House of Commons Hansard Debates for 1 May 1990

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they did in their evidence to the Select Committee--that somehow the economic squeeze that they are applying to squeeze out inflation does not bring with it, as they know it does, the expectation of a rise in unemployment. My hon. Friend the Member for Norwich, South (Mr. Garrett) challenged the Chancellor on that point in the Select Committee, but he refused to take it up. I hope that the Government are not pretending that if unemployment rises this year--we hope that it does not--it will be purely as a consequence of wage increases. They know that that is not true. Of all the commentators and forecasters who have examined the Government model for the economy, the only one who did not say that it implied an automatic increase in unemployment because of the squeeze was the National Institute of Economic and Social Research because it predicted a further change in the manipulation of unemployment statistics. It predicted nothing different about jobs, but something different about the unemployment figures. This morning the Confederation of British Industry said that it seems likely that many thousands of jobs will be lost, especially in manufacturing, because of the economic problems that we are now experiencing. It refers especially to the high cost of finance as well as of labour.

So there is no question but that one of the consequences of the policies of the present Government is likely to be an increase in unemployment, and it is clear, too, that what is happening on the wages front--the Governor of the Bank of England made it absolutely clear in his evidence to the Select Committee when he spoke about "administered" price rises--is that wage rises are still following price rises.

The Select Committee expressed a little surprise that the diagram previously in the Red Book of unit labour costs was not in this year's, but I suspect that it is because the diagram showed that, while inflation has slowly and steadily risen in the past two or three years, wage costs have stayed remarkably stable, and that it is only when people are faced with the impact of the most recent interest rate rises, of the poll tax and of the other price increases coming through this year that wage claims have begun to rise. Although a number of hon. Members intervened while the Chief Secretary was talking about wage costs, I do not recall hearing very much from any of them last year when a number of directors of the companies that support the Conservative party and give it a lot of money gave themselves wage increases, not of 7, 8 or 9 per cent. but of 27 per cent. or 28 per cent. That was only last year. I understand that some have already begun to award themselves increases on a similar scale this year. Yet these are the very people who benefited most from the income tax cuts in 1988 ; they are the very people who benefited most of all because of that considerable cut in the top rate of income tax--

Mrs. Alice Mahon (Halifax) : And from the poll tax.

Mrs. Beckett : And they are the very people--I take my hon. Friend's point--who benefit from the change from the rates to the poll tax. I recognise--the Chief Secretary was at it again today when talking about marginal tax and so on--that the Government claim that none of this matters because they have been generous to workers who are low paid. This claim is particularly difficult to substantiate if one looks at the overall tax burden--not just at income tax but at the

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real impact on people's net disposable income of income tax, national insurance contributions, value added tax and the package of measures for which the Government are responsible and because of which the average household's tax burden has increased since this Government came to power.

I want to look, particularly because of the way in which the tax-exempt special savings account is described in this Budget, at what is happening under this generous Government, where all benefit from increased prosperity and the economic miracle, to the lowest paid of all. In the Budget, the Government refer to a group that they call moderate or relatively small savers who will save up to £150 a month or about £16 a week. They obviously regard these people as not especially well-off. I draw the attention of the House to a group of people who get very little attention in this place, particularly from hon. Members on the Government Benches-- those who earn very low wages, from as low as £60 a week to £170 a week.

I have been following the detailed statistics for this group since spring 1988 when not only did we have these massive cuts in taxation which particularly benefited the best off but we had a massive package of reforms in social security. The figures are an average because they include average rents, average costs of travel and things of that kind, but they are figures from parliamentary answers and they show a particularly interesting comparison in the movement of incomes over the year and the marginal rates of tax to which the Chief Secretary referred. The figures that I have recently received from the Government are particularly illuminating. They show that someone in this low-earning bracket--the Government have deliberately fostered low earnings in their time in power--can have an increase in gross pay of £10 a week and see his net disposable income rise by as little as 55p. In one particular case, someone with a two-child family earning between £90 and £100 can experience a drop in income of 11p a week. That is a marginal tax rate, to pick up the Chief Secretary's phrase, of well over 90 per cent.

If we were particularly generous and took that whole spread of earnings, from £60 to £170--presumably, to get that kind of increase, someone would have to change his job--a married man with two children of four and six could have that gross increase of £110 a week and come out with just under £16.50 extra in disposable income--£16.50 gain for a gross rise in income of £110 a week. What was that again about marginal tax rates?

