Economic Policy

HC Deb 24 October 1989 vol 158 cc685-774 4.22 pm

Mr. John Smith (Monklands, East)

I beg to move, That this House deplores Government economic policies which have resulted in the highest interest rates and the highest level of inflation among the leading industrial nations and have caused the largest balance of payments deficit in this country's history; expresses its deep concern at the impact of the savage increases in mortgage repayments on millions of home buyers and the erosion of living standards of the less well off, including poor families and pensioners; regrets the extra burdens being placed on British businesses and industry as a result of increased borrowing costs and the exclusive reliance on high interest rates as the sole instrument of economic policy; repudiates the absurd claim that a huge balance of payments deficit is not a crucial concern; and calls on the Government to adopt a strategy to reduce the balance of payments deficit by increasing industrial investment and by ending the decade-long neglect of education and training, new technology and regional development.

Mr. Speaker

I must announce to the House that I have selected the amendment in the name of the Prime Minister. I repeat what I said previously: a large number of right hon. and hon. Members have already notified their wish to participate in the debate. Therefore, I shall need to put a limit of 10 minutes on speeches made between 7 and 9 o'clock. 1 appeal again to those called before that time, particularly to Privy Councillors, to bear that limit in mind.

Mr. Smith

As we meet today to debate the condition of the British economy, there is a deepening concern throughout the nation at the consequences of 10 years of Thatcherism. The extravagant claims of a so-called economic miracle to which we have been so persistently subjected are compared by our constituents with the facts of the economic situation and the impact of those facts upon their lives.

The ineluctable and unavoidable facts are that, 10 years on, at the end of a decade during which the Government have had at their disposal £78 billion of North sea oil revenues and all the added strengths that North sea oil resources provided for the trade balance, Britain now has the highest rate of inflation and the highest interest rates among the leading industrial nations and, as the trade figures today sadly confirm, the highest balance of payments deficit in our history. Nor should we forget that unemployment, even using the Government's massaged figures, is 1.7 million and, on the basis of previous calculation which was changed by the present Government, would amount to 2.3 million. It remains a deep-seated problem in many of our regions.

Throughout the end of the Thatcher decade and in the light of these facts our constituents, not unnaturally, query what sort of strange new form of miracle has led us to such a position. Such consideration brings them face to face with two outstanding characteristics of the Thatcher Administration: its totally non-self critical and wildly extravagant claims to success, and its habitual tendency to blame others for its failures. It was this same Chancellor of the Exchequer, whose candy floss boom is melting before our eyes, who, in the Budget debate of March 1988, said: This country is now 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.] Note the complacent arrogance of the phrase "previously enjoyed by West Germany" and the pretentiousness of the claim to rank with the Japanese level of success.

In Britain today inflation is 7.6 per cent.; in West Germany it is 3 per cent. In Britain today interest rates are 15 per cent.; in West Germany they are 8 per cent. In Britain today, as we know, we have a huge trade deficit and West Germany has an immense trade surplus. Most revealing of all, when the present Government took office in 1979 our trade deficit with West Germany was £1 billion. In the 10 years since, it has increased by almost nine times to the record and alarming level of nearly £9 billion.

Earlier this year the Prime Minister saw fit to give some economic advice to the Japanese on a visit to their country. The trade deficit between Britain and Japan when she took office was £1 billion; today it is £5 billion. Until recently it was fashionable for Government members to patronise the West Germans. We were told that their economy was sclerotic, hidebound, over-rigid and badly in need of a touch of the Thatcher market magic. However, who in his or her right mind would trade our economic position with theirs? Who would swap their dedication to education and training, their success in social partnership, their strength and depth in manufacturing industry for the problems which Britain faces today?

The facts do not fit the hype. Who is to blame? After 10 years of this Government in power, in which the wealth of the North sea has been available to them, in which they have had assured parliamentary majorities and in which they can hardly claim that they have not had sufficient economic and political leeway and opportunity, who is to blame for the failure? Is it the unions, the previous Labour Government or the nasty foreigners? As each year has passed those excuses, so readily on the lips of the Government apologists in the House and elsewhere, have become relentlessly less convincing. The most obvious fact about Britain after 10 years of Thatcherism is that this Government and their economic policies are to blame for our present position.

The Government can no longer evade or avoid their personal responsibility. The balance of payments deficit is, at heart, for this country, a balance of trade deficit. Throughout this decade, and never more so than under the present Chancellor, the importance of the balance of payments has been persistently underestimated. The Chancellor has a lamentable record on prediction. It is almost as though the wish to avoid the problem suppresses the capacity for intelligent assessment. For 1988 he predicted a deficit of £4 billion. It was over £14 billion. For 1989, by which time he should have become a little wiser., he predicted £14.5 billion for the year as a whole. Today it was announced that for the first nine months of this year we have already passed £15 billion—well past his total for the whole of the year and with a full quarter still to come—so we are probably heading, on those figures, for a deficit of between £19 billion and £20 billion, compared with his prediction of £14.5 billion.

The right hon. Gentleman's response is not to seek to reduce the deficit so much as to pretend that it does not matter. Time and again he has told us that a balance of payments deficit, even one of this magnitude, does not matter provided that it is readily financable. The right hon. Member for Henley (Mr. Heseltine), his former Cabinet colleague, observed in his sideshow speech at Blackpool when dealing with this issue: I beg our party referring to the Conservative party— not to argue that a deficit on overseas trade is of incidental importance—self-correcting and easily financed. I do not believe a word of it. Nor should we. Our balance of payments deficit has been caused by two principal acts of Government—the appalling recession of 1979 to 1982, when the mismanagement of, among other things, exchange rate policy eliminated about 20 per cent. of British manufacturing capacity, and the credit boom let loose from 1985 onwards, which recklessly expanded demand well beyond the capacity of a weakened industrial sector to supply.

When the Chancellor said that a balance of payments deficit did not matter if it was readily financable, he did not mention the price of that financing. That price is the price of his priorities. It is interest rates of 15 per cent., and it is being paid not by him but by millions of home buyers, who have faced crippling increases in their mortgage repayments. It is being paid by business and industry, particularly small businesses, which find the cost of investment and the unexpected burdens of repaying loans, often taken out in a totally different climate, intolerably high.

Consider the cost for mortgage payers. As a result of 11 increases in interest rates from May 1988 until now, a family on average earnings with two children paying off a typical £34,000 mortgage is paying an extra £88 each month. In Greater London, the increase in payments on an average mortgage of £55,000 is a massive £162 each month. Is it any wonder that about 400,000 families have mortgage arrears extending to two months or more?

Consider the price being paid by businesses. Today the CBI produced its forecast for business, and gloomy reading it is, predicting a fall in orders and a drop in investment. It is one of the gloomiest predictions that the CBI has made for many years. It has been the practice of Ministers constantly to quote CBI figures in these debates. I suspect that that may not happen today.

Mr. Edward Leigh (Gainsborough and Horncastle)

As the right hon. and learned Gentleman referred to the balance of payments deficit, may I ask him to say whether he believes in import controls? Will he answer that question yes or no? While he is thinking of how to answer that, will he say, in connection with mortgages, whether he agrees with the hon. Member for Dagenham (Mr. Gould) about the curbing of mortgage credit?

Mr. Smith

I assure the hon. Gentleman that it need not take me long to think of the answer to his questions, the answer being no. I do not agree with import controls, and I shall deal with the question of how we would impose credit controls when I reach that part of my speech.

Small businesses and mortgage payers are not the only people who have been hit hard by Government economic policies, which now adversely affect almost the whole population—with the exception of a small group of the well-off, whose bounty under this Government has been so great that they are well protected against the Chancellor's policies, as they probably lend rather than borrow and thus benefit from high interest rates.

But what of the others, particularly those in the poorer sections of society, who have had to face economic difficulties with no consideration from the Government? Retirement pensioners whose pensions have fallen so badly behind the rise in incomes of others have to face the same price increases as everyone else. We heard only today of the miserable decision once again to freeze child benefit—a shameful denial of essential support for millions of poorer parents.

So we know all too well the price that is paid for the Chancellor's folly by nearly all sections of society, and people are entitled to feel that they have been deceived. Were they not told that the medium-term financial strategy would put paid to disturbing uncertainties in financial policy? It was only last year that the former Chief Secretary to the Treasury told us: Government policy now operates in the medium-term framework which gives individuals and firms the confidence to plan ahead. Let us take an individual or a firm attempting to plan ahead in May 1988 when interest rates were 7.5 per cent. What bit of the medium-term financial strategy told them that over 18 months later, after 11 increases in interest rates, they would be paying 15 per cent. for the loans that they took out in May 1988? How do they know what Government policy will be next?

I admit that the Chancellor has some problems which are not entirely of his own making. Fairness requires that we take account of some of his difficulties in an understanding way—the present Foreign Secretary is already learning all about how the Prime Minister treats colleagues. The Chancellor could have given him a crash course before he left for Malaysia. The Chancellor was hardly back from Blackpool, where he was portrayed with others as part of the right team of people working together for Britain—[Hon. Members: "Where are they?"] No doubt the chairman will have taken careful note of those of the team who are not present. As I was saying, the Chancellor was hardly back from Blackpool when the man who was missing from Blackpool, Sir Alan Walters, struck again.

One can be naive, I suppose, about Sir Alan. One can believe that it was an accident that an article that he wrote for an American publication most unfortunately and quite unaccountably appeared in the press—an article, moreover, which described the European monetary system as half-baked. If that were not enough, he went on to deride it as not having even a minimum level of plausibility—I checked this again: he was referring not to the Government's economic policy but to the European monetary system. I do not imagine that the Chancellor thinks that it was an accident, because he has suffered before. He knows how, month after month, the unelected and unappointed alternative Chancellor in No. 10 has thwarted his policies and contradicted his purposes—sometimes an allegedly indiscreet remark, sometimes a word in a City dining room, and on occasion even a friendly reference to the need of the Chancellor to move on to other things.

These are not the antics of some eccentric outsider; they are the work of a specially appointed insider in No. 10. When assessing this happy bond between Nos. 10 and 11 Downing street, one extracts the true flavour of the team approach and a proper understanding of why no one in his right mind will believe that a team approach to anything is ever possible under the present Prime Minister. Isolated in Europe, isolated in the Commonwealth, at home she is increasingly isolated by the deference and lack of courage of a Cabinet who dare not challenge her overwhelming pretensions. These Ministers know the lessons of the reshuffle: "If you lose your job. you get another house, but if you keep your job, you lose your house."—[Laughter.] If you are not careful, you might lose both. Whatever happens, Mr. Bernard Ingham—that other unaccountable source of power in Britain—will be waiting to give a friendly benediction as one moves on. I used to feel sorry for the Chancellor of the Exchequer, but it is time that he did something for himself. It is time for enterprise and individual responsibility. It is time that he told the Prime Minister that the moment has come to end the confusion and disarray in the formulation and explanation of Government economic policy. It is time that he said, "Either back me or sack me."

Mr. Tim Yeo (Suffolk, South)

rose——

Mr. Smith

The Chancellor should know that at least one volunteer for his job on the Conservative Back Benches is rising to his feet.

I advise the Chancellor to make an early decision on the important question of whether he will jump or be pushed, because the Prime Minister has a plan for him. It is that he should attract the hostility and contumely of the public for the unpopularity of his economic policies and then be discarded when someone else—perhaps the Secretary of State for Transport—is invited to herald a new approach during the run-up to the next general election. It might be more dignified for the Chancellor to jump before he is pushed. I give him a word of friendly advice before he jumps. He should make sure that his parachute has not been packed by Mr. Bernard Ingham.

Mr. Ian Taylor (Esher)

The right hon. and learned Gentleman raises laughter among his right hon. and hon. Friends—[HON. MEMBERS: "Among Conservative Members, too."]—but the laughter should be reserved for his inadequate attempt to explain his own economic policy. Is the battle against inflation part of the Labour party's objectives? How will that battle be conducted if at the same time we are to have lower interest rates and a lower exchange rate against other currencies?

Mr. Smith

The hon. Member should listen. Occasionally, we are entitled to indulge ourselves in the odd spot of amusement, when we have characters such as Sir Alan Walters, Mr. Bernard Ingham, and others decorating public life—and who would cause endless mischief and annoyance were they but free to speak. Their lips are sealed now by vows of confidentiality, but let us wait until the memoirs are published. Let us see what the Chancellor—a handy man with a pen if not with figures—writes in his memoirs and his views on Sir Alan Walters as serialised in The Sun.

The Chancellor should take an early initiative to end the muddle over the exchange rate mechanism. Under the terms of the Madrid summit declaration, Britain has apparently agreed to stage one of the Delors report, which envisages full participation in the ERM. We are told that that will happen when the time is ripe, but what if the time is not ripe when the timescale apparently agreed at Madrid has passed? How can the Government's position have any credibility when Sir Alan says that the system does not even have minimum plausibility and writes in an article published only last week that "thus far" he has taken the Prime Minister with him?

The Chancellor must assert himself to end needless confusion and misery. Our advice is that he should negotiate to join the ERM under the important and prudent conditions that the Labour party has outlined. He should listen, and ask the Prime Minister to listen, to the advice that he received from not only the Confederation of British Industry but the annual conference of the Trades Union Congress. If the Chancellor and his colleagues believe that it is right to join, they should fight for their policies, rather than sit like cowed and frightened schoolboys whenever the farrago frowns in their direction. They should uphold the minimum requirement of proper government that Ministers of the Crown should not tolerate the undermining of their policies by unelected part-time advisers, however highly placed and with whomsoever they are connected. Ministers must face the need for alternative policies to take us forward from the economic morass in which we are stranded.

It is the height of arrogance for the Government to claim, as they frequently do, that there is no alternative. That is merely another way of saying that the Government cannot be wrong. We believe that the first requirement of an alternative approach is to adopt an industrial strategy that puts the promotion of our wealth-creating manufacturing industry at the top of the national agenda for recovery. It is the weakness of our manufacturing sector—the internationally tradeable part of our economy—that is the fundamental reason for the balance of trade and balance of payments deficits. It is not—this is our fundamental disagreement with the Government—a matter of simply attenuating demand so that the deficit comes round.

There is a structural problem in the British balance of trade and payments deficits that only determined supply-side policies can improve. I wish that the Government would listen to the growing anxiety being expressed throughout the nation and industry that our manufacturing sector is not well enough placed to face the 1990s or the intense competition, as well as the opportunities, that the single market will create. We have argued that case repeatedly, and we shall continue to do SO.

I shall content myself today with drawing the attention of the House to a report prepared for the Employment Institute which, from an objective standpoint, endorses our approach. I quote the summary of its conclusions:

• "The British disease stems from a combination of poor workforce skills and slow application of design and technology.
• Upgrading the quality of British products remains an urgent priority; cost reductions alone will not suffice.
• Manufacturing matters, because this sector is the source of the vast majority of innovative products.
• Manufacturing matters also for jobs; despite providing a falling share of total employment, manufacturing's demand for services and intermediate products generates jobs in other sectors.
• The authors conclude that extra spending in the fields of vocational training, research and development and greater 691 support for innovative producers is urgently needed if Britain is not to be relegated to Europe's second division of low wage, low quality producers after 1992."

Mr. Tony Marlow (Northampton, North)

I am sorry to take the right hon. and learned Gentleman back, but he was going to tell us the circumstances under which the Opposition would favour joining the exchange rate mechanism. Will the right hon. and learned Gentleman tell the House what those circumstances would be?

Mr. Smith

I am sure that the hon. Gentleman knows them well. They are conditions relating to proper swap arrangements between the central banks, a policy for growth rather than deflation, and consideration of the right point at which entry to the ERM should be effected. [HON. MEMBERS: "What will that point be?"] It will be at the right and appropriate rate for the success of British industry. I should have thought that that would be blindingly obvious to Conservative Members. I have given the hon. Gentleman the answer to his question.

The time to start that industrial strategy is now. Every month that we delay is a month in which the risks of 1992 become even greater.

Sir Peter Hordern (Horsham)

The right hon. and learned Gentleman has just made a most important statement to the House. He said that the Labour party rests for the success of its policies on a very considerable devaluation. His statement cannot conceivably mean anything else. What size of devaluation has he in mind?

Mr. Smith

The hon. Gentleman is mistaken. I did not propose a considerable devaluation. He should bear in mind the fact that the Chancellor, who said at the Tory party conference that the Government never stood for devaluation, has seen the pound devalue by 10 per cent. in the course of this year. So much for the party of non-devaluation.

I refer the hon. Gentleman to the interesting speech made by the right hon. Member for Henley.

Several Hon. Members

rose——

Mr. Smith

I am not giving way—[Interruption.]

Mr. Deputy Speaker (Sir Paul Dean)

Order. The right hon. and learned Gentleman has made it clear that he is not giving way.

Mr. Smith

I refer the House to an interesting passage in the speech in Blackpool by the right hon. Member for Henley. It is highly relevant—[Interruption.] I am sorry if hon. Gentlemen do not like to hear this information, but I shall give it to them. The right hon. Member for Henley said: We could accept a lower parity as part of a decision to join because it would be coupled with the disciplines of the Exchange Rate Mechanism. I interpret that as entering at a rate which is lower than the present rate of exchange. That is a quite understandable point of view.

Mr. Michael Heseltine (Henley)

Is not the essence of the challenge how it is possible to satisfy the financial world that the disciplines will be in place to sustain whatever lower parity we accept? Is not the weakness in everything that the right hon. and learned Gentleman says that all the policies in which he believes will undermine the strength of management of the British economy and stoke up inflation, not reduce it?

Mr. Smith

I am grateful to the right hon. Gentleman for confirming the thrust of the policy contained in his speech. I totally disagree with the qualification in the second part of his question. Our policies to put manufacturing on its feet are ones with which I know he has some sympathy because he mentioned them in that speech. Those policies will strengthen the country, not weaken it. How on earth are we to create the wealth with which to sustain our prosperity, let alone improve our public services, if we do not have a strong and vital manufacturing sector? I thought that the right hon. Gentleman agreed with that.

Mr. Heseltine

This is at the heart of the matter. I agree that there is a need for public expenditure programmes to deal with education and training of the sort that the right hon. and learned Gentleman mentions, but those programmes have to be paid for. They cannot be paid for by rising levels of public expenditure. What cuts would the right hon. and learned Gentleman introduce?

Mr. Smith

The right hon. Gentleman knows perfectly well that the crucial decision in government is how much of the extra resources created by economic growth should be allocated to the public sector and how much to the private sector. The Government of which the right hon. Gentleman used to be a Front-Bench member say on every conceivable occasion that a declining proportion of GDP must be allocated to the public sector because public sector investment is inherently unvirtuous while private sector investment is virtuous. It is as though it was virtuous to invest in a casino but somehow malign to invest in a health clinic. That is the approach of the Conservative party. If the right hon. Gentleman were not in a particularly difficult and sophisticated political position, the restraints of which I fully understand, he would agree more fully with the arguments advanced by the Opposition.

Mr. Heseltine

If the right hon. and learned Gentleman is saying that his policies could be implemented over a significant period only by diverting future and as yet unavailable growth, he is saying that he has no policies today.

Mr. Smith

I do not know why I should give way so often to the right hon. Gentleman. I do not know whether I should be helping him in his election campaign, but I feel that in all innocence I am being drawn into it. He knows perfectly well that every Government have to take a decision about whether to raise more money by taxation or whether to use funds available because of the buoyancy of the economy. The Government also have to make decisions about how much they should allocate to the public sector.

The right hon. Gentleman knows perfectly well, because he has written about it, of the decline in our public services. He knows the state of our education system and he knows about the problems in the regions. I understand that he is sympathetic to the Labour party policy on development agencies. I am sorry if that upsets the right hon. Gentleman's campaign, but I can tell the House that he supports many items in the Labour party's policy review. I cannot say that we advertise that when we seek to persuade the public about the merits of the policies, but candour requres me to say that we are on all fours with the right hon. Gentleman on many important subjects. I hope that that puts the right hon. Gentleman's election campaign to bed for a little.

Mr. Yeo

rose——

Mr. Smith

I am not giving way to that hon. Gentleman.

The second leg of our approach is to lessen the exclusive reliance on high interest rates by the adoption of sensible controls on the availability of credit. I did not plan to give the right hon. Member for Henley so much attention in my speech. However, in his important Blackpool speech he also said: The central problem is an excessive supply of credit. The money may have been expensive but the public has been more attracted by its availability than it has been deterred by its cost. We are all aware of it. Not a day goes by but someone somewhere is urging us to borrow. That is perfectly true. People can hardly open their mail without receiving more invitations to borrow.

The Chancellor should seek to restrain the amount of credit made available by the banks. First, he should invite their co-operation in restraining lending. I hope that we do not get any horse laughs about that. Why on earth should the Chancellor not invite the banks to co-operate? Only people who are as narrowly partisan as members of the Conservative party would think that such a suggestion was in the remotest degree odd. Any sensible Government would invite such co-operation and sensible bankers would respond. I believe that the banks would co-operate and I shall continue to believe that until I see evidence that they would not. If they do not, what will happen?

Mr. Philip Oppenheim (Amber Valley)

When would the banks co-operate?

Mr. Smith

Is the hon. Gentleman saying that the banks would refuse to co-operate with a Government who sought to place some limit on lending? Which bank is the hon. Gentleman making that accusation about? I wonder whether the Committee of London and Scottish Bankers will be pleased to read that in Hansard. If the banks do not co-operate, the Government can require them to make deposits with the Bank of England, and that would have the effect of limiting the amount available for lending. I do not see anything impractical in such a proposition. I am fortified in that view by the comments of Mr. Christopher Dow, the former economics director of the Bank of England and economic adviser to the Governor, in his recent book "A Critique of Monetary Policy". He said: A call for voluntary restraint by banks could perhaps be effective for a while. It might be worth considering such a proposition. An added advantage of this approach would be that it could affect the psychology of borrowing by sending a clear signal that it was intended to be limited. In a nation awash with unnecessary and damaging credit, such a signal could most appropriately come from the Government and I suggest that it would not go amiss.

Sir William Clark (Croydon, South)

Will the right hon. and learned Gentleman explain how his formula would work for foreign banks? What would be the lending ratio on the funds that such banks held here and their funds abroad? How would the right hon. and learned Gentleman stop foreign banks continuing to give credit throughout the country?

Mr. Smith

I do not think that foreign banks would take an irresponsible view if approached by the Government. I do not see why they should. I object to the view advanced by Conservative Members. Who are they to say that such banks would not co-operate with an elected Government trying to implement their policies? The more I listen to such arguments, the more I despair about the sense of responsibility of the Conservative party. No idea that does not come within the narrow vision of Conservative Members is considered, even when it involves insulting the whole of the banking community at home and abroad.

Several Hon. Members

rose——

Mr. Smith

There are many bankers' friends in the Chamber, but I shall give way to the hon. Member for Stockport (Mr. Favell).

Mr. Tony Favell (Stockport)

Why should not someone be able to decide for himself about borrowing?

Mr. Smith

The hon. Gentleman should have a word with the Chancellor because I think that he is trying to send a signal to that man when he proposes interest rates of 15 per cent. On the whole, the Chancellor does not want people to borrow. I conclude that he is opposed to these controls and the possibility of them not on grounds of practicality but on grounds of dogma.

Mr. Nicholas Budgen (Wolverhampton, South-West)

As a lawyer, will the right hon. and learned Gentleman tell the House to what extent he supports unlawful administrative directions to the banks, and to what extent that should be allowed and extended?

Mr. Smith

The hon. Gentleman is also a lawyer, and I am surprised by what he says. There would be nothing unlawful about making a request to the banks.

Mr. Budgen

Why should they obey?

Mr. Smith

Out of a sense of reasonableness and of national duty and a desire to co-operate with the elected Government. I am astonished, once again, that the concept of common good and civic purpose is so lacking among Conservative Members. I shall give way to a distingushed representative of it.

Mr. Norman Tebbit (Chingford)

I am grateful to the right hon. and learned Gentleman, who has given us such an entertainment. Why does he believe that the banks would be more co-operative with a Labour Government than the trade unions, which the Labour Government owned—or was it the other way round?

Mr. Smith

I am recommending action by a Conservative Government because there happens to be a Conservative Government in power. They are busy telling me that they do not want to co-operate and that the banks will not co-operate with them. When we have a Labour Government, I can assure the hon. Gentleman that we shall ask for the co-operation of all sections of the community in our economic and social policies.

Several Hon. Members

rose—

Mr. Smith

No, I have given way many times already, to the point at which I shall take a disproportionate amount of the time available for debate. I hope that hon. Members will understand if I do not give way again.

The Chancellor should take the opportuniity to make it crystal clear that there will be no tax cuts in his next Budget. That would be a prudent and timely signal to the Community and to the markets. He should also use the autumn statement, which we shall have shortly, to propose regionally targeted public investment to tackle some of the skills deficiencies and regional disparities which not only impair the working of the economy, but are the source of inflationary influences. He must know that skills bottlenecks and south-east congestion are as inflationary as they are otherwise undesirable. He should act to tackle them.

There are alternatives, but they are not recognised, and we saw this vividly in the debate today from the reaction of those on the Conservative Benches. There are none so blind as those who will not see. The country yearns for an alternative—not just in the content of policies but for a better style of government. It does not want government by leak or innuendo or by signing agreements that are repudiated before the ink is dry on the paper. We need a Government who say what they mean and mean what they say. I can understand that the Conservative party finds that an odd description of its Government. We need a Government who honestly say what they mean and honestly mean what they say. After a decade of hype and tax-subsidised advertising, a Government nurtured in their own propaganda have difficulty in distinguishing fact from fantasy. That is true in economic affairs and regrettably true across the whole range of Government policies. It is the overwhelming reason why they are so speedily forfeiting the confidence of the entire nation.

5.4 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: 'commends Her Majesty's Government on its economic policies, which have led to faster growth of output, investment, and manufacturing productivity than in any other major European country in the 1980's; applauds the Government's determination to defeat inflation by maintaining tight monetary and fiscal policies; and welcomes the continued underlying strength of the supply side of the economy, evidenced by record levels of business investment and new business start-ups, and an unemployment rate that is well below the European Community average.'. The right hon. and learned Member for Monklands, East (Mr. Smith) made, for the most part, a rather jolly speech in which he contrived to say practically nothing, except to reveal that the Labour party's conditions for joining the exchange rate mechanism of the European monetary system consist of devaluation on Britain's part and a commitment to inflation on the part of all the others. I am quite sure that, were there to be a Labour Government, the first of those conditions would readily be fulfilled, but I have to warn him that the second is most unlikely.

I shall be addressing the issues, which will be something of a contrast with what the right hon. and learned Gentleman said. There is one striking difference between this Government and the Labour party. It did not have the guts to defeat inflation, and we have. It does not have the guts to tell the British people what it takes, and we have.

Under Labour, inflation averaged 15½ per cent. Excluding the distorting effects of mortgage interest payments, the lowest it ever reached when they were in office, the lowest that it ever reached, was 7.7 per cent. Today, on the very same measure, it is 5.8 per cent.—lower than they ever achieved, but still too high for us.

Mr. Harry Ewing (Falkirk, East)

I am grateful to the right hon. Member for giving way so early in his speech. When he became Chancellor, inflation was half what it is now. As he has been Chancellor throughout the period, does he accept any responsibility for the doubling of inflation during his period as Chancellor of the Exchequer?

Mr. Lawson

What I am not going to do is take any lectures about inflation from those on the Benches opposite, when inflation was 15½ per cent. on average. It went up to 27 per cent. and the lowest underlying rate that the Labour Government ever achieved was higher than the rate that we have today.

To hear the right hon. and learned Member for Monklands, East talk, one might suppose that it is something new that our inflation rate is higher than that of our competitors. In fact, the only thing that is new is that the gap has narrowed. Over the whole of the period that we have been in office, United Kingdom inflation has averaged just half a percentage point more than inflation in the European Community as a whole. It is perfectly true that the latest figures show that the gap has temporarily widened to 2½ per cent., largely because of the distorting effect of mortgage interest payments. Without them—and to make a fair comparison, one has to look without them because of all the other Community countries, only the Republic of Ireland includes them in its index—without them, therefore, to have a more truly comparable basis, the gap would be around 1 per cent. Compare that with the last Labour Government, when British inflation—[HON. MEMBERS: "Oh."] Oh yes, they do not like it. British inflation averaged no less than 4½ percentage points above that of the Community as a whole.

Inflation remains the greatest single threat to our economic wellbeing at the present time. It has to be the priority of economic policy to get it down. And let there be no doubt about it: under this Government that is the priority.

Mr. George Foulkes (Carrick, Cumnock and Doon Valley)

What political significance does the Chancellor read into the fact that only two of his Cabinet colleagues have turned up to support him in this important debate?

Mr. Lawson

I should not have allowed the hon. Gentleman to intervene. I should have known him better.

The main issue that we have to debate today is this: how are we to bring inflation down? The right hon. and learned Member for Monklands, East spoke for more than 40 minutes without once answering this central question. Not once did he say how a Labour Government would bring inflation down. He muttered a bit of wishful thinking about credit controls, designed, no doubt, to steal some clothes from the real shadow Chancellor, the hon. Member for Dagenham (Mr. Gould). I will come back to him later. Otherwise there was nothing, absolutely nothing.

