House of Commons Hansard Debates for 5 Dec 1991

Mr. Austin Mitchell : My right hon. Friend should not be so embarrassed about the Government's position. Previous Conservative Governments have devalued the currency quite substantially. The Heath Government's own expansion was stimulated by a devaluation, which they called floating, and, in the same way in 1985-86, the pound went down about 30 per cent. in real terms against the deutschmark, which was one of the reasons for the Lawson expansion.

Mr. Williams : My hon. Friend's intervention is helpful. The Economic Secretary to the Treasury may find that his own Front-Bench Members are in a somewhat different position even before the election, not out of choice but out of necessity. I suspect that the Government would love to participate, not in a crude devaluation but in a nice respectable currency realignment. That is not devaluation--it is just tidying up the house. I do not care how it comes about and I do not care what label it is given, but if we do not face up to the reality that the rate of exchange is completely and utterly indefensible, Britain, which once boasted of being the workshop of the world, will become the back-street sweatshop of Europe.

Several Hon. Members rose --

Mr. Deputy Speaker (Sir Paul Dean) : Order. At the beginning of the debate, Mr. Speaker announced a precautionary 10-minute limit on speeches, which meant that we would judge the state of play at 7 o'clock. I am glad to inform the House that I judge that it is not necessary to impose a 10- minute limit. However, if hon.

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Members are to have the opportunity to speak, I calculate that there should be a voluntary limit of about 12 minutes on speeches. I hope that right hon. and hon. Members will respond to that request. 7.1 pm

Sir Ian Stewart (Hertfordshire, North) : I must immediately use one or two of my valuable minutes by saying a word about what the right hon. Member for Swansea, West (Mr. Williams) said. The most immediate response to his call for a devaluation of the currency is that, since sterling joined the exchange rate mechanism a year ago, there has been a substantial and sustained increase in British exports. That seems to undermine the main basis of the right hon. Gentleman's argument about the correct level of the exchange rate.

Both the right hon. Gentleman and the right hon. Member for Ashton-under- Lyne (Mr. Sheldon) filled out a bit of the case that is being deployed by the Opposition on investment incentives. The right hon. Member for Swansea, West appeared to argue that only investment in manufacturing industry is relevant to the state and the prospects of our economy. As he knows, since the 1970s, an increasing proportion of investment has been in the oil and energy sectors, which are not part of the manufacturing sector, and in the service industries. Those trends have been followed not only in this country but elsewhere.

The level of investment in the economy has risen dramatically since the late 1970s, when the Labour party was in government. The benefit of that investment has been strongly demonstrated. It has meant a great increase in output during the 1980s, which can be closely related to the changes in the investment allowances which were introduced at the time. In the 1980s, we looked very carefully at the potential impact of reducing the 100 per cent. investment allowance and, at the same time, reducing the overall level of taxation on corporate profits. We came to the conclusion that it would be far better for companies to know that they could retain a much higher proportion of their profits than that they should have to shelter their profits from high rates of tax by resorting to artificial levels of investment allowances in order to save themselves having to pass over all their profits to the Exchequer.

Although it seems to have acquired a certain vogue that increased investment allowances are needed, the converse is an increase in the basic rate of corporation tax. That would be a step in the wrong direction. In the second half of the 1980s, following the changes in the investment allowance and corporation tax regime which we introduced at that time, we saw a considerable increase in investment. I have no doubt that if we were to reverse that change we would encourage a certain amount of investment which would not and should not otherwise have taken place, because it would be less concerned with profitability and more concerned with reducing the tax bill of the companies concerned. I do not believe that that would be in the interests of companies, and I am certain that it would not be in the interests of the British economy.

I strongly caution hon. Members who may be tempted to think that simply by increasing investment allowances, which would have to be offset by an increase in the rate of corporation tax, one would encourage investment in the long term, or even in the short term. A low rate of corporation tax of 33 per cent.--33 per cent. is the highest

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rate ; the small company rate, of course, is only 25 per cent.--coupled with a reasonable flat rate of 25 per cent. for investment allowances is much more likely to encourage companies to retain profits for productive investment rather than the artificial system which applied before.

