Financial Situation

HC Deb 27 October 1987 vol 121 cc169-78 3.32 pm

Mr. John Smith (Monklands, East)

(by private notice) asked the Chancellor of the Exchequer if he will make a statement on the implications of the financial situation for economic policies and the consequences for the sale of BP shares.

The Chancellor of the Exchequer (Mr. Nigel Lawson)

I am glad to have the right hon. and learned Gentleman opposite me once again, as he was some years ago when I was Secretary of State for Energy.

Mr. Tony Banks (Newham, North-West)

There is not much left now.

Mr. Lawson

You wait and see.

The sharp falls in share prices throughout the world over the past fortnight will tighten monetary conditions somewhat and are likely to have a dampening effect on world demand. It is far too soon to put any figures to this, but I have already responded by reducing interest rates by half a per cent. Interest rates have also come down in the United States.

I will, of course, continue to watch the situation closely, and take whatever steps are required. I am also in regular contact by telephone with my opposite numbers in the other major industrial countries.

Meanwhile, the robust economic health and sound public finances that we have in this country put us in the strongest possible position to weather this storm, just as we successfully coped with the year-long coal strike and the collapse in the world oil price.

As for the implications of the stock market slide for the BP sale, there is provision under clause 8 of the BP fixed price underwriting agreement for the underwriters to seek consultation with the Treasury if a majority of them form the opinion that there has been an adverse change of circumstances, as specified by the agreement, in the light of which they believe that they are no longer assuming a proper underwriting risk. I have been informed by N. M. Rothschild and Sons, on behalf of the United Kingdom underwriters, that a majority of them now take that view. They therefore sent a written representation to the Treasury yesterday afternoon seeking consultation with a view to terminating the offer for sale. I have to say that I was surprised by this. [Laughter.] I am now considering the points that they have made, as I am contractually bound to do.

The underwriting agreement sets out a series of steps, which must be followed if the consultation process is triggered. The Treasury considers the representations and consults BP. Rothschild's also seeks BP's views. Rothschild's and the Treasury then consult together. If they are unable to agree, they jointly approach the Bank of England for its assessment. I shall take full account of that assessment before I take a final decision.

I understand that a copy of the agreement has today been deposited in the Library.

It is my intention to proceed as quickly as possible, consistent with the proper observation of the procedures. The House will understand that, now that the underwriters have invoked this consultation process, I cannot say more until the process is concluded, but I will gladly listen to the views of right hon. and hon. Members.

Mr. Smith

Is the Chancellor not ashamed that he had to be dragged reluctantly to the House to answer a private notice question, when he should have volunteered a statement on his own initiative days ago? Does he not think that he should apologise to the House for treating it as being a good deal less important to him than the stock exchange?

Is it not clear that the fundamental reason for the collapse in international markets has been the irresponsibility of Governments, including the British Government, in facing up to the twin problems of the United States' deficit and the Japanese and German surpluses? Instead of taking action to reduce gradually the United States' trade deficit and simultaneously expand the other economies, Governments — who are staffed by people such as the Chancellor of the Exchequer, who are addicted to free market theories—have abandoned their responsibilities to markets that the Chancellor describes as having absurd activities and which, according to the Prime Minister, are involved in 5 per cent. trade and 95 per cent. speculation?

Does the Chancellor understand that the free-market chickens have come home to roost? The markets are desperately seeking responsibility from the Governments that have abandoned them. Is it not now urgent for Her Majesty's Government to co-operate in setting up a new economic summit of the G7 countries with an agenda to concert a plan to tackle the deficit-surplus problem in a way that will avoid recession, reopen opportunities for growth and engage in a fresh and constructive examination of the debt problems of the developing world?

Will the Government accept that, as a result of the events of the past few weeks, free market theories no longer work?

As to BP, will the Government explain why they must take so long to go through the procedures that the Chancellor has outlined? In what he said to the House, he has made it crystal clear that he intends to hold the underwriters to their obligations. Would it not be wiser, given that we are only hours from the closing of this offer, for a little more urgency to be shown in these consultations and for the Chancellor to be more prepared to give a definitive answer to the House today?

Whatever happens with the underwriters or about anything else, will the Chancellor confirm that the Government are obliged to purchase 450 million new shares at the price of 330p and that the difference between the price at which they committed themselves to buy new shares and the present value in the markets is over £300 million?

