Economy

HC Deb 26 October 1998 vol 318 cc22-81

Madam Speaker

I must inform the House that I have selected the amendment in the name of the Prime Minister.

3.34 pm

Mr. Malcolm Bruce (Gordon)

I beg to move, That this House notes that the macro-economic policies of this Government have led to an uncompetitive and unstable pound, high real short-term interest rates and an unbalanced economy, that as a consequence of these problems, and the recent global economic slowdown, economic growth forecasts for the UK for 1999 are being revised downwards and unemployment forecasts are being revised upwards, that jobs in manufacturing industry are already being lost at the rate of over 300 per day and that agricultural employment is also declining sharply; and calls upon the Chancellor of the Exchequer to resist pressures and temptations to compromise the operational independence of the Bank of England, recognise the role of fiscal policy in stabilising economic growth in order to avoid excessive reliance on interest rates for such a purpose, make an early Declaration of Intent of the Government's commitment to join the European Single Currency, agree and establish a joint Six-Monthly Report on Convergence by the Treasury and the Bank of England to the Treasury Committee, take further actions to tackle skills shortages, and maintain the recent plans for additional investment in key public services such as the NHS and schools. I begin by warmly welcoming the Chief Secretary and the Economic Secretary to their new responsibilities. The House is looking forward to the debate and to what they have to say. However, I hope that they will not take it badly or personally if I say that many of us would have preferred it had the Chancellor himself been able to appear before the House. He is, after all, the Chancellor who has given some five Budget-type statements in less than 18 months and who seems to have spent the entire summer travelling around the world, making statements to anyone, anywhere, who would listen to his solution to the world's economic problems. He has lost no opportunity to explain the need to bring down interest rates, apparently unabashed by the fact that he is the Finance Minister of the country that has the highest real interest rates in the western world. Nevertheless, we look forward to the participation, for the first time, of the two newly appointed Ministers.

It is three months since the House had an economic debate. They have been three months of turbulence and uncertainty during which the global financial markets have been in turmoil and our economy has been suffering. Today, many people risk losing, or are losing, their livelihood and their income. They are looking not for excuses from the Government and not just for opportunistic soundbites masquerading as strategy from the official Opposition, but for answers from, and action by, the Government.

Economic commentators are debating whether our economy will grow by 2, 1 or 0 per cent. next year. Whatever the academic theory, we are experiencing serious economic problems in our manufacturing and farming industries.

Maria Eagle (Liverpool, Garston)

I am grateful to the hon. Gentleman for giving way so early in his contribution. Has he seen the figures published at the weekend by the Office for National Statistics, which show that all sectors of the economy, including manufacturing industry, grew more than expected in the third quarter?

Mr. Bruce

The hon. Lady is right to say that the overall economy is not in recession. We do not wish to have a recession and are trying to ensure that the Government deal with the existing difficulties in manufacturing and farming in order to ensure that the economy does not move into recession. The people who have lost their jobs, or who face the threat of losing their jobs today or next week, will not be impressed by complacent general statistics. The reality is that, in net terms, we are losing 300 manufacturing jobs a day. The farming industry faces a 50 per cent. drop in incomes, and employment is declining rapidly, too.

I represent a rural constituency in north-east Scotland that is dependent on the oil industry and is suffering from the lowest oil prices since North sea oil exploration began. It is also dependent on a paper industry that is struggling with the consequences of the exchange rate, and on a farming industry devastated by the consequences of bovine spongiform encephalopathy, the collapse of the pig market, poor sheep prices and a poor harvest with depressed grain prices. Whatever is happening to the economy in general, the Government must deal with the problems facing those sectors.

In private, the Government seem to recognise the problems. A report in this week's Sunday Business quoted a "frank" Treasury source as saying: Gordon's view"— clearly, the source is someone very close to the Chancellor— is that the Tories have got the attack on us wrong. They are hitting us on … the public finances … but if they were brighter they would talk about the economy, where we are arguably on shakier ground. It is absolutely true that the Government are on shakier ground with regard to the economy, and we Liberal Democrats intend to talk about the economy.

Instead of addressing the economic problems that we face, the Chancellor has been attempting to play the blame game. He has argued that our economic problems can be blamed on the world economic slowdown and on incompetent and unproductive businesses and workers. Nobody but a fool would argue that the problems in some developing countries will have no effect on our exporters, but the Chancellor is seriously exaggerating those effects so far.

We should consider that 75 per cent. of our exports go to western Europe and north American where there is no recession and where growth in the past year has been quite robust. The United Kingdom exports more to the Netherlands each year than to Russia, Japan, Hong Kong, South Korea, Thailand, Indonesia, Malaysia, Brazil and Argentina together. So let us address the reality and not the theory.

What about the Government's second favourite target—low productivity? We have had many debates on the subject and we all know that productivity in British industry has been a problem for years. However, a sudden change in productivity does not explain the present difficulties in manufacturing industry and farming. Nobody is suggesting that productivity should not be addressed, but it is not a sudden problem that has caused job losses.

The Government recently had the unpleasant experience of discovering that economic statistics are sometimes seriously inaccurate. There were substantial revisions to the earnings data and the inaccuracies in those earnings data arguably led to an unnecessary increase in interest rates. Will the Chief Secretary address the following question? Given the work recently carried out by economists at the London business school arguing that manufacturing productivity has recently been significantly understated, will the Government undertake to establish an inquiry into whether the productivity figures on which they are basing their analysis are accurate? It is important that, before they consider spending public money on programmes to address the problem, they are sure that they have the correct analysis. My hon. Friend the Member for Kingston and Surbiton (Mr. Davey) will return to that later in the debate.

The causes of our present economic problems are not a mystery. They are clearly and simply an uncompetitive and unstable pound and high real interest rates. The pound rose by 37 per cent. against the deutschmark from peak to trough between 1996 and 1998. The Library has calculated that, in real terms, the pound was higher against the deutschmark in the first half of 1998 than at any time since 1985, including during the 1990 recession, when we were in the exchange rate mechanism.

Mr. Dennis Skinner (Bolsover)

It has gone down.

Mr. Bruce

As the hon. Gentleman says from a sedentary position, it has gone down but, despite the recent fall in the pound, we are only back to the 1990 level against the deutschmark and are probably about 20 pfennigs above a fair and sustainable value.

We are also suffering from real short-term interest rates that are the highest in western Europe. Although our nominal interest rates seem relatively low, that is the consequence of low inflation. Our real interest rate—the rate that people are paying on the base rate today—is 5 per cent. and that is higher than the 2 per cent. experienced during the 1990 recession and the 2 per cent. that now prevails across the euro-zone. Therefore, the two problems of high interest rates and a high exchange rate are intimately connected.

Mr. Geraint Davies (Croydon, Central)

Does the hon. Gentleman accept that the reason why the exchange rate has been so high—it is now lower than when we came to office—is the international confidence in the management of the British economy? In an uncertain world with problems in Asia and indeed in Europe and elsewhere, the only way to bring down the exchange rate would be to bring about a complete loss of confidence in the British economy by voting in the Liberals.

Mr. Bruce

The hon. Gentleman was obviously so eager to intervene that he did not listen to a word I was saying. I was about to suggest that a 5 per cent. real interest rate against a 2 per cent. real interest rate was an incentive to hold sterling and is the reason why, in the short term, sterling's value has been forced up. If the hon. Gentleman does not believe that, he knows nothing about international financial markets and, as he claims to support the Government, perhaps they should be wary of that kind of support.

Labour cannot pass the buck on the current high exchange rates and high interest rates, because they are the consequence of Government economic policies. They did too little to cool the consumer sector and have created a seriously unbalanced economy in which the means of slowing growth—the high pound and interest rates—are bearing down on those sectors that least need restraining.

Mr. Davies

rose—

Maria Eagle

rose—

Mr. Bruce

I have already given way to both hon. Members.

The Chancellor is not now acknowledging the problem. He has got his acolytes to come along today and has not turned up himself. However, he acknowledged the problem publicly in his first Budget. He said: Britain cannot afford a recurrence of the all-too-familiar pattern of previous recoveries He went on to explain: there is now an imbalance between strong growth in the consumer and service sector and weak growth in the manufacturing and exporting sector… My goal, therefore, is to ease inflationary pressures without damage to industrial and exporting prospects. … In this way, we can moderate the upward pressure on interest rates and on the exchange rate".—[Official Report, 2 July 1997; Vol. 297, c. 304–05.] The Chancellor had the analysis right. He had the right diagnosis, but prescribed the wrong cure—extra taxes on businesses and savers. As a consequence, the pound rose to a new high within days and interest rates went up again. I should hate to have the Chancellor as my surgeon, because he acts as though, if he treated someone with a hernia, he would give that person a heart bypass.

The imbalance in the economy, which the Chancellor analysed correctly, has got worse. It was exacerbated by the decision to go on dithering on the single currency and to rule out membership in this Parliament. The Chancellor has talked tough about ending boom and bust—he talks of little else. He has done many good things that we have supported, such as giving operational independence to the Bank of England.

Mr. Skinner

I do not agree with that.

Mr. Bruce

Sometimes constructive opposition crosses the Floor.

However, the Chancellor has failed to address the instability created for our economy and for our exporters by a high and volatile pound—it has been up and down and nobody knows where it is going to settle—and by high real interest rates. The failure to address our economic problems, combined with a deteriorating global economy, threatens growth prospects next year. No doubt we shall hear evidence of that in the Chancellor's statement in the next week or so. It is clear that the Chancellor will have to revise his borrowing forecasts upwards when he presents his pre-Budget report next week.

However, we should keep matters in perspective. Our objective ought to be avoiding recession. Labour Members should agree with that. Last week's gross domestic product figures show that the economy, particularly the service sector, is continuing to grow. I acknowledge the points that have been made in interventions on that. Inflation is low and we have a tight inflation target. We support that. It should be possible to ease monetary policy and to lean against recessionary forces. That is common ground.

Recessions usually occur when high inflation prevents policy from being eased in that way, so there are optimistic signs. Growth this year is likely to come in above the Chancellor's most recent forecast, leading to lower-than-expected borrowing this year. With a moderate slowdown in growth, all the signs are that the golden rule could still be met.

The key for the public finances—before Labour Members get too complacent—is to avoid an outright recession and to rebalance the economy. If we fail to do that, the golden rule could come under pressure.

Mr. John Bercow (Buckingham)

The hon. Gentleman is weaving a tangled web for himself. He referred fleetingly to the effect of additional business taxation, but then regrettably changed the subject almost immediately. Given that the Liberal Democrat motion refers—cryptically and, I fear, euphemistically—to the role of fiscal policy in stabilising economic growth, will the hon. Gentleman tell the House by how much he would like to increase taxation, above the increases for which the Government have already provided, over the course of this Parliament?

Mr. Bruce

I shall certainly deal with that—if the hon. Gentleman will allow me—in the appropriate context.

There is no room for complacency because, general recession or not, there are already serious problems in manufacturing and farming, as I have described. It is not overstating the case to say that there is a crisis in those sectors. If the economy suffers a full-blown recession, they will bear the brunt of the losses. Manufacturing is already losing more than 300 jobs net a day. Leading indicators of industrial prospects suggest that things will get very much worse next year.

We face a serious recession in manufacturing. The House of Commons Library forecasts that that will destroy 420,000 jobs over two years. That is very similar to the prediction made only today by Ernst and Young of 500,000 job losses. Ernst and Young identify the problem as the fundamental mismatch between monetary and fiscal policy…which has led to unnaturally high interest rates unfairly penalising manufacturers at the expense of booming service industries. The forecasted job losses would reduce manufacturing employment—this is a startling figure—to levels not seen in Britain for 150 years. [Interruption.] I am astonished that Labour Members think that that is funny. The forecasted job losses would mean cutting into industrial muscle, not just fat; this is not just a shake-out. My hon. Friend the Member for Ross, Skye and Inverness, West (Mr. Kennedy) will speak later about the situation in farming, which is perhaps even more serious. If job losses continue at the recent rate, more than 50,000 more farming jobs will be gone before the end of the century. Job losses in the two sectors alone could amount to more than 500,000. That is why we need action.

What should we do? In taking account of the intervention of the hon. Member for Buckingham (Mr. Bercow), I would prefer to resist the temptation to pay too much attention to the official Opposition's pronouncements on those matters. What an utter shambles they have become. [HON. MEMBERS: "Hear, hear."] At least I have some support from those on the Labour Benches. The official Opposition have had 18 months to think of something to say, but they are still clueless. They cannot even decide who should set interest rates—let alone at what level they should be set. They blame recession on a minimum wage and spending rises without appearing to realise that such policies have not even been implemented yet. They accuse the Government of profligacy yet, in power, they increased current spending at twice the rate that this Government have planned. Indeed, the Chancellor of the Exchequer is boasting of the fact that he is holding down spending more than the Tories ever did. The Tories say that they would cut spending in general, and pledge only to raise it in the particular.

The Tories accuse the Government of fiscal laxity yet, according to the House of Commons Library, they broke the golden rule by an absolutely staggering £147.7 billion in the previous Parliament alone. They have in fact just one economic policy: to be twice as undecided as the Government on the single currency. That is not any kind of alternative. The shadow Treasury team sounds like the only group of politicians that could be trusted to make an even bigger mess of the Indonesian economy.

Our alternative would be to focus on four key areas. [Interruption.] I say to Labour Members that, however much I believe in the long term, the crisis is now and action is required today. First, my hon. Friend the Member for Ross, Skye and Inverness, West, who will be called later to move the second motion, will set out in some detail proposed help for the farming industry. Secondly, we need a strategy to bring down interest rates, and that does not mean bullying the Bank of England—something that Bank officials who were quoted in the Financial Times on 7 October suggested took place before the previous Monetary Policy Committee meeting. Nor should that be achieved by reversing the operational independence of the Bank. To bring down interest rates, we need to ensure that fiscal policy helps, rather than hinders, the process of cutting interest rates. It would be far better if the next Budget were followed by lower interest rates than if it contained lower consumer taxes. If that means delaying the much-trailed 10p tax rate, so be it.

The third priority must be an early commitment to single currency membership. Anticipating the arguments that I already hear from Conservative Members, I ask hon. Members to consider the article in today's Financial Times, which says that the car industry warns of a bleak future if the United Kingdom fails to join the European single currency. That almost exactly echoes the words said by the President of the Board of Trade only a week last Sunday.

A strategy to cut interest rates would mean a strategy to bring them down to the European level of 3 per cent. That is one of the reasons why we have argued for the establishment of a joint report on convergence by the Treasury and the Bank of England, to be presented twice a year to the Select Committee on the Treasury. Such an explicit process would lead to a more deliberate policy of harmonising fiscal and monetary policy and a strategy of reducing our interest rates. Surely, both would be good for business and exports.

Helen Jones (Warrington, North)

What the hon. Gentleman suggests—bringing interest rates down to the European level—would cost between £30 billion and £60 billion. That means 20p on the basic rate of taxation. Is that what he is proposing?

Mr. Bruce

The hon. Lady appears not only to have surfed the internet, but to have headed off into the galaxy with that information. That is preposterous.

In the course of a debate in the House, I have no problem with people trying to undermine the Liberal Democrat argument. However, it is not only our view, but the view of an increasing number of commentators outside the House, that there is an imbalance in the economy. The Chancellor of the Exchequer says that he wants Britain to join the euro and that he accepts that that requires convergence of inflation rates, interest rates and exchange rates; yet, for the past 18 months, he has been pursuing a strategy that has widened the gap on all three. He clearly cannot be serious about his endgame, if he is not prepared to apply himself to the policy that would get him there. We are setting out exactly how he might achieve that end.

When they came to power, the Government promised an end to boom and bust. They assured us that things could only get better. However, for a large part of our economy, the Government's macro-economic policy has produced a severe bust, and things are getting far worse. Instead of playing the blame game, let us now hear what the Government propose to do to turn the situation around and save jobs, secure investment and promote growth.

In the three months since the House last met, the Chancellor of the Exchequer has been to the International Monetary Fund, to the Economic and Finance Council and to most of the capitals of the world—he has hardly had time to come home and wash a shirt. He has embarked on a campaign to suggest that we need a dramatic reduction in interest rates. I should have thought that there would be resounding applause for such a strategy from hon. Members on both sides of the House. Will the Chief Secretary tell us how and when the Chancellor, instead of lecturing the rest of the world, is going to implement domestic policies that will deliver lower real interest rates, a competitive pound and an end to the threat of losing half a million manufacturing jobs in the next two years? We await an answer.

3.58 pm

The Chief Secretary to the Treasury (Mr. Stephen Byers)

I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof: notes that the Government inherited an economy in which public sector net borrowing was £28 billion, inflation was set to rise sharply above target because of the failure of the previous Government to take the necessary action on interest rates; recalls that the previous Government presided over a boom and bust economy where interest rates reached 15 per cent. and inflation reached 10 per cent., doubled the national debt in the 1990s, worsened inequality and failed to tackle the weaknesses in the British economy; commends the actions of this Government which is steering a course of stability in an uncertain and unstable world, has established a credible framework for monetary policy that has led to the lowest long-term interest rates in 35 years, and inflation hitting its 2.5 per cent. target, and has taken tough action to cut government borrowing by £20 billion; and welcomes the increase in employment of 400,000 since the election, the launch of the New Deal, reform of the tax and benefit system to tackle unemployment and poverty traps, support for British business through cuts in corporation tax and small business tax to their lowest levels ever, and the extra investment of £40 billion in education and health over the next three years. On behalf of the Economic Secretary and myself, I thank the hon. Member for Gordon (Mr. Bruce) for his kind remarks on our appointment and our fresh responsibilities, which we intend to discharge in the interests of the country.

As we debate the state of our economy, there is a responsibility on all of us to strike the right balance. We must ensure that we do not talk down our economy and that we recognise the challenges that we face as a result of the worldwide slowdown in economic growth. I therefore want to make an honest, realistic assessment of the state of our economy, which acknowledges rather than runs away from the fact that, within sectors, certain areas are suffering hardship.

