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14 Jan 2009 : Column 135WH—continued
“The problem is the UK economy doesn’t have a leg to stand on... It’s very hard to know where the floor for sterling might be when there’s nothing to support it.”
I worked for Ernst and Young in 1992 during the last sterling crisis and the resulting humiliation of John Major’s Government. I still have the original newspapers from that time. I remember how difficult it was as a former Minister and MP and a prospective Conservative parliamentary candidate to explain to colleagues what had been happening and whether there was a coherent Government policy. The judgment passed by the Ernst and Young ITEM Club is that this Government have made an absolute mess of their responsibilities and that their economic policy is in a complete mess. If we carry on like this, there will be a further devaluation of our currency.
This situation is due to gross mismanagement of our economy. Just between 2000 and 2007, Government expenditure rose by more than £100 billion in real terms after inflation. Nothing was put aside in the good times, and we are now in the bad times. I do not have time to quote the Prime Minister’s comments in The Times on 17 September 1992, when he said that confidence would not simply return on request. That is what he is asking for now. Economic events are determining the outcome. I understand why many Government spin doctors would like to preserve their cover under the cloak of membership of the European single currency. The extent to which people are being betrayed by the Government would then be less apparent.
I hope that, in responding, the Minister will declare where we should go from here. I hope that he will accept responsibility for the 25 per cent. devaluation and give some hope to those who are watching and worrying about the value of the pound in their pocket.
4.46 pm
The Economic Secretary to the Treasury (Ian Pearson): It is a pleasure to serve under your chairmanship for this short debate, Mr. Weir. I congratulate the hon. Member for Christchurch (Mr. Chope) on securing it. He will not be surprised to hear that I agree with almost nothing in the analysis he has put forward for the past 16 minutes. I will set out for the record the Government’s view on these matters.
As the hon. Gentleman knows, exchange rates fluctuate and respond to a wide variety of factors on a minute-by-minute basis. Movements in sterling in the recent past have occurred in a turbulent global economic environment. I never cease to be amazed that the hon. Gentleman and the official Opposition seem to take the view that this is not a global financial crisis. Anybody who reads the newspapers or steps beyond these shores knows that the issues we are discussing and debating in Parliament are being discussed and debated in Parliaments around the world. The concerns that people and businesses rightly have in the United Kingdom about the state of the UK economy apply equally to the European and US economies. There are downturns and reductions in growth, even in countries such as China and India.
Mr. Chope: Will the Minister give way?
Ian Pearson: I would like to reply to the hon. Gentleman’s speech, but I am happy to give way to him.
Mr. Chope: This is a fundamental point. Will the Minister explain why there has been a 25 per cent. devaluation of sterling and why that has not happened to other currencies?
Ian Pearson: The hon. Gentleman is right that overall the sterling exchange rate index has declined by 25 per cent. in the past two years and by about 14 per cent. since the beginning of August 2008. Exchange rates fluctuate. He is also right that, against the dollar, sterling has lost more than a fifth of its value in the past two years, and more than a quarter against the euro. International developments have affected other countries. The euro has lost about 8 per cent. of its value against the dollar since summer 2007 and the yen has lost about 17 per cent. The International Monetary Fund has stated:
“Foreign exchange markets have also been affected by heightened uncertainty about the safety and soundness of global financial assets and the impact of financial stress on economic performance.”
It should also be remembered that recent falls in sterling come after a sustained period of sterling strength that lasted through the late 1990s and until long after the mid-point of this decade, so despite recent falls, we have had a decade in which the exchange rate has been historically stable overall. We shall continue to see exchange rate fluctuations in this country and with other countries’ currencies as well. That is the nature of floating exchange rates.
Let me say something about exchange rate policy. If we go back, as the hon. Gentleman did, to the post-war era and before, we can see that there have been a number of attempts, as he well knows, to control the exchange rate and, as a result, the UK economy as a whole, but those have been rarely without complication and mostly unsuccessful. For the first part of the post-war era, sterling belonged to the Bretton Woods system of fixed exchange rates. That arrangement ended in 1972. Through the ’70s and ’80s, which we remember well, there were various attempts to use the exchange rate as a policy instrument, including by having sterling shadow the Deutschmark.
In 1990, sterling joined the exchange rate mechanism, which tied sterling within a target band against the euro in the hope that that would deliver low inflation for the UK economy. I do not need to rehearse the arguments about the UK’s ignominious exit from the exchange rate mechanism to the hon. Gentleman or engage in political point scoring about that or, indeed, the record of previous Labour Governments when we had to devalue the pound. The one thing in his contribution with which I agreed was what he said about floating exchanges rates. He seemed to be a fan of floating exchange rates. Since September 1992, sterling has been allowed to float freely against other currencies.
