House of Commons Hansard Debates for 1 May 1990

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That is a controversial view for my hon. Friends and others who think that, if only we can get the monetary discipline at home right, the exchange rate will look after itself. I fear that in the real world, in the real currency markets, that is too simplified a view. They are right in half their proposition--that we must get our monetary discipline more effective--but they are wrong in their proposition that we can then leave the exchange rate side to look after itself. Both are necessary and interlocking elements. Without them both being pursued with more vigour, we shall not get matters right.

On the monetary discipline side, the position is not good. Whether one is a monetarist or a revised monetarist or one merely appreciates in a common sense way the importance of money in the inflationary process, it is worrying to note that the monetary aggregates are going astray. M3 rose by 2.4 per cent. in the period to March ; M4 by 17.3 per cent. ; and even M0, which is the Government's published target--it is the only one and is only an indicator, not a quantity of control of monetary demand or supply--is moving outside the frame. It is worrying that we appear to lack the mechanisms and systems by which to control the monetary conditions inside the country. We shall never make a good member of any exchange rate mechanism until we get our own qualifications right as regards monetary discipline. That is why the Chancellor was right when, at the beginning of this year, he said, as he repeated in his Budget speech, that he was concerned about mechanisms of monetary control in this country and was seeking to reform them in a number of ways.

We must face the fact that our present structure does not operate on the supply of money. It operates mostly on the demand for money. Setting the short-term interest rate sets the price, and the Bank of England then says that it will supply virtually unlimited funds, one way or another, to the banks at that level. It is then left to the banks to decide what they do with all that money. The result is that if it is available and they can lend it, they lend it ; and if it is lent, it is spent. That position continues even with the very high short-term interest rates that we have today. We shall not achieve effective control over monetary conditions in this country until we move more to controlling the supply of money as opposed to the demand for money.

It is in that area that we must apply our minds if we are to achieve credibility internationally that we have monetary discipline at home. We must give thickness and quality to Britain's monetary policies to ensure that our currency performs decently in international markets, thereby enabling us to command respect and make a contribution in international monetary circles.

The time has come to move towards the proposition being advanced-- vigorously by the Governor and deputy Governor of the Bank of England and others--that we need a central monetary authority. The Bank of England is a politically subordinate organisation--it is effective in that role--but it must have a clear statutory obligation to achieve monetary targets and maintain control in the price and value of money. To do that, we should consider more than we have going against the monetary base of the banks, using the weapon of monetary reserve asset ratios--which on occasions the Select Committee examines and does not turn down--and developing a number of other techniques, which I do not have time tonight to enumerate, for going against the supply of money.

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In the end, it all comes out in the interest rates. It is valid to say that everything we do is reflected in interest rates. But there is a difference between setting an interest rate and then finding that we must slip away from it, or otherwise operating through a variety of ways on the supply of money and seeing interest rates come out differently. It is the difference between letting the banks lend happily in the knowledge that they will never be caught out, and putting the banks in the position of having to start drawing in their lending in case they find that they must borrow short money at a price higher than they can lend it.

The other part of the policy is the exchange rate mechanism. I agree that it is not a quick fix. We must first get our own monetary position under much better control. If we can do that, it makes sense to move into the exchange rate mechanism, and we should declare more openly our preparedness to do that. When we do that, we may have higher interest rates in certain conditions, but with less volatility.

The interest rate has been moved by public policy decisions 84 times since May 1979. Short-term interest rates have moved that number of times in this country. We can do better. We could have a calmer pattern of interest rates if we had a context in which sterling was seen to operate and in which people could lend across the exchanges without such an exchange rate risk. People could invest in this country to take advantages of our relatively high interest rates with fewer exchange rate risks and that would create a downward and calming pressure on interest rates. It would enable us to get through the next difficult year with less strain than using a system of monetary control that is not up to the task that we face. Those were the only remarks that I wished to make on that narrow issue. What I am endeavouring to put forward is fundamental to our success in beating inflation, which in turn is fundamental not only to the success of the Government but to the viability and prosperity of Britain in the coming five years.

8.55 pm

Mr. Denzil Davies (Llanelli) : This debate, as with previous Finance Bill debates, has in essence been about the development of the economy, certainly since the Budget, and there are no prizes for guessing the facts about that development. It has been poor since the Budget.

Inflation is rising again, the trade deficit is horrendous, unemployment is beginning to rise again or will rise soon, our interest rates are the highest in Europe, as we have been told, and they could rise further--that matter is not entirely within the control of the Chancellor--and manufacturing investment is beginning to stagnate and stop.

I should remind Conservative Members--there were echoes of this in the speech of the right hon. Member for Guildford (Mr. Howell)--that in 1979 they came to power to defeat inflation, to right the wrongs and curb the excesses, as the radical right say them, of the 1960s and 1970s and to stop, as the Conservatives of the time say it, the economic decline of Britain.

