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Column 87manufacturing industry--that is not the best way to invest, I grant that--it is better than using it to increase our consumption, which we shall not be able to maintain over a long period."
That was the case then for doing something with our North sea oil. It is a great pity. We missed the one opportunity that we had, which has now gone, because now it is part of our current basis of consumption.
Speaking of consumption, a consumption-led boom is not the way to spend our way out of recession. We want an investment-led boom, an investment-led recovery, and we should be working towards that. I do not think that the way to proceed is to try to increase the levels of consumption to bring an improvement in the economy.
The third great disaster was the poll tax. The poll tax was not just a foolish tax--of course it was--it was difficult to collect, in many cases easy to avoid, and very much more unfair than the old rating system. The specific problem that has resulted is that we have diminished the role of local government, and the position of local government is now far worse as a result of the introduction of the poll tax than ever it was.
I remember--I was only a small player in those days--that we created Manchester airport in the spirit of the old Manchester ship canal, whereby 95 per cent. of the ships of the world could come right into the heart of Manchester. If we were to be worthy successors to those people, we wanted our own airport.
That was the spirit, and we must return to that spirit. We must return to the spirit of local government--the spirit of co-operation between people in different ways. The beginning must be made with industry, and it is to that area of the economy that the Chancellor of the Exchequer must turn.
Mr. Nicholas Budgen (Wolverhampton, South-West) : I join all those who have recently spoken in expressing my pleasure at the maiden speech of the hon. Member for Monklands, East (Mrs. Liddell). She spoke with fluency and passion, and I felt that she brought to us some of the adrenalin that she plainly felt during a hectic election campaign. One could think, as she spoke, of the sweat and energy as she sat up thinking what she was going to say at that difficult meeting the next day, and as she rehearsed it to herself, perhaps rehearsed it to her husband and then delivered it with passion and energy. Let us hope that she continues to grace the House with the energy and interest that she undoubtedly must have displayed in her successful and difficult by-election.
I should like to start from a slightly different point of view from that of the right hon. Member for Chesterfield (Mr. Benn). He said that the Chancellor did not control anything and that international capital controlled everything.
All Front-Bench spokesmen address the House on the basis that the Government control most things. I diffidently suggest that the Government control few things. The Government govern best when they attempt to create a known and stable framework within which the people may make their own prosperity, both for themselves and for their fellow subjects of the Queen- -and, I should add, the
Column 88citizens of the European Union. It is important to decide whether the rate of growth and the general prosperity at present time are consistent with a stable framework.
One thing that my right hon. and learned Friend the Chancellor did not say about inflation was on the extent to which it inevitably distorts the economy. One of the great distortions of the boom was the housing market. We all recall that in the three years 1986, 1987 and 1988 the value of private housing rose by 20 per cent., 20 per cent. and 30 per cent. respectively. Housing was not bought for shelter or even for the display of personal goods ; it was bought for speculation. People of a very young age were trying to get on to the housing ladder as quickly as possible.
As the economy adjusts to about 2 per cent. inflation from about 10 per cent. inflation, young married couples are now buying houses later in life and the rented sector has picked up satisfactorily, not just because of the reduction in inflation but because of the considerable reduction in the stranglehold of rent controls and excessive security of tenure. In addition, the housing market is having to work its way through the negative equity suffered by about 2 million home owners who bought just before the end of the boom. The economy is now stable and sustainable--mainly, I suspect, because of the delayed advantages of having come out of the exchange rate mechanism on 16 September 1992 and because of the substantial relaxation in monetary policy that followed that.
I do not want to be too technical in this short speech, but for those who enjoy technicalities I commend a good article in the Financial Times of 5 July, which set out what is happening to sterling M0. That means cash in hand, which is now circulating at about the same rate as it was at the top of the boom in 1988. There is every sign that the retail sector is very strong. People are not borrowing to buy big items such as land or housing, but they are spending money on consumer items. One of the best signs of that can be found in that article, which details the extent to which more and more £20 notes are coming into circulation.
There is also anecdotal evidence of the strength of the retail economy--for example, the absolute explosion in car boot sales. I understand that about 1,500 car boot sales take place every week-- [Interruption.] All right, it is part of the spiv economy. Hon. Members may laugh at that and say how dreadful it is, but it creates wealth and that is what the economy is about. We should note the strength of M0, the strength of the retail sector and the considerable activity in the new car market.