A single parent with two children presents a similar picture. By going into part-time employment with earnings of £20 a week, such a person would gain £8.10 of her £20 extra, but if she went into full-time employment and earned as much as an extra £40 a week she would still get only £9.21 a week more than she would receive on benefit--an extra £1.11 in net disposable income for a £40 increase in gross pay and the burden of full-time work, with no allowance made for any contribution to child care costs--

Mr. Quentin Davies : Explanation!

Mrs. Beckett : No, I would like to go through this comparison and finish the point. I do not need any explanation, I assure the hon. Gentleman. I am very familiar with these figures. Let me give him a little more explanation.

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Let us take a family with two children. I have asked for a comparison to be made between their income now and their income in 1987 when these packages of tax and social security reforms were introduced. The House will, I know, be pleased to learn that this year, for the first time since 1987-88, the family are better off in cash terms, although in some cases by as little as 12p a week. That is a 12p increase in net disposable income over three years under a Government who have given us an economic "miracle". Of course, they are all worse off in real terms than in 1987.

If I take now the figures for a single parent with two children aged four and six, in cash terms those earning £60, £70 or £80 a week are worse off now than they were before the package of changes in 1988. If they are worse off in cash terms, they are substantially worse off in real terms.

I know that hon. Members on the Government Benches do not like criticism of the Government's record. There is an increasing and worrying tendency to equate criticism of the Government with disloyalty to the country. The Chief Secretary was at it during Question Time the other day. The phenomenon is seen at its most extreme in the case of the Prime Minister. It began--although it seems hardly to have been noticed and certainly not much commented on--when the Prime Minister began to talk about "my Government", a phrase that I had previously heard only on the lips of Her Majesty the Queen. Then we got on to the use of the royal "we". Then we had gates to protect the Prime Minister from the admiring populace. Now we have the change in approach to the civil service, who are told that their loyalty is not to the Crown but to the Government of the day, and the increasing identification of the interests of the country with those of the present Government, which is percolating along the Back Benches.

What we seem to have, therefore, is a Government who do not like the attitude of the civil service and who feel that they must change its code of conduct, and who do not like the attitude of Opposition Members. We had that again today from the Chief Secretary, who thinks that there is something wrong with an Opposition who dare to think that they have the right to criticise the Government. We have seen the ultimate in the wish to ensure proper agreement with the Government's policies in that, although the Government have not actually tried to change the electorate yet, they are doing their best to manipulate who will vote. I understand that there is a well-funded campaign, headed by the hon. Member for Dorset, West (Sir J. Spicer), to persuade those who left the country as much as 20 years ago that it is their moral duty to prevent people who have been so unpatriotic as to stay here from exercising what we had previously thought was their right to change their Government.

I find it particularly offensive in this regard that the hon. Member for Dorset, West should apparently focus his campaign in South Africa, where he is telling white South Africans to vote Conservative because Mrs. Thatcher is the best friend that they have in the world. There would be no point in his addressing any remarks to black South Africans--

Mr. Andrew Mitchell (Gedling) : On a point of order, Madam Deputy Speaker. A good many people wish to take part in the debate on the Second Reading of the Finance Bill. The hon. Lady's comments, while entertaining, are entirely irrelevant to the matter under discussion.

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Madam Deputy Speaker (Miss Betty Boothroyd) : The hon. Gentleman should leave it to the Chair to determine what is in order. If there were no interventions I am sure that the hon. Lady would finish her speech earlier.

Mrs. Beckett : You know me well enough, Madam Deputy Speaker, to know that I am about to relate my remarks directly to the proposals and policies of the Government. Despite the hon. Gentleman's intervention, however, I shall finish the point. The hon. Member for Dorset, West is appealing to white South Africans ; it would be a waste of his time to appeal to black South Africans, who do not even have the vote in their own country, let alone in ours.

The other way in which the Government are attempting to influence the composition of an ungrateful electorate is through the poll tax. In theory it might be possible to separate registration on the electoral roll from registration for the poll tax, but this is certainly the nearest thing to reintroducing a link between the ability to pay and the right to vote that has been seen in this country for many a generation.

This brings me directly back to the Government's record on inflation. One of the many administered price rises imposed on us, as the Governor of the Bank of England said, by political decision, is the poll tax itself. I know that the Select Committee received differing evidence about whether it is the equivalent of increasing income tax by a ha'penny or by twopence, but it is clear that however it is quantified or explained it is yet another increase in the tax burden that ordinary people are trying to meet ; and yet again, the only answer that they receive from the Government when they complain about that tax burden is that inflation can be dealt with only by interest rates and the price rises that they bring. I ask the Government again whether they will reconsider even now whether the use of interest rates alone is as successful as they have claimed, or whether the sheer bluntness of that instrument is not affecting its impact.

