence of exchange controls?

There are hundreds of banks established with branches located in Amsterdam. The Dutch market is free of exchange and capital controls and they could, and probably would, set up departments to handle British domestic lending. The funds flowing to and fro could not be controlled. The Opposition have not suggested a viable form of credit controls in either this debate or the debate last week.

I would make a plea to my own Front Bench spokesmen. There may be economic merit in mopping up excess spending power, but will my hon. Friend the Minister bear in mind the fact that the pips of too many mortgage borrowers are sqeaking?

When my right hon. Friend the Chancellor considers his Budget next year, he should consider increasing mortgage interest tax relief from the current £30,000 limit to £45,000. That would constitute a greater proportion of house prices, particularly in the south-east. He should restrict that to the standard rate tax band. That would be fiscally neutral to the higher earnings but would give relief to average and low-paid households that look to the Government for protection. 9.3 pm

Mr. Rhodri Morgan (Cardiff, West) : This has been an interesting debate. It has been bye bye, Blaby, hello, Huntingdon. The former Chancellor attempted to explain how he became the enemy within and referred to the interesting parable of the iceberg. It was not clear to me whether he thought that the Prime Minister was the iceberg or whether he thought that she was the captain of the Titanic and that he was the iceberg.

It is true that the Prime Minister has been busy rearranging the deck chairs in the past few days. One result

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is that the right hon. Member for Huntingdon (Mr. Major) has become the Chancellor of the Exchequer. Obviously, we all welcome him to his new job. It is always interesting to see the Bob Cratchit of the House of Commons suddenly becoming the Scrooge, and we expect to hear many more contributions from him. He is famous for being able to devour briefs from civil servants. We are sure that the Prime Minister has recognised his talents and will send him many briefs to master over the next few years. We realise that he has his own mind, but we shall not expect the Prime Minister to let him use it much. It is clear that, from now on, the Government's policies will be made in No. 10. The Prime Minister does not necessarily choose Ministers for their talent. They are chosen in spite of it.

The Government, especially the right hon. Member for Huntingdon, appear to believe that the balance of payments problem will be solved by high business investment. That is contradicted by two outside elements, which are probably more objective than the Chancellor. The first is the London business school survey, which we all probably read on Sunday, which showed that the balance of payments would continue with a deficit of £15 billion for the next four years and that the slowdown in the economy, which high interest rates will produce next year, will result only in a marginal decrease in the balance of payments deficit.

We must all look forward, because this problem will concern Governments of both persuasions, and think what a catastrophe an accumulated deficit extending over a five-year period--£20 billion this year, £l5 billion last year and at least another three years of deficits of £15 billion--is for the whole country. How can it be turned round? How can we produce surpluses of £15 billion to £20 billion in the following four or five years to repay credit from other countries used to finance present excessive consumption? Secondly, the theory is that business investment today will solve the balance of payments problem tomorrow. How can that be true, given that, during the past week, the Governor of the Bank of England has been issuing warnings about the nature of that business investment? He has made it clear over the past six or so months through informal forms of credit control that the banks are lending too much money to the property sector. There are no financial or legal sanctions that he can exact--this is an informal form of credit control. Conservative Members persist in believing that it does not and could not exist. The Governor of the Bank of England publicly announced his warning : "Please, do not lend so much money to the property sector." British industry is investing far too much in property and ergo far too little in the productive investment which might correct the balance of payments problem.

Let there be no doubt about the nature of business investment. The boom has been in fixed assets to too great an extent. Even the Governor of the Bank of England has issued informal and, finally, public warnings to that effect. Business investment is high, but it is in the wrong sectors--those that will never reduce the balance of payments deficit. Investment in office blocks has been booming, but they do not turn themselves into exports. Yes, there can be some exports in financial services, but it can never match a deficit of £20 billion without reorientation of business investment into the productive manufacturing and highly exportable sectors. Anyone who believes that our business investment is healthy, as the Chancellor said earlier today,

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and that it can on its own solve the balance of payments problem had better talk to the Governor of the Bank of England, because plainly he does not believe it.