So what has Labour got to contribute to the debate? What, when it comes to the point, does it really want? Interest rates, it has said on occasion after occasion, are too high and should be lowered. I see that the right hon. and learned Gentleman is nodding now. We are running a Budget surplus. The Labour party is busy dreaming up ways of spending it. The pound, the Labour party has made clear, is too high, so it thinks, for our exporters. They would like to see it lower. In other words, what it boils down to is lower interest rates, a lower Budget surplus—indeed, probably a Budget deficit—and a lower pound. That is Labour's recipe. That is not just what it is urging now. It is what it was urging in 1988 and in 1987, too. It is a recipe not for lower inflation but higher inflation, as, indeed, it always has been when the Labour party has been in office.

One thing is absolutely clear. Had I taken the Labour party's advice in 1987 or 1988, inflation would be far higher than it is today. The plain fact is that Labour has no credible policies whatever for dealing with inflation—not one. No wonder it received little mention in its 88-page long policy review.

By contrast, the Government's policy and position is absolutely plain. We already have the tightest fiscal policy in Europe. And by raising interest rates to 15 per cent., I have made it abundantly clear that we will continue to take whatever monetary measures are needed. Of course, I well understand the difficulties this causes to people with mortgages and to many farms and small businesses. I wish it were not necessary—but it is necessary. And unlike the right hon. and learned Member for Monklands, East, we do not seek to deceive the British people into thinking that there is some softer option.

What we have seen over the past couple of years has been a fall in personal savings and a rise in borrowing and spending on a wholly unprecedented and unexpected scale. It has certainly not been Government borrowing or spending. That was always the story under Labour: let Government spending rip, and force the private sector to pick up the bill. But under this Government public spending is under control and, so far from indulging in heavy borrowing, we are paying off old debts on a substantial scale. No, what we have seen has been borrowing and spending by private companies and private individuals. Nor, incidentally, has it just been for consumption. Again, that was always the story under Labour. But over the past seven years investment has been growing twice as fast as consumption.

The plain truth is that there has been a step change in private sector behaviour in this country. In part, this reflects the fact that people and companies are now free to lend and borrow whatever they like. When we came into office, people still had to queue up to get a mortgage. In part, too, it reflects the fact that people no longer need to keep adding to their savings to maintain their real value. In the 1970s, the last Labour Government forced the people of this country to fight a losing battle to keep up with crippling inflation. And, at the same time, they made sure that there was no real return on savings at all. I would like the Leader of the Opposition to listen to this, because that is what the last Labour Government did. They wiped out the savings of pensioners. If ever there was a great betrayal, that was it. That world, thank goodness, has gone for good. After 10 years of Conservative Government, people no longer need to keep piling up savings just to stay in the same place.

Mr. Jeff Rooker (Birmingham, Perry Barr)

What the pensioners do not understand is that if fighting inflation is the Government's top priority, why are they claiming success for fighting it twice?

Mr. Lawson

I am silenced. I have to tell the hon. Gentleman that it is not a question of fighting it twice. It is a question of fighting it all the time, whereas when the Labour Government were in office they never fought it properly at all.

One unexpected result of the new climate that we are in has been an unprecedented fall in the personal savings ratio between 1986 and 1988, which has meant an increase in spending, financed by borrowing, of over £10 billion. That is what the official figures show——

Mr. Favell

On a point of order, Mr. Deputy Speaker. The Opposition say that they want to hear what the Government's policy is. The occupants of the Opposition Front Bench, including the Leader of the Opposition, have done nothing but chatter and giggle. If they want to learn, they should listen. Will you tell them to behave themselves, Mr. Deputy Speaker?

Mr. Deputy Speaker

The right hon. and learned Member for Monklands, East (Mr. Smith), who spoke from the Opposition Front Bench, was heard in comparative quiet. I hope—[Interruption.] Order. I hope that the same courtesy will be accorded to the Chancellor of the Exchequer.

Mr. Frank Haynes (Ashfield)

On a point of order, Mr. Deputy Speaker. When my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) was speaking, that lot over there on the Conservative Benches, those public school louts, put into practice what they had orchestrated before they came into the Chamber. When they did that, Mr. Deputy Speaker, you did not do a damn thing about it.

Mr. Deputy Speaker

Order. Many right hon. and hon. Members wish to participate in the debate. These interruptions waste time.

Mr. Lawson

As I was saying, the change in attitudes to saving and borrowing has gone hand in hand with a massive growth in living standards. It is that which has given people and companies throughout the country the confidence to use the new freedoms we have given them. So they have been investing and expanding on a massive scale. Indeed, the increase in investment over the last two years has been the highest since the war.

We can all see the results in our constituencies—new factories, new offices, new supermarkets, free enterprise at work. It is quite a problem, all this activity, is it not? Rising living standards, rising confidence, soaring investment—how many nights' sleep did the right hon. and learned Member for Monklands, East lose about problems of this kind when he was in office? After a decade of revitalisation, British business and industry are taking the opportunities this has offered and are rising to the challenge. Unemployment, I may add, has fallen sharply to well below the European Community average. It is very strange that the right hon. and learned Gentleman had nothing whatever to say about unemployment. Time was when he would talk about nothing else. Indeed, in his own constituency, unemployment has fallen by over a quarter in the past year.

New businesses are springing up at a rate we have never seen before in this country. Last year's figure was yet another record, with business start-ups, net of closures, running at no less than 1,200 companies a week. Compare that with a decade ago, when there were more closures than there were start-ups.

All this has meant that productive capacity is growing faster than it used to. But there is clearly no way in which it could expand as rapidly as domestic demand has lately been growing. So the difference has been made up from abroad, and shows up as a current account deficit on the balance of payments.

That is not, of course, the disaster that the right hon. and learned Gentleman has sought to portray. The right analogy is not with a company running at a loss. It is more like a company that, though profitable, cannot finance its investment programme entirely from its own resources and has to raise external finance to fill the gap. A country in a similar position will draw on the savings of the world, which has been greatly facilitated by today's global markets. [Interruption.] I hear the right hon. and learned Member for Monklands, East expressing scepticism. In a recent publication, the IMF said: inasmuch as they reflect private saving and investment decisions … external imbalances should be seen as efficient and self-correcting. But it is clear that a sizeable part of our current account deficit is due to domestic demand growing at an excessive and unsustainable rate, which needs to be corrected and is being corrected.

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

The Chancellor, in his conference speech, referred to the old and correct definition of inflation as too much money chasing too few goods. He said that industry had to produce the goods and that the Government's job was to see that there was not too much money. Does he think that he has discharged that obligation satisfactorily in his budgetary measures?

Mr. Lawson

It is a question not of budgetary measures, but of monetary measures. Why on earth does the hon. Gentleman think that interest rates are at their present level? He really should take a course of instruction.

As today's trade figures confirm, exports continue to do well—a sure sign of the efficiency and competitiveness of British industry.

Mr. Giles Radice (Durham, North)

Will the right hon. Gentleman give way?

Mr. Lawson

I have just given way.

In the third quarter of this year, exports were 13 per cent. up on a year ago and at a new record level. As demand in the economy slows down, that will in due course show up in a marked decline in the recent rapid growth in imports.

Meanwhile, interest rates will have to stay high for some time to come. But, painful though it may be, I have no doubt that they will do the job. Indeed, without high interest rates the job would be impossible. The evidence on this is there for all to see. For 10 years we have been prepared to raise interest rates whenever it has been necessary to do so to maintain sound monetary conditions. It is that willingness that has brought us success.

We have had high interest rates before. We had them in 1981 and we had them again in 1985. On both occasions they brought inflation down.

Mr. Radice

When will the trade figures be in balance?

Mr. Lawson

I do not know, but I am glad that the hon. Gentleman asked me that. The right hon. and learned Member for Monklands, East said that he did not think that I would be quoting today from the CBI's latest monthly economic survey. Well, I will. According to the CBI's economic survey, there will be a marked improvement in the balance of payments next year.

Other countries have used interest rates, too, and that has brought inflation down for them as well. It has worked for Socialist Governments in France and for Conservative Governments in Germany. Indeed, it is only the right hon. and learned Gentleman and his right hon. Friends who seem to believe that they can cut themselves off from the real world.

Mr. Marlow

For a long time Conservative Members have been told, "You cannot buck the market." For how long and to what extent can one buck the market with regard to the exchange rate?

Mr. Lawson

My hon. Friend will have to define his terms more precisely before I can answer that question.

I know that there is a seductive view that we could somehow escape from the need for high interest rates if we were simply prepared to let the pound fall and sit idly by. But I have to tell the House that this is a sheer delusion. In the first place, I have already explained why we need a period of high interest rates to bear down on inflation, by encouraging saving and discouraging borrowing and spending. In the second place, a lower exchange rate would raise the price of everything that we buy from abroad. It would also take the pressure off industry to control its costs, including its wage costs. Together, that could only add to the inflationary pressures in the economy.

But if we stick to the policies that I have described, what then of the prospect? It is already clear that the growth of total spending in the economy is slowing down. As higher interest rates work their way through. it will slow down further. That will gradually bring down inflation and, in time, it will bring down the current account deficit too.

The economy has already come off the boil, and will come off still further. That will take time to show up in the retail price index for the familiar reason that this statistic includes the mortgage rate. In time, though, even the RPI will reflect what is going on in the real world.

But, as I have said in previous debates, what matters most is not these short-run fluctuations but the long-term health of the British economy. Here I can at last find some common ground with the right hon. and learned Member for Monklands, East. The real issues are what is happening to productivity, to the quality and quantity of investment, to profitability and to training. Those are the big questions. I agree with the right hon. and learned Gentleman on all that. The difference is that we are bringing about real progress on all those fronts whereas the Labour party never did and never could.

Mr. John Garrett (Norwich, South)

The Chancellor must be aware that throughout the western world our competitors are investing heavily in public expenditure on education, training and communications. When will he look ahead and establish how Britain is to address those fundamental problems on which we lag so far behind our competitors?

Mr. Lawson

We are addressing those problems, and we are addressing them in a way that the previous Labour Government never did and never could.

In one of our earlier debates last year the right hon. and learned Member for Monklands, East said: I advise Conservative Members that it is extremely instructive to read OECD publications to discover what it says about the British economy and to compare that with what the British Government say".—[Official Report, 14 January 1988; Vol. 125, c. 484.] I duly had a look at the latest OECD survey of the United Kingdom and I found that it says: For the first time in three decades, productivity gains were ahead of the G7 average.….growth in labour productivity has been impressive, outstripping by a wide margin both the previous United Kingdom trend rate and the G7 average.… the division of nominal GDP growth between output and inflation was more favourable over the 1979–88 period than during the 1973–79 cycle.… suggesting that there have been policy induced improvements in supply performance. I am most grateful to the right hon. and learned Gentlemen for directing my attention to that.

Mr. John Smith

The right hon. Gentleman has not read it all.

Mr. Lawson

The right hon. and learned Gentleman clearly did not because the OECD is saying that Britain's former economic performance has been transformed for the better since the Government of which the right hon. and learned Gentleman was a member was in office. That is what the OECD is saying and I am glad that he now agrees with it.

Mr. John Smith

rose——

Mr. Lawson

Not only has productivity in manufacturing industry throughout the 1980s grown faster in the United Kingdom than in any other major nation, but total investment over the same period has grown faster than in any other major European country, and business investment is a higher proportion of GDP than at any time since records began. Profitability is higher than it has been for the past 20 years, partly reflecting the much improved quality of today's investment. The quality of British management, too, has been transformed. Expenditure on training is rising fast and is now running at well over £20 billion a year. [Interruption] Yes, of course, the base when we came in in 1979 was very low. Of course, the economy was in a bad condition when we came in in 1979. I agree with that. Of course, it will be a long job. There is no secret about that. Of course, there is a great deal further to go. There is no secret about that either. But it is only by persisting with the policies that we have been pursuing these past 10 years that we shall get there.

Nor will high interest rates frustrate this process. Throughout the time I have been Chancellor, it has proved necessary for our interest rates, in both nominal and real terms, to be well above the average of our main competitors. Yet that has not prevented us from having a faster rate of economic growth, and of investment, than any of them. What destroys business is not high interest rates, but Socialist controls and bureaucracy—plus, of course, the inflation that is inseparable from Labour.

Mr. Ron Leighton (Newham, North-East)

On a point of order, Mr. Speaker. Why are Conservative Members falling asleep? Is it something to do with the television lights?

Mr. Deputy Speaker

Order. We must get on with the debate.

Mr. Lawson

Nor has the party opposite changed. The only thing it cannot agree about is what brand of red tape to use. They know that the red tape which is in vogue at the moment is called credit controls, but they cannot agree on what they mean by credit controls. All is total muddle and confusion.

According to the hon. Member for Dunfermline, East (Mr. Brown), and I quote from a recent transcript of a radio broadcast: What we are not talking about is control over people's mortgages, but there is genuine concern about the amount of plastic cards and plastic credit in the economy, and credit has been rising very fast. That is what he said—this despite the fact, incidentally, that some 85 per cent. of household borrowing is accounted for by mortgages, and only some 5 per cent. by credit cards, for which, in any event, other forms of credit could readily be substituted.

Within two days, however—it only took two days—the hon. Member for Dunfermline, East was firmly put in his place by his hon. Friend the Member for Dagenham, who told Mr. Brian Walden: We are not talking about familiar aspects of credit control, the hire-purchase restrictions, limiting credit cards and so on: these are not big elements. Quite right. He went on: But what we are saying, is that if there is a problem in managing the degree of credit growth in this economy, it has to be at the margin when new mortgages are being granted. The truth comes out, but there is a deeper truth and that deeper truth is that they have not the faintest idea what they are talking about.

Of course, the right hon. and learned Member for Monklands, East is rather cannier than his hon. Friends the Members for Dunfermline, East and for Dagenham. He says as little as he possibly can about what he would do, but he appears, as we heard earlier, to be in favour of leaning on or otherwise curbing the banks. That is what it amounted to. But, as Mr. Gavyn Davies, who was an economic adviser to the last Labour Government throughout its lifetime, wrote in last weekend's The Sunday Correspondent: I trust no one is suggesting a return to this sort of thing. It would be entirely pointless in an environment free of exchange controls, since UK borrowers could simply take their business to foreign banks. That is the truth of the matter. That is what the last Labour Government's economic adviser wrote. It is only the naivety of the right hon. and learned Member for Monklands, East, who has not a clue. Nor, incidentally, can the right hon. and learned Gentleman derive any comfort from the German or French practice of reserve asset ratio requirements, which are simply techniques for generating the interest rates needed to conduct monetary policy.

Mr. John Smith

As the right hon. Gentleman has introduced into the debate an economic adviser to the last Labour Government, may I ask him about the present economic adviser to this Government? Does he agree that the European monetary system is half-baked?

Mr. Lawson

I have made it absolutely clear. I made it clear at Treasury Questions last week—I do not think that he was in the country at the time—that Sir Alan Walters is a part-time adviser and his views on the EMS are not the views of the Government. I hope that is absolutely plain.

To return to the question of inflation, the plain fact is that the Labour party has no policy to deal with inflation today, any more than it had one when it was last in office. Over the past 10 years it has been on the wrong side of every single one of the big issues which divide the two parties—whether inflation could be brought down without a prices and incomes policy, whether economic growth could be secured without the stimulus of a Budget deficit, whether the investment we so badly needed could be secured without holding interest rates down and so taking risks with inflation, whether Britain's productivity could be improved without Government intervention in business and industry, whether unemployment could be brought down without a massive public spending spree, whether Britain could survive without the protection of exchange control, whether the economy could keep growing when we lost half our oil revenues overnight and whether the Government could perform their proper function without endless recourse to mini-Budgets. On all the issues—on every single one of them—I put it to the right hon. and learned Member for Monklands, East and the House that we have been right and they have been wrong. On all of these issues, every one of them, we have told the British people the truth.

Every time we have been asked to say precisely where growth would come from, to say precisely where the new jobs would be, to say precisely when inflation would come down, to name precisely the industries which would pick up the slack left by North sea oil, every time we have said that of course we cannot do that because ours is a free economy. It is individuals and businesses which make the decisions, not the Government. Indeed, it is only if individuals and businesses are free to choose that we can hope to have a successful economy.

Mr. Dennis Skinner (Bolsover)

Will the right hon. Gentleman give way?

Mr. Lawson

But what we can say, and have said, is this. It is the Government's business to keep total spending in the economy on track, and to keep our economy free and open. That is what we said we would do, and the House can be quite sure that we shall do it. So long as we stick to those policies, inflation will come down, and we shall enjoy strong and sustained growth and prosperity into the 1990s. These are the policies which work. These are the policies which, when the time eventually comes, will once again be endorsed by the British people.

5.36 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

The Chancellor of the Exchequer presented a rosy pciture of the economy as he has seen it develop over the past few years. He did not mention the words "economic miracle" today, but he talked about soaring investment and the improvement in business. One had only to look at the whole of the House to understand that all hon. Members viewed his comments with complete scepticism and he should be aware of that.

The crucial question was asked by my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker). He asked a question that the Chancellor did not seem to understand, which was why we had to fight inflation twice. The meaning of the question was simple. From 1979 to 1981, the Government had brought inflation down at enormous cost to our manufacturing industry and with great devastation to jobs, investment and other industrial opportunities. Having done that, one would have thought that with all the disadvantages that flowed subsequently, that was one advantage that would remain. However, it did not remain and we saw the Chancellor's approach bringing inflation up again, giving us this problem for a second time. The Chancellor has not answered the question put by my hon. Friend the Member for Perry Barr.

The other question that needs to be answered is that of Sir Alan Walters. He said, and it is worth having his exact words: My advice has been for Britain to retain its system of flexible exchange rates and to stay out of the present arrangements of the ERM. So far Mrs. Thatcher has concurred. It is no use talking about the future, because the future can be postponed indefinitely, year after year. The advice of Sir Alan Walters has been taken and, as far as we know, judging on actions not words, that is still the policy of the Prime Minister even though it may not be the policy of the Chancellor of the Exchequer. The Chancellor needs to consider his own position on that. After all, a number of people have been humiliated in the economic and political scene and they are in a position to insist that certain standards are maintained—standards that we in the House have long come to expect. Those are the standards that he should be pressing, one hopes with some certainty as to their conclusion.

We are seeing the final shudders of the Government's monetary convictions. We are now near the beginning of the post-Thatcher years. I recall with incredulity the naivety of the Government's early commitment to monetarism—the way in which prices were going to obey the iron law of M3, the way in which workers would not be able to get pay rises in excess of productivity, the way in which the theory of "rational expectations" would prevent employers from paying more or becoming bankrupt. The only trouble was that not many people involved in manufacturing industry had been to the seminars held by Sir Alan Walters or to the earlier seminars of the Chancellor of the Exchequer. All this monetarist nonsense was believed and held to be an article of faith.

William Rees-Mogg, the former editor of a one-time important newspaper known as The Times, once held that there was a precise relationship which had shown itself over the past two centuries. He produced some bogus statistics to prove that nonsense. His latest offerings, somewhat altered, are still poured out in The Independent, for those who like to read these fairy tales. We can now see that the relationship between M3 and inflation appears as close as that between any unconnected variables. The monetarists search for the holy grail of the great monetary indicator in the sky which will restore the arrogant certainty that they once held.

A notable civil servant, whom I knew well, and who went on to distinguish himself in a number of roles—in industry, the City and the academic world—once said: To every problem there is a single solution perfect in its simplicity easy to apply certain in its effect BUT WRONG". Never have a British Government impaled themselves on so ridiculous a theory. There was much of a type of religious fervour behind such a belief. Why else could a Government believe that the near doubling of VAT would not cause prices to rise? Why else have we seen the twistings and turnings along M3, M1 and M0 and all the rest? No economic theory should achieve such a level of commitment. Such theories need to be judged on their economic and political convenience. The objectives of our economy should once again command the support of the whole House.

What are the objectives of our economy? In 1966, Lord Callaghan, then Chancellor of the Exchequer, explained the complications of economic policy by referring to what he called his "triple objective". I would choose quadruple objectives: high and sustained economic growth, which is very important; low unemployment; inflation under control; and a satisfactory balance of payments. These are our basic objectives, and I do not suppose that those on the Treasury Bench would dissent, although they may wish to add others. Of those four objectives, low inflation is the easiest to achieve, if the other aims of economic policy are ignored. How to achieve it has never been a secret—just deflate the economy. Withdraw purchasing power in any way one likes and inflation will come down. However, people will be put out of work and a number of viable companies will be destroyed. There is nothing clever about it. One can deflate by raising taxes or reducing credit. Whichever way it is done, one creates a depression and inflation comes down.

The Government created the depression—the three years of unparalleled austerity predicted by the right hon. Member for Shropshire, North (Mr. Biffen). We lost sight of two of the quadruple objectives. Unemployment rose to more than 3.5 million and there was a catastrophic fall in manufacturing output in particular. The balance of payments was kept in the black only because of North sea oil.

We talk a lot about North sea oil. Whatever we say here about it, we always underestimate its importance. It produced for us £100 billion in balance of payments and £70 billion of revenue. If hon. Members had had £100 billion to spend, whether in deutschmarks, yen or dollars, what would they have done with it? Would they not have spent it on trying to do something for our manufacturing industry, to keep the finest machinery and machine tools in our firms, to make use of the best electronic equipment from the far east and to ensure that we had the latest factories, equipment, skills, training and education? Would that not have been a sensible way to use that £100 billion of foreign exchange? What did we do? We went on a spending spree and allowed imports to rise. Now there is a major problem because we do not have that base of manufacturing industry.

Ashton-under-Lyne is a microcosm of manufacturing industry. It is one of the areas that is most heavily engaged in manufacturing, even though it has lost a great deal. In 1979, there were 20,000 skilled engineers in Tameside and Stockport. They were members of the Amalgamated Engineering Union. In many parts of the country, one is not an engineer unless one is a member of that union. Those workers know the advantages of being a member. At present there are 5,000 skilled engineers. They have had five-year apprenticeships. Only a small handful of people now work through such apprenticeships. In the past, those highly skilled people were on the dole, yet now there is a demand for them. In the past, we had in Ashton-under-Lyne high levels of pay, employment and skills. The major cause of our present problems is the shortage of those skills and of factories. In two years I lost one third of the companies in my constituency. Medium-sized firms closed their doors because they could not stand a pound worth $2.40 and the high interest rates. They were caught between being unable to export and being unable to meet the competition from imports.

Mr. Oppenheim

If the Labour party now has all the answers to our manufacturing problems, can the right hon. Gentleman explain why manufacturing output fell under the Labour Government, whereas it has risen substantially under this Government?

Mr. Sheldon

The hon. Gentleman does not seem to have read the figures properly. Manufacturing industry in other countries has done extraordinarily well whereas we have failed miserably. Skills and training, to which my right hon. and learned Friend the Member for Monk land[s, East (Mr. Smith) addressed himself in his magnificent speech, lie at the heart of our problems. At the end of the war, Germany was devastated. Its factories were smashed and there was little working machinery. The Germans had only skills. Give me people with knowledge of skills arid technical training and I will swap that for any kind of economy based just on money. That is what the Germans had and what we do not have.

Our depression was monetarism in action. Unbelievably, the Chancellor recently said that the exchange rate was one of the two most important monetary indicators. Monetarism seems to embrace more and more economic indicators. Patrick Minford, one of the few unreconstructed monetarists, calls it a return "to the tea leaves". There is no certainty. Of course, we cannot have certainty. In this world, to search for certainty and a solution to our economic problems is to search for nonsense—they do not exist. We must look at a particular area and see what can best be done to meet demand.

I am waiting for the Chancellor to talk about prices and wages as monetary indicators. When he does that, we will know that monetarism has finally been buried and the obsequies concluded. There will be few such indicators left out of this new interpretation of monetarism if the Chancellor has his way.

We have the reliance on interest rates. The Chancellor has waited 14 months to see a drop in demand. He wanted that drop in demand last year. He still has not got it. That is unbelievable. Whatever people say about stop-go, at least it produced the results which the Chancellor is trying to achieve. He wants the results that were available under stop-go, but he has failed miserably after 14 months.

With regard to inflation, the Chancellor seriously underestimated the effect of his interest rate policy. As the European Commission explained, our interest rates fed directly into inflation. Why are there so many wage claims now? The answer is that many people have bought houses and their mortgage payments have increased. Therefore, they are being squeezed far more than if they were experiencing a pay cut. To compensate for that, they make pay claims. The Chancellor's interest rate policy involves an element of inflation.

I want to refer now to the fundamentals of pay, prices and unemployment. We must always return to them. We may play around with theories, but in the end we return to those three fundamentals. We will need a growth strategy based upon the enhanced skills of our people and upon investment, as my right hon. and learned Friend the Member for Monklands, East said so ably. That alone will bring us lasting prosperity.

I have been reading recently the debates which took place in 1945 on the nationalisation of the Bank of England. Those were very interesting debates in which, among others, Hugh Gaitskell, Bob Boothby and Nigel Birch participated. Bob Boothby voted with the Labour Government. He said: This Government or any other Government might one day want to go back to a Gold Standard, but if any Government ever committed such an act of insensate folly I should want to attack the Chancellor across the Floor of the House. Further, I should not want him to say that it was really the business of the Bank of England rather than his affair."—[Official Report, 29 October 1945; Vol. 415, c. 116.] That is the danger. Bob Boothby and I were worried about the Bank of England. However, we should be more worried about the German Bundesbank. When the Bundesbank put up its interest rates, who questioned that? Was it right to do that? Was there no disagreement among the Bundesbank's board? Should not others be involved in the arguments? Should it at least be accountable to those whom its actions affect? My right hon. and learned Friend the Member for Monklands, East and my hon. Friend the Member for Dunfermline, East (Mr. Brown) are prudent and cautious people and they are right to lay down firm conditions on joining the European exchange rate mechanism.

Mr. Beith

Is the right hon. Gentleman setting an additional condition that before the Labour party can consent to Britain joining the European monetary system, it must be clear that the Bundesbank and any future European central banks will not be independent of Government?

Mr. Sheldon

I approve of the formula set out by my right hon. and learned Friend the Member for Monklands, East and I believe that he has got it right.

We must return to the major problems with pay, prices, and unemployment and achieve growth. Recently, we have been going down a cul-de-sac and we are now approaching its end. The disarray before us is just one sign of that and I believe that the end cannot come too soon.

5.53 pm

Mr. Norman Tebbit (Chingford)

As the first Conservative Back Bencher to speak, it would be less than polite of me not to congratulate the right hon. and learned Member for Monklands, East (Mr. Smith) on a most amusing speech. Conservative Members often laugh at Opposition spokesmen, but it is not very often that we laugh at an Opposition spokesman's speech. However, the right hon. and learned Member for Monklands, East, achieved that today, and he had some very good jokes. The right hon. and learned Gentleman took me back 10 or 12 years. We all understand why the Opposition want a debate on the economy today—to offer them a chance to complain about high interest rates, high inflation and the trade gap.

When the Labour Government had exactly the same problems more than 10 years ago, the Opposition of the day wanted a similar debate. I believe that in those days the Opposition's speeches were even better than what we have heard today because they offered an alternative policy. However, the right hon. and learned Member for Monklands, East made some very good jokes. Indeed, perhaps Bob Monkhouse wrote his speech—it certainly was not written by an economist. The right hon. and learned Gentleman had nothing to say about what a Labour Government—should there ever be one—would do.

Other things, too, are different from what they were 10 or 12 years ago. If inflation had been 7.5 per cent. in those days, it would have been regarded as a triumph, not a disaster. In those days, our rate of inflation was not two, three or four points above the average of our competitors, but 12, 13, 14 or 15 points above. Of course, our trade gap was not so large then, but not all the mischief had come to pass in terms of the trade gap.

I know that Opposition Members do not like to be reminded of the damage done to our car manufacturing industry in the 1960s and 1970s. The repair work began in the 1980s, but it will not pay off fully until the 1990s. This year, some £6 billion or £7 billion of our adverse balance of trade is in respect of imports of motor cars.

The House will recollect that I announced in 1981 that Nissan had decided to bring a car plant to Britain—a statement that was not universally well received. There were claims that it would never get beyond the stage of assembling the CKD kits in a screwdriver operation. That was wrong. The local content at Nissan's plant is now between 70 per cent. and 80 per cent. Production in 1990 will be 85,000 vehicles and it will be 200,000 in 1993 with 50 per cent. for export. Toyota has announced its intention of following Nissan's example, not least because of some pretty nimble footwork by the Department of Trade and Industry and a great deal more realism, at any rate until recently, by some of our trade unions.

Citroen and Peugeot are expanding production here as is General Motors. I hope that Ford will do so as well, although there may be worries and doubts in Dagenham about that.

Mr. Rhodri Morgan (Cardiff, West)

Has it occurred to the right hon. Gentleman that all the foreign investment in the car industry will require remuneration by dividends, which will return to the country that provided the capital, and through the research and development content of those cars reverting to the centre where that research and development is carried out? Has the right hon. Gentleman considered the adverse effect on the balance of payments of those dividends and capital repayments?

Mr. Tebbit

Of course I have, and the hon. Gentleman should not be surprised about that. The hon. Gentleman forgets that the trade union movement did so much to destroy the indigenous British car industry and left it open to foreign companies to seize the opportunity to come to this country and replace it. I doubt whether the hon. Gentleman's constituents worry too much about some of the profits going out of this country when they have good jobs which would not otherwise have been available.

In the early 1990s, the £6 billion or £7 billion of adverse trade in motor vehicles will be steadily reduced, if not reversed. However, it takes a long time to repair the damage to our manufacturing industries from the late 1970s.

Of course, there are still difficulties, not least the present industrial action organised by the Amalgamated Union of Engineering Workers in support of a claim for a 35-hour week. For British engineering workers to believe that they can produce in 35 hours what the Japanese and Americans take 40 hours and the Germans 37 hours to produce is unrealistic to put it mildly. If the 35-hour week claim is conceded, to meet the huge order books of firms such as British Aerospace and Rolls-Royce—both infinitely more successful now than in the 1970s—would require a jump of 10 per cent. in productivity or an increase in overtime working, at premium rates which would simply add to our costs, lose business, worsen our deficit and add to our problems. Yet that is what Opposition Members support.

