House of Commons Hansard Debates for 22 Mar 1990

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where a division, or a part of the company, is given clear responsibility for an overriding task--in this instance, the elimination of inflation--and is allowed to get on with the job, with the requirement only that it should report back and be accountable. In this instance, I suggest that the Bank of England should be accountable to Parliament rather than to Ministers.

The second reason why the idea is so attractive is that it would help to entrench a thoroughly non-inflationary approach to monetary policy within our political system. It would thereby help greatly to safeguard what Mr. Enoch Powell used to describe, rightly, as honest money against the temptations of the political cycle.

The third reason--it is probably the least important of the three--is that it would equip us with an institutional framework which would be usefully compatible with the framework that operates already in the countries of our European Community partners, with which, no doubt, we shall be co-operating even more closely in the years ahead within an embryonic system of European central banks.

I do not believe that at this stage in the economic development of the Community we should hasten too precipitately in the direction of a single central bank. Nor do I believe that it is necessary for the co-ordination of fiscal policy to be a vital accompaniment of the co-ordination of monetary policy. If we start from the angle of monetary policy, I think that we shall find that some virtuous consequences in fiscal policy flow automatically in market terms from that.

I say to my hon. Friend the Under-Secretary of State for Industry and Consumer Affairs, who I know is listening carefully to the debate, that the statutory accountability of our central bank would be an important buttress to the success of our counter-inflationary policy over the next few years. I hope that it will receive careful attention.

The other institutional change that I would urge upon my right hon. Friend the Chancellor of the Exchequer when he comes to consider these matters again at the appropriate time is something which I regret has become something of a King Charles's head, although it is none the less important for that. I refer to entry at the appropriate time into the exchange rate mechanism of the European monetary system. I know that my right hon. Friend the Member for Hertfordshire, North has already spoken about the matter and arrived at a different conclusion from the one at which I shall arrive.

It seems from the evidence that I have seen, from the French and Italian experience in particular--in many ways, they started with a more difficult inflationary situation than our own--that, after an initial period of undoubted interest rate volatility, we would see the interest rate premium that we have to pay of 6 or 7 per cent. vis-a-vis West Germany diminish over time to the point where we would not have to pay it at all. We would find that in consequence the financial markets would have greater confidence in the rigour and discipline of our monetary policy. Ultimately, that would greatly reduce the exchange rate fluctuations. That would be a valuable development.

Any senior industrialist or person in financial services will say that, of all the various non-tariff barriers which British industry and commerce are facing, none is more significant than exchange rate fluctuations and volatility. There is no doubt that the nations that have been within the ERM over the past few years and have managed to

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pursue the necessary monetary discipline to buttress the exchange rate mechanism have found considerable benefit for themselves and their export sector from being within the mechanism. I have no doubt that it would be one of the best ways in which we could take full advantage of the single European market.

Now that most of the external conditions that were set by the Government at Madrid for our full participation in the ERM have been met, I trust that it is only a matter of economic and political judgment before my right hon. Friend the Chancellor of the Exchequer decides that the time is ripe to take Britain into the mechanism. With the firm foundation of this sensible Budget and the prospect of the institutional changes which I have recommended, we shall defeat inflation, promote the revival of our economy from the present temporarily difficult phase and bring about still further improvements in the prosperity and living standards of the British people.

6.26 pm

Mr. John Garrett (Norwich, South) : With inflation due to rise to nearly 10 per cent. in the next few months, with a rate of economic growth down to a miserable 1 per cent. for the year and a forecast balance of payments deficit of £15 billion--the Government are usually optimistic in such forecasts--in earlier times our economic condition would have been characterised as stagflation, the constant problem of the vilified economic management of the 1960s and 1970s. The Government seem to be trying to give the impression that we face merely a temporary pause in our economic miracle, but we have only to read the forecasts in the Red Book to appreciate that the condition is far more serious than that.

The major indicators show that we are in a worse position than that which we faced at the beginning of the great economic experiment a decade ago. The need for a neutral Budget is clear enough when we are about to face the deflationary effect of poll tax--equivalent to 2p on the standard rate of income tax--as well as an unprecedented rise in council rents of 50 per cent. to 60 per cent. in some areas--and high interest rates. It is clear why the Chancellor of the Exchequer felt unable to take more purchasing power out of the economy.

