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Lord Peston: Not at all. Certainly the fall in sterling relative to the euro is not a crisis. Equally, while the fiscal position must be subject to constant scrutiny, even the most sceptical observer would not be inclined to call it critical. And somehow or other, although I do not understand how, in some way we are even getting through the fall in equity prices throughout the world without a calamity.
However, there is no room for complacency and I am confident that the MPC itself is alert to the dangers. However, as I have said, professionally I regard all the questions of imbalance as important but difficult to explain.
I turn now to the stability and growth pact. It is generally accepted that the conduct of fiscal policy should be rules-based, but should have a flexible element too. Economists differ on the right balance, but decision makers in the real and the financial sectors require some reassurance, first, on the medium to long-term fiscal stance being aimed at by the Government and, secondly, on how fiscal policy adjusts to short-term shocks. Although we may disagree on the precise detail, in broad terms we have got the balance right in this country. This does not mean that there is no room for argument on the nature of the cycle and how the fiscal position is to be measured, not least as to what counts as public expenditure and what is the true measure of the public sector's liabilities. But the debate here in our country is open and takes place between people who know reasonably what they differ on and who can also agree to differ.
The same cannot be said about the stability and growth pact. As my noble friend Lord Sheldon and other noble Lords have pointed out, it is set out too formalistically. It is interpreted even more rigidly. Above all, it is not subject to the same kind of critical scrutiny of our own fiscal and monetary arrangements. It fails especially on the criterion of transparency. In this regard one can simply contrast the scrutiny by the European Parliament with the scrutiny of the Treasury Select Committee, the scrutiny of your Lordships' Economic Affairs Committee, and the scrutiny now undertaken by Sub-Committee A of the European Union Committee.
Although I may disagree with one or two noble Lords, I have to say here that I believe, overall, policy has not been satisfactory. While the pact may have brought stability, as the noble Lord, Lord St John of Bletso, pointed out, it certainly has not been conducive to growth. Sub-Committee A received evidence from the TUC making it clear that that was its view and I have to tell noble Lords that it is also absolutely my view.
Furthermore, the way in which the pact has been interpreted bodes ill for an expanded Union. The problem is not the one of a single interest rate and it is not the one of a single external value for the euro. It is that within such a desirable common monetary framework there must be more fiscal flexibility than at present. Within broader limits, countries must be regarded as the best judges of their own economic needs. I must add here that while I regard reform at the micro-economic market mechanism level as desirable, this, as a matter of fundamental economics, does not solve the macro-economic problem.
I am one of those who has always regarded what might be called the EMU problem, or EMU question, as one of balance. I have argued that, in my judgment, the balance favours EMU and our joining it. But I have never taken the view that those who see the balance the other way are either disreputable intellectually or idiots. I reserve that judgment for those who see that there is no downside and for those who see that there is no upside. Unfortunately, too many people do not have a balanced view.
I have to say that I would have joined at the outset. Despite not being privy to all the marvellous research documents that the Treasury has made available to the Cabinet and which I assume that we shall all be able to access early next week—I cannot wait for this vast amount of material, and of course our detailed scrutiny of it in your Lordships' House, which should not take more than around three weeks working all day—I would still join. Even if I could not see all the documents, I would still do so.
My only doubt, which arises as a consequence of our failure to join in the first place and our dithering since, is that by the time we do make up our minds to join, the stability and growth pact will be set in stone, as well as the way in which the ECB conducts monetary policy. It may be that some will then say that, as a result, joining would be disadvantageous. I would not go that far, but I can say that, were that to happen, we would have only ourselves to blame.
8.59 p.m.
Lord Taverne: My Lords, I read the report of the Economic Affairs Committee on the Monetary Policy Committee with interest. But if I may sound a note of dissent, however convenient it is to combine the debate on that with the debate on the stability and growth pact, I do not see much of a common theme between them. With the exception of the remarks made by the noble Lord, Lord Peston, it is interesting that most of those who have spoken did so about their own committee report and did not cross the border to the other field. I shall therefore speak about the stability and growth pact, except to say that I very much agree with the noble Lord, Lord Burns, that a single inflation target seems more sensible than having two targets of inflation and growth.