The Government’s objective is a stable and competitive exchange rate in the medium term, consistent with meeting the inflation target. Our experience in economic policy making is that trying to target exchange rates is simply the wrong policy. The policy of inflation targeting has stood the UK in good stead over the most recent
period. The Government’s macro-economic framework includes a monetary framework that is designed to deliver low and stable inflation through the symmetrical inflation target. As the hon. Gentleman knows, the target is 2 per cent. at all times. Under that regime, the exchange rate is allowed to adjust to clear the market.
Despite the major challenges presented by the global economy at present, the framework continues to serve us well and compares favourably with the outcome of the previous macro-economic policy approaches to inflation and growth that I have mentioned. Since 1997, inflation has averaged less than half what it averaged in the previous two decades, while growth has been stronger. Indeed, since 1997, the UK has had one of the lowest inflation rates in the G7; before 1997 it had one of the highest. There is no shortage of evidence on the other key strengths of the UK economy. I could point to the foreign direct investment as a percentage of our gross domestic product, which is the highest in the G7. The World Bank ranks the UK as the sixth best place to do business out of 181 countries in its “Doing Business 2009” report.
There are clearly implications from a weaker exchange rate, both for prices and for volumes of goods and services in the economy, and the hon. Gentleman mentioned some of them. He also mentioned Charles Bean, the Deputy Governor of the Bank of England with responsibility for monetary policy, and I, too, should like to quote him:
“We’ve had the best part of a 20 per cent. depreciation of sterling over the past year, which is pretty hefty. Now, obviously the external climate has worsened, but that very considerable stimulus from the exchange rate should also help to pull the economy out of its slow period.”
In addition to the automatic stabilisers, a floating exchange rate, combined with the Government’s overall macro-economic policy, offers a sensible strategy to help the UK economy during difficult economic times. I have to make the point that has been made elsewhere about the decisions and judgments that the Government made in the pre-Budget report and previously about giving a fiscal stimulus to the UK economy during these difficult economic times. The fact that countries across the world have decided to introduce similar packages of support indicates the strength of our position. It is simply the right thing to do.
I also refer the hon. Gentleman to the comments that the Governor of the Bank of England made recently when giving evidence to the Treasury Committee. He rightly expressed concerns:
“If sterling falls far enough, this will be a concern and it will have an impact on inflation...Just as the...Dollar fell very sharply over a period, it’s not surprising that we’re seeing some fall in sterling’s effective exchange rate; and that can be a helpful part of the rebalancing, provided it doesn’t threaten our ability to meet the inflation target. So it’s something that we keep a very careful eye on and we certainly have no wish to see it fall particularly sharply. But I think we have to accept that some fall back from the level where it was...in the summer of 2007 is probably an inevitable part of the rebalancing that’s going on.”
A weaker exchange rate, all other things being equal, makes our exports more competitive than they would
otherwise be, but also risks higher prices. That is one of the many global issues that policy makers have to consider in the current challenging environment. The hon. Gentleman and I simply part ways in our fundamental economic analysis of how the macro-economic policy framework should be designed and how the exchange rate fits into the regime. If he wants to come back and suggest that inflation targeting is not the right policy and, as his party does, that a fiscal stimulus during a global financial crisis in which the European economy and the United States are already in recession is not the right thing to do, his party needs to set out more coherent arguments as to why that is the case.
Mr. Chope: I do not speak for my party; I am just interested in finding out the Government’s policy. The Minister seems to be suggesting—laughably, I think—that we have a strong economy and stability in the exchange rate. We do not. Does he accept that the reckless borrowing policy that the Government have embarked on will inevitably drive down the value of sterling even further and that those who are predicting parity with the euro may be making the right judgment?
Ian Pearson: No, I do not accept that at all. My response to the hon. Gentleman’s question is that we started this difficult economic period in a relatively strong position compared with many other countries. Our debt levels were low compared with those of G7 and other countries. As a result, the borrowing and the fiscal stimulus that we are undertaking are an entirely sustainable policy. Of course, we need to see fiscal tightening in later years, but at this time, it is simply the right thing to do to bring forward expenditure and to have the fiscal stimulus provided by the cut in VAT. People have asked, “Does it make a difference?” At an aggregate monetary level, the VAT cut does make a difference. It is pumping an extra £12 billion into the economy and it is the right thing to do when an economy is entering a recession.
Of course, this is a global problem. It started in the sub-prime mortgage market in America, with which we are all familiar now, but it has spread to affect banks across the world. That is why the only way to resolve it is through global action. The US and the euro area are in recession, and the IMF has said:
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s”.
The Bank of England has said that
“the world economy appears to be undergoing an unusually sharp and synchronised downturn”.
This is not just happening in the UK, and it is wrong to pretend that it is.
Inevitably, there are difficult times ahead, but the measures that we have taken, such as the fiscal stimulus in the pre-Budget report, and the measures that we have announced today to support business through the enterprise finance guarantee and the working capital scheme are the right ones, and I commend them to the—
5 pm
Sitting adjourned without Question put (Standing Order No. 10(11)).
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