Previous SectionIndexHome Page

Ms Abbott: Is it right for my hon. Friend to talk about the Chancellor's granny in such disparaging terms? For all we know, she might be an expert on monetary policy.

Mr. Radice: However good she is, it would be ill advised to put relatives on the Monetary Policy Committee.

Mr. Kenneth Clarke: On a more serious point, I am not concerned about the Chancellor's granny, but I may be leaping in where the Chief Secretary feared to tread. Everybody seems to be very keen on confirmatory hearings. Is the idea that the Treasury Select Committee will cross-examine all the aspirants on their views on monetary policy? Will it award them marks them out of 10 in relation to their competence? Will it insist on more

11 Nov 1997 : Column 748

or fewer strict monetarists? Will it want some "inflation is dead" men? We could end up with a peculiar Monetary Policy Committee if the Select Committee decided to approve people with whose views it happened to agree.

Mr. Radice: It is easy to poke fun at the idea, but we shall look at the professional competence of the people concerned. We have good advisers and our own views. It will not be a question of putting monetarists or Keynesians on the committee, because we do not actually appoint members of the committee. That is a decision for the Chancellor. We will be able to make reports to the House on those appointed or nominated by the Chancellor and, in some instances, we may decide that they are not professionally up to the job. We may be wrong, but the House can take account of our view and dismiss it if it wants.

Confirmatory hearings are a sensible approach, and the House should consider them seriously. We do not intend to introduce an American "advise and consent" system, and we would not delve into the sex life or tax position of Monetary Policy Committee nominees. We will examine their professional qualifications to do the job. I hope that the Government and the Modernisation Committee will consider the proposal with an open mind.

My last point concerns the terms of office of the members of the Monetary Policy Committee. At the moment, the members--apart from Governor and Deputy Governor--will serve for only three years. It could be argued that that will give the Chancellor undue political influence over those members. Perhaps the terms should be longer than three years, and I hope that the Chief Secretary will consider that suggestion. Appointments to the court have also been reduced from a four-year to a three-year term. What is the rationale behind that change?

I strongly support the Bill, because it will help to create monetary stability. I believe that is important, because I have lived through the 1970s, 1980s and the early 1990s. It will also help to create conditions for non-inflationary growth and will enhance the openness and accountability of monetary policy.

6.2 pm

Mr. Malcolm Bruce (Gordon): I am glad to be called at last to speak in this debate, not least because there is more united support from the Liberal Democrats for the Bill than from Labour or Conservative Members. The latter appear to be somewhat confused and incoherent on the matter.

The proposals in the Bill were not contained in the Labour party manifesto, although they were clearly spelled out in the Liberal Democrat manifesto and the paper that we published before that. During the election, the subject came up in numerous debates between the then Chancellor, the then shadow Chancellor and myself, but the current Chancellor gave no indication that he intended to introduce such a Bill. I can only conclude only that he must have been persuaded by the force of the arguments. However he arrived at his decision, the Liberal Democrats are keen to support it.

The Economic Secretary to the Treasury (Mrs. Helen Liddell): I am loth to interrupt the hon. Gentleman's train of thought, but the issue of the contents

11 Nov 1997 : Column 749

of the Labour party manifesto keeps being raised. I am sure that he has read the manifesto in some detail, but he may care to turn to page 13, which states:

    "We will reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation."

What is his problem?

Mr. Bruce: The Economic Secretary knows that that is not a clear statement of operational independence, which is a clear policy that has been well discussed. Labour politicians, when in opposition, did not make their support for it clear. However, that is history. The Government's decision is welcome and I am happy to support it. Indeed, much of the detail is along the lines that we advocated. We would have preferred a more radical review of the structure of the bank, and we proposed that its name be changed to the United Kingdom reserve bank, with full statutory regional representation on the board of management or the court. Nevertheless, the Government have gone a long way towards our proposals.

I intend to concentrate my remarks on the part of the Bill relating to monetary policy. I hope that my hon. Friend the Member for Twickenham (Dr. Cable) will be able to speak later on the regulatory aspects of the Bill.

The proposals will bring the United Kingdom into line with almost every other major developed economy. I find it strange that we have heard such vehement opposition from hon. Members on both sides of the House to what has increasingly become recognised as good practice in the day-to-day management of monetary policy. The right hon. Member for Llanelli (Mr. Davies) made a ludicrous leap from the devolution of the day-to-day management of interest rates to the total management of economic policy. The change will enable the Government to get on with the job for which they are supposed to take responsibility--fundamental policy decisions on the economy--instead of being diverted by short-term arguments about interest rates.

The right hon. and learned Member for Rushcliffe (Mr. Clarke) was unable to restrain himself from justifying the position of the Conservatives in government and his own track record. His argument appeared to be, "I am right and other people are wrong. You should be glad that I had the opportunity to take those decisions, because I was right."

