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Lord Peston: My Lords, I am sorry to intervene but I feel that I must interrupt the noble Lord for a moment. Is he aware that the very greatest of all economists, Adam Smith--indeed, an economist that the noble Lord might just have heard of--took exactly that view of social cohesion and the primacy of the community before the economy? Those of us who have been in that tradition, which has lasted for 200 years, are perfectly happy to keep it going. We do not believe that it remotely indicates a lack of intellectual rigour.

Lord Cockfield: Yes, my Lords; I am most grateful to the noble Lord for his clarification. However, I am much more interested in the noble Lord, Lord Peston, who is still alive and among us, than I am in Adam Smith, who has been dead for approximately 200 years. Before the noble Lord interrupted me, I was about to say that the last thing I would accuse him of was waffling away. However, we all accept that he is a man of good will. Therefore, the comment I was making was in fact very fairly balanced. Indeed, when trying to tell us why he had tabled an amendment in such terms, the noble Lord himself explained that he was tailoring it to the needs of his friends sitting behind him. That was a very valid point to make.

I hope that the noble Lord, Lord Richard, will not object to what I am about to say, although I notice that he is not present in the Chamber today. However, when the noble Lord opened the debate on Monday on behalf of the Opposition, he seemed to think that life began in 1979 and that a veil could be drawn over everything that happened before that date. One only wishes that that could be so; but, unfortunately, it cannot. In this world, both as regards men and as regards countries, reputations are made and reputations are lost and, once lost, they are very difficult indeed to regain.

I shall return to that aspect later, but I want to talk specifically about inflation and the rate of interest. I am not talking about the rate of interest that the citizen has to pay to the bank or to the building society, or the somewhat attenuated rate that he gets on his deposits or savings; I am talking about the rate of interest that the Government have to pay on the borrowings that they make. That is what the Prime Minister recently described as the "blot" on our economic performance.

I raised this matter originally at Question Time on 13th March of this year (at col. 847 of Hansard). As neither Front Bench understood the point, I then explained it in some detail in the subsequent debate on the Finance Bill on 26th April (cols. 1375-8 of Hansard). I received no answer. I do not complain about that, but as the point had eluded so prominent and distinguished an economist as the noble Lord, Lord Peston, it was perhaps unreasonable for me to expect my own Front Bench to be able to deal with it. I have given the noble Lord the Hansard references to enable him to swot up and do a little homework afterwards. When he next addresses his students he can no doubt

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put the point to them and see what answer he gets. However, at least I shall give him the answer that I have to see what he has to say about that.

Yesterday, 29th October, the yield in the United Kingdom on the 10-year bench-mark bond--which is the measure usually taken in comparing interest rates--was 7.56 per cent. In Germany it was 6.01 per cent.; in France it was 5.99 per cent.; in Holland it was 5.94 per cent., and so on. What that means is that we are having to pay in interest on our borrowings 1½ percentage points more than Germany, France, Holland and a good many other countries. The absolute figures will, of course, be lower with short-term borrowings, but the differential remains very much the same. The rate of interest on longer term borrowings again will be slightly more, but the differential is much the same.

This year government borrowing is likely to reach £27 billion. A number of figures have been given but they are all about that order of magnitude. That has understandably alarmed the Prime Minister, but what ought to alarm him even more is that we are having to pay an additional 1½ percentage points of interest on that money compared with what we would have had to pay had our credit been as good as that of the Germans, the French, the Dutch and a good many other people. What we are talking about is hard cash. This is not economic theory or any of that sort of nonsense; it is hard cash; and 1½ per cent. on £27 billion is £400 million. That is the additional burden being placed on this year's Budget as a result of the fact that our credit standing is not as good as that of a whole range of other countries.

