| Previous Section | Home Page |
Column 887
Wisely used, public spending is sensible in a recession, as it is a less inflationary way to provide stimulus to the economy. If it is targeted towards those areas of investment which can make industry more competitive, it is a sensible direction in which to travel. The Government have had some remarkable opportunities. They have had more than 10 years in power ; they have enjoyed substantial majorities in the House of Commons ; they have had the revenues resulting from North sea oil and from privatisation. Yet they have not got rid of inflation, they are presiding over a recession, and they are trapped in a high-interest-rate policy that is the result of their own past mistakes. What a record!5.39 pm
Mr. Nigel Forman (Carshalton and Wallington) : In the characteristically witty speech of the right hon. and learned Member for Monklands, East (Mr. Smith), Conservative Members could see very clearly the extent to which Labour--throughout its long and distinguished history as a political party--has nourished a pious aspiration for cheap money. That aspiration is most commonly associated with Hugh Dalton, but it has been felt by many other Labour party figures. In office, however, Labour has always seen such aspirations end in tears--and often in devaluation. The right hon. and learned Gentleman's speech reminded me forcefully of that. It is at times such as this that the supporters of Government economic policy need to stand up and be counted, as my right hon. Friend the Member for Worthing (Mr. Higgins) has already demonstrated. I strongly agree with my right hon. Friend the Prime Minister, who said in the House on his return from the European Council just before Christmas :
"the purpose of Government economic policy is to bring down the rate of inflation, not to replace inflation today with inflation tomorrow by a premature and unwise movement on interest rates."--[ Official Report, 18 December 1990 ; Vol. 183, c. 166.]
That is the critical difference between Government and Opposition. Conservative Members do not believe in premature and risky reductions in interest rates, whereas I have a feeling that the right hon. and learned Gentleman, were he ever to become Chancellor, would run exactly that risk.
This is the second significant debate on the economy to be held in the House since my right hon. Friend the Chancellor took up his new post. It is still quite difficult for many of us--both in the House and outside, in the media and the markets--to come fully to terms with the new context of economic policy represented by our membership of the exchange rate mechanism. Although everyone professes to see in it either a panacea or a bogey, according to taste, I am not sure that everyone has fully understood the implications and, in particular, the constraints of that policy. Those constraints cannot be stressed too often or too strongly.
ERM entry has put this country firmly back on to an exchange rate standard of monetary policy, which obliges us first to control our costs--if we want to be competitive in the world economy--and secondly, to build sufficient confidence in the conduct of our monetary and fiscal policy, over a period of years, to reassure the financial markets of our determination to squeeze inflation out of the economy.
Column 888
We must provide that much more reassurance than some other Governments, because Britain's track record over far too many years--decades, indeed--is one of not being as serious about inflation as we should have been. A premium is built into our interest rates, at any level, unless and until we derive the real benefits that can flow from long -term ERM membership.We have already begun to achieve some success in our
anti-inflationary endeavours : headline inflation' has stopped rising, and now looks set to fall when the figures are published later this week. I suspect that will apply to subsequent figures as well. If we stick to our current prudent approach, which necessarily involves validating rather than seeking to lead market sentiment, it will be possible to reduce interest rates further, as and when there is clear evidence of falling inflation.
Evidence of the growth of market understanding seems already to have crept into the lower forward interest rates in the City, which were already on offer before today, and the slight strengthening of the pound against the deutschmark which followed today's interest rate decision. The Government are involved in, and must stick to, the patient building of market credibility for our monetary policy--and a new policy at that.
It took the French authorities several years to achieve the same result, and to arrive at an inflation rate as low as, or lower than, that of the Germans. It need not take us as long--provided that my hon. Friends do not clamour for premature interest rate cuts, provided that the Government do not follow Labour policy by cutting rates, putting up taxation and introducing credit controls, which we heard about today, and provided that industry and commerce, and all pay bargainers, get a grip on all their costs. That means principally labour =costs.
It is worth remembering that employers and unions can limit some of the pain of bankruptcies and rising unemployment by reducing their labour costs to what is required for purposes of international competitiveness. That is true even for industries that are not exposed to international competition. The French did precisely that in the middle and late 1980s, once they saw the light and understood the new framework, and we must do the same in the 1990s and beyond.