As the right hon. and learned Gentleman pointed out, the time lag is 18 months and we have not yet seen the full impact of his decisions, never mind those of the present Government. However, if I am not mistaken, it was about 18 months ago that he overruled the Bank of England's determination to put up interest rates--and we now have an inflationary pressure whose importance he downgrades, but which most commentators regard as real and requiring action. He is entitled to his opinion, but I am not sure that he is entitled to such uncompromising self-confidence.

Mr. Kenneth Clarke: We have 12 months in which my approach may prove to be wrong, although everybody forecast that inflation would fall in the second half of this year. My point was about overkill and excessively deflationary policies. My argument was that five increases

11 Nov 1997 : Column 750

of 0.25 per cent. each justify my suspicion that the Government have a deflationary policy. I might have decided on a couple of increases myself under the old arrangements, but I would not have reached 7.25 per cent. The Bank is behaving in precisely the way that we warned it would.

Mr. Bruce: The right hon. and learned Gentleman is entitled to his opinion. He has declared it robustly and the next 18 months may test it out. He also said in his speech, and has just repeated it, that he might have made adjustments earlier. Had he done so, the situation might have been different now. [Hon. Members: "He did not say that."] Yes, he did.

Mr. Lilley: My right hon. and learned Friend said that the committee might have made adjustments earlier, but that it would have been wrong to do so.

Mr. Bruce: That is a categorical statement about a matter of opinion, and that is the difficulty that arises in such cases. Such arguments are ultimately fruitless, because in reality someone has to make an objective economic decision. If a Chancellor appoints an independent committee to make the decision and then overrules it on the grounds that he knows best, he is effectively deciding that political, rather than economic, considerations will determine the management of monetary policy.

Our experience over the years has been fairly bitter and, more often than not, we have been wrong rather than right. We can reflect on the fact that, on the day that the Chancellor announced his decision, long-term interest rates went down. Whatever the short-term considerations, the ultimate objective must be the real gains that are to be obtained from ensuring stable, low inflation, low long-term interest rates and a degree of convergence between our interest rates and those of parallel economies operating similar forms of operationally independent central banks. That ultimately is a prize with real benefits for mortgage payers, businesses and everybody who wants stability in economic management.

I hope--at the moment it is only a hope--that the Conservative party will end its opposition to the proposal. I repeat what I said to the shadow Chancellor. I find it extraordinary that he can claim that the Chancellor is giving away his most important power--it is a questionable argument, but those were his words--while suggesting that he could not make up his mind whether or not the Conservatives would reverse the decision if they ever regained power. If what he said is true, he ought to commit his party to reversing the Chancellor's decision. The fact that he cannot and will not suggests that it is an argument for today, rather than a substantive belief. The shadow Chancellor then spelled out how one could make the Bank more independent--presumably by improving the Bill to make it acceptable to the Conservatives, and therefore not reversible.

In our view, it would be helpful to have political consensus on this sooner rather than later. The Conservative party's position may not be a worry at the moment because nobody seriously expects it to be in government for a long time. But if the Conservatives are serious in their pretensions to regain power, people in business will want to know whether they would wish to reverse the policy. They cannot leave it in limbo for ever.

11 Nov 1997 : Column 751

If they can be so definite about apparently never joining a single currency, it seems odd that they are not clear where they stand on this matter.

This is the right Bill and it should command wide support. I do not believe that people will rush into the streets demanding that politicians be given the right to interfere once again in the short-term setting of interest rates. If one looks at the American example, I hear no clamour that Bill Clinton should take over control of interest rates from Alan Greenspan. I am not sure whether anyone--even the hon. Member for Hackney, North and Stoke Newington (Ms Abbott)--would replace Eddie George with the shadow Chancellor, although, essentially, that is what the hon. Lady is arguing for.

Once the system is in place, it will be recognised as a sensible and practical way of making short-term decisions, allowing the Government to concentrate on the things that shape the long-term economy, which clearly include the fiscal stance and policies for promoting growth and investment. If we achieve stable low inflation, the climate for investment will be dramatically improved in the long term. People can start to assess risks on a much narrower basis, and clearly that will encourage a great many more investment prospects which currently fall by the wayside because of the need to allow for unpredictable fluctuations in exchange and interest rates.

A sensible decision is being opposed by the Conservative party, which nevertheless has among its number a former Chancellor who is most enthusiastic about the policy--Nigel Lawson. The right hon. Member for Strangford (Mr. Taylor) intervened on the right hon. and learned Member for Rushcliffe and got him middle stump by asking for his view on an independent central bank for the United Kingdom as compared with a European central bank. It is neither consistent nor logical to oppose the principle of an operationally independent bank for the United Kingdom while being in favour of a single currency reinforced by a central European bank. He knows that to be the case, and was able to argue only on the detail.

I had many debates with the right hon. and learned Member for Rushcliffe when he was Chancellor, and I always respected his style and his record, in spite of our differences on the details. Clearly he is proud of his record, and he has some reason to be proud. However, he can get carried away by some of his press releases--he certainly did at the end of the last Parliament. He seems to take the view that there was a great deal of entertainment in the Ken and Eddie show, and he took pleasure in being right, on his terms, more often than Eddie. The funny thing is that, when one talks to Eddie, he sees it rather differently in terms of who was right and who was wrong. He maintains, as the former Chancellor would, that the jury is still out on the final result.

