House of Commons Hansard Debates for 24 Jul 1990

Mr. Smith : I shall give way to the hon. Gentleman in case he wishes to challenge.

Mrs. Oppenheim : As the right hon. and learned Gentleman is so keen on OECD figures, he will be aware that the latest set shows that, during the 1980s, productivity in British manufacturing rose at the fastest rate of any industrial country and that manufacturing output in Britain rose by one quarter--the best performance in Europe. That compares with the experience under the last Labour Government, for which OECD figures show that manufacturing output fell and

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that during the 1960s and 1970s, our manufacturing output and productivity rose more slowly than those of all other European countries.

Mr. Smith : First, let me correct the hon. Gentleman on one fact. Productivity in the manufacturing sector did not fall under the Labour Government. However, it is interesting that the hon. Gentleman takes much the same line as the Government appear to do in their amendment. They look back to what they claim as some credits during the 1980s. There was a one- off improvement in productivity caused by running down the work force at the beginning of the decade, but the problem is that it is not sustained productivity. If I were the hon. Gentleman, I would not pursue the point about productivity because the figures are already turning against the Government, and will continue to do so.

I noted that the hon. Gentleman did not challenge any of the OECD figures on Britain's relative position on growth, investment and inflation--three important criteria.

Sir William Clark (Croydon, South) rose--

Mr. Smith : No doubt the hon. Gentleman wishes to correct me, so I shall give way to him.

Sir William Clark : I am grateful to the right hon. and learned Gentleman. I am sure that he wishes to be fair. If we are to compare like with like on inflation, the underlying rate of inflation in Britain is 6.9 per cent., not 9.8 per cent.-- [Interruption.] It is. Indeed, it is unfair to take different arithmetical calculations in the retail price index than other countries that do not include mortgage and housing costs. Surely the right hon. and learned Gentleman agrees with that.

Mr. Smith : I intend to deal with precisely that point during my speech. If the hon. Gentleman or the Government think that there should be some other means of assessing the rate of inflation, they should make representations to the official committee that regulates the basis on which the RPI is composed. I understand that the Government put to that committee the questions of both mortgage interest and the poll tax, and the committee said that they should be included, as most of us think they should be.

As Conservative Members would judge other Administrations on the basis of the RPI figures, I hope that they are prepared to be judged on that same basis. The whole reason for the exercise is because the hon. Gentleman, like his colleagues, is acutely embarrassed that inflation is knocking 10 per cent.

There has been a steady increase in inflation since 1988--two years of remorseless increases. I shall remind the House of the Government's technique with economic problems. From their foundation, the Government have always been about hype rather than reality ; about presentation rather than achievement. When inflation had almost doubled in 1988, the former Chancellor of the Exchequer told us not to worry because it was just a blip, a temporary phenomenon. The Government's first approach to the problem is to claim that it does not exist. Unfortunately for them and for us, inflation has continued to blip upwards, until it is now knocking 10 per cent.

The next technique is to rejig the figures, and that was most blatantly shown in the perpetual readjustment of the unemployment figures in the Government's favour. We

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had another example of that yesterday, which my hon. Friend the Member for Oldham, West (Mr. Meacher)--the shadow Secretary of State for Social Security--drew to the attention of the House on a point of order only a few minutes ago. The Government surreptitiously had to admit that their figures for poverty in Britain were hopelessly out of line with reality. I remind the House that, once again, the Government's defence was to say that increasing poverty did not exist in Britain, although Opposition Members knew from their constituency experiences that increasing poverty was precisely what was happening.

The Government not only claimed that the trickle-down from those whom they favoured at the top benefited the poor, but that their relative position had improved. The trouble with using statistics to belie reality is that reality has a disconcerting habit of breaking through. That is what happened in the new figures that were so shamelessly and covertly issued last evening. They revealed the extent of the Government's error and the fact that the living standards of 10 million people in Britain have declined while the Government have been in office.

