§ ADDITIONAL POWER OF TREASURY TO BORROW
§ '(1) At the beginning of subsection (1) of section 12 of the National Loans Act 1968 (power of Treasury to borrow) there shall be inserted the words "Any money which the Treasury consider it expedient to raise for the purpose of promoting sound monetary conditions in the United Kingdom and".
(2) After the said subsection (1) there shall be inserted the following subsection:
(1A) The terms (as to interest or otherwise) on which any balance for the time being in the National Loans Fund is to be held shall be such as may be agreed between the Treasury and the Bank of England.
§ (3) In section 19(4) of the National Loans Act 1968 (meaning of liabilities and assets of the Fund) after the words "the assets of that Fund shall be" there shall be inserted the words "the aggregate of any balance in that Fund and".'.—[Mr. Bruce-Gardyne.]
§ Brought up, and read the First time.
§ The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)
I beg to move, That the clause be read a Second time.
§ Variable rates of interest for government lending.
§ 5.—(1) This section has effect as respects any rate of interest—
- (a) which under any provision in Schedule 1 to this Act is to be determined in accordance with this Act, or
- (b) which is to be determined by the Treasury under section 3 of this Act,
§ (2) For any loan or class of loans the Treasury may determine or approve either—
- (a) a fixed rate of interest, that is to say a specified rate or a formula rate which is to be applied, throughout the period of the loan or any loan of that class, with the value which it has when the loan is made, or
- (b) a variable rate of interest, that is to say a formula rate which is to be applied, for each of the successive periods of the loan or any loan of that class which are of a length specified in the determination or approval (in this section referred to as interest periods), with the value which it has at the beginning of that period;
§ (3) The Treasury shall, on each occasion when they determine or approve a fixed rate of interest for a loan or class of loans, satisfy themselves that the rate would be at least sufficient to prevent a loss if—
- (a) the loan, or any loan of that class,—
- (i) were made forthwith, and
- (ii) were met out of money borrowed by the Treasury at the lowest rate at which the Treasury are for the time being able to borrow money (of whatever amount) for a comparable period, and on other comparable terms, and
- (b) the interest on the money so borrowed, together with the Treasury's expenses of borrowing, were set off against the interest received on the loan.
§ (4) The Treasury shall, on each occasion when they determine or approve a variable rate of interest for a loan or class of loans, satisfy themselves that the rate would be at least sufficient to prevent a loss if—
- (a) the loan, or any loan of that class,—
- (i) were made forthwith,
- (ii) were to be repaid at the end of its first interest period, and
- (iii) were met out of money borrowed by the Treasury at the lowest rate at which the Treasury are for the time being able to borrow money (of whatever amount) for a comparable period, and
- (b) the interest on the money so borrowed were set off against the interest received on the loan.
§ (5) If at any time the Treasury are satisfied that a rate of interest determined or approved for a class of loans, or for a loan not yet made, would not meet the requirements of subsection (3) or, as the case may be, subsection (4) above if it were determined or approved at that time, that determination or approval shall be withdrawn; and another rate shall be determined or approved in accordance with that subsection for further loans of that class or, as the case may be, for that loan.
§ (6) The Treasury may in determining or approving a rate of interest take into account any consideration justifying a rate higher than that required by subsection (3) or (4) above.
§ (7) Different fixed rates of interest may be determined or approved in respect of loans which are to be made for the same length of time; and different variable rates of interest may be determined or approved for loans which are to have interest periods of the same length.
§ (8) The Treasury shall cause—
- (a) all rates of interest determined from time to time by them in respect of local loans, and
- (b) all other rates of interest determined from time to time by them otherwise than by virtue of subsection (6) above,
§ (2) The enactments amended by Schedule 1 to that Act (government lending and advances) shall have effect as if in the third column of that Schedule for the word "fixed", wherever it occurs, there were substituted the word "determined".
§ (4) In subsection (5) of section 20 of the Crown Agents Act 1979 (grants and loans by Minister) for the words "section 5(2) of the National Loans Act 1968 (criteria for fixing" there shall be substituted the words "section 5(3) and (4) of the National Loans Act 1968 (criteria for determining".
§ Mr. Bruce-Gardyne
The new clauses, and particularly new clause 1, are important. The background to them was explained in a press notice which was issued at the time of a reply by my right hon. and leaned Friend the Chancellor of the Exchequer to my hon. Friend the Member for Kensington (Sir B. Rhys Willaims) on 25 June. A copy of the press notice was placed in the Library. The background was further discussed in the latest issue of the Bank of England Quarterly Bulletin. I shall not attempt to go into all the complexities, but if hon. Members have queries I shall do my best to answer them when replying to the debate.
The essential purpose of monetary policy is to reconcile the twin objectives of abating inflation and securing the greatest possible moderation of interest rates consistent with the abatement of inflation. That task has been rendered more complex by the way in which very high levels of inflation and accompanying high nominal interest rates, experienced throughout the 1970s, led to the virtual atrophying of the corporate debenture market and a consequent growth in the dependence of the corporate sector on bank finance. This, in turn, inevitably compounded the problems of ensuring that the growth of the monetary aggregates did not generate additional infllationary pressures.
The new clauses are designed essentially to remove two rather artificial obstacles to the management of the monetary policy. I shall refer first to new clause 2. The National Loans Act 1968 was drawn up at a time when variable rate borrowing was hardly in its infancy. As a result, no provision was included in the Act to enable the National Loans Fund to engage in such lending to the local authorities or to anyone else. Today, as the House will be aware, variable rate funding is commonplace. But since the facility has not been available from the National Loans Fund local authorities have been obliged to turn to the banking system. As a result, the local authorities are now borrowing more than £10,000 million from the banks. Most of this is in the form of variable rate finance. The local authorities have themselves been anxious to have access to such a facility from the Public Works Loan Board.
Because of the ability of the Treasury to borrow on generally finer terms than local authorities, the provision of such a variable rate facility should enable the NLF to on-lend to the local authorities on very competitive terms for variable rate loans, while at the same time observing its statutory obligation to ensure that such on-lending does not involve any element of subsidy. It is calculated that this should produce a saving to the local authorities and hence to the public sector borrowing requirement of perhaps £20 million a year. Furthermore, by helping to move local authority borrowing away from the banking system, it should facilitate our task in controlling the growth of monetary aggregates.
655 As the House was informed last October, we were able to arrange a small amount of variable rate finance from the NLF for the nationalised industries within the restraints of the 1968 Act, but this had to be arranged to conform with the Act according to a formula by which the rate of interest has to be re-determined by the Treasury every three months. Such an arrangement is not appropriate to the much larger volume of business that we hope to attract from the local authorities.
New clause 2 will take the place of section 5 of the 1968 Act. It requires the formula for interest on variable rate loans to be tested against the cost of Treasury borrowing during the initial period of the loans to ensure that the cost of lending will be above the cost of borrowing by the NLF. In practice, the formula for variable rate loans will probably be a margin above the London inter-bank offer rate. Experience shows that on this basis the Government will not be on-lending at interest rates below market rates as they are forbidden to do under the terms of the National Loans Act.
It is important that Government lending can be offered on terms competitive with those offered by the banking sector. In the highly sophisticated conditions of modern financial markets, this means not only competitive rates but competitive types of instrument. New clause 2 will permit this and increase considerably the attractiveness of borrowing from the Government. In particular, the Public Works Loan Board will be able to respond to requests from local authorities and make variable rate loans to them on a substantial scale. This should result in an appreciable saving in interest costs for borrowers and the public sector as a whole. It should also mean a useful reduction in bank lending to public bodies that has built up considerably in recent years. The effect will be to raise the Government borrowing requirement but not the public sector borrowing requirement. For a given level of funding it will reduce the level of any balance in the National Loans Fund and of any money market shortages.
That leads logically to new clause 1.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
Before the Economic Secretary goes on to new clause 1, could he say how much he expects monetary aggregates to be reduced as a result of new clause 2?
§ Mr. Bruce-Gardyne
Of course I cannot say that. I cannot predict, as the right hon. Gentleman knows, the scale at which local authorities will take advantage of this opportunity. Even if I could, I could not predict the precise implications of that for the growth of monetary aggregates. The answer to that must be, as the right hon. Gentleman will know, a lemon.
§ 4 pm
§ Mr. John Horam (Gateshead, West)
The hon. Gentleman said that he expected that local authorities would save about £20 million as a result of the borrowing that they will in future make from the National Loans Fund which at the moment they are borrowing from the banks. Therefore, the Government must have made some estimate of the proportion of the £10,000 million that is currently borrowed by the local authorities from the banks and which will now be shifted over to the National Loans Fund; otherwise the Government would not have worked out the £20 million.
§ Mr. Bruce-Gardyne
The £20 million is a rough calculation based on assumptions. We do not know precisely how much of the £10,000 million that the local authorities are currently borrowing—
§ Mr. Bruce-Gardyne
As I said, the £20 million is not much more than a guesstimate. We do not pretend that it is more than that. It is an idea of the order of magnitudes that might prevail if a substantial proportion of the borrowing that local authorities currently make on variable rate terms from the banks were now to be shifted to the National Loans Fund. I cannot give the hon. Gentleman further orders of magnitude than that.
§ Mr. Douglas Jay (Battersea, North)
Surely the Minister is further puzzling the House on an already puzzling subject. A few minutes ago he said, as I thought, that there would be a saving of £20 million on the interest expenditure of local authorities. To make that estimate, he must have estimated what the figure would be by which local authorities took advantage of this new facility. Now he is telling us that it was guesswork. Is he not confusing us still further? Was it guesswork, or was it a rational estimate?
§ Mr. Bruce-Gardyne
I said that it was calculated that this might produce a saving to the local authorities, and hence to the PSBR, of perhaps £20 million a year. I should not go on oath as to that figure, because we are not in a position to dictate to the local authorities whether they switch, for variable rate finance, from the banking sector to the PWLB. That would be their decision. All that I can tell the House is that they have said that they wish to have access to this facility, and we hope that they will use it on a substantial scale. It would be wrong for me to say anything more precise.
§ Mr. Robert Sheldon
The hon. Gentleman said that the main purpose of new clause 2 is to reduce the increase in monetary aggregates, and that this would save a useful £20 million. As the hon. Gentleman made it clear that the monetary aggregates were the prime reason for the new clause, that must have been the figure that he chose at the beginning, and the £20 million was derived from that. Any calculation would proceed in that way. The hon. Gentleman is not coming clean with the House in the way that he should.
§ Mr. Bruce-Gardyne
I am not trying to keep anything from the House. However, the scale on which this facility will be used cannot be predicted, and is not in our hands. We believe—this I readily concede to the right hon. Gentleman—that the extent to which local authorities switch their variable rate borrowing from the banking sector to the NLF will reduce the rate of growth of bank lending and thereby assist us in the business of controlling the growth of the monetary aggregates and particularly the broad aggregates. That is one of the purposes that we have in mind.
§ Mr. Joel Barnett (Heywood and Royton)
Whichever way and however much local authorities change their borrowing, and however much the monetary aggregates are affected, I hope that the hon. Gentleman will explain to the House—in trying to convince us to accept the clause—what effect this will have in the real world.
§ Mr. Bruce-Gardyne
I do not think that I can give the House any greater detail than I have already on the precise 657 sums that might transfer from one form of borrowing to another. As I have already said, this is not in the Government's hands. We are not in a position to dictate to the local authorities precisely how they borrow on variable rate terms. Therefore, the volumes are not in our hands. I readily concede to the right hon. Gentleman that one of our primary purposes in making this change is to reduce the scale of dependence of local authorities on bank finance, because we believe that this will contribute to the resolution of the problems that previous Governments have faced with the rate of growth in bank lending. That is an element in our thinking that ties in, as I was about to explain, with what we are proposing to do in new clause 1.
New clause 1 is designed to eliminate an artifical restraint on our ability to vary our funding in response to changing market conditions, and in some circumstances our ability to intervene in the foreign exchange market.
§ Mr. Bruce-Gardyne
I did not hear that comment, which is probably just as well.
For many years now the Bank of England's operations in the gilt-edged market have been designed, in the words of the Committee presided over by the right hon. Member for Huyton (Sir H. Wilson),to implement monetary policy by funding the Government's borrowing in non-monetary form, so controlling the money supply and influencing interest rates.Sometimes—depending on such factors as the buoyancy of bank lending—we need to make debt sales to the non-bank public greater than the PSBR,and sometimes we need to make them less. When we need to make large debt sales to offset the build-up of liquidity in the banking system, the National Loans Fund is liable to accumulate balances in a way that section 12 of the National Loans Act does not permit.
