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10.25 am
Mr. Denzil Davies (Llanelli): I should also like to congratulate my hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) on her courage to stand up against the latest fashion or fetish to hand power over monetary policy to the Bank of England. I also congratulate the hon. Member for Twickenham (Dr. Cable) and my hon. Friend the Member for Hove (Mr. Caplin) on their excellent maiden speeches. Their predecessors will be remembered with affection by colleagues on both sides of the House. Those of us who have been in the House for some time knew them both, and will remember them with such affection.
I admire the confidence with which those maiden speakers contributed to a debate on a rather arcane and complicated subject. In particular, I admire the certainty, I will not say absolutism, of the hon. Member for Twickenham. He offered us a clear exposition of how central bank independence would solve so many of our problems. At the end of his speech, however, a note of doubt crept in. Perhaps when he was a high-powered executive with Shell he was not allowed to show such a feeling, but now we are in the business of politics. That doubt stemmed from his belief that the Government's decision was a necessary but not a sufficient condition of economic policy.
Mr. Davies:
I note my hon. Friend's comment.
The hon. Member for Twickenham then asked about fiscal policy, responsibility for which is still left with politicians, whom we cannot trust. What really concerned me was the implication in his speech that my right hon. Friend the Chancellor will play fast and loose with the country's money.
That is not a good message to send out. It appears to say," I, the Chancellor, am not a man you can trust. You have just elected me, but you cannot trust me with your money. I may be the Chancellor, but I will do terrible things to your interest rates. I will play fast and loose with your money. You will still allow me to increase taxes, or not, as the case might be. You have still put me in charge of public expenditure, but presumably I'm not to be trusted with that, either."
That is a quite extraordinary message for us politicians to send out. The idea is that, when it comes to the Bank of England and other quangoes, we politicians can no longer be trusted. Because of that, we must transfer power to the Bank of England. Then we wonder why the public do not trust us very much and feel alienated from us. But if we tell them that they cannot trust us with their money, of all things, we cannot expect them to take us seriously.
I was saddened by the hon. Gentleman's implication about the Chancellor, whom I have known for a long time. I have a high regard for him and I would trust him with my money, but, apparently, colleagues on both sides of the House are not prepared to do so.
As I have said, the hon. Member for Twickenham referred to my right hon. Friend's decision as a necessary but not sufficient condition of economic policy. The Government still have power over fiscal budgetary policy. The hon. Gentleman said that we had to be careful to do something about that to stop those terrible bankers putting interest rates too high.
Mr. Davies:
It is no good for the hon. Gentleman denying it, because that is exactly what he said. If interest rates are set too high, the value of the pound might go up. The hon. Gentleman may say that that is right, but I understood from reading Mr. Gavyn Davies and other people who write in the newspapers that the sole criterion for fixing interest rates would be domestic. I understood that the sole criterion would be hitting the inflation target--it is an odd sort of target of "2.5 per cent. or less", and I am not sure how one hits a target that is not precise, but there we are. Perhaps we shall be told about such things when my right hon. Friend the Chancellor of the Exchequer makes a speech at the Mansion House or somewhere.
We were told that we could not have bankers putting up interest rates too much, as that would affect the pound. That is totally irrelevant, as we have now given them independence. We are now saying, "Let us use budgetary policy and put up taxes, so that we can stop the bankers putting up interest rates." But this morning, hon. Members have said what a marvellous thing it is to split monetary policy from fiscal policy.
I am not an economist, and I cannot understand those long equations that always end in zero, but I can see that the United States of America has a splendid Federal Bank, and a high budget deficit. It has been struggling to reduce it ever since President Reagan was in office. Germany has a very high budget deficit.
Mr. Radice:
Because of east Germany.
Mr. Davies:
My hon. Friend says that that is because of east Germany, and it probably is. But I have it on respected academic authority that there is considerable instability in the bond markets in the world. One reason, it is said--neither I nor anyone else can prove it--is that, over the past 10 or 15 years, we have begun to separate budgetary policy from fiscal policy. As a result, Governments will reflate the economy; because they cannot now touch interest rates, they will achieve the aim in a different way. The argument is not one-sided.
I do not believe that we should be slaves to every jot and comma in our manifesto--apparently that is the latest fashion these days, but I do not believe it. Obviously, economic crises arise and action has to be taken, but in this case there could have been consultation.
The Economic Secretary to the Treasury (Mrs. Helen Liddell):
Will my right hon. Friend give way?
Mr. Davies:
I shall give way in a moment.
The manifesto made it quite clear that we were to reform the Bank of England to create a monetary committee. I agree with that--the advice from the Governor always tended to be too narrowly based. We said the same thing in the business manifesto, which is important. It states:
I have a little question to ask my hon. Friend the Economic Secretary. I am just a pedantic lawyer, but I should like to know on what authority the monetary committee of the Bank of England made its decision on interest rates last week . It decided to put them up, but that is irrelevant. The Queen's Speech states:
I then tabled a question asking on what authority the grand people--the brilliant economists--decided to put up people's interest rates by a quarter of 1 per cent. I thought that I might get an answer from my hon. Friend the Economic Secretary, but I did not. She merely answered:
We were told in the Queen's Speech that there would be a Bill--presumably it was thought at the time that a Bill was necessary--to transfer operational responsibility. I was a bit surprised, as I thought that, under the Bank of England Act 1946--the terrible nationalisation Act under which directives could be issued--a letter to the Governor telling him what he could do would have been sufficient. Perhaps I was wrong.
