The Economy

HL Deb 05 March 1997 vol 578 cc1841-914

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.

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 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.

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 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 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 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 he 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". 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 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 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.

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 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 he 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 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 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.

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.

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". 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 3 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 2 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. 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 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 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. 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.

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 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 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 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.

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.

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 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. 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 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.

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 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 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 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

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".

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.

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 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.

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. 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 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.

Lord Barnett

That applies to Conservative Governments as well!

Lord Brabazon of Tara

My Lords, that may well be the case. However, the fact is that it would be a powerful disincentive to business and inward investment. That applies especially to the prospect of a windfall tax, which, as has been said, would not only disadvantage consumers but would also put off some of the foreign investors whom we want to attract and who have already invested in some of the privatised utilities in question. We do not want more regulation; we do not want the social chapter; and we do not want European monetary union. We have a good economy. Let us keep it that way.

5.38 p.m.

Lord St. John of Bletso

My Lords, I find it somewhat daunting to be speaking after such a distinguished and noteworthy list of speakers. I say "noteworthy" because there have been some exceptional contributions to today's debate. Like other noble Lords, I am grateful to the noble Lord, Lord Prior, for introducing the debate. Whatever criticisms may be levelled against the Government's track record on education, on the BSE crisis, on law and order or indeed on the National Health Service, I do not believe that anyone can deny now that the British economy is reaping the benefits of the Government's prudent and, if I may say so, sensible monetary and fiscal policies.

Against a raft of good news on the state of the economy, I am baffled as to why the Government are fighting such a negative campaign in the run up to the general election. The economic figures could hardly be better. Many noble Lords have spoken about them today. Consumer confidence today is as high as it was in early 1989. I beg to differ with the noble Lord, Lord Eatwell. I believe that people appear less worried now about losing their jobs than at any time since then. However, according to the opinion polls, the economic optimism does not appear to be rubbing off on political attitudes of the voters. There is a simple presumption in economics that it takes a long time for structural adjustments to take effect. The irony is that, at a time when there is so much convincing evidence that the benefits of reforms are coming through, the Government are getting little credit for what is going right and are certainly being lambasted for almost everything they do wrong.

This may sound as though I am making a party political speech. The noble Lord, Lord Barnett, said that he did not intend to make a party political speech. I am proud to be a confirmed Cross-Bencher, but I believe that credit ought to be given where credit is due. Last year there was a steady although unspectacular pick up in economic activity, largely on the back of a revival in consumer activity. The consumer side of the economy remains buoyant. Retail sales, particularly car sales and consumer confidence, are all at fairly high levels. The housing market in many parts of the country, particularly the south east, has improved sharply. Although retail sales showed a sharp and rather unexpected fall in December last year and that made consumer confidence edge down slightly, this confidence, thankfully, has picked up in January and February and in the view of many leading economists it is at its highest level since the late 1980s.

The momentum of the consumer recovery has helped explain the sharp upturn in service sector activity. However, in contrast to the evidence of growing activity in the service and construction sectors, the signs for the manufacturing sector have been fairly mixed. I look forward to the short Question which the noble Lord, Lord Paul, will ask tomorrow at Question Time on this issue. Whilst the consumer recovery has started to filter through to the manufacturing sector on the back of stronger domestic and, to a lesser extent, firmer international demand, sterling's 18 per cent. appreciation against the deutschmark since its low point in 1996 is certainly likely to take its toll on export orders.

According to a recent Merrill Lynch report, among the major economies the United Kingdom is expected to grow at the fastest rate during 1997. In consequence many fear that the United Kingdom may have to suffer a tightening of monetary policy. Fund managers—I say this in my capacity as a consultant to a stockbroking firm in the City—are certainly extremely upbeat on the outlook for the United Kingdom and are forecasting economic growth above the trend. This is reflected in a preference for investments in commercial property and smaller companies, both of which tend to prosper when growth is strong.

As several noble Lords have already mentioned, consumer spending will also shortly be boosted by the windfall gains from building society flotations and by the reductions in income tax announced in the Budget, as well of course by the reduction in unemployment and rising real incomes. Whilst inflation should stay low on a one-year time horizon, many are concerned about the longer term. One danger is that the tightening labour market could well lead to a distinctive upturn in pay settlement levels through 1998. There can be no denying that a major contributing factor to the drop in the rate of unemployment has been as a result of the relatively free and flexible labour market in the UK which has resulted in the high levels of international inward investment, which several noble Lords have mentioned.

The trend in the past appeared to be that when unemployment fell there was a tightening of labour markets causing upward pressure on wages and ultimately a rising of inflation. One of the main areas, and certainly one of the aims of supply side policy, should be to improve the trade-off between unemployment and inflation. Economists have been surprised how muted labour market wage demands have been over the past year. The hope is that we should aim to avoid the boom and bust scenario of the 1980s and, as my noble friend Lord Kingsdown, the noble Lord, Lord Ezra, and the noble Lord, Lord Barnett, have already mentioned, to work to achieve a sustainable recovery.

If the Labour Party is concerned about the supply side, I query its commitment to the social chapter. The noble Lord, Lord Brabazon, has already made mention of this in the previous speech. Although the Labour Party argues that joining the social chapter would have little effect on United Kingdom competitiveness, excessive labour market regulation has provided a powerful explanation for continental Europe's poor performance on job creation in recent years. By contrast, however, international observers have identified the United Kingdom's labour market policies as being the key reason for its improved economic performance. There is no way of estimating what costs the social chapter may impose in the future. There is a strong likelihood that the European Commission would use the institutions of the European Union to try to standardise social policies along continental lines.

On a range of important issues covered by the social chapter the United Kingdom would have no veto. It would have to accept measures agreed by the majority, just as the current Government are likely to have to accept the European Union's 48-hour week directive. I argue that the social chapter offers no discernible economic benefits to the UK. I was surprised at the statistics given by the noble Lords, Lord Eatwell and Lord Currie, that the level of international investment has fallen in the United Kingdom over the past few years. I believe that by signing up to the social chapter we may well see that level of inward investment fall a lot more over time.

My time is up. I certainly agree with the noble Lord, Lord Barnett, that it is easier to forecast the weather than to forecast the economy. My hope however is that for a sustainable recovery the next government will keep the current winning formula.

5.48 p.m.

Lord Birdwood

My Lords, more than 30 years ago, my work led me into contact with decision-making techniques which were then fashionable, by which companies decided on courses of action. Two of these, I remember, went by the names of Delphi and Monte Carlo. Perhaps they are still around today, but it is a long time since I have heard either of them referred to.

Both techniques called on one's ability to list influencing factors comprehensively, and give them appropriate weights as one moved towards a decision: open a plant, close a plant, use a particular port, stop using a port, start exporting to X, or give it up—that sort of thing. In those simple days—and they seem as far off and innocent as "Mrs. Dale's Diary"—the operational research support in a firm would make certain projections and assumptions based on currencies, markets, labour, innovation and, to a lesser extent, politics.

While I was collecting my thoughts in relation to this challenging and timely debate initiated by my noble friend today, I found myself scanning what expert opinion on "the economy" I could lay my hands on in the shape of recent publications. I have a pile with me. Economists as a breed have always frightened me far more than geneticists, biologists, or any of today's other tabloid bogeymen. When economists write about "the economy", they are so authoritative, so un-tentative.

In the context of the wording of the Motion—my noble friend has carefully referred to "the state of the economy"—the voices of expert economic opinion seem largely to be in accord. Just at this moment, just for the United Kingdom, just in the rosy glow of the longest bull market in history, things seem to be pretty good. As a House here we have exhaustively aired the things that are not so good: education, structural unemployment and welfare costs. But a snapshot of Britain is and should be a source of pride if not complacency.

Our economic cycles seem to be in advance at least of our European cousins: first into recession, first out; and it is a tribute to the economic realism of workers and managers. It is also a tribute to the profound changes in political ideology in the past 15 years or so. Two decades ago we were the closest thing to a command economy outside the totalitarian models. Today, not only are we a model of a demand economy but, with the exception of a handful of countries in permanent political quarantine, so is the rest of the world. The market has won. A little while ago we read about the end of history. And now I am led to the core of my brief and superficial observations today.

In a discussion like this, it is a natural thing to talk about "we". "We" are doing well, we say. What is the "we"? It is the sovereign state which gives us "our" identity. And it is the captive heart, the consciousness of nationhood, which seems to be drifting away from the understanding of what happens next in what the noble Lord, Lord Prior, commends to our attention.

I yield to no one in the importance I give to academic economic theory. I have infinite respect for the mathematical models which are now the basis for every economic projection, every forecast. But an economy, "our" economy, is only the collective endeavour of people—our people. What, I have often wondered, are the smallest and the largest collective identities in which the individual feels pride? The military worked it out 300 years ago: the section; the platoon; the regiment; the corps; and so on. For ordinary people what is it? Is it the company? Yes. Is it the country? Yes, as well. Is it the Continent? I do not think so.

If I were using that "expert opinion", in the form of the articles and features to which I referred a moment ago, to make decisions about a company or a country, I should be forced to have the deepest doubts about the effect of European financial integration on this our economy.

Perhaps my absorption of the detail has been careless. But one thing strikes me with force about the arguments now being laid before us on European monetary union; and it comes as a paradox. The arguments in favour of EMU are almost shockingly emotional. The arguments ranged against EMU are surprisingly intellectual. I would have expected them to be the other way round.

But why bring up EMU in a debate about the economy? It is just that everything, and I mean "everything" which could influence "our" economy—the Delphi or the Monte Carlo factors—becomes completely trivial compared with the consequences of this politically engineered fiscal tidal wave. We are like children building sandcastles on the beach and the grown-ups are assuring that the 50-foot wave coming towards us will be interesting, a challenge to our competitiveness.