Will the Chancellor also confirm that whatever happens, £20 million will have been wasted on an extravagant advertising hype? Is it not extraordinary that this colossal waste of money occurs at the same time as the Government are cutting child benefit, apparently on the ground that decent levels of such benefit cannot be afforded in this country?

Is it not clear that, whatever happens to the underwriters, the decision to sell the whole of the Government's stake in BP has been profoundly foolish? The company will suffer, the Government have wasted money and the shares will not be purchased. Repeatedly the Chancellor has claimed that his sole purpose in the BP share sale is wider share ownership. Since the shares will not have been sold to willing purchasers, what will be left of his purpose?

Mr. Lawson

I shall try to deal with the questions in the order in which the right hon. and learned Gentleman asked them. I start with something on which I can agree with him. I agree that the size of the American budget deficit, which is way ahead of its own capacity to finance it, is a major problem in the world economy today. I think, however, that it is a bit of an impertinence for him to blame me or the British Government for that. I vividly recall the time, some three years ago, when I was saying just that and I was being attacked by him and other right hon. and hon. Members who said that we should follow the policies of expanding the budget deficit in this country.

The right hon. and learned Gentleman referred to international co-operation between the members of G7. I agree with him too that that is important. That is in better shape than it has been at any time in the period that I have been Chancellor of the Exchequer, and it has been very successful in the context of stabilising exchange rates, among other things. But I have to say that the sort of workmanlike co-operation that we do have and which I hope can be built upon and improved, is rather more serious than empty waffle about a non-existent plan and some summit.

The right hon. and learned Gentleman then went on to the question of taking so long on the BP front. He obviously failed to listen to what I said. I said that it was not until yesterday afternoon that the BP underwriters made their approach to the Treasury —4.20 yesterday afternoon, to be precise. I have now informed the House and I shall go through the procedures as quickly as can he done, while properly going through those procedures. I would hope to be able to reach a conclusion by Thursday.

The right hon. and learned Gentleman then asked me whether it was true that the Government were obliged to purchase a large number of BP shares at 330p a share. I can tell him, of course, that it is not true. He then said that this episode demonstrated that it was wrong to sell BP shares. But of course, he will recall that the first sale of BP shares was conducted by the Government in which he performed in 1977.

As to the question of wider share ownership, which the right hon. and learned Gentleman seems to be against, I have to tell him that he is in conflict with the views of the hon. Member for Dagenham (Mr. Gould) who is the rising star of the Labour party—or at least he used to be the rising star of the Labour party—when he said: Instead of opposing wider share ownership, for example, we should set about making it a reality … The idea of owning shares is catching on and as socialists we should support it. The right hon. and learned Gentleman asks was not wider share ownership the sole purpose of the BP share offer? Obviously, the answer is no, because if that had been the sole purpose we would not have had the issue underwritten in the first place.

Mr. Terence Higgins (Worthing)

Does my right hon. Friend agree that it is important that the Treasury and Civil Service Select Committee, which has previously taken evidence on the underwriting of privatisation issues and on wider international matters, should be set up this week so that it has an opportunity of reporting to the House on these important issues?

I welcome the reduction in interest rates. Does my right hon. Friend agree that this must be combined with fiscal balance and that, therefore, it is important that the United States fiscal deficit should be reduced? I congratulate my right hon. Friend on the representations he has already made to the United States Government, but I urge him to redouble them. Does my right hon. Friend agree that many people think that it would he dangerous to put underwriters in a position when they can say, "Heads we win, tails you lose"?

Mr. Lawson

On the question of the BP underwriters, of course I have noted carefully what my right hon. Friend has said. On the question of the Select Committee, I am sure that my right hon. Friend the Leader of the House has heard my right hon. Friend's comments. I personally have always welcomed the constructive discussions that I have had during my period as Chancellor with the Select Committee, which my right hon. Friend heads with such distinction. The sooner it can be reconstituted the better.

As for the wider economic issues, as I said in my opening remarks, I think that it is very important that we continue to keep up the pressure on the United States. The President has made statements showing a lesser degreee of unwillingness to raise taxes than has ever been the case before. I was speaking to Secretary Baker on the telephone this morning.

