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Mr. Lamont : I did not understand.

Mr. Smith : That is a different matter. Comprehension is entirely a matter for the right hon. Gentleman, and I cannot assist him on that. I can only explain and hope that he comprehends.

Mr. Lamont : Tell me again.

Mr. Smith : We have told the Government time and again, as I did on 23 October, that at a time

"when the gap between Britain's performance and that of other members of the Community is so wide, it would not be prudent to commit ourselves to an irrevocable exchange rate or to a single currency."--[ Official Report, 23 October 1990 ; Vol. 178, c. 273.] We have made our views clear. The economic position into which this country has been led by the Government's economic policies is such that there would be a grave risk at this stage if we were linked to an irrevocable exchange rate-- [Interruption.] Conservative Members may not like the policy that I articulate, but they should not claim that it has not been articulated, because I have clearly done so.

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Mr. Dickens : I am grateful to the right hon. and learned Gentleman for giving way in the middle of his entertaining speech. If he ever became Prime Minister--and he has more chance of that than the Leader of the Opposition--would he go to Europe to negotiate, and perhaps move forward to stage 2, when no one could explain exactly what was meant by stage 2? Our Prime Minister is not that sort of person ; she wants to know the detail. That is the difference between the two parties.

Mr. Smith : The hon. Gentleman should not worry about the leadership of the Labour party. He will have a major problem over the weekend trying to decide who to vote for as the future leader of the Opposition--

Mr. David Shaw (Dover) : She is sitting on the Front Bench.

Mr. Smith : That is absolutely right. The hon. Gentleman, not for the first time, accidentally points to the truth. The Prime Minister is sitting on the Front Bench and she may win the leadership struggle, but not the next election, and will then take up office as Leader of the Opposition. I know that it is a chilling thought. At least 100 Tory Members --although the figure may have risen since lunchtime--will find that a fearful thought.

The hon. Member for Littleborough and Saddleworth (Mr. Dickens) says that he cannot understand stage 2 and, what is more, that the Prime Minister does not understand it. In that case, they should ask for the proposals to be clarified. They should not simply walk out of meetings and denounce other people : they should ask intelligently for the proposals to be clarified. They should put questions with persistence, intelligence and perspicacity--but, as the right hon. and learned Member for Surrey, East advised and admonished them to do, they should continue, within the structure of the European Community, to make Britain's case understood. They should employ constructive diplomacy on behalf of our country.

The real problem in the context of the European Community and the real problem in the context of our domestic economy are virtually one and the same--it is the weakness of our economy after 11 years of Conservative government. I have already mentioned the illusion--

Mr. David Howell (Guildford) : The right hon. and learned Gentleman says that we should not worry about the Opposition, but some of us are worried because 180 members of his party--which is practically the whole of his party--believe in the Labour Common Market safeguards committee, which is in total opposition to monetary union and membership of the exchange rate mechanism. Is that the right hon. and learned Gentleman's position?

Mr. Smith : If the right hon. Gentleman is reduced to that sort of remark, which is both pathetic and inaccurate, we can well understand why he had such a short ministerial career, even in a Government headed by the Prime Minister. We are accustomed-- [Interruption.]

Mr. Speaker : Order. Hon. Members should settle down.

Mr. Smith : As I was pointing out before I was irrelevantly interrupted by the right hon. Gentleman, the big difficulty we face, as he must know--

Mr. Norman Lamont : The right hon. and learned Gentleman explained that it was his view that we should

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not have a single currency in Europe for the moment. He did not think the time was right. Is there a difference in principle between his policy and the Government's policy on whether we ought to have a single currency?

