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a wise policy in the long term. It is a pity that the Government so rarely follow the true meaning of democracy.

If we are to have peace and stability in Ulster, we should go down the course outlined by my party. If the Government have any sense they will not surrender control of the nation's finances to any hands, but rather will retain sovereignty and freedom to act as the needs of the nation dictate and not as others would try to dictate to us. 7 pm

Mr. Spencer Batiste (Elmet) : The Gracious Speech states : "My Government will continue to pursue firm financial policies designed to reduce inflation and foster the conditions necessary for sustained economic growth and will continue to work with our European partners to complete the single market ; to enhance economic and monetary co-operation."

I should like to examine how we can best achieve those vital and interactive objectives, particularly in the context of our membership of the European Community.

We in Britain have a vigorous and robust political system. Some who have been watching our debates over the past week may say that it is too robust, but it changes only slowly. It follows behind economic and social change, and then only along clearly defined paths that are well enforced. Our partners have quite a different approach. They are comfortable with bold constitutional statements of objectives, some of which can be achieved only in the long term, if at all, and in some cases they live with patchy enforcement provisions. That difference of approach is a cause of frequent conflict and misunderstanding and often leads to important and essential debates on our future being reduced to divisive slogans, when in reality many of the differences are bridgeable.

The creation of the single market and stage 1 of the Delors report on economic and monetary union represent a response to existing needs. They have clearly defined objectives and procedures, and that responsive approach stimulates no symptoms of rejection from the British body politic. The single market and stage 1 of EMU are a "good thing." We press on with the detailed measures needed for implementation and are rightly critical of others who lag behind and impatient of their rhetoric, which we see as empty when it is not being delivered in the shape of firm measures and legislation. Stages 2 and 3 involve the notoriously hazardous occupation of crystal-ball gazing. They seek to anticipate changes that are a long way off and inherently unpredictable. Because the debate is anticipatory rather than responsive, and because at this stage there can be no timetable attached to it, all our national rejection symptoms are triggered. The debate becomes a "bad thing" and we are hesitant about becoming involved in it or even in the more immediate issue of the exchange rate mechanism. We cannot afford to reduce those important matters to the language of "1066 and All That" and miss the opportunities to advance vital British national interests by a more flexible approach.

Of course the proposals for stages 2 and 3 are controversial ; they could hardly be otherwise when we have yet to complete half the measures needed for 1992 or have even begun to address the implications of enlargement and events in eastern Europe. We should aim to separate the debate on economic union from that on

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monetary union. They do not have to run side by side, and many of the difficult controversies that arise within them can be addressed if they are treated separately. The alternative evolutionary approach for monetary union put forward--albeit rather belatedly--by the Government is a significant first step in this direction. Good arguments demand good tactics as well. Sometimes we need to be firm even if we stand alone, but not so often that we are perceived as negative and isolated. Why say "no" to initiatives when saying "yes, but" at any early stage can often lead to achieving our objectives more effectively? Better still, why not be the promoters of new initiatives rather than respondents to the initiatives of others?

I and, I believe, many colleagues in the House are concerned that this Parliament is less effective than many others in its European role, but if we as parliamentarians feel that we are peripheral to European affairs, that is our fault and for us to put right. It is not the fault of the Community, and we should not vent our frustration upon it. If we are to be responsible as members of the Government, we must address ourselves to the question of how most effectively to exercise real power now and in the future and how to achieve democratic accountability throughout the system.

I certainly would not wish to encourage corporatist

interventionism. Ron Todd may well consider coffee and croissants in Brussels an acceptable alternative now that beer and sandwiches are off the menu at No. 10, but it would be a damaging alternative, not just for Britain but for Europe at large.

All legislative decisions that can best be taken at national level should be. "Subsidiarity" is not just a convenient, if inelegant, label--it is the most effective route forward for many aspects of economic and employment policy, where market pressures will bring rapid convergence once the single market is complete.

Equally, some issues require Community action, and high on the list are those needed in our interest to complete the single market, to make it effective and to ensure that everybody is playing by the same rules. If we want others to support the measures that we regard as important, such as more open financial services, we must be sensitive also to the matters that they regard as important, particularly in the context of developing stable trading relationships and containing inflation within the exchange rate mechanism.

Against that background, we have to address as one of our highest priorities the potentially destabilising deterioration in our balance of trade over the past two years, especially with our Community partners. The statistics have looked very suspect for some time, and I hope that my right hon. Friend the Chancellor will tell us how his investigation of them is proceeding. Undoubtedly, whatever the validity of those statistics, they show a trend which must be reversed. The underlying causes of that trend are quite different from those in the 1970s, when vast chunks of United Kingdom industry were unprofitable and little was being done to put it right. The director general of the CBI, John Banham, made an impressive opening speech to his conference last week and listed the factors which between them account for the entire deterioration in our trading balance over the past two years. I should like briefly to examine them because they are fundamental to considering the need for flexible tactics in Europe.