The growth rate of 1 per cent. includes a significant increase in North sea oil output. That means that non-domestic oil output will increase by an amount so small as to be virtually unmeasurable, and certainly not a reliable figure. It must be a long time since the growth in manufacturing output was forecast as nil for the coming year. In anyone else's language, that means that we are heading for a recession, if not already in it.

A significant increase in unemployment is inevitable regardless of the behaviour of wage bargainers, but there is no forecast in the Red Book or in any of the statements by Ministers of the level to which unemployment is expected to rise. The idea that inflation will fall from well over 9 per cent.--probably nearer 10 per cent.--in the spring to 7 per cent. in the autumn is hard to believe, let alone the notion that it will decrease to 5 per cent. next year. Of course, the Government always forecast that it will fall to 3 per cent. in the year after next, but we never manage to achieve that.

The support that the Chancellor of the Exchequer has given to guidelines or a code of practice for credit lending institutions is unlikely to have much effect. It is false to

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argue that credit controls cannot work in a deregulated financial system. Most non-housing lending is undertaken by banks and building societies which are licensed. A Bundesbank research paper issued this week states :

"Reserve requirements help control liquidity in the money markets as well as automatically acting as a brake on the creation of money."

One of the advisers to the Treasury and Civil Service Select Committee put the case for direct credit controls clearly when he said :

"Whichever of the monetary policies the Chancellor might choose, his task in making it work would be easier were a minimum reserve asset system restored. The ability to limit money growth with lower interest rates than are at present required would also have a longer-term beneficial effect on inflation by reducing the extent to which capital investment plans are aborted. Indeed the Bank of England can still call for special deposits, and it might be advisable for it to do so."

On other key indicators, fixed investment is likely to fall by 1.25 per cent. this year compared with an increase of 1.25 per cent. forecast as recently as last November. Manufacturing output, which will show no growth in 1990, will enjoy a recovery to only 0.75 per cent. in 1991--far below the rate of growth in other European economies and far below the rate of growth in East European economies, let alone those of our direct competitors. It is very hard to see how such a level of recession will prepare us for the increase in competition in 1992.

British industry will continue to be under-invested, under-trained and inadequately supported by research and development in the next two years, and as far ahead as we can see. The Budget did nothing to meet those inadequacies in British industry which mark us out from our competitors-- inadequate investment in new plant and machinery, in training, in research and innovation and in energy conservation. Those should be central concerns for the future.

It is hard to see the tax relief for company contributions to training and enterprise councils as anything more than a gesture. No wonder the proposal has had a lukewarm response from business. It is Government's job to promote and fully fund training for industry--it is not for industry to make donations to training institutions. In any case, funding for the training and enterprise councils has been reduced, despite loud complaints from industry.

Nor has there been a warm response to the ending of tax on workplace nurseries. There are only 3,000 places in workplace nurseries, mostly in hospitals, health authorities and local authorities. Working mothers need a network of nurseries provided by local authorities, or there should be a levy on employers to provide for public child care. In this country, 40 per cent. of three to five-year-olds attend nurseries compared with 95 per cent. in France. Working mothers will gain very little from the Chancellor's proposals.

In this context, it is also right to mention child benefit, which after all partly replaced the tax allowance. It is a scandal that child benefit continues to be frozen, as there is no more effective device for the relief of family poverty.

I welcome the differential tax on unleaded petrol, but I believe that much more could be done to limit environmental pollution by way of taxation or tax relief. A whole range of innovations is taking place throughout Europe using taxation or tax relief to promote

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environmental protection. In Sweden, there are taxes on sulphur emissions and there will be a tax on carbon dioxide and nitrous oxide emissions, in Norway a tax on emission of CFCs, and in Finland a tax on phosphate fertilisers. In West Germany, motor taxation is being switched from engine size to classification by exhaust emission and noise, and in Italy there are taxes on sulphur dioxide, plastic products and herbicides.

