Autumn Statement

HC Deb 12 January 1989 vol 144 cc1005-91

[Relevant documents: European Community Documents Nos. 9510187 on the creation of a European Financial Area and the supplementary explanatory memorandum submitted by HM Treasury on 20 June 1988 and 6427188 on medium-term financial support for member states' balance of payments.]

Mr. Speaker

Before I call on the Chancellor of the Exchequer to move the motion on the Autumn Statement, I must announce to the House that I have selected the amendment in the name of the Leader of the Opposition. In view of the number of right hon. and hon. Members who have said that they wish to participate in the debate, I propose to impose a 10-minute limit on speeches between 7 and 9 o'clock.

4.11 pm

The Chancellor of the Exchequer (Mr. Nigel Lawson)

I beg to move, That this House approves the Autumn Statement presented by Mr. Chancellor of the Exchequer on 1st November 1988; endorses the action taken by Her Majesty's Government to ensure that inflation resumes its downward trend; welcomes the prospect of continued growth and strong investment as the basis for maintaining the trend of rising employment; and congratulates Her Majesty's Government on the continuing reduction in the share of national income pre-empted by public expenditure.

The whole House owes a debt of gratitude, once again, to my right hon. Friend the Member for Worthing (Mr. Higgins) whose Committee has produced a report on the Autumn Statement.

One matter which greatly exercised my right hon. Friend and his colleagues was the manifest shortcomings of a number of the published economic statistics. As he knows, the Government share this concern, and set up a scrutiny of Government economic statistics. That first stage is now complete, and the Government are now considering the findings. A comprehensive report will be published in due course.

In recent years, it has become customary for me to use the occasion of this debate, on the Autumn Statement, to announce the date of the Budget. I am happy to follow that precedent, and inform the House that the Budget this year will be on Champion hurdle day, 14 March—that is, in a little under nine weeks' time. Right hon. and hon. Members opposite will no doubt wish to make a note of this in their official Labour party filofaxes, which I see were among the prizes to be won in the 1988 Labour party Christmas lottery—along with a Black sea cruise for the Ron Todd wing of the party.

As usual, the Budget will be the occasion to announce the rates of taxation for the coming year and the projected size of the public sector borrowing requirement—or, to be accurate, in the new era which our prudent fiscal policy has ushered in, the size of the public sector debt repayment, or Budget surplus. What it is not is an occasion for announcing changes in public expenditure. Our public spending plans for the coming year were announced in the Autumn Statement, which we are debating today.

The House will be aware that public spending in the current year is likely to be the lowest which it has been, expressed as a share of total national income, for more than 20 years, with a further decline in the ratio likely in the years ahead. This has been achieved by sticking firmly to the planning total published in last year's public expenditure White Paper, while ensuring, within that total, significant extra money for priority programmes, from the Health Service to roads. Overall public spending has been further contained by the reduction in the burden of debt interest that flows directly from the transformation of the massive Budget deficit which we inherited from the party opposite—equivalent to some £25 billion in today's terms —into a substantial Budget surplus.

I will leave other aspects of public spending to my right hon. Friend the Chief Secretary, who will be winding up this debate—if, Mr. Speaker, he is fortunate enough to catch your eye—and who so skilfully conducted last year's public spending round. I would only add that firm but common-sense control of public expenditure remains, as it has always been, central to our economic strategy and a major contributor to the economic success which we are now enjoying. It is a success widely acknowledged by British business and industry, who have seen productivity and profitability improve beyond recognition, and now have the confidence to invest on an unprecedented scale.

It is a success, too, widely recognised abroad, where Britain's standing has never been higher. One sign of this is that last year, despite a substantial current account deficit on the balance of payments, the pound stayed strong and our foreign exchange reserves ended the year at an all-time high; and of course it is a success widely enjoyed by the British people, who see steadily rising living standards, more people in work than ever before in our history and inflation far lower than it was under Labour.

Indeed, only Labour has failed to recognise the transformation that has occurred to the British economy. As even Pravda, which I know the Opposition read carefully, was obliged to point out in an article on Britain last month: the Left have been in retreat for ten years, unable to respond to the Thatcher challenge, unable to adapt to life in the 1980s.

One of the key reasons why we have been able to achieve this long-term success is that we have never shirked taking the measures which are necessary to deal with short-term problems, even if those measures were unpopular. Getting the economy right does not mean that there will never be problems. That idealised state of affairs is not for this world.

Mr. Harry Ewing (Falkirk, East)

Will the Chancellor give way'?

Mr. Lawson

I shall give way in a moment.

What it does mean is getting the fundamentals right, which we have done, and then tackling short-term problems effectively and decisively, as and when they emerge.

Mr. Ewing

I am anxious to ask the Chancellor a question before he passes from the section of his speech in which he deals with his success as Chancellor. Interest rates are higher now than they were when he became Chancellor, inflation is higher than it was when he became Chancellor, and people are finding it much more difficult to meet their mortgage payments than they were when he became Chancellor. Does he claim the credit, or does he take the blame for that?

Mr. Lawson

I have to tell the hon. Member—although I know that many of his hon. Friends on the Front Bench do not understand this—that interest rates inevitably fluctuate. They have fluctuated before and they will fluctuate again.

In particular, sound management of the economy means acting firmly to deal with the sort of inflationary pressures that emerged in the second half of last year, when it became clear that total spending in the economy was growing at a wholly unsustainable rate. That is why interest rates have had to rise.

As every schoolboy should know by now, there is no way in which inflation can be controlled other than by a sufficiently tight monetary policy, and that means having the courage to raise interest rates as and when it is necessary to do so. There is nothing new in this—nothing new at all. It is what all other successful countries do. It is what we—unlike the disastrous inflationary Labour Government who preceded us—have always been prepared to do, and have consistently made clear we would continue to do, throughout the 10 years since we first took office.

Mr. Robert N. Wareing (Liverpool, West Derby)

Will the Chancellor give way?

Mr. Lawson

In a moment.

As a result, the underlying rate of inflation, as measured by the RPI excluding the distorting effect of mortgage interest payments, which reached 5 per cent. in July, is likely to edge up a little over the next few months, perhaps to the 5.5 per cent. or so which it reached during the last inflation blip in 1985. But then, just as it did in 1985, it will start coming down again. Let there be no doubt about that whatever. Monetary policy works, and the passage in the official Opposition amendment before us today, urging us to "combat inflation" and "move interest rates downwards" betrays that irredeemable economic illiteracy that is their hallmark in every economic debate which we have ever had.

Mr. Wareing

The Chancellor said that the Government, and indeed any responsible Chancellor, should not veer away from any unpopular decisions. Why was it that, before the last Budget, Robin Leigh-Pemberton, that famous Left-wing Governor of the Bank of England, advised the Chancellor on a cautious Budget? Why did the Chancellor not take his advice then? Why is he not taking his advice now when making a statement in advance of the Budget?

Mr. Lawson

My conversations with the Governor of the Bank of England are amiable, cordial and private. 1 would like to express my thanks today for the dinner which the Governor of the Bank of England gave in my honour last night.

So far as the recorded RPI is concerned, the position is complicated by the fact that, of all 12 nations of the European Community, we are one of the only two—the other one being Ireland—that is daft enough to include mortgage interest payments in its retail price index. So, for example, next week's RPI figure for December would show a further rise of almost half a percentage point, simply because a mortgage rate fall made the December 1987 index artificially low, even if there were no change in underlying inflation at all.

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

How can the Chancellor of a Government who make home ownership a fundamental objective of their policy say that the cost of home ownership is not relevant to an assessment of inflation by the majority of householders in this country?

Mr. Lawson

There are home owners in other European Community countries which even the deputy leader of the Liberal party—or whatever he is—ought to be aware of. As I said, of the 12 nations of the European Community, only two are foolish enough to have mortgage interest payments in their retail price index.

Mr. Tony Banks (Newham, North-West)

Will the Chancellor give way?

Mr. Lawson

In a moment. I have just given way.

But to assert that monetary policy works—[Interruption.] I do not know whether the Leader of the Opposition wishes to make a contribution or whether he is simply muttering from a sedentary position?

Mr. Neil Kinnock (Islwyn)

If the Chancellor wants to fool himself, that is up to him, but he must not fool the British people. He knows very well that every single comparable country in the OECD has included in its comparable figure with the retail price index a figure for the payment of expenditure on housing. He knows very well that those figures are directly comparable to the inclusion of mortgage figures.

Mr. Lawson

It is again my task to seek to educate the Leader of the Opposition. Of the other 10 countries of the European Community that do not include mortgage interest payments, there is a minority, it is true, that do have as a proxy for the cost of owner-occupied housing —it is a minority—imputed rents. The majority have nothing at all. So the Leader of the Opposition was trying to mislead the House, no doubt through his own ignorance.

Mr. Robert Sheldon (Ashton-under-Lyne)

Will the Chancellor give way?

Mr. Lawson

No. I have just given way to the Leader of the Opposition.[Interruption.]

Mr. Sheldon

rose—

Mr. Speaker

Order. I think that the Chancellor is not giving way.

Mr. Lawson

I am quite sure that the right hon. Gentleman would have made a much more telling intervention than that from the Leader of the Opposition. I am afraid that I had to choose which one I was giving way to, and I chose the Leader of the Opposition. I must now carry on with my speech.

But to assert that monetary policy works is not to say that we are relying on monetary policy alone. It is a matter of not being afraid to use monetary policy where monetary policy is called for. But of course it is buttressed by the firmest fiscal stance of any Government since the war: for the first time for at least half a century we have a Government in this country that are engaged in repaying the national debt, and will continue to do so next year too. It is this immensely strong fiscal position that guarantees that the historic tax reforms and tax reductions in last year's Budget—for which I make no apology whatever— will remain fully in place, to the immense benefit of the British economy in the years to come. I understand full well that the Opposition do not like it. What they want—what they have always wanted—is to see income tax put up. That is why they voted against each and every reduction in income tax—each and every one of them.

I recognise, of course, that the rise in interest rates will mean that people with mortgages will have to curb their spending on other things, in a minority of cases considerably, in order to meet the higher mortgage payments. Indeed, the policy would not be working if this were not so, and there are growing signs that it is working.

But the Opposition's charges that the Government have been deliberately stoking up borrowing, apparently by keeping interest rates persistently too high, again betray their irredeemable economic illiteracy. What we have done is to give people the freedom to choose how much to borrow, in the light of what they think they can afford. That judgment has to take account of the fact that mortgage rates do go up and down, as I told the hon. Member for Falkirk, East (Mr. Ewing) earlier.

Mr. Tony Banks

Will the Chancellor give way?

Mr. Lawson

Later.

Responsible people know this—even though the hon. Member for Islington, South and Finsbury (Mr. Smith), whom I am glad to see in his place, evidently does not, judging from his recent pronouncement on behalf of the Opposition Front Bench about home buyers who budgeted sensibly in taking out their mortgages, who mortgaged themselves up to the hilt".—[official Report, 8 December 1988; Vol. 143, c. 423.]

Mr. Tony Banks

Does the Chancellor accept that some people borrow money for the simple reason that they need to cover their costs and are forced into a great amount of debt? The Chancellor seems not at all concerned about that. Will he do anything about the expansion of credit in this country? This morning I received another invitation to spend £800 on a Visa card by 31 March to get two free tickets to America. Surely the Chancellor should do something about that. [HON. MEMBERS: "Take them."] If he lends me the money, I shall.

Mr. Lawson

I am afraid that I do not have the pleasure of knowing the hon. Gentleman sufficiently well to know whether he is capable of resisting temptation or not.

What we heard from the hon. Member for Islington, South and Finsbury was not sensible budgeting. That was Labour budgeting.

In a society which treats people like adults, it must be for individuals to decide for themselves how much it is sensible for them to borrow. That is the only way to a free and responsible society, and that in turn is the only way to a successful economy.

Dr. Jeremy Bray (Motherwell, South)

When, in due course, as the Chancellor says, interest rates go down, will the exchange rate go down also? [Interruption.] I am sorry that the Chancellor has knocked over his glass of water.

Mr. Lawson

I have a temporary liquidity problem.

I think that the hon. Gentleman is asking me to predict the course of exchange rates in some hypothetical circumstances. I am not even prepared to predict the course of exchange rates in less hypothetical circumstances, so I am hot prepared to answer the hon. Gentleman. He has been in this House long enough to know that I never predict the course of either interest rates or the exchange rate.

Mr. Nicholas Budgen (Wolverhampton, South-West)

rose—

Mr. Lawson

I must move on a bit now.

As far as the impact of interest rates on companies is concerned, the plain fact is that companies are now in a far stronger financial position than they have been for a very long time.

Whereas, in 1980, company borrowing amounted to some 45 per cent. of the total value of their equity, by the end of 1987 it was down to around 28 per cent. At the same time, their profitability has been transformed: the rate of return on capital employed has trebled from 4 per cent. in 1980 to 12 per cent. now. Moreover, although short-term interest rates have risen considerably, long-term rates this time have barely moved at all. With the Government now actually redeeming some of their outstanding debt rather than making continuing demands on the markets, there are excellent opportunities for borrowers who wish to take advantage of this market for fixed-term and long-term borrowing. Last year, for example, there were over £10 billion of fixed-rate long-term sterling bond issues, and there is likely to be even greater scope this year.

Much concern has been expressed recently about the sharp fall in the personal savings ratio—the proportion of personal disposable income that is saved. It has certainly been dramatic. Equally certainly, high interest rates, which make savings more attractive and borrowing less attractive, are likely to reverse this trend— not least because the sharp fall in the personal savings ratio has been overwhelmingly caused by the sharp rise in personal borrowing, since savings are measured net of borrowing.

But it is important—thisis not always fully understood—to set this in its proper perspective. The United Kingdom's overall national savings ratio has remained virtually unchanged throughout the 1980s, with the sharp fall in personal savings offset by a sharp rise in company savings as profitability has been transformed, coupled with the improvement in the public finances from deficit to surplus.

Even so, the strength of the recent investment boom has meant that total domestic investment exceeds total domestic savings, and the gap has therefore had to be financed from overseas. As a result, we have moved into sizeable current account deficit, with a surge in imports of capital goods and other materials for industry, superimposed on a slightly less rapid, but still considerable, growth in consumer goods imports.

But as savings rise in response to higher interest rates, particularly with the collapse of the housing boom, and as the growth of spending slows down from last year's peak, the current account deficit will narrow, although this process is bound to take time.

Dr. David Owen (Plymouth, Devonport)

Savings may well rise as a result of high interest rates. Nevertheless, without prejudging his Budget, is the Chancellor prepared to use tax allowances and the tax system to stimulate personal savings, which are seriously low?

Mr. Lawson

Of course I note what the right hon. Gentleman has said, but he will not expect me to make any comments in advance of the Budget. Two things are vital to the long-term success of an economy. One is a foundation of sound finance, and that is why, as I have explained, we are determined to take whatever action is necessary to deal with inflation. But what is equally important for economic growth, and hence for the prospects for jobs and for living standards, is the supply side of the economy—productivity, investment, and profits—and the transformation in the supply side of the British economy has been dramatic.

Mr. David Howell (Guildford)

Before my right hon. Friend refers to the supply side of the economy, in respect of which he will have a good tale to tell, I agree fully with his view that fiscal policy should be medium-term and kept right away from the short-term aim of squeezing out inflation. In addition to high interest rates, what other instruments on the monetary policy side are necessary to control monetary aggregates? Other countries seem to have other weapons at their disposal. Sometimes, the impression that we are relying totally on interest rates and nothing else at all in monetary policy may be misleading.

Mr. Lawson

I think that, if my right hon. Friend, who has made a great study of many of the aspects of this, were to look at what other countries do, he would see that, whereas in the past some other countries have relied on direct credit controls of one kind or another, in every single case they have been abandoned. Look at the case of the United States, Canada, Japan, Germany—even France and Italy who now entirely rely on interest rates, and do not rely on direct credit controls, or anything else other than interest rates, in order to control their monetary policy, for the very good reason that, in a much more open world market and for the avoidance of distortions, that is really the only sensible way to proceed. As I said to my right hon. Friend, that is the practice of every other well-conducted economy nowadays.

Going back to the supply side, manufacturing productivity has grown far faster than in any other major nation in the 1980s, after growing slowest of all in the 1960s and the 1970s. Of course, the industrial relations scene is unrecognisable from the depths plumbed in the Labour Government's winter of discontent almost exactly 10 years ago. Profitability is at its highest levels for 20 years, and, partly as a result, Britain's investment performance has improved dramatically.

One of the reasons why we grew more sluggishly than any other major European country in the 1960s and 1970s was because we fell behind in investment. Comparing the rates of growth of investment in the 12 European Community countries, in the 1960s, we came ninth out of 12. In the 1970s, we slipped further, to tenth. But in the 1980s we have shot right to the top—an achievement that bodes well—very well indeed—for the future.

Within the economy, there has been a marked shift in the balance of growth, thus between investment and consumption. In the five years between 1968 and 1973, consumption grew by about 3 per cent. a year, and investment by about 2 per cent. a year. Between 1973 and 1978, the next five-year period, and again between 1978 and 1983, the five-year period after that, in both of those periods consumption grew slowly, and investment actually fell. That was the record of the Labour Government. But since 1983—since 1983—investment has grown at getting on for twice the rate of consumption, so that private sector investment now stands at 16 per cent. of GDP—the highest figure ever.

So much for what the Opposition like to call a short-lived consumer boom. What we have seen is a long-lived investment boom—and one which is set to continue, as the surveys from the Confederation of British Industry, the Institute of Directors, and the Department of Trade and Industry all confirm.

The transformation—because that is what it is—of the supply side of the British economy has been the foundation for what is already the longest period of strong and steady growth, and the longest sustained fall in unemployment since the war; and Britain's economic renaissance is set to go on, although growth this year will be slower than in the past two years, particularly so far as domestic demand is concerned.

Perhaps the best evidence of the transformation of the supply side is the way the economy has forged ahead through the coal strike, through the oil price collapse, and through the stock market crash. There will be further evidence in the way that we shall come through the present problems about which I was speaking earlier. In the past, each and every one of these incidents would have created a major crisis. Now, they are little more than changes of pace in the sustained upward march of the British economy.

Our economic prospects will inevitably, of course—I do not deny this—depend to some extent on the wider world economy. The closer international co-operation which has been in place for well over three years now has, I am sure, been of great benefit in creating the right climate for healthy, non-inflationary growth, and particularly for investment. As the House will be aware, I was in Washington on Tuesday for an informal discussion with United States Treasury Secretary Brady, and I am sure that the new United States Administration will continue to play its full part in that process of international co-operation.

In this context, a low-profile meeting of the G7—the Finance Ministers and central bank governors of the seven major industrial nations—and of course the first involving the new United States Administration, may well take place within the next few weeks.

I have set out in the Autumn Statement the prospects for 1989, and I have explained the policies which I intend to pursue to ensure that our economic success continues. But when he comes to reply, I hope that the hon. Member for Dunfermline, East (Mr. Brown) will have the honesty and the courage to set out his own party's policies as well. For in spite of all his very frequent speeches, letters to me and television appearances, the House, I have to say, is little clearer than it has ever been on what Labour's policy on the economy actually is.

We are still waiting to hear what they decided at their retreat into seclusion in a convalescent home at Rottingdean a few weeks ago. We are still waiting to hear the outcome from their much-vaunted policy review, which seems to have disappeared from sight.

But I must be entirely fair. That great economist, whom I miss so much, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), has published his proposal to solve all Labour's problems. He recognises that it has already lost the next election. So, on the principle that if he cannot win, he is not playing, he proposes that we split the country up into ever smaller units, until we eventually find one where Labour might hope to find a majority.

So now we know what at least one section of the Labour party offers the country—what I might term the Yugoslav solution: total devolution and total ungovernability. It was only appropriate that the entire Yugoslav Government resigned, because they could not find a way out of their economic difficulties, on the very day that the right hon. Member for Sparkbrook produced his idea.

But let me come back to the hon. Member for Dunfermline, East, who is with us, and ask him a straight question—in fact, two straight questions. [Laughter.] I shall ask him three, if he is not careful. First—I know that he does not want to listen but I want to ask him this straight question first—can he bring the House up to date on what Labour's tax policy actually is this week, and in particular what Labour's basic rate of tax would be? I realise that the hon. Gentleman may find this is a tiresome question but I have to say that it is of some interest to the House, and may be of some interest to the country too.

I shall remind the hon. Gentleman that Labour voted against the cut in the basic rate from 29 per cent. to 27 per cent. in 1987, and also against the cut from 27 per cent. to 25 per cent. in 1988.

Mr. Ron Leighton (Newham, North-East)

rose—

Mr. Lawson

Yet, when he was pressed on the subject by Mr. Brian Walden a few days ago, the Leader of the Opposition said that, for the 95 per cent. of taxpayers who pay at the basic rate—and I quote from the transcript—" the possibility of increasing their income tax is very, very remote". However, I have to say that, when Mr. Walden then kindly offered to change the subject, the right hon. Gentleman exclaimed, "Thank God!"

Mr. Kinnock

Is that in the transcript?

Mr. Lawson

Yes it is.

Perhaps the hon. Member for Dunfermline, East will now confirm to the House, having heard what the leader of the Labour party said, that Labour now admits that it was wrong to vote against the cuts in the basic rate of income tax in 1987 and 1988.

Since we are debating the Autumn Statement and the Government's public expenditure plans, perhaps the hon. Member for Dunfermline, East, who has, I understand, rejoiced under the title of shadow Chief Secretary for over a year now, can tell us—this is my second question—by how much Labour would increase public expenditure in the unlikely event of their returning to office.

The House will want to hear a clear, honest and straightforward answer to that question, because the only policies we have heard from Labour, throughout the 1980s so far, have been a repeat of the disastrous policies which laid this country low in the 1970s, and would do so again, as the British people so clearly recognise. By contrast, the Autumn Statement offers the prospect of a further year of healthy growth and strong investment with inflation resuming its downward trend and above all, an economy that has been fundamentally transformed for the better. I commend it to the House.

4.44 pm

Mr. Gordon Brown (Dunfermline, East)

I beg to move, to leave out from "House" to the end of the Question and to add instead thereof: declines to approve the Autumn Statement; deplores the failings in the Government's economic policies and the higher interest rates, higher inflation, the continuing high level of unemployment and worsening balance of payments these have caused; is concerned about the damaging impact of these policies on industry, home owners and low income families throughout the country; believes that the Autumn Statement does nothing to ensure a balanced economy and fails to ensure necessary improvements in essential public services; and calls upon the Government to adopt an economic strategy which will sustain growth, combat inflation, move interest rates downwards towards the levels of Britain's competitors and reduce the balance of payments deficit by improving export performance.

What we have just heard from the Chancellor of the Exchequer is the predictable response of a man who has just heard through the post that his last remaining policy —depending on high interest rates—has been rejected by his last remaining supporter—the Bank of England. He is the one-club man who has now become the one-man club.

Mr. Tony Favell (Stockport)

Answer the questions.

Mr. Brown

I shall come to the questions in my own time.

The Chancellor made many boasts in his speech. He tells us that private investment as a share of the economy has not been higher since the 1960s. He fails to tell us that overall investment—the figure that matters—as a share of the economy has not been lower since the 1960s. He tells us that long-term interest rates have not moved at all. He fails to tell us that short-term interest rates are now 3 per cent. higher than in America, 5 per cent. higher than in Germany and 8 per cent. higher than in Japan. Our interest rates are among the highest in Europe.

Mr. Lawson

I must tell the hon. Gentleman that he is wrong. Total investment is, on the official figures, the highest for a quarter of a century and, according to outside analysts, is likely to be the highest figure ever as a proportion of GDP.

Mr. Brown

The right hon. Gentleman should consult the real figures. He has been wrong before and he is wrong now. Investment, as a share of the national income, is lower than it was in the 1960s and 1970s, and lower than in almost every European industrialised country, except Belgium.

The Chancellor tells us that manufacturing productivity is our best ever. He fails to tell us that the productivity of the labour force as a whole is less than it was during most of the 20 years before he took office. When boasting about productivity throughout the world, he fails to tell us that our growth in productivity has been half that of Japan. Those are the real figures.

Sir Peter Hordern (Horsham)

I wonder how that can be. Manufacturing output is now 10 per cent. higher than it was in 1979 and, on the Opposition's thesis, the number of unemployed is higher now than it was then. Surely it must follow that productivity is greater now than it was in 1979.

Mr. Brown

Of course it has been possible for most years under this Government to show higher productivity because less has been produced by fewer people. The figure that I was putting to the Chancellor is that if one compares our record on productivity in all sectors of the economy with that of Japan, one can see that our productivity has been rising by half as much. The Chancellor will have to come to the House to correct his figure at a later date.

I suspect that we have heard from the Chancellor one half of the Government's case on the economy, reflecting much of the weekend thinking in his get-together at Dorneywood. Perhaps later in the debate we shall hear from the Chief Secretary, who is in a position to report on the more important meeting with the Prime Minister at Chequers on Boxing day. I understand from a report in the Sunday Telegraph that, under the auspices of the Prime Minister, the get-together included the previous Chancellor, the assistant to the Chancellor and the next Chancellor. I suppose that we must wait to hear from the Chief Secretary on that subject. Perhaps he will show more concern than the Chancellor did for the problems faced by people because of high interest rates. After all, as a Back Bencher in 1982 he told the then Chancellor that the level of interest rates was simply "not tolerable". That intolerable level of interest rates was 9.5 per cent. 3.5 per cent. lower than today.

It is clear from what the Chancellor said this afternoon that he does not begin to understand the scale and significance of the problems facing millions of people. A few weeks ago he told the press that he believed in targeting. With his enthusiasm for high interest rates, he has targeted industry—the borrowing costs of which have increased by £1.3 billion—small businesses—company bankruptcies in 1988 were higher than in 1987, even before the latest wave of interest-rate rises—and most of all, home owners. The average home owner has had to pay an extra £40 a month since last summer's interest rate rises. The young first-time buyer has experienced rises of £50 a month, and the home buyer in the south-east has experienced rises of £70 a month. The reason why home owners are stretched to the limit is that throughout the nine and a half years that the Government have been in office mortgage rates have never been below 9.5 per cent., and they have been below 10 per cent. on only two occasions.

As interest rates rise yet again, more of each householder's income, for reasons beyond his control, will be spent on his home. The added burden facing families can be expressed in two figures. Ten years ago the typical home owner paid 14 per cent. of take-home pay to cover housing costs, while today it is 24 per cent.—nearly twice as much. It is not a careful Chancellor whose meticulous housekeeping has been knocked off course by imprudent home owners, but careful home owners whose budgeting has been knocked off course by an imprudent Chancellor. Home owners, small businesses and industry should know that their mortgage rises and higher borrowing costs are not some accidental by-product of the Chancellor's strategy—they are the strategy.

The Chancellor has decided that the problems facing him are to be solved at the expense of home owners, small businesses and industry. The price of his economic mistakes are to be paid by those who secured least benefit from the top-rate tax cuts in the Budget. What is the Chancellor's response? He told us today that people will have to curb spending on other items. Perhaps in the Chancellor's world people can cut back on second homes, the third car or the third or fourth holiday, but in the wider world an increasing minority are finding that the sole car is harder to pay for, that their annual holiday is under threat and that they are struggling to pay the mortgage on the one family home. The Chancellor protests that his interest-rate strategy is right because he cannot afford to admit that his Budget strategy was wrong.

Mr. John Townend (Bridlington)

Will the hon. Gentleman accept that, despite what he says, the man on average earnings is £45 a week better off than he was in 1979?