Neither Bill Jordan nor Gavin Laird are so stupid that they do not know the consequences of the unions' demands. They serve their members ill by forcing on successful companies demands which would reduce the ability of those companies to compete overseas. This may be an appropriate moment to remind my right hon. and hon. Friends of the extraordinary tax treatment of the income which will be received by those on strike in this dispute. They will receive a benefit of £ 150 per week, which apparently is not subject to tax. Because it does not arise from employment and is not a dividend, it does not qualify for income tax. By anyone's standards, it must be income and should surely be taxed. I hope that my right hon. Friend the Chancellor will therefore ensure that it is taxed.

Mr. Harry Ewing

Will the right hon. Gentleman give way?

Mr. Tebbit

I am sorry, but I will not give way. Hon. Members have been enjoined to make short speeches and the hon. Gentleman will no doubt wish to make his own speech in due course.

As I said, not everything is the same as when the Opposition of the day forced debates on the economy more than 10 years ago. In those days, the Government took great pride in informing the IMF, under whose tutelage the right hon. Member for Leeds, East (Mr. Healey) became a monetarist—I am not sure whether he is still a monetarist, particularly in view of what the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) said a few moments ago—that the standard of living in Britain was being reduced and would continue to be reduced to deal with the economic problems facing a Labour Government. Today, the standard of living has never been higher. That has not been disputed by any hon. Member today, and I doubt whether it will be because it is beyond dispute.

Mr. John Battle (Leeds, West)

Will the right hon. Gentleman give way?

Mr. Tebbit

No, I will not give way. The hon. Gentleman may speak later. Hon. Members were enjoined to make short speeches.

Prosperity and the availability of credit have greatly increased personal indebtedness. At the same time, however, my right hon. Friend has been paying off public debt and has a substantial negative borrowing requirement—again a change from 10 to 12 years ago. What is more, despite some claims to the contrary, I believe that my right hon. Friend the Chancellor is still a monetarist. [Interruption.] My right hon. Friend is not here, but I think that he would hold his hand up to that one.

There are many other differences. For example, we have just had our 37th consecutive month in which unemployment has fallen. During the past decade, Britain has acquired an extra £100 billion or so of privately owned overseas assets which, I remind Opposition Members, are generating a flow of income back to this country—exactly the opposite of what the hon. Member for Cardiff, West (Mr. Morgan) criticised about the Nissan and Toyota deal. Industrial and commercial investment are at high levels. Productivity growth and corporate profitability are strong. The drain on the public finances of many of those old money-losing laggards such as British Steel and British Leyland, to name but a couple, has ended. Indeed. those companies are now contributing.

British Telecom, for example. has not only held its prices—they are well below the rate of inflation—hut, last year, returned more than £1 billion to the public purse in corporation tax dividends and interest, and it has a massive programme of investment of a kind that it never achieved when it was in public ownership.

In the 1970s, the official Opposition, then led by my right hon. Friend the present Prime Minister, set out alternative policies. Today the Opposition have declined to do so with, of course, two exceptions. We have been told about Labour's new-found enthusiasm for entering the exchange rate mechanism of the EMS. I find the controversy over British entry less than thrilling. I doubt whether being in or out would make much difference one way or the other. It certainly would not exclude us from taking the tough decisions that need to be taken and doing the things that need to be done to run a successful economy.

Labour Governments and Labour parties have always had to have some sort of mystical solution to economic problems. In the old days which I remember and, indeed, one or two Opposition Members remember, that mystical answer to all our problems was the prices and incomes policy—the social contract. We heard nothing about such matters today. Is there still to be a social contract in Labour's policy, or was that something else that they tried, found not to work and eventually junked? Alas, it has all gone into the waste bin.

What is the new gimmick? It is industrial training, which is needed and certainly desirable, but I am afraid that the engineering strikes which the Opposition support will more than outweigh any possible gains from any conceivable programme of industrial training. What else have the Opposition to offer today? There are no import controls on offer—they, too, have gone. In the new-found enthusiasm for Brussels there will be no talk of import controls. Indeed, this must be the first debate of this kind in which the Opposition have firmly and officially denounced import controls as unnecessary and impossible. Good old Jacques Delors is having some effect somewhere at least.

Credit controls are the in thing now, but when we ask how they work the answer is not so much mystical as misty —indeed, it is thoroughly foggy. The right hon. and learned Member for Monklands, East now has another concept—a social contract not with the AUEW and NUPE but with Barclays and NatWest. They are his social partners now. He says that they will be more reliable and responsible than the old trade union leaders. I am sure that is so, but what would it amount to if it did work? It would mean that credit would be rationed not by price but by nudge and wink. How would the Government ensure that the right people got credit if it was rationed? They would need more controls. People would have to be told, "No, you must lend to him, but not lend to him, and if you don't do that we shall somehow do something nasty to you." You, Mr. Speaker, will remember the debates at the end of the Labour Government's period of office. Many hon. Members remember them. The Ford motor company was getting that sort of treatment, and it was one of the contributory factors to the downfall of the last Labour Government. Labour Members do not learn very much.

I am told, however, that the Labour party has now even abandoned changes in the tax system. The right hon. and learned Gentleman and his hon. Friends are fast boxing themselves in. I take it that the right hon. and learned Gentleman stands by his pledge that if we had a Labour Government we would never have an income tax rate of more than 50 per cent. I take it that that is so—the right hon. and learned Gentleman is a little quiet. I take it also that he backs his hon. Friend the Member for Copeland (Dr. Cunningham), the Opposition spokesman on the environment, who assured me in a television interview with my friend, if I may allude to him thus, the hon. Member for Great Grimsby (Mr. Mitchell), that the 50p would actually include local income tax. The right hon. and learned Gentleman is beginning to box himself in. I take it that he stands by his pledge that a Labour Government would not extend VAT, increase the 15 per cent. rate, or end zero rating. I am happy to allow him to intervene to say whether he stands by those pledges. All the past pledges on social contracts, import controls, high rates of tax, direct control over borrowings and so on have all gone, and the right hon. and learned Gentleman has put nothing in their place.

Today, in effect, my right hon. Friend the Chancellor once again said that there is no alternative. On today's showing, if there is an alternative, the Opposition are determined that it should remain totally shrouded in mystery. The right hon. and learned Member for Monklands, East was right to make the point that my right hon. Friend the Chancellor let that long unbroken expansion of the economy go too fast last year. Of course, those who blame him are almost without exception those who at the time wanted him to cut interest rates further and to raise public spending, too. Had they been in charge, we would have had a problem not of 7.5 per cent. but of nearer to 17.5 per cent. inflation.

There have been some changes over this decade—changes that I have described and they are very much for the better. One thing, however, is for sure—that when a long period of growth gets somewhat out of control and becomes a boom which is not sustainable in the long term, the same old unpalatable medicine is the only one that works, and that is interest rates. My right hon. Friend the Chancellor will undoubtedly take a bit of a pummeling today as he has done in recent weeks, and as he will do for some weeks to come, but as growth resumes and inflation and the trade gap fall, as they most certainly will, it will be my right hon. Friends the Chancellor and the Prime Minister who will have the last laugh—and that is indeed different from what happened at the end of the 1970s.

6.9 pm

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

Perhaps it was too much to expect of the right hon. Member for Chingford (Mr. Tebbit), but surely it was not too much to expect that the Chancellor should admit that there is a serious problem and that this country's trade deficit is something about which he is at least embarrassed, because he should be seriously worried. People in the country would think rather more of Conservative Members if they conceded that, and tried to seek the co-operation of the country in doing something about it.

I noticed that the Chancellor left the Chamber a little while ago, bundling up his papers and disappearing. I wonder whether he had a call from the Prime Minister in Kuala Lumpur and whether a press conference has been hastily arranged to reinterpret something that he failed to get right in his speech this afternoon. Whether in Kuala Lumpur dealing with foreign policy or in Downing street dealing with economic policy, the Prime Minister increasingly resembles a demented football manager who, not content with shouting reprimands from the dug-out, rushes on to the field waving her handbag and attacking the players, changing the rules as she goes along. That makes for an impossible position in which to discern any coherent economic policy.

It was the present Leader of the House, when he was Chancellor of the Exchequer, who said that the essential condition for maintaining confidence is a Government determined to maintain the right monetary and fiscal policies. Nobody really knows what the monetary and fiscal policies—especially the monetary policies—of the present Government are. The reason we do not know is the standing disagreement between the Prime Minister and Professor Walters, on the one hand, and the Chancellor of the Exchequer, on the other.

The Prime Minister and Professor Walters, who increasingly resembles Boswell to the Prime Minister's Johnson—interpreting her sayings and advising the world about whether she agrees with his various pieces of advice—do not want to buck the market. They do not want EMS entry and believe that interest rates should change in response to MO. Thus arose the dispute over shadowing the deutschmark, and the recent dispute over the Chancellor's £2 billion intervention to prop up sterling. On the other hand, the Chancellor wants a strong pound and believes that changes in interest rates should be aimed at supporting sterling. He wants to enter the exchange rate mechanism.

The whole economy is suffering from the Prime Minister's Euro-prejudices. She is determined to keep us out of the exchange rate mechanism for as long as possible. I defy the Chief Secretary to tell us in his reply when, on any reasonable calculation, the conditions that the Prime Minister has set can be satisfied. Those conditions include getting inflation down to the level of our European partners, and not only achieving the removal of exchange controls, for which there is already a timetable, but waiting to see the effect of the removal of those exchange controls. When will we be able to join the exchange rate mechanism? Surely, according to those conditions, it will not be this side of the end of next year. However, Britain could benefit now from lower interest rates if we were inside that mechanism.

The immediate effect of this dispute is that no one knows whether changes in the money supply, narrowly measured, or changes in the value of sterling will be the trigger for changes in interest rates. There is therefore confusion and a loss of confidence in Government policy generally. When one adds to that the trade deficit, one is led towards a great exposure to risk—a risk for all borrowers, mortgage buyers, home owners and small and medium-size businesses.

In such an atmosphere there will be more, not fewer, occasions when sterling is tested because of a loss of confidence. Therefore, the Chancellor has to resort to the interest rate weapon again. How many times can he use the interest rate weapon, and how far can he take it in response to the pressures which his policies have helped to generate? While confidence is low, interest rates will only rise. That is the grim message for the British economy and people unless we see some changes.

During the debate, the Chancellor has been teased about whether he is still a monetarist. Clearly, he is beginning to fail the monetarist test. When I questioned him on Thursday at his own Question Time, he was unable to answer the question whether the money supply or the pound is determining his interest policy. However, he had redefined his policy by the evening in a carefully worded section of his Mansion House speech, stating: We cannot allow the necessary rigour of monetary policy to be undermined by exchange rate weaknesses". One can interpret that how one likes, but it seems to mean that the exchange rate and pressure on the exchange rate will determine further rises in the interest rate.

How can one have confidence in a Chancellor who, in the space of one week, has said that the largest trade deficit in our history is not a problem and that he would never devalue the pound after 10 months when sterling has fallen 1 per cent. per month? How can one have confidence in a Chancellor who says that the economy is simply catching its breath or that the Government's job is to see that there is not too much money, yet who was responsible for all the mistakes of last year's Budget and the compounding of credit expansion through his measures on mortgages? I refer, for example, to his decision to allow a period within which people could take out multiple mortgages, and which would end on a stated date, 1 August. Clearly, that had a vicious effect on the spiralling house market, which started in London, and then went throughout the country and which has only lately come to an end. It had a powerful effect on expanding the private money supply, which has been a major factor in the economy over the past year. One does not need to go through the grim figures of the trade deficit to recognise what a serious problem that represents.

We have sought to argue that there is an alternative to all this. That alternative requires, first, that we enter the exchange rate mechanism to gain the stability and discipline that it provides. It is my belief that even the announcement that we are determined to join at an early date and that the conditions that I have mentioned will not be used to prevent us from doing so would in themselves bring a degree of stability. If we are successful in that object and in entering the exchange rate mechanism and, even in the course of doing so, being enabled to have lower interest rates—because that would be the effect—we cannot leave it there.

One of the failings of the speech made by the right hon. and learned Member for Monklands, East (Mr. Smith) was that he seemed—it was not entirely clear—to be moving towards membership of the exchange rate mechanism. He did not appear to recognise that one cannot stop there. We need to have other counter-inflationary policies if we are to experience the lower interest rates that so many people want.

To do that, a tighter fiscal policy will be required at least initially and there are two ways of doing that. The first would be by the Government's favourite method, which is to slash public expenditure. However, that is the last thing that one should do if there are—as I believe there are—important things that could be done to improve our competitiveness by spending money on research, on training and on some of the things listed in the Opposition motion, with part of which I agree. If we begin to cut such expenditure, we will remove our ability to do anything about the trade deficit.

We must therefore look to taking money from the economy by other means. That is why we have argued that the Government should, if they are able to achieve lower interest rates through EMS membership, remove the ceiling on employees' national insurance contributions because that would remove a significant amount of money from the economy. At the same time, the Government should carry out a number of other tax reforms, such as removing mortgage interest relief at the higher rate. It is absolutely crazy to give the largest housing subsidy to those who are on the highest rate of tax. It makes no sense. Those two measures between them could have a significant counter-inflationary effect. There should also be an announcement that next year's Budget will not be a tax-cutting Budget. The pledge that the rate of income tax will be reduced to 20p in the pound should also be abandoned.

The Chancellor dwelt heavily on savings, but he has still not devised an instrument that would provide a good tax incentive for saving. Paradoxically, high interest rates by themselves do not provide a sufficient incentive to save. The Chancellor must involve more people in saving. At the end of his Mansion House speech he said that people seemed to have lost the habit of thrift. Why does he not set about encouraging thrift with something more ambitious and exciting than the limited personal equity plan schemes?

Mr. Tebbit

I wonder how far the hon. Gentleman will go down that road. Does he accept, for example, tha.t allowing dividends and investment income to have a lower rate of tax than is standard would be desirable, or is he thinking of a bureaucratic system, rather than something that could make people feel that it is worth their while to save and invest?

Mr. Beith

The trouble with the right hon. Gentleman's suggestion is that it would give an uncovenanted benefit to very many existing shareholders without attracting more people in. That is why I have argued that we should build on what the Chancellor has already done with PEPs. We should front-end that scheme. We should make sure that tax relief is available at the point of entry. We have had that argument in previous debates, but I believe that we would have widened the range of people saving through that kind of scheme.

We have also argued that funding policy should be changed. It is interesting that the Chancellor devoted about a quarter of his Mansion House speech to saying that the Government could not go back to overfunding but then, in the small print, admitted, in a quiet way, that that would be done, in a limited way, month by month, over the rest of this year.

In present circumstances, it does not make sense for the Government to be repaying debt so heavily and thus maintaining a large gap between short and long-term interest rates. If interest rates are supposed to make industry leaner, tougher and fitter, why is the impact concentrated on smaller businesses which pay higher interest rates? Why are they, and not those businesses that have access to long-term interest rates, bearing the burden?

The House enjoyed a good speech by the right hon. and learned Member for Monklands, East, but he missed the opportunity to spell out more precisely whether the Labour party would be prepared to join the EMS at an early date. Both parties are trying to accommodate disagreements about whether to join the EMS by setting out conditions to determine when they might join. I have argued that that is true of the Prime Minister's conditions, and it remains true of the conditions set out by the right hon. and learned Member for Monklands, East and it is certainly true of the additional condition set out by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), who chairs the Public Accounts Committee, who suggested that an independent Bundesbank was an obstacle to British membership of the EMS. There will continue to be an independent Bundesbank, and if we had more central bank independence in this country there might have been more effective discipline than there has been here for the past 20 years.

Mr. Alex Salmond (Banff and Buchan)

Does the hon. Gentleman have any conditions for his policy of joining the exchange rate mechanism?

Mr. Beith

I believe that this country's interests would have been best served if we had been in the EMS some time ago and it is worth negotiating our way into it now. Any Government will negotiate their way in. I am arguing about the conditions set by the other parties, because they appear to be designed to be obstacles to entry, or intended to appear so to at least some of their supporters. The right hon. and learned Member for Monklands, East speaks as an enthusiast, but there are hon. Members who do not share his enthusiasm.

Mr. Christopher Gill (Ludlow)

Will the hon. Gentleman give way?

Mr. Beith

No, I am trying to be brief and I have given way twice.

EMS is not the only area of disagreement. I listened with great interest to what the right hon. and learned Gentleman said today about credit controls because he has almost entirely moved away from them. Initially, we thought we were being offered controls on credit cards, then there was the possibility of special deposit and controls on new mortgages, which were spelled out quite clearly by the hon. Member for Dagenham (Mr. Gould). Now we are being offered something resembling a proposal which these Benches argued for more than a year ago—that the Government could seek the co-operation of banks and financial institutions to restrain their lending.

More than a year ago we argued that the most helpful approach would be for the Government to encourage institutions to restrain high pressure advertising of credit. That could have been done. The Governor of the Bank of England has gone some way towards doing that since then because the pressure that has been put on people to obtain credit has been ludicrous and is inconsistent with the Government's arguments.

Mrs. Teresa Gorman (Billericay)

Will the hon. Gentleman give way?

Mr. Beith

No, I must draw to a conclusion. I have given way several times.

The right hon. and learned Member for Monklands, East has moved rapidly on credit controls because I suspect he realises that most of those advocated are nonsense. They will not work, and they are likely to bear heavily on those most dependent on credit, rather than those who have the discretion and the ability to seek credit elsewhere if controls are introduced.

A lot of ambiguity about fiscal policy remains. Will it need to be tightened and, if so, how? What about exchange rate policies? Does the Labour party want sterling to fall? If so, how far?

The motion is full of good stuff; I agree with every word of it. It makes some good suggestions about the steps that we need to take in, for example, training and research, and its analysis is accurate as far as it goes. However, it reminds me of a school maths book. The teacher's copy has all the answers bound in the back, but the pupils never have access to those copies. On the Order Paper we seem to have the version without the answers in the back. I refer particularly not to long-term issues, but to the immediate economic management of the economy and how we deal with the precise problem which Labour has placed before the House today—the effect of interest rates on our economy. High interest rates are very damaging. If we join the EMS properly, we can get interest rates down; but if we do that we must take other steps to ensure that inflation is under control. The absence of any discussion of those issues in the motion calls into question whether the Labour party has addressed those problems at all.

6.24 pm

Sir William Clark (Croydon, South)

There is one danger for the economy in this debate and that is that there are too many people speaking gloom and doom about our economy, whether in the media, the press or the Opposition. They are talking down sterling and that does not do the country any good. We have to show confidence in our economy, and I hope that I can prove that to the House. We have had ups and downs, but the underlying basis of our economy is sound.

The right hon. and learned Member for Monklands, East (Mr. Smith) made great play of the so-called rift between No. 10 and No. 11 Downing street. This lie must be nailed. If there were a rift, in my opinion—I am sure that my right hon. and hon. Friends will agree with me—in no circumstances would the Prime Minister go along with a policy with which she did not agree. Nor would the Chancellor of the Exchequer. Therefore logically, there can be no rift.

Sir Alan Walters, who is a part-time adviser to the Prime Minister, holds the position of a senior civil servant. He should conform to the same rules and regulations as a senior civil servant, and he should not make public statements or write articles for the public to read because it confuses politicians and the markets. It is essential that we have stability in the markets and no confusion.

Mr. Ian Gow (Eastbourne)

I have been following my hon. Friend's argument closely and I wonder what substance future speeches by the right hon. and learned Member for Monklands, East (Mr. Smith) will have if the professor follows that period of restraint that my hon. Friend has recommended.

Sir William Clark

That is an interesting point. I shall let my hon. Friend answer that for himself when he makes his speech.

The Opposition motion rightly draws attention to our present high interest rates. As my right hon. Friend the Chancellor said, all countries have recently put up interest rates. We have had to increase our rates, and are in front in that respect. because our economy was growing too fast and had to be slowed down. High interest rates have curbed spending, which is now on a plateau and will come down. High interest rates, as hon. Members have already said, have stopped the property boom and have helped to keep up the price of sterling. Consequently, they have helped to ease inflationary pressure on imports. It has been said that high interest rates help the saver, but I shall return to that.

The Opposition motion talks about the 7.6 per cent. inflation rate. As a politician, I have no right to be cynical, but I think that the Opposition have a nerve to criticise a rate of 7.6 per cent. when they were clever enough to get it to 27 per cent. Consider the effect that that had on pensioners and people with small invested incomes. It is disgraceful that, within three years, their savings were decimated.

The Opposition talk about hardship for home owners. That is a conversion; some years ago they did not like home owners. For example, they talked originally about taking away houses from those who bought them under this Government's successful sale of council houses. Now they have changed their minds because they know that there are millions of votes there. Let us make no mistake—a Socialist Government would still give priority to council housing. Owner-occupiers have independence, and the Opposition do not like that.

The Opposition criticise the Chancellor for using high interest rates alone to control the economy, but they overlook the fact that public expenditure has been controlled. I welcome the fact that the Exchequer is not taking as much of the GDP as it did in 1979. Such public expenditure control is another way in which the inflation rate has been made to come down.

The Opposition criticise the level of industrial investment, but this year it is up 15 per cent. Companies are more profitable. If one considers the tax structure of companies today, it is clear that corporation tax is much lower than it was under Labour. Let us consider the liquidity of companies. In 1980 bank borrowing by companies represented some 45 per cent. of those companies' equity in the market. Today, that figure of borrowing is down to 28 per cent. That means that industry has more money to invest and has more money to put into production.

The economy is buoyant and politicians on all sides should, occasionally, talk about the achievements of the country—not necessarily those of the Government. The economy has turned round. We should avoid talk of the Opposition and the Government. I accept that the Government have set the scene, but the economic buoyancy has been created by the country. My right hon. Friend the Chancellor told us that 1,200 new businesses start up each week. I accept that some businesses fail, but the net figure still stands at 1,200. That must be good.

Unemployment is down and the number of people employed is the highest that it has ever been. The Labour party has said that if it were in government it would operate credit controls. My right hon. Friend the Member for Chingford (Mr. Tebbit) has already said that the Opposition envisage some sort of social contract with the banks. That may be all right with the British clearers—one may have a reserve lending ratio if one wishes—but one cannot control foreign banks like that. What is their capital? It is easy to say what the capital of British clearers is and what the ratio should be, but how would one evaluate the capital of, for example, Chase Manhattan or the Japanese banks in the City? The credit control advocated by the Opposition is absolute rubbish.

One of my hon. Friends has already asked why a Government should prevent a citizen from borrowing money. Those who lend the money—banks or other financial institutions—will stop lending money when the bad debt ratio gets so high that they cannot afford to lend.

Mr. Tebbit

Does my hon. Friend agree that if such banking controls could be imposed in Britain it would be almost inevitable that banks in places such as Gibraltar and other places where we have had little problems with banking organisations would get into the credit market here and would lend to the most vulnerable people in that market on terms entirely outside the control of the Government's legislation to protect consumers?

Sir William Clark

My right hon. Friend is absolutely right. One would have a proliferation of what is known as offshore funds and Gibraltar could be the centre for such operations.

My right hon. Friend the Member for Chingford made an extremely good point when he discussed the car industry. He related the history of how that industry went down and how it has now been built up again. The car industry is part of the cause of our balance of payments deficit. My right hon. Friend is right that it will not be until 1990–91 that available cars will come on stream for sale here and for export. It is worth noting that 75 per cent. of our imports are accounted for by capital goods.

Under the Government our gold and dollar reserves are some £27 billion. My right hon. Friend the Chancellor told us that, last month, our exports went up by 13 per cent. That figure included oil, but if oil is taken out exports still rose by 8.5 per cent. Exports are at an all-time high. It is true that imports went up by just over 4 per cent., but they are flattening out.

During the past two years the policy followed by my right hon. Friend the Chancellor has resulted in some El 7 billion of the national debt being repaid. In the same period nearly £4 billion has been saved in interest. I remind the House that that is equivalent to nearly 3p off the standard rate of tax. That saving will be made not only this year, but in coming years. However, my right hon. Friend should be wary of repaying too much of the national debt. If a future Government did not have the national debt—I am exaggerating slightly—it would be so easy for them to borrow money that a profligate Government would soon lead us into the high spiral of inflation.

The autumn statement will soon be published. As soon as that happens everyone will become a mini Chancellor of the Exchequer. Everyone will have his own ideas about how the next Budget should be formed. The hon. Member for Berwick-upon-Tweed (Mr. Beith) offered two suggestions: to negotiate to join the EMS immediately and to increase taxation. The Prime Minister and the Chancellor of the Exchequer have made it perfectly clear about our joining the EMS—[Interruption.] I am sometimes worried by the Opposition; they start laughing before they know what I am about to say. Opposition Members should listen to the facts before they distort them.

My right hon. Friend the Chancellor has made it perfectly clear that we are the only country in the European Community that has complete freedom of exchange control. As soon as all the others have freedom of exchange control the playing fields will be level and, consequently, that might be the time when we should join the EMS.

I do not believe that the Chancellor should rule out tax cuts in the next Budget. In common with the hon. Member for Berwick-upon-Tweed, however, I would like a super boost to be given to savings. Last year my right hon. Friend increased the personal equity plans—PEPs—which are equivalent to new savings. I would like a tax-cutting Budget together with a savings Budget that would give an incentive to saving. I do not necessarily agree with my right hon. Friend that investment income should be at a lower rate because, as the hon. Member for Berwick-upon-Tweed rightly pointed out, that would affect people now. We want new savings and that can be achieved only by allowing contractual savings to be set off against one's income vis-à-vis the "Loi Monery".

Although my right hon. Friend the Chancellor and his team are pilloried and criticised by the media—in many cases quite wrongly—no one in the House or in the country can say that the Government do not stick to their policies. There are no panic measures and I assure the House that there will be none in the future. We have been down this road before in 1985 when we had to increase interest rates. That increase was responsible for bringing down the rate of inflation.

I am convinced that the medicine prescribed by my right hon. Friend is the right sort. My advice to him is, for goodness sake, do not change policy. It will work today as it worked in 1985.

6.39 pm

Mr. James Molyneaux (Lagan Valley)

For the benefit of the next speaker whom you, Mr. Speaker, may call, I shall be brief as usual and set a good example to him.

Leaders of minority opposition parties face the temptation of indulging in the luxury of irresponsibility in the sure knowledge that they will never be called upon to form a Government or serve in a Government. However, in response to what was said earlier, may I say that if we were ever to form a Government we could be depended on to be consistent. In response to what the Opposition spokesman said, let me point out that we would mean what we said.

The current minority Opposition party leaders can, if they wish, advocate policies which are capable of attracting short-term popularity without worrying about the need to be consistent. A new factor has entered into the equation and the two main forces in Parliament—Government and Opposition—have somewhat relaxed the requirement to be consistent. The party which I lead has seen its consistency rewarded by being branded as inflexible and stubborn. We would plead guilty to such charges on the subject of today's debate.

Ten years ago we welcomed the Treasury's conversion to the concept of the floating pound. I know that lip service is still paid to that concept. We have to ask why the Treasury and not the Government is trying desperately to control the exchange rate of the pound. Formerly, the manipulation took the form of artificially forcing the pound down to placate the Americans. This autumn we appear to be doing the opposite to please the Germans.

These contradictory policies seem to have given us the worst possible result, which is hardly surprising. Inflation has been fuelled by flooding the economy with fresh money and we are now crippling industry and business by raising the cost of credit. Unfortunately, it is, as usual, small companies and businesses which suffer most grievously. As a nation we do ourselves a grave disservice by blindly refusing to recognise that these troubles stem directly from a crazy desire to manage the exchange rate of the pound.

The Treasury simply has to shake off what is no more than a superstition that if the pound floats downwards the consequence will be higher inflation. The Treasury must refrain from cheering on its champion in his duel with the Bundesbank which should be seen as a totally irrelevant tussle and not a test of economic virility. I do not agree that any advantage would accrue from our joining the EMS. Our entry would not prevent wide fluctuations in our economy but would simply necessitate higher than average interest rates. The effect of that would be to punish non-exporting industries and companies, in particular. The Opposition spokesman, the right hon. and learned Member for Monklands, East (Mr. Smith), did not make it clear why, if we joined the EMS, we should expect European banks to take orders from the Treasury. It would, as usual, be the other way round and we would be subservient.

In recent weeks and days, and today in this Chamber, many have asked what the Chancellor can do to reduce inflation. I do not know whether his attention has been drawn to the advice tendered to him about two weeks ago by another Ulster Unionist, Enoch Powell, who in a speech at Milton Keynes said: The candid answer to that question is: 'nothing whatsoever'. The money splurge created by easy credit eighteen months ago cannot be counteracted by over-tight credit now. We simply have to sweat it out while the flood of new money, of which the creation was permitted and even encouraged by easy credit last year, in the endeavour to rig the sterling exchange rate downwards, will have worked its way gradually through the system into final prices. I would differ from the Chancellor, who seems to have taken a different approach. He seems to be waiting until interest rates have worked their way into the final prices.

It is depressing to see the recurrence of the industrial disputes of former times. We must face the fact that those are the consequence of inflation and not the cause. It simply will not do for all of us to set out on a course of industrial conflict and contemplate with bogus fortitude endless strikes and disputes. I trust that hon. Members, particularly on both Front Benches, will remember that it was precisely that misguided course which destroyed the Labour Government in the late 1970s.