All those means could be used to set the tone for environmental protection, to show that the Government intend to discourage the use of pollutants. A variety of tax penalties and incentives could be used to give signals to industry about the need to reduce pollution or to invest in environmental equipment or energy conservation. The Budget could have provided an opportunity to set the direction for a programme of inducements to reduce pollution, but in that regard, as in most others, the Budget misses the opportunity. It could have addressed the long-term needs of the economy for productive and environmental investment, but in fact it is little more than window dressing by a Chancellor left no room for manoeuvre by his predecessor.

6.33 pm

Mr. Matthew Carrington (Fulham) : I greatly welcome the Budget. It is doing what the economy requires at present. In particular, I regard the strong commitment expressed by the Chancellor to bear down on inflation and to continue the fight against it as one of the most important aspects of the Budget. Its fiscal stance is about right : fiscal tightness in the economy is at about the right level, just as monetary tightness is at about the right level.

In particular, interest rates are probably about as high as they need to go, because one runs into a law of diminishing returns fairly soon : the higher interest rates go, the less effective they become. This is partly because of the political effects of interest rates, which need not be spelled out, given that we are a nation of home owners, but also partly because of the economic effects of high interest rates on wage rises and so forth. If, however, we accept that interest rates are as high as they need to go, we must also accept a degree of volatility and of uncertainty in the exchange rate which might be difficult to tolerate but which ought to be tolerated until such time as the interest rates have done their work and inflation starts to come down.

The other side of this--also addressed in the Budget and also very welcome- -is an emphasis on increasing savings and enabling people to transfer their money into the savings sector. The abolition of composite rate tax is one of the most exciting innovations in the Budget and one which will do a great deal of good, particularly for small savers and especially for the elderly and for young people who, on the whole, will not be taxpayers. It will boost savings and be of considerable benefit to the economy as a whole. Nevertheless, we must wait for the economic medicine to work, and we must try not to get upset about the economic problems that we undoubtedly face in the short term.

It is often said that there are no alternatives to high interest rates, but this is incorrect. There are many alternatives to high interest rates. The great problem is that, on the whole, they do not work. The hon. Member for Norwich, South (Mr. Garrett) spoke about credit controls. Such remarks are often made about the beneficial

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aspects of credit controls--the trouble is that they often come from theoretical economists rather than from people who have practical experience of how our banking system currently operates. It is not hard to see how many banks and financial institutions could get round any credit controls that Government imposed.

Mr. John Garrett : I was quoting from a paper by the Bundesbank on the effectiveness of reserve asset ratios and other forms of control. West Germany happens to enjoy an inflation rate of 3 per cent. at the moment, so the West Germans may know quite a lot about the usefulness of such instruments.

Mr. Carrington : The hon. Member anticipates me slightly--I was going to come on to reserve deposits in a moment. The Bundesbank report referred to the German economy and banking system, which are very different from our own and which have different regulatory frameworks, for reasons which I will come to in a moment. Going back to credit controls, because it is important to realise how mechanisms for getting round them would operate in practice, if a borrower was denied credit by a bank because the bank, for whatever reason, felt constrained not to lend by Government regulations, either that borrower would go to other financial institutions which would not be limited by the regulations imposed by the

Government--thus creating an artificial impediment to competition and efficiency in the lending market--or, if that failed, and he could not borrow domestically inside the United Kingdom, in the absence of exchange controls, any borrower of any size--not necessarily a large size--could borrow offshore without problems.

Nor would he have to borrow offshore from an institution which had no presence in the United Kingdom ; he could do so from any subsidiary of any institution which was not under Bank of England control. An understanding of the way in which banking control works in the G7 countries and increasingly in the OECD countries means that any bank with its headquarters under the regulatory control of another central bank is controlled by that central bank and not by the Bank of England. Consequently, the ability of the Bank of England to stop a foreign institution lending to British nationals is severely limited. It would not be practical to control it even at that basic level. One has only to look back to the time before exchange controls were lifted to see how inefficient they were in preventing people from borrowing overseas.

