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18 Nov 2002 : Column 438—continued

Mr. Jim Cunningham (Coventry, South): The hon. Gentleman probably feels that the issues he has raised are very important, and I do not think the House would necessarily disagree; but does he not expect the Chancellor to deal with some of the matters he has accused him of taking lightly in the pre-Budget report?

Alistair Burt: I might feel more confident if the general display from the Chancellor had suggested that at the back of his mind were certain niggles about where we were going. He has, of course, tried to appear confident himself—a confident Chancellor, with his finger on the pulse—but the impression that is given is one of someone who is missing something that is going on which others are spotting.

Those who have been here as long as the hon. Gentleman and me have seen what goes on. It does not matter which party is in power: Conservative Governments are not immune. A Government may start thinking that what they are doing is so right that they miss something else that is going on. With the benefit of the experience of colleagues, Members sense that the economy is in a particular state. It might be assumed that a Chancellor would say something to ensure that we understood that despite what he might think was going right, certain things might be going wrong.

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Having quoted some general comments made by the engineering employers, I want to deal with particular examples of ill effects that we might expect legislation to deflect. The agency workers directive, which is currently being dealt with by the European Community, will hit industries and others whose time is given through contractual relationships with companies, as opposed to long-term employment. In the aerospace industry, those with particular skills have always tended to follow the work and the pay round. To gain experience, they have moved to different companies after a year or so. They have taken their skills to companies that have needed those skills. The agency workers directive will make it more difficult for them to be employed, and for companies to employ them. Where does the Loyal Address show any concern about that?

The climate change levy continues to have a disproportionate impact on manufacturing. It appears from surveys that Government measures are not encouraging even those hit by the levy to do anything about the problem, so it is doubly ineffective. I listened to the Queen's Speech, but I heard no suggestion that a measure that is damaging manufacturing so much would be repealed.

Small businesses in my constituency bring me problems of a more general nature. In a recent survey, more than 1,000 businesses in the area were asked whether legislative changes over the past year or so had helped them. According to the subsequent report,

The problem is the cumulative burden of the issues I have raised. That applies whether we are talking about higher taxation, specific measures that damage particular industries, or the growing burden of regulation and bureaucracy. All that is fuelling the gradual collapse and disintegration of engineering and manufacturing in my constituency and the neighbouring area. The loss of jobs and the lack of investment lead to a further loss of confidence, and suddenly, instead of a boom, there is a wormhole. During a boom, as soon as certain issues raise their heads, everything starts to tumble. Given the amount of public expenditure that is based on the continuation of the boom—given the Chancellor's spending plans—once the hopes start to unravel, where will the Chancellor and the economy be?

Farming and agriculture are also important to my constituency. According to the latest survey by the National Farmers Union, 8,500 farmers left farming this year, and 6,600 farm workers followed them. A total of 67,000 people have left farming in six years. Farm incomes are 71 per cent. down on those of 1995. Yet, with rural deprivation growing, the Government plan to take money from rural areas and give it to urban areas in the future. I cannot see that as being fair and just.

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Accordingly, I have tried to point out that although there is an understanding of where we are in terms of the world economy—better placed than some—the seeds of destruction are there. If a Government do not pick that up when times are good, they will not notice until things have turned much worse. Then, it will be too late. Be warned, because the House will address those issues again before too long.

7.50 pm

Mr. Nigel Beard (Bexleyheath and Crayford): Taken as a whole, Britain's economic performance has excelled beyond its own record and the performance of the rest of the world. The stability achieved over five years has provided the conditions to address structural weaknesses that have prevailed for many years. Coupled with prudent management of the public finances, that economic stability has enabled the notable deficiencies in our public services—education, health and transport—to be addressed for social as well as economic reasons.

There are powerful pressures toward recession in Europe, America and Japan. The major public investment programme planned for the next three years will help to counteract those recessionary forces in Britain.

The American authorities are also shaping their monetary and fiscal policy to head off recession. Whether it is admitted or not, the UK and USA are following Keynesian principles to enhance demand. In neither case does that take risks with inflation. The expansion is well within the capacity of both economies. That contrasts with the European Central Bank and the German Government, which appear to have a fixation with inflation although the alarm bells warn of recession. Moreover, the cautious inflexibility of the resulting monetary policy cannot be compensated for by more expansionary fiscal policies, because the stability and growth pact will not allow sufficiently large public spending deficits.

There is a need for a commonly agreed and firmly enforced policy to prevent extravagance in Government spending in the eurozone. However, that must take into account the position in the economic cycle and national debt, as the United Kingdom's fiscal rules do. I am sure that there is no one better placed than my right hon. Friend the Chancellor to remind his friends in ECOFIN of the difference between prudence and sadomasochism. Such an over-tight monetary policy and rigid rules restraining fiscal policy are dangerous not just because of the immediate economic consequence, but because, in the popular mind, the euro will become associated with stagnation and recession.

