Exchange Rate

HC Deb 02 July 1997 vol 297 cc235-54

11.7 am

Mr. Austin Mitchell (Great Grimsby)

I was delighted to see the full attendance by Opposition Members for the debate; I thought that, after 20 years of maintaining an overvalued exchange rate, they had actually come along en masse to testify to their conversion to a belief in competitive exchange rates. Now that they are leaving the Chamber because they cannot face hearing the catalogue of their failures, I am a little disappointed, especially because this is an extremely important subject—potentially more important than this afternoon's Budget statement in its effects on the British economy. I am delighted, therefore, to have the opportunity to draw attention to it in this debate.

We are facing an unprecedented increase in the pound sterling exchange rate—in other words, in the competitive price of our exports on export markets—which has taken us back to the levels that we were at when we were in the exchange rate mechanism. The pound is now at a five-year high. That is the prelude, in my view—in my fears—to an industrial blood letting of the type that the two previous highs, in the early 1980s and the early 1990s, produced in British manufacturing.

The exchange rate has the potential to undermine anything that the Chancellor does. Unless British industry has the prospect of competitiveness—in other words, of generating profits—we shall not get the investment that we want in our economy. Unless there is a prospect of demand for industry's product, we cannot generate new jobs and put people back to work.

The exchange rate rise threatens both profitability—and therefore investment—and employment. The facts are stark. In the year to April 1997, the pound rose by 17 per cent. against the ecu, by 22 per cent. against the deutschmark, by 7.6 per cent. against the dollar—which is rising itself—and by 26 per cent. against the yen. Those are the currencies of our competitors.

This morning, The Guardian says that the pound is 26 per cent. higher against the deutschmark and the franc than it was last August. Those are horrifying figures. That direct loss of competitiveness comes at the end of a long period in which the pound has been overvalued. Indeed, it is a long period in which our relative export unit cost—the measure of our prices against those of our competitors for manufactured goods—has risen.

John Mills has calculated for me that, from 1973 to 1997, the loss of competitiveness on relative export unit costs was between 40 and 50 per cent. It is difficult to have a more precise calculation because the bases keep changing but an increase of 40 to 50 per cent. in the price of our manufactured exports is disastrous for competitiveness. What would happen to Sainsbury if it faced such price rises on its shelves when Asda or Tesco did not? Sainsbury would quickly close, which is the effect of that sustained rise on the British economy.

What can British industry do? Although it can cut costs, fire workers or stop research and development and other measures that contribute to its long-term survival, it can do none of those on a scale adequate to compensate for the increase in its prices which the exchange rate has forced on it against its will and its judgment—a force outside its control. That rise in prices threatens it with disaster.

People tell me that exports are doing well. So what? Firms continue to export without profit just to retain their share of the market because they know that once they are out of the market, they cannot get back in. That has been the history of British failure for 20 years, so companies naturally try to keep their exports going without a profit by holding their prices against the rise in the currency. That, however, is a finite process—it cannot continue for a sustained period. People said that trees had survived the drought, only to find that they suddenly collapsed because they had been rotting from the inside.

The main threat from the rise in the exchange rate is to manufacturing, because that is our front line. Manufacturing generates 60 per cent. of our exports. It is an extremely competitive market, which is becoming ever tougher and more competitive as the industrial power of the young dragons of the far east grows. Price is crucial in manufacturing exports because they must be sold at a price that generates a profit sufficient for companies to invest, stay in the game and expand. Unless their exports grow, they are dead in today's competitive world. And unless we can sell exports at a price that allows all that, manufacturing companies' long-term prospects are disastrous. They must run at full capacity and use that capacity to keep down their unit costs. As exports suffer, capacity usage declines and unit costs rise.

All that does not happen immediately, but early warnings are already appearing in company reports. I have been poring over company reports, profitability forecasts and warnings issued by companies, which show that companies are cutting investment, transferring production overseas and slimming down their work force. Profitability is now falling rapidly in crucial sectors, such as building materials; textiles; food manufacturing, which is a problem for Grimsby; pharmaceuticals; the tourism and leisure industry; and in oil.

British Steel has supplied a briefing to Members of Parliament warning of the consequences in dire terms for British Steel and all the firms who use its products if the exchange rate rise continues. It says:

Britain's loss of competitiveness will also damage the UK's attractiveness to inward investment. Sterling's overvaluation will have an increasingly negative effect on UK manufacturing industry exports. The surge in sterling's value against the German DM (and other ERM currencies) is already adversely affecting the competitiveness of the UK economy. ICI has issued warnings along the same lines and is sensibly transferring production overseas. Stirling Tubes in Walsall, Pilkington, the British Tourist Authority, Vero and Halma—new technology companies have fantastic names—have all issued warnings. I notice that they are all quicker to warn of the adverse consequences under a Labour Government. Under a Tory Government, they might have kept quiet for longer. I hope that the Government will respond to the warnings, but those companies are certainly quicker to cry pain under Labour whereas under the Tories they tended to grit their teeth and suffer. They do not do that now because they know what the consequences will be, and those will inevitably occur after a time lag. First, there will be cuts in research and development and in what is necessary to keep up with the field; secondly, investment and in everything necessary for survival will be cut; thirdly, jobs will then be cut and unit costs will go up. Eventually, the firm will go under.

The tragedy is that we have seen it all before. Each time, we have had the same comfortable reassurances that we are getting now. We are assured that we can weather the problem and that British industry is competitive, lean and mean because it is dynamic. That is rubbish. The consequences for British manufacturing are the same now as they were in the two previous bouts of overvaluation. It is simply a truism to say that British industry is competitive at this exchange rate. By definition, any firm that still exports is competitive at this exchange rate. The problem is whether it generates sufficient profit to continue. In reality, it does not. Companies cannot learn to live with such a high exchange rate; they can simply learn to die with it.

The laws of economics and of elasticity and demand will not be suspended for new Labour, just as they were not suspended for the Tories. Exactly the same will happen now. The symptoms, the overvaluation and the warnings are the same as in 1979–82, when the Thatcher Government generated a massive overvaluation, and in 1989–92, when we belonged to the exchange rate mechanism. The collapse of the ERM afforded us some relief and made us competitive again—without disastrous inflationary consequences.

