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Column 41Economic Co-operation and Development expect our growth rate to be the fastest of any major economy in Europe this year.
We have the fastest rate of industrial production and the fastest increase in retail sales of all major European countries. Ours is the only major European economy where unemployment has fallen in the past year, and it has now fallen by 330,000 since the last cyclical peak. Despite that pick-up in growth and the welcome fall in unemployment, the outlook for inflation also remains favourable.
Our inflation rate is well below the European Union average and it is at historically remarkable low levels for the United Kingdom. Sound money has been complemented by sound public finance. I am pleased to say that the Budget deficit remains on track to return to balance in the medium term. The combination of steady growth, healthy public finances and low inflation is the result of the Government's economic policies. It has not happened by chance, and it most certainly would not have occurred if we had followed the advice of any of the Opposition parties.
Sound money, sound finances and supply-side reform of the economy are the principles that guide our economic policy. We in government understand that, to achieve growth in living standards and to sustain rising industrial production, one needs low inflation and low public sector borrowing. One cannot have prosperity without sound policies. This time last year, I said that Labour's economic strategy had about as much content as the average telephone directory. A year on, things have changed. A telephone directory now seems like a good read in comparison. The last time I addressed an audience of any size, a Socialist Worker demonstration burst in upon me, and there were rather more people involved than there are Labour Members in the Chamber at the moment. More to the point, they were the first people from a left-of-centre movement who appeared to have at least a clear idea of what they wanted and what alternative policies they had whom I had met for a long time.
The hon. Member for Dunfermline, East has yet another chance to put forward alternative policies, and he needs to do the House the courtesy of addressing them. He needs to address the fundamentals of policy which, as the Chairman of the Public Accounts Committee has said, we should talk about on the rare occasions when we debate the issues.
The least that we could expect from the shadow spokesman of the principal Opposition party is for him to say whether he would do anything that the Government are not currently doing with regard to public borrowing, public spending or monetary policy. In my opinion, if he suggested anything which deviated significantly from the course upon which the Government are set, it would only threaten our sustained economic recovery.
Mr. Randall : Probably everybody in the House would accept that the right hon. and learned Gentleman's notion of steady growth is laudable. What some of us are genuinely worried about is the rate of that steady growth ; whether it will ever be sufficient to reduce unemployment to a reasonable level and the social impact of that. What does he have to say on that ?
Column 42exactly what the trend growth is, but beyond that it comes to a point where it is not sustainable without risk and without a threat to inflation.
Fortunately, we already see that present levels of unemployment are falling as a result of that growth, and 330,000 was the figure which I have cited. But I agree that there is also a structural problem and, as we achieve sustained growth, we must take measures to make sure that we do not have a strong recovery with unemployment stuck at 8, 9 or 10 per cent. I shall return to that in a few moments. The Government have, in my opinion, coherent policies on that matter, which are gaining favour in international discussions.
Mr. Peter Hain (Neath) rose
Mr. Clarke : I thought that the hon. Gentleman was rising to answer on behalf of his hon. Friend the Member for Dunfermline, East the questions I asked about spending, borrowing and monetary policy. I do not believe that the Opposition have got a policy on unemployment either. They would do well to follow our own.
On inflation, upon which I face silence, as always, from the Opposition, only the Conservative party, Madam Speaker, is the party of low inflation.
Mr. Clarke : Mention of transvestites in politics, Mr. Deputy Speaker, caused a disturbance at the LSE, and I do not intend to make any similar reference today. I apologise to you for addressing you as Madam Speaker.
As for low inflation, the record is extremely clear. Only the Conservative party is the party of low inflation and the figures speak for themselves. Under the previous Labour Government, inflation averaged 15.5 per cent. ; inflation is now 2.5 per cent. and underlying inflation is 2.4 per cent. Since we came to power in 1979, the average rate of inflation has been 6.6 per cent.
Those low levels of inflation are not some abstract matter, because they have a real effect on people's lives. Let me give some obvious examples. The fierce competition between supermarkets has resulted in many food prices falling. Competition in the high street has meant that the prices of many goods, such as clothing and footwear, have hardly increased in the past year. Competition between manufacturers means that factory price inflation is at the lowest level we have seen for 25 years. All that low inflation brings real benefits to the shopping bags of real people at every level of income in our society.