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The first was the inflationary upsurge in consumer spending. The Government have addressed that problem by their high interest rate policy. Painful though it is, it is the only solution available to us. I hope that no one will flirt with credit controls, which would be a disaster for this country. The imposition or attempt to impose ineffectual credit controls would fatally undermine our banks when they need all the support that they can to face world competition beyond 1992.

In any event, it cannot make sense to seek to solve a trade deficit in manufactured goods by creating a deficit in our invisible trade. Many of our business men look at the Community and at the way in which every other country from one end of the political spectrum to the other has benefited from membership of the exchange rate mechanism and ask, "Could we not benefit also from belonging to that mechanism sooner rather than later?"

The second item highlighted by John Banham was lower North sea oil earnings, as a result of the Piper Alpha disaster and other problems. That is being reversed and revenues will increase again next year, but nobody should take it for granted that oil exploration will continue indefinitely, whatever the tax climate. An Opposition committed to higher taxation would only drive away those who seek to explore the North sea for new oil resources.

The third item was the long-term weakness in our motor car industry. That matter is being addressed by huge inward investment from the world's major motor companies and especially the far-sighted Japanese who, despite the Labour party, recognise that Britain is the best place in Europe to make their products. In the coming decade, it is possible that we shall once again become a net exporter of motor cars. That is of great strategic significance to us. However, it reflects not just our internal domestic industrial environment, important though that is, but the fact that our investors regard our role in Europe as critical to their plans and we must never lose sight of that.

The fourth matter was the surge of imports of world-class machinery to re- equip our manufacturing industry. That is a good sign for the future, provided we can contain unit labour costs. It highlights other important matters as well. First, there is the unique vulnerability in Europe of United Kingdom industries to hostile takeovers as a consequence of the dominance of equity investment by our stock markets and the dominance in those markets of institutional investors obsessed by short-term pressures.

It is easy to blame restrictive practices in markets overseas or competition policy at home. Both are important, particularly as takeover activity will increase, so progress on a coherent European mergers policy is vital to us. The real core of our unique problem lies in the unwillingness of our banks to invest in their customers and in our taxation system, which still discriminates against the continuity of family businesses.

Many other comments could be made in the debate, but time runs out. We must learn from the experience of the past to be flexible in our tactics towards our partners and learn not to be bound by our traditional patterns but to look forward to opportunities in Europe and be willing to grasp them, whatever our philosophical difficulties may be.

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7.6 pm

Mr. A. E. P. Duffy (Sheffield, Attercliffe) : I welcome the reference by the right hon. Member for Old Bexley and Sidcup (Mr. Heath) to regional policy. I share his fear that it was neglected by the Chancellor. I should like to describe that concern through the vehicle of my region and that of my hon. Friend the Member for Pontefract and Castleford (Mr. Lofthouse), who is secretary of our Yorkshire group. I want to talk about the current programme of regeneration of our old industrial cities in Yorkshire, and to do so in the light of the Government's economic policy.

I remind the House of the pledges in the Queen's Speech : that the Government will work for "sustained economic growth" and will form a partnership "to regenerate our cities". Those two commitments are of great importance to our region and to the cities of Bradford, Hull, Leeds and Sheffield. Since the recession, there has been a steady and consistent recovery across the broad spectrum of industries in the region. Yorkshire's base is now more high-tech, more diversified and more efficient. Business in the region is in better shape to meet the challenge of the 1990s and beyond than anyone would have dared forecast at the beginning of this decade.

With its closeness to Europe and its excellent ports, Yorkshire is well placed to meet the opportunities from 1992 of the single European market. The Humber is growing more quickly as a trade route than any other United Kingdom estuary, and carries some 55 million tonnes of cargo annually. The Humber ports are backed up by an extensive motorway and road network system as well as rail links to the rest of Britain, and are thus strategically faced towards Europe, with its 320 million single market customers.

Yorkshire's traditional industries of chemicals, wool textiles and coal and steel are also poised to make major contributions to exports. In recent years, significant investment by most of Yorkshire's chemical companies has ensured that Yorkshire chemicals will continue to play a significant role not only regionally but internationally. The United Kingdom's wool textile industry, with its roots firmly in West Yorkshire, is on course to achieve a remarkable £700 million export earnings record this year. This will easily maintain its place as one of our top five exporting industries and the country's largest exporter to Japan. Coal and steel are making all-out efforts to improve productivity and efficiency, in desperate attempts not only to preserve domestic markets but to win new ones overseas.

That is not bad for a region which is still regarded as a struggling relic of our industrial past. That impression is as much a myth as the cloth cap and clogs image of centres such as Leeds and Sheffield. Along with the rest of the Yorkshire economy, those old industrial cities have geared themselves to restructuring in the 1980s, with a view to regeneration.

