§ 3.10 p.m.
§ Lord Beswick rose to call attention to the burden of high interest rates on productive industry and on central and local government finances; to the diversion of effort to less productive but more financially rewarding activities which these high interest rates encourage and to the excessive strain on the stablility of large areas of the third world occasioned by this high cost of borrowing; and to move for Papers.
§ The noble Lord said: My Lords, it is now nine months since first I put down a Motion about the need to reduce interest rates, and since then we have seen a tentative movement downwards of¼, ½ and even 1 per cent. I do not claim a cause and effect, but the welcome given, even to those fractional changes, suggests that the Motion was rightly conceived. The reason why I still call for this discussion is because the reductions, though in the right direction, do not nearly go far enough; and, probably more importantly, they do not result from a new, deliberate and direct policy, using new techniques and on the basis of wider world agreement. The trends which facilitated those reductions could well be reversed and we could again have an upward tendency, with quite disastrous results. Indeed, that upward tendency can be seen already in the United States, and few will swear that, unless a radically new approach is adopted, it will not be followed here.
§ I want to get from the Government a wider, clearer and firmer support for the proposition that the high interest rates that we have seen—and still see—discourage the production of real wealth; they tend to distort the economy; they divert resources and activity from genuinely fruitful banking to the crude 715 handling and dealing in money; and in some parts of the world they are imposing a strain on the economic and social systems that is so severe and so unjust that a breaking point may yet be reached.
§ I trust that the Minister will not be tempted to spend too much time telling us how successful the Government have been in reducing the rate since the record reached by Sir Geoffrey Howe in 1979. The fact is that last week on non-risk money the Government were still prepared to pay 10 per cent. on the stock issue. A generation has grown up which seems to regard a double-digit return on Government stocks as a normal state of affairs. It is an essential discipline to get these rates in historical perspective. Admittedly on 1st August 1914 the authorities put up the bank rate to 10 per cent., but it was down to 6 per cent. five days later and throughout that war it varied between 6, 5 and 5½ per cent.
§ In the Second World War, we showed an even cleverer grasp of essentials. The bank rate was actually doubled on 24th August 1939, but it was from 2 per cent. to 4 per cent. With all the strains that the conflict with Germany imposed, and with the inevitably high borrowing requirement, the rate came down to 3 per cent., and on 26th October 1939 it fell to 2 per cent., where it stayed throughout the war. That 2 per cent. is worth savouring.
§ Of course, there are two arguments which will be raised when I recount those rates. I shall be told that the control of credit and credit creation was possible in war by means unacceptable in times of peace. Then there is the factor of inflation and all the modern jargon about real and nominal rates. I shall try to answer those two points. Those war-time techniques showed that it can be done, and I ask that we should now look again, with an honest, open and inquiring mind, to see in what way those techniques can be adapted and fitted into a new world monetary system. There is no party point here; there is a problem which needs the brains of all parties for its solution.
§ As to that second point about inflation, it is possible to show that high interest rates are more of a cause than a cure of inflation. Unemployment and depressed commodity prices rather than interest rates have helped bring down inflation. Moreover, I believe that we should stop clouding the issue with talk of nominal and real rates.
§ If I as a manufacturer need to borrow in order to buy new equipment and I work out my costs, I cannot say that the 10 per cent. or more is only a nominal rate and does not count. Of course, I may be told that by the time the new product is on the market the whole price level will have risen and I can recoup my costs at the expense of the consumer. However, that is only saying that the high cost of borrowing is all right so long as we have continued inflation. Yet, we all agree that inflation is a curse that we must cure.
§ Here maybe we come to the crux of the matter. At one time when I raised this issue I would be told that high interest rates were necessary; that it was their "function"—"function" was the word—to control the volume of money, which in turn was essential to control the rate of inflation. But I wonder whether it can now be shown that there is this tidy relationship between lending rates and the volume of money. If this 716 is suggested, I should want to know whether by "money" is meant M3, Ml, MO or PSL2, and what factor is allowed for velocity of circulation. If we are to have the new thinking for which I ask, we must first throw out these over-clever terms of the discredited aspects of monetarism.
§ May I make it clear that I draw a distinction between creative investment, which makes possible the production of more goods and useful services, and the interest charges imposed as part of a fallacious monetary theory which has been responsible for much of latter-day usury. Many years ago the chairman of a little airline, which I helped to start, told me with pride that he proposed to recommend a dividend of 10 per cent. Results had been good; everyone had worked hard; prospects were even better; and the shareholders who had taken the risk—and almost all were workers—deserved a reward.
§ But I draw a distinction between that and the occasion in 1979 when the Chancellor declared that things were so bad, that things had gone wrong, the outlook was black and he proposed to put up the MLR to 17 per cent. In other words, at a time when pressure to cut back public services is greatest, the reward to the money-lender is highest. That cannot be right. I recall the Nazi slogan, Kraft durch Freude: Strength through Joy. The Chancellor might well have coined the phrase, "Strength through Usury".
§ My case is that using interest rates in that way damages the economy. It puts on the brakes certainly, but only on one side of the car. The national vehicle will lurch from useful production to more profitable short-term speculation. The high cost of money may well defer the building of a factory, but it will never stop the opening of a casino. The facts about the decline in manufacturing production are there to be seen. We are producing no more and maybe less in non-oil manufactures than we were five years ago. We have an overseas trading deficit in manufactured goods for the first time ever. I may be told to look at the February figures. Of course I have done so. When one subtracts oil, precious stones and bullion from those figures, they are much more modest. And over the three-month period the overseas trading deficit is still £1.9 billions. The stock argument of present-day Ministers is that we must be more competitive. That is a safe enough remark to make. But the truth is that in the modern industrial world you need modern tools to be competitive, and tools are expensive.
§ Old-fashioned defensive work practices can be quoted, but it is not really the work practices of working men and women that have held back production. New investment was needed. Our chief competitors have had certain advantages. Some were almost paid for losing the war. Their national debts were virtually wiped out. Their post-war defence costs have been minimal compared with ours, and much of their research and re-equipment was financed before the cost of money went up.
In our case the money was there. The Wilson report made that clear enough. In fact the Western world has been awash with money. This Government have done something for small businesses—expansion schemes, and so on—but for those who have to go into the market it cost too much and still costs too much. What
I say is not out of line with the recent report of ACARD—the Advisory Council for Applied Research and Development—which said:
There is no shortage of money, nor of requirement for investment, but major difficulties facing manufacturers are the true cost of borrowing in relation to profitability.
In carefully argued terms it seems to me that the Deputy Governor of the Bank of England made that same point, which is my point, in a speech on 22nd February this year. Mr. McMahon properly paid tribute to the efforts and the success achieved by manufacturers against difficulties, but he also said:
current levels of investment are insufficient to support sustained expansion on the supply side… net investment in non-North Sea industrial and commercial companies as a proportion of their net capital stock fell from 5 per cent. per annum in the mid-1960s to less than 2 per cent in the mid-1970s and is now below 1 per cent.
The Deputy Governor said that different types of finance made measurement difficult, but he also said:
The cost of capital has been significantly higher in relation to real profitability than in either the 1960s or the 1970s… and the disincentive to fixed investment is unmistakable.
§ That speech was in February, and there has been little basic change since then It was in February too that Mr Reagan's own economic committee spoke of the "perilous"—I quote their own word—situation in the United States economy caused by borrowing and high interest rates.
So much for the discouragement of production. But the Motion goes on to refer to,
the diversion of effort to less productive but more financially rewarding activities" —
in other words, the one-sided braking I ought to confess incidentally that that phrase was given to me by my noble friend Lord Lever, who would have been here today to support the Motion but is in New York on a very happy family occasion.
It is excessively fashionable these days to speak proudly of the growth of the service industries As a child of the British Co-operative Movement, I certainly do not belittle those who usefully serve, and I respect the reputable bankers, but there are other activities which have sprouted in recent years and within the margins, as I see it, of recent interest rates I noticed a letter in The Times on 1st March under the elegant heading of "Muck and Brass" Beneath that heading Mr. Sutherland wrote:
The most prosperous people in the United Kingdom today are those who would not touch manufacturing with a barge pole—the moneylenders the brokers the middlemen, the agents. And every month the list of company liquidations grows longer.
§ In accordance with Government thinking, the Treasury report of February stressed the importance of the service sector In the small print I saw that the fastest growth between 1973 and 1979 was in the financial sector, and what they call "miscellaneous and others" accounted for a quarter of the whole growth No doubt that miscellaneous heading covered most of the individuals of whom Mr. Sutherland wrote.
§ I think of today's techniques of overnight and weekend depositing and I wonder if they do not go beyond the bounds of useful service. Shrewd operators who contrive to deposit on Friday afternoon rather than Monday morning can earn more in their brief operation than a skilled engineer will earn his firm in 718 a matter of months. I see that one industrial company with a very positive cash flow gives a figure in its 1983 accounts of no less than £125 million in net interest receipts from loans and deposits None of its share-holders can complain, but comparing that figure with what the 130,000 employees engaged in designing, making, and marketing actual goods were able to show in profits, one is bound to ask if there is not something wrong—not with that company certainly but with the economic situation within which we work.
§ Even our old friends the building societies are moving with the times. I see that Mr. Tuke of the Woolwich society says that profits from gilts, which accounted for 30 per cent. of reserves in 1981, actually accounted for 64 per cent. last year. The Government's response is to tax those profits, but how much better if the whole lnflationarv process had not been started by the high yields obtainable on Government stocks.
§ If this level of interest is pernicious, as I say, that influence is compounded and exaggerated by modern technology in communication facilities. In the days of our youth—or certainly in the youth of my noble friend Lord Shinwell—if one wanted to transfer money from London to New York it involved a gentleman with a briefcase, an ocean liner and a matter of about five days In these days of almost instantaneous transmission the situation is markedly different. The profitability of Reuters is one evidence of that.
§ The modern techniques of money payments and receipts make a nonsense of the simplistic theories of Mr. Friedman. And they open the door to the slick speculator I read in The Times that in 1981 over 20,000 billion dollars were traded across the exchanges in the spot markets alone. That figure represents something like 15 times the total annual world trade. Some burned their fingers that year, I am told Maybe, but they certainly did not contribute to orderly world trade.
§ There is another area in which insecurity and injustice are writ large for all those who want to read. My Motion calls attention to the especial strains on the economic and social system of much of the Third World In February of last year I put down a Parliamentary Question on this aspect of the problem, and I fear that the noble Lord, Lord Cockfield, that day brushed it aside with a comment that it had been discussed the previous week. It had, and a very interesting discussion too, between most distinguished Members of this House and those with notable financial experience. But most of that discussion, I fear, had been of the need to reschedule debts and of possible action by the IMF or Governments designed primarily to secure the international banking system—the lenders. The collapse as against the reform of the international banking system would indeed be a calamity for all concerned, but I am suggesting that we need to look at this mammoth debt burden a little more sympathetically from the debtor's point of view.
A recent Observer article said:
Africa's new overlords the neat IMF men bearing briefcases with combination locks, make a sharp contrast with the paternalistic governors wearing their swords and plumed hats But for all their good intentions they are starting to be almost as keenly resented.
§ I have heard it said by some that the huge borrowing 719 of the Third World was excessive and ill-used. Maybe there is some truth in that. But it is only another way of saying that the one-time old-fashioned judgment of the reputable banker was not so much in evidence. Or we could say that the Third World countries should have said—as the British manufacturers have said—"We certainly want your money but on the terms you are demanding it, it just does not make sense".
§ However, they did borrow; their export earnings did fall with the fall of commodity prices, and the interest rate payable bore no relation to their realities but only to the domestic monetary policy of the United States of America.
Noble Lords no doubt saw the letter to The Times on 3rd March from the Ambassadors of the Dominican Republic, Ecuador and Mexico. They conclude a letter, which we should do well to study, by saying:
It is almost impossible to apply the IMF prescriptions without the danger of social upheavals.
Yes, we want to pay. Proof of that is that in the past five years the developing world has paid in interest $126 billion. At this rate the interest payments will soon have exceeded the total of $140 billion borrowed during the same five-year period".
§ According to a report in the Economist, the World Bank emphasises the wretchedness of those figures with a calculation that the poor South borrowed $85 billion last year from the wealthy developed countries, but paid their creditors $95 billion in interest and capital. Leave out the morality of it all if you like, but that is a travesty of sound economics and, indeed, self-interest. And a net flow of cash from the rich to the poor is one thing, but a net flow of cash from the poor to the rich is a new style colonialism without the governor's plumes.
§ Self-interest comes into it, I am suggesting, when one considers, as the OECD pointed out, that the less developed countries take one quarter of industrial countries exports. How can we get a genuine recovery of world trade if that quarter is cut back still further? The OECD estimate was that the austerity programmes demanded of the debtors would in 1983 involve a reduction in demand of $17 billion.
A representative of one of those Third World countries said the other day:
We could cut back imports, we could give up developments, we could condemn our people to starvation—or we could cut interest on our debts".
I know there are those who would say they could also cut out waste, but the choice is basically as they stated.
§ What ought we to suggest they choose? In a balanced article in the journal Defence and Diplomacy, Lord Charles Cecil calculated that, in the case of Brazil, if their interest rate were "capped" (as he put it) at 5 per cent. they could expect a current account surplus of perhaps $1.5 billion and prospects of growth in the future. What a potential transformation.
§ One is tempted also to say that if that same process of capping was applied to United Kingdom local authorities' debt there would be a similar transformation. If that same treatment were applied to £35, 180 million of their debt borrowed at rates from 6.6 per cent. to 13 per cent. (according to the figures 720 which the noble Lord, Lord Bellwin, was kind enough to give me) we could see a saving of around £1,700 million a year—which we might compare with the estimated £178 million saving of the other rate-capping process being applied by Her Majesty's Government which is causing so much pain and grief.
§ In the minutes available to me in this debate I have focussed narrowly on the evils of high interest but I am not so naive as to believe the solution is a simple one of capping rates. My aim is more to stimulate thought than to thrust forward any easy solutions. But I do say that solutions have to be found, and quickly.
At the meeting of the Commonwealth Heads of Government last November, our own Government agreed a statement which said:
the situation calls for a comprehensive review of the international monetary, financial and relevant trade issues An immediate process of consultation is needed".
I ask the noble Lord the Minister who is to reply: what contribution is Her Majesty's Government making to that process?
§ As for our own national situation, I suggest that the challenge to find new techniques of money management faces the Government equally with those parties presently in opposition. We will all welcome incipient signs of recovery, but so far those signs largely reflect consumer spending by a limited sector and the numbers of unemployed and underprivileged continue to creep upwards I think the Government would do well to have a contingency plan in case they have to think about controlling money supplies again. As for my own party and the party of the noble Lords who sit to my right, we have plans for creating new wealth, improving the infrastructure and employing more people by schemes of public investment. I am sure that that is right, but I do say to my friends that, if that investment is funded at 10 per cent or more, then we, too, shall run into trouble.
I have quoted a lot of figures. If I had the moral courage of my noble friend Lord Soper, I might have started with a text from Pope Eugenius III, who in the year 1150 said:
Who takes more than the amount of the sum lent involves himself in the sin of usury.
I do not go as far as that, but I do state the obvious if we all lived on interest, we should all starve. What I am concerned to secure is an adjustment in our economic affairs which ensures more encouragement and a fairer reward to those who actually produce those things by which we live.
§ My Lords, I beg to move for Papers.
§ 3.38 p.m.
The Earl of Gowrie
My Lords, I congratulate the noble Lord, Lord Beswick, not only on the choice of his Motion but on the effect which the wording of the Motion has had on the money markets. Since he put the Motion down for debate we have seen all the major clearing banks in the United Kingdom cut their base rates, while prime rates in the United States have risen. I will say more about this later No doubt the noble Lord, Lord Beswick, will continue to claim—as his speech claimed—that interest rates are far too high. I agree with him there interest rates are too high, both here and abroad On that there is little to debate. 721 Where I think the noble Lord, Lord Beswick, and I differ is on how best further reductions in interest rates may be brought about —and we may also differ, of course, on the old vexed question of the chicken and the egg.
It is important that the noble Lord and his colleagues on all the Opposition Benches should understand our policies which, whatever their difficulties and whatever painful effects are still abroad in the economy, have achieved a continued downward trend in inflation and interests rates, and therefore an environment in which industry and employment can improve. Our ultimate objective is stable prices with still lower interest rates. We aim to achieve stable prices through the policy laid out in what is called the Medium-Term Financial Strategy, that is to say a combination of monetary control and prudent fiscal policies.
The House will be relieved to know that I shall not spend a long time on the monetary aggregates; sufficient to say that on the monetary side we now have targets for the growth of both broad money, as measured by what is called sterling M3, and narrow money, measured by what is called M0. But far from being discredited, attention to monetary aggregates is now a feature of economic management of all Governments. Indeed, the noble Lord, Lord Barnett, whose winding up of the debate I look forward to, was to his credit deeply involved in bringing about this state of affairs. He may be aware that I paid tribute to him and his Chancellor of the Exchequer at the time.
