Inflation (Hansard, 23 February 1989)

§ 1. Mr. Home Robertson
To ask the Chancellor of the Exchequer if he will make a statement on the current rate of inflation.

§ 2. Mr. Illsley
To ask the Chancellor of the Exchequer when he expects the inflation rate to go down.

§ 10. Mr. Leadbitter
To ask the Chancellor of the Exchequer when he expects the inflation rate to go down.

§ The Chancellor of the Exchequer (Mr. Nigel Lawson)
The retail price index increased by 7.5 per cent. in the year to January. I shall provide a forecast in the Budget in the usual way.

§ Mr. Home Robertson
Will the Chancellor confirm that housing costs are, and must remain, an integral part of any assessment of the retail price index? With that in mind, what has he to say to the many thousands of home-owners in this country who are struggling, month after month, to cope with the effects of virtually monthly doses of Treasury-led inflation? As for the figure of 7.5 per cent., was it not the Chancellor himself who said that the retail price index and inflation would be the judge and jury of his economic policies? That being so, how does he plead—guilty or very guilty?

§ Mr. Lawson
I am perfectly prepared to be judged by inflation. Inflation during the whole of the period in which I have been Chancellor of the Exchequer has averaged under 5 per cent. During the period of the Labour Government, which is almost as long as the period for which I have been Chancellor, inflation averaged over 15 per cent., so I am perfectly prepared to be judged by that.

§ Mr. Illsley
Does the Chancellor agree that the nine increases in interest rates since last June have severely increased the cost of living and particularly the cost of mortgages? Does he also agree that any perceived advantages from the tax cuts in the last Budget have been wiped away for all but the very wealthy?

§ Mr. Lawson
I do not accept that. Of course, mortgages have gone up because interest rates have gone up and that is essential in order to get inflation down. Labour Members, who all the time have been asking for lower interest rates, are asking for higher inflation. That is what it boils down to.

§ Mr. Leadbitter
The Chancellor must be aware that not only the Opposition but the Confederation of British Industry is currently urging him to reduce high interest rates and has pointed out to him the adverse effects on manufacturing industry and home demand as well as on exports. As inflation is still rising, will the Chancellor review the one instrument that he has invoked to deal with it—his high interest rate policy—and use other methods to deal with inflation?

§ Mr. Lawson
No, I will not, because that is the only effective way of controlling inflation and I will adduce as 1129 a supporter on this, despite what the hon. Member said, Mr. John Banham the director general of the CBI, who said this on the one o'clock news on 17 February: We think the Chancellor should carry on with high interest rates to combat inflation. That is the view of the CBI.

§ Mr. Tim Smith
As inflation in the United States is now only one point below the underlying rate in the United Kingdom, does my right hon. Friend agree that interest rates will have to remain high on both sides of the Atlantic until inflation is firmly on a downward path? Will he therefore ignore the mutterings of the Opposition, whose approach when in power was based not on the economics of the one-armed bandit but on the economics of the highway robber?

§ Mr. Lawson
My hon. Friend puts it extremely well and I agree with everything he has said. On the specific question of my policy towards interest rates, despite what the Opposition have been saying—and will, no doubt, continue to say today and subsequently—and despite, indeed, some of the curious things I read from some of the commentators, I can assure my hon. Friend that there will be no question of a premature let-up in interest rates.

§ Sir William Clark
Does my right hon. Friend agree that the lowest inflation rate achieved by the Labour Government was 7½ per cent.? Is it not hypocritical for Opposition Members to criticise this Government's economic policy when Britain is at the top of the economic league whereas in the 1960s and 1970s we were right at the bottom?

§ Mr. Lawson
My hon. Friend is right to say that, whereas in the 1970s we had the slowest rate of growth of all the major economies in the European Community, during the 1980s we have had the highest rate of growth of all the major economies in the European Community. As for our inflation record compared with the Labour Government's inflation record, yes, again, my hon. Friend is right. If we take the underlying rate of inflation—that is to say, excluding mortgage interest payments, which only one of the other 11 members of the European Community has—if we take that into account, our current rate of 5.5 per cent.— the most recent rate of 5.5 per cent.—compares on the same basis—on precisely the same basis, excluding mortgage interest rates—with the lowest monthly rate that the Labour Government ever achieved of 7.7 per cent.

§ Mr. Butterfill
Does my right hon. Friend agree that high interest rates are very much a sympton of his success in managing the economy? Can he imagine the Labour party ever presiding over the economy as we have done, given that we have been able to reduce taxes and repay the enormous debt that the Labour party accumulated and that we now have one of the most rapidly growing economies in Europe?

§ Mr. Lawson
My hon. Friend is right. Labour's record was lamentable in every way. In so far as it is possible to discern any policies emerging from the Opposition Benches, they would produce precisely the same lamentable results if they were put into practice today. Fortunately, that will not be the case.

§ Mr. John Smith
As the Chancellor accepts that inflation will be the judge and jury of his economic policy, is it not vital that the evidence should not be fixed by the 1130 removal from the retail price index of significant price increases? Did not representatives both of business and of the trade unions tell the official committee on the RPI that both the community charge and mortgage interest payments had to be included if the RPI was to retain credibility? In the light of that, may we have an unequivocal assurance from the Chancellor that both the community charge and mortgage interest payments will remain part of the RPI?

§ Mr. Lawson
I have to tell the right hon. and learned Gentleman that the Treasury gave evidence to the RPI advisory committee in 1986—very cogent evidence, as he knows—arguing that mortgage interest payments, as in most other countries—almost all other countries—should not be in. It took a different view and we accepted its advice at the time. I have to say that the only major change that there has been in the RPI that I can recall in recent years—the only major change—was in 1975, when the Labour Government put mortgage interest payments in because they thought at that time it would advantage them.

§ Mr. Watts
Is my right hon. Friend aware that, despite the claims of the hon. Member for Hartlepool (Mr. Leadbitter), the most recent survey of businesses in the Thames Valley shows that there is less complaining about high interest rates this year than at the same time last year, when interest rates were much lower? Should not businesses be taking advantage of the lower rates available in the long-term market, in which rates have benefited from my right hon. Friend's policy of repaying Government debt? In that way, it can obtain finance much more cheaply than by relying on overdrafts, which follow the base rate.

§ Mr. Lawson
My hon. Friend is right. Compared with previous occasions when interest rates have had to go up—and, of course, there have been many occasions in the past when interest rates have had to go up; this is by no means the first such occasion and, no doubt, it will not be the last—the difference is that the financial position of business is so much stronger now that it is far less affected and this, therefore, bites far more on consumer spending. Given that there has to be a slowing down of the rate of growth of the economy, this is desirable. My hon. Friend is also right to say that we now have a yield curve which is downward sloping so that industry is able to borrow for a term at a considerably lower rate than the cost of a bank overdraft.