Reserve deposits are a little more complicated because they do not have an immediate and direct effect on the lender. They effectively make it more costly for banks to lend, which in turn pushes up the margin or spread that bankers charge on their loans, as happened last time we had reserve deposits, when they pushed up the cost to the borrower, which had the net effect of pushing up interest rates. In addition, there is intermediation from institutions not affected by the reserve deposits. It is difficult to devise a system which catches all the quasi-banks that are capable of lending. One has only to look at the various commercial organisations in the business of providing credit in one form or another to see that, and one has only to look overseas to see the people who would come in to get round the reserve deposit requirements.

German markets still have reserve deposits, but they are being wound down and there is a great argument in Germany about how long they will survive. However, they

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work in Germany because the German economy is much more closed than ours. German banks maintain a tight control on the availability of the deutschmark, partly through tradition and partly because the German banks own so much of German industry.

Mr. Tony Banks : The hon. Gentleman has given us the key to the problem. The Prime Minister boasts from the Dispatch Box that Britain has the most open economy in Europe, but is that not the problem rather than a measure of our success? If we adopted the German model, we might have a more successful economy.

Mr. Carrington : The hon. Gentleman is right, except that the German economy is moving towards us rather than away from us and it is becoming more open. It is not more open, because the German banks still have a stranglehold, which they are slowly being forced to loosen as they start to conform with EC directives and regulations. One reason why German banks have managed to maintain the stranglehold on the German economy for so long is that it is difficult to do business in Germany unless one speaks the language. I speak from experience, having done a considerable amount of banking in Germany at various times in my career as a banker before coming to this place. It is difficult to do business with middle-sized German companies unless one is a German speaker. The linguistic barriers to entry into the German market for foreign banks are substantial.

Mr. John Garrett : I am greatly enjoying the hon. Gentleman's mini- lecture on banking for undergraduates. It is most instructive, but I took that course almost 30 years ago. Is he telling the House that the 80 per cent. of lending made by banks and building societies to private individuals for non-housing purposes cannot be controlled?

Mr. Carrington : I am sorry that the hon. Gentleman finds my speech too elementary. It is a shame that he did not adjust his remarks to take account of the fact that what he was saying was wrong, which would have relieved me of the necessity of having to teach the hon. Gentleman a thing or two.

Intermediation and the ability to borrow overseas is no longer largely dependent on the size of borrowing. In fact, it can be done at low levels for a variety of straightforward technical reasons, but they mean that most individuals, even with small amounts of borrowings, can have access to overseas funds without too much trouble.

The third factor that is also mentioned is the exchange rate mechanism of the European monetary system. It is said that if we join, it will bear down on interest rates and so assist our economy. The commitment in the Budget to join the ERM at some stage in the future when circumstances are right is vital. I am strongly in favour of joining the ERM. Currency stability with our major European trading partners is an eminently desirable goal which would be good for industry.

The only problem that we face at the moment is the straightforward practical one that there is not much to join.

Mr. Tim Janman (Thurrock) : Will my hon. Friend give way?

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Mr. Carrington : If my hon. Friend listens to my speech for a few more moments, he may find that his intervention is less pressing than he thought.

There is not much to join in the ERM at the moment, because we are in for a nasty shock on the ability of European currencies to hold together, particularly now that the Germans are proposing to merge with East Germany at the rate of one ostmark for one deutschmark, which will throw serious pressures on to the German economy. No one at this stage can foretell the effect of those pressures, partly because we do not know how the Germans are proposing to fund it. However, given the way in which Germans have funded things in the past, the likelihood is that German interest rates will rise. Another consequence is that the deutschmark will become volatile in terms of its historic volatility, and that will not necessarily bear any relationship to the inherent instability and volatility of sterling that we have seen over recent years. Therefore, the ability to hold our currency in the short and even the medium term in relation to the deutschmark within any currency band would be severely constrained.

But that is just a start. The instability of the deutschmark which will be caused by the reconstruction of East Germany is only one aspect of what is happening in Europe at the moment. The European Community will be faced with the major responsibility of ensuring the restructuring of the economies of Czechoslovakia, Hungary and, eventually, Poland. There will be a massive demand on Europe to support those fledgling economies. If we do not, the political risk of those countries ending up in chaos with internal disputes and major border disputes will be serious. That will have major financial consequences for Europe, for ERM and the EMS and it will cause a major rethinking in Europe on how monetary co-operation, let alone union, is to be tackled. At this stage, we cannot foretell how that will come out.