But the story does not stop there because the borrowings we make today impose a burden not just on this year but on future years as well. In just the same way, borrowings in the past impose a burden on this year and future years until such time as those borrowings are repaid. The total national debt by the end of this year will be of the order of £400 billion gross or £350 billion net. The additional 1½ per cent. we are having to pay on that amounts to something between £5½ or £6 billion, this year and every year. It will go up as long as there is an increase in the borrowing requirement from one year to another. Let me put this into perspective: £5½ or £6 billion represents 3p. on the income tax. In other words, if over the years we had managed our affairs with the prudence of the Germans or the Dutch and a good many other people, we would today have had an income tax rate of 21 per cent. and not 24 per cent. In other words, we would be within sight of achieving what has been our long-term target of reaching 20 per cent., and we could do it without either increasing taxation or reducing expenditure in the sense that that term is commonly understood.

One might legitimately in these circumstances ask why is it that we are still so far from the promised land and still wandering in the wilderness. The answer quite simply is that we are paying the price for 50 years of financial mismanagement, well intentioned but based on delusion; 50 years in which governments, in greater or less degree, felt that they could manage the economy; 50 years of national fiscal sovereignty which has achieved nothing other than a debased currency and

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added to industrial inefficiency and unemployment and produced an excessive level of government expenditure and taxation. Compared with 1945, the pound is worth 4p. That is the price that we are paying for the illusion of national sovereignty--and illusion is all it is. The sooner we see the back of it the better.

The present Chancellor has made great strides in getting inflation under some sort of control, but after 50 years you cannot achieve success overnight. Nevertheless the financial markets remain unconvinced that this country will not once again resort to inflationary measures to solve its problems. Our ambiguous stance on the single currency adds to those fears. The extra 1½ per cent. we have to pay on our borrowings is the insurance premium the markets exact against the risk of our backsliding. We are far from out of the woods.

We are rightly proud of our recent economic performance. Ministers are fond of claiming that we have the strongest economy in western Europe. The gracious Speech said so, so it must be true. However, if one considers inflation, the position is less reassuring. We are not at the top of the league. In August--the latest month for which comparative figures for the European Union are available--the figures indicate that we were not first, we were not second, we were not third, and we were not fourth. I shall not go on any further because not until one reaches 10th place does one finally catch up with the United Kingdom. The prospect of a Labour Government with a record of financial irresponsibility inevitably adds to fears of rising inflation. I regard the past two reductions in interest rates as unwise and as running an unacceptable risk with inflation. The increase made today of ¼ per cent. is a step in the right direction, but I very much fear that there will be a real need for further steps in that direction before we reach May, however unpalatable that may be.

There have been two developments in the past two or three days to which I want to refer. This morning we had Dr. Gordon Brown committing a future Labour Government to reductions in taxation. Whatever view one may have on the specific measure he proposed--which no doubt is a cost-effective way of buying votes--nevertheless it indicates that in the background there is always this pressure in the Labour Party for giving money away, whether or not that can be afforded.

But the most worrying thing of all was what was said by Mr. Robin Cook in a television interview on Sunday. I do not think for a moment that he intended to let the cat out of the bag in the way that he did. He is a highly intelligent man; that is why he has been put in charge of foreign affairs. However, that did not stop him meddling in economics. He was handing out advice on what the Shadow Chancellor ought to do. He has been interpreted quite rightly by the media as being sceptical on the question of the single currency. But one could see something else underlying what he was saying; namely, the clear intention of resorting to inflationary measures if he thought that that could bring unemployment down.

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Inflation always initially brings unemployment down; but there is a bitter harvest to be reaped in future years. It is that kind of thing which underlines the fears that still exist today as to whether or not this country is permanently on a low inflation basis. The nearer we come to the election and the more we hear of the hidden thoughts of the Labour Party, the greater those fears will be.

I had not intended talking about the single currency--an act of considerable restraint! However, I feel it essential to say that I do not agree with a single word that the noble Lord, Lord Healey, says about economic and monetary union. My own account of the dispute between Kohl and Pohl, which is based on conversations with Pohl himself, is fundamentally different from the noble Lord's account, which is no doubt based on his conversations with Chancellor Kohl. It is not surprising--

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