The stability and growth pact has been declared to be stupid. No less a person than the President of the Commission called it stupid. Many people have blamed
it for the period of low growth and relatively high unemployment that we have seen in recent years inside the European Union. Some of those who have attacked it have been very eminent—the Financial Times, the noble Lords, Lord Peston and Lord St John of Bletso. Yet, to my surprise, after hearing the evidence of most of our witnesses, the general conclusion to which our committee came was "not guilty". It should be adapted, it should be made more flexible, but on the whole the report does not find that the stability and growth pact is to blame.I think our report is very good, and I do not say that in a self-congratulatory fashion. It had a very able chairman and a very good Clerk. It is written extremely well, it is well argued and has a good logical flow.
Let me start with the background. On the face of it, there is a case to be made against the stability and growth pact. Contrary to what many people now state, over the past 20 years the European Union has strongly outperformed the United States. Despite the fact that it is now declared to be sclerotic, it has certainly outperformed the United States in terms of productivity growth and, over 20 years, generally in terms of unemployment. Even today, after a short period of much faster growth in the United States, productivity per hour worked is still higher in France, Germany, the Netherlands and Belgium, and is very close to it in a number of other EU countries. The only laggard is the United Kingdom itself.
That is against a background of a much more attractive form of capitalism. I greatly prefer the European form of social capitalism to what Professor John Kay has called the American business model. There is more security of employment, more consensus, fewer hours are worked, holidays are longer, there is far greater equality and not the same concern for financial engineering and maximising shareholder value. There is more investment and innovation, partly because there has been more security and much more intracompany innovation, a particularly strong feature of the German economy. However, the past five years has seen slow growth in Europe and high unemployment, particularly in Germany, which, after all, makes up something like one third of the total economy of the European Union.
I come back to the question of whether that is the fault of the stability and growth pact. Would we be better off without it? Our answer was no. Everyone agrees that it makes sense to have fiscal policy which is of common concern to all members of a monetary union. The noble Lord, Lord St John of Bletso, one of our witnesses, suggested that we should concentrate on debt, not on deficit, and that deficit was not important. This was very effectively answered by the evidence of a very impressive witness, Mr Klaus Regling of the European Commission. He said that,
- "deficit is important for the conduct of monetary policy. When you look at the policy mix and what really affects the European Central Bank, it is the deficit. When they look at this year and see the economic situation, price developments, where the pressures are coming from, it is not so important whether a country has 40 per cent of GDP debt or 80; for the management of monetary policy this year what is really important is how big the deficits are".
- "Looking at it another way, even if a country has a very favourable debt situation, no ageing problem, no long-term sustainability problem, if it is a big country and it decides during a normal economic situation to all of a sudden shift from a surplus in the public finances of 1 per cent of GDP to a deficit of 2 per cent, this has an impact on monetary policy, on the policy mix".
If we need to have rules, one obvious way is to have an economic government, but no one is ready for an economic government of Europe. That is not a realistic possibility, whatever the euro-sceptics say. But we need rules. This point was eloquently expressed in a question from the noble Lord, Lord Lea of Crondall, who said, "If we don't have rules, all that lot would spend all our money".
We cannot leave it to the market, either. That was put well in paragraph 46 of our report, which said that where previously—before there was monetary union—interest spreads,
- "might have gone up by between 100 and 500 percentage points in reaction to fiscal policies that the market saw as profligate or unsustainable, today in the Eurozone the spreads were 'down to below 50 basis points,' which was 'not surprising' because of the absence in the Eurozone of exchange rate risk".
Then it is said that the rules are much too tight and rigid. To some extent, that point was conceded in the committee, because we do call for a much more flexible approach. However, is 3 per cent really an unreasonable limit, especially if it is seen as a benchmark for the exercise of peer pressure rather than as an absolute limit? There was a good essay by Barry Eichengreen and Charles Wyplosz, which pointed out that only in exceptional circumstances were there budget deficits of more than 3 per cent in EU countries in the period since the war for more than one year. The evidence that we heard was that the 3 per cent limit—if people manage their fiscal policy sensibly—leaves plenty of room for the automatic stabilisers to work.
The problem faced by Germany and France is that they pursued pro-cyclical policies in boom years. The suggestion that there would be faster growth if they were only allowed to borrow much more has not been supported by most of our witnesses. The ideal mix is a much tighter fiscal policy and a loose monetary policy. The evidence that we heard was that Germany's position would be no better whether it had a deficit of 4 per cent or 5 per cent. The mantra is that Germany has been affected by interest rates that are too high, but historically interest rates are relatively low for Germany at present.
There is no great output gap in Germany, either, because wages are actually rising. It is difficult to know whether there is an output gap, as the Economic Affairs Committee also pointed out. However, there is no particular evidence that Germany's problems at the moment are caused by a big output gap, and that if it was only allowed to borrow more and expand by fiscal policy, its problems would be solved. The reasons our witnesses gave for Germany's problems were structural, and the legacy of reunion.
