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House of Commons

Friday 28 January 1994

The House met at half-past Nine o'clock


[Madam Speaker-- in the Chair ]


9.34 am

Mr. John Austin-Walker (Woolwich) : On a point of order, Madam Speaker. I have raised this matter with your office and I am grateful for the advice that I received. I appreciate that you are not able to deal with a question of privilege on the Floor of the House, but I seek your guidance on a related matter.

I sought guidance from the Clerks, and I appreciate that there is another remedy regarding statements made in the House on Wednesday by the hon. Member for Billericay (Mrs. Gorman), and I have sought that redress by means of early-day motion 477. I seek your guidance on whether a question of privilege is relevant in reporting the proceedings of the House.

I understand that the Select Committee on Procedure, in Session 1988-89, indicated that, in reporting the proceedings of the House outside, defence against an action for defamation

"will not extend to the reporting of a selected passage, if the selection can be shown to have been made with intent to injure." I seek your guidance, Madam Speaker, on whether outside repetition of the inaccurate allegations by the hon. Member for Billericay would be privileged.

Madam Speaker : I am sure that the hon. Gentleman appreciates that it is impossible for me to give legal advice across the Floor of the House. I appreciate the way in which he has put his point of order. He knows that he cannot resuscitate an earlier debate by means of a point of order and, as he rightly says, he has expressed his views by means of early-day motion 477. If he will allow me to look at what he has said this morning, I will be in touch with him.

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Orders of the Day

Bank of England (Amendment) Bill

[Relevant document : First Report from the Treasury and Civil Service Committee on the Role of the Bank of England (House of Commons Paper 98-1 of Session 1993-94]

Order for Second Reading read.

9.36 am

Mr. Nicholas Budgen (Wolverhampton, South-West) : I beg to move, That the Bill be now read a Second time.

I am sure that those who follow the proceedings of the House would take the view that the Bill appears to be a narrow and technical measure, perhaps concerned only with the uninteresting and arcane workings of the Bank of England. However, I hope that consideration of the Bill will be based on the belief that monetary policy is important, not just to the Bank of England but to every citizen. It is an irony that, while we rightly deal in detail and at length with the technicalities of taxation policy and look at the way in which, for the sake of argument, the increase in taxation on fuel may be mitigated by compensation schemes, the enormous importance of interest rates to our fellow citizens is not often debated in the House. Certainly it is not subject to detailed parliamentary control.

Perhaps we could think for a moment about the effect of interest rates upon an ordinary family. In recent weeks, much has been made about the increase in taxation that will occur in April. It is said that the average family will suffer an increase in taxation of about £9 a week. Of course that is a serious increase in taxation, but it is one which most families will, with difficulty, be able to contain, perhaps by doing a bit of extra overtime, perhaps by denying themselves some of the luxuries of life. I do not wish to underestimate the strain of that extra taxation, but it is an imposition which is considered in detail by the House.

Monetary policy may have a much greater effect on individual citizens. For instance, we know that, because interest rates have decreased to 5.5 per cent. from their high point of 15 per cent., the mortgage interest payments of an average family with an average mortgage may have dropped by as much as £170 per month. That has been an amazing relief.

On the other hand, when interest rates increased from 7 to 15 per cent., the person who had the average mortgage found, first, that he almost certainly was suffering negative equity in his house and he could not move, and, secondly, that the most important payment that he made every month had about doubled. When that happened, it was not a question of having two or three pints of beer fewer a week or doing a bit of extra overtime ; he found that he simply could not meet the payments, and unless he could persuade his clearing bank to lend him a bit more money or to get the building society to roll over the interest for a bit longer, he was in real trouble.

Therefore, monetary policy matters. It matters for every citizen. Even if he lives, for the sake of argument, in a council house, he probably has a young son who is buying a house on mortgage, or a cousin who is struggling with a small business and finding that the small business is being hit by higher interest rates. It is odd, is it not, that the procedures of the House were built up at a time when we

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were preoccupied with the desire to prevent the monarch from raising taxation without our permission, and yet now the Executive is able to control monetary policy--which I would argue is at least as important to citizens--without our having much control or influence on the way in which it is operated? As a result of the ups and downs of monetary policy in the past 20 or 30 years, there has been increasing interest in finding a better system for creating stability in monetary policy.

