HL Deb 19 February 1986 vol 471 cc623-32

3.8 p.m.

Lord Barnett rose to call attention to the economic situation in the United Kingdom and in particular to the impact of the fall in oil prices on government revenues, the exchange rate and interest rates; and to move for Papers.

The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. I shall start in what I hope will be a non-controversial way—and even with the agreement of the Minister. I hope the House will agree that it is helpful to economic management to have a stable and lower interest rate, and that to have a stable exchange rate at a level which I shall discuss would be helpful to the economy. I hope it will also be agreed that stability would be helpful to those trying to run trading and manufacturing companies in Britain.

I hope it will be equally non-controversial to concede at once that it is not always in the command of government to ensure that we have such an ideal climate; but that is quite a different matter from saying that nothing at all can be done. In asking what can be done we need to look first, of course, at what is the present position, recognising that it could be very different this evening, tomorrow, in an hour's time, or even while I am speaking.

The first point to recognise is that oil prices are very low and are likely to remain so unless the Saudi Arabians, in particular, cut their oil production. It is a strange policy, because it results in the oil-producing countries receiving the same money for selling more oil as they would receive for selling less at a higher price. However, it is a strange world in which we live. It is an even stranger policy that the Government pursue, that in this vital area they leave it to the oil companies in this country to decide what should happen to oil prices.

The second point on which I hope there will be agreement is that the result of the oil price has been that the sterling exchange rate has fallen against the basket of currencies, according to the index, although not against the dollar, largely because of the weakness of that particular currency. The third point is that the real interest rate in this country is exceptionally high by any standards.

I should like to consider whether these facts are good or bad for our economy. These days we constantly hear that it is bad because the Chancellor will not be able to cut income tax (or, as I should prefer, increase capital expenditure) in his Budget next month. I hope it will be agreed that that is a shortsighted and narrow view to take. It is also a misinterpretation of the real economic consequences of the oil price fall and its effect on the exchange rate. Perhaps I may say this en passant, as it were, in relation to the question of what the Chancellor may or may not do in the Budget. I do not wish to interfere between the noble Lord the Minister and his right honourable friend, but I am sure it would be reasonable to ask him to give us an assurance that he, at least, being the Secretary of State for Employment, will be pressing the Chancellor that anything he has available will go in capital expenditure rather than tax cuts. That is given that there is virtually no disagreement that that would have a greater impact on employment than a tax cut. I look forward to the Minister telling us that he agrees with that.

We have seen, as I am sure have all noble Lords, a great deal of analysis of the likely economic and financial consequences of the oil price reduction. Of course, it is first important to understand that the Chancellor's decision next month in his Budget will not be based on the current price of oil or the current sterling exchange rate, but a much more hazardous assumption of what those rates will be throughout the whole of 1986–87.

One of the serious and carefully calculated analyses that I have seen was done recently by the London Business School, which is a highly respected body. It concluded that five dollars a barrel off the price of oil boosts output in the United Kingdom by 0.4 per cent. in 1986, and by 0.7 per cent. in 1987. It also cuts the rate of inflation in 1986 by 1.3 per cent. and a further 0.5 per cent. in each of the following two years. The London Business School reckons that, at 15 dollars a barrel, inflation falls to an average of 2.5 per cent. in 1986, and at 12.50 dollars it falls to 1 per cent. That assumes an index average for sterling of 72 and the last time I looked it was at about 74 against the average of 80 on the index in the last quarter of 1985. At 15 dollars a barrel, manufacturing exports grow between 5.5 per cent. and 6.5 per cent. annually over the next three years.

One is bound to conclude that low oil prices therefore, far from being a disaster for the British economy, give us a bonus, a chance to go for higher growth and lower unemployment without the risk of inflation taking off again; although even now the greatest risk to inflation and the whole strategy of this Government is not coming from oil prices or the exchange rate but rather from what is happening to the growth in earnings. The latest figure for the year to 31st December 1985 shows a growth of 8.9 per cent.—far and away in excess of the growth in the cost of living. That is of much more serious consequence than almost anything else happening in the economy at the present time.