Far from joining the ERM at the moment, we should seek an opportunity, particularly with the French and the Italians, who will be most adversely affected by the immediate changes in the deutschmark, to discuss ways to restructure European monetary co-operation in such a way that we can all co -operate on a basis which will not throw so much dependency on to the monetary control exercised by the Bundesbank as the ERM does at present.

Abolishing the tax on workplace nurseries is a major move in the right direction. To some extent I agree with the hon. Member for Vauxhall (Ms. Hoey) that that is only the start of a major rethink of the way in which we provide support to working women who need or wish to go out to work and want their children cared for during the day. There will always be relatively few children for whom a workplace nursery will be appropriate because of the nature of the mother's work, or the father's work--let us not be sexist about it. I know of a number of instances in which it is more appropriate for the father to take the child to the workplace nursery.

There will be times however, when such nurseries are not appropriate, either for the work or for the child. Many people say that, because of their association with the place of employment, it is not necessarily beneficial for the child to identify itself with being taken by mother or father to the place of work and then being placed in care there. We will need to expand the tax relief to cover other types of nursery provision.

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We must also address the question of self- employed women. Almost as much as any other women, they need to be able to afford child care so that their children can be looked after while they are working. At present, child care is not allowed as a business expense for self-employed women, and under no likely arrangement of tax deductibility for child care in nurseries would that be appropriate. I can envisage a position where we will have to allow that expense as a deductible business expense.

My solution would be to raise the higher earnings limit from £8,500, as that would take many people out of taxation and benefits in kind, and would mean that we would save not only the considerable administrative burden in processing all the P11Ds, but ensure that the tax relief went to the least well-off, rather than going, as it will at present--if we expand it--to those who need it less with high marginal tax rates. We should raise the £8,500 higher earnings limit to something more realistic--perhaps close to £15,000.

The Budget is greatly to be welcomed. It is a cautious Budget, but one which keeps the pressure on in the battle against inflation in a highly desirable way that will pay dividends as long as we have the patience to wait for the medicine to work and bring down inflation. 6.52 pm

Mr. Pat Wall (Bradford, North) : I took a calculated risk in submitting my name for this debate, as I have suffered from voice problems for a couple of months--probably to the pleasure of Conservative Members, and perhaps occasionally that of some of my hon. Friends. Certainly the chances of my voice fully recovering are somewhat better than the chances of the Government recovering from the economic mess that they have inflicted on the country. We are told--and it is largely agreed--that this is a neutral Budget. It does nothing to address the gross inequalities in British society, nothing for the 9.4 million people who live on or below the poverty line, including 2.75 million children, nothing for the mass of pensioner couples who, by April this year, will have lost £20 per week in their pensions because of the severing of the link with average earnings, and nothing to make up the loss of child benefit, which has not been increased for the past three years. If anything, the Budget has marginally increased the trend away from direct taxation to indirect taxation and the consequent problems of the poorer sections of society.

The Secretary of State for Trade and Industry said that the average couple with the average two children were better off than they had been 10 years ago. However, they now pay 5 per cent. of their incomes in value added tax, as opposed to 2.7 per cent. when the Government came to office.

The Chancellor's attitude to the country's enormous balance of payments problem is certainly less cavalier than that of his predecessor, the right hon. Member for Blaby (Mr. Lawson), but he advances similar arguments. The former Chancellor gave three reasons why the trade deficit of £20 billion could largely be ignored. First, he believed that the deficit could be financed by inward investment, as has happened with the trade deficit in the United States in recent years. Secondly, many of the imports that led to that deficit were for capital equipment, which was only a

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sign of the enormous investment and productive boom in Britain. Thirdly, Government cash reserves were high and could meet any contingencies.

We should look at the sheer volume of the deficit--£20 billion. It is greater still in manufacturing industry. Travelling here this morning, I listened to a city expert talking about the Budget and the general economic position. He said that, even if the Chancellor achieved a reduction in the trade deficit to £15 billion next year, had there been a Labour Government the press and the City would be screaming for the International Monetary Fund to come in and take over the British economy.