The hon. Member for Coventry, North-West (Mr. Robinson) nods. He knows a great deal more about the car market than any other hon. Member will ever know. I am sure that a car manufacturer is rather like a farmer, and I have never met a farmer willing to admit that he was doing well. If an hon. Member with a car manufacturing interest agrees that the industry is doing well, car manufacturers must be doing jolly well indeed. Therefore, I contend that we have the basis for sustainable growth.
Sometimes when we talk about general trends, the man or woman in the constituency says, "We don't see much of it in Wolverhampton," or Stourbridge or wherever. I draw hon. Members' attention to two recent reports on how the local economy of Wolverhampton is growing. The first is from the Wolverhampton chamber of commerce. In its quarterly economic survey, published on 11 July, its chief executive says :
Column 89"I find the responses for the first half of the year especially encouraging. The Chamber has always held the view that our emergence from this very deep recession should be moderate and this clearly seems to be the pattern."
He then gives details of the way in which he notices sustained and satisfactory growth in all the areas that his chamber covered over the past half-year.
Those of us who have been in the House for some time may remember Mr. Geoff Edge, who is now the chairman of the west midlands economic bureau. In that capacity, each month he provides Members of Parliament and others in the west midlands with what he describes as a labour market briefing. Mr. Edge was a distinguished or, if not distinguished, vigorous supporter of the policies so consistently put forward by the right hon. Member for Chesterfield. Mr. Edge would not easily applaud much of the activity of a Tory Government. However, he says about the west midlands that unemployment among the under-25s has dropped greatly over the past year
Dr. Jeremy Bray (Motherwell, South) : It is a great pleasure to follow the maiden speech of my hon. Friend the Member for Monklands, East (Mrs. Liddell), not least to welcome her into the doughty and select company of Lanarkshire Members of Parliament. Our constituents expect a great deal from us and over the many years that we have known her, in her election campaign and, now, in her remarkable maiden speech, she has demonstrated how much she will contribute. I am sure that the Chancellor will be pleased to hear that I agree with him that there is no reason why we cannot look forward to a long period of sustained growth with unemployment falling, low inflation and the balance of payments and public borrowing coming within sustainable limits.
On macro-economic policy, both the Government and the Opposition have now rejected the argument that one target will do. In the old days it was unemployment, then money supply, then inflation, and then the exchange rate. Now, perhaps, it is unemployment again. It used to be argued that if the one chosen target is achieved and maintained the rest will come right, or at least be accepted that they are outside the Government's influence. But successive targets have been missed and abandoned, because the measures needed to achieve them would have such damaging consequences for other aspects of the economy that they could not possibly be pursued.
All the objectives are affected by all the instruments of policy--tax, public spending and interest rates--and they must be kept in mind. It is not possible to put everything right overnight. It takes years for most of the effects of policy changes to appear. Objectives now satisfactorily achieved cannot be assumed to stay achieved.
The emerging consensus is that all the instruments of policy must be used in the balanced pursuit of all the objectives--not just inflation, unemployment, the exchange rate, the current balance or public borrowing, but all of them together, with one or two more added according to taste, and for several years ahead. I have carried out the exercise of designing such balance-achieving policies with the Treasury's own apparatus of policy optimisation on the Treasury's own model. In successive years since 1987, they were published and sent to the then Chancellor. Had
Column 90Chancellors followed those analyses, they would have avoided the major mistakes of economic policy, which, in the event, were made. No doubt similar analyses were carried out at the time in the Treasury. This year, the same analysis of the Treasury model is more or less consistent with the Treasury's summer economic forecast. But it makes it possible to look further ahead, which, of course, the Treasury does internally. It goes into more detail and explores the trade-offs. The prospects are not exciting, but nor are they calamitous. With general Government consumption kept at around its present share of 25 per cent. of gross domestic product, the standard rate of income tax edging above 26 per cent. after 1995, and allowances indexed, the public sector borrowing requirement is still not brought below 3 per cent. of GDP until 1997.
Without a clear exchange rate stabilisation policy, there would be major destabilising swings of the sterling exchange rate. So policy towards the exchange rate and its mode of stabilisation, allowing for rational market expectations, needs to be treated in the policy design process. The expected exchange rate index remains near its current level of 80. The current balance remains in deficit to the extent of 1 to 2 per cent. of GDP. Inflation rises above 4 per cent. for three years from 1996, in mild breach of the Government's target range, as the effect of the increased indirect taxes and public utility charges come through.