We see, 11 years later, that they have failed to do those things. We have heard today that inflation, measured by the RPI, may be 10 per cent. this or next month, and Government spokesmen--and the few who still have some

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sympathy with the Government--try to console themselves by saying that the underlying rate of inflation is about 6 per cent. Even so, 6 per cent. is twice the rate of inflation in France and Germany, our major competitors on the continent.

By the time that the increases in the poll tax, the mortgage rate increases and the raised excise duty have fallen out of the RPI, perhaps the rate of 10 per cent. will come down. But by that time the underlying rate of inflation may have gone up from 6 to 8 per cent., partly as a result of wage increases and partly because of the devaluation of the pound which has taken place but which has not fully worked its way through the system.

I had always thought that there was an inner contradiction in the policies of the radical right. It believes in controlling and regulating the money supply, but it does not believe in controls or in regulations. That has been the fundamental problem. Indeed, that point was touched on by the right hon. Member for Guildford (Mr. Howell). If one does not believe in regulating the market but believes in freeing everything, including money, how on earth can one control the money supply? Of course, one cannot do so, as has been demonstrated to a considerable extent.

In the latter part of the 1970s it was difficult to control the money supply in a country such as Britain which, because the City of London is an international trading centre, was an open financial economy even then. However, it is far more open today than it was in 1979. Yet a Government came into power who at least espoused monetary policy and called for controls on the supply of money, but who deregulated everything and did not leave themselves any instruments with which they could control the money supply.

The contrast with France and Germany is stark. Germany has a fairly flexible governmental regulatory system but a strong independent central bank. On the other hand, France has a weak central bank--that used to be the case and I believe that it is still true because we certainly do not hear much about the Banque de France--but has a strong, central and almost inflexible governmental regulatory system.

Therefore, while one country has an independent central bank and a looser system of government, the other has the opposite, but both are now maintaining a rate of inflation of between 3 and 3.5 per cent. In Britain we have neither. We do not have a governmental regulatory system and, although I am not advocating an independent central bank, we have a central bank that is somewhere between the Banque de France and the Bundesbank. We have neither one system nor the other. As I have said, I do not believe that we should have a central bank that is totally independent because I do not believe that in a democratic society bankers should be allowed to control the supply of money. That is something for Government. With great political will and great political skill, plus the instruments at their disposal, the French have shown that that can be achieved through democratic institutions in a democratic society.

The other problem is the balance of payments. The March deficit of £2.2 billion was a shock to everybody, especially the Treasury. Last year we had a deficit of £20 billion, some of which, I concede, resulted from excess demand, and eventually some of the deficit will disappear as demand is reduced. Nobody can know for certain about such things because they are extremely difficult to forecast,

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but I do not believe that we will get our balance of payments deficit down to much below £15 billion even with high interest rates.

In the past all kinds of excuses have been made about the balance of payments deficit. First, we were told by the right hon. Member for Blaby (Mr. Lawson) that it did not matter and that we should forget about it. Then we were told that, although it did matter, it did not matter as long as we could finance it. Then we were told that if the figures were wrong anyway, why pay any attention to them? Now we have "erratics" and are back to diamonds and to being told about jumbo jets and Boeings. We have been over that ground before, but the deficit now is much greater than it was in 1970 when the Labour Government lost the election.

It does not give me--or, I hope, anybody else--any pleasure to say that I am fearful that we shall not be able to reduce the deficit to below £15 billion because there may very well be a structural problem, which could have arisen in two ways. First, large sections of our manufacturing industry have been wiped out. That means that we are not substituting for imports because we cannot produce the goods that would provide that substitute. I am talking about a vast range of consumer goods--the kind of goods that most people want to buy and are determined to buy despite the high rates of interest.

Secondly, although I concede that to some extent there has been a change in some industries in the past 10 years, even in those parts of British industry which are now more productive, most of the plant and machinery that is used and most of the investment goods have come from abroad. That is a continual process. It is not a case of buying something once and for all because, in today's world, plant and machinery must change, change, change and we must keep up with the changes.

All hon. Members have toured factories in their constituencies. We have all seen foreign machinery, plant and equipment. The replacement parts and even the servicing of that equipment come from abroad and have to be paid for ultimately in our balance of payments. Therefore, I cannot see how we can reduce our balance of payments to much below £15 billion without stringent measures.

The other night I watched "Newsnight" in which my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) participated, along with that highly respected--I say that with the greatest of respect--financial columnist, Mr. Samuel Brittan. On that occasion my right hon. and learned Friend the Member for Monklands, East was not up to his usual standard. Perhaps he was speaking with tongue in cheek, but he suggested that one advantage of having an economic monetary union was that one could wipe out the balance of payments deficit. We know that there can be an act of union and no balance of payments deficit, but that does not solve the problem. All that will do is turn Britain into the South Dakota or the Oklahoma of the united states of Europe. The problem is still there as a drain on our resources and infrastructure. The balance of payments is one of the best indicators of an economy's health. We fall down badly on that, as the Government fall down badly on inflation.