Mr. Geraint Davies (Croydon, Central):
Many people may be surprised to see me here today giving my maiden speech--none more so than David Congdon, my predecessor, who served for 16 years on Croydon council and was its deputy leader. I have served for 11 years on Croydon council and entered Parliament as its leader. Therefore, David Congdon and I are old sparring partners. I remember with fond affection looking across the chamber at him while making my contribution, and him shouting, "Rubbish" at me. Beyond the heat of political exchange, David Congdon is a mild-mannered person of considerable ability, devoted to the good of the town. I have no hesitation in stating my appreciation of him for his long record of service to the town.
Croydon--and Croydon, Central, which I represent--is more than just a town. It is an emerging European city that commands one fifth of the capital's economy, and the largest London borough . As leader of the council, I participated in the formation of a partnership that put Croydon at the centre of business investment in the south-east. The council has inspired the new tram link that will be London's flagship for environmentally friendly transport systems. It has brought about a renaissance in culture in the south of London--in terms of the new Warehouse theatre, the Fairfield halls redevelopment, and a planned new venue in east Croydon that we see as an international business and music centre for the south of London.
However, what makes Croydon Croydon is the rich diversity of people in it. I am a case in point: some hon. Members may be saying, "Who is this bloke? He is a Welshman in exile." But I am the second Geraint to represent Croydon. The first, Geraint Williams, represented Croydon for 17 years. Recent representatives of Croydon, from my hon. Friend the Member for Walsall, North (Mr. Winnick) to Lord Bernard Weatherill, have all understood the importance of supporting the rich tapestry of cultures in Croydon.
The constituency has about 80,000 electors, and extends from the north, from south Norwood, down through the Manhattan skyline of Croydon, to New Addington--I have been proud to represent that unique community for 11 years. The people of Croydon and New Addington are looking towards the new Government, not just to provide safer streets, smaller class sizes and a greater London authority, but to deliver prosperity and jobs for the future.
The ingredients for that success include the empowerment of the individual through training and education, partnership with industry and taking a leading approach in the future of our Europe. We must not lose sovereignty in the name of defending it; instead, we must robustly champion Britain's interests in a new Europe. That means putting jobs--whether in terms of youth employment, the long-term unemployed, small businesses or cutting bureaucracy--at the top of the agenda. It is about getting Europe back to work.
Central to that aim is the creation of conditions for long-term investment in Britain. That means that we need an environment in which short-term interest rates are not set according to political considerations, but in the best interests of our economy.
My right hon. Friend the Chancellor's decision to delegate operational responsibility for setting interest rates was a master stroke, which delivered overnight a reduction in the long-term borrowing costs of British industry. It was a master stroke which brought about a system of accountability enabling my right hon. Friend the Chancellor to intervene in a crisis. He will not intervene before polling day in order to keep interest rates artificially low--which we have seen--but will use the policy to enable us to pursue our long-term interests.
Some hon. Members may say, "What about Eddie George--he has just put up interest rates by another quarter per cent?"; but we have just seen £28 billion of consumer spending pushed into the economy through the flotation of building societies--that amount was forecast as £21 billion in February. At a time when the housing market is also taking off, that marginal increase was inevitable, irrespective of who was in charge.
As for exchange rates, the key to maintaining stable exchange rates for the future is low inflation, and the key to that is proper independent management of interest rates. The long-term borrowing rates are down, even though the short-term rates have gone up, which shows that what has been done is correct.
Others have said that, having got into power, we have given away power to the Bank of England. In reality, there is a system of accountability; in addition, responsibility for the supervision of high street banks has been taken away from the Bank of England and given to the Securities and Investments Board. Taken together, therefore, the reforms narrow the responsibility of the Bank of England to manage monetary policy.
Some have asked, what about consultation? In reality, long periods of consultation and uncertainty would have whipped up the money markets, which would have sent up interest rates and resulted in lower investment and higher mortgage rates. It would have been an irresponsible thing to do. My right hon. Friend the Chancellor has made the right decision, with great courage. His decision allows us to set interest rates within the wider objectives of inflation and economic growth, and, in so doing, avoid creating damaging short-term swings in interest rates and investment.
"We propose a new monetary policy committee"--
that is quite right--
"to decide on the advice which the Bank of England should give to the chancellor."
It did not mention the other policy, and no form of casuistry or sophistry from the Treasury Bench can explain that away.
"a Bill will be introduced to give the Bank of England operational responsibility for setting interest rates".
The Bill has not arrived yet, and I have tabled a question asking when it will. I have received no answer.
"Operational responsibility for setting official interest rates has been transferred to the Bank of England."--[Official Report, 10 June 1997; Vol. 295, c. 395.]
I know that. I was asking what the authority was.
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