Mr. Brown

Standards of living have risen in every decade. The hon. Gentleman should ask whether standards of living can be sustained at their present level. The answer for millions of home owners is that they cannot and that they will be worse off as a result of rises in their mortgages. If the hon. Gentleman does not believe me, why does he not ask some of his constituents about the notes that they have received from building societies over the past few weeks? The Chancellor will not make a change in his fiscal strategy because when the interests of a tiny minority of taxpayers clash with the economic interests of the nation, the interests of the small minority come first.

Last week, following the mortgage rate rises, new dental charges were introduced, train fares increased by 9 per cent. and tube fares increased by 12 per cent. Electricity prices will rise by 6 per cent., following the 9 per cent. increase last year, and in April the price of gas will increase. The price of water will increase to pay for privatisation. When those rises—which on average will amount to an extra £10 a month if rates or the poll tax are included—have wiped out the tax cuts of the majority of families, what is left of the Chancellor's boast to a Conservative party conference in 1984: On this occasion, unlike all previous recoveries, there has been no resurgence of inflation"? The right hon. Gentleman told the IMF: In previous cycles, inflation has tended to rise as soon as the recovery has become well established. As a result, many commentators have argued that an inflation upturn in the United Kingdom is imminent. We take a different view.

The Chancellor cannot blame the Organisation of Petroleum Exporting Countries or rises in world commodity prices. He has no one but himself to blame. As inflation increases to 7 per cent., when it is less than 2 per cent. in Japan, predicted to be 3 per cent. in Germany arid predicted to be 4.5 per cent. in America and Canada, what does the Chancellor say about his objectives? [Interruption.] I tell the Chancellor that, in the last year of the Labour Government, inflation was at the European average. Under this Government it is 40 per cent. above the European average. This will be the fourth year when inflation has been above it, but this is the Chancellor who told us that he would create zero inflation. On 18 December, the right hon. Gentleman said, when asked about zero inflation: It will take a long time to get there … The important thing is to be moving in the right direction.

The Chancellor's only solution is to change the rules by taking mortgage interest rates out of the retail prices index. In a year or two, he—or more likely his successor—will tell hon. Members that, like the unemployment problem before the last election, the inflation problem has been solved, no doubt after 19 changes in the retail prices index.

The Chancellor says that these rises are a temporary blip on the road to zero inflation. The temporary blip occurred. not when inflation rose above 5 or 6 per cent., but when it fell below 3 per cent. for four months in the 66 months of his Chancellorship. The real blip under this Chancellor's term of office is the four months when inflation was below 3 per cent., the three months when Britain had a visible trade surplus and the two months when mortgage rates were below 10 per cent.

Mr. Ian Taylor (Esher)

Will the hon. Gentleman explain the blip that occurred under the Labour Government, when the average rate of inflation was 15.5 per cent.? It will return to that level if some of his policies are put into practice.

Mr. Brown

I do not think that the hon. Gentleman has looked at his history. When the Labour Government left office, after a 300 per cent. rise in oil prices, inflation was falling. Under this Government, after a 20 per cent. drop in oil prices, it is rising.

What is the Chancellor's answer to every problem? His answer to rising consumption is high interest rates; to problems with the pound it is high interest rates; to inflation it is high interest rates; and, amazingly, to the regional problems it is high interest rates. A few days ago the Chancellor told the Financial Times that interest rates are helping to secure a better regional balance within the economy. I know that something had to be done to replace the lost regional grants, the lost regional status and the cut in the development agencies, but industrialists in my constituency are amazed at being told that their economy is in need of being cooled down, when it has not begun to warm up. They strongly believe that high interest rates will force them to move from a period of recession to depression without enjoying an intervening period of recovery.

The Chancellor would do well to listen to the Secretary of State for Wales, who, regarding the policy of high interest rates, was quoted in The Scotsman on Monday 5 December as saying: There is a whole range of things that can be used. I do not think you can ever run an economy dependent on any single factor alone. That was said by a man who is not only a Conservative Member, but a member of the Cabinet. He, apparently, can say that with impunity in front of the Prime Minister.

What has happened to the Chancellor's strategy? What has happened now that he is so enthusiastic about high interest rates? What has happened since the days when everything was going to be solved by M3, which is rising this year by 20 per cent. and in previous years by anything between 10 and 25 per cent., and which is rising faster than in Europe? What has happened to M3, because we hear nothing about that? What has happened to the statement that the Chancellor made in 1980 in the economic progress report: Judgments about appropriate levels of interest rates are replaced by control of the monetary base."? What has happened to the view that interest rates should be left to the markets and not to the Government? The aim was for a greater role for the market in determining the rates. What has happened to the presumption that if the public sector borrowing requirement came down interest rates would inevitably follow them?

Gone are the days when Treasury Ministers reported to us in the financial statement and Budget Report in 1981: The Government is committed to a progressive reduction in the growth of the money stock and to pursuing the fiscal policies necessary to achieve this without excessive reliance on interest rates. The Minister who was most enthusiastic about the medium-term financial strategy, and the Minister who repudiated excessive reliance on interest rates in 1981, is today the Chancellor of the Exchequer who can think of little else.

After nine years, when we have been through fads of monetarism, the totems of M0, M3, the basket of monetary aggregates and all the dogma about PSBR, we are back to the crudest, most basic, old-fashioned, short-term weapon of them all—high interest rates. The Government do not have a resolute approach, but falter from one desperate expedient to another. They pursue the short-termism that is, I suppose, the inevitable result of an unequal dialogue between a Chancellor who has not yet made up his mind when to retire and a Prime Minister who has not yet made up her mind when to sack him.

Our case against the Chancellor is not merely that without a prior and sustained long-term investment boom the consumer boom that he engineered was bound to be unsustainable. Our case is not only that the solution that he has chosen—high interest rates—is not only directly damaging to industrial investment, as everybody knows, is directly damaging to home owners and fails to address the real problems facing us—for what can high interest rates do about skill shortages, bottlenecks in technology or regional imbalances?—but that his excessive reliance on interest rates is worsening the economy and that the imbalances in the economy will only be exacerbated by the high interest rate policy that he pursues.

Mr. Tony Marlow (Northampton, North)

Will the hon. Gentleman give way?

Mr. John Redwood (Wokingham)

Where has the hon. Gentleman obtained his figures from when he says that investment has been at a low level in recent years? The burden of the hon. Gentleman's case against my right hon. Friend the Chancellor is based on phoney figures. Total investment in 1988 was at high levels relative to the 1970s. Would the hon. Gentleman like to show us his alternative figures so that we can judge their veracity against the official record?

Mr. Brown

I find the comments of the hon. Member for Wokingham (Mr. Redwood) interesting. After all, he was the hon. Member who suggested about a year ago that the Chancellor should consider pumping an extra £5 billion into the economy. If he checks the figures, he will find that, far from being an economic miracle akin to that of Japan, as the Chancellor says, the growth rate of investment in Britain has been about half the level of that in Japan since the Government came to office.

Mr. Marlow

rose—

Mr. Brown

What is even worse about the Chancellor's strategy is that, after 10 years during which he has protested that we are living through an economic miracle akin to that of Japan, after 10 years during which he has boasted that our economic position is akin to that of Germany, not only have other countries manufactured more, produced more, grown faster and exported more but they have seen the wisdom—which the Chancellor clearly has not, to judge from his Autumn Statement—of taking a pragmatic approach to public investment and to the public sector, for the future of the country.

Mr. Marlow

rose—

Mr. Brown

I have given way on numerous occasions this afternoon. I am happy to give way to the Chancellor if he wants to intervene, but I want to press on with my remarks.

In which other countries would supply side investment in education, training, research and development in the regions take second place to a doctrinaire obsession to reduce public spending below a notional and arbitrary mark of 40 per cent. of national income? In the Autumn Statement, the Government should be examining what investment is being put in place, what skills are being developed, what technology is being encouraged and what resources generally are being mobilised to ensure that we are competitive for the 1990s. We know that over the past nine years we have been spending, in real terms, less on the regions industry, transport, housing and the environment.

In the Autumn Statement, despite the Chancellor's boasts, industry and housing find their expenditure cut, in real terms, by £400 million, employment and energy by £300 million, Scotland by £200 million, the environment by £100 million and spending on education, Wales and Northern Ireland is so important to this Government that it is to take up a far smaller share of national income.

The Chancellor claims that he has managed to reduce public spending as a share of national income and to increase public spending at the same time. I shall tell him how he can claim that. The main reason why he claims he is spending more next year is that he has spent less this year than was originally planned. Once all the receipts are in, it is likely that public spending will have fallen, not by £1 billion, as is said in the Autumn Statement, but by about £2.5 billion over the year. The truth is that, for all the talk of increased spending. the real value of allocated departmental spending for all those functions is worth less next year than it has been in many of the years since 1983. There is no extra money for industry, for housing or for the environment.

There are, of course, a few exceptions—which are mainly unintentional. The £200 million for income support for pensioners is a result of the Chancellor giving a weekend briefing that went wrong. The £20 million, or more, is the result of a junior Health Minister giving a weekend interview that upset farmers. If any lesson is to be learnt, it is that our best, and perhaps only, hope of more public cash for interest groups and industry is that the relevant Minister is tempted into an indiscreet weekend interview.

Mr. Lawson

The hon. Gentleman may have forgotten that I asked him two simple straight questions. I should like now to hear his answers. First, he has seen our figures in the Autumn Statement. By how much would Labour increase the total of public expenditure—by how much? Secondly, what basic rate of income tax would it need to finance that?

Mr. Brown

I do not know what the problem is for the Chancellor. The Labour party is, of course, committed to increased public investment. The Chancellor himself was committed to that last year, but the only problem was that he did not spend the money that he promised to spend. I see from the Budget submission that even the Institute of Directors is demanding more public spending because of the chronic under-funding of education and health.

I can assure the Chancellor that we believe in more public investment, and to make that possible we would have a different fiscal strategy from the strategy that the Chancellor is pursuing. Before the Chancellor tells us that last year's Budget was a success and that there is no need to change the fiscal stance, he should talk to home owners, who have seen their tax cuts wiped out many time over as a result of his policy.

The main reason why investment represents a smaller share of our national income is that, year after year, the Chancellor has insisted on giving a low priority to public investment. The real value of Government investment fell in 1987, and the published figures show that it also fell in the first three quarters of 1988. Is it not a damning comment on the Government that in the motion they should congratulate themselves on bringing public expenditure below 40 per cent. of GDP, even though that means that public investment in our future has fallen?

Where is the basis for congratulation in the fact that there has been less spending on research and development, when we know that other countries are running ahead of us? We know that other countries have more research scientists than we do. Where is the basis for congratulation in the fact that many major companies in this country are having to recruit graduates from abroad because of the skill shortages caused by lack of investment in training? Where is the basis for self-congratulation in the neglect and decay of the infrastructure that has occurred as a result of the public expenditure policies that the Chancellor has pursued?

Sir Peter Hordern

The hon. Gentleman said that the level of public sector investment had fallen last year compared with previous years. Has he taken into account the denationalisation of British Gas and other public sector investments? If he were to make a proper comparison, he would find that total investment had risen.

Mr. Brown

I am grateful to the hon. Gentleman for allowing me to point this out. [Interruption.] The Chief Secretary says that I am wrong. I have to tell him that my figures from 1979 exclude public corporations. We are talking about general Government investment. Local authority and Government investment fell last year and the year before, yet the Government and the Chancellor congratulate themselves in the motion on presiding over this fall in public investment.

The Chief Secretary knows all about these things. He knows that the biggest increase in spending has been not on the National Health Service, roads or education but on Government advertising. What we need is action to deal with the problems of the inner cities, science space and the environment, but all that we get is Government advertising. What happened to the initiative that the Prime Minister launched in St. James's park—amid great advertising—the aim of which was to clean up the environment? What happened to the committee to push scientific research, which the Prime Minister was to chair? What happened to the initiative to help women[...]

What new measure has followed the trumpetings of Prime Ministerial enthusiasm for the global environment? What has happened to the inner-city campaign, which appears to have started and ended with the publication of that glossy brochure last March? What has changed since September 1987, when the Prime Minister did a walkabout on the wasteland in Midlesbrough to launch the inner-city campaign? What was wasteland in 1987 remains a wasteland in 1989, and the only opportunities created in Middlesbrough were photo opportunities. I am sure that the people of Middlebrough treasure the snapshots still.

We need a policy to cope with the problems that we face —not publicity or public relations. This is the Government who promised the initiative for women, but ended up freezing child benefit. They said that they would deal with the environment, but ended up cutting the money spent on research into pollution. They set out promising to regenerate inner cities, and ended up lavishing top-rate tax cuts on the landed estates. They are a Government whose priority is not the consumer, the inner city, pensioners or the family, but the top-rate taxpayer.

Let me tell the Chancellor what his priorities should be. First, he should admit that his last Budget was misconceived—that it was not only unfair and divisive but ill judged and imprudent. He should end excessive reliance on interest rates, no least by acting directly to encourage saving and on the inflation that he has created—in particular, by abandoning the electricity and water price increases. Above all, the Chancellor should set in motion a fiscal strategy that is not only fair but designed to reduce inflation, allow interest rates to fall and assist our balance of payments.

We have been told that the next Budget will be a Budget for savings. We were told that the last Budget was a Budget for savings.The huge tax cuts at the top were justified to the House on the pretext that top taxpayers would save, with the result that there would be more investment by them in the economy. We know that quite the opposite happened and that the savings ratio has now fallen to its lowest level.

If the Chancellor wants a real Budget for savings, why does he not end the discrimination against pensioners on income support and housing benefit, who are penalised for saving by the loss of that benefit? Why does he not end the discrimination against people too poor to tax who save with building societies and who are automatically taxed on their income? Why does he not create a savings scheme that will do something to promote real savings and real investments in the areas where they are most needed—in the regions? That is the first thing that the Chancellor should examine.

Secondly, the right hon. Gentleman should say now, at a time when it would have the most effect on interest rates, that in the current difficulties that he has created the British people cannot afford another Budget like the last one—a professedly tax-cutting Budget whose effects were quickly cancelled out by mortgage and price rises. Let me tell him directly that, if press reports are correct—if he intends to introduce measures to help the low-paid, to cure the poverty trap and to reduce the tax burden on low-income Britain, which is now heavier than it was in 1979—he will have the support of the Opposition for those measures. But even if tax allowances for low-income Britain are raised in line with wages, people will still be paying exactly the same share of their income in tax next year as they are this, and that represents a larger burden than existed in 1979. Would not the Chancellor be doing better if he took back at least part of the top-rate tax cuts that he gave to people who did not need them and who spent large parts of them on imports? In that way, he could take many thousands more out of tax.

Thirdly, will the Chancellor agree that with a prudent economic strategy that does not rely exclusively on high interest rates he could afford some targeted investment, especially on the regions? Such investment would not cause the inflation, the imports and the pressure on interest rates that his top-rate tax cuts have caused. Action on capacity constraints, skill shortages, technology and research, on regional imbalances and on infrastructure would not only assist greater balance in the economy, but would make for better long-term efficiency and competitiveness. Those are the measures that the Chancellor should consider introducing in a Budget.

No Chancellor has had better opportunities than this Chancellor. He has never had to deal with huge oil price rises. He has not had to deal with a world commodity price explosion. Instead, he has had huge oil revenues—more than £70 billion. He has had money from the privatisation of industry. He has had £20 billion from house and land sales. He has broken the link between pensions and earnings and thus saved himself £18 billion.

In spite of that, there is no supply side transformation. There is no zero inflation. The trade deficits are no freaks, the price rises are no blips, and the hardship that the Chancellor has imposed and is imposing is no accident. There is no economic miracle. This Government have had the best opportunities that have been available for decades but have left the nation ill prepared for the future. What we need is not just a new Chancellor, but a new Government, and the sooner the better.

Mr. Harry Ewing (Falkirk, East)

On a point of order, Mr. Speaker. Would it be in order for me to move a vote of thanks to my hon. Friend the Member for Dunfermline, East (Mr. Brown)—

Mr. Speaker

I call Mr. Higgins.

5.20 pm

Mr. Terence L. Higgins (Worthing)

This year's Autumn Statement is in many ways more important than ever before, because it includes a considerable number of the figures and data normally included in the public expenditure White Paper. I believe that the House should be glad that the Chief Secretary, together with the Chancellor, has accepted the recommendations made by the Select Committee on the Treasury and Civil Service that the Autumn Statement should be expanded and given greater prominence.

I am sorry that I missed the opening sentences of the Chancellor's remarks, not least because I gather that he was kind enough to pay a compliment to the Treasury Committee. I hope that our report will help the House in analysing the complex economic problems we face.

I should like to take up one point arising from the speech of the hon. Member for Dunfermline, East, (Mr. Brown). There was considerable disquiet on this side of the House about some of the statistics on which he based his argument. I suggest that he should, perhaps, adopt the policy used on similar previous occasions: he should put down some written parliamentary questions setting out precisely the points that he wishes to justify; then we could see what the official statistics actually are. I believe that the report of the Select Committee helps to put the present situation in perspective, especially paragraph 49, which draws attention to the fact that the worldwide fear of recession after the stock market collapse in October 1987 led the authorities throughout the world to take action to avert that risk by stimulating their economies. I believe that this time last year, everyone—with the exception of my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen)—was unanimous in believing that that was the right thing to do. That sets the background against which the present policies are to be appraised. The Committee goes on to say: With hindsight it can be seen that thereafter policy was too relaxed too long.

An important point made by the Select Committee was that there is grave concern about the margins of error that arise in official statistics, not in the context I have just mentioned, but regarding the overall national income statistics. I know that my right hon. Friend the Chancellor feels that the financial statistics are better. That is so, but, if he is trying to manage the economy against a background where there are tremendous variations—large variations of the kind which were revealed in the evidence given to the Committee—in estimates of economic growth, depending on which measure one takes, it is important that we should devote more resources to it.

I note that my right hon. Friend said that he will be publishing the report of the inquiry. I welcome that, but the fact is that the position has deteriorated significantly since the Committee originally suggested that an inquiry was needed. Therefore, if one is to manage the economy properly, that is important.

A separate issue, but related to the one which I have just mentioned, is forecasts. The Chancellor said in evidence to us that he wished he did not have to publish the official forecasts of the economy. I believe that that is wrong: it is important that the House should know the forecasts on which the Government are taking their decisions, since otherwise we cannot have a sensible debate on these matters. In the light of that, I am sure it is important that we should do all we can to improve the forecasts. The pass record of the Treasury has been good on this, but the model is now clearly defective. As the Committee has pointed out, the model at the moment, for example, would produce a conclusion, if it were not adjusted, that if there is a fiscal surplus of the kind we now have, we would also have a surplus on the current account. When the difference is that big, clearly the forecasting model needs to be looked at closely.

The first point I wish to make from an analytical point of view is that the Committee points out that, against the background of the stimulus of last year and the consequential hangover, that the Chancellor is, in effect, on a tightrope, and that there are two dangers. On the one hand, the effect of the higher interest rates could be a sudden abrupt stop in the economy, so that the unemployment figures would cease to go down and the economy as a whole would come to a halt. On the other hand, if the economy delayed its response to the hike in interest rates, before effective response is felt, we might have a deterioration in foreign confidence, a fall in sterling, still higher interest rates and an uncontrollable situation.

The Chancellor is balanced on this tightrope, but he is still clearly in a position of balance. We do not yet know how long it will be before the interest rate increases become apparent in the economy. Although the last set of balance of payment figures were the third worst ever, they showed a significant fall in imports. The increase in the mortgage rate will take some time to have the effect which my right hon. Friend has rightly described. Essentially, one should not make a premature judgment for further action ahead of the Budget, but one should wait to see what the subsequent figures are.

There are particular points of concern regarding the balance of payments, because the Chancellor of the Exchequer rightly told us: with the exchange rate given the task of combating inflation, it follows that the exchange rate cannot be assigned the task of restoring equilibrium in the balance of payments. The Committee expressed concern about restoring that balance in the current account, because the Chancellor has effectively used the exchange rate as a means of putting that right. We expressed some doubt about whether the supply side improvements—which I believe are coming through—and the reduction in the strain on domestic demand will be sufficient to ensure that there is sufficient capacity for the resources to be diverted into exports.

I have two related puzzles. The first one relates to the recent comments on these issues by the hon. Member for Dunfermline, East. Of course, there is a puzzle about what rate of income tax he would select, to which I still believe we do not have an answer. The hon. Gentleman complains about the cut in the top rate of income tax in the last Budget, but I believe that he must take fully into account what happened to revenue following that cut.

While that is a normal party political point to make, I find it strange that the hon. Gentleman argued that the totality of tax cuts in the last Budget was too great, given the fact that we are now clearly heading for, by an enormous margin, the largest fiscal surplus that we have ever had. I believe that the only previous one was the one achieved by Roy Jenkins, which resulted in the immediate defeat of the Labour Government, but that was in different circumstances. I believe that the Chancellor is heading for a large surplus. It is the relationship between taxation and expenditure and the balance between the two which are important, and not simply what the Chancellor did last time on taxation. When one looks at that balance, one sees that there was a massive surplus. I do not believe that it is convincing to say that the tax cuts in the last Budget were too great.

Another related problem is that I am puzzled because my right hon. Friend is fond of repeating that he has only one weapon with which to deal with the problems of the economy—that of short-term interest rates. He does himself less than justice. Indeed, I detected some slight change of emphasis even this afternoon. Clearly, the use of short-term interest rates occurs against the background of the fiscal policy and stance which he has established. It is true that, under a Conservative Government, that changes only once a year, in contrast with the previous Labour Government. None the less, it is a weapon of great importance in managing the economy. I hesitate to use a corny analogy, but I do not agree that the Chancellor is using only one golf club; he is using a fiscal driver and putting with interest rates. That is a sensible way of dealing with these matters.

The Chancellor's fiscal stance, which he repeated this afternoon and gave the Committee in evidence, is tight, and that is extremely important. It also has relevance to what he can do eventually when we have the latest figures for the next Budget. If he were simply to offset the effect of fiscal drag in the Budget, there would be a tight fiscal stance. If he were not to give any reductions, it would be a significant tightening. My present feeling is that a choice between those two rather than a further relaxation would be right, because it is important that the fiscal policy should reinforce the operation of what the Chancellor is inclined to call his monetary policy but what is more accurately called his interest policy.

From the Autumn Statement and the caveats which are summarised in the Select Committee report, it seems that the Chancellor remains balanced on the tightrope. There is some equilibrium. Now it is important that we wait to see what effect interest rate increases have when they have worked their way fully through to the level of consumption and consuming expenditure—against a background where, clearly, the increase in mortgage rates will have considerable importance.

We debate these matters in different circumstances from those which existed a few years ago. For many years we had negative real interest rates, but now we have positive ones. Despite that, we have seen a remarkable fall in the personal savings ratio, which gives cause for anxiety. I hope that the Chancellor will do something to rectify that in his next Budget. Above all, we now have a completely different policy stance, as, instead of having a public sector borrowing requirement, we now have public sector debt repayment. That leads to the extraordinary jargon, which the report mentions—that we now have a policy not only of full funding of the deficit but of "full unfunding" of the repayment.

Given the overall position, we can reasonably say that the picture in the Autumn Statement, with massive additional resources for public expenditure, leads us to believe that, in the Budget, we shall again see that the Chancellor can continue with his present policy. In particular, the slowing down of the rate of growth from a clearly unsustainable and unintended level will result in a significant improvement in the country's overall welfare.

5.32 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

We must always pay tribute to the right hon. Gentleman for Worthing (Mr. Higgins) for the work that his Committee does on the Autumn Statement. I agree with what he said about the problems of inadequate statistics and the fear of inadequate capacity for exports in our industries, but I disagree with him on the effects of tax cuts.

In his comments to the Financial Times, the Chancellor of the Exchequer said: No Government has done more to set out its policy and stick to it. I find myself something like the ghost at the feast. Like the right hon. Gentleman, I recall the famous Financial Statement and Budget Report 1980–81. It is dated 26 March 1980 and chronicled "Treasury Chambers, Nigel Lawson" on the first page. Clearly, he has responsibility for it. Page 16 states: Control of the money supply will over a period of years reduce the rate of inflation. Although I am proud to own this, I do not like trotting out the FSBR and I would not have dared to regurgitate it once again to the House, had the Chancellor not claimed: No Government has done more to set out its policy and stick to it. I automatically had to look to see what he said.

The Chancellor went on to say: It is to provide a firm basis for those expectations that the Government has announced its firm commitment to a progressive reduction in money supply growth. I understand that people can change their minds, but he cannot say that and at the same time say that the Government have done more than any other Government to set out their policy and stick to it. It is obvious that the Government have not done that. They set out their policy and immediately set about not sticking to it. Those are problems that the Chancellor must find some way of living with.

In the famous Financial Times interview of 3 January, the Chancellor said: As for the Budget, I have no regrets whatever. The balance of payments forecast in the FSBR this year was £4 billion. Past forecasts allow for an error of 3 per cent. It is right to allow for some error. One cannot be too precise when talking about £4 billion. The Treasury is generous enough to allow itself to be out. Three per cent. of £4 billion amounts to £120 million, so the Chancellor assumed that there might be a balance of payments deficit not of £4 billion, but of £4,120 million. We now know that it was £14 billion. That is unbelievable. We must first ask ourselves what has happened to the Treasury. Can we believe that the Chancellor has no regrets about forecasting a £4 billion deficit? Can we believe that if, at the time of the Budget, he had anticipated not £4 billion but £14 billion, we would have had exactly the same Budget? Of course not.

Why, then, has the Chancellor been so humiliated by his forecast? We know that he has been hoist by his own petard and blown up by the device that he primed. He allowed our economic statistics to decline, he took a conscious decision to downgrade their importance, and he and the country have paid an exorbitant price for that folly. The Budget was completely misconceived because of that.

Although Chancellors invariably scoff at statistics—I have heard them all on this—they all make use of them. How else can they arrive at their Budget judgement? Is it by intuition, or by feel? I should be terrified if I thought that they relied exclusively on that. Of course they cannot.

Dr. Bray

The Chancellor was smirking when my right hon. Friend gave the errors, which are confusing in their presentation. To take the Chancellor's interpretation, the forecast balance of payments deficit in 1988 was £4 billion and the error was £3 billion which is a long way short of the actual error. The right hon. Member for Worthing (Mr. Higgins) should not imagine that the Treasury forecast bears much relationship to the model. The model publication has been delayed. It was promised for yesterday, it had not been delivered when the Chancellor rose to speak and I do not know whether it has now been delivered.

Mr. Sheldon

I am sure that my hon. Friend will make his own comments, and his views on statistics are well known and important.

Statistics are not the only guide, but they are an important one, and the Chancellor should have learnt an essential lesson. How has he reacted to the £14 billion? Market forces would have led to the falling of the pound. He has reacted by an interventionist policy not to help but to harm British industry. At the time of the Budget, the pound stood at DM3.07 and now it is at DM3.22, and the index of sterling against other currencies is higher now. So once again it is cheaper to import and harder to export. So much then for manufacturing industry. The Government have not considered the matter according to that sector of our economy, as they should.

As a result of that folly we have had a consumer boom. The euphoria of a rising standard of living has given way within months to the misery of a declining one. The Chancellor of the Exchequer has reduced taxes and put up interest rates all in the same year. He did not even have the excuse of the need to win a general election.