People say that if the pound comes down, we shall face inflation. That was disproved by the ERM experience. The same will now happen with consequences for manufacturing and for our balance of payments. The reverse J-curve effect occurs here. Just as with a devaluation, things get worse before they get better as the J-curve effect makes the balance of payments adverse initially before improving it enormously. With an overvaluation, therefore, it is the other way round and the reverse J-curve effect makes the balance of payments better before making it worse long term. Those balance of payments consequences will occur next year, when the balance of payments deficit will rise. The public sector deficit will also rise because workers will have been fired and will pay less taxes, and expenditure on benefits will also rise. Moreover, the public sector borrowing requirement will rise as a consequence of the decline in manufacturing.

We must tackle the central question: "Why is that happening?" This country has always been predisposed to an overvalued exchange rate because in our economy finance is strong while manufacturing is comparatively weak. The manufacturing industry is less listened to by the Government and has less influence on the counsels of the nation than the finance industry, which sits at the centre of our economy with its glorious City dinners attended by Chancellors and thinks that it speaks for the nation. Its interests lie in high interest rates—that is what the finance industry lives by. The interests of finance are in an overvalued exchange rate, because that allows it to acquire assets and to manipulate money around the world. Those are not the interests of manufacturing. Finance has always been too strong and too much heeded in our economy.

Mr. Bill O'Brien (Normanton)

On my hon. Friend's point about causes, will he comment on the fact that £30 billion is being injected into the economy by building societies acquiring plc status and paying people bonuses with their own money? Does my colleague think that that has a bearing on the heating of the economy?

Mr. Mitchell

My hon. Friend is right. I shall deal with that later. It is ludicrous that £30 billion of purchasing power is allowed into the economy. Even if people do not spend the money that they get from the shares, they still feel more confident. They feel that they have more money, so they spend more. That will produce a rise in interest rates. The Bank will warn of inflation, demand, and the threat of overheating, interest rates will go up and the consequence of that will fall on manufacturing—on the jobs of the people who are spending the money. It is one of the stupidities of our economic policy that that goes on. I agree with my hon. Friend.

The last two overvaluations were the prelude—or the consequence, because they occurred under the Tory Government—of wilful stupidity. That still exists because the Bank still influences our economic policy, but the stupidity was mainly that of the Government. In the first great Thatcher deflation, which was associated with enormous overvaluation, which in turn was the instrument of that deflation, the psychology was that British industry is like an English public school boy—it must be made vigorous, healthy, good and virtuous by exposure to punishment in the form of cold showers and frequent beatings. Manufacturing was subjected to such treatment, and 1.8 million jobs were lost as a consequence of that overvaluation.

The second overvaluation was caused by the Government's infatuation with the exchange rate mechanism. That lost us almost a million jobs in manufacturing, and about 1.5 million jobs altogether.

Now there is a little less wilful stupidity. The Government have changed, but we face the EMU mess. It cannot be described as anything else, much as my hon. Friend the Member for Rotherham (Mr. MacShane) would like to rush in and support it. There is uncertainty about whether ERM will go ahead, which is causing instability in the markets. The growing fear is that there will be a soft euro, which is bringing more money to the United Kingdom to push up our exchange rate.

Europe's problems are causing problems for us because they have the effect of raising our exchange rate. That will continue, because Europe will not clear up the mess quickly. It is staggering to see how elites are trying to force down the throats of electorates a monetary union that they do not want and whose consequences they know will be severe for them.

We will get no relief from Europe, which will go on causing us problems. The second cause of our problems is the fact that our interest rates are high—astonishingly high in real terms. I have a table from the Treasury. I believe that parts of it are wrong, but the Treasury figures show that real interest rates in 1996, adjusted for inflation, were 2 per cent. They are, of course, higher now because interest rates have gone up. In the 1970s, they were 0.75 per cent. or 0.5 per cent.—that was in 1977, for example. In some years, we had negative real interest rates. Now they are at a record high level.

The result is that money is coming to this country. The Swiss exchange rate is rising, but the Swiss are not paying interest on the money coming into Switzerland. We are paying generous interest rates, which attract more money to Britain.

Like a self-trussed turkey voting for Christmas, we have delivered ourselves to markets, by the decision to hand interest rates over to the Bank of England and, having given up the monetary weapon, by our commitment not to use the fiscal weapon by increasing tax rates. That is perfectly acceptable to markets, confidence grows and people come in to invest in sterling and push our exchange rates up.

It was curious to give control of interest rates to the Bank of England at any time, but it was daft when interest rates have such an effect on the exchange rate by which we live and on the basis of which our exports succeed or fail in world markets; and it was crazy to do so at a time when the pound was going up anyway. That concession of interest rates pushed them up further because the Bank's thinking is, "When in doubt, raise interest rates." Its highest wisdom is to put up interest rates. It always thinks that the economy is overheating. Any glimmer of growth, and the Bank of England is howling that the economy is overheating. Three per cent. growth is pathetic by any standard for rebuilding our manufacturing base and generating jobs and well-being for the people, but the Bank is panicking. The financial committee warns of overheating and says that it is terrible.

The Bank always thinks of manufacturing industry as greedy workers and greedy shop stewards demanding more money if the economy expands. The real pressures for inflation come from the financial community and the City—as my hon. Friend the Member for Normanton (Mr. O'Brien) said, by pumping out money from demutualisation, which is in its interest—and from high pay in the City and lax credit. Most of the economic revival in the UK is due to an increase in the money supply produced by credit being poured out by the financial institutions.

The Bank blames manufacturing and, instead of dealing with the causes—the financial community itself and its methods of operation—it clobbers manufacturing with high interest rates and an overvalued exchange rate to make it suffer for the sins of others. That is a marvellous way of running an economy, but it is disastrous for any country whose economic base, like ours, is not wide enough and needs to be expanded. The asset inflation generated by finance, and not wages, is the only true cause of the current inflation.

The Bank of England is fighting inflation long after it is dead. That is necrophilia. Inflation is no longer a threat. It is in a glass case somewhere in south-east Asia. The enhanced competition of those economies, plus the breaking of wage inflation and the power of labour in the UK, which has been a tragedy in many respects, means that inflation is dead, yet the Bank of England is still clobbering manufacturing industry, which it sees as the cause of inflation. That is crazy economics.