By maintaining sound monetary conditions we shall continue to reduce inflation, and lower inflation means lower interest rates. Without recourse to jargon, one could argue that, historically, interest rates vary rather little while inflation rates vary much more widely. There, of course, is the rub. The rub is that we still have high nominal rates of interest and, as I shall argue in a little more detail in a few moments, those high nominal rates of interest are what are damaging in real terms.
The noble Lord, Lord Beswick, said that the fastest arenas of growth in our economy in 1973 to 1979—a period dominated by Labour Administrations—were in the financial sector. Was not that a feature of high inflation rates of the 1970s which we are now trying to get down? Without success in getting it down I agree with the noble Lord, Lord Beswick, that the outlook for manufacturing as against financial services will remain gloomy.
On the fiscal side we need to achieve further reductions in the public sector borrowing requirement as a share of gross domestic product to allow deceleration in monetary growth and reductions in inflation. That will bring about the conditions for further falls in interest rates, in both nominal and real terms. Our policies are directed to achieving a progressive reduction in borrowing over the medium term. Such restraint is essential if we are to achieve sound money conditions, without creating fresh upward pressure on interest rates.
We have already some justification for saying that the proof of this particular pudding is in the eating because we have made significant progress. The marked reductions in inflation and interest rates in the 722 United Kingdom during this recovery have contributed to the strong growth of output: a growth which has been well ahead of other European countries. The recent ½ per cent. reduction in the main clearers' base rates to 8½ per cent. (apart from Barclays Bank which came down ¼ per cent. to 8¾ per cent.) was a clear endorsement of the Chancellor's Budget. Base rates are now more than 7 per cent. below their peak in the autumn of 1981 and are at their lowest level since May 1978. Indeed, apart from a period in 1977–78, when there was very strong upward pressure on the pound, base rates are at their lowest level since August 1973.
Looking at other key interest rates, long and short term market rates have continued their decline over the past year. At the short end, three month sterling interbank rates are now down around 8⅚ per cent., about half what they were in December 1980, while at the long end the yield on 20 year gilts is now around 10½ per cent.; that is almost 6 per cent. down on its last major peak in October 1981. Over the last year short rates have come down by over 1½ per cent. and longs by about ½ per cent.
I will have more to say about international comparisons, particularly with the United States, but for now I would remind the House that soon after our base rates came down by ½ per cent., prime rates in America rose by about the same amount. Across the board our interest rates are now well down on those in the United States. Long rates, in particular, are now almost 2 per cent. below, in contrast with what we saw over virtually the whole post-war period. This is the result of our firm monetary control and our prudent control of the United Kingdom's public sector borrowing requirement. Even those who are opposed to us politically would have to acknowledge that achievement. Our aim is to achieve further reductions in nominal interest rates, but the centre of my argument is that we can only do that if we stick to policies that will reduce inflation as well.
I want to talk for a moment about real interest rates and investment. The main reason for high nominal interest rates is inflation and the expectation that inflation will continue. Despite our success in bringing inflation down, there is still a legacy of fear—a legacy from earlier governments—that sooner or later governments of all complexions give up the battle against inflation as they have done in the past. The only way to overcome that fear is to show that we mean what we say. This Government will not give up. Our ultimate objective is price stability. The policies set out in the medium term strategy should enable us to make substantial progress during the life of this Parliament. Success will bring down interest rates as well as inflation.
Relative to the current rate of inflation, the rates are no longer abnormally high. The Bank of England recently published estimates of the real cost of borrowing as measured by short-term interest rates compared with inflation over the last 20 or so years. This work concluded that the real before-tax interest rate paid by company borrowers has averaged around 4½ per cent. since the period when we were elected. This is much the same as the average level during the 1960s and around 1½ per cent. or 2 per cent. lower than 723 comparable real interest costs calculated for both the United States of America and for Germany over the past four years.
The same calculations suggest that the real cost of borrowing was much lower—indeed sometimes it was negative—during the 1970s, when inflation was both high and variable. But the House should not draw the conclusion that a combination of high interest rates and high inflation would produce a climate favourable to productive investment. In fact, the noble Lord, Lord Beswick, himself acknowledged that they did not. The reverse is the case, for the following reasons: high nominal interest rates would still squeeze company cash flow in the early years of the life of any investment. The noble Lord acknowledged that. This "front-end loading" (in the jargon) is caused because when inflation is high lenders charge high nominal rates to protect themselves against the declining value of the principal of their loans. It means, therefore, that high nominal interest rates, as I have already indicated, are always bad for investment, whatever the real rate of interest.
Secondly, and more fundamentally, one of the principal evils of high inflation is that it creates fear and uncertainty about the future real cost of borrowing. Uncertainty and fear are the enemies, the deterrent to investment. Forecasting inflation is always hazardous and at high rates of interest the margin for error is a wide one. No company can plan sensibly and competently for the future in such conditions. What companies need above all is financial stability; and that is not to be had unless we defeat inflation, and defeat it permanently.
Industry appreciates what this Government have achieved in this regard and appreciates our strategy for going on. The CBI's latest monthly trends have shown a further strengthening of both total and export demand. More firms now expect to increase their output than at any time since 1976. The results also point to the recovery in output becoming more widespread. Profitability is expected to rise. The CBI's forecast of the pre-tax rates of return of non-North Sea industrial and commercial companies has been revised up to 8½ per cent. this year, and an 8 per cent. rate of return is expected next year. These figures compare with a rate of return before tax of 4½ per cent. in 1982 after 20 years of decline; and I would say to the noble Lord, Lord Beswick, in particular, that manufacturing investment is forecast to rise by about 8 per cent. both this year and next. I know therefore that he will welcome that.
I want now to turn to the cost of servicing public sector debt to which the noble Lord's Motion was also addressed. Unlike the company sector, the public sector is a major issue of fixed-interest debt. The cost of servicing public-sector debt is a legacy of borrowing in the past. It will account for all the additional money that the public sector is expected to borrow in 1984–85; interest payments on public sector debt of all types are expected to have totalled nearly £16,000 million in 1983–84 and that would represent over 10 per cent. of total public spending. It is only thanks to our success in controlling public borrowing in recent years that we have kept debt interest payments down to this already too high level. In the mid-1970s, the 724 public sector borrowing requirement rose to almost 10 per cent. of GDP but fell to less than 3½ per cent.—and that is a very significant fall—in 1981–82 and 1982–83. Latest forecasts for 1983–84 suggest that, as a percentage of the gross domestic product, our borrowing will remain at the 1982–83 level. It is projected to fall sharply as a proportion of domestic product next year. If we had pursued the policy of high public-spending borrowing requirements which some, not least the shadow Chancellor Mr. Hattersley, have been advocating, we would now have a much higher volume of accumulated public debt to service. Again, as the noble Lord, Lord Barnett, knows and as the noble Lord, Lord Beswick, appeared not to know, Governments borrow in the real, not the ideal, world. They have to pay the going rate; and, indeed, they affect the rates by the scale of their entry into the market.
Does that not argue that the Government are right to try to contain the scale of their borrowing, and that the outlook for industry will continue to be bleak unless we maintain this position? Without the discipline that we have imposed on ourselves and on others we would have much higher interest rates now. As it is, the decline in borrowing since 1980–81 has been accompanied, as we see, by a fall in short-term interest rates of no fewer than five percentage points. Again, the proof of this pudding is not the theory of it but the eating of it. It may be suggested that governments have an interest in inflation which reduces the real value of outstanding borrowing and may reduce the real cost of debt service. We reject this cynical philosophy. We accept that there is a price to be paid for achieving the benefits of financial stability and lower inflation. If the price is that we do not defraud those who lend to Government by eroding the real value of their loans, no one should say that we are wrong to pay.
May I come quickly to the other part of the Motion, the issue of world interest rates. The speed with which we can reduce inflation and interest rates will be affected, and is being affected, by events outside our control. That makes it more, not less, important for us to follow sound financial policies. We cannot ignore the fact that high interest rates (as the noble Lord, Lord Beswick, has told us) have been a world-wide difficulty. The high levels of interest rates in recent years have put a burden on all borrowing, sovereign borrowers, corporate borrowers, consumer borrowers. But they have imposed a heavier burden on the developing countries. I agree with the noble Lord, Lord Beswick, that this phenomenon is a real threat to the developing or so-called, third world. The gains therefore from lower rates are large. Indeed, it has been calculated that a 1 per cent. cut in world interest rates would relieve debtor countries of some 5,000 million dollars in interest payments alone in a given year. A broad measure of agreement now exists that the key to lower interest rates is further progress towards reducing budget deficits. Of particular concern here is the effect of high United States federal budget deficits in maintaining high United States interest rates. Last year, the US budget deficit amounted to 195,000 million dollars; that is to say, 6 per cent. of the gross domestic product, which in American terms is twice the level of 1982, and the highest in the post-war period of American history.
725 In the absence of further measures, it is forecast to stay at around 200,000 million dollars until the end of the decade, even accepting the Administration's assumptions. Others, using perhaps more pessimistic but, some would argue, more realistic assumptions, estimate deficits could be significantly higher. The prospect of such large deficits continuing into the medium term inevitably raises interest rates far above what they would otherwise be. Both Dr. Feldstein, the United States president's economic adviser, and Mr. Volcker, the chairman of the Federal Reserve Board, have repeatedly stressed their concern that this is leading to a lopsided United States recovery and jeopardising growth and potential. The further risk is that, with strong economic recovery continuing, it will result in yet higher interest rates and/or a resurgence of inflation, thus further damaging growth prospects. The recent rise in United States interest rates, with 3-month rates well over 10 per cent., compared to 8¾ per cent. a year ago, is very worrying.
The folly of those who suggested that we should follow the United States example of a rising budget deficit—and again these suggestions have come from the official Opposition; although not, I acknowledge, from the noble Lord, Lord Beswick, today—should be apparent to all except the most blinkered. In announcing his budget for fiscal 1985 in February of this year, President Reagan said:Only the threat of indefinitely prolonged high budget deficits threatens the continuation of sustained non-inflationary growth and prosperity".This problem is a structural one and continued recovery will not eliminate it. It has been accompanied by a rapidly expanding external deficit. Both are likely to prove unsustainable and the net capital inflows necessary to finance these deficits have been at the expense of other borrowings causing growing resentment elsewhere in the world. It is therefore in everyone's interest that Congress and the Administration agree how to cut the deficit. We would welcome proposals, including President Reagan's latest 150,000 million dollar savings package, if they are likely to foster the necessary agreement. But so far I have to say that we have yet to see concrete results.
As I have said, higher American interest rates inevitably influence rates elsewhere. But as the British experience shows, sound financial discipline can allow some freedom of manoeuvre, and allow it quite quickly. I have pointed out that, in contrast to most of our post-war history, British interest rates are now lower than American ones, even at the long end. The lessons of the gains from monetary and fiscal responsibility in shielding domestic economies from adverse international financial disturbances apply generally in Europe and in the developing countries. I mean that you have to have immense development potential to escape the consequences of running high rates of inflation in the short term, and you never escape its consequences in the medium or longer term. Witness Latin American difficulties in this context.
The noble Lord, Lord Beswick, refers in his Motion to the problems of the developing world. Almost two years ago the world woke up one fine morning to find that Mexico was on the brink of disaster. There were those who then feared for the safety of the world 726 financial system, especially when other countries—Brazil and Argentina, for instance—ran into similar difficulties; but prompt co-operative action by banks and international institutions of governments on more than one occasion succeeded in coming to the rescue. I have on occasion, wearing another hat, rather startled some of my arts clients by saying that such and such grants are safe where the Government are concerned subject to continued good behaviour by Brazil and Argentina. When they ask what their group or theatre company has to do with Brazil or Argentina, I say: "In this tight little globe, more or less everything".
There is still no room for complacency. A number of countries continue to cause concern. I agree altogether with the noble Lord, Lord Beswick, that high world interest rates add to the burden of debtor countries, and that makes it all the more important for the United States Government to get its borrowing down. High interest rates in America have led, in turn, to a higher dollar, which for debts denominated in dollars has added further to the burden. There is a growing feeling in international circles that the problem is becoming a bit more manageable and that the light at the end of the tunnel is not for the moment that of an oncoming train.
While pursuing sound domestic policies, debtor countries can help to ease their financial burdens. Mexico and Brazil, for instance, have been able to secure better terms on this year's new money as a result of adherence to IMF programmes. I am sure that the noble Lord, Lord Beswick, is right in suggesting that this puts great strains on their political and social systems. Therefore, it is important for those countries, wherever they can, to carry the bulk of their people with them.
For the medium term, developing countries should do more to reduce barriers to inward direct investment. The cost of such capital is less sensitive to world interest rates since the parent company will look for the equity return, related to the profitability of the investment. In such ways the problems of the debtor countries can be dealt with, and in this context I would recommend the Government's policy of freeing the economy from exchange controls—a freedom which, rather in contra-distinction to what he was arguing earlier, the party associated with the noble Lord, Lord Beswick, wishes to abolish.
In conclusion, in the United Kingdom we are now seeing the benefits of the Government's resolute application of prudent money and fiscal policies. Inflation has fallen from a peak of 22 per cent. in May 1980 to around 5 per cent. now. It is set to fall further over the next year, bringing us closer to the ultimate objective of price stability. As inflation has been brought down so interest rates have fallen. Indeed, with base rates at their lowest level for six years the noble Lord's Motion is a little bit out of touch in some of its wording with the current situation. Lower inflation and interest rates have boosted the confidence of both consumers and businesses. Lower inflation has meant that consumers have less need to save to maintain the real value of their wealth intact, and lower inflation has meant that businesses can plan with more certainty and are now seeing increases in company spending on capital equipment.
727 It is against this background that total output has been growing steadily now for three years; GDP is running above its previous peak in 1979. Encouragingly, total employment is growing again, including an increase of around 170,000 in service sector employment over the first three-quarters of last year. What marks this recovery out is that its roots are in sound finance and honest money. It does not contain within it the seeds of its own destruction, as did the engineered booms which brought so many previous recoveries to a premature end.
So I would argue that prospects are more favourable than for some time. Broadly-based non-inflationary growth is set to continue, with a rise of 5 per cent. in exports, a further 3 per cent. increase in consumer spending and. as corporate profits continue to improve strongly, a 10 per cent. increase in industrial development. Acknowledging the strictures of the noble Lord, Lord Beswick, in reaching that figure I have taken oil investment out of the picture. According to the OECD, we are now growing faster than any other member of the Community, and the outlook is thus consistent with further growth in employment. I did argue in a debate last week that there is no very comfortable relation between recovery of this kind and overall levels of employment. Obviously, the rate at which new jobs are created will depend very much on realistic methods of pay.
A key aim of the Budget was to encourage business to continue to raise its performance and to build upon the welcome improvement in productivity, and that is now under way. In this way business can better satisfy rising demand over the years ahead. In this way, too, rising demand also translates into better prospects for preserving and, I hope, adding to real jobs. The radical reforms of business taxation, for instance—the phased withdrawal of capital allowances in parallel with cuts in corporation tax—do remove inefficient and outdated distortions. The measures provide the corporate sector with a clear framework of company taxation, and above all, the assurance of lower rates of tax over the rest of this Parliament.
To paraphrase the noble Lord's Motion, the Budget aimed to divert effort to more productive activities, to better-quality investment and to investment for real returns rather than tax advantage. In the medium term, therefore, we will maintain steady downward pressure on monetary growth and steady downward pressure on public borrowing as a proportion of national output. This offers the best hope—I would argue the only hope—that interest rates will come down further. The fall in base rates which followed hard on the heels of the Budget was striking confirmation that we were right both in our analysis and in our execution of policy, and we urge other governments to follow our example.
§ 4.8 p.m.
§ Lord Taylor of Gryfe
My Lords, the House is indebted to the noble Lord, Lord Beswick, for introducing this important subject in the reasonable manner in which he has presented his case. He has avoided a substantial reference to party policy in the matter, and has invited us to stimulate our thoughts a little.
728 May I say from these Benches that in general we agree with the proposition presented by the noble Lord, Lord Beswick, that the levels of interest rates seen over the last five years have undoubtedly, viewed in isolation, had a detrimental effect on the British and world economy. High nominal and real rates of interest have contributed to the deep recession from which the world is only now gradually recovering, but they cannot be ascribed solely to the high cost of money as the causes of recession are much more deeply rooted and some Government policy decisions have had a devastating effect on the state of the economy. It is not simply a matter of high interest rates. To discuss interest rates in isolation is unsatisfactory A discussion of this kind must embrace all aspects of economic policy, but since the subject is concerned substantially with interest rates. I think it is worthwhile having a quick look at the factors affecting interest rates.
