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Lord Stoddart of Swindon: My Lords, does the noble Baroness agree that young people these days are intelligent and discerning? May it not be that they are not voting in parliamentary elections because they have perceived that a good many duties and powers of Parliament have been removed elsewhere, particularly to Europe? Might they not also perceive that the parties are now in so much agreement about so many things that it is hardly worth voting because they cannot distinguish between them?

Baroness Miller of Hendon: My Lords, I must confess that I wondered whether someone would manage to ask a question like that indicating that the lack of interest was to do with Europe or various other things. I could not comment on that. I do not know.

The Post Office: Future

2.50 p.m.

Lord Ezra asked Her Majesty's Government:

The Minister of State, Department of Trade and Industry (Lord Fraser of Carmyllie): My Lords, the Government have no such plans. However, the

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Prime Minister has said that further consideration would be given to the future structure of the Post Office in preparing the election manifesto.

Lord Ezra: My Lords, does the Minister recall that on 11th May 1995 a new regime was meant to have been introduced for the Post Office, announced by the then President of the Board of Trade, which stated that in future the Government aimed to set the EFL, which means the dividend, at no more than 50 per cent. of the post-tax profit of the Post Office? Is he aware that since then the EFL has been set at 75 per cent., and that in some previous years at more than 90 per cent. of its post-tax profit, thus preventing the Post Office from reinvesting adequately and leading in one case to putting up the cost of postage stamps?

Secondly, in the Green Paper of 1994 two options were proposed; one for privatisation and one for giving the Post Office under public ownership greater commercial freedom. The latter proposal was then rejected but plans for privatisation failed. Are the Government looking once again at the possibility of giving the Post Office greater commercial freedom under public ownership which has successfully been carried out in a number of other countries?

Lord Fraser of Carmyllie: My Lords, while that is correct, it has not been possible to make progress with the external financing limits for the Post Office that we would have wished, as indicated in May 1995. We have abolished some restrictions on capital expenditure, a new corporate planning process is in place and we remain open to proposals for new business within the agreed guidelines. We have also been able to give the Post Office significant new end-of-year flexibility on its finances. However, as regards our future intentions, I repeat that the noble Lord must await the manifesto.

Lord Haskel: My Lords, is the Minister aware that the external finance limit, which is paid by the Post Office, is arbitrarily fixed at short notice according to the Treasury's needs? Does he agree that that is a totally unsuitable way for a business to work? Will he join me in welcoming Labour's undertaking to agree that the negative EFL will be fixed for a number of years so that the Post Office can operate in a much more businesslike way?

Lord Fraser of Carmyllie: My Lords, no public body can be immune from pressures on public finances. The noble Lord tells me that the Labour Party has made such a proposal and I should welcome the opportunity to hear him elaborate on it. As he appreciates, the EFL is a procedure by which the Post Office makes a contribution to public expenditure. If the noble Lord is now signalling that there is to be a decrease in what will go to the Treasury, it would be extremely helpful if he would spell it out.

Lord Clark of Kempston: My Lords, does the Minister agree that the Labour Party has always opposed any privatisation measure taken by this Government? Does he also agree that whereas when the now

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privatised industries were nationalised they cost the British taxpayers some £50 million per week, now the Exchequer receives £60 million a week, which is a turnround of £110 million?

Lord Fraser of Carmyllie: My Lords, my noble friend is correct in saying that there has been a dramatic turnround in the performance of the industries which were previously nationalised. I do not believe that there has been a single privatisation which at the time of introduction was not characterised by the party opposite as being a privatisation too far. Yet, not a single one of those privatisations is proposed to be reversed.

I agree with my noble friend that there are a number of other areas at which we might look for privatisation; but I repeat that, as regards the Post Office, he must await the election manifesto. As I answer the question, the name of the Secretary of State for Health seems to come into my mind.

Lord Jenkins of Putney: My Lords, is the Minister aware that not all privatisations have been successful and that there are considerable complaints that in some cases the services have declined? Is he further aware that I believe that the Post Office service is extremely good and I should be glad for it to remain in public hands? I believe that that sentiment is widely supported.

Lord Fraser of Carmyllie: My Lords, the experience in this country and in other countries which have followed us down the privatisation route has been that where industries have been nationalised their performance has been much better. Not only have services improved but, as my noble friend pointed out, far from being a drain on the public purse once they have been privatised, significant revenues have been paid over to the Exchequer. It is interesting to note that the recent so-called Green Paper on the Post Office, published by the CWU, recognised that if it is to succeed, a greater commercial freedom is necessary.

Lord Ezra: My Lords, following the question asked by the noble Lord, Lord Clark, is it not a fact that the Government's plans to privatise the Post Office, in particular the Royal Mail, failed because of opposition within the Conservative Party? It was not entirely to do with the Opposition at that stage. In those circumstances, and given the fact that the Minister has referred to the need for greater commercial freedom, will the Government now seriously consider the other alternative put forward in the Green Paper?

Lord Fraser of Carmyllie: My Lords, the noble Lord is correct in saying that there was not a sufficient majority to support the original proposal. However, the alternatives which might exist for the Post Office in the future will no doubt be eagerly read by the noble Lord in the manifesto once it is published.

Lord Haskel: My Lords, will the Minister remind his noble friend Lord Clark that reading out one side of a set of figures leads to bankruptcy? The figures which the noble Lord mentioned did not include the subsidies

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which are paid and the loss of assets to the public sector. It is all very well to comment on one side of the accounts, but one must also take into consideration the other side.

Is the Minister aware that 90 per cent. of the Post Office turnover comes from business mail? Most of it is generated on the computer screen. The Post Office is allowed to receive that mail electronically and distribute it the following morning on paper. In fact, it is one of the Post Office's major growth areas. However, it is unclear whether the Post Office is allowed to deliver that material electronically. When will the Government clear up that matter so that the Post Office can get into the electronic mail business?

Lord Fraser of Carmyllie: My Lords, as I indicated in my earlier answer to the noble Lord, we recognise that changes are taking place in the delivery of mail and in other electronic forms. We remain open to proposals for new business. However, as I have said on more than one occasion, I am not prepared to indicate what new proposals we might bring forward. The noble Lord, like others, must wait for the manifesto.

Lord Monkswell: My Lords, will the Minister advise the House of the connection between the Secretary of State for the Department of Health and the Post Office?

Lord Fraser of Carmyllie: My Lords, I sought to indicate that during the past weekend my right honourable friend the Secretary of State for Health was criticised for going into areas which were considered by some not to be part of his ministerial responsibilities. I wished to indicate only that I would in no sense be tempted to cover matters which were not within my responsibility.

Business of the House: Debate this Day

The Lord Privy Seal (Viscount Cranborne): My Lords, I beg to move the Motion standing in my name on the Order Paper.

Moved, That the debate on the Motion in the name of the Lord Prior set down for today shall be limited to five hours.--(Viscount Cranborne.)

On Question, Motion agreed to.

The Economy

2.59 p.m.

Lord Prior rose to call attention to the state of the economy; and to move for Papers.

The noble Lord said: My Lords, I begin by declaring my business interest in GEC, but I also declare at the start my paramount interest to see the policies of this Government--my Government--carried forward for many years, particularly with the success of the past four years in mind.

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It is a great privilege to introduce this debate. I gather that it is the last occasion for a Back-Bencher on this side of the House to have such an opportunity before the election. It provides time to review the work of the Conservative Government over the past 18 years, both in the general thrust of their policies over the period and in particular the success attained by them under the present, much maligned, Prime Minister and his very able Chancellor, Mr. Clarke. I am delighted that two former Chancellors of the Exchequer--who both received fair commendation in Lord Edmund Dell's book--are to speak in the debate this afternoon. I used to have my disagreements with both of them from time to time, but nowadays I find myself very much in agreement with them. I wish that I could say the same for all my colleagues who have served in past Cabinets.

I suppose that we must accept that most of the electorate has forgotten how bad was the state of the economy some 18 years ago. When we came to office inflation was rife and rising; public servants were in revolt as a result of pay policy; the unions had so much favourable legislation they did not know what to do with it--who remembers now the ill-fated Dock Work Regulation Bill; and our basic industries, mostly nationalised, were over-manned, unproductive and in many cases loss-making.

I remember witnessing a scene with Mr. Sidney Weighell, the very amiable general secretary of the National Union of Railway Workers, as it was at the time, coming out of No. 10 one afternoon with a broad smile on his face, having just concluded a wage settlement of well over 20 per cent. He had a microphone thrust in his face and the interviewer asked, "Can you say after this award, Mr. Weighell, that the social contract is still working?". "Certainly", said Mr. Weighell, "I am a great supporter of it". I am not the least bit surprised that he was a great supporter of it.

Also, I remember Mr. Weighell coming to see me one day. I asked him whether he thought it was necessary to have trade union directors on the board of British public companies. In this case it happened to be the Post Office. Mr. Weighell said that he thought it was absolute nonsense and he never encouraged his members to go on boards. He said, "What I do with the Railways Board is I let them have their meetings and I let them take their decisions, and then I tell them afterwards whether they can implement them or not". That was the sort of near-anarchy that existed in the days before we came into office in 1979.

It is difficult to imagine now how bad the industrial scene was in 1979, how much we were slipping as an industrial power and the very real fears at that time that this country was becoming ungovernable. Perhaps the two most important changes in policy of the 1980s were successive trade union reform and privatisation. As we have heard this afternoon, each part of the process of privatisation--this also applies to trade union law--was fought bitterly by the Labour Party, who prophesied dire consequences and of course at past elections have always urged repeal--but have now come round to the view that all should be left in place. But listening to the discussion and observing the body language this afternoon, I wonder whether they would reintroduce

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nationalisation. It is quite remarkable how things have changed in the past few years. Even the privatisation of the railways is to be left in place, although their spokesmen cannot yet bring themselves to the same inevitable conclusion on London Underground.

The path of privatisation has not always been smooth, although the policy pioneered here is now pursued relentlessly throughout the whole world, from South America to South Africa, and even China in its own characteristic way is now engaged in taking things out of the public sector. No one can defend the capital profits made by some or the over-inflated salaries paid to others. But those are of minor consequence compared with the overall benefit to the economy.

The Opposition have done their best in this House and in the other place to give privatisation a bad name. But it has been an enormous success story. What is the benefit? I should like to quote from the Economist, which is not always a magazine that lauds the present Government. It states:

    "Between 1980 and 1982, nationalised firms together received an average of £300 million a year of subsidy. From 1987 to 1995 these same firms after privatisation contributed £4.8 billion, mostly in corporation tax, to the public purse. Efficiency is up. Prices are down. Industrial gas prices have fallen by nearly 50% in real terms since privatisation; telecoms prices by over 40%".

There are other points which are just as important. Domestic gas prices have fallen by 8 per cent. in real terms and electricity prices by 5 per cent. That includes the VAT which was imposed on electricity. Also, there has been a £50 million rebate for every customer from the National Grid. All those matters have contributed enormously to the wealth of Britain.

This afternoon we heard from the noble Lord that not all privatisations have been successful. As in any business, some businesses are more successful than others. But, taken as a whole, it has been a dramatic success for the Conservative Government. Not only that, but at last too we are seeing improvements in our infrastructure, in particular rail and water. That would never have been forthcoming through the public sector.

Manufacturing industry will benefit from a more regular and certain stream of tenders and orders. I welcome the order announced today by Prism Rail for the Tilbury line. I wish that my own company had got the order, but that is another matter. The Tilbury line has been called the "misery line". There was never any question but that there would have been a wait of many years under public ownership before money could have been made available for it.

The Labour Party now threatens those companies with a windfall tax--uncertain severity on an undefined group of companies. That could penalise efficiency and investment and undoubtedly put up costs and hence put up prices. It would be a typical piece of socialist mismanagement that, if the Labour Party should come to power after the election, it would penalise the water companies as they face up to drought conditions of great severity caused by past years of under-investment, now being put right by privatisation. Even the noble Lord, Lord Howell, would not be able to save them in those circumstances, as he did when he became the rainmaker in, I think, 1976.

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It is commonplace nowadays to talk in terms of a global economy. But I doubt whether many people understand the dramatic changes of the past 10 years. My company is engaged mostly in capital goods. We have to compete throughout the world in very competitive markets. For the most part, our competitors still have considerable advantages over us; for example, aid in the form of subsidies to the customer is used on a massive scale by France, Japan and Germany. Chancellor Kohl never makes a foray into a foreign territory without a sack of deutschmarks on his back.