At present section 12 of the National Loans Act allows the Treasury to borrow to meet the outgoings of the NLF—which means basically the central Government borrowing requirement, rather than the PSBR, plus whatever sterling the exchange equalisation account needs—plus enough to meet any necessary working balances. It has over recent years been possible for sales of long-term debt to exceed the outgoings of the NLF as the excess could be used to repay the so-called floating debt, that is, Treasury bills held by the banks and ways and means advances lent by the Bank of England.
However, we are now close to the point where there is little room for this floating debt to be further reduced, so that if issues of long-term debt exceed the outgoings of the NLF the NLF would accumulate balances rather than repay debt. It would thus be in the position of a man who pays off his overdraft and moves from the red into the black. However, the Act at present does not allow this to happen, other than on a minor and temporary scale.
When the constraint imposed by section 12 of the Act, which has no coherent relationship with monetary policy, is reached, the Government of the day would be unable to vary debt sales to influence monetary conditions, with adverse consequences for the conduct of monetary policy. For example, it could leave the Government unable to contain the growth of liquidity in the economy which a rapid growth of bank lending would otherwise produce. It 658 could also, in certain circumstances, make it impossible for the EEA to undertake intervention to smooth a fall in the exchange rate. It is quite inappropriate that a section in the National Loans Act should impose such an incidental limitation on our freedom of action in this connection.
§ Mr. Terence Higgins (Worthing)
My hon. Friend says that at some point we shall reach the stage at which one runs up against the limit at present imposed by the legislation. Will he say, first, whether we have yet reached that point, or is it impending? Secondly, is not his analogy with an overdraft going black or red somewhat inappropriate, since what the Government are doing in funding in the first place is borrowing, thereby going into the red. My hon. Friend is saying that we are not in a position to pay off different debts. Either way, the Government are still in the red. We have not abolished the national debt.
§ Mr. Bruce-Gardyne
I concede that we are not at the point at which we can abolish the national debt. I wish that we were. That is something that we are not likely to see in our lifetime. It is true that we are talking about Government borrowing, but the consequence of borrowing under the National Loans Act, under certain circumstances, is a build-up of positive balances, and that is what section 12 of the Act forbids.
In answer to my right hon. Friend's question about whether we have overshot the margin, as I understand it, the answer is "No", although there is a risk that we could do so. That is not a risk that we should fairly take, in conformity with section 12 of the Act. It is equally inappropriate for our actions, whether in the funding of the public sector borrowing requirement or potentially in exchange market intervention, to be inhibited by that limit. That is why we are asking the House to agree to this new clause.
§ Mr. Shore
I wish to take up the hon. Gentleman's point within his main argument about the exchange equalisation account. The National Loans Fund has existed since 1968. The exchange equalisation fund has come under changing fortunes and circumstances during those 14 years. Can the Minister point to a single occasion on which successive Governments have felt inhibited from operating into and through the exchange equalisation account by the existence of section 12 of the National Loans Act?
§ Mr. Bruce-Gardyne
I have just explained to my right hon. Friend the Member for Worthing (Mr. Higgins) that, to date, we have not been inhibited by that rule, but we easily could be inhibited in the future. There could easily be circumstances in which we could not at the same time continue our funding operations and intervene through the exchange equalisation account to smooth a fall in the exchange rate. We should have to choose between the two. Essentially, that seems unwise, for reasons which have nothing to do with monetary policy or exchange rate management.
It is essential, therefore, to amend the National Loans Act to allow borrowing to take place to promote sound monetary conditions, even though such borrowing could cause balances to be accumulated in the National Loans Fund. Such balances, which will earn interest, would accumulate in the banking department of the Bank of 659 England, where they would be available to relieve money market shortages. I cannot tell the House the scale on which balances to be permitted under new clause 1 will—if the House approves—be accumulated, for that will depend on a variety of factors including the level of bank lending and the extent and direction of foreign exchange intervention.
§ Dr. Jeremy Bray (Motherwell and Wishaw)
Will the Minister explain in simple terms why the Government should want to borrow more than they are spending, and why, to enable the private sector to lend to the Government, they should pay back debt to the private sector?
§ Mr. Bruce-Gardyne
First, we are not paying back debt to the private sector under the new clause. The need to fund at times on a larger scale than the public sector borrowing requirement reflects the need to neutralise the consequence of a rapid growth in bank lending and the implications that that may have for the growth of the broad money aggregates. [HON. MEMBERS: "Here we go again."] When the Labour Government were in office they rightly took pride in the primacy that they gave to the observance of a responsible monetary policy. So I see no reason why hon. Gentlemen should regard that as a matter of hilarity. It shows an extremely frivolous attitude to the nation's accounts.
§ Mr. Bruce-Gardyne
The borrowing which the Bank of England must do to manage the money markets reflects the need at certain times to ensure that the broad money aggregates do not grow in a manner which all experience shows is liable to lead to future inflation. Furthermore, unless we are in a position, for example, in the tax-gathering season, to offer assistance to the market, there would be a rise in short-term interest rates which would not be indicated by the performance of the monetary aggregates and which could have untoward effects on the exchange rate. That is why we want to eliminate what is essentially an artificial restraint on our freedom of manoeuvre in section 12 of the National Loans Act.
We hope that use by the local authorities and nationalised industries of the new facility which we are proposing to create in new clause 2—this is where the two clauses fit together—and the assistance which the guidance which my right hon. Friend gave on 25 June regarding the tax treatment of deep discount and zero rate corporate borrowing to the revival of the corporate bond market will reduce the scale of banking intermediation. To the extent that that occurs, the need to build balances with the National Loans Fund to control the growth of the monetary aggregates will be reduced. However, in the end the revival of corporate funding through the market will depend overwhelmingly on a return to much lower levels of inflation than those we suffered in the 1970s, and the much lower nominal interest rates which would logically accompany that evolution.
That is our purpose, and we are on course to achieve it. These two new clauses will, I believe, eliminate two artificial obstacles in our path, and it is on that basis that I commend them to the House.
§ Mr. Shore
Ever since new clause 1 and its companion, new clause 2, appeared on the Order Paper on Friday 25 June, I have anticipated with relish the arguments that would be advanced in their support and which Treasury Minister would be entrusted with the burden of explanation. My view was, and is, that the Chancellor or the Chief Secretary was the obvious person to present the new clauses since they have a major impact on the monetarist strategy that the Chancellor has pursued since the last general election. That he has passed the responsibility to the youngest, brashest and least disciplined member of the Treasury team, does not reduce the importance of the issues, but shows the acute embarrassment that the Chancellor rightly expects is involved in the exposition of their content.
The Economic Secretary did not enjoy his finest hour in explaining the new clauses. He added only a little to our understanding of them. He devoted himself to a technical presentation—which is part of his task—but he had little to say about the larger context of monetary policy in which the clauses must be discussed and set. What he did say was unconvincing.
The hon. Gentleman said that the basic purpose was to remove an artificial restraint on the Government's power to borrow. That is one way to describe the proposal, but we have come to a major conflict with two major components of the Government's monetarist policy. The effort to reduce sterling M3 and the other money supply indicators is in total conflict with the other objective of reducing the public sector borrowing requirement and public sector borrowing. The conflict between those two objectives dominates the debate. It has led the Treasury Minister into the difficulties of exposition which we witnessed in the last half hour.
The purpose of the new clauses is plain. Section 12 of the National Loans Act 1968 limits the Treasury's power to borrow, but only in so far as the borrowing is for the purpose of meetingany excess of payments out of the National Loans Fund over receipts into the National Loans Fund",and for the exchange equalisation purposes to which the Minister referred. In short, the Treasury can borrow under the present law without any preconceived limits, but the borrowing must be related to the borrowing requirement.
New clause 1 permits the Treasury to borrow in furtherance of a purpose separate from the funding of the borrowing requirement. In the words of new clause 1, that purpose ispromoting sound monetary conditions in the United Kingdom".That takes us a long way from the present limitations of section 12 of the 1968 Act. It permits the Treasury to borrow beyond the needs of the borrowing requirement and thus to accumulate a surplus in the National Loans Fund well beyond whatever margin is allowed for working balances. That becomes plain in the last part of new clause 1 where section 19(4) of the 1968 Act is further amended so that specific reference is made tothe aggregate of any balance in that Fund.New clause 2 also amends the 1968 Act. It withdraws section 5 of the Act, which deals with the rate of interest on Government stocks, in favour of a new clause 5 which enables the Treasury not only to determine fixed rates of interest in respect of loans as they have previously done, but to determine variable rates of interest. The Economic Secretary is probably correct in what he says, but he does not know how much it will be used. He hopes that it will 661 meet a requirement by local authorities, which are limited to borrowing from the Public Works Loan Board at fixed interest rates, to borrow in future from the National Loans Fund at variable rates of interest. That is not particularly controversial, but if new clause 2 is used it will increase the public sector borrowing requirement.
§ Mr. Bruce-Gardyne
The right hon. Gentleman is wrong. The borrowing by local authorities, whether from the banking system or from the PWLB, is part of the PSBR. As I conceded, the central Government borrowing requirement will be increased, not the PSBR.
§ Mr. Shore
I see. It is possible that we are talking about thousands of millions of pounds that the local authorities are borrowing from the banks. If the total is shifted to make use of the new facility, is the Minister asserting that it will make no difference to the PSBR and will affect only the CGBR?
§ Mr. Shore
I accept that, but it does not alter the general thrust of my remarks, which basically are about new clause 1. If the Economic Secretary had conceded my argument on new clause 2, he would have enormously reinforced the point that I shall now develop. I wish to discuss the wider meaning of new clause 1.
§ Mr. Bruce-Gardyne
I wish to be sure that there is no misunderstanding. The borrowing by local authorities, whether through the banking sector of the PWLB, is bound to count towards the PSBR. I can assure the right hon. Gentleman that the acceptance of new clause 2 and any changes that may follow from it do not affect the PSBR. They affect the central Government borrowing requirement.
§ Mr. Shore
So much for the technical changes. We can be forgiven if we rub our eyes in amazement at new clause 1. The Government are legislating for new powers to permit them to borrow not less, but more, than existing powers allow. We are not dealing with small sums since there is specific provision in the unaltered section 12 of the 1968 Act for working balances. We are talking about large sums above those required to finance the public sector borrowing requirement.
At this point, we must rub our eyes again. There are, as the House knows, a series of related, though dotty, assertions which are central to the monetarist belief. The first is that the principal problem of our society is inflation. The second is:Control of the money supply will over a period of years reduce the rate of inflation.The third is that in reducing monetary growth, and therefore inflation, there must not beexcessive reliance on interest rates".The fourth is that it is therefore essential for the Government to plan for asubstantial reduction over the medium-term in the public sector borrowing requirement as a percentage of GDP".662 The words that I have used have a familiar ring because they are culled from the chapter in the 1980 Red Book entitled "Medium-term Financial Strategy". The chapter asserts:Public sector borrowing of the money supply has made a major contribution to the excessive growth of the money supply in recent years. A consequence of the high level of public sector borrowing has been high nominal interest rates and greater financing problems for the private sector.The Red Book also states:If interest rates are to be brought down to acceptable levels, the PSBR must be substantially reduced.Together, those propositions form the major part of the monetarist doctrine as the Government expound it. Recalling the propositions, no one can dispute seriously that the Government believe that the public sector borrowing requirement is a major element in unacceptably high inflation and that its financing requires both unacceptably high interest rates and a crowding out of moneys for the private sector.
The clause gives the Chancellor of the Exchequer a new power, not merely to fund the differences between Government revenues and expenditure, but to borrow without limit, providing that his purpose is linked tothe purpose of promoting sound monetary conditions in the United Kingdom".There is no definition ofsound monetary conditions in the United Kingdom".Therefore, it is a wholly open-ended clause, granting unlimited powers to the Chancellor to borrow money for any purpose that he thinks fit, provided only that the label "promoting sound monetary conditions" is attached. It is a remarkable extension of Treasury power with no limit written into the clause.
We know that we are dealing with overfunding on a large, perhaps massive, scale. At this point we are entitled not only to rub our eyes but to scratch our heads. If the Government are deliberately setting out and equipping themselves to borrow more than is necessary to meet the public sector borrowing requirement, surely, on their own argument, that must push up interest rates.
