Interest Rates

HC Deb 26 November 1981 vol 13 cc1057-89 7.32 pm

Mr. Richard Wainwright (Colne Valley)

I beg to move, That this House recalls Mr. Chancellor of the Exchequer stating in his 1981 Budget speech that "the burden of income tax and excise duties has to rise in order to secure lower interest rates"; regrets that interest rates are now higher than after his Budget; and calls upon him to implement lower interest rates in order to assist enterprise to provide jobs, capital investment and better housing.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

I have to announce that Mr. Speaker has selected the amendment standing in the name of the Prime Minister.

Mr. Wainwright

The Chancellor of the Exchequer seems to have cast himself with frigid perfection in the role of Jack Frost because the first shy signs of a modest industrial recovery are being nipped by United Kingdom interest rates which are considerably higher than the average in the rest of the world. There have been many signs that a likely consequence will be a return to further recession in the first part of next year.

In contrast to most previous periods of high interest rates, the present substantial margin over the going rate of inflation means that we now have a heavy real interest rate. For instance, the days have gone when a householder with a mortgage knew that the house was increasing in value at a rate roughly equivalent to his mortgage interest rate. The real rate of interest is now at a considerably higher level.

For businesses, the days have ended when they could cheerfully divide the interest burden by half on the ground that the other half was being paid by the corporation tax man. Taxable profits in most industrial companies are now so low that corporation tax does not enter into their calculations.

There is therefore a great deal of avoidable misery. There is also a threat of under-equipped, broken-backed industry when world recovery eventually comes. That may mean that a great part of British manufacturing industry will not be able to respond to that recovery and we shall reap the appalling consequences.

For instance, only yesterday the CBI issued a statement that manufacturing investment, including leased assets, is 12½per cent. down on the previous year. That tells a grim story. The position is summed up well in an interesting and recently published report by the chairman of the Conservative Small Business Bureau, the hon. Member for Surrey, North-West (Mr. Grylls). The report, on page 7, states: Current interest rate levels militate against medium to longterm investment, weaken the competitive position of our industry by increased costs and inevitably create greater unemployment. That is not controversial.

The short-lived interest rate drop which occurred, to our relief, in the Budget Statement last March was said by the Chancellor of the Exchequer to be the result of higher taxation which he then imposed. The autumn return to high interest rates means that the country is still swallowing the tax medicine of the last Budget, although the promised cure has already disappeared. The Government still make a virtue of turning down all manner of useful capital spending projects. Some of these are essential. One thinks of the casualties to our sewerage systems and the miles of railway track that soon will be unusable because of lack of maintenance. The Government offer nothing on the other side of the account, by way of relief on interest rates. That must be because of the Government's obsession with a dubiously measured money stock and their high sterling policy which they believe supports their money supply policy.

We are in the worst of all economic worlds, and our motion is aimed at that. We moved the motion for the sake of the future of British industry, for the sake of jobs and on behalf of people with house mortgages and other borrowings.

I shall try to anticipate some of the criticisms that may be made. Of course, we accept that lower interest rates—and we are talking not of a mere half-point drop—are likely to have an effect on the international value of sterling. We accept that 6 cents off sterling and an equivalent drop against the other major currencies would be no disaster. It would bring benefits to our exporters whilst raising import costs slightly. We do not pretend that that consequence can be avoided, but we believe that it is well worth the benefits that substantially lower interest rates would bring.

We are talking not about a half-point drop. I cannot imagine that it has ever entered the mind of the Financial Secretary to shoot a fox.

The Financial Secretary to the Treasury (Mr. Nicholas Ridley)

I do not know about that.

Mr. Wainwright

Perhaps the hon. Gentleman will tell us about it. It was a gamble—some may say reckless—to have announced a week in advance that we wished to discuss the level of interest rates. Perhaps we hovered more than usual round the teleprinter in case a few hairs on the tail of our fox had been shot off by the banks in the last day or two. They have not been shot off, but, if they had, a half-point drop would be only a few hairs off the tail. We are aiming at a more substantial drop, of at least two points.

The Financial Secretary has criticised, outside the Chamber, the interesting package of proposals by a recent member of the Cabinet, the right hon. Member for Chesham and Amersham (Sir I. Gilmour). The Financial Secretary said that reflation could not be combined with lowering interest rates. I do not agree with him. I believe that a carefully selective reflation, if protected by an incomes policy, need not prevent lower interest rates. However, we shall not have that carefully selective reflation, so the Government owe us a reduction in interest rates.

Even if we were to have a sudden Pauline conversion of the Cabinet and carefully selective reflation, there would still be room for reducing interest rates. There is sound evidence in the financial market that a higher immediate public sector borrowing requirement for profitable capital projects would do no harm to lenders' confidence. It would help to relieve the well justified market fears of under-invested industry being unable to cope with recovery if there were signs that the Government were helping to get private sector investment going, as well as attending to urgent needs in public sector capital projects.

There is clear evidence that a reduction of two points in interest rates would fairly soon relieve the PSBR substantially because it would relieve the cost of servicing the national debt. The Treasury model is in the care of Treasury Ministers, and although they ridicule it at times, at other times they have to rely on it. It shows that by 1984 a drop of two points in interest rates now could relieve the PSBR by as much as £2½ billion a year—partly by reducing the cost of servicing the national debt, but much more by increasing the buoyancy of the revenue as a result of increased activity.

In saying that I am relying not purely on City gossip, still less on my own authority, but on a substantial interview in The Guardian on 6 November with a great authority in the City, Mr. Gordon Pepper of Greenwells, who must be held in considerable esteem in most sections of the Conservative Party. He categorically said: I would also be prepared to see the PSBR rise provided the extra funds were put into genuine profitable investment: into public sector assets that earned or were likely to earn a real return. He went on in an interesting way from the depth of his experience to complain that there was still too much focusing on the demand for credit and not enough consideration being given to the enormous supply. There are many ways in which the Government could attack the credit that is available if they were to give their minds to it. The scope for extending the indexation of gilts is by no means exhausted. I hope that the Government will reveal that in the next few months. There is also scope for greatly increased borrowing by the European Community, which has been proposed in detail by the West German and French Governments.

The Government's stubborn and static posture is adding to the loss of morale in industry and to the sufferings of the unemployed. If it continues in that way, the Government's strategy will be shown in the next Budget to have been self-defeating.

My hon. Friend the Member for Truro (Mr. Penhaligon) will deal with the Government's amendment when he replies to the debate. However, the amendment is staggering in its arrogant complacency. Without a word of explanation it refers to the Government's economic strategy. It does not state whether it is referring to this Thursday's economic strategy or the economic strategy of a fortnight ago when we were told that the Chancellor of the Exchequer would resist any attempts to expand the PSBR for next year.

To anyone of my vintage, the amendment has a sad ring of those old Conservative slogans "Trust us; give us a doctor's mandate; cling tight to nurse." The doctor has been shown to be a quack and the nurse to have no qualifications. At this hour the people of Crosby are probably showing that they have lost all confidence in the Government's economic strategy and want to get rid of them as soon as possible.

7.45 pm

The Financial Secretary to the Treasury (Mr. Nicholas Ridley)

I beg to move, to leave out from "That" to the end of the Question and to add instead thereof: this House expresses confidence that the Government's economic strategy is the best course for restoring this country to prosperity". It is a pleasure to have the opportunity to debate economic policy with the hon. Member for Colne Valley (Mr. Wainwright) and the Liberal Party. At least it is an improvement on the debates that we have had recently with the Labour Party. There is no need for us to debate the wilder notions of the Labour Party and of the right hon. Member for Stepney and Poplar (Mr. Shore), with their colossal spending plans, shopping lists of public expenditure proposals and tax reductions, for which they have no conceivable means of finding finance, disguised by their plans to turn Britain into an East European seige economy.

That compliment to the hon. Gentleman does not imply that I shall be able to agree with everything that he said, as I shall make clear later. However, we can at least start from the shared premise that the world exists and that Britain is part of it. That means that the debate can take place within the realms of the possible and on the basis of certain shared assumptions.

Whatever the Labour Party may believe, the Liberal Party will surely realise that we cannot insulate ourselves from developments abroad. We are, and will remain, members of the European Community. We cannot put a ring fence around that Community. High interest rates are currently a world-wide phenomenon; they are a product of excessive demand for credit from public and private sectors taken together throughout the world. Recent high interest rates stem from the realisation of Governments throughout the world that they must now restrain inflation and that that requires tight monetary policies.

The realisation has also dawned that those countries must cease adding to the demand for credit through their PSBR. It does not make any difference whether Governments ask for credit for capital spending or for revenue spending. It is not the destination to which the spending is pledged that pleases or displeases markets, it is the supply of the funds. The hon. Gentleman said that the markets would be happy to provide that, if it was for a cause espoused by the Liberal Party. I do not believe that that is true.

Mr. David Penhaligon (Truro)

Is the hon. Gentleman aware that at the moment there is a Bill before the House to increase the borrowing ability of British Nuclear Fuels Limited to £3½ billion? That is to be done on a Government guarantee. We are told that that money will not count against the PSBR. When the Minister was challenged he said that that was because the Treasury says that it does not count. Could not we apply that attitude to a few other things?

Mr. Ridley

That would not help if the question is how to borrow the money. What affects the PSBR depends on how much money has to be borrowed, as I intend to show.

As a result of the prudent measures taken by my right hon. and learned Friend the Chancellor of the Exchequer in the Budget last March, we were able to reduce interest rates both absolutely and relatively. For several months we were able to hold our interest rates below those in other industrial countries. For a time short-term interest rates here were as much as two or three percentage points below the average for other industrial countries. The Liberal motion acknowledges that.

During the summer, external pressures, particularly dollar interest rates, mounted to the point where they could no longer be ignored. Although bank base rates remained at 12 per cent. until mid-September, rates in the market had begun to rise, reaching about 14 per cent. in July and August. In that way the market was signalling the need for interest rates to rise. Meanwhile, the weakening exchange rate in conjunction with signs of an acceleration in bank lending made it necessary for us to respond, unless we were going to let good financial management go to the wind.

