HC Deb 23 October 1979 vol 972 cc202-14
The Chancellor of the Exchequer (Sir Geoffrey Howe)

With permission, Mr. Speaker, I wish to make a statement about exchange controls.

In my Budget Statement on 12 June I announced our intention progressively to dismantle these controls. I made a number of relaxations at that time; and again on 18 July, when I informed the House of the first major move towards liberalising outward portfolio investment.

I have now decided to remove all the remaining exchange control restrictions from midnight tonight, apart from those still needed, I hope not for long, in relation to Rhodesia.

With that single exception, there will from tomorrow be full freedom to buy, retain and use foreign currency for travel, gifts and loans to non-residents, buying property overseas and investment in all foreign currency securities. Portfolio investment will be wholly freed, and the requirement to deposit foreign currency securities with an authorised depositary is abolished. Foreign currency accounts can be held here or abroad. Passport marking for travel funds can now be abolished The necessary Treasury orders are being laid this afternoon.

The removal of controls will lead to public expenditure savings of about £.14½ million a year, which represents the current cost of about 750 staff at present employed on exchange control work at the Bank of England and about 25 at the Treasury. I should like to take this opportunity of thanking all those who have had the task of administering the controls—not only in the Treasury, the Bank of England and Customs and Excise, but those in the private sector, whose co-operation has enabled the system to work.

Under arrangements announced in this House in 1971, exchange control has been used to prevent United Kingdom tax incentives supporting the leasing abroad of foreign equipment. I propose to introduce in the 1980 Finance Bill provisions, which will take effect from tomorrow, to continue to prevent this. Further details on this matter are available in the Vote Office.

From tomorrow, we shall be meeting in full our European Community obligations on the freedom of capital movements.

Exchange controls have been with us in one form or another for just over 40 years. They have now outlived their usefulness. The essential condition for maintaining confidence in our currency is a Government determined to maintain the right monetary and fiscal policies. This we shall do.

Mr. Healey

The Chancellor made an important statement. It betrayed a baffling sense of priorities. He has just given Britain the highest inflation rate in the industrial world. He started unemployment moving up again after two years of continuous decline. He has produced a collapse of industrial investment. The whole of British business now faces a severe cash crisis. Yet he comes along this afternoon not to offer any measures to remedy the situation but to announce a reckless and doctrinaire decision which can only make the situation worse.

In the light of our improved performance since 1976 there has been a case for some time for a relaxation in exchange control, but the right hon. and learned Gentleman is not only suspending all the rules governing the control of our exchanges; he is abolishing at a stroke the whole apparatus of control, so that if the balance of payments, or the position of our reserves, or the value of the pound, moves in such a way that it is necessary to restore controls it will be impossible for him to do so.

First, what does the Chancellor think will be the consequences of his decision? We were told by the Bank of England last month that the £500 million outflow the previous month was largely caused by the relaxation of exchange controls following the Budget. Can the Chancellor say what proportion of that sum was due to rich men buying property abroad and moving their wealth abroad? Secondly, what is the value of the applications that he has received for foreign exchange at the official rate since the relaxations in the Budget?

In the light of the answers to those questions will he say how much the financial institutions in Britain will invest abroad rather than in British industry, which is already suffering from a serious cash crisis? How much are the financial institutions likely to invest abroad rather than in Government securities so as to keep the money supply under control and finance the public sector borrowing requirement?

What does the Chancellor believe will be the effect of this decision on our exchange rate and consequently on the rate of inflation in Britain, and on interest rates? Finally, can he tell us no more about the reasons for his decision than that there will be a saving of £14½ million in public expenditure? Does not he recognise that to change in a moment an environment in which industry and finance have lived for 40 years risks as disastrous consequences as the decision of one of his predecessors to institute competition and credit decontrol some years ago, which were directly responsible for the fringe bank crisis and speculation in the property markets in 1973–74?

The right hon. and learned Gentleman must realise that this is one more reckless, precipitate and doctrinaire action, which the Government will regret no sooner than those who lose their jobs or go bankrupt as a result.

