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Mr. Charles Clarke: Will the right hon. and learned Gentleman give way?
Mr. Kenneth Clarke: Yes, as I mentioned the hon. Gentleman.
Mr. Charles Clarke: Does the right hon. and learned Gentleman believe that, if the Bill had been in force in the first part of the year while he was still Chancellor of the Exchequer, the interest rates would have been the same as they were?
Mr. Kenneth Clarke: No, they would not. We would have fought the election after several interest rate increases. By the time the election came, we would probably have had the four or five that we have had now. My point is that they would have been wrong. Such increases imposed in that way were unnecessary.
The hon. Gentleman looks incredulous. He is obviously a natural supporter of the Bill. He looks incredulous at the idea that I am suggesting that the Bank might be mistaken. "Could the Monetary Policy Committee ever be wrong?" is the hon. Gentleman's reaction. He finds it shocking that I could suggest that. In his eyes, I have no doubt committed the great sin of not only rejecting the advice to raise interest rates but then publishing the fact that I rejected it, publishing the advice and giving my reasons for doing so. Those reasons were economic. That was my acknowledgement of accountability to the House and a resistance of short-term political pressures.
Mr. Kenneth Clarke:
I will give way in a moment, but I must explain the dilemma. It is possible that these decisions are debatable; it is also possible that the eight wise men on the Monetary Policy Committee are getting it wrong, could get it wrong in future and should not be allowed carte blanche.
At the moment we have a most uneven recovery. The service sector is strong and is the main contributor to the high levels of growth which are believed to be unsustainable. We have a very strong and somewhat unstable level of sterling, which is squeezing exports. There is a very low level of growth in manufacturing.
The dilemma is to decide the extent to which one has regard to the deflationary effect of the strong value of sterling, the extent to which one has regard to the weak performance of manufacturing, and the extent to which overall stability is threatened by the strong growth of the service sector. This is not the time to have a full debate on the matter, but it is not obvious to me that there were underlying inflationary pressures when the new Government took over which required such a rapid increase. There is no resemblance between the current data and situation and the situation in the later 1980s when we last had boom and bust.
Unemployment is falling, but the fall is slowing. There are some skill shortages, but the decline in unemployment is slowing. That has not fed through into wage inflation, the
old British curse. Earnings are now rising by 4.5 per cent., which would have been unimaginable in the late 1980s--4.5 per cent. over an underlying inflation rate of 2.8 per cent. The retail price index, which usually determines earnings, has been driven up by the Government's interest rate increases and the taxes that they have imposed. There was a 3.75 per cent. earnings increase in 1996. This is not driving inflationary pressure. The figures for factory gate prices produced yesterday are astonishingly low. I mentioned the RPI--food prices are almost static, and shop prices are not rising significantly within the RPI.
Consumer spending has grown strongly by 5 per cent., but it has not shown any signs of accelerating this year. In fact, last month, it seemed to drop a little. That is against the background of the windfalls from the building societies. People feared what would happen when all that money flooded into the economy. My view was that the windfalls were only a one-off--if we acted to deal with the windfall spending, in 18 months' time we would find that the windfalls had gone and the action that we had taken meant our missing the target. In reality, only a quarter of the windfalls appear to be being spent, while most are being saved. The savings ratio in this country is satisfactorily high compared with what it was.
Everyone, even the Monetary Policy Committee, expects the growth in the economy to slow down next year. I do not know of one commentator who does not think that the present high level of growth will slow next year. If the committee keeps piling on interest rate increases until it sees the slow-down starting, it will face the classic problem of monetary policy: one fires the shot from the cannon, but it takes 18 months to two years before one knows where it lands and what one has hit. If we keep raising interest rates in an economy that is on the point of starting to slow down, it will slow down much faster than expected.
Two things seem to dominate the Monetary Policy Committee's minutes--which, incidentally, are anonymous, unlike the ones that I used to produce. First, the committee is obsessed with its forecasts. The committee opted for one of the increases because, had it not done so, the Bank's forecast would have shown inflation above 2.5 per cent. two years on, so it thought that it had better build in an interest rate increase to make the forecast that it had printed compatible with the target. I have already commented on the value of the forecasts.
Secondly, the most serious thing that seems to trouble the committee is that the present rate of growth is unsustainable, despite the fact that everyone believes that it will slow down. The present rate of growth of 4 per cent. per annum is not sustainable, but we are taking a terribly pessimistic view of sustainable annual rates of growth. It has only just touched 4 per cent. In the boom of the 1980s, it was above 4 per cent. for most of four years. I agree that that was before disaster occurred, but let us not take action now, as soon as growth touches 4 per cent., to head off a feared future disaster when everyone knows that the rate will not be maintained.
The Government are taking the most ridiculously pessimistic view of trend growth in this country. I do not know what trend growth is--no one does, but we have to take our best stab at it. The Government have revised the rate down from my reckless 2.5 per cent. to a more cautious 2.25 per cent., the average of what the British economy has achieved for the past 40 years. What an ambitious, modernising Government! What league tables we will soar up saying that trend growth is 2.25 per cent.!
It is because the Government do not approve of all our supply-side changes. They are probably anticipating the social chapter, the minimum wage and the trade union laws which will take us back to the trend rates of growth that this country used to enjoy. They have let loose a monetary committee that may ensure that we achieve disappointing results. The cost will fall on the public we serve, who were not given the faintest warning of the measure at any point in the election campaign.
On accountability and openness, I share many of the views that have been expressed. The right hon. Member for Llanelli attacked the Government's views eloquently, asking why we should be trusted with anything if we are not trusted with monetary policy. What we now call monetary policy has developed only since Bretton Woods, only since Nigel Lawson was Chancellor has it been operated as it is now, and we have a pretty shocking record on running it.
Of course there is a danger of short-term political pressures taking over. I am against short-term, populist pressures operating on monetary policy. That is why I published minutes. As Chancellor, I was accountable to the House, but I do not remember the House having any effect on interest rate decisions before they were taken. Even after decisions, most hon. Members were so cautious about giving their views that I was not put under too much pressure. Of course, if it all goes wrong and there is hyper-inflation, the Chancellor is rightly hammered by the House of Commons.
I thought that the best way to avoid political pressure was to print the advice given to the Government month by month, and my response as Chancellor. That had previously been a state secret. I protected my other officials by not naming them. Junior Ministers enjoyed similar protection, although I do not think that they would have minded if we had given their individual views. I allowed them to disagree with me at the meetings. We produced genuine minutes of genuine meetings for the Select Committee and the Opposition to have fun with.
We now have a new attempt to ensure openness. I should be cautious about allowing the Select Committee to vet all appointments. I do not like the American system. A similar system here might be subject to political influence. However, the Select Committee should demand proper openness.
The monetary committee produces anonymous minutes. The opinion of the Governor of the Bank of England cannot be identified from the minutes any more. I do not know whether he allows his colleagues at the Bank to express openly at the meeting views that contradict his. They tended to have a more collegiate approach when I was at the Treasury. I think that there is a pretty safe batch of votes there.
I shall not believe the new minutes--just as people, rightly, would not believe my minutes--until there is evidence of some division. So far, the monetary committee has been unanimous. It may not have been unanimous on the most recent increase, which was a little dodgy.
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