6.45 pm

Mr. Terence L. Higgins (Worthing)

I shall begin by drawing the attention of the House to a mystery: who drafted the Opposition motion? Clearly it was not the shadow Chancellor, the right hon. and learned Member for Monklands, East (Mr. Smith), who made a number of interesting points in his speech, none of which appears in the Opposition motion. He began by saying that we must not forget the unemployed; but that is precisely what the Opposition motion does because it makes no mention of the unemployed. That is scarcely surprising because, happily, the unemployment figures have been improving for a considerable time.

The shadow Chancellor went on to discuss at some length the European monetary system and its exchange rate mechanism. However, there is no mention of either of those in the Opposition motion. If hon. Members had hoped that he would elucidate the basis on which a Labour Government might join the exchange rate mechanism, they—particularly Government Members—would have found his speech unilluminating, certainly in relation to the rate at which we would join.

The shadow Chancellor talked at considerable length, and with a degree of innovation, about credit controls, of which there is no mention in the motion. "Credit controls" is not quite the right expression because apparently a Labour Government, if one should ever come to power, would encourage the banks not to expand the amount of credit. In an intervention the legality of this matter was raised. We must consider carefully the responsibility of the banks to their shareholders. If we were to have credit controls in the strict sense, the banks would have some defence against their shareholders saying that the banks were not doing as well as they might for their shareholders. However, the idea that this might be done through back-door persuasion raises difficult questions.

However, as a number of my colleagues have pointed out, such an idea is completely out of date because in a system of open economies without exchange controls it is simply impossible to achieve that degree of control, or even persuasion, over the international banking community. If nothing else, there would be no means of preventing overseas banks which had no base in this country from refusing to give credit to a person in this country who wanted a loan. Therefore, a mystery surrounds that matter.

I shall turn to broader issues and put the debate into context. It is clear that we are suffering from a hangover from the stimulus given to the economy as a result of the stock market crash in the autumn of 1987. Finance Ministers throughout the world took the view that in order to prevent a world recession it was necessary to stimulate each individual economy. At that stage no hon. Member, with the exception of my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), who I do not see in his place, objected to that.

That stimulus did not extend to the measures which the Chancellor put in the Budgets, both the one following the crash and the next one, which have produced the largest fiscal surplus we have ever had. Unfortunately, no hon. Members perceived the extent to which Britain's economy was already accelerating. After a long period of sustained growth we must bring that growth down to manageable limits. Essentially, that is the problem facing the Chancellor of the Exchequer.

I do not accept that by using the instrument of interest rates the Chancellor is, in a sense, a one-club golfer. He is also using fiscal policy on a massive scale, and that sets the framework within which monetary policy is operating. To borrow a corny analogy, he is using a rate of interest putter but in the context of having previously used a fiscal policy driver. The effect of his actions in those respects is to slow down the economy in a satisfactory way.

In a good article, the Economist this week draws attention to the fact that retail sales in the three months to September were only 1.25 per cent. higher than they were a year earlier, which is the smallest increase in the last seven years over a 12-month period. On the other side of the equation, output is rising at about 4 per cent. so the overall result is that output is rising faster than demand is rising.

That is important for the balance of payments, and combined with the natural overrun when the economy is slowing down—of stocks building up at each level of production and at the point of retail sales—one has reason to believe that the balance of payments situation will come right. The figures today, unacceptably high though they are, give reason to suppose that the peak may have been reached and that, for the reasons I have given, matters are likely to improve in the future.

It has been important for the Chancellor to act by way of interest rates. Some people, including my right hon. Friend the Member for Shropshire, North (Mr. Biffen), have asked whether interest rates are being used for domestic internal inflation reasons or for international sterling reasons. While there are occasions when those two objectives cannot both be achieved by interest rates, I do not believe that to be the situation now. The domestic and expansion of credit issues to which I have referred, and the fact that higher interest rates keep sterling at a higher level than would otherwise be the case, work together to bring inflation under control. As that is, rightly, the Government's overall objective, the measures on interest rates which the Chancellor has taken have been appropriate.

Concern has been expressed about the fact that the object of the exercise must be to put a downward pressure on demand and that that, in turn, is bound to have an adverse effect on profits in a situation in which, as the Chancellor pointed out, profits are at their highest level for 20 years. That means that the normal effect of a downward pressure on demand and a building up of resistance to inflationary wage settlements will take a considerable time to work through. It is important for us to bear that in mind.

I share the concern of my right hon. Friend the Member for Chingford (Mr. Tebbit) about the situation facing the engineering industry. He referred to the claim for a 35-hour week, the shortest that would exist in any country. I remind my right hon. Friend—I had experience of this issue some years ago in Europe—that when people in Britain say they want a shorter working week they really mean that they want to be paid at a higher rate for doing more overtime. When, in any other country in Europe, people say that they want a shorter working week, they mean what they say.

It is important that inflationary wage claims of that sort should be resisted. Otherwise inevitably, and especially in the engineering industry, the repercussions of more profitable firms granting such increases are felt by other parts of the industry, and the effects in the west midlands and elsewhere are traumatic. That would be bound to have an effect on unemployment, a subject which, although it is not mentioned in the Opposition motion, was described by the right hon. and learned Member for Monklands, East as an issue that we should not forget.

Mr. Thomas McAvoy (Glasgow, Rutherglen)

rose——

Mr. Higgins

I will not give way because I am under a strict time restraint.

I come to the issue of the exchange rate mechanism. I do not believe that being members of that would have made a significant difference in the last month or so because the Chancellor took the measures that he would have had to have taken even if we had been members of the ERM at this time. I doubt whether we would have received any more co-operation from the Germans, and it is clear that what happened in that connection had severe repercussions on us.

Similarly, in terms of the longer term prospects for the exchange rate mechanism, let us not forget the argument for joining, which is that we would have a degree of currency stability within which various currencies would be held in relation to each other. I suggest that this is not the moment when it would be sensible for us to join because exchange controls in other countries have not yet been removed, and we do not know what effect their removal will have, when it occurs.

The French, despite all their misgivings—they are lagging 10 years behind us, yet they still say that we are not communautaire—are due to take off controls next July, and that would seem to indicate that it would be appropriate to join about next August.

One cannot predict these matters because, as we are well aware, situations can change and we cannot be sure at this stage what things will look like by that time.

However, whatever my views might be on stages two and three of the Delors report—there are variations of view about that—there seems now to be a strong case for us joining the exchange rate mechanism. I hope that at the appropriate moment, which is not now but which may be next year, such a step may assist our policy rather than act in the opposite direction. It was extraordinary that the right and learned Member for Monklands, East did not spell out the alternative. Nor is it mentioned in the motion. I suggest that overall, looking at the situation, the Chancellor responded appropriately in autumn 1987, and is responding appropriately now, to get us back to sustainable economic growth.

6.56 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch)

History will heap plaudits on the right hon. Member for Worthing (Mr. Higgins) for having chaired the Treasury and Civil Service Select Committee which produced the report on the Delors issue and which said in paragraph 28 that we should join the exchange rate mechanism of the European monetary system at an early date and go on to work towards the creation of a common European currency. When those plaudits are being given, most people will have forgotten that the right hon. Gentleman voted against the proposal. But I shall not be churlish and remind him of that fact.

I wish to behave in the debate as a consensus politician, as I usually do, and to make it clear that I go along with the new economic consensus that is arising. It is not a monetarist or neo-monetarist consensus. Nor is it a Keynesian or neo-Keynesian consensus. It is shared by, among others, Sir Alan Walters, the chief economic adviser to the Prime Minister, all the way across the spectrum to Michael Boskin, the chief economic adviser to the President of the United States. That new consensus says that the Chancellor's fiscal and monetary eccentricities can no longer be regarded as economic wisdom. Indeed, the Chancellor—to paraphrase Dr. Samuel Johnson—brings to economics the wisdom of the fool and the folly of the wise.

With the right hon. Member for Worthing, I have just spent a week in Washington. In private, politicans and economists there constantly asked me what was driving the Chancellor in his dispute with the Prime Minister. The simple answer is that the Chancellor is a fan of Damon Runyon and is very taken with that sexist male chauvinist pig of a character who, in "Take It Easy", explained his dispute with the women who lived nearby by saying: I do not approve of guys using false propositions on dolls, except of course when nothing else will do. Many of the Government's problems stem from the fact that they insist that bringing down inflation is the one important goal and that everything can be subordinated to that. It is interesting that in America, Michael Boskin, the chairman of the Council of Economic Advisers, disputed this. When someone made a sotto voce comment in reply to his answers he said, "Do I detect some editorial comment there, because if you are telling me that one should subsume everything to the control of inflation, that is advice that I would never give to the President of the United States." He became agitated and went on to explain that no one in his right mind would give that sort of advice—yet it is what the Government and the Prime Minister are doing. The great and the good across the Atlantic say that it should not be done.

There are two other problems with inflation. One is the dispute between the Chancellor and the Prime Minister over how we should deal with it. The Prime Minister, egged on by that strange economic guru Sir Alan Walters—every now and then he takes centre stage like some sort of demonic Rasputin—says that domestic monetary conditions are the critical factor. She says that they are tight enough not to have given cause to raise interest rates recently and not to give cause to raise them in the future. The Chancellor, by contrast, says that we must raise interest rates to keep the level of the pound up and import prices down.

We must get to the bottom of this. The Treasury and Civil Service Select Committee meets tomorrow, and I suggest that we call Sir Alan Walters before it. We heard today that he is only a part-time economic adviser, not a civil servant, so there is nothing that the Prime Minister or anyone else can do to stop Sir Alan answering our summons and spelling out all the details of his disputes with the Chancellor. I am sure that the right hon. Member for Worthing and other members of the Select Committee, who are smiling benignly, will agree to my proposal.

The other problem with inflation is that everything that the Chancellor does to deal with it is inconsistent with what needs to he done to improve the balance of payments deficit. I suppose that the Chancellor, who is as capable of contradicting himself as he is of contradicting the truth, believes with Emerson that with consistency a great soul simply has nothing to do. Just as some people attempt to rewrite history, the Chancellor attempts to rewrite economics.

On 27 September this year the right hon. Gentleman made a speech—he referred to it again today—to the IMF and the World Bank. In it, he argued, as he did from the Dispatch Box today, that balance of payments deficits do not matter very much and are in any case self-correcting when the growth of domestic demand falls below the growth of output. I have scoured the western world in vain to find someone who believes that balance of payments deficits of £20 billion—4 per cent. of GDP—are self-correcting and do not matter. Even if that were true—it is not—the Chancellor's statement poses the question: at what level of output and employment would the balance of payments deficit be self-correcting? The answer must be that it would be self-correcting only at a level that involved a considerable recession.

I do not ask anyone to take my word for this. I am prepared to plead my own mediocrity—[HoN. MEMBERS: "Guilty as charged."]—a lovely phrase that I used to hear in the law courts. I invoke some of the great figures of the Conservative party, beginning with the right hon. Member for Henley (Mr. Hese!tine). I thought that the right hon. Gentleman made a delightful speech at that fringe meeting at conference. I saw him on television; the mane was flowing, the voice was modulated, the adrenalin was running high, and he stood every bit like tomorrow's leader of the Conservative party. He scoffed at, he poured scorn on and he ridiculed the Chancellor's assertion that the balance of payments deficit did not matter and was self-correcting, and he begged the Chancellor to think again. There came a moment when the right hon. Gentleman's pellucid denunciation of the Chancellor became so brilliant that I began to feel sorry for the Chancellor, because, unlike Shelley, the right hon. Member for Henley not only pours venom out of his mouth whenever he speaks, he really can sting.

Recently I have been asking Conservative Back-Bench Members—I shall not name them because these conversations are confidential—whether they believe it right to say that these balance of payments deficits do not matter and are self-correcting. The standard answer that I have received across the ideological spectrum on the Conservative Back Benches is: "He may say it, but he certainly does not even believe it himself." I am looking at one of these Conservative Back-Bench Members——

Mr. James Cran (Beverley)

On a point of order, Mr. Deputy Speaker. If the hon. Gentleman was looking at me when he said that, we have not had a conversation about that point today or this week.

Mr. Sedgemore

As I am in the mood to appeal to ex cathedra figures, I appeal again to Michael Boskin, whom I asked this academic question. I told him that there are arguments to the effect that balance of payments deficits driven by the public sector can be cut only by cutting the budget deficit. The counterposing argument is that balance of payments deficits driven by the private sector—the Chancellor's argument—are self-correcting. Quite rightly, the adviser to the biggest economy in the world opined that the second argument—the Chancellor's—involves the cateris paribus fallacy. All hon. Members will know that every fifth former is told not to fall into the cateris paribus fallacy which, in economic terms, runs as follows: one can produce a savings and investment equation which shows that under some conditions a deficit can start to be self-correcting; but then, things would not be cateris paribus—income, output, employment, revenue and other variables would change.

So it is nonsense to say that a balance of payments deficit of this size is self-correcting. What can we do about it? I preface my remarks by saying that I believe that such is the scale of the problem now that we can deal with it—under any Government—only with a depreciation of the currency and with at least a mild recession. There is no point in Labour Members seeking to pretend that we can get out of the current mess without at least a mild recession. The problem is how to minimise the recession.

I began with a consensus; another consensus is growing about what we should do. The City of London, industry and her Majesty's loyal Opposition, including me—the soon-to-be loyal Labour Government—all believe that we should join the exchange rate mechanism of the EMS at an early date as a prelude to working towards a common European currency. We believe that that will give us some external discipline and that it will steady markets and give us some protection against speculators.

I have suffered barbs and jibes from people who have accused me of changing my mind and said that I am not in a good position to start lecturing them on this. The politician who cannot change his mind as the world crashes around him soon becomes an irrelevant bore. Things have changed. When I was young I was brought up on the theory of comparative advantage and purchasing power parities which worked through changes in the exchange rate, driven by the current account, on the balance of payments and internal domestic price levels. All this has gone and is irrelevant to the modern world. I say that to those on the Left of my party and those on the Right of the Conservative party. We do not live in that world any more and exchange rates are not driven by the current account.

Foreign currency is no longer primarily a medium of exchange. It is an investment vehicle that provides speculative opportunities. That is why £175 billion crosses the exchange markets every day—one third of it in London. I defy anyone to tell me what those speculators say about sovereignty. They do not care a damn about sovereignty or about what right hon. and hon. Members say. In the modern world, many politicians who preach sovereignty as a noble, democratic ideal are often engaged in base, populist politics.

I congratulate my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) and his colleagues on going to Germany to talk to the officials of the Bundesbank and to France, to talk to the members of that country's Government. They engaged in something close to negotiations about the way in which Labour would join the ERM if it were returned to power.

As British society views the sarcophagus of Thatcherism and looks over its dead bones, it is time for the Labour party to take up the reins of Government with fresh ideas, new hope and some vision.

Mr. Deputy Speaker (Mr. Harold Walker)

I remind right hon. and hon. Members that speeches should now be limited to 10 minutes' duration.

7.11 pm

Mr. John Browne (Winchester)

I enjoyed the speech of the right hon. and learned Member for Monklands, East (Mr. Smith). It was extremely entertaining and interesting. Although he did not provide specific details of future Labour economic policy, he gave some interesting pointers.

For example, he said that a Labour Government would bring in credit controls. That would stifle growth and enterprise. But who is to say that politicians are better equipped than entrepreneurs, business men and professional bankers to decide whether a certain loan is worth while in terms of growth, productivity and enterprise? Who is to say that politicians are better able to choose new products, penetrate international markets and internationalise product lines? Politicians cannot do that and political business experiments have in the past proved disastrous and went completely out of control. As the right hon. and learned Gentleman and my right hon. Friend the Member for Worthing (Mr. Higgins), Chairman of the Treasury Select Committee, both asked, who will umpire and control foreign banks on the basis that they exist in England?

Another interesting point arising from the right hon. and learned Gentleman's speech is that we would see political rather than market direction of investment. That would mean bolstering sick and dying industries and companies at the cost of healthy ones. That would initially lead to inflation. Under a Labour Government there would be at least a populist drop in interest rates until inflation took hold. The right hon. and learned Gentleman mentioned an "appropriate" rate for sterling for joining the ERM. To me, that means devaluation, again in favour of British industries and companies that are either ailing or very sick.

In all those policies, we glimpsed the prospect of a return to old-fashioned hyper-inflation. That prospect is not new to the international foreign exchange markets, which regard it as a potential threat to the value of sterling. They view any threat to this Government as a threat to the value of sterling. I term it the "Thatcher factor". The Thatcher factor accounts for between 5 per cent. and 20 per cent. of the spot value of sterling on the exchange markets—at least on an initial basis. If the Prime Minister is under threat for any reason—perhaps because of internal arguments or hyped-up articles in the press—the pressure on sterling increases relentlessly. When German interest rates rise by 1 per cent. we raise ours by 1 per cent.—but it is not enough because people continue to criticise the Government.

I notice that the people who are most violent in their criticism of the Prime Minister and her economic policy are those who immediately complain that interest rates are too high. Interest rates have had to be raised to defend sterling. The Thatcher factor should be borne in mind by people who, as my right hon. Friend the Member for Guildford (Mr. Howell) said, talk down sterling and our economy. To over-criticise has an enormous downward effect on sterling. The result is that people have to pay higher interest rates on their loans and mortgages. We must take that into account when making speeches, because it does none of us any good.

Any Government guiding our economy, with its history of inflation and its declining, relative productivity, must walk a tightrope. They must achieve disinflation without creating deflation.

It is an extremely sensitive tight rope because it involves the psychology of the consumer. To cite a hypothetical example, say that a family with a joint income of £20,000 keeps £12,000 of that net of tax. Say that they have a house valued at £50,000, which is increasing in value by 20 per cent. a year—[Interruption.] Opposition Members may laugh, but houses in many constituencies are worth at least that.

I venture that house prices in many areas are so high that many newly married couples cannot buy a home. My hypothetical family start to spend their £12,000 as though they had £22,000. They save nothing for a rainy day, thinking that they could always mortgage the house. That results in tremendous property-induced inflation of the money already available. That is not measured in terms of M3 or the money that is already in circulation. On top of that, the inflationary psychology is to spend as much as possible. If the Government changed their philosophy and house prices started to tumble, that family would spend their £12,000 as though it were £6,000—and we would have an enormous slump on our hands.

Economic management is a delicate business. In October 1987, there was a stock market crash. The Government, together with others, pumped a lot of liquidity into the system. Fortunately, at that time our economy was growing faster than most others. Therefore, there has been a much greater inflationary impact on our economy. We are now paying the price for it with high relative real interest rates.

High interest rates are tough. They are a blunt instrument, especially on first-time buyers. The main aim is to reduce inflation. However, they have some beneficial side effects. First, they benefit the saver. As my right hon. Friend the Member for Guildford said, we must help savers. I understand that there are about six lenders for every borrower in a building society.

High interest rates also encourage businesses to reduce excessive wage increases and to invest in increased productivity, rather than merely add to productive capacity.

I address now the question of whether we should join the exchange rate mechanism of the European monetary system—and if so, when.

Many supporters of the ERM see it as a panacea to protect sterling, despite inflationary and disruptive economic policies at home. I believe that it is no panacea and that wildly fluctuating exchange rates are an international problem—not only a problem for sterling. Fluctuating exchange rates are caused largely by a crucial flaw in the Bretton Woods agreement of the 1940s. The flaw was that when the United States of America dominated world economics, it had a huge surplus. It was built into the treaty that to run a deficit was an economic sin. To run a surplus was fine. There was a crucial and inherent imbalance in the Bretton Woods agreement.

Now that the United States is in deficit we hear a different story. It is said that the Germans and the Japanese are doing terrible things by having a surplus. This points to a structural matter that we must get right, and we need to do that urgently. We must make sure that it is seen as evil economically to run a surplus just as much as it is to run a deficit. They have to balance out on an international basis. Someone's surplus is someone else's deficit.

In that context I see the exchange rate mechanism and even the EMS itself as something of a cartel; even a deutschmark cartel. We have decided that the world has tremendous international problems on exchange rates. Let us form a club of European nations and we will sort it out among ourselves and leave the rest to stew. It is not inherently bad to do what the EMS is doing but it should be done on an international rather than on an isolated, European basis.

Therefore, the United Kingdom should not join the full exchange rate mechanism until, first, all members have free movements of foreign exchange and capital with no foreign exchange controls. Secondly, we should not join until the single European market of 1992 has been achieved with a free flow of goods, services and labour. Thirdly, we should urge the denationalisation of the central banks of all the member nations.

In the United States there were many largely autonomous states. Yet they accepted the US dollar. It was largely successful. It was gold-linked in its earlier days, which had an enormously positive effect on its original success.

Mr. Deputy Speaker

Order. I remind the House that arrangements have been made for hon. Members to be warned in advance about the termination of the 10 minutes allowed for speeches.

7.21 pm

Dr. John Reid (Motherwell, North)

I listened to the Chancellor's speech with a mixture of frustration, anger and amazement. I was frustrated by the complacency that he continues to show, angered because he was not prepared to accept any responsibility for the mess that we are in, and amazed that he still appears to believe in what he is saying and, more important, in what he is doing.

We have heard that the balance of payments deficit continues to grow and now stands at an annual rate of £20 billion, the highest in the United Kingdom's history. Over the past year interest rates have risen inexorably. They have been raised 11 times and now stand at 15 per cent., twice the rate of those in our major competitor, West Germany. The average British mortgage has gone up by £88 a month and in Greater London it has gone up by £162 per month. We have heard that 380,000 home owners are more than two months overdue with their mortgage payments, and that the economy is tottering on the knife edge of a recession and that investment—never high under the Government—is starting to fall.

What was the Chancellor's response? He told us that the gap in inflation between us and our major competitors has temporarily widened; it is another blip. The Chancellor has had more blips than Heathrow air traffic control. He told us about rising living standards and rising confidence and said that exports continue to do well. Presumably that is why we have a projected deficit of £20 billion. He said that "in time" inflation and interest rates will come down and that the balance of payments will be self-correcting. To misquote John Maynard Keynes, "In time we are all dead economically and otherwise."

The Chancellor was complacent and insubstantial. He said nothing about training or skills or about the need for a flexible response to the present crisis. He was so removed from reality when he talked about rising expectations, living standards and confidence that I expected his peroration to end with the words "and they all lived happily ever after." A Japanese financier on "Newsnight" last night and the British public realise that we are tottering on the cliff edge of a recession. Why in God's name does the Chancellor not realise that?

We cannot allow the Chancellor alone to take the blame because the Prime Minister is just as complacent. At. the Tory party conference in the middle of yet another interest rate crisis and with a chance to address the nation she took the opportunity to give us a cookery lesson. She told us, "You can't get a souffle to rise twice." As a cook she should also understand that we cannot get a wholesome economy out of a half-baked recipe. She should be even more familiar with the old cuisine adage that too many cooks spoil the broth.

Perhaps the right hon. Lady would like to put us all out of our misery by telling us which chef is responsible for the economic stew that we are in. Is it the resident and much-vaunted chef at No. 11 Downing street, is it the part-time pastry cook in the basement of No. 10, Mr. Walters, or is it old Mrs. Beeton herself, the Prime Minister? As they say in Private Eye editorials, "Surely we have a right to know since it is us who have to eat the damned product in the last instance."

Nowhere is that product more painful or unpalatable than in my part of Britain. The remedies designed to cool down an over-heated south-east economy are unpalatable enough in the south-east, but they are excruciatingly painful in a Scottish economy that has been, at best, lukewarm. Much of the industry in my constituency and my country has been industrially destroyed and is only just starting to revive. That is why when the Prime Minister comes to Scotland she is willing to talk about almost anything except the effects on Scotland of her economic policies. She came to Edinburgh and told us about the Bible and came to Glasgow and told us about Adam Smith. She came to Perth and told us about that well-known Scottish folk hero Julius Caesar. She said in what must be the most deranged piece of political rhetoric that I have heard for many years: If Julius Caesar were to land on our shore today he would have no hesitation in saying, 'I came, I saw, I invested.' I cannot believe that any of the Prime Minister's speech writers put that in, so she must have put it in herself.

Mr. Robert Sheldon

That cannot be true.

Dr. Reid

It is perfectly true; I double checked it.

I am tempted to observe that if Julius Caesar were to land on our shores today he would be amazed at how rapidly things could deteriorate since his time. If he were able to afford the poll tax and could get a safe ferry across the Channel and find a seat on a crowded north-bound commuter train, I am sure that he would turn back at Watford Gap because economically the north of Britain has declined tremendously over the past 10 years.

I shall give some statistics. In Scotland the effect of the Chancellor's mismanagement has been nothing short of disastrous, not just in mortgage payments, hire-purchase charges or investment, but in jobs. Recently in my constituency the firm of Terex, a thriving go-ahead company with a history of investment, was forced to make redundancies. It publicly laid the blame directly at the door of No. 11 Downing street and interest rate charges.

The story is the same throughout Scotland. An economy which was bruised, battered and bludgeoned for 10 years was on the verge of revival but has been pushed back into the quagmire. Is it any wonder when every 1 per cent. rise in interest rates puts an additional £40 million burden on the shoulders of Scottish industry? The 10 rises in base rate in the last 12 months mean that by 1990 Scottish business could face an extra £250 million in borrowing costs.

Mr. Cran

Will the hon. Gentleman give way?

Dr. Reid

Time is limited.

Is it any wonder that the latest figures from the CBI—and the Scottish CBI is the equivalent of the fifth column of the Conservative party—show that in the second quarter of this year investment in plant and machinery is down by 15 per cent. compared with the previous year and that investment in building is down by 11 per cent. on the previous year? Such facts speak volumes about the lack of industrial confidence in the Chancellor's handling of the ecomony. The contention that we now have a leaner, fitter economy in Scotland at least is a propaganda myth by someone who cannot distinguish between slimming and starvation.

We do not need a crystal ball. I shall quote from one of the books that we can consult. It is from "Cambridge Econometrics" and it says: (In Scotland) the bubble bursts in 1990 and both employment and output growth starts to lag behind the United Kingdom average for the rest of the century … Most sectors of Scottish manufacturing … are forecast to under-perform United Kingdom counterparts resulting in 70,000 job losses. Scotland's population is forecast to fall a further 132,000 by the end of the century and consumer spending per head is projected to remain a consistent 6.6 per cent. below the United Kingdom average. Every other statistic supports those projections. Regional industrial assistance, worth £242 million three years ago to Scotland, is worth only £15 million this year, and will be worth only £100 million in the next two years. Scotland has gained only 2 per cent. of the jobs created in Britain between 1983 and 1988. Earnings in Scotland have fallen behind. In 1978, a Scottish male earner was earning £7.30 a week less than his counterpart in the south-east. In 1989, he was earning £49.70 a week less. The rate of investment in 1986 in Scotland was £641 million less than it was in 1979. That is a fall of 17.8 per cent., compared to a United Kingdom fall of 3.1 per cent. Rarely have I heard a more damning statistical indictment of the Chancellor's performance.

In the midst of all this, what have we heard from the Secretary of State for Scotland? Not for him the fighting of his country's corner that his counterpart in Wales has put up, and that shows in the statistics. The census of employment from 1984 to 1987, on which all Government statistics are based, the crucial barometer, showed that every area of the country had an increase of people in employment. Among the highest was Wales, with more than 4.3 per cent., and even Ireland had an increase of 1.4 per cent. The only part of the country that saw a fall in the number of people in employment was Scotland, where there was a fall of 1.2 per cent.

Admittedly, the Secretary of State for Wales does not have the burden of a Conservative party chairman who wants to do to the Welsh Conservatives what has been done to the Scottish Conservatives. I have sympathy for the Secretary of State for Scotland. It is not easy to speak both for the nation and for the hon. Member for Stirling (Mr. Forsyth) any more than it is easy for the Chancellor to speak for the Government and the Prime Minister's adviser. However, a choice has to be made. After 10 years of the Government's policies and economic miracles, we have a balance of trade crisis, a crisis of inflation, a crisis of confidence and a crisis of credit. If the confidence cannot be restored, the Chancellor should go.

7.31 pm

Mr. John Biffen (Shropshire, North)

The Opposition motion is drawn widely. It deals with the economy and the issues that they believe should be part of the developing political conflict over the coming year or so. I shall not say much about that because, within the time constraints, it is important to deal more exhaustively with a more narrow topic.

The policy of my right hon. Friend the Chancellor, through high interest rates, is showing signs of success. No doubt it will have its difficulties and carry its unpopularities, but that it can succeed I have no doubt. As the debate has proceeded, it has become plain that the exchange rate mechanism is a handy diversion for those who want to concentrate on other aspects of the broader areas of conflict. Those on both of the Front Benches and the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) are united in an impressive trilogy of commending early or measured membership. As a devotee of free exchange rates, I do not share that view, but to take part in the spirit of things, I thought that I would discuss some of the conditions that it is suggested should be attached to our prospective membership.

One can hardly find a business man who, dealing with the European Community, does not complain of the advantages of one sort or another that his competitors have in their operations. Therefore, the search for level playing fields, as is the expression, so that we operate within the exchange rate mechanism on terms of equity and equality with our partners is not only widely desired outside this place but should commend itself immensely to hon. Members.

It is clearly explicit in the Government's view that there should be the free movement of capital within the Community, and a chance to see how that operates, and that our inflation rate should come down to approximately those of Community partners. That is a fair start to the level playing field approach, and I doubt whether the right hon. and learned Member for Monklands, East (Mr. Smith) would much dissent from that. The Government's position is reasonably clear, although I suspect still tentative. There is nothing wrong about that, and continuing debate in these matters is healthy. There is a certain amount of vigorous newspaper speculation and we can live with that.

