Balance of Payments (Hansard, 11 July 1988)

§ Lord Beaverbrook
My Lords, for the three months ended May there was a deficit on the current account of £2.5 billion.

§ Lord Jay
My Lords, although we have large reserves now, thanks in part to oil earnings, would it not be wiser if the Government took the medium term prospect rather more seriously? We now seem to be running the largest current account balance of payments deficit in any year since 1945. Whereas oil earnings were set to rise 10 years ago, they arc now bound to fall in the 1990s.

§ Lord Beaverbrook
My Lords, while I agree with the noble Lord that the figure is very high, there are certain factors that make it sustainable. The deficit is easily financed, it can be readily financed, and the increase is consistent with the fact that our economy is growing faster than that of most other economies. It is a matter of record that we ran considerable surpluses during the early 1980s.
The economy is bound to have a cycle of deficits when it is growing so fast compared with other economies. Last week my noble friend the Secretary of State when answering a Question on the same subject told your Lordships that it was felt that the import of capital goods and semi-manufactured goods had a considerable impact on figures at the moment.

§ Lord Mason of Barnsley
My Lords, is the Minister aware that the trade figures given last May showed the worst ever monthly deficit on trading goods, the worst ever current account deficit and the highest ever total of imports at over £8 billion? They showed an increase of £165 million in one month. With such appalling trade figures there is nothing for the Government to brag about. When can the Minister forecast that we shall have a surplus in visible trade?

§ Lord Beaverbrook
My Lords, my right honourable friend the Chancellor of the Exchequer will no doubt have something to say in his Autumn Statement. I shall not pre-empt that and the noble Lord would be very surprised indeed if I did so. However, I reiterate that it was always expected that the trade deficit would increase as the economy has been growing so 590 fast. A large part of the imports is for industry —raw materials and intermediate and capital goods.

§ Lord Barnett
My Lords, will the noble Lord accept that most people believe that our reserves are more than adequate, even to have a balance of payments deficit up to £10 billion? However, while his noble friend the Secretary of State is away, will the Minister take the opportunity to tell us what the department really believes? Without upsetting the Prime Minister too much, is it not true that in the Department of Trade and Industry there must at least be a twinge of concern about the fall in the level of exports from Britain? In those circumstances, does not the Minister believe that the exchange rate would be a little better if it were lower?

§ Lord Beaverbrook
My Lords, the noble Lord knows better than I that the exchange rate is affected by many factors. The noble Lord will know that interest rates have gone up recently and the Government's plan is to continue a policy of sustained growth combined with low inflation.

§ Lord Boyd-Carpenter
My Lords, will the noble Lord agree that the high exchange rate to which reference has been made is an indication that foreign financial circles take a more cheerful and robust line about the British economy than certain gloomy noble Lords opposite?

§ Lord Beaverbrook
My Lords, I think that the statistics show that inward investment is at a record level.

§ Viscount Hanworth
My Lords, will the noble Lord agree that the reduction in income tax has done nothing to help because much of the extra money has been spent on importing luxury goods from abroad?

§ Lord Beaverbrook
My Lords, 1 do not think there is any evidence to show that that is the case. 1 have already said that much of the high import figures has been caused by the higher level of activity in industry.

§ Lord Stoddart of Swindon
My Lords, does not the noble Lord understand that the Government's complacent attitude may very well cause disaster later on? Is it not a fact that with this large deficit it is likely that foreign confidence in the pound will be undermined? As this Government have only one policy to cover this—that of putting up interest rates—will it not make matters worse by dampening down investment in industry, which is the basis of a good economic recovery?

§ Lord Beaverbrook
My Lords, it is very difficult to draw conclusions from taking a snapshot of the economy. Things change every day. Three months ago the pound was on the way up. However, it has come down somewhat from its position a month ago. I believe that in economic matters many things are self-correcting. The noble Lord may well find that an equilibrium will be reached very soon as regards the concerns to which he addresses himself.

§ Lord Ezra
My Lords, the noble Lord, Lord Barnett, referred to a possible level of about £10 billion before the end of this year, which is commonly mentioned in the City. If that were to increase during the course of next year at what level would the Government become concerned, because that would start to represent 2 per cent. to 3 per cent. of our GDP?

§ Lord Beaverbrook
My Lords, my right honourable friend the Chancellor of the Exchequer will no doubt make mention of that in his Autumn Statement. But, as I have just said to the noble Lord opposite, I believe that many economic factors are self-correcting. The worst fears of the noble Lord, Lord Ezra, may well not come to light.

Lord Bruce of Donington
My Lords, is it not the case that the recent increases in the interest rate will do nothing at all to relieve the rate of inflation and that, on the contrary, the recent increases will tend to exacerbate the growing deficit on our visible trade account?

§ Lord Beaverbrook
My Lords, I do not think that the noble Lord will be surprised if I disagree with him on the Government's main weapon against any rise in inflation. The Government attach the utmost importance to keeping inflation at a low level. We believe that the use of interest rates is an effective weapon. I do not believe that the higher rates of interest that we have seen recently will necessarily increase the level of imports. The pound has come down recently and that should make it easier for British exporters.

§ Baroness Seear
My Lords, but if interest rates lead to an increase in the mortgage rate and that feeds through to the retail prices index and then through into wage claims, how will the Government prevent wage pressure which will be highly inflationary?

§ Lord Beaverbrook
My Lords, the noble Baroness has a good point. Very often in economics there is a two-way tug on these indexes. But we believe that combating inflation is the most important part of our policy. A 1 per cent. increase in interest rates would be much less damaging to the British economy than a 1 per cent. increase in inflation.

Viscount St. Davids
My Lords, can the noble Lord give me and a number of other noble Lords a short lesson in economics? Is not a country very similar to a factory? When it increases production does it not first of all take in a lot of machinery and raw materials which at that point it cannot instantly pay for? Does it not also pay a lot of people to do work which is not instantly at that moment productive, and thus is slightly inflationary? Is that not the phase that we are now going through?

§ Lord Beaverbrook
My Lords, I am sure the noble Viscount will agree with me that there is probably no such thing as a short lesson in economics. However, I agree with the line that the noble Viscount took. I have already tried to put that line across, but the 592 noble Viscount did it in a much more succinct way than I did.

§ Lord Jay
My Lords, is not the Minister aware that unhappily our oil earnings are not a cycle but more like a mountain which rose to a peak about three years ago and has steadily fallen thereafter?

§ Lord Beaverbrook
My Lords. our oil surplus is still running at about £4 billion per annum. That is a very important contribution to our balance of payments.