HC Deb 20 March 1980 vol 981 cc627-30
10. Mr. Robert Sheldon

asked the Chancellor of the Exchequer what is the policy of Her Majesty's Government on the exchange rate.

Sir Geoffrey Howe

I refer the right hon. Member to the answer that I gave him on 27 November 1979.

Mr. Sheldon

Does the right hon. and learned Gentleman agree that the easiest way to reduce the exchange rate would be to get the Bank of England to sell sterling on the foreign exchanges? Does he agree that the Bank is not doing that because it fears that the money supply might increase? Are we not paying a high price for the Government's economic theory when account is taken of the agon- 1ies of British industry in meeting competition from cheap imports and finding export markets for its goods?

Sir G. Howe

The right hon. Gentleman will recollect that when he was a distinguished member of the Treasury team in the previous Labour Government it was decided that it was folly to continue intervening in the way that he has described, since that was having the adverse effect on money supply that he rightly anticipates. If one intervenes in that way to affect the exchange rate, the money supply and the domestic rate of inflation will be adversely affected.

Mr. Dorrell

Is my right hon. and learned Friend aware that the effective exchange rate now stands 10 points higher than its level before the 1967 devaluation and 20 per cent. higher than in the mid-1970s? How quickly does he expect the productivity of British industry to improve to restore the competitive balance?

Sir G. Howe

I am not prepared to comment on the precise figures to which my hon. Friend has referred. It is as well to remember that during periods when the exchange rate has been consciously depreciated in the pursuit of expanding export opportunities, that has not, as a policy, been crowned with conspicuous success. It is important, in the world in which we now live and in the conditions in which the British economy has to operate, with a petro-currency to hand, for those who bargain within British industry to recognise the importance of sensible pay bargaining as an important factor in maintaining the competitiveness of British industry.

Mr. Woolmer

Is not one of the reasons for the high exchange rate the growing revenues that will accrue from North Sea oil and gas? Is it not true that these growing revenues are causing a massacre of our manufacturing industry? Is it not about time that the Government set out a strategy for the next few years to ensure that our North Sea oil and gas revenues are used to build up and reconstruct our industries and not to destroy them?

Sir G. Howe

It is obviously sensible to recognise the impact of growing North Sea revenues on the balance of the economy. At the same time, it is sensible not to be alarmist about them. It is worth remembering that in the past few months there has been a growth in manufacturing exports. It is also sensible not to try to pursue magic solutions. The most important thing for people throughout British industry to understand is that they can do more than any Government by the effectiveness of their working together to maintain and improve the competitiveness of British industry.

Mr. Alan Clark

Is it not also true that the strength of the pound is a measure of the competence of the international community in the policies of my right hon. and learned Friend and his colleagues? Was not that exemplified by a remark of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), who tabled the question, during the debate on the financial White Paper, when he cited as an example of something that would lead to a run on the pound the prospect of the return of a Labour Government?

Sir G. Howe

I have no doubt but that the prospect of the return of a Labour Government would have a number of remarkable and catastrophic effects on the outlook for the economy. I understand the arguments that are advanced by Labour Members. However, I hope that they will take account of the fact that the Government's abolition of exchange controls is one factor that undoubtedly causes the rate to be lower in the long term than it would otherwise be. I hope that commentators on these matters will now welcome unreservedly the decision that we took.

Mr. Horam

May I refer the right hon. and learned Gentleman to the question tabled by my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon)? What is the Government's view of the present exchange rate and its effect on industry? What policy are the Government adopting towards the exchange rate?

Sir G. Howe

As I told the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) when he asked the question on a previous occasion, the exchange rate is determined primarily by market forces. The Government, through the Bank of England, intervene in the exchange markets to moderate excessive fluctuations in the rate and to preserve orderly market conditions. That is the conclusion at which the previous Government arrived, having tried to pursue different policies at different stages of their existence.