Mr. Denis MacShane (Rotherham)

Can my hon. Friend guide us by explaining why our inflation rate is none the less still significantly higher than that of the United States and most of our European partners, including those growing more strongly than we are? If wage-led inflation is dead, why is the anger over fat-cat pay feeding down into the labour market? We are seeing serious claims for 5, 6, 7 and 8 per cent. pay rises this year in many sectors.

Mr. Mitchell

I hope that my hon. Friend does not identify with the Clobber the workers theory of economics, which the Bank of England propagates. I hope that he will say something about information such as that published by British Steel, which affects his constituency vitally.

Our difference in inflation is marginal. The experience of the past few years both in the United States and the United Kingdom is that a fall in the exchange rate does not generate the inflationary consequences that were widely feared. For practical purposes, inflation is dead. To put it at the centre of economic policy, when the real problem is insufficient jobs, insufficient growth and a weak industrial base, is to live in the past and to fail. Whenever we get an expansion in the UK, we kill it.

Mr. Dale Campbell-Savours (Workington)

I have been following my hon. Friend's logic closely and I agree with much of it, although not with his general position on these matters. If he argues that interest rates are at the core of high exchange rates, what does he suggest is the best way to manipulate interest rates down? Can he give us his agenda?

Mr. Mitchell

I am grateful that my hon. Friend is following my argument—with enthusiasm and joy, I hope, as it affects his part of the world as well as mine. I shall deal with the matter shortly. I did not say that interest rates were the only cause of high exchange rates. I said that turmoil in Europe was one of the major causes, as well as the strength of finance and the prevailing orthodoxy in economic management, which is attractive to speculators in this country. All those are part of the equation and must be taken into account.

I was arguing that the first response was to clobber manufacturing, and that raising interest rates was one of the instruments by which that was done. However, we live by manufacturing. It provides most of world trade and is the basis for most of our trade deficit. Do we in Britain never learn? We are heading the same way as we were before two previous disastrous blood lettings, at a time when we need to widen our industrial base and develop new industries. Manufacturing has been through 20 years of slimming down and overvaluation and it is suffering from anorexia instead of having a lean, mean, "Let's get at the markets" mentality. The position will be made worse by the battle against inflation that dominated the late 1970s and the 1980s. Overvaluation as a means of fighting inflation will have the same consequences now as it did then.

I do not want those consequences to occur under a Labour Government. If we are not going to redistribute wealth and increase taxes—and it is right not to increase taxes—we can generate the extra public spending that we need only through economic growth achieved through getting people back into work. How can we achieve that when overvaluation is leading us into the economic trap that I have just described? We cannot narrow the tax base any more by such blood letting without disastrous consequences for Labour's programme as well as for borrowing and without producing exactly the circumstances that lead inevitably to more cuts and more deflation in the public sector. People will then say that the public sector is too big to be supported by the shrinking industrial base.

We are following the economics of folly. The Government cannot afford to be locked into a downward spiral with a shrinking industrial base and more unemployment justifying more cuts in the public sector. We must expand our industrial base by remedying its two basic problems. First, we must remedy the deficiency of demand for what the British economy can produce at full capacity. Secondly, we must offer the prospect of profitability. British manufacturing is just not profitable enough. We have to make it more profitable by generating demand. We should reduce the exchange rate and let the economy move into export-let growth.

Supply-side measures will not produce those improvements. I am all in favour of supply-side measures such as upgrading skills and training, but supply does not generate its own demand. Governments generate demand, not supply. We need extra demand and a sustained prospect of competitiveness.

A lot of rubbish is talked about economic and monetary union. It has been said that unless we commit ourselves to monetary union, inward investment will no longer come to Britain. There are fears that we will be excluded from Europe. That is total nonsense. Foreign investors want not stability, but a competitive base from which to export. We can provide them with that only if we have a competitive exchange rate on a long-term basis. That would guarantee that if companies set up here they would be able to produce and export profitably in Britain and sell at a profit internally and overseas.

We already have problems because we do not have a competitive exchange rate and we have to offer foreign investors bribes to come here. For example, Nissan was offered £28 million more regional development money in Sunderland than we could offer in Humberside. So Nissan went to Sunderland. The same applies to Toyota, Jaguar, to Ford—to develop a new model and a new engine—and to BMW. All those companies were bribed with taxpayers' money to come to Britain or to stay here because the exchange rate was not sufficiently competitive to lure or to keep them here. As a result of our obsession with an overvalued exchange rate, the taxpayer has to pay out more to keep firms here and to keep Britain attractive to inward investment.

We should also bear in mind the fact that much of our so-called inward investment involves the retained profits of overseas firms that have already invested here. In terms of attracting new overseas investment, France has a better record than we do. Retained profits represent a large component of inward investment into Britain. However, those retained profits will not remain here if exchange rates remain high. The money will be invested overseas. That is what Imperial Chemical Industries and other big British firms are doing. Ford is sourcing more from Europe. Those are the symptoms of extended overvaluation and if it continues, Britain will no longer be attractive to inward investment. We will not be sufficiently competitive to justify foreign investors coming here rather than somewhere else.

The message is clear. The prospect of sustained overvaluation may be one reason why Toyota has been hesitating about making a second investment into Britain. We have the pound down and make the exchange rate competitive to allow exports to fall in price or to generate more profit for investment in Britain and to use the existing capacity to make imports dear.

We should use the price mechanism, which is now our only weapon for changing our competitive position, to reduce our labour costs through a cheaper exchange rate. It will be claimed that raw material prices will also rise and, of course, they will, but our role is surely to add more value to our imports and to export them at a higher price. That higher price is set by a competitive exchange rate.

If the elasticity of demand for imports and exports together is more than 1, we get direct and immediate benefits from a more competitive exchange rate—from devaluation. The elasticity of demand for British imports and exports is somewhat lower than that of our competitors. In Britain the figure is 1.51, in Japan it is 2.35 and in Germany it is 1.81. It is above the crucial balance figure of 1.

Devaluation will work. Indeed, it is the only way to expand our exports and to stop the continuing and remorseless fall in Britain's share of world trade. That is still going on and we have to turn it round. So how do we do it? I hope and believe that it is not beyond the wit of the Government to address a major problem. It has to be tackled. We might say that it is not as bad as people think, but those words would be spoken in the wind in six months' or a year's time when the consequences come through. We have to act now whatever comforting words are said.

