§ The Chancellor of the Exchequer (Mr. Kenneth Clarke)
The outlook remains highly favourable. The economy grew by nearly 4 per cent. last year and inflation was at its lowest level for over 30 years.
§ Mr. Gapes
If the outlook is really favourable, why did we have a £10.5 billion deficit on trade in 1994, why has the pound devalued by 35 per cent. since the Prime Minister took us into the exchange rate mechanism at DM2.95 and why is the weakness of our economy being reflected by a weakening of our currency, day by day?
§ Mr. Clarke
First, our trade performance continues to improve. The hon. Gentleman will know that this morning's trade figures show exports up by 9 per cent. in volume compared with a year ago and he will also know that the current account last year was extremely favourable despite the strong recovery. We even showed a surplus in our dealings with Japan last year. The hon. Gentleman's sudden concern about the exchange rate is very reassuring. He will be glad to know that we are strengthening against the deutschmark today.
§ Mr. John Townend
Does my right hon. and learned Friend accept that the unemployed, small business, the construction industry, many of the service industries and much of the retail trade are relieved and grateful that he did not put up interest rates? Will he confirm that the grounds for that decision were purely economic and based on factors such as low wage inflation, the flat housing market and the quarterly survey by the Forum of Private Business showing that for the past four quarters the rate of growth had gone down? Will he confirm that if inflationary pressures rise he would have no hesitation in putting up interest rates?
§ Mr. Clarke
I confirm all those things. As my hon. Friend says, small businesses in particular want stability 868 and certainty in the Government's policy. We are pursuing steady recovery with low inflation and every policy action that I take is aimed at that conclusion. I congratulate my hon. Friend on expressing an opinion on the decision that I took on Friday. Nobody in the Labour party has yet seemed to have formed an opinion one way or the other as to whether the decision was welcome.
§ Mr. Sheldon
Is the Chancellor of the Exchequer aware that no Government can allow the Governor of the Bank of England to determine economic policy in this country? The Government, of whatever party, must determine such matters, and they are judged right or wrong by the events as they unfold.
§ Mr. Clarke
I do not know why the right hon. Gentleman should tell me that. His own shadow Chancellor needs to be told that. Everybody will discover in six weeks' time in the usual way the opinion of the Governor and myself at last week's meeting. Everyone can see from the Governor's speech this morning that the Governor of the Bank of England and I are entirely agreed on the object of policy and we believe that that policy has been delivered successfully.
The hon. Member for Dunfermline, East (Mr. Brown), the shadow Chancellor, has now got the monthly monetary report and the Governor's own inflation report; he has seen the judgment of the markets; he has heard every financial commentator give an opinion and he has heard my hon. Friend the Member for Bridlington (Mr. Townend) give an opinion, yet he has no opinion at all on the subject one way or the other. The shadow Chancellor does not even cast a shadow one way or the other. He would just wait to see what the Governor told him to do.
§ Mr. Renton
Has my right hon. and learned Friend had time in his busy morning to read an article in today's edition of The Times headedThree cheers for Clarke, the best post-Jenkins Chancellor"?Is he aware that Mr. Kaletsky, the author of the article, congratulates him on being his own man in standing up against the City and the Bank of England and their pressure for higher interest rates?
Is my right hon. and learned Friend also aware that many of his hon. Friends would disagree with Mr. Kaletsky's conclusion that he should become President of the European Commission, but expect him to remain as an extremely successful Chancellor for many years, leading and guiding the improvement in the economy of the country?
§ Mr. Clarke
I read the article and I am, of course, grateful to Mr. Kaletsky and to my right hon. Friend. I have no aspirations to be President of the European Commission.
§ Mr. Clarke
I am unlikely to be put forward for that post by my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen).
One thing with which all my critics have always agreed, as much as my supporters, is that I endeavour to be my own man. I take my own decisions. I am extremely candid 869 and clear about why I have taken those decisions. I am faced by an opponent who has no opinions and no decision-taking capacity on the subject.
§ Mr. Malcolm Bruce
Does the Chancellor agree with the Governor of the Bank of England and the chief economist of the Bank of England that interest rates will have to rise sooner rather than later? Is he still serious about keeping inflation under 2.5 per cent. by the end of this Parliament?
§ Mr. Clarke
I shall set interest rates, as I have always said I shall set them, after discussion with the Governor of the Bank of England, to pursue the objective upon which we are both agreed of keeping inflation between the 1 to 4 per cent. range and getting it under the lower half by the end of the Parliament. I shall continue to do that.
If the hon. Gentleman wants to know the opinion of the Governor on that, he will know that he made a speech in Aberdeen this morning in which he said:Notwithstanding the current excitements, I am convinced we remain in better economic shape than we have been for a very long time. The Chancellor has made it clear that the macro economic policies that have brought us to this point remain in place—and it is important, from my perspective, that they should.I agree with that. I do not know whether the hon. Gentleman agrees with that, and I have not a clue whether the hon. Member for Dunfermline, East agrees.
§ Mr. Gordon Brown
Will the Chancellor answer the question put to him just a minute ago? The Bank of England said this morning that under the present policies, the Government's last remaining target—an inflation target of 2.5 per cent. by the end of the Parliament—will not be met. [Interruption.] That is what the Bank of England said this morning. Will the Chancellor now reaffirm in clear words that the inflation target of 2.5 per cent. by the end of the Parliament will not be changed?
§ Mr. Clarke
I have just said that it will not be changed. There has been no change of policy. What the Bank of England's inflation report this morning says is that it has revised its forecast up slightly because of recent changes in the exchange rate. It stresses that the certainties about inflation are vague—it does not give a spot figure. We will continue to set interest rates to achieve the target that I have given. That is a clear policy.
If the hon. Gentleman believes that forecasts of inflation are cast in concrete, he is mistaken. If he wants a guide to policy, he should not just look at one forecast of inflation, but look at the commitment of the Government and the Governor to low inflation and the fact that, in the past 19 months, we have produced the best inflation record the country has seen since 1961.
§ Mr. Nicholas Winterton
May I congratulate my right hon. and learned Friend on his courage last week in not putting up interest rates? He knows my views about the importance to the country of the manufacturing and construction industries. Does he accept that a real guide to the true economic strength of the country is the strength of construction and manufacturing? If they are doing well, all the other indicators are, in my view, irrelevant. Would he comment on that?
§ Mr. Clarke
Much as I would love to agree with every word of my hon. Friend, in the end he underestimates 870 the complexity of delivering sustained recovery with low inflation, which has eluded the country ever since the war. We now have the best prospects of achieving that. The present recovery is being led by manufacturing and our export performance with the outside world is particularly encouraging, because we are rebalancing the economy in a much healthier fashion.
I am glad that my hon. Friend considers my decision courageous, because it is exactly the same type of decision as those I have taken for the past two years. We are pursuing a consistent policy to give manufacturers and others the stability that they require and the certainty they need about the way in which the Government intend to take economic policy.