All the figures to the contrary that were issued previously, and which were the basis not only of criticism but of justification of the Government's position, have turned out to be bogus. At the very least, a Minister should come to the House as soon as possible to explain why the Government have misled both Parliament and the nation for so long, and why it has taken them three years to admit that. Those of us familiar with the Government's techniques are not surprised by the way that they have dealt with the matter. The handout from the Department of Social Security last night stated :

"Net incomes of the population as a whole rose by about 20 per cent. in real terms over the period 1981-87. The incomes in the lower income groups also rose in real terms, but less rapidly." The actual figure for the average was 20 per cent., but for those in the lower income groups it was 2 per cent. What a euphemism for the difference between 20 per cent. and 2 per cent. to say "less rapidly". That shows the technique, the Government's sleight of hand and how they choose to deploy their statistics.

Mr. Conal Gregory (York) : The right hon. and learned Gentleman will recall that, under the Labour Administration, inflation rose to about 27 or 28 per cent. Does he share the view of the Leader of the Opposition, who, when asked on "The World at One" how he would control inflation, said :

"To cut a long story short, we don't know."

Mr. Smith : The hon. Gentleman has a selective memory. Under this Administration, inflation reached 22 per cent. and, in case he wants to blame the last Labour Government, his party doubled VAT from 8 to 15 per cent. We have persistently and consistently set out our policies to control inflation, which we believe are an important objective of Government policy. We are not in a mood to take lectures from a Government who have so lamentably failed to control inflation.

The statistics on inflation and the balance of payments show once again that the Government's first reaction when things start to go wrong is to claim that it is only temporary, a blip for inflation. The Prime Minister told us, the first time that the balance of payments deficit for the

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month was more than £1 billion, that they were freak figures. Almost every month, those freak figures have reasserted themselves. Every month has been a freak month since the Prime Minister announced that that was the explanation for our deteriorating balance of payments.

The next stage is to misrepresent the figures--the exercise on which the hon. Member for Croydon, South (Sir W. Clark) was embarked. Because the high RPI is embarrassing, two other versions are being introduced--RPI minus mortgage interest and RPI minus mortgage interest and the poll tax. Those two alternatives are being trailed across the scene. The hon. Gentleman selected the first alternative, and with a bit of encouragement he would probably adopt the second. In the first version for which the Treasury produces figures, mortgage interest is struck out as though it did not exist, as though it were not paid and were not afflicting families in this country. Unfortunately for the Government, the figures are still embarrassingly high--too high for presentation--so what do they do? They fiddle the figures again. They briefed and encouraged willing participants in the press to devise a new method of assessing it--RPI minus the poll tax.

The Government know that the official committee which regulates the basis of the RPI thinks that mortgage interest rates and the poll tax should be included. If the Government have nothing to do with this, I hope that they will take the opportunity to criticise the Sunday Times and the Institute of Fiscal Studies and tell people not to believe them.

Mr. Robert Sheldon (Ashton-under-Lyne) : The Government are not only trying to fiddle the figures downwards but have succeeded in fiddling the RPI because it does not take account of exchange rate changes, which would have put it well over 10 per cent., and perhaps up to 11 per cent.

Mr. Smith : I am grateful to my right hon. Friend for a wise and apt observation, which adds to the strength of the attack that we are making on the Government on this point.

The Government cannot exclude mortgage payments, because the public cannot exclude them. Other countries include different housing statistics because they are organised on a different basis. There is a different pattern of house ownership in comparable countries, with much more rented accommodation, but they take account of them in their prices index and do not strip them out, as the Government propose.

To try to remove the poll tax from the RPI is the worst example, because rates were always included in it. What is embarrassing for those who argue that the poll tax should not be included because it is alleged to be a tax is that they called it the community charge. They want to call it the community charge, and when we say "poll tax", they wince and say "community charge" back at us. If it is a charge, it is a charge and it should stay in the RPI.