We must move towards long-term competitiveness. Why does not my right hon. Friend the Chancellor use his mouth as a weapon and talk down the exchange rate? If he is committed to long-term competitiveness and announces that commitment, there will be an effect on the exchange rate.

Mr. Campbell-Savours

Is not the inevitable consequence of my hon. Friend's arguments that in the end he will become a passionate supporter of the single currency as we could well have the opportunity of locking ourselves in at a sensible rate? In that case, speeches such as that by my hon. Friend would be unnecessary in future.

Mr. Mitchell

I should have expected that. Fortunately, I have five pages of rejoinders to my hon. Friend as I knew he would be here this morning. However, the simple answer to him is spherical objects. There is no possibility that we will be able to lock ourselves into the single currency at a competitive exchange rate. We shall have to lock in at the market rate and, if it is the current market rate, it will be as disastrous as it was last time. My hon. Friend and I both know that.

In any case, my hon. Friend is trying to raise a divisive red herring in the Labour party. He knows that we are not going in in the first round and the decision will not be taken until after the next general election, so why is he trying to stir trouble in an ideological fashion in the middle of my speech? My hon. Friend is trying to hold me up as I approach the conclusion of my speech.

Mr. Andrew Love (Edmonton)

My hon. Friend has said that today's debate is about the consequences of a high exchange rate, although he has spoken about the means of reducing it. We should be debating the means today. My hon. Friend referred to market rates, conditions of deregulation and markets. How would he propose to manage the exchange rate down to a level that he would consider to be competitive?

Mr. Mitchell

I am grateful to my hon. Friend for taking me back to the main thread of my speech—and, indeed, bringing me to a conclusion.

First, we have to use the influence of my right hon. Friend the Chancellor's opinion and announce that our rates are uncompetitive and that the Government's objective is long-term competitiveness through the exchange rate. If my right hon. Friend says that, it will shift the perspective of the markets and bring down the exchange rate.

Secondly, it is silly to be dumping huge quantities of money on the market through demutualisations—some 30 billion quid, with another £16 million to come from further demutualisations. There should be a moratorium on demutualisation.

Thirdly, we must get interest rates down. The Bank of England must be made aware of the problems it is causing. It appears to be wholly unconcerned about the exchange rate. Perhaps it is because it does not suffer the consequences—indeed, the financial community reaps the benefit through an ability to invest overseas and to manipulate money around the world. It is manufacturing that suffers the consequences.

I would like my right hon. Friend the Chancellor to take everything back under his control. A Chancellor must have power over both monetary policy and fiscal policy. He cannot run the economy without both weapons—he needs a two-gun holster. If my right hon. Friend does not take back control—and as we have not yet passed legislation, he could still intervene in these matters—the Bank of England must be pressured and persuaded to reduce interest rates.

We also need to control credit. Why not require deposits with the Bank of England, varied and charged interest or not, according to the lending policy of the institution making the deposit? We should control credit in the economy. It is silly to allow people to pour credit on to the market—it is the money supply that is causing the consumer boom and making everybody panic. If we do not control credit, the Chancellor's only recourse is a lax economic policy. He could not fund the debt. He could get ways and means advances from the Bank of England and not pay interest on them, but that would be viewed as irresponsible economics. It would be a blow to confidence. However, that is the only alternative to effective control of credit and a policy of lower interest rates, which would bring down the pound with a sure and certain touch. The alternative is a long anorexia and another industrial winddown, which we cannot afford.

The real devaluation necessary, based on the competitiveness figures, is in the region of 35 per cent.—shock, horror. In fact, the American dollar has gone down 40 per cent. since the over-valuation of the mid-1980s, without any disastrous consequences. Indeed, there has been a direct benefit to American manufacturing and the American economy. I am not saying that we should devalue by 35 per cent. at once; we should work to get the pound down over a long period. We should make that a central objective of policy so that the markets will know what we are doing and react accordingly.

We cannot treat the pound like a phallic symbol, so that the whole country—and especially the media—are proud when it is hard and filled with post-imperial tristesse as soon as it softens. That is not what the pound is about—it is a market-clearing mechanism and it has to float. It has suffered from 20 years of over-valuation. We need 20 years of competitiveness to get back into the manufacturing game and for Labour to achieve its policies. Therefore, we should simply announce that the pound is over-valued and that Labour believes in a competitive exchange rate. What is a competitive exchange rate? It is the rate at which we can balance our trade in conditions of stable growth and full employment.

11.43 am

Mr. Nicholas Winterton (Macclesfield)

I congratulate the hon. Member for Great Grimsby (Mr. Mitchell) not only on obtaining this Adjournment debate, but on his choice of subject. He knows that I agree with a great deal of what he said. By saying that, I am not sure whether I am doing his reputation and prospects any harm or putting the kibosh on my own.

I declare my interest as I am the chairman of the Manufacturing and Construction Industries Alliance, which was launched within the Palace of Westminster—with the support of all political parties—to move the interests of construction and manufacturing up the public, political and parliamentary agenda.

I am glad to take this opportunity today to support the hon. Gentleman in his arguments, although I intend to concentrate primarily on the subject of interest rates, which have a dramatic influence on exchange rates, which in turn are damaging British manufacturing.

I shall begin with construction because it is a barometer of the overall success of our economy and it generates such demand in its own right—demand for building materials, fixtures, fittings, carpets, curtains, steel, brick, concrete, cement, furniture, electrical goods and decorating materials. It is a driving force for many parts of industry, including retail and, of course, manufacturing industry.

I am sure that I shall take all hon. Members with me when I say that the manufacturing sector is important because it is the only non-inflationary source of sustainable economic growth in this country or in any other. That is why, when I saw that manufacturing industry was part of the debate, I immediately took an interest. I am delighted to be making a contribution.

As the hon. Gentleman said, we are a trading nation. Despite the importance of the service sector and invisible trade—especially in the financial sector—we need to export manufactured goods to survive and to have a stable, progressive, successful economy. From the hon. Gentleman's argument and philosophy, I am convinced that that is also his objective. That is why I strongly support what he said.

The two important sectors of manufacturing and construction are linked not only by their comparative importance, but by the way that they have borne the brunt of the recent economic recession. The hon. Gentleman described what has happened as blood letting. Those two sectors have been seriously and adversely affected by the blunt way in which successive Governments, Conservative and Labour—and, indeed, the Governor of the Bank of England—have used interest rates as the sole panacea for all economic problems.