The growth of GDP falls below 2 per cent. in the three years from 1997, and the growth of real disposable personal incomes falls by 2 per cent. in the three years from 1996. Unemployment does not fall below 8 per cent. until 2000. All that, of course, will adapt to external circumstances. It will not work out quite like that, but that is the general picture that will follow in response to the external circumstances and internal performance as events unfold. Such an overall prospect would not be welcomed by Government or Opposition. Can we do better ? For the first time this year, the Treasury model contains a genuine supply-side effect. Investment in manufacturing industry is allowed directly to increase manufactured exports. The halt in the fall of the UK share of world exports of manufactures in the late 1980s was seized on and extrapolated in past years, without explanation, to produce hopelessly over-optimistic forecasts of the current balance. Now, a plausible, long-term explanation has been found. It is taken into account in the forecast. Could further supply-side effects be found ?
The first report in this Session of the Select Committee on Science and Technology drew attention to recent work, using international comparative data from the Organisation for Economic Co-operation and Development, on the effects of business research and development on total factor productivity, and linked that with other recent work assessing US experience with research and development tax credits. Taken together, those analyses suggest that an R and D tax credit, with supporting measures and within European Union rules, could increase the rate of growth of GDP by 0.8 per cent. per annum within five years.
The place where that would start, because it would act on competitiveness, is in manufactured exports. Putting it in there alone and not into the rest of manufacturing output, which contributes to domestic consumption, and applying the same policy rules to the better-performing economy, we get an improved picture. Of course we do, but how
Column 91much ? Income tax can be kept to 25 per cent., and growth does not fall below 2 per cent. per annum. Unemployment falls below 8 per cent. in 1996 instead of 2000, and to below 5 per cent. in 2002, by the end of the next Parliament. There would be more supply-side effects to go for if hard evidence could be found--as we found with R and D incentives--of the effects of investment incentives and improved training, let alone special employment measures.
Can such results be believed ? Do they offer a viable approach to more stable economic growth ? Certainly, they need double-checking and cross- checking. Sound judgment will still be needed, and there will, of course, be remaining risk and uncertainty. The macro-economic modelling consortium, consisting of the Economic and Social Research Council, the Treasury and the Bank of England, which finances the academic models, is asking the modellers who are applying for grants this year for the next four years to pursue such policy analyses.
The report of the consortium, referring to my work, says that there is a need for a clearly stated framework for economic policy. It says :
"The objectives and priorities of policy makers can be established (or at least postulated and, where appropriate, alternatives can be given). The modelling teams can then recommend the actual adjustment of policy instruments which would best serve these objectives and priorities, and present the expected outcomes. This makes it possible for public policy makers and businesses to see how alternative objectives and priorities affect the expected results. Teams could participate in a number of policy advice exercises."
Those are not my words, but those of the consortium--the Economic and Social Research Council, the Treasury itself and the Bank of England. Economic policy-makers now have a firmer basis for judgment if they have the wit to use it.
As we look back over the past two years, it has been clear that we have been slowly but surely in a recovery process. As with all such processes, it has been somewhat patchy. We have seen regions and industries recovering at different rates. But there is no doubt that the economy is recovering for everybody to see. What is somewhat different about this recovery, given that it has now been going for that long, is that the "feel good" factor remains low.
I read in one of the Sunday papers that some 70 per cent. of people believe that we are still in a recession. That is despite the fact that the economy is growing by nearly 3 per cent., unemployment has fallen by some 330,000 and many other indicators look good. Indeed, the OECD and other economic forecasters have made very positive observations about the British economy.
For decades, the "feel good" factor has been linked largely to property prices. Monetary and fiscal policy has been inextricably linked to that process. Since the war, the result has been something of a rollercoaster in interest rates as we have sought to revive the economy by lowering interest rates and encouraging activity in the property market, then cutting down on the revival by jacking up interest rates again and depressing property activity.