In so far as the European Union needs structural change, it does not mean that we should adopt the American business model. The Netherlands has been as successful as almost any European country in reducing unemployment and improving economic growth. It has a much more successful record than this country, I am sorry to say. That has proved that if one combines a degree of flexibility and competition with the consensus model—sometimes known as the Polder rather than the Rhineland model—one can deliver economic success and not lose the many advantages of social capitalism.
In terms of longer term historical context, we have seen a seesaw between the United States and the European Union. There was a time when Europe felt that it was unable to compete with the United States. Many years ago, a book entitled La Defi Americain was published and asked how we could meet the American challenge. Then it shifted the other way. I remember a speech by the late Lord Jenkins in the early 1970s, before he was Lord Jenkins, when he looked to the United States and saw gloom and Europe was the place of excitement, innovation and growth. "Westward look, the land is bleak", I remember him saying.
Now, in the past few years, there has been an American success. Some of the gloss has come off that success. Their success has been partly an inflated share price bubble and partly inflated profit figures. Mr Robert Gordon has been a fairly effective critic of the so-called "new economic miracle" in the United States. They may face a lot of problems with the twin deficit. I am not going to make any forecasts. I will not predict whether the see-saw will tilt again the other way. However, suitably modified and flexibly interpreted, the findings of our committee were I think sensibly that the stability and growth pact was not something that would stop that happening.
9.11 p.m.
Lord Saatchi: My Lords, like the noble Lord, Lord Lea, but I am afraid unlike the noble Lord, Lord Taverne, I am grateful to the usual channels for the fact that we are debating these two subjects together. As the noble Lord, Lord Burns, said, it allows your Lordships' House to look at how the euro-zone rules may affect the MPC and UK monetary policy. So I begin by right away joining other noble Lords in congratulating all the members of both the committees, led by their two chairmen, the noble Lords, Lord Peston and Lord Radice, on both their most thorough, comprehensive and excellent reports. Both committees have upheld the high standards set for them and have demonstrated again, I hope for all to see, why your Lordships' House deserves its new role in the scrutiny of economic policy, as the Government have now recognised.
I begin with the MPC. We, like the committee and the noble Lord, Lord Burns, do not propose any immediate or major changes in either the remit or the composition of the MPC. We, like the committee, fully support the fact that the inflation target is a single target and that the approach to it is symmetrical in the
sense that deviations below the target are treated in the same way as deviations above it. Having said that, there are three questions that I should like to put to the Minister about the report and the Government's response.First, we think that the committee is perhaps a little modest in its definition of Parliament's role in MPC appointments. I should be interested in the Government's point of view. In the United States, the appointment of the chairman of the Federal Reserve is approved both by the banking, housing and urban affairs committees of the Senate and then by the Senate itself. So while not going anywhere near as far as the noble Lord, Lord Oakeshott, we do propose that the appointment of the Governor of the Bank of England, the Deputy Governor and members of the MPC should be approved by a joint committee of both Houses of Parliament. We think that that would help bolster their independence, make the process more transparent and increase the power of Parliament. I am sorry that the committee does not agree on that. I look forward, as I said, to the Minister's views.
Secondly, our MPC model of monetary policy relies on the single weapon of the short-term interest rate and the one target of 2.5 per cent inflation. I wonder whether the Minister thinks that that model—whatever the resulting definition, as the noble Lord, Lord Barnett, raised the question—adequately reflects the fact that the overall inflation rate is made up of the composite of two inflation rates. I am referring to public sector inflation and inflation in the rest of the economy, the composite of which gives the overall familiar national inflation rate which is targeted by the MPC. That might not matter very much when the two rates are similar, but as the Minister knows, there is now a remarkable gap between the two. It is interesting to ask what the policy implications would be if people were more aware of that. For example, an analysis of official data from the Office for National Statistics reveals that government expenditure on goods and services rose by 7.6 per cent in nominal terms in the first quarter of this year, compared with the first quarter of last year. The data estimates that the real inflation-adjusted increase in the volume of services provided was just 1.5 per cent. So the official figures imply that public sector inflation has now reached 6 per cent per year—up from 5.5 per cent in the previous quarter.