It is obvious to anyone who has been involved in industry, especially those who need to export their products, that high interest rates raise the level of exchange rates. If the level of exchange rates is raised, Britain will become less competitive. The current high level of interest rates has forced up the value of sterling and brought about the debate this morning. That high level has created an almost insurmountable barrier to many of our exporters. It has placed a dampening hand on the first emerging breaths of confidence in the construction sector, whether it be business and commercial construction or domestic construction.

To take up the hon. Gentleman's remarks—and I entirely endorse his position—the use of interest rates is too blunt. It is too insensitive a tool to be deployed responsibly to manage our sophisticated economy. It is far too powerful a tool to have been passed into the largely unaccountable and undemocratically answerable hands of the Governor of the Bank of England, whose ideological purism and dogma-driven lust will lead him to maintain rates at higher levels than can be justified. It will leave us in an uncompetitive position compared with other countries in Europe and in other parts of the world.

The hon. Member for Great Grimsby referred at some length to the European Union, and some interventions related to Europe. The majority of our trade is done outside the European Union. [Interruption.] Indeed, it is. The Confederation of British Industry and others put out a lot of misleading statistics, but I assure the hon. Member for Rotherham (Mr. MacShane), who is shaking his head, that the majority of our trade is done outside the European Union, so what goes on there is of only partial interest to us.

We have a robust and healthy economy. I say that as an opposition Member: like many of my hon. Friends, I have been in the Opposition before, although for the past 18 years I have, from time to time, sat somewhat uncomfortably on the Government Benches. Our healthy and robust economy is due, at least in part, to the policies of the previous Conservative Government. It is a fact that the ogre of inflation, if not dead, is certainly firmly under control. Spiralling inflation, such as we saw under both Labour and Conservative Governments, was a product of historical, social, political and economic conditions, which no longer apply: that is, if we are to begin to believe even one word of what the new Government tell us about abandoning their bad old ways.

If the new Chancellor of the Exchequer is committed to prudent management of the economy—dare I say, following the prudent management of the Conservative Government—why must interest rates remain so unnaturally high? The hon. Member for Great Grimsby, in his interesting speech, said that interest rates in this country are abnormally and unnecessarily high. Why must British business face high interest charges when it seeks to borrow to invest in new plant and machinery and in the development of new products, which are vital if we are to remain competitive and forceful in international world markets? Why must the British service and commercial sectors face unnaturally high property prices? Why must home owners, whose support new Labour is pledged to nurture, face unnaturally high mortgage costs? We may hear some further unfortunate and bad news this afternoon.

Handing the control of interest rates to Eddie George at the Bank of England was an irresponsible and reckless folly, for which our economy may yet pay an extremely high price. The House should be able to debate that policy in considerably more detail in the near future.

High interest rates and their inevitable impact on exchange rates impose burdens, without which companies would be able to compete more effectively and become more profitable, and thus pay more taxes. The Government receive more in tax from business when there is a rise in economic growth. Without those burdens, more jobs would be created and the burdens on our social security system would be reduced. The Government would benefit, because they would get people back to work, which is one of their major objectives, for which I commend them. Putting people back in work, particularly when they are currently unemployed, would reduce the substantial social security benefit bill.

I want to send a clear message to the Chancellor of the Exchequer, who will deliver his first Budget later today. We would all be better off if he reduced interest rates, if not today, at least in the near future, because that would have an immediate impact on exchange rates.

It is a tragedy that the British economy might be hit by a double whammy: the higher interest rates that we are already experiencing and, sadly, the higher taxes that are imminent. The hon. Gentleman's message was clear. We should give our economy the boost of energy that it needs to maintain its current progress in the right direction. To bring that about, we require a reduction in interest rates, not an increase.

I expect that the comments I am about to make will fall on fertile ground among some Labour Members. We should review capital gains tax, so that unquoted companies are not unfairly penalised. We should review capital allowances, so that businesses are positively encouraged to invest: they could be targeted or capped if necessary. We should invest so that we remain competitive and are able to export, create jobs and generate extra growth in our economy. To that end, fiscal incentives are good.

I shall now say something that will perhaps not fall on such fertile ground. I believe that we should abolish inheritance tax to secure the future of many family firms. It is in family firms that real growth in industry and commerce takes place and where the majority of jobs are created. In many instances, inheritance tax is a disincentive.

We need to hit the housing market like we need a hole in the head. Housing, construction and manufacturing are a driving dynamo of our economy, and we should encourage those sectors. Mr. Eddie George regularly talks of still higher interest rates. Unacceptably high interest rates, reductions in mortgage interest relief at source, which is a small but valued help to families buying their own homes, increases in stamp duty, which is an anomalous tax that I believe should be abolished, and the possible ending of the capital gains exemption for the family home would be retrograde steps and could turn our economy from its positive, encouraging, upward course and put it into a state of stagnation and depression.

We should look to the long term and aim for low interest rates and low exchange rates. That would enable the people and businesses of this country to create genuine wealth, and to contribute meaningfully to the future of our economy and the creation of jobs.

11.57 am

Mr. Denis MacShane (Rotherham)

I am grateful to my hon. Friend the Member for Great Grimsby (Mr. Mitchell) for initiating this debate. We have heard two remarkable speeches. The contribution of the hon. Member for Macclesfield (Mr. Winterton) contained radical thinking about the importance of manufacturing. His Front-Bench colleagues should listen to him, but, alas, I fear that his remarks will fall on stony ground, because in the past 18 years there has been one long assault on manufacturing.

My hon. Friend knows that in the pantheon of socialist history, thinking has always been a left-wing deviation. I congratulate him on a speech full of ideas and thoughts, some of which were deviant. If I allow an occasional thought to slip into my speech, I hope that my hon. Friends on the Front Bench will take no notice, and will excuse my foray into the world of ideas.

Some contradictions have to be faced. If the high exchange rate is so bad for employment, why is unemployment falling as the pound is rising? If high interest rates are so damaging for British manufacturing exports, why did the high interest rates and the high pound of the early 1980s coincide? The Library has published an excellent document on economic indicators dated 1 July 1997, which shows that the last time that we had a trade surplus in manufactures was in the early 1980s, at the time of high interest rates and a high exchange rate. The situation is complex. I hate that dreadful cliché "multi-faceted", but there are many unintended consequences and the matter is difficult to get right.

