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5.18 pm

Mr. Kenneth Clarke (Rushcliffe): It is a pleasure to follow the right hon. Member for Llanelli (Mr. Davies). I agree with a substantial number of his points. In fact, he is probably a more severe critic of the Bill than I am. He gave an absolute reason, in his opinion, for voting against it. He referred to a central point, which my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) also pursued--but which, astonishingly, was not mentioned by the Chief Secretary--which is that the Bill contradicts everything that the Labour party said throughout its period in opposition up to the time of the election, and in the manifesto on which it fought the election.

Labour Back Benchers intervened a number of times in my right hon. Friend's speech. They looked at their bleepers and were obviously told to ask us whether we will commit ourselves to repealing the Bill in five years' time. My right hon. Friend the shadow Chancellor replied admirably to those interventions. After today's vote, we shall be faced with a fait accompli; in four or five years' time, we shall have an opportunity to see whether our fears were justified. Nevertheless, I disapprove of the way in which the change has been implemented and the remit that has been given to the Bank, and I will be quite content to vote against the Bill today.

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The Government have not remotely explained why it took them only four days to eat every word that they pronounced on the subject when they were in opposition. Six months after the general election, we are perhaps getting rather accustomed to that style, as there have been rather more events since then that are in line with their peculiar approach to Government.

Before the new Parliament was assembled, hon. Members had no opportunity to engage in serious debate on the matter with our constituents, with the general public, with financial commentators or with the business world. Then, with a bang and a flash, the Chancellor--in his first few days of dynamic and, as he always says, "modernising" action--announced to the House that he had a totally different policy towards the Bank of England, which he would include in this Bill.

Mr. Tim Boswell (Daventry): Just like that.

Mr. Clarke: As my hon. Friend says, a bit like that famous magician, "just like that." The Chancellor pulled it out of his hat, and we are now debating the Bill.

If the Labour party, now the Government, were minded to contemplate marching towards the past by granting a greater degree of independence than the Bank has enjoyed in recent years--as the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) said, we have had experience in the United Kingdom of independent banks--I should prefer the formulation, to which they must now cling, that was occasionally given by both the Chancellor and the Prime Minister when they were in opposition: occasionally hinting that they might contemplate giving independence to the Bank of England after it had established a good track record. As hon. Members have already said in this debate, the Bank had no track record in four days of Labour government.

I do not criticise the Bank. I worked well and constructively with it, and it is not a form of words to say that I had an extremely high regard for Eddie George and his colleagues in the Bank of England and for the advice that they gave me, even if I did not always agree with it. I was never savagely out of step with them in the advice that they gave me. With respect, however, I cannot say that they have an impeccable track record. They certainly do not have a good track record of inflation forecasting.

I was rather dismayed by the extent to which the new Chancellor relied on the fact that the inflation forecast showed the need for instant action. In some of the minutes that the Bank now publishes, the Monetary Policy Committee keeps referring to the Bank's inflation forecast. We must have inflation forecasts. With the greatest respect, however, in recent years, the Bank of England has not been very good at forecasting inflation. The Bank has always overestimated the likely upside inflation risk--which is why the right hon. Member for Llanelli said that it has a deflationary bias. The Bank always fears the worst and reacts accordingly, which is what will cause damage. That is what I fear.

Since the proposals were made, my reservation has been that, over the next few years, we will have a greater deflationary bias in policy. I fear that the Monetary Policy Committee--anxious to prove its anti-inflation credentials--will go in for overkill. If the committee does that and over-insures, to ensure that it establishes a reputation for hitting the inflation target, the price will be

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paid by the general public. If the committee merely slows down growth but growth continues, we will sacrifice some of the extra jobs and rising living standards that we might otherwise have enjoyed. If the committee goes in overly for overkill, it will cause perhaps unnecessary damage to the daily lives of those working in the economy.

Some independent banks have a better track record and very high respect in their countries. They have acquired a track record of taking a wider view of affairs. The Bank of England and the new Monetary Policy Committee have not yet satisfied me that the committee, on its track record, is the same type of beast as the Bundesbank, not to mention the Federal Reserve in the United State of America. Quite rightly, those bodies pursue price stability and low inflation, sometimes with targets that have been set for them. But they also take a view of the wider economic picture.

