House of Commons Hansard Debates for 12 Jul 1995

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that the inflation target that the Government say should be adhered to requires an increase in interest rates, the Bank should make the decision. We in the House do not know who is right, and we shall not know for 18 months. I do not think that the Chancellor should be smug in the short term. Our position is clear: the Bank should have been allowed to make the decisions that it considered necessary to implement policies set out by Government.

Mr. Budgen: Does the hon. Gentleman not agree that it must always be the Chancellor's duty to decide how quickly the inflation target should be met? He must take into account wider social and economic considerations than the Bank can ever take into account.

Mr. Bruce: That is an argument in favour of political intervention, but too often Chancellors cannot be relied on to take such objective measures, and their decisions have been made for short-term political reasons which cut across the economic requirements of the time. I believe that the fact that the German economy has built itself on the basis of an operationally independent central bank is one reason for the success of Germany's economic policy.

It must be understood that we are not talking about the Bank of England setting policies. The Government set policies and the Bank implements them. The decisions, however, are removed from the political arena. It has been argued that such action would lead to a lower overall level of interest rates, because it would remove the factor of political uncertainty, leading to a cut of between 1, and 2 per cent. on the prevailing rate of interest.

An item that I have raised in the past week has not been addressed by the Government, or even picked up by the commentators: the moves, following the merger of a number of building societies, to offer substantial bonuses to their members, which will feed into the economy over the next 12 to 18 months. According to the press reports that I have read, they could amount to between £5 billion and £8 billion. The Chancellor--and, indeed, the financial authorities--must keep a close eye on that.

It seems extraordinary that we can debate whether tax cuts of £5 billion are justified in terms of keeping economic policy on course, when building societies over which the Government have no control can suddenly inject between £5 billion and £8 billion into the economy, completely altering the Government's inflation forecast. I do not know what the answer is, but the Government should give some indication of how they intend to respond to that issue.

We need a responsible fiscal policy, not just short-term tax cuts, which, as people know from bitter experience after the last election, would have to be reversed immediately after an election. We need a sensible target for inflation and a reformed central bank given operational independence to enable it to pursue those targets free from short-term political interference.

We need a European policy crafted in the country's and not the Tory party's interests, and we need a macro-economy which recognises the importance of investment to create a climate which can sustain public services, at a reasonable taxation level and at a reasonable share of gross domestic product.

The Liberal Democrats have made it clear that education is the single most important investment that this country needs for the long-term success of our economy. Unlike other parties, we have said not only that we will

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spend more on education, but where we will get the money from. The Labour party has tabled an amendment which continues to say nothing about how it intends to deliver anything. It contains blandishments, statements of good intent and a rosy glow of change, but no substance.

It is necessary to have credibility in economic debate, to be prepared to put some facts on one's proposals, to put some costings to one's commitments and to give some indication as to how one would create the mechanism which would deliver the results that one regards as desirable. The Liberal Democrats have done and are doing that. We shall continue to challenge both the Chancellor of the Exchequer as to whether he has the resolve to stick to his commitments, and the Labour party to demonstrate whether it can put forward a coherent programme that will not finish up putting it in exactly the same position as the Government, who are split from top to bottom. 6.41 pm

Sir Anthony Grant (Cambridgeshire, South-West): I will say this for the hon. Member for Gordon (Mr. Bruce): unlike the official Opposition, he has just a smidgen of policy but, alas, I fear that it will be purely hypothetical and academic in the extreme.

The prime economic task of any Government must be to control inflation without wrecking the industrial base. We have heard a great deal about investment, especially from my right hon. and learned Friend the Chancellor of the Exchequer. The trouble is that the international market believes that in this country, under our political system and in the way in which we conduct ourselves, the will to control inflation is weak. That is why there is what is called short-termism compared with Germany and Japan.

Investors, usually international ones, suspect that political parties, and particularly Labour, will take a short-term political view, so those investors take a short-term financial view: it is as simple as that. The trouble is that with Labour in power the result would be not short-termism but minuscule-termism. It is to the Government's credit that they have maintained low inflation better than their predecessors.