Column 92Unfortunately, time and again, the "feel good" factor that has resulted has led to a hangover. But what is unique about the economy now is that the recovery is happening with low inflation and low interest rates, without any visible inflationary pressures, without the traditional recovery and, indeed, sometimes, speculation in the property sector. The evidence is very clear. Is that necessarily a bad thing ? Is a strong property revival essential to sustain growth ? On the contrary, we appear to have healthy economic growth free of all the property shenanigans of the past few years. That bodes extremely well for the future.
The distortions which have undoubtedly been caused by mortgage relief in the past are now withering on the vine. Next year we shall see tax relief reduced to 15 per cent. I hope that that process will continue, except perhaps for first-time buyers, until the tax distortions disappear altogether. They have been part and parcel of the yo-yo in interest rate movements that has paralleled the yo-yo in property prices that has been wholly unwelcome.
So we now have in prospect economic recovery with stability, without the property element involved. I am confident, as we look at the economic indicators and the lack of any inflationary pressures, that my right hon. and learned Friend the Chancellor, in maintaining the course that he is successfully pursuing, will bring about low inflation growth for many years to come.
As other hon. Members have observed, we were hit during 1994 by weakness in the bond market. Traditionally, weakness in the bond market comes about through inflationary expectations. But where, indeed, is the inflation ? It certainly does not exist at the factory gate or at the retail level. It has been limited to a number of commodities. The rot started in the United States, where people saw the signs in the US Government deficit and foresaw it increasing yet again as a result of the proposed spending plans of President Clinton.
Another factor has been the illiquidity of world capital markets. Given the volatile nature of the world capital markets and our need to continue to borrow, it is vital that we continue to scale back our deficit. Between 1993 and 1996 we shall cut our budget deficit by some 4.5 per cent. of GDP. Despite that, spending will continue to rise next year and the year after that. We need to support my right hon. Friend the Chief Secretary to the Treasury in the spending round to ensure that we keep public expenditure in check.
The post-war experience of Japan is certainly instructive. The Japanese economy is now maturing and it has its problems, but much of the Japanese success story has been based on access to capital at low interest rates. Low interest rates have attracted borrowers and investors because they have believed in the coherence and stability of Japanese fiscal and monetary policy. Japanese business got its reward because the Government played their part. Low interest rates and low inflation have been at the heart of the Japanese post-war recovery. Now here in Britain we have policies which are taking us along that route. It is already happening and that bodes well for the future.
Under the great welter of macroeconomic statistics there are sometimes good stories to tell. I should like to relay the experience of my constituency. I am happy to relay to the House that unemployment has dropped by some 20 per cent. in the past 12 months. We are seeing a revival in the local economy. Bury St. Edmunds has the
Column 93lowest unemployment in East Anglia. The agricultural sector is in good shape. The two United States air force bases in my constituency are expanding.
By far the largest employer in my constituency is the horse-racing industry. On Saturday my right hon. and learned Friend the Home Secretary visited the town of Newmarket and saw for himself the increased number of owners, the increased number of horses in training and the rising price of blood stock. That vital part of the economy of west Suffolk is fully in revival as a result of the help of Treasury Ministers, to whom I am enormously grateful, as are my constituents.
Apart from that benign situation in the western part of Suffolk, we have a constellation of good overall economic indicators. I sat here this afternoon and recalled the words some months ago of Bryan Gould. He said that the Labour party had no proposals on macro-economic policies, specifically on interest rates, money supply or any of the key elements of taxation that go to make a coherent economic policy. Nothing has changed. We have certainly heard that today. No serious attempt has been made to present any coherent alternative. We know one policy of the Labour party. It would be hugely destructive. I have spoken to many employers in my constituency about it. It is minimum wage legislation. We know that in Spain and France, where there is similar statutory wage legislation to that proposed by the Labour party, youth unemployment is tragically high, with all the consequences that flow from that. We certainly do not want to see that here in Britain at any price.
We cannot survive as a nation without exporting. I should like to take this opportunity to welcome the initiatives taken by the Department of Trade and Industry to promote exports for our business men and women. It has also undertaken an initiative to have 100 individuals seconded to the DTI from key British companies. It will help them and the DTI in the spirit of enterprise to enhance our export capabilities. That is welcome.
The Organisation for Economic Co-operation and Development has said that we have made major strides in restructuring our economy. As we survey the current economic scene, we can see that the restructuring is paying off in a truly sustainable way. The Labour party knows in its heart of hearts that that is certainly the case. Therefore, I look forward, Madam Deputy Speaker, after the next general election to continuing to sit on your right hand side.
