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Mr. D. N. Campbell-Savours (Workington): May I take the right hon. and learned Gentleman back to his reference to the role of shareholders? Has he ever been to an annual general meeting to try to overturn a decision of a board of directors? Has he noticed that institutional shareholders--in the case of British Gas, probably large pension funds and other major institutions--can prove very difficult to persuade, the more so if one is an individual shareholder? In the light of the Prime Minister's comments yesterday, and of his today, is the Chancellor prepared to write to the institutional shareholders of British Gas and ask them whether they are able or prepared to exert pressure on the board of British Gas in the matter of the chairman's salary?

Mr. Clarke: Such shareholders are increasingly taking action of that kind in some companies. I should not be surprised to find that they are usually more persuasive than the hon. Gentleman would be if he turned up at a public meeting. The hon. Gentleman seems in any case more convinced than his hon. Friend the Member for Dunfermline, East that this is an area we should explore.

To return to the hon. Gentleman's speech on last year's Budget: he attacked cuts in public spending and was against controlling public spending. He attacked tax increases, and he forecast continued downward movement for jobs, industry and investment, and a deterioration in the trade deficit. He said that inflation would come back. He of course knows what has happened since then. He knows what my right hon. Friend the President of the Board of Trade would say about that speech last year. I do not know whether Mr. Balls was responsible for drafting that peroration--but let us look at what has happened since the hon. Gentleman's attack.

Already we are the fastest growing of the major economies in Europe. Production is rising, unemployment falling. Exports are at record levels. Inflation is at a 27-year low. All in all, the country faces the most encouraging set of economic prospects for many years. It is a lasting recovery that will raise the living standards and improve the job security of men and women throughout the country, and lasting recovery is what I am going to deliver--and what the policies propounded by the hon. Gentleman could never deliver in a thousand years.

Mr. Bill Etherington (Sunderland, North): As the right hon. and learned Gentleman is painting such a rosy picture

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of the economy, and if it is as buoyant as he says it is, why are those least able to deal with it about to have more VAT on fuel imposed on them?

Mr. Clarke: The people who are least likely to pay VAT are those who have had help with VAT. For a great proportion of those people, the help has exceeded the change in price because of price reductions over the past 12 months.

I am speaking about the recovery, which gives real hope for the future for prosperity and jobs. Each and every necessary policy measure that the Government have put in place to achieve that hope of lasting recovery-- whether it is freeing up the labour market, making British business more competitive, better control and targeting of public spending, raising necessary revenue or lowering public borrowing--has been consistently opposed by the opposition parties. Those measures are the cause of the present recovery. I do not think that the public realise just how obstructive in practice the Labour party has been to all our efforts to get the recovery under way and create the present promising circumstances.

Mr. MacShane: The fact that the Chancellor is wearing hush puppies does not make him an intellectual. On the issue of good news, why is inflation 50 per cent. higher here than it is in France, why are unit labour costs lower in Germany, and why did the Engineering Employers Federation say last week that 22,000 manufacturing jobs will go next year to add to the 400,000 that have been lost since 1990? Capital investment will go down by 1 per cent. next year. That is all good news for the City and the gentlemen at the Ritz, but it is bad news for industry and manufacturing.

Mr. Clarke: I do not know about the hon. Gentleman's judgment on footwear, but his international comparisons are bizarre. Unemployment in France is 12.5 per cent., inflation in Germany is higher than it is here, and unemployment here has fallen by more than 400,000. This is the only country in western Europe where unemployment is falling at all. The hon. Gentleman thinks that his selective quotations can obscure the fact that we have put in place the fastest recovery in western Europe and that we have the best prospects of any economy in western Europe. The hon. Gentleman is deceiving himself, and he also deceives himself if he thinks that that performance would be any better under a Labour Government.