An encouraging and seldom noticed trend among banks is the tendency to move to fixed-term lending rather than the overdraft system. In that sense, an encouraging sign exists that we are moving more towards the European or German system. That will give us more long-term investment, which industry requires.

The battle against inflation, however, is a continuing one. It is affected by matters entirely outside local control, such as commodity prices. Handling inflation in a modern economy is like sailing a giant tanker: it goes on for about five miles after being put into reverse, by which time the other hazards of recession have swamped the decks. Cool pragmatic judgment rather than obsessional dogma is therefore needed.

The Chancellor of the Exchequer is right to resist perhaps the more orthodox Bank of England view on interest rates. I hope that he will continue to take that pragmatic view as what industry and the economy want more than anything else is some degree of stability. I am glad that he has given stability on the interest rate front so that people can plan for the future.

The other thing that we need is export-led growth. As I have said before, after the 1967 devaluation by the Labour party, on becoming Chancellor of the Exchequer Lord

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Jenkins of Hillhead--now a member of the party of the hon. Member for Gordon--said, "We must have export-led growth. That is the solution." Unfortunately, he never achieved it, but he was right and my right hon. and learned Friend the present Chancellor has achieved it.

When considering future interest rate policy, I hope that my right hon. and learned Friend will bear in mind two vital sectors: the housing market and construction industry, and the small firms sector. In the 1980s, reliance exclusively on interest rates to curb inflation was catastrophic for both home owners and small firms. I agree with the right hon. Member for Ashton- under-Lyne (Mr. Sheldon), who is Chairman of the Public Accounts Committee, about that. That reliance was the cause of the anxiety, the lack of confidence and the absence of the feel-good factor that everyone is seeking. Added to that, there was the fear of unemployment and the uncertainty about future employment, which happily is now easing. When considering his Budget, however, I hope that my right hon. and learned Friend the Chancellor will have special regard for that especially unfortunate and burdened sector. In addition, I hope that the wise proposals in the Latham report on the construction industry will be attractive to the Government.

The future does not lie with vast companies or supermarket fat cats. A healthy and flourishing small firms sector is the vital undergrowth for survival in the economic jungle. Bit by bit, much has been done to help small firms, but there is an awful lot more to be done.

I want lower taxation. Decades ago, I advocated a shift from direct to indirect taxation because one is a tax on work and the other is a tax on spending. I am glad that that trend has taken place, but taxes can be reduced only if public expenditure is curbed. The only way in which public expenditure can be substantially curbed is by reducing unemployment. I am delighted at the way in which that is going. Otherwise, as my right hon. and learned Friend says, the solution is a hike in interest rates, which is the last thing that industry, and especially small industry, wants.

We are a parliamentary democracy and we and the public are entitled to know what is the policy of Her Majesty's official loyal Opposition. We shall ask them that again and again and again. What is their policy? As the hon. Member for Gordon said, their amendment is clearly a mass of platitudes. Would they increase or reduce taxation and, if so, by how much and which taxes? Would they increase public expenditure, as their spokesmen nearly always imply, or reduce it? Would they raise or lower interest rates? Or do they really believe, as I do, that the Chancellor has got it about right?

I used to be fond of the previous Leader of the Opposition. I thought that anyone who was keen on rugger could not be all that bad, but I am not sure about the present one. At least one knows where the right hon. Member for Chesterfield (Mr. Benn) stands, even if one disagrees with him. We are not allowed to refer to an amendment which has not been selected, and its non- selection must be a great relief to the official Opposition as it contains two fairly dirty and obscene words which may send a shudder down their spine. It refers to "socialist policies". The terror that that must have struck in the Opposition's hearts is awful to consider.

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I will say this about the right hon. Member for Sedgefield (Mr. Blair), the Leader of the Opposition: he has a nice smile--but I question what lies behind it and what policies, if any, lie behind it. He reminds me very much of the Cheshire cat in "Alice's Adventures in Wonderland". Poor little Alice was rather like the electorate. Lewis Carroll wrote:

"she was a little startled by seeing the Cheshire Cat sitting on a bough of a tree.