Ms. Abbott : I have listened to the hon. Gentleman repeating the formula that businesses can avoid bankruptcies by cutting their labour costs. Can he tell me how many firms in the south-east, at a time of skill shortages, can continue to attract the skilled labour they need, while cutting wages as he suggests?
Mr. Forman : There are two ways of attracting the necessary skilled workers. One is to buy them in ; the other is to "grow" them within the business itself. Through the training enterprise councils and by other methods, we are trying to encourage employers to develop skills within their own firms and factories.
Mr. Eric Martlew (Carlisle) : Will the hon. Gentleman give way?
Even the suspicion that we might leave the exchange rate mechanism, or seek an early opportunity to devalue in the context of an overall realignment of the ERM
Column 889
currencies, would send all the wrong signals to the markets in the present conditions, and would set back the anti- inflationary progress that we have already made.On one point--and one point only--I agree with what Professor Congdon and the others said in their notorious letter to The Times, published this morning. They said :
"Credibility would be enhanced by a sustainable monetary discipline".
I agree with that. What was wrong with their analysis and one of the signatories, Professor Walters, has always been wrong, in my view--was the assumption that such anti-inflation credibility can be established by illusory monetary autonomy in a world of global capital markets. The days of national monetary autonomy are firmly over.
The important feature of the Government's present economic policy is the fact that they have recognised and acted on the economic realities of the modern world, and are working with the grain of market forces--whether in relation to short-term monetary policy, or in relation to the proposals for the hard ecu. We are already reaping considerable benefits from that responsible approach to our new economic policy within the ERM framework.
Let us consider the compelling evidence about inward investment, which comes to Britain only on two important basic assumptions--first, that we remain a core player in the European Community, and, secondly, that we pursue a credible monetary policy within the new ERM conditions. The figures are striking. According to an article in The Independent on Sunday, Britain is now enjoying some two fifths of inward and overseas investment by European Community nations in the Community. It is receiving two thirds of American investment in the Community, and two fifths of Japanese investment. Those are significant proportions, way beyond those achieved by our serious competitors ; and that is happening only because of the confidence in Britain that has been instilled by the credibility of our new approach to monetary policy.
Mr. Peter Shore (Bethnal Green and Stepney) : The figures from The Independent on Sunday that the hon. Gentleman has quoted are absolutely correct. They were based on the OECD report, and showed that Britain was receiving a substantial part of both Japanese and American investment in Europe as a whole.
Is the hon. Gentleman aware, however, that the figures quoted in the OECD report relate entirely to the period before we joined the ERM, when it was national policy--as represented by the then Prime Minister--that we should not join, or, at least, should not do so at early date? What conclusion does the hon. Gentleman draw from that?
Mr. Forman : The conclusion that I draw is that people were investing in this country because they had confidence in the two premises that I have mentioned--first, that we would remain a core player within the Community, and, secondly, that we would pursue a responsible monetary policy. The ERM decision gives us a better chance of doing that for the reasons I have elaborated about generating market confidence and market credibility. So it is an additional reason rather than the sole reason why it is necessary for us to adhere to those disciplines.
Column 890
I shall cite two further pieces of evidence in support of my general argument. First, as my right hon. Friend the Chancellor said, a one point move in overall labour costs is perhaps two or three times as significant to British industry and commerce as a one point move in short-term interest rates and that applies in either direction. Secondly, the volume of mobile money being moved around the world today is probably about 20 times more significant than that which is used to finance world trade. Again, we have to take account of the new realities. No monetary institution, not even the federal reserve in the United States of America or the Bundesbank in Germany now has complete monetary autonomy in modern conditions, and that must inform our monetary policy.Therefore, the Government are right to buttress their monetary policy with a cautious fiscal policy, which ought to be achieved at the present stage of the economic cycle more by overall public expenditure control than by tax increases, disguised or otherwise. I hope that that lesson is not lost on my right hon. Friend the Chancellor in his preparations for the Budget.