Prototypes of new machines are discreetly bought and tested by nationalistically inspired and aided customers. Monopolies legislation here and Europe is now outdated and superfluous as far as capital goods are concerned because we are in a world-competitive market. Prices for turnkey projects like power stations in the Far East, in China and in other countries have fallen by 30 per cent. in the past three years. A modern deal now involves much more than just selling the equipment: it involves finance, long-term maintenance and operation and specific guarantees for performance over many years.

However, despite the fact that we do not get subsidies, we have some advantages over our European competitors. It is all the more important that we do not throw these away now. A recent survey in a medium-sized engineering company has given comparisons of labour costs between us and our European competitors. I should like too give your Lordships just two examples. For skilled workers, the hourly rate in Britain is £6.46, in Belgium it is £9.5, in Switzerland £18.95 and in France £6.82. But the on-costs--that is, the social charges--bring the figures up to £7.48 in Britain, £18.15 in Belgium, £24.25 in Switzerland and £9.89 in France.

If we take a graduate engineer of two years' experience, the average salary in this country would be £18,000, with total employment costs amounting to £20,880. In Belgium he would earn £25,507, with on-costs bringing the figure to £38,644. The salary in Switzerland would be £47,400, with on-costs bringing it up to £60,672; and in France the salary would be £28,834, with the total employment costs amounting to £41,233. For every £100 paid out in wages, employers must add £31 in Germany, £41 in France, over £44 in Italy but only £15 here, although some of that disparity is taken up by the lower productivity which still exists in some industries.

I have no doubt that part of the conversion of the Labour Party and the unions to the European Union and monetary union is a belief that our wage rates and labour costs here will begin to rise towards the levels on the Continent. That is why moves towards a social chapter and a minimum wage need to be resisted. It is no use talking about greater prosperity, employment and efficiency and then promptly reducing our competitive position and advantage. The fact that 40 per cent. of world investment in the European Union has come to Britain in the past few years is the best testimony to the success of government policies--as much in the 1990s as Germany, France and Italy put together. The impact of that investment, in order of magnitude, is similar to

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that of Marshall Aid to Germany in the post-war period. It has created 850,000 pretty good jobs in Britain during that period.

I have always believed--and, indeed, I still do--that there are great political and economic advantages for Britain within the European Union. I cannot believe that any serious industrialist would advocate withdrawal. However, the top priority for industry is to get the single market working properly. I can assure my noble friends and noble Lords that it is a long way from that at present. I believe that the Government's negotiating position on monetary union is absolutely correct as it is. There are important considerations on both sides of the argument: it makes a mockery of any negotiation if you disclose your decision in advance.

We approach a general election with the economy in better shape than at any time since the war: a combination of healthy, steady growth and low inflation. The OECD forecasts that the UK is set to be the fastest growing major European economy again this year and in 1998, as, of course, it was in 1995. It is against this background that the Opposition have announced that they would leave tax rates and public expenditure programmes untouched. There cannot be a much bigger tribute to the Chancellor of the Exchequer than for an Opposition to say that they will come into government and really not change anything at all.

By so doing, the Opposition have accepted the argument that it is essential to pursue a policy of work incentives, low taxes and low labour costs. It also means accepting that the money available for health, social services, housing and education will not allow the increases and improvements that they constantly and consistently demand. It is dishonest to complain that the policies of this Government have resulted in the rich getting richer and the poor poorer and then adopt precisely the same policies. Government is about making very hard and sometimes harsh judgments. If you restrict the economy by increasing tax and expenditure, unemployment will almost certainly rise, as has happened on the Continent.

The best way to reduce poverty is by growing the economy and allowing the benefit to flow down in terms of more employment and better services. We are told now that the aim of Mr. Blunkett is a trickle-up policy of improving wealth and standards by better training and education. Of course, that is quite right; but this and the trickle-down factor have a part to play and, indeed, have been playing a part, because it is happening now and living standards in this country are rising. We have a higher proportion of working age population in work and a lower unemployment rate than any other major European Union country. Over the period 1982 to 1993 we created more jobs than France and Italy combined. According the OECD, real take-home pay of UK production workers, adjusted for cost of living differences, is similar to that of Germany and above that of France and Italy. The increase from one-tenth to one-third of young people attending university is another indication of rising standards. The degrees may not be of Oxbridge standard, but opportunities are being created for them and by them, of which I find they are

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intensely proud and would have been beyond their dreams only 10 years ago. If we can do more to train for higher and scarce skills it will help considerably.

New Labour strikes me as being like a miscreant who, after many years, has made a big effort to go straight. He does not really believe that he can and inwardly is waiting for the first chance to revert. The temptations to return to the old ways are too great to resist, and only a temporary loss of speech is holding him back. With our economy at last, after many years of decline, set on a favourable course, this is a risk that we cannot take. It will take many years of sustained improvement if we as a nation are to raise the standard of living for all our people to match their aspirations. This Government have a good record: they will need to unite and fight and put over their successes if we are to sit on these Benches in the next Parliament. I beg to move for Papers.

3.18 p.m.

Lord Eatwell: My Lords, the whole House will be grateful to the noble Lord, Lord Prior, for introducing this debate on the state of the economy. Many noble Lords will recall that, in his memoirs, the noble and learned Lord, Lord Howe of Aberavon, whose speech we look forward to hearing this afternoon, described the views of the noble Lord, Lord Prior, on economic policy as, "most interestingly incoherent". However, I am sure that the noble and learned Lord will take a kinder view today.

Debate on the economy tends to go through cycles. It swings from complacency to despair and back to complacency, while seldom ever encountering the long-term facts in between. The Government at the moment are in a complacent phase. This afternoon we have the opportunity to confront the long-term facts. It is particularly pleasing to have the noble and learned Lord, Lord Howe of Aberavon, and the noble Lord, Lord Lawson of Blaby, participating in today's debate. The noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson, were the Chancellors who bestrode the 1980s. Their experience will enable them to confront the longer term factors underlying today's economic performance.

I am sure, for example, that the noble and learned Lord, Lord Howe, will draw on his experience in the early 1980s to advise us on the likely impact of the rising pound and the current rate of inflation. Under his chancellorship the combination of a 10 per cent. rise in the pound and an inflation rate that was 50 per cent. higher than the G7 average resulted in the destruction of a fifth of British manufacturing industry. Despite the considerable improvements which have been made in the quality of British manufacturing, our industry today is still too small and continues to lose world market share.

How can we compare the policy of the noble and learned Lord, Lord Howe, with what is happening today? In the past six months the Government's monetary policy has resulted in a 23 per cent. rise in the exchange rate against the deutschmark and an inflation rate that is 20 per cent. higher than the G7 average, and rising. It is a re-run of the policy of the noble and

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learned Lord, Lord Howe, and the results are the same too. Two weeks ago BOC, the industrial gases group, announced that the rising pound had knocked £5 million off its profits. Last week the CBI cut its growth forecast because of the strong pound and this week British Steel pointed out that it loses £100 million in profit for every 10 pfennig rise in the pound, and stated that it will be forced to accelerate job cuts.

To the experience of the noble and learned Lord, Lord Howe, must be added that of the noble Lord, Lord Lawson. He presided over one of Britain's most dramatic consumption booms when consumption expenditure grew so rapidly that personal savings approached zero. The spending boom inflated tax revenues and the Government actually ran a surplus. Perhaps when the noble Lord speaks later he will confirm that in 1988 he told another place,

    "The strength and durability of the economic upswing ... compares favourably not only with our own past, but also with the economic performance of other countries".

He will confirm that in his Budget speech of 1989 he said,

    "Our economic performance has been transformed: so have our prospects for the future".

Indeed they had. The consumption driven boom of the noble Lord, Lord Lawson, precipitated the longest recession this country has endured since the war. The experience of the noble Lord, Lord Lawson, should be invaluable today, for once again consumption is growing nearly twice as fast as output. Once again we have a Chancellor who declares, as Mr. Clarke did in November,

    "I expect consumers' expenditure to be the main engine of growth next year".

So today's Chancellor is clearly the offspring of the noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson. Unlike Dolly the sheep, who is the product of a single cell, he is a dual clone. He embodies in one person the economic policy genes of them both. The Howe of Aberavon gene produces a high exchange rate and a high inflation strategy that is pricing British goods out of markets at home and abroad. The Lawson side of his personality revels in consumption driven growth.

However, the noble Lord, Lord Lawson, can fairly claim that when he stoked up his consumption boom at least investment grew too. Today investment in the British economy is actually falling, not just as a share of GDP but in absolute terms. Manufacturing investment was 9 per cent. lower in 1996 than it was in 1995. Business investment as a share of GDP is now the lowest in the major economies of Europe. How would the noble Lord, Lord Prior, explain the fact that investment, the commitment of business to the future, is actually falling? For an explanation may I recommend that he turns to the latest issue of the Economic Bulletin published by Lloyds Bank? This is the bank's view of what is going on:

    "Over the period since 1980, the UK has the worst record for economic instability amongst the 14 largest industrial countries ... Economic instability is doubly damaging to economic well-being, directly by encouraging uncertainty and indirectly through lower investment in physical capital and in training and education, thereby depressing sustainable economic growth".

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So there we have it. An authoritative source confirms that the Tory policies of boom and bust, of go and stop and stop again, have created such an all-pervasive aura of uncertainty that even in the rosy scenario painted by the noble Lord, Lord Prior, investment falls. And not only investment in physical capital, but investment in training and education too. It is a striking fact that since the general election of 1992 there has been no increase in full-time employment in this country. The instability in employment, the fear of temporary jobs with no job security, the morale destroying part-time jobs with no prospects, all discourage people from investing in themselves. And all these are not merely the outcome of the Government's policies; they are actually the objective of the Government's policies. It has been the Government's goal to create that sort of labour market in which the poor churn between temporary low paid work and the misery of impoverished unemployment. This policy has undoubtedly succeeded.

No consideration of the state of Britain's economy today can possibly ignore the fact that one of the undoubted outcomes of the policies of the past 18 years has been the creation of an underclass in this country. Your Lordships will recall that the Government's own latest figures show that a fifth of all British citizens have levels of real income which are no higher, and are often significantly lower, than their incomes in 1979. They have not shared in the growth of the past 18 years. Every year half the poorest escape from grinding poverty by getting a temporary job, making enough perhaps to buy a television, the cheapest of all sources of entertainment, or a washing machine, or something like that. But next year a third of them drop back into the poorest groups. The majority oscillate from being very poor to being merely poor. Very few ever escape the underclass that this Government have created. The underclass is a permanent feature of the state of the British economy under Conservative rule. What is extraordinary is that the Government boast about it. They boast about the so-called flexibility they have introduced into the labour market, without understanding the long-term damage they have done, just as they jeer at the economic performance of our European partners, without understanding the long-term damage done by their instability on Europe.

In this case it is a sort of emotional instability of course. How else can you explain a Secretary of State for Health who declares at lunchtime that Britain will certainly not enter the single currency in 1999, and then issues a grovelling retraction in the afternoon? How other than in terms of some collective emotional instability can you understand a Cabinet in which the Foreign Secretary declares that he is "hostile" to a single currency, and the Chancellor asserts that this was a "slip of the tongue"?

In the face of all this emotional instability it is no wonder that on the most important economic decision facing this country the Government provide no leadership at all. They provide no leadership because they have no leadership. Does the Prime Minister support the Foreign Secretary? No. Does he back his Chancellor? No. The Prime Minister declares that in his view we should enter the single currency if it were to

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be "positively beneficial" for Britain. Let us consider that statement. Can we imagine the Prime Minister saying that we would enter the single currency if it were not beneficial for Britain? Can we imagine the Prime Minister saying, "OK, I know it is harmful but I think we should do it anyway"? Of course not. The Prime Minister's statement is meaningless. It is the statement of a man who does not lead his party, but follows it. It is the statement of a Prime Minister with no policy other than procrastination. He is the Micawber Prime Minister, hoping for something to turn up to rescue him from the Conservative Party.

Well, something is turning up; it is the general election. At the general election the British people will have the opportunity to assess the impact of the Conservative Party on the economic state of the nation--the Conservative Party which has given Britain, as Lloyds Bank says, the worst record for economic instability; the party which has presided over boom and bust and bust again; the party which has created the underclass and neglected education and training; the party which is emotionally unstable over Europe.

And they will choose a Labour Government committed to economic stability, a government which will put investment first, a government which will attack poverty by creating opportunity, and, most important of all, a stable government that British business and the British people can trust.

3.30 p.m.