I apologise to your Lordships for the fact that this description of how interest rates are established is a little elementary. But the interest rate is the price that brings together the borrower and the lender, and the lender is compensated for allowing the borrower to use money for a period of time. The rate of compensation demanded will be determined by various factors, such as the expected depreciation in the value of money—the rate of price inflation—the risk that the borrower may not be able to repay and the other uses to which the lender can put the money. The borrower will also be influenced by the expected rate of price inflation and its effect on the project which he is undertaking The anticipated rate of return on the project will certainly be the most important consideration of any borrower.
Recently, borrowing decisions have been complicated during the recession by the need for countries and companies to continue operations in the short term while they have had reasonable long-term prospects. This has led to "distress borrowing" to ride the storm of recession-induced losses, while the longer term prospect would be judged to be somewhat better The painful effects of the retrenchment necessary to secure these short-term loans have been seen in the lengthening queues of unemployed and the large falls in income suffered by the LDCs.
The very high levels of both nominal and real interest rates that have been experienced have been caused in part by the needs of borrowers and lenders, but also by the monetarist policies of the major OECD governments since the late 1970s The monetary links between these countries have meant that high rates in one country have led to high rates all round. Perhaps I may say this to my friends in the Labour Party: we cannot legislate independently in this field and, although the siege economy strategy seems to be popular in some Labour circles at the moment, it fails to recognise the crucial factor of our interdependence.
The conversion to monetarism of major governments immediately led to a large increase in interest rates internationally. In fairness to the Government, inflation has subsequently fallen and interest rates have fallen slightly in turn But the major obstacles to further reductions are the expectations that inflation will rise again, and the growth of credit demands internationally and within the major 729 economies could contribute to a further increase in interest rates. There is evidence in today's Financial Times of a certain degree of nervousness in the United States and an anticipated increase in interest rates as the budget deficit mounts. As has been said by speakers from both Front Benches already, this could have an extremely serious impact on the LDCs who are substantial borrowers.
The international debt problem will be with us for some time to come and, like the noble Earl, Lord Gowrie. I too, am encouraged by the steps that have been taken by the international banking community to put their house in order. I had the pleasure of being in Washington last year during the IMF meetings, and I was impressed by the recognition on the part of the international banking community that they had to establish institutions and lending policies which could cope with the difficulties that had emerged in the case of Mexico, Argentina, Brazil and so on. Unfortunately, the application of the general principles of the IMF has not only been harsh but in many cases has been indiscriminate and has created serious political tensions in the governments of LDCs, who have had to impose very unpopular policies. As has been stated by the noble Earl, Lord Gowrie, a 1 per cent. rise in dollar interest rates, which is quite possible, would now increase the total indebtedness of the LDCs by 6 billion dollars in a year.
Last week I happened to be in Cuba, which is one of the LDCs. In Cuba, 84 per cent. of their export earnings, from which they have to service debt, are from sugar. It is the most important commodity in their economy. But the price of sugar today has fallen, in terms of equivalent purchasing power, to the 1932 price of sugar which devastated the whole of the Caribbean economies. Here we have a critical situation, that these countries are having to service an increased mountain of debt with commodities that have collapsed in price. It is no wonder that Cuba finds her rescue elsewhere than in the Western world. The country is almost forced into dependence on the Soviet Union. It might be sensible, in judging the future of LDCs, to be more receptive in making financial accommodation than sending in troops at a later stage and at great expense.
The monetary stance taken by the major governments was initially responsible for the current levels of interest rates. Although there is an uneven recovery on its way, this will make greater demands on credit and may, particularly in the United States, which has to finance a major budget deficit, create an increasing spiral of interest charges. As I say, this would be devastating in terms of LDCs servicing debt.
It is interesting in the United States, which represents the most serious factor affecting world interest rates, to talk to bankers. There is a general view here that bankers enjoy rising interest rates and making large profits, but I am quite sure that, if you interviewed any United States bankers, with their large debts in the LDCs, they would very much welcome a reduction in interest rates. It might make some of their assets in the balance-sheets look a little more respectable. So there is no pressure on the part of bankers to increase interest rates here or in the United States.
730 There are always plusses and minuses in the United States situation. I was interested at the IMF to see the French Socialist Minister of Finance point his finger at the United States delegation and say, "Of course, you know that you in the Reagan Administration are the last of the Keynesians. You are financing your prosperity on a substantial budget deficit." That is happening, but the moment of truth will presumably arrive after the election But there are plusses and minuses, and there is no doubt that a 5 per cent. growth rate, which has been achieved in the United States, and the high dollar, are increasing the opportunities in that market for the LDCs and others and can make some impact on raw material prices.
We have to accept a good deal of what the noble Earl Lord Gowrie, said about some elements of recovery in the United Kingdom's economy, but it is a recovery amounting to only about 2 per cent. per annum, which is not very exciting. The inflation rate has certainly been brought under control, but the interest rate will fall only if we can anticipate a long-term holding of a low interest rate Bankers are reluctant to lend at reasonable rates in a situation where borrowings may be repaid in inflation pounds Despite what the Government claim, the rate of return on investments, which is crucial to this whole area, has risen in Britain from the depths reached in 1980–81 only to the level at which it was when the Government took office In 1980–81, the real pre-tax rate of return for industrial and commercial companies, as estimated by the Bank of England, fell to about 3 per cent Since then it has risen to 7 per cent. But, in borrowing to finance investment, companies are faced with real interest rates at very high levels in historical terms The incentive for savers to provide funds for productive investment and for companies to use them is influenced by the expected rate of return as well as the current rate. This will be determined by the economic prospects. It is disappointing that the Government's medium-term plans only allow for a very gradual change in the financial conditions in which potential investors operate. Only if Britain's long-term anticipated inflation rate can be held to, say, 4 to 5 per cent. will lenders, both domestic and international, be willing to supply funds at lower rates of interest.
High interest rates have been bad for the economy as a whole, and there has been some suggestion that the banks have gained more than most in expanding their lending activities while others have been in trouble There is quite a fashion in Labour Party circles at the moment to blame the City for many of the difficulties of our economy and the lack of investment but I would suggest to some of my friends in the Labour Party that they should read the Wilson Report, in particular the section dealing with lending for the development of North Sea oil, which indicates that on occasion the banks are not totally unreceptive to the needs of the economy It is not only in the case of LDCs that the banks have been concerned about the mounting indebtedness If one looks at bank returns, one observes very large-scale provision for United Kingdom companies, where there has been a long list of failures and receiverships.
The Government's monetarist policies have had some effect in lowering both interest and inflation, but 731 their effects upon the real economy have been devastating in human terms. I do not believe that it is simply the objective of Government policy to hold down inflation, important though that is. and even interest rates. We have got to measure the impact of this total monetarist strategy in human terms—in terms of the increased number of unemployed people who see no prospect of employment. Also, the efforts to restrain Government borrowing have been heavy-handed. Capital projects have been cut much more readily than current expenditure. That applies particu-larly in the case of the nationalised industries and infrastructural expenditure. The level of capacity utilisation—of capital and labour—is still too low, and is expected to rise only slowly. The appropriate degree of fiscal stimulus should still be higher, and judging from the evidence of other OECD countries there is little to suggest that higher infrastructural expenditure would necessarily cause a renewed rise in interest rates. The lowering of interest rates should not, anyway, be the single aim of Government policy. Government policy should be measured by a much larger canvas than that.
The speech of the noble Lord, Lord Beswick, was interesting, even perceptive in its analysis. It pandered a little to the current fashion in the Labour Party, that the City and the banks are the enemy who frustrate economic revival and make fat profits. A reading of the Wilson Report, and of the activities on the more inventive side of British banking and services, could correct that imbalance. Undue disregard of rare public spending could be inflationary. I commend to the House the controlled reflationary policies for our domestic economy which have been advocated by the Alliance. They are much more realistic in terms of meeting the problem of high interest rates.
May I also suggest that the continued insistence by my right honourable friend Roy Jenkins upon strengthening the international banking and financial institutions could make some contribution to achieving the objectives which the noble Lord, Lord Beswick, has in mind. It is not only high interest rates that are a contributory factor to recession and lack of investment. Currency fluctuation is a major factor in creating nervousness. To the extent that we are able to create international institutions which will contribute to a greater degree of stability in this field, we shall be achieving some of the objectives which have been sought in the Motion now before us.
§ 4.26 p.m.
§ Lord Jacques
My Lords, may I congratulate my noble friend Lord Beswick not only on his Motion but for the speech which he made in opening the debate. It reminded me of some of the excellent speeches he made from the other side of the Table when we were in office—a very pleasant memory. May I also say how much I welcome the abolition of the national insurance surcharge. It was a tax upon jobs. I do not expect immediate results from its abolition, but in the long term I believe that it will be beneficial. Its abolition is a step in the right direction.
I welcome the proposed change in corporation tax—the switching of relief from capital allowances to lower rates of tax. This change will correct two 732 imbalances This tax was too favourable to the company which tended to employ capital rather than labour, and too harsh on the company which employed labour rather than capital The change which has been proposed by the Chancellor will correct that imbalance Rates of depreciation will still be higher than commercial rates of depreciation; consequently, they will be fair and reasonable. I would say, from commercial experience, that they are just about right: a little higher than commercial rates, which is just as they ought to be.
The proposed change in corporation tax has also corrected the imbalance between the large, well-established company and the small often new company When, for example, money was spent on a considerable scale upon the development of a new product, there would probably be a loss as a result of the development of that product. This was not serious for the large company which would have made profits in other departments; it could set its capital allowances against the profits made by the other departments. The large company was therefore '"sitting pretty". However, the small company, especially the new, small company, which made losses would have no other departments against which to set off its losses. Consequently, it was at a considerable disadvantage By switching relief from capital allowances to reduced rates of tax the Chancellor is helping the small company It is important to help small companies because the products of our economy come, to a lesser extent than anywhere else in the western world, from our smaller companies Therefore we have great scope for using policy to help the small company.
I would also point out that the system of capital reliefs was expiring in any case because it was not working So much so. there was a total of £30,000 million of unused allowances carried forward because there were no profits against which to set them The situation called out for radical change and I believe that the Chancellor of the Exchequer was right in taking the action that he did, although I know that some of my colleagues would disagree with that point of view.
The impact of high interest rates on British industry has been devastating in the past three years. For a long period the question of whether or not a company was successful depended not so much upon its efficiency but more upon how far its funding was subject to the current rate of interest, that was the crucial factor High rates of interest do not merely reduce the disposable income of a company but also tempt the company, in order to keep its goodwill on the equity market, to pay dividends which it cannot afford to pay.
In the three years from 1980 to 1982 the earnings cover for dividends was at the lowest point it had ever been, even measured on an historic cost basis Measured on a current cost basis, the cover was even more inadequate In one half of the 24 industrial sectors monitored by the Bank of England, the aggregate payments in each of those three years was not covered by earnings One of the consequences was that there was practically no investment. Indeed, investment during those three years in manufacturing industry was negative; that is to say, the amount invested was less than the amount of depreciation of the existing assets Consequently, industries suffered 733 not only immediately but in the long term also, because of the lack of provision for the future.
We are often told that there is plenty of money and it is not because there is no money that there is no investment; that it is because there are no profitable projects in which to invest the money. May I suggest that the demand may be less than it would otherwise be because the rate of interest is too high. If we got the rate of interest down then the demand would probably be greater and more projects would be profitable. The rate of interest has to come down if the Western economy is to be successful. I believe that there is a good deal to be said for the proposal of Mr. Heath. He says that we should tackle high interest, if we can. by international action.
Mr. Heath's proposal is that the United Kingdom would lose nothing by joining the European Monetary System. If we did so, we could then use our influence to bring the European Monetary System, the dollar and the yen under the umbrella of the International Monetary Fund, and use that machinery for control-ling the world's rate of interest. That is probably a modern version of a future Bretton Woods. I do not believe that we are likely to achieve another Bretton Woods, because that agreement came at a particular period of time immediately after the war, when it was comparatively easy to get agreement and to act upon it. But I feel that Mr. Heath's suggestion will probably be the easiest way in the long term to approach the problem from an international point of view.
The noble Lord, Lord Taylor of Gryfe, told the Labour Party in pointed terms that so far as the rate of interest is concerned, this was not a sphere in which our country would legislate alone. I say to the noble Lord that this country has never been in a stronger position than it is now to legislate alone in this particular field. For the first time it has a balance of payments which is substantially protected by oil exports. That very substantial protection puts this country in a stronger position for dealing with interest rates. If we could do it to some extent before, then we can do it even more now. Why should we not control the outflow of money? Is it good that the insurance premiums and pension contributions of our workers should be invested abroad so as to export employment? Surely there is a great deal to be said for controlling the outflow of money. If you control the outflow of money then you can proceed to fix your own rate of interest.
It might be that the oil receipts were not sufficient to protect the balance of payments and that there was some effect upon the balance of sterling. But why should we be afraid of that? The present position is that industry—particularly manufacturing industry— is 25 per cent. less competitive than it was in the mid-1970s. This was almost entirely due to the over-valuation of sterling. If our attempts to reduce the rate of interest caused sterling to fall, it would do manufacturing industry and those who are unemployed a great deal of good.
We have areas of the country such as the West Midlands where for generations the percentage of unemployed has been substantially less than the 734 national figure. Now those areas have a level of unemployment which is substantially greater than the national figure. We have to do something about that situation. Let there be no mistake but that this country cannot live off service industries alone; that is too much like taking in our own washing. We must have manufacturing industry, and we must have it on a greater scale than exists at the present time. We must rebuild our manufacturing base. In particular, we must rebuild our engineering industries, including the making of cars, because they support our coal and our steel industries. Aid will be necessary to expand that manufacturing base and I suggest that aid should be on the basis of selectivity and not upon taxation, as it was through the old corporation tax.
I sympathise with the Government and with their wish to control inflation. I even sympathise with them when they say that theirs is the only method because they have seen other methods fail. But I would point out to them that in the long run the demoralisation which is caused by unemployment is far more serious for our society than is inflation—far more serious. We cannot afford to concentrate entirely on inflation and neglect the problem of unemployment.
As I have said in this Chamber several times, all Western governments must spend themselves out of depression. They have no choice. The choice is how they spend themselves out of depression. Whether the Government spend money on 10 people to lie idle on unemployment benefit or whether they pay them to do necessary and useful work which is required in the community—that is the choice. I will grant at once that putting men to work involves greater cost than paying unemployment benefit, but there are multiplying advantages. Instead of receiving unemployment benefit those men will be taxpayers. They will spend their income and the people who sell them goods will make more profit and become even greater taxpayers. So there is a multiplying effect which should be taken into account.
I believe that it is possible to have selected public works which would reduce unemployment without affecting our balance of payments because we can choose those works which have little import input. I would also point out that in a period where there is increasing productivity, as we have had in the last few years—that is to say, the output per worker has increased—it is absolutely essential that there should be expanding demand. If we do not have expanding demand then increased productivity results in unemployment. However, if we have expanding demand we can have increased productivity without increasing unemployment. That is all the more reason why public works should be used to expand demand.
In conclusion, I remind this House that no Government have ever been subsidised the way that the present Government are subsidised. They are receiving £8,000 million of tax from North Sea oil. What would some of the previous Governments have done if they had had that wealth coming to them? But that oil will run out. It will dry up. Unless we resolve our problem of unemployment before the oil runs out we shall be in extremely serious difficulties. Our standard of living will be threatened. Our educational standards will be threatened. Certainly our health service will be threatened. Those are the long-term 735 possibilities unless we can deal with unemployment. If we are to deal with unemployment we must have a Government who recognise that there is not just one way of dealing with inflation. There are several ways, and with some of the ways it is possible at the same time to have budgetary policies which will minimise unemployment. That is not possible—or is certainly very difficult—with the methods of controlling inflation upon which this Government insist.
For my part, I believe the future of this country depends on how far we can develop partnership in industry—a partnership in which a company, whether it be private or a nationalised concern, is in co-operation with the workers through their trade union. By that I mean the trade union should be consulted on all matters affecting the employment of its members. It should be fully informed. In return, the union should be prepared to enter into agreements whereby it is prepared to have all disputes settled by arbitration—indeed, binding arbitration. That is being done by the Japanese in our own country and if it is good for the Japanese it is also good for British companies. But before we can get anywhere near that, we need a Government who are prepared to co-operate with both sides of industry; a Government who are looking for consensus and co-operation. When that day comes, I shall see some future for Britain.
§ 4.45 p.m.
