§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Dowd.]
11.55 pm§ Mr. Austin Mitchell (Great Grimsby)I congratulate the Paymaster General, my hon. and long-standing Friend the Member for Coventry, North-West (Mr. Robinson), on his new role as the Government's night-watchman, keeping the forces of Keynes at bay. I expected to meet my hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell), but I gather that, rather than continue in her role as the Government's chief Mitchell minder, she has taken refuge in Scotland. I had hoped that I would have been called to Downing street, so that I could give the reply to my own speech, but things did not work out in that way.
In my view, we should not be having this debate on the stability of monetary management at all; the Government should have listened to the long list of warnings about the rise in the exchange rate and its consequences for manufacturing. When one puts up interest rates—I am afraid that the Labour Government have been very good at that, for whatever reason—one increases inflation. Historically, there is a strong correlation between high interest rates and high inflation—high interest rates are the cause of high inflation. There is also an effect—one could call it the Viagra effect—on sterling's exchange rate: the pound goes up, which is particularly dangerous when far eastern currencies are being devalued and European uncertainties are driving money out of Europe into sterling.
Manufacturing suffers a double whammy: it has to face not only higher interest rates, but higher exchange rates, which makes it more difficult to sell products overseas and increases the competitiveness of imports. We become locked into an inevitable wind-down, and manufacturing has to shed jobs. My hon. Friend the Paymaster General was in manufacturing—at Jaguar—and well knows that, in such circumstances, fewer services are bought, investment is cut, the balance of payment gapes, and there is a further deflationary urge to cut demand. We become locked into the same kind of wind-down that the economy went through between 1979 and 1981 and again between 1989 to 1992.
We should have learnt from that, but we are repeating the process. I fear that, unless policy is changed, the wind-down will be inescapable. It is no use lecturing manufacturing and hoping that circumstances will change—they will not. What is to change them?
The consequences will be the same as they were in the early 1980s and the early 1990s. It is no use preaching at manufacturing to cut costs. It cannot possibly cut costs by the 30 per cent. by which sterling has appreciated against the deutschmark and regain its lost competitiveness. It is no use preaching increased productivity, because productivity increases only with increased production. Production is going down because of the exchange rate effect.
It is no use preaching investment. Industry will not invest, because it needs the prospect of profit to make investment worth while. It is no use trying to encourage inward investment. Who will invest here when our competitiveness is so bad because of the exchange rate?
143 It is no use preaching to manufacturing to make itself more competitive, because that shows an intellectual confusion by assuming that increased productivity is the same as increased competitiveness, which is not the case, because competitiveness is about price, which is affected by the exchange rate. A nation with low productivity—China, for example—can be extremely competitive because of its exchange rate. A nation with high productivity—the United States is the classic example—can be uncompetitive because its exchange rate is too high.
Manufacturing is being crucified by the exchange rate. It is no use the Government wringing their hands—I assume that we shall get an element of that tonight—and saying that we had to damp down unsustainable growth: we did not. It is no use saying that low inflation is worth the price, or that we are trying to bring stability, because we will produce only the stability of the graveyard.
A 30 per cent. appreciation in the exchange rate is not stability. The only way of getting stability is to have both weapons of economic management—monetary policy and fiscal policy—in the same hands, and to manage them together to offset and damp down the forces of instability washing in from outside. We are not doing that. Effectively, the Government have no macro-economic policy, so the Bank of England manages macro-economic policy—it should not be left to do it—on the basis of its inflation targets, which merely compounds the instability that is coming in from outside.
The Monetary Policy Committee is not bringing stability, because it has instituted endless nudging rises in interest rates, which have been put up five times. In that constant fiddling, members are encouraged or almost required to play safe and ignore the effects of the rises on competitiveness. Our interest rates are among the highest in our group of competitor nations, and very high in real terms on an historic basis. That burden on manufacturing and on everyone in the community has been imposed under the guise of fighting inflation, when in fact the rises cause and increase inflation.
