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We were entitled to look in the Budget for some recognition of the long- term structural problems facing British industry. We now have a better chance than at any time in recent history to create the training revolution that we need. There is support for that everywhere ; in industry, among the unions and, most crucially, among young people and those already in work.
We, therefore, have a great challenge and a great opportunity. It is not the poverty of aspiration among the
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British people that we need fear, but the poverty of aspiration of the Government. As the Conservative party's position crumbles and Conservatives begin to fight the Tory party's internal battles because they have lost the battle for the electorate, the Labour party will look forward with enthusiasm to meeting the challenges ahead, not as critics in a Labour Opposition, but as Ministers in a Labour Government.5.29 pm
Mr. Nigel Lawson (Blaby) : I shall be brief. Partly for that reason, I shall not follow the debate that we have just heard about training, but will talk about matters more closely related to the Budget which we are debating today. I have to say on the subject of training that there is agreement on both sides of the House of its importance--there is no doubt about that.
I have to confess that I was astonished by one omission throughout the speech by the hon. Member for Sedgefield (Mr. Blair). Not once did he mention the vital correlation between the amount of training done by business and industry and the profitability of business and industry. Those things are intimately connected. It was the abysmal levels of profitability of British industry in the 1970s that led to the very low level of training at that time. It is the recovery in profitability which has occurred during the 1980s and which will continue, I trust, during the 1990s which is so important for all our aspirations in the future.
I should like to commend my right hon. Friend the Chancellor of the Exchequer on his Budget. I commend it not least because of his rejection of the clamour that there was in some quarters for a massive increase in taxation. That would have been wholly misguided. He was right to resist it. I would like to quote his words from the Budget statement :
"fiscal policy is not a flexible instrument which should be altered to meet short-term contingencies. Fine-tuning fiscal policy is not only disruptive to the public sector, but business, and to taxpayers, but its effects on the economy are uncertain and often destabilising."-- [Official Report, 20 March 1990 ; Vol. 169, c.1015.]
I entirely endorse that judgment.
After all, in this country--let nobody forget it--we have a very strong fiscal position indeed--one which is the envy of most of the rest of the world. Given the inheritance, it took us quite a long time to get to that position. Having got to that position, we must and will stick to it. Within that context, tax changes should be driven by long-term supply side considerations and not by the short-term requirements of so-called demand management. Tax reform, which is of such importance, has a beneficial effect on economic behaviour and economic performance only to the extent that it is believed that the changes that are made will endure. That is why my right hon. Friend is right. But, in that context, of course, it follows that the task of bearing down on inflation must continue to rest, as it has rested before, with monetary policy. Again that is something which my right hon. Friend fully acknowledged, but I have to say that that is where my doubts creep in.
Let me hasten to say that I am not referring to the incentive for the expansion of broad money which my right hon. Friend introduced, bearing in mind the fact that broad money is principally composed of deposits in banks and building societies. I have no quarral with that, even though I know that one or two of my hon. Friends might find that somewhat paradoxical. No, the danger--the
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concern--lies with the exchange rate, for it is the exchange rate which threatens to undermine the strength of the Government's monetary policy, the strength of the discipline imposed by uncomfortable but necessary levels of interest rates.Again, that is something which I know my right hon. Friend himself fully acknowledges. He himself said in his Budget statement that he favoured a strong exchange rate policy--quite right. It was a very important statement, but it may be that words alone will not be enough.
We have already seen that, since interest rates were raised to 15 per cent. as far back as last October, the exchange rate--the index--has lost about 5 per cent. of its value, and any further drift would clearly imperil the strength of the Government's commitment against inflation and their anti- inflationary policy. That is the one area of concern which I have.
What is the solution? Where do we go? Again, my right hon. Friend, in his Budget statement and again in his broadcast yesterday, very firmly restated the Government's commitment to sterling joining the exchange rate mechanism of the EMS. But my concern is that the timetable which is envisaged by the Government might be somewhat too leisurely for the circumstances in which we find ourselves. In my judgment, it is a pity that we did not join some time ago, but we did not, and that is that. But now we really cannot afford to take the risks involved in a leisurely timetable.