The Liberal Party motion calls upon the Government to implement lower interest rates. How are we to do that? I ask the hon. Gentleman who criticises our policy on interest rates to come clean about what he would have done at that time. The alternatives—I was there so I experienced the options being put to me—were to accept the trend towards higher interest rates, which is what we did, or to resist that trend, which would surely have set off a potentially dangerous inflationary spiral, fuelled by excessive monetary expansion and a falling exchange rate. Were we wrong to take the former and more prudent course? What would the Liberal Party have done under those circumstances? How would it have implemented lower exchange rates?

Mr. Robert Sheldon (Ashton-under-Lyne)

If that is so, why did the Bank of England intervene last week to keep up interest rates, to the perplexity of all those who work in the City?

Mr. Ridley

The right hon. Gentleman has had experience in the Treasury. He should understand the technical operations of the Bank of England, and it would be wrong of me to spell them out. Despite four years in the Treasury the right hon. Gentleman now says that he did not understand the Bank of England's action.

Mr. Sheldon

The hon. Gentleman must not misquote me. I said that no one in the City understood it. If the hon. Gentleman would leave his brief for a moment, read the financial press and talk to people in the City, he would see that their incomprehension was as great as was possible.

Mr. Ridley

The right hon. Gentleman has drawn the wrong conclusion from events at that time.

Mr. Richard Wainwright

The Financial Secretary gave us an interesting history of the late summer and early autumn. Surely he will not try to conceal from the House that since then American interest rates have come down considerably. On his own logic, if he felt it necessary—I do not agree with him—to put up interest rates to follow America in the early autumn, why does not he or the Chancellor of the Exchequer bring interest rates down, as the storm has abated in the United States of America?

Mr. Ridley

I hoped that the hon. Gentleman would answer my question, but he has not. I shall come to his point in a moment. He will not answer my question, because he would have done exactly the same as the Government if he had responsibility for those matters. He knows that. Others like the hon. Gentleman are aching to find a painless way whereby we can be protected from the turbulence of the real outside world. I am sure that the Liberal Party would reject the idea of a ring fence of exchange controls, whether it is round Britain or the European Community. Such ideas are not workable. They ignore the harsh reality that much of the capital that must be attracted or retained by the industrial countries belongs to people outside Britain and the Community and, as such, could not begin to be touched by proposals of that sort.

For example, the surpluses of OPEC funds would continue to flow freely around the world in search of the best return. The recent history of exchange controls shows that those ideas do not work. Exchange controls did not protect Britain in 1976 and they are not protecting France and Italy now, both of which countries have higher interest rates than Britain. By contrast, in Germany and the Netherlands—which allow free capital movements—interest rates are lower than in Britain. The secret of lower exchange rates lies not in controls but in pursuing economic policies that will lead to lower, not higher, inflation rates. Liberal Party economic policy, with which I shall deal in a moment, inevitably leads to higher interest rates.

I admit that external forces are only part of the story. Another part is high domestic borrowing by the Government and the private sector. While making allowance for the recession, the Budget of last March sought to reduce the public sector borrowing requirement from 6 per cent. to 4½ per cent. of gross domestic product. Recovery from the Civil Service strike is now proceeding well and the backlog of tax will probably be reduced from a peak of nearly £6 billion to nearly £4 billion by the end of November. We expect the outcome for the public sector borrowing requirement to be close to the forecast. 'The deficit has been met largely by sales of debt outside the banking system. While that is good news from the point of view of the long-term reduction of inflation rates, debt sales to the public of about £1 billion every month have been an undoubted extra cause of the high level of interest rates. The consequence of those factors is long-term rates of between 15 and 16 per cent.

In addition, the rapid growth of bank lending to the private sector is worrying. Although it is difficult to be precise, the growth of sterling M3 in recent months has probably been above the target range. I am sure that the House will agree that we do not wish to make the position worse.

In January 1981, the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel)—who is no longer in the Chamber—put forward a 10-point programme for economic recovery. He wished to spend more on energy conservation, nationalised industry investment, the infrastructure and training—much the same programme as that put forward by his hon. Friend the Member for Colne Valley. He wanted a lower pound and lower interest rates, as did the hon. Gentleman. These were to be achieved by an incomes policy. The policy of the Liberal-SDP alliance appears to be that lower interest rates should be implemented and that higher inflation will be avoided by a tax on employers who pay wages above the norm, which will result in a reduction in unemployment. No one could wish for that eventuality more than I. No hon. Member would be more pleased if we could get rid of all the unpleasant, distressing factors of the economic world in which we live.

However, may I suggest gently to the hon. Member for Colne Valley that we cannot leave the matter there? We must also try to understand the world in which we live. We must ask ourselves why interest rates everywhere are high. We must draw on our experience and common sense. We must try to avoid the rhetorical gesture and resist the temptation to cobble together a set of ideas and call that a policy. The hon. Gentleman put forward a soporifically apolitical panacea of a policy. The Liberal Party imagines that, because it wishes to harm no one and do itself some good in the process, it can suddenly escape from the restraints under which the so-called political parties—such as the Conservative and Labour parties—have in the past had to operate. It should know better because it has been around for a long time.

Successive Governments have had to apply a financial discipline. Whether through adherence to exchange rate policy or to monetary targets, successive Governments have had to restrain Government borrowing as part of their discipline and they have had to adopt a view of interest rates to rein back private sector credit.

Mr. J. Grimond (Orkney and Shetland)

Many of us have been following with great interest the round by round controversy between the hon. Gentleman and his right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour). The right hon. Member for Chesham and Amersham has put forward certain proposals, including lower interest rates. He has also made some other suggestions, which have been reiterated this evening. I understand that those proposals have been put through the Treasury model, which is under the hon. Gentleman's control. Does he accept that the results of the model are reliable, because they show that if the proposals were carried out the retail price index would fall, employment and productivity would rise and the world would be a much sunnier place? He controls the instrument. Does he accept that result?

Mr. Ridley

I am grateful to the right hon. Gentleman, because he confirms what I say. My right hon. Friend fed into the model the same assumptions as were fed in by the hon. Member for Colne Valley—that everything would come out rosy. So of course he gets an answer that is pleasing. However, what one gets out depends on the assumptions that one feeds in.

Mr. Richard Wainwright

I assure the hon. Gentleman—as would the Library staff—that I put no assumptions into the model. I do not have the power, certainly not the capability, to do so. I simply put a series of propositions to the Treasury model. Built as it is under the supervision of Treasury Ministers, it gave answers similar to those cited by my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond).

Mr. Ridley

I do not have the skill to build computers or models. The model was not built under my guidance. However, if one puts in assumptions about what will happen, one gets the answer that one wants. That is what my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) did.

If one wants to spend more of the taxpayers' money and borrow more, models show that that would exert upward pressure on interest rates. If the hon. Gentleman wants more money spent and raised in taxes, that would inevitably exert greater pressure on industry and destroy jobs. If, on the other hand—this is a policy that I expect he would decide to follow—one let loose the levers of monetary constraint and abandoned the fight against inflation, sterling would fall, inflation would rise, interest rates would follow inflation in an upward spiral and confidence, investment and jobs would be the casualties.

The idea that the Government can borrow more, deceive their borrowers by paying less for what they borrow—and devalue the currency, or both, and then try to counter rising wages and prices with an incomes policy—which is the essence of the Liberal prescription—is not credible. It has been tried and failed too often for us to believe it.

I do not know how the hon. Gentleman wants to implement his lower interest rate ideas. I do not know whether he wishes to give some groups more special help with interest rates than has already been given. We are pressed to provide lower interest rates for this or that category of borrower.

I make only three points about that approach. First, by increasing Government borrowing to pay for special categories we should merely delay any fall in the general level of interest rates. Secondly, in a financial system as open and competitive as ours it is extremely difficult to ensure that the benefit of privileged interest rates goes where it is intended and that it does not leak into the wrong sector. Thirdly, there are ways in which companies and others can and do obtain the benefit of lower interest rates. There is the generous system of tax allowances. Through the mechanism of leasing, lower interest rates can be enjoyed even by tax-exhausted companies. The average rate of interest paid through leasing is about 9 per cent. Currently about £6 billion is lent to companies through leasing.

In recent months companies have substantially improved their liquidity and profitability, and that trend shows sign of continuing. We must bear in mind that, compared with wages, interest charges are a relatively small element in the costs of most businesses.

The hon. Member for Gateshead, West (Mr. Horam) wrote in the SDP economic policy paper that to suppose the first requirement"— of industry— is to lower interest rates is to totally misunderstand business psychology. It will be interesting to see whether the hon. Gentleman will be here to support the Liberal motion at 10 o'clock tonight.

There is also help for individuals with mortgage interest relief. For a person with a mortgage, who is paying tax at the basic rate, the Exchequer bears 30 per cent. of the increase in interest rates. The individual is effectively paying only 10½ per cent. after tax relief at current interest rates. At the same time the borrower is exempt from capital gains or any tax on the imputed income from owner occupation. The result of that is, as one would expect, a heavy demand for mortgage finance, which shows that interest rates this year have not put house purchase beyond people's means. The building societies have been able to maintain a high level of lending, and the banks have also found ready takers for their mortgage lending. About £6½ billion has been advanced in mortgages in the first nine months of this year.

In discussing interest rates we need to consider the position of lenders and borrowers through mortgages. Savers and depositors are much more numerous than borrowers. They have suffered in the past from a combination of low interest rates and high inflation. We must look at both sides of the equation.

Even other forms of consumer credit that do not benefit from tax relief have shown great strength. Bank lending to persons other than for housing has grown by no less than 30 per cent. over the past year.

To sum up, we have come through a difficult period in the world's economic history with less difficulty than many of our competitors. Our present interest rates have not stopped essential borrowing for industry or for house purchasing. It is ironic that, had we accepted the Liberal prescription, the result would probably have been to make both those successes unobtainable and, indeed, to have created even higher interest rates.

8.6 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

My first task is pleasing. I welcome the Financial Secretary once more to our debates. It is a pleasure to see him at the Dispatch Box for the time being. However, I wish to give him a little advice. He should not take too literally the Treasury slabs. Ministers may make use of them when they have nothing to say on an arcane subject, but I understand that the hon. Gentlemen knows quite a bit about the matters with which we are dealing in this debate, so it would be preferable for him to rely on his knowledge and understanding.