Mr. Smith : I am not clear what the Government's policy is. Is it the Government's policy to have a single currency? [Laughter.] The right hon. Gentleman should stop laughing and address himself to that question. Given our economic conditions, it is premature to decide whether we could be involved in an irrevocably fixed exchange rate. That is the crucial river that has to be crossed. Once that river is crossed, it is difficult to see how one could cross back. I am told by some Conservative Members that the hard ecu is an alternative to moving to a single currency, and by others I am told that it is a quicker way of getting to a transitional mechanism for moving towards a single currency. I deduce that some members of the Government want a single currency and others do not. We have made it absolutely clear that we would like to see established a number of matters on economic and monetary union which we think are essential components of the type of economic unity within the EC that we want to see. One is a strong regional policy which helps to preserve economic and social cohesion-- [Interruption.] Perhaps we could rise above the level of schoolboy remarks from the Financial Secretary. I do not understand how Conservative Members can think that the social cohesion of the EC is such a light matter. In the EC, 11 members think that it is sufficiently important to be regarded as one of the major objectives. It is one of the objectives of the Single European Act, for which Conservative Members voted in the House. We want to give substance to the ambitions that were enshrined in those proposals for the EC. Of course we want to see a strong regional policy. We also want to see a strong social dimension to the EC, which is why we want to see the social charter, and the social action programme coming on its heels, which the Government seek to block against the wishes of the other 11 members of the Community. That is why we want to see changes in the way in which we decide environmental and social policies.

That policy cannot be encapsulated in one sentence : it is an extremely complex and difficult matter which Labour Members take seriously because it is important for Britain's future. It is a matter on which, according to the right hon. Member for Henley, the Cabinet cannot unite and on which the Government will never be able to unite the country.

Mr. Norman Tebbit (Chingford) : Let me put to the right hon. and learned Gentleman the proposition that the hard ecu is, in essence, a swift path to the river that one would have to bridge to reach the single currency on the other side. It is a swifter way to arrive at that point of decision. Is the right hon. and learned Gentleman saying that there are circumstances in which he would say that he was satisfied on the conditions for a single currency, or is he saying no to that? In other words, are there circumstances in which he would be willing to give up Britain's unilateral control of its own economic policy?

Mr. Oppenheim : Yes, answer.

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Mr. Smith : The hon. Gentleman, who is a member of the No Turning Back group, might allow me to reply.

We do not support the proposal for the hard ecu, which is a fundamental issue of ambiguity in the Conservative party. The right hon. Member for Chingford (Mr. Tebbit) takes the view that he does only because he does not fully comprehend the trick that has been played on Conservative Members by the Foreign Office and others in producing a hard ecu with the purpose of leading to a single currency. When I last spoke on that issue in the debate about the exchange rate mechanism, the right hon. Member for Chingford was sufficiently concerned to ask questions of the Minister then addressing the House, and he was right to be so concerned. However, I cannot answer hypothetical questions about the future.

We will judge progress by the way in which we can achieve a proper regional structure for the European Community and for the social dimension. More important than all of that is the capacity of this country's economy to converge to the European standard. It is one thing to contemplate monetary arrangements of that kind if one has a strong economy, but quite a different thing if one has a weak economy, such as that being run by the present Chancellor of the Exchequer. One would think from the tenor of the questioning that there is no ambiguity or conflict of policy in the Conservative party. If that is so, why is it having a leadership election? If Conservative Members are all agreed on European Community policies, it is passing strange that the right hon. Member for Henley has chosen to plunge his party into the most divisive leadership contest seen since the end of the war--and perhaps even in the history of the Conservative party. They cannot get away with it as easily as that. It is a question that fundamentally divides the Conservative party, and unless Tory Members can reconcile their differences, it will lead them into continuing difficulty.

The Minister of State, Home Office (Mr. John Patten) : The right hon. and learned Gentleman should look behind him. Labour Members do not understand him, and neither does the Leader of the Opposition.

Mr. Smith : Conservative Members seated behind the right hon. Gentleman certainly do not understand him.

We should address the fundamental problem affecting Britain here and now-- apart from what may happen in developing the economic European Community in four, five, six or seven years' time. Stage 2 is only projected to start in 1994, and further proposals will not come forward before 1997. Anyone would be hard pressed to put a date on some of the decisions that must be made. Nevertheless, they are important decisions, and will have to be taken by the Government of this country at the appropriate time. Meanwhile, here and now--in 1990--there is much that we can do to prepare for our future in the Community, by sorting out the basic problems in the British economy. Thank goodness that the illusion of 1988--the notion that we had overtaken West Germany and were pressing hard on Japan--has, for reasons of embarrassment, ceased to be advanced by Conservative Members. The truth is that Germany is well ahead of us, France is significantly ahead of us, Italy is overtaking us, and Spain is coming up behind. That is the fruit of 11 years of Conservative stewardship of our economy.