The Conservative party also recognises the wider benefits that low inflation can bring. It brings the stability that our business leaders need if they are to invest with confidence in the future of our country. It provides stability for savers, whose resources finance investment and wealth creation. We do not support low inflation for economic reasons alone, although there are good economic reasons for achieving it, but because inflation is worse than a tax on
Column 43those with fixed incomes, and is particularly hard on the weak and the poor. Inflation randomly redistributes wealth from that group to those with the economic muscle to withstand its debilitating effects, as we saw only too clearly in the late 1970s.
Let us never forget that, under the Labour Government of the 1970s, inflation was higher than interest rates on many occasions, so the real value of the savings of retired people fell. That is not the case now and I trust that it never will be again. Let me reaffirm that the Government have set themselves a target to keep inflation within the 1 to 4 per cent. range and to reduce it to the lower part of that range by the end of the current Parliament. We are determined to stick to that target, but what of the Labour party ? Does it have a target for inflation ? How does it propose to control inflation ? The Opposition certainly will not do that by caving in to demands from their friends in the trade union movement, but their reaction to an 11 per cent. pay claim, which has come out of the blue at the moment, has hardly given anyone any grounds for assurance. I hope that the hon. Member for Dunfermline, East will set out some policy. What does he think of our inflation target ? Is it too high ? Is it too low, or is it about right ? Would he accept that target ? I am sure that all hon. Members would like to hear that answer.
Mr. Tam Dalyell (Linlithgow) : On the issue of competition, is there any unease in the Government about the circumstances in which William Low, which is, after all, a large grocer retailer in Scotland, is about to be swallowed up by either Tesco or Sainsbury ? Is there any unease about what might happen further to competition in the retail trade as a result of that ? All I am asking is whether this matter is being looked at in government, because it surely should be.
Mr. Clarke : We have an extremely clear competition policy. We seek to stimulate competition for the reasons that I have given, but that does not include all takeovers and all reorganisations of businesses. As the hon. Gentleman knows, that is a matter for the Department of Trade and Industry, which considers it in the normal way. It is for my right hon. Friend the President of the Board of Trade to decide whether any particular merger should be referred to the Monopolies and Mergers Commission. I have no views on a particular takeover, including that named by the hon. Gentleman.
Mr. Bernard Jenkin (Colchester, North) : I should like to congratulate my right hon. and learned Friend on his remarkably successful record of keeping inflation down, despite, incidentally, the 15 per cent. devaluation of sterling since coming out of the exchange rate mechanism, which bears out the monetarist analysis. What does he make of the state of the markets, particularly the high levels of long-term interest rates ? When does he think that the markets will take on board the fact that we are serious, as I believe, about defeating inflation ?
Mr. Clarke : I am glad to say that the markets have strengthened slightly from the worst situation encountered. As my hon. Friend is aware, there have been international fluctuations in the marketplace ever since the Federal Reserve bank first moved its short-term rates a few months ago. It is arguable that it over-reacted to a situation that had
Column 44built up in the previous year. As my hon. Friend the Member for Colchester, North (Mr. Jenkin) said, the best reassurance that we can give the markets is that we are committed to our inflation target. We have an extremely good record of moving towards it, despite all the pressures of the past few years. I am quite sure that we can sustain confidence in that policy. I am glad to see that long-term rates have eased in the past few days.
Mr. Gordon Brown rose
One of the steps that I have taken to reinforce our inflation policy has been to start publishing the minutes of my monthly meetings with the Governor of the Bank of England. I have done that to make it quite clear that the monetary authorities in this country should take their decisions on sensible judgments of the economic priorities of the moment, not give way to short-term political pressures. The result is that we are more open and we are discussing such matters more than we have ever done before.
We are certainly more open than the Labour party, so I hope that the hon. Member for Dunfermline, East will at last contribute to the debate on monetary policy by getting up and telling me what he thinks of our target for inflation. Is it too high, too low or about right ?
