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8.50 pm
Mr. Bob Dunn (Dartford): I am slightly disappointed because I was hoping that some Labour Back Benchers would take the opportunity to endorse Labour's proposals for a new windfall tax. There has been no endorsement of that policy by Labour Members because they have now realised that a windfall tax on private utilities would be borne by the consumer; in other words, to pay for the tax, companies would be forced either to reduce investment or to charge higher prices. That would be new Labour, higher bills. I gather that the equivalent of a £3 billion increase in windfall tax on the utilities would be a 20 per cent. increase in value added tax.
I am prepared to predict that, about 10 years from now, there will be very few current Members who will be prepared to admit that they were at any time Europhiles. The Maastricht treaty of the European Union is nothing less than a detailed programme and timetable for economic, monetary and, therefore, political union.
Behind monetary union stands an unelected European central bank, which would require and have complete control of the foreign exchange reserves of each European Union member state. It would take away the right of individual member states to determine the level of short-term interest rates, exchange rates, money supply and the extent of public expenditure. As a bank, it would decide the level of taxation, a right which is now exercised by our Government and by us as democratically elected Members.
A European central bank working with the European Commission would secure the total and absolute right to exercise those powers throughout the European Union. It would be able to take punitive action against individual nation states that could not or would not conform. Such a bank, with the Commission, would become the most powerful economic and political institution ever known.
The attempt to ensure that identical economies could be established in each of the very different nation states throughout Europe is both dangerous and unrealistic. It is dangerous because, as my right hon. Friend the Member for Worthing (Sir T. Higgins) said, it would create tensions within individual states, tensions that would erupt into social and economic chaos.
We have only to look at the damage that is being done to France, where every effort to force the country into qualifying for the criteria for monetary union results in public disorder, strikes, disobedience and anarchy. There is a lack of realism, because it will take years to bring the economies of Portugal, Greece and Spain, for example, into line with those of the more advanced nations such as Britain, France and Germany.
Everyone in the House knows that Britain trades across the world. It always has and it always will. Britain is in deficit with every European Union country, with the exception of Italy. Our profitable trade is with the rest of the world. We benefit from massive inward investment from across the globe because of our refusal to impose the social chapter.
Labour is determined to end the Prime Minister's opt-out and to introduce the social chapter. I believe that that would bring back the nightmare of pre-1979 industrial anarchy. It is no secret that Germany, especially, resents the opt-out that has been won by the Prime Minister. That is because the Germans are losing investment and jobs to Britain.
Germany maintains that that gives Britain an unfair advantage and wishes to eliminate it through the imposition of the social chapter. Germany would do so by the introduction of qualified majority voting, a move supported by Labour that would probably result in all reforms introduced since 1979 being eliminated. That, combined with the actions of the European Court of Justice, would see the enforcement of uniform legislation throughout Europe. Our Parliament could do nothing about that. Once protections are swept away never to return, it is all over for those of us who cherish parliamentary democracy and accountability.
There are two significant areas of incompatibility between us and the rest of Europe, the first being pensions and the second interest rates. In the United Kingdom, the state retirement pension is paid for by those currently in work through tax payments and national insurance contributions. All private pensions are funded. It is a system through which individuals have saved money in an earmarked personal fund.
That is not true of the continent, where in Germany, France and Italy, for example, pensions are largely funded by the state: thus a time bomb is being created in Europe where an increasing number of pensioners rely on a decreasing number of workers to provide pensions for those beyond statutory retirement age. Given the increased population of retired people, European countries will reach a point where they are unable to pay for pensions and social benefits unless they tax or raise interest rates to levels that we would consider to be unacceptable and penal.
If we joined a single currency and entered the European monetary union, we would no longer have control over tax and interest rates. We would see our private pension funds being used to subsidise the rest of Europe.
The vast majority of personal borrowing in the United Kingdom is for the purchase of housing, and 90 per cent. of that is entered into at variable interest rates. Home ownership is a markedly British phenomenon. In the rest of Europe, there is little home ownership, and that which exists is on low fixed interest rates. It is clear that any rise in interest rates, for the reasons which I have given, would adversely affect British home owners more severely than their numerically fewer European counterparts.
I am opposed to a single currency and to a federal state of Europe. The Opposition parties hold a different view, with the exception of the hon. Member for Hackney, North and Stoke Newington (Ms Abbott), who made an intelligent and courageous speech.
The answer to the Labour party's commitment to Europe is simple. In The Sunday Times on 9 August 1992, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said:
Mr. Stephen Timms (Newham, North-East):
There is a sense of unreality about today's debate. On the one hand, we have the Chancellor's sunny claims about the wonderful state of the economy and our being the enterprise centre of Europe; and there are statistics that can be called upon to support that version of reality. On the other hand, however, there is the growing fear that what we have today is just another pre-election boom engineered, like Lord Lawson's, for electoral purposes, only to lead to massive economic problems after the general election.
Understandably, but undeservedly, the Government want to claim the credit for the current apparently relatively benign economic conditions, but behind those superficially relatively benign conditions lurks the threat of yet another disastrous bust just beyond the election.
The finance director of a major public limited company told me last week that, were it not for the imminent election, interest rates would have been raised well before today. That is what the real condition of the economy unfortunately requires and that is why the Chancellor has reluctantly had to increase interest rates today by 0.25 per cent. Ten days ago, one of the Chancellor's advisers, Professor Congdon, said that the state of the economy was such that a 1 per cent. rise was needed, given the scale of the problems we face.
The financial director to whom I spoke also told me that a tidal wave of cynicism would engulf any tax cuts in the Budget, because the state of the economy means
that they can be neither justified nor sustained. It was no surprise this morning to find the director of the National Institute of Economic and Social Research calling not for tax cuts but for tax increases to restrain inflation. That is the basis of the case that I want to develop today.