§ Viscount Trenchard
My Lords, may I also congrat-ulate the noble Lord, Lord Beswick, not just on introducing this interesting Motion but on the way in which he introduced it, which was worthy of this House and not so much reminiscent of the political to-and-fro that goes on in another place. I shall try to keep very much to that same note in supporting my noble friend. I do not know whether he needs my support, but I looked at the list of speakers at lunchtime today and saw that no one was supporting him from the Benches behind him, so I put down my name, which means that I shall set Hansard an even greater puzzle than usual.
I have common ground and, to a degree, a common background with the noble Lord, Lord Beswick. I have spent 30 full-time years in manufacturing industry, and I believe that the future of this country still depends upon our productive industries. I believe that it is absolutely vital that they shall have expanded very considerably before oil starts to run out—as, indeed, the noble Lord, Lord Jacques, said just now. Along with others, I certainly do not accept the thesis that we can live on service industries alone. In very broad terms, over half the service industries are themselves dependent upon manufacturing industry. If one looks at it in terms of the percentage of earnings, of the country's GDP, the contribution by manufacturing industry and the service industries dependent upon it is still by far the largest part of our earnings.
Before I leave the service industries one must defend them. In most cases, and in particular in relation to our financial sector, they have remained extremely competitive in the world and they have brought us invaluable invisible earnings. The majority of my remarks will be addressed to the competitive position 736 of British manufacturing industry, but we have to recognise that part of the invisible earnings sector remained competitive during a period when British manufacturing industry, did not.
I should like to say a word in relation to the long-term historical survey of the noble Lord, Lord Beswick, when he went back to the First World War. There was, of course, an era when currencies were absolutely sacred—prior to the Keynes era—when very low nominal interest rates existed There were periods, as we know very well, when there was actual deflation and not inflation. We also know that interpreters of Keynes, following him, more than Keynes himself, developed his policies so as to lead in the end to accelerating inflation all over the world, to budget deficits of greater and greater proportions and to the world finding out that this route to Utopia was not real if exploited as it had been We all hope—and there is common ground in this debate again—that we shall see world interest rates come down My noble friend pointed out that Britain is playing quite a leading part in influencing world interest rates to come down at the present time.
It is no good dismissing the significance of real interest rates and nominal interest rates and, as my noble friend pointed out, periods when we have had negative interest rates. It is no good pointing out that industry is not well served when it has to pay 10 per cent. on loans whether or not there is a high rate of inflation at that time. The fact is, as my noble friend made clear, that that kind of situation with inflation as its base, is thoroughly unhelpful to industry.
My noble friend has also dealt with the point that moneylenders—and not having been in the city at any part of my life I have no particularly high regard for them—do not earn big profits just because interest rates are high. That is a non sequitur. It depends again upon the rate of inflation and upon the real rate of interest.
If I may now turn to the main contribution that I would like to make to this debate, so much of this disagreement between us and moderates and sensible people on the Benches opposite and in the country holding similar beliefs is based upon the assumption that there have been slightly softer—from a monetary point of view—and better options, which have been practised in the past and which have not produced at least such bad results, as they see them, as the sound monetary policies of this Government. They point particularly, of course, to the tragic unemployment, a view that we all share.
Were those policies in the 'sixties and 'seventies, of moderate reflation as they were sometimes called, or of slightly augmenting demand, successful? I would like to point out that in any normal period of moderate world growth they would have produced disaster at the time that they were introduced. I believe that those policies were in fact disastrous but that the result of them was masked.
As some of your Lordships know I base this on the trend of British shares of market for its manufactured goods In 1960 we had nearly 20 per cent. of the world market for manufactured goods By 1978 we had 9 per cent. we had lost over half our world market share inside two decades Our production was actually no 737 lower, it was slightly higher and our standard of living, with hiccups, had not gone down; it had gone slightly up. What we failed to notice, or notice sufficiently, was that 13 more countries passed us by in the order of GDP per head of population or in the order of richness. That made 16 by 1978. The world market doubled; our shares halved; everybody else's standards of living rose enormously; ours stayed still.
This happened to be a period when the free world grew faster than it has ever grown before and probably ever will again. It is a question as to whether those policies could have lasted in any normal times. In my view, they quite clearly could not. They would have led to heavy unemployment as our shares of market dwindled—in the 'sixties even, not even waiting for the 'seventies.
So I believe that the whole divide between us in this debate and in nearly every other economic debate is based on the misconception of the last two decades of our history. The reality was that, with inflation, with controls of every kind on industry, with other factors which time prevents me from going into today, our manufacturing industry was becoming less and less competitive and we were losing more and more of our share.
It is hardly surprising that when the world recession arrived and growth stopped, the bloodbath ensued. It was perhaps made a bit worse by the extremely strong exchange rate for the pound at that period, which owed some of its strength to the North Sea oil coming on stream at the same time. It was not so much the interest rates that caused the bloodbath; it was our uncompetitiveness, the end of world growth and then the strengthening of the pound.
Things really are improving. The noble Lord, Lord Taylor of Gryfe, used the word that the improvement was a "staggering" one. That word has two meanings. You could say, bearing in mind how uncompetitive we were in 1978, the fact that we have stopped the fall in our world shares of market, that we are growing again faster than most of our competitor countries, that we have controlled our unit costs better than they have, that that change in a matter of a few years is indeed staggering. Indeed, it is clear that the Stock Exchange is reacting to this improvement in the share values of British manufacturing industry. When I ceased to be a Minister and was able to look after my small savings again, I am glad to tell you that 1 put them back into British manufacturing industry in this country, including industries like textiles. I can further tell you that as a result I have made more money than I was paid as a Minister.
It is clear that every estimate of figures in 1983 has subsequently been revised upwards and that the rate of improvement is 3 per cent. rather than the 2 per cent. a little grudgingly admitted by the noble Lords on the other side. I do not believe it is nearly fast enough because I think we have the opportunity of a century to recover lost market shares and to go ahead. Our costs in this country today are in my view extremely competitive.
I had a great deal to do with the introduction of the statistics about how uncompetitive we were in relation to a certain base year, which I think the noble Lord, Lord Jacques, mentioned. I did it because I wanted my colleagues in Government, when I was at the 738 Department of Industry, to understand just how great were the pressures on an uncompetitive manufacturing industry with a strong pound at the same time So I know the detail of the statistics which I dragged out of the Central Statistical Office at that time Furthermore, I know that today we are competitive and are proved competitive by the figures which my noble friend has given and which I mentioned just now.
Our productivity increases in the past two years are of Japanese proportions, that is, they have not been produced nationally by anybody else except Japan in recent years, and I believe they can be kept up. I would like more investment. I would like more investment to have taken place, but it is a truism of life that if you are hopelessly uncompetitive you pay for it, and I am afraid we have paid for it. But our investment is rising and our productivity is rising dramatically, which proves that our existing investments are not incapable of better utilisation.
If one studies these statistics of world growth and of shares of market, and if one looks at the longer term since World War l, as the noble Lord, Lord Beswick, has done, one really cannot doubt but that the world will be better served if there is sound monetary policy—not as the only policy, but if there is sound monetary policy in as many countries as possible I, too, as an industrialist am critical of the particular significance of any one monetary measure, and I welcome the greater flexibility that has been shown by the Government in recent years in relation to particular measures.
It is suggested that we can spend more money in the public sector, or on capital projects, whether they be in the private or the public sector, and that if we do those things, it will not really affect inflation. It is money, like all other money, and it will be spent and paid to people, and if we spend more money than we have earned as a country and start running our deficits up again, we shall only undo the really dramatic turnaround in our competitiveness of the last three years.
It is no good classifying different aspects of expenditure in the home market and saying that this one or that one does not count They would produce a return to the policies of the 'sixties and 'seventies, and if they produced it in a period of only slow world growth, or more normal world growth, then they would lead to instant disaster Here I think of certain previous policies—and I am not suggesting that they were all Labour policies; they also included Conservative policies under the Heath Government But if we had returned to those policies in the recent recession, or if we returned to them now in a period of slow growth, they would produce disaster because there would no longer be the huge world growth to mask our policies of fool's paradise, as they were.
§ 5.2 p.m.
§ Lord Soper
My Lords, I am sure that the House will be grateful to my noble friend for introducing a topic upon which his own assertion was that it ought to stimulate thought, and I dare say that a great deal of thought has already been stimulated on the very wide issues that are involved in this Motion. I am persuaded—I was almost going to say. "stung"—into 739 participating in the debate by the contemporary resurgence of the quite impudent notion that the clergy should keep out of politics.
I have no prescriptive right and no expertise with which to compare my own competence in this field with that of the politicians and others who have already entertained and instructed your Lordships today. But I reflect that upon no subject has the Church historically spent so much time as it has upon the practical issue in the realm of economics of the place which usury, or interest, should play, or should not play, in a society which can claim to be Christian. Therefore I shall presume to make comments about three of the deliverances of the Church—or rather two positive deliverances of the Church from time to lime—and an almost total absence of any generalised programme and policy over the last few centuries.
The mediaeval Church condemned upon the Aristotelian principle the taking of interest because, as they insisted, money was barren, and therefore those who manipulated money were not making any contribution to the ongoing society in which they lived, and were to be reprimanded, and indeed to be condemned, for so doing. I notice from the wording of the Motion the extent to which the manipulation of money, which is itself sterile in its processes, has become a very large part of the economic field.
Secondly, the Church maintained that usually the ugly sister (if you like) of interest was itself a contribution to the sin of avarice, which was one of the deadly sins, and that it is inescapable that those who pronounce upon the uses of interest may indeed be committing a heinous crime, and that therefore any aspect of interest should be regarded with the greatest of care and, where it was permissible, should be well scaffolded within principles which did not encourage, but rather discouraged, the evil of avarice.
Let me therefore, for a brief time, recall the affairs that historically belong to these three propositions. The Schoolmen in the Middle Ages, endeavouring to formulate their ideas with regard to the barrenness of money, described goods in two terms: there were those which were fungible, and those which were non-fungible. The Schoolmen yielded to no modern chancellors in their ability to be almost entirely incomprehensible, and therefore I would presume, if I may, to define what they meant by the word, "fungible":Fungible is said of a thing which is the subject of an obligation, when another thing of the same or another class may be delivered in lieu of it".I have thought about that for some time, and it really means that a flat swap is permissible.
But the quality of the fungible goods—those that have a limited usefulness and which can be exchanged, such as, say, goods that can be eaten—is very different from the non-fungible quality of that which can be borrowed, such as a horse, or a house, for that has a continuing usefulness. Therefore from the very' beginning it was possible for the Schoolmen to recognise that in some concerns and in some affairs interest was permissible. But money was not non-fungible, it was fungible. It was barren in itself, and therefore those who manipulated it for profit, or for 740 the increase of their own wellbeing, were committing a sin.
That has I think remained a very potent element in the analysis of the position which money now plays in a modern economy where, as I say. its manipulation is of great importance to those who can by such means create a false excess of money without contributing anything that is in itself creative to the sum total of the wellbeing of the community.
As to the second proposition—that which is involved in the question as to whether it is possible to take interest morally—the fathers of the Church recognised that in some circumstances it was necessary to provide an outlet allowing that money, though it was barren, when it was borrowed might yet indeed cause misfortune to those who had lent it. That produced two ideas which, if your Lordships will allow me. I shall put in Latin, which makes them sound rather more important. The proposition lucrum cessans (that is to say, money was lost because it was borrowed or lent) was considered a just reason for a modest amount of interest to be taken. The other, damnum emergens (which sounds much more ominous), where by the lending of money you yourself were suffering some loss, also permitted the taking of interest.
But, as the history book recalls, it was a losing battle against those who, in an increasingly competitive world, and with the emergence of what is so often called economic man, were in fact involved in processes which no longer permitted the somewhat simplistic idea that any taking of interest was itself to be condemned.
So I turn to the third of the comments which I believe are to be derived from an analysis of the history book, in particular with regard to its Christian content. It is true that Luther, who was obviously a child of the Reformation and of the Renaissance, was conformative very largely to the Schoolmen's principle. He did not believe one gulden could produce another. In the Reformation processes he was accompanied of course by no less a figure than Calvin, and I think it may be argued that Calvin was the father of the capitalist system, in as much as it was said of him that he treated money as an apothecary treats poison. In much of what he said, he announced his total hostility to any aberrance from the mediaeval doctrines. Yet, at the same time, he opened the door to the capitalist system in no uncertain fashion. And, indeed, if he regarded money as a poison, he had a very secure place for it in the medicine chest he operated. This is the evidence that begins to emerge as you read, for instance. Pascal's Provincial Letters, when the Christian Church is confronted with the new emergence of a capitalist society, or the beginnings of it, with the discovery of silver on the other side of the Atlantic and the emergence of the middle classes and the burghers in Holland.
What happened, if I may say so without offence, was this. The Christian Church decided to give up the struggle and allow what Tawney so immaculately set forth in his Religion and the Rise of Capitalism that instead of the Christian Church maintaining a generalised attitude to the whole economic field, it abdicated. It abdicated that field to such an extent that I have to tell you with regret that no less a figure than 741 John Wesley, my spiritual father, announced that the well conducted Christian was enjoined to get all he could, to save all he could and give all he could—a thing that was totally irrelevant and inconsistent with the general principle that any economic society must conform to the general pattern of the Christian faith.
It is the abandonment of that attitude of reliance upon moral principles that I believe to be the outstanding comment that the absence of any denned and regular opposition has meant for the Christian Church and, indeed, for the modern world. Therefore, although it may sound extravagant in your Lordships' House today, I find that the capitalist system is immoral and the evidence can be found in the second part of the proposition that we are debating—that with an overplus of all kinds of commodities within the capitalist system, the rate of penury and. indeed, of total destitution tends to increase and that the third world is very largely in a condition now in which it is impossible to find the kind of interest available in order to save itself or to be helped towards some kind of better situation.
I know that this socialist concept, for that is what it is, is not particularly popular today. But if there is one element within the general announcement of what the Christian Church has done. I stand here to condemn, I hope humbly enough, its total reliance upon the market forces in its general concept of what modern society ought to be like and its abandonment of that moral principle which began with its prohibition of usury and which could have been the answer to the ever-increasing processes of monetarism and the secular society in which what is profitable takes precedence over what is right.
These may not be particularly practical concepts within the framework of this debate. But it does for me become even more important not that the clergy should keep out of politics but that the clergy should be much more informed and better aware of what is the nature of the politics in which they are intending, or should be intending, to take their part. If they do that, 1, for one, believe that they will have to be much more revolutionary. They will have to make a much more categorical denunciation of the general principles of the society that now pervades the world. If I am in a very small minority, at least I have said my say.
§ 5.14 p.m.
§ Lord Seebohm
My Lords, I am sure that your Lordships will all agree that the noble Lord. Lord Beswick, is a past master at asking very difficult questions. I think that your Lordships will also agree that his charming and innocent way of putting a question might lead one to fall into the trap of thinking that it is fairly easy to answer. In fact, when he speaks one realises that he has done a great deal of homework and that it will not be easy to answer all his questions. I agree with him entirely about the evil of high interest rates, but I do not agree with his analysis. It is that topic with which I intend to deal.
It is first necessary to say something about nominal rates and real rates. All of us know what nominal rates are, but there is some considerable confusion about what are real rates. The difference between nominal rates and real rates is the expected and subsequent rate 742 of inflation, not the rate on the day that you are looking at. It so happens that right through the 1970s and for most of the 1980s we had negative interest rates except. I think, for 1977. At the time in 1975, I remember, when inflation was running at 20 per cent., the rate at which my firm, Finance for Industry, was lending money was 16 per cent. We were compelled to have that rate for the simple reason that we had to raise it ourselves at very close to that figure. Today, a good bank customer would probably be able to borrow at about 10 per cent. The expected rate of inflation is 5 per cent. So now, there is a positive rate of 5 per cent., which is historically very high indeed. There is considerable scope, in my view, for getting interest rates down, one way or another.
It was by no means a disadvantage in those high rate times for people to borrow at 16 per cent. if they were to invest in fixed assets. For instance, if they were putting up a factory and had waited a year, it would have cost 20 per cent. more, and another year, 20 per cent. more than that. Looking back, it would have been much cheaper to pay 16 per cent. particularly if done on a floating rate. The story is very different when dealing with finance for current assets. Let us suppose that you are quoting for a contract in the Middle East, which will take a year and for which you have to borrow all the working capital. If you are being charged at 15 per cent. by your bank or the market, then that is a direct 1 5 per cent. cost that you have to add in the tender. When competing against a German firm, possibly paying only 4 per cent., you have an 11 per cent, figure against you before you start. Nominal rates are very much more important for normal business arrangements than is the real rate.