The trade deficit can no longer be matched either by invisibles, which for the first time have gone into deficit--another Government record--or by the £80 billion from North sea oil, which has been largely wasted under the present Government. There is no net investment into Britain. In 1989, net capital outflow was £14.5 billion. Combined with the current account deficit, that amounts to a total deficit of some £35 billion, which has to be financed largely by hot money from abroad. That sum amounts to 3.9 per cent. of gross domestic product to cover the curent account deficit, and 2.8 per cent. to cover the capital deficit. That is a total of 6.7 per cent.--again a Government record, and the highest figure in British history.

The United States has a deficit for those combined two figures of only 1.6 per cent. Many of the so-called capital goods imports are classed by economists as intermediate goods, which could be better described as semi- consumer goods rather than capital goods. Britain used to have an export surplus in capital goods. The fact that it is now in deficit is a sign not of the strength of the British economy, but of its inherent weakness.

The right hon. Member for Blaby (Mr. Lawson), when he was Chancellor, talked of the official reserves. He should know a great deal about them--in one day under his Chancellorship those reserves fell by $1 billion. Since 1988, the reserves have fallen from £50 billion to £30 billion. That is why it is necessary to attract hot money into Britain, leading to a constant raising of interest rates and all the consequent damage to the economy and manufacturing production in Britain. That poses an awkward dilemma for the Government. There is a possibility of a recession. We are experiencing that already in Yorkshire and elsewhere in the textile industry, which is the fourth biggest industry in Britain. Once again it is suffering from redundancies, short-time working and lay-offs. In that much- vaunted sector of the economy, the service industries, there have been lay- offs in banking, in the City of London and in other sections of the economy.

Mr. Janman : If we extrapolate from the hon. Gentleman's observations about the economy, it is clear that he is making a case for his party, if it returned to government, to reintroduce the exchange and import controls that the Conservative Government abolished in 1979, and which virtually every economy in eastern Europe is turning away from. If the Labour party won the next election, does the hon. Gentleman think it should reintroduce import controls, exchange controls and capital controls in the British economy?

Mr. Wall : The last thing I have ever been is an import controller. If controls on finance and trade are introduced, they will be a result of what is happening in the world

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economy, which is now in the seventh year of the longest boom in post-war history. However, it has also been the weakest boom, with the lowest levels of growth and profitability. It is now coming to an end, especially in Britain because of the under-investment and under-capitalisation in the British economy.

Our economy will face the dangers of recession far more sharply than those of our competitors in the Group of Seven. It is in those circumstances that trade wars and restrictions on the export of capital, finance and goods will arise. The conflict between Japan and America that is developing now reflects the difference between a surplus nation--Japan--and its interests, and a deficit

nation--America--and its interests. That has nothing to do with political dogma ; it has to do with world markets, and it explains why these conflicts will develop.

I should like to give a few more illustrations of the nonsense of the so- called economic miracle. We are told that production has grown enormously, but growth in production in the 1930s was just as great as it has been in the past 10 years. Ignoring oil, which did not exist then, it stood at about 19 per cent. in both decades. Manufacturing output only reached the 1973 level in 1987, following the recession of 1979-81. It is now about 8 per cent. higher, but in the same period manufacturing production in West Germany rose by 40 per cent., in America by 70 per cent. and in Japan by 80 per cent. It is reckoned that British investment per head is only 60 per cent. of that in Japan and 80 per cent. of that in West Germany, while investment as a percentage of gross domestic product has risen over the past two years from 13.7 per cent. to 17.7 per cent. Virtually all that increase was in the service sector of the economy. Wynn Godley and Ken Coutts in The Political Quarterly reckon that investment in new plant and equipment and in replacing obsolete equipment, compared with the years 1971 to 1979, has fallen by 63 per cent. in real terms.

This morning and yesterday a much vaunted increase in exports was announced, but I would argue that most of that increase has taken place because of the 10 per cent. devaluation of the pound since the present Chancellor came to office. Most capital investment is in banking and finance. As announced in the City today, in industries such as chemicals and metals, important to future exports, capital investment has virtually ceased and most of what is left is in banking, which does not bring in much export wealth to the country. PA Consultants brought out a report on 400 major international companies. The report showed that only 25 per cent. of United Kingdom manufacturers spend more than 5 per cent. of turnover on training and development ; the comparable figures for West Germany and Japan are 71 per cent. and 35 per cent. respectively.