The proposals that I make in the Bill are very slight. They do not seek to put the control of monetary policy on a permanent or revolutionary footing. They proceed from a very Tory attitude about the fallibility of individual wisdom ; the uncertainty that even apparently wise men have got it right and a belief that it is better to take one tiny, moderate step in the right direction than to take a large number of steps, most of which may be in the wrong direction. The detailed proposals are very modest indeed.

Hon. Members must know that in 1946 the Bank of England was nationalised. That measure was supported by all sections of the House of Commons at the time. Many people, such as Mr. Macmillan and Robert Boothby, felt that during the 1930s the Bank of England had imposed on the country too stringent a monetary policy, and that the independent Bank of England had made the slump deeper and more ferocious than it might otherwise have been. They hoped in the post-war settlement to gain political control over the Bank. That view was, of course, much supported by the Labour party, which felt that there had been a banker's ramp in the 1930s.

One of the more important parts of the Bank of England Act 1946 was section 4, which gave the Treasury the general power to give directions to the Bank of England. My Bill, by clause 1, amends the 1946 Act to provide that subsection (1) of section 4 shall cease to have effect ; but in its place is clause 2, by which the primary objective of the amendment Bill will be to impose upon the Bank the duty

"to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices."

To that end, by clause 3,

"The Treasury shall, after consultation with the Governor, set policy targets for the carrying out by the Bank of its primary objective."

That means that if, for the sake of argument, there is general inflation of 11 per cent., it will not be suggested by the policy targets that it is possible to achieve sound money within a year--it is not politically possible and socially possible to do so. Of course it would be perfectly possible economically. If there were a general interest rate of 25 per cent., no doubt one could achieve price stability in six months or a year, but the social and economic consequences of that squeeze would be horrifying. The targets would, therefore, be agreed between the Governor of the Bank, taking into account its statutory obligation to achieve stability in the general level of prices, and the Chancellor of the Exchequer.

Then, by clause 3, once that policy objective had been agreed, the policy would be recorded in writing. The details of the policy would be tabled at the first meeting of the court of directors of the Bank, and then published in the

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London Gazette. It would mean that everyone could follow the objectives and the way in which the objectives were implemented. However, of course, that would not be enough in a parliamentary democracy, and it is laid down by clause 4 that the individual responsible for the implementation of the monetary policy shall be the Governor. He would be personally responsible for the agreement and then carrying out the agreement, but--and that "but" is important--by clause 5 there is an override. It acknowledges that, wherever monetary policy is agreed and implemented, there may be more important considerations than the mere attainment of price stability. We saw how the apparently independent Bundesbank was overridden by its political masters. The monetary terms of the settlement made at the time of the reunification of Germany were not at first to the Bundesbank's liking. The independent Bundesbank was told that it would have to grin and bear it. The politicians decided, quite rightly, that the temporary maintenance of price stability was less important than a generous settlement on reunification.

Mr. Bernard Jenkin (Colchester, North) : They will pay for it.

Mr. Budgen : And they will pay for it.

Sir Peter Tapsell (East Lindsey) : We paid for it.

Mr. Budgen : That is a different point. There was no reason for us to have paid for it, in my opinion. I shall deal with that issue later. I am merely explaining the details of the Bill and do not wish, for the moment, to reopen old wounds.

Mr. Iain Duncan Smith (Chingford) : Why not?

Mr. Budgen : I am hoping to reopen old wounds later. At this very moment, I am trying to be helpful and moderate-- [Hon. Members :-- "Very unusual."]--which, as my hon. Friends say, is very unusual. Under clause 5, the Treasury may, from time to time, lay down a statutory instrument to direct the Bank of England

"to formulate and implement monetary policy for any economic objective"

other than that of price stability. It is an override power which takes account of the argument for public accountability. It deals with the legitimate argument about whether in our democracy, with a sovereign Parliament, we should have something approaching an independent or autonomous central bank.