Lord Ezra: My Lords, like the noble Lord, Lord Eatwell, I express appreciation of the noble Lord, Lord Prior, for having introduced the debate on the economy. We have recently had two major debates on the subject, on 30th October and 20th November last. Nonetheless, it remains a vital issue. I am glad that we have the opportunity to discuss it today.

I have a great respect for the noble Lord, Lord Prior, I knew him when he was in Government. He has also pursued a distinguished career in industry. However, I was sorry to note that in his preliminary remarks he joined with views previously expressed from the other side of the House of unqualified criticism of the nationalised industries. I served in a nationalised industry for 35 years. I have been serving subsequently in the private sector for 14 years, so I have had experience of both. For the record, I should like to make these points.

First, I do not believe that there is any difference between the abilities and the skills of the managers in nationalised industries and the private sector. Indeed, as industries have become privatised, the same managers have carried on. They have the same skills. During my time in the coal industry, British mining engineers were regarded as leaders of the world in deep mining and were employed in all other countries where such mining was carried out.

Secondly, there is no doubt that in financial terms the nationalised industries' performance was bad. And why was it bad, my Lords? It was bad because of the constant intervention of Government. On every single aspect of

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the affairs of the coal industry--and it went through all the other industries--whether it be wages, prices, investment or anything else, there was government intervention. And we have had evidence of that today in the Question that I asked about the Government's intervention regarding the Post Office. Although publicly owned, the Post Office happens to be a very successful enterprise--which perhaps disproves the point that no nationalised industry can be successful. But the Government are making sure that it cannot work effectively because despite a government commitment that a dividend of no more than 50 per cent. should be taken, it has been laid down that 75 per cent. will be taken. In some years past it has been 90 per cent. In those circumstances, how can the industry continue to work effectively? I do not suggest that we put the clock back, but I wanted to get the record straight.

I turn to the subject of the debate. I, too, like the noble Lord, Lord Eatwell, wish to look forward rather than back. We are at a stage in the development of our economy when I freely accept that things have been going much better for some years. As I am sure the noble Lord, Lord Mackay of Ardbrecknish, will remind us--he has done so on many occasions in the past when we debated the subject--we are in the fifth year of a recovery. The question we must ask ourselves, however, is this: how long will this recovery last? Going back as far as we can recall, the whole of our past economic history has shown that like other economies throughout the world we are subject to economic cycles. Economies do well at certain periods; and they do less well at other periods. How long, therefore, will the present recovery last?

The specific problem we have had in Britain in recent times is that when the economy moves in a down cycle it is more serious and the difference is wider than elsewhere; and that has certainly been the case in the past two recessions. The challenge is not only to estimate how long the present recovery might last, but how to ensure that when there is some degree of downturn, as seems 90 per cent. likely, it is minimised.

In preparation for the debate, like many other noble Lords who will participate, I have done a little research. I have looked at the year 1988. That was a year in which the British economy was doing particularly well. The noble Lord, Lord Young of Graffham, who sat in the seat of the noble Lord, Lord Mackay, was telling us how well it was going. Indeed, if one were to read the speeches of that time, one would probably find the wording to be almost identical. The Red Book of that year estimated that the growth in consumer expenditure in the forthcoming financial year would be of the order of 4 per cent.; and the growth in GDP would be of the order of 3 per cent. In the event, consumption increased by 7.5 per cent. and GDP increased by 5 per cent. I do not criticise the Treasury, which made those estimates, because all other pundits, including perhaps the noble Lord, Lord Desai, if he had been following the subject at that time, were taking the same view. However, one can go wrong in these estimates. It was that underestimation which led to the pressures on inflation which in turn led to the recession to which the noble Lord, Lord Eatwell, referred.

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Let us look at the estimates made for the coming financial year. By coincidence they happen to be in round figures that consumer expenditure will rise by approximately 4 per cent. and that GDP will rise by approximately 3 per cent. The question we have to ask ourselves is this: will that be any more valid than the estimates of nine years ago? I think that everyone is agreed that there is unlikely to be the enormous increase in consumer expenditure that there was then. Nonetheless, I think that there are possibilities that the 4 per cent. could be exceeded. If the growth of the economy continues as it does now--the Government are confident that it will--that will put more money into the pockets of consumers. And there is one other factor. The building societies which will become banks will hand out very substantial sums of money before the year is out. Indeed, we read in the newspapers this morning that the Halifax has a reserve of between £3 billion and £5 billion which it does not know what to do with, and is thinking of handing it back to its members. That will be a massive infusion of money waiting to be spent.

Therefore, we should be cautious about the prospects of consumer expenditure in the coming year. If consumer expenditure substantially exceeds the 4 per cent. estimate of the Government, that will work its way through to the GDP. The general feeling among economists--there are many eminent economists here--is that a GDP increase of over 3.5 per cent. could be inflationary in its impact.

While accepting that the economy has improved and has been buoyant for the past five years, I think that we are justified in asking the Government whether they have given any thought (if they were in a position to do anything about it) as to what could happen next. How long could that buoyancy continue? When could we reach the point at which we move inevitably into a downturn? What can be done to minimise the impact of that downturn?

In that connection, the Governor of the Bank of England recently suggested a modest increase in interest rates despite the dampening effect of the increase in the value of sterling. Was he making a prudent proposition in the light of what might happen? The Government turned it down. We are justified in asking whether that was because there is an election forthcoming, or whether they are convinced that there is no need for such prudent action.

While the economy has undoubtedly improved, on past evidence it is probably nearing the end of the upturn. The downturn could be coming. Can it be expedited by higher than expected consumer expenditure; and in that case what policies will the Government be pursuing in the future to deal with that?

3.40 p.m.

Lord Kingsdown: My Lords, I find it rather challenging to speak so early in this important debate as I have to open with a confession. I recently found myself embarking, albeit briefly but far too late in life, on a new career as an international bond salesman promoting sterling bonds and instruments. It seemed natural to embark upon that with confidence in view of

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the strength of sterling, its prospects for stability and the high yield available on it, about which I shall say more anon. I could not help, however, reflecting on how ironical it was when I thought of the vicissitudes of sterling in the past--not least when I was Governor of the Bank of England and looked likely to be the first one who presided over sterling's slide down to parity with the dollar, which incidentally was narrowly averted by raising short-term interest rates twice by a total of three points to 15 per cent. That would no doubt be a horrifying thought to the modern borrower. I regard it as thoroughly commendable and a tribute to government that we do not have shocks like that nowadays, so destabilising as they were to the real economy.

The strength of sterling is readily to be understood. It has risen 20 per cent. against the deutschmark since last autumn and by 6 per cent. against the US dollar in the same period. These comparisons against the deutschmark show the UK and the US to be in very similar positions in terms of economic fundamentals. Both have a respectable and sustained rate of growth, low inflation, appropriate short-term interest rates, and rising rates of employment unaccompanied by labour cost pressures--a phenomenon recently described by Alan Greenspan as unprecedented in modern memory and colourfully presented by the American markets as the "Goldilocks" scene. The United Kingdom shares the same set of experiences and hence the strength of the currency. That is not, I recognise however, universally welcome, although the rest of the scenario must be. I do not share the view of the noble Lord, Lord Eatwell, who seemed to suggest that the current strength of sterling is in some way a failure.

In my view great credit must go to the Government for their persistence and perseverance through a painful period in the early 1990s of recession and unpopularity in achieving that position. Is it sustainable? I ask the same question as the noble Lord, Lord Ezra. In my view the answer is yes. I realise that we are still subject to the economic cycle. However, I believe that in this day and age of low inflation the cycles will be flatter and longer. I believe therefore that it is possible that we can sustain the present conjuncture subject to inevitable caveats, some within government control and some manifestly not. In the latter category are unforeseen, unforeseeable political changes or exogenous shocks--"events", as Mr. Macmillan put it so succinctly; and not much can be done about them. In the former category--those matters within government control--there will always be persistent pressure from the perception that growth is inadequate and unemployment is not falling fast enough, and the consequent temptation to ease policy too readily, with the potential consequences with which we are familiar. I doubt, however, whether that is in prospect. I hope not. I make that remark in view of the expressed policy statements of both main political parties, and also on account of the pressure under which most, if not all, modern governments find themselves from the international financial markets.

I have heard these markets described recently as the vigilantes of modern financial policy. It is an apt word. These markets are no respecters of persons or governments, as anyone who was involved in the

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events of September 1992 and subsequently will know. They have no sentiment and little loyalty except, understandably, to themselves and, quite correctly, their clients. They control funds which dwarf the reserves of the central banks and modern technology enables them to deploy such funds instantly and on a massive scale--and to punish governments whose policies appear rash, ill-judged, potentially inflationary or fiscally irresponsible. It may be distasteful to contemplate that, especially for those to whom sovereignty is dear--perhaps, above all, sovereignty in monetary policy. But that restraint on action by government has arrived in our globalised world; it exists. And I have to say that I find it salutary.

Do we here in the United Kingdom with our so-called Goldilocks scenario have to fear these vigilantes? I think not at the moment. But there is one respect in which our situation needs improvement. At present, the United Kingdom Government have to offer an interest rate return on their gilt-edged stock of between 1½ and 2 full interest points above that accepted by the markets for the German bund. The UK rate is comparable to that for Italy, and the interest rate is above that for Spain and France. Why is this demand, this interest rate premium, made on us for our government stock, for all sterling bond issues, indeed probably for all sterling borrowers, in spite of the strength of sterling and the soundness of our economy?

I am afraid that this is a visitation of the vigilantes, a perception by the markets that sterling is still vulnerable to devaluation and inflation through deliberate policy or through benign neglect of the exchange rate, which is very nearly the same thing. These vigilantes demand a long track record on the way to credibility, and for all the achievements of the past three or four years we do not yet have the credibility of, say, even those countries that are believed to be going to join economic and monetary union in Europe whose fiscal position is not as sound as ours in GDP terms.

I do not on that account advocate immediate membership of EMU. I believe incidentally, as does the noble Lord, Lord Prior, that the official stance of the UK Government is the correct one and the only one in present circumstances in the interests of the country. I am not necessarily saying that the markets are right. They are not always. However, I would like to see that interest premium disappear, both as a tribute to UK financial soundness and as a means of alleviating the cost to all of us as taxpayers of our government debt--not to mention corporate borrowers or any issuer of sterling instruments or lesser borrowers.

One step could be taken now, quite apart from EMU. As long as the Bank of England Act 1946 gives the Chancellor of the Exchequer, as it does, the right to give directions to the Bank of England, the vigilantes will want that interest rate premium. Why, they ask, otherwise retain that power when governments elsewhere in the world are giving it up or restricting it except to have the option to inflate and devalue at will?

I know that the idea of an independent central bank offends in the eyes of many the principle of democratic accountability, but our cousins in New Zealand--I call

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them our cousins in this context because their constitution and parliamentary traditions are very similar to our own--have worked out a solution to this issue which has been remarkably successful for all concerned in that country. We could, in my view, appropriately crown our present success with a similar move, giving the interest rate reliefs that I have described. I know it may be said, "He would say that, wouldn't he?" Yes, I would, I have, and I believe it.

3.50 p.m.

Lord Lawson of Blaby: My Lords, it gives me particular pleasure to follow my good friend, the noble Lord, Lord Kingsdown. It brings back happy memories of the double act which we performed for seven successive years at the Lord Mayor's Banquet at the Mansion House, the only difference being that on that occasion I used to speak first and he spoke after me. We were always in harmony and I am glad to say that I find myself in harmony with him today.

As he well knows, and as noble Lords may be aware, I came to the conclusion during my time as Chancellor that the conduct of economic policy, which has always been a difficult issue, would be improved and made less difficult with the sort of benefits that he enlarged upon, if we were to have an independent but accountable Bank of England. I proposed that in 1988 to my noble friend the then Prime Minister, Baroness Thatcher. Unfortunately, at that time she was unable to agree with me. I made it public that that was my view in my resignation speech of October 1989 and have adhered to that view with increasing confidence that it is right ever since. In a time-limited debate I cannot go further along those lines but it is an important point which the noble Lord made and with which I entirely agree.

I welcome the very timely debate which my noble friend Lord Prior has introduced. Because of the time limit, I shall not follow up the speeches of the noble Lords, Lord Eatwell and Lord Ezra. The speech of the noble Lord, Lord Eatwell, was quite extraordinary. He made it appear as if all that mattered was the economic cycle and that the cycle under the present administration and its predecessors had been consumption-led. No one listening to him would have realised that during the whole of the 1979 to 1989 economic cycle, investment in this country rose very substantially faster than consumption, by something like 3.9 per cent. per annum as against 2.8 per cent. per annum for consumption, and indeed business investment rose even faster than investment as a whole. That was in complete contrast to the previous Labour economic cycle of 1973 to 1979, when it is true that consumption did not rise as fast as it did under the Conservatives, but investment did not rise at all. I did not want to go over the past but it was raked up by the noble Lord, Lord Eatwell.

