§ 3.42 p.m.
§ The MINISTER of STATE, TREASURY (Lord Cockfield)
My Lords, with the leave of the House I shall now repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement reads as follows:
"With permission, Mr. Speaker, I wish to make a Statement about exchange control.
"In my Budget Statement on 12th June I announced our intention progressively to dismantle these controls. I made a number of relaxations at that time; and again on 18th July, when I informed the House of the first major move towards liberalising outward portfolio investment.
"I have now decided to remove all the remaining exchange control restrictions from midnight tonight, apart from those still needed, I hope not for long, in relation to Rhodesia.
"With that single exception, there will from tomorrow be full freedom to buy, retain and use foreign currency for travel, gifts and loans to non-residents, buying property overseas and investment in all foreign currency securities. Portfolio investment will be wholly freed; and the requirement to deposit foreign currency securities with an Authorised Depositary is abolished. Foreign currency accounts can be held here or abroad. Passport marking for travel funds can now be abolished. The necessary Treasury orders are being laid this afternoon.
"The removal of controls will lead to public expenditure savings of about £14.5 million a year, which represents the current cost of about 750 staff at present employed on exchange control work at the Bank of England and about 25 at the Treasury. I would like to thank all those who have had the task of administering the controls—not only in the Treasury, the Bank of England and Customs and Excise, but also those in the private sector, whose co-operation has enabled the system to work.
27 "Under arrangements announced in this House in 1971, exchange control has been used to prevent United Kingdom tax incentives supporting the leasing abroad of foreign equipment. I propose to introduce in the 1980 Finance Bill provisions, which will take effect from tomorrow, to continue to prevent this. Further details on this matter are available in the Vote Office."
Perhaps I might add in parenthesis that they are available in the Printed Paper Office as well. The Statement continues:
"From tomorrow, we shall be meeting in full our Community obligations on the freedom of capital movements.
"Exchange controls have been with us in one form or another for just over 40 years. They have now outlived their usefulness. The essential condition for maintaining confidence in our currency is a Government determined to maintain the right monetary and fiscal policies. This we shall do."
That is the end of the Statement.
Lord BRUCE of DONINGTON
My Lords, the House will be grateful to the noble Lord, Lord Cockfield, for repeating the Statement. I personally am grateful for the short notice which I had of the Statement, and for the provision of a copy of it. Detailed comment examining all its economic, political and social implications will probably have to be made on a later occasion.
I am astonished at the Government's sense of priorities in making a Statement of this nature. The Government have made their decision within the context of rising unemployment; the highest inflation rate in Europe; a shortage in industrial finance of some £2.38 billion, according to today's Financial Times; the Financial Times index going down by noon today a further 3.3 points to a new figure of 463.4; and a declining market for gilts. That is the context within which the Government Statement is made. No real reason is given for the steps being taken, apart from the somewhat derisory, although significant, amount of £14.5 million that will be saved on some 775 staff—750 at the Bank of England and 25, we are given to understand, at the 28 Treasury. It works out on average, as your Lordships will note, at some £20,000 per annum each. The other reason given is, of course, that it brings us within the Community obligations. We are most grateful for the additional indication of the Government's fidelity to a Community spirit, especially at a time when some countries, particularly France, seem bent on avoiding every regulation that is put forward within the EEC. One comes to the final reason: the controls have outlived their usefulness. Time alone will show whether or not they have outlived their usefulness. Sometimes when a gesture of this kind is made and controls are freed, for the first two or three days it is perhaps interpreted in the outside world as meaning that the Government have supreme confidence, and even the rate of exchange might go up. It is when the outflow occurs that the trouble will begin.
I want to ask the noble Lord some questions, which I hope he will be able to answer. What outflow of funds do the Government envisage as a result of this abolition of controls? What concept have they formed as to how much of the outflow will go into personal and other property investment abroad?—particularly at a time when we are suffering from severe accommodation shortages in the United Kingdom. How much outflow will go into industries abroad, particularly in countries such as Korea and Brazil, which are setting up industries on the basis of being able to employ labour at one-eighth of the cost of labour in the United Kingdom, and of re-exporting products to the United Kingdom in competition with our own industries? How big a dagger is being thrust at the heart of some of Britain's industries? What impact does the noble Lord, or his right honourable friend the Chancellor of the Exchequer, think this will have on the rate of inflation?
