Government Economic Policy

HC Deb 07 June 1989 vol 154 cc247-322

Mr. Speaker

Before I call the right hon. and learned Member for Monklands, East (Mr. Smith), I must announce to the House that I have selected the amendment in the name of the Prime Minister. In view of the late start to this debate I propose to limit speeches to 10 minutes between 7 and 9 o'clock, but I ask those hon. Members who may be called before then to bear that limit in mind.

Mr. Nicholas Bennett (Pembroke)

On a point of order, Mr. Speaker. You have not announced whether you intend to call the amendment standing in my name, which is supported by 24 of my colleagues, or the amendment tabled by the Democrats. I recognise that there are a number of amendments to the Labour party motion and that it may not be possible to call all of them, but I seek your guidance. You will recall that in the unpublished and unbroadcast part of a radio interview some 10 days ago, the Leader of the Opposition, when asked about his economic policy, said, "I am not"— Mr. Speaker: Order. The hon. Gentleman knows that it is only possible for me to call one amendment and I have nominated it, so I have answered his question.

Mr. Bennett

rose—

Mr. Speaker

Order. It is not a point of order and I cannot deal with it.

Mr. Michael Brown (Brigg and Cleethorpes)

On a point of order, Mr. Speaker. I recognise that you have decided to select the amendment in the name of my right hon. Friend the Prime Minister only. During the debate, however, will it be possible for the 25 hon. Members who have signed the amendment in the name of my hon. Friend the Member for Pembroke (Mr. Bennett), should they catch your eye, to refer to the speech recently given by the right hon. Member for Llanelli (Mr. Davies) regarding the views of the Leader of the Opposition and his views of that right hon. Gentleman's economic policies?

Mr. Speaker

The hon. Gentleman is an old parliamentary hand and he will know that the debate is confined to the Opposition motion and the Government amendment. He must keep his speech within those confines.

4.54 pm

Mr. John Smith (Monklands, East)

I beg to move, That this House deplores the confusion and disarray of the Government's economic policy, the record balance of payments deficit, the rising rate of inflation and the damaging level of interest rates; notes with concern the continuing neglect of the real economy and the failures to invest adequately in education and training, research and development, and the regions, which undermine Britain's prospects of success in the single market of the European Community after 1992; and calls upon the Government to give urgent priority to such supply side investment in order to reduce the balance of payments deficit and begin to create a strong, balanced and competitive economy for the 1990s. When he presented his Budget in March 1988, the Chancellor of the Exchequer exhibited a sublime degree of self-confidence. His Budget gained fulsome praise from the Prime Minister, who said that it was "brilliant". She was not in any way inhibited by the fact that she had sabotaged his exchange rate policy a few days before. The House will recall the Chancellor's confident boast, given in his wind-up to the debate on the Budget resolutions, that Britain was experiencing an economic miracle, comparable in significance to that previously enjoyed by West Germany and still enjoyed by Japan."—[Official Report, 21 March 1988; Vol. 130, c. 109.] In presenting his Budget, the right hon. Gentleman said: the present … upswing, unlike almost all its predecessors, has not led to any resurgence of inflation".—[Official Report, 15 March 1988; Vol. 129, c. 994.] The Chancellor, warming to his task, said in the wind-up to the Budget debate: we are now talking about getting it down from something between 3 and 4 per cent."—[Official Report, 21 March 1988; Vol. 130, c. 110.] As for the balance of payments, there would be no difficulty in financing a temporary current account deficit of this scale".—[Official Report, 15 March 1988; Vol. 129, c. 994.] But the self-confidence and the self-congratulation proved to be short-lived, because it was based on blissful ignorance, the sort of ignorance demonstrated by a man on the top of a ladder who does not know he is about to fall off. The so-called temporary current account deficit soared to more than £14 billion and has been sliding relentlessly further into the red ever since.

Inflation, described by the Chancellor in a phrase that will haunt him as "a temporary blip", has doubled to 8 per cent. So, today, far from talking about temporary blips, the Chancellor prefers to warn us, as he said in his OECD speech of last week, against people who are impatient for quick results". That was his message to the OECD Ministers in Paris.

But, as interest rates blip higher and higher for longer and longer, is it any wonder that people are losing confidence in Conservative economic policy? With interest rates moving to 14 per cent. perhaps higher, with soaring borrowing costs threatening investment in industry and risking overkill and recession, is it surprising that people are becoming impatient for some results? But whose expectations was the Chancellor really trying to calm?

On the day the right hon. Gentleman announced the latest increase in interest rates he was addressing the Tory women's conference. He was reported in The Independent as having opened his speech to the Tory women by saying as follows about the timing of the interest rates: I had two conflicting thoughts. I thought it was a rather tactless time in the middle of the women's conference. Then I thought—where else could I look for such mature, intelligent, responsible support? They heckled him. I think the Chancellor has a problem with Tory women—[Interruption.]—because there is another place, not too far from where he lives where there is not much in the way of mature, intelligent and responsible support for him. The Prime Minister, in an extremely revealing interview in the Glasgow Herald told us about the nature of her relationship with her Chancellor of the Exchequer. She said: Nigel is a very good neighbour of mine, and a very good Chancellor. Geoffrey is a very good Foreign Secretary. I am not going any further. You know I have to do reshuffles from time to time. I hate them. Why?—because I have a very good Cabinet. But I know that there are young people who have to have an opportunity, as others had it. I hate them. I think she must mean the reshuffles. I have to work myself up because I know that I have to do them. I hate them. And then, ominously: So will they. Good neighbourliness is highly relevant to the confusion and disarray which lies at the heart of Government policy, and, on that subject, my sympathies are, to some extent, with the Chancellor of the Exchequer. After all, when he picks up the telephone and wants to get through to No. 10, it must be rather disconcerting to be told, "Walters here. Would you like to speak to Griffiths?" It is not clear who the real Chancellor of the Exchequer is. We have here the nominal Chancellor of the Exchequer.

Although he and the Prime Minister are neighbours, he should take account, as many of us who are aficionados do, of the theme song of the "Neighbours" programme which we hear twice a day on BBC television. The song goes: Neighbours—everybody needs good neighbours. Just a friendly wave each morning helps to make a better day. Neighbours need to get to know each other. Next door is only a footstep away. Neighbours—everybody needs good neighbours. With a little understanding, you can find a perfect blend. Neighbours should be there for one another. That's when good neighbours become good friends. The Chancellor of the Exchequer may be a good neighbour, but Walters and Griffiths are the good friends. Time after time, in the management of his policy, he has been up-ended by the Prime Minister's own intervention.

The Prime Minister wants some quick results, as Britain's inflation rate soars to 8 per cent. and the ludicrous target of zero inflation looks ever more absurd. To avoid the verdict of the judge and jury, the Chancellor has resorted to the lame excuse of the international trend, his flimsy international alibi. At the Organisation for Economic Co-operation and Development he talked about G7 inflation. What on earth is that?

The phrase is intended to give the impression that inflation is a national contagion that no one can avoid, the mere fact that one is alive means that one will catch it and that it does not have much to do with the Chancellor. It is instructive to look at the inflation rates of the other G7 countries. Japan has 1.2 per cent., the Federal Republic has 2.7 per cent., France has 3.4 per cent., the United States of America has 5 per cent., Canada has 4.6 per cent. and Italy has 6 per cent. The average is 4.4 per cent., while Britain has 8 per cent.

There is no such thing as G7 inflation, but there is British inflation, which is not externally caused. Neither oil nor other key commodities have risen spectacularly in this decade, as they did in the 1970s. The resurgence of inflation is domestically driven and caused by the Government's mismanagement of demand, their foolish credit boom, their own utility price increases and the Tories' inflationary "own goals," to borrow a phrase favoured by the Confederation of British Industry.

The mismanagement of demand has made worse the most serious problem of all: Britain's worsening balance of payments deficit. The 1988 Budget combined foolish and unfair tax cuts with an unsustainable credit boom and dramatically aggravated Britain's emerging external deficit. Sadly, that deficit is no mere temporary blip. Since 1982, Britain's non-oil current account has been in deficit and has grown worse every year except 1985. That long-running trend of deterioration, concealed for a while by North sea oil, is at the heart of Britain's balance of payments deficit.

However, the Chancellor refuses to acknowledge the problem. He has seriously and consistently underestimated its scale. Absurdly, Treasury Ministers claim that the deficit is a sign of success. The Chief Secretary to the Treasury does so regularly. By implication, the growing surpluses of Germany and Japan are evidence of economic failure, and their expanding role as the world's foremost creditor nations must be a lamentable national humiliation for them. Alternatively, the Treasury likes to present the deficit as yet another temporary event: a short-term result of excessive demand and a temporary misalignment of demand and supply in the economy. But the deficit is a long-term structural problem that will not be cured merely by the easing of domestic demand.

Since the Chancellor fails to understand the cause of the deficit it is not surprising that he cannot accurately forecast it. In 1988, we were told that it would be £4 billion and it was £14 billion. This year, the Chancellor says that it will be about the same, £14 billion, but so far this year we are heading for a new record deficit of more than £17 billion. When he replies, will the Chancellor explain why the European Commission, the International Monetary Fund and the OECD have all forecast a further record slide into the red this year? The OECD's latest forecast, available to the Chancellor in Paris last week, reportedly predicted that Britain would run record deficits this year and next.

What is the explanation for that discrepancy, given that the OECD forecast must be agreed with the Treasury? I trust that the Chancellor, this afternoon, will tell us the Treasury's revised forecast for the balance of payments this year. Clearly the figures that he gave the House in his Budget statement not so long ago are no longer credible in the House, at the OECD or in the financial markets.

The forecasts are important because they reveal how long high interest rates will be needed to attract the hot money flows which the Chancellor wants in order to finance the balance of payments deficit. High interest rates are not merely a device to curb inflation, but the price we must pay for living beyond our means. We are having to pay the Lawson risk premium, the speculator's ransom, required to attract capital into sterling and finance the balance of payments deficit. That price is rising, as the market's confidence in the Government's economic policy falls.

The Government have failed to tackle the weakness of Britain's economic fundamentals: the burgeoning balance of payments deficit and the resurgence of inflation. Those are facts which no amount of hype about Thatcher miracles can conceal from the currency markets or the electorate. The Government's dependence on higher and higher interest rates is more and more a sign of policy weakness and evidence of confusion and disarray, rather than a firm policy resolve.

A good example of that confusion and disarray arose at Prime Minister's Question Time on 23 May, when the Prime Minister, in answer to a question from my right hon. Friend the Leader of the Opposition, clearly implied that, at 13 per cent., interest rates were adequate to curb domestic demand. The evidence of a slowdown in the credit boom is growing, if not yet fully conclusive. However, 13 per cent. was not enough to satisfy the currency speculators and failed to buy off their anxieties about the British economy.

Here revealed is the self-inflicted contradiction of the Government's economic policy. The Chancellor has chosen to rely on high interest rates as a universal economic panacea, but interest rates are a double-edged sword. They are a weapon that cuts both ways: raising the exchange rate and curbing demand. Those two objectives can conflict, and that is precisely what is starting to happen in the British economy. As demand begins to fall away, high interest rates threaten overkill and recession. However, the Chancellor still needs to attract that hot money to finance his external deficit.

Mr. John Townend (Bridlington)

If he disagrees with the present rate, would the right hon. and learned Gentleman be good enough to tell the House what the appropriate rate of interest should be at the present time?

Mr. Smith

I do not agree that the only weapon that we should use should be interest rates. As we have made clear on numerous occasions, there are other methods—[Interruption.] I shall give way to the Chancellor if he will tell me what he thinks the appropriate rate should be. Not only is this House interested in whether he thinks they should be higher; even more importantly, does the Prime Minister think that they should be higher? The markets never know whether the Chancellor, the Prime Minister or Sir Alan Walters speaks for the Government.

Mr. John Redwood (Wokingham)

If the right hon. and learned Gentleman believes that the credit boom is slowing down, why is he recommending credit controls? Is he aware that credit controls and the exchange controls that they would require are illegal under the EEC arrangements which are being put in place for 1992?

Mr. Smith

There are some signs that the boom in demand is slowing down—and I am not surprised. If one takes £50, £60 or £70 a week out of people's incomes by means of increased mortgage payments, they cannot spend the money on goods produced at home or imported from abroad. But if there is a need to control demand, it should not be met by further increases in interest rates. It should be done by credit controls. Before the hon. Member for Wokingham (Mr. Redwood) departs too far from his former friends in the No. 10 policy unit, he had better read what they are sedulously leaking to the press day after day—that they are considering forms of credit controls as an alternative to the Chancellor's reliance on interest rates. I would not presume to give the hon. Gentleman political advice about his future career, but there is no need for him to stick his neck out too far on this subject.

The confusion between the Prime Minister and the Chancellor over interest rates and monetary policy merely exacerbates the inherent conflict within the Government's foundering economic strategy. No. 10, as the hon. Member for Wokingham reminded us by implication, is returning to monetarism and wants to avoid any further rise in interest rates. The City catches wild rumours that the Chancellor has resigned, but the Treasury line remains that interest rates will stay as high as necessary for as long as necessary. Is that still the Government's policy?

The Chancellor of the Exchequer (Mr. Nigel Lawson)

Yes.

Mr. Smith

In that case, they had better get a grip on some of the advisers in No. 10 who tell the press that another Government policy is to be followed.

In all this confusion and disarray one searches in vain for the medium-term financial strategy, that wonder of modern economics in which the Chancellor would repudiate day-to-day management of the economy, disparaging it as flying by the seat of one's pants, in favour of medium-term targets. But the medium-term financial strategy has turned out to be just another temporary blip in the history of modern economics. The medium-term financial strategy has been aimlessly drifting in ever decreasing circles until it has finally disappeared up the Chancellor's own monetary targets.

Recently, the Chief Secretary to the Treasury bravely attempted to resuscitate the medium-term financial strategy when speaking to a conference of small businesses, called "Small Businesses: The Quiet Revolution". He told the conference—I quote from his Treasury handout— Government policy now operates in a medium-term framework which gives individuals and firms the confidence to plan ahead. He was speaking on Wednesday 24 May, the same day on which interest rates rose to 14 per cent., the tenth such jump in borrowing costs since last summer. That is the medium-term plan to give small businesses confidence with which to plan.

I shall tell the Chancellor, who seems sceptical, what the small businesses said about his 14 per cent. interest rates. The National Federation of Self Employed and Small Businesses received the news with dismay, commenting that each percentage point increases the cost to industry by an extra £250 million. The federation complained that small businesses will be hit hardest, and went on to say that they were the pawns in the Government's move to defend the pound. So much for the medium-term financial strategy and the confidence it engenders.

I asked the National Federation of Self Employed and Small Businesses to give me an example of what it meant, which it did, calling it "Real Example No. 1". It concerns a company in Gwent, a supplier of equipment to the heating and plumbing industry. Its owner borrowed £25,000. His repayments on 19 May, when he first took out the loan, totalled £343 a month. This year, on 18 May 1989, his bank statement showed that the repayments had gone up to £552.44. He is also suffering from bad debts on the part of his creditors, because they, too, are being squeezed. If interest rates rise to 15 per cent., as the federation says seems likely, his repayments on the loan will have doubled. So much for the medium-term financial strategy and for encouraging small businesses.

The truth is that higher interest rates are a costly and ultimately futile attempt to restore confidence in the Government's failed economic policy. They will hurt British industry and British families, and especially home owners, whose mortgage misery is caused by a tax this year on home ownership—the price of the Chancellor's earlier mistakes.

Sir Peter Hordern (Horsham)

Since the right hon. and learned Gentleman is so much against high interest rates, as he openly told the House, may we take it that the Opposition's policy is a return to hire purchase controls and to a reduction in the exchange rate, as is openly avowed by the hon. Member for Dagenham (Mr. Gould)? Is it Labour Government policy to devalue sterling against all other currencies and to reimpose hire purchase controls?

Mr. Smith

I have made it clear so often that I tire of repeating it that my objection to higher interest rates is that the Government use them as the only weapon of policy to restrict demand. I have argued that there should be alternative credit controls, and that they should not be dismissed dogmatically. Indeed, one of the delegates at the Tory women's conference spoke out to that effect, and the hon. Gentleman, like some of his hon. Friends, should be careful that he is not outflanked by a change of policy under which the Government introduce some form of credit control—

Mr. Robert Hayward (Kingswood)

The right hon. and learned Gentleman has been on his feet for precisely 20 minutes. As this is the first economic debate since the publication of the Labour party's review, will he make clear what his party would do and what the cost of its programme would be?

Mr. Smith

I gave way in an excess of generosity, thinking that the hon. Gentleman would involve himself in the controversy in which I was engaged with the hon. Member for Horsham (Sir P. Hordern). However, if he will contain himself, I shall develop the points in our motion.

Mr. Nicholas Bennett

rose—

Mr. Smith

The markets' judgment of the Government's economic policy and the resulting fragility of sterling cannot be reversed by high interest rates alone. Such rates are a recipe for further industrial decline, as soaring borrowing costs become an intolerable burden on British industry. Real confidence will be restored only when the Government start to tackle the fundamental problems of the British economy and stop indulging in what The Daily Telegraph recently called rhetorical self-indulgence abroad accompanied by an ever-burgeoning culture of economic self-gratification at home"— something with which we have grown familiar over the weary 10 years of this Government.

Real confidence will return, as those on all sides of industry know, only when we in Britain invest in the supply side of the economy with the same relentless determination as West Germany does. If we are to boost our industrial capacity and trading performance we must invest, as our motion states, in training, research and development, and the regions", and especially in manufacturing industry. Only investment can build the strong and competitive economy that Britain needs to meet the challenge in Europe after 1992.

Despite the Government's receipt of £78 billion in North sea oil revenues—one statistic that the Government seek to smother: we never hear the apologists in No. 10 drawing our attention to the existence of North sea oil revenues—we have massively under-invested, especially in the manufacturing tradeable sector of our economy. Investment in the manufacturing sector has only just crawled back to the level achieved by the last Labour Government, and the cumulative loss over 10 years amounts to about £18 billion of investment forgone. We have squandered North sea oil and have failed to invest, while our major rivals without that unprecedented windfall have raced ahead.

In that excess of self-indulgence which characterised his 1988 Budget speeches, the Chancellor arrogantly compared Britain's so-called economic miracle with that of West Germany. He was so disparaging as to refer to the West German economic miracle in the past tense. We have heard that the West German economy is sclerotic, arthritic and hidebound and somehow much less efficient intrinsically than the bounding, vigorous economy that characterises the United Kingdom.

Let us look at our feeble performance compared with West Germany's investment record in manufacturing, research and development and training. The share of GDP invested in manufacturing in West Germany in the eight years from 1980 to 1987 is more than 50 per cent. higher than for the same period in the United Kingdom. Is it any wonder that West Germany's share of world trade since 1980 has gone up from 19.9 per cent. to 21.5 per cent. while that of Britain has fallen from 9.7 to 8.1 per cent.? Is it surprising that our deficit in manufactures with West Germany has grown from the £2 billion that the Government inherited to the £8.5 billion that it is now?

I looked through a list of figures comparing British investment with that in West Germany, and I shall select a few. West Germany spends £432 per employed person on research and development compared with only £265 in the United Kingdom. Over 70 per cent. of engineers in West Germany have recognised qualifications compared with 40 per cent. in the United Kingdom. The figure that I find the most shaming of all is that only 30 per cent. of our work force have recognised qualifications equivalent to at least one O-level, compared with 70 per cent. in West Germany.

Let us look at West Germany's investment in machine tools. In 1987, it spent £3 billion on machine tools, compared with £670 million in the United Kingdom. West Germany now installs as many new robots every year as the total number of robots in place in Britain. Overall, machine tool purchases have increased by 100 per cent. in West Germany against a rise of only 10 per cent. in the United Kingdom. That is what is happening in West Germany. What is happening here?

I hope that the House will not feel that it has to rely on any kind of biased statistic on a matter as serious as this. That is why I shall quote what the Engineering Employers Federation said two days ago in the Financial Times. It said: The federation predicts the negative trade balance in all engineering products will worsen by 30 per cent. from a deficit of £8.9bn in 1988 to £11.6bn this year. It says: Aerospace products will be the only significant UK metal-using manufacturing sector to remain in the black in international trade this year, … Mechanical engineering, for the first time in recent years, will slip into the red, moving from a positive balance of £166m last year to a deficit of £1.6bn this year, the federation estimates. The engineering industry last had a positive trade balance, of £2.8 billion, in 1982. Last year the deficit more than doubled from £4.2 billion in 1987. That is the sad tale of what is happening in a crucial part of our manufacturing sector. No wonder our balance of trade and our consequent balance of payments deficit are frightening.

Mr. Kenneth Hind (Lancashire, West)

In 1988, there was a record increase in investment in the United Kingdom, of 14.5 per cent. At present, investment in British industry is at a record level. The right hon. and learned Gentleman talks about increasing investment. The only way that he would bring that about is by increasing taxation and putting public money into industry.

Mr. Smith

The hon. Gentleman does what all apologists for the Government do. He seeks to confuse investment in the manufacturing sector with investment in business overall. He includes in his figures investment in casinos, leisure developments and the like. I have concentrated on investment in the manufacturing sector. The hon. Gentleman knows, and the Chancellor will not dispute, that investment in the manufacturing sector has just recently crawled above its 1976 level.

Mr. Phillip Oppenheim (Amber Valley)

rose—

Mr. Smith

I have given way repeatedly and I must get on.

Instead of following the example of successful competitors the Government continue the decade-long neglect of our manufacturing industry, the internationally tradable sector of our economy. That is the fundamental fault in the British economy and the fundamental flaw in the Government's policy. They compound this error, which is right at the heart of the matter, with confusion and disarray in the day-to-day management of the economy, especially on the demand front.

Before March 1988 the Chancellor was shadowing the deutschmark at the level of DM 3 to the pound. That was until the Prime Minister brutally overruled him, as she pointedly reminded him recently. More recently, the Chancellor has been assuring markets of his firm intention to raise interest rates as high as is necessary for as long as is necessary. No doubt he will seek to make that clear again today and the markets will ask, as they ask every time he says it, whether the Prime Minister agrees with him. Two weeks ago in an answer at Prime Minister's Question Time the right hon. Lady cut the feet from under him and precipitated a currency fall which in turn brought another increase in interest rates. Hardly a day goes by when we do not have a further indication of dissent and confusion in that border zone between No. 11 and No. 10 Downing street.

Mr. Tim Yeo (Suffolk, South)

rose—

Mr. Smith

No, I shall not give way.

On the No. 10 side of that zone there are some influential lodgers. There is Sir Alan Walters, the real Chancellor of the Exchequer, and the monetarist guru Professor Brian Griffiths. They are there to torment the Chancellor, and as he gets through and speaks to them, he no doubt remonstrates with them for conspiring against his policies. I do not envy the Chancellor in his difficulty in seeking to make some sense of the policy to which he is committed. He ought to get support from the Prime Minister once the Government have decided upon their economic policy. This country cannot have its economy managed by constant warfare between Nos. 10 and 11 and all the consequences that have flowed from that in recent months.

Mr. Ian Taylor (Esher)

rose—

Mr. Smith

I will not give way to the hon. Gentleman. [Interruption.]

I thought that I had been making clear almost to the point of repetitive boredom the Opposition's commitment to tackling the fundamental problem of Britain's economy, which is the supply side problem. I am making clear not only our disagreement about the incompetent demand management that is practised by the Government but our disagreement about their excessive reliance on interest rates as the only weapon. Can we get that clear?

I should like all Conservative Members to deal with the policy. I should like them to start explaining why we invest less than West Germany. I should like them to tell us why they do not speak up for small businesses, which complain so vociferously about the effect of higher interest rates. [Interruption.] Perhaps the next time that I meet a representative of small business I will tell him that the hon. Member for Dover (Mr. Shaw) laughed when I raised this matter.

Mr. David Shaw (Dover)

Will the right hon. and learned Gentleman accept from a small business man that the Labour party policy for the small business man has been a total and utter joke throughout the party's history? The Labour party has never had any policy to help small businesses and its 1979 and 1983 manifestos had nothing in them about small businesses.