If I were assembling evidence in a court of law, I should be content, or deeply troubled, according to my Euro credentials, on reading articles such as those of Larry Elliott in the Guardian, the noble Lord, Lord Hanson, in last week's Spectator, Mark Archer last October, Charles Goodhart in Prospect this month, and Robert Samuelson in Newsweek. These are grown-up voices too. The noble Lord, Lord Currie, has just had his own ferociously analytical work, The Pros and Cons of EMU, reviewed by the Economist. The reviewer remarks that, governments will have to act prudently and far-sightedly … Unless the potential reward is huge (which, in the report's view it isn't), why risk it?". So do those prudent, far-sighted governments exist but only by the will of the same people who feel they belong in countries, not continents; the same people who are the human engines of this or any other economy?

I feel privileged on many counts to have had this chance to participate, albeit briefly, in the debate initiated by the noble Lord, Lord Prior, on the state of the economy. It could be the last debate that this House can ever have on the subject because the idea of "our" economy could cease to have any meaning after next year. To be sure, there will be economic activity, and plenty of it. People will be richer or poorer. People will buy and sell. But to discuss in a national context the concepts of a national economy will have as much meaning as the penguins in the zoo discussing the price of admission.

5.57 p.m.

Lord Borrie

My Lords, six weeks ago, the Deputy Prime Minister, Mr. Michael Heseltine, invited himself to a conference. It was a conference to launch a significant and detailed report on the state of the United Kingdom economy. In the course of his speech to that conference, Mr. Heseltine said that the members of the Commission on Public Policy and British Business were a front organisation for the Labour Party. Many noble Lords may have read the reports of Mr. Heseltine's speech. That seemed to be a singularly inept phrase for the many distinguished people, including distinguished businessmen, who sat on that commission and had worked for some 18 months preparing the report.

The members included the chairman of Legal and General, the chairman of Sainsbury's, the chairman of British Aerospace and the managing director of GEC, the very company of which the noble Lord, Lord Prior, has been chairman for some 12 or 13 years. While we all welcome the debate that the noble Lord has initiated—I do not know whether he agrees with me—I felt that that wide-ranging commission did an excellent job in assessing in a balanced apolitical way the state of Britain's economy today. But obviously it irritated some people, especially current members of the Government who in the run-up to the general election want everyone to imagine that everything is for the best in the best of all possible worlds.

Yet the conclusions of the commission were surely not all that remarkable or novel. They did not relate merely to the past four or five years, the period to which several noble Lords referred, but to longer-term trends, especially over the past couple of decades. The commission, which includes the businessmen to whom I referred, stated that there had been more instability, more volatility, in macro-economic policy in this country than in that of our major competitors. Our recessions have been twice to three times as long as most of our competitors. Businessmen know, better than most, that instability discourages investment and long-term planning and saps business confidence in general.

The commission made the point, referred to by my noble friend Lord Haskel, that the best of British firms are equal to the best anywhere in the world. But, at the same time, there is a "long tail" in this country of under-performing firms, as the commission puts it. It drags down average business performance and is closely linked with under-investment in innovation, physical capital and research.

Of course we in this House, as no doubt do people outside it, all welcome the recent improvements in the job market. We welcome the strength, over quite a long period, of inward investment. The economy is now in good shape, as one noble Lord put it. However, one has to be careful. Worrying about these matters is not just some "nastiness" on the part of the Opposition in this House. I refer back to the views of the commission, including those distinguished businessmen. Noble Lords will have noticed last week that, according to the UN Conference on Trade and Development, our share of inward investment in Europe from Asian countries has recently shrunk. It is evident that at least a contributory cause of that is the uncertainty and instability to which those businessmen referred—in this case, in regard to the Government's relations with the European Union. Countries in Asia and elsewhere feel uncertainty as to what will be our relations with Europe in the long term. The divisions within the Government must be a contributory cause. Surely we cannot be complacent when we rank ninth in the European prosperity league; or, as the Conservative Member of Parliament and former Minister, George Walden, put it last week in the Observer: Britain remains one of the poorest countries in Europe in terms of gross national product per head". The commission pointed out that, besides the long tail of under-performing firms, there is another long tail of low-skilled, under-performing and under-achieving people. The CBI's recent policy document on education and training said very clearly: although the best in the UK is world class, the tail of education and under-performance is striking". A particular consequence of the "long tail" problem regarding people in this country, and unskilled people in particular is that part of the tail ultimately becomes quite detached from the body. Some of the unskilled become more or less permanently unemployed. As my noble friend Lord Currie said, rising inequality in this country is connected closely with that. It is wrong to think of this as purely a social problem. It has considerable fiscal and economic consequences. High levels of dependency mean heavy costs to the taxpayer, not just in social welfare but in additional expenditure in numerous budgets across numerous government departments, including those connected with the criminal justice system, the health service and so on. It means that vital public investment in our transport infrastructure, which is called for not merely by my party but by the CBI, businessmen and many others, is inevitably short-changed, to the disadvantage of British business, the British economy and the British people generally.

I would add that the UK economy suffers not just from the considerable gap between the performance of our best firms and that of the worst, or between our best graduates and those people who lack the most basic skills. We should also take into account the unevenness between one region and another. We often find, sometimes in close geographical proximity, contrasting worlds in which there is prosperity and comfort on the one hand and poverty and despair on the other. The economic success of the United Kingdom as a whole depends on the success of all regions of the United Kingdom. If any region is under-performing, then the United Kingdom as a whole is not maximising its economic potential.

The noble Lord, Lord Lawson of Blaby, mentioned competition as being among the Government's successes over many years. I believe that the noble Lord was still Chancellor when the Government, in 1989, issued a White Paper advocating considerable improvement in the competition law of this country in order to bring it up to date. I regret to say, as I believe I have on one or more previous occasions in my short time in this House, that the Government have failed time and again over the past eight years to implement those proposals. Even the last Queen's Speech made no mention of bringing our competition laws up to date. Yet surely we all agree that the competitiveness of British firms—ensuring that our policy tries to get people to compete more effectively—requires the updating of competition laws. Surely the tired mantra, "when parliamentary time permits", which was said to me by the noble Viscount, Lord Goschen, in answer to a supplementary question only a few weeks ago, is totally inadequate. Time is running out for the Government. They will never now be able to implement the promises of 1989. That will have to be done by someone else.

6.7 p.m.

Lord Astor of Hever

My Lords, I, too, thank my noble friend Lord Prior for initiating this very important debate. Like my noble friend Lord Lawson of Blaby, I also commend the noble Lord, Lord Desai, on his economic honesty in the article he wrote last month, the more so since his party's message on the economy is all doom and gloom, as we heard today. In his article the noble Lord mentioned job security and the risk that Labour policies on the social chapter might lead to more job losses, as in Germany.

Lord Desai

My Lords, perhaps I may intervene. I did not mention the social chapter in that article.

Lord Astor of Hever

My Lords, with the greatest respect, I have the article here, and it was mentioned.

Certainly Labour's enthusiasm to sign up to the social chapter would open the door to a slippery slope of higher costs, more regulation and renewed union rights which would undo much of the success that the noble Lord, Lord Desai, so accurately described, and which was acknowledged by the noble Lords, Lord Barnett, and Lord St John of Bletso, and even by the noble Lord, Lord Borne.

As a result of the opt-outs secured by the Prime Minister at Maastricht, together with the absence of a minimum wage, employers in this country are not subject to the job destruction measures which have helped to create mass unemployment on the Continent. Europe's heavy-handed labour regulations make it expensive to give someone a job, and the labour market is characterised by the classic combination of high regulation, high costs and high unemployment.

In December 1996 our unemployment rate was 6.7 per cent. and falling. Across the EU the average is 11 per cent., with the French rate a catastrophic 12.5 per cent. As a director of two French companies, I can speak with some experience of how much more expensive it is to employ workers there because of crippling tax and social security costs. Whereas those cost a British employer only an additional £15 for every £100 spent on wages, in France they add £41. It is that more than anything else that explains why Britain receives, as my noble friends Lord Prior and Lord Brabazon pointed out, more than a third of all the EU's inward investment as opposed to a tenth in France and a fifth in Germany.

Significantly, we attract more direct investment from Germany than anywhere else in the world. Because of spiralling overheads and red tape, export of jobs is now commonplace there. Already half of the staff of Bosch work abroad and in two years Siemens expects to be in the same position. Maastricht, and significantly the social chapter, placed immense burdens on German employers across the board. Tens of thousands of firms have gone into recievership and tens of thousands of firms have had to shed staff to stay alive. At the time of Maastricht, Germany had 2 million unemployed; today the official figure is 4.6 million.

As the noble Viscount, Lord Chandos, pointed out in his speech on the City of London six weeks' ago, 25 million new jobs were created in the US from 1980 to 1995; a mere 4 million were created in Europe, a paltry growth rate of 0.2 per cent. per annum. The noble Viscount wisely also pointed out that an obvious factor for that disparity was labour-market regulation, a view hardly consistent with Labour's pledge to end Britain's hard won opt-out from the social chapter which contains much more regulation.

Why should important decisions on Britain's employment policy be made in Brussels? No Tory Government is likely to sign up to the social chapter or introduce a minimum wage. Why impose burdensome new social costs on British firms, particularly smaller companies, many of which are still struggling with the after-effects of the recession?

Two industries that will be particularly affected by the social chapter and a minimum wage are the tourist and motorsport industries. The tourist industry, which typically has low wages and flexibility in the use of staff, would be devastated. So too would the British motorsport industry, an industry in which the United Kingdom dominates the world and which last year generated more than £2 billion for this country. I declare an interest as the unpaid President of the Motorsport Industry Association.