I wonder why the Opposition have chosen economic management as the subject of the debate. Perhaps they are beginning to realise that national health service trust reforms and other moves in that direction are beginning to show their worth and they no longer regard it as a suitable policy on which to try to create political difficulties for the Government. Nevertheless, it is remarkable that they should choose this subject for debate. I always enjoy the witty speeches of the right hon. and learned Member for Monklands, East (Mr. Smith), but I am always left wondering what is the economic policy of the Labour party. If Labour Members are to put themselves forward seriously as a prospective Government, they must answer some basic questions which have so far been left unresolved. The heart of the problem is the fact that Opposition Members' sums do not add up on public expenditure, taxation and borrowing.

My hon. Friend the Member for Horsham (Sir P. Hordern), who spoke about water authorities, put his finger on an important issue. At the very least, a Labour Government, if by some mischance they were elected, would discontinue the programme of privatisation and would therefore immediately deprive themselves of many billions of pounds of revenue over the public expenditure programme period. If they were to increase taxes on higher earners, savings income, capital gains and on the other matters that they threaten, they would only barely replace the money which they would lose by discontinuing the privatisation programme. That is without taking into account any money spent on renationalisation or deprivatisation, whatever the correct term might be, let alone bringing back into the public sector all the borrowings of companies which are currently in the private sector and which now do not count as part of the public debt. The Opposition cannot have thought the matter through. We have had no explanation from them. Endless speeches, statements and policy documents have been produced by Labour Members, but not a single line has addressed the gap between what they say that they would want to spend and their means of raising the money to meet it. There is a serious conflict of interest in what they are trying to do. They are saying to people, "We want you, as voters, to believe that we will spend an extra £35 billion, £40 billion or £50 billion on wonderful public expenditure projects, and we will not tax you, as earners. All right, if you are on a higher income, you will get a big increase in taxation." However, everybody knows that increasing taxes on higher incomes does not produce anything like the revenue necessary to sustain Labour's public expenditure commitments. Opposition Members cannot have their cake and eat it. They must explain how they will bridge the gap. To put it another way, they cannot use the same financial resources twice.

Let us consider a parable. Let us suppose that a disreputable business man was running a great commercial empire with many public and private companies and had control of the group's pension funds. One could not take money out of the pension fund and put it into the private companies controlled by the same person and still have that money in the pension fund. One cannot use money

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twice over. Similarly, one cannot make commitments to huge public expenditure programmes while saying that one will not raise taxation ferociously to meet those commitments.

We need only look back at the past. The same sort of noises were being made in the 1970s that the hon. Member for Derby, South (Mrs. Beckett) is making now about not imposing extra taxation on people with low incomes. In the election, as a result of which I first became a Member of this House, I well remember the right hon. Member for Leeds, East (Mr. Healey) travelling around the country with a great grin on his face saying that he would squeeze the rich until the pips squeaked with his new tax policy. The Opposition are at it again now. They want to increase taxation on higher earners. The right hon. Member for Leeds, East did not say that "the rich" included all those on anything above half average earnings, yet those were the people who received the extra tax burden.

One has to increase taxation all the way down the scale, to those on average and low incomes, if one is to raise anything like the amount that Labour would need to fund its public expenditure programmes. That is why the last Labour Government stopped increasing personal allowances in line with inflation and why, as a result, nearly 2 million people were brought into the income tax net. However, in the 1980s, under a Conservative Government, about 2 million people have been removed from the tax net. We have reversed the unsatisfactory direction that was taken by the last Labour Government. That is why take-home pay for a person on average earnings remained virtually unchanged under the previous Labour Government. Indeed, the income of the average single person actually fell whereas, since 1979 under a Conservative Government, the average increase for single and married people, and married couples with two children, has been no less than 40 per cent. in every category. That is the difference between an economy that has tax rates that are set to encourage incentive--and earnings progress--and an economy with the suffocating levels of taxation that are inevitable under a Labour Government because of their huge public spending commitments. If a Labour Government raised the basic rate of taxation from 25p to 33p, which was their chosen rate at the end of their last period in government, they would raise in tax only about half of what is needed to meet the public expenditure commitments that they have made throughout the country in the past two or three years.

That is the scale of the mismatch between the Opposition's words and figures. I warn them--perhaps I am even trying to be helpful--that they will not do their cause any good if they continue to put forward financial and economic arithmetic that does not add up. They will not be able to do that during a general election campaign because it will be easy for us to point out the gaping holes in their arithmetic and nobody will believe them.

The Labour party should come clean. There is nothing wrong or immoral about saying that one wants to be a high tax, high public expenditure party and that that is the way in which one wants to conduct oneself in government, but one cannot say that one would form a high public expenditure, low tax Government ; that simply could not work. It has not worked in the past and Labour Governments have come a cropper every time that they have tried it. One cannot use creative accounting to get out of that problem. The Opposition must face up to that. The

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sooner that they do, the better for them, but the better for the country also, because people will know where they stand.