That raises some serious questions. If public sector inflation is 6 per cent and the total is 2 per cent, what does that make inflation in the private sector? Is it zero? Is it deflation? Apparently, shop prices fell by 0.1 per cent in April, which was the thirteenth monthly decline in a row. My noble friend Lord Northbrook referred to the new fears of deflation. That is my first concern and I would be interested in the Minister's view.
My second is that it means, insofar as I can calculate, that nearly £80 out of every £100 of taxpayer's money now being spent on schools, hospitals and other public services is being spent on higher salaries, benefits and administrative costs, with
only £20 of every £100 going towards increasing the volume of services provided. Does the Minister agree that further scrutiny of the disparity in inflation rates between the public and private sector might be very interesting?My third concern is that in its document, Reforming Britain's Economic and Financial Policy, the Government time and again praise the MPC for "acting in a proactive manner". Is it not at least curious that, on the one hand, the Government praise the flexibility accorded to Britain by the current MPC system, but that, on the other hand, say that they intend and want to eliminate that flexibility by joining the euro? Is it not a supreme irony that at the very moment when we reach unprecedented, historic, cross-party consensus on the framework for monetary policy, it is only the Conservative Party that is in favour of maintaining that framework?
It is not just the possibility of joining the euro that creates anxiety about the framework. The noble Lord, Lord Burns, drew our attention to that. Perhaps I may draw to your Lordships' attention the fact that the Convention on the Future of Europe raises the question before anything arises about joining the euro. It makes a clear injunction towards the co-ordination of economic policies, but I can find no echo of it in the Bank of England Act 1988. Indeed, the committee restates the familiar remit of the MPC on page 1 of its report, but neither there nor anywhere in the iconic Bank of England Act 1988 can I find any mention of the EU, of the objectives of the EU, of EU guidelines or of co-ordination with the EU. I would be interested to hear the Minister's response to that.
The mention of Europe brings us conveniently to the second report, on the stability and growth pact. I believe that after the great inflation of the 1970s, the priority of policymakers was, as Sam Brittan put it, "to lock the monetary cupboard" to prevent governments trying to expand too fast for short-term political advantage. And so it was, as the noble Lord, Lord Lea, said, that the Bundesbank made its great gift to the euro-zone—what economists called "a pre-nuptial contract written in blood"—the stability and growth pact. The committee's report and many noble Lords who have spoken support the need for some form of co-ordination of national policies to maintain public finances across the EU. The committees says on page 38, in its conclusions, which were supported by the noble Lords, Lord Radice, Lord Sheldon and Lord St John of Bletso:
- "Market discipline alone cannot be guaranteed to ensure the sustainability of public finances".
The committee does not approve of that rule-based approach, as the noble Lord, Lord St John, made clear. While agreeing that,
- "the Commission's proposals provide member states with a useful aim and sound objective",
- "They should be interpreted as guidelines rather than as rules".
- "takes account of the particularities of each individual situation",
- "sensitive to the specific circumstances of each country".
Romano Prodi, the European Commission President, agrees with the committee that it needs to,
- "implement the stability and growth pact in a more intelligent and forward-looking way".
- "Le pacte de stabilite Europeen n'est pas inscrit sur le marbre".
- "The Council should not treat the 3 per cent figure as an absolute limit".
- "take account of the underlying economic situation, including the Member State's position in the economic cycle and possibly its level of debt".
- "should not be treated . . . as an enforceable rule, any breach of which would activate the excessive deficit procedure".
- "the legalistic imposition of rigid rules with little economic justification".
To complete that happy consensus, the Government, too, welcome any move to a more country-specific interpretation of the pact, as it allows them to continue their programme of priority public investment in public services. In their response to the committee's report, the Government said, in paragraph 165, that they support a "prudent interpretation" of the SGP. So anxious were the Government to make sure that we get the message that they repeated the phrase "prudent interpretation" five times in their two-page response. Why is that? Only a mean-minded cynic would say that the Government's motive is that their own forecast for public debt, on which the committee rightly says there should be more emphasis, has shot up from £34 billion to £118 billion in 18 months.
It is understandable that when people see those who are either in breach of the pact's rules or are about to be in breach of the rules, they wish to change things. To some people, that crumbling of the fiscal rules underlying the euro will lead to economic disaster. Others respond that in the current economic circumstances, a sustained period of public deficit is just what the euro-area needs. Either way, not everyone is impressed by the quality of the debate. The Economist, for one, said that the pact needs substantial reform,
- "preferably to the point where it ceases to exist".
- "The best argument against joining the euro".
9.25 p.m.
