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8.20 pm
Mr. Ian Pearson (Dudley, West): Over the past few weeks, we have seen a ritual massaging of expectations from the Chancellor, talking down the scope for tax cuts in advance of the Budget. The summer economic forecast continues that process, carefully massaging figures and talking up the United Kingdom's prospects in advance of the tax cuts that are sure to come.
There is every sign that the Chancellor is playing fast and loose with inflation, stoking up a pre-election consumer boom in a cynical attempt to buy votes. One has only to look at some of the figures in the summer economic forecast to see that. It predicts that consumer spending will grow by 4¼ per cent. in 1997, which cannot easily be reconciled with projections that inflation will fall back to 2¼ per cent. next year. Both M0 and M4 are outside their monetary range.
I do not believe reports that inflation is dead. It is essential that we continue to bear down on inflation. Frankly, I am not convinced that we have done that sufficiently. The Government's record on inflation is poor by comparative standards. We are 10th or 11th out of 15 EU countries, depending on whether the measure of inflation is the current year method or the average inflation rate of one year compared with the previous, which seems to be the criterion that is likely to be adopted under Maastricht.
Mr. Tim Smith:
Will the hon. Gentleman remind the House what the average rate of inflation was under the last Labour Government?
Mr. Pearson:
I remind the House that I had just left school and was at university during the last Labour Government.
The Maastricht convergence criteria--that an economy has to be within 1.5 per cent. of the best three countries on inflation--is a useful discipline, but we should go further if we are serious about bearing down on inflation. As a policy on inflation, we should aim to be in the bottom quartile of EU countries in the medium term. Depending on the method used to calculate inflation, that implies a maximum inflation rate of 1.4 per cent. or 1.6
per cent. currently. I see no reason why, in the medium term, Britain should not aim to have inflation rates in the lowest quartile of our competitors. If we are to have a competitive, modern economy, our inflation record must be at least as good as that of Germany, France, the Benelux countries and Finland, which are some of the best performing countries at the moment.
With manufacturing flat on its back, but most of the economy starting to go like a train and consumer spending looking set to boom, it would be stupid and irresponsible for the Chancellor to look for a further ¼ per cent. cut in interest rates at the end of the month. I suspect that the financial markets might let him get away with it, but the best course of action at the moment would be for interest rates to remain at the same level.
I am concerned about the future of manufacturing industry. Interest rates are a crude weapon at the best of times, and I believe that what is required in the Budget--preferably sooner--are targeted initiatives to stimulate manufacturing and the construction sector, such as the phased release of local authority housing capital receipts. It is mind boggling that the Government have not considered and implemented that as an option.
The summer economic forecast revises down projected growth figures from 3 per cent. to 2½ per cent. for this financial year. It is part of a miserable track record on growth. The average growth rate since 1979 has been just 1.9 per cent. a year--worse than any other Group of Seven country or, indeed, any other major EU country. In the 1990s, the United Kingdom economy growth rate has averaged less than 1 per cent.
I believe that we should set a target and try to increase the sustainable trend rate of growth to 3 per cent. per annum. That would put growth rates back almost to what they were in the 1960s, and almost to what the Government achieved in the 1980s. That is a wholly acceptable and sustainable policy objective. It would, however, require far better performance than the Government have achieved to date.
At the heart of such a policy objective is an improvement in this country's manufacturing sector. It is a disgrace that the summer economic forecast shows that the trade balance in non-oil goods was in deficit to the tune of £15¾ billion in the past financial year, which is projected to increase by a further £3 billion to £18¾ billion in 1996, and to be still higher in 1997. I accept that oil, services and interest on profits and dividends have helped to pull back some of our trade performance, but we are still not doing nearly good enough, particularly when export profit margins are still high, providing strong incentives for UK firms to supply foreign markets, and at a time when profits and the rate of return on capital remain high by historical standards.
Some promising leading indicators have come out of the Confederation of British Industry and the British Chamber of Commerce recently, but all too often the promise has been "jam tomorrow," and that has not happened. We have to do better, and we need to look at initiatives to support manufacturing industry, such as tax breaks for research and development, restructuring the capital gains tax system to encourage greater long-term investment. We also need to examine the entire structure of the advance corporation tax system if we are to provide the support that United Kingdom manufacturing industry needs.
Finally, on the state of the nation's finances, at the time of the November 1994 Budget, when optimism was at a peak, the PSBR for 1995-96 and 1996-97 was forecast at 3 per cent. and 1¾ per cent. of GDP respectively. The gap between the outturn now expected in this summer's economic forecast, and the one expected little more than a year ago, is £13.9 billion. That is equivalent to 7p in the pound on the basic rate of income tax. What is more, the public sector ratio of net debt to GDP will have jumped from 27 per cent. in 1991 to 46 per cent. at the end of this year. It is not a sustainable performance, and it is a disgraceful record.
Mr. Tim Smith (Beaconsfield):
Listening to the debate, one is inclined to ask oneself whether Labour Members have read the "Summer Economic Forecast" which we are supposed to be discussing. The hon. Member for Dudley, West (Mr. Pearson) spoke of Britain's exports. What has the forecast to say about that? It says:
The document also states:
What irritates me about debates of this kind is the way in which Labour Members constantly run down Britain's manufacturing industry. The hon. Member for Dudley, West said that manufacturing was flat on its back. That is an outrageous criticism of British manufacturing: some British manufacturing companies can now take on the world. We have world-class companies in a range of industries. I am thinking particularly of pharmaceutical companies--very successful British companies in which there has been a tremendous amount of foreign investment, especially from America. Aerospace is
another example. There has been investment by British Aerospace, and by many other successful companies--such as Shorts in Northern Ireland, owned by Bombardier of Canada.
Mr. Pearson:
I am not convinced by what the hon. Gentleman is saying about our export performance. At this stage in the economic cycle, our balance of payments should be in surplus. We cannot get around the fact that we have a deficit in manufactured goods to the tune of £18 billion or more.
"UK trade is highly competitive. Much of the gain to cost competitiveness and all of the gain to import price competitiveness have been maintained since sterling's exit from the ERM in 1992."
It also says that in 1995
"exports of non-oil goods"--
that is precisely what the hon. Gentleman was concerned about--
"grew by 8¼ per cent."
I would have thought that an 8 per cent. growth rate in exports was pretty good--perhaps even comparable to the kind of growth that the right hon. Member for Dunfermline, East (Mr. Brown) apparently thinks the whole economy should enjoy, as does Thailand, perhaps rather unrealistically.
"Exports fell slightly in the fourth quarter of last year, when activity in Europe weakened, but then increased by 3½ per cent in the first quarter of this year."
I consider that a pretty strong export position. It is ludicrous to complain that we have a large imbalance in terms of non-oil trade: if we view the current account as a whole, we see that this country is broadly in balance. The current account deficit is about 0.5 per cent. of GDP, a very small proportion.
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