There is one lesson—not a very difficult one—that the right hon. Gentleman might have picked up from Lord Keynes on demand management. One does not reduce taxes on the rich in the middle of a spending boom. Those people who said that the tax cuts were smaller in economic terms overlooked the psychological effects of a Budget. There was a combination of tax cuts with high house prices, which led to a euphoria. It was a created euphoria activated by the Chancellor. In his Budget statement, he said: We have thus secured an enviable, virtuous circle in public finance: lower borrowing and lower tax rates create both the scope and the incentive for the private sector to expand."—[Official Report, 15 March 1988; Vol. 129, c. 996.] That is what it was intended for. Lower borrowing and lower taxes create both the scope and incentive for the private sector to expand. He encouraged the private sector and it went ahead and expanded; it spent and spent. That was the result of the Budget.

Our problems today concern essentially manufacturing industry. We do not trade very much internationally in services, but we trade enormously in manufactured products. If we were a country like Switzerland, we could manage with a large service sector, but we have 56 million people to look after and we cannot do that unless we sell a large part of our goods as well as our services. The Chancellor of the Exchequer, with his City background, has not paid sufficient attention to that.

Those 56 million people depend on the large hinterland of a flourishing, productive economy. The Chancellor has taken pride in the financial strength of Britain arising from the North sea oil economy, which has assisted in the move from a manufacturing economy to a rentier economy in which we live off the overseas investments. There is a need for training and education and a need to avoid the harmful effects of stop-go. The danger for much of our industry is that there has not been that much of a go. There has been a very large stop, and there is a very large stop now.

I make no apology when I speak on these matters for referring to my constituency, which lost 30 per cent. of its industry in those fateful years 1979–81. It was a prosperous town with many small and medium-sized firms, the largest of which employed 500 people. We lost one third of those companies in those two years. There was a wide range of medium-tech industries such as one finds in every country of the world, including Japan, the United States and Germany. Those industries were destroyed. When we come to advance, those companies will not be there so we will have some capacity constraints. Those companies were ruined by the combination of 17 per cent. interest rates and the $2.40 pound. The 17 per cent. interest rates finished them off at home and the $2.40 pound made exports almost impossible and resulted in imports.

Those are the lessons that we must learn. We must never find ourselves in that situation again, so we must re-create a larger manufacturing economy. No incentives are too great to restore that. If the Chancellor of the Exchequer ever has money to spread around, this is where is should go.

When a manufacturing company buys a machine tool, it does not just obtain a new piece of equipment: it gets productivity, a growth in skills to operate the new machinery and a modernisation of the factory and workplace, and it helps to produce the kind of Britain that we shall need if we are to regain our place as an important manufacturing country. If the Chancellor of the Exchequer ever has money to spend, there is no better way to spend it.

It is ludicrous that capital allowances are 25 per cent. Each year, therefore, the depreciation allowed is one quarter of the reducing capital value. That is clearly absurd. The profit of the distributor selling the machinery is greater than that 25 per cent. so, when he comes to sell that new grummet press, for example, even after a week, he will not get back the amount of the depreciation that he is allowed. We therefore have not an incentive, but a built-in disincentive, to capital modernisation. The best investment decisions are made on the basis of the need for machinery, but one must never discount the incentive of a product made easier to purchase through sensible tax policies, providing benefits which can be used to the advantage of the company, the employee, the industry and the nation.

We must ask how the Chancellor is dealing with the consumer boom. He declined any control on credit, on what I consider the hilarious foundation that it would not be fair to those with little financial knowledge because others would easily circumvent it and those with little financial knowledge would be left to carry the burden. That is to suggest that the Government are a paragon of fairness and equality. In the long run, I agree that there would be ways around them, but credit controls are not required for the long run. Action in areas such as hire purchase, banks and credit cards was required and could have been taken. Such a short-term measure would have had some immediate effect—largely psychological, but none the worse for that.

High interest rates hurt industry, which finds itself competing with the banks who can now offer a better return than many investments in manufacturing industry. If we know that it will cost us 15 or 16 per cent. or more, that is obviously a disincentive to spend money on investment in machinery, but that does not affect credit card purchasers who finance APRs approaching 30 per cent. and are oblivious to the 1 or 2 per cent. above that.

Interest rates are feeding into the retail prices index through mortgage payments. There is an inflationary chain. High interest rates lead to RPI rises, which lead to wage demands, which in turn lead to what the Chancellor always forswore—exhortation. That is what we have today. There was a time when the Government said that wage demands were nothing to do with them. They said that they would control the money supply and, if firms allowed excessive wage demands, they would go out of business. It is pitiable that we now see the Government, who are responsible for wage demands, pleading with industry not to grant them.

The Chancellor of the Exchequer must bear in mind the fact that, although mortgage interest is included in the RPI, house prices are not. The enormous rise in house prices is one element of inflation; there is no question about that. It affects everyone who buys a house with a mortgage. It affects everyone other than those who have paid cash outright or who have redeemed their mortgages. The Prime Minister knew the inflationary effects of her policies when she decided to buy her own house in Dulwich. She said that, if she had not bought it then, she would have had to move 100 miles out, because she could see that house prices were going to rise. That is an important element in inflation and it is not measured by the RPI, for reasons that we know and understand.

The right hon. Member for Shropshire, North (Mr. Biffen) said in 1980 that we were in for three years of unparallelled austerity". How right he was. I hope that we are not in for even a year of that. We paid the price then and the Government should have learned the lesson. If that lesson has to be learned again, the Government will rightly be accused of the damage that they have done to the country that we were sent here to serve.

5.47 pm

Mr. John Townend (Bridlington)

I found the speech of the hon. Member for Dunfermline, East (Mr. Brown) illuminating, to say the least, because it confirmed what I and many of my hon. Friends thought: the Labour party is devoid of any policy at all. When asked twice by the Chancellor of the Exchequer how much the Labour party would increase spending if it were in office, he could not provide an answer. When asked twice by the Chancellor about the increase in the basic rate of taxation, he was unable or unwilling to answer. The only policy that he outlined was that there would be an increase in the higher rate of taxation. The Labour party is either devoid of policy or its policy is so out of this world that it is frightened that the ordinary man in the street will know what to expect if a Labour Government were elected.

I should like to spend a few minutes explaining to the House why, as a member of the Treasury and Civil Service Select Committee, I could not vote for its report. I objected to it on a number of matters of principle, particularly paragraphs 18 to 21, in which the Committee said that, when considering public sector claims on public resources, transfer payments should be excluded. That is nonsense. What difference is there on the effect on the economy of an increase in the old age pension and an increase in nurses' pay?

If transfer payments were excluded, the percentage of expenditure to GDP would fall and there would be pressure for increased Government spending. In paragraph 30 the Select Committee recommends that there should be more information about differential price increases. Again, I think that that is unnecessary. It would undermine the cash planning process and would be a first move back to planning expenditure on a volume basis, a practice which was used under the previous Labour Government when spending was completely out of control.

My final objection to the report is the recommendation that the Government should publish annual national and public sector balance sheets. That would be very expensive and time-consuming for the Treasury and there would be enormous problems in valuation. For example, the Chief Secretary to the Treasury asked the Committee, how we would assess the present market value of a prison. Furthermore, there would be problems with depreciation.

This year's Autumn Statement paints a picture of a sound economy which has some short-term problems due to the unsustainable level of growth which has resulted in the resumption of inflationary pressure and a rise in the balance of payments deficit. I do not believe that the Chancellor's Budget judgment was in any way responsible for those short-term problems. With a public sector debt repayment now forecast at £9.8 billion, as my right hon. Friend the Member for Worthing (Mr. Higgins) said, we cannot describe the fiscal stance as slack. With that size of surplus, the tax cuts were completely justified.

It is always easy to be wise after the event, and the Chancellor has already admitted that he and other financial leaders in the industrial world over-estimated the dangers to the world economy following black Monday and the stock market crash. To prevent a worldwide collapse, they slackened the monetary stance and interest rates around the world fell. The world economy proved far more resilient than anyone imagined. In retrospect, interest rates were undoubtedly kept too low and growth went ahead at an unexpected level. That was particularly so in the United Kingdom where there was a large increase in private sector borrowing and private investment.

We are facing a much less serious problem than we would have faced if there had been a slump equivalent to that in the 1930s. Therefore, I stongly support the Government's commitment to reduce inflation. The present high levels of interest rates are necessary. However, I do not believe that they will be enough on their own. They must be backed, if possible, by wage increases in the private sector that do not put up unit labour costs more than the very minimum so that our exports remain competitive. If that is to be achieved, the Government must set an example in the public sector wage negotiations this year. A large proportion of wage increases in manufacturing industry is recouped by increases in productivity, but that is more difficult to achieve in the service sector and practically impossible in the public sector. Indeed, it rarely happens.

This year the Government should do everything possible to keep public sector pay increases within the level of inflation. There have been large increases in recent years for the police, firemen, teachers, nurses and the armed forces. This year the Government must be prepared to accept short-term unpopularity and stand firm.

Everyone accepts that the balance of payments deficit is too great and it cannot be ignored. However, there is a difference between our present deficit and other deficits since the war. In the past a balance of payments deficit has always been mirrored by a public sector deficit, and that is the position in America. At the moment we have a public sector surplus. Our trade deficit is completely a private sector phenomenon. It is the result of private sector investment—which will help us to increase productivity and produce exports in the future—private sector consumer borrowing and a rundown in private savings. There is a limit to the amount that the private sector is willing or able to borrow and we can spend our savings only once. Therefore, over a period, the deficit should rectify itself. However, it will persist for some time and the Government should take some action to try to increase the speed of its natural fall. I urged the Chancellor to take measures in the Budget to encourage savings. The Government should look at all the nations with which we have a significant trade deficit to see whether we have the same access to their markets that they have to ours. That should include not only trade in goods, but trade in services. The most glaring example is Japan. It has taken 20 years to get the Japanese to open their markets to Scotch whisky. During that time their exports of manufacturing goods have increased dramatically. It is still not possible for us to have complete access to Japan for our insurance industry, and South Korea still prevents the free sale of Scotch whisky. We need a tough, no-nonsense trade policy based on reciprocity.

Mr. Jim Cousins (Newcastle upon Tyne, Central)

In attempting to put those matters right the hon. Gentleman would not want to see a protectionist trade war which would inhibit Japanese external direct investment into regions like mine. Such investment has been significant in my area over the past five years. It must be extremely important to avoid a return to competitive protectionism. In that respect, his remarks are extremely unhelpful to the development of patterns in the world economy that assist in solving the problems to which he has drawn attention.

Mr. Townend

I am sure that my hon. Friends will he intrigued to know that there has been such an increase in investment in the hon. Gentleman's constituency, and I am sure we are all delighted about that. Obviously the investment environment attracts foreign investors. However, I do not think that what I have suggested would prevent that investment. We believe in free trade and open markets, but open markets must operate two ways. I believe that the Japanese only appreciate strength in negotiations.

I congratulate the Government on their public expenditure forecasts in the Autumn Statement. It has been a long time since expenditure in a current year was expected to be more than £3 billion less than anticipated. That shows that we have Ministers in the Treasury who believe in good housekeeping.

Mr. Robert Sheldon

I thought that the hon. Gentleman said that he voted against the report. This is very important. Having looked at the report, I cannot see that he voted against it.

Mr. Townend

I want to make it clear that I was giving reasons why I could not vote for the report.

The planning total for next year will stay the same as planned and the Government deserve to be congratulated on that. However, in the two following years the Government intend to loosen their grip a little and increase spending by a further 3 per cent. each year.

Having abandoned their policy of keeping public expenditure level in real terms, the Government have set themselves a target of reducing public expenditure as a percentage of gross domestic product. Here again, they are to be congratulated on their success in bringing the figure down from 46.75 per cent. to 39.75 per cent. this year. However, it is worth putting that achievement into perpective. Under Harold Wilson's Government in 1964–65, public expenditure as a percentage of GDP was only 36 per cent. I often find it surprising to hear Opposition Members claim that we are spending far too little when we are still spending more than they did under Harold Wilson. I was a little disappointed, when I raised that matter with the Chief Secretary to the Treasury in the Select Committee, that he did not accept that 36 per cent. should be a target for the future.

I am worried that the impetus to increase spending might coincide with a period when economic growth is much slower as we try to level our balance of payments. Therefore, spending as a proportion of GDP will clearly rise.

I believe that the Government's policy is working. High interest rates are having an effect. The throttle is coming off the housing market, and once we get over the mad Christmas spend, consumer spending will drop. Provided that wage settlements do not explode, the economy should have a soft landing.

Government spending must be kept under control, but with a Budget surplus, I see no reason why, in his next Budget, the Chancellor should not continue repaying the national debt, while continuing his successful supply side policy of reducing taxation—proceeding to his ultimate aim of a standard tax rate of 20 per cent.

5.59 pm

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

This afternoon, the Prime Minister spoke of the Chancellor of the Exchequer's absolute priority. I am sorry to see the Chancellor being called away at the very moment that I refer to his Prime Minister. I wonder about the reason. Perhaps she has summoned him. I hope that the Chief Secretary to the Treasury will report my comments to him.

The right hon. Lady said that the Chancellor's absolute priority is to control inflation. As that is what she said, no doubt that is what his absolute priority will be. There was a stage when the Chancellor flirted with policies different from those of the Prime Minister, but that was not an entirely successful experiment. I do not know whether she is in the habit of reiterating strongly to him the way that she wants things done, but at the moment the right hon. Lady and the Chancellor are working to meet the same priority.

The Chancellor of the Exchequer reminds one of a doctor searching through a medicine cupboard, trying some medicines and throwing others away as being unusable. At the end of that long process, the Chancellor has lighted on one and says, "This medicine will work. If it doesn't work, you can take more of it. If it still doesn't work, you can take still more." The medicine is short-term interest rates.

It is odd that the Chancellor is still attending to the same disease of inflation. He has run out of all the excuses that he was previously able to give for inflation's continuance. He can no longer say that world commodity prices are causing inflation, as was the case some years ago. Neither can he blame over-mighty, over-powerful trade unions. He cannot blame an outgoing Labour Government for the rate of inflation. It is a little difficult to blame even the Conservative Government who preceded the last Labour Government, which the present Administration often do. Blaming the Heath Government is a little difficult for them to do at this distance.

Mr. Nigel Griffiths (Edinburgh, South)

Certainly he cannot blame the last Labour Government.

Mr. Beith

The Chancellor cannot blame the period when my hon. Friends ensured that a Labour Government reduced inflation from 21 per cent. to 7 per cent. Neither can he use the monetary supply targets, because he abandoned most of them. He cannot blame the public sector deficit, because the Government have achieved a public sector surplus.

In years gone by, I listened to many sermons from Conservative Members, including the Prime Minister, when they said that once we rid ourselves of the public sector deficit, there would be no inflation. The Conservatives have now done that—they have cracked it. They have achieved a public sector surplus, but still there is inflation.

The Government contributed to that inflation with the Chancellor's last Budget judgments. I dissent from the right hon. Member for Worthing (Mr. Higgins) on this point. Where he is wrong about the Budget tax cuts is not in his analysis that, with hindsight, they may be seen as entirely acceptable in terms of the amount of revenue needed. One could even argue that they were insufficient in relation to revenue, because of the size of the surplus. But they had the effect of generating inflationary expectations at a particular time. In making that argument, I say also that that problem will not be solved by reimposing the tax levels that were earlier reduced. Those cuts had the one-off effect of giving people the knowledge that they would shortly have more money in their wage packets, encouraging them to have more credit at a time of considerable expansion in the credit market. That one-off effect undoubtedly led to overheating and contributed to inflation.

The Government also created unnecessary public sector price increases, which have added to inflation. The remedy that the Government choose, of higher short-term interest rates, increases inflation still further. No one can really accept the Chancellor's claim that one can consider inflation without reference to mortgage interest rates, because they are such a potent factor in inflation for home owners throughout the country.

Despite the Chancellor's prophesies and forecasts, the tables identified by the Select Committee show that the goal of zero inflation never gets nearer. It is always three years away that inflation is predicted to fall to 3 per cent. How many more years will it be before it falls to zero? The Chancellor has never cracked that one. He is not even believed by his fellow Ministers. In a statement the other day after a meeting of a Committee of the House, the Chancellor's right hon. Friend the Secretary of State for Energy reiterated a forecast of £40 billion outturn of electricity industry investment. That figure assumes a rate of inflation of 8 per cent. That has been reiterated today on the Secretary of State's behalf. It is possible to reinterpret those figures to mean that inflation is only 5 per cent. However, it is impossible to get it down to 3 per cent., let alone zero. Ministers are acting on assumptions about what will happen to inflation that are wholly different from the rosy ones made by the Chancellor of the Exchequer.

Let us consider the short-term interest rates, and examine whether their use will achieve the Chancellor's objective. From whatever standpoint one considers it, the Select Committee's report poses questions about the assumptions on which the Chancellor bases his strategy. One is whether credit is all that sensitive to interest rates. The burden of the letter that is alleged to have been sent by the Governor of the Bank of England to the Chancellor is that it is not, and that if the Chancellor engages in policies of the kind he adopted for his last Budget and creates further inflationary expectations, interest rates will not by themselves stop that process.

As well as being an instrument of limited effectiveness, higher interest rates are counter-productive. They have an adverse effect on domestic inflation because of their influence on mortgage repayments, and also a serious effect on industrial competitiveness and the balance of payments, by pricing British goods upwards in foreign markets.

One is bound to question what will happen eventually if the market gets round to dealing with the curious fact that mortgage interest operates on a short-term basis, whereas borrowing money to buy a house is in reality a long-term commitment. How long will that situation continue? How long will the competitive mortgage market continue offering only short-term interest rates in house purchase finance? There is no obvious reason why it should do so, other than the traditional pattern of building society borrowing and lending policies.

From the home owners' point of view, I hope that the market will address that question and look for ways of relating home ownership to a long-term interest rate, which could be much lower—in the region of 9 per cent. Home owners would be much better off, but the Chancellor would be left naked and with no clothes at all. Short-term interest rates would cease to be available to him as his one instrument for managing the economy.

In addressing the effects of that instrument on the balance of payments, I am led to comment on our balance of payments deficit itself. The forecast trade deficit of £4 billion turned out to be in the region of £14 billion, and we must question the Government's assumptions about what will happen next. They claim that the trade deficit will be tackled by depressing domestic demand through high interest rates, so that industry will have spare capacity, and that that spare capacity will immediately be diverted to exporting more goods. The Government argue that the resulting increased price in foreign markets will be entirely offset by released capacity.

I can tell the Chief Secretary to the Treasury that I do not know many people who believe that things will happen in that way. That is not a political criticism of the Government but an attempt at making an objective assessment of the viability of such a strategy. It cannot be guaranteed that excess capacity can easily be switched to export production, or that the size of the trading sector switched will be big enough to make a significant difference to our trade deficit.

If the Government's assumptions do not hold, the United Kingdom trade deficit will remain dangerously high, and overseas confidence will be tested. At present, it is attractive to put money into this country in sterling on the basis of current high interest rates, but if confidence is lost, the crisis will come. The Chancellor blames the statistics for a lot of this and says that they are all wrong. The Select Committee, too, was fairly critical on that point, but everyone in these arguments seems to be guilty of misusing statistics. The Chancellor increasingly talks as if the retail prices index already excluded mortgage interest rates. He is in danger of getting into the position that we got into on employment statistics, where nobody any longer believes the Government's unemployment figures because they have been changed so many times. It is in the general interest that we should have generally accepted statistics so that we can talk meaningfully about unemployment, inflation and public expenditure levels. When the Government increase health expenditure by 1.7 per cent. they should stop going around saying that they have increased it by 4.5 per cent., or at least they should explain rather more clearly that a lot of that increase is accounted for by projected savings in efficiency and by changes in the balance sheet of public assets by the sale of the health authority's present assets, to which the Select Committee attached some importance.

I am bound to ask the Chief Secretary again why he believes that public expenditure should decline as a proportion of gross domestic product. What is the ultimate objective of public expenditure declining year by year? That is the yardstick to which he has been instructed to work. I tried to find out during the sittings of the Select Committee what was the ultimate objective. Was it zero or was it some accepted plateau? He said that he did not think that there was a plateau. Where are we heading? Surely the argument about public expenditure is an argument about its merits, associated with an argument about what level might be unreasonable for the taxpayer or the economy to bear.

We now have a substantial public sector surplus and a situation in which industry can see where the serious gaps in public expenditure are causing difficulties. It does not seem reasonable to argue that we should go on reducing public expenditure year by year. The Prime Minister's argument used to be that public expenditure was crowding out everything else and causing inflation, thus having a harmful effect on the economy. Many businesses would now like to see some public expenditure crowding in. Certainly many businesses in London would like to see greater public investment in London's public transport system so that their staff can travel to work. In other parts of the country, industry would like to see some public expenditure on the infrastructure on which it depends—for example, links from the Channel tunnel to the north of England and Scotland. Businesses, usually pretty sceptical about unnecessary public expenditure, are increasingly worried that if some expenditure does not take place they will not be able to compete.

There is a growing sense that in some areas of public expenditure we are getting into public squalor. It is difficult to relate that to a target of constantly decreasing public spending as a proportion of what we as a nation can produce. Therefore, I invite the Chief Secretary to tell us when he replies what is the purpose of it all.

As to the strategy that the Chancellor should adopt, we would argue that there are a number of things that he could do in the Budget which would reduce his dependence on interest rates as the sole measure and deal with some of the other matters that I have described. He should do more about savings, as I have argued in all our previous economic debates and, indeed, on the occasions when he has introduced measures that were supposed to encourage savings, but the Chancellor has had such a narrow conception.

Take the greatly trumpeted personal equity plans which were introduced two Budgets ago which were never cast in such a way that they would encourage a wider range of people to invest in industry. All the tax reliefs that they offered benefited mainly those with an existing portfolio who had not used up their other tax reliefs. Unless he gives some front-ended tax relief on the PEP schemes and extends their scope in some way, he will not attract a wider range of people into saving, and particularly into saving in industry. Unless he does give some reason for savings in industry, he will not get the level playing field either.

Mr. Budgen

Is there any sign that if there were a distortion in the tax system in favour of some form of saving, say in a particular kind of share of or something like that, it would increase overall saving, or would it merely make those favoured forms of saving more attractive and bump up their market value?

Mr. Beith

There are two options open to the Government at the moment. One is to remove all tax incentives which distort the savings market. I know that that is what the hon. Gentleman would favour. That would lead him to do what I know the Prime Minister does not want to do, which is to remove mortgage interest tax relief, which attracts savings into housing. The other is to try to balance the picture by ensuring that savings in industry, and certainly those on a fairly limited scale affecting a wider range of people, can be at least as attractive as investing in the bricks and mortar of a home. Some offsetting of existing distortions for which there are other justifications seems reasonable in those circumstances unless the Government are to change tack entirely and go for the complete removal of all tax incentives that affect saving.

The other part of the hon. Gentleman's question is perfectly fair. Will it increase overall savings? More sensibly directed incentives to savings could increase overall saving by attracting people who are not now saving. Clearly there is bound to be some shifting, but there could be a wider effect. But to do that, it would also be necessary to change the Government's approach to things such as targeted benefits. If the Chancellor goes on saying, and Ministers go on ensuring, that to have a small amount of personal savings precludes one from any form of benefit after retirement, a culture against saving is built up. That is one of the current disincentives to saving about which the Government should be more worried.

I must not deal so deeply with each individual item that I keep other hon. Members out of the debate. The Chancellor should also take some informal steps to cool the credit explosion. Formal credit controls are not an attractive way to go. They would be extremely unfair and it would be a pity to have to achieve a reduction of the overall level of credit by penalising those most dependent on credit and least able to look for alternatives. That is why I said previously that the Bank of England and the Chancellor should start to call in and talk to the credit institutions and ask them what they are going to do. They should ask them to cool off the vast pressure of ludicrous letters that go out through computer mailings trying to induce people to engage in credit that they cannot afford. The possibility that the alternative would be fairly uncomfortable credit controls might concentrate the minds of those involved.

The Chancellor should drop the public sector price increases, such as those for electricity—they are demonstrably not required for the electricity industry's investment programme which has been so hugely overstated. He should make prudent use of the fiscal surplus for investment in those areas in which he could increase industry's competitiveness. He should take early steps to get into the exchange rate mechanism of the EMS to give us some stability and that downward pressure on inflation which is the Prime Minister's reason for not joining the EMS. She does not want to be tied into German policies which bear down heavily on inflation. Why she does not is rather difficult to understand, but that would be the logical step to take.

Then we come to what should be done about personal taxation. The Chancellor is presented with an opportunity in his next Budget to sort out some of the mess of national insurance contributions and taxation for the low paid. He would earn some respect if he made some serious tax reforms in that area, given the freedom that the surplus gives him which previous Chancellors, and indeed the Government in previous Budgets, may not have felt they had. There would be scope for changes in that area which would not represent a massive tax cut programme of the kind that would have damaging economic consequences. It is that combination of greater prudence and a greater sense of social justice which many British people, including many who supported the Conservative party at the previous election, feel is desperately needed.

I have tried to set out positive ways in which there could be an alternative to a strategy which is based on some dangerous assumptions, and I commend them to the House.

6.18 pm

Sir Peter Hordern (Horsham)

The debate opened with my right hon. Friend the Chancellor agreeing that the published statistics were deficient. As the debate went on it was clear that the statistics of the hon. Member for Dunfermline, East (Mr Brown) were also deficient.

The hon. Gentleman said that he would outline the Labour party's policies for dealing with inflation and other important matters. I know that they were not spelt out overtly, but both he and the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) alluded to them, I think unconsciously. The hon. Gentleman said that it was important to act directly on prices. I think that I know exactly what the Opposition would do if they were re-elected. They would try to reactivate Mr. Solomon Binding. The hon. Member for Berwick-upon-Tweed (Mr. Beith) said that it was not necessary to go in for a full-scale prices and incomes policy; all that was necessary was for the Governor of the Bank of England to call in the leaders of the credit institutions and have a word with them. So Liberals would not go in for such a full-blooded affair as that to which the Opposition are still wedded in terms of a prices and incomes policy.

Two principal concerns emerge from the Autumn Statement—at least, they concern Conservative Members. The first is inflation, the second the balance of payments. Of those, the first is by far the more important. The solution to the first is the key to solving the second. I hope that my right hon. Friend the Chancellor is right and that the rate of inflation will peak in the next few months before falling to lower levels. One thing is certain: high interest rates are an essential weapon in combating inflation. In contrast with what other hon. Members think, I do not think that there is an alternative in the form of rationing credit, not because I believe that the techniques of doing that would be inadequate or even that it might be unfair as between one person who received credit and another.

I say that it would be impractical because London is now a world financial centre whose existence depends upon the free transfer and flow of funds between one part of the world and another. It would not be possible to mount any effective system of controlling credit in one country, such as the United Kingdom, without giving up the advantage that we have as a financial centre. It does not make sense to throw out the whole trading system in order to impose controls which, in any case, would not work.

It is right to distinguish between this and previous inflationary bouts, which those who have been in this place for some time will well recognise. First, I refer to the enormous surplus in the public sector. No one can get away from that—it is a signal achievement, for which my right hon. Friend is responsible. It is not just the sale of assets in the public sector which has achieved this effect; it would have happened in any event. There would have been a surplus of £4 billion without the sale of public sector assets.

Nor have corporations and businesses in any way failed. They have a large savings ratio; they are investing at record levels; and, as my right hon. Friend said earlier, their earnings on capital are at the highest level for about 20 years. The whole problem appears to reside in the private sector, and it is on that that we must concentrate our attention. This is what distinguishes our position from that of the United States, where there is a large public sector deficit. The trick is to encourage savings in the private sector. High interest rates will certainly have that effect if they are high enough, but this is an opportunity to broaden the entire level of savings.

