HC Deb 22 January 1998 vol 304 cc1195-212
Mr. Mitchell

I beg to move amendment No. 25, in page 5, line 2, after 'and', insert 'the highest possible levels of employment, and'.

Mr. Deputy Speaker (Mr. Michael J. Martin)

With this, it will be convenient to discuss the following amendments: No. 26, in page 5, line 4, leave out 'employment' and insert 'the level of the exchange rate.'. No. 1, in clause 12, page 5, line 9, at end insert,

'or (c) in the event of a conflict between the objectives of economic policy, how that conflict is to be resolved.'. No. 27, in page 5, line 9, at end insert—

'(1A) In sub-paragraph 1(a), "price" includes the price of houses and land.'. No. 2, in page 5, line 10, leave out 'both' and insert 'all'.

No. 33, in clause 19, page 8, line 40, leave out 'extreme'.

Mr. Mitchell

This is a Bill to bury Keynes, who was mentioned earlier in our debate. It would be better titled "The Coronation, Enthronement and Miscellaneous Provisions of Eddie George Bill". With my amendment, I want to provide a two-buttock throne—or two thrones, one for each buttock—so that he has objectives other than the single objective that the Government have given him.

I can see why the Government have introduced the Bill: they see it as a measure that will, first, win the confidence of finance and international money markets; and, secondly, commit the Government and the country to stability. The hope is that, if we kneel before finance, show that we are in awe of it and do its bidding, it will be nice and kind to us, and we shall not have to face the problems that we have faced in the past.

However, it is important that, rather than include only the objectives of bankers, we put in the Bill some of the objectives that are important to the people. Those objectives centre on full employment and economic growth, and it is those subjects I want to insert in the Bill as basic considerations for the Bank of England.

I feel that the decision to hand over control of the enormously powerful management lever of interest rates is a mistake. Interest rates control everything in the economy, and are the basic tool of management. They damp down or boost the economy, and control the rate of growth and the exchange rate. Changes in interest rates can lead either to deflation or to expansion. They are the basic, most essential weapon, yet here we are—a democratically elected Government—handing control of them to an appointed Governor of the Bank of England.

The Bank does not represent the interests of the mass of the people of this country—it represents the interests of finance, which have never been favourable to those of the people. I am suspicious of the priorities of finance, and those priorities are bound to be dominant in the Bank of England, which is located in the City and represents the City's views. Giving the Bank control of interest rates is a mistake, and it will not lead to stability, as is intended.

Indeed, the decision to give the Governor the power to raise interest rates has already led to instability, in that rates have been raised four or five times, people are beginning to complain about the rise in their mortgage repayments, and the pound is now overvalued. A move intended to bring stability has actually been destabilising.

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That is implicit in the whole operation: if we are going to manage the economy by means of interest rates and we give the Bank of England control over interest rates, its highest priority in any situation will be to raise interest rates, and it will deal with any problem by raising interest rates. In turn, interest rates affect the exchange rate, and, in the present circumstances, the exchange rate has risen. That effect has been amplified by events in Europe, because the instability and uncertainty there about what will happen in respect of monetary union, which I hope falls apart as quickly as possible—

Mr. Quentin Davies

indicated dissent.

Mr. Mitchell

The hon. Gentleman laughs, but it almost certainly will fall apart. That is my prediction, and I will take a side bet from him on that.

Reaching monetary union has caused great instability in Europe—it is like the reign of virtue, in that it would be a nice thing to have, but is very difficult to get to. Those difficulties are bringing money out of Europe into sterling and forcing up the exchange rate. Sterling is a better bet when there are high interest rates.

In Germany, there is a deliberate policy to reduce the exchange rate and depreciate the currency, because that is the only way to expand the economy after the rigours of Maastricht's deflation. The Germans are going in for what might be called competitive devaluation—if we did it, it would certainly be called that. The result is that the pound is now grossly out of kilter with other European currencies.

Two nights ago, a major plastics manufacturer told the all-party group on manufacturing industry that his products were now 25 per cent. less competitive than they were a year ago. Last night, I discussed the employment situation in Grimsby with representatives of Birds Eye Foods Ltd., which is shedding 450 jobs in Grimsby. One of the reasons is the bovine spongiform encephalopathy crisis, but the other is that products produced in this country are now 25 per cent. less competitive in the Dutch and German markets than they were before the rise in the pound began.

We have the insanity of the economy being managed simply by interest rates and that power being given to the Bank of England, which has led to a destabilising deflation in the economy. It is as if our only weapon with which to manage the economy is to bash the engine of growth with a large heavy hammer—that is essentially what we are doing in bashing manufacturing.

That is why I want to put other objectives in the Bill. Amendment No. 26 would insert the effect on the level of the exchange rate as a factor to be taken into account when interest rate increases were being considered, because today's European uncertainties mean that such effects are disproportionate. I feel that we must introduce other objectives, because I do not trust the priorities or skills of financiers and those drawn from a financial background—the sort of people who sit on the Monetary Policy Committee of the Bank of England. I feel that distrust because bankers have never served the interests of the people, and I do not suppose that they will suddenly start to do so.