Let me repeat that Yorkshire is poised to provide that incremental industrial capacity of which the British economy is clearly in such dire need. The last thing with which Yorkshire can afford to be saddled at this crucial stage is a regime of continuing high interest rates, a depleted industrial base and an investment downturn--in other words, current Government economic policy. No region is doing more to try to assist this Government, to pick itself up and to gear its economy to the challenge of

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the single European market than Yorkshire and Humberside, and no region is doing more to regenerate its cities.

The pace of urban development is being set by Government-created corporations in Leeds and Sheffield. They are charged with the task of breathing new life into districts blighted by years of industrial decline and dereliction. The Sheffield development corporation works closely with the Sheffield city council, which has also promoted regeneration with imaginative skill and vigour. Both have arrived at a unique concordat which amplifies the new partnership. All that has been achieved despite a cut in the regional aid budget of no less than 72 per cent. in real terms since this Government came to power in 1979. Partly as a consequence, economic growth in the south over the same period has been 35.6 per cent., compared with 16.6 per cent. in the north.

The economy faces two years on the brink of recession with investment slumping and profits standing still, according to a gloomy set of forecasts published by the Confederation of British Industry yesterday. In separate forecasts, Lloyds bank said yesterday that the economy will hover on the brink of recession next year as high interest rates take their toll. That raises the question whether the slowdown will turn into outright recession with a sharp drop in output, as occurred in 1979-81. However, the inflation problem is not as severe as then, and the world economy is in better shape. The balance of payments position, as we have heard almost ad nauseam during this debate, is considerably worse and the British economy is vulnerable at any time to a collapse of confidence among overseas investors. There is a danger that Britain is facing a structural deficit problem such as has plagued the United States in the 1980s. It may take several years of low potential growth in Britain before the deficit disappears.

There are some genuinely encouraging features about the latest trade figures. For the first time since the spring, as the Chancellor confirmed in his opening speech, the volume of exports has been growing faster than the volume of imports, but that more hopeful trend must lose some of its shine because of the continuing deterioration in the terms of trade. Exports, happily, have been rising faster than imports in value terms.

The Chancellor has used the Autumn Statement to play for more time. He has said nothing about the mix of fiscal and monetary policy next year, but he is only too well aware that real interest rates are the highest in recorded western history. Moreover, demand is at its weakest since 1980-81. What is he going to do about that nightmare scenario? Many of us posed that question to him this afternoon, and it is only fair to say that he was most generous in giving way and in his responses. I hope that he will seek the earliest possible relaxation, bearing in mind the lags, which may mean that it will take time to get the economy going again.

I hope that, in his first Budget next April, the Chancellor will further raise public investment, especially in areas that help to expand industrial capacity. Fiscal policy is crucial to the hopes of getting interest rates down. I also hope that the Chancellor will cut taxes, especially those that bear on costs and prices such as employers' national insurance contributions, thereby helping to bring about a fall in inflation.

Recalling the earlier reference by the right hon. Member for Old Bexley and Sidcup to regional policy, I

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appeal to the Chancellor above all to restore support for regional policy and thereby to restore confidence in regions such as Yorkshire and Humberside and in their cities, especially Sheffield and Leeds. 7.14 pm

Mr. Tim Smith (Beaconsfield) : I was most impressed by the speech of the hon. Member for Sheffield, Attercliffe (Mr. Duffy), because he gave a fair picture of the current position and I was encouraged to learn of the progress that has been made in his region of Yorkshire and Humberside, of the restructuring of the past 10 years and of the determination of the people there to try to improve matters. I recognise that 1990 will be a difficult year and that high interest rates will cause problems.

First, I welcome the Queen's Speech on behalf of my constituents, who will especially appreciate the Bill to control pollution and waste. My constituency is attractive and people want to preserve the character of the environment ; the Bill will help that cause. Secondly, I welcome more generally the Bills to restructure the coal industry, to sell the Crown Suppliers and other parts of the Property Services Agency, to develop training and enterprise councils and to reform trade union law, because those four measures will contribute to the more efficient working of the economy.

The media concentrate on the short term, but in a debate such as this, we need to recognise that the way in which the Government can help most is to make long-term structural changes to the economy which will improve its efficient running. That has been the whole objective of the Government's economic policy for the past 10 years. We have seen many improvements on the supply side. As a result, the sustainable rate of economic growth in the United Kingdom has increased considerably over the past 10 years and the performance of British industry has been transformed in the process.

Today, British industry can manage without Government restrictions such as those that my right hon. Friend the Chancellor described earlier. The most important achievement is the huge increase in industrial profitability over the past 10 years--we have returned to the levels of the 1960s. That is important, because the principal source of investment is retained profits and most companies now have substantial retained profits with which they can invest. Productivity has also improved as a result of increased investment.