Mr. A. J. Beith (Berwick-upon-Tweed)

Does not the Chancellor think that it is rather perverse for it to be suggested that he could either have caused in some way or prevented the recent upheavals, since they derive mainly from the decision of the President, whom the right hon. Gentleman and Prime Minister so much admire, to cut taxes and increase defence expenditure at the same time? Is it not time to tell the United States that the party is over and that we have to put the main industrial countries together to decide what to do to pay for it?

With regard to the BP share issue, what will the, Chancellor do about all those inexperienced small investors who were beguiled by the expensive publicity? What good will it do to the cause of wider share ownership to deliver those people a kick in the teeth?

Mr. Lawson

On the first half of the hon. Gentleman's question, I welcome, just as I did when it came from the right hon. and learned Member for Monklands, East (Mr. Smith), this late conversion to the cause of sound finance, which is something that the Government have been preaching for a very long time, when the only policies advocated by the Opposition were ever bigger budget deficits. I remember the speech I made to the IMF annual meeting in September 1984 when I said that if the United States' budget deficit was not vigorously tackled it would all end in tears. We inherited a huge budget deficit from the Labour party. Even though we were in favour of lower taxes, we initially put up taxes to deal with the deficit first before we could get on with the tax-reducing programme.

As for the question of the small shareholders who may have applied for BP shares, as the hon. Gentleman will understand, like the Treasury, applicants for shares are bound by the terms and conditions of the offer.

Sir William Clark (Croydon, South)

Will my right hon. Friend resist the blandishments of the right hon. and learned Member for Monklands, East (Mr. Smith) in favour of abandoning the free market? Does my right hon. Friend agree that the reason why our present economy is so strong compared with, say, the 1979 economy is that we have allowed the free market to operate within the Treasury's control? It would be folly if we were to change course now. Does my right hon. Friend agree that, to get international confidence back into the various money markets throughout the world, the most urgent need is for the American President to make up his mind as quickly as possible to increase American taxes and to reduce public expenditure?

Mr. Lawson

I think there is probably general agreement in the House with what my hon. Friend has said. Of course, to be fair, it is not only on the side of the Americans that action is called for. I believe that in current circumstances there is a danger that monetary policy in the Federal Republic of Germany is really rather too tight, and I hope that some action will be directed on that front as well.

Mr. Peter Shore (Bethnal Green and Stepney)

No one can accuse the Chancellor of hyperbole when he says that the events of the past fortnight will have a dampening effect on world demand. The real effects are far more likely to be a serious curtailment of investment, a curtailment of consumer spending and a resulting increase in unemployment. Therefore, will the Chancellor assure the House that he is ready to take counter-recession measures — a package of them, both national and international—to meet the scale of events?

Mr. Lawson

I can assure the right hon. Gentleman that, as I said in my opening remarks, I shall take whatever actions I believe to be necessary in the circumstances. It is too soon to say what actions will be necessary, although I have already reduced interest rates. That goes, I think, for all other members of the Group of Seven. The right hon. Gentleman will know, for example, that the President and Congressional leaders have been in active discussions on the subject of getting down the American deficit.

There is no need for the alarmist consequences that the right hon. Gentleman fears if, as I believe will be the case, economic policies in the major nations are conducted in a sensible way.

Sir Peter Hordern (Horsham)

Will my right hon. Friend accept that, if the BP share issue is withdrawn, it will be widely felt that the underwriters cannot meet their commitments? If that is the case, the damage caused will be much greater than will result if the issue proceeds.

Mr. Lawson

My hon. Friend is very knowledgeable in these matters, and I have carefully noted what he has said.

Mr. Robert Sheldon (Ashton-under-Lyne)

Will the Chancellor dismiss the impertinence shown by the underwriters in coming to him to seek to forgo their liabilities and responsibilities? Is he aware that the Public Accounts Committee has condemned the very large fees paid to the underwriters and that, on each occasion, we have been informed that this was necessary because of the large risks involved? If we are to remove the risks and give the underwriters a copper-bottomed, gold-plated guarantee, what is the purpose of underwriting at this level?

Mr. Lawson

As Chairman of the Public Accounts Committee, the right hon. Gentleman occupies a very important position in this House, and I have very carefully noted the point that he has made.