I recall the famous New Zealand poem that was penned when Sir Otto Niemeyer, from the Bank of England, went out to New Zealand in 1931 to tell the authorities how to deal with the depression. He said that they should act according to a simple formula, "Put up interest rates, fire people." The New Zealand poet, Ard Fairburn, wrote: The heart is gold, The name is Otto Women and children first, the motto". That is what always happens—interest rates are raised to pass the punishment on to the people.

Amendment No. 27 calls for a proper measure of inflation, because, if the economy is run on the basis of the inflation rate, it must be properly calculated. The retail prices index is an inadequate, unsatisfactory measure of inflation. Harold Macmillan once said that managing the economy with the information available to him was like trying to catch a train with a 19th-century edition of Bradshaw. Managing the economy according to the RPI is rather like trying to navigate the M25 with a 1936 RAC map of the road system. It is not a relevant measure. I believe that it is entirely wrong to make it the dominant consideration for the Bank of England.

One of the essential problems with inflation is that it is driven by assets as well as those factors that feature in the RPI. That is why amendment No. 27 would include house prices in any consideration of price stability. Inflation is usually caused by loose credit, such as the credit explosion that Nigel Lawson produced in the late 1980s when he was Chancellor. That leads to an enormous asset explosion, particularly in house prices. Such a factor should be included in the measurement of inflation that the Bank of England must take into account.

I object to managing the economy according to keeping the rate of inflation down on the basis of interest rates. Any fool can defeat inflation. The previous Conservative Government managed that pretty well, and qualified for that description as well. All one has to do to reduce inflation is to put people out of work. Unemployment went from 1.4 million in 1979 to more than 3 million in the early 1980s, and reached that level again in the early 1990s. That is why the inflation rate was reduced. It was simply a question of producing a graveyard of workers. Once that happens, inflation falls. That is what the Conservatives duly did.

There is no reason why an obsession with inflation should be the target for the Bank of England; nor should it dominate policy. One cannot have a decent rate of growth and keep inflation at 2.5 per cent. If one had growth at 5 per cent., inflation would inevitably rise above 2.5 per cent., because inflation is associated with growth. It is not true that a reduction in inflation leads to growth. There is no causal connection. Inflation is a characteristic of growth.

For practical purposes, inflation is dead. If one seeks to question that claim, consider the impact of the financial crisis that has hit the far eastern economies. Most of those economies have already devalued their currencies, and the others will follow suit. Their manufactured goods will come pouring into our country at low prices. That will aid our struggle with inflation, because it is won by putting people out of work and making imports cheap, so that people do not buy domestic products. That is ruinous for the domestic economy.

We have suffered from such problems in the past, and they are beginning to re-occur. Closures and unemployment in manufacturing are already being announced, and the situation will become worse in the coming year. We have already had warnings about that from British Steel. A delegation from the Inter-Parliamentary Union that visited Japan was also warned about the impact of the current financial crisis on Japanese and Korean investment in this country. Our manufacturers are already complaining about the problems that they are suffering.

The emphasis throughout the economy is on the coming deflation, which will hit it soon. It is the consequence of one-club golfing, with interest rates as the only method of economic management, carried out on the basis of an inflation-defeating agenda. That policy is not carried out according to any scientific fashion; it is not as though the people in charge know what they are doing. All they are doing is hitting the economy with a heavy hammer.

Other objectives need to be included in the management of the economy. The economic management requirements of the Bank of England should not be tied simply to the level of inflation, as measured by the faulty mechanism of the RPI. The Labour party's objectives must be, are and always will be jobs and growth, in order to maximise the living standards of our people. Those are essential parts of Labour policy. We can achieve nothing unless we achieve economic growth and full employment. That means that other considerations must guide the Bank of England.

I concede reluctantly that, by force majeure, control of economic policy will be handed to the Bank of England. I am opposed to that, but it would be better if it was set a dual target relating not only to the level of inflation, but to the level of employment. Growth should also be included in the second part of the equation. For that reason, amendment No. 25 states that the objectives of the Bank of England in relation to monetary policy should be geared to the highest possible levels of employment". I do not believe that that is a dangerously revolutionary or radical step. That consideration should be included. The Government have mentioned it in clause 11(b), but inflation is the dominant consideration. I want employment to be an equal consideration.

Other central banks have made employment one of their objectives. It is only in New Zealand that inflation is the exclusive obsession, as it is in this country. According to the New Zealand experiment, a written agreement was drawn up between the Reserve bank of New Zealand and the Government to maintain a fixed inflation target, but that has proved disastrous. The experiment has been conducted according to the policy followed in Britain—interest rates have been put up, with the result that the value of the dollar has gone up. Unemployment is therefore rising, and the New Zealand economy is suffering. That will always be the case as long as we opt for such an automatic mechanism of interest rate increases.

I therefore want to require the Bank of England to study other considerations, particularly the maximum level of employment, and to bear in mind the effects of its decisions on the exchange rate. The amendments would guarantee that. That would be a valuable experience for the Bank, because, instead of the easy automatic reflex of putting up interest rates to combat every possible problem, it would be forced to calculate the consequences. It would be forced to work out the effects on the real economy—that of jobs, growth and a competitive industry which can compete in an international market.