I draw to the attention of the Chief Secretary the report by the Treasury and Civil Service Select Committee which states : "The time which it has taken for successive increases in interest rates to restrain demand sufficiently calls into question the effectiveness of interest rate policy on its own."

The Chief Secretary quoted the Select Committee report. I shall read his remarks in the Official Report with care, but I am not sure whether he was entirely accurate. He said that the Select Committee had said that the role of reserve asset ratios had no impact on the growth of money, but in fact that was the Select Committee quoting the Red Book. So the Chief Secretary was quoting what the Government say, not what the Select Committee said. The report suggests--in particular, the comments of Mr. Reading suggest-- that the Government should consider alternatives to the use of this single instrument. The report recently produced by the Bundesbank-- [Interruption.] I shall be happy to send a copy of it to the hon. Member for Richmond and Barnes (Mr. Hanley) so that he can read it. The report draws attention to the fact that everywhere in Europe and across the western developed world, except here and in Luxembourg, there is a use--in a variety of degrees and with various detailed arrangements--of some form of credit management, some means of influencing the extent to which banks are prepared to lend and add to the growth of credit--

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Mr. Hanley : What does the report mean?

Mrs. Beckett : The hon. Gentleman should read the Bundesbank report and not waste the time of the House.

We have never said that the use of such instruments would be a replacement- -

The Financial Secretary to the Treasury (Mr. Peter Lilley) rose --

Mrs. Beckett : The hon. Gentleman will have a chance to make his own speech.

We have never claimed that the use of such instruments would be a replacement for the use of interest rates. All that we have ever observed is that their use, even temporarily, might have allowed, and even now might allow, slightly lower interest rates than are necessary when the policy pursued is one of interest rates alone. That is a matter of particular moment at a time when the danger is that interest rates may have to be raised again.

Mr. Lilley : Can the hon. Lady point to any phrase in the Bundesbank report that shows that it is possible by using minimum reserve ratios to have lower interest rates than would otherwise obtain? I am sure that she cannot, because it does not say that.

Mrs. Beckett : It does not say as much in those terms, and I cannot find the precise reference now, but the report shows that Spain and France, by manipulating their credit instruments, were able to avoid a rise in interest rates.

Mr. Norman Lamont : The hon. Lady is wrong.

Mrs. Beckett : Perhaps we can pursue this some other time ; I have not marked the exact passage in the report. It is no good the Chief Secretary shaking his head. It is not five minutes since the former Chancellor and the present Chancellor told us that no one in Europe uses these methods any more. We were told that they did not exist and that, in so far as they did exist, they had been abolished. The Bundesbank report clearly says that every country--Japan, the United States and every country in Europe except ourselves and Luxembourg--uses some form of this mechanism in a variety of ways. The report says even more clearly, in a clear contradiction of the remarks of the Chief Secretary, the Chancellor and the former Chancellor, that it is not true that the use of these instruments is being abandoned. They are being refined and made more effective. Further, the report suggests that if there is to be progress towards economic and monetary union, some measure along these lines will have to be considered in every country.

Mr. Norman Lamont : On a point of accuracy, the previous Chancellor argued not that these instruments were not used but that they were not an alternative to putting up interest rates. He argued that reserve asset ratios were merely an instrument by which interest rates were manipulated. I wonder whether the hon. Lady has read the remarks made this week by the president of the Bundesbank who has called into question the use of reserve asset ratios throughout Europe and who says that all Europe should consider getting rid of them--they are becoming redundant.

Mrs. Beckett : I have not read the report of that. The report to which I am referring was published only two weeks ago, so perhaps the Bundesbank needs to sort out what advice it is giving the rest of the world --

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[Interruption.] I am quoting from a report published by the Bundesbank in March 1990. If, in the third week of April 1990, the Bundesbank is saying something different, I shall study it with considerable interest. I remind the Chief Secretary of how he misquoted the Select Committee's report earlier, so perhaps all these reports seem to have a different flavour depending on which party uses them.

Mr. Quentin Davies rose--

Mrs. Beckett : I cannot give way ; I have spoken for too long already.