I now advance the general arguments for granting the Bill a Second Reading.

Mr. Malcolm Chisholm (Edinburgh, Leith) : Before the hon. Gentleman proceeds, will he clarify clause 5? I may have missed some details when he went through it, but my query goes to the heart of his argument. Is his suggestion identical to that of the Treasury Select Committee's report, which talks of the power being used temporarily and in exceptional circumstances? It is important that hon. Members know to what extent it is envisaged that such an override power would be used.

Mr. Budgen : Clause 5 is based on the Select Committee's recommendations. It is true that the Committee talks of a temporary override, but, as the hon. Gentleman will know, in politics, things that are supposed to be temporary turn out to be quite well established--

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income tax or, for example, rent control in the 1914-18 war. Under the Bill, the Government would state that the overrride was temporary and, under clause 5, they would have to return to the House every six months to obtain the powers for that override.

Ms Diane Abbot (Hackney, North and Stoke Newington) rose --

Mr. Budgen : I shall of course give way to the hon. Lady in a moment.

If the Government wished to do so, they could ask for the powers every six months. For the sake of argument, let us suppose that a Government had been elected with the open promise to create hyper inflation. In such circumstances, they could obtain the necessary powers every six months. As with all measures in our constitution, there is no element of entrenchment in the Bill. Even if the House agreed to my proposals, an incoming Government who wanted to go for growth and get the economy moving--and accepted the consequent advantages and disadvantages--could amend the Bill.

Ms Abbot : I have listened with interest to the masterful way in which the hon. Gentleman deploys his argument. Will he clarify the way in which the override would work? If any Government told Parliament that they were, in effect, going to let inflation rip, would not their currency drop like a stone?

Mr. Budgen : That is true. The currency would, or might, drop like stone. At any rate, the object of the proposals is to achieve openness and ensure that, if a Government say they are going to do one thing, they cannot give directives to the Bank that do something quite different.

We have had two periods of serious inflation in the past 20 years--between 1972 and 1974 and between 1986 and 1988. In both periods, when interest rates were too low they had an advantageous effect on the retail prices index in the short term and enabled the Government of the day to say that they were adamant about trying to control inflation, while creating the monetary conditions that ensured that within 18 months or two years the underlying rate of inflation would pick up substantially. The proposals would not prevent a Government from giving instructions to the Bank to let inflation rip, but if the Government do so, they must do so openly and everyone must understand the consequences.

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : If my reading of the Bill is correct, I think that my hon. Friend might be understating the extent to which the Bill would entrench the--to my mind-- entirely laudable objective of maintaining price stability. Clause 5 would allow the Treasury to introduce two orders of the type that he describes, but neither may last more than six months. The Treasury would not be allowed to introduce more than two orders within the space of 13 months. Therefore, as I understand it, the Bill would provide that there would be at least one month in any 13 when the overriding objective of clause 2 would not be suspended by the Treasury. It is not something I criticise, but it is important that my hon. Friend deals with that issue.

Mr. Budgen : If it is obvious that after the expiry of the month the Government will return to the previous policy, I do not think that the month represents a very large break.

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I was using the word "entrenchment" in a technical sense. I meant that, because we have no written constitution, we could abolish the provision of the Act--if the Bill becomes an Act--without there being an extra-constitutional impediment to that abolition. I meant that my proposals were different from the entrenched position of, for example, the Bundesbank in a written constitution. That is the sense in which I used the word, and I am sorry if I did not define it properly. Discussion of the details will, I hope, emphasise the fact that the Bill takes fully into account the necessity for parliamentary accountability in our system. Those of us who support the Bill believe that it would assist the House by providing openness and giving the House the opportunity to criticise what the Executive are doing. It is only by knowledge and by openness that the House has the opportunity to bring its criticism to bear.