The Cat only grinned when it saw Alice. It looked good-natured, she thought: still it had very long claws and a great many teeth,"--

that is the hon. Member for Bolsover (Mr. Skinner) and his friends--

"so she felt that it ought to be treated with respect.

`Cheshire Puss,' she began . . . `Would you tell me, please, which way I ought to go from here?'

`That depends a good deal on where you want to get to,' said the Cat.

`I don't much care where--' said Alice.

`Then it doesn't matter which way you go,' said the Cat. `--so long as I get somewhere ,' Alice added.

`Oh, you're sure to do that,' said the Cat, `if you only walk long enough.'

Alice said `I wish you wouldn't keep appearing and vanishing so suddenly: you make one quite giddy.'

`All right,' said the Cat; and this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone.

`Well! I've often seen a cat without a grin,' thought Alice; `but a grin without a cat! It's the most curious thing I ever saw in all my life!'"

In 30 years in Parliament, I have sometimes seen a policy without a grin, but a grin without a policy is the most curious thing that I have ever seen. To end with the immortal words of Private Eye , which I hope will get a response from the Opposition, "I think we should be told."

6.49 pm

Mr. Tony Benn (Chesterfield): I and some of my hon. Friends have tabled an amendment which, in a way, acquits the Chancellor of the main responsibility for what has happened because it says that the problems confronting this country are inherent in a system that puts profit above people. If I distributed the Chancellor's speech to my constituents, they would not believe that he lives in the same world as they do.

There is mass unemployment in Chesterfield because the pits were deliberately closed. Unemployed people come to my surgery and say, "What about a job?" Other hon. Members must have the same experience every week. People say, "My daughter is getting married. What about a house?" Another constituent will say, "My son wants to go to college. What about a grant?" I am told, "My auntie cannot get a hip operation. Granddad cannot live on the pension."

Anyone who thinks that the Chancellor's speech, in which he scored debating points about quotations--an absolute waste of time--will carry any weight, is making a grave mistake. Conservatives boast that the number of days lost in industrial disputes has dropped, but 2.5 million days are lost every day because of unemployment. Unemployment is the policy. It lowers wages, undermines the unions and boosts profits. Homelessness does the

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same. Someone who sees a person in a cardboard box on the embankment will say to himself, "If I had a row with my employer and cannot keep my job and am dispossessed of my house, I will be in a cardboard box on the embankment." The Government have not an economic policy but a political strategy to put a handful of rich people at the top and the rest in fear.

Has anyone ever asked how many home owners have mortgages? There are a great many home buyers, but not a great number of home owners who have paid off their mortgages. Another term in use nowadays is "customers" and those who have no money are not "customers". They have found a word that dehumanises and depersonalises the poor so that they do not have to think about them. People in cardboard boxes are not on the electoral register. How can anyone say, "Put me down on the register as being in the cardboard box behind Marks and Spencer"? Those people do not vote, and that is part of the political strategy.

The Government should not think that anxiety has not spread up to the middle classes because many professional people are on short-term contracts and many people are on low pay. If the Chancellor ever has a discussion about why there has been a shift in political opinion in this country, he will find that it is because the anxiety of the capitalist society has spread to layers of people who thought themselves exempt. Of course the policy is based on fear. We hear much about how marvellous is the German economy, but there are 20 million unemployed in the European Union. Does not anybody relate that to what happened before the war? I am old enough to remember Hitler coming to power. I bought "Mein Kampf" when I was 12 years old and I still have my copy. The 6 million unemployed in Germany produced Hitler, and when there is unemployment, people turn on each other. Sir Paul Condon, the Commissioner of Police of the Metropolis, has issued one of the most disgraceful statements that has ever been made. He is building up the feeling that, if there is a crime problem, it is due to blacks. When people are unemployed, they turn on others.