The astonishing thing about the debate is not the motion but the amendment. I have seen the great divisions of political and economic opinion on the Government Benches. They have rightly been paraded, and they form an essential part of the economic debate. It is, therefore, incredible that, far from taking account of the divisions, the amendment merely "expresses confidence" in "the Government's economic strategy". That is totally inadequate.

The Government inherited a minimum lending rate of 12 per cent. It shortly increased to 17 per cent., and it was between 14 and 16 per cent. for several months. We have come to associate that crippling level of interest rates with the Government.

When the present Chancellor of the Exchequer spoke from the Opposition Benches on 30 November 1976 he talked of the "crippling rates of interest" that were then current. He called them "a tax" on "British industry". That phrase is not current, but I understand the point and I am surprised that present interest rates have not been thought of in that way.

Earlier this year, in its bulletin, the CBI tried to quantify the extent of the tax. The Chancellor of the Exchequer agreed in his evidence to the Select Committee on the Treasury and Civil Service that a rise in interest rates of two percentage points cost industry about £700 million a year. As the hon. Member for Colne Valley (Mr. Wainwright) rightly stated, the reduction in interest rates at the beginning of this year from a very high level to a lower but still high level was assumed to be a benefit to industry and was accompanied by a failure to index allowances and, therefore, was paid for by increased taxation. It was argued that industry would benefit and the person in work, who was still earning and obtaining advantages from being part of the dwindling working population, would pay for the assistance given to industry.

The benefit, if that is what it can be called, given to industry was not only withdrawn but a further impost was added to the shoulders of industry. Instead of the Government coming to the House and saying "Because industry will no longer get that advantage and the benefit is being replaced by a further tax, we will ensure that those who pay for the benefit will be recompensed", there has been silence from the Government. The Financial Secretary has taken refuge—it is a peculiar form of refuge—in other countries' level of interest rates.

There is no question but that the United Kingdom has one of the highest interest rates in the world. If we consider France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and the United States, we discover that France, for reasons we know about, has the highest level of interest rates, but then comes the United Kingdom. The reason for that is not easy to understand unless we take into account what the Chancellor of the Exchequer said last week about interest rates. I put the same question to the Financial Secretary that I put to the Chancellor of the Exchequer, who gave a hopelessly inadequate response. Why did interest rates not come down last week when the United States' interest rates came down? The Chancellor of the Exchequer has been pleading that interest rates the world over have been high. However, they have not been as high as the United Kingdom's and other countries have not had the benefit of North Sea oil which is of enormous assistance to Britain's balance of payments. Even without that advantage, other countries' interest rates have not been as high and have been reducing.

The Bank of England intervened to keep interest rates up. The Financial Secretary must be aware of that and he will need to consider what the City of London is saying and doing; part of his responsibilities must be to understand these types of movements and the way they are interpreted. Therefore, far from there being a simple interpretation, there was complexity—nobody understood the situation. The Chancellor of the Exchequer said that it was because of his monetary policy. I should like that monetary policy to be spelt out more fully. If it is still in operation, why should our interest rates rise when those in other countries are, relatively speaking, falling?

Mr. John Browne (Winchester)

Does the right hon. Gentleman agree that it is the Government's legitimate role to iron out the wild fluctuations in interest rates which would occur if they responded to every change in the American rates which are linked to the monetary base system? The volatility of the American rates means that, although they were reduced a few days ago, they will increase again. Is it not a legitimate role for the Treasury and the Bank of England to smooth out the curves in the interests of the people at home to create less volatility?

Mr. Sheldon

I wish that I saw the situation in the way that the hon. Member does. I do not see us "smoothing" at all. I see a great volatility in the United Kingdom. Between the 1979 election and November of the same year there was an increase from 12 to 17 per cent. in interest rates. What we were discussing last week was movements not of 1 per cent. but about ¼ per cent. in the wrong direction. We are perplexed by the movements in the rate and, of course, I understand that the Bank of England has a proper role in trying to take a view on the level of interest rates that the Government want—not just the markets. The Government dictate the markets as well, despite the ending of the minimum lending rate. We are not in the hands of the market because the market pays great attention to what the Bank of England does and the Bank of England is instructed by the Treasury in the time-honoured way.

Although the United Kingdom's interest rates are said to be affected by events in other countries, they are higher than those in other parts of the world and higher than they need be. The argument frequently used—we have not heard it today but I expect that we shall if only in the reply—comes in connection with the crowding-out of the economy and the way in which money spent on increases in pubic expenditure needs to be offset by reductions in private investment. It is argued that, if the PSBR is increased by £100, private investment suffers by £100. We must deal with that argument fully. I question it. I hope that the Financial Secretary who, by implication, has assumed that relationship, will also question it. The two proposals do not go together, because the PSBR may be increased for many reasons. It is argued that if there is a demand for money, the greater the demand the greater the interest rates. An increase in public expenditure means more demand for more money.

Mr. Ridley

I did not use the "crowding-out" argument which the right hon. Gentleman—he has a large slab, which is not even a Treasury briefing, which he is going to say to the House—referred to. The argument I used, which is different from the crowding-out argument, is that heavy borrowing results in heavy interest rates. That is the argument that the right hon. Gentleman must deal with.

Mr. Sheldon

That is a matter of the greatest importance because, throughout most of last year, the Chancellor of the Exchequer placed primary emphasis on the crowding-out principle. Does not that principle govern the Treasury today? The Opposition must be entitled to an answer to that question because they understood that that was the main argument and why it was necessary to reduce public expenditure, so that the money that went into public expenditure could go into private industry and investment.

It was the wilful use of money to finance the public sector that prevented the private sector from achieving the great things which were at one time predicted for it by the Government. Is the hon. Gentleman abandoning all that?

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

rose——

Mr. Sheldon

No, I cannot give way.

The Financial Secretary made a point of great importance because many people spent much time examining these matters, contradicting the Chancellor of the Exchequer and finding him maintaining what we and other people saw as nonsense and what the Financial Secretary is beginning to see as nonsense. The matter cannot end there. We must discover whether the Chancellor of the Exchequer supports the major argument which he has used on many occasions in the House and in evidence to the Select Committee on the Treasury and Civil Service. The hon. Gentleman does not move to dissociate himself from the remarks that he has made. We must take note of that and bring it to the attention of the Chancellor of the Exchequer at the earliest opportunity.

If the crowding-out argument can be jettisoned, there are many other aspects of the Government's policy that can be jettisoned because there are other elements that are just as nonsensical. This piece of nonsense did not stand by itself on a pinnacle. There were many other similar peaks that are also worthy of demolition. I hope that the hon. Gentleman will look at some of these other aspects with his critical eye. He will find similar nonsenses and I hope that he will show an equal readiness to jettison them.

The argument was posed that the demand for money led to a greater level of interest rates and that as public expenditure meant a demand for more money interest rates would be higher. That is more nonsense because it does not depend on the kind of public expenditure. We have heard a simplistic argument—that public expenditure is of a uniform kind: if we increase public expenditure—whether on the old-age pension, building a road or building a productive factory—we increase interest rates. It is all the same. We must move away from that premise and behave as adults. I hope that the hon. Gentleman will turn his attention to that sort of simplistic nonsense.

Of course, some of those arguments lead to the fact that as we cannot afford so much public expenditure we had better close a productive capacity and put people on the dole and in that way reduce public expenditure and interest rates. Anyone with any understanding whatever of these matters will know how much that is costing in unemployment benefit, loss of taxation, and so on. When those costs are added together, there is not much saving of public expenditure. On the other hand, in some areas, if we cut public expenditure, we shall get a true saving. If we get rid of an official who has been doing nothing useful, that is a true saving of public expenditure. If capital expenditure is cut, we shall lose industry, put people out of work and lose the corporation tax and investment that comes from that industry. If we do that, we shall have not only the losses that I have described, but even more.

We must also consider the expenditure that goes out of the country in the form of capital flows. It is interesting that, following the abolition of exchange controls, the Bank of England Quarterly Bulletin shows that outward portfolio investment has increased enormously. That money, if it had not been available for outward portfolio investment, would have been used for the purchase of gilts. It would be interesting to know whether the hon. Gentleman thinks that if the money had not been available for the purchase of portfolio investment overseas it would have brought interest rates down because some of the money would have been used in the purchase of gilts.

The sums are large. From £146 million outflow in the first half of 1979, the figure increased to £309 million in the second half. In the first half of 1980, the figure was £424 million and in the second half £1,055 million. In the first quarter of 1981, the figure was £1,290 million and in the second quarter £1,180 million. Those figures are published in the Bank of England Quarterly Bulletin for September 1981. Those are enormous outflows. That money would have gone into private investment and into purchases of gilts. When the hon. Gentleman complains about there being insufficient money for investment, we must not accept fully his crocodile tears because we know that the Government's actions are responsible.

There is a certain spiral in these matters. As interest rates move up, they cause unemployment by slowing down investment in this country. As unemployment rises, the PSBR automatically rises to take account of that public expenditure. As the PSBR rises, the hon. Gentleman will come to the House and say that interest rates are necessarily high because of the rising PSBR. As those interest rates rise and unemployment rises, the PSBR rises. This spiral of insanity leads to greater deflation.

What damage is being caused to industry by the present levels of interest rates? I said that the CBI spoke of £700 million as being the benefit to industry of a two point reduction in interest rates, but we must see what is happening to investment.

Mr. Keith Wickenden (Dorking)

Does the right hon. Gentleman accept that £700 million is approximately 0.28 per cent. of industry's total costs?

Mr. Sheldon

I am interested to hear that the hon. Gentleman thinks that the figure is so small. The Chancellor boasted in page after page of his Financial Statement this year that the CBI said that that was one of the important measures that the Government could take. The Government responded, and then withdrew by increasing interest rates subsequently. The Government have the power to act on these matters, and when they act wrongly, as the CBI and the Opposition accept, we must condemn the Government accordingly.

In the second quarter of 1979, investment in plant and machinery amounted to £761 million. I single out plant and machinery because that is the best way of ascertaining the level of investment. Industrial buildings can be erected for a variety of reasons, not all of which apply to an immediate need for investment. Plant and machinery are rarely bought, except when the economy is expanding or when the demand in industry is increasing or when industry sees prospects of increased demand in the months or years ahead.