I shall now deal with what a Labour Government would do and refer to the key aspects of economic policy upon which the hon. Member for Dunfermline, East is always in practice quite silent. The first issue is low inflation. The Opposition have argued at every stage over the period during which I have been Chancellor that interest rates should be lower. We have falling unemployment. The Opposition are committed to a social chapter and a minimum wage, and they would destroy jobs. We have falling Government borrowing. Labour's spending pledges run into billions. There were a few billions in the speech by the hon. Member for Dunfermline, East today. We have record exports and rising investment, but the interventionism to which the hon. Gentleman is still totally committed would destroy the competitiveness of British business.

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Since the hon. Member for Dunfermline, East last gave us his litany, we have ignored all the twaddle and obstruction from the Opposition. As a result and as the hon. Gentleman knows, in preparing for my Budget next week I do not think that I could have imagined a better economic background than that which we have achieved over the past 12 months. The combination of low inflation and sustainable growth has eluded us for years, but the signs are that it is within our grasp, and I am determined not to let it slip away.

Mr. Michael Connarty (Falkirk, East): I would not like the Chancellor to pass on without looking at some of the real problems facing the economy. The Engineering Employers Federation has shown that investment in manufacturing is down by 24 per cent. in volume since 1990, and that fixed investment in engineering has fallen every quarter since the end of 1989. We are being dragged along in the tailwind of the European recovery in the trade cycle upswing, but there is no fundamental improvement in our ability to compete with the economies of Europe.

Mr. Clarke: Selective years are being chosen, like selective features of foreign countries. Manufacturing investment is going up and the outlook for it is extremely good. The years chosen by the hon. Gentleman left out the investment boom in the late 1980s. None of that can obscure the fact that in the business world, in manufacturing, which is so vital to this country, prospects are now more attractive than they have been for a long time.

Mr. Malcolm Bruce: Will not the Chancellor admit what his own colleagues have pointed out--that investment this year was lower than it was five years ago and that in the first half of this year, as a percentage of GDP, it was the lowest ever recorded? That does not give the impression that there was a confident boom in investment, which was laying the foundations for sustained recovery.

Mr. Clarke: Choosing particular years is easy.

Mr. Bruce: This year.

Mr. Clarke: This year the prospects are improving and are good for investment. Now, as we are talking, investment is rising. We have a healthy recovery led by exports, investment rapidly improving and modest levels of consumer demand.

The hon. Gentleman must look at what is happening now as a result of all our efforts over the past 18 months, which his party and the Labour party have consistently opposed. Of course, I know--it is the one hope of the Labour party--that the man on the Clapham omnibus or the man in the Nottingham video shop does not think that he is enjoying the benefits of growth.

That is true throughout the western world. A joy-free recovery--so far--is not confined to the United Kingdom. A survey last week in the United States showed that 70 per cent. of the population in that country thought that it was still in recession when it has had four years of growth. In Germany, Helmut Kohl won only a narrow victory despite German economic recovery.

People everywhere in the industrial world are still hurt by the recession and find it hard to give credit for economic progress to their Governments. That is because this recovery is combined with low inflation. People in

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Britain are not used to low inflation; they are used to the money illusion that made their houses seem more valuable and wages seem to go higher when inflation was high. They later found that it was a illusion.

Although we have a slightly sustained fall in unemployment, job prospects for many people remain uncertain. I realise--we all do--that that is what gives the Labour party hope that it can sow the seeds of fear in people despite our healthy economic position. I have no doubt--and the Labour party knows--that those fears will diminish as the recovery lasts, as it remains strong, as it delivers prosperity and jobs to men and women up and down the country and as we get used to low inflation and a modern jobs market.

As all those things happen, fear will transfer itself to the Labour party as people realise that the sneers and doubts that it is so recklessly expressing now will not cover up the lack of policy when we have achieved economic success.

Mr. Morgan: Could one of the reasons for the muted public reaction to the land of milk and honey recovery that the Chancellor talks about possibly be the strange phenomenon that for every rise of one in the number of people in employment, there is a fall of two in the total number of registered unemployed? Does the Chancellor accept that that has been the case for the past 12 months, and can he cast some light on that rather strange phenomenon?