The other day I noticed an article in CBI News in which the director- general of the CBI pointed out that, on CBI figures, productivity increased by 6.5 per cent. in 1987, by 6.2 per cent. in 1988 and by 6.9 per cent. in 1989, and was expected to increase by a further 7 per cent. in 1990. Those productivity gains have come about largely as a result of the huge increase in investment. My right hon. Friend the Chancellor was right to point out that it is the quality of investment that matters. The acid test is whether British industry is more profitable and the answer is yes, considerably more, because investment has been extremely effective. Exports have also increased : by 11 per cent. in the past year and by 40 per cent. since 1985 as a result of that increased investment.

Today, the sustainable rate of economic growth in the economy has reached between 3 and 4 per cent. However, the difficulty is that, over the past couple of years, economic growth has been well in excess of that figure and,

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as a result, we face the problem of inflation. The reduction of inflation, therefore, must continue to be the No. 1 economic priority. The most effective way to combat inflation is by the use of interest rates, painful though that may be, because they curb demand. Therefore, I hope that my right hon. Friend will keep interest rates at present levels for as long as is necessary to bring inflation down. However, he could emphasise less the aim of keeping interest rates at their present level to defend the value of sterling. It is noticeable that, over the past month, there has been a 4 per cent. fall in the value of sterling. We can afford to cope with that and on balance, it will be an advantage to British industry and to British exports. The inflationary consequences of that devaluation will then be minimal.

In 1990, the British economy will start to come back on course. The rate of investment will slow down from recent high levels, but the position is different from that of 1980-81. As a result--I base my assumption on many discussions with manufacturers in my constituency and elsewhere--the slowdown will be temporary. Towards the end of 1990, confidence will be restored and in 1991 there will be a sharp recovery.

In the meantime, what sort of Budget should the Chancellor of the Exchequer introduce in March next year? It should be a budget for business. Although I welcome his recent renewed commitment to reduce the rate of income tax to 20 per cent., perhaps next year is not the time to do that.

I am sorry that my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant) is not present. Unlike him, I believe that it would be inappropriate to increase the mortgage tax relief ceiling above £30,000. That would be an inefficient way of helping first-time buyers. Many people have no need of such help, including myself. They have no need of additional relief. If we want to help first-time buyers with cost of buying a house--I understand my hon. Friend's objectives--it would be more effective to raise the ceiling for stamp duty. The Treasury should not increase the £30,000 tax relief limit. As I said, next year's Budget should be a Budget for business. There are three principal business taxes. The first is national insurance contributions. When the Government Actuary's report is published in a few days, much of the fiscal surplus will be contained within the national insurance fund. As unemployment has fallen substantially during the past two years, the fund must be in substantial surplus. The rate of contribution has not been reduced to the same extent as they were increased when unemployment was rising. Next year's Budget may be an opportunity to reduce the employer's national insurance contribution, and thereby the costs of the payroll.

The second business tax is corporation tax. I would not wish to interfere with the changes which my right hon. Friend the Member for Blaby (Mr. Lawson) introduced in 1984. Although the reforms were much criticised at the time, there are now far fewer tax distortions in the system and investment decisions are taken for the right reasons, not for tax reasons. In the subsequent five years, we saw a huge increase in the yield from corporation tax, and today it stands at well above £20 billion.

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The Treasury should perhaps consider a change in the arrangements for leasing. The leasing industry has been a great success. Today, about 30 per cent. of capital investment is financed on lease. However, there is a penalty for leasing exporters. People who export leasing finance receive only 10 per cent. writing-down allowance on the asset, compared with 25 per cent. available on all other assets. A change in the arrangements might encourage exports by making it easier to finance them by leasing.

The third tax on business is the business rate. At present it is difficult to judge the impact of the uniform business rate, because the valuations list will not be published until January. Until then, it will be difficult for businesses to plan and budget, because they do not know what their position will be. Clearly, there will be large increases for some firms, probably in the commercial and retail sectors. I welcome the transitional protection for small firms. By the time the Chancellor drafts the Budget, the position should be clearer, and I hope that he will not renounce further help if it proves necessary.

As I said, although 1990 will be a difficult year for the British economy, it is unrealistic to compare it with 1980-81. The economy is much stronger now, and its capacity for recovery is much greater. I believe that, towards the end of 1990, confidence in the economy will be restored and in 1991 there will be a sharp upturn in growth. 7.24 pm

Mr. Denzil Davies (Llanelli) : This is the 11th Gracious Speech that we have debated since the Prime Minister was elected in 1979. She and her Government were elected principally because they persuaded the British public that they could and would conquer inflation and claimed that they could arrest and reverse Britain's economic decline. Ten years later, after much strife, upheaval and damage, the Government's economic policies have failed and inflation has not been conquered : we have the highest rate of inflation of all our industrial competitors. The relative decline of Britain's industrial economy has accelerated. We have been overtaken by Italy in the European league of national wealth and another five years of Thatcherism could see us overtaken by Spain.