Mr. Smith

I have changed my mind. I shall not report to the National Federation of Self Employed and Small Businesses; I shall send Hansard as a good example of the lucidity with which Conservative Members approach some of the problems of small businesses. Small business men will not find that tirade very convincing because they have to accept the reality of the 14 per cent. interest rate that the Government have inflicted upon them.

Sir William Clark (Croydon, South)

rose—

Mr. Smith

The Chancellor's problem in seeking not only to devise a policy—

Sir William Clark

rose—

Mr. Smith

No, I shall not give way.

The Chancellor's problem is not just in deciding what his policy should be but in making sure that it is adhered to. In that circumstance, he is not comforted by what the Prime Minister said in her interview in the Glasgow Herald when she held out two possibilities for people who were retiring from the Government. She said: They can have a great career on the Back Benches. They get respect there, you know. I do not know whether the Chancellor will follow that happy route. The signposts along that route are Old Bexley and Sidcup, Shropshire, North, Henley and—I say this almost with some affection—Chesham and Amersham. Those are the signposts to the road to self-respect. The Chancellor may not find them all that beguiling.

Sir William Clark

rose—

Mr. Smith

The hon. Gentleman has been a bit tiresome, so I shall give way to him.

Sir William Clark

I am grateful to the right hon. and learned Gentleman. He is criticising the Government's policy on investment in manufacturing industry. Would he be kind enought to tell the House what is the Labour party's policy to accelerate investment in manufacturing industry? Does it require an injection of taxpayers' money which will lead to increased taxation, or not?

Mr. Smith

One of the things that we should not do is to run a high interest rate policy which makes it almost impossible for people to invest in manufacturing industry. If the hon. Gentleman takes the trouble to read our policies with the care that I am sure most of his researchers are busy doing so at the moment, he will find the answers to the questions that he raises.

What we are debating here today is the confusion and disarray in the Government's economic policy. [Interruption.] Conservative Members find it entertaining if someone disagrees with his Front Bench. I say one thing back to them—Old Bexley and Sidcup to you.

The fact is that there is confusion and disarray in the Government's economic policy. A child could see that. Their short-term tactics are as muddled as their strategy is inadequate. That is why today, on behalf of a troubled nation, we call them to account.

5.33 pm

The Chancellor of the Exchequer (Mr. Nigel Lawson)

I beg to move, to leave out from "House" to the end of the Question and add instead thereof: congratulates Her Majesty's Government on its economic policies which have led to output, investment, and manufacturing productivity growing faster than in any other major European Community country in the 1980s; applauds the Government's firm anti-inflationary stance, and the action it has taken to exert further downward pressure on inflation; and commends the Government's supply side policies which have brought industry's profitability to a 20 year high, led to record rates of new business growth, and seen the creation of nearly three million new jobs since 1983.". The first thing to be said about the speech that we have just heard from the right hon. and learned Member for Monklands, East (Mr. Smith) is that it bore no relation whatever to what is happening in the real economy. The one thing that it did bear a close resemblance to was every other economic speech that he has made over the years. However, I have to say, in a spirit of great affection, that the trivia element was even higher than usual. In fact, it was pretty nearly 100 per cent.

It is remarkable how, whatever the economic circumstances, whether inflation is rising or falling, whether unemployment is rising or falling, whether sterling is rising or falling, whether he professes to be concerned about the threat of recession or the dangers of overheating, up the right hon. and learned Gentleman pops with the same solution—more public spending on training, research and development and investment.

Now let me try to find some common ground. I cannot accept the right hon. and learned Gentleman's assumption that these things have merit—[Interruption.] These are serious matters and Opposition Members should listen to what I have to say. I cannot accept the right hon. and learned Gentleman's assumption that these things have merit only to the extent that they are paid for by the taxpayer, but I entirely agree that we want to see more training, more research and development and more investment. That is precisely what we are seeing at the present time. Expenditure on training is rising fast and is now running at well over £20 billion a year. Spending on industrial research and development has also been growing steadily year after year. In 1987, the most recent year for which figures are available, industrial research and development was more than 30 per cent. up in real terms over the comparable figure for Labour's last year in office—that is what has been happening—while total civil R and D, as a share of GDP, is well above the European Community average. Those are the facts.

As for investment, that too is at its highest level ever and still rising fast, with manufacturing investment particularly strong. Indeed, total business investment in the United Kingdom now represents the highest proportion of GDP ever recorded. Whereas under Labour, total investment scarcely grew at all, in the 1980s under this Government we have seen investment growing substantially faster than consumption and faster than in all the other countries of the European Community.

All that is a clear sign of a healthy and vigorous economy, one far removed from the picture painted by the right hon. and learned Gentleman, who simply demonstrates how hopelessly out of touch the Labour party is with the reality of life in Britain today.

Mr. Chris Mullin (Sunderland, South)

According to figures supplied to me yesterday by the Department of Trade and Industry, manufacturing investment in the north-east—the area that I represent—in 1987, the latest year for which figures were available, was 53 per cent. of what it stood at in 1979. How does that square with the economic miracle?

Mr. Lawson

Even the right hon. and learned Member for Monklands, East admitted that manufacturing investment in Britain today is at an all-time record level.

Mr. John Smith

Will the Chancellor please tell us by how many percentage points investment in manufacturing industry today is above what it was when the Government took office?

Mr. Lawson

What I will tell him is that not only is it above and rising fast, but manufacturing output, which he considers of such importance, fell under the Labour Government and has risen substantially under this Government. That is the difference between our records on manufacturing.

What we have heard today from the Opposition is in no sense a new phenomenon. I recall, as some other hon. Members may, the censure debate on the economy that was mounted by the Opposition in January 1985—the last occasion on which interest rates were increased to 14 per cent. In that debate the Leader of the Opposition said: We know that the Chancellor of the Exchequer wants a high growth rate. We know that he wants a low inflation rate and we know that he wants everybody to go busily about their business. But given his record, that is not really on."—[Official Report, 31 January 1985; Vol. 72, c. 421.]

Mr. Neil Kinnock (Islwyn)

That is right.

Mr. Lawson

The right hon. Gentleman says that that is right, but it is wrong. It is wrong in every particular. Since January 1985 British business and industry have had four of the best years that they have ever known. Since January 1985—I am taking about the particular things to which the right hon. Gentleman referred in 1985—[Interruption.] If the right hon. Gentleman wishes to get to his feet he can.

Since January 1985, growth has averaged 3.5 per cent. a year, inflation has averaged 5 per cent and unemployment has fallen by more than a million—so much for the right hon. Gentleman's predictions.

Mr. Kinnock

In the course of doing all that, the Chancellor of the Exchequer—unforgiveably—has given us policies that result in a massive and possibly incurable balance of payments and balance of trade deficit. One of the reasons why he has managed for a part of that time to restrain inflation is that the balance of payments and dependence on foreign manufactured imports restrained inflation. Now that the Chancellor is having to revert to his policy of reliance on interest rates, inflation is shooting up and will go up further than even he wants.

Mr. Lawson

What is abundantly clear is that, four years after the 1979 debate, we can see that the right hon. Gentleman was wrong about growth, wrong about inflation and wrong about unemployment. In four years' time we shall see precisely that he was wrong about everything that he says today.

The plain fact is that, over the past five years, Britain has created more new jobs than any other European country, and we have more people in work today than ever before in our history. No wonder the right hon. and learned Member for Monklands, East did not say a single word about unemployment in the whole of his speech—a subject about which we always used to hear so much. The right hon. and learned Gentleman's speeches used to be about nothing else, but now we hear not a single word about unemployment.

At one point, the right hon. and learned Gentleman referred in a most emotional way to the question of small businesses. Let me mention just one more indicator of the new-found strength of the British economy—a strength that has spread from the south of England to the midlands, to Wales, to the north and to Scotland—and that is precisely the pace of new business formation, which last year achieved a record rate, net of closures, of more than 1,300 new businesses a week. That is what is happening to small businesses, and it is a far cry from the picture painted by the right hon. and learned Gentleman in his speech. That figure is net of liquidations—1,300 more businesses each week.

If the right hon. and learned Gentleman wants to make speeches about industrial decline, he should have reminded the House of the state of British industry in 1979 after five years of Labour Government. That was indeed an example of how not to run an economy. Industry was unproductive, unprofitable and strike-ridden—crippled by Government controls and interference, and often only propped up by state handouts, all financed by penal rates of taxation—[Interruption.]

Mr. Cranley Onslow (Woking)

On a point of order, Mr. Deputy Speaker. Given the acoustics of the Chamber, I know that it is very difficult for you to hear sedentary interventions from the Opposition Front Bench, but if you watch the lips of the Leader of the Opposition you will see that he is continually trying to interrupt my right hon. Friend the Chancellor. Can you persuade him to shut up?

Mr. Deputy Speaker (Mr. Harold Walker)

Order. I like to think that I have learnt a lot in the Chair, but I have yet to learn lip-reading. It seems to me that noise is coming equally from both sides of the Chamber. We could do with less sedentary noise from all parts of the House. I should like to hear the Chancellor of the Exchequer.

Mr. Lawson

I was saying, Mr. Deputy Speaker, that since 1979 the British economy has been transformed—a fact that has been acknowledged throughout the world. It is an economy immeasurably stronger and more confident than it was 10 years ago.

Mr. Geoffrey Robinson (Coventry, North-West)

How can the economy be seriously presented in that way? After four years of the Chancellor's policies, which he calls good policies, we have under his Government record interest rates, record inflation and a record balance of payments deficit. What can be right about policies that have brought us to that point?

Mr. Lawson

It is certainly very far from record inflation, which the Labour party knows about.

I come now to the question of inflation. I readily concede that we have not yet exorcised the spectre of inflation.

Mr. Kinnock

What spectre? It is real.

Mr. Lawson

That is the problem we face today, and it is a problem that the right hon. and learned Member for Monklands, East conspicuously failed to address in the whole of the length of his speech in any remotely coherent way. The deficit on the current account of the balance of payments, which he dwelt on at such length, is itself a problem only to the extent that it is a symptom of excessive domestic demand. Exports continue to do well, and over the past three months exports have been up 8.5 per cent. over a year ago.

No, it is the problem of inflation that the House needs to address today. Once we master that—as we can and will—the British economy is set for an even better decade in the 1990s than we have known in the 1980s.

The rise in inflation that we are experiencing today is a worldwide phenomenon.

Mr. Stuart Bell (Middlesbrough)

The Chancellor says that inflation is the major issue that faces the House, which is true, but is he saying that he has no policies at all for the next few years to reduce the balance of payments deficit?

Mr. Lawson

The reduction of excessive domestic demand will itself cause in due course an improvement in the current account of the balance of payments. I have made that clear time and time again.

The rise in inflation that we are experiencing today is a worldwide phenomenon. Taking the seven major industrial countries as a whole—that is what the G7 are, as the right hon. and learned Member for Monklands, East seemed not to know—inflation is now at its highest level for almost five years. Indeed, over the past six months the rise in recorded inflation in the United Kingdom has been only marginally greater than the rise in inflation in the G7 as a whole. That is only because, unlike most of the rest of the world, we include mortgage interest payments in our retail price index—[Interruption.] The Opposition do not like the facts, but they are going to get some facts. On a genuinely comparable basis, inflation in this country has increased over the past six months by less than in the G7 as a whole.

The right hon. and learned Gentleman may care to know that, while admittedly our recorded inflation rate is currently some 3.5 per cent. above the G7 average—that is true—during the whole of the period of the last Labour Government, of which he was a member, the United Kingdom inflation rate averaged 6.5 per cent. above the G7 average. If the right hon. and learned Gentleman wants to make comparisons, let him have the facts.

Nor is what we are seeing today, either here in this country or worldwide, in any sense a return to the levels of inflation that we suffered in the 1970s. Indeed, the current underlying rate of inflation in the United Kingdom of 5.9 per cent. as measured by the RPI excluding mortgage interest payments, is well below the lowest level ever reached in any month throughout the whole of the lifetime of the last Labour Government, let alone their appalling 27 per cent. peak, so I am not going to listen to any strictures from the Labour party about inflation. I am not interested in the slightest in what the Opposition have to say about inflation.

Even so, inflation is clearly too high and must come down—and it will come down as the measures that have already been taken work their way through. Those measures are a tightening of monetary policy through higher interest rates within the context of a substantial Budget surplus.

Over the past year, interest rates have been raised very substantially and the medicine is clearly working. The housing market, which was such a powerful engine of consumer borrowing and spending, has subsided dramatically with prices levelling off in some areas and in most of the south-east actually falling. At the same time, turnover has fallen markedly, too. Retail sales have shown little or no growth since last summer and the growth in the narrow measure of the money supply—M0—has slowed down sharply since last September and is clearly headed back towards its target range. That is encouraging, though I have to say that I will not be content until it is well within that range.

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

How can a small manufacturer of a particular product in Workington compete with a German manufacturer of exactly the same product when the interest rate paid by the business-man in Workington may well be far in excess of 14 per cent. and the German is able to borrow at perhaps 5 per cent.?

Mr. Lawson

I can tell the hon. Gentleman this—a small businessman in Workington or anywhere else in the United Kingdom has far more to fear from the rampant inflation that would follow from Labour policies than from any rise in interest rates.

Inevitably, there is a further time lag between the effect of tighter monetary policy on the growth of spending, which has now been evident for some time, and its effect on inflation.

In my Budget speech, I indicated that inflation was likely to rise for some months further to reach about 8 per cent. including mortgage interest payments, before falling back again in the second half of the year. Given the impact of higher oil prices, it is now clear that the peak will be slightly higher than this, and could well be reached quite soon. However, from the summer a gradual fall should take place as the policy has its full impact.

To repeat, the Government are determined to take whatever action is necessary to bring inflation down. Thus, although it is clear from the evidence of the domestic economy that spending—and, in particular, consumer spending—is slowing down at a satisfactory pace, I judged it necessary two weeks ago to raise interest rates by a further 1 per cent. in order to avoid taking risks with inflation. I could not ignore the fall in the exchange rate which had occurred, and which threatened to undermine the firm anti-inflationary stance we have taken. That remains our position. There is, indeed, now a widespread and well-established understanding of the problems which currency depreciation brings in its wake. As the right hon. Member for Leeds East (Mr. Healey) said: Hard experience confirms the findings of economic research—that … depreciation can no longer be treated as a soft option. But that was said as long ago as October 1978. The Labour party has had plenty of time since then to unlearn this lesson; and unlearn it it has. So we now have the spectacle of the Leader of the Opposition adopting once again Labour's instinctive devaluationist stance—arguing that sterling is overvalued and should depreciate substantially. We wholly reject this devaluationist and defeatist view, as indeed we always have done.

Mr. Kinnock

The Chancellor of the Exchequer told us that to prevent the pound from falling he had to intervene with 14 per cent. interest rates. Are we to believe that every time the Prime Minister makes an incautious remark in the House and causes a fall in sterling he will have to raise interest rates by 1 per cent.?

Mr. Lawson

If it is the case—and I do not know whether it is—that my right hon. Friend's remark in the House had an adverse effect on the markets, it is because the markets wholly misinterpreted what she was saying.

I have already referred to the censure debate of January 1985. Let me repeat what I said in my Budget speech in March of that same year, 1985. In 1985, I said this: There are those who argue that if we stick to sound internal policies, the exchange rate can be left to take care of itself … but significant movements in the exchange rate, whatever their cause, can have a short-term impact on the general price level and on inflationary expectations … So benign neglect is not an option … There is no mechanical formula which enables us to balance the appropriate combination of the exchange rate and domestic monetary growth needed to keep financial policy on track, but a balance still has to be struck, and struck in a way that takes no Chances with inflation."—[Official Report, 19 March 1985; Vol. 75, c. 785.] That is what I said then, and that is what we did then, and inflation, which had risen uncomfortably, duly came down again and did so without any adverse effects on British industry.

The plain fact is that monetary policy is and always has been the only means of curing inflation. This means setting interest rates and holding them at the level needed, and for the time needed, to do their work. This is the weapon which has been tried and tested in the past. It is the weapon on which all the other major economies necessarily rely as they, too, struggle with the forces of inflation. As I have already pointed out, it is once again having the desired effect.

I accept that effect is not painless. As a result there are always those who seek to peddle some easier alternative. As we have heard from the right hon. and learned Member for Monklands, East today, the Labour party's magic cure is credit controls. I have to tell the House that this is purest fantasy. To listen to the right hon. and learned Gentleman, would imagine that the bulk of household credit comprised hire purchase or credit cards. That is another example of how totally out of touch the Opposition are.

Of total household debt, some 85 per cent. is on mortgages. The total of credit card and hire purchase lending—the two together—amounts to only a little over 5 per cent. of household debt, so it is nonsense to imply that introducing controls on hire purchase or credit cards would do anything significant to reduce the growth of consumer credit, or to allow interest rates to be one whit lower. In any event any such controls would be simplicity itself to get around.

As for direct controls on bank lending, these proved increasingly ineffective in this country even before exchange control was abolished. Today they would simply provide a field day for foreign lending institutions. But of course it is only natural for the Labour party to hanker after the ration book and the queue, which for the Opposition is not so much a means to an end as something to be desired for its own sake.

There are also other, more sophisticated nostrums to which the right hon. and learned Gentleman alluded—neither of them, I have to say, in any way new—and which are currently being touted in the public prints.

Monetary base control was something we looked at very carefully when we first took office. The arguments were set out fully in the 1980 Green Paper on monetary control. I remember it well because I was Financial Secretary to the Treasury at the time, and had particular responsibility under my right hon. and learned Friend the present Foreign Secretary for that Green Paper.

Despite its theoretical attractions, monetary base control has severe practical difficulties, which is perhaps why no major country has adopted it. After full consultation and public discussion we decided not to proceed with it, and that remains the position today. Moreover, in essence monetary base control is another way of generating the level of short-term interest rates needed to curb inflation. It is in no sense an alternative to high interest rates.

The other proposal much aired of late is that we should over-fund—which in present circumstances would mean refraining from using the Budget surplus to repay the national debt. Over-funding was not a device that in fact we used in our first two years, which were so critical in the battle against inflation, but for a time thereafter it did play a part in policy; but it produced increasing distortions—the so-called "bill mountain"—in return for little practical benefit, and was accordingly dropped as an instrument of policy some four years ago. It is an illusion to suppose that over-funding can, of itself, tighten monetary conditions, since money drained out of the system by selling gilt-edged securities over and above the Government's strict funding requirements has to be put back into the system elsewhere.

In short, there is no substitute, and never has been any substitute, for the use of short-term interest rates. To use a hallowed phrase, which I hear Opposition Members uttering from a sedentary position, there is no alternative. The only thing is that they would never have the guts to carry out a policy of this kind if they were ever discharged into office.

The right hon. and learned Member for Monklands. East went on at great length about his confusion over the Government's economic policies, and about alleged differences within the Government. Let me take this opportunity to make the Government's position perfectly clear. Our overriding objective is to bring inflation back down. To do that, we will keep interest rates at whatever level is necessary for as long as is necessary. We will maintain our existing funding policy and our existing monetary techniques, and we will not allow the firmness of our monetary stance to be undermined by a depreciation of the exchange rate. These are the policies that have successfully brought inflation down in the past, and will do so again.

That is where we stand, but where does the Labour party stand on these vital issues? Where does it stand? I have given a full statement of our position and our policy, and we heard nothing at all about the Labour party.[Interruption.]

Mr. David Shaw

Give way to them.

Mr. Lawson

I will readily give way to the kebab experts.

Mr. Alex Salmond (Banff and Buchan)

rose—

Mr. Lawson

I am not aware that the hon. Member is a member of the Labour party, but I will let him speak for it.

Mr. Salmond

Has the Chancellor considered the impact of his high interest policy on areas of the country that are not overheating? Does he believe that at present the Scottish economy is overheating? If it is not, why should Scottish manufacturing industry, farmers and fishermen pay penal interest rates resulting from the inflationary problems being generated in the south-east?

Mr. Lawson

If the hon. Gentleman knew anything about the Scottish economy, he would know that the Scottish economy is doing extremely well at the present time. Scottish business-men are extremely satisfied with the policies of this Government, and Scottish business and industry are scared stiff of any hint of separatism, which the hon. Member supports.

After two long years of agonising reappraisal, the Labour party has at least come up with a voluminous policy review, but it has absolutely nothing to say on the key issue of inflation—nothing at all. One of Labour's economic advisers, who apparently asked not to be identified, explained to The Independent newspaper on the day the economic section of the policy review was published: they've no idea what to do on inflation. Indeed, everything the Opposition advocate would simply ensure, just as it did when they were last in office, that inflation went through the roof—massive increases in public spending, with no idea of how to pay for them; a new tax on saving, with national insurance contributions levied on savings income; lower interest rates—we have heard this from them today—and, of course, devaluation. All these would send inflation soaring through the roof, and what defences would they erect to stem the inflationary torrent which all this would unleash? Higher taxes, perhaps? That is what the hon. Member for Newcastle upon Tyne, East (Mr. Brown), an Opposition Treasury spokesman—and I see him nodding—told us on television last week. That is very interesting, but, curiously, we heard nothing about that from the right hon. and learned Member for Monklands, East today. Perhaps we shall hear more.

According to the Leader of the Opposition, in his very interesting interview with Mr. James Naughtie, Labour would resort to price controls, credit controls and import controls. So much, incidentally, for Labour's commitment to the single European market and 1992.

As the right hon. Member for Llanelli (Mr. Davies)—and I am glad to see him in his place—a Treasury Minister in the last Labour Government, so aptly put it the other day: The Labour Party idea that you should have credit controls is rubbish. There is no way you can control credit except by controlling the price of credit, and the price of credit is Bank Rate. The Opposition front bench, in short, is all over the place.

Mr. Denzil Davies (Llanelli)

If the right hon. Gentleman wishes to advance an argument about credit controls versus interest rates, that is all very well, but will he now answer a question? Why, after four years with him as Chancellor of the Exchequer, does Britain have the highest rate of inflation, the worst balance of payments deficit and the highest rate of interest throughout the industrialised world? Why can other countries do so much better than him and the Prime Minister?

Mr. Lawson

I do not want to be unkind to the right hon. Gentleman, who has made a constructive comment on the Labour party's policies, but what he said is simply not true. We do not have the worst record by any means in the industrialised world. In a number of ways, we have the best record in the industrialised world.

Mr. John Smith

Will the right hon. Gentleman say which member of the OECD has a worse record in those three important respects?

Mr. Lawson

I will tell him, if he likes, of a member of G7, not merely the OECD or the EEC. On a comparable basis, the Italian rate of inflation is higher than ours. Italy's rate of inflation is 6.7 per cent. and ours is 5.9 per cent., and that is a fact.

Mr. Kinnock

The right hon. Gentleman refers to one indicator. Will he say why we had a trade surplus with Italy in 1979 but now have a £2.1 billion annual trade deficit just with Italy?

Mr. Lawson

The performance of the Labour Government was so lamentable that they were chucked out of office. If the right hon. Gentleman wants to stand on the performance of the last Labour Government, Conservative Members would be happy for him to do so.

Mr. Graham Allen (Nottingham, North)

rose—

Mr. Lawson

No, I have given way enough.

We have learnt a little bit more, as was clearly revealed in the Naughtiegate tapes, which we now have available and from which I will read only a brief extract: Kinnock: I'm not going to— [Interruption] Labour Members should listen to the pearls of wisdom from the leader of their party. It goes like this: Kinnock: I'm not going to sit here and be bloody quizzed on the alternatives. He's the Chancellor of the Exchequer … I'm not going to be bloody kebabed talking about what the alternatives are. We're not in control of it.

Naughtie: Why don't you say that in as strong terms as you want to? Kinnock: But wait a minute. Opposition leader asked what he would do. Opposition leader says, 'to cut a long story short, we don't know."' Of course, there we have it.[Interruption.] They do not know, and they know they do not know.

Mr. Ian Gow (Eastbourne)

On a point of order, Mr. Deputy Speaker. I could not quite hear the last words of my right hon. Friend the Chancellor, and I wonder—

Mr. Deputy Speaker

Order. If the hon. Gentleman and his right hon. and hon. Friends had been quieter we might all have heard.

Mr. Lawson

They are windy—they do not want to give us a hearing.