Mr. Gordon Brown : But why are the Government's inflation forecasts completely different from those of the Bank of England ? Why are the Government predicting that inflation will just be 2 per cent. at the end of next year, but the Bank of England is now predicting that it will be as high as 3.5 per cent., far beyond the Government's target range ? Is that not because the Government are assuming now that interest rates will rise ? Will the Chancellor now answer the question that was put to him by his hon. Friend the Member for Colchester, North (Mr. Jenkin) : why have British long-term interest rates risen faster than in any other country except Canada ?
Mr. Clarke : The hon. Gentleman knows that forecasts have a wide range of accuracy. [Interruption.] Of course they do. He will also know that every forecaster has been reducing inflation forecasts since the end of last year--they are all bringing down their forecasts of inflation for the future. At the moment we are plainly on course. Every recent forecast that I have seen stays well within the Government's inflation target, upon which the hon. Member for Dunfermline, East declines to make any comment.
I have already dealt with the recent behaviour in the markets. It is true that, at first, our bonds fell further and our long-term rates went up somewhat higher than did the rest in western Europe. That is because of our country's history of high inflation, which goes back in particular to those irresponsible years when the Labour party was in office. Then, as I have cited, we were a byword for high inflation and poor economic performance. Our current policies are restoring confidence. We have a monetary policy ; the Labour party does not. We are staying in power and we will ensure that our inflation targets are hit.
Mr. Clarke : They always have been since the war, but we are very much more in line with the rest of Europe than we have ever been before, and the confidence that this country will achieve sustained growth and low inflation is very much higher than it has been for a generation. A return to a Government of the Labour party and a move to the Treasury by the hon. Member for Dunfermline, East, if that were ever seriously contemplated, would shatter the confidence that we have built up. I am quite sure that it would have an extremely adverse effect on bond markets, long-term interest rates and business confidence as well.
Low inflation is not an optional extra. We have achieved our present low inflation--well below the forecast that people were making this time last year and even at the time of the Budget--as a result of the disciplines of, first, the exchange rate mechanism but, secondly, the tight monetary framework which my predecessor, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont), so promptly put in place after we had been forced out of the exchange rate mechanism. Low inflation is the necessary condition for the sustained economic growth that the Government now wish to see as we approach the next century and beyond.
The Conservative party does not believe that there is a trade-off between growth and inflation, as so many Opposition Members still seem to believe. We shall not try to boost growth artificially by stoking up demand and thus jeopardising our inflation performance. We believe that sound public finances are necessary for sustained growth, which is why action had to be taken in the past two Budgets to improve public finances. Our borrowing was increasing by too much as a result of the prolonged recession, which was experienced, to varying degrees, by all western countries.
Every major country in the west must now tackle Government indebtedness. All the G7 and European Union countries are taking painful action to restore their public finances to order. I could almost claim that no other European Union member state has taken such decisive and effective action to reduce its fiscal deficit as this country has, but that may be unfair to my German colleagues, who are also taking rigorous action. Many countries that have not taken that action will have to do so.
Because we have acted so decisively, promptly and effectively, there is now high confidence in the British economy in both the business and financial worlds. When we debated the economy only 18 months ago, we all agreed that confidence was the missing factor needed for our recovery to take off. The following two necessarily tough Budgets were an important part of restoring the confidence that was so vital for recovery.
Mr. George Foulkes (Carrick, Cumnock and Doon Valley) : If the economic indicators are as good as the Chancellor says, why does not he end the anguish for the poor and elderly by saying that he will not increase VAT on fuel to 17.5 per cent ? Will he make that statement now ?
Mr. Clarke : I give the House a presentation on the fiscal prudence necessary to maintain confidence and keep the recovery going, and a Labour Member gets up and suggests that we should abandon one of the tax increases. A few moments ago, my right hon. Friend the Member for Ealing, Acton (Sir G. Young) made a statement on housing policy, and rows of Labour Members agreed that there should be a massive increase in spending on public
Column 46housing. The Labour party's lack of policy and its instinct to abandon sound fiscal policies and controls on public spending pose a great threat to the recovery.