The committee does not bring stability, because it is characterised by endless disagreements. The January vote was 5:3; the February vote 4:4; the March vote 4:4; the April vote 5:3; the May vote 6:2; and in June—I suppose that God gets advance notice of the minutes, but the rest of us do not—eight voted for an increase, which the committee had voted against only a month before, and only DeAnne Julius, bless her little cotton socks, was for a cut.
On what Barclays calls a hawkometer, Professor Buiter is now rated top hawk in the committee, with Sir Alan Budd as the second and Messrs King and Goodhart third equal. The interesting thing about the hawkometer is that the Chancellor's appointees, with the exception of DeAnne Julius, have been the ones who have put up interest rates against the advice of the banking professionals, who are usually against an increase.
All that is compounded by secrecy. The Treasury Select Committee asked for earlier publication of the minutes, saying that that would reduce the opportunity for leaking and prevent over-reaction by the markets, as the reasons behind the MPC decisions would be clearly spelled out 144 and not left to speculation. That assumes that there is a rational explanation for the decisions, when there does not seem to be one, and that markets will accept it.
The build-up to the decisions and the run-off afterwards have encouraged speculation. The Library has undertaken a study of speculation between the dollar and sterling in the five days before and the five days after a decision. The range of speculation in the five days before is 40 cents, up and down. In other words, speculation builds up as the decision approaches. Speculation in the five days after the decision is slightly less. Therefore, the process encourages speculation, which is heightened by press speculation about what the MPC will do. That is not stability.
My hon. Friend the Paymaster General will tell us that the Government's aim is stability, but we are not getting it; we are getting instability and speculation, which are damaging industry and creating an economy in which we will get even more instability. Fighting inflation with high interest rates works on industry, which is at the front line of international competition, largely by closing it down and killing it. In so doing, it damages our best hope of defeating inflation.
Only manufacturing can bring down inflation—by increasing its production and bringing down its unit costs. The rest of the economy cannot do that. So the more we shrink manufacturing, the higher the proportion of our output in those sectors that are sheltered from international competition. Those are the sectors in which productivity increases are hardest to achieve, in which growth is hardest to achieve and at its lowest, and in which interest rate increases, which are meant to control inflation, have the least effect, because those sectors are not in the front line of international competition.
The more we disturb the balance between manufacturing, which is shrinking, and the sheltered service sector, whose comparative weight is increasing, the more we blunt the weapon of interest rates, and the less effective it is. The more we weaken manufacturing, the more we build the stagflation society. We have gone a long way down that road, and that is why our interest rates—historically and at the moment—are higher than those of other competitors.
We are building a society in which manufacturing cannot flourish because it cannot produce at a profit with those interest and exchange rates. With his manufacturing background, my hon. Friend knows that. It is a society in which interest rates will go ever higher, because, if they are the only weapon, we will have to use bigger and bigger doses of the medicine. Having killed manufacturing, it has less effect on the rest of the economy. That is the sort of economy that we are building, and we have gone a long way down that road. When the Ernst and Young Item club suggests even bigger doses of higher interest rates, it is suggesting a folly, because they will have less and less effect the more that manufacturing shrinks.
What should we do? We are trapped in a situation in which the high exchange rate will destroy a large section of our manufacturing base. There are various solutions. We could abandon this experiment of handing interest rates over to the Bank of England—I think we should. We could change the target and bring in growth and employment as well as inflation. We could change the weapon and, instead of relying exclusively on interest rates, control credit by other means.
145 I want to show myself moderate to my hon. Friend because he knows that I am moderate in these matters. I accept that it is difficult for the Chancellor to say, "I'm sorry, chaps, but we got it wrong. We shouldn't have handed interest rates to the Bank of England." So let me make a suggestion.
Why not raise the inflation target, because 2.5 per cent is very low? Why not expand the time in which the target is to be achieved? There is no sense in aiming at 2.5 per cent. inflation on a monthly or quarterly basis. That is fine tuning with a vengeance, and we should have given up fine tuning, because it does not work and there is no use bringing it back as central to Government policy. Why not achieve our target rate over two years, or, better still, over the economic cycle in which we hope to achieve our borrowing targets?