The breakdown of the social fabric is much more important than the feel- good factor. I do not know who feels good or why, but if we break down the social fabric and turn people one against the other, we will pay a much higher political price than we would in dealing with the problem that is before the House or the aspirations in my amendment. The second world war was the cost of monetary policies, which are the same as those that are now being pursued. It cost us 50 million lives and God knows how many billions of dollars. The right hon. Member for Horsham (Sir P. Hordern) says that, if Labour gets in, there will be a run on the pound. What he told us is what the left has been saying for years--that this House does not decide anything. Decisions are made by international gamblers. Every night, I listen to the world economic news on the BBC and there is mention of the Dow Jones industrial average. I have never met Mr. Dow Jones, but by God I have to give him credit for keeping at it. Night after night, when we are all in bed, he is working on his bloody averages, and they decide what happens.

Sometimes, we are told that sterling has dropped three points of decimals against a basket of European currencies. I have never had such a basket of currencies, but I would not mind taking one on holiday. As a result,

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the Health Secretary closes three hospitals and the pound rises again because all policies are now determined by international capital demands. That is why my amendment is a little more fundamental. I should like to make fun of the Chancellor's earlier speeches but that would be difficult because I confess that I have not read them. Let us try to face the reality, which is that Parliaments and Governments do not control anything any more. There was an article in the Financial Times recently by the BBC's economic correspondent in the World Service saying:

"In Africa it would be better if the countries were run as commercial enterprises rather than Governments."

Later, in order to answer a question that might be asked, he said:

"What room does that leave for democracy? That question can be asked everywhere in a world where bond markets dominate much of the decision- making process in the world. Democracy is in a sense on the way out."

Without trying to provoke individual responses, I am trying to say that we must face the fact that the globalisation of world markets has destroyed the value of the ballot box as a link to political and economic power. That will happen to an incoming Labour Government, although I will not go into that. Everybody knows that that will happen. It happened to Healey in 1976. He has now decently written a book saying that he made a mistake about the IMF, but that does not matter.

Wherever we look, the triumph of capitalism is being celebrated, but if it is so triumphant, perhaps we should look at some of the figures. One fifth of the world's population of 5.6 billion live in extreme poverty. The richest fifth in the world have incomes that are 30 times higher than those of the poorest people. Poverty-related diseases claim the lives of 35,000 children every day, and 500,000 women die each year from causes related to pregnancy and inadequate health care. Some 1.3 billion people have no clean water. That is the result of the capitalism that has triumphed. Communism has gone and the capitalist world is not stable: it is inherently unstable. It is democracy that is being attacked, not socialist ideology. They do not want the common people without the cash to use the vote to buy collectively what they cannot afford individually. The huge achievement of the chartists and the suffragettes was to get some grip on economic policy through the ballot box.

I am not the first person to quote Harold Macmillan. I did so when I intervened on the Chancellor and perhaps I may read the quote to him again. In his book, "The Middle Way", published in 1938, Harold Macmillan said:

"We have lived so long at the mercy of uncontrolled economic forces we have become sceptical regarding any plan for human emancipation. Such a rational and deliberate reorganisation of our economic life would enable us out of the increased wealth production to establish an irreducible minimum which might progressively be raised to one of comfort and security."

The Labour manifesto of 1945 did not attack the Conservative party because in those days we did not have abuse, we had argument. That manifesto stated:

"The great inter-war slumps were not acts of God or blind forces: they were the sure and certain result of the concentration of too much economic power in the hands of too few men."

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Gaitskell, one of our more moderate members, when he spoke in the House on 5 December 1945 after Churchill had moved the first motion of censure on the Labour Government, said:

"We believe . . . that the present capitalist system is inefficient, that it produces insecurity and that it is unjust. Can anyone deny those things?"--[ Official Report , 5 December 1945; Vol. 416,c. 2364.]

Therefore, no one should think that my amendment, which, alas, has not been called but which may be studied, contains new ideas. They are rooted in human aspiration and no one can tell me that they cannot be implemented. If there can be full employment in wartime, it can be had in peacetime. If every youngster of 17 could be put in uniform to kill Germans, surely young people could be recruited to build homes or to become nurses or teachers or to clean up the environment or look after old people. Of course that could be done, but it is not profitable, and that is why it is not done. Until this society--in that I include my Front-Bench

colleagues--addresses the question of whether to put profitability above people or people above profitability, these problems will not be resolved. Do not think that the Chancellor, with his triumphalism, is convincing anyone. More and more people are learning what is happening. If they cannot express themselves through the ballot box, do not be surprised if we have the riots. That is not the right way to do it, but a disfranchised nation will not accept the injustice forced on it by a policy of the kind that we have had.