I believe that the noble Lord, Lord Ezra, was right to say that we should be cautious. He reminded us that we are five years into a recovery. Five years into the last recovery took us to 1986. It was impossible in 1986 to foresee the credit explosion which caused the difficulties later in the 1980s. There is thus good ground for caution now. He is right, and the noble Lord, Lord Kingsdown, is right, too.

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However, I would rather refer to a noble Lord who is to speak later in this debate, who said:

    "Labour's biggest obstacle is the economy. It is in great shape. There is steady growth and low inflation. Compared to Germany and France, it looks the best economy in Europe".

That was said by the noble Lord, Lord Desai, as he will recognise, only a few weeks ago. Unfortunately, because the noble Lord has an understanding of the economy, he was found ineligible to be a Front Bench spokesman for the party opposite.

We are in a benign phase of the economic cycle. But that is not what matters. What really matters is the fundamental long-term improvement in the underlying performance of the British economy during the period since 1979. What matters is why it has happened. It has happened because of the far-reaching programme of economic reform put in place by the Thatcher Government and continued by the present administration: privatisation, deregulation, competition, flexible labour markets, trade union law reform, tax reform and reduction made possible by the most rigorous control of public spending and a whole raft of reforms of that kind. That is why we have had this improvement.

It has been a sequence of governments that has taken a long view. It was set out at the beginning by the promotion for the first time of something called the medium-term financial strategy. No previous government since the war had thought in those medium-term views.

A more striking example, and something of topical interest, is what has come to be known as the pensions time bomb. That is something which the Conservative Government of this country addressed in a way that no other country has yet done but will have to do. Some noble Lords will be aware of a study produced by the IMF last year which looked into what it called the unfunded state pension liabilities of the various G7 countries. It is a very serious and important issue. The IMF tried to make its best assessment of the net present value of these unfunded public sector pension liabilities among the various countries. The result was very interesting.

In France, Germany and Japan the net present value of the unfunded state pension liabilities was over 100 per cent.--in some cases well over 100 per cent.--of GDP, requiring in the IMF's judgment, with whose arithmetic it is impossible to quarrel, either substantial increases in taxation or substantial reductions in benefits, or maybe a bit of both, in order to bridge the gap.

For two other members of the G7 the position was not quite as bad: for Canada and Italy the figure was something like two-thirds of GDP, between 60 per cent. and 70 per cent. That is still quite serious but not as bad as the position in France, Germany and Japan.

For the United States, where a big and agonised debate is taking place because there is concern about this problem and what it implies for future generations, the figure is only 25 per cent. of GDP, but even that is considered serious.

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In the United Kingdom, as a result of the reforms introduced by this Conservative Government and the previous Conservative Governments, according to the IMF figures, the value of the unfunded state public sector pension liabilities is only 5 per cent. of GDP. We are in a far stronger position than any of the other countries of the G7 in that very important respect. Indeed, it would require only a very small increase in the age of retirement to bridge the gap, in the view of the IMF.

There has been a far-reaching range of reforms concerned with the long term, with the Britain of the future, not merely the Britain we are living in at the moment, which has been put through by the Conservative Government since 1979 and which is the reason for this greatly increased underlying performance.

Each and every one of those reforms was fought tooth and nail and bitterly resisted by the party opposite. That is a fact. My noble friend Lord Prior mentioned it in his introduction. Those of us who were involved in those reforms remember it very well. I should like to think that they have changed. They say that they have changed. They say, "Oh, but that was old Labour; new Labour is quite different."

Certainly, Mr. Blair--whom, I must confess, I rather like--is a little different. He is the first Leader of the Labour Party within my lifetime who is not a collectivist. His way of thinking is not collectivist. There have been Right-wing Labour leaders but they have still been collectivist. Mr. Blair is not a collectivist and that is good news. I was delighted--my noble friend Lord Prior mentioned the fact--that Mr. Brown said that the Labour Government, if there is one, will stick rigidly to the Conservative public expenditure totals, and on no account will there be an increase in either the basic rate or the higher rate of income tax. That is remarkable. I introduced the reduction of the higher rate of income tax to 40 per cent., and there was such uproar from the Labour Benches in the other place that the Sitting had to be suspended. It was the first Budget ever during which a Sitting had to be suspended. Moreover, the biggest denunciation came from Mr. Brown. It was said that I had divided the nation and offended the most decent instincts of the British people. They went on in that vein. Now they have signed up to that idea.

There can be conversion. The New Zealand Labour Party genuinely changed. The Australian Labour Party may have changed too--indeed, I believe that it has done so. However, I must say that, although I should dearly love to believe that the Labour Party has changed, nothing that I have heard during three years and more that I have sat in this Chamber or since I last inflicted my views on your Lordships, and nothing that I have heard today from the noble Lord, Lord Eatwell, makes me believe that the change is anything more than skin deep, and even that may be an exaggeration.

I began with a quotation. Let me end with one from the Economist, which, as my noble friend Lord Prior said, is not a paper that supports the Conservative Party or the present Government. It said:

    "Until about 1979, Britain's economic decline relative to other countries was precipitous; since then, the decline has been arrested, and there are now signs that Britain is improving its position ... no other British government in modern times can claim as much".

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That was the conclusion of the Economist's special 34-page survey on this country. Unless and until the Labour Party accepts that that has happened, and unless and until it understands why it has happened, it will not be fit to be entrusted with the conduct of economic policy in this country.

4.2 p.m.

Lord Barnett: My Lords, I hope that the noble Lord, Lord Prior, will not mind if I do not follow his example and make a party political speech. Perhaps I may disagree with him on only one point. He referred to an excellent book on Chancellors by my old and trusted friend and former ministerial colleague Edmund Dell. I had dinner with my old friend on Monday night and I can assure the noble Lord that he did not agree with what the noble Lord said. Neither in his book nor in speaking did he agree that the noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson, were excellent Chancellors. Indeed, I had to tell him that I hoped his next book would not be about chief secretaries. He was very critical of every Chancellor since 1945, both Labour and Conservative.

But let me say at once that I happen to agree--one cannot dispute it--that at the moment the economy is doing well. I certainly do not dispute that. It is doing well by comparison with Europe now. I do not dispute that and indeed nobody can do so. It is doing well by comparison with the past 18 years here in the UK. I do not think that that can be disputed. But it cannot be said that it has also done well by comparison with Europe over the past 18 years. That certainly would not be true.

The 3½ per cent. growth that the Government have achieved, are achieving or seem to be achieving at the moment, is of course good by comparison with past performance. But, unlike some people, including the noble Lord who is a former Governor of the Bank of England, I do not believe that it will be sustainable. I do not believe that things have changed so much in the management of economies. If one insists on having inflation at 2½ per cent. as the main criterion for achieving such growth and achieving it, I do not believe that that 3½ per cent. can be sustained. We shall be back to the old average of 2 per cent. or thereabouts that we have had in the past 18 years and indeed before then under successive governments. I do not believe it for a moment.

Under the noble Lord, Lord Lawson, in 1987 and 1988, there were substantially higher rates of growth. But, as he will be the first to agree, they could not be and were not sustained. The fact is that next year in 1997-98, on present policies, they cannot be sustained. We are told in the Red Book in Table 3.9 that the public sector borrowing requirement will be 2½ per cent. of GDP below the Maastricht convergence criteria. When the noble Lord first said that, I was rather pleased to hear it. But I do not believe it. I doubt if the Chancellor believes it. He fudged the figures every bit as much as those in Europe who are accused of fudging their figures. One of the good reasons is also found in that Table 3.9, and the Treasury is very honest about it.

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The average margin of error over the past 10 years--the average, not the worst--on the PSBR has been £11 billion--1½ per cent. of GDP.

One can believe in miracles and believe that that will not happen again and in future there will not be any margin of error. But the Treasury does not believe that; otherwise, it would not have put those figures in the Red Book. I do not blame the Treasury for those forecasts; I do not blame the wise men who give the Chancellor advice; nor do I blame any other economist outside the Treasury. Forecasts are very difficult. In 1987 and 1988 the noble Lord, Lord Lawson, blamed the Treasury and it is worth noting what he said at that time. I quote from the noble Lord's excellent book. Talking about the Treasury forecasters, he said:

    "although the forecasters did their best, they let me down badly".

However, he went on honestly to contradict himself, saying:

    "I believed them, not because I had any faith in Treasury forecasts as such, but because they reinforced my own instinct".

The noble Lord, Lord Lawson, said that in his book. In fact, it is hard to believe in any forecasts or instincts, even instincts as good as those of the noble Lord, Lord Lawson. The fact is that it is easier to forecast the weather than to forecast the economy and economic effects.

However, the analysis of what is likely to happen shows that public expenditure very much understates the likely outturn. In the current year it looks as though the Government might achieve public expenditure as a percentage of GDP at the same figure that I left in 1979. I am not proud of that. I am sorry that I had to spend so much of my time cutting public expenditure, including that of my noble friend the noble Baroness, Lady Castle.

The reason why I say that the forecasts are likely to be wrong are manifold. But there is one reason in particular. Public sector pay is forecast to be frozen for the third year in succession. Anybody who has worked or is working in the voluntary sector or any part of the public sector will know that that is, to put it mildly, unlikely to be achieved. Inevitably there is likely to be a need for increased expenditure in the health service and in education.

On the revenue side, the Chancellor and the Treasury Red Book have assumed far too much. Perhaps I may again give just one more example: The anti-tax evasion and avoidance measures are scheduled to bring in very large sums of money. I hope that they are successful. But the fact is that it will not happen very quickly. I say that as an accountant, who is, I hasten to add, no longer in practice. The Chancellor and the Treasury underestimate the resourcefulness of accountants in advising clients on tax avoidance--not tax evasion, I also hasten to add.

But I do not believe that the present Opposition, when in government--which I assume will be the case (I know that honourable Members down the Corridor expect a Labour Government)--will do any better. It will need more tax. I know that it has made a firm commitment not to increase the rates but there are many ways of increasing taxation without touching the rates. Indeed, it could always say: "When we opened the

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books we found things much worse than we expected, so we can change the rates", as has been done by Chancellors in the past.

My view is that not only will there be a need for more expenditure, but I hope that there will be a requirement and a desire to increase expenditure. I say that as a former Chief Secretary to the Treasury who sadly had to say no to many of his dear colleagues in areas of expenditure which, when I came into politics, I desperately wanted to see improved. I do not believe that we shall be able to improve the health service, education and other areas without an increase in expenditure; it is not possible. One may be able to do a little about the administrative side of the health service, but that will only be possible on the technology side. It will be tiny in relation to what needs to be done. It will not happen.

I hope that the windfall tax will act as a catalyst to bring relief in the field of unemployment, but I am not too optimistic in that regard either. Maybe being Chief Secretary for more than five years makes one too much of a pessimist. The long-term solution is to go for higher rates of economic growth. That will not be achieved by slavishly following the present Government's policies. I would go for higher rates, even at the risk of slightly higher inflation, and a higher public sector borrowing requirement. I say that despite Maastricht.

As your Lordships will be aware, I want to join a successful single currency. But a disastrous economic and monetary union would be a gift to Eurosceptics. We all agree that we are going to stay in the European Union; it is permanent; it is there not only for this century but also for the next century and many centuries beyond. In those circumstances, 1999 should not be regarded as being written in stone as vital for the success of the European Union.

Stephen Dorrell was right at the weekend in his first statement: neither government will join on 1st January 1999. I do not regret that. I am glad to see my noble friend Lord Bruce of Donington smile--I say I am glad; I mean I am sorry! The fact is that Eurosceptics in Europe will also benefit from a disastrous economic and monetary union and an unsuccessful single currency.

Therefore, despite all that has been said so far by the Opposition, I hope a Labour government will set policies that aim for higher rates of economic growth, even at the expense of a delay in the introduction of a single currency. Such a delay now seems to be crucial to the vital need to reduce unemployment, both in the UK and throughout Europe.

4.13 p.m.

Lord Howe of Aberavon: My Lords, it is difficult--I shall certainly achieve it, notwithstanding the closing observations of the noble Lord, Lord Barnett--to resist the temptation to say any word of any kind about Europe or economic and monetary union.