That would be a valuable learning process for the Bank of England, but it can happen only if the Bill makes employment and growth, as well as the rate of inflation, matters which it must consider.

Mr. Heathcoat-Amory

It is a pleasure to follow the hon. Member for Great Grimsby (Mr. Mitchell), because he is becoming a rather distinctive voice on the Labour Benches. That used not to be the case. We used to hear a lot of concern expressed by Labour Members about manufacturing industry. I share many of those concerns, because I, too, have a manufacturing background and I represent a constituency with a surprising amount of manufacturing in it. I have always listened carefully to other hon. Members who have expressed similar worries, particularly about the exchange rate. I am afraid that the new Labour party has rather abandoned its roots, so I was particularly struck by the way in which the hon. Gentleman related his concerns about the Bill to worries about the future of the manufacturing industry. Those arguments must be taken seriously.

On Second Reading, the hon. Gentleman spoke along similar lines. On that occasion some of his worries were also expressed by a number of his hon. Friends, most notably the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) and the right hon. Member for Llanelli (Mr. Davies). He summed up his worries about the Bill by saying that the Government had a professed aim of greater devolution of powers from bureaucracy to democracy whereas the Bill was designed to make the move in the opposite direction by transferring power from democracy to bureaucracy. I think that that sums up some more general worries about the Bill.

Unfortunately, many of those voices were not represented in the Standing Committee. I believe that all such hon. Members were excluded from the Standing Committee deliberately and I am afraid that it was packed with many new Members who were most unwilling to speak out about any anxieties that they had; indeed, they hardly said anything, so legitimate worries about the Bill went more or less undebated in Committee, which was a pity.

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However, this is a new debate on Report, and we have before us an unanswered and unresolved question: how will the Government reconcile their various economic objectives if the going gets tough? Conflicts do arise in economic policy from time to time. The Government are lucky at the minute. They have inherited a golden legacy of steady growth, low inflation and falling unemployment. Things are extremely stable and, on the whole, are going well, although I am afraid inflation is starting to nudge up again and I would not be confident that unemployment will continue to fall throughout the year. Dangers lie ahead.

The hon. Member for Great Grimsby was right in saying that driving the British economy is not an exact science. He gave several illustrations of how difficult it is. A permanent secretary once said to me that running the economy from the point of view of the Treasury was like driving a car with the windscreen blacked out and the rear-view mirrors broken: one certainly did not know where one was going; one had some idea of where one was, but little idea even about where one had just been. That is the difficulty about trying to apply exact science to the setting of interest rates.

To start with, we must be clear in our minds about what the Bill does as it stands. It gives overriding priority to price stability and puts the maintenance of price stability into the hands of an unelected committee, which is given total discretion in setting short-term interest rates.

Conservative Members support a low-inflation strategy. We give way to no one in our belief that it is essential to break any inflationary tendencies in the economy and establish a permanent low-inflation culture. We were far advanced on the way to doing so—we met our inflation target of 2½ per cent. or less—by the date of the general election.

However, we know that setting up an independent Bank of England is not necessarily—and certainly not sufficiently—the way to achieve low inflation, because plenty of independent central banks in the world have fairly poor inflation records. Historians will know that the Weimar republic had an independent central bank called the Reichsbank, which was not very successful. Similarly, as the previous Government's record shows, it is possible to establish low inflation and to achieve a low inflation target without an independent central bank, by using the full array of weapons at the disposal of any Chancellor—monetary weapons, taxation and expenditure. We do not agree that giving independence to a central bank is the only way to achieve low inflation.

Moreover, there are dangers in making a mechanical change without having established a low-inflation credential and record. If the Bill as drafted becomes law, if we run into a recession in a few years' time, with unemployment starting to increase, and if inflation still stubbornly remains above—perhaps only just above—the target rate of 2½ per cent., the Bank of England will be obliged to give priority to reducing inflation. It may well continue to increase interest rates, even in the teeth of a recession.

Let us suppose that, alternatively, the economy experiences a supply side shock. Commodity prices might start to rise. Oil prices, which have sometimes increased very fast, might do so again. That might feed through into an increased general index of prices and the retail prices index might increase. In those circumstances, the only weapon at the disposal of the Bank of England and the Monetary Policy Committee of the Bank will be to increase interest rates, and that could easily feed through into higher unemployment. Clause 19 contains emergency provision for all these arrangements to be abandoned and for the Bank to give way to the Treasury. However, if there were a milder shock and inflation drifted up owing to supply side influences, the Bank would be obliged to increase interest rates, not because it thought it necessary, but because it would be required by law to do so.

One can contrast the Bank's lack of discretion concerning policy generally with the example of the Federal Reserve bank of the United States, which does not have an overriding commitment to low inflation. It has several equal objectives, including the maintenance of employment. That bank has been very successful in balancing all those objectives and achieving low inflation combined with low unemployment. Obviously, the overriding commitment to price stability is unnecessary.

Therefore I believe that the hon. Member for Great Grimsby and other hon. Members who have spoken on the subject previously are right to be worried and to ask the Government what they would do in certain eventualities. The Government certainly did not understand that dilemma earlier in the Bill's passage.