The Chancellor showed astonishing naivety today. It is clear that his previous experience as Chief Secretary, when he merely tried to add the public spending forecasts of the different Departments, has not equipped him for his onerous responsibility for overall economic policy. I do not say that in a spirit of curmudgeonliness. I welcome any new appointment which might help us to run the economy in such a way that we can look forward to some equilibrium with our overseas trading partners.

The hon. Member for Glasgow, Govan (Mr. Stillars)--once his remarks were stripped of their Caledonian paranoia--was right to say that the right hon. Member for Blaby (Mr. Lawson) had had the good fortune to preside over such a long period of a massive injection of advantageous oil wealth into the public Exchequer as to give him the luxury of making choices that Chancellors in other decades had not had.

The economy is almost back on a normal path now. There is still some extra bounce in it arising from our oil wealth, but that is much less than it was. We now need from the new Chancellor a direction of economic policy which will put the balance of payments deficit right. It is now at world record levels, 4 per cent. of our GNP, which is not production at home but consumption from other countries that we are having to finance. If we do not get that right, we will inherit an enormous mess when Labour takes over the government of Britain two years from now.

9.10 pm

Mr. Gordon Brown (Dunfermline, East) : I wish at the outset to welcome the Chancellor to his new position and I shall begin by saying what he should have said this afternoon. He should have said that he would introduce an Autumn Statement for investment in industry and that he would deal with the trade deficit as a serious problem. He should have conceded that supply side measures for investment, training and research and for the regions were necessary and that he would act to curb the inflation that the Government had directly created by their policy of inflating electricity and water prices and by the poll tax. He should have announced that he would open negotiations to join the exchange rate mechanism on the conditions that Labour had suggested.

In short, the Chancellor had a marvellous opportunity, as he changed jobs, to change policies. Instead, he told us that he was determined to repeat the errors of the past. Those mistakes in the last 18 months have meant that mortgages have risen by £80 a month for the typical home owner. They have meant that business borrowing is now up by more than £1.5 billion. They have meant that company bankruptcies have risen by 18 per cent. in the last year. Those mistakes, which have led the CBI to worry about faltering and then falling investment, have made us, for the end of this year and next year, the slowest-growing economy in Europe, and have led the European Commission in its annual report on the British economy, published a few days ago, to say that British investment was low by European standards, that savings were pitifully

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low, that the trade deficit would not fall of its own accord and that there was a range of weapons, beyond the exclusive reliance on interest rates, that should be used.

Yet today, when we are faced with all the problems that business, industry, home owners and families throughout the country confront, the Chancellor made a virtue of saying that there was not the slightest need for a change of policy. There was no hint of the possibility of even the remotest fine tuning of the nation's economic policy. The Government still claim to the last detail, to the last decimal point, of their interest rate strategy, that nothing needs to be changed.

That has been the spirit of the events of the last seven days. The first occurrence after the Chancellor resigned was that the Deputy Prime Minister told the House that their "successful policies" would continue, the economic miracle was intact. Then the new Foreign Secretary came on the radio--no doubt looking forward to the freedom of a job in which he could be far from Downing street--and said : "It is a long time since the Cabinet was so united on major items of policy."

Then we witnessed incessantly on radio and television the increasingly ridiculous and ever-present figure of the chairman of the Conservative party, a one-man Saatchi and Saatchi, saying : "Everything will go on just as before."

That was not the most reassuring statement at that time. "Just as before," he said, meaning resignation, reshuffle, confusion and disarray. "Business as usual," we were told. it was to be "the team approach".

Our argument is that, even after weeks of division and disarray, of uncertainty and confusion, even after the resignation of a Chancellor who had been in office for six and a half years, and even after the personal adviser to the Prime Minister had resigned, the divisions which led to the resignations over the economic direction of policy remain to be resolved, and nothing that the Chancellor said today leads us to believe that they are on their way to being resolved. There were two questions before us after the Chancellor's resignation--why did he resign, and what is the Government's policy? We now have an answer to the first question, courtesy not of the Prime Minister in an hour-long interview on Sunday, but of the former Chancellor in a 15-minute speech this afternoon.

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