The Labour party does not know, and what is more it knows that it does not know. The Leader of the Opposition blathers about controlling this, that and the other—he cannot even control himself. So far from running the economy, he could not even run a kebab stall. Despite all the packaging and all the razzamatazz, despite the 88 pages of fine print, despite what must have been hours of careful coaching by his minders, the right hon. Member for Islwyn (Mr. Kinnock) and his party are no more fit to govern now than they were in 1979, 1983 and 1987. Labour Members know it, and so does the country.

6.9 pm

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

I suppose that it is of the essence of these debates that Chancellors are not expected to add to the known facts about Government policy in the course of their remarks lest they cause further runs on the pound or further misinterpretations. But the Chancellor gave one or two things away. For example, he said that the rate of inflation will go higher even than he has most recently predicted and that by the end of the summer it should—he merely said "should" and not "would"—start to fall. With our climate, the end of the summer is a conveniently variable feast. Whether the Chancellor's forecast will be fulfilled remains a question.

The Chancellor also made great play of the fact that the markets had misinterpreted what his right hon. Friend the Prime Minister had said, which gave rise to the run on the pound and to the current interest rates. What they misinterpreted was the Prime Minister saying that she thought that the Chancellor's policies were working. I presume that she will say that again on a number of occasions. I am sure that the Chancellor hopes that expressions of confidence in his policy will be made from time to time. Will they have the same effect every time that they are uttered? If so, will we see a rise in interest rates as an automatic consequence?

The right hon. and learned Member for Monklands, East (Mr. Smith) set out accurately and amusingly the key defects of the Government's policy. Bearing in mind Mr. Speaker's injunction, I do not want to go over the ground that the right hon. and learned Gentleman covered.

We must concentrate on certain key elements. One is the Government's failure to tackle inflation. For some years the Government had a stock of excuses which they brought out to explain the inflation that was around in the system. One excuse was that it was due to previous failure to control the money supply. Now they claim that they have the money supply under control. Then it was oil prices. Despite some recent increases, oil prices present nothing like the problem that they presented in the early years of this Government, or of the previous Government.

Sometimes the Government blamed the trade unions. Now they reckon that they have the trade unions under control. Sometimes they blamed the Labour Government. When they were not doing that, they blamed the right hon. Member for Old Bexley and Sidcup (Mr. Heath) and his Government, of which some of them were members. Incidentally, when the right hon. Gentleman was last heard of, he was supporting the Conservative Eurocandidate in Inverness. Whether it is a case of him being fed to the Free Presbyterians I do not know, but nothing seems to have been heard of him since.

The Government have produced a new set of excuses for inflation. First, it was a blip. As inflation began to rise from the slumber induced by 3 million unemployed, what was their reaction? They said that it was just another blip. It is clearly a far worse problem, and putting up interest rates has not made it go away. Then the Government said that it was a sign of success and an indication that their policies were working, but that we had slightly over-performed and gone a little too far in the right direction. No one can remember Japan or Germany suffering from over-performance that produced such inflation rates. If that was success, it almost made failure seem tempting.

The latest excuse is that inflation is increasing the world over. If our competitors were suffering from inflation rates of nearly 8 per cent., we might have reason to attach importance to that argument but with rates like 3.6 per cent., 3 per cent., 2.4 per cent. and 1 per cent., that argument can hardly be taken seriously.

Inflation must be tackled more seriously and more effectively. The Chancellor talked about exorcising the spectre of inflation. My rather low-Church views make me no expert on exorcism but I always thought that it required bell, book and candle—in other words, a whole series of measures, not just one. The Chancellor is an inefficient exorcist, insufficiently trained and equipped for the task. He must recognise that a broader strategy will be needed. The measures that he has taken, confined as they are mainly to interest rates, run the risk of inducing recession. Unless he broadens them, we will get the worst of that recession sooner or later.

It is difficult to imagine in what direction the Chancellor will move when there is fundamental disunity within the Government even about what the basic economic indicators are and mean. One understands that the Chancellor does not attach much importance any more to M0 as a monetary indicator, but the Prime Minister's principal adviser thinks that it is the only important monetary indicator. The Chancellor does not think that broad money indicators are important either. Perhaps that is because they are so far from their target rates that he does not want to refer to them.

The Prime Minister may not want to buck the market, but the Chancellor is engaged in the task of bucking the market. That is what his policy is all about. It is about trying to buck a market that does not believe that our economy and our currency are worth what we say they are worth. Therefore, we have to keep putting up interest rates to convince the market otherwise.

What has been lacking from the debate so far has been any clear indication of alternative policies that would meet the need. There are some alternative policies in the Opposition motion to which I can give strong support and which I believe are genuinely necessary, such as greater investment in training, tackling the skill shortage and greater investment in research and development and in regional policy. All those are necessary to tackle inflation in the long term. Indeed, they are necessary if we are to have a fair and more just society, but they will not exert much influence on inflation in the short term.

The weakness of the motion is that it does not say much about what we should do now. There is confusion about whether the Labour party wants import controls or credit controls. Perhaps the reference to import controls was the result of the Leader of the Opposition being nonplussed in an interview. My picture of the interview is like the similarly blue-suited and white-collared figure in the famous painting who was being questioned by a harsh interrogator. The little boy was asked, "When did you last see your father?" I have in mind a picture of the Leader of the Opposition standing there, appalled that he should be asked such an unfair question as, "What would you do?" The little boy in the painting emerged from the exchange with more dignity than the Leader of the Opposition.

Mr. Hind

rose—

Mr. Beith

Perhaps the hon. Gentleman would let me proceed a little further into what I think the Government should be doing. If he feels that there are omissions in what I say, I shall give him the opportunity to speak.

Mr. Hind

The hon. Gentleman has rightly pointed to the message that the right hon. and learned Member for Monklands, East (Mr. Smith) has given the House about what Labour would do. Does the hon. Gentleman agree that no policy has been put forward by the Labour party to deal with inflation? The Labour party has given no idea of its interest rate policy or its tax policy. All that we have had are fuzzy, supposed panaceas that amount to nothing. We want something more specific.

Mr. Beith

I agree entirely with the hon. Gentleman on that.

Mr. Norman Hogg (Cumbernauld and Kilsyth)

If the hon. Gentleman agrees with that, will he tell us how the Social and Liberal Democrats would deal with inflation?

Mr. Beith

If the hon. Gentleman had not interrupted me, I would have gone on to do precisely that.

First, I want to say why I do not think credit controls are an effective mechanism. I do not think that the Labour party has come to terms with the real world if it imagines that the imposition of credit controls on a system of free capital movement would have a significant impact on the economy and on the rate of borrowing. I do not want to create a society in which credit controls are the stock in trade of Government policy. I do not want our citizens to have to encounter the Government every time that they go into a shop to buy a commodity. That is not the kind of society that I want to create. I think that it is an admission of failure if we even have to attempt to return to that kind of world.

We have to make our position clearer on other policies that are relevant to tackling inflation. One is the exchange rate mechanism of the European monetary system. It is a reputable argument that if we had been in the exchange rate mechanism for a reasonable time, say, two or three years, we would not have the rate of inflation or the interest rates that we now have. Indeed, a powerful discipline would have been exercised on monetary policy in a period when it is recognised, even by the Chancellor, that monetary policy was too lax. Yet the Government intend to join the system only when the time is right. We all know that that time will not be so long as the right hon. Lady is in charge. The Labour party still has not committed itself. It says in its policy review: substantial change would be required before we could take sterling into the Exchange Rate Mechanism. The Labour party does not specify what that substantial change is and it remains a reluctant potential convert to British membership of that system. Indeed, the hon. Member for Dagenham (Mr. Gould) has long been a resolute opponent of it.

There are a number of measures that we have already argued are relevant in such a situation. One on which I know the Labour party agrees is that the public sector price increases in water and electricity, for example, which arise directly out of privatisation, should not be taking place. They are Government-induced inflation and are not a response to cost pressures. They arise directly out of the attempt to make the industries saleable, and the Government could have acted on that already.

Secondly, the Government could do more to promote savings. The measures that they have taken in the Budget are not sufficient to induce savings from new savers—from people who are currently not saving. The Chancellor has the opportunity to act on that.

Thirdly, I was interested in the Chancellor's comments on funding policy. The Chancellor delivered a criticism of the idea that we should change policies on funding, as though somebody in the course of the debate had already suggested that. I wondered to whom the Chancellor's remarks were directed. They could not have been directed towards the right hon. and learned Member for Monklands, East because he did not suggest such a change. They must have been directed—

Mr. Giles Radice (Durham, North)

To Professor Alan Walters.

Mr. Beith

I certainly do not believe that the Chancellor was anticipating what I was going to say. Clearly, his remarks must have been directed at the Prime Minister's advisers. However, the mere fact that Professor Alan Walters suggests something is no reason for not taking it seriously. The fact that there is an area of policy which both monetarists and Keynesians consider to have some prospect of having a beneficial effect on anti-inflation policy is sufficiently surprising in itself to make one think that it should be taken seriously.

There is good reason to believe that if the Government—to put it in a simpler way than some of the commentators have—overfund, borrowing more than they need to do at a time of substantial public sector surplus, it could have the effect, among others, of raising the longer-term interest rate. There are fears about the consequences of that, but the Chancellor's current policy is based on the assumption that high interest rates will ensure that the rest of the economy responds to those high rates and that inflation will not take off. He should know full well that high interest rates bear most heavily on the domestic borrower and on small businesses, not on large companies.

Generally, the larger companies are able to borrow long term and have been insulated from the effect of high interest rates. That means that it is often small and innovative businesses which are struggling hard with high interest rates. The Chancellor says that they have got to suffer this to drive inflation out of the system, but he will not drive inflation out of the system if the effect is confined to that sector and does not extend to the large firm sector, which is benefiting from the much lower long-term interest rates. The gap between long-term and short-term interest rates does not seem to be a sensible part of economic policy. We all want to see the short-term interest rate brought down, but the current disparity between the two has an element of unreality about it.

The Chancellor was far too ready to dismiss one measure which, as an almost unarmed Chancellor, he could reasonably consider, which is the use of funding policy to exercise some effect on inflation. Whether he wants to believe in that policy as a monetarist, believing, as some monetarists do, that such a policy exercises restraint on the money supply, or as a Keynesian, viewing it as something that would have an effect on the yield curve and on long-term interest rates, either way it is likely to have some short-term impact on inflation. Surely we are looking for short-term measures at present which can have some beneficial effect. We have argued that the Chancellor should add some measures to his armoury and that is another that could be added to that list.

Clearly, some of the problems that the Government have faced have been problems of market perception of Government policy or market misunderstanding, as the Chancellor would say. We still have no clear explanation of the balance of power in the Government's economic policy. In a small way, it is like trying to weigh up what is happening within the power structure in Peking. We do not know who is in charge. As long as that is the case, the market will take cognisance of the fact and it will lead to short-term pressures, which will give rise to further increases in interest rates.

There are short-term disadvantages and dangers in the Government's present disunity, but there are also long-term dangers. That disunity also relates to Britain's role in Europe, Britain's place in the European monetary system and the extent to which Britain will become involved in the development of European currency and a European central bank. The danger of the Government's present attitude of hostility in varying degrees is that Britain will exclude itself from developments that it should he leading.

Our long-term economic prospects will be severely damaged both in general terms and because London will not be able to take its place as the natural financial centre of Europe. On many European issues, Britain is not merely missing the train, but throwing away the ticket at the same time. In the long term, that is as damaging for Britain as is much of the short-term damage which is being caused by the disunity between the Prime Minister and the Chancellor.

6.25 pm

Mr. Cranley Onslow (Woking)

I want to make a short speech, so I shall make no reference to the opening speech of the right hon. and learned Member for Monklands, East (Mr. Smith) other than to say that, although it contained some amusing bits, that did not conceal the fact that it was fundamentally shallow and unconvincing. Most of my hon. Friends feel the same way about it.

Mr. Radice

The great economic expert.

Mr. Onslow

One does not have to be an economic expert to be able to judge a shallow and unconvincing speech.

I want to refer briefly to one other Opposition Member. The performance of the Leader of the Opposition was just as we have learnt to expect. As my right hon. Friend the Chancellor said, he is a man who could not control inflation because he cannot control himself and we saw that demonstrated again today in the way in which he clowned it up in a sedentary position on the Front Bench. Reflecting on the reports of his interview and the episodes that did not reach the microphone, I noted that the hon. Member for Dagenham (Mr. Gould) said of his right hon. Friend the Member for Islwyn (Mr. Kinnock) that he was a man of immense self-discipline. For a man to make such a statement with a straight face, as I presume he did, tells us more about himself than about anyone else. The hon. Member for Dagenham does not make a very percipient judgment on some of his colleagues.

I want to test the credentials—

Mr. Doug Hoyle (Warrington, North)

Tell us what you want to do.

Mr. Onslow

I will tell the hon. Gentleman what I want to do. I want to test the credentials of the right hon. Gentleman's leadership and his party. I hope that he will not mind my doing so and I am sure that he will not be sensitive about that. I want to ask some questions that I hope the hon. Member for Dagenham will be prepared to answer and that many of us hoped that the right hon. and learned Member for Monklands, East would have answered in his opening speech.

The first question is that if we suppose that the Opposition had the opportunity to deal with this situation, what would they do? Where would the money come from? It is fair to put that question on the basis of some points that others have already managed to squeeze out of the Labour party's reluctant spokesmen. It is fair to ask what the basic rate of income tax would be under a Labour Government. We know from a reply by the right hon. and learned Member for Monklands, East to a question from Jonathan Dimbleby on 12 February that there would be changes in the basic rate of income tax paid by 95 per cent. of the taxpaying public. The right hon. Gentleman went so far as to say: some will pay less, some will pay more, some will pay the same. We and the public would like to know how many of that 95 per cent. will pay more and how much more they will have to pay. It is not unfair to put the questions in those terms.

My second detailed question is whether the right hon. Gentleman and his colleagues have made any estimate of how many pensioners would be made worse off as a result of Labour's proposals to impose an investment income surcharge. The Labour party is committed to that, so it seems fair to ask on behalf of the taxpaying public and pensioners, in particular, who have some savings, how many of them would be hit by such a proposal if, by some misfortune, it was ever possible for it to be implemented.

I have asked where the money would come from because the Labour party has a clear commitment to spend a great deal more money if it were in government. In its policy review, there are numerous spending pledges. Does any Labour Member have any idea what those pledges add up to in cost terms? If so, may we please be told? If not, may we please be told? In an economic debate, a party that wishes to be taken seriously should be able to cost its proposals.

By how many billion pounds—not million pounds—would a Labour Government intend to increase public sector investment, and hence demand? In asking that question, I am placing the Labour party in some difficulty because it defines its terms in a way that suits it rather than in a way that adds to general understanding. I recognise that, in using the word "investment", the Labour party rules out the factor that many of us consider important—the profitability of such investment. Experience has shown that the Labour party tends to equate expenditure with investment. I imagine that it admits that an increase in expenditure, even if it is called investment, must increase demand. Will some Labour Member please tell us what effect that will have on inflation? Presumably, increasing demand is likely to increase inflationary pressure. To say that the Labour party is concerned only with manufacturing industry begs more questions, and that does not strengthen its case.

I shall ask another question, to which I suppose I will not get an answer, but I will ask it just the same. Does the Labour party want the exchange rate to remain at its current level or does it want it to be lower? Has the Labour party made an estimate of the increase in consumer credit that would result from its proposal to reduce interest rates? I understand from the speech of the right hon. and learned Member for Monklands, East that he does not wish to rely on higher interest rates alone, so presumably he intends that interest rates should be reduced—in spite of the wise advice that the right hon. Member for Llanelli (Mr. Davies) has given.

If there are to be credit controls under a Labour Government—if that ever comes about—what sort will they be? How will they be administered? To what will they apply? May we be told more about them? May we please be told more about the import controls to which the Leader of the Opposition apparently committed his colleagues in that celebrated non-interview? To what will they apply? How will they be administered? How will they be reconciled with our international obligations? How long will it be before we are back to price controls? There is already a sign in the Labour party's policy review that under a Labour Government there will be price controls on water and electricity. What else is to be subject to price control?

Finally, if I may put this indelicately, will the hon. Member for Dagenham define what he means by the "real economy"? Having heard what the Opposition have said on this and many other occasions, Conservative Members have little doubt, as I think have people outside, that the real Socialist economy is one of controls, strikes, runaway inflation and national disaster.

6.33 pm

Mr. Norman Hogg (Cumbernauld and Kilsyth)

I am grateful for the opportunity to contribute to this important debate. I certainly support the official Opposition motion because it identifies the problems in the economy and sets out in general terms the steps that are required to rectify weaknesses. I want to relate my remarks particularly to the Scottish economy and I hope that hon. Members will forgive me for doing so. There are important differences between the economy in Scotland and the eonomy in the rest of the United Kingdom. I am sorry that representatives of the Scottish National party have vanished from the Chamber. One short intervention during the Chancellor's speech is not a contribution from a party that claims to speak for Scotland. The absence of SNP Members from the Chamber is deplorable.

The problems faced by the Scottish economy are the direct result of the Government's policies. The Government hope that many small businesses will be set up in Scotland and that those small businesses employing small numbers of people will take the place of the traditional industries that have vanished over the past decade. The Government seem to put their faith in electronics, in light engineering, in engineering in support of the electronics industry and in service industries. In my constituency, there has been some success in attracting such industries. OKI, a high-technology industry, recently opened, and low-technology firms such as Hinari, which manufactures televisions, have started operations. The success in bringing such firms to Scotland has been due to the work of Locate in Scotland and the development agencies which operate in the five new towns. The big push has been for small businesses, but they have been badly affected by a 14 per cent. interest rate.

I was interested to hear what the Chancellor said about the success in attracting small businesses to Scotland, but he did not say how a 14 per cent. interest rate would facilitate their development. Those small firms often operate to small margins. The margin for reinvestment is very much smaller, given their nature, than it is for larger firms. Initially, under-investment is often a feature. I worry greatly what is happening to small firms in Scotland. I do not believe that the statistics cited earlier this afternoon will hold up much longer.

Companies are disappearing because of the difficulties with which they are faced. Estimates in Scotland show that a one percentage point increase in interest rates can cost industry as much as £20 million or £25 million. Extra costs also fall on those who run small businesses. Often they are home owners in those places where industries and businesses are being set up. The average mortgage in Scotland is £45,000, which means that home owners have had to find an extra £100 per month because of increased interest rates. Often they are the young, high-flyer managers who are so necessary for the success of small businesses. The position will not improve in the short-term. If the building societies follow the bank interest rate increase with an increase in their rates, the position will become very worrying.

Sir Nicholas Fairbairn (Perth and Kinross)

Before the hon. Gentleman bleeds his heart blue, will he remind us of the number of small businesses in Scotland that we lost under his Government and of the increased number under our Government? Will he remember that, thanks to our fiscal policies, the number of small businesses in Scotland has mushroomed? That is all thanks to our reversal of his Government's policies, which, whatever they are wrapped in, a future Labour Government would put back to destroy small businesses again. Will the hon. Gentleman give the Government a pat on the back because big business, namely, Ravenscraig, is safe and healthy, thanks to our economic policies?

Mr. Hogg

I cannot do that because the hon. and learned Gentleman is not correct. During the first two years of the decade of Conservative Government my constituency lost 2,000 jobs, which was precisely the number created by the Labour Government during the preceding four years.[Interruptions] The hon. and learned Gentleman should pay attention to what I am saying before he interrupts me because I paid tribute to the work of Locate in Scotland and the development agencies in the five new towns, which have been responsible for 70 per cent. of all inward investment to Scotland since the second world war. The Government know that they must protect Ravenscraig because if it were lost, that would end any Conservative changes in Scotland. The Government's position in Scotland is parlous enough without threatening the future of Ravenscraig.

Before I was interrupted, I was talking about interest rates. I had hoped that the Chancellor would give some encouragement to home owners, but he said nothing on that matter. I had hoped that he would announce a freeze on mortgage interest rates, by agreement with the building societies, but he did not do so. I am afraid that that is the hallmark of the Treasury Bench and its inflexible approach to the economy.

Mr. Hind

The hon. Gentleman said that he was surprised that my right hon. Friend the Chancellor had not agreed a freeze on mortgage interest rates with the building societies. If building societies lost money as a consequence of uncompetitive rates compared with the banks, how would the loss be made up to them so that they could continue to lend, especially to first-time buyers, the money that is much needed for mortgages?

Mr. Hogg

Any such freeze would be short term. If the hon. Gentleman had any confidence in the Government's economic strategy he would accept that a short-term policy would not result in the difficulties to which he referred. If he is confident that the Government are right, I do not understand why he does not support the call for a mortgage freeze.

In addition to interest rate difficulties, inflation is now running at 8 per cent., with every possibility of rising further. That eats into our standard of living and is a disincentive to companies to invest. There is also a balance of payments deficit which, on a year-on basis, could run as high as £17 billion. The danger is that the country will be caught in a pincer movement between an industrial slump and price inflation.

The Chancellor's policy is not working in Scotland, unless its aim is to curb spending on Scottish products and investment in plant and machinery. When interest rates are used to bolster the pound, firms lose their competitive edge in export markets. Scotland is being asked to help to cool down the over-heated south-east. There is no boom in Scotland, despite what the hon. and learned Member for Perth and Kinross (Sir N. Fairbairn) said, but it is being asked—

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

The principal Scottish forecasting body, the Fraser of Allander Institute, records that the Scottish economy grew last year more rapidly than that of the remainder of the United Kingdom and forecasts that it will do so again in the coming year.

Mr. Hogg

I shall refer to the Fraser of Allander Institute later in my speech.

Scotland is being asked to accept the medicine being dished out to the south-east although it does not suffer from the same problems. The latest figures—not from the Fraser of Allander Institute, but from the Scottish Office—show a fall of 3 per cent. in manufacturing output for the last two quarters of 1988—the largest fall in five years and a consequence of earlier rate rises. The boom is being nipped in the bud and the threat of recession once again looms over the Scottish economy.

While output fell in Scotland by 3 per cent., it rose in the remainder of the United Kingdom by 0.7 per cent. We heard a great deal about total output in the Chancellor's speech. The Scottish construction industry's output fell by 8.7 per cent. while that of the remainder of the United Kingdom rose by 2.6 per cent. The electrical instrument engineering industry, so important to Scotland, suffered a fall of 12 per cent. against a United Kingdom rise of 2 per cent. There was a fall in investment goods of 9.6 per cent. against a United Kingdom rise of 1.7 per cent. If there is cheer for Scotland in all that, what is the Treasury's prediction for Scotland for the next 12 months? What is the future for the Scottish economy?

The Fraser of Allander Institute is certainly not a friend of the Labour party. I readily accept that and understand why the Minister is so quick to pray in aid anything that it might say. However, even that institute has identified pessimism among manufacturers as worse now than at any time since the oil price collapse in 1986. It says that the decline in manufacturing must soon filter through to the labour market. What is the Government's prediction for unemployment levels in Scotland during the next 12 to 18 months? There is a loss of confidence in Scottish industry that is directly attributable to the Government's policies.

Where does all that leave Scotland as it faces the advent of 1992? Professor Neil Hood, who has close connections with the Scottish Development Agency and with Locate in Scotland, said that Scotland is insufficiently prepared for 1992. My constituency is industrial—the sort of place about which the Government are fond of saying, "This is where success lies." However, as I go around my constituency I find confirmation of what Professor Hood said and, indeed, of what the Fraser of Allander Institute said about pessimism among manufacturers. In addition to all those problems the Channel tunnel will not help the northern or Scottish economies.

The Government's record in Scotland shows a decline in manufacturing and a fall in the number of employees in manufacturing as high as 34 per cent. Regional grants have fallen from £289 million in 1978–79 to £95 million in 1989–90. The Government can account for only 30,000 jobs created in Scotland between 1983 and 1986, yet 700,000 were created in the south-east during the same period.

Scotland has no confidence in the Government's policies and that will be reflected in the European election results a week on Thursday and in the Glasgow, Central by-election on the same day. The Government came second in that constituency at the last election and it will be interesting to note where they come this time.

Judged by any indicator, the economy is in trouble, and the position is much worse north of the border. The Government have failed to support the Scottish economy, failed in education and training and failed in investment.