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The economy will not be put right by the policies in the Gracious Speech, whose most alarming aspect is that it promises no change in Government policy. Now, at the end of a decade, we have a massive balance of payments deficit, the highest interest and inflation rates of any industrialised country, and rising unemployment.

It is not the first time that Britain has faced economic problems under a Conservative Government. I occasionally read publications produced by the City--some from institutes that are sympathetic to the Conservative party, but others that are more objective. The Greenwell Montagu gilt-edged research paper, "UK inflation in the 1990s", highlights the tendency of British Governments

"to over-expand demand and to preside over periods of over-rapid expansion, mistaking them for the beginning of the catching up of British economic performance with those of our competitors and the beginning of a virtuous circle."

We have not heard those phrases from the Conservative party. The report continues :

"There have been three phases of this sort, all of which had serious consequences.

(a) Maudling's dash for growth 1963-64 ;

(b) Barber's boom, 1972-73 ;

(c) The Lawson boom, 1986-88."

We are back in the stop phase of stop-go economics for the third time under Conservative guidance of the British economy. The Government tell us, as we are stuck in the stop of yet another stop-go following the depressing and worrying cycle of economic mismanagement, that we will soon be back on track.

How can we be back on track when, even in the midst of a recession in 1990- 91, the Treasury predicted a balance of payments deficit of £11 billion? Under the previous Chancellor, it was argued that the terrible balance of payments figures were the result of excessive demand and a so- called investment boom. Those are not occurring in 1990-91, yet we still have massive balance of payments deficits. Does it never occur to the Government that we need a change of policy, not merely because it has not worked under this Government but because it has not worked under previous Conservative Governments? We end up in difficult economic situations, and the Labour party has to be elected to deal with them. It has happened before. The cycle mentioned by the learned authors of the Greenwell Montagu report is not complete. Usually it has to be completed by the British electorate. We are facing such a problem now and we shall have to tackle the underlying problems of the British economy. No one seriously believes that this is some minor matter of a mismatch of demand and supply. There are serious structural defects in the British economy, which require a supply-side policy to deal with them.

As, regrettably, unemployment rises in the regions and nations of Britain, the need for a regional policy will become more manifest, and its neglect even more apparent. Just before I came into the debate today, I met representatives of 500 workers of James Howden, a company in Renfrew in Scotland. Five hundred people are facing redundancy there in a modern factory, which was opened by the Prime Minister in 1981 and which is widely regarded as having the best of technological excellence. Five hundred people will lose their jobs. That is what is happening in Britain today.

Let not the Government tell us that there is no recession and that this is some temporary problem--let them look

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into the faces of the people who are facing redundancy and tell us. Let the Government understand the consequences of their economic policies. This is not really an academic matter, as it affects the living standards and life opportunities of all the citizens of this country. The longer we continue to neglect the fragile technological base of British industry, the longer it will take us to match our competitors and to get up speed for Europe. The longer we neglect education and training the more difficult our problems will be. In another report that I came across, Mr. David Lomax, the group economic adviser for National Westminster bank, described the Government's training record as "execrable". I do not think that any Opposition Member has thought of such a dismissive and abusive term, and that quarter is not entirely unsympathetic to the Government. In powerful speeches yesterday, my hon. Friends the Shadow Education and Employment Secretaries outlined the major defects in Government policy and the Labour party's proposals for proper education and training. As we prepare for 1992, it is crucial that we get those things right, that we pay attention to building up the technological base of British industry, that we have a strong and vigorous regional policy and a new commitment to education and training, and that we give the manufacturing sector of the British economy the place it should have had during the neglected decade of the 1980s.

The Opposition intend to build for success in Britain and in Europe. We have a vision of a fair society in which world class public services provide the best of facilities for all our citizens--a society in which care and compassion are active ingredients in social policies and where those least able to help themselves are given a helping hand by the rest of the community. We shall fight for that vision within Britain and within the European Community, but we also know that Britain cannot achieve these ambitions, which we hold on behalf of all our people, without a strong economy. That is why we shall tackle the problem of rebuilding the British economy patiently, purposefully, determinedly, year in and year out. [Interruption.]