The case for doing that would be stronger if the Bank of England, the Monetary Policy Committee and the Chancellor would abandon their obsession with stopping wages rising, although they are bound to rise at this stage of the cycle. The biggest wage rises are in financial services and the City, where high interest rates mean higher bonuses. It is manufacturing that is punished for those wage increases, particularly in my part of the country, which has suffered for the follies and excesses of the City and the financial sector.
The proportion of gross domestic product represented by wages has fallen substantially during the past decade, and it was falling in the decade before that, too. Some catching up of wages, as distinct from profits, is not only possible, but desirable. Why not adjust the inflation target to allow for that, and to recognise that it is not a primary dynamic of inflation?
It is not realistic to keep the inflation target down, and to try to keep wages down as a proportion of GDP. We should not try to fit the economy into a straitjacket, but I fear that that is what we are doing. We should not create the most stable environment of all—a coffin—but we will do that if we kill growth by setting impossibly low rates of inflation.
The Government's aim must be stable and steady growth, not the stability of the graveyard. Growth is the only way to generate a surplus from public spending, and, as Tony Crosland said all those years ago, to redistribute wealth and to improve people's lives by growth in public spending generated by growth in the economy. We are heading in the opposite direction, and that damages the people, manufacturing, the economy and the Government.
Black clouds are gathering, and we are moving towards recession. We are at the end of the golden weather, and it is time to reiterate warnings that it would be wrong to go on chanting the mantra of stability. It is time to re-think. It is time to change. We need to stop the recession that has already hit manufacturing from becoming wider, and increasing unemployment over the next year.
§ The Paymaster General (Mr. Geoffrey Robinson)I congratulate my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on securing the Adjournment debate. Quite contrary to what he said about the call to Downing street, I fear that it may still come, but I do not think that he would make quite the same speech if it did. When he gave us the voting figures from the Monetary Policy Committee, I thought that he was referring to 146 Coventry City's home results in the second half of the season. Of course, his views come as no surprise to me as I have followed them with great interest for many years. If I doubted them at all, I overcame doubt by reading his "Commons Diary" in The House Magazine, titled "Preparing for office", in which, in his 21 July entry, he gave a clear account of how he saw the Chancellor's views and what he thought of them.
The United Kingdom's post-war growth performance has been poor compared with that of other industrialised countries. Our record on stability has been equally bad, with excessive swings in output and inflation. We can all agree on that. Those facts are related, because macro-economic instability has been one of the factors behind the poor growth record. That is why economic stability is a key platform of the Government's economic policy. It will make a vital contribution to our central economic objective of high and stable levels of growth and employment. That is the objective of policy; we have no difference on that.
Stability is important because it gives businesses and individuals the confidence to plan effectively for the long term. That will improve the quantity and quality of long-term investment, and help raise productivity. Confidence that inflation will stay low will also encourage the savings that go to fund investment.
If my hon. Friend talks seriously to businesses, they will tell him that their overriding priority is stability and the ability that that provides to plan for the long term. Macro-economic instability entails substantial personal cost. The loss of security and confidence that arise from recessions is considerable. In addition, instability makes it difficult for individuals to retain or develop the skills needed for long-term employment. High inflation also leads to an arbitrary redistribution of income and wealth. Those on fixed or low incomes who have little or no bargaining power often lose the most from high inflation. If my hon. Friend checks the record of previous Governments, to which 1 shall come shortly, he will find that that is the case.
High inflation is associated with more volatile inflation. Volatile inflation results in higher-risk premiums in long-term interest rates, and increases the distortions to economic decisions caused by difficulties in distinguishing between changes in individual prices and changes in the general price level. When inflation is volatile, it increases the risk that policy makers will make mistakes with damaging consequences for the stability of growth and employment. I ask my hon. Friend to bear that in mind.
