§ 5. Dr. Vincent Cable (Twickenham)
What estimate his Department has made of the level of UK exports if the pound-euro exchange rate fell 10 per cent.; and if he will make a statement.
§ The Economic Secretary to the Treasury (Ruth Kelly)
The specific effects of exchange rate changes depend on the particular causes of each change. The Government appreciate the difficulties that the slowdown in the world economy and weakness of the euro have posed. However, as set out in the Budget forecast, stronger external demand and the anticipated pick-up in world trade should provide a significant boost to United Kingdom export growth, which is projected to increase markedly from the second half of this year and to rise by between 7.75 and 8.25 per cent. next year.
§ Dr. Cable
Does the Minister acknowledge that the Treasury's model shows that a 10 per cent. change in the exchange rate is the equivalent of 50,000 or 60,000 jobs in tourism alone? Does she agree with the assessment of the president of the German Bundesbank, who was in London last week, that the pound is over-valued and will have to be devalued before Britain can join the European monetary union? Do the Government's five tests allow for an appropriate exchange rate, and if so, how?
§ Ruth Kelly
I am surprised at the hon. Gentleman's question. He knows full well that the Government are committed to Britain's national economic interest and will take a decision on the euro only if it is in our national economic interest to do so. We have clearly set out our approach to the five economic tests, and it will be rigorous and thorough. We are certainly not about to embark on a running commentary on the progress that is being made.
§ Mr. Peter Pike (Burnley)
Does my hon. Friend recognise that in a constituency such as Burnley, where 36 per cent. of jobs are in manufacturing industry, there are concerns about the value of the pound against the euro? Manufacturing industry has to fix the price of its goods—and sell them—in euros and believes that it is important to join the euro as soon as possible. That would reduce instability and provide security and jobs, although obviously we need to join at the right rate and meet the economic tests.
§ Ruth Kelly
I am glad that my hon. Friend recognises the importance of the five economic tests and that any decision on the euro will be taken in the best interests of Britain's national economy. Of course we are concerned about businesses and, in particular, manufacturing in my hon. Friend's constituency, which is similar to my own in many respects. That is why we are the party that is taking action to support manufacturing; why we are cutting corporation tax; and why we have made permanent 40 per cent. first year capital allowances for plant and machinery for small and medium-sized enterprises. It is also why we have reformed capital gains tax to ensure that this country is the best in the world for entrepreneurship and enterprise. The Budget went further by implementing research and development investment tax credits, and it will provide a platform for growth on which businesses can thrive.
§ Sir Peter Tapsell (Louth and Horncastle)
May I point out to the hon. Lady that the five economic tests do not include an examination of the exchange rate, which is what the question is about? What is the reaction of her Treasury colleagues and her former colleagues in the Bank of England to the fact that economists at home and 267 abroad almost unanimously argue that before Britain can practically think of joining the single European currency, the pound sterling will have to be devalued by between 20 and 30 per cent?
§ Ruth Kelly
I have already explained that the assessment of the five economic tests will be thorough and rigorous and will include all relevant economic considerations, including the durability and sustainability of economic convergence. The best way to achieve a stable and competitive exchange rate, to which we are, of course, committed, is to have a framework for monetary policy that removes the political control of setting interest rates and gives it to the Monetary Policy Committee at the Bank of England. It also needs a fiscal framework that keeps debt under control, something that the Conservatives manifestly failed to do during their years in power.
§ Mr. Kelvin Hopkins (Luton, North)
Does my hon. Friend accept that not just the pound but the dollar is overvalued? I am sure that she is aware of speculation in the past week that both the pound and dollar are not only over-valued but likely to depreciate significantly in the coming months and perhaps for the next year or two. Does she agree that that would put enormous pressure on an already deflated eurozone economy, probably force nations in the eurozone to break through the boundaries of the growth and stability pact, and force a fundamental rethink of economic policy in the eurozone?
§ Ruth Kelly
I thank my hon. Friend for pointing out something that we recognise: some difficulties experienced by manufacturers are caused by the weakness of the euro. In fact, sterling has depreciated against the dollar since 1997. We are committed to a stable economic framework in this country and I have set out the policies that we have put in place to ensure that we have one. As a result, the number of people in employment has increased by 1.5 million since 1997, we have the lowest inflation rate since the 1960s, and the lowest interest rates since 1964. I am sure that my hon. Friend agrees that we have a platform for sustained economic growth.
§ Adam Price (East Carmarthen and Dinefwr)
In addition to the president of the Bundesbank, two members of the Monetary Policy Committee, Christopher Allsopp and Sushil Wadhwani, have recently said that the pound is overvalued and that devaluation is necessary. They say that that could work and need not be as disruptive as the Treasury fears. If the Government are unprepared or unwilling to act, perhaps they will consider doing with the exchange rate what they did with interest rates by giving the policy to the Bank of England so that we can get the exchange rate that we need.
§ Ruth Kelly
What we do not want to do is return to the days of artificially manipulated exchange rate depreciations. We saw what happened when that policy was attempted in the past, and saw the results of policies that led to boom and bust in the 1980s. We are determined to create a platform of macro-economic stability in this 268 country and have introduced policies to make that programme work. We are committed to maintaining a framework that does just that.
§ Mr. Derek Foster (Bishop Auckland)
Does my hon. Friend accept that a fall in the value of the pound against the euro would give an enormous boost to manufacturers in the north-east, which is striving to achieve the Government's target of full employment in every region? Does she agree that a fall in the value of the pound is essential if we are ever to join the single currency?
§ Ruth Kelly
I think that my right hon. Friend will agree that the best thing that we can do for manufacturers is to have economic stability in this country. Once we have a platform of economic stability we can build on it by promoting competition, productivity and enterprise. That is why the Budget set out measures to support manufacturing and introduced a generous volume-based research and development tax credit for large companies, building on work that has already been done to support small companies. That is also why the Budget included exemptions for capital gains on substantial shareholdings in trading companies; why we have increased funding for regional development agencies so that they can act as drivers for growth and productivity throughout the regions; and why we are determined to tackle gaps in the market for finance by setting up regional venture capital funds across the country. Those are the conditions that manufacturers need to thrive and grow but, most important of all, we must avoid a return to the days of boom and bust that manufacturers had to endure for a long time under the Conservatives.
§ Sir Michael Spicer (West Worcestershire)
In view of what the Minister has just said about manufacturing, why has the rate of productivity been falling ever since Labour took office?
§ Ruth Kelly
Perhaps the hon. Gentleman would accept that in a period of rising employment—I have already pointed out to the House that the employment figure has risen by 1.5 million since 1997—there may be a cyclical variation in productivity growth. In the longer term, measures that we have put in place will increase productivity growth. I point out to him that the only year in which productivity fell in this country was when his party was in power.
§ Mr. Ian Davidson (Glasgow, Pollok)
Does the Minister accept that an artificial devaluation of the pound would make imports more expensive and thus be inflationary? Does she accept that the real problem is the fact that the euro has collapsed in value, and that that is hardly a sign of success? Does she agree that if we wish to avoid returning to boom and bust, we cannot have any artificially manipulated devaluation?
§ Ruth Kelly
I thank my hon. Friend for his comments. Economic stability must underpin all the action that we take on the economy. If we get the platform of stability right, we can take the measures essential to help enterprise and build a climate of competition and productivity growth in Britain. That is what we are doing.