Fifty thousand people are directly employed within British motorsport and twice that number enjoy part-time employment in a fragmented industry where small, specialist firms compete fiercely to achieve the results that their sponsors demand. A high proportion of the UK's scarce resource of skilled and creative engineers is engaged in motorsport. The dispersal of the industry into small, specialist sectors is one of the main reasons for its success, allowing for rapid decision-making and a high degree of flexibility.

The motorsport industry in this country has become a world leader through the readiness of its people to work what are often unsocial hours and on a part-time basis to be involved in a business about which most employees are passionate. The social chapter and a minimum wage would open the door to foreign competition, particularly from the Far East where the motorsport industry is already blossoming. Our position is threatened. Let us not destroy it with unnecessary legislation.

6.15 p.m.

Lord Monkswell

My Lords, like other noble Lords, I should like to thank the noble Lord, Lord Prior, for introducing this debate. I rather presumed that there would be a fairly one-sided description of our economy from the other Benches and I intended to offer a different perspective. I had not appreciated that virtually no noble Lord would talk seriously about our nation's balance of trade and balance of payments. I think that it would probably be quite useful therefore, particularly following the contribution of the noble Lord, Lord Kingsdown, to say a few words about what I might describe as money-market domination.

One of the difficulties in a debate in which we have contributions from a combination of academic economists and people who might be described as relatively well-off members of society is that they say that the economy is now doing very well. For those people the economy probably is doing very well. But there is another perspective, which the noble Lord, Lord Bruce of Donington, touched on when he mentioned unemployment. We need to recognise that the real economy is the business of the way we organise society to provide the goods and services and the mechanism of exchange that provides the things that we as human beings need and want to enable us to live a decent life. For many millions of our citizens the British economy is not in good shape because it does not provide them with the goods and services that they need and want.

One of the intriguing things about the introduction by the noble Lord, Lord Prior, was that he suggested that the two major good things about the changes in the economy over the last 18 years were privatisation and trade union law reform. He suggested that the trade union law reform provided industrial relations peace. It might be more sensible to recognise that it is the existence of mass unemployment rather than any changes in the rules and regulations that has contributed to the change in labour relations that has typified the last 18 years.

Privatisation is a good thing? The remarks of the late Earl of Stockton come to mind when in his maiden speech in January 1985, on the same day as I made my maiden speech, he talked about selling off the family silver and the problems that that resulted in for what he described as the gay young blades. I am not sure that I would describe Government Ministers as gay young blades. Some of them are, I suppose, but that may be a different story.

One of the reasons that we have had privatisation is that the Government have almost consistently, year on year, determined to spend more than they raised, which means that it is necessary either to borrow or to sell off some assets to bridge the gap. It is intriguing to think that not only have the Government done that and notionally sold off public assets to the British public, but we are now seeing a situation where essential national assets are being sold off to foreign interests.

In talking about the British economy, we need to recognise that it is ours and something over which we should have control. But if those major elements of our economy are owned by foreigners, then by definition we cannot be in control.

There may be some positive advantages from inward investment as a proportion of a particular industry or service sector. For example, there was the inward investment of the Ford Motor Company, basically the American company of General Motors, or Peugeot in this country when we ourselves had a very large British motor industry. But now virtually all the motor manufacturing undertaken in Britain is carried out by foreigners—the Japanese, Germans, French or Americans—and there is virtually no British-owned element, apart from the racing scene mentioned by the previous speaker, which I suspect will fall to Japanese competition fairly soon and is only a very small part of British motor manufacturing. All the rest is foreign owned. I am not sure that that is good for our economy.

The noble Lord, Lord Prior, did not talk about the balance of trade and the balance of payments. It was probably some academic economist who said that there could not be an imbalance in the balance of payments because it would naturally have to balance. But we can recognise that this country does not produce enough goods and services for our own consumption. We have to buy-in those goods and services from abroad and we have either to borrow money or sell assets to be able to afford them. That has been going on for over 10 years. It started under this Conservative Government when the balance of trade for the first time in our history went into an adverse situation. That leaves the economy of our country vulnerable to what other people think and feel about it.

That brings me to the remarks made earlier in the debate by the noble Lord, Lord Kingsdown, who, in a very telling phrase, referred to the money markets as vigilantes. I do not believe that anybody would argue that we should aspire to, recognise or accept that vigilante law or vigilante justice should determine our future. But that is effectively what is happening. The globalisation of money markets, the billions of dollars, yen and pounds which are whirling around the world's foreign exchanges completely take out of the hands of small, medium-sized or even very large nations the ability to control their destiny. For some people it may be very good to survive in that kind of "casino" operation but the vast majority of people on this planet want to have some control over their affairs. We cannot allow the money markets—the vigilante operations—completely to destabilise economies and human relationships in terms of economic affairs.

It seems to me that one of the difficulties is the fact that the vast sums of money swirling around the foreign exchanges are able to destabilise small, medium-sized and even large countries. There is a need to find some mechanism of control. I suspect that part of such a mechanism of control would be the emergence of three or four major economies in the world. The development of the European Union and the European Monetary System will be part of that.

In conclusion, I hope that we shall find some way to control the money market vigilantes before they reduce human activity to the chaos of bloody conflict and war which has previously happened in our history and which we do not wish to see repeated. We must find a peaceful way out of the problems that we have created for ourselves.

6.26 p.m.

Lord Stewartby

My Lords, I have not before followed the noble Lord, Lord Monkswell, in a debate in your Lordships' House. I am, therefore, pleased to have this opportunity of complimenting him, if I may put it that way, on a more effective speech than that of the noble Lord, Lord Eatwell, on his Front Bench.

Like many other noble Lords, I am most grateful to my noble friend Lord Prior for introducing the debate this afternoon. It has been an extremely interesting and wide-ranging discussion. I shall not try in any way to repeat what my noble friend and many others have said about the success of the British economy. I simply wish to endorse in particular the point that he made at the outset; namely, that a great deal of the economic performance that we now see in the 1990s derives from the structural changes over a wide area which were undertaken in the 1980s. It is not only a matter of having a more flexible labour force and lower non-wage costs than our competitors. We restructured our economy in a number of ways much earlier than our competitors. That is one of the reasons for significantly improved relative performance now.

The noble Lord has just mentioned privatisation. Earlier, the noble Lord, Lord Ezra, said that there were many people with significant skills in the nationalised industries before they were privatised. That is of course true. But the key fact is that many of those nationalised industries were heavily overmanned and lacked the disciplines of the financial control in the private sector. I believe that the potential of those industries could not have been realised had they not been put into the private sector. The proof is that, instead of year on year being a drag on the taxpayer, they now produce every year large and increasing revenues for the Exchequer.

My other point on the restructuring of the economy concerns taxation. When my noble friend Lord Lawson was Chancellor, I had the privilege of being a member of his team. We not only reduced direct rates of taxation for individuals, which is very important in terms of incentive as high taxation is economically inefficient as well as unattractive to those who have to pay it, but he also carried out a far-reaching structural reform of company taxation. It is hard now to remember the days when corporation tax was above 50 per cent., but it was 52 per cent., with substantial initial capital allowances for investment.

It was quite clear at that time that much of the investment was inefficient. A large part of it was done purely to avoid making such large payments of tax. Although there was much resistance at the time and many said that it would discourage investment and have unattractive consequences for industry and throughout the economy, in fact it has had the opposite effect. It has made this country in the corporate sector much more efficient than it was 10 or 20 years ago. That is a reform which is often overlooked when the catalogue of measures of the 1980s is set out. It was an important reform.

The two points on which I particularly want to touch this evening are monetary policy and interest rates on the one hand and public expenditure on the other. I took the precaution of not preparing a speech for this afternoon's debate. It seemed to me that with so many distinguished speakers it would be wiser to listen to what was said and make personal comments in the light of the debate. I particularly want to agree with what the noble Lord, Lord Kingsdown, said in relation to monetary policy and interest rates.

In the past, increases in interest rates were a "shock, horror" affair and often large. They were usually taken rather too late and inevitably had a disproportionate effect on economic activity. The past four years in particular have shown the virtues of conducting monetary policy with a longer view and taking pre-emptive judgment in regard to the appropriate level of interest rates. Of course, we have not abolished the economic cycle. But I agree with the noble Lord, Lord Kingsdown, that if we continue to pursue those policies, then the fluctuations in the cycle are likely to be flatter and the periods of recovery and growth longer.

It is a pity the way in which the tabloids and other commentators tend to dramatise movements in interest rates. I do not know whether in two years' time the present rate of interest will prove to have been correctly set at 6 per cent. or whether it should have been 6.5 per cent. We are not talking about large differences of view between the Governor and the Chancellor. I am quite sure that we will not now see economic developments taking place where interest rate policy lags behind economic developments in such a way that, when changes are eventually made, they have to be more substantial than they would otherwise have been. If they are not sudden and they are not large, then changes in interest rates are really part of a sensible and responsible management of the economy.

If it is necessary in the coming months or over the next year or two for interest rates to rise by 0.5 per cent. or 1 per cent., that will not be an economic and financial disaster; it will be merely a recognition that the policies we have been pursuing have created the conditions in which economic growth can develop strongly. In order to ensure that it does not get out of hand and become too strong, some restraining move may need to be made.

Lord Ezra

My Lords, I thank the noble Lord for giving way. I shall be brief. In the light of what he said, would he agree with the advice given by the Governor of the Bank of England that interest rates should have been increased by 0.25 per cent.?

Lord Stewartby

My Lords, as I said, I do not know whether the present rate will prove, with the benefit of hindsight, to have been correctly set at this level or whether it should be at a slightly different level. The main difficulty in answering the question of the noble Lord, Lord Ezra, is that nobody is yet sufficiently able to measure the potential effects of the recent increase in the value of sterling. It will undoubtedly have a significant impact on the degree of activity in certain areas of the economy. But because that is a relatively recent development, the nature of the impact is not yet clear.