I begin as others have done by thanking my noble friend Lord Prior for the excellent speech with which he introduced the debate. It is good to hear him offering such unqualified praise for the achievements of the Conservative Government. I should like also to

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comment on the speech made by the noble Lord, Lord Barnett. He had the wisdom and generosity to acknowledge the present healthy state of the economy. I regret the mean-minded, micro-economic, backward-looking terms of the gentleman who opened the debate on behalf of the Labour Opposition. It lacked the generosity which his leaders at least have achieved of being able to acknowledge the huge transformation in the performance of this country's economy so vividly described by my noble friend Lord Lawson. I hope it is the last we shall hear of that kind of commentary from the Benches opposite.

I do not want to rehearse again the areas of success which have been acknowledged on both sides of the House. I want to mention the success being achieved in relation to unemployment. The noble Lord, Lord Eatwell, appeared to brush it aside. But it is an irrefutable fact that, while other economies on the Continent of Europe--with the notable exception of the Netherlands--have been going in the wrong direction, we have seen a dramatic and sustained fall in unemployment by more than 1 million over the past four years. That should be acclaimed and applauded on all sides of the House. It is manifestly, in that respect and others, a huge improvement. The noble Lord, Lord Ezra, was right to ask how far that improvement will be sustained up to and beyond the election. It is a question also asked by the noble Lord, Lord Kingsdown.

The foundation of continued success in that respect is continued success against inflation. As the noble Lord, Lord Barnett, acknowledged, it is also continued success against the ever burgeoning problem of the public sector borrowing requirement. The Chancellor, in a notably optimistic speech to the Retail Consortium on Monday, went so far as to say that,

    "Britain has made a clean break with its inflation-prone past".

I wish I could be sure that he is right about that. He is right to acknowledge its importance and has taken important steps towards achieving it. He placed himself under a scrutiny which neither I nor my noble friend Lord Lawson had to face, by initiating the public judgment embodied in the so-called "Ken and Eddie" show. That has been an important additional factor towards the maintenance of proper monetary discipline.

The differences of opinion between the Governor of the Bank of England and the Chancellor on the scale of any possible increase in interest rates--it will surely have to come some time later this year--is a modest one; the difference is only that of timing. I agree with the noble Lord, Lord Kingsdown, and my successor, my noble friend Lord Lawson, in joining those who believe that we should move to achieve independence for the Bank of England. It is a conclusion, as others have pointed out, more easily arrived at by ex-Chancellors than by Chancellors in office. The experience of the United States, the Federal Republic of Germany and New Zealand all supports that conclusion.

The Chancellor also took credit, quite rightly, for the fact that the Government's spending--as a share of national income--has fallen each year since 1992-93 and next year it will be less than 40 per cent. I recognise what the noble Lord, Lord Barnett, had to say about that.

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It is important progress. The future can be judged in the light of that achievement. The real question is whether that too can be sustained. I believe that it can be, as long as discipline by the Government is maintained. Under the present Government, that is something on which the outlook remains good. To repeat the question of the noble Lord, Lord Ezra: how long will that last?

The question I should like to address is what is likely to be the effect on that prospect of the election of a Labour government. If we are to believe the Shadow Chancellor and his leader, the effect will be almost negligible. He has committed himself, so he would have us believe, to the spending plans of the present Government for at least two years; to the monetary and inflation targets of the present Government; and to the tax rates of the present Government, both basic and higher.

As other noble Lords pointed out, it is an astonishing example of political conversion. The crucial question affecting the British electorate in the days and weeks ahead is how far it is credible. The Shadow Chancellor is carrying imitation well beyond the bounds of flattery, seeking to present himself--to borrow a metaphor of the noble Lord, Lord Eatwell--almost as a clone of Clarke. I have to pronounce that the process whereby the Shadow Chancellor would achieve that result is unlawful, unachieveable, and unbelievable. There is only one "Ken"; and he, I am glad to say, is "one of us". Long may he remain in the service of the nation in that capacity.

Even so, Labour's transformation is a remarkable tribute to the success of Conservative governments over the past 18 years in redefining the common ground of British politics. It was an objective set first by my noble friend the late Lord Joseph, but also by my noble friend Lady Thatcher and indeed myself--I see the noble Lord, Lord Harris of High Cross, in his place--and promoted substantially by the advocacy of organisations like the Institute of Economic Affairs. It has been crucial to achieve that redefinition of common ground.

Labour leaders now proclaim their conversion to market-driven economic policy. Nationalisation, despite the plea by the noble Lord, Lord Ezra, has been disowned, Clause 4 overthrown, and trade unions dethroned, in Labour's constitution as well as the workplace. Tax sanity has been embraced, the leader having persuaded the Shadow Chancellor to accept the maximum rate set by my noble friend, Lord Lawson. The beguiling message we now get from the Opposition Leader is, "Life's better with the Conservatives; I won't let Labour ruin it". There is, in fact, a discreet subtext to that beguiling message: "Labour is ready to cherish a land fit even for Lloyd Webbers to live in". That was once my own objective. I consulted closely with Andrew Lloyd Webber, when he was plain "Mr." way back in the late 1970s. It would have been a disaster for this country had we not then set about the fundamental reshaping of our direct tax system. The fact that Lloyd Webber is still not just in this country but now in this place has redounded not simply to his benefit but to the benefit of the country as a whole.

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The question for electors is: why take the risk of making a change? For even a momentary examination discloses how Labour would find it impossible to live within the Shadow Chancellor's constraints. Existing public spending plans and limits depend, for example, upon the continuation of certain policies of the present Government. Further privatisation measures: would Labour continue with those? The continuing expansion of the role of the private finance initiative in the National Health Service: would Labour continue with that? Social policy changes--for example, to lone parent benefits. Would Labour continue with those? If not, Labour's promise is manifestly undeliverable.

Beyond that, Labour would proceed with a whole range of expensive policy commitments of its own. I shall not weary your Lordships with a list of those to which Labour is committed because the best testimony we can have of that conclusion comes from that old reprobate, the noble Lord, Lord Barnett--who appears, for the moment, unable to recognise himself in that guise. But if even a former Chief Secretary moves in the way that he does, what hope can there be for a Labour Cabinet? The most important qualification for leadership of a democratic government, as the noble Lord, Lord Barnett, ought to know, is the ability to say "no"; and in his years at the Treasury he was very good at saying "no". But for every Blair or Brown still ready to say "no" in a Labour Cabinet, there will be half a dozen Prescotts or Harmans competing with each other to say "yes". And so, as so often before, following the banner boldly brandished by the noble Lord, Lord Barnett, they will trace the path of all previous Labour governments back towards higher borrowing, higher taxes, higher interest rates, higher inflation and, then, the IMF--the IMF which was the tutor of every Labour Chancellor in my recollection.

The question I ask the British people to ask themselves is: why should all the young men and women on the Opposition Benches in the other place now lusting for power do any better than their predecessors of now so long ago who still adorn the Benches opposite in this House? How can the British people possibly be confident that spokesmen for New Labour will in the end be any more capable of achieving fiscal responsibility and economic sanity than the distinguished monuments of old Labour, at whom we have the chance of gazing every day?

4.23 p.m.

Lord Bruce of Donington: My Lords, it is a great pleasure to follow the noble and learned Lord, Lord Howe of Aberavon. I remember being on these Benches when he introduced his first Budget as Chancellor of the Exchequer in 1979. He gave a very interesting explanation as to the movements of taxation. He said--and I am quite sure he will agree--that he lowered the rate of income tax to enable people to pay the increased purchase tax that was going to arise in his Budget. I thought that a rather quaint observation at the time and it does not lack its attractiveness even now. All I will say is that to the best of my recollection he inherited a rate of inflation of 10.3 per cent. but by

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January it had gone up to 22.1 per cent. under his Chancellorship, acting on the principle, I have no doubt, "Hit me over the head; it's so nice when it stops".

The debate today is on the position of the economy. You can look at the economy, my Lords, from a number of angles. You can look at it from the point of view of the City of London and corporate finance in the City and elsewhere, or you can look at it from the point of view of the ordinary citizen who tends by and large to be on the receiving end. Very naturally, in view of the fact that the distribution of wealth has shifted in favour of the wealthy to the detriment of the poor over the past 18 years, one can quite understand that the Conservative Party tends to take a rather rosier view about it. In fact, the noble Lord, Lord Mackay of Ardbrecknish, when he speaks periodically on this subject, quotes the statistics, albeit selective, with some relish but without any noticeable effect outside.

The obstinate fact of the matter is that, notwithstanding the eloquence of the noble Lord and his counterparts in another place concerning the virtue of the statistics to which they refer in terms of the rate of inflation, the exchange rate, the balance of payments and all the other various factors that are of interest, there is no feel-good factor. On the basis of the argument that the Government have been putting forward over the past year, the feel-good factor should already be there. Why is that not so, my Lords? Why are people so depressed? Why do they need cheering up and reassuring so much? Surely the very logic of the figures that the Government have been laying before the country from time to time--the strongest economy in Europe, the most prosperous state we have been in over the past century and all the rest of the nonsense that emanates from them from time to time--ought to have had by this time an impact on the population as a whole. That, so far--I do not want to talk about Wirral too much because it may be rather a sore point--does not seem to have shifted public opinion at all. It remains just the same as it has been over the past year; and notably since we were forced to leave the exchange rate mechanism in September 1992. It is since that time that confidence in the Government has begun to waiver.

When the noble Lord, Lord Kingsdown, was discussing the activities of that body of men whom he called the vigilantes he said that they were responsible for forcing a premium in interest rates to be paid by this country. That is not a very good testimonial to the existence of a Conservative Government over the past 18 years. One would have thought that they needed but little reassurance. The fact of the matter is that the economy presents a very different picture from that presented from the Government Benches today.

I wish to touch on two points only. The first point is unemployment itself. There has been a systematic understating and fiddling of the unemployment figure which in 1979, when the noble and learned Lord, Lord Howe of Aberavon, became Chancellor of the Exchequer, was standing at 1,300,000. On the same basis of determining the figure then as compared with now, the unemployment figure is probably between

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4 million and 4.5 million rather than the claimant figures which are periodically trimmed and presented by the Government.

My second point is investment. Whatever the Government may say--I should be interested on another occasion to hear the observations of the noble Lord, Lord Kingsdown, on investment--investment in manufacturing industry in this country has but very occasionally reached the level at which it stood in 1979. There has been a dearth of manufacturing investment. That brings me to the point that is very often made by the noble and learned Lord opposite and by my noble friend Lord Barnett, who has since left his place. The fact that we attract so much direct investment here from overseas is associated with the success of our economy and our position in the European Common Market. What is noteworthy, and what the noble Lord did not touch on at all, is that outward investment by corporate finance in this country is double inward investment.

So whatever corporate finance may say in the City, the fact of the matter is that corporate finance has little confidence in putting its money where its mouth is. Indeed, as I have said, twice as much investment goes overseas than is put into this country. That means that we are not in a very good way for grounding our prosperity on the processing of material things. What we are becoming increasingly good at is what is called in the financial markets "new products". They vary as we found out in the case of Barings Bank. New products, which the financial community is now very adept in offering to the public, comprise the selling or buying of options, the making of loans and mortgages associated in a variety of ways and constituting a variety of products. All those are assumed to be an effective substitute, both in the medium and long-term, for manufactured goods which, as a percentage of gross domestic product in this country, have dropped even more in the past 18 years under the existing administration. That is something which has to be tackled.

So far, the suggested way of tackling the problem has been the offering of inducements. I remember the right honourable gentleman the Member for Bexley referring to this in 1972 when he complained that industry was investing too little in manufacture and finance. He said that he had offered every inducement to corporate finance in this country, including every tax concession, and still it would not invest. That position still maintains.

What we are saying on these Benches is that more encouragement and greater co-operation must be given in order that manufacturing industry receives the amount of investment that it should, but whether or not that will be successful one does not know. One's experience probably suggests that it is going to need a very great deal of effort. The question is whether the country as a whole can be sufficiently united to enable that to happen instead of having a divided society which has been deliberately engineered by the party opposite. The efforts that are required by us in our existing situation need the goodwill and co-operation of every citizen and group of citizens. Before that happens there will have to be a good deal of searching of minds among those who

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at the moment arrogate to themselves the right to think that they and they alone have been right, whereas a small degree of humility and of being prepared to think things out again, is necessary. Certainly, the problems will not be solved by party dogma on either side. The problems will be faced fundamentally in relation to the ultimate regard in which Britons esteem their own country.

4.33 p.m.