I recall making some modest suggestions earlier this year for an increase in the PSBR as part of a short-term strategy for creating employment and invigorating the economy. The Chancellor's principal complaint was that an increased borrowing requirement—and increase there certainly would have been—would be counter-productive because it would lead to unacceptably high interest rates. I did not, and do not, accept that that is the inevitable consequence of an increase in borrowing. However, that is what the Chancellor believed and believes. Therefore, why on earth is he coming to the House this afternoon urging us to give him power to increase public sector borrowing with no stated bounds?
If the Chancellor now maintains that overfunding will not have an adverse effect on interest rates and will not crowd out the private sector's need for capital, will he tell us why? Will the Minister make a note of that question and our expectation of a reply from him later?
That is only one part of the mystery—for mystery it is. Why is additional borrowing needed over and above that which is needed to meet the PSBR? What is intended to be done with the additional funds that are thus obtained? One purpose was discussed earlier—the exchange equalisation fund. That came as something of a surprise 663 to me. I have never heard of any previous Chancellor being inhibited by this constraint in dealing with matters affecting the equalisation account.
As the Minister reminded us, we were given a substantial press notice from the Treasury on 20 June. It contained an answer at great length to a written question put down by the hon. Member for Kensington (Sir B. Rhys Williams), who I see in his place, together with a long explanatory note for the guidance of newspaper editors. I refer to the written answer to the hon. Gentleman referring to the proposed amendment to section 12 of the 1968 Act. The Chancellor said:If use of this power leads to NLF balances with the banking department of the Bank of England, these sums would be available to relieve shortages in the money market, which are a corollary of debt sales."—[Official Report, 25 June 1982; Vol. 26, c. 191.]Shortages can be relieved in the money market only by making more money available. In other words, the funds raised by excessive borrowing—by new borrowing—are to be used via the Bank of England to supply additional money to keep interest rates down.
I assume that that is what the Bank of England has already been doing through the purchase from the banks of commercial bills from British companies that have been issued in large quantities. Indeed, I suspect that the appropriate department of the Bank of England is now stuffed with commercial bills. The provision of additional resources from overfunding into the NLF account will enable the Bank of England to acquire still more commercial bills from the banks or to assist them in other ways. If I have that wrong I rely on the Minister to put me right.
§ Mr. Shore
We are now coming to the whole point. It will be used not only to expand the monetary aggregate, but to do it in a way that cannot be detected. Surely the House knows that that is the real purpose of the whole Byzantine procedure. If the Government want to overfund, why do not they do it in the ordinary way by instructing the Bank of England to issue more gilts on the market as has happened in the past? If the Government are worried that credit conditions are becoming too tight, and that interest rates are therefore in danger of rising yet again, why do they not relax their monetary and fiscal stance? Why do they not supply the Bank with Treasury bills?
§ Mr. Higgins
With respect, everything that the right hon. Gentleman has just said was spelt out in the debate on the public expenditure White Paper in April. However, a moment or two ago, he asserted that the effect of this somewhat circular situation is to make the figures look better. I am not clear why he thinks that that is so.
§ Mr. Shore
I think that the reasoning behind the Government's approach—the Minister can clarify this—is the belief that the increase in money will, in the Chancellor's own words,relieve shortages in the money market".We have that on the Chancellor's authority from the written answer and from what the Minister said today. To bring that relief about it must be done in a way that will 664 not show up in either sterling M3 or in other monetary aggregates, or he will be in the same embarrassment that he was in in previous years.
That may or may not be right. If it is not, it is up to the Minister to give the real answer. I think that my answer is correct. Surely the Government are caught in their own monetarist trap. To relax credit in any normal way, as they clearly wish to do, would show up in the monetary measures—sterling M3 or PSL2, or whatever is the favoured measurement at present.
I can well understand the Treasury's worry that once again money supply figures should not go way through the ceiling set for the current financial year. In 1980–81, as we all know, the Government set for themselves a target of 8 to 12 per cent. and achieved 20 per cent. In 1981–82 they set for themselves a target of 6 to 10 per cent. and hit 14.5 per cent. This year they have set for themselves once again a target of 8 to 12 per cent. and failure a third year running would be an embarrassment.
The Government are engaged in an elaborate subterfuge, a sleight of hand, the purpose of which is to enable the Government to go on proclaiming the rectitude of their monetary target while negating its real world effects through the back door. In two short years the Government's argument has been stood on its head by new clause 1.
After a period of so-called rigorous money supply policy, and with the money supply again threatening to break through the ceiling, rather than face the logic of the policy—that is to say, the further raising of interest rates and/or the further increase in taxation—through this clause the Government are seeking to offset and negate the anticipated consequences of the increase in bank lending.
At the same time, the focus for attack has moved in the most dramatic way from the public to the private sector. Far from the PSBR being the all-consuming monster, crowding out, overshadowing and threatening the very existence of the private sector, we now find that the PSBR is too small for the Chancellor's public sector borrowing appetite. He needs to borrow more, not to limit public sector borrowing and public expenditure but to counter the undisciplined increase of private sector borrowing and private sector lending.
§ Mr. Bruce-Gardyne
Will the right hon. Gentleman cast his mind back to the period when the Labour Party was in office? Is he asking the House to believe that when the Labour Government were—in the words of the right hon. Member for Leeds, East (Mr. Healey)—paying unparalleled attention to the fulfilment of monetary aggregates, funding was exclusively required to meet the PSBR and that there was never any question of overfunding or underfunding according to the condition of monetary aggregates?
§ Mr. Shore
I am not aware that there was any proposal during the last Labour Government to amend the National Loans Act 1968 for the purposes that are central to this debate.
Unless we hear some quite remarkably convincing explanation of the purposes behind new clause 1—a far more convincing explanation than we heard in the Economic Secretary's opening exposition—I shall advise my right hon. and hon. Friends to oppose the new clause in the Lobby.
§ Mr. Higgins
I shall take up several of the points made by the Economic Secretary and by the right hon. Member for Stepney and Poplar (Mr. Shore). It is not true to say, as the right hon. Member for Stepney and Poplar sought to assert, that the public sector borrowing requirement is not big enough and that the Chancellor of the Exchequer should want to borrow even more. Of course, if the PSBR was smaller, the extent to which one would need to fund, or overfund, would also be smaller than it would otherwise be. I do not know whether that information will affect the right hon. Gentleman's voting intentions, but, with great respect, his point was not valid.
I had the great privilege of being taught by the late Sir Denis Robertson at Cambridge. His exposition was extraordinarily good and condensed. I am glad that my right hon. and learned Friend the Chief Secretary is in the Chamber, because he was at Cambridge at about the same time as me. Sir Denis used to expound his ideas by reference to "Alice in Wonderland" and the various events that took place. I wish that I had the same facility for using extracts from "Alice in Wonderland" when putting forward my views on new clause 1. Unfortunately, I do not have that skill. This subject is highly technical, but also extremely important and it should be debated.
Although the Finance Bill's long title always includes a reference to the national debt, there may have been a case for including these proposals in a separate Bill. In that way, we could have discussed them in detail. However, the Treasury and Civil Service Committee has gone into such matters and the Select Committee on Procedure (Finance), which I have the honour to chair, recently took a considerable amount of public evidence on whether the House should have control over borrowing. The Select Committee is still considering the matter in the light of the evidence that it has received. However, I am not persuaded by this afternoon's events that there is any disadvantage in going down that road.
On the contrary, I have been reinforced in the view that greater parliamentary discussion of this subject is, as all hon. Members would agree, at the very heart of economic management and might well be of advantage to Parliament. Nevertheless, we have never had effective control. In medieval times, the king did not have to go to Parliament if he could borrow the money to go to war. He only had a problem when it came to raising taxes.
I turn to new clause 2. My hon. Friend the Economic Secretary was right in what he said about the effect on the PSBR. However, it was rightly said that the effect of the change will be to reduce the M3 figure. To that extent, whatever the overall effects may be in the real world or economy—call it what one will—the cosmetic effect is to reduce, perhaps significantly, M3. Therefore, if there are any changes we shall have to take that into account when evaluating the statistics.
As other enthusiasts have done, I turn to new clause 1. In the process of overfunding, the Government have run up against the traditional limit that appears in the National Loans Fund legislation and which requires that the amount borrowed should not exceed the amount required to finance the PSBR other than for so-called working balances. This measure seeks to remove that legal block. It was interesting that my hon. Friend the Economic Secretary should say that we are not up against that yet. However, we are clearly close to it. Indeed, the point was 666 made in an interesting article, written by Sarah Hogg, economics editor of The Sunday Times, on 27 June. There may or may not be a case for making that change. As the Opposition have said, it has never before been found necessary to do so.
The Economic Secretary explained the need for the change and perhaps he could read out the passage a second time, if that does not fall into the category of tedious repetition. Sometimes it is difficult to comprehend a passage from a Treasury brief that is read out at speed. However, the legal point is fairly clear. It is much more difficult to understand the situation that has now developed. I referred to this problem either during the debate on the public expenditure White Paper or during the debate on the Budget. The Government have been overfunding, or borrowing more than is necessary to finance the PSBR from the non-bank public; that is, in a non-inflationary way. However, at the same time, they have been lending money back to the money market to relieve the pressures there.
On the face of it, that is strange, and that is why I drew attention to the point some time ago. If the Government want to control the money supply, they traditionally try to finance the PSBR from the non-bank public or, in other words, to fund it. If one is to attract funds it generally requires a certain level of interest rates. Interest rates have to be raised if it is decided to fund more, and if it is decided to fund less interest rates can be lowered. That is the normal procedure. That is what the Government would normally do in controlling the money supply.
Given the level of funding that the Government have achieved, they could have exercised effective control during the two or three years when they failed to hit their monetary targets. However, they would have done so only at relatively high rates of interest. Whenever it has come to a choice between controlling the money supply, and giving that priority, and controlling high interest rates, the Government have always decided not to control the money supply rather than to raise interest rates to the necessary level. That has happened twice. It happened about two years ago with the so-called repos where the Bank of England effectively siphoned money back into the money market to prevent interest rates from rising. When that was stopped, because I believe that the Treasury Select Committee was rather upset about what was happening, it resorted to a different device. The Select Committee questioned the governor of the Bank of England on that matter. Effectively one has to make a choice between interest rates and the money supply.
Even the most primitive first-year, if not O-level, student will point out that the quantity or price of a commodity can be controlled but not both. When it is a question of controlling the price or the quantity the governor of the Bank of England has controlled the price, contrary to all the splendid monetarist doctrines of Professor Friedman.
Having said all that, one comes to the object of the exercise. An interesting exposition has emerged in the current issue of the Bank of England Quarterly Bulletin. The most relevant passages are on pages 179 to 182 and a beautifully inset section on page 201. It makes some points upon which I believe we can all agree. On page 179 it states:In these conditions"—the ones I have described— 667the banks have played an intermediary role in bringing borrowers and lenders together; and, under the spur of competition, banks have become more resourceful and innovative in accomplishing such intermediation.If I understand it correctly, it says that because of the collapse of the long run of the bond market for private companies the Bank of England has been funding it and lending bank money back to the individual companies. It is borrowing long and lending short. We know some of the implications of that operation. I believe that we can accept that that may have been a useful operation.
The bulletin points out that the operation that I have described, and upon which we are concentrating this afternoon, where the bank buys commercial bills is not, in its effect on monetary policy, significantly different from the traditional position where it buys Treasury bills. The change has come about because we have run out of Treasury bills to buy. The bank has therefore resorted to using commercial bills. I believe that we can accept that. We still return to the question why that operation is being carried out. I have run into some problems when reading the Bank of England Quarterly Bulletin. I shall spell it out as clearly as I can. Page 180 states:The general level of interest rates depends largely on economic and financial conditions; but it is influenced also by fiscal and monetary policy as a whole. Too low a level of interest rates would not be consistent with appropriate restraint of the monetary aggregates. One route to reducing bank lending would be to seek to raise interest rates above the level appropriate for that purpose, and above the level they are now.I can see that they might be raised above their present level to achieve that objective, but I fail to understand why one would ever wish to raise them above the level that is appropriate to achieve one's objective. I do know whether it is a typing error, but I do not believe that that paragraph makes sense. I want to find out what the whole exercise is about.
