HC Deb 27 February 1964 vol 690 cc637-41
The Chancellor of the Exchequer (Mr. Reginald Maudling)

With your permission, Mr. Speaker, I should like to make a statement.

As the House is aware, the Bank of England has today, with my approval, raised Bank Rate from 4 per cent. to 5 per cent. Since Bank Rate was fixed at 4 per cent. on 3rd January, 1963, there has been a fairly widespread increase in short-term interest rates overseas. Today's change brings rates in this country more in line with what has happened in other countries.

The domestic situation is one of vigorous expansion, rising production and rising employment. Our object this year is to achieve a smooth transition from the present growth rate of 6 per cent., which is possible while we are taking up slack in the economy, to a long-term growth rate of 4 per cent. The increase in Bank Rate will make its contribution to this transition and help to strengthen the prospects of future progress.

Mr. Callaghan

The House will find it all the more difficult now to understand the relevance of the Prime Minister's speeches to the facts of the situation. Do I understand that the purpose of the Chancellor's move is to prevent an outflow of funds from this country? If that is so, since it is bound to result in increased charges for housing and will put handicaps in the way of public authorities and industries which are modernising themselves, has the Chancellor any proposals at all for insulating the domestic economy from the effects of the Bank Rate?

If he has not, how does the right hon. Gentleman proposes to carry on what he says he wants, namely, expansion of the economy? Is he aware that, to put in the way he does the contrast between the domestic economy and the foreign situation, which has been deteriorating, is a classic recipe for disaster in the long run and, therefore, that he must take steps on the other side? Is it not astonishing that, after 12 years of Conservative Government, an eight-month boom can produce a situation in which we have the worst trade gap on record and an increase in Bank Rate?

Mr. Maudling

My right hon. Friend said the economy was strong, and the purpose of this move is to keep it so. The hon. Gentleman will understand that it is not the direct effect of the Bank Rate which determines the cost of borrowing for houses, but movements in the gilt-edged market, which, I am happy to say, has received this news very well. I think that it is well known to the hon. Gentleman that the best way to produce a stop in the economy is to try to go too fast. As he was criticising my Budget for being too cautious perhaps he will think again.

Sir H. d'Avigdor-Goldsmid

Is my right hon. Friend aware that the great majority of thinking people in this country—[HON. MEMBERS: "Oh."]—I repeat, thinking people, and quite irrespective of political considerations, will welcome my right hon. Friend's reaffirmation of the Government's determination to prevent dislocation of the economy through inflation? Is he also aware that the statement from the Bank of England that this move was not intended to attract funds from other countries has the merit that it does not involve us in a competitive race for "hot" money which none of us wishes to sec?

Mr. Maudling

I agree that this move will be appreciated and understood by those who wish to understand it.

Mr. Grimond

Is the right hon. Gentleman aware that on this side of the House there appears to be a growing similarity between him and his colleague the Leader of the House, except that today the Leader of the. House has appeared to be rather rosier?

Does not this move of checking the economy fall particularly hard on investment, which is not what the Chancellor wishes to check? Secondly, has he any remedy to suggest for this dilemma —that the rate of expansion which takes up unemployment in some regions of Britain leads to such a demand for employment in others as to lead to inflation? Has he any suggestions for righting this inbalance?

Mr. Maudling

Experience shows that it is not short-term interest rates which affect industry. The Radcliffe Committee showed that quite clearly.

In reply to the right hon. Gentleman's second question, we have taken massive measures—increasing public investment and giving increased capital grants and free depreciation for industry—to assist in ironing out this imbalance which, I agree, is a very important problem.

Mr. W. Clark

Does my right hon. Friend agree that the nation would be better served if Opposition speakers ceased trying to talk as though the country were in a financial crisis? Does he not agree that we could talk ourselves into a financial crisis, and that if the Opposition were more responsible, particularly about our overseas economy, they would not talk as though we were in a crisis?

Mr. Speaker

Order. The Chancellor of the Exchequer has many duties, but one of them is not to express in answer to questions views about the responsibility of the Opposition.

Mr. M. Stewart

What does the Chancellor expect to be the effect of his announcement on the finances of local authorities? Are the Government considering giving any help to local authorities for what will be an added burden?

Mr. Maudling

There are several factors. First, short-term money depends on how the bill rate moves and I do not expect it to rise by anything like the full 1 per cent. Medium and long-term money, which is the bulk of local authority borrowing, depends not on the Bank Rate, but on the level of the gilt-edged market. This had discounted a great deal of the change and, I am told, responded well. In the meantime, the new measures coming into force on April will be a good deal of help local authorities.

Sir C. Osborne

Was not a higher Bank Rate necessary because of a greater demand for capital than is in ready supply, which is due to the unusual expansion of the economy over the last six months? If that is so, what rate of internal savings will have to be achieved in order to supply the capital and allow the Bank Rate to come down again?

Mr. Maudling

The financing of the enormous programme of public expenditure in which we are now engrossed, and which the House welcomes, involves very large resources. The higher the amount of saving, the less that has to be collected in taxation.

Mr. Ross

Is the right hon. Gentleman aware of the dilemma that there are areas where, far from having gone too fast, expansion has hardly got off the ground? Is it right that he should suggest that this general remedy should be applied, affecting those areas before they have even started to share in the boom? What is he prepared to do about it?

Mr. Maudling

I have already explained the massive measures which we have taken in the last year, on top of others, to help in these areas. No part of the country will benefit from trying to run the economy on interest rates which are too low.

Mr. Gresham Cooke

Would my right hon. Friend agree that in a time of a rapidly expanding economy and rising prosperity it is better to make a small application of the brake now than to leave the matter completely uncontrolled when much more drastic meansures may have to be taken?

Mr. Maudling

That is precisely the point. Everyone knows that we cannot expect an expansion rate of 6 per cent. to continue indefinitely after we have taken up the slack in the economy. We want to change smoothly from this 6 per cent. to the long-term rate of 4 per cent., which is what N.E.D.C. agreed. That is what I am trying to do.

Mr. Jay

Does the right hon. Gentleman recall that the Bank Rate was raised by 1 per cent. on 25th February, 1955, when he was Economic Secretary to the Treasury? In view of the sequel that year, can he assure us that the economy is under better control now than it was then?

Mr. Maudling

History never repeats itself in quite the same way.

Several Hon. Members

rose—

Mr. Speaker

Order. No doubt we shall have an opportunity to debate these matters.