Lord Blyth of Rowington: My Lords, first, perhaps I may thank my erstwhile competitor and noble friend Lord Prior for initiating this debate. I declare an interest as chief executive of the Boots company. I suspect that I am relatively unusual in your Lordships' House in that I am under 60 years of age and have run an international business for well over 20 years. That is important because today few, if any, managers under 50 years of age are likely to have run a business pre, per and post the Government of my noble friend Lady Thatcher. So I have seen at first hand the changes in the economy and their effect on business over the past 18 years. I have seen the effect on the competitiveness of our business in this country which is all-important.

What have those effects been? I believe that there has been broad agreement this afternoon that we are much more competitive. The greatest measurement of that, as has been said, has been the levels of inward investment in this country, which are second to none in western Europe. Our labour relations--again, as has been said--have vastly improved. I clearly remember in the late 1970s when I spent 20 per cent. to 25 per cent. of my time attempting to solve labour-relations difficulties, sometimes pretty fruitlessly. I detect in the present state of labour relations in this country some warning signs, some flexing of muscles and the possibility of the resurgence of some of the efforts that we saw in those times.

If we look at our main European competition, especially Germany, we see that unemployment there is at its highest level since the Weimar Government. Germany is moving more and more jobs overseas. Some two years ago my company sold its pharmaceutical business to BASF. One of the great attractions of that deal was that Germany acquired research scientists in this country who cost between two and a half and three times less than the same research scientists in Ludwigshafen. I talk to German businessmen on a fairly regular basis. They admire our success and they envy our freedom of action. It is only their politicians who regard us as the Quebecois of Europe.

Since 1992 we have consistently had a competitive currency. I believe that it is still competitive--it certainly is for my international business. We have had consistently low inflation for longer and our pricing and therefore our competitiveness are the more secure. Policies on government expenditure and the provision of public services are designed to prevent the erosion of competitiveness. That is not always successful, but it is an aim.

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It is the desire to maintain competitiveness that causes most, but not all, businessmen in this country to be opposed to the social chapter and to any sign of a minimum wage. It is also the reason that most businessmen are appalled at the prospect of more bureaucratic incursion from Brussels, even when it comes via our occasionally over-rigorous national agencies. I should make it clear that in the nearly 10 years I have spent with Boots the company has never been in better shape nor more able to compete at home and abroad. We are enjoying steady, sound, if unspectacular, growth on the high street. Our share price is at a near high and our shareholders are enjoying enhanced value. We have excellent relations with our workforce. I do not use that as a commercial. I believe that to be the case for most British companies today.

However, we cannot deny that the need for competitiveness causes real concern for the future among our employees. I believe that to be true almost everywhere in the world. Even among our employees, despite a growth in employment over the period from 67,000 in 1978 to 77,000 in 1996, their wage bill has grown from £131 million in 1978 to all of £767 million in 1996.

Lastly, I share with your Lordships a small look into the future and I would like to stay with the competitiveness theme. I continue to be surprised by the certainty of some commentators, including some of my colleagues in industry, about the future. I have just attended a four-day banking and business conference. I have to confess--and noble Lords can tell from my colour in any case--that it was two days' skiing and two days' banking and business. It was attended by 100 business CEOs from all over Europe and the United States.

One of the main subjects under discussion was EMU. I shall discuss the areas of common ground in a moment. There was huge disagreement and doubt on the following points. First, if EMU did not go ahead, what would happen to the deutschmark? The view, by a narrow majority, was that it would strengthen, render Germany less competitive and increase its unemployment. There was no consensus on who would join the first tier, but no one, including me, believed that the UK would join. There was a great variety of view on whether the UK should join at all. Interestingly, the Swiss to a man hoped that we would go in only when we were absolutely certain that it would benefit our competitiveness. I suspect that a great deal of enlightened self-interest drove that view. There was no agreement at all on whether it would be necessary for competitiveness on our part to go in at all.

I turn to the areas of common ground. EMU would go ahead at pretty much the expected time: 1999. German political will, commitment and need was far too great to be denied. The entry criteria would be fudged by early joiners, despite German objections and legal barriers. The technical difficulties of integration and effective competitiveness had been enormously underestimated by most people involved. Lastly, the overlap with the year 2000 computer difficulties had been hugely underestimated by business and totally uncomprehended by government.

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In conclusion, I suggest that we have an economy today that is in very great shape for business. It is great and it is envied, but the future is worryingly uncertain.

4.41 p.m.

Lord Harris of High Cross: My Lords, I confess that I did not have great relish for this debate, despite my warm affection for my old sparring partner, the noble Lord, Lord Prior. I thought that it might turn out to be a rather tame affair. After all, as we have heard, Labour has at last followed the Tories in embracing at least the rhetoric of the market economy. I look back almost with nostalgia to the 1960s and 1970s when a few of us at the Institute of Economic Affairs had a great deal of fun trying to get across what Enoch Powell--an early convert--called the "economics two times table" to politicians of all parties. I readily join others in paying tribute to the Labour Party under Mr. Blair as promising pupils, although perhaps they promise too much. They have learned a great deal and have left only the Liberal Democrats and Sir Edward Heath still in the duffers' class.

There are many great joys in retirement, quite apart from keeping out of the obituary columns. For an economist there is a special bonus in this blessed state; that is, one does not have to keep up with all the dubious official and unofficial statistics, usually to two or three phoney decimal places, about the GNP, inflation, growth rates, investments and all that stuff that we have heard about from the noble Lord, Lord Eatwell. Nevertheless, from general reading and observation, which highbrows dignify as casual empiricism, I proclaim that the economy is in pretty good shape. Retirement gives one more time to look around and go shopping, to go into pubs and to talk to real people rather than to other economists or politicians. This is referred to as anecdotal evidence. Whenever two or three are gathered together conversation turns to: "How are things?". Increasingly, the answer is that, apart from the weather and other ailments, things are pretty good. If one wants to consult what used to be referred to as a leading indicator, one should ask a taxi driver, "How's business?". Without exception, they will say, "Getting better and doing well".

The noble Lord, Lord Eatwell, contests the trickle-down theory. As always in these matters, he takes too short-term a view of the cascade of benevolent prosperity that comes along decade by decade. Without hilarity, I say that even for the underclass today things do not look quite so desperate from the vantage point of one brought up on a council estate near High Cross, Tottenham, some 50 or 60 years ago. Unfortunately, the bishops and others of the gloomy tendency see none of these good things.

It saddens me a great deal that most of the vocal bishops have given up rejoicing in the truly wondrous achievements of free men in competitive markets and what they have wrought with God's creation. They no longer offer up thanks for the marvellous spread of popular prosperity accompanied by less daily toil, fewer dark satanic mills and an unprecedented enlargement of individual freedom. All of these boons, to which the bishops by their calling necessarily have contributed

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nothing, are taken for granted. They have eyes only for the remaining black spots. Bemused by misleading statistics on poverty and unemployment, they join the party game of blaming the wicked Tories. However high the level of state spending on social policy and social benefits--which is now an astronomic £100,000 million a year--their derisory panacea, like that of the Liberal Democrats, is to spend a paltry 1 or 2 per cent. more on the so-called welfare state, which is and remains a torrent of wasteful, indiscriminate, universal benefits and services.

Another great pleasure of retirement is travelling abroad, especially to what I revert to calling "Europe" and not the politically correct "Continent". I see that the noble and learned Lord, Lord Howe, is watching me. Last year I made several visits to Europe. I visited France, Germany, Spain and Austria for a conference at which I met economists from dozens of other countries. In Vienna I had a sudden revelation. As I looked around and considered the company there I was suddenly struck by the wonderful contrast with travelling abroad in the 1960s and 1970s. In those days one never lightly got into serious conversation with a stranger for fear of being humiliated and treated with pity by the Germans, contempt by the French and sympathy by the Italians, Americans and others. These were the days of the English disease. I shall not embarrass the Labour Party by recalling the repeated strikes in the nationalised industries, borrowing from the IMF, the depreciation of sterling and all of those other matters. Luckily, today one does not need to read OECD reports to count one's blessings for sharing the benefits of the British economy. I have not yet found a good Anglo-Saxon word for schadenfreude, but I am enjoying it.

To top it all, after a great deal of hypocrisy and make-believe on the part of the European Commission, its recent annual economic report, still unavailable at the Printed Paper Office, admits, according to reports in the press, that the employment reforms associated with the name of Margaret Thatcher--importantly contributed to by the noble Lord, Lord Prior, and other former Tory Ministers who have spoken--are a major reason why Britain enjoys a recovery of longer duration than the rest of the European Union. The Commission has suddenly learned to say the words "supply side reforms" which it says have been introduced "since the early 1980s". (That is a bit near the Thatcher bone.) The report goes on to say:

    "By increasing competition and flexibility in both product and labour markets, they have enabled both good growth and strong labour market performance."

I have time to consider only one of the novelties of the Labour Party's approach threatened for the future. In its perennial search for a "free lunch", Gordon Brown believes that he has hit on the Crown Jewels: behold, a painless windfall tax to finance an instant cure for unemployment. Alas, he fails to grasp the key distinction which we used to learn in the first year of economics at Cambridge--I do not know whether it is taught in the time of the noble Lord, Lord Eatwell--between the impact and the incidence of a tax.

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The impact of a tax is on the target group who initially pays. But the more important incidence is on the victims who ultimately bear the cost.

The electoral spin on this tax is that "the fat cats will pay". The trouble is that the fat cats have already made off with any swag. So in the standard game of pass-the-tax-buck, those who run privatised utilities would be duty bound to try to recoup any future levy of that kind, by raising prices--if that is not forbidden by the regulator--or by reducing costs, including the wage bill, or cutting investment; or, in the last resort, by reducing dividends. If they take that option of reducing dividends, it must diminish the returns to pension funds and weaken confidence of investors, therefore raising the cost of future borrowing for those industries. There is no free lunch. When the jelly hits the fan, that is the impact. When the jelly hits the bystanders, that is the incidence.

I conclude by saying that, despite past ups and downs, I congratulate the Government on getting the economy in such splendid condition. I wish the Tories well in exposing this typical example of Labour's continued short-term, shallow, sometimes shady promises which I fear would be doomed to early disappointment.

4.52 p.m.

The Earl of Caithness: My Lords, I too wish to thank my noble friend Lord Prior for initiating this debate. It comes at a most interesting time in the run-up to the general election and, as a result, we could not have envisaged the parties opposite saying anything thought-provoking or interesting about the economy. We were not disappointed.

Looking at it from a conventional viewpoint, the economy is in good shape and the Government have done better than most of their counterparts in Europe. We have moved out of recession and on the surface the economy is stronger and people are more confident. There is much that I could say about that. I think the Government have done a very good job.

However, it is also a good time to stand back, to reassess whether our economy is soundly based. I would contest that it is not, not for the reason to which the noble Lord, Lord Eatwell, alluded, which is that it is the Government's fault, but our whole monetary system is utterly dishonest, as it is debt-based. "Dishonest" is a strong word, but a system which by its very actions causes the value of money to decrease is dishonest and has within it its own seeds of destruction. We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned.

Let us look at what has happened since then. The money supply in 1971 was just under £31 billion. At the end of the third quarter of last year, it was about £665 billion. In 25 years it has grown by a staggering 2,145 per cent. Where has the money come from? Interestingly, the Government have only minted a further £20 billion in that time. It is the banks, the building societies and our commercial lenders who have

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created the balance of £614 billion. If this rate of growth is projected over the next 25 years, the money supply in 2022 will be over £14,000 billion.

All that new money bears interest paid either by us as individuals, by companies or by the Government. Today the Government pay over £30 billion annually in interest charges--coincidentally about the same as the total money supply only 25 years ago. Governments since then have abdicated their responsibility for producing new money and controlling the money supply so that now they are marginalised. In 1971 government notes and coins accounted for 14 per cent. of the money supply. Now it is only about 3.5 per cent. "So what?", noble Lords might ask.

The problem is that it is commercial lending that has boosted the money supply, thus increasing debt and, as sure as night follows day, inflation follows growth in money supply of this sort. The only reason that debasement has not flowed into price figures in the last four years is that the high interest rates in the recession gutted businesses and individuals, leaving too many unable to pay the price levels that the debasement requires. But the wall of money is increasing remorselessly. The noble Lord, Lord Ezra, mentioned the Halifax Building Society's latest surplus of about £3 billion to £5 billion.