I share what my right hon. Friend the shadow Chancellor described as the Conservative belief in the virtues of low inflation. I believe that creating in the UK a climate of permanently low inflation is a very desirable objective, and that it would be a big change in our culture. I do not believe, however, that hitting an inflation target should override every other consideration of economic policy in all circumstances and at all times. I tried to be a real-economy Chancellor, and I think that the House should require that the authorities deal with the real economy and take a slightly wider view.

Mr. Malcolm Bruce: The right hon. Gentleman's views on the matter are well known. Is he telling the House, however, that, among his decisions, he accepts no responsibility for the inflationary pressures that have led the Bank to make its current decisions? Does he really believe that, throughout, he has been right and the Bank has been wrong?

Mr. Clarke: Yes, I do. I think that the Bank is wrong today.

The right hon. Member for Llanelli--who has been a Treasury Minister--was very wise to be cautious in his estimates of where one goes. One will not know, for about 18 months to two years, whether the judgment made on interest rates on a particular day was correct. One may never know the answer, because so many supervening events ensure that one can never guarantee that an inflation target is hit to the exact decimal point.

It would have been a fluke if, before the general election, I had delivered a final inflation figure of 2.4 per cent. I aimed, however, to get it below 2.5 per cent. Although the hon. Member for Gordon (Mr. Bruce) gets very excited about today's 2.8 per cent., I am rather pleased with the inflation record of the past three or four years, combined with falling unemployment and high economic growth. The Liberals, and certainly the Chancellor, would be a little reckless in talking about some mythical belief that the previous Government relaxed control before the general election.

In 18 months to two years, when the first full effects of the Government's decisions are apparent, we shall see how they are getting on in achieving a combination of economic growth, falling unemployment, lower inflation and the generally benign conditions that are required to produce steady growth with low inflation. Neither I nor, I think, any Opposition Member denies that low inflation

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is an extremely important part--perhaps one of the most important parts--in achieving those conditions, but it is only a part of what should be the aim of macro-economic policy.

It should never be forgotten--it is amazing how frequently it is forgotten in the discussions of commentators--that any democratically elected Government should pursue only one end in economic policy: to attempt to achieve higher living standards, low unemployment levels and improved employment prospects for the general population, whom we serve.

If low inflation is usually helpful in producing that end, low inflation is very important. However, one should not draft a Bill--as this Bill is plainly drafted--stating that, if some momentary circumstance or shock presents a dilemma in which strict pursuit of the inflation target might damage prospects for growth and employment, the independent Bank should be legally obliged to agree that the inflation target takes priority over growth and employment.

At the general election, the Labour party would have had a very animated debate indeed if it had made a statement about handing over that power to the Monetary Policy Committee of the Bank of England. All that I recall in the general election, however, was a lot of stuff about going up league tables and the inadequacy of our record on growth and employment--matters that seem to have vanished from the Bill.

My fear is that the Bill is designed to encourage the extremely good Monetary Policy Committee to go for overkill. All the members of the committee are excellent and I have no criticism of any of them, although it is noticeable that several of them are Bank employees. The majority are from the Bank, while the independent people are appointed by the Chancellor, so these people are drawn from a fairly small circle.

The Monetary Policy Committee is already demonstrating that tendency to go for overkill. There have already been five interest rate increases since the general election. The first was ordered by the Chancellor on the day that he made his announcement; the committee announced three successive increases in the following months. It also clearly flagged up the fact that it was going to continue to raise interest rates. I think that that was foolish, and particularly that it drove the value of sterling to a level that is causing considerable damage, which has a marked effect on our exports. Having paused for three months, as it said it would, and having considered the evidence, the committee yesterday raised interest rates by a further 0.25 per cent.

These are difficult decisions. The hon. Member for Norwich, South (Mr. Clarke) alleged that after Christmas of last year I had somehow suspended economic judgment and was simply being driven by politics in not following the Bank's advice. I totally refute that. I printed the minutes. I do not believe that putting up interest rates by a quarter per cent. between Christmas and the general election would have cost one vote. [Interruption.]

The phrase "Iron Chancellor" was one that I used to claim for myself. I would probably have made the same noises as the present Chancellor, saying that I had raised interest rates to make sure that we avoided boom and bust and that we had stability. The Chancellor has taken all that stuff from speeches of mine made three or four years

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ago. I would have repeated it and it would have been accepted. However, there was an underlying policy dilemma that has not gone away.

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