Of course, there are some disadvantages from an oil price fall especially in the volatility of the oil price and the exchange rate and interest rate. I hope to return to that in a few moments. But may I reiterate that the cut in the Government's oil revenues is nothing like the disaster that we have been led to believe. It is true that at 20 dollars a barrel the oil revenue will be almost halved to £6.3 billion and, at 15 dollars a barrel, the total falls another £3.5 billion. On the other hand, personal disposable income benefits just as much from a fall in energy prices as it does from a cut in income tax; although of course the Chancellor of the Exchequer will not be able to get as much political capital out of that. But I imagine that we could live with that situation.

If we care about more than just ourselves in relation to the oil price, then of course we must also note the serious consequences for the poorer oil-producing countries, not to mention the shaky banking structure in the West. On the other hand, the poorer non-oil producers stand to gain from the fall and the wealthier nations of the world will be given the opportunity to help, which one must hope that they will take this time round.

I refer to the fact that a fall to 15 dollars a barrel, on the London Business School reckoning, would push up the growth of world output from 3.7 per cent. to almost 6 per cent. in 1987. I hope that the Government will accept that some of that growth, surely, must be used more productively than was done in the past to help the third world. These conclusions should not really be so surprising for if the huge oil price increases in 1973 and 1979 were economically disastrous, especially given the reaction at that time of most of the developed world to deflate their own economies, a reduction in oil prices surely should enable us in the West to do the very opposite now.

The various analyses, assumptions and conclusions could all turn out very different in the real world, not least for us if our Chancellor takes the wrong decisions. I particularly have in mind action on interest rates and on the exchange rate. Real interest rates, as I have said, are very high; but I congratulate the Chancellor, and maybe even the noble Lord the Minister for having supported him, in at least resisting pressure to increase the interest rates even higher. In other words, the Government now have an exchange rate policy: that of allowing the exchange rate to take the strain rather than interest rates. However, one cannot help but note that one of the consequences of that fall in oil prices is to show even more graphically than did our Select Committee in the House of Lords what will happen when North Sea oil production starts to run down; because the cut in the oil price of this magnitude is effectively very similar to what will happen when North Sea oil starts to run out. Indeed, astonishingly, as Mr. Bill Martin of Phillips and Drew said recently, the present level of oil prices could push Britain into a balance-of-payments crisis now. That is astonishing given the amount of revenue that the Government have received in recent years from North Sea oil.

It says a great deal about what the Select Committee said in relation to the Government's economic and industrial policy. Speaking for myself, I believe that the gentleman concerned was being somewhat alarmist. I do not think that the Government are going to hit a balance-of-payments crisis; although one is bound to note, as did the Select Committee, who rightly pointed it out, if action is not taken now it could become a serious problem. Certainly, it exposes to instant examination the point made by the Committee and then replied to by the Chancellor when he said that the drop in oil resources would be balanced almost inevitably by an increase in manufacturing industry. We shall see whether that turns out to be the case; but it is not easy to see, as the Committee themselves pointed out, how companies that have gone out of business are going to come back into business at a stroke, as it were, because oil prices have fallen.

I return to my opening question; namely, what can be done by Government with regard to oil prices, interest rates and the exchange rate? As I have indicated, I believe that the fall in the oil price and the exchange rate against the index is helpful to manufacturing industry and economic growth. But it is very much dependent upon the assumption that it will remain at those levels consistently throughout the period. There lies the problem. Huge fluctuations, huge volatility in these areas, are, as I have said, most unhelpful. Certainly, that sort of volatility makes it not only very difficult for the Chancellor to plan his Budget but also difficult for manufacturing industry to plan its production and sales. So that while a lower oil price and sterling is helpful, a more stable base, even at a slightly higher level, would be better than extreme volatility of the sort that we have seen in recent weeks.

I am only too well aware that achieving international co-operation on almost anything is, to say the least, somewhat difficult; and it applies particularly in the case of trying to achieve agreement with the OPEC countries where unfortunately they are unable to agree among themselves. But if international agreement is difficult, one must not throw up one's hands in despair especially when an agreement could provide the kind of vital stability that is essential certainly to this country and, I believe, to the world in this important area.

I cannot pretend to be optimistic but even a little international co-operation is surely better than none. I hope that the Government will at least talk to the OPEC countries and I should like to hear from the Minister that he has certainly not ruled out the possibility of holding some discussions in this important area; for even if Britain and Norway agree to only a modest cut in North Sea oil production, it could have an important psychological impact on OPEC and help to achieve the greater stability that we should all like to see. But, apart from anything else, if selling more oil for less money is an odd policy for OPEC, it is very much odder for the United Kingdom with finite resources in the North Sea.