Sir G. Howe

I understand the right hon. Gentleman having difficulty in addressing himself to this argument. At one point he asserted his recognition of the strength of the case for some changes in our regime of exchange control. I welcome his limited support to that extent. However, at the commencement of his questions he emphasised the reckless, doctrinaire, unprincipled folly of making these changes. He must recognise that the changes that we are making are not undertaken in a moment; they are the third step in the programme of progressive dismantling of these controls which I announced at the time of the Budget. They have been undertaken stage by stage, not with a view to influencing the exchange rate but with a view to removing some of the restrictions that unjustifiably remain on investment decisions by our people.

The right hon. Gentleman suggested that these decisions would diminish the investment resources available in this country. He knows that that is not true. He knows from his own recollection of his days at the Treasury that the overwhelming body of evidence to the Wilson committee showed that there was no lack of resources available for capital investment in this country. The problem of one of the many inheritances from him is the lack of profitable investment opportunities. The idea of promoting additional investment overseas is that it will promote the expansion of the British markets. It is far better, in a period when oil adds strength to our resources and our currency, to acquire income-producing assets overseas than to shelter behind an apparatus of control.

The right hon. Gentleman began his questioning by suggesting, in an astonishing opening, that the inflation rate, the unemployment level, and the collapse—as he described it—of confidence in British industry were events for which the Government were responsible. He could not have more accurately described the inheritance that he passed on to us at the Treasury. During his period at the Treasury the pound was not protected from adverse consequences by the existence of the exchange control regime. It is not a regime of that kind that can produce economic strength—it is economic policies of a kind to which the right hon. Gentleman is not accustomed.

Mr. J. Enoch Powell

Is the Chancellor aware that I envy him the opportunity and the privilege of announcing a step that will strengthen the economy of this country and help to restore our national pride and confidence in our currency?

Sir G. Howe

I am grateful to the right hon. Gentleman for his support. I am not unaware of the historic importance of the decisions that I announced today. They mean a major break with the regime of control with which we have lived for almost 40 years. I am indeed grateful to the right hon. Gentleman for the recognition that he gave to that fact.

Mr. Fletcher-Cooke

Is my right hon. and learned Friend able to estimate the enormous increase in the earnings of the City of London as a result of being freed from the interminable barriers and paperwork that were required by the contols that he has so rightly abolished?

Sir G. Howe

I should not like to put an estimate upon that, but I have no doubt that my hon. and learned Friend is entirely right to draw attention to the extent to which these changes will add to the attractiveness and effectiveness of the City of London as the world's financial capital.

Mr. Richard Wainwright

Is the Chancellor aware that his announcement will be very welcome to all who opposed the attempts to insulate Britain from the rest of the world? Will he confirm that if one of the early effects of his measures is to reduce somewhat the sterling exchange rate, that will be good news for the millions of our people engaged in the exporting industries?

Sir G. Howe

I indicated in an earlier reply that this change is announced not with a view to influencing the exchange rate; it is announced on its own merits. It is right to give this additional degree of freedom and to allow the pound to operate in the world unrestricted by restraints of that kind.

Mr. Rost

Will British nationals also be free to open bank accounts abroad if they so wish?

Sir G. Howe

That is one of the freedoms that will be restored under the changes that I announced.

Mr. Cryer

Does the Chancellor accept that one of the features of post-war Britain has been the signal lack of enterprise by private enterprise? Does not he accept that that is a signal for those enterprises to shovel money abroad and reduce the amount of investment for the British worker, and that the trade union movement will see this as a classic betrayal of the workers of this country by a Tory Government who are the lickspittles of the capitalist sector?

Sir G. Howe

I would not begin to follow the hon. Gentleman in his emotional view of the world. My own judgment is that the enterprise of private enterprise has been the main factor in defending the economy of this country from the ravages of Socialism.

Mr. Emery

Will the Chancellor of the Exchequer accept not only our congratulations on making this move but that there will be major encouragement to the City that he has seen fit to do this not in a number of little bites, but has had the courage to sweep it away instantly in one full measure?

Sir G. Howe

I am grateful for my hon. Friend's support.

Mr. McWilliam

Will the right hon. and learned Gentleman please tell the House what he predicts will be the net effect on industrial investment of his decision this afternoon, and what will be the net capital outflow?