Mr. Tim Smith (Beaconsfield) rose --

Mr. Smith : It is a short debate ; I must get on.

The Chancellor is adopting a new approach, a wholly new wheeze, the "proximate" rate of inflation. That applies solely to our relationship with other European Community countries. Proximate is not exactly precise ; it

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gives the Chancellor a certain amount of flexibility and movement, because he has only approximately to meet his figures.

That is just as well in relation to the so-called Madrid conditions for joining the exchange rate mechanism. I remind the House that inflation had to come down to the Community level before Britain could contemplate joining the ERM. As inflation is now higher than it was when those conditions were outlined, the Chancellor has a bit of a problem, so that is why we are into the "proximate" dodge. The Chancellor cannot dodge the fact that inflation is higher than it was when the conditions were set. When we consider the Government's record over the decade, we go back to their early days and to the setting out of the medium-term financial strategy of happy memory. We hear little about it today. The truth is that there is now no effective strategy. The medium-term financial strategy did not even rate a mention in the Chancellor's Budget speech.

The Government are now involved in a new stratagem--the STES, or short-term election strategy. The plan is to maintain high interest rates--as indeed the Government must--until Britain joins the ERM and then, in the period of lower interest rates which may occur following entry, to encourage a boomlet to coincide with the election at a time when, for statistical reasons, the headline RPI is falling, although the underlying rate may be rising.

The Government do not reveal that all the economic commentators who have speculated on this outturn of events--which they note will be a politically favourable scenario for the Government--point out that not long afterwards the problems get worse, and that every economic indicator goes in the opposite direction, contrary to the national interest. Why? There is a simple reason : because the underlying problems will not have been tackled by that device. That is the heart of the matter and, I hope, of our debate.

The Government have not tackled the underlying problems of the British economy, although their hype proclaimed until relatively recently that they had overcome them. The Government started the decade with the bonus of North sea oil. Eleven years and £91 billion-worth of North sea oil revenue later, we are at the bottom of the G7 leagues for growth and investment and the top for inflation. There was a period when Conservative Members almost believed their propaganda. On 26 April 1988, speaking in the debate on the Finance Bill, the Chancellor, who was then the Chief Secretary, said : "During the 1960s we praised and envied the German economic miracle. In the 1980s the situation has been precisely reversed."- -[ Official Report, 26 April 1988 ; Vol. 132, c. 214.]

Note the careful words "precisely reversed". There can be only one meaning for that--Britain now has the economic miracle, and Germany has to learn from the British model.

This reminds us that the fascination with West Germany goes back some time before the inglorious seminar at Chequers which received extensive publicity recently. That seminar revealed some curious attitudes to West Germany, with an obsession with German history and a patronising and insulting identification of so-called German characteristics and habits. The habits relate to the economic success and the characteristics to the foreign

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policy fears that the Government detect at every hand. These characteristics were identified, in the careful hand of the Prime Minister's perpetual private secretary, as

"angst, aggressiveness, assertiveness, bullying, egotism, inferiority complex, sentimentality".

Many might think that, with the exception of sentimentality, all those characteristics could be applied with some appropriateness to the present British Administration and its head.

In the record of that seminar, was there any substantial reference to the German economic success, still less to how it had been achieved? Going through what I am sure was the full record, I noted that any notion that Britain had overtaken Germany was not mentioned in those private discussions. That was for the House of Commons. When one gets down to the real discussions at Chequers, one does not delude oneself with any of that nonsense.

The seminar did not spend time considering that matter, because the Chancellor's claim is absurd. If we have precisely reversed the position with West Germany, why is its projected growth rate for this year 4.4 per cent., while ours will be lucky to reach 1 per cent.? Why is its inflation rate 2.6 per cent., while ours is 9.8 per cent.? Why are its interest rates 8 per cent., while ours are 15 per cent.? Why has its growth in output since 1979 been twice ours? Why is the percentage of its work force who are skilled 62 per cent.--according to the European Commission--while our figure is only 38 per cent.? Why did a British balance of payments deficit of under £1 billion in 1979 become a balance of payments deficit of £9 billion today? The Government have been hoist by their own petard : they chose Germany as the comparison, but the most cursory analysis confounds their claim, and reveals that the weakness of the British economy is alarming in comparison with German success. I hope that the Government, in their slightly more subdued mood of recent months, will appreciate the point.