7.13 pm

Mrs. Irene Adams (Paisley, North) : It is now just a year since I first became a Member of Parliament. In fact, I was elected on the very day that the right hon. Member for Huntingdon (Mr. Major) became Prime Minister. In my maiden speech, I told the House of the difficulties that my constituency faced and the rundown that had occurred there during the 12 years that the Tory party had been in power.

In my first few weeks here, I listened intently to the Government telling us, "Our difficulties are over now that Mrs. Thatcher has gone. Mr. Major is about to deliver unto us a bright new tomorrow." In fact, at that time the Prime Minister and the Chancellor were denying that we were in a recession, and even when they finally conceded that there might just be a recession, they continued to deny its depth.

Far from having a bright new tomorrow, my constituency has continued to suffer since the right hon. Member for Huntingdon came to office. All the key indicators have gone from bad to worse in that time. Unemployment in the country has increased by about 3,000 a day ; businesses have failed at a rate of more than 200 a day ; and in every working day of the past year 300 families have had their homes repossessed. The misery that homelessness brings to families is a terrible indictment of any Government.

During the past year, manufacturing investment has decreased by 12 per cent. and manufacturing output by 5 per cent. In the past year, 8,178 businesses have failed in Scotland. Again, that has caused abject misery.

My constituency has not fared any better than any other. The picture has become bleaker and bleaker. Paisley is essentially a mill town--or rather, it was a mill town until 1979 when the Tories came to power. At that time, United Thread Mills in Paisley employed 3,271 people, but today only 402 people are employed there. Only last week, we were told that Paisley is likely to lose those 402 jobs in the next few months. That is not because people no longer need thread or because it is no longer being manufactured, but because that company, which started its life in Paisley, is now a multinational company with investments all around the world. Because of the Government's policy on and attitude to manufacturing industry, the jobs are no longer in Paisley--and they are not likely to be there.

In a recent written reply to my hon. Friend the Member for Paisley, South (Mr. McMaster), the Minister responsible for Scottish industry admitted that, between 1979 and 1989, the Paisley postal area lost 76 per cent. of its manufacturing jobs. If that is updated to the present day to include the recent manufacturing job losses, the figure is now over 80 per cent. In fact, only today we heard that we are likely to lose another 320 jobs in the whisky industry in Paisley, South.

Our area now needs a major economic initiative to regenerate its manufacturing base. We have suffered a haemorrhage of job losses. That has not happened in one fell swoop ; it has been death by a thousand cuts. We now need a genuine initiative, but not the sort that has

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happened in other areas, where jobs are simply transferred from one area to another without any new jobs being created. We desperately need a Government partnership with industry, such as the Labour party would initiate. As a result of the Government's lack of initiative and investment in manufacturing and training, we are in desperate danger of losing all our manufacturing skills. In my area, those were the skills of the thread-making industry and of heavy and light engineering.

During the by-election in which my hon. Friend the Member for Paisley, South and I were elected--on the day that the right hon. Member for Finchley (Mrs. Thatcher) resigned--I was campaigning when a newsagent said to me, "Look out at that road. I remember the day that Mrs. Thatcher came to power. I remember it well because a small boy was knocked down outside the shop when he was trying to cross the road. He was knocked down because the road was so busy with traffic and with people going to work in the manufacturing industries that he could not cross it safely. I looked out at that road this morning and there were two boys playing football on it." That is what the Government have done to the manufacturing industry of Britain. They have reduced it to absolute rubble.

Mr. Gordon McMaster (Paisley, South) : Does my hon. Friend recall that the newsagent made that statement on the very day that the right hon. Member for Finchley (Mrs. Thatcher) resigned? That is the legacy that she left us from that 10-year period.

Mrs. Adams : I agree with that.

As a result of the lack of investment in manufacturing and training, young people have not learnt the old skills that we had in manufacturing. Therefore, it is all the more difficult to convert those old skills to fit the new technologies of today. Indeed, we have missed a rung on the evolutionary ladder. The end result is that we miss out yet again because we do not have the necessary skills for the new industries that are coming along, so the vicious circle created by the Government becomes an ever- increasing downward spiral in the loss of manufacturing jobs that has so damaged my constituency.