Lord McIntosh of Haringey: My Lords, I have the task, which was identified by the noble Lord, Lord Taverne, of trying to find a common theme between these two reports. I also have the much more pleasant task of doubly congratulating the chairmen, members and everybody who gave evidence or took part in the production of these two excellent reports.
The common theme that I look for is macro-economic stability in this country and in Europe through sound fiscal and economic policy delivering, as we believe it has, not only sustained economic growth but low unemployment.
That is the case in this country. Clearly, as the Budget has made clear, no country can remain immune to the effects of global uncertainty. As a result of the economic framework that the Government have put in place over the past six years, Britain is better placed than many of our competitors. We are better placed than in the past to withstand difficulties. We have no intention of being diverted from our priorities of investing in public services and encouraging enterprise for achieving full employment, tackling child and pensioner poverty to build a Britain of economic strength and social justice.
The strength of the UK's economy can be attributed to the sound fiscal and monetary frameworks in place, which ensure that fiscal policy plays its proper role by supporting monetary policy during this period of global economic weakness. It has certainly been tested in recent times. There has been a background of hesitant—to say the best—global recovery, stalled by continuing concerns around the world. But we are on track to meet the fiscal rules over the economic cycle to ensure that public finances are sustainable in the long term.
Specifically in terms relevant to the stability and growth pact, the average surplus on current budget is projected to be comfortably positive over the projection period, meeting the golden rule. Our net debt is set to stabilise at 34 per cent, which is well below the 40 per cent that is necessary to meet the sustainable investment rule. It is at the lowest level in the G7 and among the lowest in the EU.
Clearly, we are cautious in our forecasts. The noble Lord, Lord Northbrook, raised that point, but I shall not read out tables of figures. But I am prepared to write to him to set out our forecast on the relevant criteria against the consensus. They are set out in table 2.4 of the Budget document, but I am happy to set them out in the terms in which he asked the question. The assumptions behind our public finances, as has been the case for a number of years now, are independently audited by the National Audit Office to provide a safety margin against unexpected events. The cautious assumption for equity prices, for example, rises only in line with GDP, locking in the recent falls rather than assuming that they will be reversed.
I turn to the European side of things and the stability and growth pact. There are assertions about the way in which the pact is being implied. I can best illustrate the situation by reading out the recommendations hot off the press from ECOFIN yesterday when it declared that France came within the situation of an excessive government deficit. The ECOFIN council recommended that the French authorities put an end to the present excessive deficit situation as rapidly as possible and by 2004 at the latest, in accordance with Article 4 of Council Regulation No. 1467/97. The council has established a deadline of 3rd October 2003 for the French Government to take appropriate actions to that end and expects the French authorities to achieve a significantly larger improvement in the cyclically adjusted deficit in 2003 than that currently planned. That gives credence to what was said about the way in which the cyclical adjustment has been taken into account in ECOFIN decisions. The council also expects France to limit the increase in the general government gross debt to GDP ratio in 2003.
In addition, the Council notes the commitment of the French authorities to ensure that the budgetary consolidation continues in the years after 2004 as reflected by the December 2002 update of the stability programme; namely, through a reduction in the cyclically adjusted budgetary deficit by at least 0.5 per cent GDP per year in order to move decisively towards the medium-term position of government finances close to balance or in surplus, and bring back the debt ratio to a declining path.
The Council notes the commitment of the French authorities to ensure a tighter control of expenditures in 2003. It welcomes the commitment of the French Government to achieve the pension reform already in process to secure the long-term sustainability of public finances. I have to say that that is slightly ironic in a week in which there is an immobilisation generale in France against the Felon project. Nevertheless, that is the way in which the stability and growth pact is being operated. It can be seen that it is by no means as rigid as has applied.
The Government firmly support the premise of a strong stability and growth pact which is founded on sensible fiscal policy co-ordination, as set out in the EU treaty. All speakers, whatever their view about the
details of the stability and growth pact, have supported the policy for co-ordination of fiscal policy and for convergence. Even the noble Lord, Lord St John of Bletso, who was the most dramatic opponent of some of the provisions of the stability and growth pact, was in favour of co-ordination and convergence.My noble friend Lord Radice and others talked about having the existing rules implemented more flexibly. That is not language the Government use. The noble Lord, Lord Saatchi, chooses to make fun of it, but our view is that a sensible fiscal policy co-ordination is consistent with the UK's prudent interpretation of the stability and growth pact, which takes into account the economic cycle, sustainability and the important role of public investment. That is what "prudent interpretation" means. It would lock in long-term fiscal discipline and sustainability, enhancing credibility while allowing the automatic stabilisers to smooth fluctuations in output and allowing appropriate increases in investment in public services.