No doubt those anti-Europeans who associate everything from original sin to global warming with the European Union are already saying that those restrictive macro-economic policies are inseparable from monetary union, but they are wrong. The stability and growth pact needs amending to something nearer the UK's fiscal rules, but the concept of European monetary union does not need to be set aside to achieve that. Japan provides a cautionary tale as to what could happen if it is not done. That economy continues to be in thrall to deflationary forces, which have proved very difficult to throw off.

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There is a real risk of the world economy in general moving into a similar position. With American interest rates at 1.25 per cent., there is not far to go before US monetary policy can have no further stimulating influence on the US economy. If Europe keeps on digging its current hole deeper, there will be no source of economic growth in the world and contraction of the world economy becomes possible. If that happens, Britain cannot escape the consequences, no matter how wise its economic policy may be.

I do not believe that deflation is the most likely future for the world economy, although I do believe that it is sufficiently possible that we should establish what to do if it happens. The nearest the world economic community has come to a contingency plan appears to be whistling in the dark to keep the evil spirits at bay. A beginning would be my right hon. Friend the Chancellor telling our European friends about the third law of holes, which is, XIf you're in one, stop digging." That is a profound truth enunciated by his predecessor, Lord Healey.

Beyond that, no one really knows what to do to counteract world deflation. For that same reason, the world economy languished in such a condition throughout the 1930s, only to be pulled out of it by the second world war and the Keynesian economic policies that followed it. I ask the Minister, what steps, as a contingency measure, are being taken to map out an approach to deflation at home and to develop a concerted international approach if that should become necessary?

I turn from the gloomy possibilities to the more usual probabilities for the future—namely, that the economic cycle will continue, with counter-cyclical macro-economic policies modifying the peaks and troughs so as to avoid the boom and bust that we have come to associate so clearly with Conservative Administrations.

In recent months, growth has been sustained by high consumer demand based, to an extent, on increased personal debt. Underlying that, however, have been certain imbalances such as the growth of the service sector along with difficulties for manufacturing, a significant balance of payments deficit and continuing house price inflation. Such inflation, which makes the conduct of monetary policy so difficult, reflects the fact that too few dwellings are being built. The programme recently announced by the Deputy Prime Minister is addressing that problem.

The other issues are interrelated. Despite the general growth in the economy, to which services contributed, domestic manufacturing has not been able fully to supply the increased demand for goods. Thus, imports have been sucked in. The high value of the pound against the euro has reduced the competitiveness of manufacturing exports, just as the volatility of the exchange rate over many years has reduced incentives to invest in manufacturing.

Manufacturing is the key to curing many weaknesses in the economy, and it is not just a few bricks in the economic edifice—it provides the keystones and the flying buttresses that keep the whole building upright. Manufacturing is the source of most of our export earnings. Without it, a vast range of skills and abilities could not be used for the economic benefit of either individuals or the country. For all those reasons, it is

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essential to place on productivity the emphasis that the Chancellor has provided. Government policy is now putting that into practice.

Our productivity lags behind that of competitors. For example, the USA has more graduates in the work force while the European Union has more people with intermediate qualifications in the work force. Investment levels are poor, because economic instability has led to uncertain expectations of reward. As a similar consequence of short-term horizons, research and development as a proportion of gross domestic product has been falling behind the figure among competitors and innovation has not been foremost among management objectives.

All those issues are being addressed by Government policy, which is underpinned by maintaining economic stability. The exchange rate remains a maverick element, distorting both import and export competition. The trade element of the $100 billion that crosses the world's exchanges every day is minuscule. The exchange rate is not settled by considerations of the competitiveness of goods traded, as traditional economic theory would have it.

To take the random foreign exchange element out of manufacturing competitiveness, it is imperative that this country join European monetary union. That would eliminate the impact of volatile foreign exchange rates for the majority of our overseas trade, which would also be no worse than for any other EU manufacturer when exporting outside the EU. For the same reason, the exchange rate affects the prospects for inward capital investment in manufacturing from overseas. There are already signs of that investment falling away because Britain is outside the European monetary union. We should not forget that after the industrial mayhem produced by the overvalued pound in the early 1980s, inward investment has sustained this country's technical and managerial skills in several industries, such as motor manufacture.

One the famous five tests is the impact on the financial services industry of joining European monetary union. I do not demur from that, but given the role that manufacturing industry plays in the economy, it has a claim to be up there, too.

Alone, we cannot escape from the effects of worldwide deflation, if that should happen, but we can prepare contingency plans to minimise the impact and to speed recovery. Equally, alone we cannot protect our industry and thus our economy against the maverick effects of today's foreign exchange markets. The solution to that is ready for us to take up by joining European monetary union.

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