Mr. Clarke: The labour force survey shows that the number of people in work is growing. It is true that demography has accelerated the fall in unemployment to some extent, but there are more people in employment. Britain has 70 per cent. of those available in work--the second or third highest in western Europe.

Our falling unemployment is on the back of growth--the rise in industrial investment and the strong export performance that I have just described. That is why we shall persist with the course that we are taking. That is why I shall take no risks with inflation, despite the usual views of the hon. Member for Dunfermline, East on interest rates. That is why I raised interest rates by half a per cent. at the first rumblings of possible inflation in September.

I shall certainly not be led by irresponsible views on inflation. That is why I shall take no chances with public finances and that is why I took the measures which reduced public sector borrowing and which were opposed by the Labour party. To take chances would put the recovery that we have already put in place very much at risk. Of course, we must never forget who was in power when high inflation first became a fact of life. New Labour may claim no longer to believe in any of its own policies and principles, but the British people know in their bones that Labour would still be soft on inflation; it would be soft on strikes in support of inflationary pay claims; and it would be soft on public spending. The Government are determined to avoid boom followed by bust. Labour has only ever delivered bust in the past and it would deliver it again. What of new Labour? Does it have a policy? Let us turn to inflation. There was no hint or mention of it in the hon. Gentleman's speech. Occasionally, the odd hint of Labour's financial policies slips out. There was a hint in

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a speech that the hon. Gentleman gave a couple of months ago. I see him blush as he does not like to have the speech referred to, as it was the time when Mr. Balls tried to persuade him to give a serious speech on economic policy.

Tucked away among all the references to new academic theories that were actually justifying old-fashioned interventionism is the following bizarre sentence. I apologise to the House for its grammar; Mr. Balls does not appear to have proof-read the press release. Referring to the inflation target, the hon. Gentleman came out with the following profound remark:

"A nominal objective has clear operational difficulties and which many academics and practitioners is both inflexible and necessarily out of date".

I am sure that the hon. Gentleman is relieved that attention was concentrated on other magic moments in his speech as he delivered his insights into where new Labour is going.

Can we at some stage--perhaps after the Budget--have some serious answers from the hon. Gentleman? Is our inflation target too high or too low? Would he keep an inflation target or would he have one at all? Does he or does he not believe in the use of interest rate policy to head off inflationary pressure, or would he abandon that? It is one thing to set out Labour party policy in terms that were totally incomprehensible to an audience in the National Film Theatre. One day he has to come here and give in English at least one straight question to some of the answers that we have given-- [Laughter.] --or one straight answer to some of the questions that we have given. It was the mention of Mr. Balls that caused a momentary slip; I hope that nothing more is contagious.

People have to demand answers and then decide how sensible it would be for Labour to claim that it would have got underlying inflation down at all, let alone to 2 per cent., which is what we now enjoy. Public finances have never been touched on in any serious way by the hon. Gentleman. Obviously, I shall have plenty to say about that next Tuesday in my Budget.

The Labour party is said to be no longer the party of tax and spend, but again there are elementary basic questions which in every speech the hon. Gentleman fails to answer. Is Government borrowing at the moment too high or too low? Should we be spending more or less? Should we be taxing more in total or should we be taxing less? Those are simple questions. No one who claims to take even a passing interest in economic policy should fail to have an opinion on any of those questions, but the Labour party has no answers to any of them, in either English or gobbledegook.

The Leader of the Opposition was quite unable to answer any of those questions. The hon. Member for Dunfermline, East is quite unable to answer any of them at Budget time this year. It is rather like someone bidding to be captain of the English cricket team when he does not appear to know which end of the bat the batsman is supposed to hold.

We in Government have answered all those questions; we are delivering steady, substantial economic recovery in which the financial and business world have full confidence. We are faced with a collection of sound bite merchants who do not have a idea in their heads.

