HL Deb 11 June 1980 vol 410 cc439-47

3.6 p.m.

Lord LEVER of MANCHESTER rose to call attention to Her Majesty's Government's monetary policies and their damaging effect on trade, investment and employment; and to move for Papers. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. I do not, I hope, in moving this Motion lay myself open to any charge of attempting to bring monetary and economic problems of a complex and often academic kind into the ambit of adversary politics in which claptrap vies with claptrap in order to win popular support.

I start with a frank admission that I do not have any complete answer to the problems which face the nation economically. I do not believe that anybody has. I believe that a great deal of the damage from which we are now suffering is the Government's monetary policies derive from the unjustified belief that there are permanent mechanical solutions for the problems such as inflation. I wish to focus my comments today on two aspects of the Government's monetary policy: namely, interest rates and the level of the parity of the pound. The manifest evils and injuries that have resulted from the Government's pursuit of high interest rates and the Government's permitting of an unsustainable and undesirable level of parity for the pound need no elaboration from me. Indeed, my Party's complaints have been drowned by the overwhelming chorus of disapproval and anguish from all sides of industry: from bankers, like the chairman of Barclays; grave warnings, on the level almost of panic, about the parity rate from the vice-chairman of ICI. It is perfectly plain without detailed elaboration that on the face of it these policies are resulting in grave economic injury, probably injury which will have a long-lasting consequence.

I am not alleging that the Government have deliberately inflicted these injuries on the nation. I do not doubt their good intentions, nor should they doubt the anguish which their good intentions are causing to most of the industry of this country. I daresay that the torturers of the Spanish Inquisition were motivated by a sense of the ultimate and enduring advantages that would accrue to their victims when they were burned alive! Something on a lesser scale of confident torment is resulting from the Government's policies.

Why did the Government get into this position? There is a central error at the heart of all Government thinking. They have focused on one problem and on one remedy. One problem: inflation. One remedy: the monetary means for controlling it. They have adopted in some sort of blurred way the thinking of the monetary school of economics to combat inflation and thereby put us on the high road to prosperity! Monetarists, in fairness, when they address themselves to inflation, do not claim that they are judging any other problems or solving any other problems. They are not addressing themselves to the political consequences of their remedy; they are acting in a seminar and presenting a perfectly logical if, to me, unconvincing case for the inevitable uprooting of inflation in an economy.

But, of course, Governments cannot take this academic view. They cannot restrict themselves to one problem, namely, inflation, and ignore all others—employment, export competitiveness, the industrial competitiveness of our nation and so on—all those other great problems of economics and politics which face the Government. Any Government that focuses so centrally on one problem and one solution is bound to get into the kind of trouble and cause the kind of damage that we now observe. Governments should not regard themselves as professors of experimental monetary economics. The more any Minister sees himself in that role the more he disables his capacity to discharge the rounder obligations of policy judgment which fall upon Ministers. I have seen great ability in Ministers seriously damaged by this mistaken assumption of a semi-professorial monetarist role.

It must be against common sense to allow employment, investment and even solvency in our industries to be imperilled without at least a clear and well-documented strategy being offered to us; and we have not had this. All we have had are some vague monetarist allusions, mainly concentrated on one or two specific statistics and their supposed association with inflation.

Take the figures of M3: the very way in which the targets are set—and I have to confess that the target-setting habit did not begin with this Government on the monetary aggregates (I am not making a party point) and neither did the high interest rates, I am sorry to have to say. But this setting of targets, at least under my Government, although I cannot say I approve of target-setting under any government, was restrained by some continuing sense of practicality. It was not altogether let loose in an obsessive contemplation in a semi-theological way of the monetary aggregates. But under his Government it seems to be untrammelled. The Government fix a target in monetary terms and not in real terms.

I wonder whether the Government, when they fixed their target on M3, really intended an outturn such as we have had: namely, in real terms over the year there has been a minus growth in M3 of 11 per cent. In the past six months there has been a minus growth—that is to say, it has retracted by 14 per cent.; and in the past three months it has been retracting at the annual rise rate of 18 per cent. That is another way of describing a savage monetary over-kill resulting from the Government fixing and adhering with religious precision to monetary targets expressed in cash in a world in which the real impact of that is not known to those fixing the targets. Still less is it within their control, because of course the real impact of a monetary target depends on the actual outturn of events. This Government have committed themselves to be on continously bad terms with reality. They intend to ignore the outturn of events. These are the central criticisms that I make of the Government's policy.