I am glad that the Chief Secretary is to respond to the debate because he will recall that he got into a tremendous muddle on Second Reading, trying to explain how the Government did not have as an overriding priority the maintenance of price stability. He was asked about that by the right hon. Member for Caernarfon (Mr. Wigley), who pointed out that the Bill did give that priority, and the Chief Secretary said: The right hon. Gentleman is mistaken. When the right hon. Member for Caernarfon persisted and said that the other Government objectives were subsidiary to the anti-inflation drive, the Chief Secretary said:

The right hon. Gentleman is reading it the-wrong way round."—[Official Report, 11 November 1997; Vol. 300, c. 712.] I believe that, on reflection, the Chief Secretary will realise that actually it was he who got that wrong. The beginning of wisdom is at least to agree about where we are at the minute, so I should be grateful if he would confirm the fact that the commitment to price stability is overriding, and will be by law. I ask him to confirm his understanding of that position, which is little more than asking him to refer to clause 11.

However, we want to ask the Chief Secretary what will happen when there is a conflict between those two objectives, especially if we beget a split between fiscal policy and monetary policy. We all know that budget decisions, which are broadly fiscal, affect inflation, directly by influencing prices and indirectly through monetary factors or the influence of debt management. From now on—this is another change introduced by the Bill—debt management will be taken away from the Bank of England and given to another quango that is controlled by the Treasury.

The way in which debt is managed has a big effect on monetary policy. Whether the Treasury sells debt to the banking sector or the non-banking sector has a great effect on the quantity of money in circulation, and therefore on eventual price levels. It is quite clear—this is a statement and not an opinion—that the Government will affect the dealings of the Bank of England. Therefore, the two could move in opposite directions.

This is not mere speculation about what might happen in future in this country: there are plenty of examples of its happening elsewhere in the world. We discussed the matter at some length in Committee, but I shall refer only to the two best examples to which we alluded. The first concerns the United States in the 1980s under the presidency of Ronald Reagan, whose budgetary and fiscal policies were, by and large, expansionary and potentially inflationary. That situation was dealt with by the Federal Reserve bank under Paul Volcker, who had to put up interest rates very sharply. There was a split between the Executive, who were pulling in one direction, and the monetary authorities, which were pulling in the other.

Another example closer to home is what happened during the period following German reunification. The West German Government failed to finance the cost of reunification by increasing taxes or cutting other expenditure, so they ran a loose fiscal policy and put all the strain of the German anti-inflation drive on to the Bundesbank, which increased interest rates sharply. We now know that that was a major factor in the destruction of the exchange rate mechanism.

Even closer to home, the July Budget sowed the seeds of a potential divergence between monetary and fiscal policies. Instead of dealing with consumption—which the Chancellor said was in danger of overheating—he taxed savings. Inflation is still above the Government's target. Therefore, the strain had to be taken by the Bank of England, which has increased interest rates four times in addition to the increase that the Chancellor introduced before he transferred monetary policy to the Bank. So there have been five interest rate increases since the Budget.

Mr. Quentin Davies

I am grateful to my right hon. Friend, whose speech I am following with great care. He has made some extremely powerful points. Is he aware that, in answer to a question that I posed in the Treasury Committee, the Governor of the Bank of England acknowledged quite explicitly that, had the Chancellor done what he obviously should have done in the conjunction of last summer and borne down on consumption and incentivised savings—he did exactly the opposite, and taxed savings with the pensions tax and reduced consumption taxes—the burden on monetary policy would have been significantly less and we would now be enjoying lower interest rates and lower sterling parity?

Mr. Heathcoat-Amory

I am very interested in my hon. Friend's comments. He provides powerful and authoritative backing for my point. I had not realised that the Governor had said that—although I am not altogether surprised. It is now generally accepted that the Government made a colossal miscalculation in targeting people who save. They failed to draw expenditure away from consumption—if that was their aim. If the Government are trying to provide an alternative to the welfare state, they should encourage rather than cut savings. The Government are making mistakes not only in each Budget but in each Treasury announcement. They compounded their attack on pension funds last year by announcing the destruction of personal equity plans and tax-exempt special savings accounts and by capping their successor at £50,000. The Government have made a series of mistakes that throw the strain of the anti-inflationary strategy on to the Bank of England.

Amendment No. 1, and the consequential amendment No. 2, ask the Government to explain themselves rather than expecting other people to sort out the mess. It may have been a rather cunning move on the Chancellor's part to try to pass to others the unpleasant business of raising interest rates. In that way the Chancellor hopes to avoid the hostility that attaches to those who increase people's mortgage payments, which is a form of taxation, in complete contradiction to everything that he promised before the election. I do not think that the right hon. Gentleman's plan will succeed because he still has responsibility for such matters—even if he has handed operational matters to the Bank of England.

Our amendment seeks to force the Government to explain how such matters will be resolved. The Government have an inflation target, which is currently 2½ per cent., and several other desirable objectives—two of which are mentioned in the Bill. However, if there is conflict between the various objectives, we want to know how that will be tackled and who will do it. Our amendment also seeks the Government's explanation of the monetary and inflationary consequences of their policies so that they do not set the Bank of England an impossible task.

