Exchange Controls Removal: Capital Outflow (Hansard, 24 November 1981)

§ Lord Beswick
My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.

§ The Minister of State, Treasury (Lord Cockfield)
My Lords, between the fourth quarter of 1979 and the second quarter of 1981, identified investment and other capital transactions resulted on balance in a net outflow of £6.3 billion. This net outflow is the natural reflection of the large current account surplus earned over the period.

§ Lord Beswick
My Lords, while thanking the Minister for that reply, may I ask whether he agrees that, with the evidence of this quite phenomenal amount of available money, it is difficult to sustain the Government's argument that capital raised for investment in the public sector must necessarily mean less for the private sector in Britain?

§ Lord Cockfield
No, my Lords. The noble Lord refers to the size of this outflow. It is important to bear in mind that a great deal of it consists of portfolio investment by pension funds and other institutions. I do not think the noble Lord would wish to criticise the trustees of pension funds, including those in the public sector as well as in the private sector, for endeavouring to protect the interests of their members in this way. As for the other part of his supplementary, the level of investment in this country—this applies to the public as well as to the private sector—is determined not primarily by the availability of finance but by the availability of profitable investment opportunities. Unfortunately, in the public sector much experience indicates that investment projects undertaken have not proved to be profitable.

Lord Bruce of Donington
My Lords, would the noble Lord agree that this massive outflow of capital from the United Kingdom is merely a reflection by those sending it abroad of a lack of confidence in the control, stimulation or activities of the Government in relation to domestic economic policy?

§ Lord Cockfield
No, my Lords, it is nothing of the sort. So long as you have a freely-floating exchange rate, it is a reflection of the very healthy surplus on the balance of payments which has been built up as a result of the success of the Government's policy. If there is any evidence of a flight of capital from this country, which I would not accept for a moment, it is because of the unfounded fears of the possibility of a Labour Government at some time in the future.

§ Lord Beswick
My Lords, if the Minister is saying that this money is simply the surplus on the balance of payments, may I ask how he can reconcile that with the fact that, in the first six months of this year alone, £7 billion went out of the country? Is he really telling us that it is the surplus on our balance of payments?

§ Lord Cockfield
My Lords, in the first two months of this year there was a surplus on the balance of 666 payments—in two months alone—of £1.9 billion. The figures are not available for a period of months, for reasons that will be familiar to the noble Lord, but a surplus has reappeared in the months of September and October. With a freely-floating pound the net outflow of capital—one must not look at the gross figure alone; what matters is the net outflow—must be equal to the surplus on the current account on the balance of payments. This is proven by the fact that the total of official reserves today is almost the same as it was in 1979.

§ Lord Mackie of Benshie
My Lords, surely the Minister must be disturbed by the fact that the managers of the pension funds prefer, or appear to prefer, to invest their money in foreign industry, as against British industry? Surely this must be one of the most disturbing factors?

§ Lord Cockfield
My Lords, what causes concern is the low level of profitability of British industry. If the level of profitability were significantly higher than it is, then investment in British industry would be more attractive and there would be a higher level of investment. This point is brought out very clearly in the report of the committee under the distinguished chairmanship of Sir Harold Wilson.

§ Lord Beswick
My Lords, if our economy is as healthy as the noble Lord is suggesting, if the availability of money is so great as he is suggesting, why was it necessary last week for the Bank of England to operate in the market to maintain the interest rates?

§ Lord Cockfield
My Lords, on a Question of this kind I do not think it appropriate to enter into a discussion about very short-run movements in the rates of interest. As the noble Lord will be aware, it is necessary to pay regard to both internal monetary conditions and international monetary conditions.

§ Lord Nugent of Guildford
My Lords, is my noble friend aware that in the management of any large funds, in particular pension funds, which are very large, it is normal practice to spread the risk? Is he also aware that when the Government gave investment funds the opportunity to invest abroad, which they have done for the first time for many years, it was natural that many funds should wish to place part of their portfolios in foreign investments? This is normal, prudent investment policy.

§ Lord Cockfield
My Lords, I entirely agree with my noble friend's analysis of the situation. Indeed, one would expect to see a fall in the level of portfolio investment after the considerable increase following the abolition of exchange controls.

§ Lord Mackie of Benshie
My Lords, would the Minister care to say what he thinks is short run? We are talking about a high level, an enormous level, of interest over two years, or more than two years. What does he think is short run?

§ Lord Cockfield
My Lords, the noble Lord, Lord Beswick, was referring to what he claimed to be 667 intervention by the Bank of England last week. I should most certainly regard a period of one week as a short run.

§ Lord Beswick
My Lords, for the sake of the record, may I say that the noble Lord placed emphasis on the word, "claimed". Is he suggesting that my claim was not accurate?

§ Lord Cockfield
No, my Lords. I was drawing no inference of any kind. I was repeating what the noble Lord himself had said, and I assume that the noble Lord accepts responsibility for the statements that he makes.