Mr. Geoffrey Robinson (Coventry, North-West) : We have heard from the last two Conservative Members who have spoken that the key to our economy is the horse-racing market at Newmarket and car boot sales in Wolverhampton. As the hon. Member for Wolverhampton, South-West (Mr. Budgen) put it, there is no difference for him between a car boot sale and a motor car sale. I am proud to speak for the west midlands and I declare my interest as a chairman of a public limited company that supplies the United Kingdom, European and world motor industry. For us there is a world of difference.
The increased size and rate of growth of the United Kingdom motor industry is much to be appreciated. We are glad to see it take off after the most dismal years in its history, engineered as only the Conservative party could, with that marvellous disregard for the interests of British
Column 94manufacturing, to give it the worst two years since the second world war. After such a bad period, it is inevitable that things will get better.
I was a little surprised to hear my hon. Friend the Member for Motherwell, South (Dr. Bray) say that his model showed that, if the Government had followed that model, their economic policy would have been better. Anything would have been better than the economic policy of the Government since about 1989 to 1990. Nothing could have been more cack-handed or better conceived to produce exactly the opposite of the Government's stated purposes of policy than the economic and industrial policy that they have pursued.
I pay a personal tribute to the maiden speech by my hon. Friend the new Member for Monklands, East (Mrs. Liddell). Having heard her today, I am sure that she will be a most successful and distinguished successor to the late John Smith. I am sure that all my hon. Friends will join me in saying that, having heard her remarkable maiden speech.
All that we can say about the Government's economic policy is that they have stopped digging a great hole. They have finally started to dig themselves out of it. As is always the case, if one creates a big enough recession, one comes out of it. There is nothing remarkable about that. We saw it back in 1966 when we abandoned the plan for growth and decided to go back to the old Treasury policies of cutting and recession. Sure enough, the balance of payments came right and unemployment increased. Sure enough, two years later in 1970 the economy was booming again. We have always seen that old pattern. The only difference in this case has been the length, depth and frequency of the recessions engineered by the Government since they first came to power 15 years ago. Three recessions in a decade must be a record.
Mr. Robinson : No, there have been three. All were marked by a continual pattern of boom doom, go bust, stop and go. Throughout economic policy, we have seen that pattern under this Government and previous Governments. It has been as simple as that.
Now that we are coming out of recession, the Government display nothing but the usual complacency that all is well. Of course, all is not well. None of the fundamentals in the British economy has changed. All that has changed is that we are at a different stage in the stop-go cycle. Instead of being complacent and thinking, "God, we have got rid of that ; we have managed to win an election despite the recession"--a remarkable achievement--the Government should ask what they can do to put right the fundamentals of the British economy and British industry. All that the Government are trying to do is settle their internal differences and divisions in the hope of trying to smooth their way to the next general election.
Nothing is more apparent than the total disdain and mutual incompatibility between the Chief Secretary to the Treasury and the Chancellor of the Exchequer, who put a scarcely credible distance between themselves and could not bear to look each at during the debate. I have not seen that since we had the remarkable spectacle of the occupants of No. 10 and No. 11 Downing street not speaking to each other, but choosing to disagree every time that they did speak. I am pleased to see the Chief Secretary deny it. It has been denied on previous occasions too.
Column 95I doubt very much that the Chief Secretary will be operating from his current position in a week or two weeks' time. I am sure that he will not. One of the chief reasons for that is that cohabitation between him and the Chancellor of the Exchequer has become impossible, as it is throughout the ranks of Conservative Back Benchers, who agree about nothing other than some implicit, sordid deal to patch over their differences in an attempt to win the next election. This time, that will not work.
Meanwhile, the job of getting the British economy and British industry right, and the need for investment and a policy on exports and industrial investment, goes by the board. What causes most concern about our recovery is that, unlike the German recovery, it is based on consumption. Although we welcome the growth in the home car market, we need to achieve a massive increase in car output. There has been an increase, but it is nowhere near enough. We need to achieve a massive increase in exports. We have achieved some improvement, but it is nowhere near enough.
The trade balance and the public sector borrowing requirement deficits remain far too high. Although the Government might smooth over the problems for a couple of years, in three years' time, we shall return, as we always have before, to the same old problems of the endemic, structural weaknesses of the British economy and manufacturing industry. They go hand in hand. They are diferent sides of the same coin.
