§ The Chancellor of the Exchequer (Mr. Anthony Barber)
With permission, I should like to make a statement.
Despite the continuing surplus in the balance of payments, sterling has been under increasing pressure for some days, both in London and in overseas markets. As the House is aware, an announcement was made this morning that dealings in sterling will not necessarily be confined within specific limits: that is to say that, as a temporary measure, sterling will be 878 allowed to float. The London foreign exchange market will be closed today and Monday in order to provide for an orderly transition to the new arrangements.
A number of sterling area countries no longer link their currencies to sterling. With a floating £ there could be a speculative outflow from the United Kingdom to these countries. Pending consultation with the Governments concerned, we have taken immediate temporary measures applying exchange control to transactions with the Sterling Area. The details are being announced by the Bank of England.
The immediate cause of this decision has been the weight of international short-term capital movements, which have proceeded despite concerted intervention by the Bank of England and other European central banks. There was nothing in the objective facts of our balance of payments position or the level of our reserves to justify these movements. The trade balance has deteriorated in recent months: but this was from an exceptionally and unusually favourable position and was foreseen in my Budget speech. Our invisible earnings continue at a high rate and, while the full figures are not yet available, there seems little reason to doubt that we remained in current surplus during the second quarter. Looking ahead, there are prospects of an upturn in world trade which should have a beneficial effect on our exports.
But it is a fact that short-term movements developed with consequent loss to the reserves. If this had continued at the rate of the last few days, we might have found that in due course our reserves had been greatly diminished in response to this pressure. I was determined that we should not revert to that situation or allow ourselves to slide into a situation where we would have to borrow substantial sums. It was therefore necessary to act decisively.
One of the underlying causes of this situation has undoubtedly been the concern about inflation. In my Budget speech I warned thatThere can be no soft options if we fail to get a grip on ever-rising costs".—[OFFICIAL REPORT, 21S March, 1972; Vol. 833. c. 1354.]To curb inflation remains our first priority.
879 We have set our national economy on the path of a 5 per cent. rate of expansion—more than twice as fast as the rate we have achieved over the past decade. Recent statistics, especially those showing the very big reduction in unemployment, confirm that we are well on course.
There is still room in the economy for considerable further development without straining either capacity or the labour force, or pressing on demand. The general growth in exports will not therefore be impeded by limitations on capacity and, unlike some previous occasions, it is not necessary, or indeed desirable, to introduce restrictive measures.
§ Mr. Healey
The House will recognise that that is a very serious statement, but given the trend of inflation—the country will be grateful to the right hon. Gentleman for identifying that as the main factor which has made this step necessary—and the trend of the balance of payments, I doubt whether there was a better expedient available in the short term. But the House and the world will know that whether or not this measure helps in the long term will depend upon what is done about inflation between now and a return to fixed parity.
How long will it be before the Chancellor tells us of a new packet of measures for dealing with inflation? It will be, I think, his fifth Budget in his first two years of office.
Secondly, does the right hon. Gentleman recognise that he must do something quickly if he is to restore confidence either at home or abroad, because the whole of his policy is now in ruins? In particular, I am sure he will be aware that the combination of an effective devaluation with the hoped for and long delayed upswing in our economy will raise some important questions about the policy of money supply.
Thirdly, does the right hon. Gentleman recognise that a pre-condition for any progress in dealing with the problem of inflation is a total reversal of the Government's attitude towards the trade unions—an attitude of which the right hon. Gentleman himself has been a foremost protagonist? Is he aware that the CBI has shown the way to a more sensible policy? Will he now follow 880 it? Will he put the Industrial Relations Act on ice, because he will be aware that it was Sir John Donaldson's action 10 days ago which sparked off the first tremendous wave of speculation against sterling, which caused the central banks to pour money into its support exactly a week ago today?
In particular, will the right hon. Gentleman take immediate action on prices and the cost of living? Will he do something to reduce the dizzy rise in the cost of food, guarantee now to withdraw the Housing Finance Bill, which will increase council rents again next October, withdraw his proposals for the inflationary and outrageously distorting value added tax, and stop the profiteering in land and houses which he himself criticised on Monday? Will he also drop the proposal for an 18 per cent, rise for the highest paid public servants, which I understand it had been his intention to announce today?