To understand what has happend to the cost, supply and demand for money, I hope that I may be forgiven for describing briefly the fundamental change in the money market mechanism that took place in the 1960s and early 1970s. This was as I saw it in my branch work at the bank and later sitting at my desk in the City. The system that started then has persisted to this day. In the 1960s, owing to the fact that London was (and still is. of course) the financial centre of the world, the foreign banks streamed into London, first to take advantage of the Eurodollar market but also—this is true of the American banks in particular—to compete directly with us in more ordinary banking lending. They operated in the wholesale market and therefore had no deposit base and no money at all with which to operate, since they did not provide current or deposit accounts for the general public. As wholesale banks, they were interested in lending fairly large chunks of money for, say, three or four years to blue chip companies. But, as they had no money available, the only way they could go into the money market was on their good name to borrow short for three or six months at a time.
However, to borrow short on variable rates and then long on fixed rates was a quick way, as everyone knows, to bankruptcy. They therefore invented or at least introduced into this country a fairly new type of lending. This was to lend for a medium term on rates that were not fixed but floating for six months at a time and were then re-fixed at a rate at which they could raise the money on the market. In this way they could lend long-term money at short-term rates. This, of 743 course, became a hot selling point to big companies because short-term rates in those days were considerably lower than long-term rates.
In my view that began the complete destruction of the fixed interest bond market for a whole decade and more. These banks, therefore, could match exactly their borrowing and lending costs, and made their profit from, Say, a 1 per cent. turn or "add on" to the raising rate. This had two damaging effects on the clearing banks. First, they lost an increasing proportion of their deposits to the money market and they also lost a growing amount of their profitable and trouble-free tendings.
The comparatively new method of borrowing short and lending long was, to my mind, an undesirable development because it meant that the lending banker—in this case mainly the Americans—in order to maintain his medium-term contract, would have to pay the money market rate of the day, however high it was, and pass that on to the borrower. This defect really came to roost in 1972, when the Heath Administration decided to make a dash for growth. I had one customer who was offered £20 million, which he needed, for 10 years at 8 per cent. at the beginning of 1973, but having refused because he preferred the short-term rate he was paying up to 14 per cent. 12 months later. As it was a leasing company with fixed interest to its leasing customers, it took several years to recover, and meanwhile he was virtually bleeding to death.
The other aspect of high interest rates to which the noble Lord referred was that they encouraged the unsound but financially profitable people. I should like to know more of his views on that matter, because in my view the reason why the property market blew up and then failed had nothing to do with interest rates, but was simply to do with inflation. The fact that interest rates were high made it less profitable rather than more profitable to buy property and to speculate on it. In my view it was entirely due to the fact that there were negative real rates and inflation was so much higher than the interest rates that they could make a considerable profit.
The other main point that the noble Lord mentioned was the question of how we can control interest rates. Here we are on a very difficult point. The first principle that we must accept is that you can control interest rates and let exchange rates rip, or you can control exchange rates and let our interest rates rip. We have been trying to compromise on that as far as we can, but there is only a very limited way in which we can do it. The Bank of England has clearly in the last few days been in the money market buying sterling in order to keep the rate reasonable, with the exchange rate not going too low, since the attraction of the American market with high rates is taking international money, over which we have no control, from sterling into dollars. I think that the noble Lord would have liked to see some form of exchange control, but I believe that that would be a great mistake. The Bank of England tells us that the increase in the rate, possibly, due to the freedom of the exchange rates, could be as much as ½ per cent., but not more.
The other point which I should like to raise is the problem of the third world. Here we must remember 744 that when the oil crisis arose in 1973 the oil consumers were in a ghastly position compared with the oil producers There was a massive transfer of wealth from oil consumers to oil producers This resulted in large quantities of dollars floating about on the international market, and third world countries particularly were in a desperate state in trying to buy absolutely essential imports when they had completely run out of foreign exchange.
In that instance the problem of recycling came in, and in my view the banks did a magnificent job. They recycled at a considerable risk and it saved some of these countries from suffering a major disaster because they could not import their essential imports After a time, as all this money was borrowed on the Euro-dollar market interest rates began to rise with inflation and naturally those who had lent the money on a floating rate basis had to put up their rates to the rates which they had to pay the money market to get it and that introduced the disastrous interest rates which the third world has been charged.
I am afraid that I do not know the solution. Some banks may yet go bankrupt. On the other hand, there is some sign from various sources—the oil companies themselves the OPEC countries and other sources—that it is gradually being sorted out Certain large debts have in fact been written oft as regards some countries—not necessarily the sovereign debts, but other debts such as trade debts—in fairly large quantities So I am hopeful that it will come through, and that in a few years' time we shall be able to see something like normal conditions.
I should like to confirm what the noble Lord, Lord Taylor of Gryfe, has said. Bankers hate high rates We are longing to see them come down. We make a bigger margin when rates are high, but high rates limit our business customers In the long run low rates increase our business, increase trade and everything else. We are longing to see them come down In order to bring rates down we have to control inflation, and inflation goes hand in hand with high nominal rates If we want to cure the latter, we must cure the former.
§ 5.27 p.m.
My Lords, the speeches of my noble friend Lord Beswick and others have made a formidable case in support of the thesis of his Motion; namely, that under current financial policies the wrong industrial and commercial activities are being encouraged and the wrong people are reaping the benefits. It is about the last part of my noble friend's Motion—that which deals with the third world—that I would like to speak. For it is in the third world that we see the most painful consequences of present policies and it is there that we see the most threatening signs of catastrophe The noble Lord, Lord Seebohm, has just touched on the problem which I would like to deal with at a little more length.
These problems have not suddenly tome upon us Indeed, as the noble Lord Lord Seebohm, indicated, they date back to 1973 or 1974 when the rapid and massive increase in the price of oil brought about a general price inflation to the very great detriment of, particularly, the poorer non-oil producing developing countries Ever since that point we have seen deepening divisions in both national and international 745 societies. At home, increasingly, as my noble friend Lord Jacques pointed out, the division is between the "haves" and "have-nots", defined as those who have a job and those who do not have a job. But in the world at large there is a deepening divide between the developed industrialised countries, on the one hand, and the underdeveloped countries, on the other hand. But there are also deep divisions within the third world itself, between the countries which are fortunate enough to have oil and those that do not.
In view of all the complexities that have been rehearsed in speeches so far about the cause and effect of these troubles and divisions—and I agree with the noble Lord. Lord Taylor of Gryfe, that the causes go much deeper and much wider than the one question of interest rates—I believe that my noble friend Lord Beswick has done well to focus the attention of your Lordships' House in this debate on the particular element of interest rates. Certainly in the third world it is interest rates which, over recent years, have been creating the severe debt problem. It is a problem that has been getting worse year by year.
I ask myself: why has this been so, particularly over the last five years? Of course, these have been the years of severe depression and unemployment throughout the world, and they have been years in which restrictive monetary policies have been applied throughout most of the industrialised world, with rising interest rates as a major feature of those restrictive monetary policies.
Whatever may or may not be the evidence that these policies have been beneficial in our own country or comparable countries, I suggest that there is plenty of evidence that they have produced disastrous consequences in the developing countries. Because the economies of the developed countries have been depressed, those countries have imported less from the third world. As a consequence, commodity prices have slumped and export earnings have declined. The combined effect of high interest rates and low commodity prices has recently been pin-pointed by the trade Minister of one of the suffering countries—namely, Brazil—when he said that:if interest rates and commodity prices had remained at 1979 levels, the country's debt would now be only 47 billion dollars instead of a calamitous 95 billion dollars".In other words, their problem would be only half as large, even though it might be disastrous in any case.
Moreover, we must remember that the prices of manufactured goods that the third world needs to buy have risen during that period, so that the developing countries get caught between the two blades of cruel scissors in trade. I have the privilege of serving on Sub-Committee B of your Lordships' Select Committee dealing with European affairs. We have recently heard impressive evidence from spokesmen directly from the third world countries. This is how one of them expressed their dilemma in concrete, down-to-earth terms:a few years ago we could buy a tractor for something like 10,000 dollars. Now it costs us about 25,000 dollars…A truck used to cost less than 40,000 dollars but now costs more than 70,000 dollars. The cost of a bus has risen from 60,000 dollars to 125,000 dollars. At the same time on our exports side, the price of a tonne of coffee has dropped from 5,000 dollars to 3,000 dollars…It is the same thing for unprocessed hides…We could sell a tonne of unprocessed hides for 2,300 dollars; now this fetches only 1,300. We could go on 746 like that. What in short we are saying is that on the one hand our terms of trade are deteriorating in a substantial degree and therefore, although we are trying to realise more of our own export earnings, these earnings are just not enough because we simply have to produce more and more to just only maintain our level of earnings".I thought that that was a graphic description of the dilemma facing third world countries. When they are faced with grim facts like that, what can developing countries do? I suggest that the answer is just one word: "Borrow" and in the past few years they have indeed been borrowing They have been borrowing at high rates of interest from private banks and the consequent debt burden is becoming overwhelming It has been estimated that for 21 major borrowers among the developing countries, the ratio of outstanding debt to exports shot up between 1979 and 1982. I shall illustrate the shooting up in this way.
In 1979 the debt was 133 per cent. of exports, which was alarming enough, but only three years later the ratio had gone up to 172 per cent. But it is probably the figures of interest and of amortisation which are more significant for today's particular debate They are equally disturbing In 1979 of every 100 dollars' worth of export earnings by these 21 countries, 50 dollars went to the service of debt In 1982—three years later—of every 100 dollars of exports no fewer than 75 dollars had to be used for interest and capital repayments In the major Latin American countries—to which at one point the noble Earl, Lord Gowrie, referred—the servicing of debts swallows up all the export earnings, and a good deal more.
Perhaps the greatest irony of the situation over these past few years, the late 1970s and the early 1980s, is that it was when the balance of payments difficulties of developing countries were becoming most crucial that official aid flows slowed down and, in some cases, even declined. In 1981—which I think is the last year for which overall figures are available—official aid to developing countries declined by 6 per cent. in current terms and even more in real terms.
That is one of the main reasons why the developing countries had to turn to private banks, and they have to pay the private banks' rates of interest which are considerably higher than the rates which are required for official aid. That is why these debts to private banks have become so significant in recent years. But I suggest that there were other reasons as well Some developing countries, mistakenly, may have seen this private lending as a means of avoiding the conditionally which is so closely attached to IMF operations. There is a good deal of conditionally, of course, in relation to bilateral official funds But that freedom which they perhaps hoped for was short-lived, because the private banks are now needing to lay down strict conditions when negotiating new loans. Moreover, they are tending to confine their new lending to the richer of the developing countries so that the poorer ones are deprived still more of the resources that they need.
However, in my view, the major part of the blame for the present critical situation, with its ever-present danger of defaults, rests principally with the banks themselves In my view, they lent money in a reckless and irresponsible way during that period At home they were losing customers in the developed world because of the depression, and they saw a chance to fill 747 the gap by lending to developing countries at high interest rates and with the prospect, as they hoped, of high profits. Those developing countries which have no oil have found themselves paying very high interest rates indeed. The average figure in 1981 was 18 per cent., whereas it had been 8 per cent. 10 years earlier.
These rates are the so called "floating rates" which the noble Lord. Lord Seebohm, has explained, and which vary with the rates which the lender has to pay on the short-term market and which are updated every few months. This is the new mechanism which the noble Lord, Lord Seebohm, described whereby it is the borrower who has to bear a major risk and it is the lender who finds protection through this method.
What is the effect of all this so far as the developing countries are concerned? It means, I suggest, that the "have-nots" now have even less. In your Lordships' House we have several times over the past few years debated the condition of the third world and its problems. Notably we did so in connection with the two Brandt reports and in a debate more recently when the noble Lord, Lord Seebohm, so effectively introduced a debate on world hunger.
It is during that period while we have been talking about these problems that the debts have been rising. It is during that period, too, that the living standards of the developing countries have been falling and the problems of hunger, of malnutrition, of high mortality rates, of illiteracy, of unemployment and of homelessness have been getting worse. The countries which suffer from these maladies are now able to produce less themselves because they have been deprived of the resources for production. And since their populations continue to increase, the inevitable result, as we see so often on television screens and in descriptive articles, is increasing destitution for their populations all round.
So what are we to do about this situation that has developed to such crisis proportions? Temporarily, of course, we must patch things up—and that is what is being done. The latest bit of patching up was last weekend when the Argentine was the latest of a series of countries to be rescued by a package deal put together by the United States and a number of Latin American countries.
The noble Earl, Lord Gowrie, took our minds back two years to the similar situation in Mexico when a package put together had become necessary. He said that we should not be complacent in this matter, and I thoroughly agree with him; but it seemed to me that he sounded a little complacent regarding the ease, or the apparent ease, with which the crisis of a few years ago had been overcome. But the point is that this was one in a series of crises: crisis after crisis, following one after another. There is one mentioned in today's paper, that a package deal is necessary to get Nigeria out of its critical balance-of-payments situation. The point is that these arrangements which are being reached from time to time are essentially temporary. They are essentially patching up. I believe that they are little more than a postponement of the evil day of default and collapse, unless we adopt more fundamental policies to deal with them.
Before I attempt to deal quite briefly with what should be done, may I point to one thing that should 748 emphatically not be done; namely, retrenchment on official aid to developing countries. To make my point I would recall what I read in the Hansard of another place of 14th March in what struck me as an extraor-dinary Written Question and Answer, when Mr. Marland suggested that part of aid to four specified countries should be earmarked to liquidate debts. I was glad to see that the Minister of Overseas Development gave his colleague a robust answer to the effect that it was not Government policy to allocate United Kingdom bilateral aid for the direct purpose of liquidating outstanding foreign commercial debts. I was most relieved to see that answer, because there had been no suggestion from the questioner that aid should be increased for this purpose. It was simply suggested that part of the aid programme should be switched to creditors at home. I would only make the comment that I hope that Mr. Marland was speaking on his behalf alone, in which case perhaps it does not matter very much, but if he was representative of any significant body of opinion in his party, then I suggest it is much to be deplored.
Indeed, instead of pursuing policies of retrenchment through restrictive monetary methods, through the reduction of official aid, and through, as we have seen. the provision of expensive bank loans at rates which the third world economies cannot possibly sustain, we in the developed world must be bold enough to adopt those remedies which were put forward so cogently in the two Brandt reports. We need, that is to say, an expansion of official aid on concessionary terms both bilaterally and through institutions such as the International Development Association and the Special Drawing Rights of the International Monetary Fund.
Above all, we should acknowledge the central message of Brandt; namely, that the problems are mutual, they concern both the developed and the developing world, and the solutions must also be mutual. This means surely that we should do what we can for the development of the third world countries in order that they can provide a better market for us. but it also means, the other way round, that we need co-ordinated economic expansion in the developed countries in order that we can be better markets for the developing countries. I believe that it is vital to understand that point about the interdependence of North and South.
It is this interdependence of the fortunes of the richer countries with the fortunes of the poorer countries which is illustrated in the double-barrelled nature of the Motion which my noble friend Lord Beswick has moved. For he calls attention in his Motion—as he did effectively in his speech—to the effect of high interest rates not only on our own economy here but also on the much weaker, much poorer economies of the countries in the southern hemisphere. It is my view therefore that his Motion, and even more his speech, have rendered a signal service to your Lordships' House today.
§ 5.49 p.m.
§ Lord Walston
My Lords. I too am grateful to the noble Lord, Lord Beswick, for having given us the chance of discussing this important problem, and particularly for having allowed us to widen the sphere 749 so that it embraces, as it must embrace, the third world. I am happy to be following the noble Lord, Lord Oram, and I thank him for his also admirable speech. I should like just to underline one point that he made, particularly in his closing remarks. That is the enormous importance of the third world to us in this country and to the developed world as a whole as a market for our products. The figures that he gave for coffee, for tractors, and for buses are of enormous significance. Until the third world is in a position to buy more from us our economic recovery will never be as rapid or as complete as it should be and as we hope it to be.
I shall deal solely with the third world and two aspects of it. Some 15 years ago I did a calculation. It was something rather better than a back-of-an-envelope calculation but I do not claim for it any enormous accuracy. In that calculation I worked out the capital cost at the then prevailing prices in this country of providing a road system, a hospital system and an educational system of a standard that we have here. The capital cost had to stand interest at 5 per cent. The cost per head of the population here came out at a figure of £50 per year in interest charges alone. Since that time costs of building roads, hospitals and schools must have increased by at least four times, and interest rates have doubled: in other words, that figure of £50 per head would now be something closer to £400 per head, or possibly even more than that.
I am not suggesting that the third world countries can expect us to provide them with facilities of that order; to arrive at that would take centuries. But I do suggest that today they require facilities which are at least 25 per cent. of those we enjoy in this country and which would—if they were to pay the normal interest charges—mean a payment for them of £50 per head. That is something which perhaps we can support in this country. With average incomes of £200, £250 or £300 per head, which is the case in many of the third world countries, it is clearly impossible. I am therefore forced to the conclusion that the provision of the essential facilities of schools, hospitals, and universities and other places of education, cannot be provided out of money which is lent, no matter how concessionary the terms are. They can only be provided as free gifts, and that is the main aspect of the aid from the rich of the North to the South. We can forget about interest rates in that case because it is a contribution—charitable if you like; but self-interest I believe also applies.