As soon as the Government took office, we took action to ensure that the UK economy decisively broke with the cycle of boom and bust, which I know that my hon. Friend deprecates as much as I do—especially the two biggest booms and busts that we had in the 1980s and early 1990s. That is why we set out to reform the frameworks for monetary and fiscal policy to secure low inflation and sound public finances. The new monetary policy arrangements were put in place immediately on taking office. The Bank of England Act 1998 gave the Bank of England's Monetary Policy Committee operational responsibility to set interest rates to achieve price stability as defined by the inflation target.
There is a clear division of responsibility. The Government set, as they must, the economic objectives, particularly the inflation target of 2.5 per cent. 147 The Monetary Policy Committee can then focus on the level of interest rates needed to achieve the target. Subject to the stability objective, the Bank is required to support the Government's economic policy, including our objectives for growth and employment.
The Chancellor appointed leading outside experts to the Monetary Policy Committee to complement existing Bank staff. Whatever my hon. Friend says about them, he must admit that an objective and balanced team has been chosen. The figures that he quoted with some delight clearly show that. The transfer of the responsibility for setting interest rates to the committee ensures that interest rate decisions are made in the country's long-term interest, not for short-term political considerations. That step was absolutely necessary because the old arrangements were not generating the necessary confidence in monetary stability.
Both the Bank and the Government are accountable for the performance of their tasks. To assist this, the framework has many features to strengthen accountability and transparency. In all fairness, my hon. Friend cannot dispute that. They include a clear and simple inflation target of 2.5 per cent. It is only sensible to keep it clear and simple. There is an exceptionally transparent decision-making process, including publication of the minutes, press notices and the Bank's inflation report. Monetary Policy Committee members are held to account through the publication of their votes. I see no alternative to that. If we are to operate a policy that is straightforward, transparent, clear and understandable, we must do that so that we do not get the endless press speculation that would occur in the event of their not being published. My hon. Friend will note that the European bank's chairman proposed never to reveal voting records. My hon. Friend would deprecate such a policy.
Monetary Policy Committee members make regular appearances before the Treasury Select Committee, which is chaired by a distinguished colleague whom my hon. Friend and I have known for years. Under the open letter system, the Governor has to send an open letter to the Chancellor if inflation is more than 1 per cent. above or below the inflation target. That system gives the Bank the opportunity to explain in full why the overshoot or undershoot has occurred, and what it intends to do about it.
Together, those arrangements make the framework of the UK's monetary policy among the most open and transparent in the world. Indeed, a recent Organisation for Economic Co-operation and Development survey said:
Transparency and accountability requirements are very strong in international comparison.It was referring to the system that the Government have set up since coming to office.My hon. Friend may say that that is damning with faint praise, but compared with what other countries have done, there can be no question but that the arrangements that we put in place seek to achieve those objectives, to which my hon. Friend attaches as much importance as I do.
It was clear last May—some 15 months ago—that stability required action to head off inflationary pressures that had been allowed to build up before the election. My hon. Friend must accept that successive advice from both the Treasury and the Bank of England to the former 148 Chancellor was that inflationary pressures were building up. We found them when we came to power, and interest rates had to be raised to hold them back. That is why short-term interest rates have gone up by 1.5 percentage points. Combined with the deficit reduction plan, those measures should achieve the necessary slowing of the economy so that it gets back on track for steady and sustainable growth, as forecast in the past two Budgets. I shall say a few words about the forecasts in a moment.
The Government recognise the difficulties that higher interest rates cause businesses and individuals, but history has shown that the bigger the boom, the bigger the bust. In the 1980s and early 1990s, we had the biggest boom and the two biggest recessions since 1945, and that was under a system that had so discredited itself that the incoming Labour Government had to do something about it if they were to gain the credibility of the markets, which was essential. We were right to take action.