For example, during the battle between Lady Thatcher and Lord Lawson, as they are now known, about what occurred and what went wrong in the middle to late 1980s, Lady Thatcher said that when Lord Lawson began the policy of shadowing the deutschmark she, as Prime Minister, did not know that it was being done. She said in her memoirs that she found out only as a result of following the exchange rate policy chronicled in the columns of the financial press. Whatever the reason for that may have been, if the Prime Minister of the day was not fully informed of the interaction between exchange rate policy and monetary police, how much less was the House of Commons informed? Therefore, I hope that the proposals in the Bill will lead to greater openness in the Treasury and between the Government and Parliament.

Mr. A. J. Beith (Berwick-upon-Tweed) : Is not openness at least as important from the point of view of subsequently knowing whether people were informed or not as not allowing them to pretend that they did not know when they did? Is not the account that the hon. Gentleman gives difficult to square with Lord Lawson's comment, which appears in the corrigendum to the second Treasury and Civil Service Select Committee report? He says of himself and Lady Thatcher : "Although we had some fairly robust exchanges on a large number of occasions, because she did not like interest rates going up as a general rule, there were only two occasions during the whole of my time as Chancellor in which in the event I did not have my way and interest rates did not go up."

That does not suggest that Lady Thatcher did not know.

Mr. Budgen : I am not here to stir up ill will over that controversy. One can only say that both proponents will be able to make their case more effectively in future. Previously there was never an open instruction from the Treasury to the Bank of England and, inevitably‡, there was a good deal of mystery about what was going on. As to the extent to which the mystery was shared between the First Lord of the Treasury and the Chancellor, we shall never really know, but I hope that I was arguing effectively that monetary policy affects every citizen in a most important way. It is extraordinary that we argue in detail about the minutiae of taxation policy while we have no influence whatever over present monetary policy.

I should like to emphasise the importance of ministerial responsibility in our system. Not only is the Executive accountable to a sovereign Parliament, but individual Ministers are personally and collectively responsible and

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there is nothing in the Bill that undermines the personal responsibility of the Chancellor of the Exchequer for monetary policy. If the override provisions of clause 5 need to be brought into effect, it is clear that the House of Commons will be able to tell the Chancellor of the Exchequer that, regardless of the monetary policy being pursued in response to agreed targets, there are perfectly satisfactory powers under section 5 of the Bank of England (Amendment) Act which will enable him to override those policy targets to produce the monetary conditions appropriate for the state of the economy.

As I explained, I hope that this is a not a revolutionary measure and that there is nothing exciting or interesting in it. I hope that it builds, in a modest fashion, on the practices that have already been adopted between the Bank and the Treasury since the great release of 16 September 1992. The Bank of England now publishes a quarterly inflation report. That may seem to be a relatively unimportant change, but the quarterly bulletin in the past was the subject of most detailed negotiation beween the Bank of England and the Treasury. It was the daily duty of countless persons, each with double firsts in classics, to pore over the exact meaning of particular words so that when a warning was given it could be in language that appeared adequately to rebuke the Government and would send a small message to the market without deeply disturbing it. That was an intellectual game which was thought to be of the greatest importance and certainly employed many of our finest brains for many weeks, months and even years.

Freedom has now been granted to that activity. The inflation report is now drawn up and published by the Bank of England without the preliminary surveillance of the Treasury. It is important to consider the content of the report. It deals with recent price developments, with monetary and fiscal policy, with demand and output, with the labour market, with price dynamics and with prospects for inflation, which are important. Therefore, if the Government were setting too lax monetary targets, which would result in an increase in inflation, the prospects for inflation would have to be set out in the Bank's assessment of the consequences of that too-lax monetary policy. That is an important innovation, since and perhaps as a direct result of, the splendid activities of the speculators on 16 September 1992.

Mr. Alistair Darling (Edinburgh, Central) : Does the hon. Gentleman agree that the test of the credibility of the Bank of England's quarterly report will not come until the Bank feels it necessary to fire an overt warning shot over the Government's bows? Suppose that, by the end of this Parliament, the inflation target of 2.5 per cent. that the Chancellor has set himself is not being reached. Does the hon. Gentleman think that the Bank will have the courage, perhaps just before an election, to fire a warning shot? Might it not resort instead to a form of words not dissimilar from that to which the hon. Gentleman has referred?