In the present circumstances, in spite of the cost of the Gulf war--in some ways we are almost in danger of making a profit, thanks to the strong and sensible efforts of my right hon. and learned Friend the Chief Secretary-- the Government can afford to take the strain of any unavoidable public spending increases in a limited extra increase in public borrowing rather than an increase in taxation. Such an approach would be readily financeable in current market conditions and at current rates of interest and could become even easier for us, once the German rates have peaked, which I believe that they will shortly, and once Spanish interest rates come down giving us more leeway within the ERM.
The policy will work as intended, provided that my right hon. Friend the Chancellor is not tempted to go in for any fiscal fine tuning, which does not really work in current economic conditions, particularly in an economy of £600 billion within a huge global economy in which we represent only about 7 per cent. of world trade. It will work provided that my right hon. Friend sticks to his guns and steadily builds market credibility for his new policy. In that way we shall see headline inflation tumble later in the year--I am confident of that--and interest rates can then safely be reduced in the wake of better inflation figures. The balance of payments will continue to improve and we shall have laid a firm basis for continuing prosperity and success in the 1990s.
5.52 pm
Mr. Giles Radice (Durham, North) : As a member of the Treasury Select Committee, I pay tribute to the right hon. Member for Worthing (Mr. Higgins) for his excellent chairmanship of that Committee. The quality of the Committee is matched only by its diversity and I hope that I will not be misunderstood if I say that it occasionally needs rather careful and skilful handling. The right hon. Member for Worthing has always provided the necessary leadership, and I salute him for it.
This year we have produced a particularly valuable report on the autumn statement. In fact, I think that in some ways it is rather more valuable than the autumn statement itself, since the problem with the autumn
Column 891
statement is that it was out of date by the time it was published. The main flaw was its gross under-estimation of the extent of the recession.On 8 November, when the then Chancellor of the Exchequer--now the Prime Minister--introduced the autumn statement, he talked complacently about a period of what he called "weak activity". He chided my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) for his allegedly alarmist talk about a recession. However, as the Chancellor spoke, the economy, as my right hon. and learned Friend the Member for Monklands, East told him at the time, was already in the grip of a fierce recession. Sadly, as we point out in our report and as the right hon. Member for Worthing mentioned, that recession is likely to be much deeper and longer than the Treasury forecast in the autumn statement.
We are now in the second most severe recession experienced by the country since the 1930s and it could turn out to be the most severe. The influential economic commentator, Gavyn Davies, director of Goldman Sachs and economic adviser to the Treasury Select Committee, has pointed out that most of the indicators in the latest Confederation of British Industry survey are worse than they were at the same stage of the 1980 recession. The CBI survey shows that manufacturing output is falling rapidly, investment is declining sharply and unemployment is likely to rise even faster than is predicted by the most pessimistic accounts.
Ms. Marjorie Mowlam (Redcar) : Does my hon. Friend agree that, if Conservative Members were interested in unemployment, those who have already spoken or intervened would have mentioned the increase in unemployment benefit claimants in their constituencies in the past nine months? The hon. Member for Esher (Mr. Taylor), who is still in his seat, would know that there has been a 72 per cent. increase in claimants in his constituency. The right hon. Member for Chingford (Mr. Tebbit) would know that there has been a 32 per cent. increase in his constituency. The Minister--
Madam Deputy Speaker : Order. The hon. Member for Redcar (Ms. Mowlam) is not making a speech ; she is intervening in the speech of the hon. Member for Durham, North (Mr. Radice).
Ms. Mowlam : I accept that. However, the Minister should know that there has been a 32 per cent. increase in claimants in his constituency. Does my hon. Friend agree that it is appalling that Conservative Members have not mentioned that?