To establish that, it might be sensible for the Prime Minister to organise another seminar at Chequers--this time, to examine German economic achievement ; this time, not to patronise but to learn. In the course of such an examination of the experience of West Germany since the war, the seminar would learn that the keys to a modern successful economy are--as Opposition Members maintain--to initiate supply-side policies, to increase investment in research and development, education and training and regional economic development, and to give proper and sustained priority to manufacturing industry.

Mr. A. J. Beith (Berwick-upon-Tweed) : Surely, when the right hon. and learned Gentleman mentions the German success in interest rates and inflation rates, he should not omit from the list the existence of an autonomous central bank with a responsibility for price stability?

Mr. Smith : I do not believe the superficial analysis of the position indulged in by the hon. Gentleman and his colleagues. The German success in countering inflation has been achieved over a much wider front than the existence of an autonomous bank. It has much to do with popular culture and a partnership economy--

Mr. David Shaw (Dover) : Are you in favour of that?

Mr. Smith : No, I am not in favour of having an autonomous bank. I do not know why the hon. Gentleman is in any doubt about that, as we have stated clearly that

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we are not in favour of an autonomous bank in Britain or in Europe. On that, we disagree with the hon. Member for Berwick-upon-Tweed (Mr Beith) and his colleagues. It is taking superficiality to excess--I know that that has long been a habit of the Liberal party, but it should not persist in it--to think that there is a casual connection between an autonomous central bank and a low rate of inflation. After any serious analysis, I do not think that that idea can be maintained.

Mr. Ian Gow (Eastbourne) : Should the proposed Chequers seminar examine the contribution that socialism has made to the German economic miracle?

Mr. Smith : I think that it should. I am grateful to the hon. Gentleman for adding an interesting extra half-hour to the discussion. It would be constructive for the Prime Minister and her colleagues to examine the success of the SPD-led coalition Government Germany, during whose time in office a great deal of German economic success and social partnership was achieved. If the hon. Member for Eastbourne (Mr. Gow) gets any more bright ideas, will he speedily communicate them to me? I feel almost like writing to the Prime Minister, saying that this is not my suggestion but that of her former Parliamentary Private Secretary, and that it must therefore be treated with some respect.

When we compare West Germany's investment in research and development with that of Britain, we discover what a state Britain is in. West Germany spends £432 per employed person, compared with £265 in the United Kingdom ; in industrial development, its Government funding for research and development is 61 per cent. higher than that of the United Kingdom ; its investment in pure science is 135 per cent. higher, its spending on transport and communications research is 194 per cent. higher ; and its spending on environmental planning is 225 per cent. higher.

Worst of all is the comparison on training. Germany really does invest in training : more than 2 million people in West Germany are constantly in training. That is why it has technicians and craftsmen who are paid well because they produce well and sustain a productive and competitive economy.

More than 70 per cent. of engineers in West Germany have recognised qualifications, compared with only 40 per cent. in Britain after 11 years of Conservative government. Only 30 per cent. of our work force have recognised qualifications equivalent to at least one O-level, compared with 70 per cent. in West Germany. I hope that Conservative Members will ponder that--only 30 per cent. of our work force are qualified to the standard of one O-level. How are we ever to compete with the new circumstances in 1992 if we neglect education and training on that scale? I do not need to go into the figures in more detail.