The only new jobs that we have been offered are at a toxic waste incinerator. An application has been made to site one in Renfrew in my constituency. No one wants such an incinerator. It would cause greater damage to the industry than we already have because the nature of the business would discourage new investment in the area. I have described the grim reality that people in my constituency face every day. The Government have presided over that loss of jobs. Coupled with that, a lack of investment in the construction industry, especially public sector housing, and a lack of funding for local authorities have created huge waiting lists for council housing and high levels of homelessness in my constituency. Council houses are in increasing disrepair. Renfrew district council estimates that it would need to invest some £300 million to bring its housing stock up to a tolerable standard.

Is it any wonder that people in my constituency continually question the sanity and morality of a Government who allow public buildings to fall into disrepair while building workers are unemployed, who have presided over record unemployment and record interest rates, who have created a level of homelessness in

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Britain that we have not seen for a hundred years, who refuse to invest in manufacturing industry and training, who are locked into a dogma of the past and who are bereft of new ideas? They are a Government in their death throes who cling on to power in the hope that something will turn up. I have to tell them that it does not look as though something will turn up. It is time for the Government to die with dignity ; it is time to go now.

7.22 pm

Mr. Tim Smith (Beaconsfield) : I had the pleasure of listening to the maiden speech of the hon. Member for Paisley, South (Mrs. Adams). She spoke then with the same passion with which she spoke this evening on behalf of her constituents in Paisley. It is entirely right that she should do so. As the character of this recession has been rather different from that of the previous recession, not only her constituents have been affected. In many ways this recession has been harder in the south-east. In some respects it has been a white-collar, middle-class recession and many of my constituents have also been affected. Therefore, I sympathise with what the hon. Lady said.

However, we must ask ourselves what policies are most likely to be effective in dealing with the problems that we face. The Government are right to give the highest priority to getting inflation down. I make no apology for repeating what I said at the end of July when we last had a debate on the economy. Reducing inflation should be the Government's top priority. Since we joined the exchange rate mechanism of the European monetary system, we have had considerable success in reducing inflation.

In the autumn statement of 1990 the Chancellor forecast that in the fourth quarter of 1991 inflation would fall to 5.5 per cent. By the Budget of this year he forecast in the Red Book that in the fourth quarter of this year inflation would fall to 4 per cent. He has beaten both those forecasts. Today inflation is below 4 per cent. In the Budget he forecast that by the middle of next year inflation would be 3.75 per cent. In this year's autumn statement he forecast that inflation would be 4 per cent. by the fourth quarter of next year.

It is possible that the Treasury is being unduly pessimistic. There is every possibility that the underlying inflation, and indeed the retail prices index, will be below 4 per cent. by the end of next year. That is the benefit of having adhered through some difficult times to the policy of United Kingdom membership of the exchange rate mechanism. That is the great benefit which the ERM will deliver to the British economy in due course.

Of course, there is an important trade-off here between the short term and the long term. What would have happened if we had not joined the ERM a year or so ago? Interest rates might be 1 or 1.5 per cent. lower today. Almost certainly sterling would be lower than it is today, and, therefore, inflation would be higher. It does not follow--I am sure that the right hon. Member for Swansea, West (Mr. Williams) would disagree if he were still here--that exporters could have taken advantage of a weaker exchange rate in the way that he suggested.

As my right hon. Friend the Member for Hertfordshire, North (Sir I. Stewart) said, the record of exporters in the past 12 months was a good one, even with an exchange rate which some people claim is excessively high. I should have thought that most people would have learnt by now that devaluation of the currency is not an economic

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panacea and that they would see that countries which have had a firm exchange rate have been among the world's most successful exporters.

If inflation was higher than at present, house prices might be a little firmer and there might be a little more consumer confidence knocking around, but I suggest that that would give the illusion of improvement but no real improvement. There is no doubt that our membership of the ERM offers an opportunity to break the mould in which we have been stuck for the past 20 or 30 years. In the short term, it seems that everyone in the House agrees that there is no quick fix. I was doing a piece for the BBC World Service earlier this afternoon with the hon. Member for Redcar (Ms. Mowlam) in which she agreed that there was no quick fix. The right hon. and learned Member for Monklands, East (Mr. Smith) did not come up with any proposals that would have any short-term consequences on the economy. There are no policies designed to give it an instant kick start. All that the right hon. and learned Gentleman could come up with were the same policies that we have heard endlessly before. As my right hon. Friend the Chancellor said, those policies are the answer to every question about Labour's economic strategy--more investment and more training. We all want to see more investment and more training, but, as I said to the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), the way to achieve that is not by increasing tax allowances to 100 per cent. That would have a distorting effect. My right hon. Friend the Member for Hertfordshire, North, who was a Treasury Minister at the time, was right to make the changes that were made in 1984. They have paid handsome dividends because the main source of cash for new investment is retained profits. If the taxes on retained profits are low, people have more cash for investment.