From a level of investment of £761 million in the second quarter of 1979, there has been a continual decline in the purchase of plant and machinery until it reached the abysmal level of £600 million in 1981. A further decrease is forecast. The problem, of course, is that a number of manufacturers are being forced out of business and are therefore selling their machinery overseas. Some of our best machinery and our most modern industries are suffering in this way, to the disadvantage of Britain as a whole.

An important point must be established here. Will the Minister tell us what is now the major determinant of monetary policy? It used to be sterling M3, but many people in financial circles doubt whether that is now so. Is the major determinant now the exchange rate? Certainly some of the actions of the Governor of the Bank of England acting on behalf of the Treasury are unclear in this respect. Will the Minister therefore tell us whether the major determinant is sterling M3 or the exchange rate?

Finally, I wish to consider the effect of interest rates on bank profits. In his Budget Statement on 10 March 1981, the Chancellor referred to taxation of bank profits.

Mr. Beaumont-Dark

Will the right hon. Gentleman give way?

Mr. Sheldon

I have given way to a number of Conservative Members. Perhaps the hon. Gentleman will allow me to continue my speech.

In his Budget Statement, the Chancellor said: bank profits in recent years have increased sharply, both absolutely and by contrast with the experience of most other businesses. A substantial part of these profits is the direct consequence of high interest rates in recent years". He continued: the contrast with the sharply reduced profits of industrial companies is, if anything, more striking. In present difficult circumstances, I cannot avoid the conclusion that I should require the banks to make a special fiscal contribution."—[Official Report, 10 March 1981; Vol. 1000, c. 772.] Despite the hopes and intentions of the Government at that time, interest rates have remained high. We must therefore assume that bank profits will also be high. Will the Minister tell us today whether it is intended to include windfall tax measures in the next Finance Bill? Will he undertake to consider this in order to ensure that the burden is seen to be fairly shared by those in a position to obtain advantage from high interest rates as well as by industry generally?

An interesting motion has been put forward by the Liberal party, but the Government amendment can only be described as fatuous. We must therefore treat the amendment with the scorn, contempt and derision that it deserves. I ask my hon. Friends to ensure that it is rejected.

8.32 pm

Mr. John Watson (Skipton)

I am grateful for the opportunity to participate in the debate. I am also somewhat surprised, as this is the eleventh occasion in two and a half years on which I have sought to participate in an economic debate, but the first on which I have been successful. I therefore express my gratitude to you, Mr. Deputy Speaker, for this opportunity to make my economic maiden speech.

Today is a significant day in economic matters, as two items of economic news have been made known, not in the House but from the normally reliable source of the Treasury. Both items are significant.

First, we have learnt that public spending next year is likely to be £4 billion to £5 billion higher than was originally intended. I confess that I regard that as good news, although I know that that feeling will not be shared universally by Conservative Members. I suppose I regret slightly that the extra demand will drift into the economy almost by default rather than being injected through a deliberate programme of capital works or national insurance surcharge reduction. Nevertheless, I welcome it.

Secondly, and equally significantly, it appears that the increase is likely to be paid for. We have on the tapes the rumour—it is no more than that—that council rents may rise by £3 per week, that unemployment benefit may rise by 3 per cent. less than the rate of inflation and that the real value of students' grants may not keep pace with inflation to anything like the extent that would appear to be necessary. All that may not be bad if it does not constitute the whole package.

I do not intend immediately to start fulminating about injustice to council tenants or the unemployed if plans for child benefit or supplementary benefit mean that the package as a whole will be acceptable; but the initial auguries are not good. On the information available so far, I have a nasty suspicion that the overall effect of the package may well be deflationary or that the burden of paying for unemployment may be unfairly placed upon those who are themselves unemployed. If that transpires, I shall have great difficulty in supporting such a package in the Lobby.

I should like to see an increase in demand stimulated by the Government. That will no doubt lead many of my hon. Friends to say that there is no alternative. They say "If the Government are to spend more money, where will it come from? Are they to increase taxes, print it or borrow it?" I shall be deliberate in answering that question. It would be counter-productive to raise money by taxation. If we are to stimulate demand, it makes no sense to change cash from one pocket to another. I should be reluctant to increase the money supply by much more than the Treasury intends.

Slightly more, perhaps, with 15 per cent. spare capacity in British industry, one is bound to question whether an increase in monetary demand will have the same inflationary consequences as it has had in the past when industry has been operating much nearer to full capacity. Therefore, I would borrow the cash, as necessary. Some of my hon. Friends say that would put up interest rates and drive Britain into deeper debt. I do not think it would. First, if we are talking of an increase in public expenditure of £4 billion or £5 billion, that is, in gross terms, some 5 per cent. of total current Government expenditure. In net terms, I guess it would be less than 2½ per cent. It must be possible to sell that amount of increased Government debt to the non-banking institutions without putting up interest rates, particularly when they are showing a declining inclination to invest their cash in equities. But significantly, the tale we were told in the spring was that it was Government borrowing alone that was responsible for putting up interest rates. That seems now to have evaporated like the morning mist. Now, so far as I can see, interest rates are high for a variety of reasons that are almost unrelated to our domestic borrowing requirement, but are very closely related to the need to protect the currency.

In fundamental terms, the Government have two economic strategies available. They can have a relatively high £ sterling, protected by high interest rates. Those high interest rates will give them the liberty to borrow more money and it will be necessary to borrow that money to prevent the ramifications for industry, caused by high interest rates and a high currency, from being too serious. Or alternatively, the Government can refuse to defend the £ sterling. Interest rates will therefore not be too high but, at the same time, the Government must control borrowing for fear that that will have an effect on interest rates. What worries me is that the Government are not pursuing either economic policy at the moment. Either policy would be logical, but we have a system of a high currency and high interest rates and we are not availing ourselves of the opportunity to borrow the extra cash that those high interest rates would enable us to do.

Some people say that the biggest problem is not interest rates but the fact that Britain is yearly, daily, getting deeper into debt as a nation. I know that many of my hon. Friends say that. There can be only one answer to that. I have tried to think of a more delicate way of putting it, but the answer is that it simply is not true. Britain is not more in debt now than at any time in the past. I shall draw attention to a comparison with a manufacturing company which, I think, bears some relevance. A business man in a manufacturing company is not normally too worried about the size of his overdraft in absolute terms. However, he is crucially worried about the ratio between that overdraft and what his company possesses or what it sells. That is called the debt equity ratio in normal City terms. For the Government, the nearest equivalent is the debt income ratio or the ratio of our national debt to our gross domestic product.

I shall briefly present four facts. First, our national debt is now 49 per cent. of our gross domestic product. In 1960, it was 109 per cent. of our gross domestic product. Secondly, the public sector borrowing requirement, as an issue, did not figure anywhere in Budget debates throughout the 1960s. Thirdly, the proportion of Government income spent on interest charges has not changed significantly for 20 years. Fourthly, while we in Britain have slavishly reduced the real value of our national debt by 23 per cent. in the past 10 years, the United States of America has increased its national debt by 14 per cent., Germany has increased its national debt by 107 per cent., and Japan—our most feared industrial competitor—has increased its national debt by 350 per cent.

When I hear some of my hon. Friends talking about the nation's indebtedness, I cannot but believe that they are reacting like a young housewife in a newly-mortgaged neo-Georgian house on an estate somewhere near Bishops Stortford. I can imagine a husband coming home and saying "My dear, I am sorry, but I have lost my job. I am unemployed." I can then imagine his wife saying "That is awful. That is the worst thing that could have happened. Obviously, the first thing we must do is to pay off the mortgage. To that end, we must sell the car and all the furniture." In saying that, the wife overlooks the fact that the husband may need the car to get another job and that the kids will scream their heads off if there is no furniture in the house. Above all, she overlooks the fact that the house has increased in value since they bought it while the mortgage is being gradually paid off.

8.41 pm

Mr. Russell Johnston (Inverness)

I am pleased to speak after the hon. Member for Skipton (Mr. Watson) and to congratulate him on the fact that his assiduous persistence has, on this occasion, been rewarded. His contribution was considerably damper than the and contribution made by the Financial Secretary to the Treasury.

I hope that the hon. Member for Skipton will pardon me if I do not take up his remarks. As he probably knows, Liberals are already on his heels in Skipton. I shall concentrate my remarks not on the hon. Gentleman's reservations about Government policy but on Government policy. As he has done for many years, the Financial Secretary pleased us with his bland and languorous gentility. I probably disagree with him as much as I would disagree with Arthur Scargill, but I should think that an exchange with the Financial Secretary is considerably more civilised. That does not detract from the fact that, ultimately, he said nothing to defend the present interest rate, to deny that it can be reduced or to respond to the effects of the present level.

I shall concentrate not on the mechanism for changing the interest rate—which my right hon. Friend the Member for Colne Valley (Mr. Wainwright) dealt with and to which my hon. Friend the Member for Truro (Mr. Penhaligon) will no doubt return in response to the Minister's remarks—but upon the effects of the savage rise in interest rates. It is important that the House should realise what they are. After all, the Government must consider what is happening within the realm. If the situation is serious, the Government must somehow find a way of doing something about it. The hon. Member for Winchester (Mr. Browne), who appears to have left the Chamber, said that. After all, politics is, above all else, about finding ways of solving impossible problems. If society's problems were not so difficult, we would not need politicians. As the Financial Secretary probably knows and appreciates, many business men would be happy if there were no politicians. Business men continually tell me that and say that the less interference there is, the better. However, we need politicians, because we need to mitigate many of the circumstances that arise.

We operate in a mixed economy. One of the Liberal Party's complaints against the Government is that they do not recognise the public element of the mixture. Similarly in terms of their declared policy through the Labour Party conference, the Opposition apparently wish to dismiss in large part the private enterprise element of the mixture. At present, we inevitably pay heed to the cry of the market in the creation of such things as the National Enterprise Board, the Scottish Development Agency and the Highlands and Islands Development Board. We do so because we recognise that the mixed economy means an acceptance that fewer market forces require adjustment, both for social and economic reasons.

The Minister told us that what he is doing has some sort of ineluctability about it. In effect, he is really saying that there is no alternative. Despite the fact that we are having a debate, the hon. Gentleman smoothly disregarded any arguments such as those made by my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) in an intervention.