We move from there to different aspects of development where high interest rates are playing such a devastating part, as was pointed out to us by the noble Lord. Lord Oram. What can we do about it? One of the most important needs for development in a country is a communications system—roads. Brazil is a fabulously potentially-rich country. It is fabulously poor and underdeveloped at the present time. Nigeria is another country of the third world in a similar position, and your Lordships will know of many others which require more roads and more transport systems.
I suggest that instead of paying interest at fixed rates on the loans necessary for those roads, we should learn from the experience of the United States in their great days of railway development at the end of the last century. The West was opened up very largely because 750 the railways were given concessions of land along those routes which they developed and where their tracks ran. They became rich not so much out of the traffic which they carried as out of the development land which grew enormously in value as a result of these new communications. The same thing will happen in the third world countries as communications develop—not in railways now—in the form of roads and possibly airfields.
I suggest that the reward to the investor—be it the World Bank or private enterprise—should not be the fixed interest under which the countries are today suffering, but rather land concessions in those areas which are to be served by the new communications. They will, in fact, probably do very much better in that way than by having their fixed interest returns. They may have to wait longer, but from the commercial point of view they will benefit from it. In other cases the answer surely must lie to some extent in an increase in equity shareholding and a decrease in fixed interest borrowing. In plantations, mines and areas of that sort, which will in a matter of a few years have a serious and profitable commercial future, it would be far better for all concerned if a large part of the money needed for developing such enterprises were to be put up in the form of equity. If the commodity market slumped, the lender as well as the borrower would suffer. If and when it boomed, both would profit. It is the diminution of the equity element in lending to overseas countries for their economic development which, in my opinion, is one of the major factors causing the present problem.
Another major factor of course—but it is too large to embark upon here—is the instability of commodity prices. It is my own opinion that until we have a system—such as that which we had under the Commonwealth Sugar Agreement—for stabilising prices of major commodities in countries of the third world, we will always be faced with these recurrent economic difficulties.
There is a third problem of a rather smaller nature and at a lower level, but one which is undoubtedly serious in many third world countries. I am referring now to the small economic enterprises from the small farm or plantation upwards. As we have heard, the slump in commodity prices has meant that a lot of these concerns have for a good many years been running at a loss. It has been accentuated in many cases, as in central and Southern Africa at the present time, by an unprecedented three-year drought. Some of those enterprises are very small and some are substantial commercial organisations, but the only way they can keep afloat is by borrowing from the bank. Their indebtedness is far too heavy. The banks are in a difficult position as they are already owed money, and it does them no good to let any of these enterprises fail because no one will come along and buy the property at the present time. But a very large proportion of the increased income which is coming in in commodity prices at the beginning of the recovery has to go, not to pay off the bank loan, not to extend production or to re-equip, but simply to pay the interest on the existing bank loan. Here again, if the bankers operating in those areas were empowered by their owners to advance money in return for shares for the equity of the enterprise. I believe that the situation 751 would recover itself very much more rapidly than it possibly could at the present time.
It is of enormous political importance for us that the third world should be stable and that its prosperity should grow. For political reasons, it is only prudent for us to do what we can along the lines which have been outlined today by various speakers, including possibly my own suggestions, to improve the political stability of these regions. Economically, undoubtedly it is in our interests that the third world should be more prosperous as buyers of our own goods and the goods of our factories.
From the moral point of view—I would here, very modestly, associate myself with the remarkable speech of the noble Lord, Lord Soper—if we invested as financial enterprises in the equity and shared the risk with the developers, the people doing the work, then as to the very well justified accusations of usury and of going against the tenets and teachings of the Christian Church, which is supposed to guide our activities in all respects, political and otherwise—by sharing in the equity rather than by lending at usurious rates of interest—I believe we would be coming closer to the moral standards which the noble Lord, Lord Soper, has expounded to us.
§ Viscount Massereene and Ferrard
My Lords, before the noble Lord sits down, I think he has rather forgotten that in some of these third world countries there is instability of governments. I understood from his speech that he suggested that if we lent them money we could have equity in their companies or have land. We have experience of this. If this is done with unstable governments—and unfortunately so many of the governments in the developing world are unstable—we can say goodbye to our money. The noble Lord, drew a parallel with the railways in America. True enough, that would open up—
§ Viscount Massereene and Ferrard
My Lords, I will tell the noble Lord afterwards where he was wrong.
§ 6.3 p.m.
§ Lord Hatch of Lusby
My Lords, there are two factors in this debate that strike me as interesting. The first is that if your Lordships include myself, the last five speakers have concentrated on that part of the Motion which deals with the third world, with the poor of our globe. I trust that this is not lost on the noble Earl who is to wind up, and that he will spend a substantial part of his winding up speech in answering the points that have been made.
The second factor is that again, as I have mentioned so often from these Benches, here is a debate on business and financial interests. Out of 13 speakers there has been one Front Bench speaker and one Back Bench speaker from the party of business: the Conservative Party. With sympathy to the noble Earl, I think he might draw the attention of the managers of his party to this constant lack of interest that is shown from the Benches behind him. We would like the 752 opportunity of a little sniping from time to time. We do not hear the orthodox business point of view put forward from those Benches and debates of this kind are largely confined to Members on this side of the House.
The Earl of Gowrie
My Lords, I am most grateful to the noble Lord for giving way. I drew substantial comfort from the speech from the Cross-Benches of the noble Lord, Lord Seebohm, and even to a large degree from the speech from the Alliance Bench of the noble Lord, Lord Taylor of Gryfe.
§ Lord Hatch of Lusby
My Lords, I am very glad that the noble Earl is making some movement away from the traditional party which he supports. Perhaps he can move even further by the end of the debate.
It has been mentioned by several speakers this afternoon, and particularly in the opening speech of my noble friend Lord Beswick, that the traditionally capital importing countries of the world today have now become capital exporting countries. Indeed, one of the most remarkable comments made was that passage in the speech of my noble friend Lord Beswick when he pointed out that last year the third world countries were exporting 10 billion dollars more than they were importing; that they had received 85 billion dollars and that they had sent abroad 95 billion dollars. What kind of a world is this? What kind of a world is it in which the poor are subsidising the rich? That issue goes much deeper into the fabric of our world society than is shown by the figures, because it means that the farmers particularly of the third world countries are now having to produce crops for export instead of crops to feed the population of their countries. Those crops are linked, tied, to the necessity to service the debts which their government have incurred.
The noble Viscount opposite has drawn my attention to this from time to time. There is extrava-gance in the third world, certainly. There is extrava-gance in many countries. If one really wants to see extravagance one cannot do better than go to the United States of America. There is extravagance; there is wasteful spending; there is prestige spending. All that has to be admitted and should be admitted. It has been pointed out by many of us who have spent many years in third world countries. But do not let us neglect the responsibility of the developed world, the Western world in particular, for the incurring of this tremendous debt burden which is threatening the stability of the present international monetary system.
Let us consider the operation of the multinational companies and their repatriation of profits. For example, it is the multinational companies that completely dominate the productive system of most Latin American countries. Look again at the banks which have been referred to previously this afternoon; look at the wasteful and profligate way in which the banks, when money was plentiful, thrust money on third world countries. This is not being patronising. It is certainly the responsiblity of Ministers of finance and governments in third world countries. Nevertheless, there is no doubt that the banks used a whole series of inducements to persuade third world governments to borrow at a time—in the case of 753 Nigeria it looked as though Nigeria would participate in the oil boom—when the prospect for the future looked rosy. Borrowing is essential for development. In any country, developed or undeveloped, borrowing to promote development is one of the essential attributes.
I believe that this issue goes deeper still. I have before in this Chamber argued the case that the healthiest method of development is to take the agricultural surplus of a country, invest that in the development of manufacturing industry, seek export markets in order to foster that industry and then unite industry and agriculture. I know that that is over-simplifying the case but it is a process which has stood the test of time.
How is any third world country to follow that model today, when a large section of its agricultural exports have to be devoted to the servicing of debts? How is manufacturing industry to develop in this world of growing protectionism? How is a manufacturing industry to develop at a time in which the sale of commodities to support it is often below the cost of production? And when you put together the problem of the payment of interest on debts and the falling commodity prices, there, as my noble friend Lord Oram pointed out, you have a prescription for disaster.
I would only refer, as I have done before, to the country that I know best, the country of Zambia. There, the short-term foreign debt has increased by 50 per cent. over the past two years. It was 1.5 billion kwacha two years ago and it is now 2.2 billion kwacha. Why?—because the Zambians have had to produce their copper and sell it at a price below the cost of production. As a consequence, they have used up their foreign reserves and, as a further consequence of this disastrous slide—and this should, again, bring home the point so well expressed by my noble friend Lord Oram that this concerns us, the workers and citizens of this country—a slide which the Zambians have been unable to halt, they are no longer eligible to qualify under the ECGD insurance scheme to receive our exports. Therefore, the disaster of the Zambians is reflected in lower employment in areas of this country that could be producing goods that the Zambians need. And Zambia is only one case among a hundred, where, because of the double problem of the weight of interest payments and the reduction in commodity prices, not only are the people of the third world suffering, but employment is undermined in this country.
My Lords, it is only two or three years ago that I remember that very remarkable man President Nyerere (whom I was privileged to know when he was a student in Edinburgh) saying here in a speech at the Royal Commonwealth Society that, whereas in 1970 one tonne of sisal, which is the main export crop of Tanzania, would buy a tractor, by then it took 28 tonnes of sisal to buy that same tractor. As my noble friend Lord Oram pointed out in his figures, that is the practical problem, the practical hurdle, which is to be seen throughout the third world today when you put together the issue of the weight of the interest with the fall in the price of those commodities on which so many third world countries still depend.
754 What do we expect these countries to do? Do we expect them to increase their exports to us? There is a very large lobby in this country against any increase of imports from third world countries into Britain and, indeed, into the EEC generally. Do we expect them to reduce their imports from us? Do we want to produce less to send to third world countries? Do we want to put more people out of employment, or do we want to induce the banks, once again, to increase their lending? Nobody has suggested that this afternoon and I doubt whether they will.
So I come to one specific issue which I want to put to the noble Earl who is to wind up. It is to ask him whether he has considered or whether he will consider another path towards at least approaching this central issue which so many speakers this afternoon have illustrated within this Motion. What is the Government's attitude to the special drawing rights? The increase in the SDRs was suspended as long ago as January 1981. Is it going to be increased in the future? Is it the Government's policy to increase the special drawing rights of the IMF; because there is at least a cogent argument that whereas some Members opposite would argue that the investment, or the gifts of extra cash, to third world countries can be inflationary, the special drawings rights were specially designed to avoid that inflationary effect. Yet, they have been suspended now for a matter of over three years.
I am sure that the noble Earl would agree that the so-called capital-importing countries—although we have seen that they are now capital-exporting countries—are all short of foreign reserves; and that this is a handicap to the world trade on which this country so greatly depends. How are we going to help to rebuild the reserves of those debtor states, to restore their creditworthiness on which an expanded trade programme depends?
Next week the interim committee of the IMF is meeting. I should like the noble Earl to address himself to the attitude which Her Majesty's Government will be taking at that interim committee and, because final decisions cannot be taken by an interim committee, at successive committees within the IMF to the fact that the use of expanded, increased special drawing rights can affect this central global issue of the debt which is not only weighing on the backs of third world countries and undermining political stability in third world countries but is also throwing a spanner into the whole process of development and production within the third world.
Finally, my Lords, let us never forget—and we may be talking in figures, we may be talking in initials, or we may be talking about institutions—-that, basically, we are talking about people, and it is the people who count. And it is the people whom we should have most clearly in mind when we are arguing the case of the relationship between money, between debt and between institutions. Over the past two years the gross domestic product of Latin American countries as a whole has fallen by 3.6 per cent. In the world as a whole the developing countries' exports were 7 per cent. lower last year than they were in 1980. Among the low-income African countries it is expected by the World Bank that by the end of the 1980s income per head will be less than it was in 1960. These are figures illustrating the plight of people.
755 We often talk about the scourge of diseases among the children living in third world countries. We give the figure normally of 17 million children dying per year. Those children do not die primarily through diseases: they die mainly because they are vulnerable to diseases through malnutrition and starvation. We are talking this afternoon about the creation of that vulnerability to the diseases which cause their deaths. We are therefore not just talking about interest rates in the abstract nor about institutions like the IMF, but about the life and death of millions of people living in the third world for whom we are responsible and the Government are responsible. We look forward to hearing how the Government intend to fulfil that responsibility.
§ 6.22 p.m.
§ Lord McIntosh of Haringey
My Lords, as my noble friend has just said, the last five speeches have been about the problems of the third world and the impact on the third world of interest rates. I hope it will be taken as evidence of my own incapacity rather than any reflection on the importance of the subject of the third world, or indeed on the quality of the speeches, if I turn completely from that subject to what is literally a parochial subject: namely, the burden of interest rates on local authorities, which is included in the admirable Motion of my noble friend Lord Beswick.
I recall (though, reasonably enough, others may not) that in a debate in this House last October on the matter of central and local government expenditure, I put the case to the Government that local authorities were prudent and reasonable in the way in which they borrowed for the purposes of capital expenditure. I put it to the Government that in fact the public sector borrowing requirement has been in surplus for most of the past 20 years, and that local authorities generally, on the maturity of loans, were paying back less in real terms than had been paid out originally, even allowing for interest on the loans when they were first taken out.
I do not think that in saying that that is the case, and that local authorities are right to borrow, there is any conflict with saying that the conditions under which they have to borrow cause enormous problems for local authorities—problems which appear to be inadequately, if at all, recognised, either in general economic debate or particularly in the actions of central government. Let me give some indication of the size of the problem which local authorities face. At 31st March 1983, which is the last date for which I have figures, the total of local authority debt amounted to £43.7 billion, and the average rate of interest on that debt in the year 1982–83 was 11.83 per cent. That means that the debt charges to local authorities over that period were approximately some £4 billion on a total local authority expenditure of £20 billion; in other words, 20 per cent. of their total expenditure went in repayment and interest charges, and of that figure at least half must have been interest payments.
The Government would say, in response to that, that the participation of the Public Works Loan Board, in dealing with local authority expenditure, has been increasing and that that participation has been 756 beneficial to local authorities in that the rates of interest for the Public Works Loan Board have been of the order of 10 or 11 per cent., which is more favourable than the rates on the market. Indeed, the Government have been encouraging local authorities to use the Public Works Loan Board, partly for the "theological" reason, I suspect, that borrowings from the board do not count in M3 in the Government's own peculiar monetarist interpretation of our national accounts. But I suspect—and I shall be interested to see whether the noble Earl, Lord Gowrie, is prepared to contradict me—that the ability of the Public Works Loan Board to continue to increase its share of local authority borrowing will not be very great in the next year or two. The relationship between bank balances and local authority expenditure makes it more and more difficult for the Public Works Loan Board to continue its present participation in local authority capital markets.
Clearly, the very size of interest payments of local authorities must be, in the words of my noble friend Lord Beswick, "a great burden" on local authorities. I want to suggest that it is not just the sheer size—that could be discounted by a consideration of inflation and therefore a consideration of the real rate of interest—but the insecurity which faces treasurers of local authorities in trying to make prudent decisions and to protect their ratepayers from the worst fluctuations and dangers which face them.
The noble Earl said in his opening speech that forecasting inflation is always hazardous. I think one could go further than that. Casey Stengel, the manager of the New York Yankees, once said:Accurate predictions are very hard to make, particularly when they are about the future".The noble Viscount, Lord Trenchard, went backwards as well. He talked about the misconceptions in the past two decades of our history about economic policy. That reminded me of the bursar of an Oxford college who objected to his college's borrowing policy on the grounds that the past two centuries had been "wholly untypical".
It is the uncertainty of interest rates and of borrowing charges which is the most dangerous thing for local authorities. If we take the period 1978 to 1983, the average rates which have been payable, based on bank base rates, by local authorities range between 6½ per cent. and 17 per cent. It is virtually impossible for any local authority to make an accurate estimate even one year ahead of what they are actually going to be, and therefore not to face the risk either of under-provision or of over-provision for interest payments.
Over-provision is a fairly simple but clearly very dangerous course to take. If you make over-provision you are taking money from the ratepayers earlier than you need to do, and all the people in your area suffer. If you make under-provision, there used to be ways round that. It used to be possible for a treasurer to adjust his under-provision by the way he dealt with housing subsidies. He used to be able to adjust his charges accordingly and to be able to borrow short without too much difficulty. And indeed there was always the possibility of a supplementary rate.