I want to make a case in support of my hon. Friend the Member for Great Grimsby for a lower pound, but I want to make a stronger case for a stable pound. We have suffered, not just in the past 18 years, but in the past 30 years, from the incredible yo-yo pound sterling, going up and down. The graph in the excellent document from the Library resembles a map of the deep ocean. It has more peaks and troughs than the Swiss alps. We should aim at a lower and stable rate. I do not regard the exchange rate as a market-clearing mechanism, as my hon. Friend seemed to suggest, which we should leave bouncing happily up and down like one of those ping-pong balls on a column of water at a fun fair.

We have a specific problem in manufacturing. I have a constituency interest, in that British Steel is the major employer in my constituency. It has taken a 50 per cent. hit on profits. Last year, it had profits of £1.1 billion for investment, pay, jobs and dividends; this year, its profits are less than £500 million. A great British success story such as British Steel cannot be asked to plan for the future, to pay fairly, to treat its shareholders well and to invest here and abroad if, from one year to the next, it takes a 50 per cent. hit on its profits. That has happened because British Steel, like many engineering manufacturers, has its products posted in deutschmarks for export to Europe.

Every engineering firm in my constituency is taking that hit on profits and employment. I warn my hon. Friends on the Front Bench with all seriousness that employment in the UK may have peaked. I fear that there will be a time lag before the immense hit that all our manufacturing sectors are taking starts to feed through into workers being laid off.

Not only manufacturing is affected. Many service companies are affected. The boss of a distinguished architectural company not unconnected with the millennium dome reported to me recently that he had had to lay off staff because he was losing orders overseas.

British tourism will take an immense hit, as will British Airways. It has become much more expensive to come to Britain compared with last year. It is fine for those such as the shadow Chancellor, who has a nice house in Normandy. He will have a lot more to spend on it this summer. But the high pound is damaging the promotion of British tourism and services.

That is true even in the micro economy—the world of conferences. Britain has become a key conference centre for Europe. In the past two or three years, orders for conference packages of interpretation, hotels and so on increased, but we are now losing orders to French or German companies, which can offer products in deutschmarks or French francs that undercut what we can offer posted in English pounds.

So I say to my hon. Friends and to the hon. Member for Macclesfield (Mr. Winterton), who is a doughty champion of manufacturing, that the service industry has also been badly hit by the exchange rate. The creative economy—the film and video economy in which Britain is a world leader—has also taken an immense hit.

I should love to enter into a long debate with my hon. Friend the Member for Great Grimsby about what we can do, but perhaps we should leave that for some other occasion. I want to put forward four simple ideas. First, the Treasury should drop its sublime arrogance. When the pound was high before the ERM debacle, it was the best thing that could have happened to Britain. Remember that? Two years ago, the pound slumped and that was the best thing that could have happened to Britain. Now, the pound is up at DM2.80, and that is the best thing that could happen to Britain.

The Treasury has the memory cells of a mite. It must humble itself and learn from other countries, perhaps from the United States, where for 10 years the dollar has been traded at a highly competitive rate, reflecting a rise in US exports. What lessons can we learn from the United States? Perhaps we can learn from the Netherlands, where unemployment is lower, interest rates are lower and the trading sector is stronger than in the UK. We might learn from Switzerland where, thanks to monetary measures, the value of the Swiss franc against the deutschmark has been reduced, not increased. There, not the invisible hand of the market but the visible hand of the policy makers has been applied.

Secondly—I am sorry to disagree with my hon. Friend the Member for Great Grimsby on this point—we have to maintain a low inflation policy. There are virtues in creating the independent Monetary Policy Committee for the Bank of England. I do not want our Chancellor, or in 20 years' time some Conservative Chancellor, waking up worrying about interest rates every morning of his life. The United States, which probably cleaves to many of the values about which my hon. Friend spoke, has an independent central bank. One could enter into the debate elsewhere. I should like the central bank to be advised by a committee with a more regional and manufacturing outlook, but we can discuss that later.

Thirdly, we must consider the unmentionable—labour market policy. The countries that have kept unemployment, inflation and interest rates low have an active labour market policy that does not allow wage demands to feed through into inflation. It is not clobbering workers; it is the essence of social democracy. Britain's adversarial labour market with one side up and one side down has not worked. I advise my hon. Friend the Minister to turn her attention to labour market policy in order to keep a stable exchange rate.

Fiscal measures need to be used seriously, and I am looking forward this afternoon to innovative and imaginative fiscal measures in order to ensure that there are no further increases in interest rates and no further need to increase the pound's strength.

Finally, we come to the question of Europe. We shall not debate that today. I should prefer the British pound to be stable in the—

Mr. Mitchell

In a graveyard.

Mr. MacShane

—in the euro, with the other economies that have a much higher percentage of their economic base located in manufacturing than we do, which requires stability. There is no lead on that at the moment. We are not in a graveyard; we are in a complete vacuum. The Confederation of British Industry has climbed back on to the fence, saying that the euro should be put off for two years, as if it will not happen—do not see the euro; do not hear the euro; pretend it does not exist. That debate will have to resume. In a year or two, when the underlying manufacturing strengths of a low inflation and low interest rate euro are compared with the problems of not cleaning up the mess that we inherited from the Tories, it will come back to haunt us.

Yes, there are policy measures. The pound can be discussed. I do not want to advise my hon. Friends on the Front Bench to talk it down, yet that has worked in other countries. We need a competitive and stable pound with which our investors can invest, our buyers can buy and our sellers can sell, knowing over a long period what its worth will be.

12.8 pm

Mr. Edward Davey (Kingston and Surbiton)

I apologise to the hon. Member for Great Grimsby (Mr. Mitchell) for having missed the first half of his speech.

Mr. Mitchell

What was the rest like?

Mr. Davey

I undertake to read it in Hansard to ensure that I do not miss anything of importance. However, listening to the second half of your speech—I mean, his speech, Mr. Deputy Speaker—made me think that I had heard it before.

The hon. Gentleman came to my college when I was an economics undergraduate. In his speech there, he talked about the overvalued pound and the plight of the manufacturing sector and argued that we definitely needed a devaluation. That was 10 years ago—1987—when the deutschmark was at 3.5 to the pound. That is the hole in the hon. Gentleman's argument: he has been arguing for devaluation almost whatever exchange rate we have had. That would be a continued devaluation.