We are not discussing the whole general economic spectrum, even though the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) sought to widen the area of debate. It is undeniable that the concurrent establishment of a prices and incomes policy would have a profound effect. We may argue about what the effect might be but the Lib-Lab pact—much abused in those days—reduced inflation to 7 per cent. A view on the exchange rate different from that presently held by the Government would also have a profound effect.

I am sure the Minister accepts what was said by the right hon. Member for Ashton-under-Lyne about Britain having one of the highest interest rates in the world. He should also recognise that he is now subject to a wide spectrum of criticism, but at no stage in his speech did he do so. That criticism is not confined to the Liberal Party or the SDP. It is clearly in evidence in the CBI, the chambers of commerce and, dare I mention it, in speeches of the right hon. Member for Sidcup (Mr. Heath) who, after all, was leader of the Conservative Party and Prime Minister. I would have thought that the Minister ought to pay some regard to this.

Because of my responsibilities for foreign affairs and for Scotland in the Liberal Party, I tend to make general speeches, but for once I shall behave like a Back-Bencher and speak about the impact of national policies on the Highlands and Inverness-shire.

I have spoken to a wide cross-section of people in my area about the interest rate problem, and although I am speaking about the Highlands, I suspect that the picture that emerged can be mirrored throughout the length and breadth of the United Kingdom. First, the industries most likely to be able to borrow in search of expansion are those that have capital assets. That is a simple and obvious statement. In the Highlands, and probably in many other areas, that means agriculture, where there is land and possibly buildings that are owned; it means tourism, where there is a hotel; it means fishing, where there is a boat. It is as simple as that. I shall deal with each section. All of those industries, although important to the Highlands, are also important to the country's general economy.

First, as regards agriculture, this argument is probably more general than particular. What is fundamentally bad is that those most hit by interest rate increases are those who, for very valid reasons, have embarked on, or been encouraged to embark on, either land reclamation programmes or stock build-up programmes, both of which take a good deal of time. Many of these exercises in the Highlands have been undertaken with loan support from the Highlands and Islands Development Board. That is an organisation about which the Minister knows. I suspect that he does not basically approve of it, knowing the way in which he thinks.

However, the HIDB is deeply concerned about this matter and is prepared to be quoted as being concerned about it. Hon. Gentlemen generally know that the HIDB is able to offer loans at fixed interest, grants, and interest-free holidays on loans up to three years. In a sense, that is a very flexible package for a development agency; but is has drawbacks. The fixed interest loans—this is often forgotten by hon. Members—are at a level about 3 per cent. below the going rate. While it is fair to say that an agricultural enterprise, in so far as it is able to peer into the future any more than the rest of us, should properly take this into account in deciding whether to embark on such a loan, there are three points which hon. Members ought to bear in mind this connection.

First, it is very difficult for any enterprise—agricultural or otherwise; but I am talking about agriculture particularly—to forecast the sort of jumps in interest rates which we have encountered, and therefore it is not fair to say that it should have taken this into account when it took a loan.

Secondly, the loan will continue to carry the going rate at the time it is made even if the going rate drops. I stress that point. If an enterprise gets a loan over 10 years at 15 per cent., the rate will be 15 per cent. to the end of the 10 years, come what may.

Thirdly, the present going rate is a deterrent to engaging in any expansion. In the case of the HIDB, the result has been to divert money from the manufacturing and risk area into rescue operations. That means that while its total budget has been held up against inflation, it is less able to do what it is supposed to do—engage in manufacturing risk. I made that point last Thursday during the debate on the Scottish economy.

The second section is tourism. It is an industry that earns us a great deal of foreign exchange. The last three years have been bad years. The tourist flow has diminished. That is not just my experience and that of others in the Highlands. It is the experience in Truro, in the West Country generally and in other areas of England. At present, in my part of the world, there are four hotels on sale in the small village of Newtonmore. A hotel in Inverness was sold for £80,000 the other day. Its owner had turned down an offer of £120,000 three years ago.

The general picture is very serious. In that circumstance, the improvement of facilities to attract the tourist is vital. The basic thing is that hotel owners are not prepared to embark on any improvement of facilities because of present interest rates.

Thirdly, fishing is severely affected by the continuing failure to reach agreement on a common fisheries policy. It is also affected by fuel prices and landing prices for fish. The position of fishermen is appalling. All are in serious debt but have to pay these interest rates.

This brings me to my final point.—[interruption.] Conservative Members should stop grumbling. There are endless opportunities for them to dilate on the Government's policy or the lack of it. Liberal Members do not have many opportunities. It is not unreasonable sometimes for us to take advantage of any such opportunity.

The Financial Secretary is not just a Treasury Minister. He is also a Conservative theorist. At the end of the day, if the wealth-producing group in this country is exceeded by the wealth-consuming group, we are in trouble. A great many existing companies cannot borrow at a level that enables them to continue. It is also true that a great many companies and people with ideas find it impossible to start for the same reason. To find 20 per cent. interest charges at a time of thin profits makes matters impossible. Times are particularly bad for companies engaged in exports, normally on a fixed contract. Those companies cannot build into the contract the effect of interest charges.

The Government's economic policy is not succeeding. This is shown by the number of unemployed and in the views expressed by industry at every level. Liberals believe that some action on interest rates would perhaps not solve the problem but would greatly mitigate the damaging general effect of the Government's policies.

8.56 pm

Mr. Neil Thorne (Ilford, South)

I shall endeavour to keep my remarks short. A number of hon. Members still wish to speak. I listened carefully to my hon. Friend the Financial Secretary. I must confess that although I have a personal interest in this matter, without intending any pun, I do not think he is right in assuming that interest charges are necessarily of less significance to businesses than labour costs. This really depends on the industry and how capital intensive it is. Most of the small businesses in my constituency are capital intensive, or at least rely on customers who have capital intensive businesses. In the same way that the buying or selling of owner-occupied homes causes a chain reaction, so does stocking for business. The direct result of destocking on small businesses is, I fear, unemployment.

It is my personal regret that the Government have not tackled the question of the public sector borrowing requirement as early as I felt they should have done. Both central and local government had a honeymoon period lasting between a year and 18 months under this Government whereas businesses, particularly small businesses, started to feel the effects of the screw within the first three to six months. This considerable gap has caused private industry to descend much faster and further because of the time it has taken to bring the public sector borrowing requirement under control through action on central and local government. This is a grave error. I hope that this will not be regretted by the Government in the months to come. The longer the matter is put off, the more difficult it is to resolve. It has to be put right to the benefit of the wealth-creating sector, which desperately needs more orders if it is to survive.

In the same context, there are many areas in which the public sector borrowing requirement could have been brought under control. One of the issues that irritate business men possibly more than anything else is the index-linked pension. To a struggling business that is not sure whether this time next year—or even this time next month—it will be able to meet its daily costs, the knowledge that someone who retired a few years ago on a pension of £8,000 is now receiving a pension of £22,000 is a major irritant. I hope that the Government will fulfil in the near future their promise to review the matter. Indeed, I hope that it will be reviewed in such a way that those who expect to receive index-linked pensions will be invited to make a major contribution towards their cost. It is not fair that those who do not have the benefit should be expected to foot the bill. I hope that it will be dealt with as a matter of urgency.

I fondly believed that when minimum lending rate was abolished the market would be left free. It was, therefore, with some surprise and concern that I noted a week or two ago that the Bank of England had intervened to keep up interest rates, at a time when industry is suffering badly. If the Government are to encourage businesses to take the kind of action that will sustain and increase employment, inevitably they must deal with interest rates. I hope that they will not intervene again in order to maintain interest rates at a high level.

I assure the Financial Secretary that my constituents suffer very badly from high interest rates. They are longing to see them reduced so that they can take on additional employees. They have to look carefully at the sums they are paying to their banks by way of overdraft interest, and decide whether they can maintain employment at the present level. I know of several firms that have done just that in the last month and have been obliged to make further employees redundant because they found it impossible to maintain their interest payments in any other way. There is no question but that that is happening. The Government know that if every small business man were to take on one or two extra employees, unemployment would be far less severe than it is. I urge the Financial Secretary to consider the matter most carefully.

I note the Government's amendment, that this House expressed confidence that the Government's economic strategy is the best course for restoring this country to prosperity". I am concerned about the issues that I have mentioned. But I believe that the Government are the only body capable of taking the necessary action. I ask them to take it, and to take it quickly.

9.03 pm

Mr. Tom Ellis (Wrexham)

I cannot resist the temptation to compliment and congratulate the hon. Member for Skipton (Mr. Watson) on making one of the few really intelligent speeches on economic affairs that I have heard from the Conservative Benches for a long time. If, as he said, it was his economic maiden speech, I hope that we shall hear more frequently from him in future on economic affairs, so that we may benefit from his sound views.

The right hon. Member for Ashton-under-Lyne (Mr. Shelton) speaking for the official Opposition, described the Government's amendment as fatuous. He was right, but it has the advantage of broadening the debate away from interest rates. It would have been extremely difficult to discuss interest rates meaningfully in isolation from all the other interlocking economic parameters.

To seek success in one of the parameters at the expense of failure in others is surely not a wise policy to follow. The obvious example is the policy of the 1930s when inflation was virtually zero. That hardly commends itself as an economic policy to be followed in the 1980s, although it appears that it is precisely that policy that is being followed.

I have been struck by the deliberately civilised and moderate way in which our society has viewed the deepening crisis over many years. That remarkable feature is one of the parameters that will impinge more directly on our economic affairs than the Government appear to realise.

Apart from parameters such as interest rates, inflation, investment, production and exchange rates, there are social and political parameters. There are the intermediate parameters, partly technical and partly economic, that include objectives that can be measured. There are parameters, partly social and partly political, that are less tangible but none the less real. It is in that area that the Government are coming unstuck.

It is clear that the Government assume that only impersonal market forces determine the economic situation. Against that background the nature of the crisis that we are facing should be extremely surprising to them. I am referring not to the gravity or degree of the crisis but to its qualitative nature. It is unique. It is the first time that we have experienced such a crisis. Incomes and prices have been rising, yet the economy has been declining.

