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Mr. Heathcoat-Amory: It is a pleasure to follow the hon. Member for Great Grimsby (Mr. Mitchell), because

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he is becoming a rather distinctive voice on the Labour Benches. That used not to be the case. We used to hear a lot of concern expressed by Labour Members about manufacturing industry. I share many of those concerns, because I, too, have a manufacturing background and I represent a constituency with a surprising amount of manufacturing in it. I have always listened carefully to other hon. Members who have expressed similar worries, particularly about the exchange rate. I am afraid that the new Labour party has rather abandoned its roots, so I was particularly struck by the way in which the hon. Gentleman related his concerns about the Bill to worries about the future of the manufacturing industry. Those arguments must be taken seriously.

On Second Reading, the hon. Gentleman spoke along similar lines. On that occasion some of his worries were also expressed by a number of his hon. Friends, most notably the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) and the right hon. Member for Llanelli (Mr. Davies). He summed up his worries about the Bill by saying that the Government had a professed aim of greater devolution of powers from bureaucracy to democracy whereas the Bill was designed to make the move in the opposite direction by transferring power from democracy to bureaucracy. I think that that sums up some more general worries about the Bill.

Unfortunately, many of those voices were not represented in the Standing Committee. I believe that all such hon. Members were excluded from the Standing Committee deliberately and I am afraid that it was packed with many new Members who were most unwilling to speak out about any anxieties that they had; indeed, they hardly said anything, so legitimate worries about the Bill went more or less undebated in Committee, which was a pity.

7 pm

However, this is a new debate on Report, and we have before us an unanswered and unresolved question: how will the Government reconcile their various economic objectives if the going gets tough? Conflicts do arise in economic policy from time to time. The Government are lucky at the minute. They have inherited a golden legacy of steady growth, low inflation and falling unemployment. Things are extremely stable and, on the whole, are going well, although I am afraid inflation is starting to nudge up again and I would not be confident that unemployment will continue to fall throughout the year. Dangers lie ahead.

The hon. Member for Great Grimsby was right in saying that driving the British economy is not an exact science. He gave several illustrations of how difficult it is. A permanent secretary once said to me that running the economy from the point of view of the Treasury was like driving a car with the windscreen blacked out and the rear-view mirrors broken: one certainly did not know where one was going; one had some idea of where one was, but little idea even about where one had just been. That is the difficulty about trying to apply exact science to the setting of interest rates.

To start with, we must be clear in our minds about what the Bill does as it stands. It gives overriding priority to price stability and puts the maintenance of price stability into the hands of an unelected committee, which is given total discretion in setting short-term interest rates.

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Conservative Members support a low-inflation strategy. We give way to no one in our belief that it is essential to break any inflationary tendencies in the economy and establish a permanent low-inflation culture. We were far advanced on the way to doing so--we met our inflation target of 2½ per cent. or less--by the date of the general election.

However, we know that setting up an independent Bank of England is not necessarily--and certainly not sufficiently--the way to achieve low inflation, because plenty of independent central banks in the world have fairly poor inflation records. Historians will know that the Weimar republic had an independent central bank called the Reichsbank, which was not very successful. Similarly, as the previous Government's record shows, it is possible to establish low inflation and to achieve a low inflation target without an independent central bank, by using the full array of weapons at the disposal of any Chancellor--monetary weapons, taxation and expenditure. We do not agree that giving independence to a central bank is the only way to achieve low inflation.

Moreover, there are dangers in making a mechanical change without having established a low-inflation credential and record. If the Bill as drafted becomes law, if we run into a recession in a few years' time, with unemployment starting to increase, and if inflation still stubbornly remains above--perhaps only just above--the target rate of 2½ per cent., the Bank of England will be obliged to give priority to reducing inflation. It may well continue to increase interest rates, even in the teeth of a recession.

