Interest Rates and Industrial Recovery (Hansard, 24 February 1983)

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

§ The Secretary of State for Trade (Lord Cockfield)
My Lords, reductions in interest rates which do not endanger sound financial conditions make an 827 important contribution to industrial recovery. I believe that this is widely understood internationally. It is also recognised that countries must secure the monetary and fiscal conditions which make such reductions possible without causing inflation. At the recent IMF Interim Committee meeting chaired by my right honourable friend the Chancellor of the Exchequer, the committee noted in its communiqué that, high real interest rates detrimental to the process of recovers could be generated by market expectations regarding Government borrowing requirements".

§ Lord Beswick
My Lords, while thanking the noble Lord for that Answer, may I congratulate him on somewhat shifting his emphasis in the reply to the Question that I put as compared with two or three years ago, when he used to maintain that the high interest rates were a major weapon in the Government's armoury and desirable on their own account? May I ask him: is it not essential now for a renewed and greater effort to get international agreement on this matter? Is it not a fact, according to the BIS report last month, that the total international net credits now stand at over £980,000 million; that much of this was money borrowed to pay interest on money already borrowed; and that very little of it has gone into really productive investment? Would he not also agree that we shall never get real stability in the world unless that vast amount of debt yields an interest relevant to some increased production and not to some RPI?

§ Lord Cockfield
My Lords, the matters to which the noble Lord refers were the subject of extensive debate in your Lordships' House recently on an Unstarred Question asked by the noble Lord, Lord Lever of Manchester. We had a most interesting and valuable debate on that occasion. I do not think that it would be right for me to traverse that ground again.
It is always tempting to believe that problems can be solved simply by international agreement. In the case of interest rates, however, they are a reflection of the domestic policies followed by individual countries, and in order to get interest rates down it is necessary for those domestic policies to be right. What is important—and I am sure the noble Lord will take encouragement from this—is that a consensus is emerging, and has been expressed at successive summits, that sound economic policies will lead to a reduction in interest rates, which, in turn, are necessary for economic recovery.

§ Lord Kaldor
My Lords, failing an international agreement on the lowering of interest rates, which I personally do not regard as really hopeful in present circumstances, will Her Majesty's Government explore the possibility of securing credit for British industry for the purpose of the reconstruction and renewal of industrial equipment at concessionary rates of interest?

§ Lord Cockfield
My Lords, so far as the first part of the noble Lord's supplementary question is concerned, I note that he, too, thinks that the prospects of international agreement on these matters, as distinct from the consensus to which I was referring, is 828 somewhat remote. So far as the second part of his question is concerned—namely, the provision of finance at lower rates of interest by way of subsidisation—that is a suggestion which has been considered on many occasions. The cost of such subsidisation has to be met by somebody. It would be met by the Exchequer, and that in turn would increase the borrowing requirement, which would in the end push up rates of interest outside the favoured section.

§ The Earl of Onslow
My Lords, is it not extremely difficult for world interest rates to come down? The American economy has, I think, a budget deficit of 180 billion dollars a year, with fairly low inflation and very high interest rates. In those circumstances, is it not true that the American economy is not going to come out of recession, and consequently the economies of the rest of the Western world will not come out of recession, either? Is this not something that worries my noble friend?

§ Lord Cockfield
My Lords, it is not for me on this occasion to debate the merits of the policies followed by the American Administration; but the position in fact is that if one puts undue weight on monetary policy and insufficient weight on fiscal policy, one may end up with interest rates higher than they might otherwise have been. This matter has been brought to the attention of the American Administration by my right honourable friend the Chancellor of the Exchequer and by others on numerous occasions. One is glad to note that the American Administration now realise the perils inherent in the very large budgetary deficits they have been running.

§ Lord Beswick
My Lords, the noble Lord said that much depends on national policy. If one accepts that, may I remind him of what he told me on 8th July 1981? May I ask him whether he will bear in mind what he told me on that date, when interest rates were 12 per cent.? He said: … we must look forward to a continued reduction, which will be followed in due time by a fall in the rate of inflation." [Official Report, 8/7/81, col. 698] Could he have been more wrong than that? We have had a fall in inflation and the base rate is still 11 per cent.

§ Lord Cockfield
My Lords, I am always happy to find that the noble Lord, Lord Beswick, reads my speeches, and I am sure the House will share his satisfaction in the Government's very great achievement in bringing the rate of inflation down below 5 per cent.—the lowest figure at which it has stood for 13 years. So far as rates of interest are concerned, the rates now are lower than the 12 per cent. to which the noble Lord referred, despite the recent increase. But it is perfectly true, of course, that rates of interest are affected by international considerations as well as by national considerations. We would hope to see, on a longer term basis, a continuing reduction in interest rates in the world generally and in this country.

§ Lord Alport
My Lords, may I ask my noble friend whether the very interesting criticism he has made of the American financial policy—that they have paid too much attention to monetary policy and too little attention to fiscal policy—might apply to this country?

§ Lord Cockfield
No, my Lords. In the first place, I do not criticise the policies of other Governments although from time to time I do draw attention to what I may regard as errors in those policies, in the same way as I draw attention to what I regard as errors in supplementary questions. We ourselves have always made it clear that one needs a mix of policies and that one needs to follow a sound financial and fiscal policy as well as a sound monetary policy.

Lord Bruce of Donington
My Lords, is the noble Lord aware that his answers to these questions have shown an astonishing degree of complacency? Is he aware that a very large proportion of British industry is very heavily indebted to the banks and is finding it very difficult, with rates of interest at their present level, to discharge its obligations? Further, is the noble Lord aware that no amount of rescheduling of these loans, the interest on which is a grievous burden on industry, from short term to medium term to long term is going to get rid of this problem? Is he aware that there is a very grave crisis in British industry as a result? And is he further aware that as a result of the disastrous policy followed by the commercial banks there is very little confidence any more in the perspicacity of bankers generally?

§ Lord Cockfield
My Lords, the noble Lord, I fear, is confusing two entirely separate issues. The first one is the domestic situation in the United Kingdom. The other matter that he touched upon is the international monetary problem associated with countries with large deficits and large borrowings. So far as the domestic situation in this country is concerned, nobody is more aware than we are of the very great problems facing British industry, but those problems will be solved only when we can get the rate of inflation down—and, indeed, we have reduced it significantly—and with that reduction in the rate of inflation we will achieve a reduction in the rates of interest which will be of long and enduring benefit to British industry. That is the objective for which we must aim.
So far as the other issue is concerned, the debt problem of many of the developing countries is a matter of very great concern. I made it quite clear when I was speaking in reply to the noble Lord, Lord Lever of Manchester, whose speech on this matter was of very great interest indeed, that this was a problem one needed to view with great concern, but not with alarm. The really important thing is that up to date the international community, particularly working through the IMF, has succeeded in avoiding default by these countries.

§ Lord Beswick
My Lords, may I finally ask the noble Lord this question: if he finds it possible to congratulate himself on the Government's achievement in coming down to 11 per cent. base rate, may I ask whether he will re-read the words of Mr. Disraeli, who reminded us of, the sweet simplicity of the 3 per cent."?

§ Lord Cockfield
My Lords, I am most grateful to the noble Lord because he is simply quoting words that I myself used in a speech in your Lordships' House recently.

§ Lord Molloy
My Lords, can the noble Lord please tell us what is the difference between the rates of interest of our contribution and the millions that we have just loaned the Argentine and those which British industrials have to pay?

§ Lord Cockfield
My Lords, the noble Lord raises a matter which has absolutely nothing at all to do with the Question on the Order Paper.