---

Lord McIntosh of Haringey: This has been a nice discursive debate and I am grateful to all noble Lords who have taken part. Let me first of all deal with one false impression which may be gained. I admit that we have tried to group these amendments rather aggressively, but they have now been ungrouped rather aggressively to such an extent that the debate, for example, on the funding of the Bank of England was ruined by aggressive ungrouping and could not be taken seriously. Now, this debate has become ruined. The fact that the noble Lord, Lord Mackay, has his name on the same amendment as my noble friends Lord Peston and Lord Barnett does not mean that they agree. It is simply that we are dealing with one part of the argument, rather than with the argument as a whole. The noble Lord, Lord Mackay, made it quite clear that his objective in leaving out the words "subject to that" would be to leave out the reference to high levels of growth and employment altogether, whereas my noble friends would prefer to have growth and employment put in as having equal status with price stability.

Lord Mackay of Ardbrecknish: I do not think I said that. I said that when I considered how to have a discussion on the relationship between subsections (a) and (b) I wondered whether it would be easiest to knock out (b) and then just ask the Minister why he wanted (b), and explore the matter in that way. However, I decided that that would be construed as a move in the direction I intended, and therefore I proposed the deletion of "subject to that". If you take out the other things, it would be like saying that the people who run your monetary policy are trying to do that like a golfer with only one club.

7 p.m.

Lord McIntosh of Haringey: The noble Lord distances himself from the implications of his own argument, if I may put it that way, even if he did not say what I accused him of.

Let me set out as clearly as I can what we mean by Clauses 11 and 12. As the Bill says, the monetary policy objective of the Government is to maintain price stability and, subject to that, to support the Government's objectives for growth in employment. But in turn high levels of growth in employment will also create the conditions for price stability on a sustainable basis. There really is no other way of promoting and maintaining high levels of growth and employment other than in circumstances of sustained price stability.

In the long run there is no conflict. Price stability is a necessary condition to ensure sustainable growth and high employment. There is evidence to suggest that high and variable inflation can actually damage growth and productivity. The framework is designed to ensure that price stability is the long-term objective of monetary policy.

25 Feb 1998 : Column 58

At Second Reading I quoted Alan Greenspan in his Humphrey-Hawkins testimony last year. That sets out the position very clearly. He said:

"Our objective has never been to contain inflation as an end in itself, but rather as a precondition for the highest possible long-run growth of output and income--the ultimate goal of macroeconomic policy".

The Bundesbank has very similar requirements, although they are expressed in rather different terms. The Bundesbank is required to

"regulate the quantity of money in circulation and of credit supplied to the economy, with the aim of safeguarding the currency".

That is comparable to price stability. It is also required by law to

"support the general economic policy of the Federal Government, but only insofar as it can do so without prejudice to the performance of its own function, safeguarding the currency".

That is in the Bundesbank Act 1957.

Price stability and high employment go hand in hand. Achieving price stability will help to achieve high employment, and achieving high employment will help to achieve price stability.

If I may anticipate my noble friend's question, I am sure he will then ask me, as he did, quite reasonably, why we do not give them equal status. Why do we not say "price stability and the Government's economic objectives"? I think we do so, and I am surprised to be able to call in aid the noble Lord, Lord Stewartby, but he is right. If we are to give targets to the Bank of England, we have to give it targets which are explicit and which do not involve internal contradictions, otherwise they will simply be warm words. Somebody used the term "weasel words". If we started to bring in all sorts of other targets--a later amendment is a target on exchange rates--this would be a target on growth and employment. The members of the Monetary Policy Committee would scratch their heads and say, "We have a choice. We can either protect one or the other. Which should we do? The Government have not told us which we should do". What we are saying here is that, for the reasons I have given, we give priority to price stability and we recognise that, subject to that, there should be support for the Government's other economic objectives.