Sir G. Howe

It is not possible to make any net prediction of that kind, but those economies that have achieved greater strength and success than our own have been notable for the extent to which they have been expanding their overseas investment. Germany, Japan and the United States are good examples. The evidence of the inquiries that have been made suggests that a willingness on the part of our economy to invest overseas will be reflected in an enlargement of our market opportunities overseas, and the prospect of a continuing flow of income to this country that we would not otherwise have. I am quite certain that is right to allow those decisions to be taken that will contribute to the strength of our industrial economy and to the growth of jobs in this country, rather than the reverse.

Mr. Budgen

Will my right hon. and learned Friend agree that this move is most of all to be commended for the enhanced freedom that it gives to individual citizens, and for the further discipline that it will impose upon this Government and all Governments in maintaining the value of our currency?

I have one small and perhaps carping point to make. Does my right hon. and learned Friend agree that it is a practice of very dubious constitutional propriety to introduce even a small control, to take effect from today, when he is not to have, on his own account, the support of legislation or of Parliament until the spring of next year? Is that not a rather dubious slip into the principle of retrospective legislation?

Sir G. Howe

I appreciate, as always, my hon. Friend's concern about the point of principle to which he has just referred. I assure him that I have had it well in mind. We shall be continuing a necessary fiscal provision that has prevailed until now. By announcing it in the House today I am giving clear warning that that is our intention. There is nothing that I judge to be improper in so doing and in asking the House to enact it when the time comes.

Mr. Healey

Will the Chancellor at least attempt to answer my questions, which were repeated by one of my hon. Friends? The Chancellor must have made some estimate of the effect of this decision on the readiness of the financial institutions to buy Government securities and the readiness of the financial institutions to invest in British industry rather than abroad. Can he tell us what the consequences will be? He must have noticed that the only case put by his supporters on the Government Benches was based on a totally doctrinaire belief in the validity of market forces, which has been exploded time and again in our recent experience.

Sir G. Howe

It is clear that any change of this kind is likely to lead to some capital outflows across the exchanges out of this country, but it is just as likely to be matched by capital inflows in the opposite direction, without producing any substantial impact on the exchange markets. The right hon. Gentleman must understand that the prospects of promoting successful and effective investment in this country do not depend upon the preservation of a ring fence around our economy. They depend on the establishment within our country of conditions of co-operation by trade unions and their members, as well as anything else, which will make investment in Britain effective and successful. These changes do nothing to impede that. On the contrary, they give us the opportunity of acquiring income-producing investments abroad. There is total sense in that.

Mr. Robert Sheldon

Is the Chancellor aware that his statement today provides real cause for dismay? Is he further aware that he has been presiding over the collapse of British industry? His answer to this, rather than to intervene in the exchange rate, is to provide means of spending money overseas in acquiring capital assets. This decision will mark a turning point in the fortunes of this country, which I believe that he and many others will bitterly regret.

Sir G. Howe

The right hon. Gentleman appears to have overlooked the fact that all the representations made to me by and on behalf of British industry have been to the effect that I should announce precisely this change. It requires this change to be made as part of sensible economic management. It is not I who have been presiding over the collapse of British industry but the right hon. Gentleman and his colleagues in the last Government. There has indeed been a marked change of direction as a result of the change of Government. British industry recognises that we are taking the steps, which have been needed for too long, to begin restoring the conditions in which it can re-acquire prosperity.

Mr. Alexander

Will my right hon. and learned Friend indicate in some way how the £14½ million will be saved? Will he assure the House that an enormous element will be the release of civil servants to more productive and useful work?

Sir G. Howe

The figures that I have quoted for the saving are the figures that will be achieved. The staff at present employed on exchange control are in most cases staff of high skills and qualifications, for whom I have no doubt other opportunities will be forthcoming in areas of the economy where their services will be much needed and well used.

Mr. Cant

The Chancellor has given no reasons for undertaking this step, except in the most vague terms. Will he indicate what is likely to be the effect of these measures on the exchange rate of the pound? Does he anticipate, as all theorists suggest, that the exchange rate will now begin to decline? Is this acceptable? Is this what he is seeking? If this is what he is seeking, would it not have been much simpler to reduce the minimum lending rate, to stop funds coming into this country?