In 1979 we had a surplus on our balance of trade in manufactured goods. This year we have a deficit of £17 billion. We have a surplus with few countries, either inside or outside the EEC. Recently, I read in the Financial Times that we now have a balance of trade deficit even in putty. So much for the Prime Minister's economic miracle. She likes to peddle the rhetoric of thrift, prudence and financial rectitude but she has achieved and created their very antithesis. We are a country of consumers and spenders, of borrowers and importers, a country using borrowed money to live off the fruits of production of the ingenuity and productivity of other nations. Some of us remember that in 1979 the Prime Minister and her colleagues were certain that they knew the causes of inflation and had all the answers. Inflation was caused by what I might call a triad of elements- -high public expenditure, high public borrowing and a failure to control the money supply. In the simplistic jargon so favoured by the ideological Right, all that was compendiously described as printing too much money. So public expenditure was cut, causing great damage to public services. Public borrowing was limited, with devastating

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consequences for public investment, the infrastructure, roads and railways. Yet, after all that misery, we still have the highest rate of inflation of all our industrial competitors. In many cases it is higher by far than that of countries in western Europe which have better public services, infrastructure, roads and railways and spend more on public investment.

Control of the money supply has been a complete shambles. From 1979 to 1981, the money supply was too tightly controlled. Then, when the right hon. Member for Blaby took over, it became too loose. It has been a shambles because of a contradiction at the heart of Government policy. The Prime Minister believes in a free market, apparently in almost anything and everything, including money.

In the pursuit of that belief and that policy, the Government abruptly abolished exchanged controls and allowed the banks, building societies and financial institutions to compete freely for money in the market place. Britain's financial system, which was one of the most open in the world in 1979, was made far more open by the changes and the free market in money which the Government instigated. A free market in money is often not compatible with tight control of the money supply. Because of that, the only way the Government can seek to control the money supply is by cripplingly high interest rates. The right hon. Member for Blaby (Mr. Lawson) eventually came to realise that. He realised that he did not have many instruments to control the money supply. He looked around for some other lodestar to control growth in the money supply and found it in the exchange rate. That is one reason why he wanted to join the exchange rate mechanism. He tried to shadow the deutschmark, but that ended in disaster. The Prime Minister would not even allow him that benchmark for monetary policy.

The Prime Minister not only believes in a free market in pounds in the domestic market, but apparently in a free market in pounds in foreign exchange markets. With a balance of payments deficit of £20 billion, that means devaluation and nothing else. We have seen devaluation of 4 per cent. in the past few weeks and we shall see much more of it in the coming months. For all her rhetoric about fiscal rectitude, sound money and a strong pound, the Prime Minister is a devaluer. The markets have tumbled to it and the City knows it. The Government's economic policy is in tatters. All that they can do is to limp--dare I say it--like a lame duck towards the next election, hoping and praying that high interest rates will reduce inflation just a little, that the devaluation abroad and the recession at home will reduce the trade deficit just a little, and that as a consequence interest rates may come down just a little. They also hope that the inflationary consequences of devaluation will not appear in the figures until after the next election.

Perhaps the Prime Minister still believes in her economic policies, but I do not think that most of the Cabinet do. I also do not believe that the City and the financial markets believe in them any more--certainly the British public do not. That is why the Prime Minister has already lost the next election.

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7.32 pm

Mr. Matthew Carrington (Fulham) : I warmly welcome the commitment in the Gracious Speech to continuing and increasing the battle against inflation. For all the pain caused by high interest rates, inflation is by far the worst scourge that can attack the country, and it must be fought at every opportunity.

Nobody pretends that high interest rates are painless. They do serious damage and hurt home owners, borrowers and, particularly, small businesses which rely on bank debt to finance their activities. Inflation does more damage to the economy and is more painful to old-age pensioners on fixed incomes, those with savings and those whose salaries cannot rise as rapidly as prices. Inflation destroys companies and hurts exports, particularly companies which export. Although inflation eventually affects the exchange rate and will eventually produce a devaluation of the currency, devaluation is erratic, slow and unpredictable. Devaluation rarely manages to ensure that the competitiveness of British manufacturing companies is sustained. In the end, everybody loses with inflation.

There is no alternative to interest rates as a way of controlling inflation. The House has often debated whether there are alternatives and the only suggestion is that somehow we can persuade banks to control credit and stop lending. In practice there are few ways to stop banks lending money. It has been suggested that we should talk nicely to them or remind them that it is not in accordance with the Government's economic policy, so if they wish to remain friendly with the Government, they should stop lending. The vast majority of banks that can operate in our market are not susceptible to those pressures, largely because they make money from lending, so they are not easily persuaded to give up that lucrative method of increasing their profits.