Mr. Marlow: I am grateful for the courtesy of my right hon. and learned Friend. There is a depressing story going around the Lobby that our contribution to the European

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Community for this year is being revised upwards by a massive £850 million. Could my right hon. and learned Friend tell the House whether it is just an unpleasant rumour or whether there is any truth in it? If there is any truth in it, can he say what the impact is likely to be on his estimate that next week's Bill, if it is passed, will increase our net contribution by yet a further £250 million?

Mr. Clarke: We have today produced a comprehensive document seeking to explain and improve the level of debate on the subject in the House and outside by a comprehensive explanation of our net contributions to the European Community both now and in the future. The total net contribution is notoriously difficult to forecast, but we have given the best forecast we can. We have also produced the trend of expenditure--which no one has ever denied is a rising trend--because, under the arrangements before Edinburgh, it is tied to 1.2 per cent. of our GDP. The GDP growth that we are enjoying now, and even our present modest inflation, keep taking up the cash total.

The figures that I gave for the Edinburgh settlement--£75 million next year rising to £250 million by the end of the century--are incontrovertible. The complex document to which my hon. Friend the Member for Northampton, North (Mr. Marlow) referred makes it completely clear that those are the only consequences from the Edinburgh agreement. To give an example of the scale of that particular additional contribution, it amounts to seven ten thousandths of the entire GDP of the European Union.

Mr. Marlow rose --

Mr. Clarke: With the greatest of respect to my hon. Friend the Member for Northampton, North, no doubt he and I will return to those matters next Monday when there is other business before the House-- Mr. Dennis Skinner (Bolsover) rose --

Mr. Clarke: Perhaps the hon. Member for Bolsover (Mr. Skinner) has an insight into such matters. He may have expertise that he would like to give to the House.

Mr. Skinner: The Government may well be in difficulty in respect of the budget increase and we will have to see how events pan out. However, in view of what has happened on the international money markets over the past few days, what are the prospects for a 1 per cent. increase in interest rates before Christmas?

Mr. Clarke: As we wait to see how things pan out, it will be interesting to see how the hon. Member for Bolsover votes because his party --

Mr. Skinner: I have no problem there. I am against the Common Market.

Mr. Clarke: Could there be divisions in the Labour party on that matter? At the moment, the Labour party is waiting for my hon. Friends to tell it whether to vote and, if so, on what amendments. The Labour party may take no part in the debate next Monday. Labour appears to have no serious role to play. Labour will wait and see whether there is anything to vote against. However, if members of the Labour party Front Bench were to vote against the European Communities (Finance) Bill, they

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would be voting against a proposition that they have consistently supported. Such matters of principle do not concern the Labour Front Bench.

I am not sure whether the hon. Member for Bolsover is a yobbo or an intellectual. He may be a unique combination of both. He might sort out the divisions with his colleagues. With regard to his point about interest rates, I have made it clear that, as he is aware, no Chancellor of the Exchequer speculates about interest rates. I have set out an extremely clear policy. Interest rates will be set according to a judgment of the prospects for inflationary pressures arising in future because if those inflationary pressures were allowed to run away, they would bring our recovery to a halt. If I were to take advice from the Labour party, I should ignore all that. Interest rates would always be lower. As a result, inflation would rise and we should have to jack up interest rates much higher to regain control. Recovery would then begin to grind to a halt. That is the truth that lies behind the jokes, hollow rhetoric and fraudulent use of economic theories that passes as Labour party economic policy.

Mr. Gordon Brown: Will the Chancellor confirm that he has issued an updated forecast of the United Kingdom's contribution since the debate began? Will he confirm that his forecast shows that the Government have underestimated our contribution to the European budget? Will he confirm that the underestimate is, as the figure suggests, £732 million?

Mr. Clarke: The figures that I have produced are the latest estimate. The outturn compared with estimates for years gone by has never been reliable. However, they are the best estimates that we can make and those are estimates compared with the last estimates that we made. I have produced the figures today because I did not want to debate the Bill next Monday and produce the figures on Tuesday at the time of the Budget.