Labour Members have the nerve to claim that taxes would somehow be lower under a Labour Government. That is preposterous, as history and their current behaviour demonstrate. Taxes would have to be increased to pay for the never-ending list of spending demands revealed by every exchange in this House; otherwise, public borrowing would rocket to unsustainable levels and high interest rates and inflation would return.
I do not understand why the Labour party has got into such a knot about this. The Labour movement is going through an identity crisis. Clearly, Labour is the party of high Government expenditure--higher than its opponents in the Conservative party. Members of the Labour and trade union movement believe that more state spending is required to solve many of the country's problems. Labour Members nodded in assent when my right hon. Friend the Member for Acton accused them of wanting to spend more on public housing only a few moments ago. If they no longer believe in socialism, surely they must still believe that they are the party of higher public spending.
To what has the Labour and trade union movement been reduced if it now cringes in shame at the suggestion that it wishes to increase public expenditure, compared with a Government whose Ministers served under Lady Thatcher ? Of course a Labour Government would increase spending dramatically, but Labour Members are no longer prepared to say that they believe that. It would happen as a result of their negligence if they ever came to power. I give way to a man of principle.
Mr. Benn : Will the Chancellor deal with two questions about taxation : what is it for ; and who pays it ? Why should pensioners pay VAT to buy a Trident ? Why should not better-off people pay more to provide for the education and health that the whole community needs ?
Mr. Clarke : Of course we all accept that certain expenditure is necessary, and we have hugely increased expenditure on key public services like the national health service, education and social security, including a greatly increased take-up of improved benefits for the disabled. We have delivered all those policies. In the real world, however, a balance must be struck between a sustainable level of growth in a successful enterprise economy, and the efficient delivery of public services. We are striking that balance. We can improve the quality of many aspects of people's lives while reducing the state's total take from gross domestic product to allow the private sector to flourish further.
That is not and never has been the Opposition's policy. When they were last in power, they took the state's take up to higher levels than we have ever taken it. Last week, we saw their reaction to defence expenditure, which was to say that it would be approached on the basis of how many public sector jobs it provides in the administrative back-up
Column 47to forces, whereas we prefer to spend the money on the front line's kit, training and weaponry, while running our defence forces efficiently.
Our spending proposals are clear. Keeping public expenditure under control is the key to healthy public finances and lower taxes. Because we believe that lower taxes help incentives, we will lower taxes when the opportunity occurs--we will and we have--but only when it is prudent to do so. The Opposition's spending proposals would not do that-- [Interruption.] If Opposition Members disagree, I wait to hear their spending proposals. Our public expenditure ceilings have just been agreed by the Cabinet. Are they too high or too low ? I have no idea of the view of the hon. Member for Dunfermline, East. I hope that he will enlighten us.
The third pillar of our economic strategy is on-going reform to the supply side of the economy. Since 1979, we have put in place a raft of measures designed to improve the performance of our businesses and to attract business from abroad. Successful macro-economic policy gives us an opportunity to take that forward. Privatisation and private finance are key factors in the British economy's steadily improving performance.
When we started our privatisation programme, it was the most ambitious programme of its kind in the world, but privatisation is now the norm everywhere, except in the British Labour movement. Forty-seven companies have now been transferred from public to private ownership. We used to spend nearly £2 billion a year--£35 million a week--propping up those state-owned industries. They now contribute more than £2.5 billion a year--£50 million a week--in taxes to the Exchequer. The main difference is that they have changed beyond recognition. As corporate entities, they now provide better quality for their customers and many are now strong international companies.
Britain also has better industrial relations now than it has had in its industrial history. Co-operative attitudes between management and work force are better than I can remember in the history of British industry. We have achieved all that by sweeping away many of the legalised institutional divisions between what people on the continent still call "the two sides of industry", which many would like to reintroduce in the name of the European social chapter. As a result of our reforms, industrial stoppages are now at their lowest level since records began almost 100 years ago.
However, improved industrial relations are only one plank of our labour market reforms.
We fought in Europe, and we shall continue to do so, against the imposition of unnecessary labour market regulations, which impose additional costs on employers, and ultimately destroy jobs. We understand that job creation is the key to improving the fortunes of the low paid. Placing burdens on employers only prices the low paid out of work and creates more misery, not less.
