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Angela Eagle : Does my right hon. Friend have a view on the unprecedented situation in respect of global monetary structures? The Asian currencies are pegged to the dollar and other western currencies are floating—a hybrid system unlike any that we have experienced before. The globally dominant currency, the dollar, is experiencing pressure. Does he have any views on what might happen?
Denzil Davies: I do not know how it will unwind. There have been calls for China to be brought increasingly among the main economic nations, but the Chinese will probably go their own way and make their own decisions in their long-term trading and security interests.
The pressures on the US are considerable. An American think-tank recently looked at the prices of products in the US and in China. Prices in China were 30 to 50 per cent. below the cost of production of similar or identical products in the US. Such pressure cannot
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continue without destroying a country's industrial and economic base. It will mean a massive transfer of wealth from the US, which is already happening, and ultimately from the countries of western Europe to China and other Asian countries.
The European Union used to believe that it was immune from such pressures. Those of us who have sat through many debates on the EU remember that it was said that one of the reasons for its formation was that it could be ring-fenced. The common agricultural policy was a manifestation of that thinking. The countries of the EU, it was believed, could trade with each other and would not need to trade with anyone else. However, that world is going or has gone. Apparently, 10 years ago the EU had a surplus on its trading account with the countries of Asia and China. It now has a deficit of $10 billion, and that is with a low rate of European growth. The EU is not capable of withstanding the pressures that we will see from China and other Asian countries.
The problem is not only the balance of payments, but costs, wages and profits. The pressure on wages is now considerable. Last month, the average yearly increase in wages was 3.7 per cent., which is well below the Bank of England's 4.5 per cent. figure used in analysis of inflation and other factors. The minimum wage of £4.85 is fine, but my impression is that wages, certainly in the manufacturing sector, are gradually being driven down towards £4.85. That figure is seen as a respectable amount, so the pressure driving wages down is considerable. Of course, that has implications for the Chancellor. He subsidises wages through the working tax credit, and the cost of that subsidy will probably increase.
If costs cannot be reduced and prices cannot be increased, companies' profits will be affected. If profits do not go up, investment cannot be made. What about the effect on tax yields? No one has studied the effect of globalisation on tax yields, but if wages are driven down, yields from income tax will fall, unless more people can find work. Indeed, the Chancellor's estimate of revenue from income tax fell short. VAT is a tax on prices. If the price of imported goods falls, and the price of domestically created goods falls in competition, the VAT yield will be reduced. Perhaps that can be made up by VAT on services or in other ways, but the fact remains that globalisation pushes down wages, costs and prices. If it pushes down profits, the yield from corporation tax will also fall. Governments may have to look at ways of raising money from taxation other than the main taxes of income tax, VAT and corporation tax, because of the effect of globalisation.
In many ways, globalisation has had a benign effect on inflation. Prices have been driven down. The high inflation of the 1980s has gone, mainly because of competitive global pressures. Japan still has zero interest rates, because some people are now more worried about deflation than inflation. Alan Greenspan in the US was so worried about deflation that he reduced American interest rates to almost 1 per cent., although they have now gone up by a few quarters of a percentage point.
Our central bankers still try to claim the credit for reducing inflation. We have heard again today how wonderful the Bank of England is, and I bow at the shrine, albeit a little reluctantly. We have heard how
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wonderful it has been in keeping down inflation, but that is putting the cart before the horse. It is international competition that has pushed down prices. The governors of central banks, who are usually behind the curve, follow that by reducing interest rates. I accept that that is not a fashionable view, but I believe it is a better explanation.
The trouble is that those central bankers keep looking for inflation everywhere; they are a bit like generals who cannot find an enemy. For central bankers, the reds are still under the bed, and they are inflation. The Bank of England looks for inflation all over the place. I do not know how an interest rate of 4.7 per cent. can be justified when the consumer price index, flawed as it may be, is only, as the Chancellor told us, 1.2 per cent. It was a mistake for the Bank to raise interest rates on the last few occasions so that the rate is now 4.7 per cent. The signals coming from the Bank are extremely confusing, almost as confused as the Organisation for Economic Co-operation and Development report about which I read in the newspaper today.