The Government have the right economic policy, even if it is frustrating that recovery seems to be so long coming. ERM membership brings a stable exchange rate and no one should under-estimate the value of that to Britain's exporters. It brings, and has already brought, lower inflation and in due course that will doubtless be followed by lower interest rates.

The Government also have the right fiscal policy. In a time of recession, it is right that we should move from the position three years ago, when we had a large public sector debt repayment, to the situation today when we have a growing but not unmanageable borrowing requirement, which will rise next year to about 3 per cent. of GDP.

Mr. Jimmy Wray (Glasgow, Provan) : The hon. Gentleman says that the Government have the right fiscal policy now. They have been in government for 12 years. I feel sorry for the Opposition Front Bench, which will have to take over after April, because of the mess that the Conservatives will leave behind. There are debts totalling billions of pounds, but the Government have sold the assets of this country. How can the hon. Gentleman say that they have the right fiscal policy now?

Mr. Smith : The Government have had tremendous success in reducing the national debt. In the previous three years, there have been substantial repayments of public debt. We can contrast the position today with that under the last Labour Government, when the fastest growing head of public expenditure was debt interest. That Labour Government borrowed so much money. The bill has to be

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met by taxpayers today and by future generations. Our achievement in repaying some of the national debt is that future generations will not have to pay, today's taxpayers will not have to pay and that money is available to be spent on hospitals, schools and all the other things that we would like money to be spent on.

Hon. Members should read a written answer given to my hon. Friend the Member for Dover (Mr. Shaw), who asked which member state is doing best in the European monetary union stakes as regards public sector borrowing, which is one of the criteria for convergence. Hon. Members will find that one of the conditions is that the total national debt of a member state must be 60 per cent. of GDP or less. Some of the member states in the European Community have a national debt of more than 100 per cent. In the United Kingdom it is well below the 60 per cent., so we shall have no difficulty meeting that test, if and when the time comes. It would be irresponsible and wrong to go any further as regards fiscal policy. We should seek to place a ceiling on borrowing of around 3 per cent. of GDP, which is exactly what the draft economic and monetary union treaty does.

In comparing this recession with that in 1981, hon. Members will recall that in the 1981 Budget, contrary to conventional wisdom--although it was certainly the right decision at the time--my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) cut public sector borrowing in the middle of a recession. That was the right policy at that time and rapidly proved successful in terms of economic recovery.

Today we face a different situation. As I described, we start from a much stronger fiscal position and so it is right that we should now have a larger public sector borrowing requirement. I welcome the autumn and the fact that the Government want to increase public spending in key areas, including health and the transport infrastructure.

Mr. Frank Haynes (Ashfield) : What about Blaby?

Mr. Smith : Does the hon. Member for Ashfield (Mr. Haynes), who is wittering from a sedentary position, want to intervene?

Mr. Haynes : What about Blaby?

Mr. Smith : I shall ignore that remark.

Mr. Haynes : You supported him, that is why.

Mr. Smith : On unemployment, the position now is very different from what it was after the recession of 1981, when unemployment continued to rise until 1986. The signs are quite encouraging. Unemployment is still rising, which is obviously unacceptable and a matter of considerable regret --certainly to those of my constituents who have lost their jobs.

However, although unemployment is normally a lagging indicator in the economy, already the monthly rate of increase in unemployment has declined substantially. Last month it was only 15,000 and it fell in Scotland, Wales and the north of England--[ Hon. Members-- : "No."] I have the Department of Employment's figures here. Unadjusted unemployment fell throughout the United Kingdom last month by 25,000. The figures rose by 16,000

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only on an adjusted basis. In Scotland, Wales and the north of England unemployment fell. That is also cause for some optimism. On the question of economic and monetary union, I was sorry that the hon. Member for Berwick-upon-Tweed (Mr. Beith), who is no longer in the Chamber, grossly misrepresented the Government's position. He knows very well that the criteria are clearly set out in the draft treaty. If he looks at them, he will realise that the United Kingdom will have no difficulty in meeting the criteria. That is not the point. The question is whether it is sensible to make a decision now about something that the treaty says will be considered in five years' time, at the end of 1996. No rational person would try to make that type of decision now. It should be for the next Parliament or for the Parliament after that to decide.