§ Mr. Bruce-Gardyne
I have the Bank of England Quarterly Bulletin before me. Surely when the bank refers in the second sentence to thelevel appropriate for that purposethe purpose to which it refers is restraint of the monetary aggregates. There is nothing inconsistent between those two sentences if they are read in that sense, is there?
§ Mr. Higgins
I believe so. The sentence reads:Too low a level of interest rates would not be consistent with appropriate restraint of the monetary aggregates. One route to reducing bank lending"—which of course is one component of the monetary aggregates—would be to seek to raise interest rates above the level appropriate for that purpose, and above the level they are now.I shall consider carefully what my hon. Friend the Economic Secretary said, but I find it a difficult paragraph to understand.
I turn to the next passage that gives me considerable trouble. Page 181 states:If the cash thus lost"—that is, from overfunding—was not restored through operations by the Bank in the money market, each bank's efforts to make good its cash holding would cause steep increases in the interest rates paid by the banks for short-term money. This would inevitably bring a general rise in interest rates above the levels needed to achieve the degree of monetary control already decided as appropriate on more general grounds. The sequence is therefore completed, as a third leg of the exchange, by the Bank acquiring assets from the banking system to replenish the banks' balances.It describes what we have just mentioned.
668 What is actually being achieved? It may be a sheer accident, and that in the day-to-day operations and week-to-week communications between the Treasury and the Bank of England the Bank has given an indication of what the Treasury believes the public sector borrowing requirement will be. It then says "Fair enough, go ahead—fund us that amount", allowing for seasonal variations and for a change in the profile and all the problems about which we know. Perhaps that was done and it went throughout the year. We know that the PSBR was significantly less than was expected. There was a considerable revision a few weeks ago in the PSBR figure. If the instructions had been formulated on that basis, it is possible for the Bank to find constantly in the market place that things were much tighter than it expected, and to ease the position at the front end of the money market it felt obliged to lend money back to prevent interest rates from rising excessively. It may have developed by accident like that. I suspect that that is not the case. I believe that there has been a greater degree of deliberate action than that would suggest, but that may have been how it started.
The other alternative is that which I mentioned in the context of new clause 2—that it is a cosmetic operation. I raised this matter at the end of the speech of the right hon. Member for Stepney and Poplar. He did not know the answer and, to be frank, I am not sure that I do. No doubt the Economic Secretary can tell us. Will the effect of overfunding and lending back to the money market by buying commercial bills have a cosmetic effect on the M3, or whatever monetary aggregate figures one Likes to consider? I should like an authoritative answer from the Economic Secretary.
§ Mr. Higgins
Does the process of which we are all aware, perhaps belatedly, of overfunding and replenishing the funds of the money market by buying commercial bills have a cosmetic effect on M3, M2, or PSL1? We should like an authoratitive answer to that. If it is not a cosmetic change but something else, I return to the fundamental question that I have asked before. We have the Bank of England Quarterly Bulletin, some paragraphs of which give rise to considerable thought. As far as I can discern, at no stage does it say what the advantage is of doing it in that way rather than by funding the amount one needs, to prevent the money supply from increasing by borrowing the equivalent of the PSBR from the non-bank public.
I hope that the Government will give a clear explanation of why all this has to be done rather than keeping to the traditional arrangement of simply funding and not lending the money back. I await the answer of my hon. Friend the Economic Secretary with considerable interest.
I regret to say that even more complicated questions arise in the relationship between the short-run and long-run interest rates. If we are to go for funding on a massive scale regardless of limit, we should perhaps know at what rates the money will be borrowed and lent back and how this is to be balanced in controlling the money supply. I shall not go into elaborate detail on the subject of short and long-term interest rates as these matters will arise in due course on other new clauses. Nevertheless, they are extremely important matters and they tend to reinforce my view that more debates on borrowing might be a salutary experience for the House.
§ 5 pm
§ Mr. Joel Barnett
I share the concern of the right hon. Member for Worthing (Mr. Higgins). He said that he wished that he had the power to speak in "Alice in Wonderland" terms, but I do not think that he needed it as we had something of an "Alice in Wonderland" speech from the Economic Secretary.
Even more important than the points made by the right hon. Gentleman is the fact that in new clause 1 the Economic Secretary is asking the House to grant a substantial extension of powers. I hope that all hon. Members will think very seriously about whether such an extension should be granted. Subsection (1) not only gives the Government power to raise moneyfor the purpose of promoting sound monetary conditions in the United Kingdom",but seeks to insert in section 12 of the National Loans Act the words:Any money which the Treasury consider it expedient to raise".In other words, Treasury officials or the Chancellor need only come to the House and say that they consider that for the purposes of sound monetary judgment as explained by the Economic Secretary on 12 July they require £10 billion, £12 billion or any other sum that they care to name.
§ Mr. Barnett
My right hon. Friend correctly amends my comment. I assume that any Chancellor wishing to borrow a sum of money of that magnitude would have the courtesy to tell the House, but my right hon. Friend is right that the Chancellor would not need the authority of the House for that borrowing.
From time to time, the House has debated the inadequacy of its own powers over the Executive and the right hon. Members for Worthing and for Taunton (Mr. du Cann) have supported us on that. Here, however, we are blithely contemplating giving the Government huge powers to borrow unlimited amounts. The Economic Secretary has made it clear that there is no limit. The new clause also makes it clear that there is no limit on the amount that the Government may borrow on behalf of the public of this country. That is not good enough, and it cannot be accepted on the basis of the wholly inadequate explanation so far given by the Economic Secretary. Indeed, even if there were a better explanation, powers of this magnitude are too great to be given to the Executive. The Government should not have such wide powers for no other purpose than promoting sound monetary conditions.
The reasons given by the Economic Secretary were rightly mocked, if that is the correct word, by my right hon. Friend the Member for Stepney and Poplar (Mr. Shore). Even if there were still the odd hon. Member who supported the Economic Secretary's monetarist theories, he would have found it difficult to go along with his argument today. In fact, there cannot be many of them left in the House or indeed in the country, as most of the major exponents of the idea have been changing their minds in every weekly article. I hope that the Chief Secretary will forgive me for putting it in that way, but his distinguished brother changes his views on these matters quite 670 frequently, as do others in the monetarist camp. I am not sure whether the Chancellor himself has yet done so. In any event, if such a huge extension of borrowing powers were to be granted, we should need far better explanations from the Government.
If one of the purposes of new clause 2 is to allow borrowing for local authorities at cheaper rates than the authorities themselves could achieve because central Government can borrow at lower rates, I wholly support that aim. In normal circumstances, money can certainly be borrowed more cheaply through the National Loans Fund. The explanation that this would provide added flexibility for local authorities is therefore acceptable. I know that my right hon. Friend the Member for Stepney and Poplar would not have disputed that as one reason for the additional powers in new clause 2.
It is not new clause 2 that gives cause for concern, however. It is the provisions of new clause 1 and the way in which they are proposed to be inserted into a Finance Bill. As Mr. Speaker has selected the new clause, I assume that it is in order to amend non-tax legislation through a Finance Bill, although I find it odd that such a major extension of powers, which have nothing to do with tax matters, is being dealt with in a Finance Bill. Such an important subject would be far better dealt with in a separate Bill to amend the National Loans Act. I did not raise the matter as a point of order, as I assumed that Mr. Speaker knew what he was doing in allowing this to be in order. Nevertheless, it is unsatisfactory by any standards that the matter should be debated in relation to a Finance Bill.
The Economic Secretary's other reason for seeking these huge new powers for the Executive is, as he has told us and as new clause 1 states, the promoting of "sound monetary conditions". Things might be easier if we knew what that phrase meant, but the Government are clearly unable to explain what they mean by it, so it is very difficult for the House. Certainly, I find it difficult to understand how the Government intend to manage sterling M3 and all the other financial indicators in arriving at a concept of sound monetary conditions that would justify their being able to borrow very large sums of money.
I very much share the scepticism of the right hon. Member for Worthing about the Government's monetary policies. If money aggregates, credit and all the monetary circumstances affecting economic policies could be adequately measured, this might have some effect in the real world, but the Government, like most previous monetarists, recognise that no such simple analysis is possible. Nor is it given to Government to control it even if it were known to them. Yet the Economic Secretary is asking the House, for these inadequate reasons, to give him these powers in order to achieve sound monetary control. It is wholly unsatisfactory for the Economic Secretary to come to the House in this way.
I agree with my right hon. Friend the Member for Stepney and Poplar—I say this with no disrespect to the Economic Secretary—that when the Chancellor of the Exchequer seeks such a substantial increase in powers he should come to the Chamber himself. This is not a small power that we are being asked to give to the Government. We are being asked to concede a major extension of powers, and it is not right that a junior Minister should come to the House and, with so inadequate an explanation, ask us to grant it.
671 Hon. Members will have heard the other arguments about what has been going on in the monetary area. The right hon. Member for Worthing referred to the way the Government have been borrowing money and lending it back in order to create a somewhat different position from that which we always understood them to want. I always believed that the Government were true monetarists—if there is such a thing—in the true market sense; that the market will decide what interest rates should be. But that is not the case. Not only will the market not decide, but the Government will intervene, with the additional powers that they seek, not just cosmetically to "fiddle"—I use the word quite deliberately—the monetary aggregates but also to fiddle what should be the market view of interest rates. The Government will take a market view. If we give them these powers they will borrow money in order to manipulate the monetary aggregates and cosmetically make it appear as though sterling M3 has not risen to an extent that they would consider bad, because it would affect inflation.
Even the Economic Secretary must now recognise that there is no evidence that the movement of sterling M3 has any meaningful effect in the real world of inflation and economy. There has been no evidence of that in the past three years under the Government's management of the economy. I hope that those who devised the word "management" will forgive me for using it in that sense. I hope that no one will believe that what has happened to sterling M3 over the past three years under the Government's management has had any real effect on what has happened to the real economy.
§ Mr. Bruce-Gardyne
I can assure the right hon. Gentleman that I do not personally accept his present dismissal of the significance of sterling M3 for the performance of inflation at one remove. Is the right hon. Gentleman telling the House that he has changed his view fundamentally, because the Labour Government, of which he was a distinguished Chief Secretary, used sterling M3 as their objective from 1976?
§ Mr. Barnett
I noted that the Economic Secretary said that he did not personally accept that sterling M3 has had no effect on the real economy. I assume that perhaps some hon. Members on the Treasury Bench do not take the same view as the hon. Gentleman. Indeed, I would be surprised if they did. He must know that the reason for the current recession has nothing to do with the sterling M3 aggregates but with the desperately deflationary policies pursued by the Government in the past three years. The Economic Secretary must know that and if he does not, some hon. Members on the Treasury Bench and. certainly hon. Members on the Conservative Benches, will know that that is the case. I am obliged for the hon. Gentleman's kind reference to my term as Chief Secretary. He must be aware that we never placed the same reliance on sterling M3 as the method of controlling the economy as the Government appear to be doing at the moment.
I did not wish to speak for long. I wished to make it clear that there will be hon. Members on both sides of the House who will not lightly give these powers to any Government. They are substantial powers, to borrow billions of pounds for utterly inadequate and ludicrous reasons. I therefore ask the House not to agree to new clause 1.
§ Mr. Richard Wainwright (Colne Valley)
It has been made quite clear from both sides of the House that in these two important, separate but related matters, the Government's design has been furtive and their execution shoddy. Their design has been furtive because, to amend in two serious respects the National Loans Act 1968, they have come along in the dog days of the Finance Bill and, at a wholly inappropriate moment, have introduced these two matters and have also tried to fudge them together for reasons about which I shall speculate briefly in a moment.
The execution is shoddy because, as has already been said, the Chancellor of the Exchequer should have been here to introduce the two important topics. The Government have once again fallen back on the fairly effective maxim that if one wants to try to bamboozle the House, one should open the debate with someone who is thoroughly bamboozled himself. That impression came through clearly in the genial and, I am sure, transparently honest but, nevertheless, hopelessly confused remarks of the Economic Secretary.
Most of what needed to be said about new clause 1 has been said with great point and precision from both sides of the Chamber. It would be redundant and otiose for me, in less happy language, to repeat that, except to say that at no point did the Economic Secretary try to give a word of explanation or enlightenment as to what "promoting sound monetary conditions" is meant to mean. He has made no reference to one of the great dials of his economic controlling machine, or one of the key indicators on which the Treasury Ministers' eyes are permanently fixed when they are not looking at the other indicators—PSL2. Will the Economic Secretary tell us, when he replies, what effect new clause 1 is expected to have, if it is made full use of, on PSL2? I remind him that under Government policy PSL2 now ranks equally alongside M3 as one of the three regulators.