They have not failed, however, in their record of low support for their policies. In all the years that I have been active in politics, I cannot recall a time when the Government had such low support among the Scottish people. They are in for a severe shock in the European elections and the Glasgow, Central by-election. I am confident that the Labour party will gain the seats because it is clear in Scotland that that is where the future lies. There will be a Labour Government; that is coming soon, and the sooner the better.

6.50 pm

Mr. Tim Smith (Beaconsfield)

The hon. Member for Cumbernauld and Kilsyth (Mr. Hogg) argued that the economic situation in Scotland was somehow different from that of the rest of the United Kingdom because, he said, there was no overheating in the Scottish economy. In a telling intervention, the Economic Secretary said that in a recent period Scotland had enjoyed a higher rate of growth than had the rest of the country. Inflation is a problem wherever we find it in our economy. It is as much a problem for Scottish businesses as it is for any other British businesses, and the hon. Gentleman admitted that inflation was a disincentive to invest.

That is precisely what it is. If small businesses must choose—it is not a pleasant choice to have to make—between high interest rates and getting inflation down, they must accept that it is in their interest to reduce inflation as quickly as possible, and high interest rates will achieve that end.

The Chancellor announced that the net growth of small businesses in the United Kingdom has been higher than ever before. I have a simple message for the Chancellor. I urge him to stick to his guns, to persist with his policy and to continue to concentrate on getting inflation down. That must be our top economic priority.

There has been much talk in the debate about short-term measures. For example, the hon. Member for Berwick-upon-Tweed (Mr. Beith) said what he would do in the short term, although he rightly rejected the possibility of credit controls. He spoke of over-funding, and the Chancellor explained why that would not be effective.

We knew when the policy was introduced that it would take time to work through, and it will. He must think back a couple of years, to the events of late 1987 and black Monday; it is fair to date recent events from that time. The right hon. and learned Member for Monklands, East (Mr. Smith) wanted the Chancellor to go further at that time in reducing interest rates. The fear in late 1987 and early 1988 was of a recession because nobody knew how the real economy would respond to the sudden collapse of the financial markets.

Industrialists today wonder why politicians and ecomomists were so concerned at that time. They say, "Our businesses were going well and we were doing good business. What did a sudden collapse in the stock market matter?" They were unconcerned, and so far from having a recession in 1988, we had high growth stimulated by low interest rates, though it was higher than we could ultimately sustain. The policies of the right hon. and learned Gentleman would merely have exacerbated the problem.

The policy, if mistaken, was right at the time, but we must now put matters right. It will take time for that to happen and for the Chancellor's policies to work through. Patience is required, and I appreciate how difficult that is for an owner-occupier whose monthly mortgage payments have gone up substantially in the last 12 months. People in that position are bound to be impatient. They want the interest rate to fall so that their monthly payments can fall.

I am convinced, however, that when the situation is explained properly to people, they appreciate that the present measures are necessary if we are to avoid a repeat of the inflationary trends of the last 20 or 30 years. That is why our top priority must be to get inflation down.

I fear that there could be a danger of over-reacting. I was disappointed at the recent rise in interest rates. I felt that it had been at 13 per cent. for quite a time, and it seemed that the policy was working. I remain convinced that it is working. I hope that it will not be necessary for the Chancellor to raise interest rates again, although I support him when he says that he will maintain interest rates at their present levels until he is satisfied that inflation is on a downward path and that, if necessary, he will raise them further.

I read with interest an article in the CBI magazine by the confederation's director-general headed: Danger: Scribblers in the dark. It appears that the director-general, John Banham, is as unhappy about some scribblers as is the Chancellor. Mr. Banham complained about information that sometimes appeared in press stories concerning the economy. He wrote: Recent headlines have blared bad news which was just plain wrong. For example, although one headline said 'Export slump in February" Mr. Banham wrote: in fact, seasonally adjusted, exports … were 9.5 per cent. in volume up on the same period last year. Another headline declared: 'Import surge continues'—yet imports of consumer goods in the three months to the end of March were down, in volume terms, compared with the preceding three months. Later in the article, Mr. Banham wrote—and he should know, representing a huge proportion of British industry—that the Government's policy was working. He said: Consumer spending has slowed right down. This was clear from the CBI's Distributive Trades Survey as early as last autumn … The slowdown will affect other sectors of the economy as we move through the year. Distributors' stocks have built up and this means less orders—for importers as well as United Kingdom producers. ….Investment is, at present, holding up well … Capacity utilisation is easing. There is plenty of evidence to show that the Chancellor's policy is working, and that is why we must stick to our guns. Then we will see, as the year progresses, that the figures start to come right.

Other people have more confidence in the British economy than some of our commentators, and I have details of a number of recent examples of people putting their money where their mouths are and investing in the British economy. On successive days in April there were announcements to that effect. The first came from Toyota, with news of a large investment in Derbyshire. Then Bosch announced a large investment in south Wales.

I was particularly pleased that Robert Bosch Ltd decided to invest in Britain because the company has its United Kingdom head office in my constituency. Up to now the company has been importing everything that it sold in this country. Now it is to establish a car component factory in south Wales which will eventually employ 1,200 people and create another 1,500 jobs. The investment will total £100 million and I am told that 80 per cent. of the output will be exported.

There are many other examples of inward investment, and we have heard about the success of the Scottish development agency in attracting overseas investment to Scotland. It is clear, therefore, that this type of investment is occurring throughout the country. Many overseas investors are coming here in preference to other countries. When I discussed with Robert Bosch why it had chosen the United Kingdom—remembering that there is great competition throughout the European Community for this type of investment; Bosch already has a large investment in Spain, where it employs 6,000 people—I was told that the company had confidence in our economy, that it believed that the United Kingdom was a stable area in which to invest, that prospects here were good, that industrial and labour relations were good and that manufacturing productivity had risen substantially. Foreign companies have confidence in our economy. My hon. Friends and I have confidence in my right hon. Friend's policies. I am sure that, given time, they will succeed.

Several Hon. Members

rose—

Mr. Deputy Speaker

Order. I remind the House that Mr. Speaker earlier announced that speeches falling between 7 o'clock and 9 o'clock would be subject to the 10-minute limit.

6.58 pm

Mr. Denzil Davies (Llanelli)

The Chancellor made what one could describe as a knockabout speech. He failed to answer the central question why, after 10 years of Conservative rule, with the present Prime Minister in charge, Britain has the highest inflation rate in western Europe, has by far the worst balance of payments deficit of all the industrialised nations and has the highest interest rates among all our main industrial competitors. For that sorry state of affairs only one person can accept the blame, and that is the Prime Minister. She is very fond of blaming everyone else inside and outside of the Government. She cannot, in fact, blame the trade unions for this sorry state of affairs. The public sector, high rates of income tax, the dreaded public sector borrowing requirements—or what she used to describe as the frontiers of Socialism—have all gone. All those dragons from the past have either been slain or at least caged. The blame lies with her policies and, indeed, those of the two Chancellors who have held office in the past 10 years.

When the Government came to power in 1979. they made the control and the reduction of inflation their main target. One way they would do that—a point that was made recently in an article in The Sunday Times—would be by increasing the supply of British goods by improving the supply side of the economy, and by controlling and reducing by monetarist means the money supply. They would increase the supply of goods and reduce the supply of money and thereby try to get inflation down.

The Prime Minister's first Chancellor, the present Foreign Secretary, was certainly able to reduce the supply of money. However, in doing so—I accept that that was combined with a world recession—he diminished Britain's industrial capacity and its ability to increase the supply of goods.

The right hon. and learned Gentleman, the present Foreign Secretary, is a mild man, but when it came to reducing the money supply he was a veritable rottweiler. With his tight monetary targets—we all have examples in our constituencies—he managed to mangle large sections of British manufacturing industry. A number of industries disappeared, never to appear again.

There were some productivity gains, but the price that was paid in productivity gains was far too low in respect of the industries that were destroyed.

The right hon. and learned Gentleman then went to the Foreign Office and the present Chancellor took over. I would not describe the right hon. Gentleman the present Chancellor as a monetarist, but at least he is reported to understand monetarism. If he does understand monetarism, he will also understand its limitations—especially in an open financial system, such as is the British economy. The contradiction in monetarism is that, although it is thought to be, and is, a Right-wing financial ideology, one of the best countries in which it could be practised would be the German Democratic Republic, because a command economy is much more capable of controlling the money supply than an open economy.

During the Chancellor's period in office, he has kept missing his monetarism targets, changing his monetary targets and relaxing his monetary targets. In fact, over the years he has considerably increased the supply of money in the economy, so that today what is called "broad money"—he never mentioned that in his speech, because now his target is "narrow money"—which is notes, coins and bank deposits, is probably running at the rate of 20 per cent. or more. On top of all that we have had the tax-cutting Budgets—especially the one two years ago—which have flooded the system with even more money.

However, the trouble by then was that the supply of domestic goods had been so curtailed as a result of the policies of his predecessor in the first four years that the increase in the supply of money, which the Chancellor engendered, has left us with high inflation rates and an horrendous balance of payments deficit, because that was the only way in which the goods could match the money in the economy.

So a Government, who started off 10 years ago determined to increase the supply of goods and reduce the supply of money, now find themselves in the extraordinary position, through mismanagement, of having reduced the supply of goods and having increased the supply of money.

What is to be done? The Chancellor is in a corner. He is caught between the foreign exchange markets, domestic inflation and the hang-ups of his neighbour next door. I am sorry to say that the person who does not understand monetarism is the Prime Minister. The Prime Minister thinks that she understands monetarism and she wants to be a monetarist, but then she recoils from some of the harsh consequences of monetarism. She brings in professors from America or gurus. I thought that the Chancellor dealt very well with Tim Congdon, but the Prime Minister did not look very happy. The Chancellor could not see her face, but she did not like it. She was not too happy at that point in the Chancellor's speech. I do not believe that she does understand monetarism, and I have some sympathy with the Chancellor in having to deal with her in that respect.

As I think I have said before, I do not believe that old-fashioned credit controls or, indeed, new-fangled deposit controls, imported from America by Professor Walters, can solve the problems. In the end, if the policy is just about monetarism, it will be about high interest rates. Our complaint is that the policy should not just be about monetarism.

I believe that there are alternatives, although they would not have a dramatic effect. The House knows very well, sadly, through debating the British economy over the past 20 years, that there are no immediate panaceas, and certainly not in fiscal or monetary policy. We need a substantial restructuring of the British economy to solve our real problems. There are some things, however, that can be done without relying entirely on a monetarist policy and on high interest rates.

It is no secret that the Chancellor wants to join the exchange rate mechanism of the EMS, but the Prime Minister will not let him. It is difficult for me to say this, but the right hon. Lady should now stop being silly and should allow the Chancellor to go to Europe and negotiate entry into the EMS. She should let him go quietly on Sunday afternoon. He could join the other Finance Ministers in some West German spa town and he could negotiate entry into the EMS and a realignment of currencies. I believe that that is what he wants to do. The Treasury is right. However, the right hon. Gentleman's next-door neighbour prevents him from doing so.

Membership of the exchange rate mechanism would restore confidence to economic policy, provide some stability for the pound, and take some pressure off interest rates. Whether we like it or not—thanks considerably to the mismanagement of the economy over the past 10 years and the reduction in Britain's manufacturing capacity—sterling is rapidly ceasing to be a world currency. It is still trying to behave as if it were a world currency, but it is rapidly becoming a regional one.

Most of our balance of payments deficit in manufactured goods is with western Europe. In fact, most of our balance of payments deficits altogether are with western Europe. The world currencies today are the deutschmark, the yen and the dollar. I am sure that the Chancellor enjoys himself when he goes to the G7 meetings but, with all respect to him, he is really a bit player on the world stage. It is the yen, the dollar and the deutschmark that count. We should recognise the fact, at last, that sterling is a regional currency. More than half of our trade is with the EEC and that proportion will increase as 1992 approaches.

If this were not such a dogmatic Government, the Chancellor could also reverse some of the income tax cuts that he so foolishly put into effect two years ago. He should make the income tax system progressive again. He should introduce further rates and raise some money in taxation to balance his policy between monetarism and a fiscal policy. Of course, he will not do that either. If he did that, pressure would be taken off interest rates and industry.

None of that will happen. Interest rates may well have to go up again to stop a run on the pound. There will be a recession. Whether one calls it a hard or a soft landing, the only way that inflation can be brought down by monetary means and high interest rates is by creating a recession. Unemployment will rise and British industry will again pay a heavy cost. We are back where we were when the Government first came in, with policies to reduce the money supply which, in turn, reduces the supply of domestic goods.

There will not be much improvement in the balance of trade. In a very careful statement, the Chancellor appeared to indicate that it will take some time before the balance of trade improves. Ten years have gone by since the Government came to power—10 years of great opportunity, of very favourable international conditions on inflation and on commodity prices and of great opportunity at home in terms of £75 billion in oil revenue. However, those 10 years have been wasted. The Prime Minister can blame no one but herself for that.

7.9 pm

Sir Ian Gilmour (Chesham and Amersham)

I agree with the right hon. Member for Llanelli (Mr. Davies) that we should join the EMS at the right exchange rate. I understood him to say—I may have misheard him—that the Government have reduced the supply of goods. I do not believe that he could possibly have meant that, because although we all have some criticisms—at least I do—of the Government's economic policy, I do not believe that anyone can seriously say that they have reduced the supply of goods.

I am sure that we would all agree, however, that the consumer boom got out of hand last year. Since mid-1985 the growth in consumption has been 6.1 per cent. a year—far greater than in any other period. Although that growth was conspicuously set off last year, it would be a grave error to say that it was merely a short-term problem or a short-term blip. It is much more deep-seated than that.

The right hon. Member for Llanelli referred to the monetarists of earlier days. There is a view going round that the monetarist experiment of the early 1980s was a great success and that all would have been well if my right hon. Friend the Chancellor had continued with such policies and maintained a firm control of the money supply. That view has been argued recently by Mr. Tim Congdon, who has been making some good forecasts. That argument does the Chancellor a serious injustice and I am happy to defend him from it. The fall in inflation in 1983 to 4.5 per cent. could hardly have been the result of controlling the money supply one or two years previously, because M3 rose 16.5 per cent. in the year to the second quarter of 1981 and 14 per cent. in the year to the second quarter of 1982. In any case, the years of alleged monetarism were far from being the halcyon days now depicted. I do not believe that anyone would reasonably want to return to them and my right hon. Friend is right not to do so.

Between the second quarter of 1979 and the second quarter of 1986, total output grew by an average of 1.25 per cent. a year and unemployment rose by 2 million. Inflation did fall, thank heavens, to 2.5 per cent. in 1986, but, obviously, that was not the result of controlling the money supply, because the money supply was not controlled. During the years it grew at an average of 14 per cent. a year. I think the right hon. Member for Llanelli possibly misunderstood that point.

Whatever mistakes the Chancellor or the Government may have made recently, my right hon. Friend was certainly not guilty of abandoning a successful monetarist policy. All that has happened has been to advance, by about two or three years, a crisis that was going to occur anyway.

As I have endlessly pointed out, economic growth can never be permanently sustained unless the growth of domestic demand is appropriately balanced by a growth of exports. Unfortunately, over the entire post-war period, long before the Government took office, there has been a persistent weakness in the ability of British industry to compete successfully. By the end of the 1970s it was already clear that if we continued to lose market share—particularly in our own markets—a critical point would soon be reached. That problem was masked for a bit by North sea oil, but certainly not now.

Our troubles spring not from the abandonment of monetarism but from the fact that the Government never addressed the problems of industry's competitiveness. Although the Government have bashed the trade unions handsomely, probably their policies have made our competitive position not better, but worse. The first three years of the Government—1979 to 1982—far from being halcyon days, look like a catastrophic mistake. Although we were continually assured that there was no alternative —I was glad to hear my right hon. Friend reintroduce that well-known phrase this afternoon—and that solid foundations were being laid for non-inflationary growth, what happened was that deflation merely dug a great crater from which our industry has been able to climb out only at a serious competitive disadvantage.

The combination of a collapse in demand and an over-valued exchange rate led to widespread scrapping of plant. For three years, investment in manufacturing was lower than capital consumption, so there was a fall in productive capacity. That must be one of the main reasons why, although the growth of output from 1979 until now has been exceptionally slow and unemployment has risen by nearly 1 million, we are now up against the limits of our capacity to produce, while inflation is climbing back uncomfortably close to the figure we inherited from the Labour party.

The main point is that the increase in import penetration is emphatically not a phenomenon that belongs to the past three years of consumer boom. It has been an almost continuous process during the past 10 years and before that. The rise in the proportion of imports of manufacturing to GDP from 14 to 18 per cent. between 1979 and 1985 was as large as it was between 1985 and 1989 when it rose from 18 to 22 per cent. One of the necessary conditions for continued growth is a cut in domestic demand. That is obviously right, because the deficit in our balance of payments is now at least 4 per cent. of GDP. At the same time, however, further growth of output is being constrained by lack of capacity.

At the moment, I cannot see from any constellation of policies now in prospect that the other necessary condition for continued growth—that net export demand will rise enough, if at all—will be fulfilled. It is not hard to see what should happen. The cut in domestic demand obviously should be confined so that the damage is limited to consumption rather than blighting the welcome recovery in investment in the past year, which at long last has got going. That cut in demand also should not frustrate the much-needed increase in net export demand.

Unfortunately, the instruments of policy which the Government have chosen—high interest rates and a high rate of exchange—do not meet those requirements. Obviously, high and, possibly even higher, interest rates are particularly bad for investment. A high rate of exchange makes investment in exporting industries, as well as exports themselves, unprofitable. Moreover, high interest rates coming at a time when household indebtedness has been encouraged to grow to unprecedented levels causes severe, random and unmerited distress.

The best way to cut domestic demand was not advocated by the right hon. and learned Member for Monklands, East (Mr. Smith), for obvious reasons. It was, however, advocated by the right hon. Member for Llanelli. Surely the right club for the Chancellor now to take out of his bag is one to put up income tax. If income tax was increased, interest rates could be reduced without causing a loss of confidence in sterling. In due course there could be a reduction in the exchange rate with much less risk of inflation. Under those circumstances there would be a much better prospect of growth coming from exports and investment, in which case growth could be sustained.

I do not accept that the existence of a Budget surplus, as measured by the PSBR, means that one should not increase taxation. It is the state of the economy that matters and if a cut in demand is, by general assent, required—as it is—the mere fact that there is a surplus in the public sector accounts tells us nothing about whether the chosen instrument should be fiscal or monetary policy.

Mr. David Nicholson (Taunton)

My right hon. Friend knows that I listen to his speeches with great interest. How would an increase in income tax contribute to pay claims and pay settlements that are currently giving cause for concern?

Sir Ian Gilmour

I recognise that difficulty, but an awful lot of people who receive wages are also buying houses so it is no good thinking that high interest rates do not affect wage claims.

The Government are looking ahead to the single market of 1992, but on present trends, it is likely to be a mixed blessing for the country. It is therefore vital that we should try to use the mechanisms of the European Community to develop a thriving and competitive industry. That would meet the needs of the hon. Member for Cumbernauld and Kilsyth (Mr. Hogg) and of those areas that currently have high levels of unemployment. It means playing an active role in the formation of Community policies and not seeking to turn it into a glorified free trade area. That is not what the Community is about and it would be directly contrary to British national interests.

The Government have, I fear, wasted a good deal of time since they cottoned on to the deterioration in our trading position. If they go on relying on their one club, they may find themselves in an electoral bunker as well as other ones. Moreover, their one club is particularly inappropriate since, for understandable reasons, the Government are extremely reluctant to use it. Therefore, the Government are in danger of going from a one-club policy to a no-club policy, as a result of which little would be done.

I hope that the exchange markets and foreign Governments have gained confidence from what my right hon. Friend the Chancellor has said this afternoon, but it is high time that a new and better policy was brought in.

7.19 pm

Mr. Giles Radice (Durham, North)

I shall confine most of my remarks to the balance of payments deficit, for three main reasons: first, because the deficit is big and growing; secondly, because it takes out of the Government's hands the power to run our own economy; thirdly—here I agree with the right hon. Member for Chesham and Amersham (Sir I. Gilmour)—because it reflects our failure to pay our way in the world.

The Chancellor has consistently underestimated both the size of the deficit and the speed at which it has grown. In March 1988, he forecast a deficit for the year of £4 billion. At the time of the Budget he told the House that it would be equivalent to 1 per cent. of GDP and that he foresaw no difficulty in financing what he called a temporary current account deficit of that scale. By last November, in his autumn statement, he revised the forecast for 1988 upwards to £13 billion. The deficit for the year turned out to be £14.5 billion, £10 billion worse than the Chancellor had estimated in the 1988 Red Book.

As hon. Members well know, the forecast in this year's Red Book also gives a deficit for 1989 of £14.5 billion. As our Select Committee report stated, even to maintain a similar level of deficit in 1989 as that for 1988, the Treasury must rely on an extremely ambitious reversal in the behaviour of both exports and imports. So far, the monthly figures have been extremely discouraging.

Taking the first four months' figures together and putting them on an annual basis, the deficit now runs at more than £18 billion a year. To put that figure in perspective, as a percentage of GDP it is well over 3 per cent. I think that the right hon. Member for Chesham and Amersham was right and that it is nearly 4 per cent. It is greater than the deficit in any other major industrial country. Contrary to what the Chancellor said in March 1988, the deficit is neither small nor temporary. Furthermore, there is no evidence of any country of a comparable size sustaining a deficit of that level for any length of time.

One view which has been sedulously encouraged by the Chancellor is that somehow the balance of payments deficit no longer matters in the way in which it used to in the 1960s. His argument goes something like this: by definition, all economies cannot be in surplus. Some will be in surplus and others in deficit. His argument runs that, in a world in which there are free flows of capital, which is very much the case at the moment, some countries will export capital and others will import it. His implication is that Britain will be an importer of capital.

Last year, the Chancellor advised the Select Committee, making up economic theory as he went along, that the countries with current account deficits would tend to be those in which the investment opportunities were attractive because they attracted mobile savings. He has also argued that we are constantly using the import of capital to re-equip British industry.

According to the Chancellor, by running a larger current account deficit we are not only doing the rest of the world a favour, but helping ourselves. The Chancellor also tells us that there is no reason why we cannot continue to run a large balance of payments deficit for a considerable length of time. What a wonderful world it would be if it were really like that. We do not need to be old-fashioned mercantilists to see that there are flaws in the Chancellor's argument. Of course there is a case for financing a temporary deficit, but if it is large and continuing, it will produce considerable dangers and risks.

If we have to finance a deficit the size of ours, and continue to finance it over a number of years, we will virtually be putting the economy into the hands of the holders of sterling. A Chancellor with a deficit of that size is bound to shape his policy according to the currency markets. As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, it will mean that British interest rates will have to be at such a level that they continue to attract the holders of sterling. If we continue to run deficits at this level, our interest rates will have to be considerably higher than those of our main rivals. Therefore, we shall have to continue to increase the level of our interest rates. We have already seen the impact of high interest rates on mortgage holders and industry. How much worse could the position become? Our higher interest rates will undermine the investment plans of industry, particularly small businesses, and cripple the prospects of British exporters.

It is quite possible, indeed highly likely, that, despite the interest rate differential, the holders of sterling will lose patience with the British economy. If that happened, our fate would be totally in the hands of the market. A run on the pound and a precipitous fall in the value of the currency would follow, with all that that could mean for the British economy. The fact that there has been considerable official intervention in the market during the past month and that our reserves fell by more than £1 billion in May, is a sign that, despite the Chancellor's propaganda, the Government are acutely aware of the risks of their policy.

I agree with the right hon. Member for Chesham and Amersham that it is entirely obvious that our current account deficit is not some benign phenomenon but a symptom of serious structural problems which, for most of the 1980s, were masked by North sea oil.

How far are British goods over-valued? The Red Book shows that, during the past two years, there has been a significant loss of competitiveness. Sooner or later there will have to be an adjustment. Even more disturbing is evidence, during the 1980s, of a growing import penetration, particularly of manufactured goods. The figures are there for all to see. We can look at the latest OECD report and listen to what the National Economic Development Office has to say. A table in the Red Book must be extremely disturbing for the Government.

I agree with the analysis of the right hon. Member for Chesham and Amersham that the recession knocked out at least 20 per cent. of British manufacturing capacity. We failed to replace that capacity with enough of the newer industries and products which can compete successfully with our industrial rivals.