I do not accept, as the Opposition do, that it was wrong to reduce taxation in the last Budget—how much further does one have to reduce the national debt? It is extraordinary that the gross debt interest is forecast to fall from £17.75 billion this year to £15.5 billion in 1991–2. It is clear that those who want to keep tax rates high want to do so not for economic reasons but for some sort of moral reasons. The people, apparently, may not be trusted to act responsibly with their own money so it must be removed from them. That is entirely in line with Socialist policy: people are not allowed to be entrusted with their money —a form of the nanny state. I hope that my hon. Friends will agree that it should be no part of Conservative policy to take more revenue than is strictly necessary to pay the state's expenditure.

There is another argument against higher tax rates. The right hon. Member for Ashton-under-Lyne slid pretty quickly over the fact that he was responsible for high rates. When he was Financial Secretary in the last Labour Government tax rates were 92 per cent. So we should not take any lectures from him about taxation levels—

Mr. John Battle (Leeds, West)

How would the hon. Gentleman respond to the answer given to the hon. Member for Hornchurch (Mr. Squire) this week, which showed that taxation, including direct and indirect taxation, is now higher under this Government than it was in 1979?

Sir Peter Hordern

I should be delighted to explain. The Opposition cannot grasp that earnings in this country have appreciated considerably, so people are vastly better off. Of course they have gone through higher rates of taxation, but they are conspicuously better off than they were a few years ago; statistics prove that.

I wonder whether it is right to concentrate on savings by lending money to the Government to reduce the national debt, or to concentrate on house purchase, on which the tax concessions operate now. There has been a revolution—the formation of a property-owning democrary—but that is confined to the home-owning democracy. In virtually every area, the Government have taken power from the state, from local authorities and from institutional landlords and handed it over to the people. But one great institution remains—the investing institutions, which are mainly pension funds. Their beneficiaries are seldom, if ever, consulted.

One reason why the savings ratio has fallen so low is that companies have waived their contribution in recent times because of the pension funds' good performance. Employees are far too dependent on their employers for their retirement benefits. We should now consider spreading the property-owning democracy still further.

Mr. Budgen

Is that really true? Surely the problem about the dramatic fall in the savings ratio is the vast increase in borrowing, not any great reduction in saving. The savings ratio appears to be a figure based only on savings, but is it not a net figure?

Sir Peter Hordern

I picked this out of the Autumn Statement—I do not have the reference now—but one of the reasons for the fall in savings is the fact that institutional investment has fallen, from employers' contributions—

Mr. Cousins

rose—

Sir Peter Hordern

I should like to give way, but many other hon. Members want to speak.

I propose that we spread the property-owning democracy much further and allow mortgage tax relief to apply to all who save additional sums up to the same level of £30,000. I mean this as an alternative for those who do not have mortgages on their homes. There are many examples of people being unable to buy homes because they are too expensive, or because of circumstances peculiar to them, but the encouragement of savings is necessary at present, and would be good in any event. It would also be helpful to have savings concessions in the same way for elderly people who have paid off their mortgages. In many respects—home ownership, education, trade union rights—we have broken institutional power and returned it to the people. Pensions, too, are an important institution, and they are far too dependent on short-term performance. Our democracy would be much healthier if ownership were spread to the roots and we could get away from the dependency culture that institutional pensions breed.

There would have to be additional investment. It would not be possible to allow people to switch from existing investments to the tax relief scheme, and investments would have to be held in private individuals' names. These investments would not be managed for them but would be held in shares and units in equities which could be bought or sold. That would be particularly apt now. It would help to enfranchise the investment market.

Bank borrowing by the private sector amounted to £49.8 billion in the first three quarters of 1988—more than the whole of bank borrowing in 1987 and virtually double that in 1985. We must try to achieve a more permanent and lasting shift into savings than is possible through the building societies or even by lending money to the Government.

I wish that I felt that all that is necessary in the control of inflation is high interest rates. I felt in 1988—and I still feel strongly—that to control inflation our currency should be closely linked with the European currencies, particularly the deutschemark. The comparison is not exact, but one has only to look at the effect of coupling the Hong Kong dollar with the United states dollar. If that had not taken place, the Hong Kong dollar would have fallen through the floor. The rate of interest in Hong Kong is lower now than it is in the United States. That direct link has done a great deal to stabilise the position in Hong Kong.

I do not suggest that we are in a similar position, but to link our currency directly with a strong currency, such as the deutschmark—since Germany's inflation rate is 2 to 3 per cent. and interest rates are 5 per cent.—would be of immense benefit to this country. I do not refer to any political advantage that might be obtained by those means. I believe that it is a practical weapon that could be used to combat inflation. The use of that weapon has already been far too long delayed. We need an external discipline as well as the interest rate weapon to deal with inflation.

The argument has been conducted so far in altogether too academic terms. The instrument for keeping sterling tied to the deutschmark would still be interest rates. Industry and business would know that the direct result of allowing wages to increase to an uncompetitive level would be higher interest rates. They would know that for certain; they would not have to guess what the Chancellor intended to do.

Practical experience, as opposed to theory, suggests that existing investments overseas have to be hedged now. People's perception of the strength or weakness of a currency is usually the same. There is far more activity now in the foreign exchange markets than there would be if there were a formal link between sterling and the deutschmark and the European Community as a whole. When people—usually academics—complain that that would place an impossible strain on foreign exchange and that the Bank of England could not intervene with sufficient reserves, the truth is that if there were a formal link between sterling and the deutschmark there would be nothing like the amount of business being done as is being done now.

As for setting up a central bank within the European Community, I think that my right hon. Friend the Prime Minister was absolutely right to deplore the Socialist idea that a central bank must be established. However, if we were part of the European monetary system, that would be the effect. I do not believe that there needs to be a formal institution, set up by the Commission or the Council of Ministers. However, the practical effect of the United Kingdom joining the EMS would be that funds would be drawn to the strongest currency. It would not be long before, for the sake of practical convenience, European Community bankers combined to form a suitable means of conducting monetary and economic policy, which would turn out to be very much like a central bank. Progress towards monetary union will be made within the EEC. It is very much better that we should be part of that process than outside it. What on earth are we afraid of? The objections to the United Kingdom joining the EMS have been concocted by lawyers. They say, "Oh, you can't have that. Look at the small print. Look at the danger of having a central bank." With respect to my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), it is a lawyer's trick. Where would the Victorians have been if they had tried to start their industrial revolution with lawyers? It would never have got off the ground. We must have far more confidence in ourselves than now seems to be the case. We should join the European monetary system, and the sooner the better.

6.34 pm

Mr. Giles Radice (Durham, North)

I congratulate my hon. Friend the Member for Dunfermline, East (Mr. Brown) on his excellent speech, the third in a row. However, before he leaves the Chamber, I am afraid that I cannot similarly congratulate the Chancellor. His speech was a characteristic mixture of insouciance and complacency. He gave absolutely no sign that he is aware of any of the economic problems, or of the fact that the economy is seriously out of balance.

I congratulate the right hon. Member for Worthing (Mr. Higgins) on his skilful chairmanship of the Select Committee. We are a diverse bunch of people. He keeps us together very well, in the circumstances. I congratulate the right hon. Gentleman on assisting us to produce a valuable report for the House.

The Select Committee report reveals that the economy is now seriously out of balance in three interconnected ways. First, demand is still rising too fast; secondly, inflation is too high; thirdly, the current account is now in very substantial deficit.

On demand, it is ironic that, after a number of years in which our growth rate was behind that of our main competitors, the Select Committee should now be warning of too fast a growth rate and advocating action to restore balance. We all applaud economic growth: it makes possible increasing living standards, it brings down unemployment and, provided that the Government make available the necessary investment, it can lead to improvements in vital services. That is why I welcomed, when I spoke in the debate on 25 October, the fact that, since the deep and disastrous recession of 1980–81, the British economy has grown steadily throughout the 1980s.

I drew attention also to the welcome increase in labour productivity that has raised the productive potential of the British economy and therefore enabled the British economy to grow more quickly. Whereas it used to be said that we could grow at only two thirds the rate of our main competitors, it is safe to say now that we can probably grow at about the same rate, without running into balance of payments difficulties.

What, therefore, has gone wrong? The problem with the British economy is that the Chancellor failed to take control of the situation last spring, despite obvious signs —I do not agree with the right hon. Member for Worthing on this point—that the economy was growing too fast and in an unbalanced fashion. By March last year—I invite the right hon. Gentleman to look at press comment at the time, at the statistics and at what Opposition spokesmen said—our growth was not only faster than that of our main competitors but faster than our productive potential.

It is true that, after the consumption-led boom—the Government have been making great play of it—that began in 1986, investment has risen rapidly, but the Government never say that investment fell by 5 per cent. in 1980 or by 10 per cent. in 1981. So there is a considerable amount of catching up to do. Despite the recent large increases in investment, we are still investing only 18 per cent. of our gross national product, compared with Japan's 30 per cent. We have a long way to go.

The other difficulty is the regional imbalance in the British economy. When the southern economy is in danger of overheating, as it is now, the northern economy is only just warming up. It was when the economy was becoming over-stretched that the Chancellor introduced his tax-cutting Budget last March. I know that the Treasury has argued that the Budget had little effect on demand, but there is no doubt—I very much agree with what the hon. Member for Berwick-upon-Tweed (Mr. Beith) said on this point—about the psychological impact of the Chancellor's last Budget. It gave all the wrong signals. Add tax cuts to the record fall in the savings ratio, the massive credit expansion—triggered off by deregulation—the consumption boom and, last but not least, earnings rising faster than inflation, and we have all the makings of a dangerously overheated economy.

The Chancellor cannot say that he was not warned. Not only the Opposition alerted him to the dangers. A number of prominent economists, many City commentators and even the Bank of England were concerned but the Chancellor allowed his political obsession with tax cuts—almost his personal political manifesto—to overrule what should have been his priority as Chancellor—economic prudence. As the Select Committee report points out, the consequences of the Chancellor's gamble are now only too apparent. There is the rising inflation forecast by the Autumn Statement. Already, the OECD main economic indicators for December show that our inflation rate is the highest of the G7 countries.

When the Chancellor gave evidence to the Select Committee, he was pressed by the hon. Member for Berwick-upon-Tweed (Mr. Beith) to say whether the inflation rate would rise above 7 per cent. His answer was that we could make our own assessment. That was telling the Select Committee that he is expecting inflation to rise above 7 per cent. during 1989. That is a disturbing prospect, and there will certainly be great difficulties in getting it down.

Despite the Chancellor's remark to the Select Committee— the central purpose of the macro-economic policy is to get inflation under control"— the Select Committee remains sceptical about the Government's recent record on inflation. As we point out in our report, the Government's goal of 3 per cent. inflation always remains three years from being realised. So we have a serious inflationary problem.

The other problem highlighted by the Committee is the extremely large and rapidly deteriorating current account deficit. At the time of the last Budget, as hon. Members have pointed out, the Treasury was forecasting a £4 billion deficit for this year. The Autumn Statement's revised forecast is £13 billion, a figure which had already been achieved by November. The forecast for next year is an £11 billion deficit. In other words, our current account deficit has reached and is expected to remain at between 2 and 3 per cent. of GDP—a proportion similar to that of the United States, which has been criticised by the Chancellor.

It is worth noting the Select Committee's comment: As a proportion of GDP the 1988 deficit is not unprecedented, but a sequence of two annual deficits well in excess of 2 per cent. of GDP has not occurred since shortly after the war. We are not aware of any occasion since then in which the economy of any major trading nation has run a long series of deficits of this size without eventually encountering currency difficulties. The Chancellor should be aware of our remarks.

As I have already argued, it is largely the Chancellor's fault that we are now in such a mess. We warned him about the dangers, and he failed to listen. Even so, it is the job of the Opposition to offer him constructive advice and I shall try to do just that. He could make a start by having the honesty to admit that the economy is seriously out of balance.

The Chancellor certainly has reaffirmed that the defeat of inflation is the Government's central objective, but, in his evidence to the Select Committee, the Chancellor was far more concerned to boost his own record on inflation and say how well he has done, and apparently to argue for changes in the way in which the RPI is calculated by removing mortgage interest rates from the index.

However, on other occasions the Government are only too concerned to say how well they have done and to stress the fact that more than 60 per cent. of people in this country are house owners. That has a major impact on inflation. The Chancellor should remember that there are probably more home owners in Britain than in any other western European country, so it would be very badly received if the Government tried to remove mortgage interest rates from the RPI. The Chancellor was certainly far more concerned to argue the case for that than to explain how inflation might be brought down.

The Chancellor is even more complacent about the current account deficit. He implies that somehow it is not a serious problem. If I understand it, his argument runs as follows: that in a world of international capital markets, without fixed exchange rates, some countries will have surpluses and others will have deficits, and we happen to be one of the countries that has a deficit. According to the Chancellor, that means that we are doing our bit for world trade and growth by running a deficit. The Chancellor considers that that is good for Britain too. On 29 November he told the House: It is more like a company that, though profitable, cannot finance its investment programme entirely from its own resources, and has to raise funds from the market to fill the gap."—[Official Report, 29 November 1988; Vol. 142, c. 596.] According to the Chancellor, it is therefore right and proper for Britain to continue to rely on the rest of the world to finance our current account deficit.

I wish it were possible to take as relaxed a view as the Chancellor. Unfortunately, despite the welcome increase in investment over the past year, it is not just a question of graciously allowing the rest of the world the opportunity to invest in our industries. The DTI figures on imports by commodity show a major increase in consumption goods as well as foreign manufactured goods. The latest OECD report on the British economy pointed out that imports of manufactured goods have increased far faster than exports throughout the 1980s and that import penetration into the British economy remains high. Therefore, it is clear that our deficit reflects much more excess demand and underlying structural weaknesses than the welcome benign effect of a foreign investment programme in British industry.

As the Select Committee report and the OECD economic outlook point out, substantial risks are attached to running a deficit for any length of time. International capital flows are only too volatile, and if confidence goes there is likely to be sharp downward pressure on the exchange rate, which the British authorities would not be able to control. The overseas assets about which the Chancellor has so often boasted and which represent one of the few tangible benefits of North sea oil will be used up if we continue to run a balance of payments deficit of such a scale. Corrective action has to be taken sooner rather than later, not only on the balance of payments but on demand and inflation.

The problem is that the Chancellor is operating with too few instruments. We are not arguing that a Labour Chancellor would not use interest rates—of course he would. We are saying that an excessive reliance on interest rates carries considerable risks. The Chancellor admitted to the Select Committee that high interest rates could hurt small businesses. Equally important, by contributing to an over-strong pound, they can also harm the prospects of exporters. Last but not least, they hurt home owners. Reliance on interest rates alone runs the danger of bringing the economy to a grinding halt if applied too bluntly, or, if applied too laxly, of leading to a catastrophic loss of confidence in sterling. So more instruments are needed.

On the monetary side, the Government should consider the possibility of at least temporary consumer credit controls. I accept that things have changed, but there is a case for obliging lending institutions to make special deposits and for imposing some limitation on bank loans to the personal sector. At least that would be a clear signal to consumers. I agree with the encouragement of savings. As we say in our report, the Government should be looking more seriously at that issue.

Sir Peter Hordern

Does the hon. Gentleman recall the time when there was a restriction on private credit that was not extended to companies? What used to happen was that company treasurers would borrow money at the corporation rate and lend it on the money market to private consumers at a rate which produced a considerable return. It is not possible to distinguish between private restriction and company restraint.

Mr. Radice

I accept that things have changed, but it would not be impossible to operate short-term credit controls. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, they are needed for short-term arrangements. We are not considering long-term arrangements. They at least give a slightly broader balance of instruments with which to operate.

The Chancellor has forsworn the use of fiscal policy, except in the medium term. He is wrong. He should say now—before the Budget—that, because of demand, he will not cut tax rates this year. I do not think that he will agree, but there is a strong case for restoring the 60 per cent. top rate band. It would at least help to finance the raising of tax thresholds, which all of us would probably agree are necessary. Measures along those lines would also give a signal to the market that the Government are serious about controlling demand.

Another problem with the Chancellor's policy, with its over-reliance on interest rates, is that the exchange rate cannot be used to redress the current account deficit, unless there is a collapse in confidence, leading to a collapse in sterling. The problem is that, with the Chancellor's high interest rate policy, the pound is now as uncompetitive as it was in the great 1980–81 recession. In 1989, with no rising oil prices and no oil exports at the same level to bail out the balance of payments, the only way for the Chancellor to improve the balance of payments is to operate on imports—that is, if he uses only interest rates—by slamming on the brakes through higher and higher interest rates. A less inflexible exchange rate policy would at least have the advantage of making exports more competitive and thus improving the balance of payments.

The truth is that, if the Government are to take action on excessive demand, bring down inflation, and bring the current account into balance again, they cannot operate on the basis of a single instrument. They must use all available weapons—monetary, fiscal and exchange rate—if they are to bring the economy into balance. I fear that there is no sign that the Government are aware of that point. On the contrary, what was so depressing about the Chancellor's speech was the lack of concern that he showed for the problem of inflation and for the current account deficit, and his repeated insistence on relying entirely on interest rates. It does not bode well for the Government's chances of bringing the economy into balance again.

6.52 pm

Sir John Stanley (Tonbridge and Malling)

The hon. Member for Durham, North (Mr. Radice) will not be surprised to know that I do not wish to follow his criticism of the Chancellor's overall economic strategy.

There is one narrow but important aspect of the Autumn Statement—overseas aid—about which I have two points to register with my right hon. Friend and his team. The first concerns the Chancellor's extremely welcome and imaginative debt reduction initiative for the poorest sub-Saharan African countries. I warmly congratulate my right hon. Friend on conceiving the scheme and on successively negotiating its acceptance by members of the Paris Club. It was no mean achievement. The whole House has reason to be grateful to him for that.

It comes as a surprise to see the Treasury's projections of the public expenditure over the next three years that is due to arise from the Chancellor's debt reduction initiative which is now in place. Given the level of indebtedness of the countries concerned and, therefore, the attractiveness of the scheme to them, one would have expected a fairly quick and significant build-up of public expenditure.

On looking at the figures, it appears that there will be no public expenditure under the scheme during the 1989–90 financial year. In the 1990–91 financial year, there will be a bare £2.5 million. In 1990–91, United Kingdom expenditure under the scheme will amount to only £14 million. Of course, that money is to be spread among all countries in sub-Saharan Africa. That is a disappointingly slow rate of build-up. I should have expected something much more significant.

It is a matter of concern that, on our own estimates, in three years from now, the countries concerned will benefit to the tune of only about £14 million. I hope that my right hon. Friend the Chief Secretary will at least give a brief explanation of why the expenditure provision is so small and why the build-up rate is so delayed. I hope also that he will give the House an assurance that, through the IMF and the Paris Club, the British Government will do everything that they can to try to maximise ways in which cripplingly indebted countries are able to benefit from the Chancellor's debt reduction initiative.

I now deal with a second, more fundamental issue—the overall provision of overseas aid. Although the Government's general performance is extremely creditable in the main range of social issues, not least in respect of the National Health Service, despite the Opposition's carpings, that is not entirely true of their provision of overseas aid. I intend and imply no criticism whatever of my hon. Friend the Minister for Overseas Development —quite the reverse. In the 15 years I have been in the House, we have had no more effective and capable Minister for Overseas Development than my hon. Friend the Member for Bath (Mr. Patten). He is doing an outstanding job, but even he can only make such bricks as he can with the straw that is available. Set against the totality of the Government's public expenditure programme, the amount of straw that he has been given is relatively small.

I cite two instances. First, table 1.10 of the Autumn Statement shows that, in real terms, overseas aid is still well below what it was when we came to office in 1979, and also that, three years from now, that will still be the case. That is not a happy situation.

Second, I am unhappy that the proportion of our gross national product that we devote to the overseas aid programme should have pursued a steady downward course while the Government have been in office. In 1979, the proportion was 0.51 per cent. It has steadily fallen. In 1987, the latest year for which we have figures, it had fallen to 0.28 per cent. According to Overseas Development Administration figures, that 0.28 per cent. is below the proportion spent by every other major western European country and also most smaller western European countries.

It is no answer to say that GNP has been expanding. Of course we all greatly welcome and applaud that, but, if GNP has been expanding, and therefore, our wealth has been increasing, one would have hoped to achieve, at least as an minimum, a constant proportion going towards least-developed countries and to those in the greatest need in sheer human terms. It is regrettable that we have not been able to maintain a more constant level of the proportion of GNP that we devote to overseas aid.

When my right hon. Friend the Chief Secretary winds up, he will no doubt be equipped with a suitable defensive Treasury brief headed "Overseas Aid". That will draw attention to the fact that the published figures in the Autumn Statement show that it is planned that there should be an increase of 5 per cent. in real terms in the overseas aid programme over the next three years. I welcome that. However, let us have no illusions. Even an increase of that sort will not bring the overseas aid programme anywhere near what it was when the Conservative party took office in 1979. Nor is it likely to bring the percentage of GNP used on that programme up to the level of the larger European countries—or even many of the smaller ones.

I hope that Treasury Ministers will continue to reflect on this matter, because all hon. Members are familiar with the needs that are made clear in stark human terms in the press and on television. We live in a world in which many people still suffer from starvation and semi-starvation, where many diseases are eminently curable with modest applications of basic health care and with relatively small sums being spent on producing small increases in the quality of diet and making cleaner water more widely available. At those basic levels, the need to spend more on overseas aid is paramount and compelling.

This country has the means to utilise more expenditure on overseas aid. No other country has voluntary and charitable organisations with more professionalism, expertise and commitment than our own. Charitable organisations and their staff who work in Third-world countries are an enormous credit to this country. I am not entirely sure why, but people in this country to a greater extent than in many other countries seem to be prepared to make a commitment to serve, in some cases for many years, in some of the most remote, harsh and disease-ridden parts of the world. Again and again, individuals from this country give unsung, and often unheard-of, marvellous commitment to some of the most desperate communities in Third world countries. Therefore, we have the means, and the need is clear.

I hope that before we debate next year's Autumn Statement—we do so each year in the comparatively extraordinary affluence, comfort and ease, of western Europe—Treasury Ministers will give further consideration to what constitutes a proper level of commitment to those parts of the world that are so singularly less fortunate than our own.

7.4 pm

Mr. Jim Cousins (Newcastle upon Tyne, Central)

The speeches of my hon. Friend the Member for Durham, North (Mr. Radice) and the right hon. Member for Tonbridge and Malling (Sir J. Stanley) brought a necessary note of humility into our proceedings. They both drew attention to the position of the world economy in conjunction with our own. That must give Conservative Members grounds for concern. Even if we were to accept that the Government are experiencing a period of short-term transitional difficulty, we should also have to bear in mind that the world economy is undergoing a period of great transitional difficulty.

The problem of world debt has been alluded to. There is the problem of grappling with the American deficit together with the problem of not returning to an era of protectionism, into which a Conservative Member slipped so easily during the debate. Dealing with the short-term difficulties in the world economy together with the difficulties in our own economy will make the task of Government extremely difficult.

I add to the note of humility one of charity. It has often been said—I have said it myself—that the Chancellor has only one policy instrument, short-term interest rates. That is not fair to him. He also has a prices and incomes policy disguised as an exchange rate policy. Now the exchange rate is for internal consumption rather than external consumption. We must proceed with the exchange rate policy on its present terms until the prices and incomes in our ecomomy are beaten down. If the consequence of that is a sustained balance of payments deficit over many months or years, we must put up with it and trust that the world economy, despite its own difficulties, will see us through. I doubt whether any hon. Member believes that that is a tenable or serious policy.

In conjunction with that, we have the Chancellor's interest rate policy and its effects on our economy. This is a curious time in which the party runs together with the headache. We are running two policies side by side—the Chancellor's boom and the Chancellor's slump. We shall experience a long war of attrition until we find out which will come out on top. That is a matter of guesswork, perhaps even for the Government.

There is doubt about whether the Government's policy is truly counter-inflationary. A policy of raising short-term interest rates, which imposes on the 8.5 million owner-occupying, mortgage-paying households a dramatic cut in their standard of living, is not counter-inflationary. Those people need no lectures from the Government about a dependency culture because they are not part of it. They belong to households in which the partners are young and often both economically active. They will attempt, by individual and collective action, to combat the effects of the Chancellor's policy. That will be shown in wage disputes and earnings drift as people seek to push their earnings ahead even if their wage rates are stationary or held down. That will have all sorts of effects in an economy in which the stock of skills is dwindling and the labour market is tightening because of demographic trends.

The Government have chosen owner-occupiers to bear the brunt of their policies. As I have said, they are young, economically active and command a great share of the dwindling stock of skills. They are in age groups where demographic trends support their attempts to combat Government policies. You will discover that relying on short-term interest rates alone is not counter-inflationary, but inflationary. You will be forced back to the side of the Chancellor's policies which ignores the balance of payments consequences as you use the exchange rate as a substitute for a prices and incomes policy. It is a period of much difficulty for the Government, and they should not ignore what they are doing.

The Chancellor deregulated the financial markets, but according to his policy that deregulation was to be accompanied by fiscal neutrality through the tax system so that the savings and investment market would not be distorted by the tax system. The Chancellor abandoned his policy of moving towards fiscal neutrality, the consequences of which are to be seen in the monetary aggregates, where M0—the figure to which we are supposed to pay attention—is 50 per cent. outside its maximum target range. M3 is at 20 per cent. inflation per year. Building society lending is a critical component of the difficulty in which the Government have found themselves, but banks and building societies have brought into existence a group of people whose expectations you will not be able to meet and whose living standards you are now attacking. Building society lending is rising at 24 per cent. a year as a direct result of the Chancellor's deregulation of financial markets and not pursuing a policy of fiscal neutrality.

Even if the Government reduce inflation, will that have the beneficial effects on the balance of payments that you anticipate? That is blind faith unsupported by any policy. The Government have no industrial policy, but they do not want one. The Secretary of State for Trade and Industry told us at lunchtime, in the context of the GEC-Plessey merger, that the time for strategic planning had gone. There is no industrial policy, so you must rely on blind faith and hope that if inflation decreases the balance of payments will return to even-steven or surplus. There is no evidence for that belief. It may be that our economy, encouraged by your policies, will structurally produce balance of payments deficits because we lend long and borrow short and because we have become too dependent on dealing on world financial markets as a substitute—this point was made in the effective speech made by my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon)—for building our industry and economic activity.

My constituency is in a region that over the past two years has begun to benefit from the trickle in the consumer boom. One third of the increase in regional GDP is accounted for by wage increases in the education and health sectors and by an expansion of financial services. That is a dangerously narrow base on which to advance GDP, and that defect is reflected throughout the country. The Government have no industrial policy and no strategy for industrial growth. They are dealing in magic politics and believe that a reduction in inflation will solve the balance of payments deficit.

We need an industrial strategy that is linked to the financial markets. We need to make pension funds more responsible. They must have longer-term vision and be more accountable to the people whose savings they represent.

Madam Deputy Speaker (Miss Betty Boothroyd)

Order. I am sorry to interrupt the hon. Gentleman, but he has had his 10 minutes. The hon. Gentleman has burdened the Chair with many responsibilities this evening. When he catches the eye of the Chair on another occasion, I hope that he will speak through it to the Government.

7.14 pm

Mr. Anthony Nelson (Chichester)

I have never heard such a catalogue of economic crimes laid at the door of Mr. Speaker.

The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) returned us to a macro-economic discussion, following a most sensitive, compelling and sincere speech from my right hon. Friend the Member for Tonbridge and Malling (Sir J. Stanley). It is not a central tenet of Government economic policy that a reduction in inflation will lead to the balance of payments deficit disappearing. We hope that it will reduce and become a surplus, but there are other influences acting on it.