Since 1991, in a time of recession, it has increased by 32 per cent. and most of that is in the last two years. We must remember that virtually all the increase represents a rise in the burden of debt the economy must carry. The wall of money has already driven the stock market to an all-time high and some are now questioning whether it truly reflects company performances. Recently more money has begun to be channelled into both the residential and commercial property markets. Here I must declare my interest as a residential surveyor in central London who has benefited from that. Our company, Victoria Soames, recorded a hardening of the residential market early last year, followed by a 20 per cent. rise in the last six months. That rise is continuing, if not accelerating. Lenders remain aggressive and, very disturbingly, the proportion of borrowing by individuals is moving up.

When the money supply increases, as it is doing, the previously existing money is debased accordingly. Therefore, either wages and salaries must also increase to maintain parity or those who earn wages and salaries will find that they no longer participate in the national economy to the same extent as they did previously. This exacerbates the growing fragmentation of our society, which cannot go on for ever. I am not advocating high wages but I am advocating less debasement and better control of the money supply.

When wage inflation does happen, it will feed through to all parts of the economy. The result, sadly, will be that the Government have to use the only tool they know--an increase in interest rates. That has happened fairly recently, but it is not the first time that it has happened. We saw it in the 1970s and again in the 1980s. It is a consequence of our debt-based monetary system that it leads inevitably to business and economic cycles.

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Conventional wisdom tells us that in order to create new jobs and boost the economy, interest rates have to be reduced. That has happened. People are encouraged to borrow to invest and spend. That has happened. As the continuing flow of new money finds its way into the economy, inflation will follow and up will go interest charges again to reduce the level of borrowing. In order to pay the increasing levels of interest, borrowers will once more have to reduce expenditure in other areas of economic activity. The cycle will continue, but the next time, as before, we will all start deeper in debt and with a burden harder to carry. Personal debt has already increased by nearly 3,000 per cent. since 1971. How much more can we take? I hope, for the sake of our economy, without which we cannot finance what we want to see--a good health service and a good social security system among other things--we will question this conventional wisdom.

We all want our businesses to succeed, but under the existing system the irony is that the better our banks, building societies and lending institutions do, the more debt is created. The noble Lord, Lord Kingsdown, said that there is little that can be done about debt. No, I do not believe that. There is a different way: it is an equity-based system and one in which those businesses can play a responsible role. The next government must grasp the nettle, accept their responsibility for controlling the money supply and change from our debt-based monetary system. My Lords, will they? If they do not, our monetary system will break us and the sorry legacy we are already leaving our children will be a disaster.

5 p.m.

Lord Currie of Marylebone: My Lords, perhaps I may add my voice to those of other noble Lords in congratulating the noble Lord, Lord Prior, on introducing this timely debate. We have had a number of interesting contributions, some of which I agreed with and understood, and others of which I could not really follow. But there is a danger that the debate polarises between the optimists and pessimists. I fear that we have something of that today. I hope that I can avoid that. The British economy is doing quite well but it is not free from problems. If I err on the side of emphasising the problems, I do not want to take away from the fact that it is performing well.

Over the past four and a half years since leaving the ERM we have enjoyed one of those benign phases, with both growth and inflation between 2.5 per cent. and 3 per cent. Forecasts for the next five years are similarly benign. My colleagues at the London Business School forecast growth and inflation over the next five years as much the same as that over the past five years. They are fairly typical. No signs there of fears of a Labour Government. One has to go back to the 1960s to see a similarly benign combination of inflation and output.

The point one has to make is that we are far from alone in enjoying low inflation. It is a worldwide phenomenon. G7 inflation has been 0.5 per cent. below our inflation rate over the past two years. The pessimist could note that over the past year or so our inflation differential against the OECD average has been

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increasing. The last time that happened was 1987-88. It will be interesting to see how the UK compares in the European inflation stakes when Eurostat publishes the standardised inflation figures on Friday. The latest interim numbers showed the UK with the fourth highest inflation rate in the EU. Eleven countries, including Italy, did better.

Although we are doing well on inflation, on the whole, others, particularly the US and Japan, are doing better. Even our growth rate performance is not dramatic when put in a sensible broad perspective. It should not be difficult to grow at something over 2.5 per cent. after a major recession. Indeed, I often wonder whether the Treasury has a manual on how to create good phases of growth: first, create a major recession. We have grown well, and that is to be welcomed. But it is not surprising. We are in one of those benign phases when it is all too easy for politicians to claim great achievements of economic management, which prove to be hollow since they are based on the transitory, cyclical element. As my noble friend Lord Eatwell observed, the cyclical element in the British economy is much greater than in all major economies. Therefore we are all the more likely to exaggerate the gains in the benign phase.

If we take a longer perspective, we find that the British economy has grown by 2 per cent. a year over the past decade, and, a little less--1.9 per cent.--since 1979. That is in line with French performance over the same period. They have had steady growth on average, but they have done as well. It is appreciably worse than Germany, whether or not East Germany is included, and significantly worse than the US or Japan. Economic historians will reflect that 2 per cent. has been very much the average growth rate of the British economy over many decades this century.

So in a longer perspective, the UK economy is growing reasonably, but no better than that of our competitors. That is more consistent with the facts than the view presented all too often by the Government. How otherwise does one explain that on OECD estimates of GDP per capita on a purchasing power basis we are appreciably behind almost all the economies with which we like to compare ourselves: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, The Netherlands, Norway, Sweden, Switzerland and the USA? Even the Republic of Ireland overtook us on that basis last year. Is that the vibrant healthy economy that is out-performing everyone else about which we hear so often from the Benches opposite? I do not think so.

Let me mention some other concerns. As has been said earlier, and the national institute has emphasised recently, our public sector finances are not in the good shape with which one would be comfortable at this point of the economic cycle. A 4.8 per cent. general government deficit is larger than we would like, and within the EU it is beaten only by Italy and Greece. Unemployment is low--I welcome that--but a number of smaller European countries, not just The Netherlands, have better unemployment records. The fall in unemployment that we have enjoyed owes much less to the expansion in the employed workforce and more to a reduction in labour market participation. That has

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a great deal to do with the changes in rules entailed in the move to the jobseeker's allowance. That may help to explain why the fall in unemployment has not been accompanied by an improvement in the feel-good factor.

There is then the puzzle about sterling that concerns many businesses, particularly those exposed to international competition. Some can sustain that, but it is an issue. We have seen an 18 per cent. appreciation in the effective rate since last August. Many commentators regarded the rate at which we were in the ERM as excessively overvalued and unsustainable. With sterling at about 2.75 against the deutschmark we are within a whisker of our ERM band. If we take account of the fact that our inflation rate has been higher than that of Germany, our competitive position on the real exchange rate measure is less competitive than it was when we were in the ERM. If it was unsustainable then, is it unsustainable now? Should we be worried about the pound's position?

The Government make a great deal of our position as the enterprise centre of Europe and as a magnet for new investment. I draw attention to the analysis on foreign direct investment published by the national institute. Using IMF numbers, that showed that inward investment into France in the five years 1991-95 exceeded that into this country. On average there was 19 billion dollars into France compared with 17 billion dollars into this country.

There are different estimates. I am aware of the uncertainties involved in estimating those numbers. There are two important points to make about the numbers which I find remarkable. One is that the French economy has experienced a large increase in foreign direct investment--double compared with the previous five years--whereas ours fell by something like 20 per cent. Is that consistent with the story so often advanced of UK success and continental failure? I do not think so.

Moreover, there is another striking fact. Since the numbers on foreign direct investment include as inward investment reinvested profits earned on existing investments in the country, and since the UK has such a large stock of such inward investment already on those numbers, and any other numbers, it must be the case that the French are attracting more new real investment than the British economy. It is a serious issue and one which should be of concern to us.

I shall point also to some other structural concerns. The noble Lord, Lord Prior, referred to the trickle-down effect of economic growth. Perhaps I may remind your Lordships of the excellent Rowntree inquiry into income and wealth of which the current deputy governor of the Bank of England was a member. That inquiry showed no trickle-down effect. It showed that income inequality had grown at a greater extent and at a faster pace since the 1970s than in any other comparable industrialised country, and that the distribution of income is more unequal now than at any time in the post-war era.

The poorest 20 per cent. to 30 per cent. of the population has not benefited from economic growth. Employment is increasingly polarised between two-earner households and a growing number of

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households where no one works. The consequences of that are serious. We are just receiving the results of the studies from the National Child Development Survey which track children through into adult life. What we find is that family financial circumstances have a much bigger impact on employment prospects in later life than we imagined before. They have major effects. That means that financial disadvantage in families in childhood leads to problems later on. We are storing up problems for ourselves in educational disadvantage and economic under-performance. Rising inequality has far reaching and distant economic and social consequences which touch us all. I do not believe that it is consistent with the truly optimistic view that has been presented in the debate.

In summary, the British economy is trying hard but could and needs to do better. I look forward to it doing so in the next decade under a different government.

5.10 p.m.

Lord Trefgarne: My Lords, I join other noble Lords in thanking my noble friend Lord Prior for giving us the opportunity to debate this most important of subjects.

Our debate is particularly timely, coming as it does at the beginning of 1997, which will be an important year for deciding which of our key partner nations, if any, in the European Union have achieved the Maastricht criteria to qualify for entry into the single currency. Inevitably, this focus on the so-called "convergence criteria" will generate a spate of international comparisons not only between ourselves and our European partners but perhaps also between some of the other member countries of the OECD. It is already clear from a number of the contributions made this afternoon that in most international comparisons the United Kingdom is actually doing rather well at the moment.

I would like to concentrate my remarks on one particular good news story; that is on the engineering and manufacturing sectors of our economy. These are sectors in which I must declare a special interest as president of the Mechanical and Metal Trades Confederation, Metcom; chairman of the Engineering and Marine Training Authority, EMTA; a council member of the Engineering Employers Federation, EEF; and also a director of Siebe, one of the largest engineering companies in Europe.

The EEF publishes a regular quarterly survey of business trends in the UK engineering sector and its survey for the last quarter of 1996 made particularly interesting reading. During the middle of 1996 it did seem that some of the momentum had been lost in the pattern of steady recovery that had been evident in the engineering sector throughout late 1994 and 1995. But the fourth quarter of 1996 saw a restoration of that momentum and revealed a very strong picture of renewed growth. The indicators for output, orders, employment and investment were all stronger than in the third quarter and back to the high levels recorded for the same period of 1995.

Growth in output, in particular, accelerated in the fourth quarter, with a very healthy increase in the volume of output. Furthermore, new order intake

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strengthened sharply in the final quarter. The seasonally adjusted figures in December for UK orders were up 15 per cent. and for export orders up 10 per cent. The survey thus indicated that domestic demand is now even more buoyant than export demand.

The trend for employment is also encouraging. The EEF December survey indicates that considerably more engineering firms are now forecasting growth in the number employed in the sector than those forecasting a decline. There were also some very positive signs with regard to capital spending. Overall then it is a very encouraging picture.

Looking into the future, engineering industry sales for 1996 will be about £164 billion and for 1997 are forecast to be £174 billion. That is 17 per cent. higher than at the bottom of the recession in 1992. But there are other indirect indications that our engineering industry is gaining confidence. The Engineering and Marine Training Authority, of which I have the honour to be chairman, monitors closely the trend in investment by industry in the training of the engineering workforce, both for new recruits just entering the industry and for the existing adult workforce. This year we forecast that 12,000 young people will commence a modern apprenticeship in engineering compared with 8,000 in 1996 and a mere 6,000 in 1995.

Additionally, 1996 saw more vocational awards made to workers in the engineering sector than ever before, exceeding the previous peak recorded in 1979, when about twice the number of people were employed in the engineering sector.

Why was that? The explanation is, I believe, twofold. First, vastly improved levels of productivity are being achieved in the engineering sector and these call for a workforce with greatly increased skills. Secondly, the importance of lifelong learning is becoming increasingly recognised. Multi-skilling and new technologies require new skills to be gained by adult workers throughout their working lives. More and more companies are committing to the Investors in People standard and this provides a positive stimulus to lifelong learning throughout the whole of industry and not least in the company which my noble friend Lord Prior leads with such distinction.

The trend is particularly evident in the recent vocational awards made by EMTA. In 1996 42 per cent. of awards were made to over 25 year-olds compared with only 4 per cent. in 1990. It is heartening that our improved economy is giving us the resources to invest in the future and that part of that investment is being made in improving the skills of our workforce.

I began by mentioning the "convergence criteria" which will provide the acid test for membership of European monetary union. It is perhaps ironic that Germany, one of the prime exponents of EMU, a country heralded as an economic miracle for most of the last 40 years, should now be approaching the status of the "sick man of Europe". Weighed down by excessive social costs, a high exchange rate, increasing structural unemployment and massive government borrowing, it seems increasingly possible that Germany itself will fail to meet the Maastricht "convergence criteria".