I turn now to the impact of interest rates on investment decisions. I was amazed to see--I note that the Select Committee was, too--that the Governor of the Bank suggested that the level of interest rates was not particularly important as an influence on investment decisions, although there were exceptions. Unfortunately, that does not agree with reports from the engineering industry, the CBI or a variety of sources. Recent reports from Peat, Marwick, McLintock, from the senior receiver, and from Barclays bank and the Midland bank suggest that these difficulties are having a serious effect on the Government.

I note also that the Select Committee remarked on the difficulties experienced because of the poor quality of statistics available to the Government. That is rich in irony : the Government have sown the seeds and they are now reaping the whirlwind. They have cut down the signposts and now complain that they do not know where they are. Here, too, the scale of the problem is alarming. I note that in his report to the Select Committee Mr. Martin says that the errors in the Government's statistics are "beyond the pale". Sir Douglas Wass, not so long ago Permanent Secretary to the Treasury, complained that as a result of economies, industrial statistics in Britain are inferior to those of almost all our competitor countries.

But although the signposts in the form of statistics may be missing, the real economy tells us all too clearly what is happening. There have been cuts in the construction industry ; a fall of 40 per cent. in starts was announced a few weeks ago. At long last British Rail has recognised that it can no longer square the circle of squeezing the consumer directly to fund investment. There has been a predicted fall in the Government's phoney measure of business investment, in which investment in casinos is seen as just as valuable as investment in manufacturing. There are problems with output and imports ; a downturn in the balance of payments is predicted based on a presumed drop in those imports. Mortgage rates are at their highest ever. We have a record manufacturing deficit and trade deficit.

The Government have utterly and comprehensively lost their way. The Chief Secretary told us that no one apart from the Opposition believes that. Let me quote from the House Builder magazine, again of March 1990. The director of the House Builders Federation says that these

"are signs of a Government in terminal decline. It has lost the ability to take sensible, pragmatic decisions, it is afraid of its own shadow, but contemptuous of important groups and industries whose support it needs."

The Government seem to have made the elementary mistake of believing their own propaganda and of believing that they have performed a miracle. The Greeks call that hubris. It is certainly being followed by nemesis. The way in which the Government are approaching the

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issue is our greatest charge against them, the Budget and the Finance Bill. Even now there is no evidence that the Government have the wisdom or the foresight to invest what is left of our oil wealth in training, industry, civil research and development, and in the engines of growth that are driving our competitors further and further ahead every month and year. These are the policies which are needed for long-term prosperity. These are the areas in which the Government are still making cuts.

In the race to 1992 our competitors are three quarters of the way round the track and we have not even left the starting block because we are still busy listening to the team captain claiming that the tactics and techniques of the other runners are wrong. We are not even in the race. We are not running in the race because we have a Government who have run out of ideas and of steam, and who are fast running out of time.

7.21 pm

Mr. Terence L. Higgins (Worthing) : The task of a Chief Secretary on the Second Reading of the Finance Bill is never easy. Although he may spend some time discussing the general economic position, he inevitably spends quite a lot of time discussing individual clauses in the Bill. On the other hand, the House traditionally tends to concentrate very little on the clauses and very much on the general economic position, and in particular to consider whether it has changed between the time of the Budget speech and the Second Reading of the Bill. The Budget looks sometimes better and sometimes worse than it did initially.

This year the Budget looks much the same as it did on Budget day, for the simple reason that the overall economic position has been confused and obscure. Inevitably that reflects the fact that we are suffering severely from the problem of inadequate economic statistics. In the report of the Select Committee, which I am glad to say was not only unanimous but on which there were no divisions, we stress strongly how important it is to get the statistics right. The debate so far has dealt at length with the position in 1987 after the stock exchange crash. I do not think that there is any doubt that mistakes were made at that time. I think that that is generally recognised on these Benches and on the Opposition Benches, where even more reflationary measures were advocated. We live now with the consequences of those misleading statistics and the actions which were mistakenly taken upon them. That is now notorious. I do not think, as the hon. Member for Derby, South (Mrs. Beckett) suggested, that it was a question of what happened on interest rates ; she would assert that it was a problem of tax cuts. Even after the tax cuts at that time the Budget surplus was still 10 times bigger than any surplus achieved under a Labour Government. Therefore, I do not believe that the hon. Lady's argument was right. None the less, the fact that stimulus was imposed on the economy at that time has caused serious problems. The Select Committee, in its report, draws attention to the possibility of using the asset price index as an additional lead indicator of what is happening in the economy. If we had paid attention to that at the time, I believe it would have been helpful.