§ Mr. Barber
I am grateful to the right hon. Gentleman for saying that in his view the action we have taken is appropriate in the present circumstances. He is right in saying that our first priority is to defeat inflation. I believe that it is the fears of inflation which have been the primary cause of the problem we have been facing recently. The right hon. Gentleman asked about money supply. He will have noticed that yesterday Bank Rate was increased. This action was taken in part because we do not wish the increase in money supply to proceed at a rate which would itself add to other inflationary pressures.
The right hon. Gentleman asked about the CBI and its proposals. Probably it would be as well if I did not comment on them at this time, but I think it right that I should tell the House that I have asked Mr. Campbell Adamson and Mr. Victor Feather to come and see me this afternoon. The right hon. Gentleman also asked me about the Industrial Relations Act and the value added tax and whether these and certain other Measures should not be dropped. I can only tell him that there is no question of putting the Industrial Relations Act on ice and that there is no question of dropping the value added tax.
Finally, if I may say so—and I would be prepared to elaborate on this if the 881 right hon. Gentleman wishes to pursue it—I do not think that it is up to him to talk about confidence.
§ Mr. Ridsdale
While welcoming the immediate measures, may I ask what further measures are being taken to reinforce my right hon. Friend's voluntary prices and incomes policy, and particularly for protecting those on small fixed incomes, and if possible to establish a powerful prices and incomes board on the lines of that established by President Nixon?
§ Mr. Barber
My right hon. Friend the Prime Minister is engaged at the present time in talks with the TUC and the CBI and there are also the talks I shall be having this afternoon, although these will be related, naturally, directly to the decision I have announced this morning.
My hon. Friend is right in making it clear that the people who suffer from inflation in the main are not those with powerful trade unions behind them but the poorer sections of our community.
§ Mr. Roy Jenkins
Is the right hon. Gentleman aware that this has been a remarkable development within a very short period, and a development for which he must bear a substantial share of the responsibility? Last December, in the Smithsonian agreement, although warned against it at the time from this side of the House, he accepted an unrealistically high rate for sterling. In his Budget speech, he announced that he might devalue, just as the trade figures were beginning to deteriorate. It has been a remarkable feat of organisation to produce an almost unprecedented speculative crisis within six months of the biggest balance of payments surplus we have ever had.
The basic question now is how the right hon. Gentleman now sees the whole position after the two wasted years of a massive balance of payments surplus which has now gone. What does he propose to deal with the much more difficult position now confronting him? Finally, will he arrange with the Leader of the House an urgent debate on the Government's economic mishandling?
§ Mr. Barber
The question of a debate is a matter for my right hon. Friend the 882 Leader of the House for consideration through the usual channels.
The statement I made in my Budget speech, to which the right hon. Gentleman referred, was fully consistent with the action which has now been taken. I can explain why it was not the cause. The fact of the matter is—and it is right that I should state this to the House—that until last Friday, months after March, sterling had been steady, there had been no pressure on it and there had been no outflow. The outflow started last Friday.
The right hon. Gentleman considers that in some way we have frittered away all our opportunities of the past two years. The facts of the matter are that our economic situation is strong, that unemployment is coming down, that production and retail sales are rising, and that our economy is expanding—if I may say so, with great respect to the right hon. Gentleman, at a rate very much faster than he or his predecessor ever achieved. I believe that this is what in due course will bring real prosperity to the British people.
§ Mr. Maxwell-Hyslop
Will my right hon. Friend bear in mind that the greatest single factor in making a prices and incomes policy unworkable was the foolish decision of my right hon. Friend the Prime Minister to abolish resale maintenance some years ago, since without resale price maintenance a prices and incomes policy is unworkable by any Government? Will my right hon. Friend therefore press the Prime Minister to repeal the Resale Prices Act so that a prices and incomes policy can be workable by the Government of the day, whatever complexion they may have?
§ Mr. Barber
I hope my hon. Friend will not think that I am being unkind if I tell him that I do not believe that the decision taken by my right hon. Friend the Prime Minister almost 10 years ago and supported by the Conservative Government of the day bears very much relevance to the problems we have to face now.
