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Mr. Christopher Gill (Ludlow): As the House knows, the Government are committed in principle to entering a single currency. Has he not observed that, on previous occasions when Britain has been part of fixed exchange rates--during our membership of the exchange rate mechanism in 1990-92 and during our membership of the gold standard in 1925-31--interest rates rose to an inappropriate level? It was only when we left those fixed exchange rate mechanisms that interest rates fell away and economic activity recommenced. Would it not be rash to take us back into fixed exchange rates with the risk that, once again, interest rates will rise to a wholly inappropriate level?

Mr. Darling: I know that the hon. Gentleman and some of his hon. Friends are obsessed with all matters European, but it is worth reminding him that, during much of the 1980s, when we were not part of a fixed exchange rate, interest rates were extremely high. In 1979, the rate of interest reached 17 per cent., in 1981, it was 16 per cent. and in 1985, it was 14 per cent. Inflation was also high. In 1980, it reached 21 per cent. That had nothing to do with the fixed exchange rate. It had rather more to do with the way in which--

Mr. Eric Forth (Bromley and Chislehurst): It was a Labour Government.

Mr. Darling: If I am not mistaken, Lady Thatcher was Prime Minister in 1981 and in 1985, but perhaps Opposition Members would prefer to forget that.

The hon. Member for Ludlow (Mr. Gill) mentioned our economic policy. Let me remind the House of what we have done in the six months since we won the election. We have begun to deliver the key measures that we believe will build prosperity in future.

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First, we are committed to economic stability and low inflation. In our manifesto, we said that we would reform the Bank of England to ensure that decision making on monetary policy was more effective, open and accountable, and free from scope for political manipulation. We are delivering that promise with the Bill.

Secondly, my right hon. Friend the Chancellor announced in his Budget the deficit reduction plan, cutting the high borrowing requirement left by the previous Government from £22.75 billion last year. We need to achieve stability in public finances so that we can meet our priorities for education, higher investment, health and long-term fiscal stability.

Thirdly, in the comprehensive spending review that I announced in the House on 11 June, we will deliver sustainable public finances and we will be able to reshape and set the Government's spending priorities.

Fourthly, we are removing barriers to growth and removing inflationary pressure. We are expanding our economic capacity, and thus generating the right climate for high levels of investment. That is why we cut corporation tax in the Budget--to the lowest level ever. We are modernising the welfare state, and investing in skills and education so that we can expand the capacity of the economy.

Fifthly, we are committed to open markets and to constructive engagement in Europe, as the Chancellor and the Prime Minister have made clear. We are preparing the country for the future because we put our national economic interests first. Business knows what is good for business, even if the Tories do not.

The Bill marks another milestone in our determination to modernise Britain's economy. We are creating a modern Bank which will meet the new requirements of the 21st century in a global economy in which clarity of purpose is essential.

Mr. Kenneth Clarke (Rushcliffe): A few moments ago, the right hon. Gentleman seemed to imply that he did not expect that conflict would ever occur between the objectives of low inflation, growth and higher employment. Does not the Bill contemplate that such conflict might arise? It states that the pursuit of growth and employment can be followed by the Bank of England, but subject to the overriding requirement to hit the inflation target.

I agree that low inflation normally goes with high employment, the creation of jobs and low unemployment, but we all know that economic shocks can hit countries. Circumstances can arise in which, in the short to medium term, hitting the inflation target can be damaging to the levels of unemployment and of growth. Why is responsibility handed to the Bank with a legal injunction that the inflation target should always be pre-eminent--in all circumstances and at all times in the future?

Mr. Darling: I appreciate that all former Chancellors of the Exchequer have to defend their position, especially those from the recent past, but I am sure that the right hon. and learned Gentleman agrees that, in the long run, it is not possible to achieve high levels of employment if we have high levels of inflation. We are agreed on that. I shall return shortly to the provision in the Bill to which he refers, but it is clear that, if the inflation target will

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not be met--for example, because of a shock--and the Monetary Policy Committee has to take the necessary steps to reduce inflation, it has to have regard to the Government's policy for growth and employment to temper what it might otherwise be tempted to do.

The formulation, as I am sure the right hon. and learned Gentleman knows, is common in most independent central banks. The objective is clear--the Bank has to maintain price stability and meet the inflation target set by the Chancellor of the day. In fixing its interest rate structure, the Bank also has to have regard to the Government's overall economic policy. As the right hon. and learned Gentleman said, there is sometimes a tension between the two in the short term, but--in the long term--unless we have low inflation we will not have the high levels of growth that we all want.

I shall move on to the responsibility of the Government, as opposed to that of the Bank, because the Bill sets in place a clear division of responsibility. The Chancellor sets the target for price stability and he will do so every year. The target announced by the Chancellor earlier this year provides a more rigorous, open and precise definition--a target of 2.5 per cent., which is a constant target. The Bank, for its part, has the responsibility for achieving that target and maintaining the long-term price stability that I mentioned. It must also support the economic policy of the Government, including their objectives for growth and employment. Therefore, the Bank and the world at large will be clear about its objective of stability in support of the objectives of growth and employment.

The composition of the Monetary Policy Committee itself will ensure a broader base of decision making than in the past. No one individual can dominate. It will be a blend of experience from the Bank and outsiders appointed by the Governor and the Chancellor for their knowledge and experience. The decisions will also be free from party political manipulation. The interests of the country will come before the interests of the party of government, especially one about to face an election. Decisions will be made with the long-term interests of the economy in mind.

The Bill ensures that there will be a level of accountability that we have not seen in practice before, not just to the Chancellor, but to Parliament. The Bill proposes three elements that will achieve increased accountability.

First, the MPC must meet rigorous reporting requirements. It is required to announce all its interest rate decisions immediately. Minutes of each meeting will be published and, if there is a vote, the voting record of each member will be recorded.

The Bank's quarterly inflation report will be put on a statutory basis for the first time. That is another instrument of accountability and one of the principal ways in which the explanations of the MPC can be assessed and be subject to scrutiny outside the Bank. The House will have ample opportunity to scrutinise the Bank through the Treasury Select Committee, which now has far greater responsibility. The Bank will be held to account, and the Committee has already made it clear that it will expect MPC members to appear before it.

Mr. Forth: The right hon. Gentleman is introducing the element of accountability, and it is at least arguable

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that his definition is correct and valid--that merely reporting to another body involves accountability. Some might say that true accountability would involve the ability of another body to remove those who make the wrong decisions. Is he prepared to take the risk that, if those making the crucial decisions get them wrong--not just once, but repeatedly--nothing can be done to affect their position or to remove them, particularly by the House of Commons?

Mr. Darling: The right hon. Gentleman has been a Member longer than I have and he might agree--when he is in a less partisan mode--that there have been many occasions when Members of all parties have wondered whether the doctrine of accountability has fallen by the wayside. In the previous Parliament and the one before, I cannot remember any Minister resigning because of policy failure. They might have resigned for other, extraneous reasons, but not very often for policy failure.

The Chancellor is accountable to the House, which can express its displeasure with him or her on any appropriate occasion. The MPC will, in practice, be more accountable and answerable than ever before. The MPC must account for its decisions, and it will appear before the Select Committee, which is able to pass any judgment it thinks fit. The House will have an opportunity through a debate--certainly once a year, but also in other economic debates--to make clear its views. Until now, we may have had theoretical accountability in relation to the policy of price stability and interest rates, but it has not always been so. Through the Bill and other measures, we are setting in place a system of accountability that, frankly, has not existed until now.

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