Under those circumstances, that is a stability and growth pact we wish to support. The noble Lord, Lord Saatchi, asked how that relates to the UK fiscal rules. They cannot and should not be compared on a like-for-like basis. Their starting points are different, but their underlying ethos is common—securing and sustaining sound public finances. As the noble Lord said, we have the golden rule and the sustainable investment rule, but, consistent with a prudent interpretation of the stability and growth pact the Government's fiscal rules operating together have both allowed automatic stabilisers to operate fully over the economic cycle; they have contributed to macroeconomic stability; and they have allowed the Government to undertake much needed quality public investment while staying within the 3 per cent deficit limit.
I turn to the committee's report on monetary policy. We are grateful for the very wide degree of support from the committee for the operations of the independent Monetary Policy Committee. We were glad to have at least a modification of the views of such noble Lords as my noble friends Lord Barnett and Lord Peston, who were opposed to considerable elements of the Monetary Policy Committee when we debated the Bank of England Bill in 1998. After all, the Monetary Policy Committee continues to deliver RPIX inflation around the Government's target of 2.5 per cent with inflation expectations anchored close to the Government's target, having fallen from over 4 per cent in 1997. As the noble Lord, Lord Burns, said, this delivery has been going on for a period approaching 10 years, which is quite a long time in the life of an economy.
Long-term interest rates are around their lowest levels for over 35 years. That has reduced the Government's debt interest payments and freed up resources for investment in public services. Again there is a query about the inflation target. There are still those who would wish to go away from a single inflation target to more complex targets. As the noble
Lord, Lord Northbrook, reminded us, that applied to the Federal Reserve Bank under the Humphrey-Hawkins Act. We do not take that view and I am glad to have the support of the noble Lord, Lord Burns. We think that inflation targets are clearly and easily understood. They make the monetary policy objective transparent, they make it possible for the public to monitor it and they provide an effective anchor for monetary policy and inflation expectations. As the committee discussed, those targets are a weighted average, but they are a weighted average between manufacturing and service inflation. They are certainly not a weighted average between the mythical public sector inflation, to which the noble Lord, Lord Saatchi, referred, and which I hoped that I had demolished for good in the past couple of weeks, and private sector inflation. It is clear that inflation has to be the right target.I turn to the question of which measurement of inflation is used. The noble Lord, Lord Northbrook, and my noble friend Lord Barnett referred to this point. In the Budget Statement the Chancellor announced only that the Treasury would continue to examine the detailed implications of changing the inflation target to an HICP basis. The implications are being examined from a monetary policy perspective only. We have already made it clear that, for example, the basic state pension will rise each year by 2.5 per cent or by the September RPI, whichever is the higher. We have made it clear that social security benefits will rise in the normal way, and it is certainly true that gilts will continue to be treated in the current way because they are legally tied to RPI. There is no difficulty about having a different criterion for different purposes. Even in the euro-zone, where the European Central Bank uses HICP, the Greek and French governments use different measures for inflation indexed bonds. There is no problem about that. There is a review continuing of which I am not going to pre-empt the outcome, except to assure my noble friend Lord Lea that the review will involve discussions with stakeholders who are concerned, as he is, particularly with wage setting.
The noble Lord, Lord Northbrook, seemed to think that there is a conflict between the inflation target and the Government's objectives for growth and employment. I hope that the summary figures that I have given show that that is not the case. Price stability is a necessary condition to ensure sustainable growth and high employment. There is some evidence to suggest that high and variable inflation can damage growth and productivity. That evidence was fairly strong over a longer period in the 1960s and 1970s when I was in business on my own account. The framework is designed to ensure that price stability is
the long-term objective of monetary policy. I have to say to the noble Lord, Lord Northbrook, that there is no evidence that it leads to low inflation—or certainly not to deflation.The noble Lord, Lord Burns, and my noble friend Lord Peston are right that the target must explicitly recognise that external events and temporary shocks may hit the economy. The target does reflect that. The MPC will need to find the most appropriate way of responding to those shocks. It does that in case inflation moves more than one percentage point away from the target through the open letter system.
We have had a valuable debate. It has been inevitably polarised by the interests of those who have taken part, but I hope that I have been able to bring the debate into the context of the broader objectives of UK monetary policy, and to indicate in doing so my support for the work of the two committees.
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