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Mr. Cotter: As my hon. Friend the Member for Eastleigh (Mr. Chidgey) has left the Chamber for a moment, I should like to defend him. We have proposed a balanced Budget, and to pick out one aspect of it without considering the others is not to consider the whole.

Dr. Ladyman: I am going only by what the hon. Member for Eastleigh said in his speech--I cannot do more than that. I confess that I have not read in great depth the Liberal Democrats' proposed Budget, but, even if it is a balanced one, without increasing interest rates it would not serve the necessary purpose of reducing inflation. The Liberal Democrats are therefore not offering any proposals to end the Chancellor's dilemma, in which--people generally agree--interest rates, and consequently the pound, are too high.

Mr. Cotter: As I said, we have a complete policy. It would be wrong to try to deal with that policy in a short intervention. However, a part of our proposals on making progress on lowering interest rates is an early single currency timetable.

Dr. Ladyman: I shall return to the single currency issue later in my speech. A belief that I have propounded many times is that in the House we could do with a lot more agnosticism about the single currency. A few hon. Members are absolutely wedded to the idea of entering it, and fewer hon. Members are wedded to the idea of never going in. I think that we need a little more open-mindedness by all hon. Members, so that we can judge what is really in the United Kingdom's best interests.

The right hon. Member for Wokingham (Mr. Redwood) has left the Chamber. I was delighted to hear his--as I said earlier in the debate--almost damascene conversion to the cause of manufacturing industry. I have absolutely no doubt from the performances that he gave on television--when he was an adviser to Margaret Thatcher, before his election in 1987, as he was beginning to climb the steps of promotion in the Conservative party--that he was not being helpful to manufacturing industry.

The quotation to which I referred in my earlier intervention was absolutely accurate. The right hon. Gentleman said that he did not consider the balance of trade significant and that it should not be used as an index of whether the economy was going in the right direction. Therefore, I am delighted that he now supports manufacturing industry.

Today's debate shows that economics is extremely complicated. As the Conservatives failed to understand that in 18 years in government, it is unlikely that they will have learned to do so after 14 months in opposition. One matter on which we all agree, but which the Conservatives appear to be trying to forget, is that at the end of the day inflation is the company killer. It kills exports and will ultimately damage the prosperity of the United Kingdom, so we have to get it out of the system.

I acknowledge some fault on behalf of the Labour party. Perhaps previous Labour Governments did not realise quickly enough the danger of inflation and the

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damage that it can inflict. That failing was shared by the Conservatives for a considerable time, but at least we have grasped that now. We realise that, once inflation gets into the system, it puts prices up for ever. It cannot be reversed a few months later. However, if it is necessary to increase interest rates to get inflation out of the system, at least they can come down again. In the long term, they are less harmful than inflation. We have to set ourselves a target in respect of inflation. Deep down, that is the view of all industrialists and those in the manufacturing sector who are currently struggling.

I have received representations from manufacturers in and around my constituency about the effect of interest rates and the high pound. I share their concerns, but in the long term, inflation is what really hurts them. I believe that they share my objective of getting it out of the system.

As everyone is aware, my right hon. Friend the Chancellor of the Exchequer set up the independent Monetary Policy Committee to set interest rates. Let us speculate for a moment what would have happened if that committee did not exist. The Chancellor would have received the same data and the same advice. Presumably he would have had the same motivation as the Monetary Policy Committee, so it is likely that, at least originally, the same decisions would have been made. There might have been differences in the interpretation of the data, but broadly the same decisions would have been taken.

Sir David Madel: One hopes that the Chancellor would not do what the Monetary Policy Committee has done in every decision--it always over-corrects.

Dr. Ladyman: The hon. Gentleman is absolutely right. Perhaps the Chancellor would have done things slightly differently. In the long term, however, my fear is that, when the going got tough, the Chancellor would ultimately have done what Chancellors have always done, and under-corrected. If that was the case, he would not have increased interest rates when that was necessary. There was considerable evidence of that towards the end of the previous Government's period in office. Although there was clear information about the inflationary pressures in the economy, the Government did not increase interest rates as quickly as they should have done.

Mr. Boswell: The hon. Gentleman is making an interesting speech. Does he agree that the essential difference is that, when there is no independent Monetary Policy Committee, the Chancellor alone is responsible for those decisions both to the House and ultimately tothe electorate? Under the present arrangements, the responsibilities are confused and to some extent deniable.

Dr. Ladyman: I do not accept that at all. Responsibility for decisions by the Monetary Policy Committee ultimately lies with the Government. The Government must be prepared to say, "We set up the mechanism, so we shall take responsibility for it." I do not accept the argument that responsibility is in any way diffused.

There is, however, a growing danger in respect of the Monetary Policy Committee, which I would ask the Chancellor and his ministerial colleagues to bear in mind. The committee has to focus only on the target that the

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Government have given it. During various dinners and meetings, I have spoken with at least four members of the Monetary Policy Committee. They were absolutely focused on the target that the Government set them--the inflation target. That was absolutely right. They said several times, "We cannot look at other matters. We cannot consider unemployment or sterling, because we have to focus on meeting the Government's inflation target, as that is the only task that the Government have set us." Now that the Monetary Policy Committee has reached the centre of economic debate, my concern is that some of its members may now try to act as quasi- Chancellors, by making political judgments and considering economic factors other than the target that the Government have set them.

Let me use an analogy. I was once given a flying lesson as a birthday present. When the aeroplane was coming in to land, the instructor explained the process of getting back down to terra firma without an almighty bang. Basically, one has to set the flaps and prepare the aeroplane for landing before slowly reducing speed. At the same time, one has to adjust the position of the nose of the aeroplane so that it remains level. He said, "It is very complicated doing everything at the same time, so I shall adjust the engine speed while you keep the nose of the aeroplane up. You focus on doing that." Because he had taken the other factors off my shoulders, I was able to focus on that one task, so the aeroplane landed safely.

In many ways, the Government have reached exactly that arrangement with the Monetary Policy Committee. They have set the target. The Government have taken the political and economic decision that inflation should be 2.5 per cent. and have given the Monetary Policy Committee one tool with which to achieve that target--interest rates. So long as the Monetary Policy Committee focuses on that target, the Government will know that, by hook or by crook, the 2.5 per cent. inflation target will be met, and they will be free to concentrate on the rest of the economy. The political responsibility, however, remains with the Government as they set the target. As I said earlier, if the Monetary Policy Committee attempts to broaden its target, there will be problems if it comes into conflict with the Government.

Although there may be some short-term problems, in the long term the Government's policy will benefit manufacturing industry. Although increased interest rates and a high value of the pound may hurt in the short term, they will be worth it if they get inflation out of the system. We have to look for some short-term ways to help manufacturing industry during that process. The Government must make sure that it really is short-term pain and that it is over as quickly as possible. If the Monetary Policy Committee were in any way inclined to listen to my advice, I would encourage it to over-correct. Frankly, the quicker it is over with, the sooner interest rates will come down. We have to aim for stability.

We have had a brief debate about monetary policy and the European currency. Let me reiterate what I said in an earlier intervention. Low interest rates, low inflation and a competitive sterling are essential regardless of whether we join the European currency. I do not need to make up my mind about the euro until after the next election, when we can see what lies before us, and I justify my agnosticism on the ground that, whether one wants to enter the currency in the next five minutes--which I

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believe would be foolish, given current circumstances--or whether one is determined never to enter it, the economic targets that one sets should be identical.

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