The Chancellor of the Exchequer claims that he is sowing the seeds of future prosperity. I know the answer and I have no doubt there will be some talented speakers in the debate who will elaborate it. It is a very simple one—almost a simpliste one: inflation is the great danger. We must either cure it or pretend to be able to cure or to know how to cure it, or believe that we know how to, whether or not we can. We must cure it as a pre-condition for prosperity. How long that will take or when the prosperity is going to emerge is left rather cloudily unindicated in the future. That is the theme but it really will not do as an answer to the kind of difficulties of the interest rates and on the parity with which our country is labouring at the present time. We are really entitled to have some substantial adumbration of the Government's strategy and policy.

I turn as briefly as I can more specifically to industry. The Government's reasons for maintaining the present extraordinary level of interest rates are that they are required in order to sell gilts, to curb bank landing and in general to advantage us with a sober money supply. I have to declare that the present rates were not required at anything like these levels in the past; and let me add for the comfort of those who think I am being excessively partisan that I do not believe they were justified under my own Government. Far from sowing the seeds of prosperity, these interest rates are not a cure for inflation but rather the engine of it.

This is fairly simply demonstrated. First of all, the Government issue long stock at high interest rates for 20 or more years ahead. Why, if they believe that this policy guarantees, or even makes extremely probable, a reduction in inflation, do they commit the Government to pay interest rates which are only explicable on the basis of continued high inflation and indeed only tolerable on the basis that they will not have to be maintained in real terms? No Government can pay in real terms over 20 odd years a real interest rate remotely resembling 14, 15, and 16 per cent. to the kind of rates that have been offered. The Government are thereby certifying, quite rightly in my view, an inner lack of confidence in their own likely achievement in the light of these misguided policies.

Secondly, these high rates of interest ruin investment prospects and hence damage seriously the future competitiveness of our industry. I need not elaborate on that, because every day a different industrialist repeats this warning to the Government. The Government, immersed in a semi-religious blanket of self-approval, are deaf to all these protests. High interest rates, far from being anti-inflationary, if sustained add to inflation by increasing the cost of production, because interest forms an ingredient of the cost of production, especially in exports which are even more prejudiced than our domestic production. They are inflationary because they add to the rent, or what is in effect the rent, namely, the mortgage interest of the owner-occupier houses in this country. That is hardly a blow in favour of restraint, discipline and the reduction of inflation. These high interest rates wreck the prospects in many cases to the point of ruin of business, and especially of small business, throughout the economy. They bear particularly hardly upon small businesses.

Finally, what staggers me is that, after this semi-theological devotion to keeping the PSBR within balance, an absurd and almost obsessive attachment to the outturn of these figures, nobody seems to have noticed that the high interest rates are themselves a major contributor to inflating the public sector borrowing requirement.

In money terms, as recently as 1974/75 interest payments by the Government reflected a negligible part of the public sector borrowing requirement. Not so now, when it amounts currently to something approaching £3½ billion per year, and is rising. That is a fine contribution to reducing the public sector borrowing requirement. If we add to that the cost of the unemployed, directly caused by pricing our products out of the export and home markets and pricing out investment by the high interest rates, you find that a great segment of the public sector borrowing requirement derives from the Government's own policies. So in the supposed sacred interest of fighting inflation and keeping down the public sector borrowing requirement, we have inflated it greatly.

On interest rates alone—I make no mention of the figures of unemployment, which are horrific in their cost to the public sector borrowing requirement and to the economy—in real terms, the cost has trebled in five years. Inflation used to be defined as too much money chasing too few goods. The Government seem to have assaulted the amount of money that is around, but simultaneously they have assaulted the amount of goods that are going to be around, so we have rather less money chasing rather fewer goods—not a promising prospect.

I shall ask two specific questions of the Minister and I hope that he will give specific and clear answers. First, do half the population have to have their rents, their mortgage interest, yo-yoed up and down, because we must curb bank lending? Is there not a better and more direct way of doing this? Is it seriously to be defended that every owner-occupier has to have his mortgage interest sharply "upped", because somebody is thought to be borrowing too much from the bank? Secondly, I hope that the Minister will explain to me why a Government which believes it is en route for bringing down inflation with a sure-fire monetarist remedy, pays 14, 15 and 16 per cent. on long term?

On the interest rate, I finally say this. True monetarists do not manipulate interest rates. This Government denies that it manipulates interest rates, but of course it clearly does. There are three positions on interest rates; there is the monetarist position in which interest rate finds its own level—it is called the residual—in the other activities of the Government and of the economy. My own position, which is largely the position of most middle-of-the-road economists who have not been intoxicated with particular monetary aggregates, is that monetary aggregates ought to be watched. Monetary instruments are a useful adjunct to other policies in helping to curb inflation, but interest rate should be managed by the Government within the limits which are feasible because of international and other pressures.