I should like to add to the tributes paid to my right hon. Friend the Member for Worthing (Mr. Higgins) for the capable way in which he chaired the interesting Treasury and Civil Service Select Committee. I note that its report was passed by the narrow margin of two votes, which shows how difficult it is to pass a Select Committee report that goes into not qualitative judgments of overall levels of public expenditure but rather narrow and esoteric points, although substantial in value, about transfer payments and their composition in general Government expenditure.

The Treasury and Civil Service Select Committee has, not for the first time, done the House a service by the way in which it took evidence from a number of economic advisers, including the Chancellor and the Chief Secretary to the Treasury. It has given us an opportunity to read the answers to questions that I am sure many hon. Members would like to pose.

Ms. Joyce Quin (Gateshead, East)

Is the hon. Gentleman aware that two members of the Committee who would have voted in favour of the report were busy in the Chamber taking part in the debate on shipbuilding? It was not passed with the narrow support that the hon. Gentleman suggests.

Mr. Nelson

I am delighted to hear that the hon. Lady would have supported this excellent report.

I am glad that the Government have been able to dip the overall level of expenditure below 40 per cent. of GDP. I believe that anticipated expenditure of £178 billion for the forthcoming financial year will maintain all the electoral promises that we made and continue the excellent spending programmes that the Government have increased, most notably those for health and education, which account for the largest market increases. The Government will bring about welcome improvements in the spending of the Department of Social Security and on roads and infrastructure.

My right hon. Friend the Member for Tonbridge and Malling devoted his speech to one major subject, so I shall deal with a matter to which in future the Treasury should be more receptive. The United States will not for much longer be able to put off tackling—in some ways progressively—its massive budget deficit. In doing so, it will have to resolve the problem of defence expenditure. It has done so this year, but increasingly over the years it is inevitable that it will seek economies in its international defence obligations. It is better for Britain and other members of NATO to be prepared to spend moneys to maintain our common defence obligations in NATO and Europe. The Ministry of Defence will in future be asking the Government for substantial real increases in its budget to compensate for the American withdrawal and the economies in Europe and elsewhere on the various NATO fronts.

I should like to follow some of the persuasive and excellent remarks of my hon. Friend the Member for Horsham (Sir P. Hordern), who spoke of the level of savings and what should be done about them. It is alarming to read chart 2.8 in the Autumn Statement, which graphically shows the enormous reduction in the propensity to save. With an anticipated ratio of saving of 3.5 per cent. in the forthcoming year, we are returning to the levels of saving that were evident in the early 1950s. It is a question that has not, I believe, been answered either in the Autumn Statement or by the Select Committee.

The real reasons for the propensity for saving in this country to have fallen so dramatically over the past couple of years have not been explained. It is accounted for not wholly by the fiscal and other incentives that have been given to investment in property, but far more by the uncertainty about fluctuations in, and the actual level of, inflation which have led people to pull out of holding money and to put the money into goods and expenditure.

Mr. Dennis Turner (Wolverhampton, South-East)

Will the hon. Gentleman give way?

Mr. Nelson

No, because we have limited time. I hope that the hon. Gentleman will forgive me.

I believe strongly, for those reasons, that the Chancellor, in the run-up to the Budget, should consider carefully and radically encouraging new forms of saving. I say with some sorrow, that we should recognise that personal equity plans have been a flop, although they were a good idea, because the management costs and bank commissioning fees have not made them worth while. We should scrap that idea. Encouragement to personal investment and savings will never be effective or taken seriously until we give a straight tax break on the extent to which people can move a proportion of their gross earnings into personal savings without having to go through saving institutions or some form of trust.

As Conservatives, we should believe in the plurality of those investment decisions and the responsibility of the individual to make those investments. Providing tax relief can be constructive—as it has been in France and other countries—in a way that does not allow substantial abuse, we should be moving away from a system that has given total tax relief towards the purchase of homes, but no tax relief towards capital provision for the future. As we consider the future liabilities that we know we shall have to meet for an increasingly elderly proportion of people in this country, we should realise that the only way to enable people to meet their own requirements and not place too heavy a burden on the state is by encouraging more direct and simple personal incentives towards saving and investment. 1 hope that other Conservative Members will join me in applauding my right hon. Friend the Chancellor if he can do that in March.

7.23 pm

Mr. Stuart Bell (Middlesbrough)

I listened with interest to the hon. Member for Chichester (Mr. Nelson), but I do not want to spend time on personal equity plans and the taxation of savings.

Each time we have these debates, there are references to the Labour Government of 1974–79 and to the inflation rates at that time. As my hon. Friend the Member for Dunfermline. East (Mr. Brown) pointed out, when Labour left office in 1979, the inflation rate was 8 per cent. and falling. If one compares that with the present inflation rate, it was not had. As my hon. Friend the Member for Dunfermline, East said, the Chancellor has not had to deal with a 300 per cent. increase in oil prices or with an explosion in commodity prices. In the 1970s, high inflation led by oil prices, commodity prices and wages chased prices, which gave us massive inflation. That is not the case now; we are living in a different environment.

Conservative Members have made many comments about Labour policies for the future. The hon. Member for Bridlington (Mr. Townend) referred to the Chancellor's questions about what our policies would be on taxation and on public expenditure. Hugh Gaitskell said many years ago that Labour was the party of high taxation, and that was the basis of Labour party policy. We believed in services and having the taxation to pay for them. We accept that we live in a different environment, but Labour is the party of fair taxation. That does not necessarily mean a high standard rate of income tax, but fair taxation throughout the economy.

The Conservatives have reduced several taxes over the years, such as the tax on investment premium income, which, like other taxes, has now gone by the board. There are many ways to redress the balance in our society without having a high income tax rate. The Labour party believes in a proper and appropriate standard of taxation —which does not necessarily mean a high income tax rate—and a proper balance in public expenditure.

The Chancellor and Conservative Members applaud the fact that we no longer have a public sector borrowing requirement, but instead a public sector debt repayment. It is not surprising that a Government who want to repay the national debt do not have a great deal of sympathy with those who are suffering as a result of high interest rates. The Chancellor said earlier that the interest rate increase policy was working and that that was why people were feeling the pinch.

If the Government are trying to repay the national debt as a matter of public policy, it is hardly surprising that they have no common sympathy with home owners, small business men and those who use credit cards for consumption, who are paying 28 per cent. APR. Many hon. Members, especially the right hon. Member for Guildford (Mr. Howell), showed some unease at the Chancellor relying entirely on a policy of regulating the economy by using interest rates.

To give him some credit, the Chancellor said in an intervention that other nation states were moving away from credit controls. He mentioned Canada, the United States, France and Italy as going down the same road. In 1981, when there was a consumer boom in the United States, the United States Government withdrew credit cards from circulation and the credit consumer boom collapsed quickly.

I am not suggesting that the Government should move to a programme of taking credit cards out of the system, but I caution the Chancellor against limiting his options in such a way that he seems to say to outside investors and those who are financing our balance of payments deficit by investing in our economy at 13 per cent., "Is that interest rate enough for you, or do you want more?" We may lose control of our own economy by reliance on a single interest file policy. The Chancellor mentioned the French, but I should be surprised if the French Government will relinquish a series of credit controls, including control of bank spending, to conform with policies such as those to which the Chancellor referred.

Hon. Members referred to the massive balance of payments deficit of £15 billion, and it is hardly surprising that it has been taken up by manufactured goods coming in from abroad. Since 1979, we have so run down the manufacturing side of our economy and placed such reliance on services that it was inevitable that, with the overheating of the economy, goods would then come in from abroad.

My hon. Friend the Member for Dunfermline, East referred to Middlesbrough, my constituency. About 50,000 jobs were lost in Middlesbrough from 1979 to 1981, while the present Foreign Secretary was Chancellor of the Exchequer. Jobs were lost in steel, chemicals, shipbuilding and foundry work, and those jobs will never come back to Teesside. We have the urban development corporation, which will have a budget of £172 million, and it seeks to lift the area, but 50,000 jobs cannot be re-created.

Mr. Julian Brazier (Canterbury)

Would the hon. Gentleman like to mention a single major industrialised country where large numbers of jobs have not been lost in the steel industry or in shipbuilding, in countries that have such a capacity?

Mr. Bell

Jobs have been lost in many western nations. There are about 28 million unemployed in the OECD countries at present. That is a great tragedy, both for our country and for those which followed in the tracks of the Government in 1979. It was a great misfortune for the 50,000 people of Middlesbrough who were working but who are no longer working, and in that sense an entire generation has been wiped out.

My hon. Friend the Member for Dunfermline, East referred to the Prime Minister's walkabout on that sacred site in Middlesbrough. I did not know that it would be referred to today, but I went down there last Friday. I found the site still empty. Now and again the Prime Minister has meetings at which she insists that something be built on that site between now and the general election; I have no idea why it should be on that plot specifically.

We are witnessing an indictment of the Government's policy on manufacturing industry. The consequence of years of running down manufacturing industry throughout the country is that, with the consumer boom, exports are not keeping pace with imports and manufactured goods are coming in from abroad. We have a destabilised economy that is not balanced in any way.

The Chancellor made the best speech that I have heard him make in five years, and I say that in all humility. One of the unforeseen consequences of the excellent performances of my hon. Friend the Member for Dunfermline, East has been that they have obliged the Chancellor to lift his game. He has been obliged to take the House of Commons into account more and to give us a speech that was interesting and illuminating—although it was not sufficiently illuminating to tell us whether he proposes to take the advice of the Bank of England that there should not be tax reductions in this year's Budget. The Chancellor would not give any indication of what exchange rate policy should be, and I thought that very sensible of him.

Last year's Budget combined reduced interest rates with reduced income tax. The reduction in the income tax on higher salaries from 60 per cent. to 40 per cent.—a reduction of one third in one go—created a climate for the consumer boom that brought imports rushing in and, in effect, destabilised the economy. At the time, we applauded the Chancellor's reduction of interest rates. That policy was right and proper, but the Budget gave so much back that it created a climate for spending. The mistake that the Chancellor made then gave rise to our present problems. According to newspaper reports, the Bank of England has advised the Chancellor to follow a tight fiscal policy as well as a policy of high interest rates, and on this occasion perhaps he will take that king of advice.

The hon. Member for Chichester referred to the lack of saving in our society. I am reminded of my visit to the United States last year, during which I saw a bumper sticker which simply said, "I am spending my children's inheritance." Under the present Government and the present Chancellor, we are squandering the inheritance of the British people. Lower taxes, reductions in services, poorer education and a poorer infrastructure all mean that we are not investing in future generations. I wonder where our economy will be when oil revenues begin to fall and all our heirlooms are sold.

7.33 pm

Mr. Nicholas Budgen (Wolverhampton, South-West)

I want to explain why I support the policy of high interest rates. The first question that hon. Members ask as they watch many of their constituents going through agony is whether there is an alternative. In our previous debate on the economy, many of my right hon. and hon. Friends said that they wondered whether we should have either some form of selective control on lending or some direction of lending—a return to the old days before the banks became very much freer, particularly in London. My hon. Friends concluded that there was no possibility of relieving their constituents' agony in that way.

In this debate, the idea that has emerged is one that has long been favoured by my hon. Friend the Member for Horsham (Sir P. Hordern). My hon. Friend will forgive me for saying that he is one of the most influential of my hon. Friends. When he advances an argument—I regret that on this occasion I concluded that I disagreed with him—it should be properly argued. My hon. Friend says that there is now a strong case for the introduction of a British loi Monory, which he says would alter the savings ratio in a helpful way. There can be no argument but that the savings ratio has fallen substantially—from 14 per cent. in the late 1970s and early 1980s to 1.3 per cent. according to recent figures. It is important to appreciate that the savings ratio is a net figure; it is the difference between saving and borrowing.

My hon. Friend was right to draw attention to paragraph 2.30 of the Autumn Statement, which identifies the fall in employers' contributions to pension funds in recent years as one of the factors in the decline of the savings ratio. I shall not elaborate that point, which my hon. Friend made very well. I am sure that he will agree that it is not the figure for saving but the figure for borrowing that is wrong. Up to November last year, the increase in bank borrowing was 27.3 per cent. higher than in the previous year. It is that figure which has had a distorting effect and has reduced the savings ratio and it is that figure which needs to be changed.

I do not think that my hon. Friend's proposal would have the dramatic effect this year for which he hopes. Furthermore, it would introduce yet another distortion into the tax system. One thing for which my right hon. Friend the Chancellor will be remembered with admiration when he comes to retire from his high office is his reform of corporation tax. In that case, he was able to apply his belief in fiscal neutrality. The measure was criticised somewhat at the time, but it has been an outstanding success. My right hon. Friend also believes in fiscal neutrality in relation to the taxation of private individuals, but, for various political reasons, he has not proceeded to apply it to private taxation. Nevertheless, the introduction of a new distortion would make it more difficult to introduce fiscal neutrality at some stage in the future. In this instance, it would be an entirely unnecessary distortion.

For the sake of argument, let us assume that the Chancellor goes away from today's debate saying, "I do not want to introduce a distortion, but the lads are in such disarray and so hate watching their constituents go through agony that I must do something, even if it mucks up the tax system." Even if that happened, the measure would not come into effect until the end of June. High interest rates may have to continue into June or July, but by the time interest rates are likely to come down the broad mass of the public will only just he starting to notice the distortion.

Once the distortion has been introduced and everybody has been told that the new Jerusalem is at hand—Back Benchers will go round constituency associations saying that the new savings measures are the most wonderful thing ever, in the exaggerated terms which I have come to realise are inseparable from politics—it will be impossible to withdraw it, even when interest rates have fallen. I would respectfully suggest to my hon. Friend the Member for Horsham, who, as I say, is so influential, that I hope he will not lead our colleagues astray on that matter.

Sir Peter Hordern

I am most grateful to my hon. Friend. He speaks about a perfect world, where there would be fiscal neutrality and no relief for mortgage interest, but I must ask my hon. Friend what happens when an irresistible force meets an immovable object. When my right hon. Friend wishes to introduce fiscal neutrality in mortgage tax relief, he comes up against the Prime Minister. I regret to say that the Prime Minister in this instance is absolutely immovable. My argument is not addressed solely to the need to find tax incentives on savings and equities, and the advantages which I believe will accrue from that. I also want to try to carry on the process of democratisation which we have seen with the freeing of trade unions and the housing market.

Mr. Budgen

I believe that my hon. Friend will agree that his argument would be very much stronger if it were possible to change the law on taxation at the very moment that interest rates go up, but it cannot be done until the end of June, and it is probable that the agony will already be being eased by then.

As to my hon. Friend's wider point about the political forces that have governed the Chancellor of the Exchequer, I can only say that I have always observed that one of the great charms of politics is its unpredictability, and leave his general argument at that.

I suspect that the second question that my hon. Friends will be turning over in their minds is whether the Chancellor will over do it. Will the squeeze be kept on for too long? Will this agony be made much worse and unnecessarily worse? All we can really say about that is that there is no evidence from the Chancellor's track record that he has pursued the defeat of inflation with any mindless and excessive zeal. A Chancellor who has enjoyed the advantages of 5 per cent. inflation per annum throughout his entire period of Chancellorship cannot be described as a sound money bigot. He says that he was successful in 1985. It is true that in 1985 inflation as recorded by the, in my opinion, rather inadequate RPI did go up to 7 per cent., and for a brief period interest rates were increased to 14 per cent. However, it was not the 14 per cent. that got him out of trouble, but two other factors. One was that petrol, oil and other commodity prices dropped sharply and the other was that sterling appreciated. As soon as those two happy horsemen came to his rescue, the money supply was allowed to increase once again.

We live in an electoral cycle. It will be possible now to have a bit of agony. It will not be possible, because the lads will not stand it, to have a great deal of agony in a year or 18 months' time. Therefore, for all those reasons I hope that my hon. Friends will give the Chancellor their support.

7.43 pm

Mr. Win Griffiths (Bridgend)

I continue to be amazed at the gullibility of the Conservative Members, because most of them appear to listen with reverence to another edition of the tales of the babes of Dorneywood from this latter-day member of the family of the Brothers Grimm.

When we look at the Autumn Statement and the various forecasts that the Chancellor has made in the past year or two, we must admit that in every case he has been a failure. He promised us that inflation would be running at 4 per cent. and it is more than 6 per cent. and rising; and that the balance of payments deficit would be £4 billion, but it will probably be more in the region of £14 billion this financial year. The Chancellor thought that imports would increase by about 6.5 per cent., but we know already that the increase will be more like 13 per cent.-plus. He thought exports would increase at the rate of 3 per cent., but we know that we shall be lucky to obtain 1.5 per cent. He thought that interest rates would remain stable, but we know that they have virtually doubled.from 7.5 per cent. to 13 per cent., and who knows where they might go in future? The Chancellor thought that the money supply would range somewhere between 1 and 5 per cent. and already we know that it is more like 8 per cent.

When forecasting for every major item in the Budget, and for expenditure, the Chancellor got it wrong. It is no wonder, therefore, that the Government are in a state of some panic about using high interest rates as virtually their only policy in this sector and are concerned about the problems caused to them by the agony and the pain felt by some people, which the hon. Member for Wolverhampton, South-West (Mr. Budgen) graphically explained.

I was staggered, too, by the way in which the Chancellor almost rushed to remove the cost of mortgages from the retail prices index. The Chancellor must be living in cloud cuckoo land with Rupert Bear and Algy, if he believes that the home owner regards an extra payment on the mortgage as something not to be counted in his or her spending in any particular month. There is no way that we can avoid responsibility by not including mortgage rate repayments in the RPI.

Another matter which struck me was the massive complacency of the Chancellor, which appears to be echoed by most of other hon. Members who have spoken, about the great economic miracle which has been performed in the past decade. That miracle can only be seen by looking down a telescope, with a long set of blinkers on the end of it, focused somewhere in the London area. The figures for the number of jobs in all of the standard planning regions, the moment one moves beyond a line from the Severn to the northern side of the Wash, tell a story of dismal failure. Conservative Members could do themselves a good turn if they studied those figures, which I shall now give them.

I shall begin with Wales, because I believe we should start with the most important part of the United Kingdom and the one which has suffered most. In Wales, there are 130,000 fewer jobs than there were in 1979; in Scotland 173,000 fewer jobs; in the north of England 107,000 fewer jobs; in the north-west of England 337,000 fewer jobs; in Yorkshire and Humberside 77,000 fewer jobs; and in the west midlands 70,000 fewer jobs. That is a grand total of 894,000 fewer jobs now than in 1979. A total of 234,000 of the extra jobs that have been created in the regions which I have mentioned are part-time jobs for women. The state of the British economy, in by far the greater part of the country, is a sad tale of woe and failure.

It is true that more jobs have been created in the south-east, East Anglia, the south-west and the east midlands, but that is because the Government have almost completely ignored the needs of the northern and western regions of the United Kingdom. I have left out Northern Ireland deliberately, because I accept that the problems of that area are far greater than any damage that the Chancellor is doing to the economy.

The Chancellor likes to talk of the success of the British economy and the wonderful way in which it is working compared with other economies. On the latest figures available, inflation in the United Kingdom is 6.4 per cent. compared with 3 per cent. in France, 1.4 per cent. in Germany, 4.8 per cent. in Italy, 4.2 per cent. in the United States, 4.1 per cent. in Canada and 0.5 per cent. in Japan. All those figures relate to the end of last year and show that Britain is at the bottom of the league of major industrialised countries.

Short-term interest rates are 13 per cent. in Britain, compared with 8 per cent. in France, 4.8 per cent. in Germany, 12 per cent. in Italy, 8.3 per cent. in the United States of America and 4.4 per cent. in Japan. The figures for Canada are not available. Again, which economy is the worst? Why, it is the British economy.

Although we are not at the bottom of the ladder for unemployment figures, we are near it. According to the Organisation for Economic Co-operation and Development figures for the end of last year, unemployment in Japan is 2.5 per cent., in Canada 7.8 per cent., in the United States 5.3 per cent., in Germany 6.4 per cent., in France 10.4 per cent. and in Britain 8.4 per cent. Again Britain is doing badly. It is only because of the distorted nature of the British economy that Conservative Members can comfort themselves in the apparent success of the Chancellor's policies.

The truth is that we have had a decade of neglect which has not been in the interests of creating a balanced and prosperous nation. [Laughter.] We have a divided nation. The hon. Member for Beaconsfield (Mr. Smith) may laugh, but if he cared to come to Wales or to visit the north of England or Scotland, he would see a different picture. It may be hard for him to admit that some areas have high unemployment and that those who earn there gain poor wages. He may like to come with me one weekend and see the poverty and deprivation that the Government have caused by deliberately taking money from pensioners and the long-term unemployed and by reducing spending on the regions by two thirds. No wonder we no longer have those jobs.

When he replies, perhaps the Minister can tell us exactly what judgment the Chancellor has made of the amount that demand will need to slow down for him either to reduce interest rates or at least ensure that they do not climb higher. I must admit that, in view of his previous forecasts, it may not be worth while getting an answer to that question, but I should like one. How long will the agony continue?

7.53 pm

Mr. Tim Smith (Beaconsfield)

One of the most interesting things about our economic debates is that most of the debate these days takes place on the Conservative side of the House. After having listened to such a pedestrian speech packed full of tedious statistics, I should like to return to the Autumn Statement and to public spending with which it is principally concerned.

The Government's objective on public spending has been changed twice during the past 10 years. The objective was first to reduce it in absolute terms and then to hold it constant; now it is to ensure that it falls as a proportion of GDP. I make no complaint about that, because, with the growth in the economy, that is something that we can reasonably afford to do, but I am worried about the projections for the next three years.

Although the achievement on this front, as shown in table 1.1 of the Autumn Statement, is impressive, as the trend is moving in the right direction, I remain worried that the target is not as ambitious as it might be. We should press on to return to the levels shown at the top of the table—for example 36 per cent. of GDP in 1964–65. My second point, which was raised by the Treasury and Civil Service Select Committee, is whether that is a sensible way to control the overall level of spending. I agree with what my hon. Friend the Member for Bridlington (Mr. Townend) said and I do not share the view of the Select Committee that this is not a sensible way to proceed. It has the virtue of simplicity, it is intelligible and it does not make sense to include transfer payments.

However, I do not agree with what my hon. Friend said about the Committee's recommendation on the need for a public sector balance sheet. I know that this is a difficult area. My right hon. Friend the Chief Secretary told the Select Committee that it would be difficult to get a market value for a prison. Of course that is true, but as a member of the Public Accounts Committee I have been shocked at the number of witnesses who have been unable to say what assets they are responsible for. For example, the Crown Estate Commissioners appeared before the Committee recently; they, who are the equivalent of a property company, produced a balance sheet for the first time only in the past 12 months. There is tremendous scope for improvement.

Departments of State should know what assets are under their control. One way of doing that is to require them to produce a balance sheet. That would have the advantage that we would then know what additions had been made and what the total level of capital spending was. That information in the Autumn Statement is deficient and I hope that, when the public expenditure White Paper is published, we shall have the table that appeared last year which showed the Government's total capital spending.

Such a balance sheet would also show capital receipts satisfactorily, which does not happen at present. Privatisation proceeds are deducted from total Government spending and the proceeds from the sale of council houses are deducted from total spending on council housing, so there is room for improvement. The production of a public sector balance sheet would be a good idea.

We have had a good deal of discussion about inflation. Every Conservative Member subscribes to the principal objective of the Government's economic policy, which is trying to defeat inflation by monetary rather than fiscal means. I have two worries, one of which was mentioned by a Labour member of the Select Committee and is referred to in the report. The Government's goal is always being moved one year out, so that the goal of 3 per cent. inflation always seems to be 3 per cent. away. We need to try to set targets to which we can adhere or people will not believe the targets that the Treasury sets itself.

Secondly, it is not widely recognised that if, instead of analysing the RPI in the normal way, which is between different items of spending, one analyses it as Christopher Fildes did in an article in The Spectator in December, which was between the public sector elements and the private sector elements of the RPI, one sees that the Government are responsible for a considerable amount of the inflation from which we are now suffering.

According to the October figures, inflation measured by the RPI was 6.4 per cent, whereas public sector inflation was 7.8 per cent. If mortgage payments were included, it would be 13.8 per cent. On the other hand, private sector inflation was 4.8 per cent. That discrepancy was due to the fact that nationalised industry prices were rising at 7.5 per cent., local authority rents were rising at 7.5 per cent. and rates were rising at 8.5 per cent. Part of the solution to the present problem of inflation lies in the hands of the Government and certainly in the hands of local government, because those prices are fixed by the Government and local government. We can expect to see an improvement when some of those figures come nearer to the general level of price inflation.

The Committee also examined the official statistics. I very much agree with the view that we must have statistics on which we can reasonably rely. Much doubt has been expressed about the balance of payments statistics. It is a well-known fact that, if we add up all the balance of payments statistics throughout the world, we end up with a large deficit, which suggests that something is wrong somewhere. We see regular adjustments to the United Kingdom balance of payments figures, which are usually favourable for the Government, because the deficit is normally reduced as a result of subsequent adjustments. I hope that the balance of payments figures will form part of the Government's inquiry, because it is important that we should have statistics upon which we can rely.

We have heard a great deal in the debate about forecasts. The Treasury has been criticised for the forecasts that it made in the Red Book at the time of the Budget, but if we consider almost every other forecast made at that time about the balance of payments, we find that the forecasts were all around £3 billion, £4 billion, £5 billion or £6 billion. No one forecast a figure near the real outturn. There is a lemming-like quality about economic forecasters who have a tendency to assume that things will continue as they are today. I am not so pessimistic.

For example, I am inclined to agree with my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) that the savings ratio problem is beginning to resolve itself. One of the principal reasons why the ratio has fallen so low is, as we can see from a table in the Autumn Statement, the close correlation between the movement of the savings ratio over a number of years and the movement of inflation. As inflation comes down rapidly, people feel the need to save far less. There is far more confidence in the economy, so they feel less need to save for the future.

That has now changed. All the evidence shows that there is more uncertainty. There will be less borrowing, which is an important element because we are dealing with a net figure. The problem is therefore already starting to resolve itself. If we were to have a Monory proposal, I doubt whether it could be introduced by the Treasury as early as June, as my hon. Friend the Member for Wolverhampton, South-West suggested. The PEP scheme did not come in until 1 January following the Budget, so I agree with my hon. Friend that the problem would have started to resolve itself before we could even tackle it.

My right hon. Friend the Chancellor of the Exchequer should cut income tax further in the Budget. With such a large public sector debt repayment, I see no reason why another 1p should not be cut off income tax or why thresholds should not be increased by more than the rate of inflation. I should like to see something done about the national insurance contributions made by the lower paid. That matter is mentioned in the submission of the Institute of Directors. I do not have time to develop the point, but I am sure that my hon. Friends will be aware of the point to which I refer. There is a poverty trap when one first comes to make these payments, and again when the rates increase. I should also like to see something done about capital gains tax in relation to investments in unquoted companies, a matter which has been raised by the Conservative Back-Bench small business committee.

I fully support the economic strategy in the Autumn Statement. We have every reason to be confident about the future of the United Kingdom economy.

8.4 pm

Ms. Joyce Quin (Gateshead, East)

The widespread reaction to the Chancellor of the Exchequer's Autumn Statement and his recent pronouncements on the economic situation in Britain shows clearly that many people, including those whom the Chancellor might normally think of as supporters, believe that he has got it badly wrong.

The hon. Member for Beaconsfield (Mr. Smith) appeared not to like statistics, particularly when they show the Government in a bad light, but none the less, it is clear that the forecasts were very wrong, particularly those on inflation, but also those relating to the balance of payments and trade deficit which is three times greater than the original prediction.

