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7.8 pm
Mr. Austin Mitchell (Great Grimsby): I will not follow the hon. Member for Saffron Walden (Sir A. Haselhurst) in his adventure in the pluperfect subjunctive, but I noted with interest that he had more to say about what the Labour party has advocated than about his party's Budget. That is probably a wise course.
There is an old saying that a Budget that plays well on the day is viewed as pretty disastrous six months later, whereas a Budget that is disastrous on the day is viewed better six months later. Frankly, that is the only hope for the Budget, because it is a rag-bag of pits and pieces. A curate's egg is good in parts--the Budget was a crate of curate's eggs. That is surprising, because the Budget was an opportunity for great ingenuity and inventiveness.
We have a Conservative party with its back against the wall, facing defeat, and an inventive Chancellor. I am an admirer of the Chancellor. He is extremely clever, insouciant, fun, and capable of clever footwork. If there were rabbits in the hat, he would be the Chancellor to find them. Those rabbits would be numerous, slightly overweight perhaps, and wearing big double bows and Hush Puppies. They would be beautifully fluffed and spruced up, ready to be exhibited to the country. Not a rabbit did we see. That must suggest either that things are worse than the Chancellor has told us, or that the Government's position is more desperate than we thought.
The only rabbit pulled out of the hat was deep-frozen-- the public finance initiative. It is a way of pretending to do something; a policy of build now, pay later. If one gets private finance to invest in the public sector, it means that one does not have to pay for a building to be built, but, over the years, a bigger bill must be paid to the people who built it in the first place. We will not even get those buildings soon, so it is clear that it is a policy of building slightly later than the Government need to, and letting a Labour Government pay for it when they come in.
Mr. MacShane:
Does my hon. Friend agree that perhaps the Chancellor has a rabbit in his hat, but is saving it for a little later next year?
Mr. Mitchell:
I do not know. It is getting desperately late for rabbits, as the season is getting colder. Rabbits do not have much chance of surviving as we reach the end of November. I do not offer great prospects for rabbits. The Budget spells myxomatosis for those rabbits.
We are confronted by two problems, one political and one economic. We are confronted by a recovery that is flagging and at the end of its tether and a Government who are flagging at the end of their tether. The Chancellor did not do much about either of those problems. The political problem is that of a party that is addicted to cutting taxes. It is now quite rightly seen by the public, however, as the high tax party. They believe it is the party that increases taxes.
The Chancellor did nothing to dissipate that image. There was a useful reduction in tax on income from savings, which I welcome, because it is an obviously sensible measure. I also welcome the increase in allowances to take more people out of tax. It is right to do that. Both those measures are good, but they will not have people dancing in the streets of Grimsby or elsewhere, because they were not major measures.
Conservative Members' reaction to the reduction of 1p on the basic rate of income tax had all the warmth of an open fridge door. That reduction will not offset the increase in taxes for which the Government have been responsible since the election. It will not offset people's sense of betrayal about those increased taxes. My leader was perfectly right to describe the Budget as the "1p off, 7p on" Budget. That is the keynote of the Government's policy, and that is what the public will remember.
That 1p reduction would not get past consumer protection legislation were it a sale offer. A reduced sale good has had to have been on sale in the store at the price from which it was supposed to have been reduced, but to increase taxes by 7p and to reduce them by 1p does not fulfil the terms of that legislation. That measure will not help the Conservatives at the election, because the people will not be fooled again. It will not get rid of the feeling that the country has been treated abominably by the Government, who promised not to increase taxes but then increased them massively.
The Budget has failed disastrously to overcome the second problem of the economy. We had a welcome and belated recovery as a result of the Government being forced out of the exchange rate mechanism. They were right to come out, because we should never have gone into that insane trap in the first place. By coming out it, the Government were allowed to reduce interest rates, which allowed the recovery to develop.
Our recovery was not as great as the Italian one, because the Italians wisely devalued by more than we did, and became much more competitive. They were helped in that procedure by something that should be adopted in this country, too, because the Italians took most of the Government politicians off to gaol. The result was a collapse in confidence in the lira, which made Italian manufactured exports even more competitive. It is a very good economic management to take one's politicians to gaol. It destroys confidence in the currency, which makes exports competitive and taxes imports. I commend that strategy to the Government, who should start looking around their Benches for those appropriate for that treatment.