Mr. Radice : I agree with my hon. Friend. What is interesting about the recession is that, in contrast to 1980-81, when the recession began in the manufacturing sector, this recession began in the housing market and spread to the service sector in the high street. Now it is severely affecting the manufacturing sector as well. Also, in 1980-81 the recession began in the southern part of the country. As my hon. Friend the Member for Redcar (Ms. Mowlam) pointed out, it is a cause for concern that Conservative Members have not mentioned the unemployment in their own constituencies, considering how fast it has been rising. My hon. Friend will know that the rash of recent bankruptcies suggests that, after a six- months time lag, the recession is now hitting the north with equal
Column 892
severity. As a northern Member of Parliament, I find it a tragedy that, after all that has been done in the north and all its efforts to adapt its economy, it should be suffering once again from recession. My hon. Friends who represent northern constituencies also recognise that.The recession will be longer and deeper than the Government were telling us three months ago, and it is hitting every part of industry and every region. The responsibility for the recession lies fairly and squarely at the door of the Government. It is not caused by world recession. Although there is a slowdown on the north American continent, the two most successful economies in the world--Germany and Japan--are still growing steadily. Germany has a predicted growth rate of 5 per cent. in the coming year and Japan has a predicted growth rate of between 2.5 per cent. and 3 per cent. That is hardly a recession, so we cannot blame the rest of the world for ours. Nor is it caused by the Gulf war. At a hearing on the cost and economic consequences of the Gulf war, the Chief Secretary rightly told the Treasury Select Committee that the Government were not "seeking to hide behind the war as an excuse for any other difficulties we face."
It is a pity that the Chancellor of the Exchequer did not heed the Chief Secretary's wise words.
The truth is that we are in a recession because of the mess that the Government have made of the economy since 1987. As the Select Committee pointed out at the time, the Government, by a reckless policy of credit deregulation, tax cuts and monetary expansion, allowed the economy to get out of balance in the first half of 1988. They should have been in a position then to use credit controls, fiscal policy and exchange rate policy to bring the economy back under control. Instead, they stuck--in some ways they did not have many alternatives since they had already got rid of credit controls--to the one-club policy of high interest rates.
As I said in a speech in last year's Budget debate, relying on interest rates as a key lever is likely to be unpredictable and disruptive. I must quote at this point Professor Paish's classic description :
"It is like pulling a brick across a table top with a piece of elastic : nothing happens for ages, and then the brick hits you in the eye."
A long period of high interest rates imposed by the Government has given the British economy a massive black eye.
The question facing the House is what the Government should do to get the country out of the mire in which they have dropped us. A package of measures is required ; the first is to reduce interest rates. Everyone welcomes the half per cent. reduction announced today, but that is only a modest beginning. There is no doubt that interest rates will need to come down-- [Interruption.] If the Chief Secretary will listen for a moment, I have some good advice for him. Interest rates need to come down by at least 2 to 3 per cent. as soon as possible.
I recognise that ERM membership imposes a restriction on interest rate policy. That is the issue raised in The Times today, and it has been mentioned by the hon. Member for Wolverhampton, South-West (Mr. Budgen) in his stimulating series of speeches ; it is also discussed fully in the Select Committee report. I advise those of my hon. Friends who have not read that report to have a look at it.
Column 893
I was a strong supporter of British entry of the ERM because it brings more stable exchange rates. Our experience outside it as compared with exchange rates inside it shows that clearly. In the medium term, the ERM can lead to a reduction in interest rates, and I note that interest rates are lower inside it than were ours outside it. It is also a useful counter-inflationary discipline : inflation is lower inside the ERM than was ours outside it.It is not possible to blame the ERM for the current recession. Unemployment started to rise in April 1990 and we did not enter the ERM until October--
Mr. Shore : Since when, it has deepened.
Mr. Radice : My right hon. Friend will forgive me if I complete my argument. As I said at the time of our entry, we entered at the wrong time, for the wrong reason and at the wrong rate. We entered partly for political reasons, before the Tory party conference, just as today, as the hon. Member for Berwick-upon-Tweed (Mr. Beith) pointed out, we had an interest rate reduction shortly before this debate. A problem has been created by the former Chancellor's handling of our entry. The weakness of sterling inside the ERM has made it more difficult to obtain the reductions in interest rates that are so vital for domestic reasons. The first answer to that is to manoeuvre such reductions and in a way that is precisely what the present Chancellor has already done. At least a 1 per cent. interest rate reduction has already been largely discounted by the markets, as shown by the fact that sterling strengthened against the deutschmark on the foreign markets today.