Mr. Anthony Nelson (Chichester)

Before my right hon. Friend reaches any final decision on this matter, will he bear in mind that he has a responsibility that overrides that of acting as a guardian of underwriting institutions in the City, or even of share applicants? I refer to his responsibility as a trustee of the public purse. Will he bear in mind the fact that the interests of the taxpayer, who will forgo a substantial sum by way of proceeds if the sale is called off should weigh heavily on his mind. After all, does my right hon. Friend really believe that if the market had risen dramatically, rather than slumped, the City institutions would for one minute have considered calling the underwriting arrangements off?

Mr. Lawson

My hon. Friend's point deals with a number of the matters that I have to bear in mind.

Mr. Brian Sedgemore (Hackney, South and Shoreditch)

Why has the Chancellor spent a week telling television viewers that it is possible to wipe 25 per cent. or more off the value of stocks and shares all round the world without serious consequences for liquidity, borrowing, trade, output and employment? In the face of impending recession, what does the Chancellor intend to do—other than to lecture foreign Governments?

Mr. Lawson

There is no need to share the apocalyptic visions of the hon. Gentleman provided that the Governments of the major countries pursue the appropriate economic policies. What turned the 1929 crash, which I think is in many people's minds, into the slump of the 1930s was not the crash itself but the wholly inappropriate economic and monetary policies that followed it.

Mr. Quentin Davies (Stamford and Spalding)

Does my right hon. Friend agree that the present situation is a splendid vindication of the Government's judgment in underwriting this and other privatisation issues and that the Government deserve the wholehearted appreciation both of the House and of the general public in the exercise of that judgment? Does he agree that the main problem with the underwriters is that the foreign underwriters have not underwritten their commitment to BP with investing institutions, and that if they have to sell shares to meet that commitment they will not mainly be British shares that they have to sell?

Mr. Lawson

My hon. Friend—and I am grateful to him for his earlier remarks—is, of course, right to point to a fundamental difference between the underwriting system in this country and the underwriting system on the other side of the Atlantic. In this country it is a feature of our system that we go in for —the underwriters go in for — sub-underwriting on a very substantial scale and therefore the risk is spread very, very widely. In the United States and Canada that practice is not adopted and of course the risk falls entirely with the underwriters.

Mr. Tony Benn (Chesterfield)

Has the Chancellor read the speech made in the House in 1914 by Winston Churchill when he acquired a majority holding in the Anglo-Persian Oil Company for £2 million? Does the Chancellor agree that that investment, albeit by the First Lord of the Admiralty in a Liberal Government, was the wisest public investment ever made?

Does the Chancellor agree that the proper course now would be to cancel the privatisation of BP and retain the assets in the public domain?

Mr. Lawson

I have to confess to the right hon. Gentleman that I have not read that speech very recently, but I do recall a more recent event—that it was when the right hon. Gentleman was Secretary of State for Energy that the first sale of BP shares was made, at a price of well under 100p per share.

Sir Michael Shaw (Scarborough)

Is it not important that the overreactions of the stock exchange should not confuse the public and lead them to believe that the state of British industry and commerce is less strong than it is? At the same time, would it not be very bad for the long-term future of this country if emergency measures were sought to be taken at this time? Does my right hon. Friend agree that we should carry on with the rules as they are and that the undertakers should not be relieved of their responsibilities.

Hon. Members

"Underwriters."

Mr. Lawson

As far as the undertakers, if I heard my hon. Friends right, are concerned, I have noted carefully what he has said. So far as his earlier points are concerned, yes, I think that if the House looks, for example, at the latest CBI trends survey, it will see an extremely strong and confident performance by British industry and I know that the leaders of British industry do feel that there is absolutely no cause for changing that confidence in the light of recent events on the stock market.

Mr. D. N. Campbell-Savours (Workington)

As the flotation was underwritten by four major American institutions, when the Chancellor weighs these matters in the next few days will one of his considerations be the fact that they may be called upon again, to underwrite the flotations with regard to water and electricity?

Mr. Lawson

As I have said to other hon. Members, I shall certainly take very much into account the view expressed by the hon. Member.

Mr. Tim Boswell (Daventry)

Will my right hon. Friend confirm that the offer for sale in formal terms remains open, with all its full legal impact? Will he take steps to ensure that when the privatisation programme is resumed, measures are taken to ensure that the undertakers—the light off [Laughter] — underwriters — cannot again appeal against the last ball of the over?