The United Kingdom will have no difficulty in meeting the criteria, which relate to inflation, to our fiscal position, our performance within the ERM and to interest rates. We meet all those criteria and we should continue to pursue policies which ensure that we meet them. I think that we shall.

The two written answers that I referred to, given to my hon. Friend the Member for Dover, show that many other countries in the European Community do not meet the fiscal criteria--either current borrowing of 3 per cent. of GDP or a total national debt of 60 per cent. of GDP. The United Kingdom is in a much stronger position than many other member states, and meeting those criteria will not be a difficulty. I was disappointed by the speech by the right hon. and learned Member for Monklands, East. I want my hon. Friends to hear a little more detail about Labour's economic policies. That is not an unreasonable request when an election is imminent. People will start asking more detailed and more searching questions as the elections approaches. I am sure that my right hon. Friend the Member for Hertfordshire, North is right in saying that we hear so little because the Labour party has no answers to those questions. We hear the same tiresome statements about investment and training, but no answers to other questions. It is about time that we had some answers to those questions from the Labour party.

7.36 pm

Mr. Austin Mitchell (Great Grimsby) : I do not intend to follow the hon. Member for Beaconsfield (Mr. Smith), because his economics is the economics of accountancy. He knows all about the figures but nothing about the reality behind them. It is his obsession with figures that leads him to make the crucial economic mistakes that he made. The debate is interesting in the light of those mistakes. It is almost a throwback debate to 1981, with the Government saying that things are bad but--a Micawberism--"Wait and see, something better will turn up, it might get a bit better."

Conservative Members have obviously been briefed by Conservative central office, because they cannot find anything good to say about their Government, so they give central office speeches attacking the Labour party and asking what it would do. They are attacking not a past Labour Government but the Labour Government who will take office next year. If that is all they have to say, if they can only attack Labour, it is a sad summation of 13 years in power. The reality is clear to all of us. My hon. and

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learned Friend the Member for Monklands, East (Mr. Smith) summed it up brilliantly--it is the state of the depression. It is horrendous--the mother of all recessions. It makes the Chancellor the Saddam Hussein of economics for accomplishing it in such a brief period.

I will not go on about the statistics. They are shocking. The consequences of those statistics are dismal for the future of this country. The manufacturing base, which is already nearing the limits of viability--it is only about 20 per cent. of GDP, compared to about 30 per cent. in Germany-- is shrinking still further. We are losing all the supporting network of training, research, development and suppliers which keeps the manufacturing base in being.

The balance of payments has become a stranglehold. In the depths of recession, we are in a balance of payments deficit. It is horrendous. What happens when we expand? We cannot expand without making that balance of payments deficit worse. Every job we lose now, every factory we close, every production line that stops producing, means more imports later. It means, in other words, a tighter balance of payments deficit.

We shall be entering the single market in the coming year. That will be a highly competitive environment and we are entering it by jettisoning investment, research, design, development and all the other attributes that would allow us to compete in that market. We are not prepared for it, whereas our competitors are.

Firms that should be investing and preparing are throwing overboard, just to survive, research, design and everything, including model changes and investment, to struggle through a depression that the Government have created. That is the prospect not of success but of disaster later. It is a national tragedy for Britain.

The hon. Member for Beaconsfield said that, sadly, the depression had hit Beaconsfield. I remind him that it hit Grimsby bitterly between 1979 and 1981, and now we are having a second dose of it, with the loss of Findus Ltd. and 900 jobs, and the shrinking of labour forces by major employers. We are suffering the failure of viable businesses. It is a tragedy. People who put their lives, their effort, their everything into creating businesses have seen them close simply because of the level of interest rates, the depth of the depression that the Government have created and the hostile, unfavourable and unacceptable behaviour of the banks.

From where will the recovery come ? What will produce it ? I cannot see the answer. The Government are always making predictions, and in that sense the Chancellor may be described as the Mother Shipton--perhaps I should call him the Brother Shipton--of economics. I fear that we are in a new norm, a prolonged recession with no real recovery, rather than the real prospect of recovery. I say that because all the engines of recovery seem incapable of driving us out of the recession.