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The Government can be accused of many things, such as the neglect of public services and the introduction of the awful, ridiculous poll tax, but in the end it is the economic mess that they have created during the past 10 years that we must consider. It will have to be cleared up by the next Government, at great cost and with great problems for the British public.

9 pm

Mr. James Paice (Cambridgeshire, South-East) : I have listened with interest to the whole debate. I support strongly what my right hon. Friend the Member for Worthing (Mr. Higgins) said, especially when he supported the Chancellor for not heeding the siren voices that called for substantial increases in taxation, and his comments about Government statistics. As we visit businesses in our constituencies and talk to bankers--as we all do-- it must be abundantly clear to us all that the Government's actions on interest rates are already having a strong effect. We can see the effects on the retail sector in the difficulty faced by shops in our constituencies. Sales are down ; many have had to shed staff and many are closing. The Chancellor's medicine is clearly working. It is a matter of regret to us all that it is taking longer than we hoped, but that could be construed as a measure of how strong the economy was in the first place.

Until recently, I had lingering yearnings for credit controls, but, such thoughts were dashed and destroyed, not by my right hon. Friend the Chancellor, or even his predecessor my right hon. Friend the Member for Blaby (Mr. Lawson), but by the right hon. and learned Member for Monklands, East (Mr. Smith) who on 24 October 1989 was espousing the cause of voluntary restraint by the banks. When he was pressed by my hon. Friend the Member for Croydon, South (Sir W. Clark) about the foreign banks--which since the abolition of exchange controls have developed a major stake in this country--he said : "I do not think that foreign banks would take an irresponsible view if approached by the Government."--[ Official Report, 24 October 1989 ; Vol. 158, c. 694.]

That is naive. Foreign banks would be more likely to heed the advice of their own Governments and shareholders than that of the Government of the country in which they operate. They operate solely for commercial benefit.

Credit controls by voluntary restraint and moral persuasion were first introduced in the early 1950s. For the following two decades, the severity of the "voluntary" persuasion was increased, until finally in 1971 it was abandoned for positive constraints on the banks. I do not believe that they have any part to play in controlling credit today, to say nothing of the fact that they would not tackle the problem of housing credit, which is the root cause of many of the difficulties.

I hope that my right hon. Friend the Chancellor will examine what has happened in the past week with credit cards. Credit card borrowing accounts for a minuscule amount of total credit, but I object--I know that others do, too--to paying charges that are used to keep interest rates down for those who use the card to borrow. The fact that people who regularly pay off their credit card accounts every month are subsidising other people's interest is especially distasteful. I do not know whether it is something in which we should intervene as a Government, but it gives me cause for regret.

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Much has been said this evening about the exchange rate mechanism. I lend my voice entirely to those who are trying to persuade my right hon. Friend the Chancellor not to adhere too strongly to the Madrid requirements but to seek entry sooner rather than later. I say that not because I believe that it is some wonderful palliative or panacea ; it is clearly not the sole answer to our difficulties, and anyone who believed that it was would be foolish. My right hon. Friend said in his Budget statement that it would provide a new framework for interest rate decisions, but that even then no one should suppose that it would bring a dispensation from the need for a strong domestic monetary policy, and that is absolutely right. But belonging to the exchange rate mechanism would provide the stability in the currency markets for which industry yearns, and it would be an extra weapon--an extra club in the bag--for the Chancellor in his constant battle to control inflation.

Those of my right hon. and hon. Friends who believe that there is some national pride at stake and that we should not on that account join the rest of Europe in the exchange rate mechanism are, I believe, mistaken : for a long time we have been influenced to a very large extent by what happens in other capitals and by other Governments' activities.

In thinking about the Bill I have also considered what is not in it and what could be in it if there were another Government. My right hon. Friend the Chief Secretary has already mentioned the minimum wage promised by Opposition Members at a cost of 500,000 jobs. What is not in the Bill is anything that could be construed as assisting inflation or accepting inflation as inevitable, but it is clear from an examination of the policy of Opposition Members that they accept a degree of inflation as an inevitable part of progress.

Perhaps most significant of all, the Bill does not introduce any extra income tax on investment income, such as a surcharge on income over £3,000 from some form of savings. Three thousand pounds is the sort of income that would come in from a relatively small amount of savings, perhaps a half-share of an inherited property--the sort of savings and income that many families would expect to have, particularly pensioners. It is not a Budget which reintroduces the gift tax or destroys the opportunity for many people to rent a home by removing the business expansion scheme exceptions from private landlords.