It may be that we should initially join within the framework of the wider bands before subsequently moving to the narrower bands, but the whole of the Government's commitment against inflation is potentially at risk. There is an exposed flank, and that is why I could favour the early entry of sterling, as I said, possibly initially with the wider bands, into the exchange rate mechanism of the EMS. There is a further reason, too, Incidentally, it is far less important even than the increased influence that we would gain within the Community--influence which is particularly important in the context of the debate on European monetary union, in which I wholly and unreservedly support the Government's stand. It is important, too, as we come up to the intergovernmental conference, to discuss this in December of this year.
But there is another reason, too. As I listened, as many hon. Members did, to the speech by the right hon. and learned Member for Monklands, East (Mr. Smith) on an earlier day of this debate, it was abundantly clear that the Labour party has no alternative coherent policy whatever--none whatever. Yet the right hon. and learned Gentleman is seeking to conceal it and, to some extent, he has been successful with the media. He is seeking to conceal it by regular repetitions and incantations about the EMS and joining the exchange rate mechanism of the EMS. It is by removing the fig leaf from the Opposition that the true nakedness of their policy and the ugliness of what is revealed will be seen by all. That is devoutly to be wished.
We, of course, have a clear and coherent policy which, despite current difficulties, has brought the people of this country unparalleled improvements over the past 11 years. It must continue to do so, and it can continue to do so, but it will continue to do so only if that exposed flank of the exchange rate is protected. That means early entry into the exchange rate mechanism of the EMS. Of that I have no doubt whatever.
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5.38 pmMr. Paddy Ashdown (Yeovil) : I am sure that the whole House and many people outside will have listened to the very interesting speech by the right hon. Member for Blaby (Mr. Lawson), the central portion of which I enthusiastically agree with. My hon. Friends and I have been arguing for some time that our early membership of the exchange rate mechanism is necessary for Britain's proper economic management. It is even more necessary now. As the right hon. Gentleman said, there is a great hole in the centre of the Budget, and that constitutes the exposed flank of the whole budgetary strategy. As the hon. Member for Sedgefield (Mr. Blair) has said, it seems odd to reflect that the Budget was less than a week ago--so much has happened in between. Returning to the Budget debate after last week's events seems a little out of kilter with the mood. However, that is not the whole case, because at the heart of the Budget debate is a lack of any commitment to the strong economic policies that the Government have talked about in the past. That is the same lack of confidence, lack of direction and confusion that has characterised the Government's policy in the past few weeks, and for which they paid a heavy penalty on Thursday and continue to pay a heavy penalty in the opinion polls.
That is not to say that we do not recognise the difficult circumstances in which the Chancellor had to frame his Budget. It was a difficult calculation. Britain stood and remains on a knife edge between high and possibly double-digit inflation on the one hand and a recession on the other. The speech of the right hon. Member for Blaby might have been better received if he had shown a little humility about leaving his successor a legacy of serious problems to address.
Those legacies can be put in the form of three questions. First, who runs the economy? Is it No. 10 or No. 11 Downing street? We all know that that is the subject upon which the right hon. Member for Blaby offered his resignation. Secondly, what is the Government's policy? That matter has been left confused and unclear in the past few months and is, in large measure, the reason why there has been a good deal of uncertainty in the money markets about the Government and the exchange rate. The third question is, what will the Chancellor do to address the problems that are the legacy of the past 10 years and, at least in part, of his right hon. Friend the Member for Blaby? What will the Government do, for instance, about the fact that, far from a Thatcher economic miracle, we are close to a Thatcher economic nightmare?
We have the highest inflation of any of the major OECD countries. We have a record that goes back for the past 11 years in which, far from tackling inflation, our rate of inflation has been higher than the average of the EC countries, inside and outside the EMS, for seven of those 11 years ; it has been higher than the average of the OECD countries for eight of those 11 years, and higher than those of our major competitors for 11 out of those 11 years. If the Government are making the case that inflation is the judge and jury, they are guilty of having totally failed to tackle it.