Our approach to labour market flexibility--to deregulation of those markets --is being followed increasingly throughout the world. It was endorsed at the job summit in Detroit ; it was endorsed at the recent Corfu
Column 48summit in Europe ; it runs all the way through the Organisation for Economic Co-operation and Development report that we recently discussed in Paris.
The Labour party is out of step. We have one of the most modern, flexible labour markets in the western world, and that is one of the principal reasons why we attract 40 per cent. of all the inward investment into the European Union, and why we continue to be such an attractive place for investment to create new jobs.
Mr. Wolfson rose
Mr. Roger Berry (Kingswood) rose
Mr. Wolfson : I am grateful to my right hon. and learned Friend, and I am delighted that he has emphasised the improvement in industrial relations. Does he agree that one of the things that that has achieved is that it has enabled our managers to concentrate on production and marketing, rather than on dealing with the bush fires that absorbed so much of their useful time in the past ?
Mr. Clarke : I wholly agree. It was a feature of management of any major company--private or public--in this country in the 1960s and 1970s, that most of the time of the most senior management was taken up with industrial relations problems, whereas now it hardly features at that level in the crucial decision-making in most of our companies.
I agree with the hon. Member for Kingston upon Hull, West (Mr. Randall) that unemployment will be, and should be, the major preoccupation of economic policy-makers in the 1990s in the western world. However, it is a combination of sound macro-economic policy, sustained growth, low inflation and supply side policies that create flexible labour markets, improved training and education--I could address the House at length about what we have done there--and active labour market measures that keep unemployed people close to the world of employment, giving them the incentives to get into employment, giving them the support to do so, that will enable us to get ahead, and which are attracting so much international support.
Mr. Berry rose
Mrs. Teresa Gorman (Billericay) rose
The deregulation initiative will cut through a lot of the red tape and bureaucracy that burdens industries in this country ; the private finance initiative is bringing private sector finance, management and expertise into the capital programmes of the public services ; and the recently launched White Paper on competitiveness outlines several initiatives to improve the supply side of our economy.
That builds on what we have achieved since the Conservatives came to power. Since 1979, our manufacturing productivity growth has been the highest of the major European economies. We are closing the productivity gap. One recent study showed our manufacturing productivity to be greater than that in Japan. That was a National Institute report in its May "Economic Review", making comparisons on a per hour basis. A recent study by the German chamber of commerce showed that two thirds of German-owned factories in the United Kingdom achieved productivity levels at least as high as those of their
Column 49counterparts back home. That is why, as I have said, we attract so much of the global investment when it is seeking a base in the European Union.
The outlook for the British economy is continued growth and low inflation. It is the most favourable that the country has enjoyed since I first entered the House, almost 25 years ago. It is the result of the coherent economic policy that Conservative Governments have put into place over many years. Some of those policies were not popular at the time that they were introduced, but by sticking to our principles, the present Government have laid the foundations for lasting economic success. We will certainly fight to keep those foundations in place, and to ensure that they deliver the prosperity and the secure jobs that we require.
The public are still hesitant. Only for three months have they had consistent reports of good economic news. I share the public view that that must be sustained, not just for months, but for years ahead, so that sustained growth with low inflation means higher living standards, lower unemployment and more secure jobs. I believe that it is now in our gift to deliver that, and I do not believe that the Labour party has the slightest clue how to contribute to that. Its members merely watch it happen before their eyes, with no alternative policies of their own to put forward.
notes the publication of the Government's latest economic forecast and the continuing tax rises-including the two new taxes in the autumn-and cuts in public services forcing down the living standards of millions of people ; calls on the Government to reconsider the plan of raising VAT to 17.5 per cent. on fuel ; notes the Governor of the Bank of England's remark that interest rates may rise, so hitting homeowners, mortgage holders and investment yet again ; and condemns the appallingly high level of unemployment under this Conservative Government and the absence of a long term economic strategy for Britain--itself essential to both the achievement of long-term high growth and the reduction of inflation--which tackles under-investment in people, industry and the social and economic fabric with a new industrial training and employment policy for the country.'. For all the Chancellor of the Exchequer's complacency and self- satisfaction--perhaps because he hopes that he will retain his job in the reshuffle while all around him others are losing theirs--the reality for millions of people throughout the country is that living standards are falling ; that poverty is once again on the increase ; that public services are being cut ; and that tax bills are increasing.