The only aspect of the British economy--and its only attraction--of which the Government can boast are the low wages that British workers are paid, as I well know as I come from the town of Bradford, which has the lowest wages of any town in the British isles. The Budget gave concessions and advantages to savers, which no one would oppose, but Conservative Members may not be aware that many of my constituents who receive their benefits or wages on Thursdays and who work in the mills and foundries will have spent the lot by the end of the weekend and have to eke out Tuesday and Wednesday on virtually no money. The attraction of savings therefore has little

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meaning for them. The Budget, and the Government and their policies, have done nothing to advance the interests of many of my constituents.

We have heard today about eastern Europe. The Secretary of State talked about the attractions and superiority of the market economy. What the events in eastern Europe have marked more than anything else is the fact that any society which cannot improve its economy within a fairly short period is a society in crisis. That was clearly shown in eastern Europe by the bureaucratic regimes, with all their corruption, nepotism and rottenness and their failure to advance the economies of Russia and eastern Europe. That failure caused divisions.

The British Government face the same problem, albeit on a lesser scale. They can no longer advance the economy of Britain, so what took place in eastern Europe will happen here. Divisions will begin to widen in the leadership of the Conservative party, just as they have developed among the leaderships of Russia and other eastern European countries in the past few months.

Last year there was a leadership contest in the Conservative party in which, for the first time since the Roman emperor Caligula, a group of politicians sought leadership from a quadruped, however well meaning he was at the time. The Tory party now faces a different type of horse--a Trojan horse being prepared within its ranks, probably in Henley-on-Thames. The Conservative party cannot solve the problems of advancing the British economy. It does not matter who leads the Conservatives after the general election, whether it be a horse or someone swinging through the trees, because the Conservatives will be defeated at the election. Then at least we can begin to solve the problems which face working people in this country and to advance the interests of the mass of the population, not just those of a few spivs.

7.8 pm

Mr. Anthony Coombs (Wyre Forest) : In my relatively short time in the House I have heard quite a few examples of hypocrisy but I have never seen such a display of brass-neckedness as we just heard from the hon. Member for Bradford, North (Mr. Wall). The hon. Gentleman is virtually synonymous with corporatism, high taxation and Government intervention--

Mr. Janman : Stalinism.

Mr. Coombs : That is my hon. Friend's word, not mine. The hon. Member for Bradford, North argued about the benefits of the sort of revolutions that have taken place in eastern Europe. But the Czechs, Hungarians and Poles are all coming to Britain wanting to learn about the policies that this Government have championed--

Mr. Janman : I should like to clarify the terminology for my hon. Friend. It is my right hon. Friend the Member for Henley (Mr. Heseltine) who is the corporatist ; the hon. Member for Bradford, North (Mr. Wall) is the Stalinist.

Mr. Coombs : That sounds accurate.

These countries have been coming here because they want to learn about privatisation, the free market, free enterprise and low taxation, all of which have been championed by the Government. So when the hon.

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Member for Bradford, North tries to argue that these revolutions support his dirigiste, socialist philosophy he is guilty of brass neck of the worst possible sort.

As many of my hon. Friends have said, the Chancellor deserves our congratulations on introducing a balanced, sensible and cautious Budget. It is properly restrictive in monetary and fiscal terms and will produce the proper balance between controlling inflation and avoiding the potential danger of recession. It is in the reforming tradition of my right hon. Friend the Member for Blaby (Mr. Lawson). It makes several supply side improvements, particularly in the taxation of husband and wife, in savings, in training and in access to the work force by women. As the hon. Member for Vauxhall (Miss Hoey), who is not here now, said, it rightly targets the football industry as in need of specific aid to implement the Taylor recommendations.

It is good to see the markets taking a more sanguine and intelligent view of the effects of the Budget today than they did yesterday. One should not become too worried about what the markets say. I recall that, in 1981, the last time we produced a fiscally restrictive Budget, 365 so-called experts wrote to The Times saying that the Government would preside over an economy that would go into slump and depression, whereupon there followed eight years of unprecedented growth.