We must recognise also the underlying strengths in our economy, which were reflected just last Friday in the gross domestic product figures for the third quarter of this year, which revealed that there had been growth across all sectors. That demonstrates that, as a result of the Government's policies, we are able to steer a course of stability in an increasingly unstable and uncertain world.

At the beginning of this debate, it is worth considering for a few minutes the position that we inherited on 1 May last year.

Ms Diane Abbott (Hackney, North and Stoke Newington)

Does my right hon. Friend agree that it is important to strike a balance between not talking down the economy and not being seen to deny the fears of people in the manufacturing sector who are losing their jobs? There are also fears in areas such as my constituency, which has one of the highest unemployment rates in the country, where people know that without real growth and a cut in unemployment, they have no chance of getting back to work.

Mr. Byers

My hon. Friend will be aware that, in her constituency in the east end of London and in my constituency in the north-east of England, there are now more people in work than there were on 1 May last year. I am sure that she will join me in congratulating the Government on that fact.

Ms Abbott

I accept what my right hon. Friend says, but does he share my concern that, although 1,808 people in Hackney have passed through the new deal programme, which is one of the Government's key strategies for getting people in areas such as Hackney back to work, fewer than 170 of them are now in jobs? The new deal cannot work in a recession, when there is an absence of growth.

Mr. Byers

I am sure that the 170 people in Hackney who have gained work and high-quality training as a result of the new deal are pleased that we implemented that policy. I say to my hon. Friend that manufacturing will benefit only if we take a long-term view of our economic prospects and do not take short-term measures, which may grab a headline today, but do not provide lasting growth for the future.

The short-termist approach of the Conservative Government meant that we inherited not a golden legacy, but an economy with serious fundamental weaknesses. Inflation was set to rise; there was chronic under-investment; consumer spending was growing at an unsustainable rate; and productivity was low. We had a weak skills base and the value of sterling was artificially high. In addition, our public finances were running out of control. The national debt had doubled under the previous Government to £400 billion and public sector net borrowing was £28 billion.

Mr. Andrew Tyrie (Chichester)

Will the right hon. Gentleman give way?

Mr. Byers

In a moment.

During the 18 years that the Conservative party was in government, Britain had lower growth than any other major industrialised country and suffered two major recessions. We do not need to look back 18 years to examine the Tory legacy. We could turn the clock back just eight years to when the shadow Chancellor, the right hon. Member for Horsham (Mr. Maude), was a Treasury Minister. I regret that he is not here this afternoon. [HON. MEMBERS: "Neither is the Chancellor."] The shadow Chancellor does not have to prepare a pre-Budget report—the Chancellor does.

What is our golden legacy from the shadow Chancellor's time as a Treasury Minister eight years ago? Let us turn back the clock. Interest rates were at 15 per cent.; inflation was at 10 per cent.; 1 million manufacturing jobs were lost as output in manufacturing fell by over 7 per cent.; unemployment rose by more than 1 million; and 1 million people suffered the misery of negative equity. That is hardly a glittering record for the shadow Chancellor. There was no surprise, therefore, at the verdict of the electors of Warwickshire, North who voted the right hon. Gentleman out of office.

Mr. Tyrie

The Chief Secretary has repeated the mantra of how debt as a proportion of gross domestic product increased under the previous Government. Is he aware that the level of debt as a proportion of GDP has fallen since 1980—in other words, in the course of the previous Conservative Administration—and that Britain is almost the only country in the Organisation for Economic Co-operation and Development that succeeded in reducing its debt as a proportion of GDP?

Mr. Byers

I am afraid that that intervention reveals a degree of complacency among Conservative Members that was reflected by the previous Conservative Government. I do not find it acceptable that we spend more in this country repaying debt interest than we spend on our schools. The previous Government were prepared to accept that situation, but this Government are not. That is why we have set about reducing the public finance deficit.

When this Government came to office in May last year, we faced an economy set to repeat the same old cycle of boom and bust. There was no golden legacy, but the worst effects of 18 years of short-termism: playing party politics with interest rates; borrowing today and hoping that tomorrow would never arrive; and failing to address the skills gap and the need to improve productivity.

Mr. Barry Jones (Alyn and Deeside)

I do not cavil at my right hon. Friend's speech, or at his Government's policies. However, today I visited the large Kimberly-Clark factory in my constituency which is to close. There will also be 200 redundancies at the modern optical fibres factory in my constituency and promulgated steel redundancies at Shotton steelworks. May I meet my right hon. Friend to tell him of my constituents' concerns and about the £400 million proposed investment in Deeside that was announced just this year? I would be grateful for a meeting with the Chief Secretary so that I may highlight the concerns of those who are about to lose their jobs.

Mr. Byers

I would be more than pleased to meet my hon. Friend and discuss the situation in his constituency that he has outlined. As I said in my introduction, it reflects the fact that certain areas within sectors are facing hardship. I recognise that fact and I do not run away from it. This Government will not turn their back on my hon. Friend's constituents, but will want to work with local employers to find a way forward and a means of offering new jobs and opportunities to those who are affected by the changes that my hon. Friend has outlined.

When Labour took office, we had to take tough action to tackle the difficulties that our economy faced. In the light of unsustainable growth, rising inflationary pressure and high public borrowing, we have put in place a platform of stability on which to build an economy that is capable of sustained and steady growth. We established a new and more credible framework for monetary policy by giving independence to the Bank of England in setting interest rates. Interest rate decisions are now taken in line with the long-term needs of the British economy rather than the short-term political considerations of a particular political party. As a result, inflation is at its target of 21 per cent. and Britain now has the lowest long-term interest rates for 35 years.

However, the independence that we have given to the Bank of England in setting interest rates has caused confusion among Conservative Members. The Leader of the Opposition declared that he opposed independence, and said: They have given up control of interest rates when they should have kept hold of them. That view is shared by the shadow Trade and Industry Secretary. However, the deputy Leader of the Opposition has said that no knee-jerk decisions should be taken regarding the independence of the Bank of England. That reflected the views of the shadow Chancellor a few weeks ago, who said that taking back control over interest rates was not a decision to rush into. However, last week, the shadow Chancellor said that he, too, opposed Bank of England independence. He said: We would not have given up control of interest rates in the first place". So there is a degree of confusion on the part of the shadow Chancellor.

Dr. Vincent Cable (Twickenham)

I welcome the Minister's strong, robust reaffirmation of the Government's decision to make the Bank of England independent, but will he explain why, given that independence, the Chancellor of the Exchequer feels it necessary to give the Bank unsolicited advice on interest rates?

Mr. Byers

I draw the hon. Gentleman's attention to the evidence that the Governor of the Bank of England, Eddie George, gave the Treasury Select Committee a few days ago, when he said clearly on the record that he did not feel under any pressure from the Chancellor of the Exchequer over his decision making on interest rates.

Ms Abbott

My right hon. Friend will accept, though, that the fact that the redoubtable Eddie George does not feel under any pressure does not mean that pressure was not applied.

Mr. Byers

My hon. Friend knows that Eddie George is a robust character. Occasionally, he may feel under pressure, but, last week, he said clearly that it did not affect his decision making. That is the important point in this context. It is to be expected that, at times, the Chancellor of the Exchequer will express views about these important matters. However, the important point is that the decision-making process no longer rests with party politicians, whether it be the Chancellor of the Exchequer or the House; it now rests with the Bank of England and its Monetary Policy Committee.

In addition to tackling the issue of interest rates, we have had to tackle the difficulties that we found regarding public finances. In our first year in office, we reduced borrowing by £20 billion. In the first six months of this year, borrowing was reduced by a further £10 billion. We have also set out our spending plans for the next three years. A central feature of our new spending regime is the fact that we have built in margins to cover uncertainties, including the risk of slower growth and its effect on revenues.

As a result of our prudent management of public finances—including last year's £20 billion cut in the deficit—we are on track to meet our strict fiscal rules, while maintaining our commitment to an additional £40 billion for improvements in health and education over the next three years.

Mr. David Ruffley (Bury St. Edmunds)

Given the recent downward revisions to gross domestic product forecasts, can the Chief Secretary tell the House by how much his forecast for public borrowing will increase, compared with the Red Book, in the years 1999, 2000 and 2001?

Mr. Byers

As the hon. Gentleman knows, a week tomorrow, the Chancellor will produce his pre-Budget report, and that will be the time for our new forecast for growth to be revealed. However, I can tell the hon. Gentleman, because he has asked an important question, that the margins that we built into our spending programmes at the time of the comprehensive spending review will be sufficient to cover our commitment of £40 billion extra spending for health and education.

Mr. Tyrie

rose—

Mr. Byers

Just a second.

Labour Members need to know whether the Conservative party opposes the £40 billion for health and education. The Leader of the Opposition says that it is "reckless". The shadow Chancellor says that it is foolish. However, the shadow—

Mr. Tyrie

rose—

Mr. Byers

I want to make this point. The shadow Education Minister, the hon. Member for Havant (Mr. Willetts), says that it is not enough. The shadow Health Secretary, the right hon. Member for Maidstone and The Weald (Miss Widdecombe), says that it is not a generous settlement for our health service", but a let down. The Opposition must state their policies clearly. Is it reckless spending, or is it under-investment in health and education? The Opposition have refused consistently to say whether they are in favour of the additional spending or not. The Leader of the Opposition says that he is against it, and that it is reckless.

Mr. Oliver Heald (North-East Hertfordshire)

What about welfare?

Mr. Dale Campbell-Savours (Workington)

The answer just came from a sedentary position, from the shadow Treasury Bench. Is not the truth that the Tories want to cut pensions and benefits, but that they are not prepared to go on television and tell the people that?

Mr. Byers

My hon. Friend is right. When hon. Members have a chance to look at the spending on welfare, they will see clearly that three specific areas receive the bulk of the increase that was outlined in the comprehensive spending review. The increase is targeted at pensioners, the sick and disabled, and children. The Opposition must come clean and say for which of those three categories they would cut the increase.

Mr. Tyrie

rose—

Mr. Byers

No, I have taken seven interventions already and I want to make progress.

We must ensure that the money that we spend is targeted on the areas that need it. The shadow Chancellor may say that the extra spending is reckless, and that it is foolish, but he should try telling that to parents whose six-year-old son or daughter is in a class of 40, or to pensioners who have been told that they will have to endure another two years of agony before they can have the benefits of a hip replacement operation.

Parents and patients do not regard our extra £40 billion spending on schools and hospitals as foolish. They see it as an investment—a reflection of the Government's priorities—which is essential to building a modern Britain and a decent society.

Mr. Tyrie

Will the Chief Secretary give way?

Mr. Byers

I want to make progress.

No debate on our economy at present can ignore the world situation. With one quarter of the world now in recession, including Japan—the world's second largest economy—no country is immune from the effects of the current instability in the global economy.

The International Monetary Fund has revised down its forecast for world growth next year from nearly 4 to 2.5 per cent. It expects world trade growth to fall by two thirds this year. Britain's export markets are set to grow more slowly.

Mr. Tim Loughton (East Worthing and Shoreham)

Will the Chief Secretary give way?

Mr. Byers

I want to make progress. I shall give way in a few minutes.

We have experienced the opportunities that flow from the new age of globalisation. We have benefited from the accelerating integration of the international economy. Now we must manage it through more difficult times. Our shared commitment to open trade and orderly progress among the G7 nations has been a driving force for growth, even in countries that not so long ago seemed likely to be permanently left behind.

Now that trend is stalled, and in some places reversed, but I believe that it is only a temporary setback, not a permanent condition. I believe that the essential answer to the problems of the moment is not less globalization—not new national structures to separate and isolate economies—but stronger international structures to make globalisation work in harder times as well as in good times. Our urgent need is for closer co-operation, continuing dialogue and an unwavering commitment to open commerce. We must not let temporary instability put global progress at risk.

Mr. Loughton

rose—

Mr. Tyrie

rose—

Mr. Byers

No, I still want to make some more progress.

As the economic weather turns, as a storm in one region threatens to spread, there are easy but dangerous shelters: a return to protectionism, the breakdown of co-operation and the rise of beggar-thy-neighbour policies—but that will only make matters worse and will not lead to renewed growth.

Protectionism anywhere is a threat to prosperity everywhere. Closing off national economies only increases national and international instability. In Asia, across the world and in the United Kingdom, it is the poorest and the most vulnerable members of society who suffer most from financial crisis and stagnation.

We make no apology for taking the lead in seeking to achieve the objectives that will lead to great co-operation and sustainable world growth. It is vital to do that to ensure that employment opportunities continue to grow.

Mr. Loughton

rose—

Mr. Bercow

rose—

Mr. Tyrie

rose—

Mr. Byers

I have a wonderful selection. I shall go for piggy in the middle.

Mr. Bercow

That was an extremely courteous description. I congratulate the Chief Secretary on his well-deserved promotion to the Cabinet. He will be aware that, in Labour's business manifesto published in April 1997, his right hon. Friend the current Chancellor stated: We will not impose burdensome regulations on business, because we understand that successful businesses must keep costs down. How does the right hon. Gentleman square that ringing declaration with the evidence in the report just published by the accountants Chantrey Vellacott, which estimates that regulatory costs to business by May 1999 will be at least £5 billion or 17.3 per cent. higher than when Labour took office?

Mr. Byers

I do not know how much that report cost the hon. Gentleman, but we know that accountants come up with these reports at regular intervals.

Mr. Bercow

I was given it.

Mr. Byers

The report was given to the hon. Gentleman. He should know better than to quote with authority freebies that might be handed out to him. The reality is that the Government have costed the introduction of a variety of measures. I know that Opposition Members disagree with some of them. However, we believe that it is in the long-term interest that some of these provisions are introduced into our economy. I shall talk later about some of the possible solutions to our difficulties that are being put forward by Opposition Members. Before I do that, and before the Treasury and the Government have costed the implications of such solutions, I must say that there is no relationship between our figures and the fantasy figures that have been quoted by Opposition Members.

Mr. Loughton

Will the Minister give way?

Mr. Byers

No. I want to make some progress. I shall give way in a minute or two.

I want to talk about the employment that has been created. We are talking of 400,000 extra jobs since May 1997. I recognise that there have been some high-profile job losses. Many companies have cited current difficulties in the world economy, and those alone, for closures that might have been experienced. However, whatever the reasons for job losses, whether they be in the constituency of my hon. Friend the Member for Alyn and Deeside (Mr. Jones), my constituency or elsewhere in the country, we on the Government Benches recognise that they are a personal tragedy for the individuals concerned, for their families and for their communities.

That is why the Government, unlike our Tory predecessors, will act positively to do what we can. There will be no turning our backs on people who become the victims of decisions that result in job losses. That is why we shall provide practical help at a local level, with training opportunities, advice on self-employment and payment of the costs of travelling to job interviews.

During the election campaign, we said that we would govern for the many and not for the few. In particular, we wanted both the young unemployed and the long-term unemployed to feel that they had a place and a role within our society. That is why we launched our new deal—the biggest employment programme for a generation. It was launched in the teeth of opposition from the Conservative party. Already, more than 140,000 young people have been helped into work and high-quality training opportunities. Although the Liberals spoke warm words about the new deal, they opposed our windfall tax which made it possible. We shall take that as a further £5 billion spending commitment from the Liberals. It is another one to add to the list.

The hon. Member for Gordon, in moving the Liberal Democrat motion, raised the question of productivity. Any honest and realistic assessment of our economy will show that there are a number of fundamental weaknesses that have held it back for too long, and one of those is our low level of productivity. I take the point that the hon. Gentleman made about figures from the London business school. Next week, with the pre-Budget report, my right hon. Friend the Chancellor of the Exchequer will specifically address issues related to productivity. We are confident that our figures, which show that we are falling behind our major competitors on productivity, are accurate. However, we shall examine the figures to which the hon. Member for Gordon has referred to ascertain whether, in the light of them, we need to revise our forecast. I have to say that given the work that has been done so far, our figures reveal an unacceptable productivity gap between us and our major competitors.

Mr. Malcolm Bruce

I am grateful to the right hon. Gentleman for what he has just said. I am sure that he would agree that, if the Government have it in mind to put money into schemes to boost productivity, we must be sure that we have the facts right. We all acknowledge the productivity gap, but it has not suddenly become worse, and that is really the problem. Will the right hon. Gentleman address how long British manufacturing industry must continue with an interest rate that is 3 per cent. higher in real terms than that of our continental competitors? Can he give any indication of when convergence might be achieved, and how?

Mr. Byers

I am happy to discuss productivity. Long-term interest rates are at their lowest level for 35 years. We hope that interest rates have peaked at 7½ per cent. and that they are on their way down. Announcements from the Bank of England have shown that the balance of risks has now changed in respect of inflation. I hope that significant decisions will be made in the next few weeks. I am guarded in what I say because, if I say something, it will be regarded as putting pressure on the Governor of the Bank of England and I would not want to do that.

The Government's productivity agenda must be seen as a fundamental part of modernising our economy. It is not about working harder, but about working better—working with world-class investment, technology, skills and management. That is why we have established a new investing in Britain fund, which will nearly double net public capital investment in this country in the next three years, and a root-and-branch reform of our education system to drive up standards.

None the less, it is not just how much we invest, but what we do with investment that is vital. Ultimately, it is business, not Government, that will close the productivity gaps, although the Government have a central role. That role includes getting the competitive framework right, underpinning the effective workings of capital markets and providing the right education and training to enable business to deliver a world-class performance. It also includes pulling down unnecessary barriers that hold Britain's companies back. Next week's pre-Budget report will take that agenda forward and build on work to strengthen the country's productivity potential.

It is instructive that, faced with world turmoil and global downturn, the Opposition's response has been to resurrect tired old Tory policies, clinging on to them like a comfort blanket. They include rejection of the national minimum wage and, in the process, condemning 2 million people to continued poverty pay; opposition to the social chapter, which provides a minimum entitlement in the work place; and objection to the working time directive. With a quarter of the world in recession, is that a serious response?