I conclude by saying a few words in relation to public expenditure. Long before I became a Member of another place and took an interest in these matters, I was impressed by a remark of Selwyn Lloyd. He said that the pressures on a Chancellor of the Exchequer to increase public expenditure had to be experienced to be believed. What may have been true a generation ago is doubly true today. It is not only the political and economic factors that come into play; there are also demographic issues which mean that any Chancellor, any Chief Secretary, faces relentless pressure to increase public expenditure.

It is difficult enough to control expenditure if the governing party has an instinct that public expenditure should be controlled and contained to a sensible level. In my view it is likely to be impossible if a governing party wish to move in the opposite direction. Therefore, I listened with great interest to what was said by the noble Lord, Lord Barnett, when he implied that, even though Mr. Blair and Mr. Brown may be saying the right things, it is unlikely that they will be able to hold to the public expenditure figures as projected. I agree with my noble and learned friend Lord Howe that it is not credible. It would be difficult for the next government, if they continue to be a Conservative government, to keep that continuous control over public expenditure. In my view it would be impossible if by some mischance the next government were to be formed by a party whose instincts over the generations have been to encourage and not to restrain public expenditure.

6.36 p.m.

Lord Desai

My Lords, first, I apologise to the noble Lord, Lord Astor of Hever, for interrupting his speech. He is quite right; I did make that remark. Unlike the Secretary of State for Health, I repeat what I said and do not say that I was befuddled or it was a breakdown in communications. It is a great honour to be quoted by a former Chancellor of the Exchequer and Privy Councillor. That is the highest state I have attained and I am afraid that from here it is downhill all the way.

When I wrote the article mentioned it was designed to warn my party not to be smug. I believe I succeeded in making the opposite party smug, and that is a good result. The more smug the opposite party becomes, the better we are and the better are our chances of success. I must point out that on our side there is a great division between me and my noble friends. I believe that a Conservative victory is impossible, but not unlikely; they believe that it is unlikely, but not impossible.

I want to take up two issues. First, the noble Lord, Lord Ezra, raised the question of whether the economic recovery is sustainable. Again, I thank the noble Lord, Lord Prior, for giving us the opportunity to discuss this question. I want to discuss it without mentioning the election and such matters again because what we have arrived at now is what we arrived at in around the late 1940s.

In the late 1940s we arrived at a consensus about the nature of the economic and social policy—later it was referred to as "Butskellism". That happened when the Conservative Party decided, after its defeat in 1945, to change its thinking on specific issues—and it is nice that it changed its thinking. Then we had around 20 or maybe 25 years of consensual economic policy making. The consensus then broke down. We are now back at a consensus that, given the way the global economy is at present, it is unlikely that any government would succeed by being fiscally irresponsible; that devaluation does not give us any permanent gains; and that we have to keep to a strict spending limit.

I welcome that. Differences still exist between us and, if I have an opportunity, I shall speak about them later. But I welcome the fact that once again we have a consensual, macro-economic framework and within that framework we will conduct policy. It is in nobody's interest that the country does badly in its economy; nobody gains by that. In fact, people only lose by it.

I turn to the question of the sustainability of the current recovery. This is the fifth year of the recovery, but that is not unusual. The last recovery, if we start from the trough of 1981, lasted to around 1990; that was a nine-year cycle. We must not all get carried away. We must make special efforts to sustain the recovery. In that respect the first point I would make, which was mentioned by the noble Lord, Lord Kingsdown, is that we are currently paying a premium of between 1 per cent. and 1.5 per cent. on long-dated government stock. That has been going on for quite some time. Why is that so? It is connected with the current hardening of the exchange rate. Is that a systematic force or is it just a blip? The answer to that question lies in a very simple fact.

Many people emphasise independence for a central bank. The noble Lord, Lord Lawson of Blaby, mentioned that point. The problem of the British economy does not arise from anything the Bank of England has done or not done but has arisen from the fact that we have not had a good record of fiscal responsibility. As I said in the debate on the Budget in November, if at the top of the cycle we are still running a deficit and if the Chancellor says that in the next year he has no hope of producing a surplus, one wonders when the British economy will ever have fiscal responsibility.

I am happy to confess that I was converted to that view about 10 years ago. I was not born a fiscal conservative. What has happened is that, on the one hand, we have narrowed the tax base. Collections have kept up but the tax base has narrowed. On the other hand, the Government, with the best of intentions, are finding it difficult to control spending. The British public like spending. It is not only a matter of political parties. The British public like certain kinds of spending to be undertaken by the Government. They want decent schools, they want good health care and they want law and order. Those are very difficult to resist. What we have seen over the past 15 years is a see-sawing of the GDP ratio from 45 down to 30 and the persistence of the PSBR problem, especially if one takes out the privatisation receipts. The treatment of privatisation receipts is a problem in economics.

One ought to worry about this matter rather seriously. We are paying a premium of between 1 and 1.5 per cent. because we are not trusted to be fiscally responsible. We are not trusted to stick to an announced policy. The temptations are rather great. I may not gain the approval of my noble friend Lord Bruce but I would have preferred it had we gone into the ERM way hack in 1985. We did not go into the ERM. We went back and forth for about five years. When we eventually went in, we did so at the wrong rate. There was a possibility of realignment within the ERM but we did not take it, and we went out. Whatever one may think about the ERM, good or bad, if one goes into something one has to show commitment to stick to it and not run away when a crisis occurs. The market quite rightly judged at that time that even after the Government had been re-elected they did not have the courage in a recession to stick to the ERM discipline. That is why we are suffering still.

I am not necessarily saying that I would immediately jump into EMU. I have already said that I am not right now in favour of going into a single currency. But whatever we think about it, if we go in, we should stay. If we do not mean to go in, we have to ask—the question has been asked for the past four years—what is our monetary and fiscal framework or medium-term financial strategy, as was mentioned by the noble Lord, Lord Lawson. A medium-term financial strategy should have not only an inflation target but a much sterner fiscal target than we have been used to so far. In this respect the golden rule of government borrowing is a very good one. We should say that whichever government come to power—it is almost an equivalent of central bank independence—the UK's fiscal policy will be conducted on the basis of the golden rule and that if we seem to be deviating from the golden rule there will be a quick and stern correction the next year. That would be done either by genuinely cutting expenditure or by increasing taxation, whichever was required. No one likes taxation but it is better to have taxation than to run unsustainable fiscal deficits.

I am grateful to the noble Lord, Lord Prior, for giving us the opportunity to speak on the economy. The problem of constructing a sustainable and viable macro-economic framework for British prosperity is one for all of us.

6.46 p.m.

Lord Nickson

My Lords, I should like to apologise to the House, and particularly to my noble friend Lord Prior, for not being here at the start of the debate. I had a meeting I could not avoid which was fixed long before the debate. I was particularly sorry to miss my noble friend's opening speech and also the speeches earlier in the debate of my noble friend Lord Kingsdown, who did me the honour of being one of my supporters when I came to your Lordships' House, and my noble friend Lord Lawson of Blaby, who was always enormously considerate to me during the time he was Chancellor of the Exchequer, except once when he rang me up at four o'clock in the morning in Tokyo under the impression that it was four o'clock in the afternoon in Scotland.

We have heard extremely important speeches from distinguished economists and politicians. I speak as a simple businessman who comes from Scotland. I want to ask your Lordships to walk down memory lane with me briefly and then, with your permission, I would like to be very parochial and talk about a particular worry I have about the economy in Scotland.

Down memory lane I should like to take your Lordships back to the mid-1960s and to the opening of a printing warehouse in Glasgow by the noble and gallant Viscount, the late Lord Montgomery. As was his wont, he spoke a lot about himself and not much about the firm for which I worked, which had just published his memoirs. He said that he had no quarrel with us over that, but as publishers of bibles and hymn books he was always being asked to sing hymns that went, "Oh Paradise, Oh Paradise, How I long for thee". "Well", he said, "I don't, I don't. I would like to sing a hymn that goes, 'Oh Paradise, Oh Paradise, I have a little shop, and just so long as profits last, here I mean to stop'".

Well, my Lords, we moved from that decade of the swinging sixties to the decade, in my terms, of the sad, sad seventies, the most miserable decade of my working life in business. I shall not rehearse to the House all the terrible problems of high inflation, high unemployment, industrial relations conflict—which I venture to suggest few Members of the House can have experienced at first hand in all its unpleasantness and severity—the secondary banking crisis, and so on. Profits did not last and many businesses, including the one to which I refer, were brought to their knees by that sequence of economic events.

My second flashback is to a meeting at which I was a guest where the then Leader of the Opposition was speaking. I am referring to my noble friend Lady Thatcher. She spoke with immense confidence—it was the first time I had seen her or heard her—about her conviction as to what needed doing for Britain. I was totally captivated. I thought I was listening to Don Quixote tilting at windmills because all my experience could not have prepared me for the idea that anything she said was likely to be possible.

The first questioner asked her about proportional representation, to which I was quite inclined myself at that time. She demolished him with withering scorn and, in my opinion, with all the wrong arguments. I said to my host—I was sitting next to him—"She can't get away with that". He said, "Well, if you want to ask a question, you go ahead". He moved a long way from me. I got my first major handbagging from her. She said, "If that's the way you think, you don't understand what needs to be done to change this country. You have no conception of what we have to do. If that's the way you think I don't want your support and I don't want your vote either". I retired duly humiliated.