My right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) suggested that we could control banks by threatening to remove their banking licence. Even if we could control them, many banks are outside the control of the Bank of England and the banking licence. We would have to rely on central banks being prepared to exercise similar controls on the banks within their jurisdiction, and it would not be possible to persuade them to do that. Nor would it be a sufficient way of producing the right effects.

It has been suggested that we could stop banks lending money through special deposits. The practice of requiring banks to place special deposits increases interest rates still further. It forces up interest rates to limit the desire to borrow and the demand for lending. That would have little effect on the totality of lending, if demand continues. In other words, it is similar to the Government increasing interest rates in the first place.

Without the reintroduction of exchange controls there can be no effective sanctions against the banks. Some right hon. and hon. Gentlemen suggest in their amendment to the Loyal Address that the reintroduction of exchange controls would cause us considerable problems with the European Community. The other effective sanction would be the imposition of tough withholding taxes on those who borrow. That, too, would cause us considerable problems with the EC and our international treaties.

The only other way of reducing liquidity in the economy is by raising direct taxes. To produce a sharp enough effect, the basic rate of income tax would have to

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be raised sharply. That would cause far more damage and be far more dangerous as a weapon than the increase in interest rates from which we have all suffered.

All the signs are that the economic medicine is working in the domestic economy and that inflation is on the way down. All the lead indicators point to a pattern of sustained economic growth which will allow a return to sensible economic growth. Our interest rates of 15 per cent. are probably not sufficiently high for the external value of sterling. We are in the classic exchange rate trap. Interest rates are high enough for the domestic economy but arguably not sufficiently high for the external economy.

Short-term attitudes and exchange rate management are misleading since foreign exchange markets tend to be volatile and swing on emotion as much as on the economic realities of the country of the currency being traded. It is misleading to look at the exchange rate at any given point as a measure of how markets are viewing the currency. The inflationary pressures arising from the recent devaluation will undoubtedly be bad, although some commentators have exaggerated the extent of the problem.

Perhaps the present value of sterling against the deutschmark will give us a chance to re-examine the exchange rate mechanism of the European monetary system. Perhaps we should be considering whether the present ERM and EMS will be suitable, given the new conditions emerging in Europe. Events in eastern Europe have certainly changed the external position of the European Community and will dramatically change Germany's position within it.

Through its intended ties with East Germany, West Germany will gain cheap labour and a large unexploited market with an almost insatiable demand for the goods that it can produce. Moreover, that market will be tied to West Germany's apron strings by strong emotional bonds. I believe that that will strengthen the deutschmark still further, and that will start to blow the exchange rate mechanism further apart if the necessary changes are not made sooner rather than later. The Italian Government are already making noises to the effect that they are unhappy with the control that the Bundesbank exercises on European monetary policy. The Italians' doubts can only get worse and should be echoed by the rest of Europe. The British Government should seek an opportunity to enter discussions with other members of the European Community to decide whether we cannot dump the Delors plan and substitute better proposals for monetary co-operation more adaptable to the new challenges that we face in Europe.

7.41 pm

Mr. Jim Sillars (Glasgow, Govan) : On 16 November 1985, the Prime Minister made a revealing statement when a senior Conservative colleague went to plead the case on behalf of the then Tory devolutionists. She said :

"I am an English nationalist, and never you forget it." We in Scotland have had cause not to forget it. There is no question but that the Queen's Speech is an English nationalist's speech, which fails to acknowledge in any sensible way the extent of the economic and social crisis that the people of Scotland face. Because time is limited, I shall take just one example to show the fault that lies with the English Tory Government

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--the death blow that they have allowed Sir Robert Scholey, chairman of British Steel, to aim at the heart of the Scottish economy. I refer to three plants in particular--Ravenscraig, Dalzell and Clydesdale tubeworks, which employ between 4,000 and 4,500 people. British Steel has pursued a deliberate policy of under-investment in Scotland. Since 1983, it has invested £580 million in steel plants, of which Ravenscraig got £16 million. In the current investment programme, £83 million is earmarked for Lackenby, £40 million for Scunthorpe, £54 million for Llanwern and £106, million for Port Talbot. Scotland is scraping along at the bottom. Schemes currently being considered for approval would cost £350 million, but not one pound of it would be earmarked for Scotland.