We are still suffering from the statistical problem. At the time of the Budget the public sector debt repayment

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was anticipated to be £7 billion. We now know that the estimated outturn, after only about a month, is £8 billion. At one time a difference of £1 billion in the public sector debt repayment or borrowing requirement would have been regarded as a major change in economic policy, yet that is now the difference being thrown up by the statistics within a few weeks. That brings out strongly the problems we are suffering.

The latest balance of payment figures have been referred to. The biggest deficit ever shown has led to very little reaction in the City because I do not believe that the City thought the figures were right. Indeed, I find the figures in conflict with what we know is happening in the high street and the market. By now it ought clearly to have come through into the import figures or, on the other side of the equation, into the export figures when the exchange rate over the last year has gone down 10 per cent.

As the Select Committee says, it is essential to put more resources into getting better statistics. As the Chief Secretary courteously said, there has been a team effort between the Select Committee and the Treasury to try to bring that about. We have had the Pickford report and an action plan to improve matters. However, further action must be taken urgently. The disadvantages of not spending money on it, compared with the potential benefit, are very great.

What worries me also--this came out in the autumn statement report of the Select Committee--is that almost always we find that the turning point errors in the forecast are very much bigger than the errors when there is an upturn or a downturn. It is when the economy turns round that the errors are great. We are at the turning point because all the Chancellor's measures are deliberately designed to get the economy back on course.

Taking everything I have said into account, I fear that the economy is probably slowing down a great deal more than the statistics or the forecasts suggest. Therefore, the Chancellor was right in his Budget to do very little to change the overall balance in the economy. A further massive move, such as some commentators in the City suggested, would have caused a real danger within a few months of a massive recession which it would have taken a long time to dig ourselves out of.

One lesson from 1987 is that when a mistake is made, largely because of bad statistics, it takes years to get the position right again. My hon. Friend was right in his Budget judgment, and he was right also in seeking not to raise interest rates further. Mr. Ian Taylor rose --

Mr. Higgins : I shall give way very briefly because I believe that Privy Councillors should not speak for more than 12 minutes.

Mr. Taylor : My right hon. Friend has made an extremely important point. Does he agree that a further tightening of fiscal policy in the Budget, as was urged by the City and by Opposition Members, would not have taken effect until the end of this year or the beginning of next year when we might already be in a severe recession?

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Mr. Higgins : I agree very much with my hon. Friend. The point which emerges is that my right hon. Friend the Chancellor has a more difficult task, because of all the conflicting signals, than perhaps any of his predecessors.

The other major problem is unit labour costs. The Select Committee published a chart, provided by the Treasury, which was not in the original Red Book. There are real dangers for our competitive position because of international relations. The fact that unit labour costs are expected to rise again is of grave concern against the background which I have just described. Although the position is vastly different in many respects from 1980, with public expenditure a much smaller percentage of gross national product and a public sector debt repayment of £8 billion plus compared with an £8 million deficit in 1980, none the less if the Chancellor's deflationary measures, which in my view are stronger than are generally supposed, run into inflationary wage settlements, we will be in danger of getting back to the position of 1979-80 and unemployment could rise substantially. We have made great progress in reducing unemployment in recent years, but the position is now dangerous. That is why it is so important to take into account what is happening with wage settlements. Overall, I believe what is happening is right. I am anxious to allow time for others to speak because a large number of hon. Members are waiting to do so, but I shall say a word or two about the relationship between monetary and fiscal policies. Up to now I have not taken the view that my right hon. Friend the Chancellor of the Exchequer or his predecessor were guilty of a one-club policy. It is not the case that, up to now, only interest rates have been used. That policy has been backed up by a tight fiscal policy, and the two have been working together. However, as the Select Committee points out, we need a better measure of fiscal stance than we have had so far. There is considerable obscurity about that at present.

However, the Committee stresses strongly that there can often be a dilemma about the use of interest rates. Sometimes, one might have to move them upwards for exchange rate stability while, at the same time, one should move them in the other direction to control the domestic economy. That is currently true and has always been true. There is not always a dilemma ; sometimes the interest rates should move in the same direction for both reasons.

If we join the exchange rate mechanism, as everyone expects--the Governor of the Bank of England rightly said that the only barrier to our joining was the differential inflation rate between this country and Europe-- interest rates will necessarily be dedicated to the maintenance of the exchange rate within whatever range band is selected. In cases of conflict, the interest rate would not be available for managing the domestic economy. Therefore, it will increasingly be necessary to adopt a more flexible approach towards fiscal policy, as well as using interest rates.