Mr. Speaker : Order.

Mr. Smith : I shall explain to Conservative Members how we shall do so, and set out our targets for the supply-side regeneration of the economy. I shall set out what we have in mind. I fear that the Conservative party's problem is not merely one of comprehension, but one of understanding what the people of this country want. They want a strong economy and a fair society. Other European Community countries seem to be able to achieve those aims. The British people want that deeply, passionately and urgently. That is why they are turning in such large numbers to the Labour party, in order to make sure that a Labour Government are elected at the first available opportunity.

4.19 pm

The Chancellor of the Exchequer (Mr. John Major) : Fond though I am of the right hon. and learned Member for Monklands, East (Mr. Smith), we have just heard the shallowest speech from the Opposition Front Bench for years. Stale jokes and cheap gibes are no policy for any Opposition who ever hope to form a Government. The right hon. and learned Gentleman spelt out his usual long

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litany of criticisms of the Government, but he did not set out in any detail, or in any sense at all, clear policies on what needs to be done.

In "Meet the Challenge : Make the Change" and in "Looking to the Future", the Labour party claims to have a selection of policies of which it is proud. So proud is the Labour party of those policies that Opposition Front -Bench spokesmen hardly ever mention them. What we get from them is absolutely nothing at all about the success of British industry over the past decade. They do not congratulate British industry on its record investment over the past decade. They never mention the dramatic improvements that British management and the British work force have brought about in terms of increased productivity. The trouble with the Labour party is that what is good for the country is bad for it, and it recognises that all the time.

Mr. Dennis Skinner (Bolsover) : Will the right hon. Gentleman give way?

Mr. Major : I shall with great pleasure give way to the hon. Gentleman a little later.

The right hon. and learned Gentleman referred to the quotation by my right hon. Friend the Member for Mole Valley (Mr. Baker) from Shakespeare's "Henry V". As I listened to the right hon. and learned Gentleman it was another, lesser-known poet, rejoicing in the name of John Gay, who sprang to my mind. John Gay was a master of burlesque. The right hon. and learned Gentleman may recall that he wrote : "I know you lawyers can, with ease,

Twist words and meanings as you please ;".

[Interruption.] Opposition Front-Bench spokesmen seem to be remarkably boisterous when their policies have no credibility whatever.

The right hon. and learned Gentleman mentioned the underlying rate of inflation. Of course we published in our document both the retail prices index and the underlying rate of inflation after the event. That is the information that he had. What I said to the right hon. Member for Ashton- under-Lyne (Mr. Sheldon), which he will understand as a former Treasury Minister, was that we never forecast the underlying rate of inflation for a sound economic reason. As we forecast the retail prices index, if we were also to forecast the underlying rate of inflation it would be possible to calculate interest rate assumptions, with very severe market effects. The right hon. Member for Ashton-under-Lyne understands that. It is a pity that the shadow Chancellor of the Exchequer does not understand it, too.

Mr. John Smith : Will the right hon. Gentleman answer a simple question? How should we judge whether or not he is successful next year--by the retail prices index or by the underlying rate of inflation?

Mr. Major : In due course the right hon. and learned Gentleman will see by both measures, and by the producer price index, how successful we are. The way to judge the success of policies is to see what the outturn of those policies is. I am content to be judged in that way. The right hon. and learned Gentleman also referred, with a total lack of self-knowledge, to what he rather

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crudely called "Lawson's boom". I seem to recall that in 1987 and 1988 the right hon. and learned Gentleman was asking for ever lower interest rates to increase demand.

Mr. Robert Sheldon (Ashton-under-Lyne) : I understand why the right hon. Gentleman did not wish to give the underlying rate. It is the same argument as was used against giving the retail prices index and unemployment figures many months in advance. Of course, we have the autumn statement, which gives much more information and I could not understand why he was so coy about giving this further information to the House.

Mr. Major : It was precisely for the reason that I have just given. If I gave the underlying rate of inflation forecast and the retail prices index forecast, it would be easy for anybody to calculate interest rate assumptions. The right hon. Member for

Ashton-under-Lyne will know that that is not an attractive proposition.

