Import Prices and Wage Costs

HC Deb 27 April 1978 vol 948 cc1620-1

4. Mr. Arnold

asked the Chancellor of the Exchequer what formula he employs for determining the relationship between import prices and wage costs.

Mr. Joel Barnett

The formula is rather complex. It begins … "ERPR over ERPR to the power of minus one equals, Z square bracket 0.5 sigma Alpha 1, where I equals 0 to 2, bracket, PR over PR to the power of minus 4 minus one". It goes on a lot further. I therefore think it might be better if I refer the hon. Member to the publication "HM Treasury Macroeconomic Model Technical Manual 1977", a copy of which is available in the Library. The formula that he wants is set out on pages 8A, 4, 5 and 6.

Mr. Arnold

I am much obliged to the Chief Secretary, but the formula is also contained in a somewhat abbreviated form in his latest Treasury working paper. The question that I wanted to put to him was this: as changes in the exchange rate inevitably feed through to domestic costs and prices, and as we now have a much clearer understanding than we used to have of the way in which these offset any initial change in price and cost competitiveness, is it not the case that if the Government were once again to embark upon a policy of repeated devaluations, such as some of their Friends have ben suggesting to them, any resulting gain in competitiveness could be obtained only at the cost of accelerating inflation?

Mr. Barnett

I do not agree with what the hon. Gentleman says. Of course, changes in the exchange rate have an effect on inflation, but this is not the only element in industrial costs. A major element in industrial costs is, of course, pay. That is why we need, and hope to achieve, moderation in pay settlements, which will help everyone on both sides of industry and in the country generally.

Mr. Powell

If that is how the Treasury does it, is it surprising that its macro-economic advice has been persistently wrong?

Mr. Barnett

I am surprised at the right hon. Gentleman. I would have thought that he at least would have understood it.

Dr. Bray

Is my right hon. Friend aware that he did not read his brief entirely correctly? Neverthless, the point made by the hon. Member for Hazel Grove (Mr. Arnold) is a complete parody of the Treasury working paper. That working paper shows that there is a very long-lasting devaluation effect, which could improve the balance of payments by about £4,000 million a year four and six years after a 10 per cent. devaluation?

Mr. Barnett

I am happy to pay tribute to my hon. Friend as another who will understand these complex figures. But he was quite wrong when he said that I read the answer incorrectly. I read it quite correctly. I have it here, and I should be happy to read it again if it pleased the House. I take my hon. Friend's point about the paper to which he referred, but the consequences for the balance of payments and many other matters depend on the time extrapolation as well as many other factors.