From listening to debates here on the economy I find that many Opposition Members have still not grasped the fundamental fact that the tax rate reductions that we have followed for the past 11 years have increased the Government's revenue and therefore the Government's ability to spend on important services. If people really care about public expenditure on those vital services, what is crucial is not the individual rates of tax but the total sum of money raised from that tax policy ; and it has been clear to us all who have followed the path of the past 11 years that the reductions in the tax rates have served to increase the overall take to the Government and therefore the amount of money available. The alternative would be to borrow or to cut expenditure, the path followed by Labour Governments in the past and one that would be followed in the future.

Hon. Members have mentioned the changes in charity taxation. They are widely welcomed on both sides of the House and are not in dispute. I know that it is outside his direct remit, but I suggest to my right hon. Friend the

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Chief Secretary that the changes would be considerably enhanced if he could persuade my right hon. and learned Friend the Home Secretary to bring forward a Bill for charity law reform to make sure that charities are in a strong position to use to the very best the enhanced resources that they will receive from this Bill. Concern has been expressed in the press only in the past few days about one large charity--

Mrs. Alice Mahon (Halifax) : Will the hon. Gentleman give way?

Mr. Paice : I will not ; other hon. Members want to speak. I believe that the Government would be wise to introduce charity reform as soon as possible.

TESSA has been widely welcomed on both sides of the House. Its strength is that it is a simple scheme that will be readily understood by ordinary people. The personal equity plan scheme has worked very well, but it has been too complicated, I fear, for many people. I should have liked a more front-end loaded savings scheme that would have enabled the saver to see his benefits more clearly. TESSA, which is fundamentally simple, will go a long way towards remedying our savings difficulties, and that in turn will, I hope, lead to a shift in the underlying levels of interest that it will be necessary to charge in the long-term future.

The abolition of composite rate tax must be right. As a parent I have found it difficult to examine possible investment schemes for my children's meagre savings, since so many of them carry composite rates of tax. Although the abolition will not take place until next year, it will be a great improvement.

The Bill is largely neutral, but my right hon. Friend the Chancellor has clearly shown that in a broadly neutral Budget it is possible to deal with unfairnesses and difficulties and to hand out a range of remedies to those who would otherwise suffer. This is a good Bill, welcomed in many sectors, and the House should welcome it, too.

9.17 pm

Mrs. Alice Mahon (Halifax) : I tried to intervene when the hon. Member for Cambridgeshire, South-East (Mr. Paice) was speaking about charities because I, like other Labour Members, was disgusted to hear Oxfam singled out for political treatment. I think that the line goes back to No. 10. I should have liked to have told the hon. Gentleman that the Adam Smith Institute is also a charity. It is highly political, and it certainly never supports Opposition policies. The Bill fails to address the real problems facing our nation. Our economic predicament is grim, but listening to speeches by Conservative Members one would think that we were in the middle of an economic miracle.

I want to concentrate on the fact that the Bill singularly fails to do anything for manufacturing industry. Manufacturing industry faces grave difficulties, yet Government policies, such as high interest rates, have brought investment almost to a halt and that has further damaged our manufacturing base.

The other day I talked to a director of a good textile firm in Halifax. Textiles have been in retreat, badly damaged by Government policies of the past 10 years. He told me that he had planning permission for an extension

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to a factory, he had full order books, yet he could not make the required investment because of the expense of borrowing money. The Government have severely neglected manufacturing industry. The latest figures show that manufacturing output has ground to a halt. The forecasts in the Budget assume zero growth, and that is bad enough for manufacturing. But recently we had a debate on the multi-fibre arrangement, in which a junior Minister at the Department of Trade and Industry spoke. He hinted that we did not need a multi-fibre arrangement and that it would save no jobs. Hon. Members who heard that must have been depressed about the future for textiles. Those representing constituencies where thousands are employed in the textile industry were very worried. The Silberston report thought that 30,000 jobs would go ; the TUC gave a more realistic assessment of about 100,000 jobs. If that happens, an important industry may be wiped out.

The Government have a dismal record on the support of manufacturing industry. The growth rate in manufacturing output in the United Kingdom between 1979 and 1989 was 12.2 per cent. That places us seventeenth of the 20 OECD countries. It would be difficult to find a Government policy which did not damage industry and workers. High inflation, high mortgages and the poll tax mean that low-paid workers have no choice but to ask for pay rises. For the Government to pretend that that in itself will lead to higher inflation is a cheek.

I have already said that high interest rates are damaging manufacturing. Nothing in the Bill will help industry. Families have not benefited, nor have low-paid workers. If Government Back Benchers were honest, they would have tried to do something for families. We have heard praise for tax relief on workplace nurseries, but we heard nothing about the freeze on child benefit which has damaged families.

The so-called reform of the social security system has led to great hardship. Every day we find out about some new hardship. Only the other day I discovered that women who were in receipt of family credit are now much worse off.