Secondly, given that we have joined the ERM, it would be wrong to devalue unilaterally--that would send all the wrong signals. However, there is a stronger case for a deutschmark revaluation within the ERM-- [Laughter.] That has been advocated by the Bundesbank ; indeed, it is being advocated by it at this very moment. That would create a space for a general realignment.
I make a prediction : within the coming year there will be a general realignment of exchange rates in the ERM, and it will be led by a revaluation of the deutschmark.
Mr. John Townend (Bridlington) : May I offer the hon. Gentleman some advice? If he really believes that a significant cut in interest rates is vital for the British economy now, does he think that possible without a realignment? If it is not, will he swallow his pride and support a realignment?
Mr. Radice : I have just said that I think that there is a stronger case for a realignment inside the ERM, led by a deutschmark revaluation.
Thirdly, we must reintroduce some form of credit controls. The minimum reserve asset ratios that operate in France and Germany should operate here, too.
Lastly, there should be what the Treasury calls greater fiscal activism, as we argue in the Treasury and Civil Service Select Committee report. The Government's refusal since 1980 to use fiscal policy counter-cyclically has been bad for the British economy. I welcome the policy announced by the Government on automatic stabilisers, but there is room for sensible investment of public money in incentives for industry, as argued by my colleagues on
Column 894
the Front Bench, in employment creation-- because we need measures against unemployment--and in training and regional policy.Mr. Shore rose--
Mr. Radice : I have only four minutes, and to give way now would be unfair to myself. I have already given way twice.
The use of these instruments in the way that I have described would restore some measure of flexibility and credibility to economic management, which has had to rely exclusively on interest rates. The Government have saddled themselves with a policy of economic management which is followed by no other country in Europe. We do not need to do that ; we need more flexible economic management policy. It is essential to tackle the recession and to bring the economy back into balance, and short-term economic management has an important role in that. But we must also operate in the longer term on the supply side of the economy. That is not merely a matter, as Conservative Members seem to think, of liberalising markets ; it is equally a question of investing in the factors of supply. We need to invest in skills. It is good that the Prime Minister has at last realised the importance of education and training, but it is a bit late--the dying gasp of a dying Government. Investment in technology, in infrastructure and in transport is also vital for the economy. By bringing the economy back into balance and by investing in the supply side we should help to prepare the economy for the certain prospect of the single market, for which we are badly prepared, because we are going into it at the wrong time for our economy. It would also prepare us for the possibility of a single currency by the end of the century. I agree with my hon. Friends who are against the idea of a single currency that we must bring about a transformation of the economy if we are not to suffer as a consequence.
The charge against the Government is that, like the Tory Governments in the 1930s and 1950s, they have failed to prepare the country for the challenges that lie ahead. In the coming months, the Labour party will press that important charge in the House and in the country. I predict that the verdict of the voters will be that the Government are guilty as charged.
6.9 pm
Sir William Clark (Croydon, South) : We should all congratulate the right hon. and learned Member for Monklands, East (Mr. Smith) on being a master at avoiding answering questions. As my right hon. Friend the Member for Worthing (Mr. Higgins) pointed out, when the right hon. and learned Gentleman was tackled about interest rate reductions and about whether there should be a realignment, he did not answer the question.
There is far too much doom and gloom in reference to our economy. Comparisons are made between the 1930s and the 1980s, but one never hears the critics of our economic policy talk about the strength of our economy since 1979. The growth in output per worker in Britain is the highest in Europe--indeed, it is higher than in any other industrial country. Twenty- seven of the 50 top performing companies in the world originate in the United Kingdom. Almost 400,000 new businesses have been created.
Column 895
Although they may be profitable, many small businesses have cash flow problems. I urge my right hon. and learned Friend the Chief Secretary to make local authorities and departments pay their debts within 28 or 31 days, or whatever period is decided upon. Many small businesses go into receivership because they cannot get money. Serious thought should be given to providing for mandatory interest after there have been outstanding debts for a certain period. That would help the cash flow. I remind my right hon. and learned Friend that if one of us owes Customs and Excise money on VAT or owes income tax to the Inland Revenue, those departments are quick to start charging interest, whether or not there is a genuine excuse. The Government must also review the draconian fines imposed on some VAT payers. I assure my right hon. and learned Friend the Chief Secretary that I in no way support or give succour to businesses that try to avoid paying VAT, but many small employers depend on someone else looking after the books. Genuine mistakes may be made. Customs and Excise and the VAT tribunals should have the discretion to decide that a business that has innocently not paid VAT should not suffer a draconian fine.The other day, I heard about a company which had an addition error of £900,000 in its sales. That error would have been spotted under the company's normal checking procedure, but Customs and Excise not only took the tax on the £900,000 but imposed a fine of £272,000. That was a draconian action. I do not know whether Customs and Excise is as keen to pay interest to someone who overpays VAT.