New clause 1 appears because the Government are increasingly unwilling to follow through the logic of their own announced policies. It is all very well to make dogmatic remarks about pressing on with the conquest of inflation, the reduction of the money supply and the rate at which the money stock is increasing but the moment that begins to imperil the future of some of our greatest businesses and threatens to make interest rates even more intolerable than they are at present, the Government are in full retreat in a furtive manner by rescuing the businesses and keeping interest rates less horrific than they might otherwise be, by a back-door method.
§ Mr. Tim Eggar (Enfield, North)
Even if that description were true, which of course it is not, surely the hon. Gentleman would welcome what the Government are doing since it is a pragmatic approach?
§ Mr. Wainwright
Not for the first time, the hon. Member for Enfield, North (Mr. Eggar) has anticipated me. I was about to say that if only these matters could be attended to in the light of day, if only the Government would honestly admit that their monetarist dogma is dead because it has brought the country to a state that can no longer be tolerated, and if only they would come clean on the fact that they are backpedalling like mad to keep some of our major industries in being, they would certainly merit support from the Liberal Benches. However, it is all 673 done by the back door, with a great deal of abracadabra and elaborate press notices which are intended to cover up the Government's full and rather humiliating retreat.
Is new clause 1 confessedly an interim, makeshift measure, which will lead on to a more elaborate new structure that the Government may have in mind, or do the Government hope that all the sticking plaster and pieces of string will hold together, in the manner of the late Heath Robinson's contrivances, for the remaining period of the Government's term of office? It has been suggested in responsible financial journals that all this is very much an interim, makeshift affair and that the Government intend to come forward with more solid proposals. I hope that we shall be told whether that is the case.
Throughout his speech, the Economic Secretary spoke very rapidly, but at no time did his syllables pop out quite so rapidly as when he skated over the fact that there had been some infringements of this part of the National Loans Act in the past but that they had been very little ones.
§ Mr. Bruce-Gardyne
I made it clear to my right hon. Friend the Member for Worthing (Mr. Higgins) that there had been no infringements, and I can assure the hon. Member for Colne Valley (Mr. Wainwright) about that.
§ Mr. Wainwright
I regret very much that, not having shorthand, I was unable to record the hon. Gentleman's precise words. But he will recollect that in his opening speech he said something rather different from the matter that the right hon. Member for Worthing put to him. The right hon. Gentleman asked about the future. He wanted to know how near the Government had now come to needing this new gateway. But in his opening remarks the Economic Secretary undoubtedly seemed to refer to the fact that once or twice in the past these limits had been exceeded. At any rate, will he make it clear that there has been no incident in the past when this has occurred?
Will the Economic Secretary also say what is the Government's attitude to some parliamentary control over this completely new permission? It is bad enough for the House to have no control over conventional Government borrowing except in very elaborate and recondite ways. But what parliamentary control do the Government have in mind for this completely new and larger power?
I turn to new clause 2, which has been fudged together with new clause 1. I am not surprised about that, because the need for screening this matter is very great, bearing in mind that new clause 2 confirms that the Government are a nationalised retail money lender. That is undoubtedly the case, on the Economic Secretary's own admission. Instead of having to go to the banks, local authorities will have yet further borrowing facilities from the Government.
I appreciate that that is no skin off the nose of the Labour segment of the Opposition. But it is very offensive to right hon. and hon. Members on the Liberal Bench, and it is made no lighter when the Government say that it will not affect the public sector borrowing requirement. It will not, of course; but they admit that it will enlarge the central Government borrowing requirement. It is a further measure of centralisation in Whitehall, rather than having a plural approach under which the banks and other private moneylenders outside Government control can deal with these matters.
What has the Economic Secretary to say about that? What reason is there, apart from an adjustment to the 674 Government borrowing requirement, for a Conservative Government to set themselves up as a sophisticated money-lender to local authorities in this way?
§ Mr. Joel Barnett
What reason is there for a Liberal to say that a local authority should be compelled to pay more for money that it borrows when it can get it cheaper by just using a mechanism which allows the Government to lend to it?
§ Mr. Wainwright
There are two reasons. The first is that a plural approach in these matters is very much healthier from the financial point of view. I have infinitely greater trust in the capacity of banks to assess the creditworthiness of local authorities than in the capacity of Whitehall, not simply because of Whitehall incompetence but because, so often, Whitehall is influenced by the political colour and plans of a local authority. I want it on record that to Liberals this is a retrograde approach.
The second reason is that I do not believe that local authorities should have a privilege that private industry does not enjoy. Why does the Economic Secretary stop short of opening this facility to industry as well? How will he explain to industries up and down the country that he is giving this privilege to public bodies and denying it to private industry?
Unhappily, these two clauses are linked. If a Division is called, I shall recommend my right hon. and hon. Friends to vote against both, if possible.
§ Mr. Horam
There is no doubt that the Economic Secretary drew the short straw when his Treasury colleagues were deciding among themselves who was to open the debate on this subject. I am sure that the hon. Gentleman regrets that he was in the office that afternoon and happened to pick the wrong straw. He was handed a tricky brief on a very important subject. As usual with a tricky brief on an important subject, the hon. Gentleman tried his best, which was simply to read a highly technical brief at great speed. That is always the standard approach—
§ Mr. Horam
We saw the hon. Gentleman's worst in the Standing Committee. Though genial, occasionally he was rather more long-winded and labyrinthine in his expositions than the rapid nose-to-the-Dispatch Box style that we had to day. I have no doubt that his right hon. and hon. Friends told him to get it through quickly in a quarter of an hour and flood hon. Members with technical details so that they were unable to see the wood for the trees. Unfortunately, the hon. Gentleman made a few hiccups on the way and there were a number of interventions which revealed that he had not understood his brief in the first place. Perhaps the hon. Gentleman had a good weekend and was not expecting this kind of difficulty on a Monday.
Before making a few remarks about the new clauses, I want to join the protest made by the right hon. Member for Stepney and Poplar (Mr. Shore) and the right hon. Member for Heywood and Royton (Mr. Barnett) about the propriety of all these amendments and new clauses and the way that we are required to discuss them. While the Economic Secretary and others were speaking, I worked through the amendments and new clauses to be considered today. I discovered that there were no fewer than 79 pages 675 of new clauses and amendments to be considered in two days, and I calculated that nearly half were Government new clauses and amendments.
§ Mr. Horam
I did not include the starred amendments which presumably the Government tabled very late in the day, all of which, incidentally, are the Chancellor's amendments. The right hon. Member for Stepney and Poplar was right to make his protest.
On one issue, the heritage, I notice that as a result of Mr. Speaker's selection we are to consider Government new clause 46 together with no fewer than 17 separate Government amendments to give effect to the changes that the Government wish to make following our debate in the Standing Committee. That is a scandalous amount of technical detail for the Opposition parties to have to absorb in the time available. It demonstrates once again how farcical our proceedings are, both in Standing Committee and on the Floor of the House when we deal with a Finance Bill.
In my view, the Government should implement as soon as possible the idea that has been around for some time of having a technical Finance Bill, which can be dealt with separately and where all these matters can be investigated. In addition, I think that we should have some Select Committee procedure.
§ Mr. Horam
A Select Committee procedure is appropriate in this case because, rather than the Economic Secretary finding himself in the difficulty that he experienced when hon. Members attempted to intervene in his speech, when he could not readily admit that he did not know the answers to hon. Members' questions, he could summon up an expert without any loss of face who immediately could supply the Committee with the answers to hon. Members' questions. We could have that sort of informed procedure in a Select Committee which we cannot have in a Standing Committee or on the Floor of the House. All this business of notes flying back and forth is really quite ludicrous. That brings out the point of how nonsensical our basic procedures are for dealing with important, highly complicated and technical financial legislation.
When I intervened in the Economic Secretary's speech I asked about the figuring behind the £20 million estimate of the savings to local authorities. I have been a Minister. The hon. Gentleman is a Minister. I know that that figure was not plucked out of the air. It may have been a crude estimate or a guesstimate but it was based on the idea of the shift of the £10,000 million that the local authorities are borrowing at present. The figure must be based on something. The Minister cannot pretend that it is merely a figure that a civil servant alighted upon for no other reason than that a figure had to be included in the Minister's speech. Perhaps the Civil Service is now so overburdened with work that it does not bother to put any figuring behind its brief to the Minister. If so, I hope that the Minister will comment on that matter. There must be something behind the figure. I hope that the Minister will tell us what it is.
§ Mr. Straw
Does the hon. Gentleman agree that if the Treasury has an estimate of a saving of £20 million, it must 676 also have an estimate of the effects of that change on the money supply? It may be a broad estimate, but it must have an effect. The Minister should come clean and tell the House what the effect is likely to be.
§ Mr. Horam
Predictions of the money supply by the Government are fraught with difficulties. The Minister may have some difficulty in coming up with that figure.
I should be glad if the Minister would oblige the House—as this is a matter of fact and history, not of estimate or prediction—by telling us how the £10,000 million, which is a large sum, has built up over the past few years. Has there been such a rapid increase in the past two or three years that it must be dealt with, or has the increase been the same for many years, and the Government are now dealing with it for other reasons than we have discussed? Has there been a sharp increase leading to the £10,000 million figure of borrowing by local authorities from banks, or has the increase been slower?
As has been said, new clause 1 gives the Government the ability to borrow more than is required by public sector borrowing. That departure has been made for the first time. As the right hon. Member for Heywood and Royton said, it is a substantial increase in the Government's powers. It is part of the great tradition of the Government giving themselves a remarkably good arrangement for their borrowing. That has been part of the approach of Governments of all complexions to those matters for a long time. That is one of the difficulties that industry has had to face over the years. The Government have always put themselves in a good position to borrow the money that they require. That has led, for example, to the indexation of Government bonds and other factors that we have discussed in the Finance Bill. From time to time it has caused difficulties for industrial borrowers. That is the other side of the coin. The weight of Government borrowing on the terms that they can command has always created difficulties at certain times in our history for industrial borrowing. It has also led to higher interest rates.
That consequence would not matter all that much. I do not fundamentally believe that industrial finance is at the heart of our problems, as some do. It is a problem, but it is not at the heart of our difficulties. It would not matter so much if the Government had a different economic policy and believed, as we in opposition believe, that the problem should be dealt with in the right way by dealing with demand instead of simply with interest rates. It is the Government's policy to focus their entire economic policy on the behaviour of interest rates. That is their present dilemma. They are pursuing a monetary policy that leads, as night follows day, to higher interest rates. They are now trying to dodge the consequences of higher interest rates on industry.
We saw the consequences of the Government's monetary policies and of higher interest rates last autumn, when an incipient upturn was gathering force in the economy. Numerous indicators showed that. However, the Government came in and clobbered the upturn on the head by higher interest rates because they were concerned about the effects on inflation caused by the beginnings of an upturn in the economy. Therefore, there has been a plateau and a slight tailing-off in the past six months. There is still no steady upturn, which the Chief Secretary has been predicting for 18 months. That shows the contradiction between the Government's monetary 677 approach and what they wish for the health of the economy and what the CBI and industry are telling them is necessary for the good handling of the economy.
I was interested that in his short and rapid speech the Economic Secretary defined the Government's monetary policy in an unusual way, to take account of the inherent contradiction in his approach. He said that monetary policy was about the abatement of inflation and keeping down interest rates, as far as possible consistent with the abatement of inflation. However, monetary policy is nothing of the kind. Monetary policy states that inflation is caused by an expansion of the money supply and we should control that to abate inflation. It has nothing to do with keeping down interest rates as well, for other reasons. The hon. Gentleman wants to keep down interest rates because he is worried about the consequences of high interest rates on industry in general. It has been brought home to him by industrialists how severe and disadvantageous are those consequences. The Government are now trying to fiddle the books so that they can have their cake and eat it. It would be more sensible if the Government admitted the collapse of their central policy in name as well as in fact so that we need not have to put up with the nonsense of the new clauses.
§ Mr. Robert Sheldon
Scepticism has been voiced about new clause 1 from all parts of the House. The right hon. Member for Worthing (Mr. Higgins) complained about the lack of control by the House over borrowing. We look forward to conclusions being made by the Committee of which he is the distinguished chairman. My right hon. Friend the Member for Heywood and Royton (Mr. Barnett) made an important contribution. He said that the powers that were being requested were too great for the way in which they had been asked for. The hon. Members for Colne Valley (Mr. Wainwright) and Gateshead, West (Mr. Horam) added their sceptical remarks to the debate.