Housing is one such engine. From where will recovery in housing come, with interest rates at their present level, with house prices still having some way to fall and with a huge overhang of unsold houses ? One house in five sold in Britain now is repossessed, and that depresses the house price market. That is why I ask where the recovery will come from in housing.

Where will it come from in terms of consumer demand if unemployment continues to rise ? People are more

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frightened as unemployment rises and they have less money to spend. Credit, the debt level, presses on everyone and causes people to save and struggle rather than spend.

It will not come from companies. They are still struggling under a huge burden of debt. Nor will it come from exports, which are now falling because the pound is so overvalued that we cannot have export success at its present level of valuation. There might have been an improvement earlier with an expansion of the German economy, but that is now being deflated.

It will not come from Government spending, because the Government will have to borrow massively to keep going at the present mean levels of public spending. Hence none of the engines of recovery is available to pull us out of the recession. There is no escape and the tragedy is that the exchange rate mechanism--which the present aggressive, decisive Prime Minister bullied the hapless, shrinking right hon. Member for Finchley (Mrs. Thatcher) into entering all those months ago, forcing it on her against her will in such a decisive fashion--precludes recovery, because we cannot reduce interest rates.

It is paramount for us now to retain high interest rates, which are high in the historic sense, in real terms, and are high compared with Japan, and with America, where they stand at 5 per cent. Interest rates at 5 per cent. have not yet produced recovery in America. Yet our higher interest rates cannot be reduced ; nor can we reduce the exchange rate, because high interest rates are necessary to support the exchange rate.

The right exchange rate is necessary for a country in deficit, as we are, to shift resources from imports to production and to attract investment into manufacturing industry by again making it profitable. The exchange rate, which in a market situation would fall, cannot come down because the whole dedication of Government policy is to keep the exchange rate at an unreasonable level. The result is that the market cannot operate. We have nailed down the lid on the recession.

There can be recovery only if we reduce interest rates and the pound with them. It is no good reducing interest rates on their own, because there is no point in just pumping out credit. It is like trying to push on a piece of string : it cannot be done. One can pull interest rates up, but one cannot push the string to get them down again. We must increase demand for British goods by adjusting the exchange rate so that demand is channelled to British goods through the price mechanism, making our goods and exports more attractive and cheaper and imports dearer.

It is no good telling me that the price mechanism does not work any more. The Government's alternative is to reduce prices in manufacturing from the uncompetitive levels to which they are forced up by the exchange rate, by firing people and depressing the price of labour. I agree that price is important, but the only way to achieve a reduction in prices and an ability to expand is to adjust the exchange rate. If inflation is too much money pursuing too few goods, it does not follow that we must--as we have been doing in this country--reduce the supply of money all the time and thus have the disastrous consequences for industry that have occurred.

We should expand the supply of goods, which simply means expanding the money supply and channelling demand to British production in Britain. If the exchange rate is kept at its present level, every coal mine, steel plant and textile mill that closes is due directly to the exchange

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rate and will produce a worse balance of payments problem later on. We are deliberately taking resources out of production by means of the exchange rate.

It is no answer for Ministers to keep saying that we need only reduce inflation to produce the conditions for recovery. That is not true. We produce nothing but a graveyard. Any fool can bring inflation down. The Conservatives, understandably therefore, have been successful in their graveyard economics. But what is to produce recovery once inflation is down?

Our tragedy has been that we have always cut the supply of money, and kept money at too high a price, because of the dominant interests of finance and the kind of economics about which the hon. Member for Beaconfield talked. It is rubbish in terms of production, because a high exchange rate means that we shift the balance from production in this country to production overseas--in other words, to

imports--thereby making imports more attractive and our production more expensive. We shift the balance from investment in Britain to investment overseas, and we have been doing that for the last 13 years. We shift resources from production into consumption, as we have been doing over the years.

Mr. Tim Smith : Why has that not worked for the Germans?

Mr. Mitchell : A country with a powerful exporting sector can let its currency appreciate because it has the economic strength to ride that out. A country in which manufacturing has been shrinking needs the edge of a competitive currency to expand and rebuild back to the competitiveness which will allow its exchange rate to appreciate. It does not happen simply by putting up the exchange rate--that way comes rigormortis for industry-- but from policies which make investment in this country profitable. It gives industry the prospect of being able to sell its production, and the only way to do that is to make the currency competitive. It is simple economics, although the Government do not understand that.