My third flashback jumps on to the early 1990s and another Chancellor of the Exchequer, the current Prime Minister. I went to see him because at the time I was chairman of what was then the Top Salaries Review Body. We had come to the conclusion that what we were paying our public servants in this country was neither fair nor wise. I went to seek the mind of government on that matter. He listened to me with great patience. Then he read me a little lecture about inflation, the state of the economy and what he intended to do about it. Shortly afterwards, of course, he did become Prime Minister. I would only point out that I was very impressed with his earnestness, conviction and determination at that time. Exactly what he said was going to happen has happened. Those are my three little flashbacks.

I hope that I sound neither gleeful nor smug about the state of the economy at the moment. I am firmly of the view that, in the words of another Conservative Prime Minister, so far as the climate for the wealth-creating sector of British industry is concerned, we have never had it so good. I now turn to Scotland. What are my fears? I am talking on a constitutional point. I am deeply, deeply worried about the proposals of the party opposite for Scottish devolution. I am worried on a constitutional level and I am worried on an economic and business level. Why? Because it is not quite as easy in Scotland to be world class as it is elsewhere. It is not quite as easy to attract inward investment—geography is against us. It is always difficult to attract key, crucial executives to run Scottish companies if they do not happen to be Scots. For all those reasons it is very important that the climate in Scotland is at least as good as it is elsewhere.

If we do have a referendum on Scottish devolution and the Scottish people vote for it, in my view that will be irreversible and indisputable. Much as I am against it, I also fear that it will not last because it will not deliver and it is a short cut inevitably—if not in my lifetime, then in that of my children—to separatism.

I have a young friend who is about to stand as a Conservative candidate in the Western Isles. He was greeted with an encouraging comment that Conservatives in South Uist are scarcer than corncrakes. We have many red-listed endangered species in Scotland, but I have to tell noble Lords that Old Labour is not among them. It will dominate a Scottish assembly if it comes. If Old Labour produces a paper on the tartan tax, it will need to say how it will be raised. Is it only on Scottish residents; is it true that it will average out at 3 pence—(£500)—for the average wage earner, £5 per week for the pensioner; £3,000 a year for the middle manager?

The point is that Scotland benefits by about 30 per cent. more spending per capita than the other citizens of this United Kingdom. That is about £8 billion. If the commitments to controlling public expenditure are true, the tartan tax might raise £400 million, not £8 billion. The pressures will come through local authority expenditure. Why? It is because the party opposite has said that it will return the business rate to local authorities. Perhaps I may tell noble Lords what happened in the late 1980s. The rateable value to brew a barrel of beer in Fountainbridge was eight times what it was in Burton-on-Trent. A tourist who laid his head on a pillow in a four-star hotel in Edinburgh paid £3.50 in rates; in London the equivalent was £1. Forty per cent. of the total rates of the Central Region come from the BP and ICI complexes at Grangemouth. Jenners in Princes Street paid £1 million—4 per cent. of its total costs—in rates, the same as Harrods, which is eight times its size.

What will happen is that pressure on public expenditure to finance Old Labour's policies in Scotland will be passed back to local authorities and they will immediately be forced to use business to finance those policies. It is business that will pay. The Scottish economy will suffer. I ask noble Lords on the Benches opposite to talk to their colleagues in another place and to express in the most serious way the concerns that I have about devolution and its effects on the Scottish economy.

6.57 p.m.

The Earl of Clanwilliam

My Lords, my noble friend Lord Nickson and other noble Lords have spoken with great experience about the state of the economy. The debate has been cogently introduced by my noble friend Lord Prior. We are indeed fortunate in having an economy which is thriving and is the envy of all Europe.

I wish in particular to refer to the valuable part played by the insurance and investment industry in the City. It has provided vital support for the City in creating an excellent balance of payments. In particular, it has been central in building up pension reserves on behalf of our great industrial companies, greatly to their cost. It has been estimated that the cost to industry of building up these occupational pensions has been in the region of 6 per cent. of its profits. That should be taken in relation to what I am about to say. As is well known, about £600 billion have been built up. That is something which cannot be said too often.

We are doubly fortunate in that we are in a much stronger position vis-à-vis other members of the EU, many of whom have a serious deficit a-building which is not, incidentally, being taken into account in the Maastricht criteria now being judged by the Commission. My noble friend Lord Lawson of Blaby mentioned the factors and I shall repeat them. It is very important to know that the net unfunded liabilities of the present systems amount in Germany to 139 per cent. of GDP; in Italy it is 113 per cent. of GDP; in France it is 98 per cent. Whereas my noble friend Lord Lawson of Blaby mentioned a figure of 5 per cent., I have a figure of 19 per cent. to the year 2070.

Similarly, as regards the percentage of total workers who have private pensions, the best figures are in Switzerland and the United States with over 50 per cent. Ourselves, Norway and Denmark have well over 40 per cent and we are followed by the Netherlands and Sweden. The rest of Europe comes nowhere; some 20 per cent. of those workers have private pensions.

That was to be the import of my speech today but, as noble Lords will know, I have been pre-empted. I had intended to ask my noble friend on the Front Bench what he was going to do about pensions for the young. My right honourable friend Peter Lilley has made a statement on pensions today which has not only pre-empted my call for what represents mandatory savings, but has gone further and answered the greater question of how he was going to ask the young of this country to make the contributions.

Perhaps I may take this opportunity of congratulating the Government on grasping the nettle that our competitors in the EU have woefully ignored. This aspect at least must contribute enormously to enhancing the excellent and positive success of the economy of this country in the long term.

7 p.m.

Lord Taverne

My Lords, this extremely interesting debate introduced by the noble Lord, Lord Prior—to whom we are grateful—has to a large extent been a review of the past 18 years of this government. A great many tributes have been paid and it struck me that they were in some ways like the tributes paid during a memorial service, although the Government are not yet dead.

The tributes from the Opposition side were rather less fulsome, as one might expect. One of the questions which was raised from the start was this. Many people conceded and stressed that in many respects we were doing well at present. The question was asked by a number of noble Lords: is the present trend sustainable? My noble friend Lord Ezra was the first to raise the question. I too wish to address it and, like many noble Lords who have spoken, wish to see what lessons can be learnt from comparisons with other countries of the European Union. If it is possible in this pre-election period, I hope to do so in as non-partisan a spirit as I can summon.

There is the Government's view of the path to continued success, as stressed by the noble Lord, Lord Prior, and a number of other noble Lords, including the industrialists who spoke, such as the noble Lords, Lord Blyth of Rowington and Lord Trefgarne. Speakers from the Government Benches have stressed the need for continued deregulation of the labour market. They say: "Essential to our success is that we should have a flexible labour market. If reliance on the market means that there are much greater inequalities, so be it". They claim that it works. "Look at the sclerotic labour market on the Continent of Europe, particularly in Germany, with its high costs and inflexibility, which has driven many of the German companies to invest elsewhere".

I do not believe that there can be any doubt that in the past 18 years the Government have scored a number of successes. To start with, it must be conceded by those who oppose the Government in other respects that large numbers of our top companies are in a much better state than they were 18 years ago. Secondly, many people, certainly on these Benches—the two of us on this occasion—would concede that over the past few years there has been good macroeconomic management by the Chancellor of the Exchequer. However, I believe that he took some fearful risks in the Budget. I agreed very much with the noble Lord, Lord Barnett, that there was a great deal of counting of chickens, particularly when it came to the gains to be realised from anti-avoidance measures.

Further, I feel that great risks are being taken with the money supply. One of the exceptions to the universal chorus of praise and hope for the future was the remarkable speech made by the noble Earl, Lord Caithness. He drew our attention to the increase in the money supply, the increase in the level of debt and the worries which that caused. I too worry about it. I hope that his gloomy predictions are not borne out. I am even more worried about it because his view is strongly supported by Professor Tim Congdon. I differ from him in many ways, but he has a remarkable record as a forecaster. If he warns about the consequences for future inflation of the growth in the money supply, we should take notice.

I am also worried about the pledge made by both the Government and the Shadow Chancellor that there should be no increase in income tax. There will be great difficulties about raising tax generally. Sometimes one wonders what will change if there is a change of government. I am reminded of the poem by Hilaire Belloc, who for some reason took exception to women and did not like champagne. He said:

• "The accursed power which stands on Privilege
• (And goes with Women, and Champagne, and Bridge)
• Broke—and Democracy resumed her reign:
• (Which goes with Bridge, and Women, and Champagne)".

So whether there will be any change I am not sure. Nevertheless, over the past four years we have had good economic management.

There has also been a drop in the unemployment figures, of which more later. There has been reasonable growth over the past few years; and more growth is projected, though too much stress is laid on the projections of the OECD, which proceeds largely on the basis of information supplied by member state governments. Particularly important, there has been a catching up in productivity.

However, before we indulge in a mood of self-congratulation, it is also important to look at the qualifications. We are not the biggest and strongest economy in Europe, as a number of noble Lords on the Opposition Benches have pointed out, not even in the past three years where, for example, the record of growth of Ireland has exceeded ours. The noble and learned Lord, Lord Howe, mentioned the record of the Netherlands. It is worth remembering that the Netherlands has had higher growth than we have had, lower unemployment than we have had, lower inflation than we have and, unlike the United Kingdom, it has managed to accompany that success without an increase in the inequalities of salaries and wages. It is also worth remembering that its success has been based on an old-style consensus. Agreement between government and unions and industry has been absolutely central to its success.

The second qualification is one on which I do not need to add to the words of the noble Lord, Lord Currie of Marylebone. It is that our growth rate over the past 10 years has been average. Our productivity is still well below that of Germany, France, the Netherlands, Sweden, Denmark and a number of other EU countries. The third qualification is that while our unemployment figures are going the right way, it should also be noted that the Government have been rather more successful at reducing the unemployment figures than they have at reducing unemployment. If one considers the OECD comparison of employment, which takes into account involuntary short-time working, participation rates, who is on the register and who has taken early retirement, one must note what the noble Lord, Lord Eatwell, said, that the total number of people employed in recent years has not increased. On that basis, on the modified OECD figures, our record is not that much better over the past few years than the average of most EU countries.