It is unsatisfactory that these matters are being discussed on Report. It would have been an advantage if there had been another Bill, as my right hon. Friend the Member for Heywood and Royton suggested, but as we did not have that, those matters should have been discussed in Committee, where we have only recently ended our deliberations.
Those weeks—they seemed like months—in Committee were precisely to discuss such matters. Such Committees were devised and brought into fruition through the combined efforts of the late Dick Crossman and Iain Macleod. They were devised so that there would be close and detailed scrutiny of important matters by people who had a long and continuing interest in them. They give opportunities for people to question and deliberate effectively. Only a couple of weeks after we finished the Committee stage the new clause has been brought up on Report for the first time. That clause is not alone, because there are another five new clauses and two lengthy schedules, apart from a whole host of amendments. Why is there this late rush, when we started the Finance Bill at an early stage, when there was plenty of time to discuss those matters? We know that the Ministers cannot be overworked. There are six Treasury Ministers being paid for by the country. The main consequence is that they are stumbling over each other. The problem is that there is inadequate 678 discussion because it is taking place on the Floor of the House instead of in Committee, where there could be the detailed discussion and deliberation which we should have had.
I shall deal first with new clause 2, because it is the least controversial of the two new clauses now being debated. We have no quarrel with the variable rate facility. We understand the advantages to local authorities in being able to borrow from the Government at rates that, normally speaking, are greater than those they could obtain from the commercial banks. We note that there is a £20 million a year saving, but none of us would be foolish enough to think that was the reason why the Government produced the new clause. The Government are interested in getting the local authorities to borrow from the Government rather than from the banks and, therefore, to reduce the money supply. The hon. Gentleman could not quantify that important factor, which must have been one of the prominent reasons for introducing new clause 2.
However, perhaps we have said enough about that, both in speeches and interventions, and I now turn to new clause 1. My right hon. Friend the Member for Heywood and Royton is right. The powers in new clause 1 are far greater than necessary for the uses to which the Government will be putting to them. The criterion is that money can be raised in excess of what is required for sound monetary conditions. There was no attempted definition, not even an explanation, by the hon. Gentleman in his opening speech of what he meant by "sound monetary conditions".
A few years ago, when we were bound by the three parts of sterling M3, we thought we knew what the Government had in mind by "sound monetary conditions". They had a long-term target. They expressed it fully in the Red Book. But now they have many more targets. They have M1, M3, sterling M3, PSL1, PSL2 and MO. These all form part of the monetary policy that the Government claim is necessary to maintain the financial and economic position of the country that they are privileged to govern.
If there are to be such widespread powers, we shall need and should demand, much closer monitoring of these figures. We shall need to know the amount of money that is being lent to local authorities through the National Loans Fund, the effect on sterling M3 and the other money indicators of such lending to local authorities and the effect of interest rates at various time scales, both long and short term. We shall require that essential information. We shall regularly ask for it and expect to receive answers.
Monetarism still rules the financial and economic prospectus of the Government. It was said that money supply and its control was the method to be used for reducing inflation. That was the way in which inflation was to be kept under control. We have seen all these new factors coming into operation which makes one very sceptical as to how far this precise relationship between money supply and inflation still exists. In fact, the Bank of England was deliberately overfunding as a means of keeping down the money supply. As a result, the banks were illiquid and interest rates threatened to rise. Therefore, the Bank of England started buying commercial bills. Why did the Bank of England do that when it was selling gilts at the same time? The Bank of England was both seller and buyer simultaneously. When an official body undertakes both tasks, one must ask, "Why?" The reason is that these figures conceal the true money supply in a definition that one could accept as more 679 valid than any of those previously put forward. What happens is that the big companies have been selling their bills to the banks. The banks have been selling their bills to the Bank of England and the corporations have been able to make use of the funds they obtain to some extent, for such purposes as "round tripping". As time goes on they can do that to a much greater extent. The Government are introducing the new clause to make use of the National Loans Fund to overfund the moneys that they require.
The simple truth is that this selling of bills to the banks arises from the fact that the commercial sector has been able to create its own money supply. The corporations have sold their bills to their own banks. That is equivalent to the Chief Secretary to the Treasury putting his name to an IOU for, say, £100. He will have no difficulty in raising a similar amount of money from, say, the Financial Secretary. The Financial Secretary, holding this particular piece of paper and being in need of funds can, by endorsing the IOU, raise money from the Economic Secretary to the Treasury. In that way, the money supply of the country would be increased by £100. If the Bank of England buys that bill, it can claim to have reduced the money supply by £100. But that reduction is only notional because in that way the money supply can be expanded indefinitely and, likewise, contracted indefinitely.
If a respected company starts to pay its own creditors with, say, a 90-day paper, those creditors can pay their suppliers with the same piece of paper. We then have a further extension of the creation of money that we are seeing in its infancy, but that is having its effect—a slight one—on the operations of the monetary markets. The right hon. Member for Worthing is right. Such a system comes close to "Alice Through The Looking Glass".
Promoting sound monetary conditions, which is the criterion we now have to make use of, follows three years of monetary endeavour. It was claimed that monetarism would reduce inflation and keep wage claims down. Confrontation with the trade unions was to be avoided by making use of the money supply. In practice, none of that has happened. However, we have seen deflation.
The hon. Gentleman should not take credit for controlling the money supply when it has increased by 60 per cent. in the past three years. According to that theory, we are ready for the explosion in prices that some members of the City university expected to see. The distinguished economists in that university, headed by Brian Griffiths—who is one of the few economists for whom I have great respect and even some admiration and affection—wrote last year thatwe are equally sure that last year's money growth will push up prices, sooner or later, and probably sometime in 1982.That was written as a result of seeing the enormous increase in money supply, which the economists could predict with certainty would have its effect on inflation. It is not the money supply that has reduced inflation, but the deflationary policies of the Government. On Thursday of last week, Sam Brittan made what sounded to me very close to a recantation in referring to a £5 billion boost. He qualified it by saying that it needed to be set convincingly in its context. Most of us would qualify our comments in a similar way. He said that a £5 billion boost may well be within the safety margin. So we are seeing what I consider to be the death throes of monetarism. If that is so, why are 680 we having the new clause? I believe that its purpose is to conceal what the money supply is to be over the remaining years of this Parliament.
In practice, it is not the money supply that is controlling the economy. It is not the money supply that is the main indicator, even if we take an amalgam of the five or six money supply indicators. What is controlling the economy, and is being used to control the economy, is the exchange rate. It is being set at an effective rate of 90 to 92. We have seen the dollar strengthen enormously; we have seen the lira weaken, and we have seen the French franc weaken. Currencies have gone up and down but the effective exchange rate has been incredibly stable, and it leads one to the conclusion that that is the prime determinant of the Government at present.
I am always suspicious of the Government when they say that they have multiple targets—inflation, balance of payments, unemployment, outward exchange rate, and so on. There is always one overriding target. Mine happens to be unemployment, followed by output, but I believe that the Government's overriding target is the exchange rate.
Almost two years ago, the Bank of International Settlements—that combination of the important bankers in the Western world—said that the monetary argument was as near to a laboratory experiment as could be devised in order to show, once and for all, whether a country was wise or unwise to operate in that way.
The laboratory experiment is now over and the conclusions are clear. Many years ago, when I was a boy, I worked on a chicken farm. I saw then that when one pulled the neck of a chicken and it died, the chicken was more vigorous after its death than it was before. The various parts of the body jerked and moved violently in all sorts of directions. That is not dissimilar to what we are seeing here with the new clauses. The body is dead but the Government still try to retain, for decency's sake, some of the old ideas to which they were once attached. The absurd notion that the economic policy of the country should be run in that way leads us to say that the new clauses—and particularly new clause 1—should have no place on the statute book. We shall be voting against them tonight.
§ Mr. Bruce-Gardyne
I was touched by the opening remarks of the right hon. Member for Stepney and Poplar (Mr. Shore), who referred to me as the youngest member of the Treasury team. I have to tell the right hon. Gentleman that flattery will get him nowhere. In any case, in that respect, as perhaps in others, his facts were wrong.
I had not expected the debate to end on the rather bloodcurdling note that the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) saw fit to inject into the closing minutes of his speech. I thought that it was a bit early in the evening for such rhetoric.
Broadly speaking, there have been three strands in the debate. I shall try to deal with them in turn. We have had a variety of comments on new clause 2, and I should like to deal with them first. On the whole, hon. Members on each side of the House saw the logic of the change that we are proposing to make. The exception was the hon. Member for Colne Valley (Mr. Wainwright), who detected in new clause 2 a sinister plot to achieve a new type of centralisation in our affairs. In clause 2 we are seeking to provide a facility that the local authorities are 681 free to use or not as they choose. As I said in my opening remarks, many of them have expressed a wish to have that facility.
It will not be a question of having only one channel for borrowing, any more than it has been in the past. The local authorities have borrowed from the Public Works Loans Board in the past and they will borrow from it in future. They have borrowed from banks in the past and will do so in future. What they will not be able to do is to borrow from the Public Works Loan Board on a variable basis. That is all we are concerned with in new clause 2.
§ Mr. Richard Wainwright
The Economic Secretary has not addressed himself, either in his opening statement or in his reply, to how the Government can live up to his earlier assertion that there will be no element of subsidy in the rates, which will be considerably finer than those offered by any of the clearing banks.
§ Mr. Bruce-Gardyne
That point was not raised by the hon. Gentleman in his earlier remarks, as I recall. The whole purpose of the clause, and the way in which it is drafted, it to ensure that that element of subsidy is not present. The clause is based on our experience of the way to relate forward expectations of interest rates in the money markets. Obviously, if it becomes apparent that the terminology of the clause is not appropriate to achieve its purpose, we shall have to look at it again, but we believe that it is correct and that it will ensure that there is no element of subsidy in the on-lending.
I turn now to the £20 million saving to the local authorities, to which I referred in my opening remarks and in regard to which several hon. Members seem to have drawn conclusions about the arithmetic and the scale of transaction. There is no mystery about it. The calculation of the £20 million is based on the fact that all the local authorities' borrowing, whether from the PWLB or the banks, will be done at a slightly finer rate, because the finer rate that the local authorities can obtain from the PWLB will also impact upon the rate that they can obtain from the banks. The £20 million is related to the scale of borrowing that the local authorities have outstanding—the £10 billion that I quoted earlier. No inference or conclusion whatever can be drawn in regard to the scale of the switch that we foresee, because we are not able to make that forecast or prediction.
§ Mr. Robert Sheldon
At any rate, the Minister should be able to tell—because the calculations refer to it—what proportion of the local authorities' borrowing he now expects to come via the National Loans Fund.
§ Mr. Bruce-Gardyne
I do not think I can, because, as I said earlier, we are not in a position to dictate to the local authorities what to do about their borrowing. The choice is theirs. We cannot predict the scale on which the switch will occur. From the evidence that we have received of their interest in the proposals, we believe it will be substantial, but I cannot tell the House the precise scale. I assure the House that the £20 million is entirely related to the totality of local authority borrowing, not to the switch that we expect may take place.
§ 6 pm
§ Mr. Bruce-Gardyne
Yes. I can give the House the answer now. We expect to be able to save about a quarter of 1 per cent. off the rates by cutting margins above the London inter-bank offer rate. The banks are expectd to do the same in response. Thus, the rate on the £10 billion, to which I referred, would fall. One quarter of 1 per cent. on the £10 billion would equal a saving of £25 million a year. That calculated saving may be slightly overstated, so the figure of £20 million is to allow for the effect not being quite symmetrical. That is the basis of the calculation.
Most of the contributions made by hon. Members referred to new clause 1, with which I shall now deal. The right hon. Member for Heywood and Royton (Mr. Barnett) speaks with great authority and the House always listens to him with respect. One is bound to take seriously his argument about the scale of unbridled licence to borrow that the Government wish to achieve through the new clause. As my right hon. Friend the Member for Worthing (Mr. Higgins) said, the House has never controlled Government borrowing in any shape or form. My right hon. Friend reminded the House that the method in the clause was the means whereby, in days gone by, monarchs avoided the need to ask the House to raise taxes. They borrowed for as long as they could and, when their credit ran out, they were then forced to ask the House to raise taxes.