In the 1930s we had low wages, low inflation and high unemployment. In the 1960s we had high wages, high incomes and a growing economy. We now have the apparent paradox of rising inflation and a stagnant economy. The reason for that lies in the second type of parameter that I have described. That is the halfway house between the technical-economic and the social-political. It is clear that firms, unions, and those in the industrial world have substantial market power. A great chunk of the economy is either monopolistic or oligopolistic. It is major error of judgment on the Government's part to rely solely, as they seem bent on doing—certainly this is the impression to be gained from the speech by the Financial Secretary to the Treasury—on the mechanistic approach. They are relying on a monetary squeeze to achieve their economic aims. They are putting pressure on the liquidity of firms and companies to squeeze out inflation.

The Government's mistake is being compounded at the point of production. When firms go out of business, their employees become unemployed, but there is more to it than that. Firms need to invest. For a long time current incomes have been given priority at the expense of investment.

The mistake is being compounded further, because unemployment is adding to inflation. A man who is unemployed still has some demand, but that demand is not met by the corresponding productive effort that he would otherwise make. The logical consequence—the hon. Member for Skipton referred to it in passing—of the mechanistic approach is to cut back the purchasing power of the unemployed. We have heard rumours that there is to be a cutback in real terms in unemployment benefit. Leaving aside subjective questions of equity, for sheer economic and technical reasons the policy of the Government is profoundly misguided.

The point that, more than any other, must be put across to the Government is that inflation is an extremely complex problem. There is a supply side as well as a demand side. I shall quote from what I consider to be a profoundly wise broadsheet produced a few years ago by the Social Science Institute called "Reshaping Britain—A programme of economic and social reform". I re-read it recently and was struck by the prescience of the authors because what they spelt out can be checked now and their forecast and prognostications are remarkably accurate.

Amongst other things, they said that: For example, a credit squeeze as such is likely, on its own, to hold back production (through shortage of funds for work-in-progress and capital investment) more than It checks consumption spending. It is clear that there are all kinds of services such as those of a dentist or a policeman. If I ask for a standard of service for which, if I am on the dole, I cannot pay in output, I cause inflation. The position is quite obvious but the Government cannot quite grasp it.

I worked in the coal industry and any colliery manager will tell hon. Members what anyone in industry would say. This sums up my argument. A good output will cover a multitude of sins. The Government are trying to eradicate all sins but there is no output and they could have done the whole thing much more easily if demand was really stimulated.

The Government are trying to control inflation by acting on total demand through their money supply, interest rates, budgetary surpluses or deficits, exchange rates and so on. However, the plain fact is that the bargaining power of the industrial world is too strong for the Government, even with 3 million unemployed. The question was asked, and still has to be asked: at v, hat level will the total of unemployed be sufficiently large for the middle range, the partly technical-economic and partly social-political, parameters be met?

The broadsheet states: We think not only that the current crisis is now propelled by market and bargaining power, but also that such power has become strong enough in Britain to render the existing form of economic management, that is to say, broadly, global demand management, insufficient to maintain stability without the support of income restraint, at least for the medium term Those words are profoundly wise and as appropriate today as when they were written six years ago.

I make one final point to illustrate the difficulties arising at the point of production as a consequence of the squeeze on liquidity. There are some dynamic firms of which the Government frequently boast. Their growth in productivity is reasonably adequate and fast. However, unions in these companies insist on having incomes increased in relation to the increase in productivity. Other companies do not have that productivity and the less efficient industries do not have that investment. The rate of inflation is being built into the system. It is tending towards the substantial difference between the growth of productivity in the more dynamic industries and the average growth of productivity throughout the economy as a whole.

It is difficult to know how to advise the Government, because they are rigidly and mechanistically committed to their policies. Mr. Roy Jenkins described a carefully thought-out and excellent package at Warrington. It is significant that four days later, although there was plenty of opportunity to consider it, the Chancellor of the Exchequer went to Warrington and did not even refer to it. It was a major issue in that by-election, yet he did not refer to it. That was extraordinary.

There is no point in advising the Government to go ahead on that basis. The Government must change their policy. If they want not to make a U-turn but to change surreptitiously, there is a route that could prevent the disaster—lowering interest rates. Their policies will not work. That is clear. They will bring us all down. They will sink the ship.

9.15 pm

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

We must be brief in what is a short debate.

I am amazed that people who talk about statistics say that 2 per cent. off the interest rate for industry represents only 0.48 per cent. of its costs. I am a business man and I talk to many business men in the Midlands. The figure is not 0.48 per cent. when £700 million is involved. The amount is often the difference between life and death for business. I wish that people would not talk so casually about percentages.

I am told that the average motorist drives about 1 million miles without an accident. To those involved in the carnage on the roads that is a small consolation. Percentages are not what matter. To industry £700 million is a huge sum. If one is heavily overdrawn and making a nil profit, interest rates matter and they should be considered.

The only genuine criticism that I have about the Government's economic policy—because the main thrust of what is being done is difficult but necessary—is that the Government are placing too much reliance on the view that if we can keep a strong foreign exchange, that will somehow have a tremendous effect upon inflation.

The most important thing that we can do is to restore the confidence of people involved in business that interest rates are going in' the right direction. Business must be confident that it is safe to borrow money to restore and make fruitful their businesses.

One of the problems is that Britain's tax system encourages the diversion of savings into housing, Government securities and debentures. We should try to discriminate in favour of direct investment in industry. Many people who invest money ask "Why take the risk? It is not worth it." The House must decide that we cannot be a service industry country and that we must invest in enterprise. Enterprise made the country grow.

I believe that the banks do an honest task. They are prepared to help companies, particularly those that have the assets to more than cover what they are willing to lend. Although I do not go all the way with continental banks, the British banking system should be more prepared to take risks. Investment means risks and some losses are necessary for profits to be hewn from enterprise. I have mentioned to bankers more than once—and although bankers have banked on me for many years I am still willing to risk that overdraft to say it—that there must be a greater commitment and a greater sense of involvement. They must be more prepared to use their interest rate profits to help the genuine and necessary growth of this country.

Crowding out is a doubtful argument. It is used by economists. We all know that if there are 10 economists there are 11 opinions. On the Treasury Seclect Committee, if there are 10 economists, there will be 12 opinions. Crowding out to me and to business people means not that one cannot get the money, but that the cost of the money is at a level at which one cannot make a reasonable profit if it is borrowed. That is what Government borrowing is doing. It is forcing up the cost of money to the level at which industry cannot make a profit.

I give one word of advice to Government and to those who urge Governments to spend money. A sum of £1 million left in the hands of private industry and private individuals is worth £5 million of State spending. What happens in the State sector is clear. Water workers say that an 8 per cent. increase is not enough. There are factories in my constituency where workers are lucky to get a 1 or 2 per cent. increase. I would tell the water workers that if the sewage came out on to the streets, we would send their addresses to the people who suffer.

The miners say that a 9 per cent. increase is not enough, whereas my constituents are lucky to get 1 per cent. Let us buy the coal from Belgium or Australia where it is cheaper. We should not be blackmailed by those who are involved in State enterprise. If they do not wish to do the job at a decent price, so be it. The country cannot place itself continually in a situation where because the State pays, the people have to pay an exorbitant sum. It is a difficult world that we live in.

There are many thousands of people who this year will receive over £1,000 million of taxpayers' and ratepayers' money to subsidise inflation-proof pensions. They will receive that because at one time a Government thought that that was sensible. That £1,000 million, which will give double the increase at least of what anyone who is earning will receive, could, if it were used productively, create about 100,000 jobs, which would create further prosperity. In other words, we must tell the banks what we expect of them. We must tell the Government that if they can leave in private industry's hands £1 million, it will become more than £5 million in its hands.

We should say to those who are lucky enough to work for the public sector that they are lucky to receive a genuine increase and to have a good and steady job, and they should be willing to accept what is offered to them. We will not be blackmailed. We should say to those who are on secure pensions that this is the time for a sacrifice from all. This is not the time when we say that a bargain that was struck in the past when 3 per cent. seemed sensible must be kept for ever. There is no Eldorado. However, we face problems.

Interest rates are one problem. I hope that the Government will see the sense in the view that interest rates affect inflation and confidence. In the end, as on any journey, we must have the confidence to set out. If we are willing to set interest rates free, money would be cheaper and business would be stronger.

9.25 pm

Mr. John Browne (Winchester)

I wish to thank the hon. Member for Truro (Mr. Penhaligon) and my hon. Friend the Financial Secretary for allowing me time to speak.

I agree with my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) and the hon. Member for Colne Valley (Mr. Wainwright) that high interest rates hurt industry badly. Although the wages bill of a company may be larger than its interest rate bill, the interest rate bill is at the margin. That, as has been said, can be the difference between profit and loss.

Unlike any other time in our economic history, when most of the debt of corporations was at fixed rates, today most corporation debt is at floating rates. When rates rise, they hit the company viciously at all its debt maturity dates, whereas before they may have hurt only the overdraft. That is an important point, which I hope will be noted by the Financial Secretary.

Secondly, we must realise that we live in an international world in relation to both interest rates and currency parities. Where people used to focus on the balance of payments, then on the money supply figures and then on relative inflation rates discounted by interest rates, now, increasingly, the world's money markets focus merely on interest rates, especially with the growth of privately held petrodollars.

Therefore we must consider closely our interest rate policy if we wish to have a sound currency. We must also consider the major influences, the most important being the United States. I am sad to say that it looks as if American interest rates will again rise. The public deficit stands at $63 billion. But if we add to that the off-balance sheet items, the total is over $100 billion, so massive funding must be carried out. The American Administration have lifted the usury laws and moved to a monetary-based system, which increases the volatility of interest rates. Just as trading in stocks or bonds in volatile times widens the prices, so volatile interest rates tend to increase the rate. There is probably a 1 per cent. or 2 per cent. premium due to volatility in American interest rates at the moment. Therefore, because American Government expenditure effectively is almost 40 per cent. index-linked, the outlook is that American interest rates will rise during the next few months.

How can we mitigate the effects of that? The first thing that we must do is to reduce inflation. To do that, we require much stronger privatisation and we must break the grip of the monopoly employment cartels. We are spending £6,000 million this year on the nationalised industries, and that must have a major impact on interest rates. We must also eradicate indexation.

My third point—here I slightly disagree with my hon. Friend—is that the quality of Government spending is vital. In any bond issue, the use of proceeds is of critical importance. the amount of Government spending is secondary to the quality. We must roll back current expenditure and return it to long term capital investment. That is the key to investor confidence and expectations about future interest rates, which both dictate today's market interest rates.