One might also judge the country's economic position by the fact that wage rises here are now racing ahead of inflation and are rising much faster than those of any of our major competitors. One might also judge the economy by the fact that, as a percentage of GDP, investment
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briefly blipped, to use a favourite word of the right hon. Member for Blaby, above its level in 1979--a full 11 years ago--for just a few months last year but, according to all accounts, is now plunging hard under the high level of interest rates. By the by, our interest rates are higher than those of any of our competitor nations and are very close to a record for this nation.Presiding over all that is the fact that, throughout the past decade, Britain's share of world markets has continued to decline at a rate not dissimilar to that experienced throughout the two previous decades. We now have a balance of trade deficit of record proportions. Those were the problems that the Budget had to address. If the Budget sought to answer those three questions--who runs the economy, what is the Government's policy and what firm action will they take to address the serious problems now facing the British economy--it provided an answer that was at best confused and at worst unconvincing.
The Government's policy is still unclear. I cannot see any thread running through it, except for the Chancellor's rhetoric that he wants to keep inflation down. But that was immediately followed by an admission that inflation would increase in the next few months. We heard only a few vague promises and prophecies beyond that. We have learnt to mistrust the Government's prophecies about inflation or anything else, because they are all remarkable for the fact that they are all breached by substantial margins.
Who runs the economy? Is it really the case, as the right hon. Member for Blaby said, that in his heart of hearts the present Chancellor believes that we should join the exchange rate mechanism now? The resignation speech of the right hon. Member for Blaby was splendid. It was one of the best speeches that I have heard in the House. In it we learned that the right hon. Gentleman had consistently argued around the Cabinet table for joining the exchange rate mechanism and that the Prime Minister was the one who had said no. We had a hint a moment or two ago that the same conditions obtain around the Cabinet table today, and that the Prime Minister is preventing that important lacuna in the Government's policy from being filled. If that is the case, the question of who runs our economic policy remains as unanswered now as it was in the days of the previous Chancellor.
If the Government's major thrust is to tackle inflation, I fear that, as has been said, the Chancellor is playing with very high risks. Whatever happens externally, his present strategy leaves him no room for manoeuvre, except to raise interest rates. In short, where we needed a Budget that was tough, with a broad thrust that the public and the markets could understand, we got a Budget that was full of minor measures, which, unless the Government are very lucky, will fail to face up to the major problems that now confront us. The reality of the Budget was very different from the hype and the descriptions that preceded it. We were told that we would get a lion of a Budget ; but the Chancellor produced a mouse. The inadequacies of that mouse of a Budget were cruelly exposed by the reaction of the City and the foreign markets.
Of course the minor measures were welcome--who would not welcome some of the things that the Chancellor did? We had been calling for some of them for some time, as had his own Back Benchers and the Opposition. I refer
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especially to measures to encourage women back to work. I found it odd that in pouring some scorn on that the hon. Member for Sedgefield--Mrs. Margaret Beckett (Derby, South) : Barbie dolls.
Mr. Ashdown : If the hon. Lady would like to intervene, I shall be happy to give way to her.
Mrs. Beckett : I am grateful to the right hon. Gentleman for giving way. I find it difficult to square his wise words about the value of women in work with his most ungenerous remarks about my hon. Friend the Member for Mid-Staffordshire (Mrs. Heal).
Mr. Ashdown : I am not quite sure what that has to do with the debate, but as the hon. Lady has questioned me about this--as I suspected she would--I ask her to look again at my comments. I was not making a comment about that hon. Lady ; I was commenting on the disgraceful way in which the Labour party would not allow a Labour candidate to speak for herself. She was treated as a Barbie doll by Walworth road. The sexist comments and approach of that manifesto are a disgrace ; they completely undermine the Labour party's rhetoric about being in favour of women in society and in politics. However, if I was to go further down that line, no doubt you, Mr. Deputy Speaker, would call me back to order. Therefore, I turn to the central question of the welcome steps taken by the Chancellor. As I was saying, it is odd that the hon. Member for Sedgefield said, somewhat contemptuously--I tried to note his exact phrase--that the Chancellor's measures would bring back to work only "a relatively small number" of women, because not many workplaces have nurseries. Unless I am mistaken, the Chancellor has precisely followed Labour's policy on this matter. Presumably, therefore, if the Chancellor's measures will bring only a few women back to work, the Labour party's measures would bring only a small number back as well.