§ Mr. Pardoe
May I refresh the right hon. Gentleman's memory by asking him to look at HANSARD of 20th December, 1971, which recorded the exchanges when the decision on the fixed parity was 883 announced? Will he bear in mind that at the time I condemned it as an act of economic madness, although it was welcomed from the Labour Front Bench? Will he look again at my letter of 22nd December, 1971, in which I told him that the present situation would happen and advocated that we should stay floating, that we should float with the crawling peg? Is he aware that the suggestion in his statement today that this is a temporary measure is entirely mistaken in that it should be a permanent measure and that we could have stability with it through the crawling peg?
§ Mr. Hugh Fraser
I congratulate my right hon. Friend on an action which is realistic and which is prompt and which, considering the unused capacity in the country still, is the best thing which could possibly have happened.
§ Mr. Loughlin
Leaving aside the miserable excuses which the right hon. Gentleman has made this morning, is it not true that the present position in which the Government find themselves reflects the grave mismanagement of the economy of this country, and is it not also true that this is in effect devaluation? Can the right hon. Gentleman tell me what steps he is prepared to take to safeguard the pensioners of this country and the lower-paid workers in consequence of this decision?
§ Mr. Barber
I would say that the answer to the first two questions by the hon. Gentleman is "No". With regard to his third point, the answer is, quite shortly, that if we can achieve a little more support from hon. Members opposite in dealing with excessive wage claims that would be by far and away the most effective way of safeguarding pensioners and others on small fixed incomes.
§ Mr. Tapsell
While fully supporting my right hon. Friend in his decision to float the £ in present circumstances and congratulating him upon the speed with which he has moved, in marked contrast to the way this matter was handled in 1967, may I ask him, in his conversations with the CBI and TUC this afternoon, to draw to their attention the fact that when President Nixon in effect floated 884 the dollar on 15th August last year he saw it as part of a broad package of measures including a short freeze on prices and wages? If that was necessary in as strong an economy and as robustly a free-enterprise economy as that of the United States, is it not something we should do here?
§ Mr. Barber
The situation in the United States was, of course, in several respects, quite different from our own. As for the suggestion about a freeze, I think, in the interests of brevity, I would only say that my right hon. Friend the Prime Minister and I within the last week or so have clearly expressed the view of the Government on this subject.
§ Mr. Eadie
However the right hon. Gentleman may try to present this decision of the Government, it is a defeat for the Government, and it is a defeat for the people of this country. Since the Chancellor seems to be little concerned about the level of unemployment by saying that he is hoping that it is coming down, will he do something, for example, about imports? Is he aware that we are importing 3 million tons of coal into this country and that this month there will be unemployed miners in Scotland? Will he do something immediately on the question of imports of coal and oil to try to assist the British people out of the defeat which they have suffered this morning because of his Government?
§ Mr. Barber
I appreciate what the hon. Gentleman says about unemployment. He will note that it has been one of our main objects for a long time now to get down the level of unemployment. He will note that I have said quite frankly to the House in the past that the extent to which it was coming down and the timing of it surprised me because I believed that our measures would have worked earlier. We then took additional measures and I think that both sides of the House will agree that on the last two occasions we have had not a record fall in absolute terms but certainly a very much bigger fall in unemployment than might otherwise have been expected. It is still too high, and I hope that the measures we have taken will ensure that it will fall further.
§ Mr. Geoffrey Finsberg
Will my right hon. Friend accept that many of us on this side welcome his further victory over the officials in the Treasury, and that 885 some of us wish that the floating of the £ had come earlier? I trust that he will not go back to a fixed £ too quickly. Can he say what par the thinks the wicked remarks of the right hon. Gentleman the Member for Leeds, East (Mr. Healey) on the subject of sterling has had on this, in sharp contrast to the statesmanlike remarks we used to get from the right hon. Member for Birmingham. Stechford (Mr. Roy Jenkins)?
§ Mr. Barber
I can assure my hon. Friend on the first point—and I can say this with absolute sincerity—that there was no difference of any kind between my principal advisers in the Treasury and myself on what was the appropriate action to take. I think it is, perhaps, right that I should say this.