Clydesdale's output is mainly for offshore construction. I have listened with amusement to hon. Members lecturing us today about the importance of the cash that has flowed from the North sea and saying that the next decade will be very different from the last. In terms of development and development values, that is bunk. According to the Scottish Development Agency, a pretty reasonable organisation, in the next decade the development work in the North sea will be worth 10 times as much as the development work involved in the Channel tunnel in terms of construction and related engineering orders. In the next five years, £27 billion is earmarked for development. In the next three or four years, 46 platforms are to be built using 740,000 tonnes of steel--and that does not include the pipelines that will be required to service the development when it comes on stream. Scotland is the only nation ever to discover oil and actually become poorer, at the hands of an English Tory Government. One third of the Scottish people are living in poverty according to the official definition. The Government privatised British Steel and gave Scholey and his anti-Scottish mates open licence with their anti-Scottish bias, to pursue malicious policies against the men at Ravenscraig, Dalzell and Clydesdale. It is not because those men have not worked well--they have broken records in terms of production and freedom from strikes and have done an enormous amount of work at a plant which badly needs investment. It is the men's work that has overcome the technical problems associated with steel production in those areas, but the malicious bias of Scholey and company has been directed to undermining that work.

If Ravenscraig, Dalzell and Clydesdale go, there will be a domino effect down the Clyde and across to the east of Scotland. Reputable economists have predicted that if we lose the Scottish steel industry we shall lose not just the 4,000 to 4,500 jobs in that industry but about 15,000 to 20,000 related jobs.

That is the potentially devastating prospect for the Scottish economy--all because the Government privatised British Steel and gave Scholey a gun to point north to destroy the industry which lies at the heart of our economy. Ironically, if Scholey and his friends have their way, not only will a nation that discovered oil have become poorer but a nation in whose jurisdiction and waters sits one of the largest developments in terms of demand for steel will not have the capacity to meet that demand and its able and skilled steel workers will be on the dole. That is Scotland's indictment of the English Tory Government and why the Queen of England in Downing street is so detested north of the border.

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7.47 pm

Mr. William Cash (Stafford) : As we move towards 8 December and the summit at which new developments towards a federal Europe will be discussed, we should reflect on the concerted attempts that have been made to undermine the position of this House over the past few months and years. The activities of President Mitterrand and Chancellor Kohl are quite understandable in terms of their countries' economies but they are wholly irrelevant to what is happening in the United Kingdom.

I would not wish to push them too far, but there are some parallels to be drawn between what is happening in Europe in the run-up to 8 December and events in the mid to late 1930s. The context may be very different but in both cases there has been a threat to the future of the United Kingdom. A concerted attempt is being made to undermine the ability of the House to determine its own economic and social priorities, and effectively, that undermines the purpose, objective and efficacy of debates such as this.

I have been given numerous notes and briefings on the state of the British economy. Chancellor Kohl and President Mitterrand seem determined that we should accept the binding rules proposed by Mr. Delors--who I believe is coming here on Friday. If that happens, we shall no longer be able to determine a basis on which our economy can function at all independently or even reasonably flexibly.

Dr. Norman A. Godman (Greenock and Port Glasgow) : Surely the treaty of Rome and the Single European Act preclude the independent decision making that the hon. Gentleman is talking about?

Mr. Cash : That is a perfect illustration of the need for greater understanding and information about the manner in which the treaty of Rome has operated. Up to and including the Single European Act, there has been adequate opportunity for co-operation. I believe that what we should be doing, and what we are doing on behalf of Britain is to ensure that there is some flexibility, so that we are not bound hand and foot to what a panel of central bankers determines. We should also ensure that we are not bound by the concerted attempts of other countries to make their economic policies prevail at the expense of ours.

In the original treaty of Rome, in the articles that deal with economic and monetary co-operation, the word "co-operation" appears and it is carefully preserved in the Single European Act. However, now they are trying to move the goal posts. As President Mitterrand said on 17 October, they do not merely want economic and monetary union, as opposed to co-operation, but political union. That is the basis upon which the new federalism is being constructed. That is no joke. After 20 years of automatic progression by stealth, we find that we have blown their cover during the past year. In effect, we are now being threatened that, if we do not go along with something that is not in the treaty--contrary to what the hon. Member for Greenock and Port Glasgow (Dr. Godman) has just said--but a new set of rules, and we will be marginalised into one of the outer concentric circles of Europe. That is what is being devised by Delors and others. We will no longer have any control over Britain's economic policy.

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Perhaps the Opposition are waiting to see what we do at the summit on 8 December. However, during the debate on economic and monetary union a few weeks ago, hon. Members on both sides of the House agreed that we would not pursue stages two and three of the Delors plan. I expect that we will resist the attempts to take us down the federal route, despite the political difficulties posed by the threat. However, we still have a major problem. Under the present Government's policy we have effectively reconstructed our economy since 1979. In the early 1970s we threw away a golden chance, when we had the opportunity, to make certain decisions. My right hon. Friend the Prime Minister has been prepared, during the last few years, to take those decisions which were ducked at the time. However, the challenge to us as a nation, and to our will power, is the need to increase productivity, quality and saving, as they are necessary to put us back into competition with our rivals in Europe. The management and work force of Britain, aided by a structure that can be provided by the Government, are the only people who are able to produce the goods for the benefit of the British people.