Sir G. Howe

As I have indicated, this change is not announced with a view to producing a given consequence in terms of the exchange rate of the pound. It is announced on its own merits. It would not be wise to accept the advice of the hon. Gentleman and to begin reducing interest rates as a means of influencing the exchange rate. The decision follows from our determination to establish and maintain effective monetary control as the foundation of conquering inflation. That in itself is the foundation for a sensible outlook for the exchange rate.

Mr. Bruce-Gardyne

I warmly congratulate my right hon. and learned Friend for his wholly admirable statement today. Can he explain to us, in the light of the remarks of his predecessor this afternoon, why that predecessor was so keen to move in the same direction last year but was frustrated by the obscurantism and sheer illiteracy of the general council of the Trades Union Congress?

Sir G. Howe

I dare say that the right hon. Member for Leeds, East (Mr. Healey) would find it hard to answer that question. Far be it from me to try to penetrate the mysterious working of his mind.

Mr. Denzil Davies

As the Chancellor has said that the main determinant of confidence in the pound is monetary and fiscal policy, will he confirm that it is still the Government's policy to achieve a yearly reduction in the public sector borrowing requirement?

Sir G. Howe

We have announced our target for the public sector borrowing requirement for the present year and it is our intention to achieve that target.

Mr. Beaumont-Dark

May I thank the Chancellor of the Exchequer for a verbal reply to a written question that I have tabled for today and ask him his view on two things? First, manufacturing industry will welcome this relaxation. Secondly, when we had exchange control regulations the pound still dropped to 1.54 dollars during the Labour Party conference of that year. The pound will be kept firm by a realistic Government policy to ensure that this country can compete, can work, and can thrive. The pound will then be at a higher level than today, backed by resources and not by theory and dogma.

Sir G. Howe

I entirely endorse my hon. Friend's observations.

Mr. Healey

I think that the Chancellor misunderstood the question put by my right hon. Friend the Member for Llanelli (Mr. Davies). Several times since the Budget the Chancellor has said that it is his intention progressively to reduce, year by year, the public sector borrowing requirement and the monetary targets. If he is not prepared to reassert that determination today, it would constitute a very important change of policy, which the official Opposition would welcome. I hope that he will come clean on that.

Sir G. Howe

The right hon. Gentleman knows that, as I stated in my Budget speech, we are determined to secure a reduction in the burden of public borrowing and, as he said, a stage-by-stage reduction in the monetary targets. We shall be making announcements in due course.

Mr. Latham

Is my right hon. and learned Friend aware that the last people in the world from whom we need lectures on the subject of the exchange rate are former Treasury Ministers, under whom it reached its lowest level ever? Will he confirm that if we cannot defend our exchange rate by our own economic performance rather than by a blanket of controls there is something wrong with our production?

Sir G. Howe

Yes. My hon. Friend makes the point that I have already made in answer to the right hon. Member for Leeds, East (Mr. Healey). The existence of a regime of control of this kind failed altogether to protect our economy from the impact of the disastrous realities of the management of the economy by the right hon. Gentleman. It is not the regime or the controls that will be effective; it is the way in which we manage our economy and perform within it.

Mr. Douglas

The right hon. and learned Gentleman has referred to British industry. Will he confirm or deny that the TUC and/or the CBI agree with this decision? Does he agree that the reason for this change is the increase in revenues from North Sea oil and that it will be a poor inheritance for the people of this country to buy Howard Johnsons and have closed shipyards and steelworks, and a decline in manufacturing investment?

Sir G. Howe

The CBI has been urging us to make this change in policy. The underlying justification for this change includes, among other things, the proposition that when we are acquiring substantial revenues from North Sea oil—itself a capital asset—it makes sense for us to use our resources to acquire income-producing capital assets in other parts of of the world. It is a long-term change, which makes total and complete economic sense, as well as the additional justification for sweeping away unnecessary controls.

Mr. Adley

Will my right hon. and learned Friend draw comfort from the fact that support this afternoon comes not only from this side of the House but from the Ulster Bench and the Liberal Bench? Does he agree that he should equate the gibes from the former Chancellor of the Exchequer and his colleagues about freedom and market economy with the kind of mentality that allowed the post-war Labour Government to keep sweets rationed rather than to allow market economy forces to get to work on those, too?

