Interest Rates and the Economy (Hansard, 15 February 1990)

The Paymaster General (The Earl of Caithness)
My Lords, the Government's tight monetary policy is working. Demand is slowing and lower inflation will follow.

§ Lord Dormand of Easington
My Lords, does the noble Earl agree that it is now crystal clear that the 11 consecutive increases in interest rates over the past 18 months represent a blunt instrument which is wholly inappropriate to the economic problems caused by this Government? Can he say how much consideration is being given to the effect of interest rates on investment, the exchange rate and the trade 1465 deficit? Perhaps I can be so insensitive and cruel as to mention today's announcement concerning the mortgage rate which is now at a disgraceful level. Not least, I refer to the business failures. Is the Minister aware that in 1989 the number of business failures rose to 18,163, an increase of 10 per cent. on 1988? Does the noble Earl agree that the time is now ripe —in fact it is long overdue —for a complete change of policy?

The Earl of Caithness
My Lords, the noble Lord asked me many questions which I believe run into almost double figures. I shall pick on the one on which he majored at the end; namely, the question of bankruptcies. The noble Lord mentioned the figure. Your Lordships will be aware that in 1989 over 80,000 more businesses opened rather than closed. In December alone there were over 7,600 net new registrations announced by Customs and Excise. It is the Government's job to create the right climate for businesses and that is why, under this Government, new businesses have been set up and it is also why, during the last year of the Labour Government, 6,000 net businesses closed.

§ Lord Tordoff
My Lords, can the noble Earl tell the House what the Government expect to be the likely effect on the rate of inflation of the increase in the mortgage rate?

The Earl of Caithness
My Lords, I am certainly not alone in the Government or indeed in the House in having a young family and a mortgage. We know full well the difficulties that ensue with the latter. I am sure that all of your Lordships will agree that it is much better to keep a tight monetary and fiscal policy to defeat inflation which did so much damage to pensioners and to all those who had savings when we had rife inflation in the 1970s.

§ Lord Tordoff
My Lords, will the noble Earl answer the question that I asked him?

§ Lord Barnett
My Lords, can we take it from the noble Earl's first Answer that high interest rates are good for business and that therefore the Government have no intention of reducing them or seeking to reduce them? He seemed to imply in that Answer that 1989 was a good year for business despite the high rates of interest. I accept that high interest rates can have an impact on inflation and demand, but does he not think that it might be helpful to the Government and make them slightly less unpopular if they thought of other methods, such as taxation, which might be less unfair and less damaging to the economy?

The Earl of Caithness
My Lords, I appreciate that when in government the noble Lord was keen to know whether he was popular or unpopular. We are concerned to do the right thing.

Lord Bruce of Donington
My Lords, is the noble Earl aware that figures published today show that manufacturing investment in the last quarter of 1989 was 12 per cent. below that of the previous quarter 1466 and that employment in manufacturing industry went down by 6,000 last month and by some 49,000 over the year as a whole? Does he still claim that that is an economic miracle, or is the so-called miracle what it always was, a miserable mirage?

The Earl of Caithness
My Lords, I accept that in the last quarter of 1989 business investment went down. But the noble Lord will, I am sure, wish to be the first to congratulate the Government on the fact that the figure was still over 9 per cent. and that in the three years up to 1989 it was over 40 per cent.

Lord Campbell of Croy
My Lords, in considering whether high interest rates are having the intended effect on consumer spending, has the Treasury a heart which would overlook the £70 million estimated to have been spent on honouring St. Valentine yesterday?

The Earl of Caithness
The Treasury certainly has a heart, my Lords, but it also has a head. In financial matters it is necessary that the head should rule the heart as otherwise inflation would get worse.

§ Lord Stoddart of Swindon
My Lords, we are all interested to know that the Government wish to do the right thing. But is it really the right thing to have such high interest rates that businesses are forced into bankruptcy? Is the policy of high interest rates right when it pushes people into homelessness? Are there not other instruments with which the Government could control the economy, particularly in credit expansion? Why, for example, do they not try special bank deposits? That is one alternative which I give to the noble Earl and which I wish he would use.

The Earl of Caithness
My Lords, I am grateful for the noble Lord's suggestion. We do look at the various alternatives. We have looked at credit control, as the Opposition have suggested to us, but found it to be totally wanting. No other country uses it. It is not effective in modern financing. However, I am grateful for the noble Lord's suggestion. I am sure he will agree with me that the key is to reduce inflation. We do not want to retain interest rates at a level any higher than is necessary but at the same time one must not ease up from a tight financial or monetary policy.

§ Lord Stoddart of Swindon
My Lords, does the noble Earl not realise that high interest rates are pushing inflation up?

§ Lord Beaverbrook
My Lords, can my noble friend tell the House what level of interest rates would be necessary to fund the spending proposals of the party opposite?

The Earl of Caithness
My Lords, the proposals of the party opposite vary considerably. One of its most recent documents has 170 ways of increasing public expenditure. What that would do for inflation it has not yet told us.

§ Lord Diamond
My Lords, while we all recognise that high interest rates have their effect on reducing 1467 consumer expenditure, is it not also the case that they have very damaging side effects on industry, house purchase and a number of other things? Will the noble Earl convey to his colleague the Chancellor of the Exchequer that Budget time is a convenient opportunity for considering what has been totally omitted by the Government? I refer to the encouragement of personal savings which would achieve much of what is desired by high interest rates without the evil side effects.

The Earl of Caithness
My Lords, the noble Lord makes a Budget representation. The answer to his question is therefore, yes; I shall convey it to my right honourable friend.

§ Lord Stallard
My Lords, does the Minister agree that a high inflation rate spawns higher wage claims and that higher wage claims and higher wages increase inflation? How does he explain that?

The Earl of Caithness
My Lords, the noble Lord refers to one aspect. There is no doubt that higher wage claims lead to a greater loss of jobs, which is to the detriment of those who put in the higher wage claims.

§ Lord Annan
My Lords, the noble Earl was less than his usual magnanimous self in scouting the suggestion of the noble Lord, Lord Barnett, that there are other ways of reducing inflation than by simply increasing interest rates. Is this not something that he and his right honourable friend should look into?

The Earl of Caithness
My Lords, I have said not only today but on previous occasions that we look at the whole range of options. That is why the Government are using both a tight monetary and tight fiscal policy.

§ Lord Elton
My Lords, is my noble friend aware that many of us hope that he will soon be enabling us to consider another Question?

§ Lord Strabolgi
My Lords, is the noble Earl aware that on average over the country only one family in five can afford to buy its own home and that only one in 10 in the South-East can afford to do so? How does this square with the Government's boast about a property owning democracy?

The Earl of Caithness
My Lords, the noble Lord tempts me to answer a question which is very different from that on the Order Paper. I reassure him that under this Government those on average earnings have certainly had a great increase in their take-home pay.