In the past few weeks, the Conservative party has gone much further in policy development. The former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), warned politicians about commitments made on a wet night in Dudley. I know that we have had some pretty bad weather recently, but that advice has clearly not been heeded by the shadow Chancellor, the shadow Trade and Industry Secretary or the shadow Social Security Secretary. Between them, those three have committed the Tory party against the working families tax credit, which will make work pay for up to 1.5 million families with children. They would not spend £40 billion over three years on schools and hospitals. The new deal would be scrapped, denying hope to tens of thousands of young and long-term unemployed people. They would also take away the Bank of England's independence and play politics with interest rates.

What we have witnessed in the past few weeks has not been a coherent and thought-out response, but political positioning to be the new darling of the right. It has been about personal ambition, and nothing to do with the national interest. The result is a significant lurch to the right. The Tory party is now the party that likes to say no—no to the social chapter, to the working time directive, to the national minimum wage, to independence for the Bank of England, to the working families tax credit, to the new deal for the unemployed and to an extra £40 billion for schools and hospitals. As a result, it is a party with no chance of winning the next general election.

The Labour Government have put in place a comprehensive economic strategy to ensure that we can steer a course of stability in an uncertain and unstable world. The questions that we face are complex and difficult, but in all our debates and policy making, we must never forget that they are also human questions. They involve people's living standards as well as the level of financial transactions. They involve not only the value of capital, trade or investment, but the deepest values of our society.

We must make markets work, in tough as well as easy times. That is the burden and responsibility of all in the Government. It is a responsibility that we intend to discharge so that, together, our country and our people can meet the challenges that lie ahead.

4.29 pm

Mr. David Heathcoat-Amory (Wells)

This is the first time that the new Chief Secretary has come to the Dispatch Box, and I join others in congratulating him on taking up his new post.

The Chief Secretary's job is important in any Government, and I look forward to debating economic matters with the right hon. Gentleman on many occasions, but his speech was a gigantic missed opportunity. He said nothing that we had not already heard from the previous Chief Secretary, and he should have used the debate at least to say something about what has happened to this economy and others in the past three months, and what sorely needed policy changes we can expect.

The Chief Secretary started hopefully by saying that he was about to make an honest and realistic assessment of the economy, but then immediately started to rewrite history and deny the existence of the golden economic legacy that he was bequeathed by the previous Government. We know—it is a matter of record, not of opinion—that we left the incoming Government with steady growth, falling unemployment and low inflation. All those achievements are now at risk or are in reverse.

The Chief Secretary asserted that the previous Administration left him with a deteriorating inflation target. That is not true; we met our target of 2.5 per cent. or less by the end of the Parliament. The policy mistakes committed last year, in the Government's first Budget, reversed that inflation record and gave the whole burden of controlling inflation to the Bank of England, which put up interest rates and caused a lot of other problems in turn.

I do not believe that the novelty of the Chief Secretary's position or his unfamiliarity with the brief produced such a shallow and unconvincing speech. Rather, the Government's whole economic strategy has become unsustainable. It was based on a growth forecast of at least 2 per cent. in this and every future year. All their spending commitments and borrowing forecasts were based on that growth prediction.

Today, no one believes that that growth will occur, and the Government do not believe that that will happen. Three weeks ago, the Chancellor told the International Monetary Fund in Washington that British growth forecasts are too optimistic. We know that the IMF has a special place in Labour hearts—it bailed out the previous Labour Government—but it is a scandal that the Chancellor of the Exchequer chose a meeting with the IMF in America to inform it about the British economy when he will not come to this House to tell us what is happening. He should tell us how the forecasts on which the Budget and the expenditure commitments were based have become largely fictitious.

Instead of a statement, a debate or some information from the Chief Secretary today, we have been given unattributable press briefings from the unofficial press spokesmen at the Treasury. In the City and throughout the private sector it is illegal for a firm to give selective briefings about price-sensitive information in its possession to third parties, but that is what the Treasury unofficial press spokesmen have been doing all through the recess up to today's debate.

All this secrecy and the dribbling out of little bits of news here and there come from a Government who came into office committed, so we were told, to openness and accountability. We remember all that waffle they cited in opposition about a Labour Government who would give the public all the information to which they had a right. The Government produced a White Paper last December entitled "Your Right to Know", but that has been quietly forgotten.

Even more recently, "The Code for Fiscal Stability", which was published last March, said that the Government would not withhold information on the conduct of fiscal policy and the state of the public finances except if substantial harm would benefit. What harm can possibly follow from the Government giving to the rest of the world information and internal Treasury forecasts already in their possession?

Mr. Geraint Davies

On the issue of disclosure, would the right hon. Gentleman disclose what the official Conservative position is on the expenditure of £40 billion on health and education? Would expenditure on welfare be cut? If so, where? What is the Conservative party's position on the Bank of England? Would interest rates be left in the hands of the Government? Why has the shadow Chancellor taken so long to attend the debate? Has he been in Asda?

Mr. Heathcoat-Amory

The hon. Gentleman has obviously already forgotten that we voted against the Bank of England Bill on Second and Third Reading. We also argued against its provisions in Standing Committee. If the hon. Gentleman wants the answer to one of his questions, he should refer to the record.

Mr. Malcolm Bruce

This is an important issue, because the Bill to make the Bank of England independent is now an Act, and is a matter of law. Is the Conservative party committed to taking the Bank of England back under political control—yes or no.

Mr. Heathcoat-Amory

It was the Government who broke their election promise. The Chancellor of the Exchequer said that he would not give interest rate decisions to the Bank of England until it had established a proven track record, but, within days of taking office, he broke that promise and introduced a Bill that we voted against. I would have preferred it if the Liberal Democrats had assisted us in holding the Government to their election promise. I will tell the House what we will do at the next election when the Government tell us when they will keep the promises that they made at the election.

Mr. Campbell-Savours

Why cannot we get a straight answer to this question? We keep seeing Tory spokesmen on television being asked that simple question. Will the Tories take the Bank of England back under political control? That is all we need to know. Can we have a clear answer of yes or no, and put an end to all the waffling at the Dispatch Box?

Mr. Heathcoat-Amory

We will give the hon. Gentleman some of the answers he seeks when he apologises for deceiving the electors in his constituency. He stood on a manifesto and a promise not to give independence to the Bank of England, but within days of taking his seat in the current Parliament he broke that promise. When will the hon. Gentleman apologise for that?

At the time of the comprehensive spending review in July, we said that it was reckless to lock the economy into a three-year spending commitment with annual increases of more than 3 per cent. a year in real terms.

Maria Eagle

rose—

Mr. Heathcoat-Amory

Events have shown that we were right. We also pointed out that the extravagance of the expenditure forecasts were due to another central failing by the Government: their failure to reform social security expenditure. It is significant that the Chief Secretary, in his speech, was already sliding on that commitment. We used to have it from the Government—indeed, from the Prime Minister—that welfare reform was right on moral grounds to end dependency on the state. It was also essential, so the Prime Minister assured us, to find the extra money to spend on health and education from a reduction in the welfare budget. It is significant that all the Chief Secretary spoke about were the problems, and the fact that that would not be possible after all.

That is why we called the overall expenditure commitment up to three years hence irresponsible and unsustainable, and we were right to do so. Since then, growth has more than halved.

Mr. Nigel Beard (Bexleyheath and Crayford)

Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

I will give way one last time.

Mr. Beard

The right hon. Gentleman made much of the possibility of a recession, but went on to outline a policy of cutting Government spending, and thus cutting demand even further. If a recession is pending, such action will make it worse. My right hon. Friend the Chief Secretary proposes that we continue spending, to boost demand and counter the recession. The Opposition policy will deepen any recession, not cure it.

Mr. Heathcoat-Amory

I gave way to the hon. Gentleman because I had seen him on one or two Finance Bill Standing Committees, and thought that I would hear a more informed intervention. Once more, I was disappointed.

The hon. Gentleman is entirely wrong. If the Government had listened to what we were saying about unsustainable spending commitments, and if they had reformed welfare as a precondition of all their other expenditure ambitions, the Bank of England would not have had to go on raising interest rates. Industry, business and the economy generally are now paying for earlier mistakes that we pointed out. The hon. Gentleman is wrong to suppose that anything that I would have done, then or now, would make the recession worse.

We would not be where we are today under the Conservatives. We would not have had the last two Budgets. During the debates on those Budgets, we warned of the dangers that the Government were risking. That is why there is now a serious possibility of a £36 billion increase in borrowing over the next three years—and that is by no means the most gloomy forecast: some recently published independent predictions speak of zero growth for next year. The £36 billion could represent the lower end of the estimates.

The Chief Secretary referred to some mythical margin of prudence built into the expenditure review. I know that the right hon. Gentleman has been in his job for only about three months, but he need only read "The Code for Fiscal Stability", and the other documents that were published at the time of the comprehensive spending review, to realise that no margin has been built in. I refer the right hon. Gentleman to page 43 of "Stability and Investment for the long term". Over the coming years, borrowing is already set to rise by at least £4 billion every year. That is extremely serious when considered alongside the new black hole that is opening up in the form of £36 billion of extra borrowing—or more, according to some scenarios.

Mr. Tyrie

May I make a point about the alleged margins built into the spending plans? The Chief Secretary seemed to be completely unaware that his Government had announced the lowest level of reserves as a proportion of gross domestic product that had ever been announced, certainly in living memory. The margin, in as much as it exists, was dangerously small even before the growth forecast was drastically altered a few weeks ago.

Mr. Heathcoat-Amory

My hon. Friend is right. The comprehensive spending review was already risky, and, with the halving—at least—of the growth forecast, it has gone into the danger zone.

Maria Eagle

I Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

I will give way in a moment.

It is no good saying, as the Chief Secretary did, that all will be revealed in the pre-Budget statement. We had a pre-Budget statement last year, and there was nothing worth while in that. Meanwhile, savers and borrowers want to know what will happen to Government debt. Businesses need to plan. Will all the growth in the economy be pre-empted by the public sector? Will the Government have to go on putting up taxes on businesses? People want answers to those questions today. The figures exist in the Treasury; why are they not being given to the House of Commons?

Maria Eagle

rose—

Mr. Heathcoat-Amory

Perhaps the hon. Lady has an answer.

Maria Eagle

It is not my responsibility, but I am grateful to the right hon. Gentleman for giving way to me at long last. Perhaps that represents the triumph of persistence.

Given his concern about excessive commitments to public spending, can the right hon. Gentleman explain just what the Opposition would cut?

Mr. Heathcoat-Amory

I have made that clear to the hon. Lady, but she need not take it from me; she can read the record. Back in July, we were saying that locking into a three-year commitment of that magnitude was irresponsible, given the Government's abject and continuing failure to deliver on their promise to reform the welfare state.

I am not asking the Government to do anything that we did not do. Over the past four years, social security expenditure has been stable, under the Conservatives and in relation to the expenditure forecasts that we left behind. During those four years, it rose by a total of only 1.5 per cent. in real terms. All the Government had to do was continue what we were achieving; instead, in their own comprehensive spending review, they have committed themselves to an annual real-terms increase of 3.3 per cent. in the social security budget. That, when added to all the other expenditure commitments, is reckless and unsustainable. We said so at the time, and we have been proved right.

What does the Chief Secretary do? He does not give us any new figures; he has no plan to sort the matter out. Instead, he simply blames business for everything. Meanwhile, job losses mount. Productivity is the new problem. It used to be the Asians who were at fault; then it was the Russians; then it was the banking system. The new problems are all caused by greedy management and lazy workers. Meanwhile, on the shop floor in our constituencies, in businesses and workplaces, job losses mount. I believe that the hon. Member for Gordon (Mr. Bruce) mentioned the Ernst and Young report, which predicts half a million extra job losses over the next two years.

Mr. Campbell-Savours

Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

I have already give way to the hon. Gentleman. I hope that he will forgive me if I do not prolong my speech by taking more interventions from him.

The Prime Minister's remarks last week were nothing short of scandalous. He dismissed all talk of job losses or the possibility of a recession as "idiotic hysteria". That was itself an interesting commentary on the Bank of England's own Monetary Policy Committee, which had said in its minutes for the month before that the chances of a United Kingdom recession had increased.

It is not only the Bank of England that has said that. In a circular sent out a few days ago, Goldman Sachs said: There is a rising risk of recession as evidenced by the continuing collapse in business confidence… On our projections the government will fail to meet its fiscal rules". Chase Manhattan says that a UK recession is now very likely in 1999". NTC, the independent research group, says that, according to its figures, there is a strong likelihood of recession in the second half of 1999.

Mr. Bercow

Will my right hon. Friend give way?

Mr. Heathcoat-Amory

Yes, for the last time.

Mr. Bercow

Does my right hon. Friend agree—especially in the light of the reports from which he has just quoted—that the Chief Secretary was guilty of gut-wrenching complacency in respect of the increased regulatory burden that British business will undoubtedly face in the lifetime of this Parliament? Was it not extraordinary that, in a 30-minute oration, the Chief Secretary failed even to refer to the European Commission's prediction that the country would slump to the bottom of the European growth table next year?

Mr. Heathcoat-Amory

My hon. Friend is right. All the warnings and all the independent research are dismissed as idiotic hysteria by the Prime Minister.

My hon. Friend is also right in saying that this concentration on failures of productivity shows a breathtaking hypocrisy. We have this from a party that opposed, with its allies, the Liberal Democrats, every one of the industrial and trade union reforms and privatisations that transformed our economy during 18 years of the Conservative Government. Those policies are being copied throughout the world, yet that same Labour Government are at it again. They lecture British industry about competitiveness and productivity and then bring in the job-destroying measures to which my hon. Friend has referred. As promised, they believe in the three Rs, which we are rapidly learning stands for regulation, regulation and regulation.

To take just one, on the Government's own figures, the working time directive will add some £2 billion a year to business costs. Everyone knows that distribution and freight charges are an important component in the cost of a manufactured item. We have among the highest distribution costs in Europe. Why? It has nothing to do with failures of industry, or the haulage industry in particular. The Government have ratcheted up fuel duties in both their Budgets and they are singling out diesel duty for yet more, higher increases.

According to Library figures, the extra costs of motoring, over and above what we calculated in our forecast, will amount to £9 billion in this Parliament, yet the Government have the nerve to tell industry to sharpen its act. The Government are piling on such extra costs and extra taxes every day.

The only consolation to the Government is that, possibly, they have the Liberal Democrats on their side. Here, I refer briefly to the weasel-worded Liberal Democrat motion, which recognises the role of fiscal policy in stabilising economic growth in order to avoid excessive reliance on interest rates". Is that some bizarre code? Can the Liberal Democrats now talk to the Government in coded language only? Have all relations broken down? Are we to suppose, therefore, that those words have within them some coded support for the Government's high-tax policies and the £20 billion-plus extra business taxes that the Government are loading on to industry in this Parliament?

Helen Jones

Given his concern about taxation, perhaps the right hon. Gentleman could explain how it is that his party voted for amendments to the last Finance Bill that would have given us £6 billion—worth of extra spending? Which taxes would he have raised to pay for that?

Mr. Heathcoat-Amory

The hon. Lady is wrong. I do not believe that she attended all the debates—[Interruption.] If she was there, no one noticed it. She might have missed the fact that on the Finance Bill we were proud to oppose the extra taxes that the Government and their Liberal Democrat allies tried to load on to individuals and businesses.

Mr. Loughton

Will my right hon. Friend give way?

Mr. Heathcoat-Amory

I hope that my hon. Friend will forgive me. I must make progress.

I want to mention interest rates because they have been mentioned by Labour Members. They are higher than they need to be precisely because of the Government's persistent and continuing failure to bring their tax and spending policies into line with their monetary objectives. The best example of that was the attack on savings in their first Budget, the notorious £5 billion-a-year raid on pension funds. That was the last thing that the economy needed at that time. It meant that the entire burden of controlling inflation was transferred from fiscal policy to the Bank of England.

Of course, at the time, the Chancellor said that it was nothing to do with him—all those nasty interest rises were due to the Bank of England; he could not control the Bank. However, last month, he was going around the world—but not this country—telling everyone else that we needed a co-ordinated cut in interest rates. Frankly, he has to decide: does he control interest rates and, if he is urging all these lower interest rates, why has he signed up in principle to joining the European central bank in Frankfurt? If that happens, it will be illegal even to seek to influence the level of European interest rates ever again.

Last week in the Chamber, we had the hilarious spectacle of Labour Back Benchers complaining about the Governor of the Bank of England. They wanted him to be sacked because he had pointed out that the United Kingdom was a single currency zone, so interest rates for the north of England were set in accordance with conditions in the country as a whole. Those same hon. Members, however, want to join a single European currency, in which case it would not be British conditions that determined the interest rate, but conditions in continental countries, which would be very different. Matters would be 10 times worse if we did that.

Mr. Malcolm Bruce

European Union interest rates are 3 per cent. lower.

Mr. Heathcoat-Amory

That was a sedentary intervention from the Liberal Democrats, who, as usual, have forgotten nothing and learnt nothing. When we were in the exchange rate mechanism, we were told by the hon. Gentleman and others that it was going to mean lower interest rates. By the time we came out, it was the reason why we could not lower interest rates.

In the economic cycle, interest rates go up and down and the need for them goes up and down, but if we were party to a single European currency the requirements would be set not by British conditions, but by continental ones. Perhaps that realisation is beginning to dawn on those on the Labour Benches, but clearly it is not dawning on those on the Liberal Democrat Benches.

Mr. Malcolm Bruce

Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

I hope that the hon. Gentleman will forgive me, but I must raise another point.

The Economic Secretary to the Treasury, who is answering this debate, will have an opportunity to clarify—because we need clarification—what went on at last weekend's European summit in Austria. That summit produced a proposal for a £200 billion spending programme. The jobs crisis in the European Union has produced a left-wing response at EU level.

The Prime Minister may not want to be left wing, but he certainly wants to bolster his European credentials by going along with that proposal, so we face not only a £36 billion black hole in our domestic expenditure, but a £200 billion black hole at EU level.

