HC Deb 08 June 1989 vol 154 cc356-8
6. Mr. Tom Clarke

To ask the Chancellor of the Exchequer what are the current interest rates in (a) the United Kingdom and (b) the rest of the G7.

Mr. Lawson

Three-month money market rates in the United Kingdom currently stand at 14 per cent., compared with an average of 8.6 per cent. in the rest of the G7.

Mr. Clarke

Given those appalling comparisons, is the Chancellor aware that the Small Business Research Trust recently conducted a survey which showed that a quarter of its members were deeply worried about the impact of interest rates on their businesses? What steps does the right hon. Gentleman intend taking to allay their fears, or can they expect things to become even worse?

Mr. Lawson

Let me say two things in reply to the hon. Gentleman's question. First, on the fact of short-term interest rates in the United Kingdom being above the average for the rest of the G7, there is nothing new about that—nothing new at all. They have been consistently higher over the past five years. During those five years, there has been a massive increase in investment of all kinds. There has been a record growth of new businesses—indeed, business and industry generally have done better than they have ever done before—so I think that the hon. Gentleman is wholly mistaken in drawing the conclusions that he does.

On the second point, I would say to the hon. Gentleman that of course what would be far, far worse for small businesses would be to see the sort of levels of inflation that we saw under the last Labour Government, and we are determined that we shall never go back to that.

Mr. Ian Taylor

Does my right hon. Friend agree that the speech yesterday by the right hon. and learned Member for Monklands, East (Mr. Smith) undermining the interest rate policy would have the effect of undermining the exchange rate, which would import inflation into this country? Does my right hon. Friend agree that the right hon. and learned Gentleman's policies would therefore be more inflationary?

Mr. Lawson

Yes, indeed. It was quite clear from the debate that we had yesterday that the Labour party has no policy at all to fight inflation. The only policy it has is one to put inflation up, through massive increases in public expenditure, through increased taxes on savings, through devaluation and through lower interest rates.

Mr. Robert Sheldon

As the Chancellor has ruled out credit controls, even of a limited kind, is it not clear that his only weapon has been ludicrously high interest rates? As this has been fed directly into the RPI, is it not also clear that wage claims are higher than they would otherwise have been, producing a further level of inflation for which the right hon. Gentleman is responsible?

Mr. Lawson

I entirely agree with the implication in the right hon. Gentleman's question that it is absurd that we have mortgage interest payments in the RPI, unlike most other countries. The right hon. Gentleman is perfectly right about that. But as for ludicrous interest rates, the only ludicrous interest rates were the interest rates during the last Labour Government when he was a Treasury Minister, which were negative in real terms. Negative real interest rates rob the saver and do great damage to the economy. That is what we had under Labour.

Mr. Gill

Will my right hon. Friend take this opportunity to remind the House that one cannot establish sound security on borrowed money? Will he exhort the nation to follow the Government's example in repaying debt, thereby reducing the burden of interest?

Mr. Lawson

My hon. Friend is right. It would, indeed, be very much better in many ways if the appetite for borrowing was somewhat moderated. This is a free country—a free country—and people and companies are entitled to borrow what they wish to borrow and what they feel is prudent to borrow and I do not wish any change in that. Nevertheless, I do feel that the higher interest rates we have now might be to some extent a discouragement to borrow and an encouragement to save and, indeed, that is what we see happening at the present time.

Mr. Beith

How can very high short-term interest rates drive inflation out of the system when they bear disproportionately on small businesses and not on the larger businesses, which borrow mainly in the long term? Unless the Chancellor has some change of policy, will the position not be that smaller business will take more and more of the medicine that is not working on the system as a whole?

Mr. Lawson

The main difference—the most important difference—between the effect of long-term interest rates—which, the hon Gentleman is quite right, are well below short-term interest rates tend to bear more heavily on consumer spending because consumer borrowing is linked to short-term interest rates whereas, as he pointed out, a great deal of investment is linked to longer-term interest rates and, therefore, the only sense of what he is saying is that the depression of the growth of demand which is necessary in his judgment should be more directed towards investment and less towards consumption. That is not something with which I agree.

Mr. Gordon Brown

Now that mortgage rates have been 10 per cent. or above for almost all the past 10 years, now that borrowing costs are just about the highest in Europe and now, as the Chancellor confirmed yesterday, that home owners face a summer of high mortgages and rising prices, does the right hon. Gentleman still dismiss the anxieties of home owners throughout the country? Does he still repeat the advice he gave earlier that they should cut back on something else?

Mr. Lawson

What I do say is that the 10 years to which he referred have been 10 years of unprecedented success for the British economy.