Like other hon. Members, I welcome the 0.5 per cent. reduction in interest rates. After the stock market crash in 1987, the pundits, economists and all the political parties said, "We must reduce interest rates because there will be a world recession. The only way to avoid a recurrence of the 1930s recession is to reduce interest rates." Interest rates were reduced, but, with hindsight, that was a mistake. The former Chancellor, my right hon. Friend the Member for Blaby (Mr. Lawson), openly admitted that. At the time, however, everyone was clamouring for an interest rate reduction. The same scenario applies today--people, including the Opposition, are clamouring for a reduction. I am delighted that my right hon. Friend the Chancellor is taking things gently and being cautious. The Government have always said that, as inflation comes down, interest rates will come down. A 0.5 per cent. reduction in interest rates is a step in the right direction. Although it will not make much practical difference in the immediate future, it shows that the Government are standing by their pledge that when inflation comes down, interest rates will, too. Business men can take comfort from the fact that this is the first step towards reasonable interest rates.
The retail prices index will be published on Friday--apparently, the Government have the figures now. My right hon. Friends the Prime Minister and the Chancellor would not have reduced interest rates by 0.5 per cent., or by anything at all, if they thought that Friday's figures showed that inflation was worse than 9.3 per cent. I am sure that the figures will be satisfactory.
Ms. Mowlam : Will the right hon. Gentleman give way?
Column 896
Sir William Clark : I am sorry, but I cannot give way in a 10-minute speech.
We must not jeopardise the future by reducing interest rates too quickly. We went down that road in 1987-88. Of course, events in the Gulf will put over public expenditure figures out, although not be a great deal because of the contributions from the Kuwaitis, Saudi Arabians and Germans. I am sure that the House is delighted at the close contact and co-operation between Chancellor Kohl of Germany and my right hon. Friend the Prime Minister. We can build on that co-operation. It was interesting to read that Chancellor Kohl gave a sympathetic hearing to the hard ecu suggestion made by my right hon. Friend the Prime Minister some time ago.
It would be a mistake to rush precipitately into the narrow bands of ERM. We must bring inflation well down before doing so. If we move too quickly, realignment may be forced upon us. That would bring inflationary pressures, because imports would cost more. We should stay on course. We will ride out the recession. The United Kingdom economy is in much better shape than it has been for many years--[ Hon. Members :-- "No."] The Opposition should be aware of the strength of the economy. Our national debt has been reduced by £26 billion over the past three years, which must be a good thing. The average family's standard of living has improved. Two thirds of people own the houses in which they live.
We are in a recession, but we are starting from a higher level of prosperity than in the past. We are not starting at the bottom. In the 1970s and the 1980s, we were at the bottom of the international league. Now we are near the top. I am sometimes astounded by Opposition Members. They seem to take delight in any economic difficulty that we have. They jump gleefully on any bad news and say that the Government's economic policy--
6.20 pm
Ms. Diane Abbott (Hackney, North and Stoke Newington) : I listened with interest, as did my colleagues, as the Chancellor talked defensively, but still rather lightly, about the current recession. People call it "Mr. Major's recession", as he was at the Treasury for almost the entire period of its gestation--a major recession, courtesy of Mr. Major.
I noted how the Chancellor talked about the ballooning of public and private debt, as though it were simply a series of coincidental individual decisions, rather than, as was the case, a response to, and the result of, Government policies--notably, deregulation of financial services, changes in the arrangements for mortgage tax relief, and tax cuts. I must be one of hundreds of Members of the House with a very healthy bank overdraft, and in the past year not a day has gone past without an expensive leaflet urging me to borrow more coming through my door. That is the climate that the Government have created. The Thatcher boom was nothing more than a 20th- century south sea bubble.
