§ 7.18 p.m.
§ Lord JACQUES
My Lords, may I first join in the tribute to the late Lord Cowley, and in the messages of sympathy which have been sent to his wife and family.
My Lords, I beg to move that this Bill be now read a second time. It is a short Bill of five clauses. Its purpose is to enable the "United Kingdom" to join with 23 other nations in the formation of a Financial Support Fund of the Organisation for Economic Co-operation and Development—commonly known as the OECD. There is some urgency in regard to this Bill, because the Fund does not commence to operate until countries representing 90 per cent. of the quotas have deposited their instruments of ratification. Therefore, we have an obligation to our partners to proceed with reasonable haste. Also, it is in our interests to do so. Our country is committed and indeed to some extent is dependent upon international trade. Since the purpose of this Fund is to foster international trade it is also in our interests to ratify the Agreement as soon as possible.
The massive increases in oil prices in the autumn of 1973 and the summer of 1974 gave rise to considerable financial difficulties throughout the world. The consuming countries were unable to adapt 1302 their economies quickly enough to the changed circumstances and in consequence they had massive deficits in their overseas accounts. On the other hand, the producing countries had only a limited capacity for taking the imports which their newly found wealth enabled them to buy. Consequently they had massive surpluses and there was a grave danger that these surpluses would be invested in a way which did not correspond with the pattern of deficiencies. There was, therefore, the great possibility of financial markets throughout the world being threatened. There was the even greater possibility that individual countries which, through no fault of their own, found themselves in financial difficulties would seek to take unilateral action in order to correct their own balance of payments. Usually it is action which restrains trade, deepens the depression and delays recovery. It was to prevent that from happening that the Agreement with which the Bill is concerned was made.
Many proposals have been made for what is now commonly known as recycling the petrodollars, and this is one of them. However, this proposal has its own characteristics. First of all, before any member of the Fund can make a claim for assistance he must show that he is encountering serious external financial difficulties. Secondly, it must be shown that the country has made the fullest use of reserves and other forms of credit. Therefore, it is quite clear that this is regarded as the safety net.
This is not a Fund in the sense in which we usually use the term. It is not a permanent institution with its own resources. It is intended only that money will be raised to meet applications and the money raised will be unlent immediately. Consequently, there is no question whatever of a floating debt. The size of the Fund is measured by its potential for raising money and unlending it. Each of the countries which is a member of the Fund is allotted agreed quotas which indicate, first, the measure of the risk which is being undertaken by each country. Secondly, they indicate the voting strength which each country will have in making decisions. Thirdly, they give a rough guide as to the amount which a country can expect to be able to draw if it is in difficulties. The total of the 1303 Fund is 20 billion Special Drawing Rights, which is equal to 24 billion United States dollars. The United Kingdom's share is 1,600 million Special Drawing Rights, or 8 per cent. of the total of the quotas. Therefore, we have a percentage of the risk and a percentage of the voting power. Also, it is a guide to what we could expect if we needed to apply for assistance.
When a country makes an application to this Fund for assistance, it has to prove not only that it is encountering serious external financial difficulties but that it has made the fullest use of its reserves and other forms of credit. Also, it has to prove that it is following economic policies which are consistent with the objectives of the Fund. The object of the Fund is to avoid the need for countries to take unilateral action which would restrain trade. Consequently, a country which was taking unilateral action that would restrain trade is unlikely to receive a great deal of sympathy from the governing committee of the Fund.
Loans will be granted for a maximum period of 7 years and will be subject to the economic policy conditions to he agreed between the governing committee of the Fund and the applicant. Before any member of the Fund could obtain his full quota he would have to obtain two-thirds of the weighted voting strength of those members of the Fund who were voting. Our quota is 1,600 million Special Drawing Rights, which at the present rate of exchange is £917 million, and if we made an application for the total amount two-thirds of the votes would have to be in favour of granting it. Before any country can obtain twice its quota, 90 per cent. of the votes must be in favour of granting it; and before it can obtain more than twice, 100 per cent. of the votes must be in favour.