We must also dramatically increase profitability through a technological revolution. For it is that alone in the long term will allow us to achieve the standard of living of a developed nation.

9.30 pm

Mr. David Penhaligon (Truro)

This has been an unusual occasion—a Liberal Supply Day. We welcome the opportunity to have this debate, although in the odd second our minds may have been elsewhere. I have been through moments of elation and of depression. It appears that the entire parliamentary Labour Party is out canvassing. We shall reflect on that tomorrow when the result of the Crosby by-election is announced, when we shall see whether my optimism was justified.

One point stuck in my mind during the speech of my hon. Friend the Member for Colne Valley (Mr. Wainwright). Manufacturing investment has fallen by 12½ per cent. this year. We may forget, certainly in my part of the country, that our economic success, which gives us the ability to provide people with hospitals, universities and better education generally, has more to do with our manufacturing base than with any other single part of our economy. In my constituency the manufacturing component is not large, but we are a manufacturing country, and I know of no alternative to building up our manufacturing base that would provide us with a reasonable economic future. The Government's economic policy has reduced investment in the basis of our economy and our survival—our lifeline. That is why we appreciate the opportunity of having this debate.

The Minister spoke interestingly, although I enjoyed the products of his speech writer more when he spoke from the Opposition Benches. We may not agree with all that he says, but we enjoy the way in which he says it. However, today it appeared that he was redundant. What is happening has nothing to do with him or with the Treasury. It is due to American interest rates—but they have come down while ours have not, so I do not understand the connection

I suspect that the hon. Gentleman was right to criticise the Treasury computer. I am a technologist and know enough about computers to be careful about the faith that I have in them.

The Minister said that interest rates do not play a large part in manufacturing costs. However, in the high technology enterprises, which we must encourage if we are to get out of the ludicrous spiral that we have been in over the past 15 years, an investment of about £50,000 or £60,000 is required for each job. The current interest rate on borrowing money is about 18 per cent. as opposed to the advertised rate in the Financial Times, and on those figures the interest would amount to £9,000 a year for each job. Even in high technology, many would be pleased to earn that sum. It is a substantial part of giving a man the opportunity to produce things that we all wish him to produce. In some cases the interest could be as much as 50 per cent. of the cost.

The Minister challenged us to say how we would handle the situation. He said that we would allow the exchange rate of the pound to slide. That factor is important, although we do not believe that it is as important as the hon. Gentleman makes out. We do not deny that it would happen if we pursued a strategy of lower interest rates.

Mr. Ridley

By how much?

Mr. Penhaligon

It is difficult to say. I have already expressed my view about the computer in the Library and I am not sure that we know the exact relationship between interest rates and the value of the pound. I do not deny that a strategy for lower interest rates would lead to a reduction in the value of the pound, I would welcome that, because one reason why we have lost so many manufacturing jobs in the past two years is that in investment and technology our manufacturing industry has been forced to compete on terms that the present value of the pound puts beyond its reach. I have no fear about some reduction in the value of the pound.

The follow-on is that such a strategy would bring some inflation into the economy. I do not deny that a freer economy may lead to a wage explosion, but that is where the alliance can make a contribution to British politics that no one else has been in a position to make for as long as I can remember. Because the alliance is free from vested interests in the economy and is not paid for by any sectional interest, it could get a pay policy to work.

I tell the Financial Secretary honestly and truthfully that the bases of the alliance's economic opinions are likely to revolve around the development of a more humane and satisfactory method of resolving the question of pay in the economy. We believe that we can achieve that. We shall have to be honest and tell the people at a general election that that is our intention. No one has ever had the courage to defend a pay policy while seeking office, but we believe that if such a policy is publicly endorsed and the alliance is the success that we expect it to be we shall get a pay policy that will work. The Government could certainly not do that. They were elected on a policy 180 degrees to our aim. I do not pretend anything but that our policy has some coherence only if we accept an incomes policy as part of the general strategy.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) spoke of a spiral of deflation. I like that expression, because it explains the situation well—cuts lead to unemployment, which leads to more cuts. It is a spiral of disaster and, if we are not careful, it will become a spiral of bankruptcy.

Many Members have spoken about the reduction in investment in plant and machinery. The hon. Member for Skipton (Mr. Watson) referred to that in his maiden speech on the subject. The hon. Gentleman has already had more congratulations than I got for my maiden speech. The hon. Gentleman's speech was probably better than mine.

If we had the present PSBR and no inflation, our debt in real terms would be increasing substantially, but as long as inflation is higher than the percentage increase in the level of GNP represented by the PSBR the total debt burden is reducing in real terms. I should not like to use that as an excuse for generating inflation, but it is a fact.

Mr. Ridley

Is the hon. Gentleman spelling out Liberal economic policy? It sounds very like it to me.

Mr. Penhaligon

It is an economic fact. It is not one on which to base an entire policy and I dread to think how far the point could be stretched, but it is nonsense not to recognise the economic fact. If the Government are trying to run the country with no PSBR when we have 3 million—or probably 4 million—unemployed, what do they think would be the level of the PSBR if everyone were employed? One of the criteria is that we allow the PSBR to rise a little in order to try to combat massive unemployment at its present level.

My hon. Friend the Member for Inverness (Mr. Johnston) told us about the Highlands. As one of his most distant colleagues, I cannot comment much on his remarks except to say that the Highlands and Islands Development Board would be more effective if Cornwall also had such a board. Perhaps I can coax the alliance into that view at a suitable opportunity.

The hon. Member for Ilford, South (Mr. Thorne) spoke about index-linked pensions. I do not accept his argument. I accept that there is a case for ending index-linked pensions although I do not agree with it. The trouble with the argument is that, from the day that people retire to the day that the good Lord takes them away, all that they have to look forward to is a steadily decreasing living standard in their declining years. The scandal of index-linked pensions is that people retire and they can only look forward to a steady and dramatic decline in their standard of living. The Government should examine that point. If we cannot control inflation better than we are, we should ask ourselves whether we are protecting people as well as we should. I believe that we have fundamentally failed to do so. My hon. Friend the Member for Wrexham (Mr. Ellis) talked about the complexity of the issue, and eventually he agreed that an incomes policy is necessary. The alliance will not duck that issue.

The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) spoke about the amount of interest paid by industry—£8 billion a year. He said that some companies are not making a profit because of the amount of interest that they have to pay. Indeed, many have gone bankrupt because they have been unable to pay the interest demanded.

There is an alternative economic strategy that reduces interest rates. We give it high priority, because if we do not we shall produce and develop a ludicrous economy for our industrial base. If a person wants to start as a secondhand car salesman he can borrow £100,000 and it will cost him no more than £60 a day. That capital could be earning money for him within hours.

If a person invests money in the deep capital areas—I think of mines in my area—at the current levels of interest he would hope to be able to make a profit of one sixth of the value of his investment within 12 months. But whether it is mining or long-term investment in engineering plant, we all know that that cannot be done. The potential investor then makes one of two decisions. Either he does not make the investment, which happens only too often, or he is forced to borrow money in order to cover the money that he borrowed the previous year. Although it may be said that in the long term his asset is increasing—Mark Twain once said that in the long run we are all dead—many are not prepared to take that risk. We need a lower interest strategy that enables people to put more money into long-term investment and high technology. I do not believe that there is a great deal of hope of that in our great country.

I hope that the Minister will pay particular attention in his reply to a point that I raised in an intervention. The Government are paranoid about the PSBR and believe that the maintenance of a particular figure for it is important beyond all else. In another guise I am Liberal spokesman on energy and therefore I attend energy debates. As I mentioned in a question, there is a Bill currently before the House—I am not keen on it, but I leave that aside for the moment—under which a Government guarantee is to be given to British Nuclear Fuels Ltd. to raise £3½ billion. Beside such a sum the Government's sponsorship of small businesses is mere confetti. Yet apparently, because it is a Government guarantee rather than the Government actually producing the money, that £31½ billion is not part of the PSBR. Had a different decision been taken—as it is for virtually every other nationalised industry except perhaps Rolls-Royce, which came into Government hands in a rather different way—I presume that the £300 million per year that BNFL is to invest would be included in the PSBR and expenditure cuts would be required to cover that.

If it is all right to produce money for BNFL in that way, why cannot this be done on a much broader front for a number of other nationalised industries when the investment in question is likely to be profitable in itself and to make a reasonable return on capital? If the Minister can answer even that one question, the debate will have been worth while.

What enraged me and my colleagues most was the Government amendment. We have always enjoyed the Minister's sense of humour. He is a man of enormous humour and great dedication to the sport hinted at in the amendment. He was clearly determined to demonstrate it to the House once again by asking hon. Members to agree that this House expresses confidence that the Government's economic strategy is the best course for restoring this country to prosperity". We are all aware that there is no majority in the House for that proposition. We shall divide the House tonight, but the real division will come in another part of the country in 13 minutes' time. That is where the real voting has taken place today, and the result will be the thumbs down sign for the Government's economic policy.

9.48 pm

Mr. Ridley

With the leave of the House, I shall try to reply to some of the many points raised in this interesting and affable debate. I do not know what leads the Liberal Members to be in such good spirits, tossing out economic promises and idealistic hopes for the future. Indeed, they have widened the debate into all manner of areas, from the Highlands and Islands to investment of every kind.

The question of public investment was dealt with by many hon. Members, including the hon. Member for Come Valley (Mr. Wainwright) and the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) as well as by my hon. Friend the Member for Winchester (Mr. Browne). Hon. Members have stressed the importance of public capital investment. On that I think that there is no difference between us. I merely point out that whenever the proposition has been put to the House that public investment might be increased if revenue could be reduced in any particular public programme, it has run into the stiffest opposition. I say that with some feeling, having had the unenviable task of persuading the House to accept a small cut in the revenues of the BBC's external services in order to make a major investment in its capital equipment. It was not an easy transformation to put to the House. Therefore, there is that difficulty.