Mr. Blair rose --
Mr. Ashdown : I shall give way to the hon. Gentleman, but I ask him to consider what my party has proposed, which is to issue vouchers that could be used whether or not there are workplace nurseries. Will he do that? I happily give way to him.
Mr. Blair : The right hon. Gentleman keeps saying that I treated the provisions on workplace nurseries contemptuously. That is entirely untrue. I was merely saying that they do not affect many people.
Mr. Ashdown : Then the criticism that the hon. Gentleman levels against the Government must be levelled against his party's policy, in which case it is odd for him to make it.
The Chancellor's proposals on savings are also welcome, although TESSA has a 1960s or 1970s flavour. According to the last figures that I saw, the level of debt has gone up from about 1.5 per cent. of average household income to 8 per cent. of average household income, whereas savings have dropped from around 12 per cent. to about 5 per cent. Therefore, I wonder how much money there is around to be put into new saving instruments and to what extent TESSA will be used simply to transfer savings from one account to another. The move and the
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instrument are welcome, but will they achieve what the Chancellor wants? If it did, that would be advantageous, but I doubt whether it would. Let us wait and see.The Budget failed significantly in its central thrust. As the right hon. Member for Blaby said, the hole in it is its lack of entry into the ERM. That could, and should, be the rock upon which the Government base their anti-inflation policy. It is the mechanism by which the Government could give themselves room for manoeuvre. It is true that, were we to join the ERM, that might take the pressure off the pound and enable us to bring down high interest rates, which would be beneficial. However, it would also release money into the economy, which might be inflationary. That is why my right hon. and hon. Friends and I have recommended that the Government should be prepared to alter national insurance contribution rates and mortgage interest tax relief rates, so as to take about £2 billion out of the economy.
The Government have argued that we cannot afford to join the ERM because our inflation rate is too high. It is a matter of fact that our underlying inflation rate is around 6.2 per cent. of the RPI, whereas the average rate of countries within the ERM is around 5 per cent. Spain went in, on the broad band rate suggested by the right hon. Member for Blaby, with an inflation rate of around 7.1 per cent. There is not a serious problem--it is an excuse for the Prime Minister to prevent us from joining the ERM because of her personal prejudice and passion against anything European, and in particular the ERM. As somebody else has said, it is simply an elegant way of saying no. I have a strong suspicion that the timing of entry into the ERM will be tied to the timing of the removal of the right hon. Lady. It will not happen until she goes.
Again, the Labour party shows a depressing lack of understanding and clear commitment about what it wishes to do about the ERM. The right hon. and learned Member for Monklands, East (Mr. Smith) has said that the Labour party would like Britain to enter the ERM, but the Labour party's conditions for that remain unchanged. It has given us no idea what those conditions now amount to. It has said that we need to go in at a competitive rate. Perhaps the hon. Member for Derby, South (Mrs. Beckett) will tell us what that competitive rate will be. Is it a devaluation?
The second condition made by the Labour party is that there should be reflationary policy. It knows perfectly well that such a thing is simply unacceptable under the present conditions of the ERM, and the Bundesbank would never buy it for a moment.
Mr. Radice : What a load of rubbish.
Mr. Ashdown : If the hon. Gentleman wishes to intervene, I am happy to give way.
Mr. Radice : My party has made it clear that we are talking about negotiating objectives. If we were in government now, we would immediately want to negotiate our way into the ERM. That is a different position from that of the Government, who are not prepared to go in at all--certainly not while they have the present Prime Minister.
Mr. Ashdown : The hon. Gentleman is making it clear that his party-- I suspect that he has different views--wants to turn the ERM into a reflationary club. None of the other members of it would tolerate that.
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The position of the Government and of the Opposition are almost exactly the same. The Government argue that they will not go into the ERM until inflation is down to the level of that in Germany, while the Labour party argues that it would not go into the ERM until the Germans risk putting their inflation rate up to the same as ours. There are equally clear ways to say, "We ain't gonna do it." It is inadequate and untruthful for the Labour party to claim that it has a stronger desire than the Government to go into the ERM.Mr. Flannery : The right hon. Gentleman will never have to face this problem, because he will never lead a Government.