While I do not think that the one-club gibe has been a legitimate attack on the Government until now, we shall need an interest rate putter in relation to the exchange rate. However, if we try to use that same club for driving the economy, we shall not hit the ball very far. Therefore, our approach to the problem will need such a change.

I believe that, in the immensely difficult position in which he finds himself, the judgment of my right hon. Friend the Chancellor of the Exchequer has been right. We all wish that he is successful in his policies. We say in our

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report that he has taken the view that what is being done at present is sufficient to put matters right. Further dramatic changes would not be either wise or necessary.

7.33 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : It is always a pleasure to follow the right hon. Member for Worthing (Mr. Higgins), particularly when he produces one of his best reports. The reports are bound to vary considerably because of the wide range of membership of his Select Committee and other factors. However, this is undoubtedly a valuable report, which I read with great interest.

I take fully the right hon. Gentleman's point about statistics. The Government were wrong to try to save money on that crucial matter. I understand full well the comments which have been made by the Chief Secretary. Treasury Ministers always make such comments, belittling and scorning statistics, but when it comes to making decisions, it is those statistics that they use, because they have nothing else to use. They can rely only on their own guesses or the figures produced for them. In my experience, they use them to a much greater extent than they confess.

The Chancellor of the Exchequer has been prepared to listen. In his Budget statement he went into great detail in producing a reasoned defence of interest rates as the only practicable weapon. I welcome such dialogue, which we have not generally had throughout this Government's lifetime. It is important for the Chancellor of the Exchequer--I give him full credit for it--to engage in such dialogue so that he can learn from some of the experiences and arguments of other hon. Members. That is the proper way to deal with such matters. I am sorry that the Chief Secretary to the Treasury did not follow that way of handling such matters, but I hope that he will in future. I do not agree with the Chancellor of the Exchequer about interest rates being the only practicable weapon. The suspicion that we have had about the present policy rests on the fact that it was on 3 June 1988--nearly two years ago--when interest rates commenced their upward drive. The purpose of that was to slow down consumer demand. The Prime Minister became involved in this matter when she spoke on 30 June. The Leader of the Opposition asked why the right hon. Lady had to inflict the increased interest rates on British industry and British home buyers. Her answer was :

"To keep downward pressure on inflation."--[ Official Report, 30 June 1988 ; Vol. 136, c. 520.]

We have had two years of that, but it has not been successful. Inflation has been going up and up. Therefore, this policy has had little effect on inflation and little observable effect on the demand for credit. One estimate is that £150 billion of extra credit has been created during those two years. That was a complete reversal of the Government's intentions. So far from credit being reduced and demand slowing down, they have increased.

Previous Chancellors of the Exchequer may have been deficient in many ways, but one thing they all knew was how to bring about a reduction in demand. It is a simple trick. All one has to do is to raise taxes or, in the old days, use the regulator and, as further measures, restrict credit and put up interest rates. Almost from day two, one could see the spending level decline. However, the Chancellor of the Exchequer did not agree with that way of handling such matters. He said :

"fiscal policy is not, in my view, a flexible instrument which should be altered to meet short-term contingencies.

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Fine-tuning fiscal policy is not only disruptive to the public sector, to 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 am sure that if he were to find himself back in time to two years ago, he might have a different view on that. There is no question but that during the past two years he has not succeeded and there are political as well as economic problems.

Mr. Neil Hamilton : The right hon. Gentleman will be aware that the tax cuts of the 1988 Budget amounted to about £4 billion. The amount of credit generated by the reduction in interest rates was £40 billion. By how much would he have recommended that the Chancellor increase taxation in 1988 in order to choke off the inflationary impetus which that gave?

Mr. Sheldon : We must not take too simplistic a view. We must take into account such matters as people's perceptions. Once they found that the brakes were being taken off, people got into a spending spin that lasted longer than it should have done. A sum of £150 billion credit is a large amount to have accumulated in those two years. Now that the two years have passed we must ask why Conservative Chancellors of the Exchequer are totally unable to do what their predecessors did so effortlessly, bring about a reduction in demand and create what might be a soft or hard landing. The trouble now is that we have had no landing. Two years have gone by and we have not landed yet. They have been unable to do so because, once again, they are impaled on a dogma, which is what rules such matters. Changes in taxation under the Government are said to be a one-way movement downwards. They cannot even be used to smooth the flow of a changing economy. That is one of the important factors. That was why the Conservative party introduced the regulator. It is not necessarily fine tuning ; there has been more fine tuning on interest rates than on taxation. They have tried to reduce the levels of demand without making changes in taxation.