I hope that the Minister will be able to tell us that he is not ruling out the possibility of some discussions. But if more stability is helpful to oil prices, it is even more important for the exchange rate. Again, international co-operation is better than no cooperation, and again I am only too well aware of the difficulties in this field.

I have in the past expressed a personal view that to this end our membership of the exchange rate mechanism of the EMS would be helpful. Not all my noble and right honourable friends, and not all noble Lords opposite, have agreed with me; but, on the other hand, many of my noble friends and others who have sincerely opposed our membership on grounds that it interfered with the Government's ability to pursue an independent economic policy without the constraints that bind members of the ERM must surely recognise now that it always was a fallacy, for a country like Britain can never really live in economic isolation from the rest of the world.

The present Government, and, indeed, the previous Labour Government, in which I was privileged to serve, never opposed membership in principle: they opposed it on the grounds of the time not being right, and those hallowed words have been adopted by the present Chancellor of the Exchequer as well. But it is not, and never was, an ideological issue. It has nothing to do with membership or non-membership of the Common Market. It is a decision to be taken on hard, practical grounds.

I have spoken to many who previously disagreed but who are now very much recognising that the time is right, or as right as it is ever likely to be. I have little doubt myself that at the current sterling rate it will provide for more stability in than out. That must surely be in the best interests of Britain. Again, while understanding the difficulties of the noble Lord the Minister, I hope he will at least be able to give me a sympathetic response as to how he is bending the Chancellor's ear.

I have tried to show that, far from the oil price drop being disastrous, it offers great opportunities, not least to manufacturing industry. I have tried not to be too controversial or to be too critical of the Government's management of the economy. I myself feel it is really unnecessary because in the context of this debate it is surely self-evident, even to this Government, that the huge increase in the exchange rate between 1979 and 1981 did enormous damage to manufacturing industry. At that time the Chancellor was positively encouraging the exchange rate to go higher; and it will be recalled that the Prime Minister boasted that it showed the world's confidence in sterling and in her wonderful management of the British economy. I do not know what she is saying today, or whether she has any time to think about it, but, for my part, making a fairly non-controversial speech, I will restrain myself in any desire to ask what the world thinks now about the Government's economic management.

I believe it is generally recognised that the decline in manufacturing industry in the last seven years owes much to that increase in the exchange rate of some 40 per cent.—the real exchange rate between 1979 and 1981—which did so much to cripple the industrial competitiveness of this country and brought a flood of imports which has never been halted. It decimated whole areas of manufacturing industry, although I concede at once that it was not the only reason, and certainly there was a decline in manufacturing industry which started before 1979. I willingly concede that; but it certainly accelerated at great speed, due in no small measure to the mistaken exchange rate policies of those years.

I have tried very hard this afternoon not to embarrass the noble Lord, Lord Young, the Secretary of State for Employment, because I know how easily embarrassed he gets. On the other hand, I am bound to say to him that I would congratulate him if he had any impact on the Chancellor in arranging for him to abandon the policy of leaving the sterling exchange rate entirely to the whim of the markets. In other words, the Chancellor now has an interventionist policy and, as I have said, he is allowing the exchange rate to take the strain rather than to increase interest rates even more. Indeed, we know that, together with the Group of Five, he has (rightly, in my view) been intervening and co-operating in this difficult area to try to ensure that there is a more stable system of exchange rates and a more sensible level of exchange rates throughout the western world.

But I trust it also indicates to the Government the follies of 1979 to 1981. I hope that they will put those behind them; and also that the noble Lord, Lord Young, will be able to assure us today that they will not lose this heaven-sent—or OPEC-sent—opportunity to expand the economy and start the vital task of rebuilding the manufacturing base of this country, especially as it will help the noble Lord and the country in the task of dealing with the most serious and urgent social and economic problems this country has ever faced—that is to say, the disastrously high level of unemployment that we face in this country. Given the kind of policy I have described, the Secretary of State for Employment, if he is able to persuade the Chancellor along those lines, could see a start at least to the reduction of the disastrously high level of unemployment. My Lords, I beg to move for Papers.

3.25 p.m.