I listened, perhaps most sadly of all, as the Chancellor said that the present recession was a price well worth paying. Right hon. and hon. Members on the Treasury Bench can say that this recession is a price well worth paying--they, in their personal lives and circumstances, are not paying it. But let them tell my constituents in Hackney that this recession is a price worth paying. Let
Column 897
them say the same thing to the new businesses in Hackney that were launched on the crest of the new enterprise bubble in the latter years of the 1980s.Many of those businesses, launched by members of the minorities anxious to better themselves by doing what the Government had told them to do--get into the enterprise culture--are now in a very different position. Let the Government talk to people who are surrounded by the ruins of their business endeavours and strangled by high interest rates. Let them talk to old- established businesses in London--particularly businesses in the construction industry--and to people in professions related to the property market. Let them hear those people say that, unless interest rates come down perceptibly in the next six months, they face ruin.
Let the Government tell young people in Hackney who will leave school this summer, and who face a complete drying-up of clerical jobs in the City and in the west end, that this has all been a price worth paying. Let them tell mortgage payers, who face the crippling burden of some of the steepest payments in the country, and consequent repossession or enforced sale, that their misery is a price worth paying. Above all, let them look at the people who have suffered the personal misery and financial disaster of bankruptcies. Let them tell the victims of the rising level of bankruptcies in the past few months that the current recession is a price worth paying. The Chancellor accused some people of blaming the EMS for the recession. In fact, no one does that--not even the more rabid anti-Europeans on his Benches. It is clear that joining the EMS at too high a level was a blow to industry. Like the new Chief Secretary, I am not an economist, but it is clear that membership of the EMS means that for external exchange rate purposes we have to maintain interest rates that are much too high for the internal domestic purpose of combating recession.
I say a few words about economic and monetary union. The Treasury and Civil Service Select Committee has just returned from Brussels, where it had a series of very interesting meetings with members of the Commission,--off the record, of course. To anyone who talks to members of the Commission it is quite clear that the Government are sidling towards economic and monetary union. For fear of upsetting some of their more excitable supporters, they will not admit it, but it is the fixed opinion of leading members of the European Commission that Europe will have a single currency by the year 2000. No one can have any doubt that economic and monetary union is a moving train and that we are on it.
Without wishing to intrude on private sorrow, I shall say a few words in passing about the hard ecu, of which we have heard so much. It is a tragic tale, but still the Chancellor clutches the hard ecu to his bosom like a mother trying to will a stillborn child to life. In Brussels we found that the hard ecu, despite the Chancellor's claim that it had been greeted with rapturous acclaim in the chancelleries of Europe, is dead in the water. Central bank governors have rejected it, and our European partners have rejected it. There is absolutely no support for a 13th currency.
Of course, the hard ecu was greeted respectfully as a step up from the "Up yours, Delors" style of diplomacy previously favoured by the British Government. Ministers
Column 898
have claimed that the Spanish proposal is very similar to the hard ecu, but in fact it is quite different. The hard ecu is acceptable only as a transitional arrangement--if it is acceptable at all. It is not, as Mr. Major has apparently persuaded his more gullible right-wingers, an alternative to the single currency. The hard ecu, as a practical alternative to the single currency, is dead. The problem is that the Government appear to be taking on all the difficulties of European monetary union but none of its benefits and opportunities.The Government talk about lowering interest rates. They say that lower interest rates are unthinkable within the European system. The fact is that, when the French joined the EMS, they realigned within a very short period. There is no reason why we should not have a realignment. I put it to the Chief Secretary that businesses and the mortgage-paying public are crying out for it. Furthermore, within Europe, the Government, as part of their policy, are taking on the difficulties but are not grasping the opportunities. They are blocking the effective distribution of regional aid. They are preventing local authorities from getting money from Europe for small businesses. Above all, they are fighting the social charter. Everyone in Europe, apart from the British Government, accepts that a single market will not have the support of ordinary people if it is seen just as a vehicle for increasing the market for big business. The Government have fought a national minimum wage, protection for part-time workers, parental leave and worker representation. Europe seems to want to burden the British Government with all the difficulties of European monetary union but to deny them all the positive aspects.