The Government rely on interest rates, but they do not bring about changes next week or next month ; they work on a long-term perception of what will happen. Taxation takes money out of the pocket and has an immediate effect. The Chancellor found that he could not use credit controls or taxation, so he was left with interest rates. Now, for the first time in recent years, he is left only with exhortation. Given the civilised behaviour of this Chancellor, it is a mild form of exhortation--somewhere between exhortation and advice. He said in his Budget statement about extended credit :

"I believe that the financial institutions would be wise to reconsider their policy, and I hope that the subject will be covered in the code of practice "--[ Official Report, 20 March 1990 ; Vol. 169, c. 1012.]

It is all very well asking the financial institutions to be wise, but their mail shots continue to pour into our homes. Recently my bank manager even berated me for not borrowing. A good customer is one who borrows, as that is to the advantage of the bank or finance house.

Another fallacy is that interest rates reduce the demand from everybody. Many people do not have high mortgages. Indeed, many have savings and they will benefit from high interest rates. There is no reason why they should reduce their spending. The great advantage of using the tax system for smoothing the ups and the downs of economic fortunes is that that affects everyone who

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spends. No one objects to tax changes downwards, but within that direction there should be fluctuations to take account of the position facing the Chancellor.

The problem facing the Government is that they are trying to be obedient not to the demands of the economy but to the needs of the election and the opinions of the Prime Minister. Although they may be cursing the fate that led them into this position only two years from the next election, they will have to live with that. They did not take the necessary measures two years ago when they had plenty of time to do so. Although they could have engineered a short-term recovery in time for the election if they had started from the position of 3 June 1988, when they first diagnosed trouble, they have now left it too late. They cannot rail against fate. They were left with plenty of time for the usual economic election tricks. In fact, surprisingly, fate has, in limited terms, been rather kind. Pay increases are running at about 9.5 per cent.--very high, but only at about the same level as last year. However, inflation is now approaching 10 per cent.

Some people decry the inflation figures in pay settlements. Sam Brittan's words are especially colourful--he insults what he calls idiot inflation figures. However, whether or not they include mortgage relief, the figures assess the spending of the family and they lead to pay increases. If the Government wish to reduce inflation, they need to take account of those factors over which they have some control, and that includes interest rates. Indeed, it appears that, however bad the trade or inflation figures, or however bad they might become, the game of playing with one club has just about run its course. The next step--if, unfortunately, one is needed- -would be to choose between letting the pound go, doing a U-turn on taxation or introducing some form of credit controls. Of course, there are those who think that the Chancellor has the ultimate secret weapon-- entering the exchange rate mechanism. They say that if we do that interest rates will come down, the pound will be steady and that, although there will be problems in the long run, that will take Britain to the other side of the general election. Meanwhile, they think that the short-term effects will be good. There will be a shock to companies that cannot increase pay because there is no prospect of devaluation. Trade unions will learn that new rules have come into play that will limit their wage claims.

Let me consider the role of companies and workers. If anyone really believes that companies and workers will be disciplined by the ERM, they are even more out of touch than the Government. After all, we have covered the same ground before. Almost 20 years ago, there were those who said that entering the Community would provide a shock ; that Britain would have to face reality. Some 10 years ago there were those who thought that monetarism and sterling M3 would provide a shock. They held to the lofty theory of rational expectation--the rational expectation that trade unions would enter negotiations saying, "Because sterling M3 is a bit too high, we will not put in much of a wage claim." What nonsense. Only the Government could believe that. The rational expectation that I and many others had was that that would prove to be nonsense. Trade union leaders and management did not believe it, and they were right.

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I agree that we should join the ERM, although my reasons for saying that are largely political in the context of a Europe in which we cannot for ever remain a dissentient voice. When we join the ERM, there will be a honeymoon period of six or nine months, and then unless fundamentals are changed there will be a forced devaluation of the pound. In political terms, that could be difficult for the Government. They have to make a judgment on the right timing and they may have little control over that. My advice to the Chancellor, for what it is worth, it to do the proper thing : act like a Chancellor, enter the ERM, and make use of his fiscal and credit control weapons. He must remember that if he gets it wrong he will be to blame, not the Prime Minister.