As the Director General of NEDO said in his March memorandum: The range of products in which the UK is internationally competitive may be limited, and when demand grows as fast as in 1988 the goods British producers no longer manufacture competitively may have to be imported. He goes on to state, in an extremely disturbing conclusion: if we simply cannot produce the goods we are now importing, the relief of demand pressures will only slightly improve the balance of payments. It is an extremely pessimistic conclusion. In short, we are in danger of becoming a nation which, year in, year out, imports more than it exports. Our present policies no longer seem to pay our way in the world.

In conclusion, the balance of payment deficits matter. Sooner or later they must be brought under control and we shall need a responsible policy on demand, which we do not have at the moment. I agree with the right hon. Member for Chesham and Amersham that we need to ensure that our goods are not over-valued. I agree with my right hon. Friend the Member for Llanelli (Mr. Davies) that we ought to join the EMS. As my right hon. and learned Friend the Member for Monklands, East said, we will need more rigorous policies on the supply side.

If the Government fail to act on the balance of payments they will hand over control of the British economy to the holders of sterling. As the Chancellor well knows, they are rapidly losing confidence in the Government's handling of the economy. As my right hon. and learned Friend the Member for Monklands, East said, they are uncertain who is running the economy. Once they lose confidence in the economy, they will force on our Government and economy an adjustment in a way and at a time that could be harmful to the long-term prospects of the British economy.

7.29 pm

Mr. William Powell (Corby)

The right hon. and learned Member for Monklands, East (Mr. Smith) is a jolly fellow and he hugely enjoyed himself this afternoon. He always exhibits some of the most engaging characteristics of his profession as a barrister. He has to the fullest degree the forensic skills and the analytical abilities that we would expect in a man of his profession, but, like me, he has spent far too much of his time defending criminals, and to defend criminals one has to have destructive analytical abilities. There is no necessity to put together the patient, constructive policies that are needed when holding the office of Chancellor of the Exchequer, to which the right hon. and learned Gentleman aspires.

Of course, the right hon. and learned Gentleman is a wise man, too. He knows perfectly well that he does not want to saddle himself with any of the flotsam and jetsam of the policies that emanate from the party on whose behalf he speaks. He is determined to commit himself to nothing on the future policies of a Labour Government. It was, as always from him, a class performance. He roared with laughter through most of it, and he will be taken no more seriously in the House than outside it.

I want to return to the themes of the speech of my right hon. Friend the Member for Woking (Mr. Onslow). The questions that he posed, to which we shall not get an answer today, are those from which the Labour party will be unable to run away. If the wishes of the hon. Member for Cumbernauld and Kilsyth (Mr. Hogg), who looked forward to the prospect of the return of a Labour Government, are to be fulfilled, the questions posed by my right hon. Friend the Member for Woking will have to be answered. I hold the hon. Member for Cumbernauld and Kilsyth in considerable affection, but he was clearly wrong about one thing—the imminent return of a Labour Government. At best, that is three years away. Anyone who imagines that a general election will be held in two years' time, or in just over two years' time, with any prospect of the Labour party winning it, is living in cloud-cuckoo-land. At best, the Opposition can hope for one about three years from today. If we have one before then, we shall not have another Labour Government in three years' time—that will be in seven or eight years' time, a very long time for the hon. Gentleman to wait. Meanwhile, real problems will have to be confronted by the party that he represents.

It is always nice to hear the right hon. Member for Llanelli (Mr. Davies). We hold him in considerable respect and affection. This decade has been a testing time for him. He has had to come to terms with some of the unpleasant and unfortunate aspects of his party's policies. As defence spokesman, and now as a commentator on economic affairs, he is always robust and independent—and he can afford to be, because his prospects of office in any future Labour Government have long since disappeared. So, from the Back Benches, he can give us the benefit of his wisdom and his commentaries on the policies being advocated by his party's Front Bench spokesmen, and very revealing they are, too.

Fundamental policy questions will have to be answered because they will be asked again and again. The right hon. and learned Member for Monklands, East said that interest rates were too high. He seemed to support a policy of high interest rates—but not quite as high as they are now—to be combined with credit controls, the nature of which he was unprepared and unable to spell out.

Mr. Allan Rogers (Rhondda)

In his lengthy six-minute preamble, the hon. Gentleman has dwelt on the trivia spoken by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) and by everyone else who has participated in the debate. He has given us a wonderful commentary, but as he is a supporter of a Government who have been in power for 10 years, will he comment on the Government's handling of the economy instead of discussing this destructive trivia?

Mr. Powell

The point made by the hon. Gentleman which will be noted most keenly was his reference to the trivia in the contribution made by the right hon. and learned Member for Monklands, East.

The Labour party will have to answer questions. What level of inflation is acceptable? What level of interest rate would the Opposition support? What level of public borrowing do they regard as sustainable and acceptable? What level of taxation? Are we to return to the days of restrictive practices, of overmanning and of secondary picketing? All these questions, asked by my right hon. Friend the Member for Woking, will not disappear.

Unfortunately, the hon. Member for Durham, North (Mr. Radice) is not a historian. He is an economist who has forgotten his history. What has happened in the 1980s has been the product of what happened in the 1970s, by the end of which this country had been brought to its knees. The nation, the House and the Labour party know that. In the 1980s we have had to begin the process of reconstruction. I, like many of my right hon. and hon. Friends, have seen it in my constituency. The Corby steelworks was closed by the Labour party, which brought my constituents to their knees. In the course of this decade we have had to rebuild and have done so extremely successfully. Employment has never been as high as it is now; nor has investment. Factories are being built all the time, and training is taking place.

The right hon. and learned Member for Monklands, East mentioned the need to improve education. That was another of his light-hearted points, because every measure that has been brought forward to improve the quality and standards of education in this country has been opposed in the House by the party that he represents. Given this opposition, this "Mr. No" attitude on the part of the Labour party to any proposal designed to improve matters, the country is entitled to take note that these people are not serious about their ambition to govern.

I want to draw two matters to the attention of the House. I remember talking last year in Germany to senior executives of that country's biggest bank. I asked them what advice they were giving to their clients about placing investment. They said that there were three places in Europe in which to invest: the corridor between Munich and Stuttgart, the greater Paris area and the whole of Great Britain. They were telling their clients that the most promising place in which to invest was the whole of Great Britain. My hon. Friend the Member for Beaconsfield (Mr. Smith) referred to the Bosch investment in south Wales, and there are many other similar examples in the regions. The need for such investment in the regions has already been mentioned.

I close with another telling statistic. Shortly before he died, that great Conservative Franz Josef Strauss was in this country, analysing the difference between the German and British economies. He said that the average hourly wage in West Germany which an employer has to pay is DM31, half of which goes on wages and salaries and the rest on social insurance costs of one sort or another. The equivalent figure in Great Britain is DM21, an hour. Our competitive advantage over Germany is considerable and we must not lose that opportunity. Any glimmer of a policy that we hear from the Opposition is designed solely to destroy that competitive advantage, not to reinforce it. As long as that is so, they are not worthy of the confidence of our people.

7.39 pm

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

Unlike the hon. Member for Corby (Mr. Powell), I do not wish to indulge in a harangue directed at hon. Members on the other side of the House. I wish to do as the Chancellor suggested and try to establish where there is common ground and whether we can proceed, perhaps not altogether with alternatives that I regard as ideologically acceptable, but on lines that the Government might be willing to accept in principle. We can agree that last year's current account deficit was £14.7 billion, which is 3.2 per cent. of GDP, and that we have a projected deficit this year of between £17 billion and £18 billion. We can also agree that we face a rapidly deteriorating balance of trade. Import penetration has doubled since 1970.

The Government publishes a booklet on United Kingdom overseas trade statistics, from the various sections of which one can glean the statistics about finished and semi-finished goods. One can select headings such as glass, footwear, domestic electrical goods, furniture, sports goods, beer and coal. I found today that there are even statistics about condoms, on which Britain has a substantial trade deficit, a major part of which is due to our European partners. Exports rose 10.1 times over the period 1970–88 and in the crucial area of consumer items exports rose 9.6 times. In the same period, imports rose 35 times. All the figures are identified in the overseas trade statistics.

The Government believe that they can offset some of the deficit by way of invisibles, although they now have to admit that there has been a substantial reduction in the invisible balance over the three years since 1986, from £8.5 billion in 1986 to £5.9 billion in 1988, so the Government can no longer depend on that area despite the substantial investment which took place overseas following the abolition of exchange controls.

How can we reduce the manufacturing deficit? I have a constructive proposition for the Government which does not necessarily require major ideological compromise. It depends on the private sector and I hope that the Government will seriously consider it. We should have a sectoral approach to the restoration of the manufacturing economy and it should be achieved by pump priming—what Walter Eltis, director-general of the National Economic Development Office recently referred to as "product loss areas". I am sure that the Minister knows what that means.

I wish to consider an area that I knew many years ago as an example of where this could work. Before I came to the House I was a clock manufacturer and one of my interests in clock manufacturing, over and above my commercial interests, was to examine what was going on in the electronic quartz clock movement market. I came to the House in 1979 and within two years the only British manufacturing plant of electronic quartz clock movements in the whole United Kingdom was in Wishaw, in the constituency of my hon. Friend the Member for Motherwell, South (Dr. Bray) and it faced closure. The factory was owned by Smith's Industries and I and my hon. Friend the Member for Motherwell, South went to the Department of Trade and Industry to argue the case for sectoral support. We did that on the basis that it was the only remaining quartz clock manufacturer in the whole of the United Kingdom, but Ministers turned us down. At the time, about eight years ago, I told the Minister that if that firm closed, within a few years the whole market would be dominated by electronic quartz clock movements made in Germany, Switzerland, Japan and France.

As a result of checks that we have made in the past few days I can now tell Ministers that every quartz clock movement in the United Kingdom, except for those fitted to Metamec clocks which are made by a firm in Norfolk which produces its own movements but only for its own finished products, is now imported from the continent. The manufacturers are Ahttori from Japan, Jungans, Hannart, Staiger and Kienzle from Germany, and those firms totally dominate the United Kingdom market. Anyone who goes through the trade statistics in the way that I have suggested will find that that has happened in many sectors of British industry.

Is it not in the national interest to restore areas that are critical to specific industries? I have mentioned only the clock industry. Is it not wise to examine what has happened in that area in the way that the National Economic Development Office used to do under the Labour Government? Working parties used to examine and define the area of loss and then set out with the National Enterprise Board and other organisations to try to promote the redevelopment of investment. Today NEDO has 16 working groups, but they only make recommendations. They advise manufacturing industry, whereas previously they were in a stronger position in terms of investment decisions.

At very little expense, the Government could set up an industrial reorganisation corporation. Only civil servants would be involved and they could identify, in the same way as NEDO did in the 1970s, product loss areas where there should be manufacturing to substitute for imports. They could identify sponsors in the private sector. In the case of clock manufacture, they could go to a company such as Metamec which has experience of movement manufacture in the United Kingdom and say, "We want to re-establish a foothold in this market because almost 100 per cent. of the market is dominated by imports." The company could be offered substantial sectoral grant support of perhaps as much as 50 per cent.

I add no rider that it should be a regionally based industry, because I understand that the Government want to rely on more market-oriented policies to develop the regions. My proposal is simply that the Government adopt a sectoral approach with substantial grant aid to re-establish our position in markets that are subject to heavy import penetration. The sectoral sponsors would raise the other 50 per cent. of the capital necessary 1.0 set up the plants. They could put up perhaps half the 50 per cent. by borrowing, which might be a requirement of the Government. The companies could go to the markets to raise money for sectoral developments and might even float on the stock exchange in the same way as Eurotunnel, whose offer was speculative.

Market penetration targets could be set by the industrial reorganisation corporation with the private sector sponsors. Apart from the grant assistance to get the companies off the ground, there would be little further public support. The enterprise would be totally privately controlled with no state interference apart from endeavouring through the corporation to establish some sort of target arrangement for markets. The Minister may say that that will not work. I talked to Metamec today about it. The company's managing director, Mr. Herbert Hanna, told me that the company tried to do that three years ago and had to put up all the money. It spent £2 million developing a plant to produce the movement that I have mentioned, but because of the absence of a United Kingdom sectoral grant the company simply could not compete.

Sectoral grant is available in West Germany, which also has research and development grants and grants from the local authorities and the Läander Parliaments in Germany through regional industrial committees. The technology went in but Metamec was not able to effect the model changes necessary to keep pace with German advances in technology.

Mr. Hanna told me that if a private sector offer were made to him, substantial grant was available for putting down the equipment, and he had to go to the market to raise a quarter of the capital required, it would have an almost immediate effect on Britain's market for clock movements. He said that within a matter of months the company would be hiring another 250 people in the Norfolk area. He knows that all that the British market wants is a cheap movement that works, is reliable and i5 internationally competitive. We are talking about tight competitive conditions where Kienzle can sell a quartz movement into the United Kingdom market for as little as 85p per unit. Mr. Hanna said that Britain would otherwise inevitably fail to get back into that area of the market.

It is not only in the clock sector that that can take place. I have identified a series of sectors in which the market is almost entirely dominated by imports. The market for trainer shoes is almost entirely dominated by imports, except for high quality products such as New Balance, which has a factory in my constituency. Why cannot we produce such goods here in the United Kingdom when everyone knows that, as the hon. Member for Corby (Mr. Powell) accepted, labour is cheaper in the United Kingdom?

One can cite the wire and cable sector; major parts of the chemical industry; photographic materials; cameras; watch movements; hosiery; the white cloth used by most cloth manufacturers when they print their fabrics ready for the market; video equipment and personal computers, which invariably carry a British name such as Amstrad but which, when one looks at the back of the machine, have been made in Japan, Korea or some other country in the far east. In office machinery and data equipment import penetration stands at 93 per cent. In man-made fibres it is 38 per cent.; in instrument engineering, 58 per cent.; in electrical and electronic engineering 49 per cent.; and in the boot and shoe and leather goods trade it is also 49 per cent.

If Britain adopts a sectoral approach, based on private sector investment in the way that I suggest, the Government's ideological position will not be compromised. That is the only way to interfere directly in manufacturing industry to reduce substantially the trade surplus. We cannot rely on market factors any more. We need positive intervention.

7.51 pm

Mr. David Shaw (Dover)

My constituents want me to thank the Government and my right hon. Friend the Chancellor for the successful way in which the economy has been managed. They remember the way in which the economy was managed by Labour. Now we have lower inflation and people such as pensioners have benefited. Now we have lower unemployment and the young and the school leavers have benefited. Now that Britain has the highest employment in its history, women have benefited, with more job opportunities than they ever had under Labour. Now we have higher wages from which nurses and other deserving people have benefited, as well as all wage earners. In other words, we have all benefited from the Government's policies.

It is true that interest rates are not at the level that we would like, but they have increased in all major industrialised countries. In those countries inflation has been increasing. For example, Dr. Richard Rahn of the United States chamber of commerce has shown that inflation in the United States of America has risen from 5.1 per cent. to 6.4 per cent. The United States Federal Reserve has tightened its monetary policy still further, even to the point of risking recession. Britain has no choice but to stay competitive and to squeeze out inflation by increasing interest rates. The Government have been right to push the regrettably necessary policy of higher interest rates in order to achieve a more successful economy during the 1990s.

The Opposition make much fuss about the current account deficit. That is strange, since foreign currency assets in Britain are at an all-time high, equivalent to some 10 years of deficits at the current level of deficit. Why do Labour make so much fuss about that deficit? It may be to hide their own mistakes. Labour killed our manufacturing industry during the 1970s, when low productivity was encouraged and when low investment was necessarily accompanied by low profits, as any Opposition Member must realise. Without high profits there cannot be high investment.

In 1976 there was a surplus in motor cars and accessories because that account and the balance of trade in it ran well. By 1979, when the Labour party left office, there was a deficit in motor cars and accessories because the amalgamation of companies such as British Leyland failed. Labour's industrial policy had failed. The Industrial Reorganisation Corporation and other Labour policies on planning the economy and industrial markets had failed.

Now, in 1989, it is likely that a major improvement in the balance of trade in manufacturing is on its way. We have new car plants. Nissan is producing record levels of cars. [Interruption.] If the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) wishes to intervene, I shall be delighted to give way to him.

Mr. Brian Sedgemore (Hackney, South and Shoreditch)

I was just thinking that it is possible to argue a case chronologically. The hon. Gentleman was talking about the so-called devastation of our manufacturing industry between 1975 and 1979 and then he leapt from 1979 to 1989. Would he care to work through the figures from 1979 to 1981?

Mr. Shaw

I am delighted to point out that one of the Government's great successes has been to reduce employment in manufacturing industry by some 2 million people, leaving manufacturing industry in a much more efficient state than it was under Labour. Hon. Members must accept that 5 million people in Britain are now producing more than were 7 million in manufacturing industry under Labour. That is success. British industry has higher productivity now than it did under Labour.[Interruption.] I am confident that I am driving my points home because of the reaction of Opposition Members.

We heard earlier about the Labour party's new policy document, but the one group of people who were not prepared to talk about it was Labour Members. It was my right hon. Friend the Chancellor who had to dissect the document. I note that the Labour party's new policies take us back not to the 1970s, but to the 1960s. I remember that in the days of Harold Wilson the Labour party was long on promises and short on answers. That certainly seems to describe today's new policy document from the Labour party.

The Labour party now promises us low interest rates. It believes that we can isolate ourselves from the rest of the world. It believes that if the rest of the world has high interest rates we can somehow have low interest rates. Many years ago King Canute tried to hold back the waters but he failed, just as those who try to hold back the waters of high interest rates in the rest of the world will fail.[Interruption.] I have already given way to the hon. Member for Hackney, South and Shoreditch. I shall be delighted to do so again if he has anything useful to say, but he did not previously so it is probably not worth giving way to him again.

Increased public expenditure is still being put across by the Labour party as being the answer to our problems. We do not have the problems that the Labour Government had. We do not need cures for increased public expenditure. They did not work in the 1970s. The Labour party did not have the money to increase public expenditure in the 1970s. It is amazing that the Labour party should still believe that public expenditure can be increased and that interest rates will remain low. How can we issue more debt to finance increased public expenditure and yet reduce interest rates? If someone has to borrow money, they have to pay high interest rates. That market fact cannot be bucked. The Labour party's policy is a contradiction.

I regret that the hon. Member for Islington, South and Finsbury (Mr. Smith) is not here today. I often listen with interest to his speeches. Earlier this year he said that we must have lower interest rates and a more stable and competitive exchange rate. If interest rates are lower than market conditions require, foreigners will not hold pounds and we would have to devalue. Therefore, low interest rates, cannot, as he says, go hand in hand with stable and competitive exchange rates. Indeed, stable and competitive exchange rates cannot go together because if an exchange rate is stable it is unlikely to be competitive and if it is competitive it is not likely to be stable. The more one examines Labour's policies—

Mr. Tony Worthington (Clydebank and Milngavie)

Will the hon. Gentleman repeat that?

Mr. Shaw

I am sorry if the hon. Gentleman, like many Opposition Members, cannot follow the economic facts of life. The more one examines Labour's policies the more one finds that they are based on the mathematics of wishful thinking. It is a very special version of mathematics, taught only at the Walworth road school of policy review.

The Opposition claim they have a new economic policy but the right hon. and learned Member for Monklands, East (Mr. Smith) again and again refused invitations earlier in the debate to outline Labour's proposals. Why did he decline to tell the people of this country about them? We must conclude that it was because those policies are not capable of being argued in rational debate on the Floor of this House. That point was proven when the Leader of the Opposition ran away from his BBC interview on economics. What kind of a man runs away from an interview on economics? The Opposition claim that they now understand competition and the market, but I do not believe that they have an economic policy that can compete with that of the Government. I shall support the Government amendment in the Lobby tonight.

8 pm

Mr. Doug Hoyle (Warrington, North)

One of the problems we face in this debate is not knowing how long the Chancellor will be in his job. We do not know when that dreaded knock will come and he will be ushered into No. 10 and told that he is on his way. It is difficult to propose any long-term solutions to a person who may have only a short-term contract.

The Chancellor and the Prime Minister both have strong views on keeping inflation down, but we hear nothing these days of zero inflation. It is no longer bedtime reading for the young in every Conservative household. It has disappeared out of the window. When the Minister replies, I shall be pleased to hear when that target will be achieved.

We do know that inflation is higher in this country than any other in the EEC except Greece and Portugal. There seems to be some complacency about our record by comparison with the rest of the Community, with the Government saying that all is right, but this country is paying a very high price for having the Government in office. My right hon. and learned Friend the Member for Monklands, East (Mr. Smith) was right to point out that the failure to invest on the supply side is now catching us out. British industry continues to lag behind because of failure to invest. It also faces high interest charges and rising costs as a consequence of gas privatisation and the proposed privatisation of the power industry. British industry costs are far higher than those of its competitors in Germany or France, which makes domestic companies even more uncompetitive than they were.

The Department of Trade and Industry and even the noble Lord the Secretary of State himself talk only of a venture economy. We get from them tinsel rather than substance. To hear Conservative Back Benchers, one would think that Labour was in office, because Government Members spend all their time attacking Labour policies while not one of them gives an iota of information about what they would do.

We are heading for a record Community trade deficit of £18 billion, yet the Government's only response is to raise the interest rate time and time again. It now stands at 14 per cent. and all the signs are that it will rise to 15 per cent., which will make a bad situation even worse. Britain's metal industries are falling into deficit, and we shall shortly be left with only aerospace. When a Labour Government were in power, our engineering industry was in the black. Today, the trade deficit in engineering products has deteriorated by 30 per cent., rising from a deficit of £8.9 billion in 1988 to £11.6 billion in 1989.

In the years 1985 to 1988, for which the hon. Member for Dover (Mr. Shaw) claimed a special degree of Government success, the deficit increased by 600 per cent. Does he call that a success story? Our trade deficit with West Germany is a calamity. Last year it totalled £845 million, which is the biggest deficit with any of our trading partners. The deficit trebled between 1979 and 1988, yet Conservative Members have the cheek and impudence to speak of that as a success story. I should not like to experience a Conservative failure.

Another Government ploy, particularly from 1979 onwards, was to say, "It does not matter much about the metal-bashing industries because the sunrise industries such as information technology will be our saviour." Information technology was the in thing which would save us all, but our IT trade deficit is rising year by year. I sit on a Committee that has just produced a report on information technology. Its advice to the Department of Trade and Industry was ignored because it would have interfered with the market. As long as we rely on market forces alone, we shall never recover from our IT trade deficit or have any hope that information technology will be our saviour. The situation will only get worse.

Whenever we spell out to the Government what ought to be done, they make no response and refuse to face the facts. I do not know where the hon. Member for Dover gets his figures about motor vehicles. Last year, we imported from the Common Market £6 billion more in motor vehicles that we exported.

Mr. David Shaw

I was making the point that we enjoyed a surplus in 1976 but suffered a small deficit in 1979. I do not deny that the deficit increased, but for the first time the trend is reversing. That has been shown up in the Oxford Economic Forecasting studies. By the mid-1990s, we may return to a trade surplus on motor vehicles as a consequence of the new efficiency that will come with Nissan and Toyota. That Government achievement cannot be denied.

Mr. Hoyle

I just wonder where the hon. Gentleman lives. I think his problem is that he gazes out to the Channel without looking at the mainland behind him. It is remarkable that the hon. Gentleman can make such a statement. I repeat that we suffered a record £6 billion deficit in our trade with the EEC.

Mr. Calum Macdonald (Western Isles)

The hon. Member for Dover (Mr. Shaw) is really saying that after 10 years of pandering to British management, the Government have given up on it and now rely upon foreign management to get Britain out of the mess that it is in.

Mr. Hoyle

Absolutely. The Government's problem is that they have no faith in Britain. It does not matter who owns our industries. They just hope that the Japanese will capture the European market for Britain and rescue our record £6 billion trade deficit with the EEC that the Government created.

It is nonsense for the Government to continue to claim a success story. One of the consequences of the Government's present policy will be that unemployment will rise again, especially in the areas represented by Opposition Members. Barclay's Economic Review estimates that there will be a 200,000 rise in unemployment, but, I think that that estimate is probably rather low.