Women who work only during school hours and who, for obvious reasons, have the school holidays off cannot claim family credit. They are excluded because they are not working for 52 weeks a year. That is unfair. We are told that the adjudicator will have to decide on those cases. In whatever the Government have done, they have damaged the low-paid and people on low incomes.

A few months ago, a regulation was pushed through the House which will mean that textile workers and other workers who are laid off regularly will not be entitled to full unemployment benefit. The Government have inflicted low pay upon us. The Budget and the Bill will do nothing about it. We have heard from various hon. Members tonight about low pay. Conservative Members have talked about workers claiming exorbitant pay increases. Let me tell them about low pay. In my constituency C and M Packing pays its workers only £10 per day. That is the kind of economy that the Government say we need. The one provision in the Bill which I welcome is the tax relief on workplace nurseries. Tax should never have been imposed on the nurseries. It was a scandal to pretend that workplace nurseries were a benefit which should be taxed,

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along with company cars. When we look at what the Government have done, we see how little it is and that the Government are not concerned.

This week in the House of Commons Magazine the Secretary of State for Employment talked about the demographic time bomb and the fact that 95 per cent. of workers in the future will be women. He praised the Government for taking off that unfair taxation in the Budget. Child care in this country is an absolute disgrace, and the Government do nothing about it. Workplace nurseries represent only 3 per cent. of child care in this country. If the Government were serious about trying to get women back to work, they would be talking about a comprehensive child care policy giving local government the money needed to fund nurseries and local authority community nurseries, doing something about low pay and making sure that women could get back to work.

One of the most comprehensive surveys conducted on workplace nurseries--a Government survey conducted by the Department of Employment--showed that less than 0.2 per cent., or 198 women, out of 1 million women surveyed had children in employment-provided creches. That shows the Government's lack of commitment towards getting women back into the workplace. Government Ministers will have to do something more than stand at the Dispatch Box and pretend. If the women of this country are to get back into the work force, they need to do something about who looks after their children, and that is a Government problem.

9.25 pm

Mr. Nicholas Budgen (Wolverhampton, South-West) : I am sure that the hon. Member for Halifax (Mrs. Mahon) will find it difficult to believe that those of us caricatured as hard-faced monetarists are so mostly because we are concerned, like her, about the weakest sections of the community who are hit hardest by inflation.

I had not expected to catch Mr. Speaker's eye in this debate. I have heard most of the speeches and came into the Chamber expecting not so much to contribute as to benefit from hearing the speeches. Having heard the various speeches, particularly that of my right hon. Friend the Member for Guildford (Mr. Howell), I reflected that he, most of all, represented respectable opinion. In all his speeches he goes on about the way in which we all want to defeat inflation, and says it is extraordinary that inflation continues. He speaks of various monetarist statistics as though he, and he alone, had the privilege of seeing them and almost says that ordinary commentators in this country had no means of noticing, for instance, that house prices were going up by 20 per cent. in one year or 30 per cent. in another. It seemed to suggest that all those signs of the stoking up of inflation can only now, retrospectively, be seen with the benefit of hindsight. In fact, all those figures were there for all to see at the time. The conclusion that we all reach is that, initially, inflation is much welcomed in this country.

Every time interest rates are unwisely brought down, it is put forward by the Government of the day as an indication of their wisdom, good management or personal generosity. The time must come--I do not know when--when this country will finally decide that it is serious about wanting to get on top of inflation. At that stage, it

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will surely say that the track record of Governments is so bad that the control of the money supply must, sadly, be delegated to another independent organisation.

Like my right hon. Friend the Prime Minister, I am highly sceptical of the proposals put forward with such magnificent effrontery by my right hon. Friend the Member for Blaby (Mr. Lawson). I recollect that on an earlier occasion he said that the relationship between the Treasury and the Bank of England was one of the Treasury deciding the policy and the Bank of England carrying it out. If a Labour Chancellor had said that, the pound would have dropped, all respectable opinion would have taken to the correspondence columns of The Times and there would have been a near constitutional disaster. However, at the time it was regarded as an engaging expression of my right hon. Friend's vigour and supremacy.

My right hon. Friend the Prime Minister was properly sceptical of the proposals to make the Bank of England more independent. She suspected that it was part of a wider scheme to bring Britain within the exchange rate mechanism and closer to a European central bank. As she rightly says, we believe in a supreme Parliament with an entirely independent central bank.