The serious economic developments that we have seen in recent months are very much related to last year's Budget in which, again, the Chancellor got it disastrously wrong. Many of us reacted strongly to that Budget for what we felt were the immoral giveaways to the richest in society, but it is now clear that the Budget was also economically very foolhardy and wholly inappropriate to the economic situation in which Britain found itself. The Chancellor was warned at the time, particularly by Labour Members, that the Budget would lead to a boom in imports and that it would mean a serious trade deficit given the great weakness of the British manufacturing sector.

We are now given the Chancellor's forecast for trade recovery and how the balance of payments is supposed to improve over the next year, but is this forecast also to be disastrously wrong? The only cure that appears to be given is that of raising interest rates, but, in that sense, the Chancellor appears to remind us of 18th-century doctors who prescribed leeches for every ailment. The problem was that so many of the patients never recovered.

Let me cite some of the reactions to the Chancellor's Autumn Statement and his economic policies. The Confederation of British Industry reported that many exporters appeared to be gloomy about the future. The Engineering Employers Federation felt that the Chancellor was misguided in the way that he thought that action on interest rates would do much to cure our trade deficit. There was widespread hostile reaction in many national newspapers and there was an encouraging headline in the Daily Mail which read: Has Nigel blown the next election?

The Bank of England has also warned the Chancellor against tax cuts in the forthcoming Budget. Organisations such as the National Federation of Self-Employed and Small Businesses say that the interest rate increases are affecting detrimentally the fastest growing firms in the country. The chairman of Ferranti International is quoted in one newspaper as saying that, because of the interest rate increases, the company will look hard at its investment programme. Last but not least, the OECD report produced last December predicted a growing trade deficit for the United Kingdom which was in very worrying contrast with the Treasury's predictions. All that adds up to a strong weight of opinion against the Chancellor and Government economic policies.

The Civil Service and Treasury Select Committee, of which I am a member, has produced a worthwhile report, which, although often worded in a restrained and sometimes even coded manner, makes many telling criticisms of the Chancellor's policy and of the defects, as we see them, in the Autumn Statement. In particular, it points out inconsistencies in the Chancellor's exchange rate policies. Only last March, he was telling us that an exchange rate of DM3 to the pound was an anchor against inflation, but, by the end of the year, he had changed his tune, particularly as the exchange rate with the deutschmark was then 3.22. He was not so certain about what the anchor against inflation would be for the future. That is another worrying sign.

In the remaining time, I should like to highlight two issues which are of particular concern to me and will be worrying factors in the coming months and years. The regional effects of the Chancellor's policy have already been referred to. Like my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins), I come from the northern region of England which has, at best, seen only a partial economic recovery. We learn that, before an economic recovery can take place there, it will feel the recessionary effects of the measures to cure overheating in the south-east.

The Government seem to have no regional strategy or economic policy to deal with the undoubted regional division. The reaction in the northern region to the Chancellor's rise in interest rates was particularly unfavourable. Mr. Paul Torday, the regional director of the Northern CBI, said that he felt that Government policy was concentrating on the south and that there appeared to be an absence of any thought about how to deal with regional variations. The chambers of commerce in Tyne and Wear and on Teesside also expressed concern. However, when I raised these points with the Chancellor in the Treasury and Civil Service Select Committee, he said more or less, "Well, they would say those things wouldn't they? They feel that they've got to say them." He dismissed real and genuine concern as ritualistic mutterings.

The Chancellor's contempt for the region was also clear from his earlier remarks when he referred to Labour party policy to regenerate the regions as the "Yugoslav solution". Perhaps he should have considered West Germany, where there is a great deal of regional economic autonomy and no clear regional division or disparity of wealth such as exists in this country. Both inflation and unemployment are lower in West Germany.

The Chancellor's policy is undoubtedly bad news for the regions. There seems to be no regional measure to offset the negative effects of the Chancellor's policy. A recent report by Cambridge and Northern Ireland economic forecasters stated that there will be an ever-widening gap between the regions in Britain if present policies are pursued.

I am also concerned about the effect on Britain of the moves towards the creation of the single European market in 1992. The Chancellor's economic policies bode ill for Britain in the run-up to 1992. A recent article in The Guardian asked whether 1989 would be the year that Europe invaded Britain. I am worried that the bids and mergers from Europe mean that much of our industry appears to be ripe for takeover while in return we have no alternative strategy or a policy to defend our industries, particularly in the regions.

I am worried that, if we follow the present course we will become the poor relation of the EEC between now and 1992. The Chancellor's policies have contributed greatly to inequalities in Britain. Perhaps they are set now to contribute to inequalities on a Europeanwide scale where inequalities between rich and poor regions are already much wider than in America.

A Conservative Member who may or may not wish to admit to the remark now, said that the jury was out on the Chancellor. On the evidence available, the only verdict possible that the jury could return is one of guilty. The Autumn Statement is an autumn indictment of the Chancellor's policy failures.

8.13 pm

Mr. Andrew Mitchell (Gedling)

I subscribe fully to the comments made by my hon. Friends the Members for Wolverhampton, South-West (Mr. Budgen) and for Beaconsfield (Mr. Smith) who referred to the importance of fiscal neutrality and the need to avoid a British loi Monory. Many Conservative Members in favour of fiscal neutrality accept the fact that mortgage interest relief is the exception that proves the rule.

I invite the hon. Member for Vauxhall (Mr. Holland)—who is not in the Chamber at the moment—to enlighten us on some points when he replies to the debate for the Opposition. He is said to be possessed of a remarkable intellect as an economist and to have invented a new form of economics. I hope that he will spell out specifically what measures the Labour party would take to control credit expansion instead of using the interest rate mechanism. We have heard a lot of non-specific talk from Opposition Members, but I hope that the hon. Member for Vauxhall will tell us specifically how he would handle that.

I do not deny that high interest rates are unpopular, although many elderly people with savings and no debt have seen a welcome rise in their income. High interest rates on mortgages have a radical effect on disposable income. Those of us with large mortgages feel the effect keenly. My hon. Friend the Member for Wolverhampton, South-West did not exaggerate when he spoke of the agony that is felt in some quarters in that respect.

I have received a pretty clear message from my constituents. They have told me that high mortgage rates are unpleasant and unwelcome. However, high inflation is a worse enemy and an ever-present threat. Many people take a longer and less staccato view than the Labour party on this issue. If there are economic squalls—it is naive to suggest that they will not occur—it is far better to have the hand of this experienced Treasury team on the tiller who will take the necessary tough decisions than the old-fashioned and confused Socialist remedies from the Labour party, some of which we have heard again today.

As my hon. Friend the Member for Beaconsfield said, the medicine may be working more quickly than was expected. It is hardly surprising, when monetary policy is tightened, for conflicting signals to occur. The inclusion of mortgage interest in the retail prices index masks the fact that the underlying level of inflation has stayed broadly static since last July.

High interest rates have already reduced demand in the economy and the growth in house prices is declining. According to the Royal Institution of Chartered Surveyors, that trend continues to spread. Mortgage lending has fallen, and recent figures show that retail sales are slowing. One of the beneficial effects of the present policy is that it reaches directly to consumer spending rather than corporate and industrial spending and investment.

As the Chancellor said earlier, at the beginning of the decade the gearing ratio of British companies averaged out at about 45 per cent. The comparable figure now is little more than half that. Investment in the United Kingdom has increased over the past year by at least 12 per cent. That cannot be dismissed as a temporary trend, as it has clearly been the pattern for the past five years.

I do not disguise the fact that high interest rates will adversely affect some businesses, particularly smaller ones. However, for companies and individuals, rising inflation is a worse and more potent enemy.

The Treasury and the Civil Service Select Committee, in reviewing public expenditure and our debt profile, has made sensible comments about the need to enhance public debate through a comprehensive public sector balance sheet. Many of my constituents were appalled at the huge level of Government debt which characterised the 1960s and 1970s. However, they are deeply impressed with and support an economic policy which yields significant increases in public expenditure while achieving such a dramatic public sector debt repayment during this financial year. I agree with my colleagues that that is a signal achievement and a complete change from the previous pattern. It is one which our constituents note and respect greatly.

The Select Committee also referred to the level of expenditure on the National Health Service. In a year when the NHS has been the subject of a major review, it should not be forgotten that the review is set against a background of the largest injection of funding that the NHS has ever received. In other words, the review takes place against a position of confidence and strength. That is very different from the other great NHS review conducted by the previous Labour Government, which took place against a background of a desperate need to find savings and make cuts in NHS provision. Those cuts emasculated the NHS building programme, which we have restored fully and increased significantly. The Nottingham health authority benefited from that increasing expenditure. Under RAWP, we hope, and need, to do better—we are till 5 per cent. short of our target.

Next year, as the Select Committee makes clear, there will be an overall 9.5 per cent. increase in cash in the NHS which is a growth rate of 4.5 per cent. in real terms. I am grateful to the Select Committee for making clear how that figure was reached. It is a fine achievement. The purpose of the Prime Minister's National Health Service review is to ensure that that significant expenditure increase will be directly translated into similar increases in the quality arid quantity of patient care. That is how we in Nottinghamshire will judge the review.

I was surprised not to find more in the report about the Government's programme of Third-world aid. I am not entirely in agreement with my right hon. Friend the Member for Tonbridge and Mailing (Sir J. Stanley). One must recognise the quality of the United Kingdom aid programme, which is acknowledged by the OECD's development assistance committee, and is well illustrated by the high priority it gives to the development of renewable natural resources. The increased budget announced this year means that our aid programme will increase by 18 per cent. over the next three years. Included in that figure is the expected cost of the Chancellor's widely praised sub-Saharan debt initiative. We have already set an example by writing off £300 million in loans to 14 African countries, and ours was the first country to subscribe in full to the World bank's general capital increase.

I turn briefly to four tangential points that I hope my right hon. Friend will consider in the run-up to his next Budget. The first concerns employee share ownership schemes—this is an important subject and one with which the Finance Bill Standing Committee wrestled last year. My hon. Friend the Member for Esher (Mr. Taylor) spoke eloquently on that subject. If we are serious about spreading share ownership more widely throughout society, we must consider the role that such schemes can play in enhancing and augmenting that objective, as well as motivating and improving the supply side of our economy. Share ownership schemes can help break down ancient barriers. They also clearly offer an additional savings benefit. Secondly, there are in my constituency families who, faced with a competitive mortgage market, have changed their mortgagee. The effect of such a move—in which, technically, a new mortgage is drawn down, repaying the old one—is that any portion of the first mortgage that financed a home improvement, perhaps even 15 years ago, becomes ineligible for mortgage interest relief.

I cannot see how that can be fair, and I hope that my right hon. Friend will see whether anything can be done to clarify this point. At the very least, building societies and banks have a duty to make that situation clear to customers seeking to roll over their mortgages and who risk being caught in that way.

Thirdly, I refer to the Inland Revenue's consultation document on the taxation of non-domiciled individuals. Action rightly needs to be taken against various abuses, but I hope that care will be taken before changing the rules in respect of those whose arrangements with the United Kingdom authorities have already been made on the basis of the existing law on domicile. Valuable inward investment into the United Kingdom may be jeopardised by the current uncertainty. I note from a recent publication that some concern is felt by the DTI on that point. In any event, an early announcement by my right hon. Friend will be welcome.

Fourthly, the next Budget will be the right one in which to lift as many of the lower paid out of the tax net as possible. I urge my right hon. Friends to make that direct contribution to helping to defeat the poverty and employment trap, and to seize the opportunity to effect this great and important change.

I have strayed from the debate's main theme, but the essential facts remain. Our economy is strong. Inevitable economic difficulties are being courageously dealt with. The Opposition are unable to put forward any coherent alternative medicine—although we wait with interest for their wind-up speech. The country continues to trust my right hon. Friend's judgment, and that of his colleagues on the Treasury Bench.

8.23 pm

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

The strategy outlined by the hon. Member for Gedling (Mr. Mitchell) applies to the south, and not to the north and to the part of the country from which I come. I intended speaking about interest rates, but about one and a half hours ago I received a telephone call from my constituency concerning a company whose progress I have followed in detail over many years and which tonight has made 90 people redundant. It is in that context that I shall comment on the Autumn Statement.

The company to which I refer, Miller Footwear of Cockermouth, has a good export record but has experienced certain difficulties over the past few years. It competes directly with South Korea and a number of other countries in the far east on their manufactures, which have in recent years been dependent on the value of sterling in international markets. With the fall in the value of the dollar over the past couple of years, the South Koreans and other far east nations producing footwear decided that, instead of exporting, for example, their Union Jack-clad "Reebok" footwear to America, they would move out of that market, because the price of their prodcts there was increasing as the value of the dollar fell. They redirected their exports to European markets, where exchange rates have moved more in parallel with far east currencies.

In the European market, the problem arises that, whereas many of our European competitors introduced import controls that single out far east products, the British Government failed to do so. The result is that exports of footwear from South Korea in particular have been directed mainly towards the United Kingdom. Its market share has been enhanced still further by the authorities' decision to raise interest rates. With the upward movement in sterling, South Korean footwear has become more competitively priced in the United Kingdom, and our markets are increasingly being crowded out by footwear imported from the far east whose manufacturers take advantage of an increasingly favourable sterling exchange rate.

That places in context what happens in the real world when the Government decide, in order to resolve, as I see it, a uniquely southern problem, to increase interest rates, inflate sterling's value, and draw in imports—leading to 90 people working for a footwear company in my constituency being placed in the dole queue.

Although there is a great shortage of skilled labour in the south and in certain sectors of industry in west Cumberland, many of those who have been made unemployed will find that the only jobs available to them are in industries whose capitalisation is low in terms of plant and equipment. The reason for that was outlined by the hon. Member for Gedling when he spoke about gearing in the sense of lending to assets. Companies that have failed to invest as a result of high interest rates but are willing to offer employment are invariably labour-intensive. Because they are not highly capitalised, they have to compete with low-wage economies overseas. That forces down the wages available to my constituents.

The product of the Government's strategy is a sucking in of imports, which become more competitive, driving people out of home industries into those that are either under-capitalised or should be more highly capitalised, with a higher degree of automation. The overall result is lower wages. Such companies tend to resist trade unionism. Employers in the region then adopt a brutal and ruthless approach.

My hon. Friend the Member for Gateshead, East (Ms. Quin) has had the same experience as I have, particularly over the past few months. There has been an increasing incidence of what I can only regard as brutal employers who almost but not quite flout the law, who reject trade unionism, who refuse to recognise trade unions in their plants and whose only intention is to secure the cheapest labour in conditions of high unemployment in areas such as mine.

As a result of that, while unemployment in west Cumberland has gone down over the past few years, we have seen the development of non-union, low-wage industry which, when we are playing around with exchange rates and interest rates in the way that we are today in Britain, can only lead to the creation of sensitive industries which can be wiped out in the cool breeze of international recession. On the one hand, I can accept that the Government's policy has led to an increase in employment in west Cumberland, but it has come about in industries that are geared to that strategy, which is a southern strategy for resolving problems and difficulties in the south. We cannot continue on that basis.

Finally, let me deal with the specific problem which, although it affects all the United Kingdom, affects the south of England in a disproportionate way, and that is property price inflation. I want to leave the Government and those on the Government Benches with a thought that they would do well to consider.

I never believed that it was the miners who brought down the Government of the right hon. Member for Old Bexley and Sidcup (Mr. Heath) in 1974. I had a theory at that time that the Government were brought down because of the collapse in property prices that took place after the high inflationary period for property in the early 1970s which we all remember. The hon. Member for Wokingham (Mr. Redwood) shakes his head. He may have been in Downing street at the time. Perhaps he was an adviser to the right hon. Member for Old Bexley and Sidcup. The levels of property price inflation in 1971, 1972 and early 1973 were just as high as they are today, and the gearing of earnings to house prices was as precariously balanced then as it is now. That was a major contributory factor to the fall of the Conservative Government in 1974. In the same way that the bubble burst then, it will burst again. When it bursts, it will burst with a vengeance and it will be reflected in the ballot box.

8.32 pm

Mr. John Watts (Slough)

The Treasury and Civil Service Select Committee report refers towards the end to the unsatisfactory state of official statistics. During the evidence sessions I compared them to driving in the dark without headlights.

There is concern about trends in inflation, the current account of the balance of payments, and the rate of growth of GDP, which most commentators believe to be at an unsustainably high level. But at best, we have to rely on informed hunches to know the position of any of those key economic factors. Official statistics do not provide us with the basic information on which judgments can be made.

The Autumn Statement provides a wide range of choice on most of the key economic indicators. At the time of the Budget my right hon. Friend the Chancellor forecast a £4 billion deficit in the balance of payments current account. The Autumn Statement revises that upwards to £13 billion and the latest figures show that that total has already been exceeded before the year end.

But tucked away on page 50 of the Autumn Statement in the annexe to chapter two, we find described in paragraph 2A.7 the large overseas balancing item in the first half of 1988 of about £7 billion or, annualised, an amount equal to the forecast deficit for the whole year. The note goes on to explain most helpfully that that shows that there were either unrecorded net credits on the current account or unrecorded net capital inflows or, most likely, both.

On the most favourable assumption, the whole of that balancing item could be unrecorded visible or invisible exports, in which case there would be no deficit on current account this year. That is not likely, but it is equally improbable that no part of that balancing item is represented by unrecorded overseas earnings. It seems likely that the true deficit will prove to be less than the Autumn Statement forecast of £13 billion for the year. But we do not know, and we should know with greater accuracy.

Examining the GDP statistics, we find that in the first half of 1988 GDP grew by 6 per cent. on the output measure, but by only 2.5 per cent. on the expenditure measure. The Autumn Statement follows the normal practice of averaging the various measures to arrive at a likely growth rate of around 4.5 per cent. But which, if either, of those measures is correct makes a great deal of difference to judgments about whether GDP growth is unsustainably high.

Growth of over 6 per cent. is almost certainly more than the economy can sustain, but 2.5 per cent. is just as certainly not unsustainable. It is a serious situation when the difference between those two measures for the current year is almost equal to the total growth of GDP during the period of the previous Labour Government.

On the other hand, the measurement of inflation is perhaps subject to less uncertainty than the other statistics, particularly if the short-term distortions created by changes in mortgage interest rates are stripped out. For example, inflation as measured by the GDP deflator has proved stubbornly stable at between 4.5 and 5.5 per cent. between 1983 and 1987, as my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) made clear, showing that perhaps rather too little attention has been paid to the measures necessary to exert that steady downward pressure on inflation which is claimed by my right hon. Friend the Chancellor to be the cornerstone of his policy.

It can be said that statistics do not matter. The chief economic adviser refuted my suggestion that great policy decisions were taken on the basis of rather unreliable statistics. My right hon. Friend the Chancellor has made it clear that he places little reliance on statistics. To an extent, that is comforting and reassuring, given the deplorable and unreliable state of those statistics. But there are others who operate in the financial markets at home and abroad who take the official statistics rather more seriously than Ministers do. Confidence in sterling and in the performance of the economy can be seriously undermined by false signals from official economic statistics.

Furthermore, statistics have some direct influence on Minister's decisions in the management of the economy. When I asked my right hon. Friend the Chancellor whether his fiscal judgment would have been different if the information available to him at the time of the Budget had given him a rather more accurate reflection of the likely growth of GDP, he replied that his fiscal judgment would have remained the same, but: Had I had the greater knowledge which you posit, then what we would have had is a tighter monetary policy, a tighter monetary stance, and indeed a tighter monetary stance at an earlier date, even before the Budget.

I interpret that as meaning that if official statistics had shown my right hon. Friend how strongly GDP was growing last spring and summer we would not have seen reductions in interest rates during the summer to the low point of 7.5 per cent. Without that unnecessary and perverse relaxation of monetary policy, we might have avoided the need for interest rates to go as high as the current level of 13 per cent. That provides an additional and powerful reason for the Government to give a rather higher priority to improving the quality of the official statistics, as we urged in our report that they should.

My right hon. Friend the Chancellor has explained that interest rates are the most effective short-term economic regulator and that fiscal policy should be set to achieve longer-term objectives. In that he is right. He should not be deflected from his policy of continuing to reduce the burden of direct taxation and of moving towards a reduction in the standard rate of income tax from 25p to 20p in the pound. Clearly, the public finances would enable him to achieve that in this year's Budget and still achieve a substantial Budget surplus, but my right hon. Friend's policy has always been to make further reductions in the standard rate when it is prudent to do so. With the continuing and unexpectedly strong performance of the economy, it clearly needs no further stimulus now. So I do not urge my right hon. Friend to make further reductions in the rates of income tax this year.

However, as my right hon. Friend the Member for Worthing (Mr. Higgins) pointed out, if the Chancellor made no changes in income tax there would be a significant and automatic tightening of an already tight fiscal stance. So there should be scope for over-indexation of personal allowances. The opportunity should be taken, as my hon. Friend the Member for Gedling (Mr. Mitchell) suggested, to remove more people on low incomes from the tax net to increase the advantages of taking employment as against drawing benefit.

These measures aside, I believe that most of our constituents would prefer further improvement in their disposable income by means of prudent reductions in interest rates when conditions permit rather than through reductions in income tax in the immediate future. Those reductions can wait to be enjoyed in future years.

The last Labour Government would have loved to face the problems arising from over-rapid economic growth that this Government face. That Labour Government faced the problems of economic failure and decline. The Government now face the problems that come from economic success. The strength of the economy and of the public finances ensure that the problems of the inflation blip and the increased import bill can be ridden out. The Labour party must face up to the fact that we shall be able to hit the target of a 20p standard rate of income tax before the next general election, after which that party will still be in opposition.

8.44 pm

Mr. Pat Wall (Bradford, North)

At the end of November the Chancellor said that the economy was fundamentally very strong. According to The Sunday Times, he went on to say that the rise in interest rates this year would ensure that that continued. Yet a recent MORI poll showed that economic optimism has plunged to a record seven-year low. The last time economic opinion was so pessimistic was in the autumn of 1981. That was a significant date because it marked the depths of the recession of 1979–81, when 20 per cent. of British industry was wasted.

These are two rather different pictures drawn by people who stand in many ways on the same footing. They all use the same statistics and examine the same economic trends. They all support a demand-led, free enterprise, capitalist economy. In the coming months we shall see which of their forecasts is correct.

One of the more entertaining aspects of the recent economic debates has been the conflict between the Chancellor and his Treasury team and former members of Conservative Treasury teams, including an ex-Prime Minister. The Chancellor has painted a vivid picture of a booming economy and rising living standards. He has gone further and said that this is an unprecedented boom in our post-war history—a "first time ever".

I hesitate to involve myself in the argument on the Conservative Benches, but it is reasonable to compare this Chancellor's statistics with those of some of his Conservative predecessors. At the height of Reginald Maudling's boom from 1963 to 1964 there was an 11 per cent. growth of the gross domestic product over a two-year period, with an inflation rate of about 2 per cent. At the height of the Barber boom from 1973 to 1974, a 10 per cent. increase in GDP was achieved, with an inflation rate of 4.5 per cent. This Chancellor has equalled Maudling's record on the GDP, but achieved only half the rate of growth in the Barber boom—yet inflation has risen to 6.4 per cent.

The Chancellor speaks of an overheated economy. What does that mean? It means that manufacturing industry, which he says is leaner and fitter, is incapable of meeting the demand that has resulted from the consumer-led boom. The reason why industry cannot meet the demand is the lack of investment during the time of this Government. Investment has only just passed the level at which it stood in 1979. In the third quarter of last year manufacturing employment fell by another 18,000.

It is true that output per head has risen by 50 per cent. since 1975, but it has risen from a very low level. According to a Labour research survey, productivity in British industry remained, in 1986, 30 per cent. lower than in American industry and 25 per cent. lower than in European industry. In the three months to October 1988, imports rose by 14 per cent. and exports by only 0.5 per cent.

The high cost of borrowing, with nine increases in interest rates since the Budget, will slow down the rate of investment in manufacturing industry and the rate of productivity increases. The over-valued pound will price British goods out of world markets and attract imports on an ever-increasing scale. My hon. Friend the Member for Workington (Mr. Campbell-Savours) was right. Even the increases in productivity have been achieved by the threat of unemployment, by the managerial counter-revolution, by greater exploitation of working people and by attacks on the rights of working people to organise in trade unions. In the next few months there will be rising unemployment, stagnation of the economy and rising inflation, much of it Government-inspired.

We should not forget that the threat of a world trade war has not receded. The row over American meat treated with hormones may be, to mix a metaphor, over peanuts in terms of world trade: it involves about $100 million on each side. That argument may be resolved, but it is a portent for the future. I repeat a point I have made before: America imports 30 per cent. of the rest of the world's exports and exports only 6 per cent. of its own production. Britain and West Germany export one third of all they make, and some European countries export 50 per cent. of what they produce. Given those figures, Europe cannot win any protracted trade war with America—certainly not Britain, whose economy is under-productive, under-skilled, under-researched, under-trained and not provided with enough investment.

The process has been hidden by the £70 billion of oil revenue, but oil is a finite resource and revenue is declining as world oil prices continue to fall. The process has also been hidden by the billions of pounds that have been taken as a result of this Government's privatisation policies, but most of the family silver has been sold off. Unless the Government can devise methods to privatise the air that we breathe or the pavements on which we walk, those options are fast disappearing. We face a period of stagflation. If a trade war were to break out, it would lead to a recession and a slump.

As for the social cost of the Government's programme, the Chancellor says that this first-time-ever boom has led to unparalleled increases in income. But that does not apply to everybody, because 9 million workers receive wages that are lower than the EEC's decency threshold. For the first time in 600 years, shipbuilding is to come to an end on the River Wear, and during the next few months 50,000 jobs are to go in the City of London. Moreover, 3,000 textile jobs have gone in the east midlands, and thousands more in Lancashire and my own west Yorkshire.

The Chancellor had the nerve today to talk about mortgages. The fact is that 8.5 million people are having to pay more now, while the 3 million people whose mortgages are reviewed annually will face a savage increase of up to 25 per cent., in many cases, during the next few weeks. No doubt the notice will be accompanied by a "happy new year" card from the Treasury Bench. House prices are rising four times faster than people's incomes. The building societies admit that there were 23,000 repossessions last year, although there were only 2,500 in 1979. Where will the people who are made homeless go? According to Shelter, there are already 1 million homeless people. Only 29,000 council houses are to be built this year, although as recently as 1975 the figure was 174,000.

The Government talk about the growth of share ownership and democracy, but a survey conducted by The Times of the top 1,000 companies showed that the top 25 companies own 37.3 per cent. of the turnover and 53.6 per cent. of the capital assets, that the top 200 companies dispose of 78.1 per cent. of turnover and own 90.9 per cent. of the capital assets and that the top 1,000 companies are owned by 0.1 per cent. of the population. If their families are taken into account, that is less than 1 per cent. of the population. Those are the people whom this Government represent. They are not concerned about the welfare of the great mass of the British people.

When the many poor people who have given up political views face the onslaught, I believe that they will come to realise that politics is important to them and that many middle-class families who are hit by mortgage increases will change their politics and realise that a change of Government is needed. The Government's alternatives are either a demand-led economy or a bureaucratically-dominated economy. I believe in Socialist planning which can be controlled by democratic means. That will bring real benefits to the people of this country.

8.53 pm

Mr. John Redwood (Wokingham)

The hon. Member for Dunfermline, East (Mr. Brown) owns a most useful distorting mirror. He portrays a world in decline and despondency, whereas all about us there is manifold evidence of growth in prosperity, capital investment, and the like. His mirror extends to distorting the statements of Conservative Members. He claimed that at the time of the major slump in world stock markets in 1987 my advice was to increase the public sector borrowing requirement.