I return to Mr. Major's recession--
Mr. Speaker : Order. The Prime Minister.
Ms. Abbott : --the Prime Minister's recession. First, we were told that there were problems of definition. Then we were told that the recession would be short and shallow. Now, as all honest Members must admit, the economy is in free fall towards a slump.
I can do no better than quote the Treasury Select Committee's report on the autumn statement :
"Taking all factors into account, we conclude that the recession is likely to be deeper and longer in duration than the Treasury forecast."
That was true when we drafted the report ; it is even more true now. The recession will be much deeper and much longer than the Government admit. Right hon. and hon. Members on the Treasury Bench will not pay the human cost of this slump, but we in the Opposition believe that, inexorably, between now and July 1992, they will pay the political price of the Government-manufactured recession. 6.28 pm
Mr. John Townend (Bridlington) : I am pleased that, after considerable delay and pain, the Government's anti-inflation policy is now working. It has taken a long time to show through, but on an analysis of the past three months' inflation figures--I appreciate the danger of doing that in light of the experience of the right hon. Member for Leeds, East (Mr. Healey)--the figure amounts to only 1.9 per cent.
Today's cut in interest rates is welcome, but it is smaller than many hon. Members would have liked. To bring inflation down, the Government had to reduce the
Column 899
overheating in the economy--which, I hesitate to say, was grossly underestimated by the Treasury in 1987-88-- through the use of high interest rates.Interest rates have been high now for well over 18 months. It is certainly the longest period of high interest rates that I can remember. High interest rates have taken time to work, but they are working now with a vengeance--so much so that the Treasury's forecast of a shallow recession is, as the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) said, proving to be far too optimistic. If action is not taken soon, I foresee disaster on the horizon. There is a danger that the recession could turn into a real slump. I was a strong supporter of the monetary policy of my right hon. Friend the Member for Blaby (Mr. Lawson) and it was a tragedy that he did not stick to it. From a monetarist point of view, all the indicators are screaming for an easing of monetary policy and a significant reduction in interest rates. If inflation comes down, but interest rates do not come down as quickly, there will be a tightening of the monetary stance at the very time that it needs to be slackened.
Unemployment is rising and will soon be more than 2 million. The savings rate is once again rising and is most satisfactory. The froth has come out of the housing market and house prices are flat, or in many places are still falling. Retail trade is falling and company liquidity is under severe pressure. Industrial production is falling and in some industries demand is dropping through the floor. At long last, private sector wage settlements are coming down and it is a great pity that they are not following suit in the public sector. Bankruptcies and closures are increasing by the week. The growth of money supply is falling ; seasonally adjusted for the last quarter it was only 0.8 per cent. The balance of payments deficit is also coming down. Why are interest rates so high? The answer is the exchange rate mechanism.
On 12 Decembr, my right hon. Friend the Chancellor of the Exchequer said :
"There can be no question of a reduction in interest rates that is not fully justified by our position in the ERM. That will be the case however strong is the pressure for lower interest rates based on other indicators." --[ Official Report, 12 December 1990 ; Vol. 182, c. 966.]
That is a chilling statement. The logic is that if to maintain our position in the ERM we needed to raise interest rates, the Chancellor would not flinch from doing that. I believe that that would be disastrous at this stage.
We are now paying the penalty for joining the exchange rate mechanism and for changing interest rates from being an instrument of monetary policy to being an instrument of exchange rate policy. If that policy continues unchanged, the price that we shall have to pay will be a recession that is deeper than the 1980-81 recession and one that will last longer. If that is allowed to happen, the damage to our economy and to the political fortunes of the Conservative party would be immense.
This recession will be worse than that in 1980-81 because at that time much of the unemployment was due to the removal of overmanning and restrictive practices. Many of the firms that went out of business then were inefficient, old-fashioned, badly managed and, in some cases, were driven into the ground by the trade unions. This time, the inefficient, slimmed- down firms with good union relations are going to the wall. On this occasion, the
| Next Section
| Home Page |