Mr. Ashdown : The hon. Gentleman ought to realise that the biggest failing of his party is that, although it has become successful in opposing, it says nothing about the policies that it would introduce were it in government. The hon. Gentleman and his party are failing Britain today, although they have a real opportunity to remove the Government. They lose that opportunity by the day, because they fail to put forward proper policies. Anybody who heard the Leader of the Opposition last Friday on the "Today" programme explaining what his economic policy would be and could divine from that extraordinary collection of platitude and waffle anything that constituted something like an economic policy was capable of a divination of a high degree. The Labour party has a real opportunity to defeat the Government, but it will not do so by putting forward vacuous policies that amount to nothing.
The Budget fails in other areas. It does not realistically address the necessary steps open to the Government to protect the environment. From this Budget, I have come to the conclusion that the environment was an electoral toy with which the Prime Minister has played around and in which she has now become disinterested. The Chancellor claimed that this is a fiscally tough Budget, but we have to ask whether the £500 million that the Chancellor is taking out of the economy by bringing more people into the higher band of taxation is not more than compensated for by the £1,000 million that will be released into the economy by independent taxation. That is the moot point.
This is a weak Budget and, unless the Government are very lucky, it will be inadequate to solve the problems that confront us. The Budget does not deal seriously with those problems. It shows complacency. It is built on hope, not on solid policies. If the Government were true to their rhetoric, they would be taking risks with the Conservative party's support in the short term so as to ensure the country's stability in the long term. Instead, the Chancellor has taken risks with the economy in the long term in a vain attempt to restore the Conservative party support in the short term. We now need a party committed to free enterprise, to a just competition policy and to taking the necessary hard actions to tackle inflation. We need a party that understands the importance of Europe in that strategy, and in particular the importance of the ERM.
There was a day when some--not all--of those attributes could be claimed by the Conservative party, but not after this Budget. In it, the Chancellor takes high risks with the future. He has hoped that everything will come
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right. This Budget makes the point at which the Conservative party lost its nerve. If it now loses its luck as well, the price of the Budget will be high for the Conservative party, but higher still for Britain.6 pm
Sir William Clark (Croydon, South) : The right hon. Member for Yeovil (Mr. Ashdown) made an extraordinary speech. All that he has to offer is immediate entry into the European exchange rate mechanism. He ended his remarks by falling out with the Opposition, not with the Government. It was an extraordinary performance and I might come back to it later.
I congratulate my right hon. Friend the Chancellor of the Exchequer on the presentation of his maiden Budget. I think that hon. Members in all parts of the House will agree that his presentation was perfect. I believe that he gave us the right Budget. It has been overlooked that my right hon. Friend the Member for Blaby (Mr. Lawson) left a legacy of separate taxation of husbands and wives. That will benefit about 3 million people. I am sure that none of us will forget the achievements of my right hon. Friend the Member for Blaby.
My right hon. Friend the Chancellor of the Exchequer had a difficult decision to take. He could have gone for overkill or underkill. In the event, he presented a roughly neutral Budget. He did not opt for overkill because, obviously, he did not want to risk recession. The Budget achieved about the right balance. I agree that the City's reaction was not all that favourable, but I am sure that hon. Members who have connections with the City will agree that there seems to be too much computerisation. Far too much time is spent looking at "boxes". When the programme says sell, they sell. When it says buy, they buy. Sensitivity, on other occasions a lack of sensitivity, and instant statements have an effect on our currency. The hon. Member for Sedgefield (Mr. Blair) did his best to denigrate the economy, but it cannot be all that sick when we consider the amount of foreign investment that comes into the country weekly. The Japanese, the Germans and the Americans, for example, are confident in investing in Britain. We must not over-react to the fears that some express. We must not panic ourselves into entering the exchange rate mechanism. There are those who suggest that the ERM is the panacea for all our ills, and the right hon. Member for Yeovil is at the fore of that group. My right hon. Friend the Chancellor of the Exchequer was right when he said in his Budget statement that we shall join it. It is only a question of when. There are more complications now, because we do not know what will happen with monetary union in East Germany and West Germany. The ostmark will be made convertible with the deutschmark or will be swapped with it. Helmut Kohl apparently took the decision to promise to swap and the Bundesbank did not want to have anything to do with it. So much for the so-called independence of the Bundesbank.
