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8.53 pm
Mr. Nicholas Budgen (Wolverhampton, South-West): I want to make only one point, about the importance of monetary policy, and to invite the Chancellor to give us a better, more detailed explanation of his monetary policy.
Tonight, we have very reasonably heard many pleas for better treatment. The hon. Member for Dudley, West (Mr Pearson) believes--as no doubt do many members of the Labour party--that the state is the great provider of economic prosperity. He believes that, provided he can
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Mr. Pearson:
I believe that the state does have a role to play in ensuring the necessary conditions in which companies can compete in a modern economy. I do not pretend to say that the state should do everything; it patently should not.
Mr. Budgen:
I am glad that the hon. Gentleman has modified his position, because it seemed to me that, every time he mentioned an activity, he suggested that it could move from poverty to prosperity as a result of state action.
We all know that the role of the state, although much enlarged--many of us believe that it should be diminished--is not the primary factor in deciding this country's prosperity. That is decided by the energy and ingenuity of our fellow citizens.
When we study the overall effect of the Budget and ask how much it decides our future prosperity, we appreciate that the Budget changes are relatively insignificant. The Chancellor tells us that he has taken £1.8 billion out of the economy. That, he says, is a tight Budget, which will mean that it will not, or may not, be necessary to increase interest rates in future.
I wish to emphasise the importance of monetary policy, not only because I believe that it is better that monetary policy should be decided in this country rather than in an enlarged Bundesbank, but because it has an enormous effect on the British economy. As I demonstrated, the effect of the Budget changes is equivalent to a tiny reduction in demand but, as my hon. Friend the Member for Rutland and Melton (Mr. Duncan) said, we are already witnessing considerable increases in asset prices.
In the past 18 months or so, the general level of the value of stocks and shares has increased by 27 per cent. In the past quarter, there has been a 6 per cent. increase in the value of housing in the south-east. In a recent short period, consumer spending has increased by 28 per cent. That means that, when monetary policy is lax, there can be as much as a £2 billion increase in consumer demand in any one month. Lax monetary policy can easily produce a £24 billion increase in demand in a year. The great mistake of the Barber boom and of the Lawson boom was to allow monetary policy to become too lax.
When monetary policy is too lax, it is extremely pleasant for everyone--in the initial period. Asset prices rise; everyone feels richer; the feel-good factor returns; inflation is low; and everything seems lovely. Then it is possible to talk proudly of an economic miracle. It is only later, when interest rates have to be put up--often very high--that we realise the importance of monetary policy.
I say all this because it seems to me that the Chancellor's account of his monetary policy was cursory to the extent of being non-existent. At column 156 in the Official Report on 26 November, he makes a joke about Eddie keeping him steady, saying that he intends to "continue to be canny"; but thanks to the new arrangements between the Chancellor and the Governor of the Bank of England, we can read the continuing dialogue between them. The Bank has said many times that it is concerned about the rate at which the money supply is
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It is therefore not enough, I respectfully suggest, to make a joke about the dialogue between the Chancellor and Eddie; it is necessary for the Chancellor to tell us whether he is a monetarist. He certainly never was one before. I have had many conversations with him over the past 30 years. He was an unrepentant supporter of the Barber and Lawson booms. We should like to know whether he has learnt from those mistakes, whether he now believes that monetary policy is important and whether he believes that it should continue to be controlled from this country and by the House.
Mr. Tim Smith (Beaconsfield):
Looking back 10 or 15 years to past Budget statements, we find that Chancellors of the Exchequer did preface their remarks with long descriptions of the state of the world's economy and of what had happened to the United Kingdom economy over the previous 12 months. They often included a great deal of detailed information about monetary policy, too. Not only were the public bored--so were Members of the House of Commons. The fact that the Chancellor referred only briefly to monetary policy in his Budget statement does not mean that he does not take the issue seriously. Indeed, the fact that he has taken the trouble to publish the minutes of his meetings with the Governor of the Bank every six weeks is a sign of how seriously he takes monetary policy.
I have said before in the House--my view is confirmed by this latest Budget--that I think we have in our present Chancellor one of the most successful Chancellors since the second world war, in terms of the judgments that he has had to make. He has had to make some finely balanced judgments, and he continues to make them. My hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) referred to a number of factors which suggest inflationary pressures in the economy, but my hon. Friend the Member for Colne Valley (Mr. Riddick) referred to other factors suggesting that inflationary pressures are not as great as some would claim. In the minutes of the Chancellor's meetings with the Governor, these various factors are set out. In the end, someone has to weigh them up and judge whether it is necessary to increase interest rates. It is thus not true to say that my right hon. and learned Friend is unconcerned about monetary policy.
This was an excellent Budget. I also thought that the Secretary of State for Health made an outstanding speech this afternoon, in which he explained that the
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The Budget gives priority to target areas of public spending. It also reduces public borrowing and, to some extent, taxation. The Financial Secretary knows that I have campaigned long and hard for tax simplification, so I was pleased to hear in the Budget statement that the Inland Revenue is set to take the tax law rewrite programme forward. I welcome the fact that my noble Friend Lord Howe will chair the committee that will oversee that programme. Finance Bills have become far too big and complicated and at last something will be done about that.
I have always favoured the idea of a broad tax base and low tax rates. If we are to achieve those, we cannot afford to have leakage, and clearly there has been leakage. The Chancellor was right to place new emphasis on securing the tax base through a number of measures that appear in the Budget, such as phasing out profit-related pay and introducing 6 per cent. capital allowances for long-life assets.
The Opposition have suggested that the Chancellor does not care about people on lower incomes. However, the Red Book shows how the reductions in income tax have been allocated. Whereas the cost of reducing the basic rate of income tax to 23p is £1,250 million on a non-indexed base, the cost of increasing personal allowances by £200 over indexation is more than that, at £1,290 million. More money has been devoted to taking people out of the tax net altogether than to lowering the standard rate. That is the same balance as in last year's Budget. The Chancellor could have reduced the standard rate by 2p in the pound, but he chose not to do so. He reached a sensible balance, which benefits all taxpayers, but which greatly benefits taxpayers who pay relatively small sums in tax and takes quite a few people out of the tax net altogether.
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