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The noble Lord said: My Lords, there is no doubt about the importance of overseas trade to the British economy. Taking our gross visible exports alone, they represent something like 20 per cent. of GDP and a substantial amount is also represented by the invisible side. Over the years there have been many successes in both visible and invisible exports.
I initiate the debate at this time because it is just over 10 years since the report of the Select Committee on Overseas Trade was issued. It was perhaps one of the most important reports of a Select Committee in recent years. The committee was presided over very effectively by the noble Lord, Lord Aldington. He has asked me to say that, regrettably, he is unable to participate in the debate this evening. I am delighted that, apart from myself, two members of that committee, the noble Lords, Lord Boardman and Lord Selsdon, will participate this evening. I am grateful to all other noble Lords who are to participate. In particular, I look forward with much anticipation to the maiden speech of the noble Lord, Lord Blyth of Rowington.
The report drew attention to the fact that for the first time we were running into a deficit on visible trade. Because of the possible implications of a continuation of that deficit, the committee made a careful review of the situation. It interviewed a large number of witnesses and made a number of recommendations. Somewhat to the surprise of those who participated in the committee--which came to a unanimous conclusion and represented all sides of the House--the report was severely criticised by senior Ministers as soon as it appeared. The first criticisms were made even before it appeared. The Treasury took the view that we were wasting our time and there was no need to worry about the trade balance because over the years it would be a self-correcting exercise. Those who are interested in that rather detached view of life should turn to paragraphs 69 and 70 of the report where that view is set out. The committee did not share it.
Unfortunately, the concerns of the committee have been justified by subsequent events, in that, although there have been fluctuations between one year and another, there has been a negative balance on visible account every year since 1983. In 1985 it was £3 billion and in 1995 it was over £11 billion, in spite of a continuing contribution from North Sea oil. Incidentally, the committee got it wrong. It believed that North Sea oil would not be contributing at that stage. Unfortunately, it has however been proved right that in spite of the contribution of North Sea oil the adverse balance is as high as it is. There has also been a positive contribution from invisibles, thus reducing the net overall imbalance on current account to just over £6 billion. The figures for January and February suggest that this situation is likely to continue for the time being. The Office for National Statistics states that
It is a rather sobering thought that, in spite of the considerable efforts, the visible gap is widening. After the positive contributions of oil and invisibles, we are left with a net deficit which, at any rate for the time being, appears to be widening. Of course, there have been many achievements by particular companies in particular sectors. The extent to which sales teams from Britain visit all parts of the world is most impressive. The Government's White Papers in 1994 and 1995 on competitiveness illustrate the considerable gains in productivity in British industry. These have been remarkable gains, and many companies are far more efficient than they were. Unfortunately, that has to be seen against a much reduced industrial base. The 1995 report indicates that the share of manufacturing in terms of GDP has fallen from 34 per cent. to 20 per cent. since 1970. It has also fallen in other countries, but ours is one of the steepest falls in Western Europe and indeed the developed world.
It is worth contemplating what we may do to try to correct these trends, reinforce the successes already achieved and expand our overseas operations in such a way as to narrow the gap, which has been with us for many years and could be with us for many more years unless action is taken to deal with it. The report in 1985 indicated a number of measures which the committee considered should be taken. In my opinion, if those measures had been taken seriously we would not be in quite the situation that we face today. I refer to two in particular: investment and macro-economic policy.
Our investment levels, although high, have unfortunately compared badly for a number of years with those of our main competitors in the rest of the world. Regrettably, the recent trend, far from improving, has deteriorated further. The Economic Indicators Research Paper of 1st May 1996, which is issued by the House of Commons Library--I wish to be quite clear about the text from which I quote--indicates that in 1995 total gross capital formation dropped by 0.7 per cent. compared with 1994 and was 11.5 per cent. lower than the peak of 1989. Both in the private and public sectors investment has been falling. While some improvement is expected in 1996 and 1997, the pace will remain slow.
What is required is a framework to stimulate a greater rate of investment. It is that to which I now turn. It raises the question of macro-economic policy. Government economic policy at present is concentrated on holding down inflation, with which we all agree, by using the interest rate mechanism as the main weapon to achieve it. The unfortunate result of using that weapon is a level of interest rates which is higher than that of our major competitors. For example, if one looks at Britain's main competitors in Western Europe, interest rates vary between 2 and 4 per cent., whereas here the rate is 6 per cent.