Let us consider France and West Germany, where there is massive state aid. We have the recent example of Renault, which is a state-owned company that has had to withdraw from the position it had adopted--presumably with the full knowledge and connivance of the French Government who provided massive state aid.

Italy is doing the same. We know about that from figures recently produced by the Commission. The percentage of state aid in Britain is rapidly declining. However, other countries in the European Community are engaged on a policy to get inside the rules before 1992 bites. West German companies have increased investment in Britain by as much as 200 per cent. in the past few months. For example, there has just been an agreed merger between Morgan Grenfell and the Deutsche Bank.

There have been massive increases in the amount of money made available to the southern parts of Italy, through the structural fund. The system is being abused and that is combined with massive fraud, yet the system provides an opportunity for a strong, liberalised, deregulated economy.

Britain will do well, but we have to take the opportunities open to us. We must be vigilant and ensure that other member states do not take us for a ride.

7.57 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch) : I congratulate the right hon. Member for Huntingdon (Mr. Major)--who, alas, is not here at the moment--on his appointment as Chancellor of the Exchequer at the Treasury, and as juvenile lead to the Prime Minister in the Cabinet.

As I listened to the right hon. Gentleman today, I was reminded of the assertion of George Jean Nathan ;

"politics is the diversion of trivial men who when they succeed at it become important in the eyes of even more trivial men behind them".

That is a little unfair. I shall analyse, in a moment, the view of the Chancellor that he is unfit for the job--and there are others who agree with him.

The recent Whitehall farce at the Treasury has its more serious side. It has forced us to re-examine our

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understanding of the English language. When the previous Chancellor was driven from office, we had to redefine words such as "brilliant" and "unassailable". Now the closest friends of the new Chancellor and his most fervent admirers describe him as dull, boring, ignorant and grey. Therefore we will have to redefine such words as "loyalty" and "hagiography."

Quite the most fulsome praise that I have heard about the Chancellor came from a neutral observer on "The Money Programme" last Sunday week. He said :

"The Chancellor has a lot to learn in many policy areas". I suppose that the alternative view is that the Chancellor has a lot to learn in every policy area.

One thing worries everyone : who is in charge at the Treasury? To judge from the 4 per cent. depreciation in the pound that has occurred in the few weeks since the Chancellor took office, the dealers on the foreign exchanges do not believe that anyone is in charge. Phillips and Drew, the city experts, take a rather different view. In their bulletin, describing the Chancellor's policies as grim and grisly, they argue that the right hon. Gentleman is in the pocket of his civil servants. Bill Martin, their leading economist, puts it rather delphically :

"More than Mr. Lawson, the current Chancellor is likely to be sensitive to the natural fiscal conservatism of his Treasury officials."

If there are Conservative Members present who hope for tax cuts, perhaps I should read them another sentence :

"It is probably right then to think in terms of a mean Budget, incorporating perhaps an implicit tax increase of £1-2 bn". I do not agree with the foreign exchange dealers or with the City experts. I believe that the power in the Treasury still resides at No. 10. Why did the Chancellor spend last evening at No. 11, which I understand is not customary? I understand that he does not normally sleep there. I am told that he woke up last night in a cold sweat, turned towards No. 10 and, in a whispered cry, was heard to mutter : "Oh! Why does the wind blow upon me so wild?

Is it because I am nobody's child--Margaret?"

We know that the Chancellor is the son of a trapeze artist. As such, he will know that, when a child falls from dizzy heights, it has a hard landing. The Chancellor's non-oil forecast of three quarters of 1 per cent. for the economy next year means that all the rest of us are in for a hard landing. On television on Sunday, and here at the Dispatch Box today, the Chancellor told us that he is a monetarist with a one-eyed view of the economy. With his one eye, he sees only one problem--inflation. And he has only one weapon to deal with it--interest rates. His sadly misplaced approach reminds me of Mr. Kremlin in Disraeli's "Lothair" :

"Mr. Kremlin was distinguished for ignorance for he had only one idea--and that was wrong."

The famous economist John Maynard Keynes was certainly not a monetarist. He has been dead for a long time, yet in his "Essays in Persuasion", written in the inter-war years, he had the prescience to anticipate the recent shambolic hysteria at the Treasury. He said : "The Economic Problem, as one may call it is nothing but a frightful muddle, a transitory and unnecessary muddle".

Did not the Chancellor's appointment to his new office arise out of a transitory and unnecessary muddle? It was unnecessary because the Prime Minister put her pride before her country ; it was transitory because, even if the

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