However, the right hon. and learned Member for Monklands, East had a chance to make more clear the approach of the Labour party to the level playing fields so that we can be in a fit state to take on this new challenge and responsibility. His speech saw a delightful occasion that will he etched in our memories of the dying days of this Session—the fraternal relationship that he struck up with my right hon. Friend the Member for Henley (Mr. Heseltine). I got a little worried that my right hon. Friend would be asked to address a fringe meeting at the Labour party conference next year, which would have all the frenzy and evangelical excitement that was generated within the Conservative party, because there was such a clear rapport. They agreed on going in at a lower exchange rate and on a great deal of industrial planning as the means of preparing the country for the enterprise. It was clear after a while that there has been a vacuum in the policies of those on the Opposition Front Bench. The team there is stuffed with right hon. and hon. Members of the utmost quality, but of ideas and policies there was a certain absence. After tonight, we know that they follow the Henley school of Socialism.

One central factor in this is that we have a trade deficit. My right hon. Friend the Chancellor argues that one should not get too emotional about these matters. A different view is taken by the Labour party and my right hon. Friend the Member for Henley, who are anxious about the sums of the trade deficit and presumably the compensating capital inflow. Therefore, I suspect that they believe that the present exchange rate, which is a factor in that, is not an acceptable exchange rate in which to secure membership of the exchange rate mechanism. I believe that a great many people take that view. To join a kind of exchange rate link dominated by the Germans when we have a record trade deficit, 40 per cent. of which is accounted for in trade with that country, is a rather heroic undertaking. Once fixed, the whole of domestic policy will be aimed at the struggle to compel and to cajole British industry to perform within the new disciplines.

If an exchange rate view is taken as part of the exchange rate mechanism, that is an essential piece of levelling to provide the appropriate groundwork for our membership of the mechanism, but it should not be a rush job. It cannot be secured on the early terms suggested by the Select Committee and endorsed by the Liberal party—it gets worse as one reads through this litany of enthusiasts.

We have to ask ourselves to what end this enterprise will be undertaken. As a nation of tradesmen, shopkeepers, yuppies and entrepreneurs, we often think that life is all about economics. I do not believe that stage 1 of the exchange rate mechanism, leading to economic and monetary union as elaborated in the Delors plan, is just an economic enterprise. It has political objectives to create a much more centralised western European Community than I think is appropriate for the Europe of tomorrow, which has to be related to the great changes taking place in the Warsaw pact countries and the Soviet Union, which will require a much more flexible response on our part. By all means look at the economic implications of the level playing fields, but never be so concerned to go around with the digger that one fails to set one's eyes on the far further, more fundamental and more challenging political objective of trying to create for the next generation a much happier set of European institutions than we have now.

7.40 pm

Mr. Alex Salmond (Banff and Buchan)

I shall argue, in terms of the amendment that my hon. Friends and I have tabled, that neither a policy of penal interest rates nor the rather old-fashioned deflationary credit squeeze proposed by the Labour party is appropriate to the Scottish economy. As we note in our amendment, the argument applies also, for example, to the north of England, Northern Ireland and Wales. Within the monetary union of the United Kingdom we have, as the deputy Prime Minister reminded us last week, one monetary policy for the entire country—regardless of whether that is appropriate for all the constituent parts of the United. Kingdom. Sky-high interest rates are clearly misplaced in a Scottish context.

The most that can be said about the state of the Scottish economy at the end of last year is that it was undergoing a painfully slow recovery from the oil price recession of 1986—a recovery which has been aborted by a succession of interest rate rises. The industrial production figures for the first quarter show a further sharp fall of over 2 per cent. following the 1.3 per cent. fall in the final quarter of 1988. Two surveys, prepared by the CBI in Scotland and the Fraser Institute, confirm that recession has arrived in the Scottish economy. No one—not even the absent Minister of State, Scottish Office, with his tremendous experience of advancing hopeless arguments in a deadpan manner—could argue that the Scottish economy is overheating. Everyone accepts—including the Minister of State, who did so in a Radio Scotland interview on 18 July—that the objective of high interest rates is to cool the over-heating in the South East. I think that we can safely assume that the Minister was not talking about the south-east of Scotland.

It is uncomfortable to endure a high interest rate policy when an economy is overheated, but having to endure it with an economy that has barely come out of the fridge adds significant insult to substantial injury. That was commented upon by the hon. Member for Motherwell, North (Dr. Reid). The hon. Gentleman should bear in mind, however, that to be told by the Labour party that the alternative is to implement a credit squeeze is advice which defies explanation, except in the sense that the right hon. and learned Member for Monklands, East (Mr. Smith) is displaying all the excessive zeal of a convert to monetary rectitude.

The Scottish economy requires neither high Tory interest rates nor Labour's credit squeeze. The damage caused by high interest rates is severe. Interest rates in Scotland are at least 5 per cent. higher than the rate which could be justified by domestic economic conditions. The cost is substantial to home owners, council tenants and Scottish industry in terms of additional borrowing costs amounting to about £200 million per year. The cost to Scottish farmers is about £50 million and for the hard-pressed Scottish fishing industry it is about £7.5 million. The Government owe a substantial explanation to all those individuals, industrialists and farmers.

I was interested when the Chancellor of the Exchequer said that high interest rates were not of major economic significance. That will come as interesting news to those being forced out of business by the policy of high interest rates. The Government must explain what possible contribution will be made to the defeat of inflation, which is generated in the south-east of England, or to overcoming the United Kingdom balance of payments difficulty by wrecking the finances of, for example, the fishing industry in the north-east of Scotland. What contribution will be made to the defeat of inflation by implementing such a policy in an area of the United Kingdom which manifestly does not need it?

Much has been said about the exchange rate mechanism. I think that on balance the United Kingdom should join it, but I wish to add one word of caution. Sterling is a major international investment currency. It is highly visible and highly volatile. The United Kingdom's domestic economy is chronically weak and poorly balanced. Sterling's entry into the exchange rate mechanism will turn a system which is currently deutschmark dominated into one with a dual polarity. There is at least as much chance of sterling destabilising the exchange rate mechanism as of the ERM stabilising the price of sterling. The ERM offers no panacea for the United Kingdom's economic problems.

Since the war, successive Administrations have applied a variety of solutions to the endemic balance of payments problems. Withdrawal east of Suez, dashes for growth, freezes, squeezes, stop-go, indicative planning, the floating of the pound, entry into the EC, social contracts and compacts, monetarism with M3, monetarism without M3, Lawsonism and shadowing the deutschmark—all these policies have been tried and all, without exception, have failed. I was interested to hear some hon. Members express concern about the Bundesbank taking control of United Kingdom economic policy. In defence of the ERM, I should have thought that in view of the litany of failure that I have described the Bundesbank could scarcely do a worse job than the United Kingdom Treasury or the Bank of England.

There may be some in the EC who realise that sterling's entry into the ERM will create substantial difficulties. There is no stable staging post between the present position and full monetary union. If it comes to that, the House had better bear in mind the Scottish experience of full monetary union within the United Kingdom. The Chancellor of the Exchequer has said that the Tory party has never been one of devaluation, although sterling has depreciated by 10 per cent. during this year alone. The right hon. Gentleman should ponder that the alternative within monetary union could be the Tory party becoming the party of emigration as capital and people flow to the high activity areas of the EC.

The position could be ameliorated by resource transfers and an active regional policy, but the Government have entirely undermined regional policy and the Chancellor of the Exchequer has set his face against it in a European context. In any event, Scotland's experience within the monetary union of the United Kingdom is that resource transfers almost always operate in the opposite direction—from the periphery to the centre. How else can we explain why, with 30 per cent. of the population, the south of England obtains 50 per cent. of tax relief—a subsidy of more than 1 billion in one area and a sum greater than the regional aid budget for the entire United Kingdom?

The Chancellor of the Exchequer should know that there is an alternative to his policy of prescribing the wrong medicine for a disease from which the Scottish economy is not suffering. A Scottish pound within the European monetary system would allow for a monetary policy suitable for Scottish domestic requirements against a framework of European currency stability. In this context, I was struck by a remark made by Professor Tony Thirlwall of the department of applied economics at the university of Kent, which was reported in the Glasgow Herald last month. Professor Thirlwall stated: I have always thought that if I was Scottish and lived in Scotland I would be a Scottish nationalist. Sovereignty is an appealing and attractive prospect for a people rich in history, culture and resources, both human and material. There are also reasons for believing that Scotland might be better off if it was able to pursue an independent economic policy in the fields of taxation, public spending and trade relations with other countries. Professor Thirlwall is right. He has advanced an argument which grows in strength daily as the Government's economic policies are misapplied in Scotland.

7.48 pm

Sir Peter Hordern (Horsham)

We have learnt from the Opposition this afternoon that a central part of their policy is to devalue the pound against other currencies. I would think that they would seek to devalue it substantially given the large increase in public expenditure that they plan. I do not know what they believe that that will do to inward investment. It would certainly have a major effect on investment as well as providing a substantial spur to outward investment. Consequently, such a policy could only be followed by the usual run on the pound, which would have to be met by extremely high interest rates, the very thing which the Opposition seek to avoid.

My right hon. Friend the Prime Minister clearly put it on record in Madrid that the United Kingdom should join the exchange rate mechanism when we have inflation under control and when capital controls in other European countries have been lifted. My right hon. Friend's adviser, Professor Sir Alan Walters, differs. He says: My advice would be to retain the system of flexible exchange rates and to stay out of the present arrangements of the ERM. The article from which I am quoting states: So far, Mrs. Thatcher has concurred. Professor Walters's advice does not accord with what my right hon. Friend the Prime Minister said in Madrid, but I have not referred to all that the professor said. He added: Of course, I would not be opposed, at least not on economic grounds, to the development of a proper European currency administered by a European central bank preceded by absolutely fixed exchange rates. That is so far from the position of my right hon. Friend the Prime Minister, let alone that of my right hon. Friend the Chancellor of the Exchequer, that I can assume only that the professor is playing the part of a licensed jester within 10 Downing street. That is not an unknown position. The president of the Horsham Conservative Association was once Lord Egremont, and it was a role which he played extremely well. However, Lord Egremont always played the role in private. He did not jest outside, as the professor is now doing. Whatever policy the professor is espousing, one thing is certain, and that is that he relies absolutely on interest rates. He does not appear to rely on anything else.

I prefer the economic policy of Sir Alec Douglas-Home to that of the professor. At least with Sir Alec one could see the matchsticks and count them. But while the professor is busy digging among the entrails of MO and M4, it is uncertain, and hard to tell, what will happen. He could send up the storm cones in the Channel when things are going badly, and when things are going well light beacons on the downs and set the church bells ringing. But it is hard for the outside observer to guess exactly what the professor's policy is if he spends all his time delving among the entrails.

I regret the professor's entry into the public arena. If he is to hold his position as an official adviser, he should remain silent in the best possible tradition. I think that he sees himself as some kind of Rasputin figure, but it is high time that he was disabused of that view.

However, the question that the professor raises is one that we all have to answer. Although almost everybody agrees that interest rates play some part—I believe a vital part—in dealing with the economy, are interest rates alone sufficient? What about, as the Opposition suggested today, deposits with a central bank or hire purchase controls? Those arguments were effectively dealt with by my right hon. Friend the Chancellor and others by pointing out that that could apply only to British banks, so what about foreign banks'?

There is one other matter that I should have thought that my right hon. and hon. Friends would have held dear, and that is that there is something disturbing about referring to credit rationing by decree rather than to credit rationing by price. That surely brings us back to interest rates.

However, interest rates in themselves are not sufficient. The exchange rate is an additional and necessary weapon. We should align ourselves to the deutschmark and the ERM, and that is the Government's policy. In the best of all possible worlds we would have an independent central bank. In the old days we were tied to the gold standard, and that was regarded as the height of British sovereignty. In those days we depended entirely on South African, Russian and American gold, so we could hardly be called independent. That was not independence at all.

What are those who oppose our joining the ERM talking about when they talk about sovereignty? They mean the right to let sterling go where it will. That is not policy; it is an abnegation of policy. It is to allow companies to pay their people as they will. It is for the Government to accommodate any wage increase, no matter how large, including directors' salaries, just as they come. It is the sovereignty to let things slide. It is called "keeping our options open", but it means a one-way track leading downwards towards certain inflation.

We should have joined the ERM 18 months ago and at the same time given clear warning that we would align sterling to the deutschmark and that high wage increases unrelated to productivity would end in disaster because the Government would not bail them out. That was an opportunity that we missed at the time. It is necessary now to explain that the pound will be aligned to the deutschmark and to join the ERM.

It is necessary to set a standard. We do not need to go any further than to join the ERM. I am against a common currency, a European central bank and all that sort of nonsense. But joining the ERM is not painless, nor is it an alternative, but it is a necessary additional weapon—a standard for all to see.

We are committed to reducing inflation. Only one person is directly. responsible for the economy and that is my right hon. Friend the Chancellor. He should be given every possible support, and he deserves it. We cannot have the professor with an official position apparently second-guessing, and we cannot be ambivalent about tackling inflation. We should be allowed to wave goodbye to the professor and to let him go on writing his memoirs.

I have one final word about the serious statement at Madrid. That was regarded as a commitment which we cannot, with honour, go back upon. It was a commitment and a contract. We sometimes seem in relation to Europe to spend all our time counting the pennies and examining the small print. That is a lawyer's view. I have no doubt that that is all very necessary, but it is not in itself sufficient. Western Europe is changing fast, just as eastern Europe is changing, and we must be part of it. Western Europe is in flux, but it is moving and we should join it in order to keep the balance of power in our interests. Otherwise the train will leave the station while we are still counting our change.

7.55 pm

Mr. Thomas McAvoy (Glasgow, Rutherglen)

I am sorry that the right hon. Members for Chingford (Mr. Tebbit) and for Worthing (Mr. Higgins), who attacked the members of the Amalgamated Engineering Union, are not here to listen to what I have to say. AEU members have taken action with the genuine intention of reducing their working week. It is the height of hypocrisy for the right hon. Member for Chingford, with the number of jobs that he has, to attack people who are trying to reduce their hours. The more the right hon. Gentleman reduces the hours that he works in the House, the more jobs he takes on outside. The same applies to the right hon. Member for Worthing. I should like to hear how many jobs he has outside the House.

While I waited to speak, I could not help recalling the atmosphere in the House when the Chancellor presented his Budget in 1988. I recall how the Chancellor was the hero of his Back Benchers as they cheered every concession made for the better-off in our society—among whom, of course, they count themselves. The Chancellor must regret his overuse of the word "prudent" that day because, as he was warned by the Labour Front Bench spokesman, he was sowing the seeds of the recession that the British economy is now facing. In addition, he also had the accolade—if that is the right word—of being described by the Prime Minister as "Brilliant, brilliant, brilliant." Later, she stabbed him in the back, undermining his strategy by using the phrase, "You can't buck the market."

Because of disagreements, the Prime Minister would now like to make her brilliant Chancellor semi-detached, or even consider him as a future Leader of the House. After all, that is the position in which she placed the latest Cabinet Minister who had the guts to disagree with her—replacing him with a toy poodle who, in his first major role as Foreign Secretary, has been publicly humiliated by his Prime Minister.

The Government and the Chancellor claim that there has been an economic miracle, but let us look at the record. September's balance of payments deficit of £1.6 billion completes the most disastrous quarter in our history. The deficit for the first nine months of 1989 is the worst ever, at more than £15 billion, and suggests that we are heading for an annual rate of more than £20 billion. The Chancellor's forecast of a massive £14 billion deficit has already been exceeded. Industry and employment have been mentioned. The level of imports, in both value and volume terms, is at a record high. Britain's performance in manufacturing continues to deteriorate, with September seeing the highest level of manufactured imports ever at more than £8,000 million.

I take no joy or satisfaction from those figures. It would be irresponsible and counterproductive for anyone to gloat over the position in which Britain finds itself. It is the British people who are suffering from the present situation, and Labour Members are conscious of that. Conservative Members will try to say that any criticism of the Government is tantamount to treason and that in the interests of the country we should remain quiet. That attitude can only be described as the last refuge of those trying to avoid the consequences of their own actions. It is precisely because we have the interests of the people at heart that we are exposing the folly of the Government's policies and calling for a change of direction.

The behaviour of the Chancellor and the Prime Minister in relation to the public conduct of the dispute between them has been nothing less than grossly irresponsible. They have indulged their baser instincts, not caring about the damage being done to the perceptions of a united front in running the economy. It cannot be credible for the Prime Minister's personal economic adviser to be making public pronouncements undermining the Chancellor of the Exchequer, especially when the adviser claims the endorsement of the Prime Minister. The Chancellor and the Prime Minister should cease their war of the ego trip and act in the interests of the country.

We all believe that the Chancellor is ready to go and that he is staying on only so as not to damage the economic credibility, as he sees it, of his Government. It is getting to the stage, however, when any damage to the Government's policies—eventually the country suffers or benefits from those policies—involved in his going will be as nothing compared with the damage done by the Prime Minister's economic adviser, especially when she seems to be using that adviser in a war of attrition against her own Chancellor.

The Chancellor should be made aware of the effect that his policies are having on people in Scotland, for example. In June to July 1989, unemployment rose by 1.8 per cent. in Scotland and by 1.5 per cent. in the United Kindom. In Strathclyde region—the central belt—it rose by 2.8 per cent. If one takes into account the Government's special measures to fiddle the unemployment figures, the unemployment rate in Strathclyde region would be 21.9 per cent. Strathclyde has published its own study of economic trends, taking employment into account. The Opposition have complained that no mention has been made of employment. Since 1979, manufacturing employment in Strathclyde—I continue to stress manufacturing employment because manufacturing is the wealth creator—is estimated to have fallen by 152,000 jobs, or more than 46 per cent. That is the economic miracle from which Scotland is supposed to have benefited since 1979.

In my own constituency, we have just had the latest instance of the damage caused by the Chancellor's one-club policy. At the Hoover factory in Cambuslang there have been more than 200 redundancies, which are directly due to the high interest rates policy. High rates have always damaged the domestic appliance industry. I can vouch for that as I worked at the Hoover factory in Cambuslang for 13 years and I experienced several periods when redundancies followed immediately from the jacking up of interest rates. I may have reservations about how Hoover is responding, but there is no doubt that the company is having to deal with a difficult economic situation which has been caused by the Government.

I shall quote one part of the statement from the Hoover management announcing redundancies. It said: The market place situation in the United Kingdom has continued to worsen significantly on an over-all basis. Hoover is an important manufacturing company uttering what can only be described as a cry of despair about the state of the market place in the United Kingdom—the very market place which is the object of adulation by Conservative Members. In the judgment of that market place, the economy of the United Kingdom has continued to worsen. The statement also says that Hoover cannot predict the economic climate in which we will operate and obviously this has a very major effect on some of the assumptions and proposals that have been made. What a position for a major manufacturing company to find itself in!

Mr. Morgan

Hoover is a major exporter.

Mr. McAvoy

Is that the best way ahead? Is that the best way to plan investment and to provide employment? Is that the best way to encourage British industry to respond to the challenge of imports, which are not always subjected to the same scrutiny and checks to which our exports are subjected? To depress our own manufacturing industry simply creates easier trading conditions for our competitors. The balance of trade figures have proved that yet again.

The report from the Confederation of British Industry says clearly that 19 per cent. of firms reported that the cost of finance was likely to limit their authorisation of capital expenditure over the next 12 months, and that figure was up from only 5 per cent. in April 1988.

I did not receive it in an envelope, but I happen to have a copy of the Tory brief for today's debate. It says: For the most part companies are in a far stronger financial position today than they were in the early 1980s. The resurgence of company profits has enabled firms to fund more investment". Let us look at the contrast between what we read in Tory propaganda and the reality that one sees in the statement by the management of Hoover, a major manufacturing industry in the United Kingdom and, as my hon. Friend the Member for Cardiff, West (Mr. Morgan) said, also a major exporter. The reality is wholly different from the propaganda in the Tory brief. It is significant that I am the first contributor to today's debate to have quoted from that brief—Conservative Members did not even trust or quote their own figures.

I could continue, but having waited so long to speak, I am aware that other hon. Members are waiting, so I will finish now.

8.4 pm

Mr. Julian Amery (Brighton, Pavilion)

In the short time allowed, I want to return for a moment to a point that I made in the Budget debate earlier this year. I suggested that it was time that the Government considered restoring to the Bank of England some of the old independence it had until 1948. I thought that that was a rather radical proposal for an elderly Privy Councillor to make, but nobody paid it the slightest attention. Perhaps, like tonight, other hon. Members were in the Smoking Room or elsewhere and the Press Gallery was empty.

Since that debate, many rather eminent people, who are far more qualified than myself, have taken up the idea, not the least of whom is my right hon. Friend the Member for Guildford (Mr. Howell) who has written a powerful letter to The Times.

The case for separating the Bank from the Treasury is fairly simple. It rests on the belief that fiscal policy is essentially political, whereas monetary policy should be essentially professional. Fiscal policy is obviously political. It is concerned with taxing and borrowing and with which interests in our society we want to encourage at any time and which we want to restrain, whether in the private or the public sectors. All such matters are essentially political and that is the bread and butter of our normal debates in the House. That must be the responsibility of the Chancellor of the Exchequer of the day and of the Government.

It could be argued—as I would argue—that when the fight against inflation has top priority, monetary policy should be professional and should be run to some extent independently, as it is in the United States and in West Germany, which has the Bundesbank. Of course, it should not be completely independent. Under the old system, the Governor of the Bank of England was appointed by the Government, like the Archbishop of Canterbury or the Lord Chief Justice, but once appointed he was very much his own man.

The question I asked in the Budget debate and which I ask with a little more insistence now is whether we should not again consider the desirability of moving towards that. Of course, one cannot do that at once. The Treasury and the Bank have become so mixed up that one cannot get matters back overnight to where they were. But should we begin to think about that? Should it be an item in our next manifesto? I do not know.

Certain advantages would follow from such a change. I do not for a moment doubt the sincerity of my right hon. Friends the Prime Minister and the Chancellor of the Exchequer in saying that the fight against inflation is their first priority, but the markets are suspicious of Britain. The British public do not have the same fear of inflation as the Germans have or as the public have in some other countries that have endured appalling inflation. Those markets are suspicious, but the change that I propose would be a signal to them of our determination to fight inflation and would show them that control of the currency was not wholly in the hands of the Government, but in the hands of a more or less independent Governor of the Bank. Such a development would also protect the Chancellor and the Government, whose position is rather vulnerable today. I am talking about such a reform taking place in the future, but let us look at the position today.

If I have read the Mansion house and Blackpool speeches aright, my right hon. Friend the Chancellor is saying that he has two weapons against inflation—the interest rate, which he says must be kept high, and maintenance of a high exchange rate. In effect, my right hon. Friend says, "We will not countenance devaluation." These are a couple of rather difficult horses to ride. If there were an attack on sterling, because of poor figures or some other unaccountable development, he would have no option left but to increase the exchange rate. This is a speculator's paradise. I wonder whether it might be more helpful for him to restore authority to the Bank of England and so keep the markets guessing which way we are going—to an increase in interest rates, or to a smaller devaluation? I have never been convinced that it might not have been wiser to let sterling fall a point or two rather than increase interest rates from 14 to 15 per cent. However, that is neither here nor there. It does not affect my argument.

There is another consideration. As we move towards a convergence of European currencies—we will—I wonder whether we would make more successful practical progress if the Bank of England enjoyed the same autonomy as the Bundesbank in Germany and whether between them they might reach agreement more easily than our Government do with a German Government who do not entirely control the Bundesbank. There is much that they could do in common. The deutschmark is the strongest currency, but the City of London is the biggest place after New York and Tokyo—in some respects it is bigger—where transactions are made. We also have extraordinary experience. Unlike any other country, Britain created a reserve currency of its own, the sterling area. We had a single reserve currency, sterling, and a single reserve bank, the Bank of England, but all the other independent members of the sterling area had their own currency and central bank and there was no attempt to dictate to them what their budgets should be.

There may be lessons to be learnt here in approaching the second stage of the Delors programme. I am convinced that we must join the EMS. I would like our inflation rate to come down first and exchange controls to be lifted by our potential partners. My good friend, Sir Alan Walters, has said that it is a half-baked scheme. He may be right, but if it is, let us get in and do some more of the baking ourselves.

8.12 pm

Mr. Denzil Davies (Llanelli)

There were not many memorable phrases in the Chancellor's speech, but I noted one. Alluding to the vast sums of what used to be called "hot money", which are now deposited in London—they need interest rates of 15 per cent. to keep them there—he described it as drawing on the savings of the world. The habitués of the bankruptcy courts have been given another argument—"I was merely drawing on the savings of the world, my Lord"—when they are faced with having borrowed so much money.

Indeed, the Chancellor needs to draw on the savings of the world. Today we were told—the statement was greeted with relief—that the balance of payments deficit this month was merely £1.6 billion, or an annual rate of almost £20 billion. Imports account for a quarter of all domestic spending, including spending on services, which in the main are not and cannot be imported. Inflation is almost 8 per cent. The bank base rate is 15 per cent. This is despite the Chancellor's cry that he is not a devaluer. In his Blackpool speech—my hon. Friend the Member for Glasgow, Rutherglen (Mr. McAvoy) referred to the splendid background briefing from Conservative central office—the Chancellor said that there was salvation in the rakes progress"— a good phrase— of perpetual devaluation". The Chancellor did not say "devaluation"; he said "perpetual devaluation". This is not the time to indulge in textual analysis, but I wonder what he means. Does he believe in a stepped devaluation into the EMS? We have had perpetual devaluation over the past year because the pound has depreciated in value by at least 10 per cent. against most other currencies. Unemployment will soon start to rise again as the recession begins to bite. Inflation will come down and unemployment will go up. Unfortunately, that is the structural problem that we have with the British economy. Yes, inflation can be reduced, but at the cost of closing firms and of rising unemployment.

The Government have no excuse. They can blame only themselves. They must do so because of a couple of horrendous economic misjudgments and the rapid deindustrialisation of Britain over the past 10 years. The economic error started in 1981 when monetary policy was tightened far more than was needed. As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, it has been estimated that about 20 per cent. of our industrial manufacturing capacity was destroyed at that time, never to be replaced.

In addition, when the Chancellor took office, he suddenly realised that perhaps the tools of monetary control in his hands were not as perfect as he had thought or as he had been led to believe, so he lurched in the opposite direction. He changed his monetary targets and abandoned some. In fact, he loosened monetary targets. On top of that, the election came along and it was necessary to bribe the electors with tax cuts, and substantial tax cuts were put in place. This caused a pent-up demand in the economy, with the result that British industry could not meet demand and imports flowed in.

If the British economy and our industrial base had been as strong as that of the Germans or the Japanese, we might have been able to withstand even the Government's economic mismanagement. Unfortunately, we know that that did not happen. Over the past 10 years, we have witnessed the deindustrialisation of Britain. The Conservative party, in government or in opposition, has never had any real interest in Britain's manufacturing industry and its industrial base. Those of us—there are a few left—who between 1974 and 1979 sat on the Government Benches during economic debates listening to the then Opposition spokesmen speaking on economic matters could not help but realise their contempt for any attempt to rebuild, rejuvenate and help our industry. Any measures put forward were greeted with contempt and derision by them.

At that time, the present Chancellor, Leader of the House, Secretary of State for Trade and Industry, the Prime Minister and others were interested merely in a service economy, a financial economy, a rentier Britain living off foreign income and foreign investments, a tax-saving Britain. In a memorable speech, the present Leader of the House called for a low-tax Britain to bring back all the pop stars who had had to go to California because the British tax base was so high. That was an Opposition who were not interested in industry and who came into government with no industrial strategy. The attitude of the Conservative party to industry was completely different from that of even the Right-wing political parties of western Europe.

We had something called "supply-side economics". It is included in the Government's amendment. The Chancellor did not mention it. I do not think that one Conservative Member mentioned it. That phrase merely meant tax cuts for the rich. With a fistful of money, apparently the Government were going to invest, create wealth and rejuvenate our industry. That has not happened. I believe that the phrase was not even invented by the Tory party. It was invented by a rather loopy Right-wing American Congress man. Supply-side economics has not done the United States any good. Over the past 10 years of supply-side economics the United States of America has been transformed—if that is the right word—from one of the largest creditor nations in the world to the largest debtor nation. So much for Reaganite and supply-side economics in the United States.

What has happened in Britain with supply-side economics? We have heard the figures for manufacturing industry. However, over the past 10 years there has been only a 12 per cent. increase in manufacturing industry output and that is little more than 1 per cent. a year increase. Manufacturing industry's share of gross fixed capital formation has fallen under supply-side economics from 18 per cent. in 1979—and that figure was far too low—to 13 per cent. last year. The share of manufacturing in the United Kingdom's gross domestic product is lower than in any other major country in the Western world.

I accept that there have been some increases in productivity, but most of the fruits of those increases have gone to consumption instead of to investment. We must have lower interest rates to assist industry. I believe that we must join the European monetary system, but I do not believe that that is a panacea. However, it is necessary to have some kind of monetary discipline. The Chancellor would agree with me and he would have liked to have joined the EMS a year or 18 months ago to provide the kind of discipline which his monetary targets have failed to provide. We need a better balance between monetary policy and fiscal policy. If that means raising income tax, so be it. There must be a better balance between the two arms of Government economic policy.

