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10.41 am
Mr. Michael Jack (Fylde): This has been an extremely interesting debate, and one of the few opportunities we have had since the new Government took office to probe and question an important and fundamental change in the way in which economic policy is to be set in the United Kingdom. To that end, I welcome the new Economic Secretary to the Dispatch Box, and I wish her well at the Treasury.
I congratulate the hon. Members for Twickenham (Dr. Cable), for Hove (Mr. Caplin) and for Croydon, Central (Mr. Davies) on their maiden speeches. The hon. Member for Croydon, Central showed that he will be a real asset to the Labour Whips, because he performed well in a short time, and sat down when required. He will be doing a lot of that in future. I was also grateful to all three new Members for their kind words about my former colleagues, Toby Jessel, Tim Sainsbury and David Congdon, who will appreciate the remarks of their successors.
I also congratulate the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) on having maintained her reputation for robustness and independence of thinking by challenging, in a wholly un-Mandelsonlike way, the accepted treatise followed by the Labour party. She must have read the article by Anatole Kaletsky in The Times, published shortly after the announcement was made. The headline was "A steel cage for the Iron Chancellor" and it said:
I am lucky enough to be a former Treasury Minister and one who has sat where decisions on monetary policy are made, so I am one of the few people who can comment with a degree of authority on the former system, which led my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) to deliver this country's best inflation record for 50 years. The hon. Member for Hackney, North and Stoke Newington was kind to record my right hon. and learned Friend's achievements in that respect, and in those remarks she got to the heart of the matter.
The heart of the matter when setting interest rates--whether they are set by the Bank of England or any other body--is the degree of judgment that can be exercised in determining the decisions. The hon. Lady put her finger on it, saying that, when my right hon. and learned Friend had to make a decision of his own volition, he had to--in the nicest sense--out-guess the experts; and he got it right. No one group of people has a monopoly on wisdom and knowledge. Setting interest rate objectives requires feel, touch and sensitivity.
I asked the Economic Secretary to use her Treasury model and expertise to work out, given current levels of economic activity, what levels of interest rates would be required to achieve a series of parameters. Her response was remarkable, given the degree of expertise that still--believe it or not--abounds in the Treasury. She wrote:
One of the sacrifices made by taking the present route is that interest rates will be set at a higher level than would otherwise be the case, because the Bank of England has to hit an inflationary target. In parliamentary questions, I probed the matter of the period over which the Bank was
supposed to hit the target, what sanctions would be imposed if it did not do so, and how the Bank would be made accountable; however, I got no answers other than, "Watch this space for the Mansion House speech."
I hope that the Economic Secretary will convey to the Chancellor the message that we will watch that speech very carefully, because we want to see some numbers. So far, all we have had is great headlines and lots of chat, but no facts and figures.
I asked the Economic Secretary about the time scale over which the Bank of England would be required to achieve the new inflation target, and was told:
I challenge the Minister to put into the public domain her Department's monthly monetary forecast--or perhaps even that has been done away with. That was a jolly good Treasury document, which gave a really good assessment and enabled us to understand how the inflation target was to be set. The Government believe in openness, but there must be openness on both sides; it is no use having only the minutes from the newly independent Bank of England to look at--we want to know the Treasury's view, because it is also part of the monitoring process.
When I asked about how the Chancellor would resolve any difference of opinion between the Governor and Chancellor on the Government's objectives for growth and employment--both unspecified--and the achievement of price stability, I was again told, "Watch this space for the Mansion House speech." It will have to be a hell of a speech if it is to answer all those questions.
How are such differences to be resolved? In his article, Kaletsky asks:
When I asked how we will identify the numerical targets of the Government's economic policies, so that we can monitor what is happening, the reply again referred me to the Mansion House speech. When I asked how differences were to be resolved, I was given a restatement of what was in the Chancellor's statement to the House of Commons on 20 May.
We are owed much more information about how, for example, the inflation target is to be set. If the Chancellor of the day wants to manipulate the Bank of England--for all its independence--he can choose a lax inflation target and so give us low interest rates.
We have heard nothing from the Chancellor about what he thinks will be the potential for inflation in the British economy. Does he think it could be 2.3 per cent? Could it
be 2.2 per cent? That will have a profound effect on what the Bank of England will do when setting future interest rates. We need to know the basis for those decisions, so that we can judge how well the Bank, in its new way of working, is doing.
On another occasion, I was told that the Government would retain the right to override the Bank's operational independence in extreme circumstances, for a limited period only. What on earth does that mean? I was told that further details would be made available when the draft Bill was introduced in the House. We have searched, but no answers are forthcoming.
The Economic Secretary to the Treasury (Mrs. Helen Liddell):
I welcome the fact that my hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) was successful in securing this debate on such a significant issue. It is a key element of the Government's tone that we were not prepared to wait to get the grounding for stability into the economy; we wanted to do it as quickly as possible.
The Government recognise my hon. Friend's sterling work on the Treasury Select Committee. She has pursued a distinctive line on central bank independence and we acknowledge her commitment to that. When I was doing some background reading of the Select Committee's reports in preparation for the debate, I noticed that my hon. Friend has very little regard for economists. For example, on one occasion she said:
We have had an interesting debate, with interesting and commendable maiden speeches from the hon. Member for Twickenham (Dr. Cable) and my hon. Friends the Members for Hove (Mr. Caplin) and for Croydon, Central (Mr. Davies). They were outstanding introductions to the House. As someone who only recently made her own maiden speech, I know what it feels like to stand up and speak in the Chamber for the first time. I had a great sense of deja vu when the hon. Member for Twickenham spoke, because my formative days in economics were spent in debate with him in Glasgow. Indeed, in those days he had a very different political viewpoint.