As for the remarks of the right hon. Member for Leeds, East (Mr. Healey), I think, quite frankly, that the House and the country must judge. I will merely give the facts. The expert information which is received by successive Chancellors, as former Chancellors will know, about the markets, made it quite clear that the remarks of the right hon. Gentleman the Members for Leeds, East led to significant additional pressure on the £ and to a slide in the value of it. Those are the facts, and they speak for themselves, and any condemnation by me would be superfluous. I would only add this. It is inconceivable that such a comment would ever have been made by the right hon. Gentleman's predecessor, the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins).
§ Mr. Harold Wilson
Has not this remark come from the same right hon. Gentleman who knocked the trade figures three years ago even to the point of saying they had been cooked? Is that not what the right hon. Gentleman said?
Secondly, did he note that article in Le Monde, which we all read in The Times yesterday, and in which that very distinguished writer set out very clearly the feelings in the City and in Europe, and that that article was published on Monday afternoon in Europe and before my right hon. Friend spoke on Monday evening? Will the right hon. Gentleman recognise that the pressure on sterling was already heavily under way and owed nothing at all to my right hon. Friend's remarks?
886 Further, will the right hon. Gentleman compare the very grave situation he announced today with the speeches of his right hon. Friend the Prime Minister in the week of the General Election, when he set out to crab the performance of Britain when there was a record balance of payments surplus which he regarded as a disaster and the trade figure was about £20 million after one month, not merely £50 million after four months? Would he justify those statements by his right hon. Friend?
Further, will the Chancellor tell us how far what he has announced today is in breach of the undertaking he entered into with the European Community countries just a few weeks ago? Will he tell us, if this leads to a fall in the value of sterling, what will be the additional cost of the commitments entered into in connection with the Treaty of Rome—because of levies and other things? What effect will it have on prices?
Finally, will he reinforce the demand for a debate which the House is entitled to have in this situation? Even though it does not mean devaluation, this is the first time since 1931 that the £ has been floated unilaterally in this way, and it is bound to cause great uncertainty to business men, industrialists and so on. Would he give an assurance that he will arrange for an early debate in Government time?
§ Mr. Barber
Arrangement of a debate is a matter for my right hon. Friend through the usual channels. I am sure my right hon. Friend will have noted the request by the Leader of the Opposition.
As to his point about agreement with the EEC, and the new arrangement for narrower margins, the position is that we have now withdrawn temporarily from that arrangement. The reasons for this are, I think, well understood. I would just say this in answer to the specific point the right hon. Gentleman raised. The Margin scheme was never intended to deal with an exceptional situation like this.
On his second point, and his remarks about what my right hon. Friend and others, including myself, said when we were in Opposition, I think that what the House ought to take note of is the respective actions and statements made by the then Opposition when the £ was under pressure when the right hon. Gentleman 887 was Prime Minister, and while the £ has been under pressure on this occasion.
It is clear, as my right hon. Friend the Prime Minister said the other day, that he repeatedly stood at the Opposition Dispatch Box prior to devaluation and made it clear, as he did in the country as well, and as was noted by most commentators at that time, that there was no rational justification for devaluation. When sterling was under pressure at that time I said nothing whatever which could have been in any way adverse to sterling.
The other point the right hon. Gentleman raised was to ask whether I had read an article in Le Monde, because he seemed to think that this showed that his right hon. Friend had nothing whatsoever to do with the extent of what has been happening over these days. I have given the House the substance of expert information received by successive Chancellors and which I have received. I have not myself read the article in Le Monde, but I have, of course, read the article in this morning's Daily Mirror by Mr. Woodrow Wyatt, who says,Unfortunately, foreigners do not understand, as we do, that Mr. Denis Healey knows little about finance and economics. So when, as Shadow Chancellor of the Exchequer, he put in his two pennyworth on Monday, he unwittingly did grave damage to the country".
§ Mr. Harold Wilson
The right hon. Gentleman is getting a bit hard up for authorities. After his rather lame defence of the Prime Minister, would he say whether the word "devaluation" occurred in the "at a stroke" statement in election week? Did he say that, with a £600 million surplus, within two years the £ would have to be devalued?
That disposes of the argument that the right hon. Gentleman has tried to use.
Has there been consultation with the European Governments before this action was announced this morning?
§ Mr. Barber
My right hon. Friend the Prime Minister dealt with that first question very satisfactorily the other day.
We are in touch with our European partners and with many other capitals throughout the world.