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6.2 pm

Mr. Denzil Davies (Llanelli): The hon. Member for West Dorset (Mr. Letwin) seemed to say at the beginning of his speech that he did not see much point in considering the Finance Bill on Second Reading. I do not know whether he was saying that. Most of us would wish to have the debate; otherwise, he would have been deprived of 39 minutes of a rather rambling but no doubt intellectual speech. That would be to do him an injustice.

The hon. Gentleman rambled from the aggregates tax eventually to savings. His treatment of savings was extremely simplistic. There is much evidence that the savings ratio decreases when people are confident about the economy. [Interruption.] People may be confident of their jobs, confident of growth and confident in the Government. He suggested that there will not be capital for investment because the savings ratio is low. The United States has a low savings ratio, but it manages to provide considerable capital--partly through the stock market--for the investment that he wishes to see.

Mr. Letwin: If there is an excuse for considering the Finance Bill on Second Reading, to hear the right hon. Gentleman is possibly it.

First, does the right hon. Gentleman recognise that I was referring to domestic sources of savings? I take his point that one can call on external sources, but those are difficult in terms of the exchange rate. Secondly, does he accept that if the savings ratio remains low despite the lack of confidence that is beginning to emerge, there is genuinely a worrying trend?

Mr. Davies: I do not think that there is a lack of confidence. If people were less confident about the economy, they would probably save more. These things happen from time to time. There is no correlation between a bad economy and low savings. People do not save when they are confident. They seem to save more when they are less confident. That seems to be the history of this difficult subject, which the Treasury and many economists have considered over the years.

The purpose of a Finance Bill is to provide the legislative means to put into effect the taxation changes, about which we heard about from my right hon. Friend the Chief Secretary, that are announced in the Budget. It is necessary to have a Finance Bill to put most of them into effect. There are clauses that provide for a reduction in fuel duties and a reduction in vehicle excise duties. There is the welcome increase in the children's tax credit and the increase in family tax credit. There are small but extremely helpful changes to VAT, which I believe are welcomed by businesses, especially small businesses.

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There is also the welcome way in which my right hon. Friend the Chancellor of the Exchequer provided income tax relief by extending the threshold on the 10p lower rate rather than providing relief on the basic rate. As my right hon. Friend the Chief Secretary said, that relief provides in a full year about £1 billion extra assistance for those who pay tax at the lower rate.

I move on to table A.11 of what my right hon. Friend referred to as the Red Book. It is no longer the Red Book, but I do not want to be pedantic. Perhaps it is a book of many colours. The tax reductions that are given legislative form by the Bill amount to perhaps slightly more than £3 billion in this financial year. That is not an insignificant amount to put back into the economy when the outlook for the global economy--I do not think that there is any dispute about this--is looking less certain.

Such a sum, together with the public expenditure increases for the next three years announced in the autumn by my right hon. Friend the Chancellor, should, apart from the intrinsic merits of spending that money, provide a welcome cushion for the British economy if the world economy, especially the economy of the United States, slides into recession. It is to be hoped that it will not, and that there will be merely a slow-down. The tax reductions, which amount to about £3 billion, and public expenditure will obviously help to cushion a global recession or slow-down, if there is one.

Those of us who are not directly concerned with business and commerce do not always realise the pressure that the global economy and global competition now put on domestic industry, especially manufacturing industry. That pressure also bears on some sectors of service industry that have to compete internationally. To maintain profit margins, costs must continually be kept down or cut and prices not be increased. Indeed, prices often must be reduced. That places tremendous pressure on industry and businesses.

As I see it--perhaps I should not say this--the problem is becoming not rising inflation but a falling rate of inflation. If the trend continues, there could be a fall in the general level of prices. That would take us into deflation, as may have happened in Japan over the past few years, where inflation has probably settled at zero.

I must be careful what I say because my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), like me, was around in the 1970s, when inflation was high. Having been around at that time and in the early 1980s, when inflation was also high, I do not find an inflation rate of 1.9 per cent. worth worrying about. I worry slightly that perhaps we should have a higher rate of inflation. I do not know how the harmonised European figures are meant to apply to Britain, but they suggest that our inflation is about 1 per cent.

I am not particularly worried about a rate of inflation of 1 per cent. As someone who was around in the 1970s, I am amazed at how rapidly over a fairly short time-- 10 or 15 years--the level of inflation has fallen from the high levels of the 1970s to 1 per cent. or 1.9 per cent. Many people will claim credit for that, but most is claimed by that worthy group of people known as the central bankers, who could be described as the high priests of monetary policy. The past 10 years constitute the decade of the central bankers, who have peddled their ability, expertise and prudence in monetary policy. They maintain that its mysteries are best left to the high

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priests because they approach such matters with clean hands, unsullied by the grubbiness and self-seeking of democratic politics and politicians.

As I have said that I do not worry about inflation, I might as well say that I do not believe central bankers. I do not believe that central banks or monetary policy had much to do with the sharp fall in inflation in the past 10 to 15 years. It was caused mainly by forces that are outside monetary policy. Many factors contribute to intense global competition. They include the reduction in tariff barriers--in many cases, their elimination--and the working through the system and elimination of controls and regulations, which perhaps date from the second world war. We are now in a position that is similar to that before the first world war. There is complete freedom of movement of capital, and money can move quickly and easily from country to country. There has been an immense advance in technology, which is easily transferred to developing countries. That enables them to compete with countries that are described as more developed than they are.

The fall of the Berlin wall, the break-up of the Soviet system and the intensification of competition that that caused also affected the global economy. Countries that were on the other side of the iron curtain are now trading in the same way as western countries. All those factors have driven down costs and prices through the intensity and universality of competition.

The fall in inflation therefore has little to do with central bankers and monetary policy. Indeed, my impression is that central bankers are, to use an American phrase, behind the curve. The Federal Reserve and the European central bank are behind the curve. Indeed, our much revered Monetary Policy Committee seems to take decisions on last month's figures and not on what it believes might happen in future. The Federal Reserve is not merely behind the curve; although it is supposed to be independent of Government, it is not independent of Wall street. Mr. Dow Jones frightens the living daylights out of Alan Greenspan, who is the Caiaphas of the high priesthood of central bankers.

We get wonderful language from the Federal Reserve; some time ago, the chairman criticised Wall street for irrational exuberance. Let us leave aside the philosophical question of whether exuberance can be rational. Given that it was irrational, rational language, debate and argument from the chairman of the Federal Reserve would do no good. It did not. He was frightened to do anything because he did not want to upset Wall street. He was following the bubble upwards, and presumably hoping that it would burst itself so that the Federal Reserve would not get the blame for the consequences, which are now occurring.

The asset bubble, whether comprising shares in America, property in Japan and, on a lesser scale, property and shares in Britain, appears, paradoxically, to be a consequence of low inflation. Investors and managers have never adjusted to a world of low real income returns, and they therefore look for bubbles and capital assets to supplement or prove their existence.

Even if we accept that the central bankers managed to decrease inflation from very high levels, once it is down to 1 per cent. or 1.5 per cent., they are out of a job. Central

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bankers are not needed when we approach zero inflation because they cannot do much. A 0.5 per cent. or 1 per cent. cut in interest rates when rates are 5 per cent. and inflation is 1 per cent. or 1.5 per cent. is hardly likely to have an effect. We fear that global competitive pressures will push prices down, and no amount of interest rate reductions by central bankers will have much effect.

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