6.59 pm

Sir Thomas Arnold (Hazel Grove): The current monetary framework has been in place for three years. The inflation rate during that time bears healthy testimony to the wisdom of the policy that the Government have chosen to follow. I support what my right hon. and learned Friend the Chancellor said in announcing the new inflation target one month ago. He said in answer to a written question: "Beyond this Parliament I propose that our aim will be to continue to achieve underlying inflation--measured by the RPI excluding mortgage interest payments--of 2 per cent. or less. Monetary policy will be set consistently to achieve this target. This should ensure that inflation will remain in the range 1 to 4 per cent."-- [ Official Report , 14 June 1995; Vol. 261, c. 517. ] That statement showed confidence in the future and confidence in the present policy.

It is absolute nonsense to suggest that the goalposts have been moved or that policy has become more discretionary or relaxed. On the contrary, the Government have repeated what policy has been for some time now. That has done wonders for confidence. It shows exactly what the Government intend to do in respect of monetary policy. The monetary framework that the Government put in place three years ago consists of three components: the inflation target, to which I have referred, the inflation report published by the Bank of England and the published minutes of the monthly monetary meeting. I should like to deal with the two latter items in turn.

The great advantage of the inflation report is the transparency that it confers on the decision making within the Bank of England. It shows carefully and clearly the intellectual influences at work. It makes absolutely no attempt to hide any of the forces which are taken into

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consideration. I was particularly impressed in that regard by the evidence given to the Treasury Select Committee recently by Mr. Mervyn King, the chief economist at the Bank of England. He described in some detail what was taking place in the labour market. The facts and figures are there for all to see in the inflation report. Mr. King referred to what he called the tale of two cities. Most of us can see what he meant when we consider what is taking place in our constituencies. The sectors directed towards the export or net trade sector are growing rapidly. In those sectors, one can see evidence of capacity constraints. The sectors directed primarily towards domestic retail spending are weak. In housing and construction they are extremely weak. There is no sign of any capacity constraints. So we are seeing a recovery the pattern of which is very different from anything that we have seen for a long time. Net trade, although volatile, is the main driving force behind the recover. My view is that there is still plenty of capacity in the economy and that we should take account of that fact in deciding whether to raise interest rates. My right hon. and learned Friend the Chancellor has been right to take a robust stand on interest rates and to make a fine judgment which so far has won the backing of the markets. That brings me to the published minutes of the monthly monetary meeting. The meeting represents a considerable step forward, once again, in the transparency with which economic policy is now made. I hope that the Labour party sees fit to applaud the publication of the minutes, which means that, for the first time ever, it is perfectly obvious to everyone what specific arguments are put forward by the Governor of the Bank of England and by the Chancellor. There can be no doubt whatever how the decision not to raise interest rates at the celebrated meeting on 5 May was reached.

My right hon. and learned Friend the Chancellor made it perfectly clear that there were conflicting pressures which had to be accommodated and conflicting arguments that had to be addressed. There were clearly cost pressures arising from increased commodity prices and a weakening exchange rate. On the other side, there was clear evidence that demand pressures within the economy as a whole were not so great as to warrant an increase in interest rates. My right hon. and learned Friend took the decision not to increase interest rates. I applaud him for that decision. I applaud the transparent way in which he showed to the world his internal thought processes, how he reached his decision and why on that occasion he did not accept the advice given to him by the Bank of England. The transparency of policy within the new monetary framework is serving both the Government and the country well. I hope that my right hon. and learned Friend will persist in his policy and keep his nerve.

7.4 pm

Mr. Terry Davis (Birmingham, Hodge Hill): There is no question but that the most important problem that Britain faces today is unemployment. It is important not only because of the direct effect on families whose members are unemployed, with the effects of poverty and everything else that goes with unemployment, but because

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it represents a waste of resources. Even within the Government's narrow vision, unemployment should be seen as important, because it represents a cost to the Treasury.