Instead, they have shifted the emphasis from production to consumption by the exchange rate. In other words, they have shifted from labour, which we represent, to wealth, which they represent. It has been a matter of simple social priorities for them. They have shifted it from manufacturing to finance. The whole policy of the Government has been dedicated to making money dear and people cheap, and they have succeeded. They have produced the sort of society that reflects that set of attitudes. Unemployment will increase because there is no way of stopping it increasing.

There is no way out unless we reverse the priorities. We must reduce interest rates, and with them the exchange rate. We must do that to channel demand to production. No other way will lead to recovery. Water cannot be made to flow uphill. By constantly preaching about defeating inflation, the Government simply shift the emphasis from the real economy to the mythical battle against inflation.

It is a mistake for a country to tie its currency to that of another, because a currency insulates a country against drops in another countries' economies. It is also a mistake to tie our economic cycle to that of Germany, which wants to increase interest rates and deflate its economy, whereas we want to hold interest rates down and expand our

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economy. Yet we are forced to keep interest rates high to suit Germany. It means that we cannot improve our balance of payments and market forces cannot operate. It is a mistake to make changes in our exchange rate dependent on competitors who have a vested interest in seeing that exchange rate overvalued, because it strengthens, confirms and sustains their access to our market.

To make all those mistakes and then compound them by entering the exchange rate mechanism at too high a rate is total folly. The Prime Minister took us in at that high rate, and it is the last nail in his coffin. The pound is 24 per cent. overvalued in real terms against the deutschmark and more than 40 per cent. overvalued in real terms against the dollar. British industry can never recover the ground that it has been forced to give up by that overvaluation. The estimate of John Williamson in the bulletin of the National Institute of Economic and Social Research is similar.

The overvaluation will cause a growing deficit in our balance of payments, more unemployment, less investment and a Government who are twisting in the wind because they will be subject to every threat and challenge to the exchange rate. Governments who hang on in that way are usually challenged by their friends--in the present Government's case, the markets, which will test them in the next six months. Every year we are wasting production and there is a gap between what we produce and what we should produce, if we were on the trend growth line, even the low trend growth line of the 1980s. I do not know how much that amounts to. Sir Donald MacDougall came up with an estimate of some £60 billion a year in lost production just because of that economic folly. How much richer that would make us and how much more powerful as a nation, yet we are chucking it all away.

The position worries me, because I now see a deflation sustained by the exchange rate mechanism, which has become tripartisan policy. Each party is committed to the mechanism that imposes that deflation. It is strikingly close to the situation of the 1920s, when Winston Churchill took us back to gold at an overvalued rate in 1925. The consequence was the general strike of 1926, the depression of the rest of the 1920s, and the suffering of manufacturing industry and basic industries of this country because they could not leap the hurdle of overvaluation that the Government had imposed on those industries. The problem ended only in 1931, when a Conservative Government took us away from gold and devalued by 30 per cent. A Labour Government, who had broken their backs and given their all to keeping the country on gold, went out, with Ministers saying, "They never told us we could do that".

We now have the same orthodoxy, except that it is called "communautaire". It is called a commitment to Europe, and is placed higher than the recovery of our economy and jobs for our people. It is producing the same results, and the outcome can only be the same. There will be a breach, and we shall devalue because such suffering cannot be imposed on electorates through the hidden hand of the exchange rate. The Government cannot keep the lid down.

We have seen what is happening in Europe. Because of the futile quest of the exchange rate mechanism to get inflation rates down to Germany's abnormally low level, which it has achieved because of its powerful manufacturing sector, France now has the CRS using its batons on nurses and has experienced four rounds of public

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expenditure cuts, and Ministers cannot leave Paris without a police escort. A similar fate awaits us, because our deflation will be harder than that.

The only way out is to devalue. It will happen because it is the job of politicians in an untenable situation to walk out backwards, proclaiming that they are doing something different from what they are doing. I hope that it will be a Labour Government who do that because, without that devaluation, no Government can succeed, people can only suffer, our manufacturing base can only shrink further, and we shall be relegated to an indefinite, long-term future of crippling-- [Interruption.] The hon. Member for Beaconsfield sneers. The previous Chancellor of the Exchequer effectively devalued our currency by 30 per cent. against the deutschmark in 1986. That was the reason for the expansion and was a contributing factor to the Tory party's success in the 1987 election. So let us not have a sneering partisan attitude to that, because the fate of this country and British industry is at stake. British industry has been strangled by a crippling and excruciatingly high exhange rate, from which there will be no escape unless someone devalues.

7.55 pm

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