What have the Government got to offer ? Nothing except a policy to try to nudge through the next week, the next set of figures and the next problem. They will deal with anything but the real problem, whatever it is.
A few people tell us that Germany is in great trouble. Germany is a massive continental power of 80 million people. It has invested enormously in the former East Germany. In the eastern countries on its border with the former Soviet Union, countries in the far east and in China--where its investment is much higher than our investment--it is emerging as the powerhouse of the European Union. We shall be a tiny island, a sideshow compared with what is going on in Europe.
That is a future that the Chief Secretary may welcome. I happen to share many of his views and reservations about the common currency and the so- called purport of the Franco-German alliance. But running away from the problems will not help our problem ; and trying to pretend that we have achieved growth in gross domestic product and in income will not hide the basic problem that the Germans and the French are investing in productive output and in the strength of their economies, but all that we are doing is achieving growth out of consumption.
That is the central problem of the recovery. That problem is bound to come home to roost. That is why in the foreign markets sterling is still so weak. For the moment, the attention is on the dollar, but where will the international currency markets focus their attention next ? It is bound to be on sterling, and sterling's weakness will therefore be exposed.
We need a policy for our manufacturing industries, exports and investment. We need a policy that will encourage growth in investment and exports. We must understand net exports. As we all know, exports are not enough if our our propensity to import is disastrously high.
Column 96Unless there is a policy for the growth of net exports and for investment in manufacturing, and unless a series of projects are geared towards that, in two years time we shall be back to where we were two years ago. That is the sum total of Government policy. The country deserves far better.
Mr. Richard Ottaway (Croydon, South) : The hon. Member for Coventry, North-West (Mr. Robinson) should have read the Evening Standard --not a paper that traditionally supports the Conservative party--three weeks ago, when it carried the headline "Triple Whammy". The article in question talked about the Government's good economic news of the past few weeks. That headline said it all. It referred to the fact that unemployment and inflation were decreasing and to the fact that productivity was increasing. Perhaps it should have read "Quadruple Whammy" or "Quintuple Whammy", as retail sales and manufacturing output have also risen. Many of the hon. Gentleman's comments did not add up ; and, unfortunately, owing to lack of time, I cannot answer the points that he made.
Of the great whammies referred to in the Evening Standard headline, inflation was the most important. If one buys a property, the three most important rules are location, location and location. If one tries to run an economy, the three most important points are inflation, inflation and inflation. Our respective inflation policies illustrate the differences between the Conservative and Labour parties.
The Labour leadership election has been more revealing of Labour party policy than any speech in the House. The right hon. Member for Derby, South (Mrs. Beckett) said that jobs should be a higher priority than inflation-- and the fact that the hon. Member for Kingston upon Hull, East (Mr. Prescott) said that low inflation and low employment were mutually incompatible shows the distinction between the two parties. To take a comment by a previous Chancellor of the Exchequer, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont), and turn it round, the Labour party is now saying that high inflation is a price worth paying for lower unemployment.
I am pleased that in his Mansion house speech, my right hon. and learned Friend the Chancellor rejected that approach and said that he was not prepared to throw away the hard-won gains of recent years--he did not want Britain to go into a boom that we all knew would be followed by a bust. I must say that talk of a boom takes those hon. Members with seats in London or the south-east a little bit by surprise, as unemployment remains stubbornly high. But the recovery is now stronger than expected.
The first reaction to the Chancellor's Mansion house speech came from Lord Lawson, who disagreed, saying that one could not stop the ups and down of the economic cycle. As he saw a few ups and downs in his time as Chancellor, one has to say. "He would say that, wouldn't he ?" Both Chancellors are right. One cannot flatten out the economic cycles but one can do as the United States of America has managed to do and make them less violent. With a different approach to economic policy, the United States had a shorter and shallower recession. Why should we, as members of the governing party, be believed when we say that history will not repeat itself and
Column 97that inflation will not run away again ? First, we have a clear determination to get public finances under control and to control public expenditure. The defence statement and what I am hearing from the Department of Social Security is encouraging and leads me to believe that we will, indeed, get public expenditure under control. In addition, the public sector borrowing requirement is perhaps now lower than we originally thought.
