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Mr. Denis MacShane (Rotherham): Is the Chancellor aware that yesterday there was a critique of his policy launch in Yorkshire which said that the problem with the British economy is too much slow growth industry, too little innovation, too few good managers, too little investment in research and development, and too many
children leaving school ill educated? That report was produced by the Yorkshire and Humberside regional office of the Government and it was launched by the Deputy Prime Minister. If the Deputy Prime Minister was telling the truth yesterday, what on earth is he doing today?
Mr. Clarke: I have not heard this particular version of the Deputy Prime Minister's launch in Yorkshire yesterday. I work with the Deputy Prime Minister, I know the Deputy Prime Minister, and the Deputy Prime Minister agrees with me on economic policy and shares my description of what is happening to the British economy. In desperation, the Labour party is saying that the Deputy Prime Minister is on its side on this issue--it is deluding itself. Those matters have been tackled, which is why things are going better.
I refer to the decisions on inflation and interest rates. All this has been achieved against a backdrop of falling inflation. Underlying inflation has been below 4 per cent. for three and a half years, the longest period of sustained low inflation for almost 50 years. We are well on course to hit the Government's inflation target of 2½ per cent. or less by the end of the year. Doubts have been raised about that achievement many times in debate in the House, but I do not think that we shall hear much about it from either side today. I expect underlying inflation to be 2½ per cent. by the end of 1996 and 2¼ per cent. by the middle of 1997.
Mr. Ken Livingstone (Brent, East):
Will the Chancellor give way?
Mr. Clarke:
No, I must address the key points and explain what has happened in the past six weeks. The excellent inflation performance has enabled me to cut interest rates four times since last year's Budget. The most recent cut--to 5¾ per cent.--occurred after my monthly meeting with the Governor on 5 June. The minutes of that meeting--which were published today--show that, on balance, the Governor thought that interest rates at that time should remain at 6 per cent. It was a fine judgment, and I decided to move to 5¾ per cent.
That decision will be analysed, but we must examine the background in order to see how the Governor and I are handling the pursuit of a policy to which we are strongly committed. The inflation record that I cited--our best for 50 years--proves that the Ken and Eddie show is a pretty successful team performance. Six weeks ago, the Governor and I differed by just ¼ per cent. The Governor agrees that, by any standards, it is a narrow debate. He accepts, as I do, that there are risks on both sides. In his Mansion House speech--his public pronouncement made shortly after our meeting--he said:
We came to a decision. We share a commitment to achieving a low inflation economy, although we are often reported as disagreeing about other matters. Yesterday,
by chance, I had lunch with the Governor and we were amused that, after giving evidence before the Select Committee for five hours, commentators had to scratch around trying to find any differences between us.
My final decision six weeks ago was based on careful assessment and particularly on the lack of inflationary pressures in the economy. We have easing cost pressures, spectacularly good producer prices--both input and output prices--spare capacity and moderate earnings growth which has abated slightly since then. I judged that another ¼ per cent. cut was sensible and posed no threat to the Government's inflation target. That target must continue to guide me; I will not take any risks with inflation. On the basis of that determination, the Governor and I work comfortably together in pursuit of the same objectives.
Since that meeting--I do not know whether we will ever know whether the ¼ per cent. cut was quite right; it may become clear in 18 months--the good news on inflation has continued, with some of the lowest rates of producer price inflation for a decade and input prices nearly 5 per cent. lower than a year ago. Moderation in earnings growth is continuing, with earnings growth at 3½ per cent. in May--down from 3¾ per cent. in April. In the immediate aftermath, inflationary pressures remain very subdued and I am confident that, 18 months out, we will still be on a safe course.
I sought--and, rather surprisingly, got--the views of the right hon. Member for Dunfermline, East regarding the interest rate change. He gave rather bizarre reasons for supporting it. In the past, he has advocated that I reduce interest rates in each and every circumstance. I hope that he will study the minutes of the meetings carefully, begin to cotton on to what is happening and appreciate that we have combined the recovery with the lowest inflation rates that this country has seen for half a century.
If the right hon. Gentleman is minded to address those issues in his speech, I ask him also to clarify other issues besides interest rates. Does he agree with my inflation target? He does not have one of his own, but what does he think of my target of 2½ per cent? Does he dare comment? Does he agree with my borrowing target? That was the other issue raised. [Interruption.] There is some excitement about borrowing; I look forward to discussing with a big-spending political party how we will tackle borrowing in this country. If we are to have a serious debate about borrowing, the right hon. Gentleman should say whether he agrees with my borrowing target.
Mr. Clarke:
Bringing the Budget towards balance over the medium term is the only objective that I have ever pursued.
Does the right hon. Gentleman agree with my spending target, to bring expenditure down to 40 per cent. of GDP? He is not usually able to answer that. Does he agree with my taxation target, to get the basic rate down, when we can afford it, to 20p in the pound? The truth is that he does not dare to answer any of those questions. He knows the reality that lies behind his silence. He knows that all those objectives would be utterly beyond the reach of any Labour Government who could ever get elected to power in this country.
The right hon. Gentleman will not tell us his opinion on what I do, and he will not tell us what he wants to do. That is the difference between Government and Opposition.
Mr. Clarke:
I shall deal with borrowing and then give way to the hon. Member for Coventry, North-West (Mr. Robinson), who has been persistent.
Government borrowing is steadily coming down from the £45 billion that we reached at one point. The PSBR in the past financial year was £32.2 billion--£3 billion higher than I anticipated at the time of the Budget. That was because people paid less taxes than I expected at the time of the Budget. In the forecast, I expect the PSBR to continue to come down to £27 billion in 1996-97, and to come down further to £23 billion in 1997-98. My commitment to keep the PSBR coming down towards balance in the medium term remains as strong as ever. Under the right hon. Member for Dunfermline, East, the PSBR would go in only one direction--upwards yet again; up and up and threatening our recovery.
Much nonsense has been written in recent days about our revenue forecasts. Let me set the record straight so that we are all clear about how the forecasts have been adjusted. Tax revenues are rising quite strongly because the economy is strengthening. It is precisely because our tax revenues are rising and because we are holding public spending so firm that public borrowing is falling, as I have just described. Where the forecasts have changed is that taxes are not rising quite as fast as we expected and borrowing is not falling as fast as we expected. People are not paying as much tax as I expected, even after the tax cuts that I made last November. That, if anybody wants to address what is set out in the forecasts, is the real nature of the issue.
"There is a . . . downside risk to activity in the short term. There is, on the other hand, accumulating evidence of strengthening demand . . . which could come to represent an upside risk to the inflation target, further ahead."
As we can see from those remarks, he was concentrating on what he believed to be the dangers of the upside demand growing too quickly and not on the depressing statistics referred to by the right hon. Member for Dunfermline, East.
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