HC Deb 26 January 1978 vol 942 cc1581-4
8. Mr. Biffen

asked the Chancellor of the Exchequer what assessment he has made of the impact of the recent liberalisation of sterling exchange control upon employment in the United Kingdom, overseas investment, and the £ sterling exchange rate, respectively; and if he will make a statement.

Mr. Healey

Yes, Sir. Among the adjustments which I announced on 26th October last, the liberalising of sterling borrowing by non-resident controlled manufacturing companies for their United Kingdom business has stimulated some interest. This could lead to additional industrial investment from overseas in the United Kingdom. The greater freedom for banks and insurance companies to retain foreign currency should help them to compete for business abroad and so assist invisible earnings. This may also bring benefit in the longer run to domestic employment. It is too early for any more detailed assessment of the impact.

The abolition of the 25 per cent requirement will mean about £200 million less inflow into the reserves during 1978 but will enable United Kingdom portfolios of foreign currency securities to be managed more effectively.

Mr. Biffen

If sterling continues to appreciate, will the right hon. Gentleman pay particular attention to the opportunities and advantages which that situation will provide for a further liberalisation of exchange control?

Mr. Healey

I am keeping all aspects of the problem under review, but the hon. Gentlemant knows as well as I do that countries such as Japan, Switzerland and Germany, which have no outward exchange controls and which have imposed inward controls, nevertheless have seen their currencies appreciate just as fast as happened formerly. There is a tendency grossly to exaggerate the impact of what happens to exchange controls when there are movements in the exchange rate.

Mr. Gould

Does my right hon. Friend think that the disappointing and damaging trend in the trade balance in manufactured goods in the last three or four months, following the encouraging performance earlier in 1977, might conceivably have anything to do with the appreciation of the pound?

Mr. Healey

Not on the sort of calculations that my hon. Friend espouses. Those who believe that depreciation brings automatic benefits to the trade balance do not expect that benefit to accrue for at least two years after that process has taken place. If one examines the improvement in the volume of exports of manufactures, one sees that it pre-dates the depreciation of March 1976. On these matters, there is a tendency among economic theorists grossly to exaggerate and sometimes to mistake the impact of exchange rate movements on the flow of trade.

Mr. Hordern

Since the Chancellor is so confident about debt repayment and the fact that debt management is said to be under control, what justification can there be for having stricter foreign exchange controls for a creditor country with a large supply of North Sea oil for years to come when the countries to which the right hon. Gentleman referred have no such restrictions? Surely now is the time to continue a further lightening of foreign exchange controls.

Mr. Healey

We also have a very large burden of foreign debt to repay, and that is not the case with the other countries to which I referred. I warn Opposition Members to be cautious about supporting the propaganda drive from some sections for the abolition of exchange controls, because it was that same section of the financial community which pressed for the introduction of competition and credit control, and the Government and the Bank of England have been wrestling with the consequences of that mistake for the past four years.

Mr. Jay

If the present problem is an inflow of foreign funds, rather than a further liberalising of exchange controls, would it not be better to have a further substantial cut in interest rates, which would benefit all parts of the economy?

Mr. Healey

Short-term interest rates have fallen substantially in the past 12 months and are now lower than they are in New York, but I do not believe that it is right to think that the inflows of foreign currency which we suffered or enjoyed, according to hon. Members' points of view, last autumn had very much to do with the level of interest rates. They were basically speculations on capital gains, and the fall in interest rates that we brought about at that time had no apparent effect on them.

Sir G. Howe

The Chancellor mentioned the pressure for relaxation from certain quarters of the financial community, but does he not recognise that those in industry, specifically the CBI, who are concerned with helping manufacturing industry and British exports are concerned about the impact of the value of the £ sterling on price competitiveness and that this is a factor that has to be taken into account? Is he aware that, unless he is prepared to make a relaxation of exchange controls when the opportunity presents itself, there is a grave danger that intervention, far from saving jobs, will destroy them?

Mr. Healey

The right hon. and learned Gentleman must make up his mind whether he agrees or disagrees with the CBI over various matters. On most matters, such as incomes policy, it seems that he tends to disagree. In his question he was mixing up two different matters. He expressed his disquiet about the rise in the exchange rate, but this is welcomed by his monetarist friends. I should be interested to hear how he reconciles his views on monetarism with his views on the exchange rate.

The Association of British Chambers of Commerce takes the opposite view on the appreciation of the exchange rate. I quoted its view in my speech during the last economic debate. Opposition Members should be more cautious in making wide generalisations about the effect of movements in one monetary or economic variable on all others. It is not as simple as the right hon. and learned Gentleman makes out.