However, I wish to look particularly at the comparison with Germany made by many speakers. First, Germany has problems galore, many of which stem from unification, which led, after all, to the transfer of 4 per cent. of the GDP of West Germany to East Germany. It is worrying that despite that vast transfer, there has been no lessening of East Germany's dependence. Secondly, it was also unification which led to strong deflationary policies from the Bundesbank. There was no restraint in wage claims and it was felt by the bank that there were inflationary pressures which could only be restrained by a very restrictive monetary policy. This affected the rest of the European Union as well. Thirdly, as the noble Lord, Lord Prior, pointed out, Germany has suffered from high social costs which have risen strongly recently. I was looking at them the other day. Social security costs were 26.5 per cent. of wages in 1970, 35.8 per cent. in 1990 and 40.9 per cent. in 1996. That has led to the relocation referred to by a number of noble Lords, particularly relocation of industries which require a low level of skill.

But it is a mistake to assume that the Germans are about to abandon the Rhineland model and go hell for leather for the Anglo-Saxon model instead. That is for good reasons. Despite the high labour costs, the extraordinary thing is that in the past 15 years, while we have lost our share of world trade, they have increased their share. Despite their high costs, they have managed an export surplus; indeed, the French, too, with their high costs have managed it, while we have an export deficit. There is a very interesting balanced analysis in the January edition of the National Institute of Economic and Social Research review. The paper is by Wendy Carlin and David Soskice, who works for an institute in Berlin which looks at the secrets of German success in exports. One of the reasons for this is that the Germans sell on quality. They have a particularly good record in high quality incremental innovation in medium technology industries. This success is based on several factors. There is a very high level of training both in the high technology skills and the less skilled labour force. There has been company-specific innovation which enables particular companies to compete successfully despite their high costs. All of this is based on consensus and a degree of security of employment that is quite incompatible with a hire and fire approach.

Further, in approaching the need for redundancies it is noticeable that there has been an agreement between the unions and management to keep up the training of young workers and concentrate redundancies among the older workers, who get good unemployment benefit and then become unemployed but treat this as a preliminary stage of retirement. Therefore, one has a low level of unemployment among young workers in Germany and a high level of unemployment of people who are in effect retired and have ceased to work at about the age of 55.

If one compares skills in Germany and the United Kingdom, disturbingly one finds that 61 per cent. of the United Kingdom workforce is low or unskilled, whereas 16 per cent. of the German workforce falls into that category. I do not suggest that we should copy the German solution. I believe that we have many advantages. Our open capital markets make the United Kingdom, like the United States, perhaps a better place for growing new hi-tech companies. Obviously we cannot transplant the German model in any event to very different circumstances. But it is not altogether surprising that in Germany there is no rush to copy the Anglo-Saxon model.

This raises very important questions for us of sustainability in the longer term. What will be the future for employment? So many speakers from the Benches opposite have stressed our low labour costs. Of course, that is a very great advantage, but in the end we cannot beat India or China on low labour costs. In the end we must compete on quality. The future sustainability of our employment depends on the UK being a high technology, high wage, high skill economy. It is not always fashionable to stress the importance of maximising security of employment and the value of involving the workforce in achieving the kind of training that is essential to a high quality workforce. The central factor in training and securing the quality of our workforce is security of employment. It also means that government must play a major role. In the long term if sustainability of prosperity rests, as I believe it does, on the quality of our products, we have no grounds for complacency but much ground for concern.

7.13 p.m.

Viscount Chandos

My Lords, I add my thanks to those of other noble Lords to the noble Lord, Lord Prior, for initiating today's debate even if, not surprisingly, I disagree with much of what the noble Lord has said, particularly in respect of these Benches.

Twelve minutes is a short time in which to try to draw together the debate over the past four hours or more, let alone to attempt an economic assessment of the 17 years and 10 months during which the Benches Opposite have been filled by a Conservative Government. The fin de siècle feeling which, inevitably, hangs over the closing days of this Parliament, led the noble Lord, Lord Prior, in his opening speech, and many other noble Lords to look back over the full period of this Government, as well as at the present position and the performance of the economy since the country last had a chance in 1992 to pass judgment on the Government's stewardship.

Although I am wary of appearing presumptuous to the many noble and learned Lords in your Lordships' House, I can understand the task that faces a distinguished judge in summing up a long and complex court case and giving appropriate directions to the jury. In this case the jury is not here in your Lordships' House but in the country at large. Even without the benefit in almost every case of having heard this afternoon's provocative debate and of my directions (as it were), the electorate will shortly determine whether the arguments of my noble friends Lord Eatwell—who is absolutely anything but mean-minded—Lord Currie and others on these Benches are fair in assessing the Government's economic record and whether the policies and approach of the Labour Government would be better.

The noble Lord, Lord Harris of High Cross, was more generous than the noble Lords, Lord Prior, Lord Lawson and others on the Benches Opposite, in his acceptance of the Labour's Party's integrity and good faith in its advocacy of a market economy and the consequential framework of policies. I am sorry if the noble Lord, Lord Harris, misses the fun of educating all shades of politicians on the virtues of the market. I hope that he will in retirement come more often to the meetings of the Institute of Public Policy Research and the Social Market Foundation—the think tanks that my noble friend Lord Eatwell and I have respectively played a part in founding—where the next generation of such debates now takes place.

I admire, enjoy and value the views of my noble friend Lord Desai and all my noble friends, even when I do not entirely agree with them or even understand them. The noble Lord, Lord Lawson, knows perfectly well that the noble Lord, Lord Desai, speaks from a more prominent position from behind me because of his irrepressible individuality, and that the similarly distinguished economic credentials of my noble friend Lord Eatwell, along with my own experience (setting false modesty aside) of 22 years as an investment banker and businessman, bestow adequate credibility on our Front Bench in these areas of debate.

There is a fundamental commitment going from my right honourable friend the Leader of the Opposition through every level of the Labour Party to a market economy, and it is one that I have every confidence will be seen very clearly in years to come as different and better than that over which the Conservative Government have presided. The noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe of Aberavon, may feel uncomfortable at my noble friend Lord Eatwell's dissection of their trial-and-error approach to economic management during the 1980s, but they cannot cover up the facts by pretending that my noble friend Lord Eatwell and I are International Socialist Party entryists to the Labour Party or (in the words of the noble Lord, Lord Prior) miscreants gone straight who will return to our misguided ways on the 2nd May this year or, for that matter, any year hereafter.

The noble Lord, Lord Lawson, suggested that we had to understand what the Conservative Government had achieved before we—or more relevantly, in the case of economic policy in particular, our colleagues in another place—were fit to govern. I find this concept of pre-qualification to form a future government, based on a satisfactory appreciation of the incumbent's achievements, a novel constitutional innovation, but I shall put it down to the desire of the Conservatives to find at least some initiatives in this area where otherwise they seem uncritically to advocate the status quo—perhaps timed to steal the thunder of the very welcome constitutional package announced today by the combined Opposition Benches.

Of course there have been some improvements in the economic framework of the United Kingdom in the past 18 years, particularly in the area of supply side reforms which were referred to in particular by the noble Lord, Lord Harris of High Cross; it would be an achievement even beyond the grasp of the Benches opposite to have used those 18 years, the £60 billion of North Sea oil tax revenues and similar levels of privatisation proceeds to absolutely no avail. It would be churlish not to recognise even that the Government could take some credit for initiatives in this area. Even my noble friend Lord Eatwell might have done so had he not been limited to a speech two minutes shorter than mine. Nonetheless, your Lordships' House would be in danger of equal and opposite generosity in seeing these changes as deriving solely and exclusively from the actions of the Conservative Government.

As Samuel Brittan has highlighted, the former head of economics at the OECD, David Henderson, has traced the general movement of western governments in a market-oriented direction from the late 1970s onwards, but not with any consistent association with Conservative governments, given the changes in this period in countries such as Australia, New Zealand, Spain, Sweden and even France.

Like Napoleon's generals, successful politicians are lucky, and perhaps they also identify early the trends running through global economic and social developments and hitch themselves and their party to that moving wagon. Despite the more extravagant claims of certain members of the party opposite, whose rewriting of history concerning privatisation, for instance (which was barely mentioned in its 1979 election manifesto) deserves the Booker prize for fiction, the Conservative Government did not single-handedly move the world away from collectivism; nor have these Benches played anything other than a constructively critical role.

Those supply side achievements have nonetheless been against the background of the unparalleled volatility and instability to which my noble friend Lord Eatwell referred, and so strikingly expounded by the Lloyds Bank Review. The noble Lord, Lord Kingsdown, referred to the period when, as governor of the Bank of England and with the noble Lord, Lord Lawson, as Chancellor, the sterling exchange rate fell to near parity with the US dollar. Since that occurred at a time when the tax revenues from North Sea oil were close to their peak of £14 billion in a single year, your Lordships will, I suspect, recognise the extent to which the Conservative Government's economic policies have been based, as I have already said, on trial and error.

In his newly adopted role as an international bond salesman, the noble Lord, Lord Kingsdown, expressed surprise that government bond yields were up to 2 per cent. higher in the UK than in Germany, despite the strength of the currency. Surely it is perfectly clear that it is the other way around: the current exchange rate is uncomfortably and damagingly high for all exporting industries, except, I suppose, sterling bond trading firms, precisely because of that interest rate premium which is attracting high levels of inward portfolio investment to the UK. There is a real economic and social cost to that: jobs lost unnecessarily and painfully, of which my noble friend Lord Eatwell has already given examples.