Mr. Lawson

I have noted the suggestion which my hon. Friend has made.

Mr. David Blunkett (Sheffield, Brightside)

Does the Chancellor accept that in our democracy accountability for the economy and what happens to public assets rests with him, as accountable to this House, and that the so-called capital-owning, share-owning democracy is neither democratic nor effective? As a consequence, does he agree that he should give an assurance to the House that further sales of major public assets will cease and accept that the most widespread form of share ownership is social ownership?

Mr. Lawson

I entirely accept the fact that I do have a heavy responsibility in this job, but I do not accept anything else that the hon. Member said, particularly his belief that share ownership is something which is to be condemned. I welcome the growth of share ownership; it will continue. The privatisation programme will continue and I am delighted that we now have a convert to the cause of share ownership in the person, the important person, of the hon. Member for Dagenham (Mr. Gould).

Mr. John Redwood (Wokingham)

Does the Chancellor agree that there are times when concerted foreign exchange intervention can be dangerous before the underlying problem of the deficit has been resolved? Is not that danger especially clear if the German and Japanese authorities put up their interest rates to deal with the monetary consequences of that intervention?

Mr. Lawson

I see no need for German or Japanese interest rates to rise in present circumstances, although that is obviously primarily a matter for those countries. As for intervention in the foreign exchange markets, what my hon. Friend has to recall is that we did not intervene in order to stabilise markets until we had first intervened in a massive way following the Plaza agreement to drive the dollar down, and we only intervened to stabilise it after the deutschmark and the yen had risen by as much as 50 per cent. against the dollar in order to give that massive change in exchange rates time to work through.

Mr. Harry Ewing (Falkirk, East)

I represent a constituency where BP is the largest employer, employing more than 2,000 people. Does the Chancellor understand that it is distressing that throughout this fiasco no reference has been made to those who have spent their lives working for BP? Is he aware that I do not hold any strong feelings about what might happen to the directors of BP, and that I care even less about what might happen to the. underwriters? However, I care deeply about what will happen to the workers. Will he give an assurance that, whatever decision he reaches, the working people will not be made to pay for the fiasco for which he is now responsible?

Mr. Lawson

I am glad to be able to reassure the hon. Gentleman that there is no danger whatsoever either to BP or those who work for that company, which is indeed one of the finest companies in the world.

Mr. Patrick McNair-Wilson (New Forest)

May I congratulate my right hon. Friend both on his sensible answer and, more importantly, on the calmness that he has demonstrated during this most difficult time? Is it not in such stark contrast to the hysterical posturings of the Opposition, who have no credible economic policy?

Reference has been made to the problems in the United States, and there is no doubt about them. However, as there has not yet been any real problem with exchange rates, will my right hon. Friend be most careful to resist any pressures for managed, even fixed, rates, such as were suggested during the Louvre agreement before the crash took place?

Mr. Lawson

My hon. Friend, and I am grateful to him for the remarks he made in the early part of his intervention, is mistaken if he thinks that the Louvre agreement is an agreement to try to create fixed rates á la Bretton Woods. It is nothing of the sort and, indeed, I devoted a considerable part of my speech to the annual meeting of the IMF and World Bank in September of this year to explaining the system of what I called managed floating, which we have arrived at and which I think is beneficial, not least to industry, which finds the wild gyrations in the dollar in recent years extremely disruptive and, indeed, which has had an adverse effect on world trade.

Mr. Eric S. Heffer (Liverpool, Walton)

As the casino economy, otherwise named by the Prime Minister as people's capitalism, is now coming apart at the seams, is it not clear that the time has come for a proper recognition by the people of this country, especially those in this House, that the capitalist system is falling apart? Is it not time that the Government learnt that lesson and stopped their nonsense with privatisation, which is hurting a great many ordinary working people who have been kidded by the Government?

Mr. Lawson

The hon. Gentleman is really one of the dinosaurs of this House, and as such I have a great affection for him. The workers of this country know a great deal better what is good for them than he does and they have shown this in their response to privatisation issues, in their response to worker share schemes and in their response, indeed, at the last general election.