It would be a massive innovation for the House to seek to exercise direct control over public borrowing, but the new clause is not an innovation. My right hon. Friend and his distinguished Committee are considering the issue at present. I had the honour to submit myself to the scrutiny of the Committee the other day, and I await its report with great interest. However, it would be new for the House to exert control over Government borrowing. The terminology of the clause is not new. Furthermore, the terminology of section 12 of the National Loans Act is remarkably widely drawn. It allows the Government to raise any money to meetany excess of payments out of the National Loans Fund over receipts into the National Loans Fund.These may be raisedin such manner and on such terms and conditions as the Treasury think fit.Money so raised is paid to the National Loans Fund. The only distinction is that the National Loans Act lays down that the balances must be only working balances.
§ Mr. Bruce-Gardyne
If the right hon. Gentleman will show some patience, I shall deal with that issue.
Some hon. Members have talked about overfunding as though it were something that the Government had invented. It is nothing of the sort. I ask the right hon. Gentleman to recall the performance of the Labour Government on that subject. He said that the Labour Government had never indulged in lunacies such as overfunding. Let me refresh his memory. The right hon. Gentleman will remember that in 1977–78 the PSBR was just under £5.6 billion. Debt sales to the public in that year amounted to £6.7 billion, so there was substantial overfunding for the same reason as the Government believe it advisable to have overfunding.
§ Mr. Joel Barnett
If the Economic Secretary is saying that it was possible to do that in 1977–78 under existing legislation, why does he now wish to widen it substantially to allow unlimited borrowing powers?
§ Mr. Bruce-Gardyne
The right hon. Gentleman anticipates me. I shall come to that point later. The point that I wish first to make clear is that there is nothing new about overfunding. Furthermore, the Labour Government believed it right to overfund from time to time for precisely the same reason.
In answer to a question from my right hon. Friend the Member for Worthing, I should say that this is not a cosmetic operation. We are trying to ensure that we can increase the public holding of secure instruments—to move money away from cash and, therefore, away from immediate spending powers. There is nothing cosmetic about that.
My right hon. Friend the Member for Worthing and others complained that I read this part of my opening speech too quickly, so I shall repeat the crucial paragraph:At present section 12 of the National Loans Act allows the Treasury to borrow to meet the outgoings of the NLF—which means basically the central Government borrowing requirement, rather than the PSBR, plus whatever sterling the exchange equalisation account needs—plus enough to meet any necessary working balances.That is what the National Loans Act allows us to do, and that meets the point raised by the right hon. Member for Heywood and Royton and others.
The paragraph continues:It has over recent years been possible for sales of long-term debts to exceed the outgoings of the NLF"—without running into trouble with section 12 of the Act—as the excess could be used to repay the so-called floating debt, that is, Treasury hills held by the banks.The problem is that the banks' holdings, because of this operation—indulged in by the Labour Government and by this Government from time to time—have gradually soaked up their holdings of Treasury bills. That has meant a limitation of our ability to fund through section 12.
§ Mr. Higgins
We all agree that the operation through commercial hills is the equivalent economically to the old operation through Treasury bills, so that may be a non sequitur. However, I wish two points to be clarified. First, my hon. Friend said that there was nothing cosmetic about the operation, but he did not refer to the overall operation that we have been discussing—overfunding, on the one hand, and the buying of commercial bills, on the other. Does that composite operation have a cosmetic effect on the money supply figures?
Secondly, my hon. Friend said that overfunding was designed to get more money permanently into—I forget the expression that he used—secure assets. One can do that up to the point when one is funding, because the PSBR is being funded from the non-bank public sector. Therefore, there is no effect on inflation or on the money supply. However, that is not an argument for overfunding, still less for this curious circular arrangement. What is the case for overfunding, on the one hand, and lending back, on the other?
§ Mr. Bruce-Gardyne
The purpose of overfunding, as used on occasion by the Labour Government, by Governments, I suspect, that preceded them, and by this Government, is to counteract the impact of a surge in bank lending to the private sector. The dependence of the corporate sector on bank mediation and the dependence of 684 local authorities on borrowing from the banking sector has meant that there has been a surge in bank lending. This is why new clauses 1 and 2 are interrelated. To counteract this surge, it has been considered essential, on occasion, to overfund and so prevent an excessive growth in the broad monetary aggregates.
I insist that this is not a cosmetic operation. The whole purpose is to move savings held by the public out of money into long-term assets that are further removed from market liquidity. That is the essential purpose of the whole operation.
§ Mr. Higgins
I appreciate the point that my hon. Friend seeks to make. He remarked earlier that interest would be paid on balances that then accrued in excess of the working balances covered by the existing legislation. I seek to identify exactly the nature of these overfunded balances. Where do they reside? By whom is interest paid?
§ Mr. Bruce-Gardyne
The overfunded balances, if the House approve new clause 1, would lie in the National Loans Fund. It is to enable the balances to accumulate in the National Loans Fund, which cannot happen at present because of the restrictions under section 12 of the National Loans Act, that we seek authority for the new clause.
§ Mr. Sheldon
On a point of order, Mr. Deputy Speaker. I do not often raise points of order. The new clause was tabled on Report to avoid proper discussion in Committee where hon. Members could have examined it thoroughly. By refusing to give way, the hon. Gentleman is not allowing discussion of these important matters at this stage, having been able to avoid it in Committee.
§ Mr. Deputy Speaker
I regret to say that I am not aware of these matters. I am here merely to ensure that order is kept.
§ Mr. Bruce-Gardyne
I am not giving way again. I have given way extensively during this speech and my previous speech. I have given way a great deal more frequently than the right hon. Gentleman was prepared to give way. I do not wish to delay the House much longer. I believe that hon. Members wish to reach a conclusion.
The right hon. Gentleman wanted an assurance that the Government would provide information about movements in National Loans Fund balances. That information is already available. The balance sheet of the banking department of the Bank of England is published every Friday in the Financial Times with respect to the previous Wednesday, and it also appears in table 1 of the public deposits in the Bank of England Quarterly Bulletin. The composition of the balances of the National Loans Fund is available in both those places.
§ Mr. Bruce-Gardyne
I have answered the question. I shall not give way to the right hon. Gentleman again. I have given way several times. I believe that the House wishes to come to a conclusion.
I accept fully that it is right for the House to examine closely the powers that the Government seek, especially in new clause 1. I submit that we are not breaking new ground. We are essentially eliminating two artificial obstacles to the achievement of our monetary and exchange market intervention policies, as the need may arise. I do not know how many times the right hon. Gentleman has to be told, before he believes it, that we are not operating an exchange rate policy.
My right hon. and learned Friend the Chancellor of the Exchequer has made it clear time and again that, while we need to observe the performance of the exchange rate as a guide to the general condition of monetary policy, our intervention is confined to smoothing the movement of the rate in either direction. The right hon. Gentleman has been told this many times. If he looks at the record, he will see that the actual outturn of the exchange rate has conformed to what my right hon. and learned Friend said.
It is nonsense for the Opposition to complain in the over-colourful similes of the right hon. Member for Ashton-under-Lyne that monetary policy is dead. On the contrary, it is just as senseless to attack the Government for killing off or abandoning monetary policy as it is to accuse us, as is done frequently in the same breadth, of being obsessive over one statistic of monetary policy. We are paying attention, as my right hon. and learned Friend has made clear, to the three major aggregates—not all six as the right hon. Gentleman maintained—of M1, sterling M3 and PSL2. We are also paying attention to the course of interest rates and to the movement of the exchange rate. All these factors tell us that the counter-inflation policy is moving in the direction that we seek.
The answer to the right hon. Member for Ashton-under-Lyne is that inflation has fallen and is falling. It is falling a great deal faster than the right hon. Gentleman and many others predicted at the time of the Budget. In this way we shall rebuild a sound future for the British economy. To enable us to achieve that purpose effectively and smoothly, we need the new clauses. I hope that hon. Members will give them a fair wind.
§ Question put, That the clause be read a Second time:—
§ The House divided: Ayes 278, Noes 218.688
|Division No. 262]||[6.17 pm|
|Adley, Robert||Biggs-Davison, Sir John|
|Aitken, Jonathan||Blackburn, John|
|Alexander, Richard||Blaker, Peter|
|Alison, Rt Hon Michael||Body, Richard|
|Amery, Rt Hon Julian||Bonsor, Sir Nicholas|
|Arnold, Tom||Bottomley, Peter (W'wich W)|