The Government's position is to pretend that they are not managing the interest rates, but actually to manage them. This pretence is so transparent that it hardly needs more than a minute to expound it. The Government have, in fact, declared explicitly that they are not going to get interest rates down until bank lending comes down. How do they know, unless they are controlling it, and who controls the minimum lending rate if not the Government? Or perhaps it is not the Government but merely the Bank of England; but I must treat that as an arm of Government. So I find it very difficult to justify the intellectual position which the Government have taken up on the matter of interest rates.

Finally, I want very briefly to say a word on the exchange rate. The Government here—with, alas! more credibility—claim that they are leaving the exchange rate to market forces. But it happens that market forces here are very damaging in their consequences to our parity, from the point of view of our exports and protecting us against an excessive in-rush of imports. I have no time to elaborate on this subject—I might find an occasion at some future date, when I may elaborate on this area—but at the present time we are living in a period when there is no satisfactory international money system and when a greater degree of anarchy prevails in the movement of large sums of money.

So far as the currencies of the OPEC nations are concerned, a minor percentage change in the portfolio holding can completely disrupt the parity of a currency such as sterling. To give a quick word, the official estimate of OPEC's current account surplus is something in the region of £120 billion. I think that it is running at about £150 or £160 billion. It is quite obvious that if even 10 per cent. of that is thrown on to the market in search of sterling, then sterling will go up and it will go into the hands of people who are indifferent either to the consequences to us of the change of rate, or even to the consequences, marginally, to themselves. They are not concerned about whether the pound goes up or down. They are buying the pound for political reasons, as part of the diversification of their portfolio, to protect themselves against every political contingency.

We are a country which can least afford to allow our currency to be jerked up out of a realistic range, because we are a country which has fallen behind in the technological race in recent years. We cannot afford to let our currency go bouncing up and down in this manner. Moreover, it is fraught with very serious danger, which I have no time to elaborate. What we are witnessing is a pretty vast outflow of funds for permanent investment from this country, and it is more than matched by an inflow of funds, nearly all of which are very temporarily anchored in this country. It is fairly obvious that a disturbing situation will arise, when the temporary attractions of interest rates and political factors lead to that temporary money being dragged out at a time when very large sums, which are not returnable to this country, have gone out.

I therefore urge upon the Government to intervene in the parity. I cannot, within my available time-space, explain that it is possible for the Government to mop up this inflow of money without causing inflation in the country. The most successful market economy Governments, Germany, Switzerland and Japan—and I do not want any lectures on the market economy and its Governments from people who, for the most part, have never taken any part in the market economy—have intervened to prevent their currencies from going up too fast or going down too fast. They have done so copiously and, as the noble Lord, Lord Kaldor, has pointed out, they have been very indifferent to their money supply when they have done so. We must do something of the kind.

In short, I am asking the Government to abandon the Utopian fantasies of monetarist correction of our evils which seem to be motivating them. They have so far resulted in savage overkill of a deflationary kind. I do not believe that the Government intend deflation; I do not believe at all that the Government intend to create unemployment. But that is what is happening, and it will get worse unless the Government start to take into account the realities of our economic and political situation on a broader basis than monetarist professors might think it right to do.

I feel that one of the most worrying parts of this situation is that, in their obsession with inflation, this Government have forgotten all the lessons of pre-war, when we did not have inflation but, Heaven knows! we had enough disastrous troubles caused by deflation and unemployment. It was deflation and unemployment that led to the miseries and the villainies of Nazi Germany and the Second World War, not—however uncomfortable—inflation. I have a feeling—and I have to say this without wishing to be unduly hostile—that there is a kind of spiritual arrogance that will have to be corrected if this Government are to come off this dangerous, destructive monetarist path on which they have set their feet, because implied in it is not merely the rejection of the Utopian fantasies of the Left or the Right but the rejection of all the more thoughtful, subtle, reflective people in their own ranks.

This Government must learn that they cannot sail forward, propelled only by little gusts of self-approval from a minority in the Cabinet. They have to learn that they have to carry the country with them. They have certainly got to carry with them the hearts and minds of their own people, and they have not done that. I dare not think what the old and the more sophisticated hands in the Tory Party are thinking when they watch the repudiation of everything that was created and which took into account the lessons of the evils of pre-war. What would the Harold Macmillans, the Ian Macleods and the Rab Butlers have said to a policy so monomanically concentrated on an academic monetary thesis such as this? I beg the Government to retract before it is too late from the doctrinal obsessions which alone can justify their persistence in a monetarist role as savage and as damaging as the one they are now taking. My Lords, I beg to move for Papers.