My greatest condemnation of the speeches of Government Members this afternoon is that they paid so little attention to the importance of unemployment. All my right hon. and hon. Friends have drawn attention to unemployment and rightly argued that the immediate and urgent priority is to increase investment and training. Of course, the two go hand in hand. They are essential.

To be fair to the right hon. Member for Horsham (Sir P. Hordern), he referred to training. He drew attention to the fact that, in the United States of America, more was spent on training than in Britain. He said that the money was spent not by the federal Government but by private companies. He could have added that more is spent on training in many other European countries than in Britain. I suspect that much of that money is spent by private companies. However, the right hon. Gentleman did not face the logic of his statement. The fact is that, in Britain, private companies are not spending money on the essential training that we need, so it is a job that the Government must undertake.

The right hon. Member for Horsham asked how training would be paid for. The answer is that we certainly cannot pay for it if we take the earliest possible opportunity to reduce taxes. We could provide for investment, through either investment allowances, as my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) suggested, or some system of investment grants, which I personally prefer--we can discuss the details, but the important thing is to boost investment. We could provide training. Yet we cannot do those things at the same time as reducing taxes. We did not get from the Chancellor of the Exchequer any consideration of those points.

Instead, we had a speech which consisted mainly of a series of jokes. The biggest joke was when he described himself as a conviction politician. I wondered whether I heard him right. It seems to me that what we had this afternoon was a complacent politician. His speech had throughout it a thread of complacency about the economy. We have a reduced forecast for growth, a higher forecast for inflation and a lower forecast for investment. If he had given us a forecast for unemployment, which he refused to do, he would have given us in the medium term a higher one than was previously forecast. Yet, against that background, he described the slowdown as a change of pace. I suspect that, when the economy goes into its next recession, the right hon. and learned Gentleman, if he is still the Chancellor of the Exchequer, will say that we have simply gone into reverse gear. He does not understand the effects of the present economic policies and his forecasts.

The Chancellor says that the economy is doing well. He says that it is on course for steady recovery, which will continue in years ahead. He says that living standards will rise this year, in 1996 and in 1997--that sounds to me like a significant year--in the year after that and, the Chancellor trusts, in the years after that, too. However, if he had been more open, if he had given us some of that openness of which he boasted, he would have told us the undisclosed truth, which is that he expects the recovery to

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come to a stop in 1998 or 1999. It will probably be then, because the effect on employment and living standards always lags behind the rest of the economy.

Indeed, the Chancellor gave it away when he told us that the Budget will be balanced at the top of a cycle, which suggests that the economy will next go into recession. That is the problem in this country: recovery followed by recession followed by recovery followed by recession. It is the business cycle. The Government simply do not want to change that sequence.

Increasingly, people are conscious that recoveries are going to be followed by recessions. That is one of the causes of the insecurity that people feel. They do not expect recovery to last. They know that the economy is going to the top of the cycle and then, as it goes down, unemployment will go up.

Mr. Michael Stephen (Shoreham): Will the hon. Gentleman give way?

Mr. Davis: I have not got time. There should not be interventions when speeches are limited to 10 minutes.

At the end of each recovery, unemployment is left higher than it was at the end of the previous recovery. Every time that we go into recession, we start with a higher level of unemployment than we had at the start of the previous recession.

The Chancellor of the Exchequer told us that the tax take, as he calls it, was lower than forecast. He blamed that on lower inflation. The fact is that the tax take is lower than expected because unemployment is high. It is employment--people having jobs and paying income tax--that affects the tax take. The Chancellor left that out of his speech.

The Government are concerned about reducing taxes in the next 18 months. They have not even pretended this afternoon that they are using some theory of trickle-down economics. They do not suggest that tax reductions will reduce unemployment. They will reduce taxes to spread the message. The Chancellor of the Exchequer gave it away when he said that they would spread the message of rising living standards and falling unemployment between now and the general election. The issue is what will happen after the general election. We know what will happen: the economy will go into another recession.