I disagree with Liberal Members because they seem to suggest that it is somehow cheaper and easier for the Government to borrow if the object of that borrowing is a particular industrial investment. That is not true. If one issued a gilt edged stock, marked "Government investment in high technology", or "Investment in the future of the coal industry" one would be asked only what the coupon and the date was. The stocks would be classified alongside all the other Government stocks. Therefore, by having a worthy objective in mind, the Government cannot borrow more cheaply. If private industry seeks to borrow for an investment that the market considers attractive and good, it can borrow more cheaply than if it seeks to borrow for a purpose that is clearly not well thought out. That is not the case as far as the Government are concerned.

Mr. Richard Wainwright

Is the hon. Gentleman asking the House to accept that when the financial markets consider the rate of return they want on a Government security they pay no attention to the Government's policy, to the drift of their economic policy or to the quality of the purpose for which they are trying to raise the loan? Does that count for nothing?

Mr. Ridley

I should not have given way to the hon. Gentleman, because that is not what I said. I should love to take up his remarks, but I must answer more of the points raised during the debate.

It is asked whether large Government borrowing crowds out private sector investment. The answer to that question is different at different times. The proposition is not a constant one to which it is possible to say "Yes" or "No". However, I should tell the right hon. Member for Roxburgh, Selkirk and Peebles that in the next breath one cannot complain about the outflow of funds for profitable investment overseas. If the right hon. Gentleman believes that there is no such thing as crowding out by Government borrowing so much that they leave very little for the private sector, he must believe that there is an infinite source of funds, which, if they go overseas, in no way diminish the funds available for investment. I did not express an opinion about that argument, but the right hon. Gentleman cannot have it both ways.

In addition, the right hon. Gentleman cannot get away with a proposition that many Liberal Members advanced. They said that investment in Britain was falling. That is not true. I accept that manufacturing investment fell from £761 million in the second quarter of 1979 to £600 million in the third quarter of 1981, but those figures do not include leasing, which accounted for £6 billion this year. If the leasing figures are added to those for direct borrowing, the figure increases by about 10 per cent. between the second quarter of 1979 and the second quarter of 1981. Indeed, investment in manufacturing industry is rising, because the interest rate is lower through investment. That proves only how valuable such investment is by sections of British industry.

My hon. Friend the Member for Ilford, South (Mr. Thorne) fairly pointed out that for some companies, interest rates are more important than other costs. For some companies, labour, or the national insurance surcharge, represent heavy burdens that they would like to reduce. To other companies, interest rate charges are the most serious factor. I cannot say with any certainty that either policy will be universally popular with industry. Some businesses are capital intensive and care more about the reduction of interest rates than about the taxation of their work force. Therefore, the answer varies according to particular circumstances.

There is always a trade-off between the two. If we were to alter the fiscal balance on companies, that would also have an effect on the interest rate. This House must decide whether its priority is to reduce interest rates or to be looser fiscally, because the tighter we are fiscally, the lower interest rates will be.

I cannot quantify exactly the effect of the extra borrowing that has been called for, but I am certain of one thing. If there was extra borrowing it would almost certainly push up interest rates. There seemed to be a bland and hopeful feeling among Liberal Members that they did not believe it. Their view was that we could borrow £5 billion more and that it would have no effect on interest rates. When asked "Why?", they say, "Because we hope so and because we think it would be cosier and nicer".

Mr. Robert Sheldon

What about windfall tax?

Mr. Ridley

I congratulate my hon. Friend the Member for Skipton (Mr. Watson) on his maiden economic speech. If there were another £4 billion or £5 billion of borrowing, it might be that in a couple of years some of that would come back in increased revenue and reduced expenditure, but there would be a definite time lag of perhaps a year or two. That would adversely affect the figures in the short term.

Mr. Robert Sheldon

Windfall tax.

Mr. Ridley

But whatever the time lag, it would make it more expensive to borrow, which would place an extra load, not only on the Government but on industry.

Mr. Robert Sheldon

Windfall tax.

Mr. Ridley

The Liberal party wants to find ways of reducing interest rates. That is also what the Government want.

Mr. Robert Sheldon

Will the hon. Gentleman say something about windfall tax, because he was asked a question about it?

Mr. Ridley

The right hon. Gentleman must read Hansard. He knows perfectly well that my right hon. and learned Friend answered that question. He can look up the reply in Hansard. Perhaps he will have the manners not to shout "windfall tax" like a parrot all the way through my speech.

The flaw in the Liberal party argument is that it has tried to make out that we can have extra spending and borrowing without any ill effects. Liberal Members say that the exchange rate might go down slightly. They would not mind that. If the exchange rate went down, import costs would go up. That would increase inflation, and in turn interest rates would go up, because interest rates are the rate of inflation plus or minus a small amount for real negative or positive return.

Liberal Members must realise that the effect of their idealistic but well-meaning ideas—adjectives that characterise the Liberal Party—would be to make the situation worse. I therefore hope that the House will accept my right hon. Friend's extremely sensible amendment.

Question, That the original words stand part of the Question, put and negatived.

Question, That the proposed words be there added, put forthwith pursuant to Standing Order No. 32 (Questions on amendments):—

The House divided: Ayes 125, Noes 31.

Division No. 12]	[9.59 pm
AYES
Alexander, Richard	Cadbury, Jocelyn
Alison, Rt Hon Michael	Carlisle, John (LutonWest)
Ancram, Michael	Carlisle, Rt Hon M. (R'c'n)
Arnold, Tom	Clark, Hon A. (Plym'th, S'n)
Atkins, Rt Hon H. (S'thorne)	Cope, John
Baker, Nicholas (N Dorset)	Costain, Sir Albert
Beaumont-Dark, Anthony	Dean, Paul (North Somerset)
Benyon, Thomas (A'don)	Douglas-Hamilton, Lord J.
Berry, Hon Anthony	Dover, Denshore
Best, Keith	Elliott, Sir William
Biggs-Davison, Sir John	Emery, Peter
Blackburn, John	Fairbairn, Nicholas
Boscawen, Hon Robert	Fairgrieve, Sir Russell
Boyson, Dr Rhodes	Faith, Mrs Sheila
Bright, Graham	Fenner, Mrs Peggy
Brinton, Tim	Finsberg, Geoffrey
Brotherton, Michael	Fisher, Sir Nigel
Brown, Michael (Brigg & Sc'n)	Fletcher-Cooke, Sir Charles
Browne, John (Winchester)	Fookes, Miss Janet
Buck, Antony	Forman, Nigel
Budgen, Nick	Garel-Jones, Tristan

Gow, Ian	Page, Richard (SW Herts)
Greenway, Harry	Parris, Matthew
Griffiths, PeterPortsm'th N)	Patten, Christopher (Bath)
Gummer, John Selwyn	Percival, Sir Ian
Hamilton, Hon A.	Pollock, Alexander
Heddle, John	Prentice, Rt Hon Reg
Henderson, Barry	Proctor, K, Harvey
Hill, James	Rees-Davies, W. R.
Hogg, Hon Douglas (Gr'th'm)	Rhodes James, Robert
Hunt, David (Wirral)	Rhys Williams, Sir Brandon
Hunt, John (Ravonsbourne)	Ridley, Hon Nicholas
Hunt, Hon Douglas	Sainsbury, Hon Timothy
Jopling, Rt Hon Michael	Shaw, Giles (Pudsey)
Lang, Ian	Shaw, Michael (Scarborough)
Lester, Jim (Beeston)	Sims, Roger
Lloyd, Ian (Havant & W'loo)	Speed, Keith
Lloyd, Peter (Fareham)	Speller, Tony
Loveridge, John	Spicer, Jim (West Dorset)
Lyell, Nicholas	Spicer, Michael (S Worcs)
McCrindle, Robert	Sproat, Iain
Macfarlane, Neil	Stainton, Keith
MacGregor, John	Stanbrook, Ivor
McNair-Wilson. M. (N'bury)	Stradling Thomas, J.
Major, John	Taylor, Teddy (S'end E)
Marland, Paul	Tebbit, Rt Hon Norman
Marlow, Antony	Temple-Morris, Peter
Marten, Rt Hon Neil	Thomas, Rt Hon Peter
Mates, Michael	Thompson, Donald
Mather, Carol	Thorne, Neil (Ilford South)
Maxwell-Hyslop, Robin	Trippier, David
Mellor, David	van Straubenzee, Sir W.
Miller, Hal (B'grove)	Viggers, Peter
Mills, Iain (Meriden)	Waddington, David
Mills, Peter (West Devon)	Waller, Gary
Mitchell, David (Basingstoke)	Warren, Kenneth
Moate, Roger	Watson, John
Montgomery, Fergus	Wells, Bowen
Morris, M. (N'hampton S)	Wheeler, John
Murphy, Christopher	Wickenden, Keith
Neale, Gerrard	Wolfson, Mark
Needham, Richard
Neubert, Michael	Tellers for the Ayes:
Newton, Tony	Mr. Peter Brooke and Mr. Alastair Goodlad.
Osborn, John
Page, John (Harrow, West)

NOES
Atkinson, N.(H'gey,)	Pavitt, Laurie
Booth, Rt Hon Albert	Penhaligon, David
Cocks, Rt Hon M. (B'stol S)	Pitt, William Henry
Cryer, Bob	Richardson, Jo
Dean, Joseph (Leeds West)	Roper, John
Dewar, Donald	Ross, Ernest (Dundee West)
Ellis, Tom (Wrexham)	Sheldon, Rt Hon R.
Evans, John (Newton)	Skinner, Dennis
Grimond, Rt Hon J.	Steel, Rt Hon David
Hamilton, W. W. (C'tral Fife)	Stoddart, David
Harrison, Rt Hon Walter	Wainwright, R.(Colne V)
Haynes, Frank	Wellbeloved, James
Johnston, Russell (Inverness)	Wrigglesworth, Ian
McKay, Allen (Penistone)
McNamara, Kevin	Tellers for the Noes:
Maynard, Miss Joan	Mr. A. J. Beith and Mr. Stephen Ross.
Miller, Dr M.S. (E Kilbride)
Owen, Rt Hon Dr David

MR. SPEAKER forthwith declared the main Question, as amended, to be agreed to.

Resolved, That this House expresses confidence that the Government's economic strategy is the best course for restoring this country to prosperity.

c1089
1. HOUSING (AMENDMENT) (SCOTLAND) BILL 38 words
c1089
2. HOUSING (AMENDMENT) (SCOTLAND) [MONEY] 156 words