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As things stand, I seriously believe that, when the economy hits some rough patches, there will be much recrimination and misunderstanding. There is the danger of a direct confrontation between the Bank of England and the Government because the Bank will try to deliver on the inflation objectives but will be hampered in that aim—and possibly prevented from doing so—by the actions of the Chancellor of the Exchequer and the Government who will pull in a different direction. The Government must respond to that serious issue. Our amendments seek to force the Government to think carefully about the matter and to tell the House what they will do.

Sir Michael Spicer

I agree with the hon. Member for Great Grimsby (Mr. Mitchell) on many matters, particularly on the subject of Europe—although we sometimes battle against each other on the "Target" programme. The hon. Gentleman has some interesting contributions to make on European issues. I agree with the amendments' general proposition that Government must make choices between conflicting objectives. My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) made the same point from the Front Bench.

I do not agree so much with the objectives that the hon. Gentleman is pursuing in some of his amendments. Like my right hon. Friend the Member for Wells, I think that balancing employment against inflation is a false choice. I agree with my right hon. Friend that, when it comes to conflicting objectives, the real choice might lie between fiscal policy and monetary policy. If the Bill is enacted, one part of economic policy will be handed over to a non-elected body, which will be told to get on with it. To that extent, all sorts of potential conflicts—to use my right hon. Friend's words—may emerge in terms of economic policy. As the Government threw out proposed new clause 1, Parliament will have no voice in decisions about conflicting objectives. One feels for Labour Members, who are getting increasingly restless. Suddenly they are becoming frightened. Members of the Treasury Committee, on which I serve, constantly try to probe witnesses in the hope that they will say that the effect of the Bill should be diluted. The hon. Member for Great Grimsby has the merit of trying to amend the Bill to build in different objectives, which is a legitimate aim, although the Government will presumably reject the amendments. As the Bill stands, all the other policy objectives are to be made subject to that of price stability.

The hon. Gentleman argued that price stability was not an important component of employment policy. I do not agree; I entirely accept the position outlined by my right hon. Friend. The hon. Gentleman may find historical examples where growth has been accompanied by inflation, but he would have to concede that for growth in jobs to take place, there must be low inflation and high competitiveness. High savings go with low inflation, because if there is high inflation, there is no point in saving, so the resources from which to invest in jobs do not exist.

It is possible to find historical precedents of inflation going hand in hand with growth, but over time countries that have suffered inflation and especially hyper-inflation have not experienced growth—in many cases their employment and manufacturing have collapsed. I accept that price stability is a vital part of a healthy economy.

Mr. Mitchell

Having argued well so far, the hon. Gentleman is moving towards a false conclusion. Growth is inevitably associated with increasing inflation. I can think of only two examples of perfect price stability this century: Salazar's Portugal, and the United States in the three years up to the great crash of 1929. Those are examples of almost perfect price stability, and what growth did that generate?

Sir Michael Spicer

There are many examples in history, ranging from the Weimar republic forwards and backwards, and all over the world, in which, because a currency has collapsed, the real economy has collapsed with it. Historical precedents support the view that price stability is accompanied over time by a sound economy.

I agree with the hon. Gentleman on amendment No. 26, which replaces "employment" with the level of the exchange rate", if that arises from his worry about false exchange rates, which may occur if an independent central bank pushes us towards a single currency.

We have only to look across the channel to see what has happened in France. It has been extraordinary over the past 24 hours. The socialist Government in France seem to believe their own claim that the massive unemployment there has nothing to do with the false exchange rate that they created against the deutschmark, and that they will adopt expenditure policies, the like of which the hon. Gentleman may want to have incorporated in the Bill under his amendment No. 26. I would not agree with that, but I agree with him when he implies that false exchange rates have a lot to do with unemployment.

I do not approve of the idea of taking away a major slug of economic policy and handing it outside the control of Parliament, especially now that the Select Committee is to have no statutory say in the appointment of the board. I do not like that, for the reasons stated by my right hon. Friend. The grave distortions that can emerge between monetary and fiscal policy in that context are self-evident.

Once that decision has been taken—I accept the Government's premise that price stability is an important feature—it is right that the Bill should explicitly restrict the Monetary Policy Committee to dealing with a specific policy objective. I cannot see any argument for handing the whole of economic policy, which is effectively the hon. Gentleman's aim, outside the sphere of Government and Parliament. That is the principle behind the amendments.

The hon. Member for Great Grimsby does not like the price stability objective, and he probably does not like the fact that the Bank of England is to run it, so he proposes giving everything to the Bank of England: employment policy, as he defines it, exchange rate policy—everything should be given to an unelected body. That is the end of democracy. He argues strongly, as I do, against the move in Europe towards stripping our Parliament of its powers and handing them to Europe, yet his amendments would strip Parliament and our elected Government of the ability to make choices between economic policies. That is very serious indeed.

Although I sympathise with Labour Members who are suddenly waking up to the implications of the Bill, the way to put it right is to throw out the entire Bill, not to agree to the hon. Gentleman's amendments. He is effectively saying, "We have put all those powers outside our control, so let us give the Bank even more powers. Let it make the choices, so that Parliament and the Government do not have to do any work, because everything has been given to an unelected outside body."