Many of us have sat through debates on the economy and listened to discussion of monetary and fiscal engineering. We always debate macroeconomic matters. However, all the monetary and fiscal engineering in the world will not retard the dangers of the de-industrialisation of Britain which has been happening for the past 10 years. The Government do not have the will to stop that. They do not have the tools and they do not want to acquire the tools. It will be left to the next Labour Government to stop that de-industrialisation and to try to rebuild our industry. That will be a major task.

8.22 pm

Mr. James Arbuthnot (Wanstead and Woodford)

It is always a pleasure to listen to the right hon. and learned Member for Monklands, East (Mr. Smith). In the past few days, I seem to have seen little else but the right hon. and learned Gentleman or one of his colleagues telling us how frightfully badly we are all doing. I had always thought that being a Scot meant being reasonably short on words but long on actions. Having listened to the right hon. and learned Gentleman as closely as possible today, I must say that his speech was the exception that proves the rule. It reminded me of the froth at the end of a strawberry milkshake—full of air, of little substance, rather sweet and sickly and unremittingly pink.

Mr. Graham Allen (Nottingham, North)

Such imagination!

Mr. Arbuthnot

How very kind!

The right hon. and learned Member for Monklands, East and his right hon. Friend the Leader of the Opposition have no policies to deal with the problems facing the world. Both are turning gently on their kebab sticks, trying to remember the answers of the 1950s to the problems of the 1950s. They have no idea that the world has moved on, but they have suggested three solutions.

First, the Opposition believe that the problems could be solved by the return of a Labour Government, with their history or successful management of the economy and a relationship with the International Monetary Fund which became so close as to border on the indecent. Secondly, they suggest a return to virtually fixed exchange rates through the exchange rate mechanism. As many hon. Members have already pointed out today, the problem with that is that our European competitors have yet to abandon exchange controls. Thirdly, the right hon. and learned Member for Monklands, East seems to have suggested the return of credit controls. I was not sure whether he was actually backing gently away from credit controls, but in the absence of any other sensible solution one must assume that a leopard does not change its spots and that what the Labour party said two weeks ago remains its policy today.

The true voice of the Opposition has been revealed in all its glory. When they do not like something, they decide to ban it. If they do not like it, they want to make it illegal. If someone wants to borrow money, even with the present high interest rates, the Opposition will put a stop to it. Socialism throughout the world is in retreat. The only people left who agree with the Opposition seem to be Herr Honecker and Fidel Castro—and one of those two has resigned. The Opposition have no policies apart from the ephemera of credit controls, which they know could not work without the reintroduction of exchange controls.

Let us consider the experience of our competitors in Europe. My right hon. Friend the Chancellor of the Exchequer quoted from the Organisation for Economic Co-operation and Development economic survey of the United Kingdom. I shall quote from the OECD survey of France: As in many other OECD countries, the instruments and mechanisms of monetary policy in France have changed considerably as a result of the spate of financial innovations and the reform of financial markets. The complete removal of credit controls in January 1987 helped to make adjustment in the Banque de France's official intervention rates on the interbank market the main instrument of monetary policy. Germany does not use direct controls on credit. Spain has controls on bank ratios, but they have not been a success and Spanish interest rates are virtually the same as ours. Italy has credit controls, but it also has an uncompetitive banking system. The Italian controls on credit barely work. The more competitive the banking system, the less effective exchange controls will be. Italy has tried the persuasion method of credit controls, which the right hon. and learned Member for Monklands, East sought to wish on us today, but the Italians had virtually no success with that. Even the banks in Italy ignored it. To suggest that foreign banks would take any notice of such suggestions from the Italian Government is bordering on the laughable.

Credit controls do not work unless there are exchange controls. Would the Opposition renounce the possible reintroduction of exchange controls? If they refused to do that—and we are approaching a time when a Labour Government might conceivably be elected—there might be a run on the pound of a kind never seen before except the run on the mark in the Weimar republic. We might end up going to the shops with a wheelbarrow full of money, only to find that the wheelbarrow is worth more than the money it contains. If the right hon. and learned Member for Monklands, East is now prepared to renounce the reintroduction of exchange controls, however, I have a slightly different vision from that of the wheelbarrow—the vision of a Labour Chancellor as a butterfly collector busily chasing the butterfly of credit with a small butterfly net of credit control. As he wanders around falling desperately over his own feet, he will want to use the blunderbuss of exchange controls, although he promised his mother he would not use it. I fear that if a Labour Government were returned to power we should see a return of exchange controls and the economic disaster that that would entail.

8.29 pm

Mr. Pat Wall (Bradford, North)

One of the Chancellor's most endearing characteristics is his lack of any overweening modesty. He best expressed his view cif his achievements at the 1988 Conservative conference, when he said: The people understandably feel more confidence about their future than they have for decades. Everywhere a new spirit is alive—a new confidence, with factories humming, new businesses starting up, busy cranes dotting the skyline. He received the typical spontaneous standing ovation at the Conservative party conference led by the Prime Minister, but, possibly even at that time, he was not supported by Sir Alan Walters. He added: The growth of the British economy will go on and on. Last year the Chancellor probably wrote his speech on the back of half a dozen seaside postcards in his hotel suite. This year, there was the unedifying spectacle of his scuttling back to his constituency to rewrite his speech, which contained less imagery and self-congratulation. No doubt he again received a standing ovation, but he certainly would not have had the support of Sir Alan Walters.

It is interesting to look at the economic figures over the period of the right hon. Gentleman's Chancellorship and of the Government's time in office. The right hon. Gentleman said that British factories were humming. In the recession of 1979–82, manufacturing production in Britain fell by 32 per cent. As several of my hon. Friends have pointed out, at least 20 per cent. of industry was laid waste. Only in 1987 did manufacturing output regain its 1979 level. In that period, manufacturing output rose by 38 per cent. in Japan, 25 per cent. in America, 16 per cent. in Italy, and 12 per cent. in West Germany. From 1979 to 1988, economic growth in Britain was only 2.1 per cent. a year, which was the slowest in any nine-year period since the end of the second world war, to end wars.

The key to that crisis and the situation that we now face is a lack of investment. At 1985 prices, in 1979, investment was £10.14 billion a year. In 1982 it was down to £6.35 billion, and in 1988 it rose to only £10.01 billion, scarcely recovering the 1979 position—not much higher than in 1973 and, in real terms, little different from the position in 1950.

Although manufacturing investment has stagnated over the Tory decade, financial and business investment has doubled. At the same time, we have had a 50 per cent. reduction in infrastructure. The Chancellor spoke about the cranes that dotted the skyline. However, those cranes were not building new factories, schools or hospitals; they were building hotels, leisure centres and speculative offices.

In her Conservative party conference speech this year, the Prime Minister poured scorn on the previous Labour Government going cap-in-hand to the IMF like a Third world country, but, with the horrifying decay of our hospitals, sewers, water, and rail and tube transport, we are approaching Third world levels. Taiwan spends a greater proportion of its gross domestic product on research and development than Britain does. South Korea spends a greater proportion of its gross domestic product on education and training than we do. A recent article in The Political Quarterly described the Chancellor's predicament as a strategic predicament of staggering proportions with the only real alternative to a trade deficit of £40 billion or more a virtual stop to growth or even an absolute decline in total demand and output in the British economy". The Chancellor has an unpalatable choice. If he allowed sterling to fall in line with the views of Sir Alan Walters, it would certainly help exports and make imports dearer, but it would increase inflation and eventually lead to a recession. If the Chancellor continues to increase interest rates to protect the pound and reduce inflation, he will lead us to an even earlier recession. The Chancellor is taking a gamble, hoping that he will create a soft landing by reducing the rate of economic growth and inflation, but avoiding bringing the economy to a halt. That gamble depends on the world economy.

America has not managed to deal in a real sense with its twin problems of balance of trade and budget deficits. Added to that is the $20 billion which the American Treasury had to use to prop up loan banks, and the leverage bids—the over-extended bids—in the American takeover madness. West Germany and Japan have not greatly reduced their balance of trade surpluses over the past few years.

The gradual rise in interest rates, not only in Britain but in other economies, means that Third world indebtedness is approaching a trillion dollars because of the change in circumstances. The Chancellor talks about going on and on, but he has been a monetarist, an interest rate cutter, and a man who has savagely increased interest rates, but he is still the same Chancellor. We now have a stop-go economy, stagflation and possible recession.

British labour costs have risen over the past two years twice as high as those of our major competitors. In 1987, consumer credit including mortgages reached £282 billion, which is more than the total disposable income of wage earners in this country. Personal savings, which in 1981 were 15 per cent. of personal income, are now down to 1.3 per cent. of personal income, and the Chancellor talks about encouraging savings. Since 1979, 100,000 mortgage default repossessions have taken place—an 800 per cent. increase under the Tory Government. Sixteen thousand individuals have been declared bankrupt and 170,000 companies have been liquidated.

That is the new spirit of enterprise which the Government have spoken about. There is a new spirit in Britain, but it is among the Opposition and the working people who have fought back over the past few months despite the managerial counter revolution which the Government have encouraged and despite the reactionary and vicious anti-trade union legislation. More workers were prepared to take industrial action in one week in July than in the whole of 1986. There is a new spirit in this country. Many people—40 per cent.—have never received anything from the Government. They have not had an increase in their standard of living, and their housing benefit, pensions and child benefit have been reduced under this Government. Those who once gained have also been savagely attacked. That means that the Chancellor will go and that there will be a change of Government, and the sooner the better.

8.39 pm

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

There is, of course, no doubt that we have some economic problems at present. Indeed, I cannot think of a time in the history of this country when there have not been some economic problems and it would be nonsense to say that all is now going swimmingly. However, at least my right hon. Friends are dealing with the problems of success. In fairness to Labour Governments, I should say that successive Governments after the second world war had no such problems of success. They had to deal with one failure after another.

I have sat through most of this interesting debate. Whenever people pick on just one name, I always think that that means that there is a paucity of argument. The name of Alan Walters has stalked this debate like a ghostly mist over the moors. His name has been brought up because those who do not know what else to do think that if they can say that Her Majesty's Government, in the shape of the Prime Minister and the Chancellor, are split, it somehow makes it easier for them to define what to do. It may be true that the Chancellor thinks one thing and that Alan Walters thinks another. However, Alan Walters is only an adviser.

As a Member of Parliament, one does not have the time to be a partner or a director, so I am called a "consultant" to some businesses. That means that I am an adviser. Every now and again I am asked for advice and it is not taken. If we ever reached a position where as soon as an adviser were appointed everything that the adviser said had to be taken as gospel, no one in his right mind would ever have an adviser. The adviser would become Prime Minister and the Prime Minister would become nothing. If Alan Walters feels that he must disagree, he should shut up because he damages what he is trying to advise.

As my right hon. Friend the Member for Shropshire, North (Mr. Biffen) said, those who talk about the EMS and the Common Market, which Opposition Members now seem to think is a wonderful witches' brew which will take them into office, should beware. As my right hon. Friend said, Britain's balance of payments with West Germany is nine times worse, so why should being in the EMS suddenly make things so much better?

I come from the midlands and my right hon. Friend the Chancellor sometimes accuses me of being a Brummie industrialist, as though that is an insult—I do not think that he means it that way.

The Chief Secretary to the Treasury (Mr. Norman Lamont)

He does.

Mr. Beaumont-Dark

When the pound went to $2.40, industry melted and wilted. When in 1985 the pound went to something like $1.20—heading down to almost $1—manufacturing industry began to blossom. Therefore, I do not go all the way with the Government when they seem to think that the panacea of a high pound will somehow solve all the problems of inflation. When one looks at the figures for the deutschmark, which is the Chancellor's favourite currency, or at the dollar, one finds that it is not true that a high pound against the deutschmark or a high pound against the dollar helps inflation. When there were five deutschmark to the pound, inflation was something like 14 per cent., and when there were three deutschmark to the pound it was 10 per cent.

Economists are the great plague of our time because they get paid so well to say such nonsense. If one takes 500 economists, one gets 700 opinions and 200 computers. I wish that we had never heard of them. If only common sense could rule.

I turn now to business men. In my view, a trade deficit of £20 billion matters. I come from a manufacturing area and I do not care what clever people say. I know that a trade deficit of £20 billion cannot go on for ever. What I find most disturbing is that the investment views of West Germany and Japan are so different from ours. In West Germany and Japan the mega-rich are those who make things—the industrialists who have built great manufacturing companies. It is even the same in Italy, but in America and, unfortunately, in the United Kingdom at present the mega-rich are those who make money and who make deals. I advise hon. Members not to believe what anybody says about this because the simple truth is, "If you don't make it, you haven't got it." We should not fall for the charismatic chimera that making money is the same as making goods, because it is not. In the end, money must lead to goods, to the things that people buy.

We in this country must do the same as the West Germans and the Japanese—let us pray that this day comes—and produce goods so that our mega-rich will comprise more than just a few shopkeepers, property dealers and financiers. Our mega-rich should once again be those who make the goods. This country was at its greatest, as Japan and West Germany are now, when the great rich—apart from landowners who are always rich—were those who made something and built businesses.

Unless we build something for ourselves, all that we are doing is sucking in other people's goods. That is what is happening at present. It is not the problem of Government alone; it is industry's problem and the financiers' problem. It is no good saying that Governments can solve everybody's problems because, of course, they cannot. Why do British financiers regard a long-term investment as being one of six to 12 months when the Japanese and West Germans regard a long-term investment as one of five to 10 years? The Japanese and the West Germans mean to invest and to build.

By some form of tax concession, the Government should encourage us to be producers, not consumers. If we can encourage people to conserve and to preserve our manufacturing wealth, this country has just as much chance as other nations. We have inventiveness, and people who care and those who are economic and financial geniuses. But what good is that without someone who can make the goods? If we invent things but the Japanese and the West Germans make them, we will end up more and more in debt. Let us turn our thoughts, respect and will to those who make things.

8.47 pm

Mr. Giles Radice (Durham, North)

The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) accepted that Britain is now facing serious economic difficulties. However, as we heard from his speech, the Chancellor prefers euphemisms. He talks about a temporary blip and about the British economy catching its breath. At the Mansion House last week, he even blamed the short-term vagaries of the economic cycle. However, as everybody now knows, the reality is that the British economy is dangerously out of balance. Our inflation rate is higher than that of any major industrial country and there is little sign so far of any improvement.

The other glaring symptom of the imbalance in our economy is our huge balance of payments deficit, which is the largest in our history. The Chancellor has consistently sought to play down the significance of the deficit. According to him, it is merely a temporary phenomenon. He says that it is benign because it is the result of British industry re-equipping and reinvesting. He goes on to argue that in an age of massive international capital movements deficits can be easily financed.

The trouble for the rest of us is that the markets no longer believe the Chancellor. Why should they? In defiance of the Government's forecasts, the deficit has grown from a rough balance two years ago to a deficit of between £19 billion and £20 billion this year, and even the most optimistic forecasters do not believe that there will be a major improvement next year. Indeed, on present trends we will be running a balance of payments deficit of between 2 and 3 per cent. of GDP well into the 1990s.

The United Kingdom deficit is not just a symptom of reinvestment by British industry, as the Chancellor argues. nor is it merely due to overheating, although the over-rapid growth of the economy in 1987 and 1988 sucked in a massive flow of imports.

The major structural problems which are increasingly revealed in our balance of payments are what disturb most of us. Growing import penetration, the weakness of our exports and the massive deficit in manufactured products all suggest that British industry is simply not producing enough of the goods that people want to buy.

Does this failure really matter? As we are finding out, the short answer is that it matters very much indeed. In a world of global markets, we cannot rely upon international capital to go on financing our deficit indefinitely. Money which comes in can go out again and, sadly, as we shall find out to our cost, it can go out again very rapidly.

Many hon. Members have consistently warned the Chancellor about the dangers of running a massive balance of payments deficit. The main problem is that it takes control over the shape and timing of economic decision making out of the hands of the Chancellor. Instead of being able to adjust in our own time, we are likely to be forced into a process of abrupt adjustment, both to levels of demand and the value of sterling, by the markets.

I predict that the Chancellor's failure to react to the balance of payments deficit in 1988, when it was still manageable, will force the British economy into a hard landing in 1990, and affect employment, output and growth. I predict that the Chancellor's gamble will fail.

I agree with the right hon. Member for Worthing (Mr. Higgins) on many things, but, contrary to what he said, we warned the Government of what would happen, of the dangers of inflation and the balance of payments problem. We urged the Government not to make drastic cuts in taxes in the March 1988 Budget and to take a grip on consumption. They did not listen, and now the economy is in a mess. I do not want to say, "I told you so"; I want to draw a lesson for the future.

The conclusion that should be drawn from the failure of the Government's economic policies is that the prime objective of economic management must be to secure and preserve balance in the economy. A Government must keep a balance between their objectives—low inflation, low unemployment, sustainable growth—and an equilibrium between exports and imports. When one of those objectives is pursued at the expense of others, the economy runs into trouble, as we have seen.

As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) has often said, good economic managment is a question not just of keeping a balance between objectives, but of ensuring a proper balance, or mix, of economic instruments. The Chancellor's obsessive reliance on interest rates risks getting the worst of both worlds. To work effectively, it has to bear down heavily on mortgage holders and on business and, as we have seen from the survey published by the Confederation of British Industry today, it also clobbers vital investment.

Because the strategy takes such a long time to work, it risks being derailed by the markets before it achieves its objective of slowing down the economy. That is why the Chancellor should have been employing fiscal methods and control over bank lending as well as an interest rate policy, and why there should have been a balance between nationally and internationally co-ordinated instruments. Hence the case, which I have long supported, and which has been ably argued by my right hon. and hon. Friends, for joining the exchange rate mechanism of the EMS. We should join as soon as possible, as it would provide greater currency and interest rate stability and could add a useful counter-inflationary discipline.

A better balance is needed between the short term and the long term. One of the most powerful charges against this Government is their neglect of the long term. The Chancellor has often criticised other people for their short-term outlook, but the Government have mortgaged the country's future to a considerable extent with their poor record on education, training, research and development, the labour market and regional policy. A Government committed to a better structural balance in the economy would have to give a higher priority to this issue.

I doubt whether the Government are capable of providing the leadership necessary to bring the economy back into balance, particularly as they have allowed it to get so out of control. Once again, it will be the Labour party that has to get Britain out of the mess—as it did in 1964 and in 1974. To judge by the excellent performance of my right hon. and hon. Friends, they are well equipped to provide the necessary leadership, in contrast to that of the Government.

8.55 pm

Mr. Philip Oppenheim (Amber Valley)

Every one of the policies urged upon us by the Opposition in the past 10 years would have exacerbated our demand side problems. They have consistently urged that the Government should spend more, which would have pushed up demand and crowded out private sector investment. In October 1987, the Opposition joined the huge chorus of people urging the Government to cut interest rates. In May 1988, when there was a debate as to whether we should cut interest rates to lower the pound, which many people said was uncompetitive against the deutschmark, the Opposition urged the Government to cut interest rates, which the Government eventually did—although I think that they now recognise that that decision unwise.

The supply side is far more important than short-term demand. It is worth recognising that our problems on the supply side, in manufacturing industry, are not new but go back at least to the turn of the century. Germany and the United States overtook us in manufacturing output before the first world war. Japan almost overtook us in the 1930s and eventually did so in the 1960s. To blame the present Chancellor for Britain's long-term industrial problems is to blame him for history and for the mistakes of the past. Britain's supply side and manufacturing problems are so deep-seated and have been with us for so many years—probably as long as a century—that it will take more than a decade to turn them round. It will be many years before British industry is capable of competing with the best in the world.

It is easy for Opposition Members to pose as the champions of manufacturing, but it is worth reminding them that this country's manufacturing output fell under the Labour Government. Under this Government it has risen, and last year it rose by 4 per cent. Those figures tend to get lost in the fuss over the mini stock market crash. People may talk about the decline in our manufacturing industry, but it is worth pointing out that large sectors of that industry have done well. Our aerospace industry is booming, and last year it overtook that of France for the first time in many years to become the third largest aerospace industry of the world after America and the Soviet Union.

Rolls-Royce, a company which operates close to my constituency and was virtually written off as an industrial basket case in the 1970s and early 1980s, is now booming. It is recognised as a major world manufacturer of high technology engineering and jet engines. Our pharmaceutical industry—another high-tech industry—has also done extremely well and in recent years its exports have overtaken those of West Germany, the United States, Japan and Switzerland to become the largest exporting pharmaceutical industry in the world. For the first time in many years, our share of world exports has stabilised.

With regard to imports, it is worth bearing in mind what is known as the "balancing item", which is a black hole in the world trade balance worth something in the region of £50 billion. If the effect of that is aggregated across the world's trade balances it substantially reduces the trade deficits of those countries in negative balance.

I cannot take the Labour party's pose as the champion of manufacturing seriously when it has rigorously opposed every policy designed by the Government to improve the supply side of the economy. The Opposition opposed our reform of the trade unions and they have consistently opposed our attempt to end monopolies and subsidies for industry. They have opposed our attempts to increase competition in the economy, they have opposed our cuts in taxes and they have opposed our attempts to lower public spending as a percentage of GDP so that it does not crowd out private investment so much. Now they tell us that education is vital to our industrial performance, but they opposed our reforms designed to make our education system more disciplined and more geared to the vocational needs of our industry. The Opposition sneer at us when we say that education must be so geared.

What of the Opposition's policies? Today we have heard that they want us to join the ERM, but they have not told us at what rate they would do so. They have told us that they will abandon any pretence that trade protectionism can work. If they plan to abandon trade barriers, does that mean that they will renounce the multi-fibre arrangement? We all know what Opposition Members will do at the first sign of constituents running to tell them that those awful foreigners are making goods with which they cannot compete—they will put up trade barriers. The Opposition have also told us that there will be a new form of administrative guidance for banks, as though anyone believes that the banks would take any more notice of them than their trade union pals and paymasters did in the 1970s.

It is also important to consider the industrial policy of the right hon. and learned Member for Monklands, East (Mr. Smith), who is, I believe, a lawyer. He was one of those who urged the Government to drop the proposed General Motors takeover of Land Rover in 1986. What was the result of that industrial policy? General Motors effectively pulled out of United Kingdom van manufacture. It made most of its work force redundant and handed the remainder over to the Japanese company, Isuzu. That outcome was partly thanks to Labour's national industrial champion. the right hon. and learned Member for Monklands, East.

I know that it is fashionable to compare us with the Japanese. Hardly a Labour spokesman stands up without comparing our performance with the Japanese and without telling us that we must adopt the policies adopted by the Japanese since the war. Those Japanese post-war policies can hardly be called Socialist. The Japanese have extremely low levels of taxation and of public spending. They have not been ashamed of encouraging enterprise and business. They have virtually no nationalised industries and they have denationalised the few that were. Above all, the Japanese have always had a high rate of saving and a sound, vocationally-oriented education system. If, when the history books are written, people say that the Government have made one major mistake and if there is a lesson to be learnt from the Japanese, it is that we should have implemented our education reforms much sooner than we did. Despite the firm action that we have taken to improve our education system, unfortunately, the benefits of those reforms will not be seen for many years.

In Japanese schools the children are expected to clean out their classrooms. That has a great effect on the level of litter in Japan and on the cleanliness of the workplace. Anyone who has worked in industry will know that that is important. If the Government were ever to propose such a policy for our school children, it would be met with howls from the Opposition saying that it was terribly inhumane to expect children to do that.

The other leaf that we could take out of the Japanese book is that, traditionally, the Japanese have taxed savings either at a low rate or not at all. They have followed that policy because they want to encourage savings and because high levels of saving mean a good pool of available investment for industry. Virtually every economy in the West has, on the one hand, heavily taxed savings and, on the other, heavily subsidised and given tax reductions towards consumption. I believe that to cut taxation on savings or to abolish it altogether up to a certain level would do us much more good than the currently fashionable panacea of joining the EMS.

It is fashionable for Opposition Members to say that it would be a good idea to join the EMS and I shall not argue the rights and wrongs of that, but I know full well—as does every Conservative Member—that if we had gone in 18 months ago and still had economic problems; Opposition Members would claim that those problems were a result of our rash and unwise entry into the EMS tying us to the high interest rate policy of the German Government.

Today we have learnt that, at best, the Opposition have no policy and at worst, at the very time when the Soviets are dropping their Gosplan industrial planning policy and when virtually every Government in the world bar North Korea, Romania, East Germany, China and one or two others are abandoning planning, the Labour party proposes fresh industrial control and a fresh industrial planning strategy for Britain. Have Opposition Members learnt nothing? Do they not recollect the economic planning board of the 1960s and the National Enterprise Board of the 1970s? Have they forgotten the fiasco of the British Leyland merger, the billions of pounds which were pumped into Concorde and the unwise and unnecessary investment in the British Steel Corporation? Have they forgotten their attempts to set up an office equipment company to rival the world which they called Nexos and which has now been consigned to the history books of the office equipment world?

Those policies are not part of some new postThatcherite agenda, but a return to the old, discredited pre-Thatcherite agenda which is being abandoned right across the world.

9.6 pm

Mr. Rhodri Morgan (Cardiff, West)

In the four minutes available to me I shall concentrate—as we should on this supply day or seminar on the state of the economy—on a couple of facts which should be common between us since they are well established. Perhaps we can discuss their implications for the economic conduct of the Government over the next five to 10 years.

The trade figures for September were published today. They show that we are still running with a trade deficit equivalent to 4 per cent. of our gross national product, which we can no longer regard as an odd statistical freak. That is one of the largest gaps which any country has had in its current trade this decade. It is a sort of San Andreas fault underneath our economy which has opened up in the past two or three years. We lived in a fool's paradise for many years, believing that we were somehow manufacturing the oil which emerged from the ground under its own internal pressure. This hid the weakness in our trade deficit.

Now that our oil revenues are about one quarter of what they were at the peak of oil production, because oil is worth only half what it was and we produce only half what we did, we are returning to normal. Can we make as much to sell to foreign Governments and consumers as they make to sell to us? It is perfectly clear that in 1989 we cannot. We have an absolutely colossal trade gap which shows a lot of competitiveness of a kind with which we are familiar in a mild form but which we now have in an acute form.

I can see the Financial Secretary shaking his head as though what I have said is contradicted by the fact that the economy is growing too fast and that we expanded the economy because we did too much to restimulate it when we misunderstood the October 1987 stock market crash. But that is complete baloney. Every other country overstimulated its economy but they do not have a trade deficit equivalent to 4 per cent. of their GNP.

I hope that I can kill off Government claims that exports are rising strongly. Of course they are. There has never been a better time to export because world trade is rising strongly. In the past couple of years the economies of Japan, Germany and the United States have been importing and consuming as never before. The fact that our exports are rising, but our imports are rising faster is not due to some strange aberration of British economic policy caused by an overstimulation of the British economy alone after the October 1987 crash.

Every OECD advanced country stimulated its economy because of fears of a recession after the October 1987 stock market crash. Let us never again hear from Conservative Members the excuse that somehow only this country expanded rapidly after October 1987 and that exports generally have been difficult to find, suggesting that the fact that our exports have been going up represents massive credit to the British economy.

It has never been easier to sell abroad than it has been in the past two years. Economies abroad have been sucking in imports as they have never done before, as the OPEC decade and a half has expired and as the post-OPEC era has been upon us. As I say, it has been easier for OECD Governments to get their economies and manufacturers to expand. It is a unique factor of the British economy that our competitiveness has undoubtedly worsened, as is evident from the 4 per cent. equivalent of GNP in our trade deficit. We are now weaker than we were 10 years ago in the competitiveness of our economy.

9.10 pm

Mr. Gordon Brown (Dunfermline, East)

The background to this debate is the worry of industry, small businesses, home owners and low-income families that, after 15 months of the highest interest rates, the worst inflation and the biggest trade deficit of our major competitors, inflation has still been rising, the trade deficit is worsening and interest rates have still been going up.

The Chancellor devoted a major part of his speech today to the subject of inflation. The issue, he said, was getting it down. We must ask why it went up. The same Chancellor who told us that the battle was with inflation is the Chancellor who has doubled inflation over the last 15 months. The same Chancellor who told us that inflation was a blip presents us today with inflation at 7.6 per cent., the highest of all our major competitors.

The same Chancellor who told us that his objective was zero inflation now presents us with a situation in which we have 7 per cent. inflation here, 3 per cent. in Germany, 3.5 per cent. in France and 1 per cent. in the Netherlands. This is the Chancellor who said that he would eliminate inflation. It looks just now that inflation will eliminate him.

Not only have we the highest inflation in our major competitors, but we have the worst interest rates. Interest rates have risen 11 times, yet still the Chancellor persists in denying the reality of the consequences. High interest rates, he told the Tory party conference and repeated at an interview afterwards, were testimony to the vigour of the economy. The Prime Minister said after that that Britain, as a result of those policies, was stronger than ever. The British economic miracle, they still insist, is intact.

What are the real problems that people are facing? What are business men and industrialists saying about their prospects? The Chancellor quoted from the CBI, but he did not tell us the main impact of the CBI's message—that manufacturing investment will fall, that order books are falling back and that vital investment to correct inefficiencies is being denied.

Last year's business man of the year, the head of the Coloroll Group, John Ashcroft, is saying that next year investment in his company will be halved. He says that in terms of what is happening in the United Kingdom now, if this is a soft landing, pass him the bruise cream because the present rates of decline are significant.

Consider what is being said throughout the country. The West Midlands chamber of commerce comments that the cash flow problems for small businesses are worsening. Birmingham chamber of commerce reports that about 40 per cent. of companies have reduced export orders. Investment in Yorkshire and Humberside, reports the chamber of commerce for the area, "is falling quite rapidly." The Scottish Federation of Small Businesses reports that small business is buckling under the strain.