Let us suppose that, alternatively, the economy experiences a supply side shock. Commodity prices might start to rise. Oil prices, which have sometimes increased very fast, might do so again. That might feed through into an increased general index of prices and the retail prices index might increase. In those circumstances, the only weapon at the disposal of the Bank of England and the Monetary Policy Committee of the Bank will be to increase interest rates, and that could easily feed through into higher unemployment. Clause 19 contains emergency provision for all these arrangements to be abandoned and for the Bank to give way to the Treasury. However, if there were a milder shock and inflation drifted up owing to supply side influences, the Bank would be obliged to increase interest rates, not because it thought it necessary, but because it would be required by law to do so.

One can contrast the Bank's lack of discretion concerning policy generally with the example of the Federal Reserve bank of the United States, which does not have an overriding commitment to low inflation. It has several equal objectives, including the maintenance of employment. That bank has been very successful in balancing all those objectives and achieving low inflation combined with low unemployment. Obviously, the overriding commitment to price stability is unnecessary.

Therefore I believe that the hon. Member for Great Grimsby and other hon. Members who have spoken on the subject previously are right to be worried and to ask the Government what they would do in certain eventualities. The Government certainly did not understand that dilemma earlier in the Bill's passage.

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I am glad that the Chief Secretary is to respond to the debate because he will recall that he got into a tremendous muddle on Second Reading, trying to explain how the Government did not have as an overriding priority the maintenance of price stability. He was asked about that by the right hon. Member for Caernarfon (Mr. Wigley), who pointed out that the Bill did give that priority, and the Chief Secretary said:


When the right hon. Member for Caernarfon persisted and said that the other Government objectives were subsidiary to the anti-inflation drive, the Chief Secretary said:


    "The right hon. Gentleman is reading it the wrong way round."--[Official Report, 11 November 1997; Vol. 300, c. 712.]

I believe that, on reflection, the Chief Secretary will realise that actually it was he who got that wrong. The beginning of wisdom is at least to agree about where we are at the minute, so I should be grateful if he would confirm the fact that the commitment to price stability is overriding, and will be by law. I ask him to confirm his understanding of that position, which is little more than asking him to refer to clause 11.

However, we want to ask the Chief Secretary what will happen when there is a conflict between those two objectives, especially if we beget a split between fiscal policy and monetary policy. We all know that budget decisions, which are broadly fiscal, affect inflation, directly by influencing prices and indirectly through monetary factors or the influence of debt management. From now on--this is another change introduced by the Bill--debt management will be taken away from the Bank of England and given to another quango that is controlled by the Treasury.

The way in which debt is managed has a big effect on monetary policy. Whether the Treasury sells debt to the banking sector or the non-banking sector has a great effect on the quantity of money in circulation, and therefore on eventual price levels. It is quite clear--this is a statement and not an opinion--that the Government will affect the dealings of the Bank of England. Therefore, the two could move in opposite directions.

This is not mere speculation about what might happen in future in this country: there are plenty of examples of its happening elsewhere in the world. We discussed the matter at some length in Committee, but I shall refer only to the two best examples to which we alluded. The first concerns the United States in the 1980s under the presidency of Ronald Reagan, whose budgetary and fiscal policies were, by and large, expansionary and potentially inflationary. That situation was dealt with by the Federal Reserve bank under Paul Volcker, who had to put up interest rates very sharply. There was a split between the Executive, who were pulling in one direction, and the monetary authorities, which were pulling in the other.

Another example closer to home is what happened during the period following German reunification. The West German Government failed to finance the cost of reunification by increasing taxes or cutting other expenditure, so they ran a loose fiscal policy and put all the strain of the German anti-inflation drive on to the Bundesbank, which increased interest rates sharply. We now know that that was a major factor in the destruction of the exchange rate mechanism.

Even closer to home, the July Budget sowed the seeds of a potential divergence between monetary and fiscal policies. Instead of dealing with consumption--which the

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Chancellor said was in danger of overheating--he taxed savings. Inflation is still above the Government's target. Therefore, the strain had to be taken by the Bank of England, which has increased interest rates four times in addition to the increase that the Chancellor introduced before he transferred monetary policy to the Bank. So there have been five interest rate increases since the Budget.


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