That cannot be the solution to the worries and dilemmas that many of us share with the hon. Gentleman. The answer is for him to vote against Third Reading and to get 300 or 400 of his colleagues to do the same, and to throw out the Bill. He has about two hours in which to go round the bars and collect all his hon. Friends. We will be with him in the Lobby, if he is prepared to do that.

It is wrong to say, "We do not like giving the Bank of England powers, so let us give it even more powers and choices in the running of our economy." Although I share with the hon. Gentleman many of his initial premises, I could never agree to a group of amendments that gave the Bank of England not only the operational powers to carry out the policy that the Government have set for it in terms of price stability, but the choice between unemployment policy, fiscal policy and so on. The amendments are nonsense in the context of the hon. Gentleman's objectives. I hope that the House will vote against them.

Mr. Gibb

I support amendment No. 1. Clauses 11 and 12 are key to the monetary objectives of the Bank of England, once it achieves independence. Clause 11 states: In relation to monetary policy, the objectives of the Bank of England shall be— (a) to maintain price stability". Subsection (b) continues:

subject to that, to support the economic policy of Her Majesty's Government". It is interesting how the phrase "subject to" has crept into the drafting of the Bill, whereas in letters from the Chancellor to the Governor of the Bank of England and to the Chairman of the Treasury Select Committee, the phrase has always been "without prejudice to". I do not want to go into semantics to see how distinct is the difference between those two phrases, but "subject to" subjugates the pursuit of the Government's other economic objectives to the overriding objective of maintaining price stability.

Clause 12(1)(a) enables the Treasury to write to the Bank of England to set out what the Government understand by the phrase "price stability". Subsection (1)(b) enables the Treasury to write to the Bank of England to set out its economic policy to enable the Bank of England to conduct its monetary policy in accordance with Government wishes.

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There is, however, no mention in clause 12 of what the Bank of England should do when there is a conflict between the Government's economic objectives and the Bank of England's overriding objective of maintaining price stability. That is why amendment No. 1 seeks to add a new paragraph (c), which states: in the event of a conflict between the objectives of economic policy, how that conflict is to be resolved. That enables the Government to write to the Bank of England to specify how that should be done.

There are three principal areas where there could be an important conflict between monetary policy being conducted by the Bank of England and other economic measures being taken by the Treasury and the Government. The first relates to the exchange rate. The Bill gives the Treasury responsibility for conducting exchange rate policy. At the moment, we have a high level of sterling and the Government are also maintaining a tight monetary policy because they fear the re-emergence of inflationary pressures in the economy. Therefore, even today we have the possibility of such a conflict.

The position could arise where the Government were concerned about the high level of sterling. Farmers throughout Britain have lobbied the House this week and they share that concern. As a consequence, the Treasury could conduct a foreign exchange policy of trying to bring down the level of sterling. It would do that by selling sterling into the market. The result of that would be an increase in the money supply in Britain.

Meanwhile, the Bank of England would try to maintain price stability and would monitor the money supply. When it saw the increase in the money supply, the Monetary Policy Committee would want to trigger higher interest rates in order to counter that. It would not know that that increase in the money supply was the result of a deliberate action taken by the Treasury to bring sterling down by selling sterling into the market. It would look at the data and believe the increase to be a normal activity in the economy, along with the shocks and various other influences that affect it. The amendment enables the Treasury to tell the Bank of England what its exchange rate policy is because it sets out what it should do in the case of a conflict.

In Committee, the Paymaster General and other Ministers were asked what the Government's exchange policy was, to which there was no response. Time after time, we asked the Paymaster General how such a conflict would be resolved. It is a genuine conflict. No Minister seems to be able to say how such a conflict should be tackled. At the moment, the Treasury is responsible for interest rate and exchange rate policy, but when the two are split and the knowledge of the two different entities is divorced, there is no way in which one hand will know what the other is doing and there will be conflict. We could end up with the dog chasing the tail. The Government could sell sterling to the market, thus increasing the money supply, leading to their raising interest rates further and pushing sterling up. The Treasury would sell more sterling into the market to bring the level of sterling down, and the vicious circle would continue. It is a recipe for chaos.

The second area where potential conflict exists is in the management of Government debt, which is to be handed over to a quango of the Treasury. Again, there are different ways in which to manage debt. There is, for example, the fully funded method of managing debt. If the Treasury, which is handling debt management, decides to maintain a fully funded policy, and if debt is sold to the non-banking sector when there is a public sector borrowing requirement, the money supply will decrease.

Meanwhile, the Bank of England could well be trying to ease monetary policy because it was concerned about deflationary pressures in the economy. Again, one hand would not know what the other was doing. The activities of the debt management side of the Treasury could do precisely the opposite of what the Bank of England was doing.

The final area of conflict is that between fiscal and monetary policies. Again, fiscal policy makers are divorced from those conducting monetary policy. The Treasury could be busy relaxing fiscal policy for various social reasons—to improve incentives in the economy or to increase spending in certain areas. Meanwhile, the Bank of England, fearful of inflationary pressures in the economy, could be raising interest rates, pursuing a tight monetary policy.