Mr. Nigel Forman (Carshalton and Wallington) : The right hon. and learned Gentleman has an important point about education and training. I notice that the Opposition motion refers to education and training as an Opposition commitment. To what extent would the right hon. and learned Gentleman finance that expansion of education and training, to which he attaches such importance, from taxation or borrowing? If it is the latter, as I suspect it would be, what would be the implications for interest rates?

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Mr. Smith : The hon. Gentleman is making a valiant effort in that respect, but he must know that we have made it absolutely clear that our spending programme will be related to the capacity of the economy to sustain it. For education and training, I believe that that is an absolutely fundamental investment which must be made by this country. I suggest that the hon. Member for Carshalton and Wallington (Mr. Forman) should read an editorial which I believe appeared in The Independent yesterday, which attacked the Labour party for not promising to spend more than we had announced.

It is absolutely crucial that the investment is made. We will consider how best that investment can be made when we become the Government in the light of the economic circumstances that we inherit. If the concern of the hon. Member for Carshalton and Wallington for education and training is genuine, what does he think about the record on that over the past 10 or 11 years? Does he believe that it has been a good deal for Britain to neglect our investment in education and training so that we have the most demoralised teaching force ever this century, and when our industrial training is pitiful when compared to training in other countries? As an important part of our investment programme, we must finance education and training which will at least raise us to the level of our industrial competitors.

In addition to education and training, we could add as a subject for the seminar the value of social cohesion, indicated by German support for the social charter which the Government always attack. Our most successful competitors embrace and endorse the social charter. It is not even a matter of political controversy. The German Chancellor, head of a CDU-led coalition, went to the German trade unions and told them that he would support their claim for a social charter. Would that our Prime Minister espoused something in the national interest like that. The value of partnership between management and the trade unions in creating a successful economy might also be studied with profit at the seminar.

However, I fear that such a process of self-education is unlikely to happen, demonstrable though its advantages would be. I fear that, in the spending cuts in store over the summer, regional investment which has already been cut by 70 per cent. over the decade will once again be the victim of the foolish priorities of the disastrous Department of Trade and Industry. I fear that the cuts of £190 million in the training budget at a time when our training is pitifully inadequate will not be restored.

Now that the hon. Member for Carshalton and Wallington, who has been asking me about expenditure on education and training, has been liberated to some extent by changes in the Administration--although I commiserate with him on the fact that he has not yet joined it will he use his freedom to ask the Government why they cut the training programme by £190 million? Why on earth, at this stage in our development, we should be contemplating cutting one penny from the training programme is hard to understand. I hope that that cut will be restored.

On 31 May 1990, the Financial Times published some comparative figures with regard to publicly funded training for employed adults, which show how disastrous is Britain's record on training. I will pick the figures at random. The figure is $1,000 per trainee in France, $3,500 in Germany, $5,000 in Greece, $1,000 in Japan and $600

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in Spain ; but it is $400 in the United Kingdom. We are not only bottom of the league again, but we are bottom by a very long shot. Why is it that, every time we look at international comparisons, Britain is at the wrong end of the league? It is at the bottom of the league when we should be at least halfway up, and it is at the top of the league when we should be half way down. It will not do for us to enter the 1990s unless we secure an economic base that can sustain our standard of living and finance our hopes of social progress.

Mr. Michael Grylls (Surrey, North-West) : Will the right hon. and learned Gentleman give way?

Mr. Smith : I have given way enough.

The Government claimed that they made a break-through to a competitive and productive economy in the 1980s. Anyone who looks at any of the statistics can see at a glance that that manifestly has not happened. One thing is certain--it had better happen in the 1990s, or there will be no economic future for this country.

I do not believe that that can happen under a Government with such a lamentable record for the 1980s. However, it will occur under a Government who recognise the problems we face, but who believe that, with effort and determination, we can overcome them ; who face reality--even awkward reality--rather than seek to abolish it by statistical sleight of hand ; who recognise the problems but are prepared to develop opportunities ; and who, by adopting the policies outlined in the motion, can create a better economic future for this country. The Conservatives have failed. It is Labour's chance in the 1990s.