Despite all of that, the Chancellor is hamstrung by his obsession with high interest rates, like a gambler obsessed with a system that shows no sign of immediately working and who increases the stakes regardless of the damage that is being caused and regardless of the difficulties that industry faces.

For those reasons, our policy is to end exclusive reliance on interest rates. We would introduce an autumn statement for investment in our future and we would take steps to deal with the supply side problems that the Government have created. We would rule out tax cuts in the Budget so that we can have proper investment in our future. The Chancellor should act directly on the inflation he has created by refusing to allow higher water, electricity and rail prices and the poll tax to be imposed on this country.

Our complaint against the Government lies not just in the mistakes of the past two years; it lies in the mismanagement of our oil wealth over the past ten. It is not only that they have pushed up interest rates to levels way beyond those of our competitors, yet still failed to curb inflation; or that we have the worst combination of these indicators of any country in Europe; it is that the Government have failed to create, after the one decade of North sea oil, the long-term stable environment that industry needs for a modern economy of the future. To seek to run a consumer boom without the necessary prior investment was bound to he unsustainable and to lead to the problems that we now face. The solution that the Chancellor has chosen—high interest rates—directly damages the investment that we need. And the tragedy of the Chancellor's position is that he has no greater desire in life than to repeat the mistakes that he has made.

We know that the Budget surplus that the right hon. Gentleman has is never intended to be used for investment, now or in the future, in training, skills, the regions or innovation. The Budget surplus is to be kept in store to finance exactly the same mistakes that we saw in the past—a give-away Budget, a consumer boom on credit and a further deterioration in our trade deficit with all the predictable consequences for interest rates and inflation.

Nowhere is the Government's failure to be seen more clearly than in what has happened to the trade balance—the worst quarter in our history, the worst month for imports and a trade gap not only in our traditional industries but in the new high-tech industries of information technology and electronics. Imports of consumer goods are up by four or five times the level of imports of capital goods. The volume of imports is up by twice as much as the Chancellor's forecast in the Budget.

What does the right hon. Gentleman claim now? Does he still claim that a trade deficit approaching £20 billion for the year is a result of freak figures—his first explanation? Does he still define it as of no consequence? Does he still say that it gives no cause for concern? Does he still repeat, now that it is approaching £20 billion, that the trade deficit is a second order problem? Does he still insist that it is self-correcting and easily financed? How many of the Chancellor's previous statements are now inoperative? The truth is that he cannot admit that there is a problem because he has no solution to it, and he cannot admit that the gap has not widened because we have had a supply side transformation, because there has been none.

Having denied industry the necessary stability and subjected it to the uncertainties of rising borrowing costs, having starved it of essential infrastructure and imposed on it all the inefficiencies and absurdities that flow from the doctrinaire abandonment of regional, training and innovation policies, what is the Government's view now? Their policy is to abandon Government responsibility for industry when we need a Government who will adopt a policy for all the regions. We need a Government with a strategy for science and technology and for innovation, a Government with a competition policy that restricts the use of junk bonds in company takeovers.

Instead, we have a Department of Trade and Industry presided over by a Minister appointed from the Department of the Environment, not to head it up but to close it down—not a Minister but the Official Receiver. This Department, once the responsibility of Gladstone and of Churchill, is to become the retirement home for the Secretary of State for Trade and Industry. When all those working breakfasts of the previous incumbent have been cancelled and the glossy brochures have been pulped, when the PR men have been sent to the Department of Health for the next campaign, what will be left of the Department of Trade and Industry and of the Government's responsibility to industry? The Secretary of State, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley), will be seated alone at his desk: no in-tray, no out-tray, just an ash tray.

If the economy of the 1980s in Great Britain is as Ministers claim it is, if all the countries of the world are following our example, as the Chancellor tells us they are, why are not the Japanese closing down Miti, their department of industry, why are not the French abandoning their policy of encouraging centres of excellence, why are not the Germans abandoning regional policy and leaving the Ruhr to market forces? What other nation on earth runs down regional policy or its policy for science and for innovation? Blind to the needs of industry, deaf to the claims of small business and insensitive to the damage done by high interest rates, the Conservative party—the party of high interest rates—can no longer even pretend to claim to be the party of industry.

Where is the Chancellor in all this? The man who has been bestriding the world stage for the past few years, boasting of his successes and their applicability to countries abroad, now tells us that the German economic miracle is one of the past but that ours is of the present. How does he see himself now, when his day begins with a begging telephone call to the president of the Bundesbank and continues with telexes to the Bank of Japan and with calls to the Federal Reserve Bank? The Chancellor who once boasted of his economic successes around the world is now reduced to ringing around the central banks for handouts to support his currency at the mercy of speculators.

What is his policy now? The man who considered every nuance of the M3 figures unceremoniously abandoned their publication this summer after 10 years. The man who said that interest rates were to be set by the markets in 1979 now insists on setting them himself. He is the man who has cast aside all the Right-wing theories of the Adam Smith Institute in which he has successively lost faith. The only invisible hand in which he now believes is that of Professor Sir Alan Walters, who is making the decisions at No. 10 Downing street.

What do we know of that mysterious figure of influence? He was once a member of the Centre for Policy Studies—the think tank for the Prime Minister—financed by the now Lord Joseph, and is a member of the American Enterprise Institute financed by American business—a think tank for such impressive figures as Vice-President Dan Quayle.

For a few years Sir Alan was also a member of the standing committee of the Global Economic Action Institute, financed—as The Sunday Times revealed—by the Unification Church of the Reverend Sun Myung Moon; in short, the Moonies. Is it the case that our economic policy is no longer under the influence of monetarism but under that of Moonie monetarism? Have we, in six or seven years, moved from punk monetarism to Moonie monetarism?

Let us consider the Chancellor's difficulties. Many lonely, sad and embattled people labour under the delusion that their thoughts are being influenced by the. Moonies next door. But, for the Chancellor at No. 11 Downing street, sadly, such fears may be thoroughly well grounded. I assure the right hon. Gentleman that he is not paranoid. They really are out to get him.

What does Sir Alan do? Much has emerged from documents from America. Leaving aside the question whether a truimphalist autobiography by Sir Alan Walters is yet in order, the Chancellor will be interested to know that he described himself in his recent article as a natural leader for the monetarist revolution in the United Kingdom. The Chancellor may also be pleased to notice his description of the man who brought about immense changes in monetary and fiscal policy. That was not the Chancellor, but Sir Alan himself. Not that he is ungenerous in his articles. Although much of the credit goes to himself, the rest goes to what Sir Alan describes as the real architect of Britain's economic renaissance—the Prime Minister.—[HON. MEMBERS: "Go on—smile."] I am sorry that the Chancellor finds none of that amusing, but Sir Alan says of his own role as an economic adviser: My role was defined by the Prime Minister with the words, 'You know what you can do best and you know what needs doing' but the Prime Minister and I agreed that I would be most effective at her elbow in No. 10. That is a proximity that the Chancellor might find not only unlikely but quite dangerous.

Mr. Tebbit

The hon. Gentleman verges on the edge of boring the House by reading extracts from newspapers and articles which any of us could read. In his last 10 minutes, would he like to turn his attention to what we cannot read and do not know about, the Labour party's alternative policy—if there is one?

Mr. Brown

I do not think that the right hon. Gentleman was here when I outlined the main points of Labour's alternative policy. I can tell the right hon. Gentleman that it might be difficult for him to get hold of the article "A Life Philosophy" by Sir Alan Walters because the institute which has produced it tells us that on the instructions of No. 10 Downing street it is not to issue any more copies.

Mr. Tebbit

Is the hon. Gentleman allowed to issue any copies of Labour's policy or to tell us how it would impose credit controls?

Mr. Brown

Perhaps the right hon. Gentleman has not seen the Labour party policy review document. If he cares to pay £2.50 for a copy he will receive one.

The Chancellor knows that even if Sir Alan goes a bigger problem remains—the Prime Minister. Having signed the Madrid agreement on European monetary co-operation, she obviously spent subsequent months backtracking on it in the same way as she signed the Commonwealth conference agreement and immediately repudiated it. The Chancellor should be warned about what will happen if he goes to Europe for the next summit and reaches agreement on European monetary cooperation. Having successfully negotiated an agreement, he will no doubt find that barely has the ink dried when the Prime Minister will descend from her aircraft at London, call the press together and declare another triumph of diplomacy and another great success in international negotiations. She will say, "In my hands I have two pieces of paper, the official agreement and the official repudiation." Not a Minister will stand up and tell her that she is wrong.

The Government are prepared to make the consumer pay with higher prices, the pensioner with an inadequate pension, and whole communities with deteriorating public services. They are prepared to make 7 million mothers and 12 million children pay by freezing child benefit. I can think of no parallel this century. Top salaries have risen and dividends and executive perks are greater than ever, but the Government have done little to mitigate child poverty and the poverty of millions of people. They are destroying the pretence of ever being called the party of the family.

What about home owners? Two million have lost £80 per month as a result of the increase in the mortgage interest rate and 4 million are worse off by £50 a month. The teacher with the typical mortgage is worse off by about £80 a month and the engineer by about £100. What does the Conservative party say? Why is there no apology, word of regret or sympathy for people with such problems? I have here a copy of the Conservative party's research department document called, "Politics Today". It is about the economy and contains questions and answers. Needless to say there are more questions than are answered in the document.

The Government say that they are committed to extending home ownership, but the following question caught my eye. It says: Aren't its high interest rate policies crippling countless homeowners especially families and first buyers? After two paragraphs we get to the heart of the answer. It says: Yet though higher interest rates do increase costs for borrowers, including mortgagors, research evidence shows that there is no link between levels of interest rates and the number of people unable to cope with their mortgage payments. There is "no link" but the numbers of people in arrears of two months or more have risen from 240,000 to nearly 400,000 this year. When the Governor of the Bank of England has said that there is a link, when the Building Societies Association has produced research showing that there is a link, the Conservative party tells worried home owners that there is no link between high interest rates and the arrears of many people. Can the arrears be blamed on poor housekeeping and bad budgeting? On what does the Conservative party blame the rising amount of arrears over the past year? That is a lie that even the Chancellor might have been unable to sustain in the heady atmosphere of a Blackpool audience in that conference hall.

These are the people who budgeted on the Government's claim that there was an economic miracle, who were told to believe that there was a transformation, and who were encouraged in the view that Britain's prospects and theirs were transformed. These are the people who are being dismissed by the Chancellor with the words, "Cut back on something else." There is no sympathy, no apology and no regret. People are told that arrears have nothing to do with high interest rates. Now they are being told by Ministers that it is nothing to do with them and there is nothing that they can do about it. Ministers deny all responsibility and will walk by on the other side. That is the prerogative of the Pharisee down the ages.

First, the Government abandoned the pensioners, then they abandoned the unemployed. Then then neglected the low paid, then they froze child benefit. Now they have betrayed industry, small businesses and home owners. Soon there will be no one left to betray. The Conservative party has had 10 years. It has squandered the oil revenues, wasted the opportunities, mismanaged the economy and failed Britain in the 1980s. The 1990s belong to Labour.

9.31 pm

The Chief Secretary to the Treasury (Mr. Norman Lamont)

I agree with the hon. Member for Dunfermline, East (Mr. Brown) on one point, and that is that the main issue in the debate is inflation, why it has picked up and what should be done about it. It was interesting that, when inflation should be the main problem in our minds, both he and the right hon. and learned Member for Monklands, East (Mr. Smith) spent only a relatively short time in their speeches dealing with it. We all know why—because they have no policies for inflation. They know that the record of the Labour party in government was catastrophic, and on the evidence of the speeches that we have heard today it has no policy for inflation now.

Why has inflation increased in the last year? The hon. Member for Dunfermline, East sought to place the blame on top rate tax cuts. According to the Labour party, most of the evils in the world stem from that. However, when we have had a budget surplus for two years running, it is stretching the imagination to suggest that tax cuts worth £3 billion could cause a surge in inflation in an economy with a gross domestic product of some £500 billion. That does not make sense; it does not add up.

The origins of our inflation must be deeper than that, and part of the explanation lies in the loosening of monetary policy in the wake of the stock market crash. We were facing a situation that had not been seen anywhere for over 50 years, and everybody, including the Labour party, was unanimous in believing that the appropriate thing to do was to lower interest rates. With hindsight, it is clear that the stock market crash had no lasting effect on demand, but that was not clear at the time. Furthermore, even with hindsight, we cannot be sure that there would not have been a severe impact on confidence if we had not reduced interest rates when we did, with the full support of the right hon. and learned Member for Monklands, East.

Our policy was also part of a co-ordinated international move. That is why there has been a rise in inflation in the United Kingdom and worldwide. If we take the seven major industrial countries as a whole, inflation is around its highest level for five years. That reflects the action that was taken here and elsewhere. It reflects also the acceleration in growth that we have been seeing throughout the world. Opposition Members may not like it, but the true comparison when measuring inflation here and elsewhere is achieved by removing mortgage interest payments That is done in other countries. From February 1988 to May 1989, inflation, excluding mortgage interest payments, rose in the United Kingdom by 2.5 per cent. In the same period, inflation in Germany rose by 2.2 per cent. In Japan, the rise was 2.2 per cent. and in Italy, where inflation both now and then was and is higher than in Britain, the rise was 1.9 per cent.

The reason why inflation affected Britain somewhat more than other countries is that we had been enjoying growth for seven years. We did so at a higher rate and for a longer period than other countries in the rest of Europe. Our economy was no doubt nearer to capacity and the inflationary pressures were therefore greater. We cannot expect Opposition Members to understand this. They never had to deal with the problems of an economy growing too fast. All that they ever had to deal with were the problems of a thoroughly stagnant economy.

Mr. Morgan

We all note with interest the Minister's attempt to award the Government innocence by association, by trying to draw in the fact that other countries have experienced an increase in inflation, especially OECD countries. In his attempt to produce innocence by association, can he name any half year, any year or any quarter of any year in which the British inflation rate under this Government has been near or below the OECD average?

Mr. Lamont

As my right hon. Friend the Chancellor of the Exchequer said, throughout the Government's term of office the inflation differential between Britain and the EEC has been a fraction of what it was when the Labour Government were in power.

Although inflation is the most pressing problem that we face, we heard no policy advocated by the Opposition to deal with it. That is remarkable. The hon. Member for Dunfermline, East seems to think that investing public money is somehow an anti-inflationary policy. That is the strangest anti-inflationary policy that the world has ever heard of, and one that will not impress the financial markets.

There are only three ways of dealing with inflation: direct controls on pay and prices, which the Opposition are against; monetary policy, the mere mention of which makes them shiver in their bones; and taxation, which we all know is their anti-inflationary policy. They are always itching, always wanting and always about to increase taxes.

The right hon. and learned Member for Monklands, East made a tremendous amount of the current account deficit. The deficit is not a reflection, as deficits were in the past, of an uncompetitive economy. It is much more a reflection of the excess demand and inflation which is the main and key problem. As demand slows down, the current account will improve. Inevitably it will take time for the slow-down in the high street to work through to stocks, lower production orders and imports. Likewise it will take time for exporters to divert orders from the easy and expanding home market, as conditions tighten, into the international market. Just as the boom last year diverted orders from abroad to the home market, as our economy slows down we shall see orders diverted overseas.

That the current account deficit is a product of excess demand is, with great respect to the point made by the hon. Member for Cardiff, West (Mr. Morgan), shown in the export figures. If our current account deficit were largely the result of a loss of competitiveness, we would not be seeing anything like the rise in exports that we are currently seeing and that we have been seeing since the Government tightened monetary policy at home.

In the three months to September, exports rose by more than 13 per cent. in value and by more than 8.5 per cent. in volume. That shows that British exports are competitive and that the current account deficit is largely a product of excess demand rather than lack of competitiveness.

My hon. Friend the Member for Amber Valley (Mr. Oppenheim) referred to the statistics for our share of world trade, which Labour Members have mentioned. For decades, our share of world trade has been falling. It stabilised in the 1980s right up to 1987 and deteriorated in 1988 as we had excess demand in our economy. But this year the performance of our exports is good and all the signs are that our share of world trade will stabilise again.

I have talked about the problems that fast growth has created for us, but my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) was right to remind us that the very fast growth that we have had, the fact that we have been top of the growth league in the 1980s when we were bottom in the 1960s and the 1970s, has been an enormous advantage to the British people. It has meant that we have had more to invest in the public services that so concern the hon. Member for Dunfermline, East, and it has meant that we have had a dramatic rise in living standards.

The hon. Member for Dunfermline, East made a remarkable claim. He said that the Government have now abandoned the unemployed. Some statistics have just been published which show that in the past year unemployment has fallen faster than in any other major country. We hear a lot about international comparisons on inflation, but we do not hear comparisons on unemployment. We used to hear them a few years ago, but the United Kingdom unemployment rate is now almost two thirds of the EC average and, more importantly, youth unemployment has also fallen sharply. The OECD figures for the United Kingdom show that the United Kingdom unemployment rate for under 25-year-olds is only about half the EC average. Why do not Labour Members welcome that and face the facts?

Mr. Brian Wilson (Cunninghame, North)

Since the Minister had the impertinence to mention youth unemployment, will he recognise that one fifth of the total fall in all unemployment in the past year has been achieved by the simple expedient of removing unemployed 16 and 17-year-olds from the register by depriving them of the right to claim benefit? That is the truth of the matter, and to claim those 16 and 17-year-olds as a trophy is obscene.

Mr. Lamont

The hon. Gentleman is talking nonsense. The fall in unemployment has been due to the expansion of our economy. We need only to look at a newspaper to see that there is a tightening market for young people and that many employers cannot get young people.

Labour Members also suggest that the acceleration in inflation and the deterioration in the current account mean that nothing has changed in the British economy; that we have simply moved to a situation where the old familiar constraints apply every time that we try to expand our economy; that nothing has changed in the supply side. It is travesty to say that nothing has changed. An article in The Economist two weeks ago pointed out that the sort of sudden surge in demand that we have had in the past two years would, in previous decades, have caused much higher inflation and that what we have seen in the past year has underlined the flexibility and the ability of British industry to respond to the increase in demand that we have had.

There has been a change on the supply side and the results of our policy speak for themselves. My right hon. Friend the Member for Chingford (Mr. Tebbit) referred to the dramatic and remarkable changes in the British motor industry, which was written off when the Labour party was in power. My right hon. Friend the Member for Chingford and my hon. Friend the Member for Croydon, South (Sir W. Clark) also referred to the remarkable growth in investment. Business investment is now at an all-time high as a proportion of gross domestic product. Is that not a change which the Labour party should welcome? Investment has also been growing twice as fast as consumption. When the Labour party was in government, investment was growing at one eighth of the rate of consumption. Is that not a significant change, and is that not a change that the Labour party should welcome if it is really prepared to face the facts?

British industrialists and British business men are taking the long view because they have confidence in this country and they have confidence that our growth will continue. It is nonsense to say that nothing has changed. Plenty has changed and our economy is much stronger than it was 10 years ago. That is well recognised outside this country, even if Opposition Members stubbornly refuse to acknowledge it.

The right hon. and learned Member for Monklands, East put forward the usual arguments today for credit controls. We are told that credit controls would be a painless alternative to increases in interest rates. It is disappointing that the right hon. and learned Gentleman does not know rather better than that. I have read in the newspapers that he and his hon. Friend the Member for Dunfermline, East have been dressed up in their pinstripes by Mr. Mandelson, sent round the central banks of Europe and wined and dined, but unfortunately the wining and dining in the central banks has been a bit too good. The right hon. and learned Member for Monklands, East does not really understand how monetary policy operates, either in Germany or in France. When the hon. Member for Dunfermline, East talks about reserve ratios and the German and French use of them, he should know that that is merely the way in which those countries create the money market shortages to put interest rates up. That is not at all surprising because if credit controls work and make credit scarce they put up interest rates, and that has been the effect.

We heard a new twist today from the hon. Member for Dunfermline, East, who said that he wanted a voluntary arrangement between the banks and the Government. He seemed shocked that my hon. Friends were no more impressed by this solemn and binding undertaking than they were by the solemn and binding undertakings entered into by previous Labour Governments. A voluntary agreement between the Government and the banks would, of course, have no chance of working in a world in which there were no exchange controls. As my right hon. Friend the Member for Chingford said, to have such an agreement would merely leave people exposed to the blandishments of offshore lenders, and we have quite a number of problems with offshore lenders as it is.

The right hon. and learned Member for Monklands, East seemed surprised that my hon. Friends thought that the banks were not likely to agree to his proposition. My hon. Friends are entirely realistic. In the competitive international world of the City today, it is sheer lunacy and fantasy to imagine that the City of London could remain competitive and expose itself to competition from offshore lenders in the way that the right hon. and learned Gentleman described.

Mr. Robert Hughes (Aberdeen, North)

I am grateful to the Chief Secretary for giving way. As he has had an emotional 10 minutes, I shall give him time to calm down and think carefully about the answer to my question. What is the Chief Secretary actually saying? Is he saying that if the balance of payments and trade position deteriorate, and if there is a run on the pound, all he and the Chancellor will do will be further to increase interest rates?

Mr. Lamont

The hon. Gentleman does not come to economic debates often. If he did, he would know that we have not only a tight monetary policy but the tightest fiscal policy of any country.

We have heard much from the Labour party about the plight of home owners. Of course, I accept that higher mortgage rates, although necessary to fight inflation, may cause difficulties for those who have recently taken out mortgages. The figures quoted by the hon. Member for Dunfermline, East and the right hon. and learned Member for Monklands, East on the plight of those with mortgages greatly exaggerated the problem. The hon. Member for Dunfermline, East might have had the grace to mention that the rise in disposable income over the past two years would have dwarfed the increase of £90 a month that he chose to put forward in his distorted example. Over the past two years, take-home pay for an average married couple has risen by over £150 a month. Of course there are problems, but they should be considered in that context.

Labour's conversion to home ownership would be convincing if we could believe in it, but the Labour party is the party that has fought the right to buy and the party under whose leadership councils daily obstruct tenants' efforts to exercise their rights. It is the Labour party that wants millions of permanent tenants to remain dependent on the Government.

We know from the comments of the hon. Member for Dagenham (Mr. Gould) on "The Walden Interview" on 15 October what ideas Labour is toying with for home owners. The hon. Gentleman talked about controls on the building societies and on lending in relation to people's incomes. To be fair to him, he made it clear that he would not apply those policies to new home owners, but he went on to say: Oh, this is very clear, the people who would be hit but only in prospect, I mean they would be … fully warned and we would be fully alert to the change that had occurred in the interest of the national economy … would be those who were trading up, those who over recent years and again I say, I've done it myselr— that was decent of him— who buy, who move for one reason or another and find that because of asset inflation, the availability of this form of credit that it is possible to buy a more expensive house". Now we know: if a person lives in a house he should make sure that he likes it, because it will be difficult to move under the policy put forward by the hon. Gentleman.

Labour Members have told us that the exchange rate is at the heart of economic policy. The right hon. and learned Member for Monklands, East spent a large part of today talking about Professor Walters. Without him, I do not know what the right hon. and learned Gentleman would manage to make speeches about. If Professor Walters did not exist, he would have to be invented. As the right hon. and learned Gentleman believes that the exchange rate policy is at the heart of economic policy, and as he believes that there is some ambiguity and lack of clarity in the Government's policy, I am sure that he must therefore be confident that the Labour party's policy on EMS is crystal clear.

What is the Labour party's policy? The hon. Member for Dunfermline, East has been on a tour of the central banks of Europe. He has had discussions with eminent central bankers. He has come back and told us that there is a possibility that Labour will join the EMS. Labour is eager to join the EMS, provided certain conditions are satisfied. The trouble is that those conditions are about as long as the Labour party's constitution and just about as interesting. Labour is prepared to join the EMS provided that, first, there is a strategy for balanced growth in the Community; secondly. there are more structural funds; thirdly, there are more regional funds; fourthly, there are more swaps; fifthly, there is an EEC-wide trade policy; and, sixthly, the deflationary bias of the system is removed. The Labour party's position is crystal clear, is it not?

The most interesting statement was that the Opposition want more swaps within the EMS. Normally it takes a Labour Government two years before they go to the IM F and line up their creditors. Because the right hon. and learned Member for Monklands, East is prudent and cautious, he is doing that well in advance.

Most puzzling of all, the Opposition propose the removal of the deflationary bias in the EMS. I thought that the whole purpose of the EMS was that one currency could be tied to another so that inflation rates converged towards those of the low inflation countries. That is the main point of the EMS, and that is what the right hon. and learned Member for Monklands, East wants to remove. He does not want to join the EMS. He wants to drive a coach and horses through it.

The right hon. and learned Member for Monklands, East spoke at great length about the views of Professor Walters on the EMS. However, he has not contrasted the different views among his fellow Opposition Members who are not part-time advisers, but members of the shadow Cabinet. I will contrast those views now. The right hon and learned Member for Monklands, East said: We see advantages in the stability that membership of EMS could achieve for the currency in a very volatile world. The hon. Member for Sedgefield (Mr. Blair) has said: We should treat with extreme caution claims about stability which membership would bring to our currency … I do not believe that there is compelling evidence that long-term stability had been brought to the exchange rate currencies in the EMS."—[Official Report, 29 January 1986; Vol. 90, c. 988–89.] The hon. Member for Dagenham said: For sterling, EMS membership would actually mean a reduced ability to maintain a particular parity against the dollar. Nor is there any evidence that exchange rate stability of itself would necessarily be of great help to our economy. It is relatively easy to hedge against short-term volatility. The right hon. and learned Member for Monklands, East has had the cheek to tell us that Government policy is disunited because a part-time academic adviser to the Government has expressed a view about the EMS. However, what does the right hon. and learned Gentleman say about the views expressed by his hon. Friend the Member for Dagenham?

The hon. Member for Dagenham was once an academic, but, as far as I know, he is not now a part-time adviser to the Labour party. He is a fully paid up member of the Labour party and a member of the shadow Cabinet. How can the right hon. and learned Member for Monklands, East maintain the fiction that the Labour party has a policy on the EMS which contrasts with the Government's policy or claim unity against disagreement? That is absolute nonsense and rubbish, and the right hon. and learned Gentleman knows it.

The hon. Member for Dagenham has expressed his total opposition to the EMS. He declined to answer questions when he appeared before the Treasury and Civil Service Select Committee. He said that it would be inappropriate for him to reply, in his words, given my general hostility to the prospect of full membership of EMS. How can Opposition Members talk about Professor Walters? Before they do that again, they should sort out their own policies and attitudes.

We have heard no policies from the Labour party. It was like the Labour party conference—everyone was waiting for the big idea, but we did not get it. The big idea was a little idea. We did not really get any idea at all. All we have seen is the big vacuum. We were told to meet the challenge and to make the change. We know what we would be making the change from. We have certainly been given no indication to what we would be making the change.

It appears that the Labour party simply stands for what it thinks people will fall for. That is its policy. It reminds me of what used to be said about an unsuccessful Republican candidate for the American presidency—"At least with him you know you don't know where you stand." That is exactly how it is with the Labour party. We know what the big idea is. The big idea is one small step for the right hon. Member for Islwyn (Mr. Kinnock), but it would be one gigantic, catastrophic step for the British people and the British economy.

Opposition Members have today exposed all the divisions in their shadow Cabinet. We are grateful to the hon. Member for Dagenham. He may be an embarrassment to the Opposition, but he is of service to the country because he is the only one who lets us see anything more than the Mandelson puppet show. The Government have courage. They will bring down inflation, and they deserve the confidence of the House.

The Parliamentary Secretary to the Treasury (Mr. David Waddington)

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

The House divided: Ayes 208, Noes 306.