As there is no symbiotic relationship between the two organisations, one could be pursuing a policy directly opposite to that of the other. There would be no incentive in the Treasury to pursue a sensible fiscal policy because it would know that it was not responsible for inflation. All inflationary problems would be dealt with by the Bank of England and, again, there would be a recipe for higher interest rates than would otherwise be necessary.

In conclusion, the amendment seeks to enable that conflict to be sorted out, and to enable the Treasury to write to the Bank of England to put on the record how this inherent conflict, which arises from giving the Bank of England independence, should be resolved by those responsible for Britain's economic policy.

Dr. Cable

This is the best opportunity to say something on the substantive economics of the issue rather than on the constitutional issues that we dealt with before. I intend to speak against the amendments.

Clause 12, which relates to economic policy in general, has just been read out and it makes it clear that the Bill provides for multiple economic objectives. Clearly, if there is an emergency and large-scale unemployment, the Chancellor has powers under the Bill to give employment and growth priority. That flexibility is built into the legislation.

My main comments relate primarily to the speech by the hon. Member for Great Grimsby (Mr. Mitchell). He spoke at some length about sterling and the problems of exchange rates. We have heard more and more about the problems of sterling in the House. Treasury questions are increasingly populated with questions on that subject.

I am probably one of the relatively few people in the world who claim to have read the hon. Gentleman's book on the subject, which I think he wrote with a former Member who has now emigrated to New Zealand. It was an eloquent book, but it had throughout it a fallacy that he has perpetuated this evening, which is not distinguishing between the real and the nominal value of the exchange rate—an important distinction. It is perfectly possible to maintain the competitiveness of one's exchange rate while the value in the markets—the nominal value—is appreciating. That has happened in Germany where, during the past 30 years, the exchange rate has appreciated from DM11 to less than DM3 against sterling. For the most part, German exporters were more than able to maintain—or more than maintain—their competitiveness with the United Kingdom because we had an appallingly bad relative rate of inflation. If we think about real exchange rates rather than nominal rates, the problems raised by the hon. Gentleman are simply not applicable.

The hon. Gentleman is on sounder ground when he worries about the particular problem that we have now of an exchange rate that is overshooting in the markets. Overshooting in the markets occurs for one of two reasons. One we saw during the early days of Mrs. Thatcher and another in the early 1990s which directly arose from the lack of credibility of those who were carrying out monetary policy. We had a period of lax control of money, a very high rate of inflation and then, over-compensation through high interest rates. The whole purpose of the legislation and of an independent central bank is to prevent such a problem from arising again.

Sterling is also very high because of the EMU premium. We have consistently argued with the Government that they should not procrastinate over EMU membership, but should get on with having a referendum and consider at least early entry, as that would shorten the transition to our having stable exchange rates in relation to European countries. As long as the delay persists there will be uncertainty and an exchange rate premium, because the ecu will trade at a relatively soft rate. In other words, it will be more competitive than sterling would be on its own. The Liberal Democrat argument to deal with that problem is that the sooner we proceed to EMU, the sooner we shall eliminate many of the problems of volatility and over-valuation that have been described.

Mr. Nick St. Aubyn (Guildford)

We have heard for many years that the benefit of the euro is that we shall have a hard currency. Now we are hearing from the Liberal Democrats that the benefit will be that we shall have a soft currency. Does the hon. Gentleman understand why those who have doubts about the euro remain totally unconvinced by the arguments on this subject?

Dr. Cable

The possible answer to the hon. Gentleman's question is that people use the words "hard" and "soft" in totally different ways. The argument for belonging to EMU is that the euro will be hard, in the sense that it will have a low rate of inflation, but it may well have a rate that is competitive—one that devalues against the dollar and the yen. Both of those characteristics are possible and desirable, and we would welcome them.

Mr. St. Aubyn

Surely if there is to be a soft euro, it is because of the expectation that, with the participation of states such as Italy, the inflation rate will be higher. If one has a soft currency, there is a very high risk of inflation creeping into the system.

Dr. Cable

I do not think that the hon. Gentleman has read the financial press for many months, if not years. If he had, he would know that the inflation rate in Italy is now very low and that the Italian economy is one of the better managed economies in western Europe.

The other incompatibility that has been raised is the difference between fiscal and monetary policy. It is a genuine technical issue; it is also a political issue. It is perfectly possible for Governments—or, in this case, an independent central bank—to run a tight monetary policy and for it to be undermined by profligate fiscal policy. That is why the Liberal Democrats argue very strongly that this measure should be followed by another, which we would call the Fiscal Responsibility Act, which would make a set of rules for fiscal policy to match those in the Bill. Were those complementary measures to be taken, many of the difficulties that have been described in this short debate would not exist.

Mr. Darling

This has been an extremely long debate for what is a fairly short point. I will try to reply in short measure.

My hon. Friend the Member for Great Grimsby (Mr. Mitchell) and I disagree on a central point. The Government believe that low inflation and price stability are an essential precondition for sustainable growth and high employment. One has only to look at the history of this country since the war—it had high inflation, which was into double figures in very recent memory, and the boom and bust, with swings between one extreme and another—to realise that instability was one of the main reasons why we have not had the long-term sustainable growth that competitor countries have had.