The hon. Member for Dunfermline, East will be aware that the trend revealed by the figures is the trend that we have always described. It is the trend that he knows follows from our membership of the European Community. It is a trend that he always supported. The addition from the Edinburgh ceiling is the £75 million next year and the £250 million or thereabouts by the end of the century. The Edinburgh decision has precisely the consequences which he has always supported and which no one opposed at the time of the Edinburgh deal.

However unpredictable may be the vote of the hon. Member for Bolsover, I hope that the vote of the hon. Member for Dunfermline, East will not change in respect of something that he has always supported.

Several hon. Members rose --

Mr. Clarke: We shall debate all those issues next Monday once hon. Members have had an opportunity to see the forecast. As ever, the debate about European finances is breaking out among a collection of hon. Members who seem merely to have picked up one figure from a 12-page booklet and who are anxious to transform that as if it has something to do with next year's bill, which it has not.

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We must approach the economy seriously--

Mr. Morgan: With regard to Europe--

Mr. Clarke: No, we shall debate that next Monday.

If the markets seriously believed that I was about to be replaced by the hon. Member for Dunfermline, East or by another Labour Chancellor, the pound and bond markets would fall, long-term interest rates would rise and capital would flee the country. The British people would feel the hard practical consequences of those fears if they delivered the economy into the hands of a reckless party without beliefs or policies.

However, the British people will not be fooled at the next election. The thought of economic improvement towards the next election makes Labour Members' blood run a little colder and the hairs prickle on the back of their necks. Without the markets telling them, the public know that their job prospects would be worse under a Labour Government. The public know that from the evidence of their own ears.

Labour does not have a credible policy on taxation, public spending, unemployment or inflation. Labour's minimum wage would destroy thousands of jobs. The social chapter would drive businesses out of the country. Labour claims to be the party of partnership with business, but its regional development agencies and the windfall taxes are not partnership; they are old-fashioned state intervention.

Post-classical neo-socialism is all Labour has on offer. Labour speeches are either sound bites or meaningless econobabble. Sound bites, econobabble and good jokes do not deserve to win the trust of the British people at the next election when it is prosperity and jobs that are at issue. Labour will not win that trust in the face of substantial economic achievements and the steady confidence that is being restored month by month by this Government.

4.56 pm

Mr. James Molyneaux (Lagan Valley): I am glad that the shadow Chancellor did not refer to me in respect of the group of intellectuals, as my hon. Friend the Member for Fermanagh and South Tyrone (Mr. Maginnis) is aware of the identity of an ambitious young man in my constituency who, when told in the year I was elected, "You've missed the boat, chappie" said, "No, not at all: Molyneaux, with his very limited ability, will be only a short-term caretaker"--that was 24 years ago.

The Queen's Speech commits the Government to

"continue with firm financial policies designed to support continuing economic growth and rising employment, based on permanently low inflation."

We on this Bench welcome that pledge to continue a policy which has, for example, produced a drop in unemployment in Northern Ireland of around 5,500 in the past month, thus continuing a welcome downward trend throughout the year which has resulted in the lowest unemployment figure in Northern Ireland since 1990.

That trend is guaranteed throughout the United Kingdom in the wording of the next paragraph of the Queen's Speech:

"Fiscal policy will continue to be set to bring the budget deficit back towards balance over the medium term."

Last year, in his usual forceful way, my hon. Friend the Member for Londonderry, East (Mr. Ross) expressed his and our dislike of public deficits. He looked forward to

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the time when we could resume repayment of the public debt. My hon. Friend doubted whether a nil deficit could be achieved before the end of the century, but I know that he would be happy-- as would the Chancellor--if that objective could be achieved ahead of time. It is always popular to advocate a reduction in interest rates, but in my view the Chancellor and the Bank of England may have to take the opposite course--particularly in view of last week's growth rate figures, which were the highest for six years.