But nowadays the flexibility available to the treasurer of a local authority who has made, for 757 whatever reason, under-provision for inflation, and therefore for interest charges, is rapidly being taken away and will be taken away even more if and when the Government's Rates Bill is finally enacted. In their Rates Bill, the Government are not only seeking to cap the expenditure of a certain number of authorities: they are seeking to take away the ability of all authorities under the general powers to make reasonable economic assessments of their needs, of their likely expenditure and therefore of their needs for revenue. Not only is the supplementary rate being taken away, but it would be necessary, if the legislation were passed, for a treasurer to make a special applica-tion to the Secretary of State if he wanted to undertake any additional borrowing to deal with fluctuations in interest rates.
That is not a recipe for prudent management of local authority finances: it is a recipe—and I am talking now about the treasurers and not, in any way, about the politicians—for excessive caution by financial officials in local authorities. It is a recipe for the kind of excessive caution which will inevitably lead to larger and earlier charges against the ratepayers. The Government show very little understanding of the nature of the problems which local authorities face from high interest rates, and very little understanding of how it is that Government could help the prudent management of local authorities in the way they approach their financial problems.
The problem raised by my noble friend Lord Beswick is an all-embracing problem. It affects all aspects of our economy. I have sought to show in this brief intervention only that, in the particular case of local authority expenditure, the Government are hardly tempering the wind to the shorn lamb. They are actually making for extravagance, making for bad provision, making for high fluctuations in the expenditure of local authorities, and therefore the expenditure required of individual ratepayers.
§ 6.32 p.m.
§ Lord Ezra
My Lords, the great merit of the important Motion which has been so ably introduced by the noble Lord, Lord Beswick, is that it is possible to choose one or more of the items without dealing with the whole lot, and at this advanced hour of our debate I shall try to be selective, as indeed was the noble Lord, Lord McIntosh, who has just spoken. As he pointed out, we have had a series of very eloquent speeches made on the subject of the third world, and I should like to join, in particular, my noble friend Lord Walston in paying tribute to the noble Lord, Lord Soper, for his very learned and compelling speech, in which he drew our attention to the moral aspects of the third world problem.
But I should like to concentrate on those parts of the Motion which deal with the burden of high interest rates on productive industry and the diversion of effort to less productive but more financially rewarding activities. Like my noble friend Lord Taylor of Gryfe, I should like to start by taking a wider view of this problem before coming down to specific proposals. It is necessary in looking at this aspect of the Motion to consider the state of economic affairs in the nation at the present time. There is no doubt that there is a 758 gathering momentum of recovery, and the latest CBI report emphasised that this is gathering pace.
What is important, however, is to get an impression of the nature of that recovery, and that is still somewhat eneven. In geographical terms, it still tends to be concentrated towards the south-eastern portion of the nation, and it diminishes in its intensity as one moves northwards. In sectoral terms, it still tends to be concentrated at the consumer goods end, the high technology end, and tends to peter out as one goes deeper towards heavy industrial activities. Therefore, I believe that what emerges from that analysis, if it be a correct one, is that the aim must now be to try to widen in both geographic and sectoral terms the momentum of the recovery. The big question is how this can be done without falling back into the difficulties of inflation and within the means available. I think that this is, therefore, a very germane issue to the main point raised by the noble Lord, Lord Beswick.
I was very pleased indeed to hear the noble Viscount, Lord Trenchard, emphasise the importance which he attached to manufacturing industry. He was quite right to point out that at least half the service industries, which have been expanding so rapidly recently, are totally dependent for their existence on the manufacturing industries. This is something that must be very carefully borne in mind as one considers this problem. When one comes to the question of investment, there is not the slightest doubt that from a very low level investment is now beginning to recover.
The important issue, however, is not the totality of the investment; it is the quality of the investment. If that investment is to be concentrated in areas of the economy which will be less labour-intensive, more up-market in the technological sense, then we shall continue to get the unevenness which we are experiencing at the present time. The challenge will be to see how we can, in an effective manner, steer a greater proportion of the investment down into the manufacturing and heavy industrial area and so help to deal with this immobility in the whole question of unemployment.
That was the worst part of the CBI report: that in spite of the recovery, in spite of the 2 to 3 per cent. improvement in the economy that they foresaw, they could not see this having any impact on unemployment over the period ahead with which they were dealing. So that is the challenge and that is the circumstance in which we should be considering this whole question of high interest rates.
The noble Earl, Lord Gowrie, in his as usual, very fluent speech, drew attention to the problems that high nominal rates of interest can cause in those industries which have a long lead time in their investment. This loading at the front can be a very onerous obligation, and can therefore be a major disincentive to long-term investment. For example, I happen to believe that investment in such projects as major combined heat and power schemes, which I know the Government are very keen to stimulate and which were the objective lying behind the Energy Act which we debated in its various stages last year, is likely to be very difficult to stimulate so long as interest rates remain where they are, because those are projects which will require large amounts of capital and a long period before they can mature and show a return. So 759 if we are to try to deepen the recovery, we have to look very seriously at this problem of interest rates which was so effectively raised by the noble Lord, Lord Beswick.
One of the most encouraging recent developments is the way in which we have been able to move our interest rates in a different direction from the American interest rates. I recall, when we were debating this subject a few months ago—and we were all, as now, keen on reducing interest rates—the major reason given for our interest rates being so high was the impact of the American level. I think it is a very good sign that we are now moving in the opposite direction. As the noble Lord, Lord Jacques, pointed out, undoubtedly the benefits which we are getting from the North Sea have given us the strength with which to move our own interest rates separately from those of the Americans.
There is no doubt that in the United States interest rates are bound to increase as they begin seriously to tackle the problem of their budgetary deficit. We must not be caught up in that slipstream. On the other hand, the period during which we can move independently of the United States and other countries which may be putting up their interest rates is going to be limited. As the noble Lord, Lord Jacques pointed out, it is limited to the period when we shall have the benefit of the North Sea revenues. Those could be reaching their peak in a matter of a few years.
Therefore, my conclusion is that we have, I believe, a unique opportunity, while our present circumstances persist, to extend in an effective manner the recovery which is already evident in certain sectors and in certain areas if we take courageously the steps that seem to be necessary, particularly in relation to interest rates. Positively and firmly moving our rates down, whatever may be happening to them elsewhere, while we are in this favoured position seems to me to be a very important element in getting the sort of full-blooded recovery which we should all like to see.
§ 6.42 p.m.
§ Lord Barnett
My Lords, I know that everybody who has taken part in this debate, or who has heard any part of it, will wish to join me in congratulating my noble friend Lord Beswick both on his excellent Motion and on the way in which he introduced it. I doubt whether anybody will disagree that it has stimulated a remarkably fine debate, made all the better by the intervention of my noble friend Lord Soper who made a quite remarkable speech which, speaking for myself, I thoroughly enjoyed. I would not seek to emulate it. During the course of my remarks I hope to deal with some of the practical problems of the day. Servants of the Church are required to deal with these problems, and to receive remuneration from rents and interest is something with which my noble friend would probably disagree.
I was particularly interested when the noble Viscount, Lord Trenchard, told us that one of the reasons why he agreed that the Government were doing well for industry—he was the only speaker on the Government side, so perhaps he felt obliged to say that—was that, since coming out of Government, he had invested in equities in manufacturing industry and 760 had done very well. I have to tell him that that is more due to the time when the noble Viscount happened to leave Government than to anything the Government did, and that he should not expect too much in the future.
§ Viscount Trenchard
My Lords, since the noble Lord has commented on a personal remark of mine, may I say that I merely pointed out that the confidence of the Stock Exchange, which is not generally misplaced, is extremely high about the future of manufacturing industry, which is what I invested in.
§ Lord Barnett
My Lords, I am interested in the noble Viscount's comments. During the course of my remarks, I hope to show that that is very' far from being the case. If we were to judge by the state of the equity market now and say that everything in the garden is marvellous, we should be very foolish indeed.
Let me turn immediately to the speech of the noble Earl, Lord Gowrie. I feel a little diffident about criticising him too much, because from time to time I want to be able to go and see him in order to ask for money for the arts. Therefore, I shall have to be careful. Let me begin by saying that I agree with the noble Lord, Lord Ezra, that the economy is in a period of recovery. Few would doubt that. I do not doubt it. According to historical evidence, we in this country are going through a very high period of economic growth. But the noble Earl was, to say the least, more than a little complacent in his remarks about the prospects for future economic growth. His remarks about those prospects may, in a few years' time, look a little sick. When we look at the rate of growth in the future, it might not, for the reasons I have indicated, be at the present level.
Turning to the Motion, few will dispute—indeed, nobody did dispute it during the debate—that high interest rates are a burden, particularly on industry. This point was well made by the noble Lord, Lord Ezra, and by my noble friends Lord Beswick and Lord Jacques. As my noble friend Lord McIntosh of Haringey said, they also have serious effects on local authorities. These matters were also brought to the attention of your Lordships by the noble Lord, Lord Taylor of Gryfe.
I should have liked to say a word about the problems of the third world, but they have been so fully and effectively covered by noble Lords who know so much more about the subject than do I that I feel free to concentrate on the domestic economy. The speeches of my noble friends Lord Oram and Lord Seebohm, besides the speech of my noble friend Lord Hatch, with which I agree so much, and the speech of the noble Lord, Lord Walston, were of a very high calibre, by any standard. I hope that the noble Earl will take account of them both in his winding-up speech and when advising the Government about the kind of policies which need to be pursued.
Turning to the management of the economy generally, the problem over the Government's cure for high inflation and high interest rates is that it is likely, I fear, to be worse than the disease itself. Nothing that the noble Earl has said has made me alter my view. Both he and the Government must answer the real charge: that they have put inflation above every other 761 economic problem facing the nation, especially the problem of unemployment. I accept that the noble Earl and the Government sincerely and genuinely believe that if they reduce the rate of inflation and, with it, interest rates, it will have the effect of improving the rest of the economy. Sadly there is absolutely no evidence, either at home or abroad, that it is likely to have that kind of effect. The Government have shown that by pursuing for a sufficiently long period a deflationary policy the rate of inflation and interest rates can be reduced. However, the real problem in trying to run any economy—I willingly concede that nobody in any party in this country has yet managed to solve this problem—is the juggler's trick of getting all the economic balls in the air at the same time and solving the problems of inflation, unemployment, growth, balance of payments and so on. As I have already said, the Government genuinely believe that once they have solved the problem of inflation, all else will come right.
The Library have kindly extracted for me figures which show that in 1983 the real rate of interest was the highest since the war, apart from 1967, which was the year of devaluation; yet 1983 saw the highest rate of economic growth that we have had for some years—3 per cent. Therefore, a high real rate of interest at that time did not restrict growth. However, I hasten to assure your Lordships that I am not for a moment suggesting that we need high real rates of interest in order to achieve high rates of economic growth. All I am saying is that there is absolutely no evidence, either from last year or from other years since the war, that low real rates of interest at the same time achieve high real rates of economic growth. Equally, there is no evidence that the Government's method of bringing down the rate of inflation and interest rates is likely to help unemployment in the long term. There are many other reasons why unemployment has refused to come down despite the fact that we have had these levels of growth in the past year or two. All the signs are—very sadly indeed—that there will be no reduction in the appalling level of unemployment.
I want to say at once to your Lordships that international statistical comparisons of what happens in other countries are usually quite misleading. Certainly it does not necessarily follow that countries such as the United Kingdom could for any length of time sustain low unemployment with high inflation and high interest rates. I do not believe that for a moment. I believe that we should seek in every conceivable way to bring down the rate of inflation and keep it down and, if we can achieve them, have low rates of interest—particularly because of the devastating effects of high rates in areas which have been referred to by so many other speakers in this debate—especially in the third world. Managing the United Kingdom's economy requires particularly the skills of the juggler. There is no evidence yet that this Government or any other government have achieved that skill.
I want to say a few words about the two main difficulties of achieving the trick of getting all the economic balls in the air at the same time. First, the problem of managing a domestic economy—certainly in the United Kingdom—is that when any government have tried to solve one of the problems (such as the 762 Labour Government's attempt to bring down unemployment and the attempts of previous Conservative Governments to bring down unemployment by stimulating the economy) the net effect has been to increase inflation. We did not eventually achieve the sustained levels of growth for which some of us hoped. Also, there is little evidence to support the belief that, having brought inflation down to 4½ per cent. or 5 per cent., it can be reduced to the 3 per cent. by 1988–89 forecast in the Chancel-lor's Budget speech. I shall be very surprised if he manages to achieve that figure of 3 per cent. Even assuming that he does, there is no evidence that it will bring down the level of unemployment substantially, if at all. Nor is there any evidence that we shall be able to sustain the levels of economic growth which we have been achieving in recent years.
The second difficulty concerns the way in which we in the United Kingdom can pursue sensible domestic economic policies when the rest of the world—particularly the United States—begins to move, as it may, in the opposite direction. Indeed, I fear that once the presidential elections are out of the way it is likely that the level of economic growth which there has been in the United States cannot be sustained much longer and that we shall see it coming down, with a recession being created in that country if not elsewhere.
Let me deal first with the management of the domestic economy. All governments—including that in which I had the honour to serve—have fought the battle to beat the problem of inflation and to get the rest of the economy right with one arm tied tightly behind their backs: that is to say, without the wholehearted co-operation of both sides of industry. I particularly refer to the co-operation of the trade unions. The Labour Government did achieve for short periods some co-operation, followed by an explosion. This Government—rightly or wrongly—are not seeking even the minimum co-operation. Indeed, some will think that they are positively seeking provocation. The Government believe that they can perform the juggler's trick by simply bringing inflation down and then everything else will fall into line thereafter. There is no evidence that that is likely to work.
What then is to be done? I myself am satisfied that securing the active co-operation of the trade union movement by any government, Labour or Conservative, at the present time in what inevitably would be a policy for incomes is unlikely. The chance of achieving that is slim. I do not want to shirk the issue. I do not mean a statutory incomes policy, because if you have an understanding with the trade union movement you do not need legislation. Indeed, it would be positively counter-productive, as we have seen in the past, while legislation without an understanding simply will not work and has not worked. That is not to say that we should not strive for such an understanding. Without it, I say to your Lordships that there is little or no chance of sustaining the permanent situation which all of us would like to see—the juggler's trick of getting all the balls in the air at the same time, or, in other words, achieving economic growth, getting unemployment down, getting inflation down and keeping it down, and keeping interest rates down.
763 We have to keep striving for that policy despite the difficulties and despite the impossibility, but certainly this Government are not seeking to achieve it. I am sure that if this Motion is right—and every speaker in this debate has agreed that it is—about the damaging nature of high inflation and high interest rates, then one day we shall really have to find a lasting solution that will deal with all the problems and not just one of them; not just inflation or interest rates.
Even if we were rather more successful in managing our own domestic economy your Lordships know that we should still face the second of the difficulties to which I referred; namely, how we keep the United Kingdom's domestic economy on a sensible path when the rest of the world, and particularly the United States, is moving in the opposite direction. As the noble Lord, Lord Taylor of Gryfe, said, one has to face the fact that, if the rest of the world is in a major recession, we cannot escape it and pretend that we live in another world. We have tried to do that in the past, as other countries in the Western world have tried. But we cannot escape and say, "We are going to run our economy differently"—certainly not in a country like the United Kingdom.
There is much we can do short of such a major recession. We could do much more if the EEC was talking about these major problems instead of its current obsessions. But it is not doing so, and it is unlikely to be doing so in the near future. So if the United States increase interest rates (and I fear that they are all too likely to do so) then there is absolutely no need for us to follow suit, as another noble Lord has said. The noble Earl the Minister said, quite rightly, that the Government have not followed the path of US interest rates in recent weeks and months. But I should like to make a little bet, if one is allowed to do so in your Lordships' House, that the next time US interest rates rise, so will ours. Unfortunately, the Chancellor above all people still hankers, as we saw from his Budget speech, after such concepts as sterling M3, PSL2, M2 and his new definition of MO. These policies, plus his mistaken concern about maintaining an exchange rate higher than it needs to be, will, I fear, mean that interest rates are more likely to rise than fall. This was said by my noble friend, Lord Jacques, and by a number of other speakers.
I conclude by reverting to the Motion calling attention to the burden of high interest rates, upon which all speakers have agreed. They must be reduced, but that reduction must be part of an economic policy which, as I have said, seeks to win on all fronts. Like the juggler, we must keep all the balls in the air, especially the one marked "employment". This Government may have temporarily won on one front—that of inflation—but I fear the consequences for our nation and for the wider world—as expressed in this Motion and in the course of our debate—in terms of long-term growth, employment and the very social cohesion of our people if we do not move along different paths.
§ 6.59 p.m.