The Government should use the money that they will use to reduce taxes for investment, training and creating jobs. That does not mean creating work. There is no need. The need for work is everywhere to be seen around us in our constituencies. It is a matter not of creating work but of employing people to undertake the work in front of our eyes: the housing shortage, the terrible provision of care in the community, social services. They are all labour- intensive. That is what we should use the money for if we are serious about reducing unemployment.

People who are employed pay taxes. The Chancellor of the Exchequer gave no forecast or target for unemployment. He told us that he had a target for income tax--20p in the pound; he told us that he had targets for capital gains tax and for inheritance tax--zero. What is the target for unemployment? A Government worth their salt who justified the confidence of the country would face the fact that it is unemployment that people care about most. The economy is not good enough. We have to a find a better economy. We have to find an economic system that will deal with the problem of unemployment.

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The biggest condemnation of the Government's complacency is that they do not understand the need for a new economy.

7.12 pm

Mr. John Townend (Bridlington): Ever since Mr. Soros blew us out of the exchange rate mechanism, our economic situation has got better and better. In retrospect, even most members of the Government would admit that he did us a good turn. To their credit, the Government have taken full advantage of that opportunity. Despite the fact that the value of the pound has dropped by nearly 15 per cent. and that everyone forecast that that would feed through into inflation, the Government have kept inflation consistently down. We should congratulate the Government on the skill with which they have operated monetary policy and which has made that possible. Despite the gloom of the Opposition, the economy has been growing for three years. What has been so pleasing is that it is the first export-led recovery in my lifetime. I believe that the prospects for non-inflationary sustainable growth are very good. Because of the success of our exports, the balance of payments deficit has dropped dramatically. The hon. Member for Birmingham, Hodge Hill (Mr. Davis) talked about unemployment. That has also dropped dramatically--in the last fiscal year by no less than 372,000. That is a pretty good record. The budget deficit is also falling.

Why then is there a feeling among much of the public that things are not getting better? I think that my hon. Friend the Member for Hazel Grove (Sir T. Arnold) put his finger on the main problem. It is that we have almost got two separate economies: the successful manufacturing export industry, which is doing very well indeed, and what could be classed as the home- based industries. The housing market in many places is still drifting downwards. The construction industry is flat. Consumer spending is weaker than we expected. The leisure, hospitality and drink industries are not doing well. I speak from some experience of those industries. The figures in June were generally very poor. The retail trade has undoubtedly been affected by the enormous amounts of money being spent on the national lottery and the fact that the draw is held on a Saturday night.

In many areas, business confidence is falling. After a very buoyant last quarter in 1994, in the first quarter of this year growth slowed. I expect that, in the second quarter, as a result of the Budget, it will slow down further. Inflationary pressures are almost all imported due to high raw material prices. There has been no upward pressure on wages during this recovery. Indeed, I believe that at long last we are moving slowly into a low-inflation culture. While increased raw material prices have forced up manufacturers' costs, manufacturers have not been able to pass those costs on to wholesalers and retailers. When retailers have tried to pass them on, the public have refused to buy, and discounting and sales have followed.

Manufacturers have undoubtedly been much helped by our supply-side reforms and increased productivity and efficiency. In the private sector, strikes are virtually unknown. I think that the large increases in raw material prices will now ease off. Indeed, in the past few weeks there has been a significant drop in the price of coffee.

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Investment has been somewhat disappointing overall, but if we consider the figures carefully, we see that investment in buoyant manufacturing industry is quite good. All the factors that have caused pain and lack of confidence in the non-exporting sector have a bright side, in that they make the necessity or likelihood of raising interest rates much less, especially taking into account the lead of the United States, which has recently reduced interest rates. It was followed by France, and I think that other countries will follow. It seems likely that the United Kingdom is near the top of the interest rate cycle.

I congratulate my right hon. and learned Friend the Chancellor on not putting up interest rates last month. He had the right feel. A further rise now would be bad for the Government, the housing market and the internal economy. I would like to see the second and third quarter figures before any change was made.