Lord Young of Graffham

My Lords, I must first apologise for the fact that because of a long-standing engagement with a Select Committee in another place I cannot be with your Lordships for the full course of this debate. The Motion calls attention to the economic situation. The noble Lord, Lord Barnett, spoke with characteristic wit and moderation, but I have to say that I found little that I recognised in his account of the past, the present or even the future. The noble Lord painted a picture, from my point of view, of uniform pessimism. It simply just does not square with the facts.

Let us look at the facts. What has been happening since the trough of the recession over the five years since 1981? Our economy has grown at a healthy rate: the real GDP growth has averaged 3 per cent. a year. Investment has increased substantially, increasing by 4 per cent. a year. Profitability has improved—up from 6½ per cent. to 11½ per cent., to reach the highest level for 20 years; and better profits will lead to higher investment in the future. We are also more successful in the world economy. United Kingdom exporters have at long last halted the slide in their share of the volume of world trade.

All this sounds rather different from the threats of economic decline which the Opposition uttered at the last general election. Indeed, the general election victory has been followed by low inflation, substantial employment growth and sound economic growth—a combination not seen by this country for many years. Inflation has averaged 5.1 per cent. and the numbers in work have increased by about 600,000. We topped the European growth league in 1983 and we are expected to top it again in 1985, with a growth rate which is faster than even that of the United States of America.

These are real successes. And in case some of your Lordships are reluctant to accept my assurances—though I cannot think why you should be—let us look at what independent commentators are saying. The chief economic adviser to the National Westminster Bank said recently that only four other nations in the world can now match Britain for economic growth, price stability and a strong balance of payments. As he put it, we are now in the world economic super-league.

The OECD, too, in their 1985–86 survey of the United Kingdom economy, drew attention to the strength, duration and nature of our recovery, to the sharp fall in inflation, to the recovery in profitability, to the growth of employment and to the successive surpluses on current account. All these add up to an impressive performance in many areas of the economy.

The noble Lord's Motion refers specifically to oil and its place in the United Kingdom's economy. The recent sharp falls in the price of oil are bound to unsettle the financial markets to some extent, but it is too easy to exaggerate the importance of oil to this country. Oil accounts for only between 5 and 6 per cent. of our national income and for only 5 per cent. of our capital investment. Net oil exports make up 8 per cent. of our total exports and oil represents under one-half of one per cent. of total United Kingdom employment.

Of course, it is true that a sharp fall in the price of oil will have a substantial impact on tax revenues: that much is self-evident. But noble Lords will understand that I am not here to "second-guess" my right honourable friend the Chancellor of the Exchequer's Budget strategy: nor, for that matter, to satisfy your curiosity and disclose any discussions that I might have had or might still have with him. And, in any case, we must look at the wider economic impact of the fall in oil prices. Lower oil prices would benefit consumers and industry and would stimulate higher world trade and output. The overall effect on output and inflation should be broadly neutral or, if anything, slightly beneficial.

The noble Lord referred only at the very end of his speech to the question of unemployment. I will concede straight away that this is one area of the economy that has been disappointing. When last month's figures were published I said they did not make happy reading, and they did not. However unemployment is calculated—and there is plenty of room for argument about that—it is just too high. But bringing it down depends on producing goods and services which people want to buy.

What Governments can do, and what Governments must do, is to create the economic climate in which enterprise and employment can flourish and grow. Our economic success provides that climate. Our policies to encourage enterprise help firms to grow. Over 600,000 more jobs created since the last general election are evidence of the progress made by our industries.

But economic success does not of itself guarantee that unemployment will fall immediately. First, the huge problem of overmanning in the 1970s is now being overcome. Manufacturing productivity has been growing at three times the rate experienced during the Opposition's years. Higher productivity and new technology costs jobs in the short term, but in the longer term our economy will be stronger and able to provide more real jobs. Secondly, pay increases well above the rate of productivity growth make our industries uncompetitive. They also make our industries determined to reduce their use of expensive labour. Thirdly, the rising number of people seeking work makes the task of lowering unemployment even harder.

But we are conscious of the need to help those most hit by unemployment. This year we are spending almost £2 billion on employment and training measures. This money is being spent in ways that will ensure that economic growth can be sustained by a properly trained and flexible workforce. More than 1 million young people have joined the YTS since it began in 1983. Up to 1,250 unemployed people are now being given a start in business each week through the enterprise allowance scheme, and this will increase until 80,000 new businesses a year are benefiting from the allowance in 1986–87.