The Earl of Gowrie
My Lords, I have said it before, and so I apologise for saying it again, but the quality of the economic debates in your Lordships' House is, even allowing for our besetting sin of self- 764 congratulation, still well ahead of the quality of economic debates in another place, most of which I read carefully. I sometimes feel the quality of economic opposition in your Lordships' House follows suit, perhaps for the simple reason that the conventions of your Lordships' House allow credit occasionally to be given where it is due. I welcomed the limited credit that most sides of the House have given to some aspects, at least, of the Government's economic policies.
The noble Lord, Lord McIntosh of Haringey, put it very well, I thought, when he said that the Motion of the noble Lord, Lord Beswick, was concerned with an all-embracing problem which affects every aspect of our economy. That is one of the reasons why the debate has been a specially interesting one. It is also one of the reasons why it is a difficult debate to which to reply. Your Lordships would not wish me at this hour, even though I believe I have over an hour in hand under the new rules, to use that time to wander too far and wide into some of the fascinating reaches of the debate. However, I should like to say to the noble Lord, Lord Beswick, and to the House—because I treat the subject with the greatest seriousness—that my opening speech, for better or for worse, was really part of my general reply. Most of the issues which have arisen in the debate—not least those connected with the third world—were covered, at least in terms of general policy objectives. I will therefore restrict myself to trying to deal with particular points which have been made during the debate.
With regard to the speech of the noble Lord, Lord Beswick, since I spoke after him I think some of the points that he made were touched upon in my opening speech. However, he raised a specific point which was echoed by the noble Lord, Lord Jacques, with calls for "a new Bretton Woods"—the phrase used by the Commonwealth Secretariat when in 1982 the Commonwealth Finance Ministers commissioned a paper from the secretariat with that title. The noble Lord, Lord Beswick, wanted to hear what we thought about it. We welcome further work to identify areas for improvement in the international monetary system, and I shall briefly touch on that later. But we believe it is best to work within and to develop existing international institutions. The United Kingdom is a member of the Commonwealth Consultative Group, set up in New Delhi by the heads of government, and we are playing our full part there. It is rather early to make a substantive report on progress, as I am sure the noble Lord will understand; but we look forward to the meeting of the Commonwealth Finance Ministers in September, when the group's report will be considered. Perhaps that will be the time for the noble Lord to return to questioning me about it.
I found much to agree with, not for the first time, in the speech of the noble Lord, Lord Taylor of Gryfe. In particular, I welcome his realistic acceptance that banks want falling interest rates and that a fall in interest rates does require, first, that inflation should be seen to be under control. I therefore find it a little surprising that he blamed monetarist policies for the recession, because that ignores, to mention only one thing, the oil price shock that disrupted growth, sapped confidence and, moreover, boosted inflation; though, as a bit of a purist on this front. I would say that it was perhaps the reaction of various Western 765 Administrations to that shock rather than the shock itself that did the most harm.
After such a shock to the world economy it takes time to get back onto an even keel and lay the foundations for non-inflationary growth. It is the policy—and I say this particularly to the noble Lord, Lord Barnett—not of getting inflation down at all costs but of sustaining lower rates of inflation and, therefore, establishing the conditions for non-inflationary growth, in which the Government are most exercised. It is not enough to talk about inflation. We must also, as almost all the House acknowledged, talk about growth. We feel that one is the prerequisite of the other. As I said in my opening remarks, we are seeing some signs in the real world that we are on the right track.
The noble Lord, Lord Taylor, also criticised our approach to capital expenditure on infrastructure. We do not have targets for spending on infrastructure as such—targets to be applied willy-nilly. Surely the right approach is to look at each proposal for capital spending on its merits, to see whether there is a genuine need and whether the project is justified economically. It is a great myth that there is no capital spending in this economy. It is also, I fear, something of a myth that capital spending, which is, in things like construction, increasingly capital intensive (like so much else in our economy) will by itself cure unemployment. Again, I apologise for repeating a point from personal experience that I have made many times in your Lordships' House, but if capital spending could solve economic problems generally, or unemployment specifically, Northern Ireland would be an exceptionally good case and we all know that it is not.
I very much enjoyed the speech of the noble Lord, Lord Jacques, not least because he managed from the Labour Benches and in the same speech to distribute praise equally between my right honourable friend Mr. Nigel Lawson and my right honourable friend the previous Prime Minister, Mr. Edward Heath. That is something of a squaring of the circle even for your Lordships' House, but nonetheless welcome or enjoyable for that. The noble Lord, Lord Jacques, wished us to join the European Monetary System. That is something which we constantly watch and keep under review, although I have to say that there are no early plans to join. As the experience of the Government of which the noble Lord, Lord Jacques, was a member and supported bears witness, joining in the wrong conditions would not only be damaging to ourselves but damaging to the system and could mean greater interest rate instability. That would not be helpful to British industry, and the CBI Council recognised this by voting against sterling's participation in the ERM last October. That said, I remain personally convinced that in the long term we should join. It is a matter of getting the conditions right.
Both the noble Lord, Lord Jacques, and the noble Lord, Lord Oram, talked about the need for international monetary reform. I welcome the decision, following the Williamsburg summit, of the Finance Ministers of industrial countries to work to identify areas where improvements in international monetary systems might be sought. Again, I believe 766 that we need to work within and to develop existing international institutions, rather than to fall into the old trap of hoping that the creation of new institutions will somehow ameliorate the problems. It is also important to recognise that the original Bretton Woods arrangements, which have been much praised in this and other economic debates, broke down through inflationary policies by member governments. It seems to me that a general view about the importance of controlling inflation does offer the best prospects for going back to a stable and durable international system.
The noble Lord, Lord Jacques, was a little rude about the service industries, thinking them somehow less respectable than manufacturing industries. I would point out to him that they are rather more than "taking in our own washing". We export more and more services. Indeed, it seems to me that it is increasingly difficult to make the old distinction between service and manufacturing industries.
My noble friend Lord Trenchard has been teased, and so have I, for being the only speakers on the Conservative Benches. Naturally, I assume that such is the confidence in the policies of Her Majesty's Government on this side of the House that there has not been quite the usual imperative to attend. I congratulate my noble friend, not only for what he said but for backing Britain successfully, and 1 welcome his wise and encouraging words about the indicators for growth in manufacturing industry given by the equity markets.
I think they are especially encouraging because of their source. The noble Lord shared an office with me in the early days and years of the first Thatcher administration and he provided a very early analysis of the exchange rate difficulties to me. Perhaps we should collectively have listened more carefully to my noble friend. He also provided, it seems to me, if I may say so without patronising him in any way, an object lesson in behaviour that we should all follow when we leave Government. The usual thing is to castigate the Governments in which one has served, when in their wisdom or lack of it they dispense of one's services, which alas they do from time to time. In this case my noble friend, who has more reason than most to have been proved right in much of his early analysis, was glad that the Government was getting back to the paths of virtue.
Everyone who spoke in the debate admired—and so did I—the speech of the noble Lord, Lord Soper. It was very fascinating to go into the theology of usury. At one point during his remarks I looked up at the press Gallery and was pleased to see a great chiaroscuro cloud of puzzlement over their faces. The noble Lord must in future break them in a little more gently to the change of gear that he introduces regularly into your Lordships' House.
As it happens, my brother is an expert and writer about contemporary Islam, and he has often interested me in describing the ways in which modern Islamic states try to get round their interdict in terms of usury and interest rates. I therefore felt in reasonably familiar territory in the first part of the noble Lord's speech when he was dealing with the mediaeval approach. But that said, and with all my admiration for his originality, I do think that the noble Lord, Lord 767 Soper, subscribes to a great myth—the myth that money is not creative. Money is, like art indeed, a medium of exchange, literally a method of communication. It seems to me that one should follow what the great Wesley, whom he described as his father in theological terms, urged in getting all one can—perhaps one could adapt "saving all one can" to "investing all one can", and certainly giving all one can—not least in the interests of the employment of others. It seems to me that socialism, which the noble Lord held up to us as a moral imperative as well as an economic one, has few successful exemplars, and few lead richer or fuller material or moral lives as a consequence of its adoption internationally. Perhaps people simply have not got it right yet but I am sceptical about that.
The noble Lord, Lord Seebohm, generally endorsed the Government's policy. Of course, this was all the more welcome for the fact that it did not come from our own Benches. He endorsed the need to get down interest rates by getting down inflation and recognising that the latter was a prerequisite of the former.
The noble Lord, Lord Oram, made a most interesting speech on the third world theme and others took up many of his thoughts. I thought it should be said to him that not all developing countries need to be considered poor. One of the mysteries of the modern world is why international financial stability should be so threatened by a country with the potential of, say, the Argentine. Admittedly my analysis may be superficial as I do not know the country, but from all I know of the facts and figures about it, it should be a very wealthy country indeed and its potential is enormous. Again, the importance of getting sound financial management and sound political systems is very relevant in this regard.
The noble Lord, Lord Oram, was perhaps a little inconsistent in criticising banks for lending money to third world countries in a reckless and irresponsible way—a criticism that I would certainly endorse—but he also appeared to be urging developing countries to borrow all they could, and that again is a circle that it seems to me he was trying to square.
The noble Lord, Lord Walston, talked about aid rather than loans. I think it would be fair to say to him that it is a moral imperative on this country, and indeed on all the western countries, to become richer. Without improving our own growth rates we certainly will not have the purchasing capacity to help, in the most sustained and practical way, the third world. Though I certainly agree with him that there is a need for aid.
The United States of America has of course put out very large sums of aid to developing countries during my entire adult lifetime; and I am talking about direct intervention, not investment or aid seeking a return. We also remember, of course, the great injection of aid to a devastated Europe after the war. One is not always thanked for this and I am still of the view—if I may relapse into my arts role for a moment—that one of the most significant novels of the post-war period is Graham Greene's The Quiet American, which deals with this dilemma of the well-intentioned aide acting in fact as an explosive ingredient in some international situations.
768 I am certainly very close to the noble Lord, Lord Walston, in his urging for equity capital investment on an international scale, and again I commend the Government's policy of liberating ourselves from exchange controls and making this possible. Again, one has to be very delicate and careful in political terms because the notion of the profiteer and the exploiter can often run counter to the notion of internal investment or investment from outside sources being beneficial to the bodies who receive the investment.
I have a note here which will try to deal with the specific point put to me by the noble Lord, Lord Hatch, about special drawing rights. I have to tell him that we are not convinced that there is a global shortage of liquidity (in his words) which the IMF's articles require to be demonstrated before a new SDR is allocated. As he himself anticipated, we would argue that a premature allocation could be inflationary. We do, however, expect world reserves to grow in line with world trade, and of course we recognise that some individual countries face very severe problems and that their reserves may be depleted excessively. The answer to these individual problems, it seems to me, is for them to agree programmes for recovery with the fund. The fund is not draconian; it is indeed sensitive in the plurality of its applications to solutions to different places. It might therefore supply them with liquidity and make it conditional on their keeping to prudent policies. I am a passionate believer in the International Monetary Fund and confess that it has been the long ambition of mine to try to work for it one day.
Coming to the speech of the noble Lord, Lord McIntosh, he brought us back to this part of the earth in dealing with the problems facing local authorities. Again, rather predictably but, I really believe, accurately, I can only say that the local authorities must be helped by lower inflation. Many of their difficulties have been the inflationary shocks, not least in terms of wage claims, of the 1970s. But they must struggle to contain their current costs. Again over 70 per cent. of their spending is involved in wages.
The noble Lord complains about the uncertainty facing local authorities. Again, I tried to deal with this issue of inflationary expectations in my opening speech. The point of this dull-sounding medium-term financial strategy is not the dogmatic attraction of our own forms of economic theology, but simply a signal to client bodies, whether in the public or private sectors, that the Government mean what they say, that this is roughly what their spending and borrowing is going to be over a precise period of time, and that they should therefore have lowered uncertainty and be able to plan accordingly.
As to the issue of rate capping, it is perhaps rather late to go into this, and perhaps I am the wrong person to deal with it. But is seems to me that rate capping is there to stop the upward drift of spending, borrowing and taxation; and if it is applied as I believe it should be, it can only bring down interest rates in the long term. So I wholly support it. I think that the particu-larly moral problem where rate capping is concerned is really that local government is now providing far too large a share of local government finance, and therefore it would be impossible for any government in 769 present conditions to lose all controls over the money that they supply.
I welcomed the recognition by the noble Lord, Lord Ezra, that interest rates are moving in the opposite direction from those in America. However, I quarrel with him about one part of his analysis. This is not all to do with North Sea oil. North Sea oil is a significant, but relatively small, sector of our economy. Other sectors play an enormous part, not least coal. If it can sort out its problems, it has a great future in this economy, and is underwriting our sources of energy in the long term. Also, there are factors such as our fiscal and monetary stance. I think that the noble Lord, Lord Barnett, was right in saying that if there is a big hike in American interest rates it will be very difficult for ours not to go up. But I would hope that we would keep the present successful differential between them, if at all possible.
The last point I wish to make deals with the biggest problem of all—the problem of unemployment. I tried to go into this question in a debate last week, and I then admitted, as I think Ministers should take every opportunity to admit, that not merely in our own economy but in the Western economies generally now, there is no very easy or comfortable correlation between improved economic growth and performance and the solution to this terrible problem.
Broadly, we have to concentrate on generating the wealth in the most competitive and cost-effective ways, and I believe that markets and a little help from governments will then see that we can tackle unemployment through a sensible spending of that wealth. Our big fault is to try to confuse the issues of unemployment in a capital-intensive economy and a high productivity economy with the issues of wealth generation. But this is a large subject, and I am sure that we shall return to it many times during the life of this Parliament.
The noble Lord, Lord Barnett, talked about the need for co-operation with the trade unions. I think that this co-operation is going on at many levels all the time. It is simply the view of the Government that the two sides of industry work best together when both are least interfered with by Government, and I think there is some reason to believe that that may work out, though of course there remain very great anxieties and difficulties in some large public sector unions.
I said my piece at the beginning. I do not accept that the Government have concentrated on lowering inflation to the exclusion of all the other balls in the air (to adopt a phrase of the noble Lord, Lord Barnett). However, I reiterate our view that both nationally and internationally lowered inflation is a prerequisite of the sustained growth which this country, and indeed other countries, not least the developing ones, so badly need.
§ Lord Beswick
My Lords, I have the time sincerely to thank all those noble Lords who have taken part in the debate, and not least for their unremittingly good-tempered approach to the issues which I sought to describe. I have learned much from the debate, not least the meaning of the term "fungible". My noble friend Lord Hatch seemed to think that the speakers 770 before him had concentrated on questions regarding the third world. I confess that I did not quite follow his arithmetic because among the five speakers before him was the noble Lord, Lord Soper, and not for one moment can I believe that the principles and the theology which the noble Lord, Lord Soper, expounded to us were meant to apply to the third world only. Those are matters for us to take very much to heart.
I thought that when he took to task the noble Lord, Lord Soper, on the question of money, the noble Earl, Lord Gowrie, was not quite dealing with some of the issues that had been raised. The noble Earl says that money is creative. I wonder whether he would say that the 20,000 billion dollars that went across the exchanges into the spot market alone in 1981 was creative. Much of that was just a question of taking a quick turn, and it is the kind of thing I think we must so arrange our affairs as to reduce.
Having said that, I was grateful to the noble Earl for the number of times in which in his first speech he agreed with what I had said. Since I have referred to the fact that the noble Earl made a first speech and then a second speech, I must say that I was reminded of Mr. Harold Macmillan, now the noble Earl, Lord Stockton, who once, when challenged in the other place in a debate on the Budget, said, "I am not a twice-nightly performer". Since those days the Conservative Party has acquired very competent twice-nightly performers, and I am sure that we congratulate the noble Earl, Lord Gowrie, on the way he has succeeded twice in the one evening in giving us a half-hour speech.
But I must again say to the noble Earl that I agree with what my noble friend Lord Barnett said—that the noble Earl was very complacent about the problem of unemployment. If the figure of 3½ million unemployed—or 4½ million, which it really is—is not brought down, we shall have trouble. I say again that if as a result of world pressures, or transatlantic pressures, the Government once more have recourse to an upward movement in interest rates, then they will so add to an already unacceptable mass of unemployment and under-privilege in this country as to make revolt quite inevitable.
The noble Earl said that the Government had to borrow in the real world. But I put it to him that the real world is shaped by human hands. We could do something to change the conditions within which money is borrowed or invested. There are ideas such as more direct control of monetary bases, a more positive direction of credit, and perhaps a two-tier interest rate. These ought seriously to be studied—and, as I have suggested, not only on that side of the House, but on this side, too. With regard to the international sphere, I say again, as so many others have already said, that concerted worldwide effort is needed to secure a stable world monetary situation and to extend repayment, at lower rates of interest, of the quite absurd debt burden of the third world.
But I shall not restart the whole argument. I say again to all noble Lords who have taken part in the debate, thank you very much; and I beg leave to withdraw the Motion.
§ Motion for Papers, by leave, withdrawn.