We want to know what Treasury Ministers think about that. How will it all be paid for? Again, some people who attended that summit have an answer for that as well. They want an EU-wide direct tax to be levied on businesses or individuals in member states. It would bypass national Governments. That is the new proposal, so can we have a definitive statement about it before the end of this debate? Can the Chief Secretary or Ministers speaking for him assure the House that the Government will veto any such increase in the EU's taxation powers? Can we have a clear, unequivocal response to what is, after all, a straightforward question?

The problems that the Government have with unemployment, economic growth and borrowing are not sudden or unexpected. They were warned about them at the start of the summer. They fit into a pattern of mistakes and broken promises that go back to May last year. The Government broke their promises on taxes; they put them up 17 times last year. They attacked savings in their first Budget at the precise moment when they should have been encouraging them. They continue to put up business costs by introducing regulations and more taxes, and then blame the managers for being greedy and the workers for being lazy. The Government have also not only failed to reform social security but made reckless spending commitments.

Ministers blame everyone but themselves, and they fail to come clean with the House. The country is now paying for the Government whom it elected last year.

4.59 pm

Mr. Christopher Leslie (Shipley)

In my short time in the House, I have not seen such a good example of the bad practice that politicians have adopted over the years—of being asked to answer a question but failing to do so—as that provided by the right hon. Member for Wells (Mr. Heathcoat-Amory). When asked a simple question about what the Conservative party would do about Bank of England independence, he told us, "We will answer you only when you answer this, that and the other question." Does the right hon. Gentleman realise how ridiculous he looked today? His speech was pathetic.

If Conservative Members are able to take decisions so quickly on matters such as the single currency, why on earth cannot they take a decision on whether to reverse Bank of England independence? They really have to answer that question. The right hon. Gentleman was asked other questions, which he ignored completely. He tried, pathetically, to duck giving any answer.

As my hon. Friend the Member for Warrington, North (Helen Jones) said, during the passage of the most recent Finance Bill, Conservative Members proposed removing £8.7 billion of funding for public services. If they want to reduce public spending by such an amount, they should tell us which services they would cut. We know that they would remove the working families tax credit. We know also that they are not worried about the poverty trap or structural unemployment, because they think that people affected by those issues can go to the wall. Do Conservative Members realise that £8.7 billion—an astronomical sum—is more than is spent annually on fighting crime in the United Kingdom?

Conservative Members have also mentioned welfare and social security. They must therefore be thinking about what they would do with pensions and child benefit.

Mr. Ruffley

Will the hon. Gentleman give way?

Mr. Leslie

Of course I will give way; I should like some answers.

Mr. Ruffley

Is the hon. Gentleman aware that, on 10 April 1997, the Prime Minister said that he wanted to start reducing the very high welfare and benefits bills we pay in this country"? Nevertheless, it has been clearly demonstrated that, between now and the end of this Parliament, there will be an average annual spending increase of 3.3 per cent. Why did the Labour party deceive the British people on welfare?

Mr. Leslie

As the hon. Gentleman knows, in the Labour party manifesto, we talked about shifting our priorities from paying the costs of social and economic failure, such as paying the jobseeker's allowance, and placing greater emphasis on education and health. Making such a shift is our policy, and that is what we are doing. We are spending an extra £40 billion on health and education, although Conservative Members oppose that increase.

I should love to hear a Conservative politician come clean, for a change, and just spit out what is at the bottom of his heart. We know that the right hon. Member for Wells is against the euro and against the independence of the Bank of England. What spending cuts would he make?

Mr. Loughton

Perhaps the hon. Gentlemen will take a stab at answering this question. Will he commit himself and the Labour party to retaining the independence of the Bank of England after the next general election, or will that independence have been abdicated to the central European bank by then?

Mr. Leslie

The hon. Gentleman has a funny way of answering a question about whether the Conservative party would reverse the Bank of England's independence. Labour Members made the Bank independent, and independence is working well. Interest rates have reached their peak and are now on a downward slope. We feel that independence is the best policy for managing the British economy and monetary policy.

The House wants to know the risk—the clear and present danger—presented by Conservative Members to the British economy. Would they recklessly return monetary policy to the control of politicians, who might tinker around with that policy for their own benefit? How would Conservative Members go about things? The fact is that they offer fiscal and monetary policies that would be disastrous for the British economy.

Conservative Members talk about the need to cut and slash public services, but disregard the infrastructure that is necessary across the country and the vital public services—health and education services—that people cherish.

Curiously, although Conservative Members talk about an economic downturn, they talk also about reining in public expenditure. Surely such spending cuts would simply amplify any possible economic problems and—as the Financial Times said today—push things in the wrong direction?

Mr. Tony McWalter (Hemel Hempstead)

My hon. Friend is very eloquently making his case. Opposition spokesmen say that our spending plans on education and health are irresponsible, reckless and unsustainable, which implies that they would not propose such plans. I should like to confirm that, as my hon. Friend said, Conservative Members would like to rein in those plans. They should make their intentions very clear.

Mr. Leslie

As my hon. Friend says, Conservative Members face in two directions on those issues. Although they like to talk about more public expenditure on this, that and the other, they try simultaneously to appease their own right-wing instincts by saying, "We must rein in all public expenditure, regardless of the value that it provides to the economy and the nation."

Mr. Loughton

The hon. Gentleman has expressed his great confidence in the ability of the Bank of England to do a better job of running the economy than his colleagues are able to do. Does he therefore agree with the hon. Member for Rotherham (Mr. MacShane), who recently called for the resignation or sacking of the Governor of the Bank of England and claimed that the Governor and his colleagues were sacrificing manufacturing jobs in the north for the sake of protecting the south? Does the hon. Gentleman think that the Governor is doing a good job?

Mr. Leslie

I think that interest rates should be left to the experts—those who are expert in monetary policy. I do not think that politicians, such as the hon. Gentleman and I, are capable of dealing with the daily technical issues of monetary policy—which is why the Government, correctly, gave the Bank independence and created the new monetary policy framework. Although it is open to all hon. Members to make suggestions on monetary policy and on what course the Bank should take, ultimately the decision rests with the Monetary Policy Committee—which is where the decision should be made.

I accept that world economic conditions will undoubtedly have an impact on the British economy. Events in Japan have ricocheted around Russia and Latin America, and problems such as the crisis in Long Term Capital Management and other financial institutions have caused significant problems that are likely to have an impact on Britain. Perhaps other problems are to come. I am extremely proud that the Prime Minister and the Chancellor have shown such strong leadership on the world financial and political stage. They are showing the way forward, urging greater transparency among financial sectors, pushing for better supervision and regulation—particularly of wide-scale speculation—and ensuring that they create a framework and show the leadership that are necessary to avert significant global recession which could affect Britain in the long term.

We should consider current events in Britain in the wider context. Although we might prefer it if some things did not happen, many good things are happening. Britain is having many economic successes. As Labour Members have said, economic growth—currently at 2.5 per cent. annually—is still very robust. Moreover—much as Conservative Members would love there to be, so that they could rub their hands in glee and poke fun—there is no recession in manufacturing.

Labour Members will try our best to keep growth on a sustainable course in the long term. Interest rates have peaked, and homeowners and businesses will be helped in coming months as rates decrease. The pound is now lower against the deutschmark than it was when Labour was elected. A survey of corporate management by Energis, reported in yesterday's Financial Times, stated that 70 per cent. of corporations believe that profits will be higher over the next 12 months. It says that two thirds of companies are predicting higher sales. In fact, it shows that exporters are among the most optimistic firms, so it is not all doom and gloom as the Opposition love to suggest.

We know why Opposition parties call for debates such as this. They like to rub their hands in glee whenever there is a hint of any bad news so that they can take a dig at the Government and try to grasp some scrap of political advantage. Unfortunately, it rings rather hollow when they have absolutely no solutions or suggestions of any substance as to what they would put in the place of our policies.

Let us consider the Liberal Democrats for a moment, as Opposition day debates provide us with a great opportunity to scrutinise Opposition parties' policies. At the heart of their recent document entitled "Moving Ahead", which was published at their party conference, was a policy to increase the personal income tax allowance from £4,195, as it is now, to £10,000. The Library has calculated for me—I am happy to share the information with the House—that the cost to the Exchequer of that policy would be more than £30 billion.

Mr. Malcolm Bruce

It would be £29 billion.

Mr. Leslie

What is the odd £1 billion to the Liberal Democrats? Whatever the figure, it is still an awful lot of money. In fact, it is more than is spent on trade and industry, crime fighting and defence combined. The hon. Member for Gordon (Mr. Bruce) likes to combine statistics—let us see how he likes them apples. He should realise the implications of his policy—£30 billion is nearly half this country's income tax take. He talks about fiscal policy having an impact on the wider economy, but we want to know specifically how he would find a substitute for that £30 billion.

The Liberal Democrats' solution is to phase out ill-judged reliefs and allowances", as it says in their policy document. Would they phase out tax relief for occupational pension schemes to raise £9.3 billion? Would they phase out tax relief on redundancy payments? That would raise only £1.1 billion. The hon. Member for Gordon has been talking about phasing out mortgage interest relief at source all together, which would raise £2.7 billion. Even if the Liberal Democrats phased out all of those, they would still have a heck of a long way to go to find that £29 billion or £30 billion.

The Liberal Democrats say that they want an extra 1 p on income tax, but that would raise less than £2 billion. They want a new 50 per cent. tax on salaries of more than £100,000, but that would raise only £2 billion. I shall give way to the hon. Member for Gordon if he can clarify how the black hole is to be filled. I see that he is not rising to his feet, so I give way to my hon. Friend the Member for Liverpool, Garston (Maria Eagle).

Maria Eagle

Did my hon. Friend, like me, obtain a copy of the Liberal Democrats' document from the internet? If so, did he notice the name under which it was filed, namely "FINECON"? Having read it, I thought it was a fine con. Does my hon. Friend agree that the document is packed with uncosted and unfunded spending commitments, and that it would be impossible for the Liberal Democrats to pay for any of them?

Mr. Leslie

My hon. Friend is entirely correct. It is a fine con that the Liberal Democrats are trying to pull. They would create a £30 billion or £29 billion gaping black hole, and I hope that they will specify how they are planning to fill it.

Mr. Edward Davey (Kingston and Surbiton)

I am more than happy to deal with the hon. Gentleman's point. We said at the conference that there should be energy taxes—I believe that that appears in the document. We also said that some reliefs should be phased out. How is the hon. Gentleman's party going to pay for the 10p rate that it has set as its long-term tax target? I ask the hon. Gentleman that as his party is in government.

Mr. Leslie

That is very revealing. We know that the carbon tax, or whatever the Liberal Democrats call it, means that petrol would have to triple in price. [HON. MEMBERS: "No."] Oh, so it is not quite as clear as we thought. I shall have to read Hansard to see exactly what was said.

Mr. John Swinney (North Tayside)

As the hon. Gentleman is talking about the cost of fuel, is he aware that the fuel duty escalator that the Government have applied to above-inflation increases in the cost of fuel means that, by 2002, the cost of a gallon of petrol in Scotland will be nearly £5?

Mr. Leslie

That would be a matter for the Chancellor to review every year in his Budget. I do not know how the hon. Gentleman arrived at that figure, but he knows that it was the Conservative party that introduced the fuel tax escalator, and we are continuing it. That is entirely realistic.

Mr. Bercow

rose—

Mr. Leslie

I must make some progress, as I wanted to make a concise contribution.

Let us consider what the Liberal Democrat party and the Conservative party are saying. One wants to slash public expenditure but fails to say where it would make the cuts. The other wants more spending on everything, not only on services but on reducing interest rates. As usual, they have no solutions and do not accept responsibility for the consequences of their pronouncements. They spit out proposals, but they must follow through and take responsibility for them.

The Government are pursuing the right course. Instead of falling off to the right or taking the Liberal way, they are pursuing a course of prudent and stable fiscal policy, aiming to increase productivity and long-term investment and making sure that the economy is put on a very firm footing. The Opposition parties present risks, but we know that the way forward is the Labour way forward.

5.16 pm

Mr. Andrew Tyrie (Chichester)

As we are discussing a Liberal Democrat motion, I shall pay some attention to Liberal Democrat policy.

We know the problem: it is that a recession is looming. We have higher interest rates than we would like and the exchange rate is higher than we would like—and it is the Government's policies that have brought much of that about. The Liberal Democrats are at least consistent—their response is to join economic and monetary union. That was their policy 18 months ago, as well as three years ago. In every situation, their response is to say that we must join EMU. They believe that it will solve whatever the short-term problem might be at any moment. I want to knock that idea on the head completely before I concentrate on other matters.

Britain's economic ills certainly cannot be solved by joining EMU now. Of course, joining EMU would deliver lower interest rates, but it would make the short-term problems even worse. The differential in interest rates between Britain and Germany did not happen by accident; it reflects the fact that the markets believe that there is a long-run inflation performance differential between this country and the average of the euro Eleven. In other words, if Britain joined EMU, something would have to be done to squeeze out that differential. Nominal wage rises would have to come down to European levels, as would private consumption. Forecasts of those two measures reveal a 1 or 2 per cent. differential, so the economy would have to be squeezed over a period of years to enable interest rates to stay at the lower level.

What exactly would the Government have to do to achieve that? They would have to do one of two things—there are only two things that they could do. One is to tighten fiscal policy, which would mean higher taxes all around on a pretty big scale. At one point, I thought that we were going to hear commitments to higher taxes from the Liberal Democrats, but they seemed to change their mind.

The other option is to enter EMU at a higher exchange rate than we have now, but that policy would be even more disastrous. However, it is what the Irish have decided to do. In the spring of this year, they revalued the Irish punt against the basket of euro currencies as a prelude to entering EMU.

Apart from the Liberals, I do not think that anybody seriously believes that joining EMU now offers a short-term solution to Britain's current economic problems. It would give the British economy a far worse headache. It seems to me that the Liberals will remain isolated on that issue. Without a policy on EMU, their entire economic strategy starts to look extremely shaky.

The hon. Member for Gordon (Mr. Bruce) hinted at a tightening of fiscal policy with a rise in tax rates. Unfortunately, however, when pressed on the issue, he was able to tell us merely that the commitment to a lop rate should be abandoned. That seems to be an abdication of both fiscal and monetary policy on the part of the Liberal party.

Mr. Edward Davey

The hon. Gentleman seems to think that Liberal Democrat policy is immediate entry into EMU. Of course that would be neither practical nor feasible. It would take at least two or three years. Does the hon. Gentleman think that the interest rate differential could be closed over that period—yes or no?

Mr. Tyrie

The hon. Gentleman has just changed Liberal party policy quite dramatically. We are now told that the Liberals would not consider joining EMU for two to three years. I have no doubt that, if they analyse the position a little more closely, they will conclude that EMU should wait four or five years. Conservative policy is that we shall return to the issue in seven or eight years' time. Labour policy seems to be pretty elastic. Just after the election, there were rumours that there would be a snap referendum and we would be in in a jiffy. Given relations between No.10 and No.11 on the issue, it now appears that entry will be many years hence, if ever. So there is movement towards a marriage of minds between the Liberals and Labour on the issue.

I should say a few words about Labour policy. This is the first debate in which we can reasonably say that the Government should be held responsible for the performance of the economy. Eighteen months have elapsed since the election—certainly enough time to see whether monetary and fiscal policy have been handled well. On the supply side, the Government may be benefiting from some of our reforms. In any case, the economy does not generally respond instantly to supply side changes and there tends to be a long lag before the damage to the supply side caused by increased regulation becomes apparent.

Labour has made something of a mess of monetary policy. In an effort to give the impression that the golden economic legacy which the Government were bequeathed—and which they tried to pretend did not exist—was not so golden after all, the Chancellor produced an emergency Budget in July 1997 in which he said that we were on the brink of an unsustainable boom. Rather than sort it out himself, however, he decided to hand responsibility to the Bank of England. In my view, he botched the job as he did not make the Bank of England fully independent, but created a halfway house. He gave most of the members of the Monetary Policy Committee three-year terms and, as a result, they have been over-anxious to bare their monetary teeth and prove their anti-inflationary credentials. So interest rates have been higher than they would have been.

Mr. James Plaskitt (Warwick and Leamington)

On interest rates, does the hon. Gentleman not accept that the Bank of England, operating independently, has taken the inflationary pressures that we inherited from the previous Government out of the economy by taking rates to 7.5 per cent? Does that not compare favourably with the record of the previous Administration who, on three separate occasions when interest rates were under political control, took interest rates to 14 per cent.—twice the level that has now succeeded in dampening inflationary pressure?

Mr. Tyrie

I would like to be able to share the hon. Gentleman's optimism that interest rates have peaked. I note that Labour Members seem to take that absolutely for granted. We do not know that. Indeed, most Ministers appear to have no idea whether we are in an upswing or a downswing. When I asked the former Chief Secretary to the Treasury that very question, he was unable to tell me the answer. I expect that he has noticed by now that we are probably in a downswing. We cannot be sure. Nor can we be sure that interest rates have peaked. Of course they were set at the level required to get inflation down. We did bring down inflation to meet our target. At the election, inflation was below 2.5 per cent., as promised by the Conservative Government. I am trying to recall what interest rates peaked at to deal with Labour's inflation in the mid-1970s, but the figures elude me. No doubt someone will be able to tell me. [Interruption.] I understand that it was 15 per cent.

Now we have the result of the initial decision to give the Bank of England independence in a form that led it to tighten monetary policy. There has been a rapid slowdown in the economy, a rise in sterling, the collapse of manufacturing, as well as falls in exports and increases in unemployment. All that was under way before the far east crisis and the Russian crisis. Now, 18 months later, the Chancellor is begging the Governor of the Bank of England to take his foot off the brake. The Chancellor's acolytes are on to the press to persuade the Bank to cut interest rates sharply and there are calls for the resignation of the Governor from a number of Labour Members.

One minute the newly independent Bank of England was the most visible symbol of new Labour and the next minute it is a stumbling block to Downing street's preferred economic policy. First, we were told that monetary policy was too loose; then we were told that it was too tight. First, we were told that the Governor of the Bank of England should be left to sort it out; now we have been told that the Chancellor should be and is leaning over his shoulder. Nobody would consider that to be a good record on monetary policy. It may be short of a disaster, but it is certainly in a mess.