Mr. Mitchell

I apologise for interrupting the hon. Gentleman again, but that is not true. I have argued consistently for a competitive exchange rate, although sometimes that would have been more competitive than at other times. That is not an argument for constant devaluation.

Mr. Davey

With due respect, it seems to me that that was exactly your argument. You talked about going for a competitive pound, but in 1987 you seemed to think that that was lower than—

Mr. Deputy Speaker (Mr. Michael Lord)

Order.

Mr. Davey

Mr. Deputy Speaker—

Mr. Deputy Speaker

Order. When I am on my feet, hon. Members must sit. The word "you" is being used again. Can the hon. Gentleman try to remember the right form?

Mr. Davey

I apologise, Mr. Deputy Speaker.

In the speech that the hon. Member for Great Grimsby made to my undergraduate colleagues and me, he said that if we devalued, even from DM3.5 to the pound, we would get a competitive exchange rate. Now, however, he suggests that if we devalue from about DM2.7 we will get a competitive exchange rate. At what level does he believe a competitive exchange rate lies?

I believe that the hon. Gentleman's remedy is a recipe for inflation. He argues that we should slash interest rates and have a lower pound, which would surely stir up inflation. The worst aspect of his proposals is that they would damage manufacturing industry—the sector of the economy that he hopes to help—because the spiralling inflation that his policies would cause would produce short-termism in British industrial investment. Industry would need to consider financial factors all the time instead of the real aspects of its business.

The real issues that face people who run a business are the training of their staff and investment in research and development. If there is spiralling inflation because of ever devaluing exchange rates, they are reduced to financial jiggery-pokery instead of dealing with the real elements of their business success. That is why an independent central bank is a good idea, and a good policy for manufacturing industry. It would set a stable framework for our macro-economic policy and help the Government in their attempts to bear down on inflation over the long term. That would reduce short-termism in the British economy and such a reduction is the one thing that manufacturing industry really needs if it is to invest for the future.

The hon. Member for Great Grimsby seems to have a bizarre understanding of how the exchange markets set exchange rates. He thinks that the Chancellor of the Exchequer has a powerful voice and can suddenly talk down the pound at will. I am sure that past Chancellors would say, "If only." If only they could open their mouths and the exchange rate would go wherever they said.

The idea comes from cloud cuckoo land. There is no way in which the Chancellor could push the sterling exchange rate in any long-term direction just by opening his mouth. Serious macro-economic policies are needed to direct the level of the pound and I am afraid that the hon. Gentleman gave no indication of the policies with which he proposed to direct that level.

For example, the hon. Gentleman seemed to suggest that we should loosen monetary policy, while giving us no idea what he wanted to do with fiscal policy. That is where the tough questions for setting macro-economic policy lie. If he really wants to reduce the level of the pound he needs to propose a massive tightening of fiscal policy.

In simple terms, that means that we must ask the hon. Gentleman whether he proposes to slash public expenditure or to increase taxes massively. The logic of your argument means that you have to—I am sorry, Mr. Deputy Speaker, I mean the hon. Gentleman has to—answer that question. He failed to do so.

The hon. Gentleman also failed to tell the House what type of exchange rate regime he wanted—a flexible or a fixed regime. I am worried that he seems to have taken no account of the need for stability in our exchange rates. He proposed neither a fixed exchange rate system nor support for the single currency.

Having made those criticisms of the hon. Gentleman's speech—

Mr. Mitchell

A speech I made 10 years ago.

Mr. Davey

The criticisms are still pertinent today, because the hon. Gentleman's arguments have not changed.

None the less, I welcome the debate, because it gives the Minister a chance to state Government policy on exchange rates—or perhaps the Chancellor of the Exchequer will enlighten us on Government exchange rate policy this afternoon in his Budget statement. Until now, we have heard nothing.

The policy seems to be one of benign neglect and we have seen the currency appreciate with no comment by the Treasury. That policy is not sustainable in the long term. We need a clear signal of the Government's attitude to the pound sterling and of their future policy as Britain prepares to move towards the single currency. I hope that, in her reply, the Minister will state clearly the Government's policy on the exchange rate.

12.17 pm

Mr. Tim Boswell (Daventry)

I congratulate the hon. Member for Great Grimsby (Mr. Mitchell) on initiating this interesting debate and all who have played a part in it. I also take the opportunity to welcome the Economic Secretary to the Treasury to her post, the ministerial counterpart of mine. I look forward to debating matters such as these many times with her.

First, I must say from the Opposition Benches, in case there is any doubt—although my hon. Friend the Member for Macclesfield (Mr. Winterton) will have left the House in no doubt—that there is as much sympathy for and interest in manufacturing industry on our side of the House as there is on the Government side. In my election address, directed to a constituency in which engineering is extremely important, I took the trouble to mention the subject, as well as information technology. It is of great importance to us all.

In terms of the analysis offered by the hon. Member for Great Grimsby, some parts of manufacturing industry are undoubtedly feeling the pinch. He cited British Steel as a clear example; I could add agriculture to the others that have been given. As everyone will know, agriculture is an industry whose financial arrangements are somewhat distinctive, but the effect of green pound revaluations has much the same, although an indirect, effect.

I pause to make the point that things can vary over time. Certain industries may be able to bear a high exchange rate for a period, but it may cause difficulties in the longer term.

As for the Opposition's approach, first, there is no simple policy of targeting the exchange rate. There have been excursions into that idea in the past—I need not return to them now—but they met with little success.

Secondly, there must be a middle way between the danger of abandoning all approach to fiscal prudence—at times it seemed that that was the hon. Gentleman's argument—and the equal and opposite danger that may be described as neurotic over-caution in the conduct of fiscal and monetary policy.

Thirdly, whatever the exchange rate is at any one time, it can be no cop-out or substitute for the adoption of policies designed to support business success and competitiveness. In that context, I cannot understand why the Government wish to go ahead with the minimum wage or sign the social chapter.