Over the past 18 years, the Government have combined those selective achievements with debilitating instability and inadequate investment, both in the physical stock of industry and the nation's infrastructure, but also, and even more damagingly, in the education of the next generations of our workforce. As my noble friend Lord Borrie spelled out, the Conservative Government included in their last two election manifestos commitments to the much needed reform of competition policy and law—action which is central to the achievement of sustainable, non-inflationary growth, and yet no legislation has been introduced.

There need be no doubt that there is much that a Labour Government can do which this Government have ignored or neglected; the country need have no fear that the coming choice is not a real one and a vital one. Education, investment, a constructive but critical attitude towards the EU and EMU can be combined with non-inflationary growth and economic stability, and will be if a Labour Government are elected in two months' time.

7.24 p.m.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)

My Lords, as I have said in your Lordships' House on a number of occasions at the end of a Wednesday debate, this has been a particularly interesting debate. But I believe that this one wins the prize. All of your Lordships who have sat through the debate, as I have done, will agree with me. We have had a number of splendid contributions. The only thing upon which I will agree with the noble Viscount, Lord Chandos, is that it is extremely difficult to sum them up and encompass every one of those contributions. My difficulty is even greater than that of the noble Viscount, because I have listened to all of the speakers in the debate.

Before I come to some of the impressive speeches, I should like to start with the opening speech of the noble Lord, Lord Eatwell. The noble Lord, I thought, was going to give me an introduction to what a Labour Government might do. So I took out my pen. I prepared a piece of paper. I waited, and I waited, and I waited. At the end of the 12 minutes, the paper was blank. Because he did not tell me anything a Labour Government might do if they were to win an election in a few weeks' time. I did learn a few things. He did not like the high rate of sterling. He went on at some length about that. He did not tell me what might he done about that; how we might get it down; what steps we might take. He did not tell me whether we should take any steps to get it down. He did not like the growth in consumption, but he did not tell me whether he wanted to do something to reverse the growth in consumption, although I suspect that the election of a Labour Government might reverse it pretty smartly without anything else happening. But that is beside the point. That is history being repeated, I should think.

The noble Lord went on a bit about instability in employment. I wonder about that, and want to take it up because it is one of the little fictions that is being pushed around by the Labour Party at present. Yes, I did say a fiction. Widespread job insecurity was a myth. Those are not my words, my Lords, but those printed in Friday's edition of the Daily Mail. They referred to Mr. Frank Field, Labour's very respected spokesman and expert on social security. Mr. Field said that he condemned the doom and gloom analysis of the employment market, supported by his party's leadership. He would have had a pretty troubled afternoon listening to the noble Lord, Lord Eatwell. Mr. Field said that insecurity was no worse than it had ever been. The interesting thing to back that up is that if one looks at part-time and full-time jobs—both have risen significantly since 1992—all the surveys show that 85 per cent. of people with part-time jobs want part-time jobs. As for job insecurity (temporary jobs) in one of my idle moments while reading Social Trends, I came across table 4.11 in the labour market chapter on the percentage of employees with temporary jobs and making an EU comparison.

Your Lordships will be forgiven for thinking that we were in the lead in that table. Our total figure in the UK for males and females in temporary jobs is 7 per cent. In Germany it is 10 per cent., France 12 per cent., Sweden 12 per cent., Finland 16 per cent., Spain 35 per cent., and the EU average is 11 per cent. That is not quite the picture that the noble Lord, Lord Eatwell, was painting. Indeed, anything positive waited until the end. At the end, we had five sound bites from the collective book of sound bites from the Leader of the Opposition but they did not add up to a policy on a single issue.

When my noble friend Lord Prior introduced the debate, he reminded us of the late 1970s. I had almost forgotten the trade union anarchy, the winter of discontent, and, indeed, discontent in the Cabinet of those days, as the noble Lord, Lord Barnett, struggled manfully, as is explained in his interesting book, to contain public spending and the desires of all his colleagues, as my noble friend Lord Stewartby said, to push up public spending.

Indeed, my noble friend Lord Prior reminded us that learned newspapers and journals were asking whether the UK was ungovernable. It was not. It just needed a change of government. What do they say to us now? It is time for a change! Back to that? Back to 1979? Some change! Anyone who wants a change back to that must have forgotten all we learnt in those dreary days in the late 1970s.

In his interesting speech my noble friend Lord Lawson agreed with the noble Lord, Lord Ezra, about the need for caution in watching economic growth, inflation and so forth. He mentioned in particular, unfunded pensions, as indeed did my noble friend Lord Clanwilliam who has taken part in a number of debates on that issue. One of the great advantages we have in this country is that we have £650 billion of funded pension provision—more than the rest of the EU put together.

This morning, my right honourable friend Peter Lilley and the Prime Minister announced a policy which will bring for future generations the same strength of funding to the basic pension and to the SERPS equivalent. We will move away from the dangerous pay-as-you-go systems which we have tried to follow in the past.

The noble Lord, Lord Barnett, always makes an interesting speech. He was open in saying that there might be a need for higher taxes if a future Labour Government are to do what they want. In his usual extremely interesting speech, the noble Lord, Lord Desai, suggested a somewhat similar conclusion. The Labour Party is going to put up taxes, together with their Liberal Democrat friends, as my noble friend Lord Nickson explained. However, those who live in England will be fortunate enough to avoid one of their new taxes; the one to which they are pledged. Those of us who are unfortunate enough to live in Scotland will be paying 3 pence in the pound or even more. As my noble friend Lord Nickson said, in Scotland old Labour reigns supreme. Every newspaper in Scotland carries story after story of the demand from local politicians for more spending, regardless of the consequences. Therefore, the party is not reconstructed, and a weekend in Scotland will show any of your Lordships who doubt that that is the case.

The noble Lord, Lord Ezra, mentioned privatisation. I agree with him that not all the management in nationalised industries were bad. Indeed, many were very good, as they proved when their industries became privatised. The noble Lord should have asked why they were not good in the nationalised industries. As he said, it was because of Government intervention and interference, not the market. They were transformed by privatisation and I hope the noble Lord does not believe that we should return to that.

Lord Ezra

My Lords, indeed, no.

Lord Mackay of Ardbrecknish

My Lords, I am delighted to hear that.

The noble Lord, Lord Kingsdown, made an interesting speech. He answered the question, "Is it sustainable?", asked by the noble Lord, Lord Ezra. The noble Lord tends to ask me that question a great deal, so I am grateful to have an answer from the noble Lord, Lord Kingsdown, to which I shall refer the next time that the noble Lord, Lord Ezra, asks me.

The noble Lord, Lord Kingsdown, was interested in the independence of the Bank of England and my noble friend Lord Lawson and my noble and learned friend Lord Howe indicated that they approved of that. However, my noble and learned friend Lord Howe said that it is easier for former Chancellors to approve of the independence of the Bank of England than it is for still serving Chancellors. That is probably right.

My noble and learned friend Lord Howe talked about government spending and tax rates. He welcomed the fact that the Labour Party is saying that our spending plans for the next two years and the tax rates that were fixed are right. The noble Lord, Lord Borne, did not appear to believe that the figures were right. He appeared to be asking for more government spending; a great deal more than his friend Mr. Gordon Brown believes he would be able to agree to if he were ever to move into Number 11.

The changes that we have made, which were explained by the noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe, who are distinguished former Chancellors, have been remarkable during the past 18 years. The private finance initiative, for example, is changing the way in which we look at public spending. I wonder whether the Labour Party would continue it if they were to win. One has only to sit in your Lordships' House to know that the party opposite does not like privatisation. Every single Question Time my noble friend Lord Goschen has to come to the Dispatch Box and remind it that in the halcyon days of nationalised railways trains did not always run on time; trains were not always clean; staff were not always polite; and the whole system did not always run brilliantly. To listen to Members opposite one would believe that it did.

The last speech that I wish to mention in particular before I make one or two points of my own is that of my noble friend Lord Blyth of Rowington, who is a distinguished businessman. He made many interesting comments, but one of the most interesting was a quotation from his German business friends. He said, "They admire our success and they envy our freedom of action". No one should doubt that our economy has been transformed over the past 18 years. Indeed, the noble Lord, Lord Barnett, said that the economy is doing well. He went on to say that no one can dispute that, but I am sorry to tell him that someone can; his noble friends Lords Eatwell and Lord Chandos. And they did, as usual.

I shall quote not only the noble Lord, Lord Barnett. The IMF stated in its latest report on the UK economy: Recent economic performance has been enviable. and, The strong overall performance is a product of sound economic policies. The OECD is also an admirer of the UK's recent economic performance. It recently stated: Prospects for achieving sustained output growth and low inflation are the best in 30 years". My noble friend Lord Lawson quoted from the Economist. The noble Lord, Lord Hams of High Cross, quoted from what in my view was unlikely reading material for him; that produced by the European Commission on exactly the same lines about the success of the British economy.

As a number of your Lordships mentioned, during the past 18 years the Government have been determined to bring inflation down and to keep it down. My noble friend Lord Caithness made an interesting speech on how we might continue to do that. Returning to what was said by my noble friend Lord Prior in his opening speech, we saw only too clearly in 1979 that the high inflation of the 1970s, with prices rising at an average of 13 per cent. a year, was bad for Britain. It was distorting economic decisions, it meant that Britain was always struggling to maintain its competitiveness, and it was robbing pensioners of their hard earned savings.

