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5.34 pm
Sir Peter Tapsell (Louth and Horncastle): It is always a particular pleasure to follow the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) in an economic debate. We have debated the economy across the Floor of the House for many years and I have a high regard for him. When he was a Treasury Minister, he had a magnificent record in trying to restore fiscal prudence to a Labour Government when fiscal matters had got out of control. He will not be surprised to hear that I did not agree with the main thrust of his speech about Europe, but I certainly agreed with his remarks about Mr. Greenspan and the fact that the United States Federal Reserve does not take a narrow view about inflation, but takes a wider view that embraces growth, employment and other social factors.
I welcome the Chief Secretary's carefully worded statement, giving the most categorical assurance to the House and the nation that the Labour Government will veto any attempt by the European Union to impose tax harmonisation on this country. I am sure that he will have the almost unanimous support of Conservative Members in honouring that pledge. However, history has proved that Ministers who give such assurances in all good faith can find it more difficult than they had supposed to fulfil their undertakings.
While the Chief Secretary was speaking, I was handed a piece of paper from the Press Association tape from Brussels, reporting events of only a few hours ago. It said:
"German Finance Minister Oskar Lafontaine today called for majority voting on tax harmonisation in Europe--removing Britain's veto."
Mr. Lafontaine is quoted as saying:
"The principle of unanimity must be broken."
1 Dec 1998 : Column 712
I am sure that that sounds even more impressive in German.
Mr. Byers:
Will the hon. Gentleman confirm that that was a personal statement by Mr. Lafontaine, rather than a statement on behalf of the German Government?
Sir Peter Tapsell: Yes, Mr. Lafontaine said that. However, when Finance Ministers say, "This is a personal statement and that is a Government statement," I become somewhat anxious. I hope that the Chief Secretary's statement to the House about tax harmonisation was a Government statement rather than a personal one. I am reminded of Harold Wilson's habit, when he had made some great announcement to the country on television or elsewhere, of saying, "This is not just a pledge; it is a promise." Sometimes, he would say, "This is not just a promise; it is a pledge."
I hope that Ministers here and in Europe will not become too schizophrenic and will not think that some public statements can be passed off as just a personal point of view while others count as ministerial statements. All the Finance Ministers of Europe are meeting today. It is such a crucial meeting that our Chancellor feels that it is more important to attend that meeting than the economic debate on the Queen's Speech. In all my years in the House, I cannot remember a Chancellor not being present at this debate. This is the day that the Finance Minister of Germany--the most powerful economy in Europe--has chosen to say that the principle of unanimity on harmonisation of taxation must be broken. Ministers should take that statement seriously.
The Gracious Speech says:
The Chancellor is clearly anxious about his hasty and furtive decision to give independence to the Bank of England a few days after the general election and to abandon his ministerial responsibility for monetary policy. That was not in the Labour party's manifesto and it was not agreed with the then shadow Cabinet before the general election. We are told that it was not even put to the full Cabinet for discussion before the announcement.
As I have said in the House before, that decision was one of the most important that the Government have taken; I believe that it will prove to be an albatross around their neck and the neck of the nation for many years to come. The whole project was very much the Chancellor's baby, which is why he keeps saying that it has been a huge success. As its unwisdom becomes ever more evident, we must not forget that he is the man to blame.
Lord Healey has pointed out, in his usual frank and genial way, that
For a year, the academic economists--none of whom has had much experience in industry or any form of business--have been fighting the battle on the wrong front, looking over their shoulders at past inflationary problems rather than forward to the darkening skies of what will almost certainly be the most serious world recession since the war.
Six increases in the bank rate--making our interest rates the highest in the developed world--produced a seriously over-valued pound for a prolonged period. The speculators were happy to take the enhanced income that was offered to them, but the price was paid by our export manufacturers and farmers, for whom this monetary mismanagement has been a disaster.
The Bank of England and those on the Treasury Bench cannot accuse their critics of being wise after the event. For more than a year, some of us have been warning the Chancellor that 1999 would be a year not of inflation but of recession, or worse. On each occasion I have put that point to the Chancellor in the House--when one can catch him here on one of his flying visits from Europe--he has invariably dismissed it with his usual cocky bombast. He has uttered the meaningless slogan that he had no intention of pursuing a policy of boom and bust--as though anyone had asked him to do so. Now the penny has finally dropped, even for him. Boom is no longer on the British economic agenda, even as a slogan, but bust most certainly may be.
The academic economists have now cut interest rates and will doubtless cut them again, if not on their own initiative at least every time that Mr. Greenspan gives them the lead. The damage has already been done, however. There is always a time lag before changes in monetary policy are felt throughout an economy--it may be 12 or 15 months or longer. The damage caused by the Government's mistaken monetary policy--they cannot shuffle off the ultimate responsibility, certainly not in the eyes of the electorate--will be felt for a long time. Some exporters and farmers will never recover, but will be forced out of business.
The decision to give independence to the Bank of England has been a disastrous failure so far. The Chancellor is looking more and more like Philip Snowden and less and less like Maynard Keynes. As hon. Members from both sides of the House have pointed out in the past 18 months, if one puts a central bank in sole charge of monetary policy and gives it a target for inflation but not for growth or employment, one is bound to end up with an excessively tight monetary policy and rising unemployment.
That is exactly what happened in continental Europe, which was the main reason why Chancellor Kohl lost the German election on 27 September and why President Chirac lost his conservative parliamentary majority in the French Assembly. Mr. Lafontaine, the new German Finance Minister, seems to understand that well. In recent years, the record of the previous German and French Governments, whether of the left or of the right, has been disgraceful in the crucial matter of employment.