The community programme currently has 174,000 filled places. By June the figure will be 230,000 and some 300,000 places will be available every year at a future cost of over £1 billion. In the current financial year 200,000 adults will have begun their training under our adult training programmes. Overall we are currently helping some 670,000 people through employment and training measures. This is compassion in action—action not words. And in the last few weeks we have started on two new initiatives designed to help those hardest hit by unemployment.

We are experimenting with a new three-part programme to help the long-term unemployed: first, an in-depth counselling interview to identify the needs and potential of each person who has been out of work for 12 months or more; secondly, a new short course designed specifically to help the long-term unemployed brush up their basic working skills; and, thirdly, a job start allowance of £20 a week for those who take jobs with gross earnings of less than £80 a week—a direct financial incentive for those with high benefit entitlement to re-enter the job market.

If these experiments are a success, we shall be looking to extend them as soon as possible. The greatest problem for the long-term unemployed is simply getting out of touch—out of touch with the job market and with the help which is already available to them. Our aim is to get them back in touch and to give them the help they need. In addition, only two weeks ago I announced a new initiative to bring together the efforts of government departments, local government, the private sector and the local community in eight inner city areas.

These are all positive steps that we have taken to stimulate employment and to help the unemployed back into work. They are worth more to the unemployed than wild promises to reduce unemployment by 1 million through a massive extension of the public sector. Let me remind the noble Lord, Lord Barnett, of some wise words spoken nearly 10 years ago: We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists and that, in so far as it ever did exist, it worked by injecting inflation into the economy. And each time that happened the average level of unemployment has risen. Higher inflation, followed by higher unemployment. That is the history of the last 20 years". Those were, of course, the words of the last Labour Prime Minister, in whose Cabinet the noble Lord served, addressing his own party conference nearly 10 years ago in 1976. How does the noble Lord reconcile those words with the promises of massive increases in public expenditure which flow daily from the leaders of his party in another place?

Only the day before yesterday the right honourable Roy Hattersley, shadow Treasury spokesman in another place, was urging local authorities and the public utilities to prepare spending plans for an incoming Labour Government. He apparently said that money would be awarded on a "First come, first served" basis. How does that sound to a former Chief Secretary to the Treasury? We have costed the Labour Party's continuing commitments at £24 billion and this does not include all the costs. It does not include the cost of any re-nationalisation, nor of the recent invitation to local authorities and other public sector bodies to, "Cash in on Labour".

How is this massive increase in public expenditure to be financed?—not through income tax. Mr. Hattersley has given an unequivocal commitment not to increase the basic rate of income tax. The noble Lord, Lord Barnett, does not need me to tell him that taxing earnings above £30,000—as the Leader of the Opposition has promised—would not begin to yield the sums required, even if the tax was at 100 per cent. How then is the money to be found?—by increasing VAT by 26 percentage points to a rate of 41 per cent., or by inflating the public sector borrowing requirement from £7½ billion to £20 billion or more? What a disastrous effect that would have on interest rates, on Inflation and on the value of the pound. Forget, my Lords, about the price of oil.

For example, just look at what an increase in VAT up to 41 per cent. would do. It would increase inflation by around 13 per cent., so that the country would have to endure inflation of nearly 20 per cent. That would have an effect on wages which would cost jobs on a massive scale. What a way to cure unemployment! We saw the effect of the Opposition's policies in the 1970s. The noble Lord, Lord Barnett, has a wealth of experience. I almost felt like promising that I would not mention his book; but that book, Inside the Treasury gave us a vivid description of the crisis of 1976, of the resort to the IMF and of the swingeing expenditure cuts which accompanied it. He hears the promises of his party's leaders in another place.

I have a vision of Mr. Hattersley walking into the Treasury and thinking that he can walk down into the basement, open a vault and there in front of him would be gleaming £5 billion of the money which he said was locked up from the sale of council houses and waiting to be spent. I think that he should learn the difference between cash flow and what exists in the books. But, either way, it was said of the Kings of France—and we must all have this feeling of history repeating itself—that they had learnt nothing and forgotten nothing. I sometimes think that the Labour Party have gone one better: they have learnt nothing but they have forgotten everything.

Lord Hatch of Lusby

My Lords, will the noble Lord allow me to intervene? In his remarks about Labour Party policy, has he taken note of the words of his right honourable friend the Secretary of State for Energy yesterday in calling for greater public expenditure? Has he read the report of the all-party committee of another place also calling for greater public expenditure?