The Government have succeeded in their role in turning the UK into a low inflation economy. Since the previous election in 1992, underlying inflation has averaged just 2.5 per cent. That achievement has been no accident. Our recent success in keeping inflation down at the same time as the economy has been recovering has been due to the UK's new monetary framework in place since 1992. To quote the IMF: The inflation targeting framework for monetary policy has delivered impressive results". That is endorsement indeed. Thanks to the sound anti-inflationary policies of this Government, the daily economic decisions of people and business all around the country can be made on the basis that low inflation is here to stay. Low inflation is now a way of life in Britain. The noble Lord, Lord Kingsdown, suggested that we might still have to persuade the people whom he called the vigilantes—the bond market—that that was the case. He made a valid point. We must all continue our determination to keep inflation low and never lower our guard against the danger that it can so easily creep up on us again unawares.

I turn to the public finances. We have consistently pursued sound public finances; smaller government, lower taxation. By combining low taxation, low public spending and low debt we are now in a position that is just as good as any in Europe—and better. We intend to maintain this enviable position and we can do that only if we continue to bear down on public spending.

In the 1980s across the rest of Europe the state remorselessly took an ever greater share of the nation's output. The average level of public spending in the European Union rose from 44 per cent. of GDP in 1979 to around 50 per cent. today. Only we in Britain held the line. We privatised loss making nationalised industries. I must say that the noble Viscount, Lord Chandos, amused me when he suggested that his party had co-operated. It resisted every single one of the moves such as privatisation. We cut back on government subsidies and it resisted every single move. We curbed the growth in social security spending. I know that I receive no support from either of the parties opposite when I suggest that we might contain government spending on social security. We bore down on the waste in public services. The proportion of GDP spent by the state in this country is now 8 per cent. lower than the average in the rest of the European Union. If our spending had risen to their levels—in other words, if we had not maintained our vigilance on this front—we would now be having to raise nearly £2,300 a year more in tax from every British household—

Lord Eatwell

My Lords, would the noble Lord agree that the proportion of public spending in GDP today is higher than the level inherited from the last Labour Government?

Lord Mackay of Ardbrecknish

My Lords, is that the best that the noble Lord, Lord Eatwell, can do for an intervention? I rather hoped that he would tell us what the Labour Party is proposing to do.

When we took over from the last Labour Government, thanks to the major efforts of the noble Lord, Lord Barnett, they had managed to do that. But they left us with very considerable borrowing and a great many wage rises in the pipeline which we then had to honour. My noble and learned friend had to find the money for that. However, the important fact is that other countries in Europe are way ahead of us in what they spend as a percentage of their GDP in the public sector. I welcome any conversion from the party opposite to keeping that down. But when I come to your Lordships' House with proposals to keep social security under control, I do not receive much support from any noble Lords on the Benches Opposite. Perhaps if the noble Lord, Lord Eatwell, were a spokesman for social security matters, I should find it a good deal easier to take our proposals through your Lordships' House. Perhaps I may suggest that as a useful transfer after the next election.

We have said that it is our goal to reduce the share of national income which goes on public spending to 40 per cent. and below. This year, we shall meet our immediate target and reduce it to 40 per cent. In the next parliament, we intend to reduce it a great deal further.

I believe that in the area of public finance, there is a considerable difference between the Government and the party opposite. It is our belief that the state should withdraw from activities which are best left to the private sector. Everything that is said by noble Lords opposite about, for example, the railways leads me to believe that they do not share my view. They instinctively distrust the private sector. If noble Lords opposite do not believe me, I invite them to spend a weekend in Scotland to see the real Labour Party on the ground, at local level. Not just in Scotland but up and down the country Labour local authorities want to spend more money. Without exception, that is what they want to do.

In addition to reducing the state's involvement in the nation's affairs, we are also set apart from many of our European competitors by our vision that we should make this country uniquely competitive and make it an enterprise economy right at the heart of Europe. That vision is rapidly becoming a reality. Over the last complete international cycle, from 1982 to 1993, Japan was the only G7 country to enjoy faster growth of GDP per head than Britain. Since 1993, we have had faster growth of GDP per head than any other G7 country.

Britain is the number one destination for inward investment into Europe. As my noble friend Lord Prior said at the beginning of the debate, inward investment is responsible for more than 850,000 jobs since 1979. According to OECD figures, the UK has attracted as much inward investment as have Germany, France and Italy put together since 1990.

Some doubt was expressed about that. Instead of quoting statistics, I shall give a few examples. Hyundai in Scotland has created 2,000 jobs—investment worth £2.4 billion. These are real projects. LG in Wales has created 6,100 jobs—investment worth £1.7 billion. There is Toyota in the East Midlands and Samsung in the West Midlands. I could go on. There are many examples in Scotland which I can see with my own eyes. Factories are being built and new jobs are being created. Indeed, at Mossend in North Lanarkshire, close to what was the Ravenscraig steel works, manufacturing plants are being built which will bring more jobs to that areas than were lost when the steel works closed. That is the reality. As my noble friend Lord Brabazon of Tara said, not only is it inward investment from the rest of the world but it is inward investment from other parts of the Union; for example, we are the number one destination for German overseas investment. My noble friend mentioned Siemens coming to the north east of England with £1.8 billion and 1,800 jobs.

It is not just inward investment. It is also home-grown firms which have been successful. My noble friend Lord Prior exhibits that in the work that he does. In 1996, GEC reported another record year. My noble friend Lord Blyth of Rowington, from where he sits, can see also that his company presented very good results recently.

Indeed, that reminded me, thinking about the pharmaceutical industry, that the pharmaceutical and chemical industries have helped the UK to have a trade surplus in 1995 of £2.3 billion and £3.9 billion in their products. We are Europe's biggest exporters of computers, televisions and microchips. Our share of European exports in those products is 24.6 per cent., 22.4 per cent. and 27.7 per cent. respectively. The noble Lord, Lord Monkswell, was concerned about car production. Car production in this country is at its highest level since 1973. As my noble friend Lord Prior said, only today there has been an announcement from a privatised rail company for an order for 44 trains worth £200 million to be placed in Derby.

All those successes show that in our country, inward investors and home-grown companies are doing well. They are doing well because of the policies that we have outlined and fought for. First, there is the UK's flexible labour market. The OECD said in its most recent survey of the UK economy that the UK is one of the least-regulated labour markets of any industrialised country; and, secondly, the UK has one of the most competitive business tax regimes in the G7. Taxes on business in the UK are lower than those in any other major European country. We have the lowest main rate of corporation tax in G7, a point underlined by my noble friend Lord Stewartby. Thirdly, we have the lowest non-wage labour costs in the UK. Seldom has the climate been better than it is now for inward investment, for growth in this country and for a rise in employment.

I wish to look at the employment statistics across Europe. I have made these comparisons before and I should say that I make them using the Eurostat figures based on the ILO measurements, before the noble Lord, Lord Bruce of Donington, jumps to his feet. The figure that I have for this country is 7.5 per cent. while it is 9.3 per cent. in Germany, 12.5 per cent. in France, 12.2 per cent. in Italy and 22.3 per cent. in Spain.

The noble Lord, Lord Taverne, discussed youth unemployment. In that respect, the Germans do better than us and we need to learn from them. The figure for Germany is 9.8 per cent. while we are at 13.1 per cent. But we are dwarfed by the French figure of 29 per cent., the Italian figure of 33.6 per cent. and the Spanish figure of 42.9 per cent.

My noble friend Lord Astor of Hever and other noble Lords mentioned non-wage labour costs. I believe that they are relevant. I remind your Lordships what they are. For every £100 of wages in the United Kingdom, it costs an employer another £15 to employ somebody. That figure is £31 for Germany, £33 for Spain, £41 for France and £44 for Italy. I suggest that there is some connection between those high non-wage labour costs and the high and rising unemployment of our Continental friends.

Needless to say, I could go on for some considerable time extolling the virtues of the British economy because I believe that it is right and proper that you should stand up for your country and explain to noble Lords opposite exactly what is going right. However, I wish to leave with your Lordships one further quotation about deregulated labour markets. I do that in order not to miss out the noble Lord, Lord Currie, from my summing up speech. I read with huge interest in a report from the Economist Intelligence Unit recently an article that he wrote about EMU. He said: EMU could hinder business: for instance, by encouraging Europe-wide comparisons in wage negotiations, or by promoting further social legislation as part of a broader trend towards federalism. These dangers need to be guarded against". We intend to guard against them.

What has been achieved, my Lords? Since the current international economic cycle began in 1993, we have enjoyed the fastest growth in GDP per head than any country of G7. Unemployment has fallen continuously over the past four years and now stands at 1.2 million below its peak. New jobs have been created; indeed, 900,000 extra ones since the recovery began. Moreover, we are experiencing the longest run of low inflation for almost half a century. In recent years, we have seen some of the lowest numbers of working days lost due to strikes since records began in 1881, and government borrowing has been restored to a clear downward path, thus allowing us to cut the basic rate of income tax to its lowest level for 60 years. Healthy growth; low inflation; falling unemployment; current account in broad balance; public borrowing shrinking; and living standards rising. That is some record: why change it?

7.50 p.m.

Lord Prior

My Lords, I think we might say that we have had a pretty good debate this afternoon. I should like to thank all noble Lords who took part. I do not suppose that the press or the media will care two hoots about it, but I believe that it has been an important debate. Indeed, many useful comments were made. If I may say so, I particularly liked the speeches made by the noble Lords, Lord Barnett and Lord Desai. I felt that they exposed the need for their side to reconcile their urge to spend more with their master's view that there can be no increase in taxation or spending. I believe that they have a real dilemma in that respect.

However, the dilemma for us is that we have a strong economy and, when we say so, we are regarded as being smug. Well, we also have a lot to do and I hope that we will get on and do it. But, generally speaking, I hope that the press will pay some attention to today's debate. Again, I should like to thank all those who took part in it. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.