HC Deb 29 June 1978 vol 952 cc1548-51
2. Mr. Atkinson

asked the Chancellor of the Exchequer if he will appoint a panel of experts to inquire into the reasons why the level of the public sector borrowing requirement or the money supply has had little or no influence over the rate of price inflation during the past five years.

The Chancellor of the Exchequer (Mr. Denis Healey)

No, Sir. As to the implications of the Question, I have repeatedly make it clear that the prime task of the Government is the control of inflation and that this depends not only on moderation in pay bargaining but on firm control of the monetary aggregates. The monetary record of the last Conservative Government had a massive impact on the rate of inflation during the last five years. I think that that is now common ground between the two Front Benches.

Mr. Atkinson

Does my right hon. Friend not acknowledge that he has failed to carry with him the Labour movement, and the trade unions in particular, as well as more progressive opinion among economists, and that his fear that increasing Government expenditure will bring rising prices is not borne out by our experience over the last 10 years, when it has been shown that neither prices nor wages have responded to the level of demand?

Mr. Healey

With respect to my hon. Friend, I think that he is mixing up the level of public expenditure with the level of the public sector borrowing requirement and the money supply. If the PSBR cannot be financed without increasing the money supply, that will undoubtedly add to inflation. That, of course, is what happened in 1972 and 1973, when the rate of increase of money supply was twice the rate of increase of GDP.

Mr. Nelson

As the Question refers to the public sector borrowing requirement, and in the light of the reports today that the Greater London Council's loan in Swiss francs may have incurred a foreign currency loss of about £25 million already, does the Chancellor accept that there are very severe lessons to be learned by the Government and other public sector authorities about borrowing abroad? What view does the right hon. Gentleman take about the substantial loss incurred in the case of the GLC loan?

Mr. Healey

That does not have very much reference to the Question on the Order Paper, but I will answer the hon. Gentleman. Of course some foreign borrowing turns out to be very unwise, if the terms and conditions and the currency are not well judged, but it has played a useful role in enabling this coun- try to survive the impact of the increase in oil prices. I am glad to say that we are now repaying foreign borrowing at a very fast pace.

Mr. Watkinson

Will my right hon. Friend reiterate the point that the crucial factor here is the way in which the public sector borrowing requirement is financed? Does he agree that there have been considerable problems arising out of the undershooting of Government targets for the PSBR? Have any investigations or studies been undertaken to see why this degree of undershooting has taken place?

Mr. Healey

I have done my best to attribute the various elements in the undershoot of the PSBR last year to a number of factors. One was the very much faster fall in interest rates than we had earlier expected; another was the fact that public expenditure was well below the limits that we set; another was the fact that we introduced new ways of refinancing export credit. I am as concerned at the failure of public expenditure to expand as fast as possible as I am with a failure of public expenditure to keep within the limits.

Sir G. Howe

Will the Chancellor address himself to the reasons for concern at what is happening to the money supply in today's circumstances? Will he recognise that it is his responsibility that money supply—M3—grew at over 16 per cent. over the last 12 months, that M1 is growing at a much faster rate, and that he is creating these problems for himself by the size of his borrowing requirement and his very determination to expand public spending by 6 per cent?

Mr. Healey

No, Sir. As always, the right hon. and learned Gentleman is absolutely wrong. The 16 per cent. increase in money supply last year had nothing to do with public expenditure, which was a great deal smaller than expected. In fact, 40 per cent. of the growth in money supply—M3—last year was due to inflows of foreign currency due to the strength of the pound. If it had not been for that, the annual increase in money supply last year would have been 10 per cent. and not 16 per cent. The Swiss money supply figures at the moment are more in excess of their target than ours were last year; so are the German figures. That is having none of the malign effects which infantile monetarists ascribe to it.