We witnessed an economic recovery in the country, but it is clear that the Chancellor and the Governor of the Bank of England between them set out deliberately to dampen that recovery, if not to abort it, because the Bank of England is obsessed with not letting manufacturers
increase their manufacturing prices. Those manufacturers constantly receive sermons from the Governor, who knows nothing about the dynamics of manufacturing.
Through the ERM deflation, British manufacturers kept exports going without a profit, just to keep their markets and their production going. They were in a desperate situation. They were starved, anorexic, because of the pressures on profits. They needed to increase prices to generate profits to pay off the debts accumulated at that time. When they did so, however, they were lectured by the Governor, who was determined to stop those price increases.
British manufacturers had to increase their prices, because one of the main causes of our tragedy is that the rate of return on manufacturing is half the rate of return on other commercial undertakings in other markets. It is also less than the rate of return on manufacturing in competitor countries. That is why we are not investing, and not expanding production. We are not producing enough profit--enough return--to finance the investment that the country needs.
Manufacturing needed a devaluation because of the way it had been squeezed and hit by deflation. Devaluation represented an opportunity to generate more profit, and it had to be taken. The Bank of England, however, determined as ever to maintain its discipline, and empowered by the published minutes of its meetings with the Chancellor, which give the Governor a platform from which to preach his usual ritual insanities to the country, was determined not to give manufacturers that opportunity. As a result, interest rates were kept far too high when the rate of inflation was coming down. As a result, the value of the pound was kept at a level far higher than it should have been.
In the past couple of years, real interest rates, allowing for inflation, have been double the historic average of real interest rates since the war. The result was an overvalued exchange rate, which was made worse because interest rates were then increased. The fall in those rates was halted, and the value of the pound was pushed back up. By those procedures, the recovery was aborted. I do not know why. Was it to be communautaire? Was it to show a spirit of good will and shared suffering with the French?
Was it motivated by a desire to discipline manufacturers?
What was supposed to be an export-led recovery has been halted. Imports have begun to rise again. In the three months to August, United Kingdom exports--trade with the world, including the European Community--went up by 5 per cent., while manufactured imports went up 9 per cent. Manufactured output went up 1 per cent.
The latest non-EC figures, which come out in advance of those EC figures, are even worse. The export-led recovery is tailing off, and imports are beginning to rise again. Imports have a dominant share of our current market--that share has trebled to about 50 per cent. of the market for manufactures. As a result, the manufacturing trade deficit is now widening again. It was £7.1 billion in 1992, but this year the figure, at an annual rate, is
£8.9 billion. Such is the deficit in manufactured trade.
Because of the rise in the value of the pound, our relative export trade prices are now 10 per cent. higher than they were in the fourth quarter of 1986. It is no wonder, therefore, that the growth rate is slowing; that
manufacturing production has not returned to the level achieved in 1990, and is only a few points above that achieved in 1973. What an abysmal record. It is a record that has been beaten only by a few other countries. Nearly every country has increased manufacturing production by more than half in that period. Very few countries have not increased it. Our pathetic record explains the huge rise in unemployment, which is basically due to the reduction in manufacturing jobs.
The recovery that we have experienced since our departure from the ERM gives us an opportunity to reverse the record. The best way to do that--the action that the Chancellor needs to take now to atone for his failure to do anything in the Budget--is to reduce interest rates. He should take the Governor by the scruff of the neck and tell him, "Eddie, reduce interest rates."
They should be reduced by 2 per cent.--3 per cent. would be better, but 2 per cent. would provide some help, if that is the most that can be forced out of the Governor. A reduction in the exchange rate will turn the economy round, and manufacturers will realise that investment will pay off because exports will pay and the recovery will be sustained. Unless we take that action, we shall not obtain the investment in increased production that we need. The only way to boost exports, to tax imports and to increase productivity--which always increases with production-- is to have a competitive exchange rate.
We need to turn round the economy, and the Chancellor needs to take steps to do that now. He has a great opportunity to do so while Europe is immersed in the monetary union folly, and while the French are sacrificing their economy to the policy of the franc fort. Here is our opportunity to revive our economy and boost a recovery that began with our departure from the ERM, but is now petering out. That recovery desperately needs boosting-- we can and must boost it by reducing interest rates.
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