Lord Peston: I hope my noble friend will forgive me for interrupting, because I know how irritating it is when you are in full flow. If what he says is to make sense, then it seems to me that he would be just as happy with a wording of the Bill which said:

"The objectives of the Bank of England shall be ... to support the economic policy of Her Majesty's Government, including its objectives for growth and employment, and subject to that, to maintain price stability".

In other words, if the two are simply always compatible and price stability is a means to an end, it could be done the other way around. I take it that it is this way round for a reason.

My noble friend was more or less saying that price stability has priority when there is any conflict. Clearly I will read my noble friend's words in great detail, but I do not think, listening to them at this moment, that

25 Feb 1998 : Column 59

they stand up. If they were to stand up then reversing the clause would work just as well, and I am certain that he will not accept reversing the clause.

Lord McIntosh of Haringey: I am certain they are not, because then we would find the Monetary Policy Committee scratching its head even more. If they say, "Our first priority is to encourage and support high levels of growth and employment", then how do we do it? The means available to the Monetary Policy Committee are the setting of short-term interest rates. It is the setting of short-term interest rates which has the most direct connection with price stability, and the other objectives of government economic policy, according to this model, follow from that. But we do not go out to the ultimate objectives--what I recognise as being the ultimate objectives and what Alan Greenspan calls the ultimate objectives--and then come back to the means by which they are achieved.

Lord Mackay of Ardbrecknish: I am sorry to interrupt the noble Lord again, but I thought I was quite clear in what I was saying. I did not take the interpretation as the noble Lord, Lord Peston, took it. I took it to mean quite clearly what I think it means, but I am still puzzled because that is at variance with what Mr. Darling said when he said it was being read the wrong way round. Subsection (b) seems to me to be subsidiary to subsection (a), but Mr. Darling said that it was being read the wrong way round. The Minister said what I believe "subject to that" means, which is that price stability is the principal objective. That is okay, and then you can worry about the other things. That is maybe too simple, but I think that is what he is saying.

Lord McIntosh of Haringey: That is right, because that is most closely within the power of the body which has the control of short-term interest rates. I have to take the Bill as I find it. I have not read the quotes from the Chief Secretary, but I base my arguments on the way in which the Bill has been framed.

Lord Barnett: I am not concerned about what the Chief Secretary says. I took down the words my noble friend used, "Price stability is necessary to support the objectives for growth and unemployment. They go hand-in-hand". If that is the case we do not need the words there. We can have it as the amendment suggests. Either one takes priority over another or they go hand-in-hand. Which is it? Is he saying that they go hand-in-hand or is he saying that one takes priority over the other?

Lord McIntosh of Haringey: We are in danger of becoming theological in this argument, quite honestly. When I say that they go hand-in-hand, I mean that achieving price stability helps to achieve high employment, and high employment helps to achieve price stability. But in terms of what the Bank of England Monetary Policy Committee has to do, we have to pick on something and that is price stability, because that is the measure that is most closely related to the powers of the Bank of England. Short-term interest rates are the responsibility given to the Bank of England by the

25 Feb 1998 : Column 60

Treasury, and they are given the power to set short-term interest rates with the direct responsibility set by the Government of maintaining price stability.

I do not doubt that in the economic lectures of my noble friend Lord Peston it is impossible to interpret price stability as being a low level of inflation, but I am sure that he is correct in terms of economic theory that price stability means stability; in other words, zero inflation. We are not using the words in that sense. In the Bill we are saying the Government take responsibility for setting the inflation target which they think is appropriate and consistent with price stability. We have set that inflation target at 2½ per cent., and we said that in the first instance the Bank has to explain when the inflation target varies from 2½ per cent. by 1 per cent. either way. There is an open-letter system whereby if it varies more than 1 per cent. either way, it has to go much further and explain itself and say what it is going to do to get itself back into line.

I return to the difference between setting high levels of growth and employment as a target and setting price stability as a target. Price stability is deliberately set in terms of short-term interest rates. It is in the long term that the two go hand in hand.

---