Early action to reduce inflationary pressures was essential to minimise the size of the adjustment. Interest rates remain reasonably low by historical standards, and at 7.5 per cent., they compare favourably with the mid-teen rates of the late 1980s and early 1990s.
§ Mr. MitchellReal interest rates.
§ Mr. RobinsonI take my hon. Friend's point, but if he checks the figures, he will find that, even in real terms, they are considerably lower than they were during that period. The fact that our booms and busts were out of sync with the rest of Europe accounts for part of the difference.
The failure of the old "Ken and Eddie show", to which my hon. Friend appears to want to revert, was that people had no confidence in its long-term ability to deliver low inflation. A measure of the success of the new arrangements is what has happened to long-term interest rates and inflation expectations. As my hon. Friend said, he is a fair and moderate man, but he is also a man of fixed views. One can admire that while not agreeing with him in this instance. To be fair in these matters, one cannot take any particular point in time—certainly not one after only 15 months in office—and say that that is the position. We must look at the long-term position as projected by those who know best—those in the market—who determine such matters.
Interest rates on long-term measures, such as 10 or 15-year gilts, have fallen from some 7.4 per cent. to some 5.9 per cent., and are now at their lowest level for 33 years. That must help long-term investment, which is what the whole policy is about. The long-term differentials between UK interest rates and those in other counties have also fallen. The differentials in forward rates five years ahead—it can also be said for 10 years—have fallen from 1.1 to 0.5 per cent. with respect to Germany, and from 0.7 per cent. to zero with respect to the United States. That is where the markets think that we are going. That must be our aim, which is why we have this policy for the long term.
On inflation, the average of the comparison of independent forecasts for inflation in the fourth quarter of 1998 has fallen from 3.1 to 2.7 per cent. The average inflation forecast for 2000 has fallen from 2.9 to 2.5 per cent.—exactly what the inflation target is. Thus the markets are taking a different view. I do not know what my hon. Friend's experience is, but it is hard to prove the markets that wrong over a number of years. 149 The markets have taken a different view from the one that my hon. Friend has taken. He appears to be trying to repeat the arguments of the past, but we are doing something substantially different from what was done in the past. If he looks closely at the policies, he will see how they are playing out.
Success will not come easily and everyone has a part to play. As the economic and fiscal strategy report noted, it is vital that those involved in wage bargaining in the private sector recognise that the new environment means low inflation permanently and adjust their expectations accordingly. We are determined to deliver on that in the medium and the long term. I must say that I disagree with my hon. Friend here and that I would have disagreed with him in any of my previous occupations in the private sector. Failure to achieve that on the part of those involved in private sector wage bargaining will lead to unnecessary job losses and lower growth. In addition, as the OECD report commented, the credibility of the new framework could improve further as the Monetary Policy Committee continues to establish a track record.
I am not trying to duck the issue, so I hasten to add that some hon. Members have said that we should tighten fiscal policy. In fact, when the opportunity has arisen, the Government have used fiscal policy precisely to support the stance of monetary policy—the two have gone hand in hand. My hon. Friend will be aware that the fiscal 150 stance has tightened significantly over the past year, by about £20 billion or 2.74 per cent. of GDP. That is the largest fiscal tightening in one year since 1981. My right hon. Friend the Chancellor's recent statement on the economic and fiscal strategy report ensures that that fiscal tightening is locked into the medium term—that is why we have gone on to three-year programmes. My hon. Friend will appreciate that that is utterly different from the whole cast of previous Government policy. The speeches made and the stance taken by Treasury Ministers, in particular by the Chancellor, show utter determination to make the policy stick this time. We cannot change and tack from side to side.
We do not have a target for sterling, but we aim for a stable and competitive exchange rate over the medium term consistent with the objective of price stability. My hon. Friend and I have different views on where that balance falls, but that is the Government's policy. Economic stability is in the long-term interest of the UK economy as a whole, including manufacturing and exporting—
§ The motion having been made after Ten o'clock, and the debate having continued for half an hour, MR. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at twenty-five minutes past Twelve midnight.