There is one factor which, more than anything else, has prevented the Government from getting the feel-good factor from that outstanding economic performance. Increases in taxation are, without doubt, the Government's Achilles' heel. Last week, my right hon. Friend the Prime Minister said that he wanted to lead his party from the centre-right and reduce taxes as soon as possible. In the spirit of reconciliation and unity that is sweeping our party, which was illustrated by the Cabinet reshuffle, it behoves us all on the Back Benches to help the Prime Minister achieve his aim to reduce taxes and fulfil his election commitments.

The task before us is very demanding. Since the previous election--we cannot deny it, it is in the Red Book--the tax burden has risen enormously, almost to the level that it reached under the last Labour Government. The Chancellor told the Treasury and Civil Service Select Committee that his tax increases were equivalent to roughly 7p on the standard rate. Under the present plans in the Red Book, we can cut taxes only if one or more of three things happen. First, the economy could grow faster than planned in the Red Book. This year's forecast for growth was 3.25 per cent. and has already been downgraded to 2 per cent., so that is not likely.

Secondly, we could slow down our budget deficit reduction programme, which the summer book shows will be £16 billion in 1996-97. I would personally not be prepared to cut taxes by increasing the level of borrowing. I do not think that my right hon. and learned Friend the Chancellor of the Exchequer or my right hon. Friend the Prime Minister would want to either, because it would cause the pound to come under pressure and be likely to force us to increase interest rates.

We are therefore left with the final option, which is to cut public spending. We should aim to cut the control total this year by some £10 billion. If we manage to cut it by only £7 billion, we can reduce by half the burden that we have imposed on the taxpayer since 1979. Anyone who has to make cuts in industry and has done so in a recession knows that, to make cuts, one has to be tough and courageous, have the will power to force through one's cost reduction programme and pay attention to detail. One rarely achieves the objective with a few big cuts in a few areas; what is needed are thousands of small reductions in every area. I hope that events prove me

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wrong, but I sometimes--only sometimes-- doubt whether the Government have the will power to take the action required.

I could talk for an hour about ways to cut public expenditure, but I know that you would not let me, Madam Speaker. However, I shall run through a few ideas. According to the Red Book, we are aiming to increase--not cut-- real expenditure next year by 0.5 per cent. If we said that there would be no real growth, we would save £1.3 billion. I have mentioned the reduction in unemployment. That would save us around £800 million and, in addition, the extra people in work would be paying tax and national insurance contributions. We could cut half a billion pounds off the overseas aid budget. We have the sixth largest overseas aid budget in the world, but we are certainly not one of the six wealthiest countries.

We could cut £200 million from the heritage fund, as the lottery is pouring more money into sport and the arts. We should declare war on waste in the public sector--wherever we look, there is waste and overmanning. There should be a recruitment freeze on all staff except police, teachers, nurses, doctors and the armed forces. To be fair, some Departments have made savings, but in the past, any savings have not gone back to the Treasury but have immediately been re-spent by the Departments in question. Those savings should be used to cut taxes.

We should remove the cap on local authority spending, but cap the funds provided by national Government and go back to the old definition of public spending. We should put the squeeze on local authorities and force them to address the problems of waste and overmanning. My hon. Friend the Member for Dartford (Mr. Dunn) has a very good suggestion: we should penalise local authorities that do not collect council tax and rent arrears. Some local authorities have millions of pounds outstanding. We should reduce those councils' grant by a certain percentage, which they could make up by being more efficient.

If inflation comes down faster than forecast, instead of the Departments being allowed to spend the money saved, it should be clawed back. We should abolish the national health service's stores department, apart from the buying office, and thus save £50 million. We should also cut down on consultancy expenditure, advertising and glossy brochures. Personally, I do not think that we are achieving anything in Bosnia--we should bring the troops home.

The cost of illegal immigration is very high--45,000 immigrants are costing us £210 million a year. There should be quicker repatriation, so that people who have no right to be here are not able to string out the procedures and draw social security while they are here. We should make further savings in the social security budget, and I am pleased that the Government are making moves in that direction. One of the most disturbing results of our generosity with social security is the fact that the number of young girls--not widows or divorcees--who have just left school and caught on to the idea of gaining benefits by having a baby, although they are without a proper relationship or a husband, has increased threefold.

I could go on--

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