The right hon. and learned Member for Monklands, East made a great deal of the short-term problems that he perceives we have. He ignored the growth that we have had over the past eight years, the growth this year and the growth that we shall have again next year. Alas, he neglected to mention that. Of course, he wants to portray prospects as black as he can because he knows that, when inflation is heading down, we shall return to sustainable growth and a stronger economy. That is what concerns the right hon. and learned Gentleman. He knows that economic success for his country will mean political failure for his party. He knows very well that recovery is not just possible but probable because the underlying economy is incomparably stronger than it was a decade ago. Industry knows that, too. Last week John Banham addressed the Confederation of British Industry conference and said :

"We must believe in ourselves and build on what has been achieved We must not let our present difficulties obliterate the memory of the past 10 years. And this is precisely what is in danger of happening."

Indeed it is. It is partly because Opposition Members see party advantage in denying the changes and improvements of the past decade.

We should not be blind to the improvements that have taken place. Business investment has risen dramatically.

Mr. Neil Kinnock (Islwyn) : Manufacturing investment?

Mr. Major : Over the three years to 1989, business investment rose by 45 per cent., which is an unprecedented increase. It is hardly surprising that that is not sustainable at this stage of the economic cycle. However, even assuming the modest downturn that we forecast this year and next, business investment will still be over 50 per cent. higher than when the Government took office in 1979. Over the past decade, the economy has grown faster than France or Germany. That is the first post-war decade in which that has happened. Also, living standards have risen enormously, with the real take-home pay of a married man with two children up by a third since 1979.

Mr. Kinnock : This is a fraud.

Mr. Major : I ask the Leader of the Opposition, who is muttering : which of those improvements are inaccurate and why do he and his right hon. and learned Friend never acknowledge them? Why do not they offer some real hope for our prospects in the 1990s? My statements are accurate and the Leader of the Opposition knows it.

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Mr. Giles Radice (Durham, North) rose--

Mr. Major : I shall give way a little later.

I do not believe for a second that those achievements will vanish. They are fundamental and they will last. With other supply side improvements, they will improve Britain's economic fortunes throughout the 1990s. Do not be deceived. Our prospects in the medium and longer term remain excellent. In the 1990s we shall see the huge investment of the past few years bearing fruit as new capacity comes on stream ; provided that firms remain competitive by containing their costs, it will continually help to close the current account deficit.

I am wholly determined that the British economy will be ready for the challenges that lie ahead of us in the 1990s. I am wholly determined that we shall take the difficult decisions necessary now to ensure that it is. That is why we joined the exchange rate mechanism. That is why we shall stick with the tough policies that we have pursued and why I have no intention of reducing interest rates until I am satisfied that it is safe to do so.

Mr. D. N. Campbell-Savours (Workington) rose--

Mr. Major : I shall give way in a moment.

High interest rates, although painful, are bringing the slowdown in demand that is necessary to reduce inflationary pressures. As for our forecasts, as the right hon. and learned Member for Monklands, East who now clearly reads so much that is published in the City, will know, the overwhelming majority of analysts now agree with our forecast that inflation will come down next year to around 5.5 per cent. by the fourth quarter, and we intend then to keep it there.

Mr. Campbell-Savours : Does the Chancellor agree with the former deputy Prime Minister who said yesterday that failure to enter the ERM in 1986 had been inflationary and had led to inflation?

Mr. Major : No, Sir, and for the reason, which should appeal to the hon. Gentleman, that if we had entered the exchange rate mechanism at that time, we should have done so at a rate against the deutschmark of about 3.30 and 3.85. I am not convinced that it would have been the right time to enter. The right time to enter was when we entered. The moment the opportunity was there, we took the opportunity on the first available occasion when I judged that it was safe to do so.

Mr. Skinner : On entering, will the Chancellor tell us whether he is prepared to take out his bat first wicket down?

Mr. Major : So far as I am aware, the opening batsman is well played in and will stay there, I hope, for a long time to come. The current account deficit, to which the right hon. and learned Gentleman referred and in which he has apparently lost interest, so narrow is his span of interest, is now narrowing as a result of the low growth of import volumes combined with a substantially stronger growth of exports.

Mr. Gordon Brown (Dunfermline, East) : It was £16 billion.

