The Economy (Hansard, 14 July 1988)

§ Lord Beaverbrook
My Lords, the Government's firm financial policies will continue to control inflation and provide the right background for satisfactory and sustainable growth. Moreover, investment growth is expected to be strong this year and this will further improve the supply potential of the economy.

§ Lord Ezra
My Lords, does the noble Lord nevertheless not agree that there are certain potentially dangerous signs in the economy: the continued high level of consumer expenditure, the continued expansion of credit, the low level of personal savings, the continued increase in house prices particularly in the South-East, and the consequential impact on the balance of payments? Are these not all causes for concern? All of us are keen that the economy of Britain should be properly managed. What are the Government's measures to deal with those problems?

§ Lord Beaverbrook
My Lords, as my right honourable friend the Chancellor of the Exchequer has made clear, the economy has recently been growing at an unsustainably rapid rate and needs to slow down. However, that can and should be achieved without drama. The Government are determined to take no risks with inflation, as evidenced by recent interest rate rises. The noble Lord is no doubt aware that interest rates are now at 10 per cent., which is the level that pertained prior to the stock market crash. That is some two and a half points up on only six weeks ago.

§ Lord Bruce-Gardyne
My Lords, since the Government's own current chosen measure of monetary growth is way outside the target zone set for it, does that not suggest that notwithstanding recent increases in interest rates there is a case for further tightening of monetary policy and a further increase in interest rates?

§ Lord Beaverbrook
My Lords, my right honourable friend the Chancellor of the Exchequer has indicated that if inflation appears likely to increase he will not hesitate to take action to raise interest rates in order to try to stop any such increase.

§ Lord Peston
My Lords, having mentioned the rise in investment, would the Minister care to comment about the danger of that increased investment—which is sorely needed— being brought to a premature halt if interest rates are raised further?

§ Lord Beaverbrook
My Lords, it is true to say that investment is running at a higher level than was originally forecast in the FSBR forecasts. Recent rises in interest rates may indeed slow up that rate of investment a little. But it seems that the rate of investment is at a healthy level. It was originally forecast to run at a level of 11½ per cent. in 1988 in the manufacturing sector but is running at a higher level at the moment.

§ Lord Rippon of Hexham
My Lords, would my noble friend the Minister agree that increasing interest rates does not necessarily control inflation but may in fact fuel it, apart from other side-effects? In so far as the noble Lord, Lord Ezra, suggests that there is a rise in consumer expenditure which is in some ways dangerous, would it not be a good idea for the Government to do something to stop the banks and others issuing credit cards and excessive borrowing at rates of interest which would make a Mafia loan shark look like a charitable institution, and which incidentally would have landed the Mafia loan shark in prison for a very long time?

§ Lord Beaverbrook
My Lords, the Government's main weapon against inflation is interest rates and for the foreseeable future it will remain interest rates. I would also say to my noble friend that I do not believe that a return to direct credit controls would be very effective. I think that they would cause a major distortion of the market. Such controls can easily be circumvented in the highly developed global credit markets of today.

§ Lord Seebohm
My Lords, are we to understand from what the Minister has just said that interest rates are the only weapon that the Government have to control inflation?

§ Lord Beaverbrook
No, my Lords. I said that it is the Government's principal weapon.

§ Lord Hatch of Lusby
My Lords, is it not the case that the Government's control of monetary policy has been completely abandoned? Is it not also the case that North Sea oil revenues are rapidly dropping and that raw material prices are rapidly rising? Is that not a prescription both for inflation and for continuation and escalation of unemployment?

§ Lord Beaverbrook
My Lords, the North Sea oil revenues are doing very well. There was a surplus of £4 billion this year in our balance of payments. Employment figures are also doing very well, with considerable decreases in the last year or so. I would also point out that as money supply has increased my right honourable friend the Chancellor of the Exchequer has seen fit to increase the cost of money. I believe that that will be an effective means of controlling inflation in the economy.

§ Lord Stoddart of Swindon
My Lords, does the noble Lord not appreciate that the weapon which is being used is a blunt instrument and simply is not working? Is it not the case that high interest rates are damping down investment in industry but are not damping down demand for goods and are certainly not damping down demand for houses? The building societies have not put up their interest rates. Does the Minister not understand that if the Government do not take action the enormous increase in the price of houses, particularly in the South-East, will merely drag up wages, cause inflation and put the country's economy at risk?

§ Lord Beaverbrook
My Lords, in answering the noble Lord, Lord Peston, earlier I stated that investment is running at an even higher level than the Government had predicted. The Government's policies have brought steady growth with no resurgence of inflation, unlike most previous upswings. Our aim is to reduce inflation further and we shall continue not to be deflected from that policy.

Lord Bruce of Donington
My Lords, in noting that the noble Lord has not replied specifically to the Question on the Order Paper, may I ask him whether he is aware that output in the United Kingdom is at the moment running at one-quarter of the rate that it was in 1987? Does he not recognise that for the 2 to 3 million unemployed people in this country the temperature of the economy. far from generating any heat, is completely frozen?

§ Lord Beaverbrook
My Lords, the Government's policies are encouraging considerable growth within the economy, and I should have thought that growth in economic activity is the best way to bring down unemployment.