When an application is received the governing committee can decide to call upon the members who have a choice of two options in deciding how they will proceed to deal with the call. First of all, they can make available the money or credit. If we did that it would be a charge to the National Loan Fund, and any capital repayments and interest on the loan would go to the credit of that Fund. This is provided for in Clause 2 of the Bill. Alternatively, we need not 1304 contribute at all; we may be content to allow the money to be raised elsewhere by the governing committee and then we would simply guarantee the amount. Therefore, we have an option. Either we can provide the money or just be guarantors. If, of course, we guaranteed and had a loss it would have to be charged to revenue, not to capital account, and. therefore, it would be a charge to the Consolidated Fund. That is dealt with in Clause 3. A further alternative is that when it receives an application the governing committee of the Fund need not go to the members of the Fund for either contributions or guarantees. If it wishes, it can raise the money elsewhere on the collective guarantee of the members of the Fund.
If it did that our share of the liability would be 8 per cent. because our quota is 8 per cent. of the total. In practice, any loss that we are likely to make because of our guarantees will probably be negligible, for any default by a member of the Fund will probably be technical in the sense that the member was unable to find the necessary resources at the due date but found them afterwards. Therefore, any liability arising out of this Fund is likely to be temporary. The usual privileges and immunities are granted under the Agreement. In particular, there is tax relief to non-residents on securities issued by the Fund. This is dealt with in Clause 4.
In conclusion, the creation of this Fund is evidence of the willingness of developed countries to act in concert to overcome the effects of the oil crisis, and that we welcome. The provisions for the supply of credit may appear to be complicated but that is because an attempt has been made to make them flexible, so that the members of the Fund can adopt the methods which are most suited to their financial position and their legal procedures. So far as the United Kingdom is concerned, our first commitment is gradually to reduce and eliminate our external deficit, because while we have it we have to finance it. We have many different ways in which it can be financed. We welcome this facility, but we do not expect to have to use it in the near future. It is intended as a safety net and we intend to treat it as such. I beg to move that the Bill be now read a second time.
§ Moved, That the Bill be now read 2a.—(Lord Jacques.)
§ 7.31 p.m.
The Earl of GOWRIE
My Lords, it is by custom rather than constitutional provision that your Lordships' House debates but neither amends nor delays Money Bills. Until the last few months it had never occurred to me to question this sensible national habit, but I must say that the Government's record of economic management makes me question our wisdom a little, it being so much worse even—and I stress the word "even"—than the previous Conservative Government's record, and so much worse even than the record of Mr. Wilson's previous Administration. In my view, there is probably more economic expertise and skill and practical experience in your Lordships' House than in another place, even if it is not much on parade today. I feel so pessimistic about the chances of any kind of national recovery under this Administration—even short-term recovery—that I rather wish we could block Money Bills, precipitate a constitutional crisis and force a General Election. But I acknowledge that for the time being this is wishful and indeed somewhat Antipodean thinking.
Consider, as an instance of the fearful cul-de-sac in which the Government are holed up, the present Bill. It is a perfectly sensible Bill and the noble Lord, Lord Jacques, introduced it in his usually clear and sensible way. Normally one would welcome it—or not exactly welcome it since the circumstances that engendered it, the OPEC cartel, the rising oil prices of 400 per cent.—are not exactly convivial topics. But one could at least have said that it was entirely sensible for the OECD countries to club together to set up a Fund to help each other finance the massive balance of payments deficits resulting from the oil producers' limited capacity to absorb imports from us, the oil importing industrial economies.
This legislation before us is the result of the desire of the United Kingdom to become a principal likely beneficiary of the Fund, since we are all too easily capable of demonstrating to the governing committee of the Fund that we are, under the qualifying rubric stated by the noble Lord, Lord Jacques, encountering serious internal financial difficulties. Un- 1306 for the Gvernment we are also, under the same qualifying rubric, required to demonstrate that we are making the fullest use of our reserves and other forms of credit.
One of the first things that your bank manager requires of you, when you apply to him for a loan because you are in trouble rather than because you have a bright or expansionist idea, is that you should state your intentions and chances of avoiding the same kind of trouble in the future. Yet we now know that, despite all the firmly-stated intentions to reduce public expenditure which the Chancellor of the Exchequer has been making, plainly he will do very little of the kind. Let us look briefly at the figures. The annual public expenditure review is to be completed next week and the White Paper is due in January. We understand that cuts of £3,000 million are proposed for the next two or three years, but in the present year we have exceeded last year's forecast by nearly £2,000 million, excluding the interest on that extra £2,000 million, so that in fact after interest it is of course a lot more.