Let me now deal with fiscal policy. Initially, the Labour Government got it roughly right, but that is hardly surprising, because they were implementing Conservative spending plans, even down to the level of each departmental spending head. However, a few months ago, the Chancellor turned all that on its head and let spending rip. Now we have a massive and almost certainly unsustainable increase in spending.

The Chief Secretary talked about margins to his spending plans, suggesting that we do not need to worry about the growth forecast having been cut, but he seemed completely unaware that the Government's most recent Budget provided smaller reserves as a proportion of gross domestic product than any Budget that I can remember. I do not have the exact figures to hand, but I think they are less than half the average reserves in every Budget presented by the Conservative Government. That is very worrying and should be taken extremely seriously. I am pleased to see that someone has gone to check the figures with the Treasury officials. That is very prudent. The Government will no doubt wish that they had had higher reserves. The most recent Budget took a gamble on spending. In my view, that risk should not have been taken and we will find out soon enough whether the Government will need to backtrack on that.

There have also been massive hikes in taxation, albeit cleverly concealed from the taxpayers who will have to stump up the money. Tax increases have not been easy to spot, but they have been to the tune of at least £20 billion on business alone. Although I do not think that borrowing will rise much in the current financial year, in two years' time we will realise how fast it has been rising. Whatever figure the Chancellor announces in a few days' time, I predict that, although it may not happen in the first year, in future the borrowing outturn will be higher than the figure that he announces.

Let us put fiscal and monetary policy together. How does Labour want to see the combined picture? The Government want us to believe—I have heard this again today—that their policy will put an end to boom and bust. It is astonishing that they are prepared to continue that argument. There will be no more stop-go, they say, just nice, smooth economic performance. Sometimes I feel that their rhetoric consists of saying that there is no longer a business cycle. As I said a moment ago, the previous Chief Secretary was unable to tell me what he meant by boom and bust. They give us mere rhetoric and soundbite economics.

I should like to say a few words about the supply side of the economy. We have had some discussion about the regulatory burdens imposed on business. All those measures taken together amount to a furring up of the arteries of the whole economy. It will take a long time for the effects to come through and we are only at the early stages. I shall not catalogue them all, because some may find it tedious, particularly if others refer to the same points. However, agreeing to the social chapter was a huge blunder, as were the changes to employment protection and the introduction of the minimum wage. The supply side of the economy has been damaged since the election.

Should anyone doubt that, I invite Labour Members to ask groups of business men in their constituencies a few simple questions, such as whether they sincerely believe that the burden of taxation on business will be lower in two years' time, whether borrowing will be lower and whether there will be fewer burdens on business. I do not think that they will find any takers in the business community. They should try it—I have.

Ms Margaret Moran (Luton, South)

I have spoken to many businesses in my constituency. Will the hon. Gentleman concede that the Government's introduction of the lowest ever rate of corporation tax is an excellent boon to business, as those in my constituency told me during the recess?

Mr. Tyrie

I am afraid that that intervention betrays ignorance about the total burden of business taxation. The total burden has risen substantially. That is how the Government have succeeded in surreptitiously obtaining far more revenue than they implied they would before the election. That is one reason why business performance in the medium term will be poorer than it would have been had the measures not been introduced.

The Labour Government were elected not to implement an alternative economic strategy, but because they had convinced the electorate that they were capable of running the policy that they inherited. The Chief Secretary's comments this afternoon about the importance of markets and how they must be made to work were in language that very few Labour spokesmen would have been prepared even to consider only a few years ago. That is one reason why Labour was elected.

In the past 18 months, the economic legacy that the Government were bequeathed—it is a remarkable legacy; compare Britain 20 years ago with Britain today—has been put at risk. Monetary policy has pointed in two directions, almost at once. Risks have been taken with the public finances, particularly on the spending side, and heavy burdens have been placed on business. We do not need to look into a crystal ball to know what will happen if those policies continue—we can read the book. We know what happens with such policies. They are being implemented less vigorously than in the 1970s, but the genre of policy is the same in many ways, despite the new Labour rhetoric concealing the fact.

When the electorate come to judge, they will realise how damaging many of the Government's policies are. They thought that they had elected a Labour Government who would broadly continue Conservative economic policies, but they will realise that that was a terrible mistake and that, to continue with the economic policies that brought prosperity to Britain, they should return a Conservative Government.

5.35 pm

Jacqui Smith (Redditch)

I am pleased to be able to contribute to the debate. Of all the constituencies in the Hereford and Worcester area, mine is the most reliant on manufacturing industry. The west midlands is the engineering centre of the country. I shall not take any lectures from the Conservative or Liberal Democrat Opposition on the need to maintain manufacturing jobs or on the record of the present Government.

Several hon. Members have mentioned our inheritance from the previous Government. When we talk about manufacturing jobs, perhaps it is worth thinking about that inheritance. If anyone is an expert on manufacturing job losses, Conservative Members should be. We shall not forget the early 1980s, when manufacturing output fell by 15 per cent. and investment fell by 17.5 per cent. Nor shall we forget the second Conservative recession, in the early 1990s, when manufacturing employment fell by 10 per cent. and investment fell by 16 per cent. We shall not take lectures on manufacturing jobs from the Conservative Opposition.

We shall also take no lectures from the Liberal Democrats, who have called today's debate. Their opportunistic approach to economic policy is truly breathtaking. Their response to the announcements of increased Government spending for public services in the past 18 months has invariably been to shout, "Higher, higher!" while refusing to explain how they would support their calls for higher spending. Indeed, they have voted against policies such as the windfall tax, which have been necessary to support the measures that the Government have been willing to take to improve the country's skills base.

Mr. Bercow

Given that the hon. Lady wants to continue with substantial increases in public expenditure, the economic downturn notwithstanding, will she take this opportunity to confirm her belief that taxation at the end of this Parliament will be higher than it was at the beginning?

Jacqui Smith

I will confirm that the Government have taken the necessary tough decisions on public spending in the first part of the Parliament, enabling us to put into operation the spending increases on education and health that were part of our manifesto. I shall come back to the Conservative approach to fiscal policy.

We can add to the Liberal Democrats' previous inconsistencies the argument that fiscal policy should be tightened so significantly that short-term interest rates could be halved for early entry into the European single currency. Presumably, that means another increase in taxation. At least they are ambitious. Last year, they were calling for an extra 1p on income tax; they have now boosted that to at least an extra 20p on the basic rate and a rate of 50 per cent. for those on £25,000 or more.

Manufacturing in my constituency most certainly does not need the political opportunism that we have heard today. It needs a Government who are willing not only to take decisions for the long term in the macro-economy but to put renewed vigour into dealing with long-term structural improvements in productivity.

Ms Abbott

If it is important for the Government to take decisions on the macro-economy, why have we given away the ability to make decisions on monetary policy to the Bank of England?

Jacqui Smith

I was about to come to that point. The Government have the fundamentals of macro-economic policy right. As I suggested, the Government took the necessary action in the first part of this Parliament to cut borrowing—part of the previous Government's golden economic inheritance—and to find the extra £40 billion for education and hospitals that the country so badly needs. We have seen today further evidence of the disarray in the Conservative Opposition's approach to fiscal policy. The shadow Chancellor says that we should spend less on public services; shadow health and education spokespeople say that we should spend more; and the Leader of the Opposition claims not to have heard what they have said.

Mr. Tyrie

I really do not think that the nation believes that the Conservatives will find it impossible to control public spending. After all, Labour spent years telling us that we were at it too vigorously. As for where we shall find savings, one need look only at the fact that social security spending was growing at a lesser rate than the economy as a whole under the previous Government. It is now growing at a far greater rate. That is an area in which the Conservatives will be able to find some savings when we return to power.

Jacqui Smith

The hon. Gentleman describes precisely the problem that we inherited. The previous Conservative Government were not at it vigorously enough when it came to ensuring that social security spending went on providing opportunities for people as opposed to keeping them on the dole. Through the introduction of the new deal, this Government have ensured that that happens.

Mr. Ruffley

Does the hon. Lady believe that the Prime Minister said on 10 April 1997 that he wanted to cut the social security benefit bill? Did he say that—yes or no? If so, why are the Government not doing so?

Jacqui Smith

We have already done so. I reiterate that there is a significant difference between the expenditure on economic and social failure that we inherited from the previous Conservative Government and spending on the new deal, which is providing opportunities for people to work, using money to good effect as opposed to keeping people on the dole. The Government have turned such spending around.

If the Government had not granted the Bank of England independence in setting interest rates, we would still be facing a political-risk premium on long-term interest rates instead of their being at their lowest for 35 years. On that issue, we once again see contradictions in the Conservative Opposition's policy. As I understood his comments, the shadow Chief Secretary suggested earlier that the Conservatives would reverse the policy. We certainly need clarification from the Opposition on that.

High exchange rates have undoubtedly caused concerns for exporters but, as a Redditch manufacturer told me this month, I can't build my business on hoping the pound will fall. I've got to get out and sell and build the quality of my products". That is, of course, the crucial lesson for the Government.

International competitiveness, business success and jobs cannot be built solidly on calls for constant devaluation. It can be built only on improved competitiveness and productivity. Furthermore, only by dealing with improving productivity can we get rid of the sort of bottlenecks that were responsible for the boom and bust and the instability from which the economy suffered under the previous Government. By getting rid of such bottlenecks and improving productivity, we remove the inflationary pressures that were so obvious under the previous Government.

I welcome the measures that the Government have already taken on corporate taxation, research and development, science, reform of the tax and benefits system and transport. Even so, we in the west midlands face a major challenge in skills shortages. I urge the Government to work even harder on improving training opportunities and skills levels. My local chamber of commerce reports that 59 per cent. of manufacturers have attempted to recruit in the past three months but that 75 per cent. of them have had difficulty, particularly in the recruitment of skilled manual and technical employees. There are several reasons for that. Employers, for example, report that young people are unaware of opportunities in engineering and manufacturing and still tend to view such jobs as dirty, badly paid and of low status. The main answer to that lies with employers. I am therefore pleased that representatives of the Redditch Manufacturers Association are already considering how they can communicate the positive benefits of manufacturing and engineering work to young people.

The Government also have a role in boosting positive contact between young people and employers. That is recognised in initiatives to break down the academic and vocational split in education and to ensure that young people take part in imaginative and on-going work experience projects, such as those that have been introduced in parts of Worcestershire by the Hereford and Worcester chamber of commerce, training and enterprise. It is also important to boost training for people who are already in employment. I welcome the opportunities provided by the introduction of individual learning accounts to boost skills levels, especially in areas such as information technology. We must push that forward to broaden the scope of such training if we are properly to deal with the skills shortages that we in the west midlands face.

Some employers express concern to me about the mechanics of implementing the individual learning accounts, tracking the training provided and ensuring that work force development can be facilitated through training funds. Redditch manufacturers, for example, have plans for a training centre that is linked to setting skills, for which there is great demand locally. Through imaginative use of training and enterprise council funds and new training finance, we should be able to promote projects that respond to positive local initiatives in order to build productivity. I hope that the Government continue to make that area a priority. They have shown a commitment to building the skills base and the provision of opportunities through the new deal in order to tackle unemployment and skills shortages. That must be carried forward—despite warm words but a lack of political support from the Liberal Democrats and a lack of any support from the Conservative Opposition.

I look forward to the Chancellor's statement next week. The Government have taken important decisions on the fundamentals of the economy that will enable the country to steer through difficult economic times. We must also look forward to the Chancellor spelling out further measures for improving productivity, because only with such a dual approach, which I believe that the Government are adopting, will we offer real hope for manufacturers in my constituency and the economy as a whole.

5.48 pm

Mr. David Chidgey (Eastleigh)

Although I have no wish to talk down our economy—on the contrary, I have the greatest belief in the strength of this country and its work force—running at the heart of this debate, when we can pull the Government on to the subject, is a concern that many parts of our manufacturing industry are in the midst of a life-or-death struggle. That struggle for survival has not been helped over the past couple of decades by a Government who basically allowed manufacturing to lapse into neglect. In fact, that Government treated the industry with contempt and left much of it ill prepared and ill equipped to face the demands of the cut-throat global market.

Most Labour Members present today, whether or not they were Members of Parliament at the time, will remember that the previous Government made no secret of their contempt for industry. The 3 million jobs that were lost while they were in power were described as The jobs we do not want". Well, the Conservatives might not have wanted those jobs, but it is a racing certainty that those who lost them did want them. We had a right to expect something better after almost 3.5 million voters turned their backs on the Conservatives and turned them out of office. For our industry, we had the right to expect better than a reliance on market forces to kill or cure its ills. We had a right to expect better than low productivity being blamed on lazy workers.

The House will recall that the Secretary of State for Trade and Industry is a man of many talents, but on the Sunday before last he revealed what one might describe as an almost endearing talent for honesty. On "Breakfast with Frost", he said that Britain's refusal to join the single European currency was starting to damage our trade prospects. That is honesty. He went on to say that, by failing to join the single currency, we could not be at the heart of Europe. That is more honesty. That being so, the Secretary of State added, the USA might now think twice about investment in Britain, because it was not just Britain that the Americans were worried about, but access to Europe. That is a key point.

Hon. Members might like to reflect that, for more than 15 years, the USA has been the largest inward investor in Britain, accounting for more than 40 per cent. of total inward investment from 1984 to 1994, and nearly 60 per cent. in 1995. The Secretary of State might have added that failing to make, at the very least, a statement of commitment on the single currency, failing to stabilise the economy, failing to bring down interest rates and failing to bring down sterling quickly enough is crippling what remains of Britain's manufacturing industry.

Mr. Bercow

Will the hon. Gentleman give way?

Mr. Chidgey

Ah, it is the hon. Member for Buckingham (Mr. Bercow), whose new nickname politeness forbids me to use.

Mr. Bercow

The hon. Gentleman's politeness is unequalled in the House, as we all know. Given his enthusiasm for joining the European single currency as soon as is feasible and, therefore, his acceptance of the running of interest rate policy by the European central bank, would he support in principle the idea that the European central bank should also run our direct taxation policy—yes or no?

Mr. Chidgey

I appreciate the hon. Gentleman's kind words, although whether my politeness is known in every corner of the House is a matter for debate. However, as he well knows, the two issues he raises are quite separate and unrelated.

Mr. Bercow

Answer.

Mr. Chidgey

No, because they are not related.

Mr. Bercow

Answer.

Mr. Chidgey

The hon. Gentleman is clearly a little hard of hearing today. The answer is: no.

To return to the subject of the performance of the Secretary of State for Trade and Industry over the past week or so, I should like to point out that, on Wednesday's "Today" programme, his response to the crisis facing the 16,000 workers at Longbridge and the 45,000 other workers linked to that business was that Rover should sharpen up its act". Between Sunday and Wednesday, the message changed from a failure of Government policy to a failure on the part of lazy workers and poor managers. We know that the Secretary of State is famous for his ability to spin, but to spin a complete U-turn in only three days must be a record even for him.

The Government have been quick to point out that, although Rover is in severe difficulty, other car manufacturers are committing large investments to their UK operations. I welcome that, but it is not surprising, given that Britain attracts far more inward investment than any other country in the world, with the exceptions of the USA and China. Records show that, over the past decade, the UK has attracted about 40 per cent. of all inward investment into the European Union, far outstripping any other country. However, the key question is: why? A recent Government survey shows that almost three quarters of the investors in this country's industry—our inward investors—invested because they needed a British or European base. Only 10 per cent. were attracted by labour skills and only 6 per cent. by labour costs. It is clear that most investment could readily divert to other European Union countries and my concern is that such will be the trend if the economy becomes unstable and if interest rates and the value of sterling do not fall to sustainable levels.

In spite of improvements in productivity, Britain still lags far behind our competitors in modern management, capital investment and, most critically, in skills. That is not new—the evidence has been clear for decades. The Government can shrug off any responsibility for the past, but the figures from the House of Commons Library tell a depressing and continuing story for which the Government must take some responsibility. Between the 1970s and the mid-1990s, manufacturing as a share of gross domestic product has fallen from more than 30 per cent. to slightly more than 20 per cent. That is a fairly common message across the industrialised world. Employment in manufacturing has fallen from 7 million to 4 million.

However, it is interesting to note that, in the same period, productivity in this country has almost doubled. That is a relatively good performance compared with that of many of our competitors, but it is not good enough. In 1995, United Kingdom labour productivity still lagged 14 per cent. behind France, 18 per cent. behind Germany and 30 per cent. behind the United States. It is hardly surprising to learn that Britain, having been the first nation to industrialise, is now de-industrialising faster and deeper than any other country.

The rot is set to continue. As my hon. Friend the Member for Gordon (Mr. Bruce) said, industry suffers a net loss of 300 jobs every day. The House of Commons Library, using the Treasury model, forecasts that, in the next two years, a further 420,000 jobs will be lost. Those jobs will be lost for ever: the records show that jobs shed when industry is in recession do not return when the economy improves. The losers end up in dead-end jobs, with lower wages and even lower prospects. Under-investment in improving productivity, skills and competitiveness has the inevitable outcome of dumbing down the economy.

Maria Eagle

Will the hon. Gentleman give way?

Mr. Chidgey

Ah, I see that the Millbank mafia are still twitching over their pagers. If the hon. Lady has something to contribute, I should welcome it, but I greatly doubt that she has.

Maria Eagle

If the hon. Gentleman gives way, he will hear my contribution. I agree with much of his lengthy analysis, especially his comments about skills shortages and productivity, but will he fill in the details of the motion being debated? It makes passing reference to taking further actions to tackle skills shortages". Can the hon. Gentleman tell us what he would do and how he would pay for it?

Mr. Chidgey

I am delighted to learn that I have managed to hold the hon. Lady's rapt attention for so much of my speech—she is obviously itching to hear my conclusions. If she has just a little more patience and there are fewer interruptions, I promise that all will be revealed towards the end of my speech.