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Mr. Major : The hon. Gentleman says that it was £16 billion. He is the hon. Gentleman who, at one stage, was forecasting that it would be more than £20 billion this year. So much for accurate forecasts. Mr. Ketime to enter was when we entered. The moment the opportunity was there, we took the opportunity on the first available occasion when I judged that it was safe to do so.

Mr. Skinner : On entering, will the Chancellor tell us whether he is prepared to take out his bat first wicket down?

Mr. Major : So far as I am aware, the opening batsman is well played in and will stay there, I hope, for a long time to come. The current account deficit, to which the right hon. and learned Gentleman referred and in which he has apparently lost interest, so narrow is his span of interest, is now narrowing as a result of the low growth of import volumes combined with a substantially stronger growth of exports.

Mr. Gordon Brown (Dunfermline, East) : It was £16 billion. Mr. Major : The hon. Gentleman says that it was £16 billion. He is the hon. Gentleman who, at one stage, was forecasting that it would be more than £20 billion this year. So much for accurate forecasts.

Mr. Ke

Mr. Major : As the hon. Gentleman will know, the trend has been reversing itself, and exports have been growing substantially faster than imports over the past year or so and are projected to continue to do so. The expansion of growth of demand, actually sucked in more imports that domestic supply could not produce, but with the collapse and reduction of demand, it is moving back into equilibrium at a rapid rate.

The slowdown in the economy points again to the trade deficit narrowing still further next year to around 1.75 per cent. of GDP.

Mr. Radice : Will the right hon. Gentleman give way?

Mr. Major : If the hon. Gentleman will forgive me, I have already given way more often than the right hon. and learned Member for Monklands, East. If he behaves himself, I may give way to him later. That trade deficit compares, for example, with Spain's current account deficit of 3.5 per cent. of GDP, which perhaps puts ours in a better perspective.

As I made clear to the House last week, we intend to continue to maintain a tight fiscal stance both to support monetary policy and to squeeze inflation. By the end of 1990-91 we expect to have repaid £29 billion- worth of public sector debt over four years. That will save £2.75 billion in interest payments every year, the equivalent of a penny-ha'penny off the standard rate of income tax. We now expect a lower debt repayment this year than I had forecast in March at the time of the Budget, and lower than we enjoyed last year. But it is perhaps not only unusual but remarkable and encouraging that, at this stage of the economic cycle, with activity weakening, our central forecast for debt repayment amounts to £3 billion. Germany, for example, so often quoted against us as a

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virtuous economy, is likely to have a deficit this year in excess of 3 per cent. of GNP, while France's deficit this year is likely to be about 1.25 of GNP.

As the autumn statement showed, we have not loosened our grip on public expenditure. We have made the difficult choices that were necessary and are not accommodating fully the higher than expected inflation either this year or in the planning totals that my right hon. Friend the Chief Secretary negotiated for the next three years. Instead of seeing a surge in the ratio of public expenditure to national income, as we have in past economic downturns, our plans maintain a stable ratio until 1993-94, when we expect it to resume its downward movement.

Despite that restraint, within the overall settlement we have been able to keep our word and have not reneged on the spending commitments that we made. There has been room for more resources to be allocated to key areas, especially to protect the more vulnerable groups in society. We have been able to maintain the real value of benefits that are paid to 10 million pensioners and 11 million people on income-related benefits ; we have been able to increase spending on health between this year and next by £3 billion, which is a real increase of 5 per cent. ; we have enabled British Rail and London Regional Transport to spend nearly £750,000,000 on safety measures in the next three years ; and there has been an increase in provision for capital expenditure of £1.5 billion.

Nor, in addition to those increases, have we overlooked the self-evident uncertainties in the world economy or at home. In view of those, we have set aside higher reserves in the next three years--up to £10.5 billion in the third year.

Mr. Tam Dalyell (Linlithgow) rose --

Mr. Major : Will the hon. Gentleman forgive me? I want to make a little progress.

While Opposition Members speak at length about the problems that we face, as we saw from the right hon. and learned Member for Monklands, East, they are a little less clear, to put it kindly, about how to solve them. Their industrial strategy would not do so.

Mr. Radice : Will the right hon. Gentleman give way?

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