I see your eagle eye upon me, Mr. Speaker, so I will conclude. We have an independent judiciary, which is not supported by any special Bill of Rights. It is supported by convention. That is recognised by all parts of what I might pompously describe as educated opinion. In the same way, if we find, as we shall, that entering the ERM does not bring a painless attack upon inflation, and if we find that it has gone exactly the same way as prices and incomes policies, the control of interest rates through reserve assets, credit controls, or all those other myths of a painless way to control inflation, we shall have to give to the Bank of England greater independence within our constitution because we shall have plainly proved that, sadly, over all the years since the war democratic politicians have demonstrated that they and the British people, if in doubt, like inflation. 9.32 pm

Mr. Chris Smith (Islington, South and Finsbury) : Perhaps inevitably, much of today's debate has focused on the general condition of our national economy rather than on many of the detailed items of the Finance Bill. That is as it should be because the Bill will ultimately be judged by what it does or does not do to bring relief, improvement or assistance to our ailing economy. It roundly fails that test.

I wish to remind the House about some of the overall economic indicators. Had my hon. Friends the Members for Nottingham, North (Mr. Allen) and for Leeds, West (Mr. Battle) been lucky enough to catch your eye, Mr. Speaker, I am sure that they, too, would have wanted to draw attention to those indicators.

Many hon. Members have referred to the balance of payments deficit. The March figure is the second worst ever. The figure for the first quarter of this year of £5.6 billion is the highest ever first quarter figure in our history. Hon. Members have drawn attention to the rate of inflation, which now stands at 8.1 per cent. and is set to rise dramatically in a week and a half.

It is worth reminding ourselves that when the Government took office they inherited an inflation rate just above the European average. It is now double the

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European average. Right hon. and hon. Members have drawn attention to the record on output. The latest figures show that manufacturing output is lower now than it was in January 1989. They have also drawn attention to the investment figures. In the last quarter of 1989 investment in manufacturing was 5 per cent. down on the previous quarter, so we have stagnant output, falling investment, a record balance of payments deficit and rising inflation.

It is scarcely surprising that the Chief Secretary concentrated on what had happened in the past rather than on what is happening now to the British economy. However, he made one slip. He tried to convince us--as he has tried to do in the past and we have tried to put him right--that the present Conservative Government believe in low taxes. He may have forgotten what the Government themselves have said in the Red Book which was published at the same time as the Budget. Table 2.5 of the Red Book shows clearly that the overall taxation burden in the economy in 1978-79 was 34 per cent. of GDP. In 1989-90--the financial year just gone--after 10 years of Conservative stewardship of the economy, the overall taxation burden was 36 per cent. of GDP. What is worse, in the current financial year, 1990-91, the overall taxation burden goes up by a full percentage point from 36 per cent. of GDP to 37 per cent. The bulk of that increase is largely due to the unfair and undemocratic imposition of the poll tax on the people of Britain.

The Government are not the party of economic success, nor are they the party of low taxation. What about the Government's chosen policy to bring an errant economy to heel--high interest rates? We have the highest interest rates among the major economies and the highest mortgage rate ever in our history. Those interest rates are supposed to be bearing down on the demand side of the economy, but the figures to which my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) referred show that they are not working.

Since the previous Chancellor of the Exchequer began to tighten monetary policy to bear down on the demand side, a further £150 billion worth of credit has been pumped into the domestic economy. We have had 21 months of pain, increasing repossessions, household budgets in savage difficulty and mortgage payments increasing by £200 a month or more. And all for what? For £150 billion of extra credit going into the domestic economy.

Interest rates not only have an impact--however loose and ineffective that impact may be--on the demand side of the economy ; they also harm the supply side of the economy. We need look no further than the account given by Midland bank on 24 April this year when its chairman warned that high interest rates were hitting businesses as well as individuals and leading to the worsening of the bank's bad debt situation. That warning was echoed again two days later by the deputy chairman of Barclays bank.

The evidence is clear that the operation of high interest rates is hitting business even more harshly than it is hitting the mortgage payers who are paying so much more each month for the homes in which they live.

Mr. Quentin Davies : Will the hon. Gentleman give way?

Mr. Smith : No. I am afraid that time is extremely limited. Against that background, the Finance Bill fails completely to measure up to the task that the economy

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demands. Some items in the Bill are sensible and we welcome them. We have pressed some of them on the Government for some time. Last year we pressed for assistance for friendly societies. The Bill contains a little assistance for them. Last year the Government said that there was no way in which fiscal measures should be used. Now they are using them. We asked for changes in the provisions on Third world debt. The Bill introduces some changes that will help to stop the gravy train for banks to some extent, but those measures will do nothing specific to assist the ailing economies of the Third world. Last year we asked for the abolition of the tax on workplace nurseries. We have argued that case throughout the past four years. It was dismissed out of hand last year by the Chief Secretary. Now he asks us to accept a Finance Bill that includes it. We welcome that. We are glad that the Government have changed heart on some matters. We wish to scrutinise other items more closely, such as the changes in oil taxation. We shall want to be convinced that the relief on abandonment costs is balanced by the cap on petroleum tax payments. We are not sure that it is.