In spite of his assertions to the contrary, many commentators--I include myself among them--take the view that the conduct of the right hon. and learned Member for Rushcliffe before the election underlined the case for an operationally independent bank. I do not believe him when he says that the rate set in the six-month run-up to the election was not influenced by political considerations. He may have taken a different view, but others in the Cabinet at the time definitely thought that the Conservatives could do without interest rate rises in the run-up to the election. The sooner the Conservative party can accept the principle of the policy, the better.

11 Nov 1997 : Column 752

The Conservative party will have no credibility if it opposes the policy, and it is not prepared to say whether it will endorse the policy or leave it uncertain.

There are a number of issues which we can debate in more detail in Committee, but I should like to follow the hon. Member for North Durham (Mr. Radice), who referred to some of the Treasury Committee's recommendations which bear further consideration.

The terms of appointment of the members of the Monetary Policy Committee are important and, having discussed the matter with people inside and outside the banking fraternity, I can say that there is a general recognition that three years is rather short, on two grounds. First, if one is trying to determine an inflation target and a policy to hit that target with a lag time of two years, one does not have an opportunity to produce a significant track record in three years. It takes longer than that, and that is fundamental to the argument.

Second, and less importantly, is the freedom from apparent political pressure. I am not accusing the Chancellor of seeking directly to intervene on or influence the independence of the monetary committee, and I am not convinced that the people to be appointed would be susceptible to pressure. But the perception that they could be put under pressure cannot be removed in the case of a three-year appointment which requires their reappointment this side of a general election.

Perhaps the period could be extended to five years--not the 10 or 15 years which apply in other countries--which would give them long enough to establish a track record and to depend for their reappointment on the next Government and the next Parliament, not the current ones. Those are persuasive arguments. If the Government genuinely believe that their claim to have an open mind is valid, I hope that they will be persuaded to reconsider the terms of appointment and extend them to take that into account.

I wish to refer also to confirmatory hearings. The Government have indicated that they are not against them in principle, but the Chief Secretary--in his evidence to the Select Committee--basically said that, although he had an open mind, he would resist all amendments. He argued on the grounds of the time scale and the fact that this would be a radical departure that had implications for other appointments. That is why the hon. Member for North Durham is suggesting that the Modernisation Committee should look into that matter.

I urge the Government to approach the matter the other way round. If we are to move in that direction--many feel that that is a logical area for Select Committees in general to be involved in--we have to start somewhere. I am suspicious of the argument that we should either introduce it across the board or not at all, because I know where that would lead:it would lead to our not introducing it at all.

We should start somewhere, perhaps providing a model that could be extended elsewhere. That would be a good constraint from the Government's point of view: a Select Committee that knew that it would be judged to determine whether its use was to be extended would be constrained in its actions by that consideration. I hope that the Government will consider that a reasonable starting point that could be extended if the project was a success and not repeated if it was not. If they do not, I fear that we may never get into that slightly more innovative mode.

11 Nov 1997 : Column 753

I ask the Government to follow the spirit of their own terms and allow their open-mindedness to develop into real, practical activity that could help to strengthen the role and respect of Select Committees and to test the Government's good faith. I am not challenging their good faith, but it must be borne into practical action.

Everybody is aware that the Governor's term of appointment is due for review in the near future. I want to put it on record that, regardless of the differences of view that he has had with a variety of people, he has conducted himself in recent years with great credibility and integrity. The Government would do well, considering that this is a new departure, to take an early decision to confirm his reappointment. If this exercise is to be a success, it is pretty important for the Bank to know in whose hands its new role is to be developed.

The Government have set themselves the task of preparing the country for membership of a single currency, even if, regrettably, they have effectively ruled out the possibility of an early decision in this Parliament--although I suspect that they may yet have to return to that. The Bank is likely to have some years of operational independence before the decision is finally made to become part of the European central bank, so perhaps its track record in those years will pave the way.

The Conservative party has put itself in a remarkable position, given its track record and former contacts and support: on all the central issues, it is substantially on the wrong side of the debate with the business community, which needs at least some suggestion of a practical political focus for decision making that takes account of what is really happening.

In the real world, politicians do not have the power they often claim to manipulate the economy as some interventionists would wish, but they can create a climate of stability and allow business to thrive. In the European environment, there is a clear determination to set up a strong single currency, pursuing policies of monetary and fiscal rectitude to the benefit of all the economies of the European Union.

There is no apparent role for a United Kingdom that is not part of that, and the Conservative party has not articulated any coherent possible role in that circumstance. If it cannot do that, it can hardly be surprised that it cannot convince the captains of industry and the decision makers in business that what it has to say is relevant to the 21st century.

The Government have made a commitment in principle to the single currency that accords with practical reality, and have introduced a Bill that accords with good common sense and should lay the foundations for stable low inflation and a climate of good investment. We commend it, and will support it.

Next Section

IndexHome Page