4.35 pm

The Chancellor of the Exchequer (Mr. John Major) : I beg to move, to leave out from "House" to the end of the Question and to add instead thereof :

"congratulates Her Majesty's Government on the improvement in economic performance over the last 10 years, with the United Kingdom's growth of output, manufacturing productivity, employment and investment since 1980 exceeding that of almost any other major European Community country ; and endorses the priority the Government attaches to reducing inflation, in order to safeguard and build on these achievements."

For all its customary charm, the speech by the right hon. and learned Member for Monklands, East (Mr. Smith) had a familiar ring. Perhaps a touch scaled, it is an old favourite that the House has heard on a number of occasions. It is no wonder that the right hon. and learned Gentleman delivers it so well, for he has delivered it so often. None the less, as ever, we enjoyed it. Despite that, it was an empty speech because it was empty of the alternatives that he and his colleagues would bring into operation were they in government. If the right hon. and learned Gentleman wishes to be taken seriously as a potential Chancellor, he will need to produce in some detail policies that, when examined, can be seen to be capable of being carried out and to add up in economic and political terms. The right hon. and learned Gentleman will achieve nothing if he continues to condemn the disease and also condemn the cure, which he should know must involve monetary policy of the sort that we are using at the moment.

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The right hon. and learned Gentleman has no policies to curb the central problem that exists at present--the problem of inflation. Neither does he have any policies to prevent it from recurring in future. All that he has to offer are the same old traditional recipes that have been handed down from generation to generation in his party-- looser monetary policy and looser fiscal policy, that is lower interest rates and higher spending. Where does the right hon. and learned Gentleman think that that would leave him and his party? That is the classic recipe for the debt and devaluation that have been the legacy of every Labour Government.

I was intrigued a few weeks ago to listen to the leader of the Labour party when he appeared on "Panorama". He said then that, when monetary policy was loosened at the end of 1987 in the wake of the stock market crash, "We"-- that is, the right hon. Gentleman and the Labour party--"were saying steady, steady." In retrospect, it would certainly have been right to say, "Steady, steady." However, I was not sure whether that was how I remembered the Labour party's posture at the time, so I had a brief look to see what the right hon. Gentleman was advising at the time, and I certainly did not find "steady, steady" among the right hon. Gentleman's pronouncements. Indeed, I offer a prize to anyone who can find the term "steady, steady" used in any context by the right hon. Gentleman at that time. I found what I had expected to find. Then, as now, the right hon. Gentleman was arguing for lower interest rates and described the modest cuts we had made as "inconsequential". He told us : "This is a time for judgment, and that judgment should be a big cut in interest rates."--[ Official Report, 29 October 1987 ; Vol. 121, c. 446.]

No "steady, steady" there.

Perhaps, I thought, the right hon. Gentleman leads a collegiate team and is remembering the words of his colleagues, so I checked those too. I found that his hon. Friend the Member for Dagenham (Mr. Gould) spoke in the House on 5 November, but he did not say "steady, steady" either. He said :

"If the Americans were to follow the Chancellor's monetarist advice, and if the interest rates and taxes were to be raised or social security benefits were to be cut, it could only bring the threat of worldwide recession so much closer."--[ Official Report, 5 November 1987 ; Vol. 121, c. 1154.]

It is clear what the hon. Member for Dagenham had in mind. He was not saying "steady, steady" ; he wanted a reduction in interest rates too. I then wondered whether the Leader of the Opposition had remembered the words of his right hon. and learned Friend the Member for Monklands, East--that pillar of fiscal rectitude. I checked and I found it as I remembered. The right hon. and learned Gentleman did not say anything in the House that I could find, but he went to Paris to talk to the OECD on 13 November 1987. Did he tell the OECD that things should be taken "steady, steady"? Did he heck. He called for "A stimulation of the economy by cuts in interest rates". Just to make sure that there was no doubt that the right hon. and learned Gentleman wanted to loosen policy he said it again the next day at Airdrie :

"Now is the time for cuts in interest rates to stimulate the economy".