We shall examine the treatment of unit trusts, which seems to leave investment trust companies out in the cold. We shall scrutinise the precise operation of relief against VAT for bad debts. We shall examine the closing of loopholes for dual resident companies, a long overdue measure. We shall want to know that those loopholes have been fully closed.

We shall examine the abolition of the business expansion scheme locality rule which makes yet more attractive the private rented property sector of BES, which is already gobbling up 80 per cent. or more of BES relief.

Most important of all is not what the Finance Bill does but what it fails to do. It contains no green agenda for environmental use of the taxation system. Before the Budget we urged the Government to consider some sensible measures such as reducing VAT for energy-efficient appliances, insulation material, recycled material and catalytic converters and increasing VAT on chlorofluorocarbons and other polluting substances. We urged them to use the allowance system against corporations in an environmentally friendly way, to grade the vehicle excise duty scale of payments to encourage people to have smaller cars, and to reduce car tax where catalytic converters are fitted. None of those ideas has been taken up by the Government.

The Government have included no green agenda in the Bill. Nor is there any real help for investment in the manufacturing sector of our economy. There is no help on first-year capital allowances. There is no switch of the emphasis of the business expansion scheme from rented property to manufacturing.

The Bill contains only relatively minor measures on training. The negligible estimated cost of training and enterprise council provision in the Bill reveals that the Government do not intend very much training to take place as a result of the change that the Bill brings about.

The Bill contains no relief for ordinary people facing financial problems with their mortgages, electricity payments, water rates, transport fares, rents or the poll tax. Indeed, the Government have given clear signals that high interest rates are likely to be with us for a long time until there is an unseemly dash to the ballot box with

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electoral bribes to the people. By that time the British people will have rumbled the Government for what such bribes undoubtedly will be.

Above all, there is no statement in the Bill or in any of the speeches about it that gives us any hope that the Government are more serious than they have been recently about British membership of the exchange rate mechanism. The evidence of the Select Committee on the Treasury and Civil Service is extremely instructive here. When the Select Committee asked the Governor of the Bank of England whether all the conditions, other than the condition on inflation, out of the Madrid conditions had been met, the Governor said clearly, "Yes." When the Chancellor of the Exchequer was asked the same question, he said, "No." We are entitled to ask the Financial Secretary tonight which of them was giving the Government's position. Have the conditions other than the inflation condition been met or not? On the exchange rate mechanism, as on so much else of Government policy, there is doubt and confusion leading ultimately to disaster. The Bill is a tinkering Bill which merely scratches the surface of the major problems facing the British economy. It fails miserably to measure up to the task. When the Chancellor commented on the appalling trade figures last week, he made much of what he called "erratic" items in the accounts. The Financial Times on Saturday had the right riposte to the Chancellor and the Government. It said :

"Erratic imports are being blamed for the Government's latest trade disaster. Other factors leading to the economic mess, presumably, include erratic inflation, erratic bank lending and erratic productivity growth. But I guess that the Government will never blame erratic policies."

The truth is that we have a Government with erratic policies who have failed the British economy and the British people. The sooner they go, the better.

9.46 pm

The Financial Secretary to the Treasury (Mr. Peter Lilley) : Before I begin properly, I will answer the question asked by the hon. Member for Islington, South and Finsbury (Mr. Smith). Yes, we are on course to join the exchange rate mechanism of the European monetary system. We welcome Italy's recent moves to abolish exchange controls, but there remain conditions to be met--notably the reduction of inflation in this country. We wait to hear whether the Opposition are still committed to, as they said, "major changes" in the working of the European monetary system before they would be able to join. This has been an important debate with a number of excellent contributions. I especially regret missing the contributions of my right hon. Friend the Member for Guildford (Mr. Howell) and of my hon. Friends the Members for Surrey, North-West (Mr. Grylls) and for Cambridge, South-East (Mr. Paice). I shall read their contributions closely after the debate. If I am unable to reply to them or to a number of other hon. Members now, I hope that I shall be forgiven due to the brevity of time available. I will provide written replies on any outstanding points.

My right hon. Friend the Member for Worthing (Mr. Higgins) made an especially important contribution. He will appreciate that I cannot pre- empt the reply that my right hon. Friend the Chancellor of the Exchequer will make to the excellent report of the Treasury and Civil

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Service Select Committee. My right hon. Friend the Member for Worthing placed particular emphasis on getting the statistics right. I assure him that my right hon. Friend the Chancellor is fully seized of the importance of that and is vigorously pursuing measures about which he has given the Select Committee an idea and on which he will report to it further. We certainly do not intend to spoil the ship for a ha'porth of tar, and it is fair to say that the problems with statistics are not the result of reductions in expenditure, but a consequence of deregulation and more rapid change in the economy with which the statistical process has not kept up.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) said that we should return to fiscal fine tuning to control demand and that interest rates were unsuitable for that task. We should be virtually alone among the major countries of the world if we accepted that advice. Most other countries rely on interest rates and on small and regular adjustments, and are successful in so doing. They include socialist countries as well as Conservative countries. Moreover, I do not recall exclusive or major reliance on fiscal policy being as easy or successful as the right hon. Gentleman suggested.