I venture to tender further advice to the Treasury team. Schedule 2 to the Finance Act 1994 permitted gains on disposals after 30 November 1993 to have roll-over relief on reinvestment, but that provision does not cater for held-over capital gains to qualify for reinvestment relief, particularly in private limited companies. The effect would be that holders of such funds would be encouraged to invest in qualifying companies, and thus make badly needed seed capital available in regions of the United Kingdom such as Northern Ireland--and one can think of other relevant regions in the kingdom. I wonder whether consideration could be given to making the whole of Northern Ireland an enterprise zone. The existing experiment has not been entirely happy. In the Ulster business and industrial community there has been a tendency for undertakings to move to what is simply the other side of an imaginary chalk line on a street and thus denude adjacent areas. Companies on the wrong side of the chalk line which are excluded from the enterprise zone then find it difficult to compete with companies within it and take themselves to locations outside Belfast where rates and overheads are much lower, taking with them much- needed city jobs.

A total Northern Ireland enterprise zone would create a dynamic economic driven by the private sector, not by Government, and would have an immediate effect on employment, especially in construction. The Treasury team, I hope, will be glad to hear a no-cost suggestion. It is directed mainly at international business men who have been invited by the Prime Minister to his international investment forum next month. I understand that a great many of them have already accepted. Of course, we hope that investors will be convinced that the high standards of education, the Ulster work ethic and the infrastructure in Northern Ireland combine to make Northern Ireland an ideal place in which to invest and to put down roots. Perhaps trade is more important than aid. Those who come to our Province for that forum in December might consider a three-year or five- year package whereby Great Britain, United States and European Community companies might each voluntarily agree to place, say, £250, 000 a year of new trade with Northern Ireland companies. In the short term, that would be a terrific boost to the Ulster economy. It would be up to the Ulster community, by the wholehearted co-operation of all of us as individuals, groups and public agencies, to persuade those customers to become permanent clients of Northern Ireland companies.

Small and medium-sized enterprises--SMEs--could be dramatically boosted by what in Eurospeak is called "tax environment", without doing violence to the principle of unitary taxation in the United Kingdom. There could be proposals aimed at reducing job losses during the transfer of prosperous SMEs. There is need for the further simplification of administrative procedures for SMEs. We

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really must improve SME access to European funding. There is much scope for job-creating programmes in sectors such as local services and the environment.

I now refer to what must be the main theme--trade, not aid. In the years to come, we must move in that direction in Northern Ireland. That is the challenge that we must meet.

The December joint declaration empowered the two signatories--the two Prime Ministers--to establish conferences and forums in their respective jurisdictions. Mr. Reynolds has established, within his jurisdiction, a forum for reconciliation, which has already had quite a few sittings. I gather that there might be plans for another session this week in an effort to reconcile those now at variance within the Dublin Parliament. Reconciliation with God and fellow deputies might be a worthy objective.

Within his jurisdiction, our Prime Minister, with the support of the leader of Her Majesty's Opposition, is convening the international forum to which I have referred. The Prime Minister has also convened a Downing street conference in January for all 26 council chairmen and chief executives in Northern Ireland to consider how better use could be made of the economic development units which we find in practically all 26 council areas.

Those two initiatives demonstrate the commitment of the Prime Minister and of Northern Ireland Ministers--I am glad that the hon. Member for Devizes (Mr. Ancram) is present--to advancing the work of restoration, of reconstruction and of rewarding what I persistently describe as the greater number of all religions and none who have proved conclusively that democracy will always win. I say "will" win because there is some way to go. The first step, and only the first step, has been taken by various paramilitary organisations. When parliamentary colleagues ask me what will happen, I point them with some confidence to an assessment by my hon. Friend the Member for Fermanagh and South Tyrone (Mr. Maginnis) who on 11 July provided me with a paper before my meeting with the Prime Minister. It contained a prediction which has now been validated by events. It states:

"To keep them happy the hard men will be allowed to infringe any ceasefire after the end of the 3-month period and once talks have commenced, on the pretext of taking `only that defensive action necessary to protect the Catholic community'. Sinn Fein will of course, while understanding the provocation, regret such occurrences."