At the start of this financial year the public expenditure of 1976–77 is expected to be £4,000 million lower than previously, but we have the roller effect, the effect of accumulated interest and the compound interest and we have extra expenditure projects such as the Chrysler crisis, and the like. To put it mildly, it also seems to me to be unlikely that at a time of sharply rising unemployment the Chancellor will be able, or will wish, to raise income tax.
Only yesterday, in an article in the Sunday Times, the Chancellor wrote, mentioning the social wage, that if we raise public expenditure in the short-term at the expense of productive investment we shall destroy our chances of improving public services in the future. I contend that we already have destroyed those chances, and for very many years to come. So the governing committee of the OECD Support Fund is faced with the British Government hurrying through this legislation in order to qualify for help, stating their intention of reducing their public borrowing requirements, but effectively doing the reverse the lesson of Chryslers is that we can only increase I our public borrowing requirements—by 1307 how must we shall probably learn tomorrow.
My honourable friend Mr. David Howell has calculated in another place that our existing outstanding amount of foreign currency loans to the public sector—I am talking not about general public borrowing but only foreign currency loans—is in the region of £9,500 million. The annual interest on this figure cannot be far under £1,000 million—or a modern billion—in each year, so that in addition to the OECD Support Fund entitlement—the Bill we are discussing today—we owe money to the IMF General Account, the IMF oil facility, the US Federal Reserve and the EEC joint borrowing scheme.
Of course I acknowledge that we shall have to borrow—or rather to continue borrowing—for a very long time to come but as we know from the recent history of the aerospace, shipbuilding and motor car industries there is a distinction between borrowing to get back on one's feet and borrowing to stave off reality just a little bit longer. The Government, like Mr. Micawber, are hoping for something to turn up and they think they know what it is—North Sea oil. But as the OPEC experience has warned us, this is next to useless unless a common energy policy and minimum price levels can be agreed. Yet the whole posture and behaviour of the Foreign Secretary recently has put this into jeopardy and raised the deepest and, I should think, justifiable suspicions among the very nations whose Support Fund we are now scrabbling to utilise. My Lords, one need not kow-tow to one's bank manager, but there is no reason to spit in his face.
My Lords, a final contradiction. It seems likely that on Wednesday the Government will introduce selective import controls. Certainly there are widespread rumours to this effect. It also seems likely that these will satisfy the TUC very little, some of whose leaders are urging a siege economy. What on earth good would a siege economy do to British Leyland or to the jobs it generates? What good would it do to Chrysler, whose continued existence in this country as a creator of goods and work depends entirely, as the Department of Industry acknowledges, on co-operation from the company's European subsidiaries?
1308 The noble Lord, Lord Jacques, said that the governing committee of the Fund would look with distaste at a Government who took unilateral action directed at disturbing the balance of world trade. I agree with him, but do the Government realise that if they introduce import controls on Wednesday these would be totally incompatible with the principles of the Fund whose legislative effects we are debating? In my opinion, it would be a far better thing for the country and for the House if we refused to give this Bill a Second Reading, at least until Thursday. I have to say I regret that our conventions preclude us from doing so.
§ Lord JACQUES
My Lords, the noble Earl, Lord Gowrie, has been very selective in the evidence he used. If I were going to the bank manager, I would point out that the first thing this country has to do is to bring down the rate of inflation, and that there are strong signs that the Government have taken effective action. The latest figures show that for the first time in more than three years the monthly rate has fallen three months in succession—I repeat, for the first time in three years. I would remind the noble Earl that this Government have not yet been in Office for two years.
My Lords, I would also point out that in the last six months the average increase in the Retail Price Index has been just over 1 per cent. bringing the inflation rate down, on an annual basis, to something around 15 per cent. That indicates that the action recently taken by the Government, with the co-operation of both sides of industry, has been effective. That is the most important thing to do. The noble Earl criticised the public expenditure of the Government, but he did not spell out the alternative. The alternative would be massive unemployment.
§ On Question, Bill read 2a; Committee negatived.