The Government have been left a golden legacy by my right hon. and hon. Friends—a strong economy. It will take a long time for that to dissipate and be lost—but lost it can be, if the wrong policies are adopted. For reasons that have a lot to do with electoral credibility, the Economic Secretary and the Chancellor have invested a great deal of effort in emphasising fiscal prudence. That is fine and good, but the danger is that it may lead to excess zeal and end up damaging the real economy. That is the substance of the argument we heard in the speech from the hon. Member for Great Grimsby.

The cumulative impression being given by the Government suggests a tendency towards this excess zeal. First, we had the remitting of monetary and interest rate policy to the Bank. Now, there is all this talk of an alleged black hole in the finances, based on a changed set of highly pessimistic assumptions about the course of policy. We also have had some heavy briefing—I put it no higher—from the Chancellor about his readiness to put up taxes today. He would do well to remember the example of the first Labour Chancellor, Philip Snowden, and he would be ill-advised to adopt such reactionary policies. The big danger at the moment is that all this self-indulgent talk of retrenchment will build pressures that feed into the existing buoyancy of exchange rates and may create in due course an unwelcome hard landing for the British economy.

12.20 pm

The Economic Secretary to the Treasury (Mrs. Helen Liddell)

I congratulate my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on securing this debate, which takes place on a day when there is considerable interest in the performance of the economy. We have seen on two occasions this morning great posturing from the Opposition on matters unrelated to the substance of this debate, yet when it comes to matters of considerable substance the Opposition Benches are almost empty. An intriguing development is the use of these Adjournment debates to hold the Government to account in relation to policy and then not to leave sufficient time for the Government to explore the policy options.

We were, as always, treated to an engaging canter through macro-economic policy by my hon. Friend the Member for Great Grimsby, who referred to self-trussed turkeys and the pound as a phallic symbol. We heard from the hon. Member for Macclesfield (Mr. Winterton) about the dogma-driven lust of the Governor of the Bank of England. These were unusual phrases to be used in a debate on this subject.

Many interesting points have been raised; some I can agree with, but a considerable number I cannot. Not the least of those was the comment made by the hon. Member for Macclesfield that inflation is dead, a point made also by my hon. Friend the Member for Great Grimsby. For ordinary people, inflation is a significant element in how they control and plan their lives, and gaining control of inflation is of considerable significance.

The remark by the hon. Member for Kingston and Surbiton (Mr. Davey) that he had heard a number of the points made in this debate before was correct, as this debate on the nature of the exchange rate and its relationship with the overall performance of the economy has been going on for more than 20 years. With respect to my hon. Friend the Member for Great Grimsby—whom I admire greatly—there was a touch of deja vu in my mind in relation to some of his remarks on devaluation.

I take this opportunity to welcome the hon. Member for Daventry (Mr. Boswell) to his responsibilities. I look forward to engaging him in debate in the years ahead. The Government have inherited an economy that has repeatedly gone through periods of boom and bust, with too little long-term stability. Our record of economic stability is one of the worst in the G7 and, since 1979, the United Kingdom has experienced the two deepest and longest recessions since the war.

As my hon. Friend the Member for Great Grimsby pointed out, our inflation performance has been poor also. Over the last full international economic cycle, from 1982 to 1993, the UK's inflation rate was higher than any other G7 country apart from Italy. Short-term interest rates are higher than in most other major industrialised countries and long-term interest rates—as my hon. Friend pointed out—have been well above the average for the major G7 industrial economies. That record reveals the lack of credibility of the previous Government's ability to meet their inflation targets, and it is why my right hon. Friend the Chancellor has made clear that the commitment of this Government is to secure long-term stability and, from that, economic growth.

Changes have been made in monetary policy to enable the country to secure the basis of sound finances and the criteria for setting the level of inflation. We are taking politics out of the matter, so that businesses—manufacturing businesses in particular—are in a position to plan ahead to secure economic growth.

The Government share the anxieties about the exchange rate, but there are no short-term fixes—despite what my hon. Friend the Member for Great Grimsby suggested. There is a need for a stable and competitive exchange rate, consistent with the Government's objective of price stability. That is one of the main reasons why we are committed to creating an environment of macro-economic stability. Low inflation and sound public finances are necessary conditions for sustained exchange rate stability and are sensible objectives in their own right for the management of the economy. Monetary policy has to be guided by the long-term needs of the economy and not just by short-term political considerations. In putting monetary policy into that long-term framework, we believe we are in a position to create the climate for growth and competitiveness.

The subject of this debate was not just exchange rates, but raising long-term growth and competitiveness. I disagreed with my hon. Friend the Member for Great Grimsby on the price mechanism, which he said was the only way to secure competitiveness. Securing competitiveness is much more complex than that and the Government have acted to put in place mechanisms to secure long-term competitiveness.

The appointment of my noble Friend Lord Simon as Minister for Trade and Competitiveness in Europe underlines the Government's commitment to taking forward growth and competitiveness. Lord Simon will play a leading role in completing the single market and will call for firm action to be taken against illegal state aid, which distorts the operation of markets and the criteria for long-term growth. He is also chairing the interdepartmental ministerial group on competitiveness and the single market, on which I serve as the representative of Her Majesty's Treasury. It will consider how to improve EU competitiveness as an effective means of improving the performance of United Kingdom firms in world markets, thus creating sustainable jobs and greater prosperity.

I accept what the hon. Member for Macclesfield said about improving export performance, particularly in relation to manufacturing, but we must not forget the other aspects of the economy which require good export performance. The Government are establishing a new export forum to revive the United Kingdom's export performance. One critical element in that is improving the skills and training of the work force, so that it becomes internationally competitive. That underpins many of the announcements made by my right hon. Friends in the two months since the Government were elected.

We are investigating ways to improve the advice and support available to small and medium-sized businesses that need to be brought much more into the export market—the background from which I come. I know only too well that it is important to provide the right economic conditions in which investors can make decisions with greater certainty to allow companies to plan for the future. The announcements made by the Government since our election underpin our commitment to invest in infrastructure, technology and people as the keys to future economic success. In addition to the economic criteria determined by monetary and fiscal policy, they are critical elements in ensuring this country's growth and competitiveness.

In the next few hours, we will hear from my right hon. Friend the Chancellor about his plans for the future of the economy. I think that I can say without in any way prejudging his comments that he is committed to ensuring that the British economy is put on a sound footing for the future so that we can achieve economic growth and competitiveness into the next century. That will enable all our people to benefit and will enable us and our industry to play a part in world markets.