My hon. Friends the Members for Gosport (Mr. Viggers), for Croydon, South (Sir W. Clark) and for Horsham (Sir P. Hordern) expressed concern about our measures on sovereign debt. They were particularly concerned that the new tax treatment might interact adversely with prudential provisioning for bad debt. I can reassure them on that. One effect of our measures will be to separate the tax treatment from the prudential aspect of provisioning, which will remain the responsibility of directors, taking into account the advice that they receive from the Bank of England. The measure will bring certainty both to the Exchequer and to the bank and will phase future increases in relief over a period. It will also increase the relative attraction of selling back debt to debtor nations--a measure that I know is welcomed by hon. Members on both sides of the House. My hon. Friend the Member for Tatton (Mr. Hamilton) was in vintage form. I heard it suggested that he was being rather brave, at a time when the possibility of promotions is in the air. I thought that his speech was a naked bid for promotion--if only to shut him up. I am certainly not brave enough to comment on all the thorny issues that he raised.

My hon. Friends the Members for Tatton and for Wolverhampton, South-West (Mr. Budgen) joined together in affirming that the British are wedded to inflation, but I believe that they are wrong. It may have been so in the past, but since the experience in the foothills of hyper-inflation in the late 1970s, things have changed. That experience registered a shock on the British psyche similar to the shock which made the German people permanently hostile to inflation. Our shock may have been smaller, but it is fresher in our minds. I believe that there is now a much larger constituency in this country for anti-inflationary policy. I do not expect people to express pleasure while undergoing the painful measures that are essential to get inflation down, but I am certain that they will never vote in a party which is manifestly soft on inflation and whose policies are wholly lacking in credibility.

That brings me directly to the speech made by the hon. Member for Derby, South (Mrs. Beckett). I am grateful to her for her welcome for a number of the measures included

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in the Bill. Those apart, however, she did not mention a single item in the Bill, nor did she use the occasion--as one might have expected from the spokesman of a party which hoped to be taken seriously as an alternative party of Government--to spell out Labour's alternative tax proposals. There was not a word about them. Sometimes Treasury Ministers are criticised for going into pre-Budget purdah. The present Opposition are the first Opposition to go into a post-Budget purdah, which is in fact a pre-election purdah. Labour Members intend to remain mum on the subject for as long as they can, but we shall not permit them to do so.

The hon. Member for Derby, South refused to answer the question posed by a number of my hon. Friends : what would the Labour party do to get inflation down? We know what Labour would do to get inflation up. It would cut interest rates prematurely, increase public spending, squander the surplus and return to deficit financing. The hon. Lady admitted that Labour had endorsed the mistake that we have acknowledged that we made in reducing interest rates in October 1987, following the worldwide stock market collapse. What she did not admit was that the Labour party demanded that we do more--lots more--and continued demanding it for some months afterwards. The right hon. and learned Member for Monklands, East (Mr. Smith) said :

"Now is the time for cuts in interest rates to stimulate the economy Now is the time for a programme of well planned public investment to mobilise the unused capacity There is no economic constraint on such action"--

only the restraint of what the right hon. and learned Gentleman called "self-imposed dogma."

The Labour party is in a difficult position. If Labour Members admit that our problems resulted from cutting interest rates too much and holding them down for too long, they would have to acknowledge that a period of high interest rates is a necessary and practical way of getting inflation down. Instead, Labour tried to blame everything on the 1988 Budget--the first Budget with a £14 billion surplus that I have ever heard described as inflationary. At that time, no other Government in the western world were running a surplus of that magnitude. The income tax cuts that we made then were more than offset by rises in tax revenues elsewhere, so that Budget was more than fully balanced. There were only £4 billion of reductions in income tax then. As my hon. Friend the Member for Tatton explained, there was something like a £50 billion increase in borrowing over the ensuing year. It is hard to believe that any increase in taxation could have been adequate or appropriate to offset that rise in borrowing. Clearly, one should treat such matters at source--and that means dealing with interest rates.

The hon. Member for Derby, South thought that there might be some salvation for her position in a rather obscure Teutonic document from the Bundesbank. She said that if we adopted minimum reserve ratios we would be able to reduce our interest rates but still control the volume of credit. Nowhere in that document is it suggested that minimum reserve ratios enable the Bundesbank to restrict the volume of credit while keeping interest rates below the market clearing level. Minimum reserve ratios are simply a device to help to ensure that the interest rates set by the Bundesbank are transmitted throughout the banking system.

That point is made crystal clear in a research paper, also published by the Bundesbank, which states :

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