If my hon. Friend were to ask any investor or business what it wanted more than anything else, it would say that it wanted certainty and stability. That is why we attach so much importance to price stability. I know that my hon. Friend disagrees with that. I do not claim to have read the books that he wrote with our former colleague, Bryan Gould, but I know that central to their belief was the argument that rising inflation was not necessarily a bad thing. I have to disagree with him.

Where I do agree with my hon. Friend is that interest rate policy is not the only matter with which the Government need to concern themselves. We have made it clear that we intend to maintain fiscal as well as monetary stability. That is why we are ensuring that public spending will be maintained in a sustainable way and that is why we are taking steps to expand the capacity of the economy, so that it can grow in a sustainable way, as was not possible in the past.

Central to monetary stability are confidence and certainty. The rationale behind our setting up the Monetary Policy Committee is that the markets and the general public will know that the Government are serious about their commitment to long-term price stability. We have already seen the benefits of that, because long-term rates fell almost immediately following the announcement by my right hon. Friend the Chancellor earlier this year.

I shall now deal with a point that the Opposition made much of on Second Reading, and to which they returned in Committee. They should look at clause 11, which is written in plain terms. The key objectives of the Monetary Policy Committee are to maintain price stability, and … subject to that, to support the economic policy of … Government, including"— my hon. Friend the Member for Great Grimsby will no doubt note— objectives for growth and employment. It is precisely to encourage sustainable growth and employment that we want to ensure price stability. A plain reading of clause 11 makes it abundantly clear that the Bank, in achieving the Government's inflation target of 2.5 per cent., must have regard to the Government's other objectives—growth and employment. That means, among other things, that if there were some violent shock to the economic system, the Monetary Policy Committee would have to take account of the Government's policy on growth and employment to decide the time frame in which it would reach the inflation target of 2.5 per cent.

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We have also made it clear that if the Bank does not believe that the inflation target will be met and that the rate will deviate by more than one percentage point from its target, it must write an open letter to the Chancellor explaining why the rate will not reach the target and the period within which the MPC expects to meet it. The point of all that is that the House and everybody else will be able to judge what the Bank is doing and be satisfied that it is acting in accordance with the strictures established by clause 11. It is as clear as day to anyone who wants to see it. The problem with the Opposition is that they are not concerned about clause 11. It is becoming increasingly clear that, after eight long months, they are edging towards outright opposition to the idea of giving the Bank operational independence. That is their real objection. They have no real interest in the wording or phraseology of particular clauses.

The Government are responsible for exchange rate policy and for fixing the inflation target. There is no conflict. The Chancellor of the Exchequer is, as always, accountable to the House for the overall conduct of economic policy, so there is no dubiety about the framework that we have established. We are ensuring that we get something that this country has wanted for many years: price stability and economic stability, which, more than anything else, will benefit the long-term prospects for growth and employment.

Mr. Mitchell

I am very disappointed at the Minister's reply, although I expected him to say what he did. The point that he made about the Government being responsible for exchange rate policy provokes me to ask: if they are responsible for exchange rate policy, why is the exchange rate so high? Given the manifest problems of industry and agriculture—the rise in imports, the difficulties with exports, the threat to close capacity and therefore lose jobs—why do not the Government act and exercise their responsibility for exchange rates by getting them down? The answer is, of course, that it is interest rates and the uncertainties in Europe that determine our current exchange rate and the current over-valuation, which will be disastrous. I do not agree with my right hon. Friend on that; nor do I agree with my right hon. Friend that low inflation is the precondition of economic growth.

I do not defend high inflation—nobody is advocating high inflation—but some degree of inflation is an inevitable concomitant of growth. There cannot be growth without some degree of inflation. We are making low inflation more important as a priority than growth. Growth and jobs should be the Government's central priority. Inflation should be treated as a residual, not the determining aim of policy, as seems to be imposed on the Bank of England. Although my right hon. Friend said that the Government can introduce objectives of growth and employment, and the Bank of England has to support that, the paramount requirement—according to Maastricht—is to maintain price stability, and subject to that, because it is paramount, to support the economic policy in respect of growth and employment.

I had hoped for some more concessions because we are embarking on a doomsday machine. We are locked into a target of 2.5 per cent. inflation, which risks doing severe damage to the economy. It is wrong of the Government to abdicate their democratic responsibility for economic growth and jobs to bankers, who will always act like bankers. However, there is no point in my going on because the new Government have decided their priorities and will pass this Bill tonight. They have a responsibility to be right in what they do and say, and I do not think that they are. We shall live to regret this day because of the inflexible requirements that the Bill imposes on us.

I realise that my fellow Members of Parliament want to get away, as I do. I was told that I am building up extraordinary resentment among northern Members. I am a northern Member, and my fellow northern Members are gathering on these Benches solicitously to persuade me. It would have been better to have discussed this matter in Committee. Given their large majority, the Government should not be frightened of appointing people with dissenting opinions to Standing Committees. Had they done so, we could have had a longer discussion in proper and appropriate circumstances, rather than trying to discuss this matter now, late at night, with hon. Members pressing to go home. It is a question of the Government's confidence in their priorities, which they should allow to be thrashed out in the appropriate environment.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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