So the fact that some commentators are saying that the Budget is not deflationary enough, while others are saying that the Chancellor has been unduly pessimistic about the possibility of controlling inflation, means that he has probably got it about right. He has maintained a consistent philosophy involving low rates of taxation, proper monetary control and improvements on the supply side, a policy that has resulted in eight years of consistent growth.

I represent a manufacturing area, involved mainly in consumer durables, particularly the carpet industry. Although there has obviously been a slowdown in the consumer durables and carpet sector in recent months--as should have been the case, with higher interest rates ; they were designed to achieve that end--industry bears in mind the economic background against which the changes are taking place. Companies recognise that they have been making better profits than at any time in the past 20 years. Indeed, when I visited a company in the traditional metal-bashing industry last week, I was told that the firm made 12 per cent. on turnover before tax, which is an extremely good example of some record profits that have been achieved in recent years.

Investment has improved in my area, as it has throughout the economy. Companies are employing more people, and between December 1988 and December 1989, unemployment in my area dropped by over a third, to only 4.2 per cent., compared with about 16 per cent. seven years ago. That has been due to the massively improved performance of companies in the area.

I believe that companies would not expect an athlete to go on breaking records year after year. There must be a time to slow down, take stock and draw breath. That is what 1990 will prove to be. There is no doubt that the Chancellor's deflationary measures are working. Consumer spending is slowing and there is a fall in orders and some retrenchment.

The difference between the present fall in orders and retrenchment and other such movements in the past is that

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industry is today far better equipped to deal with that type of mini-recession. It is leaner and more efficient. The stock against output figures have dropped dramatically recently as destocking has taken place.

The growth in world trade is healthier, more firms are turning to export markets and our exports are increasing twice as fast as world trade as a whole. Indeed, a carpet company in my area, Brintons Carpets Ltd., probably the biggest, increased its exports last year by no less than 50 per cent. Businesses are better prepared on this occasion in terms of their financial ratios and gearing for the downturn that we are currently experiencing.

With imports flat and exports growing fast, the Chancellor may have erred on the side of pessimism in estimating that the trade balance will improve to only £15 billion this year. I estimate that there is a good chance of it improving much more quickly.

The British Textile Confederation is prepared to see the multi-fibre arrangement wither on the vine, provided that GATT is adequately reformed to achieve a level playing field for exports. But it is concerned lest the Government and the European Commission do not take tough enough action against countries such as Turkey, which are effectively subsidised by their Governments and are dumping goods into this country.

Turkey is now the largest exporter of textile goods to Europe. There are effectively no duties on its imports to us, yet when we try to export to Turkey, the duties average 200 per cent., including a contribution to that country's national housing fund. That is a particularly virulent form of protectionism, which must be addressed quickly by the British Government and the European Commission. Continued progress in improving our trade balance will depend on our competitiveness. While last year our unit wage costs increased by only 4 per cent.--although in many countries they did not increase at all--if productivity begins to slacken this year as capacity restraints are reached and as investment growth levels off, our competitive edge may be blunted unless there is a significant restraint on wages. That is crucial for our strategy, and I hope that groups such as the Engineering Employers Federation recognise it. We cannot take seriously the Labour party's regard for wage costs. Between 1974 and 1979, when Labour was in office, unit wage costs in Britain increased 50 per cent. faster than in any other European country, which inevitably damaged our competitiveness. Labour now proposes a payroll tax of 0.5 per cent. of turnover, which would cost industry £1.25 billion a year, and which again would damage our competitiveness.

Even the Labour party's advisers have estimated that Labour's proposals for a minimum wage--half annual industrial wages working up to two thirds on hourly earnings--would cost, because of reduced competitiveness, about 750,000 jobs once that policy had been fully implemented. How the Labour party can have any credibility, bearing in mind its industrial strategy and proposals for improving competitiveness, is beyond belief.

With industrial profit margins being reduced, there is a chance that industry will hold the line and that unit wage costs will be held down. That will be made more difficult because the labour market everywhere is extremely tight. I pointed out that in my constituency unemployment had fallen by a third in the past year. Skilled people are at a

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