Mr. Budgen : I agree that that is a risk. All constitutional changes that occur in a country that has an unwritten constitution take a little time to bed down. It is very proper that we should move slowly and steadily and by incremental steps, and we may realise the direction in which those incremental steps are taking us only with the value of hindsight. In Stuart times, the judiciary emerged

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as an independent force. With the advantage of hindsight, it is easy to look back on the various incidents and say that they were all moving in the same direction, but it probably did not appear to people at the time that that was what was happening. Practices get slowly embedded. They get noticed and perhaps applauded ; then the chattering classes say that they are a good thing ; then, later, the man in the pub may take a transitory interest in them.

It is possible that, at some later stage, pressure will be put on the Bank of England to modify the judgments that it publishes in its quarterly inflation report, and no doubt some consideration will be given by the Bank to the modification of that report, just as in Stuart times some judges no doubt regarded themselves as no more than the handmaiden of the Executive and from time to time did not support the independence of the judiciary. But that will not stop the general trend, which I suggest will lead to more stable monetary policy.

Mr. David Willetts (Havant) : Surely the real dilemma is a dilemma within the Bank. If it produces an unfavourable inflation report, its prospects of successfully conducting gilt sales at favourable prices will be jeopardised. That is one reason why many who argue in favour of giving the Bank of England an independent role in monetary policy have suggested that the role of selling Government debt should be taken away from it. Can my hon. Friend explain why that proposal is not in his Bill?

Mr. Budgen : My Bill is based on the recommendations of the Treasury Select Committee and on the belief that one small step in the right direction is better than a great number of steps in the wrong direction. Many people will say that this is in any case far too large a matter to be dealt with in a private Member's Bill. [Hon. Members :-- "Hear, hear."] Some of my hon. Friends have strong views about that. A great many subsidiary issues--for example, the Bank's role in supervising other banks and selling Government debt--may come to the House for consideration in future, but I do not think that it would be necessary or wise for my Bill to deal with those secondary problems. I say that even though I agree that once the Bank becomes more distant--I think that that is a better way of describing it--from the Treasury, many of those issues will arise. I have dealt with the importance of the quarterly bulletin and its inflation report. A second change has occurred recently--a change in the way in which the Bank implements agreed changes in interest rates. As the House knows, the custom that has grown up is for the Governor of the Bank of England and the Chancellor to meet monthly. In the past, that was often the point at which the Chancellor announced any agreed change in interest rates. A new practice has arisen, however. Now, when there is agreement to change the current rates of interest, the Bank decides when it will announce the change and it has a month in which to do so.

That is important in relation to the Bank's function in managing Government debt, to which my hon. Friend the Member for Havant (Mr. Willetts) referred. If the Chancellor of the day finds that the Government are in a bit of difficulty and there is general pressure to lower interest rates, he may say, "Okay, Governor. We have agreed to lower interest rates by 1 per cent. Whoopee. Let us get it

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announced as quickly as possible." That may prove very expensive in relation to the sale of Government debt. It may lead to great difficulties in managing the gilts market.

I have referred to two steps in the direction that I hope the House will take by giving the Bill a Second Reading. We ought not to dismiss the growing interest in the country at large in some form of independent or autonomous central bank. Every week brings a new high-powered report suggesting the advantages of such a bank. Most of those reports are based upon the academic interest in fancy foreign institutions, which, it is wrongly believed, can be easily grafted on to our constitution. I should be the last person to say to those who were previously unthinking supporters of the exchange rate mechanism, "Here is another splendid foreign institution. If we get on the bandwagon, there will be a major change for the better in the management of our monetary policy." But those honourable academics who give up much of their spare time to produce influential pamphlets do it because they see that monetary policy has created so much instability in the past 20 years, and perhaps because they do not recognise the overwhelming necessity in our constitution of both ministerial responsibility and parliamentary accountability. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) referred to the report of the Treasury Select Committee. The Bill is based--I hope accurately--on that Committee's recommendations. It is important to remember that that Committee represents all sections of opinion in the House.