Division No. 333]	[10 pm
AYES
Abbott, Ms Diane	Bell, Stuart
Allen, Graham	Benn, Rt Hon Tony
Alton, David	Bennett, A. F. (D'nt'n & R'dish)
Anderson, Donald	Bermingham, Gerald
Archer, Rt Hon Peter	Bidwell, Sydney
Armstrong, Hilary	Blair, Tony
Ashley, Rt Hon Jack	Blunkett, David
Ashton, Joe	Boyes, Roland
Banks, Tony (Newham NW)	Bradley, Keith
Barnes, Harry (Derbyshire NE)	Bray, Dr Jeremy
Barnes, Mrs Rosie (Greenwich)	Brown, Gordon (D'mline E)
Barron, Kevin	Brown, Nicholas (Newcastle E)
Battle, John	Brown, Ron (Edinburgh Leith)
Beckett, Margaret	Bruce, Malcolm (Gordon)
Beith, A. J.	Buchan, Norman

Buckley, George J.	Janner, Greville
Caborn, Richard	Johnston, Sir Russell
Callaghan, Jim	Jones, Barry (Alyn & Deeside)
Campbell, Menzies (Fife NE)	Jones, Ieuan (Ynys Môn)
Campbell, Ron (Blyth Valley)	Jones, Martyn (Clwyd S W)
Campbell-Savours, D. N.	Kaufman, Rt Hon Gerald
Canavan, Dennis	Kennedy, Charles
Carlile, Alex (Mont'g)	Kinnock, Rt Hon Neil
Clark, Dr David (S Shields)	Kirkwood, Archy
Clarke, Tom (Monklands W)	Leadbitter, Ted
Clay, Bob	Leighton, Ron
Clelland, David	Lestor, Joan (Eccles)
Clwyd, Mrs Ann	Lewis, Terry
Cohen, Harry	Litherland, Robert
Cook, Robin (Livingston)	Livingstone, Ken
Corbett, Robin	Livsey, Richard
Corbyn, Jeremy	Lloyd, Tony (Stretford)
Cousins, Jim	Lofthouse, Geoffrey
Cox, Tom	Loyden, Eddie
Crowther, Stan	McAllion, John
Cryer, Bob	McAvoy, Thomas
Cummings, John	McCartney, Ian
Cunliffe, Lawrence	Macdonald, Calum A.
Cunningham, Dr John	McKelvey, William
Dalyell, Tam	McLeish, Henry
Darling, Alistair	Maclennan, Robert
Davies, Rt Hon Denzil (Llanelli)	McNamara, Kevin
Davies, Ron (Caerphilly)	Madden, Max
Davis, Terry (B'ham Hodge H'l)	Mahon, Mrs Alice
Dewar, Donald	Marek, Dr John
Dixon, Don	Marshall, Jim (Leicester S)
Dobson, Frank	Martlew, Eric
Doran, Frank	Maxton, John
Dunwoody, Hon Mrs Gwyneth	Meacher, Michael
Eadie, Alexander	Meale, Alan
Eastham, Ken	Michael, Alun
Evans, John (St Helens N)	Michie, Bill (Sheffield Heeley)
Ewing, Harry (Falkirk E)	Michie, Mrs Ray (Arg'l & Bute)
Ewing, Mrs Margaret (Moray)	Moonie, Dr Lewis
Fatchett, Derek	Morgan, Rhodri
Fearn, Ronald	Morley, Elliot
Field, Frank (Birkenhead)	Morris, Rt Hon A. (W'shawe)
Fisher, Mark	Mowlam, Marjorie
Flannery, Martin	Mullin, Chris
Flynn, Paul	Nellist, Dave
Foot, Rt Hon Michael	Oakes, Rt Hon Gordon
Foster, Derek	O'Neill, Martin
Foulkes, George	Orme, Rt Hon Stanley
Fraser, John	Owen, Rt Hon Dr David
Fyfe, Maria	Parry, Robert
Galloway, George	Patchett, Terry
Garrett, John (Norwich South)	Pendry, Tom
Garrett, Ted (Wallsend)	Pike, Peter L.
George, Bruce	Powell, Ray (Ogmore)
Gilbert, Rt Hon Dr John	Prescott, John
Godman, Dr Norman A.	Quin, Ms Joyce
Golding, Mrs Llin	Radice, Giles
Gordon, Mildred	Rees, Rt Hon Merlyn
Gould, Bryan	Reid, Dr John
Grant, Bernie (Tottenham)	Robertson, George
Griffiths, Nigel (Edinburgh S)	Robinson, Geoffrey
Griffiths, Win (Bridgend)	Rogers, Allan
Hardy, Peter	Rooker, Jeff
Harman, Ms Harriet	Ross, Ernie (Dundee W)
Hattersley, Rt Hon Roy	Ruddock, Joan
Healey, Rt Hon Denis	Salmond, Alex
Heffer, Eric S.	Sedgemore, Brian
Hinchliffe, David	Sheerman, Barry
Hoey, Ms Kate (Vauxhall)	Sheldon, Rt Hon Robert
Hogg, N. (C'nauld & Kilsyth)	Short, Clare
Home Robertson, John	Sillars, Jim
Howarth, George (Knowsley N)	Skinner, Dennis
Howell, Rt Hon D. (S'heath)	Smith, Andrew (Oxford E)
Howells, Geraint	Smith, C. (Isl'ton & F'bury)
Howells, Dr. Kim (Pontypridd)	Smith, Rt Hon J. (Monk'ds E)
Hughes, John (Coventry NE)	Smith, J. P. (Vale of Glam)
Hughes, Robert (Aberdeen N)	Snape, Peter
Hughes, Sean (Knowsley S)	Spearing, Nigel
Illsley, Eric	Steinberg, Gerry
Ingram, Adam	Strang, Gavin

Straw, Jack	Williams, Rt Hon Alan
Taylor, Mrs Ann (Dewsbury)	Wilson, Brian
Taylor, Matthew (Truro)	Winnick, David
Thompson, Jack (Wansbeck)	Wise, Mrs Audrey
Turner, Dennis	Worthington, Tony
Vaz, Keith	Wray, Jimmy
Wall, Pat	Young, David (Bolton SE)
Wareing, Robert N.
Watson, Mike (Glasgow, C)	Tellers for the Ayes:
Welsh, Andrew (Angus E)	Mr. Frank Haynes and Mr. Allen Adams
Welsh, Michael (Doncaster N)

NOES
Aitken, Jonathan	Curry, David
Alexander, Richard	Davies, Q. (Stamf'd & Spald'g)
Alison, Rt Hon Michael	Davis, David (Boothferry)
Allason, Rupert	Devlin, Tim
Amery, Rt Hon Julian	Dorrell, Stephen
Amess, David	Douglas-Hamilton, Lord James
Amos, Alan	Dover, Den
Arbuthnot, James	Dunn, Bob
Arnold, Jacques (Gravesham)	Eggar, Tim
Ashby, David	Evans, David (Welwyn Hatf'd)
Atkins, Robert	Evennett, David
Baker, Nicholas (Dorset N)	Fallon, Michael
Baldry, Tony	Favell, Tony
Banks, Robert (Harrogate)	Fenner, Dame Peggy
Batiste, Spencer	Field, Barry (Isle of Wight)
Beaumont-Dark, Anthony	Finsberg, Sir Geoffrey
Bellingham, Henry	Fishburn, John Dudley
Bendall, Vivian	Fookes, Dame Janet
Bennett, Nicholas (Pembroke)	Forman, Nigel
Benyon, W.	Forsyth, Michael (Stirling)
Bevan, David Gilroy	Forsythe, Clifford (Antrim S)
Biffen, Rt Hon John	Forth, Eric
Blackburn, Dr John G.	Fowler, Rt Hon Norman
Blaker, Rt Hon Sir Peter	Fox, Sir Marcus
Body, Sir Richard	Freeman, Roger
Bonsor, Sir Nicholas	French, Douglas
Boscawen, Hon Robert	Gale, Roger
Boswell, Tim	Gardiner, George
Bottomley, Mrs Virginia	Garel-Jones, Tristan
Bowden, A (Brighton K'pto'n)	Gill, Christopher
Bowden, Gerald (Dulwich)	Gilmour, Rt Hon Sir Ian
Bowis, John	Glyn, Dr Alan
Boyson, Rt Hon Dr Sir Rhodes	Goodhart, Sir Philip
Braine, Rt Hon Sir Bernard	Goodson-Wickes, Dr Charles
Brandon-Bravo, Martin	Gorman, Mrs Teresa
Brazier, Julian	Gorst, John
Brown, Michael (Brigg & Cl't's)	Gow, Ian
Browne, John (Winchester)	Grant, Sir Anthony (CambsSW)
Bruce, Ian (Dorset South)	Greenway, Harry (Ealing N)
Buck, Sir Antony	Greenway, John (Ryedale)
Budgen, Nicholas	Gregory, Conal
Burns, Simon	Griffiths, Peter (Portsmouth N)
Burt, Alistair	Grist, Ian
Butcher, John	Ground, Patrick
Butler, Chris	Grylls, Michael
Butterfill, John	Hague, William
Carlisle, John, (Luton N)	Hamilton, Neil (Tatton)
Carlisle, Kenneth (Lincoln)	Hampson, Dr Keith
Carrington, Matthew	Hanley, Jeremy
Carttiss, Michael	Hannam, John
Cash, William	Hargreaves, Ken (Hyndburn)
Chalker, Rt Hon Mrs Lynda	Harris, David
Channon, Rt Hon Paul	Haselhurst, Alan
Chapman, Sydney	Hawkins, Christopher
Chope, Christopher	Hayes, Jerry
Clark, Dr Michael (Rochford)	Hayhoe, Rt Hon Sir Barney
Clark, Sir W. (Croydon S)	Hayward, Robert
Clarke, Rt Hon K. (Rushcliffe)	Heathcoat-Amory, David
Colvin, Michael	Heddle, John
Conway, Derek	Hicks, Mrs Maureen (Wolv' NE)
Coombs, Anthony (Wyre F'rest)	Higgins, Rt Hon Terence L.
Coombs, Simon (Swindon)	Hind, Kenneth
Cormack, Patrick	Hogg, Hon Douglas (Gr'th'm)
Couchman, James	Holt, Richard
Cran, James	Hordern, Sir Peter
Critchley, Julian	Howard, Michael
Currie, Mrs Edwina	Howarth, Alan (Strat'd-on-A)

Howarth, G. (Cannock & B'wd)	Patten, John (Oxford W)
Howe, Rt Hon Sir Geoffrey	Pattie, Rt Hon Sir Geoffrey
Hughes, Robert G. (Harrow W)	Pawsey, James
Hunt, David (Wirral W)	Peacock, Mrs Elizabeth
Hunt, Sir John (Ravensbourne)	Porter, Barry (Wirral S)
Hunter, Andrew	Porter, David (Waveney)
Hurd, Rt Hon Douglas	Portillo, Michael
Irvine, Michael	Powell, William (Corby)
Jack, Michael	Raison, Rt Hon Timothy
Janman, Tim	Redwood, John
Jessel, Toby	Renton, Tim
Johnson Smith, Sir Geoffrey	Rhodes James, Robert
Jones, Gwilym (Cardiff N)	Riddick, Graham
Kellett-Bowman, Dame Elaine	Ridley, Rt Hon Nicholas
Key, Robert	Ridsdale, Sir Julian
Kilfedder, James	Rifkind, Rt Hon Malcolm
Kirkhope, Timothy	Roberts, Wyn (Conwy)
Knapman, Roger	Rossi, Sir Hugh
Knight, Greg (Derby North)	Rost, Peter
Knight, Dame Jill (Edgbaston)	Rowe, Andrew
Knowles, Michael	Rumbold, Mrs Angela
Knox, David	Sackville, Hon Tom
Lamont, Rt Hon Norman	Sainsbury, Hon Tim
Lang, Ian	Scott, Rt Hon Nicholas
Latham, Michael	Shaw, David (Dover)
Lawson, Rt Hon Nigel	Shaw, Sir Giles (Pudsey)
Leigh, Edward (Gainsbor'gh)	Shaw, Sir Michael (Scarb')
Lennox-Boyd, Hon Mark	Shephard, Mrs G. (Norfolk SW)
Lester, Jim (Broxtowe)	Shepherd, Richard (Aldridge)
Lloyd, Sir Ian (Havant)	Shersby, Michael
Lloyd, Peter (Fareham)	Sims, Roger
Lord, Michael	Smith, Sir Dudley (Warwick)
Luce, Rt Hon Richard	Smith, Tim (Beaconsfield)
Lyell, Sir Nicholas	Smyth, Rev Martin (Belfast S)
Macfarlane, Sir Neil	Soames, Hon Nicholas
MacGregor, Rt Hon John	Speed, Keith
MacKay, Andrew (E Berkshire)	Speller, Tony
Maclean, David	Spicer, Sir Jim (Dorset W)
McLoughlin, Patrick	Spicer, Michael (S Worcs)
McNair-Wilson, Sir Michael	Squire, Robin
McNair-Wilson, Sir Patrick	Stanbrook, Ivor
Madel, David	Stanley, Rt Hon Sir John
Malins, Humfrey	Steen, Anthony
Mans, Keith	Stern, Michael
Maples, John	Stevens, Lewis
Marland, Paul	Stewart, Allan (Eastwood)
Marlow, Tony	Stewart, Andy (Sherwood)
Marshall, John (Hendon S)	Stewart, Rt Hon Ian (Herts N)
Marshall, Michael (Arundel)	Stokes, Sir John
Martin, David (Portsmouth S)	Stradling Thomas, Sir John
Maude, Hon Francis	Sumberg, David
Maxwell-Hyslop, Robin	Summerson, Hugo
Mayhew, Rt Hon Sir Patrick	Tapsell, Sir Peter
Mellor, David	Taylor, Rt Hon J. D. (S'ford)
Meyer, Sir Anthony	Taylor, John M (Solihull)
Mills, Iain	Taylor, Teddy (S'end E)
Miscampbell, Norman	Tebbit, Rt Hon Norman
Mitchell, Sir David	Thompson, D. (Calder Valley)
Molyneaux, Rt Hon James	Thompson, Patrick (Norwich N}
Moore, Rt Hon John	Thorne, Neil
Morris, M (N'hampton S)	Thornton, Malcolm
Morrison, Sir Charles	Thurnham, Peter
Morrison, Rt Hon P (Chester)	Townend, John (Bridlington)
Moss, Malcolm	Townsend, Cyril D. (B'heath)
Moynihan, Hon Colin	Tracey, Richard
Mudd, David	Tredinnick, David
Neale, Gerrard	Trippier, David
Nelson, Anthony	Twinn, Dr Ian
Neubert, Michael	Vaughan, Sir Gerard
Newton, Rt Hon Tony	Viggers, Peter
Nicholls, Patrick	Waddington, Rt Hon David
Nicholson, David (Taunton)	Wakeham, Rt Hon John
Nicholson, Emma (Devon West)	Waldegrave, Hon William
Norris, Steve	Walden, George
Onslow, Rt Hon Cranley	Walker, Bill (T'side North)
Oppenheim, Phillip	Waller, Gary
Page, Richard	Walters, Sir Dennis
Paice, James	Ward, John
Parkinson, Rt Hon Cecil	Wardle, Charles (Bexhill)
Patnick, Irvine	Warren, Kenneth

Watts, John	Wood, Timothy
Wheeler, John	Yeo, Tim
Whitney, Ray	Young, Sir George (Acton)
Widdecombe, Ann	Younger, Rt Hon George
Wiggin, Jerry
Winterton, Mrs Ann	Tellers for the Noes:
Winterton, Nicholas	Mr. Alastair Goodlad and Mr. Tony Durant.
Wolfson, Mark

Question accordingly negatived.

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

The House divided: Ayes 302, Noes 205.

Division No. 334]	[10.15 pm
Aitken, Jonathan	Couchman, James
Alexander, Richard	Cran, James
Alison, Rt Hon Michael	Critchley, Julian
Allason, Rupert	Currie, Mrs Edwina
Amery, Rt Hon Julian	Curry, David
Amess, David	Davies, Q. (Stamf'd & Spald'g)
Amos, Alan	Davis, David (Boothferry)
Arbuthnot, James	Devlin, Tim
Arnold, Jacques (Gravesham)	Dorrell, Stephen
Ashby, David	Douglas-Hamilton, Lord James
Atkins, Robert	Dover, Den
Baker, Nicholas (Dorset N)	Dunn, Bob
Baldry, Tony	Eggar, Tim
Banks, Robert (Harrogate)	Evans, David (Welwyn Hatf'd)
Batiste, Spencer	Evennett, David
Beaumont-Dark, Anthony	Fallon, Michael
Bellingham, Henry	Favell, Tony
Bendall, Vivian	Fenner, Dame Peggy
Bennett, Nicholas (Pembroke)	Field, Barry (Isle of Wight)
Benyon, W.	Finsberg, Sir Geoffrey
Bevan, David Gilroy	Fishburn, John Dudley
Bitten, Rt Hon John	Fookes, Dame Janet
Blackburn, Dr John G.	Forman, Nigel
Blaker, Rt Hon Sir Peter	Forsyth, Michael (Stirling)
Body, Sir Richard	Forth, Eric
Bonsor, Sir Nicholas	Fowler, Rt Hon Norman
Boscawen, Hon Robert	Fox, Sir Marcus
Boswell, Tim	Freeman, Roger
Bottomley, Mrs Virginia	French, Douglas
Bowden, A (Brighton K'pto'n)	Gale, Roger
Bowden, Gerald (Dulwich)	Gardiner, George
Bowis. John	Garel-Jones, Tristan
Boyson, Rt Hon Dr Sir Rhodes	Gill, Christopher
Braine, Rt Hon Sir Bernard	Gilmour, Rt Hon Sir Ian
Brandon-Bravo, Martin	Glyn, Dr Alan
Brazier, Julian	Goodhart, Sir Philip
Brown, Michael (Brigg & Cl't's)	Goodson-Wickes, Dr Charles
Browne, John (Winchester)	Gorman, Mrs Teresa
Bruce, Ian (Dorset South)	Gorst, John
Buck, Sir Antony	Gow, Ian
Budgen, Nicholas	Grant, Sir Anthony (CambsSW)
Burns, Simon	Greenway, Harry (Ealing N)
Burt, Alistair	Greenway, John (Ryedale)
Butcher, John	Gregory, Conal
Butler, Chris	Griffiths, Peter (Portsmouth N)
Butterfill, John	Grist, Ian
Carlisle, John, (Luton N)	Ground, Patrick
Carlisle, Kenneth (Lincoln)	Grylls, Michael
Carrington, Matthew	Hague, William
Carttiss, Michael	Hamilton, Neil (Tatton)
Cash, William	Hampson, Dr Keith
Chalker, Rt Hon Mrs Lynda	Hanley, Jeremy
Channon, Rt Hon Paul	Hannam,John
Chapman, Sydney	Hargreaves, Ken (Hyndburn)
Chope, Christopher	Harris, David
Clark, Hon Alan (Plym'th S'n)	Haselhurst, Alan
Clark, Dr Michael (Rochford)	Hawkins, Christopher
Clark, Sir W. (Croydon S)	Hayes, Jerry
Clarke, Rt Hon K. (Rushcliffe)	Hayhoe, Rt Hon Sir Barney
Colvin, Michael	Hayward, Robert
Conway, Derek	Heathcoat-Amory, David
Coombs, Anthony (Wyre F'rest)	Heddle, John
Coombs, Simon (Swindon)	Hicks, Mrs Maureen (Wolv' NE)
Cormack, Patrick	Higgins, Rt Hon Terence L.

Hind, Kenneth	Oppenheim, Phillip
Hogg, Hon Douglas (Gr'th'm)	Page, Richard
Holt, Richard	Paice, James
Hordern, Sir Peter	Parkinson, Rt Hon Cecil
Howard, Michael	Patnick, Irvine
Howarth, Alan (Strat'd-on-A)	Patten, John (Oxford W)
Howarth, G. (Cannock & B'wd)	Pattie, Rt Hon Sir Geoffrey
Howe, Rt Hon Sir Geoffrey	Pawsey, James
Hughes, Robert G. (Harrow W)	Peacock, Mrs Elizabeth
Hunt, David (Wirral W)	Porter, Barry (Wirral S)
Hunt, Sir John (Ravensbourne)	Porter, David (Waveney)
Hunter, Andrew	Portillo, Michael
Hurd, Rt Hon Douglas	Powell, William (Corby)
Irvine, Michael	Raison, Rt Hon Timothy
Jack, Michael	Redwood, John
Janman, Tim	Renton, Tim
Jessel, Toby	Rhodes James, Robert
Johnson Smith, Sir Geoffrey	Riddick, Graham
Jones, Gwilym (Cardiff N)	Ridley, Rt Hon Nicholas
Kellett-Bowman, Dame Elaine	Ridsdale, Sir Julian
Key, Robert	Rifkind, Rt Hon Malcolm
Kilfedder, James	Roberts, Wyn (Conwy)
Kirkhope, Timothy	Rossi, Sir Hugh
Knapman, Roger	Rost, Peter
Knight, Greg (Derby North)	Rowe, Andrew
Knight, Dame Jill (Edgbaston)	Rumbold, Mrs Angela
Knowles, Michael	Sackville, Hon Tom
Knox, David	Sainsbury, Hon Tim
Lamont, Rt Hon Norman	Scott, Rt Hon Nicholas
Lang, Ian	Shaw, David (Dover)
Latham, Michael	Shaw, Sir Giles (Pudsey)
Lawson, Rt Hon Nigel	Shaw, Sir Michael (Scarb')
Leigh, Edward (Gainsbor'gh)	Shephard, Mrs G. (Norfolk SW)
Lennox-Boyd, Hon Mark	Shepherd, Richard (Aldridge)
Lester, Jim (Broxtowe)	Shersby, Michael
Lloyd, Sir Ian (Havant)	Sims, Roger
Lloyd, Peter (Fareham)	Smith, Sir Dudley (Warwick)
Lord, Michael	Smith, Tim (Beaconsfield)
Luce, Rt Hon Richard	Soames, Hon Nicholas
Lyell, Sir Nicholas	Speed, Keith
Macfarlane, Sir Neil	Speller, Tony
MacGregor, Rt Hon John	Spicer, Sir Jim (Dorset W)
MacKay, Andrew (E Berkshire)	Spicer, Michael (S Worcs)
Maclean, David	Squire, Robin
McLoughlin, Patrick	Stanbrook, Ivor
McNair-Wilson, Sir Michael	Stanley, Rt Hon Sir John
McNair-Wilson, Sir Patrick	Steen, Anthony
Madel, David	Stern, Michael
Malins, Humfrey	Stevens, Lewis
Mans, Keith	Stewart, Allan (Eastwood)
Maples, John	Stewart, Andy (Sherwood)
Marland, Paul	Stewart, Rt Hon Ian (Herts N)
Marlow, Tony	Stokes, Sir John
Marshall, John (Hendon S)	Sumberg, David
Marshall, Michael (Arundel)	Summerson, Hugo
Martin, David (Portsmouth S)	Tapsell, Sir Peter
Maude, Hon Francis	Taylor, John M (Solihull)
Maxwell-Hyslop, Robin	Taylor, Teddy (S'end E)
Mayhew, Rt Hon Sir Patrick	Tebbit, Rt Hon Norman
Mellor, David	Thompson, D. (Calder Valley)
Meyer, Sir Anthony	Thompson, Patrick (Norwich N)
Mills, Iain	Thorne, Neil
Miscampbell, Norman	Thornton, Malcolm
Mitchell, Sir David	Thurnham, Peter
Moore, Rt Hon John	Townend, John (Bridlington)
Morris, M (N'hampton S)	Townsend, Cyril D. (B'heath)
Morrison, Sir Charles	Tracey, Richard
Morrison, Rt Hon P (Chester)	Tredinnick, David
Moss, Malcolm	Trippier, David
Moynihan, Hon Colin	Twinn, Dr Ian
Mudd, David	Vaughan, Sir Gerard
Neale, Gerrard	Viggers, Peter
Nelson, Anthony	Waddington, Rt Hon David
Neubert, Michael	Wakeham, Rt Hon John
Newton, Rt Hon Tony	Waldegrave, Hon William
Nicholls, Patrick	Walden, George
Nicholson, David (Taunton)	Walker, Bill (T'side North)
Nicholson, Emma (Devon West)	Waller, Gary
Norris, Steve	Walters, Sir Dennis
Onslow, Rt Hon Cranley	Ward, John

Wardle, Charles (Bexhill)	Wolfson, Mark
Warren, Kenneth	Wood, Timothy
Watts, John	Yeo, Tim
Wheeler, John	Young, Sir George (Acton)
Whitney, Ray	Younger, Rt Hon George
Widdecombe, Ann
Wiggin, Jerry	Tellers for the Ayes:
Winterton, Mrs Ann	Mr. Alistair Goodlad and Mr. Tony Durant.
Winterton, Nicholas

NOES
Abbott, Ms Diane	Davies, Ron (Caerphilly)
Allen, Graham	Davis, Terry (B'ham Hodge H'l)
Alton, David	Dewar, Donald
Anderson, Donald	Dixon, Don
Archer, Rt Hon Peter	Dobson, Frank
Armstrong, Hilary	Doran, Frank
Ashley, Rt Hon Jack	Dunwoody, Hon Mrs Gwyneth
Ashton, Joe	Eadie, Alexander
Banks, Tony (Newham NW)	Eastham, Ken
Barnes, Harry (Derbyshire NE)	Evans, John (St Helens N)
Barnes, Mrs Rosie (Greenwich)	Ewing, Harry (Falkirk E)
Barron, Kevin	Ewing, Mrs Margaret (Moray)
Battle, John	Fatchett, Derek
Beckett, Margaret	Fearn, Ronald
Beith, A. J.	Field, Frank (Birkenhead)
Bell, Stuart	Fisher, Mark
Benn, Rt Hon Tony	Flannery, Martin
Bennett, A. F. (D'nt'n & R'dish)	Flynn, Paul
Bermingham, Gerald	Foot, Rt Hon Michael
Bidwell, Sydney	Foster, Derek
Blair, Tony	Foulkes, George
Blunkett, David	Fraser, John
Boyes, Roland	Fyfe, Maria
Bradley, Keith	Galloway, George
Bray, Dr Jeremy	Garrett, John (Norwich South)
Brown, Gordon (D'mline E)	Garrett, Ted (Wallsend)
Brown, Nicholas (Newcastle E)	George, Bruce
Brown, Ron (Edinburgh Leith)	Gilbert, Rt Hon Dr John
Bruce, Malcolm (Gordon)	Godman, Dr Norman A.
Buchan, Norman	Golding, Mrs Llin
Buckley, George J.	Gordon, Mildred
Caborn, Richard	Grant, Bernie (Tottenham)
Callaghan, Jim	Griffiths, Nigel (Edinburgh S)
Campbell, Menzies (Fife NE)	Griffiths, Win (Bridgend)
Campbell, Ron (Blyth Valley)	Hardy, Peter
Campbell-Savours, D. N.	Harman, Ms Harriet
Canavan, Dennis	Hattersley, Rt Hon Roy
Carlile, Alex (Mont'g)	Healey, Rt Hon Denis
Clark, Dr David (S Shields)	Heffer, Eric S.
Clarke, Tom (Monklands W)	Hinchliffe, David
Clay, Bob	Hoey, Ms Kate (Vauxhall)
Clelland, David	Hogg, N. (C'nauld & Kilsyth)
Clwyd, Mrs Ann	Home Robertson, John
Cohen, Harry	Howarth, George (Knowsley N)
Cook, Robin (Livingston)	Howell, Rt Hon D. (S'heath)
Corbett, Robin	Howells, Geraint
Corbyn, Jeremy	Howells, Dr. Kim (Pontypridd)
Cousins, Jim	Hughes, John (Coventry NE)
Cox, Tom	Hughes, Robert (Aberdeen N)
Crowther, Stan	Hughes, Sean (Knowsley S)
Cryer, Bob	Illsley, Eric
Cummings, John	Ingram, Adam
Cunliffe, Lawrence	Janner, Greville
Cunningham, Dr John	Johnston, Sir Russell
Dalyell, Tam	Jones, Barry (Alyn & Deeside)
Darling, Alistair	Jones, Ieuan (Ynys Môn)
Davies, Rt Hon Denzil (Llanelli)	Jones, Martyn (Clwyd S W)

Kaufman, Rt Hon Gerald	Quin, Ms Joyce
Kennedy, Charles	Radice, Giles
Kinnock, Rt Hon Neil	Rees, Rt Hon Merlyn
Kirkwood, Archy	Reid, Dr John
Leadbitter, Ted	Robertson, George
Leighton, Ron	Robinson, Geoffrey
Lestor, Joan (Eccles)	Rogers, Allan
Lewis, Terry	Rooker, Jeff
Litherland, Robert	Ross, Ernie (Dundee W)
Livsey, Richard	Ruddock, Joan
Lloyd, Tony (Stretford)	Salmond, Alex
Lofthouse, Geoffrey	Sedgemore, Brian
Loyden, Eddie	Sheerman, Barry
McAllion, John	Sheldon, Rt Hon Robert
McAvoy, Thomas	Short, Clare
McCartney, Ian	Sillars, Jim
Macdonald, Calum A.	Skinner, Dennis
McKelvey, William	Smith, Andrew (Oxford E)
McLeish, Henry	Smith, C. (Isl'ton & F'bury)
McNamara, Kevin	Smith, Rt Hon J. (Monk'ds E)
Madden, Max	Smith, J. P. (Vale of Glam)
Mahon, Mrs Alice	Snape, Peter
Marek, Dr John	Soley, Clive
Marshall, Jim (Leicester S)	Spearing, Nigel
Martlew, Eric	Steinberg, Gerry
Maxton, John	Strang, Gavin
Meacher, Michael	Straw, Jack
Meale, Alan	Taylor, Mrs Ann (Dewsbury)
Michael, Alun	Thompson, Jack (Wansbeck)
Michie, Bill (Sheffield Heeley)	Turner, Dennis
Michie, Mrs Ray (Arg'l & Bute)	Vaz, Keith
Moonie, Dr Lewis	Wall, Pat
Morgan, Rhodri	Wareing, Robert N.
Morley, Elliot	Watson, Mike (Glasgow, C)
Morris, Rt Hon A. (W'shawe)	Welsh, Andrew (Angus E)
Mowlam, Marjorie	Welsh, Michael (Doncaster N)
Mullin, Chris	Williams, Rt Hon Alan
Nellist, Dave	Wilson, Brian
Oakes, Rt Hon Gordon	Winnick, David
O'Neill, Martin	Wise, Mrs Audrey
Orme, Rt Hon Stanley	Worthington, Tony
Owen, Rt Hon Dr David	Wray, Jimmy
Parry, Robert	Young, David (Bolton SE)
Patchett, Terry
Pendry, Tom	Tellers for the Noes:
Pike, Peter L.	Mr. Frank Haynes and Mr. Allen Adams.
Powell, Ray (Ogmore)
Prescott, John

Question accordingly agreed to.

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

Resolved, That this House commends Her Majesty's Government on its economic policies, which have led to faster growth of output, investment, and manufacturing productivity than in any other major European country in the 1980's; applauds the Government's determination to defeat inflation by maintaining tight monetary and fiscal policies: and welcomes the continued underlying strength of the supply side of the economy, evidenced by record levels of business investment and new business start-ups, and an unemployment rate that is well below the European Community average.

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1. BUSINESS OF THE HOUSE 20 words