The validating events were the murder of the Newry postman and the nauseating excuses of a Mr. Adams who has not yet washed the blood stains off the hands he now holds out to the world as a man of peace. Although we may have to endure further terrorism, the victory of democracy cannot and will not be cancelled out, nor can the surge of constructive determination ever be extinguished.

In the context of this debate I sincerely convey Ulster's gratitude to all Members of the Parliament of the United Kingdom, of all parties, who have sustained us for 25 long years. In return, we shall discharge the debt that we owe you--I think that I am entitled to include the Chair in that--by taking our responsibility to make Ulster a place of which we all can be proud.

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5.7 pm

Sir Thomas Arnold (Hazel Grove): It is always a pleasure to follow the leader of the Ulster Unionist party, with whom I have always had very friendly relations ever since I was a Parliamentary Private Secretary in the Northern Ireland Office many years ago.

In the 12 months since the previous Gracious Speech, we have seen a startling increase in transparency in the making of economic policy in this country. I refer, of course, to the decision of my right hon. and learned Friend the Chancellor of the Exchequer to publish the minutes of his monthly meetings with the Governor of the Bank of England. Nobody should underestimate the importance of that development. It will be difficult, if not impossible, for a future Government to go back on that decision and the consequences of that decision, which will increase as time goes by.

It is not simply that the minutes themselves are published; it is not simply that, the decision to increase or reduce interest rates having been taken by the Chancellor, the timing is then left to the Governor; it is the knowledge and the pressures which arise from that knowledge, in the markets and elsewhere, of the nature of the debate and the discourse between the Chancellor and the Governor which must have a profound effect on market perceptions of what the Government, in the broadest possible sense, intend.

I welcome that transparency, which I consider wholly consistent with the modern world, the political system in which we live and the many decisions taken in recent years with the aim of opening public life to much greater scrutiny. I hope for further progress in the same direction. I also welcome the greater autonomy conferred on the Bank of England; I hope that the majority of hon. Members support that decision, and will continue to do so.

In the context of transparency, may I draw attention to the continuing controversy--I think that that is the right

phrase--surrounding the reports, and indeed the activities, of the panel of independent forecasters? I shall not comment on the panel's membership, which is none of my business, but I hope that my right hon. and learned Friend the Chancellor will allow it to continue to exist. So far he has indicated that that is his wish, and that he will not be put off by suggestions in the press and elsewhere that the existence of differences of opinion--to put it mildly--between the forecasters is a reason for winding up the panel.

I believe that, on the contrary, the fact that we can have access to the wide range of advice given to the Chancellor is itself a welcome contribution to economic debate. It can only add to understanding of economic policy-making and the options open to policy makers, and to an increase in general knowledge of contemporary economic policy issues. I personally enjoy the existence of such a divergence of views: I think that it makes the panel's reports both lively and--dare I say it, given the somewhat arcane subject matter--extremely entertaining reading. The fact that forecasters disagree with each other is not something to be deprecated, but something to be pondered and, indeed, debated in the House. I hope that my right hon. and learned Friend will retain the panel and be patient with the more obvious disagreements; we can then try to pick our way through the arguments and find a sensible way forward.

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Economics, after all, is an imperfect art, or science. No one can pretend to absolute knowledge, least of all the Bank of England itself. In the conclusion to its latest inflation report, dated November 1994--a further welcome exposition of the transparency to which I have referred--the Bank states:

"The greatest uncertainty concerns the continuing difference between retail and producer price inflation. It is not clear how far price pressures will be passed down the production and retail chain."