We are all too familiar with Conservative policies: strip out regulation of business and commerce, leave everything to market forces and let the fittest survive. The Conservatives appear to think that any form of employment protection adds an unbearable burden to business, but it might surprise them to learn that France and Germany—the most regulated countries in Europe—outstrip Britain in productivity by 14 per cent. and 18 per cent. respectively.

There is no doubt that, at its best, British industry is a world-class performer. Our aerospace and pharmaceutical industries are world leaders, as is our film industry. Hon. Members might be surprised to learn that the local shipbuilders in my constituency of Eastleigh are still winning contracts worldwide. An award-winning local firm involved in the optics industry has slashed the cost of contact lenses through advanced technology and, in just five years, has grown from having 60 to having 600 employees—that is a success record of which we are proud.

However, we cannot rely on market forces and the survival of the fittest. Government policies have to ensure the success of the able. The new driving force in our economy, as many of us recognise, is made up of small and medium enterprises. They are the dynamic job creators that need an environment in which they can flourish—they need less bureaucracy, easier access to affordable capital and, most of all, a steady flow of well-trained, highly skilled workers.

Helen Jones

Will the hon. Gentleman give way?

Mr. Chidgey

I shall make progress. The hon. Lady can have nothing to contribute to what I have heard before.

While industry and commerce wait in vain for clear, efficient policies from their Government to attract and maintain inward investment, three Ministers have their fingers in the pie. The Deputy Prime Minister, who is responsible for regional development agencies, is tasked with promoting business in the English regions and providing better support for SMEs. The Secretary of State for Education and Employment is responsible for training and enterprise councils, which have a long way to go before they will have any impact on bridging the skills gap. The Secretary of State for Trade and Industry is anxious to shift the emphasis away from regional agencies with a new regional industrial policy aimed at getting industry clusters to collaborate across the country. Three Ministers, with an annual spend of around £5 billion, are each pursuing their own agenda.

If we are to maintain the high levels of inward investment that we currently attract, Government Departments must develop a more co-ordinated approach to strategic business support. The White Paper on competitiveness, which we await with bated breath, and the Committee stage of the Regional Development Agencies Bill give the Government opportunities to strip away the bureaucracy in the system. They could provide opportunities to end the scramble for inward investment and start to target resources on the areas of greatest potential for the long-term benefit of our economy. Simply targeting new jobs at areas with the longest dole queues does little for the country's long-term economic stability.

Inward investment must be a lever for developing skills, retraining and upskilling. Poor productivity results more from low skills than from lazy workers. Germany's high productivity owes far more to skills than to sweated assets. It is interesting that, throughout the 1980s and 1990s, the proportion of skilled and qualified technicians in the German work force has consistently been three times that in Britain.

This may be the last chance for any Government to bridge the skills gap in our industry and create a well-trained, flexible, highly skilled work force, which is attractive not only to overseas companies looking to invest but to successful British firms eager to expand. It is a chance that the Government must not be allowed to miss.

6.2 pm

Ms Diane Abbott (Hackney, North and Stoke Newington)

I am grateful to have the chance to take part in this important debate on the economy.

There has been a great deal of party political point scoring, but beyond these Benches is a real economy. My hon. Friends are right to say that, overall, the economy is not in recession, but there are sectors that are anxious about the future. People in the north-east, who saw the traditional smokestack industries, in which they were brought up to believe they would find work, collapse under them, did the right thing and retrained and reskilled. They went into high-tech industries, such as the new car industry in the north-east which was created by inward investment. That is now collapsing under them.

People in north Hackney, which has one of the highest unemployment rates in the south-east, are locked into structural unemployment. After 18 long years, they look to a Labour Government to implement the economic policies that will create a return to full employment. Only full employment will float my constituents back on to the job market.

The problem for Conservative Members in attacking the Government's economic policy is that so much of it is their own policy. In its survey of the British economy earlier this year, the Organisation for Economic Co-operation and Development remarked that the Government are largely following the market-orientated policies of the previous Government. That is why the Tories are twisting themselves into knots, making spurious claims and descending into their internal obsession with Europe.

I want to make a few brief points not about what is going wrong, but about issues that need to be considered if my constituents, who have waited for so long for a Labour Government to put them back to work, are to have their hopes for themselves and their children fulfilled.

I was surprised, last week, to hear my colleagues abusing the redoubtable Governor of the Bank of England, Eddie George, who is well able to look after himself. Eddie George's views on inflation were well known; his background and history were well known; the likelihood that, given control of monetary policy, he would subordinate to the City the interests of manufacturing in the north was well known; and the history of the Bank of England in relation to interest rate policy up to 1945 was well known. My hon. Friends are raising their hands in horror because Eddie George has expressed opinions that he was well known to hold when he was given control of monetary policy. Their criticisms might better be directed at those who gave him those powers.

My colleagues hailed the handing over of monetary policy to the Governor and the Monetary Policy Committee as the greatest political act since Moses parted the Red sea. They will know that I have consistently criticised that policy. One did not have to look into a crystal ball to know what would happen if one gave the Bank of England untrammelled control of monetary policy; one simply had to read the book. It was always the case that handing over monetary policy would have the deflationary effects that we are now witnessing.

To be fair, Liberal Democrat Members have been consistent on this matter, and have consistently pushed the policy today. However, it surprises me that my colleagues are criticising Eddie George for expressing views that it was well known he held when he was given those powers.

Sir Michael Spicer (West Worcestershire)

The hon. Lady is making an interesting speech and I do not want to interrupt her, but she has not dealt with the fact that the Bank of England is constrained not so much by the personality of the Governor or by the MPC, as by the laws that the Government have laid down for 2.5 per cent. inflation. That is what the hon. Lady should be attacking.

Ms Abbott

I shall come to that.

Far from being a great forward leap, the Government's early step to return monetary policy to the Bank of England was a reversion to the system that obtained until 1945. It has not been much remarked on in the House or the media, but part of the Government's problems with monetary policy is the way in which they implemented the handing over of the policy to the Bank. That was done not by an announcement on the Floor of the House, but by administrative diktat at a press conference outside the House.

As a member of the Labour party's national executive committee, I can tell the House that giving monetary policy to the Bank of England has never been party policy and was never specifically debated by the party at the NEC or any other level. I put it to colleagues on the Treasury Bench that, if the policy had been properly discussed inside the party and in the House before implementation, we might have arrived at a better framework for the Bank.

I am opposed in principle to giving the Monetary Policy Committee power over monetary policy, but if the Government had allowed a debate in the House before implementing the change, better legislation might have resulted. The Governor is constrained, which is why I am surprised that he is criticised by my colleagues. He is dealing with the narrow target of inflation rates, and he does not have to take into account jobs and growth.

One of the problems that arises from the lack of debate, in the party and in the House, on the change in monetary policy is that many people do not seem to understand it. I was against handing monetary policy to the Governor of the Bank of England because the decision is not reversible. It is absurd for colleagues to say, "Let's drop hints and put pressure on the Governor." The decision is not reversible, and it is quite wrong for the Government to attempt to put covert pressure on the Governor by way of Charlie Whelan's briefings to journalists. If I were the Governor of the Bank of England, I would be a little irritated by that. Either we have given the Bank genuine independence or we have not. According to colleagues on the Treasury Bench, Eddie George said that did not feel under pressure. However, that is not the same as saying that he was not subject to pressure—indirect and direct, implicit and explicit.

In due course, it might be possible for the House to reframe the legislation and the terms under which the Bank operates. However, a policy of spinning and leaking and covert pressure will make that much more difficult. It will also increase the price that we shall have to pay on the markets for refraining the policy.

My colleagues on the Treasury Bench have two or three soundbites about monetary policy that they repeat constantly as a substitute for expressing a view. The first is, "No return to boom and bust" and the second is, "We have taken the politics out of interest rates". Whether the Government like it or not, interest rates are a political matter in this country at this time. We cannot tell the public that the price that they must pay for their mortgages—people are likely to lose jobs because of climbing interest rates and an overvalued pound—is not political. Colleagues must not think that, by handing monetary policy to the Governor in the ill-advised manner that I have described, they will escape the political responsibility if monetary policy is seen to be going badly wrong.

I do not want to dwell on this topic, but many of my hon. Friends refer constantly to Germany. The circumstances are very different in Germany: the German people have fixed-rate mortgages and companies have long-term investments. The German political class has long been inured to the consequences of high interest rates in a way that politics in this country is not.

My colleagues on the Treasury Bench also frequently repeat the soundbite, "There is no trade-off between interest rates and employment." There is no absolute trade-off, but it is a fact that, in certain sectors of the economy—particularly manufacturing and sectors that export—and at certain points in the cycle, there is obviously a trade-off between rates of interest and job growth and prospects. If, as Ministers insist, there is no trade-off whatsoever, why do people set interest rates? Why do we not just program a computer to set them? I repeat: if, in nine months or a year, monetary policy is seen to have gone badly wrong, Ministers will not be able to escape their responsibility.

However, it is a done deal: we handed control of monetary policy to Eddie and his committee, and the consequences were totally predictable. However, the Government could have taken further action. They could have examined other aspects of macro-economic policy in order to offset the very obvious and predictable deflationary consequences of giving monetary policy to Threadneedle street. One of those aspects is fiscal policy.

When Liberal Democrat Members spoke earlier this evening, some of my colleagues said, sotto voce, "What are they saying? Are they saying that we should put up taxes?" Taxation, in itself, is morally neutral. We seem to have reached a position in the Labour party where taxation is viewed as an absolute evil. Taxation is simply another instrument of macro-economic management. The issue for the Government is not whether taxation is good or bad but whether taxation—

Jacqui Smith

Will my hon. Friend give way?

Ms Abbott

I am sorry, but I must make progress as the Economic Secretary wishes to respond in a few minutes.

The issue for the Government is not whether taxation is good or evil, but what is in the interests of the British people. There are times when taxation and fiscal policy are important. The Government could have used taxation policy to help bear down on inflation. Taxation is a key instrument for redistributing wealth. We do not hear that from Ministers any more, but I come from one of the poorest constituencies in the country and I assure them that redistribution of wealth is still dear to my heart. Taxation is also a very important instrument when it comes to raising revenue.

Hon. Members have talked about taking the big decisions about macro-economic policy. However, within weeks of attaining office, Labour handed over monetary policy to the Bank of England without bothering to debate the decision on the Floor of the House. The Government have adopted an attitude to fiscal policy that is not pragmatic or economic, but political and entirely doctrinaire. Taxation is an ill—the Mondeo owner in middle England will not wear it—so, regardless of the consequences for the economy or the problems inherent in trying to bear down on inflation using monetary policy alone, the Government will not consider using fiscal policy as an instrument. If there are three major instruments of macro-economic policy—monetary policy, fiscal policy and public expenditure—the Government have already ruled out two of them.

I turn, therefore, to the third major lever of macro-economic policy: public expenditure. What can we say about this Government and public expenditure? The Government boast that, overall, they will have tighter control on public expenditure than the Tories had. I served in the last Parliament and I remember how the right hon. and learned Member for Rushcliffe (Mr. Clarke) did not even believe in these public expenditure limits when he brought them before the House. Now I must sit behind Ministers who boast that they will have tighter public expenditure controls overall than the Tories.

The rise in expenditure to which Ministers refer—luckily, the Tories are also talking it up—is contingent on growth. I am sorry to say that many forecasts suggest that certainly the growth prospects to which the Chancellor referred at the beginning of the summer are now remote and that we may have less than 0.4 per cent. growth. Expenditure is contingent on growth but, apart from that, the Government have tighter controls than the Tories.

How do the Government respond when not just Labour voters, but electors around the country ask: from where will the investment in public services come? Ministers talk about the public finance initiative. I do not wish to examine that mechanism in detail, but I put it to the House that, although PFI sounds like some sort of magic wand, in truth, it is a glorified form of hire purchase. We shall face all sorts of problems regarding the long-term effects of PFI on public expenditure. PFI is fine when used to build a toll bridge, but it is a very dangerous and dubious instrument to use in the health service. If colleagues believe that PFI will get them out of their public expenditure fix, they are very much mistaken. I refer them to the many excellent reports produced on this subject by the Treasury Select Committee in the last Parliament.

There are many theories about why people voted in such huge numbers against the previous Conservative Government in May last year. However, few would deny that the public wanted to see more investment in the public sector; they wanted to see public sector standards rise. There is no question but that the Government have introduced a series of initiatives, held launches and conferences and conducted other consciousness-raising exercises concerning the public sector. I say to Treasury Ministers—I will have cause to return to this theme—that, if they want to raise standards in the health service, they will have to pay the nurses. The single most important thing for a person who is admitted to hospital is the quality of care that he or she is offered by nurses.

I read the Government's submission to the pay review body regarding the nurses, and every other sentence read, "We want an affordable settlement." In this context, I take it that an "affordable settlement" is a settlement on the low side—after all, the Government can afford what they wish to afford. The situation is the same with teachers and education. In those areas of the public sector, everything turns on the people who deliver the service. Ministers are deluding themselves if they believe that standards can be raised if there is no willingness to raise the basic rate of pay for some of these people.

It is no good talking about super-nurses. Ordinary people will be nursed by ordinary nurses, and those nurses should have decent pay. Which one of us in the House would want to teach in schools in the inner city, given the pressure that those teachers are under, their difficulties in finding accommodation, and the social problems that they must deal with among the children in their schools, and who can expect them to work for the salaries that they are offered?

There are three major levers of macro-economic policy: monetary policy we have handed to the Bank; fiscal policy we forswear; and our proud boast on public expenditure is that we are bearing down on it more heavily than the Tories did.

In the early months of this Administration, the Government have said a lot of things that the nation has waited a long time to hear. A tremendous responsibility rests on the Government's shoulders to fulfil the aspirations and life chances of people like my constituents in Hackney, but I put it to the Government that, within the broad framework of Tory macro-economic policy, it will not prove possible to fulfil the aspirations that we were elected in May 1997 to fulfil.

People may mock tonight, but I believe that, as this Administration wear on, and as we see the full nature of the slowdown that we are presented with, we shall return, as a party, to this subject. It is all very well to give people soundbites and to refer to the pledge card, but we know in our hearts what people expect of the Labour Government, not this week, next week or next year, but in the long term—and how can we fulfil those genuine hopes and aspirations within what is, as I speak, broadly a Tory macro-economic framework?

6.20 pm

Mr. John Swinney (North Tayside)

Mr. Deputy Speaker, thank you for the opportunity to speak in the debate.

Several Labour contributions to the debate showed complacency. However, the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) spoke about real, live economic conditions, such as those that are familiar to me from my constituency. I should have thought that, as this is the second week since Parliament reconvened after the recess, we might all be more aware of the realities of life in our constituencies, but the several Labour contributions that I have heard do not strike a chord with me when 1 consider the conditions that I found, and the experiences that I learned about, in my constituency during the summer.

I listened with care to what the hon. Member for Redditch (Jacqui Smith) said about productivity. She said that the value of sterling was a side issue to the issue of productivity and the challenge that it sets our economy. During the summer, in my constituency, I visited many highly productive and very effective companies which, although they demonstrated to me that they had made 30 to 35 per cent. productivity gains in their activities, were crippled in their export activities by the value of sterling. However much productivity improves, if the pound is valued above an acceptable trading level, it will create trading difficulties for companies in our constituencies.

This debate takes place at an appropriate time in the economic cycle, in the light of some of the information that has been traded across the Floor of the House about the difficulties that are faced. In addition, we are all aware of the succession of job loss announcements that were made during the summer, throughout the country. The Chancellor's announcement of a change in his growth target makes this debate very appropriate. Obviously, we await with anticipation the publication of the pre-Budget report next Tuesday, but I sympathise with the concern that was expressed in the House today at the Chancellor's absence from a major debate after the end of the summer recess.

The debate also takes place against the background of the European Commission's conclusion that the United Kingdom will have the slowest growth in the European Union area in 1999, and against the background of other survey information. I quote two surveys whose findings reached me in the past few days. The Bank of Scotland survey of Scottish businesses shows that, in August and September, output and employment fell in the manufacturing and service sectors in Scotland. It shows that the manufacturing decline in Scotland is in accord with the United Kingdom pattern, but that service sector activity has suffered a sharper slowdown in Scotland than in other parts of the United Kingdom. A Business Strategies survey of consumer confidence in Scotland has shown an index fall from 29 to 26 in the space of one quarter—the largest quarterly fall since 1992. In that consumer survey, confidence about employment was at its lowest for four years.

Since the general election in May 1997, nearly 9,000 jobs have been lost in companies in Scotland. During the summer, several high-profile announcements were made. Yesterday, there was a major demonstration—at which many hon. Members were present—in the borders town of Galashiels, in connection with the severe job losses that have affected several sectors there, such as textiles, agriculture and electronics.

The agricultural sector predominates in my rural constituency. One learns—from visits to markets, individual farmers or estates, from lobbying organisations and from council events held to represent the interests of the agricultural sector—that every aspect of the industry records difficult economic conditions. In the House, against the background of those difficult economic conditions, whether in the manufacturing sector, the service sector or the agricultural sector, we must guard against the complacency that was more than amply shown by what the Government said tonight.

That brings me to the influences on Government policy. It is no wonder if the ears of the Governor of the Bank of England are warm this afternoon, given the way that he was referred to in the House. Let me continue those references. The Governor has said that, to cope with over-heating in the south of England economy, it is necessary for a price to be paid in other parts of the United Kingdom. He told us—from Washington—that the Monetary Policy Committee had engineered a slowdown in the UK economy to dampen down inflation. Interest rates have been used as the device for controlling the unsustainable growth in the economy.

If we are to be grateful to the Governor of the Bank of England for one thing—or if I am to be grateful to him for one thing—it is for the fact that he has confirmed a suspicion that I and my party colleagues have long peddled in the House: that economic policies were pursued to address economic conditions in the south of England, and that, as a consequence, other parts of the United Kingdom where those economic conditions did not exist would pay a price that did not need to be paid.