|Aspinwall, Jack||Bowden, Andrew|
|Atkins, Rt Hon H.(S'thorne)||Boyson, Dr Rhodes|
|Atkins, Robert(Preston N)||Braine, Sir Bernard|
|Atkinson, David (B'm'th,E)||Bright, Graham|
|Baker, Nicholas (N Dorset)||Brinton, Tim|
|Banks, Robert||Brittan, Rt. Hon. Leon|
|Beaumont-Dark, Anthony||Brooke, Hon Peter|
|Bendall, Vivian||Brotherton, Michael|
|Bennett, Sir Frederic (T'bay)||Browne, John (Winchester)|
|Benyon, Thomas (A'don)||Bruce-Gardyne, John|
|Benyon, W. (Buckingham)||Bryan, Sir Paul|
|Berry, Hon Anthony||Buchanan-Smith, Rt. Hon. A.|
|Bevan, David Gilroy||Buck, Antony|
|Biffen, Rt Hon John||Budgen, Nick|
|Bulmer, Esmond||Hunt, John (Ravensbourne)|
|Burden, Sir Frederick||Irvine, Bryant Godman|
|Butcher, John||Jenkin, Rt Hon Patrick|
|Cadbury, Jocelyn||Jessel, Toby|
|Carlisle, John (Luton West)||Johnson Smith, Sir Geoffrey|
|Carlisle, Kenneth (Lincoln)||Jopling, Rt Hon Michael|
|Carlisle, Rt Hon M. (R'c'n)||Joseph, Rt Hon Sir Keith|
|Chalker, Mrs. Lynda||Kershaw, Sir Anthony|
|Channon, Rt. Hon. Paul||Kimball, Sir Marcus|
|Chapman, Sydney||King, Rt Hon Tom|
|Churchill, W. S.||Knight, Mrs Jill|
|Clark, Hon A. (Plym'th, S'n)||Knox, David|
|Clark, Sir W. (Croydon S)||Lamont, Norman|
|Clarke, Kenneth (Rushcliffe)||Lang, Ian|
|Cockeram, Eric||Latham, Michael|
|Colvin, Michael||Lawrence, Ivan|
|Cope, John||Lawson, Rt Hon Nigel|
|Costain, Sir Albert||Lee, John|
|Cranborne, Viscount||Lennox-Boyd, Hon Mark|
|Critchley, Julian||Lester, Jim (Beeston)|
|Crouch, David||Lewis, Kenneth (Rutland)|
|Dorrell, Stephen||Lloyd, Ian (Havant & W'loo)|
|Douglas-Hamilton, Lord J.||Lloyd, Peter (Fareham)|
|Dover, Denshore||Loveridge, John|
|du Cann, Rt Hon Edward||Luce, Richard|
|Dunn, Robert (Dartford)||Lyell, Nicholas|
|Durant, Tony||Macfarlane, Neil|
|Eden, Rt Hon Sir John||MacGregor, John|
|Eggar, Tim||MacKay, John (Argyll)|
|Elliott, Sir William||Macmillan, Rt Hon M.|
|Eyre, Reginald||McNair-Wilson, M. (N'bury)|
|Fairbairn, Nicholas||McNair-Wilson, P. (New F'st)|
|Fairgrieve, Sir Russell||Major, John|
|Faith, Mrs Sheila||Marland, Paul|
|Farr, John||Marten, Rt Hon Neil|
|Fell, Sir Anthony||Maude, Rt Hon Sir Angus|
|Fenner, Mrs Peggy||Mawby, Ray|
|Finsberg, Geoffrey||Mawhinney, Dr Brian|
|Fisher, Sir Nigel||Maxwell-Hyslop, Robin|
|Fletcher, A. (Ed'nb'gh N)||Mayhew, Patrick|
|Fletcher-Cooke, Sir Charles||Mellor, David|
|Fookes, Miss Janet||Miller, Hal (B'grove)|
|Forman, Nigel||Mills, Iain (Meriden)|
|Fowler, Rt Hon Norman||Mills, Sir Peter (West Devon)|
|Fox, Marcus||Miscampbell, Norman|
|Fraser, Rt Hon Sir Hugh||Mitchell, David (Basingstoke)|
|Fraser, Peter (South Angus)||Moate, Roger|
|Fry, Peter||Montgomery, Fergus|
|Gardner, Edward (S Fylde)||Moore, John|
|Garel-Jones, Tristan||Morris, M. (N'hampton S)|
|Glyn, Dr Alan||Morrison, Hon C. (Devizes)|
|Goodhart, Sir Philip||Mudd, David|
|Goodhew, Sir Victor||Murphy, Christopher|
|Goodlad, Alastair||Myles, David|
|Gorst, John||Neale, Gerrard|
|Gow, Ian||Needham, Richard|
|Grant, Anthony (Harrow C)||Nelson, Anthony|
|Gray, Hamish||Neubert, Michael|
|Greenway, Harry||Newton, Tony|
|Griffiths, E.(B'y St. Edm'ds)||Normanton, Tom|
|Griffiths, Peter Portsm'th N)||Nott, Rt Hon John|
|Grist, Ian||Onslow, Cranley|
|Hamilton, Hon A.||Oppenheim, Rt Hon Mrs S.|
|Hamilton, Michael (Salisbury)||Osborn, John|
|Hampson, Dr Keith||Page, John (Harrow, West)|
|Hannam, John||Page, Richard (SW Herts)|
|Haselhurst, Alan||Parkinson, Rt Hon Cecil|
|Havers, Rt Hon Sir Michael||Parris, Matthew|
|Hawksley, Warren||Patten, John (Oxford)|
|Hayhoe, Barney||Pattie, Geoffrey|
|Heddle, John||Pawsey, James|
|Heseltine, Rt Hon Michael||Percival, Sir Ian|
|Higgins, Rt Hon Terence L.||Pink, R. Bonner|
|Hill, James||Pollock, Alexander|
|Hogg, Hon Douglas (Gr'th'm)||Porter, Barry|
|Holland, Philip (Carlton)||Prentice, Rt Hon Reg|
|Hordern, Peter||Price, Sir David (Eastleigh)|
|Howell, Rt Hon D. (G'ldf'd)||Proctor, K. Harvey|
|Howell, Ralph (N Norfolk)||Pym, Rt Hon Francis|
|Hunt, David (Wirral)||Raison, Rt Hon Timothy|
|Rathbone, Tim||Stewart, Ian (Hitchin)|
|Rees, Peter (Dover and Deal)||Stokes, John|
|Rees-Davies, W. R.||Stradling Thomas, J.|
|Renton, Tim||Taylor, Teddy (S'end E)|
|Rhodes James, Robert||Tebbit, Rt Hon Norman|
|Rhys Williams, Sir Brandon||Temple-Morris, Peter|
|Ridley, Hon Nicholas||Thatcher, Rt Hon Mrs M.|
|Ridsdale, Sir Julian||Thomas, Rt Hon Peter|
|Rifkind, Malcolm||Thompson, Donald|
|Roberts, M. (Cardiff NW)||Thorne, Neil (Ilford South)|
|Roberts, Wyn (Conway)||Thornton, Malcolm|
|Rossi, Hugh||Townend, John (Bridlington)|
|Rost, Peter||Townsend, Cyril D, (B'heath)|
|Royle, Sir Anthony||Trippier, David|
|Rumbold, Mrs A. C. R.||Trotter, Neville|
|Sainsbury, Hon Timothy||van Straubenzee, Sir W.|
|St. John-Stevas, Rt Hon N.||Vaughan, Dr Gerard|
|Scott, Nicholas||Viggers, Peter|
|Shaw, Giles (Pudsey)||Waddington, David|
|Shelton, William (Streatham)||Wakeham, John|
|Shepherd, Colin (Hereford)||Waldegrave, Hon William|
|Shepherd, Richard||Walker, Rt Hon P.(W'cester)|
|Shersby, Michael||Waller, Gary|
|Silvester, Fred||Walters, Dennis|
|Sims, Roger||Ward, John|
|Skeet, T. H. H.||Warren, Kenneth|
|Smith, Dudley||Watson, John|
|Smith, Tim (Beaconsfield)||Wells, Bowen|
|Speed, Keith||Wells, John (Maidstone)|
|Speller, Tony||Wheeler, John|
|Spence, John||Whitney, Raymond|
|Spicer, Jim (West Dorset)||Wickenden, Keith|
|Spicer, Michael (S Worcs)||Wilkinson, John|
|Sproat, Iain||Winterton, Nicholas|
|Squire, Robin||Wolfson, Mark|
|Stainton, Keith||Young, Sir George (Acton)|
|Stanbrook, Ivor||Younger, Rt Hon George|
|Steen, Anthony||Tellers for the Ayes:|
|Stevens, Martin||Mr. Selwyn Gummer and|
|Stewart, A.(E Renfrewshire)||Mr. Robert Boscawen.|
|Abse, Leo||Cowans, Harry|
|Allaun, Frank||Cox, T. (W'dsw'th, Toot'g)|
|Alton, David||Craigen, J. M. (G'gow, M'hill)|
|Archer, Rt Hon Peter||Crowther, Stan|
|Ashley, Rt Hon Jack||Cryer, Bob|
|Ashton, Joe||Cunliffe, Lawrence|
|Atkinson, N.(H'gey,)||Cunningham, G. (Islington S)|
|Bagier, Gordon A.T.||Cunningham, Dr J. (W'h'n)|
|Barnett, Guy (Greenwich)||Dalyell, Tam|
|Barnett, Rt Hon Joel (H'wd)||Davidson, Arthur|
|Beith, A. J.||Davies, Rt Hon Denzil (L'lli)|
|Benn, Rt Hon Tony||Davis, Clinton (Hackney C)|
|Bennett, Andrew(St'kp't N)||Davis, Terry (B'ham, Stechf'd)|
|Bidwell, Sydney||Deakins, Eric|
|Booth, Rt Hon Albert||Dean, Joseph (Leeds West)|
|Boothroyd, Miss Betty||Dewar, Donald|
|Bradley, Tom||Dixon, Donald|
|Bray, Dr Jeremy||Dobson, Frank|
|Brown, Hugh D. (Provan)||Dormand, Jack|
|Brown, R. C. (N'castle W)||Dubs, Alfred|
|Brown, Ronald W. (H'ckn'y S)||Duffy, A. E. P.|
|Brown, Ron (E'burgh, Leith)||Dunnett, Jack|
|Buchan, Norman||Dunwoody, Hon Mrs G.|
|Callaghan, Jim (Midd't'n & P)||Eadie, Alex|
|Campbell, Ian||Eastham, Ken|
|Campbell-Savours, Dale||Edwards, R. (W'hampt'n S E)|
|Canavan, Dennis||Ellis, R. (NE D'bysh're)|
|Carmichael, Neil||English, Michael|
|Carter-Jones, Lewis||Ennals, Rt Hon David|
|Cartwright, John||Evans, John (Newton)|
|Clark, Dr David (S Shields)||Ewing, Harry|
|Clarke, Thomas C'b'dge,A'rie||Faulds, Andrew|
|Cocks, Rt Hon M. (B'stol S)||Fletcher, Ted (Darlington)|
|Cohen, Stanley||Foot, Rt Hon Michael|
|Coleman, Donald||Ford, Ben|
|Concannon, Rt Hon J. D.||Forrester, John|
|Cook, Robin F.||Foster, Derek|
|Foulkes, George||O'Halloran, Michael|
|Fraser, J. (Lamb'th, N'w'd)||O'Neill, Martin|
|Garrett, John (Norwich S)||Orme, Rt Hon Stanley|
|Garrett, W. E. (Wallsend)||Owen, Rt Hon Dr David|
|Ginsburg, David||Palmer, Arthur|
|Golding, John||Park, George|
|Graham, Ted||Parker, John|
|Grant, John (Islington C)||Parry, Robert|
|Hamilton, W. W. (C'tral Fife)||Pavitt, Laurie|
|Hardy, Peter||Race, Reg|
|Harrison, Rt Hon Walter||Radice, Giles|
|Hart, Rt Hon Dame Judith||Rees, Rt Hon M (Leeds S)|
|Hattersley, Rt Hon Roy||Richardson, Jo|
|Haynes, Frank||Roberts, Albert (Normanton)|
|Healey, Rt Hon Denis||Roberts, Allan (Bootle)|
|Heffer, Eric S.||Roberts, Ernest (Hackney N)|
|Hogg, N. (E Dunb't'nshire)||Roberts, Gwilym (Cannock)|
|Holland, S. (L'b'th, Vauxh'll)||Robertson, George|
|Homewood, William||Robinson, G. (Coventry NW)|
|Hooley, Frank||Rooker, J. W.|
|Horam, John||Roper, John|
|Howell, Rt Hon D.||Ross, Ernest (Dundee West)|
|Hoyle, Douglas||Ross, Stephen (Isle of Wight)|
|Hughes, Mark (Durham)||Rowlands, Ted|
|Hughes, Robert (Aberdeen N)||Ryman, John|
|Hughes, Roy (Newport)||Sever, John|
|Janner, Hon Greville||Sheerman, Barry|
|Jay, Rt Hon Douglas||Sheldon, Rt Hon R.|
|Jenkins, Rt Hon Roy (Hillh'd)||Shore, Rt Hon Peter|
|John, Brynmor||Short, Mrs Renée|
|Johnson, James (Hull West)||Silkin, Rt Hon J. (Deptford)|
|Johnson, Walter (Derby S)||Silkin, Rt Hon S. C. (Dulwich)|
|Jones, Rt Hon Alec (Rh'dda)||Silverman, Julius|
|Jones, Barry (East Flint)||Skinner, Dennis|
|Kaufman, Rt Hon Gerald||Soley, Clive|
|Kerr, Russell||Spearing, Nigel|
|Kilroy-Silk, Robert||Stallard, A. W.|
|Lamond, James||Steel, Rt Hon David|
|Leadbitter, Ted||Stewart, Rt Hon D. (W Isles)|
|Leighton, Ronald||Stoddart, David|
|Lestor, Miss Joan||Stott, Roger|
|Lewis, Ron (Carlisle)||Strang, Gavin|
|Litherland, Robert||Straw, Jack|
|Lofthouse, Geoffrey||Summerskill, Hon Dr Shirley|
|Lyons, Edward (Bradf'd W)||Thomas, Dafydd (Merioneth)|
|Mabon, Rt Hon Dr J Dickson||Thorne, Stan (Preston South)|
|McCartney, Hugh||Tinn, James|
|McDonald, Dr Oonagh||Torney, Tom|
|McElhone, Frank||Urwin, Rt Hon Tom|
|McGuire, Michael (Ince)||Varley, Rt Hon Eric G.|
|MacKenzie, Rt Hon Gregor||Wainwright, E.(Dearne V)|
|Maclennan, Robert||Wainwright, R.(Colne V)|
|McNally, Thomas||Weetch, Ken|
|McTaggart, Robert||Wellbeloved, James|
|McWilliam, John||Welsh, Michael|
|Magee, Bryan||White, Frank R.|
|Marks, Kenneth||White, J. (G'gow Pollok)|
|Marshall, Dr Edmund (Goole)||Whitehead, Phillip|
|Marshall, Jim (Leicester S)||Whitlock, William|
|Martin, M(G'gow S'burn)||Willey, Rt Hon Frederick|
|Mason, Rt Hon Roy||Williams, Rt Hon A.(S'sea W)|
|Maxton, John||Williams,Rt Hon Mrs (Crosby)|
|Maynard, Miss Joan||Wilson, Gordon (Dundee E)|
|Mellish, Rt Hon Robert||Wilson, William (C'try SE)|
|Mikardo, Ian||Winnick, David|
|Millan, Rt Hon Bruce||Woodall, Alec|
|Miller, Dr M. S. (E Kilbride)||Woolmer, Kenneth|
|Mitchell, Austin (Grimsby)||Wrigglesworth, Ian|
|Morris, Rt Hon A. (W'shawe)||Wright, Sheila|
|Morris, Rt Hon C. (O'shaw)||Young, David (Bolton E)|
|Moyle, Rt Hon Roland||Tellers for the Noes:|
|Newens, Stanley||Mr. James Hamilton and|
|Oakes, Rt Hon Gordon||Mr. Allen McKay.|
§ Question accordingly agreed to.
§ Clause read a Second time, and added to the Bill.