Sir Peter Emery (Honiton)

To help stabilise the position, will my right hon. Friend point out to the public, the Opposition and the press that in today's stock market list in The Times hardly one share is not well above the low mark of this year? The concept that there is panic in overall share ownership should be hit hard. The Opposition do nothing to stabilise the position — indeed, they are creating the panic.

Mr. Lawson

I think there is much in what my hon. Friend says, although I do not credit the Opposition with such influence that they were able to start the Wall street slide which began the movement in share prices throughout the world. Nevertheless, if they could have done they would have done.

Mr. Peter Hardy (Wentworth)

The right hon. Gentleman suggested that he had been made aware of the view of the majority of the United Kingdom underwriters. Would he care to tell the House whether he has received any communication from the American underwriters, American business or the American Administration? Was the matter a subject of his conversation this morning with Mr. Baker?

Mr. Lawson

I, of course, never reveal private conversations, as I am sure the hon. Gentleman never reveals private conversations, but the provisions in clause 8 of the underwriting agreement concern the fixed price underwriting agreement and they concern the United Kingdom underwriters. There may, of course, have been conversations between the United Kingdom underwriters and the overseas underwriters, but that would not be directly known to me.

Mr. Ian Gow (Eastbourne)

Will my right hon. Friend pay a more generous tribute to the right hon. Member for Chesterfield (Mr. Benn)? Was it not he who, under the benign influence of Dr. Johannes Witteveen, came before this House 10 years ago and commended the sale of BP shares? Faced with that precedent, will my right hon. Friend pay a glowing tribute to the right hon. Member for Chesterfield?

Mr. Lawson

I do not think that I could possibly improve on the tribute that my hon. Friend has already paid.

Several Hon. Members

rose—

Mr. Speaker

Order. We have another important statement this afternoon. I shall take two more questions from either side and then we must move on. However, I say to those hon. Members who will not be called today that there will be another opportunity at Trade and Industry questions tomorrow and also at Treasury questions on Thursday, when I will bear their legitimate interests in mind.

Dr. Jeremy Bray (Motherwell, South)

The Chancellor gave the impression at the IMF that there were intervention bands for the dollar in the Louvre accord, but it now appears that that is not the case. Is it his intention that the pound should not stay with the deutschmark but come somewhere between it and the dollar?

Mr. Lawson

So far as my speech at the IMF is concerned it was an accurate description of the Louvre agreement and anything that the hon. Gentleman may have subsequently read in any newspapers which may conflict with that is therefore incorrect. So far as sterling is concerned, I believe that the maintenance of stability of the sterling exchange rate is in the interests both of British economic policy, including anti-inflationary policy, and the interests of British industry.

Mr. Robert G. Hughes (Harrow, West)

In rejecting the Opposition's advice, will my right hon. Friend agree that the nation and the international financial community will conclude that the economy of this country is in far better hands with a Chancellor who sticks to his policies and strategy, rather than with one who follows the Opposition's advice? In the 1960s and 1970s Labour Chancellor after Labour Chancellor gave the impression of running around like a wet hen but did nothing to help the economy.

Mr. Lawson

My hon. Friend is correct.

Mr. Pat Wall (Bradford, North)

Last week, did the Chancellor read an edition of The Wall Street Journal, which pointed out that the eight occasions since the end of the second world war when shares fell sharply—this is the sharpest fall of all—were followed eight to nine months later by a recession or a severe slowing down of the world economy? That led to increases in poverty, unemployment and economic misery. Will he explain to the people of my constituency what is popular about a people's capitalism which offers them shares at 64p below the market price?

Mr. Lawson

It is indeed fortunate that this Government are in office in this country, as they are the one Government who can steer the country's economy successfully through the stormier period which we may be in. As for share price falls, as my right hon. Friend the Prime Minister pointed out, although there has been a sharp fall in share prices, they are now roughly where they stood at the beginning of this year. That is in sharp contrast to what happened in 1974, when the Labour party came to power, and shares fell during the course of that year by some 50 per cent.

Mr. Keith Mans (Wyre)

Will my right hon. Friend the Chancellor explain the position of the small shareholder who has applied for BP shares but does not pay the second instalment?

Mr. Lawson

The rules are very clear in the terms of the offer document. If the second subscription is not paid up the shares are forfeited.