In many respects—this is where I very much agree with the hon. Member for Hackney, North and Stoke Newington—the Government have absented themselves from setting an effective fiscal policy that could counterbalance the pursuit of that monetary policy by the Bank of England. The indications of what the Government are prepared to do, and what they were prepared to do when they came to office, to address any aspects of economic management have been compromised by the Government's unwillingness to address fiscal issues, and by their willingness to hand power to an independent Bank of England.

There is a contradiction in the arguments that have been advanced on that subject. We are constantly told that we cannot have monetary policy that is directed toward the economic conditions of different parts of the United Kingdom. I contend that there is no overheating in the Scottish economy, so we do not need interest rates to be at the present level. However, by dint of the Governor's admission that interest rates are used to address overheating in the south of England economy, we now know that one part of the United Kingdom is predominating in decisions on economic policy.

During the passage of the Bank of England Act 1997, an attempt was made, in this House and in the House of Lords, to secure broader representation on the Monetary Policy Committee to guarantee that opinions from different component parts of the United Kingdom could be brought to bear on the discussions of that committee. Those representations met Government refusal, but I noticed that, in the weekend press, a growing number of commentators on the Scottish economy were recognising that the case was continually becoming stronger for broader representation on the Monetary Policy Committee, to enable that committee to come up with a more representative set of actions in relation to economic conditions in various parts of the country. The difficulty will be the framework within which the Monetary Policy Committee operates.

Mr. Bercow

I am following the hon. Gentleman's argument with close interest. He objects to the fact that the Bank of England takes interest rate decisions without regard to the interests of particular parts of the United Kingdom. Given that that is his criticism, why are he and his party in favour of permanently giving power to set interest rates for the whole of Europe, and not for the interests of Scotland, to the European central bank?

Mr. Swinney

The answer is simple: so that we do not make the same mistake in the constitution of that project that has been made in the constitution of the Bank of England project. That will guarantee that interest rates set by a European central bank are based on a broader assessment of economic conditions than is the case in the United Kingdom.

It is essential that we establish a balance between monetary and fiscal policy, to create the trading conditions that are appropriate in different parts of the United Kingdom. From what the Government have done so far, and from what we have heard from the Government Benches this evening, there is no recognition of the existing economic conditions in our community.

At a time when we are clearly moving towards greater economic difficulties, the Government are reducing the resources available for economic development in the Scottish economy. Real cuts in the Scottish Enterprise budget over the next financial year will compound the cuts that were made in two successive years under the Conservatives. That instrument could assist in counterbalancing the dominating effect in UK monetary policy of the overheating of the economy in the south-east of England. By giving appropriate economic development assistance to parts of the United Kingdom that face challenges in their economic development, we could address some of those economic imbalances, but the Government have not been prepared to do that.

As the debate winds to a conclusion, I hope that we shall hear from the Government clear and definitive answers to some of the questions that have been left hanging. The Chancellor appeared on television a few weeks ago to tell us that, despite revising his growth targets, borrowing, taxes and spending would remain unchanged. One does not need to be a member of the Monetary Policy Committee of the Bank of England to work out that something has to give in all that. Like many other hon. Members, I was surprised to hear of the elastic margins of the financial settlement produced in the comprehensive spending review, in the previous Budget and in other documents.

The Government must give us an answer on what is going to give in the relationship between borrowing, taxes and spending. We need a balanced economic policy which reflects monetary and fiscal considerations. Most important of all, UK monetary policy should be designed to allow us to counter the present difficult global trading conditions, not to walk straight into them.

6.32 pm

Mr. Edward Davey (Kingston and Surbiton)

I begin by adding my welcome to the new Ministers on the Treasury Bench. We look forward to future debates with them. I hope that the former Education Minister turned guardian of the nation's purse will be as keen as we are that the spending review's settlement for schools is not just delivered in full, but is exceeded in the next three years.

I pay tribute to the former Member of Parliament for Wolverhampton, South-West, Mr. Nick Budgen, whose death was announced today. I know that he brought incisive intelligence and a dogged determination to debates on the economy. We on the Liberal Democrat Benches rarely agreed with him, but he certainly made a contribution.

Tonight's debate has been a long time coming. Over the summer recess it sometimes seemed that every day brought another shock to our nation's economy—job losses at home, storm clouds abroad and forecasts of worse to come. Now we have heard from the Chief Secretary and Labour Members that the picture is far rosier than has been made out.

During the debate, there has been the usual ping-pong of statistics across the Floor, quote and counter-quote, but no one has sought to argue with the fundamental point that the United Kingdom is fast decelerating. No one has challenged our basic premise that manufacturing and agriculture are in great difficulties. Indeed, the Chief Secretary acknowledged that. I cannot recall any hon. Member arguing this evening that the economic prospects, especially for industry, are anything less than serious, with a distinct possibility of a significant loss of manufacturing jobs over the next few months.

There has undoubtedly been disagreement over the causes of the downturn. As my hon. Friend the Member for Gordon (Mr. Bruce) predicted, the Minister tried to play the blame game. He said that it was not the Government's fault and he tried to blame the previous Government. He said that it was the fault of the right hon. and learned Member for Rushcliffe (Mr. Clarke). He blamed the crisis in the far east, and unproductive and inefficient businesses. However, as my hon. Friend the Member for Gordon pointed out, the facts do not bear out that story.

The mistakes made by the Chancellor, particularly those in his first Budget, are now all too apparent, with the economy unbalanced by a growing services sector and shrinking manufactures, caused by the misguided mix of monetary and fiscal policies in the Government's first 18 months.

The Chief Secretary's speech was full of good stuff. We could all agree with much of what he said, but he did not deal with the fundamental point. It is a pity that the Chancellor has not participated in the debate, to take this early opportunity provided for him by the Liberal Democrats to answer the rising criticism in the country.

In the Chancellor's absence, what has the Minister said in his defence? How do the Government try to argue that the current situation is nothing to do with them, and that all their policies have, despite evidence to the contrary, been successful? Unfortunately, they have used little more than the usual stale and unconvincing mantras, which we have heard in every debate since the election and in every "Today" programme interview.

Mr. Geraint Davies

Will the hon. Gentleman give way?

Mr. Davey

I want to make progress. I shall take interventions later.

The Chief Secretary said that the Government's policies were designed to end the cycle of boom and bust. In the parrot-like fashion to which we have become accustomed, he said that stability and prudence were the thing, for the long term. Those are good objectives. We all agree with them. Like motherhood and apple pie, even John Humphrys could not disagree with the sentiment. However, the continual incantation of such choruses does not put the words into action. That is the key part of our charge tonight.

The Government's oft-recited rhetoric of long-termism is not sufficiently followed in their practice of economic management. That is why the pound has been so unstable, real interest rates are so high and the economy is so unbalanced. Those are the results of bad economic judgments made in Downing street.

Unlike many hon. Members who have spoken tonight, we do not blame the Bank of England for the high interest rates. The Chancellor gave the Monetary Policy Committee little choice but to raise interest rates when he refused to use taxation to curb the consumer boom in his first Budget. As my right hon. Friend the Member for Yeovil (Mr. Ashdown) said in reply to the Chancellor back in July last year, instead of shackling businesses, the Chancellor should restrain the consumer in order to prevent high interest rates.

Of course Liberal Democrats support the independence of the Bank of England. That policy, borrowed from our manifesto, is essential. [Interruption.] Labour Members laugh, but the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) said so herself. That policy is essential to tackle the boom and bust that has been endemic in the British post-war economy. The problem is that the Chancellor has failed to understand his newly acquired policy. In his recent comments urging the case for reduced interest rates—

Mr. Plaskitt

rose—

Mr. Davey

No, I must press on.

However correct thatcase is, the Chancellor has done much to undermine the policy of independence for the Bank. As our motion states, it is important that the Chancellor resist such pressures and temptations.

The pressure that the Chancellor put on the MPC from the International Monetary Fund to cut rates was not the first time that he has meddled. In autumn 1997, Treasury sources were reported as saying that the Bank was not putting rates up fast enough—"Stick 'em up, Eddie, one season; drop 'em, Eddie, the next." That is not the stuff of long-termism.

Mr. Barry Gardiner (Brent, North)

Will the hon. Gentleman give way?

Mr. Davey

No. That is not the stuff of long-termism. It does not contribute to ending boom and bust. Why cannot the Chancellor practise what he preaches? This is not an academic point. Whatever the governor told the Treasury Select Committee last week, if the markets begin to perceive that the Bank does not have the independence that the Chancellor promised, its credibility will be hit.

Mr. Gardiner

Will the hon. Gentleman give way?

Mr. Davey

The low long-term rates that the Government rightly crow about could start to rise. The Government's meddling with the Bank's independence could have even worse effects. The Bank may feel the need to reassert itself to prove its independence. Short-term rates will fall more slowly than they would otherwise have done. There will be higher short-term rates and long-term rates merely because of the ill-discipline of the Chancellor and his Charlie on the mobile.

It is not only with the Bank's independence that the Government are failing to practise long-termism. Their lack of policy on exchange rates shows their complete failure to set a clear and stable lead. In less than three months—

Mr. Plaskitt

Will the hon. Gentleman give way?

Mr. Davey

I will not give way because I need to make some progress.

In less than three months, 11 of our partners in the European Union will grasp a new opportunity for prosperity—the euro. Our Government still have not made up their mind. Apparently the single currency is a good thing in principle—no doubt like central bank independence and manufacturing industry. However, in practice, the Government dither, dodge and duck.

We on the Liberal Democrat Benches are absolutely clear where the United Kingdom's long-term interest lies. That is where currency stability for hard-pressed manufacturers and farmers can be found and not in the let's-not-take-a-decision economics of the Labour party. Look at the gyrations of the pound over the past year. It is

Mr. Plaskitt

Will the hon. Gentleman give way?

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

Order. The hon. Member for Kingston and Surbiton (Mr. Davey) has made it clear that he will not give way.

Mr. Davey

Labour Members should consider the gyrations of the pound over the past year. It soared to DM3.10 to the pound before falling to a still rather high DM2.80. That is how unstable the Government's current policy is. The Chancellor's bungie jumping policy on sterling is a return to the Tories' boom-bust economics, not an end of them.

That brings me to the third part of the Government's macro-economic policy, which we are told has been set for the long term, for stability, but which Ministers look ready to fudge if the going gets tough. That is fiscal policy. It is our old friend prudence.

The problem is that prudence has been put in a straitjacket. Unwilling to admit that their election promise not to raise rates of direct taxation was irresponsible, the Government have tied their hands behind their backs. That is why the economy is now so unbalanced. It is the result of the Government's disavowal of a proactive role for fiscal policy. That is something that the occupants of the Government Front Bench share with the Tories. In a world where Governments struggle against global economics it is pure madness to deny oneself weapons such as direct taxation.

When Liberal Democrats argued for an independent Bank, we did not say that the Government should give up all responsibility for macro-economic management. Fiscal policy has to support monetary policy. In some situations—classically in that of an unbalanced economy, where services and manufacturing are growing at different rates—fiscal policy can be used far more effectively than monetary policy. That is why we argued when considering the Budget of July 1997 that taxation should have been increased.

Mr. Bercow

By how much?

Mr. Davey

We said at the time and it is on record.

A Chancellor truly concerned with the long term would be prepared to take the political flak for raising personal taxation, when needed.

The Government are culpable in this economic situation because their actions have not met their words. They are meddling with the Bank, when they said that it should be free. They are dithering over the exchange rate, which they say in principle should be joined to the euro. Worst of all, they are unwilling to use the weapon of fiscal policy, making their target a starting rate for income tax of 10p in the pound.

In the minutes that remain, I shall move on to a key, issue that has been raised by Ministers before and during the debate—the productivity performance of British manufacturing industry. This is relevant because Ministers are saying that poor productivity is a cause of our problems. Why this should suddenly be the case is not clear, but that is the ministerial charge. The Government are right to be concerned about the productivity gap. However, I hope that Ministers will examine the charge made by some people, who believe that the productivity performance of British industry is much better than the official statistics suggest. This is crucial because it bears directly on the interest rate decisions of the Monetary Policy Committee. Productivity figures are relevant because they tell us about the inflationary implications of wage rises of 4 and 5 per cent. It is possible for firms to meet such wage demands without a knock-on effect if healthy productivity increases accompany those wage rises.

Yet we are told by the Office for National Statistics that wage increases in recent years have been accompanied by very low increases in manufacturing productivity, seeming to add new cost-push pressures to inflation. We are told that worries about wage inflation have been a major factor in the decisions of the MPC to keep interest rates high. However, I wonder whether Ministers have seen a recent paper produced by two academics, Paul Robson and Neil Blake, in the "August Economic Outlook" of the London business school. The paper questions the reliability of the official statistics for manufacturing productivity. It argues that the dramatic slowdown recorded in these figures since 1994 has not actually happened. Using other evidence, the two academics to whom I have referred find that productivity could have risen by as much as 4 per cent. per annum rather than the tiny 0.7 per cent. in the official data. That is a dramatic difference.

Coupled with the Government's concerns about the reliability of the statistics on average earnings growth—concerns that prompted the Chancellor to launch an inquiry into that dataset—it is quite possible that the MPC has been making decisions not only in the dark but with the wrong information. If average earnings are growing more slowly than the data have been telling us and if manufacturing productivity has been much higher than we previously believed, the danger of inflation has been completely overstated. Against that background, interest rates should be moving to lower levels, converging with European levels. This analysis backs up our long-held view that the problem in today's economy is not manufacturing but an overheated service sector and that interest rates and an over-valued pound are exactly the wrong policies to be applying.

I hope that the Chief Secretary will, as he promised in his earlier remarks, reflect on the argument that I have outlined. It is fairly fundamental. The right hon. Gentleman said that he would do so. If the data of the Office for National Statistics have significantly affected policy making, as they appear from the minutes of the MPC to have done, it is the Government's responsibility to act fast.

The motion calls for some significant changes in economic policy. It sets out how to operate a truly independent Bank and refers to exchange rate and fiscal policies. All our policies are consistent with what the Government claim they want to introduce—a long-term approach to macro-economic management and a more stable economy. With manufacturing jobs being lost in their hundreds of thousands and with farming on its knees, it is time that the Government listened to our arguments and acted. Liberal Democrats provide the Government this evening with the opportunity to act and they should take it.

6.47 pm

The Economic Secretary to the Treasury (Ms Patricia Hewitt)

I thank the hon. Member for Gordon (Mr. Bruce) and his colleagues for initiating the debate and for the welcome that they gave to my right hon. Friend the Chief Secretary and to me. It has been a pleasure for me, as the new Economic Secretary, to listen to the debate. It has been a particular pleasure to hear so many thoughtful and well-informed contributions from my hon. Friends. I say with some regret that we heard very little by way of policies from the Liberal Democrats, and even less from Conservative Members by way of answers to the questions which remain on what their policies really are.

The right hon. Member for Wells (Mr. Heathcoat-Amory) spoke of the golden legacy which the Government have supposedly inherited from the previous Administration. He suggested that we needed only to continue what the previous Administration were doing. That would mean continuing to let inflation get out of control and excessive borrowing. Indeed, borrowing in the public sector reached £50 billion in the early 1990s. If we continued with what the Conservative Government were doing, it would mean continuing to fail to invest in education and health. It would mean also continuing with one in five of working-age households having nobody in work. It would mean continuing to ignore the productivity gap between us and our competitors.

My hon. Friend the Member for Shipley (Mr. Leslie) rightly stressed in his very fine contribution that the official Opposition were once again talking down the British economy. He stressed that we need to recognise the successes that, despite the difficult conditions that we face in the rest of the world, we are still achieving at home. The output figures published last Friday—those are real figures, not surveys or predictions—show that output in the third quarter of this year rose by 0.5 per cent. on the previous quarter, and by 2.5 per cent. on the previous year.

Mr. Nick Gibb (Bognor Regis and Littlehampton)

I thank the Minister for giving way, as it gives me an opportunity to congratulate her on her appointment. What growth figure do the Government forecast for 1999?

Ms Hewitt

I thank the hon. Gentleman and in turn congratulate him on his promotion to the Opposition Front Bench. As my right hon. Friend the Chief Secretary said at the beginning of the debate, and as the hon. Gentleman well knows, our revised forecast for growth and for the public sector will be published in the normal way in the pre-Budget report next week.

The hon. Member for Chichester (Mr. Tyrie) spent some time pointing out, and rightly so, that there was a black hole in Liberal Democrat policy, although he fell into the hole himself in respect of Conservative policy on EMU. He tried to argue that the Government's monetary and fiscal policies were working against each other. Mervyn King, Deputy Governor of the Bank of England, said at the Bank's press conference on the August inflation report that the idea that in some sense fiscal policy is being wildly expansionary I think is completely off the mark. Fiscal policy is absolutely in line with the golden rule and on a stable, sustainable path. The hon. Gentleman also suggested that our public spending plans were unsustainable. Let me stress, as the Chief Secretary did, that, unlike our predecessors, this Government have consistently taken a prudent and cautious approach to managing the public finances.

Mr. Ruffley

Will hon. Lady explain why the Prime Minister said in April 1997 that he would reduce welfare spending, when the Government are now increasing it?

Ms Hewitt

The Prime Minister said then and on many other occasions that we would reduce the bills on failure and invest in the conditions for success. That is precisely what we are doing. We said, as a result of the comprehensive spending review, that we would invest an additional £40 billion over the next three years in health and education, and we shall do so. We are able to do so, despite the difficult conditions that we face in the world economy, because we took a more cautious view of the trend rate of growth in the economy and tested our public spending and investment plans against the risk that there might be lower growth than we were then forecasting. We built in margins to cover uncertainties, so we shall stick to the £40 billion investment.

Mr. Gibb

Will the Economic Secretary spell out to the House precisely what those margins are?

Ms Hewitt

I have just done so. We built into our forecasts a lower rate of trend growth in the economy than the Conservative Government did.

Mr. Gibb

Read the document.

Ms Hewitt

The hon. Gentleman will see it there.

Mr. Loughton

How much by?