There is no doubt that the policy of my right hon. Friend the Chancellor of the Exchequer of a 15 per cent. base rate has slowed down spending and had an effect on the price of housing. Hon. Members on both sides of the House must accept that. No one has mentioned the fact that our exports are increasing. They increased by 11 per
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cent. year on year and imports reduced by 1 per cent. three months on three months. We shall not see a miracle overnight, but the trend is favourable.The Opposition are keen on credit controls as a means of controlling expenditure. How we could have credit controls without a reintroduction of exchange control is beyond me and, I should think, beyond most people. If the Opposition say that they want credit controls, that means that they are committed to the reintroduction of exchange control, and that goes against the EEC. One of the Madrid conditions of the United Kingdom's joining the exchange rate mechanism is the abolition of exchange controls throughout the Community. If the United Kingdom is to introduce credit controls and then have to reintroduce exchange control, how is it credible for the Opposition to say that they would join the EMS? Their position is illogical.
I welcome the repayment of the national debt. About £25 billion has been repaid over the past two or three years, which has saved us about £2.5 billion a year in interest payments. I suggest to my right hon. Friend the Chancellor of the Exchequer that we should not over-rush the repayment. That would make credit far too easy for any Government. My right hon. Friend has discouraged borrowing to spend and I welcome, as did the right hon. Member for Yeovil, the concept of the tax-exempt special savings account. I believe that it will prove to be a success. Personal equity plans are extremely valuable, but there has been a tremendous switch from various forms of investment into PEP.
There was some new money, but not as much as was wanted. The catchment area for savings that we should target is the person with an income between £20,000 and £30,000 a year. That sort of person will find TESSA extremely good. My right hon. Friend the Chancellor of the Exchequer has said, in effect, "If you want to spend money and you do not have that money, the cost of borrowing it will be high." That has stopped a good deal of spending, but there are those who do not have to borrow to spend, and those people will find TESSA especially attractive. There is tremendous potential, especially when we consider that there are about 11 million shareholders. Two out of every three families own their own house. There are many more people now, compared with 1979, who have something to conserve.
I regret that action was not taken on disincorporation. A family business pays capital gains tax on whatever assets it may sell. When the family tries to get the money out of the family company, it has to pay capital gains tax again. It is double taxation. I remind my right hon. Friend the Chancellor of the Exchequer that about two years ago a discussion paper was produced. It has been discussed, and I understand that many representations have been submitted to the Treasury. I hope that my right hon. Friend will let me know what is happening.
I am struck by the absence of suggestions or options from the Opposition. It is worthy of an entry in the "Guinness Book of Records". During the by- election campaign in Mid-Staffordshire the Labour party did not hold a public meeting. No answer was given to any question asked. Surely the Opposition do not think that they will be able to adopt the same stance at a general election. Do they think that it will be sufficient merely to make vague statements attacking the Conservative party's policies? That would be a con trick on the electorate.
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Before 1979, many U-turns were made to the detriment of the economy and, incidentally, to the detriment of the Conservative party politically. We must go for the long-term future of the country. Of course, we are extremely unpopular at the moment, but there is no point in trying to relax polices just to gain votes. There are some rough seas ahead, but my right hon. Friend is on the right track. If he stays on course, we will succeed.6.10 pm
Mr. Robert Sheldon (Ashton-under-Lyne) : The hon. Member for Croydon, South (Sir W. Clark) thinks that the Budget judgment is just about right. It is hard to get a Budget judgment just right, and the Chancellor bears an awesome responsibility for that.
I share one sentiment with the right hon. Gentleman, which is his admiration for Iain Macleod. My view on the Budget judgment follows that of Iain Macleod. His beliefs are not mine, but his approach to political life and the standards that he held earned him the respect and regard of many people outside his party. It is more than 20 years since he said that the Budget that was cheered on the day that it was delivered tended to look rather different later. I and many others made similar points, even before that occasion. I am sure that we could go back to the last century and find similar views. However, rarely have we seen the waving, cheering and shouting that occurred at the end of the Budget statement last week, which was then repudiated by so many the following day. The poll tax remained a problem and there was a failure to deal effectively with the pound, which resulted in Bank of England intervention.