I see the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) in her place. She is a distinguished and vigorous member of that Committee. Hers was the only voice dissenting from our report. She will speak most eloquently for herself I am sure, but I think that she feared that the Committee's recommendations would lead to a British Bundesbank. The hon. Lady nods in agreement, and I certainly do not wish to misrepresent her position. It is true that there are some members of the Treasury Select Committee who would like to see a British Bundesbank, but the last thing in the world that I want is a British Bundesbank.

The proposals that I support are designed to create openness and accountability, but not as a preliminary to a free-standing independent British central bank or, even worse, to a European central bank.

Mr. Alan Duncan (Rutland and Melton) : Does my hon. Friend agree that the key to the parallel between the ERM and the gold standard before the war is that it was a Government decision to enter that particular form under the then Chancellor of the Exchequer, Winston Churchill, and it was the Bank which operated within those constraints? The Bank was subsequently criticised for having a too stringent monetary policy. The pre-war decisions and problems about which many people criticise the Bank were set by a political decision of the Government. They were not caused by the Bank and, when they were eased, the situation changed very quickly.

Mr. Budgen : When the Bank was independent in the 1930s, it had all the faults of the accumulated tradition of being the spokesman for the City interests. It was a very powerful pressure institution. It did not have its present characteristic of being a servant, albeit a very superior servant, of the Treasury. Therefore, it is not surprising that

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some politicians agreed with Keynes that Winston Churchill was an outstandingly disastrous Chancellor of the Exchequer. However, they also said that people should consider the rotten advice that the Bank gave to Winston Churchill and the way he, as a very powerful politician, gave way to that even more powerful vested interest. We can understand why, in 1946, many Keynesian Tories felt that the influence of the Bank had been harmful in accentuating the depression in the 1930s.

I want to conclude with two arguments to show why the Bill should receive a Second Reading. If the Bill goes into Committee, I will welcome all suggestions for its improvement. The last thing I want to do is to suggest that the Treasury Select Committee or any other small partial body has a unique wisdom in producing legislation. Indeed, most of the legislation that is bashed through this place in a hurry is disastrous.

In relation to monetary policy, I do not want my Bill to be an example of the wisdom of the Dangerous Dogs Act 1991. If the Bill enters Committee, all suggestions for its improvement, modification and even its scaling down will be considered very carefully. However, I suggest that the Government should allow the Bill to go into Committee for two reasons.

First, if the economy picks up as we all hope it will--and there has been a major relaxation of monetary policy since 16 September 1992, so we are entitled to hope and believe that the economy has picked up and will pick up further--the consumer will save less, spend more and be less inclined to buy Government debt. That means that the deficit of about £1 billion a week will be increasingly funded by foreign holders of sterling, most of whom come from countries that have independent central banks. They will find it very difficult to understand how a Government can say to them on the one hand, "Please lend us £1 billion a week" and on the other, "The last thing we want is a system of more open relations between ourselves and our subordinate, the Bank of England."

Secondly, if the Bill goes into Committee, it will give the Government a splendid opportunity to explain their present thinking about the Maastricht treaty and the move towards a European central bank. I know that the Government will grasp that opportunity. It is interesting to remind ourselves that the Government's position on that matter is still based on their very clear expressions revealed in the Conservative party manifesto issued before the last general election.

I have detained the House for a long time and I do not wish to continue for much longer--

Mr. Michael Spicer (Worcestershire, South) Shame.

Mr. Budgen : Well, if my hon. Friend wishes me to continue, I will remind the House of the clear expression of principle set out in the Conservative party manifesto. It states :

"But the treaty goes on to say that monetary union will come about automatically in 1999, for all who meet the conditions. We did not want to exclude ourselves from membership ; but we could not accept such an automatic commitment. By the end of this decade the EC's membership will have changed ; the economic performance of many of its members may have changed. We cannot tell who the members of such a union might be.

We therefore secured the freedom to make a proper judgment on events. We are as free to join if we wish as any other member. We would have to meet the same conditions--no more, no less.