The second reason why we shall be believed about our efforts to control inflation is that the minutes of the meetings between the Government--the Chancellor--and the Bank of England are now published. It has dawned on everybody what a significant step publication represented : it makes it impossible to abandon the battle against inflation for a quick political fix.
That battle remains finely balanced. The good news is that there is no house-price inflation. House prices are not soaring as they did in the late 1980s, primarily because of the erosion of mortgage tax relief and the rise in fixed-rate mortgages. Buyers are no longer putting their last pound into property, so I hope we shall see an investment-led recovery rather than a housing-boom recovery. All the indicators are set to green, and the danger is that inflationary pressures will build up. I remind the House that the target for inflation is between 1 and 2 per cent. by the end of this Parliament. The acid test of the Government will be whether, having reduced interest rates for some years, they will be prepared to increase them if circumstances require it. Monetary policy is extremely loose.
Real interest rates are very low, but long-term interest rates are quite high and the gap between the two is quite substantial. The market expects interest rates to rise, and that is confirmed in the Bank of England's inflation forecast. I have no doubt that the tax rises will take some heat out of the inflationary pressures and that the imposition of VAT on gas and electricity has barely started to bite, but we must raise interest rates if necessary--coupled with tight control of public expenditure in the November Budget if appropriate.
My great surprise is that the public are still not aware of the recovery. As my hon. Friend the Member for Bury St. Edmunds (Mr. Spring) said, some 70 per cent. of the country still believe that we are in recession. There is no doubt that unemployment is still a problem, particularly in the south -east, but one of the signs that things are beginning to turn is that skill shortages are appearing. The disappointment is that the recovery has not led to a rise in confidence in the City. In the past six months, the stock market has gone into substantial slide, which has probably been linked to the interaction between the yen and the dollar and the herd-like instincts of fund managers in the City in following the New York markets. There has been scepticism about the American Government's handling of the economy, and a leading American forecaster said the other day, "Whenever a Government spokesman says something about the US economy, I think, Sell'."Only two weeks ago, the United Kingdom market finally broke away from the American market and there has since been a 4 per cent. rise in our stock market, which shows that fund managers are placing reliance on our own instincts and our own good results rather than worldwide indicators.
We must remain competitive to sustain recovery. As the President of the Board of Trade is well aware, having just published his competitiveness White Paper, we must
Column 98change and move on. The City should become more involved in companies' and industries' future and economic well-being. Everyone must change their attitudes. I believe that the modest proposal from Mr. Alistair Ross-Goobey, chief executive of Postel, one of the largest fund managers in the City, to abandon three-year rolling contracts and replace them with two-year rolling contracts is a step in the right direction, showing that institutions can and should change their attitude to and involvement with the City. We must aim to be the world's best, but if that is our aim we are already out of date because the world's best have already moved on. We have the ability to be the world's best and I support the motion.
Mr. Alan Milburn (Darlington) : This debate has been characterised by much false optimism from Conservative Members. According to them, the green shoots of recovery promised so long ago by the former Chancellor, the right hon. Member for Kingston upon Thames (Mr. Lamont), are finally blossoming and everything in the garden is rosy. I am afraid that most people outside this place probably would not recognise that picture.
The recovery is far from well established, with much uncertainty and lack of confidence prevalent among consumers and industrialists. They know that the Government are promising a false dawn yet again, for they have not forgotten that £7 billion-worth of tax rises are still in the pipeline, with 10 more Tory taxes on the way. It will take more than a puff of hot air about full employment and a visit to a TUC conference to convince people of the Government's ability to manage their way out of the economic mess that they have created. The public will know that Ministers have been forced to talk the language of full employment not by the misery of 3 million people being without jobs but by the threat to their own jobs from the consequences of their economic and political failure.
The Government's conversion to the merits of full employment is belied by their actions. There is no Treasury forecast for unemployment. I notice that there is a forecast-- quite rightly, because these things are significant-- for growth, inflation, the trade balance and the public sector borrowing requirement, so why not for unemployment ? The answer is simple enough : the projected growth rate of 2.75 per cent. is simply not enough to reduce unemployment to anywhere near its pre-recession levels. Interestingly, while the number of people on the unemployment register is falling, claimants clearly are not going into jobs. The number of people in employment fell by 73,000 in the last quarter and by more than 100,000 in the last half year. No wonder the air is thick with accusations of statistical jiggery-pokery.