At a conference in Berlin at the beginning of the year, I pointed that out in a private conversation with a senior Minister in the previous German Government. I asked him whether he was concerned that unemployment in Germany was approaching the level that brought Hitler to power. He replied, "The situation today is quite different. Our social benefits are now so good that many Germans, particularly in the east, are better off out of work than in work and many of them don't want to work anyhow." No doubt that reply was realistic, but it represents a lamentable way to run an economy. That approach will eventually produce a lack of international competitiveness, which will be a threat to the welfare budget as well as to employment.
That is exactly what is likely to happen when fiscal and monetary policies are separated. Governments run an even laxer fiscal policy to cope with social discontent and the independent central bank tightens monetary policy to offset the lax fiscal policy. One ends up simultaneously with a monetary policy that is too tight and a fiscal policy that is too loose. That is the almost inevitable consequence of putting responsibility for the control of those two levers of economic management in different hands. The result is bound to be higher unemployment than is necessary to maintain a reasonably stable currency.
As Aneurin Bevan was fond of saying, "You do not have to look into the crystal ball when you can read the book." Turn to almost any page of that book in recent years and the writing is clear--it is set out in capital letters. In the 1980s, the United States Administration ran a lax fiscal policy, the Fed responded by running a tight monetary policy and American unemployment soared. In Germany, in the 1990s, the German Government ran a lax fiscal policy, the Bundesbank responded with a tight monetary policy and unemployment soared. In Britain, while we were members of the exchange rate mechanism, we followed the same policy mix, with the same dismal result.
In opposition, one of the most intellectually attractive aspects of new Labour thinking was that it appeared to have grasped the message that there must be a close correlation between monetary and fiscal policy. As soon as the new Chancellor, on his fourth day in office, announced that he was abandoning his personal responsibility for the difficult and politically burdensome task of fixing interest rates--a vital decision, which he had hidden from the electorate and, apparently, from most of his colleagues throughout the election campaign--I realised that the self-proclaimed iron Chancellor was clad in tin. So it has proved. After one year of boasting about his fiscal prudence, and as the Bank of England pushed interest rates higher, the right hon. Gentleman suddenly announced a popular and much looser fiscal policy and increased expenditure substantially over previous levels on assumptions about future growth that no one but he thinks are attainable. New Labour had transformed itself into the new Bourbons.
Mr. Lafontaine is a highly intelligent, outspoken man, full of interesting ideas. He is clearly destined to be a left-wing Newt Gingrich in Europe in the years to come, which will be tremendous fun. For all our sakes, we must wish him well, not least because of his declared intention to run our economy and tax system as well as his own. However much he may favour his general approach to Europe, our Chancellor is already jealous of Mr. Lafontaine because he is a real intellectual as well as being a real socialist. When I first entered the House, there were many people like that around and I rather miss them, so at this stage I feel well disposed towards Mr. Lafontaine, so long as he confines his activities to a purely German context. He clearly agrees with me about central banks, and he has made it clear that the lack of democratic accountability of the European central bank is unacceptable and that it must have obligations about employment and growth as well as inflation.
I seem to remember some of us--including, dare I say, my honoured Whip, my hon. Friend the Member for Beverley and Holderness (Mr. Cran), who is sitting on the Opposition Front Bench--pointing that out during debates on the Maastricht treaty and being much scorned by those on the Labour Front Bench for doing so. Of course, Mr. Lafontaine's suggestions for clipping the wings of central banks have produced howls of protest from bank governors everywhere. I cannot recall an occasion on which there has been such unanimity between governors. When they attend International Monetary Fund meetings in Washington every September, they are usually at each other's throats.
Mr. Lafontaine is also right to put the reduction in unemployment in Germany and Europe as his top priority. The political class in the European Community has shamefully betrayed its people on that issue for too long. At last, we seem to have a European Finance Minister who is determined to reverse the process, and all power to his elbow. Unfortunately, and this is where Britain must be careful, he seems so far to be less preoccupied with reducing supply-side rigidities in Germany and Europe than with emphasising the social chapter aspects of economic policy as his method of reducing unemployment. That would be a serious error if it were continued--an error into which the British Government are already falling. Like Britain, Europe needs--particularly if the world is heading for a deep recession, as I believe it is--flexible labour markets, enhanced skills and the encouragement of entrepreneurship to maintain competitiveness.
Attractive though they may superficially appear, shorter working hours, minimum wages, longer statutory holidays and extra social provisions are ultimately a direct threat to high levels of employment, as Germany and France have been demonstrating for some time. It is bad news for Britain that Labour seems to be going down that road and throwing away the benefits of some of our opt-outs from the Maastricht treaty.
"My Government believe the historic decision to give the Bank of England the power to set interest rates has been crucial to the meeting of its inflation target and credibility in the system."
I hope that it will not sound ungracious if I point out that inflation today is approximately the same rate that the Government inherited from their predecessors and that the credibility of the Bank of England's inflation forecasting machinery has never been lower. It has been difficult in recent months to meet, anywhere in the country, any industrialist of experience--certainly anyone who has worked in the exporting industries--who believes that the Bank of England has been getting its monetary policy right.
"an independent Central Bank is a gimmick to be used as an apologia by failed Chancellors to shuffle off their failures on to the Bank of England."
He speaks with some authority on these matters. The failure of the experiment has already become evident and the shuffling off has already begun. As soon as it became evident to everyone that the Bank of England had pushed up interest rates too far, Ministers scurried around briefing everyone, on and off the record, saying that they favoured a cut in interest rates. By then, however, the damage had been done.
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