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We will play our full part in the discussions of the monetary institutions Europe may create in the 1990s. But we are not obliged to join in a single currently if we do not want to."

I hestitate to repeat this and I hope that I will not be criticised in private.

Madam Deputy Speaker (Dame Janet Fookes) : Order. The hon. Gentleman would be well advised to hesitate. I need to know that his comments relate directly to the terms of the Bill.

Mr. Budgen : Indeed they do. The proposals in the Maastricht treaty are, first, for a half-way house to a European central bank and, secondly, by stage 3, the possibility of our joining a system in which there is a single European central bank. That is directly relevant to our consideration of the role of the Bank of England, which is our domestic central bank.

I draw the attention of the House to that section in the Conservative party manifesto because the Government, very properly, have argued against the very limited proposals in my Bill on two grounds. On 16 December, my right hon. and learned Friend the Chancellor of the Exchequer said :

"We should consider it with care, also taking into account such matters as parliamentary accountability for an increasingly more autonomous Bank of England."--[ Official Report, 16 December 1993 ; Vol. 234, column 1257.]

On an earlier occasion, when the Prime Minister was Chancellor of the Exchequer, he said that he was against any form of independence for the Bank of England because

"the man or woman responsible for monetary policy should be available to the House of Commons to answer for his or her policies."--[ Official Report, 5 July 1990 ; vol. 175, column 1110.] Each of those arguments is important and compelling.

I hope that I have persuaded the House that those two general principles should not defeat this very modest measure. But when we apply those two principles to the European Monetary Institute and to the European central bank, we see how extraordinary it is that the Government agreed to the proposals for stage 2 and left open the possibility that we might join stage 3. It is quite obvious that stages 2 and 3 are completely inconsistent with the two arguments of principle that were so properly brought forward by the Government in considering the Bill.

Much has changed in Europe in recent months. We have had the great freedom that has resuscitated our economy and given hope to our people since 16 September 1992. The unfortunate peoples of Europe suffered a terrible setback during the first weekend of 1993, when their exchange rate mechanism was blown out of the water and has been left but a broken shell waiting only to sink. We need an opportunity for the Government to restate their position. We want to know whether, once again, we are to be subordinated to the Bundesbank, and whether, once again, we are to go back into the exchange rate mechanism. We want a bit of openness between the House and the Government. This is a narrow, consensus Bill based upon, as legislation should be, agreement of a very narrow, carefully defined nature between persons of very different views. It allows the Government, not of course to say, "Sorry for the ERM"--that would be too much--but to explain their changed position.

Mr. Michael Spicer : And to say "Thank you".

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Mr. Budgen : As my hon. Friend reminds me, let us say "Thank you" to the Opposition for their support of the Government over the Maastricht treaty. It would not have been possible for the Government to maintain us within the ERM, to thrust the Maastricht treaty down the throats of the British people, but for the unswerving support of the Opposition parties. It was selfless. Whenever the Government were in difficulty, we always knew that the Opposition would be there. Their support for the social chapter and for the single currency was unswerving. It was the most splendid demonstration of gallant principle that we have seen for a long time.

Perhaps the Government will now look for an opportunity to explain their thinking. We should accept the closure motion, which I am sure will be necessary at the end of the debate, and we should give the Government an opportunity to explain themselves not only to the House but to the British people.

10.32 am

Mr. A. J. Beith (Berwick-upon-Tweed) : When the hon. Member for Wolverhampton, South-West (Mr Budgen) waxes so eloquently about the green pastures which he believes we have entered since we left the exchange rate mechanism, he is inclined to forget that our time in it was actually the source of the degree of control of inflation that we have been enjoying in recent months and that, therefore, there are two sides to the story.

Indeed, one of the significant points about the Bill is that it is designed to provide another means of building a bulwark against inflation, which we might need not in the immediate circumstances but in foreseeable circumstances, especially if, by that time, we are still not within any other sort of constraint that effectively links monetary policy to keeping prices stable.