I remember clearly the television encounter to which he referred. My advice was that growth should continue and that the Government should continue with their policy of a balanced budget, but that they should make the banking system more liquid to see us through the temporary crisis. I do not regret giving that advice. I think that it was correct. However, it has been distorted by the hazy memory of the hon. Member for Dunfermline, East.

More serious is the hon. Gentleman's view of the world when he looks at figures. He told us that public investment is falling and is in a bad way. He did so by ignoring investment in public corporations, which usefully leaves out, for example, the major investment increases in the railway network that were announced recently. His figures relating to total investment are incomprehensible. Perhaps they do not exist.

I, together with several of my hon. Friends, have asked him to make available the figures which he says show that total investment in our economy is lower now than it was during the 1970s. That is almost impossible to believe, but I look forward to the hon. Gentleman providing us with his sources so that they can be compared with the official statistics, which on this occasion I think are more reliable than they are in some other areas.

The Government are right to have taken action over interest rates. I hope that they will continue their downward pressure on the natural growth of public spending. I am delighted to see that my right hon. Friend the Chief Secretary is here. When he prepares the next autumn round of public spending, I hope that he will recognise the need for further increases in health and transport expenditure, which I am sure will be necessary. However, I hope that at the same time he will identify the many areas in which further reductions, or some reductions, can be effected.

With the development of regional growth and the return of prosperity to many towns, the huge regional transfers—called rate support grant—should be reexamined, and some of them reduced. My right hon. Friend should look again at the Scottish programme. Scotland is over-endowed with public spending, relative to its population and its new-found prosperity. He should look again at the interest burden as public sector debt begins to be repaid. That programme could be squeezed quite nicely, making space for other more desirable ends.

I hope that my right hon. Friend will also look at Europe where there has been a singularly large increase for the current year—a 100 per cent. rise forecast for 1989–90 compared with 1988–89. We cannot afford increases of that scale for that type of spending. We need to ensure that it does not happen again.

In order to enjoy the benefits of the large public sector surplus that the Government have engineered, it is also important to guarantee that currency intervention does not get out of hand. It is a sad fact that last year an excellent £3.6 billion surplus still required the borrowing of some £7 billion from the gilt-edged market to offset the impact of intervention through the foreign exchanges. That was the right decision from the monetary point of view, but I hope that the policy will be simpler to understand this year and that a large public sector surplus will be reflected in a major repayment of gilt-edged securities and public sector debt. That would be something of which the Government could rightly be proud. It is impossible to combine that policy with joining the EMS as a full member, but I should prefer financial prudence and debt repayment to membership of the EMS.

Personal savings have rightly worried many hon. Members who have taken part in the debate. There is a story to be told about the figures, in exactly the same way as my hon. Friend the Member for Slough (Mr. Watts) dealt admirably with the figures relating to the balance of trade and GNP. The figures, as compiled by the Central Statistical Office, are the result of subtracting consumers' expenditure from personal disposable income. The CSO pointed out in its advice note to editors that these are two very large figures and that a small error in either of them can cause a very large error in the savings ratio, as computed.

The figures in the other personal income category in the second and third quarters show quite a sizeable decline. I do not know whether they represent a realistic assessment of what was happening or whether those figures are subject to revision. Because my right hon. Friend took the right action on interest rates, we shall see, beginning in the fourth quarter of 1988, and much more strongly in the first quarter of 1989, a sharp improvement in the savings ratio, because borrowing is clearly reducing in volume and that will come through in the balance between personal disposable income and consumer expenditure if the figures are to be relied on at all.

Looking forward to the Budget as I do, because the Government are in such a strong position with their surplus, I do not consider that there is any need to make dramatic gestures to reduce income tax. Let us not forget just how strong the position is. If the Government decided to produce what until two years ago would have seemed almost inconceivably prudent—a Budget with no borrowing and no surplus—the standard rate of income tax could be set at around 17p or 18p in the pound. That would be below the current rate and below the target set by the Government to reach a rate of 20p in the pound during this Parliament.

I hope that the Government will take a small step on the way to 20p in the pound in the coming Budget and will continue to run a very tight fiscal policy for the ensuing year. I hope that people will become aware that there is enormous scope and that perhaps in the medium term we should think of a standard rate of income tax not of 20p in the pound but perhaps 15p in the pound which would be ideal to produce incentives and an impact on lower earnings. That will be eminently achievable if the downward pressure on public expenditure is maintained and if the growth rate of the economy remains reasonable despite the higher interest rate.

The important policy is to time the decline in interest rates properly. It is too soon to forecast when it may be possible to lower interest rates again, but there is no need whatsoever to raise them. They can remain at the present level for a while where they will have a great impact on borrowing levels and savings, and in due course it will become apparent when is the right moment to reduce them and people will benefit from the relief on their mortgages.

Finally, I am glad that the Labour Whips have been able to keep a few Opposition Members in the Chamber and find the occasional hon. Member to sit on the Front Bench, but until the hon. Member for Berwick-upon-Tweed (Mr. Beith) returned to the Social and Liberal Democrat Bench no one from that party was present throughout most of the debate. When one gets to the point where one is not interested in public spending or taxation, one is tired of politics. The SLD Bench has been empty for most of the time that I have been present in the Chamber.

9.1 pm

Mr. John Battle (Leeds, West)

The right hon. Member for Tonbridge and Mailing (Sir J. Stanley) made a powerful call for Government aid in support of the poor of the Third world. I whole-heartedly endorse and support that and I was glad to hear his speech. However, the Government's economic strategy had done little for the poor in Britain who represent a significant minority—28 per cent. of the population have not participated in the much-vaunted prosperity of our country.

The Chancellor opened the debate in the same spirit of complacent optimism with which he presented the Autumn Statement. His tone was that of the "winner takes all" gamester—the Chancellor as conqueror. Last autumn he presented to the House his White Paper on public expenditure. In the same speech he managed to represent public expenditure as going up, going down and remaining unchanged. Of course each of those positions serves different functions and is geared for different markets. Today it served his interest—as he goes through a rough patch—to emphasise that public expenditure is unchanged. He said that the totals are on target and that the Government are sticking to planning targets. He now suggests that he is an accurate forecaster and that he has got the forecast right.

In order to appease the National Health Service supporters that remain on the Government Benches, the right hon. Gentleman had to assure us last time that health expenditure was going up. Today, no doubt to appease the transport lobby in the Conservative party, he slipped in a reference to the fact that public expenditure on roads is going up. However, he did not point to the downside in public expenditure. He did not highlight the housing cuts, which, taking into account the Government's clawback from receipts on council house sales, mean a cash cut for housing in Britain of £550 million in real terms, when more than 128,000 households in Britain were officially recognised and registered as homeless in 1987. That is in the face of the admission of the Housing Minister on the radio this morning that there are 350 mortgage repossessions a week.

The Chancellor's statement is all things to all people, but it leaves out the homeless. They are not the only exception. There is no hope for the unemployed, either. The Chancellor claims that unemployment fell by 1 million in the past two and a half years, yet the Government's own figures show that only 50,000 full-time jobs were created in that period. That points to the development of a part-time, temporary, low-wage economy. Earlier this week, we saw two further measures presented to reinforce the establishment of a low-wage economy—the Social Security Bill and the Employment Bill.

Another aspect of public expenditure is the £1 billion reduction in the social security budget. The Chancellor may claim that expenditure is down because of a fall in unemployment and that it has nothing to do with creative accounting and the 28 changes since 1979 in the method of calculating the number of unemployed people. He may claim that it has nothing to do with proposals in recent Bills which will force eligible people out of benefit altogether, to save the Government a further £100 million. He will say that it has nothing to do with the savings that the Government achieved through freezing child benefit for the past two years and from real reductions in savings in respect of other benefits.

There is a myth of steadily rising living standards for everybody, but prosperity in Britain is not shared by all. It is not shared by the homeless or the unemployed. It is not shared by the 9.4 million people—40 per cent. of the work force—in low-paid jobs, earning less than the Council of Europe's decency threshold. It is striking that even those on average wages have not benefited from the Chancellor's economic strategy.

The Government are addicted to computation by averages. They are still trying to peddle the potent myth of the average wage. I sometimes get the impression that Conservative Members believe that the average wage is the national minimum—that everyone is on £254 a week. Many people understand that the majority of people in Britain earn far less than that average. They must live in the real world, on much less. Even those on that average wage pay more in tax now than they did under the last Labour Government.

Recently, a question was put to the Financial Secretary by the hon. Member for Hornchurch (Mr. Squire). The tables given in reply showed the total tax paid by a single man on average earnings of £254 a week. That total includes income tax, national insurance, and estimates of VAT and domestic rates. I would add that national insurance contributions and domestic rates are not optional; one cannot choose whether to pay them. The single man's total taxes amounted to 45.5 per cent. in 1978–79, and they will be 45.7 per cent. for the current year. For a married couple who are both working, taxes are up from 36.4 to 39.3 per cent. For a married couple with two children, they are up from 35.7 to 37.3 per cent. So much for the myth that the Government peddle of cutting taxes for all. In reality, the tax burden of the people has increased.

For all the Government's reliance on unregulated market forces, the end result of their economic policies is higher taxation for the majority, great tax handouts for the richest, higher mortgages for home buyers, and little or nothing for the poor. The Government's theory of the trickle-down economy is totally discredited. The Chancellor has yet to discover that he cannot go on pretending that the economy is like a Heineken advertisement—that the wealth at the top will filter down to the poorer parts of society. In practice, it is not happening. I am beginning to wonder whether the Chancellor really cares about that.

The right hon. Gentleman's attitude on political economy is beginning to filter through to social attitudes. People seem to believe that our society is based on what we can get away with and what we can get out of it. The dealing room has become the lodestone of morality in our society. Dealing room morality dominates Government policy. In practice, that means a "winner takes all" morality which is typical of the conqueror mentality. A strategy of continuing conquest which will eliminate all opposition, reduce the unemployed to statistical fiction and rub out the poor by redefining them away means that the minority—the losers in our society—will get nothing.

I remind the conquering Chancellor of a remark in a little-known and little-read play by Shakespeare which says: This England never did, nor never shall, lie at the proud foot of a conqueror, but when it first did help to wound itself.

9.10 pm

Mr. Stuart Holland (Vauxhall)

First, I should like to address the question of statistics. I shall return to it a little later in relation to the excellent observations of the Select Committee.

The hon. Member for Wokingham (Mr. Redwood) raised the question and, had he been here, I would have told him that the figures given by my hon. Friend the Member for Dunfermline, East (Mr. Brown) are corroborated. For example, on the basis of European Community data given by the Government, averaged out for the period from 1974 to 1979, gross fixed investment as a percentage of GDP was 19.3 per cent. From 1980 to 1984 it was 16.8 per cent. and from 1985 to 1989 it has risen a little to 17.9 per cent. but is lower than it was under the previous Labour Government.

My hon. Friend the Member for Dunfermline, East, who is always careful about such matters, obtained an independent valuation of the figures from the House of Commons statistical section which effectively confirms the same. I shall not detain the House with the figures in detail, but in 1979 gross domestic fixed capital formation amounted to 18.7 per cent. of GDP. It never achieved that level in the subsequent years under the Conservative Government. In 1987, the last year for which we have definitive figures, it was only 17.1 per cent. Therefore, my hon. Friend's figures were justified.

The Autumn Statement has been a missed opportunity for public expenditure and investment. The public spending figures show that there will be cuts in housing, environment, trade and industry, employment and energy. In real terms, there will be cuts of £400 million in the budgets of the Departments of Trade and Industry and Energy, £300 million in the Department of Employment, £400 million in housing and £100 million in environmental services. One wonders how genuine the Prime Minister's conversion to environmental issues will prove to be. There will be a cut of £200 million in the Scottish budget and a standstill for Wales and Northern Ireland.

That is only the current picture, a snapshot of what is happening now. The cuts are compounded by the neglect in public investment that has occurred under the Government. General Government expenditure has fallen by 40 per cent. in net terms since 1979 and will fall a further 6 per cent. during the next three years. Failure to invest in a public housing programme means that in 1987 almost 130,000 households in Britain—370,000 people—were officially recognised as homeless. That is twice the number declared homeless in 1979, and the figure is getting worse. That is an example which relates to my constituency of Vauxhall, which lies over the river from the House, where the problem of homelessness is shocking.

None of this is new because we have known for a long time that, as opposed to the care to achieve consensus—the hallmark of previous Conservative Administrations ever since Disraeli—this Government have been uncaring in their economic policy ever since they came into office and the most callous and uncaring of any Government since the war. That is not new, but the way in which the Government have been trying to run their economic policy since 1986 is. We know that they have failed to sustain their original targets and instruments for managing the economy. I well remember that when the Chancellor's predecessor took office in 1979 he said: It is crucially important to re-establish sound money. We intend to achieve this through firm monetary discipline and fiscal policies consistent with that, including strict control over public expenditure. In a statement to the Treasury and Civil Service Select Committee he said: Any suggestion of a reversal would take us into horrendous areas of outer space so to speak. I welcome the Chief Secretary to the Treasury and the Chancellor to outer space, because in effect that is where they are in terms of their overall management of the economy.

The Government tried for a while to adjust the figures to the facts. During an earlier phase, the Chancellor—Lawson mark 1—shuffled his monetary targets and adjusted the figures so often that had he been playing cards he would have been thrown out of any self-respecting casino. He shrank his targets from the broader M3 to the much narrow M0 in a way that did not convince anybody outside the House, certainly not in the square mile of the City of London.

By the autumn of 1986, the Chancellor had reverted to demand expansion with a pre-election mini-boom, and from his spring Budget of 1987 onwards he has confirmed that by reducing the basic tax rate. The irony is that the Chancellor is supposed to be economically literate. I am sorry that he is not present because for some reason during the debate he chose to claim that Labour Members were economically illiterate. I taught economics for at least 10 years and had many a better economics undergraduate student than him. He wrote about economics as a journalist, but it does not seem to have done him much good.

Even the Chancellor should know that what he has been engaged on since 1986 is not monetary policy, despite all the talk of sound financial discipline. In practice, although he dare not say its name, the post-1986 boom has been a demand-led classic boom. Such a boom was derided by Conservative Members for many years as a Keynesian boom. In an article next week, Professor Meghnad Desai of the London School of Economics reflects on the irony that since the autumn of 1986 the Government have run an economic policy that closely followed what the shadow Cabinet was proposing, but with a difference, because in practice, for all the rhetoric of the supply side of the economy, they have not intervened in supply and ensured the most basic equivalence of a supply response to match demand response. The result is a horrendous balance of payments deficit.

It is not surprising that the Chancellor should not be advertising these facts. Hilaire Belloc could have warned him And always keep a hold of Nurse For fear of finding something worse. In this case, nurse does not like John Maynard Keynes, just as she does not like the international variants pursued by the Chancellor either in the form of managed floating of currencies or in his penchant to get everything over with by joining the European monetary system. Again, the irony is not merely that the Chancellor is a closet Keynesian; he is an incompetent Keynesian. It is one thing not to read John Maynard Keynes and to dismiss him, as I assume is the case for the Prime Minister, but if the Chancellor claims to be economically literate, he should have been able to do better than he has.

He should also have been concerned about the congratulations he received from the Tory press until May last year, because there is one certain statistical correlation. Every time the Tory press congratulates a Chancellor of the Exchequer—since Reginald Maudling in the 1950s—it has seen only the upswing in the cycle and has been taken for a ride. In every case, the result has been a massive balance of payments deficit. The trade deficit for 1988 is the worst in recorded history.

The situation is highlighted by considering the non-oil visible imbalance, which in 1987 was nearly £15 billion. For 1988, it may be up to £20 billion. That reflects, of course, structural factors in the economy that the Government simply have not addressed, although other nations have addressed them by pursuing an industrial strategy. The Chancellor should, once he abandoned the medium-term financial strategy, have realised the real implications of the supply side and should have concerned himself with encouraging Ministers and the Department of Trade and Industry and even, if there is still something called collective responsibility in the Cabinet, with seeking to persuade the Prime Minister that when every other country plans its investment and its medium-term trade strategy—whether European economies or Japan, with the only exception being the United States, which is hardly an example to us all with its trade deficit—this country too should be intervening on the supply side and should be planning.

Another of the Chancellor's problems is that he has stripped the policy armoury of the main Keynesian instruments. He may want to join the European monetary system and obtain gains in stability, but he is not ready to appear to adopt a policy of devaluation. That is ironic because in the 1960s, which I remember because I was in the Cabinet Office, the pressure on the pound was such that civil servants and Peter Jay, who virtually got himself sacked from the Treasury for it, scarcely dared to mention, not a four-letter word, but the word "devaluation". We understand that a similar policy is being pursued now inside the Treasury.

The message going round is that devaluation will not be referred to. I wonder why. It cannot be for trade reasons. We cannot assume that the Government have been so persuaded by some of the arguments on the multinational structure of trade that they too now have reservations about devaluation. It does not seem to be that. The reason is that the situation is so precarious at the moment, as the Chancellor and the Government know, that they simply will not allow the word to be used. I know of the devices adopted by people in the 1960s. I remember people talking about the real need for a double dose, although it was not specified what that was. In the 1960s, some Government economic advisers had an advantage over Terry Burns. Lords Kaldor and Balogh, as they later became, simply picked up the telephone and talked about the matter in Hungarian. Terry Burns no doubt worked out his own devices for trying to discuss devaluation without doing a cloak-and-dagger act in St. James's park.

Why are the Government so concerned to avoid a discussion about the exchange rate? The reason why the pound is relatively strong today is that it is buoyed up by interest rates that are higher than any of those of our leading competitors, and also because the dollar is relatively strong. As the dollar weakens, the pressure on the pound will become considerable. The Chancellor is standing by because he knows that he may well be forced by world pressures into the realignment of the pound.

Sir Peter Hordern

The hon. Gentleman said that the balance of payments deficit is at a record level. In nominal terms—in terms of figures—he is right, but the proportion of GDP accounted for by the balance of payments deficit is still not approaching what it was under the two previous Labour Governments, and the hon. Gentleman does not take into account the enormous public sector deficit that occurred under previous Labour Governments, which forced them to appeal to the International Monetary Fund for rescue. That is the difference between the present situation and the one for which the hon. Gentleman and his party were responsible.

Mr. Holland

The hon. Member for Horsham (Sir P. Hordern) has missed the fact that there is another difference. In the 1970s, sterling was a key reserve currency. We had a relatively fixed exchange rate system but the devaluation of the dollar in 1971 put tremendous pressure on the pound. I am not saying that I would have acted in precisely the same way as some of my former colleagues, but the pressure was exceptional. Furthermore, this Government have never had to face anything equivalent to the increases in oil prices that occurred in September 1973. Every OECD Government slowed down the international economy at that time, and with horrendous consequences. Instead of adjusting the steering or changing down, most of them slammed on the brakes.

The hon. Member for Horsham, knows—perhaps even the Chancellor knows—that one country's imports are another country's exports, and that the result was the contraction of mutual OECD trade. This Government have not had to face such problems. [Interruption.] Conservative Members should know by now that I am quite happy to take them on, but if they wish to intervene, why do they not get to their feet?

The Economic Secretary to the Treasury (Mr. Peter Lilley)

Will the hon. Gentleman explain why, if the Labour Government alone among Governments of industrial countries got their economic policy right between 1973 and 1976, they were the only Government who had to call in the IMF?

Mr. Holland

I did not claim that; I wish the hon. Gentleman would listen to what I am saying. Sterling was, and still is, a key reserve currency and the pressure placed on the pound by the devaluation of the dollar in 1971 was exceptional.

The Chancellor will not touch any controls other than that represented by interest rate policy. The Opposition cannot see how that will be effective in sustaining recovery in the economy as a whole. One thing is quite clear, and that is that the self-financing of big business means that it will not be as deeply affected by higher interest rate charges as small firms will be. The interest rate increases will not be the euthenasia of the rentier but they will wipe out many small and medium-sized firms, as Conservative Members well know.

The Chancellor appears to need no persuading that there is an economic miracle. The shine may have slipped off his smile somewhat, but it beggars the imagination to claim that there is an economic miracle when we have a most horrendous balance of payments problem and when there is a structural crisis in the long-term manufacturing trade performance of this country.

Mr. Brazier

If there is such a structural crisis in our manufacturing performance, why has it improved so quickly in the past 12 months?

Mr. Holland

The balance of payments crisis is a very long-term problem. It certainly goes back to the 1970s, but it is very little affected by macroeconomic policies and demand management. We simply have not invested enough. Certainly in the decade during which the Government have been in power there has not been sufficient long-term, technology-embodying investment to improve our competitiveness vis-a-vis other countries in Europe and vis-a-vis Japan. The hon. Gentleman should know that. The so-called recovery of manufacturing investment lauded by Conservative Members is simply a recovery from the depths to which the Government had allowed the economy to sink by 1981. We are still hardly back to the manufacturing output level that we had reached in 1979.

Of course, the Chancellor is not confident of sustaining his miracle. He might be praying for his miracle. I am not sure of his fiscal stance on this. It appears that his fiscal stance—with interest rates where they are—is horizontal rather than vertical, but there is certainly a problem for the Chancellor. Let us be sympathetic. The statistics which we have are a problem for the Chancellor. That was put brilliantly by Bill Martin, the adviser to the Select Committee, in the following words: the junk-data which these days pass for official statistics make it impossible to get anything but the most tenuous appreciation of recent economic behaviour, let alone predict its future course. Consequently, forecasters who have been collectively burnt to a crisp by economic developments this year are still in no position to write a happy ending to Britain's overheating saga. Further on in his memorandum to the report, he says: Worse still, the holes in the official statistics have left forecasters with only the foggiest appreciation of why the economy accelerated.

Mr. Ian Taylor

The hon. Gentleman appears to be getting into trouble despite his long years of experience as a lecturer. The reality is that the balance of probability is that any variables in the system will be in favour of a reduction in the outturn of the balance of payments deficit this year. Even last weekend it was pointed out that there is probably an under-recording of £4 billion on invisible exports. That puts his argument completely in threads.

Mr. Holland

I am pleased that the hon. Gentleman has brought me precisely to that point. He has helped me a great deal. One thing which is wrong with our foreign trade statistics is that we measure imports accurately, because there are duties liable on them, but the recording of exports is voluntary. There is no mandatory obligation to report figures or any penalty for not reporting them accurately. Further, the Government have no idea what is happening with the transfer pricing by the big businesses which dominate our trade.

When we were in government, we published the figures, for example, on the share of trade commanded by big business from 1971 onwards. When I came into the House in 1979, I asked the Government to continue to give that information. It shows, for example, that some 30 firms command 40 per cent. of our visible export trade, 75 firms half and 220 firms two thirds. What those companies do crucially affects our trade performance, but all those companies are multinationals and all are integrated in world markets. We saw an example in the Evening Standard today. There was a report that Ford will or will not decide to produce just one vehicle at Dagenham. Whatever is done to the exchange rate will not affect Ford's decision on that Dagenham location.

Mr. Brazier

rose—

Mr. Holland

No. I have given way enough.

If the Government do not introduce some transparency not only on figures concerning expenditure and output, but on the structure of supply, in future, as now, they will simply be groping in the dark with their economic policy.

Mr. Redwood

Will the hon. Gentleman give way?

Mr. Holland

No. I shall not give way any more. If I give way, it will be at the expense of the Chief Secretary.

It is double standards for the Chancellor to claim, on the one hand, that his high interest rate measures are well targeted on the south-east, because that is the area where house prices are out of line, yet, on the other, that there will be nothing wrong with the RPI if it does not include mortgage costs. To do that lays him open to the charge that the country's core rate of inflation should exclude the country's property-owning democracy.

The report from the RPI advisory committee on issues affecting the retail price code said: These represent tangible expenditures which most owner-occupier households need to make at some time. The households concerned think of mortgage payments as an integral part of their regular expenditure. In a survey which that committee carried out, 80 per cent. of those consulted said that they felt that mortgage interest rates should be included as part of the RPI.

The Chancellor also knows that if he does not achieve an industrial strategy, we shall see further de-industrialisation of the economy in coming years. He may not agree, for example, with unilateral nuclear disarmament, but he should not accept for GEC and other takeovers unilateral industrial disarmament. The Government must take steps which ensure that we have a sounder economic structure on the supply side of the economy, and that can be done only by intervention, negotiation and the type of consensus on both sides of industry which the Government do not wish to achieve.

If the Chancellor cannot address the issues of an alternative industrial strategy, he may shortly be looking at his employment. Perhaps the City can afford him, but the country cannot.

9.35 pm

The Chief Secretary to the Treasury (Mr. John Major)

We have had a wide-ranging and occasionally baffling debate in which several hon. Members, particularly those on the Treasury and Civil Service Select Committee whose report has so well informed this debate, have made excellent and interesting contributions.

My right hon. Friend the Member for Worthing (Mr. Higgins), who ably chairs that lively assembly that I occasionally have the pleasure of appearing before, raised, as did my hon. Friend the Member for Slough, (Mr. Watts), the question of official statistics. My right hon. Friend reiterated strongly the Committee's worries about the current state of economic statistics. The Government share that anxiety, which is why last year my right hon. Friend the Chancellor of the Exchequer set up a review to examine the present arrangements for producing them and to make recommendations for improving them. That scrutiny has been completed and the Government are now considering it. As my right hon. Friend the Chancellor intimated earlier, we shall in due course publish a comprehensive report as a result of that inquiry.

In the closing remarks of his teach-in, the hon. Member for Vauxhall (Mr. Holland) was pessimistic about our prospects and painted a picture which I suspect few would recognise. In his analysis of the economy it seemed that he missed some of the ingredients that many other less learned people might conceivably think important. He omitted the fact that capital investment is growing at more than twice the rate of consumption, that private investment is at its highest level since records began—he expressly stated the contrary—that manufacturing output is at its highest ever level and growing fast, and that non-oil company profitability rose by about 10 per cent. in 1987—[Interruption.] The hon. Member for Workington (Mr. Campbell-Savours) should wait a minute as he will hear something that will interest him. Non-oil company profitability is expected to be higher in 1988 than at any time since 1960. It may be that the hon. Member for Vauxhall thought that unimportant and he is not alone in that, for the hon. Member for Dunfermline, East (Mr. Brown) also failed to mention many of those facts.

Mr. Holland

Will the Minister give way?

Mr. Major

In one moment. Neither did either hon. Member mention that unemployment has now fallen for 28 successive months. Perhaps that is because in 1986 the hon. Member for Dunfermline, East said: there would be no fall in unemployment", and the hon. Member for Vauxhall only last March said: The reality is that unemployment will get worse. It is now two years since the hon. Member for Dunfermline, East made his prediction and 10 months since the hon. Member for Vauxhall made his. In that time, unemployment has fallen in every month and in every region.

Mr. Holland

First, one point is missing from the catalogue given to us by the Chief Secretary and that is that the balance of trade is an imbalance. Secondly, what matters is not the profits that companies have in their pockets, but how they invest them and how competitive we are. Our productivity recovery is nothing compared with the higher levels of other countries. Thirdly, if the Government had not changed the unemployment figures 23 times, we would be more persuaded. The Chief Secretary should learn that real jobs cannot be stimulated by massaging the figures.

Mr. Major

If the hon. Gentleman intends to talk about catalogues, I shall deal with the catalogues of the hon. Member for Dunfermline, East in a few moments.

Both hon. Gentlemen, and the Labour party generally, still predict gloom with avid glee. That is the central part of everything that Labour Members say. The Labour party has been predicting a slump for a considerable number of years, although it stubbornly refuses to appear. With characteristic inhibition, the Leader of the Opposition, who is temporarily absent, predicted in 1983 a super-slump and forecast that the Government's promise of a recovery was "a mirage." The only mirage was the right hon. Gentleman's forecast of a super-slump. Since then, we have had steady growth and we are entering our seventh successive year of it.