So much for "steady, steady". "Steady, steady" is fiction, fiction. In retrospect we all acknowledge that it was the relaxation of monetary policy that helped cause the difficulties.

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Mr. John Smith : As we are trailing over the years since 1987, let us look to the Budget of 1988. Will the Chancellor tell us--given that the situation was so obvious in 1987--what on earth was the justification for the huge tax cuts in 1988, which were attacked by me and my right hon. Friend the Leader of the Opposition, but which the right hon. Gentleman defended?

Mr. Major : I believe that the right hon. and learned Gentleman has just taken economic advice from the leader of the Labour party, and if that is so, he has just made a material mistake. The underlying problem that generated many of the difficulties that we faced was, in retrospect, a relaxation of monetary policy because of fear of a recession. One could see that, with credit growth of £40 billion in the subsequent year, the problems were not caused by the cuts in income tax that amounted to only £4 billion, as a supply-side measure. The figures do not remotely add up and I suggest that the right hon. and learned Gentleman should get a new and better economic adviser than his right hon. Friend.

Mr. John Smith : With the benefit of hindsight, can the right hon. Gentleman tell us whether the Government were right to let a credit boom rip to the extent that he has just described? If so, what on earth was the justification for making tax cuts in such a situation?

Mr. Major : Does the right hon. and learned Gentleman not realise that one of the things that generate a credit boom is lower interest rates, which he was precisely calling for? The reduction of taxation was on the back of a huge fiscal surplus in 1988--a point which the right hon. and learned Gentleman and his right hon. Friend have momentarily overlooked.

Given that the Leader of the Opposition has criticised us for causing inflation, the uncomfortable truth is that, judged by his words and those of his colleagues, he would have made bigger mistakes on monetary policy than anyone else. The problem of the credit boom would have been materially worse. I suspect that the right hon. Gentleman has remembered that only latterly, but it is about time that he admitted that he was wrong in 1987. The uncomfortable truth--

Mr. Neil Kinnock (Islwyn) : As a matter of history, it is important to refresh the Chancellor's memory, as I believe that he is trying to offer the view that the difficulties, to which, presumably, he will own up, only began with the relaxation of policy in response to the slip in the stock markets in the back end of 1987. The right hon. Gentleman should understand that, before the 1987 election, in order to make a contribution to try to win that election, policy was greatly slackened with the intention of tightening it up after the election. The Government, however, were taken by surprise and made an utterly incompetent response to the events on the stock markets. Until now I thought that the Chancellor was a candid man ; if we are to have a story, let it be the whole story.

Mr. Major : I shall not only provide the whole story, but remind the right hon. Gentleman of the other element he has overlooked. Just before the November stock exchange crash, in August, my predecessor, my right hon. Friend the Member for Blaby (Mr. Lawson), unexpectedly increased the interest rate by 1 per cent. because of concern about the growth of credit. That was a considerable shock and

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surprise to people, but he acted so because he wanted to restrain what he thought might be an incipient growth of credit. If the Leader of the Opposition would also care to come to the Dispatch Box again to give me chapter and reference of when he said "steady, steady" in 1987 I shall happily give way. [ Hon. Members-- : "Come on."] I should be happy for the right hon. Gentleman to advise the House on that.

Mr. Kinnock : I shall do so on the understanding that my reply will be given in exchange for the right hon. Gentleman's readiness to get on with addressing the present problems. He is the Chancellor and we want to know what he will do about dealing with the problems, because that is what will most interest the British people, business and anyone else concerned about the future of our economy.

The right hon. Gentleman will recall that, in 1987, and definitely as we came up to the Budget of 1988, which he has defended, we proffered urgent counsel that everything possible should be done--it should also be done now --to assist the supply side of British industry. We included in that the reduction in interest rates and the avoidance of the type of tax cuts the Government were then making. That was the policy for stability, steadiness and production, but instead the Government pursued their policies that have resulted in a disastrous balance of payments deficit and an inflation rate of 10 per cent. "Steady, steady", John.