I am worried about investment. With 25 per cent. capital allowances, there is no longer a great deal of incentive to invest. If a company buys a machine for £1,000, the next day it will be written down to £750. That is serious because it means that companies are having to borrow money at high interest rates, and with depreciation being wholly out of line with the worth of the machine. That could result in serious cuts. I am sure that the Confederation of British Industry is right to highlight that important factor.

The Chancellor could have done something about that. A 15 per cent. interest rate acts differently on different people. For an individual, there is a problem with the mortgage. For those with savings, it will improve income. For an expanding industrialist, it hits very hard. Not only is the level of capital allowance less than the actual depreciation, but the industrialist must also find a large sum of money in a market that is uncertain because of the uncertain future of the economy. The Chancellor could have dealt with those matters. If he was so optimistic about the future, he could have said that for this year only capital allowances would be improved. That would have had a strong effect. He could have judged the right level to encourage the sort of investment that could have been afforded. That would help industry at a time when it is under pressure.

The invisible earnings have shown us that only manufacturing industry will save the country, yet we have treated it abominably, shabbily and disgracefully. It is to manufacturing industry that we must now look, and it is time that we started looking after its interests.

7.48 pm

Mr. Neil Hamilton (Tatton) : I must admit that I had some difficulty in understanding the logic of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon). If he agrees with the hon. Member for Derby, South (Mrs. Beckett) that the rapid reduction in interest rates following black Monday in 1987 was substantially responsible for the credit boom, I do not understand why that theory does not work in reverse and that credit is discouraged when interest rates are increased sharply. The right hon. Gentlemen seems to have the odd idea that we should not have increased interest rates and that the economy could have been calmed down by some increase in taxation, when to match the volume increase in spending which has occurred in the past few years, the increase in taxation that would have been required to substitute for rises in interest rates would have been absolutely colossal and, I have no

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doubt, quite unacceptable. I do not believe for a moment that any Labour Government faced with such a problem would ever have been able to do that.

I shall start my speech with a text, as the rest of it may sound a little like a sermon :

"Let us admit it frankly as a business people should.

We have had no end of a lesson, it will do us no end of good." Those were lines written by Kipling on the Boer war, but I want to apply them to the experience of the Government in the past few years in what I hope to be the temporary abandonment of monetarism. I was heartened by the speech of the hon. Member for Derby, South as it betrayed no understanding of the causes of the problems that the economy poses for us today, and certainly showed no idea of what to do about it. That bodes well for us politically at the next election, whenever it will be.

I hope that Conservative Members, at any rate, now recognise the problems that have been caused and the reasons for them. I believe them to be threefold : first, the end of overfunding ; secondly, the abandonment of broad money targeting ; and, thirdly, the fixation with fixed exchange rates, particularly following the Louvre agreement and the unofficial peg with the deutschmark up to early 1988.

It would be as well for us to admit that at that time my right hon. Friend the Prime Minister was right. She faced a Chancellor who took a different view of the role of monetary policy, and in particular the role of exchange rate targeting. There was a public row when the Prime Minister was regarded or accused, as she always is, of being intolerant, dogmatic and handbagging Cabinet Ministers round the table in the manner of "Spitting Image". But she was defeated by the then Chancellor, my right hon. Friend the Member for Blaby (Mr. Lawson), and had to retreat, and what a disaster it was for us all.

Mr. Nicholas Budgen (Wolverhampton, South-West) : My hon. Friend ought to remember also that she was undefeated by the 1922 Committee, who told the Prime Minister that the position of the Chancellor of the Exchequer was unassailable in the Tory party at the time.

Mr. Hamilton : I know nothing of the workings of the 1922 Committee, which is a mythical body which I seldom attend.

The myth of the dictatorial Prime Minister is hard to dispel. But when the Prime Minister is being accused similarly in other areas of policy, it is as well to recognise that perhaps the truth is different.

On 30 January 1985 my right hon. Friend the Member for Blaby delivered the following judgment :

"I have never believed in intervention in the foreign exchange market as a way of life, still less as a substitute for firm fiscal and monetary action."

How correct he was and how that has been proved by the experience of the past two years.

Having started out very successfully in our fight against inflation by targeting broad money and having no exchange rate target, we reversed our policy and did not target broad money and had an exchange rate target. The end of overfunding meant that we could no longer be confident of meeting broad money targets by selling gilts to neutralise the effects of high bank lending, and thereby denied ourselves the opportunity to bolster our anti- inflationary policy. I remember agreeing with my hon.

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