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How different is the picture here in the UK. Since 1992, the UK has had the strongest economic growth of any major EU country. Both the OECD and the IMF forecast that the UK will grow faster than any major EU economy in 1996 and 1997 and the OECD forecasts that this success will continue into 1998.

As a result of this success, unemployment in the UK is falling steadily. Our unemployment is now well below 8 per cent., compared with 22.3 per cent. in Spain, 12.5 per cent in France and 12.2 per cent. in Italy. In Germany, it is believed that figures to be published tomorrow will indicate that a further 120,000 Germans sadly lost their jobs in February, taking the total unemployed to 4.9 million, or 12.5 per cent.--a truly frightening statistic.

As many of your Lordships will already know, this is an important year for the engineering community here in the UK. Indeed, 1997 has been designated the Year of Engineering Success and it is intended that the whole engineering community will come together to promote the engineering sector and to celebrate the success of the engineering achievements of the United Kingdom.

This campaign for engineering could hardly have come at a better time. Our economy is now in better shape than at any time in living memory. We have low inflation, low taxation, sound public finances and tight control of public spending--a truly exciting combination of factors.

The 1980s proved to be a difficult decade for the engineering and manufacturing sectors as the industry struggled to come to terms with decades of over-manning and under-investment and a worldwide downturn. That period has passed and I believe that we can now look forward to a period of rebirth for our manufacturing and engineering industries which will herald further improvements in our international competitiveness well into the next decade.

The outlook is an exciting one. Let us seize the new opportunity that a strong economy offers us and make 1997, the Year of Engineering Success, just the beginning of a new era for a much strengthened engineering and manufacturing sector here in the UK.

5.20 p.m.

Lord Haskel: My Lords, my noble friend Lord Eatwell spoke of the Government being in a complacent phase. I would rather refer to it as a gleeful or triumphant phase regarding the economy. Frankly, I find that mood rather misleading and somewhat offensive. It is a little offensive because we are in a single market and bad news about the French and German economies is bad news for British companies trading in those countries.

The noble Lord, Lord Prior, spoke of the importance of the single market, and I congratulate him on introducing this debate. The glee about French and German unemployment is misplaced because the unemployment figures do not compare like with like. As my noble friend Lord Bruce told us, our unemployment figures do not include those of working age, who are inactive, who would like to work but are not claiming benefit. Their figures do.

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According to the Government's Statistical Service's Labour Market Trends, the Government do not even know what our employment figures mean. The January edition stated that they did not know how much the fall in unemployment was due to the jobseeker's allowance and how much to job growth. My noble friend Lord Currie referred to that.

Many noble Lords have been gleeful about inward investment. Again, my noble friend Lord Currie explained that recent figures cast some doubt on that and, in any event, it is foolish to assume that the situation is static. The Deputy Prime Minister expressed the matter rather well in an article in The Times on 27th February when he said:

    "Past success is pocketed as a restless world moves on".

French and German manufacturers are taking steps to cut their employment costs, some by moving their production overseas. But in recent weeks companies and unions have agreed to patterns of flexible working and longer hours which were unthinkable a few years ago. Noble Lords know that business location does not depend only on hourly labour costs, low taxes and easy hiring and firing. We all know that investment depends also on plant flexibility, closeness to the customers, technology, quality and productivity. We must compete on all those grounds; otherwise, the noble Lord, Lord Prior, would be leading his company to Madagascar where there are no taxes, no labour rights, virtually no social costs and generous grants.

The fact is that most UK outward investment is now going to the European Union, according to a recent table in the Business Monitor, the very place that noble Lords have been telling us is so difficult. But when it comes to Europe, the Government's glee or triumphalism is rather more muted because there is no single vision of where we are going.

Let us take the social chapter. Of course many firms vary in their views, but many companies are now turning to works councils and consultation. The reason is simple: having gone through the phase of achieving cost cutting by redundancies and closures, we have also to reach levels of quality, productivity and customer service which require the full co-operation of all employees. That is precisely the philosophy of the social chapter.

Certainly our economy is doing well because we have some wonderful companies which invest, train and progress and which are world class; and yes, the Government deserve some credit for that. But we have a long tail of poorly performing companies, plus a lot of people who are economically inactive, and we have many poor people. The divisions in our society and economy are greater than ever.

It is that division which has helped us to fall from 13th to 18th in the world prosperity league. Certainly there has been an increase in wealth, but it is unequally distributed. My noble friend Lord Bruce explained that, even among the beneficiaries, the distribution is unequal. The rise in equity values has done a lot more

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to increase the wealth of company directors and pension fund managers and their companies than to increase the wealth of the employees and the pensioners themselves.

That may have delivered the feel-good factor to companies, but it has certainly not done so to individuals. That is because pay and pensions do not reflect the increasing value of the investments. To give people a stake in the future, their benefits need to rise in line with the prosperity of the companies. That has not happened. There has not been a trickle down and that is why the mechanism that transforms economic growth into a sense of well being has broken down. When all that is taken into account, I find the picture more sobering.

Noble Lords opposite have been gleefully telling us that we are on the threshold of the best prospects of a lifetime. I do not agree. In my lifetime, that occurred about 15 years ago when many noble Lords opposite were in government, and I am sorry that many of them are not here for me to congratulate them. As a result of their work in the past 15 years, income from North Sea oil and privatisation has averaged £35 million per day. Those are the prospects which I relished. But where has all that wealth gone? I believe that £6 per person per day should have created a better-skilled and better-educated society with a better infrastructure and less division. It should have lifted us in the prosperity league. Instead, we have gone down. Public finances should have been in surplus but instead we are told that we have a deficit of £26 billion. Instead of glee there should be sadness at the thought of what might have been and we should be determined to make up for that.

There lies the difference between the Government and new Labour. The noble Lord, Lord Prior, told us that the Government are happy to let the prosperous part of the economy thrive in the marketplace and leave the rest to its fate. New Labour too is happy to let the prosperous thrive. But, in addition, Labour is determined to get the best out of the poorer performing parts of our economy. We believe in an inclusive economy which gets the best out of all people.

On 1st March Tony Blair spoke about how we shall restructure the welfare state around the work ethic; where opportunity will go hand in hand with responsibility; how we shall modernise the welfare state; and, yes, we shall use the windfall tax to move 250,000 unemployed young men and women off benefit and into work or training. The option of staying on full benefit and doing nothing will cease to exist. The only way that our companies and country will succeed is by getting the best out of all our people and their potential.

New Labour intends to do that by encouraging investment, promoting competition, improving skills and modernising the welfare state. That is all laid out in Labour's Vision for Growth, of which much is repeated in the Promoting Prosperity Report. Adair Turner said of that report:

    "It shows a welcome degree of consensus is emerging over ways in which the UK's economic performance can be improved".

I agree with that.

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Nothing stands still. Those who lived through the boom of the noble Lord, Lord Lawson, only to see it shatter in recession will realise that. My view is rather tempered by the warning in the Bank of England's February inflation report which stated:

    "Over the past year there has been a gradual pick-up in the pace of activity in the UK economy, driven by domestic demand".

There is a warning for us.

We have made considerable progress. However, our competitors have been making similar efforts and as regards inflation and growth, they have been more successful, as my noble friend Lord Currie reminded us. We should remember that Britain remains one of the poorer countries of Europe in terms of gross national product per head. We need to do better. For all our success, there is still a long way to go.

5.29 p.m.

Lord Brabazon of Tara: My Lords, like other noble Lords, I am grateful to my noble friend Lord Prior for giving us the opportunity to debate this important subject this afternoon. As has been said, we are in our sixth year of sustained growth; inflation is at its best for nearly 50 years; interest rates are at historically low levels; and mortgage interest rates are close to their lowest levels for more than 30 years. As my noble friend said, the OECD forecasts that the UK will be the fastest growing major economy this year and next, as indeed it was last year. Days lost due to industrial disputes are at an historic low and my noble friend must take some credit for that fact. Moreover, unemployment is down by 1.2 million since 1992, which was its peak in the recession at that time. Our rate is falling and is now among the lowest in Europe at 6.5 per cent., with Germany, as has been said, at over 12 per cent. and France at 12.5 per cent. All the signs are good. We should ask ourselves how we got into that position.

One reason is not perhaps of our own doing; namely, our forced removal from the ERM in September 1992. That may have been critical in getting us into the competitive position in which we now find ourselves. But unless we were able then to take advantage of other steps that the Government had taken in the past 17 years, it would not have been any good. I refer of course to privatisation, competition and deregulation and the trade union reforms that have taken place. They have resulted in lower energy and telecommunications prices which have attracted investment into this country. However, the fact that we have also resisted the temptation to join the social chapter and adopt a minimum wage, both of which are promised us by the party opposite, must also be important factors.

It is small wonder then that we are attracting so much inward investment. I gather that about one-third of all such investment coming into Europe comes into this country and that a higher proportion of investment than that is coming from the United States and Japan. The noble Lord, Lord Currie, who I see is no longer in his place, cast doubt on those figures. But I believe that one needs to look at the practical experience, because we are also attracting inward investment from within Europe. As an example, one has only to look at the enormous investment that Siemens is making in the north-east.

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That company is leaving Germany because of high non-wage overheads and red tape and because of the other matters to which I also referred, such as the social chapter and so on.

Other speakers, especially the noble Lord, Lord Eatwell, referred to the strength of sterling at present. Of course, it is undoubtedly causing concern to some companies. However, a strong currency did not harm other countries like Germany and Japan during the 1970s and 1980s when they had remarkable growth. It does bring down producer prices for imported inputs; indeed, input prices fell for the 16th consecutive month last month, with the sharpest monthly fall since last July.

Why is sterling so strong? That is obviously partly because of the strength of the economy at present. However, I believe that it is also seen as an alternative to EMU and of course we do have high real interest rates of some 3 per cent. The shadow of European monetary union hangs over us, as mentioned by my noble friend Lord Trefgarne among other speakers. The present policy of wait and see is, while admirable, to some extent irrelevant. I cannot see how we might be able to join in 1999 in any event, whether or not we wanted to. There are too many hurdles to be crossed, such as the referendum and other matters.

Of course, one must question whether EMU will take place in 1999. As for the four criteria--deficits, debts, inflation and interest rates--unless the figures are fudged, the leading contenders for membership will fail on at least one count. As my noble friend Lord Trefgarne said, Germany would fail, with its soaring unemployment on debt, France on the deficit and Italy on almost everything. My worry is the fudge. I simply do not understand how the decision on who enters can be taken by majority voting in the Council early next year as regards who has passed the entry criteria. Either a country has passed the test or it has not. It is surely not something that can be voted upon; it is a question of figures. I believe that we will be well out of it, it is to be hoped, for ever, although, curiously enough, we might be one of the few countries which will be able to pass all the tests for joining, with the possible exception of interest rates.

I believe that my right honourable friend the Chancellor of the Exchequer has got the policy right on interest rates. There is no need to put them up at present and further strengthen sterling. As my right honourable friend said on Monday:

    "For every commentator concerned about the prospect of too strong growth, another is concerned about the effect of the strong pound on activity. I am happily placed in the middle".

I believe that that is an admirable position to be in.

It is essential for Europe to remain competitive versus the rest of the world. The rest of the world is out there; for example, there is America, Japan and South-East Asia, all of which have booming economies at present. If we are not careful in Europe, we shall find ourselves left behind as a sort of museum. But we must also resist the temptation to gloat over our economic success compared with our European competitors. In that respect, I agree with what the noble Lord, Lord Haskel, said. These are important markets for us. Despite how

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well we are doing, if anything, our economy must be being held back at the moment by sluggish demand from European markets. As the noble Lord, Lord Harris of High Cross, said, the Commission does at least seem to realise that there are failures in its previous policies. So perhaps this country has got a few things right after all.

I gather--and perhaps my noble friend the Minister can confirm this--that the Commission is now expressing doubts about extending the 48-hour week to sectors like the transport industry which is not at present covered by it. I hope that that is correct and that the Commission has now seen the light. However, if the Commission does make that judgment on competitive grounds, then it would rather raise the question of how it managed to enforce that directive upon us on health and safety grounds and why we were not able to use the opt-out that we thought we had in the bag.

Our economy is in good shape. Whoever wins the next election--and I very much hope that it will be the Conservative Party--will inherit a very healthy situation. Let us not spoil it by making increases in either direct or, indeed, indirect taxation. The noble Lord, Lord Barnett, said how difficult it would be for an incoming Labour Government, having committed themselves to no increase in direct taxation, to resist the temptation to raise taxation in another area.

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