Sir G. Howe

I agree that the breadth, quality and nature of the support that I have received this afternoon for the decision that I have announced tends to confirm me in the view that it is a correct decision.

Several Hon. Members

rose—

Mr. Speaker

Order. I shall call the five hon. Members who have been rising.

Mr. Leighton

We have heard from the Prime Minister this afternoon that Britain is now subject to what she calls the edicts of the Common Market, and the Chancellor has told us that he is now fulfilling a Treaty commitment for the free movement of capital. Does he agree that as capital has no nationality, no patriotism, but is solely attracted by the highest rate of profit, the most likely result of his move will be that the entrepreneurs, of whom we hear so much, will now shovel their capital on to the Continent, where they will get a higher rate of return and will accelerate the deindustrialisation of this country?

Sir G. Howe

The capacity of capital to move from one corner of a market to another and around the world market in search of opportunities for higher profit is one of its greatest justifications. Our economy has performed less well than it should have done because during the years of Socialist direction and over-taxation there was a lack of profitable and effective investment opportunities in this country. When we change those conditions, as this Government are doing by their policies, capital will find more fruitful opportunities for central investment in this country. Meantime, it makes good sense for capital to be employed in producing income from overseas and building up additional assets and opportunities for exports as a result of this measure.

Mr. Norman Atkinson

For those reasons, does not the Chancellor's statement represent a total and final abdication to the multinational companies? Is this not now the prelude to the sale of public sector assets to overseas interests?

Sir G. Howe

I do not think that the hon. Gentleman understands the essential requirements of how our economy can work. Our economy is attractive and will be the more attractive to multinational companies as well as to British investors—British entrepreneurs—the greater our success in creating conditions in which investment here can be profitable and successful. If the hon. Gentleman will join me in seeking to persuade his friends in the trade union movement of the crucial importance of recognising the legitimacy of profit seeking investment here, this country will be a great deal more prosperous than it was under the Labour Government.

Mr. Spearing

The Chancellor reminded the House that this move was fully in line with our obligations under the Treaty of Rome. Will he assure the House that it has nothing whatsoever to do with other monetary obligations of that Treaty under current discussion? Will he confirm that, as the Government's object is to give full freedom to the pound and let it find its own level in world markets, the Government have ruled out sterling from joining the EMS?

Sir G. Howe

No decision has been taken on the relationship between our currency and the exchange rate mechanism of the EMS. This decision has been taken entirely on its own merits.

Mr. Skinner

Will the Chancellor confirm that the Government's strategy hitherto has been to try to push investment away from the public sector to the private sector, presumably with a strong emphasis on small firms? Will not today's announcement, which is a continuation of the policy announced in July, mean that more money will, in the main, go into the multinationals abroad as opposed to the small firms that the Tory Party seems bent on supporting? Has the Chancellor not a duty to tell the House what effect this will have on the balance of payments, especially when we take into account that, within only four months of this Government being in office, the invisibles have become invisible?

Sir G. Howe

The hon. Gentleman must understand that this decision in no way impairs the capacity of small firms to expand their investment in this country. As I have several times said today, there is no lack of capital for investment in this country. The shortage has been lack of suitable and effective opportunities for that investment. The Government are committed to policies that will increase those opportunities for both small and large firms.

Mr. Dubs

Does the Chancellor agree that flows of capital into and out of this country are influenced by the question whether our rate of interest is higher or lower than that of other industrial countries? Will not the steps that he has announced today leave him particularly dependent upon the rate of interest as a weapon and therefore delay into the long and distant future any significant reduction in the high interest rates that are now crippling our economy?

Sir G. Howe

Rates of interest are not a significant determinant of flows of that kind. The underlying health of the ecenomy is far more significant in the long run. Interest rates are a necessary weapon in securing proper and effective monetary policy—control of the money supply—and they remain to be used and will be used for that purpose.

Mr. Hooley

Will there be any restriction on investment in or the acquisition of property in South Africa?

Sir G. Howe

There are no special provisions in relation to that matter in my announcement this afternoon.