The Chancellor was generous to his right hon. Friend the Member for Blaby (Mr. Lawson). He did not blame him for his inheritance--and in these rather less scrupulous times, he earned the respect of some of us for that. The right hon. Member for Blaby thought that the exchange rate mechanism was enormously important. The reduction of inflation is the Government's principal objective, which the Chancellor confirmed in his Budget statement. The right hon. Member for Blaby thought the main way to achieve that objective was through the exchange rate mechanism. Having been denied the use of that method, it was honourable of him to resign. The present Chancellor may face a similar problem in due course.
I wish to pose two questions about the Budget. First, was it tough, and secondly, was it directed towards a general election in 1991 or 1992 or towards our economic problems? The answer to the first question came the following day with the problems of a declining pound. All Chancellors face that problem because to show toughness towards those on whom they depend to retain the value of the pound means that they frequently have to do things that they do not like. Pressures were constantly placed upon the last Labour Government to increase prescription charges. That was unimportant economically, but it showed that we were anxious to satisfy the market and do those things that we disliked most. The parallel for this Government is an increase in income tax. It may not have meant a great deal in terms of withdrawing sums of money from demand, but doing what they disliked would have shown the seriousness of the Government in their attack on inflation.
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In view of the Government's difficulties in trying to engineer a recession, it did not make political and economic sense to have the pre-election boomlet in 1988. It could not be avoided because the decision was taken in the light of other matters about which the then Chancellor could not convince the Government. The Government's difficulty was simple--they wanted to engineer a recession but could not do it. They have been trying to do that for more than 18 months. In the past, the simplest way to achieve that would have been to increase taxation and Excise duties and so reduce demand, but they did not do that. I understand the difficulty with VAT, because it is a simple tax of 15 per cent. It is not as easy to change it as it was to change purchase tax. However, income tax was readily available, but the Government did not know how to deal with the ghosts of the past.The Government were left with just one club because all the others had been thrown away. Credit restraint might have sent the right signals. Although it might not have meant a great deal in theory, we should not underestimate the importance of such actions in practice on markets and individuals. Having been trailed for more than 18 months--and I believe that we are now heading for a real recession--such action may not now be worth resurrecting. It would have been available, but the opportunity was missed.
Only the day after the Budget, I received another massive credit offer, almost geared to the Budget, asking me to borrow some more money. The problem is that we are relying on interest rates, which also increase the income of savers. Although those who borrow lose during the time of high interest rates, those who save gain. We are not sure of how much those who gain then spend.
Mr. Denzil Davies (Llanelli) : Does my right hon. Friend agree that it is a terrible condemnation of the Government that, even with such high interest rates, which mean high interest for savers, the Government still had to give tax subsidies to savers?
Mr. Sheldon : The Government were in a dilemma. Everyone knows that they should have increased income tax. They could also have done more with Excise duties last year, but that time has now passed. It is usual to increase taxes if we want to reduce levels of inflation and demand. The Government were boxed in ; they had only the one club and they did not use it wisely.
Borrowers spend less, but lenders may spend more because of the increased interest on their savings. The problem with soaring house prices is that more and more people spend up to the level of their income, fully satisfied that they can afford it. Many people feel that they need less money for a rainy day because the value of their house represents the savings that people used to make in the Post Office, with saving certificates, and so on. They now believe that they have a valuable cushion, so if they find themselves temporarily short of money, they borrow against their house to maintain their standard of living. The more the Chancellor tells them that there are good times around the corner, the more readily can they justify that borrowing, which they will believe will be short term.
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The medium-term financial strategy states that the central objective is the defeat of inflation. I have the 1980-81 financial report--which I treasure--by the right hon. Member for Blaby. The very first sentence states :"The Government's objectives for the medium term are to bring down the rate of inflation."
The Government have been in office for 11 years. What is a medium-term financial strategy? According to the current Red Book, it will be another four years before inflation significantly reduces. It is the longest term medium-term financial strategy that I have ever known.