Like everyone else, I shall enjoy a sunny pre-election boom but, in truth, the condition of the economy demands urgent measures if we are not to slide shortly into a post-boom, post-election slump, just as we have done before. Worry about the state of the economy is spreading, and the most disturbing sign of weakness is the state of the public finances. Indeed, even some Conservative Members acknowledged that fact.
The public sector borrowing requirement remains very high, and the Chancellor's forecasts of it have proved hopelessly over-optimistic. Less than two years ago, he was predicting a PSBR this year of £13 billion, but that figure now looks absurd. Last November, he had revised it up to £22.5 billion. This summer, it was up again--to £27 billion. What he will come up with in the Budget at the end of next month is anyone's guess.
The Chancellor's sunny optimism about the future depends entirely on the same quality of forecast that he made previously. If we are to share his optimism, we have to do so on the basis of forecasts from the same stable, which has been resoundingly discredited in the past. The Confederation of British Industry estimates that next year's total borrowing requirement could well be as high as this year's, so even the slow downward trend will have ground to a halt altogether. The CBI's concerns about Government borrowing are echoed by the Institute of Directors, which describes the state of the public finances as "ever more disturbing". In a succinct and brutal critique, it says:
The trend in borrowing is downward only because of the unprecedentedly high PSBR a couple of years ago. In 1993-94, the PSBR stood at £45 billion, or 7 per cent. of gross domestic product. That is high compared with the level under the Labour Government in the late 1970s, despite what the Chancellor said. Judging the current level of borrowing against that benchmark is a thin line of defence, especially given that investment in the economy is so low. That is the Government's central economic failure, the source of the gathering storm clouds beyond the sunshine which the Chancellor exhorts us to bask in today--storm clouds pointed to by the interest rate rise announced today.
Britain is failing on investment. The level of investment has recovered more slowly in the current upturn than in any other this century and, far from being the enterprise centre of Europe, we are investing less per head and less as a proportion of gross domestic product than Portugal or Spain. The welcome investment from outside Europe cannot make up for the disastrously low levels of investment from within the United Kingdom. Our economic problems will not be conquered while that continues.
I have listened to a long succession of Conservative Members denouncing the project for the single currency, but I am doubtful whether we can overcome our
investment problems if France, Germany and Benelux--and, in all probability, Ireland--are in a single currency zone with low interest rates and we are outside, inevitably with higher rates. We will not be able to afford to stay outside the Euro-zone. We need that investment and so far we have failed to secure it. The Government have failed after 17 years to secure it. If we are to continue to have significantly higher interest rates than in continental Europe--we heard the figures for a number of countries earlier, not including Italy, and lower rates will be achieved in the Euro-zone--we will continue to fail to secure the investment that we desperately need.
One of the signs that we are heading for a short-term, unsustainable boom is the growth in consumer spending. The Chancellor's statement today announcing the interest rate rise boasts of growth in retail spending of 3.5 per cent. The summer economic forecast projected that consumer spending would grow in 1997 by 4.25 per cent. The last time consumer spending grew by that amount was in 1988: two years later, inflation was at 10 per cent. and we were in the midst of a disastrous slump. In the first part of the 1990s, consumer spending averaged less than 1 per cent. growth annually. Last year, it was 2 per cent., it is now 2.5 per cent. and next year the Treasury says it will be more than 4 per cent. That would be great if it lasted.
I questioned the Governor of the Bank of England when he attended the Treasury Select Committee in July. I asked him whether he thought that a growth in consumer spending of 4.25 per cent. was credible. He said:
Aside from interest rates, a number of other indicators are lining up to suggest the return of boom and bust. Barclays bank, in its latest quarterly review, points to signs that it finds worrying. House prices are beginning to spiral upwards, which will bring much-needed relief to people trapped in negative equity, but projections for increases of between 10 and 20 per cent. in the next year are alarming and point to overheating in the economy. The current low levels of retail stock relative to sales are picked out by Barclays because they will have a multiplier effect as they are corrected.
Barclays points to windfall gains for individuals from building society mergers which might cause a surge in consumer spending. A surge of approvals is likely, we hope, for private finance initiative projects currently stuck in the bottleneck the Government have created. A significant number of lottery-funded projects are likely to start in the next 12 months. All those factors could lead to an unsustainable, short-term surge in capital spending. Barclays concludes:
If there are to be tax cuts in next month's Budget, there is no doubt whom those cuts should benefit the most. They should be targeted on the least well-off--the people who have lost out most through the policies of the Government. The bottom tenth of the population is 18
per cent. worse off, after allowing for housing costs, than they were in 1979. Those are the people whom the Chancellor should be targeting long before he turns his attention to more handouts for well-off people by abolishing taxes on capital gains or on inheritance.
I warmly welcome the commitment that my right hon. Friend the Member for Dunfermline, East (Mr. Brown) gave earlier to reduce VAT on fuel to 5 per cent. The analysis by the Institute for Fiscal Studies in this year's "green budget" shows that that would benefit the least well-off disproportionately. It constitutes a key first step in the right direction, healing some of the wounds.
"Labour has converted to Europe because Europe has converted to socialism."
That is the reason for the commitment.
"There is nothing wrong with the Government's objectives for borrowing . . . The problem is the alarming lack of progress towards"
achieving them. It is absolutely right.
"Certainly, I would think a rate of over 4 per cent . . . would not be sustainable."
Just as the Governor was right today on interest rates, I fear that he is also right on that point.
"as things stand, the risks appear skewed to a period of demand and output growth significantly above trend."
The bank is right to warn of the risks of returning to boom and bust. If that is the outcome, after the next election we will face the dreadful problems that we had after the last one.
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