Ms Hewitt

By 0.25 per cent. We also tested our public sector spending plans against the possibility of lower than expected growth. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) will have to wait for detailed figures, which will appear in next week's pre Budget report.

Mr. Loughton

Will the hon. Lady give way?

Ms Hewitt

I have already given way several times—[Interruption.]

Mr. Deputy Speaker

Order. We cannot have the hon. Member for Buckingham (Mr. Bercow) interrupting all the time. He must calm himself.

Ms Hewitt

We shall stick to our £40 billion of planned additional spending on health and education, which the hon. Member for Bognor Regis and Littlehampton and other Conservative Members do not want us to spend. We favour additional spending on health and education, whereas Conservatives are against it. That is one of the biggest differences between us and the modern Conservative party—[Interruption.]

Mr. Deputy Speaker

Order. The hon. Member for Bury St. Edmunds (Mr. Ruffley) must behave himself.

Ms Hewitt

Thank you, Mr. Deputy Speaker.

Mr. Tyrie

The hon. Lady mentioned me in her speech. Can she explain what those margins are? For example, what percentage of each spending total are they, and how are they built into each part of departmental budgets? Such margins are a novelty in the history of public accounts, as they are not separately identified in the general reserve, which the Government halved.

Ms Hewitt

I have already dealt with that point twice.

My hon. Friend the Member for Redditch (Jacqui Smith) spoke for manufacturing industry in her constituency and the rest of the country. She made an extremely important point about the need to raise the level of training and skills. She said that employers in her constituency are, like some in my constituency, finding it impossible to recruit people with the required skills. She will welcome, as I have, the Government's investment in the new deal, a programme that not only has individual learning accounts but establishes a university for industry. We shall hear more about productivity and improving skills and training in next week's pre-Budget report.

The hon. Member for Eastleigh (Mr. Chidgey) was rightly concerned about the health of manufacturing industry after 18 years of Conservative Government. The real disaster for manufacturers in his constituency and throughout the country would be a return to the Conservative policies that gave us interest rates of 15 per cent. and a devastating loss of jobs in manufacturing industry.

My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) made a particularly robust contribution to the debate. She seemed to conclude that there was no difference between the present Government and the previous Administration. Let me remind her and the House of some of the differences. By giving the Bank of England operational independence we have achieved the lowest long-term interest rates for 35 years. We have brought down corporation tax to the lowest rate for 30 years. We shall introduce a minimum wage to protect millions of the lowest paid people. We have introduced the new deal for young and long-term unemployed people, lone parents and people with disabilities. Moreover, we shall make work pay, particularly with the introduction of the working families tax credit.

The hon. Member for North Tayside (Mr. Swinney) was concerned about the impact of economic policies on the Scottish economy. I remind him that, in the year to the third quarter of 1998, employment in Scotland increased by 13,000 and unemployment fell by 26,000, and employment in Scotland has risen by 52,000 since the general election. Thanks to the work done, particularly by Locate in Scotland and the Scottish Office, we have helped to attract to Scotland 87 inward investment projects involving planned investment of more than £1 billion and we expect the creation or safeguarding of nearly 18,000 jobs. Those measures will be as welcome to the hon. Gentleman and his colleagues as they are to me and mine.

The hon. Member for Kingston and Surbiton (Mr.Davey) appeared unable to say whether we had given too much or too little independence to the Bank of England. He repeated a concern raised by other hon. Members that my right hon. Friend the Chancellor had somehow put undue pressure on the Bank of England. Just a week or so ago, the Governor of the Bank of England said: It is… entirely legitimate for the Treasury, the Chancellor, to make plain what their perception of the future of the economy is, and indeed rather proper that they should, when they see a significant change of this kind, so I have absolutely no complaints about that". As I hope the hon. Gentleman would agree, an independent central bank is the best way to ensure the long-term credibility of this country's monetary policy.

The hon. Member for Kingston and Surbiton referred to the arcane dispute about productivity between the London business school and the Office for National Statistics, but what he failed to say about that interesting article from the London business school was that it accepts that the revised figures—the revised methodology—produce more accurate and reliable estimates of level of output and of employment in the economy.

Mr. Malcolm Bruce

Will the Minister acknowledge that the true problem facing manufacturing industry is real interest rates of 5 per cent. compared with 2 per cent. in Europe and an exchange rate that is higher than that achieved in the previous recession? When will the Government address those issues?

Ms Hewitt

The exchange rate against the deutschmark is now back where it was when we were elected last year; long-term interest rates are the lowest they have been for 35 years; and the problem that manufacturing industry needs to address, and which we are helping it to tackle, is the productivity gap between us and our competitors.

We inherited from the previous Government an economy that was heading for another Conservative boom and bust. We have taken the tough decisions necessary to get the economy on a long-term, stable course. Thanks to the tough decisions that we have made, especially on public finances, we are able to invest an additional £40 billion over the next three years in education and in health.

Of course the United Kingdom is not immune to what is going on in the rest of the world economy. We will announce next week our own predictions for growth; that will still be growth in line with other forecasts for next year. We have put in effect measures to strengthen the economy for the long term—the new deal, the minimum wage and cuts in corporation tax.

We are making the decisions that are needed for the long-term strength of the economy and to make provisions that will enable everyone in the community to fulfil his or her potential. That is why the United Kingdom economy is steering a course of stability in an increasingly unstable world. I commend the amendment in the Prime Minister's name to my hon. Friends and to the House.

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

The House divided: Ayes 43, Noes 330.

Division No. 365]	[7.1 pm
AYES
Allan, Richard	Davey, Edward (Kingston)
Ashdown, Rt Hon Paddy	Ewing, Mrs Margaret
Baker, Norman	Fearn, Ronnie
Ballard, Jackie	Foster, Don (Bath)
Beith, Rt Hon A J	Hancock, Mike
Brake, Tom	Harris, Dr Evan
Brand, Dr Peter	Heath, David (Somerton & Frome)
Breed, Colin	Hughes, Simon (Southwark N)
Bruce, Malcolm (Gordon)	Jones, Nigel (Cheltenham)
Burnett, John	Keetch, Paul
Burstow, Paul	Kennedy, Charles (Ross Skye)
Cable, Dr Vincent	Kirkwood, Archy
Campbell, Menzies (NE Fife)	Livsey, Richard
Chidgey, David	Maclennan, Rt Hon Robert
Cotter, Brian	Michie, Mrs Ray (Argyll & Bute)
Dafis, Cynog	Moore, Michael

Oaten, Mark	Tonge, Dr Jenny
Öpik, Lembit	Tyler, Paul
Rendel David	Webb, Steve
	Willis, Phil
Russell, Bob (Colchester)
Smith, Sir Robert (WAb'd'ns)	Tellers for the Ayes:
Swinney, John	Mr. Andrew Stunell and
Taylor, Matthew (Truro)	Mr. Adrian Sanders.

NOES
Abbott, Ms Diane	Cook, Frank (Stockton N)
Ainger, Nick	Cooper, Yvette
Ainsworth, Robert (Cov'try NE)	Corbett, Robin
Alexander, Douglas	Corbyn, Jeremy
Allen, Graham	Cousins, Jim
Anderson, Janet (Rossendale)	Crausby, David
Armstrong, Ms Hilary	Cryer, Mrs Ann (Keighley)
Ashton, Joe	Cryer, John (Hornchurch)
Atkins, Charlotte	Cummings, John
Austin, John	Cunliffe, Lawrence
Banks, Tony	Cunningham, Rt Hon Dr Jack (Copeland)
Barnes, Harry
Battle, John	Cunningham, Jim (Cov'try S)
Bayley, Hugh	Darling, Rt Hon Alistair
Beard, Nigel	Darvill, Keith
Beckett, Rt Hon Mrs Margaret	Davey, Valerie (Bristol W)
Begg, Miss Anne	Davidson, Ian
Bell, Martin (Tatton)	Davies, Rt Hon Denzil (Llanelli)
Bell, Stuart (Middlesbrough)	Davies, Geraint (Croydon C)
Benn, Rt Hon Tony	Davis, Terry (B'ham Hodge H)
Benton, Joe	Dawson, Hilton
Bermingham, Gerald	Dean, Mrs Janet
Berry, Roger	Denham, John
Best, Harold	Dismore, Andrew
Blair, Rt Hon Tony	Dobbin, Jim
Blears, Ms Hazel	Donohoe, Brian H
Blizzard, Bob	Doran, Frank
Blunkett, Rt Hon David	Dowd, Jim
Bradley, Keith (Withington)	Drew, David
Bradley, Peter (The Wrekin)	Drown, Ms Julia
Bradshaw, Ben	Eagle, Angela (Wallasey)
Brinton, Mrs Helen	Eagle, Maria (L'pool Garston)
Brown, Rt Hon Gordon (Dunfermline E)	Edwards, Huw
	Efford, Clive
Brown, Rt Hon Nick (Newcastle E)	Ennis, Jeff
Buck, Ms Karen	Field, Rt Hon Frank
Burden, Richard	Fitzpatrick, Jim
Burgon, Colin	Fitzsimons, Lorna
Butler, Mrs Christine	Flint, Caroline
Byers, Rt Hon Stephen	Follett, Barbara
Caborn, Richard	Foster, Rt Hon Derek
Campbell, Alan (Tynemouth)	Foster, Michael Jabez (Hastings)
Campbell, Mrs Anne (C'bridge)	Foster, Michael J (Worcester)
Campbell, Ronnie (Blyth V)	Foulkes, George
Campbell-Savours, Dale	Galloway, George
Canavan, Dennis	Gapes, Mike
Cann, Jamie	Gardiner, Barry
Caplin, Ivor	George, Bruce (Walsall S)
Casale, Roger	Gerrard, Neil
Chapman, Ben (Wirral S)	Gibson, Dr Ian
Chisholm, Malcolm	Gilroy, Mrs Linda
Clapham, Michael	Godsiff, Roger
Clark, Rt Hon Dr David (S Shields)	Goggins, Paul
Clark, Dr Lynda (Edinburgh Pentlands)	Golding, Mrs Llin
	Gordon, Mrs Eileen
Clark, Paul (Gillingham)	Griffiths, Jane (Reading E)
Clarke, Eric (Midlothian)	Griffiths, Nigel (Edinburgh S)
Clarke, Rt Hon Tom (Coatbridge)	Griffiths, Win (Bridgend)
Clarke, Tony (Northampton S)	Grocott, Bruce
Clelland, David	Grogan, John
Clwyd, Ann	Gunnell, John
Coaker, Vernon	Hain, Peter
Coffey, Ms Ann	Hall, Mike (Weaver Vale)
Cohen, Harry	Hall, Patrick (Bedford)
Coleman, Iain	Hamilton, Fabian (Leeds NE)
Colman, Tony	Hanson, David

Heal, Mrs Sylvia	Mallaber, Judy
Healey, John	Marsden, Gordon (Blackpool S)
Henderson, Doug (Newcastle N)	Marsden, Paul (Shrewsbury)
Henderson, Ivan (Harwich)	Marshall, Jim (Leicester S)
Hepburn, Stephen	Marshall-Andrews, Robert
Heppell, John	Martlew, Eric
Hesford, Stephen	Maxton, John
Hewitt, Ms Patricia	Meacher, Rt Hon Michael
Hill, Keith	Meale, Alan
Hinchliffe, David	Merron, Gillian
Hodge, Ms Margaret	Michael, Alun
Hood, Jimmy	Michie, Bill (Shef'ld Heeley)
Hope, Phil	Milburn, Alan
Hopkins, Kelvin	Miller, Andrew
Howarth, Alan (Newport E)	Mitchell, Austin
Howarth, George (Knowsley N)	Moffatt, Laura
Howells, Dr Kim	Moonie, Dr Lewis
Hoyle, Lindsay	Moran, Ms Margaret
Hughes, Ms Beverley (Stretford)	Morgan, Rhodri (Cardiff W)
Hughes, Kevin (Doncaster N)	Morris, Ms Estelle (B'ham Yardley)
Humble, Mrs Joan	Mountford, Kali
Hurst, Alan	Mudie, George
Hutton, John	Mullin, Chris
Iddon, Dr Brian	Murphy, Denis (Wansbeck)
Illsley, Eric	Naysmith, Dr Doug
Jackson, Helen (Hillsborough)	Norris, Dan
Jenkins, Brian	O'Brien, Bill (Normanton)
Johnson, Alan (Hull W& Hessle)	O'Brien, Mike (N Warks)
Johnson, Miss Melanie (Welwyn Hatfield)	O'Hara, Eddie
	Olner, Bill
Jones, Barry (Alyn & Deeside)	O'Neill, Martin
Jones, Mrs Fiona (Newark)	Osborne, Ms Sandra
Jones, Helen (Warrington N)	Palmer, Dr Nick
Jones, Ms Jenny (Wolverh'ton SW)	Pearson, Ian
	Pendry, Tom
Jones, Jon Owen (Cardiff C)	Perham, Ms Linda
Jones, Dr Lynne (Selly Oak)	Pickthall, Colin
Jowell, Ms Tessa	Pike, Peter L
Kaufman, Rt Hon Gerald	Plaskitt, James
Keeble, Ms Sally	Pollard, Kerry
Keen, Alan (Feltham & Heston)	Pope, Greg
Kelly, Ms Ruth	Pound, Stephen
Kennedy, Jane (Wavertree)	Powell, Sir Raymond
Khabra, Piara S	Prentice, Ms Bridget (Lewisham E)
Kidney, David	Prentice, Gordon (Pendle)
Kilfoyle, Peter	Prescott, Rt Hon John
King, Ms Oona (Bethnal Green)	Primarolo, Dawn
Kingham, Ms Tess	Prosser, Gwyn
Ladyman, Dr Stephen	Purchase, Ken
Laxton, Bob	Quinn, Lawrie
Leslie, Christopher	Radice, Giles
Levitt, Tom	Rammell, Bill
Lewis, Ivan (Bury S)	Rapson, Syd
Lewis, Terry (Worsley)	Raynsford, Nick
Linton, Martin	Reid, Rt Hon Dr John (Hamilton N)
Livingstone, Ken	Robertson, Rt Hon George (Hamilton S)
Lock, David
Love, Andrew	Robinson, Geoffrey (Cov'try NW)
McAllion, John	Roche, Mrs Barbara
McAvoy, Thomas	Rogers, Allan
McCartney, Ian (Makerfield)	Rooker, Jeff
McDonagh, Siobhain	Rooney, Terry
Macdonald, Calum	Ross, Ernie (Dundee W)
McDonnell, John	Roy, Frank
McGuire, Mrs Anne	Ruane, Chris
McIsaac, Shona	Ruddock, Ms Joan
Mackinlay, Andrew
McNulty, Tony
MacShane, Denis
Mactaggart, Fiona
McWalter, Tony
Mahon, Mrs Alice

Russell, Ms Christine (Chester)	Temple-Morris, Peter
Ryan, Ms Joan	Thomas, Gareth R (Harrow W)
Salter, Martin	Timms, Stephen
Savidge, Malcolm	Tipping, Paddy
Sawford, Phil	Todd, Mark
Sedgemore, Brian	Touhig, Don
Shaw, Jonathan	Trickett, Jon
Sheldon, Rt Hon Robert	Truswell, Paul
Shipley, Ms Debra	Turner, Dennis (Wolverh'ton SE)
Short, Rt Hon Clare	Turner, Dr Desmond (Kemptown)
Singh, Marsha	Turner, Dr George (NW Norfolk)
Skinner, Dennis	Twigg, Derek (Halton)
Smith, Angela (Basildon)	Twigg, Stephen (Enfield)
Smith, Miss Geraldine (Morecambe & Lunesdale)	Vaz, Keith
	Vis, Dr Rudi
Smith, Jacqui (Redditch)	Walley, Ms Joan
Smith, John (Glamorgan)	Wareing, Robert N
Smith, Llew (Blaenau Gwent)	Watts, David
Soley, Clive	White, Brian
Southworth, Ms Helen	Whitehead, Dr Alan
Spellar, John	Wicks, Malcolm
Squire, Ms Rachel	Williams, Rt Hon Alan (Swansea W)
Starkey, Dr Phyllis
	Williams, Alan W (E Carmarthen)
Steinberg, Gerry	Winnick, David
Stevenson, George	Winterton, Ms Rosie (Doncaster C)
Stewart, Ian (Eccles)	Wise, Audrey
Stinchcombe, Paul	Wood, Mike
Stoate, Dr Howard	Woolas, Phil
Straw, Rt Hon Jack	Worthington, Tony
Stringer, Graham	Wray, James
Stuart, Ms Gisela	Wright, Anthony D (Gt Yarmouth)
Sutcliffe, Gerry	Wyatt, Derek
Taylor, Rt Hon Mrs Ann (Dewsbury)
	Tellers for the Noes:
Taylor, Ms Dari (Stockton S)	Mr. Clive Betts and
Taylor, David (NW Leics)	Mr. David Jamieson.

Question accordingly negatived.

Question, That the proposed words be there added, put forthwith, pursuant to the Order [this day], and agreed to.

MR. DEPUTY SPEAKERforthwith declared the main Question, as amended, to be agreed to.

Resolved, That this House notes that the Government inherited an economy in which public sector net borrowing was £28 billion, inflation was set to rise sharply above target because of the failure of the previous Government to take the necessary action on interest rates; recalls that the previous Government presided over a boom and bust economy where interest rates reached 15 per cent. and inflation reached 10 per cent., doubled the national debt in the 1990s, worsened inequality and failed to tackle the weaknesses in the British economy; commends the actions of this Government which is steering a course of stability in an uncertain and unstable world, has established a credible framework for monetary policy that has led to the lowest long-term interest rates in 35 years, and inflation hitting its 2.5 per cent. target, and has taken tough action to cut government borrowing by £20 billion; and welcomes the increase in employment of 400,000 since the election, the launch of the New Deal, reform of the tax and benefit system to tackle unemployment and poverty traps, support for British business through cuts in corporation tax and small business tax to their lowest levels ever, and the extra investment of £40 billion in education and health over the next three years.