I think it very sensible of the Bank to admit in that important report that the transmission mechanisms are imperfectly understood, and that there are nagging uncertainties. Its approach is far preferable to that adopted in the days when the Governor--or the Governor's eyebrows--supposedly told us everything that we needed to know about economic policy. The admission that all is not known is worth while in itself.

I thank the Governor for arranging for me to visit the Bank of England's Manchester branch on Friday. I have passed the building many times during the past 25 years, but have never set foot in it; I look forward to doing so. The Bank's agent in Manchester, like agents in other large provincial cities, is responsible for finding out what is going on in the local economy, and reporting his findings to the Governor and his colleagues in London. The connection between retail and producer price inflation mentioned in the report--on the basis of surveys, statistics and anecdotal evidence from, in this instance, the north-west--is clearly important, and I look forward to exploring the issues with the Manchester agent.

My experience of the economic recovery leads me to a view that I believe to be shared, in some respects, by the Chancellor, but I want to probe the Government further. I believe that deflationary pressures are still at work in the economy, and that there are few inflationary pressures. Our labour market has undergone huge changes in recent years, partly as a result of the supply-side changes of the 1980s and early 1990s; I do not think that, when we debate economic policy, we always pay enough attention to what is going on in what I would describe as the engine room of the economy--the labour market. There has been a huge structural increase, for instance, in the amount of part-time earnings, especially those of female workers. We should take account of such changes when registering our view of what is happening.

At any given moment, a snapshot of the economy will be imprecise. Members of Parliament must therefore rely on knowledge and experience of local circumstances, as well as what we can glean from the official statistics. My conclusion from observation of life in the north-west is that there is still excess capacity in the economy. I was surprised to hear the hon. Member for Dunfermline, East (Mr. Brown) say near the beginning of his speech--at least, I thought I heard him say it--that he thought we were running up against capacity constraints. I find that very odd; how can the hon. Gentleman berate the Government for not lowering unemployment fast enough, pointing out that regrettably 2.5 million are still unemployed, and in the next breath say that we are running up against capacity constraints? It does not add up.

As I have said, I believe that there is still excess capacity in the economy, and the Chancellor admitted as much during his last Question Time. I should like to hear this evening whether that is still the Government's view. If there is still excess capacity, we should not be panicked

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into altering interest rates by a neurotic obsession with one day's events. I congratulate my right hon. and learned Friend on his cautious handling of monetary policy, which I consider admirable; I sincerely hope that he will maintain his stance, taking account of the mixed signals that he is receiving but recognising that we are living in a generally deflationary world. He should resist any knee- jerk temptation to raise interest rates simply because he receives a signal from the markets on a particular day suggesting that such a move is called for.

We should also take account of the huge increase in productivity, and the huge change in the inner workings of the labour market. The deflationary pressures at work in the economy are reinforced by further deflationary pressures from overseas. Our country, together with the other OECD countries, is now under severe new pressures from the emerging markets, particularly--although not exclusively--in Asia. Low-cost producers in those countries can exert on our manufacturers competitive pressures that we have not experienced hitherto. We are moving into a new world, and it is most unlikely that those pressures will go away: that is why the supply side changes of recent years are so important, and why it is also important not only to recognise the existence of greater flexibility in the British economy, but to welcome it.

Our economy has shown a remarkable ability to adapt to changing circumstances in the past few years. We should not be ashamed of that, or defensive about it; we should realise that the pressures from the far east and elsewhere with which we are now having to cope are likely to be with us for a long time.

I would welcome an expression from the Minister today of whether, broadly speaking, the Treasury supports my analysis of what I have referred to as the deflationary pressures which are still at work on our economy, and whether it believes that the inflationary pressures referred to in the financial press and elsewhere may have been exaggerated.

The Bank of England inflation report is optimistic on inflation. The current prospects for inflation are better than we have seen for many years --low inflation, a situation in which we can continue to look forward to a steady recovery of a non-inflationary kind and the firm financial policies to which the Gracious Speech refers are, I believe, the best possible bases for sustaining our recovery up to the next general election.

5.20 pm

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