We cannot wish away globalisation. Some of the effects have been benign and beneficial, as I have tried to point out, but there is a danger when a huge country such as China begins to dominate world trade in goods and can make such inroads into the productive capacity of western countries. We have to consider whether we can bear the substantial transfer of wealth from western countries to such countries, as the effects on standards of living, taxation yields and public expenditure will be considerable. The time is past when globalisation can be viewed merely as a consequence of free trade and countries such as China can be described as trading partners rather than as competitors. That type of imbalance makes a mockery of Ricardo's economic tenet that trade is good for all, because each country can export the products that it is good at making. That is no longer the case when a country such as China could completely dominate world trade.
It will not be easy to try to alleviate the consequences of globalisation and to stem the seepage of wealth from western economies, but we should at least recognise that there is a problem and that it cannot simply be left to the free market. Governments, whether of the left or the right, will have to interfere again to protect their economies, industries and societies from the pressure from free trade and globalisation. Once we acknowledge that there is a problem, perhaps we can find ways of countering it.
3.23 pm
Mr. Mark Prisk (Hertford and Stortford) (Con): I am delighted to have this opportunity to contribute to an important part of the Queen's Speech: the economic affairs that underscore the country's wealth and prosperity.
I want to turn from the broad landscape of the global picture of economic affairs to something more local but just as important—the concerns of small businesses and the self-employed. I do so both as someone who was self-employed for more than 10 years before I became a Member and as honorary treasurer of the all-party small
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business group. I am especially pleased that it is the largest all-party group and I hope that that reflects the genuine interest and concern of all Members in the importance of small enterprises.
There are 3.8 million small businesses in the UK and 3.6 million people are self-employed. Those distinct but overlapping groups represent the backbone of our economy. After all, they employ more than half the private sector work force and they generate much of the wealth that enables us to afford the public services that we debate in this place. They are also often the most entrepreneurial and innovative enterprises in our economy.
There is an additional reason why I believe that small enterprises matter; indeed, it is one of the reasons that I joined the Conservative party. Family businesses—the self-employed and small enterprises—send out a clear message that no matter what someone's background is, whatever the colour of their skin, whatever their race or creed, if they have the ambition, the ability and the will to work they can be their own boss and make their own way in the world. That is a very powerful reason for us to consider the role of small businesses—not only in the context of the economic debate that we are holding today, but because those businesses reach beyond mere economics.
As a former freelancer, and having met many of the small business organisations in my constituency, it is clear to me that entrepreneurs are struggling. They tell me that they are struggling for two main reasons: the burden of regulation and the burden of the tax system. It is evident that both the volume and scope of regulation has worsened over the past seven years. We know that there are 15 new regulations every working day—a 53 per cent. increase since 1997. In absolute terms, the number is between 3,500 and 4,000 in any one year.
I am well aware that many of the regulations come from Brussels, but the majority still come from Whitehall. It is fair to say that Whitehall manages—extraordinarily—to make EU regulations even worse than they might otherwise be, but nevertheless regulations, and their burden, matter. They matter not simply as a debating point—in the jousting between the Opposition and the Government in this place—but because, no matter what their worthy aims may be, the costs of complying with regulations and of administering them actually count for businesses. Let me give a short example: the working families tax credit—apparently worthy in its aim, whatever one may think of its merits as a system—costs business £105 million every year to administer. That is a significant amount for business to take on, and it is but one measure. I know that it is a favourite of the Chancellor's, and given that tomorrow's will, I hope, be his last pre-Budget report, I hope that this measure will go with him. When the Secretary of State for Work and Pensions replies to the debate perhaps he will enlighten us on what I am sure the Government will wish to claim is their radical—nay, modernising—agenda to seek to reduce this burden. I look forward to his eloquence on that point.
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