The Government are producing slogans instead of remedies. As has been said, the problem is that the Government are running a casino economy. They are like gamblers who are drunk on the roulette wheel. All they are doing is throwing chip after chip into the casino. We can no longer afford the luxury of this Government, nor can we afford their incompetence.

Several Hon. Members

rose—

Mr. Deputy Speaker (Sir Paul Dean)

Order. I am very grateful to those hon. Members who have co-operated so well in observing the 10-minute limit on speeches. The wind-up speeches are expected to begin at 9.20 pm and five hon. Members still wish to speak. If my mathematics is correct, that means that I can now relax the 10-minute limit on speeches, but I hope that hon. Members will bear in mind that five hon. Members hope to speak between now and 9.20 pm.

8.11 pm

Mr. Kenneth Hind (Lancashire, West)

The hon. Member for Warrington, North (Mr. Hoyle) said that Conservative Members have criticised the Opposition. I join in those criticisms. The Opposition introduced the debate to criticise Government policy. National politics today is essentially a two-horse race. The Conservative and Labour parties agree that the centre parties are a broken force: therefore the public look to the two major parties for policies for the future. It does not come well from the Opposition simply to ask what the Government will do when recently they have produced a detailed document for public examination setting out what they would do if they were in power. Therefore, it is fair for us to say to the Opposition that we accept that there are problems in the economy, but we and the public are entitled to know what they would do if they were in power. We have repeatedly asked that question in today's debate.

The right hon. and learned Member for Monklands, East (Mr. Smith) opened the debate by making a number of points that revealed the weakness of the Opposition. But what are the strengths of the Government's present position? In the past four years, unemployment has fallen by 1 million. Since 1982, more jobs have been created in Britain than in the rest of Europe put together. Inflation has fallen to an average of 5 per cent. per year, there have been major reductions in taxation and an average annual growth in industry of 3.4 per cent. We have the highest productivity growth in the OECD except Japan. The growth in small businesses has mushroomed, creating 1,300 new businesses a week. Company profits are higher than they have been for 20 years. Despite the criticisms from the Opposition, manufacturing industry has grown by 7 per cent. in the past two years—twice the growth in the economy. That is a major achievement.

The right hon. and learned Member for Monklands, East leads the Opposition charge and states that what is required is new investment in training, research and development and new machinery. I agree with him. We all agree on that, but we recognise that to close the gap between our imports and exports we need to increase the capacity of British industry. Our industrial base has to grow. My right hon. Friend the Chancellor of the Exchequer has encouraged that. In 1988–89, the last year for which detailed figures are available, there was a 14.5 per cent. increase in investment in British industry and we are now witnessing record levels of investment, achieving precisely what the right hon. and learned Member for Monklands, East wants us to achieve.

A large proportion of our trade deficit is created by new machinery which is imported only to increase the British industrial base to close the gap between imports and our exports. In 1987 half our trade deficit was made up of imports of machinery into the United Kingdom. British industry has the confidence to expand and to create jobs, and that is a major achievement.

Mr. Worthington

I wish to ask the hon. Gentleman a simple question. Why is capital machinery being imported?

Mr. Hind

We have to go back a fair number of years. I regret that much of our manufacturing industry was killed off in the 1960s and 1970s and cannot easily be replaced. Anyone who knows anything about economics knows that, at the first sign of an upswing in any economy, the manufacturers of machinery benefit first. However, we do not have as big a machinery industry as we should like, so we have to import machinery, but we have the beginning of the upswing and the about-turn that will help to close our trade gap.

The major enemy that the Government face is inflation. I fully support the line taken by my right hon. Friend the Chancellor of the Exchequer when he put that at the top of the problems that we face. He is right to attack that problem as his first priority. There is pressure on the pound at the moment because of the improvement in the American economy and external pressure. There is an increase in inflation across the board in the G7 countries. It is no good Opposition Members saying that it is not happening elsewhere. Of course it is happening elsewhere and that is recognised, but unfortunately we in Britain have a greater dose of the disease than we should like, but we know that the cure lies in introducing higher interest rates to suppress demand and reduce inflation.

No one should think that the Conservative party likes high interest rates. No one who has worked in any industry wants high interest rates. We can see the damage that they do and I am sure that my right hon. and hon. Friends agree that they are a short-term measure which will improve our financial performance and help to close our trade gap, dampen down demand and reduce imports. That solution is working now. Mortgage inflation is beginning to reduce.

The Opposition suggested introducing credit controls, particularly for credit cards, but that is such a small part of the problem, representing less than 5 per cent. of debt, that it will not tackle the problem. It will take time, but the economy is stronger than it has been for many years and that has been shown by the winds that it has faced in the past few years—black Monday, the crash in the world markets, the fall in the value of sterling a few years ago and various problems created in the economy by the fall in oil prices. The British economy has been strong enough to weather those storms and will be strong enough to weather the problems that we are facing at present.

The Opposition have offered no solutions. The right hon. Member for Llanelli (Mr. Davies) is on record in The Independent saying that the Opposition have no idea how to deal with inflation. One of the Labour party's advisers was quoted in The Independent as saying that it has no idea what to do about inflation. The Leader of the Opposition admitted in an interview with James Naughtie of the BBC, which has been hidden away in the archives and which we will never hear, that he did not know what to do about it. He said, as have Opposition Members throughout the debate, that the Government are in power, so, "Let us see what they can do about it." The British public are entitled to ask the Labour party what it would do if it were in power.

In an interview this morning, the right hon. and learned Member for Monklands, East ducked a question about control of sterling. He could not speculate on the appropriate level of the pound because he does not have an idea what it should be. The Opposition have no policy to deal with the pound, which is an essential part of managing the economy.

The Labour party has produced a document outlining its policies for the future. It clearly emerges from it that the Labour party is the party of higher taxation. It proposes to return to the old remedies such as raising taxation and renationalisation. The right hon and learned Member for Monklands, East ducked my question when I challenged him in an intervention about how new investment will be financed. It will be financed using ratepayers' money, by raising taxes and using that increased taxation to intervene in industry. Higher taxation, intervention and failure to control inflation and the pound will increase inflation and make a bigger mess of the economy than the Labour party has done previously. We all remember what a terrible mess it made of the economy in 1976.

The abolition of the upper earnings limit on national insurance contributions will make anyone earning more than £17,000 a year worse off. The married couple's allowance will gradually be withdrawn, making 12 million couples worse off as they lose indexation. Labour has taken a step backwards from the clear-cut pledge to restore cuts in the basic rate of income tax. It is trying to conceal its intention by talking about an income tax regime of many different rates. The right hon. and learned Member for Monklands, East admitted that any reform of income tax along the lines proposed will make some basic-rate taxpayers worse off.

We have asked the Labour party to cost its programme. It ducks the question because it knows that it will inevitably lead to higher rates of tax, increased inflation and lower standards of living and show that they are not in a fit state to control the economy or run the country.

I should like to mention a matter to which my hon. Friend the Member for Dover (Mr. Shaw) referred. We must consider expert forecasts of the performance of the British economy. The survey by Oxford Economic Forecasting, which was published on 31 May, predicts that manufacturing industry will boom throughout the next decade, generating thousands of new jobs. By 1995, manufacturing output is expected to be 60 per cent. higher than today. Car production is forecast to rise from 1.25 million today to 2 million by 1995, helped by the dramatically improved efficiency and profitability of United Kingdom car plants. Such profitability will run right through the British economy.

The Chancellor of the Exchequer and Conservative Members accept that mistakes have been made in the past, but the right policy to correct the economy is being pursued, despite the criticisms of the Opposition. The Government do and mean what they say. At least we are prepared to say to the public, "This is where we stand, and this is what we shall do," unlike the Opposition, making it clear that we are fit to govern this country and that they are not.

8.25 pm

Mr. Tony Worthington (Clydebank and Milngavie)

I wish to return to the central problem—the fact that Britain is not paying its way.

Last year we ran a current account deficit of £14.7 billion, and it seems that this year's deficit will be £18 billion to £20 billion. I treat the problem seriously because the Chancellor has always done so with other countries. A few years ago he lectured the Americans about a deficit of 3 per cent. of gross domestic product, but our deficit is now 3.2 per cent. of GDP. The Chancellor lectured debtor nations, whether they were developing or developed countries, when they were in deficit. He never visits Japan or Germany and says, "How weak your economy is—it is in surplus." Strangely, our economy is supposed to he the only strong economy with a record deficit.

It is difficult to find a part of the world with which we are not running a deficit. We are not running a deficit with north America, but the surplus is falling. We are not in deficit on oil, but that surplus is also falling. The reason why we are in deficit is that after 10 years of Tory Government we cannot compete effectively with other countries. When Tory history books are written, the chapter on the period between 1979 and 1981 is always missing.

Absurd reliance has been placed on service industries. When Labour Members said that we needed manufacturing industry to survive, we were criticised by the Financial Secretary to the Treasury and others for concentrating only on that sector. The chickens are coming home to roost and what we have been saying for many years about the Government's neglect of manufacturing industry is being proved correct. My hon. Friend the Member for Workington (Mr. Campbell-Savours) said earlier that we must play a more interventionist role in manufacturing industry, perhaps on a sectoral basis. It is certainly difficult to see how market forces can cause manufacturing industry to re-emerge.

We run deficits on almost everything. One would have thought that we produce a lot of potatoes, yet we export £18 million-worth and import £58 million-worth. The picture is similar for sports goods.

Mr. Macdonald

And condoms.

Mr. Worthington

Condoms are mentioned yet again, which reflects some hon. Members' obsession with them, but there is only a £3 million deficit there. Last year, we exported £64 million-worth of coal but imported £427 million-worth. Twenty years ago, no one would have believed that we would be running a £24 million deficit on carbonated water.

In the 18 years from 1970 to 1988 there was a 23-fold increase in imports of capital goods and a 35-fold increase in imports of consumer items. In those 18 years there was less than a tenfold increase in exports. There was a 78-fold increase in car imports but only a sixfold increase in car exports. We assemble cars but although the wages are earned in this country the profit and the control are elsewhere.

We can no longer rely on oil as a surplus. The surplus in 1985 was £8.1 billion but by 1988 it had been reduced to £2.3 billion. We can no longer rely on invisible exports. In 1986 they amounted to £8.5 billion, but by 1988 they had fallen to £5.8 billion. Earlier we were told that we need not worry about the deficit because we were importing capital goods. We are indeed importing them—we have ceased to manufacture capital goods.

The hon. Member for Corby (Mr. Powell) pointed out that the average wage in Germany is 31 deutschmarks per hour and that the average wage in this country is 21 deutschmarks per hour. He said that we had a competitive edge. It is strange that Germany is beating us hollow on wages as well as having all the social benefits, extra training, better pensions and nurseries for children that we are denied.

We had the clearest confession from the hon. Member for Corby that the Government's strategy is to seek a low-wage economy, but the people do not want a low-wage economy. They want an economy with high wages, high education standards, better research and development. They want a Government who believe in the future of the United Kingdom as an economy which can compete with countries like Germany.

The speech of the hon. Member for Corby reminded us of the words a few months ago of the director general of the CBI, who said that a combination of British productivity and German social costs would be lethal for this country. He was right. That is the legacy that the Government have given us.

It is essential that we abandon our non-interventionist strategy in industry. There are no grounds for thinking that work will return to many areas simply by leaving things to market forces. Capital remains the most portable of the factors of production and it can go anywhere in the world. Labour has to stay here; it should stay here and should have a good life. Certainly we need far more investment in education and training. We should abandon the pretence that the employment training scheme is anything other than a means of lowering unemployment figures. It is an insult to the people to pretend that the employment training scheme will provide adequate training for people to compete in the modern world.

We have a capital-oriented economy on the Government Benches. We need an economy much more oriented to the needs of the people. There has been much reference in the House to the creation of jobs. Jobs may have been created in some parts of the country but in Strathclyde, the region that I represent, total employment had fallen in September 1988 to 767,000, a decline of 10,000 jobs since September 1987, and the number of jobs in manufacturing industry had fallen by 162,000, or 49.7 per cent. Since 1979, the last peak in the trade cycle, Strathclyde's total employment is estimated to have fallen by 220,000 or 22.3 per cent. Strathclyde's share of employment in the United Kingdom has fallen from 4.3 per cent. to 3.5 per cent. since 1979. That is the economy within which I live and work. That is the reality of life there and in Glasgow, Central, where male unemployment in Bridgeton and Dalmarnock is 38.2 per cent.

All that the Government promise us is that there will be a decline in the economy over the next few years while their high interest rates continue to take effect. The Government have to recognise that the only hope for many parts of the country is for them to abandon dependence on market forces. They must realise that in area after area we have no products to sell and that the only way to have products is by taking a much more interventionist stance.

When we lost television manufacturing to the Japanese, we then lost video, compact discs and all the developments that occurred after that. My hon. Friend the Member for Workington (Mr. Campbell-Savours) referred to the knock-on effect of the loss of production of quartz digital mechanisms for clocks, and showed how we have lost products in one area after another. We must abandon reliance upon market structure and take a much more interventionist role.

8.37 pm

Mr. Tim Janman (Thurrock)

I congratulate the Chancellor, the Government and my hon. Friends on the Front Bench on the many positive aspects of the economic advance that we have made over the last decade. Deregulation, lower taxation, privatisation and the control of public spending—all the things that the Labour party never sought to do when in power—have led to increased productivity, investment and profitability in British industry, and to a longer period of sustained real growth in the economy than we have seen for many decades, whereas in the past we were continually in stop-go cycles.

All that could be undermined if inflation is not brought under control. It is vital to regain full discipline of the money supply. I want to concentrate on one concern—that broad money is no longer targeted and has not been targeted for some time; broad money is no longer under control. I acknowledge that narrow money has been brought under control, although clearly it was out of control until fairly recently. The December 1988 increase in MO was the biggest monthly increase since 1979. Recent figures show that the interest rate increases, which the Chancellor was correct to bring in, have been working and that narrow money growth has been tumbling.

That is shown by some recent statistics. In the year to January, narrow money increased by 7.4 per cent., in the year to April, it increased only by 5.7 per cent. and in the six months to April, narrow money has been increasing at an annual rate of only 0.9 per cent. That is one of the key ingredients in bringing inflation under control and getting it out of our economic system.

My concern is that broad money is not under control. If we look at the rates of growth in M3 and M4, we see that those rates of growth are far too high. In the 12 months to April this year, M3 grew at 20.6 per cent. Over the six months to April, it grew, annualised, at 19.1 per cent., and over the three months to April, it grew, annualised, at 18.8 per cent. The equivalent figures for M4 money supply growth show 18.1 per cent., 16.7 per cent. and 20 per cent. increases.

The figures for narrow money are welcome and, if anything, narrow money growth over the past few months has been slightly too tight compared to current and expected general growth in the economy. But the M3 growth and the M4 growth are not acceptable. Those figures are the result of printing money last year to buy deutschmarks and of attempts to fix or control exchange rates by allowing the commercial banks to throw money at the problem. The strength of sterling should not be a major consideration in counter-inflation policy. It should be the result of counter-inflation policy achieved through sound money policies, which we have still not wholly achieved or certainly have not been achieving for the past few years.

There was a considerable time after 1979 when we were well on the way to achieving sound money and well on the way to achieving zero inflation. Our policies achieved an inflation rate of less than 3 per cent. in mid-1986, when inflation reached a trough of 2.4 per cent. Sceptics will say that broad money is not important. However, taking into account the longer time lags that exist, the M4/retail price index relationship is clear.

I want to go through some figures for the period from 1972 to the present, which clearly show that there is a relationship between broad money and inflation, albeit not quite as tight or with such short time lags as with narrow money. In 1972 and 1973, the average increase in broad money on the M4 measure was 22 per cent. From January 1974 to August 1975, inflation increased from 12 per cent. to 26.9 per cent. During 1974, broad money growth was reversed and it went down to a trough of 12 per cent., which resulted, in July 1976, in inflation coming back down to 12.9 per cent. During 1975, with the election of a Socialist Government, we inevitably saw an irresponsible increase in broad money supply growth—

Mr. Bryan Gould (Dagenham)

The election was in 1974.

Mr. Janman

I am quite aware that the election was in October 1974, but in 1975, the Labour Government had already escalated broad money supply growth to 16 per cent. That increase resulted in inflation peaking in June 1977 at 17.7 per cent. During 1977, as a result of the International Monetary Fund coming in, broad money supply was again reduced to a trough of 11 per cent. growth on an annualised basis and this worked through to produce a reduction in inflation to 7.4 per cent. in June 1978. During 1978, while inflation was coming down, broad money supply again reached a peak growth rate of 18 per cent., which in turn, in May 1980, produced an inflation rate of 21.9 per cent.

During 1982, after this Government's heroic Budget in 1981, broad money again reached a trough of 13 per cent. in annualised growth terms and this resulted, in May 1983, in inflation coming down to a low of 3.7 per cent. In more recent years, between 1983 and 1986, broad money, on the M4 criteria, grew between 13 per cent. and 14 per cent. and that resulted in inflation between 1984 and 1987 averaging 4.7 per cent. The disturbing news is that, between the fourth quarter of 1987 and the fourth quarter of 1988 inclusive, broad money has been allowed to creep up to a growth range of 16 per cent. to 18.5 per cent., which has unfortunately resulted in an inflation rate of about 8 per cent. in April 1989.

I am not saying that narrow money is not important, because it is probably more important than broad money, but I am trying to show that broad money is also an important consideration. If we take snapshots of two periods in the middle and late 1980s, we can see that that is the case. Between the fourth quarter of 1984 and the fourth quarter of 1985, the annualised rates of broad money varied between 12.8 per cent. and 13.8 per cent. The equivalent figures for narrow money were 5.6 per cent. and 3.3 per cent. In 1986, allowing of course, for a time lag, that resulted in inflation coming down to 3.4 per cent., with the lowest figure in the middle of 1986 being 2.4 per cent.—the lowest figure for about 20 years, which was a fantastic achievement at that time.

If we now look at the 1987–88 picture, we see that between the fourth quarter of 1987 and the fourth quarter of 1988, broad money grew at a rate of between 15.3 per cent. and 18.6 per cent. and narrow money has been allowed to increase to growth rates of between 4.2 and 8.5 per cent. over that same period of five quarters. That has resulted in the current inflation rate of 8 per cent. and rising.

From those figures it is clear that we can conclude that not only is narrow money supply important in looking at inflationary trends and seeing what is going to happen in the future, but so is broad money. Broad money targets, preferably M4 targets, should again be set and achieved, although I take the view that those broad money targets can be more liberal than they otherwise would need to be if narrow money is under control. If we go back to having targets both for broad money and narrow money, and try to achieve and be seen to achieve those targets, I am confident that that will give a signal to the financial markets that the Government are serious about maintaining sound money and about attempting to achieve 0 per cent. inflation.

There is an article in The Guardian today in which several hundred words are printed to try to show that there is no connection or no particular relationship between either narrow money or broad money and inflation, but the graph printed at the end of the article shows exactly the opposite. The graph shows a clear relationship between narrow money and the retail prices index, and with a time lag, with broad money. The figures show that to achieve zero per cent. inflation, we need to bring down broad money growth to not more than 10 to 11 per cent. per annum and narrow money, on which we have already perhaps gone slightly further than we need to, should be brought down to an annualised rate of no more than I to 2 per cent. growth at present.

This particular aspect of economic policy, about which this evening's debate has given me an opportunity to speak, is a matter about which I have some concern and which I would ask my right hon. Friend the Chief Secretary to review. It is not a matter about which one should be dogmatic and there are no simplistic solutions. If we look at the trends and the figures, and the fact that over the past few years we have ditched broad money targets, whereas for the first four or five years in office after 1979 we had such targets, it is clear that to achieve that worthy target of zero per cent. inflation, we need to keep high interest rates for as long as we need to. We need to allow exchange rates to float freely. We should encourage the Bank of England to sell securities to the banks to mop up that 7 or 8 per cent. of broad money that needs mopping up.

When considering the tenor of our economic policy and all the measurements upon which our economic success can be judged, it is ludicrous for the Opposition to deny that the past 10 years have brought this country excellent economic success. It is even more ludicrous for them to snipe at the Government's achievements when clearly, from the leadership of the Labour party downwards, Labour Members have no realistic alternative to put in its place and no understanding of how they can even try to find an alternative. We must consider having both broad and narrow money targets. If we do that, we shall have policies that will achieve the target, which we all want, of sustained zero inflation.

8.50 pm

Mr. John Battle (Leeds, West)

One line in the Chancellor's response to our motion drew my attention —his claim that so far not a word had been said about unemployment. I was surprised that he drew attention to what might be described as the forgotten factor whenever Conservative Members participate in a debate on economic policy. I should like to focus on the forgotten factor of unemployment.

As we have commented throughout the debate, when we have a Government who have given us record interest rates and a record trade deficit, we should not forget that they have also given us a record unemployment level. It is still unacceptably high. The unemployment level represents not figures, numbers and statistics but real people who do not have jobs. It is worth reminding the House that, according to the Government's figures, nearly 2 million people are still without work. The Unemployment Unit estimates that we should add at least 500,000 to that figure to take account of changes in methods of calculation.

There is talk about handling inflation and references have been made to the Government having the single instrument of interest rates. There is another secret, unmentionable weapon—unemployment. The Prime Minister offered the following economic advice in February 1981 to readers of Time magazine: bringing down inflation does mean that you have increasing unemployment and I don't know of any other way of doing it. Clearly, unemployment is a weapon in the Government's armoury, although they are not anxious to stress that. However, this year's economic policy statement paragraph 3.04 in the Red Book, "Financial Statement and Budget Report 1989–90", refers to the labour market, and spells it out: Unemployment … is most unlikely to continue falling". What else can that mean, except that unemployment is expected to rise? That is the basis of the Government's economic and budget strategy.

My hon. Friend the Member for Warrington, North (Mr. Hoyle) referred to Barclays Economic Review, which has estimated that unemployment will increase in real terms by at least 200,000. On 21 April, the Parliamentary Under-Secretary of State for Employment was asked in a written parliamentary question when he expected unemployment levels will fall to the 1979 level". He replied: The Department does not forecast future levels of unemployment."—[Official Report, 21 April 1989: Vol. 151, c.347]. We are entitled to ask why on earth not, when it seems to be part and parcel of the Government's strategy. The country knows that since 1982 the Government's unemployment figures have been subjected to 24 changes in the method of counting and there are another four to come. According to the Government's figures, unemployment has been more than 3 million for nearly six of their years in office.

I shall draw attention to one group that is often forgotten—the long-term unemployed, who, understandably, could be the most aggrieved at the talk of the economic boom in Britain and all that we hear about the economic miracle of the Government's policies. The proportion of people who have been unemployed for more than a year rose from 25 per cent. in 1979 to 41 per cent. last year. It is not that those people were in and out of jobs. They and their families were paying the long-term price for the Government's faulty economic experiments.

There are regional inequalities in the distribution of employment. The 1988 "Regional Trends" shows that the Yorkshire and Humberside region, part of which I represent, had the highest proportion of people in the United Kingdom who had been unemployed for between one and two years—17–2 per cent. That region had the second highest proportion of people who had been unemployed for between two and three years—9.4 per cent. It had the fifth highest proportion of people who had been unemployed for more than three years—22–7 per cent. Unemployment is still high in the region. It has the second highest level of unemployment generally, with more than 270,000 people still unemployed. To take a smaller area, long-term unemployment in West Yorkshire is 42 per cent.

When dealing with statistics, how often do we forget the hopelessness of the long-term unemployed? On 4 May 1980, in the News of the World, the Prime Minister was reported as saying: I could not live without work. That is what makes me so sympathetic towards those people who are unemployed. I do not know how they live without working. Under this Government many of the long-term unemployed have had to live without work, and it seems that the Prime Minister either has forgotten her sympathy for them or is pretending that they no longer exist.

We are entitled to ask what future the Government offer to people in my constituency who are living with long-term unemployment, with no hope of employment for their children. When considering the prospects, we need look no further than the CBI quarterly report. Its industrial trends survey points out that, after a period in which manufacturing employment has risen, firms now expect to cut their work forces. No region comes out of that survey worse than my region of Yorkshire and Humberside. Commenting on the report, the Sunday Times said: it suggested that firms are still tending to cut back employment rather than make a determined effort to rein back pay. Indeed, the CBI's own evidence on skill shortages, with more than a fifth of companies regarding them as a constraint on output, suggests that many firms have no option but to meet employees' demands. The more fundamental point was that economic behaviour still conforms to the view that there is a trade-off between unemployment and inflation. In addition, if we regard the current-account deficit as in part an outlet for inflationary pressures, there is also a trade-off between the jobless total and the trade gap.