At the same time the Government are pursuing a relaxed fiscal policy, monetary and fiscal policies being their two economic weapons. We have a strong policy for keeping up interest rates to deal with inflation but at the same time relaxed fiscal policy, for reasons which I have no doubt the other side of the House will be able to explain better than we can, to reduce taxes, as was done in the last Budget, and, despite the Chancellor's warnings, there is strong pressure for that to be done in the next Budget.
The result of that juxtaposition of policies of course is to give signals which lead, on the one hand, to a reduction in the level of investment, inhibited by higher interest rates, and therefore of export capability and import substitution capability, while, on the other hand, there is a stimulus of consumer spending by giving people more money to dispose of. So we find ourselves moving into a situation in which we are probably doing the reverse of what we should be doing. What we should be doing is increasing investment and exports, and until those increases have been achieved, not stimulating consumer demand, because consumer demand stimulated at a time when investment is relatively low, and when our export proportions are also relatively low compared with imports, merely means that the extra consumer demand will be met by a higher level of imports. Then we shall be back in the situation in which we were in the late 1980s, with all those unfortunate consequences. That has to be avoided.
In 1993, and to some degree in 1994, we achieved the virtuous position of having what looked like export-led and investment-led growth. Unfortunately it lasted for a short time only. It is the application of the macro-economic policies to which I have referred which contributed to the problem that we now face.
I have tried to take a view over the 10 years since the 1985 report was produced. I have, I hope, paid tribute to the great successes we have achieved in our export trade, both visibles and invisibles. I am certain that we possess the skills, abilities and resources to get right the relationship between exports and imports, but we have not yet achieved that. I believe that a large measure of that is due to the fact that we have not yet adopted the right mix of macro-economic policies. I shall be interested to hear what the Minister has to say on that when he replies.
Lord Boardman: My Lords, I am grateful to the noble Lord, Lord Ezra, for introducing this debate on such an important subject. Like him, I look forward to hearing the maiden speech of my noble friend Lord Blyth of Rowington. As the noble Lord, Lord Ezra, said, he and I served, with others, on the Select Committee in 1984-85. We came to a number of conclusions. Some were right, and some time has shown to be less right. Perhaps I may deal with those in a moment.
It is correct that in 1984 the adverse visible balance was said to be about £3.8 billion. That was later changed to £5.3 billion. Today, on a similar basis, it is something like £11.5 billion. I ask the noble Lord to look at the details of those figures. In 1994, which is the last full year for which figures are available, the balance on current account was £2 billion, which is substantially less. Those are the only figures of which I have the details, because the figures for 1995 are not fully available.
In that figure we had deficits from the EU of £7 billion and from EFTA of £9 billion. I shall return to that point. There were positive surpluses from the USA, Africa, Australia, Canada, South Africa and a number of other countries. I was intrigued as to why EFTA should be showing a £9 billion deficit. Of that, £7.3 billion comes from Switzerland. I could not believe that we had bought that number of cuckoo clocks or Swiss chocolate to account for that figure. It seems that the bulk of the deficit is the result of travel. Travel represents an enormous part of the deficits that we have with France, Spain and other places. Travel represents a large item in the current account balance.
On the other side, our investment income has a healthy surplus of £11 billion. There was one figure which intrigued me. It is what is called transfers made without a quid pro quo. When one looks at that figure one sees that there is a deficit of about £5 billion--I am sorry to give all these figures--for things such as institutions of the Economic Community. There are transfers in the form of aid to non-OECD countries and such things. These figures--£5 billion here and £7 billion there--make the balance on the current account shrink into insignificance, yet the implication in using the figures, as the noble Lord, Lord Ezra, did, is to suggest that we are not making enough widgets or are buying too much from abroad.
Those are factors, and the figures are a warning. However, we should not take those figures without looking behind them to see what are the real components of the deficit about which we are talking. All kinds of other figures come into the totals in various forms. In view of the time available, and with my lack of knowledge, I shall not refer to the details. The European Investment Bank and the European Atomic Energy Authority appear in the balance of payments. Then we have capital transactions.
When we buy a few jumbo jets, we pay a great deal of money. They last for 20 years or whatever it is. They will be revenue-producing for a long time. In the commercial world one puts the capital investment in the jumbo on one side and shows depreciation year by year on the balance sheet. That is not so in government
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