Manufactures: Balance of Payments (Hansard, 17 July 1989)

§ Lord Young of Graffham
My Lords, in 1979 there was a surplus in trade in manufactures of £2.7 billion on a balance of payments basis. This surplus continued until 1982. In 1988 there was a deficit of £14.7 billion. I have arranged for the figures to be available in the Library.

§ Lord Dean of Beswick
My Lords, I am grateful for the detailed Answer that the Minister has given. But am I correct in saying that the figures for the first quarter of this year, which the Minister has not quoted, show an increase in the first quarter for last year of £1.5 billion, which is an enormous increase? Can the Minister give us the figures for the second quarter of this year, bearing in mind that the figures I gave for the first quarter are the worst for the first quarter of any year in our industrial history?

§ Lord Young of Graffham
My Lords, for the three months to May, for which I have the figures, there was a visible trade deficit of £5.5 billion compared with £5.9 billion in the previous three months. What we have to appreciate is that the balance of payments deficit is not in itself of great importance provided that it can be financed. The present current account deficit is being readily financed by the inflow of private sector capital, which shows great confidence in this country as a base for investment. We have seen recent evidence of that in the motor car industry. Recent deficits come after a long period during which the United Kingdom has run large current account surpluses.

§ Lord Williams of Elvel
My Lords, has the noble Lord read the analysis made by Professors Godley and Coutts in the current edition of the Political Quarterly to the effect that the manufacturing trade deficit was wholly predictable, that it will continue and that it will probably worsen? What is the Government's response to that analysis?

§ Lord Young of Graffham
My Lords, speaking for myself, I gave up reading Professor Godley many years ago.

The Earl of Halsbury
My Lords, will the noble Lord include in the figures he is proposing to place in the Library details of the classes of goods in which we are in balance? Does it interest the noble Lord to know that when I visited the basement of Peter 570 Jones to buy a wedding present for one of the younger generation, I found that every household refrigerator was made in Germany or Italy? When I asked why, I was told that British manufacturers involve Peter Jones in uneconomic after-sales service.

§ Lord Young of Graffham
My Lords, it is true that we lost the market in refrigerators a good many years ago, but it is fair to say that only a quarter of the growth in imported manufactured goods in 1988 was in consumer goods. A large part of imports are for industry—raw materials, semi-finished manufactures, intermediate and capital goods.

§ Lord Ezra
My Lords, will the noble Lord give us his view of what he thinks the trend will be over the next 10 years? If, in his opinion, this unfortunate trend is likely to be reversed, will he give us the reasons why he comes to that conclusion?

§ Lord Young of Graffham
My Lords, if I gave the noble Lord a forecast over the next 10 years, I trust that no one in your Lordships' House would believe me. These are matters which are not within the wisdom of Ministers to say. However, at the present time quite a part of our deficit is in the import of motor cars. We have seen from the results in the past few months that far more cars will now be manufactured in the United Kingdom, and that is one part of the balance of payments deficit which will disappear over the years.

§ Baroness Seear
My Lords, the noble Lord has told us that a considerable part of the imports are semi-finished and finished goods. Which of those goods could be manufactured in this country? If they are not, why are we failing to supply our own semi-finished and finished goods to industry?

§ Lord Young of Graffham
My Lords, I said that a large part of the imports were raw materials, semi-finished manufacturers, intermediate and capital goods for industry. What we have seen is manufacturing output going up year by year. It stood at a record level in 1988, some 7 per cent. higher than in 1987. We have also seen our exports continuing to go up month after month. It might be of interest to your Lordships that in emerging markets such as Japan, where through my department we have been running an Opportunity Japan campaign, for the first five months of this year exports to Japan are 36 per cent. up against an equivalent period last year. That is very good news indeed.

§ Baroness Seear
My Lords, if the position is as good as the noble Lord says why do we have the balance of payments problem? It is quite contradictory.

§ Lord Young of Graffham
My Lords, there is no question that part of the balance of payments problem is due to the increased demand which has appeared in the United Kingdom during the past two years and which has exceeded our capacity to manufacture. Any country which has had a resurgence—Japan was a parallel case in the 1950s—will go through a period of balance of 571 payments deficit until the manufacturing capacity returns and the balance is regained.

§ Lord Stoddart of Swindon
My Lords, is the Minister aware that his orginal Answer smacks of complacency? Some of us believe that a deficit of £14 billion does matter. Is it not a fact that the deficit, although financed from abroad, depends upon borrowing and that therefore interest rates here must be high which undermines investment in our manufacturing industry?

§ Lord Young of Graffham
My Lords, if the noble Lord believes that I am being complacent I ask him to question his own judgment. I am not. It is not financed by borrowing. The noble Lord knows perfectly well that we had massive inward investment in this country; that is one way to pay for deficit payments.

§ Lord Kennet
My Lords, this is the first time that someone has spoken from these Benches on this Question. Can the Minister tell the House the proportion of export earnings in manufactured goods—whatever the level—from goods designed in this country as opposed to those which are assembling other people's designs and mere metal chopping operations?

§ Lord Young of Graffham
My Lords, I am not sure what the noble Lord means, nor is it possible to discern it. He may as well have asked what proportion of goods around the world are manufactured from designs originated in this country. As regards the motor car industry—if that is what the noble Lord means—we have a position where we shall have 80 per cent. sourced within the United Kingdom. This is a matter upon which we are prone to put ourselves down. I have far more confidence in British industry. During the past two years I have continually travelled around the country and have detected a tremendous spirit of optimism among those in manufacturing industry. Also there is the realisation that the markets are theirs if they know how to go and get them.

§ Lord Peston
My Lords, reverting to the question of complacency, does the Minister intend noble Lords to believe that there is no short-term financing of the deficit? Surely, a large amount of the inward capital flow is short-term financing at an interest rate of 14 per cent. Is it not the case that if we run a deficit we must eventually run surpluses to repay our debts? There is no way around the fact that in due course we must run a balance of payments surplus: there is no sign that we shall do so in the foreseeable future.

§ Lord Young of Graffham
My Lords, the noble Lord, Lord Peston, is a reputed economist. I shall not argue economics with him. However, reluctant as I am, I must point out that I did not say what he suggested. I said that recent deficits came after a long period during which the United Kingdom ran large current account surpluses. The noble Lord must not confuse today with 1976. The IMF is no longer in the habit of calling on our shores.

§ Lord Hatch of Lusby
My Lords, is it not the case that virtually the whole of the deficit is due to our trading deficit with the EC and that our trade with the rest of the world is in surplus? Is that not the real reason for the present and apparently continuing deficit?

§ Lord Young of Graffham
My Lords, it is true that we run a considerable deficit with the EC. I am not sure about there being a surplus with the rest of the world but there is no doubt that we have a considerable deficit with the EC. That shows precisely how important we are to the Community.