Both the hon. Gentlemen and others raised matters to which I shall turn in a few moments, but my right hon. Friend the Chancellor promised earlier that I would deal with the public expenditure aspects of the Autumn Statement to which the hon. Member for Berwick-upon-Tweed (Mr. Beith) devoted a considerable amount of time. The House will of course have a further opportunity to discuss the spending plans in detail next month.

The most important part of the public expenditure survey to note is the fact that we have been able to hold spending for next year unchanged at the total of £167 billion. That means that we have been able to meet two separate but important objectives. The first has been to reduce overall spending as a proportion of national income, so that we can maintain a strong fiscal position and, when it is prudent to do so, reduce taxes as well, because Conservative Members believe in lower taxes.

Over the past four years, public spending has fallen, from over 46 per cent. of national income—

Mr. Leighton

Will the Minister give way?

Mr. Major

The hon. Member for Vauxhall took a considerable amount of the limited time available and, if the hon. Member for Newham, North-East (Mr. Leighton) will excuse me, I shall not give way.

Over the past four years public spending has fallen from over 46 per cent. of national income to less than 40 per cent. It is set to fall further to the lowest level since 1966 by 1991.

For the future, our plans provide for spending on programmes to grow by an average 3 per cent. in real terms over the survey period. But the reduction in the burden of debt interest means that total spending is set to grow by less than 2 per cent. a year on average in real terms. That means that we shall continue to have firm control of total public spending as well as real growth in priority services. In the total for next year, we have achieved substantial savings through the rapid fall in unemployment, which cut spending on social security benefits by £1.5 billion a year, the success of the right-to-buy scheme, which has been tremendous, and far better performance by nationalised industries. Those are the direct results of the success of specific policies and together they provide substantial savings that we can redeploy to priority services.

Those savings, together with a rigorous reassessment of priorities that we made in the public expenditure round, have meant that we are now spending money where we choose to spend it and not where circumstances dictate. That is the second objective that we have met, and it is very welcome. Let me illustrate why it is so welcome. It has made possible an unprecedented increase in resources for the National Health Service of over £2 billion next year and over £2.5 billion the year after. That will offer real service growth, as the hon. Member for Dunfermline, East, even with his perverted statistics, must know. It has enabled substantial increases for roads, the police services and the development of a modern prison system.

The science budget, mentioned by a number of hon. Members, will be over 16 per cent. higher next year. There is substantial extra investment for the water authorities to reduce both sea and river pollution, as was mentioned in the debate. In direct response to the hon. Member for Berwick-upon-Tweed, I should point out that extra investment by British Rail and London Transport will improve safety and services for passengers.

All in all, the increase in total capital spending for next year is about £2.25 billion. I cannot recall, and neither can any other hon. Members, when there was last such an increase in capital public spending in a single year. We should compare that with Labour's record on public sector capital investment. Total public sector capital investment under Labour fell by 12 per cent. in real terms. What did that mean for the services about which they claim to care? National Health Service capital spending went down by 30 per cent. in real terms. We have increased it by 40 per cent. Spending on roads fell by 40 per cent. in real terms and we have increased it by 30 per cent. We need and will accept no lectures from Opposition Members about proper capital spending and public services.

As a result of sound management, public finances are in better shape now than for a generation. For the past two years we have managed to reduce taxes, increase spending in key areas and repay the national debt on an unprecedented scale.

My hon. Friend the Member for Horsham (Sir P. Hordern) regarded the fiscal surplus as a great achievement by my right hon. Friend the Chancellor, and I agree with him. Over the past two years my right hon. Friend will have secured a net repayment equivalent to 8 per cent. of the total outstanding stock of Government debt. That means that we are the first tax-paying generation for more than 50 years to stop the growth of debt and to start repaying it, so relieving the burden that future generations would otherwise have to face.

The hon. Member for Dunfermline, East was his usual self this afternoon—lucid, forceful, agressive and a purveyor of more doubtful material than Arthur Daley. The hon. Gentleman has a way with facts that I have rarely seen equalled and he should spend tomorrow having a painful interview with his research assistant who presumably provided them.

The hon. Gentleman wriggled like a fish on a hook when challenged by my right hon. Friend the Chancellor to set out his policies on taxation and public expenditure. He repeatedly failed to give them. He left the impression with me, and I suspect with most hon. Members, that he did not respond because he had no ideas what those policies were. It would be tiresome and time-consuming to correct all the hon. Gentleman's fanciful howlers, but I will deal with some of them.

The hon. Gentleman said that inflation was at the European average when the Labour party left office. He is wrong. In May 1979 the European Community average was 8.8 per cent. and United Kingdom inflation was 10.3 per cent. He also said that inflation was on a declining trend, but it was not. It was on a sharply rising trend. In January 1979 it was 9.3 per cent., in February 9.6 per cent., in March 9.8 per cent., in April 10.1 per cent. and in May 10.3 per cent. Even the hon. Gentleman cannot say that there was a declining trend when the Labour party left office.

The hon. Gentleman also said that overall investment as a share of GDP was never lower than it is now. He is wrong again. I gloss over the fact that the figures for the current year, which has been a dramatic investment boom, are not yet available, so the hon. Gentleman cannot know the position. Even on the figures that are available, I suspect that he is wrong.

The hon. Member was also pressed to reveal his fiscal strategy and he gave a remarkable answer. He announced that he would—at one and the same time—reduce inflation, allow interest rates to fall and reduce the balance of payments deficit. In other words, he would loosen monetary policy, expand fiscal policy and expect to reduce inflation. That is an interesting trick if he can do it, but he would have to defy most of the known laws of economics to achieve it. It that is the best that the hon. Gentleman can do, I understand entirely why he failed to answer the direct questions that my right hon. Friend the Chancellor asked him.

The hon. Member for Dunfermline, East also told us that he would increase spending on training, the environment, science, the regions and technology. He did not explain how increasing that spending would help to reduce inflation. What the hon. Gentleman effectively proposed was fiscal laxity—not a fiscal strategy That is precisely what we expect from Labour spokesmen, because that is what we get from Labour Governments when we are unfortunate enough to have them.

We did learn something about the Opposition tax strategy, and very interesting it was too. The hon. Member for Dunfermline, East said that it was unfair to tax any form of saving and he specifically instanced building society investments. I assume therefore—I will give way to him if he wants to respond—that he would abolish the composite rate of tax, at a cost of around £3 billion in the short term and far more in the long term as people switch from shares into deposits. That is what the hon. Gentleman said and implied.

Some time ago, the right hon. and learned Member for Monklands, East (Mr. Smith), whom we all look forward to welcoming back, said that he was careful about making pledges, because the Conservatives added up their costs. I may tell the hon. Member for Dunfermline, East that that is exactly what I shall do, because the Opposition are racking up the cost of their programme again and again. We shall keep a very close check on what they say.

The hon. Member for Dunfermline, East dismissed a reminder that the man on average earnings is £45 per week better off now than when the last Labour Government left office. He implied that living standards automatically rise. I remind him that under the last Labour Government, real take-home pay fell by more than £1 a week for a married man on average earnings. That is the record of shame which must be compared with the increase of £45 per week that has taken place as a result of the present Government's policies.

The hon. Gentleman implied that the period at the end of the last Labour Government was a golden age, so I looked it up. To be strictly fair to the hon. Gentleman, I picked precisely today's date 10 years ago. I also picked the only newspaper that happened not to be on strike that day. I shall read the headlines to the hon. Gentleman. Under the headline "Regional 'trouble shooters'", it reports: The Prime Minister held back from declaring a full State of Emergency last night…Instead, the Government is setting up regional emergency committees. Is that the hon. Gentleman's idea of regional policy? It continues: Apparently, they will not have the power themselves to order the use of troops. That power at least stayed with the Government.

Other headlines include: Grocers may close as stocks dwindle. and: Walk-out hits water supplies. That report continues: Water supplies and sewerage services covering 750,000 people in central Lancashire will be hit by an unofficial strike. On that same day 10 years ago, in that golden age, an emergency was declared in Ulster, and British Airways pilots were on strike.

However, those were not the main headlines. Those were the secondary stories. The main headline was: Nation on precipice, says Healey. Union spurns Cabinet plea. Lorry strike made official: food stocks 'will run out'. That is the record of the golden age to which the hon. Gentleman refers. Those were the policies he advocated again today, however he described them. That would be the result of those policies, and that is why the country will have nothing to do with them.

Mr. Holland

Which newspaper was that?

Mr. Major

It was The Daily Telegraph, which was the only newspaper not on strike that day, so good were the activities of the Labour party. Those were the headlines of 10 years ago.

Many right hon. and hon. Members concentrated their remarks on their concern about inflation. I can understand why, and I reiterate the Government's well-known view that the reduction of inflation is the priority to which our policy must be directed, and that it will continue to be directed at that priority in the future. The Opposition's apparent policy of lower interest rates, lower exchange rates, more public spending and more public borrowing is a lethal concoction which is bound to lead yet again to spiralling inflation.

My right hon. Friend the Chancellor of the Exchequer set out the economy's outstanding success over recent years, with growth of more than 3 per cent. per year in each of the last four years, investment rising faster than for years—and faster than consumption in six years out of the last seven. Both company profits and productivity have reached their highest levels since the 1960s.

Nor is there any doubt that supply-side reforms and the knock-on effect of the present investment boom will improve capacity and profitability in future. At present we face the particular problem of excess demand. That must and will be overcome with a strong fiscal position and a strong monetary policy to ensure that we do not jeopardise what has been achieved and our prospects for the future.

But Labour Members seem not to understand what our policy is achieving. For some years our policy has been to seek a progressive reduction in inflation together with steady and sustainable growth, and we are achieving that with the right mix of monetary and fiscal policy.

Our present fiscal position is extremely strong—a large budget surplus and no increase in planned public expenditure. Therefore, the right method to deal with excess demand is short-term interest rates. The right, most appropriate and most effective method is short-term interest rates. I have no doubt that they will work on this occasion as they have done in the past.

In the odd world in which he lives, the hon. Member for Vauxhall may not have noticed that there is an investment boom this year and every projection shows that it will continue next year.

Mr. Holland

What about small business?

Mr. Major

Every week 1,000 new firms are being registered net of those that close down. When did that happen under the previous Labour Government?

There are already signs that house price rises are being curbed, that the demand for mortgages is falling and that consumer spending is slowing down. That is what we seek and that is what we need to see in the next few months.

Despite out lack of success when pressing the Opposition earlier, we now have some clues to some of the hidden policies that they have but choose not to talk about. For example, we know that they wish to reverse higher tax cuts, because they frequently tell us so. We know that they wish to increase basic rate taxes, because they regularly vote against reductions and pledge themselves to expenditure that would raise taxes. We know that they have traditionally been proud—boastful even—to be the high-tax, high-spending, high-borrowing and high-inflation party.

Inflation during our period of office has never approached half of the average it was under the Labour Government.

Mr. Holland

rose—

Mr. Major

The hon. Gentleman has already taken up far too much of the time of the House.

Mr. Holland

rose—

Mr. Speaker

Order.

Mr. Major

We know too that the Opposition want credit controls because they tell us so frequently. But that is all we know, because beyond that one needs second sight to divine their policies. What policies they do have are concealed with misleading language.

Conviction has been replaced by camouflage in the Labour party's vocabulary. Nationalisation is out. That has now become social ownership, courtesy of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). Devaluation is out. That is now called seeking a realistic exchange rate, courtesy, I think, of the hon. Member for Dagenham (Mr. Gould). Government intervention and regulation is now out in the Labour party. That is now called supply-side Socialism, courtesy of the hon. Member for Dunfermline, East.

The Labour party is in hock to yesterday's ideas. They have different packages, but they have exactly the same poison in them that they always had.

The concept of supply-side Socialism is breathtaking plagiarism; another piece of yuppy camouflage by the hon. Gentlemen. It is about as realistic as horse-drawn hang gliding. The idea was first mooted by the hon. Member for Dunfermline, East, but no one has since come forward to claim credit for it. Frankly, I am not surprised, because higher taxes, more taxes and credit controls are an odd policy to encourage the supply-side. I will tell hon. Members what it is. It is a supply of Socialism, not a supply-side policy. It is also a gimmick, an idea, a jumble of words which do not add up to anything.

The Opposition claim that they want to help the poor, but they have no policy for inflation. They want to help the low paid, but they vote against tax reductions. They hope that they will get power without policy, but they Will not, because people understand the improvements in Britain. They know that the economy has been transformed and they want to keep it that way. That is why they will support the need for policies to achieve growth without inflation. The Autumn Statement is central to that and I commend it to the House.

Question put, That the amendment be made:—

The House divided: Ayes 212, Noes 276.

Division No. 32]	[10 pm
AYES
Abbott, Ms Diane	Coleman, Donald
Adams, Allen (Paisley N)	Cook, Robin (Livingston)
Allen, Graham	Corbett, Robin
Alton, David	Corbyn, Jeremy
Archer, Rt Hon Peter	Cousins, Jim
Armstrong, Hilary	Crowther, Stan
Ashdown, Rt Hon Paddy	Cryer, Bob
Ashley, Rt Hon Jack	Cummings, John
Ashton, Joe	Cunliffe, Lawrence
Banks, Tony (Newham NW)	Cunningham, Dr John
Barnes, Harry (Derbyshire NE)	Dalyell, Tam
Barnes, Mrs Rosie (Greenwich)	Darling, Alistair
Barron, Kevin	Davies, Rt Hon Denzil (Llanelli)
Battle, John	Davies, Ron (Caerphilly)
Beckett, Margaret	Dewar, Donald
Beith, A. J.	Dixon, Don
Bell, Stuart	Dobson, Frank
Benn, Rt Hon Tony	Doran, Frank
Bennett, A. F. (D'nt'n & R'dish)	Dunnachie, Jimmy
Bermingham, Gerald	Dunwoody, Hon Mrs Gwyneth
Bidwell, Sydney	Eastham, Ken
Blair, Tony	Evans, John (St Helens N)
Blunkett, David	Ewing, Harry (Falkirk E)
Boateng, Paul	Fatchett, Derek
Boyes, Roland	Faulds, Andrew
Bradley, Keith	Field, Frank (Birkenhead)
Bray, Dr Jeremy	Fields, Terry (L'pool B G'n)
Brown, Gordon (D'mline E)	Fisher, Mark
Brown, Nicholas (Newcastle E)	Flannery, Martin
Brown, Ron (Edinburgh Leith)	Flynn, Paul
Buchan, Norman	Foot, Rt Hon Michael
Buckley, George J.	Foster, Derek
Caborn, Richard	Foulkes, George
Callaghan, Jim	Fraser, John
Campbell, Menzies (Fife NE)	Fyfe, Maria
Campbell, Ron (Blyth Valley)	Galloway, George
Campbell-Savours, D. N.	Garrett, John (Norwich South)
Canavan, Dennis	Garrett, Ted (Wallsend)
Cartwright, John	Godman, Dr Norman A.
Clark, Dr David (S Shields)	Gordon, Mildred
Clarke, Tom (Monklands W)	Gould, Bryan
Clay, Bob	Grant, Bernie (Tottenham)
Clelland, David	Griffiths, Nigel (Edinburgh S)
Clwyd, Mrs Ann	Griffiths, Win (Bridgend)
Cohen, Harry	Hardy, Peter

Harman, Ms Harriet	Murphy, Paul
Hattersley, Rt Hon Roy	Nellist, Dave
Heffer, Eric S.	Oakes, Rt Hon Gordon
Henderson, Doug	O'Brien, William
Hinchliffe, David	O'Neill, Martin
Hogg, N. (C'nauld & Kilsyth)	Orme, Rt Hon Stanley
Holland, Stuart	Owen, Rt Hon Dr David
Home Robertson, John	Pendry, Tom
Hood, Jimmy	Pike, Peter L.
Howells, Geraint	Powell, Ray (Ogmore)
Hoyle, Doug	Primarolo, Dawn
Hughes, John (Coventry NE)	Quin, Ms Joyce
Hughes, Robert (Aberdeen N)	Radice, Giles
Hughes, Simon (Southwark)	Redmond, Martin
Illsley, Eric	Rees, Rt Hon Merlyn
Ingram, Adam	Reid, Dr John
Janner, Greville	Richardson, Jo
Johnston, Sir Russell	Robertson, George
Jones, Barry (Alyn & Deeside)	Robinson, Geoffrey
Kaufman, Rt Hon Gerald	Rogers, Allan
Kinnock, Rt Hon Neil	Ross, Ernie (Dundee W)
Kirkwood, Archy	Rowlands, Ted
Lambie, David	Ruddock, Joan
Lamond, James	Salmond, Alex
Leadbitter, Ted	Sedgemore, Brian
Leighton, Ron	Sheerman, Barry
Lestor, Joan (Eccles)	Sheldon, Rt Hon Robert
Lewis, Terry	Shore, Rt Hon Peter
Litherland, Robert	Short, Clare
Livsey, Richard	Skinner, Dennis
Lloyd, Tony (Stretford)	Smith, Andrew (Oxford E)
Lofthouse, Geoffrey	Snape, Peter
Loyden, Eddie	Soley, Clive
McAllion, John	Spearing, Nigel
McAvoy, Thomas	Steel, Rt Hon David
McCartney, Ian	Steinberg, Gerry
Macdonald, Calum A.	Stott, Roger
McFall, John	Strang, Gavin
McKay, Allen (Barnsley West)	Straw, Jack
McKelvey, William	Taylor, Mrs Ann (Dewsbury)
McLeish, Henry	Taylor, Rt Hon J. D. (S'ford)
McNamara, Kevin	Thompson, Jack (Wansbeck)
McTaggart, Bob	Turner, Dennis
Madden, Max	Vaz, Keith
Mahon, Mrs Alice	Wall, Pat
Marek, Dr John	Wallace, James
Marshall, David (Shettleston)	Walley, Joan
Marshall, Jim (Leicester S)	Wardell, Gareth (Gower)
Martin, Michael J. (Springburn)	Wareing, Robert N.
Martlew, Eric	Welsh, Andrew (Angus E)
Maxton, John	Welsh, Michael (Doncaster N)
Meacher, Michael	Wigley, Dafydd
Meale, Alan	Williams, Rt Hon Alan
Michael, Alun	Williams, Alan W. (Carm'then)
Michie, Bill (Sheffield Heeley)	Wilson, Brian
Michie, Mrs Ray (Arg'l & Bute)	Winnick, David
Moonie, Dr Lewis	Wise, Mrs Audrey
Morgan, Rhodri	Wray, Jimmy
Morley, Elliott	Young, David (Bolton SE)
Morris, Rt Hon A. (W'shawe)
Morris, Rt Hon J. (Aberavon)	Tellers for the Ayes:
Mowlam, Marjorie	Mrs. Llin Golding and
Mullin, Chris	Mr. Frank Haynes.

NOES
Aitken, Jonathan	Bellingham, Henry
Alexander, Richard	Bendall, Vivian
Alison, Rt Hon Michael	Bennett, Nicholas (Pembroke)
Amess, David	Benyon, W.
Amos, Alan	Bevan, David Gilroy
Arbuthnot, James	Biffen, Rt Hon John
Arnold, Jacques (Gravesham)	Body, Sir Richard
Arnold, Tom (Hazel Grove)	Bonsor, Sir Nicholas
Ashby, David	Boscawen, Hon Robert
Aspinwall, Jack	Boswell, Tim
Atkins, Robert	Bottomley, Peter
Baker, Rt Hon K. (Mole Valley)	Bottomley, Mrs Virginia
Baker, Nicholas (Dorset N)	Bowden, A (Brighton K'pto'n)
Banks, Robert (Harrogate)	Bowden, Gerald (Dulwich)
Batiste, Spencer	Bowis, John

Boyson, Rt Hon Dr Sir Rhodes	Grist, Ian
Brandon-Bravo, Martin	Grylls, Michael
Brazier, Julian	Gummer, Rt Hon John Selwyn
Bright, Graham	Hamilton, Hon Archie (Epsom)
Brooke, Rt Hon Peter	Hampson, Dr Keith
Browne, John (Winchester)	Hanley, Jeremy
Bruce, Ian (Dorset South)	Hannam, John
Budgen, Nicholas	Hargreaves, A. (B'ham H'll Gr')
Burns, Simon	Hargreaves, Ken (Hyndburn)
Burt, Alistair	Harris, David
Butler, Chris	Haselhurst, Alan
Butterfill, John	Hawkins, Christopher
Carlisle, John, (Luton N)	Hayhoe, Rt Hon Sir Barney
Carlisle, Kenneth (Lincoln)	Hayward, Robert
Carrington, Matthew	Heathcoat-Amory, David
Carttiss, Michael	Heddle, John
Cash, William	Hicks, Mrs Maureen (Wolv' NE)
Channon, Rt Hon Paul	Higgins, Rt Hon Terence L.
Chapman, Sydney	Hill, James
Chope, Christopher	Hind, Kenneth
Churchill, Mr	Hogg, Hon Douglas (Gr'th'm)
Clark, Hon Alan (Plym'th S'n)	Holt, Richard
Clark, Dr Michael (Rochford)	Hordern, Sir Peter
Clark, Sir W. (Croydon S)	Howard, Michael
Clarke, Rt Hon K. (Rushcliffe)	Howarth, Alan (Strat'd-on-A)
Colvin, Michael	Howarth, G. (Cannock & B'wd)
Conway, Derek	Howe, Rt Hon Sir Geoffrey
Coombs, Anthony (Wyre F'rest)	Howell, Rt Hon David (G'dford)
Coombs, Simon (Swindon)	Howell, Ralph (North Norfolk)
Cope, Rt Hon John	Hughes, Robert G. (Harrow W)
Cormack, Patrick	Hunt, David (Wirral W)
Couchman, James	Hunter, Andrew
Cran, James	Irvine, Michael
Critchley, Julian	Irving, Charles
Currie, Mrs Edwina	Jack, Michael
Curry, David	Jackson, Robert
Davies, Q. (Stamf'd & Spald'g)	Janman, Tim
Davis, David (Boothferry)	Jessel, Toby
Day, Stephen	Johnson Smith, Sir Geoffrey
Devlin, Tim	Jones, Robert B (Herts W)
Dickens, Geoffrey	Jopling, Rt Hon Michael
Dicks, Terry	Key, Robert
Dorrell, Stephen	King, Roger (B'ham N'thfield)
Douglas-Hamilton, Lord James	King, Rt Hon Tom (Bridgwater)
Dover, Den	Knapman, Roger
Dunn, Bob	Knox, David
Dykes, Hugh	Lamont, Rt Hon Norman
Eggar, Tim	Lawrence, Ivan
Evans, David (Welwyn Hatf'd)	Lawson, Rt Hon Nigel
Evennett, David	Lennox-Boyd, Hon Mark
Favell, Tony	Lester, Jim (Broxtowe)
Fenner, Dame Peggy	Lightbown, David
Field, Barry (Isle of Wight)	Lilley, Peter
Finsberg, Sir Geoffrey	Lloyd, Sir Ian (Havant)
Fishburn, John Dudley	Lloyd, Peter (Fareham)
Fookes, Dame Janet	Mackay, Andrew (E Berkshire)
Forman, Nigel	Major, Rt Hon John
Forsyth, Michael (Stirling)	Mans, Keith
Forth, Eric	Maude, Hon Francis
Fowler, Rt Hon Norman	Miller, Sir Hal
Fox, Sir Marcus	Mills, Iain
Franks, Cecil	Miscampbell, Norman
Freeman, Roger	Mitchell, Andrew (Gedling)
French, Douglas	Mitchell, Sir David
Gale, Roger	Moate, Roger
Gardiner, George	Monro, Sir Hector
Garel-Jones, Tristan	Montgomery, Sir Fergus
Gill, Christopher	Moore, Rt Hon John
Glyn, Dr Alan	Moss, Malcolm
Goodhart, Sir Philip	Moynihan, Hon Colin
Goodlad, Alastair	Mudd, David
Goodson-Wickes, Dr Charles	Neale, Gerrard
Gorst, John	Needham, Richard
Gow, Ian	Nelson, Anthony
Gower, Sir Raymond	Neubert, Michael
Grant, Sir Anthony (CambsSW)	Newton, Rt Hon Tony
Greenway, Harry (Ealing N)	Nicholls, Patrick
Greenway, John (Ryedale)	Nicholson, Emma (Devon West)
Gregory, Conal	Norris, Steve
Griffiths, Peter (Portsmouth N)	Oppenheim, Phillip

Page, Richard	Stewart, Andy (Sherwood)
Paice, James	Stokes, Sir John
Patnick, Irvine	Stradling Thomas, Sir John
Patten, Chris (Bath)	Sumberg, David
Patten, John (Oxford W)	Summerson, Hugo
Pawsey, James	Tapsell, Sir Peter
Peacock, Mrs Elizabeth	Taylor, Ian (Esher)
Porter, David (Waveney)	Taylor, John M (Solihull)
Portillo, Michael	Taylor, Teddy (S'end E)
Powell, William (Corby)	Thatcher, Rt Hon Margaret
Price, Sir David	Thompson, D. (Calder Valley)
Raison, Rt Hon Timothy	Thornton, Malcolm
Redwood, John	Thurnham, Peter
Renton, Tim	Townend, John (Bridlington)
Rhodes James, Robert	Townsend, Cyril D. (B'heath)
Roberts, Wyn (Conwy)	Tracey, Richard
Roe, Mrs Marion	Tredinnick, David
Rossi, Sir Hugh	Trippier, David
Rost, Peter	Twinn, Dr Ian
Rowe, Andrew	Vaughan, Sir Gerard
Rumbold, Mrs Angela	Waddington, Rt Hon David
Ryder, Richard	Wakeham, Rt Hon John
Sackville, Hon Tom	Walker, Bill (T'side North)
Sainsbury, Hon Tim	Waller, Gary
Sayeed, Jonathan	Walters, Sir Dennis
Shaw, Sir Giles (Pudsey)	Ward, John
Shaw, Sir Michael (Scarb')	Wardle, Charles (Bexhill)
Shephard, Mrs G. (Norfolk SW)	Warren, Kenneth
Shepherd, Colin (Hereford)	Watts, John
Shepherd, Richard (Aldridge)	Wheeler, John
Shersby, Michael	Widdecombe, Ann
Sims, Roger	Wiggin, Jerry
Skeet, Sir Trevor	Wilkinson, John
Smith, Tim (Beaconsfield)	Wilshire, David
Soames, Hon Nicholas	Winterton, Mrs Ann
Speed, Keith	Winterton, Nicholas
Speller, Tony	Wolfson, Mark
Spicer, Sir Jim (Dorset W)	Wood, Timothy
Spicer, Michael (S Worcs)	Woodcock, Mike
Squire, Robin	Yeo, Tim
Stanbrook, Ivor	Young, Sir George (Acton)
Stanley, Rt Hon Sir John
Stern, Michael	Tellers for the Noes:
Stevens, Lewis	Mr. Tony Durant and
Stewart, Allan (Eastwood)	Mr. David Maclean.

Question accordingly negatived.

Main Question put and agreed to.

Resolved, That this House approves the Autumn Statement presented by Mr. Chancellor of the Exchequer on 1st November 1988; endorses the action taken by Her Majesty's Government to ensure that inflation resumes its downward trend; welcomes the prospect of continued growth and strong investment as the basis for maintaining the trend of rising employment; and congratulates Her Majesty's Government on the continuing reduction in the share of national income pre-empted by public expenditure.