It may well be that part of the intention—one does not know because no reason is given—is slightly to ease the position of sterling against the dollar and against other European currencies. If that is so, this of course will increase the cost of imports into the United Kingdom. One thing we can conclude from this extraordinary announcement is that it rules out the possibility of any decline in the 29 minimum lending rate for the next foreseeable period. I hope that noble Lords opposite and their supporters in another place will be busily telling that to small businesses in the United Kingdom. The result is that it will leave the United Kingdom highly vulnerable.
This is not the abolition of one or two controls; this is the abolition of a whole system of controls that has been built up over 40 years for the protection of sterling. Are the Government so sure that over the next year, or perhaps even less, they will be in such firm circumstances that they will not need to exercise exchange control again? If they do find that necessary, will the noble Lord give some indication as to how they propose to proceed in those unfortunate circumstances?
§ Baroness SEEAR
My Lords, I, too, should like to thank the Minister for the Statement that he has made this afternoon and I welcome it. We believe that controls have been excessive and that this is a very desirable step in the direction of free movement of capital which is long overdue and which honours our EEC commitments. However, I would ask the Minister what the anticipated effect will be on the exchange rate of sterling, and in what way, if any, the dollar premium will be affected by the introduction of this change.
§ 3.54 p.m.
§ Lord COCKFIELD
My Lords, the noble Lord, Lord Bruce of Donington, referred to this Statement as having been made against a background of rising unemployment, a high rate of inflation and pressures on company liquidity. This is, of course, the price that we are having to pay for five years of Labour Government and if, therefore, what my right honourable friend the Chancellor of the Exchequer has announced this afternoon represents a complete break from the policies which were followed by the previous Administration—which led to the disastrous results which the noble Lord, Lord Bruce of Donington, has outlined—I should have thought that that was the strongest possible argument in support of what we are now doing.
These controls have long outlived their usefulness. They impose considerable burdens on industry and 30 on private individuals. There is no reason to suppose that they assist the national economy in any way. Our belief is that it is important that we should get growth back again into the national economy, and this represents an important and desirable step in that direction. The noble Lord specifically asked what outflow was expected as a result of the abolition of control. Very simply, the answer is that there will be flows across the exchanges in both directions; there will be flows in as well as flows out. At this stage nobody can say precisely what the net effect will be, but we do not expect it to he very great.
We have proceeded in this matter with caution and responsibility. There were two earlier major relaxations which have brought no untoward effects, and we believe that the third one will be taken by the British economy with benefit. The noble Lord also asked what would be the effect on the rate of inflation. He did not seem to be able to make up his mind whether it was a good thing for the rate of exchange to go up or for it to go down. We do not think that in itself this measure will have a great effect on the rate of exchange, which depends upon much more important and fundamental factors, particularly the creation of a sense of confidence in British industry and in the British economy generally, which lies at the heart of our policy.
I greatly appreciate what was said by the noble Baroness, Lady Seear, when she welcomed this move towards freedom. On this matter our views are much the same as those of the party which she represents. The noble Baroness asked specifically what the anticipated effect on the exchange rate would be. I can only say that this depends upon the size of the flows across the exchanges. There may be some immediate effect one way or the other—we cannot say which way—but we believe that in the long run the rate of exchange depends upon the strength of the British economy, and that is what we propose restoring.
§ Lord PLANT
My Lords, the noble Lord has said that this will benefit the British economy. As the action which the Government propose will stifle investment in Britain, will he please explain that statement?
§ Lord COCKFIELD
My Lords, there is no reason whatever to suppose that this measure will stifle investment in the British economy. Investment in the British economy depends as much as anything on the prospects for the British economy, and particularly the prospects for profits. We are doing everything we can to restore confidence in the British economy. All the evidence of the past is that direct investment overseas by British companies, and, indeed, by British individuals, has tended in the long run to benefit the British economy by creating greater export opportunities.
§ Lord HANKEY
My Lords, will the Minister reply to the interesting point raised by my noble friend Lady Seear as to whether this will affect the investment premium? Will that continue?
§ Lord COCKFIELD
My Lords, I must apologise for not having answered that point. I was endeavouring to make a large number of notes, and unfortunately I did not reply to it. The investment dollar premium market is a private market for which the Government have no responsibility at all. It is difficult to believe that in the absence of exchange control such a market will continue.