Mr. Janman

I have no quarrel with the hon. Gentleman's genuine concern about unemployment, and it is true that at the beginning of this decade there was a period of high unemployment. Given that every Labour Government have ended their term of office with higher unemployment levels that when they took office, can the hon. Gentleman tell the House how the return of a Labour Government would improve matters?

Mr. Battle

I must make it absolutely clear that the levels of unemployment under Labour Governments were a great deal less than those under this Government.

The paper presented by the Centre for Economic Policy Research, entitled "The Thatcher Miracle", points out that the unemployment-inflation trade-off has not disappeared during the past 10 years but has simply been clouded by the existence of North sea oil. That is the key point. The centre points out that the level of unemployment required to reduce inflation—the non-accelerating inflation rate of unemployment—would have to be well above the current jobless total.

To achieve a steady rate of inflation of even 4 per cent. to 5 per cent. under current Government policies would require a higher level of unemployment. Higher unemployment levels will be inevitable in regions such as mine as a consequence of the Government's efforts to reduce inflation, yet the Government's response in a written answer was that the Department did not forecast future levels of unemployment. Perhaps they dare not do so; perhaps they are deliberately suppressing economic data. We have the right to challenge the Government on why they will not forecast the levels of unemployment that would be a consequence of their policies.

What will happen when unemployment rises? It will be much easier for employers to dismiss workers or to make them redundant, because workers' rights have been undermined through legislation to eliminate trade unions, the reduction of wages councils' minimum provisions and the removal of social security entitlements. Even during the past few weeks, the Government have introduced measures to ensure that unemployment will no longer be seen to rise because those who do not accept low paid jobs will be taken out of the social security records. Perhaps, even now, officials at the Departments of Employment and of Social Security are working at their computers trying to find programmes for new ways to conceal the unemployment figures when they begin to rise again. At the very least the Government have a duty to spell out the Labour market implications of their economic policies.

In a party political broadcast on 4 May 1977, the then Leader of the Opposition—the right hon. Member for Finchley (Mrs. Thatcher)—said: Sometimes I have heard it said that Conservatives have been associated with unemployment. We would have been drummed out of office if we had had this level of unemployment. At that time unemployment stood at 1.3 million. Since then, and for every year of this Tory Government's office, the level of unemployment has been higher than 1.7 million. When the Prime Minister was Leader of the Opposition she said that a Government presiding over 1.3 million unemployed should be drummed out of office, so perhaps the time has come for her Government to be drummed out of office. Who, other than the long-term unemployed—the forgotten factor of the economy—have more right to beat that drum loudly and call upon the Prime Minister and the Chancellor not to get their act together? They manifestly cannot get their act together. Together they should go.

9.3 pm

Mr. Calum Macdonald (Western Isles)

The hon. Member for Thurrock (Mr Janman), who has unfortunately left the Chamber, showed why the Conservative Government have got the economy so badly wrong over the past 10 years. The hon. Gentleman was becoming further and further lost in the clouds of monetarist mysticism with his talks of MO, M4, M25, and so on. The Conservative party used to boast that it was the party of household economics. I should love to hear the hon. Gentleman giving a speech to housewives and to hear what they made of it. The hon. Gentleman's speech was difficult to follow, but I think that the gist was that the Government had it right at the time of the big recession, but that in the past few years they had made a terrible mess of things.

While I do not wish to go over ground that has already been traversed in the debate, I cannot resist referring to the latest issue of Business magazine, not only for the value of .its leading article but because I recall Conservative Members referring to that magazine a couple of weeks ago, citing the then leading article which was headlined: Born again Britain. How industry is getting it right. I remember well how that magazine was held aloft and waved regularly at Question Time, with Conservative Members proclaiming that industry was once again confident of the British economic miracle.

The latest issue of Business magazine has a different tone to its leading article. It is not "Born again Britain" but How Britain lost its balance and the first sentence of the article reads: Britain is gripped by a trade crisis. There is no better illustration of the collapse in business confidence than the change in tone of Business magazine and its attitude towards the Government's economic policy. The magazine's latest article goes on to say that its analysis suggests that the country might be facing a trade crisis even more deep-seated and fundamental than recent monthly figures indicate. In this debate various figures have been given for the different industrial sectors. It is clear that one by one they have all slipped further into deficit. What I find most telling—this has not been mentioned in the debate—is the fact that we have now slipped into deficit in the umbrella trade. I should have thought that if there was one area in which Britain could stay ahead, it was in the manufacture of umbrellas, but we are now importing £28.7 million-worth of umbrellas compared with exports worth £6.4 million. That must surely be a latter-day example of carrying coals to Newcastle.

When we examine the various regional sectors with which Britain trades, we find the same dismal tale. We are in deficit with all but two of the world's regional trading blocs, the two exceptions being the Arabian countries and North America. Amazingly, we are in deficit with the Socialist bloc. Indeed, we are in deficit with Russia. Even Mr. Gorbachev's perestroika has outstripped our Prime Minister's economic miracle.

It is important to note that the item so often pointed to in the past—our export surplus on invisibles—is no longer sufficient to keep our heads above water. Even that has decayed over the years. Whereas our surplus in invisibles was running at £8.5 billion in 1986, it slipped last year to £5.9 billion. In all those sectors we see a steady decay in Britain's economic situation, such that Business magazine concludes that the Government have managed to dig the biggest hole in Britain's economic history. If that is the view of that magazine, it is little surprise that the financial markets are showing less confidence in the Government's performance. The key to finding our way out of the present difficulty must be to tackle the long-term underlying structural problems that the country faces.

Conservative Members regularly jump to their feet to ask what we, the Opposition, would do in this situation. It is certainly a difficult task to devise the Houdini trick that will get the Government out of the present mess. I do not believe that this is the right kind of approach. Our approach should not be to find some way of slipping out of a particular conjunction of bad figures in one month. Our approach should be one that is rigorously applied over a number of years and one which will resolve the long-term problems of the British economy.

The hon. Member for Lancashire, West (Mr. Hind) said—it was about the only point on which I agreed with him—that a solution to the present crisis would take time. It definitely will take time; there are no immediate solutions. The Government, however, have had time enough and they have only got us deeper into our economic mess and have not brought us any nearer to resolving it.

It was interesting that, when during his speech the Chancellor felt himself to be in a position of weakness, he turned to what he called some area of common ground. He said that he recognised the problems to which we have pointed, such as those in education and in training, but the point is that after 10 years of this Government and four years of the right hon. Gentleman as Chancellor we are no nearer resolving any of those problems.

My right hon. and learned Friend the Member for Monklands, East (Mr. Smith) cited the very telling example of the level of training in this country as compared with West Germany. In West Germany 70 per cent. of the working population are trained to the equivalent of having at least one 0-level, whereas in this country it is 30 per cent. That is after the Government have been in office for 10 years, so it is no use Conservative Members saying that solutions take time or the Chancellor saying that he recognises the problem—the Government have had 10 years to deal with the problems and nothing has been done.

Mr. Allen

I must have misunderstood the Chancellor's remarks, because I thought that the common ground that he was seeking was between No. 11 and No. 10 Downing street, as my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) elucidated.

Mr. Macdonald

I think that the Chancellor has given up on that. That is why he was hoping to strike up a friendship with my right hon. and learned Friend the Member for Monklands, East.

The policies that the Government have pursued to try to fight their way out of the economic hole that this country is in boil down largely to privatisation, reform of industrial relations and taxation policy. I do not believe that anyone could sensibly argue that privatisation has made an iota of difference to this country's competitive performance. The Conservative party has made much the same mistake that we tended to make at one time, which was to think that a simple operation in nominal ownership would actually introduce some zest and vim into trading performance. It did not happen when we nationalised, and it certainly has not happened after privatisation.

This summer of strife must take its place among other famous seasons of industrial discontent. That shows how weak, one-sided and inadequate the Government's approach to industrial relations has been. Industrial relations are still characterised by a mediaeval culture of industrial lords and industrial serfs. There is still the primative indignity of separate canteens and toilets in too many factories. All that there has been in the past 10 years is an alteration in the balance of power between management and labour. There is still the old situation of conflict—the subdued warfare that is peculiar to Britain. It is one of our great social shames and a great source of industrial weakness.

Despite everything that has been said today by Conservative Members, the Government have still failed to reduce taxation. They have, indeed, increased taxation as a proportion of national wealth. Moreover, it is an entirely false goal to consider that the simple totem of reducing taxation will reinvigorate the economy. Sweden has high taxation rates, but it has one of the richest economies in Europe. One should not conclude, however, that if one increases taxation one will have a wealthier society. Nevertheless, the example of Sweden certainly makes people think twice about making a simple equation between reducing taxation and increasing wealth and industrial initiative.

The Chancellor likes to think of himself as a tax reforming Chancellor. We have also heard a great deal from the Government about how keen they are to improve efficiency in various sectors. They often talk about the National Health Service in this context. I was surprised, therefore, to discover how poorly the efficiency of the Inland Revenue compares with other countries. The collection costs of the Inland Revenue service absorb 2 per cent. of income tax receipts—twice the amount absorbed by the similar service in Sweden, a country often cited as an example of administrative efficiency. It is staggering that our collection costs are four times greater than those in the United States of America which employs the same number of people to handle twice as many taxpayers. The tax reforming revolution is a sham, the industrial miracle is a sham and, day by day, those shams are ever more exposed.

9.16 pm

Mr. David Nicholson (Taunton)

This is, after all, an Opposition Supply day, but we have heard little from the right hon. and learned Member from Monklands, East (Mr. Smith) or from the hon. Member for Western Isles (Mr. Macdonald) who spoke of shams, about Opposition policy.

During the speech of the right hon. and learned Gentleman, I was struck by the appearance of the Leader of the Opposition trying to show his weight and, perhaps, to overshadow his shadow Chancellor. The bicentenary of the French revolution is coming up next month and I was struck by the contrast between the two right hon. Gentlemen—one representing the great voice of Danton and the other the trim figure of Robespierre. Every French pupil and perhaps one or two English pupils know what Robespierre did to Danton and what eventually happened to Robespierre.

To run an economy and to present an alternative economic policy a degree of comradeship, agreement and fraternity is needed. When I observe the Labour party I am reminded of a remark about the French revolution that my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) is often fond of quoting: Having seen what was done in the name of fraternity, If I had a brother I should call him cousin.

Mr. William Powell

Will my hon. Friend give way?

Mr. Nicholson

I am sorry, but I only have two minutes to go.

Reference has been made to trade deficits and to various business forecasts. It is interesting to refer to the British Chambers of Commerce quarterly economic survey for the first quarter of the year, which was published last month. That showed that, after a slack growth in export orders towards the end of last year, in the first quarter of this year export orders were firmly up. That survey covered 3,000 businesses in 12 regions. I was particularly pleased to notice that in the south-west there was an increase in the export orders. The hon. Member for Leeds, West (Mr. Battle) spoke about regional imbalance, but I was pleased to note that that increase in export orders also occurred in the north-east.

The survey report also stated: There is now clear evidence that the effect of interest rate rises has now put the trend in home orders growth firmly on a downward path. This will encourage my right hon. Friend the Chancellor, who has been looking to high interest rates to cool down home demand. Despite the difficulties which have been caused for many people and businesses, the first quarter survey also shows that business confidence in increased growth in turnover is increasing, as is confidence in profitability growth, and I am pleased to welcome that.

I receive many letters from retired people in my constituency. Often, they are from solid Conservative voters who are not entirely happy with aspects of Government policy. One thing which they absolutely emphasise, and which concerns them because they lived through the Labour Government of the 1970s, is that the Government must reduce inflation.

I hope that this debate will show the whole-hearted support for my right hon. Friend the Chancellor which comes from his colleagues in the Conservative party and in the House.

9.20 pm

Mr. Bryan Gould (Dagenham)

We have had a valuable and interesting debate, of which one of the most interesting features has been the marked change of mood as we discussed today's economy. We have certainly heard some assured and skilled contributions from the Opposition. It has been noteworthy that the Government have had some difficulty in finding enough speakers to keep the debate going. Perhaps that was because those Government Back Benchers who have contributed have exhibited some anxiety about the current state of the economy. There has been some tendency towards admitting mistakes, even a little self-criticism.

The Chancellor was largely immune to that trend arid was his usual boastful self. However, even the Chancellor was just a little muted. I also noted that his speeches contained no blips. A year or six months ago his speech were full of blips. There were so many blips that his speeches often sounded like the Greenwich time signal, but he now finds it a little more difficult to dismiss some of his handiwork as mere blips.

He forecast 4 per cent. inflation, then 7 per cent., then 8 per cent. and he was constrained to admit today that it may go beyond 8 per cent. That can hardly be regarded as a blip. He has raised interest rates no fewer than 10 times, to their current level of 14 per cent., and he assures us that he stands ready to raise them yet further. That is hardly a blip. A trade deficit, which he forecast as £4 billion last year, turned out to be £14 billion. He said that it would be £14.5 billion this year, it is already heading for £18 billion and he concedes that it will take some time to deal with it. That can hardly be regarded as a blip. From Conservative Members today we have heard, not a series of blips, but a long cry of pain, which has been echoed by many families in Britain and much of British industry.

That is not the only change that we have noticed in the Chancellor's presentation of his policy. Barely a year ago the Chancellor was forecasting inflation of 4 per cent. and a balance of payments deficit of £4 billion. He was saying, by implication, that the correct rate against the deutschmark, which he was implicitly shadowing, was 3 deutschmark to the pound. When asked to pronounce on the subject he made it clear that 3 deutschmark 10 pfennigs was unsustainable, and he may be right.

A year or so later, our inflation rate is twice that of Germany. If a rate of 3 deutschmark 10 pfennigs was unsustainable a year ago it must be doubly unsustainable today. The Chancellor goes to the barricades in defence of an exchange rate against the deutschmark of 3 deutschmark 10 pfennigs. The Chancellor may be prepared to spill his last drop of blood in defence of that new target, but it comes a little hard when he is prepared to spill the blood of others in support of something which he so recently invented.

Not often do I feel a twinge of sympathy for the Prime Minister, but even the hardest-hearted among us can feel a little sympathy for her if she feels a little bemused by these gyrations on the part of her Chancellor. She herself has changed her stance somewhat. We do not hear too many references these days to her brilliant Chancellor. Her comments are decidedly less flattering. She vouchsafed to the World Service that mistakes had been made, and that the mistake had been to shadow the deutschmark, for which we know exactly who was responsible. It was that mistake which pushed up inflation, so the prime ministerial finger was pointed directly at her Chancellor.

On 23 May the Prime Minister said in this House that she saw no reason to put up interest rates. Less than 24 hours later she was directly contradicted by the Chancellor —one assumes that she went along with it—who promptly put up interest rates. That was more evidence of the growing divergence between the Prime Minister's view of the economy and what the Chancellor thought was required and desirable—

Mr. Tim Smith

Will the hon. Gentleman give way?

Mr. Gould

I want to conclude this little catechism.

Underlying all this is the Prime Minister's famous nostrum, "One cannot buck the market." As we see the Chancellor wrestling with the foreign exchange markets, urging them to support the pound and pushing up interest rates, we realise that he is trying to do exactly that—buck the market. He is engaged, as the central tenet of his economic policy, in trying to do something which the Prime Minister says cannot be done—and that encapsulates the nub of the problem, which is that the Chancellor and the Prime Minister were fair weather friends. They would stick together while the going seemed good, but as soon as it got tough they set off on different paths.

We know what path the Chancellor is on. He may sometimes strike a rather undignified posture as he proceeds along it, trying to stand on his head as he moves along, but at least the path is clear. He continually tells us —he said so again today—that he is determined to push up interest rates every time there is bad economic news and every time sterling comes under pressure. There is no shortage of bad economic news; the problem for the Chancellor is that he is so often called to account to make good that threat, promise or boast, whichever it is. The problem is that promising in advance to be tough and to ask others to take the necessary medicine is good tactics and policy as long as the action does not have to be taken. When it has to be taken, and then taken again and again and again and again and again and again and again and again and again, it starts to lose some of its magic. It also starts to lose some of its credibility.

The markets have called the Chancellor's bluff, and they now demand thick and fast, almost day by day, that he should make good his threat, promise or boast. If he does not, they will conclude, as we shall, that the Chancellor's stated policy is no longer the policy being applied by the Government.

Having raised interest rates no fewer than 10 times, the Chancellor now faces the following comment from a respected City adviser—not a teenage scribbler, but Roger Bootle of Greenwell Montagu, who said on 5 June: To all intents and purposes the policy of relying solely on short-term interest rates to effect a major turn-round in the United Kingdom economy has failed". That is the judgment of the City. The Chancellor persists with his one-club policy, however damaging it may be to personal and family budgets or to British industry. The CBI survey, the most pessimistic in two years, shows that business confidence and export orders are at their lowest ebb for two years.

Mr. Tim Smith

Will the hon. Gentleman give way?

Mr. Gould

I shall give way in a moment.

The Chancellor persists with interests rate hikes even though they have been shown in recent months to be almost totally ineffective in securing his own stated policy objectives. High interest rates have not reduced inflation. So far as we can measure their impact, they have pushed it up. Interest rates are a price, and like other prices will feed through into the RPI as the Chancellor well knows. Why else is he so anxious to get mortgage rates out of the RPI? He persists with interest rate rises even though they have notably failed to reduce demand. Vehicle sales are at their highest ever level and yesterday consumer credit was still soaring ahead. The Chancellor has found that increasing interest rates and pushing up the value of the pound does not reduce demand. It stimulates it because every over-valued pound will buy more cheap imports than it should. He is caught in that cleft stick.

Mr. Tim Smith

What is the hon. Gentleman's view on the value of the pound? Does he want to see it go up or down or would he prefer to see it stay the same?

Mr. Gould

I am inclined to say that it is difficult to buck the markets. The Chancellor insists on pushing up interest rates to ridiculous and dizzying levels which do great damage, and one of the consequences is that the pound is held at an over-valued level. As the CBI makes clear, that makes it difficult for British industry to compete. The paradox is that the Chancellor uses interest rates to try to dampen demand, but as fast as demand comes down, the supply side of British industry is damaged. That discourages investment, reduces our competitiveness and makes it more difficult for British industry to meet demand.

The Chancellor persists with an interest rate of 14 per cent. and threatens us with 15 per cent. I invite him to tell us why it is that, after 10 years of Tory stewardship, with inflation at the highest level in the G7 countries and a record trade deficit, we have to have an interest rate of 14 per cent.—twice as high as the German interest rate. What is the purpose of that? Why is it so essential for us to have the interest rate at such a level? We are entitled to a straightforward and simple answer, and the Chancellor has the opportunity to put the answer on the record. I invite him to do so.

The Chancellor's problem is that, every time he pushes up interest rates, he makes the basic situation inherently more unstable and makes us more and more dependent on hot money. He makes the rate for sterling more and more vulnerable and makes the prospect of a hard landing more and more likely. No wonder the Prime Minister is distancing herself from a Chancellor who seems to have lost control. No wonder her office briefs the weekend press to the effect that the Chancellor is now under threat. Is it surprising that she told the Glasgow Herald that, although he is a good neighbour, she will go no further? When the hard landing that the Prime Minister now expects occurs, she has decided that part of the wreckage that will have to be cleared off the runway is the Chancellor himself.

The problem is that the evidence is mounting daily that the Chancellor has lost the argument. Since rates went up on 24 May, sterling has continued to be under pressure. Every day that goes by without the Chancellor making good his boast suggests more and more strongly to the markets that the Chancellor is no longer running the show; that other counsels now weigh the Prime Minister. If we continue to see pressure on sterling for the remainder of the month and we do not see the Chancellor raising interest rates, we can all afford to draw the obvious conclusion.

The Chancellor is in trouble and that may be why today he chose—unwisely some may think—to fight back. First, he ticked off the Prime Minister for her indiscretion on 23 May. Judging by the expression on her face, he did nothing to make his position more secure.

The Chancellor then decided to conduct a little seminar on the practical deficiencies of monetarism. There was a delicious irony about his dismissal of monetary-based control and over-funding, but what was remarkable about that was that it must have been the first time that any hon. Member present could recall a lesson in economics being delivered by a Chancellor to the Prime Minister in public and on the Floor of the House.

Then, perhaps most unwisely of all, the Chancellor assented to the proposition that there is no alternative. Those of us who could see the Prime Minister's expression and who also noticed some of the occupants of the Government Front Bench will fear that, in that as well, he may prove to have been mistaken.

The problem is that all this is too late. The Chancellor has lost the argument because the Prime Minister is now listening to other advice. Sir Alan Walters is telling her that a mistake was made in shadowing the deutschmark, that the price for that mistake has to be paid, that a fall in sterling as a consequence of that mistake cannot be avoided, so it is impossible and futile to try to buck the market by pushing up market rates in order to defer the evil day. I would not embarrass right hon. and hon. Members by naming them, but I see that there are those on the Government Benches who entirely agree with that analysis.

That is bad news for the economy because it suggests that the Prime Minister, with her new advisers, is now intent on a return to the basic rigours of monetarism. That is bad news because it means that we are about to re-enter the sort of recession that was created in 1980–81, which wiped out fully one fifth of British manufacturing industry.

But that is even worse news for the Chancellor. It means that the Chancellor's strategy is in tatters and his reputation in shreds, and with very good reason. His legacy is an under-invested, ill-equipped badly trained economy, saddled with an inflation, interest rate and trading deficit burden, which means that we are in no shape to face the fierce competition of the 1990s and the single European market. The only hope for the economy is that we should make a new start, and the European elections on 15 June give us the chance to take the first step towards it.

9.37 pm

The Chancellor of the Duchy of Lancaster and Minister of Trade and Industry (Mr. Tony Newton)

I had intended to start by saying that we had a wide-ranging, if in some respects rather predictable, debate. It has certainly been predictable, not least the last thirty seconds or so of the speech made by the hon. Member for Dagenham (Mr. Gould), but it has certainly not been wide-ranging enough to give us one second's insight into the policies of Her Majesty's Opposition. That has been the most striking single fact about the whole debate.[Interruption.]

Mr. Speaker

Order. The Opposition Front Bench spokesman was heard in silence.

Mr. Newton

In a speech that made a ritual genuflection to the terms of the Opposition motion, which at least purports to have something to do with economic policy, the hon. Member for Dagenham made reference to what I know he is prone to describe as "the real economy", which the motion also mentions—and the neglect of which is one of the themes of that motion. I leave aside the question of what that phrase is supposed to mean, although the more I listen to or re-read the speeches of the hon. Member for Dagenham, the more difficult I find it to discern the distinction that he draws between one aspect of economic activity and another.

Whatever distinction the hon. Gentleman draws, it is clear that by any measure of output, jobs or investment, the real economy—and I presume that output, jobs and investment are what he means by "the real economy"'—shows no sign of neglect. On the contrary, over the past two years unemployment has fallen. My right hon. Friend the Chancellor remarked how interesting it is that we hear so little from the Opposition about unemployment.

Mr. Battle

As the Minister did not hear some of the contributions made by my hon. Friends, perhaps he will say why unemployment under the present Government has been higher every single year than it was under any Labour Government.

Mr. Newton

Over the past two years the rate of unemployment in the United Kingdom has continued to fall faster than in any other major industrialised country. On agreed international definitions the United Kingdom's unemployment rate is about 21/2 percentage points lower than the European Community average. The United Kingdom has a lower unemployment rate than Spain, Italy, France, Belgium, Ireland, Greece and the Netherlands.

What is more, we have enjoyed much greater success than other European countries in creating jobs. Since March 1983, the number of people in employment increased by nearly 3 million to more than 26½ million, which is the highest number of people at work ever in this country. The latest available international comparisons —I know how keen Opposition Members are on international comparisons—show that the increase in the number of people in employment in the United Kingdom between 1983 and 1987 was greater than in the rest of the European Community put together. That is one of the achievements of the real economy.