Increased poverty is accompanying tax increases, with VAT hitting people this spring ; more tax increases in the winter with the two new taxes already announced ; cuts in mortgage relief and personal allowances next spring ; and tax increases throughout the next year and the year after that. The problem is that the tax increases that have dominated this year and will dominate next year are not, as people would want them to be, investments to build for the future ; they are simply paying off the Government mistakes of the past. The tragedy for Britain is that, as the Chancellor had to admit when pressed on the issue of long-term interest rates and when he came to the section of his speech dealing with high levels of unemployment, all the problems that brought about the last recession are apparent now. They are lack of investment in manufacturing, which is still 13 per cent. less than in 1979 ; excessive dividend payments, which the
Column 50Government have yet to come up with any proposals to tackle ; worsening manufacturing trade deficits, mysteriously increased in the summer statement from £6.5 billion to £8.5 billion this year ; and skill and capacity shortages throughout the economy.
For skill shortages to exist when 2.6 million people are unemployed represents a complete failure of free market dogma, and it is the ultimate failure of leadership to cut the training and employment budget when there are millions of unemployed people in need of training and thousands of companies in need of trained people. All the problems--skills shortages, lack of investment, worsening trade deficits--that brought about the last recession are already apparent even at this stage of the economic cycle, and without the Government being prepared to take action.
Mr. Tony Marlow (Northampton, North) : The hon. Gentleman set out a catalogue of what he would call reasons for the recession. What about the United Kingdom's adherence to the exchange rate mechanism ? The hon. Gentleman has been criticising the free market. The ERM had very little to do with the free market.
Mr. Brown : It was the failure of the Government's economic policies that drove us out of the exchange rate mechanism. As everybody-- [Interruption.] As all Conservative Members understand--indeed, the Financial Secretary to the Treasury made a speech about it--the stop-go economics that were pursued by the Conservative Government throughout the 1980s are responsible for the fact that, every time the British economy grows, we run into problems of bringing in imports, pressures on inflation and pressures on interest rates, and we are incapable of achieving sufficient growth to keep unemployment down and improve our public services. Mr. Jenkin rose
Mr. Budgen rose
Mr. Jenkin : I am grateful to the hon. Gentleman. On the matter of long-term interest rates, what can he do to contribute to the stability in the financial markets ? Will he publish an inflation target ? Will he say how he will reduce Government borrowing ? Will he say how he will control public expenditure ? Or will he, as I suspect, say none of that, and carry on contributing to the instability with which we have to cope ?
Mr. Brown : I do not see why I have to continue to listen to the hon. Member for Colchester, North. After all, he was the Member of Parliament who said to his constituency at the general election : "Ten good reasons to vote Conservative : Low taxes".
That is what the hon. Gentleman said. [Interruption.]
Mr. Jenkin rose
Mr. Budgen rose
Mr. Brown : The hon. Member for Colchester, North is clearly not trying to catch your eye alone, Mr. Deputy Speaker ; he is trying to catch the Prime Minister's eye in a succession of interventions. I may say that his chances of promotion after that intervention are rather less than they were before it.
Mr. Budgen rose
Column 51Mr. Geoffrey Dickens (Littleborough and Saddleworth) rose
Mr. Dickens : This is quite a straightforward question to which the nation is most anxious to know the answer : does the hon. Gentleman favour an increase in the top level of taxation ? Yes or no would be quite acceptable.
Mr. Brown : The hon. Gentleman is good at asking questions. In his election manifesto, he gave as the third reason for voting Conservative, "Taxes Down". Who will ever believe anything that he says again ? Incidentally, in the same election manifesto, he said that whenever he stood up to speak, Members of Parliament rushed into the Chamber to hear him.
I give the hon. Gentleman the assurance that there will be a fair taxation system under a Labour Government. We will end the practice under this Government that allows millionaires to end up paying no income tax because they use the allowance system--something that even the hon. Gentleman could not defend.