The proposed solutions are similar to what they were 10 years ago. The Government produced the figures for the money supply decreasing year by year until the magic year four years on. It is now four years on and the figures are the same. Who believes them now? The price rises in 1974, about which the Prime Minister makes something every Question Time, were due to the quintupling of oil prices. Page 11 of the Red Book states :
"Reductions in marginal tax rates have increased incentives to work and save, and improved the quality of investment."
I wish that were true. Not long ago I went to the opening of a bank that had carpets up the wall. Another bank had leather lining the whole of its office space. Banks get the same investment and capital allowances as anybody who buys plant and machinery. They get a 25 per cent. reduction in the first year. Plant and machinery is worth more than that. That is the problem.
Page 11 talks about
"A firm fiscal policy Frequent changes are harmful." I am not sure that that is so. The right hon. Member for Blaby pointed out that tax changes should be rare, and, presumably, always downwards. Why should he have that view about tax changes? What is so holy about them? Why should they not be used for short-term alterations in people's perceptions? Why should that be left to interest rates? We never heard such an argument previously. Perhaps the Chancellor of the Exchequer will deal with that.
The Chancellor has said that he does not want to reduce interest rates because he may have to increase them again. Why should they not be used in accordance with varying circumstances? We know that he believes in short- term changes, so why should he deny himself this particular opportunity? When in the Red Book he says that monetary growth is excessive with
"too much money chasing too few goods,"
it sounds suspiciously like demand management as I used to know it. Indeed, I cannot see any difference between that formulation and demand management. With all those qualifications for money supply, is there a monetary policy at all? It is like reading tea leaves. If we see a forest or a baby in the tea leaves, we can justify it. The justification for the money supply is the same.
My second question was whether it was a Budget for the economy or for the next election. It was a balancing act and I am not sure that the Chancellor will reach the end of the tightrope safely. In 1988 the goodies were handed out too early to the Government's friends. It is a pity that they were not handed out more fairly. It is normal to hand out goodies nearer to a general election. If the Government did that for political reason, they got it wrong, and if it was for economic reasons, they also got it wrong. The inheritance--the Chancellor is kind not to refer to it--meant that the boom came at the wrong moment.
Column 73
With a deficit of £21 billion a year, we have to appear a safe haven for overseas borrowing. That meant a hard Budget, but with an election only two years away it also meant that politically the Buget could not be as harsh as those who lend us money would like. Therefore, the answer to whether this is a harsh Budget is that it is not hard enough for overseas investors, and the markets expressed their anxieties.In his Budget statement, the Chancellor said :
"I favour a strong exchange rate."
That is not a ringing declaration, if one is trying to calm the nerves of those who deposit money here. Overseas investors look at these matters day by day because they know that once that commitment is not expressed, it is time to withdraw their money.
The Chancellor of the Exchequer (Mr. John Major) : I appreciate the graciousness with which the right hon. Gentleman makes his remarks. Is he aware that, although it is true that sterling fell the day after the Budget, it has since risen and is now higher than when I rose to deliver the Budget speech?
Mr. Sheldon : We must see first the amount of intervention by the Bank of England, and secondly, the long-term reaction of the markets as the Budget affects them.
In his Budget statement, the Chancellor said :
"I am confident that the period of low growth will be short-lived--not least because of the permanent improvements in the underlying economy in the 1980s."--[ Official Report, 20 March 1990 ; Vol. 169, c. 1011- 14.]
Comparing 1979 with 1990, what are the permanent achievements? In the last full year of the Labour Government the balance of payments stood at plus £5 billion, whereas last year it was minus £21 billion. The non- visible balance is disappearing. In May 1979 inflation was 10.3 per cent., whereas in 1980 it was 21.9 per cent. That was not because of the quintupling of oil prices, but partly because of the doubling of VAT. Is there a permanent improvement? Inflation will increase to 9.5 per cent. as against the Labour Government's 10.3 per cent. Since the 1950s output has fallen only under this Government. In Tameside and Stockport we had 20,000 skilled engineers ; now we have only 5,000. Questions about skills remain supremely relevant. Where is the permanent improvement?
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