Mr. Kevin Barron (Rother Valley)

Will the Minister give a British comparison and say when unemployment in this country is likely to return to the numerical level of 1979?

Mr. Newton

Given the speed at which the economy has been growing and the pace at which unemployment is falling, we can certainly look forward to a further reduction. The hon. Gentleman knows very well that it would not be right for me to make a prediction of the kind that he seeks. He knows also that under this Government unemployment has fallen faster than the rate promised by the Opposition at the time of the last general election.

All United Kingdom regions have shared in the downward trend in unemployment, with the west midlands and Wales experiencing the biggest reductions over the past year. That reflects the fact that, during the 1980s, the United Kingdom has grown faster than all other major countries of the European Community, whereas in the two previous decades it was at the bottom of the growth league. The same holds true for investment. We have heard a great deal from Opposition Members about investment. In the 1980s the growth of total investment in Britain was higher than in any major European country, after being very much lower in the 1960s and 1970s. As my right hon. Friend said, last year alone the growth in business investment was more than 14 per cent. and we expect a further substantial rise this year.

Mr. Mullin

Yesterday, the Minister's Department supplied me with figures for the level of manufacturing investment in the north-east of England, which includes my constituency. In 1987 they were 53 per cent. of what they were in 1979. Those figures were supplied by the Minister's Department. I drew them to the attention of the Chancellor of the Exchequer but he chose not to address them. Would the Minister care to do so?

Mr. Newton

Since the period to which those figures relate, there has been a substantial further increase in investment. One has only to go to Newcastle and the north-east to know how much investment is being made there and how the spirit and confidence of industry in the north-east has increased.

Mr. Pat Wall (Bradford, North)

rose—

Mr. Newton

I shall not give way for a moment.

The hon. Member for Dagenham and the right hon. and learned Member for Monklands, East (Mr. Smith) have persistently failed to acknowledge the extent to which we have achieved a substantial increase in investment in the economy and we have changed the pattern of decades in which our consumption consistently rose faster than our investment. In the past seven years we have produced a pattern in which, for the first time in a generation, investment has grown twice as fast as consumption. During the 1970s, consumption rose almost five times faster than investment.

Mr. Wall

rose—

Mr. Newton

In view of the hon. Gentleman's persistence, I shall give way.

Mr. Wall

The Minister talks about patterns of investment. Investment in manufacturing industry has barely reached the level that it was in 1979. Investment in financial and service industries has doubled in that time, but investment in the infrastructure has halved. Surely anyone can understand that if we do not create wealth and support the infrastructure we shall be unable to support the banking and service side of the economy for any length of time.

Mr. Newton

I have two points in response to that. First, the shifting pattern between manufacturing industry and other aspects of the economy is part and parcel of the development of all advanced industrial economies. The strength of the financial services and other sectors so despised by Opposition Members is not the least of the achievements of the present Government in the past decade. Secondly, just a few weeks ago we had a debate on manufacturing industry and the hon. Member for Dagenham made a speech in which virtually his entire argument was that manufacturing industry was not stronger than it had been for a considerable time. He said that the level of investment in manufacturing had still not quite reached the level that it was in 1979. I said to him then that that argument was a figleaf which would last very little time. Indeed, within a week, the figures showed that manufacturing investment in Britain was at a record level.

Mr. Gould

I am glad to welcome the Government's achievement in at last bringing manufacturing investment back to the level that it was in 1979. But the Minister misrepresents my speech. My major point to show the decline in manufacturing industry was the turnround of £19 billion in our trade in manufactured goods. I wonder whether the Chancellor of the Duchy can explain that away.

Mr. Newton

I was about to deal with the balance of payments position. It is not in dispute between the hon. Member for Dagenham and me—whatever view we take about the right position of manufacturing industry in the economy and what I regard as the rather antique approach of the hon. Gentleman—that manufacturing output has risen steadily and now stands at record levels; that manufacturing productivity has increased at a pace not experienced in the economy for decades; and that manufacturing investment has risen sharply, not least over the past few years.

The hon. Member for Dagenham ignored the fact that not only the quantum but the quality of investment and what it achieves for productivity and output is important. The increase in productivity of British manufacturing industry bears witness to the greater profitability and higher quality of investment since 1979.

For British manufacturing industry, the 1970s were a period of overmanning, stagnant productivity, declining profitability and dismal industrial relations. Many companies were not gaining the full benefit from their investment. During the 1980s, the growth of productivity in manufacturing has been faster than in any major manufacturing country, and manufacturing productivity has improved 50 per cent. since the beginning of the decade.

The hon. Member for Dagenham spoke little about what he termed the "real economy". He did not refer to the substantial turnround that has occurred in some of our important industries, not least our important manufacturing industries. I shall take one example to which Labour Members frequently devote attention—the vehicle industry. The production of passenger cars in 1988 was 7 per cent. higher than 1987. More cars were produced in this country last year than since 1977, and that trend is continuing. The same pattern emerges for commercial vehicles, with 318,000 being produced in 1988, which was no fewer than 29 per cent. more than in 1987. The success stories of the individual companies can be seen.

Mr. Rhodri Morgan (Cardiff, West)

rose—

Mr. Newton

I shall complete this point, which is of some significance, not least in relation to the questions that the hon. Member for Dagenham asked.

Just under 1.25 million motor cars were produced last year, compared with just over 1 million in 1979.

Mr. Gould

What about the trade balance?

Mr. Newton

I shall come to that in a moment.

In 1974, 1.5 million cars were produced. During the period of the last Labour Government, the production of cars fell by about 300,000 or 500,000, but it has recovered by about 200,000 since the Government took office.

I shall tell the hon. Member for Dagenham what happened to the import penetration of motor cars. In 1988, it was almost the same as in 1979, but between 1974 and 1979 it doubled from 27.9 per cent. to 56 per cent. That is when the worsening of trade in that crucial sector occurred, and it is clear from what is happening to production and investment, not least inward investment, in the British motor car industry that we are now beginning to recover from that disastrous position that the last Labout Government created.

Mr. Morgan

The Minister keeps reeling off trade deficit-defying, wondrous success stories. He leaves us with a question. If our batting averages are so good, how come we are losing all the test matches?

Mr. Newton

The point is almost exactly illustrated by what I have just shown in respect of motor cars. During the 1970s and to a substantial extent the 1960s as well, the policies, in so far as there were any, advocated by Opposition Members led to poor industrial relations, low increases in productivity and low increases in investment. Not least, credit controls such as the Labour party now advocates had a serious effect on many consumer goods industries. One industry after another began to sink in the same way as the motor car industry sank, as was shown clearly by the figures that I have given.

Of course, it has taken time to make inroads into the problems and to turn things round, but it can be seen clearly not only in the motor car industry but in other industries that productivity and output have been rising and that there is more investment. The scope for an improvement in performance that we all want to see has increased steadily.

The hon. Member for Clydebank and Milngavie (Mr. Worthington) spoke of the loss of the television industry. In the light of the point that the hon. Gentleman made, it is worth noting that in the first quarter of 1989 we had a trade surplus in colour television sets and video tape recorders. That reflects in part the contribution being made by inward investment which shows that people around the world do not accept the analyses of Her Majesty's Opposition of the British economy, and that they are voting with their feet by coming to do business with us in the construction of factories.

The fundamental strengths of the economy are clear from the record to which I have referred, with its sustained growth, its falling unemployment, its surge in investment in manufacturing and throughout the economy, and the extent to which people from other parts of the world are voting with their feet by doing business here. That strengthening results from the policies that the Government have pursued.

The debate has been remarkable for its confirmation that the Opposition have no serious policy. The right hon. and learned Member for Monklands, East told us that he would be coming to his policy and to what he would do about inflation. He never did; he could not because he does not know. In that he has at least achieved unity with his leader. We have already heard about the celebrated interview with James Naughtie. I am in the unhappy position of not being able to quote most of it because, even if it were printable in the Evening Standard, it would not be quotable in the House within the terms of order. I can quote the reporter's magnificent description of what happened: The disagreement began after Mr. Naughtie, a respected and experienced journalist, asked Mr. Kinnock what would be his plans on bringing down interest rates. A long silence followed". The approach of the Leader of the Opposition is not just that he has not got a policy, but that it is not even fair to expect him to have one. His excuse is that he would not be starting from here. Of course he would not be. We know where he would have started. He would have started where the last Labour Government left off, with inflation higher, with investment lower, with growth slower and with the country's industrial relations in a shambles. Neither the House nor the country has any intention of going back down that road with him.

Mr. Derek Foster (Bishop Auckland)

rose in his place and claimed to move, That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question accordingly put, That the original words stand part of the Question:—

The House divided: Ayes 184, Noes 315

Division No. 231]	[10 pm
AYES
Adams, Allen (Paisley N)	Beckett, Margaret
Allen, Graham	Beith, A. J.
Alton, David	Bell, Stuart
Anderson, Donald	Bermingham, Gerald
Archer, Rt Hon Peter	Bidwell, Sydney
Armstrong, Hilary	Blair, Tony
Ashley, Rt Hon Jack	Blunkett, David
Ashton, Joe	Boyes, Roland
Barnes, Harry (Derbyshire NE)	Bradley, Keith
Barnes, Mrs Rosie (Greenwich)	Bray, Dr Jeremy
Barron, Kevin	Brown, Gordon (D'mline E)
Battle, John	Brown, Nicholas (Newcastle E)

Bruce, Malcolm (Gordon)	Leighton, Ron
Buckley, George J.	Lestor, Joan (Eccles)
Caborn, Richard	Lewis, Terry
Callaghan, Jim	Livingstone, Ken
Campbell, Menzies (Fife NE)	Lloyd, Tony (Stretford)
Campbell, Ron (Blyth Valley)	Lofthouse, Geoffrey
Campbell-Savours, D. N.	Loyden, Eddie
Canavan, Dennis	Macdonald, Calum A.
Cartwright, John	McFall, John
Clark, Dr David (S Shields)	McLeish, Henry
Clarke, Tom (Monklands W)	Madden, Max
Clay, Bob	Mahon, Mrs Alice
Clelland, David	Mallon, Seamus
Clwyd, Mrs Ann	Marek, Dr John
Cohen, Harry	Marshall, Jim (Leicester S)
Cook, Frank (Stockton N)	Martlew, Eric
Cook, Robin (Livingston)	Meacher, Michael
Corbett, Robin	Meale, Alan
Corbyn, Jeremy	Michael, Alun
Cousins, Jim	Michie, Bill (Sheffield Heeley)
Crowther, Stan	Michie, Mrs Ray (Arg'l &Bute)
Cryer, Bob	Mitchell, Austin (G't Grimsby)
Cunliffe, Lawrence	Moonie, Dr Lewis
Cunningham, Dr John	Morgan, Rhodri
Dalyell, Tam	Morley, Elliott
Darling, Alistair	Morris, Rt Hon A. (W'shawe)
Davies, Rt Hon Denzil (Llanelli)	Morris, Rt Hon J. (Aberavon)
Davies, Ron (Caerphilly)	Mowlam, Marjorie
Davis, Terry (B'ham Hodge H'I)	Mullin, Chris
Dixon, Don	Murphy, Paul
Dobson, Frank	Nellist, Dave
Douglas, Dick	Oakes, Rt Hon Gordon
Duffy, A. E. P.	O'Brien, William
Dunwoody, Hon Mrs Gwyneth	O'Neill, Martin
Eastham, Ken	Orme, Rt Hon Stanley
Evans, John (St Helens N)	Pike, Peter L.
Ewing, Mrs Margaret (Moray)	Powell, Ray (Ogmore)
Fatchett, Derek	Prescott, John
Fearn, Ronald	Quin, Ms Joyce
Field, Frank (Birkenhead)	Radice, Giles
Fields, Terry (L'pool B G'n)	Randall, Stuart
Flannery, Martin	Redmond, Martin
Flynn, Paul	Rees, Rt Hon Merlyn
Foster, Derek	Richardson, Jo
Foulkes, George	Robertson, George
Fraser, John	Robinson, Geoffrey
Garrett, John (Norwich South)	Rogers, Allan
George, Bruce	Rooker, Jeff
Gilbert, Rt Hon Dr John	Ross, Ernie (Dundee W)
Godman, Dr Norman A.	Rowlands, Ted
Gould, Bryan	Salmond, Alex
Grant, Bernie (Tottenham)	Sedgemore, Brian
Griffiths, Nigel (Edinburgh S)	Sheerman, Barry
Griffiths, Win (Bridgend)	Sheldon, Rt Hon Robert
Grocott, Bruce	Short, Clare
Harman, Ms Harriet	Skinner, Dennis
Hattersley, Rt Hon Roy	Smith, Andrew (Oxford E)
Haynes, Frank	Smith, C. (Isl'ton & F'bury)
Henderson, Doug	Smith, Rt Hon J. (Monk'ds E)
Hinchliffe, David	Snape, Peter
Hogg, N. (C'nauld & Kilsyth)	Soley, Clive
Howarth, George (Knowsley N)	Spearing, Nigel
Howell, Rt Hon D. (S'heath)	Steinberg, Gerry
Howells, Geraint	Strang, Gavin
Howells, Dr. Kim (Pontypridd)	Straw, Jack
Hoyle, Doug	Turner, Dennis
Hughes, John (Coventry NE)	Vaz, Keith
Hughes, Robert (Aberdeen N)	Wall, Pat
Hughes, Roy (Newport E)	Wallace, James
Illsley, Eric	Walley, Joan
Ingram, Adam	Wardell, Gareth (Gower)
Janner, Greville	Wareing, Robert N.
Jones, Barry (Alyn & Deeside)	Welsh, Andrew (Angus E)
Jones, leuan (Ynys Môn)	Welsh, Michael (Doncaster N)
Jones, Martyn (Clwyd S W)	Williams, Rt Hon Alan
Kennedy, Charles	Williams, Alan W. (Carm'then)
Kinnock, Rt Hon Neil	Wilson, Brian
Lamond, James	Winnick, David
Leadbitter, Ted	Wise, Mrs Audrey

Worthington, Tony	Tellers for the Ayes:
Young, David (Bolton SE)	Mr. Allen McKay and
	Mrs. Llin Golding.
NOES
Adley, Robert	Devlin, Tim
Alexander, Richard	Dicks, Terry
Alison, Rt Hon Michael	Dorrell, Stephen
Amery, Rt Hon Julian	Dover, Den
Amos, Alan	Dunn, Bob
Arbuthnot, James	Dykes, Hugh
Arnold, Jacques (Gravesham)	Eggar, Tim
Arnold, Tom (Hazel Grove)	Emery, Sir Peter
Ashby, David	Evans, David (Welwyn Hatf'd)
Aspinwall, Jack	Evennett, David
Atkins, Robert	Fairbairn, Sir Nicholas
Baker, Rt Hon K. (Mole Valley)	Fallon, Michael
Baker, Nicholas (Dorset N)	Favell, Tony
Baldry, Tony	Field, Barry (Isle of Wight)
Banks, Robert (Harrogate)	Fishburn, John Dudley
Batiste, Spencer	Fookes, Dame Janet
Beaumont-Dark, Anthony	Forman, Nigel
Bellingham, Henry	Forsyth, Michael (Stirling)
Bendall, Vivian	Forth, Eric
Bennett, Nicholas (Pembroke)	Fowler, Rt Hon Norman
Benyon, W.	Fox, Sir Marcus
Bevan, David Gilroy	Franks, Cecil
Biffen, Rt Hon John	Freeman, Roger
Blackburn, Dr John G.	French, Douglas
Blaker, Rt Hon Sir Peter	Fry, Peter
Bonsor, Sir Nicholas	Gale, Roger
Boscawen, Hon Robert	Gardiner, George
Boswell, Tim	Gill, Christopher
Bottomley, Peter	Gilmour, Rt Hon Sir Ian
Bottom ley, Mrs Virginia	Glyn, Dr Alan
Bowden, Gerald (Dulwich)	Goodhart, Sir Philip
Bowis, John	Goodlad, Alastair
Boyson, Rt Hon Dr Sir Rhodes	Goodson-Wickes, Dr Charles
Braine, Rt Hon Sir Bernard	Gorst, John
Brandon-Bravo, Martin	Gow, Ian
Brazier, Julian	Grant, Sir Anthony (CambsSW)
Bright, Graham	Greenway, Harry (Ealing N)
Brooke, Rt Hon Peter	Greenway, John (Ryedale)
Brown, Michael (Brigg & Cl't's)	Gregory, Conal
Bruce, Ian (Dorset South)	Griffiths, Sir Eldon (Bury St E')
Buchanan-Smith, Rt Hon Alick	Griffiths, Peter (Portsmouth N)
Buck, Sir Antony	Grist, Ian
Budgen, Nicholas	Ground, Patrick
Burns, Simon	Gummer, Rt Hon John Selwyn
Burt, Alistair	Hague, William
Butcher, John	Hamilton, Hon Archie (Epsom)
Butler, Chris	Hamilton, Neil (Tatton)
Butterfill, John	Hampson, Dr Keith
Carlisle, John, (Luton N)	Hanley, Jeremy
Carlisle, Kenneth (Lincoln)	Hannam, John
Carrington, Matthew	Hargreaves, A. (B'ham H'll Gr')
Carttiss, Michael	Hargreaves, Ken (Hyndburn)
Cash, William	Harris, David
Channon, Rt Hon Paul	Haselhurst, Alan
Chapman, Sydney	Hawkins, Christopher
Chope, Christopher	Hayward, Robert
Churchill, Mr	Heathcoat-Amory, David
Clark, Hon Alan (Plym'th S'n)	Heddle, John
Clark, Dr Michael (Rochford)	Hicks, Mrs Maureen (Wolv' NE)
Clark, Sir W. (Croydon S)	Hicks, Robert (Cornwall SE)
Clarke, Rt Hon K. (Rushcliffe)	Higgins, Rt Hon Terence L.
Colvin, Michael	Hind, Kenneth
Conway, Derek	Hogg, Hon Douglas (Gr'th'm)
Coombs, Anthony (Wyre F'rest)	Hordern, Sir Peter
Coombs, Simon (Swindon)	Howard, Michael
Cope, Rt Hon John	Howarth, Alan (Strat'd-on-A)
Cormack, Patrick	Howarth, G. (Cannock & B'wd)
Couchman, James	Howell, Rt Hon David (G'dford)
Cran, James	Howell, Ralph (North Norfolk)
Critchley, Julian	Hughes, Robert G. (Harrow W)
Currie, Mrs Edwina	Hunt, David (Wirral W)
Curry, David	Irvine, Michael
Davies, Q. (Stamf'd & Spald'g)	Irving, Charles
Davis, David (Boothferry)	Jack, Michael
Day, Stephen	Jackson, Robert

Janman, Tim	Miscampbell, Norman
Johnson Smith, Sir Geoffrey	Mitchell, Andrew (Gedling)
Jones, Gwilym (Cardiff N)	Mitchell, Sir David
Jopling, Rt Hon Michael	Moate, Roger
Kellett-Bowman, Dame Elaine	Monro, Sir Hector
Key, Robert	Montgomery, Sir Fergus
Kilfedder, James	Moore, Rt Hon John
King, Roger (B'ham N'thfield)	Morris, M (N'hampton S)
Kirkhope, Timothy	Morrison, Sir Charles
Knapman, Roger	Moss, Malcolm
Knight, Greg (Derby North)	Moynihan, Hon Colin
Knight, Dame Jill (Edgbaston)	Mudd, David
Knowles, Michael	Neale, Gerrard
Knox, David	Newton, Rt Hon Tony
Lamont, Rt Hon Norman	Nicholls, Patrick
Lang, Ian	Nicholson, David (Taunton)
Latham, Michael	Nicholson, Emma (Devon West)
Lawrence, Ivan	Norris, Steve
Lawson, Rt Hon Nigel	Onslow, Rt Hon Cranley
Lee, John (Pendle)	Oppenheim, Phillip
Lennox-Boyd, Hon Mark	Page, Richard
Lightbown, David	Paice, James
Lilley, Peter	Parkinson, Rt Hon Cecil
Lloyd, Sir Ian (Havant)	Patnick, Irvine
Lloyd, Peter (Fareham)	Patten, Chris (Bath)
Luce, Rt Hon Richard	Patten, John (Oxford W)
Lyell, Sir Nicholas	Pattie, Rt Hon Sir Geoffrey
McCrindle, Robert	Pawsey, James
Macfarlane, Sir Neil	Peacock, Mrs Elizabeth
MacGregor, Rt Hon John	Porter, Barry (Wirral S)
MacKay, Andrew (E Berkshire)	Portillo, Michael
Maclean, David	Powell, William (Corby)
McLoughlin, Patrick	Price, Sir David
McNair-Wilson, Sir Michael	Raffan, Keith
McNair-Wilson, P. (New Forest)	Raison, Rt Hon Timothy
Madel, David	Redwood, John
Major, Rt Hon John	Renton, Tim
Malins, Humfrey	Rhodes James, Robert
Maples, John	Riddick, Graham
Marlow, Tony	Ridley, Rt Hon Nicholas
Marshall, John (Hendon S)	Ridsdale, Sir Julian
Marshall, Michael (Arundel)	Roberts, Wyn (Conwy)
Martin, David (Portsmouth S)	Roe, Mrs Marion
Mates, Michael	Rost, Peter
Maude, Hon Francis	Rumbold, Mrs Angela
Mawhinney, Dr Brian	Sackville, Hon Tom
Maxwell-Hyslop, Robin	Sainsbury, Hon Tim
Mayhew, Rt Hon Sir Patrick	Sayeed, Jonathan
Mellor, David	Scott, Nicholas
Meyer, Sir Anthony	Shaw, David (Dover)
Miller, Sir Hal	Shaw, Sir Giles (Pudsey)
Mills, Iain	Shaw, Sir Michael (Scarb')

Shephard, Mrs G. (Norfolk SW)	Tracey, Richard
Shepherd, Colin (Hereford)	Tredinnick, David
Shepherd, Richard (Aldridge)	Trippier, David
Shersby, Michael	Trotter, Neville
Sims, Roger	Twinn, Dr Ian
Skeet, Sir Trevor	Vaughan, Sir Gerard
Smith, Tim (Beaconsfield)	Viggers, Peter
Soames, Hon Nicholas	Waddington, Rt Hon David
Speller, Tony	Wakeham, Rt Hon John
Spicer, Sir Jim (Dorset W)	Walker, Bill (T'side North)
Spicer, Michael (S Worcs)	Walker, Rt Hon P. (W'cester)
Stanbrook, Ivor	Waller, Gary
Stanley, Rt Hon Sir John	Walters, Sir Dennis
Steen, Anthony	Ward, John
Stern, Michael	Wardle, Charles (Bexhill)
Stevens, Lewis	Watts, John
Stewart, Andy (Sherwood)	Wells, Bowen
Stewart, Rt Hon Ian (Herts N)	Wheeler, John
Stradling Thomas, Sir John	Widdecombe, Ann
Sumberg, David	Wiggin, Jerry
Summerson, Hugo	Wilshire, David
Tapsell, Sir Peter	Winterton, Mrs Ann
Taylor, Ian (Esher)	Winterton, Nicholas
Tebbit, Rt Hon Norman	Wolfson, Mark
Temple-Morris, Peter	Wood, Timothy
Thatcher, Rt Hon Margaret	Woodcock, Dr. Mike
Thompson, D. (Calder Valley)	Yeo, Tim
Thompson, Patrick (Norwich N)	Young, Sir George (Acton)
Thorne, Neil
Thornton, Malcolm	Tellers for the Noes:
Thurnham, Peter	Mr. Tristan Garel-Jones and
Townend, John (Bridlington)	Mr. Tony Durant.
Townsend, Cyril D. (B'heath)

Question accordingly negatived.

Question, That the proposed words be there added, put forthwith pursuant to Standing Order No. 30 (Questions on amendments), and agreed to.

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

Resolved, That this House congratulates Her Majesty's Government on its economic policies which have led to output, investment, and manufacturing productivity growing faster than in any other major European Community country in the 1980s; applauds the Government's firm anti-inflationary stance, and the action it has taken to exert further downward pressure on inflation; and commends the Government's supply side policies which have brought industry's profitability to a 20 year high, led to record rates of new business growth, and seen the creation of nearly three million new jobs since 1983.