Mr. Major : That was an amazingly skilful reinterpretation of events, as one would have expected from the right hon. Gentleman. If he will forgive me for saying so, it was more slippery, slippery than "steady, steady". Let me be sufficiently unkind to quote again what the right hon. Gentleman said :

"This is a time for judgment, and that judgment should be" as Leader of the Opposition, his judgment is important

"a big cut in interest rates."--[ Official Report, 29 October 1987 ; Vol. 121, c. 446.]

That is what the right hon. Gentleman said in October 1987. Let us leave it to stand on the record between us whether that judgment was "steady, steady" or slippery, slippery. [H on. Members : -- "What about inflation?"] I am about to deal with that, because the uncomfortable truth for Governments of whatever complexion is that inflation does not respond to soft options. It certainly does not respond to speeches. It takes tough measures, which are inevitably unpleasant, to defeat inflation. There is no choice in my mind about the necessity to defeat inflation.

It was difficult and often painful and unpopular measures that brought inflation down at the beginning of the 1980s. I understand that monetary policy is often unwelcome to people, but that is how every other major industrial country deals with inflationary pressures. That is why we are using interest rates and that is why the Leader of the Opposition should know that we shall continue to use them. We shall use them for one simple overriding reason : they work. No one should doubt that, and that is the only recipe for getting inflation down.

Mr. John Smith : The Government will ruin industry.

Mr. Major : So the right hon. and learned Gentleman would not use monetary policy, but let inflation rise. That is excellent.

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The evidence that interest rates will work is indisputable. It is now there to be seen in the housing market, which has cooled down. It is evident in the high street and in sales of new cars. In recent weeks, it has been evident in slower money growth, in the easing of capacity constraints in industry and in a better export performance.

Mr. John Smith : What about imports?

Mr. Major : Imports are down. They are higher than I would wish them to be, but they are down, and in the past 10 months, exports have grown five times as fast as imports. When did that happen under a Labour Government?

Perhaps the real concern in the Opposition's mind is that the policy is working. In this, unusually, they are right. No doubt that is why the right hon. and learned Member for Monklands, East is so concerned and agitated. But it is perfectly true that although the policy is working, its job is not yet done. I readily concede that the inflation rate is still too high and, because of the time that it takes for policy to have its full effect, it may move a little higher yet before it begins to turn down. But turn down it undoubtedly will, towards the end of this year and on through next year--although perhaps a bit more slowly than we had hoped.

We are determined to keep a tight policy in place to secure this fall in inflation. There should be no doubt about that. I have made it clear before --and I willingly do so again in view of what the right hon. and learned Gentleman said--that this policy is not a short-term attack on inflation. It is not a question of bringing inflation down by a few per cent. and then letting up. There will be no pre-election boomlet of the sort sketched out by the right hon. and learned Gentleman. The policy is a long-term attack on inflation. First, we must get our inflation down to our competitors' average level. Then we must get it down further still, then down to the level of the best and onward down beyond that. That is clearly the policy.

Perhaps I may attract the attention of the right hon. and learned Member for Monklands, East. [Interruption.] I shall endeavour to do so, and I shall certainly give way to the Leader of the Opposition if he wishes me to do so.

My remarks about inflation do not mean that I am unaware of, or insensitive to, the difficulties that high interest rates cause. I am fully aware of the feeling that they arouse and I do not ignore them or weigh them lightly. But there is another consideration which any Government are bound to take into account and which, in my view, is decisive : the damage that inflation does if it is permitted to entrench itself. If it entrenches itself and goes unchecked, it can cause long-term damage to the economy, as we saw only too clearly in the 1970s when the Labour party did, indeed, leave it unchecked. The legacy of that was acutely painful.

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