Like all my right hon. and hon. Friends, I was delighted by the victories in Hove and in Croydon, Central. I am sure that we all wish to congratulate my hon. Friend the Member for Croydon, Central on the happy event for his family--new Labour, new baby. I am sure that his child will enjoy growing up under a Labour Government.
My hon. Friend the Member for Hackney, North and Stoke Newington referred to universal acclaim for my right hon. Friend the Chancellor's statement. I note the
point made by my hon. Friend the Member for East Ham (Mr. Timms), that it was not just universal acclaim from the City and the financial institutions, but universal acclaim from the people. As recently as Saturday, at Shotts highland games--hardly the usual scenario for talking about monetary policy--I was assailed by people wanting to congratulate the Government on their decision on the Bank of England.
My hon. Friend the Member for Hackney, North and Stoke Newington made a number of points about the statistical background to the concept that a central independent bank and low levels of inflation are related. She mentioned the issue of causation. It is always difficult conclusively to prove cause and effect. However, there are a number of recent examples, such as New Zealand, where countries with a history of high inflation have moved to a central independent bank and benefited from a consequent fall in inflation. We must bear such important elements in mind.
A number of hon. Members said that setting and maintaining low levels of inflation is important for the economy, as well as for individual households. As a Labour Member, I am conscious that, as my hon. Friend the Member for East Ham said, it is the poorest in society who suffer from high inflation. A considerable amount of academic work has been done since the Treasury Select Committee report on an independent central bank. There is considerable evidence of a relationship between an independent central bank and low inflation.
My hon. Friend the Member for Hackney, North and Stoke Newington and the right hon. Member for Fylde (Mr. Jack) referred to removing political judgment from the setting of monetary policy. That is precisely what it is all about. My hon. Friend the Member for East Ham said that, under the previous Government, there were repeated beauty parades, with the then Chancellor setting an interest rate immediately before the Conservative party conference, getting a standing ovation, and then making another change. That is not sound economics. It will not lead to the stability that is important for long-term growth.
The setting of interest rates is not the only monetary policy lever. To suggest that there is reduced accountability and a removal of the political imperatives to secure growth and to take into account social inclusion, is to fail to understand that the Monetary Policy Committee must operate within the parameters set by the Government's strategy for growth and stability within the economy. That is vital.
The right hon. Member for Fylde deserves sympathy, as not one member of his party has been here to support him--probably because they have other things on their minds. I suspect that the right hon. Gentleman's speech in praise of the former Chancellor is now being distributed. He may be nervous about what position he will be given by whoever emerges as the Conservative party leader.
My right hon. Friend the Chancellor will be making a statement tomorrow night at the Mansion House, and the text will be available before that in the House. The targets for monetary policy will be laid out in my right hon. Friend's speech.
Accountability is important--we recognise the debate to which my hon. Friend the Member for Hackney, North and Stoke Newington and the hon. Member for Twickenham referred. My hon. Friend made some
interesting proposals about the role of the Treasury Select Committee, especially in the appointment of members of the Monetary Policy Committee. When my right hon. Friend the Chancellor addressed the House, he made it clear that membership of that committee would be based on the need for recognisable expertise. The appointments that he has made so far have been universally recognised as taking that need into account.
It is, of course, possible for the Select Committee to summon before it not only members of the Monetary Policy Committee, but my right hon. Friend the Chancellor to account for those appointments. My hon. Friend the Member for Hackney, North and Stoke Newington has made suggestions about how the Select Committee might operate in future, and we will carefully consider them. Indeed, my right hon. Friend the Leader of the House is currently examining our procedures, so my hon. Friend the Member for Hackney, North and Stoke Newington might like to make representations to the new Select Committee on the Modernisation of the House of Commons.
"Brown is throwing away the key to policy".
I remember the hon. Member for Bolsover (Mr. Skinner) saying that Labour had waited 18 years to get control, but was now giving it all away. We have often seen in the new Government's policies the Pontius Pilate approach to politics--"Not me, guv. I'll give the decision to somebody else." The hon. Lady carefully probed the question of accountability.
"it is not possible to be sure about the precise level of interest rates required to hit an exact inflation rate ten months ahead."--[Official Report, 3 June 1997; Vol. 295, c. 147.]
I agree that it is difficult, as is any element of economic forecasting; but the old scheme, whereby we had a mixture of politics, with its degree of flexibility, married with the comment and detail from the experts from the Bank of England and the world of commerce--no Treasury Minister, Bank of England or monetary committee is ever short of advice on what to do about interest rates; it comes in by the bucket load--meant that the feel and touch of a real human being, a politician who could sense factors that experts do not, made an important difference.
"The Chancellor will set out the Government's approach to monetary policy in his Mansion House speech".--[Official Report, 4 June 1997; Vol. 295, c. 181.]
When I asked about the definitions of various elements of price stability, growth and so on, I was told that the Government would not set growth or employment targets. How are we to judge the setting of the inflation target? On what basis will that be done?
"what will happen when the Bank and the Government start to disagree about where the economy should be going?"
It is all very well having that wonderful independence in the good times, but what will happen in the bad times? We have seen Germany, with its independent bank, trying to deal with the German economy and the strictures of inflation getting in the way of the sound of the unemployed crying for the economy to be expanded. We have yet to test the difficult decisions resulting from having an independent Bank of England.
"Economics is a happy hunting ground for charlatans."
As an economist who went into politics, I must be on a downward slide. Perhaps I should assure Arthur Daley that I have no intention of becoming a used car salesman. Perhaps my position is mitigated by the fact that my hon. Friend then said:
"This is partly because it is dominated by men."
At least I am off the hook on that count.
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