It must be unusual for the hon. Member who has the second slot in the private Member's Bill ballot to be such an enthusiastic supporter of the first Bill in the ballot and quite so keen even for it to be considered in Committee, although, for my own reasons, I hope for only brief Committee proceedings on this nevertheless important Bill. I have energy conservation matters that I know the Government will want to discuss in detail in Committee, and which the same Committee will have to consider as soon as it has disposed of the necessary work on this Bill.

At least the Liberal Democrats cannot be accused of advocating an independent central bank in response to fashion--unless, that is, we are the setters of fashion, which we like to believe we are, because we put that proposal in election manifesto commitments when it was the preserve of only a few. It has taken a spate of ex-Chancellors to give the concept some respectability, which it did not previously enjoy, and dispassionate and careful analysis in a Treasury Select Committee convinced some hon. Members who might initially have been sceptics that we should make moves in that direction.

Our commitment arises, first, from the belief that stable prices should be part of the general framework for economic management. Secondly, we believe that such stability is more likely to be achieved if we have an institution that conducts monetary policy with that sole or primary objective. Thirdly, we believe that such a system would make for greater accountability for monetary policy ; at the moment, monetary policy is divided between the Chancellor and the Bank.

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Fourthly, we believe that the experience of the present system, which was acknowledged by the Bank during questioning by the Select Committee, is that Chancellors will be influenced in at least the timing of interest rate decisions by such political events as party conferences, hostile debates coming up in the House of Commons, and so on.

Fifthly, we believe that markets are well aware of that fact and will exact an interest rate premium in proportion to their fears about the reliability of anti-inflation policy, so that rates are sometimes higher than they would be if those fears could be removed or reduced.

The evidence that interest rate decisions have been determined by possible events is now in the open. It was the former Chancellor, the right hon. Member for Kingston upon Thames (Mr. Lamont) who said : "While my right hon. Friend the Prime Minister and I have been in general agreement on interest rate policy, I do not believe that even the timing of interest rate changes should ever be affected by political considerations. Interest rate changes should never be used to offset some unfavourable political event. To do so undermines the credibility of policy and the credibility of the Chancellor."--[ Official Report, 9 June 1993 ; Vol. 226, c. 284.]

Why did he say that? That was not said in an abstract theatre ; it was not in an Institute of Economic Affairs pamphlet ; it was not in an Adam Smith Institute tract that those words occurred. They occurred in the resignation personal statement of a Chancellor who was reflecting on what had gone wrong while he had been in that position and how much of that was other people's fault rather than his own. He said those things in order to indicate that they happened.

In order to get that statement verified, I put it to the present Governor, who was deputy Governor of the Bank at the time, Mr. Eddie George. I asked :

"Does your experience confirm that such a warning was necessary?" Mr. George said :

"I think I have to say yes It is undoubtedly true that there are times when the short-run tactics are adjusted to take account of events which are actually not a lot to do with a monetary policy. In any single incident, in my experience, that can be damaging for a little while. Provided actually it was not an unreasonable thing to do in a strategic sense, that does not last for very long, but it has a corrosive influence over time. People tend to think that these decisions are made on that basis."

What clearer evidence could we have than that? The Chancellor warns that interest rate decisions should not be taken on that basis. The man who was deputy Governor at that time and who is now in charge of the Bank said, "Yes, that is a danger, it does happen, at least in respect of timing, and, because people know that it happens, that fear affects market perceptions about anti-inflation policy." We could not have a better tested case of the dangers.

Of course, the terminology of all that is confusing. Hardly anyone is attempting to introduce into this country a totally independent institution carrying out all the present functions of the Bank on a totally autonomous basis. Nor is it conceivable that we could devise a British clone of the Bundesbank or the "Fed". The term "independent central bank" has become shorthand for various models in which the central bank has allocated to it the operation of monetary policy in pursuit of declared objectives and is then held to account for its effectiveness in carrying out those objectives.

The consensus in the Select Committee was that the remit should be price stability, but that targets, which could take account of other objectives, should be publicly set by the Government, with parliamentary approval. It is

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