The conjuring trick has been given a new slant by documents released to me- -or, rather, leaked to me--in the past few weeks from the Employment Service, which show that unemployed claimants are being deliberately offered low-paid, hard-to-fill vacancies in out-of-the-way parts of the country to try to con them out of their benefits. Ex-miners, who have been made redundant through no fault of their own, risk losing their benefit entitlement if they turn down jobs as hairdressers, debt collectors and so on. That seems to be the Government's vision of the future
Column 99--less concern for unemployed people than for meeting artificial Treasury targets imposed by Ministers and a low-pay, low -wage, low-skill and no-hope economy.
If there was any correlation between forcing down wages and driving up employment, my region would be the boom region of Britain, but the north has the worst of both worlds. We are the low-pay capital and we have had the highest regional unemployment in every month since the Conservatives took office in May 1979. Nor is it just the north that is suffering. Between March 1990 and March 1994, unemployment in the previously prosperous south-east almost trebled. That has been the Government's triumph--the creation of a level economic playing field, where economic dislocation and devastation stalk the whole land from John O'Groats to Land's End. That is why, north and south, the Government's false promises will not be believed.
The Government's record tells its own story : it is a record of low growth and high unemployment ; of deceit and broken promises on tax ; of a failure to pay our way in the world, with record trade imbalances in the past few years ; of casualisation of employment ; and of one of the worst levels of investment in skills training, research and development and manufacturing. That record promises no long-term future of sustainable growth for our country or its citizens. Britain will succeed only if we can harness the strength of every part of Britain. If we allow any region to decline, economic and social decay will result and the ability of the whole economy to compete will be weakened.
The structural unemployment that characterises so much of our nation is a symptom of political failure. It is wasteful, inefficient and, most of all, unnecessary. However, it is the direct by-product of a market-driven approach, determined from the centre, which ignores the regional impact of central Government policy. That approach failed in the 1980s and it will fail again in the 1990s.
Mr. Heald : If the hon. Gentleman looks across Europe, he will see far higher unemployment, particularly in countries such as Sweden which have followed the kind of philosophy for which the hon. Gentleman is arguing. Can the hon. Gentleman see other reasons why unemployment is high in Europe but low in Britain ? Perhaps unemployment is low here because of the flexibility of the labour market. What does the hon. Gentleman say about that ?
Mr. Milburn : I would not call between 2 million and 3 million unemployed a low figure. That is a direct insult to those people who are out of jobs and reflects the complacent attitude that we have seen throughout the debate. The Government seem to be content to sit on their laurels and rest with the achievement--if that is what it can be called--of creating 2.5 million unemployed. I do not know about Conservative Members, but people in my part of the world are not happy to sit back and satisfy themselves with that kind of record. The current structural unemployment is a disgrace and it is quite unnecessary. During the 1980s, the market-driven approach produced an overheated south and an under-resourced north. Pressure on the green belt,
Column 100labour shortages and crazy property prices sat side by side with under-utilised industrial sites and unemployment--and that in regions just 200 miles apart.
A sensible Government would have redirected spending to mop up excess supply and to dampen down excess demand by switching investment priorities. Instead, the brakes were slammed on : interest rates were forced up, plunging the whole country into a deep and damaging downturn. The recession, which was born and bred in the south of England, grew into a Frankenstein's monster that stalked the whole land.
Quite simply, Britain's centralised decision-making process could not produce the necessary flexibility to deal with the differing needs of different parts of the country. Instead, it treated the whole nation as though Liverpool and London were exactly the same. No other industrial nation has such a centralised decision-making and financial system. Indeed, the success of economies such as that in Germany is built on the sure bedrock of decentralisation and devolution. Public banks are organised in such a way that they are embedded in the local and regional clusters that make up the German success story. That approach has been underpinned by a more widespread diffusion of economic and political power to ensure that industrial enterprises across the whole nation and in all regions receive the lifeblood of investment that they need to survive and to compete.
In this country, long-term sustainable growth is dependent on the adoption of industrial and employment policies that place the premium on investment for the long term in all regions of Britain. However, in this country there is no proper annual regional audit of public spending and no regional element to monopolies or mergers policy. There is no attempt to diffuse outwards the centralised financial structures that dominate the United Kingdom economy. Instead, we have the absurd spectacle of a Government cutting regional aid spending during a recession